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Tuesday, June 29, 2010

Stocks Zig, Fundamentals Zag? Psychology is Wild Card - Still Good News Out There for Those Interested

Today's market action and headlines can paralyze even those with the strongest stomachs. Some headlines from Yahoo! Finance's (YHOO) main page as of 9:45pm EST:
In our view, technology improves productivity and efficiency, and makes life more interesting by facilitating access to people and information from diverse and far away geographies. Still, we can see how the rapid flow of media information via the Internet could negatively impact consumer behavior because everyone seemingly remains "on edge" and people often overemphasize the negative over the positive. Consumer confidence no doubt dipped in June on the heals of the Greek/Europe debt crisis and, potentially, in conjunction with the truly frustrating and saddening oil spill. Note that we also covered some negative concerns in our our How's the Economy Doing post and Debt-to-GDP post the other week.

STILL, here are some positive headlines from the shipping/trade arena today (via Journal of Commerce) that were likely NOT featured front and center on Yahoo!, MSN, Google, and all of the other sites the whole world frequents daily:

Global Air Cargo Tops Pre-Recession Levels 
Global air cargo traffic soared 34.3 percent in May from a year ago and is now above pre-recession levels, the International Air Transport Association said.

NAFTA Trade Jumps 32 Percent in April 
Truck, train and pipeline shipments between the U.S. and Canada and Mexico totaled $65.8 billion in April, a 32.4 percent increase from a year earlier, the Transportation Department reported.

While certainly favorable, the NAFTA Y/Y comparison benefits from an easy year over year "comp." However, we see the air cargo news as 100%, honest-to-goodness impressive news and consistent with positive shipping news we've been highlighting.

Where else can we find "good" news? We shared news from Pier One Imports (PIR) and Select Comfort (SCSS) last week, yet for those wondering about the state of plain old U.S. manufacturing in the American heartland, see Baldor Electric (BEZ) in Arkansas and Lincoln Electric (LECO) in Ohio -

From Baldor on 6/3/10:
  • Baldor Electric Company markets, designs, and manufactures industrial electric motors, mechanical power transmission products, drives, and generators and is based in Fort Smith, Arkansas.
  • Today, members of Baldor's management team are visiting with investors at the KeyBanc Industrial Conference in Boston and have updated sales guidance for 2nd quarter 2010. Due to continued strength in incoming orders for all products, Baldor now believes sales for 2nd quarter will be in the range of $435 to $445 million. This is an increase from the previous guidance of $415 to $430 million provided on April 28, 2010. At these higher levels of sales, Baldor believes the operating margin will be slightly better than the peak quarterly operating margin of 14.2%.
  • Baldor expects to release 2nd quarter 2010 earnings results on Thursday, July 29, 2010, after the market closes.
From Lincoln on 4/27/10:
  • Lincoln Electric is the world leader in the design, development and manufacture of arc welding products, robotic arc-welding systems, plasma and oxyfuel cutting equipment and has a leading global position in the brazing and soldering alloys market.  
  • Sales were $471.0 million in the first quarter versus $411.8 million in the comparable 2009 period, an increase of 14.4%. Operating income for the first quarter increased to $34.7 million, or 7.4% of sales, from $1.0 million, or 0.3% of sales, in the first quarter of 2009.  Excluding special items, operating income in the quarter was $35.5 million or 7.5% of sales.
  • "We are pleased that we have started the year off with much stronger operating income compared with the first quarter of 2009," said John M. Stropki, Chairman and Chief Executive Officer. "The actions we took throughout 2009 to rationalize our operations and reduce our overall cost structure coupled with an improving economic environment drove significantly better results in the first quarter of 2010 compared with the prior year period.
  • "We continue to experience sequential improvements in demand levels in many market segments and geographic regions. Also, key economic indicators suggest a cautiously optimistic view that market conditions will continue to improve as the year progresses. As always, our strong financial position will allow us to execute on investment opportunities that further our long-term strategic objectives."
Now, are things so bad? In some ways, perhaps yes (e.g. tough decisions need to be made around government expenditures and entitlement programs - see our earlier post re: debt levels); in others, clearly not (see above and reference links). Fortunately, we see some good signs to counterbalance some of the negative signs. Fundamentals are what matter, both near-term and long-term. Negative psychology may present more bargain values for patient capital.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, June 28, 2010

Japan Growing Again? Good News from Japan and Keeping a Global Perspective

We promise to share more on individual stocks in coming posts. But, on the heels of our How's the Economy Doing post last week, we wanted to briefly relay positive, relevant news from Japan.

