Saturday, June 28, 2008

Holiday Shortened Weekends Do NOT Matter

With the Independence Day holiday weekend coming up fast, I was really curious as to how oil prices have moved in the past relative to holiday weekends.

Here is a list of oil prices from the past year prior to a holiday shortened weekend. The prices reflected are the prior two trading days, so I could compute a price % change. (For example, if the holiday is on a Monday, I gathered data from the past Thursday and Friday). I do not take into account holidays that fall in the middle of the week.

Date:

Po

P1

% Change

8/30-8/31

$73.36

$74.04

0.93%





1/17-1/18

$90.13

$90.57

0.49%





2/14-2/15

$95.46

$95.50

0.04%





3/19-3/20

$104.48

$101.84

-2.53%





5/22-5/23

$130.81

$132.19

1.05%

As you can see, there really is no sufficient data to go by to make a serious projection or conclusion on the effect of a holiday weekend on price or sentiment. I did not even post data from before Summer (2007) because it is all repetitive. There are conflicting price swings going into a long weekend, not always up and not always down. It annoys me a bit that often people make such a big deal about “traders not wanting to be short oil going into a long weekend.”

Point taken, but in this market, I would not want to be short oil any day. There are many things that can spring up at any time during the week: Geopolitical events, EIA Inventory data, natural disasters and policy changes just to name a few.

The prices reflect that- the rumored, likely, probable or even improbable events that could happen any given day. Yes, there is an increased chance of a market moving event if you throw in a weekend-plus-1. My point is: People are not short all week in this market just to buy back on a Friday to hedge.

I realize oil gets plenty of coverage, as it no question deserves. I just think these long weekends are a bit overrated in terms of traders' sentiment.


Thursday, June 26, 2008

Diabetes Stocks Beat Today's Market

There are nearly 133 million Americans alone considered overweight- putting them at risk for the rapidly growing Type II Diabetes. I have done a bit of research on projections as to how many Americans would be living with the disease in the future. And I have seen some scary predictions:

U.S. Centers for Disease Control and Prevention 2001 study: est. 29 million Americans affected by 2050. (Not accounting for undiagnosed diabetes)

From Diabetes Care magazine: 30.3 million Americans affected by 2030.

While I am no medical professional, I have to believe that population increases and longevity have more than a little to do with these figures. Some of the biggest increases are amongst seniors- no surprise there- elderly population is expected to double as a result of the mass amounts of retirees starting in 2011 (first “baby-boomers” turn 65).

So, today’s market was a real foreshadowing to me. Down 350+ points on the DJIA. All 30 stocks trading lower. 95% of the S&P 500 lower. And these three companies are green:

Lantus®, from France-based company Sanofi-Aventis (SNY) is the number one prescribed insulin in the United States. Their most recent quarter (Q1 2008) saw sales of 557 million for Lantus®, a 30.8% increase.

Second, there is Denmark based Novo-Nordisk (NVO), whose slogan is “changing diabetes.” Judging by the array of products and drugs they offer, I do not have any basis to disagree. Among the advertised insulin delivery products include pens like the #1 global sales leader “FlexPen®”, needles and also a specialized hypoglycemia kit for emergencies.

NVO has tremendous growth opportunities in many countries. Half of their employees are located in Denmark (12,689) but check out the host of countries they have penetrated:

North America: 3,940
Japan & Oceania: 1,025
International operations: 4,943
Europe: 3,411

Finally, DaVita (DVA) offers a different angle of treatment. The California based company operates kidney dialysis centers in the United States, serving over 100,000 people with both inpatient and outpatient options. The stock bottomed out in March and has not even come close enough to test the lows.

Here is an impressive string of analyst coverage/upgrades for DaVita:

6/3/2008 – Sun Trust Rbsn Humphrey (Initiated BUY)
4/29/2008 – Citigroup (Initiated BUY)
3/28/2008UBS (Upgrade to BUY)
3/12/2008 – Piper Jaffray (Upgrade to BUY)

…And the future is easily predictable... it will be up to companies like these to provide us with the innovation of new and effective treatments.

