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.