Kraft is yet another reporting the type of margin squeeze that I expect the economy as a whole to increasing show. [more]
It looks like regulators are 10-years-after-the-fact getting around to closing a loophole that has most likely destroyed life as we know it. [more]
Sometimes someone punches numbers and they just hit you "no wonder" kind of thing. [more]
Through this period of market "correction" I find myself looking more at the depression than other financial crisis in terms of defining the problem. [more]
I am looking forward to the next stream of financial and annual reports that will be coming soon for base metals. I predict that the press releases will focus on the annual earnings and completely gloss over the 4th quarter earnings, which I expect will not be rosy for any base metal company. However, the 4th quarter earning are probably more representative of the company's next quarter earning potential rather than looking at the full years.
In a recent post I was asking if base metals would fall off a cliff. There were many indicators that economic growth was slowing.
The US is of particular concern. According to Nobel economist Joseph Stiglitz the US has been drawing down home equity at a rate of $700 to $800 billion per year.
That's a lot of unsustainable US economy. Further, the US consumption economy is about $9.5 trillion. The home equity borrowing has been 7-8% of the consumption US economy. Now that lending standards have tightened, and home equities have declined, that borrowing is not likely to continue at anywhere near the same rate. It has to be a strong US slow down in the economy and the trickle down effects can not possibly be pretty.
Emerging markets are not likely to make up the slack. China's consumption economy is a mere $1 trillion, so $700 billion is 70% of their economy. Anyone who thinks China will pick up the slack is smoking something pretty strong.
This can't possibly be good for base metals. There are a lot of base metals that go into consumer goods. Additionally, commercial construction is rapidly declining as well, and municipal budgets that might do big capital projects that require base metals are in trouble because municipal budgets are in trouble due to declining revenue from declining home prices in the US. Cities are demanding all departments cut budgets.
Mining projects in the process of being developed do not just stop in the middle of hundreds of millions of dollars being committed to them, so increases in supply tend to strongly lag changing economic conditions. Data showing slow downs for material usage tends to be lagging rather than leading. In the US housing starting were going full throttle as late as last March, and all of the materials that go into housing would have continued to be used until some time in the fall or winter, yet by then housing starts had plummeted, but the actually declines in demand from that reduction will not be fully showing up in financial reports until the end of Q1, and it should be significant. So far Q4 earnings are down about 20% for companies that have reported Q4 earnings. That's gigantic and it is crazy to not think that that isn't have an effect on commodity demand.
Base metals have had enormous leverage of earnings from record commodity prices and they've been bid up in price, valuing the base metals stocks like a coca-cola stock, only base metals are at far more risk to supply and demand price fluctuations that demand a low P/E when prices are strong. When the market looks good and the company has good growth prospects I'd never give a second look to a base metal stock with a P/E of 12 or higher. It has room built in for down side risk and a opportunity to exit without wiping you out should the market turn, which it appears to have done.
There are numerous examples now of how the downward leverage affects earnings. From Q2 07 to Q3 07 FNX mining's revenues declined 28.3%, but earnings declined 64.3% despite the fact that "the total tons of ore, pounds of nickel, pounds of copper and ounces of precious metals produced and sold was were higher ... than in any previous quarter," according to the Nov 1, 2007 news release. According to google finance the current P/E is 21.7, but that has earning of $12.5 million (the last report), $35 million, $30.2 million and $19.7 million included. Go four quarters forward based on last quarter and you get $50 million per year of earnings compared to the current last four quarters of $97 million. It means the P/E for last quarter reported is about 43. Average nickel price was $11.65/lb and copper price was $3.57/lb. FNX is still richly valued despite being down 37% from its high. The $24.87 shares earned 15c/share last quarter. Even if you believe they can double earnings, the shares seem richly valued.
Teck Cominco's earnings declined from $2.01/share to $1.16/share for the same two quarters, only Teck Cominco did not get so insanely valued. Their revenues were down about 1/3rd yet earnings were down 42%. Their loss of leverage of earnings was not nearly as drastic as FNX. Teck's current P/E is 6.46 and forward P/E is 10.63. It is down 40% off its high. The $32.51 shares earned $1.16/share last quarter.
It is likely any base metal company examined will show a higher decline in earnings than revenue because of the leverage and it is also likely that all established companies will experience a significant decline in earnings due to the declines in commodity prices, which are at risk to decline further due to the economic slow the entire world seems to be experiencing. [more]
I think buyback are bad for stay and hold investors and reward those who sell the stock. [more]
An article on Mining Journal say that refinery charges on zinc concentrate are increasing dramatically. They were about $300/ton last year and are up 10% to $330/ton and some have even asked for as much as $360/ton. [more]
I had good laugh at this quote on Mish's blog: [more]
Calculated Risk has a post about raising the conforming limit to $625k.
