rovo's Market Journal -- 2011

[yclept]

Rovo,
Do you still have TBT? I've still got 300 shares of it and am wondering about the logic behind the original purchase back in December. For the last several months, the market has certainly been trying to tell me it's a mistake!
My original thought was that interest rates have to go up and when they do bond prices will have to fall. I figured I would have to wait awhile for that to happen, but also thought that TBT had to be much closer to a long-term low than to a high. Interest rates, after all, are as close to zero as I've ever seen in my life and seemed like they had only one way to go.
I'm now beginning to think that people who are afraid will buy bonds no matter what the interest rate is. I'm guessing many see it as the only place to put money they don't want to have long the stock market, and that many of those same people would not short stocks to save their souls. We've seen (assuming you are still in TBT) roughly a 20% drop since December (I'm actually down ~13.51% since I bought a little before the December peak).
If TBT drops another 3 points or so, it will be matching the lowest price it has ever experienced since its inception back in mid 2008.
I still think the original logic holds regarding interest rates and bond prices. But I am having second thoughts about the "fear factor" that seems to drive money into bonds even when they give a negative yield.
Then too, there's the vague stance of the Fed. They have stated no QE3 is in the works, so that might reduce support for the price of bonds (the Fed is now the largest holder of Treasury debt, almost half-again as large a holding as the Chinese who are second largest holders). But they haven't indicated they will liquidate their current holdings or even that they will not replace them with current debt issuance as current holdings mature. There's an old saying "Don't fight the Fed", that by owning TBT over the last 6 months I have been ignoring, and that has been costing me money.
Anyway, I'm just wondering if you still have some TBT and if so what you're current thoughts are regarding it.

finance.yahoo.com/news/Freaked-Out-Debt-Ceiling-Buy-dg-1313876395.html;_ylt=Au7EhVQI3qEieH3Sgfvatlq7YWsA;_ylu=X3oDMTE1bTJlNjR2BHBvcwM5BHNlYwN0b3BTdG9yaWVzBHNsawNmcmVha2VkYWJvdXQ-?x=0&sec=topStories&pos=6&asset=&ccode=

[rovo]

Yclept, Yes, I'm still holding a ton of TBT. For sure a bad move on my part. I didn't expect the financial problems to last this long as they have never done so in my lifetime. I keep expecting the Fed to back out of the QE business but it appears they are in it until hell freezes over. I've made a lot of bad assumptions on the economy during this down cycle and I never expected the Executive Branch to institute policies so harmful to our economy. Oh well, live and learn. Maybe in my next life I will do better at realizing how insane our government leaders are.

[yclept]

Actually, I don't blame the Fed so much. Their moves have all been announced and with more than enough time for other market participants to react. I believe it's more due to individual investors and institutional investors. The individual investors panic and don't know where else to run but government securities. Many institutional investors are not allowed to take short positions or even chase good opportunities below a certain market cap, so they just sit there with other people's money letting the hedge funds and such cut them to shreds. I kind of think of them as carcasses in a meat locker, just hanging there where anyone passing by with a knife can cut off a nice steak and move on.
The individual investors I put in the same classification as people who buy precious metals, each of whom is the "next bigger fool" for the one that preceded. Gold and silver are a world-wide Ponzi scheme.
Anyway TBT really looks to me to be bottomed-out. I guess what we need is a big shake-up, like the default on Federal debt that the tea party seems hell-bent to accomplish. At that point Treasury bonds will be seen to be very risky and not backed by the "full faith and credit" of the US as was previously sworn.

[Driftr]

We can take this somewhere else if you'd like, but from what I've seen the Tea Party is anything but hell-bent on defaulting on the actual debt of the United States. You can say they're hell-bent on renegotiating the social contract the government has made with the American worker as to the benefits he or she will receive in retirement, but I've never once seen anything about actually defaulting on the TBT-related debt.

[yclept]

Blocking the raise in the debt limit is defaulting on the national debt. You're right, it's probably more political than we want to be in this forum.

