June 14, 2010 Linkage Is Our Friend

BAGAKOAA;


June 14, 2010 Linkage Is Our Friend


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


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


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


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


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


“Follow The Links”


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


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


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


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


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


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

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


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


Salve Lucrum

BAGAKOAA June 2, 2010 One Barrel, Two Barrel, Three Barrel, Four

BAGAKOAA;

June 2, 2010 One Barrel, Two Barrel, Three Barrel, Four


We got a house and a car today. There was good news on the pending home sales number which was up 6% after being up 7% the month earlier. Auto sales were strong as well. This was enough, strangely enough to kick all the market up about 2%. Of the 14 equities in the portfolio, all were up today except our new position in ACN. Accenture was down a few cents today because of their heavy weighted European business base. Cramer even sent out a special alert today saying not too worry and I agree. Gold and silver, which we hold was down, but again that was more due to the strength of the dollar than true demand issues. In fact we might pick up more gold in the GLD etf in pre market trading tomorrow if the opening shows more weakness.


The leak in the gulf is a huge wake up call. Without pontificating, I feel it may be the wake up call we all need to reevaluate where our next abundant supply of energy will come from. Think about it. Norway, Saudi, North America, parts of South America and parts of Asia are implementing or considering implementing moratoriums on deep water drilling. That means (the possible end or TransOcean as we know it), but also the last round of easy money oil is off limits for a while. The next abundant oil source is shale oil, but that is really messy business. As the current supply of oil gets used up, we as a country and I would expect the world will migrate towards the next most abundant, relatively clean, relatively safe energy source, Natural Gas.  Take a look at nat gas ETFs.


If you agree, how do you make money on that premise. Yesterday’s WSJ had a great article about fuel storage companies. In essence the article by Lananh Nguyen explains that commodity traders have been hoarding oil for months now and there is a premium for storage production facilities. This trend should continue a while longer as oil should stay below 75 bucks a barrel. As the commodity creeps up these traders will start unloading the black stuff. The two elements of this scheme is that construction costs are low for building the storage facilities and the price of oil will increase at some time in the future. Now the giant in the industry is Vopak out of Amsterdam. Unfortunately there are no US ADR available to trade because if you do the homework on Reuters’ or FT, their fundies look real pretty. Another possible play is Noble Energy NE.


It has an attractive value at 5.9 times earnings, but has some drilling and exploration exposure besides its storage capacity. Another interesting play is NuStar energy which is a stronger storage play, but its financials are not quite as pretty. At 16 times earning it is more expensive, BUT its throwing a nice dividend at 7+%. Keep in mind both of this were up big today on the market advance. Do your homework and wait a day or two to see if there is a correction down a bit. We own neither but a looking very close at them.


Let the four winds blow BUT, we have our first tropical storm of the season. So far more than 180 people have perished as a result of this beast hitting the Central American coast between Guatemala and Mexico. I only share this info as I am sure we won’t hear about it here in the states until the wind blows down a tree atop of someone’s Lexus.


I was asked recently if I have a hobby. I like to play golf, but I don’t call it a hobby. In thinking about the question, the stock and portfolio homework I do every night is like a hobby to me, except it helps pay some of the bills. I don’t know of many hobbies that fall into that category. Stamp and coin collecting, I guess might qualify, but even after you do all the homework of findi the right coin at the right price, you have to find a market it for it. The same effort could be put into finding a good stock or bond, making the investment, and then with a couple of clicks, you tell a bunch a million people that you want to sell at a price you determine. Some friends of mine have favorites sporting teams they follow and it takes them hours a week to know all the players and the stats, but you can’t make money on that info. (Trust me I know as I spent 13 years in Las Vegas one night.) So yes I have a hobby that let’s me keep abreast of the market, keeps me up to speed on relevant news, keeps me informed of the macroeconomic information I need to be a good boss, and so far has made me some decent returns. It’s a good hobby. Now get out there and make some money.

Salve Lucrum