Thursday, June 30, 2011

Stat of the Day: Chicago PMI Smashes Double Dip Theory

The Chicago PMI came in today at a seasonally adjusted 61.1 much higher than expectations of a faltering economy. This number showed a nice jump from the 56.6 in May. More importantly the Production and New Orders components accelerated.

With such a strong June report for the manufacturing sector in the Chicago area, the soft patch theory is starting to hold water. Production surged to 66.9 from 56.0 in May while New Orders jumped back over 60 from a very low 53.5 in May. These numbers jive with the rebound in industrial production in Japan during May and June following the disaster in March.

Watch for a stronger ISM Manufacturing report tomorrow. Prior to the Chicago number today, the market expected a rather weak 51.8 which was a drop from last month. Now it wouldn't surprise us to see the number ramp up from the 53.5 in May. The correlation has been very strong in the past. Could a 54-55 number be possible?

Wednesday, June 29, 2011

Myspace to be Sold for $35M

The sell of Myspace by News Corp for $35M after buying the company for $580M around 6 years ago should signal to investors to tread carefully with the current hype with social media companies.

Even going back to Yahoo (YHOO) and how ten years ago it was the hot internet property. In a way, these companies have an initial spurt of business when they become cool with the early adopters or younger generation. Unfortunately like in the case of YHOO or Myspace at some point they become outdated or just can't keep up with the cool new features.

The four social media companies in the process of IPO'ing in the next year all face significant risks to valuations that seem very obsessive compared to existing companies.

Facebook - might not IPO until 2012. Though they are the dominant player in social media they face a significant issue with remaining the focal spot for youth. Youth originally dominated the site, but its recently seen a huge influx of adults. We all know that kids don't want to hang out with their parents so this places a huge concern that kids will flee thee site for something hipper and younger. Heck, maybe Myspace has a chance to reel this kids back. Recently valued at $70B with a likely IPO next year valuing them at over $100B.

Groupon - Earnings are meager and the company faces huge competition from fellow IPO candidate Livingsocial not to mention Travelzoo (TZOO), Google (GOOG), and others. A $20B valuation seems absurd considering the facts and history.  How much margin can be made on 50% off discounts? YHOO is only worth $19B for comparisons.

Livingsocial - Have yet to see financials, but the theory is that they'll be similar to Groupon if not worst considering the 2nd tier company usually has much lower margins.

Zynga - Zynga is very profitable and a valuation around $15B would likely make them the most reasonable of the group. Revenue should exceed $1B this year, but competition going forward will be fierce from late arrivals to social games in the likes of Electronic Arts (ERTS) and Activision (ATVI). Hard to imagine that  Zynga valued at $20B would be worth more than the combined ERTS and ATVI. Especially nobody considers Zynga to have any special technology expertise other than having a couple of major winners while the big boys weren't looking.

While I wouldn't suggest that anybody short these IPOs out of the gate, one would have to expect the majority of them will eventually blowup. Heck Netflix (NFLX) is only worth $13B and they've had a huge history of analysts calling them overvalued.

Now all four of these companies are going to be worth more than NFLX? Facebook is only one that can justify such a valuation at this point in its history. But it might want 10x that. Wow!

Heck, I'd likely invest in Myspace before any of these overhyped companies!

Disclosure: No position in any companies mentioned. Please review the disclaimer page.

Spreadtrum Communications Survives Short Attack: Turning Point for the Sector

Spreadtrum Communications (SPRD) became the next in a long line of Chinese stocks to be accused of improper accounting. The stock initially plunged $4, or 34%, but then the market got a surprise as the stock rallied back to breakeven.
A couple of weeks back, our article on Chinese frauds suggested that when the clouds finally lifted on all these fraud allegations, the surviving companies would soar. SPRD might be the signal that the constant allegations are finally being overdone. Clearly the market doesn't believe this one as it lacks the merit of the previous cases against Longtop Financial (LFT) or Sino-Forest (SNOFF.PK).

Read the full article at Seeking

Disclosure: No positions in stocks mentioned. Information is provided for informative purposes only. Please review the disclaimer page. 

