Good morning from Milwaukee, Wisc. -- Suds City, as many have come to know it. Futures are lower this morning. S&P futures are down 2, Nasdaq futures off 2.5 points and Dow futures are lower by 23 points, suggesting a bit of softness at the open.
On the energy front, crude and natural gas are higher this morning -- crude over concerns regarding the Iranian nuclear program ahead of potential security council consideration of action against the country.
Natural gas will focus entirely on the storage number today. Expectations are for a storage decline of about 160 Bcf. If that number is close, it will be the first time this year that storage has declined more than both last year's decline and more than the five-year average. While there is still plenty of gas in storage, such "good news" from the weekly data point may help support the commodity price and the stocks. You saw good results from service companies like Dril-Quip (DRQ:NYSE) yesterday which help push the group higher. Still a big battleground ahead of spring. Patience required!
Watch President Bush's visit to India and Pakistan. While we don't think about it being a major investment event, talks over nuclear issues and cooperation from the two nations on terror control are important psychological datapoints.
Have a great day.
Position: None
Costco (COST:Nasdaq) and Wal-Mart's (WMT:NYSE) Sam's Club reported February same store sales this morning.
Costco posted an impressive 8% gain with 7% growth in the U.S. Sam's Club logged a 3.1% gain. That compares with worst of breed BJ's Wholesale Club's (BJ:NYSE) February comp of 1.6%.
Warehouse clubs have been performing very well, yet BJ's can't seem to get any traction.
I don't suspect that's about to change any time soon. You can read my reasons why, as I'll be posting a look at BJ's earnings and conference call shortly.
Position: None
Well, the FDA is clearly working -- last night ImClone (IMCL) announced Erbitux received approval for use in head and neck cancer. So long as the FDA doesn't deal us any material setbacks, the mid- and small-caps of the group should continue to be attractive relative to the large-caps.
Position: None
I'll be speaking this Saturday in Dallas at a breakfast meeting of the Dallas/Ft. Worth CANSLIM group on how to leverage the proven stock selection methodologies of investing greats. The meeting runs from 9-11 a.m. at the Studio Movie Grill -- Addison. I thought my readers in the area might like the opportunity to attend. Hope to see you there.
Position: None
Just an update on Threshold Pharmaceuticals (THLD:Nasdaq). The earnings release and subsequent conference call were uneventful yesterday. The company will be investigating TH-070 in prostate cancer due to the drug's ability to shrink prostate tissue. The story basically remains in a holding pattern till the second half of 2006, when the BPH data will be released for the US Phase 2 and the European Phase 3 trials.
Position: Long THLD
Here are a few clips worth watching today:
Scott Moritz talks to VeriSign (VRSN:Nasdaq) about the future of the mobile Internet.
Missed "Mad Money" last night? Check out Jim Cramer's interview with the CEO of iRobot (IRBT:Nasdaq).
David Peltier rounds up the premarket action.
Robert Martorana outlines step 3 in his six-part series on setting better stops.
Position: None
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Cody Willard |
| Retail Not Great, Can Nazz Hang? |
3/2/2006 9:09 AM EST
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Retail comps weren't very pretty in aggregate, though the blast of cold in February is how the bulls will explain the softness. I agree with that assessment. One less-than-huge month of comps isn't going to have me throwing the towel in on the consumer. But it most certainly is a net-negative data point.
In my 10-year span of not missing a day without some hoops, I was often obsessed with working on follow-through and seeing my cousin Eli last night and talking about back in the days when he (tried to) cover me, but couldn't, reminded me of how important that follow-through can be. And the biggest question facing the bulls and bears today: Can the Nazz and the small-cap techs follow through? Hope they've been working on their cross over. Okay, enough stretched analogy. More analysis soon though!
Position: None
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Cody Willard |
| Hanlon, Dent, Cody: Bubbles and Books |
3/2/2006 9:32 AM EST
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Hey, Chip, thanks for the dialogue last night, I had to head out early yesterday and missed it. I did try to read Harry Dent's latest book, but I couldn't get into it early enough and moved on. Regardless, interesting article you wrote about him.
The thing about any potential bubble developing is that we can only navigate it as it happens. While I do believe the odds are now setting up to favor a bubble, there are about a million or trillion things, political, terrorist, energy-related, housing ... well, all those bear worries are possibilities. It's just that I continue to see them as low probability in the near-term.
Speaking of books, you should've seen everybody fawning over James Altucher and his newest book SuperCash: The New Hedge Fund Capitalism last night. I even had to let him sign my copy to my cousin, who I just found out is another RealMoney reader.
