Monday, June 28, 2010

June 28,2010 Home Depot and Train Depots


June 28,2010 Home Depot and Train Depots 

BKS, Barnes and Noble did miss. They hoped not to loose 81 cents a share. We were thinking a loss of 85 cents a share. Wrong, they got whacked at 89 cents a share down with a 17% increase in top line sales.

Everyone (Well almost everyone) agrees that stocks are over sold a bit and we should see a rally. The market closed so close to yesterday’s number you need a Cray-2 Super computer to see the difference. Oops, just dated myself.

The G-20 announced that all members are going to cut deficits in half by 2013. That should have bumped the debt scared market up, but perhaps the market has a hard time believing this can be done. The market did not move. Mixed personal income and spending numbers did nothing for the market either. Do you think the market is waiting for job numbers? Good guess.

I had two people over the weekend ask me about HD, Home Depot. I only mention it as I have not done the homework, but will and report here, but Cramer had an alert this morning and he dropped some of his HD. He thinks we will be dealing with poor housing data for some time to come. I suggest you join Action Alert Plus at for more details or watch Mad Money on itunes. I did not get to see today’s episode but I will be surprised if he did not mention it.

It made me feel good today that two Forbe’s article had typos. Sometimes I go back and read this blog and think you must all think I am either drunk, tired, or stupid. Two out of three ain’t bad.

Earlier in the day we added to MDR McDermott, FLS Flowserve, and CVX. I also put some limit calls on Sep 12.50 calls on Greenbrier GBX if I can get them at 1.25 each. They are a fairly strong player in the rail car business. Fundamental don’t look perfect but they are well positioned for a recovery. I do not recommend this for the weak of heart. More info taken from FinViz: The Greenbrier Companies, Inc. designs, manufactures, and markets railroad freight car equipment in the United States, Mexico, and Poland. It offers double-stack railcars; boxcars used in forest products, automotive, perishables, and general merchandise applications; covered hopper cars for grain and cement industries; gondolas and coil cars for the steel and metal markets; conventional railcars; center partition cars for the forest products industry; bulkhead flat cars; flat cars for automotive transportation; and solid waste service flat cars. It is selling for 12.50 and has target prices of 19-20.

I owe one of our readers some comparative homework on CVX versus XOM. Give me a day for those as well as the home Depot stuff.

Salve Lucrum

Sunday, June 27, 2010

June 27, 2010 The weak ahead, stick to the fundamentals


June 27, 2010 The weak ahead, stick to the fundamentals

It was a great weekend. Friday night we went out with our next door neighbors (He is a casual reader of this blog), for they had to tolerate 11 months of construction to get our little backyard project done, and we haven’t connected with them in while. Then Saturday an unexpected (that means Devin knew about it and I forgot about it) but wonderful visit to our house from some longtime friends and her parents. (Her Dad is an avid reader of the blog and has helped me make some nice money with bonds over the last year or so.) So what does that have to with making money. Nothing other than the fact it’s nice to be able to enjoy friends, a nice meal, and a glass of wine, after all, that is what it’s all about.

Another wonderful moment happened when I got up Saturday about 6:20 am and found my Barron’s in the driveway. Every Saturday morning feels a little like Christmas when I see Barron’s on the drive. As usual, it’s a great issue and I recommend you subscribe so you can see how close I come to blatantly plagiarizing each week.

The cover story turned me off because it was about Pharms. You know drugs. Boring, (except maybe TEVA). Patents are expiring, the FDA is making almost impossible to get trials completed, there are still questions about the health care bill and prescription care programs, we have an administration that is anti big business, so Pharms do not get much of my attention. The portfolio made some good money over the last couple of years ambulance chasing the swine flu vaccine makers and some SARS virus groups like RHHBY, PFE, MRK, GSK, and BMY. (The realized gain for about a 11 month holding was 16% from about Feb 09 to Jan 2010.)

Needless to say I did not head right to that article. I got my cup of tea, brewed with my Keurig K-Cup coffee maker, love that thing, and enjoyed going through the entire issue. Picked some positive news about travel and our industry. Abelson’s opening article The Coming Storm made me feel like my recent entrance into the financials (BAC, C, WFC) may have been ill timed. His top line review of the financial reform situation was not optimistic except for citing that it could have been worse. I am going to keep riding those horses even though later in the morning on pages M32-M33, in the short interest data both C and BAC has significant shifts in the short positions meaning there are some large hedge fund moneys placing 3-6 month bets against these to equities. Abelson spent the last 400 words spouting negativity from a buddy of his (must be because he quotes him a lot), a guy named Dee Keesler of SDK Capital. He is yelling the sky is falling. Dee has a track record of saying the sky is falling. We checked out some history on the guy, and he get its right quite a bit of the time, but his cited causes are not always spot on. If you say the sky is falling long enough, some sky will fall.

Leslie Norton wrote an interesting article explaining which stocks and fund might do well when the Chinese actually get around to unpegging the Yuan from the Dollar. (versus talking about it). It is interesting to note that China wanted the heat off of its currency issue prior to the Toronto G-20 meeting and Obama wanted financial regulatory reform. China issued a sound bite and our legislation locked itself in rooms for twenty hours and delivered a bill that some are calling draconian. It is even more interesting to think that somewhere between 10-17% of the population is unemployed and we don’t have a jobs bill that shows results, but The President can now stand in front of 19 other nations (many of which have less debt than the US) and say we have financial reform. Ya think Washington has some priority issues? But I digress.

Norton’s article is a good primer on the impact of the Chinese currency float. In a snapshot, think Australasia Currencies, Base metals and commodities should all benefit. The article actually has specific stocks and funds to consider. If anything excites me I will mention them here.

I finally got around to reading the Andrew Bary article about the PHARMS, and it has me rethinking my position. They are dirt cheap, some great companies and could be very interesting long term plays (Beyond 24 months.) More homework and I’ll report back. Please get a copy of this article if you think that people will continue to get fatter, that heart disease is going to impact every industrialized nation in the world, that science is getting more cleaver in treating diseases and that there is long term profits in drugs. There is some money to be made.

A couple of other articles got my attention and we will be kicking the tires on Darden Restaraunts DRI (Cramer was pimping this a couple of times last week.), and Lincare

And if there was not enough bad news to go around, Mark Veverka wrote a piece explaining all the things that could go wrong with AAPL. It’s like reading the small print on a bottle of cough syrup, you eyes might fall out, you could be incontinent, you may loose feeling in your hands, and hearing might be amplified to where your ears bleed and in some case may cause death. Provocative but useless article. By the way, the article was based upon a Bernstein Research report. The kicker is that the researcher at Bernstein has a 300 dollar target price?

The title of tonight’s blog mentions fundamentals. It is worth noting the average P/E ratio for the S & P is currently 15 on past 4 quarter and 12 time future quarters. Historically that is low. In other words stocks are cheap. There is no forward or upward momentum. That is why the market is called range bound. The only way to make money in this kind of market is to look for the value. Make sure your picks have cash (Free Cash Flow), make sure they are using that cash to pay down or eliminate long term debt, issue juicy (North of 3%) dividends, and are buying back shares. If your picks do not do that they for sure must have the next best new thing or they are using the cash to buy the company that makes the next best new thing or it will be extremely hard to see appreciation for quite a while.