Disclosure: None

Wednesday, June 25, 2008

Robert Toll: Harsh but Real?

Take a look at a few recent quotes from Toll Brothers CEO Robert Toll:

From MarketWatch (5/13/08):

"When we have held promotions, buyers have come out to play and put down deposits. Often, however, a lack of confidence in the direction of home prices overcomes their enthusiasm and they don't take the next step of going to contract," said Toll, the CEO. "They, like all of us, read the papers and watch TV, both of which keep advising them that home prices are declining."

Conference Call Transcript (6/3/08):

“Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize.”

“We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices. As we have said before, we favor a tax incentive for all those who buy homes within nine months of the Bill's passage; this would create a sense of urgency. Interest rates are low, supply is abundant and a buyer's market prevails. With a little motivation, the new home market could turn around, which would have a very positive impact on banks, bond prices and many other areas of the economy. Once home prices stabilize, Congress could then more successfully address mortgage issues; however, without stabilization of home prices, trying to address mortgage issues may be difficult at best.”

From the AP, (6/4/08):

"Can the market go down another 10 or 20 percent? Sure."

"There's a whole bunch of them [materials] that's oil based ... I see costs going up from here. So we're caught in a squeeze. Certainly, our clients aren't going to pay more money because our costs our going up."

From a CNBC interview during the Bank of America Homebuilders Conference (6/19/08):

“What I found is a market that was slow.” [after visiting project sites]

Paraphrasing here- “The U.S. Census Bureau is overstating the action in the market by 1/3” – referring to the U.S. Census apparently not including cancellations in a down market.

_________________________________________________________

As for the market today: May new home sales came in at 512,000- a bit below expectations. And there is still no sign of any forthcoming strength here.

The question I ask: Does Bob Toll’s straightforwardness have something holding Toll Brothers over $20/sh? Over the past year TOL has beaten the (maybe I shouldn’t use that word—more like has not sustained a loss as large as the…) XHB index. Stuart Miller, CEO of Lennar has deemed the market as challenging and difficult as well, and Lennar’s stock has plummeted to another level compared to TOL. Both have been increasing cash on the balance sheet and TOL has been paying down some long term debt.

So, do you attribute the somewhat remarkable sustainability of TOL to Mr. Toll or is this just a perk of being a top ‘best of breed’ (if there is one right now) U.S. homebuilder? Or is it just a matter of time until their inventory/sales ratio catches up to the stock?

Monday, June 23, 2008

Barack Obama Wrong on Ethanol

Barack Obama is helping to ruin your summer BBQ’s. The New York Times ran an article today about the Obama campaign and its immense support of ethanol and subsidies.

Senator Obama certainly realizes his views tie in with rising corn and other grain prices: In a May 2008 interview, he said “And so there are a whole host of reasons why we're seeing problems with food supply. There's no doubt that biofuels may be contributing to it.” With oil rising and floods in the mid-west, corn supply has to be stretched- some going to ethanol production and some going to the grocery store- and at a premium.

“Mr. McCain advocates eliminating the multibillion-dollar annual government subsidies that domestic ethanol has long enjoyed. As a free trade advocate, he also opposes the 54-cent-a-gallon tariff that the United States slaps on imports of ethanol made from sugar cane, which packs more of an energy punch than corn-based ethanol and is cheaper to produce” (Rohter, 6/23/08).

There is no doubt Obama wants lower energy prices and cleaner fuel, but he is clueless about Economics 101 and how to get there. Opposing aspects of NAFTA and insisting on tariffs will not help our case for alternative energy. Brazil’s sugar-cane ethanol, the article points out, is much more efficient and cost effective. In the meantime, with his guarded views on trade, Obama is not helping ease oil tension by opposing more drilling in the United States. Should make for a great debate topic between the two candidates.

