News items of conflicting interest
Managers most negative on stocks in a decade, survey says - MarketWatch
UCLA economists stick to no recession forecast - SacBee.com
Today’s news readings are bringing up some interesting predictions and forecasts. I have linked to a couple of these articles above and I have a few comments.
First, the UCLA economists article. They repeated their forecast that, although the U.S. and California economies are slowing, they do see an actual recession. For California, they stated the slow down had not spread beyond the housing sector. The tone of the article really gave the impression of the UCLA economist starting to hedge their bets. The article ends with this quote from UCLA’s Edward Leamer, direcctor of the forecast:
“I am holding on to what is now a shaky view: no recession this year,” Leamer wrote.
The MarketWatch article gives us a chance to decide how contrarian we really are. The survey of fund managers from Merrill Lynch first had me asking: What kind of fund managers? So I dug up this from the ML website:
The Global Fund Manager Survey is a monthly report that canvasses the views of 300+ institutional, retail, and hedge fund managers around the world.
Now I at least have an idea of where these “fund” manager come from. Next I am very impressed on how much there beliefs can change in the period of a single month. Here are a few figures from the MarketWatch article:
61% of fund managers believe that the global economy will weaken over the next year, up from 39% taking this view in May.
36% now expect higher short-term interest rates. This view contrasts with May, when a net 4% of managers believed that short-term interest rates would fall.
42% of managers are now overweight cash, compared to a net 31% holding this view last month.
The point of the report is that these fund managers are the most bearish they have been in a decade. Going back to June 1998, the S&P 500 ended that month at 1134, dropped to about 940 in Sept. 1998 and was at 1464, end of June 2000. If it has been an exact 10 years, their bearishness may be justified, but it looks like we will bottom this summer this time and start upwards. I know, know, the past does not the future predict, but I thought the numbers were interesting.
Remember, at least in mutual funds, less than half the of the managers manage to beat the market, so are these 300 in the top half, bottom half or evenly spread? With the large changes in their beliefs quoted above, I tend to believe they have capitulated (late) to current market beliefs and the turn towards the plus side is near.
Never ending bad news put me in a good mood
On Friday, I was about to write that it appears the continuing bad news makes me want to just go sit in the sidelines and wait for better days. The housing down turn is turning into a 4 year odyssey of pain for homeowners. Gas prices are causing SUV owners to trade in for Vespas. The recession that has been forecast by many actually appears to be arriving. Every time the stock market makes a modest gain, it gives it up and then some over the next few sessions. Stocks I believe are good values lose 50% of that value. Finally, the floods in Iowa strike close to home both personally and in regards to some of my investment choices. So by market close on Friday I was ready to pack it in for a few months.
Then I started thinking about some the the stocks that have been so disappointing and realized that opportunities like we have now do not come along very often. Many stocks are priced like their entire sector or industry is going out of business.
First, off many energy companies are going to do very, very well in this environment. My exposure is probably a little light here, but some the stocks in my Income Portfolio should do very well over the next couple of years. Take a look at (PWE: 31.82 -1.24 -3.75%), (NRGY: 25.38 -0.383 -1.49%) and (APL: 38.75 -0.41 -1.05%) for growing earnings and dividends. On the growth side, Headwaters (HW: 10.25 -0.19 -1.82%) is rolling out technologies to clean waste coal and process oil sludge into extra energy sources.
The market is also acting like every airline will go bankrupt due to high fuel prices. A well run profitable, fuel efficient airline like Copa Holdings (CPA: 26.56 -0.65 -2.39%) should pick up market share and continue to be profitable. My big loser so far is the aircraft leasing company, Aircastle, Ltd. (AYR: 8.65 +0.15 +1.76%). The stock price has been cut in half on the fears that some of their leasing customers will be turning in aircraft. One is US Airways, which has indicated it will return some leased aircraft, however, it has not been disclosed who those aircraft are leased from. At this time AYR stock is trading at 4.5 times last years earnings and is yielding 11% on a dividend that is 55% of net income and 35% of free cash flow. Global air travel would have to have a severe meltdown to make Aircastle worth any less than it is today.
Then in financials you have a company like City Bank (CTBK: 9.21 +0.13 +1.43%) of Linnwood, WA. This is a bank with 30+ years of growing profits, is conservatively managed and is in a part of the country that has not been hit bad in the real estate down turn. There is almost no news besides quarterly earnings reports on this stock, yet it has fallen from the low $20s to $12. When was the last time you saw a quality company with a PE of 4 and a yield of 5%, just because of it’s industry?
