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Wednesday, May 31, 2006

Through TheFLY's Eyes: Costco

For Costco, A Good Enough Quarter

Costco (COST) missed the Street’s quarterly earnings estimate, but it wasn’t a large enough miss to change the Street’s prevailing evaluation of COST.

In general, Wall Street doesn’t like earnings misses. The surest way to see investors large and small flee your stock is to underperform regarding quarterly earnings.

Costco Wednesday reported Q3 EPS of 49c, compared to 43c a year ago, and the Reuters consensus estimate of 50c. The company reported Q3 revenue of $13B, compared to $12B a year ago, and the consensus estimate of $13.3B. These same analysts surveyed expect Costco to earn $2.33 in 2006.

And the market’s response Wednesday to Costco’s slight underperformance? Muted, a non-event by Wall Street standards. Costco shares were down just 20c to $53.36 in early afternoon trading.

Why the muted response? Costco, the U.S.'s largest wholesale club, has a demonstrated business model in a sector that analysts expect to fare reasonably well, even during this year’s probable economic slowdown. Moreover, because Costco’s mid-value to high-value inventory appeals to customers with higher incomes than low-price wholesaler Wal-Mart (WMT), most analysts believe Costco is less vulnerable to purchase cutbacks by consumers, prompted by high gas prices. Further, Costco’s fundamentals are strong.

In light of the above, the Street overlooked Costco’s 1c earnings miss on confidence that a better performance is up ahead for the company.

Through TheFLY's Eyes: BHP Billiton

Unbiased Reporting?

In an
article from The Age titled "BHP probes untold uranium riches," Barry FitzGerald highlights the company's prospects as it is about to release its annual report. He writes, "BHP's 2005-06 annual report in September is expected to show a major increase in the resource estimate, last updated in 2004."

His cause for titling his article "untold riches?" The following quote from Richard Yeeles, group manager, corporate affairs, for base metals division, "We are going quite deep now and we're finding we are still in ore in some places. What that drilling is indicating is that we have yet to define the depth of the ore body. The previous resource estimate certainly did not include the results of the most recent deeper drilling."

The tone of the piece I bring up because of the disclosure at the end of the article, that Mr. FitzGerald is a BHP shareholder.

The exact disclosure is "The reporter owns BHP shares," which by the definition of reporter, is an oxymoron. From Wikipedia, "Reporters find the sources for their work, their reports can be either spoken or written, and they are generally expected to report in the most objective and unbiased way to serve the public good."

This Fly, which does not own BHP shares, would re-title the article "Depth of BHP's Ore Body Uncertain."

Tuesday, May 30, 2006

Through TheFLY's Eyes: Koninklijke Philips Electronics NV

A Technical View

Philips (PHG) was the beneficiary of a positive piece in this weekend's Barron's magazine, but even this could not help the stock from falling today.

The chart, frankly, is a bit scary. It looks like a major top has been in development for some time and the stock is in a bearish (downward sloping) price channel.
Further there is a possible Broadening Top (valid on a break of the lower blue line) which appears to have downside risk to the $25 area.

The critical level to hold is $30.34. If that is broken then the whole of the up-move would be called into question. Next supports below that level would be $29.84, $29.35, $28.84.

As to resistance levels if the stock should make an upside attempt, they are as follows: $31.60 (a breakout above this level breaks the current bearish price channel),$32.21, $33.00.

Chart created with Equis MetaStock

Through TheFLY's Eyes: Advanced Micro Devices

Advanced Micro: Swimming In A Slowing Current

This may be the year the semiconductor sector experiences a sea change – namely a change leadership. Then again, it may represent a shift to dual leadership in a sector that’s experiencing decelerating growth, or more of the status quo.

Advanced Micro Devices (AMD), in a heated battle with No. 1 chipmaker Intel (INTC) for both sector leadership and market share, announced Monday that it will invest $2.5B to expand its two chip-building facilities in Dresden, Germany. Advanced Micro traded Tuesday at $31.13 down 50c in early afternoon trading.

Advanced Micro needs the extra capacity to eliminate production constraints that have hindered its chase of Intel. Still, with AMD’s inventories rising, and Intel aggressively cutting prices, some analysts say it may be hard for Advanced Micro to achieve its sales estimates for the June quarter; other analysts expects a flattish June quarter, and a sluggish 2006. The Reuters’ analysts consensus expects AMD to post June quarter sales of $1.3B and 2006 sales of $5.7B. Meanwhile, these analysts expect Intel to post sales of $8.3B and $40.1B in the same periods, respectively.

Advanced Micro is striving for a market position where it can confidently state to its clients that it offers not only a better product than Intel, but a better value, as well. And the aforementioned production expansion is a step in that direction. However, if computer and other semiconductor-utilizing purchases slow along with the globally economy, as many expect, that may elongate Advanced Micro’s timetable for improving its position against Intel.

Through TheFLY's Eyes: IDT Corp.

Jonas Pulls Off Another Big Deal

Barron's is once again touting the merits of IDT Corp.'s assets. IDT Corp. (IDT) has turned into a classic cigar butt investment-- its market cap essentially mirrors the cash on its balance sheet. Ergo, Wall Street is giving management zero value. The theory behind cigar butt investing is that the value of the assets on the balance sheet out-weighs management's competence or lack thereof over time.