The week ahead is busier than the last few. Monday will see an analyst meeting for Roche holdings (Speaking of drugs) and they are touting, maybe their new diabetes drug and tell how they are doing with the FDA trials. Maybe Roche could come out with a drug that would let Barnie Franks Talk like Sidney Poitier. Sony issues its annual report. YAWN. Barnes and Noble reports and hopes to not loose more than 81 cents a share. I am guessing minus 85 cents a share. Sorry B&N.

Tuesday will see consumer confidence reporting. The collective brain trust out there is looking for a rating of 63 as we have seen increases in the number from 47 over the last few months. This is mostly employment driven so it could go either way. I am an optimist so I am hoping for a 65-66 and a nice little bump to these moribund equities. Tuesday the only stock reporting is GIS General Mills. OK its not the only, but look at the list of 43 companies reporting on Tuesday. I swear I do not know another name on the list. GIS is looking for 41 cents a share. Keep in mind that Kraft and ConAgra both had weak numbers last week. Logic dictates GIS should too, but I am going to have two bowls of Cheerios on Tuesday and I will help them make a 44 cents a quarter quarter and get a little nudge in the stock.

Wednesday we get the teaser ADP Payroll report which is sometimes a good tell for Fridays Job report. We will also get the sporadic Chicago Manufacturers index number which is a gauge of all kinds of business in the Chicago area. The number of the street is 59.7 (anything above 50 means economic growth), I am thinking 62. Apollo Group and Monsanto report on Wednesday. APOL has icky all over it because of a class action lawsuit involving the SEC. It won’t matter if they hit the 1.55 a share that is the consensus. (They will). Until we can get the details the stock should continue the slide its been on for 6 weeks. I cannot for the life of me get a feel for whether MON will hit the 8 cents a share as expected. We do not own the stock and have done no homework. Good luck. (Can’t wait till Jul 12 when the new earnings season kicks of with AA.)

Thursday we see the Auto sales number for June. The consensus is flat at 8.9 million units. Because we just helped our mother in law get into a car, we are going to wild and say 9 million and look for a nice market reaction. Thursday will also give us a look at initial jobless claims. I suggest you look at the last 12 month chart on this stat and then tell me things are not stabilizing. It will be about 450M give or take 5. If it’s less than that, break out the cheap scotch. If it’s better than that, it won’t matter as there is too much doom and gloom in the press. A busy day on Thursday will also bring us the Institute of Supply Management index. Again anything over 50 means economic expansion. The consensus is 59. I am looking for 60.5, BUT I did not drink tonight so I may be going through withdrawals. Construction spending is reporting that day too but it should be flat or maybe up 1%. That is the consensus and I have no opinion.

Friday has a couple of biggies, the employment report, look for overall unemployment to go up a hair to 9.8 to 9.9% and the market having a tizzy going down 2% on Friday. Then we have factory orders which should finish up 1%, but not enough to help the market which will be focused on the sky is falling job situation.

Steady as she goes and to quote the old Hill Street Blues TV show, “Let’s Be Careful Out There”. Do your homework ease into your picks, buy on the dips, take a profit when you can, and move your stops with your average cost.

Salve Lucrum

Friday, June 25, 2010

June 25, 2010 Don’t Get Pinched In The Clouds


June 25, 2010 Don’t Get Pinched In The Clouds

Today was the epitome of a fairly low volume range bound market. It finished flat and mixed. Financials carried most of the day because all of our hard working legislators stayed up for 20 hours to put to bed legislation for financial regulations. Though the final details were not completely understood the fact that we had a bill gave some stability to the sector. GDP, which somehow I did not take a guess at, came in a bit soft while consumer sentiment was raised up.

Lot’s to pontificate about tonight. There was a great article in the Journal today that has its basis in the history of the Razor. Razors of some type have been around since the Bronze Age. In the late 1800s straight razors became the tool of trade for barbers. Just prior to 1875 a Frenchie named Perret looked at the design of a joiners plane and designed the first safety razor design. The Kampfe Bros brought the device to market and it was expensive but effective. It was only bought by barbers and the wealthy. Then a guy named King Camp Gillette took the design and made disposable razors. It allowed what would become the Gillette Corp make the Razors cheap and basically give them away in order to capture the replaceable blade business. And the rest is history.

Now have you noticed all of the ads for the price wars on the eReaders from Sony, Barne’s and Noble, and even my favorite the Kindle!  Here is the scoop. They are giving the razor away. Well 150-190 dollars is not giving the things away but I can assure there is very little profit at that price. They are doing because they want the replaceable blade business, the digital downloads.

Lee Gomes does a great job of walking us through the economics of eReaders. He also shares a similar phenom when Kodak flooded the market with Brownie Cameras at cost in order to get the film business. Gomes then goes on to throw the iPad into the mix but wisely points out the profit on the iPad is enormous (It sells for 500 and cost is estimated at 259). What can I say, buy AAPL.

Get Off My Cloud- Rolling Stones

The buzz word of IT buzz words is Cloud Computing. I have been meaning to do more homework on the topic and was pleasantly surprised to find out Forbes had done it for me. To get a good grasp of what cloud computing is all about as well as detailed company profiles CLICK HERE.

As a favor to those of you who are getting to old to click on links here is my homegrown summary of the players and my basal understanding of how they play in the Virtualization Cloud Computer Sandbox. This is a stretch for me as I know of at least 8 technophiles (several whom I work with) read this blog so if I screw up I will know about it. Anyway let’s hope I get them relatively correct.

CRM, one of the largest and leading cloud platform companies. They were one of the first to utter the words death to software. Their original business model of supporting road warriors with their Customer Relations Software, by chance I think, worked well to support the concept of cloud computing.

Amazon AMZ, has a division called AWS that allows thousand of companies the ability to host eshopping carts. AMZ is leveraging that technology to offer a broader range of cloud products and services.

Google GOOG, offers Google Apps, Google Documents, over a global network of redundant servers which is in essence Cloud Computing.

IBM has offered the concept of Cloud Computing to many of its global customers by designing hardware and software solutions behind the firewall. They are trusted advisors to hundreds of large and midsize companies as these companies take on the challenges of vituralizion and cloud computing.

Microsoft, MS ironically is playing catch up on every front of virtualization and cloud computing. I say ironically because if you go back a look at the early Gates books like Business at the Speed of Thought (1999) and The Road Ahead(1995), he in great detail explains the concepts of Cloud Computing and virtualization and mobile apps. What happened Bill? Don’t count them out as the predominate usage of Windows Products and MS office apps positions them well for Cloud Computing migration and support. Keep an eye out for MS Azure as a big hit sleeper product for MS.

If you are not fortunate enough to sit through an IT SWOT meetings, you might not know VMware, but they are branded incarnation of the buzz word Virtualization. Their products allow multiple applications to run on the same server and they are considered by many the datacenter technology rule maker.

Rackspace is an interesting play in the clouds as they support the scalability of datacenter demands. If you are a small company your server needs are minimal, you can use their services to support your needs. If you have astronomical growth, their ability to growth with you makes it cost effective to continue using them versus investing in your own data centers.

Terremark is also a scalable solution to cloud computing but are very closely aligned with VMware. Not a bad thing.

Rightscale is a cloud computing management software company that offers programs and services designed to insure your data center solutions are scalable and portable. (Portable in this definition is from a user centric POV not meaning the data centers are portable.)

CA, the old Computer Associates has bought their way into the clouds as their recent acquisitions allows them to address many facets of cloud computing.

And there you have 10 prominent cloud blazers. Please read the Forbes link as it is a great collection of stories about cloud computing and many other firms are mentioned.

