Wanna Know The Details of Financial Instutions' Mortage Exposure?

http://data.nationalmortgagenews.com

Now, Even Borrowers With Good Credit Pose Risks

http://online.wsj.com/article/SB119802116320237959.html

"In an interview last week with Wall Street Journal editors, Kenneth Lewis- CEO of BofA- expressed concern that even borrowers with strong credit scores might turn out to be default risks if housing prices keep tumbling. In other words, what is being portrayed as a credit-quality problem with the riskiest 20% of the mortgage market could spread to a much wider cross-section of home loans."

"In such an environment credit scores don't really provide a definitive gauge of how hard a borrower will work to avoid default, says Mark Zandi, chief economist of Moody's Economy.com Inc., a West Chester, Pa., economic-research firm. A better test, he says, is how much equity owners have in their home. If they have a lot at stake, default becomes almost unthinkable. Without much equity, the commitment to keep paying the mortgage, no matter painful that may be, begins to dwindle."

Best Buy's Impressive FY 3Q Performance

The consumer-electronic retailer's profits soared 52% amid strong sales in videogame products, notebook computers, flat-panel TVs, and notebook computers, flat-panel TVs, and computer- and home-theater services. This result highlights the mixed performance among retailers this holiday season. Some benefit as consumers are still buying consumer electronics, gaming-related products, and teen apparel. Meanwhile, chains tied to housing market and women's clothing are struggling.

Morgan Stanley Economist Expects Mild Recession

http://blogs.wsj.com/economics/2007/12/10/morgan-stanley-economists-recession-ahead/

"In a research note today, chief economists Richard Berner and David Greenlaw say tightening financial conditions, coming weakness in business capital spending and slowing global growth “have tipped the balance.” They say a “mild recession” is now likely, with domestic demand contracting by an average annualized rate of 1% in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings contracting by 5% to 10%.
“Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth,” the economists write. “But the time for incremental changes is over.” “Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing.”
And while growth abroad remains strong, they say, slowdowns in Europe and Japan are undermining that. Their forecast is for global growth to slip to 4.3% in 2008 from 5% this year, though “the risks like south of that still-hearty pace” and translate into downside risks to growth in U.S. exports."

EBIT Margin, Net Interest Margin, and Price to Book

In diagnosing growth, we often look at sales, earnings, and cash flow growth. However, margins are also an important variable to gauge growth prospects. I prefer EBIT vs. profit margins because EBIT is less susceptible to accounting tricks (income statement manipulation and extraordinary variances between lines such as tax rates, interest income, share buybacks, etc), which in turn provides a truer snapshot of a company, industry, or sector's operating activities.

Nonetheless, net interest margins are a more applicable analysis tool for financials since a large part of revenues is derived from interest income, while interest paid is a major expense. Net interest margin is the spread between a bank's cost of money and the rate it gets on loans.

Banks in emerging markets such as India's HDFC Bank has been benefiting from the soaring stock market, which provides the bank cheap deposits and higher net interest margin. The bank is a leader in processing payments for those securities transactions. Six out of ten brokerages have their accounts at HDFC Bank.

Meanwhile, price to earnings ratios are not relevant in valuing brokerage firms' shares. The ratio is usually low, reflecting the difficulty in forecasting volatile earnings. The more relevant is price-to-book ratio.

U.S. Automakers Continue to Suffer

As reflected byNovember's light vehicle retail sales data released by Autodata, Detroit's Big Three (GM, Ford, Chrysler), which relies on fuel-thirsty but profitable pickups and SUVs, continue to lose ground against Japanese automakers Toyota and Honda, that produces better-mileage vehicles. Other risks that will continue to loom in 2008 are worse-than-expected U.S. economic slowdown and high energy prices.

http://www.motorintelligence.com/m_frameset.html

ETF Proxies for Various Indices

iShares Russell 3000 Growth Index Fund (IWZ): proxy for the universe of U.S. growth stocks
iShares Russell 3000 Value Index Fund (IWW): proxy for the universe of U.S. value stocks

2007 marked a shift among money managers to favor"growth" stocks, those whose earnings are growing faster than market average, over "value" stocks, which look cheap relative to their assets or earnings. The technology and health care sectors, for example, is believed to continue to deliver steady growth as the economy slows in 2008.

iShares S&P 500 Index (IVV)
Financial Select Sector SPDR (XLF)
KBW Bank ETF (KBE)
Energy Select Sector SPDR (XLE)
SPDR S&P Homebuilders (XHB)
Oil Services HOLDRs (OIH)
Market Vectors Gold Miners ETF (GDX)
iShares MSCI Brazil Index (EWZ)
iShares FTSE/Xinhua China 25 Index (FXI)

Florida Blues

One of the states that has been hit the hardest in this housing downturn is Florida. According to WSJ and Commerce Department, in October building permits for new construction- an important indicator of future housing activity- came to just one-quarter of their 2005 peak levels (Hit by U.S. automakers troubles, Ohio has the highest foreclosure rate in the country, according to the Mortgage Bankers' Association) . GS economist Jan Hatzius said that Florida is unlikely to get much help from strong global economic growth due to low exports level. Companies that supply homebuilders continue to feel the pain, such as PGT, Inc., a manufacturer and supplier of residential impact-resistant windows and doors. During the third quarter of 2007, new housing starts continued to decline, and housing inventory levels continued to rise,'' said Rod Hershberger, PGT's President and Chief Executive Officer. Home starts in the third quarter of 2007 were down 53% compared to the third quarter of 2006 and down 29% from the second quarter of 2007. Unsurprisingly, its quarterly earnings growth also fell 78.90% yoy. Furthermore, MarineMax, Inc., a Florida-based operator and dealer of recreational boats, reported that its fiscal fourth-quarter profit slid 48 percent on higher costs and lower margins due to a soft retail environment.

