Tuesday, August 31, 2010

August 31, 2010 Thinking “out of the box”

BAGAKOAA; August 31, 2010 Thinking “out of the box”

We don’t know how we missed it yesterday, but Warren Buffet turned 80 yesterday. His doctor told him his life expectancy was about another 12 years. Warren wants to work till he is 100, but admits it will take some “out of the box” thinking.

Well we had some misleading good news today from the case schiller real estate pricing report. Prices went up be they at a lower rate BUT (Behold the Underlying Truth), it was June report. That was the tail end of the government buy house program. Next month (July Reporting) is expected to be ugly just as the auto numbers post clash for clunkers.

I was way off on the consumer confidence number thinking it would miss and come in at 48.5, behold it came in at a surprising 53.5. I don’t understand the number, but there it is. That helped the market until Uncle Ben released the minutes from the August 10, 2010 FOMC (Federal Open Market Committee)

As a US taxpayer I get to be lazy and steal portions of the report.  You can click the link about to read the whole ten pages.  Here are some highlight we felt might be releavnt:

"In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011.

Overall inflation was projected to remain subdued over the next year and a half. The staff’s forecasts for headline and core inflation in 2010 were revised up slightly in response to the higher prices of oil and other commodities and the depreciation of the dollar. Even so, the wide margin of economic slack was projected to contribute to some slowing in core inflation in 2011, though the extent of that slowing would be tempered by stable inflation expectations.

Real GDP growth was noticeably weaker in the second quarter of

2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter. Private payrolls and consumer spending had risen less than expected. Business spending on equipment and software had increased strongly but reportedly was concentrated in replacements and upgrades that had been postponed during the economic downturn. Investment in nonresidential structures continued to be weak. Housing starts and sales remained at depressed levels, falling back after the expiration of the temporary homebuyer tax credits.

The incoming data suggested that economic growth abroad had been somewhat stronger than anticipated and remained solid, boosting U.S. exports and supporting a pickup in U.S. manufacturing output and employment, though a surprising surge in imports in the second quarter widened the U.S. trade deficit.

In particular, consumer spending had contracted more over the course of 2008 and the first half of 2009, and recovered less rapidly, than previously estimated, even as households’ after-tax incomes had increased more than shown by the earlier data. In

combination, these revisions indicated that the personal saving rate had been higher and had risen somewhat more during the past three years than previously thought. Participants recognized that the implications of these new data for the outlook were unclear. On the one hand, the revised data might indicate that households have made greater progress in repairing their balance sheets than had been realized, potentially allowing stronger growth in consumer spending as the recovery proceeds. On the other hand, the revised data might signify that households are seeking to raise their net worth more substantially than previously understood, or to build greater precautionary balances in what they perceive to be a more uncertain economic environment, with the result that growth in consumer spending could remain restrained for some time.

I particularly liked this piece of info about employment as we have suggested this concept for several months here in the blog.  Employers don't know how much an employee will cost next year.  For someone like PADI this is not a big deal to hire two or three people with that uncertainty.  For Ford, who claims they need another 3,000 people, they are not hiring becuase they do not know how much that will cost.

Policymakers discussed a variety of factors that appeared to be contributing to the slow pace of job growth. A number of participants reported that business contacts again indicated that
uncertainty about future taxes, regulations, and healthcare
costs made them reluctant to expand their workforces. Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees’hours. Most participants viewed weak demand for firms’ outputs as the primary problem; they saw substantial scope for stronger aggregate demand for goods and services to spur employment in a wide range of industries.

Those minutes created a sell off into negative territory by mid day PST. Then the HFT (Hight Frequency Trades) must have kicked in to balance the market to no where land. Flat again.

I took a shot at the Chicago Purchsing order last night saying it would off its expected 56 coming in at 54. It cam in at 56 and change. I got Dollar General right saying the would beat big and they did. I say 41 the came in at 42 cents a share. It looks like Lebarge reports on the morning on the second of September.

Take the heart out of the trade.

I have had a few people ask me what I spend on trading fees in the course of a year. I spend a bunch, but that is because I remove myself from the trading process once I have made a decision. As we have mentioned here many times, after the homework, (Like I described in painful detail last Sunday.) choose an entry point with a limit order and automatically choose a down side exit point (subject to change) before you place your order. I have on many occasions watched a stock slide through my exit stop limit order

and decide to go back in after re-looking at my homework and bought at a lower price. Yes I took a loss, but I re-establish at a lower price or if I don’t like what I see I am out for good.

For the first 10 years or so of trading, I would hang on to dogs until they turned into the hounds from hell eating away at my investment flesh. I would rather have a few dozen mosquito bites than 3 or 4 hounds from hell. Do yourself a favor and take yourself out of the equation when ever you can. I second guessed this strategy after the Flash Crash of May sixth and it cost me some serious money.

And now from the basement of the Western Whitehouse in San Clemente Califirnia:

Here is President Richard Nixon completing his PADI Rescue Diver Program with an assist from Jackie Gleason

Salve Lucrum

Monday, August 30, 2010

August 30, 2010 The Best Defense Is A Good Offense.


August 30, 2010 The Best Defense Is A Good Offense.

That adage has a long genealogy. It can be traced back to military strategist Sun Wu, better known as Sun Tzu around 500 BC. He wrote the “Art of War” used by military and business strategists for years. Today the tactic was used by a politician. President Obama took time out of his schedule to speak in the Rose Garden today about the economy. I can not strongly disagree with his message. The jobs bill has been held up in congress by republicans and it is probably an effort to make the democratic congress look bad and weaken their chances for re-election this fall.

With that said, it was an opportunity lost as he could have made his point and offered some leadership at the same time. If he had not only blamed Bush (That was the former President for those of you who have forgotten) and those big bad ugly money grabbing old fat republicans, while providing some stability to the situation, by acknowledging recent economic news disappointed him and his White House Cabinet, versus saying that all along he has said that this would be a long term return to stability and that things would get worse before they got better. That just is not the case. But it is a great illustration that those that write history make history.

