Saturday, April 28, 2007

Goldilocks or Cinderella?

This week’s GDP report brought home the reality that the economy is on the downswing. The size of the deceleration caught me by surprise: from 2.5% Q4 2006 to 1.3% Q1 2007.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

WHO CARES ABOUT THE GDP?
You do. It tells you where people are spending more or less money. That’s an important factor affecting where to invest (and, conversely, where not to invest).
You also care because it isn’t always the result of spending slowdowns but also the cause. People perceive a slowing economy and tend to accelerate it by hoarding their nuts for the winter.

SO WHERE IS MONEY GOING AND NOT GOING
Money is going to food, fuel, and medical services.
Money is flowing away from residential.

We want to talk about GDP excluding residential. Residential measures home sales and IMHO a home sale does not constitute value generation or consumption. Nothing was made and nothing was consumed.
And I want to look at the economy from the standpoint of actual growth.

Housing is being blamed for being a drag on the GDP and that is correct mathematically. As homes sales and prices drop, the residential figure drops. (I looked at GDP by quarter based in 2000 dollars.) In this case, between 1Q 2006 and 1Q 2007, Residential dropped $100B and that alone removed 1% from the GDP.

To give a sense of things, here’s what GDP would look like with and without residential.
Notice that for the first time in a few years, GDP grew faster without residential than it did with residential. In fact, the last 3 quarters of GDP net residential show accelerating growth. Also interesting, the variance of GDP with and without residential hsa typically been <0.4%,>

Now consider the absolute dollars (as measured by 2000 dollars). The last 4 quarters are worth $230B less than the previous 4 quarters. Residential quarterly production hasn’t been this low since Q2 2003.
We have gone from $620B for 3 quarters in 2005/2006 to $515B and dropping. What took 7 quarters to go from $515B up to $620B, and now it’s taken 4 quarters to fall back down.
I am expecting a full blown retreat to $400B within 4 quarters. That’s another 1% drop in GDP and will mark the recession.
But that doesn't mean the rest of the economy freezes up - it just means that the technical measurements say that the economy is in retreat.
HOUSING PRICE LED GDP DROPS AND THE REST OF THE ECONOMY
Housing price drops are a mixed bag.
The losers are the real estate business sector, banking, and consumer durables. Some owners will be less prone to spend money.
But house price drops are also a big boon to others. For most people, rent equals ~30%+ of their after-tax salaries. So a 10% drop yields a 3% after-tax bump in discretionary spending.
I think blue collar jobs are at most risk. They are doubly exposed: job loss (manufaturing and home construction jobs will get wiped out) and bankruptcy (many of the most financially exposed homebuyers are blue collar workers). White collar spending will continue for the most part.
My main point here is that the end of housing is not the end of the rest of the economy. But that doesn’t mean a Goldilocks scenario.
Personal consumption has been on a decelerating trajectory for the previous 5 quarters. Consumption Increase
Q1 06 9079
Q2 06 9228 149
Q3 06 9347 119
Q4 06 9422 75
Q1 07 9590 168
This last quarter reversed the declerating trend significantly. Except that the bulk of the rise was food, gas, and medical spending.
What I would call discretionary spending is slowing down.
The challenge for the US economy is not the housing market but the fact that commodity prices won’t drop in sync with a US consumption slowdown. The global economy is flying on many engines now; US demand doesn’t dictate the rise and fall of commodity prices. In the past, the pain of a slowdown has been eased by falling prices. Not so this time. Manufacturers will be challenged to maintain margins in the face of falling sales and steady input prices. Raising prices during a recession is hard. The Fed is also limited in interest rate adjustments.
Meanwhile, a weakening dollar keeps commodity prices high.
INVESTING GOING FORWARD
Investments should have two flavors:
1. Food, medical, or energy
2. Global
I haven't been able to find a good food growth stock, but we are deep in medical and energy. And we are global.
Also, be prepared for stock market jitters. One major jitter maker will be as the GDP edges closer to recession. Another will be unemployment figures. I strongly believe that the last jobs report was fudged: we know that lenders and home builders have been firing in the thousands.
A final element is interest rates. I don't think the conditions are right for an interest rate drop and that will upset people. A weakening dollar and rising commodity prices is inflationary and typically leads to interest rate hikes.

