http://www.smallcappulse.com/index.php/blog/detail/ en tpitcher@smallcappulse.com Copyright 2010 2010-08-13T13:31:00-08:00 http://www.smallcappulse.com/index.php/site/the_media_is_dumbing_down_the_economy_we_see_potentially_disastrous_consequ/ http://www.smallcappulse.com/index.php/site/the_media_is_dumbing_down_the_economy_we_see_potentially_disastrous_consequ/#When:12:31:00Z August 13, 2010 - The financial media continues to exacerbate the problem by lame thinking. We listened to a reporter on Bloomberg this morning talking to a fund manager about the potential for a double dip. The fund manager forecasted slower growth, at about 2% this year but suggested a double dip was unlikely. While the Bloomberg reporter brought up the ‘Bush tax cuts’, opining, ‘why would we eliminate the Bush tax cuts while we are in this period of slow growth?’ insinuating that to do so would almost certainly thrust us back into a double dip. This is bone-headed thinking. The Bush tax cuts go to the heart of the ‘leveraged’ way of thinking that threw this economy off the rails in the first place. Remember that before Bush took office the economy ran at a surplus. As Nobel winning economist George Akerloff put it, Bush just ‘looted’ the U.S. economy, drove national debt to record levels and sent the dollar into a tail spin. Here we are now in a debt-ridden economy and short-term thinkers are suggesting an extension of the Bush tax cut regime, which, by the way aren’t paid for, so they would add to our debt. Keep in mind that the proposal by the Obama administration is not to raise taxes on the middle class but only on those making more than $250,000. The leftover dogma of ‘trickle down’ economics from the Reagan era has got to go. We don’t see money trickle down from the haves to the have-nots. In the W Bush era, amidst his tax cut regime, poverty levels increased. There was an appearance that the tax cuts were having an effect of driving the economy because there was so much other leveraged policy in place, including easy money and ridiculous incentives for folks to borrow on homes and personal expenditures. But as we saw, at some point, in a leveraged economy you have to pay the tab. We would expect a more intelligent positioning of the issue by a media powerhouse like Bloomberg. But they have dumbed the issue down to suit the political purposes of those advocating the extension of a Bush tax cut and through implicit advocation of the policy, they are almost holding the Obama administration hostage on the issue. The more they build up expectations that the Bush tax cut policy should be extended and show the perception that more fund managers are behind it, the higher the potential shock to the markets if the Bush tax cuts get eliminated. As it stands, there are hardly any people in Washington that have the intestinal fortitude to craft and advocate policy that is designed for the long-term good of the country. We have ‘fast food’ policy instead – policy for the here and now. Policy to make us feel good for the time being – never mind the longer term implications. This is the same mindset that drug addicts get – just one more fix. In this analogy, our addiction is leverage and spending. But we are inevitably faced with the ‘new normal’, where GDP growth is going to, at best be in the 1% to 2% range. Consumers who are tasked in this flawed economic paradigm  to carry the weight of 70% of GDP, have seen 8 to 9 million jobs lost and confidence is reasonably poor. So we see in this morning’s data that retail sales are sluggish. This is a predictable conclusion. We haven’t seen the Street recalibrate expectations for S&P earnings yet to reflect 2% GDP growth instead of 3%. When they do, stocks will look more expensive, so we see systemic risk built into the markets at current levels are suggest that investors take a risk-managed approach accordingly. Here is another topic that the financial media is totally missing. There is no serious reporting going on, only ‘oohs’ and ‘ahs’ of the type that you get at a  circus when the ringmaster stands in front of the elephant in the room. Well, the elephant in this room is that the system is broken. The economic assumptions are flawed. Policy makers in Washington are paralyzed by partisanship. And the financial media, which should be informing us and providing us with a breadth of perspective, is just dumbing us down instead. Structural Problems: ·         Housing market continues to reel and foreclosures continue to increase, while home price values remain soft; ·         The labor market remains in bad shape, as businesses borrow and hoard cash but are not hiring back the workforce; ·         Credit remains tight, if