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Gov\’t & Utilities Archive

Guest Post: “Long case for Fifth Third Bancorp” by Ryan Yamada

**Note from Jeffrey: Not seeing much in this market you can hold for more than a couple hours, so haven’t written about any opportunities for investments or longer term trades. Here’s one from my college buddy Ryan Yamada. Ryan’s got a great blog, Sunburnt Sky, on Politics and Macroeconomics. Take a gander. **

LONG CASE FOR FIFTH THIRD BANCORP (FITB) by Ryan Yamada

Note: This is not a rigorous analysis on either the fundamental or technical side. It’s simply an observation based on the price action of other sizable regional banks following events similar to those experienced by Fifth Third Bancorp.

Introduction:

Fifth Third Bancorp (NASDAQ:FITB) this last week is a regional bank headquartered in Cincinnati, OH, with about $67.3 bn in assets, and $41.1 bn in deposits, according to the FDIC as of Oct 28, 2008 (Thursday). I compared the figures with the June 30, 2008 report from FDIC and they are comparable: assets: $67.3 bn; liabilities: 61.8 bn; deposits: $41.6 bn; equity capital: $5.43 bn. Stock prices, incidentally, are also comparable (June 30: $10.18; Oct 28: $10.72) for the two dates.

The last few weeks have been nuts for the entire market. But in particular, regional banks are seeing a lot of volatility, and increasingly, sharp increases in share price.

SunTrust: assets: 171.5 bn, liabilities: 152.2 bn, deposits: 120.9bn, equity: 19.3 bn

PNC: assets: 128.3 bn; liabilities: 116.3 bn; Equity capital: 12.1 bn

Price increases are event driven:

Here are a few events that dramatically changed the outlook for FITB:

Aug 1: First Priority Bank is closed by the FDIC – SunTrust receives $254m in deposits (at zero premium) and purchases an additional $36m in cash-equivalent assets (total of $290m).

Sep 30: IRS rules that acquirers of weak banks can apply “losses on loans and bad debts” without limits.

Oct 24: PNC Financial Services Group Inc. announces acquisition of National City Corporation for $5.6 bn, increasing its deposit base by $90 bn and potentially earning offsets on $5.1 bn in taxes from loan losses associated with National City.

Oct 26: FITB announces that it has applied for capital from the Treasury’s Capital Purchase Program (CPP).

Oct 27, 2:28pm, Reuters: Fitch announces a downgrade of Issuer Default Ratings on municipal bonds to A from A+; Fitch had downgraded the IDRs of FITB to A+ and F1 in June 18, but these downgrades were erroneously not passed through to the ratings of muni bonds supported by FITB. In other words, some of them were downgraded from AA- to A. (http://www.reuters.com/article/bondsNews/idUSWNA768820081027)

Oct 28, 12:20 pm: FITB to accept $3.45 bn as part of the Treasury’s CPP. Treasury receives senior preferred securities with 5% dividend for first 5 years and 9% thereafter. Shares are callable at par after three years. 10-year warrants on common stock on 15 percent of the preferred stock investment ).

Oct 29., 2:17 pm: Ladenburg Thalmann analyst Richard Bove cuts outlook on concerns about poor lending habits.

2008 estimate: 16 cents/sh (from 53 cents/sh)

2009 estimate: 94 cents/sh (from $1.30/sh)

Oct 31, 6:21 pm: FITB to accept $227m in deposits and $36 in assets from the FDIC, receiver for Freedom Bank. The additional deposits from Freedom Bank give them about a 59% larger deposit base in the Bradenton-Sarasota-Venice Metropolitan Statistical Area.

Important dates coming up:

Nov 4: Presidential election

Nov. 14: Companies must notify Treasury by 5 p.m. EST if they want to apply for the Capital Purchase Program.

Let’s look at the following events and see what similar events for other banks did for their share prices:

1. Capital Purchase Program funds
2. Acquiring deposits from FDIC-seized banks
3. Acquisition of weaker rivals with sizable deposit banks and losses that can be credited to acquirer’s future capital gains.

1. Capital Purchase Program Funds

FITB announced on the 28th that it would receive $3.45 bn in funds from the US Treasury’s Capital Purchase Program (CPP). Under CPP, the Treasury receives senior preferred securities with 5% dividend for first 5 years and 9% thereafter. Shares are callable at par after three years. Furthermore, the Treasury receives 10-year warrants on common stock on 15 percent of the preferred stock investment .

The new funds give FITB options above and beyond their relatively bleak choices prior to the announcement.

According to CNN, Fifth Third had announced in June a capital plan that included raising its capital ratio targets, including a Tier 1 ratio of 8-9 percent. The recent Fed infusion would push Tier 1 to 11.5 percent. FITB’s Chairman/President/CEO Kevin Kabat also indicated that they may postpone plans floated in June to sell “non-core assets”. In other words, the Treasury funds will help them avoid trying to unload assets at fire sale prices.

There was an immediate impact on share prices. FITB was off session lows of $8.15 and was trading at 8.50 when news broke – the stock price jumped 13.5% to $9.65, and then followed the broader market’s large gains to close at $10.76, up 26.5% from levels prior to the news. Tuesday’s price rise translated into a 1.3 billion increase in shareholder equity. The government warrants are callable in 10 years, so their immediate impact is non-dilutive. The preferred shares, while receiving a dividend, are non-convertible, unlike FITB’s June issue of $1.1 bn in convertible preferred stock.

The dividend due to the government on the infusion is about $172.5 m per year. To pay off just this dividend, FITB can either make loans of $2.88 bn ~6%. Subtracting required reserves of $288 m, this leaves $3.16 billion for acquisitions and loan loss reserves. Alternatively, FITB may try to acquire weaker competitors at discounted prices, in the model of PNC’s takeover of National City Corporation at a discount.

Note that this infusion represents a 65% gain on FITB’s asset base, compared with a 28.9% gain on PNC’s asset base. Consequently, I would expect an overall move from 1-2.25 times the size of the move from PNC’s gains.