Credit Conditions Tighten Again

http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

The closely watched gap beween the important lending rate 3-month Libor and fed funds rate has been widening. Libor is a short-term borrowing rate used as a benchmark for floating rate debt, from corporate borrowings to ARMs; the rise signals tightening in credit conditions. This usually means the banks see increased risk of loan defaults. Nonetheless, this gap could be one of the factors that may influence the Fed to ease rates further next week.

As of Nov. 30:
Federal-funds rate target: 4.5%
Libor, 3-month: 5.13% (it touched 5.73% in August)

Food Retailers Metrics to Watch

Example: Whole Foods, Kroger, Safeway
Compare forward P/E, quarterly same store sales growth, gross margin, operating margin

Great Valuation Tutorials

Valuation is certainly one the central concepts in finance. I found these resources very helpful in enhancing my understanding of the topic.

http://www.thestreet.com/university/personalfinance/10385275.html
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/

Who are the bigget players in the alcoholic beverage industry?

Constellation Brands = world's largest wine industry; it has about 20% market share of the fragmented U.S. wine market after the acquisition of Fortune Brands' wine business (the cash deal valued it at 14 times EBITDA)

Fortune Brands = big player in premium spirits business (which has higher margins and less CapEx intensive than wine). It makes Jim Beam bourbon and Sauza tequila

Sweden's Vin & Spirit = maker of Absolut vodka

Diageo = Maker of spirits,wine and beer. Its brands include: Smirnoff, Johnnie Walker, Captain Morgan, Baileys, J&B, José Cuervo, Tanqueray, Guinness (my favorite), Crown Royal, Beaulieu Vineyard and Sterling Vineyards wines, and Bushmills Irish whiskey.

Free ABX Indices

Bloomberg does not provide ABX indices data, but I managed to find this free resource:

http://www.markit.com/information/products/abx/history.html

Check it out!

According to BofA, interest rates are set to rise or "reset" on $362 billion worth of adjustable-rate subprime mortgages. This can worsen the subprime turmoil, since a lot of subprime mortgages already went bad in their first year even before their rates rose.

What is SIV?

"SIVs are off-balance sheet vehicles that sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.
SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles."

More Metrics to Watch: Mining Companies and Asset Managers

Mining companies: Market Cap/Net Asset Value
Asset Managers: Market Cap/Assets Under Management or AUM; Revenue Yield = Revenue/AUM

One Dollar Menu, Anyone?

When I ate at Wendy's a couple of days ago, I realized that the price of each item on its Super Value Menu is not exactly $1.00, it is rather $1.19. But fortunately I had a few coins in my pocket to afford a double bacon cheeseburger. Anyways, I found interesting figures from a market research cited by Russ Klein, Burger King's global marketing, strategy, and innovation president. Burger King's Value Menu accounts for about 12% of total revenues, McDonald's Dollar Menu contributes 23%, and Wendy's Super Value Menu brings 25% to total revenues. It seems that these low-margin menus turn out to be very important driver of customer traffic and sales for these major fast-food chains.

Interesting Facts abut Luxury Retailers

Spending by middle-market customers are expected to decline in this holiday shopping season because of higher gas prices and weak housing market. This has hurt midtier retailers like Target, Limited Brands, and Zale according to WSJ. However, spending by the ultra-rich would hold up as they are less affected by these factors. The weak dollar has also boosted spending by foreign tourists, benefiting luxury retailers who have flagship stores in NYC or Beverly Hills. Saks' Fifth Avenue store for example, generates about 20% of the company's $2.9 billion annual sales. Meanwhile, Tiffany & Co., which derives 20% of its total sales of engagement jewelry, also generates 10% of its annual sales from its flagship Fifth Avenue store.

Surging Latin American Basic Materials Industry

I found this article very helpful in enhancing my understanding about the risks and rewards in doing mining business in Latin America.. It also includes interesting stats. Check it out.

http://www.mckinseyquarterly.com/Energy_Resources_Materials/Weighing_the_risks_in_South_American_basic_materials_1969

Wanna Know What The Top-Performing Hedge Funds are Holding?

http://www.stockpickr.com/port/Lone-Pine-Capital/
About Lone Pine:
http://biz.yahoo.com/indie/071116/996_id.html?.v=1

http://www.stockpickr.com/port/Maverick-Capital/

http://www.stockpickr.com/port/Atticus-Capital/
About Atticus:
http://www.thestreet.com/newsanalysis/stockpickr/10359349.html

http://www.stockpickr.com/port/Glenview-Capital-Management/
http://www.stockpickr.com/port/Pequot-Capital-Managment/

These stock-focused HFs are mentioned on a WSJ article on November 19.

Others to watch:

http://www.stockpickr.com/port/Leon-Cooperman/
http://www.stockpickr.com/port/T-Boone-Pickens-BP-Capital/
http://www.stockpickr.com/port/Renaissance-Technologies/

Some portfolios are up-to-date and some are not.. so proceed with caution!

List of HFs:
http://media.ft.com/cms/02fd5a42-f338-11db-9845-000b5df10621.pdf

Explanation about HFs (in plain English):
http://nymag.com/news/features/hedgefunds/

Today's size of global HF market:
According to Hedge Fund Research: close to $2 trillion

Challenges:
Smaller funds that lack unique investment case are struggling for new money
Emergence of cheaper hedge fund imitation: mutual funds with "130/30" strategy

HF managers often invest their own money in their funds, under an assumption that it could incentivize them to behave conservatively. This is not necessarily the case. Since the use of leverage can maginify gains or losses, a fund that obtains big returns at any point in time can quickly reverse to losses. Bottom line, investors should be aware about the danger of chasing performance. Moreover, with so much money chasing similar opportunities, the average fund will find it harder to beat stock market returns. Therefore, average returns could fall going forward.

