Seeking Alpha
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.
-
Instablogged Stocks
Stocks that instabloggers have most recently written about -
Latest Instablog Posts
-
1
The Call for a New Stimulus Package is Prema...
-
2
Get-on-the-Web Limited Is Swindler, Don't bu...
-
3
Storytelling and Leadership
-
4
Are You Prepared for an 800-Point “Blowoff...
-
5
Market Tests SPX 1100 Again!
-
1
-
Top Instabloggers
See all Top Instabloggers » Top StockTalkers »
Buffet's BNI Buy Sheds Light on Opportunity for YOU!
Buffet Buys Burlington Northern OutrightRemember that old adage, "Buy into fear and sell into greed?" As well-known as it is, it remains mostly misunderstood. It seems it goes against human nature to walk toward danger, but the answer to the riddle is found deeper within that philosophy. It is precisely because what seems dangerous is not always really so bad that opportunity exists. Our savings, however, is so important to our security-centric mindset that we cannot bear the risk of losing, and so we lose out.
Buffet's big trick is that he thinks differently. He considers first the long-term you see, and until they invent the Star Trek transporter, there will be a need for traditional transportation methods. Buffet, acknowledging this, thought here's a wonderful opportunity to take a greater stake in a key transportation company that supplies a fantastic economy.
Berkshire Hathaway Inc. (NYSE: BRK-A, BRK-B), Buffet's investment vehicle and conglomerate, agreed to acquire Burlington Northern Sante Fe (NYSE: BNI) today. Berkshire is acquiring the 77.4% of the company it did not already own. The deal, valued at $44 billion when including the $10 billion in debt obligations that Berkshire will take on, prices Burlington Northern at $100 a share. The acquisition price represents a 31.5% premium to the prior day closing price of $76.07. That's a nice short-term windfall for BNI investors. And isn't it just so Buffet like to set the acquisition price at $100 even!?! Buffet called the deal "an all-in wager on the economic future of the United States." You gotta love this guy...
Buy Railroads, Sell Truckers
Buffet likes railroads for the long-term because of what's going on in energy. As demand for oil and its distillates likely fires in the years ahead, truckers like J.B. Hunt (Nasdaq: JBHT), Landstar System (Nasdaq: LSTR) and Con-way (NYSE: CNW) face an economic impact four times more expensive than the railroads, according to Buffet. If this is truly the case, you could expect market share gains to ensue for the railroads, and at the expense of the truckers. Market share gains are often drivers of P/E expansion as well, and they certainly are drivers of earnings growth. Therefore, railroads should produce better than recent earnings growth and share price appreciation. Add to that the whammy of prospective economic recovery, and you have something worth owning. As a result, you might find strategic investors and profiteers alike seeking to buy railroads now. Thus, the shares of all the segment's stocks should rise.
This deal places the P/E of Burlington Northern at 18.2X BNI's estimated 2010 earnings of $5.51. Union Pacific's (NYSE: UNP) relative P/E ratio is 13.1, according to Yahoo Finance and its data providers. CSX (NYSE: CSX), another major rail player, sees a P/E of 13.1 as well. BNI's P/E was 13.8 before this deal was effected, and the slight premium probably had a lot to do with Buffet's growing interest, in every respect of the phrase.
While we do not offer investment advice here, another investment idea might be to play the market share trend by buying the railroads and selling the truckers, though economic recovery benefits all players, including the truckers. However, you negate that factor by evenly matching the two sides of the deal, or you might overweight the rails if you believe in the economic driver.
Now keep in mind that Buffet's reasoning ignores the possibility of changes in technology. While expecting the transporter beam to become reality any time soon might be far-fetched, it is possible truckers might find another way to fuel the big rigs and regain competitiveness. However, that does not seem to be soon coming either. The power train of a big truck seems a big stretch to be run by electric, natural gas, hydrogen fuel cells or any other prospective technology anytime soon. However, if that does become reality, you can sure bet Buffet will be buying truckers, or whichever segment adopts new cost effective technology.
Disclosure: No Positions
New & Existing Home Sales - Foreclosures Distinguish
Still, for those who noticed a conflict in the data and did not quite understand why it exists, the report offered confounding information. After all, the New Home Sales slump contrasted against last Friday's reported strong Existing Home Sales pace (+9.4%) for the same month. So which is it then? Which data point is telling the truth? Is housing stabilizing or is it about to take another shot to the gut?
