July 29, 2010 Where Are The Tectonic Plates Of The Market

BAGAKOAA;

July 29, 2010 Where Are The Tectonic Plates Of The Market


I was fortunate enough to be provided a great article from UBS’s Mike Ryan, (Thanks Tim). It is titled Aftershocks and subtitled, Strategies For Rebuilding Wealth In An Uncertain World.


The article describes how each and every ripple piece of news since the depths of the global financial crisis has reverberated like aftershocks in the market. Ironically, Wednesday’s Mad Money had Cramer saying basically the same thing in his unique colorful style. He called it the panic strategy.


Ryan along with a stable of co-writers and analysts such as The following contributed to this report: Anne Briglia, CFA; Andrea Fisher; Stephen Freedman, PhD, CFA; Kurt Reiman, Anthony Roth; Kevin Ruth; Joseph-Anthony Sawe; Mike Tagliaferro, CFA; and Jeremy Zirin, CFA and they spent ten pages describing strategies to repair an investor's balance sheet including increasing current cash flows, more aggressively deploying cash balances, diversify outside of traditional assets, enhancing debt management, and hedging against extreme events. If you know some one at UBS, get a hold of this great piece. If not, let me know as I know one of the best.


Time to step on the gas


One of President Obama’s many priorities and campaign promises was to deploy an energy program that would reduce the country’s dependence on imported oil and institute the first functional cap and trade program for carbon dioxide emissions. If you were reading the headlines last year, amidst all the other programs being introduced in the congress and the senate, one bill introduced known as the Waxman-Markey bill, addressed clean energy, energy efficiency, pollution reduction, transition assistance for a move to a clean energy economy, and offsets for forest and agriculture programs that could reduce emissions. (The last half of that sentence was taken from an AP story about the bill).


Well even this administration and this Senate admitted they bit off more than they can chew and a kinder and gentler bill is under consideration and just might pass before the fall session. This will be good news for us who have been hedging our bets on nat gas. The main components of the news bill will be an elimination of the 75 million dollar cap on damages from oil spills. (I wonder what brought that about?), Homeowners will get financial assistance to make their homes energy efficient, (Don’t worry, wealthy people won’t be given any incentives because we all know only middle and lower income people have the 20-60 thousand to put in solar.), and most importantly it offers huge subsidies for the production and purchase of electrical and nat gas vehicles. This portion of the bill will be in the 5 billion range and will impact many of the stocks mentioned here over the last several month that are nat gas plays. (CNG, UNG, WPRT, CLNE)


What is really cool is the bill will pay for itself with taxes on oil. It would be an eight cent to fifty cent tax on a barrel of oil. That is nothing since oil is floating around 72 a barrel and we didn’t stop using the stuff when it was 140 a barrel. This could work. It is estimated we have 200 years worth of nat gas buried all over the states.


Legislation versus regulation.


We have discussed here the 2,307 page Finance Regulation Bill that got passed. As we mentioned, I have gleaned it but really don’t know how it will impact the likes of JPM, WFC, BAC etc. Well today, running home to check on the cats, I heard an exec from a huge bank say he did not know how it will impact business yet. He did say it will cost him more to run his business and that bank that have a capitalization below 2 billion will find it hard to stay sustainable. (As a primer for those who need it. Market capitalization is just the current value of the stock times the number of outstanding shares. Example, AAPL Apple has a market cap of about 238 billion=920 million shares outstanding at about 250 dollars a share.)


Now what the exec went on to describe is the process for converting the 2,307 page legislation into a functional set of banking and finance regulations. The process is painful, tedious and slow. The resulting document, could be volumes upon volumes. This is where they would take a single paragraph out of the legislation and write 300 pages of rules to fulfill the meaning of the paragraph. An example might be that consumers must have adequate acknowledgment as to the documentation they need to take out a loan. The regulation would define the documents, the copies needed, distribution of the copies, grace period details, retention of documents, recourse initiatives, audit requirements and so on. The exec indicated and I am sure that other Banking and Finance leadership is feeling the same way, that he is in no hurry to add staff, address former strategic initiatives, issue dividends, dilute the balance sheet in any way until he sees the working documents of regulation. I can’t say I would blame him.


Now we often talk about linkage in this blog. That would be hearing a piece of news and using our intuitive skills to draw hopefully adequate conclusion that other have failed to deduce. If this exec in this industry is feeling this way, and we just had a massive health care initiative passed with yet completed regulation, and a pending but probably energy bill (Thankfully gutted of the cap and trade BS), and an education bill that was introduced early on but is now causing the President some angst because teach unions are now just finding out that it is performance based and not tenure based, (Oooops, looks like he forgot a lot of AFL-CIO people –like teacher unions- got him in office.), I would bet there are a lot of execs in a lot of industries waiting to see how all these regulations are going look once complete and what political fall out will occur at the mid term elections.


My long winded point is that we may feel the earthquakes on a weekly and daily basis, (Greece is going to collapse, Germany will have bond defaulty issues, the Euro is going to evaporate, a volcano is going to close Europe for decades, the medical-insurance reform bill is going bankrupt the country, flash crashes will happen at any given moment, finance reform will chase all bankers to Hong Kong, Chinas GDP is collapsing, the Yuan float will lead to wild inflation, and the list goes on and on.) is the result of the panic strategy introduced at the beginning of this global crisis, but what we really need to look at is the underlying facts and values of what is going on with companies, their free cash flow, and what significant underlying geopolitical issues are diving the craziness of the market.


One real good example is UK Prime Minister Cameron is over in India doing kissy face with India to try and shed their imperialist 300 year history in the region. While there he made some very “in your face" remarks about Pakistan supporting and encouraging global terrorism. The is about as stupid as smoking and talking on a cell phone while you fill your car next to tanker pumping gas into the stations underground tanks. Both countries are on the verge of nuclear capabilities and his comments and positioning could blow up in all our faces. That would not be an earthquake, but a major shift in the tectonic plates of the world market as we know it.


Because of our holiday this week I did not get a chance to prognosticate about any earnings this week. Two I would have missed on and you should take to heart was PG and CL. Both missed top line sales and bottom line earnings. This is not a good sign as both are defensive type staple goods companies. I have owned both and still have some in a couple of the accounts we manage. We will be reading the filings and see how bad the damage is and determine that these might be buying ops or the tell of something more serious.


Be nimble and be careful.  We have a GDP number coming out tommorow and I don't think we are going to like it.


Salve Lucrum

July 28, 2010 Catch and release, it works with stocks too.

BAGAKOAA;

July 28, 2010 Catch and release, it works with stocks too.


I’m back! We had a great time doing death by fishing again this year. Nothing clears the mind more than walking through the majestic rivers and streams of Yellowstone National Park, trying to figure out where the fish are, what kind of bug they are chompin’ on, and how to present your size 18 (That would be about the twice the size of this letter J) Blue Winged Olive fly so said trout will chomp on it. Oh yeah, you do this while trying not to fall in the river and keeping a wary eye out for those pesky Bison and occasional Grizzly Bear.


When we catch a fish, we (collectively we call ourselves The Fishwhisperers) put a little pressure as possible on the fish, release them for other anglers to enjoy or possibly to live another season and catch them exponentially bigger next year.


And so it with is stocks. Our last post suggested you pick up a copy of Katsenelson’s “Active Value Investing” for these directionless volatile markets. It’s main premise is, the days of buy and hold are long gone. Ironically Matt Barthel from Barron’s had a piece this weak explaining that hedge fund managers and especially financial advisors are now recommending active versus passive portfolio management techniques. In the article he describes how high net worth account holder’s understand the need to be more nimble now than ever. Catching and releasing equities is becoming not only acceptable, but effective in drawing returns worthy the big bucks that fund manager take. We suggest the article.


Since leaving for holiday, we have seen the portfolios I am involved recover an average of about 4%. Perhaps I should stop publishing the blog. . . . waiting for the applause to end . . . . However I did take a bit of a hit on GLD the Gold ETF which was one of or stellar performers over the last few months. Our average cost on it is 106.39. We have seen 122 which means we should take some profit if and when it hits 112. At 113 today we have to decide whether to take the cash or wait. The Euro worries seem to have subsided, No One is talking about short term (12-18) month inflation, in fact the "D" word is bantered around a lot more than the "I" word, but WalMart could address deflation with a 2% price increase overnight. So what is gold going to do.