Though a separate issue, of course drilling in ANWR and off certain coastlines of the US would take years to affect the supply. Some critics cite fears of another oil spill, which is irrational. Rigs are drilling all over the world, why should the US be exempt if we have the technology to increase supply at some point.

Just last week, Obama commended the override of President Bush’s veto of the Food, Conservation, and Energy Act of 2008 – extending subsidies for corn ethanol. That’d be OK in moderation, but this bill proposed $288 billion in spending, in part for an alternative fuel that is actually harming the American consumer. More spending should be concentrated in Nat Gas, solar and wind power. And did I mention? DRILL.

UPS: The Next Oil Victim

Trading of the United Parcel Service, Inc. (UPS) was halted today after hours until about 4:55 PM EST (T3) as they warned on Q2 earnings, citing, you guessed it, rising oil prices and package volume:

Old guidance range: $0.97 to $1.04 per share
New guidance range: $0.83 to $0.87 per share

UPS has plenty of concerns with the obvious. But, along with FedEx, international demand seems to be holding serve. In fact, UPS is an official sponsor of the 2008 Beijing Olympic Games and has been serving China since 1988 with non-stop flights. Just spit-balling here, but perhaps the international goodwill and global media presence this August can help enhance their full year earnings.

As an investor, though, there is not much to do besides sit on the sidelines. The dividend doesn’t merit the risk involved in holding companies affected by oil to this extent. Airlines are a better hedge against lower oil prices. Recent history shows, you’ll see a larger total percentage return on low per-share stocks like UAL Corp (UAL) and U.S. Airways (LCC)- that is- if you can muster up the courage to take the bearish position for short-term oil. The airline sector and the United States Oil Fund ETF (USO) have been trading inversely for a while now. For the risk takers, perfect timing could net some nice profits.

Obviously, management knew they would take a hit to the per share price after seeing FedEx (FDX) warn about their quarter and full-year earnings just a week ago. Perhaps the folks at UPS figure it is better to follow in their peer’s footsteps and take the hit now, rather than hugely disappointing come their expected reporting date in July.

Moreover, UPS took a dive on FedEx’s lowered guidance – so some of this news was certainly priced in the stock. Shares ended the after-hours trading session down $2.30 to $63.96, nearly a 3.50% move. Expect the gap just a bit lower tomorrow.

Disclosure: none

Wednesday, June 18, 2008

ETF Revolution: First Pure Wind ETF Launched Today

First Trust launched the first ever wind sector ETF today, ticker symbol (FAN) will track the performance of the ISE Global Wind Energy Index.

From First Trust’s website: “The index is a modified market capitalization weighted index of publicly traded companies throughout the world that are active in the wind energy industry based on analysis of the products and services offered by those companies.”

With estimates from the U.S. Department of Energy that wind power could generate 20% of electricity by the year 2030, it looks like the ETF will play right at [Jim] Cramer favorites like Trinity (TRN) and Otter Tail (OTTR), as well as many international giants in Asia and Europe. See the full ISE Global Wind Energy Index here.

I’m surprised this ETF is the first of its kind. In 2008, with so much speculation involving alternative energy, I expected to see a wind ETF already trading. The closest thing I could find to a wind ETF was the Market Vectors Global Alternative Energy (GEX), whose performance has been quite unimpressive to say the least YTD. Anyway, this is a great way for wind bulls to segregate themselves from other forms of alternative energy.

Wind energy certainly has some advantages over the field: It is relatively inexpensive and about as ‘green’ as you can get (renewable and environmentally clean). It is only a matter of time before the United States catches up to the likes of Denmark and Germany. Wind power accounts for 19% and 6% of electricity in the two countries, respectively. As such, I have a long term bullish sentiment on FAN, especially because of its global diversity of components.

FAN opened around $31.00 today with around 275,000 shares traded as of early afternoon on Wednesday. This certainly will not be the last we hear of this one.

