Wednesday, April 30, 2008

What the Fed Meant

The Fed cut rates again, but this time said "uncertainty about the inflation outlook remains high." That is how the Fed fights inflation today. Not by holding or raising rates, but cutting them and saying "we'll keep an eye on inflation." I'm beginning to wonder if these guys ever get out into the real world and experience what has happened to the cost of things people actually buy.

One of the reasons they keep cutting is to try and get mortgage rates lower to encourage people to buy houses and refinance out of bad loans. But the banks aren't are tightening the strings. Mortgage rates have actually gone up in recent weeks.

As for stocks, there aren't a lot of positive catalysts for them to rise. Consumer sentiment is very low, and the generality of "the worst is probably over and the second half of 08 should be good" are the biggest factors right now. We've moved plenty off of oversold levels. The "stronger dollar" play will probably be very short lived, and will probably be a good entry point for agricultural and oil stocks.

I'm looking at Arcellor Mittal(MT) and Companhia Vale do Rio Doce (RIO). RIO just signed a 10 year partner ship to provide iron ore to Arcellor for steal. This is a positive for both companies. I was close to pulling the trigger on RIO just under 37, but wanted to wait until after the Fed, but S&P upgraded Brazil to investment grade, and Brazilian ADR's all surged. Anyway, both are good long-term stocks to own.

Bears Running Out of Ammo

It is a little funny to watch all the bearish analysts/media types change their tune. First it was, "just wait, multiple banks or brokerages will collapse." Then it was, "just wait, earnings will horrible, estimates too high, etc." Then it was, "just wait, GDP will show we're in a recession." To quote Judge Smails from Caddyshack, "Well, we're waiting!"

The Fed might surprise us today, but its doubtful. You don't want to do much trading ahead of the Fed, because anything can happen.

I do think the consumer is weakening substantially, but it might not spill over into the stock market like many have predicted. The market might tread water or advance while waiting for the consumer. Then again, this could just be a bear market rally. But after today, there won't be a lot of negative or positive catalysts, and we may be range bound for awhile.

Tuesday, April 29, 2008

Investors are Fed-Proofing Their Portfolios

Investors are considering the possibility of the Fed starting to adjust its policy. They probably will still cut rates, but we're interested in the language they use for what they'll be focusing on. Most think they may change focus from "economic weakness", which left the door open for future rate cuts, to "inflationary pressures" which could jeopardize that. The result of that could strengthen the dollar, cause oil and gold prices to drop, and the weak dollar game plan which has worked for the last year could be on hold. I still have to believe this would only be temporary though, so its not prudent to re-adjust one's entire portfolio. But if you've had some good gains in these stocks, maybe take a little off the table.

Mastercard (MA) reported a good quarter, saying overseas growth is strong (shocker!). They also said they saw a trend away from luxury goods to consumer staples, again not a surprise. Investors have poured money into Mastercard and Visa because they only process transactions and don't hold the actual debt. That's great, but do you really want to pay 33x earnings for a company that reliant on consumers? Debt or no debt, its getting a little expensive. Be careful of the herd behavior here.

Portfolio holding Manitowoc (MTW) reported earnings that beat estimates, and confirmed full year guidance. But the stock gets clipped 6%. Hmmm. Maybe if they lost billions, slashed jobs, cut their dividend, like all the banks, they would trade up 6%! Crazy. This stock gets played too much. Don't get shaken out of it. It is a good company.

Monday, April 28, 2008

Rotation Out of Oil Stocks?

I think we'll see some short-term rotation out of oil and oil-related stocks. This is due to the fear of a strengthening dollar. The price of oil, which has jumped partially due to the weak dollar, could also fall. Although this could happen, it will only be temporary. As far as stocks go, I wouldn't sell much. I'm definitely holding Noble Corp. (NE) and am hoping for a pullback to buy more shares. I'd also be interested in National Oilwell Varco (NOV) in the low 60's.

Barron's had a bullish cover this weekend, but I'm worried about the market losing momentum as earnings season wraps up.

Sunday, April 27, 2008

Why I'm Not Buying Investment Banks Yet

So you think you're a contrarian and are buying stock in troubled investment banks? I got news for you, you're aren't. Everyone is looking at these stocks and trying to call a bottom. Banks go through boom and bust cycles, often following the real estate market. Following those periods, they adjust their risk. Right now, all a bank has to do is say they aren't going bankrupt, their write-downs aren't too massive, and they think conditions are improving. Poof! The stock surges. But there will be a time, I believe, that this will wear off, and investors realize that the earnings are just plain bad right now (if they are making money at all). They will be tightening up on their lending and its no secret why. Less risk will mean less potential return, especially for those banks who rely on trading for a large percent of their income.

