In the Thursday Stock Blog post, Three New Energy ETFs You Should Know, which one was NOT on the list?
Trader Talk blogger Bob Pisani reported on three new Powershares energy ETFs that investors should know:
That leaves Dynamic Energy Exploration as the odd man out.
In the feature, “ETFs Provide Cover When Markets Get Crazy,” which ETF does John Schloegel recommend?
Nevertheless, Schloegel likes a variety of ETFs, with exposure to alternative energy, materials, commodities and utilities.
Some of his favorites include: iShares Dow Jones Basic US Materials (IYM) up nearly 12 percent this year and nearly 23 percent over the past 12 months; Poweshares Water (PHO), which tracks domestic water-oriented businesses and is up 11 percent in the past year, and Claymore S&P Global Water (CGW), which is like PHO but is focused internationally.
Scholegel also points to one of the more popular ETFs, the SPDR Gold Shares (GLD) fund, which tracks the commodity’s movement as a good diversification tool. The fund is up about 34 percent over the past 12 months.
Looks like an “all of the above” situation.”
My latest column is up at RealMoney. In it, I explain why I think the recent rally in semiconductor stocks should continue.
First, as I have mentioned before, the supply/demand balance remains favorable.
Second, pricing power appears to be improving, based on the most recent PPI report.
I think the names that will perform best are those whose gross margins are currently depressed, as improving margins would result in accelerating earnings power.
Disclosure: At time of publication, William Trent holds shares of SMH and MXIM, as well as put options against the shares of LRCX.
Disclosure: William Trent has a long position in SMH.
North American-based manufacturers of semiconductor equipment posted $1.23 billion in orders in February 2008 (three-month average basis) and a book-to-bill ratio of 0.93 according to the February 2008 Book-to-Bill Report published today by SEMI.
The three-month average of worldwide bookings in February 2008 was $1.23 billion. The bookings figure is about eight percent greater than the final January 2008 level of $1.14 billion, but 12 percent less than the $1.40 billion in orders posted in February 2007.
With semiconductor sales essentially running flat, I was able to take solace in the fact that the steeper declines in semiconductor equipment orders were a signal that excess capacity was being soaked up. In fact, semiconductor sales have now likely outstripped orders for new manufacturing equipment for each of the last 12 months.
Unfortunately it hasn’t yet helped semiconductor manufacturers. The SOX index has lost a quarter of its value over that same time period.
If semiconductor manufacturers want to get their stocks’ mojo back, the last thing they should be doing is ordering more capacity in the face of an economic slowdown.
Disclosure: At time of publication, William Trent owns shares of Maxim (MXIM) and the Semiconductor HOLDRS (SMH). He holds put options against the shares of LAM Research (LRCX).
Disclosure: William Trent has a long position in SMH.
Last September I was bearish on Delta Airlines (DAL), saying “How quickly we get from something that looks enticing to something that looks like it came out of bankruptcy five months ago. Which, of course, it did. Bottom line, if you want to take a flier on an airline, I’d stick with one of the short squeeze plays. The majors still look like they can cause a major league stomachache.”
Earlier this month, I noted that I should learn to take the money and run, as three of my previously correct bearish calls had been bolstered by takeover rumors. With Delta now solidly back in the column of not making me look stupid, it’s time to call it quits on this call.
U.S airlines plunge on recession worries | Markets | Markets News | Reuters
Shares in U.S. airlines plunged on Wednesday, with Northwest Airlines (NWA) and Alaska Air Group (ALK) dropping more than 10 percent, after JP Morgan cut its ratings on those carriers and several others due to recession concerns.
Since my original bearish article, Delta is now down 37.3%, compared to a 10.3% decline in the S&P 500 (SPY) over the same period. Although I didn’t take a financial position in the stock, I am figuratively closing the position. Before another greater fool comes along and tries to buy them out, I’m taking the money and running.
Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned.
The Semiconductor Industry Association released the January semiconductor sales report today.
Worldwide sales of semiconductors in January were $21.5 billion, a nominal increase of 0.03 percent from January 2007, the Semiconductor Industry Association (SIA) reported today. Sales declined by 3.6 percent from December 2007 when the industry reported sales of $22.3 billion. SIA said the sequential decline in sales was in line with traditional seasonal patterns for the industry.
