The Wall Street Stand

A Rick Santelli View...

2008-09-22T22:35:00.000-07:00

The TED Spread, albeit still historically high, came down from the highs last week. I would be hard-pressed to call it a ‘rally’, but at least more faith is being shown that the government is doing the right thing.

What is the TED Spread? The TED Spread is defined as the yield difference between the [risk-free rate] United States three month Treasury Bill and the three month London Interbank Offered Rate (LIBOR).

What does it mean? The TED spread is a way of taking the pulse of global credit risk. The three month T-Bill is considered ‘risk-free’ because of the full faith and credit backing of the US Government (i.e. no default risk). To compare that to the LIBOR reflects the credit risk of unsecured lending between banks in the London interbank market. In a nutshell, a rising TED spread indicates what we have now- fear of the default risk. Low spreads indicate more of an appetite/tolerance for risk in a ‘safe’ economy.

What other data supports the TED Spread? Many economists argue that the LIBOR-OIS spread is the complement to the TED spread. The LIBOR-OIS spread measures the difference between LIBOR and the overnight index swap rate. The rate has been viewed as confirming the credit risk by “measuring the availability of funds in the market” ( Bloomberg ).

Bullbeartrader.com put out this paragraph that perfectly summarizes the spreads: “As discussed in a recent Bloomberg article, the spread between the 3-month Libor and the overnight index swap (OIS) rate, traded forward 3 months, is greater than similar expiring spreads. This recent movement in the spread is signaling that traders are concerned that banks will have difficulties obtaining cash to fund existing assets, as well as putting into question their ability to shore-up their balance sheets. In general, an increasing spread signals that funds are becoming less available. The recent activity appears to be driven more by traders leaving the short-term, closer to expire positions early over worries about Libor and its reliability” (BullBearTrader).

Back in May, MarketBeat’s David Gaffen also pointed out that the TED spread improved (fell) because of the T-Bill rates rising, not LIBOR rates decreasing. Now, we are seeing the complete opposite (TED rising). Investors are now flooding into T-Bills and thus sending prices higher and yields lower. To think - investors at one point in time were willing to put their money in 0% yield instruments.

Conclusion:
The scary part is that the U.S. three month T-Bill traded at either zero or even negative late last week. While it has recovered, the TED spread is still too high and I am sure the Federal Reserve is paying close attention to it, among other factors. After holding rates steady, the Fed will surely have the finger on the ‘ease-rate button’ should emergency intervention be needed pending Congress’ vote on the Paulson bailout plan.

Below:
The first chart shows the dramatic volatility in the TED itself. It has historically charted between only a few basis points, but the recent events in the U.S. have created a spike that finally broke out.

The second chart gives a closer view of what has been going on the past year. We finally got the biggest spike in the TED after a week that changed Wall Street forever. Although it has subsided from its highs, the TED is worth watching as a future indicator, pending the government's solution.

Charts are (c) of http://www.bloomberg.com

The Short Ban and ETF's

2008-09-19T11:04:00.000-07:00

Since the SEC decided to follow the lead of the UK and ban short selling, this time on 799 select financial stocks, with others beginning to petition to be put on that list to protect their own shareholders. The transition into ETFs only seems logical.

For this purpose, we’ll look at the (SKF), which is the UltraShort Financials ProShares. The (SKF) managers don’t actually short the underlying stock directly; they enter into equity swap contracts with an intermediary – who goes out and shorts the stock. With the ban in place, there are less (if any) counter-parties to assume the risk on the other side of the swap contract.

ProShares made the following announcement this morning, while the ETF was halted: “Due to the emergency action announced by the Securities and Exchange Commission on September 18, 2008, temporarily prohibiting short sales of shares of certain financial companies, Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF) are not expected to accept orders from Authorized Participants to create shares until further notice. Unless notified otherwise, shares will be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets today, but may trade at prices that are not in line with their intraday indicative values.”

It has subsequently started trading again, down nearly 20% during mid-day action. Obviously, we see the inverse action on the 2x long ProShares (UYG). So, if bears really think Paulson & Company will be stuck holding a bad hand after this weekend, they can go ahead and short the UYG itself rather than even dealing with the SKF and the mess created by the ban. On the flip side, others will confide in the government and remain long the likes of the UYG and the Financial Sector SPDR (XLF).