I had Bloomberg on in the background when the President eventually made his remarks. (There were several false starts due to audio difficulties) I did listen and expected him to address comments from the Central Bank of Japan. Earlier in the day or perhaps last night Kan-san, the Prime Minister and Shirakawa-san the Governor of the Bank of Japan blamed the rising yen and the real threat of a double dip in the US economy for the deteriorating economy in Japan. These comments had a lot of negative impact on our market place today, more so than the miss/beat on personal income outlay report early this morning. Many, including the talking heads at Bloomberg, NBC, MSNBC, CNN and Fox were expecting the President to provide some reassurance that things are difficult but not as bad as our friends in Japan are implying. (Keep in mind that Kan-san is running for re-election as Prime Minister and US bashing is a great vote getter.) This can be illustrated by looking at the market before the President’s comments and then after. We went from about .5% down to .9% down in all three indices.

PE or Peehew?

I was going to spend some time tonight letting you know about my most recent conspiracy theory. That Jim Cramer of Mad Money fame and Alan Abelson of Barron’s fame have lunch every Friday. My theory is based upon recent Friday broadcasts of Mad Money and then Abelson’s article in Barron’s, delivered the following morning. Last week they both said the same thing. That the cards are getting more stacked against the retail investor/trader.

Note we said we were going to. We reserve the right to address this conspiracy later in this post or I might spare you and save it for another day. (I noticed its hard to write this blog late at night after a couple of glasses of red wine, so I have cut back on drinking wine. Who’da thought that blogging could become part of a healthy life style. But I digress.) In both The Mad Money segment and the Abelson article, reference was made to the relevance of the P/E ratio.

Well, low and behold, there was a great article today in the journal
by Ben Levisohn who raises the question with supporting data, that maybe the holy grail of comparative analysis might be flawed. (Graham and Dodd are rolling in their graves, listen.) He correctly identifies economic uncertainty for one of the causes in the overall drop of earnings resulting in an overall lower P/E ratio for the S & P 500 (the appropriate index to use for this argument). He even provides a beautiful chart (below) showing an 80 year history of the average P/E ratio for the S & P 500.

And yes the average is dropping as the economy changes its rate of recovery and companies in that economy and analysts covering those companies change their expectations for future earnings growth. A decrease in future earnings growth always lowers the P/E ratio. That does not make the metric irrelevant or unimportant, it makes it lower.

To prove the point, we tried to get the actual P/E ratios of companies in the S & P 500 in the 1980s. After about 20 minutes of Googling, good luck with that. It is apparent that companies like Exxon, Mobil, GE, IBM all had lower P/E ratios in 1980, because we could, stock by stock, extrapolate their PE with their earnings and year ending prices, but they were all lower (in the 9-11 range) and so were their competitors. So the PE was lower but still relevant. In the late 1990s PE ratios were running in the 20s, but all of the value companies were running in that same range.

The article highlights that there are other important factors to consider when evaluating a stock besides the P/E ratio, but even back in 1934 when Graham and Dodd wrote “Security Analysis”, there was more to look at than just the P/E ratio.

As a segway, the article does delve into the common message from Cramer and Abelson, regarding the issue of HFTs or High Frequency Trades. This is a recent phenomenon and the result of our reliance on computerized trading programs combined with the proliferation of Exchange Traded Funds. This is causing some non-value based stock price adjustments that are impacting the retail investor (you and I) also known here in the blog as the “day trading casino monkey”. What HFTs have managed to do to the casino monkey is to put a blind fold on him as they enter the casino. The black jack dealer can turn over any cards they want and we wouldn’t know. The craps dealer can change the dice to 7 out when ever they want. The roulette dealer can drop the ball in any one of the 38 slots on the wheel (37 if you are playing in Monte Carlo). The rules have changed and when you couple that with the uncertainty in the market place, it is a wild and discouraging game to be playing.

So let’s make some money.

Cramer reported on some none bad news for Bank of America, a stock we hold in a few accounts (we stopped out after a 9% loss in the main account), and I can see his point as it has an expected growth of 10% and a book value of 23 dollars a share and target prices in the 20-28 dollar range. It is just a question of waiting to see what the actual regulation of the banks looks like now that we have the legislation passed. If you own, watch your bottom but hang on to it. If you need a bank to diversify look at BAC, C or WFC.

INTC is my worst performing stock at this moment in time. We are down 12% on a large long position and we are down 74% on a sizable call option dated January 2011. The recent acquisitions are good for the long term prospects of the company. Obviously Otellini has convinced the board that the purchase of McAfee and Infineon, are strategic and critical to protecting market share and more importantly their 60% margin. The purchases do make sense. The future of technology revolves around being SMRFy, an acronym you have NEVER before seen until today. Can you figure it out? Secure, Mobile, Reliable, and Fast. Combining Infineon’s skills set with McAfees security prowess with the economic scale of INTC should create an enterprise perfectly positioned to become an all around solution to mobile based secure transactional hardware for the likes of Apple, HTC, Motorola, and Nokia. If I were ARM Holdings, I’d have a hard time sleeping tonight.

A side note and this has not had much press, INTC and McAfee have been working together for almost two years. Someone in the legal department at MAY have said that no matter how they try, it might be difficult to come up with secure chip technology without infringing upon McAfee technology and or it would not preclude McAfee to go out and offer that technology to AMD or Broadcom. Food for thought possibly explaining the 60 % premium they spent.

We will be very patient with INTC and consider it a 3 year play, taking dividends along the way. By then, we are expecting an easy double.

Tomorrow is another day.

We have consumer confidence reporting tomorrow and the oracles of wisdom are predicting a slight bump to 51. Personally I don’t see it. The time period surveyed is July and while the UofM report showed a little hope, we don’t see it so look for a disappointment to 48.5. Other than that, there is little news reporting tomorrow. The Chicago Purchasing Index reports and everyone is rightly expecting the number to be down. (I am thinking 54 compared to the expected 56.) And there is a retail report tomorrow that should also disappoint.

As far as earnings, we are getting to the bottom of the barrel in the earnings season. I had to go and look for anyone reporting tomorrow that might matter. Yahoo shows Dollar General DG reporting but I can’t confirm it anywhere. If the date has not been moved they are expecting 38 cents a share. A little bit of homework has me thinking they can beat, possible 40 cents a share. I found a sleeper (Maybe) with Lebarge LB, a defense contractor trading at a multiple of 9 and has recently been awarded a series of contracts from Lockeed, Boeing, and Sikorsky. They are looking for 27 a share in earnings. Look for a sizable beat, say 32 a share. And look for a 1-2% bump regardless of the market. My guess is based upon some interesting upside volume. (People bidding the stock higher by actually buying the stock.) DO YOUR HOMEWORK.  I am agin cash poor so we are not taking a position in LB. 