“Virtually all product lines and all geographic markets experienced slightly lower sales in January,” said SIA President George Scalise.
The good news, as I see it, is that orders for semiconductor manufacturing equipment were down 22.3% in January. Less equipment means less capacity, and even the same amount of sales generation will soak up the excess and improve the pricing environment.
The semiconductor sales growth has exceeded semi equipment order growth since March 2007, so it is now likely to start showing up in the fundamentals. Yes, a general economic slowdown will make it harder for semi pricing to improve. But as long as the supply continues to grow at a slower rate, the semi cycle will return regardless of what happens in the business cycle.
Disclosure: William Trent is long SMH and MXIM, and has written put options against shares of LRCX.
Disclosure: William Trent has a long position in SMH.
According to Semiconductor Equipment and Materials International (SEMI):
North American-based manufacturers of semiconductor equipment posted $1.12 billion in orders in January 2008 (three-month average basis) and a book-to-bill ratio of 0.89 according to the January 2008 Book-to-Bill Report published today by SEMI. A book-to-bill of 0.89 means that $89 worth of orders were received for every $100 of product billed for the month.The three-month average of worldwide bookings in January 2008 was $1.12 billion. The bookings figure is about three percent less than the final December 2007 level of $1.16 billion and 22 percent less than the $1.45 billion in orders posted in January 2007.
22.3%, to be exact. To me, this is good news for semiconductor manufacturers, because the demand for chips is still growing – barely. With equipment installations going down, the oversupply that currently exists will soon be absorbed, recession or no.
Disclosure: Long SMH, MXIM; wrote put options against LRCX
Disclosure: William Trent has a long position in SMH.
This article is a guest post by Steve Selengut, author of The Brainwashing of the American Investor: The book that Wall Street does not want you to read!
Many investors are beginning to think that income investing is every bit as risky as equity investing, but nothing has really changed in the relationship between these two basic building blocks of corporate finance. What has changed in recent years is the nature of the derivative products created by the wizards of Wall Street to deliver both forms of securities to investors. The most popular form of equity delivery today is the three-levels-of-speculation Index Fund. New ETFs are birthed every day and, in total, have become as common as common stocks. Have you noticed that regulators always strive to prevent financial disasters from happening… again?
But, in the meantime, the forever-sacred bond market has become the hysteria arena of the moment in media, country clubs, neighborhood pubs, and retirement villages. Does my nest egg have a crack in it? No, not really.
Stories abound concerning the sub-prime mortgages that financed the recent bubble in real estate prices. Many people, who couldn’t afford to purchase homes at any price, were able to obtain financing with no-documentation-required mortgages. Many loans had sub-prime, short-term teaser rates that would adjust to above market levels too quickly. Many borrowers weren’t concerned because they never intended to occupy the properties… speculators attempting to flip the properties quickly in a much too hot real estate market. Predatory lenders and some greedy realtors exacerbated the problem. Lenders didn’t care because the bad loans and higher risks were gobbled up by Wall Street institutions to be sliced, diced, seasoned, and syndicated into CMOs, CDOs, and SIVs of all imaginable shapes and risk levels.
Rating agencies gave the products AAA status because they were guaranteed. Insurers guaranteed the derivatives because they were AAA rated. Investment bankers underwrote and syndicated the products because of their high quality ratings and their banker friends made markets for them through their trading desks. It was party time on Wall Street, as it always is before such MLMesque schemes unravel. Have you noticed that regulators always strive to prevent financial disasters from happening… again? You can bet that attorneys have.
So when over-the-top real estate prices began to settle and the flippers were hooked with homes that began to smell fishy, the houses-of-cards began to tumble, bursting bubbles and drowning speculators as they fell. Borrowers with adjustable rate mortgages had to face new financial realities, but contrary to the picture painted by the media, most homeowners are making their payments right on schedule. Speculators should expect losses, but should financial institutions encourage the speculators? Welcome to Las Vegas east.
It is practically impossible to determine how many and precisely which mortgages within the CDOs and SIVs are in or near default. As a result, the market value of these products has fallen to levels that unrealistically presume a major default experience. The fact that Wall Street leveraged some of the products excessively has made a bad situation worse, and banks worldwide have written down billions on mortgage portfolios that contain an unknown number of potential defaults. But regardless of the financial reality, the market value reality of having no buyers for these securities has caused a global panic and spiraling illiquidity in the financial markets. So, as a result of their self-inflicted capital-raising problems, the banks have become risk averse with everyone. Aren’t banking and mortgage lending regulated industries? Is it time to change the way banking institutions assess the value of their debt investments?
