Passion for Stocks and Life

Short squeeze on GMCR's earnings

2012-02-02T14:25:00.001-05:00

As I am writing, the shares price of Green Mountain Coffee (GMCR) soared by over 22% to $65.81 following its earnings release yesterday.

The once enamored star had been brutally attacked, not the least, by a high profile bashing of the renowned hedge fund manager, David Einhorn in October, sending the shares plummet from over $100 to as low as $37.

Yesterday, the company's announcement of a 102% rise in sales and a stunning 526% increase in operating income seemed to have garnered some confidence. The call did sooth the nerves of investors who were worried about the growth potential of the Keurig system and K-cup pack sales.

The Keurig system and K-cup did not seem the least bit losing momentum. "Our brewer sales in the first quarter of fiscal year 2012 were above our expectations, with approximately 4.2 million brewers sold by the combination of GMCR and our licensed partners. That total is more than half of the 6.5 million brewers sold in all of our fiscal year 2011," said Blanford, the CEO of GMCR. Taking away the effect of the acquisition of Van Houtte that contributed 13% increase in K-Cup pack sales, the company managed to raise the price point of K-cup by as much as 21% (talk about pricing power) and brought in a whopping 81% rise in sales volume.

The inventory was cited by critics as an issue. According to the management, it was a deliberate effort to meet the increase in demand. In the quarter ended December 31, 2011, inventories were $606.7 million compared to $269.1 million at December 25, 2010. However, more than half of the increase was due to a 266% increase in raw materials, most notably from an increase in green coffee volume and a 44% average green coffee cost increase. Combined with the growth in sales, a $162.4 million increase in finished goods inventory was hardly a sign of slowing sales.

With a current market in the mode to chase "growth", GMCR, with "growth" written all over its head, is back to the game. This is not all without caveats though. The management guided a 60-65% growth in net sales for the fiscal year of 2012. Given a 102% growth in the first quarter, investors who was looking for super growth above the company's past 3 years (75% compound annual growth rate) could very well be disappointed.

Disclosure: I do not have any position of GMCR in our personal account.

It's time for a uranium rebound?

2012-02-01T13:39:00.001-05:00

Source: Press Release from Paragon Financial Limited – Wed, Jan 25, 2012 8:20 AM EST

"The Global X Uranium ETF, which holds over 20 uranium stocks, has surged more than 25 percent over the last month as positive guidance from some of the industry's largest players has renewed investor optimism in the sector. In addition, recent remarks from Chinese Prime Minister, Wen Jaibao have highlighted the country's intentions to focus on nuclear energy and limit its use of coal......................

China's primary economic planning agency, The National Development and Reform Commission, estimates that China can expand its current nuclear capacity of 10.8 gigawatts to between 70 and 80 gigawatts by 2020. According to the U.S. Energy Information's International Energy Outlook for 2011, China intends to add 106 GW of nuclear capacity by 2035. China plans to have 40 reactors by 2020 and, by 2030, enough additional reactors to generate more power than all 104 reactors in the US. In early 2011, following the tragic meltdown of the Fukushima Energy Plant, the Chinese State Council temporarily halted the construction of 27 nuclear power plants declaring the need for new safety regulations. During the delay, China re-assessed the safety of its planned and approved Generation-II reactor projects. "

My watch list: URS, URZ, URRE, USU, CCJ, DNN

My notes: I am not a chartist but these stocks' charts look stretched in the very short term. The risk/reward of entering the play now is not favorable. However, this is a policy change that is important enough to lift a relatively small sector, thus worth noting and finding opportunities for building some small positions.

Disclosure: I do not have any position of the above stocks in my personal account.

Stocks and the Economy: Economic Slowdown?

2011-08-03T22:08:00.000-04:00

Stocks and the Economy: Economic Slowdown?: "July manufacturing and non-manufacturing survey released by the Institute of Supply Management (ISM) pointed to a worrisome outlook of the ..."

Which stocks get hit by the budget cut? Part II

2011-08-02T21:36:00.001-04:00

As the debt deal came to a close, most started to worry about ramifications of budget cuts on the economy. Most of the cuts will not take place until 2014. discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut $21 billion in 2012 and $42 billion in 2013, according to an analysis by the Congressional Budget Office. The spending cuts wouldthen increase to $75 billion in 2015 and $156 billion in 2021. Overall, the first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion. One condition that popped out involved defense spending. If lawmakers fail to reach a deal on a second round of cuts, the Pentagon's budget would be cut automatically by about $500 billion.

Defense-related stock prices such as General Dynamics (GD), Lockheed Martin (LMT), etc, had been shedding since July, anticipating such budget cuts.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author may have released this information prior to this post to affiliates or parties that have financial interests in trading on this information. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of August 2, 2011

Which stocks get hit by the budget cut? Part I

2011-08-02T20:21:00.001-04:00

While budget cuts are inevitable following the debt ceiling deal, the Centers for Medicare and Medicaid Services surprised the market on Friday that it planned to reduce payments to skilled-nursing facilities by 11.1% for fiscal 2012, cutting $3.87 billion out of the spending plan. The 11% was much larger than the 5-6% that was anticipated. CMS said in a note Friday that the rates “correct for an unintended spike in payment levels and better align Medicare payments with costs.”

The news hit nursing and healthcare facilities. Catching the eyeball was Sun Healthcare Group (SUNH) which dropped more than 50% in a day. Others hard hit by the news included Skilled Healthcare Group Inc.(SKH), Kindred Healthcare Inc. (KND), Ensign Group Inc.(ENSG) , National Healthcare Corp. (NHC) , Five Star Quality Care Inc. (FVE). Real Estates Investment Trusts (REITs) that cater to nursing and healthcare facilities did not escape the slump. Omega Healthcare Investors (OHI) , Health Care REIT Inc. (HCN) , HCP Inc. (HCP) all lost more than 6% on Monday.

General care hospitals soon joined the slump as the market anticipated further Medicare/Medicaid cut would involve this group that included HCA Holdings Inc. (HCA), Community Health Systems Inc.(CYH) and Universal Health Services Inc. (UHS).

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author may have released this information prior to this post to affiliates or parties that have financial interests in trading on this information. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of August 2, 2011

可乐股吧 Coke and King Kong: 天然气汽车-初步涉猎

2011-07-14T21:59:00.000-04:00

可乐股吧 Coke and King Kong: 天然气汽车-初步涉猎

Coke wrote on stocks related to natural gas engines/vehicles

Citigroup Bullish on Potash

2011-07-14T11:46:00.000-04:00

I ran into a useful excerpt from the Business Insider that I would like to share with you:

With potash prices riding high, and fertilizer fundamentals growing strong, Potash Corp (POT), is expected to have a strong second half this year.
Citi analyst P.J. Juvekar explains why:

•Fall is expected to be a strong season for fertilizers after Spring application came in 10% lower that expected because of a slow start to planting. With grain prices riding high, farmers are expected to usmore fertilizers to maximize yields.

•Supply of Chinese diammonium phosphates (DAP) and urea exports may be restricted because of the nation's sliding scale tariff policy. Urea exports are projected to decline to 5 million metric tons, from previous 7mmt, while DAP exports are expected to fall to 2mmt from 4mmt last year.

•The DAP market is also expected to be tight because of a ruling that has barred phosphate mining company Mosaic from mining in South Fort Meade. The Mosaic Company (MOS) may also have to buy large quantities of phosphate rock which is likely to constrain the market making room for Potash Corp (POT).

•Rising spot prices and the floor price for potash set by the China contract bode are expected to maintain price momentum. India imports all of its potash but even with a lack of contract settlement there, high global demand has kept the market tight. Potash Corp is looking for $590/st price for shipments later this year and expectations are that a portion new prices will be accepted by Q4.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author may have released this information prior to this post to affiliates or parties that have financial interests in trading on this information. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of July 14,2011.

可乐股吧 Coke and King Kong: Coinstar 能从Netflix消息得利吗？

2011-07-13T23:31:00.000-04:00

可乐股吧 Coke and King Kong: Coinstar 能从Netflix消息得利吗？

Alcoa's earnings and the global economy

2011-07-13T13:29:00.001-04:00

Alcoa (AA), the largest aluminium producer in the world is broadly viewed as one of the barometers of the global economy. Analysts often look at AA's earnings release for some hints of economic conditions.
The second quarter report was no exception. The shares price of AA fell about 2% preceding the release and did very little after it.

Bulls on the global economy may have found assurance from AA's forecast. For the year, Alcoa projects aluminum demand to grow 12% on top of the 13% growth witnessed in 2010. What is better is that the optimism is broad based, including aerospace (7%), automotive (4-8%), commercial transportation (7-12%), packaging (2-3%), building and construction (1-3%), and industrial gas turbines (5-10%). According to Alcoa, aluminum demand would double by 2020 from 2010 on 6.5% annual growth.

By segments,

Alumina - The shipments increased 11.8% year over year to 2.4 million metric tons on production of 4.1 million metric tons. The price of alumina jumped 7%.

Primary Metals - Shipments were 0.7 million metric tons, almost flat with the previous-year quarter. Pricing improved. Production increased by 5% year over year to 0.9 million metric tons.

Flat-Rolled Products - Shipments jumped 24.8% year over year to 0.4 million metric tons. Both Russia and China continued to see positive trends. Besides, third-party volumes were up 41% in Russia and 30% in China compared with the second quarter of 2010.

Engineered Products and Solutions - Shipments surged 23.9% year over year to 0.57 million metric tons. The segment’s strong results were marked by new product developments and productivity improvements.

Obviously all the above results were partially offset by higher energy and raw material prices.

Not everyone shared the optimism. Citigroup analyst, Brian Yu lowered his 2011 earnings estimate to $1.21 from $1.25 per share and his 2012 estimate to $1.35 from $1.43, citing higher-than-expected input prices. Yu estimates that cash costs in the company's primary metals group averaged $1.11 per pound in the second quarter. He notes that if other producers are seeing the same high prices, then current aluminum prices are too low to offset them. He believes these cost pressures are continuing in the third quarter.

My takes:
AA's earnings release echoed another economic bellweather Fedex (FDX)'s earnings release that indicated that impacts on profit margins were contained. However, if oil prices stay stubbornly above $80 for the rest of the year, smaller companies that do not have global presense may not be in the same shoes.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of July 13, 2011

Stocks and the Economy: The Timeline of The Fed's Exit Strategies

2011-07-13T11:13:00.000-04:00

Stocks and the Economy: The Timeline of The Fed's Exit Strategies: "From the June FOMC meeting minutes , Step 1 : cease reinvesting some or all payments of principal on the securities holdings in Special Ope..."

可乐股吧 Coke and King Kong: 咖啡股经

2011-07-11T14:32:00.000-04:00

可乐股吧 Coke and King Kong: 咖啡股经

GMCR, SBUX, JVA, PEET, CBOU, FARM. Coke wrote about coffee stocks stories in 2011.

Corn prices caught a break from China

2011-07-08T22:30:00.000-04:00

In a previous post, corn (futures) prices plummeted on a USDA survey that reported more acreage planted than anticipated. July corn futures price dived from almost $8 to as low as $6.15. This sharp dive in crop prices also dragged down most of the agriculture-related stocks.

However, corn prices rebounced sharply to $6.75 after a report from USDA on US trade data and exports sales released on Wednesday and Friday respectively revealed that China bought 540,000 metric tons of corn from the US just last week, much more than the USDA's forecast of 500,000 tons for the whole year.

China is known to be the largest corn consuming country in the world. However, its timing to import corn has been elusive. USDA, as well as analysts will fumble to revise their exports estimates to China upward significantly.

From Wall Street Journal

The USDA is slated to update its outlook for China's corn imports in a crop report Tuesday. The agency will likely raise the forecast by 3 million to 4 million tons, said Shawn McCambridge, senior grains analyst at Jefferies Bache, a brokerage in Chicago.

USDA chief economist Joe Glauber wouldn't preview next week's report, but said the staff "will certainly be looking at this information" on recent China corn purchases.

"The fact they are in the market is significant," he said. "We expect them to be a bigger and bigger player in the corn market."

Market analysts are also now increasing their China corn import projections. Sudakshina Unnikrishnan of Barclays Capital predicts that China will import about 5 million tons in the 2011-2012 crop year. A month ago, she said she would have forecast about 2 million tons of imports.

"You don't know when or where they are going to make a big splash," said Paul Christopher, international markets strategist at Wells Fargo, "but they will,"

The fact that the Chinese is in the market is certainly bullish for agriculture related stocks such as POT, MOS, AGU, CF.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned positions in her personal account as of July 8, 2011

可乐股吧 Coke and King Kong: Lululemon瑜伽风姿

2011-07-08T17:59:00.000-04:00

Click on the link for more details on LULU:
可乐股吧 Coke and King Kong: Lululemon瑜伽风姿

June 2011 Same Store Sales Scorecard

2011-07-07T22:48:00.000-04:00

Whether it is the overly pessimistic downward revised estimates, or the rather sudden subsiding raw material and gasoline prices, or the unusually dry and hot weather, most retailers reported same store sales that beat analysts' estimates.

Luxury and Strong Brand

Leading the way were luxury and strong brand name retailers. Luxury departmental stores such as Neiman Marcus and Saks 5th Ave (SKS), strong brand superstore such as Costco (COST) and women's clothes, Limited Brands (LTD) whose flagship lingerie stores, Victoria's Secrets reaped a 17% rise in same store sales, all reported double digit same store sales growth.

Teenager brands such as Abercrombie and Fitch (ANF), Aeropostle (ARO), American Eagles (AEO) no longer provide monthly same store sales figures while Buckles reported a 10.4% same store sales growth.

ALL GOOD FROM NOW OR JUST AN ADJUSTMENT OVERDONE?

Just a little over a month ago, shares of retailers, especially apparel and shoe makers were beaten down on costs pressure and profit margin squeeze brought by record raw material prices (leather, cotton,etc) and rising gasoline prices that kept shoppers at home.

Commodity and energy prices went through almost a month of correction. International Energy Association (IEA) together with Obama's administration gave energy prices an ultimatum by releasing strategic petroleum reserves，an unusual move given the circumstances but a strong signal of the authorities's determination to stop the energy and commodity rally. The market got the hint. Analysts very soon picked up optimism as gasoline and cotton prices retreated.

However, as many retailers getting ready to hike their products' prices, some as much as 10-15% to pass on higher costs, will the relief in gasoline and raw material prices be enough and in time to score a good report card for retailers in the summer?

Disclosure: The author does not own any of the above mentioned position in her personal account as of July 7, 2011

可乐股吧 Coke and King Kong: Green Mountain Coffee 和 K-cup

2011-07-06T20:07:00.000-04:00

可乐股吧 Coke and King Kong: Green Mountain Coffee 和 K-cup

Coke wrote on GMCR

可乐股吧 Coke and King Kong: SODASTREAM,自制汽水？

2011-07-05T16:32:00.000-04:00

可乐股吧 Coke and King Kong: SODASTREAM,自制汽水？
Coke wrote about SODA

可乐股吧 Coke and King Kong: Crocs再续

2011-07-05T15:19:00.000-04:00

Coke wrote about CROX
可乐股吧 Coke and King Kong: Crocs再续

Macao Casinos Delivered Again in June

2011-07-03T23:35:00.000-04:00

From Reuters

Macau, the world's largest gambling market, posted an annual 52.4 percent rise in gaming revenue in June to 20.8 billion patacas ($2.6 billion), the Macau government said on Friday, signalling a ravenous gambling appetite from Chinese tourists.

Casino stocks that stand to benefit from a regional presence rallied on Friday : Las Vegas Sands(LVS) up 4.22% today, MGM Resorts (MGM) up 4.16%, Wynn Resorts (WYNN) up 4.26%, Melco Crown Entertainment (MPEL) up 6.03%.

For related articles， please check out the following section:
http://cocacolabuffet.blogspot.com/search/label/Gaming

Disclosure: The blog author does not own any of the above positions in her personal account as of July 3, 2011

Two conflicting cases for fertilizer stocks this week

2011-07-03T23:26:00.000-04:00

Two pieces of news moved stock prices of fertilizer companies this week .

As most of us probably have noticed, stock prices of fertilizer companies move closely together with crop prices (especially corn prices) in the short-term. Surveys by the U.S Agriculture Department (USDA) reported on Thursday that U.S. farmers planted far more corn than expected this growing season. This report sent corn prices plunging and sparked speculation that upward pressure on food prices may be coming to an end. Corn futures for July delivery tumbled to 9.9% to $6.29 a bushel after falling as low as $6.15 on Thursday. Shares of agriculture stocks were affected despite a 4-day rally for Dow Jones Index.

From Wall Street Journal,

USDA's conducted during the first two weeks of June found farmers had planted 92.3 million acres of corn, the second most since World War II after 93.5 million acres in 2007. ..........

As recently as June 9, USDA officials had guessed that excessive rain and widespread flooding this spring limited farmers to 90.7 million acres. But a separate USDA report also found supplies were bigger than expected in early June, signaling relief for food companies, livestock producers and consumers.

In the meantime, fertilizer stocks found strength in Canpotex's success in negotiating a price hike of potash with China. The agreed-upon price of $470 per tonne was $70 higher than last year. Many had expected $450 per tonne. This contract signalled tightness in the supply of potash and continued strong demand from China, the largest fertilizer consuming country in the world.

In my opinion, share prices of fertilizer stocks will go through a streak of volatility and possibly weakness as crop prices, especially corn prices are testing their support. Once corn prices find their support, say, between $5-$6, the tightness in supply of fertilizers should regain importance. After all, it is generally believed that the economics of using fertilizers makes sense as long as corn prices stay above $3.56, soy bean $8.49, wheat $6.73.

Note: Canpotex is a potash consortium formed by Potash Corp (POT), Mosaic (MOS) and Agrium (AGU). It controls 70% of the world potash trade.

Disclosure: The blog author does not own any of the above positions in her personal account as of July 3, 2011

Take aways from Fedex's earnings

2011-06-24T13:13:00.001-04:00

FedEx Corp.(FDX), the world's second-largest package delivery company painted a rather rosy economic picture on Wednesday as it reported a 33 percent increase in earnings for the quarter ended May 31 (its 4th quarter for the fiscal year 2011) in addition to a guidance of per-share earnings growth of 39 to 50 percent for the fiscal year 2012. The company expects the global economy to accelerate in the second half of the year as fuel prices retreat from three-year highs and the Japanese economy recovers. While much of the growth will be driven by China and other developing nations, FDX said the U.S. economy will improve as well.

The company serves as the barometer of the global economy as it transports a variety of goods. FDX expects the U.S. economy to grow 2.5 percent this year and 3 percent in 2012. The company expects U.S. industrial production to grow around 4.2 percent this year and another 4.3 percent next year.

However, as one digs deeper into the statement, FDX's good news may be more of its own growth story rather than a global economic growth story. FDX, after successfully squeezed its European competitor, DHL out of the US market, understandably should enjoy a signficant pricing power sharing a duopolistic market with UPS. FDX, in its last quarter, was able to raise revenue per package by 10%, including raising fuel surcharge. In other words, it was able to pass on higher costs to its customers.

If an increase in transportation cost is widespread , can this be good news to other companies and the economy?

What happens to the economy this week? June 13, 2011

2011-06-16T12:32:00.000-04:00

Manufacturing

Stocks and the Economy: Manufacturing is in contraction: "Two important regional manufacturing indices this week reported contractions in manufacturing. For the first time since November 2010, Empi..."

Prices

Stocks and the Economy: CPI figures mean no more QE3?: "The consumer price index in May grew at a 0.2 percent rate. The core CPI, that excludes energy and food prices, jumped 0.3 percent. Both mea..."

Commercial real estates the next leg down?

2011-06-13T15:07:00.000-04:00

With all the fuss about a slowing economy and increasing tighter capital market with QE2 winding down, one would probably start to find cracks in cyclical sectors, sectors that are most vulnerable should the economy slow.

Commercial real estates (CRE) have historically been one of the most sensitive to economic conditions and capital availability. With the Fed's two rounds of quantitative easing, recovering businesses and confidence among investors, CRE has been able to utilize leverage to significantly improve return on investment. Real-estate research firm Green Street Advisors reported that its index of Midtown Manhattan office-building values is up 88% since its mid-2009 nadir, back to within 15% of their 2007 peak. The index is tilted toward better quality buildings.

Stock market noted this sharp rise in valuation. Dow Jones Equity All REIT Index has almost tripled since the market's low on March 9, 2009. CRE big names like Vornado Realty Trust (VNO), Boston Property (BXP), Simon Property (SPG), has each almost quardupled its share value in March 2009. However, hints of caution have crept in these waves of euphoria. Big players may have started their way to take some chips off the table.

According to a recent article from Wall Street Journal, high-profile office buildings in large cities have been put on the sell block, including Willis Tower in Chicago, Constitution Center in Washington, the Seagram Building in New York, to name a few.

In April, the total value of new sales listings of U.S. office buildings was $8.7 billion, according to real-estate research firm Real Capital Analytics. That was the highest level since 2008. Preliminary data for May show $10 billion in new listings, which would be the highest monthly total since late 2007.......................................................................

