I've written about Collateralized Debt Obligations before at RealMoney, but if you didn't catch Tom Graff's piece yesterday, it is worth a read.
The only thing that I would add is that it matters what part of the credit risk cycle you are in when deals are originated. Deals done now are likely to be good, because risk-aversion is high, and the rating agencies have gotten religion, temporarily. Another way to say it is in a bear market, only the best deals get done.
Position: none
I have received a number of questions from subscribers on Masco. My view is at the current level it is well worth accumulating. This is a case of the baby being thrown out with the bathwater. Masco has strong brands and a long history of shareholder friendly management. My view is if the shares continue to decline the management will opt to take the business private. Remember this stock is yielding 5.20 % so even in todays less than robust debt markets it is still possible to finance a transaction.
Even if the going private scenario doesn't materialize,this company is still well positioned. This is also the proverbial good house in a bad neighborhood. Yes new construction is off but eventually home owners will have to refurbish.In any event it is wise to have a couple of year time horizon in this name.
Position: none
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Patrick Schultz |
| China Mobile is the Big Loser in Government Restructuring |
5/28/2008 7:30 AM EDT
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The big business news out of China this week was the much anticipated restructuring of the telecom sector. The bottom line: China Mobile (CHL:NYSE) appears to be the big loser in the restructuring. CHL's shares have refelcted that reality, and are down over 10% in past few trading days. Goldman Sachs piled on, downgrading the stock and adding CHL to its "Conviction Sell list".
China Mobile is a victim of their own success. The company is the 800-pound panda of the mobile telecom landscape in China--- a runaway capitalist success story. Now, the Chinese want to "encourage" (translation: do what we say or you will end up in a gulag) more competition.
In the US we say, "Don't fight the Fed", well I am coining a new phrase ..."Don't fight the commies." If the Chinese government wants more competition in the telecom space, you better bet your bottom renminbi that you will get more competition.
Worry not capitalists, as there is still a lot of money to be made in the China telecom space as the other telcos play corporate shuffleboard in a government encouraged mandated "catch up" to China Mobile. The beneficiaries are: China Unicom (CHU:NYSE), China Telecom (CHA:NYSE), and China Netcom (CN:NYSE). I like China Unicom of this bunch, and would sell China Mobile on any lift. In fact, I think if CHL gets back above $80, it looks like a good risk/reward short setup.
Look for my two-part video series on this restructuring today and Friday for China Watch on TSC TV.
Position: none
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Adam Feuerstein |
| Introgen: Advexin phase III study failed |
5/28/2008 7:45 AM EDT
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Introgen Therapeutics (INGN) released new and negative data on its gene therapy cancer drug Advexin this morning.
Disregard much of what's contained in the company's rosy and misleading press release this morning because it's a mainly a rehash of previously announced results from April (which I debunked quite thoroughly here.)
The most significant new piece of information from the phase III study is that Advexin failed to boost survival in head and neck cancer patients, per the study's primary endpoint as analyzed using the intent-to-treat patient population (the only thing that really matters.)
Introgen, once again, tries to bamboozle us with talk of positive results from a retrospectively defined subgroup of patients, but it's all garbage.
Position: none
From my perch, financials look like a buy, while it might be time to sell energy/materials.
Position: None
Dow Chemical (DOW:NYSE) just announced that it's raising prices across the board by up to 20%, because of higher feedstock prices.
This year alone, the company expects that "hydrocarbon-based feedstock" prices will be $32 billion, up from $8 billion in 2002.
This is one of many strategies that the chemicals producer has undertaken to try and limit the effect of higher commodity costs, including a joint venture of its basic chemicals business with Kuwait's Petrochemical Industries last December.
The aggressive price hike will help Dow regain some of this margin, but the key question is: when will the company hit the tipping point and raise prices high enough to cut into demand?
Position: none
If you saw Tony Crescenzi's TIPS post yesterday, you would have read that the TIPS market is factoring in a longer-run inflation rate of 2.5%, which means that anyone owning the two-year Treasury (or less) at this point is earning a negative after-tax, inflation-adjusted real return.
In addition, the 10-year Treasury is nearing 4%, which after adjusting for the inflation rate leaves just a 1.5% real return before taxes.
