Commentary on Citi by Mish

Nonstop Entertainment Analyzing Citigroup

Hi, here’s an article from Mish. We’re moving back to this site temporarily while some details are being worked out on perfecting the section on Phil’s main site. So, check in here once in a while for new reading.
Thanks! - Ilene

Buffett: Recession Longer, Deeper Than Most Think

You know, that would be Jim Cramer; here’s an article on him which I found very interesting.  For the full article, click on the title. 

Money madman who declares capitalism is crazy

By Andrew Clark

Host of prime-time TV investment show says the neocon free market is to blame for the crisis.

CNBC host Jim Cramer. Photograph: Lisa Carpenter

Excerpts:

"To celebrate international Earth Week, the television empire NBC has asked America’s favourite share tipster to infuse his daily Mad Money broadcast with a green theme. As the minutes tick down to showtime in his chaotic New Jersey studio, Jim Cramer is anxious for props.

‘Do we have jungle music?’ he demands. ‘How about a pith helmet? Can you find me a pith helmet? It’s like an upside down round thing - and it’s hard!’…

"Capitalism is supposed to be regulated," he says, citing the need to protect the public against dodgier hedge funds and sub-prime mortgage brokers. "The marketplace is really stupid, rapacious at the margins. It’s a remarkably inefficient and brutal world."

Citing rocketing food prices while crops are diverted to ethanol production, he compares the US Treasury secretary, Henry Paulson, to the 19th century British prime minister Lord John Russell, whose free market policies were blamed for exacerbating the Irish potato famine in the 1840s.

Cramer reserves his greatest ire for the Fed’s Ben Bernanke, who, he maintains, was complicit in fuelling the housing boom. "Anybody who looks at his legacy will see he’s laissez-faire, laissez-faire, laissez-faire," says Cramer. "If you go back and look at his speeches in 2004, 2006, he was very much in favour of the kind of exotic home equity mortgages which are now part of a $400bn morass."

There were 14m homes sold in the US between 2005 and 2007, Cramer points out, of which a large chunk were on sub-prime mortgages. In the meantime, the Fed kept raising interest rates.

"Where was Bernanke? Did anyone sound the alarm on the rapacious strategies of the mortgage brokers? No - because they thought the market was terrific and the market could handle it," says Cramer, gathering a head of steam. "The market was so out of control that it almost destroyed capitalism as we know it but these guys thought it was just fine because the market’s never wrong.

‘It’s that hubris - that belief in the market, that Ayn Rand ‘Fountainhead’ nonsense that became our mantra in our country. It’s embarrassing!’

With hindsight, Cramer admits that his agitation can occasionally become "cartoonish", adding that he briefly feared that he had suffered some kind of aneurysm with the aggression of his outburst which has been viewed more than 2m times on YouTube.

Fiercely competitive, Cramer has since run into trouble by acknowledging his familiarity with some of the more dubious methods of hedge funds - such as shorting stocks and then spreading rumours to push down the price. This practice, known as "fomenting", is illegal - but "you do it anyway, because the securities and exchange commission doesn’t understand it" he told one interviewer. He later insisted that he was not talking from personal experience."

This article, on the Dollar, was posted on Seeking Alpha by Eli Hoffmann.

Dollar Doldrums Will Soon Be History - Barron’s

Barron’s says the U.S. dollar could gain 15% vs. the euro over the next year.

How so?

While the Fed is more-or-less at the end of its rate-cutting cycle, European central banks are still on the precipice of their credit crisis. As the spread in interest rates begins to narrow — and as fickle investor sentiment makes an abrupt about face — the dollar should rise, it says. Commodity stocks and overseas earners like Mosaic (MOS) and Halliburton (HAL) will likely fall as commodities prices fall and foreign earnings become less lucrative. Other stocks with much to lose from a rebounding dollar include Apache (APA), Freeport-McMoran (FCX), Southern Copper (PCU) and Bunge (BG)…

Barron’s has been unwavering in its case for lower commodity prices.

Here’s a sampling of some pretty diverse opinions about the dollar and where it’s headed:

• Kathy Lien thinks the amount of reserves held in euros will rival dollar reserves within the next 10 years.  
• Michael Shedlock agrees with Barron’s: He anticipates a dollar bounce, but notes traders will have to be flexible.
• Blogger Seven Days Ahead thinks there’s no stopping the euro.
• Robert Tabloid thinks we’ve got it all wrong: All fiat currencies will continue to go down in terms of buying power.
• Bespoke refrains from making any forecast, but takes a hard look what investors can expect in commodities and oil if the dollar were to actually start going up.

Note Seeking Alpha’s super-useful Currency ETFs and ETNs and Commodity ETFs and ETNs selectors.

Daniel Carroll, compares the financial crisis now to those in previous years and determines that every period is unique.  Here’s his analysis, courtesy of Dan Carroll, of  Vestopia.

Comments on Inflation; or is it Deflation?

You can’t read a newspaper article without reading comparisons to a past financial crisis. The conclusions will vary depending upon which time period is used for the comparison. I thought is useful to run through the similarities and differences with past crisis. The following table outlines the comparison between the current period and three prior periods: the Great Depression, the Stagflation of the 1970’s, and a recent but mild recession in 1992. I look at various key stats, particularly as they relate to the current hot button issue: are we headed for higher inflation?