Tuesday, June 28, 2011

Sector Review Since the Financial Crisis: Life Insurance

This is the 4th in a series of articles on stock sectors that have struggled to recover from the levels prior to the financial crisis. (See the first three here: 123)
This article focuses on the life insurance and retirement financial services sector. As in most sectors, these companies don't have the exact same business models making broad comparisons an initial step of research.

Read the full article at Seeking Alpha.

Disclosure: Long CB, HIG, LNC in client and personal accounts. Please review the disclaimer page. 

Friday, June 24, 2011

China Jumps 2%, US Market Looks in the Wrong Direction

Still amuses us that the market is more focused with Greece than China and/or Japan. China is the number 2 economy and it's stock market has slumped since mid April with fears of rate tightening caused by inflation. With the significant drop in oil prices over the last few months, those inflation fears are starting to subside.

Japan recently dropped to the number 3 economy and was devastated with the March earthquake and tsunami. The combination of which sent industrial production down some 15%. Production is expected come close to the February levels in June.

Instead of looking at Japan coming back online and China beginning to push back to growth mode, the SP500 is slumping for what would be an 8th straight week  if not for a minuscule gain last week. What is concerning the markets the debt problems in Europe and more specifically Greece. Yet, both the EU and IMF have pledged to ensure that Greece doesn't fail and cause and collapse of the financial markets in Europe.

With the Lehman Brothers collapse fresh on everybody's minds, the leaders just aren't going to allow it to happen. Yet the market continues to fret over such a collapse driving risk assets down in many cases as much as 30%. They should be set to rally possibly next week and likely a major summer rally in July. The Greece issue should be resolved next week and all indications are that earnings will remain strong.

Back to China. The Shanghai Index jumped 2.16% today placing it back to mid-May levels. Another similar jump and the market could quickly retake the 200ema and move into a very positive stance. The China market has been flat to down for 2 years now even though their economy has grown some 10% a year. China is ripe for a major rally and a halt in interest rate hikes could just be the signal for the rally.

Next week watch the China market and the Japan recovery for clues on global growth and ignore all the news on a Greece bailout that has already been worked out behind closed doors.

Accenture Trades Close to All Time High, Company Continues Buying Shares

After the close on Thursday, Accenture (ACN) reported earnings that surpassed earnings estimates. The company continues to report strong numbers with 21% revenue growth and 27% earnings growth.
More important to us is that all though the stock traded at an all time high during the quarter at $58.21, the company bought back $644M worth of stock at an average price of $56.50. The stock remains a top five pick in our Net Payout Yields (NPY) portfolio, which invests in stocks with high yields comprised of dividends plus stock repurchases.

Read full article at Seeking Alpha

Sector Review Since the Financial Crisis: Engineering & Construction

This is the third in a series of articles on the performance of stock sectors since the financial crisis. The first article focused on steel producers while the second article was on women's apparel.
As with the first two articles, the goal is review a sector where stock prices remain drastically depressed from highs seen prior to the financial crisis back in 2006-2008. In some cases, this might be a sign that the sector was just overvalued back then and hence the current price is deserved. In other cases, this might signal that the sector has plenty of room for recovery especially if the global economy gets over the current soft patch.

Read the full article at Seeking Alpha

Disclosure: Long FWLT in client and personal accounts. Please review the disclaimer page for more details. This information is provided for informational purposes and should not be relied upon as investment advice. 

Thursday, June 23, 2011

Sears Holdings Files to Spin-off Orchard Supply Hardware Stores

Interesting news from Sears Holdings (SHLD) after the close today. SHLD announced plans to spin-off the 80% controlling interest they have in Orchard Supply Hardware to existing shareholders. Must admit I didn't even remember that SHLD owned this asset.

This is interesting as shareholders have been waiting for SHLD to unload the numerous assets they have trapped in the losing retail concepts of Sears and Kmart. Its also compelling that they've decided to spin the assets out instead of outright selling the company and possibly using the cash to repurchase more stock. A lot of shareholders have suggested that SHLD should spin off the real estate assets in order to unlock value. Possibly this is the start of things to come.

