28 August, 2008

Morning Market Musings 8/28

As the Democratic Convention rolled on with another star-studded political night, the morning Markets turned positive from the opening bell. While the majors opened nearly half a percent higher, several news points stood out.

Previous gloomy growth forecasts for the US economy were actually revised higher, as GDP for quarter 2 of the year came in at 3.3% growth versus the initially estimated 1.9%. However this result was propped up by the stimulus package provided in the quarter and economists still expect slowing growth for the rest of the year.

Freddie and Fannie continue their torrid rebound, as the 5 day tally for Fannie Mae (FNM) now stands at a 43% gain, and trying not to be outdone by it's mortgage partner in crime Freddie Mac's (FRE) 5 day tally stands at 65% in gains. As the yells of government bailouts turn into whispers and some optimism the street has rewarded these battered companies by showing Investment support. Quite the turnaround from even just a few days ago!

All is still not well with Sears Holdings (SHLD) as it continues to limp along from quarter to quarter with sales declines. Sears delivered an over 60% profit decline year over year, earning $65Million of $0.50/share all the while adding a gain that without would have pegged earnings at $0.21/share. The outlook? Not so bright either as the company predicted earnings to continue to fall compared to 2007 on a year to year basis.

iPhone comes to Russia via Vimpel Communications. The Russian mobile operator announced earnings earlier this morning and announced it had signed a deal to bring Apple's (AAPL) iconic mobile handset to Russia, being the first official carrier to do so. Russia has always been one of the largest grey-markets for iPhones, having an estimated 600,000 units floating around unofficially on local carriers. With no signs of exclusivity, Apple will likely continue negotiating an eventually offer the iPhone through other large Russian providers.

Disclosure: Author owns AAPL

25 August, 2008

Buyer Beware, Monday belongs to the Bears

Coming off the weekend and looking ahead to the start of school years the the Labor day holiday, Traders were decidedly negative with the markets today, selling off in droves. Once again uncertainty in the Financial sector was the biggest catalyst of downward pressure.

Stocks started the day lower with the major indices hitting bottoms by mid-day, staying around those levels through the rest of the trading session. AIG (AIG) stock was making the most noise after having its price target cut by an analyst at Credit Suisse, following Friday's rumblings of falling ratings against the insurance giant. AIG was down over $1 (around 5.5%) to under $19.

The debate over Financial sector strength has swung negative lately with the rumors of Lehman Brothers (LEH) potentially needing a bailout, or impending partial sale abroad. Coupled with the daily Freddie Mac (FRE)and Fannie Mae (FNM) exploits it makes for a Financial situation in the US as turbulent as any in recent memory. Although both Mac and Mae were up substantially in this session, the bottom dwelling trades have to be timed and even with slight rallies, the only real course of action for both appears to be a government-led bailout effort.

When that kind of talk is on the table not even a 3% jump in Existing Home Sales can rally this market on this day.

20 August, 2008

Hewlett-Packard's Strong Quarterly Showing

Not to be outdone by the 8 Golds won in Beijing by Michael Phelps, or Jamaica's Usain Bolt's 100-200m World Record double, Hewlett-Packard (HPQ) showed its quickness in dealing with eroding economic conditions and the apparent stagnation in technology spending. The company reported a quarter besting analyst expectations in all key metrics, sending shares higher.

The computer company reported earnings of $2.03Billion ($0.80/share and $0.86/share excluding certain costs), which compared favourably to the $0.84/share expected by analysts. On the revenue side, the street wanted $27.4Billion, but got $28Billion, another plus for HPQ. These positive kept coming for Investors in the form of guidance where HPQ was once again ahead of the curve, hitting analyst expectations for revenue and guiding profit a couple cents higher than previously anticipated.

One of the biggest growth areas, Notebooks, rose 26% for HP, keyed by demand in Europe and Asia, as the computer maker battles for the market share top dog prize with Dell (DELL). This was a big driver for the company this quarter in allowing it to post year over year profit and sales increases of 14 and 10% respectively. Now, Hewlett-Packard is a giant global company, and the attractiveness of foreign business in foreign currency has boosted the bottom line to be sure, but I for one like where management is going and what is being said. Even though a rising US Dollar may prove less favourable for foreign business results in the coming quarters HPQ is positioned in a growth area, with popular products.

While its dividend is nothing to write home about, it does pay one, and HP has I feel, significant growth in front of it, and that's where the money will be made on this investment. Even as the stock climbs several percentage points on the results, it is down about 15% from its highs of the past year, which means it'll have work to do through this quarter and next to rally back near those mid $50s ranges. But I feel much more comfortable hearing a CEO like Mark Hurd, coming out saying "We have a significant opportunity" rather than an executive group that complains about the economy or the tight wallet of today's consumer.

Disclosure: Author holds no position in the above mentioned companies.

18 August, 2008

Home Improvement Retailer Earnings, Lowe's beats

Binford Tools is proud to present, quarterly earnings for America's Home Improvement retailers, starting with Lowe's (LOW). If whispers on Wall Street carry their typical pre-numbers influence, market's were looking for a confirmation that Tim Taylor's been telling his Cable TV audience Lowe's is in a better position than its bigger rival Home Depot (HD).