The shiny stuff is up 500% since 2002. But it is still almost half of its 1980 inflation adjusted price of $2,360 an ounce. So if you are into reading tea leaves, there is plenty of room to the upside, however there is no place for interest rates to go but eventually up which should eventually tarnish the commodity even if it is in the next business cycle (Beyond 24 months). Again, an interesting article in Barron’s by Alan Abelson, he takes an anti-Gold Bug view of the nuggets. Abelson quotes Bank Credit Analysts Peter Berezin for his contrarian view. The overall gist is Gold is a sound investment for at least the next 12-18 months, but keep an eye on inflation, interest rates, and the dollar exchange.


And in a further indication I have no life, if you look at the December Calls to Put Option Chart on Schwab, it cost about 15% more to put the GLD ETFs versus calling the ETF indicating a slightly bearish trend. So what will we do? Nothing. I have stop order at 111 and hope it does not trigger. If it does, I’ll take the 6% gain and be happy. Remember, NEVER be ashamed of taking a profit. Keep in mind we have been in and out of this ETF since June 09. If we stop out, we will have a realized annualized gain of about 13.5% before the firm of ORP (Obama, Reid, and Pelozi) has there way with us.


Over the last week, we have been asked to kick the tires on a few stocks and or funds and ETFs. Here is some feedback on some of those.


Bob H. asked if I had seen the Proshares UltraPro Short (or Long) Dow30 ETFs. SDOW and UDOW are the tickers. The goal of these funds is a plus or minus 300% daily leverage of the return of the DOW industrial average. In other words if you are UDOW, Dow Long, for every percentage point up, the ETF should be 3 percentage points up. A 100 point gain on a 10,000 dow would be one point so the long fund should reflect a 3% gain. Ok, how do they do it?


I read the prospectus and even after reading it, I am still confused as to how they, on a daily basis, utilize equities (The Dow 30), derivatives of those equities, futures contracts on those equities, less than a year swaps, money market accounts, and certain none Dow 30 basket securities. In this case, I go to rule number one in my investment rule book. If you don’t know how they make money, don’t buy the stock. (To this day, Warren Buffet only holds 100 shares of his friend’s former company Microsoft, because he does not completely understand the business model-his words)


Don’t get me wrong I find both of these ETFs intriguing, but you really have to feel confident in guessing the market (The DOW) and you would have to tend those ETFs several times a day to protect your down side. This is speculation at its best, and the reader who sent this to me pointed that out in his note. Not for the faint of heart for sure.


There was a few questions from readers and some fringe readers about MSFT. If you go back to the July 11th post, we did some reverse linkage using the positive news about the number of Windows 7 seats to prognosticate the number of Boxes (CPUs) being shipped and as a result suggested Intel would have a hell of a earnings report. They did. We suggested then it was time to get on Board the Balmer Train. We got in on July 13 at 25.13. We have another buy in at 24.75, but it has not triggered. We might be moving that up to 25.25. For the tea leave readers there does seem to be resistance at 26, but as we saw last August-Sep, once it breaks the high end of the trading channel (Think Bollinger Bands here), it made it to about 32. There are fairly priced target prices of 33.50-35 out there by some of the big boys (Barkley’s, Oppenheimer, UBS) They gotta a gaga ROE of 43%. There current P/E is 12.7 and forward looking is 9.79. (BTW, in Barron’s this week a historical study showed that most forward looking estimates are optimistically inaccurate to the tune of about 21%.) Even if that is the case with this stock it forward looking P/E would be 11.8, a bargain. Also check out their Price to Book at 4.9. If you screen the Dow 30 for a P/B value between 3-5, you get the likes of JNJ, CSCO, KO, UTX, MMM, AXP, CAT, and DD. None of them have a forward looking P/E below 10. The second cheapest on the list is Johnson and Johnson at 11.53. In other words we will be adding to our MSFT position.


Then we had a hopefully new reader ask about a company called DryShips, Inc. DRYS, through its subsidiaries, engages in the ownership and operation of drybulk carriers and drilling rigs that operate worldwide. Its drybulk fleet principally carries various drybulk commodities, including bulk items comprising coal, iron ore, and grains; and minor bulk items, such as bauxite, phosphate, fertilizers, and steel products. As of April 6, 2010, the company owned and operated a fleet of 39 drybulk carriers consisting of 7 Capesize, 28 Panamax, 2 Supramax vessels, and 2 Panamax newbuilding vessels with a combined deadweight tonnage of approximately 3.3 million dwt, as well as owned and operated 2 ultra-deep water semi-submersible drilling rigs and 4 ultra deep-water newbuilding drillships. The company was founded in 2004 and is based in Athens, Greece.




The company reported today and blew by estimates of 22 cents a share and scored 30 cents a share income giving it a current P/E of 11.25 and forward looking P/E of 4.45. That makes it look real cheap. Let’s see if we can figure out why. I am working on 3 red wines and a scotch so this could be sketchy. They have had positive free cash flow since sep 08. They currently have 149 million in FCF. That compares to 958 million in long term debt. (This is a capital intensive segment and according to their earnings report today they are taking delivery on 6 new ships which does not help Long Term Debt.) They have reduced LTD 40 % over the last 2 years. They suspended their 20 cent a share dividend first quarter 2009. And they don’t do stock buybacks.


I had to do some homework to find the raw file for their second quarter earnings report as they are regisetered in Athen Greece so they file a 6-K filing not an 8-K filing. To quote the report “The dry cargo freight market was relatively strong in the first half of 2010, with Panamaxes averaging $30,155 per day. In July, dry bulk freight rates have dropped significantly from the level seen earlier in the second quarter as, among other factors, steel mills undergo maintenance and overbuilt steel inventories are run down. DryShips is insulated from this seasonality as our drybulk carriers are almost 100% fixed for remaining 2010 and 82% for 2011. This seasonal slowdown in the market is expected to be short lived as long-term fundamentals of the drybulk market remain strong. If on the other hand this downturn is prolonged we will be poised to take advantage of opportunities that will arise.” That comment reflects some of what we mentioned here on July 12, 2010 and here are those comments, “Today’s WSJ had several gems in it if you looked for them. In the Money and Investment section there was some dismal information about the Baltic Dry Index. I have mentioned that metric many times here in the SL blog. However I may have misrepresented the number as being the tonnage of cargo shipped internationally. It is in fact an indicator of the daily rate charged for shipping. That rate has collapsed over the last two months. It is actually lower than April 2009 figures. So it could be extrapolated that the global economy is no longer expanding. However, and this is not in the article, rates are determined by availability of tanker. During the economic boom of 06-09, when oil was high and commodities were high possibly due to a dismal dollar, shipbuilders went on a frenzy floating anything they could build. That capacity is now on the high seas creating carrier to carrier competition meaning they are lowering their rates. Henceforth, (cool word- always liked that word) rates are falling and the BDI is collapsing. I would for a while pull this metric out of the leading economic indicator crystal ball.”


So you could extrapolate DRYS is cheap for a reason. There are a bunch of ships going on line making that 30,000 a day in shipping fees difficult to sustain unless there is surge in the world economy and dry good, bulk good demands significantly increase.


Also of note in the report is the re-issuance of senior convertible notes to improve their balance sheet. Again this is a very capital intensive industry and the issuance of debt is far from unordinary. It does raise a question in my mind how the debt and interest service will impact free cash flow in Q3 and Q4. You also have to look at the 8.7 million in income for Q2 against the long term debt of 958 million in LTD. That seems to be quite a hole to dig out of. In their best quarter Q2 08 when oil was in the stratosphere and the global economy party was going on full tilt, their income was 299 million. Their average for the last 8 quarters is a minus 68 million a quarter.


Underneath all of this funky fundamental stuff is the fact that the board just replaced the CEO. As you may know that is a huge red flag for us when a CEO or CFO gets an opportunity to “Spend more time with their family.”


Now to be fair, out of 137 companies in the service shipping sector, DRYS is in the top 20 or so depending upon the stat you choose. (That is an indication this is a weak sector). One worth taking a closer look at is VLCCF, Knightsbridge Tankers Limited, through its subsidiaries, engages in the seaborne transportation of crude oil and dry bulk cargoes worldwide. As of December 31, 2009, the company's fleet consisted of four double-hull very large crude oil carriers and two capesize dry bulk carriers. It serves oil companies, tanker companies, dry bulk carriers, petroleum products traders, and government agencies. Knightsbridge Tankers Limited was founded in 1996 and is based in Hamilton, Bermuda. I ran across this one in March doing some homework on the Baltic Dry Index. We liked it as they seem to get a higher price for their services and their margins were a bit better. (36 vs 28 agains DRYS). VLCCF also has a nice yield at 8.31% base upon a Feb dividend of 30 cents and a May throw of 40 cents a share. It seems like the best of breed in this sector, but it is a dog of a sector.


