Wild Wind Financial

S&P 500 Addition of First Solar Idiotic

2009-10-01T20:34:00.003-05:00

I heard this evening that First Solar (FSLR) will be added to the S&P 500 index when Pfizer closes its acquisition of Wyeth soon. First Solar is an innovative fast growing solar firm. However, there is a glut of solar cells on the market which is expected to cause a decrease is solar pricing and margins. As a result, this is another case of S&P adding a company to its index when the company is at its peak. S&P did the same thing during the technology boom adding Yahoo and others to its index during the height of the tech bubble. This action once again demonstrates why the S&P 500 is a not a good index to be invested in.

Down Day but Optimism for Hotel REITs

2009-05-05T19:03:00.002-05:00

The markets were lower today with 4 stocks up for every 5 stocks down. Notable today was a continued increase in casino and hotel REIT stocks. The most beaten down and speculative securities have continued to outperform in this market. I have serious concerns that this winning streak will not be able to continue forward.

No Social Security Increases for the next two years

2009-05-04T20:04:00.002-05:00

I was watching NBC Nightly News tonight and Brian Williams announced that there will be no increases to Social Security for next year and the year after.

Sure looks like no inflation on the horizon anytime soon.

It is amazing to watch the action in the commodity stocks today. Energy, Metals, and Agriculture all up big today. Is stagflation in the future? I think there will be pockets of inflation as there was a discussion on Fast Money tonight that water prices will soar over the next few years because of a lack of supply. Scary news!

Let's hope for the best.

Swine Flu Adding Pressure to Stocks

2009-04-28T07:24:00.003-05:00

The swine flu continues to spread throughout the world, causing stocks to feel downside pressure this morning. Also not helping is the Federal Government telling Citigroup and Bank of America that they need to raise more capital. Trading continues to be challenging in this market.

Market weakness continues. Strength in metals and agriculture.

2009-01-19T10:05:00.002-05:00

Market weakness continues with financials leading the way lower.

From Jan. 1st through the 17th:
The S&P 500 is down 5.9%
The Dow Jones is down 5.6%
The Nasdaq Composite is down 3.0%

Strength is currently being experienced in Metals and Agriculture.

Ride these sectors until they cross back below their 50-day moving averages.

HENRY's Susceptible in this Recession

2008-11-02T21:57:00.000-05:00

The latest BusinessWeek magazine highlights HENRYs (High Earners, Not Rich Yet) which are families that earn $250K - $500K per year, but who are vulnerable to the economy due to the lack of job security given their high earnings. These families have seen their costs for child daycare, private schools, and paying college expenses for their children increase dramatically along with the increase in the AMT tax. Due to these high costs, these families have not saved susbstantially to be self sufficiently wealthly in an economic downturn making their earnings very vulnerable to today's recession. The impact of these high wage earners to the overall economy is still uncertain, but even this group of high wage earners is getting squeezed today.

Hardly anyone has been immune from the current credit crisis and its effects on the economy.

Will the U.S. Follow Japan?

2008-11-02T21:48:00.000-05:00

Will the U.S. Follow Japan into nearly two decades of stagnant growth?

I believe the risks are increasing that the U.S. will act similarly to Japan.

Full-time jobs are hard to find in both the U.S. and Japan. Innovation has become more expensive and productivity gains have continued to slow. The social burdens of caring for an older population keep growing. The high value of both the Yen and Dollar impede economic growth by discouraging manufacturing and imports. Deflation has become a growing threat to both economies. Each generation lacks more ambition than the previous generation. Interest rates are gradually heading towards zero. Fiscal stimulus by both governments have failed to ignite either economy. Spending has slowed dramatically and savings are increasing for both economies as well.

The similarities between the U.S. and Japan is quite scary. I do not see how the U.S. will be able to avoid the same fate as Japan.

I hope I am wrong.

Is the Market Rally This Past Week Sustainable?

2008-11-02T21:31:00.000-05:00

The U.S. stock market appears to have rebounded nicely this past week?
Was it end of month window dressing or an indication that fundamentals are improving?

Here is what we know:

1. Earnings estimates for 2009 are still too high and will need to be revised lower.
2. Job cuts are continuing at a rapid pace and unemployment will continue to grow.
3. Balance sheet deterioration in financials and insurance companies continues.
4. Consumer confidence is at record lows.
5. There is no sign of a bottom in real estate yet.
6. Commodity deflation will effectively lower prices over the next 6 months.
7. Social Security checks will increase 5.8% in January.
8. Private sector workers will most likely get no increase in pay in 2009.
9. A second federal stimulus package will probably be passed in 2009.
10. The Federal Budget deficit will continue to grow enormously in 2009.
11. The strong dollar will make exports less competitive and reduce earnings for multi-national firms in 2009.
12. The U.S. trade deficit may improve in 2009 if imports decline dramatically due to a slowing U.S. economy.
13. Retirements will be delayed by millions of baby boomers in 2009 due to the market losses in 2008.
14. No country in the worls has been immune from the effects of the U.S. credit crisis. We are one world whether people acknowedge it or not.
15. Mutual fund window dressing ends in October. Funds typically sell losers and hold winners that month. Were there any winners to hold on to?
16. The U.S. stock market rebounds typically 6 months prior to any bottom in the economy.

So is the U.S. economy ready to rebound in 2009?
Most likely not.

However, bond yields and dividend yields on stocks are looking very attractive relative to U.S. treasury bonds these days, making these securities more attractive in today's market.

Unfortunately today's market is still requires one to tiptoe and sift through for potential opportunities. Market opportunities found today will require patience as the market recovery will most likely be very slow and drawn out.

So in answer to my title for this post, th market rally this week appears to be sustainable over the long-term, but not so much over the next 6 months.

Major Short Covering Today

2008-09-02T10:27:00.000-05:00

The biggest gainers in the U.S. stock market today are the Financials, Home Builders, Restaurants, Airlines, Hotels, and Consumer Discretionary companies.

All of these sectors have been heavily shorted with 10% or more of the outstanding shares being bet against.

Traders are unwinding these short positions resulting in large gains of 5% or more in these stocks.

Both high-quality and low-quality companies are increasing in value today.

This is a good time to continue to hold certain high-quality names for the long-term while taking profits or establishing new short positions in lower quality names.

Commodities Falling Rapidly Today

2008-09-02T10:23:00.000-05:00

With global growth coming to a standstill and recession spreading from the U.S. to the rest of the world, demand for commodities is falling.

Today, gold is down $30/oz. and oil is down $10 per barrel.

The U.S. dollar also is gaining value today, especially relative to the Pound, Euro, Canadian $, and Australian $.