The country reported May trade figures last week and a 6/24/10 Journal of Commerce article, "Japanese Exports Surge 32.1 Percent," succinctly summarized salient points. We share bullets directly from the article to again illustrate that global commerce is alive and doing fairly well despite ongoing economic concerns - some emphasis added:
  • Japan posted a trade surplus with the rest of the world for the 14th consecutive month in May thanks to strong exports, especially to the other Asian economies, according to preliminary figures released by the Finance Ministry on Thursday.
  • In May, Japan's overall exports rose for the sixth straight month on a year-on-year basis, surging 32.1 percent to $59.01 billion, while its overall imports increased for the fifth successive month on a year-on-year basis, growing 33.4 percent to $55.41 billion. As a result, Japan posted a trade surplus of $3.6 billion in May.
  • The year-on-year rise in Japan's overall exports in May was led by automobiles, steel and electronic parts, including semiconductors. The year-on-year rise in Japan's overall imports in May was fueled by crude oil, liquefied natural gas (LNG) and nonferrous metals.
  • After falling for 28 months, Japan's exports to the United States rose for the fifth consecutive month in May on a year-on-year basis, growing 17.7 percent to $8.42 billion. After falling for 15 months, Japan's imports from the U.S. also increased for the fifth straight month in May on a year-on-year basis, growing 23.5 percent to $5.76 billion.
  • Japan's trade surplus with the U.S. widened for the fifth successive month in May on a year-on-year basis, expanding 6.9 percent from the same month of last year to $2.66 billion. The year-on-year rise in Japan's U.S.-bound exports in May was driven by automobiles, auto parts and steel. The year-on-year rise in Japan's imports from the U.S. in May was buoyed by aircraft, electronic parts, including semiconductors, and organic chemicals.
  • Japan's exports to its biggest trading partner China rose for seven months in a row in May on a year-on-year basis, surging 25.3 percent to $11.34 billion, while its imports from China rose for four months in succession in the month on a year-on-year basis, jumping 32.2 percent to $12 billion. Japan posted a trade deficit of $647.78 million with China in May. It was the second consecutive monthly trade deficit.
So, even with the second highest debt-to-GDP ratio in the world (please see our prior post here), Japan's economy appears to be moving in the right direction, with a trade surplus to boot. On a related note, last week, Japan also raised its FY 2010 GDP growth forecast to 2.6% from 1.4% - from an AP article
  • Japan's economy will grow at a faster pace in fiscal 2010 than projected at the end of December, the government said Tuesday, predicting real gross domestic product will expand 2.6 percent instead of 1.4 percent. 
  • If the latest projection holds true, it would mark the first economic expansion in three years, with the growth rate topping 2 percent for the first time since fiscal 2006, when the economy grew 2.3 percent.
  • The government said the economic recovery is expected to pick up pace as growth in demand will likely help to boost corporate earnings and improve employment and income conditions, resulting in a positive growth cycle.
To put all of this in perspective, Japan is the fourth largest economy in the world -- from the CIA World Factbook:

There are a number of ways to participate in global growth trends, including ownership stakes in multinational U.S.-based companies as well as investments in foreign companies. One way we expect to benefit from the recovery in global trade is through our ownership positions in container shipping companies Seaspan (SSW) and Global Ship Lease (GSL).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, June 24, 2010

How's the Economy Doing? Under the Hood in June + Portfolio Strategy and Long Ideas

This is an update of our "How's the Economy Doing" periodic series and follows recent posts around economic data and divergent views. As a reminder, while our our investment strategy focuses on bottom-up analysis of individual companies, we think awareness of overall macroeconomic conditions is helpful since trends may impact certain companies or sectors.

In recent months, we shared a number of headlines from the global shipping industry highlighting positive developments. Let's look at some hard data across other sectors:
  • Railroads - from Association of American Railroads on 6/17/10: "For the week ended June 12, 2010, U.S. freight railroads continue to post traffic gains over 2009 levels. U.S. railroads originated 288,973 carloads last week, up 10.5 percent from the comparable week in 2009. However, carloads were still down 10.3 percent from the same week in 2008. Intermodal traffic totaled 223,075 trailers and containers, up 17.7 percent from last year but down 2.3 percent from 2008. Compared with the same week in 2009, container volume increased 20.1 percent while trailer volume rose 5.9 percent. Compared with the same week in 2008, container volume was rose 6.2 percent while trailer volume fell 33.3 percent. Sixteen of 19 carload commodity groups were up from last year, led by an 88.9 percent jump in metals. Combined North American rail volume for the first 23 weeks of 2010 on 13 reporting U.S., Canadian and Mexican railroads totaled 8,463,154 carloads, up 10.2 percent from last year, and 5,940,938 trailers and containers, up 12 percent from last year.".
  • Trucking - from American Trucking Associations (yes, ATA is plural) on 5/28/10 for the month of April (reporting lag): "The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased for the sixth time in the last seven months, gaining another 0.9 percent in April. This followed a 0.4 percent increase in March. The latest improvement put the SA index at 110.2 (2000=100), which is the highest level since September 2008. Over the last seven months, the tonnage index grew a total of 6.5 percent. Compared with April 2009, SA tonnage surged 9.4 percent, which was the fifth consecutive year-over-year gain and the largest increase since January 2005. Year-to-date, tonnage is up 6 percent compared with the same period in 2009. ATA Chief Economist Bob Costello said that the latest tonnage reading fits with a sustained economic recovery." 
  • Air - from IATA on 5/27/10: "The International Air Transport Association (IATA) announced international scheduled air traffic results for April 2010. Passenger demand slumped by 2.4% as a result of massive flight cancellations centered in Europe during the six days in April following the eruptions of an Icelandic volcano. The fall in traffic interrupted the industry’s recovery from the global financial crisis. International scheduled cargo traffic, less impacted by the cancellations, saw the pace of its recovery slow to 25.2% growth in April (down from the 28.1% improvement recorded in March). The scale of the ash crisis saw global load factors drop to 76.9% from the 78.0% recorded in March. Freight load factors also dipped to 55.3% from the 57.1% recorded in the previous month. While March traffic was within 1% of pre-crisis levels for both passenger and cargo, this slipped to 7% for passenger and 3% for cargo in April.
  • Semiconductors - from SIA on 6/10/10: "The Semiconductor Industry Association (SIA) today released an updated industry forecast that projects worldwide chip sales will grow by 28.4 percent to $290.5 billion in 2010. The forecast projects 6.3 percent growth in 2011 to $308.7 billion, followed by 2.9 percent growth in 2012 to $317.8 billion.“Healthy demand in all major product sectors and in all geographic markets drove sales of semiconductors to record levels in the first four months of 2010,” said SIA President George Scalise." We note that this forecast is highly sensitive to GDP and, therefore, can change quickly
  • Residential Housing Permits and Starts - from US Department of Housing and Urban Development on 6/16/10: "PERMITS: Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 574,000. This is 5.9 percent (±2.2%) below the revised April rate of 610,000, but is 4.4 percent (±2.6%) above the May 2009 estimate of 550,000. Single-family authorizations in May were at a rate of 438,000; this is 9.9 percent (±2.1%) below the revised April figure of 486,000. STARTS: Privately-owned housing starts in May were at a seasonally adjusted annual rate of 593,000. This is 10.0 percent (±10.3%)* below the revised April estimate of 659,000, but is 7.8 percent (±9.7%)* above the May 2009 rate of 550,000. Single-family housing starts in May were at a rate of 468,000; this is 17.2 percent (±7.9%) below the revised April figure of 565,000. 
So, aside from volcanic eruption impacting air travel, essentially all other areas are seeing Y/Y growth, including the still challenged real estate sector with positive permits and starts Y/Y. Of course, we have yesterday's news on new home sales - from the AP via Yahoo! Finance (YHOO): "sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits." AND, in the other areas - as we've noted in the past -- we're up against easier Y/Y comparisons.

