Financial, Real Estate, Stock Markets Trends and Current Affairs

Comments on global news from the weekend past...

Bloomberg.com:

• $7.88 billion of slices underwritten by Deutsche Bank under downgrade review since underlying CMBS have been downgraded (CDOs are MAX CMBS I Ltd. Series 2007-1 and Series 2008-1), S&P has already downgraded 2007-1 to BB+
• A BlackRock presentation stated that Deutsche Bank's CDO portfolio does not forecast for tranche losses
• The MAX CDOs are among the Federal Reserve's holdings in Maiden Lane III
• AIG provided Deutsche Bank with $5.61 billion in collateral before the Maiden Lane III transfer

FT Article: Merkel v. Greece Round 239,084.67 (Ding, ding) @ http://www.ft.com

• Merkel insists Greece has not asked for money, and Greece does not need any [Let's permanently attached this to Merkel's credibility rating]
  
• European Commission and IMF officials are far from same page as Merkel
• The article wasn't dense with info, which is not unusual considering the subject matter, but what is clear is that the bazooka everyone was talking about has no trigger, and probably loaded with more baby powder than gunpowder!
• That is going to be a big issue with Greek debt maturing in April if they have no revenue to pay it off

FT Article @ http://www.ft.com

• British Airway strikes did nothing to dampen travel plans over the weekend
• Examples like this are calling the union's bluff, they are not stopping society, potentially leaving room for union break ups by private companies, sovereigns and municipalities if they choose so, this could be a blip on the radar or an emerging trend, so something to continue to watch

I would like professional and institutional subscribers to know that they can always submit research requests. If we feel that there is some potential to the requests, we will follow up with custom research.

This idea, submitted by shaunsnoll, is developing into something worth looking into. See this asset manager's opinion at Seeking Alpha (http://seekingalpha.com/article/190073-high-conviction-a-russian-miner-leveraging-massive-china-demand) then download part one and part of our cursory overview and analysis. All may feel free to discuss this in the comments section below.

• Mechel (MTLR)
  

Mechel (MTLR) Overview, pt2 (NEW)

I urge all interested to download the Mechel (MTLR) overview. You can feel free to discuss it in the comment section of this thread if you desire. If anything of interest is brought up I will have the team dig in a little further.

Mechel (MTLR) 2010-02-26 03:49:25

My suspicions regarding CAT were right on point last year. Unfortunately, the suspiciously engineered "feeling" bear market rally made it very difficult to profit from being right. I still have an OTM position on them. Let's see what comes of it.

From CNBC:

Caterpillar Fourth Quarter Revenue Falls Short

Caterpillar reported fourth quarter earnings that beat Street estimates on Tuesday, but fell short on revenue, sending shares lower in pre-market trading.

Sales reached $7.90 billion, below expectations of $8.11 billion and down from $12.92 billion a year ago.

Caterpillar expects 2010 sales and revenues to be up 10 to 25 percent from 2009, and profit is expected to be about $2.50 per share at the midpoint of the sales and revenues range.

Alcoa's Quarterly Profit Trails Estimates on Higher Energy, Currency Costs

Jan. 11 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported fourth-quarter profit that trailed analysts’ estimates as the company faced higher energy and currency costs...

Profit was hurt by higher energy prices and the dollar’s decline against the euro and the Brazilian real, Deutsche Bank AG analyst Jorge Beristain said...

“This quarter was disappointing, especially with the energy costs, and having to buy primary aluminum on the open market,” said John Stephenson, who helps manage C$1.5 billion ($1.45 billion) including Alcoa shares at First Asset Investment Management in Toronto. The miss on earnings was “significant,” he said.

If the shipping and cargo business is a leading indicator, then we are not at the nadir of the downturn, by far... Note to readers: I haven't checked shipping rates recently nor verified the date of this video. It was forwarded to me, and the post date of the video was September of 09. We did predict the collapse shipping last year due to an imbalance of supply and demand, but I haven't revisited this sector recently. Being that exports from the leading export nations have stagnated significantly, I don't see a hardening of rates, but I do want to be clear that this has not been verified as being recent.

This glut was forecasted by your's truly, and it is apparent that the market is definitely in bubble mode since the share prices of those companies affected are literally levitating. Imagine if your pricing softened to the tune of 90% and your share price went up. What would you do? Sell! Sell! Sell! There is no surprise that insider sells outweight buys by over 10 to 1 these days.

Frontline Investment Summary - Retail

Frontline investment highlights - Pro

FRO Oil Price Arbitrage Addendum

Here are the results of the review of over 50 CAT optimized option strategies ranging from bearish to market neutral, using actual market data (not simply theoretical pricing) based upon upon our forensic research.

