Wednesday, September 28, 2011

Net Payout Yields Model Holding Up Well

The Net Payout Yields (NPY) model continues to perform well in this wild market. Naturally the model is down slightly for the year, but it has held up much better than the SP500.

The model invests in companies with over a $10B market cap and a heavy dose of dividends and stock buybacks. Similar to the Dogs of the Dow theory, the higher the yield the more attractive the stock.

If a company has enough money to pay a 5% dividend yield and a 5% buyback yield, than just maybe the market is overlooking its future potential. Any company with that much cash must be worth a second look. Instead though of spending hours upon hours of research, the model lets the management team provide the signals.

Not only is this more efficient, but it removes the emotion from investing. Sure a few companies might have bad management teams that are just wasting money, but in general it tends to work out that the company is signaling a brighter future for the stock than the market.

The model is only slightly down YTD while the SP500 is down 6.5% providing for a net outperformance of almost 6%. Not bad for a mostly passively managed portfolio and much better than a SP500 index.

The below results are pasted directly from based on their calculations. Future results can not be guaranteed.

Inception Nov 02, 2010 Manager* S&P 500 Avg Sub
Month to date (%) -1.54 -3.57 -1.68
1 month (%) -4.66 -5.68 -4.24
3 month (%) -8.12 -9.39 -
Annualized since inception (%) 2.07 -1.69 n/a
Since inception (%) 1.87 -1.52 n/a
Sharpe (annualized) 0.10 -0.09 n/a          

Tuesday, September 27, 2011

Business Down the Street Must Be Doing Bad

Great quote from the CEO of Manpower today on CNBC. Executive after executive has gone on television talking about how business remains strong. Clients are doing just fine, but somebody else must be having problems since the economy is supposedly lousy.

Our clients are telling us that business isn't that bad. It must be the guy down the street who has bad business.
The CEO even claims that Europe remains strong.  How is that possible?

According to him the conversations about business are vastly different than 2008 which remains our thesis. The market has priced in a 2008 scenario already even though it doesn't appear to be a possibility.

See the video below:

Disclosure: No positions. Please review the disclaimer page for more details. 

Is Sears Holdings Finally Turning Into a REIT?

According to this news last week, Sears Holdings (SHLD) has apparently made a major move on the long hoped for leasing of their under utilized real estate assets. According to the real estate website, it now has numerous leasing options available for retailers at 3,768 locations. Or nearly all existing stores.

The real estate options include the following:

Store-in-Store Leasing: Establish presence within Sears Holdings Corporation (SHC) store.
Outlots: Outlots to build new retail locations.
Demised space: Establish an independent presence adjacent to an SHC store
In-Line Leasing: Establish an independent presence adjacent to an SHC store
License business: Provide specialized product/service from a location inside an SHC store, fully integrated into operating platform
Specialty Marketing Opportunities: Strategic partnership to creatively reuse non-traditional space

Please read the full article at Seeking Alpha.

Disclosure: Long SHLD. Please review the disclaimer page fore more details. 

Monday, September 26, 2011

Buckeye Oil Billions

Most investors have probably already heard about the new oil potential in Ohio via the Utica Shale. Great article in Forbes about the potential for thousands of jobs in this struggling manufacturing state. Would imagine that many a laid off employee in the manufacturing sector could potentially shift to the oil services sector. Sure it'll take training, but the skill set would appear similar.

Now if Obama's job ideas would just include money for retraining unemployed workers instead of short term tax breaks. Why does the government always come up short term ideas?

Or maybe Obama could just come up with an energy plan to take advantage of the new abundant oil and nat gas resources in the US. Sure he can for through with his green energy plan, but that is a long term plan for 2020 or 2030. What this country needs is a plan to make it to the 2020s living off the fuels already available. 

On a cautionary note, the more I read about the oil shale plays including our recent investments in Eagle Ford plays Carizzo Oil & Gas (CRZO) and C&J Energy Services (CJES), the more I get concerned that oil shale will do to the oil industry what natural gas shale has done to the nat gas industry in the US. Remember that the Bakken is just now swinging into full speed and the Eagle Ford is ramping up so the Utica would be the 3rd major play kicking up the production in a major way. Don't forget about the Niobara as well. Definitely something to keep on the radar for the future.

Oil is a international market so maybe it won't be that impacted until foreign locations kick up production as well. Possibly not enough exists like in the domestically isolated nat gas markets to crush it.