Great Depression (1929-40)
Stagflation (1972-83)
Gulf War (1990-93)
Real Estate Bust (2007-?)

General Price Direction:
-Great Depression - Deflation (-25% or -7% per year through 1933)
-Stagflation - Inflation (+140% or +8-9% per year)
-Gulf War - Disinflation (+10%, or +3-4% per year)
-Real Estate Bust - ?

Fed Funds Rate:
-Great Depression - Raised
-Stagflation - Lowered
-Gulf War - Lowered
-Real Estate Bust - Lowered

Note: The Fed lowered rates in ‘72-73 to fight recession, raised them sharply in 1980 to end inflation. The Gov’t printed money in 1941 to finance war, which reinflated economy, after maintaining tight monetary policy throughout the Depression.

Unemployment Peak:
-Great Depression - 25% (1933)
-Stagflation - 10% (1982)
-Gulf War - 7.5% (1992)
-Real Estate Bust - 5% (Current)

Began with a Debt Crisis?
-Great Depression - Yes
-Stagflation - No
-Gulf War - Yes
-Real Estate Bust - Yes

Note: Interest rate hikes in 1980 to end inflation were the primary cause of S&L crisis during that decade, helped along by Congress in 1982.

Commodity Prices:
-Great Depression - Flat (after brief drop early)
-Stagflation - Up (+350% to 1982 peak)
-Gulf War - Flat/Slight decline
-Real Estate Bust - Up (+300% since 2002)

Real Estate Prices:
-Great Depression - Down
-Stagflation - Up
-Gulf War - Mixed - declines in certain markets
-Real Estate Bust - Down, severely in some markets (after bubble)

Currency Rates:
-Great Depression - Fluctuated (+0% vs GBP)
-Stagflation - Down (-43% vs DM)
-Gulf War - Flat (+2% vs DM)
-Real Estate Bust - Down (-40% vs Euro since 2002)

Stock Market:
-Great Depression - Down (-70% to 1933, -42% to 1940); bottom P/E: 8x
-Stagflation - Down (-37% to 1974, +50% to 1983); bottom P/E: 8x
-Gulf War - Up (+50%); P/E: 15-20x
-Real Estate Bust - Down (-15% to trough so far)

Peak-to-Trough EPS Growth:
-Great Depression: -27% (to 1933)
-Stagflation: +21% (to 1974)

Geopolitical:
-Great Depression: Turmoil and war in Europe and Asia
-Stagflation: Middle East, Vietnam, Cold War
-Gulf War: Middle East, End of Cold War
-Real Estate Bust: Middle East, Terrorism

Demographic/Technological Changes:
-Great Depression: Urbanization, Mass Production, Improved Farming
-Stagflation: Baby boom, robotics
-Gulf War: Computers, free trade
-Real Estate Bust: Rise of China/India, aging boomers

Identified Causes:
-Great Depression - Credit collapse, rising interest rates in the face of deflationary shocks, severe restrictions on international trade, European collapse, demographic/technology changes, tax hikes, severe drought
-Stagflation - Low interest rates in the face of rising inflation, de-linking of fixed currency unleashing pent-up inflationary pressures, tax hikes, technological change, demographic changes
-Gulf War - Credit crisis
-Real Estate Bust - Credit crisis, real estate bubble collapse, demographic change

The only similarity between the 1970’s and today is the surge in commodity prices and the decline in the dollar. However, these events occurred several years prior to the current crisis (since 2002), while in the ’70’s commodities surged while stocks declined and inflation heated up simultaneously. Commodity stayed flat during the Great Depression after a brief plunge early which reversed itself. Therefore, commodity prices do not appear to be a good indicator of recession or inflation, as they have behaved very differently in every period studied.

As you can see, the current crisis has both similarities and differences to each of the other three periods. The media likes to compare 2008 with 1973 because of the commodity price surge and the fact that the stock market has not returned anything in either decade (1972-1980 versus 2000-2008). However, the comparison falls short because we are currently experiencing falling asset prices (excluding commodities) and a debt crisis, neither of which existed to comparable severity in the 1970s and both of which are highly deflationary. In addition, the stock market experienced a deflationary collapse in 2000-2002 of a magnitude not seen since the Depression, yet only resulted in a modest recession and no inflation.

The lesson here is that every period is different, and making comparisons could lead to wrong conclusions. It is therefore important to understand the underlying causes for each of the phenomenon. Commodity price surges in the 1970’s were primarily the result of monetary expansion and inflation, were not a cause of inflation. Thus, the run-up occurred subsequent or simultaneous to recession and inflation. From 2000-2007 there was significant demand pressure on commodity prices driven by various external factors, mostly China and India, and has since led to investor speculation leveraged by significant use of derivatives (up to 20:1 leverage) in the last couple of years. As the US dips into recession, the rest of the world will follow, and demand for commodities will fall (as has already begun). Ironically, supply is still declining in certain important commodities as well, attributable mostly to political factors. Further, high prices will finance the hunt for alternatives, as is also in full swing.