According to the PR, Orchard Supply Hardware has 89 full service hardware stores in California which also explains why I have no knowledge of the stores as well. The news is limited at this point so the flow over the next few months will be interesting. Not to mention that a lot of these corporate spin-offs can be very profitable as they most likely have been ignored with the focus on the big losing concepts.

Stay tuned.

Disclosure: Long SHLD in client and personal accounts. Please review the disclaimer page. 

Sector Review Since the Financial Crisis: Women's Apparel

This is the second in a series on stock sectors that have yet to recover from their pre-financial crisis levels. The first report focused on domestic steel producers (Are Steel Stocks Poised to Recover?) that aren't anywhere near to recovery levels. I pointed out in that article that a major user of steel such as Caterpillar (CAT) has had a fantastic recovery to new highs.

This time, the focus will be on the apparel sector and more importantly mainly women's clothing providers. Many of the high end retail providers such as Ralph Lauren (RL) or Coach (COH) or V.F. Corp (VF) have rebounded to new highs in 2011, easily surpassing the previous 2006/2007 highs. Whether it's because these companies provide higher end merchandise or focus on items that typically fall into the gift category or maybe it's even more of a focus on men that has helped these retailers; the stocks have all fared much better than the women's apparel sector. 

Read the full article at Seeking Alpha

Disclosure: Long LIZ in client and personal accounts. Please review the disclaimer page. 

Wednesday, June 22, 2011

Exporting Nat Gas to Reduce Oil Prices

Interesting comments from the CEO of Cheniere Energy (LNG) on the Mad Money show. The debate continues to rage on whether the US should export the abundant natural gas supplies now provided by shale drilling. Naturally the US would want domestic supplies to fuel domestic consumption, but its apparent that the government isn't going to come forth with policy that encourages the use of nat gas for domestic vehicles.

The next best alternative is for the domestic producers to export that nat gas to foreign markets where not only can they obtain higher prices, but also the use of nat gas by markets more willing to replace gasoline in vehicles with lng would actually reduce the consumption of oil. In theory, this would reduce the prices of oil though it might just increase the prices of nat gas hence diluting the benefit to the US consumer.

The biggest benefit would be businesses in the sector exploring and drilling for nat gas that is now open to the global market. Employment would also pick up as these processes are labor intensive.

See the video below. It is a compelling point if truly extra supply of nat gas to the world market could help reduce the dependence on OPEC oil. Unfortunately though its going to take LNG until 2015 to have the capability to export.

Monday, June 20, 2011

Sector Review Since the Financial Crisis: Steel Producers

As the market has rallied significantly off the March 2009 lows, it's worth reviewing how sectors have performed over that time period. Some companies such as Caterpillar (CAT) have recently reached all time highs. Others like the steel sector have struggled to even approach those levels.

This will be the first in a series of articles reviewing sectors that remain significantly below the pre-financial peak. Some sectors might offer huge upside as their sector might join the rally while others might never recover. 

Real the full article at Seeking Alpha

Disclosure: Long X is client and personal accounts. Please review the disclaimer page. 

Friday, June 10, 2011

Buy This Met Coal Leader After a 30% Sell-Off

In January, Alpha Natural Resources (ANR) soared to a 52-week high around $68. Since then the stock has cratered some 30%. During that time frame, ANR snatched up Massey Energy (MEE) and now controls the largest domestic metallurgical reserves, enough to become the third largest in the world. (See The New Met Coal Powerhouse.)
So why has the stock been hammered from those January highs to the lows today around $46? Difficult to tell in this fickle market. The deal with MEE closed recently and the stock has just plunged during June. Maybe a bunch of MEE holders have dumped the stock upon the conversion to ANR shares. If so, this is the ultimate buying opportunity.

Read the full article at Seeking Alpha

Disclosure: Long ANR in client and personal accounts. Please review the disclaimer page for more details. 

Thursday, June 9, 2011

Suffering From Premature Accumulation

Great interview with Bruce Berkowitz of Fairholme Capital Management. Berkowitz was named Mutual Fund Manager of the Decade and has some interesting long term views on the market. Interesting that he shares some of the same stock picks as our more aggressive Opportunistic models.