[Driftr]

Jun 10, 2011 15:01:02 GMT -5 @yclept said:

Blocking the raise in the debt limit is defaulting on the national debt. You're right, it's probably more political than we want to be in this forum.

Only if we take in less in taxes than we owe in interest. OK. I'll stop too.

[rovo]

If you want to discuss the ramification of the politics in this market, please do so in another thread. If you do start a new thread just remember to keep it civil or the thread will be tossed to the P&M board.

[yclept]

Ford news; this may be old hat, but I hadn't seen it before now:
www.bloomberg.com/news/2011-06-10/ford-loses-2-billion-judgment-to-dealers-law-firm-says.html

[rovo]

I picked up 500 shares of BRCM this morning at 33.10 to add to my holdings of BRCM in the IRA.

[livinincali]

Ford news; this may be old hat, but I hadn't seen it before now:

F looks pretty bad technically. Don't really see any reason for a trend reversal until it tests support around 10. It might get an oversold short squeeze bounce at any time, but I wouldn't expect a bounce from these levels to be lasting.

[rovo]

The market mover this morning was a weak, but better than expected, retail sales report.

Retail sales fall for first time in 11 months
9:19a ET June 14, 2011 (MarketWatch)
WASHINGTON (MarketWatch) -- Sales at U.S. retailers decreased 0.2% in May to a seasonally adjusted $387.1 billion, the Commerce Department estimated Tuesday, further evidence that the economy has hit a soft patch.

This is the first decline in sales since last June. But details of the report were not all weak. While auto sales were down as expected, there was

some strength in building materials and miscellaneous stores.

Compared with May 2010, sales are up 7.7%.

Sales rose an downwardly revised 0.3% in April, compared with a 0.5% increase originally reported.

The sales are seasonally adjusted, but they aren't adjusted for price changes.

A drop in sales in May was expected, based on earlier reports from auto makers. But the decline was not as bad as feared. Ahead of the report, economists surveyed by MarketWatch expected sales to fall 0.7%. See MarketWatch calendar with economic forecasts.

Excluding a 2.9% decline in motor vehicles sales, retails sales for the month rose 0.3%, stronger than the flat reading expected.

Sales at gasoline states rose 0.3% despite slightly lower pump prices. Excluding gasoline, sales fell 0.3%.

Excluding autos and gasoline, sales rose 0.3% in May.

So-called "core" retail sales, which exclude cars, gasoline, and building materials, rose 0.2% in May.

Retail sales account for about half of total consumer spending and about a third of final sales in the U.S. economy.

Economists don't think that inflation-adjusted consumer spending for the second quarter will do much better than the 2.2 % rate recorded in the first three months of the year.

Details

Motor vehicle sales fell 2.9% in May after falling 0.7% in April. This was the largest decline since February 2010.

Furniture store sales fell 0.7%. Sales at electronics and appliances stores fell 1.3%.

Building materials and hardware store sales increased 1.2% after rising 0.5% in April.

Sales at the nation's malls were lower in May. Sales at general merchandise stores fell 0.1%, including a 0.7% decrease at department stores. Sales at clothing stores rose 0.2%.

Sales at stores catering to leisure-time pursuits, such as hobbies, sports and reading, fell 0.4%.

Sales at health and personal-care stores rose 0.8%.

Sales at food and beverage stores fell 0.5%. Sales at restaurants and bars rose 0.6%.

Sales at non-store outlets, such as catalogs and online stores, rose 1.2%

[rovo]

From my previous post:

For May: A 2.9% decline in motor vehicles sales.

Looking at Ford since I hold many shares, the month of April was as follows:

Ford's April sales totaled 189,778, up 16 percent versus a year ago

Cars up 26 percent, utilities up 11 percent, and trucks up 11 percent

Ford brand sales up 25 percent

Fiesta sales eclipse 9,000 for second month in a row


For the month of May the reported number is down 2.9% and the Ford portion was as follows:

Ford sold 192,102 cars and trucks in May, down 0.1 per cent from 192,253 a year earlier. This fell short of the 195,000 vehicle sales projected by Barclays Capital but was above the 188,280 sales sales estimate from TrueCar.com.

