Friday, July 29, 2005

S&P 500 earnings growth

Remember the VP from Thomson Financial that confidently predicted that S&P earnings growth in Q2 will be growing at a minimal of 10-15% versus the estimated 7-8% growth. Well, we are at the half way point this week, and the blended growth rate is 9.4%, hardly beating the bottom end of the expected range. The one stat that stood out was that not only companies in aggregate did not exceed the whispered high expectations, they beat by the smallest amount, +3.3% surprise and is below the 5% average surprise factor recorded over the past 8 quarters. So in Wall Street parlance, the rate of change has slowed.

Tech companies has the biggest upside surprise about 6% above estimates. This may sound good, but it wasn't mentioned in the report HOW MUCH tech companies typically beat in last recovery...6% upside sounded too little spread to me given their operating leverage. This is in light of no or little "option expensing" yet to be baked into their earnings numbers which over inflate earnings potential.

Consumer discretionary sector is reporting 4% decline in earnings growth. Strange, you'd think that consumers are shopping till thier pants drop, why are those companies not making money?? In spite of news that unemployment rate is running low, layoff announcement data tracked by Challenger, Gray is running at 45% above last year. This has to be the ONE THING that an investor needs to watch: especially the bulls that continue to argue that consumers are doing VERY WELL.

Once again, I cannot reiterate enough (if you can garner something from this blog), is that when people's expectations are high, make sure you look at the facts to support that expectations. If those expectations are based on thin air, then you have to decide to take appropriate actions.

Friday, July 22, 2005

MSFT is a value blue chip WOW, what a concept.

Ms Mancin of Gabelli Value Blue Chip, told CNBC that she owns MSFT in her portfolio as she could made a valuation case for MSFT. As far as I'm concerned, anything that is trading above 20x trailing (not estimated P/E as the E could be influenced by high expectation as to compress the P/E) and 6x book is not a VALUE stock. Arguably, MSFT could be in a secular decline as the world is moving away from PC centric and open sourced application such as LINUX is getting on its tail.

Even with growth to P/E metric, assuming 10-12% EPS growth (probably lower after factoring in stock options compensation which would compress EPS calculation), it doesn't justify such a high P/E ratio. Many portfolio managers will look at its valution RELATIVE to its last 5 year (very misleading due to such short period after the bubble years), and say it looks cheap. That is the trouble with this kind of thinking, and I'm surprised Wall Street still hasn't adapted to the potential of MULTIPLE COMPRESSION of the years ahead even as earnings could continue to grow.

Thursday, July 21, 2005


All eyes on GOOG, I'm not going to make a prediction. BUT, I'm going to let you know that if you follow GOOG over the next few days on how it trades, it could be the tell on how overall market is going to do. Citigroup (C) has already made its move by trading lower, now we need a strong Tech leader to do the same. The reason why banking and techs are important tells is this: banking is 20% of S&P index and it shows money flow sentiment of the institution and tech went to 20% in 2000 and crashed but still have a huge following among both institution and retails a major psychological tell.

GOOG is trading down $20 after the initial pop, so we'll track its movement and see whether it's a BUY or a BYE!


Just a quick post on MICROSOFT's Q2, missed top line by a mere $10mm in spite of 3 pennis beat. MSFT has been on my SHORT list (NOT ADVICE) since they announced the big special dividend since DEC 04.

Tuesday, July 19, 2005

China - the Black Swan

As I stated below about the real risk of the market -- i.e. the black swan that has low probability of happenning but nevertheless exist, please read China's bad debt crisis and Chinese State Enterprises. These articles confirm for me that the risk of Chinese economy dragging down the global economy is higher than Chinese bulls that think China will be the next superpower soon. My contention has always been, yes, China may be the next Superpower but it may not be in my lifetime. They may have to go thru' what the Americans went through, the Great Depression, clean up the mess and then rise from the ashes.

For now, the risk is increasing that the hyperleverage Chinese economy could kick off the this hyperleverage global economic dominos.

Monday, July 18, 2005

Bank of America (BAC) beat numbers but stock down, why?

