Sunday, October 31, 2010

Quantitative Easin' - A Barry White Style Ballad

This a great song for anybody with a sense of humor and a economic interest. Or somebody that wants a basic understanding of Quantitative Easing, but would rather not read an article from Bill Gross or watch CNBC.

"Quantitative Easin, the time has come to relever. Lending short-term, baby that's just teasin' - I want to lend forever. Now the credit markets are misbehavin', I think they need a spanking. That's why I'm ready to show them, some very special central bankin'."...... "baby I want to buy the long bond".... "one part pleasin', five parts act of desperation".... "we're going to have to quantitate"




Had to delete the embed as it was causing issues with the blog formatting. See the song on youtube.com. 

Friday, October 29, 2010

Vale Proposes Doubling Capital Spending in 2011

Incredible news from Vale (VALE) the leading iron ore producer in the world located in Brazil. VALE plans to double capital  spending int 2011 to $24B in order to diversify away from iron ore and into pricier metals and fertilizers. This is nearly a doubling from the $12.9B planned for 2010. Who will benefit from the increased spending?

Naturally companies like Joy Global (JOYG), Bucyrus (BUCY), and Caterpillar (CAT) could see improved orders. Terex (TEX) could see some orders for its new port crane business as well.

What's interesting is that a large portion of the increase will go towards logistics building of expanding rail capacity and ports. Maybe that explains why CAT recently expanded its rail engine exposure.

One of the major focuses of the spending will be on fertilizers. Goals include doubling phosphate rock output and quadrupling potash production by 2015. Coal production will also nearly quadruple with just about every area nearly doubling.

As far as VALE, its now becoming a concerning investment. It appears that the government is placing pressure on them to expand at all risks very similar to the other Brazilian giant Petrobras (PBR). PBR recently raised an incredible $70B to expand oil production. Something that places Brazil and its government into a greater focus in the world, but not something that generated profits for shareholders. This aggressive plan is likely to pressure the stock price especially if it requires any dilution financing like on PBR. PBR continues to trade near a 1 year low while the markets continue soar especially in Brazil.

VALE has been a core holding in the Net Payout Yields Portfolio for the 3 years its been tracked, but this news lead us to sell half the position today. Depending on the stock action, the remaining position might be sold as well. Government intervention seems all most certain providing a bad backdrop for investors.


Via Reuters:

  • Brazilian mining company Vale, the world's top iron ore producer, will invest a record $24 billion in 2011 as it diversifies toward pricier metals and profitable fertilizers.
  • Vale's eagerly awaited capital spending budget is nearly double this year's planned $12.9 billion outlays and will lay the groundwork for the company to vastly boost output of key products amid soaring demand for minerals from emerging markets such as China.
  • The company, which has spent nearly $6 billion this year alone on fertilizer acquisitions, expects to double phosphate rock output and more than quadruple potash production between 2011 and 2015.
  • The company will dedicate about 20 percent of 2011 investments to logistics projects, including expanding the rail system linked to the massive Carajas iron mine and increasing the capacity of the Ponta da Madeira port terminal.
  • The government still holds considerable sway over Vale, a former state-run company that was privatized in the 1990s. State-linked pension funds and the government's development bank BNDES are still key shareholders.
  • Analysts believe Vale's strong cash position, which has allowed it to give shareholders billions of dollars in dividends, will spur politicians in the coming months to push for higher mineral royalties to tap into rising prices.

via VALE:









November Investment Report

October was another strong month with the SP500 up over 3% and the Opportunistic Model up almost 10%. Combined with a strong September, the market has had an incredible run during what is typically the worst 2 month period in the stock markets. Whether this rise has been due to better economic news, strong earnings reports, speculations on quantitative easing, or the likelihood of Republicans retaking Congress, these events have helped lift the moods of the markets catching most experts off guard. Now these same experts provide constant analysis of how the market typically has the best 6 month period of a presidential cycle during the November to April period following the midterm election. Will they be correct this time?


Elections
With the likelihood of the Republicans retaking the House virtually certain this has had a huge impact on the bullish market performance over the last 2 months. The markets like that the new Congress will be less punitive to business. Unfortunately though, the markets might be in for a disappointment when the new House doesn't immediately produce anything substantial. So while the change is bullish the market likely expects too much short term. Now if Republicans also take control of the Senate then the market could continue the rally. Also, an upset in the House leaving the Democrats in control would surely roil the markets but both these scenarios seem unlikely.

Quantitative Easing 2
Quantitative Easing 2 or QE2 is probably one of the least kept secrets in the financial markets. The amount clearly remains in debate, but the policy will surely be implemented beginning in November. Being on the side of head honcho at PIMCO, Bill Gross, this measure seems very unnecessary and possibly damaging to the economy, but for now it'll continue to push up risk assets including commodities and stock prices with the goal of reflating the economy. See Bill's report here for more on his very interesting views or check the summary I posted on my website.

China/Copper/Coal
As discussed the last couple of months, the China/Copper/Coal play remains a focus of this model. The Shanghai Index in China had a huge run during October. Copper started out strong but has faded during the last week of the month. Likewise Freeport McMoRan Copper (FCX) and Lihua International (LIWA) started strong and faded. Coal stocks were strong as well with Massey Energy (MEE) particularly strong on speculation management would agree to buyout as the company continues to be weighed down my regulation following the April explosion at its mine. Puda Coal (PUDA) benefited as well from China demand and a return of investors to the small cap Chinese stocks as the Shanghai Index soared.


Tech Stocks
As mentioned in the September report, cloud computing stocks like Riverbed Technology (RVBD) and Terremark Worldwide (TMRK) have been a major focus of this model for awhile. In October, RVBD reported strong Q3 results that easily surpassed analyst estimates leading to another huge jump in the stock to $57 from $47. TMRK on the other hand has gone mostly sideways due to issues at competitor Equinox (EQIX) even though they appear to be mostly an EQIX issue. Both positions were trimmed in October to reduce leverage after huge runs in the stocks. The other tech stock this model owns is Apple (AAPL) and it finally broke the $300 mark leading to an all time high of $319. AAPL continues to be a strong holding with many catalysts going forward.

Trades
Recent purchase MF Global (MF) has had a nice run since purchasing the stock late September. Nothing news worthy this month, but the company is likely benefiting from competitors that continue to face more regulations. The only long position bought this month was Savient Pharma (SVNT) after it lost nearly 50% on the 25th due to news that they would not sell the company in an auction process as expected. The reaction was completely overdone as the company still has a FDA approved orphan drug desperately needed by patients with severe cases of gout. The drug Krystexxa should sell itself making this selloff extremely overdone.

On the short side, got in and out of lululemon athletica (LULU). This highflying yoga apparel maker was used as a hedge against some of the gains made in other longs. As the market continued higher, the position was covered. The only remaining hedge is a short on the Drexion Daily 3x Small Cap Bull (TNA). The market appears toppy for now so this position might be added to as November progresses.

Conclusion
Market has rallied strong but remains poised for a year end rally. The SP500 is still 40 points below the 2010 high despite the huge run off the August lows. Stock valuations are very compelling especially compared to other assets like low risk bonds yielding next to nothing. The market though has seen a 140 point gain without even a break of the 10 day EMA. This increases the chances of a short term selloff that would set up a year end rally possibly in December especially if politicians decide to extend the Bush tax cuts. The model will continue to reman fully invested on the long side while looking for opportunities to hedge the downside risk if the market turns down especially as the new Congress fails to meet unrealistic expectations.