IDT Corp. is best known for starting Net2phone and selling the company to AT&T for big bucks in the late 1990s. Net2phone turned out to be a disaster for AT&T and they sold the company back to IDT for a fraction of the original price. This is where the huge cash position comes from.

When looking deep into the operating performance of any of its businesses, it is tough to find anything promising about this company. The first quarter of 2006 was a complete disaster as virtually all its divisions showed serious deterioration in their operation performances. Management didn't quarrel with the poor performance but cited investments in future projects should get the company going again.

This week Liberty Media agreed to buy IDT Entertainment, a digital media company consisting primarily of the CGI movies assets, for $400 million. IDT Entertainment consists primarily of a computer generated imagery animation studio. Once again, Howard Jonas, IDT Corp.'s head, convinces some smart people to give him a lot of money for an unproven asset.

Despite the very unorthodox operating methods of Jonas, each time IDT appears to be in big trouble, he pulls of another deal that gives him a boat load of cash. Once again, Jonas does it.

Through TheFLY's Eyes: Trading Ideas

Stocks That Could Move This Morning

Sirius (SIRI) and XM Satellite (XMSR) were upgraded this morning by both Lehman and Cowen. Both firms cited that the stocks have gotten unfairly oversold and are now cheap. We blogged specifically about Sirius last week writing that Sirius reported an excellent first quarter and is the better play in our opinion.

AES Corp. (AES) after being mentioned by Cramer a few weeks ago, Calyon Securities had positive comments on the stock this morning. AES is a less volatile way to play the growth in emerging markets. While commodities and emerging markets correct, AES has exposure to this high growth area but has not participated in the rapid rise in emerging market stock prices. New projects and better earnings will drive this stock higher.

Tribune (TRB) announced a Dutch offering this morning where it is willing to pay between $28 and $32 per share for 25% of its outstanding stock. TRB closed at $27.89 last week. TRB stock has gotten killed the last few years as advertising continues to shift away from newspapers to the Internet. This should be a good trade as TRB is cash rich and might be willing to pay at the upper end of the Dutch-auction range.

Friday, May 26, 2006

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Through TheFLY's Eyes: eBay Inc. and Yahoo, Inc.

A Technical View

This week saw a strategic alliance forged between eBay (EBAY) and Yahoo! (YHOO) which resulted in a rapid price rise for both stocks on the news. What we wanted to look at today was the prospect that there were some technical clues evident before the news was known.

First, we put out a note on our news feed on the morning of May 23rd concerning some relative volume interest and price gains in the four Internet stocks in the NDX 100 (Yahoo!, eBay, Amazon (AMZN) and Google (GOOG)). The entire basket was on the move and it was clearly evident in a down market there was something afoot with the group. What exactly that might have been could not be known at the time, but volume was much higher relatively than normal and the average price gain at the time was around 2.1% while pretty much everything else in the index was heading south at the same time.

On the charts of Yahoo! and eBay we can see some important events happening. It first became evident in the chart of Yahoo! on May 22nd and then on eBay on May 23rd. eBay had just been downgraded with a price target cut at Deutsche Bank on poor global listing. Despite that the stock was moving up and had broken its downtrend resistance line. This was a major bullish move given the sentiment backdrop (bearish) in the index in general and Internet stocks since the beginning of the year in particular.

The next morning, on the 24th, several firms came out with recommendations to buy eBay (and almost exclusively eBay) as well as some other Internet plays on the basis that there might be a recovery in '07.

On the morning of the 25th, the news broke of the eBay/Yahoo! strategic alliance. Both stocks took off on the news, with eBay gapping up some 9%.

Our point here is the charts held some interesting clues, the relative volume indications showing "smart" money moving into the sector ahead of the news was yet another clue especially in a down market. The volume moves in the names mentioned coupled with the break of the resistance lines was another.

The next moves ahead for both Yahoo! and eBay are less certain. There was a lot of technical damage inflicted on the names (they are still in bearish trends with Yahoo! entering into neutral mode only today after several days of rallying sharply). Both face a great deal of resistance overhead (eBay would only be back to neutral above $37 dollars, some 10% from where we are as this is written). Keeping an eye on the levels noted on the chart in the days ahead will likely provide additional clues to where the stocks may yet go as the news is fully digested.

Charts created with Equis MetaStock

Through TheFLY's Eyes: U.S. Steel.

U.S. Steel: At The Foundation Of Global Growth

After the recent two-week sell-off, if you think the secular or global growth trend in commodities and minerals has ended, think again. Demand for minerals and basic materials in Brazil, China, India and Eastern/Central Europe continues to be robust.

Moreover, a good short hand – or one way to quickly gauge the demand for commodities, and more broadly, the health of the ongoing global economic expansion – is to evaluate U.S. Steel (X).

That’s because U.S. Steel is leveraged primarily not to the American economy, but the global economy. In other words, as the global economy goes, so goes the fortunes of U.S. Steel. And right now things are going pretty well for the global economy, and for U.S. Steel.

U.S. Steel, which traded at $65.98 up 98c on Friday at mid-day, is experiencing strong demand for carbon flat-rolled and seamless tubular products. Further, orders are solid across the building spectrum – in the non-residential construction, capital goods, and energy markets. In addition, steel prices, after a period of consolidation, are firming gain – another sign of solid demand. And that’s a major reason why the analysts in the Reuters’ consensus estimate expect U.S. Steel to earn $8.52 per share in 2006.

