For the first time, Germany's Green Party will control one of the country's state governments, just in time to decide the fate of several nuclear plants temporarily idled in response to the Japanese nuclear mess—the same mess that catapulted the Greens to unfamiliar success in state elections two weeks ago.
Were they to surrender to their inner Al Gore, their answer to the resulting electricity shortage would be for consumers to make do with much higher prices. But Green Party leader Winfried Kretschmann is unlikely to seek immediate return to the political wilderness. Forget the fantasy talk of wind and solar. The choice then is nuclear or coal.
Countries all over the world are making similar choices in light of Japan's disaster, whose severity the government now puts on a par with Chernobyl (even if the radiation releases haven't been remotely comparable). Thanks to Fukushima, officials everywhere will have to reacquaint themselves with one of the great noise-to-signal puzzles of modern science: How much harm does low-level radiation exposure do?
For 60 years, the hunt has been on for handfuls of "excess" cancers in populations subjected to unnatural doses of radiation. The findings have been more politically vexing than scientifically satisfying.
The once-golden Hiroshima and Nagasaki studies, jointly funded by the U.S. and Japanese governments, showed little or no low-dose cancer risk, and even a boost to longevity from low-dose exposure in the form of reduced deaths from "non-cancer" diseases. But the A-bomb studies have had their scientific crown knocked askew in recent decades. One reason is "survivor bias"—having survived not only the bombings but homelessness, hunger and a typhoon in the immediate aftermath, the subjects may be a hardier lot than the Japanese population at large.
Investigations of U.K. infants exposed to X-rays in the womb and workers in U.S. weapons plants gradually began nudging the bomb studies aside in the 1980s, for reasons due partly to legal and regulatory convenience: Their findings seemed to confirm the simple and intuitive "linear, no-threshold" hypothesis, which holds that radiation is always dangerous in direct proportion to dose.
These studies have problems too. British mothers had to guess years after the fact how many X-rays had been taken during pregnancy. A study of workers at the Hanford weapons plant claimed to distinguish between 6% and 7% "excess" cancers out of 2,500 cancers suffered by 35,000 workers.
There are other caveats. In lab experiments, low levels of radiation appear to stimulate the cell's own highly capable repair mechanisms. Studies of radiologists show a heightened cancer rate among those who practiced before the dangers of X-rays were known; later cohorts show no effect from a lifetime of small exposures.
And then there's the "hot particle" problem: The real danger may be long-lasting particles ingested or inhaled, even low-energy particles whose radiation doesn't normally penetrate the skin.
Meeting in Vienna in 1986, experts expressed a hope that Chernobyl would finally resolve the debate. "In 20 to 30 years' time we're going to know whether the linear dose hypothesis [is correct]," predicted one, "at least for leukemia and maybe for lung cancer."
It was not to be. For the record, aside from a serious uptick in curable thyroid cancer among those exposed as children (which faster action at the time would have avoided), a U.N. monitoring project finds "no scientific evidence of increases in overall cancer incidence or mortality rates" among residents of the Chernobyl region. But that hasn't stopped other studies from predicting tens of thousands of "excess" cancer deaths across Europe over many decades based on the same linear, no-threshold modeling that governments everywhere have adopted as a regulatory standard.
All this has direct bearing on Japan, where hot particles especially will be a worry for some time to come. In a linear, no-threshold world, the Japanese government can never call a given level of exposure "safe" even if the additional risk is statistically negligible for the average person. In fact, Japanese politics may be roiled for decades to come by insoluble arguments over small anomalies in the cancer rate and whether a given sufferer is a "victim of Fukushima."
Of course, the galloping irony for the Baden-Württemberg Greens is that the exact risk model doesn't matter. However you slice it, coal is more dangerous than nuclear.
Start with deaths that aren't the product of statistical imagination: Thousands more die in coal mining accidents each year (especially in China) than have been killed in all nuclear-related accidents since the beginning of time. What's more, coal plants spew toxins like mercury and other metals—along with more radioactive thorium and uranium than a nuclear plant—which are no less amenable to linear, no-threshold thinking. In 2004, the EPA estimated that a new emissions standard then being promoted would, by itself, save 17,000 lives a year.