The gain in the U.S. dollar is exacerbating the downside move in commodities.

The relief in commodity prices is welcome for those of us who have had limited pay increases over the past two years.

Near Record Short Interest

2008-08-23T14:46:00.000-05:00

Short Interest (the amount of shares shorted on the NYSE) is at near record levels due to continued bets against large financial firms such as Fannie Mae, Freddie Mac, and Washington Mutual.

Until the financial contagion is resolved, short interest will continue to remain at high levels.

U.S. Mint Suspends Sale of Gold Coins

2008-08-23T14:41:00.000-05:00

There has been unprecented demand for gold coins recently as gold prices have corrected 20% from near $1,000 per oz. down to $800 per oz. creating a shortage of coins for sale by the U.S. Mint. See link below:

http://www.reuters.com/article/businessNews/idUSN2140103820080821?feedType=RSS&feedName=businessNews&sp=true

This demand is very positive for gold and other metals prices. My favorite names in the metals space include Freeport McMoran (FCX), Yamana Gold (AUY), and Pan American Silver (PAAS).

Be Wary of United First Financial

2008-07-18T15:36:00.001-05:00

A person I met through the Greater Brunswick Area Chamber of Commerce (GBACC) has started to sell financial services through a third-party provider. She said that people could pay off their mortgage sooner and save money using her services. I did some investigating and found many of these companies to be a pyramid scheme with high upfront costs and little added value to mortgage holders.

See this article below from Kiplingers:

http://www.kiplinger.com/magazine/archives/2008/05/prepay_mortgage.html

Short-term Bottom Is In

2008-07-16T17:14:00.001-05:00

Good earnings from Wells Fargo and a drop in oil prices have led to a great rally in the financial stocks today. Expect this rally to continue for the next month as stocks are way oversold and short interest and pessimism are at record highs.

Oil, agriculture, and metals all headed lower today. These stocks will be bargains in the next couple of weeks and can be picked up at good prices soon.

Financial Stocks Continue Lower

2008-07-14T12:32:00.001-05:00

IndyMac bank was taken over by the Feds this weekend, and regional bank stocks continue to move lower. National City (NCC), Washington Mutual (WM), and Wachovia (WB) look like they are on the ropes with shares below $10 today. Investor pessimism is at record levels, but still no signs of a bottom.

Money flows continue to move towards metals, agriculture, and energy. As one investor has said, anything that can fall on your foot is something one should invest in today.

Dick Bove, a respected financial analyst who has been right about predicting the fall in the financial stocks has said that much of the decline in companies such as Citigroup (C) and Bank of America (BAC) has been overdone.

Unfortunately the financial stocks will not find a bottom until confidence starts to move up. Confidence will head higher when job losses shrink and end which will probably eventually occur in 2009. Until then, it will be a painful 6 to 9 months minimum ahead.

Commodity Prices Exacerbated by Weakness in Financials

2008-07-11T09:49:00.000-05:00

Commodity prices are being exacerbated by weakness in the financial stocks. Every time bad news comes out on a U.S. financial firm, commodity prices head higher as investment managers sell financial stocks and hide in commodities. Oil is definitely overpriced at $145 per barrel, but the price of oil will not decline until financial stocks stabilize at the end of 2008 or 2009.

This is not necessarily speculation as much as finding a place to hide when the U.S. economy heads south. bankruptcies increase and the dollar falls.

Stop Losses Important

2008-07-11T09:44:00.001-05:00

Today the markets are falling to new lows thanks to worries about Fannie Mae and Freddie Mac. It looks likes these stocks will go to zero at this point on lack of liquidity and overleverage.

Even though market sentiment is the lowest in years, creating a very bullish sign, it would be best to wait for Fannie and Freddie to hit zero and be recapitalized before dipping toes back into the market at this time.

Time for Summer Rally!

2008-07-09T07:21:00.000-05:00

The stock market has been oversold over the past weeks with major bargains across all sectors.

Even the weakest sectors including financial, aerospace, retail, and REITs have been sold beyond any reasonable targets.

Bottom fishing in high quality names is a good strategy at this time.

Names to consider include Bank of America (BAC) in the financial space, United Technologies (UTX) in the aerospace sector, Target (TGT) in the retail sector, and Felcor Suites (FCH) in the hotel REIT sector.

Commodity and International Exposure is The Place to Be

2008-04-13T19:32:00.000-05:00

The best opportunities in the market right now involve international and/or commodity exposure.

My favorites that are less volatile that I think would be great are:

COP - ConocoPhillips - one of the largest oil/gas production andrefining companies in the U.S. The stock is trading at $78.50. Earnings are estimated at $10.55 for 2008 and $10.77 for 2009.

SBS - Companhia de Saneamento de Estado de Sao Paolo - This is thewater and waste treatment utility for Sao Paolo, Brazil. The company's earnings estimates keep rising thanks to growth abroadand the devaluation of the US dollar. The stock is trading around $46 with earnings for 2008 estimated at$5.82 and 2009 at $6.31. Very good value. I have a target price of $64 for the shares.

CPO - Corn Products International - US based corn processing company(no ethanol) makes corn syrup, food additives, and biodegradeableplastic as I mentioned to you a while back. The stock is trading at$37.55 with earnings estimates that are rising with 2008 projected at$2.82 and 2009 at $3.24. 40% of the company's revenue comes fromoutside of the U.S. I have a conservative target price of $45 for the shares.

TEF - Telefonica S.A. - $137 Billion telecommunications firm based in Madrid, Spain with services in Spain, Europe, and Latin America.Trades at $87.50 a share with 2008 estimates of $7.80 and 2009earnings of $9.08. This stock is down from its high of $103. Solid, dominant company. The shares may go lower if the rest of the worldslows with the U.S., but shares trade cheaper than either Verizon or AT&T relative to potential for growth.

UN - Unilever NV - $94 Billion consumer company based in theNetherlands. Owns brands including Ben and Jerry's, Breyer's,Klondike, Popsicle, Lipton, Hellman's mayo, Dove Soap, SlimFast andothers. They have been improving operations and are trading at only15x this year's estimated earnings which is great value for a large food company such as this one.

General Electric blowup a surprise

2008-04-13T19:25:00.001-05:00

General Electric (GE) disappointed Wall Street with its first earnings miss since 2003 on Friday.
Shares dropped 13% and the outlook was not positive. The stock is a good proxy for the U.S. economy given its diversified revenue in financial, healthcare, entertainment, and industrial businesses.

The stock is a good long-term hold given its diversified business and 3.4% dividend.
However the shares do not look like they will go back up to recent levels anytime soon.

The GE miss is a proxy for diversifying investments outside of the U.S. right now.