What about gold? Gold is difficult to analyze fundamentally, because it has little value aside from its use as an informal currency (even jewelry demand is an indirect function of its status as a symbol of wealth). If gold is again adopted as a quasi-formal currency, then it would be valued the same way paper currency is - supply and demand. Ironically, however, a bid up in price of gold is likely to a self-defeating prophesy in this regard.

So what is driving investors to commodities? Commodity prices go up every time interest rates go down, all else equal. This didn’t happen in the 1990’s because of excess capacity and productivity improvements. So, yes, commodities are indirectly linked to inflation since low interest rates sometimes fuel inflation absent other deflationary factors.

Why are commodities linked to interest rates? Because when interest rates are low, the cost of owning real assets is low. When rates are low, investors have little incentives to own interest-bearing securities, because the risk of rate rises - and even inflation - outweighs the return expectation. In times when investors have an appetite for risk, they move into stocks (like the growth stocks of the late 1990’s). When financial leverage is available, investors use it (with the low rates) to buy real assets, as in real estate, LBO’s (aka private equity), and M&A. When the price of risk is high and/or when debt is not available, commodities become one place to invest. Of course, leverage can be obtained with commodities through derivatives.

The mistake the Fed made in 1973 was to lower interest rates in the face of commodity price shocks (mostly oil) when no deflationary factor was present, which of course aggravated the problem. It was believed at the time that commodity price shocks would be deflationary (by shifting capital away from the rest of the economy) - that turns out not to be true. The Fed made the opposite mistake in 1929 by removing liquidity from the financial system when very severe deflationary factors were present (they did it again in 1936-7), aggravating the problem. At present, if the Fed cuts rates further (more than the market already expects), then the likelihood is for further commodity price gains. However, when the Fed raises rates again in the future, which it most certainly will, there is a good chance that the bottom will fall out on commodities, as it usually does in these kinds of circumstances.The recent commodity price moves are simply not explained by underlying industrial demand or inflationary factors, in my opinion.

Inflation is simply a monetary phenomenon - the supply of currency relative to demand. However, supply is complicated by multiplying factors, otherwise known as leverage or debt. The base money supply is magnified by up to 10:1 by lending, and probably additionally by other leveraged factors such as derivatives, then recycled again for more leverage. Growth in base capital has multiplicative effects on the growth in aggregate money supply (sometimes informally known as "M4&quot as well as on growth in money demand. But when a credit crisis hits, lenders are forced to stop lending to rebuild their capital base, which has a similar multiplicative effect in reverse. This can cause deflation and recession. This is what the Fed is most concerned about right now.

What is the risk of inflation? In my opinion, the primary risk is that the Fed will overshoot. Greenspan is now being criticized for overshooting in 2002 and fueling the real estate bubble. Indeed, spontaneous asset bubbles are a very clear risk of low interest rates, even in the face of modest inflation, and especially since we have experienced a global savings glut. By the way, I believe that the net debt statistics on the US citizens tends to be overstated because the assets of US citizens are understated. The same is true for the current account deficit, which appears to understate US exports.

Fellow ID Thomas Tan’s arguments about Gold are interesting, specifically his discussion of emerging market citizens’ understandable aversion to fiat currency. While I don’t agree with some of his macroeconomic arguments, if his analysis of gold demand is correct, then emerging market demand for gold will continue to grow. What I am interested to know is the degree with which derivative leverage has magnified the demand impact on gold specifically, and how fragile that leverage is - could a small correction be magnified into a general price implosion? If that leverage is significant, then any fluctuations in base capital would overwhelm any emerging market core demand effects.

In general, I believe the inflationary pressures we are seeing now are a function of a speculative bubble in commodities, magnified by derivative leverage. I don’t believe that the price levels in commodities (or currencies) are sustainable long-term, unless the Fed gets reckless with monetary policy. The key risk to the Fed is when the financial system starts to reinflate and restarts the lending process, which will cause the end-market money supply is likely to expand rapidly. Once that happens, the Fed will need to reign in liquidity - if it moves too fast then it may nip it in the bud, but if it moves too slowly then it could fuel another asset bubble or ignite inflation. Further, it will need to tread carefully the resulting commodity price declines, which could cause its own collateral damage.

As an investor, I am not much exposed to commodities, and a little exposed to financials. Some of that is by accident - I tend to focus on other areas of the economy, but I also have an aversion to asset bubbles, even if that means missing some of the upside.

Positive commentary on E*Trade by Dean Laster, posting on Seeking Alpha.

E*Trade’s (ETFC) management is doing everything right to turn the company around, and their efforts will reap benefits for shareholders sooner rather than later. The stock has obviously taken a serious hit due to its careless investments in commercial mortgage-backed securities and other derivative products. The company has also done a great job disclosing the magnitude of future writedowns, namely $3 billion over the next two years, which in turn has painted a clearer picture of future performance. Joe Moglia, the CEO of TD Ameritrade (AMTD), recently mentioned on CNBC’s Fast Money that the defection of customers from E*trade has already taken place.

