Sunday, March 29, 2009

Auto Sales and Vehicles per Driver

Over at Calculated Risk there have been several posts on the auto sales numbers as that data has been released. CR's take (link to the latest post: HERE) has been that the fleet turnover ratio, currently at a record 26.8 years is unsustainable and believes that the correction in this value will take the form of an uptick in auto sales rather than a decrease in the fleet size. The comments have been in disagreement with this outlook far more than is typical for a post over there. The comments section has typically evolved into a "I've got a 1982 Honda that I've driven around the world 18 times and expect it to make another 2 trips," sort of thing. Not exactly hard evidence. There was one comment in the last string about 2 car families becoming 1 car families. This is far more interesting.

I decided to try to dig up the data on licensed drivers and the registered vehicles to see if there has been a change in the ratio or anything that would remotely resemble a historical "norm.

Here are the charts: the first one containing the data on licensed drivers, passenger cars and trucks along with one line combining those last two. Motorcycles are omitted because in the more recent sources they are not found broken out separately as in the earlier reports. (See the source links at bottom.) Also note that until 1990, the year axis is ticked off in increments of 5 years and then in 1 year increments.

The second chart shows the ratios of passenger cars to licensed drivers and passenger cars + trucks to licensed drivers over the same period. Early on in these data sets, there is a shift in the categorization of trucks and so these early points are omitted. I don't think it matters in the final analysis anyway.

One interesting thing is the decline in passenger cars and the rise in the cars + trucks ratio. I am assuming this represents the change in vehicle mix as the SUV came to be such a dominant class. However, I did not dig very deep into the specifics of the classifications in this case. The most important thing to note is that the ratio of vehicles to drivers is greater than 1 and the 2007 ratio stood at 1.19 vehicles per driver in the US. In 2001 (the last data I can find), the percentage of households with 3 or more vehicles in the US was 23.6%.

If there really is a new sense of frugality that creeps into the American household budget it does not take a great leap to imagine that the ratio of vehicles to drivers might actually fall back closer to 1. This could get even worse if the low interest credit that the automakers have been providing courtesy of the government disappears since it seems very likely that consumer credit is going to be significantly reduced in the coming year. (And justifiably so.) At any rate, simply because the fleet turnover rate has reached a hitherto unknown height does not necessarily imply that auto sales will push up. I think the data and change in patterns argues for a much closer examination of the possibility that the vehicle fleet is reduced.

Earnings Week of 3/30

Here's the week's earnings spreadsheet:

Spreadsheet Link

This is a relatively light week with only a couple of names worth paying attention to so I'm going to stick a little recap of last week's action in here. Kind of a "Keepin' Score Lite" post for those that have been reading long enough to remember those posts.

Last week, I got a few things correct and few things sort of off.
First the correct stuff:
- Pointed out IV was too high for FMCN to make a profit. Result: peak price about 1.20 below B/E price.
- WSM did get above the 10 mark and spiked up ever so briefly to 12.36 before falling back.
- RHT looked interesting and it closed the week at 16.99 above the strangle B/E of 16.30 and at one point had reached 17.80.
- GME, if you had a long-weighted position you would have done fine as it peaked out at 28.45 just above the B/E price of 28.05 for a neutral position.
- I thought TXI was priced perfectly on the downside but had some wiggle room for profitability on the upside. It benefitted from a strong run and closed the week at 25.10 - well above the B/E price of 20.07.

Things I didn't do so well on:
- I thought TIF had peaked out, but it pushed upward and broke past the DMA(50).
- I didn't think WAG had very good odds to be profitable and it would have been.
- Similarly, I felt CCL wasn't worth the time but it came within a penny of the B/E price in the sheet.
- Not really sure how I managed to overlook BBY last week but that was a stupid, stupid move on my part. I would have treated that like GME given my ongoing thesis that the liquidation of CC has been like BBY buying outs its biggest competitor at zero cost. Hindsight is 20/20 but that's pretty disappointing for me.

So has the rally played out? I mentioned to someone in the middle of this past week that 666 * 1.25 = 832.5 so that was my target for the local maxima. The peak of SPX this week was 832.98. Obviously, it's a bit premature to declare the top here it does fit with the KISS idea of theories - Keep It Simple, Stupid. We'll see, but suffice to say longs are hedged and I am looking for more downside in the coming week, even if it is just a pullback to the DMA(50) around 790.

Anyway, as mentioned earlier the number of earnings releases this week is small. But here they are anyway. One important note: Yahoo! is providing yet another reason why their share price deserves to be where it is today. Again, the data reporting on the options has been dicey and in several instances the puts are intermixed with the calls. I have tried to manually correct, but I think in a few cases I have missed some so be aware.

