Friday, September 12, 2008

Offtopic: Metallica's Death Magnetic

I usually try to stay on-topic here on Market Folly, but very rarely certain events cause me to stray off-topic. So, I'll keep this short and sweet. For those who may be interested, Metallica's new album "Death Magnetic" was released today and it is amazing. They really got back to their roots on this one, while still providing us with some great new style and sounds. If anyone is a guitar player like myself, you've gotta check this stuff out!

My favorite track so far, "All Nightmare Long" is featured below.

......And now back to your regularly scheduled programming.

Brazilian Banks/Asset Managers Continue to Gain Assets

With Brazil's emergence onto the global economy, there have undoubtedly been some excellent investment opportunities. But, most of the gains have been concentrated in the energy and natural resource spaces. As Brazil continues to emerge as a growing nation with a strong economy, I've turned my focus to the next wave of investments to make in Brazil. And, I think it can come from a sector that has been touched on by many before, but has never really garnered the spotlight. I'm talking about Brazilian banks and asset managers. Over the long term, their financial landscape will continue to evolve and the underlying financial firms are poised to benefit, seeing as Brazil has now become a net foreign creditor. Also, due to the booming economy, many Brazilians have started to enjoy new-found wealth and are turning to banks/asset managers looking for a place to put their hard earned money to work.

Institutional Investor has a piece out that discusses how Brazil will see an influx of cash from foreign pension funds. The reason behind this is because the nation's long term foreign currency debt was recently upgraded to investment grade. Also in the article is a quick list of Brazil's biggest money makers. In it, you will notice that some of the mainstream banks that trade on ADR's here in the states are among the biggest asset managers in the country: Banco Bradesco (BBD), Banco Itau (ITU), and Unibanco (UBB). Numerous hedge funds I track here on Market Folly have been in and out of these names, but they have never been major stakes or top 10 holdings. These are larger cap names which could be great long term investments (5-10 years).

And, even more hidden from the limelight are mid-cap Brazilian banks and asset managers. You won't find any of these mid-cap names traded on ADR's here in the states. Instead, you'll have to go directly to Brazil to buy them. Obviously, these names are difficult for the average joe to just invest in. And, they are also riskier investments. Firstly, you have to overcome the barrier of entry and find a way to personally invest in Brazil directly. Secondly, you have the added currency risk. But, nevertheless, they represent an interesting opportunity within Brazil's burgeoning financial landscape.

Individual risks aside, Brazil as a whole also has some risks investors need to be conscious of. Over the past few years, they have been heavily reliant on commodity sales abroad. Should a global economic slowdown present itself, Brazil's growth rate would obviously be in jeopardy. That would be the true test as to whether or not they could diversify their exports enough to protect their long term growth. Having enjoyed low borrowing costs and record commodity prices on exports for nearly five years, Brazil has been on 'easy street.' The question remains, "How will they respond if and when tough times arise?" It's always something to keep in the back of your mind. Additionally, one must be concerned with the Brazilian currency, the Real, which has seen massive appreciation to near its highest levels since 1999. Over the past few years, the central bank has been continually purchasing US Dollars in an attempt to slow further appreciation. Obviously every investment has risks, and its important to understand all the various risks associated with investing in a booming country like Brazil. Stay tuned in the coming weeks, as I am in the midst of completing my research on both the larger cap and mid-cap Brazilian names as I search for prospects for my ├╝ber long-term portfolio.

Source: Insitutional Investor here and here.

Thursday, September 11, 2008

McDonald's (MCD) Continues to Dominate

As I mentioned in my post about a deteriorating consumer environment here, I think McDonald's is shaping up to be an excellent play. Earlier in the year, McDonald's (MCD) was touted as a "weak dollar" play due to their extensive international exposure and the massive currency gains they were posting from the exchange rates worldwide. But, things have changed in six months time. Nowadays, a recently strengthening dollar provides currency headwinds for MCD's global business. But, I do not see this as being a major problem because demand and sales should easily overshadow any and all currency implications.