So when news stories appear arguing that a ‘major global economic slowdown’ is imminent or underway, before forming a conclusion think first about those pictures of building cranes in use in China , Europe, and the Americas. And then check to see how U.S. Steel is doing.

Through TheFLY's Eyes: Chico's FAS Inc.

A Great Growth Company Hits A Bump In The Road

Chico's (CHS) has been one of the great growth companies this decade with company-wide sales increasing from $155 million in fiscal year 2000 to $1.4 billion in the most recent fiscal year. However, Chico's stock is selling at $31, down from a high of $49 earlier in the year as its core business has shown a slowdown in same-store sales growth.

Wall Street is concerned that the market for Chico's stores might be maturing. However, management says it needs to be more diligent in talking about future merchandising strategies which competitors are now copying. Chico's management historically has communicated very clearly with the investment community about marketing and merchandising strategies, but it appears to be backfiring as competition quickly adjusts their own merchandise.

With the stock down 37% from its peak, it is worth being a contrarian with Chico's. In addition to its Chico's brand it owns two newer brands, WhiteHouse/BlackMarket and Soma, that are now growing in the mid-teens and should do so for a number of years. In addition, the company has another new brand which will see growth in 2008.

This management team has demonstrated a great ability to grow profitably and throw off cash. This is most likely a good time to buy a high quality company after a big correction in share price.

Thursday, May 25, 2006

Through TheFLY's Eyes: American Airlines

American Airlines’ Long, Slow Climb Back to Profitability

Concerning American Airlines’ (AMR) effort to turn its operation around, it’s been a case of two steps forward, one step back.

At some point in 2006, American is expected to be operating profitably. But will the return to black ink represent a long-term trend, or a pyrrhic victory? American, which was trading at $24.55 Friday, up 15c, has rigorously cut operating costs, reduced its fleet size, and eliminated under-used routes, while at the same time incrementally increased fares to get revenue end expense lines headed in the right direction. Analysts particiapating in the Reuters consensus estimate expect AMR’s EPS to jump to $3.26 in 2007 from $1.49 in 2006.

However, these analysts also expect revenue to remain largely flattish in the same time frame, rising slightly to $22.7B in 2007 from $22.4B in 2006.

The modest 2007 revenue estimate underscores Wall Street’s cautious stance toward equities at this stage of the economic growth cycle, aa well as the high risks associated with investing a legacy carrier, such as American, or United Airlines (UAUA). Investors know that although American has made progress, a major air carrier’s prospects can deteriorate quickly: another spike in fuel costs - already chewing up 30c of every $1 in AMR’s revenue – could quickly erode profits. Further, a downturn in the economy could also reduce travel by the public, and further complicate a turnaround effort.

To be sure, American has made progress, but for the moment the investment signal from Wall Street is stand-by until the U.S.’s economic picture becomes more-clear.

Through TheFLY's Eyes: Sirius Satellite Radio Inc.

Sirius vs. XM Satellite: Go With Sirius

XM Satellite Radio (XMSR) has gotten crushed during 2006, with the stock decreasing 57% for the year. It has been especially hard hit the last few days as XM warned it was going to miss its subscriber targets. The reasons for the miss were a bit weak--not enough radios and a vague outlook for subscriber growth.

Conversely, Sirius (SIRI) said yesterday that it is still very comfortable about hitting its numbers. The Karmazin approach of getting Howard Stern to be the front man for the company is paying off. The company had good adds in Q4 of 2005 and had a very good Q1 of 2006 (typically a seasonally weaker quarter for the industry.) In addition, the company gave the impression that they were being conservative about net subscriber growth prospects for the year.

We should see a de-coupling of these two satellite radio companies as the improving fundamental performance for Sirius drives the stock higher. Supposedly, XM's CFO inferred in his speech yesterday that it might even be a good idea for the two lone satellite radio companies to merge. That is not a big vote of confidence.

Through TheFLY's Eyes: Pacific Ethanol Inc

Morgan Stanley, Goldman Sachs, Bill Gates All Bet on Ethanol

Investors and politicians are both flocking to ethanol's banner. President Bush has praised the alternative energy source as a way to reduce independence on foreign oil. Morgan Stanley (MS) invested $66M into Aventine Renewable Energy LLC, an investment that is now worth $750M. Goldman Sachs (GS) is investing in Iogen Corp, which is developing enzymes that can break down wheat stalks, wood chips and straw into ethanol components. Bill Gates, the founder of Microsoft (MSFT), has invested $84M in Pacific Ethanol (PEIX), which is building a 35 million gallon-a-year plant that will make the company the biggest ethanol maker in California.

Although none of this is new, it proves the point that "news doesn't matter until it matters," as a Bloomberg article highlighting these points on ethanol earlier today has moved Pacific Ethanol's stock up +1.15 to 31.43 today, as this is written, apparently on the piece.

Through TheFLY's Eyes: MasterCard

A Thought on MasterCard's First Day

For any investor thinking of buying into the MasterCard (MA) IPO, you might want to read this article from the Wall Street Journal (subscription required), which highlights the fact that credit card users are paying off more of their monthly credit card bills, which in turn affects the fees that credit card companies collect. The article does not specifically mention MasterCard, although it is ironic that it came out the same morning of the company's IPO.