All I'm saying here is its too early to get excited about these stocks. Many of these companies have world-class brands that are well respected. But when a lot of people lose a lot of money, it takes some time to get their confidence back.

Friday, April 25, 2008

Crude Oil Spikes...Will it Ever Come Down?

Crude oil spiked today on news of a ship contracted by the U.S. firing over an Iranian ship. Geopolitics is one major factor of oil prices. That's why any threat of military intervention with Iran will bump oil prices. Is the market pricing in action in Iran? I would say no. The other major factors of the price of oil are:

1)Simple supply and demand. Fears of an economic slowdown, either in the US or entire world, are what caused a short dip in oil prices early in 2008. Although this didn't last long because of factor 2.

2)The weak dollar. The crude oil we speak of is priced in dollars. The dollar has declined drastically over the past year, thus naturally causing an inflation in the price of many things, specifically in-demand commodities.

Take a look at this post and chart from Bespoke Investment Group.


Although geopolitics plays a role in oil prices, right now its seems the biggest threat to oil prices is the dollar. If we see some short-term strength in the dollar, which is possible, oil prices could see a correlation.

Will the End of Earnings Spell the End of This Rally?

Our latest rally has been driven by earnings. Both good earnings and bad earnings. The good earnings have come from companies pulling in profits from overseas markets and benefiting from exchanging those profits into the weak dollar. The bad earnings have come from financial stocks. With financials, its "If you're not going bankrupt, then it was a great quarter" and the stock trades higher. But once these earnings wrap up, we'll be left with economic data and the Fed. And from what many large US companies have been telling us from their guidance is that things aren't looking great. Will those correlate through to economic data? Probably. Will it affect what the Fed is going to do? Maybe.

The bottom line is that once volatile earnings season is finished, we have to come back to economic reality. We can't rely on a good report from Google to spur a 300 point rally. Many are saying the worst of the credit crisis is behind us, and that may be true, but lets not forget about the consumer, and the affect they have on the economy.

Thursday, April 24, 2008

Bad News Can't Hold Market Down

Poor outlooks by US companies, combined with weakness from consumer related stocks can't pull the market down. A couple of thoughts:

Noble Drilling(NE) beat estimates and continues to provide a strong outlook. They also announced a .75/share special dividend. Their prospects are very strong with dayrates rising, as well as their potential partnership with Petrobras for drilling their new massive offshore finds. Competitor Diamond Offshore(DO) missed on earnings. Diamond has been given a better multiple based on their policy of returning more cash to shareholders. Noble is actively looking for mergers to grow their business, and prefers to buyback their own stock. This policy returns less cash to shareholders through dividends, but creates long-term value for their shares. Plus I think Noble has a better fleet and is positioned better in highly profitable international markets, with high barriers to entry.

Manitowoc(MTW) continues to get beaten up in the media and by investors for agreeing to purchase food service company Enodis. Sure, they are losing confidence from the momentum players trying to capture their strong crane business. But Manitowoc management isn't catering to those people. They, like Noble, are trying to build long term value for shareholders. This is why. Cranes are a cyclical business. They are hot right now, and will be for a few more years, but it will ease off. Food service is a business that may not look great right now, but will in the future. All these emerging economies that need cranes to be built will develop businesses that will need things like food services. Look at McDonald's. They are thriving in international markets, supplying demand for drink dispensers, coolers, ice machines, and fryers. Manitowoc and Enodis supply these items.

These short-term runs in stocks that aren't performing will not hold. I'm not interested in catching any run off the bottom with a false move. I've got a couple of names I'm adding and will post those soon.

Wednesday, April 23, 2008

Slow Economy/Market Disconnect

We're hearing pretty bearish outlooks from a lot of companies that rely on the U.S. economy. UPS, FEDEX, Dupont, GE, Starbucks, and that's not counting the banks. But you have a disconnect. The market is focusing on the expanding emerging markets, and the demand for commodities that they have brought. Overseas demand, coupled with a weak dollar has allowed US based multinationals to report solid earnings. I think its important to be invested in the areas that are benefiting from current conditions, but we can't ignore the other situation. Our economy, which is largely driven by consumers, is hurting, and this will eventually catch up with the market.

Tuesday, April 22, 2008

Is the Market Behaving Rationally?