Both Sears Holdings (SHLD) and Regions Financial (RF) appear in his top 10 holdings. His fund has suffered this year and with his voice suffering in the interview he made possibly the quote of the day "suffering from premature accumulation". Any portfolio manager knows that being early is the same as being wrong. Even if you eventually end up long term, being a year or two early can significantly hurt performance.

Berkowitz does seem too bullish on financials for us. Typically a market leader over one decade becomes a laggard the next. Similar to how the tech sector soared in the 90s, then struggled after the internet bust. Stone Fox remains bullish on financials such as Hartford Financial (HIG) and Lincoln National (LNC) trading at 60% of book value without the regulatory issues of Goldman Sachs (GS) and Bank of America (BAC).

Video is worth watching. Great interview.

Disclosure: Long SHLD, RF, HIG, LNC in both client and personal accounts. Please review the disclaimer page for more details. 

Wednesday, June 8, 2011

Investment Report - June 2011: Net Payout Yields

The Net Payout Yields Model had a positive month on a relative basis, but on an absolute basis the model lost money. The model was down 0.15% versus the 1.35% drop for the SP500. More verification of how this model can outperform in down markets. For 2011 as of the May 31st close, the model was up 7.53% versus 4.53% for the SP500.

The model spent the month of May switching out of low yielding stocks and moving into higher yielding stocks. As the model is designed, when the Net Payout Yield (combination of dividends and stock buybacks) declines its a sign that the stock might be fairly priced compared to earnings and cash flow or just the visibility of management is more negative about the future. Naturally as a stock goes up, the dividend yield will decline making a stock less attractive. Also, the companies are less likely to engage in stock buybacks when a stock rises in price. This makes the model less emotional and a sleep well at night concept. Also as a stock in the model declines, the stock has yield support and likelihood of higher buyback purchases.

Proctor & Gamble (PG) and Millicom Cellular International (MICC) were both sold during May. Both stocks had huge gains over the last couple of months lowering yields. In addition, in the case of MICC the company decided to only be listed in Sweden going forward making the stock a required sell.

Three stocks were bought for the model. Raytheon (RTN) had been hurt by the fears of budget cuts in the defense sector pushing up the yields into the top of the list. RTN currently pays a 3.5% dividend and has an equally impressive buyback program. Annaly Capital Management (NLY) is a REIT that has a dividend yield over 13%. Activision Blizzard (ATVI) is a developer and publisher of video games. The sector has struggled with the move away from consoles to online gaming where new competitors like Zynga have gained a lead. The company has a small dividend around 1.4%, but the company has a major stock buyback in place boosting the total yield to near 10%. With all three companies having yields around 10%, its a sign that the market is focusing too much on the negatives and ignoring the cash generation ability of these companies.

The model should expect some more rotation in June as numerous other companies in the retail, services, and industrial sectors have very attractive yields now.

As previously mentioned, while the market has been weak the last few months, the weakness actually benefits this model where stocks are able to buyback company stock at lower levels and dividend yields naturally rise. With a decent yield in the 2-3% level, the model gets paid to wait.

Disclosure: Long ATVI, NLY, and RTN. Please review the disclaimer page. 

Tuesday, June 7, 2011

Investment Report - June 2011: Opportunistic Levered

May was a very rough month for the Opportunistic Levered model. It severely underperformed the market as China specifically and emerging growth stocks in general were hit much harder than the overall market. This trend will likely continue into June, but eventually will provide great upside potential as most of the stocks in these areas remain extremely cheap.

Expanded Track Record
Recently the track record was expanded back to January 30, 2009 adding a little over a year to the previous record. As one can see, the model can be very volatile, but the end result has been very good for anybody that remains invested. Sometimes an investor has to accept wild price swings in order to make long term gains. It is not uncommon for top stocks to drop more than 25% before eventually rebounding to higher prices. At times it can be worthwhile to cash out to avoid losses such as the recent sell of Limelight Networks (LLNW). The sell limited losses without incurring material capital gains impacts as the stock was sold within the general range of the purchase price. Other times though, a sell could trigger a large capital gains event that would reduce any benefits of protecting short term losses. In those cases the volatility is worth it. Ideally this model will hold winners for multiple years as the story plays out.