Saving the economy one house at a time:

Realizing the housing market is so important to the economy, President and First Lady Obama, spent their holiday showing perspective buyers some new homes. 

Salve Lucrum

Sunday, August 29, 2010

August 28, 2010 Waste Not? Why Not?


August 28, 2010 Waste Not? Why Not?

I am really excited about the blog today as Saturday morning I had the chance to spend sometime with a beam of light into the next generation of investors. I have spent time with my son and my daughter explaining the basics of how to use money to make money. Today I got to work with someone who is not my child, but definitely part of the extended family. They just graduated and have landed a nice position at Waste Management.

There are a lot of people in this person’s age group who would scurry through the paperwork of medical care choices, direct investment opportunities and 401 K options. This person chose to seek out advice and I was honored to be one of their pools of experience to draw from.

They also happen to be in the envious position of graduating without debt (Thanks Mom and Dad-occasional readers) and have a couple of bucks to put into play in this crazy game of investing.

In the course of sharing some insight with this person, I suggested that if they really want to be responsible with their investment money and to be sure the advice they were getting was sound that they might consider investing an hour a week for each stock they own doing homework. They immediately said they were up to that challenge, but then asked, “What kind of homework?”. That is a great question, and I am surprised more of the Mad Money Audience does not challenge Jim Cramer with that question since I basically stole the time commitment from him.

So I though it might be beneficial, first of all to me, then to the person I was working with and perhaps to a few regular readers to know what I do as part of the regular homework on an equity I own or are considering buying. (I know a few of you are already headed to the end of the blog to see what kind of crazy caption I came up with today, and that is fine. For those of you wishing to hang out, I will do my best to entertain as well as educate.)

It would make sense to use a living breathing example so in the spirit of making this relevant to at least one person, let’s look at Waste Management.

Rule one of investing, and these are not my rules, they are Cramer’s Rules, William J. O’Neil’s Rules (Founder of Investor’s Business Daily), and go all the way back to the Rosetta Stone of value investing Graham and Dodd’s “Intelligent Investor”, (Actually you can go back to Security Analysis circa 1934 where Graham and Dodd use three forms of analysis of securities and the first is the descriptive fundamentals.), and that would be know what you buy. If you can’t easily describe what company does in 3 sentences, don’t buy the stock.

Waste Management is easy. They generate revenue collecting, transferring, disposing of, and generating energy from waste. Obviously that is not enough information to make an investment decision.

The next thing I would do would be to read the media about the company. I subscribe to The Wall Street Journal, The Financial Times, Barron’s (Great issue this weekend, more later), Investor’s Business Daily, and a slew (more than three) of other investment economic publications. I would not suggest anyone have as many subscriptions as I unless you have no life. Here is a quick way to glean what the media has to say about your possible investment.

Go to a website called FINVIZ.COM. Please take a moment and to the virtual tour. I say that as I have been using FINVIZ for about 6 months and I just learned some nice stuff about the site using the virtual tour. I’d go as far as to suggest signing up (it’s free) as I believe you get a few more bells and whistles that if you don’t including some of the best stock screener around. On the home page you will see the major indices and how they are performing intra day or at the end of the day. You will also see a cool graphical interpolation of what is going on or went on that day by sector by stock. Right now I am looking at a big green mosaic which tells me the market was up on Friday. There is one big green box in the energy sector with XOM on it. Exxon had a good day on Friday. There is a small red square with GS on it. Goldman Sach’s did not fare as well.

At the top, put in WM and click on the magnifying glass. The first thing you will see with be the 10 month chart for WM. Here it is:

From looking at this stock you can see it has some cyclical tendencies. In other words it is highly reactive to the economy. That makes sense as a growing economy makes trash. You see how the stock did well post our lows of March 2009- Late January 2010. That is when we saw some weak retail numbers and economy that was hard to read. The stock corrected with the economy. By Mid February, earning were coming in fairly strong and we read some good news into the economy and the stock went up again about 18% in a couple months only to discover we may have gotten ahead of ourselves with good news and the stock came back down again. It seems to be on the mend again since July. The light blue lines at the bottom are lines of price support. The purple lines at the top are lines of resistance or other technical chart signals; in this case what is called a head and shoulders, but we won’t bore you with that mumbo jumbo.

So you see what the chart looks like. Still not enough information to make a buying decision. Take a look further down the page and you will see all the relevant news about the company from mostly well vetted sources. NOTE, I said mostly. The first one I can see is an article from Motley Fool, (great website) that questions, “Is this the time to Short WM?” For my new trader investor, to short a stock means to sell shares in a company you don’t own in the hopes of buying them back at a lower price. You get to keep the money. I do not suggest this to any new players in the market. Save that for us experienced stupid investors. Actually there are great investment trading strategies that utilize short selling, but that will be a lesson for another day. More importantly, I want to know the reason why Motley thinks Shorting is a good idea. In other words why do they think the stock is going to drop?

Well I read the article and must say it was great. I encourage this new investor to read the article not only for the sake of understanding why WM might be a candidate for shorting, but to help identify when other stock might be over valued. The short of it is there are a lot of put options in the market place compared to call options for the stock which means more people are betting on the stock to go down then go up. While Jeremy Phillips does a great job of explaining the underlying fundamentals of why WM MIGHT be over valued, investor pessimism right now plays a large role in some of the put options market. From the financial fundamental stand point Phillips points out some possible weakness (compared to competitors Republic, Covanta, and Stricycle) in the area of future growth, debt, and Price per earnings growth. This is a great article to illustrate why, if you are going to do the homework, why it might take you an hour per equity.

The next article, ironically enough is also by Motley Fool.com and they show how to use their CAPS stock screening tool to decide why WM is a good investment. And you wonder why consumer can’t think of anything better to do with their investment money but pay down the Master Card Balance? (You can’t tell by reading, but I took a break to get Devin’s car washed. She does read this occasionally but thought I could make some brownie points. My bet is she has skipped and went looking for the picture of the day.) But I digress.

The next article is from seekingalpha.com, another great website. They go on to explain the healthy yield on the dividend at 3+ %. They go on to explain if they paid out more of their free cash flow the yield could be as much as 7%+. That won’t happen but the point is made, they have a good cash situation.

