Market Summary

Market has weakened considerably since last Wed. Media says that is technical selling of momo’s and bubbly stuff and I agree. But overall the market has been frothy – and fewer stocks are driving the indices – and the technical weakness here indicates a real lack of non-nano buyers. Next day or two may bounce a bit around the 50 day averages – but the weakness indicates that a 200 day retest is likely (and LONG overdue). Intermediate-term, a sector rotation is more likely than a more serious decline. I just don’t see any indicators of the sort of crisis-type event that would precipitate that. Longer-term, valuations suck and the stock market remains a poor place to deploy anything that isn’t trading capital.

Ideas to look at further (technicals look safe for trade at least) – Unilever (UN or UL); Pepsi (PEP); BritAm Tobacco (BTI); Philippine Long Distance (PHI); Ritchie Bros (RBA); Peabody Energy (BTU); Cullen Frost (CFR); HDFC Bank (HDB); Toronto Dominion (TD); TransCanada Pipeline (TRP); Grupo Aeroportuario del Pacifico (PAC)





Dec 7, 2011

New buy — Bed Bath Beyond (BBBY at 62.83 – (B)BBCD – CCI). SPY baseline at 126.73 . Among existing buys, INTC has moved to hold; others remain at buy.

Dec 6, 2011

Having had pretty poor luck on trades this year – and generally bearish on the likelihood of a positive longer-term trend developing anytime soon, I’m going to try a couple of tracking experiments for shorter-term trades. I’ve never been good at this but hopefully can develop the discipline here.

My trading universe is roughly 40 stocks (see JMVF).
Today’s buys are Lincoln Electric (LECO at 39.76 – rating (B)CCAB – Aroon/MAX); Centene (CNC at 37.95 – rating (A)BBAD – MAX); Sensient Technologies (SXT at 36.93 – rating (B)DCBA – MAX), Intel (INTC at 25.35 – rating (B)CCAD – CCI); and Westinghouse Air Brake (WAB at 68.83 – rating (B)CCAB – MAX). SPY baseline is 126.26.

International Equity Valuations

Not really interested in any longs right now but did want to see whether any markets have declined to actual “good value” levels. Countries are grouped with similar “risk” countries

True blue-chip countries — None.

AA rank countries:

Country P/S P/B P/CF ROE % Financials
Switzerland 1.5 2.18 10.72 15.1 18.8%
Sweden 1.19 1.33 10.97 14.6 27.9%
Finland .66 1.39 7.9 11.7 13.8%
Norway 1.27 1.63 9.38 11.4 13.3%
Canada 2.01 1.06 12.05 5.2 27.3%

A rank countries

Country P/S P/B P/CF ROE % Financials
Japan .56 .93 3.79 5.3 17.8%
Germany .63 1.34 6.82 12.3 15.4%
France .78 1.28 6.34 10.2 14.9%
Denmark 1.25 1.66 7.02 11.4 14.7%
Netherlands .83 1.33 10.71 11.3 17.9%
Austria .92 1.07 4.04 6.5 39.6%
Singapore 1.92 1.66 -22.2 12.8 46.8%
Hong Kong 2.36 1.52 386.3 13.9 47.0%
Taiwan .89 1.85 8.37 11.9 16.7%
Chile 1.91 2.5 19.94 14.7 18.6%
US 1.20 1.89 6.78 27.5 14.5%

Near Junk countries

Country P/S P/B P/CF ROE % Financials
UK 1.13 1.8 13.21 12.0 18.0%
Belgium .97 1.2 3.7 8.6 23.8%
Spain 1.37 1.26 3.09 14.9 37.8%
Italy .41 .55 9.31 5.44 33.2%
Australia 1.9 1.78 13.68 11.3 37.9%
New Zealand 1.24 1.55 8.2 6.6 12.7%
S Korea .47 1.21 6.27 12.9 14.5%
Czech Rep 2.15 1.95 6.8 18.3 20.0%
Israel 1.58 1.83 8.5 14.3 19.2%
Poland 1.15 1.52 15.35 11.1 37.8%
S Africa 1.36 2.00 11.65 12.5 25.3%
Malaysia 2.24 2.17 46.2 12.5 24.9%
Brazil 1.09 .95 22.04 15.2 24.4%
Mexico 1.82 2.63 10.43 13.9 8.5%

Included the % financials because that’s the sector of every economy that is most tied together and correlated with other countries. There’s some value already in some countries – but still a lot of potential downside in most. Given the total debt level in many of these countries, it’s hard to make a case that any returns will flow thru all that debt and to equity holders. What is most interesting is the fraud in the US re “earnings” – via the unsustainable outlier ROE. The US is now equivalent to – maybe worse than – China or Russia or other insider kleptocracies.