Monday - SNP. I've mentioned many times on here that I don't like/trust ADR/ADS because of their even worse overseas regulation. The exception would be a company like STO because of its location in Norway. Who doesn't trust Norwegians? At any rate, I am not going to make a comment either way here because I've seen screwy patterns and volume many times in the past.

Tuesday - I think APOL will be volatile, just not volatile enough. Same thing for GIGM. ACH is another Chinese ADR. LEN... a 40% move seems a bit much to ask of any stock in this environment.

Wednesday - nothing. Probably because no bank wants to have their earnings on April Fool's Day. It's just too easy to make jokes. I'm sure LOLFed is sad.

Thursday - Two big companies MON and RIMM. I'll take MON first. Current pricing has an average absolute move of 11.25 which is well within the performance of the last two quarters considering the moves of +19.22% and +18.38% respectively. However, it just moved up from the 80 level and just like the rest of the market has moved basically 25% in 2 weeks time. It's difficult to imagine how much room is left on the upside especially with the DMA(200) looming at 93.20. MON has not been above DMA(200) since October. My two cent gut feeling is a return to 80. Now for RIMM, which is up about 22% give or take in the same period of time. The way that the spreadsheet calculates its break-evens is on a gap in strikes but even buying both at 45 still is no guarantee of success. The downside B/E ends up at 37.90 which is virtually the trough before the latest run and to move up requires a big bounce above the DMA(50). It's certainly not impossible - RIMM has made moves like this in the past - but it seems more unlikely this time around with the indices appearing to hit a local maxima. Of the other two on this day, KMX has shot up about 40% and MDRX about 25%. It seems unlikely that either of these two will be profitable strangles.

Friday - nothing made it through the screen.

Tuesday, March 24, 2009

Market Sector Valuation Breakdown

I really should apologize for my utter lack of posts in the last few weeks. As noted before, it’s been a combination of unsuitable-for-posting work, lack of inspiration and real-life requirements that have reduced my output to a trickle. Plus, what’s the point of posting work that relies on a data set that might literally be worthless overnight? (See: PPIC announcement, SPX reaction to as Exhibit A.) Anyhow, now that the SPX rally seems to have hit some local maxima, I figured I’d have a go at looking at valuations from a sector perspective. I thought this would be interesting on its own merits, but also because tons of bulls out there continue to state that financials aside, stocks are cheap, cheap, cheap. My belief is that they are not but unexamined assumptions have a way of biting you and giving you rabies. (Look no further than the current real-estate malaise infecting the system for proof of that assertion.)

So, here’s the background: I downloaded data on PE(ttm) and PE(fyf) for 5,214 stocks on the evening of 3/23. Included in the set was the Sector, Industry, and sub-Industry information. Not included were OTC stocks.

The first thing that I noticed was the sheer number of companies with an unreported PE, or perhaps more correctly an undefined PE. Unsurprisingly, the percentage of companies reporting an undefined PE varied considerably by sector. Here’s a snapshot:

Surprisingly, the financial sector did not have the highest percentage of unprofitable companies – that honor went to health care, though largely due to the substantial number of biotech start-ups that have never turned a profit. Anyone that has dabbled in that industry knows how many of those companies fail. On the other end of the spectrum, consumer staples and utilities were the two lowest which makes sense considering their positions in the standard “defensive” portfolio. Please note, this says absolutely NOTHING about the volume of loss within each sector. Case in point, as is clearly stated in the SP500EPSEST sheet by H. Silverblatt: AIG alone accounts for -$7.10 of the -$23.04 reported EPS loss. (Yes, AIG is apparently still in the index!) One bonus: here is a table of the PE Breakdown by Industry, which provides a bit more detail than this sector overview.

Anyhow, one can further refine this by removing the pharmaceutical and biotech industries from the overall total which reduces the overall percentage of undefined PEs to 37.8% making the relative value of the financial group that much worse. The reason for explaining this is that I have never read someone discussing average PE that talked about how they treated the “undefined” result. In the discussions below, the average of any group is defined as the average of the numeric response PE. To illustrate if there were 3 companies with PEs of 5,10 and undefined then the average of the group would be 7.5. Including the breakdown of unprofitable companies really helps add needed detail to the analysis.

Here’s a chart of the major sectors and their PE(ttm) binned out. The sub-0.1 bin is an artifact of an Excel quirk and is a stand-in for the “undefined” bin. This is a percentage chart within sector so that the sector-to-sector comparison is a bit easier to see. Again, it is pretty easy to see the lower representation of the utilities and consumer staples in the “undefined” bin and the very large proportion of the healthcare sector for the reasons mentioned above.