Many are expecting Home Depot to post another declining quarter, but for Lowe's results were mixed, skewed positive. While Profit dipped 8% to $0.64/share it was still better than analyst expectations of $0.56/share. Top Line revenue actually grew this quarter by 2.4%. An anomaly maybe, during an economic slowdown, due to the stimulus package approved by the Federal Government, but nonetheless an increase. And when considering Home Depot customers received the same stimulus, yet the street expects declines, it paints a slightly better picture for Lowe's. Granted neither company's outlook portrait will resemble the Mona Lisa anytime soon.

Lowe's had some positive to say in fact, as it increased the range of it's full year profit forecast from between $1.45-$1.55 per share to a range of $1.48-$1.56 per share. The vital thing here was raising the bottom for analysts allowing them to price Lowe's at a slightly higher multiple.

Coming from the lows, a terrible form of humour I know, Lowe's has rallied into these quarterly results. Up 23% over the last month, which is stretching both trailing P/E and forward P/E ratios away from those of HD.

While the economy is on the hearts and minds of traders, the feeling around the Home Improvement retailers is more of a wait and see approach, treating the government stimulus package as temporary relief. There isn't a growth or turn-around possibility here just yet. While Lowe's stores open more than a year had smaller sales declines than some expected, the fact remains that it's a tough investment pitch until Americans get back to comfort levels where they can renovate their homes, and with Lowe's being centralized in the US and Canada, that may be 6-12 months away yet. So until '09, I don't think so Tim.

Disclosure: Author holds no position in any of the above mentioned companies

13 August, 2008

Genentech rejects Roche Buyout, Shares keep climbing

The Pharmaceutical Industry is one that's complex and often difficult for Investors to understand. What with drugs, pipelines, trials, approvals, the FDA, and all the potential dangers, it is a business model built on spending massive amounts of money and taking even greater risks trying to develop medicine.

Drug development is one of the longest and most turbulent processes in capitalism and one doesn't have to look past a few pages in the paper, or a few web news articles these days, to see the problems and successes of drug makers first hand. The science behind medicine is fascinating but what makes this high stakes game of trial and error so lucrative is the fact that it is at its core, incredibly difficult.

So when the Amgen's (AMGN) or the Biogen's (BIIB) or the Genentech's (DNA) have something promising coming down the drug pipeline, doctors, patients and Investors take notice!

Genentech has one such success with Avastin, an FDA approved therapy that is designed to inhibit cancerous tumor growth by blocking the travel of nutrients through blood vessels to the tumor. Avastin is a big seller for Genentech and by accounts it will continue to be a blockbuster for the company. Sales of Avastin are already up to $1.3Billion in 2008, a sizable chunk of the $5.9Billion the company has done in total sales so far this year.

Roche Holdings (RHHBY) offer for Genentech of $89/share was eclipsed briskly in July by traders hoping Genentech would hold out for more. Shares were in the low 90s then and have continued climbing to stand at about $99/share today, the day Genentech officially rejected the buyout. Roche, based in Switzerland, already owns a majority stake in DNA (about 56%) but wants to own it outright, and for this it will have to put up plenty of cash.

The original offer of $43.7Billion for the remaining 44% of Genentech was sternly rejected as being too low, and Roche, it seems, would now have to pay north of triple digits per share to appease shareholders and management. At its current market cap, 44% of DNA works out to $45.7Billion.

To close the deal, I think Roche has to up their bid by as much as 10% from current levels, and that would give Genentech shareholders a lucrative reason to hold on to their shares. But this Investment, much like the Industry the companies find themselves in, is ever-changing and high-risk. For holders of DNA, the bottom's been set and rejected at $89/share, which should let you sleep a little easier, so continue to hold. Buyers beware as "buy high, sell higher" should work with this trade, but even so, the returns wont break open any portfolio.

Disclosure: Author holds no position in any of the mentioned companies

11 August, 2008

Oil continues slide, Markets up Monday

The Bulls on Wall Street pulled ahead once again as the slide in Oil Prices continue due to weakening demand. It is becoming clearer week after week that the Auto Makers, especially in the US, are in serious trouble; leased vehicles can not be resold, Trucks are sitting in lots, and drivers just aren't driving much.

The slowdown in Auto Sales, coupled with American's resistance to drive during times of high gasoline prices have lowered US oil demand to a point where Oil Trade speculators are feeling their bid up prices fall quickly and feverishly. Oil dropped into the $113s today pushing stocks up through the middle of the trading day. Not even the conflict between Russia and Georgia is stopping Oil's slide. The Russian invasion is likely not a threat to turn around Oil Prices in the short term as the pipeline, which funnels oil through Europe and Asia is too lucrative to become a target as this conflict grows militant and becomes a traditional war.

Hence, the 3 main US market trackers have trended higher since the open with the Dow standing at +96 points, the Nasdaq at +41 points, and the S&P at +15 points.

05 August, 2008

American Markets Rally on Oil Price Drop

Fears of a late storm season abated earlier this week and that, coupled with statements by the Federal Reserve, sent Oil Prices responding in kind; dropping to 3 month lows under $120/barrel. Markets jumped significantly on Oil's retreat, and the confirmation that Interest Rates will for the time being stay where they are.

For the Fed, inflationary risks are weighing heavily, and pricing pressure is "significant". The reaction for now is to wait and see, by holding rates, as the economy is expected to stay weak in the United States for several additional months.

The Dow Jones jumped 330 points (a gain of 3%), while the Nasdaq rose 64 points (a gain of 2.8%).