not totally unavailable to most consumers; ·         Consumer confidence remains poor; ·         Retail sales continue to be soft (keep in mind that in order for consumers to carry their weight of GDP they will have to spend more than 90% of their disposable income); ·         Economic data is basically weakening across the board; ·         The national debt is approaching 100% of GDP. The New Normal ·         Target unemployment will be closer to 7% than 4%; ·         Target GDP growth will be closer to 1.5% than 3%; and ·         Unless the U.S. addresses its debt issues, a step down from Aaa rated debt. There is no quick fix. We are not going to get the economy back to a truly stable condition until we make some hard and uncomfortable decisions, which may mean a prolonged period of that feels recessionary. Do we expect that to happen? No. Politicians won’t have this conversation. The financial markets don’t want to hear it. Consumers have been led to believe it doesn’t need to happen, having bought into the rhetoric spewed out by talk radio that all negativity in the economy which impacts them at home could have been avoidable by a better decision and policy in Washington. So the best case in our opinion, is the New Normal. The worst case, in our opinion, is that the stress just continues to build as Washington kicks the ball down the road in deference to the quick fix today. If that happens, the stress in the system, the structural problems, will ultimately lead to a break and the recession of 2008 will look mild in comparison. At that point, we will have less tools to deal with it as well. We will have run debt up to much higher levels, and our debt will likely have achieved a lower rating by that time. We won’t be able to as quickly print our way out of it. 2010-08-13T12:31:00-08:00 http://www.smallcappulse.com/index.php/site/our_take_on_the_new_normal_adjust_for_downside_risk_now/ http://www.smallcappulse.com/index.php/site/our_take_on_the_new_normal_adjust_for_downside_risk_now/#When:12:37:00Z August 12, 2010 - We continue to think that the Street has already priced in, if not overpriced in, the impact of relatively strong earnings season. It has, up until yesterday, been largely ignoring the implications of all of the negative economic data we have been getting. ·         Retail sales lagging as consumers are spending less. MasterCard Advisors SpendingPulse reported this morning that U.S. retail sales rose 0.1% in July from June. Excluding autos, sales fell by 0.9%. On a year-over-year basis July sales ex-autos were up1%. ·         Housing market remains in disarray. Realty Trac said this morning that foreclosures increased again in July. Banks repossessed more than 92,858 properties in July, up 9% over the previous month and up 6% in the year. ·         The labor market is a mess. This morning’s weekly jobless claims report, once again, was worse than expected. There can be no economic recovery in an economy which counts on consumers to represent 70% of GDP, when that economy has lost 8.5 million jobs and is close to 10% unemployment. In this environment consumers will predictably slow their spending. GDP will predictably contract, and potentially grind to a halt. Add to this dynamic the fact that there is really very little the government can do without making the situation worse, either in the short term or the long term. If the government opts for the populist-driven near-term relief, it will continue with stimulus (debt) spending measures and policies. But with the national debt approaching $14 trillion, and 100% of GDP, we run the risk of throwing our economy off the rails if the U.S. loses its AAA rating. If the government does what it needs to do (our opinion), and focuses efforts on nursing the economy back to health by cleaning up its balance sheet, shifting policy to emphasize more export  business and more domestic manufacturing and less on a reliance on consumer spending, then we can expect a prolonged period of slower, if not anemic growth while the U.S. economy’s fundamentals hopefully stabilize – the ‘new normal’. What the populists don’t admit, or realize, is that it is probably going to be the case that this is unavoidable. Even if they throw stimulus measure after stimulus measure against the wall – whether in the form of cutting taxes or printing money. The disingenuous component of the populist argument is that any tax cuts would not be paid for any way and would just add to the debt. This is a discussion that most folks in Washington either don’t want to have or are totally missing the point on. Against this backdrop, we will continue to remain cautious. We think there needs to be a shift in thinking