Why might you ask? The answer is simple: consumers worldwide trading down to "cheap" alternatives. McDonald's is the king of cheap. They are a fast-food chain, after all; with a $1 menu to boot. When consumers are in a pinch, they look to save money anyway they can. And, McDonald's allows them to do just that. As I wrote about here, the US economy is accelerating to the downside. Then, add in the fact that Goldman Sachs thinks half the globe is in a recession. Lastly, you've got the former federal reserve chairman Paul Volcker claiming that growth in the US economy will be the slowest of any decade since the Great Depression, as I noted here. Tough times ahead to say the least. The US consumer is in for a wild ride. So, if you're going to play any consumer stock in such a tough environment, make sure it is a company that deals with necessities. McDonald's provides food, and cheap food at that. Don't buy the rationale? Just take a look at McDonald's most recent quarter.

McDonald's delivered yet another dominant quarter last Tuesday. August sales in the U.S. increased 4.5% compared to an analyst expected 3.5% gain. Sales in the Asian Pacific region gained 10% and an 11.6% gain in Europe compared to analyst expectations of only 6% in Europe. On average, analysts pegged McDonald's at a global increase of 4.7%. McDonald's came in with a 8.5% gain globally. Needless to say, it was a dominant quarter. They are winning cash-strapped consumers over in both the US and Europe. And, their market position in Asia continues to be very profitable. Not to mention, MCD is seeing operating margins of 25.78% and a return on equity of 29.71%, both solid numbers which reflect the strong underlying fundamentals.

People were concerned that economic weakness in Europe would hurt sales. But, I argue the opposite. A weak Economic environment means more people trade down to cheaper alternatives. European consumer confidence is at one of the lowest levels in five years. Their economy is contracting as their consumers face the exact same problems ours do: rising food and fuel prices. In the US, the cost of living rose 5.6% for the year (ended in July). The U.S. Labor Department reports it is the largest jump in 17 years. So, as the cost of living goes up, consumers look to trade down. It's that simple.

And, if you're worried about consumers "shutting down" altogether, then look to go long MCD and hedge your position by buying some puts or by shorting rival discretionary casual dining restaurants such as BJRI or DRI. Those casual dining chains are suffering from rising input costs and slower dining traffic. At any rate, I think MCD is a solid choice going forward. Let's see how it sets up on the technicals. Pulling up a 3 year chart on MCD, we see that it is in a nice long-term uptrend. Every major dip in the name has been a buying opportunity, as you can see below.

(click to enlarge)

Then, zooming in on a closer 6 month time frame, we can see how MCD has been trading recently.
(click to enlarge)

You'll notice it put in a most recent high at around $65/66 and then sold off. That level represents some near-term resistance in the name and you could see some sellers come in as MCD begins to trade back up near those levels as it is doing now. What you'll also notice is that during the months of May, June, and July, MCD was bumping up against severe overhead resistance at around $60/61. This is shown by the lower of the 2 horizontal red lines I've drawn in. You can see it kept bumping up against that resistance level before finally enough buyers came in August to push it through to new highs. After those recent highs, you will see that MCD came back down to that $60/61 level that was previously resistance. And, that level now acts as a support level to the stock as it bounced off those levels, trending back higher. So, in terms of selecting opportune entry, exit, and stop loss points, the chart gives us a pretty clear picture. How you play it is determined by whether or not you are an investor or trader. But, as outlined above, I think McDonald's (MCD) is poised to benefit in the coming months.

Disclosure: is long MCD

Sources: WSJ, Bloomberg

Wednesday, September 10, 2008

Technical Analysis: Charts With Solid Risk/Reward

Just wanted to breeze through some charts really quick, since it's been a while. Time for some good old technical analysis. Ok, right to it. BJ's Restaurants. Simply put, this place is a clusterf*ck. They're facing rising input costs and slower dining traffic. As I've written about here and here, the consumer environment just isn't that hot right now. In fact, its accelerating to the downside. So, this place will only get squeezed harder. Their solution? Raise prices faster. Oh, great, that will really get struggling consumers in the door. BJRI is hurting so much for any type of positive news that it was up 9% yesterday on an analyst upgrade. Yes, one upgrade. Well, the good news is that this fluke of a 9% move gives us a low risk opportunity here. Check out the chart below.