Despite the financial turmoil, management has shrewdly decided to focus on investing in its core competence. The company is continually investing in its trading platform; after having had an account with TD Ameritrade and Schwab (SCHW) I can attest to E*Trade having a superior trading platform. Another great initiative has been the firm’s global trading platform, namely the ability of a U.S investor to invest in stocks traded on a variety of global stock exchanges in local currencies. That strategy should become highly accretive to earnings once it gets more widely adopted. The company’s marketing strategies have been highly effective and have allowed the company to at least regain some of the customers who had switched to other brokerages.

Click here for more.

Here’s an article on AXP by Andrew Horowitz, courtesy of the Disciplined Investor.

American Express (AXP): False Sense of Security?

It is no secret that I am no big fan of the bank and financial sector, particularly the consumer credit divisions. The numbers out from American Express Company (NYSE:AXP), show that during Q1 they saw a 6% decrease related to credit card losses and reported a significant increase in total spending and credit usage by customers. So essentially, they are lending more money during a time when they are seeing a higher level of delinquencies and defaults. (Scratching head&hellip

Bloomberg.com: Worldwide
April 24 (Bloomberg) — American Express Co., the biggest U.S. credit-card lender, reported first-quarter profit that beat analysts’ estimates as income rose overseas. The company climbed more than 4 percent in extended New York trading.

Net income from continuing operations at the New York-based company declined 11 percent to $974 million, or 84 cents a share, American Express said today in a statement. That’s 4 cents better than the average estimate of 17 analysts surveyed by Bloomberg.

American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped more than 25 percent in the past year on concerns rising U.S. unemployment will hurt consumers’ ability to repay debts. The damage at American Express was cushioned by a 30 percent rise in overseas profit to $133 million as customers spent and borrowed more.

The biggest dislocation I see is still in the future outlook as compared to the stock price for many of the constituents within the banking sector. With all of the downgrades along with the fact that we are seeing a historic rise in defaults, what is it that I am not seeing? BEFORE you answer that, whatever you do, don’t tell me that the worst has been priced already as that is not possible. There has got to be something else as there are reports, predictions and further “shoes” to drop from eco-space.

Chart Courtesy of E-Trade: 1 Year AXP:

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Barry Ritholtz discussing the Fed causing the global food crisis, link to an article entitled "Why the Economy is Worse than we know. "

Is the Fed Causing a Global Food Crisis?

Excerpt:   "The Federal Reserve’s irresponsible bailout of Wall Street’s most reckless players is having very significant repercussions, both in the US and abroad.

It starts with the US dollar, now off 40% from its highs earlier this decade. This has had a huge impact on commodity prices, and is the prime reason so many countries are considering dropping their peg to the US Dollar.

Overseas, price spikes in basic foodstuffs has led to riots and political unrest. Considering that in many regions of the world most of a family’s income goes to basic survival purchases such as food shelter and energy, it doesn’t take much in the way of price rises to lead to significant turmoil. According to Bloomberg, the average household in India spent 32% of its income on food last year. Compare that with 6% in the U.S., and 43% in Indonesia, or 36% for the Philippines.

Digging deeper into this situation is the cover story of the May 2008 edition of Harpers is titled "Why the Economy is Worse than We know" (pdf).  It contains a review of the myriad ways the government has corrupted the way official statistics are reported for jobs, inflation, GDP, etc. (I have a brief mention in it)."

Click here to read the rest on Barry’s site.

A little off topic, from Mish, for anyone up late at night having trouble sleeping. If something’s bothering you, this could take your mind off it.

Congress Threatens Oil Producers

Before we discuss Congressional threats on oil producers, let’s first consider the Florida legislature’s move to ban fake testicles on vehicles.

Senate lawmakers in Florida have voted to ban the fake bull testicles that dangle from the trailer hitches of many trucks and cars throughout the state.

Republican Sen. Cary Baker, a gun shop owner from Eustis, Florida, called the adornments offensive and proposed the ban. Motorists would be fined $60 for displaying the novelty items, which are known by brand names like "Truck Nutz" and resemble the south end of a bull moving north.

Some might think that legislators have better things to do than debate "Truck Nutz". Not me. I would like to see state and national legislators spend more time debating "Truck Nutz", flag burning, baseball steroids, the nation anthem, and motherhood and apple pie on the general principle the more time they spend debating frivolous topics of no economic importance, the less likelihood they will do real damage somewhere else.

For example, please consider U.S. arms sales to OPEC at risk over oil.

Democrats in the U.S. Senate stepped up their attacks on OPEC oil producers on Thursday, threatening to block billions of dollars in arms sales to suppliers such as Saudi Arabia if they fail to take action to tame record oil prices.

Democratic senators Charles Schumer of New York, Byron Dorgan of North Dakota and others called on the White House to "jawbone" OPEC members to boost output or risk Congress blocking arms deals with Saudi Arabia, the United Arab Emirates and other OPEC members.

"The Saudis have to understand this is a two-way street," Schumer told reporters. "We provide them weapons, our troops provide them protection, and then they rake us over the coals when it comes to oil."

Last year, Democrats in the U.S. Congress pushed through a bill that would allow the federal government to sue OPEC for price manipulation. The White House has said it would veto the so-called NOPEC bill, and opponents have warned that OPEC members could retaliate by turning off the taps.

