What might be in store for the first quarter corporate earnings? For sure, many (perhaps more than 50%) will beat. More important, revenue picture should continue to improve, along with profitability. But most important of all is the outlook. Do companies feel more optimistic about the business, and they will thus invest more and create more jobs?
We'll be reading and watching these outlooks.
Perusing through this weekend's Barron's. Surprised to find something missing: Where is the deeply sarcastic perma-bear Alan Adelson? Has the market advance towards 11000 finally convinced him? Or is he taking a nap? Anyway, it's hard to continue to press for a pessimistic view in front of all the improving economic data and more importantly the markets.
The cautiously optimistic Michael Santoli is alive and well with his continuing caution for a potential correction. This time, we obviously agree. We think Q1 could have some surprises. The generally optimistic mood could have set it up for "buy on rumor, sell on news" kind of trade. But if the fundamental pictures are sound, we should see opportunities in post-earning blues. This is our thinking for raising cash last week.
Santoli mentions China being a factor. We do see RMB rising within a bigger band. The move won't be large. China needs to release some inflationary pressure that has been building up. And to transform itself into more consumption oriented, China should empower the consumers a bit. On this front, the Obama administration seems to be handling it well by pursuing an engagement policy, despite all the protectionistic noise.
If RMB rises substantially over the course of 2010, say another 5-10%, the increased raw material purchasing power should help crude, copper, steel, and other raw material producers. We want to be overweight in these areas.
See Big Picture for an interesting discussion on market sentiment.
Saturday, April 10, 2010
Thursday, April 8, 2010
It's time to take some profit
Stock market looks very resilient, able to overcome many bad news. Optimism is returning.
Retail sale has been up on consumer strength. Mortgage rate is up too. Gold has been up to highest level for this year.
Some of our holdings are breaking new highs. It has been none-stop since early February.
There is no big concern, but it's important to raise cash at this point. The retail strength noted above could very well be short-lived. So we sold quite a bit of winners, and even started a short position. This sets us up nicely to rotate into the next promising areas.
We hope the upcoming earnings season is going gangbuster. We just don't want to depend on that outcome. If market rises from earnings, we'll benefit; but if vol picks up, or credit risk turns up, or the Fed moves earlier than expected (unlikely) we'll be ready for it.
Retail sale has been up on consumer strength. Mortgage rate is up too. Gold has been up to highest level for this year.
Some of our holdings are breaking new highs. It has been none-stop since early February.
There is no big concern, but it's important to raise cash at this point. The retail strength noted above could very well be short-lived. So we sold quite a bit of winners, and even started a short position. This sets us up nicely to rotate into the next promising areas.
We hope the upcoming earnings season is going gangbuster. We just don't want to depend on that outcome. If market rises from earnings, we'll benefit; but if vol picks up, or credit risk turns up, or the Fed moves earlier than expected (unlikely) we'll be ready for it.
Wednesday, April 7, 2010
Consumer credit, Fed concern and rising mortgage rate
The Federal Reserve said Wednesday that borrowing declined by $11.5 billion in February, much weaker than the $500 million gain that economists had expected. The February weakness reflected a sizable 13.6 percent drop in revolving loans, the category that includes credit card debt. On the news, American Express (AXP) dropped nearly 2%.
Consumers are cautious. It's still difficult to find jobs.
In remarks to business people in Dallas on Wednesday, Fed chairman Ben Bernanke said he saw no evidence of a "sustained recovery" in the housing market, noting that foreclosures keep rising. Commercial real estate remains a trouble spot, too.
The toughest problems are in the job market. Even though layoffs have slowed, hiring is "very weak," Bernanke said. He noted that unemployment, now at 9.7 percent, is still close to its highest levels since the early 1980s.
Record-low interest rates should help foster the recovery, but economic growth won't be robust enough to quickly drive down the jobless rate, Bernanke indicated.
The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market -- a threat to the fragile recovery in the housing market.
These factors drove down REITs and home builder stocks on Wednesday.
Consumers are cautious. It's still difficult to find jobs.
In remarks to business people in Dallas on Wednesday, Fed chairman Ben Bernanke said he saw no evidence of a "sustained recovery" in the housing market, noting that foreclosures keep rising. Commercial real estate remains a trouble spot, too.
The toughest problems are in the job market. Even though layoffs have slowed, hiring is "very weak," Bernanke said. He noted that unemployment, now at 9.7 percent, is still close to its highest levels since the early 1980s.
