The Weakest Sectors Signaling Market Bottom

Well, with a gain of over 3% last week S&P as the leading provider of financial market intelligence gave a boost to equities and market sentiment in general. Meanwhile, some of the weakest market sectors, ones that have led the recent declines like the homebuilders and financial stocks, these sectors which have sold off sufficiently are currently on the rebound.

Toll Brothers (NYSE: TOL), for example is trading nearly 20% above its low. Pulte Homes (NYSE: PHM), D.R. Horton (NYSE: DHI) have rebounded even further. Additionally, the combination of lower housing prices and aggressive rate slashing which has never failed to jump start the economy or the stock market - has set the stage for a turn in the housing market. Prices are clearly showing some signs of stabilization with the rate of liquidation of unsold new homes getting near benign levels.

However, we can not see pessimism unwind in the wake of these data. Undeniably, a considerable amount of bearishness on the Street remains dominant since we find ourselves in this - almost universal sense that markets are in permanent decline.

But regardless of this pretension, fact remains the market has endured a good deal of bad news of late and yet it has held its ground. Last couple of weeks despite a few disruptive trading sessions, the big cap blue chips (the big kahunas of the financial world) performed quite well. That’s extremely encouraging and it suggests the worst is already baked into share prices.

So taken altogether, housing and banking may be the weakest sectors of the economy, but the bottom is in view. And if the weakest sectors are bottoming, that’s good news for the rest. Perhaps, the market is signaling that if the bottom of the trough has not yet been reached, it is very close.

We think the performance of equities in the last several days, should be taken in conjunction with the current strength that the market is showing fundamentally. Economic statistics so far have been more smoke than fire. Having said this - I am sure contrarians aren’t holding their breath - but after all, exchange of ideas and valuations from different perspectives make conclusions even more convincing.

I have continuously argued and still contend that the problems in the financial sector and the larger economy in U.S emanating from the persistent drop in house prices is that they will eventually end, and the underlying resiliency of the U.S. economy will reemerge. As it has always been the case.

ron

Wallstreetpit.com

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Gold and Energy: Only a Temporary Correction

When it comes to rising commodity prices oil has been grabbing most of the attention. But other commodities like copper, steel, and precious metals have surged as well over the past years.

True, the commodities market is not a new concept. It has been in existence for a long time and its bullish growth in recent years has made it a lucrative investment option. Especially, during fiscal ‘07 where commodities accelerated their strong run.

Naturally, there has been no lack of theories and explanations as to why prices have soared.

A common alternative against the argument has been the weight of investment money driving prices higher. However, the continued uptrend in commodities, particularly energy and metals is primarily attributable to the developing world led by China and India.

China is going through a very metals-intensive phase of its industrial development which now accounts for 20%-30% of the world’s consumption of base metals. During fiscal ‘07 alone, precious metals were up 10% to 25% due mostly to tight supply-demand fundamentals.

Meanwhile, with gold now well below $1000, down 10 percent from its highs of $1,030.80 an ounce on March 17, and oil dipping briefly below the $100 p/b levels, investors are fleeing commodities on a view that perhaps gains are overdone. So what spooked the traders? Why the broad-based sell-off in commodities? Is this simply profit taking or something more significant that marks the end of the bull run?

Our guess is that it is only profit taking. All commodities suffer corrections from time to time, even in a bull market. However, there are some key factors contributing to the current correction. Starting with Fed’s .75 basis point cut on March 18, suggesting that Fed is going to rest for a while. Also, if gold were to start heading lower again, below $900 an ounce, that might create a temporary cycle of further selling. Additionally, the data released from different agencies measuring global trade activity is quite relevant as well. According to the latest reports: the annualized rate trade for the 3rd quarter of fiscal ‘07 grew at almost 7% against that of only 0.2% in the following quarter.

The number still suggests growth however, when compared with the 7% increase of the third quarter, the last reporting remains significantly weak.

Based on data it is very clear that we are seeing a slowdown in global trade activity thus the selloff on the last few days.