Leave it to Congress to threaten a major oil producer when prices are at record levels, brag about out troops on their soil when most of Saudi Arabia does not want them there, and threaten to stop sales of weapons when our balance of trade is in shambles.

A more rational viewpoint came from Frank Verrastro, an energy expert at the Center for Strategic and International Studies who said, " Tying oil prices to arms sales could motivate Middle East producers to seek cozier arms-for-oil agreements with countries such as Russia and China."

Mike "Mish" Shedlock

Thoughts on coolness from Mish.  Do the parents out there reading this agree? 

Cool to Be Frugal

Changes in behavior begin with changes in attitudes. And there’s no better place to build a proper attitude than in the youth of America.

Professor Depew was once again on top of the changing attitudes story with point number 5 of Monday’s Five Things.

We ran across an interesting piece in USA Today this morning playing right into our theme of a growing wave of resentment against consumption and a disassociation from luxury goods and symbols of wealth.

According to the article, "Teens Turn to Thrift as Jobs Vanish and Prices Rise," rising costs of typical teenage indulgences are causing teens to do something they rarely do: be thrifty. As the article notes, "It’s even becoming cool to be frugal."

Let’s take a closer look at the article.

The stalwart retailers of teen apparel, such as Abercrombie, based in the Columbus, Ohio, suburb of New Albany, and American Eagle Outfitters Inc., are reporting sluggish sales, defying the myth that teen spending is recession-proof: It holds up longer, but can eventually fold.

It’s even becoming cool to be frugal.

Last week, Ellegirl.com, the teen offshoot of Elle magazine, launched a new video fixture called Self-Made Girl, which shows teens how to make clothes and accessories. The first video offers tips on how to create a prom clutch.

"It’s a little tacky in the economic unrest to tote a big logo bag," said Holly Siegel, the site’s senior editor. She said it’s no longer about teens "one-upping each other," but rather where they can get it cheap.

Economists say this teen spending slump could be the worst in 17 years, when teen frugality led to the demise of once-hot Merry-Go-Round Enterprises Inc. and ushered in an era of flannel shirts and torn jeans.

Sales at teen retailers open at least a year averaged a 0.5% decline last year, compared to a 3.3% increase in 2006 and a 12.1% gain in 2005, according to a UBS-International Council of Shopping Centers tally. Among the few bright spots is Aeropostale Inc., whose jeans are about 30% cheaper than Abercrombie & Fitch. Candace Corlett, principal at consulting firm WSL Strategic Retail, said low-price chains like H&M and Steve & Barry’s should do well.

"It is way cooler to get a super deal on that shirt rather than being able to spend the most money on something," said Anna D’Agrosa, director of Consumer Insights at The Zandl Group, a market research company focusing on teens. "Kids are becoming really aware of what is happening to their economy and to their families."

Teen Awareness

Mike "Mish" Shedlock

Trade Energy Now?

Minyanville professor Adam Michael is commenting on the Geopolitics of Peak Oil.

A few weeks ago, I highlighted the fact that the U.S. government was topping off the strategic petroleum reserve at a time when oil prices were over $100 and during an election year. I also mentioned that Vice President Cheney was in the Middle East at the end of March and I would add that President Bush met with Vladimir Putin just a few weeks ago. Something didn’t smell right and based on the trading in crude in the past few weeks, we’re starting to understand why.

This week, we learned that the Israelis did in fact bomb a Syrian nuclear reactor last year and the United States in now claiming that the North Koreans were assisting the Syrians in their efforts. Today, the Chairman of the Joint Chiefs of Staff accused the Iranians of increasing their efforts to train and arm insurgents in Iraq and Afghanistan.

Folks, the saber rattling is getting louder and its no wonder that crude is back to all-time highs. I’m not sure what the agenda is, but it does appear that the Bush administration is trying to 1) force a confrontation or 2) get everyone to the negotiating table. This feels like high-stakes poker to me.

The crude oil market has shown how sensitive it is to every little supply disruption. There simply isn’t enough product to go around and demand has shown no sign of abating.

So how do you play the energy markets? I’m not sure you do. Sometimes it’s better to be on the sidelines. Right now may be one of those times.

Here’s some excerpts from an article written by Jack Yetiv, posted at Seeking Alpha.  He has written previous articles on solar companies, which you can find by clicking on his name. 

Further Musings on Solar Stocks

“Yesterday, my third article on the solar space appeared on these virtual pages. That article built upon my two previous articles, which offered some forward-looking views on the solar space in general and concluded that Trina Solar (TSL) offered the best risk-reward ratio in this space….

Because CSIQ has gone up so much, it is no longer as much of a bargain as it was when I recommended it—its 2008 PE has increased from 11 to 15. Because TSL’s price hasn’t moved as much—despite the fact that earnings estimates for 2008 have increased substantially (from $2.83 to $3.39)—TSL is now the best bargain in this group…

Other metrics on TSL are also quite compelling—TSL is projected to increase revenues from about $300 million in 2007 to $800 million in 2008, and to more-than-double its earnings from $1.54 in 2007 to $3.39 in 2008. One analyst believes that TSL will make $4.19/share in 2008. Another positive for TSL is that it has secured much of its polysilicon requirements from 2008 til 2015 (TSL has secured 95% of its 2008 requirements). Finally, TSL still has a long way to go to revisit its 52-week high of $73.

