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Tuesday, February 19, 2008

January 2008 Weekly Posts

1/28/08 Coal stocks moved up 16.9?om Tuesday's low (ETF: KOL). There is a perfect storm developing in coal markets. In 07, we helped focus attention on coal plays, featuring CNX as our Against the Grain on 2/26/07, BTU as an Against the Grain pick on 4/16/07 and JOYG as our Against the Grain on 11/12/07. 3 of the top 5 coal producing countries are dealing with export risk. China is artificially deflating power costs forcing power producers to hold the line on electricity prices despite liberalizing coal prices. In December, China coal prices rose 3.8?om November. In 07, China coal prices rose 14?Y while electricity prices rose only 2.1?queezing power plant margins. The result: the biggest power shortages on record. In 2004, China price controls forced 40 gw of shortages, prompting a 16.5?mp in oil imports as diesel generators made up the difference. This year, the shortage stands at 70 gw. 50-year storms, alongside the Feb 7th start to the Chinese Spring Festival, bottlenecked coal transports as record numbers (178.6 mn people vs. 156mn in 07) sought travel by train to family events. The bottlenecks put 10? China power capacity at risk with 90 power plants idle (equivalent to the total power capacity in the U.K.) As a result, China has shutdown coal exports for the next two months. Global supply has one less player and China will now compete more forcibly with supply from Australia and South Africa. However, South Africa, the 5th biggest coal producer, is also enduring power shortages, threatening export volume. The Richard's Bay Coal Terminal is the biggest in the world. Prices in South Africa have already rose on EU and India demand, and now power shortages threaten reallocation of exports to state power provider Eskom. Richard's Bay coal prices rose $6 per ton Friday to $104. Meanwhile, those same power shortages have shut-in underground mining at Anglo Coal's (the 2nd biggest coal miner in So. Africa) export mines and Richard's Bay Terminal inventories exiting December were historically low, at about 50? max capacity (2.1mn tons). In the U.S., miners have been enjoying decade high export demand as the EU has turned to us as an alternative to South Africa. The weak dollar and steep drop in shipping costs in December have further boosted demand. However, in Baltimore, CNX's (3rd largest U.S. producer) big coal port remains shut as it fixes its pier, which failed on Jan. 3rd. European coal prices rose the most in 3 weeks and remain near highs. EU coal at $129 per ton has doubled YoY. 5 years ago the price was $35 a ton. In Australia, the biggest coal exporting country, floods continue to hamper deliveries to ports, putting contracted coal deliveries in jeopardy. In India, 14 power plants have virtually no coal inventory. Coal provides 25? global energy and 40? global electricity (World Coal Institute). China and India will equal 60? global coal demand by 2030. China uses more coal than the U.S., EU and Japan combined. India gets more than half its energy from coal and 80? its electricity. India has announced new investments in underground coal mining - which is the major source for coal in China yet is only 20? India coal production. Global investments in production will continue - bullish for mining equipment. As a result of the rising power shortages, diesel demand will expand in '08, pressuring prices as refiners reallocate production. In 07, China diesel imports doubled. During China's last power crisis in 04, U.S. diesel prices rose from $1.55 in January 04 to $1.96 in January 05. China's oil demand jumped in December with the highest growth in 7 months. YoY '07 China crude imports rose about 12? 1.1 bn bbls. Price control inspired power shortages simply put-off future price hikes and will keep imports flowing into China in 08. In December, China diesel demand rose 16?its biggest growth in 3 years. The IEA projects China crude demand will rise 5.9? 