Friday, November 30, 2007

Another overdone resource play?

Charles Dickens, in his A Tale of Two Cities, didn’t know he was describing the stock market when he wrote: “it was the best of times, it was the worst of times.” But he was prescient in his unknown description of investor behavior. We are operating in a market that has no memory! We have returned to a goldilocks economy aided by upcoming Fed rate cuts. Soon we’ll change our minds and concentrate on why the Fed is cutting rates and credit issues.

I mused a couple of days ago that Deere, while an excellent company, looked like it may have gotten way ahead of itself in the latest batch of euphoria. Deere splits its stock on December 3rd and in our present elated state, the stock may run upward in a 1990’s type behavior even though the split doesn’t change any economic value. Besides I found a better candidate to cheer against.

AGCO has run faster than Deere in the last three months. While De is up 30% and CNH Global [Case] is up 25%, AG has climbed 60% in three months and all three were behaving alike on prior charts. It will probably move with DE upward when DE splits. Over the next 6 months I think it is vulnerable.

AG, while not as solid as Deere, is a good company. But selling to farmers hasn’t been terribly steady or lucrative in past history. The good times have been few. Has ethanol in the US and Brazil and a growing middle class worldwide changed agriculture for good? I don’t think so. Would you pay 21X forward earnings, DE trades at 14X, and 14X cashflow for a farm machinery manufacturer? Evidently momentum investors will chase AG as long as it is moving upward. Other ag manufacturers like Valmont haven’t surged in the past three month. At some point AG will come back toward the other stocks.

My thought process is the same as with MLM. A good company in a solid industry that has moved further than it should have. MLM hit $170 and visited $118 within 3 months. It ought to be valued around $100 and it will get there before long. I exited at $120 and the Dickens Christmas gift has pushed it up to near $130, so I’ll start that process over again. AGCO is a very similar situation. The company isn’t going broke, it is just going to go down . I can’t ever pick when and the carrying costs can become expensive, but agricultural earnings won’t grow at 20% forever and forecasts won’t always be rosy. When the momentum buyers become dissatisfied they leave in a hurry and hopefully I will have made a few dollars to make up for poker, golf, a new remote control boat cover/lift.

Wednesday, November 28, 2007

Blast off, then Back off

When I last wrote, November 21st, my last paragraph forecasted a rally possibly led by large foreign M & A activity before mid December. The Dubai investments in Citicorp and Sony has provided new hope to stock investors and we’re off to the races. I haven’t followed the Sony deal other than hearing that it is a minority stake, as is Citi’s. The Citi deal is being cheered and the common has rallied even though the Dubai deal is a preferred that pays 11%. If Citi craters in the next two years they have a preferential position and are being paid 11% in the interim. Our Arab brothers aren’t stupid. Given the terms, Citi was either in extremely bad shape or their managers were stupid.

Look upon this rally as an opportunity to re-balance your assets. The economy is getting worse, internationally as well, and credit markets haven’t reflected all the sins of the last 5 years. As I wrote in my missive about derivatives, they are terribly complex and the impact hasn’t been felt yet as we haven’t had counterparty defaults and the havoc that will ensue.

The follow through on this burst of enthusiasm may be strong and last for several weeks. The larger the move the more I will like it. But any move upward can’t be sustained. The economies of the world need a pause and they will take one. It may not last long with central banks pouring money into the fray, but the markets will anticipate, or follow, the economies downward and I intend to increase my negative bets.

Besides betting against bank ETFs and the construction materials, Deere, an admittedly good company, as is Martin Marietta Materials, is worthy of a close look over the next several days. It closed at an all time high today and now sells at a very high multiple of cashflow and other benchmarks. Can ethanol keep this rocket going? I’m starting to wonder as I remember the mid-to-late 1980s and the decline that Deere endured. I need to look closer, but I’m intrigued.
Crusty is generally a “long investor”, but as any reader can discern, I’ve become much more cynical and grown comfortable on the “dark side.”

By the way, crusty has lost at both poker and golf in the last two days so read my meanderings at your own peril.

Wednesday, November 21, 2007

Small caps are having a tough time

Sentiment seems to have changed from the seesaw pattern of the last 90 days to almost complete pessimism. The Russell is down over 6% YTD and short selling seems to be accelerating. Investors are selling their small caps and moving into large cap multi-nationals [ Pepsi, P & G, J & J, etc. ]. Until we get another sentiment shift, the smaller companies are not the place to be. If you want to see the short selling acceleration, go to the NASDAQ site and find the monthly short positions on any small cap you own. There won’t be many that haven’t been heavily sold.

As I’ve mentioned before, I have moved a significant amount of my capital to shorter term bonds and puts, with the remainder in large multi-nationals with the exception of the US Concrete, which started as a hedge, and Jones Lang LaSalle. Luckily for me the market sunk fast before I could accumulate much JLL. I’m currently waiting for a lower entry point, but still like the company.

The short interest in RMIX has actually decreased quite a bit! That along with the recent CFO stock purchase may indicate that this company’s price slide is near an end.

I’m staying with both of these small companies.

I’ve thought that we’d get an early December rally before the tax selling begins mid month. What could be the catalyst amidst all of the current pessimism? My guess is announcements of a couple of M & A deals of American companies and dollar flush foreign acquirers. That is apt to be followed by tough talk by Secretary Paulsen on a stronger dollar. Both activities could foster a large rally before recession thoughts re-emerge. So, I think the market will give investors another chance to reduce positions at higher prices, or short or buy puts for the New Year.