Stat of the Day: Chicago PMI Unexpectedly Rises

The Chicago PMI came in at a surprisingly strong 60.6 in October well above the 57.6 expected by economists. While this was only slightly higher then the 60.4 in September, it showed a strong jump in new orders to 65. Production was off the chart at 69.8 showing deep strength in the report.

Market initially snapped back, but some slightly weak Michigan consumer sentiment data has weakened the market. Considering a strong September and October it wouldn't be surprising to see a sell the news scenario at the beginning of November. Though I'm slightly concerned that too many pundits are suggesting such a result. Looks like 1180 in the SP500 is crucial. Any breakdown would likely signal short term selling.

Long term though, any selloff in November will be a huge buying opportunity. The Nov - Apr period of a mid term election is historically off the chart bullish. Only concern is that it usually comes after a weak Sept - Oct period setting up the rally after the elections.


Highlights
Chicago purchasers report strong, broad-based month-to-month acceleration this month. The Chicago index for October rose two tenths to 60.6, well above the break-even level of 50. New orders are especially strong, at 65.0 for a more than three point rise. Employment is also strong, up more than one point to 54.6 and reflecting robust production which jumped 5-1/2 points to 69.8. Delivery times slowed, input prices rose, and businesses in Chicago added to inventories -- all consistent with deep strength. This report points to solid plus 50 readings for next week's national purchasing reports from the Institute For Supply Management.

Thursday, October 28, 2010

Cephalon Raises Estimates for 2010, 2011 Again

Cephalon (CEPH) again raised estimates for 2010 to $8.3 and provided guidance for 2011 of $8.55. Typically though, don't expect much action in the stock tomorrow. Although the stock remains incredibly cheap at a sub 8 PE, the market is concerned about drugs coming off patent and a slowing of growth.

Its interesting listening to conference calls as analysts dig down into minute details. They seem to over analyze every bit of data and seem to miss the big picture that this biotech company has a great management team that continues to under promise and over deliver.

CEPH now has $1.2B in cash and annual cash flow of around $1B though they do have $1B in debt. At a market cap of $5B the company could theoretically buyback 20% of the company just using the annual cash flow. That of course wouldn't be the best use of cash as I'd rather see them continue to buy up small biotechs with promising drugs that they can use their expertise to help bring to market. It is a great indication of the value prospects of this company. Investors tend to forget that great companies like CEPH generate huge cash flow every day they turn on the lights. Even if they don't grow, the company will pile up huge hoards of cash.

Leading drug Provigil goes off patent soon causing the stock to be depressed, but don't fret too much on the future as this management team will find a way to continue growing the company.


PR Highlights:

  • Quarterly Sales and Earnings Exceed Top End of Guidance
  • Quarterly Sales of $707 Million Increased 32 Percent
  • Quarterly Basic Adjusted EPS of $2.27 Increased 34 Percent
  • Quarterly Cash from Operations Totaled $272 Million
  • Total sales guidance is $2.69-$2.73 billion. This includes expected CNS franchise sales of $1.34-$1.37 billion, pain franchise sales of $510-$530 million, oncology franchise sales of $500-$520 million, and other product sales of $325-$345 million
  • Adjusted net income guidance is increased to$617-$632 million and basic adjusted income per common share guidance is increased to $8.20-$8.40, assuming 75.2 million basic shares outstanding.
  • full year 2011 sales guidance of $2.96-$3.04 billion.  This includes CNS franchise sales of $1.39-$1.43 billion, pain franchise sales of $540-$570 million, oncology franchise sales of $570-$600 million
  • The company also is introducing adjusted net income guidance for full year 2011 of $652-$668 million.  Cephalon is introducing 2011 adjusted net income per common share guidance of $8.45-$8.65, assuming 77.2 million basic shares outstanding.  


Disclosure: Long CEPH

Wednesday, October 27, 2010

Cramer on The Jones Group

More on The Jones Group. The stock likely sold off way too much, but I don't have a comfortable feeling on this sector and we're already invested in Liz Claiborne (LIZ). Amazing that Cramer is always portrayed as the 'Crazy One' but he seems to have a calming effect on some of the stocks he brings onto his show.

JNY CEO on Mad Money tonight.




As I said earlier, bad companies make excuses. Sure they may have a higher mix of shoes, but they clearly didn't position themselves correctly coming into the Q. Though Wall St tends to over react so don't join them.

Higher Costs at The Jones Group Hits Retail Sector

The Jones Group (JNY) reported higher costs today causing them to miss earnings estimates by a little over 10%. Consequently the stock has slumped over 20%. Considering the stock trades at a remarkably low 10x estimates the reaction in the market has been harsh.


JNY blamed higher commodity costs such as cotton, wages from employees in Asia, and transportation costs from having to ship goods via air which naturally costs a lot more. The first 2 costs should have been built into analysts models and impact most of the industry. The higher transportation costs could very well be a JNY specific issue of not ordering enough inventory early. 

The news has caused a huge drop in the stock of Liz Claiborne (LIZ) seen as a major competitor to JNY and other retailers owned in our portfolios including Sears Holdings (SHLD) and Dicks Sporting Goods (DKS). 

It's too early to tell whether this is an industry issue or just bad management and modeling with JNY. Yesterday, Coach (COH) reported fantastic results showing that labor costs and inventory levels aren't an issue with properly managed companies. Good companies produce great results with no excuses and bad companies blame the weather for every problem. JNY has some 'blame the weather' sounds to their report. 

Noteworthy is the conflicting message in the Marketwatch piece. First, the company and company is struggling with too much inventory and a slower consumer, but then the CEO talks about significant volume increases in Q4 and higher costs to obtain inventory on time. Thought they had too much inventory? If thats the case, I'd tell them to send it via rowboat not air next time. Hmm.....

The retail stocks owned in the Stone Fox Capital portfolios still remain too cheap to consider selling. This news isn't positive for the sector, but most of the costs are seen as temporary except for the higher labor costs in goods producing countries. That trend is likely to continue. JNY did report 19% revenue growth and likely got caught by a quicker bounce back then expected as much as anything. They had a relatively strong 2009 so maybe this is partially a payback. Holding my retail stocks for now. 



  • In addition to higher labor wages, cotton and other raw-material costs, tight capacity in factories in the Far East led to slight product delays and the company flying in more products than last year during the quarter ahead of the key holiday season, Chief Executive Wesley Card said in an interview.
  • “Into next year, I know we are raising prices,” Card told MarketWatch. 
  • Despite the cost pressures, Card said he’s optimistic about the upcoming holiday season, with consumers driven to shop by new fashions.
  • “We expect a significant volume increase in the fourth quarter,” he said. “People are still spending reasonably strong. There’s some emphasis on value, but the fashion element is critical.”
Company PR:
  • Revenues for the third quarter of 2010 were $1,022 million, as compared with $856 million for the third quarter of 2009, a 19.4% increase.    
  • The Company reported adjusted earnings per share of $0.54 for the third quarter of 2010, as compared with adjusted earnings per share of $0.46 in the same period last year. Results for both periods exclude the impact of the charges considered by management not to be part of ongoing operations 

Sammy Ponzi Scheme

Interesting Investment Outlook from Bill Gross today. Bill is a Managing Director at PIMCO and commonly known as a leading expert on the fixed income market.

