29 May, 2009

GM is finished as Bankruptcy nears, shares slide below $1

Shares of General Motors (GM) are off about 20% today as all signs are pointing to the inevitable bankruptcy filing on Monday June 1st. The struggles in Detroit continue to drag down domestic Automakers but GM's well-publicized cash flow problems and stand-offs with the Federal Government have led to its demise.

Unlike Motor City brethren Ford (F), GM was unable to reign in enough the costs that had been spiraling out of control as deals with the UAW and CAW only go so far. The cost-cutting pacts with the Canadian union and the ownership agreements with the US Union could not in the end support the business model without an infusion of outside help that wasn't in sight. Italian car maker Fiat is still interested in GM's European operations to the tune of a merger with the Opel brand, but without a leg to stand on, General Motors as this generation has come to know it, no longer exists.

The electric Volt will not save the company now, far too little and far too late, all that will happen now is a sell-off of assets to anyone willing to buy. Perhaps GM can pick up the pieces and re-emerge as a brand in-tune with a new generation of motorist, but as a company and especially as a stock in today's market it is.

Turmoil at GM can only mean good things for competitors, with the company distracted by the slashing of assets, the brokerage of deals & spin-offs and the necessity of brazen survival for workers up and down the corporate chain, the only winners will be other car-makers.

Names like Ford, Toyota (TM) and Honda (HMC) should emerge with a stronger competitive advantage while luxury European brands continue to fight for the affluent customer throughout North America. Auto Stocks are all marginally higher today signaling that although one of the Titans of the industry has fallen, the car business will not go away and the remaining horses in the race will not slow down to pick each other up. What sometimes seems like a 0-60 sprint in the car business actually is and I expect the other big automotive companies to not pull any punches when it comes to advertising their strengths, and as is always prudent advice when it comes to investments: Stick with the strong.

Disclosure: Author owns TM

26 May, 2009

Consumer Confidence outweighs Housing Prices as Markets Rally

US Markets found themselves on the buy side up between 2 and 3% at the last hour of trading as stronger consumer confidence data triggered a surge of bids in morning trade. The Consumer Board's confidence index rose to 54.9 in May from a 40.8 reading in April and this jump was enough to get investors to shrug off another rather negative housing data point.

An S&P Index of Housing prices reported a decline of 19%, details at CNBC (Link), which was the steepest drop in the reading's history. Foreclosures, economic woes, and increasing supply dampen prices all are contributing factors to the decline, however, as these prices bottom, investors clearly see a bottom forming with the terms "housing affordability" and the like being tossed around.

The increase in consumer confidence was a heavily watched metric that started the market's rally in the early hour. The forecast for confidence was pegged at around 42 and May's reported 54.9 mark handily trumped that, leading to a flurry of buying activity.

As for other market news, Technology was a main driver, primarily led by an upgrade of Apple (AAPL) shares. One of Apple's skeptical analysts, Katy Huberty has finally changed tunes, with an upgrade and a substantial price target raise from $105 to $180. The Morgan Stanley analyst has had an appalling record of late predicting Apple's quarterly results, at one point being rated the "worst" in terms of estimate accuracy in research amongst 8 top Apple analysts, which is why her bearish tone had attracted far more skepticism than that of RBC Capital Market's analyst Mike Abramsky (He too however recently changed his tone as fears of Steve Jobs' sabbatical lasting indefinitely have subsided for the time being).

The reason for the change of heart, that ever popular iPhone, which by all rumour accounts is due for an upgrade during the WWDC event the company will host in early June. While speculation runs rampent about just what features will be included in new iPhones the sheer numbers just dont lie. Over 30Million iPhone/iPod Touch buyers downloading 1Billion applications creating a massive, and massively sticky, software distribution and upgrade cycle.

Apple shares have double the Nasdaq advance rising over 6% in late trading.

Disclosure: Author is long AAPL

25 May, 2009

Memorial Day

Canadian market action could only do so much as Americans take the long weekend on Monday in honour of those lost in military service. During these times when North American troops are engaged in war on two fronts it is imperative to remember just what it means when life is taken away in the service of one's country.

19 May, 2009

Tool Time with Lowe's & Home Depot

The markets had a strong start to the week, led mainly by Bank stocks and the Tech sector. However, the two biggest names in Home Improvement were also on tap to deliver results. Lowe's (LOW) delivered Monday with bigger brother & competitor Home Depot (HD) coming in on Tuesday.

During Monday's bullish day, Lowe's was able to capitalize on results that beat expectations and climb 7% utilizing its first-reporter advantage. Now although profits fell 22% year over year, expectations were for a more severe drop. Income came in at $476Million vs $607Million in the year ago quarter ($0.32/share), while on the top line, Revenue was $11.83Billion vs $12.01Billion, a drop of 2%.