Calculating Annualized Return

Nice free online calculator..
http://www.gummy-stuff.org/petrovski.htm

Wanna Know More about Private Equity?

Private equity firms, also known on the Street as Sponsors, are facing tough times ahead. Not only tighter credit market made it more difficult for them to do deals, it is also getting harder taking their holdings public. As the result, sponsor-related LBOs and IPOs are drying up. These firms' exit opportunities, by way selling portfolio companies to strategic buyers or listing them through public offerings, have diminished.

GP Investments,

LatAm's biggest PE firm
http://www.gp.com.br/gp/index_pt.htm

Comprehensive PE Portal
http://www.pehub.com/

How to Calculate IRR?
http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/
http://office.microsoft.com/en-us/excel/HA011136321033.aspx

What is economic net income (Blackstone's "eps")?
Net income excluding the impact of income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets. One CIO admitted that the company's valuation is very complex and it is actually a concern among investors. BX shares has fallen more than 30% since IPO.

What is CAGR?

According to Investopedia, CAGR is defined as t"he year-over-year growth rate of an investment over a specified period of time." However, the number need not be an investment. It can be profits, revenue, etc. CAGR is often mentioned in research reports and investor presentations of publicly traded companies.

Example:
According to HFR Industry Reports, aggregate fund of hedge funds AUM has grown from $76 billion in 1999 to $547 billion in 2006.

What is the CAGR?
Ending value:$547 billion
Beginning value: $76 billion
n = 7 years ; 2006-1999 = 7

=(547/76)^(1/7)-1

Apply to the formula:
http://www.investopedia.com/terms/c/cagr.asp
http://office.microsoft.com/en-us/excel/HP011225061033.aspx

OR download a free spreadsheet from this blog:
http://www.experiglot.com/2006/01/28/compound-annual-growth-rate-cagr-calculator-xls/

The answer is 32.6%.

What is Earnings Yield?

Earnings yield of a stock is the ratio of earnings to its share price. This ratio is often compared with U.S. 10-year Treasury, currently yielding 4.15%. Example: Petroleo Brasileiro. Current P/E of 19 times implies earnings yield of 5.26%, 111 bps higher than risk-free Treasurys.

2008 Iron Ore Price Increases Will Hurt Steelmakers

The possible tie-up between BHP and Rio Tinto are worrying Chinese steelmakers who do not have iron-ore reserves of their own. China is the largest producer and end user of steel. BHP, Rio Tinto, and CVRD altogether control about 75% of international trade. BHP and Rio Tinto own more than 85% of the world's largest copper mine, the Escondida deposit in Chile. This leaves Chinese steelmakers with weak bargaining position in the current negotiations. Iron-ore producers already aim about 30-50% price increase for 2008. Price hikes will ultimately affect steel's biggest end users such as auto and appliance makers. Meanwhile, the world's largest steelmaker by output, ArcelorMittal already plans price increases in the first half of 2008.

"Full of Bull"

This is a great book for investors and those who are interested in research. The author is the former top Wall Street analyst Stephen McClellan.

http://www.thestreet.com/s/open-book-how-to-decipher-wall-streets-secret-code/funds/openbook/10390466.html?puc=_dm

Should Companies Provide Earnings Guidance?

There is no right or wrong answer to this question. But take a look at this interesting article:

http://www.businessweek.com/investor/content/jun2007/pi20070629_967923.htm

A company that I found that provided detailed guidance is Intuitive Surgical (ISRG).

http://library.corporate-ir.net/library/12/122/122359/items/267611/IR_Presentation_110107.pdf

If every publicly traded company issued something like this, jobs of research analysts in forecasting earnings would have been much easier!

World's Largest Miner 2008 Commodities Outlook

On its latest earnings release, BHP Billiton issued its outlook for next year.
A few important points regarding macro and commodities:
a. "Despite moderating US economic growth, global economic fundamentals remain strong and the ongoing strength shown by emerging Asian economies (including China) should support global growth."
b. "Recent discussions with our customers have indicated that they do not expect the volatility in the US and European credit markets to have impact on raw material demand. In particular, our customers in China and India believe domestic demand criteria are much more important factors in their markets."
c. "In the interim, commodity prices are likely to stay high relative to historical levels, albeit with increasing volatility."

Consumer Spending Slowdown

According to the Commerce Department, retail sales rose only by 0.2% in October, after climbing 0.7% in September.

Link: http://www.census.gov/svsd/www/advtable.html

Economists forecast that this holiday season could be the worst in 5 years, as consumers pull back spending due to declining home prices and rising fuel and food prices. This could be bad news for retailers who obtained a bulk of their revenues in November and December.

An interesting question is whether or not the affluent customers will also cut down spending. on luxury items. Coach has issued warning regarding slowdown in customer traffic and Polo Ralph Lauren has lowered profit forecasts citing a more "conservative view of discretionary spending among U.S. consumers," as reported by the WSJ. Nonetheless, the London-based luxury-goods maker Burberry has boosted its average selling price of its luxury handbags by more than 25%, expecting that affluent shoppers will continue to spend since they are less affected by the economic slowdown.