Position: None
I'm surprised the Gap (GPS:NYSE) isn't being hit hard today after that -11% comp number, which had the benefit of a weak February 2005 number of -3%. I guess there are a lot of believers in the turnaround story, and there is plenty of room for activists to really get involved there.
Position: None
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Jim Cramer |
| Didn't Get the Memo |
3/2/2006 10:07 AM EST
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I guess I didn't get the memo which says, "When in doubt, buy Broadcom (BRCM:Nasdaq), Marvell (MRVL:Nasdaq) and F5 (FFIV:Nasdaq)!"
Position: None
I have an article up today about portfolios with too much exposure to emerging markets.
If you are inclined to read the article, thanks, you could substitute commodity stocks anywhere that I mention emerging market stocks. There is a lot of excitement for that part of the market too. As with the EM theme, I am jump-up-and-down bullish, but too much of anything is asking for trouble.
On a slightly related note, Tony Crescenzi has a great blog post up about rising rates in Japan and the Eurozone leading to an unwinding of the commodity play.
This may be true, to be sure, but commodity-based themes tend to have a low correlation to domestic stocks. Reducing may be a good idea -- a couple of weeks ago I sold Telecom New Zealand (NZT:NYSE) for this very reason -- but zero exposure is not a good idea if you want to be diversified.
Position: None
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Cody Willard |
| Act Now? Or Cross All Your T's First? |
3/2/2006 11:15 AM EST
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Quick lesson I just learned again. On several calls during this most recent earnings call, I heard several companies mention an uptick in demand from Ciena (CIEN:Nasdaq). I've been working on Ciena, doing my homework, making my checks, reading up, etc. Meanwhile the stock's done nothing but go straight up. And this morning I'm finally looking to pull the trigger and start a position, when Lehman just upgraded it.Stock flies. I don't own it yet. Patience is a virtue? Or he who hesitates is lost?
Position: None
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Guy Lerner |
| 10-Year Bond Yields |
3/2/2006 11:17 AM EST
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Yields on the 10-year Treasury are moving sharply higher today, and in fact are breaking above the weekly pivot at 4.624%. If this holds, which I suspect it will, the next stop is 4.827%.
Once again rising yields will provide headwinds for the retail and housing sectors, and this is a theme (rising yields) I have been stressing all year.
With regards to the broad market, I have taken a short position in the QQQQ. This is an intermediate-term bet and I believe this to be the high odds play right here.
Position: Short QQQQ
Watch that 10-year, it's getting crushed, and rates are "breaking out." Of course, if you can figure out how to factor that into whether you should be in (or short) F5 (FFIV:Nasdaq), or chase Ciena (CIEN:Nasdaq) ... well, be my guest.
Position: Net long FFIV
Hey, Guy, I was just reading your bio and I have to ask if you have an opinion on Aspect Medical (ASPM:Nasdaq), the maker of the conscious monitoring system, or more specifically the technology itself. Every check I've done is that it is complete mumbo-jumbo clinically, but lawyers seem to have more to do with medicine than doctors nowadays, so I've kept away from shorting it (unfortunately) since the fear of litigation outweighs the small incremental cost of using its system for each surgery. Any thoughts fundamentally or technically for that matter? Or both? I'd love to see it get back to new highs to slap some out there, if it is the right thing to do.
Position: None
Justin: this is just an opinion of one, but I believe a well-informed opinion.
For those who don't know, Aspect Medical (ASPM) makes a device called the Bis Monitor. "Bis" is short for bispectral index. Essentially this is a monitor that measures electrical brain waves through a sticky pad placed on the forehead. The monitor is primarily used in operating rooms while patients are under anesthesia, and it measures the level of consciousness. There are some applications for the device in ICU but this is small.
When I say measure, the device actually gives out a number between 20 and 100. 20 means the patient is under deep anesthesia and 100 means they are conscious and responding appropriately.
Bis Monitors were originally touted as a way of ensuring that your patient is asleep and not aware under anesthesia. But there is no Bis number or single way that one can totally ensure that a patient is aware under anesthesia. There are numerous clinical signs that are monitored to ensure that a patient is unconscious; plus we can monitor the level of anesthetic gases quite well. This is what an anesthesiologist gets paid for! A Bis monitor is not necessarily needed to ensure that a patient is unconscious.
Bis monitors tend to rise in popularity with hospital administrators especially as reports of patient recall circulate throughout the popular media. It seems like ABC's "20/20" does one of these reports every year.