In closing the market today hit some technical restraints and backed off. The real blanket (a heavy and wet blanket I might add) was a piss poor durable goods order. Most were expecting a .4% improvement after a dismal -.8% drop last month, NOT. We got a -1.0% drop. Ouch. Look for the market to start out in the red in the morning. Bob H. maybe a good time to play your SDOW. Do it with your Vegas money baby. I just downladed the July Beigebook report from the Fed to my Kindle to read in bed. What an exciting life I lead!


Salve Lucrum

BAGAKOAA; JULY 21, 2010

I am headed off to Yellowstone to do death by fishing.  I watched Bernanke try and answer questions put forth to him and it was interesting to watch him be the pawn of the Senators posing the questions.  My take is watch for the GDP number to be down and the market take a sizable hit.  Make sure your stops are in place and if you got cash, look to buy on the dips.  In the meantime pick up a copy of Active Value Investing: Making Money in Range-Bound Markets by Katsenelson.  This would be a great time to read up on how to make money if a truly funky market.

SALVE LUCRUM 

July 20, 2010 Christmas in July and other crazy stuff

BAGAKOAA;

July 20, 2010 Christmas in July and other crazy stuff



We had a busy first half of the year and never made up to our place in Utah to take down our Christmas decorations. Devin and her good friend up here decided to have Christmas in July. Today we made a full trimmed out 19 pound bird. I had the pleasure of chopping onions and celery at 7 am this morning. The event went off marvelously. It culminated in a non gag gift under 10 dollars. I scored some really cool wine glass trinkets that I can also wear as earrings or fishing lures. They are cool.


If that sounds crazy, did you see the market today. I am almost embarrassed to tell you how badly I did on my guestimates for earnings. Before we get to earnings estimates, let’s see how we did on the economic prognostications.

We had some really bad news on housing starts which kicked the market in the synthetic derivatives. The consensus was 583,000 units and we suggested a scary number of 579,000. Well we got a really ugly 549,000 number which should have been a triple digit whammo for the market. Again, this is a goofy market to figure out, but on this stat, what kept the house of cards from collapsing? If you looked at the single family new permits number is came back kind of strong. This could be, (I am a glass half full kinda guy), an indication that all of the stimulus hang overs are over and these are real people buying new homes. If we can see this trend for two more months, it will be a trend worth reacting to.


Oh yeah, as we suggested Canada bumped its rate .25%, it did. No big deal.


Last night we suggested that GS Goldman would beat estimates of 2.07 a share and we threw out a 2.15 number. That was a huge miss on my part as they came in at 78 cents a share. Top line revenue was down 36%. They did have quite a few unordinary charges related to the fraud settlement and UK bonus taxes, but it was a big miss by the company and huge miss for our guess.


As suggested last night, JNJ Johnson & Johnson did beat and even with the beat, concerns over a recall and a downward adjustment to 2010 annual earnings forced the stock down a dollar. Their magic number was 1.21 a share, and they hit 1,23 without too much accounting shenanigans. That made my January Calls easy to pick up at 2.25, so we will be in the money at 62.25.


Pepsico did beat which was contrary to my guess from last night. In looking at the numbers, there was an 11 cent a share adjustment to the upside for foreign currency exchange. If that change had not been executed, their quarter would have been 98 cents a share. They do about 40% of their revenue outside the US.


AAPL surprised many of us with a huge beat. Most analysts and this blog were thinking 3.11 a share or 3.12 a share. They blew everyone away and came in at 3.51 a share. The stock was up in after hours trading. As I mentioned, everyone was watching their gross margin whish did slide just a hair. (From 40% to 39.1%) This makes for some very healthy growth. Target prices are in the 300-320 range. We are even on the stock at the moment. (Remember we took a nice profit in the May Flash Crash and generated some much needed tax revenue for the Firm of ORP. (Obama, Reid, and Pelosi).


As a reminder, please keep an eye on your stop orders. I am liking what we are seeing in the earnings report, but only about 62% of the companies reporting so far this quarter are hitting top line numbers. That is not the type of growth we need.


There is a long list of companies reporting tomorrow, but only two I am focused on. KO, Coke is expected to hit 1.03 in profit for the quarter. Look for some similar action as in PepsiCo regarding foreign currency exchange issues. They should be so look for 1.07. Their P/E ratio is a fair 14 and target prices are in the 61-65 range. They have manageable debt but their yield is a weak 1.7%. Keep in mind that the 10 year treasury was below 3% today so my benchmark return is just this side of 6%. We need a better yield or a POP on KO to make this sexy again.


Wells Fargo reports tomorrow and they are looking for 48 cents a share. They already announced some layoffs due to the banking finance reform bill and other reorganization changes. These are already worked into the price of the shares, so any new surprises tomorrow could make this equity a wobbler. We own it and it is part of our banking troika of C, BAC, and WFC. I like a beat here to the tune of 52 cents a share. I hope.


We have yet another reader for the Salve Lucrum Blog. My wife’s and my good friend Elizabeth will be joining us making her reader 36. Welcome aboard Elizabeth.


Salve Lucrum

July 19, 2010 It’s hard to be a gambler . . .

BAGAKOAA;

July 19, 2010 It’s hard to be a gambler . . .


Elvis may have said it best in one of his last recordings, Moody Blue with the lyrics, “Its hard to be a gambler bettin on a number that keeps changing everytime.”


Well the housing market index was weak as we suspected here last night. I have been hunting down the results from F Ford only to find out they actually report this Friday. Barron’s fooled me. If I had checked Yahoo Finance (One of the best line ups of earning reports and estimates out there, I would seen it was Friday.)A tell of good news today was a press release about Ford putting up 300 million in a joint venture in Mainland China. 300 million is not a lot to Ford, but if things were going the wrong way they may not have considered it. We will stick with our guess of 50 cents a share versus the consensus of 41 vents a share. IBM did beat the 2.58 on the street and came very close to the 2.68 we called last night to hit 2.65 a share. If you adjusted 500 million for currency exchange allowances for a weaker Euro you would have seen a number closer to 2.70 a share. Seeking Alpha has a transcript of the earnings report if you want to get it. We will be perusing it tonight in depth as it is a large holding in the Salve Lucrum and other portfolios. While top line and bottom line numbers beat estimates, concerns were voiced by management about their important service sector as those revenues were down 12%. That and some cautionary statement about the breadth of the global recovery tempered the enthusiasm of the good quarter. Wow I wrote that with too much plagiarizing.


Today’s volume was light but not non-existence. The market finished up, but not as well as I had hoped. The crummy housing index report had the market down for a while and some shaky credit news out of Ireland and a German real Estate Bank rattled the market. Then there was a comeback later in the day.


We did add more AAPL on the continued oversell due to the antennae debacle. We got some at $245. As we suggested we also picked up more BAC at 13.99 a share. BAC did not bounce back as we had anticipated. Part of their earnings announcement last week was the prediction that the banking reform bill would cost the company between 1.8-2.3 Billion in profits. That explains the 9% hit last week and the additional point today. We think it is enough and at 13.75 it is a good value. Moynihan’s comments on Friday, and I read them today on my Kindle waiting for a lube job in beautiful Draper Utah, (Actually my vehicle needed the lube job.) were very pessimistic and accounted for no passing of fees onto the customers. Having been a loyal prisoner (I mean customer) of BofA fro more than 25 years, I know they will fee their customers, vendors and partners to death and offset the losses. They will also probably follow Wells Fargo lead and disemploy some people. Those job losses will be directly attributed to the firm of Obama, Reid, and Pelosi. In essence, all analysts following the banking sector think that Moynihan was exaggeratingly negative in his statements and that BAC will fee they way back to prosperity. Also if you read the 2,371 page financial regulation reform bill and I know you did as I sent you the link to the PDF last week, Bof A and other banks can hike annual credit card fees and monthly maintenance fees on deposit accounts and regulators have not yet determined what the fee restrictions will be yet. Most analysts do not think the end result will be as Draconian as Moynihan suggests. Once everyone figures this out, like tomorrow, we would see some repair to the stock. Target prices remain anywhere from 19-24, and we are looking for 20 by mid year 2011.