Citi's Analyst's Bold Downgrade of E*Trade

On November 11, Citi's analyst Prashant Bhatia downgraded the online brokerage and banking firm from hold to sell due to "higher probability of a run on the bank." As another victim of the turmoil in mortage-related securities market, he thinks that "depending on the extent of asset write-downs in 4Q, E*Trade may fall below well-capitalized." The stock plunged 59% on that trading day, although it has recovered partially today on takeover rumors. This is an example of how influential a research analyst can be in moving a stock. Nonetheless, what impresses me is his blunt opinion on management. He votes "no confidence in the CEO, in the President & COO, and in the members of the Board of Directors. Management lowered its earnings guidance for the 5th time in 8 months and now management believes that it is no longer beneficial to provide earnings expectations for 2007." Very few analysts have the courage to issue such criticism to the management of the companies they cover.

Value Investing

I found a great website for those who would like to learn more about Value Investing..

http://valueinvestingresource.blogspot.com/

Curious about Gas Prices

Narrowing refining margins have hurt refiners. Oil prices are widely reported in the media, but what about gasoline prices?

"AAA's Daily Fuel Gauge Report is updated each day and is the most comprehensive retail gasoline survey available."
http://www.fuelgaugereport.com/

Citi's Deteriorating Tier 1 Capital Ratio

Citi's Tier 1 ratio is still above a 6% threshold considered by the Fed to assure that institutions are well capitalized. But its ratio- a key measure of a bank's capital cushion- is in a downtrend. It is now below the large banks' average Tier 1 ratios of about 8%.

Tier 1 ratio = Bank's capital divided by risk-weighted assets = a gauge of the banks ability to absorb huge losses

At the end of 3Q, the ratio was 7.3%, down from 8.6% a year earlier. This creates concern among investors whether or not further write-offs will hurt cash flow and the bank's liquidity. Citi has been hurt by losses stemming from the exposure to super senior CDOs that were thought to be shielded from volatility that hit riskier CDOs. By bailing out seven SIVs and bringing the assets to its balance sheet, Citi said that the move could erode that ratio by an additional 1.6 bps. Betsy Graseck, a Morgan Stanley analyst, who rated the stock "Underweight," predicted that Citi would need to cut dividends and take further steps to protect its capital position.

Cautious on the Technology Sector

In a postclose conference call, Cisco's CEO John Chambers said "We saw dramatic decreases year over year in orders from financial services" as well as softness in the automotive market. This means that the company is beginning to feel the impact of credit crunch in the U.S. After the earnings announcment, Cisco's shares have fallen to below $29 after hitting 52-week high of $34 last week. Run-up of the tech-heavy Nasdaq Composite Index has also ended. On Friday, it closed at 2628 points, 8% off the 52-week high of 2862 reached on October 31st. The tech sector was thought to be a safe haven among many investors- but disappointing guidance from Cisco and the looming impact of credit crunch on tech spending have brought down investor sentiment.

Bottom line: U.S. industries such as retail, manufacturing, and financial services have begun to cut tech orders

Beyond Traditional Metrics: Beyond the Balance Sheet

I enjoy analyzing companies beyond traditional financial metrics. If you read my posts, I pay a lot of attention to industry-specific metrics. I also found Forbes' "Beyond The Balance Sheet" series to be helpful.

www.forbes.com/bbs

Tracking Hedge Funds Performance

I am often curious about how the lucrative hedge fund industry is doing in terms of performance. I found this free site helpful to quench my thirst for such knowledge.

http://www.djhedgefundindexes.com/

Homebuilder Blues Metrics

As housing woes continue, homebuilders are suffering. Beazer Homes USA recently announced that thay are going to post $230 million pretax charges for its FY 2007 Q4 results. They will also suspend a quarterly dividend to save costs.

The charges include:
a. Costs related to land-option contracts abandonment
b. Inventory impairments (inventory values fall with home prices)

Other negative signals:
a. 53% drop from a year earlier in net new home orders- driven by high cancellation rate
b. Job cuts on 25% of its work force
c. 39% decline in home closings

What are Writedowns?

An excellent guide on "writedowns," a jargon that has become increasingly popular since the collapse of subprime-backed securities.

http://www.thestreet.com/_yahoo/s/how-to-interpret-writedowns/university/financeprofessor/10388120.html?

What is Incremental Operating Margin?

Incremental margins is a comparison of changes in revenue and operating margins.

Stock prices can be punished if investors are disappointed by op margins results- despite solid earnings growth. This is evidenced by BHI and AMZN, which declined substantially on earnings announcement days. In Q3, BHI's op margin declined to 21.76%, only up slightly from 21.17% in Q2, and much weaker than 22.65% in Q1. The company also cut its Q4 op margin guidance to 25% from its long-term goal of 30%. Meanwhile, AMZN's op margin fell consecutively to 3.77% from 4.02% in Q2 and 4.81% in Q1.

This means that investors are getting more nervous about rising costs and how it can hamper future earnings growth.

Return on Invested Capital

Great tutorial to ROIC, an often overlooked metric.

http://www.investopedia.com/offsite.asp?URL=http://www.fool.com/school/roic/roic.htm

Plus an article about how to screen stocks according to ROE and ROIC metrics.

http://www.smartmoney.com/stockscreen/index.cfm?story=20041020intro

My Favorite Acronym: CDO (Collaterized Debt Obligations)

What is a CDO? CDOs are complex structured financial products. CDOs pool different securities, often including bonds backed by mortgages, and sell slices that carry different risk and payout levels. The major banks said the majority of its CDO holdings were considered to be the safest slices but the downgrades had affected even these securities. The most troubled CDOs bundled together only subprime bonds that had low investment-grade ratings such as BBB. Many of these bonds are now rated junk. One $873 million CDO slice was rated AAA- the highest of 10 investment-grade rankings. It was cut 10 notches to a junk rating of Ba1 by Moody's. The CDO downgrades show there is no quick fix for subprime problem. Subprime mortgages were collateral in these investments, and it is eroding faster than the rating firms had expected.
What makes it worse is that the downturn would also impact bond insurers, who are committed to pay investors if a bond issuer defaults. Since these guarantors depend on solid credit standing (usually AAA) for access to capital and to win business, a possible downgrade on their credit rating could detriment banks that bought credit guarantees from the insurers on bonds they hold (generally in the form of credit default swap agreements).