Pinch Me. Did I really stop out or was it a dream!

Have you ever got pinched in a range bound market. I have been discovering something that I think will help traders or investors who are heading the advice (From me and others), about setting stop order and stop limit orders.

In this crazy market, we have been advocating you take a look at how you establish a position on a stock. For example you have lunch at McDonalds, love the food, do some homework on the stock and like what you see. You have $2,500 dollars to allocate to that sector in your portfolio. We do not suggest you plunk down $2,500 on McDonalds. In a range bound market like we are in now, it is wiser to step into the position over a period of days or even weeks. Buy in the dips as there will be dips. (There was huge dip this morning in Boeing which was a great opportunity and we missed it.) Anyway if you follow that wisdom, you buy ten shares and wait for a dip and then another ten shares or even smaller increments. If you immediately set stops after the buys, you will have set a stop and then buy into a lower price. Remember to change your stop to reflect the lower average price. I have noticed that I have bought into a few equities and discovered that I am a point or two away from a stop. We must keep that in mind when we step into a stock.

If you are better with numbers here is an example. MCD is selling for 68 a share. You want to put $2,500 dollars to work at MCD which means you can buy 36 shares. So today you buy 12 shares at 68. Like a good boy or girl you set a stop or stop limit at 62.50 to protect your back side. (I use 8% down as a stop drop.) The next week a MCD customer spills hot coffee in their lap and you see MCD go down to 65, like a hungry brown trout coming up for a juicy grasshopper, gulp, you pick up 12 more MCD at 65. You go in and adjust your stop for 24 shares versus 12 shares, BUT did you change your stop order price down to reflect the average cost of the shares which is now 66.50. Using the same down side your stop should be moved from 62.50 to about 61.25 (I use 25 cent increments when setting my stops). That way if the person who spilled hot coffee in their lap was the daughter of a US Senator and there is now a bill proposed to only sell cold coffee (It could happen) and MCD goes down to 62.50, you don't inadvertently get sopped out of the stock for no good reason. If MCD goes down to 63, Gulp, you pick up your last block of 12 shares, your average cost is 65.33 and your new stop limit price is 60.00. You have now established your position, you can watch the stock hopefully recover, but if not, you still have the protection at 60 which is about 8% below your average cost.

Have a great weekend and remember behind all the range bound chaos in the market, there is a value statement in each and every equity. Do the homework and forget the headlines.

Salve Lucrum

Thursday, June 24, 2010

June 24, 2010 A Subtle Little Kick In The Crotch


June 24, 2010 A Subtle Little Kick In The Crotch

You had to really pay attention to hear what triggered the landslide today in the market. At face value when you read the Federal Open Market Committee minutes you might say nothing has changed. To make it really easy for you we will provide a side by side comparison. Not to worry I can cut and paste this as it is public domain content. It is one of the few things we actually get with our tax dollars. Open and notorious use of stuff they write and publish. Anyway, pay close attention or you will miss the subtle little shift in phraseology that caused all of our turmoil today.

April’s statement in June: “Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually.”

March’s statement in April: “Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.”

Another subtle example, pay attention boys and girls.

April’s statement in June: “Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

March’s statement in April: “Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”

Did you see it? Did ya feel it. Very subtle, but the Fed went from, “You might have heard rumors about some crazy ass bird running around here possibly observing unusual particles coming from the general direction of above us.”, to, “We have found feathers on the ground supporting the theory that some big crazy ass bird has been alarming everyone about unidentified debris possible landing in the general vicinity of our town.”.
 As we’ll mentione later, the FOMC minutes combined with the Euro Contagion flu, had a nasty effect on the market today. More on that later.

Positive news from the April in June FOMC report: "Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.”

Negative news from the April in June FOMC report: “Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.”

If you want to know where I am copying and pasting from, it is the original report from the Fed, IF YOU DARE

On the cover of the WSJ today there was a teeny tiny article called Vital Signs. It was a summary of the CEO Economic Outlook Survey. You have to respect a survey from CEOs as they are very smart and insightful people don’t ya know. Anyway according to the SURVEY, their optimisms rose to 94.6% in the second quarter of 2010 from 88.9 in the first quarter. Most expect sales and demand to go up, but contrary to my feelings and opinion they expect expenditures on capital improvements to go down.

In an article that I can not call linkage, Kelly Evans of the Journal points out an interesting play for packaged-food companies that might be worth exploring. She explains that the lackluster retail sales figure are a tell for consumer spending. When that happens, the food industry sees a shift towards packaged food and comfort food. While the over retail sector is down 15% of late there are three plays that are known to be down less than the overall market and might do well if we see continued stress on the economy. They are GIS , General Mills, K Kellogg, and CAG ConAgra. All three are apparently healthy (do your homework) and show a decent upside. Even if you believe in a sold second half of 2010 then a shaky next couple of years, you might do the homework and slide into these or one of these very slowly on the dips over the next 12 months.

CAG has a nice 3.3% yield and some target prices with a 12-20% upside. Kellogg has a decent 2.8% yield and about a 12% upside on target prices. GIS is trading at a fair value of 37 and change and throws a 2.6% yield. This actually is linkage, it’s just that Kelly Evans came up with it and put it in the most read newspaper in the US. (That’s right the WSJ passed USA today in late 2009.)

Finally a headline and a story that make economic sense. It was reported today that gold futures gained as the dollar went down. That is a typical trading pattern, but one we have not seen for a while. Because of all the Euro concerns we have seen the dollar rise and gold rise. Today we saw gold and other commodities rise as the dollar regressed. Something finally resembling normality.

As to the “kick in the crotch” day in the market, the only thing we can point to is the sympathy pains for the Euro contagion flu and some uppity downdity earnings reports. The financials were hurting today over rumors that the final legislation is going to be uglier than expected. (Come on Barnie “Elmer” Franks, I was counting one you.)

New jobless claims came in lower than expected, but it was not enough to lift the market. It came in much lower than my negative guess of 470,000. It came in at 457,000. We would have needed a 400 to get anyone’s attention. I was also wrong on the durable goods order number. Sunday I told you it would be even and the best guess was a -.5%. It came in at a very low -1.1%. I will tear it apart tomorrow and see what the components look like. If you want to have a shot at it, here is The Durable Goods report.

And in further confessions, my guess of 43 cents a share profit for CAG ConAgra was off as they reported 39 cents a share. There were some unexpected corporate expenses and they missed a weeks revenue for some reason. More reading for tomorrow. I do not own it so I won’t be listening to the earning report.

With that I will get out my whip and give me forty lashes. Oh yeah, Happy Birthday to my buddy Butch. He turns 172 tomorrow. Don’t worry he says he reads the blog but I know better and his investment decisions prove it.

Salve Lucrum

Wednesday, June 23, 2010

June 23, 2010 The ORP Giveth, the ORP Taketh Away


June 23, 2010 The ORP Giveth, the ORP Taketh Away

If you are a regular reader here you will note that ORP is the prestigious brain trust of Obama, Reid, and Pelosi. OOOoooppps, hope I don’t get removed from my post for that comment.