What do Goldman Sachs, Gilead Science, Apple Computers, United Health Group, Johnson & Johnson, Mellon Bank of New York, and PepsiCo have in common. Ok they all report tomorrow. We don’t follow all of these, but a few we do.


Despites all the grief of late and the settlement with the government over some malfeasant trading schemes and communications to investors, Goldman should beat the 2.07 a share estimates. We did big with GS in the trials and tribulations of 08-09 getting in at an average price of 89 then selling taking a nice profit at 137 in June of 09. We got back in around mid July at 160 and finally got out at 179 in October. Since then we have watched and got real tempted in May at the 136 range. Its fair value is about 180 and its trading at 145. I know there are some of you saying that is a pricey stock. I assure it is not expensive because it is selling for 145 a share. Its forward looking P/E is 7.4. That is dirt cheap for a company like GS. I have looked everywhere to get a feel for where earings are going to end up, but the media is focused on the fraud case which is now settled for 500 million. (pocket Change for GS). Now there is a lot to read about to determine how the financial regulatory reform bill will affect GS, but it appears as though the restructuring as a holding company will somewhat reduce how the company can leverage their proprietary trading which might reduce investor returns. However they will have to boost their assets as part of this make over and the returns on the assets should offset the leverage they were enjoying before. All of the big banks have gone through some restructure and we feel that some of the comments tomorrow will indicate a shift in market share to GS. Look for a beat at 2.15 a share tomorrow and a nice kick to the stock.


Gilead Science GILD we don’t follow but it is huge player in the HIV Virus filed and now that the CDC in Atlanta is now recommending HIV testing I would suspect this plays well for GILD so look for a beat.


AAPL, Apple computer will beat. Quarterly revenues are expected to jump more than 75%. The real question will be can they keep or improve their margin. There are so many top analysts watching this stock that the beat will not be huge. I am thinking 3.11, which would be nice and can we finally stop talking about the antennae.


United Health Group. Don’t know and don’t care. From all I can see at the surface look for a small miss.


Johnson & Johnson. We were really bullish about this stock back in February but never pulled the trigger. They are looking for 1.21 a share and they should hit and beat. It has a great yield and plenty of cash to support the 3.5 % yielding dividend. I can say we are glad we did not get in at 64, but at 59, this is a sexy stock. I will be checking out some January 60.00 calls tonight. If I can get in below 2.75 I might give it whirl. That would mean we would be in the money at 62.75 which seems very doable by January.


Bank of NY Mellon, we do not follow as we focus on C, WFC, and BAC. It is ahuge behind the scenes kind of international financing companies and like a lot of other banks they are trading at the low end of their value range. Look for a beat, but we have no idea how much.


Pepsico, we also do not follow. We have a sizable position in Coke. Yeah me and Warren buffet have a lot of things in common. He owns coke, we own coke, he owns jets, we fly on jets, he owns a railroad company and I saw a train today. 1.08 a share is what Pepsi needs to beat. I don’t see it happening. Look for a near miss of 1.05.


We will have a new regular reader as of tonight. My lovely wife Devin will become reader 35, but in my book she is number one. She has visited the blog on occasion, but will now be receiving it on a regular basis. She is very supportive of the long hours I put into this drivel and I do appreciate it. One of my fondest memories was getting a phone call back in 1989ish from Devin saying “buy Disney, they just bought ABC”. It was a good move for us and helped with a down payment on a home. Welcome aboard dear and enjoy the ride.


Salve Lucrum

BAGAKOAA; July 18, 2010 Mia Culpa Mia Culpa


We left you with this comment on Thursday night, “Let's see how we wrap up the week tomorrow. My guess is we will see a little bump on real light volume.” Well we had 355 million shares traded which was well above average and we took a hit, a big hit.


Most of you can read so I won’t kill you with all the possible reasons why we took the hit, but it involved some soft economic news and good but not awe inspiring earnings reports. More importantly the fact that most “beats” in the earnings reports were due to cost management versus top line growth.


I am enjoying a vacation this weekend and week ahead taking the “Fishwhisperers” to Yellowstone for 4 days of death by fishing. This weekend has been family time, but I have been cutting and pasting Salve Lucrum worthy data and news since Thursday Night. Now I will attempt to wordsmith this into something entertaining and helpful for the week ahead.


As far as the portfolio goes, there was very little changes overall. Friday we would have taken advantage of the huge dip, but honestly, we are short on cash so we are just watching.


Just like Alcoa, the market watches GE very closely. It beat estimates but again that was due to good financial cost management as top line sales came down 4.3%. Energy and health care divisions were the driving positive force in the company. The positive news was that management is committed to growing earnings and expanding the dividend in 2011. The 4.59% drop on Friday puts it close to a nice value. I might be looking at some January calls on this beast.


BAC, one of my three banking stocks along with WFC Wells Fargo and C Citigroup all got spanked on Friday. BAC was down 9 % even though they beat and showed improvement in lending costs. I did what any good value investor would o and put an order in for more hoping to catch a 14.25 or lower tomorrow morning. We would be very surprised not to find out this was oversold.


We received our AAII newsletter this week. (American Association of Individual Investors) and again we highly suggest you consider joining. It’s affordable and very informative. (Much more so than this blog.) They send out a survey to their members (That would be me) and asks if their members are bullish or bearish over the next 6 months, That last several week we have seen a shift to the upside. Their long term average of bulls to bears is 39%. The latest survey came in at 39.4 and that has been trailing up for about 4 weeks. Again, this is just feelings of investors like me and is focused on the next 6 months.


Friday’s numbers did come as a surprise to quite few folk even at the halls of Barron’s Magazine. (Cramer seemed to take it in stride) We reviewed this weeks magazine and it is a goodie. It seems that our friend Alan Abelson was expecting more turmoil during the week due to the banking regulatory reform. He was a bit surprised to see the reaction to the lackluster economic news and soft top line sales figures. He did point out the JPM and Citi earnings were bumped because of provisions for losses which has nothing to do with growth. We agree. He and other in the magazine feel that real anchor to the numbers were associated with the huge drop in consumer sentiment. He indicates, although I could find no record, that the fed is on deflation watch. Personally I think Alan is reading a lot into Bernanke’s comments from last week. However he does meet with Bernanke from time to time and I as of yet had not had the pleasure.


With the carnage from Friday, I was looking for some, heck any good news. We did note a report from Singapore that they have adjusted their GDP outlook up from 7-9% to 13-15%. It is an export economy and growth like that is a good sign.


Which brings us to the week ahead.


Monday will see the National Association of Home Builders which is based on a survey in which respondents (people In the Industry) are asked about the general economy and housing market conditions. There is no consensus out there but I would think the survey will be lackluster if not negative.


Tuesday


Tuesday we will see the housing starts numbers, which if you remember fell back last month. The consensus is .583 million units, but we are not feeling that optimistic. Look for a number closer to 579 and the fact it is below 580 will be a wobbler for the market. Also, not a biggie, but the Bank of Canada will announce their monetary policy (Interest rates) and look for a little kicker of .25 basis points. Their economy is cooking with gas and oil and they need to tap the breaks a bit.


Wednesday the The Mortgage Bankers' Association compiles various mortgage loan indexes. This will tell us how busy mortgage banks are. The news will be soft.


Initial jobless claims report on Thursday and the consensus 450,000 but even the analysts say it’s a squishy number because of the inbetween automotive tooling season. My guess is the number will go up to about 470,000, which again will be bad news for the market.


Existing home sales report on Friday. If you remember they fell last month to 5.66 million units. The brains that know say it will fall further to 5.26. Unfortunately, from looking at the last 6 week trends, I don’t see 5.2. We are guessing 5.1 and yet another ding to the market.


Now to balance all this bad news, we have a heck of a week of earnings ahead.


Monday is IBM and Ford. Both will beat estimates. So will Texas Instruments, but we don’t follow the stock. Ford was down 4.5% last week and it is a bargain. It’s forward P/E ratio is 7.2 and they have about 7 dollars a share in cash. Revenues are doing well. (And there are about 46,000 12-14 dollar call option September Contracts) If you thought you missed the boat on F, this is a food chance to get in. It is conservatively valued at 16. They are looking for 41 cents a share. IF there are no accounting surprises we are suggesting 50 cents a share and some positive forward looking statements. IBM will beat the 2.58 cents a share estimates expect. Their 2% drop on Friday is a buying opportunity as at 128, it is affordable. The average target price for analyst covering the stock is 147. Forward looking P/E is 10.41. 2.68 seems like a very doable number for IBM and look for some top line growth and positive statements to kick this stock up a notch.