So considering the percentage of unprofitable companies in each sector and the average multiple of the remaining issues, it would appear that energy is perhaps the best value right now if one were to buy into a sector ETF for the long term. What makes this also an attractive sector to me is the average yield – at least on a trailing basis – is the 2nd highest of any sector. The first is the financial sector but this will soon change as the dividend cuts in this sector will far outweigh the devastation in the share price. While the popping of the crude bubble will have similar effects, it will likely not be as drastic going forward. (I did not include the dividend breakdown here.)Further, if/when the demand side returns in energy the price in commodities could be shocking since so many projects were cancelled. And finally, it must be mentioned that the Fed is clearly bent on inflation and commensurate dollar devaluation which can only serve to boost most commodity prices. Let’s just hope the inflationary cycle has both legs – price AND wages. If the latter fails to keep up, the demand side will fall slack as I don’t think the credit will be around to offset the lack of earning power. But that’s a long digression that will be far better covered in more professional places.

Again, all of this must be put in the context that valuation is whatever the market feels like it being. There's a funny quote about how, "only god knows the right PE," and it's true - it's totally a function of supply and demand. And I believe I have made the case in past posts (see here & here) that only earnings recovery will signal a true bottom and demand for equities will far outweigh any concerns regarding valuation when that happens. I would conceded that there are sectors where the market is "cheap" relative to historical norms and further, that within each sector there is some skewing that is occuring due to a small-ish number of very high multiple issues. These types could offer some interesting pair trades with long sector ETFs and short on the high multiple componenets. However, these observations do not support just buying a sector or index but rather very selective stock-picking. Something to investigate further...

(If anyone is interested in further industry/sub-industry breakdowns, let me know and I’ll try to post up some additional charts as requested.)

Sunday, March 22, 2009

Earnings Week of 3/23

Here's the week's earnings spreadsheet:

Spreadsheet Link

Once again, for the readers that are out there, I apologize for not putting up some better (or any at all, really) posts though I have been keeping up with the NYMEX charting which has been pretty interesting for those that keep up. Last week, I actually had a couple of decent selections: first, GES did jump nicely despite no forward guidance. Second, DRI was a good play and cranked out a big gap and move. It seems that earnings plays are slowly becoming more attractive as the IV premiums have shrunk back a bit from the levels that generally made these strategies rather unattractive for the last couple of months.

It also would appear that for the moment, the bulls lack the conviction of various pundits out there telling everyone that stocks are cheap, cheap, cheap and you should buy, buy, buy! While I could perhaps tolerate some of that talk when SPX was sub-700, now that the index has run up so much, those multiples are again pushing on expensive territory. However, keep in mind that earlier charts on this blog have shown that multiples do NOT have to come down to what is generally considered "value" territory in order for a bottom to be put in. Instead, EPS needs to recover and that is the current unknown. Just beware of the people prattling on about the Fed model for valuation. That you can have outright manipulation of Treasury rates through the QE activity of the Fed constituting a sound basis of comparison seems a bit... odd. But that's just me.

Enough of the blather... here's the earnings rundown for the week:

Monday - FMCN, TIF, & WAG. FMCN's IV is so out of whack it seems virtually impossible to turn a profit from a long strangle unless you plan on holding it until next op-ex and get lucky on the long side. Similarly, TIF has never made a move like the options are priced for. They interest me from the consumer discretionary aspect of things. How much are people cutting back in the most discretionary of purchases - jewelry? Just like the rest of the market, TIF peeked above the 50 day MA and looks to be headed back down. I'd guess 19.50 would be the next stop but ultimately, the 17.50 area could be in reach. WAG might have an outside chance but also seems low odds.

Tuesday - CCL, DB & WSM. DB deserves no comment except to note that they were a HUGE recipient of taxpayer dollars routed through AIG. So huzzah for them I guess. You can believe their statements at your own risk. It's all theatre of the absurd and far too opaque. CCL isn't worth the attention. WSM constitutes another discretionary store in my mind because you can buy all the stuff they sell at TGT, albeit lesser brands. Crazily though, WSM is almost in breakout mode having breached the $10 line and has moved quite a bit in the last two quarters. This could be worth a look, particularly on the long side if the market doesn't completely fall apart around it.

Wednesday - Only RHT deserves any attention because it jumped +16.8% last earnings announcement. It is very close to the top of a channel and has a chart very similar to DRI's bullish one from last week. I'd guess a move above 16.25 could send this one blasting. A bad reaction probably means 14.75 first and then if things get really ugly to 13.25 or so.

