The Market Is In Despair, So Now What?

It seems like every day more and more economic indicators come out in disappointing fashion and the market acts accordingly. The Dow has dropped almost 650 points since August 9^th and the S&P has been equally affected. This is indeed significant but now one must asked themselves what to do with their money with such a lack of predictability in the equities market.

You could find yourself asking: is it too late to short particular stocks, because we’ve seen how well the CRM short has worked; is it too soon to call the market oversold, maybe from a resistance level perspective; is it too late to catch the gold train, I personally think so but there is no creditability to that notion; is it too soon to call a top on wheat/agricultural ETFs, who knows, there’s the Russian issue, along with the chance that two hurricanes are going to ravage the eastern seaboard in the near future. We’ve even seen the SIRI perma-bull selling his stake, or at least a large part of it, causing a ruckus in the small community that is SIRI followers.

So what is one to do? You could look at boring fixed-incomes, especially strong corporate bonds or take some risk on international debt offerings. But one could also look at the industry leaders that have been trading strongly within range over the last few weeks of mayhem. And yes, I know that this is going to read just like a dividend aristocrat article (though not all 5 of these meet the criteria), but that’s okay with me because right now they may be the best way to go. With that said we’ll look at the graphs of 5 very strong companies. Not too much analysis will be presented as these companies are very well known and stand on their merits.

McDonald’s MCD – McDonald’s is currently trading around their 52 week high at $73.19, well above their moving averages, and really shows no signs of stopping. Their dividend is at a respectable 3%.

Johnson & Johnson JNJ – J&J has been showing some strong resistance recently. It is mainly held by dividend appreciators who buy up more as the price drops keeping it from falling too far (this is evidenced by the immovable 200 day moving average). Currently priced just below $58 means its yielding 3.7%.

Altria Group MO – People smoke through recessions and Altria is the play to be made in the industry. It trades within a fairly tight range and pays a very nice dividend of 6.2%.

Walmart Stores WMT – Walmart is similar to JNJ in the fact that their 200 day moving average is relatively stable. There has of course been much talk about how one would not have made anything holding Walmart over the last decade, but of course this does not account for their steady dividend, and the fact that their earnings have been increasing over that time is no secret. Walmart is the only stock on this list yielding under 3% and they are currently at 2.4%.

Verizon Communications VZ – Verizon may rub some people the wrong way in that their long term future is nowhere near as certain as the other stocks on this list, but for right now they have been relatively stable, especially after their spinoff of Frontier FTR and latest earnings release. At $29.66 they are yielding 6.5% with room for some growth.

-Jeff

Looking Down The Tracks...At Slow Growth

In a previous article we looked at the movement of US freight rail traffic and compared it to GDP in an attempt to gauge future growth of the economy. Today we will examine how rail traffic has performed over the past couple of months in order to gain a better perspective for growth in the coming months. In the August Rail Time Indicators Report published by the American Association of Railroads, seasonally adjusted US freight carloads were up 3.2% from June. In the most recent release for the week ending August 7, the number of freight cars originated was 284,507. This is down over 5% from the prior week's huge, and obviously not sustainable, 300,292 carloads, which was the largest weekly total since November 21, 2008. Rail carloads originated have remained subdued, especially after last week's disappointing reading. We were hoping the recent uptick would serve as a positive sign, but our worries have been confirmed 2 fold this past week, by both this reading and the monster Trade deficit. We will examine the trade gap and a few other indicators in an attempt to decipher the future path of US economy growth.

Inter-modal volume has continued to rise, while carloads originated have remained steady, at best. Inter-modal volume is nothing more than the number of carloads that are transferred from 1 mode of transportation to another i.e. from ships to trains. The inter-modal volume for the week ended August 7 was 231,208 carloads, about 1% off from the prior week's 232,895 which was the largest weekly result since October 17, 2008. According to the AAR, "In the first six months of 2010, import TEUs (twenty-foot equivalent units) at six major ports - Los Angels, Long Beach, Savannah, New York and New Jersey, Seattle, and Norfolk - rose 18.2% compared with the first six months of 2009. Export TEUs rose 17.4%." This increase of inter-modal volume was consistent with the June surge in imports. As one can see, I am calling for a slight widening of the trade gap, a bit over $51.0 billion, which will be led by another increase in imports. This is clearly what the inter-modal traffic is showing us. The increase in inter-modal traffic is an important barometer because it tells us that demand is picking up WITHIN in the US however the same cannot be said for our international trading partners (evident from the trade gap).

Now let us look at housing starts and the monthly average of lumber carloads. There was a slight uptick from June into July, which allows us to forecast a similar slight up tick in housing starts or even a possible slowdown (which makes sense considering it can only move up or down, but I digress). I don’t think the latter is likely, since these two series generally correlate pretty well and that overall rail volume picked up nicely in July. What does this tell us? Well basically the housing market is going to remain stagnant for some time now and we should all begin to accept this fact. There have been 0 signs of life from this extremely important industry, including Monday's reading of 13 from the NAHB.