Today Bill published a report titled Run Turkey, Run. Basically a slam on the QE2 plans and the end of the 30 year bull market in bonds (finally!). Not to mention a slam on the 2 party political system that leaves the American people high and dry. The bondholders remaining after QE2 will be like the turkey waiting on Thanksgiving Day. They might receive some immediate fat gains from bond yields being pushed lower for the last time, but ultimately they'll be served up on the platter of rates that can't go lower.  Rates ultimately will begin creeping higher.

Bill basically outlines why a thesis of investing in companies that prosper abroad has been very rewarding over the last 10 years. The political system in the US has become as corrupt as ever and void of a fiduciary responsibility to the American people. He suggests the best places to invest in fixed income will be in emerging markets debt and high quality corporate debt with short durations. It even appears that he suggests moving money to stocks and commodities though as a fixed income manager that'd never be prudent to announce.

Definitely read the report, but below are a few of the highlights and funny comments.


Highlights:


  • The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
  • We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
  • The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

Who said Bond strategists weren't funny?
  • This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.
  • Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants
  • The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. 

Tuesday, October 26, 2010

F5 Networks Announces $200M Stock Buyback Plan

Did I read that correctly? Leading highflying networking stock F5 Networks (FFIV) just announced a $200M buyback while reporting Q3 earnings. Wow! FFIV has a forward PE of 30+ so its almost arrogant for management to presume the best use of cash is by buying back stock. Also, with a market cap over $8B this buyback won't provide much of a dent into outstanding shares.

The company continues to blow out numbers similar to favorite Riverbed Tech (RVBD) owned in our portfolios so it could be an indication of the 5-10 year growth plan they can envision. Still its a head scratcher unless they are just hoping to buy the next time the market corrects 20% on this stock. And it will happen.

Definitely something to watch! Details below from Briefing.com.



4:11PM F5 Networks beats by $0.07, beats on revs; guides Q1 EPS above consensus, revs above consensus; announces $200 mln share repurchase program (FFIV) 102.54 +1.71 : Reports Q4 (Sep) earnings of $0.79 per share, excluding non-recurring items, $0.07 better than the Thomson Reuters consensus of $0.72; revenues rose 47.8% year/year to $254.3 mln vs the $249 mln consensus. Co issues upside guidance for Q1, sees EPS of $0.80-0.82, excluding non-recurring items, vs. $0.73 Thomson Reuters consensus; sees Q1 revs of $265-270 mln vs. $259.76 mln Thomson Reuters consensus. The company also announced today that its board of directors approved a new program to repurchase up to $200 million of the company's outstanding common stock. "As enterprises and other large organizations confront the new realities of today's global economy, they are turning increasingly to technologies that enable them to operate more efficiently and compete more successfully by giving them flexible, on-demand access to more resources while reducing overall costs. This shift is reflected broadly in the trend towards data center consolidation and the widespread adoption of server virtualization and new infrastructure models such as cloud computing... Within the past year, these trends have accelerated, and our products have been increasingly deployed as strategic points of control in new data center architectures, integrating disparate resources and managing the flow of traffic within and between data centers. In addition, we have continued to see growing demand for our products among service providers grappling with the proliferation of mobile devices, the explosion of mobile applications and the corresponding increase in mobile data traffic. As a result, our product revenues grew 12 percent sequentially in Q4 and 38 percent during fiscal 2010,"

Savient Pharma KRYSTEXXA Launch Conference Call

Company refused to provide information on the failed buyout process so investors are left guessing the interest level. On one hand, its understandable that management doesn't want to discuss details in order to not hurt their hand in future discussions. On the other hand though, they need to do something better to support the stock price and shareholders. They should provide some expectations on sales price since they apparently aren't willing to sale to the highest bidder. They're leaving too much open for interpretation and the market has spoken that its not acceptable.

Having said that, I was pleased to hear the company has made a lot of progress towards the launch of KRYSTEXXA. They already have the initial product labeled and ready. Marketing materials are waiting for approval from the FDA. One of the largest private payers has already agreed to include it as a reimbursable cost without knowing price. They also expect limited costs to develop the infrastructure needed for launch.

All in all, the company appears ready for a December launch which is probably the direction they should've taken all along. Going public with the desire to sell was never going to elicit the highest bids. The stock price has seen limited bounce back today. As usual, traders are overly focused on a buyout and quick money. SVNT has a FDA approved drug in high demand. Don't sell the stock short just because management didn't handle the buyout process well. The company has a lot more value then the current market cap around $820M. As I reported yesterday, one analysts expects peak revenue to exceed that market cap which is unheard of in the biotech sector.

Highlights:
  • Commence shipments in Dec with announcement of price
  • Available for prescription at time of shipment
  • Initial launch - ACR November 7-10th - use package insert material while awaiting FDA approval of Marketing materials
  • Initially concentrate infusion centers - 1,700+
  • 60 person sales force to be ready and trained by Jan 2011
  • Doesn't require a lot of infrastructure costs due to the limited targeted population
  • Company refused to discuss cash needed for launch
  • Filing EU application Jan 4th, 2011.... review process takes about a year
  • one of the largest medical payers has already agreed to reimburse the cost without knowing the cost
  • still focused on 170K patients or 3% of the gout population

Monday, October 25, 2010

Massey Energy Worth $60+ in a Buyout?

A couple of analysts have come with targets in the $60+ range for Massey Energy (MEE) based on a report that the company is up for sale. Recall that MEE suffered the mine explosion at Upper Big Branch (UBB) that killed 29 miners. Naturally MEE has suffered under tighter regulatory scrutiny and a management team that has been focused on the tragedy. Results have suffered, but back in May we suggested that investors focus on the assets particularly the met coal reserves [Buy the Other Disaster Stock].

The WSJ broke news last Wednesday that MEE was seeking a sale. Today we've seen estimates from a couple of analysts that MEE would be worth north of $60 in a buyout. That number seems high, but the stock has been highly depressed due to the accident hence the signal to buy the stock over the summer in the first place. MEE just didn't face the long term issues of a continuous leak so it seemed absurd for the stock should suffer so much. Stock dropped from a high near $55 on April 1st to nearly $25 by July 1st.

With MEE only trading in the mid $30s prior to the WSJ news, $60+ seems highly unlikely regardless of the asset quality. Wall Street tends to not pay much more then 30-40% premiums for stocks especially ones with regulatory risk.

Gladly accept a deal in the $60s allowing us to exit a coal position and reduce our exposure to the sector. Stone Fox owns Alpha Natural Resources (ANR) and Puda Coal (PUDA) in both the Growth and Opportunistic portfolios in addition to MEE so we'll remain highly exposed to met coal and Asian demand growth if cashed out. Not really expecting a deal and it was never a theme of the original purchase. The stock will continue recovering with or without a buyout.

Via Pittsburgh Post-Gazette:

Andrew Ross, of First New York Securities, said the loss of production from the Upper Big Branch mine and the resources the company is devoting to investigating it and responding to federal regulators have depressed Massey's stock. He said based on the estimated value of Massey's coal reserves, the stock currently trades at a 25 percent discount compared to its peers.

He speculated that if Massey goes to market and multiple bidders emerge, "a price above $60 per share could be realized." The coal producer's officers and directors own just less than 1 percent of the company's 103 million shares outstanding.