FURTHER, we now have a growing realization that individuals, corporations, and governments can't borrow into perpetuity. On this point, let's bring in a synopsis from Annaly Capital Management's (NLY) monthly commentary (released 6/8/10):
  • "We begin this month's commentary with the same sentence we used to close our last one: In case anyone needed a reminder, the financial crisis is not over. The uncertainty over Greece has spread to other corners of Europe and prompted deep soul-searching and grudging action by the central planners of their monetary union. Here in the US, Congress gets down to brass tacks on finalizing a financial regulatory reform bill that was conceived in the middle of a crisis with little apparent regard for potentially negative unintended consequences. (One example: the capital required for 5% risk retention by mortgage originators will likely impede meaningful recovery of the securitization market and won't help underwriting standards. Another example: the amendment to require banks to spin out their derivatives operations lives on despite the protests of Bair, Bernanke and Volcker, people who presumably know better.) And signs appear that the economic recovery might be built on sand after all, with the housing and job markets flashing yellow and the risk of deflation rising."
Thus, no question -- as if the ongoing monstrous oil spill wasn't enough -- Annaly succinctly provides a perspective to keep everyone awake at night and negatively pressure Market psychology.

Fortunately, looking at corporate fundamentals, we continue to see favorable results and forward guidance. Our expectation, similar to that espoused by Bob Dole of Blackrock in his WSJ opinion article (and shared in our Maria Bartiromo post), is that better fundamentals can support share prices and, potentially, surprise to the upside in the second half of 2010. Recall that valuations are directly related to underlying earnings, as pointed out by Peter Lynch in the 1990 video we shared the other day. The risk to this view is if psychology becomes sufficiently negative to impact consumer and corporate purchasing/investment behavior. Also, we admit that the job market remains tenuous and may stay this way as a result of (1) creative destruction and (2) incessant corporate streamlining (related to point number one). We'll see what happens.

If you need some "good" consumer news to provide comfort/confidence, look no further than 1Q10 results (*acknowledge: prior to debt crisis) and commentary from Pier One Imports (PIR) on 6/17/10:
  • Comparable store sales growth of 14.3% versus last year’s decline of 7.5%
  • Merchandise margins were 58.6% of sales compared to 54.2% last year
  • Gross profit improved to 37.4% of sales compared to 30.2% last year
  • Operating income of $8.3 million compared to an operating loss of $26.7 million last year 
  • CEO says: "... Store traffic, conversion rate and average ticket all increased during the quarter – our customers are clearly enjoying our merchandise, our stores and our customer service. We experienced strong performance in all merchandise divisions and all areas of the country. Our confidence level is high and we know how to keep the momentum going...." 
AND from Select Comfort (SCSS) on 4/21/10:
  • Net sales for the quarter totaled $158.0 million, an increase of 13 percent on same-store growth of 29 percent, compared to $139.6 million in the first quarter of 2009. 
  • The company reported net income of $7.8 million, or $0.14 per diluted share in the first quarter of 2010, compared to a net loss of $2.7 million, or $0.06 per diluted share, in the first quarter of 2009.
  • CEO says: "... We took advantage of an improving consumer environment and positive in-market testing to increase media investments behind our proven value messaging. The result was sales growth across all company-owned channels. While still cautious about macro-trends for the balance of the year, we anticipate an improved outlook for 2010 based on our continuing momentum, and consequently are increasing our earnings guidance."
The improved operating performance for both companies is reflected in incredible share price recoveries over the past year:

Scratching your head? Yes, the results from Pier One Imports and Select Comfort might be considered counterintuitive relative to the steady flow of negative media headlines around the weak consumer and economy. We come back to something we wrote in our long thesis for BIDZ (BIDZ) last August:
  • People like to shop – while the average American consumer is struggling, we submit that Americans will always be consumers, with some arguably addicted to purchasing products from TV channels such as QVC.com (LINTA) and HSN.com (HSNI), as well as Web sites like Bidz.com. A growing middle class elsewhere in the world also brings more consumers.
From a portfolio perspective, our strategy hasn't changed: as always, we need to pick our spots with a preference for very low multiples of current earnings and growth.