08. Ag suppliers are another area with earnings clarity. The DBA is up 18.6?nce November 30th. POT joined MON and MOS in posting double digit percentage EPS beats this month. Global inventories remain tight (POT's potash inventory is the lowest since '91) while record farm incomes increase fertilizer, seed and equipment demand. U.S. grain exports are surging thanks to lower shipping costs and the weak dollar. In the prior week, wheat exports were above estimates, corn sales were 25?ove the 4-week average and soybean sales were 39?ove the 4-week average (grain and coal volumes are helping rails). China is increasing grain imports to guarantee supply and pricing through the Chinese Spring Festival. U.S. farmers can't source high quality soybean seeds with the April/May planting season fast approaching. The shortage of quality seed will keep seed prices high and force overseeding of lower germination seeds this year. With corn and soybean prices remaining high, look for cotton acres to switch over to soybeans. Global grain consumption is set to outstrip production for the 8th of past 9 years as BRIC GDP growth fuels global grain demand. Despite an expect 88-90 mn planted corn acres in the U.S., world corn output in 07/08 season will be 6mn tons below world demand - keeping inventories at multi-decade lows. The deadline for BHP to formally bid for Rio Tinto is Feb 6th. Iron ore prices are set to rise for a 7th consecutive year as producers negotiate contracts with China to close the pricing gap with spot prices. Rio Tinto is boosting margins by supplying only 90? contracted volumes at contracted prices. Global steel demand is expected to rise 6.8? 08, despite the U.S. slowdown. Consolidation in miners will continue as companies look to sure up and internalize supply. Steel input cost increases are prompting higher steel prices. AKS is raising prices for carbon steel by $30 a ton for March 1st and later orders. Hot rolled band spot for Jan 14 rose 6? $659 per metric ton. NUE has increased hot-rolled coil prices by $80 per ton, to $660/ton for March - the highest level since 04 and up from $544/ton from December. Global supply is tighter as China export taxes are removing lower cost product from markets. Copper prices are holding December lows despite U.S. recession risk. 1/22/08 The Russell 2k fell 4.5?6amp; the NASDAQ fell 4.1?st week. The Russell is now 21?f its July highs. The NASDAQ is 18?d the SPX is 15.8?f highs. The average small-cap stock in our universe is 15?low its 200 day moving average. The average small-cap stock has 8.88 days to cover. There are 415 small-cap stocks trading more than 5?low their 200 day moving average. 75? the mid cap universe is more than 5?low its 200dma - 318 stocks. The average mid cap is 16.1?low its 200dma. Shorts are at 6.18 days to cover, up from 5.17 ( 20?ays one month ago. The average large cap is now 8.39?low the 200dma. 220 large caps are more than 5?low their 200dma. The average days-to-cover on large cap has climbed 11?nce December 4th to 3 days. The NASDAQ is down 11.7?is year. Earnings clarity is worth a premium as technical investors have shifted to sellers into strength and fundamental investors update earnings models to reflect U.S. GDP contraction. Use oversold relief to upgrade. The stocks in our Jan. 2nd "worst" list have fallen -11.86? average. The stocks in our November 6th, 2007 "worst" list have fallen -34.48?. -12.7?r the SPX. Avoid/Short our worst lists. Ag supply fell Thursday as market leaders succumbed to profit taking. Use pull-backs to buy suppliers as farmers increase spending in the wake of record farm incomes. Corn exports were 4x larger than the week ending January 3rd, and 20?gher than the 4-week average. Corn sales in the 07/08 marketing year are 1.687bn bushels, up from 1.298 bn bushels YoY. Soybean sales in the 07/08 marketing year are 805.1 mn bushels, up from 793.5mn YoY. Wheat sales in the 07/08 marketing year are 1.097 billion bushels, verus 652 million YoY. World corn output in 07/08 season will be 6mn tons below world demand - keeping inventories at multi-decade lows. Iron ore prices are set to rise in 08 and consolidation chatter continues as steel makers act to sure up supply and contain costs. Rio Tinto is now delivering only 90? supply at contract prices - boosting margins by delivering the remainder at much higher spot prices. Iron ore prices have risen for 6 years and negotiations for 08 are underway. In November, BHP valued Rio Tinto at $140bn. New rumors have BHP pricing Rio Tinto at $180bn. BHP will have to make a formal bid by February 6, or risk having to wait for 6 months. Vale is rumored