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Showing posts from November, 2007

Does the Durable Goods report cast a shadow over tech stocks?

The Commerce Department reported on Durable Goods today while the markets were engaged in a powerful rally. For the Computers and Electronic Products category, new orders in October fell at a surprising rate, down more than 8%, from the level established in September.

Two of three sub-categories were considerably worse:
Computers and related products: -15.2%
Communications equipment: -22.6%

These declines were the largest of any sub-category in the entire report. The next closest was a 10.6% decline in Defense aircraft and parts. (The third sub-category under Computers and Electronic Products is Semiconductors. New orders data is not available for Semiconductors.)

What does this say about a recovery in tech stocks?

Moreover, given that tech as an industry has the largest over-seas sales exposure, what does that say about the concept of "decoupling"? At least some of this fall-off in orders has to be from foreign customers postponing purchases.

As noted above, the markets rallied st…

Citi takes the money and runs

Today we heard about the "investment" in Citigroup by an entity controlled by the government of Abu Dhabi. Citi will receive a $7.5 billion cash injection by selling a stake in the firm to the Abu Dhabi Investment Authority, the sovereign wealth fund that acts as the investment arm of the Abu Dhabi government.

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

I was reminded of a post I recently read at the Information Arbitrage blog. (Read the post here) It was titled "Looking Overseas for a U.S. Financial Sector Bail-Out: It'll Cost You."

The author, Roger Ehrenberg (who also quotes Thorold Barker, a writer for the Financial Times), points out that the sovereign funds have "lots of investable cash at a time when relative bargains might become available. And given the scarcity value of their …

AGCO -- is there any upside left?

The agricultural equipment sector has been strong this year and appears to be one of the sectors that may provide some relief for stressed investors in this difficult market.

The John Deere Company (DE) recently reported strong earnings that gave the whole market a boost on the day the numbers were announced. Sales in agricultural equipment were very strong though construction equipment sales were somewhat under pressure. Deere provided solid forward guidance despite the risk of a falloff in the market for building construction equipment.

Everyone is familiar with Deere but a lesser known player is AGCO (AG).

AGCO company background --

Here are a few excerpts from the AGCO company profile at Yahoo Finance:

"AGCO Corporation manufactures and distributes agricultural equipment and related replacement parts worldwide. The company's products include tractors, combines, self-propelled sprayers, hay tools, forage equipment, and implements, as well as a line of diesel engines. ...the com…

Weekly Market Update and TradeRadar portfolio round-up

The week started off poorly with a Goldman downgrade of Citigroup. Things went further downhill from there. Lowe's, Target and Freddie Mac added to negative tone. We got a little positive blip in October housing starts but the housing market remains far underwater. The Fed released the minutes from their last FOMC meeting and surprised investors by revealing the decision to lower rates was "close". They also provided an economic forecast for 2008 that predicted slower growth due to continued financial market turmoil.

All in all, this week was pretty much like the last few weeks: volatile and in the end, depressing for investors.

Against this backdrop, there has been a higher level of trading in the TradeRadar portfolio and the holdings have changed quite a bit. There were a number of disappointments delivered by TradeRadar stock picks, stops were hit and we have ended up with a more bearish set of investments. Let's look at what happened to these stocks, why we sold or…

Business Intelligence consolidation - who's next?

We have seen a consolidation wave begin in the Business Intelligence space. IBM just bought Cognos and Oracle recently bought Hyperion. SAP just announced they are buying Business Objects after barely having time to digest their recent acquisition of Pilot Software.

There are three major database vendors at this time: IBM with their DB2 product, Oracle with their flagship Oracle database and Microsoft with their SQL Server database. IBM and Oracle now have premier, industrial-strength data analysis and reporting products in their product portfolios that complement their core database products. Microsoft has what, Excel?

Actually, Microsoft, like IBM and Oracle, has a suite of proprietary tools that do happen to integrate very well with Excel and SQL Server. Still, IT departments are not deploying the Microsoft tools for heavy-duty corporate use. Microsoft is unique among the big three by their lack of a premier reporting product. It seems safe to assume that Microsoft will be the next …

Lending tightest since 1990 - can the Fed make a difference?

The focus was on the Fed today after they released minutes of the last FOMC meeting and provided their economic forecast for the next several years.