With this latest surge in the market, I seem to be hearing disbelief from many columnists and bloggers. Its seems everyone set themselves up for the worst, and it just won't seem to arrive. This goes back to the question I've been posting for the past few months, can a bear market arrive if everyone expects it to? I think investors can prepare for earnings and overall market weakness, but if everyone is sheltering themselves, the overall declines will be limited. All I heard in January through March is "financial crisis, banks have no liquidity and will collapse, etc. We had the situation with Bear Stearns, but it was handled quite well by the Fed, and so much of that was fueled by fear. After that was over, all I heard was "earnings estimates are way to high." Well, in a one-word response to that, I'd say "Google." This situation reminds me of a quote by famous economist John Maynard Keynes, "The market can stay irrational longer than you can stay solvent."

Don't get me wrong, I do think there is a lot of weakness out there, but this is a point I wanted to make.

Friday, April 18, 2008

Various Thoughts/Who Can Believe Analysts?

Quite a bit happening this morning. First off, you have the huge Google results. I couldn't find anyone who had them beating on the quarter. But they did. Is there some fuzzy math involved? Maybe. I've heard things like they benefited from a currency exchange. I've also heard their model for paying advertisers is very complicated and can be adjusted if needed to make numbers look better. They may have used the Double Click acquisition which closed this quarter to help the numbers. Who knows? Right now it doesn't matter as people are throwing money back into the stock. I'm sure Google's management is laughing today as they have been getting beaten up in the media for the past few weeks.

We seem to be hearing the same thing from every large cap company. "International sales strong, especially from emerging Asia and Middle East." Also, very week in U.S. They are benefiting very much from the weak dollar. Although most people don't see this happening, what if the dollar strengthens? It will actually hurt these companies. Commodity prices will also fall. Look at a company like Nokia. Pretty strong sales worldwide, but pretty slow in the U.S., and they are getting nailed for being on the complete reverse end of the trade having to convert into a strong European currency. It just seems like numbers being manipulated.

Potash (POT) crashed through 200 for the first time this morning. I remember back to legendary trader Jesse Livermore's advice of when a stock breaks though a major number barrier, like 100 or 200 for the first time, it typically bolts right past it. I'm not buying the stock here, but it should be something to watch for.

Manitowoc (MTW) is back up to 39 this morning, showing further proof of the bogus downgrade earlier this week. Seems like they were trying to shake small investors out of the stock.

Wednesday, April 16, 2008

Earnings Solid, Will it Continue?

The first batch of earnings this week has been solid, and it has been from companies which we expected good things. Companies with lots of international exposure, such as Coke and IBM. The bank earnings are in a strange trend. It doesn't seem to matter how bad their numbers are. It is a pattern of "everyone expected horrible, and we did a little better than that." Economic data from the fed has shown increased weakness in the overall economy. Inflation has made the "price" of everything increase, and this will continue as long as the dollar weakens.

We will continue to see these trading patterns of "Oh great, some companies are in good shape" and stocks surge, and then panic days like last Friday. Google's earnings tomorrow will move the market one way or the other. As investors, we have to be patient.

Tuesday, April 15, 2008

Understanding Ethanol

I've been writing about our biofuel/ethanol policies for awhile now. These policies appear to be taking us down a path which won't be helpful or sustainable. We've seen a boom in agricultural and fertilizer prices, and it is having major effects throughout the world. Inflation has pushed up the raw cost of food, and thus nearly every purchase the average consumer makes. Now third world countries are facing a hunger crisis partially because of these policies.

Here are two great articles you can read for more in-depth commentary.

First, a blog post from www.fundmymutualfund.com.

Second, a post from www.marketminder.com.

A couple of points:

1)Corn-based ethanol is inefficient and expensive to make.

2)Politicians are too worried about losing votes to stand up to a poor policy. This is especially true because of the amount of influence farmers have in government.

3)What will have to happen for us to consider other options? Will the new administration do it? Will it take a global food crisis?

Manitowoc Trouble

One of my favorite stocks, Manitowoc (MTW) is getting slammed today following two downgrades. Yesterday, they agreed to buy food service company Enodis, who supplies products to McDonalds, among others. Wall Street didn't like the purchase. Manitowoc operates in three segments: cranes, food service products, and ship building/repair. The reason for their strong earnings growth has been the cranes, due to the large overseas demand. If they were just a crane company, Wall Street would like them much more. Management is looking to improve all aspects of the business, and Wall Street isn't interested. So, they get some bogus downgrades by analysts who don't like money spent on anything buy cranes. As an aside, who feels like they can trust any analyst at this point?

