Companies of all stripes are hurting. Just not MasterCard (MA). The New York-based “transaction processor” and card company painted a pretty sweet picture of what it expects in earnings going forward. As per Bloomberg:
MasterCard, the world's second-biggest credit card network, rose to its highest level in New York trading since going public in May 2006 after increasing its profit-growth target on expanding card use outside the U.S. The network expects net income to increase an average 20 percent to 30 percent annually over the next three years starting in 2009, MasterCard said today in a conference, compared with a previous goal of 15 percent to 20 percent.
This is great news for MasterCard and its shareholders. Here's why:
First, in 2008 and 2009 Wall Street had been expecting the company to earn $8.65 and $10.55 a share respectively (which suggests an almost 22% forecasted rate of growth). So this unexpected acceleration, from an already high base of earnings, is bound to draw more than a few eyeballs and generate some positive sell-side research.
Second, every quarter many fund managers generally look to jettison underperforming companies and to bulk up on companies that are both delivering and expected to deliver good news. Enter MasterCard. That window dressing toward the end of the second quarter could give the stock a nice goose as well.
Next, it’s important to note that this new growth rate seems quite competitive with Visa (V) which had, in conjunction with its fiscal second quarter numbers, touted its expectation of a “20% or greater” earnings per share growth rate. In turn, this may allow MasterCard to garner the multiple of earnings (or close to it) that Visa is presently enjoying. (Note that Visa currently trades at about 42 times the current year estimate of $2.03 a share, whereas MasterCard currently trades at about 35.7 times the current year estimate of $8.65 a share.)
Another point worth considering is that the growth rate MasterCard is banking on (pun intended) seems in large part predicated on its ability to continue to grow overseas. In fact, the aforementioned Bloomberg piece points out that “MasterCard generates half its revenue from overseas and is less reliant on the U.S. than Visa, which gets about two-thirds from domestic transactions.” This apparent diversity, if you will, may make it the better play, particularly since the U.S. consumer is so unpredictable as this point.
The flip side: This news can cut both ways. MasterCard just set the bar pretty high. If it were to fail to live up to those expectations, the stock could get hit - big time.
Shares of MasterCard were up more than 22 points, or almost 8%, the other day. While there was some fairly severe profit-taking on Friday, its upbeat outlook suggests the stock may be headed higher still over the next several weeks and months.
Long V and MA
Saturday, May 31, 2008
Friday, May 30, 2008
today
the clock actually seemed to slow down in the final couple of hours of today’s session, but even though the action was dreary this afternoon, a very sharp spurt of selling in the final 5 minutes took the averages well off the highs. the late-day fade yesterday was mainly concentrated in materials and energy, but today was spread across sectors and was very sudden. given the pick-up in volume, it’s very likely that there were some end-of-month games being played.
meanwhile, the back and forth rotation continued, with weak dollar/strong oil plays bouncing while banks and retailers lagged. trying to find any consistency in this market lately has been challenging to say the least.
the question, of course, is how things are going to develop from here. the sell-off in bonds might be an indication that investors are starting to look for better yields and may be more willing to take on risk. that stated, overhead resistance (for those that believe) is fast approaching and given the volatility in crude and the greenback, things will likely remain volatile.
meanwhile, the back and forth rotation continued, with weak dollar/strong oil plays bouncing while banks and retailers lagged. trying to find any consistency in this market lately has been challenging to say the least.
the question, of course, is how things are going to develop from here. the sell-off in bonds might be an indication that investors are starting to look for better yields and may be more willing to take on risk. that stated, overhead resistance (for those that believe) is fast approaching and given the volatility in crude and the greenback, things will likely remain volatile.
Thursday, May 29, 2008
one more thing....
i can't make up my mind on the banks. now i'm starting to think it's a good time to buy a basket to hold for 2 or 3 years. while the negatives of the credit cycle, the dilutive effect of the industry's seemingly endless refinancings and other factors cannot be dismissed, quite frankly, i can make the case that we are now at an unprecedented point of time to get long financials.
i'm seriously thinking of accumulating a basket consisting of bac, c, wfc and jpm.
long jpm calls
i'm seriously thinking of accumulating a basket consisting of bac, c, wfc and jpm.
long jpm calls
more musings
oh go ahead and admit it: you loved the waltons!
does anyone really care about satellite radio?
still the best hedge fund manager book i've read - and i've read plenty of them - is cramer's "confessions of a street addict" - really gives one the picture of what it's really like working in that high-pressure, don't-make-any-mistakes world...
does it feel like an arby's night?
ibm's model DOES work - so watch out for hp now...
hey, no one is perfect: case in point: edward lampert. an extremely talented fund manager; smart as a whip; an excellent long-term record for making ALOT of money. BUT, after sears holdings' absolutely terrible earnings report (and i am shocked the stock only fell 3%), one has to wonder whether eddie's in more than a little slump. i was in a sears yesterday, and it was a wasteland of bulging racks of marked-down, non-selling merchandise. the store was clean though. the short-term and medium-term outlook does not look good for shld. lampert's invested like a genius in past years, but his decision to buy back nearly $3 billion in stock last year at a price that is roughly 50% higher than today's price is simply bad management. however, if the stock touches the 50s, i'm a long-term buyer just for the real estate.
long shld puts
does anyone really care about satellite radio?
still the best hedge fund manager book i've read - and i've read plenty of them - is cramer's "confessions of a street addict" - really gives one the picture of what it's really like working in that high-pressure, don't-make-any-mistakes world...
does it feel like an arby's night?
ibm's model DOES work - so watch out for hp now...
hey, no one is perfect: case in point: edward lampert. an extremely talented fund manager; smart as a whip; an excellent long-term record for making ALOT of money. BUT, after sears holdings' absolutely terrible earnings report (and i am shocked the stock only fell 3%), one has to wonder whether eddie's in more than a little slump. i was in a sears yesterday, and it was a wasteland of bulging racks of marked-down, non-selling merchandise. the store was clean though. the short-term and medium-term outlook does not look good for shld. lampert's invested like a genius in past years, but his decision to buy back nearly $3 billion in stock last year at a price that is roughly 50% higher than today's price is simply bad management. however, if the stock touches the 50s, i'm a long-term buyer just for the real estate.
long shld puts
musings
ma had a great day today; lots of negativity out there as to the sustainability of the stock price rise - will it keep rising?
one sitcom that i've come to appreciate more and more over the years is fraiser - definitely underrated
the mooninites rule!
pink floyd. led zeppelin. here's my suggestion: get both groups back together; get them to tour TOGETHER.....charge $1000 bucks a head - just to see if it can be done!
it's relaxing to watch tropical fish swim around their tank...
the best part of cramer's show is watching that animated bull strut across the screen...
will the royals win again this season?
how many games will the chiefs win this season?
a fantastic read about congress, which grows more and more true with each passing day is "a parliament of whores" by p.j. o'rourke
what would richard feynman think of the world, 20 years after his death?
pink roses are prettier than red ones
when will spinal tap tour again?
one sitcom that i've come to appreciate more and more over the years is fraiser - definitely underrated
the mooninites rule!
pink floyd. led zeppelin. here's my suggestion: get both groups back together; get them to tour TOGETHER.....charge $1000 bucks a head - just to see if it can be done!
it's relaxing to watch tropical fish swim around their tank...
the best part of cramer's show is watching that animated bull strut across the screen...
will the royals win again this season?
how many games will the chiefs win this season?
a fantastic read about congress, which grows more and more true with each passing day is "a parliament of whores" by p.j. o'rourke
what would richard feynman think of the world, 20 years after his death?
pink roses are prettier than red ones
when will spinal tap tour again?
Another one poised to rise: SGR
SGR, an engineering, procurement and construction (EPC) firm has significant exposure to nuclear power plant projects in the U.S. and China. The stock has traded relatively flat so far in 2008 because the timeline for nuclear projects in the U.S. remains uncertain, but I see significant long-term potential for investors as the nuclear story evolves both domestically and abroad. Shares were recently trading at $59.36.
Shaw offers a combination of solid near-term business momentum in its domestic engineering business, along with an outstanding long-term catalyst based on its 20% equity stake in Westinghouse Electric, a leading global designer of nuclear power plants. This relationship provides Shaw with exclusive access to engineering work on Westinghouse- designed reactors. This is significant because the company's AP1000 pressurized water reactor is considered a leading contender for new projects around the world. Shaw and Westinghouse are already in the initial stages of work on four new AP1000 reactors in China, with substantial potential for additional work based on China's plans to construct numerous additional reactors over the next decade.
In the near term, Shaw's non-nuclear businesses are generating solid momentum. The company's primary strength is in coal-fired power plants, providing services ranging from new plant construction to installation of scrubbers, which are key components necessary for reducing emissions of sulfur and other pollutants. Environmental concerns are on the upswing in the U.S., and Shaw's management has said that environmental and scrubber projects should remain plentiful in the U.S. for another three to five years.
Shaw also services natural gas-fired plants, providing it with some diversification away from coal. Its Energy & Chemicals segment has shown progress on the international front over the past 12 months, announcing projects in India, China and Korea, as well as a polysilicon manufacturing plant in Idaho for Chinese solar company Hoku Scientific (HOKU:Nasdaq). The plant is expected to be completed in 2009. Military-related projects have also provided a steady source of revenue in recent years, particularly in environmental remediation at U.S. military bases that are in the process of closing.
Shaw recently announced a deal with the U.S. Department of Energy to proceed with full construction of a mixed oxide (MOX) fuel fabrication facility in Aiken, S.C. The $2 billion deal had been much anticipated by analysts heading into the latter months of 2007, but, as is often the case with large contracts, negotiations dragged on longer than expected.
The company also made headlines earlier this week after announcing that it has been awarded EPC contracts for two AP1000 nuclear units to be built at the V.C. Summer Nuclear Station near Jenksville, S.C. The contract is with Scana Corp.'s South Carolina Electric & Gas unit and Santee Cooper, a state-owned electric and water utility in South Carolina. However, the process for securing a COL (construction and operating license) to begin work will take years, and Shaw's management commented that it expects the COL, which was submitted in March, to be approved in 2011.
Timing is a key concept for investors to remember when taking a position in an EPC company because catalysts develop more slowly than at most other businesses. Because of the significant time between project bids, negotiations, per-construction preparation and completion, a new deal announcement does not necessarily translate into a big jump in the company's stock price on the day it is first announced.
In a similar way, it's uncertain how quickly the full nuclear power opportunity will develop. Although there are four AP1000 reactors being constructed in China, it's hard to pin down the size of the opportunity for the Westinghouse/Shaw combination, or how long it will take before subsequent new projects are announced. However, uncertainty creates upside potential for investors, and we're obviously bullish on Shaw's position in China. I believe that shares of Shaw are undervalued relative to the long-term opportunity afforded by the company's early entry into the developing Chinese nuclear market.
One of the reasons for the aforementioned uncertainty is that nuclear power has significant competition from traditional fuel-based plants, as well as alternative energy plants like solar and wind power. China is expected to invest heavily in alternative energy over the next 10 years, but nuclear offers its own advantages and reasons for significant long-term success in both China and the U.S.
As a refresher, there's a big difference between certain power sources such as wind and solar, which only produce power part of the time (when the wind is blowing or the sun is shining) and baseline sources that reliably generate power 100% of the time. While there is enough room for many technologies to have a place in power generation, nuclear power is known for being the low-cost solution in terms of fuel and other operating costs. In fact, the only technology that can produce power on the same scale at a similarly low cost is hydroelectricity (which obviously has limitations caused by geographic requirements). The tradeoff is that nuclear power has some of the highest startup costs in terms of plant construction, and no permanent solution has been found for safely disposing of spent nuclear fuel. On a long-term basis, however, the return on a nuclear investment is very attractive.
The continuing rise in energy demand around the world, combined with increasing concern over the environmental effects of carbon emissions, create a favorable setup for nuclear power. In the U.S., concern over dependence on foreign oil is another factor that could accelerate the uptake of nuclear and other energy alternatives.
The four reactors in the early stages of construction in China could also provide a blueprint for future success in the U.S. New commercial nuclear projects in this country have been virtually nonexistent since the 1970s, so a solid showing in these early projects could serve as an effective marketing tool for new plant projects. Shaw's stock currently trades at 26 times 2008 consensus earnings estimates. However, relative to 2009 earnings expectations, Shaw appears downright cheap, trading at 18 times the Thompson Reuters consensus. It's also useful to note the company's valuation relative to larger competitors like Fluor (FLR:NYSE) and Jacobs Engineering (JEC:NYSE), which both sport price/earnings multiples above 23, based on 2009 estimates.
Shaw's smaller size accounts for part of the reason for the discount as does the recent success of competitors in projects such as building and expanding oil production capacity, which isn't one of Shaw's specialties. Another notable point: Shaw's most recent quarterly earnings (announced in April) were a disappointment, coming in below expectations due to a number of small negatives, including weaker-than-expected results in its Environmental & Infrastructure segment, the push-back of the MOX deal signing, and some one-time charges. In addition, management provided lower guidance based on an anticipated higher tax rate. My view on the results is that they helped bring investors' near-term expectations down, which is a positive for investors with a long-term view of a company's potential. None of the issues that affected last quarter's results are what I would consider a red flag for investors, and I see additional potential for upside based solely on the market's lower expectations for upcoming quarterly results.
disclosure: none
Shaw offers a combination of solid near-term business momentum in its domestic engineering business, along with an outstanding long-term catalyst based on its 20% equity stake in Westinghouse Electric, a leading global designer of nuclear power plants. This relationship provides Shaw with exclusive access to engineering work on Westinghouse- designed reactors. This is significant because the company's AP1000 pressurized water reactor is considered a leading contender for new projects around the world. Shaw and Westinghouse are already in the initial stages of work on four new AP1000 reactors in China, with substantial potential for additional work based on China's plans to construct numerous additional reactors over the next decade.
In the near term, Shaw's non-nuclear businesses are generating solid momentum. The company's primary strength is in coal-fired power plants, providing services ranging from new plant construction to installation of scrubbers, which are key components necessary for reducing emissions of sulfur and other pollutants. Environmental concerns are on the upswing in the U.S., and Shaw's management has said that environmental and scrubber projects should remain plentiful in the U.S. for another three to five years.
Shaw also services natural gas-fired plants, providing it with some diversification away from coal. Its Energy & Chemicals segment has shown progress on the international front over the past 12 months, announcing projects in India, China and Korea, as well as a polysilicon manufacturing plant in Idaho for Chinese solar company Hoku Scientific (HOKU:Nasdaq). The plant is expected to be completed in 2009. Military-related projects have also provided a steady source of revenue in recent years, particularly in environmental remediation at U.S. military bases that are in the process of closing.
Shaw recently announced a deal with the U.S. Department of Energy to proceed with full construction of a mixed oxide (MOX) fuel fabrication facility in Aiken, S.C. The $2 billion deal had been much anticipated by analysts heading into the latter months of 2007, but, as is often the case with large contracts, negotiations dragged on longer than expected.
The company also made headlines earlier this week after announcing that it has been awarded EPC contracts for two AP1000 nuclear units to be built at the V.C. Summer Nuclear Station near Jenksville, S.C. The contract is with Scana Corp.'s South Carolina Electric & Gas unit and Santee Cooper, a state-owned electric and water utility in South Carolina. However, the process for securing a COL (construction and operating license) to begin work will take years, and Shaw's management commented that it expects the COL, which was submitted in March, to be approved in 2011.
Timing is a key concept for investors to remember when taking a position in an EPC company because catalysts develop more slowly than at most other businesses. Because of the significant time between project bids, negotiations, per-construction preparation and completion, a new deal announcement does not necessarily translate into a big jump in the company's stock price on the day it is first announced.
In a similar way, it's uncertain how quickly the full nuclear power opportunity will develop. Although there are four AP1000 reactors being constructed in China, it's hard to pin down the size of the opportunity for the Westinghouse/Shaw combination, or how long it will take before subsequent new projects are announced. However, uncertainty creates upside potential for investors, and we're obviously bullish on Shaw's position in China. I believe that shares of Shaw are undervalued relative to the long-term opportunity afforded by the company's early entry into the developing Chinese nuclear market.
One of the reasons for the aforementioned uncertainty is that nuclear power has significant competition from traditional fuel-based plants, as well as alternative energy plants like solar and wind power. China is expected to invest heavily in alternative energy over the next 10 years, but nuclear offers its own advantages and reasons for significant long-term success in both China and the U.S.
