Durable Goods Orders

The Commerce Department reported that Durable Goods Orders rose less than forecast in November, posting a .1% gain. Analysts had forecast a rise of 2%, nonetheless this was the first gain in 4 months and followed a revised .4% decline in October. Excluding transportation orders demand was down .7% versus an expected increase of .5%. Orders for military gear fell 24% led by a drop in aircraft demand. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, fell .4% after a 2.9% gain in October. Initial Jobless Claims rose 1,000 to 349,000 while continuing claims increased 75,000 to 2,713,000. Weekly mortgage data reported by the Mortgage Banker’s Association showed declines of 6.5-8.5% in its applications, purchase and refinance indices. At 9:00am CST we will get the final read on December Consumer Confidence.

'Tis the Season to Remember

I hope you enjoyed your Christmas / Holiday and are taking some time off to rest and relax.

As this year comes to a close, I hope it’s been a profitable one for you. And, as you all reflect on the past year and plan for the New Year, please take a short break from the busy world of finance, to view this brief, but important public announcement. Hopefully, it will give you a better appreciation for how good you have it, and a brighter outlook for 2008.

The following is one of the hottest things on the internet and has been featured on Fox News recently. Lizzie Palmer who put this YouTube program together is 15 years old. There have been over 3,000,000 hits on this. In case you missed it, here it is.
http://www.youtube.com/v/ervaMPt4Ha0&autoplay=1

Wishing you all a prosperous New Year!

UPDATE: As for me, I plan to coast into the New Year 72% in cash as the “hammer of death” smashes the market, Thor style.

Bearish

Time to take profits and sit on the sidelines in cash until it looks like a bottom is confirmed.

No New Positions

I'm not seeing any specific entry points for any of the sector ETFs. Still waiting for good set ups to appear.

Holding off on any new positions. Taking a defensive stance right now and staying on the sidelines, I remain bearish.

More on RIG

RIG, the leader in deepwater drilling has been languishing as of late. They had announced an $8.5B financing, which included $6B in converts and $2.5B in senior notes. The downward pressure on the stock is most likely due to selling by the Arbs on the convert. You also have to question why the company would pursue a convert issue just days after a massive recapitalization and $15B buyback through the GSF merger.

While management could have provided more disclosure and transparency on this move, the converts seem to be prudent. This is due to the low coupon rates of 1.5% to 1.625%, and no near-term dilution.

Dilution won’t hit until the stock gets to $168.61, which is the equivalent of a 32.5% converson premium. RIG is obligated to settle the converts for cash up to the principal amount of the notes upon conversion, and in common stock above the conversion price. If the stock gets above $168.81, RIG is then obligated to issue shares at the conversion ratio. If it gets to $185, the converts are about 1% dilutive without factoring in lower interest expense from the coupon rates.

I wouldn’t worry about this issue. RIG is still a buy long term and should outperform others drillers.

Sub-Prime Explained

Btw, if you're still wondering, and have a few minutes, here's an eight minute summary that explains (in no uncertain terms) the sub-prime mess.

The Soda Pop Kid

Interesting news out on Jones Soda (JSDA). Founder and CEO, Peter van Stolk has just announced his resignation.

Board members Scott Bedbury and Steve Jones will assume the chairman and CEO roles, respectively, until a replacement is found. Bedbury is better know for his “Just Do It” campaign slogan at Nike in the late 80’s and his repositioning of Starbucks stores as destination coffee shops in the 90’s. His next challenge will involve the expansion of the Jones Soda brand from niche to mainstream.

This change comes as a result of the mismanagement of JSDA, by van Stolk. The company failed to move into the larger canned soda market earlier this year.

JDSA is currently up over 7% today.

Flow International (FLOW)

Here's something for the "low-priced stock" affectionado:

Flow manufactures Ultra High Pressure waterjet cutting systems and related products. These products are used to cut materials in different industries such as aerospace, automotive, disposable products, food, glass, job shop, metal cutting, marble, tile and other stone cutting and paper industries.