Existing and new home sales are in the dirt and the conclusion of the housing stimulus program is to blame. Let me offer a different perspective. I think there are three groupings of people in the US at this moment in time. We have about 2-3% of the population who can and will and are buying homes when ever they like because they are filthy stinkin rich. Then you have the 10-17% of the US who at this moment in time not employed. That is a squishy number but almost everyone agrees with the 10-17% spread, so let's use 13.5%. Then there are the rest of us who are potential home buyers and sellers. There are two questions we must ask ourselves. How much of an incentive is it going to take to buy a home we are not sure we can or will be able to afford? And do we want to buy a home that we know that we cannot sell?

Banks must clean up their inventory of questionable mortgages; prices need to come down to clear this 8.5 months of housing inventory. Until that happens, no incentive is going to be effective or sustainable.
 Now if you compare to the shake out of the cash for clunker campaigns and the first month or two after the program there are some parallels to be drawn. Auto sales did drop significantly at the end of the program then in a couple of months returned with vigor. We might see that happen in housing, but we eventually have to address the inventory and the value. Click here for the actual details of the housing report.

Because of the terrible housing news, a lot of the housing stocks came down more than need be. Cramer, in his subscription based Action Alerts was pimping SWK, Black and Decker (He bought some shares today, but I didn’t tell you that.) If you do the homework, it is an attractive story. Do some Google searches about today’s analyst meetings and comments by the COO James Loree, or join The .

OK, I know I bummed some of you out with all my negativity of late, so here is a ray of sunshine. There has been a giant bag of doodoo news over the last few weeks.

There is a lot of talk about a double dip recession. Short term, I do not think that is the case. All indications are that manufacturers and retail inventories are lean. Labor income, not jobs is up a bit. China is growing in almost every economic indicator. Remember those rail car indicators mentioned here a couple of weeks ago, they still look very attractive. In fact there should be some healthy growth in many sectors for the balance of this year.
 The market came back to even today which surprised me immensely. We did add to a few positions before lunch today near the bottom of the trading day. Those would be BAC, 2 more of the January 20.00 calls for INTC, and one more September 45 dollar ITW call. And we stopped out of one we have to take another look at. I did and I am ashamed to say I accidently set a limit on WPRT and not a stop limit order. I basically broke even on the trade (Down .2%) but will re-establish my position in the morning. I should be back in at 17 looking for a 22 price by the end of summer.

Sorry, no linkage today but I am working on two possibilities. Some very promising tourism travel news was reported in the WSJ and there are developers beginning to buy land parcels in distressed areas like Las Vegas and Phoenix. I’ll tell you what I’m thinking in a day or two once I get some solid linkage. Do you have any ideas for these two pieces of news?

Salve Lucrum

Tuesday, June 22, 2010

June 22, 2010 Here come da judge, here come da judge


 June 22, 2010 Here come da judge, here come da judge

I started this blog today from inside the Orange County Municipal Superior Court. I had been called to do my civic duty. Don't ask me about the case I can't talk about it. The day has given me ample opportunity ton clean up some email and watch the market. This is as borings as watching a television show made. Sorry Kristin?

Looks like I came close to calling the existing home sales number but it did come in lower than even I had expected. Cramer was sending notes out today to take profits in HD, Home Depot on the news. We were way ahead of him that one. We took profits on the flash crash day and did not get back in.

Unfortunately I did not have the opportunity to fish for linkage today as we were entertaining tonight and it is late. I called it beating the expected 57 cents a share and the report came in at 46 cents a share a big miss. Revenues were up 6.2% which is why I was expecting a beat, but expenses were up even more. The CEO tried to give some words of encouragement but the stock took about a 5% hit today. If you like the sector take a look at WAG as it is real cheap now. Do your homework. I will take a close look at it as well.

Jabil reported and as estimated here had a great quarter. The street price was 34 cents a share, I was expecting 36 and they got 38 on some great top line sales. This bodes well for most of the electronic segment.

Carnival reported today and I missed that one as I was expecting a beat of 30 cents a share all the way to 34 cents a share. They did beat but not enough to impress and the CEO is lowering expectations for the balance of the year because of increased fuel costs.

I know this was a really weak blog tonight, but quite honestly, its late, I’m tired and I enjoyed too much Rubicon and Justin Isosceles. Another great meal at Hannas.

Salve Lucrum

Monday, June 21, 2010

June 21, 2010 Portfolio Update

BAGAKOAA;  June 21, 2010 Portfolio Update

A few have asked so here is the latest.

Salve Lucrum

June 21, 2010 Yaun vs. Yawn


June 21, 2010 Yaun vs. Yawn

That was fun. We had a great start today as world markets reacted to the incredible news that China was going unpegging its currency from the US dollar. Well it wasn’t really news as much as a position statement. Actually it wasn’t as much like a position statement as much as a signal. Actually it wasn’t much of a signal as much as a sound bite, but did we bite. The market broke out about 1.5% higher and within about two hours everyone started to ask, “What does this mean?” We had to ask, “What did they say?” first. As our friends in Bloomberg were saying most of the day, what are the details? By noonish PST everyone had realized we reacted to a head jerk by the Peoples Bank of China. See they, the Chinese, do not want the G-20 meetings coming up to be focused on the valuation of the Yaun. This move kind almost takes that issue off the table, except for a handful of vocal democratic Congressmen who are running for election this fall and want China to do what we tell them to do and revalue the Yaun NOW. Imagine a foreign entity thinking of their own people and their own timeline. Don’t they realize these politician have ads to prepare. Who cares what the unpegging of the Yaun will do for the people of China we have a government to run into the ground. But I digress.

By the end of the day, we all saw the point and half evaporate and close down a hair.

Overall the announcement is a good thing from everything I could glean tonight. It is at the very least an indication that China has assessed all of the global economic threats and decided to consider how to appreciate it currencies responsibly again a basket of currencies including the dollar. Details are not available and that was what took all the wind out of the rally’s sale this afternoon.

So what does this mean to the market place. Probably not much short term except for those playing the currency exchange game. We have not figured out how to loose money in FX so we do not discuss it here, but look for China’s strongest inbound trading partner’s currencies to get a little bump this week. We are talking Brazil, Australia, Japan, Korea and as that happens look currency trader to accept a bit more risk in places like Canada and New Zealand. But overall the announcement is a vote a confidence for the global economy short term. Perhaps Zhou Xiaochuan Chairman of the People’s Bank of China monetary committee read our blog last night. Hey it could happen!

Find the Linkage

With the news that the Yaun was going to be free floating, well that is not exactly what they said, I know I did that already. I was gleaning articles as I could throughout the day and tonight. What we discovered was an article in the Financial Times, (remember I have a portfolio over there too that I help with) and a related story about the strength of the Chinese economy surfaced but it did not have to do so much with the Yaun, but could as their economy continues to expand. The article was based upon comments made by a Greek Shipping Magnate, Mr. Peter Georgiopoulos. He pointed out that the dichotomy of the expanding Chinese economy and recent cancelled orders for dry bulk and double hulled tankers are creating a price spike for the shipping industry. Mr. Georgiopoulos has launched several companies of late to take advantage of the situation. One of them is General Maritime Corp GMR and the other is Genco Shipping. We would draw your attention to GMR which is well positioned to meet the demands of the expanding Chinese market and, pay attention boys and girls, they carry a significant portion of Saudi and Indian Ocean oil to the US. Why is that important? Deep well drilling is in deep doodoo. New restrictions on shallow water drilling will also stress supplies and we will need oil from points ANYWHERE or we will be staring down the barrel of 100 oil again. Ironically, while researching GMR and Genco, Credit Suise had some positive comments about a recent equity offering for GMR that raised 200 million for fleet development. Their day rates for double hull tankers has risen from 40,000 a day to 70,000 a day. Their financials are not all that pretty because of the lackluster oil market over the last 2 years. China and the Gulf of Oil Mess is changing the game. GMR had a nice run from February till April 19th and the stock has come from that high of $8.70 to today’s close of $6.82 which is way below the 200 day MA and just below the 50 day MA. It currently has an accidental yield of 7.33%, but the dividend may get cut because of the recent 200 million dollar offering it did. (it is long and complicated but the offering might have breached some covenants and restrictions that will cause them to drop or lower the dividend). If the day rates stay above 50 grand, a forward looking value for the stock could be 12-14 dollars a share. I am playing with a November $5.00 call which I am paying 2.80. This one could be fun and it was true game of connect the dots which makes it a little harder for everyone to be in the pool ahead of us. If you get in, put your stops in right away. We now know how goosey the oil industry could be.