As a refresher, there's a big difference between certain power sources such as wind and solar, which only produce power part of the time (when the wind is blowing or the sun is shining) and baseline sources that reliably generate power 100% of the time. While there is enough room for many technologies to have a place in power generation, nuclear power is known for being the low-cost solution in terms of fuel and other operating costs. In fact, the only technology that can produce power on the same scale at a similarly low cost is hydroelectricity (which obviously has limitations caused by geographic requirements). The tradeoff is that nuclear power has some of the highest startup costs in terms of plant construction, and no permanent solution has been found for safely disposing of spent nuclear fuel. On a long-term basis, however, the return on a nuclear investment is very attractive.
The continuing rise in energy demand around the world, combined with increasing concern over the environmental effects of carbon emissions, create a favorable setup for nuclear power. In the U.S., concern over dependence on foreign oil is another factor that could accelerate the uptake of nuclear and other energy alternatives.
The four reactors in the early stages of construction in China could also provide a blueprint for future success in the U.S. New commercial nuclear projects in this country have been virtually nonexistent since the 1970s, so a solid showing in these early projects could serve as an effective marketing tool for new plant projects. Shaw's stock currently trades at 26 times 2008 consensus earnings estimates. However, relative to 2009 earnings expectations, Shaw appears downright cheap, trading at 18 times the Thompson Reuters consensus. It's also useful to note the company's valuation relative to larger competitors like Fluor (FLR:NYSE) and Jacobs Engineering (JEC:NYSE), which both sport price/earnings multiples above 23, based on 2009 estimates.
Shaw's smaller size accounts for part of the reason for the discount as does the recent success of competitors in projects such as building and expanding oil production capacity, which isn't one of Shaw's specialties. Another notable point: Shaw's most recent quarterly earnings (announced in April) were a disappointment, coming in below expectations due to a number of small negatives, including weaker-than-expected results in its Environmental & Infrastructure segment, the push-back of the MOX deal signing, and some one-time charges. In addition, management provided lower guidance based on an anticipated higher tax rate. My view on the results is that they helped bring investors' near-term expectations down, which is a positive for investors with a long-term view of a company's potential. None of the issues that affected last quarter's results are what I would consider a red flag for investors, and I see additional potential for upside based solely on the market's lower expectations for upcoming quarterly results.
disclosure: none
today in the market
although a late-day pullback off the highs of the session dampened what were some very strong gains mid-day, it was a positive day for the market. in fact, most of the late selling in the dow jones was in high oil/weak dollar names like aa, xom, cvx and cat, while tech, consumer discretionary and financials held on to most of their gains. ideally, this market would continue to see leadership in those areas, and the thing we need to watch is the action in fixed income. the big question is if the recent jump in rates is indicative of inflationary pressures, or if investors are looking to sell their low yielding assets (treasuries) and looking to move in to higher yields (like equities). the decent economic data and bounce in the greenback seem to suggest the latter.
still, given the whipsaw action we’ve been seeing, it’s far too early to declare victory for the bulls. moreover, even if oil doesn’t come roaring back tomorrow and the market continues to move higher, we aren’t too far from overhead resistance levels… again (for those that believe). as such, simply cooling one's heels and seeing if there is a new theme emerging may be one's best bet at the moment - we may get whipsawed again. trying to identify and stick with leadership lately has been a tricky game to play and has frustrated both bulls and bears alike.
still, given the whipsaw action we’ve been seeing, it’s far too early to declare victory for the bulls. moreover, even if oil doesn’t come roaring back tomorrow and the market continues to move higher, we aren’t too far from overhead resistance levels… again (for those that believe). as such, simply cooling one's heels and seeing if there is a new theme emerging may be one's best bet at the moment - we may get whipsawed again. trying to identify and stick with leadership lately has been a tricky game to play and has frustrated both bulls and bears alike.
a look at a beaten-down, hated name that just might be poised to rise again....tso
tso refines and markets petroleum products and provides marine services in the gulf of mexico and the west coast. it operates 836 retail stations. it has refineries located in alaska, hawaii, washington, utah, north dakota and san francisco. its 2007 refinery throughput was about 534,120 barrels per day; and has about 2,150 shareholders.
let's look at tso's recent financial performance first. the company's fourth-quarter results came in lower than expected, with the company reporting a final-period loss per share of $0.29, driven mainly by poor results at the hawaii refinery, where local product prices failed to keep pace with a rise in crude oil prices. results were also hurt by unplanned downtime at this refinery. in addition, tso took an $18 million pretax charge for product inventory movements at its golden eagle refinery. too, refining margins were lower than expected in the company's pacific northwest and mid-atlantic regions.
most, if not all, analysts reduced 2008 share-net estimates. although many of the fourth- quarter problems were one-time events, tso's refinery operating costs continued to climb. they averaged $3.60 a barrel in 2006, rose to $4.40 in 2007, and are liable to increase to $4.75 this year. refining margins across the industry have been on a downtrend since late summer of last year, and most analysts see no sign of a reversal. tso has to make up for lost generation time at its hawaii facility, and throughput will probably be slightly down due to needed upgrades at the recently acquired los angeles refinery, and the replacement of a coking unit at the golden eagle plant.
the company's second quarter will be important; when tso (like other refiners) traditionally generates at least 50% of its annual earnings, driven by the gasoline spring rally. however, due to expected lower demand, and tighter environmental emissions standards in california, earnings don't look to be quite as strong this year.
i think tso's long-term capital gains potential has improved. the equity has fallen considerably since reaching a high of $66 late last year. fears of a protracted downturn or leveling off in the refining cycle, possibly lasting years, has investors nervous. however, tso's west coast holdings should stand it in good stead once an upturn occurs, since west coast refining margins are among the highest in the nation.
a few weeks ago, gas cracks (and implied refinery margins) continued to exhibit upside down behaviour -- the june crack for heating oil was about $28, entirely out of season and insanely overpriced. at the same time, gasoline cracks, entirely in season, remained (in my opinion) insanely underpriced at around $8 in the july crack.
it was clear then that traders were caught massively short in the heating oil crack, assuming that lousy refining margins in the more important and in-season gasoline crack would translate to an easing in the less important and practically useless heating/diesel measure - oops...
entirely upside down action will continue until either there is a return to fundamental pricing in the crude barrel or until a real time shortage from refining maintenance and transport problems emerges in the cash market - i think it's coming soon, but i've thought that for awhile.....
jumping to today, and whether the drubbing that crude is taking is going to be short lived or not, the upside is that in-season gas cracks are getting better fast - better for the refiners that is.
at one point today up more than $2, i think the incredible disconnect i've been expecting for awhile now will begin to be seen - crude will go down, but gas prices will remain relatively unchanged from the high numbers they're at right now.
i believe that it's a good time to get in on refiners at these paltry, tiny, undervalued numbers - about $23.50 for tso, $49 for vlo, etc. if it prints $15 gas cracks, which i think may be coming soon, that will mean tso, vlo, etc. will be making money again - big money, in fact.
disclosure: DO YOUR OWN DD!!; thinking seriously about buying tso at about $23
let's look at tso's recent financial performance first. the company's fourth-quarter results came in lower than expected, with the company reporting a final-period loss per share of $0.29, driven mainly by poor results at the hawaii refinery, where local product prices failed to keep pace with a rise in crude oil prices. results were also hurt by unplanned downtime at this refinery. in addition, tso took an $18 million pretax charge for product inventory movements at its golden eagle refinery. too, refining margins were lower than expected in the company's pacific northwest and mid-atlantic regions.
most, if not all, analysts reduced 2008 share-net estimates. although many of the fourth- quarter problems were one-time events, tso's refinery operating costs continued to climb. they averaged $3.60 a barrel in 2006, rose to $4.40 in 2007, and are liable to increase to $4.75 this year. refining margins across the industry have been on a downtrend since late summer of last year, and most analysts see no sign of a reversal. tso has to make up for lost generation time at its hawaii facility, and throughput will probably be slightly down due to needed upgrades at the recently acquired los angeles refinery, and the replacement of a coking unit at the golden eagle plant.
the company's second quarter will be important; when tso (like other refiners) traditionally generates at least 50% of its annual earnings, driven by the gasoline spring rally. however, due to expected lower demand, and tighter environmental emissions standards in california, earnings don't look to be quite as strong this year.
i think tso's long-term capital gains potential has improved. the equity has fallen considerably since reaching a high of $66 late last year. fears of a protracted downturn or leveling off in the refining cycle, possibly lasting years, has investors nervous. however, tso's west coast holdings should stand it in good stead once an upturn occurs, since west coast refining margins are among the highest in the nation.
a few weeks ago, gas cracks (and implied refinery margins) continued to exhibit upside down behaviour -- the june crack for heating oil was about $28, entirely out of season and insanely overpriced. at the same time, gasoline cracks, entirely in season, remained (in my opinion) insanely underpriced at around $8 in the july crack.
it was clear then that traders were caught massively short in the heating oil crack, assuming that lousy refining margins in the more important and in-season gasoline crack would translate to an easing in the less important and practically useless heating/diesel measure - oops...
entirely upside down action will continue until either there is a return to fundamental pricing in the crude barrel or until a real time shortage from refining maintenance and transport problems emerges in the cash market - i think it's coming soon, but i've thought that for awhile.....
jumping to today, and whether the drubbing that crude is taking is going to be short lived or not, the upside is that in-season gas cracks are getting better fast - better for the refiners that is.
at one point today up more than $2, i think the incredible disconnect i've been expecting for awhile now will begin to be seen - crude will go down, but gas prices will remain relatively unchanged from the high numbers they're at right now.
i believe that it's a good time to get in on refiners at these paltry, tiny, undervalued numbers - about $23.50 for tso, $49 for vlo, etc. if it prints $15 gas cracks, which i think may be coming soon, that will mean tso, vlo, etc. will be making money again - big money, in fact.
disclosure: DO YOUR OWN DD!!; thinking seriously about buying tso at about $23
Rate-hike odds up
The market has now completely ruled out any chance at a rate cut, with the possibility of a hike now beginning to creep into the pricing of fed funds futures contracts. No hike is priced in for the June 25 and Aug. 5 FOMC meetings. For the Sept. 26 FOMC meeting, the market is priced for 28% odds of a 25-basis-point hike.
For the end of 2008, the market is priced for 100% odds of a 25-basis-point hike and for 20% odds of 50 basis points in cumulative hikes. By the end of the first quarter of 2009, the market expects that the funds rate will be 2.69%, up from 2.00% currently.
I do not believe that an interest rate hike will occur this year, as the Federal Reserve is unlikely to feel that economic growth has become self-sustaining by then. It normally takes at least six months before such conditions begin to set in, and the economy has not shown any meaningful sign of recovery yet.
For the end of 2008, the market is priced for 100% odds of a 25-basis-point hike and for 20% odds of 50 basis points in cumulative hikes. By the end of the first quarter of 2009, the market expects that the funds rate will be 2.69%, up from 2.00% currently.
I do not believe that an interest rate hike will occur this year, as the Federal Reserve is unlikely to feel that economic growth has become self-sustaining by then. It normally takes at least six months before such conditions begin to set in, and the economy has not shown any meaningful sign of recovery yet.
The 10-year reaches 4%
U.S. Treasuries have fallen sharply of late, with yields across the yield curve moving to their highest level since last December. Yields on short maturities have moved up the most, reflecting increased expectations for a reversal in Fed policy, such that investors are now expecting the Fed to eventually raise interest rates rather than lower them.
This is evident in federal funds and eurodollar futures, which are priced for a single quarter-point rate hike occurring in the fourth quarter of this year, and for as many as two additional hikes in the first quarter of 2009. Much of the recent increase in Treasury yields reflects these sentiments, which are rooted in both the recent improvements in the credit environment and an intensification of worries about inflation.
Treasury yields have been climbing ever since bottoming for 2008 on Monday, March 17, which of course was the first day of trading after the Bear Stearns (BSC) rescue. The 10-year's yield has climbed 69 basis points since then to 4.0% from its low of 3.31%.
The yield on two-year notes has increased much more, by 126 basis points to 2.60%, which of course means that the yield curve has flattened since then. It has done so because the Federal Reserve is no longer seen as cutting interest rates and because the flight-to-safety trade has moved in reverse since March.
The increase in yields on five-year notes has been 114 basis points, a very sharp increase in relation to the two-year, given its flattening to 10s, reflecting the fact that fives tend to shine on the way up and get hammered on the way down. (Many entities are not allowed to invest beyond five years, and that makes the five-year an obvious target to overweight and underweight, depending upon the interest rate outlook.)
A major factor pushing Treasury yields higher in recent weeks has been a flight to other segments of the fixed-income markets. In the corporate bond market, for example, the issuance of company bonds has increased dramatically, with issuance topping $30 billion per week since the Bear Stearns rescue, which is roughly $10 billion above normal. In two of the weeks since then, issuance topped $45 billion, making those weeks the two best ever in the corporate bond market. Even high-yield issuers have gotten into the act, selling more bonds in a single week than at any time since last November.
The impact and message from the increase in corporate bond issuance is multifold. First, the increased issuance produces a crowding-out effect, reducing the amount of dollars available for investing in Treasuries. Second, the fact that the new issuance was extremely well received indicates that investors have become more willing to move out on the risk spectrum. Third, the issuance will benefit the economy, improving the outlook and dampening the chances at further interest rate cuts.
The credit environment in general has improved substantially from its worst point, cutting the demand for Treasuries. The improved environment is apparent in the increase in bond issuance that I mentioned and in gauges such as swap rates, where the swap market has improved sharply from its third distinct episode of fear -- with August, November and March representing the three major periods of heightened anxiety.
Important also has been the decline in one-month LIBOR, which has fallen sharply ever since the Fed increased the size of its term auction facility, or TAF, to $150 billion per month beginning in May, from $100 billion in March and April, $60 billion in January and February and $40 billion in December. Today, one-month LIBOR is trading at 2.38%, down 12 basis points in two weeks' time and 51 basis points in May alone. With the Fed's term auction facility priced at 2.10% in the latest week, there is room for additional, albeit smaller, declines (the Fed auctions loans to banks via its TAF).
Healing in the credit markets has strongly influenced perceptions about the direction of monetary policy, but so has the recent acceleration in inflation and inflation expectations. Last week, for example, the market for inflation-protected securities was priced for the consumer price index to increase at a pace of 2.57%, the most since August 2006. The ever-increasing level of energy prices has obviously had significant influence on inflation views.
This is evident in federal funds and eurodollar futures, which are priced for a single quarter-point rate hike occurring in the fourth quarter of this year, and for as many as two additional hikes in the first quarter of 2009. Much of the recent increase in Treasury yields reflects these sentiments, which are rooted in both the recent improvements in the credit environment and an intensification of worries about inflation.
Treasury yields have been climbing ever since bottoming for 2008 on Monday, March 17, which of course was the first day of trading after the Bear Stearns (BSC) rescue. The 10-year's yield has climbed 69 basis points since then to 4.0% from its low of 3.31%.
The yield on two-year notes has increased much more, by 126 basis points to 2.60%, which of course means that the yield curve has flattened since then. It has done so because the Federal Reserve is no longer seen as cutting interest rates and because the flight-to-safety trade has moved in reverse since March.
The increase in yields on five-year notes has been 114 basis points, a very sharp increase in relation to the two-year, given its flattening to 10s, reflecting the fact that fives tend to shine on the way up and get hammered on the way down. (Many entities are not allowed to invest beyond five years, and that makes the five-year an obvious target to overweight and underweight, depending upon the interest rate outlook.)
A major factor pushing Treasury yields higher in recent weeks has been a flight to other segments of the fixed-income markets. In the corporate bond market, for example, the issuance of company bonds has increased dramatically, with issuance topping $30 billion per week since the Bear Stearns rescue, which is roughly $10 billion above normal. In two of the weeks since then, issuance topped $45 billion, making those weeks the two best ever in the corporate bond market. Even high-yield issuers have gotten into the act, selling more bonds in a single week than at any time since last November.
The impact and message from the increase in corporate bond issuance is multifold. First, the increased issuance produces a crowding-out effect, reducing the amount of dollars available for investing in Treasuries. Second, the fact that the new issuance was extremely well received indicates that investors have become more willing to move out on the risk spectrum. Third, the issuance will benefit the economy, improving the outlook and dampening the chances at further interest rate cuts.
The credit environment in general has improved substantially from its worst point, cutting the demand for Treasuries. The improved environment is apparent in the increase in bond issuance that I mentioned and in gauges such as swap rates, where the swap market has improved sharply from its third distinct episode of fear -- with August, November and March representing the three major periods of heightened anxiety.