Bank of America beat numbers handily this morning but the stock was down by almost 2%. Most people attributed this to sympathy trades as Citigroup missed their numbers as well. Yeah, but why? Did anyone bother to explain? Let me help:

First, BAC's technical picture (chart) has deteriorated since it peaked in late May. After the sell-off since the acquisition annoucements, it briefly rallied above its 200 moving average with light volume. Now, the bear on the stock is showing who really is the boss. Today earnings is merely a catalyst.

Second, fundamentally, the buy side is REALLY concerned about the acquisition of KRB (MBNA)(see my BLOG below when they first announced it). It is really late in the game to buy a credit card company especially they just did one big acquisition less than a year ago.

Third, now the concern has manifeasted itself from today Citigroup's and KRB's earnings. Narrowing of net interest margins is really eating into profits. What that means is that as FED is raising rates, long rates has not risen fast enough to compensate for the risks to underwrite the loans. As I have numerously point out about yield inversion (i.e. long rates are cheaper than short term rates SEE Posts below), this is exactly why I said it is really really late to buy a Credit Card company. The reason is yield inversion typically happens at the peak of the cyclical business cycle and it is predicting recession ahead. While credit quality still looks good, that is as good as it gets...and when credit quality goes bad which I expect as the business cycle heads south, BAC will have to contend with earnings implosion with the newly acquired company.

So has BAC traded down due to mere sympathy trade with Citigroup? Financial media will easily dismiss it as such because they REPORT on things but never done any HOMEWORK on it. If you don't believe me, look at the numbers that been reported and decide for yourself. The worst is that you don't agree with me, but at least you've done your homework.

Saturday, July 16, 2005

If you really aspire to be a landlord, read this.

Ok, I was rambling generally about housing bubble which I firmly believe is in the late stage. This doesn't mean that one can't make money on real estate, the odds are just getting slimmer especially if you don't do your homework. Just like bear markets, in its bear declining phase, only 25% of the stocks has the potential of going up. So will the real estate market when it goes down. With this disclaimer out of the way, if you decide today that you want to be a landlord, by all means, but please at least read Do your homework first. This is at least how the REAL pros are doing it, by the numbers.

Just in case you wanted to see how a real world example could screw up your balance sheet and cash flow, read this: Landlords have high hopes in Silicon Valley

P.S. More housing troubles in Denver (free registration required). What this article didn't point out is that what would happen to their nice profits if you factored in a 5-10% DECLINE in prices which happens even in price Boom (it's called a correction).
The profits that most people have may turn out to be losses due to how little equity there is in those speculative properties. Imagine having to pay your bank in order to get rid of your house, suddenly you realize you don't really OWN the house. Remember LEVERAGE works both ways, it'll make you rich and it'll make you poor, too.

Friday, July 15, 2005


Ok, CNBC is running hot second home properties with gleaming agents and owners touting their million dollar second homes property from Aspen to Hamptons. Just as a coincidence (NOT), Fox News is running HOT PROPERTY at the same time??? WHOA!!! This is getting too creepy for me, the whole country's psyche is OBSESSED with properties!! HMM, I remember the country was OBSESSED with IPOs and venture capital once not too long ago time. HOUSEDAQ.COM. 'nuff said!

P.S. couldn't resist check out this link:You can quit your day job now

PPI, tame inflation? NOT. Fear Deflation

Wall Street and main stream media is still obsessed with inflation, so is Federal Reserve. My believe is that due to the massive debt inflation during the last 60 years especially during the last 4 years in which fed tried to prolong the growth cycle, we are facing the coming implosion of the debt bubble. The result of that massive implosion will cause deflation not inflation.

So PPI is down 0.1%, and Wall Street is cheering? They should be worried now, especially with material costs going up and they can't pass through their cost by increasing prices. We're are already transitioning into stagflation environment which is the precursor of deflation.

Thursday, July 14, 2005


Knight Ridder's earnings have the same theme as that of Gannett, namely cyclical part of the business was dragging the group lower in spite of good internet properties such as Career Builder etc. Newprints costs spike has also wrecked havoc to margins as circulation is down.

The other point that I wanted to make on GCI's post was that June advertising trend was down versus May and it fell off faster than anticipated. KRI experience the same case in June. This is important given the overall Retail Sales stats that came out this morning that in my opinion was much skewed by GM's incentives. Many bulls will point to strong consumer as the main pillar in this recovery, although I would like to caution you that Corporate advertising spending leads the economy 3-6 months ahead of the consumer cycle.