CAT option stategy analysis 2009-08-11 23:34:52 2.74 Mb

CAT Additional options strategies analysis 2009-08-11 23:37:00 1.25 Mb

• Caterpillar Inc. Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb
• CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb
• CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb
• Cat follow commentary on Q2 - 2009 2009-07-24 10:14:26 1.30 Mb
• and for non-subscribers - CAT’s 2Q09 results analysis

This earnings season has shown this quarter's research to be quite accurate. I am still bearish on the market, and the weak earnings performance coupled with the still elevated equity prices and valuations make me even more suspect. The last time this happened to this extent (well, not quite to this extent) was right before the dot.com crash. As a quick recap for the past week.

Wells Fargo, right on point, nearly to the "T":

• WFC Investment Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb
• WFC Investment Note 22 May 09 - Pro 2009-05-27 01:56:54 853.53 Kb
• and for non-subscribers, Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses

Caterpillar, very, very close to perfection. I also believe we have caught CAT in a shenanigan or two, which I will post on later:

• Caterpillar Inc. Preliminary Analysis 2009-06-17 10:34:20 666.50 Kb
• CAT Forensic Analysis Retail 2009-06-25 15:43:20 374.87 Kb
• CAT Forensic Analysis Professional 2009-06-25 15:44:27 836.39 Kb
• and for non-subscribers - CAT’s 2Q09 results analysis

GS, results are on point, valuation is through the sky as I have anticipated.

And just this morning, Starwoods, whose actionable intelligence item I posted very recently: Starwood Hotels (HOT) Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. From WSJ.com:

Worsening end market demand and continuous reduction in the dealer inventory have led a steeper than anticipated decline of 41% (y-o-y) in the CAT’s revenues to $7.98 bn in 2Q09 from $13.62 bn in 2Q08. Total machine sales and engine sales declined 49% and 32%, respectively, while the revenues from financial products declined 13%. Decline in machine and engine sales was primarily volume driven and was across all geographies. Machine sales in North America, EAME (Europe, Middle East and Africa), Asia Pacific and Latin America declined a significant 51%, 61%, 25% and 47%, respectively. Engine sales in North America, EAME, Asia Pacific and Latin America declined 30%, 36%, 26% and 31%, respectively. The weak demand scenario propelled by cut in residential and non-residential construction spending is reflected in the company’s recent financial results.

The bottom line was severely hit by the sharp drop in the top line along with margin contraction. The increase in SG&A and R&D expenses as percentage of revenues offset the improvement in gross margin achieved through drastic workforce reduction. While the cost of goods sold (material and labor cost) as percentage of revenues declined to 72.1% in 2Q09 from 73.7% in 2Q08, the SG&A costs as percentage of revenues increased to 11.5% in 2Q09 from 7.9% in 2Q08 and the R&D costs as percentage of revenues increased to 4.4% in 2Q09 from 3.0% in 2Q08.

Operating profit (excl redundancy costs of $85 mn) declined 71.7% to $401 mn in 2Q09 from $1,525 mn in 2Q08. However, the sharp decline in operating results was moderated by $93 mn of favorable currency impact included in other income (expense) and lower effective tax rate which was about 10.0% in 2Q09 against 28.2% in 2Q08. Consequently, net income declined 66.5% to $371 mn in 2Q09 from $1,106 in 2Q08. EPS was $0.60 in 2Q09 against $1.74 in 2Q08.

Caterpillar has released revenue and EPS figures for 2Q09. Although the reported revenues of $7.97 bn is lower than the consensus estimates of $8.86 bn and our even more opitmistic estimates of $9.2 bn, the reported earnings per share of $0.60 per share stands higher than the consensus estimates of 0.22 per share and our (even more optimistic) estimate of $0.29 per share.

The results have beaten the expectations of the Street and our calculations primarily due to better than expected margins which it seems has been achieved through higher than expected (and apparently drastic) cut in workforce as well as a lower tax rate. From Bloomberg.com: "[Caterpillar] has eliminated about 17,100 full-time jobs since December. More than 17,000 contract and temporary workers also were cut." We will be able to ascertain the reasons for margin expansion after analyzing the full results when they become available.

For professional subscribers, if you recall, we had highlighted the sensitivity of the stock's valuation to the change in margin and highlighted it in the forensic report. Higher-than-expected margins have propelled the earnings for the company, though revenue of the company still remain significantly subdued, declining a significant 41% y-on-y in 2Q09. It is my belief, that cost cutting can only go but so far. If they are not able to raise revenues next quarter, a profit surprise is highly unlikely unless they cut imprudently deep into overhead and expenses.