to be interested in buying Xstrata in a $60bn deal. Tata Steel is looking for iron ore acquisitions. AAUK is in talks to buy 2 iron ore mines for $5.5bn. Arcelor Mittal , the biggest steel maker, wants to have 90?p from 47?f its iron ore sourced internally by 2018. China may flex its sovereign wealth fund muscle to add supply and offset inflation. Iron ore price expansion is driving profits. Sinosteel, China's 2nd largest iron-ore trader, tripled profits in 07. AAUK's Kumba Iron Ore Ltd, Africa's biggest iron-ore producer, saw profit rise 48?Y ex 2006-items. Overall, steel companies are effectively sitting underneath iron ore prices hoping for a sale to step in and buy. Buy related stocks. The rise in iron ore and coking coal prices is driving steelmakers to raise prices. AKS is raising prices for carbon steel by $30 a ton for March 1 and later orders. Hot rolled band spot for Jan 14 rose 6? $659 per metric ton. NUE has increased hot-rolled coil prices by $80 per ton, to $660/ton for March - the highest level since 04 and up from $544/ton from December. Steel supply remains tight, despite falling U.S. demand. China's export taxes are reducing global supply while world steel demand is estimated to expand by 6.8? 08 (Int'l Iron & Steel Institute). Buy steel. Copper prices are moving higher as LME inventories dropped 5.2? the past month. U.S. GDP contraction is helping China rein export growth. A 7?cline in U.S. imports yields a 1.5?ll in China exports - less than a 1?ag on China GDP growth, according to Rio Tinto's Chief Economist Vivek Tulpule. The Yuan continues to gain ground and boost U.S. export activity. China coal shortages in the Yunnan and Guandong southern provinces are creating power shortages. China, the biggest coal consumer, shifted to a net coal importer in 07, and will remain a net importer through 2010. The growth in China's power capacity pushes China coal demand to 2.76 bn tons in 08, up from 2.62 bn in 07 and above the 2.58 bn tons it produced (80?gher production than 2002). China is increasing regulations to curb mining accidents (3800 deaths in 07). Bottleneck fears in Australia and India demand impacting African port prices, is driving coal prices higher - boosting overseas demand for U.S. coal. Miners will invest in more production - boosting mining equipment. India's government controlled Coal India Ltd, which produces 85? India's coal, is upping investments in underground coal mining to offset power demand. Currently 80? CIL's coal supply comes from open cast mines while China produces most of its supply from underground mines. Overall, CIL aims to up coal production from 43 mn tons to 67 mn by 2011/12. Last week's EPS related sell-off was driven by continuing write-downs at major banks and brokers and upped loan loss provisions for consumer debt including credit cards. Further, the ABK and MBIA credit rating risk potentially impacts $2.4 tn of debt - another shoe. ABK abandoned plans to raise $1 bn because MBIA's $1 bn bond offering last week dropped to 70 cents on the dollar, yielding nearly 25?Fitch downgraded ABK on the news. Dollar LIBOR dropped below Fed Funds for the first time in 2 months and asset backed comm'l paper grew 3.4?ts 3rd consecutive week of expansion. The TED spread continues to reflect easing credit. Exchanges remain our favorite financials as they've reported record 07 volumes. Last week, NITE beat estimates by 92?anks to volatility inspired volume growth. CME 07 volumes rose 28?Y will electronic trading grew to 77? all volume. ICE Europe volumes rose 49?d ICE U.S. rose 22?Y. NYX bought the AMEX and its ETF and options business. Global volumes will continue to benefit from asset relocation in Q1. As we've been writing since the end of December, seasonal tailwinds have ended for Semiconductors and are ending for Internet stocks. Use rallies to sell. GE EPS and guidance was solid thanks to demand for power generators and plane engines. GE's infrastructure group saw sales rise 30?50? GE sales are international. GE inked a $500 mn turbine deal with Abu Dhabi. Power capacity investments will continue worldwide - buy related stocks. Blackstone bought PFGC for a 43?emium as distributors are passing along higher costs faster than input costs are rising. Sysco, the largest food distributor to restaurants, saw profits climb the fastest since 2004 as it raised prices. IBM upped forecasts thanks to Europe and Asia sales. IBM now expects $8.2-$8.3 vs. $7.9 estimates. IBM sales to BRIC nations rose 39? the first 3 quarters of 07. SLB missed estimates as nat gas related sales prices fell and more than offset the 30?se in sales to Middle East and Asia. Overall, SLB sees capital spending on oilfield services rising 13? $2.9 bn. 3205 rigs operated globally in December, up 2.5?d (BHI). Focus on offshore, Eastern Hemisphere players. 