Important also has been the decline in one-month LIBOR, which has fallen sharply ever since the Fed increased the size of its term auction facility, or TAF, to $150 billion per month beginning in May, from $100 billion in March and April, $60 billion in January and February and $40 billion in December. Today, one-month LIBOR is trading at 2.38%, down 12 basis points in two weeks' time and 51 basis points in May alone. With the Fed's term auction facility priced at 2.10% in the latest week, there is room for additional, albeit smaller, declines (the Fed auctions loans to banks via its TAF).
Healing in the credit markets has strongly influenced perceptions about the direction of monetary policy, but so has the recent acceleration in inflation and inflation expectations. Last week, for example, the market for inflation-protected securities was priced for the consumer price index to increase at a pace of 2.57%, the most since August 2006. The ever-increasing level of energy prices has obviously had significant influence on inflation views.
Wednesday, May 28, 2008
an interesting tidbit about chk
chk's ceo aubrey mcclendon bought another 600,000 of chk shares on 5/23/08. this brings his direct holdings to 31.8 million shares. two interesting factoids about mr. mcclendon's purchases: (i) most have been open market buys, rather than option exercises and (ii) best i could tell from the 10-k and proxy statement, the company is not lending him money to buy the stock: it's ALL HIS OWN DOUGH AT RISK.
i'm of the opinion right now to be broadly short energy through various etf's and such, but.....i'm also thinking of going long via calls on chk.
disclosure: none; but thinking about buying calls on chk
i'm of the opinion right now to be broadly short energy through various etf's and such, but.....i'm also thinking of going long via calls on chk.
disclosure: none; but thinking about buying calls on chk
today
as was the case yesterday, it was looking like we were headed for a somewhat flat close, but a flurry of buying late in the day pushed the indices higher into the end of the day. one interesting thing, however, was that the day’s modest gains occurred despite a strong rebound in crude prices. for those that believe, the market is technically primed for some relief to the downward pressure from last week, and as such, reading too much into the correlation between stocks and oil is dangerous.
not only did the bounce in crude not send the broader market straight back down, it also sparked a renewed interest in many of the momentum names that have led this market for much of the year, including CLF, CF, MOS, DRYS and CSIQ to name a few. the big question, of course, is if this is a sign that the narrow leadership that as been the hallmark of this market for the past several months is back in play. although many were hoping for a quick retreat for oil, the momentum in that commodity and the stocks which benefit from higher energy prices has obviously not gone away.
not only did the bounce in crude not send the broader market straight back down, it also sparked a renewed interest in many of the momentum names that have led this market for much of the year, including CLF, CF, MOS, DRYS and CSIQ to name a few. the big question, of course, is if this is a sign that the narrow leadership that as been the hallmark of this market for the past several months is back in play. although many were hoping for a quick retreat for oil, the momentum in that commodity and the stocks which benefit from higher energy prices has obviously not gone away.
Tuesday, May 27, 2008
A sometime series: Valuing securities (this time by using discounted cash flow)
A friend offers to sell you a dollar bill right now. How much should you pay for it today? Assuming there's nothing special about the bill, such as it being a rare silver certificate from the 1930s, offering anything other than the $1.00 face value seems absurd, doesn’t it?
But suppose your friend offers to give you a dollar bill exactly one year from now in exchange for a cash payment from you today. How much is that future dollar worth today? If you pay face value today you're likely overpaying, since there's opportunity cost associated with the dollar you currently have. At the very least, that buck could be earning interest in at a bank account somewhere. Plus, inflation may eat away at its purchasing power.
You estimate that the buck in your pocket will net you 5% over the next 365 days. If so, then you'll need to ‘discount’ the value of that future dollar into present day terms. By applying your estimated ‘discount rate’ of 5%, you value that future dollar as being worth 1/(1+0.05) = $0.95 today. If you pay less than $0.95 today, then this transaction should be a good deal for you. If you offer more than 95 cents today, then you're better off keeping that dollar in your pocket.
Let’s look at one more scenario. Your friend proposes a longer term deal. Beginning exactly one year from now, your friend will pay you one dollar on this day for each of the next 10 calendar years.
Assuming the same 5% discount rate you employed earlier, how much is this stream of future dollars worth today? The analytical process proceeds similar to the one you employed earlier, but there are now 10 periods to discount instead of one. The math looks like this:
*
1st year dollar is presently worth 1/(1+.05) = 0.95
*
2nd year dollar is presently worth 1/(1+.05)2 = 0.91
*
3rd year dollar is presently worth 1/(1+.05)3 = 0.86
*
4th year dollar is presently worth 1/(1+.05)4 = 0.82
*
5th year dollar is presently worth 1/(1+.05)5 = 0.78
*
6th year dollar is presently worth 1/(1+.05)6 = 0.75
*
7th year dollar is presently worth 1/(1+.05)7 = 0.71
*
8th year dollar is presently worth 1/(1+.05)8 = 0.68
*
9th year dollar is presently worth 1/(1+.05)9 = 0.65
*
10th year dollar is presently worth 1/(1+.05)10 = 0.61
Summing all those present values equals about $7.72. If you pay less than $7.72 for this future stream of cash, then you’re likely to benefit. If your friend wants more than $7.72, then you are better off not making this trade.
Note the underlying assumptions. One is that that your friend will make good on those yearly payments. If your buddy misses one or more future payout, then the future cash stream is worth less today. We’re also assuming that you estimated the correct discount rate. For example, greater declines in forecast purchasing power require higher discount rates. Applying a higher discount rate to that future cash stream will reduce its value today.
The general form of the present value formula we used above looks like this:
PV = C / (1+r)n
PV = present value of future cash payment
C = future cash payment amount
r = discount rate
n = term (number of periods)
While bonds are commonly valued using variations of the approach described above, similar 'discounted cash flow' methodology can also be useful when estimating the 'fair value' of stocks. Ever wonder what price you should pay for General Electric (GE), Pfizer (PFE), Exxon (XOM) or other equities? We’ll consider this in future missives.
But suppose your friend offers to give you a dollar bill exactly one year from now in exchange for a cash payment from you today. How much is that future dollar worth today? If you pay face value today you're likely overpaying, since there's opportunity cost associated with the dollar you currently have. At the very least, that buck could be earning interest in at a bank account somewhere. Plus, inflation may eat away at its purchasing power.
You estimate that the buck in your pocket will net you 5% over the next 365 days. If so, then you'll need to ‘discount’ the value of that future dollar into present day terms. By applying your estimated ‘discount rate’ of 5%, you value that future dollar as being worth 1/(1+0.05) = $0.95 today. If you pay less than $0.95 today, then this transaction should be a good deal for you. If you offer more than 95 cents today, then you're better off keeping that dollar in your pocket.
Let’s look at one more scenario. Your friend proposes a longer term deal. Beginning exactly one year from now, your friend will pay you one dollar on this day for each of the next 10 calendar years.
Assuming the same 5% discount rate you employed earlier, how much is this stream of future dollars worth today? The analytical process proceeds similar to the one you employed earlier, but there are now 10 periods to discount instead of one. The math looks like this:
*
1st year dollar is presently worth 1/(1+.05) = 0.95
*
2nd year dollar is presently worth 1/(1+.05)2 = 0.91
*
3rd year dollar is presently worth 1/(1+.05)3 = 0.86
*
4th year dollar is presently worth 1/(1+.05)4 = 0.82
*
5th year dollar is presently worth 1/(1+.05)5 = 0.78
*
6th year dollar is presently worth 1/(1+.05)6 = 0.75
*
7th year dollar is presently worth 1/(1+.05)7 = 0.71
*
8th year dollar is presently worth 1/(1+.05)8 = 0.68
*
9th year dollar is presently worth 1/(1+.05)9 = 0.65
*
10th year dollar is presently worth 1/(1+.05)10 = 0.61
Summing all those present values equals about $7.72. If you pay less than $7.72 for this future stream of cash, then you’re likely to benefit. If your friend wants more than $7.72, then you are better off not making this trade.
Note the underlying assumptions. One is that that your friend will make good on those yearly payments. If your buddy misses one or more future payout, then the future cash stream is worth less today. We’re also assuming that you estimated the correct discount rate. For example, greater declines in forecast purchasing power require higher discount rates. Applying a higher discount rate to that future cash stream will reduce its value today.
The general form of the present value formula we used above looks like this:
PV = C / (1+r)n
PV = present value of future cash payment
C = future cash payment amount
r = discount rate
n = term (number of periods)
While bonds are commonly valued using variations of the approach described above, similar 'discounted cash flow' methodology can also be useful when estimating the 'fair value' of stocks. Ever wonder what price you should pay for General Electric (GE), Pfizer (PFE), Exxon (XOM) or other equities? We’ll consider this in future missives.
A sometime series: Valuing securities (this time by using free cash flow)
Fundamentally, buying stock in a company like Procter & Gamble (PG) is like trying to determine how much money to lay out today for shares of PG in light of the perceived potential for a stream of cash that could flow your way as a shareholder.
Operationalizing this method requires an estimate of future cash flows coming to you from the corporation. Dividend payouts represent a concrete expression of cash flowing to shareholders on a routine basis. However, many companies, even established ones like Berkshire Hathaway (BRK.A) and Cisco Systems (CSCO), don’t pay dividends. Moreover, there has been a secular corporate trend towards reducing dividend payouts in favor of retaining earnings for internal projects.
As such, I like to value securities using measures of free cash flow. Free cash flow (FCF) is cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital (Jensen, 1986: 323). Stated another way, it's the cash that is 'free' for distribution to shareholders after all investments have been financed (Stewart, 1991: xvii).
The most common expression of FCF is as follows:
free cash flow (FCF) = cash flow from operations - capital expenditures
I prefer FCF for a number of reasons. Fundamentally, it helps answer an essential question that should be on investors’ minds: "Based on the capital that goes into an enterprise, how much can I get out?" Moreover, measures of FCF are less influenced by accounting tricks that often distort earnings numbers on income statements. Free cash flow tends to a reasonable gauge of the true value creating power of an enterprise.
FCF approaches using the equation above are less effective when operating cash flows or capital expenditures do not accurately reflect inflows and outflows central to the ongoing enterprise. Financial firms, for instance, commonly employ sources of capital that are not considered capital expenditures by accounting standards. Adjustments must be made to render FCF meaningful in such situations.
It should be also noted that negative FCF might not be a bad thing. For example, young enterprises such as SunPower Corporation (SPWR) often invest heavily in the present with an eye towards creating value in the future. From a discounted cash flow perspective, the challenge becomes forecasting the size and timing of future FCF values.
Operationalizing this method requires an estimate of future cash flows coming to you from the corporation. Dividend payouts represent a concrete expression of cash flowing to shareholders on a routine basis. However, many companies, even established ones like Berkshire Hathaway (BRK.A) and Cisco Systems (CSCO), don’t pay dividends. Moreover, there has been a secular corporate trend towards reducing dividend payouts in favor of retaining earnings for internal projects.
As such, I like to value securities using measures of free cash flow. Free cash flow (FCF) is cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital (Jensen, 1986: 323). Stated another way, it's the cash that is 'free' for distribution to shareholders after all investments have been financed (Stewart, 1991: xvii).
The most common expression of FCF is as follows:
free cash flow (FCF) = cash flow from operations - capital expenditures
I prefer FCF for a number of reasons. Fundamentally, it helps answer an essential question that should be on investors’ minds: "Based on the capital that goes into an enterprise, how much can I get out?" Moreover, measures of FCF are less influenced by accounting tricks that often distort earnings numbers on income statements. Free cash flow tends to a reasonable gauge of the true value creating power of an enterprise.
FCF approaches using the equation above are less effective when operating cash flows or capital expenditures do not accurately reflect inflows and outflows central to the ongoing enterprise. Financial firms, for instance, commonly employ sources of capital that are not considered capital expenditures by accounting standards. Adjustments must be made to render FCF meaningful in such situations.
It should be also noted that negative FCF might not be a bad thing. For example, young enterprises such as SunPower Corporation (SPWR) often invest heavily in the present with an eye towards creating value in the future. From a discounted cash flow perspective, the challenge becomes forecasting the size and timing of future FCF values.
a bearish idea
investors' focus this week will remain on surging food and energy costs and their impact on the economy. earnings from several retailers, including cost and shld, will provide clues about the health of consumer spending. the numbers are likely to indicate a continued slowdown in sales. with this theme in place, i'd like to offer an idea: a bearish position in cec -- the operator of the Chuck E. Cheese chain of family restaurants.
shares of cec hit a 10-month high of $39 on 5/12, giving the stock a year-to-date gain of almost 50% and making it one of best performers in the casual dining sector. since then, however, the stock has rolled over, closing at $33.60 on friday. in addition, for those that believe, the chart appears to have put in top.
cec has done a great job managing costs as well as its concept, which is one-stop family dining and kids' entertainment. but if food costs continue to rise and discretionary consumer spending declines, i expect this chain's sales will suffer during the summer. low-priced restaurants such as rrgb and jbx have recently reported disappointing earnings, and both have seen their shares tumble.
because cec doesn't report earnings again until late july, the price deterioration might take some time to play out. so i'm looking at buying longer-dated, out-of-the-money options to create a low-cost bearish position.
one way to do this would be to buy to open 20 sept $30 puts at $1.50 a contract.
i think the shares may hit $24 a share. use a close above $38 as a stop for exiting the position.
disclosure: DO YOUR OWN DD!! also - long shld puts
shares of cec hit a 10-month high of $39 on 5/12, giving the stock a year-to-date gain of almost 50% and making it one of best performers in the casual dining sector. since then, however, the stock has rolled over, closing at $33.60 on friday. in addition, for those that believe, the chart appears to have put in top.
cec has done a great job managing costs as well as its concept, which is one-stop family dining and kids' entertainment. but if food costs continue to rise and discretionary consumer spending declines, i expect this chain's sales will suffer during the summer. low-priced restaurants such as rrgb and jbx have recently reported disappointing earnings, and both have seen their shares tumble.
because cec doesn't report earnings again until late july, the price deterioration might take some time to play out. so i'm looking at buying longer-dated, out-of-the-money options to create a low-cost bearish position.
one way to do this would be to buy to open 20 sept $30 puts at $1.50 a contract.
i think the shares may hit $24 a share. use a close above $38 as a stop for exiting the position.
disclosure: DO YOUR OWN DD!! also - long shld puts
today
although it was looking like the market was going to drift into the close sporting modest gains on the day, a spurt of buying about 90 minutes before the final bell drove the averages higher. technology was the biggest winner, with the nasdaq 100 sporting gains of almost 2% while materials and energy lagged. the bounce in the greenback also triggered some additional profit-taking in solar, steel and agriculture stocks.
certainly, the pullback in crude prices today will be given the credit for this slight bounce, the fact is that the market was due for some relief buying after the very poor action last week. the big question, however, is if the selling last week was just another step in the recovery process for this market and if the action today was an initial step in repairing that damage. for those that believe, given the lack of volume – which turned out to be even lower than friday’s volume – and vigor, many doubt that today’s session was any more than an oversold bounce.
certainly, the pullback in crude prices today will be given the credit for this slight bounce, the fact is that the market was due for some relief buying after the very poor action last week. the big question, however, is if the selling last week was just another step in the recovery process for this market and if the action today was an initial step in repairing that damage. for those that believe, given the lack of volume – which turned out to be even lower than friday’s volume – and vigor, many doubt that today’s session was any more than an oversold bounce.