Read the article for more information on the Utica Shale and the potential for jobs in Ohio. Per a industry study, the following economic impacts are expected for the state by 2015:

  • 200,000 jobs
  • $12 billion growth in overall wages
  • $22 billion increase in state economic output
Incredible especially considering these investments could decrease the energy costs to US consumers and make us more energy independent. No longer reliant on Middle East dictators not that friendly to the US. One has to wonder why the government isn't full speed forward on plans that would speed up production. 

For now, Stone Fox Capital hasn't come across any clear winners from this shale other than the normal companies involved in the other areas. CJES would probably benefit from the expanded demand fir its fracturing services. In fact, it wouldn't be a surprise to see them deploy new fleets 6, 7, or 8 in the Utica or Marcellus areas to expand from the current focus on mainly TX, OK, and LA.

Disclosure: Long CJES and CRZO. Please review the disclosure page for more details.

Tuesday, September 20, 2011

Rio Tinto Confirms Strong Commodity Demand

Interesting statement from Rio Tinto (RIO) ahead of an investor seminar. In summary, RIO continues to see strong demand for commodities not only now, but over the next 10 to 20 years. On the other hand, supply constraints remain due to regulatory issues, labor shortages, and geology constraints.

Based on continued strong demand and supply issues, one would think the stock would be trading towards not only recent highs but also all times highs. That person would be very wrong. RIO is in fact down some 20% from February/April highs and not even close to the highs hit in 2008.

The stock market disconnect just doesn't add up. Sure some commodities like Copper have plunged in the last few weeks, but prices remain close to all time highs. Clearly still at prices that suggest very healthy profits. One could easily argue that stock prices never reflected the commodity prices hit in the Spring.

Even more precarious is the surging stock prices on some momentum stocks like Apple (AAPL) or Chipotle Mexican Grill (CMG). Naturally these stocks benefit from lower commodity input prices, but you can't really get higher demand for their products and ultimately lower prices unless supply increases. That clearly hasn't and isn't going to happen.

The only conclusion is that investors have just rotated sectors short term, but they shall return soon enough. Emerging market and global growth stocks have been smashed. Funds continue to flow from the sector, but reality doesn't suggest now is the time to sell. The inflation fear should be subsiding ironically from the falling commodity prices.

Brent Crude remains around $110. Copper is still above $3.70/lb. The panic selling is absurd. Freeport-McMoRan Copper (FCX), Alpha Natural Resources (ANR), and Carrizo Oil & Gas (CRZO) remain our favorites to invest in with stock prices down big while commodity prices remain high.

Details of RIO statement via Marketwatch:

  • Albanese, in a statement ahead of an investor seminar in London and New York, said the company's long-term view of demand growth is unchanged, with demand for copper, aluminum and iron expected to double over 15 to 20 years.
  • "Our order books are full and pricing is strong, but it is noticeable that markets are somewhat weaker than they were six months ago," he said.
  •  "Demand growth remains high as the development of provincial cities ramps up and the longer-term outlook for Chinese demand is positive," he said.
  • Echoing comments made by executives at other leading global mining companies, Albanese said the speed that industry can supply new metals and minerals to the market is being limited by permitting delays, labor and equipment shortages and challenging ore bodies. Project financing also is tight because of the current market jitters, he said.

Disclosure: Long AAPL, FCX, ANR, CRZO. Please review the disclaimer page for more details. 

Sunday, September 18, 2011

Screw'd By Sears!

Nice to see Sears (SHLD) so involved in the internet and social media realm. This company has a split personality. Go into the stores and it seems like your grandfathers store. Check out the website and it appears like a new age company with a future.

As somebody said the other day, SHLD is attempting to become the (AMZN) with brick and mortar locations. Heck, if you can buy online and pickup at the store without really going into it they might just have a fighting chance of a solid retail future. Considering that I don't even count retail as part of the reason to invest in SHLD, any small contribution helps.

Nice creative Craftsman music experiment. Not what I'd expect from Sears!

Watch live streaming video from craftsmanexperience at

Disclosure: Long SHLD. Please review the disclaimer page for more details.

Friday, September 16, 2011

Materials Very Weak Today

Not only were materials weak, but anything to do with global growth such as infrastructure hit a wall today even with the market up .5%. Oddly utilities and consumer discretionary had a strong day.

FirstEnergy (FE) in the Net Payout Yields (NPY) model closed right at the 52 week highs hit in mid May. Amazon (AMZN) soared 5.5% after closing at a new 52 week high yesterday. It has now bounced from below $180 in mid August to nearly $240 now.