So the question is a no-brainer for the Baden-Württemberg Greens. Yep, you guessed it: They can be counted on to shut down the nukes anyway. Their anti-nuke stance is an article of faith not subject to review.
Wednesday, April 13, 2011
Oversold Bounce
The market was set up for an oversold bounce, and we even had the potential for President Obama's speech to serve as a positive catalyst, but the buying was very lackluster.
We managed some green today and the Nasdaq outperformed, but breadth was only 2,875 gainers to 2,650 decliners. Banks were the biggest problem, but there wasn't any big rush by dip buyers to load up on them.
We are still oversold and have the potential for a better bounce attempt tomorrow, but it's troubling that the bulls couldn't manage better energy today. So far the two major earnings reports have been disappointing, with both AA and JPM being sold off on their reports. GOOG reports tomorrow after the bell and we'll have a better test to see what sort of sentiment is likely to prevail during earnings season. There usually is some sort of theme that develops, such as "buy the bad news" or "gap and reverse." We haven't had enough reports to establish a clear theme yet, but Google will be important in that regard.
For the eleventh straight day, the market was unable to close near the highs of the day. That is the sort of action you expect to see in a downtrend. We are very lucky that this consistent intraday selling pressure has not resulted in more aggressive downside so far.
We managed some green today and the Nasdaq outperformed, but breadth was only 2,875 gainers to 2,650 decliners. Banks were the biggest problem, but there wasn't any big rush by dip buyers to load up on them.
We are still oversold and have the potential for a better bounce attempt tomorrow, but it's troubling that the bulls couldn't manage better energy today. So far the two major earnings reports have been disappointing, with both AA and JPM being sold off on their reports. GOOG reports tomorrow after the bell and we'll have a better test to see what sort of sentiment is likely to prevail during earnings season. There usually is some sort of theme that develops, such as "buy the bad news" or "gap and reverse." We haven't had enough reports to establish a clear theme yet, but Google will be important in that regard.
For the eleventh straight day, the market was unable to close near the highs of the day. That is the sort of action you expect to see in a downtrend. We are very lucky that this consistent intraday selling pressure has not resulted in more aggressive downside so far.
Tuesday, April 12, 2011
Thoughts
I view the price of energy to be crucial in here.
Should the price of oil continues its descent, the autos, airlines and retailers could provide something of a near-term floor for the broader market.
Signs of Slower Domestic Economic Growth
My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.
The higher-than-expected trade deficit of $45.8 billion (consensus was $44 billion) confirms my view that first-quarter 2011 GDP will be weaker than most economists expect.
Most notably, especially within the context of a weak U.S. dollar, exports are down 1.4% month over month and will serve to reduce first-quarter GDP by as much as 0.6%.
My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.
The trade deficit, when combined with March's higher headline import prices (up 2.7% month over month), raises the specter of stagflation.
That said, wages are going nowhere, and with the drop in oil prices over the last three days, the second quarter could see an acceleration in growth -- but it's too early to tell right now.
The yen is advancing -- causing an unwind of the carry trade and selling of leveraged equity and commodity positions.
It'll be interesting to see if (or when) the G7 cabal intervenes to stabilize the capital and currency markets.
The National Federation of Independent Business Optimism Index declined to 91.9 -- well below the prior month (94.5) and well below consensus of 95.
It's the first drop in this index in three months, with most of the decline in economic expectations and in expected sales growth.
Two positive features of the release were in capital spending plans and in hiring expectations, so if energy prices continue to drop and the jobs market continues to improve, we might see a better overall reading next month.
Should the price of oil continues its descent, the autos, airlines and retailers could provide something of a near-term floor for the broader market.
Signs of Slower Domestic Economic Growth
My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.
The higher-than-expected trade deficit of $45.8 billion (consensus was $44 billion) confirms my view that first-quarter 2011 GDP will be weaker than most economists expect.
