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Chicago PMI Declines in March

Chicago PMI declined sharply from a reading of 62.6 in Feb to 58.8 in March (compared to a consensus call for a decline of 61.0). This is a sharp decline and combined together with the continued job losses in March as reported in ADP employment report suggests continued weakness in the economy.

The market has gone way ahead of itself pricing in a perfect V-shaped recovery. It's going to be a question of "when" and not "if" for a strong pullback.

Bull Market Anniversary

Today marks the anniversary of the bull market that started on March 10th 2009. S&P500 has gained a whopping 68%, Dow 61% and Nasdaq 85% since then.

A lot of people have been questioning this rally since the past few months and an unusually low trading volume over these past months confirms that most people are sitting on the sidelines waiting to press the panic button. On one hand, there are people who are changing strategies to succeed in this market and there are some who are preaching patience as the key to succeed. Few days ago, there was an excellent post by Barry Ritholtz, which exactly hits on most people's sentiment.
Here is what he offered as an advice to a person who wrote to him:

“I’m rapidly losing faith in this whole game, Barry.”

Followed his terrific response:

XXXXXXX,

I cannot restore your faith or improve your morale (Only you can do that). What I can do is share with you what I have learned over two decades, and perhaps in these words you might find some small comfort.

Yes, there is an insanity to the markets that can make you mad if you let it. Instead, learn to see the delightful absurdity of it all. Revel in the stupidity, learn to read when the ‘wisdom of the crowd’ turns into an angry mob. Find some Zen in the foolishness of others.

Step back and look for the variant perception . . . then wait for it to become a money maker.

Consider this was an issue from 1996 or 97 until the collapse in 2000, and from 2005 to the collapse in 2008-09. It is a 3 or 4 or even 5 year time lag between the earliest inklings of recognition of mass stupidity/insanity, to any eventual collapse.

Time is always on the side of the patient. Study, learn, absorb all you can. You are waiting for the next opportunity to make your bones, your fortune, your reputation. It will come along eventually — if you wait for it and are in a position to take advantage when the moment arrives. As Pasteur said, “Chance favors the prepared mind.”

You must become a philosopher, a historian, a statistician, a trial lawyer, and a psychologist when looking at Mr. Market. Simply reading the data and trying to trade/invest off of it is a sucker’s game. The noise so totally outweighs the signal that it is easy to get caught up in distractions. For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them.

But you work in the business, and your clients want/need to outperform, so you must give them something value added. You need to be able to comment on the madhouse — and you can do so acerbically, mockingly, derisively at times — while recognizing, acknowledging, and waiting for the technical set up to bet against the crowd.

The saying goes “The trend is your friend.” The smart money adds ” ‘cept the bend at the end.” The momo crowd, the lemmings, the mad money all pile onto that trend as the trees grow to the sky. Especially at the end — that’s when the weight of the sheeples, the johnny-come-latelies ultimately pressures that tree, and is what causes that deadly “bend at the end.”

You must learn patience, young grasshopper. You must have faith that EVENTUALLY, the sorta kinda, almost efficient market will figure it out. That is when money returns to its rightful owners. There will be long periods of time when the blowhards, the jackasses, the arrogant, the ignorant will be eating better than you. During the dot com bubble, the dumber you were, the more money you made. Many of those who understood how silly things were missed out on the boom.

But this state of affairs is temporary. Eventually, the knaves starve to death under the oppressive force of their own ignorance. Be patient. The day of reckoning is often surprisingly late in its arrival, but it will not be denied. The beast must be fed.

Trust me when I tell you, its worth the wait . . .

US Light Vehicle Sales Drop 3.5% in Feb

US Light Vehicle sales dropped 3.5% from January to a seasonally adjusted annual rate (SAAR) of 10.million vehicles. On an year over year basis, the no. however jumped 13.4%. The year over year comparison is easier as Feb'09 sales stood at an all time low of 9.17 million SAAR.

This is still however a very strong report, given the record snow storms we had in the northeast this month.

ISM Manufacturing Expands At A Slower Pace In Feb

Per the ISM Report published today, Manufacturing continued to expand in February but at a slower pace. The PMI index registered a 56.5 percent reading, a drop of 1.9 points from January's reading of 58.4. As discussed before, any reading above 50 indicates an expansion - so, this is still good news.

Key Highlights from the report:
* New Orders index declined 6.4 percentage points (65.9 percent in Jan to 59.5 in Feb). This is the 8th consecutive month of growth for New Orders.
* Production index declined 7.8 percentage points (66.2 in Jan to 58.4 in Feb). This is the 9th consecutive month of growth for Production.
* Employment notched up by 2.8 percentage points (53.3 in Jan to 56.1 in Feb). This is the 3rd consecutive month of growth in manufacturing employment.