However, having said all this, if gold were to retreat $100 or more from current levels, as a reaction to prices nearing the $1,000 mark again, I would treat it as a buying opportunity. The pullbacks will eventually chase out the weak hands and the declines are likely to be only temporary retreats along the way to much higher prices down the road.

Today, virtually all opinion-makers think commodities are headed south over the long haul. Personally, I disagree with that assessment. If there is one thing with the highest probability in happening is that - in the coming years inflation will make quite a comeback, fueled in large part by energy and easy money. As a result, gold and energy stocks will post great returns.

ron

Wallstreetpit.com

Article published by Seekingalpha

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Visa IPO To Launch - A Gutsy Move

Despite unsteady financial markets and global liquidity issues that could eat into transaction volumes, Visa (V) seems determined in proceeding with its plans for a public offering this week.

A gutsy move without question, particularly based on the fact that the deal is getting done in the midst of what is otherwise one of the driest IPO markets in recent years. The market certainly reflects nervousness among investors however, the company seems willing to take the gamble.

Visa is the world’s largest credit-card network, connecting banks and merchants. It makes money on each transaction made over its network.

In 2006, Visa processed almost 45 billion transactions, surpassing its three biggest competitors combined : MasterCard, American Express and Discover. During the the fourth quarter alone of fiscal ‘07, the company processed 9.1 billion transactions, printing an increase of 13% despite projection of economic slowdown. Total value of Visa transactions processed for entire fiscal ‘07 - came in at $3.5 trillion.

The company is owned by about 20,000 member banks worldwide, and offers unsurpassed acceptance around the world at more than 30 million merchants and retail outlets. Its sales volume and number of credit and debit cards in circulation is almost double that of number two - Mastercard (MA).

Last year, in dollar terms, VISA posted over $3 trillion globally, compared to $1.9 trillion for Mastercard. Operating revenues came in at $5.2 billion for a net income topping $1 billion.

Over 60% of the credit cards in the world carry the Visa brand compared with 30% for MasterCard logo. But then again, Visa declared that it s everywhere you want to be! - Definitely, more exposure there than its rival.

The San Francisco-based company, through its IPO, could raise an estimated $18.8 billion, while offering 406 million shares at $37 to $42 each. With this move Visa will be shifting from being a privately held interest company to a publicly traded one. If there is enough demand for stock, 19 underwriters will then have the option to buy an extra 40.6 million shares.

There are positive and negative aspects in this deal that investors should consider. The card network and brand name are solidly established, however the management team is brand new since the company completed a reorganization end of fiscal ‘07:

- Since Visa is actually a merging of associations, there should be more motivation in cutting costs, especially once it becomes a public company. Cost cuts combined with healthy revenue growth could produce 20% annual gains in earnings per share, and consequently prompt operating margins to grow even further. This will allow more revenue to fall into the company’s bottom line which stimulates growth.

- There is always the risk of Visa remaining the target of a series of lawsuits and government regulations, some a decade old and some still in the works, aimed at introducing more competition to the industry. But the company will set aside $3 billion raised in the IPO to pay out settlements - which may be enough to cover losses. However, rivals continually claim anticompetitive practices and unfair dominance of the credit-card network, thus the insinuation of Visa possibly, facing more costly court fights in a cutthroat market place.

- I wouldn’t expect a spike from ticker when L2 trading, even though the IPO is reportedly oversubscribed.

- It will take some time for Visa (as with any new company) to prove itself. Even MasterCard’s IPO didn’t do that great right away. It took several earnings reports before investors gave their vote of confidence in company’s potential.

MasterCard currently trades at 25.40 times ‘08 earnings with a forward P/E of 22.00 for $7.53 p/sh projected earnings. Analysts expect MasterCard’s earnings growth to approach 20% annualized over the next three to five years.

If you’re bullish on MasterCard, there’s no reason not to feel the same way about Visa. Both companies have a powerful business which is likely to grow in future as people will continue to shift away from cash and towards payment with cards as e-commerce grows.