Via Barron's:
  • Shares of coal producer Massey Energy (MEE) are up $1.99, or 5%, at $41.82 after Stifel Nicolaus & Co. analyst Paul Massoud this morning wrote in a note to clients “Would Cliffs buy Massey? Should they? Could They?” referring to coal producer Cliffs Natural Resources (CLF).
  • Massoud is following up on The Wall Street Journal’s article by Kris Maher and Joann Lublin, who wrote on Wednesday that Massey is exploring a possible sale of the company, citing anonymous sources.
  • Massoud notes Massey this year bought Cumberland Resources, while Cliffs purchased INR Energy. In the case of the INR deal, Cliffs paid $6.36 per ton. That’s well above the $2.50 per ton of coal that Massey might command for its $2.8 billion tons in reserve.
  • That $2.50 per ton implies a $62 per share bid for Massey, muses Massoud, a $6.32 billion buyout. With $1.5 billion in capital available to Cliffs, the company would need to go to private equity for the rest of the financing, he notes.


Savient Pharma: Today's Market Gift

Savinet Pharma (SVNT) might be one of today's biggest losers, but it could be tomorrow's biggest gainer. SVNT announced that they have been unable to find a buyer at a suitable price for the company. The stock initially dropped over 50% to a 52 week low on the announcement. Was the move warranted?

Regardless of whether SVNT is bought out, the company still owns an orphan drug, KRYSTEXXA, recently approved by the FDA for the treatment of severe gout cases where no other option exists. The intrinsic value of the company hasn't changed because they couldn't find a deal for an agreeable price. The only change is the value an investor can expect to receive in the short term.

With the drop in price, I'm sure a significant amount of companies have called seeing if management would drop there price to a level likely very attractive with the stock currently trading in the $12s around midday. SVNT could be tomorrow's biggest gainer.

While the news is disappointing to long term holders looking for a buyout in at least the $25-27 range providing for a nice boost over the stock recently trading in the $22 range, the fact the stock has fallen 50% today provides for a huge gift to those able to buy more. Biotech stocks should only fall 50% when drugs fail to not get FDA approval.

SVNT management likely trapped themselves into a corner by leaving their fate up to buyouts. Its difficult to get premium prices when you place yourself up for sale. Suitors were likely trying to low ball them leaving the only possible course to move forward with a US rollout. Maybe somebody will step up now that SVNT shows a seriousness to go it alone. As of last report, SVNT has nearly $89M in cash to support such a move.

Bought shares around $12.4 today in the Opportunistic portfolio and currently hold slightly less then a 2% position in the Growth portfolio. Looking for a jump back to the $18 level as reality replaces hysteria and investors come to grips that SVNT has a drug with expected revenue in the $500-900M level. A quick move back up to $18 would not shock us.


SVNT PR:
  • today announced that its previously announced process to identify, following the approval of KRYSTEXXA™ by the U.S. Food and Drug Administration (FDA), a strategic transaction for the sale of the Company did not result in a sale of the Company at this time. The board of directors will continue to evaluate strategic alternatives available to the Company to maximize value. 
  • The Company is working toward the commercial launch of KRYSTEXXA, which it expects will be available by prescription in the U.S. later this year. 
From Bloomberg:
  • Bristol-Myers Squibb Co. and Novartis AG both looked at acquiring Savient and passed because of concern about price, according to two people with knowledge of the matter, who declined to be identified because the talks are private. The board of directors will continue to “evaluate strategic alternatives,” Savient said in a statement today. 
  • Savient has enough money to bring the drug to market itself, said Gene Mack, an analyst at Soleil Securities, who owns shares of Savient in a personal account. 
  • Krystexxa, the first disease-modifying therapy for gout, a type of arthritis, could be priced between $25,000 and $49,000 a year per patient, said Mack. The therapy may bring in peak sales of $900 million worldwide within five years of going on the market, Mack said. (market cap is currently less then $900M which is incredibly cheap for a biotech with an FDA approval providing limited downside risk with the stock at $12)

Sunday, October 24, 2010

Trade: Bought MedcoHealth Solutions

On Thursday, purchases MedcoHealth Solutions (MHS) for the Net Payout Yield Portfolio. As mentioned back on Aug 23rd [MedcoHealth Solutions: Ultimate Net Payout Yield], MHS was on the radar for addition to this portfolio. It almost ran away from us after hitting bottom just one week after writing that post, but this recent pullback touch the 50ema and gave us an entry point.

MHS is on a massive stock buyback spree signaling not only a financially strong company, but also a cheap stock. Just bought a half position at this point as typical for this portfolio size.

Note: This portfolio will be available soon at Covestor.com under Mark Holder. It will be the 2nd model I offer after the successful Opportunistic model that currently has 16 subscribers. This portfolio has consistently beat the SP500 by 6% since being tracked first by hand since the start of 2007 and then the last 27 months at Marketocracy.com. The important key to this portfolio is that it has a Beta of 1 and involves minimal trading. Otherwise, it has the same risk characteristics of the SP500, but much higher gains.


Friday, October 22, 2010

Terex Continues to Make Progress But Cranes Struggle

After the bell on the 20th, Terex (TEX) reported earnings that showed an improvement in all divisions except for Cranes. Unfortunately for TEX, Cranes is the largest and most important division though it's impact has been significantly reduced this year as sales bounce back in Aeriel Work Platforms (AWP), Materials Processing (MP), and Construction . The results were a slight disappointment mainly due to unexpected order cancellations and pushouts in Europe. Based on the results from Manitowoc (MTW) reported earlier this month, it wasn't too surprising that Crane sales were weak.

TEX saw a nice improvement in backlog even including a 2% sequential increase in Cranes. All in all with rental companies such as United Rentals (URI) reporting high utilization rates and the ABI turning positive it appears that the weak division in the TEX portfolio will finally turn around in 2011.

Another positive sign is that TEX is finally moving aggressively into developing markets. They are just now starting sales in the AWP facility in China and building a facility in Brazil along with added production in India. Currently developing markets account for 33% of sales.

Most importantly though, backlog increased sequentially signaling stronger quarters ahead. Also, the operating income was finally positive although only at $3M. TEX is forecasting $15M for Q4 which isn't outstanding but headed n the right direction.

TEX remains a solid position in both the Growth and Opportunistic Portfolios. Unfortunately the position was purchased too soon, but finally a return to growth seems at hand.

Highlights from PR:
  • Net sales for continuing operations were $1,075.8 million in the third quarter of 2010, an increase of 15.2% from $933.9 million in the third quarter of 2009. Income from operations was $3.0 million in the third quarter of 2010, an increase of $103.3 million as compared to a loss from operations of $100.3 million in the third quarter of 2009. 
  • We expect the fourth quarter to reflect continued strengthening trends in AWP, Construction and MP, with a weaker Cranes business than we had previously anticipated. Consequently, we expect net sales to increase approximately 10-15% sequentially and to generate a consolidated operating profit of roughly $15 million in the fourth quarter, excluding unusual items, although this will not be sufficient to generate net income in the quarter.” 
  •  Backlog: Backlog for orders deliverable during the next twelve months was approximately $1,175 million at September 30, 2010, a decrease of approximately 6% from September 30, 2009 but an increase of approximately 8% from June 30, 2010.

Trade: Sold Caterpillar

Catching up on trading from yesterday. Trimmed half our position in Caterpillar (CAT) in the Net Payout Yield Portfolio after a weak reaction to a positive earnings report. Also after the huge run and the lack of a buyback implemented by CAT leaves the NPY at only 2.4%. This is not significant enough for this portfolio so discipline requires us to sell.