I have some recommendations in a follow-up post.

Where are all of the good jobs?

2008-03-25T08:34:00.000-05:00

Since Google ramped up their hiring over the last 4 years, there has not been a fast growing company to carry the torch to continue high quality job growth.

On the contrary, large companies with well paying jobs have been continuing to trim payrolls in the name of efficiency. Telecommunications companies continue to consolidate.

Investment banking and financial firms are cutting people and costs. Mergers and acquisitions continue in many industries creating greater efficiencies but with a lack of long-term investment or job growth.

The trend will only reverse when:
(1) the U.S. dollar declines low enough to encourage jobs to return to the U.S. that had been shipped overseas.
(2) the next wave of innovation begins creating a wave of growth

Yahoo! Rejection of Microsoft Bad for Shareholders?

2008-02-13T10:44:00.000-05:00

Yahoo! rejected Microsoft's buyout offer over the weekend.

With the U.S. economy continuing to weaken and advertising slumping, many people are worried that Yahoo! may be hurting its shareholders by rejecting Microsoft's initial offer and playing a game of chicken with other bidders to get a better bid.

Businessweek summarizes the situation nicely in the article below:

http://www.businessweek.com/technology/content/feb2008/tc20080211_848555.htm?campaign_id=yhoo

Buffett Plan to Save Muni. Bond Market is a Joke

2008-02-13T10:20:00.001-05:00

Warren Buffett is proposing to buy from the bond insurers $800 Bil. worth of municipal bond insurance from them. By buying from them their safest insurance, he would only be weakening these companies further, creating a worse situation for the bond insurance market and the financial markets while putting extra money in his pocket.

I agree with the thoughts of Mark DeCambre in the article from TheStreet.com linked below:

http://www.thestreet.com/story/10403198/1/buffetts-not-insurers-only-hope.html

Lenders Demanding Larger Deposits

2008-02-13T10:17:00.000-05:00

Morgage Insurer MGIC reported a $1.5 Bil. loss for the 4th Quarter on higher home delinquincies and payouts.

Starting March 3, MGIC said it will require at least 5 percent down on homes in so-called restricted markets. They include the entire states of Arizona, California, Florida and Nevada and major metro areas such as Washington, D.C., Detroit, Chicago, Boston and Atlanta.

Stock Market will Stabilize When...

2008-02-13T10:13:00.000-05:00

The U.S. Stock Market will stabilize when people believe that asset prices including homes and commercial real estate stop declining.

Currently the financial markets are in turmoil because many loans have been taken out on residential homes and commercial real estate where the value of the asset has dropped and is now worth less than the loan.

Lenders are concerned that borrowers will walk away from the asset used as collateral for the loan, leaving them to hold the bag and pick up the pieces.

I do not believe that asset prices will stabilize until 2009 at the earliest.

Utilities Look Undervalued Here

2008-02-07T19:35:00.000-05:00

Slowing growth for the U.S. is hitting the stocks of electric utlities and telecommunications companies hard. These sectors pay high dividends (3-5%) relative to treasury bonds and cash, providing a safer alternative to riskier parts of the stock market.

Some suggestions for this space include:
Electric Utlities - SCANA (SCG) and El Paso Electric (EE)
Telecommunications - Verizon (VZ) and AT&T (T)

Stocks & ETFs versus Mutual Funds

2008-02-07T19:32:00.000-05:00

A good reminder on CNBC concerning the purchase of stocks & ETFs versus mutual funds.

Stocks and ETFs trades take 3 business days to clear versus mutual fund trades which take 1 day to clear.

Why is this important?

If one sells a stock or ETF and buys a mutual fund the same day, there will be insufficient funds in the brokerage account to purchase the mutual fund because the stock or ETF transaction needs another 2 days to clear.

Car Rental Agencies Commodity Business

2008-02-05T10:29:00.000-05:00

Car Rental companies are a dime-a-dozen and are very sensitive to economic conditions as shown by the weak results from Dollar Thrifty (DTG) yesterday.

From Barron's yesterday: "Car rental companies have fallen sharply Monday, with Hertz (HTZ) and Avis Budget Group (CAR) in the wake of the profit warning from rival Dollar Thrifty (DTG) which issued a profit warning late Friday. Trying to sneak downbeat earnings guidance past this market is generally about as successful as trying to camouflage that ugly dent in the passenger-side door of the Fiesta you’re returning. Analysts are insisting the selloff of names like Avis is unwarranted, because, unlike Dollar’s leisure-travel market, Avis is a commercial-fleet operator, and thus not exposed to the same market conditions. No buyers for that argument, though."

I rented a car last spring to attend a wedding one weekend and was amazed how cheap the rental was. I may be wrong, but it seems to me like prices for car rentals have not changed much over the last few years.

Stick to investments in hotels and hotel REITS where there is differentiation among properties and greater control over the supply of hotel rooms in many competitive markets.

Bargain basement recommendations for hotel REITs include Felcor Suites (FCH) and Ashford Hospitality (AHT).

Consumer Non-Discretionary Stocks Cheap Here

2008-02-05T00:03:00.000-05:00

Consumer non-discretionary stocks look undervalued here.

My favorites in this space include:

Unilever (UL) (UN) Forward P/E: 14.58
Proctor and Gamble (PG) Forward P/E: 16.92
Sara Lee (SLE) Forward P/E: 13.48

Upside targets for these stocks are 10-20% from current levels.

Each of these stocks also pay dividends from 2-3% per year as well.

Lack of Innovation Hurting U.S.

2008-02-04T23:42:00.000-05:00

The U.S. domestic economy is getting hurt by major productivity improvements and the lack of new technological innovations that resulted in major job creation in the past.

U.S. corporations are more efficient than ever resulting in record profits, but unfortunately this efficiency has meant that fewer people are needed to run these companies.

New industries and innovations need to drive U.S. job growth. Unfortunately since Google and Facebook, there has not been major new industries or innovations in recent years that have resulted in major increases in employment.

Our country can only support so many teachers, healthcare workers, and government workers.

If the U.S. does not continue to innovate, we will ultimately lose our place as the most admired economy in the world.

Cost of Manufacturing in China Going Up

2008-02-04T23:38:00.000-05:00

Expect inflation in Chinese produced goods to hit the U.S. in a big way over the next year.

Great article below:

http://www.smartchinasourcing.com/china-competitiveness/cost-of-manufacturing-in-china.html

Be Wary of Google Stock

2008-02-04T23:30:00.000-05:00

Google stock closed below $500 per share for the first time since August 2007 today.