(click to enlarge)

As you can see, BJRI used to bounce right off of support at $13.5 way back in April and May. Then, the stock ripped lower. It has already tried to test $13.5 once in August and it failed. Well, it's right back up at those levels again. $13.5 was past support and thus is now future resistance. The analyst upgrade today moved the stock up to a high of $13.62. So, a low risk play here would be to short BJRI at these levels and then place your stop just above the resistance (and the 200 day moving average) at around $14 or so. You can be the judge as to how tight of a stop you want to use here. One thing to note if you want to play this from the short-side: be cautious because the recent move upwards has had some volume behind it. Because, as you've seen yesterday, the slightest bit of positive news can send these consumer related names flying. Conversely, if you do get stopped out, you could just flip your trade to the long side. Because, if BJRI breaks out above its 200 day moving average, as well as above the strong resistance at $13.50, it has the potential to go much higher. Another option would be to just stand on the sidelines to see which way it is going to move and then pile on. The point here is that BJRI has very clear risk/reward in both directions. Watch it and play it however you're comfortable.

Next up, I want to point out the large channel Goldman Sachs (GS) has been trading in for a long while. I meant to post this up a few weeks ago, but I've been so busy that I forgot. Here's the original chart I meant to post up showing the clear support for GS at around $155 and then the resistance at around $200 (you could also make a point for resistance around $190).
(click to enlarge)

Now, take a look at GS currently.
(click to enlarge)

As expected, it bounced right off $155 and traded higher up to $170. The simple play here has been buy GS around $155 and stop out around $145 or so (depending on how tight you want your stop). Then, you turn around and sell GS as it rallies higher into various levels of resistance around $170, $190 or wherever you want to lock in some profits. As you can see, this name has been trading sideways for a while. So, while there might not be a big play here right this moment, keep your eye on it. Eventually, some very favorable risk/reward setups will take place just as they have in the past in this name.

Next, I want to turn to a little series that I like to call: There's no such thing as a triple bottom. First up, we have Companhia de Saneamento (SBS). Now, I actually like this name as a longer term play on Brazil. But, for the time being, you absolutely have to respect the technicals, which point to lower prices. Obviously this presents us with a risk/reward setup. You can either try to catch a falling knife (which I don't really recommend). Or, you can wait until it slices through that past support line and short it down along with the rest of the momentum players. It's up to you. The point is that around $37 or so has served as past support for SBS as it double bottomed back in April of 07 and February of this year. You could get a reflex bounce off that support level. But, since we all know there is no such thing as a triple bottom, it looks like it's heading lower.
(click to enlarge)

The second chart in the "no such thing as a triple bottom" series is Freeport McMoran (FCX). Again, this company is actually a great name to own for the longer term, as valuations have just gotten ridiculously cheap. But, in the mean time, you've got to respect the technicals. Some hedge funds have been forced to sell their shares, while others are merely front-running each other. It's a mess out there and it doesn't look like it will end anytime soon. On the chart, you see that FCX double-bottomed in September of last year and February of this year. Yet again, we're down along those levels of $65. Triple bottoms don't exist so I expect this name to trade even lower to the secondary support level I've drawn in around $60. This is simply another risk/reward setup for you to keep your eye on. These charts are painting an ominous picture right now.
(click to enlarge)

So, what does everyone think about these setups? Are there some you like, some you don't? Would love to see what other people think about these setups. Because, after all, technical analysis is in the eye of the beholder. And, what I see could be completely different than what you see.