Reasons for this collapse:




a. Soaring rate of delinquencies and foreclosures; about two million adjustable-rate mortgages prepare to adjust in 2008




b. Aggresive bank lending amid lax lending standards




c. Falling prices make borrowers owe more than the house is worth

Energy Information Administration Data

Like economic indicators, releases of energy data can move both energy-related stocks and the broader market, creating various trading opportunities. These are the data that I track:

List of Petroleum Publications
http://tonto.eia.doe.gov/dnav/pet/pet_pub_publist.asp

Weekly Petroleum Status Report
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

The Energy Department's Energy Information Administration releases the U.S. crude oil inventory report for the latest week every Wednesday.

Goodyear: Textbook Turnaround Story

Yesterday Goodyear Tire and Rubber (GT) reported 3Q earnings of $0.68 per share, a 168% increase from the same quarter a year earlier. What impresses me is the way they achieve profits- which are based on basic finance and accounting textbook style.

a. Focus on selling higher-margin and higher-priced tires
b. Production cut on private-label tires with lower profit margin
c. 47% increase in operating profits on 3.1% rise in sales
d. Weaker dollar help to boost operating profits overseas
e. Cost cuts (reflected by 30 bps decline in COGS) played a role in offseting high raw-material prices and slowing North American tire demand

Metrics to Watch for Semiconductor Stocks

Monthly book to bill ratio is one of the key forward-looking metrics in analyzing semiconductor companies. A number of 0.85 for example. indicates that the semiconductor equipment maker took in just $84 in orders (bookings) for every $100 shipped (billings). It is important to see the month by month trend, if it is an uptrend or downtrend.

Chinese ADRs Information

This a decent website that tracks news for Chinese American Depository Receipts (ADRs). Always remember to use the information with caution.

http://www.cnanalyst.com/china_insights/index.html

What is Investment Research?

This a great introduction about different aspects of Investment Research.

http://www.thestreet.com/university/financeprofessor/10378513.html

Make sure to read it if you are interested in building a security analysis-related career in the Street.

Cheers,
Ari

How to Use Multiple Analysis?

Valuation multiples is arguably the simplest and widely used valuation metric. It is actually one of my favorite ways to value a stock. For those who are interested to learn about it, this link will bring you to a useful primer presented by UBS research analysts.

http://pages.stern.nyu.edu/~ekerschn/pdfs/readingsemk/EMK%20NYU%20S07%20Global%20Tech%20Strategy%20Valuation%20Multiples%20Primer.pdf

Enjoy!

Kind Regards,
Ari

Weak Economy in Q4 Seen by UPS and BNI

Transportation companies' guidance are often great gauges of the economy's health. When the economy is good, more goods are produced and more are shipped, benefiting these companies. And also vice versa. United Parcel Services-the world's largest package delivery company- and Burlington Northern Santa Fe- a Forth-Worth based major Class I railroad-cautioned investors in their 3Q earnings announcement that this year's surge in peak-season deliveries is likely to be the weakest since 2003.

The holiday shopping season is "not dead on arrival, but it's a dud," according to Matthew Rose, BNSF's chairman, president and chief executive officer. " Meanwhile,
Scott Davis, vice chairman and chief financial officer at UPS, said the Atlanta company expects an "OK season, just not as robust as we've seen in the past four years. We expect slowing retail sales will restrain U.S. domestic volume growth."

Nonetheless, both companies are expecting decent growth on international shipping.

Freepot McMoran's Bullish View on Copper

CEO Richard Adkerson of Freeport McMoran (FCX) says that copper may rise to a record because the world's miners are struggling to increase supply, such as lack of new mine projects. The company is now the world's second largest copper producer after acquiring Phelps Dodge last year. Goldman Sachs estimates that copper prices in London will rise to a record $8800 a metric ton reached in May last year, and heading for a sixth consecutive annual gain. On LME, it is now trading at $8180 a metric ton, gaining 30 percent YTD.

Pain in Housing Market is Spreading to Other Sectors

a. The newspaper industry has the been hurt not only by readers and advertisers who have moved the Internet, but also by the downturn in real-estate. It puts further pressure on ad revenue and classified revenue. All newspaper stocks: Gannett, Tribune, McClatchy, and New York Times recently reported lower earnings in 3Q. Heavy buyers of newspaper ads such as auto makers, airlines, and retailers have shifted ad dollars away from print.

b. High-end consumers. Coach spooked investors on Tuesday when it said it was seeing fewer than expected shoppers in stores in California, Florida and the Northeast. The company is a bellwether for the mass affluent, having helped create the category when it reinvented itself several years ago as a status brand minus the sticker shock. Though still priced well below designer handbags, Coach has quietly gotten more expensive, a fact that may make it "less accessible to a certain demographic challenged by higher fuel costs and lower housing values," wrote Todd Slater of Lazard Capital Markets in a research note yesterday. Slater estimates that the average Coach bag has seen a price increase of 30 percent over the last few years, with $400 handbags now accounting for a quarter of the company's overall sales. Another retailer that has courted the mass affluent shopper is Nordstrom. The company recently cut its third quarter earnings guidance after September sales came in below plan and inventory piled up on store shelves. Michael Boyd, a spokesman, said women's apparel was among the weaker areas, although sales of designer clothing and handbags remained strong. Nordstrom shares are also trading near their 52-week low of $37.80. "To think that this customer is immune to the ups and downs of the economy is simply not correct," said Danziger, of Unity Marketing. "They may not be defaulting on their mortgages, but there's a good chance their homes are not worth as much as they were last year - and as a result they don't feel as rich."