Flow is in negotiations to acquire its main competitor Omax Corporation, signing an option to acquire the company for $109m rising to $135m after 2 years subject to performance. Any merger will be subject to Hart-Scott-Rodino clearance. Flow currently has $33m in cash and minimal debt. Additional funding will be required, likely with an equity element. Omax is based a half mile from Flow’s headquarters, and like Flow has its roots in technology developed by Boeing (BA)engineers. Integration would be relatively easy from a cultural and logistical standpoint.

Omak has some technology that Flow does not, and also has unique overseas distribution channels. Omak would also benefit from Flow’s internet-based order fulfillment strength. Another advantage of the acquisition is that it will settle the outstanding patent litigation that has been ongoing for several years between Flow and Omak.

Further details will be available during Flow’s 2Q08 conference call to be held tomorrow. The stock has been beaten up since the retirement of the turn-around CEO, Stephen Light, but is up nicely this morning. It’s not too late to get in now, as I estimate a target of $12—but patience should be exercised, something that many of you may be lacking in spades.

EPS:
2007A $0.10 P/E: 74x
2008E $0.43 P/E: 17x
2009E $0.63 P/E: 12x

(Fiscal Years ending in April)

Is a Recession Priced Into Stocks?

Is a recession already priced into stocks? Well, that depends. There are certain sectors that have already discounted a recession and there are some that have not. The haves and have nots. Additionally, within each sector, there are specific industries that are attuned to economic developments and some that are not.

Without getting too detailed, let me summarize and then expound on a specific example.

Industries that have largely embedded a recession scenario: Hardlines Retail, Apparel, Transportation, Steel, PVC Chemicals, and Telecom.

Industries that have little, if any, recession risk embedded: Electrical equipment, regional banks, softlines retail, airlines.

If you haven’t figured it out, list number two is the one to avoid, if you think we will experience a recession.

Here is a list of stocks, primarily cyclicals, that should do well if we have a “soft landing” scenario: ACN, AEO, ASH, BA, CAKE, CIT, FCX, LEH, LOW, MAN, MRO, MU, JWN, OMX, OSK, PRU, STX, RIG, X.

On the other hand, here is a list of stocks that are currently discounting little recession risk, that could underperform if we do get a recession: C, DIS, WLP, S, AMZN, PCP, EOG, TXT, WM, WY, AMP, HOG, NTAP, BEAS, ACI, CENX, TMA, YRCW.

And here are your defensive plays that should do relatively well, even in a downturn: APD, AA, APC, CELG, CNP, CL, CEG, CVS, XOM, FPL, GOOG, HPQ, HNZ, INTC, JCI, LMT, MCD, MCK, NWS, NKE, PEP, QCOM, LUV, SPLS, UPS, TEVA, UTX, UNH, VZ, WMT, WYE.

Not Your Father’s Shit

Now, let us turn to the important matter of Fertilizer stocks, as an example. These stocks are not pricing in a recession. They are too busy banking coin and pricing in a boom. Driven primarily by Asian demand, and to a lesser extent, alternative energy, industry growth has dramatically overshadowed the normal cyclical nature and the high energy costs.

Historically, the correlation between GDP growth and domestic fertilizer consumption is not high to begin with. The global relationship, while stronger, is not overwhelming either. I would also argue that the global correlation is rapidly declining due to emerging market development. As markets develop, their demand becomes less GDP sensitive and more correlated to population growth and other factors.

If we look back to the past two recessions, we see mixed messages regarding consumption of fertilizer in North America. Nitrogen consumption increased in 1990-91, but declined in 2001. Phosphoric acid consumption declined in 1990-91, but gained modestly in 2001. And the third major category of fertilizer, potash, declined in 1990-91 and consumption was flat in 2001. But what should matter most to investors is whether domestic producers benefit from consumption trends, which makes looking at North American operating rates more relevant.

Moreover, the fertilizer industry has undergone some significant structural changes which have served to dampen the cyclical nature relative to historical trends. Declining economics in nitrogen and phosphates has led to meaningful capacity rationalization, while improving dietary trends in third world regions has been a boon for potash demand. Additionally, corn-based ethanol demand has benefitted domestic producers.