LiveRocket Week 17 - Up 1%


All in all a decent week. About what the market did. We would have beaten the market solidly but the UCTT drop cost almost 2% in portfolio value.

HIGH TECH
AMX – Up 5% following solid earnings. Another 52 week high. Almost 2X normal volume. Technically, AMX looks a bit overbought.
CTSH – Up 2.7%. No real news. Pre-earnings IMHO. Interestingly enough, they announced plans to hire another 18,000 people. Business must be booming. Technically, CTSH looks oversold and has retreated to between its 50 DMA and 100DMA – I like that. Retreats to the 100 DMA create bottoms from which stocks move up.
NUAN – Down 3.3%. Down every day this week but on low volumes (Friday was 40% of normal). Technically, NUAN looks good – neither oversold nor overbought. And if it pulls back to its 50 DMA, that’s ~$15.50
PWR – Up 4%. They also hit a new 52 week high. They look hot and overbought – far above the 50/100/200 DMA.
TRID– An exciting week. TRID soared ~10% only to give it all back. But they gave back only this week’s pre-earnings run up, and I see that as a positive for future growth. Technically, figures show that there is not much interest in this stock, but that’s better than the active disinterest of a few months ago.
UCTT – Down 21%. Big ouch. However, I am not too worried. Business is solid and the drop was really just down to their 100 DMA. They do that and then bounce back. I don’t like it, but I think that they are a buy at this price.

OIL SERVICES/EQUIPMENT
Technically, all of these stocks are trading hot: MACD/RSI indicate over buying and they are far above the 50/100/200 DMAs. On the othe rhand, because they are so cheap measured by P/E /G, I think the prices are finally catching up.
ATW – Up 8%. A new 52 week high. No news, just pre-earnings excitement.
CLB – Up 9.5% after strong earnings.
ESV – Up 5.9% after solid earnings
MDR – Up 5%. I think that this is part of the wave of oil related earnings releases as well as nuclear power excitement.

BIOTECH
DIGE – Up 4.6%. No news but pre-earnings excitement. Technicals show interest has returned with a vengeance. We bought back in after the MACD bottomed out and turned up and it hasn’t stopped rising since.
HOLX – Down 1%. Third down week in a row. This was also a very volatile week. So I turn to the technicals and I see that HOLX is touching its 50 DMA and that the sentiment is turning weak. This happened last quarter right before earnings release: MACD around 0 and price at 50 DMA. Lets hope for a repeat because HOLX surged 20%+ last quarter after earnings.
The thing is, I think that they are fairly valued. So I am thinking that the upside is limited unless I see more than 50% earnings growth this quarter.
IMA – Down 0.7% because of the lingering Biosite bid. Technicals show a recent return of positive sentiment. The Biosite move heralded a big selloff: MACD collapsed from a positive level to -1. RSI plummeted to 20. The price even dropped to below the 100 DMA. This week, however, RSI and MACD trended back up.
OTHER
KSU – Down 1.3%. I think that this is post earnings and post Buffet. It could ease further. One thing I noticed was Friday’s big drop to $37.4 before re-bounding. So the technicals mirror a potential pullback to $36. Everything says overbought.
OCN – Up 3%. The market is starting to understand that not only is OCN shielded from a subprime meltdown and actually making money off of it. Interest in OCN has been rising for a few weeks. This could get interesting.
PCP – Up 3.2%. believe it or not, PCP actually looks oversold.
TIE – Flat. Which is better than the competition. ATI and RTI are down ~3% for the week. I take no pity because TIE has been flat for a month while they rose 10% until this week. All signs are positive: ATI announced 90% growth in earnings and beat expectations by 5%. They have a P/E of 17.
Nevertheless, the technicals are neutral on TIE. Which is ok given that it has established a bottom of $35. That means $40 is possible soon.

