Unemployment Up - No Surprise

With so many layoffs in th efinancial sector and homebuilding sector, I'm actually surprised the numbers were so faint: only a 4,000 increase.
http://news.yahoo.com/s/ap/20070907/ap_on_bi_go_ec_fi/economy

That means the next few weeks will show even more massive levels.

My concern, as you know, was the way the market would react. It's never predictable how the market takes bad news.

However, as long as the problem APPEARS to be isolated to a specific sector or two (homebuilders, lenders) the Fed will not be motivated to cut rates. The Fed will cut when it anticipates that the broader economy is slowing and will do so ~6 months from now.

As always, I think the Fed is either a bunch or liars or they are stupid, because 6 months from now consumer spending will be dropping. It isn't going to be a White Christmas.

HOG Downshifts -I told you

Did you go short on HOG? If so, you should be smiling.
They are lowering forecasts. AND I GUARANTEE THEY WON'T STOP LOWERING
http://www.marketwatch.com/news/story/harley-davidson-downshifts-profit-view-after/story.aspx?guid=%7BAEB15520%2D24A4%2D44F8%2DB713%2DE8A4D0251342%7D&siteid=yhoof

This is a Blue Collar Recession (my term) and hogs are bought by the exact folks getting laid off.

You should wait for the Spring and Summer of 2008 to buy some very high quality used cars and toys, even unsold furniture. Panic starts January

Jobless claims fall - don't believe the hype

Official employment figures look good, but as always - you have to take government figures with a grain of salt. "The Labor Department reported that jobless claims dropped to 318,000, down 19,000 from the previous week."

The first big problem is that these are adjusted figures - not the raw numbers. http://www.dol.gov/opa/media/press/eta/ui/current.htm
Unadjusted figures show that the drop was a mere 7,000 from the previous week.

The second big problem is that these figures represent only 320K workers. The insured unemployment figures, representing ~2.3M workers, was flat from the previous week.

But on a year-over-year basis, unemployment is up 110K workers. Is this a slowdown, a drop, what?

The canary in the coalmine is temp workers: first to be hired, first to be fired.

Unemployment figures for temporary workers show that unemployment is, in fact, rising. And fast
http://money.cnn.com/2007/08/27/news/economy/temp_workers/index.htm?source=yahoo_quote
* Demand for temp workers has been down every month for 6 months
* Demand for temp workers is down 2% for the first 6 months
* Demand for temp workers is crashing: For Q2, Manpower reported a 9% drop, Kelly Services a 6% drop

"In 2001, a fall in temporary employment occurred roughly a year before a drop in overall employment, said the Journal. Economists believe that businesses usually cut temporary workers first before dismissing full-time employees"

The Fed us stymied

As students of history like to point out, housing collapses follow a recession. And so does an increase in unemployment.

Well, not this time. Now we have a massive unemployment rate about to hit the books before a recession. Friday's unemployment report may not sho wit, but the layoffs from builders and mortgage companies will add 300,000 folks to the non-income earning lists - in just 2 months. Official estimates are that 80,000 planned layoffs will happen inAugust, up from 45,000 in July. Countrywide alone will fire 25,000 in September. And it is just starting.

This will be a very bad holiday season for retailers.

The Fed doesn't know what to do. Although it is VERY clear that they will not re-inflate this asset bubble. But they are scared.
* Financial institutions are not solid - Merril Lynch, Citi, H&R Block and others are playing accounting games to hide the impact of the loans that are defauling that they can't sell off.
* Lenders are losing business - loan volume is pitifully down
* Retailers are showing signs of consumer distress - Mainly blue collar workers (construction workers and home builder related workers) but there are plenty of faux white collar workers (real estate agents, lenders, brokers) who are going
* True inflation is much higher than reported. Steel and other materials continue to rise in price. Now wheat is jumping 20%. Wheat is rising partly because of the dumb ethanol craze (which takes land and corn out of the system) an dpartly because of world demand growth

The unfolding dilemna of inflation coupled with rising unemployment is a problem and are the marks of stagflation.

The Fed will stick to official numbers and by January those numbers will show a big drop in economic strength.

I think this Friday will show that we are downtrending and I wonder how the markets will react. They may actually get excited because this heralds a strong potential for a rate cut.

I believe that the Fed is not dumb about the housing crash impact on consumer spending. But I think they either don't care (consumer spending is inflationary) or they recognize that the housing market as a bubble distorted asset allocation and it needs to end. oftentimes, that is where a recession helps - it clears away misallocated capital, much the way a brush fire prepares the land for new growth.