Much of these trends appear to be relatively insulated from a decline in U.S. GDP. What should not be overlooked, however, is the highly global nature of the fertilizer industry, and the potentially more relevant threats associated with economic weakness in third world economies. These risks are somewhat modest since GDP only sets in motion the underlying drivers of new demand above and beyond population growth. And, the impact those drivers have on food demand unwinds only slowly. The picture isn’t so bleak. Odd, no?

But where could we be wrong? Where is the downside? Regardless of the U.S. economic trends, fertilizer consumption and operating costs should remain fairly constant. But, a modest decline in pricing power is possible if the economy creates a situation where farmers become more cost sensitive. Presently, they are driving brand new pickups and drinking rich man’s whiskey. If that is your concern, take a look at Mosiac (MOS), which has lower exposure to U.S. and Canadian demand.

MOS gets only about 40% of its revenue from North America, while Potash (POT), Agrium (AGU) and CF Industries (CF) get roughly 70%, 85% and 90%, respectively.

Should we be concerned about valuations? Currently, valuations are well above any historical norm because strength in the market is weakly correlated to economic activity. Potash and phosphorous producers are in a relatively good position to cut back on supply if markets begin to get sloppy.

Know this: a U.S. recession is not a substantial risk to fertilizer stocks. However, a reversal in economic growth in China and India is. But even then, the risk of a sharp drop in consumption is limited because grain supply worldwide is so low and shifts in the workforce of those countries makes changes in demand less likely to slacken.

In summary, buy that shit.

Turkey Telephones....TKC

TKC. This is the Turkish mobile phone company that get a 15% monthly fee, paid by the Turkish government on the gross revenue of the company.

The chart looks really nice. Just what you would expect to see from a non-US based investment.

It Helps to Watch the Bond Market

Treasury prices are climbing higher in early trading with the benchmark 10yr up almost a half of a point to yield 3.88 percent while the 30yr bond is roughly a full point higher to lower its yield to 4.32 percent. Highlighting the pronounced degree of volatility currently embedded within the financial sector, investors should expected further consternation in the general direction of interest rates given the release of the employment data at the end of the week and the next FOMC meeting eight days away. Despite all the uncertainty, however, the broader economy remains poised to outperform the financial sector as indicated by the corresponding slopes of the Treasury yield curves.

With a difference of 60 basis points, the spread between the 2yr/30yr curve and the 3mo/10yr curve is particularly low given historical norms. Due to the abnormal amount of productivity accumulated over the course of the prior decades and mostly underutilized to this point, the economy will have relatively easier time acting with a greater degree of efficiency than that of the financial sector as investors un-extrapolate growth prospects already “priced-into” a number of investment vehicles.

As far as interest rates are concerned, nominal levels have a strong tendency to go lower overall (not, however, in a straight line dynamic) as the current environment is decidedly non-inflationary in nature. With the output gap (the difference between realized and potential rates of GDP) continuing to widen, the strength of long-term disinflationary pressures are poised to easily overcome that of any transitory inflationary dynamics that flare up in the interim. One such risk would be the reversal of the current trade environment.


According to last quarter’s GDP data, exports growth topped 18 percent for the period, extremely high for a service-dominated economy. The uncharacteristic performance of exports, subsequently, owes much of its near-term success to the general weakness in the trade-weighted dollar. The performance of the dollar reflects the health of trade at any given time which means that should trade revert to more efficient fundamentals; the dollar should begin to regain its value over a protracted timeframe. Domestic good-production, therefore, will need to be monitored closely for any signs of such a change, a major reason why today’s ISM data is so important.

According to the Institute of Supply Management (ISM), the monthly diffusion index for November came in at 50.8, mostly in line with consensus estimates. The lowest realized level since January, activity was about the same it was in October (50.9) showing signs of slowing manufacturing growth quarter-to-date. Much like the headline data, new orders grew at a similar pace they did in October (52.6 vs. 52.5), decidedly below the six month average of 55.3. Hiring, meanwhile, fell to below contractionary sub-50 levels for the first time since March. New export orders, however, was strong again last month while imports fell for the second consecutive month. Taken altogether, although overall export orders remain strong, the overall sustainability of continued strength remains very much in question given the lack of further investment within the manufacturing sector.