The longer-run "real return" on Treasuries typically is closer to 2%, so if you do the math, you could conclude that the 10-year Treasury should be closer to 4.5% current yield and that the short end of the yield curve needs to continue to adjust upward in yield (and lower in price).
This makes a good case for munis and for our clients an overweight in corporate, both high-grade and high-yield, and in mortgages at this point in the cycle.
Position: Long indiv munis, corporate bonds, high-yield and mortgage funds
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David Sterman |
| Tying the Durable Goods Numbers to Exports |
5/28/2008 9:38 AM EDT
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I'm curious as to the strength in non-defense capital goods. I have to wonder how much of it is coming from exports. I also have to wonder if this reading was derived from activity prior to the latest oil spike. if so, we still may see the slowdown in goods that some have been expecting.
At a minimum, this morning's number implies that next week's Chicago PMI index will stay fairly close to the 50 range.
Position: none
The charge-off news from Key shows that the playbook isn't working for banks this time, despite the talking heads preference to tout it. Rising loan losses on all types of debt during the Great Unwind is key to my negative call on the sector. Avoid banks and brokers until we get a bottom in housing prices, which should be sometime in 2009 or 2010.
Position: no positions in stocks mentioned
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David Sterman |
| 10-Year Notes Approaching 4%: Not What Housing Needs |
5/28/2008 11:23 AM EDT
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While many of us try to jockey the end of the housing downturn, we should be cognizant of mortgage rates--which are pegged to the 10-Year. Bonds have been backing up in recent weeks--a worrisome trend.
If inflation bubbles up this year, as some fear, then mortgage rates could start to move to the 6.5-7.0% rate, or beyond. And if that happens, the housing affordability index will stay at challenging levels.
Position: none
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Eddy Elfenbein |
| 19 Straight Record Years for Donaldson |
5/28/2008 12:25 PM EDT
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Apparently no one told that folks at Donaldson (DCI) that we're in a recession. Donaldson is a classic case of great stock, boring business (filtration systems, woo!). After the bell yesterday, the company reported earnings of 57 cents a share, six cents above the Street.
But what really impressed me is that the company raised its FY 2008 forecast for the third time. Donaldson now expects to deliver its 19th straight record year--and in January, the company raised its dividend for the 22nd straight year.
Position: none
This company has now batted around. That's right it is back to where it was not long ago but it has doubled. It is the only independent iron ore company left in the US . And it still is less than $10 billion. Getting expensive. I would take off half if you bought it at my recommendation but it can still go higher..
Position: none
You're right Jim, the IBM model works - for IBM. But let's not forget how many gut-wrenching years it took for them to get there. Gerstner started this in in 93 if memory serves me correctly. Maybe more importantly, just because it works at one place doesn't mean it will at the other. HPQ makes PCs profitablly; IBM couldn't.
Position: None
I noticed that shares of Symantec are htting a 52-week high today. It's been a long slog back to credibility for this former high-flyer. The move to branch out from the core network security business seemed ill-fate at the time. Now, the company's cylinders are all firing.
But I still question the company's decision to move into storage a few years ago, and wonder if a break-up might still be pondered. In the interim, shares appear cheap, despite the recent spike, trading at less than 15 times the current year's EPS estimates. Those estimates, by the way, have been rising nicely in this tough economy.
Position: none
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Gary Morrow |
| Ralph Lauren Is Looking Good |
5/28/2008 2:30 PM EDT
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Ralph Lauren is near the top of the NYSE percentage gainers list today. The company reported its latest earnings this morning before the open and the strong report sparked a huge gap higher open. RL vaulted above its April and May highs on the opening bell and quickly climbed past its previous '08 highs left behind in late February. The stock has faded a bit since the early excitement but is still holding on to a 10% gain. Volume on today's breakout is running extremely heavy and is already over 6 times RL's daily average. By the close, today's final volume will be an all-time record.
The surge today in RL has lifted the stock above a consolidation pattern the stock has been tracing out since mid-January. The stock bottomed on Jan. 22 after undergoing a vicious selloff from the $100 area. At this year's low, RL had dropped more than 50% from its July high of $102.60. The recovery earlier this year repaired some of the damage but a quick reversal in late February halted the rally. Since then, RL has been trading in a narrowing yet constructive range as volume slowed dramatically.