In other Salve Lucrum action, we picked up more UNG on the afternoon dip. We did secure the HNZ December 49.00 calls at 84 cents each. We doubled down on our January 20 dollar INTC calls for 2.68 each. Other than that we just watched the market take in the China Non-News.

My intel told me that MLHR, Miller Herman was reporting today. Sorry for the confusion as they report Wednesday. Ironically Steelcase did report today and they were way off due to a charge for healthcare. Is that a tell for MLHR? We’ll know in a day or two.

Salve Lucrum

Sunday, June 20, 2010

June 20th, 2010 Lookin back, lookin forward


June 20th, 2010 Lookin back, lookin forward

Hopefully you will agree my scorecard was pretty good last week as far as hits or misses. Friday provided me a day to clean up some portfolio positions, and really read about what is important in the next week. I really am struggling to find meaning data.

When that happens to me I just grab one of the 34 investment books on the shelf or in my kindle and read until an idea comes along. Well it’s Sunday and I got a lot of reading done, but the ideas are scarce. Let me pontificate a moment or two about what I think might happen in the weeks, months and yes, years ahead.

The week ahead is very light again in economic and earnings news. Monday will have some typical Federal Bond auctions and there should be no surprises there. All week long we will be at the mercy of European and Asian markets as there is no significant news out of the US. The 10 year note will probably hang around the 3.25% mark making my return target for 12-18 month investments 6.5%.

The fed will have it FOMC (Federal Open Market Committee) meeting on Tuesday and don’t look for anything exciting there. They have hinted that there is a rate change in the wind and last month they were indicating 4th quarter 2010. The mixed economic news last week and the glacial employment recovery (More about my hypotenuse on employment later), will probably have the FOMC moving any rate adjustments to 2011 possibly even mid year.

Tuesday will also show us what is happening with existing home sales. Now this will not be a clean number as we still have a residual float from the home buying stimulus package. The consensus is for 6.2 million homes sold in May. I am thinking that it will be down from that figure but above the 5.7 million we saw in April. I am thinking 5.95 which will shake up the market a bit. Look for the market to be down about 1-1.5% on this news.

Wednesday will see mortgage apps and new home sales. There are no consensus figures on mortgage app numbers but the stimulus is done and there is a very slow recovery underway so I would not expect the number to be glowing. That report will be followed by New Home Sales. The new home tax credit is officially over for now. It applies to contracts closed as late as June, but the contract had to be started in April. 400 thousand units is the spec number. I think it could be close to that as that number has been adjusted down 100 thousand units from April. If it is a lot weaker than the 400, the market could be dragged won a bit.

Durable goods report Thursday morning. The number was up in April mostly do to aerospace related orders. The consensus figure is a -.5% drop. After all the reading I did this weekend and some of the off the radar economic tells, I am a bit more optimistic about this figure. Look for a dead even number. Now that does not sound positive, but if the market is thinking down -.5%, 0 will be a win. Don’t look for a big market reaction unless its way below the minus.5% figure.

Thursday will also see a new jobless claim report. Don’t look for good news. The best guess number is 465,000. I am thinking 470.

This would be a good segway for my thoughts on employment. American companies (and quite a few int’l companies as well) are sitting on gobs of cash. I looked up the meaning of gobs and the fiscal definition of gobs means way many billions. BUT, (Remember that BUT means Behold the Underlying Truth) these companies are not running out and hiring people for the sake of hiring people. These companies are going to deploy this cash in one of three ways. They will pay down long term debt. They will issue dividends. They will make capital improvement or new business acquisitions. Ok they could also buy back shares, but let’s group that with paying down long term debt. All of these actions play well for shareholders. (Keep that in the back of your head when I continue to pontificate about the next 12-24 months).

Regarding employment, let’s focus on the money deployed for capital improvements. Think computers, notebooks, system upgrades, virtualization, cloud computing, smarter networks, better utility utilization, cleaner cheaper energy, automation, and network security. All of these will require money spent on products, outsourcing or staff development. All of that will generate new jobs, but not until mid 2011 and at that, very slow growth with many of those related jobs not being in the US. We as a country need to redefine our base unemployment rate. Prior to 2006, it was assumed our base rate unemployment was in the 4.5-5% range. (Dad used to say when we hit 4% unemployment that we were hiring the dead.) In other words, there is about 5% of the qualified population who does not want to or can’t work. During the crisis of the last 2 plus years, we have extended unemployment payments almost indefinitely, and provided a litany of stimulus relief programs for a host of good or at least reasonable situations. Those result whether we like it or not will have a conditioning effect of the population of qualified employable people. We are conditioning groups of people to not work or at least not look for work so hard. That will raise the base rate of the unemployed to, by my guesses 6.5-7%. So in essence we may never see 5% unemployment ever again. So if you agree with this premise, our unemployment is at 9.7% nationally, we are only about 2.5% away from full employment under this news definition. We could see that kind of unemployment number by the end of 2011 or mid 2012. That is not that far away and in line with historical employment recoveries.

Let’s play that out. We would have a very slow, but stable improvement in unemployment figures; you would have companies with plenty of cash, low interest rates for at least mid 2011 and apparent stable but slow economic growth. All of that bodes well for the next 12-18 months. Then, the prevailing wisdom says we need to increase interest rates because our current debt level cannot be supported at the current interest rates. The fed will eventually going to have to bump rates because we do not have the fiscal fortitude to do what is proper and slash the hell put of federal and State budgets. Guitner, Bernanke, Dodd, Franks, Buffet, and host of other in the last 3 moths have all uttered the same comment. The current level of debt in the US balance sheet is unsustainable in the long term.

When we move to fix things via an interest rate bump and some fiscal sobriety, we will see a probably collapse of the recovery. A cataclysmic collapse could be in the cards, but not at least 18-24 months. Wow, I wrote that I am depressed. Then I realized I get a lot of stuff wrong so don’t worry. Just in case, what can we do between now and then to make and protect our investments.

I go back to lot’s of homework or put your money in places that don’t require you to do homework. Think index funds, ETFs or bonds.

If you are wiling and able to do the homework, look for the linkage. Sometimes you don’t need to do hours of homework to come up with the linkage. Just watching Bloomberg or even my Buddy Jim Cramer can trigger some linkage plays. If you watched Friday’s Mad Money he gave a couple of linkage plays in his plan for the week ahead. He mentioned that Adobe and RIMM are reporting next week. They will be saying some good stuff about their companies and the state of their industries. They will have to acknowledge AAPL in their comments and will probably be trying to take the willy out of AAPL. If they do a good job, you might find a dip in AAPL worth buying into. I will be watching.