Ken Heebner to Start Hedge Fund Wayfarer Capital

Ken Heebner, manager of the renowned CGM Focus Fund (CGMFX) and other mutual funds, is set to start a hedge fund. In a regulatory filing made in August, it was revealed that Heebner is starting a new firm, Wayfarer Capital LP. So far, the fund has raised around $73 million, with Heebner targeting $5 billion for his new fund. Heebner employs a macro investment strategy, trying to capitalize on economic trends. In his mutual funds, Heebner runs a smaller, more concentrated portfolio than most managers. He even short-sells a few names, a tactic normally reserved for hedge funds and the like. But, since he runs mutual funds, he is limited in what he can do on the short side. And, it seems as if Heebner wants more freedom to be able to short and employ some leverage.

Seeing as how mutual funds are typically long-only, you can't blame him. In this type of market, one definitely needs to be hedged as much as possible. His CGM Focus fund returned 80% last year, due to smart bets on energy and resource plays. One of his other funds was up 34%. But, this year, Heebner is faced with tougher times, as his fund sits down around 17% year to date. It has been a wild year for him, to say the least. Earlier in the year, he was up around 16%. Then, he lost nearly 30% over a few months time to land him at his current returns.

Fortune magazine has called him "America's hottest investor," and rightly so. He has returned nearly 27% a year over the past decade with his Focus Fund. I am curious, though, if Heebner's mutual fund will take a back seat to his newly formed hedge fund. Apparently, it has always been his dream to run a hedge fund, and you can bet he'll want to make sure it succeeds. The hedge fund structure will allow him to short much more than his mutual fund ever would, which should allow him to hedge and pursue his macro investment strategy more effectively. Either way, the guy knows what he's doing. And, it's interesting to note that Heebner is set to start his hedge fund during a time when many funds are closing up shop due to poor returns and investor redemptions. Contrarian, to say the least. I'll definitely be keeping my eye on this here at Market Folly.

Source: Bloomberg

Hedge Funds & Alternative Asset Management Industry Aren't What They Used to Be

Roger Ehrenberg is out with a thought provoking piece over on his site, Information Arbitrage. In it, he discusses the tough times facing hedge funds and the simple root of the cause. Here's an excerpt:

"Many recent mega-losses aren't the case of simply taking the long view and getting stung by short-term volatility; this is getting carried out because of either too much leverage (the most prevalent cause of failure) or too much concentration. I had always thought that hedge funds were supposed to hedge, and were designed to generate attractive absolute returns regardless of market conditions. Such thinking is clearly a remnant of bygone days for much of the industry, where managers want the best of all worlds: stable management fees, quarterly performance fees, and the ability to suspend redemptions. There just aren't that many Steinhardts and Robertsons any more. And this is too bad for the industry and its investors."

Definitely check out the rest of his thoughts here.

Tuesday, September 9, 2008

George Soros on Oil

If you missed it, George Soros talked about oil in his testimony before the US Senate Commerce Committee Oversight Hearing. Read his thoughts here.

Deteriorating Consumer Environment: Abercrombie and Fitch (ANF) Evidence

This is just continuing evidence of a lackluster consumer environment. Abercrombie and Fitch (ANF) same store receipts were down in August, setting up what I predict will be a downward accelerating consumer environment. Both Citi and Merrill Lynch downgraded ANF on Friday, citing deteriorating sales and increased markdowns. In fact, Citi went as far as to say that they think ANF could trade at its lowest multiple in 5 years. Just something to keep an eye on as you try to balance your portfolios.

Specialty retail is getting hit hard (and will continue to get hit hard) as effects from the housing market, consumer credit crunch, and inflation take a toll on consumer's pocketbooks. Abercrombie is known for its upscale niche within the teen segment, often selling more expensive items than the likes of competitors Aeropostale (ARO), who seems to be doing alright in this environment. So, look for consumers to "trade down" in this environment.