Global growth stocks such as materials, infrastructure, and emerging market stocks were very weak today.  Coal, copper, and crane stocks were smashed even with global markets up. What is this telling us? Maybe that global destruction is off the table, but global growth is still a concern. Investors appear headed for high dividend paying stocks as the NPY model was up nearly 1% while the Opportunistic model stocks were relatively flat.

Have treasuries finally hit bottom now that a Lehman type collapse for Greece appears off the table? Sure better to get a 4% dividend than a 2% ten year that might lose value.

Most of the global growth stocks have bottomed out, but many haven't soared off the bottom like AMZN, Ralph Lauren (RL) or even Apple (AAPL) that is headed to a 52 week high as well.

Below are charts of some of our favorite global growth stocks.

Alpha Natural Resources (ANR) a top 3 met coal company is making higher lows, but the stock was very weak this last week. Considering the stock is trading just below $30 from a high around $68 back in February the upside potential is very attractive.

Freeport McMoRan Copper (FCX) a leading copper producer hit new lows this week and failed to rally even with a market up 5 straight days. FCX faces particular strike issues at a few mines. The biggest concern is what happens when the market sells off.

Gafisa (GFA) is a Brazilian homebuilder that was under immense pressure from higher inflation in Brazil and rising rates. The stock made an attempt to rally a few weeks back after Brazil lowered interest rates. The stock was actually down this week, but it formed an inverse Head & Shoulders pattern that could signal a breakout if it holds this level early next week.

Didn't show the crane stocks but Manitowoc (MTW) and Terex (TEX) plunged this week. Not being able to hold the 10ema is very concerning though MTW has still held the early August lows.

All of these stocks depend to a major extent on the growth in China. The Chinese stock market has been horrible this year and hasn't rallied like the US. Note how the Shanghai Stock Exchange was down this week and only up .13% today. Apparently the above stocks are following the lead of China. Whether China bounces Monday morning might be the key to these stocks next week rather than the US market.

Disclosure: Long AAPL, ANR, FCX, GFA, MTW, TEX. Please review the disclaimer page for more details.

China Internet IPOs: Approaching One Year After The Boom

At the end of 2010, China internet stocks saw a surge in interest leading to some rather magnificent IPO pops. The next Facebook, Amazon (AMZN), Akamai (AKAM), and many other leading tech companies were launched onto the US markets at sometimes very expensive prices. Investors were eager to obtain the next big thing from the fast growing China economy. Back in April I wrote about how investors should beware of the meteoric rise in the below four IPO stocks. [See China IPOs Gallop Out of the Gate: Time to Buy?]

Unfortunately as months have passed, the picture isn't so bright for the sector these days. The problem relates to the distrust in China stocks in general due to numerous fraud allegations that hit the reverse merger sector. Then some previously thought to be legitimate China stocks like Longtop Financial and Sino-Forest were accused of frauds causing even the IPO stocks to come under question. Combine that with high valuations and the stocks have plunged since the post IPO pop.

Read full article at Seeking Alpha.

Disclosure: Long CCIH. Please review the disclaimer page for more details. 

Thursday, September 15, 2011

2 Eagle Ford Shale Plays Not Closely Followed

A few weeks back CNBC sent anchor and Mad Money host Jim Cramer up to the Bakken shale to get an on the ground view of the amazing changes taking place in the area. North Dakota is booming with an overwhelming demand for employees. The companies leading the drilling efforts such as Continental Resources (CLR) and Brigham Exploration (BEXP) have benefited handsomely from the massive growth in that area.

Though known by many industry experts and investors, another area exists in southern Texas that might match or exceed the oil produced from the Bakken. That area is called the Eagle Ford Shale. 

Read the full article at Seeking Alpha. 

Disclosure: Long CJES and CRZO. Please review the disclaimer page for more details. 

Wednesday, September 14, 2011

Investment Report - September 2011: Net Payout Yields

August was a decent month for this model with an active return of 1.02% (Portfolio was down 4.66% versus the benchmark S&P500 down 5.68%). Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up producing superior returns over time.

After several semi active months of trading especially in May and July, August saw no trades executed. Typically the model trades more in good markets as companies outgrow yields making them less attractive to keep. While down markets normally lead to higher yields and a improvement in the decision for keeping a security in the model.