The sharp rise in values has come over the past year, a relatively short time frame in the real-estate market. Recent deals include the sale of 750 Seventh Ave. in New York's Times Square by Hines Interests for a surprisingly high $485 million and Beacon Capital Partners' sale of Market Square in Washington for a record $905 a square foot........

Beacon also is considering bringing to market 1211 Ave. of the Americas in coming weeks, for which the company would look to retrieve well above the $1.5 billion that it paid in 2006, according to people familiar with the matter. The 45-story property houses the headquarters of News Corp., publisher of The Wall Street Journal.

This rush to sell is likely to result from worries that there will no longer be easy money, namely easy access to financing. Since April, rallies of high yield corporate bonds and commercial real estates debt came to a halt as yields rose, a sign that lenders now require higher risk premium before they provide the financing. In an article of Wall Street Journal,

Some of the selloff can be attributed to a heavy supply of these bonds, both from the Fed and from companies taking advantage of better market conditions since the crisis. Companies issued a record $114 billion worth of junk bonds through June 2, a 27% increase of the same period last year, according to Standard & Poor's Leveraged Commentary & Data.

"The timing couldn't be worse for the market," said Marina Tukhin, head of asset-backed securities trading at Gleacher Descap in New York, referring to the effect of the Fed's auctions on the mortgage market, which she calls "oversaturated" with troubled assets.

Meanwhile, other measures that gauge the ease of obtaining financing or risk attitude, such as TED spread (the difference between LIBOR and treasury securities yield) has remained quite subdued although its current level is much higher than the one in March. Fundamental wise, most REITs are showing growth in net operating income (NOI) and funds from operations (FFO) which measure strengths in CRE companies.

That said, for those who anticipate no more quantitative easing and a slowdown in the eocnomy, gradually building shorts position in REITs into the summer should provide fairly handsome risk/reward profiles.

Restaurants feel the cost pinch

2011-06-08T12:41:00.004-04:00

Cost pinch is hard to ignore. Whether we are at an isle of supermarket, a clothing store, a gas pump, or sitting down at a restaurant table, trying to enjoy a meal after a day of hard work, signs of inflation are everywhere. Some of us may have noticed a few percent price hikes have been sneaking into restaurant menus here and there.

As discussed in my previous post, rising commodity prices not only have weighed heavily on retailers, but also many other sectors such as restaurants and food manufacturers. Many low-mid end restaurants may find difficulty in throwing a few percentage into the menu without deterring customers. Meanwhile, rising price tags at the gas pump have kept some households eating at home.

Shares of Cracker Barrel Old Country Store (CBRL)have been on a downward trend since May on the company’s weaker-than-expected third-quarter profit, as an only meager improvement in sales could not offset higher commodity costs.

“We are disappointed in our results for the third quarter, as both restaurant and retail sales were below our forecast,” Cracker Barrel CEO Michael Woodhouse said in a statement. “Since many of our customers continue to feel the negative impact of economic conditions, we need to continue to focus our efforts on providing the great food, service, atmosphere and shopping experience that differentiates our brand.”
CRBL is not alone. Shares of fushion-concept restaurant chain, PF Chang (PFCB) shedded more than 10% on its earnings report in which the management warned about higher costs eating into its profits.
McDonald's(MCD) and Starbucks(SBUX) also said in March that rising commodity costs were eating into their bottom lines.

I expect more of these announcement to come in summer. Lower end restaurants and those that have less-than-spectacular brand names and sales will get hit the hardest. Off the top of my head, Dine Equity (DIN) that runs Applebees and IHOP will see its bottomline eroded due to IHOP's relatively low income customer demographic despite relatively strong results from Applebees. Brinker's (EAT) that runs Chilli's and Maggiono's should see itself being dragged down by Chilli's who may not be able to turnaround its brand strong enough to have loyal customers who do not mind paying a few more bucks.

For related posts on cost pinch, please see the following:
Retailers feeling the cost pinch
A shorts list of retailers
Retailers the next leg to fall

Disclosure: The author does not have any of the above mentioned positions as of June 9, 2011

Potential Increase in Coal Imports to China

2011-06-06T14:55:00.000-04:00

Amidst big sell-offs of material stocks, the possibility of reduced tariffs and port charges may offer a reason to feel a little better about coal companies or even a good opportunity to accumulate coal stocks before Chinese announcement for ardent coal bulls.

From Investors' Business Daily,

Yanzhou Coal Mining (YZC) and L&L Energy (LLEN) led a sell-off among China-based coal producers. But some U.S. coal producers gained ground, led by Peabody Energy (BTU) and Consol Energy (CNX).

China's miners fell on reports that the country's National Development and Reform Commission is "studying adjustments of VAT (value-added tax) and port charges relating to coal imports.

"The country's energy commodity imports have declined recently, despite coal shortages and a looming electricity shortfall heading into the high-demand summer season. Analysts say lower tariffs and port charges could encourage more imports, helping hold down prices in China's tight coal market..........................

Although China does import U.S. metallurgical coal for use in steel production, chances are slim that it will turn to North America for more thermal coal, according to analyst Meredith Bandy with BMO Capital Markets. China likelier will buy coal from Australia and other sources that otherwise would end up in Europe. The Europeans probably would make up the difference via purchases from the U.S. Peabody could profit via the Australian and U.S. channels. "Peabody is the U.S. stock that would most directly benefit," Bandy said. "About half their value comes from Australian operations."

On the metallurgical side of the business, miners like Walter Energy (WLT) also face a potential windfall.

On the side, some analysts are betting on labor strikes in Australia to boost shares of coal companies.

Australian miners voted Thursday to give their unions the right to strike. The unions are in negotiations with BHP Billiton (BHP)-Mitsubishi Alliance, the world's largest producer of seaborne met coal."If this strike occurs — and we don't know that it will, but if it does — these met coal guys will probably go crazy," Bandy said.

Disclosure: The author of this post does not own any positions of the above mentioned stocks as of June 7, 2011

Same store sales in May mostly disappointed

2011-06-02T15:38:00.000-04:00

It's the monthly round-up of same store sales (aka comparable-store sales) again. Same store sales is an important metric of the health of retail businesses. It compares the sales of a store open for at least a year with the figure a year ago. This metric thus excludes sales of new openings and closings.

From Benzinga.com

Costco Wholesale Corp (COST) reported a 13% rise in its May comparable-store sales on Thursday. The retailer's net sales surged 17% to $7.14 billion, from $6.09 billion in the year-ago month. However, analysts expected same-store sales to rise 11.2% for the month. Its same-store sales increased 11% in the US and 21% internationally. Excluding higher gasoline prices and the positive effect of stronger foreign currencies against the US dollar, Costco's same-store sales climbed 7% for the month.

Target Corp (TGT) reported a 2.8% rise in its May same-store sales on Thursday. Analysts were expecting same-store sales to increase 3.5%. Its net sales for the four weeks ended May 28 surged 3.8% to $$4.8 billion.

Dillard's Inc (DDS ) reported a 2% increase in its May same-store sales on Thursday. Dillard's total sales for the four weeks ended May 28 surged 2% to $434.7 million. However, analysts were expecting same-store sales to increase 3.5%.

The Gap Inc (GPS) reported a 4% drop in its May same-store sales. Gap's net sales came in at $1.06 billion, versus $1.05 billion, in the year-ago quarter. Analysts were expecting a 1% fall in comparable sales. Gap North America's comparable sales dropped 4%, while its international same-store sales dipped 9%.
Ross Stores Inc (ROST) reported a 4% rise in its May same-store sales on Thursday. ROST's total sales for the four weeks ended May 28 climbed 8% to $661 million. However, analysts were expecting same-store sales to climb 3.8%.

Nordstrom Inc (JWN) reported a 7.4% rise in its May same-store sales on Thursday. Nordstrom's total retail sales for the four-week period ended May 28 climbed 13% to $796 million. Analysts were expecting same-store sales to increase 5.9%.

Stage Stores Inc (SSI) reported a 1.1% rise in its May same-store sales on Thursday. SSI's May same-store sales surged to $117 million. However, analysts were expecting a 3% rise in same-store sales.

Pier 1 Imports Inc (PIR ) reported a 10.2% surge in its comparable-store sales for the quarter. PIR's total sales climbed 9.5% to $335 million, from $306 million in the year-ago period. The retailer projects its FQ1 net income of $0.11 to $0.12 per share, up from $0.07 per share, in the year-ago quarter. However, analysts expected net income of $0.09 per share for the quarter ended May 29.

Limited Brands Inc (LTD) reported a 6% rise in its May same-store sales on Thursday. Analysts were expecting same-store sales to increase 7%.Its net sales for the four weeks ended May 28 surged to $717.4 million from $657.3 million.

The Buckle Inc (BKE) reported that same-store net sales for May 28 surged 8.8%. Net sales for the four-week fiscal month ended May 28, 2011 increased 12.7 percent to $68.1 million from net sales of $60.4 million for the prior year four-week fiscal month ended May 29, 2010.

The Wet Seal Inc (WTSLA) reported a 2.9% rise in its May comparable store sales.

Kohl's Corporation (KSS) reported a 0.8% rise in its May same-store sales. KSS reported that its total sales increased 2.5 percent for the four-week month ended May 28, 2011.

Rite Aid Corporation (RAD) reported a 1.3% rise in its May same-store sales. However, analysts expected a rise of 1.5%.

Fred's Inc (FRED) reported a 0.2% rise its comparable store sales for the four-week fiscal month of May, which ended May 28, 2011. Fred's total sales for the month increased 1% to $143.5 million from $141.5 million in May 2010.

Saks Incorporated (SKS) reported that owned sales totaled $208.2 million for the four weeks ended May 28, 2011 compared to $177.5 million for the four weeks ended May 29, 2010, a 17.3% increase. Comparable store sales increased 20.2% for the month.

The TJX Companies Inc (TJX) reported May 2011 sales at $1.7 billion, up 7% over the $1.6 billion achieved during the four-week period ended May 29, 2010. Its consolidated comparable store sales increased 2%.

The Bon-Ton Stores Inc (BONT) reported a 2.3% decline in its comparable store sales for the four weeks ended May 28, 2011. Total sales decreased 2.9% to $181.0 million for the four weeks compared with $186.5 million for the prior year period.

Why Are Education Stocks So Strong?

2011-06-02T14:00:00.000-04:00

For-profit education stocks surged against a rather gloomy broader market. These companies claimed a victory on Gainful Employment Rules that are much more lenient than expected.

From Star Tribune

The stock of Corinthian College (COCO), which runs The Everest Institute, a chain of medical field for-profits with a location in Eagan, was up 30 percent by mid-day. The Apollo Group (APOL), parent company of the University of Phoenix, was up 10 percent.
Minneapolis-based Capella Education Company (CPLA) watched its stock climb nearly 4 percent. Capella enjoys a good reputation and has not been linked to any of the bad practices that sparked the gainful employment rules. After a long wait, the U.S. Department of Education has issued rules that require public and private colleges which offer career education to prove that they are preparing students for "gainful employment."

The regulations come in reaction to reports of high tuition charges, high pressure sales tactics, high dropout rates and job placements that don't pay enough for students to pay back federally insured loans if they do graduate and find work..................

If students default on government loans, taxpayers must pick up the tab..................................

What are outlined in Gainful Employment Rules?

To qualify for federal aid, the new rules require that "most for-profit programs and certificate programs at nonprofit and public institutions prepare students for gainful employment in a recognized occupation," the education department announced. "A program would be considered to lead to gainful employment if it meets at least one of the following three metrics: at least 35 percent of former students are repaying their loans; the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income; or the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings."

Schools with programs that don't meet those criteria will have until 2015 to bring them into compliance or risk losing access to federal money to pay for students in the program.

Why are casino stocks relatively strong?

2011-06-01T18:42:00.000-04:00

While Dow Jones Index dropped more than 2% today, casino stocks that have exposures to Macao held up quite nicely. MPEL was up 5%, LVS was up 1% while WYNN was down less than 1% . MGM, another casino operator that has much smaller shares in Macao than the other three dropped together with the rest of the market.

The source of strength was likely to have come from gaming revenue statistics released by the Gaming Inspection and Coordination Bureau of Macao. According to Wall Street Journal,

Gambling revenue in Macau rose 42% in May from a year earlier, government statistics issued Wednesday show, as the opening of a massive new casino resort last month helped revenue rise to a record high for the fourth month in a row.....................................

Gambling revenue in the Chinese territory rose to 24.31 billion patacas ($3 billion) last month, up from 17.08 billion patacas a year earlier, according to data from Macau's Gaming Inspection and Coordination Bureau. The May figure was 19% more than the last monthly record of 20.51 billion patacas set in April. In the year to May 31, Macau's gambling revenue was up 43%, following a 58% surge for the whole of last year.

Following the data, RBS analyst Philip Tulk said he will need to raise his current forecast for Macau's gambling revenue to grow 28% in 2011. CLSA analyst Huei Suen Ng noted Macau's May revenue alone was equal to almost half the house's $6.5 billion forecast for the Las Vegas Strip's gambling revenue for 2011. .......................................

Analyst Billy Ng said the strong growth was partly due to the May 15 opening of Galaxy Entertainment Group Ltd.'s new casino resort in Macau's Cotai area.

"We see Galaxy Macau driving traffic and injecting new VIP liquidity, with growth in both mass (market) and VIP for the rest of 2011," Mr. Ng wrote.

Divergence between high and low-end retailers

2011-05-28T16:11:00.002-04:00

Mentioned in a previous post, many retailers suffered cost pinch. Rising raw materials costs have eaten into the profit margin of retailers. Higher gasoline prices have slowed shopping traffic. In addition, slow economic growth has rendered it hard for retailers to pass on higher costs to customers. The hardest hit sofar have been low to mid end retailers including teenager apparels. However, high-end and luxury goods retailers have sofar dodged the bullets.

According to Associated Press,

High-end jewellers, Tiffany & Co (TIF) reported a 25% jumped in first quarter profits from a year ago across all regions, including even the calamity striken Japan.

According to Sales in Japan rose 7 percent to $123.4 million. However excluding the stronger yen, sales fell 3 percent. Still, that was better than Tiffany expected.

Revenue in the Americas, Tiffany's largest region, rose 19 percent to $374.7 million. The region includes the U.S., Canada and Latin America. Revenue from stores open at least one year rose 17 percent, including a 23 percent jump at Tiffany's flagship store in New York, a mecca for tourists.

Revenue in Asia-Pacific rose 37 percent to $167.2 million. In Europe, revenue rose by a quarter to $85.6 million.

While some had speculated results in Hawaii and Guam might suffer from fewer Japanese tourists, the six-store region's revenue in stores open at least one year actually rose 30 percent.

The company does not have problem passing on costs to customers.

High precious metal and diamond costs caused Tiffany to raise prices earlier this year, and Tiffany said it may raise prices again in various categories and regions to offset the higher costs. "But the rising prices have not deterred shoppers," Investor Relations Vice President Mark Aaron said.

..............."Customers are certainly aware of rising commodity costs and we have not experienced any meaningful resistance to higher prices," he said.

Interestingly, lower priced items such as silver jewelry's growth is constrained

The U.S. economic environment that is affecting spending by some of our silver jewelry customers at entry-level price points will likely remain challenging for a while," Aaron said.

Tiffany's results are echoed by other luxury retailers such as Coach (COH), Neiman Marcus that owns Neiman Marcus and Bergdolf Goodman, Signet (SIG) that operates Kay Jewelers.

Will the divergence persist through this difficult time for retailers or we will see convergence at the downside soon?

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned positions in her personal account as of May 28, 2011.

Crop prices rise

2011-05-26T22:17:00.002-04:00

As the market went through a couple of weeks of choppy and mostly downward sessions, shares of fertilizers companies such as POT, MOS, CF seems to have navigated it quite smoothly these few days. One of the key reasons is prices of crops such as corn, wheat, soy bean have resumed upward trend again after participating the commodity sell-off in the last couple of weeks. The much talked about planting delays in North America since April has finally taken a toll on crop futures prices.

From Agriculture.com,

Time is running short for John Brink to plant his corn crop.

The southern Illinois farmer had put just about 7% of the crop in the ground as of Friday following weeks of delays due to rain. This is a sharp contrast from typical years, when he would normally have finished planting already.

"We are way behind," he said via cellphone from one of his fields.
Farmers across the Midwest have similar stories. Wet weather has kept them out of their fields and pushed corn prices back near all-time highs set last month.

The clock is clicking. If the weather is not clearing up soon, farmers may have to give up planting this season altogether. Corn futures price July contract is on its way to break historic high. Again. Shares of fertilizer companies, farming machinery companies are almost in tandem with crop prices , especially corn prices, in the last few months. Although my conjecture is that the broader market may face a bumpy road into the summer, and most likely a downward one, shares of agricultre-related companies can find some support in strong crop prices, albeit with increased volatility.

To see relationships between crop prices and fertilizer companies, please see related posts:
3 cases for POT

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned positions in her personal account as of May 26, 2011.

Unrevised GDP Figure Disappoints

2011-05-26T15:02:00.001-04:00

Economic growth remains anemic with the year-over-year GDP growth well lower than 3%, a rate that is believed to be the critical to sustainable improvement in the job market.

From Wall Street Journal

The economy did not get the hoped for upgrade for the start of the year. The Commerce Department's second estimate for quarter GDP growth was unrevised at up 1.8 percent annualized and came in lower than the consensus forecast for 2.1 percent. The first quarter remains notably softer than the 3.1 percent pace in the fourth quarter.

Unfortunately, demand numbers were nudged down and inventory investment bumped up. Final sales of domestic product were revised to an annualized 0.6 percent from the initial estimate of 0.8 percent. Final sales to domestic purchasers were revised to 0.7 percent from the original estimate of 0.9 percent annualized. The downward revision to final sales was mainly in personal spending, now at up 2.2 percent instead of the initial 2.7 percent for the first quarter.

For overall relative strength (not merely the direction of revisions), PCEs growth remained moderately healthy. Also, business investment in equipment & software is strong. Inventory investment is positive but levels are still low. Weakness remained in government purchases, nonresidential structures, and net exports.

Even though the headline number was disappointing, odds are that growth will not slow further in coming quarters. Momentum is still favorable for consumer spending, equipment investment, exports, and inventories.

Initial Unemployment Claims Data Are Not Upbeat

2011-05-26T14:56:00.000-04:00

From Wall Street Journal

Initial jobless claims rose 10,000 in the May 21 week to a 424,000 level that's 20,000 higher than expected. Revision to the May 14 week is also a negative, up 5,000 to 414,000. The Labor Department isn't citing any weather or auto-related factors for the results. The four-week average of 438,500 is nearly 30,000 higher than a month ago in a comparison that points to trouble for the May employment report. Even the four-week average for continuing claims is higher, at 3.742 million in data for the May 14 week vs 3.702 million in mid April. [Click on the diagram to see a larger view]

In the meantime, GDP was not revised as hoped.

Family Dollar is Backed by Ackman

2011-05-26T12:18:00.000-04:00

In a previous post, Family Dollar (FDO) is briefly mentioned as a retailer that may suffer a cost pinch because it may find difficulty in passing on costs to its relatively lower-end customers. However, the stock is not a good short candidate because it is backed by renowned hedge fund manager Bill Ackman.

In today news, Ackman acknowledged that he had been actively buying shares in FDO, believing a push in the management (implying that he may adopt an activist role) allows the retailer to catch up with its peer, Dollar General (DG). The hedge fund mogul also cites a 70% upside for the shares ($92 dollar per share including dividend. In the meantime, he also views FDO as a potential candidate for leveraged buy-out.

In sum, although I believe that low-end retailers will suffer the most in this round of cost pinch, I would definitely restrain myself from shorting these companies that are backed by strong hands.

Mitigating Losses in an Option Position

2011-05-24T18:31:00.003-04:00

Options are often known for increasing leverage with limited risks. However, losses are losses. Because options are less frequently used than equities, people often feel that there is nothing they can do when a uni-directional option bet does not go the way they have intended. In fact, they are many ways to mitigate losses or even sometimes to turn losing positions into profitable ones. The following is one of the many scenarios:

Scenario:
1. Losing position: Long VIX 20 call at $1.75. Currently, VIX is $17.80
2. Old cost: $1.75
3.Trader's new expectation: The market may not be as bearish as expected, VIX may not jump high.
4.Mitigating losses: Sell 2 VIX 20 call at $1.50 and buy 1 VIX 16 call at $3.00
5. New position: 1 VIX 20 call and 1 VIX 16 put (A bull spread)
6. New cost: $1.75 (incurred by the old position) and zero for the new position.

The new position has lowered the breakeven point from 21.75 to a much lower point at 17.75. VIX does not have to rise as high for the trader to break-even. On expiration day, if VIX closes at $18.50, the trader will have a small profit of $0.75 instead of a loss of $1.75 if he had stuck to his initial position. Note that this strategy is best applied with the new position incurring little to no cost other than commissions.

Hope this helps. Please feel free to comment if you have any other strategy to mitigate/reverse losing positions. For more details on option strategies, I find "Options as a Strategic Investment" by McMillan quite useful. It is much more practical than John Hull's " Options, Futures and other Derivatives".