Their expectation for slowing growth has Wall Street holding its breath waiting for more rate cuts. Yet the minutes reveal that the decision to lower rates at the last meeting was a "close call".

It is worth considering what power the Fed has to resolve current market problems with rates alone.

As everyone knows, one the primary problems facing the economy is the "credit crunch." The term "credit crunch" appears in so many articles and blog posts that it sometimes seems to be in danger of losing its impact on investors. That is, until the next financial blow-up that is the result of credit not being easily available or loans or debt offerings being rebuffed. Just look at some of today's examples. It was reported that the $4 billion sale of loans stemming from Cerberus Capital Management's acquisition of …

What happened to China Automotive Systems?

China Automotive Systems (CAAS) reported 3rd quarter earnings on November 9 and the stock promptly sank.

I have written about the stock previously. The post was titled (with high expectations) "China Automotive -- looking for another good quarter." What went wrong?

Chart Breakdown --

CAAS had been caught in the general market downturn that began in the first few trading days of November. This derailed what was looking like a nice pattern forming that indicated the stock might be bouncing off support and getting ready to start running up again. The support didn't hold and the stock has been trading in a choppy manner before dropping further today. It now looks like the stock could take another leg down before bottoming.

The Numbers --

For the most part, it appears that 3rd quarter earnings were actually quite good. The day earnings were actually announced, the stock ran up nicely but fell back before the end of the day. Here is a rundown of the numbers:

-- Total net sales for t…

Chinese stocks weakening -- an ETF can help

Note to users of the TradeRadar software -- the FTSE/Xinhua China 25 Index ETF (FXI) generated a SELL signal about a week ago. Using a start date in early March of this year, you will see a clear signal with all green lights on the dashboard.

No one can be sure if this is the bursting of the Chinese stock bubble. If you are interested in a trading opportunity, however, there is now an inverse ETF that will allow you to take a bearish position. It is the ProShares UltraShort FTSE/Xinhua China 25 (FXP).

This TradeRadar SELL signal is based on daily data. Looking at a weekly chart, the SELL signal is not quite as strong as the daily signal but almost. As a result, this may not signal the big crash in Chinese stocks but it seems there is a good potential to see the intermediate term downturn continue for a while.

Knowing how volatile the underlying index is, caution is advised. Be sure to determine a stop before opening the position.

Disclosure: author is nibbling on a few shares of FXP

Using the TradeRadar software -- thoughts after one year

It has been one whole year since I started writing this blog and trying to document both my opinions on the markets and my experiences using the TradeRadar software.

In terms of writing on topics of interest related to stocks, ETFs and the economy, I know I have gone in many directions but I hope that I have at least hit a few areas that have been of value to you, the readers. Many times I have tried to pull together information in such a way that a new point of view can be derived. Other times I have tried to be informative on a subject in which I myself wanted to know more. In any case, I want to thank everyone for visiting this site and taking time to read the posts and leave your comments. Feel free to leave suggestions on new topics you might like to see covered.

As for using the TradeRadar software and attempting to trade based on its signals, it has been an interesting journey. There are a couple of general points that I would like make.

One of the pieces of advice that many stock…

Industrial Production trending down -- are stocks next?

Industrial Production numbers for October were released today by the Federal Reserve. It was a somewhat dismal report with decreases across all categories compared to the previous month.

I wanted to see how the numbers were trending so I plotted the Manufacturing sector (in red in the chart below) versus SPY, the SPDR S&P 500 ETF (in brown in the chart).


As can be seen, Manufacturing hit its peak in July of 2007 at a reading of 116.6; SPY, on the other hand, was at that time on its way down to the August lows. Since then stocks have recovered, made new highs and are currently in another downtrend.

To do a few comparisons, during the time period covered by the chart above, Manufacturing has gained 5.16% since November 2005. The S&P has gained 19.7% even after the decline shown in the last segment of the chart.

In 2005, manufacturing comprised 12.2% of GDP, roughly the same percentage contributed to the nation's output by the government. Interestingly, the real estate-rental-le…

FASB Rule 157 still has teeth

In a recent post I wrote how Goldman Sachs and others could be facing deeper write-downs as the result of FASB Rule 157.