And from Seeking Alpha:

Is Ford taking an "unjust" hit on news that impacts makers such as Toyota (TM), Honda (HMC) and Nissan (NSANF.PK) more than themselves? I think the answer to that is yes. So far this year Ford has sold over 877,000 cars, an average of over 175,000 cars per month. Last year Ford had sold 782,000 cars at this point for a monthly average of about 156,000. Ford is selling about 12.5% more cars per month in 2011 than it did in 2010. This is wonderful news, but it seems to be getting overshadowed by the poor sales of some of the Japanese brands that are still suffering the impacts of the quake. On a month over month basis Ford actually increased sales. April sales were at 189,788 and May saw sales of 192,102. For comparison GM sales declined month over month from 232,538 to 221,192.

[rovo]

So, what is my point? Cali commented on the "technicals" of the share price of Ford looking bad. Yup. The technicals on Ford look weak but the technical analysis is for the short term and Ford has rebounded 3.02% today, currently. I follow and watch technical movements in many stocks and while I'm no where as expert in this arena as Cali is I believe the fundamental analysis will dominate in the long run.

Stock prices go up and stock prices go down based upon many things occurring in the economy as well as the individual companies. The economy appears to be softening and the overall market is down. In spite of this softening Ford has been able to maintain very respectable sales for this year in the USA.

I think it is also important to note the "beta" on Ford is 2.4. This means the share price of Ford moves approximately 2.4 times as much as the overall market. When the market dips, Ford tumbles. When the market rises, Ford soars. This in and of itself is not good or bad but is just the way it is until Ford proves itself after being deeply hurt bu the previous recession.

[livinincali]

I won't disagree with the fundamentals of Ford, they seem to be doing well from a business perspective but in today's computer algorithm driven market that might not matter when it comes to the short term/intermediate term direction of the stock. Usually you would say current fundamentals should eventually win out but it's difficult to project fundamentals over the long term. Based on the current fundamentals of F you would say it certainly has to be higher 2-5 years from now, but it's very possible we'll see another recession in the next 2-5 years so maybe those fundamentals change drastically.

I honestly think long term investing is dead in our stock market casino but maybe I'm wrong. I'd like to be wrong, but I'd rather take an approach of short term gains and losses rather than waiting it out.

[IPAfan]

I think that long term investing is the most viable when everyone believes it's dead. It's a timeframe arbitrage. If you're the only one looking at where value will be in 5-10 years then you'll be able to pick up long term bargains.

[clarkrl2]

I'm not an expert on candlesticks but I believe the star on the F daily chart on Monday is bullish short term. Today's candle seems to me even more bullish. The doji (Monday) and the white candle today opening above the doji indicates a trend reversal (I believe this is an abandoned baby). I don't use these patterns much because they are way too short term for me but sometimes if I've been watching a stock and looking for an entry point I'll use a pattern like this.

I also like to look at the point and figure charts for support and Resistance levels. The point and figure chart seems to indicate a level of support for F at around 10.5 to 11. I noticed the bearish target objective at stockcharts is at 9.50. Sometimes I use levels like this to average down on a stock I like for the longer term.

I have a bull put spread on F with strikes at 16 and 12 with a Sept 2011 exp. Looking at the charts it looks like this position is in a world of trouble if that doji doesn't hold up as a trend reversal. Because of the short term nature of my position I think I'll use this doji pattern as a line in the sand and cut my losses if todays open is breached.

[IPAfan]

Just bought some more TTT ($7.68) and a new position in SCPZF.PK ($4.50)... I'd been watching this one for a while, but it got away from me before I could pull the trigger. Just a small position for now, but I'm impressed with management at Sprott Resources Corp and want a bit of skin in the game.

[rovo]

The following article may explain why Ford stock has been doing poorly.