Through TheFLY's Eyes: Internet Stocks

Big Cap Internet Stocks Have Dropped Big--Time To Start Buying

During the 1990s, the leading high tech companies would have 30% to 50% drops, all of which proved to be very good buying opportunities. eBay (EBAY), Yahoo! (YHOO) and Broadcom (BRCM) are all down some 30% from their highs. It is probably a good time to start buying.

Cisco (CSCO), Dell (DELL), Intel (INTC) and Microsoft (MSFT) all had big pullbacks during the 1990s, those who did not buy into those declines lost out on great money making opportunities. Today, the leading edge companies are eBay, Yahoo!, Google (GOOG) and Broadcom which are all down big from their highs and possess the same characteristics of the 1990s leaders--industry leading positions, massive cash generation, good balance sheets and high growth markets.

Actually, from looking at the price chart of Yahoo! and eBay, these companies actually tend to be the first movers out of downturn and tend to lead into a slowdown. It appears from the eBay-Yahoo! news this morning, they will once again lead out of a downturn.

Wednesday, May 24, 2006

Through TheFLY's Eyes: Sepracor Inc.

The Rumor Mill

An FDA non-approvable letter for Neurocrine Biosciences' (NBIX) Indiplon tablets has created rumors that Neurocrine partner Pfizer (PFE) will end its partnership with the company and purchase rival drugmaker Sepracor (SEPR), which makes the insomnia drug Lunesta. Early last year, Bloomberg reported that Sepracor hired Morgan Stanley (MS) to explore a sale, but neither company confirmed the report.

Sepracor's intra-day call option volume of 42,447 contracts compares to intra-day put volume of 5,132 contracts. The June 60 calls are bid 75c, above its theoretical value of .09 cents, implying speculators are positioning for an upside event.

As this is written, shares of Sepracor are up $1.34 to $50.

Through TheFLY's Eyes: Microsoft Corporation and Viacom, Inc.

Windows Has the Urge

Looking back at some recent reviews on the blog, I realized I had been critical of a few new services (Yahoo's remodel, TiVo's magazine deal). To avoid solely being a naysayer, I waited for a chance to write a favorable review of a new product. Urge has provided me this opportunity.

The Urge service, which was announced by Microsoft (MSFT) and Viacom's (VIA) MTV Networks last December, launched one week ago on May 17. The service is meant to be an alternative to Apple Computer's (AAPL) iTunes music download service. A free two-week trial, which doesn't even require a credit-card, is available here.

Now it is known that Apple's iPod is king, and no product is going to come out and immediately knock iTunes off its pedestal, but Urge is a genuinely impressive product, considering there is a substantial digital music market beyond iPod/iTunes.

This article in MP3newswire, which previews a number of new "iPod Killer" MP3 players due out this summer, notes that 3 out of 4 MP3 players purchased are iPods. This means Urge has 25% of the portable music market as "easy fruit" to pick before converting a single iPod user. With Microsoft and MTV backing the product, Urge may have the legs to contend with iTunes in a longer-view scenario.

Looking at the product, Urge is sleek and polished, with an easy to navigate interface. There is an extensive library of all types of music, as well as over 130 radio stations.

The downside to the product is a confusing pricing strategy which involves a la carte pricing (99 cents a song), a monthly/yearly subscription ($9.95/$99), and a monthly/yearly subscription with "ToGo Access" for portable MP3 players ($14.95/$149). Fortunately, Urge's FAQ section is easy to navigate.

Through TheFLY's Eyes: Citigroup

Citigroup’s China Push

When signs of economic sluggishness surface at home, one tonic may be to consider new business opportunities abroad.

Consumer and investment banking giant Citigroup (C) appears to be taking that stance in going the extra mile in its effort to secure a stake in China’s Guandong Development Bank (GDB).

Since China’s Banking Regulatory Commission indicated that bids for GDB had to comply with the country’s regulations on foreign ownership of domestic lenders, there has been talk that Citigroup would seek a China-based partner in a revised bid attempt.

Late Tuesday the Wall Street community received word that Citigroup was in discussions with China Life to possibly submit a new bid, one that would counter French-bank Societe Generale SA’s $2.83B bid for a majority stake in GDB.

Wall Street, and the international investment community for that matter, are watching the China GDP deal’s status/outcome for a variety of reasons, not just the value-added potential for Citigroup. Many financial observers view it as a test case to gauge whether the Chinese Government will be willing to allow greater foreign control of China’s smaller and less-competitive banks.

Citigroup and GDB officials declined to comment on the issue, but the sense on Wall Street Wednesday was that a revised offer may surface in the near future, providing another east/west data point for analysts to mull over for its international business implications.

Through TheFLY's Eyes: Corning Incorporated

Weak Flat Panel Sales, But Telecommunications Business Is Picking Up

Prior to attending two investor conferences this week, Corning (GLW) released a business update where it expects its liquid crystal display (LCD) business to be weaker than forecast. The stock sold off as the company expected the LCD to be flat to down 5%, versus a previous estimate of being flat to up 5%.

However, despite the negative news on the LCD front, the old telecommunications business continues to come back. Management upped its guidance for growth of 15% to 20%, from the previous guidance of 10% to 15% growth. Higher-than-expected demand from the US and Europe for fiber, hardware and equipment products are the reasons for the guidance increase.