Thursday, April 26, 2007

TRID Beats estimates

TRID Continues to grow
* Margins higher than expected (50%+)
* Sales were $60.5M, just slightly above expectations and a 35% growth over last year
* Accounts receivables increased ~$7M from previous quarter. Those are sales that just haven’t booked. TRID enters thi squarter with a $14M AR number
* One negative: Inventory up $2M (~15%) from last quarter despite flat sales

On the conference call, it became clear that TRID is scaring off competition. At the low end, price is all that matters but at the higher end (32" TVs) quality matters. As a result, TRID commands a premium price relative to others.

The conference call was positive.
Customer acquisition continues. In addition to the announced acquisition of China's top TV makers, TRID discussed current accounts.
Samsung’s share of TRID’s sales has surged to 46% from the 30% zone. Considering the sales growth, that means significant penetration at Samsung. Philips is still coming on line as a customer.

June Quarter had similarly positive guidance of 50%+ margins and $71M revenue (a slight increase). They also reaffiemed $320M revenue for the year.

Meanwhile, there is still no finalization of the options issue. It is really pathetic. As a result, there are no firm earnings information to point to.

The stock fell in afterhours and then rebounded.
In my opinion, that extra $7M in AR points to them beating expectations by more than a little.

AKAM crashes $9 or 15%

I voted thumbs down on them because I felt growth was no longer accelerating.
In fact, growth remains above 50%, but no upside surprises in the works so they got hammered

UCTT update

I hate losing money. I really do. And UCTT went from a high this week of $20 to $15 yesterday. It seems to have bounced back a bit to $15.4.

This happened last quarter - a miss, a price crash, and then a big rise.
I'm hoping the same thing happens. Semi demand remains strong and demand for equipment is good.

KSU has strong quarter but misses expectations

* Revenue up 6% but miss expectations by 1%
* Earnings up ~100% but analysts expected 150%

Housing and automotive slowdowns continue to plague all railroads

I'm thinking we get ready to exit

OCN earnings fall 25% but hit expectations

OCN reported as follows
* Revenues up 12%
* Earnings down due to change in tax rate from 23% to 34% as well as a $3.3M charge tied to the closure of their loan business (was $9M write off last quarter)
* Servicing $55B loans vs $44B last year same quarter. That is up from $52.8B last quarter

Now I understand why analysts were more mellow than my calculations - that tax change removed ~$2M of profit or $0.03 EPS.

AAPL, NTRI, AET & ILMN

AAPL blew away earnings thanks to strong MAC sales and a one time benefit of low semiconductor chip costs. Those costs alone drove margins up from 29% to 35%, adding $330M in net profit.

I was right about the iPod sales slowing down - they grew only 24%.
I was wrong about Mac sales growth - they really hit hard.

As you recall, I changed my view of AAPL last month and voted them a buy.
--------------------

In early April I mentioned that NTRI was moving up but I didn't know why. They were around $53 at the time. Today they are at $61 after hitting $66 on great results
They beat earnings expectations by ~20% and revenue by 10%. Plus they raised 2007 expectations.

I still think that they haven't shown enough non-US presence for me to love them.
----------------------------
AET hit a new high. We used to own but I felt that they had less room to move going forward
1. Recovered from the over selling of last year
2. Growth in customer base peaked and any economic downturn would reduce their revenue

AET beat expectations by 4% and showed 8% growth. Memberhip increased by 270,000 which is nice but nothing exciting. Besides, a P/E of 15 on 8% growth feels fairly valued

--------------------------------
ILMN had great sales but bad earnings. I would get in on a bad day

AMX blows past expectations

Let the results speak for themselves
* Earnings up 52% and beat expectations by 33%
* Revenue up 28% and beat expecttaions by 2%
* 6.5M new customers added

Tuesday, April 24, 2007

Housing mess gets even worse

http://biz.yahoo.com/ap/070424/home_sales.html?.v=9

Existing home sales for March dropped 11% year over year. It fell 8.4% compared to february. recall that home sales are supposed to increase not decrease as Spring approaches. Lots of excuses were trotted out (the weather) but the trend is your friend - housing is busting apart and willing it to be different won't make it so.