Seriously, I read too much more of this kind of thing and I will become a gold bug...
But, that means gold bullion, not stocks. I stick to my position that gold stocks are extremely problematic.
I was reading "Are Gold Stocks Dangerous" by Alex Wallenwein. [more]
I'm reading "Worries That the Good Times Were Mostly a Mirage" and the statement that got my attention: [more]
Many investors have been trained that rates drop, the economy booms as does the market, but I think there is little thought into why. [more]
The losses coming in today are huge... [more]
Demographia just update their housing affordability survey. I leave it for you to check out your area on your own. [more]
I was just reading a blog by a writer from Alberta on his views on food inflation, which sent me looking a little closer at what is happening in the industry. It is yet another recession red flag. [more]
I don't think I have read anyone express their feelings about how so few could be so full of self-importance to have unleashed such a mess on the rest of us as this blog I just read:
I Am Ashamed of Wall Street
I might add that the feeling expressed about the workers of wall street who did this fit into a baby finger in comparison to my feelings about the corporate executives who have robbed investors with their multi-million and hundreds of million dollar bonuses for essentially running good companies into the ground for no other purpose than to line their pockets. [more]
Consider that wholesale prices are up 6.4%. I am not sure the degree to which this is a problem, but I picked two of my caps picks to have a quick look at. McAfee has a market cap of about $5 billion and 160 million shares. My first glance is that the wholesale price increases will hurt them less than other businesses. Their cost of revenue for the last five quarters, starting with 09/06 and going to 09/07 is 22.3%, 22.6%, 22.2%, 22.7%, 24.2%. It has taken a jump in the last quarter, but overall their cost of revenue is low so wholesale prices increase should not hit them as badly as say a company with say 60% cost of revenue. They have this "other" income that I haven't a clue as to what it is and I'm not inclined to spend hours trying to find out. It is about 30% of the earnings so it is a fairly serious wild card that has the potential to seriously hit the earnings. [more]
The S&P is coming out and saying banks will suffer into 2009, which is closer to the truth than this rubbish we've been reading that that things are going to turn around in the second half of 2008. [more]
The financial losses are huge and they aren't over. Credit card defaults are up, and commercial real estate is now showing that businesses paid too much just like homeowners and defaults are up. [more]
Sometimes it amazes me how differently I interpret something compared to someone else. This is a comment I read on Mish's blog today: [more]
What happens in the after math of an economy that allows financial profits to rise from something like 12% to 28%? [more]
Stocks that looked good year ago, and had future growth priced into them can quickly look like a big problem in a declining market. When input costs increase and the ability to charge more declines, margins get squeezed fairly quickly, and much stronger than most expect. [more]
I am reviewing some of the work of Edward Chancellor. [more]
The concept of value added is when you take a resource, say a tree, and you process it, into 2 by 4s for construction, furniture, etc. [more]
Somewhere I read a story about where “the short end of the stick” came from and it was a story about debt. Some British King borrowed the gold of wealthy people and gave them a stick with a notch representing how much they were owed. The economy was good as the King spent the money on whatever. But, the King spent all the gold and had no way to pay it back leaving the wealthy merchants holding the short end of the stick. [more]
Read my posts, How I Discovered the Gold Bubble, The CopperCorp Disaster, Goldcorp: The Oxymoron of Fiat Creation, and you might get a sense that I don't like Goldcorp. The reason are extensively supported. [more]
In my post Battle of Economics: Inflation or Deflation I briefly contrasted Mish and Schiff, one of whom is in the deflation camp, the other in the inflation camp. [more]
Personal Fianance Blog did a post about his investment costs for the past year. What caught my attention with it was that his commission cost and subscription costs only came to 0.07% of his portfolio. [more]
I continue to be shocked by the degree of incompetence and fiscal irresponsibility that I read about, the latest from Nouriel Roubini. [more]
Imagine if you could get a return of 30% per year for 5 years. With compounding you'd have 271%. At this rate it wouldn't take long to secure a very nice retirement. [more]
Out of all the banks it appears that Citibank is in the most trouble. They have just cut customer's daily access to their funds through bank machines. [more]
In Six Degrees of Leverage Part I I showed how a modest change of interest rate changes the effective yield on a hypothetical 10 utility bond. Because rates declined from 6% to 4.5%, the bond was priced up so the yield would be 4.5% and because of selling early the yield ended up being 8.3%. [more]
What a title, I stole it from Bespoken. [more]
This week I have been packing. [more]
Motley Fool said they were giving 2c to charity for every post and comment to the blogs in December. I did 45 posts and I counted 227 comments made to those posts in December. I did not check to see if there were comments added to older posts. So, it looks like my blog was worth $5.44 to charity via the Motley Fool. [more]