Week of 2/16/08

There is some important economic information coming up this week to keep your eyes on.
First is at 8:30 AM Wednesday the 18th the housing starts and permits data for January is being release by the Census Bureau of the Camber of Commerce. Markets are expecting around 530k and 525k respectively, down from the December numbers.

Second, at 10:30 AM on the 18th the Crude inventories data comes out. Recently an unexpected high inventories caused oil prices to drop to their recent lows in the low 30s. Unfortunately, I think with the oil prices we are at right now, slight increases in prices would help push markets upward. Higher prices indicate higher demand which would help reassure investors there is some life in the economy.

On the 18th there is also some export/import price data being released but I would (and the markets seem to) focus more closely on the January core PPI and PPI which comes out the morning of the 19th. The markets are expecting a .1% and .2% respectively. PPI is the producer price index which is pretty self explanatory. More importantly is tracks inflation or deflationary trends. Core PPI is an attempt to exclude cost of energy and food from the measure. There seems to be some dispute over the validity of this method. Phil of over at Phil’s Stock World (which provides truly great analysis) often jokes about which companies arn’t using energy or food. When oil was really high it excluded the major cost for most producers artificially showing low levels of inflation. On the other hand, the government really likes the core PPI data and tries to isolate inflationary trends from the strong movements of energy which often control the short term measures. With interest rates so low the Fed is going to keep a close eye on these types of numbers to ward off major inflationary movements. Happily, other countries have taken the hint and dropped their interest rates as well while the dollar has been gaining against the British Pound and Euro since the summer.

CPI and core CPI (Consumer price index) come out the morning of the 20th. Markets are expecting .3% and .1% respectively. This is really the benchmark inflation indicator. It measures a basket of goods and services over time, and the results are used to adjust cost of living standards for government programs. Drop in car prices major post new year sales for apparel makers may drive the down even further.

On to Earnings!
After market close on the 17th Jack in the Box (JACK) is reporting earnings. I got a bit of love for this company because of their San Diego roots, and their commercials are pretty funny. Other then that, I dont think they belong on the catagory of other fast food restaurants who had major beats this last week, (BWLD and CMG to name a couple of my favorites). THey have fairly substantial debt but havn’t lost much of their value over the last 6 months and are trading at a fairly low P/E of 11. The market consensus is a $.52 earnings per share.

Same day Walmart (WMT) is releasing their earnings with a consensus of $.99 a share. They had a major beat last quarter and I believe that as consumers feel more and more poor, they shift over to Walmart for their purchases. Not just for the traditional household goods Walmart offers, but consumers are willing to brave the lines for cheap cheap oil changes and drugs. Not to mention ruthless management and a new series of commercials that will almost make me forget how shitty they treat their employees. Another piece of information I will be watching is their international sales. They have had mixed results in Europe, in some countries they have become very successful while in others they havn’t. Perhaps the economic downturn will get people suckling on the nipple of rock bottom prices that is the Walmart empire.

On the 18th we have Baidu (BIDU) with a consensus estimate of $1.34 per share. The pure volatility of the company and the “Chinese Google” effect make this a fun stock to watch.

Kinross Gold (KGC) is reporting on the 18th as well. It is approaching a technical resistance at $20. I read one article that was noting the rise in gold prices hasn’t corresponded to a rise in stock for gold companies. Couple that with decreased transportation costs over the last 3 months and this may turn out to be a good mid term play. The consensus is to see $.12 a share. If there is a beat, expect the stock to break above 20 aiming for 25.

Priceline (PCLN) is reporting the 18th. I love this stock, maybe irrationally, but my user experience combined with the jsut basic economic model it supports is great. Allow people to say exactly what they are willing to pay for a hotel or flight and see if that is profitable for the company. Gives power to the consumer on the internet which maybe the only place this can really happen. Their website is significantly better then their competitors and they offer a dramatically better product. If you have never tried it and want to have a nice getaway to LA, enter downtown LA 5 star hotel and start at $70 bucks a night. I would be very surprised if you didn’t get a hotel for that price, and could always enter $80 the next time around. I have done this on a few occasions and it makes for a great getaway for the weekend at a pretty affordable price. The overall pressure of the economic downturn is a flight to low price goods. Priceline is the low-cost leader in this market and actually offers service that is as good as you can get without having a travel agent. Furthermore, its down 50% from its highs last june. Seeking alpha posted saying priceline is likely to beat estimates. EXPE is reporting the following day, the contrast should be informative.

Whole Foods (WFM) is reporting. Generally overpriced image oriented sales havn’t been so successful. The problem with Whole Foods, is the die hard organic/local/green consumers find better places to buy their produce, and the others go back to shopping at the normal Vons or Kroger, who are starting to offer enough “hippie” products to make them feel better about themselves. On the other hand WFM is down trading around $10 from $50, so they have taken quite the hit already. Look for $.15 per share.