Yield Inversion

This is pure FYI from Bernie Schaeffer's website.Conventional Press' wisdom on the economy versus Bernie's view

Wednesday, July 13, 2005

Review of Gannett's Q2 earnings

Gannett is the first major newspaper/broadcasting company to report Q2. I always view old media company as the leading indicator to the economy (see post below), so I track them very closely.

For details: Q2
Press Release

Here's my quick 2 cents:

There are 3 drivers to the story that you need to track.

The gem to story is, its internet sites (and various other local papers that have websites). Today, web based revenues are only generating slightly over 10% of total revs. The other 90% of its revs are both cyclical and in structural decline. In order for the story to get exciting, I would like to see the mix to be at least 50% internet and/or valuation get really cheap whichever comes first.

Second, old media like I mentioned continued to plaque general growth. Newspaper circulation continue to decline and circulation revenues growth is currently helped by price increase in USA TODAY. However, this is unsustainable as we all know price boost on declining volume will do more damage in the long term. Advertising is very cyclical and right now GCI is facing tough comparision till the end of the year due to 2004 political advertising compaigns. The other key point that I would like to make is that job wanted ads are contributing as much as 40% of revenue. We are almost 3 years into this job recovery, and if anything, one has to discount a higher
PROBABILITY that job wanted ads may be in the last stage of this cyclical recovery.

Third, you need to track national versus local advertising. Typically, when CFOs get more cautious, they would most likely cut national advertising first as they are more costly and experiment with local advertising to get bigger bang for the buck. National is currently in decline versus local advertising, so this could be an early tell to the national economy that you may not hear from CNBC.

Overall, GCI is stuck between the rock and the hard place. Business is ok but has the potential to get worse and its valuation is not compelling yet (in spite of Wall Street analysts shout of BUYS). Estimates still run about double digits next year and P/Ebitda is around 9x, around median valuation. For a stock to be interesting to me, I need to see stock at 5-6x p/ebitda. By then, you'd likely see estimates running low single digits or even negative (a rare events on Wall Street). Then you'd BEEP BEEP, back the truck UP!

Monday, July 11, 2005

Expectations Versus Facts...Q2 earnings

This morning, a Vice President from Thomson Financial (sorry, never good at remember names) was interviewed by CNBC and was asked about Q2 earnings. Interestingly, he mentioned that although, earnings growth is estimated to be +7% this quarter, he expects that the aggregate earnings growth would beat and most likely come in at around 10-15%, The main reason he gave was that preaanouncements have been running low till now, as result, he sees upside to the estimates. I didn't think much until I saw this : Preaanouncements
is worst since Q1 2003
Why the discrepancy, especially since both sources appear to be from Thomson Financials. Are they so optimistic that they chose to believe the positive data rather the the others. Well we'll find out soon enough heading into this earnings seasons.

What unsettles me with this interview was the manner this information was disseminated. It was presented as a matter of factly as facts rather opinions and why would USA article contradict this gentleman's preaanouncement data? Was he too bullish to see it and why didn't he disclose it on TV while he was making his predictions of companies beating expectations?

Is there too much to ask for financial journalist to separate facts from fictions?

Friday, July 08, 2005

Digging deeper into our beloved Dow Jones Industrial Index.

DJIA (Dow Jones Industrial Index) has bounced nicely off its yesterday abyss and is retracing about half of its plunge from June Peak. So out of curiosity, I decided to look at % of its component that is trading above its 50/200mva, a conventional way of confirming the health of the general markets.
+ prices are trading above, - prices are trading below
AA -50mva/-200mva
Aig +50mva/-200mva
AXP +50mva/+200mva
BA +50mva/+200mva
C -50mva/-200mva
CAT +50mva/+200mva
DD -50mva/-200mva
DIS -50mva/-200mva
GE -50mva/-200mva
GM +50mva/-200mva
HD +50mva/-200mva
HON -50mva/-200mva
HPQ +50mva/+200mva
IBM +50mva/-200mva
JNJ -50mva/-200mva
JPM -50mva/-200mva
KO -50mva/+200mva
MCD -50mva/-200mva
MMM -50mva/-200mva
MO -50mva/+200mva
MRK -50mva/-200mva
PFE -50mva/-200mva
PG -50mva/-200mva
SBC -50mva/-200mva
UTX -50mva/+200mva
VZ -50mva/-200mva
WMT +50mva/-200mva
XOM +50mva/+200mva

Here is the verdict: 11/30 above its 50day and 9 above its 200day. Only 6 are above both 50/200 day. Here's the facts, this is not an opinion. Decide for yourself if you think this is bullish or bearish.