Two questions: (1) Will hedge funds start piling in these ETFs [traditionally used by small-capital investors for the moderate-long term] with no shares of individual companies available to short? (2) Will the shorts go right back after the financials, specifically the likes of Morgan Stanley and Goldman Sachs on Oct. 2nd? We’ll wait and see- any unusual activity in the October 2008 options, as the plan from the Treasury and Congress becomes clearer, could signal the future of the financials come the 2nd of October.

Midday (2pm on 9/19/08) charts of the UYG and SKF, respectively:

I have no position in either ETF.

VeriFraud back to being VeriFone:

2008-08-25T02:03:00.000-07:00

VeriFone Holdings (PAY), which manufactures the devices which enable debit/credit card transaction automation for merchants, is finally seeing a pop in their stock’s performance – months after an accounting debacle sagged PAY shares to a 52-week low of $10.10.

The San Jose based company was busy this past week, upping forecasts while naming a new CFO to the team- as a part of cleaning house. Veteran Clinton Knowles replaced Barry Zwarenstein after months of allegations and current SEC investigations into VeriFone’s books.

It looks like VeriFone is getting back on the right track after erasing $70 million in overstated profits from fiscal 2007. The company also beat earnings consensus of $0.28 per share [excluding books adjustment and other one-time expenses] and upped guidance for Q4 to $0.36-$0.39 from the original analyst forecast of $0.30 per share.

CEO Douglas Bergeron also pointed out the raised FY 2009 earnings guidance to $1.45/share versus the previous $1.21/share consensus.

The results prompted the following opposite reactions from analysts:

"The optimistic outlook prompted SunTrust Robinson Humphrey analyst Andrew Jeffrey to predict VeriFone's stock will rise to $30 within the next year, up from his previous target of $22.

'We are convinced that VeriFone's historical competitive advantage remains materially intact, even as its two primary competitors have probably used the company's recent travails as an opportunity to take market share,' Jeffrey wrote in a Wednesday research note titled 'Starting Over: Phoenix Rising.'

Other analysts, though, were more skeptical.

In a Wednesday research note Goldman Sachs & Co. analyst Julio Quinteros wrote that VeriFone still appears to be facing 'headwinds' because the company is selling less profitable products, particularly in international markets. VeriFone hopes to offset some of those pricing pressures by lowering its expenses." (AP via Yahoo! Finance)

The $64,000 question is: What now?

Here’s my take:

1. VeriFone has great secular growth potential (25% international, 40% latin America, 25% asia, as per the conference call)

2. The inherit nature of the industry- (i.e. an Oligopoly- I, personally have not seen debit keypads manufactured by any other company)

3. Note the huge pop in MasterCard (MA) over the past year and a half, the IPO buzz surrounding Visa (V) and the Warren Buffett apparent continued buying of American Express (AXP). All of these factors indicate higher margins for VeriFone.

4. Accounting mess cleaned up = takeover target for big tech? No one can rule that out.
This business just seems that it has such vast growth; had it not been for the account debacle, the stock could very well be hanging around in the $40/share range and threatening the 52-week high of $50/share.

Conclusion: Assuming the accounting mess is 100% straightened out- the stock is a bargain, assuming any multiple less than 1.5 times the growth rate. I often screen out stocks with high PEGs [very generally, for long term plays], but this stock really does looks cheap considering the 1.00 PEG ratio.

PAY added nearly 36% after-hours on Tuesday and finished the week at $18.79.

Disclosure: None

Buffett and Gates help bid up Canadian Natural Resources:

2008-08-21T18:49:00.000-07:00

Warren Buffett and Bill Gates, ranked #1 and #3 richest in Forbes [respectively], took an unusual summer trip together - to northern Alberta on Wednesday to explore CNQ’s multi-billion dollar oil-sands project.

The Horizon project is an “open pit mining strategy [which] will consist of mobile equipment and bitumen extraction facilities to mine and separate the raw bitumen from the oil sands. Canadian Natural will further upgrade the bitumen to a sweet synthetic crude oil using proven delayed coking and hydro-treating technologies” (CNRL.)

The project comes with some drawbacks: Budgeted costs have risen to (est.) $8.5 billion and drilling in the oil sands is not as environmentally clean as the likes of Transocean’s (RIG) deep-water drilling. CNQ projects that the costs will be easily covered, though, with the 40 year project life-span. Drilling technology over the next few decades will undoubtedly advance, as well.

In all, the oil sands of Canada are the second largest such reserve for crude oil production – an estimated 175 Billion barrels- not a bad output to help curb the supply-curve while alternatives to fossil fuels are explored.