Funky Friday

The markets are going insane today. The Dow gapped up to 11500 to open — fell to 11150 — is now rocketing up to 11500 — and it isn’t even 1pm EST. That is a huge daily range and is a serious failure of equilibrium “price discovery”. The market has ceased to function and is now, basically, just fibrillating.

Either no one – except the high-frequency computers on autotrade — knows what anything is worth anymore or the markets are no longer run on a timescale where humans can comprehend what is happening. Or maybe both. Maybe computers are our “capital allocators” now – and we humans are just along for the ride. Let’s hope the computers aren’t hostile like Skynet or HAL (popular culture joke).

On edit: The sectors going up today are: consumer staples, health, telecom, utilities. All highly defensive sectors that traditionally do very well in a recession. Could this be “rotation” — for the first time in oh – roughly a decade? Or is that merely how the computers are programmed – to ramp them up today – and dump them on Monday when the program tells them the recession has ended? At any rate — SYY may be a good play

On edit on edit: Apparently the news event of the day was the ECB’s announcement of its Italy/Spain bailout plan. Germany (and supposedly France – until France goes broke too) is now on the hook for an additional 35% of its GDP in order to bail out German/French banks that lent money to the Italy/Spain governments.

We don’t need no steenkin safe haven

Well so much for the swissie and the yen as safe havens. The Swiss National Bank just announced their version of QE in order to halt-reverse the skyrocketing appreciation of the Swiss Franc. The Bank of Japan just announced an intervention to crush the yen. Brazil and Philippines — yeesh – safe havens?!? – just announced their versions of a currency war. Bank of New York just announced that they will charge 13 bps for all large cash deposits. The 3 mo T-bill is now yielding negative interest. Italy is now on the “bailout” list — markets all now shut down — but is too large to bail out. All markets are projectile vomiting – down multiple %.

Gold is up — big — but be very careful buying here. It is a dead bang certainty that CME will raise margins real real soon in order to wash paper longs out. Why the freak don’t they just raise margins to 100% and leave them there. The whole point of gold as an alternative currency is that it is UNLEVERAGED unlike all the other leveraged fast-money speculations out there. And that it therefore does not have to suffer from occasional deleveraging bank-based fiat currencies. Forget about gold mining stocks here — the risks of nationalization and confiscatory taxes worldwide are rising in line with the gold price. Central banks are now panic buying gold — and they will have no problem confiscating gold in the ground if they can’t get gold in the market. These stupid greedy fucks running the world are driving every single fucking economy in the world into a depression. It is time to pry their hands off the levers of power — cold dead hands if necessary.

With all the developed world sovereigns in, basically, various stages of bankruptcy; we could be nearing the Kondratieff winter credit crunch of all credit crunches. Right now, bond vigilantes are only focused on Eurozone – Italy, Spain, etc. But that could change in a nanosecond. All major nation public finances are crap and none are remotely capable of growing out of their debt load. The only thing preventing the emergence of true bond vigilantes – ie investors who are concerned with not only getting paid a reasonable rate of interest but also interested in getting their principal back — is that they have no safe “base” where they can withdraw to if necessary. Currency wars and trade wars are imminent.

Western Union

Western Union (WU – $20) is the largest non-bank money transfer company in the world. Its primary business right now is to service the “non-banked” part of the population — specifically, remittances from immigrants back to their families at home. There are currently roughly 200 million migrants who are working in one country and supporting a family in another. And roughly 4-5 billion people in the world are, basically, unserved by banks and live in the cash economy. Government regulations – mostly rationalized on the basis of fighting terrorism or tax evasion or pretty much anything that threatens big banks – serve to eliminate all smaller competition in this business. For companies that already have the scale to incur regulatory overhead, those regulations make for a protected moat from competition. And the money transfer business itself is one that has phenomenal operating scale. Once the operating infrastructure is in place, it does not cost any more to send $1 billion through the system than it does to send $10.

Banks are increasingly – and quite obviously – not interested in competing with WU or even really remaining in the money transfer business. Rather, they seem hell bent on eliminating most of their “small” customers and focusing entirely on enhancing their central bank subsidies and their multinational clients. So the “unbanked” part of the world is not only likely to remain stable. It is likely to grow within developed economies themselves and not just among differing economies.

The money transfer business is highly fragmented. Western Union is 5x larger than its nearest competitor but has less than a 20% market share in its current markets. And it has not really even begun to tap markets outside the Americas.