http://money.cnn.com/2007/10/24/news/companies/luxury_slowdown.fortune/index.htm?source=yahoo_quote

c. Bond insurers such as Ambac and MBIA. Their job is to guarantee the interest and principal payments on bonds in the event of default. Although the majority of the financial guarantors' business is insuring securities such as muni bonds, they have also insured some $100 bilion of riskier CDOs. The increasing default rates and rapid downgrades of subprime-related CDOs have contributed to the decline of value of policies underwritten by these insurers (in the form of CDS) on their balance sheets. The question is whether or not they will have enough capital to support them in the case of worse-than-expected losses. At this point Ambac's and MBIA's triple-A credit ratings become questionable.

d. Office Depot Inc., the nation's second biggest office-supply store chain, said Tuesday its third-quarter profit fell 9 percent, hurt by lower consumer spending and a weak housing market. The company said North American retail same-store sales fell 5 percent for the quarter, hurt mostly by the slumping housing market. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones. At a September retailing conference, CEO Steve Odland said purchases by small business customers connected to the housing market, such as real-estate agents and contractors are "down significantly." According to WSJ, the company estimates the % of its customers in housing-related businesses is in the double-digit range.

Caterpillar's Negative Outlook on Weaker US Economy

Caterpillar is widely seen as a barometer of the health of the various segment of the U.S. economy. The company's guidance can be as valuable as what an economist say. Interestingly, the company's CEO Jim Owens has a doctorate in economics. Caterpillar said in the press release that more interest rate cuts from the Fed "will be needed to move economic growth to nearer the economy's potential." However, the company doesn't expect the cuts to benefit substantially the industries the company serves in 2008.It pegs U.S. economic growth at about 2% this year and 1.5% in 2008.

The company also lowered its earnings outlook for the year, citing weakness in several key industries such as:

a. Housing

b. Non residential construction

c. Coal mining

d. Trucking- There is a significant decline in the demand for new trucks amid a reduction in tonnage hauled and freight rates



For now, sluggishness in the U.S. is offset by strength in emerging economies partucularly in several key industries such as:

a. Mining

b. Oil and gas

c. Electric power

d. Marine engines

Natural Gas Prospects

a. Natural gas prices per thousand cubic feet (MCF); spot prices now about $6

Weekly Natural Gas Storage Report
http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html
http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp

b. Bulls say that the prospects for natural gas is bright because:

1. The fuel's clean-burning qualities

2. Growing energy demand

3. Declining North American gas production

4. Limited imports in liquefied form from abroad

Stock to watch: XTO Energy (XTO)
XTO Energy Inc. is an independent domestic producer engaged in the acquisition, exploitation and development of high quality, long-lived producing natural gas and oil properties. The Company's reserves have grown from 296 Bcfe in 1993 to 8.549 Tcfe at year-end 2006, making it the fourth largest owner of domestic natural gas reserves among the independents. XTO is poised to deliver 18% production growth for 2007 and 17% growth for 2008. The Company’s low-risk development inventory of more than 7.3 Tcfe should provide steady production and reserve growth for years to come.

Metrics to watch for this company:

XTO's fields experience modest annual decline rates of 10-15%, half the industry average. With this depletion advantage, XTO is able to shift a decent amount of CapEx to expand output, not simply mantaining it

Analyze the company's proven, low-risk potential, and additional potential reserves in TCF (trillion cubic feet equivalent); for proven reserves, how many years of production is it worth?

Compare the company's finding costs per thousand cubic feet vs. its peers (exploration and production companies); the lower the better, since there is risk in finding reserves

Seeking giant oil fields overseas such as in Russia, Venezuela, and Kazakhstan is appealing, but it is financially and politically risky. XTO sticks to the Continental U.S.

The biggest risk with any energy company is reserve replacement

Metrics to Watch for Airlines, Telecom, and Semis

Airlines
Pay attention to:
a. Fuel costs; airlines’ biggest outlay
b. Passenger-unit revenue or revenue collected per seat for each mile flown (increasing or decreasing?)
c. Capacity growth; airlines typically pull back on capacity growth during tough operating environment (due to high fuel costs and economic slowdown). This could help the industry avoid a oversupply of seats, which in turn could enable airlines to more readily raise fares and cope with any travel slowdowns; broken down as domestic seat capacity and international seat capacity growth
d. Operating margin trend

Telecom equipment makers
Gross margin trend; is the company able to sell more high-margin products?

Telecom Provider
ARPU (Average Revenue per User)

Semiconductor makers
Gross margin trend; for example, it is an important metric to watch in Intel's battle with AMD - which affects both unit sales of chips and their pricing - as well as the company's ability to increase manufacturing efficiency and control other costs

The Street's Best Equity Research Analysts

Every year, the Insitutional Investor Magazine releases its annual polling of the best analysts in Wall Street. This is the first time they release it online with no charge. Looking at this survey is personally inspirational to me, but it is also worth a look for everybody.

http://www.iimagazine.com/EarlyReleaseII.aspx

Metrics to Watch for Oil Companies

Oil Companies
Pay attention to these data:
a. Geographical exposure
b. Production mix (oil, natural gas, etc.)
c. For refiners, look at refining margins; defined as the difference between the price refiners pay for the price of oil and the price of the refined products (such as gasoline). Currently refining margins for refiners are narrowing as tepid U.S. demand dampens gasoline prices. Meanwhile, crude prices are shooting up amid Middle East tensions and falling U.S. dollar.
Examples: Valero as pure-play refiner (it doesn't pump any oil on its own) and Chevron as Integrated
d. Production growth. Drop in production in Q3 is normal since this is a time when majors carry out maintenance work on refineries and production facilities. Most major oil companies aren't expecting to grow production at all, as evidenced by the recent Q3 results. An exception is the main Chinese oil and gas producer PetroChina that projects to grow 4-6% a year. It has been able to find enough new oil and gas to continually increase its reserves even as it pumps more, through acquisitions and better exploration and production techniques.