As we have been saying in our blogs, the commodity that is going to see growth in the second half of 2006 is bandwidth, not copper and gold. Demand along the whole fiber food chain is getting tighter and tighter. Corning will benefit along with companies like JDS Uniphase (JDSU) and Applied Micro Circuits Corporation (AMCC).

Through TheFLY's Eyes: Dynegy Inc.

Trading Opportunity: Dynegy Prices Secondary At $4.60

Dynegy (DYN) priced its secondary offering at $4.60 last night. Dynegy was selling over $5.00 a few days ago. See Monday's blog to get details. But the essence of the story is that this company is building a foundation to become an industry leader in the merchant power business. This price weakness due to the secondary is a price point to either build a position or put on a trade.

Tuesday, May 23, 2006

Through TheFLY's Eyes: New York Stock Exchange

The Drive To Establish A Global Marketplace

The New York Stock Exchange (NYX), which recently went public, heated up the battle to create the world’s most-seamless regional stock exchange with its $10.2B offer to takeover Euronext.

Euronext’s Board of Directors, which said it favors the NYSE’s offer over a previous proposal from Deutsche Boerse, plans to call a special meeting to discuss each offer. Euronext has operations in Paris, Amsterdam, Brussels, and Lisbon

Here’s what may result, if an NYSE/Euronext deal comes to fruition: On the positive side, traders in Europe and the United States would have easier access to equities in each other’s regions. Likewise, companies would see improved access to capital sources not on their home country’s continent. On the down side, NYSE and Euronext specialists and traders may have to adjust to trading hour changes: it may mean early starts for New York trading and later closes for European trading. Likewise, companies may experience questions from financial analysts located on another continent at odd hours.

NYSE/Euronext union show strong signs of making sense for shareholders: working through the operational and administrative implications/changes may very determine whether the deal comes to fruition in the period ahead.

Through TheFLY's Eyes: Nasdaq Stock Market

Oversold Market: ETFs

TheFly blogged earlier this morning about bottom-picking individual stocks in an oversold market. However, ETFs also provide a more diverse way to play a stock market rebound. There was a very good piece this morning by recommending playing the NASDAQ 100 to make money from a market rebound.

The essence of the article is that there have only been five times in the last twenty years where the NDX has closed below its lower Bollinger Band for five days in a row. In each case the market was higher one week later. Click on the above link and read full piece.

Through TheFLY's Eyes: Yahoo! Inc. and Broadcom Corporation

Playing An Oversold Market: Individual Stocks

Bear Stearns investment strategist, Francois Trahan, issued an excellent report yesterday on ways to play an oversold market through individual stocks. Some of the variables to consider are: high short interest, higher beta, high long-term estimated EPS growth, percentage drop in price, mid-market cap, lack of yield and favorable analyst rating.

After running the screen he came up with a bunch of names two of which TheFly found interesting: Yahoo! (YHOO) and Broadcom (BRCM). Yahoo! is beginning to pick up some investor interest momentum due to holding their analyst meeting last week and a big cover story in Barron's. In addition, the stock is down from $46 to $31. A big drop!

Broadcom is the poster child in the semiconductor industry as voice, video and data converge. Forget Intel, Broadcom is the semiconductor stock of the future. Broadcom has been a great high beta way to play an oversold NASDAQ. Broadcom peaked at around $50 and has dropped to $35.

Monday, May 22, 2006

Through TheFLY's Eyes: Crashes

How Markets Crash...Slowly? The Oil Bubble Goes Burst in Ways Not Expected

When I began writing this piece it was centered solely on the near-collapse of the Saudi and other Persian Gulf State stock markets ten days ago (as this is written). Today, the BSE Sentex in India plunged 10% before a trading halt and circuit breakers kicked in mitigating some of the damage. We will deal first with the fall-out from the Saudi market.

The TASI (Tadawul All-Shares Index) plunged over 21% in a week, now off over 39% from last year's peak, the Dubai Financial Market Index dropped 15.6% in the same week, and the Abu Dhabi Securities Market closed down 10.5%. So what? Well, in dollar terms the loss in the TASI alone was over 350 billion dollars since the start of the year. The other two indices lost some 50 billion since the start of the year.

It is also the speed of the loss and the underlying reasons market participants there are giving for the crash that is worrisome. They believe that an unprecedented speculative equity bubble fueld by oil profits led the market to irrational levels and that that excess is now being squeezed from the market. In interviews with people investing in those markets the view is that a "sea change" in psychology has taken place and that participants will not soon return to the markets. By the way, this is the third and largest of the sudden drops the TASI experienced this year.

What possible relevance can this have here? The reason we are raising this issue is that Saudi money in particular is a major supplier of liquidity to our own markets (and others). Although not focused solely in the stock markets, the Saudis alone have some $420 billion in assets in the US in direct and passive form. We may have not heard the crash in Riyaddh or Dubai, but it is not out of the question that our own markets are feeling the effects in milder form here over the past week (and possibly weeks to come). As particpants in one market experience losses, they may be compelled to liquidate in other markets to cover losses or to hedge risk exposure. Further, foreigners own significant stock assets in the Saudi market through less direct means. So those losses are not simply local, but global. A global negative price feedback loop may be developing.

