Tuesday, 06 July 2010 08:57

In the News Today July 6th, 2010

Relevant news clips...

CNBC reports Banks Too Big to Fail, Too Big to Bail Out: Roubini:

Europe  faces the quandary of being unable to afford to bail out banks that are still considered too big to fail, while the global economy is heading for a slowdown economist Nouriel Roubini told CNBC.

Governments are running out of ways to counter a "massive slowdown" or the risk of a double-dip recession, Roubini said.

"A year ago we had all these policy bullets," he said. "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system."

"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there," he said.

Roubini said he was unimpressed with the June US employment report, pointing out that the jobless rate fell because of a large number of discouraged workers leaving the labor force, and also noted recently weak data on manufacturing, retail sales and housing.

"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China," he said.

BoomBustBloggers should be well positioned to take advantage of this development. Starting January of this year I made it clear that the EU was "Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sov

Here is a the final list of companies culled from a group of nearly 1,800 that we feel have the most profit potential for the year going forward.

This is a professional/institutional level document, but annual Retail subscribers and any subscribers who have been with me for a year ore more can email customer support for a copy as we show our gratitude for your continued patronage. Professional and Institutional subscribers should download this document in its entirety here: icon Financial and Non-Financial Short Scan Review & Analysis - Pro (392.88 kB 2010-06-28 05:33:44)

This is the culmination of four blog posts:

  1. 1. Non-Financial Companies to Short in 2010: methodology and short listing results;
  2. 2. BoomBustBlog Bankruptcy Search: Focus on British Petroleum and Collateral Damage: an objective look at the prospects of BP’s potential insolvency;
  3. 3. The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search:  a review the financial and bank holding companies whose economic and financial outlook do not support their current valuations;
  4. 4. and On Shorting Stocks, Double Dips and the UAL/CAL Merger: a drill down of suspect airlines stocks.

Note: The embedded spreadsheets contained in the posts above should be used to access the extensive fundamental data used in calculating the results below.

After two separate and rigorous short exercises, one each for financial and non-financial companies, we have narrowed down the list of potential candidates from nearly 1,800 companies to just 10 (with 13 runner-ups) – all of which we are confident are materially overvalued given their current and prospective financial condition and economic  outlooks. What is of particular interest is the fact that a full 50% of these companies landed on our computer screens as finalist in 2008, before the great market melt-up of 2009. They were overvalued and in bad shape during the lower prices of the turbulent times, hence they are significantly more so after seeing their share prices ride the wave of irrational, recession double-dipping, "recovery" exuberance. We have even released forensic analysis of 4 of these 10 companies over the last two years, and all of the banks in the list were also members of the original Doo Doo 32 of May 23, 2008. Members of this list provided significant profits for bears and short sellers as their prices gyrated and collapsed and the market began to realize the precarious situation that they were in. Now that low volume melt-ups are [starting to] giving way to realistic fundamentals, one can expect more of the same. The more things change, the more they stay the same. We plan to refresh the analysis of the repeat offenders, and offer fresh analysis of those who are new to the list.

The two separate short scans that we have conducted were for the non-financial sector and the financial/banking sector resulted in a short-list of 23 companies, with 10 of those companies targeted for full blown forensic analysis, time and resources permitting.

Below is the outline of the methodology used to produce them as well as a select excerpts from one of our previous reports on a particularly egregious "valuation" repeat offender that has proved profitable in the past whose macro outlook tied to the housing sector is a gloomy as ever - despite a near 100% pop in its share price. This the obligatory "freebie" that I toss in to entice non-subscribers to take the plunge. This particular "freebie" happens to be quite actionable, at least in my humble opinion.

Published in BoomBustBlog

In continuing our search for potential bankruptcy candidates (see part 1, The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search - US Banks), we would be remiss in ignoring the malaise that is currently British petroleum and their drilling partners. I have just released a report to subscribers (see end of post) laying out our empirical analysis of the probability of insolvency and default for British Petroleum and their drilling partner, APC. Below, I have included a summary for the general public.

Apart from the extreme headline risk British Petroleum faces:



There are very real potential and actual fundamental challenges facing it as well as its contracted partner, APC.