Individual investors have always relied upon fixed income obligations to fund everything from college to retirement. Historically, the default rate on corporate bonds has been low, and that on Municipal bonds approaches zero. Dot-com debt was added to the markets in the later half of the 1990s, and the 8% leveraged-corporate-bond default rate in that era helped cause recession a few years later. But corporate balance sheets were far less liquid than they are today, and by early 2004 the default rate was under 1%. In late 2005 there was a short-term spike to 2%, but since then the default rate has dropped to a recent historic low of 1/4 of 1%. There does not seem to be a major quality issue within corporate debt right now, but fearful investors have abandoned all but treasury securities… finding even the commodity markets more of a safe haven than Municipals. Boy, are they in for a surprise. The fear of a routine cyclical economic slowdown and the credit crunch has caused massive selling of income securities while the default rate has not increased at all.
Corporate and municipal closed end funds have not responded normally to recent reductions in interest rates because of the general problems plaguing the industry and, additionally, because of questions about the Auction Rate Preferred Stock (APS) they use to finance short-term borrowing. (Keep in mind that nearly all corporations and municipalities use debt financing and that such financing is not, in and of itself, a bad thing.) APS in effect resets the interest rate the borrower pays every seven to twenty-eight days. The preferreds are mostly purchased by banks, but may also be sold to individual investors. The credit crunch that originated with the sub-prime problem has spread to the APS market as well. Consequently, CEF managements now have a higher cost-of-carry on short-term borrowing.
APS issues include maximum interest rates that are generally well below the amounts the funds receive from their holdings, and all Closed End Funds can raise new capital by selling additional shares of stock. As long as the earnings generated by the assets in the portfolio continue to exceed the costs of the APS financing, such financing is beneficial to the shareholders. Should the cost approach the revenue, the manager can simply redeem the APS and reduce the holdings in the portfolio.
To alleviate the problems, central banks worldwide have injected billions to help ease tight credit conditions. Ours has slashed the Fed Funds rate to lower borrowing costs and to ease general credit conditions; more rate cuts are expected. Unlike the quality issues in the sub-prime mortgage market, the weakness in the corporate and municipal CEF markets is a more solvable liquidity problem. Historically, the easing of interest rates and injection of reserves into the system eventually move credit markets toward normal conditions. The Fed Funds rate now stands at 3%, down from 5.25% a few months ago. In 2003, the rate moved to 1% as the Fed liquefied the credit markets after 911; there is still a lot of rate cutting room in the system.
Investors would fare better if they could learn to think long-term in the face of short-term problems. This is not the first, and certainly not the last, dislocation in the financial markets. The Treasury Secretary and the Federal Reserve Chairman have testified that they expect economic growth to resume during the second half of 2008. The congressional stimulus package will be implemented quickly. The Fed stands ready with rate cuts and will inject additional reserves if needed. Typically, credit crunches with or without stock market corrections have proven to be investment opportunities. This one will be no different.
Typically, commodity cycles are driven by supply, not demand.
World gold production fell by 1% in 2007, according to the latest Gold Survey from GFMS. Gold prices have risen to new highs this year, but fresh supply has been held back by a global shortage of mining professionals and equipment. China, where gold output rose by 12% last year, supplanted South Africa as the world’s number-one producer—a position it had held for more than a century.
Although a recession in the US could take a bite out of demand for gold, it won’t help the supply any. Inflation is still higher than the Fed has historically been comfortable with, and that too seems unlikely to change much in a recession. There seems to me to be more inflation risk than is being priced into most assets, so I’m keeping 10% of my own assets in yellow metal.
Disclosure: Long GLD
Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.
The following is a reprint of my January 8, 2008 RealMoney column.
In other articles, I have outlined the reasons why I think the semiconductor industry is poised for strong stock performance and why I think MEMC Electronic Materials (MEMC) is the best play on the sector.
But I also realize that a bullish semiconductor outlook right now involves making a grab at that falling knife. Therefore, I thought I should also let people know which semiconductor stock looks most vulnerable to a downturn.
I think that stock is Microsemi (MSCC).