Compared to expectations of $11.63Billion in Revenue and $0.25/share in Income, it would appear that Lowe's is holding onto business at a better than expected clip. However, talk from traders, and what was wildly reported by the Investment media was that the expectation beating results were driven primarily by cost-cutting, as top line Revenue numbers were rather muted.

Lowe's did its best to try and appease Investors by guiding higher for next quarter with a range of profits from $0.51 to $0.55 per share, compared to Wall Street's numbers of $0.50 per share in earnings. Lowe's continues to pay its quarterly dividend, with a yield standing at about 1.7%.

Housing data coming out Tuesday morning along with results from Home Depot were worrisome to Investors at the start of trading. Housing starts, which is a big part of the Home Depot and Lowe's business models fell 13% to a record low in April, according to the latest figures. These headlines took much steam of out of a pretty good Home Depot report which largely mirrored Lowe's from the day before. Once investors digested the news, there was a few points that could act as silver linings for bullish traders. First off, the number was actually better than the forecast by economists (485000 vs 525000 expected), and second, a majority of the drop off was due to condos and related living fixtures. An area of the Home Improvement sector generally not suited to the repeat home renovation business that both Lowe's and Home Depot rely heavily on. Case in point, the number of new pure housing starts actually rose by nearly 3% in April, which provided some good news in this sector, hence the rebound in Lowe's stock to near break even territory.

The Home Depot stock story today, is unfortunately not as rosy, as many buyers of the stock yesterday retreated today, selling on the expected earnings news. Nearly a 10% drop in Revenue to $16.2Billion was met with mixed reaction even though profits were above expectations, mainly due to cost cutting. Ex-items Home Depot earned $0.35/share versus analyst expectations of $0.29/share, which had been baked into the stock already given Lowe's nearly identical performance just a day ago. Home Depot lost around 4% this morning and hasn't seen the same uptick as its smaller competitor after the housing report had been looked over. Home Depot has the added benefit of a dividend yield, twice the size of Lowe's for those keeping score.

These stocks will largely trade in tandem, as the economy recovers as both are similarly priced to earnings and both have the cushion of a dividend yield for the more conservative Investor. With foreclosures still likely to rise in the near future and the unemployment number still showing no signs of turning back around for now the time to invest in these names will still present itself later in the year. You can only go so far on cost cutting alone, and Wall Street will only celebrate this type of approach for a few quarters before some real questions have to be answered on the conference calls. For now both should be a Hold, but as economic indicators improve and the work force stabilizes and begins to grow again, there will be a surge of pent-up Home Improvement demand going into 2010. There will still be time to own these names, but for a longer term play LEAPS should be in the investment cards for some potential high-powered Tim Taylor style returns.

Disclosure: Author holds no position in HD, LOW

12 May, 2009

A Look at Energy with Oil racing back to $60

Oil, like many investment vehicles had been battered along the hard road from peaks in 2007 nearing $150. The fall in fact, had been so dramatic that prices for the commodity were down to $34 a barrel in February of this year. Set against the backdrop of American economic problems and the ongoing 'Carpocalypse' the slide in oil is completely understood.

However, of late, things are changing, and with a resurgence of market participation in the last 2 months, oil has enjoyed a steady climb and has now almost doubled off its lows. The traditional American big oil names have held steady as Exxon Mobil (XOM) is down 5% in the last 3 months, and up 1% in the last month, while competitor Chevron (CVX) has been virtually flat for 3 months. Nothing to light the socks off in any portfolio. These big names, which have enjoyed such outlandish record profits in recent years are being propped by their cash and their dividend payments, but none of that spells growth during a bullish run on the markets in this still economic-headline driven marketplace.

What has been making noise have been the smaller players. In the oil and energy business, small is of course relative. ConocoPhillips (COP), which reported recently an 80% year over year drop in profit has risen 12% in the last month, including a 4% pop on earnings day and its S&P rating of Strong Buy. Not to be outdone, Haliburton (HAL) has rallied strongly with a 34% gain in the same single month time frame.

In Canadian markets the big story of late was the deal stuck by Suncor (TSE:SU) to purchase Petro Canada (TSE:PCA) in a stock deal worth approximately $15Billion. On the news of the deal, Suncor stock fell but has since rallied back to the $35 level, which is about 6% higher than pre-deal prices. Petro-Canada, being the takeover target has consistently rallied from $30 to its current levels of $45/share. Who says M&A activity is dead?

Shifting to the drillers and the market has seen a similar story. Bigger Transocean (RIG), being outgained by smaller Nabors Industries (NBR). Despite estimate-topping earnings and a buy recommendation from Citigroup, RIG has performed only admirably when compared to gains from its smaller counterpart. Rig is higher by 22% and 10% in the 3-month and 1-month periods, while Nabors has shown gains of 59% and 40% in those same periods.