As a rough estimate, let’s take the $3.16 bn, and subtract the amount by which stock equity has already increased ($1.3 bn). This leaves $1.86 bn. Even if 50% of that goes to loan loss reserves (and is used for that purpose), that still leaves $930 million. And, assuming that FITB finds no better use for it than to sit in a digital safe somewhere, that still represents an increase of 14.8% in net equity (based on Friday’s closing market cap of $6.27 bn). So, very conservatively, I can estimate an additional appreciation of +15%

(Summary: +15-66% because of additional equity capital)

2. Acquiring deposits from FDIC-seized banks

I calculated the impact of the additional deposits relative to existing deposits and assets, and how it could affect net assets (in the unrealistic event that FITB chose to loan out all the cash).

Freedom Bank FITB pct chg 10x ($mm) asset growth potential ($mm)
Deposits ($mm) 254 41604 0.70% 2900 4.13%
assets purchased/ total assets ($mm) 36 67272
FDIC cost ($mm) 80-104

For comparison, I look at a similar action taken in June when Suntrust took over First Priorty bank, also located in Florida.

First Priority Suntrust pct chg 10x ($mm) asset growth potential ($mm)
Deposits ($mm) 227 119800 0.22% 2690 1.52%
assets purchased/ total assets ($mm) 42 177400
FDIC cost ($mm) 72

How did Suntrust perform after that? The chart below illustrates it best.

In terms of raw numbers, it looks like STI appreciated 15.2% over the week prior to the announcement, a premium of 6.4% over XLF (+8.8%) and 13.1% over the S&P500 (+2.1%). On Monday, after the announcement, STI closed for a gain of +1.9%, outperforming XLF and S&P 500 by 2.3% and 2.9%, respectively. Over the week after the announcement, it rose by 8.0%, a premium of 4% over XLF (+4.0%) and 3.5% over the S&P 500 (+4.5%) over the next week.

It’s not to say that all of the Suntrust movement was due to the deposit acquisitions, but a search of news stories indicate that most other important events happened outside that time period. (For example, a disappointing Q2 report happened on Jul 22, while the announcement that the dividend would not be cut happened on Aug 12. (The dividend was subsequently cut on Oct 27.) So, I would argue that at least a large portion of the price action, relative to the overall markets, was in response to this particular piece of news about the acquired deposits. (If talk surrounding the other news did affect the price action this day, then it would’ve affected it negatively, and the analysis would price in even greater gains from the deposit acquisition.)

A comparison to the week’s actions prior to the FDIC announcement for FITB is more complicated, especially since so much news happened. Here’s a chart with some of the important news events highlighted.

During the last week, FITB rose by 28.1%, while XLF rose 14.1% and the S&P by 14%. However, looking at just the action over the last three days, FITB rose only +0.8%, while XLF rose +3% and the S&P 500 fell 2.2%. So while FITB performed 3% better than the S&P over those last few days, it lagged XLF by 2.2%.

I’ll also note that FITB experienced a 6% increase in the last 15 minutes of trading, a full 2% more than XLF and 4% more than the S&P 500. There was a slight pullback after-hours, then another spike after the announcement.

Note that the asset growth potential supplied by the additional deposits is 3 times that enjoyed by Suntrust on a percentage basis. FITB is also taking the deposits at a slight premium (1.16%), while Suntrust took them without one.

Using the STI price action as a guide, we might reasonably expect FITB to outperform XLF by 4% and the S&P 500 by 3.5% over the next week. If I adjust for the last-minute spike, FITB could be expected to outperform XLF by about 2% and lag the S&P 500 by around 0.5%.

(Estimate contribution: +2% rel. XLF; -0.5% rel. SPY)

  1. Acquisition of weaker rivals with sizable deposit banks and losses that can be credited to acquirer’s future capital gains.

As mentioned above, Suntrust probably has at least $3.16 billion of the Treasury CPP funds for acquisitions and loan loss reserves, and potentially more from its recent increase in share equity, its issue of preferred securities, and its spare cash on hand. FITB may try to acquire weaker competitors at discounted prices, in the model of PNC’s takeover of National City Corporation at a discount.

That’s why FITB has the potential for a short-term trade on the long side. Yes, long-term the new deposits and CPP funds will help them make more loans. But in the near-term, it gives them ammunition to take over their weaker neighbors, particularly banks that have (1) sizable deposits, (2) don’t yet have access to CPP funds, and (3) are in trouble because of bad loans. National City Corporation had all three properties, and since the present environment favors the shareholders of the acquirer rather than the target, this spells short-term appreciation for FITB shares.

Note that PNC jumped 3.5% on Friday, Oct 24, while XLF fell 6.5% and the S&P fell 3.5%. The NCC acquisition allowed PNC to outperform by 10% the XLF and 7% the S&P 500. Since the deal was announced, PNC has essentially traced both XLF (0%) and slightly outperformed the S&P 500 (+3%). It is up in nominal terms 17% since the announcement.

It’s difficult for me to estimate how much of the gain was due to the Treasury CPP funds, and how much in response to the acquisition of NCC. I will estimate, as I did above, that the increase in Treasury funds led to an increase in NAV. PNC has assets of $128.3bn; liabilities of $116.3bn, and therefore an equity capital of $12.1 bn. Applying a similar sort of analysis as before, PNC will need to pay about $175m in interest on the preferred shares to the Treasury each year for the next five years. Assuming it can make new loans of about $2.9bn, it needs to set aside $292m for reserves, leaving it with $3.2 bn in additional equity. Applying 50% of that to loan loss reserves, and 50% to shareholder equity, I come up with an increase in equity capital of 26.5%.

PNC’s share price did not jump 26.5%, or anywhere near that amount. The combined value placed by the market is 17%. As a guide, then, only 2/3 of the equity capital increase has been priced in, and none of the increase from what is widely being considered a good acquisition deal for PNC.