about valuations – unfortunately. In the ‘new normal’ , a price-to-earnings target of 14x (the historical average) the S&P 500 is probably wishful thinking. In the ‘new normal’ it is probably going to be closer to 10x. We also continue to think that the Street is over-optimistic about FY10 expected earnings for the S&P at $82 to $85. We think the number will likely be closer to $70. If we are right on these points, at yesterday’s closing price, the S&P 500 is trading 15.6x earnings of $70 and looks topped out. The consensus view would have the S&P trading at 13.28, still not exactly a depressed asset range. If we are right about the inevitable adjustment to valuations under the new normal, a 10x trading range for the S&P 500, assuming $70 would put the index closer to 700, a serious leg down from the current 1,089 level. Even at $80, it would put the index closer to 800, which represents about 26% downside risk. In our opinion this scenario is not a question of ‘if’ but ‘when’ and we would caution our readers to stay sober and not get caught on the wrong side of this trade when the Street gets around to doing the math. To be sure, this last round of earnings reports was pretty solid, demonstrating that companies are doing a good job managing their cost infrastructure. But they are hoarding cash. In this market, for a public company, it is easier to borrow money (at historically low rates) for stock buybacks to window dress solid earnings than it is to find the intestinal fortitude to start hiring again, in anticipation of consumer demand 2010-08-12T12:37:00-08:00 http://www.smallcappulse.com/index.php/site/time_to_get_agressive_on_renewables/ http://www.smallcappulse.com/index.php/site/time_to_get_agressive_on_renewables/#When:13:44:01Z An investor asked us the following question this morning: Do you think it is time to go big time on margin into renewables, thinking they will catch up here to the market finally??? Our response:   Nope - margin is for extreme situations (opportunistically) in my opinion. Right now, we are in the Netherlands. Street continues to bet on $80-$85 on S&P 500 earnings this year. At $80, we are looking at a current P/E of 13.83. Historically, trades in the 14 range, so go ahead and mark 13 on the low side and 15 on the high side - which would put the S&P at 1,200 to the upside. To me that doesn't make a compelling use of margin.   I would be more inclined to use margin on a deeply oversold scenario.   My outlook for the S&P is more bearish. I don't think $80 will be attainable. I am looking for something closer to $65 to $70. At $70, we are at 15.8x earnings, which seems a bit topped out.   The data on the economic front remains mixed, so I don't see a scenario where the bulls run valuations up into the 16-20x range in any case.   This is all more 'macro' driven considerations. Drilling down the renewables, my general approach is not to try and swim upstream. So if the broader markets are getting pretty topped out, and could potentially pull back, I will wait for the pull back to stick the net into the stream for the fish I want to catch.   Until then, I am looking at relative strength as  an opportunity to sell calls into (hedging downside risk)....when stocks pull back, selling puts on stocks I want to own at lower prices.   This morning's reaction to home sales data is what it is - 'less bad' - it is not 'good'. Businesses are still not hiring. Consumer sentiment remains in the tank. Washington is getting set to go to war over the Bush tax regime which will further infuse 'uncertainty' into the mix and the Street is not fond of uncertainty. It will certainly react to the potential that rich folks don't get to maintain their tax brackets at some point in the process.   2010-07-26T13:44:01-08:00 http://www.smallcappulse.com/index.php/site/losing_the_energy_debate/ http://www.smallcappulse.com/index.php/site/losing_the_energy_debate/#When:12:49:00Z Depressing – that is about what comes to mind when one thinks about the deconstruction of Obama’s once impressive Energy Plan. 2009 started out with a bang and expectations were high that Democrats in Congress might leverage their majority, spurred by Obama, to get an Energy Bill enacted in Obama’s freshman year. But then Obama embraced the healthcare debate and energy took a back seat. By the time all was said and done, a weaker healthcare plan was passed, and as Obama made his first State of the Union Address, he was conceding ground, now backing offshore oil drilling, clean coal and promising more support for nuclear. All the while, opponents to an energy bill promising commitments for alt energy, clean tech and putting a price tag on pollution have