Disclosure: none.

Tuesday, June 17, 2008

Visiting the Smokeless Tobacco Players

Often overlooked, the smokeless tobacco industry still has some long-standing growing power. We’ll explore two top players in the U.S. market, and try to decipher who’ll come out on top in the headwinds an economic slowdown- and realize that taxes and political pressures also face the tobacco industry as a whole.

UST, Inc. (UST):
First, UST is your essential vice stock as the holding company for two principal subsidiaries: United States Smokeless Tobacco Company and Ste. Michelle Wine Estates.
UST produces and markets the premium brands of ‘dip’ – Skoal ® and Copenhagen ®.

Q1 2008 sales in the tobacco segment grew 1.7% year over year, while operating profit added 3.8%.

There is no question they have a problem with growth drivers. This needs to be addressed before I would contribute my personal capital to the company. While Skoal has been rolling out various new brands of dip- including mild flavors like Citrus Skoal- designed to both convert smokers and add new younger consumers to their base. An older article I read on SeekingAlpha.com pointed out something that holds true today: It may be in UST’s best interest to diversify beyond tobacco and explore joint ventures and acquisitions. In fact, their winery division grew 25% on extremely high volume last quarter.

If we pull up the 6 month chart, we clearly see a trading range set up from $52 to $58.


Even if it continues to be bound to the range- its 4.6% dividend yield should please any investor and negate the price swings, especially on the ex-dividend dates. After all, many investors hardly look to tobacco stocks for fast money.

In an April 2008 article on MSN Money USSTC president Daniel W. Butler said:

"This marked the seventh consecutive quarter of premium volume growth. I am especially pleased to see that despite a challenging economy and new price value entrants, premium volume trends remain strong and there has not been an acceleration in the price value segment."

In fact, that’s not entirely true. Low priced smokeless tobacco has been gobbling up market share from UST for several quarters now, as this RealMoney.com article points out:

“UST has had significant losses in market share to rivals like No. 2 player Conwood, a unit of Reynolds American , which is focused on the price-value segment with its low-cost Grizzly brand. Ten years ago, UST owned more than 80% of the smokeless tobacco market. By late 2004, the company's market share had slipped to 68%. Today, it's less than 60% and trending down.”

And the trend has no reason to break, yet. Sure, there is ALWAYS brand loyalty. I’d be na├»ve to doubt that. But, if we are in a recession, you can bet that the discount dip will creep its way up the income brackets.

That leads us to the primary discount player, Reynolds American (RAI):

R. J. Reynolds Tobacco Company is the subsidiary of interest here. It is much more diversified within the tobacco industry. They are primarily well-known for the Camel® and Kool® cigarette brands. Although in 2006, they acquired the rights to both the Grizzly and Kodiak brands of smokeless tobacco. RJR Tobacco Company is considered the second largest manufacturer of smokeless tobacco in the United States.

These two discount moist snuff brands are becoming increasingly popular and gaining market share on UST.

Again, let’s pull up the 6 month chart of RAI:
Despite the 6.5% yield, RAI is trading around its 52-week low of $51.08. RAI has been taking hits in the headwinds of analyst downgrades and lowered guidance, but trading flat since May 1st. This is not the Conwood division’s fault; the producer of the discount dip posted double digit volume growth, according to the Winston-Salem Journal. In fact, Conwood has huge growth opportunities, making up only 4% of revenues in 2006. RAI should follow in UST’s footsteps and start to market more varieties of their discount products.

Is it time to try to catch a bit of a, I don’t know, let’s call it a falling butter knife? Execs must think so after initiating a $350 million buyback program for the forward twelve months. RAI has a strong balance sheet; lots of cash, in other words, your 6.5% yield is safe. Now, time your entrance point right or cost-average down and you’ll mint money.