1/14/08 202 of 390 large caps, 294 of 430 mid caps & 400 of 580 small caps in our universe are trading more than 5?low their 200dma - all records since we began tracking in 2004. The average mid and small cap stock is 13.8?low its 200dma. The SPX is 11?f its October high. On Thursday, the Russell 2000 was trading nearly 20?low its July high. Fear has swung the pendulum too far suggesting a 5?lief rally. Use snapback rallies to rotate into our favorite sectors below. Thursday, Bernanke suggested the economy will need "substantive" cuts. Job losses keep wage inflation in check, providing cover for Fed cuts. Overseas, pressure is rising in Europe to ease. The Bank of England, which chose not to cut last week, will ease at their next meeting. The Pound has declined against the Euro for 4 consecutive weeks, and against the dollar for 2 weeks. We mentioned last fall, we believe the dollar will bottom when other central banks ease. In November, factory output in the U.K. fell 0.1?In December, Canada lost 18,700 jobs, the first drop in jobs in 8 months. Canadian manufacturers lost 33,200 jobs last month and 131,600 jobs in the past year. Canada will reignite exports through rate cuts. India's industrial production expanded at its weakest level in 13 months, suggesting India may delay further hikes. China's trade surplus fell to $22.7bn from $26.2 bn in November while China M2 increased the smallest in 7 months. The Yuan's rise, combined with the elimination of export incentives, are cooling the economy while a weak dollar is allowing U.S. companies to grab export share from Europe. China is still sitting on a record $1.53 trillion in foreign exchange reserves, up 43?Y. U.S. exports set records for the 9th consecutive month, climbing 0.4? $142.3 bn. Our gap with China narrowed to $24bn from $25.9 billion in the previous month. Earnings clarity is worth a premium. Baskets offering greater EPS clarity include energy service, agriculture supply & coal. Basic industries post the strongest Q1 seasonality. Rio Tinto reports this week and has traded higher in 4 of the past 5 February's. GGB and SID are up 5 of the past 5 February's, returning 6?d 12?spectively on average. Copper will trade up ahead of the end of month Fed meeting. A weak start to January is the recent norm for the OIH. The OIH has traded down the first 10 days in 2 of the past 3 years. In the last three years, the OIH has returned 8.4?.1?d 8.2?spectively from the January 11th close through January 31st. Energy service companies benefit from bigger exploration budgets. For example, Statoil's 2008 spending will be a record. Deep-water exploration and drilling spending is estimated to rise 30? $25 bn a year by 2012 from 08. On Friday, the USDA announced winter wheat seedings below estimates at 46.6mn acres. Estimates were for 48.6mn. In 2007, 44.9mn were seeded. Wheat stockpiles are estimated to drop to 60 year lows. U.S. grain exports continue to benefit from the weak dollar and growing demand from Asia. Foreign buyers remain underneath wheat bids. The USDA also cut its corn ending stock estimate by 359mn bushels, as more corn is expected to be used and yield estimates decline. Last week, Dupont cited demand for agriculture products as one reason for upping guidance. The prior week, MON beat Street estimates by 31?iting greater South American demand. Ag supply can be bought on down days as record farm incomes are reinvested in yield per acre. POT, for example, has been up 5 of the past 5 February's, posting an average 4?turn. Coal prices rose 73?st year. Bottleneck fears and tight supply in Australia and South Africa continue to fuel near high spot prices. China, seeking to increase domestic commodity supply, continues to discourage exports, while importing heavily from Australia. Through November, China coal imports rose 39? 