We will other earnings guesses tommorow.

Salve Lucrum

July 15, 2010 You May Be Right. . I May Be Crazy

BAGAKOAA;

July 15, 2010 You May Be Right. . I May Be Crazy


Billy Joel said it best in 1980.  I was golfing a day or so ago, actually I was walking around and sweating not golfing and I was bragging about nailing a couple of earnings report this week and my buddy reminded me about a prognastication I have made regarding the DOW was way off.  


That obviously was someone else as I know I never miss on my predictions.  I was a bit annoyed as the reason I do this bloody blog is to keep track of my mistakes.  We'll after a little research, I discovered the e-mail (predecessor to the blog) from September 9, 2009 and you will see what my friend was reminding me about.  


Here is that e-mail in its entirety with comments IN CAPS FROM ME TONIGHT.


BAGAKOAA *


9/16/09






WOW, a 107 point day on the Dow. Cool.


I hope hope hope, you caught Mad Money last night. Cramer has a great tip. OK, he had several, but in his humble subtle way, (two wheelbarrows full of apples), he explained about a little FASB (that’s a real cool club of people in Connecticut who sit down and figure out what makes a credit a credit or a debit a debit.) ruling that makes makers of hardware that houses software (Dell, HP) amortize their earnings for 8 quarters versus taking the earnings in the quarter earned. That ruling will no longer apply to smart phone makers. Think Apple. That means AAPL’s earning should inflate. Cramer has had a target price of 200 on the stock for more than a year. He upped it last night to 264. He is ahead of the analysts on this, or he was until this morning. I did get in last night and increased 4 or our portfolios with more Apple. It was up $6.82 today. AAPL WAS SELLING AT 185 A SHARE MAKING IT A 35% GAINER SINCE THIS POST.


OK everything was up today. If you didn’t make some money today, you weren’t trying. Yeah I saw a little red with MDRX, but I still believe. Fundies are OK and I have seen the software in two doctor’s visits in the last two weeks. I asked the admin if they like it. The answer is NO, they love it. They could not show it to me due to patient privacy issues so I had to wait for them leave the room before I explored. Mrs. Kaplan needs to lay off the pasta, but the software seems real intuitive.  MDRX WAS AT 18 AND CHANGE AND IS AT 17 AND CHANGE TODAY


And yes my VLO Jan 2011 options were down another penny, but I don’t care because I can’t even remember why I bought them in the first place. PEP was down .30 cents today but that was my fault I had a Diet Coke last night. General Mill was down a buck twenty and I had my bowl of cheerios this morning with raspberries, anybody know where in the hell all the blueberries went?  I STILL HAVE VLO AT A HUGE LOSS IN A JANUARY 2012 LEAP.  I HAVE ONE OF OUR READERS TO BLAME FOR THAT. GIS IS UP ABOUT 29% SINCE THE POST.


Other than that today was one of the best days I have ever had in the market. I am now not only drinking the cool aide, but am starting to make my own. Well OK, its not cool aide but I am treating myself to a 2006 Fontodi Flaccianello, rated 99 by Wine Spectator. It will be magnificent this time next year.


In recent readings, thank you, Mr. Tunney for the 3 articles in last weeks UBS mailings. Economics:The Anatocy of Excess, Sugar Rush Recovery and Deflation-Inflation Knife Edge. Good stuff if you can get a hold of it. I was able to send it to my Kindle and enjoyed it on the go!


So how high will this rally go? My February year end prognostication of 9420 on the Dow is in serious trouble. If you look at the PE ratio for the S & P 500, it is creeping up on 17. At the markets peak, like in September of 07, the PE for the S&P 500 was almost 22. The big question mark is when all the money on the side lines will start returning to the equity market. Currently people are hoarding money and reducing debt. August saw a 21 Billion dollar drop in consumer debt. Personal savings have gone from 1.2% in 2006 to 7.15 in July. There is almost 4 trillion in money markets. In the last three month we are seeing some of this money move to the debt markets either in bonds directly or in debt mutual funds. That is the first sign of a shift towards bigger risks, equity markets.


Here is my new “drinking the cool aide” guess. 12,670 in the Dow by mid year 2010. Ok keep this in your files so you make fun of me. More importantly, PLEASE use your stop order to protect these beautiful gains. THERE IT IS, 12,670 BY MID YEAR 2010.  YOU CAN MAKE FUN OF ME NOW. 


My buddy Ben sent in some encouraging info one of my winners from earlier in the year Grainger, GWW. (This is till in my son’s portfolio as I took some profit a while back and got out.) Here is the highlight from his note:


Case in point: W.W.Grainger recently held a distribution center tour in New Jersey. Some comments were outlined by BB&T Capital Markets analyst Holden Lewis and his team in their weekly newsletter. (Get on their mail list for some great insight on industrial and commercial equipment markets as well as a select group of distributors they cover.)


Among the interesting insights in this report:


Grainger is benchmarking other distributors, some of which have 500,000 SKUs, to explore further product expansion. BB&T notes it is contributing 200-300 basis points to annual sales growth.


Grainger's global sourcing is now 11 percent of sales and rising.


E-commerce is now 24 percent of sales with potential for eventual 40 percent.


Managed inventory programs (both vendor and customer) are small but growing.


Remember when Grainger threw millions of dollars in the 1990s into producing the first large-scale catalog on CD-ROM? Feels like ancient history perhaps, but little more than ten years later their e-commerce sales are about a quarter of their business. That tends to be higher margin and higher average order size business. Not a bad transition from a ten-pound catalog that cost a lot to get onto a lot of order desks in America.


WWG IS UP 17% SINCE THIS POST.


My apologies again to all last week about the ETF UNG, I hope you shifted to FCG as it has turned out to be a good Liquid Natural Gas Play, up 5.6% this week. In that same note I mentioned XTO, up 8.20 5 this week and APC up 10% this week (mostly today). LNG is going to get its political foot print together in Washington and this market will be very lucrative.

iNTERESTING TO NOTE I AM BACK IN UNG?


We have at least one new reader this week, hello Megan.


In closing, please remember to save those gains with a stop. I am tonight. I have quite a few positions up well over 20% and will secure 12% gains on all of them by setting stops at 8% below their current marks.


If anyone wants to drop off this note, I would not be offended, so please send me a note and you will be off the list.

Ok let's look at those earnings reports from today see how we did.

JPM reported today and street estimates were bewtween 67 and 72.  We thought they would beat and the did, BIG, but not as BIG as we thought.  We had them at 75 cents a share and they came in at 73.  Still a great quarter.  This stock, now that Fin Reg has been put to bed shuld start creeping towards 50-54 a share.  It closed today at 40.46.  Dimon the CEO had some cautionary comments which kept the stock from popping late in trading. 

AMD had a consensus of minus 7 cents a share.  We thought that would be close but had the overall chip makret recovering well so we said minus 4.  They reported minus 6.  They were really strong top line growth at 40 % over last year.  We will take a close look at the reporting as there were a lot of references to GAP verusu Non-GAP items and I want to check out the 45% gross margin reported and see how that compares ti INTC and ARMH.  

PPG we mentioned Sunday is a good bell weather for the economy.  We had them missing the street guess of 1.40.  We were way off.  In yet another tell for the underlying economy, they blew away the dollar forty, made our guess of 1.32 look stupid and came in at 1.64.  We do not own this but will be taking a close look at it.  Sales were up 11% and the CEO had some promising forward looking comments.  He was talking about acquistions and he has the cash to pull them off.

 WWG, Grainger is still in one of the portfolios.  Because of a lot of homework, we pegged them easily beating the 1.50 a share street guess.  There were a couple of whisper guesses out the at 1.55 which made me feel better about taking a leap of faith and saying 1.60 a share.  The reported 1.65 a share a true blow out.  Grainger is yet another great candloe in the coal mine of our and other country economies.  They provide MRO materials for companies and job sites.  It popped nice today as we suggested (OK who said you can't make money reading this blog.)  The stock was up 3% + today but it is getting to the high side of value.  I'd be looking to take a samll bit off the table.  (Next quarter's earing will be even better, but let's not be greedy.)