Another thing you can do between now and the Cronin Crash of 2013, is look for stocks you like but that are throwing a nice yield. In this week’s AAII Journal (American Association of Individual Investors) they show some great stock screens for high yielders. There are plenty of great stock screen out there so go ahead and use them a look for growing dividend yields over the last 5-7 years. Then decide if that is a company that you want to own.

Also look at your holdings now and make sure you know when you want to get out of a stock. All successful investors eventually master all three elements of investing or trading. They are buying, holding and selling. Most of us, myself included focus on buying. Know when to get out is actually more important then know when to get in. Our ego and our emotions will usually cause us to hold on to a stock well beyond its useful life. Kate Stalter of IBD did a great article in the AAII Journal about know when to sell. She is a writer and content editor for Investor’s Business Daily. If you have never read an issue of IBD, I suggest you pick one up. Very informative and they teach a lot about investing. IBD has a strict rule of thumb that has helped me over the years and that is to sell on a 7% downside regardless of the situation. I use an 8% downside and put my stops in accordingly. That has saved me and made me some nice money over the years.

In looking at the earnings releases next week, there seems to be no earth movers there. These are the tail end of the first quarter reports, Alcoa will kick off second quarter earnings in a couple of weeks. (July 12 to be exact) I have it market as I am doubting they will hit the 17 cents a share forecasted. I am going to listen to the report indicating again I have no life.

Monday this week we have Miller Herman. If you don’t know they one of the largest makers of modular office furniture. They are expecting 18 cents a share profit. My guess is they will disappoint. Look for 15 which would be a sizable miss. Palm report tomorrow as well. Who cares. Tuesday Walgreens reports and they should hit the 57 cents a share they are hoping for. No news there. Jabil, an electronics manufacturer will do well and will beat the 34 cents expectations. Look for 36 cents a share. Carnival will beat as well. Look for 34 cents a share versus the 30 expected. Fuel and food is in check, people are looking for the good value in cruises and people have been traveling a tad more. As I mentioned Adobe is reporting Tuesday. I do not have a guess on how they are going to do. They are expecting 42 cents a share and I can find no compelling argument either way, so 42 sounds good to me. Nike is a good economic tell about the retail sector ands they report on Wednesday. Look for some accounting mumbo jumbo to cloud up the results, but I think they will beat. I am guessing 1.03 compared to a consensus of .99 a share. Bed Bath and Beyond reports first quarter numbers and is a good tell for the retail sector. I am thinking they will be up, but not above the 48 cent estimate. Look for 45 cents a share and cautious forward looking statements from management. Conagra reports on Thursday and I am thinking that they will do well. All of their cost were down for the trailing quarter, prices are flat and even slightly up so margins should be better than expected. 40 cents a share is the number to beat. Look for 43 cents a share.

I will leave you with a great book tip. This was one of the books I dusted off my shelf this weekend and it has some timeless advice. The book is “Winning the Loser’s Game”, 4th edition (@2001). It is a great investment book about defensive strategies, watching your bottoms, knowing when to sell, index funds and how to put it all together. Charles Ellis the author writes in an easy style, but pacls a bunch of knowledge into each chapter. It is almost all practical examples and ideas. Kindle User’s, NOT. There are a lot of useful charts and tables the do not format well on the kindle. Here is a promise, get the book and if you don’t learning something about making money from the book let me know and I will buy it off of you. It is that good.

Salve Lucrum

Thursday, June 17, 2010

June 16, 2010 Electric Cars catch up with mothballs?


June 16, 2010 Electric Cars catch up with mothballs?

Ok we may have found some Linkage today, but we will get to that in a while.

Today a lackluster weak market squeaked into positive territory at the end of the day. We added some BMI, UNG, WPRT, and C on the dips today. They were little chunks, but we added just the same. We called the consumer price index wrong Sunday. I was thinking that since WMT was cutting back some of its discounting, we would see a small spike in the CPI. It didn’t happen and it hit expectations of being down.2 %. It will be interesting to see how quadruple witching trades shake up the market tomorrow. Now I had to look up quadruple witching as I was familiar with triple witching. This is a day when we have stock index futures, index options, stock options and single stock futures all expire. Remember if you buy a future or an option, the elements of that trade is the price of the option, the price of the underlying stock or index, and the expiration date of the contract.

So tomorrow all of the worlds collide. If you bought an S&P index option in January with a June 17 strike price of 1200, you are really out of the money so you would let it expire worthless. Now if in January you thought the S&P would close at 1000 on June 17th and you sold a put option, you have to make good which means you will be buying the index option in order to close out your position. Tomorrow if there are a lot of short positioned people out of the money we will see a bump as people will have to buy their way out of their positions. If they are in the money, we could see a sell off.

Follow The Linkage

Might have a couple here today. In a WSJ article about electric cars and California’s subsidizing of SmartCharge stations, there were a list of companies that stand to benefit if EVs take off. One is a private company, (but keep your ear to the ground as my SEC homework tonight indicates they have had two rounds of preferred stock offerings.), Coulomb Technologies is in the bird seat as far as designing and building these charging stations in NY, NJ, CA, TX, and IL.

There are a few companies mentioned in the article, but that is not linkage, that is old news. But if you read more about the charging stations and look at the specs on the charging system themselves, you see they are very hi tech with interconnectivity to smart phones and the internet. When you do a little more digging (third degree of separation), you see that one of their key partners on the project is Siemens AG SI. Now Siemens is a huge multinational. You would think that the analysts covering SI would be all over this. Not. I only found a couple of peripheral mentions about EVs.

Now in reading about SI, the more I liked the stock besides the EV opportunity. They specialties in Smart Grid technologies are very impressive. It goes head to head with GE in many sectors and frequently eats their lunch. They also do well against Rockwell and EMC. Their financials are pretty. If the catastrophe in the Gulf of Oil is the catalyst to start considering LNG or eCars, Coulumb will be the Exxon of the future and SI will be making the gas pumps and smart grid network powering those vehicle. This is a 2 to 5 year play so do your home work and get in very very slowly as an investor. Watch the Euro as well as the value of the stock will be tied to the Euro performance.

More Links.

We have a problem. There are way too many tomatoes. That’s right we have a tomato glut. Growers are seeing a 30-35% drop in prices. Growers are donating tomatoes to charity to move tonnage and to get some value. The obvious play would be to short any publically held tomato growers. Too late. Its so bad even poor people can afford tomatoes. Now here is the possible linkage. 41 % of Heinz’s global revenue comes from the sale of ketchup. Guess what they use to make Ketchup, tomatoes. Ok don’t go out and buy gobs of Heinz just yet. They, Heinz have long term contracts to protect them from the commodity swings in tomatoes. But there is a little article that I discovered while doing the hunt for green tomatoes. (Three degrees of separation) Heinz is negotiating with the CA tomato growers association for at least a 10% drop in the price of tomatoes. That is pretty fair to the growers that are seeing a 25-30 % drop in prices.

So what happens when a company that sells about 4 billion dollars a year in ketchup get’s to lower the primary cost of its main ingredient by 10%. You can even figure it out your self. Let’s assume that ketchup makes up 40% of the Income 1.2 billion. (Right from the annual report) That means that 500 million in profit is from ketchup. If you improve that bottom line by 10%, that is 50 million more to the bottom line. The company’s current P/E is 16.6 and it closed today at 46.60. Do the math. 46.60/16.60 = 2.80 a share earnings. Take the 50 million in savings and divide it amongst the 312 million shares and you get 16 cents more a share in earnings. That makes earnings 2.96 time the multiple of 16.6 and you got a 49 dollar stock.