That is important to me as an investor/trader (I’ll explain the difference in a second.) As an investor, you are looking for a company that has a good value and future growth. You look for a company that has a solid management team. You look for that management team to improve shareholder’s value. The best thing a management team can do is to generate enough profit to generate enough cash to do any combination of four things:

1. Pay down or eliminate long term debt. If we look at the matrix right below the WM chart, you will see a box labeled Long Term Debt to equity. Long term debt is any obligations the company has that extend beyond twelve months. These could be corporate bonds, leases on property or equipment, payable royalties with base line covenants, lines of credit in use, loans from banks, to name a few. The higher the LTD/Eq ratio is the more aggressive a company has been in financing its growth and operation via obligations. Some industries by nature have a large LTD/Eq ratio. Waste Management happens to be one of those companies in one of those industries. Garbage trucks are expensive, they are usually leased as a fleet transaction, landfills are bought like a mortgage usually, scrap metals facilities have huge capital expenses. (A Typical Mag Crane, you know those magnets that pick up the Soprano’s competitors cars and squish them in the compactor) cost in the neighborhood of 700,000 dollars. The compactors are not cheap either. So by nature a 1.2 long term debt to shareholder’s equity ratio is not out of line for that industry. I would look to see if WM is using Free Cash Flow (The monies left over after paying all of their current expenses and short term obligations.) to pay down long term debt. To do this we look to another website. Go to Morningstar.com. If you haven’t already done so, sign up for access to some more bells and whistles on this website. The subscription service is well worth the money if you have a decent sized portfolio. I am using the basic for this illustration. At the top of the page enter WM in the symbol box. You will see the basic quote page for Morningstar. It has a lot of great information about WM. Right now we are worried about their debt level, free cash flow and net income. A little ways down the page you’ll see a box called Key Stats. Take a quick look at it. MS simplifies things for you using red and green lines. If the stat has a green bar that means it is doing well in that category compared to other in the same sector. Red, well I’ll let you figure that out. Total debt to equity is a little higher than the rest of the industry. Not terrible surprising since WM and Republic are the two largest in this category. Another thing to keep in mind is that WM expands their growth threw acquisitions. If you acquire another company to grow it is always good to do with other people’s money if you can, that also creates long term debt. Below the key stats page is Financials. Go to the right of Financials and look at the little word more. . . and click on it. It should bring up a five year history of financials starting with the income statement. Note you can look at annual or quarterly. When doing my first glance I like to look at Net Income before Taxes for the last 5 years, listed here as Income before taxes. As you can see, they made 1.4 billion in net income in 2009. Keep that number in mind, or jot it down as we will look at another number. Click on Balance sheet at the top of the financials page. Here you will get a 5 year history of their balance sheets. Go down the list and look for long term debt. Got it? You can see they run about 8 billion a year in LTD. Personally I like a company that can pay off their LTD from Net income in under 5 years. This puts WM a little beyond that but again they seem to be best of breed in a capital intensive sector. I am not overly concerned.

OK you probably need a break now so here is some art to go along with your reading:

"Hey can someone tell this damn dog I live here!"

2. Issue dividends. We can evaluate the WM dividend situation in Morningstar or back in FINVIZ.COM. Let’s got back to FINVIZ. In the first column of the WM matrix you will see Dividend %. That is the dividend yield which is the annual dividend divided by the current price of the stock. Lately you have been hearing Jim Cramer pontificate about AHY’s, Accidental High Yielder. Those are stocks with decent fundamentals whose depressed stock prices are creating impressive dividend yields. A dividend is cash paid to the shareholder just because they are a shareholder. When evaluating a stock, it is important to determine if they pay a dividend and what the yield is of that dividend. Here we see WM paying a yield of 3.75% annually. Is that good? Well the US Treasury 10 year note is yielding 2.65% right now so 3.75% for a sound equity like WM look really sexy. Now is that dividend sustainable. A few weeks ago I did a whole schpiel on dividend yields and sustainability so for a change I am going to steal from myself, “In essence, ‘buy the dividend’ is at the heart of value investing. Just watch the cash flow on stocks that pay a high yield (We consider a high yield as anything above the current 10 year treasury yield, currently at 2.6%) to make sure it is a sustainable dividend and not a sucker bet. A quick check for sustainability would be to look at the payout ratio which compares earnings per share to dividends per share. The lower the better as it is a good indicator that they can continue to pay that dividend. For example one stock you mention is VZ Verizon. If my numbers are correct they are paying a 6.3% dividend yield, but the payout ratio is an obscene 733%. (Please check my numbers). However having been a holder of VZ and VOD, I kind of get the convoluted relationship between Vodafone, Verizon, and Calico (sp) Partnerships. This is a cash rich arrangement. VOD has a nice 5.4% yield and only a 50.6% payout, but the incestuous relationship should cover VZ ability to pay dividends.” If we go to the fourth set of number below the chart almost to the bottom you will see the payout ratio for WM. It is 57.75% which is a little high but very doable. I prefer to see PO ratios below 40%, but this again is a capital intense sector.

3. Stock buybacks. This is usually a good sign when a company thinks its stock is undervalued and buy some of it off the street. There are few places to check for stock buy backs, but I found a cool website that is free and they give a graphical interface for seeing stock buy backs, dividends, free cash flow and a whole bunch of other metrics. Go to ycharts.com. On the home page type in WM and select Waste Management. That will bring up a series of little charts. The first one will be price. Click on that chart which will make it bigger. Once it is bigger, at the top of the chart, change the drop down menu to show Free Cash Flow. You should see a chart that indicates as of June 10th (the last SEC filing by WM) they had free cash flow of $260 million. At the top of the chart you can choose another attribute to compare FCF to, choose Stock buybacks. You will see that WM is inconsistent with buybacks although they are retuning to their buy back program as of a year ago. We will discuss SEC filing in a moment, but that is where you find the size and timing of the buy back as they must be Board approved and report to the SEC.

