Transports weaker on rising crude, not slowing economy ...

As the attached chart shows the recent weakness in transports is more directly related to the recent rise in crude than due to economic weakness

CNBC Video hit of Fusion Analytic's Josh Brown ...

See our own Josh Brown on CNBC talking about the beneficiaries of the big Boeing (BA) contract.

Click the link to watch the video - http://www.cnbc.com/id/15840232/?video=3000007438&play=1

See what our FusionIQ software ranking system thinks about Boeing (BA), Spirit Aerospace (SPR), United Technologies (UTX) and other names Josh discussed on his CNBC hit by visiting on the web  at www.fusioniqrank.com

Fusion Media Alert

Today, Fusion’s own Josh Brown will be a guest on CNBC’s Street Signs starting at 2:00pm EST. He will be discussing names that will be helped by the BA contract news and other aerospace names.

  

Markets finding their footing ...

The markets found their footing a bit yesterday after three days of selling.  The stabilization occurred in and around key moving averages (the 50 day on the NASDAQ and the 40 day on the S&P 500).  Two factors we noted during this recent run up still persist; investor fund flows continue to find their way into equity markets and anecdotal sentiment is still doubting and not embracing this rally.  That said measured sentiment also has moderated as seen in the chart below from the American Association of Individual Investors (AAII) which shows bulls have fallen from north of 60% to 36% as of yesterday.   Its’ hard to have big corrections when liquidity flows are in and sentiment remains skeptical. While logically it may make sense that the markets need to correct, I found out a long time ago and the hard way that markets don’t care what we think.  Rather it beats to its own drum and most times the obvious and logical trade is the wrong trade. 

 

Additionally markets only correct when trading successes seduce investors into thinking the game is easy and they have it all figured out.  This overconfidence lends itself to over commitment on the long side via leverage, until investors exhaust their buying power.  Markets don’t go down when everyone is sourcing for short trades or when the loudest voices in the crowd are the skeptics.  Moreover, it also takes persistent distribution to turn the tide from up to down, and other than Tuesday so far the sellers have only been a one act (one day) show.

This above are brief comments from our more expansive FusionIQ Mid Morning Comments ...

To see expanded commentary and get rankings on over 8,000 stocks subscribe today to FusionIQ ... visit us today @ www.fusioniqrank.com  !!!

Fusion Analytics in the USA Today

Kevin Lane, chief investment officer at Fusion Analytics, says it's premature to expect a multiyear advance. "There are plenty of issues that will overhang the market for years," he says.

Click the link below to see the full story

http://www.usatoday.com/money/markets/2011-02-24-bullmarket24_CV_N.htm

Two Great Tastes that taste great together .... HSY & CBOE

Please see our two new research reports on Hershey’s and CBOE located at www.fusioniqrank.com

The Hershey Co (HSY) 

    

CBOE Holdings Inc. (CBOE)

AMGN testing support ....

AMGN testing Critical support near $ 50.00.  With a FusionIQ score of only 42 out of a possible 100 and also on an IQ SELL signal it is clearly a stock to steer clear of ...

Oil hits $100

A very painful experience coming to a gas station near you shortly.

http://online.wsj.com/article/SB10001424052748703775704576162002479520710.html?mod=WSJ_hp_LEFTTopStories

401k Plans, Missing The Mark

The Wall Street Journal confirms what we already suspected, 401k plans were not designed to cover 30 years of retirement.

http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsSecond

Interest Rate Risk, What it Means to You.

Interest rates are likely to be rising in 2011. Here’s a primer on interest rates and the affects of interest rate risk on

your investment portfolio.

There’s been quite a bit of hand wringing over municipal bonds in the press lately, specifically around the issue of interest rate risk and it’s affect

on your investment portfolio. These developments should come as no surprise to readers of our blog and readers of my newsletters over last 18

months. I’ve been suggesting for some time that interest rates cannot remain at historic lows indefinitely, and that an actual policy change by the

Federal Reserve isn’t needed to cause a significant move in the bond markets. To wit, that’s exactly what’s happening in the bond markets right now.

To begin, we to need to identify what role fixed income vehicles (bonds) play in your investment portfolio. If you’re at or near retirement, municipal

bonds should be acting as agents of capital preservation. Not as vehicles of growth or speculation. Municipal bonds also provide a tax-free income stream,

according to the coupon. Investment grade bonds purchased in the last 2 years typically carry a coupon of 4.00% or lower. A $100,000 bond with a 4.00%

coupon provides you with $4,000 in annual tax-free income. However, interest rates got so low in 2009-2010, that in order to receive an investment grade bond

with a 4.00% coupon, that wasn’t set to mature in 2055, investors often paid a very handsome premium. $100,000 worth of bonds often cost $114,000 or more.