Saturday, May 24, 2008
smooth seas ahead for shippers
since the beginning of the year, dry-bulk shipping stocks have risen, in general. kind of bumpy at times, but most are up nicely. i think things stand to get much better in due time.
why, when things are up so much, can they stand to go even higher? there are three reasons: coal, the earthquake in china and the credit crunch.
first, a quick review of how things got to this point.
the most-followed stocks in the sector have followed the roller-coaster ride in the cost of freight rates. last november the Baltic Dry Index, which measures the cost of moving bulk commodities such as ores and grains, started plunging from a november high of 11,039 down to a low of 5,615 -- a 49% drop -- on 1/29/08.
the fall erroneously led some (including me - i sold osg too quickly) to see an economic abyss ahead for the global economy, the theory being that shipping reflects overall economic activity.
in reality, what happened this time had more to do with negotiations between iron ore miners in brazil and the consumers of it in china. the stalled price talks meant the ores weren't being hauled across the ocean, and many large ocean cruisers were available to be rented for substantially lower day rates.
when the negotiations settled, things picked up. and since the low in late january, the bdi has soared to an all-time high of around 11,800.
here are 3 things to watch/consider moving forward:
coal inventories in china are dwindling fast. accounts vary, with one press report saying 32 power plants have had to shut down due to insufficient fuel. others say overall inventories are down to less than eight days' worth of consumption.
either way, it's low.
compare that to current inventory levels in the us, which now stand at around 55 days and typically average 50 days, according to Paul Forward, a dc-based coal stock analyst at stifel nicolaus, in a recent research report.
one way or another, china will need to replenish those inventories to more sustainable levels (albeit likely lower than ours), or risk continued power-supply issues into the olympics this summer. to a lesser degree, at least in terms of the volume of coal needed, it also needs the coal for producing steel, a vital component for the construction of new buildings and machinery. the metal is made from coked coal, limestone and iron ore.
but the problem for china is that it won't be able to meet that need solely by using domestic sources. instead it will have to turn to the global market and ship it in from overseas.
china will flip from net exporter of thermal coal in 2007 to a net importer this year, according to recent Australian Bureau of Agricultural and Resource Economics projections. that's partially as a consequence of increases in electrical generating capacity, but also as a result of the shuttering of some less-efficient domestic coal mines, analysts say.
thermal coal is used in power plants, whereas metallic coal, of which china is already a net importer, is used to create steel.
the terrible earthquake earlier this month, which has so far left more than 50,000 dead and many more homeless in china, has disrupted the economy in ways that will benefit the bulk freight carriers.
the internal infrastructure is so broken that trains can't be used to haul freight around the country, explains Natasha Boyden, managing director of shipping research at Cantor Fitzgerald. instead, coastal ships are being used to move materials around.
one way or another, that puts upward pressure on the cost of renting all dry-cargo ships, including the very large ocean-going ones.
second, it's been clear that much of the building work previously carried out in the quake zone was shoddy. china will now need to rebuild. to do that, massive quantities of cement and steel will be needed to make reinforced concrete for quake-proof buildings.
and all that material will need to be hauled across the ocean in dry-bulk carriers.
as if all that weren't enough, there is also the credit difficulities worldwide. some us government officials might be saying that the worst of it is behind us, but try telling that to anyone wanting to purchase a dry bulk ship.
not only is it hard for the buyers to find financing, but the shipyards themselves are finding it hard to stay afloat. in some cases, the yards that have taken orders have either yet to be built themselves or have failed to produce any ships.
in addition, there is the rising cost of steel, which has added cost pressures to the financing problem.
the result has been skyrocketing freight rates as demand has outstripped shipping capacity.
the cost of renting a cape-class cruiser, the largest of all the dry-bulk ship categories, was recently around $200,000 -- up from $90,000 in the first quarter, and a deal was inked on friday for $300,000 -- and way above a more "normal" $8,000 back in 2004.
the financing problem also means that it's unlikely any new capacity will come on line soon, helping to keep a floor under freight rates at the very least, or more likely sending them even higher.
the $300,000 deal is really astounding, if one thinks about it. it only adds further evidence to the good news ahead for the shippers.
why, when things are up so much, can they stand to go even higher? there are three reasons: coal, the earthquake in china and the credit crunch.
first, a quick review of how things got to this point.
the most-followed stocks in the sector have followed the roller-coaster ride in the cost of freight rates. last november the Baltic Dry Index, which measures the cost of moving bulk commodities such as ores and grains, started plunging from a november high of 11,039 down to a low of 5,615 -- a 49% drop -- on 1/29/08.
the fall erroneously led some (including me - i sold osg too quickly) to see an economic abyss ahead for the global economy, the theory being that shipping reflects overall economic activity.
in reality, what happened this time had more to do with negotiations between iron ore miners in brazil and the consumers of it in china. the stalled price talks meant the ores weren't being hauled across the ocean, and many large ocean cruisers were available to be rented for substantially lower day rates.
when the negotiations settled, things picked up. and since the low in late january, the bdi has soared to an all-time high of around 11,800.
here are 3 things to watch/consider moving forward:
coal inventories in china are dwindling fast. accounts vary, with one press report saying 32 power plants have had to shut down due to insufficient fuel. others say overall inventories are down to less than eight days' worth of consumption.
either way, it's low.
compare that to current inventory levels in the us, which now stand at around 55 days and typically average 50 days, according to Paul Forward, a dc-based coal stock analyst at stifel nicolaus, in a recent research report.
one way or another, china will need to replenish those inventories to more sustainable levels (albeit likely lower than ours), or risk continued power-supply issues into the olympics this summer. to a lesser degree, at least in terms of the volume of coal needed, it also needs the coal for producing steel, a vital component for the construction of new buildings and machinery. the metal is made from coked coal, limestone and iron ore.
but the problem for china is that it won't be able to meet that need solely by using domestic sources. instead it will have to turn to the global market and ship it in from overseas.
china will flip from net exporter of thermal coal in 2007 to a net importer this year, according to recent Australian Bureau of Agricultural and Resource Economics projections. that's partially as a consequence of increases in electrical generating capacity, but also as a result of the shuttering of some less-efficient domestic coal mines, analysts say.
thermal coal is used in power plants, whereas metallic coal, of which china is already a net importer, is used to create steel.
the terrible earthquake earlier this month, which has so far left more than 50,000 dead and many more homeless in china, has disrupted the economy in ways that will benefit the bulk freight carriers.
the internal infrastructure is so broken that trains can't be used to haul freight around the country, explains Natasha Boyden, managing director of shipping research at Cantor Fitzgerald. instead, coastal ships are being used to move materials around.
one way or another, that puts upward pressure on the cost of renting all dry-cargo ships, including the very large ocean-going ones.
second, it's been clear that much of the building work previously carried out in the quake zone was shoddy. china will now need to rebuild. to do that, massive quantities of cement and steel will be needed to make reinforced concrete for quake-proof buildings.
and all that material will need to be hauled across the ocean in dry-bulk carriers.
as if all that weren't enough, there is also the credit difficulities worldwide. some us government officials might be saying that the worst of it is behind us, but try telling that to anyone wanting to purchase a dry bulk ship.
not only is it hard for the buyers to find financing, but the shipyards themselves are finding it hard to stay afloat. in some cases, the yards that have taken orders have either yet to be built themselves or have failed to produce any ships.
in addition, there is the rising cost of steel, which has added cost pressures to the financing problem.
the result has been skyrocketing freight rates as demand has outstripped shipping capacity.
the cost of renting a cape-class cruiser, the largest of all the dry-bulk ship categories, was recently around $200,000 -- up from $90,000 in the first quarter, and a deal was inked on friday for $300,000 -- and way above a more "normal" $8,000 back in 2004.
the financing problem also means that it's unlikely any new capacity will come on line soon, helping to keep a floor under freight rates at the very least, or more likely sending them even higher.
the $300,000 deal is really astounding, if one thinks about it. it only adds further evidence to the good news ahead for the shippers.
A little (very little, actually) on fixed-return options
One can use FROs to create a variation on a covered-call strategy. It would be akin to selling a call spread, as it allows you to collect premium, but also provides unlimited upside once the stock price moves above the option's strike price.
One way to take advantage of the limited-risk aspect of these options that are essentially a spread -- that is, it has limited risk -- as one can sell more calls than the number of shares you own.
In this sense, one could integrate FROs into an existing portfolio. For example, let's assume you have been riding the energy wave by buying the Oil Services HOLDRs (OIH) exchange-traded fund. With the shares currently trading around $210, one can sell the June 220 call for around $6.20 a contract. You can see the option chain by going to the Amex of the Web site.
But I think the real value, and how FROs will ultimately be successful, is that it offers a very low-cost way to take speculative positions in some of the most popular stocks, but at minimal cost.
The names that infatuate people, such as Apple (AAPL) and Google (GOOG) skew toward a younger demographic, who through no fault of their own, tend to not have much risk capital available, to say nothing of trading experience in stocks or options. FROs can be a great stepping stone toward learning how markets price various trading instruments.
Let's say you love Google and Apple. If you wanted to buy 100 shares of those stocks, it would cost you about $55,000 and $18,000 respectively. OK, let's assume 50% margin and cut it half. That is still about $36,000 to take a relatively small, and highly risky, position in just two names. Assume each stock gains 10% in the next two months. You would make about $7,300. That would be awesome. If they dropped 10% you'd lose about $7,300. Bummer.
But if you anticipate a 10% increase in price, one can buy the Google July 590 FRO calls for a mere 30 cents, or $30 a contract. This compared to buying the standard calls, in which the July 590 strike is trading around $7, or $700 a contract.
If Google is above $590 at the July expiration, the FROs will deliver a maximum of $70, or 120% profit. And while the standard options have an unlimited profit potential, their breakeven point is $597, or some 1.2% higher than the FRO of the same strike; they are also subject a greater impact of time decay and changes in implied volatility. Note that both options can be sold at point prior to the expiration date.
Trading options has a never-ending learning curve, which only seems to get steeper the higher you climb. I think FROs offer a path for people taking a first step by placing real money behind their opinions, but not having to worry that a misstep will prove fatal.
One way to take advantage of the limited-risk aspect of these options that are essentially a spread -- that is, it has limited risk -- as one can sell more calls than the number of shares you own.
In this sense, one could integrate FROs into an existing portfolio. For example, let's assume you have been riding the energy wave by buying the Oil Services HOLDRs (OIH) exchange-traded fund. With the shares currently trading around $210, one can sell the June 220 call for around $6.20 a contract. You can see the option chain by going to the Amex of the Web site.
But I think the real value, and how FROs will ultimately be successful, is that it offers a very low-cost way to take speculative positions in some of the most popular stocks, but at minimal cost.
The names that infatuate people, such as Apple (AAPL) and Google (GOOG) skew toward a younger demographic, who through no fault of their own, tend to not have much risk capital available, to say nothing of trading experience in stocks or options. FROs can be a great stepping stone toward learning how markets price various trading instruments.
Let's say you love Google and Apple. If you wanted to buy 100 shares of those stocks, it would cost you about $55,000 and $18,000 respectively. OK, let's assume 50% margin and cut it half. That is still about $36,000 to take a relatively small, and highly risky, position in just two names. Assume each stock gains 10% in the next two months. You would make about $7,300. That would be awesome. If they dropped 10% you'd lose about $7,300. Bummer.
But if you anticipate a 10% increase in price, one can buy the Google July 590 FRO calls for a mere 30 cents, or $30 a contract. This compared to buying the standard calls, in which the July 590 strike is trading around $7, or $700 a contract.
If Google is above $590 at the July expiration, the FROs will deliver a maximum of $70, or 120% profit. And while the standard options have an unlimited profit potential, their breakeven point is $597, or some 1.2% higher than the FRO of the same strike; they are also subject a greater impact of time decay and changes in implied volatility. Note that both options can be sold at point prior to the expiration date.
Trading options has a never-ending learning curve, which only seems to get steeper the higher you climb. I think FROs offer a path for people taking a first step by placing real money behind their opinions, but not having to worry that a misstep will prove fatal.
Friday, May 23, 2008
today's action
quite often, the thin trading in front of a holiday has a positive bias. that wasn't the case today, as stubbornly high crude oil prices kept market players uneasy. breadth was poor with better than two losers for every gainer. gold and solar energy showed some relative strength, with oil services, steel, coal, biotechnology, financials and energy struggling.
interestingly, oil stocks are softening, while crude oil is holding up quite well, but what is really worrisome is the continued pressure on the financial sector, which indicates that many are expecting more bad news for the group.
for those that believe, technically, it was a very poor week for the major indices. the uptrend line that has been in place since the march low was breached, and we could only manage an extremely weak bounce thursday before the downtrend resumed today.
the good news is that we are now a bit oversold and ripe for some sort of short-term bounce. in addition, a lot of attractive stocks are now pulling back to key support level. while the overall market mood has definitely darkened, we are now starting to see some very severe pullbacks which may present opportunities in the near term. i will definitely be working on a shopping list this weekend, although i don't think there will be any rush to jump in.
interestingly, oil stocks are softening, while crude oil is holding up quite well, but what is really worrisome is the continued pressure on the financial sector, which indicates that many are expecting more bad news for the group.
for those that believe, technically, it was a very poor week for the major indices. the uptrend line that has been in place since the march low was breached, and we could only manage an extremely weak bounce thursday before the downtrend resumed today.
the good news is that we are now a bit oversold and ripe for some sort of short-term bounce. in addition, a lot of attractive stocks are now pulling back to key support level. while the overall market mood has definitely darkened, we are now starting to see some very severe pullbacks which may present opportunities in the near term. i will definitely be working on a shopping list this weekend, although i don't think there will be any rush to jump in.
a move and a future move
oil's gone parabolic, in my opinion, so i think the price per barrel comes down...eventually. however, even though i think oil comes down - which will eventually benefit the consumer - i think certain areas of retail are hurting; and will hurt more even if gasoline comes down .50 a gallon. the one i'm targeting is shld: in an earlier post i wrote that shld may be an enticing long at 80 or so. i've changed my thinking: i think it's an enticing short to about 60; then i'd look at it as a long.
and at the risk of being slightly premature, i'm seriously looking at establishing energy-related shorts via a long position in dug and a short in oih.
long shld puts
and at the risk of being slightly premature, i'm seriously looking at establishing energy-related shorts via a long position in dug and a short in oih.
long shld puts
Thursday, May 22, 2008
gme (II)
forgive me if i repeat a few items from the first gme post today. the stock's selling off, despite a good reported quarter. indeed, high expectations were a hinderance this time for gme. however, with the company's conference call over, shares of gme are at least attempting a rally off their lows from early this morning. after listening to management's comments, i'm on the fence about adding exposure to gme; although i'm not selling what i have.
during gme's conference call, management went over the strong sales and earnings numbers announced this morning. more importantly for investors, the company detailed its expectations for the rest of 2008. management said that it expects to open 550 to 600 new stores during the year -- half of which will be outside of the U.S. -- and also that it is confident about growing earnings per share at a 25% clip over the next two years. the company's used-game business continues to be a positive focus because of the higher margins generated by selling used or refurbished titles.
overall, the conference call was resoundingly positive, with management putting significant effort into reiterating its confidence that the company is doing as well as it ever has. the majority of analyst reports released today have also retained a bullish stance on gme, although they acknowledged that guidance could have been more bullish.
management didn't offer much in the way of new titles that could drive sales growth beyond its guidance for 2008. instead, they pointed out that the top 25 best-selling games were spread across seven different platforms (indicating just how diverse gme's sales are).
but the fact is that in order for the company to surpass expectations, there needs to be some big games to drive the sales momentum. it's true that its hardware base (gaming consoles) is positioned to drive the company's continued strength in video-game sales, but the high expectations for gme mean that upside will only come if it significantly beats estimates. today's selloff is partially a result of the market not being able to make a case for upside to sales and earnings estimates when there isn't a high-profile title like "Halo 3" (which was released in the fall of 2007) to look forward to.
however, these concerns aren't new. in fact, it has been said that a negative story in Barron's could help the stock by creating some skepticism. but judging by the fact that shares moved lower today on strong results, there's a valid argument to be made that the high expectations are making it difficult for investors to see a big gain going forward.
shares of gme rallied off their lows throughout the day as the conference call provided no additional negative news and analysts defended the results.
during gme's conference call, management went over the strong sales and earnings numbers announced this morning. more importantly for investors, the company detailed its expectations for the rest of 2008. management said that it expects to open 550 to 600 new stores during the year -- half of which will be outside of the U.S. -- and also that it is confident about growing earnings per share at a 25% clip over the next two years. the company's used-game business continues to be a positive focus because of the higher margins generated by selling used or refurbished titles.
overall, the conference call was resoundingly positive, with management putting significant effort into reiterating its confidence that the company is doing as well as it ever has. the majority of analyst reports released today have also retained a bullish stance on gme, although they acknowledged that guidance could have been more bullish.
management didn't offer much in the way of new titles that could drive sales growth beyond its guidance for 2008. instead, they pointed out that the top 25 best-selling games were spread across seven different platforms (indicating just how diverse gme's sales are).
but the fact is that in order for the company to surpass expectations, there needs to be some big games to drive the sales momentum. it's true that its hardware base (gaming consoles) is positioned to drive the company's continued strength in video-game sales, but the high expectations for gme mean that upside will only come if it significantly beats estimates. today's selloff is partially a result of the market not being able to make a case for upside to sales and earnings estimates when there isn't a high-profile title like "Halo 3" (which was released in the fall of 2007) to look forward to.
however, these concerns aren't new. in fact, it has been said that a negative story in Barron's could help the stock by creating some skepticism. but judging by the fact that shares moved lower today on strong results, there's a valid argument to be made that the high expectations are making it difficult for investors to see a big gain going forward.
shares of gme rallied off their lows throughout the day as the conference call provided no additional negative news and analysts defended the results.