Market Review
The market in general has been weak as it ended May on a rare five week losing streak. Individual emerging growth stocks were just crushed in many cases. The fears abound regarding a double dip recession, even though, the likelihood according to the New York Fed is less than 1%. This is due to the very positive Treasury Spread or yield curve as can be seen in this chart. Recessions just don't happen unless the Fed reduces liquidity causing short term interest rates to move higher than long term rates. In addition, the earnings yield on the SP500 stocks remains higher than the yield on the 10 year Treasury bond suggesting investors obtain a higher yield in stocks.

The Chinese stocks in this model continue to get crushed even after a horrible April. In hindsight, selling and waiting for the fraud fears to settle would've been a better move. Both ChinaCache (CCIH) and Lihua International (LIWA) remain extremely undervalued as fear prevails in this sector. It appears more panic than reality as this point as both companies have been vetted by numerous analysts. Puda Coal (PUDA) remains halted as the company continues to investigate the alleged illegal transfer by the Chairman. The subsequent $12 buyout off is also being reviewed by the special committee and remains a legitimate option with the potential for a higher offer. Several indications exist that the Chairman is raising cash selling other investments suggesting a real opportunity to reclaim the money and maybe even profit from this stock. Time will tell as these Management Buyouts in China remain hit and miss. At the end of the day, these companies could obtain higher valuations as time passes and the scrutiny subsides leaving the cream of the crop to rise. The situation reminds us of the financial crisis where all stocks were crushed without discrimination. Now the remaining strong companies have higher earnings and trade at higher valuations than prior to the crisis. This too could happen to the China stocks that survive the fraud scare.

Weak Economy or Japan Induced Slowdown?
The growing consensus seems to be that the global economy and especially the US is moving towards a severe slowdown if not a double dip recession as mentioned above. On the contrary, any slowdown seems directly related to reductions in the supply chain from the Japan disaster in March. The auto sector had significant hits in March and April, but it appears that the sector will be on the mend in June as even Toyota (the most impacted auto company) rebounds to 90% production rates.

Several stocks including Manitowoc (MTW), U.S. Steel (X), and Freeport McMoRan (FCX) were added to the model to benefit from global growth and the rebuild in Japan. While the theme has been slow to play out, the recent rebound in copper gives us confidence that the recovery is now underway in a meaningful way. Dr. Copper bottomed out in mid May and has continued to rally into June providing strong evidence of growing demand.

Stocks remain cheap. The Fed remains accommodative regardless of whether QE2 ends in June. Market psychology is slowly turning from bullish to very bearish.  The combination suggests staying fully long with limited hedges as the opportunity ahead could match the rally off the 2009 lows.

Disclosure: Long all stocks mentioned in personal and client portfolios unless otherwise stated. Please review the disclaimer page. 

Streaming Profits of Soda Might Just Sink Shorts

SodaStream (SODAreported an impressive 50% gain in Q1 revenues to roughly €45.1M. More importantly, SODA reported a 141% increase in adjusted net income to €5.3 Million. Impressive growth numbers, but the debate rages over whether SODA is a fad or a future consumer powerhouse. See Cramer vs Greenberg challenge on CNBC to see the debate.
To back up a little, SODA is a leading manufacturer of home beverage carbonation systems. These systems provide an easier and greener way of consuming soda at home. According to the taste test, the SODA product even tastes better....

Read the full article at Seeking Alpha

Disclosure: No position in any stock mentioned. Please read the disclaimer page. 

Monday, June 6, 2011

No Double Dip According to Treasury Spread

Mark Perry's Carpe Diem blog had a great little post on the recession predictive ability of the Treasury Spread. The New York Fed has a great chart that I've used in the past that predicts the possibility of a recession over the next year based on the treasury spread between the 10 year bond rate and the 3 month bill rate.