GOOG, Google missed today much to my surprise.  They had some good revenes but spent BIG on advertising and it whacked the heck out of the bottom line.  The street number was about 6.54.  I had them coming in at 7.00 a share.  They reported 6.45 a share which is a big miss, but it was for a good reason.  They were investing in the brand with some huge advertising programs.  I'd keep a close eye on this as it is fairly valued at 494 as of today.  Other must think so too as the stock was up 2.5% today on a MISS?

Let's see how we wrap up the week tommorow.  My guess is we will see a little bump on real light volume.

Salve Lucrum

July 14, 2010 Say Hay Nay Say Nay Sayer

BAGAKOAA

July 14, 2010 Say Hay Nay Say Nay Sayer


If you ever wanted proof that this is the goofiest market around, the market closing mixed today makes no sense. All evening we have been looking for a reason for the slightly up (DOW) slightly down (S & P) market today. Yeah the fed said the recovery might be a robust as hoped, but this was based upon meeting minutes for last week. Read the earnings report from Intel. It reeks of more Corporate IT spending. More boxes being sold. More internet infrastructure. Give it up, the Intel report should have been a nice kick in the backside to get this market where it belongs which is at least 7-9% higher than it is now.


I was reminded a couple of times recently that this blog is cool (Chapter 7 The Prince “Beware of the Flatterers), but does not really help people make money. First, please remember the purpose for the blog is very self centered. It really is for me to keep my thoughts about what is going on in a place where I can find them, refer to them as necessary, and keep myself honest. If during that exercise I discover a new strategy or disprove an old one, it is a good tool for me to track that. If I visit an equity in November and it does not seem to be the right economic climate to pull the trigger I can go back and review the logic for looking at it in the first place. You all know I am a fan of Cramer. I was just reminded of how much I spend on his Actions Alert Plus subscription to Street.com. I had to go back and ask, is it worth it. Using my blog to go back and see what he thought versus my research, I came to the conclusion that it is worth it. As I have said here I do not always agree with the picks and or the timing, but his logic and market understanding is almost always spot on. He does get pressured to get a story on air probably before it is timed appropriately. In other words in his vast research he might discover some linkage and need a 15 minute slot to fill tomorrow night, so he does a segment on Drones for the military, or natural gas storage facilities, or FILL IN THE BLANK. That does not make it the right time to buy buy buy, or that the companies he chose are right ones for that day or week. This blog does not have that pressure. (OK PNG was a great call and looking better by the minute, Thanks Jim).


Also this blog was a way for me to communicate to the handful of people I felt comfortable sharing ideas and schemes for minimizing their losses. As I have mentioned I would tell people something or send them a note and then 3 months later I would be bragging about the score and they would say I never told them about it. (Actually that happened this week with some bond issuance and I could find no less than 4 e-mails where I had told the individual about GMAC Smart Notes, Citigroup Bonds, Zion nat bank Bonds and FMAC Bonds).


I really wish every paragraph could be filled with stock tips and how to make a million on those tips. This is about learning along with me if you care, me doing some of the heavy lifting on research which I enjoy, and how to look for the linkage before the next guy finds it. Besides that, it just a little entertaining I hope.

Here is a tip that might make you some money, but again it does require homework. Every once in blue moon you can find a company that has positive income and more cash than their current market cap. (We have a few new readers so for their sake market cap is nothing more than the number of outstanding shares multiplied by the the current value of the stock Play a long with me.. ABC Company has one million shares outstanding, and is selling for 10.00 a share. Their market cap is. . . waiting. . . .That is correct 10 million.). If you find one of these gems, it is ALMOST impossible to loose money on them. How do you find them? Use a stock screener. Yahoo is free and very effective. I just spent about an hour and found none. That does not mean they are not there, it means I must spend more time on my vacation hunting. When I find them you will be the first 34 or so people to know. I read a blog today and a guys spent three weeks last November and found three companies. 3 month return on the companies in the fisrt quarter 2010, over 700%.


In closing and much to my surprise, one of my good buddies who I poke fun at here from time to time actually read one of my posts. It was actually a repeat of a November Post called Investing step by step. He indicated that he thought it was entertaining, but pointed out most people do not go through the trouble it takes to do the homework I suggested. He is right. My suggestion is to anyone who feesl that step by step analysis is too much work, then don’t invest in stocks. Choose a highly rated mutual fund or ETF, They have teams of people who do this all day long for you. You have to love the numbers the research and the learning. If not leave it to someone who does.


I GOT Marriot wrong. There I admit it. We were suggesting a weak performance today from Marriot of 20 cents a share. They blew by the 28 cent consensus and solidly nailed 31 cents a year. This too makes the market reaction today even more confusing. All night I have been searching for the weakness in the market and except for the ill timed comments from the fed and a slightly depressed retail sales report (If you take petrol out of the report it was .1% below last month. Come on that is about 3 hours sales at Wal-Mart.)


We must rest now as we have a big earnings day tommorow. If you have any equities you want me to do the heavy lifting on, let me know.


Salve Lucrum

July 13, 2010 When you’re good, you’re good

BAGAKOAA

July 13, 2010 When you’re good, you’re good


We just got back from the All Star Game. Yawn! But I was thrilled to hear this afternoon that Intel topped top line and bottom line estimates. Sunday night we called the 43 cents a share income estimate soft and went way out on a limb and said 50 cents a share. Now when you look at that it’s only 7 cents a share right? How hard could it be to best an estimate by seven cents a share? Well in the case of Intel it would mean having to generate $389,200,000 more in profit as the have 5.56 Billion shares outstanding. Well they actually produced more than $444800000 of profit that expected or 51 cents a share. There was a nice 2% jump today and if you were insightful enough to do the homework and bought the January 2011 20 dollar call mentioned here in the blog in May (about the 24th), you should be in a position to consider taking some profit here.


We also suggested YUM was going to disappoint. We did not get that correct, at face value. They reported a 58 WHEN CORRECTED for a one time charge. Without the correction they would have hit 50 cents a share. We suggested a disappointing 52 cents a share. I’ll let you decide if we got that one right. The market took it as a good report which we did not expect and the stock was up 2.14%. So contrary to what we were thinking, MCD was up, the sector was up and there was no buying on the dips.


We initiated two new positions today before the market opened. Do your homework as these are speculative stocks. One is the Israeli defense contractor ESLT Elbit Systems LTD. I am easing into this and though we had a good day, will look for small dips or flat days to add to the stock. 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. They have little debt sexy fundies, decent free cash flow, and took a 20% hit when the Turks were trying to get materials into the Gaza Strip because it was a regional geo political issue. The theory is that the Turks won’t by from Elbit anymore. Read their filings as they do less than 5% of their business in Turkey. They major customer are (besides Israel) is the US and the UK. This has the making of an 82 dollar stock. Its forward looking P/E ratio is 9.69. It normally trades in the S & P Average Range of 14-15. Do the math. Even on the low end, it should be a 74.48 cent stock. Please do your homework as this one looks too good to be true so I may have missed something. Anyway I’m in and I have my stops in place.


The other one I have to give Cramer Credit for. PNG PAA Natural Gas Storage is a publicly traded master limited partnership engaged in the development, acquisition, operation and commercial management of natural gas storage facilities. The Partnership currently owns and operates two natural gas storage facilities located in Louisiana and Michigan, which together have an aggregate working gas storage capacity of approximately 50 BCF. The Partnership’s general partner, as well as the majority of the Partnership’s limited partner interests, is owned by Plains All American Pipeline, L.P. The Partnership is headquartered in Houston, TX. Now if you have been reading the blog, you know we have a couple LNG plays at work. (UNG and MDR) They have been under pressure (That is Wall Street Speak for I am getting my butt kicked) because of the underlying value of the commodity, Natural Gas. Though we feel this is going to be our savior fuels of the future, we have way too much of the stuff. Cramer does the linkage game better than anybody I know. Too much Gas, where to you put it? Cramer did the homework, and PNG looks pretty good. Now I got lucky as the stock went up 4% today because they announce an LLP unit distribution. (Think of it as a dividend on steroids.) I did not know it was coming, neither did Cramer, it was just blind luck that it was announced a few hours after we secured out new position. And don’t ask to be put in the will because as we have suggested of late, baby steps and this position was a baby step. We will be adding as we dig up more info on the Limited Partnership. LP Fundies are a little harder to read the fundamentals but have the same SEC filing requirements so its just a question of digging.