Thursday - GME catches my eye. It took a beating last quarter at earnings time. However, I'm looking at it in a way similar to GES. It has never moved enough to the downside to profit on the options pricing on a 1:1 contract basis. However, a long weighted play could be more interesting as the day grows closer. We're still in a situation where there is no telling where SPX will be in 3 days. But, it's sitting just below the 30/50 DMAs and I'd guess that a pop above those could let it run to the mid-28 level. TXI looks priced to perfection on the downside but has some wiggle room on the upside with the next resistance probably around 20.86. Again, this has to be watched since Thursday is far away.

Friday - KBH. Stay for the laffs maybe?

That's it for this week.

Sunday, March 15, 2009

Earnings Week of 3/16

Here's the weeks' earnings spreadsheet:

Spreadsheet Link

The lack of posting in the last week was a combination of some personal business in the earlier half, some computer problems caused by the interaction of my fat cat with the cables causing a video card issue, some non-postable work, and finally something of a lack of inspiration. Even today, I switched off my usual Sunday morning TV of Meet the Press and This Week because I couldn't tolerate the moronic questions of David Gregory, the obfuscation of Larry Summers, and the pathetic political maneuverings of Mitch McConnell. Maybe I missed something - but I doubt it. Each week the actors are different, but the lines are all the same.

Anyhow, this could be an interesting week with options expiration on Friday and the rally on Vikram "Bandit" Pandit's utterance that C is profitable if you ignore all the other write-offs and neglect to consider they are basically being given free money with which to play. But that's what happens when the market goes in a virtual straight-line down and gets oversold. It doesn't take much substantive to spark a fierce rally. This might be the topic of a post as the EPS forecast and multiple gets revisited in light of the SPX movement. But onto the main topic, of which there is little to discuss:

Monday: SINA has been a nice speculative bouncer in the past, though not necessarily at earnings time. I don't know much about the other two releases - FRPT & MDVN.

Tuesday: ADBE & GES. It's hard to imagine a consumer discretionary rally a whole lot more but then again... I must admit I find this one tempting to play weighted to the long side. I've got no solid justification for this though. ADBE, eh. Usually not a big mover.

Wednesday: Restaurant player DRI (owner of Red Lobster/Olive Garden), consumer staple GIS, consumer discretionary NKE and tech heavyweight, ORCL. DRI has a bullish looking chart since December and is just under a resistance/breakout point at 30. Otherwise, I guess 24 is the downside target. GIS has been brutalized since hitting a 52-week high a couple quarters back, though it popped up a bit in the last couple of sessions. Only DRI is really interesting to me though as a play. NKE/ORCL are important for what they say.

Thursday: DFS, FDX, ROST, and PLCE. FDX is often quite an important source of data on direction of the economy and so are important to listen to. ROST is like the Dollar Store - they should be thriving in an environment like this. At the moment, share price is just a hair under the SMA(200) and looks like it wants an excuse to go higher. PLCE... are there really enough yuppies to keep buying outfits from this place instead of TGT? It's been occasionally volatile in the past and several of the last quarters have seen moves larger than what the options are pricing in so it might be one to keep an eye on as Thursday approaches.

Friday: Nothing but op-ex. Stay safe!

Sunday, March 8, 2009

Earnings Week of 3/9

Here's the weeks' earnings spreadsheet:

Spreadsheet Link

This week, I've had some personal projects so while the earnings spreadsheet is posted here, it will remain without comment - at least until later.

Wednesday, March 4, 2009

U3 & Participation Rate Updates

In a post from last December titled "Fighting the Last War," I looked at the vast differences between the initial conditions of the tech bubble recession and the one that the US entered in December of 2007. At this point, if there was any lingering doubt residing in the populace, it should be shaken.

This post then, is not to re-iterate that point but rather just to provide an update of those charts to see just how much worse things have become. First, there was the rather cluttered chart with SPX, U3, and the Fed target rate. U3 has shot up on both the SA and NSA measures to 7.6/8.5%, respectively. Keep in mind my projection of a 7.9-8.1% U3 (SA) rate from early February, so obviously I think this has room to get worse. What is ominous about this number is that JPM had a loss projections for the WM takeover that used 8.0% in its "severe recession" scenario. Obviously, that is going to be overtaken if not this month than the next. Not coincidentally, the banks have not reported their loss sensitivities based on U3 as of late.

The next chart was the U3 values with the participation rate. This make the picture even more bleak when it is noted that the participation rate is about 1% lower than during the bubble recession, even while U3 is itself 1.5 points higher. This does not bode well for consumer spending since now even more households have a single income.