Metrics to Watch for E-Commerce Companies

E-Commerce Companies
Look for the YOY change of:
a. Number of new users
b. Revenue generated per user
c. Overall revenue growth
d. EBIT (operating) margin trend

Robert Peck of Bear Stearns observed that North American gross margins "contracted significantly" even when adjusting for the "Harry Porter" impact.
"If those trends remain consistent, then significant margin expansion is likely to be a challenge for Amazon to achieve," he wrote in a report Wednesday. "Further, we continue to believe that Amazon will ultimately have to reaccelerate technology and content spend in order to remain competitive."

e. Amazon: Free cash flow= operating cash flow - capex; it acts as a proxy for operating profit
f. eBay: transaction revenue per listing, which indicates the amount of revenue generated by each item posted for sale at the website. Improving monetization is the biggest driver of revenue growth.
g. Faster growing companies: Gross merchandise volume = total value of all goods sold
h. For valuation, look at EBITDA multiple instead of P/E

General info:
EPS boosters are:
a. Higher revenues
b. Lower costs
c. Lower tax rate
d. Lower share count due to share repurchases

GoldPlay

As the U.S. dollar continues to weaken and inflationary pressures heightening, many investors have now turned to gold for safety. The World Gold Council reported that demand around the world for gold rose in Q2, up 19% YOY. Demand was up 91% in India, 32% in China, and 20% in Middle East. Moreover, governments overseas have intended to gradually reduce their exposure to U.S.-dollar based assets. Last month's 50-bps Fed-funds rate cut also contributed to further weakness in the currency.

Gold prices have now risen more than 19% YTD to a record-high of $758 per troy ounce today, not far away from the psychological barrier of $800. The recent takeover of Meridian Gold by Yamana Gold also fueled the optimism of industry participants that further M&A activities could occur amid high gold prices. Speculators seeking to buy potential acquisition candidates should pay attention to this following criteria:

a. Diversity of operations (location of operating mines, which are often at geopolitically unstable countries, and also type of commodities)
b. Growth profile (is the amount of production (in million ounces for gold or metric tons for copper) in an uptrend?)
c. Cost profile (how well does the company control costs? Look at the trend of operating costs per ounce)
d. Hedging books (companies with little or no hedging books will be more leveraged to the price of gold)

Credit Worries Diminishes

Amid the credit crunch phenomenon, the average risk premium on high yield bonds had jumped to as high as 487 bps above treasuries in September (before the rate cut on the 18th), compared to June's record low of 263 bps. Although the current high yield spread has eased to below 400 bps, it is still well below the 20-year historic average of 540 bps. Lower spreads are generally associated with lower levels of risk aversion, which means that investors are willing to take lower returns when they risk their money. In turn, this will be good news for junk-rated companies who have been anxious to return to the debt market to borrow money.

India, Too Big to Ignore

a. India's GDP is growing at about 9% per year
b. According to WSJ, investment in infrastructure is running at around 5% of GDP, or about $280 billion a year
c. It plans to raise that to about $500 billion over the next five years
d. India's currency has risen by about 11% YTD against the dollar, amid huge inflows of foreign capital; this trend is hurting the technology sector
e. Unlike China, India has avoided the heaving loading of dollars
f. According to the Cellular Operators Association of India, cellphone subscribers grew more than five million a month on average in 1H, totaling 136 million, or less than 12% of the population
g. According to Technopak Advisors, a New-Delhi based consulting company, India's total retail market is valued at about $370 billion a year and will expand more than 55% in the next four years. Supermarkets and department stores account for less than 5% of the industry, with millions of small players constituting the rest. Although retail would be a booming industry from a long-term perspective, big Indian and foreign retailers are facing tough resistance by protesters who fear chains will throw smaller merchants out of work
h. Foreign operations in India are restricted to minority investments in retail ventures, but they can establish cash-and-carry stores
i. India's largest listed stock is Reliance Industries with a market cap of close to $100 billion. It is 20% owned by foreign investors
j. The Ambani brothers, Anil and Mukesh, who control a group of companies using the Reliance name, has emerged to be one of the wealthiest family in the world due to surging economy and stock prices