Largest Weights
Lorillard (LO) remained the largest stock in the model as the tobacco stock was able to post a nearly 5% gain in the month. CSX Corp (CSX) remained a top weight even though the stock plunged. The railroad operator remains tied to a cyclical business and was the 2nd biggest contributor to the portfolio loss in August. FirstEnergy (FE) remains one of the largest weights as the utility company ended August close to 52 week highs. Accenture (ACN) had the 4th largest weight in August, but it saw significant losses over fears the technology consulting company would be hit hard from a global recession. Campbell Soup (CPB) was another top weighted stock for August though it saw a small drop as well.

The market has seen significant losses this summer due to fears of a global recession. As the market got weaker, the net payout yields only got more attractive in most stocks in this model. 3% dividend yields turned into 4% dividend yields. 10% net payout yields turned into 12% net payout yields.

Not only do these stocks gain in appeal when the market drops, but investors can sleep at night knowing that weakness is an advantage for the typical stock in the model that has massive income and liquidity. This financial flexibility can be used to buy more stock, increase the dividend yield, or take advantage of a weaker competitor or new market. All adding up to strong companies and hopefully higher stock prices down the road.

Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details. 

Tuesday, September 13, 2011

Obama Odds of Being Re-elected in 2012 Drops Below 50%

According to the odds of Barack Obama being re-elected President in 2012 has dropped below 50% now. Considering he spent most of the year at or above 60%, it shows the significant weakness he has faced as the economy falters.

Intrade is the world's leading prediction market though I haven't seen any details on the accuracy of the predictions. They are based on actual money invested so its people putting hard earned money at risk. Probably much better than a random poll of 1,000 people that would rather not have answered the phone.

The reduction in the chances of Obama being elected in 2012 could help push the markets up. Otherwise, summer 2012 could be another rough year if the markets have to come to grips with Obama for another four years. Anybody recall the end of 2008 through March 2009?

Ulta Beauty's Earnings Show Continued Upside

After the close Thursday, Ulta Beauty (ULTAannounced earnings that easily surpassed estimates. Earnings came in at $.38 versus estimates of $.32 and 72% higher than last year on only a 22.6% increase in revenue. Revenue beat due to very strong comps of 11.3% over 2010.
ULTA appears to be firing on all cylinders with gross margins up 170 basis points and inventory per square foot down over 1%. The ability to grow revenue while decreasing inventory suggests superb inventory controls.

Read full article at Seeking Alpha. 

Disclosure: Long DKS. Please read the disclaimer page for more details. 

Monday, September 12, 2011

Doug Kass Stands Somewhat Bullish

Anybody following this blog knows that I've been a big follower of Doug Kass for years now. Not only is he normally bearish so he provides a counter view to mine for a sounding board, but he is impeccable at calling bottoms in the market. He isn't a perma-bear like most shorts though. In a way he is the flip side of Jim Cramer known as a perma-bull. Cramer has a history of calling tops, but he typically turns bearish too long similar to March 2009 when he missed the generation low that Kass called.

Kass published a good article where he highlighted the reasons a recession is all but impossible currently. He lists numerous reasons why the market might be unable to rally, but expecting a major recession and a massive selloff just doesn't appear in the cards.

Doug's reasons that a recession seems unlikely:

  • large private payroll drops in excess of 175,000 a month (adjusting for nonrecurring issues, payrolls are still averaging about 95,000 growth over last four months);
  • an inverted yield curve (it is positively sloped);
  • acceleration in inflation (inflation is contained and so are expectations);
  • an increase in real interest rates (anything but!);
  • bloated corporate inventories (low inventories to sales in place now);
  • retreating retail sales (they are expanding);
  • negative year-over-year leading economic indicators (advancing now);
  • a drop in factory orders (also rising) and;
  • outsized durable spending relative to GDP (housing and autos remain at or near cyclical lows).

Read the rest of the article for some other good analysis of the market potential for a recession or a major rally. Don't always agree with his points, but his opinions are very sound and researched. 

Disclosure: Please read the disclaimer page for more details. 

Sears Holdings Externalizing Brands Could Be Major Catalyst For Stock

With news last week that Sears Holdings (SHLD) would be selling Craftsman tools in Costco (COST) stores, Eddie Lampert has hopefully ushered in the era of breaking away from a retail store based operation. Ever since Lampert bought Sears and Kmart, investors have been looking forward to the day that the company would focus more on selling the brands worldwide and monetizing the massive real estate assets versus focusing on a dying retail operation that seems utterly lost.