4. Acquisitions and capital appropriating. I told you we would be getting to the SEC filing and here is where you need them. Head your browser over to http://www.sec.gov/ There you will see a box called filing and forms. Click on the little box called search for company filings, click on it. It should bring you to http://www.sec.gov/edgar/searchedgar/webusers.htm , then click on the link that says Company or fund name, ticker symbol, CIK (Central Index Key), file number, state, country, or SIC (Standard Industrial Classification) and you should end up at http://www.sec.gov/edgar/searchedgar/companysearch.html or you skip all of that crap and just save the link in you browser favorites. You will use it a lot. In the box that says “CIK or Ticker Symbol, type in WM. One of the first lines that comes up is the SEC filing 10 Q. That would be there quarterly filing dated August 2nd, 2010. Open that document by clicking on the little blue box marked document. The first line is the 10Q and it is one of the larger files. Go ahead and click on it. I encourage to look through the 10 Q in its entirety at some point in time. For this exercise, look at the table of contents and find the link to Management’s Discussion And Analysis of Current Financial. . . . And click on that link. It will take you to page 31 of the quarterly filing. That first few paragraphs are some of the general statements about the company and cautions about forward looking statements. The CEOs discussion begins on page 33. If you read that section you learn a lot about the entity. You’ll learn that some of their pricing schemes are tied to inflation benchmarks and as we all know inflation has been and should remain low, impacting their ability to bump revnue. What I was looking for was how they use Free Cash Flow and there on page 48 was the following- Net Cash Used in Investing Activities — During the first half of 2010, net cash used in investing activities was $823 million, compared with $563 million during the first half of 2009. The most significant items affecting the comparison of our investing cash flows for the six-month periods ended June 30, 2010 and 2009 are summarized below:

• Investments in unconsolidated entities — We made $161 million of cash investments in unconsolidated entities during the first half of 2010. These cash investments were primarily related to a $142 million payment made to acquire a 40% equity investment in Shanghai Environment Group (“SEG”), a subsidiary of Shanghai Chengtou Holding Co., Ltd. As a joint venture partner in SEG, we will participate in the operation and management of waste-to-energy and other waste services in the Chinese market. SEG will also focus on building new waste-to-energy facilities in China. We did not make any similar investments during the first half of 2009.

• Capital expenditures — We used $475 million during the first half of 2010 for capital expenditures compared with $583 million in the first half of 2009, a decrease of $108 million. The decrease can generally be attributed to timing differences associated with cash payments for the previous years’ fourth quarter capital spending. Approximately $145 million of our fourth quarter 2009 spending was paid in cash in 2010 compared with approximately $245 million of our fourth quarter 2008 spending that was paid in the first quarter of 2009.

• Acquisitions — Our spending on acquisitions increased from $59 million for the six months ended June 30, 2009 to $237 million for the six months ended June 30, 2010. During the second quarter of 2010, we paid approximately $150 million to acquire a waste-to-energy facility in Portsmouth, Virginia. We continue to focus on accretive acquisitions and growth opportunities that will contribute to improved future results of operations and enhance and expand our existing service offerings.

• Net receipts from restricted funds — Net funds received from our restricted trust and escrow accounts contributed $26 million to our investing activities in the first half of 2010 compared with $71 million in the first half of 2009. The year-over-year decrease in cash received from our restricted trust and escrow accounts is generally due to the timing of requisitions from our tax-exempt bond funds, which are used to support related capital projects.

That shows you how they are using their free cash flows and support the argument that they are growing their revenue by acquiring other entities.

Ok WM is looking better and better the more we read about the company. In looking in the executive suite, I did note that David Steiner CEO to over the presidency in June 2010 from Lawrence O’Donnell the III. You might know him as the boss who went undercover for WM on the CBS show Undercover boss.

The last thing to do before making a decision to buy is to decide what price you want to get in at and what would be a good return. This is a unique situation as the person entering the stock will be buying the stock as part of an employee benefit package. They will not allow the purchase to be more than 20 % of their 401 K retirement package. It will be a direct purchase so I am not sure how much flexibility there may be. Despite this, the employee will be buying in small increments over a long period of time. Not a bad plan with a cyclical stock dependent upon the economy. Going back the FINVIZ site for moment, we can see the stock closed Friday at $33.62. Looking below the matrix box you will see several analysts upgrades and down grades. The range of target prices are from 36.00 to 47.00. The target price in the matrix is 39.06. If we were going to buy more of this stock, 33.50 looks like a good entry point, and we should be looking for 37-38 by the end of first quarter 2011.

Once all of that homework is done, the weekly maintenance would be to check FINVIZ and Morning Star. Also as a Charles Schwab client tye have great equity reports updated every few days which are helpful in keeping an eye out for your stock. You can also set up text alerts for your stock so every time they are mentioned on the news, you get a text message. This saved me a fortune on BP and RIG the day of the explosion. I was out of both positions within two hours. Another interesting exercise in doing weekly homework is to go to Google News and put in the name of the company and their hometown. In this case the search would be “Waste Management” and Houston. It turns up some interesting news pieces relevant to shareholders. There was an article from an Alabama news paper indicating that WM has contracts with municipalities and BP for clean ups of oil in Texas, Alabama, Louisiana and Florida. Those revenues have not hit the quarterly reports. BTW, WM saw a nice spike in revenue and profits post hurricane Katrina. Food for thought. Along with that revenue come some EPA liability issues, but that is the risk of lucrative oil clean up contracts.

Hopefully that give our new WM employee and new investor and idea of the homework needed to stay on top of the game. There are other things like listening to the earnings call report when they come up. And reading eh annual reports as they come out. Checking in with the companies website in the investor’s relations department is also a good way of staying in touch. Hope this helps.

Now I mentioned we would discuss the difference between a trader and an investor. Most of eh homework I just described would be relevant to both. The major difference in most cases would be the timeline the person is considering. In this case we have a young person who is starting their career with a sound organization. They will probably be inching into the stock through direct purchase plans through the company. So we would be looking for a relatively long term investment. That would be an investor point of view. If I was Joe “Horse Sense” Six Pack and ran across the article about WM being contracted to do BP oil spill clean ups, I might do the same homework and say, this new business will be a nice surprise to the stock and it looks as though none of the analyst have worked this event into their forward looking estimates. Buy the stock and wait a quarter maybe two and look for the upside and get out. That would be a trader point of view.

Whether you are Joe Six Pack or our new WM employee, before we establish our position in Waste Management, we should decide when to get out of our position in WM. That would again be determined by our time line and risk tolerance. If our new employee is cognizant of the 10 year yield and is looking for at least double that yield, say 5% annually, than at 35 a share in one year or less they would have to consider taking some profit. If Joe Six pack is looking for a quick six month turn around at 10%, then when the stock hits about thirty seven, he should look at getting out or at least selling his profit. These are decisions that should be made before entering a position.