gained ground, promising to thwart any version of a bill that threatened higher energy prices and American jobs. After all, that is how they have framed the debate, while Obama and other advocates have stood by letting them have it their way. At this point, it looks less likely that any energy bill is going to make it. Not even the worst environmental disaster in U.S. history, which should be an indictment on offshore oil drilling, and make us all think twice about mountain top mining as well as nuclear storage issues, has buoyed Obama et. al.’s agenda. Clearly, Obama is feeling the pressure. This week, reports surfaced that Obama is making another concession. White House Chief of Staff Rahm Emanuel has gone on record signaling that the Obama administration will now propose caps on the utility sector this week, and utilities only – never mind other polluters. The thinking here is that this would give an energy bill a better chance to get through a more-partisan-than-ever Congress. Did we say this is depressing? With this much of a lack of conviction, why should opponents agree to even a utility-only cap? Why not hold out for no caps at all? Meanwhile, a federal judge in the U.S. Eastern District Court of Louisiana struck down the Obama administration's six-month ban on deepwater oil drilling in the Gulf of Mexico as rash and heavy-handed Tuesday, saying the government simply assumed that because one rig exploded, the others pose an imminent danger, too. If the Obama administration had its act together, it would have made a better case. It gets worse. In California, which is generally speaking a proxy for where clean energy legislation is heading across the nation, the oil industry-backed measure to suspend AB 32, which sets a limit on GHGs from automobiles, oil, refineries and other industry, requiring up to a third of the state’s electricity to come from renewable sources by 2020 and would drive increased sales of fuel-efficient cars,, has qualified for the November ballot. On the oil industry’s side – Meg Whitman – who is gaining momentum politically in the race to California’s governorship. On the side of AB 32, and the advocacy to reduce emissions, is Governor Schwarzenegger,  who is on his way out under heavy criticism over the state of fiscal disrepair in California. Opponents to AB 32 have smartly positioned the legislation as being anti-jobs, and as a ‘tax’ on energy which will make life harder on consumers, or at least more expensive. This is a mirror image of the debate being held on the national level, and as with that debate, supporters of AB 32 are totally failing to show the costs of higher emissions and effectively counter the argument that reducing emissions will result in job losses. Did we mention this is all depressing? 2010-06-23T12:49:00-08:00 http://www.smallcappulse.com/index.php/site/our_take_on_first_solar_nasdaqfslr_is_needhams_bearish_view_warranted/ http://www.smallcappulse.com/index.php/site/our_take_on_first_solar_nasdaqfslr_is_needhams_bearish_view_warranted/#When:14:01:00Z June 7, 2010 – Asked this morning by a reader about my take on Needham’s outlook and comments regarding to First Solar (Nasdaq:FSLR) – initiated at UNDERPERFORM with Fair Value of $92 – here is my take:  I am most concerned about the whole group on the euro exchange – most company guidance is based on a $1.20-$1.25 euro. If the euro continues to slip, it will mean further downward adjustments. For example, as Bachman from Auriga points out about First Solar: “A sensitivity analysis suggests that for each 0.01 move in the EUR/USD exchange rate, revenue is affected by $10 million and net income is affected by $6 million.” First Solar’s guidance is under an assumption of $1.30, we are at $1.19 this morning. I agree with Needham’s assessment that margins will contract, and with most of its reasons for the contraction. It is a bit of a concern that module efficiency seems to be hitting a ceiling in terms of improvement, and manufacturing cost/watt has been leveling out as well. Perception will likely be that c-Si firms will start to catch up. In terms of insulation to this risk,  I think First Solar’s balance sheet with more than $1 billion in cash and marginal debt is key. It has the potential to deploy capital strategically for higher margin/value-add opportunities. The Needham assessment is a good one, I think, on its own merit. Add to that the potential for broader market risk. The Street, and media, is starting to spend more cycles on the topic of whether we are heading for a retracement back into stronger recessionary headwinds. That this is just becoming a media-worthy topic is remarkable, as it has been obvious for months that