Read the full article at Seeking Alpha. 

Disclosure: Long SHLD. Please review the disclaimer page for more details. 

Thursday, September 8, 2011

Economists Back Off Recession Calls

This has to be the least covered story of the day. With everybody focusing on the Bernack, Obama, and even China inflation today, everybody seems to have missed that not only has the recession likely been taken off the table, but most economists now call for around 2.5% growth this quarter.

Even Goldman Sachs (GS) is going to likely raise their estimates for Q3 GDP from 1% to maybe as much as 1.5%. Remember they originally sparked a ton of fear when the supposed experts at GS reduced growth to such a meager level a few weeks back.

Interesting that so many 'experts' had previously stated that the US was already in a recession or was definitely headed into one, but now Q3 will be back to near standard growth.

Great interview with Jan Hatzius, GS chief economist. One very telling point was how the sentiment data factored into recession fears while the real data has turned out much better than expected. Clearly the sentiment data has clocked in much worse than normal primarily due to the 2008/9 financial collapse and possibly some hangover from the 2001 internet collapse. Consumers have a much more gloomy mentality these days than reality making the data not as useful.

China CPI Finally Cools

Chin'a inflation eased to 6.2% in August from July's three-year high thus allowing China to stop tightening monetary policies. More importantly is that inflation only increased .3% sequentially showing only a 3.6% annualized rate.

Part of what investors have missed in this whole inflation scare is that the huge year over year increases are due to the yo-yo pricing caused by the 2008 financial crisis. Are oil prices higher now? Are corn or wheat soaring above the highs seen back then?

Unfortunately though these commodity prices are significantly above the 2009 and 2010 lows. Are current gasoline prices in the US inflationary? They are relatively equal to the 2008 peaks so how could it be inflationary when flat for over 3 years?

Now inflation has a lot more to do with just pure commodity prices especially in the US. In emerging markets though food prices can have a dramatic impact. One has to wonder if the US would quit burning its corn if food inflation wouldn't plunge. Seems so simple, but naturally the president is busy working on tax credits instead of solving the worlds problems.

Anyway, year over year inflation will moderate as most commodities peaked back in February. For example, copper has been mostly over $4/lb since back in November and peaked over $4.6/lb in February. So while copper factored into massive inflation when looking at YoY or MoM results as the year began, it has been flat to down all year reducing the inflation pressure. As the calendar moves into October and November, prices will be flat to down for this commodity and most of them in general.

In this theory pricing pressure should moderate unless the world pushes forward with growth and copper hits $5 or $6/lb as I estimate the next run will hit. One should understand that should a run would be normal for strong global growth. This pause in the market over the last 5+ months has helped the inflationary period long term.


  • China's inflation eased slightly to 6.2 percent in August from July's three-year high, raising expectations that the central bank will hold off on further policy tightening amid worries about a global economic slowdown.
  • The figure was in line with market forecasts of 6.2 percent, and compares with 6.5 percent in July.
  • "Consumer inflation has obviously peaked. Inflation is no longer a big problem now as we are seeing very bad industrial fundamentals and weakening external demand as shown in the PMI data," said Dong Xian'an, an economist at Peking First Advisory in Beijing.
  • The consumer price index rose 0.3 percent in August from the previous month, after a 0.5 percent rise in July. The figure is not seasonally adjusted.
  • Giving a more detailed breakdown of the index, the bureau said food prices rose 13.4 percent in the year to August, with non-food prices up 3.0 percent.
  • The producer price index rose 7.3 percent in the year to August and was up 0.1 from July. Market Ignores Expenses Growing Faster Than Revenue

When reading through the recent (CRM) Dreamforce Analyst Session presentation (obtain from the upper right hand corner box), a reader should be constantly struck by the desire to grow at all costs. Both Sales & Marketing and Research & Development costs soared beyond the rate of revenue growth. Another striking point is slide 55 that shows how the FY12 Guidance Midpoint for revenue has increased by $185M or roughly 9% while the Non-GAAP EPS has dropped. Now the earnings drop is mostly associated with the purchase of Radian6, but it further highlights how CRM is buying revenue.

Read the full article at Seeking Alpha.

Disclosure: Long MSFT. Please review the disclaimer page for more details.

U.S. Renewable Firms Going Bankrupt, What About Investing in China Counterparts?