Click on the image to review the book

A Shorts List of Retailers

2011-05-24T11:37:00.001-04:00

I rarely write about shorts. As most of you have known, shorting a stock theoretically involves unlimited risks/losses. Therefore, before you even consider using this as a reference, you must have enough trading experiences that will allow you to reverse/mitigate risks should things do not go the way as planned.

The make-up of this list is based on the following assumptions:
1. Retailers are facing increased cost pressure and difficulty to pass on to consumers
2. Gasoline prices stay high into the summer and deter shopping traffic.
3. Risk aversion heightens going into summer.
4. The target price is primarily calculated using the lowest P/E among peers (that I consider as relevant) in the category. E.g. shoes (TBL is the one with the lowest p/e)=15.58. Some adjustments (adding premium) have been made for growth and luxury stocks like LULU, SKS, ANF. As this is based on a standard, methodical calculation, further adjustments should be made based on your research of these companies. For example, there may be substantial risks shorting stocks that may be taken over. Rumors had that ANF may be taken over last November.

If you have doubts about the above assumptions, then you probably should stop here.
Click on the diagram to see a larger view:

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not have any of the above position in her personal account as of May 23, 2011

ICSC showing temporary slowdown

2011-05-24T10:47:00.000-04:00

The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index dropped 1% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis.

"The wettest comparable week in 10 years--combined with cooler temperatures--negatively impacted spending on apparel and other seasonal merchandise," ICSC Chief Economist Michael Niemira said, adding seasonal items may see a bump as consumers gear up for Memorial Day weekend.

On a year-on-year basis, the reading rose 3.1%, easing slightly from the growth posted in the prior week.
For May, ICSC still expects monthly industry retail sales will increase by 3% to 3.5%.

                  Week Ended Index 1977=100   Yr/Yr Change   Weekly Change

21-May-11 512.0                                        3.1%                 -1.0%

14-May-11 517.0                                        3.2%                 -2.0%

07-May-11 527.6                                        2.7%                  0.0%

30-April-11 527.4                                        2.8%                 -0.8%

An Opportunity for Liquefied Natural Gas?

2011-05-23T22:14:00.000-04:00

There has been a divergence of natural gas price between the United States and the rest of the world, especially Europe and Asia. Natural gas price of the United States is at about 30% discount of that of Europe and Asia.

From the US Energy Information Administration (EIA),

Two important spot prices for natural gas are the Henry Hub in the United States and the National Balancing Point (NBP) in the United Kingdom. The difference between NBP and Henry Hub spot prices has increased significantly since early 2010. Relative prices in these two locations can be important to spot suppliers of liquefied natural gas (LNG) who are able to select cargo delivery destinations in order to maximize returns.

Reasons for the change in relative prices include: increasing production and expanding natural gas storage volumes in the United States (driven by shale gas developments), a stronger price linkage in Europe between rising crude oil and natural gas, high European demand which reduced European natural gas storage inventories this winter, and supply uncertainty associated with the diversion of LNG cargoes from Europe to Japan to help offset the loss of nuclear power generating capacity following the earthquake and tsunami. Japan is the world's leading consumer of LNG. [Click on the image for a larger view]

Things may change. US natural gas companies may be able to sell to much higher prices in all trading countries following the US Energy Department's decision to allow Cheniere Energy Partners (LNG) to
export up to 803 billion cubic feet of gas a year from its Sabine Pass LNG terminal in Louisiana. The gas will be carried on tankers after being chilled to super-low temperatures to become liquefied natural gas, which makes it easier to transport by ship.The Energy Department said this is the first time an exporter has been allowed to send natural gas from the lower 48 states as liquefied natural gas, or LNG, to all U.S. trading partners. Some believe that this decision paves the way for more approvals of exports. Southern Union (SUG) and BG group are applying for an approval to export from Lake Charles Terminal.

LNG's and its subsidiary, Cheniere Energy Inc (CQP)'s shares soared on this news. SUG's shares also surge on hopes that it may get its approval soon.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any positions in the above stock in her personal account as of May 23, 2011.

Existing Home Sales Continued to Show Weakness

2011-05-20T16:11:00.000-04:00

From Wall Street Journal

The housing sector continues to stumble with April existing home sales coming in a little below expectations at a 5.05 million annual unit rate, down 0.8 percent in the month with the year-on-year rate moving into the negative double digits at 12.9 percent. Supply on the market ballooned to 9.2 months at the current sales rate vs 8.3 months in March.

But price readings are positive in the report with both the median and average moving higher, up 2.4 percent on the median to $163,700 with the average at $214,600 for a 3.5 percent gain. High supply however won't be supporting further increases for prices which however are very affordable as mortgage rates are favorable. Yet the housing sector just can't get going, weighed down by distressed sales and difficult credit conditions.

Retailers feeling the cost pinch

2011-05-19T19:57:00.001-04:00

Echoing the previous post, "Retailers the next leg to fall", apparel and shoe retailers continue to feel tremendous cost pressure that they find it hard to pass on to consumers. Many clothing sellers plan to raise prices this summer and fall to make up for higher costs, but there will be limits to how much shoppers will tolerate in a still challenging economy.

Gap's shares (GPS) fell $3.63, or 15.6 percent, to $19.66 in after-hour trading as the company announced a decline in EPS and revenue. Gap now expects to earn $1.40 to $1.50 per share for the year, down from its February forecast for $1.88 to $1.93 per share, citing increased costs. Before Thursday's earnings report, analysts expected $1.84 per share, according to FactSet.

The company claimed that it had to spend 20% more on each item it produced. Other retailers had generally reported 10-15% hikes in cost.

Today, the worse-than-expected results sent shares of Aeropostale (ARO) down $2.04, roughly 10 percent, to $19.32 in after-hours trading. The company cited higher costs and softer sales. This drop in shares was after dropping as much as 16% in early May as the company first warned about cost pressuring margins.

Earlier on, Timberland Co (TBL) saw its shares plunging 32% as it expected margins to shrink this year as the shoemaker battles rising product and labor costs.

As we are getting into the summer, the list of retailer sell-off list may expand as companies, especially low-to-mid end, fail to pass on higher costs to customers. The most vulnerable may be those of the low end such as DLTR, FDO, DG, WMT, COST, TGT, BIG, to name a few, although names like DLTR, FDO, DG may be helped by more thrifty buyers as the economy slows.

For those who do not like the hassles of doing research on individual companies, building short positions in retailer ETF such as XRT into the summer may offer favorable risk/reward profile.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above positions in her personal account as of May 19, 2011

Retailers the next leg to fall

2011-05-18T17:15:00.001-04:00

Low-to-Mid end stores are reporting more cautious customers, spending on necessities such as food and gasoline and not the others.

From Reuters,

In general, retail earnings looked all right in the quarter ended around April 30, said Kurt Salmon retail strategist John Long, but shoppers were largely absorbing higher costs just on food and gasoline and had yet to face looming increases other goods.

"We're already starting to see a little bit of margin pressure," Long said. "And we think that as we get into the summer and fall, when we see bigger price increases ... that may cause some consumers to pull back."

............................At BJ's, the No. 3 U.S. warehouse club chain, shoppers traded down in both brands and package sizes, Chief Financial Officer Bob Eddy said during a conference call.

............................The U.S. recovery will continue to be slow and uneven, particularly for more moderate-income households, Target (TGT) Chief Executive Gregg Steinhafel said during a conference call.

.............................Wal-Mart Stores Inc (WMT) said its customers were showing pronounced signs of living paycheck-to-paycheck, as sales at its U.S. discount stores open at least a year had fallen for two straight years.

In my opinion, as long as gasoline prices stay close to $4 at the pump, this is going to be a slow and long summer and even fall for many retailers, especially those with very little margin to squeeze such as discounters, supermarkets, low-end department stores as they start to pass on cost increases to customers in the next few months.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not have positions in the above stocks in her personal account as of May 18, 2011

Housing starts do not indicate a recovery

2011-05-18T15:29:00.000-04:00

From Wall Street Journal

The annualized pace of housing starts posted 0.523 million units below the median market forecast for 0.570 million units and is down 23.9 percent on a year-ago basis. ......................................................................

By region, the drop in starts in was led by a monthly 23.0 percent plunge in the South with the Northeast declining 4.8 percent. However, gains were seen in the Midwest and West, up 15.7 percent and 3.7 percent, respectively.

Housing permits have been volatile in recent months but trending flat. Housing permits declined 4.0 percent in April, following a 7.5 percent surge the month before. Overall permits came in at an annualized rate of 0.551 million units and are down 12.8 percent on a year-ago basis.

The bottom line is that housing is flat and at anemic levels.

Oil demand remains soft despite inventory surprise

2011-05-18T13:17:00.000-04:00

Oil price jumped today as oil and gasoline inventory increased less than expected. Meanwhile, distillates inventory showed a larger-than-expected decline.

However, there is no evidence that demand for oil products is turning the corner after months of softness

From Wall Street Journal

Demand indications, that is products supplied to wholesalers, are soft, showing the eighth straight year-on-year decline for gasoline, at minus 2.3 percent in the latest week, and the first year-on-year decline for distillates, at minus 2.9 percent, since February and the steepest decline in more than one year

From the inventory chart, it is too early to infer that the bullishness in oil price will resume immediately.

Gaming Revenue of Macao Soared in April

2011-05-04T22:37:00.001-04:00

According to Gaming Inspection and Coordination Bureau of Macao (DICJ), casino revenue in Macau, the world's biggest gaming market, rose 44.6 percent in April to 20.5 billion patacas ($2.56 billion. $1 = 8.020 Macau Patacas). This is about 4 times the market size of Las Vegas.

Accumulated revenue for the first four months of 2011 rose 43.3 percent 79.0 billion patacas.

From Reuters, Macau's casino industry is booming on robust demand from gamblers from mainland China, which account for the bulk of the territory's visitors. The former Portuguese enclave is the only place in China where mainland Chinese can legally gamble.

Casino stocks that have exposures in Macao include LVS, MPEL, WYNN and MGM.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of May 4, 2011.

Is Las Vegas Sell-Off a Buying Opportunity?

2011-05-04T22:09:00.001-04:00

Shares of the casino operator (LVS) slumped as much as 6% in the morning session on May 3, 2011 as earnings and revenues disappointed, largely due to disappointing results from Marina Bay Sands. Although an EBITDA of $284.5 million are nothing to sneeze at for a casino that is opened for only a little over a year, investors have high hopes for the gaming industry in Singapore, expecting $325 million EBITDA . Contributing to the shortfall was an unexpectedly low table hold, which is the measure of wins as a percentage of cash and markers deposited into a drop box of a gaming table and also according to the company a very conservative allocation of account receivables.

In the meantime, the company's properties in Macao including Venetian China, Sands China, the Plaza Casino and Four Season Hotel continued to deliver amazing growth in terms of both gaming and hotel revenues. The company's old base in Las Vegas continued to recover after the 2008 financial meltdown.

While Singapore might have failed to excite investors in the first quarter, it is no doubt by far the most promising gaming destination in the world. It generated an EBITDA of $1 billion in its first year of operation in 2010 even without a full-year of operation. How promising? Just think about having the entire Las Vegas strip gaming business split up between only two casinos, Marina Bay Sands and Resort World Sentosa.

In short, the price reaction of LVS after the earnings report was typical of a stock priced for perfection. The long-term prospect of LVS remains intact. Market capitalization relative to EBITDA is around 16, compared to 16.83 its closest US competitor, WYNN, is a tad cheaper considering its invaluable asset in Singapore.

That said, this valuation is not completely innocent. Litigation risks remain with LVS. In March 2011, the company received a subpoena from the SEC requesting documentation regarding its compliance with the Foreign Corrupt Practices Act which bars bribes to foreign officials. “Any determination that we have violated the FCPA could have a material adverse effect on our financial condition,” said the company.
Later in April, the company’s subsidiary, Sands China, was investigated by Hong Kong regulators for using inappropriate leverage against Macau government officials with the intention of accelerating the sale of apartments at its Four Seasons Hotel. It is also alleged that the company was spying on the officials with the purpose of collecting negative information to pressure the officials.

"When the smoke clears I am absolutely a thousand percent positive that there won’t be any fire below it.” That was the response given by Sheldon Adelson, the CEO of LVS. On a related note, when subpoenaed for his email, Adelson responded by saying that he does not use email. He is not an email- kind- of guy. If you ask me, that is a red flag.

You may find related articles
3 cases for LVS
Is Macao giving casinos a second wind

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of May 4, 2011.

3 Cases for POT

2011-04-14T13:37:00.003-04:00

Potashcorp (POT), the largest fertilizer company in the world with dominant presence in potash fertilizer, is a winner riding the agriculture boom for years to come. There are at least half a dozen of reasons why it is a good play but three should suffice to make a case:

1. A surge in more protein-oriented diet in developing countries

This notion is not new. With substantial increase in income and wealth, meat consumption in China has increased by 600% in the last 30 years and there is no end to this growth in sight. According to a study from Purdue University, Chinese pork demand is projected to be 68 million metric tons in 2015. This is a large increase from 2003, when pork consumption was 45 million metric tons, and a 32% increase from 2010 levels.

The demand for a more protein-oriented diet and to a lesser extent, ethanol fuel has been and will be the driving force of a secular growth in agricultural industry. To increase the yield per acre, fertilizers are essential.

2. Barriers to entry means high margins

Other than nitrogen, soil nutrients such as phosphate and potash are scarce resources especially the latter. Only 12 countries have potash mine and about 50% of the world capacity is in the hands of three major players, namely Potashcorp (POT), Mosaic (MOS) and Belaruskali. New capacity takes years and billions of dollar to come in place, giving existing players plenty room to enjoy huge profit margins leveraging the economies of scale in face of heightened demand for the materials.

3. Hot money is favorable to commodity

With the US government printing money and tightening unlikely to be soon and severe, plenty of liquidity is left pursuing riskier assets especially commodity that is mostly denominated in US dollar. That includes agricultural products and thus providing incentives for farmers to apply fertilizers. Materials that go in these fertilizers are just as likely to enjoy the commodity fever. Currently, potash, phosphate fertilizers are priced at roughly half of its peak in 2008 when the crisis brought down everything. It is foreseeable for these commodities to go up by at least another 50% in the next 12 months.

In sum, POT with its overriding presence in fertilizers is set to ride the multi-year agriculture boom and the stock price is likely to go along with 50-100% upside (It is currently at $56). That said, these are not without risks. One of the near-term risks include hard landing in the US or China, drying up excess liquidity quickly once again. As I am writing, stock and commodity markets are going through a technical pull-back that may take a few more sessions to settle. For friends who shy volatility may want to wait till the dust is settled.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own positions in POT in her personal account as of April 14, 2011

Foreign Currency Reserves and Inflation Soared in China

2011-04-14T12:59:00.001-04:00

From Reuters,

China's foreign exchange reserves soared to a record of more than $3 trillion by end-March, while its money supply growth blew past forecasts, threatening to aggravate the nation's inflation woes and trigger more policy tightening.

Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.

Tapping the brakes on money and lending growth has been a crucial part of Beijing's campaign to rein in inflation, which probably hit a 32-month high of 5.4 percent in the year to March, according to local media reports.

After making progress at the start of the year in mopping up excess cash, the People's Bank of China appeared to lose some ground in March.

"The latest numbers show that it is still too early for China to ease monetary tightening. China still needs to keep tightening policy at the current pace in coming months," said Qu Hongbin, chief China economist with HSBC...................................................
.......................
China has raised benchmark interest rates four times since last October and has required the country's big banks to lock up a record high of 20.0 percent of their deposits as reserves.

Economists polled by Reuters last week said that China was heading for a pause in its half-year cycle of monetary tightening, forecasting that it would raise interest rates just once more this year.

Las Vegas is still out of game

2011-04-13T15:55:00.000-04:00

From Bloomberg

"Las Vegas Strip gambling revenue fell 9.6 percent in February, the fourth straight monthly decline as the city faces an uneven recovery after a record slump in the casino industry.

Revenue declined to $513.7 million from $568 million a year earlier, Nevada’s Gaming Control Board said in an e-mail today. Betting fell 6.3 percent in the first two months of 2011 from a year earlier.

Las Vegas is struggling to recover from record declines in gambling and convention revenue. Strip betting proceeds increased 4.1 percent last year, after dropping more than 9 percent in 2008 and 2009. MGM Resorts International (MGM), Las Vegas Sands Corp. (LVS), Wynn Resorts Ltd. (WYNN), and Caesars Entertainment Corp., the four biggest Las Vegas-based casino owners, have said the worst has passed.

Revenue for all Nevada casinos fell 6.8 percent to $881.8 million in February, the board said. Monthly proceeds for Clark County, which includes downtown Las Vegas as well as the Strip, dropped 7 percent to $769.5 million. "

While Las Vegas is struggling, elsewhere in Asia has had gamers rolling in. Gaming Inspection and Coordination Bureau of Macao announced yet another significant year-over-year rise in gaming revenue. Gaming revenue in Macao rose 33%, 47.7% and 48% in January, February, March 2011 respectively.

3 Cases for LVS

2010-11-09T22:49:00.005-05:00

There is only one word that can describe the price movement of stock of Las Vegas Sands (LVS), a casino property developer and operator: H-O-T. The stock price went up by a whopping 200% in the last 12 months, compared to about 12% of the S&P 500 Index.

1. Singapore
The super growth lies with Singapore, a prominent tourism, finance and trade center in Asia that attracts millions of tourists each year.

LVS's owned Marina Bay Sands (MBS), cranked out an EBITDA of $241.6 million in 3rd quarter, 2010 after opening just 6 months ago, about 4 times the EBITDA of LVS’s base in Las Vegas. This is just the beginning. Hongkong-based investment company, CLSA offered very bullish forecast on the growth of the Singapore gaming industry. The industry is expected to grow to a $6 billion industry in 2011 and $9 billion by 2013. Citigroup analysts offered a less upbeat, expecting a $4.5 billion industry in 2011. Currently LVS carries about 34% of the market share.

Between the lower and upper range of estimated industry growth, LVS can take in a revenue between $1.53 billion and $2.04 billion with a midpoint of $1.785 billion in year 2011. LVS is expected to soon take the market share up to about 40%, drawing closer to the only competitor in Singapore, Genting. Given this market share, between the lower and upper range of estimated industry growth, LVS can take in a revenue between $1.8 billion and $2.4 billion with a midpoint of $2.1 billion in year 2011. To put these numbers in context, the old base of LVS in Las Vegas has an annualized revenue of $1.19 billion in 2010. Even without any growth, MBS, just by operating the full year should have about $1.4 billion in revenue (the annualized revenue of MBS in 2010).

2. Macao

Also contributing to significant growth of LVS for years to come is Macao. LVS owns 3 casino properties in Macao, the largest gaming industry in the world now. LVS took in an EBITDA of $334.6 million, about 6 times the EBITDA of LVS’s properties in Las Vegas. LVS’s properties in Macao brought in $3.02 billion in revenue as of the end of 3rd quarter, 2010. Year to date, Macao gaming industry reaped in a total of $19 billion revenue. On a very conservative side, suppose the remaining 2 months have the same results as October (ignoring the positive effects of holiday seasons on the industry), Macao could be a $24billion revenue industry. The industry is expected to grow 30% in the region next year, thus taking the revenue over $30 billion. LVS currently has about 18-19.8% of the market share which translates into $5.4 -6.17 billion revenue in 2011, 34-53% higher than the annualized revenue of LVS in Macao in 2010. This is not the end of the story. LVS is still expanding its business in Macao. One of its new properties in Cotai Strip is expected to open in the third quarter, 2011. [Click on the graphic to enlarge the view]

Source: Gaming Inspection and Coordinaton Bureau of Macao

3. Las Vegas and Economic Recovery

While growth stories in Singapore and Macao go on and on and they will carry a huge chunk of LVS in the near future, LVS’s properties in Las Vegas will benefit from the economic recovery of the United States. While the recovery is slow and uneven, it is on the right track.

In sum, Las Vegas at its current price $52 is 53.6 times and 31.7 times its estimated EPS for 2010 and 2011 respectively. With an expected growth rate between 30-50%, the valuation is attractive for a super-growth stock. In 2007, with Macao business just beginning and without Singapore business, the stock of LVS reached as high as $150. With the growth prospect in Macao and Singapore, it is foreseeable to see the stock price go over $100 in the next 6-12 months.

One caveat lies with the short-term risks of possible correction as the stock has gone straight up almost every other day. Entry at a short-term correction of 10-15% may be a better risk/reward tradeoff.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own LVS in her personal account as of November 9, 2010

The Demise of Cable Television?

2010-11-05T14:32:00.004-04:00

From "Cable Subscribers Flee, But Is Internet to Blame?"

"..........TV subscribers are ditching their cable companies at an ever faster rate in the past few months, and many of them aren't signing up with a satellite or phone competitor instead.

Their willingness to simply go without pay television could be a sign that Internet TV services such as Netflix and Hulu are finally starting to entice people to cancel cable, though company executives say the weak economy and housing market are to blame............

Third-quarter results reported this week by major cable and satellite TV companies show major losses, but don't settle the question of what's causing them.