China, Too Big to Ignore

a. According to IMF, China for the first time will contribute more to global economic growth than any other country
b. China is on track to surpass Germany as the world's third-largest national economy by dollar value with this year's estimated GDP growth of approximately 11%
c. China has become a rising source of profit for multinational companies
d. China is the world's biggest market for cellphones with more than 500 million subscribers, according to the country's Minstry of Information Industry
e. China is the second biggest market for PCs and cars behind the U.S.
f. With 162 million, China is home to second biggest number of internet users behind the U.S.
g. China is the biggest consumer of steel and iron ore
h. Per capita income has tripled in the past decade, fueling consumer spending
i. China has been pushed by the U.S. to allow its currency to trade more freely (arguably giving its products an unfair advantage in world markets) and to improve its environmental record
j. The average Chinese farm is less than 1 acre, compared with 440 acres in the U.S.
k. China is expected to soon surpass the U.S. as the world's largest greenhouse gas emitter
l. One the biggest source of agricultural-related greenhouse gas is nitrogen fertilizer, since only half the applied fertilizer is normally consumed by plants; the rest seeps into the ground
m. Intellectual property remains to be a major problem
n. YTD, Yuan has risen 3.7% in value against the dollar; China has been implored by the U.S. government to let its currency appreciate. Chinese stocks have fallen in recent weeks on concern that China's central bank would lift interest rates or take other steps to cool the economy. China's benchmark one-year lending rate is currently 7.02%. However, CPI also stood at a decade high of 6.5% in October. By raising rates further, China could have risked boosting the value of its currency, hurting exporters. A stronger yuan would make Chinese exports less competitive in world markets
o. According to eMarketer, the number of Internet users in China is expected to reach 245.5 million by 2011, up from 133.5 million in 2006. That leaves a huge room for growth for a country with 1.3 billion people!
p. China has cash to spare in the form of foreign reserves of around $1.4 trillion
q. In China, the rise of the consumer class means its rapidly growing economy is no longer dependent on exports
r. China uses coal , which is relatively abundant and cheap, to generate 78% of its electricity, vs. 50% in the U.S. China becomes a net importer of coal this year for the first time

Miners Facing Higher Costs

Alcoa- the first large cap company that reported Q3 earnings- was hurt by higher energy and raw-material costs although demand for aluminum in China offsets effect of weakening dollar. The WSJ said that Alcoa's results are a clear sign the aluminum industry is facing higher costs, especially for energy. Aluminum uses huge amounts of energy in the manufacturing process. Therefore, more aluminum makers are building smelters in areas where energy is relatively less expensive than Europe and North America, such as Iceland, Russia, China, and Middle East. Key ingredients in Aluminum are bauxite and alumina.

Links to My Published Articles

Quoted by New York Sun

http://www.nysun.com/article/52436



Ari's The Ticker articles

http://www.theticker.org/user/index.cfm?event=displayAuthorProfile&authorid=2351723



Quoted by Canada Daily Buy-Sell Adviser

http://www.dailybuyselladviser.com/news/blank/64-1.html



Quoted by Forbes.com

http://www.forbes.com/personalfinance/2007/02/07/suntech-china-solar-pf-ii-in_jd_0207gurusow_inl.html



Quoted by Bull & Bear Newsletter

http://www.thebullandbear.com/digest/0407-digest/0407-pmetals.html



Fuel-Tech PMC Research Report

www.theticker.org/media/paper909/documents/rg9hx1fj.pdf



Ari's article on Las Vegas Sands

http://thebullandbear.com/monetarydigest/md_pdf/MD-0207.pdf



"Ethanol is manna to farmers and their suppliers" by Ari Jahja

http://www.thebullandbear.com/digest/0407-digest/0407-pmetals.html#JAHJA

How to Profit from Global Infrastructure Boom

My investment theme has been firms that are benefiting from growth in emerging markets and the resulting increase in commodities demand. Furthermore, high oil prices have prompted some analysts to conclude that the current energy investment cycle is secular instead of cyclical. According to the International Energy Agency, global energy use is expected to increase by over 53 percent by 2030, requiring $20 trillion in investments. The major beneficiaries from this uptrend will be engineering and construction (E&C) companies, which have high international exposure to oil and gas segment. A few of them are Foster Wheeler (FWLT), Fluor (FLR), and McDermott (MDR).While these companies have demonstrated solid backlog growth, new contract announcements could also serve as near-term catalysts for their stock prices. However, since the industry has had a strong performance year to-date, investors should be very careful in terms of stock picking.

Based on comparable analysis, Foster Wheeler is my top pick in the group.Foster Wheeler's Global E&C group, which contributed about 63 percent of the company's total 2006 revenue, provides a variety of engineering, consulting, and project management services. 90 percent of the group's backlog in terms of future revenues is derived from its wide client base of oil and gas companies. FWLT is known for its expertise and technology in projects such as upstream oil and gas, oil refining, and petrochemicals. Furthermore, the company is also a major player in the power sector. As of the second quarter, about 94% of its total backlog is for projects located outside the US: 33% in Middle East, 33% in Asia, 15% in Europe, and 13% in Australasia. By applying an estimated P/E multiple of 21 times to its average FY 2009 EPS estimate of $7.02, my 12-month price target for the stock is $147- implying an 18 percent upside from the current levels.

nother company that will continue to capitalize from the strong demand for energy infrastructure is Fluor, a global E&C company that is diversified across energy, industrial, and government segments and possesses strong balance sheet. Fluor management has also reiterated that the company is still in the early stages for upstream and petrochemical activities, supported by its ability to win more and more clients in the oil-rich Middle East. As of the second quarter, Fluor's backlog stands at a record high of $25.7 billion, 43 percent higher than a year earlier. More than half of this is oil and gas projects outside the US. Unfortunately the stock's valuation looks a bit stretched now, unless upward EPS revisions occur from many analysts. Currently Merrill Lynch has the street-high FY 2009 EPS estimate of $7.90, and target price of $165.

Lastly, McDermott International is a leader in E&C for offshore oil and gas worldwide. In addition to benefiting from the uptrend in offshore capital expenditures abroad, MDR is also poised to benefit from the rising electricity demand in the US through its power generation segment (they build coal-fired power plants and nuclear generators). As of the second quarter, MDR's backlog stands at a record high of $8.9 billion with about 50 percent from its oil and gas segment. Furthermore, the company boasts superior operating margins relative to its peers. Although MDR's fundamentals are strong, the stock's upside looks limited after the 110 percent run-up year-to-date.