Most notably, especially within the context of a weak U.S. dollar, exports are down 1.4% month over month and will serve to reduce first-quarter GDP by as much as 0.6%.
My guess is that first-quarter GDP will barely grow by 2% -- down appreciably from 3.1% in last year's fourth quarter.
The trade deficit, when combined with March's higher headline import prices (up 2.7% month over month), raises the specter of stagflation.
That said, wages are going nowhere, and with the drop in oil prices over the last three days, the second quarter could see an acceleration in growth -- but it's too early to tell right now.
The yen is advancing -- causing an unwind of the carry trade and selling of leveraged equity and commodity positions.
It'll be interesting to see if (or when) the G7 cabal intervenes to stabilize the capital and currency markets.
The National Federation of Independent Business Optimism Index declined to 91.9 -- well below the prior month (94.5) and well below consensus of 95.
It's the first drop in this index in three months, with most of the decline in economic expectations and in expected sales growth.
Two positive features of the release were in capital spending plans and in hiring expectations, so if energy prices continue to drop and the jobs market continues to improve, we might see a better overall reading next month.
Bears Are Bolder
There was a lot of selling pressure and plenty of red on the screens today, but most notable was the weak intraday action. We were in good shape for a late rebound after the sharp selloff in the morning. We did start to bounce around 1:30 p.m. EDT, but the buyers couldn't keep it going, and we closed in the middle of the intraday range. When the market was trending higher, the buyers would be tripping over each other to add long exposure late in the day.
There were two others negatives today. First was that breadth was quite poor. We were around 3-to-1 negative, and the banks and retailers that had been leading fizzled late. The second negative is the degree to which many stocks have been hit. The thinner small-caps were not attracting any bids. The buyers just stood aside and let things free-fall. Without dip-buying interest, many stocks become ugly very fast. With earnings season coming up, conditions could change quickly, but for now the poor intraday action makes it clear that the bears have the edge.
There were two others negatives today. First was that breadth was quite poor. We were around 3-to-1 negative, and the banks and retailers that had been leading fizzled late. The second negative is the degree to which many stocks have been hit. The thinner small-caps were not attracting any bids. The buyers just stood aside and let things free-fall. Without dip-buying interest, many stocks become ugly very fast. With earnings season coming up, conditions could change quickly, but for now the poor intraday action makes it clear that the bears have the edge.
Monday, April 11, 2011
Thoughts
Run, don't walk, to read Mary Meeker's analysis of America's financial statements.
There seems to be a lack of conviction around the direction of bank earnings.
This is best expressed by the implied volatility of between 4% and 6% percent in numerous bank and non-bank financial shares, including BAC, 4.1%, WFC, 4.1%, STT, 5.1%, HIG, 6.4% and PRU, 4.7%.
Structural Unemployment Is Ever-Present:
Globalization, technological advances and the use of temporary workers becoming a permanent condition of the workplace are all conspiring to keep unemployment elevated and wage growth restrained. The lower the skill grade and income, the worse the outlook for job opportunities and real income growth. (This is not a statement of class warfare; it's a statement of fact.)
Home Prices Remain Pressured:
The consumer's most important asset, his home, continues to deflate in value, despite the massively stimulus policies, a multi-decade high in affordability, improving economics of home ownership vs. renting and burgeoning pent-up demand (reflecting normal population and household formation growth). Consumer confidence has continued to suffer from the unprecedented home price drop, which has been exacerbated by the aforementioned (and decade-plus) stagnation in real incomes. The toxic cocktail of weak home prices, limited wage growth and nagging upside commodity price pressures (particularly from the price of gasoline), will likely pressure retail spending for the remainder of 2011.
There seems to be a lack of conviction around the direction of bank earnings.
This is best expressed by the implied volatility of between 4% and 6% percent in numerous bank and non-bank financial shares, including BAC, 4.1%, WFC, 4.1%, STT, 5.1%, HIG, 6.4% and PRU, 4.7%.