One last though to ponder: Altria (MO), better known as Philip Morris USA, is testing their own smokeless tobacco product. If market penetration proves difficult for big MO, will either subsidiary be ripe for acquisition by the tobacco giant? Would not be a big surprise to me.

Disclosure: none

Tuesday, June 10, 2008

Time to Buy Petsmart

Petsmart is the “top dog” in its industry – outdoing its competitors in every phase of the pet game. Naturally, the primary business operates pet stores (1,008 stores per Yahoo! Finance) in North America. What separates Petsmart form its competitors: Veterinary services, grooming, doggie day camps and boarding. Instead of going to a discount store to buy food and supplies, many consumers still splurge on their pets – perhaps taking advantage of the loyalty the company shows to both animals and their owners. The diversity of the stores are unrivaled- down to the simplest form: Petsmart offers both specialty and national chain brand pet food!

With a plurality of sales coming from essentials like food, Petsmart seems to be in a decent position to handle the penny pinching becoming prominent in the face of $135 oil. Business week points out that food sales account for 40% of total revenue and the newly implemented PetHotel grooming rose 22% last quarter. April same-store sales also rose 2.9% despite headwinds blowing in the direction of most retailers.

In the most recent conference call, PETM also reaffirmed full year guidance of $1.51-$1.59/share. Only time will tell if a dismal macroeconomic picture factors into pet spending.

Additionally, I found the following quotes interesting [from the article]:

a) “Based on the 2007-08 APPMA National Pet Owners Survey, more than 71 million U.S. households, or 63%, own a pet.”

b) “Increasingly, pets are being treated like family members, according to the APPMA. While discretionary spending by consumers is likely to slow in 2008, precipitated by rising gasoline prices, a decline in home equity loans and refinancing, and burgeoning debt levels, we believe that pet retailers are somewhat insulated from these pressures. If pets are considered part of the family—and are treated as such—we think this subindustry should be able to weather the negative economic issues that are currently hurting most retailers.”

©businessweek: See the full article here.

And I personally don’t disagree. People will certainly give up some luxury items to keep their best friends happy. I know I will. Sure, we all know Walmart wants to penetrate the pet food and supplies market. But, remember, Walmart sells clothes and that does not stop people from shopping at Nordstrom and Abercrombie & Fitch. This same theory, in my opinion, will hold true for this specialty retailer.

Finally, from a trading/technical standpoint, take a look at the 6 month chart with 50 day SMA:


It has bounced off the 50 day SMA twice since breaking through in late April. After just breaking under the 50 day this week, a bounce back off it will further affirm my conviction from a technical standpoint as a great time to enter a position.

Disclosure: I have no position in PETM as of 6/11/08.

Thursday, June 5, 2008

Recession or Not; Here DGX Comes

It is no secret that the Healthcare sector usually outperforms the market during recessions or quasi-recessions. Whether or not the U.S. Economy is in one right now is not a concern for Quest Diagnostic (DGX).

30 Minute waits? You're not at the DMV. You're at DGX. Quest Diagnostic is the nation's leading provider of any kind of blood test you can draw up, serving over 500,000 patients everyday. In a recession, the logical thought is: What will NOT change? Clearly health concerns are not going away and, now more than ever, tests are needed to check cholesterol levels and aid in the diagnosis of diabetes. With a growing population, increased longevity, and the aging 'baby boomers', the demand for blood and urine screening is hardly going to be overlooked. This company is about as secular as General Mills and Coca-Cola.

"Laboratory test results impact more than 70% of healthcare decisions," says CEO Dr. Surya N. Mohapatra.

Dr. Mohapatra also knows how to keep up with the times. First announced in February, Quest Diagnostics and Google Health agreed to team up to provide test results online. Physicians are the point men for this service through Quest's Care360 connectivity program. Patients can now have instant access to their medical records from home without fully sacrificing contact with their doctors.

They have also expanded into international markets, namely Mexico, with operations in Mexico City. Look for further expansion with increased demand abroad.