CAT has been a long term holding of the portfolio, but the gains in the stock and the limited payouts suggest the stock may be topping. Not to mention the negative action in the stock from bullish earnings. From the chart, its apparent that at least the short term action is negative.


Thursday, October 21, 2010

Riverbed Tech Crushes Q3 Earnings

Wow! Wow! Wow! While expecting huge results from Riverbed Tech (RVBD), the actual numbers were beyond any expectations. RVBD reported Q3 earnings of $.34 versus $.27 estimates. Revenue increased 17% sequentially to $148M vs $135M estimates. Not often that a company reports a revenue beat of 10%. In fact both numbers easily exceed the Q4 estimates. Very impressive!

These numbers had to be impressive to justify the 35x forward PE. Hence, Stone Fox unfortunately trimmed a third of our remaining shares in the Growth and Opportunistic Portfolios leaving roughly 50% of the original investment. Considering the stock was up over 100% in both portfolios it was just time to take more profits considering the wide swings in stock trading. Equinix (EQIX) dropped 30% after missing earnings and VMWare (VMW) dropped 7%.

Guidance was for $155-158M with earnings of $.35. Appears they sandbagged on earnings especially considering the crushing numbers in Q3.Operating margins are expected to be flat, but that's likely low as well. Growth like that typically produces higher margins.

RVBD is by the leader in WAN Optimization now with 40% of the market. If I understood the conference call correctly, 2nd place Cisco Systems is now 29%. Following this trend will be interesting as typically in the tech space when a product becomes the leader in a sector it tends to grab 80% of the market. Everybody typically wants the leading product.

They also announced a 2 for 1 stock split effective 11/1/10. While not really a meaningful transaction, it might help pop the stock short term. Would prefer they not make this move unless the stock really got into the $60+ range. Stocks above $20-30 tend to appear strong then ones that slip back into the teens. Ultimately it doesn't matter but its all a mind game in the stock market. 

Price action will be interesting tomorrow. Blowout numbers will undoubtedly lead to much higher prices by the time RVBD reports Q4 numbers in 3 months. Tomorrow though could be impacted if insane traders try to work the limited earnings bump from Q3 to Q4. 

Q3’10 Financial Highlights
  • Total revenue increased 17% sequentially and 45% year-over-year
  • Product revenue increased 22% sequentially and 48% year-over-year
  • Non-GAAP operating profit increased 36% sequentially and 84% year-over-year
  • Non-GAAP operating margin increased to 28.1% compared to 24.2% in Q2’10 and 22.0% in Q3’09
  • Days sales outstanding decreased to 27 days from 32 days in Q2’10 and 42 days in Q3’09
  • Cash and investments grew to $469 million compared to $422 million in Q2’10 and $297 million in Q3’09

Disclosure: Long RVBD

Wednesday, October 20, 2010

Net Payout Yield Focus: Boeing

Boeing (BA) reported solid Q3 results and upped guidance. Unfortunately though Boeing has done nothing to improve its Net Payout Yield. The dividend yield has now slumped to 2.4% which isn't shabby but by no means impressive considering they lack a buyback component. For now, BA is a core holding of the Net Payout Yield Portfolio (coming to Covestor soon). Without a higher yield though, we'll likely trim the position on any advances in the stock price. Management did pay down $500M in debt during the quarter which is positive, but without any moves on the stock it suggests they are complacent with the current price.

At a current price of $72, BA trades at roughly 17x the high end of the 2010 guidance of around $3.80 to $4 making the stock on the expensive side. Analysts place the 5 year growth rate around 10% so BA clearly trades expensive compared to growth potential as well. While the airplane industry is on the verge of a multi year cycle, BA management hasn't made an aggressive move to push more capital to shareholders especially in the form of a targeted buyback with the stock trading in the low $60s for a good portion of Q3. All adding up to a company with great prospect, but a stock that might be over valued now.

Most notably BA had $10B in cash/marketable securities and chose to not utilize that money to enhance shareholder value. 

Boeing PR:
  • Third-quarter earnings per share of $1.12 reported on operating margin of 8.2 percent and revenue of $17.0 billion
  • Operating cash flow of $1.9 billion reflects strong operating performance
  • Cash and marketable securities of $10.0 billion provides strong liquidity
  • Backlog grew to $321 billion including $25 billion of new orders in the quarter
  • 2010 earnings per share guidance increased to between $3.80 and $4.00 per share on stronger Commercial Airplanes outlook
"Our results and revised outlook reflect the continued strong performance of our commercial production and services programs and the ability of our defense businesses to produce solid results in a challenging environment," said Jim McNerney, Boeing chairman, president and chief executive officer.  "Orders were particularly encouraging, with a multi-year production contract for 124 F/A-18 aircraft and more than 200 net commercial airplane orders booked in the quarter, increasing our backlog and demonstrating improved overall market confidence."

Architecture Billings Highest Since January 2008

The Architecture Billings Index (ABI) has been one of the weakest indexes to recover from the recession. The index measures the work of architects on non-residential construction projects and usually signals work in the next 9 to 12 months.

The September Architecture Billings Index was up 2.2 points to 50.4, marking the fourth consecutive month of increases, the American Institute of Architects said. Finally suggesting a recovery in the very weak construction area. Also encouraging was that the project inquiries index hit 62.3, the highest level since 2007. 


Apparently the US finally sees a recovery in construction activity early next year. This will help companies like Terex (TEX), Manitowoc (MTW), and Ingersoll-Rand (IR) which haven't benefited as much from the gains in industrial spending. 


From Reuters:
  • "The strong upturn in design activity in the commercial and industrial sector certainly suggests that this upturn can possibly be sustained," said Kermit Baker, AIA's chief economist. "But we will need to see consistent improvement over the next few months in order to feel comfortable about the state of the design and construction industry."
    The AIA'S separate, less predictive, project inquiries index rose to 62.3, from 54.6 in August, reaching its best level since July 2007. Project inquiries typically produce a higher reading than actual billings because multiple architecture firms bid on the same work. 

Disclosure: Long TEX

Tuesday, October 19, 2010

Lihua International Signs Major Supply Contract for Copper Anode

Today Lihua International (LIWA) announced a major supply contract for copper anode equivalent to nearly 40% of their expected 2011 production. Even more incredibly is the announcement of more then 80,000 metric tons is potential contracts which alone exceed the production expectations for 2011 even after building another facility. Guess this explains why the stock soared over 11% yesterday. Guess this news wasn't that guarded.

LIWA along with several other Chinese reverse merger small caps continue to be the cheapest investments into the China economy. Yet most investors continue to avoid these stocks due to fraud scares as if the US market is that safe.

LIWA also confirmed guidance for 2010 and expansion plans are expected to begin soon. This remains one of the best ways to play the expected copper shortage beginning in 2011 and the huge demand from Asia. Anybody concerned about fraud can limit the position to less then 5% or diversify among other China plays like LLEN, PUDA, or CNAM.