I see stocks growing earnings and getting their share prices hammered because the market believes the numerous problems mentioned above will affect all companies the same. At this time it looks to me like we may not see stocks at these bargain prices for a long time.
Note: I have long positions in AYR, CTBK, PWE, NRGY and HW.
Aircastle client list: Any disasters?
I found this list of Aircastle Ltd’s. (AYR: 8.65 +0.15 +1.76%) customer client list on their website. The stock price is in a free fall and I am trying to determine if the market is punishing the stock for good or bad reasons. The bad reason would be a general hammering of airline related companies due to high fuel prices, and the stock will recover if there is no real impact to the company’s financials. The good reason (bad for shareholders) would be that some of Aircastle’s customers will not be making timely payments on their leased jets, thus impacting the earnings of AYR. The list of airlines includes some that scare me (SriLankan Airlines), some I know are in great shape (LAN) and a bunch of who-would-know (Aeroflot). Any feedback anyone?
Note: I have a long position in AYR.
| REPRESENTATIVE CLIENT LIST | |
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LOT Polish AirlinesLotus AirMalaysia AirlinesMartinairMeridianaMonarch AirlinesNational Air ServicesOceanAirPacific AirlinesQatar AirwaysS7 AirlinesSama AirlinesSAS Scandinavian AirlinesShanghai AirlinesSingapore AirlinesSky AirlinesSkyservice AirlinesSouthwest AirlinesSriLankan AirlinesSterling AirlinesSwiss International Air LinesTAM Linhas AéreasThomsonflyTransaviaTUIflyTurkish AirlinesUkraine InternationalUS AirwaysVivaAerobusVRG Linhas AéreasWorld Airways |
Why does this darn stock keep going down? Part II
On Friday I started this post concerning a pair of stocks that have me baffled by their eroding stock prices. Part 1 was some information on what I see going on with City Bank (CTBK: 9.21 +0.13 +1.43%) and today I will complete the duo with some information on Aircastle Ltd. (AYR: 8.65 +0.15 +1.76%) the aircraft leasing company.
I first noticed Aircastle when they cut their dividend from 70¢ to 25¢ per quarter earlier this year. I started watching the company to see if their financial condition was deteriorating or improving. When the 1st quarter earnings report came out in early May the results were very positive. Revenues and earnings are rising and the company is doing a good job keeping their fleet leased out. Aircastle has less than a 10% exposure to U.S. based airlines and international air traffic is considered a growth area. I made the conclusion that there is a high probability the company will start increasing the dividend and added the stock to this site’s Income Portfolio and purchase a small holding for my own account.
After the earnings release the stock price hovered in the $16 range, then about two weeks ago started dropping. The descent has been steady, and now the stock is trading at less that $12.50. Ouch! I have not been able to find any news to justify the price decrease, and my only guess is that investors believe high fuel prices for airlines (Aircastle’s customers) will end up having a negative effect on Aircastle. At this point the stock price is trading for only 6.7 times estimated 2008 earnings and the yield is at 7.8% with the current dividend.
My purpose in writing these posts is to express a realization that as primarily a fundamental investor, it can be a disadvantage to ignore technical trends. When I see a stock I like decrease in price, my tendency is to want to buy more, but it appears that once a stock price starts a trend it is very difficult to determine when the trend will reverse, without (apparently) regards to the prospects for the company. Or I just do not have access to the level of information that is telling investors to bail out on these stocks. From my experience with these two stocks, I will be looking for some signs of a trend reversal before jumping in to start or add to a position. I think I need to study up on some basic technical analysis techniques.
Of course, I did add to my position in AYR on Friday when it looked like the stock was leveling off and today it is down another 3%. Good thing the position is still very small. If they follow last year’s schedule, Aircastle should announce the 2nd quarter dividend around the middle of this month. Keep watching!
Note: I have long positions in CTBK and AYR.
Buying on dips, or Why does this darn stock keep going down?