If "cord-cutting" in favor of Internet video is finally taking hold, that has wide-ranging implications. Consumers who use the Internet to get their movies and TV shows bypass not just the cable companies, but the cable networks that produce the content. The move could have the same disruptive effect on the TV and movie industries as digital downloads have already had on music........................................"

Is Internet to Blame?

This trend coincides with a very sluggish economy, thus rendering it difficult to pinpoint the cause of "cord cutting". Are tv subscribers turning to internet video streaming or they simply can't afford cable TV bills these days.

Time Warner Cable Inc.'s chief operating officer, Landel Hobbs, said the company does not see evidence of people dropping cable in favor of the Internet. First, the biggest subscriber losses have been occuring for people who do not already have high-speed internet without which online video streaming is impossible. They either have switched to satellite or giving up paid TV channels. Second, college students who are viewed as more high-tech savvy, and more inclined to switch to online TV, have not shown a drop rate that is out of line with previous years.

Meanwhile, there are a couple of hurdles to overcome before online video streaming can take over cable TV/satellite like cell phones taking over landlines 5-6 years ago. First, hooking up computer or game console or other devices to get internet video content streaming as easily as a switch of a button on the remote control may seem like a piece of cake to high-tech savvy people but not others. Second, or more importantly, TV fans find content on internet very limited. For example, there is not a lot of life sports on TV yet. Content providers like Walt Disney and Newscorp currently make billions of dollar from cable TV. 6 content providers carry 85% of the content viewed by the nation. They are unlikely to give it up easily to internet providers who are unlikely to pay the same amount of fees. There will be a battle between content provider and internet providers. Until they iron out these differences, cable TV may catch a breather.

However, I think this will not be a long breather.

Related tickers: CVC, CMCSA, DIS, NWC,NFLX

Some Statistics on Midterm Election Effects

2010-11-04T23:13:00.000-04:00

From the article "Midterm Election Impact on Stock" in huffington.com

Year 2011 is the year before a president faces re-election, the year after a president has lost control of Congress and the second year of a fragile economic expansion.

THE YEAR BEFORE A PRESIDENT RUNS FOR ELECTION:

Since 1945, the Dow Jones industrial average has gained an average of 19 percent the year before a sitting president runs. That's more than double the 7.9 percent average annual gain during the same period. If you take out the 10 years when the president was running, the average gain drops to only 5.8 percent...................................................

THE YEAR AFTER A PRESIDENT LOSES CONTROL OF CONGRESS

Presidents whose party controlled both houses of Congress have lost at least one chamber five times in the past 80 years. Stock returns in the following year haven't followed a pattern. The Dow plunged 53 percent in 1931 and gained 34 percent in 1995. Gains in the other three years ranged from 2.2 percent to 20.8 percent. That makes it impossible to forecast what will happen this time. The change in Congress in 1931 came during the Great Depression, while the 1995 transition came during the first part of the Internet boom. The next Congress faces a fragile economic period, which could mean that the market offers another single-digit gain like this year.

Gridlock hasn't been great for stocks. Since 1945, the Standard and Poor's 500 index has gained 4 percent in years when Congress was split between parties. It increased 8 percent when Congress was controlled by one party and the White House another. When a single party was in control of Washington, the index gained an average of 11 percent.

SLOW-GROWING ECONOMY
..................................................................................................................
.....................Stocks have been in a bull market for 18 months, pushing the Dow up 70 percent since it hit a 12-year low in March 2009. That gain is larger than normal but isn't surprising considering that the rally followed the worst financial crisis since the Great Depression. During slow recoveries like this one, bull markets typically last 30 months and bring gains of 44 percent overall, according to Ned Davis Research.

According to Clearbridgeadvisors.com,

"......Subsequent to 17 mid-term elections since 1942, the S&P 500 appreciated 17 times (100% batting average) over the next 200 days, with the average return being 18.3%. The low percentage gain (+3.9%) was in 1946, just after World War II ended and deflation fears were in vogue, and more recently the 6.1% gain for the S&P 500 after the 2006 mid-term elections....."

In the same report, MKM Partners and the Leuthold Group both suggest bull market ahead. MKM Partners pointed out that stock valuation are more attraction than bond. The earning yield of companies , which is earnings divided by stock price is 3 percent higher than bond yield, the highest since 1951, the administration of President Truman. The Leuthold Group, by studying the relationship between P/E during the midterm election and the following 10-year stock return, suggests that the 10-year-annualized return following 2010 election will be 11%.

All in all, without digging into the "Why's", descriptive statistics generally lean toward a bull market following this midterm election.

3 Cases for DECK

2010-10-29T21:32:00.001-04:00

Deckers Outdoor Corporation (DECK), the shoemaker that makes the "ugly shoes", UGG, just announced a stellar earnings report. As the winter draws closer, fans of UGG are contemplating buying another pair of UGG classic or a fancy Jimmy Choo collaboration while for people like me who don't own a pair of UGG yet may very well start thinking about getting one. Although I can't say UGG, as accessories, completely suit my tastes, I do think that DECK, as a compay, suit many criteria of my "BUY" list.

1. The Lure of UGG

Spotted on celebrities such as Sarah Jessica Parker, Nicole Ricci, Kate Hudson and the likes, UGG is not just another pair of furry, comfy , chunky boots, it is a fashion statement. 15 years after being acquired by DECK, UGG sales now carry over 90% of the sales of the company. The message is clear, the growth of UGG equals the growth of DECK.

UGG has demonstrated years of double digit growth. In the third quarter, UGG has once again turned in a 20% year-over-year growth. Well, one could very well argue that it is unrealistic to expect double digit growth forever. Granted this is a valid argument, another equally valid question is: If decelerating growth is inevitable, what would be the trigger events?

Given that the fashionable niche of UGG has been proven to be sustainable (by years of double digit growth), the trigger events include either a formidable competition in the category or saturation of markets. Neither is in sight yet.

2. International Expansion

Saturation of markets is unlikely for DECK in the next few years as there is still a lot of room for international expansion. International business carries only 26% of the company business. The company is just starting to gain traction in its international markets such as Europe and Asia, especially China (China of course). In the last quarter, international sales expanded as much as 48% over last year.

3. Valuation
DECK has a P/E of 16, on par with peers in the industry. This a very conservative multiple for a company that has demonstrated sequential double-digit growth. For a slightly higher multiple ranging from 18 to 20 and the current estimate of 2010 EPS, the stock should command a price ranging from $66 to $73.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own DECK in her personal account as of October 29, 2010

Related posts:
1. DECK and UGG continue to rock

DECK and UGG continue to rock

2010-10-29T14:51:00.000-04:00

Deckers Outdoor Corporation (DECK) reported a stellar third quarter yesterday.

Earnings Highlights

Net sales increased 21.7% to $277.9 million versus $228.4 million last year.
Gross margin improved 420 basis points to 47.1% versus 42.9% a year ago.
Diluted EPS increased 24.4% to $1.07 compared to $0.86 a year ago. The Company completed a three-for-one stock split, in the form of a stock dividend paid on July 2, 2010. All share and per share data in this release and accompanying tables have been adjusted to reflect the impact of such split for all periods presented.
UGG® brand sales increased 20.2 % to $255.8 million versus $212.8 million last year.
Teva® brand sales increased 51.7% to $13.7 million compared to $9.0 million a year ago.
International sales increased 48.2% to $73.2 million versus $49.4 million last year.
Retail sales increased 63.3% to $20.2 million compared to $12.3 million last year; same store sales rose 17.9%.

Outlook
Based on better than expected third quarter results combined with higher projected sales for the UGG and Teva brands, the company is raising its full-year outlook.

The company is expecting its full-year revenue to increase by 16% over 2009 level compared to 14% guided earlier. That comes up to $943.23 million. The average estimate by analysts is $941.41 million with a range from $931.34 to 977.7 million
The company now expects its full-year diluted EPSto increase approximately 22% over the non-GAAP diluted EPS of $2.98 in 2009, compared to previous guidance of approximately 16%. That comes up to $3.64. As of 10/28/2010, the average estimate by analysts is $3.52 with a range from $3.46 to 3.60.
A caveat lies in the 4th quarter guidance. The company does not change the 4th quarter guidance. It expects the 4th quarter revenue to be 8% over 2009 level. That comes up to $375.83. The average estimate by abalysts is $375.72 million with a range between $347.99 and 411.10 milion

Source: Deckers Outdoor Corporation, finance.yahoo.com and author's own calculation

Is Netflix too expensive?

2010-10-20T23:18:00.001-04:00

As high-speed internet becomes a household staple, Netflix has been stepping up its online-streaming video business. 66% of its subscribers watched streaming videos in the third quarter, up from 61% in the second quarter and 41% a year ago. Falling subscriber acquisition costs eased the earlier concern that it may become harder/costlier to get customers as competition emerged. Subscriber acquisition costs fell to $19.81 in the quarter, down from $24.37 in Q2, and $26.86 a year ago. Another important measure, the churn rate, which measures the percentage of customers dropping out was also very positive. Churn fell to 3.81%, from 4.0% in Q2, and 4.4% a year ago.

Guidance was upbeat. In the earnings result that was released today, the management raised the guidance of the number of subscriber this year to a range from 19 million to 19.7 million from a previous estimate of 17.7 million to 18.5 million. If this comes true, the company will have doubled its subscriber base in two years since its first streaming service. Revenue for the fourth quarter was also raised to $586 million to $598 million from $580 million to $596 million. On the earnings side, the company continues to see the fourth quarter EPS of $0.59-0.74a share.

It was a very good earnings release, to say the least. What now? One question that lingers on is whether the stock of the company is too expensive.The company at its closing price today, $153.15 is 55 times its 2010 EPS and 41 times its 2011 EPS. This is way higher than conventional standard of P/E ratio. That said, many would argue that P/E ratio is irrelevant when it comes to growth stocks, PEG which is P/E divided by growth rate is more relevant. At a P/E of 55, Netflix will have to sustain a 55% or higher growth rate in the relevant time frame into the future. So, is this growth sustainable? We will leave this question to the next post.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not have any position of NFLX in her personal account as of October 20, 2010

Is Macao Giving Casinos a Second Wind?

2010-10-18T21:03:00.006-04:00

Casino stocks or otherwise known as gaming stocks tumbled during the financial crisis in 2008 when credit market closed itself to these highly leveraged companies and speculators betted on the collapse of them. Most of these companies lost over 90% of their stock prices over the crash since the peak in 2007.

As the economy is creeping up from the trough, these stocks have been seeing very bullish action this year. LVS, WYNN, MGM, MPEL have seen a rise in stock price as much as 150%, 50%, 10% and 50% respectively.

In addition to the domestic economic recovery, a very large extent of recoupment of losses of these stocks came from their oversea exposure, specifically, Macao for LVS, WYNN, MGM and MPEL and more recently Singapore for LVS. Macao has surpassed Las Vegas to be the largest gaming spot in the world. MPEL and LVS each has three casino properties while WYNN and MGM each has one in Macao. As of September, JP Morgan analysts' channel check showed that SJM carries the largest market share at 31.1% followed by 19.8% of Sands China which is owned by LVS, 10.4% of WYNN Macao owned by WYNN, Melco Crown 16.8% owned by MPEL, Galaxy 12.7% and MGM 9.2%.

According to Macao Gaming Inspection and Coordination Bureau, the gross gaming revenue has recovered sharply from 2009, with each month posting significant increase this year. As of September 2010, the gaming revenue has accumulated to as much as 133.2 billion MOP (equivalent to $16.4 billion).

	Monthly Gross Revenue
	2010	2009	Variance
Jan	13,937	8,575	62.50%
Feb	13,445	7,912	69.90%
Mar	13,569	9,531	42.40%
Apr	14,186	8,340	70.10%
May	17,075	8,799	94.10%
Jun	13,642	8,269	65.00%
Jul	16,310	9,570	70.40%
Aug	15,773	11,268	40.00%
Sept	15,302	10,943	39.80%

No doubt Macao will be the most important source of growth for gaming companies in the world. The million- dollar-question for shareholders will be how much this growth is worth in terms of share prices?

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of October 18, 2010.

Economic Indicators on October 18, 2010

2010-10-18T17:08:00.000-04:00

1. Industrial Production Index

The index came in lower than expected. Production declined by 2% in September versus an increase of 2% in August. It is much lower than the consensus of an increase of 2%. Capacity utilization was 78.7%, slightly lower than 78.8% in August and the consensus view of 78.8%

Industrial Production Index shows how much manucturing segments such as factories, mines and utilities are producing. Although the manufacturing sector carriess less than 20 percent of economic activities, it accounts for most of its cyclical variation. Consequently, this report has a big influence on market behavior.

2. Housing Market Index

The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes.

In Wall Street Journal

The housing market index rose three points in October to 16, a gain led by the expectations component yet also including gains for current sales and for traffic. Gains were also posted across regions. The report said financing remains scarce for both buyers and builders. The housing sector has been regaining its feet though the prospect of a foreclosure moratorium obscures the outlook. Housing starts will be posted tomorrow.

3 cases for CROX

2010-10-09T21:02:00.008-04:00

Crocs (CROX), known of its quirky, "ugly" clog-like sandals, the almost forgotten "hype" has seemed to make a come-back, in a different way, in a better way. The share price reached a new 52-week-high at $14.72 on Friday.

As a long-time follower of its stock since its IPO, and also a long-term fan of its product (I bought each one of my whole family members a pair of crocs and they love it!), I bring to you 3 cases for renewed optimism in the company:

1. High gross margin
I once had feared that the shoes might become just another commodity after the company used up its quirky brand power. By then, it would be hard for it to maintain high gross margin as it might have to lower the price point to compete with peers and more importantly, the knock-offs. However, CROX's management has averted this fate by employing supply-chain efficiency (e.g. moving distribution centers close to the target market) and introducing new, higher margin products. The gross margin in the second quarter of 2010 was a jaw-dropping 57.8%. In addition, the company managed to raise the average price to $17.76, up 12% from last year.

2. Expanded product lines
Before the financial crisis that almost announced the demise of the company, the former management had already had the plan of diversifying the product lines as this step was crucial to the sustainability and consistency of this once-one-trick-pony. The company now has gone from less than 25 styles/models to 250 models including a nice collection of warmer weather shoe wear and women's high-heels and pumps. The percentage of total revenue carried by the core products has dropped to 21%. Although colder seasons are still the weak spot for the company, it is on track to become a full-fledged shoemaker which will further strengthen its brand building.

3. Direct-to-consumer retail approach
Since the turmoil of the economy and also the company in 2007, the management has focused on switching more emphasis to direct-to-consumer channel from its previous wholesale approach. The company now runs 363 company-operated stores Not only does this approach vital to its future of brand-building, it also plays a crucial role in keeping the high gross margin.

In sum, CROX has emerged from its abysmal in a stronger way. Diversified products, prudent cost and inventory control and direct-to-consumer channel have led to and will continue to lead to more sustainable growth.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author owns CROX in her personal account as of October 9, 2010.

Retail Sales in August

2010-09-14T22:14:00.000-04:00

The most recent retails sales report released by the Department of Commerce suggested that there is no sign of double dip in the economy. The report counts receipts of stores that sell durables and non-durables.

Retail sales in August beat the median forecast of 0.3 percent with components more positive than not. Overall retail sales in August continued to improve, gaining 0.4 percent, following a 0.3 percent rebound in July.

Among the gainers are gasoline station sales (up 1.9 percent), food & beverages (up 1.3 percent) and clothing (up 1.2 percent), health & personal care, sporting goods & hobby stores, general merchandise, nonstore retailers, and food services & drinking places.

Among the losers are 1.1 percent fall in electronics & appliances and a 0.9 percent decline in miscellaneous stores. Motor vehicle & parts dealers decreased 0.7% while furniture & home furnishings slipped 0.5 percent. Building materials and garden equipment sales were flat.

Healthcare Reform Part II

2010-09-13T22:27:00.000-04:00

In my previous write-up on this topic, I talked about inclusion of preventive services. Today, I’ll discuss including children with pre-existing conditions into the health-care system. According to a new report , there are 5 million children under the age of 18 who has pre-existing conditions. So far, insurance companies had been denying coverage to people with pre-existing conditions. The Affordable Care Act recognized the need for brining in all those children with pre-existing conditions into the system. So accordingly, health plans beginning on or after September 23, 2010 for new plans and existing group plans, “The new law includes new rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition.”

Now the law says that from this year no children should be denied coverage because of pre-existing conditions.

This is a very good step to consumer protection. But there are some loopholes in this law. The law states that children cannot be denied coverage because of pre-existing conditions, but it did not say that all children need to be covered. So, insurance companies can stop offering coverage to these children till 2014, when everyone need to be offered insurance. Anticipating that the insurance companies would read through these fine prints, the Health and Human services announced a Pre-existing Condition Insurance Plan that will “offer coverage to uninsured Americans who have been unable to obtain health coverage because of a pre-existing health condition”.

So will this provision of Health-Care Reform help the consumers?

The actual benefits will be delayed till 2014 for sure.

http://www.familiesusa.org/resources/newsroom/press-releases/2010-press-releases/pre-existing-national.html
http://www.healthcare.gov/law/timeline/index.html
http://www.hhs.gov/news/press/2010pres/07/20100701a.html

by Roy Tutu

About the author:

Roy Tutu is the publisher of the blog, “ephemeralthinking.com” – a blog that covers topics related to economics, business, society and entertainment.

Roy is an economist with a passion for writing. According to Roy, “our informal conversations leap from one topic to another, transforming and reshaping our views and opinions. Ephemeralthinking.com is an avenue that brings in such informal discussions to curious readers.”

Contact Roy Tutu at roytutu@ephemeralthinking.com

Petroleum and Natural Gas Weekly Report

2010-09-11T15:05:00.001-04:00

According to EIA reports on Thursday,
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.9 million barrels from the previous week to 359.9 million barrels, giving an immediate boost to the crude oil market price. However, the inventory is high compared to the same period last year.

Among the petroleum products, total motor gasoline inventories decreased by 0.2 million barrels last week, distillate fuel inventories decreased by 0.4 million barrels, and both are above the upper boundary of the average range for this time of year.

Total products supplied over the last four-week period has averaged 19.6 million barrels per day, up by 0.7 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 9.4 million barrels per day, up by 1.1 percent from the same period last year. Distillate fuel demand has averaged 3.8 million barrels per day over the last four weeks, up by 9.4 percent from the same period last year.

In the meantime, stock in natural gas rose 58 billion cubic feet in the September 3 week, higher than expected.

Note: Financial markets have begun to monitor closely crude oil inventory since 2004. It is general believed that sharp price hikes in crude oil accompany falling inventories while price declines concur with rising inventories.

Economic Indicators September 9, 2010

2010-09-09T22:36:00.000-04:00

1. International Trade

The overall U.S. trade deficit narrowed to $42.8 billion in July from $49.8 billion in June, much smaller than the consensus forecast for a $46.8 billion deficit.
Exports rebounded 1.8 percent, following a 1.3 percent decline in June. Overall imports declined 2.1 percent after increasing 3.1 percent the prior month. Nonoil imports fell 3.0 percent, following a 4.6 percent jump in June.
the boost in goods exports was led by a $2.3 billion jump in capital goods excluding autos. A large part of this--$1.4 billion-was civilian aircraft
The drop in imports was broad based though following a large overall increase in June.
Improvement in trade deficit adds a little lift to third quarter GDP growth. Manufacturers certainly will be happy about the resumption of export growth.

2. Initial Jobless Claims

As a sign of improvement for the labor market, initial jobless claims fell substantially in the September 4 week.
Claims came in at 451,000 vs. 478,000 in the prior week (revised from 472,000). The 451,000 level is the lowest since July and the second lowest since May.
The Labor Department told Market News International that nine states had to be estimated due to delays tied to the holiday shortened week, but the government stressed that data since received confirm the improvement.
The four-week average fell nearly 10,000 to 477,750 and is only slightly higher than a month-ago.
Continuing claims show 4.478 million in data for the August 28 week with the four-week average at 4.488 million, the latter down mildly from the month-ago reading. The unemployment rate for insured workers is unchanged at 3.5 percent.

Economic Indicator September 8, 2010

2010-09-08T15:54:00.001-04:00

1. ICSC-Goldman Store Sales

                                            Prior     Actual

Store Sales - W/W change    0.1 % -0.4 %

Store Sales - Y/Y                 2.8 %    1.8 %

The ICSC-Goldman Store Sales index fell 0.4 percent in the September 4 week to pull down the year-on-year rate to plus 1.8 percent for the lowest reading since May.
Weather effects was cited to have curbed demand for buy-and-wear fall apparel.
The year-on-year rate is expected to plus 3.0 percent for the full month of September in what would be a continuation of trend

2. Beige Book

"Continued growth" but "with widespread signs of a deceleration."
Growth is described as "at a modest pace." Still, there is no talk of a double dip.
"Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases."
"Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts."
Within manufacturing, weakness was largely related to construction while strength was in auto-related production, including production of steel. Some Districts reported that export demand was an important contributor to healthy manufacturing conditions.
No inflationary pressure on most final goods and services despite some upward pressure on grain and selected industrial materials

3. MBA application

                                                              Prior    Actual

Purchase Index - W/W Change              1.8 %    6.3 %

Refinance Index - W/W Change             2.8 %   -3.1 %

Composite Index - W/W Change           2.7 %   -1.5 %

The MBA Purchase Applications index jumped 6.3 percent in the September 3 week and is at its highest level since May.
still well below levels prior to the April expiration of second-round housing stimulus and is still down nearly 40 percent year-on-year.
month-to-month change and the latest gain, the third in a row for this index, together with last week's jump in the pending home sales index, will raise hopes that the housing sector is now beginning to climb out of its post-stimulus valley.
The Refinance Index did slip 3.1 percent for its first decline in six weeks but it's still very strong as low rates draw in borrowers. The refinancing share of mortgage activity is at 82 percent of total applications. The average 30-year mortgage rate rose 7 basis points in the week to 4.50 percent.