In general, this is a strong ISM report showing continued expansion. There are a lot more economic reports in the pipeline this week including February car sales due tomorrow, ISM Non-Manufacturing report on Wednesday, ADP report on Wednesday and BLS unemployment report on Friday.

Interesting Tidbits From Buffet's Annual Shareholder Letter

Some interesting observations and excerpts from Berkshire's annual shareholder letter:

* Re-enforced that Berkshire will invest in businesses where profits can be reasonably predicted.

"In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.

Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.

 * Possible hinting of Berkshire successor?

"If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit."

  * Feels good about the record low housing starts as it's easing the supply of homes and believes that the housing problem will be behind us in a year or so.

"The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news."

 * Defended issuance of Berkshire's stock for BNI (Burlington Northern Santa Fe Corp.) purchase.

"In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term."

 * Funny end to an insightful letter.

"P.S. Come by rail", asking shareholders to use BNI rail while coming to the annual shareholder meeting.

Chicago PMI Inches Higher But Unemployment Drops Sharply

Chicago PMI released earlier today and the overall index inched higher from 61.5 in January to 62.6 in February (the consensus however called for a decline to 59.7). The report is surprisingly strong on all fronts except employment - Employment sharply declined from 59.8 to 53.0, though any reading above 50 still represents growth. The sharp increase in weekly unemployment claims this month along with this weak employment report doesn't bode well for the BLS reported unemployment rate due next week.

On the bright side, the rate of growth in production and new orders declined slightly in February, and the indices both remained above 60 at 65.2 and 62.2, respectively. Even if growth continues to slow at its current pace, it would take at least 6 months before production and new orders turn negative.

Leading Indicators Show Different Trends

I am looking at the leading indicators from two different sources:
First one is the the Conference Board's Leading Indicator Index (LEI) that was released yesterday. This index comprises of 10 different components with different weights:

i) Average Weekly hours, manufacturing

ii) Average weekly unemployment claims

iii) Manufacturer's new orders, consumer goods and materials

iv) Index of Supplier deliveries

v) Manufacturer's new orders, non-defense capital goods

vi) Building Permits

vii) Stock Prices

viii) Money Supply, M2

ix) Interest rate spread, 10-yr Treasury less federal funds rate

x) Index of Consumer expectations

This US Leading Economic Index (LEI) has been on a roll since Jan-09. It increased 0.3 percent in January'10, following a 1.2 percent gain in December'09, and a 1.1 percent rise in November'09 - all painting a rosy picture.

On the other hand, if I look at the ECRI's Weekly Leading Index (WLI), I see the index topping out almost a month ago. In fact, the index has dropped 2.9% since it's top from the week ending Jan 15th 2010. The index released today dropped 1.2% from last week suggesting continued weakness.

Only time will tell if this is a temporary blip in an otherwise upward trend or the beginning of a new downtrend. Let's keep watching!

Nasdaq down 99.99% as per Yahoo Finance

Yahoo Finance momentarily depicted a staggering 99.99% drop for Nasdaq after the markets close today. The issue is fixed within half an hour but I did manage to take a snapshot for this bug.

NFP Unemployment Rate Due Tomorrow

After the bloodbath in the markets today, all eyes are going to be on tomorrow's NFP unemployment no.s. Few interesting links to read up on the upcoming  BLS Birth/Death adjustments and other NFP data:
- Bloomberg Birth/Death Adjustment Model
- BLS Payroll Revision Announcement
- Good Summary of what to expect tomorrow

Jan US Light Vehicle Sales Drop 4% From Dec (SAAR)

As per the estimates from Autodata Corp., US Light Vehicle sales dropped 4% from Dec (11.25M SAAR) to Jan (10.78M SAAR). The chart below depicts monthly SAAR no.s from Jan'09 to Jan'10. Note that the spike in August is due to the effect of "Cash for Clunkers" program. Although year over year comparison looks good due to a weak first half of 2009, this no. is really low on an absolute scale if we compare it to over 16M SAAR in 2007. It's going to take us a lot of years to reach the peak of 2007.

Interesting Reads: 02.02.10

•  Super Bowl Indicator will be bullish
•  Insider Trading in Ann Taylor options
•  No help in sight, More home owners walk away

Q4 GDP Analysis

Q4 GDP grew at an annual rate of 5.7% from the third quarter of 2009, according to the advanced estimate released by BEA yesterday morning. Some interesting observations:
- Overall, PCE (Personal Consumption Expenditure) constitutes 71% of GDP. This is a chicken and egg problem. PCE will not improve unless unemployment comes down, and businesses will not start hiring unless they see an improved economy.