Just as important is watching the down side. For Joe, since this is a trade, he should have a firm determined downside before entering the position. If Joe does not want to loosed more than 8%, he should enter a stop limit order at $31.25 immediately after establishing the position. Since our new WM employee is accumulating the WM stock, they can be more flexible with the down side as they will be buying into those dips with intent of being in the game for a while.

The week ahead, come a little late to this post. In economic news for tomorrow, we have the consumer income and spending report. The consensus is expecting a slight uptick in income. I think both will disappoint. Instead of .3% and .1% (Income and consumption) look for .1 and -.1. This will knock the market down the 1.5 we made on Friday and a half a point for the bad news. That would be a 2% drop by days end on Monday. There is no relevant earnings news coming out on Monday so that won’t help or hurt the market.

And to quote Boz Skaggs, here is one more for the road:

Without a song, the day would never end

Without a song, the road would never have been

When things go wrong, a man ain't got a friend

Without a song

Salve Lucrum

Thursday, August 26, 2010

August 26, 2010 "Stocks slip as caution about the economy returns."

BAGAKOAA; August 26, 2010 "Stocks slip as caution about the economy returns."

Ok that was not my headline, that was from Associated Press this afternoon about 4 O’clock EST. What we would like to know is, when did the concern about the economy go away? We have been playing Bloomberg on the radio in the car almost 24/7. We read the Journal and Barron’s everyday in at least three formats. When did we not have concern about the economy?

Perhaps it was that brief moment when the jobless report was released early this morning and the report should the first decrease in initial jobless claims in three weeks. That moment soon passed.

Thanks to one of our readers (Tim) I am armed with about 34 research reports compliments of the fine people at UBS. While I would not presumptive to plagiarize these articles, I do wordsmith some of this great research when relevant.

Today I ran across a report about gold and silver and as most of you know, we hold the ETF GLD and SLV as our attempt to enjoy some of the gains in the metals sector. Dr. Edel Tulley wrote the interesting piece for the UBS publication. He brings a unique point of view supporting a claim that silver could be playing an important role in the most recent Gold Rally. He explains the volatility of gold with some wild mid day swings this year sends people towards gold over silver when seeking safe havens from many of the questionable sovereign debt in the market place. His explanation implies that big money managers such as people in the central banks of other countries looking to buy foreign debt have been scared of so their options are US debt and metals. When looking at metal, gold appears to be steadier than silver so monies (Up till about three weeks ago) have been headed to more gold than silver. That appears to changing of late and the article suggests near future silver values around 20 dollars. This shift should not tarnish gold much. Food for thought. If you have access to the UBS reports, I suggest giving the 8 page report a read. In the article, Dr. Tulley reveals one of his sources of basic data. Mining weekly is a gold mine (couldn’t resist the pun) of metals reporting. From miners trapped below the surface of the earth to flooded shafts to social unrest in South Africa, this on line magazine is full of valuable information about the mining industry. It’s all about the linkage.

Changes in the SL Portfolio

We did little with the portfolio today. All of our natural gas plays are getting clobbered as the Natural Gas inventory report came out today and was about 14 % higher than anticipated at 40 billion cubic feet. As a result, we placed a limit order for PNG, PAA Natural Gas Storage, LLC which develops and operates underground natural gas storage facilities. PAA Natural Gas Storage, LLC is based in Stamford, Connecticut. It has operations in Michigan and Louisiana. As of September 15, 2005, PAA Natural Gas Storage, LLC is a subsidiary of PAA/Vulcan Gas Storage, LLC. This was an addition to an established position and our limit was at 24 a share so we should catch it in the morning. The thinking is, there is more gas to be stored, PNG stores Gas. Sales should be up. When demand is revived, PNG get paid to stream the gas to utilities. That is what you call a win win. Oh yea, they pay a 5.1% dividend at the current price.

Talking about Linakge

Back in June we published a significant article in the Journal explaining the amazing correlation between railroad carload statistics and the general economy. If you recall the post, it was identified that the correlation of waste carrying rail car loads and the general economy was one of the most relevant of ANY economic indicators. The June report (Covering March, April, May) indicated that waste filled railroad cargo car numbers were on the rise. The correlation factor in the Journal Article was some 80% and we had some decent economic news.

Well, we have continued to follow the AAR.GOV website and the traffic report. The latest set of numbers does not bode well for the economy.

                                         Difference                  % Change

Commodity     July '10        July '09       July '08 '10-'09 '10-'08 '10-'09 '10-'08

Waste  (8)          29,043 31,672  42,842 -2,629 -13,799 -8.3% -32.2%

If that paginated properly, you can see the trend is not pretty. This is strong conformation that the recovery could be in trouble.  To further illustrate this, here are the actual general traffic graphs from ARR.GOV.

For those who missed the original post, the thinking is that an economy that is thriving generates a lot of trash that must be hauled away. It makes sense.

And this from the Secret White House Photo Archives:

"So with 100 of these robots I could replace the entire Senate?"

Salve Lucrum

Wednesday, August 25, 2010

August 25, 2010 The Devil In Disguise


August 25, 2010 The Devil In Disguise

In 1963 Cliff Richard had a hit song called “It’s All In The Game”. I didn’t care for the song much but it seems apropos for today’s blog. “Why?”, you might say, because the last time new home sales were this low, it was 1963. At 274 thousand units, a 12% drop from last month, it took the willy out of the market. Ok, there was no willy in the market, but it took some legs out of the market at about 10:00 EST. Had you the opportunity, the DOW broke through 10,000 creating some apparent buy opportunities as it was almost back to even by 11:00 EST. Henceforth, (I just like using that word.) It’s All in the Game.

What surprised me, as I had Bloomberg on all day in the background in my office, was the lack of attention on the Durable Goods report which also disappointed. The market seemed to take it in stride. While the number was an improvement over the month before it was well below what the oracles of knowledge were expecting. As Cramer mentioned, I believe on Monday, the Durable goods number should spike because of new aircraft order for Boeing. He was right as according to the report, the transportation sector was up over 75%. All other sectors were negative. One more piece of news indicating the recovery, if it remains a recovery, is snail paced.