Google is exhibiting major heartburn over the proposed merger of Microsoft and Yahoo!.
Google owns the search market with close to 60% market share.
Yahoo! and Microsoft combined would have 35% market share in search providing a solid competitor to Google where no solid competitor exists today

Google stock looks like it has peaked and is ready to continue to move lower for the following reasons:
1. Technically the chart pattern in Google is weak with major support levels recently crossed.
2. With close to 60% market share in search, Google has reached its growth limits
3. Google has been on a hiring spree, hiring lots of new employees while the core talent exits the company, cashing out their stock options
4. Google is spending gobs of money on initiatives with little payback potential such as alternative energy and open wireless access that have little to do with their core software technology strengths.

Financial stocks strong this week

2008-01-26T12:18:00.000-05:00

Financial stocks rallied this week from their lows.

Bank of America (BAC) was up about 8%.
US Bancorp (USB) was up about 9%.
Citigroup (C) and Wachovia (WB) were each up about 10%.
and Wells Fargo was up about 15% for the week.

When the financial stocks bottom, we will most likely have hit our lows for the year.

Price action in these stocks over the next month will dictate whether we have reached a short-term or long-term bottom.

Market valuations near 2008 lows

2008-01-26T11:51:00.000-05:00

The global financial markets continued to deteriorate over the last 2 weeks.

Wednesday we hit a candlestick bottom where the Dow Jones Industrial Average (DJIA) rallied 600 points from its bottom.

On Friday, the gains from Thursday and much of Wednesday evaporated with a nearly 200 point loss in the DJIA.

The technical trend is still down.

Stock valuations based on book value and past earnings have not been been this low in over 5 years.

For long-term investors, this is a great time to invest.

In the short-term, continued volatility and earnings downgrades are expected as consumer spending continues to decrease and global growth continues to decelerate.

Financials Need to Bottom First

2008-01-08T21:40:00.000-05:00

The overall U.S. stock market will not change course and move higher until the financial stocks lead the process of bottoming and turning over. Unfortunately this looks far from occurring as numerous banks, brokerages, and mortgage lenders hit new lows today.

Either one of two events should occur in the near future to help the market hit a near term bottom: (1) a major Federal Reserve cut in interest rates or (2) a dramatic panic selloff that purges all weak and fearful holders of stock out of the market.

There is a strong likelihood that both of the events above may occur, creating a market panic bottom.

Unfortunately until all of the bad debt in the financial markets is identified and properly accounted for, a major long-term bottom is not likely.

For long-term holders of stock, this is a good entry point.

January 2008 Market Stats

2008-01-08T21:35:00.000-05:00

For the first 5 trading days of the year, both the S&P 500 and the Dow Jones Industrial Average are down over 5% each and the Dow Transportation Average is down over 9%.

The 10-year trasury yield broke below 3.8% today as well making current dividend yields for many stocks looking very attractive.

So much for January being one of the best months of the year for the market.

Bottom fishing now that tax loss selling is ending

2007-12-21T10:29:00.000-05:00

Many stocks near 52-week lows are great bargains now. Downside is finally reaching a short-term bottom now that tax-loss selling for 2007 is wrapping up. Caution is still warranted as not all stocks near 52-week lows are considered worthy of purchasing.

Continued caution is still warranted for home builders, mortgage insurers, and airlines and transportation companies dependent on cheap financing and low energy prices.

Retailers can be selected cautiously given how beaten down they are.

International firms and cyclicals with high international exposure are still favored areas for purchasing beaten down names right now.

Foreign ownership of US Assets continuing to increase

2007-12-21T10:24:00.000-05:00

Foreign investment vehicles from Asia are continuing to gobble up US assets. A Singapore investment fund has recently announced a large stake in Merrill Lynch. This follows large investments by China, Dubai, and Australia in our country within the last year.

National barriers continue to blur. Soon people will be asking why U.S. taxpayers are paying for a large military to defend foreign owned assets when much of the U.S. will be owned by foreign interests soon at the rate at which foreign capital is being recycled back into the country.

Time for Year End Rally

2007-12-21T10:16:00.000-05:00

Many stocks have been decimated this year and with Christmas around the corner, we should see a short-term move higher through the first week of January. Whether the trend continues past the first week of January is the big question.

Outside of housing and the financial markets, the US economy continues to show strength.
Demand for employees with strong skills are still greatly in demand.

Financial stocks remain near record lows

2007-12-18T22:48:00.000-05:00

There is continued concern that the credit defaults for subprime borrowers will spread to higher quality borrowers who are getting squeezed by the increased costs for debt obligations plus basic needs such as food and gasoline.

This concern is weighing on higher quality financial firms along with the lower quality names.

As a result of this concern, stocks such as Bank of America (BAC) now yield over 6%.

If one already owns financials, I would not be selling these stocks at these low levels, but holding on for the long-term.

End of year tax loss selling is only exacerbating the reduction in share prices for these higher quality names.

The stock market will not be able to recover without a recovery in the financial stocks.

As a result, any recovery in the overall stock market is unlikely until mid-year 2008.

For those with patience and the ability to withstand volatility, the large financial, industrial, and retail companies provide good entry points at this price level.

Agricultural commodities strong

2007-12-18T22:30:00.000-05:00

Agricultural commodity prices have remained high with strong global demand and poor weather in Australia and South America.

These prices are expected to hit the grocery store shelf sometime over the next year.

Making money in the stock market from this trend has not been easy. Agricultural equipment and fertilizer stocks are at very high prices and P/E ratios making them unattractive from a value perspective.

The Agriculture ETF (DBA) remains the best play in this space.

Slowdown extending into economy

2007-12-13T09:59:00.000-05:00

In September, the slowdown looked isolated to housing and consumer finance.

Since then, weakness has spread into commercial finance, autos, consumer retail, transports- truck and rail, domestic manufacturing, drug companies, and discretionary purchasing such as elective surgeries, designer goods, and travel.

Weakness looks like it will spread. Already 2008 earnings expectations are being reduced across the board for many companies. This bodes poorly for the stock market.

Long-term investments should weather the storm fine.

Short-term investments can expect continued weakness and volatility.

Continued headwinds

2007-12-13T09:27:00.000-05:00

The writedowns of financial assets continue creating strong headwinds in the US economy.

Credit has tightened dramatically and interest rates for loans relative to US treasuries are high.

Yesterday a global consortium of government financial ministries got together to add $40 Billion to the global financial system to increase liquidity.

Unfortunately I do not see an end to tight lending standards until asset prices stop declining and foreclosures peak.

This will probably not occur until late 2008 or 2009.

Strong US Economic Data

2007-09-28T14:15:00.000-05:00

It looks like the US economy is not doing as bad as economists had feared.
Consumer spending numbers for August were strong, jobless claims continue to drift lower, and construction spending and manufacturing data also look strong.