Meanwhile mortgage defaults are picking up the pace.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aq3flDbwBCbk&refer=home
As you will notice in that article, banks are less exposed than investment houses like Lehman Brothers. That is what I have been saying all along.

Now, the $75B loss that they are predicting needs perspective. While that is about 1% of all property mortgage in the US, it is 7.5% of all mortgages coming due in the next 2 years. If you are a potential investor and the conservative estimates are for a 7.5% default rate, you willl demand greater risk protection via higher returns.

It's the reverse junk bond effect, so to speak. Back in the 80s, Mike Milken observed that junk bonds paid a higher rate for their perceived risk but that the risk of default was a lot lower. Today, the quality mortgage backed securities carry a higher risk than is reflected in their rates. This will reverse.

Housing supply is increasing from slower sales and new inventory (both newly built and returned to the market). At the same time rates are higher. This is a formula for falling prices: more supply and less demand.

The only curve ball is interest rates, and so far the Fed is inclined to keep them up. When the Fed does drop them, will they drop again to 3%? Great question. They understand what happened the last time they did it. Also, I'm not sure that it will trickle down to mortgage rates the way it did last ime.

WHR & T

Whirlpool (WHR) saw profits tumble 15%. Accounting for acquisition costs tied to Maytag, profits were down 'only' 9%. However, that is much better than analysts expected

So now I know why WHR shares have held steady the last year - they've been buying them back aggressively.

North America demand dropped 10%, but overseas activity made sales appear better due to exchange rate benefits. In fact, sales only grew 2%. Still, that means that overseas business is booming in order to counter the significant US slowdown.

The reward for falling profits and flat sales - a 10% stock price jump.

-----------------------------------
ATT (T) had a great quarter
* Revenue up 90%
* Earnings up 22%. Excluding merger related costs and the earnings were up 90%

Cingular added 1.2M subscribers - wow!

With the Bellsouth and Cingular acquisitions done, the theme going forward is delivering video.

ESV Beats expectations

More good news from the oil services sector
* Revenue up 35% and beat expectations by 1%
* Earnings up 55% and beat expectations by 2.5%
* Utilization grew to 93%

Forward projections are for strong business as they expect more days in operation

Monday, April 23, 2007

CLB beats - raises guidance

Great news continues from CLB
* Revenue up 13% and they hit expectations
* Earnings up 56%. And they beat by 7%
* Operating margins increase 600 basis points (from 18% to 24%). That's the secret sauce behind the EPS growth

They also raised next quarter's earnings expectations about 5%
The company is growing ~50% with a P/E of 20

The biggest growth sector is reservoir description (revs up 17% and earnings up 82%)

UCTT Misses - Down 14% in after hours

UCTT reported pretty great results:
* Revenue up 95%, beating expectations by 2%
* Earnings up 100%
* Next quarter revenues reduced about 1%~3% below expectations

The key here is that they missed EPS expectations by 10% or $630K.
Looking forward, things are still good. Analysts expect 40% growth this year and next, and this quarter does not put that at risk. Next quarter is still in range. If you take this quarters revenue upside and add it to next quarter, UCTT is on target to hit analyst expectations.
Nevertheless, UCTT is trading ~$17 in afterhours. The shares are ~133K which is not insignificant. It doesn't look like institutional selling, but this is ~1% of non-insider shares. This will get very ugly because this is a very shorted stock: about 10%. A dip in price could create an avalanche as shorties sell.
It feels exactly like last quarter - solid revenue but an earnings miss.
I focus on the fundamentals, and this is what I see.
1. Growth is stil lsolid but no longer triple digit. The era of phenomenal growth ended this quarter (I pointed that out previously) but we are still enjoying 40% growth going forward
2. P/E is cheap. At $17, the P/E is ~18. That's a PEG <0.5.
3. P/S is <0.9>
I wonder if the AMD problems are contributing to some slowdown.
I don't know why the earnings missed. But the selling off is an over reaction.