07. India coal demand is so strong, South African producers are considering exporting very poor quality coal to India to fill the gap. Meanwhile, high South African prices are driving Europeans to source more coal from the U.S. Buy any sell-offs. Technology, especially large cap tech, is a mixed bag for Q1 seasonality but tend to do a bit better in the second half of January. Drop down in market cap where possible. Avoid semiconductors and Internet stocks as seasonality tailwinds have ended. Markets moved Thursday and Friday on the CFC acquisition by BAC. BAC, for its part, moved to protect its $2bn investment last August, which had declined 57? value. BAC CEO Lewis had little faith CFC would get back to the $18 convert price anytime soon, and $4 bn for the entire company, versus the earlier $2bn 16?nvertible stake, was more attractive than throwing continual small chunks of liquidity at CFC. The move to buy the thrift puts BAC over the 10?posit cap. Financials will move this week on C and MER reports and both COF and Amex have upped reserves to offset rising credit card defaults. Overall, exchanges remain our favorite basket in finance. The DJIA had only 2 above average volume days in December. In January, volatility surges have pushed volumes to 6 consecutive above average days. Exchanges are benefiting from faster asset relocation and increased hedging. Buy exchanges on sale. CME & ICE are more than 13?f December highs. Healthcare stocks will become more volatile as seasonality tailwinds fade in February and the basket begins to trade on political risk. Focus your attention on plays tied to an aging population and where technology will boost margins. Utilities offer solid Q1 seasonality and can be bought as investors shift defensive. 1/7/08 We've been writing the Fed will have room for cuts as wage inflation is contained. Friday's job report provided additional cover and rationale for continued 08 central bank easing. The Fed acknowledged credit risks (yet again) with Friday's intraday announcement; increasing the January auctions 50? $30bn. While the TED spread has narrowed from 221 bps on December 11th, to 143 bps last week - it remains too wide. Globally, central banks will have to continue to make money cheap. Since the 26th, the NASDAQ has fallen 8?d the Russell has fallen 9.5?The SPX is now 6.9?f its December closing high. The SMH has fallen 13?nce its December 10th peak. The XLK is down 8.1?nce the 26th. Importantly, the DJ Transports (along with the Russell 2k) has set a new closing low, now trading 13?f its December 10th level. To emphasis the size of the most recent sell-off, the following example highlights leaders near or greater than 10?f December highs: AAPL, ICE, CME, MA, RIMM, BIDU. Earnings season gets underway on Tuesday with Alcoa. Investors have set the bar low. AA is trading 26.3?low its July high. The pendulum has swung toward oversold. The VIX had its biggest one-week move in two months, rising 15?Our small cap universe has the 2nd highest reading of stocks trading more than 5?low their 200 dma's since we began tracking the data in 04 (November 23, 2007 boasted the highest reading on record at 373). Volumes on the SPX spiked to their highest level since the SPX rallied 24 points on the 21st, suggesting we're near capitulation. Volatility and volumes boost exchanges, which sold off this past week and offer solid entry points (CME, ICE). Use weakness to your advantage and buy leading exchanges. Use market weakness to buy ag supply stocks. The ag commodities ETF (DBA) is up 12.8?nce November 30th. Farmers are flush with record incomes and spending on equipment and supplies continues to rise as farmers look to boost yield per acre. MON's 31?at of Street estimates provides insight into ag supply for upcoming EPS. Latin America spent heavily last quarter to capitalize on multi decade highs in various grains. Grain prices remain high thanks to developing nation demand growth drawing down stockpiles. Pullbacks in grains will elicit renewed tenders from major grain importers such as Japan, Egypt and India. The removal of import taxes in China on various commodities will further prop pricing (DBA, BG, DE, POT, TRA) Coal stocks ran strongly in December alongside per barrel's march toward $100, and are now selling off. Use weakness to buy coal