4. Consumer Credit

Consumer borrowing fell again in July as households cut back on their credit card use for a 23rd consecutive month
Increase in auto loan is more than offset by declining other forms of consumer loans including credit card loans
The latest drop in overall borrowing was slightly higher than economists' expectations and followed a $1.02 billion decline in June, which was revised from an initial estimate that total credit had dropped by $1.3 billion that month.
Borrowing in the category that includes auto loans rose 0.6 percent in July after gains of 3.2 percent in June and 1.2 percent in May. The three monthly increases reflected a revival of auto sales this summer after automakers endured slumping sales during the recession.
Borrowing on credit cards fell by 6.3 percent in July after a bigger 7.5 percent June decline. This category has now fallen for a record 23 consecutive months as Americans have struggled to repair their household finances after the worst recession since the 1930s.

Chris Botti & Yo-Yo Ma - Cinema Paradiso

2010-08-15T14:18:00.001-04:00

The weather in New York is cooling down. It makes people wanna dance. This classic “Cinema Paradiso" was introduced me by a very gifted individual stock trader. Wish him all the best thousands of miles away.

Health Care Reform Part I

2010-08-11T15:00:00.000-04:00

“On March 23, 2010, President Obama signed the Affordable Care Act. The law puts in place comprehensive health insurance reforms that will roll out over four years and beyond, with most changes taking place by 2014.”

We are planning to run a mini-series examining different aspects of the Act. In this part, we will talk about the effects of expanding preventive services to millions. The Act states that for health plan years beginning on or after September 23, 2010, “All new plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.” http://www.healthcare.gov/law/about/provisions/services/index.html

How will it affect consumers?

Although it is a blessing to consumers, the actual cost of health-care might go up. Insurance companies will provide the preventive care at no extra cost, but in effect, they will raise the cost of providing overall insurance. So, consumers can expect that their overall deductible/coinsurance/copays to rise.

Good news for medical device manufacturers!

Demand for all devices that helps in preventive care will rise. As preventive care becomes more affordable, people will have regular routine care. So, demand for mammograms, colonoscopies and other preventive care are expected to rise and medical devices manufacturers will have to keep up with this extra demand. It is a very positive news for medical device manufacturers.

How will it affect the overall society?

“Prevention is better than cure.” Early detection of diseases can prevent life-threatening episodes that need emergency visits or costly health-care procedures. So, preventive services are expected to lower costs of health-care, by preventing frequent emergency visits and other costly medical procedures. Hence, the overall benefit to the society is considered to outweigh the cost. However, many studies have pointed out that availability of improved preventive care has sometimes led to higher cost of care. It is stated that with the availability of better preventive care, doctors ask to have more preventive care services which shoots up health-care expenses. If preventive care services are available to consumers at no extra cost, then we do not see that problem. However, we also have to be careful that insurance companies do not shoot up the overall health-care costs, as mentioned earlier.

by Roy Tutu

About the author:

Roy Tutu is the publisher of the blog, “ephemeralthinking.com” – a blog that covers topics related to economics, business, society and entertainment.

Roy is an economist with a passion for writing. According to Roy, “our informal conversations leap from one topic to another, transforming and reshaping our views and opinions. Ephemeralthinking.com is an avenue that brings in such informal discussions to curious readers.”

Contact Roy Tutu at roytutu@ephemeralthinking.com

Have steel prices bottomed?

2010-08-05T19:20:00.001-04:00

Steel prices in China have reversed a sequence of decline that lasted for more than 3 months since April, according to data reported by China Iron and Steel Association (CISA).

As China is the world largest producer of steel, producing half of the global steel output, steel prices of China have significant impacts on global steel prices. In the first quarter of 2010, over-production in China created downward pressure on steel prices worldwide as steelmakers such as those in the US face fierce competition from low-priced imports from China.

However, analysts cautioned that it is too early to call for a turnaround in the sector. In Marketwatch,

"We believe that the signs of a tentative recovery are welcome for a beleaguered sector," said Goldman Sachs analysts in a report this week.

"However, we caution that channel checks with steel traders themselves suggest that it is too early to tell if the current recovery is sustainable," said analysts Rajeev Das, Nana Hasegawa and HJ Moon.

......................."Many traders do not believe the recovery to be real," they said, because the price rises for flat steel "represent the raising of asking prices, as few actual transactions appear to have taken place."

Moreover, they said, traders have indicated that "barring the auto sector, demand from many other industries remains weak" amid a seasonal slowdown in many Asian markets, particularly South Korea.

While activity in China "still appears to be quite strong, some traders are afraid that the government tightening could yet have a delayed impact when construction in progress is finished," they said. But they cited consensus among traders that production cuts in July were deeper than those in June, and economic data due out in the middle of this month "will help soothe concerns."

Despite this caution, investors took advantage of this short-term rally of steel prices. Steel stocks such as AKS, X, NUE had large gains since mid-July after months of downtrend. Steel ETF, SLX, rallied 12% since mid-July versus 3% of the major index, S&P 500.

America turning Japanese?

2010-06-11T15:15:00.000-04:00

Paul Krugman in New York Times,

What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

................. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

What’s behind this new pessimism? It partly reflects the troubles in Europe, ...............But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

........................................I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Retail Sales in May 2010

2010-06-11T14:07:00.002-04:00

Advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased by 1.2 percent from the previous month, but increased by 6.9 percent from May 2009. Total sales for the March through May 2010 period were up 8.1 percent from the same period a year ago. The figure of April 2010 was revised from an increase of 0.4 percent to 0.6 percent.

Excluding auto and parts, retail sales in May dropped by 1.1 percent from April but it is still 6.2 percent higher than the same period last year.

So, the question here is, " Have consumers finally run out of steam after 7 months of increased retail spending together with fiscal stimuli? "

By looking at each individual category in retail sales, categories that dropped in May from April include auto and parts, building materials and garden equipment and supplies, gasoline stations, clothing and general merchandise (including departmental stores). Among those that increased were furniture, electronics and appliances, food and beverages, healthcare and personal care, non-store retailers.

Building materials and garden equipment and supplies experienced a very sharp drop (9%), that alone could have led to close to 0.6% decline in total retail sales as the category carries about 0.6% of the total. Together with an increase in sales of furniture and electronics/appliances, it seemed to me retail sales in May was disapproportionately affected by homebuilders rushing to build houses to meet the demand of first time home buyer as home buyer credit was drawing to a close at April 30. This was further supported by the fact that this category had a big jumped of 8.4% in April from March following the previous big jump of 7.8% in March from February.

Furthermore, consumer confidence index of June compiled by University of Michigan showed the highest reading of 75.5 in two years. Although consumer confidence index is known to be fickle, it is one of the key leading indicators of future consumer behavior. I guess we will have to wait till June data to confirm whether consumer spending has really come to a halt.

It is Hungary This Time!

2010-06-05T00:32:00.001-04:00

US stock market dropped precipitously yesterday as Hungary spooked investors with another potential sovereign debt default after Greece.

From Wall Street Journal

Lajos Kosa, vice president of the right-leaning Fidesz party, which won an overwhelming victory in the April elections, said Thursday that Hungary was in a Greek-style sovereign-debt crisis. And Friday, the prime minister's spokesman, Peter Szijjarto, roiled markets by saying the economic situation is severe and that Hungary isn't likely to meet budget-deficit targets prescribed by the International Monetary Fund.

.......................................................................................................................................
Mr. Szijjarto's remarks clobbered the Hungarian forint and the euro Friday. The reaction spilled over into sovereign debt-insurance markets across Europe and into the currencies of Poland and the Czech Republic, the two other large non-euro countries in the former Communist east.

The euro sank below $1.20 to a fresh four-year low, trading at $1.1966 late Friday in New York. The cost to insure against sovereign debt default rose sharply early Friday in Europe—to the highest levels in nearly a month for Greece and Portugal. Bigger economies, such as Spain and Italy, also saw debt-default insurance costs rise to their highest levels since at least the start of 2009, according to data provider Markit.

Mr. Szijjarto said at a news conference that Hungary's new government is "ready to avert the Greek road," but he added that "there is nobody in the country apart from the previous government who still says the budget deficit of 3.8% of gross domestic product can be reached." That is the IMF's target for this year.

Metallurgical Coal is Red Hot

2010-06-02T23:05:00.000-04:00

From Business Week,

June 1 (Bloomberg) -- JFE Holdings Inc., Japan’s second- largest steelmaker, and two rivals agreed to a 12.5 percent price increase for coking coal contracts with BHP Billiton Ltd., three people with knowledge of the agreements said.
Prices for the steelmaking ingredient will rise to $225 a metric ton for the July quarter, from $200 a ton for the three months started April 1,...........

Coking coal will be in tight supply globally this year as imports by China, where domestic production can’t meet demand, may reach the second-highest on record, Citigroup Inc. said April 22. Prices may reach $300 a ton in the second half, equaling a record set in 2008, the bank said in the same month.

“The price rise for BHP Billiton is in line with our expectations,” Lyndon Fagan, a Royal Bank of Scotland Group Plc analyst, said by phone in Sydney. “Coking coal is looking like one of the strongest commodity markets.”

From Forexyard

Nippon Steel Corp, the world's No. 2 steelmaker, will likely seek to increase steel prices by an average 25,000 yen in July-September to pass on the rise in costs, the Mainichi newspaper reported.

Nippon Steel will aim to lift prices to 100,000 yen a tonne in talks with automakers and other with automakers and other customers, the paper said, adding that it was in late-stage negotiations for April-June to raise prices by 15,000 yen per tonne to about 90,000 yen

Retailers' Outlook in the Second Half

2010-05-27T22:01:00.000-04:00

Earnings report cards of retailers so far this year have been upbeat. In the last quarter, about two-thirds of the nation's retailers' earnings topped analysts' expectations, with profits up 26% on average from a year earlier, according to Thomson Reuters.

Their stocks reflected that. Retail stocks have been one of the best performers since the bottom of the financial-meltdown-induced bear market. Many retail stocks had a streak of new 52 week highs until recently, for instance, Steve Madden (SHOO), Aeropostale (ARO), Kohl's (KSS), Autozone (AZO), Macy's (M), Officemax (OMX) to name a few. [Click on the diagram below to enlarge it]

Can this be sustainable? Wall Street analysts seem to think not. They forecast retail-profit growth will slow to 17% in the second and third quarters this year and to 11% in the fourth quarter, according to Thomson Reuters.

Companies are very cautious too. Macy's, Kohl's, Staples that have just reported spectacular earnings offer cautious outlook of the full year.

Some of the concerns cited by analysts and companies include:
1. Tougher comparison --- 2008 and early 2009 were easy beat. Consumer confidence and sales were at historically depressed level. Excess inventory cost a bunch. Companies rushed to slash inventory by giving up profit margins altogether.

2. Expected increase in inventory rebuild and other expenses---As the economy and demand recover, companies have started to rebuild inventory and spending on marketing, technology and capital expenditure. Profits can no longer come from cost cutting as they did in the last few quarters

3. Price hikes in raw materials--- As global economy recovers, so is the price of raw materials. Some retailers like Abercrombie and Fitch (ANF) is already citing rising cotton price eating into the profit margin.

Leveraged ETF List

2010-05-27T21:10:00.000-04:00

ProShares UltraShort S&P 500 Fund (SDS) Top 100

ProShares Ultra S&P 500 Fund (SSO) Top 100

ProShares UltraShort 20+ Year Treasury Bond ETF (TBT) Top 100

ProShares Ultra QQQ Fund (QLD) Top 100

ProShares UltraShort QQQ Fund (QID) Top 100

ProShares UltraShort Financials Fund (SKF) Top 100

ProShares UltraShort Real Estate Fund (SRS) Top 100

ProShares Ultra Financials Fund (UYG) Top 100

ProShares UltraShort Dow 30 Fund (DXD) Top 100

ProShares Ultra Real Estate Fund (URE) Top 100

ProShares UltraShort Russell 2000 Fund (TWM) Top 100

ProShares Ultra Oil & Gas Fund (DIG) Top 100

ProShares Ultra Dow 30 Fund (DDM) Top 100

ProShares Ultra Basic Materials Fund (UYM) Top 100

Barclays S&P 500 2X Long 2009 ETN+ (BXUC)

Barclays S&P 500 2X Short 2009 ETN+ (BXDC)

Direxion BRIC Bear 2X ETF (BRIS)

Direxion BRIC Bull 2X ETF (BRIL)

Direxion India Bear 2X ETF (INDZ)

Direxion India Bull 2X ETF (INDL)

Market Vectors Double Long Euro ETN (URR)

Market Vectors Double Short Euro ETN (DRR)

PowerShares DB Agriculture Double Long ETN (DAG)

PowerShares DB Agriculture Double Short ETN (AGA)

PowerShares DB Base Metals Double Long ETN (BDD)

PowerShares DB Base Metals Double Short ETN (BOM)

PowerShares DB Commodity Double Long ETN (DYY)

PowerShares DB Commodity Double Short ETN (DEE)

PowerShares DB Crude Oil Double Short ETN (DTO)

PowerShares DB Gold Double Long ETN (DGP)

PowerShares DB Gold Double Short ETN (DZZ)

ProShares Ultra 20+ Year Treasury ETF (UBT)

ProShares Ultra 7-10 Year Treasury ETF (UST)

ProShares Ultra Consumer Goods Fund (UGE)

ProShares Ultra Consumer Services Fund (UCC)

ProShares Ultra DJ-AIG Commodity ETF (UCD)

ProShares Ultra DJ-AIG Crude Oil ETF (UCO)

ProShares Ultra Euro ETF (ULE)

ProShares Ultra FTSE/Xinhua China 25 Index Fund (XPP)

ProShares Ultra Gold ETF (UGL)

ProShares Ultra Health Care Fund (RXL)

ProShares Ultra Industrials Fund (UXI)

ProShares Ultra MidCap 400 Fund (MVV)

ProShares Ultra MSCI EAFE Index Fund (EFO)

ProShares Ultra MSCI Emerging Markets Index Fund (EET)

ProShares Ultra MSCI Japan Index Fund (EZJ)

ProShares Ultra Russell 1000 Growth Fund (UKF)

ProShares Ultra Russell 1000 Value Fund (UVG)

ProShares Ultra Russell 2000 Fund (UWM)

ProShares Ultra Russell 2000 Growth Fund (UKK)

ProShares Ultra Russell 2000 Value Fund (UVT)

ProShares Ultra Russell 3000 Index Fund (UWC)

ProShares Ultra Russell MidCap Growth Fund (UKW)

ProShares Ultra Russell MidCap Value Fund (UVU)

ProShares Ultra Semiconductors Fund (USD)

ProShares Ultra Silver ETF (AGQ)

ProShares Ultra Small Cap 600 Fund (SAA)

ProShares Ultra Technology Fund (ROM)

ProShares Ultra Telecommunications ETF (LTL)

ProShares Ultra Utilities Fund (UPW)

ProShares Ultra Yen ETF (YCL)

ProShares UltraShort 7-10 Year Treasury Bond ETF (PST)

ProShares UltraShort Basic Materials Fund (SMN)

ProShares UltraShort Consumer Goods Fund (SZK)

ProShares UltraShort Consumer Services Fund (SCC)

ProShares UltraShort DJ-AIG Commodity ETF (CMD)

ProShares UltraShort DJ-AIG Crude Oil ETF (SCO)

ProShares UltraShort Euro ETF (EUO)

ProShares UltraShort FTSE/Xinhua China 25 Fund (FXP)

ProShares UltraShort Gold ETF (GLL)

ProShares UltraShort Health Care Fund (RXD)

ProShares UltraShort Industrials Fund (SIJ)

ProShares UltraShort MidCap 400 Fund (MZZ)

ProShares UltraShort MSCI Brazil Index Fund (BZQ)

ProShares UltraShort MSCI EAFE Fund (EFU)

ProShares UltraShort MSCI Emerging Markets Fund (EEV)

ProShares UltraShort MSCI Europe Index Fund (EPV)

ProShares UltraShort MSCI Japan Fund (EWV)

ProShares UltraShort MSCI Mexico Investable Market Index Fund (SMK)

ProShares UltraShort MSCI Pacific ex-Japan Index Fund (JPX)

ProShares UltraShort Oil & Gas Fund (DUG)

ProShares UltraShort Russell 1000 Growth Fund (SFK)

ProShares UltraShort Russell 1000 Value Fund (SJF)

ProShares UltraShort Russell 2000 Growth Fund (SKK)

ProShares UltraShort Russell 2000 Value Fund (SJH)

ProShares UltraShort Russell 3000 Index Fund (TWQ)

ProShares UltraShort Russell MidCap Growth Fund (SDK)

ProShares UltraShort Russell MidCap Value Fund (SJL)

ProShares UltraShort Semiconductors Fund (SSG)

ProShares UltraShort Silver ETF (ZSL)

ProShares UltraShort Small Cap 600 Fund (SDD)

ProShares UltraShort Technology Fund (REW)

ProShares UltraShort Telecommunications ETF (TLL)

ProShares UltraShort Utilities Fund (SDP)

ProShares UltraShort Yen ETF (YCS)

Rydex 2X Russell 2000 ETF (RRY)

Rydex 2X S&P 500 ETF (RSU)

Rydex 2X S&P MidCap 400 ETF (RMM)

Rydex 2X S&P Select Sector Energy ETF (REA)

Rydex 2X S&P Select Sector Financial ETF (RFL)

Rydex 2X S&P Select Sector Health Care ETF (RHM)

Rydex 2X S&P Select Sector Technology ETF (RTG)

Rydex Inverse 2X Russell 2000 ETF (RRZ)

Rydex Inverse 2X S&P 500 ETF (RSW)

Rydex Inverse 2X S&P MidCap 400 ETF (RMS)

Rydex Inverse 2X S&P Select Sector Energy ETF (REC)

Rydex Inverse 2X S&P Select Sector Financial ETF (RFN)

Rydex Inverse 2X S&P Select Sector Health Care ETF (RHO)

Rydex Inverse 2X S&P Select Sector Technology ETF (RTW)

COMEX Silver Bear Plus ETF (HZD-TSX)

COMEX Silver Bull Plus ETF (HZU-TSX)

Horizons BetaPro COMEX Gold Bullion Bear Plus ETF (HBD-TSX)

Horizons BetaPro COMEX Gold Bullion Bull Plus ETF (HBU-TSX)

Horizons BetaPro NYMEX Crude Oil Bear Plus ETF (HOD-TSX)

Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (HOU-TSX)

Horizons BetaPro NYMEX Natural Gas Bear Plus ETF (HND-TSX)

Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HNU-TSX)

Horizons BetaPro S&P/TSX 60 Bear ETF (HXD-TSX)

Horizons BetaPro S&P/TSX 60 Bull ETF (HXU-TSX)

Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF (HED-TSX)

Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETF (HEU-TSX)

Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETF (HFD-TSX)

Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETF (HFU-TSX)

Horizons BetaPro S&P/TSX Global Gold Bear Plus ETF (HGD-TSX)

Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF (HGU-TSX)

Horizons BetaPro S&P/TSX Global Mining Bear Plus ETF (HMD-TSX)

Horizons BetaPro S&P/TSX Global Mining Bull Plus ETF (HMU-TSX)

MSCI Emerging Markets Bear Plus ETF (HJD-TSX)

MSCI Emerging Markets Bull Plus ETF (HJU-TSX)

NASDAQ-100 Bear Plus ETF (HQD-TSX)

NASDAQ-100 Bull Plus ETF (HQU-TSX)

S&P 500 Bear Plus ETF (HSD-TSX)

S&P 500 Bull Plus ETF (HSU-TSX)

S&P Agribusiness North America Bear Plus ETF (HAD-TSX)

S&P Agribusiness North America Bull Plus ETF (HAU-TSX)

US 30 Year Bond Bear Plus ETF (HTD-TSX)

US 30 Year Bond Bull Plus ETF (HTU-TSX)

US Dollar Bear Plus ETF (HDD-TSX)

US Dollar Bull Plus ETF (HDU-TSX)

ETFS Leveraged Agriculture ETF (LAGR-LSE)

ETFS Leveraged All Commodities ETF (LALL-LSE)

ETFS Leveraged Aluminium ETF (LALU-LSE)

ETFS Leveraged Cocoa ETF (LCOC-LSE)

ETFS Leveraged Coffee ETF (LCFE-LSE)

ETFS Leveraged Copper ETF (LCOP-LSE)

ETFS Leveraged Corn ETF (LCOR-LSE)