In India today it is very possible the ripples of the shockwave from the the Middle East are being felt. In our markets so far, the ripples have been relatively mild. It is worth keeping a watch on all the major global indexes at this stage for signs of continued impacts and the possible damage they may yet inflict here.

Through TheFLY's Eyes: Dynegy Inc.

Balance Sheet Continues To Firm Up

Dynegy (DYN) announced a series of moves this morning to continue to improve its balance sheet. It is going to pay off a $400 million preferred, sell a plant and do a secondary offering.

Unlike Enron, Dynegy was able to avoid bankruptcy, and with the help of new management, is turning this company into one of the leading consolidators of the merchant power business. Dynegy has taken care of its money-losing toll arrangements, restructured its debt and should generate a good amount of cash in 2007. Today's announcement further positions the company to begin acquiring assets in this much-forgotten, yet relatively high-growth merchant power business.

The leader behind this effort is Bruce Williamson, a long-time executive at Duke Power. Williamson has been with the company since the early part of this decade and accomplished quite a lot. Williamson has clearly said he is optimistic about the long-term prospects for this industry and a lot of money should be made for shareholders. While everyone is focused on the Enron trial and the bankruptcy of Calpine, Dynegy is building a solid foundation for growth and good shareholder returns.

Through TheFLY's Eyes: Lowe's Companies, Inc.

Lowe’s Posts Solid Q1 Earnings

Lowe’s Monday reported Q1 EPS of $1.06 compared to 73c a year ago, and the consensus estimate of 94c.

The company said Q1 revenue totaled $11.9B compared to $9.9B a year ago, and the consensus estimate of $11.8B. Same store sales rose 5.7% in the quarter.

Analysts were, for the most part, impressed by the report: while also commenting on the solid Q1 revenue total, several underscored the company’s operating margin, which improved to 35.0% from 34.3%. Like others in the home improvement/hardware sector, such as Home Depot (HD), Lowe’s faces a more-challenging selling environment as the housing sector slows. Most analysts expect rising interest rates and premium home prices to continue to slow both new and existing home sales in the quarters ahead. In addition, rising energy prices are expected to reduce consumers’ disposable income, presenting another damper for the home improvement sector.

Those slowing home sales will undoubtedly make it harder for Lowe’s to continue robust growth levels in the remaining quarters of 2006, but as of Q1, Lowe’s has signaled it is equal to the challenge and capable of delivering adequate earnings growth to today’s more-challenging market.

Through TheFLY's Eyes: TiVo Inc.

TiVo applying Band-Aid to Severed Legs

TiVo (TIVO) made itself a house-hold name by popularizing the idea of recordable television, and in doing so, made its brand name a verb. However, cable companies were quick to cannibalize on the innovations TiVo made, introducing generic digital video recorders (DVRs), and cut TiVo's legs off before the company even got running.

Step in TiVo CEO Tom Rogers, who clearly realizes his position and informed the New York Post, "We've been putting a lot of effort into differentiating Tivo from generic DVRs."

His latest solution, as reported by the New York Post, is to partner with magazines to "offer viewers virtual TV channels with content hand-picked by magazine editors." Since the magazines are getting free television branding, I doubt TiVo has to pay anything for this partnership, but does anyone think that this will increase TiVo's struggling viewership? Rogers should be working on TiVo's next revolutionary idea, not "Guru Guides" featuring Entertainmant Weekly.

Through TheFLY's Eyes: Barron's

Legendary Investor Agrees With TheFlyOnTheWall.Blog

Barron's interviewed legendary investor Joe Rosenberg who has run the investment portfolio for Loews (LTR) and the Tisch family for years.

Rosenberg trashed commodities and emerging markets which are filled with froth. One great stat from the interview is that there is between $120 billion to $140 billion in commodity funds today, up from $6 billion in 1999.

What does Rosenberg like: big cap names that are receiving little attention. He mentioned: Microsoft (MSFT), Pfizer (PFE), Schering Plough (SGP) and Johnson & Johnson (JNJ).

His comments are right in line what we have been saying the past month in our blogs--get out of commodities and emerging markets and start looking at large cap, high quality names. The drop in commodities will continue for quite a while, start looking as some big cap growth names like Oracle (ORCL), EMC (EMC), Time Warner (TWX), Comcast (CMCSA), most of big pharma (SGP, MRK, JNJ, PFE) and you should make some good money.

Friday, May 19, 2006

Through TheFLY's Eyes: Sears Holding Corporation

More Steps In The Right Direction For Sears

It is hard to argue against the success story currently building at Sears.

Sears (SHLD) said Q1 EPS rose to $1.14, compared to a 61c [excluding charges] a year ago, and the consensus estimate of 65c. In addition, the company said Q1 revenue totaled $12.0B, compared to the $7.6B a year ago.

The stats indicate that the company’s new management, which includes chairman Eddie Lampert, has successfully implemented substantial changes to bring expenses under control and improve operating margins. Same store sales could have been better: they declined -4.8% in Q1 – but as one analyst characterized it, underperformance in same store sales can be overlooked if earnings are strong and it appears the company has the right inventory for its customers. Sears is performing well on both metrics, and the broader sense among analysts is that a recovery in same store sales will follow.

On Friday Sears’ shares were trading higher, up 70c to $156.55 in early afternoon trading.