We continue to sleep well owning franchise type businesses that are currently generating significant excess cash flow and have limited to no debt. As in the past, examples in this category include eBay (EBAY), PetMed Express (PETS), 1-800-Flowers.com (FLWS), and Weight Watchers* (WTW, *has what we see as a manageable debt load). Click company name for our prior commentary.

Finally, per our Approach caveat #2, we may sometimes purchase out of favor or off-the-radar companies that offer a meaningful margin of safety relative to current liquidation value and/or normalized asset values. There remain names that have not participated in the torrid market rally, but offer what we believe to be significant margins of safety. Our ownership positions in container shipping companies Seaspan (SSW), Global Ship Lease (GSL), aircraft leasing company Babcock and Brown (FLY), and waste services company Casella Waste Systems (CWST). Micro-cap Sonic Foundry (SOFO) also falls into this bucket because we continue to believe the company is trading at a meaningful discount to the private market value that would be assigned to Sonic's growing Mediasite franchise by an informed strategic buyer.

Happy investing,

Jeffrey Walkenhorst


© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, June 22, 2010

SSW/GSL: More on Positive Container Trends and "Unprecedented" Box Shortage; TAL Insiders Selling Into Strength

Last Tuesday, we again shared various positive headlines from the shipping sector, including the following:
  • China Breaks Box Traffic Record Container traffic through Chinese ports hit an all-time monthly high of 12.44 million 20-foot equivalent units in May as the nation's foreign trade surged by nearly 50 percent from a year ago..
A few additional points from the article:
  • The record volume was up 21.9 percent from May 2009 and 16.6 percent higher than the same month in 2008, according to Alphaliner, the Paris-based container shipping consultancy.
  • Six of the top 10 ports booked record volumes, led by Ningbo which reported a 52 percent increase to 1.23 million TEUs. Shanghai, Guangzhou, Tianjin, Xiamen and Dalian also recorded all time high monthly traffic.
  • China's exports rose 48.5 percent in May from a year ago and imports were up 48.3 percent, according to Chinese customs.
The recovery defies doom and gloom fears that Europe is going to drag down the world. Moreover, the news is positive for our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL), through which we gain exposure to global trade and stand to benefit from likely long-term growth trends. Of course, we acknowledge that these are asset-heavy companies operating in a cyclical industry (*but with stable long-term business models) where -- admittedly -- our ownership position runs counter to our preference for high margin, asset-light companies such as eBay (EBAY) and Weight Watchers (WTW). We own the shippers as asset recovery plays offered by the Market at low multiples of earnings and distributable cash flow that, we believe, provide a margin of safety. 

Here's a bit more on current events in the sector. Amazingly, as "box" volumes surge, shippers in Asia and elsewhere find themselves short of containers to ship goods - see this commentary from The Journal of Commerce as well as these stories -
A direct beneficiary from the container imbalance is TAL International Group (TAL), which we referenced in the past regarding container history since 1985. TAL leases containers to major shipping lines and we track the company for insights into the space. Not surprisingly, investors continue to bid the stock higher: 

Even with the run, shares of TAL are not necessarily overvalued depending upon perspective (choose your preferred metrics and target fair value range) - from Yahoo Finance:

Market Cap (intraday)5:814.71M
Enterprise Value (Jun 22, 2010)3:1.99B
Trailing P/E (ttm, intraday):13.39
Forward P/E (fye Dec 31, 2011)1:12.75
PEG Ratio (5 yr expected):1.22
Price/Sales (ttm):2.42
Price/Book (mrq):1.93
Enterprise Value/Revenue (ttm)3:6.00
Enterprise Value/EBITDA (ttm)3:8.38

TAL management highlighted as much at the company's recent analyst day (link to presentation). Still, we retain our preference the the container shippers, which -- in our view -- have yet to be fully embraced by the Market. FURTHER, TAL insiders and major holder, The Fairholme Fund (Bruce Berkowitz), are taking advantage of recent market strength to reduce exposure - also from Yahoo Finance (click Yahoo link to see more):

10,000DirectSale at $21.82 per share.$218,200
5,500DirectPurchase at $20.64 - $20.7 per share.$114,0002
15,000DirectSale at $21.05 per share.$315,750
15,000DirectSale at $21.72 per share.$325,800
15,000DirectSale at $22.89 per share.$343,350
15,000DirectSale at $24.22 per share.$363,300
15,000DirectSale at $23.08 per share.$346,200
15,000DirectSale at $23.30 per share.$349,500
Beneficial Owner (10% or more)
21,800IndirectSale at $22.66 per share.$493,988
Beneficial Owner (10% or more)
18,900IndirectSale at $25.20 per share.$476,280
Beneficial Owner (10% or more)
32,300IndirectSale at $25.27 per share.$816,221
Beneficial Owner (10% or more)
20,600IndirectSale at $24.86 per share.$512,116
Beneficial Owner (10% or more)
14,000IndirectSale at $24.86 per share.$348,040
Beneficial Owner (10% or more)
20,100IndirectSale at $24.79 per share.$498,279
Beneficial Owner (10% or more)
17,980IndirectSale at $24.44 per share.$439,431
1,000DirectSale at $23.95 per share.$23,950

We always prefer to see insider purchases rather than sales. Nonetheless, we think continued improvement in fundamentals bode well for TAL as well as our SSW and GSL.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long GSL, SSW, EBAY, WTW.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, June 21, 2010

The Future - What Would Peter Lynch and Sir John Templeton Say? Short Clip Provides Timeless Counsel

Last week, we shared concerns around high public debt levels that may well lead to slower economic growth for over-levered countries such as the U.S. In this post, we re-orient away from well-publicized risk factors to focus on common sense investing strategies.