In other Portfolio action today we added to FANUY and initiated a new position in a company out of Washington State you may have heard of called Microsoft MSFT. Yes I bit the bullet. Its time to ride the Balmer Machine. We’ll take the 2.2% pop on that today. We did not have the cash to add to AAPL today but wished we had. It was a nice buying opportunity.


We got a ton of earnings reports over the next two days. Like those boys at the Big A tonight let’s hope I can keep my average at 100%.


Salve Lucrum

July 12, 2010 14 cents = a shiny quarter

BAGAKOAA;

July 12, 2010 14 cents = a shiny quarter


We’ll we got lucky again. We called 14 cents a share for Alcoa against a 12 cent expectation. That should help this 5 day rally (as small as today’s was) run at least one more day. It didn’t hurt that CSX had a strong showing. More importantly, execs indicated that global consumption of aluminum should improve from 10% to 12 %. That is a 20% improvement, not a 2% improvement. That is sizeable and means economies will be using many forms of the metal. This is positive news. We will be looking for any accounting games in the numbers but at face value they look clean.


Today’s WSJ had several gems in it if you looked for them. In the Money and Investment section there was some dismal information about the Baltic Dry Index. I have mentioned that metric many times here in the SL blog. However I may have misrepresented the number as being the tonnage of cargo shipped internationally. It is in fact an indicator of the daily rate charged for shipping. That rate has collapsed over the last two months. It is actually lower than April 2009 figures. So it could be extrapolated that the global economy is no longer expanding. However, and this is not in the article, rates are determined by availability of tanker. During the economic boom of 06-09, when oil was high and commodities were high possibly due to a dismal dollar, shipbuilders went on a frenzy floating anything they could build. That capacity is now on the high seas creating carrier to carrier competition meaning they are lowering their rates. Henceforth, (cool word- always liked that word) rates are falling and the BDI is collapsing. I would for a while pull this metric out of the leading economic indicator crystal ball.


In the corporate news column there was a little article about MSFT and Fujitsu teaming up on a cloud computing partnership that some say will exploit Fujitsu’s network of global data centers to support MSFT Azure software suite. The announcement will come on Friday. This might be one of those “buy on the rumor (today) sell on the news” (Friday). With MSFT so cheap, it might not be a bad bet.


It’s like they were hiding the good news in the Journal today. They even tried to hide it on the front page. In the lower left had corner they showed a chart from the Organization for Economic Cooperation and Development (OECD) and low a behold 29 of the 30 countries leading economic indicators have continued to rise from a low of 96.7 in March of 2009 to 101.48 in May 2010. The growth has slowed, but it is a 4.9% growth in 14 months which is sizable.


On the inside cover was an interesting article about the size of The US Navy. I highly recommend you take look at this article for the opportunities implied about the future use of drones and remote control war fare as it relates to the size of our Navy Fleet. If you do some homework, you will discover linkage and some interesting speculative plays. (Check out Israeli company ESLT @ 50 a share.)


And then, there was a real interesting article about The Obama Administration addressing the business community to see what obstacles are there to hiring people. Now first let’s take a look who is heading this effort. This policy review committee is driven by The US National Economic Counsel and they probed the Business Roundtable (An organization of the several hundred leading US Businesses from the likes of Allstate and Alcoa to Yahoo and Xerox) on what policies could be changed to improve the employment situation. Heading the US national Economic Committee is of course President Obama, but the director is Lawrence Summers an economist with a questionable backround who has NEVER been responsible for a budget or creating a single job in the private sector. He is assisted by Jason Furman who by his own Whitehouse bio is an economist and an influential policy intellectual. They are helped by one Diana Farrel who was a director or research at McKinsey and Company a lobbyist research resource company. They are joined at their meetings by (I will proved the names and practical work experience in the private sector managing budgets and hiring people since that what this policy review board was intended to do.) Joe Biden NONE if you don’t count a couple of part time jobs while in school), Hillary Rodham Clinton, NONE if you don’t count her time on the Board of Wal-Mart as legal representation) Timothy Geithner, NONE ,

Tom Vilsack NONE, Gary Locke NONE, but managed to put together enough part time jobs and scholarship to make his way through Yale, Hilda Solis NONE (Anyboday seeing a trend here?), Shaun Donovan, he was a Managing Director at Prudential Mortgate overseeing a 1.5 billion dollar portfolio of loans, Ray LaHood who did work his way through school and was director of the Rock Island County Youth Services Bureau, which based upon a newsletter from March 2010, annual proceeds today might be in the neighborhood of $60,000 (that would be thousands) meaning he had some budget responsibilty, Steven Chu physicists NONE, and Kathleen Sebelius has a BA in political science and an MBA in Public Administration NONE.  If you recognize the names from Joe Biden on, That is the White House Cabinet. 

(Sidenote- I got a crisp $100.00 Bill to the first person who can tell me what administration had fewer people from the private sector responsible for a budget or creating jobs on their cabinet.)

Here is what the roundtable came up with:  "FCC controls on broadband Internet, EPA regulation of greenhouse gases, increased taxes on foreign earnings, shareholder rights to nominate directors,
new requirements on derivatives trading, end to secret ballots in union elections, expanded damages for pay discrimination, uncertainty over new healthcare rules,and  restrictions on drilling".
Source: Business Roundtable I did cut and past that list.

Now we provided this list as a record for what the 54 page document provided to the government might help grow employment.  Let's track what if anything they do with the list.

Salve Lucrum

July 11, 2009 A finger in the wind

BAGAKOAA;

July 11, 2009 A finger in the wind


Last week was a holiday shortened week. But it was positive for no real compelling reason. It could be people are hoping for a positive earnings season which starts next week. Only people driving the market up 5.5% are not people like you and I who are buying 10 shares of AAPL or maybe a big bet like 100 shares of Boeing. These are people moving millions of shares and billions of dollars and have all kinds of info that you and I are not privy to. In order to move the market 5% in a 4 day week, it was more than hopes and dreams at work. Again it could be knowledge of some promising earnings release (more on that later) or just the fact that the market might have been oversold by 2-3 points. Friday's action was only up a half a point and I am pretty sure it was on Cramer and I doing the trading as volume was really really really light. Although we pay good money for the info, Cramer was buying during the up last week. Boeing, Johnson Controls, Nucor, INTC, Accenture, MCD position were all added to during the ride up. He gave one of the most thorough updates of each of his holding in the Street.Com Action Alert Plus portfolios. It is a great read and if you have a few bucks in the market the subscription might be worth it. He rates all of the stocks in his holdings right now as well as his operational prognostications about the future.


We did have a slightly disappointing inventory report on Friday, but the market seem to take it in stride. And if you looked real close, The bank of Korea raised its prime interest rate .25% which makes it about the fifth Asian bank to bump rates. That is a good sign as it means they have confidence in the durability of the recovery.


I had to read my Barron’s on line again, one of the few down sides of being in Utah over the weekends in the summer. Alan Ableson’s opening article was fun and entertaining but not much help from an investment point of view. He talked about the "death cross" when the 50 day moving average cross downwards through the 200 day moving average. Then he goes on to explain it is only a 50% reliant technical tell? Thanks Alan. Then he ranted about Blagojevich of Illinois Governor fame and how his actions over the last tow year we good examples of stimulating the economy. Thanks Alaln. Then he spoke about the Russian US spy swap. Thanks Alan. Then he had some dismal info (accurate but dismal) about the state of real estate mortgages in the US. This was the only investment worthy info he shared. He’ll be back to normal next week.


Then Tom Sullivan had a great article about how and why people who have divested into bonds and bond funds might want to consider that their risk increases as bond yields fall especially if they are in bond based mutual funds. He suggest looking for the safe exits such as moving from bond funds to quality bonds and if you are in bonds consider that actually stocks behind those bonds if they a re throwing a good dividend. Great food for thought.


We have been telling you for weeks now that Monday is the big day. The new earnings season is upon us. For us it’s kinda like a second spring. We got our butts handed to us in the second quarter with most indexes down 10-14% (Would have been worse for not the 5.4% week we had last week. Our guess was 2.5-3%). But now we must batten down the hatches because very indication is that IF and it is a big IF we can see some decent earnings in the next week we will see the continuation of the long term cyclical bull rally that started a year ago March or a mini bull rally in the midst of a cyclical bear market that started in February (19th according to my charts). Either way IF we see some earnings strength, we could see some upward movement for a couple of months as it should drag in more individual investor money as well as big boy money. And the games begin tomorrow.