Press release:
  • today announced that it has signed a 2011 copper anode volume supply contract for 30,000 tons with its recently announced domestic customer, one of the world's leading copper and metal conglomerates. Additionally, Lihua has received 2011 copper anode volume demand indication from 3 other customers totaling 80,000 metric tons. 
  • In order to meet this expected demand, Lihua plans to break ground in the near term on its second copper recycling facility, located on approximately 33 acres of land adjacent to its existing copper recycling facility in Danyang, China.  The Company expects to complete construction of this new facility during the second half of 2011, bringing annual refined copper production capacity to 100,000 tons. The Company plans to allocate 75,000 tons to copper anode, with the remaining 25,000 tons allocated to copper rod.
  • "We have received 2011 customer demand indications for copper anode which already exceeded our full year estimated refinery capacity, reinforcing our belief in the sizeable market opportunity that exists for this product and supporting our decision to launch the anode product line during the second quarter of 2010," said Jianhua Zhu, chairman and CEO of Lihua. "Since launching copper anode in July, we have shipped over 4,000 tons and remain on track to meet our goal of shipping 8,000 to 10,000 tons of copper anode during 2010."
2010 Financial Guidance and Outlook
Lihua reaffirms its full year 2010 financial guidance based on its recent capacity expansion, positive market trends and strong end market usage for Lihua products. Lihua expects to increase its gross profit by 46-53% over 2009 to $52.9 to $55.7 million, and grow its non-GAAP net income by 48-57% to $38.1 million to $40.3 million. (estimates are close to $2 for next year)

Monday, October 18, 2010

Profit Taking on Apple

After the close, Apple (AAPL) reported earnings that blew away analyst estimates by some $2B with earnings at $4.64 vs $4.06. The stock sold off some 6% though due to various 'concerns' such as weaker margins and iPad sales.

Typical Wall Street action. Take astonishing bullish numbers and focus like a laser beam on a few minor concerns. Instead of explaining how revenue could beat estimates so badly with iPad sales some 600K weaker then expected. Or explaining how supply constraints due to the overly successful launch of the iPad likely lead to the weakness and how it might be overcome in the coming months. Or figure out how iPhone sales coming in at a strong 14M+ will lead to future iPad sales that could someday surpass the iPhone numbers.

All in all, the stock reaction in after hours is nothing more then profit taking. Clearly the numbers were blowout and signal the trend higher continues. The $500 target just reported on last week remains intact and even solidified with these numbers. Its very important to distinguish between profit taking on a good report and a sell off from a bad report. A bad report needs to be avoided while a scenario like AAPL's should be bought.

Another key is that an investor must know the real value of a stock. Is it trading at lofty valuations so that bad report might signal the top? Or is it trading at reasonable values to where a sell off is a load the boat moment? In the case of AAPL, the stock after hours trading at $300 sells at sub 15x eps estimates while growing easily at 20%+. We'll just ignore growth above 20% (net income up 70% this Q) and assume its not sustainable for a company the size of AAPL. Using 20 though, AAPL should trade over $400 based on earnings that will likely hit $22 in the current year now that AAPL has reported Q4 numbers. Highlighting another important factor in valuing them. Now that estimates for FY 2012 will roll onto earnings boards like the one on Yahoo! Finance, investors will begin focusing on future numbers that will be considerably higher. Don't get shaken out of this true value.


Apple Q4 summary - notice the huge cash balance:

For the fiscal fourth quarter ended September 25, the company posted $20.34 billion in revenue, with profits of $4.31 billion, or $4.64 a share, ahead of the Street at $18.86 billion and $4.06 a share. The company’s own guidance had been for $18 billion in revenue and profits of $3.44 a share.

After tax profits and revenue were both records.

Gross margin was 36.9%, down from 41.8% a year ago. The Street had expected margins of about 38%.
  • The company sold 3.89 million Macs, up 27% from a year ago.
  • Apple sold 14.1 million iPhones, up 91%.
  • The company sold 9.05 million iPods, down 11%.
  • It sold 4.19 million iPads in the quarter.
“We are blown away to report over $20 billion in revenue and over $4 billion in after-tax earnings—both all-time records for Apple,” CEO Steve Jobs said in a statement. “iPhone sales of 14.1 million were up 91 percent year-over-year, handily beating the 12.1 million phones [Research In Motion] sold in their most recent quarter. We still have a few surprises left for the remainder of this calendar year.”

For the December quarter, the company sees revenue of $23 billion and profits of $4.80 a share; the Street has been forecasting $22.22 billion and $5.02. {translates to a weak margin forecast, but get real people. This means an easy $5.75 number)

“We’re thrilled with the performance and strength of our business, generating almost $5.7 billion in cash flow from operations during the quarter,” added CFO Peter Oppenheimer. (Huge cash flow. The coffers pile up on a daily basis}

Apple finished the quarter with over $51 billion in cash, short-term securities and long-term securities. The company has no long-term debt. (Roughly $51 per share and growing on a quarterly basis)

Terex Upgraded to $40 By Buckingham Research

Terex (TEX) got a $40 target from Buckingham Research today suggesting as much as a 65% gain from these levels. TEX is a leading construction equipment company specializing in AWPs and Cranes. TEX will benefit from the recovery from the global recession and the return to infrastructure building around the world.

Can't find any specifics on the upgrade other the headline details of the $40 target. The target while aggressive should be in line with expectations considering that management has a viable plan for $6 in earnings in the next few years and global growth should oblige.

The next potential catalyst will be earnings on Wednesday after the close. Analysts expect a $.16 loss and based on recent history and the crane number out of competitor Manitowoc (MTW) numbers should be relatively in line depending on cost cutting efforts. As the economy continues to turn though, margins will quickly become more favorable and additional revenue will flow to the bottom line. Load up on TEX on any weakness on Thursday.


Friday, October 15, 2010

Apple Zooming to $500?

Hudson Squares Boosting of it's Apple (AAPL) price target to $500 this morning is all the rage. Clearly nobody was paying attention during the financial crisis when we reported back in 2009 a Minyanville.com article that predicted AAPL would hit $1,000 [Apple to $1,000?]. High price targets were ignored back then but now they are all the rage.

AAPL clearly remains cheap and getting to $500 doesn't seem beyond the realm of possibility especially in a strong market. As Barron's points out, at $500 AAPL becomes a $450B company. It will be difficult to grow from there, but history has shown that you should stay with companies until the momentum runs out not when they hit magical market caps. Like Microsoft (MSFT) in 2000. When the music stopped back then, it was time to abandon Mr. Softee. It's almost impossible to turn momentum once it stops mainly because the markets they dominate hit saturation points. Then once growth slows, multiples compress. Oddly though, AAPL hasn't seen expanding multiples despite blowout numbers.

For now AAPL has all the momentum so sit back, relax and continue holding the stock. Once the music stops though, sell immediately!

Barron's summary:
  • Hudson Square Research analyst Daniel Ernst.This morning, Ernst raised his price target for Apple (AAPL) to $500, from $300, while repeating his Buy rating. That’s the highest target for the stock among Street analysts tracked by Thomson First Call. He raised his FY 2011 EPS forecast to $17.67, from $16.67. At $500, the company would have a market cap of more than $450 billion.
  • Piper Jaffray analyst Gene Munster this morning writes that September quarter results are likely to be in with the Street, but were constrained by iPhone and iPad supply shortages worldwide. “We believe the printed numbers for iPhone and iPad are less relevant than usual given the lack of supply and we expect the company to address these supply shortages on the earnings conference call,” he writes. “Bottom line: we believe over the next three months, investors will become increasingly more optimistic that the Street revenue growth in FY11 of 26% y/y is conservative given the size of Apple’s addressable markets combined with the company’s relatively small market share.”
  • RBC analyst Mike Abramsky, on the other hand, thinks Apple will post a “big” Q4 beat; he’s now looking for revenue of $20.3 billion and profits of $4.48 a share, up from $19.7 billion and $4.15. HE sees the company selling 13.5 million iPhones in the quarter, with 5 million iPads, 3.7 million Macs and 9.4 million iPods. His FY 2011 forecast is now $19.27, up from $19.
  • UBS analyst Maynard Um expects a solid Q4, and adds that the company could surprise with stronger guidance than the Street is expecting.