In my view, although SPWR is clearly the technology leader in the group today (they are cranking out 22% efficiencies in the lab, and are selling 19.3% efficient panels commercially), its growth rate has definitely decelerated. Indeed, on the conference call last week, SPWR indicated that revenues in Q3 of this year will be flat with Q2. In my view, even given its technological prowess, SPWR is overpriced at a forward PE of 43. In addition, I believe other companies will substantially narrow the efficiency gap in the next year or two (note that STP’s Pluto technology is reputed to be achieving production efficiencies of 18-19%).

Suntech Power (STP) is a closer call for me. It has actually done worse since my last article, having dropped from $51.70 on 1-25-08 to $49.18 yesterday. I panned STP in January because I thought it was overpriced at its PE of 31, but I picked up some shares last week at about $45, at a PE of about 28. The reasons for this are as follows: STP’s price got nailed recently because of lower than expected revenues, lower margin due to higher silicon cost, some foreign-exchange losses and unexciting 1Q08 guidance that was below 4Q07 actual revenues…. 

One stumble and all of a sudden, FSLR no longer merits a PE of 100, and contraction of the multiple kills the stock price….Stocks like FSLR remind me of a Ponzi scheme or of our housing bubble—the only reason you are willing to pay “X” amount for something is because you believe someone else will pay YOU more than “X.” But there is always a peak and a crash, whether it’s a ridiculously-priced house or a ridiculously-priced stock….

Frankly, I would not even pay a forward PE of 30 or 40 for FSLR, and here’s the reason why not:…”

Five Things You Need to Know: If the Economy Is So Bad, Why Are Stocks Going Up?

Courtesy of Minyanville’s Kevin Depew.

Kevin Depew’s daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. If the Economy Is So Bad, Why Are Stocks Going Up?

It’s a classic investment conundrum: The economy looks terrible, so why are stocks going up? The reality, difficult as it may be to grasp, is that the economy and the stock market are two different things. That’s why it is important to consider long-term economic issues within the context of short-term movements in supply and demand.

There continues to be underlying demand for stocks as illustrated by the long-term bullish percent indicators we follow being positive and in reasonable field position.

Below is where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.

• NYSE Bullish Percent: Xs (Positive) 42.8% 
• Nasdaq Composite Bullish Percent: Xs (Positive) 29.2%
• Russell 2000 Bullish Percent: Xs (Positive) 42.7%

This simply tells us demand is in control of the stock market. That’s great for the short-term. But if you listen closely to what companies are saying, there’s little reason to be encouraged longer-term by what’s happening in the broader economy. So what does this discrepancy mean?

We believe it means we are simply in a counter-trend rally driven by a reversion of excessive negative sentiment. Put more simply, people are relieved the entire economic system did not collapse on the back of the (ongoing) debt bubble. However, once this condition of relative relief is, well, relieved, we face a darker reality in the second half of the year.

2. A Darker Reality 

Consider PF Chang’s (PFCB). Yesterday on the company’s earnings conference call we head the following nuggets:

President Robert Vivian:
- “Many traditional household expenses are as high as we have ever seen them. We continue to believe we have not seen the bottom of this cycle, and that it will be with us into next year.”
- “Even though our commodity contracts provide stabilization for the balance of this year, we do have concerns looking into 2009.”

• The company raised total menu prices 2.5% last quarter.
• On the bright side the company noted sequential improvement in comps spread across the 36 states where comp stores are operating.  BUT, their traffic remains negative, and, as Vivian said, “as long as this continues to be the case, we’ll be swimming upstream.”
• In the Q&A, Vivian reiterated how important traffic is to the company, saying “the biggest factor effecting our ability to deliver… results is how many guests venture through our doors each day.”
• Moreover, Exec. VP Russell G. Owens noted that the company has a high percentage of restaurants in subprime-effected areas. In those areas is the company seeing a bottoming of the impact? No. According to Owens, “As a general rule it’s gotten worse in the first quarter than the fourth quarter, and we have
  seen during the quarter [it] continue to worsen in those markets.”
• PFCB is projecting 200-250 basis points of margin improvement. The question was asked, “How?” Well, largely through labor costs, and maybe 50-80 basis points in cost of sales. This is an ongoing theme we’re hearing: margin improvement or margin contraction improvement for some companies, through labor cost cutting. That has a very important and direct impact on consumer spending and the economy.

3. Dude, Where’s My Job?

Virtually everywhere we turned yesterday, especially in the consumer discretionary category, the talk was of cost savings. And if companies weren’t outlining specific labor cost reduction strategies, they were busy alluding to them in Wall Street code; i.e.,  ”right-sizing,” “enhancing productivity,” “cross-training,” “consolidations.” Below is a survey of what we’re hearing:

Dover (DOV): “We did a lot of spending to shutdown plants, lay off people. I think the head
count of that company is probably down well over 200 people. There will probably be additional actions to right-size the company.” - Ronald Hoffman, President and Chief Executive Officer.