conditions in the labor market were nowhere near where they need to be to support GDP forecasts and S&P 500 earnings forecast that were driving stocks higher. I think a test of the 1,056 level is eminent. There are basically two lines of thinking here – the bullish one is that stocks are oversold, and this is based on expectations of S&P 500 earnings this year coming in the $75 to $85 range. At Friday’s close of 1,064, this would put the forward PE at 12.5 to 14.18. Pretty much near discounted to historical levels. On the other hand, the labor market is so dismal, and credit markets are so unforgiving, adding to that the outlook for the housing market, that consumers will be loath to contribute the level of spending corporate America needs to achieve the kind of earnings mentioned above. In which case, I am looking for earnings this year closer to $65, and therefore, stocks don’t look oversold. They still look expensive with a forward PE of 16.36. Assuming a PE worthy of getting back into accumulation mode for stocks is at about 14, and assuming $65 in earnings this year, we would be inclined to stay on the sidelines form the buy-side until the S&P 500 dips to 910, which would be another 14% dip from here. So broader market pressure could also be a drag on First Solar, as well as the group. It is too bad for solar companies, which generally had positive remarks in the latest round about increasing demand. That theme is getting totally drowned out now by the FX issue, as well as erosion in the European economy which has been a key driver of growth. And looking at the most recent California Solar Initiative (CSI) data, where California is basically a proxy for the U.S. market, it is a mixed bag. In May we were way down in terms of applications at 63MW (from a record 168MW in April), so this could be a signal that headwinds are picking up. On the other hand, year-to-date through May, we are at 332.59MW in applications compared to 104.44MW, a 218% positive variance. A lot to watch. 2010-06-07T14:01:00-08:00 http://www.smallcappulse.com/index.php/site/world_energy_use_to_grow_49_between_2007_and_2035/ http://www.smallcappulse.com/index.php/site/world_energy_use_to_grow_49_between_2007_and_2035/#When:16:30:00Z May 25, 2010 – The EIA reported this morning that world energy use is forecast to grow 49% between 2007 and 2035, noting that “renewables are the fastest-growing source of world energy supply” although fossil fuels will still meet more than 75% of total energy needs in 2035 – all things being equal. Other key findings: ·         China and India are among the nations least impacted by the global recession, and they will continue to lead the world's economic and energy demand growth into the future. In 2007, China and India together accounted for about 20% of total world energy consumption. With strong economic growth in both countries over the projection period, their combined energy use more than doubles by 2035, when they account for 30 percent of world energy use in the IEO2010 Reference case. In contrast, the projected U.S. share of world energy consumption falls from 21 percent in 2007 to about 16 percent in 2035. ·         In the Reference case, oil prices rise to $108 per barrel by 2020 (in real 2008 dollars) and $133 per barrel by 2035. Total liquid fuels consumption projected for 2035 is 28 percent or 24.5 million barrels per day higher than the 2007 level of 86.1 million barrels per day. ·         From 2007 to 2035, total world energy consumption rises by an average annual 1.4 percent in the IEO2010 Reference case. Strong economic growth among the non-OECD (Organisation for Economic Cooperation and Development) nations drives the increase. Non-OECD energy use increases by 2.2 percent per year; in the OECD countries energy use grows by only 0.5 percent per year. ·         In the absence of additional national policies and/or binding international agreements that would limit or reduce greenhouse gas emissions, world coal consumption is projected to increase from 132 quadrillion Btu in 2007 to 206 quadrillion Btu in 2035, at an average annual rate of 1.6 percent. China alone accounts for 78 percent of the total net increase in world coal use from 2007 to 2035. ·         World net electricity generation increases by 87 percent, from 18.8 trillion kilowatthours in 2007 to 35.2 trillion kilowatthours in 2035. Renewables are the fastest growing source of new electricity generation, increasing by 3.0 percent per year in the Reference case; followed by coal-fired generation, which increases by 2.3 percent per year. ·         In the IEO2010 Reference case, energy-related carbon dioxide emissions rise from 29.7 billion metric tons