Ford to miss 2nd qtr estimates: WSJ
8:55a ET June 16, 2011 (MarketWatch)
New York (MarketWatch) -- Ford Motor Co. said that second-quarter pretax profit will be lower than its first-quarter results and miss analysts' estimates, according to a report published Thursday. The Wall Street Journal said Thursday that the Dearborn, Mich. automaker last quarter reported a pretax income of 62 cents a share, and analysts are expecting profit of 64 cents a share in the latest quarter. Robert Shanks, vice president and controller, said at an analysts' conference that second quarter will be "very close to the first quarter, maybe a bit lower." Higher costs for steel, oil and rubber and expansion expenses will according to the paper drag the profit lower and Shanks said that he expects Ford to spend $2 billion more on commodities in 2011 than last year.

[rovo]

re Ford:

I'm still looking for Ford to earn between $1.95 to $2.05 for this fiscal year. Center point of $2.00 per share against last years results of $1.69 represents a gain in earnings of 18% for the current year. Also, this would represent a PE ratio of 6.6 when using yesterday's closing price of $13.15.

[IPAfan]

By my calculations, Terra Nova Royalty Corp has about $6.85 in NET cash/equivalents per share. That means you're paying only about $35 million for all the operating businesses. This includes the valuable commodities trading business, a whole set of proprietary investments, the iron ore royalty, and a whole set of small hidden assets including mines, german real estate, and a bunch of legacy assets.

The iron ore royalty itself is conservatively worth $180 million...probably well over $200 million. Michael Smith has hinted that there will be a "rationalization" of the iron ore asset. This could be a sale, spinoff, or some type of transaction to realize the value here. I personally think the commodities trading business is quite valuable just by looking at the history of MFC Bancorp from the late 90s and then Mass Financial after the spinoff from MFC Bancorp. (Mass was acquired by Terra Nova in 2010)

I really can't fathom how cheap this business is right now. The only big concerns I have are: 1) Michael Smith loses all the cash, or 2) somehow the company is a fraud and the cash balances are being overstated.

1) Michael Smith has been a great investor and has earned outstanding returns with his investments. It's possible that he could make a risky investment and lose it all. Anything in life is possible. Still, Michael Smith has a long history of protecting his shareholders capital and growing it by investing in distressed businesses trading at discounts to their hard assets.

2) I suppose this is always possible. Still, it's hard to fake $350 million in cash. The company has proved that it's certainly not a complete fraud as it has bought many distressed companies, turned them around, and spun them out. (Most recently KHD Humboldt Wedag which is valued at over $200 million in the market right now).

I know I've written the company up over and over. I'm not trying to convince anyone to buy these shares. I just can't believe the deal we're getting on this company right now. I'd love to hear any bear scenarios anyone could think of. I'm very very long on this company, but I'm at the point in my investing career where I'm willing to go "all in" on the right investment. I think Terra Nova is the right investment. Now with that said I'm not planning to sell any of my other long term investments like FRFHF.PK, ENH, or PM. I even bought a small position of Sprott Resource Corp (SCPZF.PK or SCP.TO). Still, I'm devoting most of my buying power to TTT. I bought another $3,500 of shares in my taxable account this week. I think I will keep an absolute minimum in cash and continue to buy TTT shares as long as prices are at these levels.

I think Michael Smith believes he has some extremely attractive investment opportunities in the relatively near term. I have a couple reasons for this. 1) MS said on a recent CC that he thinks 2011 would be a "watershed" year for Terra Nova. 2) The company is dirt cheap. If there were not good investments for the big cash pile then MS could create a tremendous amount of value by buying back shares at this level. Every dollar spent on buybacks at these prices would increase BV by $1.20 per share, plus it would spread the royalty income and commodities trading income over a smaller share base and increase earnings substantially. This company is managing to earn a decent ROE with a HUGE AMOUNT OF CASH that's earning nothing. I think simply buying back shares could grow the NAV, increase the ROE to 20% or higher (depending on how much cash was used in buybacks or dividends), and run the share price up 30%+ in the short term and then provide 15% annual returns going forward. Michael Smith is very intelligent and he obviously knows this. So it seems logical to me that Michael Smith believes he can do even better with his cash than to buyback shares and return capital. This is why I'm so darned bullish about this company.