As the chart shows, the possibility of a recession is below 1%. It just doesn't seem to happen when the treasury spread is this large. The market is increasing worried about a recession even though it just isn't likely under the current monetary circumstances. Clearly when an economy hits a soft patch as it did during April and May, the slant of the yield curve is hugely important in determining the next move whether up or down.

With such a positive curve at over 3%, corporations and investors are encouraged to take on risks and in essence buy the dips. While a negative sloping yield curve causes the reduction in borrowing and business expansions hence leading to a recession. Remember, savers get zero interest putting money in banks. They either have to loan it to corporations for expansion or make investments in businesses or the stock market in order to enjoy a decent return.

Based on the NY Fed chart, it seems very apparent now that the economy is in nothing more than a soft patch caused by the combination of the Japan disaster and the bad weather not only in the US but around the world such as the flooding in Australia.

What I find truly amazing is all the negative comments back on the Carpe Diem post. The facts of the chart and logic speak very loud and clear. Such negative psychology makes me more bullish. It appears that a vast majority are readying for a double dip just like in 2010.

The market has now been down for 6 straight weeks counting this week. Also, the Dow/SP500 have had 4 straight losing sessions for the first time going back to August 24th, 2010. Interestingly that was right before the market surged and risk assets had a huge September and didn't really stop until February in most cases. Could this be round 2?

Market is cheap, monetary policy is insanely positive, and now investor sentiment is turning very dour.

Sunday, June 5, 2011

Toyota Returning to 90 Percent Production Levels

In a sign that the global economy will return to normal production levels in June, Toyota now expects to hit production levels approaching 90 percent. Considering Toyota is the largest producer in Japan, this return to normalcy should shift the global auto market back into balance. Competitors could likely make up any difference at those levels.

After weak May manufacturing numbers spoked the market, the June numbers should be predictably better. The market doesn't act like the facts matter, but the data should naturally improve considering the major impact to both jobs and the growth numbers have been the auto sector. The industry will undoubtedly see higher numbers possibly approaching February numbers prior to the quake.

Outside autos, no evidence exists that a significant slowdown is under way around the world. Heck, even Dr. Copper has lurched back to $4.13/lb signaling strong demand. Copper bottomed out in mid May most likely when global production especially in Japan saw the beginning of a rebound in the supply chains.

As the Fed remains super easy with interest rates at all time lows and the yield curve remains significantly positive, all of the fears of a double dip recession are very off base. In just about all cases it requires, the Fed to cut off liquidity in the markets to cause a recession. Its the lack of liquidity when an extraneous event hits, that eventually takes down the market. In the case of the Japan disaster, this only causes a pause in the market as the low interest rates encourages investment and not retraction. Guess its natural for the market to panic, but all the parts to the puzzle exist for a significant rally into year end.

Via CNBC report:

  • The president of Toyota Motors said on Saturday he expects the automaker to resume full production globally in November and its Japanese output is expected this month to recover to 90 percent of levels seen before a March earthquake.
  • That more optimistic outlook compares with a prediction last month for production to return to 70 percent of normal.
  • Because Toyota builds 38 percent of its cars in Japan compared with a smaller 25 percent at Nissan Motor Co Ltd [NSANY  19.16    0.01  (+0.05%)   ]and Honda Motor Co Ltd [HMC  37.51    -0.02  (-0.05%)   ]the impact at Japan's biggest auto company has been greater.
  • n contrast, South Korean rivals Hyundai Motor and Kia Motors posted double-digit sales growth and a record-high combined market share last month in the key market, putting their combined U.S. sales almost on par with that of Toyota.

Thursday, June 2, 2011

Joy Global: Multi Year Expansion

Joy Global (JOYG) reported analyst beating quarterly numbers prior to the market open this morning. JOYG is the worldwide leader in high-productivity mining solutions. There report is very useful in gleaning insights into the worldwide mining sector and specifically coal and copper.

Throughout the earnings report, JOYG talks about record demand for equipment and commodities and a limited supply whether due to lower ore grades or delayed mine expansions from the financial crisis. Regardless of the reasons, it appears that mining companies are finally moving forward with plans helping JOYG reach records in bookings and shipments.