What should be realized, however, is that patient recall is a very rare phenomenon. In 15 years of practice (over 15,000 anesthetics, probably), I have not had a single incident (knock on wood!). I haven't heard of any colleagues having one either.
So from an epidemiologic perspective, the question to ask is are we worried too much about something that doesn't happen too frequently (and is sensationalized in the press) and that we have other (more effective) tools to use to monitor awareness? In other words, why spend all the money on Bis Monitors and the sticky pads, when we can spend it on a real problem like heart disease.
Personally, there are clinical instances where the Bis may be useful, and it should be available in every OR for those instances. But as a tool that should be used on every patient, I have not found any benefit.
Aspect has always touted monitoring the Bis number leads to quicker wake-ups and less drug use by the patient, but anecdotally I have not found it helpful and the literature, as you say, is unconvincing.
This is the tough call because Bis monitors have become imbedded in almost every OR I have been in. The arrangement is that they give you the monitor for free and you pay for the sticky pad on a per-patient basis. It seems to me that MD's and nurses are indifferent, but many decisions are not driven by the facts but by ill-informed administrators and patients.
Position: None
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David Merkel |
| Long End Falling Apart, Curve Deinverting |
3/2/2006 1:06 PM EST
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The last two days haven't been pretty for the long end of the yield curve. The new 30-year bond has traded off roughly $2 in two days. Part of that is the speculative long interest in 10- and 30-year Treasury futures getting frightened and running. The rest is a temporarily self-reinforcing cycle of cash bond managers exiting trades where they were speculating on the long end. Different players have different pain thresholds, but new thresholds are being reached. The swap curve has deinverted, and there are hints of mortgage hedgers selling fixed, and buying floating, which reduces their interest rate sensitivity.
Mini-panics like this in the bond market can last for a week or so, so I would not fight the momentum. As it is, I am considering re-entering my trade in the iShares Lehman 20+ Year Treasury Bond Fund (TLT:Amex) when things calm down.
Two asides: the new 30-year bond now trades 10 basis points rich to the old 30-year bond, which is what I suggested seven months ago. When the relationship was 14 basis points, I said to myself, "This is nuts. There is too much speculation going on here. Time to exit the TLT." So I did; a good move in hindsight.
Second aside: I wonder how much of this might have to do with anticipating the ending of the Bank of Japan's zero interest rate policy? When cheap financing leaves, yieldy assets tend to blow up. I have no clear data on this, it is only a raw speculation.
Position: None
I am really surprised that REITs, which are so interest-rate sensitive, aren't getting pummeled on a day like today. Or yesterday. Weird.
Position: None
Thanks, Guy. You confirmed everything I have learned in the past. It still leaves me throwing my hands up in the air on the stock, but it is always good to understand what you don't know.
Position: None
I received a few emails asking for a response to Melissa Davis' articles on SFBC (SFCC:Nasdaq). I'll address both and then throw out my best dart on what I believe the stock will do over the coming days/weeks/months/years.
The DSO knock is accurate -- they have DSOs in the 100-day area. The company's math is tough to justify using advances as contra-receivables to calculate DSOs. Justifying it in this strange way creates an uneasy feeling, for lack of a better descriptor. This is the wrong question though. The right question is just why? Why are DSOs so high? The reason is almost all of SFBC's business is CRO clinical trials work, which is accounted for in the percentage of completion method. By its very nature, it books revenue before it even bills the customer (hence the rationale for utilizing customer advances as a contra-receivables). Covance (CVD:NYSE) and Charles River (CRL:NYSE) have a small percent of their business in clinical trials. CVD's is roughly 25%, and the rest are services which are billed and collected in a short period of time like chemistry, tox, or central lab work. SFCC has very little of this.
Shorts, if this is your silver bullet, then look no further than Pharmaceutical Product Development (PPDI:Nasdaq), almost 100% clinical trials as well. This is your comp (and start covering if this is your rationale). In its September 2005 quarter, DSOs were 110 days ($265 million in A/R on $216 million in sales) but net of advances ($153 million), its SFCC-style DSO number is 52 days. The fact is this is how the proper accounting here works. If Natan was a bit more street savvy or experienced, he'd be more articulate in walking everyone through this. He was replaced as CFO in January, and I believe the new CFO will be more educated on things of this nature.