Since I don’t know how much of the price increase can be accounted for by each component, I am going to say that the short-term gains from BOTH the CPP funds AND the acquisition of a weaker rival with the three criteria listed above translates into a gain roughly equal to 2/3 of the initial equity capital increase. The market is either pricing in an inability for the new banks to make new loans, keep existing loans current, or successfully acquire rivals at a discount, or otherwise have greater difficulty financing their loans than I have assumed here.

Let me further build in a margin of error by saying that FITB may find a deal only about 60% as good as the NCC deal. This translates into an anticipated increase in FITB of 60% x 66% = 40% of the increase in equity capital supplied by CPP.

This still means that when FITB announces its 60%-as-good-as-PNC’s-NCC deal, FITB’s combined appreciation over its price prior to the CPP announcement should be an increase of 40% from its Tuesday noon price of 8.50, taking it to 11.90. This represents a $1.25 or 11.7% premium over Friday’s close.

Political Risk?

The PNC-NCC deal has caused some uproar in the halls of Congress, so there is some political risk that stricter guidelines might be placed on CPP funds. I’m not sure how difficult it would be to do that retroactively, however. Congress might push through something, but that would be after the Nov 4 elections, and likely after the deadline of Nov 14 for banks to apply to CPP anyway. Based on this, I would assume that retroactive restrictions on CPP funds would be difficult, if not impossible. In the unlikely event that greater restrictions could be made on subsequent tranches of the $700 bn, this would affect new applicants, and therefore put FITB and other early recipients at a relative advantage.

Let’s summarize:

Short-term gain from CPP+acquisition: +11.7%

Short-term gain from acquired deposits: -0.5%

Combined with an expected bump Monday of about -0.5% from the news of new deposits combined with the last-minute rally, and I would anticipate at minimum 11% upside for FITB, corresponding to a share price of $11.93 in the very near term, assuming no market appreciation or depreciation.

Naturally, the price targets increase for broader market gains, and decrease for market losses. Since I anticipate modest losses or gains, I will play it safe and enter into a position at prices below $11.00 and will likely sell out following announcement of an acquisition by FITB.

I would also hurry. Barron’s mentioned FITB in a recent article, and while I would hardly consider buying on news from Barron’s, it will mean that more people will be looking at this stock and coming to similar conclusions.

Disclosure: none, though author intends to be long FITB.

**Disclosure: No positions.**

McDermott Press Release: B&W Positioned for $960 Million in New Defense Contracts

B&W Positioned for $960 Million in New Defense ContractsHOUSTON–(BUSINESS WIRE)–

McDermott International, Inc. (NYSE:MDR) (“McDermott”) announced today that its subsidiary, The Babcock & Wilcox Company (“B&W”), has received a new award for the manufacture of nuclear components in support of U.S. defense programs. Under this award, the contracts for 2008 are valued in excess of $230 million. These are the initial contracts under a negotiated set of orders that, if executed, would total more than $960 million between 2008 and 2010.

These awards are in addition to a $1.7 billion series of contracts that B&W previously announced for 2007 to 2009. If the future orders are placed, the total value of the awards for the period of 2007 through 2010 would be approximately $2.7 billion.

The contracts employ a multiple-award approach over a number of years. This system is designed to give the U.S. government cost predictability while providing B&W with additional financial incentives based on performance.

“This multiple-award system provides additional opportunities to load level our manufacturing facilities to improve efficiency and scheduling activities,” said John A. Fees, Chief Executive Officer of McDermott International. “Both parties will benefit from improved efficiencies to control cost and schedule. All of us at McDermott are proud of our work for the government, and we look forward to continuing to provide products of the highest quality.”

The work that is funded by these contracts is conducted by B&W’s subsidiary, Nuclear Operations Group, Inc. Headquartered in Lynchburg, Virginia, the Nuclear Operations Group’s other locations include Barberton, Ohio; Mount Vernon, Indiana; and Euclid, Ohio.

McDermott is an engineering and construction company, with specialty manufacturing and service capabilities, focused on energy infrastructure. McDermott’s customers are predominantly utilities and other power generators, major and national oil companies, and the United States Government. With its global operations, McDermott operates in over 20 countries with more than 25,000 employees, and can be found on the internet at www.mcdermott.com.

McDermott cautions that statements in this press release which are forward-looking and which provide other than historical information, involve risks and uncertainties that may impact actual results. Forward-looking statements in this press release include statements about the expected timing and value contracts subject to the award and benefits or opportunities from the award. These statements are subject to numerous uncertainties and risks, including adverse changes in the needs of the U.S. government, the possibility that some of the contracts under the multiple-award system will not be finalized or awarded as expected, or other adverse changes or modifications to the award. If these or other risks materialize, actual results may vary materially from those expected. For a more complete discussion of these and other risks involved in our operations, please see McDermott’s most recent annual and quarterly reports filed with the Securities and Exchange Commission.

Source: McDermott International, Inc.

**Disclosure: I own shares of MDR as of this post.**

Historic Day Bouncers

“Historic day” definitely refers to the global coordinated interest rate cut by the U.S., England, Europe, and China- the four most influential economies of our day.  I was joking on my Twitter feed how exciting it was that China joined the “Allied Forces.” Yeah, the rate cuts probably took the world a step back from the cliff of a worldwide deep recession, but the positive benefits of the cuts, if any, probably won’t be felt for months and months.  What mattered more for me today, and probably for those who monitor their investment accounts closely, it was just good to have a day where we weren’t in freefall.  Down 200 on the DOW is never a happy day, especially working off a DOW 9450 base rather than a DOW 13000.  Despite the last hour selloff, there was sustained buying for the later half of the day after the initial selloff.  That was encouraging. People weren’t just letting things free fall anymore.  A lot of stocks were actually up today- stocks that haven’t seen the (green) light of day for quite a while now.  Many of these have been blown back to levels of 2, 3, or more years ago where there was sustained buying interest, so maybe those acted as temporary support as well.