Structural Unemployment Is Ever-Present:
Globalization, technological advances and the use of temporary workers becoming a permanent condition of the workplace are all conspiring to keep unemployment elevated and wage growth restrained. The lower the skill grade and income, the worse the outlook for job opportunities and real income growth. (This is not a statement of class warfare; it's a statement of fact.)
Home Prices Remain Pressured:
The consumer's most important asset, his home, continues to deflate in value, despite the massively stimulus policies, a multi-decade high in affordability, improving economics of home ownership vs. renting and burgeoning pent-up demand (reflecting normal population and household formation growth). Consumer confidence has continued to suffer from the unprecedented home price drop, which has been exacerbated by the aforementioned (and decade-plus) stagnation in real incomes. The toxic cocktail of weak home prices, limited wage growth and nagging upside commodity price pressures (particularly from the price of gasoline), will likely pressure retail spending for the remainder of 2011.
Weakness
Lower oil got the market off to a positive start this morning, but intraday weakness set in again and we closed near the lows of the day. There was a slight bounce in the last few minutes of trading, but buyers were in no rush to jump in.
Retail and defensive stocks led today while oil and metals were laggards. Particularly troubling was the poor performance of technology and many big-cap momentum stocks. There were really no good pockets of momentum to be found.
The downside has remained contained, which is a positive, and we aren't seeing any panic selling or a rush for the exits. The S&P 500 is just slightly off its recent highs and hasn't been gaining any major downside momentum. There is still plenty of technical support, but the longer we continue to experience this poor intraday action, the greater the risk that selling will pick up as buyers move to the sidelines.
Retail and defensive stocks led today while oil and metals were laggards. Particularly troubling was the poor performance of technology and many big-cap momentum stocks. There were really no good pockets of momentum to be found.
The downside has remained contained, which is a positive, and we aren't seeing any panic selling or a rush for the exits. The S&P 500 is just slightly off its recent highs and hasn't been gaining any major downside momentum. There is still plenty of technical support, but the longer we continue to experience this poor intraday action, the greater the risk that selling will pick up as buyers move to the sidelines.
Friday, April 8, 2011
Thoughts
Being someone who appreciates a great valuation, I must post in defense of RIMM. Although there is some good analysis of legitimate risks to the RIM story, mostly focused on competition, I also find that it is now fashionable to be a RIM-hater.
Since the generational low in spring 2009, RIM stock essentially topped out around $85 in early summer 2009, and has gone nowhere since.
This sort of stock performance is usually reserved for boring no-growers, or companies with real issues they are working through. In contrast, RIM has been wildly successful over this period, posting the sort of growth that few companies can ever hope to achieve. Sales are up 62% over that period; units have grown 91%; and the subscriber base is up 114%. Furthermore, RIM is one of the leaders in a huge market with open-ended growth opportunities. The mobile phone market is over 1 billion units annually. The leading smartphone vendors, AAPL, RIMM and the Androids, are still only selling a fraction of the total.
One argument the bears immediately make is that sales are not up as much as units, so ASPs are declining. Fair enough, except this is the story of every high-growth technology product market that ever existed. Your expectation should be that the company can bring down the unit price as the technology matures and volumes boom. Apple is doing exactly the same thing. Be far more fearful of tech companies that do not lower prices! Another ursine argument is that sales growth is in lower-end devices to emerging markets. Again, fair enough, the growth is overseas and RIM is addressing the most robust markets.
The proof that they are doing the right thing is in gross margins, which were supposed to collapse but instead have remained right in the 40%-45% range this whole time.
There is no doubt the smartphone market is getting more competitive, but I can think of few markets in which one company garnered 100% market share. I like AAPL stock and the company very much, but they will not sell every smartphone shipped in the world. Look at those unit growth numbers for RIM again: Since the iPhone was introduced two years ago, RIM has doubled its unit sales. Some people just like the attributes that the BlackBerry offers.
