Friday will be a travel day as we finally get to place a check mark on one of my Bucket List items…….the Crossroads Guitar Festival in Chicago.
BTW tickets for this event have to have been my investment of the year…….if not the decade. Our $100 tickets are going for $1900 apiece in our section, but……..we’re not selling. I’ve never seen BB King, Buddy Guy, ZZ Top, Jeff Beck or Los Lobos. The top of the bill is an extended set between Eric Clapton and Beck together along with a Blind Faith set with Steve Winwood.
Will be back on Monday morning and hopefully my hearing will restored by Wednesday.
BP
“Malaise” seems to be the word of the day as markets cope with incompetence in both business and political realms.
Will the leak caused by BP in the Gulf ever end?
Will the war in Afghanistan as highlighted by Rolling Stone ever end or remain in FUBAR?
Will the Obama administration ever make job creation are real priority rather than lip service?
Will China (which is much more important than Europe) achieve the soft landing in its economy?
Despite the chatter about “double dip recessions” economic data just doesn’t support the dd premise. Growth isn’t robust but it moderate and lumpy and expectations have pulled back sharply in expectations since the start of the year……..a good thing.
Capital Goods orders were up 2.1%.
Durable goods orders were up 0.9% and now have been up in 5 out of the last 7 months and up to 20% ytd.
“Malaise” as been bantered about now on CNBC and Jim Cramer is not the type of attitude existent at market tops but more often at market bottoms when economic blemishes are visible to all and the bulls have turned to bears.
The soft patch we find ourselves in presently could change in quick order should something good happen.
Earnings have been growing nicely but have been largely ignored this year. We’re using an earnings estimate of $90 for the S&P 500 in 2011 which makes the market 12x times 2011 earnings. Historically the S&P has been nominally valued at 15.3x earnings with comparable interest rates and inflation, and up to 17x. There is significant upside potential looming and with negativity growing rapidly the bottom in the current correction may be soon. My best guess is the “real” rally would likely be in the 4th quarter but the risk at present is not great by my estimation.
“In speculation, interestingly enough, contrary-mindedness is often a virtue. A layman might suppose that profits lie with the majority. Because the mass of people have the weight of the money, he might imagine that the crowd would tend to be on the winning side of things. Not for long, in my experience. If the majority confidently knows something, that one thing is probably already reflected in the structure of prices, and the market is vulnerable to a surprise. Markets are moved by the unexpected and the unexpected is what the crowd isn’t anticipating. The financial future may be imagined, but it can never be positively known. What people know is the past and present, and they often project the familiar out into the unknown, with unsatisfying results”
— Jim Grant, Minding Mr. Market: Ten Years on Wall Street With Grant’s Interest Rate Observer
While running screens on a slow market day I ran the “Magic Formula” screen:
A solar stock passed the screen: GT Solar International SOLR
Alternative fuel component maker Fuel System Solutions FSYS did as well.
No positions
Over the past few months we’ve spent a fair amount of time determining what value this blog could add to its readers. We’ve essentially boiled down our conclusions to the point where we could identify with many outstanding financial blogs that espoused old school investing in regards to value, balance sheets and growth, we could not find any that merged with the ideals of socially responsible or green investing. That is when the light bulb turned on as this is the type of analysis performed daily.
Being an investment adviser in the Boulder Colorado area would seem ideal since the area is chock full of alternative energy companies but with 20 years in the industry we also are very aware that the vast majority of these firms will not exist in their current form in just 3 or 5 years from now. As a rule of thumb the strength of their balance sheet in light of sales or a weak economy (and weak fossil fuel prices) will determine their inevitable success or failure, not sales, hype or even great technology.
Case in point regarding solar stocks: Reuters is reporting that a parliamentary mediation solution in Germany may reduce the amount of subsidy cuts in solar. Solar has been weak across the board with the expected cuts coming from Europe due to their financial crisis. Hence, why we’ve been avoiding the sector for over a year with the understanding that if a company cannot generate its own revenues without subsidies despite the lofty projections for worldwide revenue estimates, then the investment will likely be a loser.
In the interim we’re assembling a list of solar stocks and searching for those falling to extreme values (Price to Net current asset value) where risk should be minimal.
Ultimately, we think that the European mess will get worse and the domino effect of proposed subsidy cuts are inevitable hence solar stocks with significant European exposure are trades not investments at this juncture.
Markets are quite overbought in the short term and we don’t believe now is a good time to be adding new money to equities as the window of opportunity appears closed for the near term. The ideal time would have been a couple of weeks ago when fear approached extreme levels not seen since last March.
On the bright side, the weak Philly Fed data would have poleaxed the markets had it been released 2-3 weeks ago, whereas today it only creates mild selling. This leads me to suggest that a slowing economy is now baked in the cake.
Yesterdays rally confirmed our more constructive intermediate term outlook as the S&P 500 pushed above the 200 day moving average on a 90% up day. We have not seen a cluster of 90% up days since 2009 during the strongest points of the rally. Bears will comment that it was a fake rally due to high frequency trading, but as the coach of the New England Patriots Bill Belichick would drolly would say: “It is what it is”.
Yesterday while driving home I remembered a conversation from the mid 1990’s with a major SRI fund manager who insisted upon owning a major oil company despite their environmental screening policies. His rationale was that this particular company was the best of the lot, the most progressive within the space. Care to guess what that company was? Hint: my initials.
Being that I’m somewhat of a financial geek I get excited when our model identifies companies that are also identified as promising by other proven investment models. Case in point is IDT Corp. which also ranks very high on the esteemed
Piotroski model
as well as our own. We don’t own the stock for clients at present but will begin to look closely at it.
Also, will be breaking down a host of Green Tech firms looking for revenue acceleration. Stories about this morning about the promise of Green Tech but unless revenues start to move higher its only a trade and not an investment.
All the best,
BP
This will sound like a post straight out of the 80’s:
One of our recent new purchases for clients was RCM Technologies symbol RCMT which shortly after our purchase became the target of a hostile takeover by CDI Group. My initial attraction to RCM (which is a service provider of IT, engineering and commercial staffing) was its balance sheet relative to the stock price.
Just before the announcement of the takeover attempt RCMT was the #1 rated stock in our proprietary RMHI model:
Stock Price 6/15 $4.79
Price/sales .93
Price/book .96
Book value $5
Current ratio 3.8
Cash .94 per share
No debt
EBITDA $5.3 million
CDI has made an unsolicited offer for RCMT for $5.20 in cash which RCMT immediately rejected. Apparently CDI has had a sweet spot for RCMT for quite a while and might have made overtures in private which were rejected as well, hence going public to shareholders with the hostile offer.
As in any negotiation CDI can raise the price of their offer to RCMT shareholders. One appealing aspect of RCMT is the cash they have on the books of almost $1 a share. This pristine balance sheet could evaporate should RCMT continue to reject the offer while CDI remains hostile. The RCMT board is tiered where no board replacements of significance could occur till 2011.
RCMT is a stock very much “in play” as we used to say, call it a financial soap opera. Should RCMT continue to reject CDI overtures they’ll have some very unhappy shareholders especially if the offer is raised. Another course of action for RCMT is the “white knight” where RCMT rejects CDI but offers itself to sale to a different company entirely.
Be careful out there
Brad
Long RCMT
Get out your old Wall Street video: Bud Fox likes RCMT