There has been news that the rule has been deferred for one year. In actuality, the FASB has only chosen a partial deferral. The rule takes effect today as scheduled for financial assets and liabilities of financial institutions. Accounting in compliance with the rule will be deferred for one year for non-financial assets and liabilities.

The FASB statement is brief and the full text of the announcement is below:

"NEWS RELEASE 11/14/07
FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities

Partial Deferral Granted for Nonfinancial Assets and Nonfinancial Liabilities

Norwalk, CT, November 14, 2007-At its Board meeting today, the Financial Accounting Standards Board (FASB) reaffirmed its vote against a blanket deferral of Statement 157, Fair Value Measurements. For fiscal years beginning after November 15, 2007, companies will be required to implem…

SIA Forecast strengthens case for SanDisk

As we head into the close today, SanDisk (SNDK) is trading well under $40 per share. It is in the vicinity of the lowest prices it has seen in the past two years. It was last at this level in July 2006 and then again in March 2007. It now has a forward PE of about 15 and a PEG ratio of 1.03. These indicators suggest that SanDisk is reasonably priced.

Recap: why the shares have been beaten down --

Earlier this week, market research firm iSuppli downgraded its rating on near-term conditions for suppliers of NAND and DRAM memory chips to "negative" based on expectations that the average selling price for 512 Mbit NAND will drop 24% in the fourth quarter, to 46 cents from 60 cents, after having seen price increases in the previous two quarters.

Last month, Needham and Oppenheimer both downgraded the stock when shares were up around $48. Their message was that supply from competitors looked to increase and pricing could weaken. There were also questions on how solid demand appeared …

Goldman sparks rally in financials but FASB Rule 157 is an overhang

Financial stocks rallied today. The Select Sector Financial SPDR (XLF) was up 4.69%. The KBW Bank ETF (KBE) was up 4.63%

What was behind the gains today? WalMart reported good earnings and provided decent forward guidance but I don't think that did much for the banks. Apple selling iPhones in China? Not likely. Many analysts attributed the rally to comments by Goldman Sachs (GS) CEO Lloyd Blankfein saying that Goldman doesn't expect to take any significant write downs and has a "pretty good grip" on asset valuations. Furthermore, it is said that Goldman has short positions in subprime mortgages.

All that is well and good; however, there is a good possibility that Blankfein is being a little too sanguine on the situation. Last week there were several blogs that wrote about FASB Rule 157.

The general thrust if Rule 157 is that assets and liabilities should be valued at market prices and take risk into account. It will make it harder for companies to avoid putting market p…

Weekly Market Update - tech joins financials in the doghouse

The long run of outperformance tech stocks have enjoyed came to an end this week. Cisco and Qualcomm failed to provide forward guidance to Wall Street's liking and tech stocks were treated like tainted financials; ie, they sold off with a vengeance.

The technical outlook --

With financials already dragging the markets down, the collapse of tech has removed on of the major supports for the major averages. We now see both the Dow and the S&P 500 falling below their 200-day moving averages. We also see the 20-day moving averages just about crossing below the 50-day moving averages. This situation occurred in August and the markets recovered; unfortunately, there is no guarantee that history will repeat itself.

Especially ominous are the intra-day charts. It can often be seen these last few days that volume is heaviest on down moves. This can be observed looking at both financial and tech ETFs. This is not a good sign.

There some analysts who say the financial and economic situations …

Citi - penny wise, pound foolish

Citi (C) has spent the last five years pushing risk prevention and regulatory compliance deep into the corporate culture, right down to the lowest levels. Under the leadership of Chuck Prince, the lawyer picked to head one of the world's largest financial institutions, no process detail has been too small for Citi's internal auditors to obsess over.

It is therefore quite ironic to see Citi undone by the flagrant lack of risk management at the highest levels in their fixed income and investment bank segments. SIVs seem like an easy way to make money? Citi had to be the biggest player. Sub-prime mortgages kicking out high interest rates? Grab as many as you can. CDO's look like a good place to park some money? More is better.

Evaluate the risk in all of this? Why bother? The pressure is on to expand profits; after all, this is the "year of no excuses." And no one gets fat bonuses by being timid, right?

So with so much of the debt on Citi's books going from "m…

Overweight Tech No Longer

It wasn't so long ago that I wrote a post titled "Why I'm Overweight Tech". After today's volatile day, I can no longer say that I'm overweight tech.