Strong areas of economy: technology, healthcare, energy, agriculture
Weak areas of economy: home construction, autos, finance, consumer discretionary

Will the Federal Reserve lower interest rates again in October? The market is betting "Yes". I am beginning to not be so sure. If the economic numbers look good, the Fed may pause here.

Stay tuned...

Time to Bargain Hunt!

2007-09-27T14:57:00.000-05:00

As it is the end of the year for mutual funds, many funds have been dumping their losers to take tax loses and loading up on the big movers to "window dress" and make their portfolios look better. This has created a situation where there are many bargains in the market.

This morning I purchased additional shares in Cemex SA (CX). The stock was recently trading at one-year lows on concern over the US housing market. In reality this company is a global cement play that is doing very well in emerging markets outside of the US. This company has very strong cash flow that will be only slightly affected by the weakness in US housing.

Other good sales are in domestic and foreign banks and brokerage firms that have been trashed by the subprime concerns. Two of my holdings that are down over 20%, but look very attractive and are up today include E*Trade Financial (ETFC) and Allied Irish Banks (AIB).

Real Estate Investment Trusts (REITs) also are looking more attractive with the Federal Reserve having lowered the Fed Funds rate over a week ago, making REIT yields more attractive relative to cash. With construction costs up, those companies with real estate in urban locations on the east coast and west coast where land is in short supply should continue to do well.

Three ideas for today.

Subprime exposure update

2007-09-06T20:23:00.000-05:00

A lot has happened in the financial markets since April when I predicted the subprime mortgage market to explode. I was correct that the effects would ripple through the stock market, but incorrect about the exposure of some leading banks. Lehman Brothers and Bear Stearns exposure to the subprime mortgage market is greater than I had anticipated, creating a deeper decline in these stocks. These stocks are currently trading at less than 10x 2007 and 2008 earnings which would normally be considered cheap. Unfortunately earnings estimates are declining which does not bode well for their stock prices. In addition liquidity in the financial markets is drying up rapidly which will ultimately create much lower earnings for these companies.

I currently recommend one underweight the investment banking sector due to declining earning estimates, declining financial liquidity, and the major unknowns regarding the effect of the subprime market, debt unable to be sold for hedge fund buyouts, and potentially declining investment banking deal flow.

Gold over $700 and Oil above $76

2007-09-06T20:08:00.000-05:00

Today gold closed at $704.60 oz., a level not seen since mid-May.
In addition light sweet crude closed at $76.30 per barrel, a level not seen in over a month.

Precious metals and energy are in high demand in the developing world.
US supplies of crude oil and gasoline are significantly lower than normal.
People are also buying commodities in anticipation of a rate cut by the Federal Reserve this month which traders are predicting will create more growth and drive up demand for these commodities and overall inflation.

Overall the story is very strong for both precious metals and energy in a diversified portfolio.
In the energy sector, some of my favorite names are: ConocoPhillips (COP), Devon Energy (DVN), and Sasol Ltd. (SSL).
In precious metals, two of my favorite names are: Freeport McMoran Copper & Gold (FCX) and Yamana Gold (AUY).

Hertz continues to climb

2007-04-01T15:57:00.000-05:00

Hertz Global (HTZ), continues to make new highs. Friday's announcement of Enterprise purchasing National and Alamo to consolidate the car rental industry helped Hertz move up. Hertz is trading at 30x 2007 earnings estimates which is still quite high given the state of the economy today.

State of the markets - April 1, 2007

2007-04-01T15:52:00.000-05:00

The US stock market is holding its own considering the headwinds currently with readings on higher inflation and the subprime mortgage mess. Valuations for US stocks are very reasonable for large-cap stocks today to buy good quality names at reasonable prices. Small and mid-cap stocks, in general, are trading at much higher valuations than in October 2006, and caution is warranted here. I believe that growth stocks have a high possibility of facing a correction this late spring to summer. Pick stocks carefully in today's market.

Vacation home ownership tip

2007-04-01T15:48:00.000-05:00

There is a great article on TheStreet.com this weekend on the tax benefits of vacation home ownership: http://www.thestreet.com/funds/toponepercent/10346847.html

This article is especially valuable for those saddled with a costly vacation home that is rarely used but can be rented out.

Sub-prime meltdown occurring

2007-03-06T16:22:00.000-05:00

Sub-prime mortgage companies are getting hit hard this week after announcing growing defaults among borrowers, especially those who chose no verification of personal financial information. Stay away from this sector. The ripple effect is causing the blue-chip financials major pain. Bargains are showing up among the large banks, such as Bank of America (BAC), as well as Wall-Street firms such as Lehman Brothers (LEH) and Bear Stearns (BSC) whose exposure to subprime lending is minimal compared to other financial firms.

Yen Carry Trade Unwinding

2007-03-06T16:09:00.000-05:00

The global financial markets have had a good-sized sell-off over the last week that started following the Bank of Japan raising short-term interest rates from 0.25% up to 0.5%. The sell-off was due to the yen carry trade unwinding. What is the Yen Carry Trade? The Yen Carry Trade involves people taking a loan denominated in Yen and charging less than 0.5% yearly interest, and then using the money to purchase US treasury bonds or riskier assets with the money to get a higher yield. Over the last year, Japan has raised short-term interest rates from 0% to 0.5% and the Yen has remained cheap relative to other currencies. However, over the past week, the Yen has appreciated 10% relative to other currencies, reducing the ability to people to borrow cheap Yen and invest them abroad at a profit.

The last global selloff in June 2006 was triggered by the first increase in Japanese interest rates from 0 to 0.25%

Japan's economy is coming out of a 15 year funk that should result in the Japanese Central Bank continuing to raise interest rates slowly and increasing the value of the Yen, reducing the ability for foreigners to borrow against the Yen to fund purchases abroad. This should have the effect of reducing asset inflation over the short-term. The Yen carry trade can be blamed for rampant increases in global real estate prices, commodities prices, and stock prices in emerging markets.

Energy Prices Down Big Today

2007-01-04T14:24:00.000-05:00

Energy prices are down again today huge due to the above normal temperatures across the Eastern United States. Oil prices are down to $56+ per barrel, natural gas prices are below $6.50 per btu, and gasoline and heating oil are both trading lower as well.

My belief is that these price lows are temporary due to weather, a slowing economy, and a US dollar that is reflating in the short-term since the dollar has dropped significantly in December against most major currencies. A major energy trader on CNBC noted that oil supplies have been gradually decreasing in the US as the prices have been going lower. He noted that if demand should spike due to abnormally cold weather or due to a heat wave this summer, then prices could be much, much higher from where they are today.