gme (I)
the streak continues: for the sixth quarter in a row, video game and entertainment retailer gme has reported earnings that exceeded analyst's expectations. the company reported earnings of $62.1 million, or 37 cents a share, 151% better than the same period last year. the analysts who follow gme had predicted that earnings for the quarter would be 32 cents a share; revenue was up 41% compared to 2007 and comparable-store sales were up 27%.
the sales of new video games were particularly strong, with new game sales rising 72% in the three months. the sales leader in games was Grand Theft Auto IV, despite being available only the last five days of the period, followed by Super Smash Brothers. used game sales rose 27% in the three months.
the retailer opened a record 210 stores in the first quarter as well. with the new store openings, gme now has over 5,400 retail locations in 17 countries. each store stocks over 4,500 items -- including games, consoles and accessories.
ceo R. Richard Fontaine commented on the quarter saying,
"GameStop's trade model continues to provide our customers with a way to lower the cost of video gaming while offering the largest selection of gaming products of any retailer in any market. We continue to attract and serve a broader consumer base as video gaming continues to attract the core gamers and is moving towards becoming mainstream family entertainment."
the company also raised its guidance for the full year; the company now expects to earn between $2.30 and $2.39, up from the previous level of $2.25 to $2.34. currently, the consensus expectation is for the company to earn $2.33. the company also expects revenue growth to be between 12% and 14% at stores open at least one year. gme is also well ahead of pace to meet its goal of 550 to 600 new stores this year. at least half of those stores will be outside the us, and international profits are expected to grow by 25%.
in its release, the company expects full-year profits for gme to rise at least 25%. management attributes the growth to the growing market for video games, with new gaming platform sales rising by over 31 million nationally in 2007 and the continuing changing demographics of the gaming marketplace. over 38% of the market is female, the fastest-growing segment of the video game market. the average age of video gamers is now over 30, dispelling the myth that the marketplace is comprised of just teenage and early 20s hardcore gamers.
releases of new games such as Guitar Hero IV and Nintendo's Wii Fit are also expected to help fuel sales growth for gme. in spite of the good news, the stock's selling off.
the sales of new video games were particularly strong, with new game sales rising 72% in the three months. the sales leader in games was Grand Theft Auto IV, despite being available only the last five days of the period, followed by Super Smash Brothers. used game sales rose 27% in the three months.
the retailer opened a record 210 stores in the first quarter as well. with the new store openings, gme now has over 5,400 retail locations in 17 countries. each store stocks over 4,500 items -- including games, consoles and accessories.
ceo R. Richard Fontaine commented on the quarter saying,
"GameStop's trade model continues to provide our customers with a way to lower the cost of video gaming while offering the largest selection of gaming products of any retailer in any market. We continue to attract and serve a broader consumer base as video gaming continues to attract the core gamers and is moving towards becoming mainstream family entertainment."
the company also raised its guidance for the full year; the company now expects to earn between $2.30 and $2.39, up from the previous level of $2.25 to $2.34. currently, the consensus expectation is for the company to earn $2.33. the company also expects revenue growth to be between 12% and 14% at stores open at least one year. gme is also well ahead of pace to meet its goal of 550 to 600 new stores this year. at least half of those stores will be outside the us, and international profits are expected to grow by 25%.
in its release, the company expects full-year profits for gme to rise at least 25%. management attributes the growth to the growing market for video games, with new gaming platform sales rising by over 31 million nationally in 2007 and the continuing changing demographics of the gaming marketplace. over 38% of the market is female, the fastest-growing segment of the video game market. the average age of video gamers is now over 30, dispelling the myth that the marketplace is comprised of just teenage and early 20s hardcore gamers.
releases of new games such as Guitar Hero IV and Nintendo's Wii Fit are also expected to help fuel sales growth for gme. in spite of the good news, the stock's selling off.
fed auction favorable for markets (hey, any good news at this point is welcome)
the fed just auctioned a swap for its treasuries with the nation's primary dealers, which obtain the treasuries in exchange for mortgage and other collateral, to help them liquefy their balance sheets.
the fed made available $75 billion of its treasuries, but only $46 billion in bids were submitted, producing a bid/cover ratio of 0.62, the lowest cover ratio for any of the three $75 billion auctions since the first one on 3/27, which was the first TSLF (Term Securities Lending Facility) auction.
about $108 billion of the fed's securities have been lent through the TSLF, $92 billion less than has been authorized by the fed's board of governors. about $157 billion were outstanding after the first four weeks of the program.
this is good news to the extent that it indicates dealers have become less dependent upon the fed's balance sheet in order to liquefy their own.
the fed made available $75 billion of its treasuries, but only $46 billion in bids were submitted, producing a bid/cover ratio of 0.62, the lowest cover ratio for any of the three $75 billion auctions since the first one on 3/27, which was the first TSLF (Term Securities Lending Facility) auction.
about $108 billion of the fed's securities have been lent through the TSLF, $92 billion less than has been authorized by the fed's board of governors. about $157 billion were outstanding after the first four weeks of the program.
this is good news to the extent that it indicates dealers have become less dependent upon the fed's balance sheet in order to liquefy their own.
today's market
after an ugly two-day pullback blamed on a spike in oil prices, we got a bit of a bounce today, as oil fell back $2.50. given how far and fast the markets fell, a bounce was to be expected, and the softening in oil prices was a good justification.
unfortunately, the action today didn't seem to indicate that bargain hunters are rushing in to take advantage of the lower prices. in fact, some of the hot sectors, like solar energy, bulk shipping, and metals and mining, saw some severe dumping, as momentum players moved to the sidelines.
most likely the bulls' best hope at this point is that energy prices will ease further and help dampen some of the concerns about inflation. i don't think it's going to be that easy, and even if oil does fall further, we still have a number of other concerns out there that may persist. all one has to do is look at how poorly the financial sector has been acting if you want proof that there are still some problems brewing out there.
with the three-day weekend in front of us, trading tomorrow is likely to be quite thin. in fact, i would not be surprised if volume ends up being the lightest of the year. however, holiday trading tends to have a positive bias, so i would be hesitant to press shorts at this point. next week will be the real test of whether the "worst is over" rally was just a bear market bounce or something more lasting. lots of smart people are betting on the bears at this point.
unfortunately, the action today didn't seem to indicate that bargain hunters are rushing in to take advantage of the lower prices. in fact, some of the hot sectors, like solar energy, bulk shipping, and metals and mining, saw some severe dumping, as momentum players moved to the sidelines.
most likely the bulls' best hope at this point is that energy prices will ease further and help dampen some of the concerns about inflation. i don't think it's going to be that easy, and even if oil does fall further, we still have a number of other concerns out there that may persist. all one has to do is look at how poorly the financial sector has been acting if you want proof that there are still some problems brewing out there.
with the three-day weekend in front of us, trading tomorrow is likely to be quite thin. in fact, i would not be surprised if volume ends up being the lightest of the year. however, holiday trading tends to have a positive bias, so i would be hesitant to press shorts at this point. next week will be the real test of whether the "worst is over" rally was just a bear market bounce or something more lasting. lots of smart people are betting on the bears at this point.
Wednesday, May 21, 2008
just a little more on gme
will gme's hot streak continue? the company will report tomorrow morning, and the expectation is for the company to almost double the profit levels of the first quarter of 2007.
like i wrote earlier, the consensus analysts' estimate for gme is for earnings of 35 cents per share vs. just 16 cents a year ago. as consumers search for lower cost entertainment options and home gaming spreads, the company has become one of the few bright spots on the retail landscape. it has exceeded expectations for the last five quarters and is hoping to make it six. as with many fast-growing companies, analysts have been scrambling to keep up, raising their estimates three times in the last three months.
sales have been helped by the introduction of several hot new game titles, including the controversial but very popular Grand Theft Auto IV released earlier this month. the popularity of the Nintendo Wii and its DS handheld gaming platform has also fueled sales increases for the retailer. in addition to the platforms, Wii games such as Super Smash Brothers have been a huge hit for gme. the company has also ramped up its used games sales in recent months, responding to consumer demand for lower-priced entertainment.
the company is already one of the fastest-growing retailers and has no plans to slow any time soon. the company hopes to open around 600 stores this year after 586 new locations last year. currently, there are 5,260 stores in 17 countries around the world. half of the new stores planned for 2008 are expected to be outside the us, and company officials have said that they expect growth rates in key european markets to exceed those here in the us in 2008. two-thirds of new international store openings for this year will be in europe, with the balance in canada and australia.
in the us, gme currently has about 25% of the new video game and an enormous 80% of the used game market. the ability for consumers to turn in one game for a credit is one of the company's key selling features and gives it a ready inventory of used video games for consumers to purchase unlike the big box competitors.
long gme
like i wrote earlier, the consensus analysts' estimate for gme is for earnings of 35 cents per share vs. just 16 cents a year ago. as consumers search for lower cost entertainment options and home gaming spreads, the company has become one of the few bright spots on the retail landscape. it has exceeded expectations for the last five quarters and is hoping to make it six. as with many fast-growing companies, analysts have been scrambling to keep up, raising their estimates three times in the last three months.
sales have been helped by the introduction of several hot new game titles, including the controversial but very popular Grand Theft Auto IV released earlier this month. the popularity of the Nintendo Wii and its DS handheld gaming platform has also fueled sales increases for the retailer. in addition to the platforms, Wii games such as Super Smash Brothers have been a huge hit for gme. the company has also ramped up its used games sales in recent months, responding to consumer demand for lower-priced entertainment.
the company is already one of the fastest-growing retailers and has no plans to slow any time soon. the company hopes to open around 600 stores this year after 586 new locations last year. currently, there are 5,260 stores in 17 countries around the world. half of the new stores planned for 2008 are expected to be outside the us, and company officials have said that they expect growth rates in key european markets to exceed those here in the us in 2008. two-thirds of new international store openings for this year will be in europe, with the balance in canada and australia.
in the us, gme currently has about 25% of the new video game and an enormous 80% of the used game market. the ability for consumers to turn in one game for a credit is one of the company's key selling features and gives it a ready inventory of used video games for consumers to purchase unlike the big box competitors.
long gme
commodity prices and the idiots in congress
if these morons in congress that think commodity prices are only high because of "speculators" get their way and try and limit investment in commodities, then gold is going to be the big beneficiary of the move. limiting the ability of investors to hedge against inflation in ag ETFs or oil futures (for example), will only force them into more traditional inflation hedges, like physical gold and silver. and it would probably crush the dollar too, since it would drive more wealth offshore.
after all, before there were ETFs and futures, there was a reason that gold (and not oil or wheat for example) was a currency and considered a store of value. that's because currencies and stores of value have certain characteristics which gold also has (i.e. - scarcity, portability, etc).
it’s ironic, but if congress were to try to limit investment in commodities that consumers need, like energy and food, it would not only likely make inflation even worse since it would encourage hording. but it would also benefit gold the most since the yellow metal, which isn't a traditional "commodity" and hurts nobody but jewelery buyers if the price rises, would become the premiere liquid investment vehicle to hedge against rising inflation. as a big proponent of investing in gold in the current environment, i hope they do it!
commodity prices aren’t high because of "speculators.” they're high because of rising inflation, which is the result of too much money and credit. and we all know who produces that money and credit. if congress wants to blame someone, then blame greenspan and bernanke.
after all, before there were ETFs and futures, there was a reason that gold (and not oil or wheat for example) was a currency and considered a store of value. that's because currencies and stores of value have certain characteristics which gold also has (i.e. - scarcity, portability, etc).
it’s ironic, but if congress were to try to limit investment in commodities that consumers need, like energy and food, it would not only likely make inflation even worse since it would encourage hording. but it would also benefit gold the most since the yellow metal, which isn't a traditional "commodity" and hurts nobody but jewelery buyers if the price rises, would become the premiere liquid investment vehicle to hedge against rising inflation. as a big proponent of investing in gold in the current environment, i hope they do it!
commodity prices aren’t high because of "speculators.” they're high because of rising inflation, which is the result of too much money and credit. and we all know who produces that money and credit. if congress wants to blame someone, then blame greenspan and bernanke.
more on gme, which reports before the open tomorrow
gme reports first quarter results tomorrow. current consensus estimates show that analysts are expecting gme to post earnings of 35 cents a share on sales of more than $1.7 billion. a strong sales number is expected due to a number of hit games during the quarter, including "Grand Theft Auto IV" and "Super Smash Bros. Brawl". as always, management's guidance will also be a key focus for investors, as attention shifts toward the second half of 2008 and which games are expected to be major drivers for the company's results. during the company's previous earnings announcement in march, management provided guidance for earnings per share in the $2.25 to $2.34 range for the first-quarter.
expectations are extremely high for gme, but there is still a fair amount of skepticism on wall street. a recent barron's article effectively called a top in the stock, saying that expectations are too high and that looking past "Grand Theft Auto IV," the potential for similar blockbusters is limited.
in this case, the skepticism could actually create additional upside for gme, as video-game spending remains in an uptrend that can be boosted by blockbuster games, rather than being purely dependent on them. obviously close attention will be paid to management's guidance and commentary for insight into its expectations heading into 2009. i'm still long options in gme.
expectations are extremely high for gme, but there is still a fair amount of skepticism on wall street. a recent barron's article effectively called a top in the stock, saying that expectations are too high and that looking past "Grand Theft Auto IV," the potential for similar blockbusters is limited.
in this case, the skepticism could actually create additional upside for gme, as video-game spending remains in an uptrend that can be boosted by blockbuster games, rather than being purely dependent on them. obviously close attention will be paid to management's guidance and commentary for insight into its expectations heading into 2009. i'm still long options in gme.
a few thoughts on vrgy
piggybacking off gs' chip call from monday, vrgy looks like a good bet in the back half of the year: vrgy was spun out of A in 2006 and is primarily an advanced test systems and solutions provider to the broad semi-space. for the most part it has been producing solid EPS results as a sole operator. its last quarter was weaker, probably due to weaker results in their memory end markets, but they are not alone in this regard. recent reports seem to indicate that the memory biz may be broadly hitting a bottom or at least a slowing in the pace of declining results.
additionally, vrgy has a very strong balance sheet and they are selling for just a bit over 3 times cash and investments, as well as selling for under two times sales while producing solid EPS results. those are cheap metrics unless you believe they will suffer sales and earnings declines over a sustained period. at these valuation levels (and high cash position), the stock may also be subject to potential M&A activity.
over time i think vrgy can make a substantial move higher. if any material weakness occurs as a result of tonight's call, i will start to think seriously about owning this one.
additionally, vrgy has a very strong balance sheet and they are selling for just a bit over 3 times cash and investments, as well as selling for under two times sales while producing solid EPS results. those are cheap metrics unless you believe they will suffer sales and earnings declines over a sustained period. at these valuation levels (and high cash position), the stock may also be subject to potential M&A activity.
over time i think vrgy can make a substantial move higher. if any material weakness occurs as a result of tonight's call, i will start to think seriously about owning this one.
today
without a doubt, it was an ugly day for the market, but most concerning is the break below the intermediate ascending trendlines for the major indices (for those that believe). it'll be interesting to see how the market does the rest of the month.
by the close, the indices each lost just under 2% on breadth that was worse than 2:1 to the negative with particular weakness in materials, financials, tech and consumer discretionary. we’ll see what level of dip buying interest there is, but with yet another technical breakdown, it is very possible that investors will be more inclined to sell into strength (again, for those that believe).
the bottom line is that the “worst is over” crowd is going to be put to the test here, and as a result, going very defensive until we see what kind of support they provide may be prudent.
by the close, the indices each lost just under 2% on breadth that was worse than 2:1 to the negative with particular weakness in materials, financials, tech and consumer discretionary. we’ll see what level of dip buying interest there is, but with yet another technical breakdown, it is very possible that investors will be more inclined to sell into strength (again, for those that believe).
the bottom line is that the “worst is over” crowd is going to be put to the test here, and as a result, going very defensive until we see what kind of support they provide may be prudent.
what the heck; let's go for $316 oil!!
methinks oil's a bit ridiculous, up another 4 or so today. it certainly makes one sit up and take notice, given its parabolic rise. the market and oil reacted today like the fed isn't finished; more cuts; lower dollar; etc., etc.
is it REALLY demand driving the oil price here? or a squeeze? have 18 major fields just dried up? i don't think so. i can envision an immediate, short-term move in the price down below 120. then it probably drifts up again. just my opinion.
is it REALLY demand driving the oil price here? or a squeeze? have 18 major fields just dried up? i don't think so. i can envision an immediate, short-term move in the price down below 120. then it probably drifts up again. just my opinion.
Tuesday, May 20, 2008
One to ponder - apwr
A-Power is an under-the-radar name in the alternative energy space that I believe has potential for explosive earnings growth. Many stocks in this space have been rallying sharply in recent months, and shares of A-Power have followed suit. Although the stock has been trading near a 52-week high, I believe investors will see major additional upside over the next few years given that the company is rather well positioned in the Chinese energy market.