There are two stocks in my Income Portfolio for this site that have me completely baffled. Their stock prices continue to erode and I am at a loss to find a good reason. These two point out some of the challenges of investing in smaller cap stocks where often the only news available is the quarterly earnings report and the investor has to live with the share price swings for the 3 months in between without much information to decide whether to hold or sell or buy more. Compare this with a popular stock like Apple (AAPL: 170.12 +1.94 +1.15%) where I count 15 news headlines at Yahoo Finance for today alone (and it is still relatively early). One of my goals and challenges here is to try to find those companies and stocks where the lack of news leads to an undervalued stock. So as these stocks start to fall in price, the new challenge is are they more undervalued or is there a hidden problem?
First, up I will discuss City Bank (CTBK: 9.21 +0.13 +1.43%) of Lynnwood. WA. This mid sized ($1.3 billion in assets) bank has 30+ years of conservative management and growing profitability. It pays a quarterly 15¢ dividend which gives a yield of over 4% at the current share price and has recently paid an additional $1.00 dividend at year end. City Bank is an industry leader by most of the metrics banks are measured by. Earnings per share were $2.62 in 2007 and current estimates have 2008 earnings at $2.25. This puts the PE for 2008 at 6.3 based on today’s (still falling price).
I first reviewed and added City Bank to the tracking portfolio here in October, 2007 when the price was about $23. I was looking for a banking sector stock that was down trodden by the market distrust of financials, but was stable and profitable. I though CTBK was a good fit for what I wanted. Since then (before this recent downturn) the stock varied between $18 and $24, based on how the market was feeling about banks and has paid $1.30 in dividends. I made my initial, personal purchases in the $21 range. CTBK started the 2nd quarter at almost $24 and has been sliding downward since. I picked up some additional shares at $18 and have watched the stock continue downward to about $14 today. In the last 2 months the only news were 1st quarter earnings report and a 2nd quarter dividend announcement.
So now my stock is down 1/3 and I scour the news daily for reasons: Nada. I check Seattle area news to check if there is an economic change there: Still appears relatively strong. My only guesses on the price meltdown are that City Bank’s large portfolio in construction loans is in big trouble, and we will not find out until the next earnings report or the many individual share holders (very little institutional ownership) are bailing out as the stock continues to fall. At this point, I plan to hold my position until actual financial results are revealed.
My other falling stock that I do not understand is Aircastle Ltd. (AYR: 8.65 +0.15 +1.76%). I have expounded enough for today, so check back tomorrow or Monday for my thoughts on Aircastle.
Note: I have long positions in CTBK and AYR.
Have energy prices peaked?
Could oil mania be coming to an end? | Anatole Kaletsky - Times Online
Today, with oil reaching new highs, is probably not the best day to link the article from the U.K. Times Online. However, it is interesting and thought provoking so I will reprint a few exerpts and you can read the rest if interested.
Concerning a U.S. recession:
While the slowdown in Britain and Europe has only just started, the US economy now seems likely to avoid an outright recession as Washington’s huge tax cuts, interest rate reductions and bank and mortgage bailouts appear in the nick of time over the economic horizon,
What could prevent economic recovery:
there is now only one key uncertainty marring the signs of improvement: the huge increase in energy, food and other commodity prices since the start of this year. This now poses a far greater danger to the world economy and financial system than the correction in US and British housing markets and the related credit losses suffered by leading banks.
Three reasons commodity inflation is worse than housing deflation:
First, rising prices of food and energy hit poor people hardest and therefore provoke turmoil among groups that would otherwise be politically apathetic
Secondly, inflation is inherently harder for governments and central banks to deal with than deflation
Thirdly, the countries most exposed to the risks of commodity inflation - China, India and other large consumers of energy and food - are precisely the ones that the world economy now depends on for most of its growth.
However, the author puts forth the opinion that the commodity inflation is primarily panic and speculation driven and not by a supply and demand imbalance. He gives several arguments to back up his position and I will include one:
The Chinese and Indians are not eating any more rice today than they were three months ago. The doubling of rice prices cannot therefore be explained by a sudden shift in supply and demand. And the same is true of oil, since the global growth of oil output in the past two years has been substantially faster than the growth of consumption.
The article closes with this note:
This week Brian Marber, one of London’s most experienced technical analysts and one who has been consistently forecasting higher oil prices, told his clients that the trend was probably reversing. Let us hope he is right.
Read the article and see if you get the same take from it that I do. Four years ago we were in the middle of a housing price boom and look where we are today. The same four years ago gold was under $400 an ounce and oil was under $40. Is this another bubble that will burst in the near future?
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