Back in February, I did a webinar for Covestor and highlighted that renewable energy was my least favorite sector due to the expected reduction in subsidies in Europe. Witin the last couple of weeks, numerous US solar companies have gone bankrupt including the infamous Solyndra that US President Obama visited.
The biggest cause for the bankrupties has been the claim that China subsidizes their solar industry to the detriment of US firms. Considering the previous negativity on the sector, the thought crossed my mind that the collapse of competition and continued high prices of oil and gasoline might make the sector worth another look.

Read full article at Seeking Alpha. 

Disclosure: No positions. Please review the disclaimer page for more details. 

Wednesday, September 7, 2011

Walter Energy Soars Nearly 30%

Walter Energy (WLT) is a leading met coal pure play not only in the US but in the world. The stock is up nearly 30% this morning on news of a potential bid from Anglo American at $120 share.

While yesterdays closing price of $75 does make a $120 bid appear attractive one needs to step back and realize that the stock traded over $130 as recent as the end of July. Not many long term investors would be willing to take such a low price.

This stock along with our favorite met stock, Alpha Natural Resources (ANR), and the sector have just been crushed with the fear of a global recession. Ironically the main growth drivers of China and India don't appear to be weakening much at all. The assets of ANR and WLT remain just as attractive as it did back in July.

WLT has a 52 week high of $143.76 and I'd expect any accepted offer to exceed that price.

ANR appears more attractive with a much larger met coal reserve base. The stock also remains over 50% below its 52 week high of $68.05.

The 'leaked' news doesn't surprise us one bit. Making a bid above $120 would be impossible unless the investment bankers can get the market price up to the $100 range in the next few months. Then when Anglo or BHP (BHP) comes calling with a $130 bid it'll only look like a 30% premium and much more acceptable to the shareholders of the acquiring company. Just how the games are played. Similar action went on when ANR bought Massey Energy (MEE) earlier this year.

Long term met coal assets remain in huge demand so don't be shocked if a bidding war ensues at prices below the $150 level.

Via Reuters:

  • The Times of London newspaper said in its market report on Wednesday that there were rumors of a bid for Walter by diversified mining group Anglo American.
  • The report said Anglo was said to be weighing an offer for Walter, pitched at $120 a share, and would discuss the matter over the weekend.
  • However, analysts at London broker Liberum Capital called such an offer "unlikely," citing Anglo's minimal presence in U.S. coal markets.

Disclosure: Long ANR. Please review the disclaimer page for more details. 

Double Top in Gold?

Not much talk today about the stunnng reversal in gold for the second time in the last month. Gold has now made two attempts in overnight markets to break above $1,900 and more specifically the $1,915 to $1,920 range. Both times the move has failed miserably.
Interesting to see the home page of Seeking Alpha this morning featuring the potential move of gold going to $2,000. Ominous sign of a peak?

Read the full article on Seeking Alpha. 

Disclosure: Long FCX. Please review the disclaimer page for more details. 

Tuesday, September 6, 2011

Has Ciena Finally Turned the Corner?

Ciena (CIEN) soared after reporting an EPS beat and non-GAAP profits for the first time in several quarters. CIEN had a impressive mix of improved revenue combined with a reduction in operation expenses. The real question is whether this combination can last in the competitive environment.

Ciena has long been a leading optical and networking equipment provider back to the internet bust in 2000. Since the bust, CIEN has had some good periods, but it has never been able to flourish. The company continues to make lower highs every 4 or so years with peaks around 2004, 2007 and 2011. 

Read the full article on Seeking Alpha. 

Disclosure: Long RVBD. Please review the disclaimer page for more details. 

United Technologies Reaffirms 2011 Guidance

Good news before the opening today from United Technologies (UTX) as it reaffirmed 2011 guidance of $5.35 to $5.45 per share and %58B in revenue.

The European Union could collapse and completely washout this guidance, but it very encouraging to see a major industrial to keep guidance intact after the weak markets in August and the start of September.

For those betting on a collapse in earnings estimates, UTX says not so fast.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Sunday, September 4, 2011

Recession of Confidence

Jeff Kleintop of LPL Financial speaks to the Breakout crew over at Yahoo on the difference between sentiment indicators and actual data.

As Stone Fox Capital has been saying for a few months now, the data such as retail sales, industrial production, initial jobless claims, yield curves, and leading economic indicators have been relatively strong or at least not indicating a recession. On the flip side, the sentiment data such as consumer confidence and the regional fed manufacturing data have been bad.