Record-low interest rates should help foster the recovery, but economic growth won't be robust enough to quickly drive down the jobless rate, Bernanke indicated.
The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market -- a threat to the fragile recovery in the housing market.
These factors drove down REITs and home builder stocks on Wednesday.
Tuesday, April 6, 2010
Not sure I should be excited when the Mad Money guy agrees with me
I usually don't watch Cramer's Mad Money. This guy flip-flops too much, and there is too much yelling.
So I was curious to see he has turned bullish on California housing market, even recommending one of my top holdings to play this recovery: Standard Pacific (SPF). He still doesn't quite understand how Standard got here. I don't mean to brag, but there are good reasons to like this company. See my analysis here, here and here.
See CNBC Yahoo report and the video.
(note added on 4/8/10) Cramer was able to pump up SPF by 4-5% or so. Amazing. When he is so bullish, it's about time to take some profits.
So I was curious to see he has turned bullish on California housing market, even recommending one of my top holdings to play this recovery: Standard Pacific (SPF). He still doesn't quite understand how Standard got here. I don't mean to brag, but there are good reasons to like this company. See my analysis here, here and here.
See CNBC Yahoo report and the video.
(note added on 4/8/10) Cramer was able to pump up SPF by 4-5% or so. Amazing. When he is so bullish, it's about time to take some profits.
Sunday, April 4, 2010
Are New Home Sales About to Go UP?
(This article has been published on Seeking Alpha: http://seekingalpha.com/article/196985-are-new-home-sales-about-to-go-up )
Much discussion on new home sales has been focused on how bad the recent sales have been (for example, see this post). March number will probably not be any better.
The rear-mirror view is consistent with high unemployment, sluggish job recovery, abundant supply of foreclosed homes, consumer retrenchment and low household formation coming out of a severe recession.
Looking forward, however, there are signs that point to an upturn, however slow it may turn out to be.
GDP has been growing for the past three consecutive quarters. Much of that growth is underpinned by manufacturing expansion, surge in export and strength in technology. The expansion is spreading to other key industries such as retail, construction, travel, financial services etc. That will add much needed jobs.
Job loss appears to have stopped. And we can now look forward to job growth in the coming months. Job creation is probably the single most important factor that will spur housing rebound.
In a series of recent posts, John Lounsbury has examined analysts forecast for home builder revenues in the next three quarters (see here and there). While his main point is that these estimated revenues appear to be too optimistic, I think he might have identified a turning point for new home sales.
In the table and the graph below, let’s look at the annual revenue picture as a whole for some representative builders, to smooth out seasonality. The data is obtained from Yahoo Finance, or from companies annual reports.
On average, builder revenue has been dropping 30% - 40% for at least three years since 2006. The size of some builders as measured by sales has shrunk over 75% since the peak. The correction has been severe, and rightly so. They should not be building so many houses.
Looking forward, analysts are estimating only a 1.2% increase for these six builders (DHI, LEN, KBH, SPF, HOV, TOL) for 2010 over 2009. And for 2011, the growth is about 18%.
Looking at the graph below, if these estimates are right, 2010 will represent a turning point for new home sales, and 2011 will only see a modest increase.
Going into the recession, analysts tend to over-estimate sales, whereas coming out of the recession, they tend to under-estimate revenues and profits. So I think it is very likely we are at the turning point. The next couple of quarters should see increased home sales year-over-year.
We all know about the problem with foreclosures and the feared “shadow” inventory. Those are the potential supply that may hit the market over the next few years. That may help depress new home sales.
One can argue that there is a countervailing factor, i.e. the “shadow” demand that may materialize as the economy improves. This potential demand is difficult, if not impossible to estimate. But we know there is a substantial population growth in the U.S. and people have been putting off home purchase due to jobs and credit. One interesting area to look at is the household formation.
Household formation in the U.S. historically has been running at about 1.3 million per year. It has slowed dramatically during the recession, to about 400,000 or so in 2009. Young men and women who cannot find jobs tend to go back to live with parents, or share apartments. If employment situation improves, there is a glaring gap of nearly one million new households to be formed. That could definitely help drive up new home sales due to affordability and low mortgage rates.
Another important and overlapping demand factor is from those who have jobs but have been sitting on the fence. If they gain more confidence in the economy and the job market, they’re a ready source of buyers who will benefit from owning homes at a low price point.