Schering-Plough (SGP): “[O]ur quarterly results reflect the impact of our rigorous focus on cost controls such as the hiring freeze we imposed from March of last year.” - Fred Hassan, Chairman and Chief Executive Officer.

“[W]e are looking for savings and productivity improvements across the company. We’re currently targeting the biggest chunk of our savings to come from SG&A. In looking at the individual lines, we see about half from SG&A and the remainder split pretty evenly between R&D and manufacturing.” - Robert J. Bertolini, SGP Executive Vice President and Chief Financial Officer.

Smurfit-Stone Container Corp. (SSCC): “We reduced head count by an additional 230 positions in this quarter for a total of almost 5,600 since 2005. We closed an additional box plant for a total of 29.  We remain on target to reach our 525 savings target in 2008 through additional savings from our capital program, plant closures and head count reductions.” - Steven J. Klinger, President and Chief Operating Officer, Smurfit-Stone.

Norfolk Southern (NSC): “The employee counts have come down a little bit. We’re
watching that very carefully. As we’ve discussed before, we have a significant attrition issue facing us over the next few years due to the demographics of our workforce and we have been hiring aggressively, as you know, for a while. But we have some very good models which take traffic levels into account. And as we’ve seen traffic soften, we’ve really started to moderate on our hiring and work that into our plans.” - Charles Moorman, President and Chief Executive Officer.

Host Hotels & Resorts (HST) - “On the cost front we are reexamining the light labor models at each hotel, looking to avoid filling positions and emphasizing cross-training to add further efficiencies. We are carefully reviewing our food and beverage service platforms to identify opportunities to cut costs, to adjusting hours of operation or staffing levels. In some instances, in concert with our operators, we are mandating across the board expense cuts.” - W. Edward Walter, President and Chief Executive Officer.

Monaco Coach (MNC): “We will continue to lower our production run rates, reduce our SG&A and our overhead costs and more quickly facilitate other consolidations within our company. While these steps are painful for many of our great employees, they are necessary to ensure the long-range stability and strength of our company. - Kay Toolson, Chairman and Chief Executive Officer.

4.  New Home Sales Plummet Despite Price Cuts

Sales of new homes fell to the lowest level in nearly 17 years, according to the Commerce Department. Sales of new one-family houses in March were at a seasonally adjusted annual rate of 526,000, 8.5% below February’s revised rate, and 36.6% lower year-over-year.

Even more ominous, sales plummeted despite a sharp deceleration in price. The median price for a single-family home fell 13.3% year-over-year.

And inventories also increased, moving to 11 months’ supply from 10.2 months’ in February.

5. NASCAR Fans Taking a Pit Stop

An interesting article in USA Today takes a look at how slowing consumer spending and high gas prices are impacting NASCAR.  TV ratings are up 2% so far this year, but attendance at the tracks has declined or remained flat.

As a result, some tracks are attempting to offset increased costs for fans by lowering ticket prices. Lowe’s (LOW) Motor Speedway in North Carolina is promoting its $39 tickets for the 165,000-seat Coca-Cola 600 on May 25 as part of affordable packages, the newspaper reported.

NASCAR attendance is an interesting indicator. According to the article, 53% of NASCAR fans earn less than $50,000 annually and 31% less than $30,000.

Here’s the long-awaited update on educational service companies from David Tsao. 

DeVry’s long term prospects

Here’s some excerpts from an article written by Jack Yetiv, posted at Seeking Alpha.  He has written previous articles on solar companies, which you can find by clicking on his name. 

Five Things You Need to Know: If the Economy Is So Bad, Why Are Stocks Going Up?

Courtesy of Minyanville’s Kevin Depew.

Kevin Depew’s daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. If the Economy Is So Bad, Why Are Stocks Going Up?

It’s a classic investment conundrum: The economy looks terrible, so why are stocks going up? The reality, difficult as it may be to grasp, is that the economy and the stock market are two different things. That’s why it is important to consider long-term economic issues within the context of short-term movements in supply and demand.

There continues to be underlying demand for stocks as illustrated by the long-term bullish percent indicators we follow being positive and in reasonable field position.

Below is where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.

• NYSE Bullish Percent: Xs (Positive) 42.8% 
• Nasdaq Composite Bullish Percent: Xs (Positive) 29.2%
• Russell 2000 Bullish Percent: Xs (Positive) 42.7%

This simply tells us demand is in control of the stock market. That’s great for the short-term. But if you listen closely to what companies are saying, there’s little reason to be encouraged longer-term by what’s happening in the broader economy. So what does this discrepancy mean?

We believe it means we are simply in a counter-trend rally driven by a reversion of excessive negative sentiment. Put more simply, people are relieved the entire economic system did not collapse on the back of the (ongoing) debt bubble. However, once this condition of relative relief is, well, relieved, we face a darker reality in the second half of the year.

2. A Darker Reality 

Consider PF Chang’s (PFCB). Yesterday on the company’s earnings conference call we head the following nuggets:

President Robert Vivian:
- "Many traditional household expenses are as high as we have ever seen them. We continue to believe we have not seen the bottom of this cycle, and that it will be with us into next year."
- "Even though our commodity contracts provide stabilization for the balance of this year, we do have concerns looking into 2009."