Back in February, we shared a video featuring Peter Lynch in 1982 and Philip Carret in 1995 (thanks to Youtube and WSW). Below is another gem of a video we've been waiting to share until market fear and uncertainty resurfaced. The 1990 video is also from Wall Street Week with the late Louis Rukeyser. In our view, the 11 minute clip is worth revisiting often to glean and reinforce significant insights on how and why to pick companies (stocks).

The video features Peter Lynch at age 46 and the late Sir John Templeton at age 78. A few nuggets of wisdom:
  • Peter Lynch: there is a direct relationship between earnings and share price; know what you own (don't buy thin air); be patient - most money is usually made in third, fourth, or fifth year. "Almost everybody has the brain power to make money in the stock market. The question is, if you have the stomach and are willing to do a little bit of work." 
  • Sir John Templeton: average holding period of five years - be patient; "very rarely is any share valued for it's true price, it's true value. In a single year's time, they go 50% too high, 50% too low...." 
  • This is priceless: "The main thing that people need to learn is that selecting assets is totally different from almost every other activity. If you go to ten doctors and they tell you the same medicine, that's the thing to take. If you go to ten engineers to build a bridge, they tell you the same thing, that's the thing. If you go to ten investment advisers and they pick the same asset, you better stay away from it!"

Despite ongoing worries and approximately flat market performance during the first decade of this century, we suspect these investment legends would relay similar counsel today. There are always opportunities, particularly for those willing to remain patient and, as Mr. Lynch notes, committed to at least a modicum of ongoing research.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Thursday, June 17, 2010

Economics: Debt to GDP Ratios, the U.S. Predicament, and Japan's Unemployment Rate - Somehow, Life Goes On? Yet, We Can't Borrow into Perpetuity

In recent posts, we presented data on positive corporate fundamentals and offered other commentary that points to a more bullish outlook. Generally, we focus on individual companies and their underlying fundamentals. Our goal is to buy dollars for fifty cents (or better), then wait for the Market to come around. However, we also can't operate in a complete economic vacuum, oblivious to what's going on around us. For this reason, we offer our "How's the Economy Doing" series (which we will soon update).

Given recent events in Europe and stateside, an increasing concern is government debt levels. A common way to look at this is through public debt to GDP levels and we can find this data through The World Factbook from the CIA. Here are the top 15 using 2009 estimates (click to enlarge):

The U.S., not in the top 15 above, ranks 42nd according to CIA data with debt to GDP of 53%. Note that Japan is second at 192%. For another view, we came across this visualization from Visual Economics (click to enlarge; data source is also CIA World Factbook, although the figures don't match):

Higher levels of debt with increasing obligations are a real problem if counterparties lose faith that debt can be serviced and, ultimately repaid (or rolled over). Further, high debt levels can crowd out investment that is critical to driving productivity gains and growth.

Drilling further into the U.S. predicament. We often watch and/or listen to Consuelo Mack's weekly WealthTrack program and highly recommend the show. She featured Rob Arnott the other week, founder and CEO of Research Affiliates, and his commentary neatly summarizes current (and future) challenges. -- from the transcript:
  • CONSUELO MACK: So Rob, what are the bigger seeds that have been planted that you think we’re going to have to face at some point?
  • ROB ARNOTT: Last fall we wrote a piece entitled “the 3-D hurricane.” It talked about deficit, debt and demographics. We’re spending more than we produce as nation, which is leading to a buildup of debt to be paid for by whom, a shrinking population of workforce as a percentage of the population. So how bad are each of these problems? Deficit: 10% of GDP last year. There are those who say, don’t worry about it. It’s a one-off. We have a global financial crisis; we need to spend this money to spend our way out of this mess. I could almost buy that if I believed that it was a one-off. Simple fact is that the 10% was tip of the iceberg. The accounting that got us there would have made Enron execs blush. You have off-balance sheet spending, that’s the pre-funding of social security and Medicare trust funds and a few other items. They’re off balance sheet, but they’re prefunding future obligations. They are legitimate spending. That takes you to 14% of GDP. You have the GSEs, government-sponsored entities: Fannie Mae, Freddie Mac and several others. Those take us to 17% of GDP. They’re now backed by full faith and credit of the U.S. government.
He then goes on and, after more detail, gets to this:
  • .... We have a government and a society addicted to debt-financed consumption. That leads to the debt level. The debt level for the national debt officially is approaching 90%. That doesn’t include state and local and it doesn’t include GSEs.
  • CONSUELO MACK: 90% of total output.
  • ROB ARNOTT: Of GDP. And if you include state and local and GSEs, you’re now up to 143%. Greece, as the crisis has been blowing up there, has been in the 120% range. We’re above 140%. If you add in the unfunded portion of social security and Medicare, we’re at 420% of GDP. The corporate debt is 320%. Household debt is 100% of GDP. Combined private debt is another 420%, the largest in the world. So we have aggregate debt and unfunded future obligations eight times our annual income. If you borrowed eight times your annual income, how comfortable would you feel about your ability to service that debt in the years ahead?
Thus, Mr. Arnott provides an alarming summary of just how big our big government obligations are relative to more widely discussed figures. On top of the challenge of continuous deficit spending, large entitlement programs are seemingly poised for failure under aging demographics. Clearly, something needs to change -- someday, politicians will need to do unpopular things: cut spending (programs and jobs) and benefits. Will they do this? Hard to say. Rhetoric is cheap and action can be costly (beyond merely the monetary component).