I think the Fed is striving for a brush fire but it will become a major fire instead. Not just because they may be ignorant (they were blindsided by last month's liquidity squeeze). I thinnk the Fed knows but isn't saying that they have no control over inflation. Their entire mandate is to keep pricing predictable (thereby ensuring stable growth and ongoing investment). Because the global economy is now in charge of the US economy, the Fed is in a very precarious position - a new one at that.

Who resisted today's sell off?

Most of our stocks resisted the selloff:
DO -.3%
MDR +.3%
NUAN +2%
TRID +1%
PCP - .4%
CLB + .6%
HOLX -.3%
ATW - .7%
NOV -.7% (although we made a bit of change)

I like that.
CSCO also staye dtough

TIE & TRID in the news

TIE was named the 5th fastest growing company in Fortune magazine's top 100.
Which is nice. A lot of folks will be asking their broker about positions in TIE.
http://money.cnn.com/magazines/fortune/fortunefastestgrowing/2007/full_list/index.html

TRID was called a BUY by Deutsche bank.
"TRID's leadership position in the digital TV image processing market should allow the company to deliver strong revenue/earnings growth in CY2007 and CY2008. A solid 2H07 seasonal build combined with an attractive valuation leads us to believe that significant upside exists for TRID stock over the next 12-24 months."

Attractive valuation? Ya think?

Buying MICC and NOV

Buying on a down day
MICC 140 shares @ 83.3
NOV 100 shares @ 129.65

AKAMAI = AKA-BYE-BYE

2 years ago, AKAM was ready to break out. AAPL was gearing up to announce the huge iTunes activity. AKAM was a buy precisely because of that gap between stock price and the business actual/potential growth.

UPSIDE GONE
If people were downloading TV/movies through iTunes, then AKAM would be a buy. But the reality is that folks aren't downloading much video. The huge surge just isn't there.

OVERVALUED
Even at these low levels, AKAM has a 75 P/E. Not bad when they were growing 90% Year-over-year, but that is slowing to 40%. A still respectable rate of growth, but not for 75 P/E.

MORE COMPETITION
And competition has emerged, that didn't exist a few years ago. If GOOG wanted into this space, they could do it easily without AKAM and the iTunes bullshit.

To show the precariousness of AKAM's business, a recent tiff between NBC and AAPL over programming downloads on iTunes sent AKAM shares down ~10%. NBC downloads accounted for 30% of iTunes TV show sales (HEROES and THE OFICE, among others). AAPL is doing something stupid in response - they are pulling all NBC shows.
Not too long ago, Viacom was THE source for cable shows and they strong-armed ESPN (dropping them for a while when ESPN tried to get better rates).
Well, AAPL is trying to do the same thing and folks don't like it. Plus, as NBC is finding, they can let users get their shows via the NBC site. AAPL is about to have problems as the one-stop shop.
Other programmers may take note and bail or ask for better rates.

In fact, Universal Music has also bailed on iTunes.

These are wake-up calls for AAPL that other companies are feeling confident that they do not need iTunes or AAPL.

None of this spells good things for AKAM.

AKAMAI = AKA-BYE-BYE

2 years ago, AKAM was ready to break out. AAPL was gearing up to announce the huge iTunes activity. AKAM was a buy precisely because of that gap between stock price and the business actual/potential growth.

UPSIDE GONE
If people were downloading TV/movies through iTunes, then AKAM would be a buy. But the reality is that folks aren't downloading much video. The huge surge just isn't there.

OVERVALUED
Even at these low levels, AKAM has a 75 P/E. Not bad when they were growing 90% Year-over-year, but that is slowing to 40%. A still respectable rate of growth, but not for 75 P/E.

MORE COMPETITION
And competition has emerged, that didn't exist a few years ago. If GOOG wanted into this space, they could do it easily without AKAM and the iTunes bullshit.

To show the precariousness of AKAM's business, a recent tiff between NBC and AAPL over programming downloads on iTunes sent AKAM shares down ~10%. NBC downloads accounted for 30% of iTunes TV show sales (HEROES and THE OFICE, among others). AAPL is doing something stupid in response - they are pulling all NBC shows.
Not too long ago, Viacom was THE source for cable shows and they strong-armed ESPN (dropping them for a while when ESPN tried to get better rates).
Well, AAPL is trying to do the same thing and folks don't like it. Plus, as NBC is finding, they can let users get their shows via the NBC site. AAPL is about to have problems as the one-stop shop.
Other programmers may take note and bail or ask for better rates.

In fact, Universal Music has also bailed on iTunes.

These are wake-up calls for AAPL that other companies are feeling confident that they do not need iTunes or AAPL.

None of this spells good things for AKAM.

TIE & TRID WATCH

TRID is ~16% of our total portfolio and deservces some special focus.