Disclosure: Long AAPL

More Competition for Indian Banks

Interesting Bloomberg report on increasing competition for Indian banks not only for employees, but also the potential for new licenses to be issued by the government. The main thrust of the article is the potential implementation of 'gardening leave' which bans employees from working for a competitor for 6 months unless they pay a fine, but the more important aspect for the 2 Indian banks trading in the US, ICICI Bank (IBN) and HDFC Bank (HDB), are the new bank licenses to be issued by the Indian central bank.

Portfolio holding IBN is the main private bank in India and hence the market appears to follow their moves. They appear to already be facing high turnover with 15% of junior staff leaving last year. Not sure that's high enough to be overly disruptive, but the number could rise if more competition is let into the market. Those new banks will want the experience of the employees at IBN. From a business perspective, they'll likely focus efforts on attacking the 70% control of the market by state run banks.

Recently sold some IBN stock in our portfolios due to it's huge run the last couple of months. This Bloomberg article hints at potential reasons to sell the remaining stock. New licenses to be issued by the central bank could really heat up a sector that hasn't faced new entrants for 7 years now. IBN is the market leader and the Indian market can probably handle new entrants, but it's clearly something an investor needs to follow.

Bloomberg:

  • ICICI, led by Chief Executive Officer Chanda Kochhar, is bracing for more competition for talent as India’s central bank prepares to issue new bank licenses for the first time in more than seven years. Religare Enterprises Ltd., controlled by billionaire brothers Malvinder and Shivinder Mohan Singh, said in August it may apply for a permit. 
  • The rate of employee turnover among junior staff has almost doubled this year to about 15 percent as an expanding economy bolsters job prospects, the person said. ICICI’s board will review the plan to introduce gardening leave at a meeting later this month, according to the person. 
  • V. Vaidyanathan, who was CEO of ICICI Prudential Life Insurance, quit in July to join Future Capital Holdings Ltd. Sonjoy Chatterjee, an executive director at ICICI Bank, departed in April to join Goldman Sachs Group Inc. as a managing director and co-CEO for India.
  • The requirement for so-called gardening leave would apply to about 120 employees at the level of joint general manager or above, the person said, declining to be identified because the deliberations are private. ICICI has about 53,000 workers. 

Disclosure: Long IBN

Stat of the Day: Empire Manufacturing Jumps

The Empire State Manufacturing Survey indicates that conditions improved in October for New York State manufacturers. The general business conditions index rose 12 points, to 15.7. New orders jumped to 13 suggesting the index will remain strong the rest of the year. Especially considering that inventories plunged to -11.7 suggesting that corporations were caught off guard with a rebound in the economy during September. The increase in employment coincides with the better employment numbers seen since the beginning of September as well. 

All in all a very solid report that suggests the economy is pulling out of the fog from the summer. The index is now signaling strong growth in manufacturing has returned. The only question is whether profit margins are beginning to be squeezed with employment hitting 21 and now above the general conditions. If employment continues hotter then general business conditions, corporations might face costs growing faster then revenue. Something to watch.

Thursday, October 14, 2010

CRB Index Components

As the CRB Index grabs more and more headlines attention, an investor needs to understand the commodities that make up the index. For more then 50 years, the CRB Index as served as the most widely recognized measure of the commodities markets. The index is comprised of 19 commodities with agriculture comprising 41% of the index followed by energy at 39%. Crude oil is by far the largest individual component at 23% followed by numerous commodities at 6% such as Copper, Corn, and Live Cattle. Yes, that's correct. Live Cattle ties for the 2nd biggest component in the index.

The index likely does an exceptional job of capturing the cost changes to the market. Crude oil is by far the largest commodity used and hence the largest expense to the US economy. For investors though, this index doesn't exactly capture the investment environment. Precious metals such as Gold make up only 7% of the index. From an investment standpoint, most of the commodities offer equal opportunities for investment. An investor can either invest in oil, nat gas, copper, corn, or gold. An equal weighting would be more useful from that standpoint. Do I really care whether Live Cattle go up or down?

Knowing the size of crude oil in the index, its little wonder now that the index is at a 52 week high but no where near the 2008 highs. Oil remains significantly lower while gold has hit new highs and copper nears that high. The picture is clearly skewed towards inflation and not investment results from the sector. Just something to consider when reviewing the index chart or results.

Also, interesting is that the index use to include lard, oats, and potatoes of all items. Lard! Really?

List of the 19 items in the index:

Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat


China's Effect on Copper

Great summary information from the CEO of US Global Investors on the impact of China on Copper supplies. Copper is expected to be in shortage in 2011 due to the return of growth in the US and Europe plus the unsatiable demand in the emerging world.

Amount of copper used in common household items:

  • Average single family house - 439 pounds
  • Air conditioner -52
  • Refrigirator - 5
  • Automobile - 50
As can be seen, growing domestic demand in emerging markets for homes, air conditioners, and automobiles will strain the supply of copper. Supplies are already dropping even though home building in the US is near historical low levels. Imagine when the US begins even normal levels of construction come 2011 or 2012.

 Below is a chart from BMO Capital on the imports of copper from China. The numbers continue to surge making China by far the dominant influence on demand.















Lihua International (LIWA) remains incredibly placed to take advantage of the looming shortage of copper and demand in China. As a Chinese recycler of copper and maker of refined copper, this company should see soaring demand. Expectations are for over $2 in earnings next year yet the stock is trapped at $9. Load up on dips.

China Roars For 6 Straight Days

The China stock markets have been on a major 6 day winning streak taking the Shanghai Index from 2,600 to nearly 2,900. Though the below chart doesn't capture the roughly 0.6% move overnight, this index has been on a major rally. Its likely to end soon as the RSI and CCI numbers already show overheating without the lastest results included.

For the short term, the market could easily see a small correction but longer term this index is likely going back up to at least 3,100 which is where it was at back in April. The China domestic plays like LIWA and PUDA remain the best plays as they still haven't rallied much especially compared to their very strong fundamentals. US stocks that benefit from a stronger China have mostly rallied very strong such as FCX hitting 100 today. Met coal plays such as ANR and MEE haven't run as much so they might provide the best upside from a domestic play. Or possibly a company like TEX might provide the best upside as crane sales have remained weak and if China perks back up that might drive demand in that sector.


Wednesday, October 13, 2010

Intrade.Com Shows Nearly 50% Chance of Republicans Controlling Senate

In a dramatic surge, Intrade.com now suggests that the Republicans might just get control of the Senate. The odds have been relatively low most of the year until recently. Intrade shows a nearly 46% chance of Republicans gaining control up from a lowly 30% chance back on October 1st. This dramatic change is clearly being seen in the stock price surge in October. Less power for Obama means higher stock prices for a market trading at low valuations.

Apple Clears $300.... Still Cheap!