HOWEVER, one thing we find interesting is the following: Japan's debt to GDP is the second highest in the world (based on the CIA data) and, yet, somehow the Japanese seem to get along pretty well even in a stagnant economy with a shrinking population. Not just the basics - food, water, shelter - but the populous enjoys a highly productive, technologically advanced, modern society. AND, even with the downturn, unemployment remains around 5% (down from a peak of 5.6% last year, though up from a low of 3.6 in 2007 - *acknowledge cultural and business differences that support higher employment):

Extremely high debt levels, as in Japan, are suboptimal from a growth, savings, and investment standpoint. This isn't where a country wants to be, particularly ever dependent upon foreign borrowing to finance consumption and government spending. We don't have the all of the answers to this challenging scenario, but perhaps Japan's experience is a sign that one way or another, we'll also survive. Of course, we can't keep borrowing more and more into perpetuity.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, June 15, 2010

What's Happening in the Shipping Market? On Balance, More Good News; Bodes Well for Everyone

We continue to keep tabs on global shipping news because of our interest in broader economic trends and, importantly, our container shipping companies Seaspan (SSW) and Global Ship Lease (GSL). Accordingly, in the spirit of our Don't Fret - Plenty of Good News Out There post from early May, we again share a number of recent headlines from the sector (all subsectors, not merely containers).

From Lloyd's List, highlighting order/purchase activity and volumes:
 From The Journal of Commerce, highlighting traffic:

China Breaks Box Traffic Record 
Container traffic through Chinese ports hit an all-time monthly high of 12.44 million 20-foot equivalent units in May as the nation's foreign trade surged by nearly 50 percent from a year ago..

 Marseilles Fos Container Volume Climbs 16 Percent 
Cargo handled at leading French port Marseilles Fos through May reached 36.6 million metric tons with container throughput contributing a 16 percent increase in both tonnage and 20-foot equivalent units, the Marseilles Fos Port Authority said Monday.

LA-LB Import Volume Grows 18.3 Percent 
Containerized import volume into Southern California ports jumped 18.3 percent in May, as the shipping recovery at Los Angeles and Long Beach picked up speed and retailers pushed more goods out of Asia at a faster pace.

Frankfurt Cargo Hits Record High in May 
Frankfurt airport's cargo traffic hit an all time high in May after climbing nearly 40 percent from a year ago, driven by soaring shipments from Asia.

June Container Imports Seen Rising 15 Percent 
Import cargo volume through the nation's nine busiest container gateways is expected to post a year-to-year increase of 15 percent in June and rise by double digits into this fall, the National Retail Federation and Hackett Associates said in their monthly Global Port Tracker.

To be sure, there also remain some negative headlines scattered in Lloyd's and the JOC. Yet, we continue to see more positive than negative news across the sector. In our view, this bodes well not just for our shipping companies, but for the global economy at large.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Sunday, June 13, 2010

Link to 2010 Noble Financial Conference Catalog (Captured with Mediasite)

We mentioned in our January post, Who On Earth Needs Mediasite?... Did Your Firm or Organization Get the Memo?, that Noble Financial is a major proponent and user of Sonic Foundry's (SOFO) Mediasite solution to capture conference events. We also mentioned that Sonic Foundry hosted a Webinar last fall in which the broker-dealer explained why they use Mediasite to capture all of their events:
Judging A Book By Its Cover: What Does Your Webcast Say About Your Event and Your Brand?

Last week, the firm held the Noble Financial Sixth Annual Equity Conference (click for link to full catalog) and the event was again captured with Mediasite. A variety of companies, large and small, presented at the conference. We recommend sorting the catalog "by name" to see presenting companies listed in alphabetical order.

A number of companies of interest to us were in attendance (click to launch presentation), including:
We previously discussed PetMed Express (PETS) in some detail, but have yet to comment on Dynamex (DDMX) -- we may come back to this delivery/logistics provider in the future. We briefly mentioned International Speedway (ISCA) in conjunction with Churchill Downs (CHDN) and World Wrestling Entertainment (WWE) in conjunction with j2 Global Communications (JCOM). Note that a j2 competitor, Easylink Services (ESIC), also presented at the conference.

To this point, Noble remains of the few Wall Street firms using Mediasite for Webcasting. Our view: always excellent to clearly "see" management along with well synchronized audio and slides (or other digital content). Accordingly, more firms should move down this path and could potentially improve client relations by doing so (better end user experience). Outside of finance, many are "getting the memo," including InfoComm and major companies such as Autodesk (ADSK) (although they've been aboard for some time now).

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO, PETS, CHDN, JCOM.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, June 9, 2010

Maria Bartiromo Says "Get Out of the Way" - We Say: There's Always Something to Worry About, Stay Focused

We watched NBC Nightly News last Friday and happened to catch Maria Bartiromo's one minute market update. After a quick synopsis of various, well-known negative data points -- "So much nervousness for investors to digest" -- her conclusion: my advice would be to "get out of the way" of this "a nervous period." In other words, stay on the sidelines or sell now and come back later.

She may well be right -- maybe the market will remain on a downward path; who knows for sure? Yet, the world always has problems. If it's not one thing, it's another, with media and market pundits fueling the currents on the upside and the downside. In this way, mainstream media often spoon feeds the buy-sell-buy-sell mentality where investors only "rent" rather than "own" stocks in hope of making a quick buck in days, weeks, or months.