In order to estimate the probability of bankruptcy of BP and APC, we built three scenarios in which we have estimated the costs from the spill in Gulf of Mexico. While the cleanup costs are thus far being completely borne by BP (owning 65% and the current operator of the leaking well), the share of losses of APC (owning 25% in the leaking well) and Mitsui (owning 10%) will arise when BP contests for loss sharing in the courts. Since APC and Mitsui are only the financial owners with no strategic and operating interests in the leaking well, legal experts are giving a strong possibility that APC and Mitsui might escape most of the spill costs if it is proven that the explosion was largely owing to the negligence on the part of BP. Thus, for this initial qualitative portion of our analysis we assume the entire costs currently being borne by BP.

Published in BoomBustBlog

I would like to draw attention to BoomBustBlogger Shaunsnoll and his write up on Envirostar titled, "A dollar for fifty cents: EVI"

EVI is a well run company with 60%+ of shares owned by management that has an absurd amount of cash on the balance sheet, no debt, and trades at a ridiculous valuation with a few likely catalysts.

EVI primarily distributes commercial and industrial laundry and dry cleaning equipment including a proprietary line of dry cleaning machines (98% of revenue) with a focus on environmentally friendly dry cleaning methods and equipment. There is even a “green” angle here for you environmentalists! Overall prospects for this business are not great but not terrible. Much of their dry cleaning products sales goes into hotels, hospitals etc, which is obviously very weak. They do have some good growth into international and latin America though, which is ~20% of their sales and growing. Not exactly the most “sexy” industry but keep reading!

Valuation for this company is ridiculous given ROE, ROIC, cash flow and balance sheet and there are some clear catalysts that could unlock value in the next year. Company has ~80% of market cap in cash, no debt, is fcf positive, insiders own >60% of shares, and company has respectable ROE, ROIC and EPS growth over last few years.

...

Summary: So you essentially have 25% downside and 70%+ upside using relatively conservative estimates, for a 2.5x return/risk ratio with very little risk of permanent loss of capital. Impossible to know exactly what could happen but it seems under almost any scenario the company is under valued. Stock could do anything in the short term but over the next year or two I have a hard time coming up with any scenario that has less than a 40% return. Given market environment and limited downside this looks pretty compelling to me. I am a buyer at anything <$1.20. If the company starts having multiple quarters of negative net income indicating likely extended cash burn or if management shows me reason not to trust them, then I will likely exit the investment.

To read the full write-up as well as ability to download an accompanying word.doc, visit Shaunsnoll's microblog on the BoomBust by clicking here. Neither I, nor BoomBustBlog necessarily endorse this work, nor have we verified the contents, for it is independent and research and opinion posted by Shaunsnoll but I do encourage all readers to investigate, comment and share.

Any registered member may post their ideas to their own microblog, and if the content is deemed compelling I will announce it to the general population for review. You may also install the Google Ads application from within your profile and generate some ad revenue from our site's traffic.

Published in BoomBustBlog
Tuesday, 01 June 2010 06:44

Quick Newscan for Tuesday, June 1st 2010

In the news this morning:

  1. Stocks, U.S. Futures Tumble on China Growth Concern, BP Spill; Oil Plunges: We discussed the topic of China's unsustainable growth and the knock on effects its slowdown would have on other economies in detail just last week. How timely...
    1. The Narrowing Chinese Trade Surplus
    2. In Australia, Tax as a Contagion
    3. Australia: The Land Down Under(water in mortgage debt)
    4. BoomBustBlog China Focus: Inflation?
    5. BoomBustBlog China Focus: Interest Rates
    6. My China Ruminations Have Come to Pass As the Country Enters a Bear Market
    7. Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
  2. Euro Weakens Against Dollar on Speculation Crisis Hurting Region's Economy: Nothing new here. BoomBustBlog newcomers, see the Pan-European Debt Crisis here.
  3. BP Tumbles Most in 18 Years After Abandoning Attempt to Plug Leaking Well: The company's future doesn't look to bright!
  4. Paulson Drops 6.9% as Hedge Funds Post Biggest Monthly Losses Since Lehman (HNWs and institutional investors should take the time to read this article and my summaries): Many funds, including Paulson's, made hard bullish bets on the financial sector recovering, in direct contravention to my positions and research. Yes, the financial sector took off like a bat out of hell the last 3 quarters of 2009, but one shouldn't confuse sharp market price movements with fundamentals. Many, if not most are in bad shape, and it ain't lookin' much better in the near term either. See The Next Step in the Bank Implosion Cycle???. Most importantly, many (if not most) professional money managers and analysts totally underestimated the extent of the damage being done Europe. I have was weary of Europe since 2008, put short research and positions on in 2009 (with mixed results due to the bear market rally) and went full blown GRIZZLY BEAR in 2010 (reference the Pan-European Debt Crisis which publicly documents and details it all). Back to the news clip:
    1. (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased. “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”

    "SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year’s gain to about 4 percent, according to people familiar with the firm.

    Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.

    Brevan Howard Asset Management LLP in London, Europe’s largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.

    1. I will gladly compare the performance of BoomBustBlog research to any bank, fund or asset manager that charges big commissions or 2 and 20! Reference Updated 2008 performance and the 2009 Year End Note to BoomBustBlog Readers and Subscribers for rough performance numbers covering 2007, 2008 and 2009.
  5. Analysts Boosting Forecasts See 25% Stock Gain Defying El-Erian New Normal: Yeah, but aren't analysts mostly wrong unless we're in  a bull  market? Stocks always go up, Right????!!!! Reference Blog vs Broker, Who Do You Trust?
  6. Cameron Bull Market in Gilts Beating Merkel Bonds as U.K. Keeps AAA Rating: For now, at least. Subscribers, see 
    File Icon UK Public Finances March 2010

Published in BoomBustBlog

At the request of one of our Professional Subscribers, we performed a preliminary analysis of Force Protection, Inc. While it doesn't suit our needs, I have decided to put the summary out in the public domain. I urge any and all readers, subscribers or not, to forward me leads on opportunities (long or short) that you truly feel may be worthwhile. I will offer a month's professional (high end) subscription to anyone who proffers and idea that I consider actionable. Now, on the the analysis...

Force Protection, Inc. (FRPT) provides survivability solutions to support the armed forces of the United States and its allies. The company produces specialty vehicles, which are based on the blast- and ballistic-protected technology, and are designed to protect their occupants from landmines, hostile fire, and improvised explosive devices, referred to as IEDs. The company designs, manufactures, tests, delivers and supports its blast- and ballistic-protected products to increase the survivability of the users of these products. The business has only one operating segment which is ‘survivability solutions’.  FRPT is a key provider of the U.S. military's Mine Resistant Ambush Protected ("MRAP") vehicle program and have sold and delivered over 3,000 vehicles under this program. FRPT currently offers four vehicle platforms the Buffalo, Cougar (includes Mastiff and Ridgeback variants), Cheetah and Ocelot. In addition to vehicle platforms the company also offers modernization and spare and sustainment services for its supplied vehicles.

Poor operating performance is a key concern for the company

  • For 1Q10, net sales declined 27.0% to $134.8 million compared to $184.7 million in 1Q09. Operating margins also declined significantly to 1.3% from 6.2% in 1Q09. Though, in 1Q10, the company added $48.2 million of modernization revenue, it has failed to offset the decline in revenues from vehicle sales and spares and sustainment.

frpt1

Published in BoomBustBlog

A few minutes ago, I posted an informational piece on Australia's creeping protectionism in the form of taxing multi-national mining companies in "In Australia, Tax as a Contagion". This begs the questions, "Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?" Well, the answer most likely is because it is actually a "Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese

Published in BoomBustBlog
Thursday, 27 May 2010 03:57

In Australia, Tax as a Contagion

From Blomberg: Mining Tax ‘Contagion’ Set to Spread From Australia:

May 20 (Bloomberg) -- Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.

“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”

The new Australian mining tax coupled with rising worries over possible slowdown in China has become a serious concern for both domestic and international mining companies that have substantial exposure to Australian mining assets.

Here's a synopsis on the topic from my point of view...

Published in BoomBustBlog

After an allegedly 5.7% GDP rise in Q$-09 and a supposedly voracious appetite from China imports (you know, the nation who is supposed to lead the developed world out of recession, yet had a trade deficit last quarter), Alcoa reports a first-quarter loss of $201 million on revenue of $4.89 billion.

Alcoa's first-quarter loss narrowed as the company benefited from higher aluminum prices, which offset lower shipment volumes.

That equates to a 7% top like revenue MISS! For those that don't get the gravity of this occurrence, Alcoa is a bellwether of the global economy's use of Aluminum and there is a very slim chance the economic engine is humming along with this dismal performance.

In addition, it is very difficult to miss top line estimates by that much since it is Alcoa that guides the sell side estimates!  It is not as if those Wall Street guys come up with the numbers on their own.

I will release some interesting stats on global commodities in a day or two.

Published in BoomBustBlog

I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.

From Alliance Bernstein:

  • Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
  • Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
  • Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
  • The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy

Bloomberg.com:

  • Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
  • Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity
Published in BoomBustBlog
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