I might erase this whole argument if this stock traded at a multiple that reflected its growth prospects. Instead of being a highflier with a momentum multiple, this fashion to hate RIM has driven the P/E down to 7x this year's EPS estimate. I mean ... really? Even if you discount the bear case, it isn't worth a market multiple?
RIM has gone through these periods before. Mid-decade, the patent suit kept the stock in a flat range for two years, while the business continued to grow. When the cloud lifted, the stock ran from $20 to $140 in one year. We are at a similar junction now. Unless their business completely collapses, sentiment will turn and this stock will have a massive run. My price target is $150 or so. This uses 20% growth on top of this year's $7.50 guidance, meaning $9.00 of calendar 2012 EPS, and a multiple of 18x, a modest premium to the market to account for the growth prospects. That is a 200% gain from current levels, and could happen literally in months IF (that is a big "if") the revaluation happens in the near term. Obviously, if the stock is re-rated next year, the multiple would apply to an even higher EPS number, since by mid-2012 you will start trading off the calendar 2013 EPS estimate.
Inflation is accelerating more quickly than CPI and other measures can pick it up, in my opinion.
When researching potential retail names, do two things:
1. focus on those with comps well above inflation rates; and
2. dig in to see which names have increasing unit volumes and traffic.
Since the generational low in spring 2009, RIM stock essentially topped out around $85 in early summer 2009, and has gone nowhere since.
This sort of stock performance is usually reserved for boring no-growers, or companies with real issues they are working through. In contrast, RIM has been wildly successful over this period, posting the sort of growth that few companies can ever hope to achieve. Sales are up 62% over that period; units have grown 91%; and the subscriber base is up 114%. Furthermore, RIM is one of the leaders in a huge market with open-ended growth opportunities. The mobile phone market is over 1 billion units annually. The leading smartphone vendors, AAPL, RIMM and the Androids, are still only selling a fraction of the total.
One argument the bears immediately make is that sales are not up as much as units, so ASPs are declining. Fair enough, except this is the story of every high-growth technology product market that ever existed. Your expectation should be that the company can bring down the unit price as the technology matures and volumes boom. Apple is doing exactly the same thing. Be far more fearful of tech companies that do not lower prices! Another ursine argument is that sales growth is in lower-end devices to emerging markets. Again, fair enough, the growth is overseas and RIM is addressing the most robust markets.
The proof that they are doing the right thing is in gross margins, which were supposed to collapse but instead have remained right in the 40%-45% range this whole time.
There is no doubt the smartphone market is getting more competitive, but I can think of few markets in which one company garnered 100% market share. I like AAPL stock and the company very much, but they will not sell every smartphone shipped in the world. Look at those unit growth numbers for RIM again: Since the iPhone was introduced two years ago, RIM has doubled its unit sales. Some people just like the attributes that the BlackBerry offers.
I might erase this whole argument if this stock traded at a multiple that reflected its growth prospects. Instead of being a highflier with a momentum multiple, this fashion to hate RIM has driven the P/E down to 7x this year's EPS estimate. I mean ... really? Even if you discount the bear case, it isn't worth a market multiple?
RIM has gone through these periods before. Mid-decade, the patent suit kept the stock in a flat range for two years, while the business continued to grow. When the cloud lifted, the stock ran from $20 to $140 in one year. We are at a similar junction now. Unless their business completely collapses, sentiment will turn and this stock will have a massive run. My price target is $150 or so. This uses 20% growth on top of this year's $7.50 guidance, meaning $9.00 of calendar 2012 EPS, and a multiple of 18x, a modest premium to the market to account for the growth prospects. That is a 200% gain from current levels, and could happen literally in months IF (that is a big "if") the revaluation happens in the near term. Obviously, if the stock is re-rated next year, the multiple would apply to an even higher EPS number, since by mid-2012 you will start trading off the calendar 2013 EPS estimate.
Inflation is accelerating more quickly than CPI and other measures can pick it up, in my opinion.
When researching potential retail names, do two things:
1. focus on those with comps well above inflation rates; and
2. dig in to see which names have increasing unit volumes and traffic.
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