In our view, the short-term truly is a gamble and making real money with this casino mindset is near impossible. From our own experience, aside from the "easy money" of 2009 made across nearly all sectors and in especially exceptional recoveries for companies such as Dollar Thrifty Automotive Group Inc. (DTG), most money is made over the course of years, not months or even a year or two.

This again brings us back to advice from the late Philip Carret, who we can't help but keep mentioning in our posts. Some of his guidance from the insightful 1999 article (previously shared):
  • "Pick stocks for what they'll do in the coming years, not the coming weeks. Only invest in stocks you think are going to be worth more in five years. Never mind what the stock is going to do next week or in the next few months.
  • If you buy stocks because of what you hope will happen next week, you are trying to be a market timer. I never knew anyone who could time the market consistently, so why even try?
  • How do you know if a stock will be worth more in five years? You don't. But the odds favor the stock being worth more in five years if it is from a company with a good track record, where the management owns a significant stake in the company and the balance sheet is strong."

So refreshingly sensible and akin to our approach at Common Stock $ense.

Back to Ms. Bartiromo - if you listen to the clip, you'll hear her hedge her bets by also saying something to the effect that you need to have confidence in America and we'll pull through this. We're not sure what she was saying several months back, but we suspect she might have been more sanguine when overall market sentiment was more favorable prior to the Greek crisis and the oil disaster. No question, market psychology and commentary can turn on a dime.

In fact, it's possible that several months from now, the Market will embrace "The Bullish Case for U.S. Equities" espoused by Bob Dole of BlackRock in his 6/8/10 WSJ opinion article. Some may say, "hey, he's an equity guy only talking his own book," yet his views appear balanced and consistent with our recent commentary highlighting favorable corporate fundamentals. A few excellent points directly from his article that few seem to be paying attention to:
  • At the beginning of this year, the consensus expectation for 2010 U.S. GDP growth was around 2.6%. Today it is 3.5%. Expectations for Europe have slid to 0.5%-1.5% from 1.2%-2%. Cyclical recovery appears much stronger in the U.S. than in other developed economies, creating an important tailwind for our stocks.
  • What about emerging markets? The largest of the emerging economies (Brazil, Russia, India and China) have advanced their global GDP share to 15% from 7% since 1995. But their relative economic expansion has come at the expense of Europe and Japan—not the U.S. Fifteen years ago, the U.S. accounted for 25% of global GDP. Today? Still 25%. Europe's share, however, has fallen to 21% from 25%, while Japan's has plummeted to 9% from 18%. What's more, emerging market prosperity is to our advantage: It hinges on increasing domestic demand that translates into a larger market for U.S. goods and services.
  • Corporate profits could reach a new record high in this year's third quarter. Free cash flow for nonfinancial American companies is also exceptionally high—cash on the balance sheet is close to 11% of assets, a 60-year high. And high cash levels are already generating dividend increases, share buybacks, capital investments and M&A activity—all extremely shareholder friendly.
To Ms. Bartiromo's credit, she's right - things may not be fantastically great. Yet, things really could be much worse and, as Mr. Dole points out, there are numerous positives to consider. Also, remember that lower equity prices imply more available bargains -- it's always better to buy merchandise when it's on sale. Even better if it's severely marked down.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Tuesday, June 8, 2010

More, Better, Now: "Get Your [Economic] Indicators" - Mostly Okay Except for those Pesky Mortgage Delinquencies

Our friend and former colleague, John, authors a first-rate blog focused on marketing called more better now - Going, doing, making things happen (& etc.). We recommend giving a look as he shares a number of great images, ideas, strategies, and commentary.

On 5/26, in Get Your Indicators, John relayed a snapshot of a helpful visualization from Russell Investments of key economic and market indicators. We include this graphic for reference here:

Despite persistent and potentially mounting economic worries in the Market, nearly all indicators are tracking in the normal range (for what normal is worth). The one indicator that is an extreme outlier from the "typical" range is mortgage deliquencies, which isn't a huge surprise given the size of the recent real estate debacle (thank you easy money and all facilitators, including main street). Drilling further on the Russell chart, we quickly and vividly see just how much of a problem real estate remains for the U.S. economy:

Suffice to say that real estate will remain a drag as the economy languishes forward, with prices likely under pressure as supply continues to exceed demand. Fortunately, we see stabilization and pockets of strength in other areas. As a side note on this topic, we are way, way overdue in updating our "How's the Economy Doing" series. Soon.

Thanks to John for bringing the Russell visualization to our attention.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Monday, June 7, 2010

Sonic Foundry: Customer Insight into How/Why Organizations Evaluate (and Choose) Mediasite

We wanted to share a brief update on Sonic Foundry (SOFO). In our 5/1 post, Sonic Foundry: Déjà Vu as Pot of Gold Remains Around Corner? we relayed management guidance calling for large deals to begin boosting results this summer. As we await confirmation that the Mediasite franchise is scaling to plan, some of best fodder to provide us comfort comes from customer commentary. In addition, we can also look to event capture activity highlighted in Sonic Foundry's spring newsletter:

Recent events webcast by Sonic Foundry Event Services
- 2010 Virtual Symposium: Education for Everyone - Expanding Access through Technology
- Bersin & Associates' IMPACT 2010
- InfoComm 100
- National Multiple Sclerosis Society & American Academy of Neurology

On the customer commentary front, we can look to this recent Webinar:
  • Evaluating Lecture Capture Total Cost of Ownership. Get an inside tour of the objective process University of Toledo created to evaluate lecture capture solutions. See how they weighed different methods of course capture, what criteria they used to compare vendors and how total cost of ownership became a key component in guiding their selection.
In the Webinar, Deirdre Jones of the University of Toledo shared a number of slides, as well as supporting documents, explaining what the university was seeking in a lecture capture system. Please see links in the Webinar to download primary supporting attachments - we include several snapshots below.