Visa also plans to offer an annual dividend of 42 cents a share.

ron

Wallstreetpit.com

Article published by Seekingalpha

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$200 oil is a very real possibility

A decade or so ago sustainable energy was thought more in terms of availability relative to the rate of use.

In today’s global economy however, with the constant growing shortage of energy and in light of great demand from the emerging markets, there is clearly growing concern as to how the energy needs are being addressed and what’s being done in prolonging energy sustainability prospects. Including the overconsumption factor which consequently elevates the risk of resource depletion.

Currently, the subject of resource sustainability ranks the highest on the world agenda and remains directed at a very critical question. How the developing countries, including the emerging markets of India and China which alone constitute 40% of humanity and fast advancing economically, will meet their rapidly intensifying energy needs?

The world presently consumes energy at a steady 15 trillion watts, 86.5% of which comes from burning fosil fuels. By 2050, experts expect demand to increase by another 30 trillion watts. For those aware of the real state of our global energy situation - the next logical question would be : where is this oil going to come from?!

The sad reality is that despite all the spin and hype about oil, limited supplies of oil simply can not keep up with soaring global demand. During fiscal ‘05, despite the unquestionable fundamentals of oil market at the time, almost every single Wall Street firm projected that oil will cost no more than $25-$45 a barrel in three year’s time.

According to reports, world’s oil production may have peaked since 2005. If we accept the reality of peak oil production, what are the implications? Unquestionably, price instability. An instability that we continue to experience as of 2008 in both oil and gas markets. (Peak oil does not mean an abrupt end to oil. It does mean that demand of conventional oil will exceed supplies of conventional crude, thus marking the end to cheap crude).

The idea that oil reserves will be there forever is a non-realistic notion. It is concept that we should disengage rapidly from and instead accept the reality, that world’s wells are at full capacity and at some point will run dry.

A good indication of this theory is that of Saudi engineers injecting close to 7million barrels of seawater daily, into the Gawhar field in Saudi Arabia, which produces over half of Saudi oilfield. This is a fatal sign that the world’s largest oil field is nearing a collapse of output. Keep in mind, Saudi Arabia is responsible for approximately one eighth of the world’s oil. As Saudi Arabia goes, so goes the world.

What’s more, besides the fact that no significant world-scale oil discoveries have been made since the North Sea and Alaska in the 1970s - for the first time ever, Saudi officials admitted to the world’s leading industrial powers - that OPEC will not be able to meet Western oil demand in 10 - 15 years.

Additionally, on average, production in the world’s oil and gas fields is declining between four and six percent and more significantly, almost all the spare capacity has disappeared.

As energy supplies decline the complexity of human enterprise unavoidably will get effected - and whether we like admitting it or not : $200 oil barrel, by the end of this decade - is very much a possibility if not a certainty.

ron

Wallstreetpit.com

Article published by Seekingalpha

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FMCN ...only matter of time before liftup

Keep an eye on FMCN. Ticker should hit $98+ levels from current $43 range, 9-12 mnths time frame.



ron

Wallstreetpit.com

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BHP Billiton: The Standout Choice

It is already an established fact and a favorable notion that the majority of business endeavors start primarily with the ambition of profitability, followed by the aspiration of building a relevant, sustainable and successful operation.

However, projecting success in business versus achieving it remains irrefutably complex. These two elements are consistently difficult to attain and represent a systematic challenge for those involved. That's why obtaining financial and operational success of a company requires a carefully designed and calculated approach with a strategic direction to deliver on objectives.

The strategy, from a business perspective, should be based on the premise of ensuring long-life rather than a myopic concentration on the short term, low cost yet high quality assets; profitability throughout the inevitable economic cycles, diversification, growth, expansion and lastly, a robust governance structure in place to implement the necessary philosophy and management concept in creating shareholder value.

Undeniably a monumental task. However, if measures are identified in locating a company's potential and ability to create value while gaining broad exposure, then the speed of execution impacting the transformation process with a clear articulation of a strategic direction is the only obstacle remaining in the way of success.

One company which has not only structurally but quite constructively capitalized on these measures is Melbourne based BHP Billiton Ltd (BHP).