By the closing today, everyone had forgotten about the bad housing report, the miserable durable goods report, and some lackluster retail reports and turned slightly positive. At about 10:15 am, I had to take a look at the Portfolio and we waded back into a few positions. This was after doing homework last night into the wee hours of the night. When the Dow broke 10,000 this morning we had to pull the trigger on a few trades.

We added a few shares of VLCCF at $17.49, Kightsbridge. I like the financials and I really like the huge sustainable yield.

We added to our position on Chevron at $73.74. We have a lot of Intel long, about 3.1% of the portfolio, but could not resist picking up more via the January 2011 $20.00 call of .87 a contract. (Ok with a call option, you have the right but not the obligation to buy a share of stock at a specified future price and date. In this case we are buying the right to buy a share of INTC Intel next January for $20.00 and it only cost .87 a share to control that right. If INTC is above $20.87 next January, I am “in the money”. If if is below $20.87, I am out of the money.) Currently, INTC closed today at $18.48. We added to our natural Gas ETF, UNG at $6.51. We re-established almost all of our AAPL position at 239.34 a share. We started a NEW POSITION in Amazon at $126.09. More on that later.

We added to our relatively new position in RINO, RINO International Corporation, which, operates as an environmental protection and remediation company in the People's Republic of China. The company engages in designing, manufacturing, installing, and servicing wastewater treatment and flue gas desulphurization equipment primarily for use in the iron and steel industry; and anti-oxidation products and equipment for use in the manufacture of hot rolled steel plate products. Its products include Lamella Inclined Tube Settler Waste Water Treatment System, which comprise industrial water treatment equipment, effluent-condensing equipment sets, solid and liquid abstraction dewatering equipment, and coal gas dust removal and cleaning equipment; and Circulating, Fluidized Bed, Flue Gas Desulphurization System that removes particulate sulphur from flue gas emissions generated by the sintering process in the production of iron and steel; and High Temperature Anti-Oxidation System for hot rolled steel, a set of products and a mechanized system, which reduces oxidation-related output losses in the production of continuous cast hot rolled steel. In addition, it offers contract machining services for third-party industrial enterprises. The company was incorporated in 1984 and is headquartered in Dalian, the People's Republic of China.

It is a dirty business, but when the major steel producers in China want to (and now have to) address fume scrubbing, dust management, sludge treatment, desulphurization, who dey gonna call? RINO.

We added to our MCD position. It is apparent that for the next 12-18 months, people going to Ruth Chris or Morton’s will continue to do so till the firm of ORP (Obama, Reid, and Pelosi) pocket pick them via the new tax burdens. Joe six pack is still enjoying Mickey Ds new coffee and Burger King Whoppers and Taco Bell’s whatever. The big audience in between is not going to high end steak houses or even sizzler, they are migrating towards McDonald’s. This is a good secular bet. (Again, last Friday’s Mad Money did a whole segment on cyclical versus secular industries. Secular industries are the steady eddie of the market place. Think about the stuff you need to survive at the lowest level of the Maslow Hierarchy of needs. Food staples, utilities, drugs, etc). MCD for many people is a staple.

We are inching our way back into Boeing today at $60.72 a share.

We also added to our Nuclear ETF play NLR at $19.44.

We also added to our Israeli Brother in alms via ESLT. It is a defense contractor to whom we outsource. Elbit Systems Ltd. develops, manufactures, and integrates defense electronic and electro-optic systems primarily in Israel, the United States, and Europe. The company involves in military aircraft and helicopter systems; helmet mounted systems; commercial aviation systems and aero structures; unmanned air vehicle systems; naval systems; land vehicle systems; command, control, communications, computer, and intelligence (C4I) systems; electro-optic and countermeasures systems; homeland security systems; electronic warfare (EW) and signal intelligence (SIGINT) systems; and various commercial activities. It also performs upgrade programs for airborne, land, and naval defense platforms, as well as develops and manufactures systems and aero structures for the commercial aviation market. The company markets its systems and products as a prime contractor or subcontractor to various governments and defense contractors. Elbit Systems was founded in 1966 and is based in Haifa, Israel. Elbit Systems Ltd. (NasdaqGS:ESLT) operates independently of Elbit Ltd. as of November 27, 1996.

I liked their financials and their contracts are very sticky. These are not the type of contracts you re-write with new vendors every couple years. We added at the $49.74 level.

And we added to MDR, McDermit our position. We got in originally in June/July as a Nat Gas Nuclear play and then they spun off the Nuclear Division now listed as BWX, Babcock and Wilcox. We got 1 share of BWX for each two shares of MDR we had as well as our original MDR position. Our net is almost even, but we still like the MDR side so we added to it today at 12.74 a share.

Welcome To The Jungle

I don’t know why, but I have never owned Amazon. Even I was surprised to do the homework tonight and discover I have never owned this. I have been an Amazon customer since it was known as, “The World’s Biggest Bookstore”. 1996 I think. I have owned all the Kindles since generation 1 in late 2008. I just ordered the new Kindle.

Today’s WSJ had a great article called “The ABCs of eReading”.

Hopefully you can launch that article, if not please get a hold of it. The metrics are really impressive. Here are some highlights. There are an estimated 11 million owners of eReaders in the US. eBook sales increased 183% the first half of this year. We are now leaving the demographics of the “early adopters”. (That would be me the little old geek meister.) eReaders read 3.3 times as much as a non-eReaders. They buy more books and they buy more print books than non-eReaders.

Anyway read the article, do your homework in AMZN, and you know why we anteed up 125.99 a share. It has spent the last 15 years seeding the lowest cost retail infrastructure around. It has incredible customer loyalty and as a result can affordably roll out new products and news product lines very cheaply. (I swear I only plagiarized a few words there.) Amazon is well positioned to be a third party outsource to companies looking to support cloud computing especially in a transactional secure environment. One of the big bugga boos (an investment term meaning uncertatinty) to keep in mind is the national and international retail tax quagmire. If and when it becomes an issue, AMZN will feel the pain or possible pass it on to customers. Anyway, we be in the Jungle of Amazon. My intent is to creep in below 130, and look for a 200 in 12-18 months. There is no dividend but all the other metrics look sweet. The price based metric look rich, but this is a very popular stock and people are betting on huge but attainable future growth. It has a 3 year average revenue growth of 31% and a 3 year average profit growth of 65%. That explains the forward looking P/E ratio of 51 times earnings.