Looking at the big momma, GDP, we can see that activity is clearly slowing down. With this latest reading for the trade gap, I am inclined to cut my GDP forecast almost in half, to around 1.3%. However, this would be in direct violation of the rail volume trend, which is rising considerably. Let it be known that this is the quarterly average for rail loads originated. It should also be said that GDP has NEVER strayed this far for the trend of rail volume, which leads us to conclude two important points: 1. That the next two revisions to Q2 GDP may not be as significant as we originally thought and 2: That we are in a new normal (i.e. tremendous stimulus, government intervention ect) and that our old friend, rail volume, may not be as reliable in forecasting GDP as she once was.

These next few reports will give us a gauge on how demand is behaving here in the US. My advice,would be to short Treasuries even though slow growth is going to persist from some time. My reasoning...what goes down, well, must come up.

-Andrew

Problems at Wendy’s: You Know When It’s Real

Times are still tough in the world and this could indicate reasonable prosperity for cheap fast food establishments with dedicated customers, but some, like Wendy’s/Arby’s, cannot just sit back, and must rather innovate and fight for continued market share. A recent announcement has been made regarding their agreement with Wenrus Restaurant Group Limited to open 180 combined Wendy’s/Arby’s restaurants in the next 10 years in Russia. This is to be part of a 400 store international expansion in the aforementioned Russia, the Caribbean, Japan, Brazil and China. This would represent a 4% increase in total number of stores, which as of April stood at 10,231. Of these, 6,546 are Wendy’s and 3,685 are Arby’s.

At this point international success would mean very good things since North American sales have not been so hot. Same store sales for the quarter at Wendy’s were only down 1.7%, but Arby’s was down 7.4%. Investors fret not because margins are improving and the most recent month was only down YoY because of the 2009 unveiling of boneless wings at Wendy’s. I’m not even sure if I’m being sarcastic in making this statement. I had tried the wings back then and was not that impressed, and the 2010 month they are comparing the wings to includes the introduction of premium bacon cheeseburgers, a slap in the face to their other 20 burgers featuring bacon (there will be more on consumer sentiment later, and by consumer sentiment I mean my sentiment).

The good news is that WenArb saw 3.2% growth in EBITDA and that the execs are optimistic on future sales and growth initiatives. Wendy’s drop on in same store sales has been parred by the popularity of their new premium salad line. The quality of these salads is actually quite high. Even better is the re-emergence of the spicy chicken nuggets and the small frosty on the dollar menu coming in September. In high school I had a standard order at Wendy’s that included a 5 piece nugget, junior bacon cheeseburger with no tomato, medium fry, and a small Frosty; this ran for $4 plus tax. The same order now would be over $5; that’s 25% increase in price in 5 years, while Burger King double cheeseburgers and McDoubles have decreased in price.

While Wendy’s has been raising prices, the ever-over-priced Arby’s has been trying to shed themselves of this particular opinion. In August and September the price of a junior deluxe roast beef meal will be reduced to $2.99. This is a good deal, since the meal for a regular used to be up around $5.50. One of Arby’s highest priorities right now is improving value perception. Taken from their earnings call they are working on the following areas: “serves food made with fresh ingredients, has great tasting food, affordable to eat often, serves high quality food, offers premium quality sandwiches and good value for the money.” Some of this seems very cookie cutter, and applicable to any fast food restaurant, but some things contradict. The fresher ingredients get, the more expensive they become and it seems that Arby’s may be banking too much on the public caring just how fresh their food is. I would think that to most, fast food is fast food, the general freshness level will be the same at McDonald’s, Burger King, or Wendy’s; and nearly everything is coming out of a freezer in the back (it is this sort of thing that sets Panera and Chipotle apart). Aside from all of this, Arby’s says that the dollar menu is here to stay, even though I think the public is aware of just how little they are getting for a dollar. At other establishments where lets say there is a small, medium, and large offering of a product and a dollar menu is introduced, the small becomes the dollar menu item. At Arby’s they made new cups to put the Jamocha shake in for a dollar, and I am fairly sure the same can be said for the fries (we’re on to you Arby’s). They will also be offering a price cut in core items like the Beef and Cheddar. Arby’s has unveiled a 30 items under $3 marketing campaign in test markets. This may help get people through the door but it has yet to be quantified.