 

- Out of 5.7% annual growth, Change in Inventories contributed almost 3.39 percentage points, or roughly 60% to the overall growth. While a lot of economic experts and pundits do not think this as a real growth driver for obvious reasons and I tend to agree with them, but I am also cautiously optimistic that this trend and growth in inventories lead to businesses confidence and may lead to hiring of workers, which can then led to higher PCE, thus breaking the chicken-egg problem. Also, noteworthy is the fact that despite a 60% contribution to overall GDP growth, the inventories actually fell a further $40bn in the quarter.But the drop in this quarter was much less than the record liquidations that happened in Q3 2009. This suggests me that there is a lot of scope for inventory restocking and that the change in inventories might still continue to add positive momentum to Q1 and Q2 2010 GDPs.

 

- Within the PCE Goods contribution of 11% to the growth, most of the growth is coming from Non-durable goods such as food, beverages, clothing etc. Durable goods consumption such as motor vehicles dropped from Q3. Motor Vehicles consumption was expected to see a drop because of the much criticized but extremely successful "cash for clunkers" program. Motor Vehicles and parts contributed 0.81 percentage points to the 2.2% growth in Q3, while it subtracted 0.57 percentage points from the 5.7% GDP growth in Q4. Assuming Cash for clunkers borrowed sales from Q4 into Q3, this event led to a drop in Q4 GDP. .If not for cash for clunkers, Q4 GDP would have grown by 6.3% assuming no change in motor vehicles consumption from Q3 to Q4.

More analysis on the report later..

Chicago PMI - Jan 2010

While most of the media today focused on the lagging Q4 GDP report, little attention was paid to the foremost leading indicator Chicago PMI, which was also released today as expected on the last business day of the month. The Chicago Purchasing Manager's Index strengthened significantly in January and jumped from 58.7 in December to 61.5 in January. Most noteworthy change is in the employment index which entered into the expansion phase (>50) for the first time since November 2007 and is now at its highest level since April 2005. Given Chicago PMI's 91% correlation to the ISM report, it would be interesting to see how this report impacts the upcoming BLS Non-farm payroll no.s and the unemployment rate.

SHOR - A Long Term Opportunity

In the last week’s sharp selloff, Shoretel (SHOR), a leading SMB IP telephony provider has declined almost 8%. I think this is a great buying opportunity for both short-term as well as long-term investors. As can be seen in the chart below, the stock’s downtrend ended in November and since then, the stock has been on an upswing. If the stock further goes down to under $5.5 levels, it should be seen as a stronger buying opportunity in my opinion.

Although SHOR competes with giants such as Cisco, Avaya, Nortel and Mitel, it’s a long term play for various reasons:
-  Superior distributed architecture:  To do research on SHOR, I visited various VOIP forums, where IT administrators discuss their PBX issues. I didn’t come across a single forum, where IT admins were pissed off with SHOR, whereas there were complaints about other competitors. Every single forum agreed on the superiority of SHOR solution over other established firms. Finally, the firm has been gaining market share consistently and is already the #1 SMB IP provider.
- Extremely strong balance sheet: Cash per share of $2.5 and no long-term debt.
- Nortel bankruptcy: The industry recently saw the bankruptcy filed by Nortel Networks. SHOR stands to gain from this development as it’s a great opportunity to attract Nortel’s re-sellers and customers.
-Stock Ownership: As per the proxy filed in October 2009, the insiders own around 8.4% of the stock and roughly 53.5% of the stock is owned by VC firms including Crosspoint and Foundation. Although, VC ownership can cause some trouble but I don’t see that happening till the stock price is less than the IPO price of $9.5.
- Cheap Valuation: With EV/Rev ratio of 1.0x, the stock is extremely cheap compared to its peers.


The company is scheduled to announce its Q2 results this week on Wednesday, and while the short-term response is hard to predict (as can be seen with other technology names such as INTC, GOOG, SKWS all of which have been sold despite solid quarter results), I remain bullish on the long term prospects of SHOR.

Disclosure: Long SHOR
The article was first published here: http://seekingalpha.com/instablog/527966-sgrover/45299-shor-a-long-term-opportunity

Personality Negative Premiums

Following up to my original post of Personality Premiums it seems like Real Networks (RNWK) is celebrating the news of Rob Glaser stepping down as its CEO. The stock is up more than 17% jumping from $3.86 to $4.50.

Happy New Year 2010

Here's wishing everyone a very happy and prosperous new year 2010!