Considering that our models are big investors in coal and copper stocks, its always interesting to see their outlook on those markets. They see limited excess mining capacity today and hence see strong fundamentals even in a slower economic growth environment.

Also interesting is not only the data on China restocking, but the increased coal demand expected from Japan and the rest of Asia. Japan is shifting the nuclear volumes to coal and SouthEast Asia is adding some 35 GW of new coal-fired power that will limit their ability to export supplies to China. This all adds up to huge benefits for the recently closed merger between Alpha Natural Resources (ANR) and Massey Energy (MEE). The combined ANR will have major export capacity and the size to be a market driver.

Some highlights from the JOYG PR:

Company Highlights:

  • Second quarter bookings increased 46 percent to $1.5 billion and net sales increased 19 percent to $1.1 billion, compared to the same period last year. 
  • Operating income of $234 million was 22 percent of sales, compared to operating income of $181 million, or 20 percent of sales, in the second quarter of fiscal 2010. Net income for the second quarter was $162 million or $1.52 per fully diluted share, compared to $120 million or $1.15 per share in the second quarter of last year.
  • “As a result of the strong market fundamentals and improved throughput from Operational Excellence, we are able to raise our guidance for the full year and now expect revenues to be $4.1 to $4.3 billion, up from $4.0 to $4.2 billion previously. We expect to get similar operating leverage on the incremental revenues, and therefore are raising our guidance for fully diluted earnings per share, which we now expect to be $5.30 to $5.60, up from $5.10 to $5.40 previously. This guidance does not include costs related to the LeTourneau acquisition. LeTourneau is expected to close by the end of June, and it will be immediately accretive excluding transaction costs and the higher level of purchase accounting charges typically experienced in the first 12 months,” said Sutherlin.
Market Outlook:

  • Power generation in China during the first four months of this year is up 12 percent from last year, and steel production is up 7 percent. Both power generators and steel makers have been reluctant to buy coal at prices that were elevated by the Australian flooding earlier this year, and therefore coal stockpiles have been depleted. The national average of coal stockpiles at power plants in China reached a yearly low of 13 to 14 days of supply in April. These low stockpiles are occurring at a seasonal period in which stockpiles are normally replenished going into the summer cooling season, and this is creating concerns about growing power shortages this summer. In addition, drought conditions in China are reducing hydro generation by 15 to 20 percent, and this should increase coal burn for replacement power generation. Although domestic coal production is up 11 percent year to date in China, this increase is in line with consumption increases and is not enough to reduce imports. As a result, imports are expected to increase for the remainder of the year. There was some evidence of that in April, with coal imports into China up 23 percent from the prior month.
  • India’s demand for seaborne coal also remains strong. India plans to double its rate of growth in power generating capacity between 2010 and 2012, with 78 GW planned to come on line during this period. India imported 70 million tonnes of coal last year, and this is expected to grow to 140 million tonnes by 2012.
  • Japan is now an additional factor in seaborne coal demand. The damage to nuclear plants in Japan as a result of the earthquake has caused the indefinite shutdown of roughly 7 GW of electricity generation. An additional 6 GW of coal-fired generation is already planned to come on line between 2011 and 2020, and it is likely that previously shuttered coal plants will be reinstated to replace the lost generation from nuclear power. Supply constraints will add further pressure to the seaborne markets. The Southeast Asian countries of Indonesia, Thailand, Vietnam and Malaysia are constructing 35 GW of new coal-fired power generating capacity, and this will redirect more of their seaborne capacity to domestic consumption.
  • Copper fundamentals are among the strongest of all commodities. Demand has broadened with recovery in the industrial sector of the developed economies, but China remains the major consumer of global demand. China copper imports have slowed this year, but inventories at the Shanghai Futures Exchange have dropped by half, which indicates that China is going through another cycle of de-stocking. China has a history of moving between periods of de-stocking and re-stocking, and it is expected that re-stocking will return in the second half of this year. In addition, China’s multi-year program to build out the electricity grid in the western provinces is expected to add 20 percent to its copper demand, and overall China demand is expected to grow 7 percent this year.