WU has a roughly $12 billion market cap. Delivers roughly $1 billion in free cash flow (and net income) each year. Its reinvestment needs are minimal. Revenue growth has been about 5-7% per year which is surprisingly strong considering that unemployment has hit migrants harder than anyone else. Has gross debt of about $3.6 billion – half of which will need to be paid or rolled over in Nov. That is what IMO is creating the current depressed stock price.

WU has used its free cash flow over the last two years to (mostly) buy back stock (retired 12% of shares outstanding in the last 2 years) rather than to grow its business (currently WU has 400,000 points of service worldwide – mostly in supermarkets, gas stations, bank branches, etc). Given the undervalued stock price and the economic/financial uncertainties, this seems pretty smart to me.

I am comfortable that the potential November debt rollover is not going to be a problem. The corporate bond market is bubbly to say the least and WU has cash on their balance sheet to delever a little bit if they want to. The institutional shareholders are far more solid and index (S&P 500) funds are not the largest holders of shares. Likewise for the institutional bond holders – who are far more important if a true credit event is perceived.

WU is a 5 star opportunity. I think the shares are currently worth in the high-20’s based on the current business and current economic conditions. If employment generally recovers in the US, WU will be a major and early beneficiary. If stagflation hits, WU will benefit by having more zeroes (hence higher fees) sent through their system. If they use free cash to expand geographies, they will cement their #1 competitive position and create a more stable revenue stream. And the labor force that utilizes WU services is the one that can most quickly take advantage of and benefit from the dynamics of changing economic growth. They are mobile – unlike homeowners in an upside-down mortgage.

Post-script — A news item re WU. It may be about to buy Travelex for $1 billion. Travelex, according to its website, is the largest provider of foreign exchange to mid-sized corporate clients and the largest operator of FX/currency terminals at airports and tourist areas. An M&A may make shares of WU volatile but this sort of acquisition seems to be right in line with WU’s business.

June 23, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 1 yellow, 3 red
Composite: Neutral but deteriorating

Another day where the bounce is met with selling. Strike two. The positive divergence was large cap tech. Ideas I like are — AAPL (Apple) and CHL (China Mobile) which had news today that could carry both (CHL will carry iPhone starting in a few months); STE (Steris) – medical sterilization equipment is not affected by general economy; and JEC (Jacobs Engineering) – an infrastructure play for the next round of fiscal stimulus. All have value, upside that can outperform a trading bounce, some resistance to a further decline in the general market, and for the smaller companies stable/good institutional shareholders.

Weekend Stock Screen

Not a lot of value out there. 45 stocks – mostly US – meet my 5 star criteria. Most of them seem a bit meh to me. The following however fall into “watch list” territory.

Market/liquidity “watch list”: AAPL (Apple) and XOM (Exxon). These are megacaps where one should have zero expectation of outperforming the market over a short/intermediate bull run/bounce. OTOH, there is value in both of them and they will be immediate beneficiaries of any change in market trend. They make for good “lack of a better idea” buys WHEN there is a trend change in the market overall.

Longer-term “watch list”: WU (Western Union), NCI (Navigant), WOOF (VCA Antech), JMP (JMP Group), LXK (Lexmark), and RRC (Range Resources). They will be studied further.

Quarterly Update

Here is the summary update of individual stocks mentioned over the last quarter

Date US Ticker Price Current Price % Change
9/16 TSM 9.96 10.24 2.8%
9/16 AMX 49.78 54.09 8.7%
9/16 CAJ 45.30 47.42 4.7%
9/16 SCBFF 30.04 29.23 -2.7%
9/16 NVS 55.34 57.22 3.4%
9/16 BTI 73.56 74.76 1.6%
9/16 ABV 120.91 125.07 3.4% + $2 div
9/16 TSCDY 20.27 20.48 1.0%
9/16 NSRGY 52.01 53.80 3.4%
9/16 LVMUY 26.52 28.96 9.2%
9/16 BRGYY 85.65 92.84 8.4%
9/16 CEO 187.67 196.64 4.8%
8/23 NEMFF 3.81 5.01 31.5%
8/23 MCP 15.34 29.60 93.0%
8/23 ACAZF 5.75 5.89 2.4%
8/21 LUK 20.37 23.82 16.9%
8/2 RIG 50.68 64.50 27.3%
7/24 FCN 35.80 34.87 -2.6%
7/12 PVD 42.86 63.55 48.3%
7/9 ATK 64.19 73.80 15.0%