Do your homework, but I am going to get in a December 49 dollar call for under a buck for the contract. That means I won’t be in the money until 50 a share. Ironically there is a huge block of calls at 50 a share in December. Perhaps a few fund managers have done the math.

Ok one more linkage but I am too tired to do the homework tonight. See if you can figure out where I am going with this. Fedex did beat estimates as expected but the CEO had some sobering expectations, BUT mentioned they are putting more planes in service. What is the linkage?

Salve Lucrum

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Wednesday, June 16, 2010

June 16, 2010 200 and counting

BAGAKOAA June 16, 2010 200 and counting

Well last night’s post was the 200th post of The Salve Lucrum Blog, since the middle of October 2009. That is ALMOST one a day. Proof I have no life.

Follow the Linkage

Sorry none today. I was really looking too and again it’s hard to make a separation of 3 links from a piece of news to a good stock play. I read a lot about Boeing tonight thinking I could make a third degree separation from the 737 production increase to their key suppliers to sub supplier or commodities.

No such luck. Here are key suppliers to Boeing who might see a pop because of BA production boost and there are some very sound stocks on the list. Mitsubishi, Kawasaki, Honeywell, General Electric, AZX International Corp., (Private I think), Bridgestone Corp., Cytec Engineered Materials Inc., (Private but keep an eye on them),Deharde-Maschinenbau H. Hoffmann GmbH a German company and no ADR that I could find, and Frontier Electronics Systems Corp., (Private).

The only other linkage, I would have to give Cramer credit for and that is the impact of the banking regulations and how it might make a huge play for Barclay’s and Duetche Bank. That is news not linkage since the Lenin look alike did ten minutes on it last night.

Under the category of "Damn I’m Good", the market did pretty much as we had indicated on Sunday night. We said housing starts would be off. We estimated 600-610M against a forecast of 650,000. The number came in at 593,000 units and much to my surprise by the end of the day, the market took the news with little volatility. We also called the beat by Fedex, ($1.33 vs $1.32) but the CEO had some wet blanket forward looking comments concerning their pension plans to take the stock down.

 Happy news for AAPL holders today. AT&T were beating customer off with a stick today selling more than 600,000 units of the iPhone 4G. It actually crashed (the say they shut it down) their servers. So AT&T can’t hand calls or internet traffic. AAPL was up almost 3% today.

 We did add to our UNG position on a dip early in the day and picked up some more FLS on the 1.2% dip today. Remember to ease into your positions in this WTF market. (Thanks Megan I stole that from you now that I know what it means. For those people who live under the rock with me WTF means What The &*@%)

Since I had no linkage to discuss today I will leave with a nice wine tip. Last night Devin and I enjoyed, well we ate, some meatloaf premade by our grocer who will remains nameless PAVILLIONS. It was far from the best meatloaf I have ever had but scads better than the gasoline fumed stuff my mom used to make. Don’t worry she does not read the blog, she passed in 1992. Anyway I was in the mood for a big cab and have been learning more and more about the Yakima/Walla Walla area of Washington State. I chose a 2003 Woodward Cab and it was incredible. Deep dark black purple in color. Clingy and thick on the glass, almost jammy. (I know, not a word, made it up) On the nose there was a smoky meaty smell, some florals but not exotics more like wild flower type smells kinda like a potpourri type of thing. In the mouth, it had some spice and earthy tones to it as well as the currant dark berry taste you would expect. It was terrific. I’d have to give it a 91. The meat loaf got a 43, but the wine was knock your socks off. If you see it, get it. The 2003 I had to get at auction ( but I will be looking for the vintner from this point forward.

Speaking of auction, yesterday a 1937 bottle of Glenfidich Single Malt went for 37,000 Pound Sterling to an anonymous bidder and I just wanted to say thank you to who ever it was for remembering my birthday next month, July 20th. What a thoughtful gesture.

Salve Lucrum

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Tuesday, June 15, 2010

June 15, 2010 The King of Linkage Has Left The building.


June 15, 2010 The King of Linkage Has Left The building.

After a long and successful western music singing career, and playing the unforgettable Las Vegas Billionaire Willard Whyte in 007 Diamonds Are Forever, Sausage King Jimmy Dean Passed away on the 13th of June. Now that guy knew about linkage.

Since we are talking about food today, it was brought to my attention by one of our readers that Cramer was pimping Del Monte. They made a good case for the stock, but I have to do my own homework so I thought I would share what I found out.

DLM Del Monte has a good brand name in the market place. One of the attractive things about the stock is the price to book value. It is about 1.7 which is low for such a recognized brand. Its multiple is OK at 11.7 and that is cheaper than the industry average of 17 making it affordable. Its revenue growth over the last three years has been flat. You (The reader) cited a new product which triggered your interest in the stock. Just keep in mind that they have annual sales of 3.7 billion dollars across approximately 18,000 SKUs so any one product is not really going to make a difference in the value of the stock.

Strategically Del Monte, recently (2006) bought a series of pet food companies and that is becoming a more important part of their mix.

So they will grow by acquisition and basic economic growth. The do not have a lot of free cash flow so acquisitions would have to be debt arranged. Their long term debt, is not bad but it would take about 7 years out of current income to pay it down. I did discover that some of their long term debt are two bonds with 2015 and 2019 maturities. They are 6.75% and 7.5% respectively. You might consider that versus owning the shares.

Here is my reasoning. Their operating margin is 13.9% which is slightly better than the industry average of 12.4% but their net margin is 6.6% compared to the industry average of 10.0%. We own GIS, same sector and their financials are little sexier, and their margins are almost double. Here is why this is important. We are having a period of very little inflation and low commodity costs. As those rise, and they will, DLM will be in a tougher position to maintain those margins and those dividends. Remember a company will cut dividends before considering not meeting their bond obligations.

The good news is despite the economy people continue to spend more on their pets and DLM has some good grocery real estate in that sector. (Think Milk Bones, Kibble’nBits, 9 Lives etc,) They are also growing their organic offerings which is gaining traction as (in America) 67% of Americans are clinically obese (30 % or more BMI).

It is selling for about 15 a share and I am coming up with a value of about 11-11.50. If you factor in a 3-4% growth factor and a 2% increase in commodity costs, the margin is going to get pinched. They also get 34% of their income from sales to Walmart. That is risky. Especially since WalMart is notorious for dumping vendors over a point or two in pricing. At the top of the heap you have a tenured executive, but he is wearing the both titles of Chairman and CEO, (Personally I don’t see the problem with that LOL) which is less common now a days in public companies. The entire executive team only owns about 3.5% of the company so they are not well vested in the stock.

Here is my take. Buy the bonds. You will get about 7% return every year you own them and you don’t have to worry about the daily fluctuations of commodities like sugar, corn, oil, etc which will play havoc with the stock. The company should have no problem meeting their bond obligation.

BBY, Best Buy did disappoint and they did it in a big way. The consensus was 50, we pegged earnings at 48 cents and Best Buy came it at 36 cents. The market nailed them today, but the overall market did not pick up the cause indicating a positive sentiment in the larger trading environs. ooohh I liked that. The explanation was unusually high general and administrative G & A expenses which are expenses of operating a business that are not directly linked to the company's products or services. They include salaries, rent and payments to utilities generally known as overhead. Anyway we called it here Sunday but not that bad. Ironically the unusual G & A expenses were about 10 cents a share putting the miss at 46 cents a share earnings much closer to the 48 cents a share we prognosticated.