Monthly lows for the stock have been trending higher since the January spike low, adding to the strength of the growing base. As this week comes to a close, RL will be leaving behind a great deal of support. RL will close today above its 200 day moving average for the first time in 10 months. This level, just below $66, would be a low-risk area to buy on a pullback. Slightly below the 200-day is another layer of support at the March and April highs between $65 and $65.50.
RL is battling some resistance near $70, but I believe the stock will work through this area and up to $76.60. A rally to this level would retrace about 50% of last year's selloff.
Position: none
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Brian Gilmartin |
| Bank of America Retests the January '08 Low |
5/28/2008 2:59 PM EDT
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With the KeyCorp (KEY) news from this morning, Bank of America (BAC) is now within $0.25 of the Jan. 22 2008 low of $33.12.
With BAC, it is all about the dividend, as we discussed on the April conference call. We still don't own the stock, but are watching it as it approaches this key technical level.
In a nutshell, BAC's dividend isn't allowing it to retain any excess capital. Dick Bove recently put out a note on BAC saying that he thought -- with the free-cash-flow generation of $3.5 billion, plus the recent preferred stock issuance of $12.5 billion, and an additional $9.5 billion in deposits -- the dividend was safer than at the time of the earnings report. The $11 billion annual dividend looks to be covered given the above numbers.
However, on the April conference call, it was clear that the key to BAC's dividend was additional reserves and charge-offs in the consumer portfolio. This KeyCorp news, particularly the comments about the home-improvement portfolio, might ripple through to BAC.
Let's see if BAC can hold $33 with its 7.5% current dividend yield.
Position: none
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Geoff Johnson |
| Financials Burning In A Hell Of Their Own Creation |
5/28/2008 3:27 PM EDT
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Financials are entering a new, lower circle of hell as a growing list breaks to new 52-week lows on the news from Keycorp. In due time I suspect many more of these irresponsibly managed institutions will make new lows, too. In the mean time it's nice to see that the rest of the market, though off its highs, is nowhere near making a new low.
As I have said before I think part of the reason for this dichotomy is that to a degree the problems with financials is between them, their shareholders and those who will give them the capital they need to repair their balance sheets. Consider this: once I have no equity in my house I can't have any less equity. Once my equity is gone it's the bank's problem.
Another good thing about the sinking banks is that we're beginning to bake in losses deeper out in their loan books, a process that needs to be completed before we can move on for good. It just dawned on me that one signal of a bottom will be more CEO firings in the regional and small banks. Too many of these terrible managers have gotten off the hook under the cover of everyone was doing it. At some point this excuse won't fly.
I'm not arguing that the economy lacks for problems. Indeed, the knock on impact of tighter credit will hamper growth for some time to come and it is becoming increasingly clear that any recovery will be weak at best. However, outrageously negligent management at financial institutions all across the spectrum has made it hell to manage the markets for almost a year now. I'm not a vengeful person - really, I mean it, and it's not like I'm staring at the banks on my screen saying "die suckers"; after all, many of my friends and contributors own these stocks. However, all the same I'm glad to see that the worst of their problems are, at least for now, becoming their problems and not mine.
Position: Long AGO, BLX.
It's another day of retail reporting, and so far Dress Barn (DBRN) looks like the winner after posting 39-cents-a-share in earnings vs. the 26-cent consensus. Revenues were in-line, and the company reaffirmed 2008 earnings guidance. Shares are up 6% in after-hours trading.
Also moving higher is Coldwater Creek (CWTR), which beat sales estimates nicely ($271 million vs. $246 million estimate) and posted a 10-cent loss for the first quarter, 6-cents better than analysts had forecast. Guidance was in-line. Shares are up more than 3%.
On the losing end was Men's Wearhouse (MW), which missed first-quarter estimates by 2 cents and offered weak guidance. Management said second-quarter earnings would be in the $0.75 to $0.79 range vs. the $0.82 consensus estimate, and that it sees 2009 earnings between $1.75 and $1.85, well below the $2.01 analyst consensus. Shares are trading down about 6% in the post-market.
Overall, it still looks like retail/apparel names are offering upside, as analyst estimates are finally holding up vs. actual results. I'm not a fan of these particular names, but this morning's strong numbers from Polo Ralph Lauren (RL) could signal upside for names at the more fashionable end of retail, including Guess? (GES).
Position: none
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