The best market gains can always be made with contrarian bets. Today presents one of those contrarian opportunities if one is underexposed to energy and wishes to increase their commodity exposed and is not afraid of volatility over the next couple of years, particularly with many energy stocks trading at 2007 expected P/E ratios of below 10.

Mutual Funds had Large Distributions in December

2007-01-04T14:23:00.000-05:00

A friend of mine asked me for a few mutual fund recommendations for his IRA shortly after Thanksgiving. He took my recommendations and spread some of his money among those mutual funds. Last week I spoke to him and he said that he sold out of two of the funds because he noticed the share prices had dipped 10%, and the correction made him nervous. I asked him whether he had looked at the number shares owned in each of those funds and the total value of the money invested in each fund, and he hadn't. I told him that he worried for no reason and he should have called me before selling the funds. Here is why.

Mutual funds that have been successful disburse a portion of the fund for capital gains purposes in mid-December each year. In the case of a retirement fund, the gains get reinvested into the mutual fund, so one ends up with more shares of the mutual fund at a lower price. My friend was not aware of this and thought that his investment in the mutual funds that recently had distributions had actually declined rather than stayed even or even increased.

Always consult your financial advisor prior to selling a mutual fund because of a perceived loss that may not actually exist due to capital gains distributions.

So what are capital gains distributions? They are a distribution of profits from a mutual fund that result from the sale of securities in the mutual fund portfoliothat are taxed in a taxable account.

Megatrend #4: Watch out for a falling US dollar

2006-12-29T09:18:00.000-05:00

The value of the US dollar will continue to be eroded by the continually escalating budget and trade deficits. The US government is spending far more each year that it receives in taxes and has little financial restraint. In addition, millions of baby boomers are getting ready to retire and are living longer, which will strain the US entitlement budget. The trade deficit is a huge threat to the dollar and US economy as all of the wealth in US gets exported abroad. At the same time, the oil exporting countries and China continue to aggregate wealth from the rest of the world.

I am currently reading Senator Byron Dorgan's book, Take This Job and Ship It, and he has a great passage in the first chapter stating that "American consumers watch our Japanese television set, wearing our Chinese T-shirts, Taiwanese trousers, Mexican shorts, and Italian shoes. We drive a Korean car to the store to pick up our Mexican vegetables, Australian beef, and a six-pack of Heineken. And then we wonder what happened to all of the good jobs here at home." If foreigners do not buy US goods and services at the same rate that US citizens purchase foreign goods, then US capital will slowly be eroded and disbursed to the rest of the world, ultimately reducing the value of the US dollar. The US dollar has already declined significantly compared to the Chinese Yuan, Euro, Pound, and Australian dollar over the last 5 years and this trend will most likely continue over the next decade.

Hertz IPO Perfoms Better than Expected

2006-12-28T15:46:00.000-05:00

Hertz Global, HTZ, is currently trading at $17 per share today on Dec. 28th, up more than 10% from the IPO price of $15 on Nov. 16th. Lehman Brothers released on Overweight rating on Hertz with a target price of $20 per share two days ago. Lehman cites the experienced management team, the low age of the car fleet relative to its competitors, the cost-cutting expertise of management and the 30% market share they have which towers over their competition. Their 22-page report also predicts robust margin and profit growth due to increased personal and business travel over the next few years. The Lehman reports makes a strong case that Hertz is the best run car rental firm in the world. However, what price is one willing to pay to own a piece of this company. Lehman optimistically predicts Hertz will earn profits of 79 cents per share in 2006 and 95 cents per share in 2007. These estimates far exceed the profit of 64 cents per share in 2006 and 65 cents per share in 2007 predicted o average by analyst submissions to Yahoo Finance. Even in the most optimistic case, the car rental business is a very competitive business and I would not pay more than 14x 2007 earnings estimates for a share of this company which equals $13.3 per share, making HTX overvalued by over 20%. Time will tell whether the auto rental industry is as strong as Lehman anticipates or less robust as I anticipate.

Megatrend #3: Healthcare will continue to grow

2006-12-28T11:32:00.000-05:00

As the world population continues to increase in age and lifespan, healthcare will continue to grow and be an increasing share of the world economy. Drug spending is rising at double digits per year. Companies that specialize in acute care and homecare are continuing to grow and the need for physicians in the US continues to outpace demand. Surgery for hips, knees, backs, and hearts are also rising as an aging population demands to be as active as when they were younger. Cosmetic surgery is also in high demand as the old insist on looking and feeling much younger. Billions are being spent currently on genetic and stem cell research for future drugs as well. Healthcare is continuing to be a growing part of the global economy.

Beware of Real Estate Carrying Costs

2006-12-28T11:02:00.000-05:00

Many people that are actively looking for a new home focus on the purchase price and monthly payment based on current interest rates in order to determine whether they can afford a new home. However, there are many additional costs that have become more significant that one needs to be more cognizant of these days. These costs include: maintenance costs, real estate taxes, insurance, and electricity/heating/cooling costs.

Maintenance costs usually run about 1% of the price of a new home each year. These costs include general maintenance and upkeep to a home. On a $400,000 house, these costs will average about $4,000 per year.

Real estate taxes have been increasing at a rapid rate across the country over the last 5 years. The average homeowner in the Washington, DC metro area current pays over $4,000 per year in real estate taxes and these taxes are climbing at 10% per year.

Home insurance has tripled in cost over the last 5 years due to storms and high claims. I blame much of the increase on global warming causing more severe storms as well as shoddy construction of new homes. Have you seen a new home built recently by a national builder? These new homes go up in less than a month and have the cheapest structure and siding I have ever seen. I believe that many of these homes were designed to crumble to the grund once their 30 year mortgages have been paid off. One should budget at least $800 per year for home insurance.

Energy costs have also been escalating at a rapid rate with natural gas and heating oil costs soaring and electricity rates set to double in areas such as Washington, DC. One should budget at least $250 per month for all electricity/heating/cooling.

Let's add up the additional carrying costs for a home that we have calculated so far:
$4,000 per year home maintenance
$4,500 per year real estate taxes
$900 per year home insurance
$3000 per year electricity/heating/cooling
Grand total: $12,400 = $1,033 per month.

Over $1,000 per month needs to be budgeted for home carrying costs.
It is important for new home owners to keep this in mind in the purchase process.