Disclosure: Long ANR, FCX, PUDA in client and personal accounts. These stocks will benefit from any growing demand in coal or copper. Please review the disclosure page. 

Wednesday, June 1, 2011

Japan Industrial Production to Roar Back

As world economies limp through weak data over the last two months, the market needs to look no further then Japan. After the March 11th earthquake and tsunami, industrial production plunged 15.5%. In April, it only bounced back 1%. While better then a decline, it was still a anemic rebound considering the huge plunge. Clearly signals of the short term impact to the global economy.

The good news though is that companies in Japan expect a major recovery in May and June. The May industrial production number is expected to soar by 8% and June up over 7.7%. Nearly back to the pre quake levels at that point.

  • Output rose 1.0 percent last month, below analysts' median 2.8 percent forecast, but manufacturers sharply increased their forecast for May, predicting output would rise 8.0 percent compared with the previous 2.7 percent forecast, data from the Ministry of Economy, Trade and Industry showed on Tuesday.
  • Companies expect the recovery to continue in June with production seen rising 7.7 percent, in a sign they are making headway in restoring supply chains and bringing back production lines idled by the disaster and power blackouts.
  • "Output will likely rise in the coming months as supply chains are repaired. The economy is expected to pick up in the latter half of the current fiscal year, as the Bank of Japan and many analysts project. But until around summer, growth will be sluggish."

These numbers seem to match up with the price of copper. Dr. Copper has rebounded recently after a weak couple of months. Before bottoming in early May, many analysts were expecting copper to swoon much lower after breaking $4/lb. As originally thought back after the destruction in Japan, copper could finally see the higher demand as Japan undergoes major reconstruction plans. Unfortunately the nuclear meltdown pushed the initial recovery back maybe a month or two partly contributing to the weak global manufacturing numbers.

See below chart showing how copper snapped back from what appeared to be a technical breakdown.

Now though investors are looking backwards at past data and apparently imperious of the disaster that took place in March and continued through April and into early May. Clearly the lag in reporting the data has investors misguided on the reasoning. Naturally the damage occurred in March so a report released on June 1st lacks the connection within the market mindset.

Sure the China PMI has been weak as the government has attempted a slowdown and the US ISM numbers had huge drops, but was it really anything but a temporary blip from the Japan disaster? Bespoke has a couple of interesting graphs showing how initial claims and ISM numbers were hit immediately after the Kobi quake as well backing up the concept that any current declines will be as temporarily as back in 1995.

Claims have already started backing off as the real time report shows evidence of an improving market as May ended while the ISM could likely rebound in June. The claims report tomorrow will be interesting as it could highlight further increases in demand from the Japan production rebound or point to further weakness in the global economy.

In our view, the sell off today and any further weakness is drastically over done. The economy faces very little risk with huge liquidity in the markets and a still very positive yield curve. The fears from QE2 ending have to almost be laughed at considering the Fed is doing nothing more than stopping the purchase of an increased amount of assets. At this time, they still have extremely low interest rates and will be reinvesting paid off principal amounts. Hardly a reduction of a lose monetary policy. Stocks remain extremely attractive.

Poll of the Day: Investors Positioning for a June Correction

At every turn of this market rally from the March 2009 lows, investors have been very quick to head for the exits and brace for a correction. Unfortunately for the correction hopefuls, it just isn't likely to happen when  a majority of people are prepared for a correction. Corrections happen when a majority of investors are willing to buy the dips and hence nobody is left to buy forcing the market to keep going lower.

According to this Fast Money poll over 60% of investors that responded to their poll question on May 31st are positioned for a June correction. Sure its only 4,700 investors, but its a good indication of the investor sentiment heading into June. The economic data has been weak of late, but it appears that most investors are already on the sidelines waiting for an event not likely to happen as only a limited amount of sellers remains.

Are you positioning for a June correction?
Yes... Greece non-starter, seasonally weak month.
No... global growth on good footing.
Total Votes: 4705
Not a Scientific Survey
Results may not total 100% due to rounding