• The company raised total menu prices 2.5% last quarter.
• On the bright side the company noted sequential improvement in comps spread across the 36 states where comp stores are operating.  BUT, their traffic remains negative, and, as Vivian said, "as long as this continues to be the case, we’ll be swimming upstream."
• In the Q&A, Vivian reiterated how important traffic is to the company, saying "the biggest factor effecting our ability to deliver… results is how many guests venture through our doors each day."
• Moreover, Exec. VP Russell G. Owens noted that the company has a high percentage of restaurants in subprime-effected areas. In those areas is the company seeing a bottoming of the impact? No. According to Owens, "As a general rule it’s gotten worse in the first quarter than the fourth quarter, and we have
  seen during the quarter [it] continue to worsen in those markets."
• PFCB is projecting 200-250 basis points of margin improvement. The question was asked, "How?" Well, largely through labor costs, and maybe 50-80 basis points in cost of sales. This is an ongoing theme we’re hearing: margin improvement or margin contraction improvement for some companies, through labor cost cutting. That has a very important and direct impact on consumer spending and the economy.

3. Dude, Where’s My Job?

Virtually everywhere we turned yesterday, especially in the consumer discretionary category, the talk was of cost savings. And if companies weren’t outlining specific labor cost reduction strategies, they were busy alluding to them in Wall Street code; i.e.,  "right-sizing," "enhancing productivity," "cross-training," "consolidations." Below is a survey of what we’re hearing:

Dover (DOV): "We did a lot of spending to shutdown plants, lay off people. I think the head
count of that company is probably down well over 200 people. There will probably be additional actions to right-size the company." - Ronald Hoffman, President and Chief Executive Officer.

Schering-Plough (SGP): "[O]ur quarterly results reflect the impact of our rigorous focus on cost controls such as the hiring freeze we imposed from March of last year." - Fred Hassan, Chairman and Chief Executive Officer.

"[W]e are looking for savings and productivity improvements across the company. We’re currently targeting the biggest chunk of our savings to come from SG&A. In looking at the individual lines, we see about half from SG&A and the remainder split pretty evenly between R&D and manufacturing." - Robert J. Bertolini, SGP Executive Vice President and Chief Financial Officer.

Smurfit-Stone Container Corp. (SSCC): "We reduced head count by an additional 230 positions in this quarter for a total of almost 5,600 since 2005. We closed an additional box plant for a total of 29.  We remain on target to reach our 525 savings target in 2008 through additional savings from our capital program, plant closures and head count reductions." - Steven J. Klinger, President and Chief Operating Officer, Smurfit-Stone.

Norfolk Southern (NSC): "The employee counts have come down a little bit. We’re
watching that very carefully. As we’ve discussed before, we have a significant attrition issue facing us over the next few years due to the demographics of our workforce and we have been hiring aggressively, as you know, for a while. But we have some very good models which take traffic levels into account. And as we’ve seen traffic soften, we’ve really started to moderate on our hiring and work that into our plans." - Charles Moorman, President and Chief Executive Officer.

Host Hotels & Resorts (HST) - "On the cost front we are reexamining the light labor models at each hotel, looking to avoid filling positions and emphasizing cross-training to add further efficiencies. We are carefully reviewing our food and beverage service platforms to identify opportunities to cut costs, to adjusting hours of operation or staffing levels. In some instances, in concert with our operators, we are mandating across the board expense cuts." - W. Edward Walter, President and Chief Executive Officer.

Monaco Coach (MNC): "We will continue to lower our production run rates, reduce our SG&A and our overhead costs and more quickly facilitate other consolidations within our company. While these steps are painful for many of our great employees, they are necessary to ensure the long-range stability and strength of our company. - Kay Toolson, Chairman and Chief Executive Officer.

4.  New Home Sales Plummet Despite Price Cuts

Sales of new homes fell to the lowest level in nearly 17 years, according to the Commerce Department. Sales of new one-family houses in March were at a seasonally adjusted annual rate of 526,000, 8.5% below February’s revised rate, and 36.6% lower year-over-year.

Even more ominous, sales plummeted despite a sharp deceleration in price. The median price for a single-family home fell 13.3% year-over-year.

And inventories also increased, moving to 11 months’ supply from 10.2 months’ in February.

5. NASCAR Fans Taking a Pit Stop

An interesting article in USA Today takes a look at how slowing consumer spending and high gas prices are impacting NASCAR.  TV ratings are up 2% so far this year, but attendance at the tracks has declined or remained flat.

As a result, some tracks are attempting to offset increased costs for fans by lowering ticket prices. Lowe’s (LOW) Motor Speedway in North Carolina is promoting its $39 tickets for the 165,000-seat Coca-Cola 600 on May 25 as part of affordable packages, the newspaper reported.

NASCAR attendance is an interesting indicator. According to the article, 53% of NASCAR fans earn less than $50,000 annually and 31% less than $30,000.

Here’s the long-awaited update on educational service companies by David Tsao. 

DeVry’s long term prospects