The Difference
The clear difference between Existing and New Home Sales is of course foreclosures, or the absence of them within the New Home Market. Their existence in the pre-owned home market has impacted pricing (pushing prices downward), while also speeding the recent sales pace within the segment. When reported on Friday, most interpreted the sharp increase in Existing Home Sales as the beneficiary of the expiring incentive provided by the First-Time Homebuyers Tax Credit. The theory goes that those who could were rushing to enjoy the tax benefit before its end of year expiration, and we are sure this is the case to some degree. However, first time homebuyers are allowed to buy new homes just as soon as existing properties, so why the drop in new home sales then? Well, that question tells us something more.
"I just do not believe a jobless recovery is possible when the jobless rate is as high as it is now."
Maybe the impact provided by government incentives is losing its punch. Perhaps we should face the fact that a new normal is going to rule the day. Credit standards have tightened, and so the growing American home ownership rate, which characterized recent times, might stall for a long while to come. I do not believe a jobless recovery is possible when the jobless rate is as high as it is now. The unemployed and under-employed are certainly not qualifying for mortgages anyway. At the very least, any economic growth in the short-term should not be robust.
Most "gurus" would not venture out on a limb like that just ahead of a GDP report that is expected to show a return to economic growth, and a sharp bump up at that. But, while GDP will likely look good for Q3, "cash for clunkers" will not a recovery make beyond the quarter, in my view. Heck, I do not even expect to see much inventory build benefit yet, and that factor would be expected to provide a quarterly kicker, before a step back into recession (or rather negative change in GDP) for another quarter. Given consumer spending appears to be giving way to consumers hiding in their basements for the winter, economic recovery might lag a bit.
A Closer Look at the Report
While the annual pace of home sales slipped to 402,000 from a revised August rate of 417,000 (from 429K), the trend was not consistent across geographical regions. The Northeast held steady against August sales, and the Midwest experienced a 34% increase in the pace. The South (-10%) and West (-10.6%), where development is predominant and where prices ran most ramped, drove the monthly slowdown. Foreclosures are also most common in those same important regions, and so, they likely put distance in the variation between market segments as well.
Inventory of New Homes for sale stuck at 7.5 months in September, versus the same in August, but was much improved from the 10.9 months stock available last September and the peak inventory of 12.4 months seen in January. Still, inventory did not change this last month, which may be showing us an inflection point toward forward deterioration.
In conclusion, a boost in sales that is supported by foreclosure activity is akin to A-Rod's batting statistics, supported by performance enhancing drugs. Eventually the beneficial effects wear off, replaced by troublesome side effects and a good look at reality - drug addiction. So, as foreclosures thin out, we expect the Existing Home Sales pace will better match its New Home cousin. In the meantime, I would suggest trusting the new home sales figures a bit more. After all, they don't cheat.
Go Phillies!
Disclosure: No Positions
Railroaded by BNI
The Merriam-Webster Dictionary defines “railroad” as “to convict with undue haste and by means of false charges or insufficient evidence.” The definition seems to fit snuggly around what happened on Wall Street Friday, while also offering an interesting play on words. Based on popular press reports, investors convicted the market on the earnings data and forecast warnings of a couple key railroad companies. Specifically speaking, Friday’s downturn was placed squarely on the engine car of Burlington Northern Sante Fe (NYSE: BNI).
Railroad companies and other shippers of goods, including truckers like J.B. Hunt Transport Services (Nasdaq: JBHT) and shipping companies like DryShips Inc. (Nasdaq: DRYS), are considered barometers of the economic lifecycle. After all, if manufacturers and distributors are moving product, it is going to be visible in the results of the shippers.
So when Burlington Northern reported third quarter results that fell short of analysts’ consensus, a call to arms went up. Investors moved even more to the defensive when the popular press pointed out how well Burlington’s bad news complemented the dastardly economic diagnosis out of its railroad peer Union Pacific (NYSE: UNP) from just one day earlier. The corporate leaders of both important transportation firms noted a common view for little improvement in the year ahead.