So, I grabbed a stock screen off of FinViz.com (the coolest free financial website) of the stocks that were up today.  These might indicate where some buying interest are, and where long term holders have felt the stocks have gotten back to prices where they’d buy them.  Also, a lot of these stocks were held by liquidating hedge funds and, at least for today, they’ve stopped liquidating.  Doesn’t mean they, or their copycat funds, won’t.  So there’ll likely be a lot of resistance (sellers selling into strength).  But after the bounce today and the sellers do their thing, if these levels can hold I’ll dip into a few of these.

About half the list the screen turned up were basic materials stocks (probably another interest rate cut = lower dollar = higher commodities).  A lot of the basic material stocks were the gold miners, f.y.i.

Screen: Market Cap Over $300mln, Relative Volume over 1.5x average

No. Ticker Company Sector Industry Country Market Cap P/E Price Change Volume
1 ABX Barrick Gold Corporation Basic Materials Gold Canada 31.13B 16.77 35.71 17.08% 29,922,500
2 AEM Agnico-Eagle Mines Ltd. Basic Materials Gold Canada 7.26B 63.14 50.51 12.97% 7,672,300
3 ANR Alpha Natural Resources Inc. Basic Materials Industrial Metals & Minerals USA 2.79B 24.01 39.62 10.79% 8,357,600
4 CAM Cameron International Corporation Basic Materials Oil & Gas Equipment & Services USA 6.21B 11.94 28.54 8.11% 11,076,900
5 AU AngloGold Ashanti Ltd. Basic Materials Gold South Africa 5.56B - 19.71 19.53% 3,736,000
6 AUY Yamana Gold, Inc. Basic Materials Gold Canada 5.25B 24.23 7.51 18.83% 34,883,100
7 CF CF Industries Holdings, Inc. Basic Materials Agricultural Chemicals USA 3.24B 4.91 57.31 11.52% 9,480,800
8 CNX CONSOL Energy Inc. Basic Materials Industrial Metals & Minerals USA 6.77B 38.49 36.95 11.26% 11,352,900
9 FCX Freeport-McMoRan Copper & Gold Inc. Basic Materials Copper USA 16.36B 5.45 42.60 10.11% 33,631,000
10 GBN Great Basin Gold Ltd. Basic Materials Nonmetallic Mineral Mining Canada 340.85M - 1.61 11.03% 1,624,300
11 GFI Gold Fields Ltd. Basic Materials Gold South Africa 5.84B 10.16 8.94 32.05% 14,869,400
12 GG Goldcorp Inc. Basic Materials Gold Canada 22.10B 45.62 31.02 19.72% 30,307,500
13 GOLD Randgold Resources Ltd. Basic Materials Gold Channel Islands 3.17B 74.29 41.60 22.79% 2,454,100
14 HMY Harmony Gold Mining Co. Ltd. Basic Materials Gold South Africa 4.29B - 10.66 34.77% 8,845,900
15 HSVLY HIGHVELD STEEL ADR Basic Materials Industrial Metals & Minerals South Africa 1.19B 8.65 12.02 9.57% 35,700
16 KGC Kinross Gold Corp. Basic Materials Gold Canada 9.97B 31.76 16.20 18.94% 19,087,400
17 KWK Quicksilver Resources Inc. Basic Materials Independent Oil & Gas USA 1.95B 3.96 12.29 8.76% 6,945,500
18 LIHR Lihir Gold Ltd. Basic Materials Gold Papua New Guinea 34.77B - 18.30 10.17% 1,753,200
19 MON Monsanto Co. Basic Materials Agricultural Chemicals USA 44.79B 23.88 81.44 9.79% 27,036,900
20 NEM Newmont Mining Corp. Basic Materials Gold USA 16.95B 533.29 37.33 14.83% 16,291,200
21 POT Potash Corp. of Saskatchewan, Inc. Basic Materials Agricultural Chemicals Canada 30.07B 15.60 98.60 13.52% 32,992,400
22 PXP Plains Exploration & Production Company Basic Materials Independent Oil & Gas USA 2.56B 5.24 23.75 9.45% 8,448,400
23 RGLD Royal Gold Inc. Basic Materials Gold USA 1.35B 59.30 39.73 16.00% 1,218,000
24 RRC Range Resources Corp. Basic Materials Independent Oil & Gas USA 4.75B 78.56 30.64 9.27% 8,418,600
25 SD SandRidge Energy, Inc. Basic Materials Oil & Gas Drilling & Exploration USA 2.31B - 13.97 11.40% 10,866,200
26 SSRI Silver Standard Resources Inc. Basic Materials Silver Canada 835.66M - 13.33 10.53% 1,579,300
27 WLT Walter Industries Inc. Basic Materials Industrial Metals & Minerals USA 2.02B 16.63 36.26 10.62% 5,429,000
28 XCO EXCO Resources Inc. Basic Materials Independent Oil & Gas USA 1.74B - 8.26 7.97% 8,203,600
29 SYT Syngenta AG Basic Materials Agricultural Chemicals Switzerland 17.06B 12.17 36.02 7.14% 2,604,100
30 SPW SPX Corporation Consumer Goods Appliances USA 2.61B 7.57 48.13 7.72% 4,776,500
31 FBN Furniture Brands International Inc. Consumer Goods Home Furnishings & Fixtures USA 459.11M - 9.41 8.41% 1,899,900
32 GGP General Growth Properties Inc. Financial REIT – Retail USA 1.45B 21.60 5.40 20.00% 17,753,200
33 CBL CBL & Associates Properties Inc. Financial REIT – Retail USA 717.03M 22.06 10.81 19.84% 4,246,600
34 AOC Aon Corporation Financial Accident & Health Insurance USA 11.78B 20.10 42.42 8.27% 5,080,100
35 STT State Street Corp. Financial Regional – Northeast Banks USA 18.82B 10.43 43.60 9.14% 14,257,900
36 SLG SL Green Realty Corp. Financial REIT – Retail USA 2.85B 21.24 49.07 8.25% 1,763,200
37 RBS Royal Bank of Scotland Group plc Financial Foreign Money Center Banks United Kingdom 18.54B - 1.85 24.16% 14,986,300
38 XIDE Exide Technologies Industrial Goods Industrial Electrical Equipment USA 384.13M 7.61 5.10 7.37% 3,115,100
39 FLS Flowserve Corp. Industrial Goods Diversified Machinery USA 3.66B 9.93 63.84 12.12% 3,258,400
40 MELI Mercadolibre, Inc. Services Business Services Argentina 853.91M 77.12 19.28 8.50% 1,748,800
41 IRM Iron Mountain Inc. Services Business Services USA 5.51B 37.44 27.33 11.37% 2,735,600
42 DISH Dish Network Corp. Services CATV Systems USA 8.19B 8.54 18.19 7.44% 7,346,700
43 YRCW YRC Worldwide Inc. Services Trucking USA 362.01M - 6.32 26.91% 7,084,900
44 SYNA Synaptics Inc. Technology Business Software & Services USA 801.19M 31.26 23.76 10.05% 2,927,800
45 RHT Red Hat Inc. Technology Application Software USA 2.80B 38.55 14.65 8.76% 3,889,700
46 NTCT NetScout Systems Inc. Technology Business Software & Services USA 376.22M - 9.60 21.21% 745,100
47 PCLN Priceline.com Inc. Technology Internet Service Providers USA 2.47B 14.43 63.51 10.74% 3,897,600
48 PEGA Pegasystems Inc. Technology Business Software & Services USA 398.94M 39.25 10.99 7.43% 178,600
49 WFR MEMC Electronic Materials Inc. Technology Semiconductor – Integrated Circuits USA 5.19B 8.07 22.99 11.12% 10,347,800
50 DASTY Dassault Systemes SA Technology Technical & System Software France 5.35B 19.01 45.25 8.93% 54,400
51 CLS Celestica Inc. Technology Printed Circuit Boards Canada 1.20B 10.92 5.24 8.94% 3,341,700
52 CNQR Concur Technologies, Inc. Technology Technical & System Software USA 1.56B 92.88 31.58 7.78% 1,970,100
53 ARBA Ariba Inc. Technology Internet Software & Services USA 942.45M - 10.96 8.51% 2,530,800
54 ATML Atmel Corp. Technology Semiconductor – Broad Line USA 1.84B 103.00 4.12 8.71% 7,950,700
55 CBR CIBER, Inc. Technology Information Technology Services USA 337.29M 11.26 5.63 7.85% 666,500
56 CEL Cellcom Israel Ltd. Technology Wireless Communications Israel 2.97B 10.86 30.40 7.61% 414,700
57 LDK LDK Solar Co.Ltd. Technology Diversified Electronics China 2.29B 8.49 21.48 11.18% 4,630,500
58 FORM FormFactor Inc. Technology Semiconductor – Broad Line USA 816.85M - 16.65 12.27% 1,462,600
59 BRKS Brooks Automation Inc. Technology Semiconductor Equipment & Materials USA 464.21M - 7.30 7.20% 1,201,400
60 AYE Allegheny Energy Inc. Utilities Electric Utilities USA 5.08B 9.90 30.10 8.63% 7,126,500