All the news today is about Apple (AAPL) clearing $300. Ok, maybe just the financial news because of the heroic rescue of the trapped Chilean miners. Its amazing though that the financial media still becomes fascinated with these psychological numbers. What does $300 really mean? Does it tell an investor anything about value, market cap, or future gains? No, no, no.

Typically it can be assumed that a stock with a price tag above say $100 and likely $300 has had huge gains in the past and AAPL clearly meets that criteria. More importantly though what is the PE, growth rate, and market cap? Two of the previous three items suggests that AAPL has plenty of growth ahead. The third questions that permise.

First, AAPL only trades at a forward PE of 17 based on average earnings estimates, but when using the more likely high end numbers around $22/share the PE drops to below 14. Historically low for a stock with the growth rates of AAPL. Second, revenue is expected to grow some 30% next year and roughly 20% over the next 5 years. Earnings could grow at much higher levels. PEs don't typically trade below these growth rate numbers suggesting investors are still stuck on a assumed high stock price and not the real valuation. Third, the market cap now places AAPL as the second biggest company in the SP500. When a stock reaches such lofty sizes it becomes very difficult to sustain that growth. Large companies becomes targets for rivals and regulators. So far they have managed to sidestep those issues and they benefit from relatively low market share in huge markets. They aren't the dominate player in personal computers or wireless handsets so they haven't ran into saturation issues.

Keep an eye out for when AAPL its the size wall, but until then the stock remains incredibly cheap for their growth rate. The market correctly understands that being a large company that growth can't be sustained for every, but for now AAPL will continue generating huge cash flow reminding us of another benefit to buying the stock. A huge horde of cash and strong cash flow greatly reduces the enterprise value of the company.

Ignore the stock price and pay attention to the value. AAPL remains cheap at $300+.

Tuesday, October 12, 2010

Why is FASB Reconsidering Mark- to-Market?

The Financial Accounting Standards Board (FASB) is looking into a possible reimplementation of the mark to market rules that just about destroyed the financial system in 2008. How is it possible that they would even reconsider this concept? Didn't the recent flash crash further remind us that markets can be very irrational short term? Markets can and will become disconnected from the financial benefits of the instruments they track. In some instances they can be an indicator of future cash flows of the fixed income instruments they track, but do we really want to use a system proven to be wildly inaccurate just because the other main option gives management leeway to manipulate data.

Data manipulation falls into the category of fraud and hence the management team can be fired and prosecuted. All detriments to widespread adoption of false reporting. Why doesn't the FASB instead work on solutions that would reduce the ability to engage in fraudulent reporting? Instead they are focused on a system that has no solution when markets go awry like in the financial crisis from 2007-09. Banks were left recording huge unrealized loses on instruments that ultimately paid off. Instruments that never quit paying. Maybe a system where companies record results based on the economic situation, but they 'highlight' how the market is trading the instruments. It could highlight to investors the risks with the company, but it wouldn't require unnecessary capital raises.

Supposedly the mark to market system was implemented so investors could be protected from fraud but instead we got diluted to oblivion as bank after bank had to raise capital at the lows of the market. The repeal of the literal implementation of the law is likely what created the bottom in March 2009. When companies where able to quit taking loses on illiquid and forced trades, the market turned on a dime. Why is FASB even rethinking this issue? Any meaningful implementation will be bad for the markets.

One of our favorite analysts (actually a hedge fund manager now) Tom Brown wrote a great letter to FASB that he posted on bankstocks.com. The details on State Street is the paramount problem with mark to market. How are investors protected if the system can cause a 59% decline in a stock price? All for a charge that wasn't real. Especially considering the potential dilution. Its one thing to have your stock drop, but it's a completely different one for it to be diluted to heck because of a bad rule. You'll never recover that investment once its diluted at the bottom.

In the fullness of time, furthermore, we now know that the collapse in prices during the credit crunch was largely irrational and the attendant charges to capital pointless. There’s no shortage of examples to illustrate this, but one that stands out is State Street’s experience after it reported its earnings for the fourth quarter of 2008. In the report, the company disclosed additional losses of $3 billion in its fixed income portfolio. The losses arose entirely from the credit panic, not from credit issues in the portfolio itself. Still, speculation immediately arose that the company would have to do a big capital raise to shore up its financial ratios, which in turn put enormous pressure on its stock. The more the stock fell, the larger the estimate became of how many new shares the company would have to issue, which in turn pressured the stock even further. Result: thanks to the bogus “loss” State Street had to report, its stock dropped by 59% in a single session. All because of a misguided accounting rule. Since then, we now know that the company’s fixed-income portfolio encountered no undue credit problems. As the credit markets have recovered, the company has reversed that entire fourth-quarter charge. What, exactly, is the point? 
FASB requested feedback by September 30th so it'll be interesting to see what comes of their proposals. Unfortunately they seem uninterested in listening to investors even though they are they people most impacted by these rules. Check out marktomarketdebate.com for more info on the debate. Stay tuned as the debate heats up.

Goldman Sachs Triple Top Breakout?

Very interesting to see the stock of Goldman Sachs (GS) appear headed to a triple top breakout when just about every analyst has downgraded its earnings potential due to reduced trading profits and market activity. Not to mention that the stock is ramping prior to earnings just a week away on the 19th. Also, note the higher lows in the chart pattern suggesting further strength in the stock. The lower moving averages are about to cross the 200ema which is another very bullish sign.

Though my portfolios have no position in GS, the stock is a leading indication of financials and the market in general. Right now the stock says the market is headed higher. Our favorites in this general area remain MF Global (MF) and International Assets (IAAC) both of which have been breaking out lately as well.


Monday, October 11, 2010

MF Global Looks to Take Advantage of Develeraging By Larger Financial Institutions

At least that's the goal that new CEO John Corzine has outlined for MF Global (MF). What exactly that entails it's probably much harder to grasp and understand. MF clearly wants to move into investment banking and money management sectors left dismantled by the financial regulations and credit crisis. It's also areas that Corzine and his new COO likely understand following their careers at Goldman Sachs (GS). Whether they can be successful pushing MF into these competitive areas seems up in the air.

According to FT.com report and news from an investment conference last month, Corzine made the statement that MF hoped to double to 4,000 employees within a couple of years from an aggressive move into investment banking and money management. Now that's a very aggressive statement and very atypical in the financial sector these days where most institutions are expected to decrease in size. MF has the potential to skate under the radar and take share from bigger rivals that face much stronger regulation scrutiny. Hence, the initial position into MF on September 30th [Trade: Bought MF Global]. While the targets of MF seem overly aggressive and likely wrought with risk, Corzine has the connections and experience to make this happen providing MF with the risk/reward potential Stone Fox finds appealing. 

The Q2 report was also encouraging showing a profit for the first time in 5 quarters. Corzine was able to initiate a restructuring that helped reduce compensation ratios while also increasing revenues. An impressive start to his tenure, but now its still to be seen whether they can capture new business. MF has a global background and vast experience in the natural resource space providing an ideal platform for growth.Capturing that growth won't be easy, but unlike the analysts in the FT.com article I expect MF to have less trouble breaking into the industry.

All eyes will be on execution over the next 12 months. Not being related to a financial crisis institution will surely help but its possible that clients and the media could paint a negative picture of a firm now entrenched with Goldman Sachs executives. Time will tell, but for now the huge potential reward far outweighs any downside risk with the stock in the mid $7s.