Apparently the rest of the world read the eReader article today as AMZN was up 1.8%.

And from the White House Archives:

"Now ah Elvis, I'm a bit confused, ah last time you were here you wore a nice velvet cape. That was a much better look for you."

In case you were not familiar, here is the Elvis Pic.

Salve Lucrum

Tuesday, August 24, 2010

August 24, 2010 Well Now I have cash

BAGAKOAA; August 24, 2010 Well Now I have cash

I have been complaining about being cash poor as our cash holding in the Salve Lucrum portfolio went from 22% to 1.2% as we were buying on dips. Well, we have had our share of dips since the August 19th, my estimation of the semi rally that started at the end of July. As a result I was stopped out of some hefty positions. I was at lunch with a couple of employees trying to solve the issue of demands and resources when my phone started pinging away. I checked to make sure it was not my abandoned 13 year son and was relieved to see it was my buddy Chuck (Charlie Schwab) telling me there was activity on a few of my accounts.

After the lunch I got the good news. I was no longer cash poor. I had stopped out of quite a few large positions as was now back to a 15.6% cash position in the Salve Lucrum account. The only thing that would have been better was if I stopped out with a gain. NOT.

Here is the damage report. AAPL stopped out at 240.00 even with an average cost of 245.80. That would be a 2% loss if you are rounding. For you accountant types that would be a 2.36% hit.

I was bounced out of Boeing at a stop of $61.98. My average cost was $63.20. That would be 2% or 2.04% for you really anal people.

Then, (and this one bummed me out) we were taken out of Flowserve at $91.62. Now I bought into this in tiny little chunks beginning in May (12th according to the blog) My average cost was $90.52 an amazing gain of 1.2%. Whoa! Ok if I head my own advice, that 1.2% was realized over a three month time period so annualized the gain is 4.8%. Which is 83% better than the 10 Year Treasury Yield of 2.62%. Don’t ever tell me I can’t find a bright side somewhere.

So now what do I do with all this cash. I can tell you what ever it is it will be done slowly and methodically.

Just to prove you are wasting your time reading this blog, I will remind you of a January 3, 2010 post:

“So in 2010 the index to watch will be the S & P 500. Since my Feb 2009 prognostication the DOW went up 33% and the S & P 500 went up 26%. There are 500 stocks in the S & P 500 and many have revenue growth as well as cost cutting strategies. The S & P 500’s forward looking PE ratio is about 16. With the year end close of 1113, I am looking for a year end S & P 500 of 1335, almost a 20% increase. This will take two critical elements that must happen. Consumer need to start spending be it frivolous or value purchases. And we need to see a bottom in real estate. If both happen by mid year, the 19 % improvement in the S & P 500 is real. If not it will be difficult if not impossible. You could extrapolate a DOW around 12, 500 based upon that guess, but I wouldn’t bet me life on it.”

Now, the next person who accuses me of only telling about my gains, I will take the binary code from this page and beat them to death with little 1s and 0s.

And to add to this self abuse, let’s see how I did with the earnings calls today. I, yes I, called a miss for Burger King, and they beat by 2 cents. Most of the gains came from overseas, but a beat just the same.

MDT, Medtronic which I suggested a beat, came in a penny short, but what really tanked the equity was the less than enthusiastic comments by the CEO. Hawkins said the top line sales were difficult and that things weren’t looking much better for the balance of the year.

Yes I did get the loss call right on Barnes and Noble, but hey that was not that tough a call. The estimate was an 81 cents a share loss. They lost 1.12 a share Ouch!. Think they got in the eBook reader market a little late? The CEO said they expect more losses ahead. There must be a White House cabinet position available for this guy, don’t you think. I shouldn’t make fun as Lawrence Summers is the only guy on the cabinet that has ever managed a budget, Bill Lynch would be an improvement. Ooops too much politics, just lost somebody’s attention.

The EGLE has not landed.

One of our readers still looking at the bulk container cargo sector, and they are looking at EGLE, Eagle Bulk Shipping Inc., which engages in the ocean transportation of bulk cargoes in the dry bulk industry. The company primarily transports iron ore, coal, grain, cement, and fertilizer along worldwide shipping routes. As of December 31, 2009, it owned and operated a fleet of 27 oceangoing vessels with a combined carrying capacity of 1,412,535 deadweight tons. The company was founded in 2005 and is headquartered in New York, New York.

Here are our ideas on this. It is a tough cyclical sector (If you watched Cramer last Friday as suggested, cyclicals are stocks that typically do good in a rising economy, they do poorly in a down or moribund economy. This is either a moribund or a down economy.) That said there are some positive things about EGLE worth mentioning. They have a fleet of ships called Handymax ships, about 27 with 9 in production and they have the temporary advantage of being able to get into shallow narrow ports in China and India. They also only use this one size of ship which makes crew mobility a competitive advantage. They were slightly ahead of the curve in ordering new vessels so they will have a short lived advantage against competitors with comparative fleets.

That short lived advantage comes at the expense of long term debt. They got in trouble with one of their loans last year and had to drop their dividend and agree to some higher interest rates for the ships they are taking control of in 2011-2014. If the global economy, especially Asia, continues to climb and does not cool off as some are expecting this will be a good bet for EGLE. If it does cool off, it will make paying for these new ships coming on line more difficult. Their forward looking P/E ratio is half of the industry average which makes this cheap stock (Under 5 dollars) a cheap stock. (Remember a cheap stock has nothing to do with the price of the stock. I would consider Berkshire Hathaway relatively cheap at $114,000 a share as of today). Their debt seems manageable, but with the cautions I already mentioned. Their margins are some of the highest in like sized companies, but that is eroding as demand drops and competitors add to fleet size.

I’d keep this baby on a watch list to see how the Baltic Dry Index (Index of going rates for ocean bound containers. The rates are determined by how many containers are in transit and how many ships are available to fulfill the demand.) shapes up over the next two months. If container demand goes up I’d put it in play. Until then I still like VLCCF Knightsbridge for the11% sustainable dividend and no debt.

And from the Left Behind in the White House Picture Vault!
"O, babe, you gotta look one more time.  It was a little black book about yay big, had some phone numbers  . . . ."

Salve Lucrum