Please visit my stock research tools site, SuckingLess.com, for more resources like FinViz.com

**Disclosure: no positions in stocks mentioned.**

(formerly known as) Merrill Lynch – Power & Gas Leaders Conference…Here I Come!

All set for the (formerly known as) Merrill Lynch Power and Gas Leaders Conference!  I’m trying to sound excited like I WAS maybe a month ago…but with the world’s economy/financial markets imploding before our eyes, it kinda dwarves everthing.  A couple of companies even withdrew from the conference, or, like Constellation (CEG) who simply got bought by Warren Buffet.  Reliant (RRI) isn’t on the presenter’s list anymore, and Entergy (ETR) isn’t either.  Still, there are more presentations and breakout sessions that I want to be at than I have time for, so yes, I’m certain there’ll be tons of exciting stuff I can report back to y’all.  Follow my Tweets on Twitter during the day incase I don’t have time to update my blog till I get back on Thurs or Friday.

I’m taking requests for any Merrill Lynch memorabilia!  Email me your sizes or color preferences!  I’ll try to schnitzle whatever I can before they use a sharpie to write Bank of America over everything!

Ok, hope there’s still a market by the time I land tomorrow at 5pm Eastern!  Stay in your foxholes everyone and goodluck.  I’m glad I’m in 95% cash, but I’m still scared.  Maybe being in the conference all day TWOsday and Wednesday will be good for me…hide out in the conference room till the bombings stop and the smoke clears.

Personally, this is a great achievement- being able to leave the house, but to go all the way to New York and do work, is nothing short of a miracle. Just four months ago, before I met the doctors at the University of Utah Medical Center, I’d fallen back to the worst condition I’ve ever been in, none of my medications were working, and I honestly didn’t know how I’d live to see tomorrow.   Long time readers of my blog know I’ve been really sick since early 2006 and was confined to my room, which is why I started trading and blogging- to keep my sanity.  So, even with the world collapsing around us, it’s a great first step for me- a first step towards hope of a normal life! So even if we wake up to a world that’s significantly different tomorrow, at least now I have hope I can be one to help pull others along rather than the one needing to be pulled.  Even when the market neared death last Thursday and the VIX hit cougar levels of 42, it still felt like one of the best days for me to be alive compared to the darkest days of the past 2.5 years.  Just glad to be alive.

Thanks Joe, for making this trip happen.  Means infinitely more than I can express here.

**Disclosure: no positions in the stocks mentioned**


Created with flickr slideshow.

Purchasing.com Price & Supply Alert – 9/18/08

In a market that’s been 90% panic and cannibalism, it’s hard to think any fundamentals matter anymore. I’m not sure when and how fundies will come back into play as the shockwaves of the financial collapse around the world has very very real effects in the real world. Still, I like keeping an eye on this stuff.