A-Power designs, builds and installs distributed energy facilities, which provide power separate from traditional massive grid-based supplies. Demand has been strong in China and recent announcements indicate additional potential to expand into other countries in Southeast Asia.
In addition, A-Power has plans to enter the wind energy business, with its new production facility in Shenyang that is scheduled to begin churning out 2.5 MW (megawatt) turbines later this year. The combination of an entrenched distributed energy business and a move into wind turbine manufacturing has the potential to turn the company into one of the fastest-growing alternative energy players in Southeast Asia.
I expect A-Power to win additional distributed energy projects in 2008, as well as continue its progress in the construction of the Shenyang plant. Updates on both of these fronts should help drive shares higher.
China's wind energy industry remains in the early stages of development, and government commentary has prioritized making renewable energy a much larger contributor to the power supply in China. It's no secret that the country suffers from power outages and brownouts caused by the overburdened national energy grid. I believe that the construction of distributed energy systems (including wind energy facilities) in China has the potential to undergo a rapid multiyear growth spurt as the country looks to solve problems stemming from the combination of skyrocketing national energy consumption and an unreliable energy infrastructure.
In addition, China's mounting pollution problems create an added incentive for government support in getting alternative energy projects up and running quickly. Recent laws provide evidence of this favorable government view: The 2007 Energy Conservation Law and the 2005 Renewable Energy Law provide a strong framework for ongoing support of the renewable energy industry in China.
China's NDRC (National Development and Reform Commission) has taken an aggressive stance toward expanding the nation's wind power capacity over the next 12 years, and has set specific long-term targets. In 2010, installed wind power capacity is expected to hit 5 GW (gigawatts), and by 2020 it is estimated that total capacity will reach 30 GW. Based on these expectations (which could prove conservative), the wind power industry is poised to benefit from a period of rapid and sizable investment, likely totaling more than $20 billion over the next 10 years.
China's electric utility industry is highly regulated, giving China-based companies an edge over foreign players looking to secure lucrative deals. Currently, companies such as Denmark's Ventas, Spain's Gamesa and General Electric have double-digit percentage shares of the Chinese market. However, China-based companies are likely to see domestic-friendly government incentives that will help solidify and possibly expand their market share.
A-Power's GaoKe Energy Group is the company's main operating unit that focuses on securing new projects, handling design and subcontracting of most preparatory activities, and overseeing the facility construction. The company also engages in the development and commercialization of renewable energy technologies through its relationships with Tsinghua University and the China Sciences Academy in Guangzhou.
GaoKe has a corps of over 100 engineers, and specializes in projects for distributed energy systems ranging from 5 MW to 25 MW in size. The company also recently acquired a construction company that was previously run by the Chinese government. The key to this acquisition was that it came with a class A license, which is needed in order to work independently on projects larger than 25 MW. In effect, A- Power's potential for large projects within China is just beginning.
However, the company has plans to expand its operations outside of China, where it already has the ability to ink larger deals. Just last month, the company announced it had received a $150 million contract in Thailand to develop a 300 MW system fueled by 50% coal and 50% biomass.
In addition to its attractive distributed energy business, A-Power is poised to accelerate its long-term growth by becoming a full-scale producer of wind turbines. In January, the company signed license agreements with two major European turbine makers, Fuhrlander AG and Norwin A/S, and expects to begin production later this year upon the completion of a new production facility in Shenyang. By producing its own turbines, the company faces less potential for pricing pressure from manufacturers, and benefits from more favorable labor costs in China. In addition, A-Power qualifies for a 17% value-added tax rebate (from the Chinese government) on exported equipment, making the exporting of wind turbines even more profitable.
A-Power announced full-year 2007 results March 31, posting net income of $15.2 million on revenue of $152.5 million. More importantly, management confirmed 2008 full-year guidance for earnings in the range of $35 million to $45 million, or $1.05 to $1.35 in earnings per share. Also of note was the large jump in the company's backlog, which increased to $550 million as of March 31 from $398 million at the end of 2007.
The company's growing backlog makes sense when you consider the rapid growth in energy demand from Chinese businesses. Also, it's understandable that businesses would choose to build a new distributed energy facility rather than rely on the nation's overtaxed grid system. This is certainly true for businesses that operate in remote parts of China, where energy infrastructure is almost nonexistent. It's no wonder that A-Power's GaoKe subsidiary is seeing such acceleration in its business, as building new energy facilities is essentially a necessity for the many of the new businesses that are springing up (or simply expanding) across China.
In addition, investors should not discount the advantage of A-Power being the first established company in a growing area. GaoKe already has completed nine projects that now serve as a major marketing tool for securing new contracts.
The April 15 announcement of a $150 million distributed power generation contract in Thailand marked A-Power's first major international deal. We believe international opportunities will be a huge driver for the company, as many nations in Southeast Asia also suffer from limited or unreliable energy infrastructure.
Although shares of A-Power are trading close to their 52- week high -- set earlier this week -- I believe that there is much more room for appreciation as the company's potential becomes clear to institutional investors and Wall Street researchers. Consensus estimates from the two research firms that currently cover A-Power indicate that expectations are for net income to grow 145% in 2008. Revenue for the year is expected to jump 155%. These numbers could potentially prove very conservative, especially considering that A-Power's guidance released at the end of March was for an earnings-per-share range of $1.05 to $1.35, the midpoint of which is 4 cents greater than the analysts' $1.16 consensus earnings estimate for 2008.
Based on the $1.20 midpoint of management's 2008 earnings guidance, shares of A-Power are currently trading at about 17 times earnings -- a number that is downright cheap considering the company's growth profile. Using the existing analyst estimates for 2009 (consisting of two data points), shares are trading around 15 times earnings expectations. I believe the modest valuation is a result of the company's under-the-radar status and lack of major institutional support.
Other positive factors for A-Power include a solid balance sheet with zero debt and a cash balance of $97 million as of March 31. The company's GaoKe unit qualified as a foreign investment enterprise under Chinese regulations in 2006, entitling it to a full exemption from Chinese income tax through 2008, and a 50% exemption for three years starting in 2009.
A-Power's small size (it has a market cap of less than $300 million), short track record of results and limited analyst coverage all contribute to the speculative nature of this investment. However, I believe that a discretionary investment portfolio needs a few highly speculative positions, and in this case I see a favorable risk/reward profile. A-Power is an unproven company with a story that is just beginning to take shape. As such, it's a high-risk name that could see large swings in its stock price even without major news.
Disclosure: None; but seriously looking
A-Power designs, builds and installs distributed energy facilities, which provide power separate from traditional massive grid-based supplies. Demand has been strong in China and recent announcements indicate additional potential to expand into other countries in Southeast Asia.
In addition, A-Power has plans to enter the wind energy business, with its new production facility in Shenyang that is scheduled to begin churning out 2.5 MW (megawatt) turbines later this year. The combination of an entrenched distributed energy business and a move into wind turbine manufacturing has the potential to turn the company into one of the fastest-growing alternative energy players in Southeast Asia.
I expect A-Power to win additional distributed energy projects in 2008, as well as continue its progress in the construction of the Shenyang plant. Updates on both of these fronts should help drive shares higher.
China's wind energy industry remains in the early stages of development, and government commentary has prioritized making renewable energy a much larger contributor to the power supply in China. It's no secret that the country suffers from power outages and brownouts caused by the overburdened national energy grid. I believe that the construction of distributed energy systems (including wind energy facilities) in China has the potential to undergo a rapid multiyear growth spurt as the country looks to solve problems stemming from the combination of skyrocketing national energy consumption and an unreliable energy infrastructure.
In addition, China's mounting pollution problems create an added incentive for government support in getting alternative energy projects up and running quickly. Recent laws provide evidence of this favorable government view: The 2007 Energy Conservation Law and the 2005 Renewable Energy Law provide a strong framework for ongoing support of the renewable energy industry in China.
China's NDRC (National Development and Reform Commission) has taken an aggressive stance toward expanding the nation's wind power capacity over the next 12 years, and has set specific long-term targets. In 2010, installed wind power capacity is expected to hit 5 GW (gigawatts), and by 2020 it is estimated that total capacity will reach 30 GW. Based on these expectations (which could prove conservative), the wind power industry is poised to benefit from a period of rapid and sizable investment, likely totaling more than $20 billion over the next 10 years.
China's electric utility industry is highly regulated, giving China-based companies an edge over foreign players looking to secure lucrative deals. Currently, companies such as Denmark's Ventas, Spain's Gamesa and General Electric have double-digit percentage shares of the Chinese market. However, China-based companies are likely to see domestic-friendly government incentives that will help solidify and possibly expand their market share.
A-Power's GaoKe Energy Group is the company's main operating unit that focuses on securing new projects, handling design and subcontracting of most preparatory activities, and overseeing the facility construction. The company also engages in the development and commercialization of renewable energy technologies through its relationships with Tsinghua University and the China Sciences Academy in Guangzhou.
GaoKe has a corps of over 100 engineers, and specializes in projects for distributed energy systems ranging from 5 MW to 25 MW in size. The company also recently acquired a construction company that was previously run by the Chinese government. The key to this acquisition was that it came with a class A license, which is needed in order to work independently on projects larger than 25 MW. In effect, A- Power's potential for large projects within China is just beginning.
However, the company has plans to expand its operations outside of China, where it already has the ability to ink larger deals. Just last month, the company announced it had received a $150 million contract in Thailand to develop a 300 MW system fueled by 50% coal and 50% biomass.
In addition to its attractive distributed energy business, A-Power is poised to accelerate its long-term growth by becoming a full-scale producer of wind turbines. In January, the company signed license agreements with two major European turbine makers, Fuhrlander AG and Norwin A/S, and expects to begin production later this year upon the completion of a new production facility in Shenyang. By producing its own turbines, the company faces less potential for pricing pressure from manufacturers, and benefits from more favorable labor costs in China. In addition, A-Power qualifies for a 17% value-added tax rebate (from the Chinese government) on exported equipment, making the exporting of wind turbines even more profitable.
A-Power announced full-year 2007 results March 31, posting net income of $15.2 million on revenue of $152.5 million. More importantly, management confirmed 2008 full-year guidance for earnings in the range of $35 million to $45 million, or $1.05 to $1.35 in earnings per share. Also of note was the large jump in the company's backlog, which increased to $550 million as of March 31 from $398 million at the end of 2007.
The company's growing backlog makes sense when you consider the rapid growth in energy demand from Chinese businesses. Also, it's understandable that businesses would choose to build a new distributed energy facility rather than rely on the nation's overtaxed grid system. This is certainly true for businesses that operate in remote parts of China, where energy infrastructure is almost nonexistent. It's no wonder that A-Power's GaoKe subsidiary is seeing such acceleration in its business, as building new energy facilities is essentially a necessity for the many of the new businesses that are springing up (or simply expanding) across China.
In addition, investors should not discount the advantage of A-Power being the first established company in a growing area. GaoKe already has completed nine projects that now serve as a major marketing tool for securing new contracts.
The April 15 announcement of a $150 million distributed power generation contract in Thailand marked A-Power's first major international deal. We believe international opportunities will be a huge driver for the company, as many nations in Southeast Asia also suffer from limited or unreliable energy infrastructure.
Although shares of A-Power are trading close to their 52- week high -- set earlier this week -- I believe that there is much more room for appreciation as the company's potential becomes clear to institutional investors and Wall Street researchers. Consensus estimates from the two research firms that currently cover A-Power indicate that expectations are for net income to grow 145% in 2008. Revenue for the year is expected to jump 155%. These numbers could potentially prove very conservative, especially considering that A-Power's guidance released at the end of March was for an earnings-per-share range of $1.05 to $1.35, the midpoint of which is 4 cents greater than the analysts' $1.16 consensus earnings estimate for 2008.
Based on the $1.20 midpoint of management's 2008 earnings guidance, shares of A-Power are currently trading at about 17 times earnings -- a number that is downright cheap considering the company's growth profile. Using the existing analyst estimates for 2009 (consisting of two data points), shares are trading around 15 times earnings expectations. I believe the modest valuation is a result of the company's under-the-radar status and lack of major institutional support.
Other positive factors for A-Power include a solid balance sheet with zero debt and a cash balance of $97 million as of March 31. The company's GaoKe unit qualified as a foreign investment enterprise under Chinese regulations in 2006, entitling it to a full exemption from Chinese income tax through 2008, and a 50% exemption for three years starting in 2009.
A-Power's small size (it has a market cap of less than $300 million), short track record of results and limited analyst coverage all contribute to the speculative nature of this investment. However, I believe that a discretionary investment portfolio needs a few highly speculative positions, and in this case I see a favorable risk/reward profile. A-Power is an unproven company with a story that is just beginning to take shape. As such, it's a high-risk name that could see large swings in its stock price even without major news.
Disclosure: None; but seriously looking
banks
as the financials continue to slump, i can't help but think that the market is beginning to fully realize that the problem with the financials is not just fixing the balance sheets, but the probable fact that earnings power is dramatically weaker without the benefits of fees from structured finance and that this weaker earnings power itself will be dramatically diluted due to the capital raises. this is a change in my thinking, as i had been under the notion that it was more about fixing balance sheets; and that the snapback would be quicker. not to mention that the capital raising efforts, though well along, are still probably not done.
as long as the financials can get the money they need to repair their balance sheets, i am now arguing that the problem is theirs, not ours. to this point, last night aig increased their plan to raise capital from $12B to $20B. not only will they further dilute shareholders, but all that CDS business that they need to write off is not likely to come back any time soon. thus, the remainder of their earnings will be further diluted and just as insurance is entering a soft market. sounds terrible, but only if you own the stock. as for the rest of us it sounds like one less crack in the financial system to worry about.
i recommended c at 22 and at 18; and declared victory when it reached 26. now at 22 or so, i'd not be surprised to find it at 18 again this year. bac seems stuck between 35 and 40 for a long while i'm afraid. i own gs; and it's the best one, but the market doesn't care right now. i'm starting to believe the financials still have a good scare in them left for us, but i believe the market is showing some signs of moving on without them. i don't know how far it can go given that the main engine of the economy, the spending power of the consumer, is also impaired, but it is a positive to see that one more problem is beginning to take care of itself.
as long as the financials can get the money they need to repair their balance sheets, i am now arguing that the problem is theirs, not ours. to this point, last night aig increased their plan to raise capital from $12B to $20B. not only will they further dilute shareholders, but all that CDS business that they need to write off is not likely to come back any time soon. thus, the remainder of their earnings will be further diluted and just as insurance is entering a soft market. sounds terrible, but only if you own the stock. as for the rest of us it sounds like one less crack in the financial system to worry about.
i recommended c at 22 and at 18; and declared victory when it reached 26. now at 22 or so, i'd not be surprised to find it at 18 again this year. bac seems stuck between 35 and 40 for a long while i'm afraid. i own gs; and it's the best one, but the market doesn't care right now. i'm starting to believe the financials still have a good scare in them left for us, but i believe the market is showing some signs of moving on without them. i don't know how far it can go given that the main engine of the economy, the spending power of the consumer, is also impaired, but it is a positive to see that one more problem is beginning to take care of itself.
Today
After the selling pressures from the morning abated, the indices spent the afternoon in a relatively tight trading range near the lows of the session. Financials, consumer discretionary and tech led the market lower, while the hottest groups saw mixed action. Solars and chips were weak but oils were strong on a fresh high for crude. Meanwhile, gold continued to improve. The GLD is back above its 50 day moving average, and I suspect that there may be more upside if it can hold its recent gains.
Overall, it was a poor day for the market, but given how well it acted over the past several weeks, a little downside here is to be expected. The question now is if it starts to gain momentum. For those that believe, there are plenty of charts that would look a whole lot better after a bit of consolidation, but we need to see how the dip buyers behave first.
Overall, it was a poor day for the market, but given how well it acted over the past several weeks, a little downside here is to be expected. The question now is if it starts to gain momentum. For those that believe, there are plenty of charts that would look a whole lot better after a bit of consolidation, but we need to see how the dip buyers behave first.
thoughts from 3 am
more 'revelations' from the nba's 'lone rogue' ref: is the nba REALLY more like a sport or professional 'wrestling'? are you absolutely sure about that?
remember "barney miller"? what a great sitcom, from the 'sitcom era.' check out seasons 1 and 2 on dvd...
check out the economist's wonderful report on banking - shouldn't it be considered a positive that many banks have been able to raise capital so easily?
also check out craig karmin's 'biography of the dollar;' it's a good read.
will roger waters get a new inflatable pig?
greyhounds or whippets?
remember "barney miller"? what a great sitcom, from the 'sitcom era.' check out seasons 1 and 2 on dvd...
check out the economist's wonderful report on banking - shouldn't it be considered a positive that many banks have been able to raise capital so easily?
also check out craig karmin's 'biography of the dollar;' it's a good read.
will roger waters get a new inflatable pig?
greyhounds or whippets?