Perhaps the biggest news to come from all of this is that Wendy’s, like Subway and Sonic, will begin tackling the beast that is the breakfast market. They have already begun to do so in Pittsburgh, Kansas City, and Phoenix and hope to take this national in 2011. They claim to have a fresh egg and cheese muffin offering, panini sandwiches (I’m guessing like the ones at Dunkin Donuts), and an oatmeal bar, not sure if this means bar as in Nutri Gran or bar as in station to put a bunch of stuff on top of oatmeal, like a baked potato bar. Wendy’s also claims to have taken great strides in finding a premium coffee supplier. This should not be that difficult since I’d assume they still have their old Tim Horton’s contacts available. WenArb is also remodeling several of their US stores, like McDonald’s has done. They hope to have completed 100 of each by the end of the year. I do not frequent either enough to notice the difference, or they have yet to get to New Jersey.

So those are WenArb’s short and long term goals for future growth. Unfortunately I cannot offer any predictions as to how their stock price will react to this as this has not been as much of a financial piece as it has been a rather skeptical overlook of their business. They have high hopes and I wish them all the best since I do have a long position established a few years ago; it’s just that some of their competitors look much more appetizing right now, pun intended.

-Jeff

How To Play Captain In The Shipping Market

Demand for commodities has become a leading indicator for the future growth of the global economy. One way to look at this is through shipping rates. As shipping of raw commodities picks up, it is evident demand has risen, and in turn, shipping rates will rise. This is all fine and dandy, except this is not what we are seeing here. So how does one play the almost stagnant shipping market? Well hopefully this article will shed some light on a few different plays.

We will begin by looking at the Baltic Dry Index, which is the Baltic Exchange's freight index that tracks shipping rates for commodities across 26 different shipping lanes. Various raw materials are shipped via ocean vessel, including but not limited to iron, grain, coal, and others. After declining for 35 straight days and over 37% year to date, the Baltic Dry Index has finally showed some signs of life. The index has risen for 13 of the past 15 days, a 16.3% increase from a recent bottom in mid July. This is a positive sign given the talk of a double dip and a global economic slowdown. The chart below shows the movement of the index dating back to 2009.

The index reached its peak in May of 2008, which was followed by an unprecedented 94% drop in shipping prices through December 2008. Since then, the index has bounced around, as global demand remains sluggish. This recent push forward in prices is only a small step, providing an indication that demand for these raw materials has remained subdued.

The Baltic Dry Index serves as a leading indicator in that it provides an estimate of demand for raw material inputs, which are used in the production of other goods. However, the recent decline in prices may not fully reflect a drop off in demand. It should be noted that when the index was rising back in 2007, production of additional vessels was put into motion. Now that these vessels have been completed, the increased supply of ships could also bring downward pressure on prices. Both of these theories will be examined in an attempt to shed some light on a few different plays.

We will first take a peak at demand for the leading cargo, iron ore, and one of the largest importers of this commodity, China. Chinese importing of this particular raw commodity, which is used in the production of steel, has stalled as of late. As China attempts to cool it's economy, demand will remain low. As the graph shows, imports have dropped as of late, and this is certainly taking its toll on the BDI. If demand continues to slip, expect to see the BDI remain at standstill, at best.

So if there is supposed to be a large amount of capesize ships coming to fruition, why not get in on DRYS? DryShips Inc “owns and operates dry bulk carriers,” as the name implies. The company moves major bulks and also owns Ultra Deep Water Rigs, which gives some nice exposure to the recovering offshore drilling sector. But I digress. DRYS has solid fundamentals with consistent revenue dating back to Q4:08. The company is also in a better financial position, with a 54% gross profit margin compared to 36% average of its peers. The company as has much less debt than the average of the companies I surveyed.

Looking at another small cap stock, ONCF, is one I think would be a solid short. "The Company is engaged in transporting drybulk cargoes, including such commodities as iron ore, coal, grain and other materials and crude oil cargoes through the ownership and operation of nine drybulk carriers and four tanker vessels." The company has negative EPS, at -4.86, and mountains of debt compared to its competitors. For example, long-term debt to assets sits at 84.07%, while its net profit margin is -133.84. A recent splitting of shares has diluted earnings nicely as well. Clearly, the drowning shipping market is taking ONCF down with it. It appears that this ship is sinking with the shipping market, multiple puns intended.

The final play I will suggest would be SEA. The Claymore shipping ETF, which "seeks investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called Delta Global Shipping Index (the “Index”). The Index is designed to measure the performance of companies listed on global developed market exchanges and currently consists of companies within the maritime shipping industry." If one thinks that the shipping index is going recover quickly, this maybe a solid place to park some cash. I personally would not advise it since the fund actually stopped trading in April and has since exploded. I think a correction is due, and once investors realize that sea freight is a slowing industry, this fund will get hit.

All in all, it is important to look at the global macro factors that are influencing this particular industry. As demand for raw materials slows, it will lead a chain reaction that may leave many companies and fund devastated.

-Andrew