In many sub-markets, new homes are not competing directly with foreclosures. It is likely that we'll see warm markets developing while many foreclosure hot spots are still facing huge pressure in the next few years. It is not realistic to think that the excess inventory must be cleared out first before new homes can be built.
Much discussion on new home sales has been focused on how bad the recent sales have been (for example, see this post). March number will probably not be any better.
The rear-mirror view is consistent with high unemployment, sluggish job recovery, abundant supply of foreclosed homes, consumer retrenchment and low household formation coming out of a severe recession.
Looking forward, however, there are signs that point to an upturn, however slow it may turn out to be.
GDP has been growing for the past three consecutive quarters. Much of that growth is underpinned by manufacturing expansion, surge in export and strength in technology. The expansion is spreading to other key industries such as retail, construction, travel, financial services etc. That will add much needed jobs.
Job loss appears to have stopped. And we can now look forward to job growth in the coming months. Job creation is probably the single most important factor that will spur housing rebound.
In a series of recent posts, John Lounsbury has examined analysts forecast for home builder revenues in the next three quarters (see here and there). While his main point is that these estimated revenues appear to be too optimistic, I think he might have identified a turning point for new home sales.
In the table and the graph below, let’s look at the annual revenue picture as a whole for some representative builders, to smooth out seasonality. The data is obtained from Yahoo Finance, or from companies annual reports.
Looking forward, analysts are estimating only a 1.2% increase for these six builders (DHI, LEN, KBH, SPF, HOV, TOL) for 2010 over 2009. And for 2011, the growth is about 18%.
Going into the recession, analysts tend to over-estimate sales, whereas coming out of the recession, they tend to under-estimate revenues and profits. So I think it is very likely we are at the turning point. The next couple of quarters should see increased home sales year-over-year.
We all know about the problem with foreclosures and the feared “shadow” inventory. Those are the potential supply that may hit the market over the next few years. That may help depress new home sales.
One can argue that there is a countervailing factor, i.e. the “shadow” demand that may materialize as the economy improves. This potential demand is difficult, if not impossible to estimate. But we know there is a substantial population growth in the U.S. and people have been putting off home purchase due to jobs and credit. One interesting area to look at is the household formation.
Another important and overlapping demand factor is from those who have jobs but have been sitting on the fence. If they gain more confidence in the economy and the job market, they’re a ready source of buyers who will benefit from owning homes at a low price point.
In many sub-markets, new homes are not competing directly with foreclosures. It is likely that we'll see warm markets developing while many foreclosure hot spots are still facing huge pressure in the next few years. It is not realistic to think that the excess inventory must be cleared out first before new homes can be built.
Friday, April 2, 2010
Recovery no longer jobless
(This article appears on Seeking Alpha and genrated some heated discussions: http://seekingalpha.com/article/196885-recovery-no-longer-jobless )
Investing in recovery means allowing the possibility for the economy to overcome obvious hurdles. And these hurdles can be huge.
In 2009, bullish investors went after improving credit condition and corporate profits. The biggest worry at the year end was the uncertainty around revenue. Many questioned if the profits were all due to cost-cutting. Soon that worry was relieved as companies reported increasing sales. Nobody talks about that anymore.
Joblessness became the biggest worry, which is deeply tied to consumer's spedning power. Now it appears that worry is going to melt away.
The Labor Department said Friday that employers added 162,000 jobs in March, the most since the recession began but below analysts' expectations of 190,000. The total includes 48,000 temporary workers hired for the U.S. Census, also fewer than many economists forecast.
Most important, private employers added 123,000 jobs, the most since May 2007.
Manufacturers added 17,000 jobs, the third straight month of gains. Temporary help services added 40,000, while health care added 37,000. Leisure and hospitality added 22,000.
Even construction industry added 15,000 positions. This is not surprising given that many national builders have been ramping up community counts and getting ready for the Spring selling season. For example, Standard Pacific (SPF) has made a series of acquisitions of communities in North Carolina recently, targeting entry-level buyers. Construction and selling are expected to start this Spring. Lennar (LEN) has also announced similar activities in North Carolina and Florida.
The employment picture has turned a corner. The gain is not big, but certainly significantly positive.
Manufacturing continues to underpin the global recovery, from China, to Japan to U.S. and even Europe, according to a Bloomberg report:
We continue to invest in global recovery.
Investing in recovery means allowing the possibility for the economy to overcome obvious hurdles. And these hurdles can be huge.