A few analysts remarked that Sears could realize more cost-savings by closing underperforming stores quicker, but in general, Sears’ Q1 report provided ample evidence of a turnaround in place

Further, Sears apparently is confident that its recovery is well underway and/or that it’s stock is undervalued: the company bought back $411M worth of shares in Q1, and it has another $497M left in its current repurchase authorization.

And while performance and confidence cannot guarantee future corporate success, any experienced analyst on Wall Street will no-doubt convey that they certainly are steps in the right direction.

Through TheFLY's Eyes: Nasdaq Stock Market

NASDAQ Hits Support Level released an excellent chart this morning showing that NASDAQ has hit a major support level. NASDAQ's drop has been pretty severe, with many big cap names getting crushed. It most likely is a good time to start nibbling.

TheFly has been saying avoid emerging markets and commodities which are beginning to break apart. Tech will most likely take the lead in the second half of the year. This is a good opportunity to buy big names such as EMC Corp (EMC) and Oracle (ORCL).

Through TheFLY's Eyes: Saudi Arabian Stock Market

Saudi Arabian Stock Market Is In A Free Fall

As the chart shows, the drop in the Saudi Arabian stock market has been precipitous. Obviously there has been a lot of speculation, but does this also portent lower oil prices.

Natural gas reported a big increase in inventories this week. Copper is down its limit this morning along with many other commodities that are trading down big. If stock markets over time mirror the underlying fundamentals of the assets, the Saudi stock market is saying oil prices are coming down

Saudi Arabia's King Planning To Implement A "Risk-Free Fund"

The most likely symbol of the Saudi stock market excesses is the story referred to on TheFlyOnTheWall's news feed. The BBC reports that the King of Saudi Arabia wants to start a risk-free fund for its citizens. "The fund will be for people of limited income, employees and others...this group matters most to me," said the monarch. "If they win then this is their luck, with God's will, and if they lose, then their capital is preserved with us."

From looking at this chart, the King or God better have some deep pockets.

Thursday, May 18, 2006

Through TheFLY's Eyes: JDS Uniphase Corporation

Needham Upgrades JDSU To Buy

On Monday, we blogged about using JDS Uniphase's (JDSU) price weakness as a buying opportunity, after the company issued a $375 million convert last Thursday night and the stock got killed. Needham this morning upgraded the stock to a Buy from a Hold, agreeing with TheFlyOnTheWall.

The company has a new management team and a bunch of new products that are coming to market. JDSU looks like it is going to succeed.

Through TheFLY's Eyes: Emerging Markets

It Is Time For Emerging Markets to Consolidate

Emerging market funds have been some of the best performers during the last three years. The monthly charts of Russia and Turkey's leading indices clearly show this outperformance. Investors can look at almost any emerging market index and see the same upward slope.

Emerging markets historically have had a tough time when the US is in a tightening phase of its credit cycle. It might be time to take some money off of the table.



Wednesday, May 17, 2006

Through TheFLY's Eyes: Carnival Corporation

Carnival Warned Of Weak Results Yesterday:
This Plays Into Our Contrarian Call On Expedia

Carnival (CCL) lowered earnings as its Caribbean business is expected to show a 6.2% drop in its load factor for its Carnival-branded product. The other brands, targeting higher end customers, continue to do well. This is a sign that the lower-end consumer is beginning to feel the impact of higher gas prices and interest rates.

The other day we wrote about Expedia's weak results due to not being able to get enough inventory to sell. The online travel business appears to be counter-cyclical in nature, doing better when airlines, hotels and cruises are not doing well. They then have to fill their beds and seats and use the online industries powerful distribution network to sell inventory. Carnival earnings miss is the first sign that the consumer is slowing down, the first data point showing why investors should look at Expedia.

Through TheFLY's Eyes: Hewlett-Packard Company

From Much-Maligned To Much-Improved

Hewlett-Packard (HPQ), which had been out-of-favor in Wall Street circles for so long that some traders and investors thought the company’s full name was “much-maligned Hewlett Packard,” looks like its turnaround is underway.

Hewlett said it earned 51c per share in Q2, compared to 33c per share a year ago, and a 49c consensus estimate. In addition, Hewlett said Q2 revenue rose to $22.6B, compared to $21.6B a year ago, and a $22.6B consensus estimate.

Sector analysts were generally positive regarding the report. In particular, Goldman Sachs commented that Hewlett’s margin improvements are straddling all key sectors, providing solid evidence that Hewlett should be able to exceed its 7.5%-8% operating margin guidance for fiscal 2007. Further, Goldman also argued that Hewlett could be one of the best defensive stocks at this stage of the economic growth cycle, providing both a shelter in the midst of a battered tech sector and a firm opportunity for share appreciation.

And the market continued its generally favorable response to Hewlett on Wednesday: in early afternoon trading Wednesday, Hewlett surged almost 4% or $1.22 to $32.33 with more than 19M shares traded.

Moreover, and if the company continues to improve its business fundamentals in the quarters ahead, the modifier in front of Hewlett will no-doubt change from “much-maligned” to “much-improved.”

Through TheFLY's Eyes: Pacific Ethanol Inc

Insider Selling At Pacific Ethanol

The Wall Street Journal reported insiders at Pacific Ethanol (PEIX) sold $100 million worth of stock as the company's value has tripled. Here's a link to the Yahoo! insider selling page.

Do you think the door is wide enough for everyone to get out?