Manitowoc also took the time to re-affirm 2008 earnings targets as well, something almost no company can do right now. But the stock is getting hit hard by all the momentum traders and hedge funds who were just in it for the crane business. I'm sticking with the stock, and may add on further weakness.

Earnings with continue to be bumpy, especially when we hear from some more investment banks. I'm considering adding an ETF that shorts basic materials (SMN), because I think the agriculture sector has gotten overheated with speculation. Most people don't have the guts to short agriculture stocks, but that could be a reason to take a look.

Monday, April 14, 2008

The Problem With GE

I've been bullish on industrial companies with international exposure, and still am. On Friday, we witnessed the problem of investing in GE to gain this exposure. Although GE's industrial unit is performing quite well, many of its other units, especially finance based units, are not. Thus, the stock suffers. This is a case in which diversification can hurt you.

Last week, I recommended Vanguard's Industrial ETF (VIS). It has a large weighting in GE (like 20%). The drop in GE's share price actually helps if you're looking to buy this ETF. I still like many names in the fund, and you get GE at 10-15 percent less than a week ago. Although GE has some headwinds with those specific divisions, their industrial companies will help earnings. The fund managers might lighten up its exposure on GE as well.

If you're worried about GE, you can buy an individual stock out of the fund, like Boeing, United Technologies, or Caterpillar, but you run the risk of an earnings miss in this unpredictable quarter.

Friday, April 11, 2008

GE Throws Market a Curveball

Big surprise today with GE's announcement. GE appeared to be executing well, as told to us less then a month ago by their management. Either one of two things happened: 1)They lied in March, or 2) The market has significantly deteriorated since then. I'd say its mostly scenario 2. They probably saw some weaker results early in the quarter, but figured things would iron out as the marked calmed down. Didn't happen. Lots of unhappy money managers today. Anyone stop and think how many mutual funds own GE? Many have it as their largest holding? As I write, the stock is down 10%.

Consumers are completely spooked right now. And who wouldn't be? Has anyone seen the news lately? Any person who casually follows economic trends, and gets most of their information from the nightly news, has to believe we are in for a bad stretch. I've said this before, but the media doesn't realize their role in this. They make the same money or more if there is bad news. It makes for good ratings. But they are helping to weaken consumer confidence, which negatively affects the economy.

First UPS, and now GE. Two companies which represent good broad indicators of the US economy have given bleak reports. Not a great sign.

Wednesday, April 9, 2008

Stocks Headed Lower

Signs are pointing to a lower level for stocks here. UPS guided lower, and people view UPS and FedEx as good indicators of the overall economy. I see the Boeing news had the opposite effect most were thinking. I've talked about this happening before. Stocks often go up when an announcement like this is made, even if its negative. It takes the unknown away. Investors hate the unknown. I was hoping to pick up some Boeing shares in the low 70's, and I still think it will happen once today's news wears off, especially if there is overall market weakness. I think it will be a great stock to own moving forward.

Greenspan is going on the defensive trying to clear himself of this crisis. Although it's not entirely his fault, he's right in the middle of it, and it appears he's going to get labeled with it.

Tuesday, April 8, 2008

Q1 Earnings?

Mostly negative bias on Wall Street today. Corporate profits are the big issue right now. Most people believe that the analysts estimates are still too high. I think we will see some surprisingly poor numbers, and some surprisingly good ones.

Visa and Mastercard are getting overpriced. There is this misconception out there that just because they get paid by servicing transactions and don't hold debt they will be unscathed. A economic slowdown hurts them no question. They just don't have the risk of holding bad debt. Investors are looking for a safe haven in financial stocks, and although these are it, they are getting too expensive. They are good stocks to own, but not to buy, at least not here.

Boeing has an update tomorrow on the 787. It has seen many delays and investors are restless. I've been looking to buy Boeing as they should see strong earnings as these planes hit production. There is a huge order backlog from airlines all over the world. I'm looking to use any negative press releases of delays as an opportunity to pick up some shares. I'm targeting low 70's to buy.

Its been tough to get the market to move much in the past 4 or 5 days, and I'm sure many have no problem with that. Its a waiting game on earnings, but I'm looking to buy a few stocks here.

Friday, April 4, 2008

Jobs Report/What's Working on Wall Street

That much anticipated jobs report came in worse than economists' projections, but about what everyone else expected. What does it mean? The economy is having a tough time. Employers are cautious, as are people in general. Will this mean we're in a recession? Probably? Maybe? It doesn't matter. The market now appears to be undeterred by these type of announcements. The bank collapse headlines we saw a couple of weeks ago are carrying more weight.