These are the ones I’m going to be watching. Can’t forget the ever important stimulus that will be coming through. Most of the major economic data and earnings are coming on Wednesday. If the stimulus isn’t signed before then don’t expect much action out of the markets. Otherwise, its difficult for me to imagine how nearly a trillion dollars stimulus money being pumped into the economy will cause the market to breakdown. The major concern are the specifics of the bank rescue plan, but it sounds like the administration is headed in the right direction by pumping money into the hands of consumers who will be foreclosed on. Stop the foreclosures, home prices increase, consumers arn’t pumping money into a losing investment and their spending/confidence will go up. As for this stress test, i really believe this is what the market needs. the problem has been that the extent of the bad assets is still unknown. Even if this is bad news for some banks, the overall confidence we will have in where the market is at should increase by ‘cutting the fat’ so to speak. Honestly, someone has to be thrown under the bus.

According to the great wisdom of the masses as understood by Wikipedia, a industry is said to be a natural monopoly “if one firm can produce a desired output at a lower social cost than two or more firms”. The most obvious situation arises in the case of utilities. If there is little possibility for differentiation in the product and traditional understanding of economies of scale apply, then the company who scales the quickest can offer the cheaper prices driving consumer costs below the production costs of the other companies.

There has been some discussion of whether the online search industry follows this pattern and the jury is probably still out on this question. The permutations of search mean that niche markets can exist such as the twitter-yahoo news search. It seems unclear how Google could do this cheaper simply because of its size (it may have better engineers or ideas but the size doesn’t drive down costs of new search development).

I would propose that online security for payments has many characteristics of a natural monopoly.

First, this industry operates on the back end of most websites. This means that the average user knows almost nothing about the various providers other then their logos.

Second, keeping up with hackers and ensuring the safety of data requires a significant amount of R&D. Currently, this industry is Verisign (VRSN, 3.87 B market cap), Entrust (ENTU, 97.07 M market cap), and Symantec Corp. (SYMC, 12.91 B market cap). Symantec is the creator of Norton anti-virus stuff too so the market cap comparison isn’t exactly great. Anyhow, to give you an idea how standardized Verisign has become, even PayPal has their logo promising security. Their earnings are this afternoon so we can get a little more information. Just some ideas I had during constitutional law today.

Happy Hunting all

Looks like this week may turn out pretty positive. We opened this morning around the one month low and moving upward. Also, Senate Republicans are putting up a fight over the stimulus that passed the house the week asking for less spending, more tax cuts, more money for business and possibly a 4% mortgage for people with good credit. But it is unlikely that these concerns will significantly effect the passage of the bill. Ultimately, Republicans don’t want to be thought of as irrelevant and this is one way to include themselves in this bill even if they wont really have alot of control over the outcome.

Secondly, the 800 billion package is calculated into the market, but perhaps not completely because it is not clear exactly where all the money is going. Once the specifics are announced there maybe a good play on specific companies or industries effected by this bill.

Thirdly, China is talking about another round of stimulus. My guess is that they will have to do something because the whole regime is based on the governments ability to provide really high growth. People are willing to sacrifice democratic decision making for returns, but if the returns slow down then people get uphappy.

Here is the DOW chart for the start of the market today

And the month long chart.

There are so many great websites out there to read and learn from that it is often overwhelming. I found this website that catalogs investment blogs by category. You could probably spend weeks on this site finding great blogs. Hope you all find as much use from it as I do.

I found this great article on the SuperBowl Indicator. Where I grew up (San Diego) there was a deep cultural war taking place between football fanatics and soccer fanatics. Often discussions would digress in skill versus smash, and I, myself played a bit of soccer. Basically the article points to the correlation between the winning teams NFL history and stock market growth. Anyhow, I did some quick history of the stock market returns and the World Cup. In 2006 Italy (a European team) won, and the stock market went down. In 2002 Brazil (Yup, South America) beat out Germany, and the stock market went down. In 1998 France (you can guess), beat out Brazil, and the stock market went up. In 1994 Brazil won again, and the market sank. Anyways you can go a ways back and there seems to be no correlation between European or South American wins and growth. On the surface it seems American Football has won round one of the stock indicator battle to the death.

Saw this article today about a buy report on ebay and noticed stock jumped above previous resistance line… this is probably a pretty good buy signal with target of $42. obviously do your own research.

On my last post I mentioned that the model I used for the prediction combined Williams %R and the ADX. So I figured I should explain what those are, which I’ll begin doing for any of the indicators I use, that should build up an index of them on here too.

Williams %R - is a measure of how overbought or oversold the stock is. It uses the high and low over past x periods and recent close to create a scaled indicator between 0 and -100. Generally 0 to -20 indicates overbought and -80 to -100 indicates oversold. The formula is

%R=[(Recent High - Close)/(Recent High - Recent Low)] * (-100)
note: recent is defined by whatever length you want to consider, most common period is 14 days.

ADX - is an indicator that measures the strength of a recent trend. It is scaled from 0 to 100. Generally a move above 20 is considered a start of a new trend, and a move below 40 indicates the end of a trend.