ETFS Leveraged Cotton ETF (LCTO-LSE)

ETFS Leveraged Crude Oil ETF (LOIL-LSE)

ETFS Leveraged Energy ETF (LNRG-LSE)

ETFS Leveraged Ex-Energy ETF (LNEY-LSE)

ETFS Leveraged Gasoline ETF (LGAS-LSE)

ETFS Leveraged Gold ETF (LBUL-LSE)

ETFS Leveraged Grains ETF (LGRA-LSE)

ETFS Leveraged Heating Oil ETF (LHEA-LSE)

ETFS Leveraged Industrial Metals ETF (LIME-LSE)

ETFS Leveraged Lead ETF (LLEA-LSE)

ETFS Leveraged Lean Hogs ETF (LLHO-LSE)

ETFS Leveraged Live Cattle ETF (LLCT-LSE)

ETFS Leveraged Livestock ETF (LLST-LSE)

ETFS Leveraged Natural Gas ETF (LNGA-LSE)

ETFS Leveraged Nickel ETF (LNIK-LSE)

ETFS Leveraged Petroleum ETF (LPET-LSE)

ETFS Leveraged Platinum ETF (LPLA-LSE)

ETFS Leveraged Precious Metals ETF (LPMT-LSE)

ETFS Leveraged Silver ETF (LSIL-LSE)

ETFS Leveraged Softs ETF (LSFT-LSE)

ETFS Leveraged Soybean Oil ETF (LSYO-LSE)

ETFS Leveraged Soybeans ETF (LSOB-LSE)

ETFS Leveraged Sugar ETF (LSUG-LSE)

ETFS Leveraged Tin ETF (LTIM-LSE)

ETFS Leveraged Wheat ETF (LWEA-LSE)

ETFS Leveraged Zinc ETF (LZIC-LSE)

ETFX DAX 2X Long ETF (DEL2-LSE)

ETFX DAX 2X Long ETF (Sterling) (DL2P-LSE)

ETFX DAX 2X Short ETF (DES2-LSE)

ETFX DAX 2X Short ETF (Sterling) (DS2P-LSE)

ETFX Dow Jones EURO STOXX 50 Double Short ETF (SEU2-LSE)

ETFX Dow Jones EURO STOXX 50 Double Short ETF (Sterling) (SE2P-LSE)

ETFX Dow Jones EURO STOXX 50 Leveraged ETF (LEU2-LSE)

ETFX Dow Jones EURO STOXX 50 Leveraged ETF (Sterling) (LE2P-LSE)

ETFX FTSE 100 Leveraged ETF (LUK2-LSE)

ETFX FTSE 100 Super Short Strategy ETF (SUK2-LSE)

ETFs within all subcategories:

Direxion Financial Bear 3X - Triple-Leveraged ETF (FAZ) Top 100

Direxion Financial Bull 3X - Triple-Leveraged ETF (FAS) Top 100

Direxion Small Cap Bear 3X - Triple-Leveraged ETF (TZA) Top 100

Direxion Small Cap Bull 3X - Triple-Leveraged ETF (TNA) Top 100

Direxion Large Cap Bull 3X - Triple-Leveraged ETF (BGU) Top 100

Direxion Large Cap Bear 3X - Triple-Leveraged ETF (BGZ) Top 100

Barclays S&P 500 3X Long 2009 ETN+ (BXUB)

Barclays S&P 500 3X Short 2009 ETN+ (BXDD)

Direxion 10-Year Treasury Bear 3X - Triple-Leveraged ETF (TYO)

Direxion 10-Year Treasury Bull 3X - Triple-Leveraged ETF (TYD)

Direxion 2-Year Treasury Bear 3X - Triple-Leveraged ETF (TWOZ)

Direxion 2-Year Treasury Bull 3X - Triple-Leveraged ETF (TWOL)

Direxion 30-Year Treasury Bear 3X - Triple-Leveraged ETF (TMV)

Direxion 30-Year Treasury Bull 3X - Triple-Leveraged ETF (TMF)

Direxion China Bear 3X - Triple-Leveraged ETF (CZI)

Direxion China Bull 3X - Triple-Leveraged ETF (CZM)

Direxion Developed Markets Bear 3X - Triple-Leveraged ETF (DPK)

Direxion Developed Markets Bull 3X - Triple-Leveraged ETF (DZK)

Direxion Emerging Markets Bear 3X - Triple-Leveraged ETF (EDZ)

Direxion Emerging Markets Bull 3X - Triple-Leveraged ETF (EDC)

Direxion Energy Bear 3X - Triple-Leveraged ETF (ERY)

Direxion Energy Bull 3X - Triple-Leveraged ETF (ERX)

Direxion Latin America Bear 3X - Triple-Leveraged ETF (LHB)

Direxion Latin America Bull 3X - Triple-Leveraged ETF (LBJ)

Direxion Mid-Cap Bear 3X - Triple-Leveraged ETF (MWN)

Direxion Mid-Cap Bull 3X - Triple-Leveraged ETF (MWJ)

Direxion Real Estate Bear 3X - Triple-Leveraged ETF (DRV)

Direxion Real Estate Bull 3X - Triple-Leveraged ETF (DRN)

Direxion Semiconductor Bear 3X - Triple-Leveraged ETF (SOXS)

Direxion Semiconductor Bull 3X - Triple-Leveraged ETF (SOXL)

Direxion Technology Bear 3X - Triple-Leveraged ETF (TYP)

Direxion Technology Bull 3X - Triple-Leveraged ETF (TYH)

ProShares UltraPro Dow 30 ETF (UDOW)

ProShares UltraPro MidCap 400 ETF (UMDD)

ProShares UltraPro NASDAQ 100 ETF (TQQQ)

ProShares UltraPro Russell 2000 ETF (URTY)

ProShares UltraPro S&P 500 Index Fund (UPRO)

ProShares UltraPro Short Dow 30 ETF (SDOW)

ProShares UltraPro Short NASDAQ 100 ETF (SQQQ)

ProShares UltraPro Short Russell 2000 ETF (SRTY)

ProShares UltraPro Short S&P 500 Index Fund (SPXU)

ProShares UltraPro Short S&P MidCap 400 ETF (SMDD)

source: http://etf.stock-encyclopedia.com/category/leveraged-etfs.html

What investors buy when they are scared?

2010-05-26T22:29:00.002-04:00

The last two years has been bloody and cruel to stock investors. S&P 500 has not even recovered the loss.
However, not all stocks shared the loss. Investors flocked to these stocks as consumers have been trading down from brand names to generic names, from departmental stores to thrift stores, from changing cars to sticking to old cars and fixing them up.

Thrift stores DLTR, FDO, NDN and auto parts companies AZO, ORLY and AAP are some of the names that benefit most from "trading down". Amidst a newfound fear of financial crisis in Europe, these names surged to new highs just recently as investors fled for safety.
[Click on diagrams to enlarge them]

Renewed Worries in Housing

2010-05-26T21:25:00.000-04:00

Two pieces of housing data, Case-Shiller Home Price Indices and new home sales, came out this week. Some are worried that all the good news that came from the sales front did not translate into price improvement sequentially.

S&P/Case-Shiller1 Home Price Indices (C-S Index), released yesterday show that the U.S. National Home Price Index fell 3.2% in the first quarter of 2010, but remains above its year-earlier level. In March, 13 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down although the two composites and 10 MSAs showed year-over-year gains.

“The housing market may be in better shape than this time last year; but, when you look at recent trends, there are signs of some renewed weakening in home prices,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. .................................................................................................

“While year-over-year results for the National Composite, 18 of the 20 MSAs and the two Composites improved, the most recent monthly data are not as encouraging. It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.”

In a report released by Census Bureau , sales of new one-family houses in April 2010 were at a seasonally adjusted annual rate of 504,000. This is 14.8 percent above the revised March rate of 439,000 and is 47.8 percent above the April 2009 estimate of 341,000. The sales outstrips new homes for sales, bringing the months of supply to as low as 5 months (i.e. at the current rate of sales, it takes 5 months to deplete the inventory). However, the price trend is not nearly as encouraging as the sales. The median price of new home sales has been trending downward for months.

How Fearful is the Market?

2010-05-25T22:38:00.000-04:00

As the sovereign-debt crisis in Europe develops, market participants are pricing larger scale systemic risks.

Libor and Libor-OIS spread
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to the most since July 16. The cost of borrowing in euros for three months climbed to 0.64 percent.Libor has more than doubled this year.

The Libor-OIS spread widened to 31.6 basis points from 28.4 basis points. The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the collapse of Lehman Brothers Holdings Inc. in September 2008.

TED spread
Another gauge of fear, the TED spread, the gap between the three-month T-bill interest rate and three-month Libor jumped to 36.9 basis points, also the highest since July. The TED spread -- -- spiked in October 2008 to more than 460 basis points. Adding to the sign of rising costs for companies to borrow funds is two-year swap spreads that just rose to 58 basis points, the highest since May 2009.

VIX
Volatility Index of S&P 500, VIX, now a popular barometer of fear factor, rose to 34.61 today. It reached a peak of 80 in October 2008.

Can Aeropostale sustain the momentum?

2010-05-21T16:24:00.002-04:00

It is not an overstatement that Aeropostale (ARO) has weathered one of the biggest economic crisis in a century unscathed. While retailer peers fumbled to cut cost, slash inventory, raise cash, deleverage and avoid bankruptcy, ARO was not only surviving but also growing. Yes, you read it right, "growing" !

Its major competitors, Abercrombie and Fitch (ANF), American Eagles (AES), Hot Topics (HOTT) paled before ARO's same store sales, a common metric to measure how a store opened longer than a year fares compared to a year ago. Until recently, ARO stunned analysts with its streak of positive same store sales growth, something that one would be hard pressed to find in the last 12 months.

April 2009                 20%
May 2009                  19%
June 2009                  12%
July 2009                   6%
August 2009              9%
September 2009       19%
October 2009            3%
November 2009        7%
December 2009         10%
January 2010             6%
February 2010           7%
March 2010              19%
April 2010                 -5%

What makes Aerospotale so good?
Not only was ARO able to maintain traffic to its stores, it was also able to grow its operating margin, attributable as much to pricing power as cost control . The operating margin was 16% in the first quarter, 2010 compared to 13% in prior year.

The management pointed to nimble business models with the right mix of product at the right price. The company integrates designing, sourcing, distribution and marketing all in house, enabling very efficient response to change of fashion trend and demand. However, many analysts pointed to "trading down" among teenagers from higher profile brands like Abercrombie and Fitch as the unemployment rate teetered at almost 10% for the overall population and 25% among teens. Some doubt the sustainability of this success as competitors Abercrombie and Fitch and American Eagles lower prices. Some bet against ARO as teenagers return to brand pursuing as the economy recovers and unemployment pressure subsides, citing potential loss of market share and more need for marketing expenses.

My takes
1. I do not foresee a sharp and quick recovery in the global economy especially with the European debt crisis overshadowing an emerging recovery. Therefore, I believe teenagers will continue to "trade down" at least until 2011.

2. With its expansion of store front, additions of key items, cross selling efforts (e.g accessories) and enhanced marketing initiatives, it may be able to retain a majority of its "trading down" customers even if the economy returns to good times.

3. I was a little concerned by a sudden break of its streak of positive same store sales growth in April. That was the first negative figure in the last 12 months. The management attributed that to an earlier Easter this year that pushed sales forward to March. I generally do not like "calendar" excuse but I think this management deserves benefits of doubt after showing such consistency in delivering spectacular results in a very hard time.

In short, I believe ARO, given its unusually attractive valuation (P/E less than 10 with 2010 earnings estimates compared to its peer's average at 15) and a management that seems to do everything right, can continue to offer favorable risk/reward in the next 12 months.

That said, I am a big believer in the notion that first-hand experience gives best stock selection. I am neither a teenager nor do I have teenager friends. Therefore, I count on you, shoppers, to offer me feedbacks on the sustainability of its appeal to teenagers and kids.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does NOT own any position of ARO in her personal account as of May 20, 2010

How does the Europe sovereign debt crisis affect the US? Part I

2010-05-14T21:55:00.001-04:00

It seems that the market was not convinced that the sovereign debt crisis in Europe is over even after a $1 trillion backstop program for Euro Union (EU) and over $100 billion rescue package to Greece. The Dow had another triple-digit down day when there was no single sector that closed in green. The euro tumbled as far as $1.2358, its lowest level since the fall of 2008 as investors fled to safety such as gold, USD and yen. Since the beginning of 2010, the euro has lost about 13.5% of its value against the dollar.

Some argued that the EU problem is far from over while some argued that the $1 trillion program was more than enough to put an end to the panic. Some others argued that the spillover effect of the crisis on the US was exaggerated. After all, Germany was the only country that is among the top 5 trade partners in 2009 [Click on the following diagram to enlarge it.]

However, together EU countries carry about 20% of the US foreign trade. Exports to EU countries were $221 billion and imports from those countries were $281 billion. As a result, the trade impact is not completely dismissable. Precipitous fall of Euro against US dollar may hurt American exporters. In additions, multinational companies who derive revenues from overseas will suffer from unfavorable translations of their overseas revenues into US dollar. Among American companies with large exposure to Europe are Exxon Mobil (XOM) 38%, General Electric (GE) 24%, Ford Motor (F) 21%, Johnson & Johnson (JNJ) 26% and Dow Chemical (DOW) 13%. This effect has not taken into consideration cross-country spillover effects. For example, if Chinese economy slows as demand from Europe weakens, Chinese demand for American goods may weaken too.

Is the Job Market Getting Back on its Foot?

2010-05-13T11:57:00.000-04:00

While the unemployment rate stays stubbornly close to 10% and is expected to do so, other job market indicators seem to be looking up.

Initial jobless claims, a measurement of the number of jobless claims filed by individuals seeking to receive state jobless benefits, in the week ending May 8, after adjusted for seasonal factors was 444,000, a decrease of 4,000 from the previous week's revised figure of 448,000. As weekly fluctuations can be volatile, 4-week moving average is often used . The 4-week moving average was 450,500, a decrease of 9,000 from the previous week's revised average of 459,500.

Events of extended mass layoff and the number of separations (workers who are let go for more than 31 days from their jobs) in the first quarter 2010 declined sharply from the same quarter last year. There were 1,564 mass layoffs and 221,150 separations in the first quarter 2010 compared to 3,979 and 705,141 respectively a year ago.

What is more encouraging is that 42 percent of employers expected to recall at least some laid-off workers,
up from 25 percent a year earlier.

The adverse blow of economic conditions to the job market has also subsided. Among the seven categories of economic reasons for extended mass layoffs, business demand factors accounted for 41 percent of events and 38 percent of related separations during the first quarter of 2010,down from 54 percent of events and 48 percent of separations in the same period a year earlier. Separations related to business demand factors decreased over the year by 250,749, or 75 percent. Within the business demand category, the largest over-the-year decrease in separations was due to slack work/insufficient demand (-205,424).

So, are workers seeing lights at the end of tunnel yet?

CLF plunged despite good earnings

2010-05-02T20:57:00.000-04:00

The stock of Mining company, Cliffs Natural Resources (CLF) took a beating (of about 10% in the day following the earnings report) despite beating analysts' earnings estimates and offering very upbeat outlook on demand for its main product, iron ore and metallurgical coal.

Revenue in the first quarter rose to $727.7 million from $464.8 million a year ago while net earnings were $93.5 million, or 69 cents per share, compared with a loss of $7.4 million, or 7 cents per share, in the same quarter of 2009.

Iron ore pellet sales volume rose 116 percent to 4.4 million tons due to the boost to more demand as the North American steel industry has increased capacity utilization to between 70 percent and 75 percent in recent months. Iron ore price per ton rose 24 percent to $94.97

As a result of the recovery in steel industry, metallurgical coal sales volume rose to 662,000 tons from 494,000 tons, with average revenue per ton at $104.38, up from $95.34 a year earlier.

The management expected strong demand to continue in 2010 and it increased its sales volume estimate to about 27 million tons in North American iron ore, from 25 million tons.

In its North American coal business, Cliffs said it is maintaining its sales and production volume expectations of about 3.4 million tons in 2010

Very good report card. So, what gives?

First, it has to be the broader market. The Dow had 2 triple digits down days in 3 days which was quite rare since the market rally started in February this year. The civil and potential criminal probe of Goldman Sachs together with sovereign debt fear in Europe spooked investors.

Second, what I would think is more relevant is new measures to crack down on real estates in China. If Chinese government is determined to slow down its economy, the biggest engine of global growth since the financial meltdown, the renewed recovery in demand for basic materials may die prematurely.

My takes

Chinese government is not as determined to cool down on its economy as it appears. International Monetary Fund, IMF, is still expecting China to grow 10% in 2010 and 9.9% in 2011. In addition, global economy, especially the US is recovering, albeit at a moderate space, thus contributing to upcoming demand for basic materials. Steel industry, for example, has increased its utilization significantly from last year to 70-75% year to date. With the auto industry recovering quickly this year and housing market slowly stabilizing and strengthening, steel industry is expected to strengthen further, adding to the demand for iron ore and metallurgical coal.

CLF stands to take advantage of this recovery. Once the stock price finds its footing, it offers a good buy.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any position of CLF in her portfolio as of May 2, 2010

Ford's upbeat results and cautious outlook

2010-04-27T13:57:00.000-04:00

While the auto giant swung to a $2.1 billion profit for the first quarter of 2010 from a loss of $1.43 billion for the same period last year, the stock price of company took a hit together with the rest of the market today.

Underneath the upbeat results is a toned down outlook by both the management and analysts.

As written in "Ford delivers $2.1bn net profit" of Financial Times,

Alan Mulally, chief executive, said that 2010 was “off to a more encouraging start than anticipated”. But he added that “while we are pleased with our momentum, the outlook remains challenging”.

Mr Mulally pointed to excess capacity in key markets and uncertainty surrounding the termination of car-scrappage incentive schemes, especially in Europe.

Lewis Booth, chief financial officer, indicated that quarterly profits were likely to be lower for the rest of the year, partly due to a lower contribution from Ford Credit. But Mr Booth said he was confident of positive operating cash flow.

Although Ford’s bottom line far exceeded analysts’ forecasts, Credit Suisse’s Chris Ceraso expressed disappointment at the $107m pre-tax profit in Europe and the $203m from South America. The first-quarter cash flow of $200m, before subvention payments to Ford Credit, was also weaker than expected.

Despite all the good news, the company remains very debt ridden with $34.3 bn of debt on March 31

Mr Booth told the Financial Times that “we’ve made no secret of the fact we’ve got too much debt.”

But he said that Ford was “making progress”, including a $3bn payment on its revolving credit facility earlier this month. “From here on in, our principal strategy is to improve the business and generate positive operating cash flow,” Mr Booth said

Coal Price Forecast 2010-2011

2010-02-12T21:35:00.000-05:00

Analysts mostly expect a rise in coal prices in 2010 and 2011, especially metallurgical (coking) coal, citing recovery in the global economy and tight supply.

Coal Prices may Head Up

UBS analyst Henry Kirn and Citi Investment Research analyst Brian Yu both expect higher coal prices in 2010 and 2011.
Yu expects prices for coking coal will settle at $200/ton in 2010 and 2011, up from earlier forecasts of $140/ton. Latest available data from the Energy Information Administration (EIA) has coking coal selling for $137/ton.

World coal price expected to increase

Analysts at Macquarie Bank expects an average world seaborne coal spot-price increase of 15% this year to $82.50/metric ton from $71.75 in 2009 while Merrill Lynch forecasts a 20% hike to $86.
Neither forecaster sees prices spiking back to the $127 level of 2008.
Macquarie analyst Carol Cao says in a research note that the recent 30% spot coal price surge to $100/metric ton "has been largely due to weather issues," and she expects to see lower spot prices at the end of winter. Still, winter costs are rising; Macquarie says internal Russian coal transport costs have risen to $75/metric ton to ports in both the Baltic and the Pacific, which will cause winter export prices to rise soon.
With the world coal price increase, the risk of a new resources tax and slim chances for a tariff hike in the first half of 2010, Merrill Lynch analysts also think Chinese independent power producers will face a "material margin squeeze" at least in the winter of 2010.
Fitch Ratings expects only a "modest increase" in domestic steam coal prices in the second half of 2010 from the $53 average of 2009 on partial recovery in domestic industrial power demand and less gas for coal substitution.

World coking coal prices seen rising

Scotiabank economists predict that the cost of coking coal will increase by 31% this year to $169/metric ton in benchmark Asian markets from an average $129 in 2009.
J.P. Morgan Securities is slightly less bullish, projecting 24% inflation to $160/metric ton.

out of the country

2009-12-13T09:29:00.000-05:00

Friends, you guys must be wondering why I haven't updated the blog as frequently.

I have been out of the country visiting my family for weeks. Visiting friends and relatives takes up most of the time, more than I have expected. with very limited access to the internet.

Sorry for any inconvenience. Will be back to normal in mid January.

Have a good holiday season and Happy New Year!

The Danger of Hot Money

2009-12-07T05:02:00.003-05:00

Dubai shook the world last week with a potential default. The country, until recently, with $60 billion foreign debt has been the rising star in emerging markets in the recent years. On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt. Influential bank analyst Richard Bove said in a note "it does not appear that American banks have any major direct impact from this event."