Sorry haven’t been posting much exactly because of the madness.  Just been making tiny “bunts” or “single hits” day trades and posting these throughout the day on my Twitter feed- follow me on Twitter! or check my Twitter feed here on the top left column.  Other than that, I like hiding in my foxhole, eating some marshmellows, listening to some She & Him (I didn’t know actress Zooey Deschanel was such a good singer!), watching Erin Burnett on CNBC, and waiting for the world to implode.  Hmm…Erin and Zooey do look kinda alike.  Nice.

Oh, prepping for my trip to NYC on Monday for the Merrill Lynch (MER) (well Bank of America (BAC) now I guess) Power & Gas leaders conference…except I dunno how many people will actually be there now as companies keep disappearing. Constellation (CEG) was supposed to be there…but Buffet just ate them today.  Kinda disappointed- I had done the homework on all these Utils.  Oh well, maybe Buffet will go instead for CEG….now that’d be uber awesome…and uber not happening.

Ok, back into my foxhole.

** Disclosure: No positions in the stocks mentioned **

The Plot Thickens for the Mining Giants

Sure why wouldn’t Australia approve of Chinalco’s stake in Rio Tinto. Australia’s wealth has grown like a weed thanks to it’s biggest customer, China, and China’s buying of Australia’s commodities. So why not play buddy buddy with you’re biggest customer? Sure, other “developing countries” are growing too…and while this might sound awkward referring to a commie country like China…China’s actually good for it’s money. You don’t just want a customer that pays, but pays steadily and that you know they’re good for it. Some of the politically unstable countries? I dunno. Countries (well country- U.S.A.) with debt growing like a tumor? Not too sure either. But China, a country that’s growing fast and steadily, and strategizing around the world, such as with African nations, to secure it’s future growth, and with national reserves growing up the wazoo- just on interest alone. Yeah, I’d play buddy buddy with China too. It’s like in the old days how a king would send over his sister or daughter to marry another country’s royalty. In this case, I guess the princess’ name is Rio Tinto. But then eventually (well after a year or so) the two kingdom’s would be at war again and the sacrificial princess be killed. Let’s see how this modern remake plays out!

Australia approves Chinalco stake in Rio Tinto

SYDNEY (Reuters) – Australia has approved Chinese aluminum giant Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto (RIO.AX: Quote, Profile, Research, Stock Buzz) (RIO.L: Quote, Profile, Research, Stock Buzz), but warned the Chinese firm against buying more shares without prior approval.

State-owned Aluminum Corp of China (Chinalco), backed by U.S. peer Alcoa Inc (AA.N: Quote, Profile, Research, Stock Buzz), began amassing shares this year with the aim of taking up to 14.9 percent of Rio, the target of a $127 billion takeover bid from rival BHP Billiton (BHP.AX: Quote, Profile, Research, Stock Buzz)

Full Article: Australia approves Chinalco stake in Rio Tinto

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Ingersoll Rand makes Appearance on “Four Energy Efficiency Trades for a Cool Summer” Redux

Industrial machinery conglomerate Ingersoll Rand (IR) will report second quarter earnings this morning. This is not an earnings preview post or comments about my expectations. Obviously this market is not right in the head, cookoo, insane, whatever you want to call it. So I’m not expecting the stock price to correlate with the fundamental story one way or another. I do want to point out to folks that Ingersoll Rand is a completely different beast that we’ve all known it as. No longer is it construction equipment or the road building machinery that we’ve all seen when driving around. While it still has a lot of those identifiably Ingersoll products, Ingersoll Rand went through a dramatic transformation this past year as it sold off Bobcat (small excavators and loaders) and acquired heating, ventilation, and air conditioning (HVAC) maker Trane.

Folks should forget the old Ingersoll Rand and focus on the newly-acquired Trane business as that should be the pride and joy going forward. Trane was such a big acquisition that Trane is now the dominant business for Ingersoll Rand, and rightly so. HVAC (heating, ventilation, and air conditioning) is a major component of both the infrastructure and energy theme, but a story which the media has chosen to neglect. Given the high energy prices, more attention should be paid to HVAC systems since the heating and cooling of buildings, homes, factories, etc. is actually the top user of energy in the U.S. All this talk of alternative fuels for our cars or solar power pales in comparison to the amount of energy we could save on heating and cooling buildings. Also, energy conservation rather than increasing energy production would lighten the load on our already failing power grid. Similarly, it would save costs as we wouldn’t have to build out our power grids and increase power generation capacities with new power plants, wind farms, solar panels, etc.

Last summer, I wrote an in-depth piece on this topic in Four Energy Efficiency Trades for a Cool Summer. I think it’s such a decently written piece that I’m not gonna do it again- just read it! But remember, Trane was a brand of American Standard at the time of the publication, but Trane is now part of Ingersoll Rand. So what was said about Trane now applies to Ingersoll Rand. In 2003, I was part of a team that conducted an energy efficiency study of the Keck Science Building of the Claremont Colleges (CA), working with both Trane and Johnson Controls (JCI) on proposed solutions. I can attest to the importance and viability of the HVAC system to increase energy efficiency.

For a closer look into the “new” Ingersoll Rand, Jim Cramer had a great Mad Money segment dedicated to it: The Great Transformation of Ingersoll-Rand. He explained it much better than I can. Take a gander. Or, read the segment’s transcript on Mad Money Recap.