Lastly. Michael Smith's family owns about 11% of the outstanding stock through a couple trusts so I believe his interests are aligned with shareholders. Plus, the new 2011 incentive plan granted stock options (mostly to Michael Smith) with a strike price of $7.81 so there's definitely an incentive for MS to realize the value in this company.

[IPAfan]

In terms of the profitability of Terra Nova's operating businesses...the company earned $17 million in operating income in Q1 from its merchant banking and commodities and resource businesses. Most of this profitability is disguised by the ongoing restructuring expense (although the company still netted about $5 million in operating profit after all those charges). So I think we're looking at a normalized earning power of the CURRENT BUSINESS (excluding the $6.85 in cash) of about $70 million annually. Slap a very modest 5X multiple on this normalized earning and you're looking at about $7 per share in value JUST FROM THE OPERATING BUSINESSES. So I could basically see about 100% of upside even without any acquisitions. I just wish I could borrow some money long term to invest here right now.

[IPAfan]

I apologize. I used the wrong share count in calculating the above numbers. The value is still great in my opinion, with a wide margin of safety. However, the share count is 62 million and not 52 million. So we're looking at $5.85 of net cash per share and at a 5X multiple I'd say we're looking at a very conservative $5.50 per share in the current value of the operating businesses (I suspect that the royalty is worth $4 a share just itself, but trying to put out a conservative number). So anyway, I'd say that a very conservative fair value would be $11.35 per share, and realistically probably $15 per share. That's the PRESENT BUSINESS. I think there's probably a lot of extra value in Michael Smith's ability to allocate capital and improve the intrinsic value of the business.

[rovo]

I sold off 1K of HI today at $22.97. HI has not dropped much during the market decline. It just doesn't seem to do much of anything at anytime. I am so disappointed in the performance of this stock. Oh well, at least all of my shares are in the green and my next sell order is at $23.17. I made 7.3% on the sale today plus a few dividend payments.

[rovo]

Placed a buy order for 100 shares of AAPL at $311.00 to add to my small colection of AAPL shares.

[rovo]

My next block of HI on the auction block is 1K shares at $23.17. Then 1K shares at $0.20 increments. Currently trading at 23.05 with a high for this morning of $23.14.

[rovo]

HI's fiscal year ends at the end of September, so they are just finishing up their Q3. I'm being told the K-Tron division has already met the budgeted sales and profit goals for the fiscal year. This means the next quarter, fiscal Q4, is all above budget for revenue and profit. I don't have info or perspective on the entire HI picture.

[rovo]

SLV is dropping sharply in response to the stronger dollar today. The dollar is up almost 1% and silver, as measured by SLV, is down about 3.7%. GLD is down about 2%.

ZSL, ultra-short silver is up over 7% this morning.

[rovo]

Interesting. AAPL opened down quite a bit but has recovered to +0.4% while the indexes are all still in the red.

Anytime Ben B. speaks and then Obama offers something, like opening up the SPR, the market takes a while to sort out the ramifications. Today's close will give us a better insight into the winners and losers for the immediate future.

[yclept]

I'm getting damned tired of the beating TBT is meting out. Regardless of how logical it seems that interest rates have to go up eventually, I think scared people will still buy Treasuries even if the government begins to charge them interest instead of paying it! I've been very tolerant (if not remiss) in ignoring what the market is telling me about TBT. It has dug a nice hole and I'm getting close to giving it a whack in the back of the head with the shovel, throwing it into the hole, and covering it up.

Your thoughts as a fellow sufferer?

[danshirley]

I've been scared out of my positions on TLT twice this year because of the on-going rhetoric about staying away from treasuries.

So far that doomsday has not materialized

When that sort of thing happens I simply avoid the area altogether. I cannot predict the future. Thus I am not in TLT, TBT or anything related and won't be until the situation re debt ceiling etc. has resolved itself.