Through TheFLY's Eyes: Economic Outlook

David Malpass of Bear Stearns Turns Bearish On Stocks and Bonds

David Malpass, long-time international economist, has one of the best records on Wall Street for understand how money flows through the US and global economies. He was the only higher profile economist screaming in the late 1990s that deflation was a much greater risk than inflation. He was proven right.

Malpass today is saying that the incremental 25 basis point interest rate increases by the Fed are not working. The Fed is always behind the curve that is why gold is going up. His advice to the Fed: increase short-term rates by 50 bps. This will pop the gold bubble and end the selling of the dollar.

Sooner or later the Fed will recognize this and will make the move, according to Malpass. This will mean economic growth will be much slower in 2007.

Full comments by Malpass can be found on Richard Karlgaard's Digital Rules blog.

Malpass has often been proven correct with his twelve-to-eighteen month forecasts.

Tuesday, May 16, 2006

Through TheFLY's Eyes: Broadband

Broadband Is The Real Commodity

The Great Gretzky used to say: "You have to skate where the puck is going to be." The same is true for investing: buy what is going up in the future, not what has already gone up.

What is the big commodity of the future? Bandwidth

* IP traffic is growing about 70% per year. Oil grows about 3% per year

* Standard TV uses 450x the bandwidth of an email. High definition TV uses 3,000x the bandwidth of an email.

* About 50% of Internet traffic is video peer to peer.

* 20% is streaming video and music.

* posts 20,000 videos per day.

As the stock market corrects, the companies poised to have strong earnings growth in the second half of 2006 are bandwidth-oriented companies. Forget the old economy names and get back into the new economy names. The email of the future is sharing big files on peer-to-peer platforms. This will use up all the bandwidth that was built in the late 1990s.

Investors can play it from both the equipment and network sides. On the equipment side, the big name is Cisco (CSCO). Some of the smaller names that are beginning to report good results are Applied Micro (AMCC), JDS Uniphase (JDSU) and Power One (PWER). On the network side, look at the pure IP players such as Level 3 (LVLT), Qwest (Q), Broadwing (BWNG) and Time Warner Telecom (TWTC).

Through TheFLY's Eyes: Home Depot, Inc.

Adequate Earnings, But Not Adequate Enough

Home Depot (HD) executives Tuesday said they were “disappointed” with Q1 retail sales, and from its initial response Tuesday, so was the market.

In early afternoon trading Tuesday, shares of Home Depot plunged more than 3.5% or $1.42 to $39.06 after the company reported its Q1 totals.

Home Depot reported Q1 EPS of 70c, compared to 57c a year ago, and the 67c consensus estimate. The company said Q1 revenue totaled $21.5B, up 13.1% from Q1 2005, and slightly ahead of the consensus estimate of $21.4B.

Why the sell-off, despite a Q1 earnings stat that exceeded the consensus estimate? Tuesday’s market response was a classic example of Wall Street taking the “good numbers, but not good enough” stance. Home Depot’s Q1 revenue and profit results were adequate, but they were not good enough to allay investors’ concerns about the home improvement / hardware sector, in general.

Wall Street believes that with the economic expansion in its fifth year, the housing and home improvement sectors will slow, which would be consistent with sector slowdowns in previous economic cycles. In addition, rising energy/gasoline prices threaten to reduce consumers’ disposable income, putting another damper on Home Depot’s potential sales in the quarters ahead. Hence, while Home Depot posted adequate results, the totals were not enough to cancel out the downside factors of an expected housing sector slowdown and rising energy/gasoline prices. It’s a double whammy that argues against risk taking.

And currently, Wall Street is in no mood to take inordinate risks.

Through TheFLY's Eyes: Yahoo! Inc.

Yahoo Modernizes Homepage, But is it Enough?

Yahoo (YHOO) has finally updated their homepage, The updated version can be viewed here with a compatible browser. Although positive for the company, will it be enough to compete with the 800 pound search gorilla, Google (GOOG)?


* Site looks shiny and modern after the long-overdue remake

* New features added (i.e. Yahoo! Pulse)
* The site easier is now easier to navigate


* Compared to Google's stark homepage, it is still an overly crowded page

* The added features don't seem to be groundbreaking
(i.e. Google Maps, Gmail)
* Not enough to convince users to switch from another search engine

In the end, the users and the market will judge for themselves, but I for one, am not impressed with this dress-up, my overall rating of the redesign is - yawn.

Through TheFly's Eyes: Apple Computer, Inc.

A Technical View

Apple's (AAPL) stock is taking a hit today on a report from OffTheRecordResearch suggesting that Apple's third quarter is off to a slow start on sales falling below plans. On a technical basis the stock was signaling trouble several sessions ago when the short-term uptrend line was broken. Further cause for concern in the chart has been a notable drop-off in volume interest as the stock's price was rising. This is a negative divergence from what appeared to be bullish price action.

Support levels to watch (which may now be downside targets) are $64.35, $62.90, $61.05. Resistance levels (which may stop rally attempts but are bullish if the levels hold or are exceeded on those attempts) are $66.01, $67.35, $68.04.

Chart created with Equis MetaStock

Through TheFLY's Eyes: Berkshire Hathaway Inc.

Great Notes

Matt Stichnoth of published great notes on his visit to Berkshire Hathaway's (BRK.A) annual shareholders meeting.

Berkshire Hathaway's Annual Meeting