When we pay a premium, that is paying more than the $100 per bond par value, we incur interest rate risk. That’s because bonds always mature at par, or

$100 per bond. Hence, should rates begin to rise, you could have a built-in $14,000 loss.  

Here’s where it gets tricky. The bond markets are not retail markets. That’s a critical distinction, because, unlike stocks, there is no electronic market place

ready to accept a sell order at the stroke of a key. Any individual bond is really only worth what someone else is willing to pay for it. Bonds prices are a function

of several things, but most importantly, credit quality, and, that’s right, interest rates. And, make no mistake, bond traders operate with a No Prisoners mentality.   

Bids on bonds will move instantly at the slightest notion that rates may be changing, well in advance of an actual Fed policy shift. Furthermore, rates now only have

one place to go, and that’s higher. If you hold a bond with a 4.00% coupon, and bonds are now available in the marketplace with a 5.00% coupon, by definition

your 4.00% bond is worth less than it was before. If you paid a significant premium for that 4.00% bond, you now understand interest rate risk. Yes, you should

receive $100,000 in principal back at maturity, but that $14,000 premium is gone. It also leads to some unattractive numbers in parenthesis on your monthly statement,

we’ve found that clients usually don’t like that.   

This brings us to credit quality, what does investment grade mean? Typically bonds rated BBB or better are said to be investment grade. My clients at Fusion rarely,

if ever, traffic outside A-AAA ratings in the municipal markets. Further, muni bonds are said to be insured when the issuer purchases default insurance, often provided

by, among others, AMBAC or MBIA. The credibility of these insurers was badly damaged during the debt crisis, when numerous offerings said to be “investment grade”

defaulted. Now, stronger issuers often forego insurance and issue debt based solely on their perceived financial strength. To clarify, investors trafficking outside the investment

grade arena do so for reasons other than capital preservation. Speculating on credit quality and interest rates is not part of our portfolio management philosophy at Fusion.         

 

Working around interest rate risk isn’t impossible, and we don’t want to eliminate bonds entirely from our investment strategy. There are two ways we can address this challenge

in the portfolio. First, we can use a standard bond ladder, and second, we can buy shorter maturity bonds. With a ladder strategy, bonds should mature at regular intervals, typically

annually. We should then have the opportunity to reinvest in a more attractive interest rate environment. Second, buying shorter maturity bonds limits our interest rate risk

downside. Bonds closer to maturity aren’t as vulnerable, since they will mature in the near future. The catch, shorter bonds pay lower coupons, which is the trade off for taking less

risk. Alarmist media and uninformed TV anchors aside, if you’re not sure why your bond portfolio is behaving badly, it may be time for a portfolio review and some estate planning.

Best Regards,

Russell Brewer, Partner

Fusion Analytics Investment Partners  

[email protected]

How the Harvard and Yale endowment models changed to avoid a repeat of 2009

Interesting article from RIAbiz that talks about how the Harvard and Yale Endowments got tripped up ….

Extreme events are now modeled in, but the love affair with alternative investments remains  With the dust settled and markets on the rebound, many people might have expected chastened endowment managers to change their approach to avoid an embarrassing déjà vu.  Yet despite giant paper losses during the depths of 2009, the aftermath has only served to strengthen the conviction of endowment managers and rightly so in their beloved endowment model. The one difference is a tweak or two in handling liquidity.  Given the enormous obligations of many Ivy League endowments to fund general university operations, their portfolios were positioned on the wrong point of the efficient frontier. In other words, given their current liabilities, they simply invested far too little in cash and liquid assets rather than too much in alternatives like private equity.

Now that the financial crisis has receded, we thought it would be instructive to take a fresh look at some of these same endowments to see what lessons they learned and what, if any, changes they made to the constructions of their portfolios. We begin by reproducing part of Table 1 from our first white paper.

Table 1

Policy/Target Portfolios

All endowments construct theoretical portfolios allocated among a mix of asset classes designed to return and risk over the long term. Our thesis in the original white paper was that the allocation to cash was too low. Let’s take a look at Harvard and Yale, by far the two largest endowments, to see how they have adjusted their respective allocations to cash.