Davis' other article addresses the margins at Miami and suggests that maybe Miami contributes more to the overall operating margin than the Street is currently led to believe. Miami is certainly a facility with high operating leverage. Miami needs to restore confidence with the few clients who have left, or more importantly, those who have stayed. Unfortunately, the degree of leverage at Miami discussed in the article uses Natan's figures as a basis for calculation. I have little confidence in those figures (reference above). Operating leverage cuts both ways. The good and bad thing about phase 1 business is that it carries short visibility. A client who leaves this quarter can be back running business next. Whether or not that is likely is for you to decide, but unlike phase 2 or 3 business, which carries long contracts and long lead times, phase 1 does not.
So what to do with the stock? I don't own any common here. I sold my stock after the 50% recovery. This quarter is going to be ugly. You have to be crazy to think otherwise. I can only imagine how many charges it will report, giving the shorts another angle that the business is deteriorating worse than "reported". The list of explanations, excuses, and Grassley discussions will be very long. How many shorts will be yelling at the new CEO? Gosh, it's gonna be a ton! But what will make the stock go down? You need a fundamental problem, one that will show the business deterioration has accelerated, that the new management team has no way to get their hands around the challenges. Clients running. Cats and dogs living together!
Pull up the shareholders list on Bloomberg. All blue. Everybody is new. Some of those people are trading on the stock for sure. But I would guess most are in the camp that this is going to take some time to right the ship and make some real money. The value of Pharmanet, Anapharm, and whatever is left of Miami will be realized by an effective operating management team. 15 million of the 18 million shares outstanding are short. Somebody owns those shares too.
If you are a short, you have to be hoping for a point or two down move to get some stock back. You've worked yourself into a tight corner that will likely involve a GI procedure to get out.
I am not fighting this battle at this point after making some money. I'll be back buying alongside of the shorts on that point or two downward move. SFBC is not an attractive short to me either. The value of the business will be realized and the upside potential is far smaller than the downside. Maybe it goes to $20, but in 12 to 18 months the stock will probably be worth $40. Putting $17 bucks at risk to make $3 bucks is bad math. I can go to Vegas and get free drinks for that.
Position: Short a variety of SFCC options
You know you are in a bizarre alternate universe when Google (GOOG:Nasdaq) goes up a dozen points simply because it didn't stick its feet in its mouth.
Position: None
On Tuesday, I sent a note to our research clients which in part looked at the different time frames technicians and economists look at.
Yesterday, I read Rev Shark's similar discussion of the tension between those with different time frames.
In part, that answers Cody and Norm's question the other day, which is how can you be bearish long-term, yet bullish short-term?
The answer is time frames. You've read enough of my dour macro views to understand that viewpoint. Economics unfolds over very long periods of time, and hence, why I am negative for year's end.
However, in tomorrow's column (tentative title: "Enjoy the Rally but Cull the Herd"), I note that, on the other hand, the more recent technical data is rather positive. Here's a preview of some of the data that explains why starting next week, I believe the market goes up:
Despite the up/down action this week, the Technicals favor an upside bias over the next month or so. There are numerous reasons for this.
Most of the major indices are above their upward sloping 50- and 200-day moving averages: The Russell 2000, DJIA, the Dow Transports, the NYSE, the S&P 400 mid-caps. The notable omission is the NDX, which remains just below its downward-sloping 50-day. This is the most basic of trend indications.
We also see a continually expanding margin debt, which is a net positive for equities short-term. When this measure gets to extremes, it's a warning sign, but we are not close to those levels yet. Studies have shown that as margin debt expands, it helps to fuel bull markets. Once the market turns south, however, it rapidly dries up, adding to the downside momentum. This remains a bullish factor, at least for now.
Sentiment is also on the side of the bulls. Ignore the anecdotal evidence and stick with the actual data. Nearly 30% of market advisors now read bearish, and that tends to be the level where, in bull markets, we get rallies (it's different in confirmed cyclical bears).
Further, noted technician Stan Weinstein observed this week that public short selling is at a very high 8.3%, while NYSE member short selling measures "unbelievably low, at a reading of 40.3% (which is the lowest reading since mid-September 2001, which was registered in the immediately after the 9/11 tragedy)." That combination of the public shorting while the smart money chooses not to has historically led to market advances.
And we are still in the seasonally best period for equities.
See you at 5 p.m.
Position: None
Cramer just wrote: "I used to go on the road all the time when I was a salesperson at Goldman Sachs, and I would call into the office with a list of stocks that would tell me where the market was. This was before the Net -- heck, it was before cell-phones. It was collect calls from pay phones!"Yet people really do, all the time, ask me how in the heck can I call this a wondrous time and place to be alive. And it is (and not just because we're living through the communications revolution).
Position: None
Very impressive numbers out of little ol' Finisar. I'm outta here till manana. Have a good night.
Position: Long FNSR
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