The Philly Fed indicator is the main number that triggered the panic, but in reality this number records sentiment and not actual manufacturing activity. Note how the ISM reported 50.6 for August though Philly Fed was negative 30. Clearly the reality is a ton better than the sentiment. Guess the question is which one catches the other.

Interview with Jeff:

Friday, September 2, 2011

Monster Employment Index Hits Post Recession Highs

Considering the weak government jobs report today, its interesting that the Monster Employment Index (MEI) hit a post recession high in August. With the doubts over the validity of the government report, why not look at this index instead combined with ADP and jobless claims.

All of the other jobs reports were mostly encouraging. Jobless claims have been flat around 400K, ADP showed 91K jobs gained, and the household survey had 330K in gains.

Honestly Stone Fox hasn't used the MEI in the past so understanding what the data represents isn't probably 100% accurate. The MEI is reportedly a gauge of US online job demand based on real-time review of millions of employer job opportunities culled from a large representative selection of career Web sites.

So clearly the index could have issues with certain firms moving hiring decisions to the internet or the Web sites used lacking key representation. Logically any company probably wouldn't still be in busines if they just now began hiring via the web.

The MEI grew 8% YoY and 2% MoM. Both solid numbers for what is suppose to be a dismal jobs market. Note how August 2010 saw a drop from July so it even beat a possible seasonal trend for less activity in last month. One year naturally doesn't make a trend.

The index also wasn't impacted by the 46K Verizon union employees that went on strike and were classified as being laid off in August and then rehired in September. What a joke that union members can chose to strike and have all the non-union people pick up the tab via government programs. How nice of us!

As far as Monster Worldwide (MWW) the stock, it had a very strong reaction to the jobs report today. Maybe it was partially due to this strong report that offset the weakness in the overall market. In August, MWW regularly dropped 8-10% on bad news so the meager 1.7% drop was very encouraging for anybody looking for a beaten down stock with a major catalyst like the new Facebook app BeKnown.

Not a very good copy but if click on the previous link you can see the graph in more detail.

Disclosure: No position in MWW but looking to initiate possibly next week. Please review the disclaimer page for more details. 

Austerity vs Default

Anybody wanting to debate what Europe should do with specifically Greece and possibly Italy and Spain should look no further than the results from Iceland (default) and Ireland (austerity). Iceland just exited the IMF program as a success and though Ireland is muddling along it has at least returned to solid growth.

The Bond Vigilantes blog has a good post on the two options. Clearly the best path is to decisively pick an option and move forward. Both countries are moving forward while Greece continues to flounder.

The problem with Greece is that austerity plans and the lack of growth initiatives are killing the country. Less government spending leads to a smaller economy and in the end it makes no progress on the debt plans.

Have to agree with Jim that a quick haircut by the bondholders would've helped move the Greece situation forward a lot quicker. The market continues to fret over default or no default, but the real question is the size of the default. Honestly, most people have the concept that a default means a 100% loss when its more likely 20%.

Unfortunately though the PIGS don't have the option of currency debasement that helped Iceland out.

Now if the markets could just get the last I (Italy) off the fear list, than it might just rally and put this crisis behind us. Make this into a GPS issue or GPs where Spain is a small concern and the market would rally big time.

Thursday, September 1, 2011

BeKnown That You Own Monster Worldwide

Ok, so that's a catchy title to correspond with the new Facebook app that Monster Worldwide (MWW) created to counter the trend towards social media recruiting especially by LinkedIn (LNKD).
In reality, 2011 has been the year to not own MWW. Clearly any investor holding this top S&P 500 loser all year doesn't want to be known by the public. Times might be changing though as anybody buying since mid August could've participated in the 21% gain on Tuesday.

Read the full article at Seeking Alpha. 

Disclosure: No positions, but might purchase MWW within the next 72 hours. Please review the disclaimer page for more details. 

C&J Energy Services Reports 336% YoY Growth

If anybody wants a growth company trading at a cheap valuation, recent IPO C&J Energy Services (CJES) might just be the stock for you. CJES is a independent provider of hydraulic fracturing, coiled tubing and pressure pumping services operating mainly in the Eagle Ford and Haynesville Shales. The company IPO'd at the end July and has traded down from the $29.50 IPO price even with initial trading reaching $33.

CJES reported Q2 adjusted earnings of $.78 versus $.60 in Q1 and $.04 last year. Revenue jumped 43% from Q1 to $182.2M and a amazing 336% from Q210. The majority of growth is from deploying additional hydraulic fracturing fleets with minor gains from the Total E&S acquisition that added $4.5M in revenue or roughly $2.2M per month.