When used in NeuroShell the program optimizes the parameters. Combined they seem effective, this is probably because they provide different information. Williams %R indicates a potential direction while ADX indicates the strength of this movement.

figured I would add some chart stuff about ebay.

First I put together a quick NueroShell prediction model using two momentum indicators; Williams %R and the ADX. I kindly ask NueroShell to find what are best (most profitable) parameters and relationship between these too indicators. The algorithm is optimized from late June 07 to this last September and the the model is tested on the last three months. NueroShell then chooses model which maximizes profit on the test area. The result produced a model with a 75% wining trade ratio and one year return on trades of almost 250%. (pretty good eh?) The signals are represented on this graph by the triangles, blue triangles are buy signals red sell, the X are where the signal gets executed.

Also, there was a big gap in lat January 07, after which I think we can see a megaphone pattern. Generally, its not a conclusive directional signal, just indication of valuation disagreement. But it can be a good price target model.

This graph is a bit tighter and shows the Fibonacci projection lines. Recently the price has been in between the 23.3% (aprox $33) line and 38.2%(aprox $34). I’ll be watching whether it breaks below $33 on its way to retest the bottom of the pattern. If the stock turns up, look for it to start its move to the top, around $42 depending on how fast it moves up. We’ll watch the next few day so see if it holds $33 and can begin a leg up, I’ll be looking for the NeuroShell system to signal buy. Also as a little teaser there seems to be some talk about them merging, but I certainly cant speak to that.

Almost a year ago I was telling my family about this great idea I had for a new micro finance design. For anyone who doesn’t know, microfinance institutions are designed to provide credit and financial services for people in extreme poverty. The movement began with micro loans which gave small sums of capital to individuals in developing countries to start an income generating business. Because there are no ‘credit scores’ (or method for evaluating risk) for these regions, financial institutions had been unable to provide loans. However the revolution came by substituting social capital for financial capital to guarantee the loan. Specifically, loans are issued to individuals in groups who are then all obligated for the entire amount of the loan. Thus if I’m a loan recipient and my business fails or I just take the money and leave, then the rest of my group is obligated to pay the amount before they can receive any higher loans. Coupled with social marketing programs these institutions have blown up in the last decade. In some cases the limiting factor in expanding these programs is the capital. I purposed, to my family at least, that there should be a micro finance bank that had all the standard on the ground operations but generating loan capital by connecting the local recipient population with individuals in wealthy countries through the internet. There by a individual with a little money to invest could get online and loan the money directly to a business in the developing world. This helps solve the shortage of capital, but more importantly creates a feedback cycles where western consumers are financially encouraged for assisting people in poverty. For a long time the closest thing i could find was Kiva, which allows basically this idea except the critial part where investers earn a return. In Kiva’s model, the individual makes a loan and receives full repayment a year later, but without any interest (with the current trend in the dollar and inflation is actually a net loss of the investor).

Well my friend called me this weekend and told me he found my company, how sad. MicroPlace does exactly this idea and interests rates vary between 1-4%. The company is dedicated to expanding access of microfinance from the current 113 million people to 1 billion. The website is very clean, easy to use, and the best part is that its owned by ebay! Talk about aligning interests. I still think there would be a huge benefit in higher interest to lure people away from guaranteed return investments (government bonds). The logic goes further, why not an international bank that places the majority of its investments in microfinance loans, (diversified across countries sectors ect obviously). The bank can offer the standard services for its clients but vary its investment strategy. When bank patrons put money in their checking or savings accounts, that individual is passively provided poverty relief. While large banks already have some capital in micro finance banks the level of investment is dwarfed by say the investments in subprime mortgages. Here is a great article about the MicroPlace, their goals and experience. Right now there is approximately 22.4 billion invested globally in micro finance institutions. This works out to be about $200 invested per person served. If MicroPlace even comes close to the ten fold increase, ebay is in store for a billion dollar cash flow. Longterm, this seems like a pretty killer strategy that integrates the publicity of a major online retailer, easy of efficient online payment, and huge benefits of micro finance.

So this stock was (probably still is just they havn’t been shouting about it) on some peoples (saw it on Trading Goddess, Alpha, the Street, ect) hot lists. The fell short of estimates on their last report by 2 cents, and seeing as it had built up huge momentum investments the price tumbled. Their one year chart is not very impressive but they apparently have great management and their raw financials look pretty fucking hot. with a market cap of a bit more then 500 million they have $72 million in cash and zero debt. They have big growth goals and the capital to do it. I heard they are (or maybe have) renegotiated their chicken contracts and with a significantly larger size and more growth around the corner i would venture to say their position should be improved. BWLD has relatively more cash on hand, higher percent insider holdings, and higher levered free cash flow then CMG and PNRA. Here is their graph to date, notice it looks like the stock just bounced off a previous resistance point at $26 about the same time Dow bounced above 13,000. Next resistance should come around $35, if next week keeps up the recent strength then we could be there before we know it.