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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