in 2007 to 42.4 billion metric tons in 2035--an increase of 43 percent. Much of the increase in carbon dioxide emissions is projected to occur among the developing nations of the world, especially in Asia. 2010-05-25T16:30:00-08:00 http://www.smallcappulse.com/index.php/site/scp_trading_strategies_selling_puts_on_first_solar_nasdaqfslr/ http://www.smallcappulse.com/index.php/site/scp_trading_strategies_selling_puts_on_first_solar_nasdaqfslr/#When:14:46:00Z May 25, 2010 – We have been calling for a pullback in the markets for months. Ironically, the basis for our bearishness has been the underlying fundamentals of the U.S. economy but the trigger for the current selloff has been Greece. Now, add to the mix concerns about Washington imposing regulations on the financial industry, uncomfortably high unemployment data, uncertainty in the housing markets, tight credit markets, a disaster oil spill in the Gulf and now the potential for instability in the east driven by North Korea, and the mood has turned blue. Against this backdrop, we have not been believers in valuations as the markets rallied. Bulls were calling for earnings on the S&P 500 in the range of $70 to $75 which would supposedly rationalize the S&P at 1,350, that would put the P/E at 19.28 (assuming $70) which would be a remarkable premium relative to historical valuations for the index. The bottom line, in our opinion, is that consumers, which are responsible for maintaining 70% of GDP, are in bad shape. Unemployment is pushing 10%, home prices continue to drift and credit remains tight. So consumers aren’t going to be much help in driving S&P earnings. Neither will exports, which represent a paltry 11% of GDP, and especially against the backdrop of a reeling Europe which is tightening its belt. So, what, is Washington going to divvy up another stimulus package? Not likely. With the national debt pushing $13 trillion and foreign debt accounting for about $4 trillion, our balance sheet doesn’t look much more appealing than Greece’s. So what to do for investors? With stocks rallying, and believing valuations were overdone, we advocated selling out of the money covered calls into the strength as a hedge against downside risk. We also advocated moving more into cash to save some powder for a selloff when it comes. When stocks are selling off, we think it makes a lot of sense to consider selling puts on stocks you want to own. This is a great, and disciplined strategy to get paid to buy stocks you want to own anyway, at more attractive prices. We have advocated this strategy on the Small Cap Pulse: ·         First Solar (Nasdaq:FSLR) – On February 2, we suggested selling puts on First Solar into weakness and then to close the position on February 18, locking in a 50%+ gain. Then on February 24, we suggested selling puts again, and then locking in a 65%+ gain on March 29. ·         On February 25, we advocated selling puts on American Superconductor (Nasdaq:AMSC) – the July 25s- which are up about 10% right now. It may be the case that, if AMSC dips below $25 between now and the July expiration date, and we get put the stock, we are ok with that because we are bullish on the company and would be happy to own the stock at $22.55 (the strike price, less the premium we were paid to sell the stock). If the stock maintains above $25, we pocket 100% of the premium, unless we close the position prior to expiration date by buying back the July 25 put. The rationale for a Naked Put strategy: ·         Applied to a stock that you want to own; ·         Pays you to take on the obligation to purchase that stock at a lower price; ·         If the stock does not move below the strike price, and you don’t get put the stock, you keep the premium. A stock that we like this morning for this strategy: ·         First Solar, September 100 Puts for $12.80. If the stock continues to trade higher than $100 between now and the September expiration date, you keep the premium. If the stock moves lower, and you are put the stock, you will own it at $87.2, which would put the stock at a $7.42 billion market cap (2.87x FY10 projected revenues and 13.1x F10 projected earnings), an attractive entrance point, in our opinion. Note: we are using Mark Bachman of Auriga’s estimates here. Important Disclosure: This information is intended to assist investors.  The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice.  Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement.  It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations.  As with all investments, there are associated risks and you could lose money investing.  Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment 2010-05-25T14:46:00-08:00