I think it is unlikely that Buffett and Gates will invest in CNQ or one of its competitors – a lot of investors, politicians, journalists and government officials take trips to explore the future of energy in North America and the world. "We were asked to come up and give a general overview on the oilsands and Canada's role in the world of energy in general, which we did," said Greg Stringham, CAPP's [Canadian Association of Petroleum Producers] vice-president. "They were exercising curiosity, basically saying, 'Wow, this is neat.' " (Calgary Herald)

Even if Buffett has a desire to invest here, history says he is always highly educated on both the sector and company he invests in (i.e. no tech companies). I’m sure the idea has crossed his mind, but unless he’s seen more than a small presentation about how the industry operates, I would not expect anything more than a flicker of hope for CNQ longs (who, not to mention, have had a nice ride with CNQ already).

So, whether it be an investing trip, sightseeing trip or both- one thing is certain: Both institutions and individuals follow every footstep of Buffett. If there is a remote chance he will put capital towards this form of oil harvesting, you bet your house that the money will follow.

Edward Jones analyst Lanny Pendil apparently did not get the memo that these billionaires really do move stocks: “The fact that people were up there kicking the tires means nothing from a financial standpoint and therefore really shouldn´t really play into what the price of these stocks is doing today.”

So, why did CNQ jumping the highest since 2005 on the day of the visit? Hmm. I’m still amazed how Buffett can materially move stocks, especially from my point of view as a young investor who has not had the privilege of following Buffett.

CNQ added 7% on Wednesday on the speculation and another 3% Thursday on higher oil.

Disclosure: None

A Currency Called the Oil/Dollar?

2008-08-08T15:51:00.000-07:00

The old “Which came first: The chicken or the egg ?”debate has turned into “Does oil affect the U.S. Dollar or does the Dollar strength (or lack thereof) drive oil prices?”

Here’s both sides of the story:

Option A: Oil is driven by supply and demand – Economics 101. Sure, there are speculators floating around, but certainly not prominent enough to drive the price of oil more than a few dollars either way. Oil prices react to socioeconomic events, conflict premiums and EIA data, among others.

Therefore, as demand increases, other countries (namely, the BRIC: Brazil, Russia, India, China) bid up the price and force oil to be valued at X amount of dollars in the eyes of the U.S. citizen/investor. In terms of companies that use the oil, like airlines, the smartest ones have had a hedge on prices for years.

Solituons: The government needs to look for both alternative energy and drill offshore to create our own extra supply. Citizens should demand congress to enact legislation promoting the use of nuclear power. Democrats argue that leaving Iraq would help lower prices (probably true, but should not be considered before we win the war). Other, in my opinion, less effective arguments include Sen. Obama’s call for a bigger reliance on the mass transit system.

Conclusion: Oil drives the Dollar.

Option B: I could not think of a better way to put this, so I’m using a quote I found in this FOREX Blog: “In a nutshell, this inverse relationship exists because global oil prices are denominated in dollars. Thus, as the USD declines, oil producers are paid fewer 'units' of foreign currency in exchange for oil. They must compensate for this decline in real revenues by raising the price of oil (in dollars).”

To add to that, the price of physically importing the oil from foreign countries increases.

Solutions: Raise Federal Funds rates while growing the economy- the Fed’s dual mandate (FYI, the ECB has a single mandate). If China and others would float their currency, the USD would strengthen versus the EUR.

Conclusion: The Dollar drives oil prices.

Clearly, we see an inverse relationship from the weekly closing charts of the Dollar Index and Lt. Sweet Crude, respectively:

Carl Ichan Stocks Having A Bad Month

2008-08-07T21:05:00.000-07:00

After the Yahoo! debacle that had us watching his every move this summer, August has not gotten off to the best start for the billionaire, either.
Blockbuster, Inc. (BBI) posted a larger than expected 2nd quarter loss lead by low DVD rental margins. The stock reacted by dropping $0.31 to $2.88 (-9.72%) in Thursday’s trading session. The $44.7 million dollar loss fell below estimates by a penny.

“Although it hasn't been driven into bankruptcy like some of its smaller rivals, Blockbuster has suffered nearly $4.5 billion in losses since 2001, causing its stock price to plummet by nearly 90 percent” (Liedtke, AP, 8/7/08).

My response to that is: …“Hasn't been driven into bankruptcy YET.” The industry is clearly moving towards different means of video rentals- from ordering movies directly from your cable service or using Netflix to have movies delivered to your home. Blockbuster’s in-store sales and rentals may become obsolete in only a few short years if they do not continue to diversify at a low cost. Their best chance of survival is to team up with a competitor like Netflix and get in front of the 8-ball rather than stay behind it (i.e. pull a Sirius-XM Satellite Radio merger).