Software Miss!

This is the second indicator that things are slow in the tech land. SEBL and BORL both pre-announced earnings. Software are the second thing (right after Advertising $) that CFO could cut if things doesn't turn out as expected.

Should we listen to Larry Kudlow ? NOT

I've had it, I can't stand it anymore. The ex-fed Fed reserve is the forever spin doctor...give him poop and he'll spin it to gold. There, I've said it...take his advice at your own risk.

Thursday, July 07, 2005

Pricing in the risks?

As an investor trying not to lose money in this wacky market, I am always cognizant of risks that are not priced in the security markets. Risks are not well documented and outlier or in other terms, out of the blue risks (the so called Black Swan) are the ones that you want to be cognizant about. Why am I talking about this when financial markets snapped back smartly off its low since the London attack this morning? Who Cares, right? Well, let me ask you how you felt this morning waking up and looking the stock futures down 150 points. Let assume for a minute that what if 150 became 200 then 500 and would you have reacted then knowing that markets may not recover all the time (history tells us that market crashes all the time bull markets such as the one that peaked in 2000 only come once in a lifetime). Would you have cared then, I bet you would.! Unless you are one of those that bury your head in the sand when sustaining losses, I can't help you.

So what is the Black Swan that is not priced in the markets. PLENTY. Unfortunately, it may not be oil price hitting $100 (like the recent Goldman Sachs' analyst predicted, didn't hear him say oil price would be $40 when it was trading at $14. It always bothers me when people use linear projection to predict future events). Events risk that are most talked about often has either the least probabilities of impacting the market and or least impact on the markets if and when it actually happens. For instance, housing bubbles that has been talked about for 3 years now and it hasn't burst, yet. I'm sure it'll burst when I start seeing Business Week headlines such as Housing Golden Years or Quit your day job! Learn to become a millionaire landlord! etc.

So what is out of the blue that people don't talk about. It could be anything that you don't get to watch on CNBC. Let's start with something simple, how about some Chinese banks collapsing overnight because its customer couldn't meet liquidity requirements due to the economy growing ONLY at 9% versus the required growth rates of 10% to remain solvent. This in turn set off a chain of events due to inter-connectability of global instituitions nowadays that force some serious selling of financial assets to meet margin calls. Think this is far fetch, not by much, considering how leverage the Chinese economy is nowadays. But this is THE kind of events that noone is talking about and hence the impact would be the greatest.

I certainly can't make money betting on Black Swan risks but I could stay away when the markets is overvalued, option pricing is cheap (VIX all time low) and Bull/Bear spread on AAII has not inverted for weeks. Sure the market so far has shrugged off the London attack but next time the Black Swan would be bigger and darker and I'm not sure investors are prepared for that. The worst thing is that I don't even consider terrorist attacks as the Black Swan anymore...

Wednesday, July 06, 2005

5 quick steps in preserving your net worth

  • Raise cash in your 401K. You should start trimming any funds that are investing in reits and growth stocks.
  • If you want to keep some stock in your portfolio, invest only 50% of your cash at this cycle. Personally I would go as low as 20% only and I'd be very selective in what I own. I'd consider only deep value funds and would inspect closely what the fund own in its perspectus.
  • If you are over 55, you shouldn't invest more than 50% of your cash in stock at any time. Keep some cash handy as there will be more opportunity to invest in higher yielding instrument.
  • Start paying off your debt, starting with credit cards, car loans and then mortgage.
  • Raise your emergency funds from 3 months to 6 months at the minimum.

Media stocks depressed, why?

David Faber was doing an ed-op piece on the old media stocks, namely TWX, DIS, NWS and VIA, wondering why they are still depressed and not attracting any buyers. The morning guest (his name eluded me) offered that when they're split and separately IPOed then maybe there would be some interest (referring to VIA), especially after people focus on their cash flow.