Finally, but on a similar point, the home ATM is now functionally empty. I'm not putting that chart up but the net equity extraction from homes went to a -$64B for Q3/08. (The last data point available.) Suffice to say, this is very bad for anyone that had relied on consumers tapping their houses for big ticket items. I'm looking at you, HOG!

Bottom line: the picture is growing darker.

Update (3/6/09):
U3 (SA) was 8.1% today and the NSA value hit 8.9%.

Sunday, March 1, 2009

Earnings Week of 3/2

Here's the weeks' earnings spreadsheet:

Spreadsheet Link

From what I saw of last week (admittedly not as much as I would have liked), it would appear that this the market is entering the "Beginning of the End" phase. It would appear that participants are slowly realizing that stocks aren't cheap, EPS forecasts really should be pessimistic, yields are garbage, and the banks are likely still hosed.

As far as the earnings releases, this week there are far fewer (in fact almost zero) big names like DELL or HPQ that can really shift an entire sector. There are, however, far more of the smaller float/high short interest shares that quite often lend themselves to profitable strangle/straddle strategies. Additonally, there are many companies that are hitting new 52-week lows. I'm going to post the spreadsheet up first, and then do the full run-down later this evening as an update to this post.

Monday: CMED, EIX, FCN, OSG and PDLI are all within 5% of their 52-week lows. Several others have short percentages greater than 10%. Unfortunately, the past quarter's performance of most of these has been spotty in terms of magnitude of movement, particularly relative to current IV levels. I will say that it if TWGP doesn't say something pretty great that it could easily be headed for the 52-week low.

Tuesday: High-flying retailer AZO. Interestingly, it hit a 52-week HIGH last week at 148.50. Go figure. I'd guess that 136 would be about the low side if profit taking occurs with an absolute line of 125 in the event of a debacle. Still, the chart of this one is a freakishly bullish in an ugly market. Speculative solar play TSL. It should be mentioned that FSLR was shellacked last week. TSL doesn't have quite the stratospheric PE level that FSLR did and it is also in the single digits.

Wednesday: BJ must have come out with something good last Friday since it spiked hard for a 6% gain. JOYG intrigues me as a potential gamble on the long side, because I don't see the implied low price being hit. PETM has a nice upward channel forming with the 50SMA as the lower bound. The SMA(200) is at 20.88 to provide some resistance and the upper channel line would be around 21.75. SIGM has a nice level set up right at the SMA(200) around 13.75. However, it has a large short interest (which might have been covered and account for the large gap between 12.40 and 13.40). If I were going to lay odds, I'd guess the gap will be closed more solidly. TOL rounds out the bigger names on Wednesday.

Thursday: CIEN has been volatile 3 out of the past 4 quarters but not at the level that the options are pricing. IPI strikes me as a poor-man's POT, but I've heard that potash isn't moving lately and it has little to do with price. Still, the daily chart looks cautiously bullish. URBN has put a small and steady run from it's Dec/Jan lows but it feels to me like they better say something good or else.

Friday: Women's retailer ANN and PBR (not the beer).

One thing that struck me was the considerable variance in the daily charts. There are several that are outright bullish (AZO & PETM for example) and some that have literally no supports left (FCN & OSG as examples). I didn't get to tune in much on Friday and I'm still playing catch up from the weekend. But the fact that SPY never really threatened to overtake Thursday's closing price during Friday's session doesn't exactly engender confidence. Re-iterating my comments above, I think that the horror of what the year holds is finally being realized by investors.

A final note: I find it appalling that Bill Gross is constantly given a platform in the financial media to talk up his book in the guise of "what's best for the US economic system" without anyone calling him out on it. However, his recent statement about equities in the US being dead deserves a little attention. Yes, it's hyperbolic and shrill and it is coming from the kingpin of the bond world. But he is right when he asks why any investor would hold equities with crappy yield and tons of risk when they are the lowest slot on the totem-pole in event of a bankruptcy? About a year back, VZ floated an issue that I believe had a coupon of 8 7/8. Why would you buy the common shares without a guaranteed dividend and a decent chance of further erosion of capital? This is the other side of the coin of my earlier thesis that the equities market is going to emerge from this episode as one in which investors buy shares for dividend yields - big boring companies like KO and JNJ that pay regular dividends and have a solid track record of doing so for many years on end. One play that could be worthwhile is selling puts on these types of stocks in an IRA or some other long-term account - assuming you have the free cash to do so - at a price you'd be comfortable owning. Even if the puts aren't exercised on you, you've generated a little bit of income. And if they do, you have companies that can generate income with some dependability and then you can also sell calls against them each month. Just an idea. Some time this week I'm going to work a bit more on the dividend vs EPS relative changes. So keep an eye out for that.