Microsemi is a leading designer, manufacturer and marketer of high performance analog and mixed-signal integrated circuits and high-reliability semiconductors. Its products manage and control or regulate power, protect against transient voltage spikes and transmit, receive and amplify signals.
Microsemi has held up fairly well, handily beating the performance of the Semiconductor HOLDRs (SMH) over the last year. This may be due largely to its strong end markets, which include defense, commercial aerospace, industrial/semicap, medical, mobile connectivity and notebooks, monitors and LCD televisions.
More Questions Than Answers
To me, however, the strong end markets only raise questions concerning Microsemi’s fundamental performance. For example, with such strong end markets, why did its cash from operations fall by more than half in the year ended September 30, 2007, compared with the prior year? Why is its inventory rising faster than sales, and why is its gross margin slipping?
I turned to the company’s latest 10K in hope of finding answers.
To begin with, the area is highly competitive. According to the 10K (emphasis added), “some of our current major competitors are Freescale Semiconductor, Inc., National Semiconductor Corp. (NSM), Texas Instruments, Inc. (TXN - Annual Report), Koninklijke Philips Electronics (PHG), ON Semiconductor Corp. (ONNN), Fairchild Semiconductor International, Inc. (FCS), Micrel Incorporated (MCRL), International Rectifier Corp. (IRF), Semtech Corp. (SMTC), Linear Technology Corp. (LLTC), Maxim Integrated Products, Inc. (MXIM), Skyworks Solutions, Inc. (SWKS), Diodes, Inc. (DIOD - Annual Report), Vishay Intertechnology, Inc. (VSH), O2Micro International, Ltd. (OIIM) and Monolithic Power Systems, Inc. (MPWR).” Gosh, I wouldn’t want them to leave anyone out.
Yet competition is just the third risk factor among a list that runs more than 12 pages.
The company notes the decline in net income related to non-cash acquisition related charges, restructuring charges and other factors. Yet non-cash charges don’t quite explain the decline in cash flow from operating activity. Furthermore, with “non-recurring” charges being reported in each of the last three years I’m going to go out on a limb and say investors can probably expect more of them in the future.
A Questionable Acquisition
According to the 10K, the company completed a merger with PowerDsine on January 9, 2007 and subsequently renamed PowerDsine Ltd., Microsemi Corp. – Analog Mixed Signal Group, Ltd. (”AMSGL”). Later, it notes that it “provided a valuation allowance of approximately $9,534,000 as of September 30, 2007 on all of our net deferred tax assets related to AMSGL as we have determined that it was more likely than not that the deferred tax assets would not be realized.”
Deferred tax assets are realized when the company earns taxable income in future periods. I’m not a big fan of acquiring companies that will “more likely than not” fail to earn taxable income in the future. This was one of the contributors to the decline in cash flow.
Microsemi’s gross margin weakened in the latest quarter (see chart.)
Source: Zacks Research Wizard, compiled by William A. Trent
I think there is additional margin risk stemming from burgeoning inventory levels.
Source: Zacks Research Wizard, compiled by William A. Trent
Since a large percentage of costs at semiconductor companies is fixed, producing more units results in a lower cost per unit and higher profit margins. But many of the additional units Microsemi is producing are going into inventory rather than the hands of customers.
At some point, Microsemi is going to have to sell that inventory (by producing less than customers demand.) That will reverse the positive effect on future gross margins.
Valuation Too High
All this would matter less if the stock looked cheap. But on the basis of free cash flow yield, which is my favored metric, Microsemi looks more expensive than most of its peers.
Free cash flow in 2007 was less than $4 million. On an enterprise value of $1.56 billion, that amounts to a free cash flow yield of just 0.25%. The cash flow would have to grow 150-fold just to bring the yield on par with that of Treasury bonds.
Even using the company’s best cash flow on record ($36.5 million in 2006) the yield is just 2.35% – nearly a percentage point below that of Treasuries. If I thought the company could return to the 2006 cash flow level, then grow at the forecast rate, I would be willing to consider an investment.
But given the rising inventory, unprofitable acquisition and potential for further declines in gross margin, I won’t be holding my breath.
Disclosures: William Trent is long Semiconductor HOLDRS (SMH) and Maxim Integrated Products (MXIM). He holds put options against shares of Lam Research (LRCX).
William Trent currently owns put options against the shares of Lam Research (LRCX).
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