Earnings should continue to grow with expanded fleets, but Q3 will see a higher share count from the IPO. It was unclear from information provided exactly what the impact will be in Q3. The Q2 report showed 44M shares outstanding though the prospectus has 53M prior to the IPO and nearly 58M after. The difference is unexplained at this point.

Future growth plans include adding new fracturing fleets and coiled tubing units as follows:

  • Fleet 5 - started working Aug 1st
  • Fleet 6 - delivery Q411
  • Fleet 7 - delivery 1H12
  • Fleet 8 - delivery 2H12
  • Fleet 9 - possible by end of 2012
  • Coiled Tubing units - 3 more by year end

The Conference Call was generally bullish with limited analysts questions suggesting that the company is very underfollowed. Especially considering the high demand for the services it provides. The biggest news was probably that it has the ability to add Fleet 9 by the end of 2012 if demand continues strong. Pricing remains strong and stable. Though capacity has been added to the industry, wells awaiting facturing have increased from 2,500 to nearly 4,000.

The acquisition of Total gives them the ability to add equipment quicker and cheaper. This could be a huge advantage if demand continues to soar.  Not to mention that the equipment can currently be added mainly from cash flow with adjusted EBITDA of $65.8M in Q2. Fleet 6 only costs $33M and net income should only grow from the roughly $38M profits.

The Bakken provides a future growth prospect and well does the Marcellus I would imagine. For now though, the company has plenty of work in the Eagle Ford and Haynesville with spot work in the Granite Wash and the Permian Basin. Logically its more profitable to remain in the general Texas location if business remains strong. As long as the customer base remains diversified the company should be fine if one of the shales were too dry up.

All in all, this is one of the best growth stories the market has seen in a while. Not to mention, its one of the best valuations as well. Typically IPOs like a LinkedIn (LNKD) and SodaStream (SODA) that has similar growth are met with outrageous valuations.

Take a look before the market catches on!

Disclosure: Long CJES. Please review the disclaimer page for more details. 

Brazil Slashes Interest Rates 50 Basis Points

After the markets closed tonight, Brazil cut interest rates 50 basis points to 12% from 12.5%.

Wow! Guess I haven't paid enough attention to the Brazil economy as I was not expecting an interest rate cut much less a 50 basis point cut. Many an investor would probably be surprised to realize that Brazil interest rates remain as high as 12% after a big rate cut.

Apparently this move caught investors off guard as the expectation was for a 25 basis point cut if at all. With inflation running around 7%, I'm surprised as well though inflation rates should moderate as material costs maxed out earlier this year. Year over year numbers will eventually subside as 2012 rolls around.

This bodes well for emerging market stocks that have been rocked this year due to interest rate increases due to rapidly rising inflation fears. Some economists think China might be done raising interest rates as well which could usher a major rally in Chinese stocks that have underperformed for well over a year now.

This move should be bullish for homebuilding stock Gafisa (GFA) which might explain why the stocks chart had turned more bullish recently. Though the government subsidizes a lot of the mortgage rates in Brazil, it clearly never hurts a homebuilding stock to have lower interest rates. Considering this stock remains down nearly 50% from recent highs back in November I'd say this is just what the doctor orders.

NII Holdings (NIHD) could also benefit as it is in the process of building a 3G network in Brazil and has vast wireless networks in Latin America. Any news that boosts growth in the region will help them. The stock has flat lined for the last 52 weeks so I wouldn't expect huge beta from this move.

Per CNBC on rate cut:

  • Brazil's central bank slashed its key interest rate to 12 percent from 12.5 percent on Wednesday in a shock decision that it said reflects a mounting global slowdown as well as weaker growth in Latin America's largest economy.
  • In a split decision, the central bank's monetary policy committee, Copom, voted five to two to trim the so-called Selic rate by 50 basis points, following five consecutive increases earlier this year. It is Brazil's first rate cut since July 2009.
  • All 20 analysts in a Reuters survey had expected the central bank to keep the Selic rate unchanged. The decision also surprised investors — interest rate futures had been reflecting expectations of steady rates or at most a cut of 25 basis points.
  • Economists have been cutting their GDP forecasts for the year to between 3 and 4 percent as evidence builds that Brazil's indebted consumers are running out of steam and the manufacturing sector suffers from a strong currency.

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