Monday we have the “Gentlemen start your engines” earnings report with AA Alcoa. Friday we missed what could have been a real tell as to what earnings will bring as AA was up 2% on Friday’s market. Get you butt’s up early and see what it does in pre-market trading. If you visit Edgar Sec Filings for the company you’ll read they have sold off some of their dog operations and focused manufacturing where cost are significantly lower. (It takes Gobs and Gobs of water and electricity to make one roll of aluminum foil.) That should help last quarter earnings. BA Boeing demand has to have had a great impact on revenues and should carry so into the balance of the next 12-18 months. Unfortunately the cost of aluminum is determined by global traders who trade the commodity on the London Metals Exchange and because of energy costs having gone down and new sources of bauxite coming on line the commodity has take a big hit in the last 12 months (Down about 50%). If we are in a global recovery (the verdict is still out), AA is well positioned to benefit from increased demand and commodity costs. The big question is will they hit the consensus figure of 12 cents a share. I am thinking they will. They should hit a 14, but that will probably be enough to get the market excited. We do not own AA and have a real hard time seeing the 11 dollar value. Quite honestly, their fundamental are a bit scary. Income is weak, free cash flow is non existent, the dividend (3 cents a share) is a joke, and long term debt looks like a (ORP) project’s balance sheet. (Obama, Reid, Pelosi). This would be a good buy at 9 a share and expensive at 12. It is too close to 12 for our liking. If you are a gambler, you could buy some long term 10.00 calls (Leaps meaning out to Jan 2012). Otherwise just watch the number and see what happens tomorrow.


Tuesday we have INTC, Intel. As you know, between calls and longs it is one of our largest holdings. We took an unintentional buy lucrative profit in INTC the day of the flash crash. We re-establish our position and then some so we are hoping that 43 cents a share will be a no brainer. We are liking the competitive moat around INTC each day it takes market share from AMD (Reporting Thursday). If you do the linkage again, MSFT is saying they are moving quite a few Window 7 programs. How does MSFT sell soft ware? Yeah you might see a few go out the door at Staples and BBY, but the majority of their tonnage comes from on board installation in CPU or boxes as we call them. That means that boxes are selling fairly well or better than they have been in some time. So if boxes are selling box makers (DELL, HPQ, ACER etc) are buying chips and we are not talking Lays. Look for a neat beat of the 43. I am hoping for a blow out 50 cents a share. We will be taking some profit if that occurs. If not we will be buying more on any dip. INTC and ARMH are the two best chip plays going.


Speaking of potato chips and fast food. YUM reports on Tuesday. (See why I love the new earnings season. YUM is a group of fast food companies and a direct competitor to MCD. Think Taco Bell, KFC, and Pizza Hut. (Don’t worry Sharon, reading those names will not increase your BMI.) I do not follow YUM that closely as we are well entrenched in MCD. We thought the 43-44 it hit in April was real rich/ The current value of 40 is a fair value but not a bargain, unless they have a blow out quarter and some strong forward looking statements. They need to hit 54 cent a share. My guess is, keeping in mind we don’t follow the stock, 52 cents, a small disappointment. Now watch this close because if we are right, you will see a dip in YUM which will bring down the sector including MCD which reports on the 23rd. MCD should not have a problem hitting their 1.12 a share UNLESS the Whacko Jacko Euro currency adjustments are bigger than most analysts expect.


Wednesday we have Marriot MAR reporting. This is overpriced because of its global brand name. Business travel is just starting to come back, they have not adjusted some of the real estate values on their balance sheets, and that brand is getting a little long in the tooth. At 31 its ten time book value and as we just said a questionable book value. MAR will come in at 20 cents a share versus the needed 28 and look for a one point correction.


Thursday JPM reports. The banking finance sector is all over the board right now. They are looking for 72 cents a share. We followed this in 09 as we had some preferred. We are focused on BAC, (Which reports on Friday), C, and WFC. The stock closed up a point and half on Friday which could be a tell of earnings. The stock has some 60 dollar values out there, but because of the Washington DC witch hunt for big bad banker the stock is selling at 38 a share. We think that 72 is possible and maybe a bit low. Look for 75 and a nice bump in the Financials.


AMD reports on Thursday and I mentioned INTC has been taking potato chips out of their lunch back (versus eating their lunch, cool vernacular for taking market share) so I think the miss of 4 versus seven is probably going to sting the stock.


PPG has never been mentioned in this blog and would not be except it is a bit of a bell whether fro the industrial sector. They started out as Pennsylvania Pittsburgh Glass and has since grown to be come one of the world leaders in industrial coatings (Think autos, appliances) and commodity chemicals like chlorine and caustic sodas.) They do have a wide competitive moat because they make such special coatings that customer find it difficult to switch. They are looking for 1,40 a share profit. We do not do enough homework on the stock for a sound guess, but there have been no changes in forward looking statement from the company which were relative strong last quarter and the economic turn around has not been as robust as one might have hoped so I think they will miss and come in at 1.32, a big miss.


Thursday will also see a sleeper with GWW, Grainger. They will easily beat the 1.50 a share number. They are best of breed in this category compared to Westco and Fasental. They have a great supply chain and tremendous control of their costs. Their margins have eroded lately, but that is because they are expanding their product line. If the market did not get whacked to badly, the 1.50 should be a cake walk. Look for 1.60 and a nice bump in the price. Take some profit on this when it happens because 105 is a fair value on the stock. 110 is running a bit rich.


GOOG is the last big boys reporting Thursday. 8 Billion in Cash, No Debt, a true money machine. A P/E of 15. A 29% margin. A return On Equity of 20%. Why don’t I own this stock? I do not have a good answer. It is fairly value at 469 a share as some very credible analysts have 1000-1200 as their target prices. Will they hit the 6.54 a share they are looking for in profit. Heck yeah. Look for a number near 7.00 and the stock will get back to its true fair value of $550. Wish I had a bit more cash.


And Friday, we have one of our holding C CitiGroup hoping to hit a nickel a share profit. It’s happen unless we see some funky adjustments in the accounting footnotes. Again if they hit five cents, it will be good news for the sector so WFC and BAC (which also reports on Friday) should bounce nicely. Mattel reports Friday and should hit the 15 cents a share unless if WMT Wal-Mart had pressure on the toy maker’s margin. We don’t follow MAY so we have little insight to the chances of exceeding the 15 cents a share. Let’s go with that.


BAC, Bank of America will hit the 20 cents a share number on the street. Look for a very strong quarter and some cautionary comments about bank reform. They may also follow Wells and announce a trimming of jobs as a result of the new banking reform. So they will hit their number and even exceed, (we are thinking 24) but the stock will come down on negative comments from management.


Lastly we have GE In march of 09 we loved this stock because we thought it was a 20 dollar stock at 7 a share. We made some money with it and then began to understand the importance of free cash flow and shareholders yield. They have no free cash flow and gobs of debt. This is a 7 dollar stock selling for 15. But that has nothing to do with earnings. They need 27 cents a share to meet expectations. The need about 40 cents a share to make this a 15.00 stock. They will come in short at 13 a share and the market will not like it.


If all goes according to plan we will see more positive earnings than negatives and the market will like and be up 2% again next week. The other wild card in that prognostication will be economic data. Tommorow, Monday is very quiet. Tuesday we have the Int’l trade gap report which is supposed to continue its drop as in last months fashion down about 39 billion. As usual, oil plays a big part in our trade imbalance. Because the dollar got stronger and oil came down over the last month. We are thinking the number might come down more like 40.5 billion. Tuesday we get a peak at the Treasuries undies or should I say fundies. The 10 year average June figure is a surplus of 16 Billion, but last year 09 we had a June deficit of 94 billion. Look for a deficit of about 80 billion. The expectations are 70 billion, but we are not that optimistic. Wednesday we have a new retails sales number. Last month they fell 1.2%. we had some mixed but positive next last week in a couple of retail related reports. Look for a nice surprise. They are expecting a drop of .2%. We are thinking a positive .1% and the market will like it. PPI reports on Thursday and expect little change. No one is talking about inflation at the moment. Industrial production reports on Thursday and the forecasts are not pretty. Both the production number and the utilization rate are expected to be down (-.02% and 74%). We are a bit more optimistic on the production umber but not the utilization number. (our guess is 0% and 74%). Friday is CPI and again it is a non number. Once Wal-Mart starts raising prices, and they will because they have squeezed the life out of china then we will see the PPI and CPI increase and get some long needed inflation.

Salve Lucrum