Burlington Northern’s shares tanked 6.5% Friday, and while aided by Union Pacific’s 5.5% decline, drove the DJ Transportation Average (^DJT) down 3.5% on the day. Lower moves for the Dow Jones Industrials and S&P 500 Index Friday erased a previously established gain for the week. The Dow slipped only fractionally through the period, while the higher-flying S&P 500 Index moved about 1% lower on the week.
Still, we are not so sure you can blame the railroads for the market’s re-evaluation. After all, even an overwhelmingly stellar earnings season could not keep Wall Street on track Friday. Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) both reported market-pleasing news last week, though Microsoft’s lift came from its forward guidance. Amazon’s estimate beating result simply aligned the tech giant with 81% of the S&P 500 companies that have bested estimates this quarter, according to Thomson Reuters. We should note that just less than 50% of traded firms have reported results thus far for the third quarter.
The overwhelmingly positive earnings trend, coupled with a less than surefooted recent market response, suggests to us that stocks may be fully valued currently. The S&P 500 Index is up 60% since the closing low set on March 9 of this year. Thus, stocks would need further economic reasoning to move higher in the months ahead. You would think the market might have found its economic reasoning in Friday’s Existing Home Sales data though. Sales of pre-owned homes ran at an annual pace of 5.57 million in September. That otherwise dismal rate compared favorably against the economists’ consensus for 5.35 million and against August’s 5.10 million sales pace. However, the market found a flaw in those numbers, since first-time homebuyers are about to lose their special incentive to purchase when the relative federal tax credit expires at the end of the year. The rush to buy now is attributed to the processing time involved in buying a home and qualifying for the credit. We note, however, that many industry experts expect another extension of this important incentive for 2010.
Given Wall Street’s modest reaction to good news at current valuation, and its tendency to run for cover at the sighting of a single cloud, market correction seems possible through the short-term. Unfortunately, a solid support for the market seems about to be pulled away. Paper gains and tax consequences are perhaps keeping institutions and retail investors alike from selling-off stocks. Most stock sales now would lock in taxable profits for the 2009 tax year. Thus, as the fiscal year for many a fund manager concludes, and a significant minority of them will before December, investors are likely to exchange winning holdings for cash or other securities. While that exchange could include perhaps shares in companies better positioned for this point in the economic cycle, short-term market consolidation would seem likely from November through January.Disclosure: No Positions
Today's Market: Earnings Reports and Dark Pools
Economic Data
Mortgage Activity
The Mortgage Bankers Association (MBA) made its regular reporting of weekly mortgage activity today. After adjusting for Columbus Day, the week ending October 16 proved a difficult one. As the average contracted rate on 30-year fixed rate mortgages inched higher to 5.07% from 5.02% (15-year mortgages to 4.51%, from 4.44%), mortgage activity dropped sharply. The Market Composite Index of mortgage activity volume declined 13.7% on a seasonally adjusted basis. The drop was driven by a steeper 16.8% week-to-week fall in the Refinance Index, and confirmed by the 7.6% fall in Purchase Activity. The decline marks the second straight, and as first time home buyer tax credits expire, without new legislation, housing seems likely to stumble near-term. However, we expect a renewal or extension of the incentive.
Oil Inventory Report
With the nearest WTI Crude futures trading up to approximately $78 now, the weekly oil inventory data gains in its influence of trading. The sensitivity of futures pricing to news of all sorts increases as trader interest intensifies. Trader interest intensifies as price volatility increases, and the viscous cycle is reborn.
Last week's Petroleum Status Report noted an increase in oil stocks of 0.4 million barrels. A sharp draw in fuel stocks combined with a weakening dollar last week to push oil higher. Total motor gasoline inventories fell by 5.2 million barrels in the week ending October 9. Distillate fuel inventories fell by 1.1 million barrels. However, Indian Summer is taking the Northeastern US by surprise this week, which should offset any further draws in heating oil and settle crude oil as well. The Northeast is the most important market in the States for heating oil, and so weather in New England plays a key role in price trend. The dollar is finding support in the words of market gurus, but we expect there's less weight in those words these days than in years past.