Sure, Blockbuster is doing what they can – stocking more of the DVD hits, focusing on the hot XBOX360® and Nintendo Wii® games and closing 233 of its nearly 8,000 stores this year. But they still lag far behind rival, and also unimpressive, Netflix with their online rentals.

CEO James Keyes helped prop Netflix’s up 1.5%, saying spending on advertising its online rental service has probably peaked. If he really believes the stores are more important than its online rental service, I doubt he would close as many stores as he has. Downloading multimedia is the present, not the future. Sure, Blockbuster has more of a two-facet system going, but their advertising concentration should be more proportional to both current and projected costs, sales and growth.

By the way, Blockbuster is sure lucky they were able to get out of the Circuit City acquisition. They should be looking to become a takeover candidate, not vice versa. Two bad companies do not make a good one.

For Icahn, the August pain has not been limited to Blockbuster. Shares of Biogen (BIIB) fell $19.64 (-28.2%) to $50.12 during the August 1st trading session after they released material news: The Bioigen-Elan partnership prize Multiple Sclorsis drug Tysabri yielded new cases of brain disease in patients. The drug had previously been halted in 2005 because of the same problems.

Again, my response: There really is no reason to buy a biotech stock with a short pipeline. Celgene or Gilead Sciences would be much better options. Biogen still has not recovered any of the massive drop last week- trading flat to close at $49.88 on Thursday.

Check out these three Icahn favorites and their three month performance; Even he does not always beat a volatile market:

Disclosure: none

Holiday Shortened Weekends Do NOT Matter

2008-06-28T21:44:00.000-07:00

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.

Diabetes Stocks Beat Today's Market

2008-06-26T19:47:00.000-07:00

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)
3/28/2008 – UBS (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

Robert Toll: Harsh but Real?

2008-06-25T22:19:00.000-07:00

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?

Barack Obama Wrong on Ethanol

2008-06-23T19:32:00.000-07:00

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

2008-06-23T19:30:00.000-07:00

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

ETF Revolution: First Pure Wind ETF Launched Today

2008-06-18T12:00:00.000-07:00

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.

Visiting the Smokeless Tobacco Players

2008-06-17T20:29:00.000-07:00

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 naïve 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

Time to Buy Petsmart

2008-06-10T20:07:00.000-07:00

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.

Recession or Not; Here DGX Comes

2008-06-05T22:10:00.000-07:00

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.

NYMEX Shareholder Uproar:

2008-06-04T20:55:00.000-07:00

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.

The Bearded One Backs the Buck

2008-06-03T14:17:00.000-07:00

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."

Celgene: A 'Shot' of Relief in a Volatile Market.

2008-01-15T21:23:00.000-08:00

With this uneasy domestic economy, it's time to look at more defensive names in order to persevere through a very volatile tape. It's not time to bottom pick, catch falling knives or take unecessary risks. This market simply calls for safe, defensive plays. And ONE of those MANY stocks that can make you money is Celgene (NasdaqGS:CELG). In fact, the healthcare sector as a whole is one of the safe bets to ride out a slowing economy, before the Federal Reserve steps in to (hopefully) ease their target interest rate aggressively again tomorrow. But, after watching this Fed and their recent actions, I would not be buying any equity ahead of the meeting, for nothing else but the chance of only a 25 point cut.

Let us move to Celgene independent of the tape. I could go on with the technicals, but that is readily available information. I'd like to point out certain aspects of Celgene that will push this stock to full-valuation in 2008-- be it good management/pipeline or a takeover.

Celgene's 15% year-over-year full EPS growth recognizes this as a $65-$70 stock, trading at a huge discount. For the skeptics, all that needs to be seen is how far the stock is from its fall 2007 high. It's ripe for the picking.

1. The management has been dedicated to not only improving the quality of its pipeline, but to development of innovative cancer drugs, as well as acquisitions of competitors. CELG recently purchased its parter in Revimlid -- German based Pharmion (NasdaqGS: PHRM)-- for $2.9 B in cash and stock. In my personal opinion, contrary to others, they are NOT overpaying for this company. Let's take a look at the advantages of this acquisition:
-Their pipelines are a perfect marriage. Mike Nagle of DrugResearcher.com describes it to a tee:

"A large part of Celgene's oncology franchise consists of thalidomide and derivatives of that molecule, such as Revlimid (lenalidomide). These are approved to treat multiple myeloma (MM) and myelodysplastic syndromes (MDS).