"Business requirements" (click to enlarge):
"Vendor Questions and Answers":

Excel spreadsheet of "Mission Related Features":

We share the Webinar and her extensive due diligence materials to illustrate the myriad institutional requirements for large-scale, enterprise-grade rich media capture solutions. Considering all of the necessary front- and back-end features in the proper context helps an organization answer the question we presented in January, Who on Earth Needs Mediasite..., and brings us back to our original thesis from May 2009:
  • (1) Sonic Foundry/Mediasite is far along the learning curve with (2) intellectual property protection, and (3) very satisfied, captive customers that face high switching and search costs. Points (1) – (3) are both related to and strengthened by (4) economies of scale and (5) leading market share.
Specifically, recall the "background" we shared related to point number three:

(3) very satisfied, captive customers that face high switching and search costs


  • Information technology purchasing cycles can be long and, in higher education, are typically very long. Institutions want to make certain that a solution provides (1) attractive returns on investment, (2) properly integrates with and augments existing systems, and (3) includes reliable customer support as well as a credible roadmap for future development. Benefit to long sales cycle: once a solution is in, it typically stays in.
  • Aside from initial capital investment in the solution and recurring maintenance costs, customers invest time and resources in solution management, operation, and training.
  • Given upfront and ongoing hard and soft costs, institutions find comfort in numbers – as the reference base grows, institutional buy-in becomes easier.
The bottom-line is that understanding how a potential solution meets current and future institutional needs is critically important. Via the Webinar, we were happy to hear that -- following a thorough evaluation process -- Mediasite met/meets these requirements for University of Toledo. We've seen the same results elsewhere, both in education and in government. Recall The Uniformed Services University of the Health Sciences (USUHS) decision last fall (we relayed in September):
  • USUHS has determined that Sonic Foundry is the only reasonably available manufacturer to meet the government’s requirement:
  • USUHS has determined that the Sonic Foundry Mediasite RL Recorder is essential to the Government’s requirements and market research has not produced any other companies’ products that meet the agency’s needs.
Per an earlier post where we mentioned some similarities to Philip Carret's water meter thesis, there are many reasons to view Mediasite as an long-lived appliance that becomes an integral, mission-critical system within an organization. We also relayed this sentiment in comparing Mediasite to a jet engine last year. Finally, when reviewing potentially competitive solutions to Mediasite, we continue to see apples and oranges.

While weak education budgets remain a noteworthy risk factor, we think evidence points to continued Mediasite adoption, revenue growth, and -- importantly -- positive earnings and cash flow.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer

Wednesday, June 2, 2010

POOF - Now You See It, Now You Don't - Shares of Youbet Disappear as Churchill Closes Acquisition

We've been tracking Churchill Downs' (CHDN) proposed acquisition of Youbet.com (UBET) since the deal was first announced last November given our ownership of Youbet.com. For reference, we posted our detailed Youbet.com long thesis in spring 2009.

Shares of both companies retreated in recent weeks along with the broader market and potentially on news that the companies extended "the outside date for termination of their merger agreement" into 2011. The latter may have raised suspicion among some investors/traders that DoJ approval was not imminent despite management reiterations that the deal should close in 2Q10. We argued against this stance.

Well, sure enough, the transaction became a done deal as of today, somewhat surprisingly with no prior notice of DoJ approval. Management commentary and deal mechanics from Churchill Downs' press release:
  • Churchill Downs Incorporated (“CDI”) (NASDAQ: CHDN) announced today that it has completed its merger with Youbet.com, Inc. (NASDAQ:UBET).
  • “We are happy to now be able to move forward and continue the development of new technology-enabled features and services that Youbet.com and TwinSpires.com customers want, and that can attract new customers to racing,” said Robert L. Evans, CDI President and Chief Executive Officer. “In a recent survey we conducted, we learned that 34 percent of new TwinSpires.com accounts were established by people who say they have never wagered on thoroughbred racing previously. We find that an exciting development for racing and for the future growth of our online wagering business.”
  • As a result of the merger, each share of Youbet.com common stock was converted into the right to receive 0.0591 shares of CDI stock and $0.99 in cash. After the new shares are issued, CDI will have 16.48 million shares outstanding. CDI issued approximately 2.70 million shares and paid approximately $45.26 million in cash to the Youbet.com stockholders in connection with the merger. Youbet.com stock will no longer trade on the NASDAQ Capital Market and will be delisted.
The original ratio of 0.0598 was slightly reduced to $0.0591 while the original cash payment of $0.97 was increased to $0.99. Based on Churchill's $32.85 closing price today, we estimate the total consideration paid to Youbet shareholders at $2.93, well above Youbet's closing price of $2.48. Of course, it's now possible that shares of Churchill may move higher with deal uncertainty lifted.

With shares no longer trading, we're not sure what happens with all of the shorts:
Shares of Youbet are up in after hours trading this evening, but we're unsure of volume. Perhaps any remaining short position will be transferred to a CHDN short position with the $0.99 cash payment per UBET share immediately being covered (repaid). While this isn't our problem, we're curious of the solution.

It would have been nice to observe the market reaction to the DoJ news, but so be it. Onward.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long UBET.
© 2010 Jeffrey Walkenhorst
Please see important Risk Factors & Disclaimer