Beige Book
The Fed's Beige Book of regional economic indicators is due for afternoon release at 2 PM. This notation of regional conditions might offer insight into future Fed plans. Also on tap, several Fed speakers are due to take podiums around the country. Look for Fed Governor Tarullo to speak in Washington at 1 PM ET. Richmond's Jeffrey Lacker answers questions at 3:45 ET and Boston's Eric Rosengren will kick off the Fed's Cape Cod Economic Conference. The topic of discussion: Re-evaluating regulatory and monetary policy... Timely...
SEC Reviews Dark Pools
The Securities and Exchange Commission will not be surveying swimming pools around the country for chemical balance, as the terminology implies. Rather, they will be reviewing investment vehicles/methods/systems known as "dark pools," and discussing whether they need special checks and balances. This SEC "open meeting" will hear all sides of the argument, including Wall Street's renewed interest in being left alone.
"But how dark are dark pools?"
Dark Pools allow for anonymity of trading, keeping stocks in check as important players take significant interests in sometimes illiquid stocks incognito. But how dark are dark pools? If some traders have information that the rest of the market is not privy to, then we have a problem. Institutions now use dark pools to trade up to 15% of daily equity volume. It makes sense for institutions that do not want to drive the price of the stock they have interest in owning, thereby forcing a higher cost and sometimes negating opportunity. Still, things have to be kosher boys, and we're not sure you can be trusted anymore. Give us a few more months of gains though and we'll see what we can do...
Earnings Reports
Boeing is off slightly to start the day, as the plane maker posted a $1.6 billion loss on development charges related to its 787 and 747 models. The market was already well-aware of the troubles with the new jumbo jet, so the impact was minimized in today's trade. Still, Boeing (NYSE: BA) was forced to slash its full year forecast to $1.35 to $1.55, from a previous target of $4.70 to $5.00. Analysts were already looking for $1.53 on average, thus the modest decline. Still, with all the delays, one has to wonder if the "big plane projects" project might be better off scrapped. Maybe you just can't fly a plane that big safely. I know I would never board one after all this trouble at Boeing and Airbus.
Wells Fargo (NYSE: WFC) shares are up slightly to start the day, as its solid loan business offers traders safe-haven. Wells' results offered higher loan losses like its peers at Bank of America (NYSE: BAC), J.P. Morgan (NYSE: JPM) and Citigroup (NYSE: C), but it made so much money in interest income from its acquired Wachovia mortgage assets that it about covered charges for an increased level of losses. Without a significant volatile trading business to account for, Wells' income stream seems more predictable, and certainty is valuable these days.
Note though, that there are times when risk is in demand, and coming out of economic trough, that's usually the case. So, while Wells' may be the safest hold over the long-term, it may just as soon underperform its player peers in the near-term. We've already seen low quality stocks lead the way out of the hole though, and so stocks like Wells might be drawing some capital from the sidelines now.
Disclosure: No Positions
Ballon Boy - Dow 10,000
The entire nation followed the news story with great trepidation as it unfolded dramatically before our eyes. What harrowing heights he had risen to! With anxious hearts, we feared the little chap might crash down hard after climbing too high too fast. We are, of course, speaking of the Dow Jones Industrial Average, and its burst above the symbolic 10,000 mark. The Dow broke 10,000 this past week, revisiting the mark for the first time in over a year. Like an old pal last seen on October 3, 2008, we greeted our once earthbound friend with affection. Still, just as soon as we had soared to cloud nine with him, acrophobia set in.Through the close of trading Friday, the Dow's heroic climb had taken the poor balloon boy 55% above the intraday low he marked on March 9. Year-to-date, the index is up 13.9%, which clearly illustrates the V-shaped market turn from those shaky days we survived in February and March. What is disturbing though is that despite lessons learned, the naive child has seemed to gain courage from his own momentum, rising 377 points the week before last. Yes, he's come quite far, but also quite fast. Therefore, we must ask, is his strange vessel sturdy enough to survive the harsh conditions of the upper atmosphere?
As we admired the great heights our little friend had so boldly reached, we could not help but feel terrified at how high he was, and without a safety net. Even when taking into account the favorable changes to the component companies within all the indexes, where the worst of losers have been replaced by up and comers, the economic environment does not seem to offer enough lift for the high flyer Dow. We expand for the war-beaten: the companies that had been most decimated by the economic catastrophe just endured, would have offered little earnings per share now to justify the index's valuation. Though, when replacing that troubled lot with the next generation of industrialists, we raise the denominator in the Price-to-Earnings equation. Thus, we reduce the P/E ratio and offer foundation for the numerator to grow (read make you money).