2007 - The Year for Mortgage ARM Resets

2006-12-28T10:48:00.000-05:00

Over $1 Trillion of mortgage debt is set to reset in 2007 causing many homeowners lots of pain and increases in payments and possibly foreclosure. The belief in the financial markets recently is that the housing market has bottomed and that housing will stabilize in 2007 since ne home sales in November were relatively strong and home inventory for sale has been gradually declining. However, the mortgage debt ready to reset will impact the housing market mext year, keeping things weak. In addition, the strong new housing data has been more of a reflection of builders cutting prices to move inventory and not a core increase in consumer demand. Home inventory levels have also been dropping because there are few buyers out and about in the wintertime and many people are not interested in keeping an active listing for their home if there are few buyers out there shopping. The spring and summer of 2007 will be true test of the strength of the US home market, but if you are in the market for a new home, do not rush and look for the right home at the right price.

Is the Roth 401K for me?

2006-12-28T10:40:00.000-05:00

Over the last couple of weeks, I have had a lot of people ask me whether the Roth 401K is appropriate for them. The answer is that it depends on the individual. If one believes that tax rates in the future will be the same or higher than today, then the Roth 401k is worth consideration. However, many people I know are currently in a high tax bracket and paying high income taxes in states such as Washington DC, Maryland, and Virginia. In this circumstance, one may be better off defering taxes to retirement when one may be in a lower tax bracket and possibly retired to a no icome tax state such as Florida.

Also, many people I know are exposed to paying the Alternative Minimum Tax (AMT). tax-deferred 401k contributions help to lower one's overall take home pay, thus limiting their exposure to paying AMT.

People have also asked me about the matching 401k contributions that employers provide. Is there a benefit to having the employer contributions matched into a Roth 401k plan versus a standard 401k? Unfortunately the majority of employers will only match contributions on a pre-tax basis. This complicates matching contributions in a Roth 401k, because one may have tax-free and tax-deferred money in a Roth 401k due to employer contributions that were not taxed. This complicates the process of figuring out tax owed once withdrawals are made.

Check with your financial advisor to determine if the Roth 401k is right for you.

Megatrend #2: Foreign markets will grow faster than the US

2006-12-15T20:08:00.000-05:00

The economies of the emerging markets including Brazil, Russia, India, and China are growing at a faster pace than the United States creating investment opportunities in emerging markets. In addition, the US consumer is loaded with debt due to low interest rates and a high cost of living and the US government is loaded with debt. The interest payments on all of this existing debt limits the ability of the US to grow its economy at a faster rate than economies with less debt. The US also has a large trade imbalance with the rest of the world which means that US dollars are leaving the US for other parts of the world, also reducing US growth when those dollars are not reinvested back into the US economy.

Megatrend #1: Global Increase in Energy Demand

2006-12-15T19:33:00.000-05:00

Currently, the 300 million people in the US, use over 1/3 of the global energy produced. Demand from emerging markets such as BRIC (Brazil, Russia, India, and China) continues to increase at double digits. Yet the global supply of energy continues to grow at a slower pace than demand and exploration and drilling costs continue to increase rapidly to bring new supply on the market.

The net result is that global energy prices will continue to increase for the forseeable future.
Integrated oil, natural gas. and coal companies, refiners, drillers, and equipment suppliers are all great ways to play this trend.

Economy looking better..is it temporary?

2006-12-15T19:28:00.000-05:00

This week retail sales for November were announced up 1.0% versus laster year, higher than expectations of .1% and jobless claims also came in weaker, driving the 10-year treasury bond yield back up to 4.6%. In addition, hiring is very strong in the services sector especially for skilled personnel, adding weight to the argument that the US economy is humming along nicely.

Is the optimism temporary, and just a part of the holiday season?

Hard telling I admit. I think the US economy will continue to experience hot spots and cold spots will an overall economy growing slower than the rest of the world.

Further Proof of Slowing US economy

2006-12-01T16:44:00.000-05:00

We had weak U.S. economic data released this week. Industrial activity is weakening fast and retail sales for November were mediocre expect at high-end and specialty retailers. In addition, consumer confidence dipped below the previous month and jobless claims were higher than Wall Street expected. The 10-year bond fell to an interest rate of 4.425% this year, a level not seen since January.

The action in the market definitely looks like one in which strength over the next month will be in healthcare, drugs, and food as people seek safety stocks in uncertainty about how bad of a recession we are going to get over the next year. Also these sectors are finally coming back after hitting recent lows a few days ago.

In addition, the survey of bulls versus bears continues to remain skewed towards a high level of optimism which is not good for further advances in the market anytime soon.

An Inconvenient Truth

2006-11-24T19:07:00.000-05:00

Yesterday my family watched the movie created by Al Gore, An Inconvenient Truth. The movie was highly educational and informative, providing good evidence for global warming and the increased CO2 levels that humans are continuing to spew into the atmosphere. The movie helped to highlight several megatrends:

Clean water will be a problem in the future as global warming dries up freshwater lakes, rivers, and mountain glaciers and we reach the limit in tapping fresh water from underneath the ground.
Energy demands globally are continuing to increase each year, especially in the developing world. To exacerbate the situation, the US has spews 1/3 of the world's greenhouse gases and has done very little to slow the growth in CO2.
Increased flooding and droughts will occur. This has been validated by the record huricane season in 2005 and also by my experience living on a farm in Maryland. Most recently on our farm we have experienced several month intervals with no precipitation at all during the fall and winter of 2006 and other months with record precipitation such as June 2006 and October 2006. The extremes seem to be a lot more common these days.
Trees and forests are becoming more critical to the environment to help convert the CO2 in our atmosphere to oxygen and slowing the build up of greenhouse gases in our atmosphere.

So how do we take advantage of these megatrends from a financial and investment perspective?

To be continued...

Inflation or Deflation?

2006-11-24T18:37:00.000-05:00

On Friday, US markets closed early at 1 pm instead of 4 pm, making for what should have been a dull day. However, the day was not dull at all:

The US dollar fell to 19 month lows today against the Euro and has fallen to near record low levels against the Pound and Chinese Yuan recently.
In addition, the US 10-year treasury bond receded below 4.55% today down to 4.548%. The 10-year bond has not been this low since January 2006.
Gold also climber to $637.90, within $30 of its record high
Oil prices also climbed today above $60 per barrel, which would be expected given global growth in energy demand, except for the fact that US inventories of oil are much higher than last year at this time.

Other data that came out this week include the fact that:

Employee wages as reported by the government are soaring, up 5% year over year. I would not have believed this statistic given the lack of raises in much of corporate America these days. However, a coworker of mine, recently left our telecom company and she is getting a signing bonus plus a big raise to take another offer.
Discounts at retailers are extremely aggressive this season with Wal-Mart continuing to lower prices on electronics, toys, and food.

What can we make of all of this data?

Inflationary signals: Dollar falling, Commodities rising, Wages rising.