In any given sector, I like to take a balanced approach and often times am market neutral. For instance in retail, being long the likes of Walmart (WMT) or various other discounters who sell essentials (food, gas, toiletries, medicine) is very appealing to me. Then, you take the other side by going short discretionary retailers, such as ANF. Long cheap and/or necessary items; Short expensive and/or discretionary items. The same logic can be applied to food by going long the likes of McDonald's (MCD) for the "cheap" factor (although they might see some slight headwinds due to their strong international presence and a rising US dollar). Then, shorting casual dining restaurants such as BJ Restaurants (BJRI) or Darden Restaurants (DRI), who are feeling the pinch of rising input costs and slower dining traffic.

The main point to take away here is that we all know the consumer is strapped for cash. However, I think too many people are counting on a recovery. With vast evidence of the housing market accelerating to the downside, I just don't see how that is possible. Add in the consumer credit crunch and the inflationary pressures consumers are seeing on everything they buy, and you've got a recipe for a very thrifty consumer.

Monday, September 8, 2008

Apple (AAPL) at Make or Break Point

Chart says it all. Major bounce or major breakdown coming. Not to mention, they've got the "Let's Rock" event schedule for tomorrow, where everyone is expecting new iPods to be unveiled. Typically, Apple (AAPL) has been a "sell the news" type of stock. We'll see what happens tomorrow. Either way, an opportunity either long or short is setting up in this name. Watch the $155 level.

(click to enlarge) is LIVE!

Hey everyone, just wanted to announce that the site's new url is now live:

The old url ( will automatically forward you to the new address, So, you don't technically need to update your bookmarks or links. But, I would appreciate it if you did.

If there are any kinks or errors on the page in the next day or two, I apologize. Everything is in the midst of switching over and so there might be a glitch here or there. But, for the most part, everything else seems to be working just great. Rest assured that everything will be working perfectly fine in the next few days! Also, all of the feeds should still be working as well, so you don't need to do anything there either.

Exciting times here at Market Folly. Thanks for your support and make sure to spread the word!

Fannie/Freddie Bailout & Unemployment Rate

Undoubtedly, you've heard this news already. But, I am simply re-posting it to stress the type of environment we are in. The Unemployment rate has now hit 6.1%, the highest in five years. While the Fannie/Freddie saga has ended, people seem to have already forgotten about the unemployment rate and the fact that we still have tough times ahead. But, the market likes to get all giddy on any glimmer of hope. The root of the "pooring of America" stems from the horrid housing market. And, until it corrects, we are in for tough times. So, while the indexes are up big and we should start off this week in positive territory, I'm still cautious in the near-term. I still believe this is merely a small rally within the context of a broad bear market. The credit crisis is a whole nother animal, which only complicates the situation.

(click to enlarge)

The descending channel (green lines) tells the story. Watch the tape. Barry Ritholtz has an excellent post up over on his blog where he talks about weekend bailouts and the subsequent reactions. He asks,

"How many Sunday press releases is it going to take to save the financial system from ruin? If you’re are keeping score at home, this is now the sixth Sunday night/Monday morning press release in 14 months aimed at saving the financial system. Consider the recent history of these weekend rescues:

• August 2007, when the credit crunch was officially recognized by the Fed, when they cut the discount rate.

• December 2007, with the announcement of the TAF and other credit facilities;

• January 2008 Soc Gen panic, and a 75 bps emergency cut;

• March 2008 with the Bear Stearns bailout.

• July 2008 the first Fannie/Freddie rescue attempt

• September 2008 the actual Bailout of Fannie/Freddie."

Head over to The Big Picture to check out his thoughts/takeaways from the situation. Lastly, I will leave you with an excellent quote from David Moenning, President of Heritage Capital Management:

"All rallies over the past year have been based on the idea that we had seen the worst in whatever was ailing the market at the time – I.E. the credit crisis or the oil spike or the economic slowdown in the U.S. But unfortunately, after the requisite rallies, the light at the end of the tunnel has more often than not turned out to be an oncoming train."

Unemployment Data: CNNMoney
Weekend Bailouts: The Big Picture
David Moenning's Thoughts: StreetInsider

Transocean (RIG) Added to Goldman Sachs Conviction Buy List

I forgot to post this up on Friday since there was so much going on. Amidst all that news, we saw that Transocean (RIG) was added to Goldman Sachs Conviction Buy List. They removed Halliburton (HAL) and swapped RIG in its place. Goldman's new price target on RIG is $178 due to its tie to oil, where they see strong long term fundamentals (obviously).