"With this latter group of conditions, the bone marrow typically produces more blood cells than normal, yet they are defective, leading to lower numbers in circulation. In some cases, this can lead to acute myeloid leukaemia (AML).

"Although Celgene has four immunomodulatory drugs, dubbed 'IMiDs', in its pipeline, they treat MDS, not AML. This is where Pharmion comes in, with its drug called Vidaza (azacitidine). The injection form of the drug is already approved to treat MDS, but crucially, is also in Phase II trials for AML. An oral form is also in Phase I clinical trials for both diseases (see table below).

'It's a great move for Celgene,' Michael King, an analyst with Rodman & Renshaw, told Bloomberg.

'Vidaza has the potential to be a billion-dollar product.'

(C) Mike Nagle from [http://www.drugresearcher.com/news/ng.asp?id=81456-celgene-pharmion-thalidomide-vidaza-azacitidine-myelodysplastic-syndromes]

2. Follow the big money? Carl Icahn is moving into BioTech company Biogen (NasdaqGS: BIIB), looking to overthrow the board with three of his supporters (http://biz.yahoo.com/ap/080128/biogen_idec_icahn.html?.v=2)

3. Takeover? Celgene has been trading at a discount for months, and along with (NasdaqGS: ISIS Pharmaceutical), is a prime takeover candidate for a pharma-giant. Its blood cancer drug, Revlimid, has achieved record sales growth in Europe. I personally own a basket of Biotechs, namely CELG and ISIS.

Disclosure: I am long both CELG and ISIS. This article is for informational purposes only and is not a recommendation to buy or sell any security.

NMX Trading Box...?

2007-07-25T22:02:00.000-07:00

The exchange sector has been the center of more takeover speculation, especially after the merger of the trading pits in Chicago - the BOT and Chicago Mercantile Exchange (CME) - was approved. The news most notably affects the other major players: The NYSE (NYX), NYMEX (NMX) as well as the Intercontinental Exchange (ICE).

I'd like to use this column to focus on the New York Mercantile Exchange (NMX). I've been aggressively trading this stock for a few months now, and have noticed a trading box forming. It's a very interesting phenomenon to watch the trading action on this, especially while many longs are tied down with seat ownership.

Ride the Fed to "GLD"ilocks

2007-01-31T21:43:00.000-08:00

The Federal Reserve helped out the cyclicals & commodities on Wednesday, with their endorsement of the economy, saying: "Overall, the economy seems likely to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time."

Some last-minute numbers contributing to the Fed's decision included a surprising 3.5% GDP from Q3's 2.0%. While the number cured the permabear recessionary fears, it also told us the Fed should be on pause until the April meeting - at the earliest. Not to be outdone, the Chicago PMI came in at 48.8. Low inflation + Growth = A Goldilocks Economy, and the Market rallied in response.

Traders were timid to move into Gold on Tuesday, ahead of the Fed, despite a huge 5%+ rally in Crude Oil. After the manufacturing number, weaker dollar and Fed statement on Wednesday, Gold contracts moved up nicely to close at $657.9.

The 10 year note is near 5%. GDP is stronger than anticipated. Cyclicals are strong, and we can still see rate cuts in the second half of the year. Still 8 points under its 52-week high, I believe there is room for Gold to stretch its legs - and the best way to play this is the streetTRACKS Gold Shares (NYSE:GLD) ETF, which tracks the commodity price itself.

Look at the intra-day chart below for (GLD). All traders needed was the strong GDP number @ 8:30 A.M. to trigger the rally at the opening bell:

Furthermore, look how (GLD) has tested and maintained the support level of $60. To add to that, I've included a 20 period MA with Bollinger Bands. Look how the bands constrict up until the most recent rally, then diverge & open up. Keep an eye on the upper limit band as it should continue to trend upwards with the rally. [click for full view below].

Finally, if you pull up the Dollar Index 1-year chart, pay close attention to the moving average. It's been in a free fall slide, and I don't see anything that makes me think it will get its act together anytime soon. In my opinion, gold downside is minimal and upside potential is another 8% or more.

Sentiment: Buy
Disclosure: I have no position in (NYSE:GLD). Again, just a reminder that this article is for informational purposes only, and is not a recommendation to buy or sell any security.

Small-Cap Gem

2007-01-30T20:53:00.000-08:00

Wondering how to play the market as all of the Baby Boomer generation retires? I’ve heard numerous pundits mention everything from casinos to retirement homes, hospitals and pharmaceuticals as bullish investments in the midst of the ever growing population aged 65 and older.

