Buzz Bits: Dow, Nasdaq Close Lower
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Earnings Report - MV News
McAfee (MFE) reports 2Q EPS of $0.30 ex-items vs. $0.31 cons on revs of $277.0 ml n vs. $272.6 mln cons.
KLA-Tencor (KLAC) reports 4Q revs of $579.0 mln vs. $573.7 mln. The company is not reporting EPS due to the ongoing internal investigation into stock options.
Bell Buzz - Todd Harrison - 3:46 PM
- We ain't got nothing if we don't have trust. And it seems like trust is becoming a scarce commodity in the marketplace.
- What scares Hoofy the most? How bout the overbought, toppy stochastics in the financials. If those puppies roll over, we may all play dead.
- Don't try to digest everything at once. Simply look at the four metrics (fundies, technicals, structural, psychology) in the context of four time horizons (cycles, phases, trendes, nuances). It almost sounds easy, doesn't it?
- I just got off the phone with the savvy soothsayin' sommelier Jeff Saut of Raymond James, who's counting the days till the mountain mingle. He truly is as good as it gets.
- Keep the "abstract" on your radar. Hedge funds, derivatives and the like.
- Fear? Sorta, kinda but not really. While the VXO is up 8%, it's still hanging in the low teens. When there was real fear (Thai Baht, LTCM), it was up near 60.
- He'll walk over, but he'll be limpin' back. I hear ya Sherman, I'm limpin' myself. My grand plans tonight involve bed rest, chicken soup and Nyquil. But you know what? It could be worse. Fare ye well into the bell and I'll see you on the other side of the GDP.
Position in the financials
What was that!?!? - Fil Zucchi - 2:59 PM
- Nice little bovine-flattening reversal on chatter of Apple (AAPL) lay-offs. Any excuse will do when people wanna get out. With Dow Chemical (DOW) joining 3M (MMM), the Transports (TRAN), PC related tech, semiconductors, telco tech (Tellabs (TLAB)), the HMO's (tried to scalp some Cigna (CI) and CI scalped me), Capital One Financial (COF), the retailers, etc., etc., either the stock prices or the earnings prospects are lying. This is no longer a one-day correction story Minyans. Away from the Indices there are a spate of meaningful stocks which have outright crashed.
- Speaking of crashing, the homies continue to do their part. Bad news is now assumed from that group, and "new home sales" data did not disappoint Boo. Sales down, months supply up, average prices at new cyclical lows. Any questions?
- Navteq (NVT) followed hardware sibling Sirf Tech (SIRF) off the cliff. Lesson for yours truly: I like the GPS business. I said yesterday that better logistics is one of the few ways companies can still improve margins. I also figured that both SIRF and NVT were going to have issues, not only because of competitve pricing and weak car sales (that was about as wasy a 1+1 as the market will hand you), but also because of the valuations of the companies. But I was so intent into looking for a long entry point that playing the dark side never even crossed my mind. Lesson learnt.
Position in homebuilders, IYT, COF, CI
The case for ARM's is slowly receding in our view and we are planning our exit - Bennet Sedacca - 1:58 PM
My firm has been a proponent of Adjustable Rate Mortgage Pools for the last couple of years and, not to crow, are pleased that they were instrumental in our helping clients benefit from rising rates. Obviously, the coupons adjusted upwards for us and some are even in the 8% range now - which means the poor guy that bought his home with a 3/1 ARM in 2002-2003 is feeling some serious hurt. Their payments have doubled or more - yes, that is hurting housing, particularly speculators.
But like all good things, they must come to an end. We feel that the Fed will be lowering rates and as we have mentioned multiple times of late, we will soon be parting with some or all of these positions as their coupons reset downwards.
Keep in mind that we bought them with resets in the mid '06 time frame and will have a year or so to still enjoy these fat coupons. So we hope to be able to find the liquidity we want and need (and the right prices) to delete from portfolios and replace with fixed rate product.
Again, not advice, just what we find is prudent for us personally and professionally.
Position in ARM's
Pay close attention - Vitaliy Katsenelson - 12:26 PM
AJ Gallagher (AJG) reported very decent numbers yesterday, for a change. If you look below the surface, as one should, the revenue grew organically by 9% across the brokerage and risk management business. This stock has been in the dog house for awhile and I believe we saw the first signs yesterday of its coming out party. I like the management and the business model and the contingent commission issue is gradually disappearing in the rear view mirror. The valuation at this point is a bit tricky as its tax rate could be as low as 20% or as high as 40% - depending on what oil prices do.