What else moved the market today. The tea leave readers were out today as the S & P 200 day moving averge got breached and that helped the market stay up. That is the first time since about Mid May it has broken the 200 MDA. The Euro came up a couple of points which helped. Boeing has some good news. Hope you been reading our pimping of the stock as it was up 4% today. (Hint-It is still cheap). And for the ever diligent of you homework people, take a look at the international inflo of cash into the treasury today. Commonly called the TIC flows was up showing confidence in US Debt.

We are always looking for the next possible investment. In the last few days, we have seen really sad pictures of birds in The Gulf of Oil. Have you noticed that almost all of the rescue people use DAWN soap. Apparently they say it’s the only thing that works on wildlife. PG, Proctor and Gamble makes Dawn. I did some homework and it’s a nice company. It is well situated both vertically and horizontally to whether bumps and grinds of consumer behavior. Rightly Dawn would not be the reason to buy the stock, but it has us looking. They priced themselves out of many market in 2009 and lost market share and are in the process of winning back customers. Their new CEO is really investing in strategies that will help their already strong 16.2% net margin. Their debt is very manageable and they are trading at the low end of their value range at 61 a share. We are coming up with a value of 71-73. We are initiating a July 60.00 call. It appears as though a bunch of fold will have to buy their way out of short positions in the next for days so this may be a good call. I am looking to turn this in a week at a 5% gain. Long term the stock look nice if you can get in now around the 62 level.

This is not linkage because I could not get three degrees of separation. Today’s news about Boeing’s 737 program was good news for industrials. One of the companies that bodes well when Boeing is making airplanes is welding and welding machine companies. Two of the bigger brands in the market place are Miller and Hobart. Both are own by ITW. I won’t bore you with the details, but ITW, Illinois Tool Works has some good financials. They are a dominant brand in many of the infrastructure programs in China and India. In the first quarter of 2010, ITW Asian business was up 37%. Their accounting protocols are very clean, no games as far as I could tell. And do you ever snap a buckle on a backpack or vest type jacket with those black nylon snaps and say gosh I wish I had though of that, ITW did and they still own the patent. Look at their three month chart and the 46 dollar price looks attractive. This is below its apparent of value of 71-73. Even conservative target prices has it pegged at 61. (Credit Suisse). We have an October call at 45 for 3.50 if I can catch it tomorrow.

Do your homework and look for the linkage.

Salve Lucrum

Monday, June 14, 2010

June 14, 2010 Linkage Is Our Friend


June 14, 2010 Linkage Is Our Friend

We have a new word here at the Salve Lucrum Blog. Linkage. We will, as often as possible, identify the linkage between a data point or piece of news and the market, industry, sector, company impact. It will have its own heading called “Follow The Links”.

An example is the possible linkage we presented last night between PPI, CPI, Margins for WMT and the overall retail sector. This is important as it is more difficult now than ever before to identify the linkage. News is more abundant and instantaneous than at any time man has walked the Earth. That means that you can not just read and article and make a move.

Here is an example. Today at 6:00 AM EDT, Forbes reporter Ed Sperling reported about Google’s threat to AAPL. There was a time and a place, (and I will bet that was at 6:01 AM EDT Today) that people would read this well written factual article from a respected title, and they sold AAPL. (Thank you as we needed the liquidity.) Unfortunately almost everything Sperilng wrote could have been deduced about the two companies by doing the type of homework that Cramer and others, including this blog harp on, over the last few weeks. In other words, it has already been built into the price of the stock.

We need to look further ahead and determine the linkage forward looking rather than relying on historical data regardless of how recently it was published. Keep in mind that this linkage is based upon unique but separate pieces of news and data (the more the better-think at least 3 degrees of separation) and certain assumptions. If not, then it would not be linkage, it would be an article in the Journal or in Bloomberg.

Investing based upon linkage is risky, so in order to moderate the risk, the actual trade or investment (which is determined by the time horizon) we would want to feel real good about the underlying stock, commodity, or ETF. And you really have to protect your bottom using stops and stop limits in case the assumptions are bogus.

“Follow The Links”

In today’s WSJ there was an article about rivalries between US Farmers and Railroads. As Asian countries satisfy their appetite for a higher protein diet, US Farmers should benefit with increased tonnage of soy, feed corn, and other crops. In order to get those crops to market, they typically use rail to fill the bill. (Suddenly we see how Buffet might have used Linkage to buy the rest of Burlington Northern at a premium last year.) The article explains how farmers are complaining about the rail industry control and abusive pricing strategies. The Rail industry says they have rising fuel costs to deal with as well as infrastructure support. The two sides are lining up legislative battles as we can’t do anything in this country without the Federal Government being involved. So a battle is commencing. That was the crux of the article. Now here is the Linkage.

Both sides must be careful as farmers cannot afford to price themselves out of the market and drive that business to another grocer in another part of the world. That means you might see growth, but margin squeezes for the likes of Cargill International, Bunge Ltd. BG, and Archer Daniels Midlands ADM and Burlington Northern, Union Pacific, and Norfolk Southern.

Your linkage might be to find a solid rail company that does not have as much exposure to agribusiness and or geographically disposed to support the farming industry. A good choice might be CSX. The rail sector does look promising 2010-2011. They, CSX, are very strong in the north east, not a strong agri-base. They have a significant income from “Clean Coal” (one of the best oxymorons of all times). Financials are relatively strong except for their operating margin which is improving. The 52 dollar stock has valuations on it of 60-65 so it is cheap. If you agree with the assumptions and you like the company check out the Linkage. I would see this as a 12 to 18 month play making it an investment not a trade. Put a stop or stop limit at 46ish and look for a reevaluation at 60 a share. If the assumptions don’t play out, take the 15% gain and look for more links. We do not own CSX. I will do more homework to confirm the linkage and determine the value statement.

So how did we do today? As expected it was a slow news and economic day and the market did carry on the happy dance from Friday till about 1:00 PST. Then there was this noise from Europe about a Moody’s down grade of Greece’s debt. The Euro started to slide again and investors started yelling Ο ουρανός πέφτει ο ουρανός πέφτει. Which is Greek for The Sky Is Falling the Sky is Falling. (I think that is what is says or it could be, “cute sheep there fella?”)

Keep an eye on the Baltic Dry Index as it is coming down rather sharply. It is measure of ships on the high seas carrying cargo. Think stuff leaving China going to points elsewhere.

Cramer was pimping ACN today after reviewing notes from an analysts strategy meeting last week. I finally tracked them down (Call me the Google King), but all I could do was confirm what Carmer well summarized in the Real Money alert this morning. (This is a good subscription I highly recommend.) He indicates a significant income stream from Cloud Computing strategies over the next 2-5 years. We added to our position at 38 a share today.

Cool, just had a little shakey quakey.  Hope everyone is all right.  We called daughter and she did not feel it.  Must be south.  If your reading, hope you are all ok in Fallbrook.

Credit Suisse raised the target price on RIMM today to 100 a share. The stock is currently at 59. We do not own it and have not done enough homework to thumbs up it. Interesting and sizable upgrade. (Current P/E ratio is 9.4.)

Salve Lucrum

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