Dubai’s problem may not have direct impact on the global economy. However, Dubai’s crisis is just a tip of an iceberg of a potential global calamity. Since the eruption of subprime crisis that originated from the United States, historic low interest rates and weak economic recovery in the United States and Japan have led to massive carry trade. Arbitrageurs borrow “cheap money” at very low interest rates from countries like the United States and Japan in search for higher returns in many emerging markets.

China's foreign currency reserves rose $141 billion from July to September alone, up 20 percent from the same period in 2008. The China International Capital Corporation estimates that $50 billion in speculative capital flowed into China in the third quarter. In the meantime, Southeast Asian countries are growing increasingly concerned about strong inflows of hot money that could lead to asset bubbles in the region, says the Asian Development Bank (ADB). Noritaka Akamatsu, senior adviser at ADB’s Office of Regional Economic Integration, said that some regional governments are thinking of limiting capital inflows in the “short-term, liquid side of the market” as they could destabilise financial systems. “Last week, Indonesia’s central bank said that it was “studying” possible limits on foreign ownership of short-term debt but has no plans for controls on capital or the currency. The South Korean government plans to hold talks on what can be done to handle inflows financed with cheap US-dollar loans. Outside Asia, Russian Finance Minister Alexei Kudrin said that he was alarmed by the amount of hot money flooding into Russia and would support 'soft measures' to stop speculators from inflating the value of the stock market.

Hot money is speculative and destabilizing short-term capital flow. Its elusive and abrupt reversal characterized many previous financial crises such as the Asian Currency Crisis in 1997. Should carry trade unwind due to monetary policy tightening of the United States and/or sudden heightened risk aversion among foreign investors, a financial calamity in emerging markets is foreseeable in the absence of preemptive actions to slow down hot money.

Job Market Recovery

2009-12-04T09:33:00.001-05:00

Initial job claims' trend very close to creating job?

In a report of Market Watch on December 3,

The number of Americans filing for state unemployment benefits fell by a seasonally adjusted 5,000 to 457,000 in the week ending Nov. 28. It's the fewest initial claims since September 2008. Claims in the previous week were revised lower by 4,000 to 462,000. Economists surveyed by MarketWatch had expected initial claims to rise to about 480,000.

The figures come just a day before the Labor Department reports on November's unemployment rate. Economists expect the jobless rate to remain at a 26-year high of 10.2%, with 100,000 nonfarm payrolls lost. It would be the fewest jobs lost since January 2008.

In Thursday's report, the Labor Department said the four-week average of new claims fell 14,250 to 481,250, the lowest in 13 months. The four-week average smoothes out distortions caused by one-time events, such as bad weather, holidays or strikes.

The most recent data were collected in the Thanksgiving week. The seasonal factors attempt to adjust for the shortened workweek, but cannot do so perfectly.

It is generally believed that once initial claims fall to the range of 400,000 and 425,000, new jobs can be created.

Unemployment Rate Fell
In Reuters today,

U.S. employers cut a far fewer-than-expected 11,000 jobs in November, the smallest decline since the start of the recession in December 2007, government data showed on Friday, strongly suggesting the deterioration in the labor market was in its final stages.

The Labor Department said the unemployment rate fell to 10 percent from a 26-1/2 year high of 10.2 percent in October. The government revised job losses for September and October to show 159,000 fewer jobs lost than previously reported

These data are consistent with our previous discussions on this blog that the economic recovery is on track.
http://cocacolabuffet.blogspot.com/search/label/Economic%20Data

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Out of Town for 2 days

2009-11-22T21:31:00.002-05:00

I will be on the road for the next two days. Will be back to update the blog as usual on Wednesday.
Happy Thanksgiving, all!

Updates on TRIT

2009-11-18T14:56:00.002-05:00

Third Quarter 2009 Earnings Highlights

Revenue for Q3 2009 increased 131% to $4.9 million from $2.1 million in Q3 2008.
Gross profit (exclusive of depreciation and amortization) increased 112% to $1.9 million for Q3 2009 from $0.9 million in Q3 2008.
Q3 2009 gross margins decreased slightly at 39.1%, vs. 42.6% for Q3 2008.
Income from operations increased 150% to $1.3 million from $536,000 in Q3 2008.
Net income increased 112% to $1.1 million from $506,000 in Q3 2008.
Diluted earnings per share increased to $0.27, from $0.14 in Q3 2008.
Weighted average number of diluted shares outstanding was 3.95 million as of September 30, 2009, compared to 3.56 million as of September 30, 2008.
Completed an initial public offering of 1,700,000 ordinary shares at a price of $6.75 per share, traded on NASDAQ Capital Market on September 10, 2009.

New Contracts:

Awarded $960,000 in Mountain Torrent Forecasting contracts covering eight projects in four provinces.
Awarded $1.6 million Municipal Sewage Treatment contract in Kuancheng County of Hebei Province.
Awarded $1M Phase One Contract for Wastewater Treatment Plant in Jinjing Newtown in Baodi District of Tianjin Municipality in Northern China.

You may find related articles in
http://cocacolabuffet.blogspot.com/2009/10/no-drought-for-trit.html
http://cocacolabuffet.blogspot.com/search/label/Green%20Technology

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author owns TRIT in her personal account as of November 18,2009

DDR's Deal Signals Recovery in Credit Market?

2009-11-17T21:21:00.004-05:00

Commercial real estate industry has long been the alleged next leg down for the economy and financial markets. The industry not only has been plagued by defaults, declined occupancy and rent, but also the shut-down of credit market to finance property purchase and development. Since March, the credit market has been gradually easing, as shown by significant drops in credit spread. The recent success in U.S. mall owner Developers Diversified Realty Corp (DDR) in debuting the first Term Asset-Backed Securities (TALF) loan is a further evidence that commercial loan market is back to business. Under TALF, investors apply for low-cost non-recourse loans that are backed by the bond collateral. TALF has cut borrowing costs for consumer auto loans and credit cards.

According to Bloomberg,

DDR's $400 million issue is the first new U.S. commercial mortgage-backed backed security since mid-2008. The $323.5 million AAA-rated portion is expected to sell at a 1.45 to 1.60 percentage point premium to the five-year interest rate swap benchmark, or a yield of about 4.21 percent, IFR reported. Underwriter Goldman Sachs at midday lowered the yield premium from a range of 1.60 to 1.75 points, indicating it was seeing good demand from investors. By comparison, top-rated issues done under relatively conservative underwriting standards in 2004 are selling at premiums in the mid-2 percentage point range, according to Guggenheim Capital Markets.

The deal may signal some relief for the $700 billion commercial mortgage-backed securities market, which became key funding for office, retail and apartment buildings during the real estate boom.

You may find related articles in the following:
http://cocacolabuffet.blogspot.com/search/label/REIT

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author owns DDR in her personal account as of November 17,2009

What they say about the economy today?

2009-11-16T22:05:00.000-05:00

Meredith's Bearish on Banks and the Economy
The influential bank analyst, Meredith Whitney who cut her rating on Goldman Sachs Group Inc. last month, said bank stocks are overvalued after rallying faster than the U.S. economy and share prices will fall to tangible book value.

“I haven’t been this bearish in a year,” Whitney, founder of Meredith Whitney Advisory Group LLC, said today in a CNBC television interview. “I think you can sit on cash for a little bit, because you have to wait for a leg down in valuations. The S&P is expensive across the board.”

“The banks that are asset-sensitive to consumer credit are not places you want to be,” Whitney said. Financial companies aren’t adequately capitalized and will need to raise more capital in the next year, she said.

Whitney said she expects a so-called double-dip recession in which the U.S. economy slumps again before recovering. She said bank stocks won’t fall as far as they did last year because of a smaller impact from fair-value accounting, which requires companies to value assets each quarter to reflect market prices.

Ben Bernanke Signals No Intervention in Foreign Exchange
Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

The U.S. central bank chief didn’t address asset prices outside of the country. Financial officials in Japan and China, Asia’s two largest economies, said this week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

Bernanke said in his speech that the “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs. Bernanke also said the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

BDI surging to 4000

2009-11-12T10:36:00.001-05:00

Baltic Dry Index (BDI) , a measure of dry bulk shipping spot rate, surged 206 points yesterday , bringing the index to 3954. As we have previously discussed in " Dry Bulk Shipping Ready to Sale? " Iron ore negotiations and China growth are two drivers of the surge. COSCO analyst predicted that BDI would reach 4000 before the end of the year. Today certainly made him look like a genius.

The current index of three types of ships: Capeside, Panamax, Supramax stand at 67385, 30430 and 21129 respectively, significantly higher than the "dark age" a year ago at 4193, 6912, and 5580 respectively. [Click on the diagram to enlarge the view]

The global economic recovery led by emerging markets such as China has definitely lifted the tide but the spot rates are still abysmal compared to its peak in 2008 when Capeside rates could fetch as high as approximately 230,000, a little less than 4 times yesterday's rate. All dry bulk shipping companies, in face of adverse and precipitous economic meltdown, dashed to raise fund by issuing new shares to avert bankruptcy. Most of the companies had their equity diluted to such an extent that the level of spot rate that yielded jaw-dropping profits in the past will have to go a much longer way in producing the same results.

Another dark cloud that has been overshadowing the industry is the potential huge glut of new ships coming online by 2011.

According to N Cotzias Shipping, the capsize market at the end of September consists of 825 ships of a total of 149 million tonnes carrying capacity. The average age of fleet is 10.6 years.Based on its latest monthly report, N Cotzias said that just 16 capes of 2.8 million tonnes DWT have been scrapped. At the same time, the projected contracted and already under construction vessels that will enter the market until 2016 are 736 units of a total 144 million DWT. Out of these new buildings 429 units, or 80 million DWT are to enter the market by the end of 2010. Until today we only have 25 new buildings capes cancelled of which 9 were to be delivered in 2009 and 12 in 2010.This is a mere 5% only of the total of new ship orders.

Based on this assumption, Cotzias said that that "If we scrap only 2% of the total active fleet and if we cancel only 5% of the total orders, we are mathematically driven to expect that the Capsize market is head on to be over capacitated by 90% to 95% if all current trends prevail during remaining 2009 and 2010."

I remain short-term speculatively bullish in this sector due to near term catalysts such as favorable asset market sentiments, especially to commodities, imminent iron ore negotiations and continued growth in China. For longer term, uncertainty surrounding the sustainability and strength of global growth together with the upcoming glut in ships still have not offered attractive reward/risk profile for this industry.

How many Kindle will be sold?

2009-11-10T22:49:00.000-05:00

Since the e-commerce giant, Amazon (AMZN) released its earnings on October 22, 2009, I have been debating with myself whether I should write something about it. Most of my reluctance comes from my inherent resistance to high-tech toys. I have to say I have a good nose for almost everything in fashion except for these gadgets which I dismiss as a guy thing which I , you know, don't wanna barge into. However, I have to admit that Kindle did leave an impression on me at a Xmas party last year when the host's wife proudly showed all female guests her favorite Xmas gift, Kindle. Staring into Kindle held in her hand, the screen itself could easily pass as a "book" to me rather than "a guy thing". Between the Xmas songs, the Xmas tree, the warm blistful crowd, it even appeared to be "friendly" to me.

This "not-a-guy-thing” has caught a spotlight after almost a year. It has become the top selling products on Amazon, not just in the category of electronics but across the board.

The other part of my reluctance to write about it is the likelihood that I am late on board. Spending too much time on a short-lived hype is definitely not my style. After some thinking and research, it strikes me that this may be revolutionary rather than just a hype. So, maybe late, but not too late.

Because Amazon refused to reveal the sales number of Kindle, we can only rely on analysts' estimate for the moment. According to Techflash,

Citigroup's Mark Mahaney now believes that Amazon will sell 1.5 million Kindles this year -- 500,000 higher than his previous estimate. Likewise, he's saying Kindle revenue could jump to $700 million from $550 million.

Mahaney writes in a research note that Amazon's Kindle price cut -- from $299 to $259 -- is "typical" of the ecommerce giant, coming "prior to the market having a viable competitor." He said the price cut "sets up the Kindle for a full runway for Q4" and increases the reader's chances of becoming "one of the hit products of the holiday season."

He estimates that Kindle will sell 2.7 million units and do $1.5 billion in revenue in 2010, roughly 5 percent of Amazon's total revenue. Amazon hasn't revealed any numbers on Kindle sales -- and CEO Jeff Bezos has suggested the company may never give up that information -- so a lot of this is reading tea leaves.

Amazon's big competition in the e-reader market, Sony, is ramping up its advertising ahead of the holiday season. And there's a bunch of other companies are making plans to jump into the fray, including Irex, Asus, and Plastic Logic.

Forrester Research today boosted its projection for total e-reader sales, saying they'll now reach 3 million units in 2009, with 30 percent of sales occurring during the November-December holiday shopping season. That's up 50 percent from Forrester's previous projection of 2 million units in 2009. The research firm said further that e-reader sales could reach beyond 6 million in 2010.

With the launch of Kindle Global, guessing the sales number will be a more difficult task. But one thing for sure, Kindle will definitely be one of the top Xmas gift this year.

Has Risk Aversion Returned?

2009-11-10T10:56:00.001-05:00

It is common that in the early stage of economic or stock market recovery, small cap stocks outperform large cap stocks. We have seen that in the last 8 months until recently. In the most recent pullback, small caps were beaten so hard that many had stock prices go back to the pre-summer level. Small caps have not claimed the lost ground despite very strong rally of major indices since last Wednesday. Has risk aversion returned and we are in danger of a significant correction? Or small caps will catch up soon?

1-year and 3-month charts of Dow Jones Industrial Index (that represents large caps) and Russell 2000 (that represents small caps) show this divergence. [Click on diagrams to enlarge the view]

DGW-China Water Play

2009-11-09T22:05:00.001-05:00

As risk aversion among investors subsides, growth stocks may be in fashion. Duoyuan Global Water Inc. (DGW) could be one of the niche plays amidst increased government spending and regulations on the standard of water in China.

The company reported a earnings result that epitomizes a growth company for the third quarter 2009

Revenue increased 30.9% to RMB255.2 million ($37.4 million) from RMB195.0 million in the prior year period.
Gross margin increased to 49.5% from 46.8% in the prior year period.
Operating income increased 31.1% to RMB95.7 million ($14.0 million) from RMB73.0 million in the prior year period.
Net income increased 23.1% to RMB73.4 million ($10.8 million) from RMB59.6 million in the comparable period of 2008.
Diluted earnings per ADS was $0.49. Each ADS represents two of the Company's ordinary shares.

While all three segments of the business grew fast , the wastewater segment outpaced circulating water treatment and water purification.

Revenue from wastewater treatment equipment increased 42.3%, to RMB100.1 million ($14.7 million) in the third quarter of 2009 compared to RMB70.3 million in the third quarter of 2008, due to increased demand for Duoyuan's belt filter press machines, sludge screw, online testing equipment, ultraviolet shelving disinfection systems and microporous aerators.
Revenue from circulating water treatment increased by 20.0% to RMB96.1 million ($14.1 million) in the third quarter of 2009 compared to RMB80.1 million in the third quarter of 2008, driven by increased demand for the Company's new fully automatic filters, electronic water conditioners and circulating water central processors.
Revenue from water purification equipment increased by 28.4% to RMB55.0 million ($8.1 million) in the third quarter of 2009 compared to RMB42.8 million in the prior year period, as the Company's newly introduced models for central water purifiers, industry pure water equipment and ultraviolet water purifiers continued to be well-received by the marketplace.

While the growth is good, Chinese water market is a highly fragmented one. DGW carries only about 1% of the market share, facing large rivals such as Zhejiang Omex Environmental Engineering, is a subsidiary of Dow Chemical, General Electric and Ashland that are also players in the Chinese market.

As a strategic plan, I would expect the company to acquire smaller companies to consolidate long-term growth. The company has cash and bank deposits of RMB937.2 million ($137.3 million), compared to RMB198.5 million as of December 31, 2008, mostly reflecting net proceeds from the Company's initial public offering.

Until the company gains reasonably larger market share, I would view this as a tactical speculative play that works well in a market that is less risk averse rather than a long-term growth value play.

You may also be interested in the following articles:
http://cocacolabuffet.blogspot.com/2009/10/tap-into-chinese-water.html
http://cocacolabuffet.blogspot.com/2009/10/no-drought-for-trit.html

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not have positions of DGW as of November 9, 2009

10.2% Unemployment!! Now What?

2009-11-06T15:04:00.002-05:00

The Bureau Labor of Statistics (BLS) announced today that the unemployment rate increased from 9.8% in September to 10.2%, the highest since 1983. 190,000 non-farm jobs were lost. 8.2 million people lost their job since December 2007, the beginning of the economic meltdown. In October, the number of unemployed persons increased by 558,000 to 15.7 million.

On a normal day, one would have taken this as a disastrous number. After all, 10% was thought of a psychological level just like Dow Index 10,000. But, nothing, nada!

The news received fairly silent treatment from the market as the market wanders around a very narrow range for the most part of the trading day (It's 2.34pm EST now). With a number like this and there is no triple digit sell-off, not even a double digit sell-off, not even a knee-jerk reaction, there is only one obvious reason: People are not panicky. People saw it coming and people believed this was as bad as it could get.

On the hind sight, it probably should not be a surprise after all. The survey of 52 economists by Wall Street Journal in September reported that most economists still expected the unemployment rate would climb to 10.2%, from September's 9.7% , before falling early next year. These economists also in general expected jobs being added in the next 12 months although they expected only 200,000 jobs will be added. They expected the unemployment rate to stay as high as 9.3% in December 2010.

This is quite consistent with the Fed's forecast in September FOMC minutes. The Fed expected the unemployment rate to stay around 9.4% in 2010 and come down to 8% only in 2011.

So, now we know people did see it coming and it should not come as a surprise that the unemployment rate will stay high for quite a while (which is typical of recessions in 1990s and 2000s). The next question we have to get ahead is: Is 10.2% as bad as it can get?

Related posts:
http://cocacolabuffet.blogspot.com/2009/11/how-much-longer-can-productivity-be.html

How Much Longer Can Productivity Be Squeezed?

2009-11-05T23:54:00.001-05:00

The Bureau of Labor Statistics (BLS) reported a stunning 9.5% jump of productivity in the third quarter. Productivity , simply put, is output per labor hour. With unemployment rate expected to top 10% soon, workers who still have jobs are beeing squeezed to get the job done. How much longer can companies go without hiring by simply squeezing every bit out of productivity?

Although history does not always repeat in the same manner, it may be fun to do a little bit of pre-weekend economics homework by looking into the past. I looked at the economic downturn in the last 40 years. The economic downturn refers to the peak to trough of the US economy as marked by National Bureau of Economic Research (NBER).

The first date marked the peak of a business cycle while the second date marked the trough (the end of the downturn) and the number in parenthesis marked the quarter.

1. December 1969(IV) --November 1970 (IV)
Productivity peaked 1 quarter after the end of downturn. Unemployment peaked 1 month after the end of downturn.

2.November 1973(IV)-- March 1975 (I)
Productivity peaked 1 quarter after the downturn ended. Unemployment peaked 1 month after the end of the downturn

3. January 1980(I)-- July 1980 (III)
Productivity peaked 2 quarters after the downturn ended. Unemployment peaked in the very same month the downturn ended.

4. July 1981(III) --November 1982 (IV)
Productivity peaked 2 quarters after the downturn ended. Unemployment peaked 1 month after the downturn ended

5. July 1990(III)-- March 1991(I)
Productivity peaked 4 quarters after the downturn ended while unemployment 15 months after the downturn ended

6. March 2001(I)-- November 2001 (IV)
Productivity peaked 7 quarter later although there was a significant spike 1 quarter after the downturn ended.Unemployment peaked 17 months after the end of downturn

7. December 2007(IV) -- ???

By a very quick look at these numbers, one may notice a difference between the periods in 1970s,80s and the periods in 1990s,2000s. During downturns in 1970s,1980s, productivity and unemployment peaked soon after the end of the downturn (within a quarter or two for productivity and a month or two for unemployment). In contrast, productivity and unemployment peaked long after the end of downturns was marked in 1990s and 2000s (as long as 5 quarters and/or 17 months).

What contributed to such a long lag between the bottom of the downturn and the peak of productivity and unemployment? A wild guess of mine would be technology and outsourcing. Technology nowadays enables a company to go by just fine without many in-house supporting services such as accounting, human resources, customer services. These tasks can all be outsourced in order to save cost. I suspect this will also be the case for this downturn. Productivity and unemployment rates can stay high long after the trough has been reached.

Ok, now. The next question is: Have we reached the trough yet?

Retailer October Round-Up

2009-11-05T19:32:00.001-05:00

It's that time of the month again when retailers reported their monthly sales. The industry reported October same store sales growth of 1.8%, slightly below analysts' estimates of 2.0% according to Thompson Reuters.

In general, almost all sub-sectors of retailers posted some sales gains from September except for teenage apparel and departmental stores. The following is a snapshot of the % change of same-store sales, an important metric of retailers' performance and the % of total sales [Click on the diagram to enlarge the view].