What's working right now? Its still agriculture stocks. A couple of months ago, I did a post called energy issues for the future, and saved it on the right tab of the blog. It discussed what is happening with energy, and which companies I think will benefit. Please read the post for the details, but I'd like to talk about what has happened since. Ag stocks are still doing well. Oil stocks have been mixed as crude has spiked, but recession fears have held back stock gains. Alternative energy has been highly speculative, and thus volatile.

I picked 13 stocks/ETF's. Collectively, they are up 3.35%. Individual results are all over the map.

-Baker Hughes-Down 8.59%. Oil services have been weak on overall economic outlook.

-Diamond Offshore-Down 7.01%. Offshore driller. Had been on a tear right before I recommended it, and thus has backed off. Offshore drillers have shown recent strength.

-General Electric-Up 4.05%. Diversified company doing well, and I anticipate more strength. Innovators in alternative energy.

-Alternative Energy ETF (GEX)-Down 9.14%. This has been all over the map. I like it because of its holdings in Vestas Wind Systems, but holds too few holdings and too many solar stocks which have been extremely volatile. Decent long term hold.

-Monsanto- Up 14.38%. Ag-enough said.

-Ag. ETF (MOO) Up 9.22%-See above.

-Mosaic- Up 35.84%-Hitting on all cylinders.

-Potash- Up 36.79%-See Mosaic.

-Noble Drilling- Up 1.61%. Great company. In highly profitable offshore drilling. Lots of expanding international companies. Just signed a new $4 billion deal with Brazilian Petrobras to drill in large offshore find.

-Transocean- Up 7.50%. Similar to Noble, but more Gulf of Mexico based and much larger. Lots of hedge funds trading this stock.

-Siemens-Down 25.32%. Took a big hit when announcing profit warning. Trading very cheap right now. Similar business as GE, but having some minor issues. A good long term stock to own.

-Xcel Energy- Down 8.75%. Good utility to own. Making large investments into wind power, which will pay off in the future, but could hurt earnings near term. Got to like the 4.5% dividend.

-Schlumberger- Up 1.27%. Oil services giant. Have seen some earnings slowing, but great long term company. Buy on any declines.

Thursday, April 3, 2008

Does Unemployment Data Signal Recession? Does it Matter?

Inital jobless claims jumped to 407,000 today. These types of jumps have been signals for recession in the past. Tomorrow's jobs report may cement that view. Ben Bernanke admitting the possiblity of a slight recession basically means thats what we're in. But I raise the question of, if we're in a recession, does it matter for stocks at this point? The possibility of at least a mild recession has been priced into many stocks. Throughout history, its been hard for investors to get out in front with cautious sentiment like they have the past couple of months. To me, that limits the downside risk. Now if things really deteriorate, which many are prediciting, thats another story.

I saw some interesting stuff from the WSJ's Economics blog, with Ted Kennedy trying to go after Bernanke a bit. What's interesting to me is just how out of touch congress really is. Kennedy speaks of all these financial issues over the past few years, and now he's worried about it? When the real estate bubble was inflating, no one worried, and the average American benefited. But now that its gone, everyone wants to point the finger. I think Bernanke is right. We won't see financial problems like the 1930's because the Fed will step in an stabilize, like they did with Bear Stearns. But this has to be allowed to level itself out over time. That's what people like Kennedy don't understand. He thinks government can solve this problem with regulation. The best they can do now is to prevent it from happening again.

Tuesday, April 1, 2008

Financial-Led Rally

Today's rally is because of financial stocks. When you have a sector that's beaten down, you get lots of short covering and bottom fishing rallies. This is multiplied when its a sector like financials which comprise so much of the large indexes. It has happened a few times already in 2008, and will continue to happen. Even though a bank like UBS reported a lot of problems, investors like it because it provides a level of disclosure. Investors hate and fear then unknown. And the known, as bad as it may be, often provides a sense of relief. This is especially the case for investment banks, which many investors have been talked into believing that they'll all collapse. But that is the psychology of Wall Street, and we have to live with it.


Here's an interesting excerpt from Herb Greenberg's column, regarding Bear Stearns and Lehman:

Accusations flew across Wall Street accusing hedge funds of shorting Bear stock and then conspiring to drive it down by pulling their accounts. This may ultimately turn out to be true, but it doesn’t disguise the fact that Bear was the riskiest player in a risky industry during a very risky time. Successful short-sellers figured this out before everyone else.

Link to full column.

Interesting take, and quite believable.