Deflationary signals: 10-year treasury bond interest rate, retailers dropping prices.

Conclusion:

The US economy is slowing due to slowing real estate prices, slowing car purchases, and slowing retail purchases.
Inflation will be muted even though commodities are increasing in demand and price worldwide. This is due to the fact that the US economy has become more of a services economy and less of a commodity based economy.
Those who are highly-skilled will continue to be in high demand and will be able to charge a premium for their services in today's global economy, thus continuing the paradigm shift of making some folks in the US economy very successful and wealthly while at the same time others are struggling. This conclusion is reinforced by the record bonuses to be given out on Wall Street this year.

So how do we invest successfully in an environment where the US economy is slowing, but the rich continue to do well? I will be discussing several mega-trends and themes for investing over the course of the next month.

US Economy slowing

2006-11-17T09:46:00.000-05:00

Today, US housing construction fell to its lowest level in 6 years. Housing has been one of the major drivers of growth in the US economy over the last 5 years. The Consumer Price Index (CPI) reported yesterday also fell last month for the second straight month. Combined with oil prices diving to $55 per barrel this morning and other commodity prices in slow decline, I believe the US economy is headed into a period of very low inflation or deflation from a period of higher than average inflation. The REITs and utility averages where high-dividends rule are close to new highs which help confirm the low interest rate and inflation period that we are heading towards next year.

Hertz IPO is a bust

2006-11-17T09:45:00.000-05:00

The Hertz Global (HTZ) IPO went off yesterday at $15 per share, lower than the anticipated $16-$18 per share planned price. People are having a harder time justifying the nose-bleed valuations for these Private Equity offerings. The stock closed yesterday at around $15.72. I anticipate that Hertz will move lower than the IPO price over the next couple of months.

Another buyout of a company I own :(

2006-11-14T22:48:00.000-05:00

Whenever you hear the news that a company whose shares you own are being bought out and taken private, you usually jump for joy. Not in this case however.

From bizjournals.com:

Valley National Gases (AMEX:VLG - News) is a supplier of industrial, medical and specialty gases and related equipment and is based in Washington, Pa.

Caxton-Iseman Capital, the New York investment firm, is acquiring Valley National's outstanding shares for about $249 million, and assuming the company's debt for a total transaction value of about $312 million.

Under the terms of the agreement, Valley National shareholders will receive $27 in cash for each share they own, which is equal to Monday's closing price.

Valley National will continue to be based in Washington, Pa., but will now operate as a private company.

"We are investing because we believe Valley National is well positioned to expand in its existing markets and enter new geographies through strategic acquisitions and internal growth," said Caxton-Iseman managing partner Frederick Iseman.

----

Valley National is being purchased without any premium provided to shareholders. To add insult to injury, as you can see by the chart, VLG has traded $5 higher in the last 6 months. In fact I actually sold half of my stake at $32 this summer because it had more than doubled from my originial purchase price. However, I never would have expected an investment firm to be able to purchase the company at only $27 per share. What a steal! The press release even admits that the company is well positioned for growth.

We can only hope that a secondary suitor comes within the next few weeks to outbid Caxton-Iseman Capital. Two years ago, I owned an oil tanker firm, Stelmar Shipping that received a buyout from another tanker firm. The final buyout price ended up being almost $10 more than the original buyout offer due to disgrunted shareholders unwilling to tender their shares to management. Unfortunately in this case, insiders own the majority of the shares, so we minority shareholders may be screwed. Oh well. I still cannot complain too much on a company who shares have doubled in the last 18 months.

Flip This Company

2006-11-14T22:44:00.000-05:00

The Washington Post this morning had a good article on the coming IPO for Hertz Global Holdings, the largest car rental company in the world. Less than a year ago, three investment firms bought Hertz from Ford Motor Co. for $15 Billion, putting up $2.3 Billion of their own money and then loading up Hertz with more than $12 Billion in debt.

Now it gets more interesting. The three investment firms recently paid themselves a $1 Billion dividend and plan to pay themselves an additional $400 Million upon completion of a soon to be completed Initial Public Offering (IPO). After the IPO, the three firms will still control 72% of Hertz, which would be valued at $18 Billion including $12 Billion in debt.

Let’s do the math: the investment firms put down $2.3 Billion, 15.33% of the purchase price into Hertz. In less than a year, the investment firms will have paid themselves $1.4 Billion and will still control 72% of Hertz’s equity of $6 Billion equal to $4.3 Billion. In less than a year, the $2.3 Billion investment will have turned into $5.7 Billion or a return of 148%.

No wonder private equity firms are so hot and the graduates of the Wharton School MBA program are clamoring to work for private equity investment firms.

Lets ask and try and answer a few questions here:

1. Did Ford undervalue Hertz when it sold it to the 3 investment firms?

Based on the S-1 filing for the Hertz IPO, we see that earnings for Hertz were $158.6 Million is 2003, $365.7 Million in 2004, and $371.3 Million in 2005 through December 20th. If we round up to $375 Million for earnings in 2005 and divide the purchase price of $12 Billion by $375 Million, we get a Price to Earnings (P/E) ratio for Hertz in 2005 of 32. The valuation based on P/E appears to be high based on revenue growth of 8-10% per year. At first glance it certainly does not look like Ford undervalued Hertz.

2. How does the valuation of Hertz compare to its publicly traded competitor Avis Group?

Let’s take a look at Price to Sales. Price to Sales upon completion of the buyout was $12 Billion divided by $7.5 Billion in 2005 which equals 1.6. Avis Group is trading at only .11 times sales and is valued at $2 Billion versus the planned $18 Billion for Hertz.
What are we missing here?
Per the company description, Avis has approximately 6,600 car and truck locations in North America, Australia, New Zealand, Latin America, and the Caribbean.
Hertz, on the other hand, has approximately 7,600 locations in approximately 145 countries. Does having 1,000 more rental locations around the world equal 9 times the market capitalization?

Also, Avis is burdened with a substantial amount of debt just like Hertz will be after the IPO.
Hertz’s valuation after the IPO will look like a pig with lipstick in comparison to Avis.

3. What changed at Hertz to make the company worth 50% more in less than a year?

Good question. I haven’t figured out the answer yet to that given what I have read so far concerning the valuation and risks for Hertz.

4. Have the investment firms overloaded Hertz with too much debt?

Pretty close. As the S-1 states “We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Transactions and from the funding of our costs of operations, working capital and capital expenditures.”

5. Does a firm that is burdened with a ton of debt justify such a high valuation?

The market values stocks per supply and demand in the marketplace. I am interested to find out who is buying shares of the Hertz IPO in order to justify the valuation.

To be continued...