The Fed maintains a sweet spot

2009-11-04T15:18:00.004-05:00

From FOMC Statement

On the real economy:

Economic activity has continued to pick up.
Conditions in financial markets were roughly unchanged.
Activity in the housing sector has increased over recent months.
Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.
Businesses are still cutting back on fixed investment and staffing, though at a slower pace
Businesses continue to make progress in bringing inventory stocks into better alignment with sales.

On inflation:
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Monetary policies:
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

Off the top of my head
The economy is in the "sweet spot" for the next 3 to 6 months-- economic activities continue to improve while monetary policies continue to be very accomodating. Cheap money is always welcomed. Stock market and bond market should be able to benefit from liquidity and subdued inflation and inflation expectations. New highs can be made. Low interest rates should continue to lead to weak US dollar. In the immediate short term, however, I would be cautious about 3-5% pullbacks of the stock market (e.g.Dow getting to aroung 9650) as substantial resource slack may shake confidence easily after an extended rally.

The Auto Industry Post Cash-and-Clunker

2009-11-03T22:39:00.001-05:00

After a dismal September figure immediately after the end of "Cash-and-Clunker" , many cast doubt on the sustainability of the encouraging signs of stability in the industry without incentives such as "Cash-and-Clunker". October sales soothed the anxious nerves.

October sales were unchanged at 838,000 from the same period last year but up 12% from Sept.The October annualized figure rose to 10.5 million after slumping to 9.2 million in September although it was still far short of the 17 million annual rates from the late 1990s and early 2000s.

From Yahoo Finance ,
"It's ... a fairly stable kind of footing that the industry is getting under it," said Gary Dilts, a former Chrysler sales executive who is now senior vice president of global automotive operations for J.D. Power and Associates.

"Clearly we're seeing improvement in the economy and in the industry. It isn't huge, but it's a good sign given that Cash for Clunkers is over," said Mike DiGiovanni, General Motors Co.'s executive director of global market and industry analysis.

The biggest winner among major automakers was South Korea's Hyundai Motor Co., which saw sales skyrocket 49 percent to 31,005 vehicles, boosted by the Elantra small sedan. Japan's Nissan Motor Co. came next with a 5.6 percent gain, followed by GM at 4.7 percent, aided by strong pickup truck sales, the performance of new models and the highest incentives in the industry. It was GM's first year-over-year monthly sales increase in 21 months.

Toyota Motor Corp. said its sales edged up less than a percent, while Honda sales were flat. Less-rosy news came from Chrysler Group LLC, whose sales fell 30 percent, though they improved from September.

Ford Motor Co.'s sales rose 3 percent and it gained U.S. market share for the 12th time in 13 months as its critically acclaimed vehicles continue to grab buyers from rivals. Ford has benefited from consumer goodwill because it didn't take government bailout money or go into bankruptcy protection, as General Motors and Chrysler did.

Emily Kolinski Morris, Ford's top economist, said uncertainty will continue as long as employment keeps declining, but she said October sales show a real underlying demand for new vehicles after the distorting effects of the clunkers program during July and August. The economy, Kolinski Morris said, is in transition from recession to recovery with financial markets improving.

And the auto industry still has to see its way through a number of economic challenges, said Bob Carter, a Toyota vice president. "We expect the recovery to be very gradual, extending into next year and beyond," he said.

GM was obviously concerned about its incentive spending, with new sales chief Susan Docherty saying that the company had to bring the numbers down. GM spent $4,100 per vehicle last month as it paid to phase out the Saturn and Pontiac brands. It also had to unload a large number of 2009 pickup trucks.

In October, 52 percent of GM's sales were 2009 models, 47 percent were new 2010s and one percent were from 2008. By contrast, 80 percent of Ford's sales were 2010 models.

GM, Docherty said, plans to reduce incentives as it sells down older models and ships more newly launched vehicles.

Despite GM's spending, industrywide incentives were down about $100 per vehicle compared to September, said Jesse Toprak, chief analyst for the car-pricing Web site TrueCar.com.

He expects incentives will continue to drop in November before rising again at the holidays in December.

He also said that as GM winds down Pontiac and Saturn, eliminating the need for incentives on those vehicles, he expects GM and other automakers to start pricing cars closer to what they'll sell for instead of relying so heavily on incentives.

"Eventually, the product has to sell itself," he said.

Simon: Ready to Shop?

2009-11-02T15:20:00.000-05:00

Simon (SPG), the largest U.S. real estate investment trust (REIT) that developed and operated shopping centers shed some lights on better retail atmosphere toward the end of this year.

The people that we’ve been talking to, their inventories are down anywhere from 15% to 22% from last year. So while that is not going to drive top line sales, they are much more optimistic because they have less inventory they have to push out the door, they’re going to be able to be much more disciplined on their pricing and drive a lot more margin improvement and most importantly, cash flow.

......based on talking to the retailers, which David and I are doing a whole lot of everyday that they’re feeling better and we have absolutely seen several instances of retailers that were in here in the second quarter asking for rent relief and modifications and then came back in the third quarter and said, “Looks like, we’re okay.” We don’t need anything. We’re going to make it.

“as I read all of the retail analysts and all of their ratings and their movements virtually all of the retailers are getting upgrades and more positive outlooks based on the expectation that there’s going to be a more profitable Christmas, which may or may not be related to more sales.”

Retailers have started to gain their footing and certain retailers are growing store counts including Aeropostale, Gachi, Apple, the Buckle, California Pizza Kitchen, Fresh, Forever 21, H&M, Michael Kors and Red Robin, to name a few. In a number of predominantly outlet ,tenants are also increasing their store counts. We have a significant amount of leasing volume in our pipeline over 500 deals and 8 million square feet of leases in process across all of our domestic platforms.

In particular, it is good to note the volume of big box activity has significantly increased in the second half of the year. Since mid July we have completed 20 big box deals across the four platforms and discussions are underway on 20 to 30 more retailers will include Forever 21, H&M Dave & Buster’s, Bed Bath & Beyond. We are seeing a slight quality of the big box retailers they want to be in malls, outlets, mills or strip centers where they benefit from shopper quality and traffic.

Preliminary reports from retailers regarding October have been encouraging. We believe our retailers will have a decent holiday season.

Sales Per Square Foot

Occupancy in all of the four platforms was up sequentially from 6/30/09, Mills was up a 150 basis points and Regional Mall and Premium Outlet Centers increased 50 basis point and Community, Center, Lifestyle platforms increased 40 basis points.

Regional Mall retail sales in the third quarter were $430. The decline in sales for September over September was much lower than any month year-to-date. Mall leasing spreads were $4.04 for the first nine months of 2009, average base rent was at 9/30/09 was $40.05, up 2% for the year earlier period.

Premium Outlet comparable sales were relatively stable in the third quarter at $492 per square foot, down only $1 from 6/30/09, and actually were up in September on a comparable sales per square foot. Premium outlet releasing spread continues to be strong at $9.25 per square foot for the first nine months of ‘09. Average base rent for the outlets at 9/30/09 was $32.95 per square foot up from the year earlier period.

My Takes

SPG's remark on retailers was consistent with most of the "stabilizing" and "getting better" pictures. However, the multi-billion question at this stage is: How much better?

ISM continued the expansion

2009-11-02T13:21:00.000-05:00

"The manufacturing sector grew for the third consecutive month in October, and the rate of growth is the highest since April 2006 when the PMI registered 56 percent. The jump in the index was driven by production and employment, with both registering significant gains. Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode," said Norbert Ore, the chair of the Institute for Supply Management™ Manufacturing Business Survey Committee.

WHAT RESPONDENTS ARE SAYING ...

"We are beginning to be affected greatly by lead-time increases on semiconductor components." (Computer & Electronic Products)

"Still a very difficult environment — commodity increases threaten recovery and don't seem to correlate with any supply/demand fundamentals." (Food, Beverage & Tobacco Products)

"Automotive demand still remains strong even after 'cash for clunkers.'" (Fabricated Metal Products) [indicated for the second month]

"After several rather busy months, we are seeing the order intake for early next year soften." (Transportation Equipment)

"The improvement seen earlier is not holding." (Primary Metals)

BREAKING DOWN THE INDEX

PMI
The recovery in manufacturing strengthened in October as the PMI registered 55.7 percent, which is 3.1 percentage points higher than the 52.6 percent reported in September, and the highest reading for the index since April 2006 (56 percent). A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the sixth consecutive month in the overall economy, as well as expansion in the manufacturing sector for the third consecutive month.

New Orders

ISM's New Orders Index registered 58.5 percent in October, 2.3 percentage points lower than the 60.8 percent registered in September. This is the fourth consecutive month of growth in the New Orders Index. A New Orders Index above 48.8 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

Production

ISM's Production Index registered 63.3 percent in October, which is an increase of 7.6 percentage points from the September reading of 55.7 percent. An index above 50.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the fifth consecutive month the Production Index has registered above 50 percent.

Employment

ISM's Employment Index registered 53.1 percent in October, which is 6.9 percentage points higher than the 46.2 percent reported in September. This is the first month of growth in manufacturing employment following 14 consecutive months of decline. An Employment Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower in October as the Supplier Deliveries Index registered 56.9 percent, which is 1.1 percentage points lower than the 58 percent registered in September. This is the fifth consecutive month the Supplier Deliveries Index has been above 50 percent, following eight months of faster delivery performance. A reading above 50 percent indicates slower deliveries.

Inventories

Manufacturers' inventories contracted at a slower rate in October as the Inventories Index registered 46.9 percent. The index is 4.4 percentage points higher than the September reading of 42.5 percent. An Inventories Index greater than 42.6 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).

Customers' Inventories

The ISM Customers' Inventories Index registered 38.5 percent in October, slightly lower than in September when the index registered 39 percent. The index indicates that respondents believe their customers' inventories are too low at this time. This is the seventh consecutive month the Customers' Inventories Index has been below 50 percent, following eight months above 50 percent.

Prices

The ISM Prices Index registered 65 percent in October, 1.5 percentage points higher than the 63.5 percent reported in September. This is the fourth consecutive month that the Prices Index has registered above 50 percent. While 37 percent of respondents reported paying higher prices and 7 percent reported paying lower prices, 56 percent of supply executives reported paying the same prices as in September. A Prices Index above 47.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.

Backlog of Orders

ISM's Backlog of Orders Index registered 53.5 percent in October, the same as reported in September. Of the 81 percent of respondents who reported their backlog of orders, 27 percent reported greater backlogs, 20 percent reported smaller backlogs, and 53 percent reported no change from September.

New Export Orders

ISM's New Export Orders Index registered 55.5 percent in October, 0.5 percentage point higher than the 55 percent reported in September. This is the fourth consecutive month of growth in the New Export Orders Index, following nine consecutive months of contraction.

Imports

Imports of materials by manufacturers expanded in October as the Imports Index registered 51 percent, 1 percentage point lower than the 52 percent reported in September. Imports have contracted in 18 of the last 21 months.

Buying Policy

Average commitment lead time for Capital Expenditures increased 4 days to 103 days. Average lead time for Production Materials decreased 5 days to 41 days. Average lead time for Maintenance, Repair and Operating (MRO) Supplies decreased 2 days to 21 days.

Mr Coal Optimist vs Pessimist?

2009-10-29T21:54:00.004-04:00

Two large coal miners, Patriot Coal (PCX) and Massey (MEE) reported earnings this week. The media has portrayed PCX;s earnings report as being good while MEE's earnings report being bad. The optimist was rewarded with a jump in the stock price after the release while the pessimist was punished. Reading between lines, they both are telling the same story. Just in different tones.

At PCX,
in an article of Miningweekly,

The CEO Richard Whiting said on Tuesday that markets for both coal segments remain "challenging", but that the company expects to see improvements during 2010. The demand for its steelmaking and thermal coal will recover strongly in the “near term” according to Whiting.

“We believe the markets are at an inflection point, poised to see a substantial improvement in demand in 2010, in both metallurgical and thermal coals,” Whiting said on a conference call.

“While we don't expect the market recovery to be in full swing by early 2010, we are optimistic that the timeline for recovery is more within our sights than it seemed just a quarter ago,” said CFO Mark Schroeder.

He said there is no doubt that metallurgical coal demand around the world is rebounding.

“And because of the limited availability of high quality met coal in the world, our forecasts show demand outstripping supply, and therefore driving up met pricing as we move into and through 2010.”

Patriot is also expecting to see domestic demand for thermal coal improve “significantly” in the next six to nine months.

Demand will likely exceed supply for US thermal coal, especially for central Appalachia, around the end of 2010, he said.

“And the change from oversupply to undersupply may be abrupt, taking place over a very short period of time.

“With upward pressure on demand and downward pressure on supply, we believe the effect on pricing will be meaningful.”

Although inventories remain high, customer sentiment is showing signs of improvement.

At MEE,
in a report at Yahoo Finance,

The CEO Blankenship said worldwide production and use of coal will likely increase by more than 120 million tons per year during each of the next five years.

But "the macroeconomic factors facing all businesses and particularly the coal industry have never been more
challenging," he said.

He expected domestic thermal coal demand to remain weak for the next several quarters and perhaps through 2010. Utility stockpiles remain very high and the amount of coal being burned was low.

"We continue to be encouraged by the positive news we are hearing from the seaborne metallurgical coal export markets," he said, noting steel production in China was up 22 percent in August and 5 percent for the first eight months of the year.

Steel producers have restarted or announced plans to restart more than 40 blast furnaces that have previously been idled, Blankenship said, adding that Massey has the capacity to produce more than 12 million tons of metallurgical coal per year.

Supply will be constrained by permits

At PCX, in a report by Miningweekly,
"Supply will be constrained by the delays that miners face getting new surface mining permits, and a lot of production that has been taken off line may actually leave the market permanently," Whiting speculated.

At MEE, in a report by Reuters,
"The demand for coal to generate power and make steel is growing, but environmental bureaucracy is making it more difficult to mine the fuel," Blankenship said on Wednesday

Last month, the EPA ruled that all 79 pending mine permits in Appalachia must undergo additional evaluation, because they pose a potential hazard to water in parts of Kentucky, West Virginia and Ohio.

In a nutshell,
No significant recovery is expected before the end of 2009. The demand for metallurgical coal is looking good, expected to come around in early 2010.The demand for thermal/steam coal is expected to come around only in later part of 2010.

Is it just me or it's the tone of Mr. Whiting and Blankenship? Had Mr Blankenship colored his speech with more adjectives like "significant", "substantial", "optimistic", "near term", the stock price probably would have received "significantly" more generous treatment from the Wall Street.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author has no positions of PCX and MEE in her personal account as of October 29,2009

Cold winter for steel

2009-10-28T15:57:00.000-04:00

Just like the past 3 months, the only important support to the stock price of steel companies is all but the US dollar. The fundamentals of steel have not been good since steel prices peaked in July. The 4 trillian yuan (approximately $586 billion) government stimulus has led to overexpansion in the steel industry, among other industries on the focus list. Steelmakers responded to favorable steel price early in the year by ramping up production, reaching record high output. Major steelmakers like Baosteel, Hebei Steel, have repeatedly lowered prices of their products. With excess output and export rebates comes the incentive to exports. Exports from China will place a downward pressure on the global steel price which is currently higher than its chinese counterpart. Major US steelmakers such as AK Steel, US Steel's earning releases continue to point to weaker prices in the near future.

In the coming months, there are a few factors that will change the above conjecture for the industry

1. Recovery in the automakers. If automakers can hold up their production in the second half of the year as announced early this year without "Cash-and-Clunker", steelmakers will give upside surprise in the upcoming earning reports.

2. Global economic growth. Global steel demand is expected to rise by 9.2% next year. If this is on track, we may see some "real demand" for steel instead of just "restocking"

3. US dollar. If US dollar weakens further, all commodity prices will rise.

4. Chinese government since August, has made several announcements and initiatives to crack down on over-expansion of steel industry, among others. If these initiatives can be enforced effectively, the excess capacity can be absorbed in a few months.

Steelmakers don't have Xmas

2009-10-27T17:34:00.000-04:00

U.S. steelmakers reported better-than-expected third-quarter results on Tuesday but offer gloomy short-term views for the industry and the economy.

As pointed out in September post, over production of steel in China continued to pressure steel prices. Despite fairly upbeat 2010 forecast by the World Steel Association on the ground of Chinese stimuli, U.S steelmakers have generally expected the end of "Cash-and-Clunker" to slow down demand for steel toward the end of the year. US steelmakers also expect lower prices for the fourth quarter.

U.S. Steel expects to report a fourth-quarter operating loss and idle two blast furnaces to lower production.
AK Steel, which has been operating at less than 60-percent capacity, said that while it expects to post an operating profit in the fourth quarter, it anticipates a decline in average selling prices.

"Technically speaking, we may be out of the recession, but it certainly doesn't feel that way," James Wainscott, AK Steel's chairman, president and chief executive told analysts.

"Suffice to say we've bounced off the bottom, but we've got a long way to go from here."

According to Reuters,

Wainscott said AK Steel expects to ship more steel in the fourth quarter as it increases its capacity rate to around 65 percent from 55-60 percent in the third quarter.Wainscott said he was optimistic that auto build rates would increase since carmakers currently had low inventories, due to the business generated by the clunker program.

U.S. Steel's third-quarter net loss was $303 million, or $2.11 per share, compared with a year-earlier profit of $919 million, or $7.79 per share. Revenue dropped 61 percent to $2.82 billion, but was 32 percent higher than in the second quarter, the Pittsburgh-based company said.

Excluding a one-time currency gain, the loss was $2.43 per share versus analysts' average forecast of a loss of $2.87 and revenue of $2.72 billion, said Thomson Reuters I/B/E/S.

AK Steel's third-quarter net earnings were $6.2 million, or 6 cents per share, compared with earnings of $188.3 million, or $1.67 per share, in the same quarter last year.

Revenue fell more than half to $1.04 billion, the West Chester, Ohio-based company reported. Analysts on average were expected a profit of 1 cent per share.

These forecasts are consistent with the peers that have recently announced their earnings.

POT Saw a Dry Season

2009-10-25T16:32:00.000-04:00

The largest potash fertilizer producer in the world, Potash Corp of Saskatchewan (POT) announced that its net income dropped to $248.8 million, or 82 cents a share, in the three months ended Sept. 30, a very shartp decline from $1.24 billion, or $3.93, a year earlier. Analysts on average expected earnings of 81 cents a share, according to Thomson Reuters I/B/E/S. The company expects fourth-quarter earnings of 65 cents to 85 cents a share. Analysts are expecting $1.24, according to Thomson Reuters I/B/E/S. The company also expects full-year 2009 earnings to be at the low end of its previously forecast range of $3.25 to $3.75 a share.

This was obviously a very dismal result however very few people were surprised as potash prices dropped from as high as $1000 a ton last year to barely $500 this year. Most kept their eyes focused on what the management had to say about the future.

Outlook
POT currently expects 2009 potash shipments of 3 million to 3.2 million tonnes. In 2008, the company produced 8.7 million tonnes of potash. The company expects global potash demand of about 50 million tonnes in 2010, which is at the low end of the 50 million to 55 million tonnes range forecast in September. In July, the company saw 2010 demand at between 55 million and 60 million tonnes.

Agricultural market is expected to be tight going forward.

"We’re in the midst of the slowest harvest since 1985, as of October 18, 17% of the crop have been harvested versus the five year average of 46%. The crop is only 83% mature and right now certain consultants believe with the freeze that we had earlier this month that are around 215 million bushels have been lost, maybe up to a billion bushels have been affected......In terms of the corn price, December corn was 304 in early September, $4 yesterday. .." said Bill Doyle, the CEO of Potash Corp.

The contract with China remains to be the key catalyst in the remaining of the year. Closing the deal is expected to eliminate uncertainty among smaller buys regarding the future price of potash fertilizer and starts replenishing the stock. Bill Doyle said that the inventory of China is about 2.5 million to 3 million tonnes now. "When they get to 2 million, they will buy," said Doyle. He expects the deal to be closed by the end of this year.

My Takes
Echoeing the recent Mosaic (MOS) ' s earnings release and the recent rally of fertilizer, the near term catalysts of fertilizers are:
1. China negotiation
2. Crop prices
3. Inventory
4. Merger& Acquisition (M&A)

While the timing of negotiations with China is uncertain, an end of the negotiation given the current inventory of China is highly likely. As far as crop prices are concerned, according to the Organisation for Economic Co-operation and Development (OECD), FAO and the Food and Agricultural Policy Research Institute (FAPRI), world stocks of most crops are not seen as evolving much during the next five years and prices are likely to remain strong. In addition, International Fertilizer Association (IFA) expects the demand for fertilizer in 2009/2010 to increase modestly by 2.6% to 165.4 MT. IFA also forecasts the demand to recover in 2011. However, this is likely to be offset by new production capacity that will come into operation in 2011.
While I don't speculate on M&A myself, having a speculation on a stock serves as a positive catalyst.

All in all, while it is too early to get aggressive on fertilizers as the economic recovery is unclear and the market may be in danger of a correction after rallying more than 6 months, I do see modestly favorable return/risk profile to accumulate these stocks on dips during market corrections.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any positions of MOS or POT in her personal account as of October 25,2009