In terms of the stock and how it would fare during a recession, MotleyFool had a great little piece about the 2001 recession. After the tech bubble burst and the economy sunk, strong fundamental companies, like Quest Diagnostic, more than held their own ground:

Data from the Motley Fool article:

DGX Closing price:
3/1/2001..........$24.60
11/1/2001........$32.76
%Change..........+33.2%


Three analysts either rolled out coverage or changed opinions on DGX in 2008:

Feb '08: Credit Suisse upgraded DGX to Outperform.
Apr '08: Citigroup initiated a Buy on the stock.
May '08: Oppenheimer followed with a Buy rating.

Quest Diagnostics does not come without its critics- 11.25% of the float is short with 24 days to cover. Granted, the stock trades on light volume compared to some of its peers, but any good news could send this stock right back to 52-week high levels of $58.

Disclosure: I'm long DGX as of 6/4/08.

Wednesday, June 4, 2008

NYMEX Shareholder Uproar:

Shareholders of the New York Mercantile Exchange (NMX) are still in a frenzied fight over the proposed merger with the Chicago Mercantile Exchange (CME).

With CME’s stock tanking and no price protection on their original $11 billion dollar offer. The current bid for each share of Nymex is 0.1323 shares of CME and $36 cash, equating to an offer with a single digit premium-- in the $85 per share range, a 20+% decline from the January bid, once valued at around $119 per share.

Prominent member and shareholder Cataldo J. Capozza is now even considering a Carl Icahn-like move by petitioning to remove Dr. Newsome, the CEO of NYMEX. He has both a pending lawsuit against the deal and still believes NYMEX is getting a lowball offer from the CME.

After acquiring the CBOT last year, the CME is looking to diversify its trading platform to include the volatile commodities traded on the NYMEX. But according to shareholders, they still are not willing to pay the premium that NYMEX deserves. Furthermore, seat holders are far from happy with the $612,000 per seat ($500 million total) offer for the memberships.

With record highs in crude oil and an 11 handle on natural gas futures, the exchange will only continue to flourish and grow earnings, as it has done for the past few quarters. You have to believe the NYMEX members and shareholders have a case.

Take a look at the six month charts of both the NMX and the CME, respectively. They've been trading, as expected, symmetrically. Notice that the CME has taken a more dramatic percentage decline. Not only are they facing the headwinds of federal regulation, but they still DO have to shell out capital for both their acquisition of the BOT and potential acquisition [albeit at the current or higher price] for NMX. A successful acquisition of the NYMEX will clearly bring the Merc future benefits and a higher stock price- but in terms of 2008- the bottom may not be in yet.



Stay tuned. Its proxy battle time.



Note: I am long NYMEX (NMX) as of 4 Jun 2008.

Tuesday, June 3, 2008

The Bearded One Backs the Buck

If you any doubt as to where Fed Chairman Ben Bernanke's mind is these days, there are three words you need to know: Inflation. Inflation. and Inflation.

Bernanke's remarks at an international conference today sent the dollar higher and oil lower. After the big run-up of the EUR/USD, the trade cooled off to the lows of the last 5 days. Take a look at intra-day EUR/USD chart and see the sell off around noon:


Oil followed suit and the front month contract settled at $124.31 after Bernanke hinted the next Fed policy move will NOT be a cut.

Obviously it would be a mistake to start talking rate hikes right now in the face of still-poor housing data and lingering concerns over the financials (namely Lehman Brothers and Wachovia this week). Lehman, rumored to report a loss this quarter, found itself denying more rumors about the firm accessing the Federal Reserve's discount window. Shares of LEH fell close to 10% intraday. And thats just brushing the surface of the ongoing turmoil that the financial sector just can't shake. The clear yet subtle message from Bernanke today was enough to contribute to a red tape among the major indices.

It looks like the chairman is doing his best, intentional or not, to throw a dart at the short term oil bubble. Says Bernanke: "...households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit and higher energy prices."