AJG has been involved in a (very legal) tax shelter where for investment in clean coal they are able to lower their tax bill significantly. However, once oil prices exceed the $70 level and stay there for a long time their tax credits disappear (go figure). When oil prices fell below $70 the company put on a hedge, and in addition there are some rumors that congress may drop the $70 oil provision. In the mean time we get a 4% dividend and restarted growth in the top line which will be followed up by growth in the bottom line very soon.
Position in AJG
When Will They Ever Learn? - Rod David - 11:04 AM
Thursday's session is barely one hour old, and it already bears a striking similarity to the past two. Their common bond is the pattern that was described here yesterday: an overly-optimistic surge that is retraced fully, and then a retest of the surge's peak, also retraced. According to this price action, the rally's sponsorship has been depleted.
But until a key support is broken, momentum remains intact. Until sellers retake control, buyers will have free reign to continue probing higher highs. And if higher highs don't attract sellers to retake control, a new breed of buyer will eventually fill the void left by the rally's depleted sponsorship. They'll have to. It's their nature.
The window did close a little for that new breed of buyer, when this morning's opening surge peaked. Actually, not just when, but also where. Just 1 point higher would have signaled a new rally leg underway. But the door - or window, whatever - wasn't shut entirely on the potential for a new breed of buyer. Not until sellers prove willing to prevent another higher high instead of just fading it.
Deflation and housing... - Scott Reamer - 9:47 AM
Rental prices are of no little import: at a full 38% of the CPI and seeing their largest increase in 6 years, the cost of renting a home or apartment are nearly as unaffordable as purchasing a home. Thank you credit boom. But just as rental prices follow home sale prices on the way up in a credit expansion (well, let's call a spade a spade: credit orgy), they follow home prices on the way down. The cycle is the same for practically any good in a credit boom: increasing prices attract speculators, speculators increase the price to unsustainable levels, those prices provide the economic incentives for providers of that good to bring more to market until both the demand for them exhausts and the suppliers flood the market with new product. Think condos in Miami.
But the often overlooked bust phase has equal (but opposite) deleterious effects. As homes for sale go unsold, those financing them (bankers or "owners") start to get pinched and need to turn them into cash flow generating properties. They need to rent them. Thus the supply of rental properties increases, driving down the price of rents to more affordable levels. The net effect: lower CPI levels and more affordable housing. But to put into perspective just how far out of normal the rental/ownership ratio has gotten, Dave Rosenberg published the attached chart this AM that tells the story in vivid (and disturbing) detail: the ratio of media home sales prices to median apartment rents. One can see that this relatively stable series from 1996 (the data before this period is equally stable) went beserk in 2004 and 2005. As Dave says, a full 20% decline (which would produce a net decline in home prices nationally – see my buzz from two days ago (regarding the rarity of this) would revert this just to normal.
We'll see. But lower rents for apartment dwellers are a silver lining here.
See…deflation's not so bad.
Bank of America Moves to All-Times High - Brian Gilmartin - 9:32 AM
Bank of America (BAC) has quietly moved to an all-time high after this latest earnings report, which is something my firm is not unhappy to see given that it is our largest overweight in the money-center or mega-bank sector.
Our three holdings within this group are BAC, Washington Mutual (WM) and JP Morgan (JPM). Technically WM doesn't qualify as a bank, but more of thrift but the 4.6% dividend yield and low volatility gives me the low-beta financial exposure in client portfolios, in addition to the fact that this group seems to correlate negatively with the brokers in terms of trading patterns. Thus I like to combine these positions in client accounts.
One aspect of these businesses I am a little uncomfortable with is the growing credit-card acquisitions, like BAC's acquisition of MBNA, particularly at the time that the housing market is weakening (and this could be a bigger risk for WM than BAC), but bank capital adequacy continues to be pristine at least from a sector perspective.
And from the perspective of the deteriorating housing market, the untold story continues to be the strong capital adequacy of a lot of banks that could absorb consumer-related losses, without nearing the impact of the RTC and commercial real estate mess in the late 1980's. However, we are actually trying to get some bank capital information relative to potential mortgage and housing default exposure from the Chicago Fed's economic research department, so I won't draw any definite conclusions before seeing the data.
Positions in BAC, WM, JPM
Remember BSX? - John Succo - 8:44 AM
Boston Scientific (BSX) reported pretty good numbers, but the charge-off for the aquisition of Guidant was larger than expected.
If you recall, our stance was they paid way too much for this company. Back then the stock was $26 and almost every analyst loved it.
Now at $17 no one likes it anymore. Those anlaysts were downgrading the stock when it hit $15.50. Typical.
At these stock levels there is now quite a bit of bad news baked into the stock. We are fine with it here but think it will take time to see how things play out. It looks to be basing.
Position in BSX
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