My play is a little known, lightly traded stock that I've been following for a few weeks now. It’s called Healthcare Services Group, Inc. (NasdaqGS:HCSG), and this chart looks absolutely beautiful. I'm showing the 5 year chart to illustrate the true run this company is having:

Yahoo! Finance’s description of the company: “Healthcare Services Group, Inc. provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States and Canada.”

Bullish case:

I believe HCSG warrants its 34 P/E – there is so much growth in this industry, as we’re just starting to see the wave of Boomer retirement.

Acquired Summit Services Group, Inc. in September, 2006.

They’re due for another 3:2 split, just like they’ve done numerous times in the past.

Increased dividend to 2% on 1/23/07.

Upside surprise looking at the trailing 4 quarters.

Absolutely NO debt

I would not be surprised to see some firms initiating coverage and/or upgrading the stock. I intend to start a position on the next dip and see strong potential in both healthcare and service stocks.

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This commentary is for informational purposes only and is not a recommendation to buy or sell any security.

A Traders Dream

2007-01-27T12:51:00.000-08:00

Next week is a dream week for the active trader: Not only does Google, Inc. (NasdaqGS:GOOG) report earnings [Wall Street expects $2.90/sh], but we'll also find out a lot about the state of the economy.

Altria (NYSE:MO) reports on 1/31 (Est. $1.23) and is widely expected to announce the details of their Kraft spin-off. I've heard rumors from anywhere b/w 0.62 and 0.72 shares of KFT for every share of MO. We'll have to wait and see.

1/31 is a HUGE day for economic data, and will certainly influence investors:

GDP (Est. 3.0%)

Chicago PMI (Est. 52.0)

Crude Inventories (For week ended 1/26)

... All those numbers precede the F.O.M.C's policy statement at 2:15pm. Steve Leisman of CNBC pointed out that CBOT Fed Fund futures show a non-existent chance of rate cuts or hikes -- and also revealed that the 10-year note (yield 4.879%) has been climbing, and could be silently doing the Fed's job. Expect 5.25% for some time yet.

Chart is (C) of ClevelandFed.org

We'll also see unemployment rate early Friday morning, expected to hold at 4.5%.

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Disclosure: I have no position in GOOG, MO or KFT. This commentary is for informational purposes only and is not a recommendation to buy or sell any security.

On Every Street Corner: Starbucks (SBUX)

2007-01-26T19:13:00.000-08:00

New Starbucks (NasdaqGS:SBUX) stores are popping up on every street corner. It seems that if you look the other way -- you'll miss a new grand opening. While Starbucks appeals to a wide variety of consumers, they certainly have capitalized on the college student mindset -- all-nighters, early-risers or mid-day crammers looking for a jolt.

I'll run through a few brief pros/cons.

Pros:

Price-point: Donny Deutsch pointed out on The Big Idea that CEO Howard Schultz has the power to charge whatever he wants for the coffee -- because you're really paying for the atmosphere. Starbucks continues to increase their top line revenues via price hikes ($0.05 in October, 2006) and new, innovative decor.

Brand loyalty: The parking lots are full, the lines are long, and I even ran a search on the company to find complete blogs and discussion forums dedicated to the coffee giant.

International growth: Starbucks raised its goal to 40,000 new stores (+10,000) in October of last year.

I believe Starbucks sees itself as almost a secular-type stock -- that regardless of an economic downturn, people will keep buying Starbucks like they buy cereal, beverages and other household items. If the present bull-market subsides, I think SBUX is still a strong hold, especially with analyst price targets holding above $40.

Cons:

*P/E of 47 trailing, 31 forward with a 1.68 PEG ratio: Investors were scared off last summer when the stock bottomed out at its 52-week low of $28.72. It could certainly happen if and when SBUX reports sub-par earnings and stagnant growth.

Market Share: Starbucks has been the subtle target of recent Dunkin' Donuts (TM) advertisements -- aiming to show difficulties in ordering and waiting for Starbucks coffee, complete with a clever jingle.

Had a nice run off of its lows, but has broken below its 50 day moving average versus its 1 year chart.

*All fundamentals & technicals are as of market close on 1/26/07.

What to watch in the Options Market:

Feb. $37.50 calls ($0.20) are a cheap alternative for the bullish bulls.

April $30 put ($0.40) volume is high and worth watching.

Sentiment: Hold
Disclosure: I have no position in (NasdaqGS:SBUX). This commentary is for informational purposes only and is not a recommendation to buy or sell any security.