Referenced Resources:

** Disclosure: I am long IR calls as of this post **

Infrastructure: Power Grids and Bridges

As readers of this site know, I am all about the infrastructure boom. Both for infrastructure growth to support the lighting speed growth in China, India, Mid East…and infrastructure repairs needed in the U.S. I am so convinced that this theme trumps all other investable themes out there that my portfolio is now concentrated on this theme, diversified only by the different components of the infrastructure buildout. First, my conviction is based on the fact that infrastructure is the foundation of modern civilization. We must keep our utilities running so we can have water and power. Witness the chaos in New Orleans after Katrina- New Orleans, a limited area, and yet the importance of our daily infrastructure necessities could not be more obvious. This leads to the second reason for conviction: governments must put infrastructure integrity as a top priority. Same for both the U.S., whose infrastructure needs massive repairs, and China, who is building cities daily. The fundamental need to have solid infrastructure means, to me, governments will finance these projects regardless of the economic conditions…baring a full scale global depression. Even in the depression, we completed big projects like the Hoover Dam, setting ourselves up for decades of power to fuel the growth in on the west coast. Thus, specific infrastructure plays should be relatively insensitive to the slowdown or recession if you look out 3-5 yrs. And although I’m don’t care much for the “long term” investment theories, for these companies you have to look out 3-5 yrs just because many of their projects take several years to complete. But yes, in the long term we’re all dead, so don’t just buy, hold, and forget!

POWER GRID

As just mentioned, the basic utilities are my #1 focus, and the power grid specifically.

“Demand for cable products in the developing regions of the world is being driven by high levels of energy infrastructure, construction and mining activities. Particular strength is coming from government sponsored infrastructure projects in Latin America and Southeast Asia. Additionally, the core infrastructure investment required for the upcoming 2010 World Cup soccer event in South Africa has added pressure to an already taxed energy grid that is also supporting growing mining activities in the region, resulting in increased spending for energy transmission and distribution as well as construction, said Mathias Sandoval, President and Chief Executive Officer, General Cable Latin America, Sub-Saharan Africa and Mideast/Asia Pacific.” ~General Cable 2008 Q2 Earnings Release

I’ve written many times about the power grid, and the company ABB specifically as they’re one of the most exposed to this trend, but also because public companies with exposure to this theme has been hard to find. Woodward Governor, WGOV, this past quarter has shown to be a strong beneficiary in developing the wind power part of the power grid. I also like SPX corp (SPW) for its transformer business. Thomas & Betts (TNB) has a lot of the small electrical components and makes the huge towers for the transmission lines, but have yet to shown it is benefiting from the power grid repair and buildout. Possibly because a lot of it’s electrical components are also used in industrial and commercial buildings, which aren’t so hot anymore. Also, as more transmission lines are now buried underground rather than strung overhead by steel towers, TNB’s transmission tower growth might be limited. But other than that, it has been difficult to find suppliers of the “stuff” going into the power grid.

The most obvious “stuff” are the transmission lines we see everywhere. However, the biggest transmission line and cable producers, domestic and international, are divisions hidden within larger companies. For example, the biggest producer of copper cables is General Cable (BGC). However, it has so many other businesses and domestic infrastructure construction services that, to me, dilutes the value of the power grid cable business. Sort of like how GE’s finance division diluted the value of its strong global industrial and infrastructure business, but obviously not extreme. Note, though, that BGC bought Phelps Dodge’s copper cable business when Phelps Dodge merged with Freeport McMoran (FCX).

This growth was principally due to the acquisition of Phelps Dodge International Corporation (PDIC) in the fourth quarter of 2007, the Companys exposure to global electrical infrastructure markets and favorable foreign exchange translation partially offset by lower demand as a result of ongoing weak economic conditions primarily in the United States and Spain which are major markets for the Company. ~General Cable 2008 Q2 Earnings Release

In this one move, copper cables now is the dominating business in BGC, and BGC’s sales will be mostly international- some 64% in the last quarter. The reserve I have of jumping into BGC is whether they have the ability to grow or has become a large supplier of a commodity for the power grid. I have limited slots for power-grid stocks, and BGC isn’t replacing my ABB, WGOV, or SPW yet.

Along the same lines,

South Korean cable maker LS Cable has received regulatory approval from the U.S., Spain and Germany to acquire copper wiring firm Superior Essex and create the third-largest global maker of magnet, communication, industrial and building wire with pro forma consolidated annual revenues of almost $13 billion. ~ LS Cable is Buying Superior Essex, Purchasing.com

Thus, confirming the value of companies supplying power grid components, but many of which are private, international, or subsidiaries of bigger corporations.

BRIDGES

Like the Power Grid story, our road infrastructure repair and upgrade isn’t a question of IF, but WHEN. While companies like Terex (TEX) have taken a beating with the rest of the market, understand that a big wave of demand for road construction equipment is coming, and soon.

“A report from the American Association of State Highway and Transportation Officials estimates that $140 billion is needed today to repair all the nation’s bridges. An Associated Press report cites Federal Highway Administration statistics that 152,000 out of the nation’s 600,000 bridges are either structurally deficient or functionally obsolete.

Nearly 25% of the nation’s bridges need repairs, and the average age of America’s bridges is 43 years — seven years shy of the maximum age for which most are designed, according to the “Bridging the Gap” report. One in five U.S. bridges is more than 50 years old.” ~Repairing Bridges would cost $140 Billion, Purchasing.com

The U.S. government is good at just focusing on short term problems or worthless issues, but as more roads crack and bridges collapse, there’ll be another panic to deal with another crisis, and companies like TEX may benefit more than if these road repairs were done right now. A construction/repair binge would likely cause shortages of equipment just as the mining binge now (from decades of neglect to invest) is causing shortages of Joy Global (JOYG) and Bucyrus (BUCY)’s underground mining equipment.

Referenced SuckingLess.com Research Tools:

** Disclosure: I own shares of ABB, WGOV, SPX as of this post **

China’s Olympics Vacation – How Real is the Drop In Commodities and Inflation?

We all know the relief madness over the past week or so: oil got denied when it almost tapped $150 and dived to $123, taking down the rest of the commodities world- metals, agriculture, coal…you name it. Meanwhile, banks hit a trampoline and the XLF rebounded some 50% off the lows. Yes, it’s great to see gas here down to $4.59 from $4.89 just 2 weeks ago. Sure, maybe it’s the speculators the regulators have now caught, or maybe it’s money coming out to chase the banks off their lows.