I definitely agree with them on this call as I believe oil will face big supply/demand issues as we go forward many years into the future. And, I believe Transocean (RIG) is an excellent proxy for this (besides just owning oil in the commodities markets or the etf USO for the long term). The reason I say that is because there is an increasing demand for deepwater rigs. As evidenced by Petrobras' desire to lock up nearly 80% of offshore rigs, the demand for RIG's services is very strong. As oil companies shift from shallow water searches to deep water finds, RIG becomes all the more attractively positioned.

The only problem I have with RIG right now is the technicals. The chart looks horrible right now and the name looks to be breaking down. I've drawn a line in the sand at $120. If RIG can hold onto this level (typically past support), then I think its safe to enter RIG here. But, if it begins to trade lower yet again, I think it would be safer to stay away as it will have broken down on the technicals. RIG trading lower is a real possibility simply due to the fact that it is tied to the price of crude. And, since crude has been selling off recently, it doesn't look good. As crude approaches the very important psychological level of $100 a barrel, things could get interesting. Add in the speculation regarding hedge fund liquidations and you've got a recipe for a wild ride. The point is that both crude oil and RIG are around pretty significant levels in terms of technicals. As you can see from the chart below, $120 has typically been an area of support for RIG. If it breaks through this support level, it looks to be heading lower.

(click to enlarge)

This is a simple case of "trade the perception, not the reality." In reality, Transocean (RIG) is poised to rake in major dollars as their new rigs come out of production down the road. And, they are constantly seeing rising day rates on their existing deepwater rigs. But, everyone seems to be concerned with the "here and now" and thus the technicals are on the verge of a major breakdown. So, you've got to respect the action and step aside if you get stopped out below $120. Long term, this should be an excellent name to own. So, if you're one of those Buffett-buy-and-hold investors, then go for it. I am simply painting a picture for those who like to take a more active role in their positions.

Fundamentally, RIG is one of the best buys out there. Their trailing PE of 7.8 and forward PE of 7.4 is very compelling, especially considering that they trade at some of the cheapest multiples in the drilling sector, despite being one of the largest companies. They have a PEG ratio of 0.55, indicating they are primed for earnings growth. Where the company really becomes attractive though, is in its operating margins and returns on equity. I like to call this the "bread and butter" of any given company. With operating margins of 46.17% and a return on equity of 38.54%, Transocean is cranking out some of the highest numbers out there. Their merger with Global Santa Fe has certainly paid off in terms of increasing their fleet and extending their dominant market share. The only real negative with Transocean fundamentally would be its massive debt. They currently have $976 million in cash and over $15.2 billion in debt. The majority of this debt is from financing the merger of Global Santa Fe and Transocean and a special dividend that the company paid shareholders upon completion of the merger. So, the massive debt load is a concern. But, when you think about how much money the company is making, it becomes less of a worry.

Fundamentally, RIG looks very strong. But, you've got to worry about oil too since this name is tied to the price fluctuations of the underlying commodity. If we are indeed seeing a global slowdown, then the price of oil will obviously suffer, affecting RIG's shares in a negative manner. Still though, RIG remains attractive due to their dominant market share and positioning, their rising day rates, the rising demand for their deepwater rigs, and the fact that they have many new rigs scheduled to be completed in the coming years. This is a great long term buy (3-5 years +). But, if you want to potentially save yourself some money in the near term, watch the $120 level as the technicals have really dictated this volatile and whacky market as of late. As long as you've got a stop just below $120, call it good. Or, you can take the Buffett-buy-and-hold approach with this name, as they stand to benefit over the long haul.

Source: StreetInsider

Sunday, September 7, 2008

Half the Globe in Recession? Goldman Sachs Thinks So

A few weeks old, but still relevant. Some nice weekend reading here.