I couldn't disagree more. There are 2 forces right now driving media stocks, one is cyclical and the other structural which both are pointing down right now. Cyclical forces such as ad sales, film box office are hitting cyclical down turns suggesting companies are not spending as much ad $ which is a major discretionary expense and reflects the psyche of the CFOs getting cautionary at best. Structural forces are also compressing Media companies ability to compete with the new media such as the internet, blogs etc getting the bigger pie of the ad pool. In additional, piracy is not helping the content department either.

Add these negative forces with stocks still trading at only median valuations (not depressed like the Street suggest), insane analysts' price targets assuming expanding multiples and complacent option crowd (still insanely bullish -- low Put/call ratio) as well as technical breakdown, you have disasters in the making. These are the forces that mere financial engineering such as spin-off or share buy-backs will cure.

IMHO, stay away with these stocks and you'd likely buy them a LOT cheaper, at truely depressed levels.

Tuesday, July 05, 2005

Earnings Season --- take a deep breath, wait till the dust settles!

Totally agreed with this post from Reuters: Look through the numbers of this upcoming Q2 earnings season. Companies are already expert in managing expectations and earnings massaging will still be the norm in this reporting season. If a company beats, make sure they beat on revised up estimates instead of revised down estimates and vice/versa on the miss in earnings. Or better still, wait for the Balance Sheet and cash flow data to come out before deciding what to do with your positions or cash. Or better still, wait for the 10Q to come out for more details. With 8000 hedge funds and 8000 mutual funds shooting each other every day, it pays to be patient. Remember the Chinese Proverbs says "When the Snipe and Clam Grapple, the Fisherman Profits". So Hurry up and Wait, be the fisherman rather than the Snipe or the Clam.

GM sales precursor to a strong economy?

There has been many bull pundits touting 41% sales pop from GM last month as the indication that consumer is still strong and the turning point to GM's profits. First let's talk about the fundamentals of GM's business.

In a manufacturing environment, when your gross margins (i.e. sales less gross costs to make goods) are declining 1-2% every year while sales are increasing is nevertheless a dying business. Using sales as a pure metric to measure success is equivalent to tracking's sales (below costs at the peak of 2000) or tracking yahoo's eyeballs. Those were misinformed tactics as we have witnessed time after time since the internet bubbles burst. In addition, when you have the manufacturer actively financing their wares so that their customers could buy on a consistent basis is unsustainable. Think Nortel or the others during the telecom boom...remember vendor financing? Just watch GM's receivables which ballooned from $98b in 2000 to today $200b at the end of 2004. Top line sales growth is sustanainable until your customers blow up, then you'll get both sales implosion and "on going concern" implosion.

Many people also touted the cash cushion ($35billion) held in GM's coffer but the total liabilities of this company of $450 billion dwarfs anything the company has to offer. In share price terms, cash may appear to be almost $60/share versus GM stock price of $35 today, however, total liabilities is about $795 just to give you a perspective.

Do the math yourself and don't let the Wall Street pros or CNBC spin and obsfusicate the truth. As to whether GM's sales pop in June indicate the resilience of the consumer, you'll have to wait for another post. But the short answer is no.

Market Randoms to start the week

  • Batman Begins i s the best Batman made in movie ever...hope you had a great July the 4th as I did, spending quality time with my 5 year old and fireworks...
  • Would the market confound again by doing nothing for the rest of the week or negative preannouncements would shock and awe the slumbering analysts and traders?
  • More negative buzz on potential indigestion by BAC (WSJ online)...
  • Are Transports (TRAN) and 10 year yields telling us something about the economy. LEI (leading economic indicator) has already confirmed that we are sliding into a recession.
  • Trailing P/E on the S&P (measured on core operating EPS versus the doctored pro-forma) is still overvalued at 20x historically see Hussman on P/E> at your own risk.
  • Dollar shorts are getting crushed again...avoid the most talked about trades, never works. You'd do better asking your friends what they are doing and run the other way.
  • If you still haven't figured out that this is a bear den, you're not READING at all. Also a closet contrarian if you'd like to know.