Shorts are going to leave.
At $15, what more is a short hoping to achieve: another $1 down? It re-tested the Augg 14th low of $14 and bounced back. Not much bang for the buck. And at this point, it really isn't going down anymore, especially given their stated growth and cash flow.
In fact, the August short position dropped 6%.

Under accumulation
With their expected growth and the options issue resolved, funds are moving back in. I can't prove this, but I see larger block trades, an indicator of fund interest.

No more surprises
It's all upside from here

No CEO
Why no CEO? Perhaps nobody would touch the company until the options issue got resolved. If so, then expect a CEO to be announced. That would provide a stock price boost.
Alternatively, no CEO may mean a buyout under discussion. For $850M any fund or company can pick up TRID, a company expected to hit $450M in sales in the next 12 months. Cheap even for $1.5B ($21 per share).

I know that I have lost a lot of paper money on this company. I was excited by TRID at $25 and I'm even more ecstatic at $15. Nature abhors a vacuum and undervalued growth companies always correct to being correctly valued. I am going to keep averaging my costs down. The smart play here is to buy calls: $20 january 08s OR $20 April 08s.


TIE
TIE is 10% of our portfolio.
TIE pays $0.86 per share to special shareholders.
To begin with, the only owner of these shares is the CEO's wife. (Some guys buy their wives jewelry, this CEO gives her $1M of the company's money.)
The company has the right to buy these shares at a very low price relative to current value ($50 vs $420). The company SHOULD buy them immediately. Instead, it continues to pay out cash to line the owner's pockets (or his wife's). This has been going on for some time, and the amount has dropped 40% as she converts to actual shares.

Why should she convert? Well, the 0.$86 per share is not a lot relative to price. Holding them is ot going to do much.
Conversely, converting today gets 13 common shares per preferred shares. If the company is bought, they will buy the preferred for $50 (about 1.7 common shares per preferred share).

I am getting bored, sitting around and waiting for these shares to produce.

LiveRocket Week 35 Performance - Flat

We were stopped out of CTSH, ESV, PWR and UCTT. I regret PWR the most. Nevertheless, we now have $25K to buy some hot stocks, and that's where we are going. I am not going to pile back in. We already have plenty of money in 2 stocks that do not show market enthusiasm (TRID, TIE) and that's plenty for now.

My strategy is to remain recession-proof multinational, continue the focus on oil services and equipment companies, and concentrate more on infrastructure among emerging and developing economies.

Recession proof Multinational: HOLX, IMA

Oil services/equipment: ATW, CLB, MDR

Infrastructure: AMX, PCP, TIE

Other: NUAN, TRID

The picks I have in mind fit these areas:

INFRASTRUCTURE:

MICC - Emulates AMX as a cell phone company except that it is much smaller: $8B vs $100B for AMX. The smaller size in the explosive cell phone sector makes it have better revenue growth as well: 76% vs 30%. It also has a much lower P/E and P/S.

AMX territory: Mexico, Brazil, Chile, Peru, Argentina, Paraguay, Uruguay, Colombia, and

Ecuador.

MICC territory: El Salvador, Guatemala, and Honduras in Central America; in Bolivia, Colombia, and Paraguay in South America; in Chad, the Democratic Republic of Congo, Ghana, Mauritius, Senegal, Sierra Leone, and Tanzania in Africa; and in Cambodia, Laos, and Sri Lanka in Asia

If AMX continues its aggressive buyout campaign, MICC is in its sights.

ZNH - I don't trust Chinese accounting. I am willing to go after this company for a few reasons

1. Chinese domestic air travel can only grow

2. ZNH has a dominant position - largest Chinese airplane company by fleet size.

3. Stronger yuan will reduce fuel costs

4. THE OLYMPICS - People will fly in and want to travel.

5. Foreign airlines interest - Look for links to be established via chare purchases by other companies. Creates underlying price support.

And then there is the recent announced purchase of 55 Boeings. I look at that as a response to burgeoning growth.

Downsides are the Chinese economy slowing down (I don't see that happening anytime soon) and overvaluation. The latter makes me hesitate somewhat. Very few shares are floated (629K sahes) and 350K are shorted. This price bump may really be tied to a short squeeze.

for that reason, I will put ZNH back on a watch list for now.

OIL SERVICES/EQUIPMENT

NOV - I would call these guys "Pipeline and extraction buildout." A more focused version of MDR. In fact, they are growing faster and have better margins than MDR.

ESV Guides lower, we get stopped out

ESV has some problems in the Gulf of Mexico which will hit Q3 earnings.

As you can see from all other drillers (ATW, DO, RIG, NE) this sector remains hot - it's an ESV specific problem.

You could jump in and bottom fish.

We still have another driller - ATW (up 54% since we bought) - and I think if you wanted to get more, NE or RIG might be a better bet right now than ESV.