While the smaller players may have risen faster with the market ramp-up, Investors shouldn't let themselves get carried away, and take some energy-related profits when they present themselves. Headlines are already starting to change from a tone of "Go Bullish Rally" to "Is It a Suckers Rally" and it may just be that over the next couple of months the staple behemoths of the Energy industry will make the safest investments.

Disclosure: Author owns NBR, SU, recently sold PCA

07 May, 2009

For Bank Of America, $34Billion, what $34Billion?

Bank Of America (BAC) has been surging the last few days, up 56% the last 5 days, despite leaked information from the Federal Government Stress Test results. Even though the leaked details of BAC's capital needs seem ludicrously high, the number could have been a lot worse. Analysts have been on BAC's high horse, upgrading the stock, despite the need for $34Billion in capital! And here's why.

Despite the fact that $34Billion seems high, you've got to remember this is Wall Street thinking. The same Wall Street thinking that applauded a government move to secure defaults on over $300Billion in debt of Citigroup (C). Both banks have been surging lately as Investors jump back into an industry that was decimated by the credit crunch losses and prolonged recession.

For Bank Of America, and several other banks requiring more capital, the easiest thing to do would be to convert preferred shares into common equity. In BAC's case, doing so would add approximately $28Billion in capital, according to an analyst from Morgan Stanley. The comprehensive analyst report from Morgan's Betsy Graseck details other potential asset sales that would raise the remainder of the required capital. All in all, a situation for BAC, that looks much brighter compared to several weeks ago. It was very recently that Goldman Sachs (GS) made a splash by raising $5Billion in a stock offering, in order to use the money to repay the government's TARP funds.

Ken Lewis having his role of Chairman and CEO separated has given shareholders a new life, and recent gains certainly helped cement realistic rebound expectations. All this, despite the the financial sector still on what can be described as slightly thicker ice.

What Investors are still most weary of is government control of the financial sector, and despite the new Administrations repeated denials of Nationalization the potential of having the US government as the largest shareholder of several major banks will do nothing to quell the argument.

For now though, When the Stress Test results are made public investors will await word of what exactly Bank Of America will do to raise capital. Till then, what $34Billion?

Disclosure: Author owns C, GS

04 May, 2009

Stock Climb continues, S&P above 900

Despite what should have been a corporate backlash against recently announced plans by President Obama to curb corporate Tax Havens and loopholes, markets brushed off worries with a shrug and kept pushing higher. This sent the Dow to the green by 200 points, while the S&P however was the big winner of the day, climbing higher by 3.3% to finish at 907.

The changing tax rules, which are estimated to bring in $210Billion in additional tax revenue over a decade, are in part a response to the growing easiness by which corporations shelter income with offshore holdings offices in countries with low to nil tax rates. By having these subsidiaries, overwhelmingly popular with Financial Institutions, which ironically are the same ones who have taken most of the $700Billion in TARP bailout money, companies can avoid paying taxes by shifting money around and through other countries. Considering a report from January pegged 83 out of the 100 biggest corporations having overseas "offices" in tax havens, the amount of money in lost tax revenue adds up.

The 2nd part of this change is driven by economics, as incentives are re-created in order to spark employment and investment in the domestic United States. Previous policies and tax incentives had been adopted to spark International Investment, however, the current unemployment situation in the US has made keeping Americans employed a top priority for the new Administration.

In other news, despite the tie up with Italian car maker Fiat, amongst other restructuring plans, Chrysler still anticipates losing nearly $5Billion in 2009, with a minute return to profitability by 2012.

Financials continued to rally again today, despite Fed Stress Test results that are likely to indicate several banks that need additional capital. Amongst those, it is being reported that Bank Of America (BAC) is looking to raise $10Billion in fresh equity capital. The stock today was up almost 20% compared to the Financial sector's gain of nearly 6%.

The summer movie season is getting started, and that means it is the time for the popcorn blockbuster. First up is a continuation of the X-Men franchise from 20th Century Fox, a studio owned by News Corp (NWS). The X-Men comics were created by Marvel Entertainment (MVL), and the first 3 films in the franchise has grossed over $600Million in domestic box office. X-Men Origins: Wolverine tells the origin story of the most famous mutant of the group and despite the sting of a piracy leak, which put an unfinished version of the film on the Internet a whole month before release, the film managed excellent $87Million domestic and $160Million Worldwide box office tallies. The popularity of the character is surely showing among movie fans and this will likely mean a continuation of other Marvel properties that Fox has the license too. Marvel itself also stands to benefit as its license fees are typically tied to box office receipts and up front payments.

So with the March and April rallies continuing to mount, is it time to take some profits? Since March lows, the S&P is up 220 points, or 32%, and with an economic situation just barely showing some glimpses a case can be made that the markets have gotten ahead of themselves. Taking some off the table would be a prudent thing to do for Investors, however any leg down or significant down day is an opportunity as valuations are still attractive and the S&P is just broken even for the year.

Disclosure: Author owns MVL, holds puts in BAC