After Cisco's report of a very good quarter and good but not great guidance, tech stocks sold off heavily. As for the TradeRadar model porfolio, both Cisco (CSCO) and the ProShares Ultra Tech ETF (ROM) hit their stops and were sold. ROM ended up returning only a couple of percent during the short time we held it but gains on CSCO were about 18%.

It is telling that Cisco's guidance had such a lethal effect on the markets. Here is an example of investors suddenly looking at the glass as half empty rather than half full. As other bloggers have put it, today we realized we could no longer hide in tech while the rest of the market (financials, homebuilders, cosumer discretionary and recently retailers) showed signs of weakening.

A bear by default --

As a result of the stops that were hit today, the model portfoli…

Financials tank but UltraShort ETF is up nicely

Investors were greeted with a barrage of bad news this morning. GM reporting its worst quarter ever including a charge of $39B. Rumors of a $3B to $6B writedown at Morgan Stanley. Gold futures up, the dollar down. Estimates that the value of broken buy-out deals will total $200B this year. Ratings agencies downgrading $92B in corporate bonds. Reports of $5B of defaults in CDOs. Banks like Washington Mutual and Citi continued to garner bad press with conjectures of more writedowns, law suits, etc. Bloggers were starting to use phrases like "perfect storm". Stock futures indicated a big down day on the way.

In thinking about which sector would be hardest hit, it seemed that the financials were about to really take it on the chin. Looking at the Select Sector Financial SPDR (XLF), it is already down about 18% this year. Could it go lower?

I have written about avoiding chasing trends when using sector ETFs. In the case of the financials, the trend has been clearly down for a while…

Facebook Ad Platform Announced - why I'm skeptical

Facebook made their formal announcement today of how their new ad platform will work. Founder Mark Zuckerberg made an enthusiastic presentation at ad:tech in New York, outlining several new sets of functionality.

Facebook Ads --

This is the primary advertising vehicle. As described in the press release:

Today, Facebook Ads launched with three parts: a way for businesses to build pages on Facebook to connect with their audiences; an ad system that facilitates the spread of brand messages virally through Facebook Social Ads™; and an interface to gather insights into people’s activity on Facebook that marketers care about.

Advertisers can design custom pages with information, content, and custom applications--"any application that was written for users on the Facebook Platform," Zuckerberg explained. Facebook users can sign up as "fans" of that brand, install branded applications (games, etc.), that will all show up in their profiles' "mini feeds" and on t…

What happened to Rogers Corp?

Back in October, Rogers Corp. (ROG) boosted its outlook for 3rd quarter earnings and its stock moved up nicely. At the time, they indicated they expected earnings, excluding items, of 44 cents to 48 cents a share for the third quarter, up from its prior view of 32 cents to 35 cents a share. The chart started looking pretty good and the TradeRadar software flashed a BUY signal (read the original post).

Actual earnings were reported late last week and the results exceeded raised expectations. So why did the stock take a dive? Management pointed to Durel.

So what is Durel? The Durel Division manufactures Electroluminescent (EL) backlighting systems for wireless telecommunications, portable electronics, automotive, signage and timepiece applications. One reason for this quarter's good earnings is an unexpected $3.6 million increase from forecasted sales of Durel products related to mature cell phone programs. This one time benefit of those Durel sales totaling $1.7 million in pre-tax pr…

Inventory Level Analysis -- more gains in store for oil?

Having recently invested in the PowerShares DB Oil Index ETF(DBO), the following statement caught my interest today:

"New work published by Gary B. Gorton of Wharton, Fumio Hayashi of the University of Tokyo and K. Geert Rouwenhorst of Yale, shows how investors can win bigger profits with futures-trading strategies based on the amount of a given commodity that is held in storage. Returns -- or "risk premiums" -- are bigger when low inventories make prices more volatile, Gorton and his colleagues conclude."
Clearly, the average investor would find it difficult to know with any accuracy what the inventory levels are for most commodities. Gorton and colleagues have determined that investors can infer inventory levels from futures- and spot-pricing data.

Here is the background as Gorton and his associates describe it:

"The new work looks at the key role played by inventories -- commodities stored for future sale. Inventories serve as buffers against fluctuations in su…