Wednesday, November 14, 2007

RMIX CFO buys 15,000 shares

I got interested in betting against MLM when I noticed the CEO selling shares. He not only sold, but exercised relatively new options that still had several years till expiration. It’s very rare to see someone sell before an option expires as the hope is always that the company will have several more years of quality earnings and increases in share price. Plus the investment continues to compound tax free. In the MLM CEO case he accelerated the payment of tax by exercising and selling. The only conclusion I could draw was that he thought the stock price had gotten way ahead of itself and there was no need to wait for expiration and run the risk of the share price decreasing with a slowing economy.

The opposite happened yesterday. The CFO of US Concrete bought 15,000 shares using his own money. The size of the buy was significant and no one should know the company’s financial situation better than the numbers guy. When CPAs buy, pay attention.

In week or so since I bought some shares as a quasi-hedge on my MLM puts, RMIX is down about 20% to $4!! Luckily for me MLM also fell and I closed them out at the $120 level for a 70% gain since they were put on in April. The RMIX losses reduced that gain, but the combined plan worked fine. I still think the trend is down for MLM based upon valuation and I’ll buy puts again soon.

I didn’t close out my RMIX position when I closed the MLM puts so I’m now long US Concrete and will add to that position after the recent decline and the CFO’s confidence.

Friday, November 9, 2007

Commercial Real Estate’s Best Operator

I sold this company several months ago at it’s peak, around $125, not because I was worried about its performance or high valuation, but just to raise cash and reduce my equities position. Since that time I’ve watched it trend down to the $85 range even as it reported record earnings and doubled it’s semi-annual dividend. The worry is evidently its involvement in real estate. Specifically, that commercial real estate will be the next shoe to fall in the credit crisis.
Commercial could be next. Values have risen and buildings were subject to some of the same shoddy lending and securitization as home mortgages. Big commercial and investment banks have been active in this segment of the CDO market and there isn’t much reason to expect that they maintained discipline here when they sure couldn’t on the consumer side.
So, while JLL operates in this marketplace, it doesn’t lend, securitize, insure, or own real estate for it’s own account. It operates as a service company for owners of, and investors in, commercial real estate. It helps in the sale, acquisition, management, and investment in commercial properties worldwide. It’s business is nicely spread between those segments and also nicely represented in all areas of the globe. It’s foreign earnings benefit from the stronger foreign currencies and increase eps. Like an investment bank, JLL is a people talent business. It’s main assets ride up and down on the elevator daily and are the true value of the company.
JLL earns a superior ROE, has virtually no leverage, and sells for a modest multiple of cashflow for a growth company. If commercial craters next, many companies will come to JLL to find a solution for their problem.
It’s share price may continue downward if the market swoons. But if the market stages a late year rally, it will rise quickly and significantly. I’ve gotten back in this name as I think that even in down markets there will be winners and i believe JLL is likely to be one.

Tuesday, November 6, 2007

The Media never gets it

I’ve been on the road for the past four days heading to Mount Dora. Along our route, we take a different route to and from Omaha each Fall and Spring, we visited several wonderful small, historic communities. Hermann and Ste. Genevieve in Missouri were great river towns with structures dating from the 1830s.We found Mobile, Alabama to have a downtown that was a vibrant, smaller version of Savannah. Apalachicola and Cedar key in Florida were once the biggest ports in the state and Civil War era economic powers. Both are now reborn with artists and interesting restaurants.
Each evening I’d catch some news and start giggling to myself as the current news was usually the opposite of the prior day’s concern. One day we were going to hell in a handbasket because Citicorp was rumored to need a larger loan write-off, the next was filled with euphoria as the employment report showed more jobs were created than had been expected. Recession one day, continued global expansion the next. A rate cut is good for stocks one day and indicative of a slowing economy the next. What is one to believe? The talking heads and cub reporters won’t help you understand because they don’t understand.
Crusty says we’re going to have a recession and a fairly severe one.The seeds have already been sown and the Fed’s rate cuts aren’t going to be the panacea, by the way we also drove through Panacea, FL on the way down. Cheap money in the U.S. and around the world encouraged easy credit and speculative behavior. Credit fueled the economy. But it wasn’t productive credit and it’s asset pricing was based upon the greater fool theory.
The air needs to come out of this credit induced asset bubble and it is in process now. Everyone has read of the subprime mortgage debacle. But easy credit didn’t stop with mortgages for the uncreditworthy, it flowed to home equity lines on over-inflated homes, condo developers whose market was mostly flippers, credit card companies that have continued to finance consumers now that they can’t refinance their homes, land developers and home builders, private equity to take companies private at ridiculous valuations, and finally the funding of the huge leverage of the hedge funds that has been used to create another bubble in commodities. The commodities run up began as an emerging markets growth story, but it evolved into a place to park cheap money.
How can an economy not suffer when it’s banks are no longer interested in lending, it’s consumers feel poorer as the value of their real estate decreases and real inflation makes day-to-day living more difficult? Gasoline will soon follow oil up and the transition to $4 gas won’t be as “easy” as our acceptance of the move to $3. The prospect of the Democrats winning in November and raising taxes will encourage selling of stocks as investors capture today’s lower capital gains taxes.
The economy’s direction is down, but that doesn’t mean that stocks will immediately decline. It is likely that there is another move upward before yearend. After the new year starts I think the direction is down and for quite awhile.If you are young I wouldn’t do anything as 2-3 years from now the market will have recovered. If you’re crusty like me, take some money off the table. You maybe save yourself some heartburn if the rest of your portfolio declines and you will save yourself some tax by selling at the pre-Hillary capital gains level.
Crusty has moved about half of his portfolio out of equities and into short term treasuries and short-like positions. The remainder is in large cap, multinationals and international stocks. As the yearend nears, and I worry less about an irrational rally, I may increase my bets against the market.
Conservative stock pickers like to say that they wait for a “fat pitch”, well, I think the economy is setting up to be a fat pitch on the downside.
Time to meet my daughter and granddog for dinner.
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