Monday, May 19, 2008
today
one great difficulty of the market is that when investors are feeling the most optimistic and excited, the chances for a quick reversal increase. that is exactly what happened today. this morning, buyers were chasing already extended stocks into the stratosphere, and the biggest worry was that maybe you are underinvested.
if one is a disciplined investor, one probably wasn't chasing this strength, but if one was holding some of the recent highflyers, like drys, pot or fslr, one suffered a sharp swing from profit to loss. a disciplined approach would have helped keep the damage from becoming too severe, but it's a good reminder why chasing an extended market is a risky proposition.
typically, these sort of severe intraday reversals are regarded as a sign of top, and an indication that more downside lies ahead. given the degree to which some of the charts have gone parabolic recently, (for those that believe), there is an awfully lot of profits to protect, and i would suspect some more selling lies ahead.
on the other hand, a lot of folks were distrustful and missed out on this move, so there is likely to be some inclination toward dip buying. whether it will be powerful enough to overcome the profit-taking is the big issue. eventually, i'm looking for the sellers to take control, but the dip buyers are going to put up a good battle at first, and will only give up after they are turned back a couple times.
if one is a disciplined investor, one probably wasn't chasing this strength, but if one was holding some of the recent highflyers, like drys, pot or fslr, one suffered a sharp swing from profit to loss. a disciplined approach would have helped keep the damage from becoming too severe, but it's a good reminder why chasing an extended market is a risky proposition.
typically, these sort of severe intraday reversals are regarded as a sign of top, and an indication that more downside lies ahead. given the degree to which some of the charts have gone parabolic recently, (for those that believe), there is an awfully lot of profits to protect, and i would suspect some more selling lies ahead.
on the other hand, a lot of folks were distrustful and missed out on this move, so there is likely to be some inclination toward dip buying. whether it will be powerful enough to overcome the profit-taking is the big issue. eventually, i'm looking for the sellers to take control, but the dip buyers are going to put up a good battle at first, and will only give up after they are turned back a couple times.
Sunday, May 18, 2008
stuff on names already mentioned
lcav, in addition to taking a hatchet to its generous dividend, chopping the payout to $0.06 a quarter from $0.18, ceo steve strauss had the following business update: “Recent news reports of the FDA panel review of post-Lasik quality of life matters have not caused a material change in our pre-operative or treatment appointment cancellations. However, the number of bookings quarter-to-date of pre-operative appointments have dropped approximately 20%. Our new marketing creative continues to outperform our older marketing messages across all media, but appointments are significantly softer than prior periods and prior year levels.”
even though few should have been overly surprised that procedure volume is punk (after all, the stock had already dropped from a 52-week high of more than $50), as discretionary consumer spending, especially on elective surgery, is weak, depressed lcav shares quickly shed another 20% of their value. many were clearly disappointed with the dividend cut, which has taken the yield down to 'only' 2.8%.
lcav is inexpensive, trading now for 51% of sales and for less than nine times the current reuters estimates eps forecast, while the balance sheet is rich in cash and poor in debt. with the potential market for laser vision correction procedures in the us at about 120 million procedures, versus only 1.4 million or so completed in 2007, i'd state it's ok to buy the stock up to 10.
lcav wasn't the only one to get beat up this week, as ers plummeted in price the other day after reporting a big decline in quarterly earnings. empire, a distributor of value-added, semi-finished aluminum products, saw revenue in the quarter drop 15% on a year-over-year basis and eps tumble to $0.11, compared to $0.24 a year ago.
in the company’s 10-Q filing, management blamed the revenue shortfall on “lower shipment volumes in our North American market” and said, “Our gross profit margin was negatively impacted by lower sales as well as continued pricing pressures due to increased competition in our North American market from both domestic and overseas sources. This strong competition compressed the fabrication premiums which we in turn can charge our customers. Additionally, our extrusion manufacturing facility continued to operate significantly below capacity, which resulted in excessive fabrication costs and diminished our overall profitability.”
because net income actually doubled on a sequential basis, and the shares now trade for 14 times cyclically-depressed earnings and for just 10% of sales and 1.4 times tangible book value, while yielding 4.2%, i remain optimistic about the long-term prospects for the stock. i'd still buy it up to 5.
disclosure: long ers; DO YOUR OWN DD!!
even though few should have been overly surprised that procedure volume is punk (after all, the stock had already dropped from a 52-week high of more than $50), as discretionary consumer spending, especially on elective surgery, is weak, depressed lcav shares quickly shed another 20% of their value. many were clearly disappointed with the dividend cut, which has taken the yield down to 'only' 2.8%.
lcav is inexpensive, trading now for 51% of sales and for less than nine times the current reuters estimates eps forecast, while the balance sheet is rich in cash and poor in debt. with the potential market for laser vision correction procedures in the us at about 120 million procedures, versus only 1.4 million or so completed in 2007, i'd state it's ok to buy the stock up to 10.
lcav wasn't the only one to get beat up this week, as ers plummeted in price the other day after reporting a big decline in quarterly earnings. empire, a distributor of value-added, semi-finished aluminum products, saw revenue in the quarter drop 15% on a year-over-year basis and eps tumble to $0.11, compared to $0.24 a year ago.
in the company’s 10-Q filing, management blamed the revenue shortfall on “lower shipment volumes in our North American market” and said, “Our gross profit margin was negatively impacted by lower sales as well as continued pricing pressures due to increased competition in our North American market from both domestic and overseas sources. This strong competition compressed the fabrication premiums which we in turn can charge our customers. Additionally, our extrusion manufacturing facility continued to operate significantly below capacity, which resulted in excessive fabrication costs and diminished our overall profitability.”
because net income actually doubled on a sequential basis, and the shares now trade for 14 times cyclically-depressed earnings and for just 10% of sales and 1.4 times tangible book value, while yielding 4.2%, i remain optimistic about the long-term prospects for the stock. i'd still buy it up to 5.
disclosure: long ers; DO YOUR OWN DD!!
Friday, May 16, 2008
bdi
inflation expectations have increased to a two-month high, as measured by the Treasury's inflation-protected securities. feeding into the increase in inflation expectations is undoubtedly the recent pattern in global shipping rates, which tend to correlate well with commodities prices.
the baltic dry index is of course a top gauge of shipping rates and is widely followed in the financial markets. on thursday, the bdi reached an all-time high of 11,067, representing a near doubling of the index since it bottomed on 1/29 at 5,615. the previous peak was at 11,039 set last 11/13. the recent surge has seen the bdi increase 3,000 points in just under a month, coincident with a renewed surge in commodity prices.
the bdi, according to the baltic exchange, provides "an assessment of the price of moving the major raw materials by seas. taking in 24 key shipping routes measured on a time charter and voyage basis, the index covers supramax, panamax and capsize dry bulk carriers," that carry a wide range of commodities. the index therefore provides useful information on the pace of economic growth.
the baltic dry index is of course a top gauge of shipping rates and is widely followed in the financial markets. on thursday, the bdi reached an all-time high of 11,067, representing a near doubling of the index since it bottomed on 1/29 at 5,615. the previous peak was at 11,039 set last 11/13. the recent surge has seen the bdi increase 3,000 points in just under a month, coincident with a renewed surge in commodity prices.
the bdi, according to the baltic exchange, provides "an assessment of the price of moving the major raw materials by seas. taking in 24 key shipping routes measured on a time charter and voyage basis, the index covers supramax, panamax and capsize dry bulk carriers," that carry a wide range of commodities. the index therefore provides useful information on the pace of economic growth.
today's market
once again, a strong, late-day rally appears just as some minor cracks begin to appear in the indices. just like yesterday, what looked like a rather mundane day turned giddy as late-day buyers jumped in aggressively.
yesterday, many commentators explained the market rally as being due to relief over a pullback in oil, but the reverse wasn't the case today. today, when oil jumped up sharply, the market ignored it, and the indices held up well overall. part of that is because oils and cyclical plays resumed their very strong momentum and are a big component of the major indices, but it is interesting that the market seems to consider oil as important only when it is pulling back. when sentiment is this positive, then all news is good news.
it has been a good week for the bulls, and with the indices above some key technical levels, many are feeling extremely confident and looking for more upside. there is some upside momentum, but it is extremely difficult to make new buys unless you are willing to chase breakouts and new highs.
many are looking for the market to rest after the big run we've had off the march lows, and when that doesn't happen, market players get anxious and make some new buys out of fear of being left behind. undisciplined buying usually proves costly, but in the short term it sure feels good to be part of the party.
yesterday, many commentators explained the market rally as being due to relief over a pullback in oil, but the reverse wasn't the case today. today, when oil jumped up sharply, the market ignored it, and the indices held up well overall. part of that is because oils and cyclical plays resumed their very strong momentum and are a big component of the major indices, but it is interesting that the market seems to consider oil as important only when it is pulling back. when sentiment is this positive, then all news is good news.
it has been a good week for the bulls, and with the indices above some key technical levels, many are feeling extremely confident and looking for more upside. there is some upside momentum, but it is extremely difficult to make new buys unless you are willing to chase breakouts and new highs.
many are looking for the market to rest after the big run we've had off the march lows, and when that doesn't happen, market players get anxious and make some new buys out of fear of being left behind. undisciplined buying usually proves costly, but in the short term it sure feels good to be part of the party.
Thursday, May 15, 2008
today's market
although yesterday’s afternoon reversal did not bode well for today’s action, the bulls were on parade once again. a dip in crude triggered some broad-based buying, and even though the action stalled mid-afternoon, a fresh wave of buying kicked in just before the close, even though oil rebounded to the unchanged mark toward the end of the session.
this market is being driven more by short-term trading and less by fundamentals. market players just can’t avoid being sucked in to a market that keeps grinding higher regardless of what is thrown at it. even though volume continues to be extremely light and the big money is apparently not jumping in with both feet, the fear of being left behind is really starting to pick up.
this market is being driven more by short-term trading and less by fundamentals. market players just can’t avoid being sucked in to a market that keeps grinding higher regardless of what is thrown at it. even though volume continues to be extremely light and the big money is apparently not jumping in with both feet, the fear of being left behind is really starting to pick up.
one to consider - ckh
this company does not have a big following on wall street - and that's probably good news. as energy prices soar with no end in sight, ckh is a company that supports offshore oil and gas exploration efforts; and it could become an even better value, even if it gets little notice from street analysts.
ckh operates a fleet of offshore support vessels and helicopters servicing oil and gas exploration, development and production facilities worldwide and a fleet of us-flag product tankers that transport petroleum, chemicals and crude products primarily in the us domestic trade.
it also operates a fleet of inland river barges transporting grain and other bulk commodities on the us inland waterway and offers environmental consulting services to companies that store, transport, produce or handle petroleum products and environmentally hazardous materials.
despite having a market capitalization of nearly $2 billion, and despite its exposure to the agriculture/energy/infrastructure boom, ckh has wall street coverage from just two analysts. this makes ckh an enticing wallflower, in my opinion.
the company's $1.4 billion in operating revenue for 2007 was divided approximately as follows: 51% offshore marine services, 16% aviation services, 12% environmental services, 9% inland river services and 9% marine transportation services. it generates about half its revenue in the us, and about 30% in potentially volatile regions such as africa and the middle east. many of the services are capital intensive, and small swings in revenue can have an outsized impact on profitability.
because of the leverage inherent in the business and the potential for short-term hangups that are outside the company's control (like weather in the gulf of mexico), investors who are interested in seacor should prepare themselves for a potentially bumpy ride. since there are only two analysts publishing estimates, there is little consensus about the company's prospects, and overshooting or undershooting the consensus estimate should be considered the norm rather than the exception. earnings surprises have recently ranged from a 6-cent miss in the most recent quarter to a 52-cent beat in the 9/07 quarter.
reflecting that volatility, earnings estimates have been brought down recently. the estimate for 2008 stood at $9.35 per share three months ago, but it has been reduced to $7.45. the 2009 estimates have been cut from $10.18 to $8.58. in a report, lehman brothers attributed its estimate reduction to adverse weather conditions affecting utilization rates in the gulf of mexico, flat drilling activity and a higher tax rate.
the only thing certain about lehman's list is taxes. weather changes, and with oil trading above $125, i'd lay odds that drilling activity won't remain flat for long. meanwhile, in spite of the sharp reductions to estimates, ckh is trading at just 11.6 times this year's expected earnings and 10.1 times next year's.
over the last year, seacor has performed roughly in line with the S&P 500. its earnings appear to be of relatively high quality, as the accrual ratio indicates just a 2% difference between its cash-based and accounting-based earnings. the company ended 3/08 with $445 million in cash on its balance sheet, which is sufficient to cover nearly half its total debt load.
over the last 12 months, seacor has generated about $325 million in free cash flow, which equates to a very juicy free cash flow yield of nearly 17%. this wasn't just a fluke number, either. over the last three years, free cash flow has averaged $295 million per year.
the company is using most of that cash flow to buy back its stock and convertible bonds. over the last three years, debt has been reduced by $177 million, and $336 million has been used to repurchase stock. the diluted shares outstanding fell by more than 1 million (4% of total shares outstanding) in 2007.
at 1.2 times book value, seacor is trading well below the industry average (according to zacks research wizard) of 2.7 times. on the basis of its return on equity, i estimate a sustainable growth rate in the high single digits. adding in a potential valuation expansion to the industry average, total return could range from 20% to 30% per year, with the main variable being the estimated time for seacor's price/book to converge to the industry average.
even at the low end of that range, seacor could prove worth the wait.
ckh operates a fleet of offshore support vessels and helicopters servicing oil and gas exploration, development and production facilities worldwide and a fleet of us-flag product tankers that transport petroleum, chemicals and crude products primarily in the us domestic trade.
it also operates a fleet of inland river barges transporting grain and other bulk commodities on the us inland waterway and offers environmental consulting services to companies that store, transport, produce or handle petroleum products and environmentally hazardous materials.
despite having a market capitalization of nearly $2 billion, and despite its exposure to the agriculture/energy/infrastructure boom, ckh has wall street coverage from just two analysts. this makes ckh an enticing wallflower, in my opinion.
the company's $1.4 billion in operating revenue for 2007 was divided approximately as follows: 51% offshore marine services, 16% aviation services, 12% environmental services, 9% inland river services and 9% marine transportation services. it generates about half its revenue in the us, and about 30% in potentially volatile regions such as africa and the middle east. many of the services are capital intensive, and small swings in revenue can have an outsized impact on profitability.
because of the leverage inherent in the business and the potential for short-term hangups that are outside the company's control (like weather in the gulf of mexico), investors who are interested in seacor should prepare themselves for a potentially bumpy ride. since there are only two analysts publishing estimates, there is little consensus about the company's prospects, and overshooting or undershooting the consensus estimate should be considered the norm rather than the exception. earnings surprises have recently ranged from a 6-cent miss in the most recent quarter to a 52-cent beat in the 9/07 quarter.
reflecting that volatility, earnings estimates have been brought down recently. the estimate for 2008 stood at $9.35 per share three months ago, but it has been reduced to $7.45. the 2009 estimates have been cut from $10.18 to $8.58. in a report, lehman brothers attributed its estimate reduction to adverse weather conditions affecting utilization rates in the gulf of mexico, flat drilling activity and a higher tax rate.
the only thing certain about lehman's list is taxes. weather changes, and with oil trading above $125, i'd lay odds that drilling activity won't remain flat for long. meanwhile, in spite of the sharp reductions to estimates, ckh is trading at just 11.6 times this year's expected earnings and 10.1 times next year's.
over the last year, seacor has performed roughly in line with the S&P 500. its earnings appear to be of relatively high quality, as the accrual ratio indicates just a 2% difference between its cash-based and accounting-based earnings. the company ended 3/08 with $445 million in cash on its balance sheet, which is sufficient to cover nearly half its total debt load.
over the last 12 months, seacor has generated about $325 million in free cash flow, which equates to a very juicy free cash flow yield of nearly 17%. this wasn't just a fluke number, either. over the last three years, free cash flow has averaged $295 million per year.
the company is using most of that cash flow to buy back its stock and convertible bonds. over the last three years, debt has been reduced by $177 million, and $336 million has been used to repurchase stock. the diluted shares outstanding fell by more than 1 million (4% of total shares outstanding) in 2007.
at 1.2 times book value, seacor is trading well below the industry average (according to zacks research wizard) of 2.7 times. on the basis of its return on equity, i estimate a sustainable growth rate in the high single digits. adding in a potential valuation expansion to the industry average, total return could range from 20% to 30% per year, with the main variable being the estimated time for seacor's price/book to converge to the industry average.
even at the low end of that range, seacor could prove worth the wait.