So by replacing the old broken down General Motors (NYSE: GM) and Citigroup (NYSE: C) in the Dow with new names like Cisco Systems (Nasdaq: CSCO) and Travelers (NYSE: TRV), the index gods fortified the Dow's wings. Of course, changes like these were more prominent in the more encompassing and actively managed S&P 500 Index, and so the earnings comparison between old and new components is much more prominent there. The Dow's valuation based on estimated earnings for calendar year 2009, as compiled by First Call/Thomson Financial, show a P/E ratio of approximately 16. That is not so expensive when compared against the index's value dating back to 2005, but there is of course a new factor in valuation these days... risk. And in the case of the S&P 500, we compare today's apples to yesterday's oranges.
Now given the fly boy's swift rise, many Wall Street guru types (Greek included) warned of impossible expectations heading into the "show me" third quarter earnings period. Thus, as the season wore through this past week, we were shown the door. Even while most stocks have beaten EPS estimates thus far in Q3, those that did not have been punished in trade, versus little gains posted for those companies that beat their numbers.
Banks, and others claiming to be stalwart institutions of consumer finance, offered disturbing bad debt data last week that also threatens the important holiday shopping season. While credit card charge-offs generally stabilized in September, rising delinquencies of 30 days or more portend deterioration in bad loan numbers in the months ahead. Bank of America (NYSE: BAC), the nation's largest lender that recently lost its chief to the guillotine, reported the most troubling data, with charge-offs representing 14.25% of its representative debt outstanding.
So even as the ballooning Dow rose above 10,000 on Wednesday, the wind was being sucked right out of it. The index teetered around the mark both Thursday and Friday, before closing the week at 9,995.91. With more earnings reports threatening to deflate our high-flying friend over the next few weeks, we suspect he's hoping to find a safe place to crash.
Disclosure: No Positions
A Closer Look: Retail Sales Recovery Not So Clear
Retail Chain Store Sales Recovery in Question
Most would use caution in predicting recovery based on such a small increase, and on preliminary data nonetheless! Yet popular media sounded the same song on Thursday, while also inspired by lower than expected weekly jobless claims. Thus, a market that was hungry for a reason to recover, gained ground on the day. The S&P 500 Index rose 0.75% yesterday, and the Dow Jones Industrials moved 0.63% higher.
However, your favorite truth-teller, Wall Street Greek, feels compelled to warn you of the shenanigans run amok. The first sales gain since July 2008 got a special boost you see. Labor Day arrived especially late this year, in fact, as late as it could possibly be. School does not start until summer officially finishes though. Thus, "back to school" shopping season extended deep into this past September. We warned about this "pending" event about a month back, but you forgot about anyway didn't you?.. Taking the late Labor Day impact into account, a 0.1% gain does not offer an ounce of enthusiasm. So, we would expect that as the market gains better understanding of this, these resulting gains will dissipate. So now that we have stolen the ICSC's thunder, let's review the store tally.
The September Sales Tally:
Making a Case to the Contrary:
We owe it to ourselves and to you to consider all angles to an issue, and you are always guaranteed to get unbiased opinion from me. I have no interest here; I am not selling anything to you or the companies I'm addressing; nor am I doing any business with the government or anyone who might have an interest in how this story is reported. So here's the other side of the story.
Part of the reason the market grew enthusiastic Thursday was because of a second report. Retail Metrics, Inc. reported that September same-store sales increased 1.1% last month, significantly more than the ICSC noted for September chain store sales. Also, many of the companies reporting their individual sales beat analysts' estimates. In fact, according to Retail Metrics, 70% of retailers reported better numbers than the average figures the statistician compiled from analysts.
Even so, Labor Day falling on September 7, versus September 1st last year, is BIG! It plays a significant role when we are speaking about "back to school" shopping season. It's also very likely that sales that may have not occurred in August, might have led panicky retailers to slash prices and promote products to lure in last minute September sales. So from my perspective, because of the special Labor Day factor, we cannot call the "beginning of recovery" in retail just yet.
Disclosure: No Positions