stocks such as BTU, CNX and ACI. Australian export demand will remain strong and US exports are benefiting from tight supply in African ports supplying the EU. Energy service stocks will post another solid year of EPS expansion as high oil prices continue to fuel exploration budgets. Use pullbacks in energy service to add to positions for Q1 strength. Buy crude on pullbacks into the $80's or a breakout above $100. Our weekly best and worst lists have done a nice job of keeping you in the right names and avoiding losers. For example, the 13 stocks in our small cap best list one year ago returned 25.55??rnover) while the 7 stocks in that list with scores below 20 (worst) fell 51.8? the past 52 weeks. Use our best and worst lists to narrow your focus. January is an important indicator for full year returns. Historically, January's performance shows how the year will finish. Further, the first 5 days are a good indicator for how January will finish. This suggests bulls will look to mount a rally early this week. If they fail, it will become even more important to rely on our weekly Focus and Against the Grain picks and our Best and Worst lists to outperform indexes. A weak dollar helped BA reach its 3rd consecutive year of record plane orders. Backlogs at supplies remain near records. Aerospace suppliers are one of the few baskets where earnings have above average clarity. On sell-offs, buy names like HON, BEAV & UTX. Technology Q1 seasonality is mixed. Semiconductor seasonal tailwinds have ended and Internet seasonality ends mid month (GOOG, for example, has yet to post a positive Q1). The CES and MacWorld will help move consumer electronics related stocks. Historically, small and mid cap tech have offered better upside than large cap in Q1. Healthcare stocks have begun to breakdown as February is around the corner -marking the end of its seasonal support. As the candidates leapfrog through the primaries, look for more volatility in the baskets. Focus your buys on stocks with strong demographics for demand and where technology will boost margins. Use our best lists to find the winners. 12/31/07 The Russell 2000 has led the S&P 500 by 70bps in December ("January Effect"). January is an important month. Historically, January returns are an excellent barometer for the year. Weekly, we pick one Focus and one Against the Grain pick. Our Q1 2007 picks returned 23.07?rough Friday. In 2008, use our two weekly picks to add excess. (see below for this week's picks) In the past 5 years, basic materials have led other sectors in Q1. Energy related stocks are particularly strong. Changes to China's import and export taxes add upside to global commodity prices. Despite tight monetary policy, profit at Chinese industrials continues to propel investment and inflation. The Yuan will appreciate further against the dollar, benefiting U.S. exporters in 08. Iron ore, grain and coal related stocks will enjoy profit growth. Healthcare will become more volatile in 2008 as candidates leapfrog in the polls. Seasonality supports the sector through February. Overall, own stocks where demographics support demand (re. Orthopedics) and where technology will improve margins (re. PBM's). Exchanges remain the primary focus in finance. As global markets open and discretionary incomes rise, volumes will grow. Volatility is driving faster asset relocation across bonds, futures and stocks while spurring increased hedging. Profits at exchanges will continue alongside record average daily volumes. Consumer electronics makers and suppliers are best in technology. Internet stocks lose steam come mid month and semiconductor positive seasonality has ended. Instead, rotate tech focus into consumer electronics names.Crude will test $100 resistance. Q1 is historically strong for energy service stocks and the basket has run in December, up nearly 10?A successful move above $100 will help propel oil an additional 10??gher. Coal stocks will move up as prices rise. U.S. coal exports are rising, improving balance sheets. Grain prices remain near highs. Watch for farm surveys regarding corn versus soybean acreage, as shifts will affect fertilizer demand. High farm incomes boost equipment and supply demand. We expect more EPS upside.




posted by Todd Campbell at 9:27 AM

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