In 2009, bullish investors went after improving credit condition and corporate profits. The biggest worry at the year end was the uncertainty around revenue. Many questioned if the profits were all due to cost-cutting. Soon that worry was relieved as companies reported increasing sales. Nobody talks about that anymore.
Joblessness became the biggest worry, which is deeply tied to consumer's spedning power. Now it appears that worry is going to melt away.
The Labor Department said Friday that employers added 162,000 jobs in March, the most since the recession began but below analysts' expectations of 190,000. The total includes 48,000 temporary workers hired for the U.S. Census, also fewer than many economists forecast.
Most important, private employers added 123,000 jobs, the most since May 2007.
Manufacturers added 17,000 jobs, the third straight month of gains. Temporary help services added 40,000, while health care added 37,000. Leisure and hospitality added 22,000.
Even construction industry added 15,000 positions. This is not surprising given that many national builders have been ramping up community counts and getting ready for the Spring selling season. For example, Standard Pacific (SPF) has made a series of acquisitions of communities in North Carolina recently, targeting entry-level buyers. Construction and selling are expected to start this Spring. Lennar (LEN) has also announced similar activities in North Carolina and Florida.
The employment picture has turned a corner. The gain is not big, but certainly significantly positive.
Manufacturing continues to underpin the global recovery, from China, to Japan to U.S. and even Europe, according to a Bloomberg report:
Manufacturing in China grew for a 13th month and U.S. factories expanded the most since July 2004, reports showed. Business sentiment in Japan rose to the highest since 2008, while factories in Britain and the euro region stepped up production.The momentum in the coming quarters should accerlerate and spread into more and more industries. A clear sign that the manufacturing expansion is not just an inventory-restocking story can be found in increasing sales from Williams-Sonoma (WSM) to car dealers.
We continue to invest in global recovery.
Wednesday, March 31, 2010
Quarterly Review
The first quarter of 2010 is drawing to a close. We made some good calls.
Our article at the end of January turned out to be right. At the time, S&P was at 1070 or so. Since then, it has climbed to around 1170, a 100 points advance, just shy of 10%.
That set our tone for the quarter. Developments in manufacturing, export and retail subsequently reinforced our view that the global economic recovery was firming. For the upside, equities, especially small caps, are the place to be.
Better yet, this is also the time to invest in early cyclicals such as home builders. We did some analyses backed by fundamental research on this sector. In particular, our call on Standard Pacific in several articles turned out to be very profitable. We invested in the stock this year at $3-3.8 range. Along the way, we traded a bit, selling above $5 and buy back in more at below 4.5. It has been quite interesting. Lennar has performed fine too.
We've trimmed some bank stocks. Sold all JPM shares and some WFC shares. New regulations may not be friendly to shareholders. But these large banks should do just fine.
We've been moving into retail stocks. Recently, we picked up SCSS at below $7. It's now at $8. But this is a very volatile stock. It could continue to swing widely.
Energy sector surprised us. It did not perform as well as expected. It could surprise the other way in the next quarter.
REIT sector surprised us on the upside. It's likely not over yet. So we don't think we should short the sector in general.
For the quarter, our fund is up 15% versus S&P's 5%. That's nice. We look forward to the Spring quarter.
Our article at the end of January turned out to be right. At the time, S&P was at 1070 or so. Since then, it has climbed to around 1170, a 100 points advance, just shy of 10%.
That set our tone for the quarter. Developments in manufacturing, export and retail subsequently reinforced our view that the global economic recovery was firming. For the upside, equities, especially small caps, are the place to be.
Better yet, this is also the time to invest in early cyclicals such as home builders. We did some analyses backed by fundamental research on this sector. In particular, our call on Standard Pacific in several articles turned out to be very profitable. We invested in the stock this year at $3-3.8 range. Along the way, we traded a bit, selling above $5 and buy back in more at below 4.5. It has been quite interesting. Lennar has performed fine too.
We've trimmed some bank stocks. Sold all JPM shares and some WFC shares. New regulations may not be friendly to shareholders. But these large banks should do just fine.
We've been moving into retail stocks. Recently, we picked up SCSS at below $7. It's now at $8. But this is a very volatile stock. It could continue to swing widely.
Energy sector surprised us. It did not perform as well as expected. It could surprise the other way in the next quarter.
REIT sector surprised us on the upside. It's likely not over yet. So we don't think we should short the sector in general.
For the quarter, our fund is up 15% versus S&P's 5%. That's nice. We look forward to the Spring quarter.
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