Wednesday, May 14, 2008
mortgage apps
the mba weekly mortgage applications index rose 2.9% for the week ending 5/9/08. but weakness remains as an unadjusted basis the index was down 1.1% from the same week one year earlier. the four week moving average is down 2.7%.
applications for new purchases, which provide an indication of future sales, slipped 0.7%. but refinacing activity rose 6.5% as homeowners took advantage of a drop in rates and the fact that lenders are becoming more willing to rework loans to avoid foreclosure.
the average rate for 30-year fixed-rate mortgages decreased to 5.82% from 5.91% and the average rate for 15-year fixed-rate mortgages decreased to 5.38% from 5.49 % one week earlier.
applications for new purchases, which provide an indication of future sales, slipped 0.7%. but refinacing activity rose 6.5% as homeowners took advantage of a drop in rates and the fact that lenders are becoming more willing to rework loans to avoid foreclosure.
the average rate for 30-year fixed-rate mortgages decreased to 5.82% from 5.91% and the average rate for 15-year fixed-rate mortgages decreased to 5.38% from 5.49 % one week earlier.
did you know?
lincoln was the only president to hold a patent, for a device to lift boats over sandbars. he was a very skilled mechanic, but never manufactured his invention.
an interesting one to look into: gmkt
with a focus on small and mid-size merchants, south korea's gmkt, which is 10% owned by yhoo, continues to see its market share grow. at the end of last year it was 22.4%, up from 18.8% at the end of 2006. in south korea, e-commerce is a $17B market, and that was up 17% last year; gmkt continues to be a share gainer in its market. as they move into new categories, they have whole new levels of growth. competition is stiff, and now wireless telecommunications services provider skm has jumped into the business. the company's focus is on clothing, accessories and electronics, and has added food staples and perishables such as meat, fruits and vegetables. advertisers like what they see, as gmkt now draws 18M visitors. their "special sauce" is the advertising platform they have inside the site - much like goog's ad model. in the first quarter, advertising was 43% of total revenues, up from 37% a year ago and 29% two years ago, and margins have increased. first quarter earnings jumped 50% to 21 cents per share, as revenue climbed 35% to $65.4M. analysts that cover the shares see earnings being up 26% this year and next, to 88 cents a share. one to watch..
a revelation
so you're telling me if, maybe, just maybe, you CUT home prices then they might sell? my oh my! now why didn't i think of that......
today's market
for those that believe, it seems the market has been stuck between important technical levels and hovering below overhead resistance, unable to make up its mind. today’s session was a perfect example of all of the different factors at play.
anyone who needs to eat or drive to work knows that prices are going up across the board, but today’s CPI data said different. the tame inflation data allowed a market that was tentative early on to rally strongly in the morning and into the afternoon, but investors moved swiftly and aggressively to lock in gains and/or short just as the averages hit so-called technical resistance levels.
the late-day reversal seen today definitively reinforces the feelings of some that this market will undergo another bout of selling. many are calling for (in some cases) extreme caution.
anyone who needs to eat or drive to work knows that prices are going up across the board, but today’s CPI data said different. the tame inflation data allowed a market that was tentative early on to rally strongly in the morning and into the afternoon, but investors moved swiftly and aggressively to lock in gains and/or short just as the averages hit so-called technical resistance levels.
the late-day reversal seen today definitively reinforces the feelings of some that this market will undergo another bout of selling. many are calling for (in some cases) extreme caution.
Tuesday, May 13, 2008
More on OI
OI had its analyst day today. The meeting sounded very similar to the conference call held after the company's earnings release two weeks ago. As you recall, OI beat earnings by 29 cents a share and raised prices by 7%. The company is still gaining market share, increasing prices and is benefiting from the trend toward glass bottles from plastic. The stock is probably down today because the company indicated it is seeing higher cost pressures from natural gas, oil, freight, etc. This isn't really a surprise, and I think the company is being conservative. In addition, I believe the company will be able to offset a good portion of these pressures with price increases as well as better productivity.
OI noted that in the long term, it will see profit margins growing to the high teens from better productivity, its Six Sigma program, price/mix and acquisitions. It is generating huge cash flow and will continue to pay down debt (its debt/equity is now 30%/70%), buy back stock and look at strategic acquisitions. This all sounds good to me.
By the way, the CEO said on the conference call that the company is finding it hard to find energy in several regions. This supports our energy call of strong demand but limited supply. The valuation is too cheap to ignore. Presently, the stock is trading at 6.3 times EV/EBITDA and 11 times earnings on 2008 numbers. On 2009 estimates, it trades at 5.5 times EV/EBITDA and 9.7 times earnings. This is way below its peers.
disclosure: none, but looking
OI noted that in the long term, it will see profit margins growing to the high teens from better productivity, its Six Sigma program, price/mix and acquisitions. It is generating huge cash flow and will continue to pay down debt (its debt/equity is now 30%/70%), buy back stock and look at strategic acquisitions. This all sounds good to me.
By the way, the CEO said on the conference call that the company is finding it hard to find energy in several regions. This supports our energy call of strong demand but limited supply. The valuation is too cheap to ignore. Presently, the stock is trading at 6.3 times EV/EBITDA and 11 times earnings on 2008 numbers. On 2009 estimates, it trades at 5.5 times EV/EBITDA and 9.7 times earnings. This is way below its peers.
disclosure: none, but looking
etfc
looks like shares of etfc have a favorable risk/reward over the next 12 to 18 months.
after falling victim to the subprime crisis, etfc appears to have regained its footing after receiving a cash infusion by Citadel Investment Group in november and by selling off noncore assets in an effort to free up capital. on the brokerage side, not only have outflows stabilized, but the company also added accounts in the previous quarter. that is a huge sign of confidence that investors do not believe the company will go bankrupt -- something an analyst at c predicted six months ago.
getting into the details of the company, etfc diversified itself into mortgages in 2000 after acquiring online banking franchise telebanc. the company used low-cost cash deposits to fund mortgages, but then began to extend itself into riskier loans, including asset-backed securities. the strategy paid dividends that accounted for nearly half of the company's operating profit in 2006, but then the credit markets seized up and etfc was forced to disclose higher loan losses.
negative headlines sparked huge outflows as customers pulled out billions of deposits. with a much-needed cash infusion, Citadel stepped up and bought the company's risky asset-backed portfolio for $800 million, or 27 cents on the dollar. also, etfc issued $1.75 billion in 12.5% senior notes and 85 million common shares. Citadel now owns roughly 20% of the company and has one seat on the board of directors.
this is most likely a win/win for Citadel and etfc. the 12.5% notes are spread out over 10 years, and Citadel essentially received an equity stake in the company for free as etfc was in dire need to stop client outflows. the company -- while receiving unfavorable terms on its asset- backed securities -- was able to get a quick infusion as opposed to selling off additional assets at fire-sale prices.
since the cash infusion, etfc announced plans to sell noncore assets, starting with its RAA Wealth Management division that it purchased in 8/06 for $25 million. the division could fetch as much as $80 million, which is small considering the $11.6 billion in home equity loans that etfc still has on its books. however, management continues to free up capital in an effort to reduce risk against further deterioration in the housing market.
looking at the latest quarter, which was reported 4/18/08, management provisioned an additional $234 million for loan losses. however, etfc has made significant progress, increasing its excess capital by $260 million to $695 million and expects this number to rise to $1 billion by the end of the year. this is enough to cover the $400 million to $600 million loan-loss provision that management is forecasting for 2008.
also, the company increased its assets by $300 million and added 60,000 new customers in the most recent quarter. while these numbers are small given that etfc ended the quarter with $168 billion in client assets, the increase suggests that clients are optimistic that the company will survive this credit mess.
etfc definitely has risk. further deterioration in the credit markets will result in higher loan losses that could exceed management's estimates. also, if the economy weakens we could see DARTs (daily average revenue trades) fall, which could impact cash flow moving forward. in the prior quarter, the company saw an increase in DARTs but commission rates were down 2% sequentially, mostly due to promotional trades used to attract new business and retain existing customers.
while some are saying that the housing crisis will likely get worse before stabilizing, with etfc trading at roughly $4 a share and management anticipating taking a $400 million to $600 million loan-loss provision in 2008 and $300 million to $400 million in 2009, i believe that this risk is mostly priced in to the stock. also, now that etfc's retail segment appears to have stabilized, i expect commission rates to improve over the coming quarters.
disclosure: none yet; looking at leaps with a $4 strike
after falling victim to the subprime crisis, etfc appears to have regained its footing after receiving a cash infusion by Citadel Investment Group in november and by selling off noncore assets in an effort to free up capital. on the brokerage side, not only have outflows stabilized, but the company also added accounts in the previous quarter. that is a huge sign of confidence that investors do not believe the company will go bankrupt -- something an analyst at c predicted six months ago.
getting into the details of the company, etfc diversified itself into mortgages in 2000 after acquiring online banking franchise telebanc. the company used low-cost cash deposits to fund mortgages, but then began to extend itself into riskier loans, including asset-backed securities. the strategy paid dividends that accounted for nearly half of the company's operating profit in 2006, but then the credit markets seized up and etfc was forced to disclose higher loan losses.
negative headlines sparked huge outflows as customers pulled out billions of deposits. with a much-needed cash infusion, Citadel stepped up and bought the company's risky asset-backed portfolio for $800 million, or 27 cents on the dollar. also, etfc issued $1.75 billion in 12.5% senior notes and 85 million common shares. Citadel now owns roughly 20% of the company and has one seat on the board of directors.
this is most likely a win/win for Citadel and etfc. the 12.5% notes are spread out over 10 years, and Citadel essentially received an equity stake in the company for free as etfc was in dire need to stop client outflows. the company -- while receiving unfavorable terms on its asset- backed securities -- was able to get a quick infusion as opposed to selling off additional assets at fire-sale prices.
since the cash infusion, etfc announced plans to sell noncore assets, starting with its RAA Wealth Management division that it purchased in 8/06 for $25 million. the division could fetch as much as $80 million, which is small considering the $11.6 billion in home equity loans that etfc still has on its books. however, management continues to free up capital in an effort to reduce risk against further deterioration in the housing market.
looking at the latest quarter, which was reported 4/18/08, management provisioned an additional $234 million for loan losses. however, etfc has made significant progress, increasing its excess capital by $260 million to $695 million and expects this number to rise to $1 billion by the end of the year. this is enough to cover the $400 million to $600 million loan-loss provision that management is forecasting for 2008.
also, the company increased its assets by $300 million and added 60,000 new customers in the most recent quarter. while these numbers are small given that etfc ended the quarter with $168 billion in client assets, the increase suggests that clients are optimistic that the company will survive this credit mess.
etfc definitely has risk. further deterioration in the credit markets will result in higher loan losses that could exceed management's estimates. also, if the economy weakens we could see DARTs (daily average revenue trades) fall, which could impact cash flow moving forward. in the prior quarter, the company saw an increase in DARTs but commission rates were down 2% sequentially, mostly due to promotional trades used to attract new business and retain existing customers.
while some are saying that the housing crisis will likely get worse before stabilizing, with etfc trading at roughly $4 a share and management anticipating taking a $400 million to $600 million loan-loss provision in 2008 and $300 million to $400 million in 2009, i believe that this risk is mostly priced in to the stock. also, now that etfc's retail segment appears to have stabilized, i expect commission rates to improve over the coming quarters.
disclosure: none yet; looking at leaps with a $4 strike
something to think about
the global infrastructure story and the commodities story really seems to have multi-year legs. prices for gold, copper and molybdemum are quite firm due to strong demand and tight supply. i don't see this changing anytime soon, especially with the tragic news in china where it is estimated that 80% of the buildings collapsed in the region that was hit by the earthquake on monday. but it's more than just one area of the world that needs rebuilding. infrastructure-building is happening all over the world at record levels, and the supply of materials is hard to get. because of this dynamic, keep looking at fcx, etc.
Monday, May 12, 2008
today's action
very light day. surprising gains though. was it too many leaning the wrong way after last week's downer? big-cap tech favorites rimm and aapl attracted buyers, indicating some performance anxiety and a desire to catch up by buying high-beta names.
the light volume today calls into question how much momentum the bulls really have at this point. certainly the price action must be respected, but when volume is light, many are inclined to take gains into strength rather than try to ride things.
breadth was very positive and the point gains big, so the bulls get the benefit of the doubt.
the light volume today calls into question how much momentum the bulls really have at this point. certainly the price action must be respected, but when volume is light, many are inclined to take gains into strength rather than try to ride things.
breadth was very positive and the point gains big, so the bulls get the benefit of the doubt.
intraday
whiplash today. had some strong bounces in energy and other cyclical plays, but that slowed down the broader market, which was up on weak oil this morning.
does the market want strong or weak oil? obviously, high oil is inflationary and serves as a tax on business and the consumer, but the market has continually rallied as energy prices have gone up. that correlation has been in place for years and still seems to hold despite the growing concern over the fallout of record high prices.
i suspect that a lot of folks are being caught off guard by how well this market is acting, and that is helping to feed the upside. bears are scrambling to cover shorts, and the underinvested bulls are looking for more long exposure.
is a severe pullback forthcoming? i don't know. some say it is coming. traders are sticking with the pockets of strong momentum, like the bulk shippers, although some of the other strong groups, like solar energy, are quite choppy today.
does the market want strong or weak oil? obviously, high oil is inflationary and serves as a tax on business and the consumer, but the market has continually rallied as energy prices have gone up. that correlation has been in place for years and still seems to hold despite the growing concern over the fallout of record high prices.
i suspect that a lot of folks are being caught off guard by how well this market is acting, and that is helping to feed the upside. bears are scrambling to cover shorts, and the underinvested bulls are looking for more long exposure.
is a severe pullback forthcoming? i don't know. some say it is coming. traders are sticking with the pockets of strong momentum, like the bulk shippers, although some of the other strong groups, like solar energy, are quite choppy today.
Saturday, May 10, 2008
things i'm thinking about
according to research done by citibank, over the past 7 years russia accounted for 80% of the growth in oil production outside opec. the increase in its output in the early part of the decade matched the growth in demand from china and india almost barrel for barrel. yet in april of this year, production fell for the fourth month in a row. it is now over 2% below the peak of 9.9 million b/d reached in 10/07. before that, the growth in russia's output had been slowing steadily, suggesting that the drop is not a blip. could the discovery that russia can no longer be relied upon to cater to the world's ever-increasing appetite for oil be causing record-high prices?
the media's obsession with msft continues; yet another business publication cover for a smiling steve ballmer. and yet more interviews with msft executives and accompanying stories vowing that msft "will win." do msft executives really believe that fear of msft still works? uh, i don't think it does....i think goog and aapl employees laugh when they see that stuff nowadays....why is it that every time i see a msft executive with the included quote "we will win," i don't believe him or her?
sorry to anger some of you, but here goes. don't try to impress me with your boasting about driving a prius: impress me by stating that you're driving LESS (and that can be accomplished many ways = combining trips, delaying trips, smarter routes, simple conservation, etc., etc.) hey, it's great you've got a prius; now don't go out and drive 30% more just to make yourself feel good about how wonderful you are for the environment....
the media's obsession with msft continues; yet another business publication cover for a smiling steve ballmer. and yet more interviews with msft executives and accompanying stories vowing that msft "will win." do msft executives really believe that fear of msft still works? uh, i don't think it does....i think goog and aapl employees laugh when they see that stuff nowadays....why is it that every time i see a msft executive with the included quote "we will win," i don't believe him or her?
sorry to anger some of you, but here goes. don't try to impress me with your boasting about driving a prius: impress me by stating that you're driving LESS (and that can be accomplished many ways = combining trips, delaying trips, smarter routes, simple conservation, etc., etc.) hey, it's great you've got a prius; now don't go out and drive 30% more just to make yourself feel good about how wonderful you are for the environment....
is it time to consider buying shld?
in my opinion, not yet, but the time may be drawing near. absolutely hated stock? check. cramer soon to be pulling his support of the name? check. cramer's not a "fan" of retail right now, and thinks shld's restructuring story is taking too long to play out. every publication under the sun is predicting shld's demise. lampert, architect of several other retail miracles, may have "lost his touch." the stock's trading in the low 90s; a swift kick in the pants down to the high 70s would really get me interested. more later.
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