The merger between BHP and Billiton Plc on June 29, 2001, resulting in BHP Billiton Limited as the world's largest diversified commodities firm in the resources industry, has created a company which is not only a top producer of energy-related products, but also an exceptionally well managed, low-cost and high quality asset based business.

BHP is the third largest producer of nickel, the world's second largest exporter of energy coal, a leading supplier of core steelmaking materials and one of the world's top five producers of uranium. Because of its size and a substantial oil production business worth noting (it is one of the company's fastest growing segments), BHP has the widest spread of products globally, selling more than twenty different commodities while engaging in mining, drilling and processing of mineral resources, this way giving investors a stake practically in every major commodity.

As a global organization, BHP has implemented a constructive business model in place, organizing its customer sector groups into nine main business segments including Petroleum, Aluminum, Iron Ore, Base Metals, Manganese, Carbon Steel Materials, Diamonds and Specialty Products, Metallurgical & Energy Coal, and Stainless Steel Materials. By operating on six continents and in 25 countries across the world, BHP, through its subsidiaries, maintains a central role in the global economy, continuously providing raw materials in support of global economic growth and social development.

Key Points

The world economy these last few years has experienced the highest rate of expansion in nearly thirty years. This trend, combined with the emergence of the developing economies driven by strong activity in Asia and Europe, has allowed many companies to generate positive operating results and financial performance.

Meanwhile, the highly cyclical aspect of the mining industry, along with the difficulty of covering its cost of capital during negative economic changes, remains a well-known phenomenon. However, a closer look into BHP's financials reflects a well capitalized company to weather considerable uncertainty regarding the magnitude and distribution of losses stemming from industry cycles and their impact on the company's broader financial stability.

Key Measures

BHP's strong balance sheet is reflected in key financial ratios: Revenues generated during fiscal year '07 reached almost $40 billion with a net income of $13.42 billion. Operating margins came in at 33.67%. Currently, return on assets stands at 15.59% followed by a solid 49.77% return on equity. Profit margins posted 34% return. Operating cash flows at almost $16 billion, suggesting that the company will continue spending in exploring and expanding its business, repurchasing shares and continue to raise dividends. Additionally, BHP's proposed combination with Rio Tinto (RTP) is another demonstration of the company's optimal goal and persistence in correlating returns across assets. This calculative approach will progressively benefit the company's bottom line and will further unlock value by creating an organization without peer in the industry.

In a demanding commodities market, BHP keeps running its assets at full capacity by controlling costs while increasing output in a safe and sustainable manner. It is important to remember that only six years ago, BHP's market cap stood at $28 billion. This full-year profit alone amounted to half of the company's 2001 market capitalization.

Conclusion

I believe that the global economy remains robust, pointing to further expansion on macroeconomic basis. This will inevitably benefit companies such as BHP with a business model concentrated on the premise of a globally diversified portfolio.

The global growth story is a view broadly consistent with IMF's current baseline scenario which continues to forecast solid growth ahead. That is not to say that the emerging markets, to some extent, don't represent a delicate balance between some economies experiencing rapid growth and some with only positive economic background. Certainly, these economic systems will have to minimize and eliminate system vulnerabilities, when possible, so that they don't build to more systemic levels. However, based on data, the overall economic global sentiment reflects a convincing consensus of continued global growth, profitability and that of healthy capitalization prospects over the medium term future.

I have a positive outlook on BHP's profit picture based on the favorable global demand for commodities. The company has undertaken various exploration projects, representing a $20 billion commitment. It's debt-light balance sheet combined with its free cash flow yield of 5% suggest that the company can continue to stimulate its growth through organic means while enhancing its production capacity, once operational. This, in conjunction with high commodity prices, provides a favorable backdrop for revenue.

Supported by favorable fundamental factors, look for the stock to reach above $108 levels within 12-18 months.

ron

Wallstreetpit.com

Article published in Seekingalpha


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I have started a long position in KO @ $62.88 levels. relatively long term hold trade.

ron

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