But- what if it’s because China has halted a big chunk of it’s manufacturing to clear the air for the Olympics that starts exactly in 2 weeks? I haven’t figured out the effects yet. Just thinking what will happen starting September, when the Olympics are over, and the China manufacturing beast roars to life again? Devouring commodities for breakfast, lunch, dinner, and a midnight snack 7 days a week – because the Chinese are workaholics and wouldn’t know what to do if they had a day off? (I am serious – this is what my dad tells me from his business trips to China every 2 months) Sure, one could argue that China has been limiting it’s manufacturing to clean up it’s air since early in the year, yet commodities kept climbing. There probably was quite a bit of speculative money or money that sought safe haven away from the banks. However, China did not completely slam on the brakes till recently. And, had China not been slowing down it’s manufacturing all year, where would commodity prices be even without the speculative money? Would oil be at $150, and in that scenario NOT be due to speculation? Meaning, where should we expect commodities to rebound to once China goes full steam again?

Also, for those hoping China slowed down because the U.S. and Europe have slowed to a crawl, I beg you to do more research and think again. My dad and his business partners are having trouble placing their orders at factories in China because domestic demand is too strong. Factories are actually turning down orders for exports, the very exports that catapulted China’s economy to the fastest growing. If I had to place a wager, I’d bet China’s recent weakness is self-imposed for the Olympics, and not because it’s being dragged down by U.S. slowdown. Again, we Americans always thinking we’re the center of the world, and the rest of the world depends on us. This is a very dangerous tunnel vision and, as Mitt Romney said, will turn us into a second rate country like France in no time.

My dad is currently visiting factories in China, saying his factories have been required to set aside roughly ~20% of steel for China’s domestic use (so he can’t get his products made as they’re exported here to the U.S.) This restriction is because steel mills have been shut down to clear the air for the Olympics. Also, he says China is fixing steel prices 20% – 35% below market prices specifically for the earthquake rebuild. This is to ensure steel availability to the damaged areas.

This corresponds with the following reports from Capital Link Shipping’s Imarex report (yes, shipping research websites are great even if you’re not rolling the dice on a DryShips):

Steel mills affected by the Olympics have finally begun suspending production to ensure clean air in Beijing. Domestic Chinese steel consumption, although very strong, is also expected to come down a bit due to a normal summer lull in consumption. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small steel mills to keep up production. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly22.pdf

And on the July 25h report:

All eyes are on China / Olympics. The skies in Beijing are still smoggy as hell, expectations point to a slowdown in industrial production, but no indication yet of any significant reduction in iron ore imports. The Chinese are good at always keeping us guessing. One important thing to point out: even if shortterm sentiment is a bit iffy, medium-term sentiment is really good considering the period activity we’ve been seeing. Interesting side note: for the most part, there’s a general consensus that dry bulk rates will trend sideways / fall for the Olympics, then rebounded significantly in the fourth quarter and approach record freight levels by the end of the year. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly25.pdf

Be careful out there. And remember, don’t assume what seems the most logical, or what you want to believe, to be reality. The biggest risk is not knowing, so do your research.

Referenced SuckingLess.com Research Tool:

** Disclosure: no positions in the stocks mentioned **

Fast Money’s Joe Terranova Says Nat Gas June Highs July Lows?

Coming into July, we were riding the Natural Gas high like we had a straight shot to the moon, especially off big shale announcements like Chesapeake (CHK)’s Haynesville Shale venture. Sure, nothing goes vertical forever and we all knew natural gas would have to “correct” for a while. However, for us at-home mom-and-pop non-commodities traders, a lot of the time it felt like we’re just riding this straight shot to the moon blind.

Thankfully, veteran commodity trader Joe Terranova on CNBC’s Fast Money had a simple rule of thumb to offer: June Highs, July Lows. Does it always work? Of course not! Market’s aren’t that easy! But I did a little check and found this rule of thumb is a good one any of us with natural gas exposure to keep close to heart. I used charts from the Federal Energy Regulatory Commission’s Natural Gas Market info- one of my favorite research tools I’ve collected at my SuckingLess.com website.

FERC Natural Gas Market Overview - Daily Henry Hub Spot Prices 2002-2008

As you can see, other than the out-of-norm Katrina event in 2005, July natural gas prices have generally been lower than June prices. This weakness seems to persist from July into early or mid august. While natural gas prices in the following December-Januarys are usually higher than the July-August weakness, there are a few years where Natural Gas prices just keep sliding the rest of the year. I suppose Natural Gas prices still depend on the weather and how much of it is used, so it still has that random factor that we should all be aware of.  Personally, I think selling some Natural gas, whether taking partial or full positions off, seems like a smart thing to do given historical trends suggest July will be lower than June. Sure, you might miss another “Katrina” spike, but that feels more like rolling the dice.  Because I didn’t want to be completely out natural gas in case we get the hurricane spike, I’ve kept 25% of my HAL position, but bought USO puts against it.

However, this year, Natural Gas prices have been on a steady climb alongside crude oil’s climb, natural gas looking much less volatile than in the past. Natural gas isn’t a direct replacement of crude oil, but there are various users of energy who can switch between the two. When crude oil gets too expensive, they would switch to natural gas, thus increasing natural gas’s demand and raising it’s prices alongside crude. Jim Cramer offers a separate rule of thumb: Natural Gas prices trade at roughly 1/6 the price of crude oil. So, at the moment, either crude oil is too expensive or natural gas is too cheap

Also, I have offered the analysis of the trend to use much more natural gas for electrical power generation by utilities around the world. This should decrease some of the volatility in natural gas prices as demand becomes more consistent to produce consistent electrical power. Still, we need to do something about our limited storage capacities!

Remember, beyond just owning the companies, dig just slightly deeper into the businesses the companies are in. That’s why I started SuckingLess.com, to collect the most relevant industry magazines and information useful to investors.

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**Disclosure: I am long of CHK, HAL, and USO puts as of this post**