Harvard Learns Lesson

Harvard appears to have learned a lesson from the financial crisis. Specifically, they have made a major adjustment to the endowment’s “policy portfolio” allocation to cash. In 1995, the target for cash was -5%. In 2005, the target was still -5%. In 2010, the policy target swung by 7 percentage points to a new target allocation of 2%.

Set forth below are a few telling extracts from Harvard’s most recent endowment report:

• “On the topic of limited partnerships, we also intend to continue to reduce uncalled capital commitments to real estate and private equity fund managers. Our uncalled capital commitments at the end of fiscal year 2010, were $6.6 billion, down from over $11 billion two years ago.”

• “We have attended closely over the last two years to liquidity [emphasis added], capital commitments and risk management….”

• “We also need to be mindful that our portfolio, while large, still operates under liquidity constraints [emphasis added] and spending demands that are greater than they were 5-10 years ago. The endowment now funds 35% of the total University budget.”

• “Can our strategies and insights be improved? Yes. We learned some specific lessons over the last two years about keeping control of our capital and being prepared for unexpected market conditions.”

Yale Changes Course

Similar to Harvard, Yale’s endowment funds 38% of the University’s operating budget.

In 2005, Yale had an actual 1.9% allocation to cash (compared to Harvard’s target allocation of -5% in the same year). By 2009, Yale’s actual allocation to cash had flipped to -1.9% (compared to their target of 0.5%). As of the 2010 fiscal year, Yale’s target allocation for cash stood at 4%.

Set forth below are some of Yale’s comments on liquidity as of June 2009 (the date of the University’s most recently published endowment report):

• “Prudent investors maintain sufficient liquidity to meet the full range of portfolio commitments, which, in the case of an endowment fund, include annual spending distributions and contractual commitments to external money managers.”

• “Even with a zero allocation to cash in the portfolio, investment holdings generate a fair amount of natural liquidity. For instance, bonds pay interest, stocks pay dividends, real estate produces rents, energy reserves provide returns on capital as well as returns of capital (through depletion), and private equity partnerships distribute proceeds from realizations.”

• “Liquidity matters, even to portfolios with modest spending requirements and long-term horizons. By putting in place mechanisms to tap a variety of internal and external sources of liquidity, endowment managers provide the means for educational institutions to satisfy the full range of portfolio commitments.”

Conclusion

Harvard’s 2010 endowment report asks the question bluntly: “Has the ‘endowment model’ run its course?” Harvard’s response: “Our answer is No. We continue to believe that the creation of a diversified portfolio including significant exposure to a variety of alternative assets has been a major factor in HMC’s [Harvard Management Company] long-term success.”

We agree wholeheartedly. The only difference now is that both Harvard and Yale have enough cash in their portfolios to fund their considerable and ongoing operating budgets obligations.

Dell (DELL) scores blow out fourth quarter ....

Dell’s expanding strength as an enterprise solutions provider and continued  strong execution during the fiscal fourth quarter drove record results and one of the company’s most successful financial quarters ever.

Results

·         Record earnings per share in fiscal fourth quarter

·         Enterprise solutions and services revenue up 27 percent for full year

·         Revenue increase of $8.6 billion in FY11 - largest single-year revenue increase in company history

·         Revenue in the quarter was $15.7 billion and totaled $61.5 billion for the fiscal year, an $8.6 billion or 16 percent increase from the previous fiscal year, including the impact of acquisitions.

·         The company had its highest operating income in five years. GAAP operating income was $1.1 billion, or 7.3 percent of revenue. Non-GAAP operating income was $1.3 billion, or 8.2 percent of revenue.

·         GAAP earnings per share was a record 48 cents; non-GAAP EPS was 53 cents.

·         GAAP gross margin in the quarter was 21 percent and 18.5 percent for the year. Non-GAAP gross margin was 21.5 percent in the quarter and 19.1 percent for the year, the result of record profitability in the enterprise solutions and services business, lower component costs and strong commercial execution.

·         Cash flow from operations was $1.5 billion, and Dell ended the quarter with $15 billion in cash and investments.

Strategic Highlights:

·         Revenue for enterprise solutions and services grew 7 percent to $4.6  billion in the quarter and now represents 29 percent of the company’s consolidated revenue. Server revenue increased 16 percent. EqualLogic sales grew 49 percent and, combined with Dell PowerVault sales, accounted for almost two-thirds of the company’s storage revenue and more than 80 percent of the company’s storage gross margin dollars.

·         Revenue for the combined Large Enterprise, Public and SMB businesses was up 9 percent to $12.4 billion in the quarter, with revenue for commercial laptop and desktop computers growing 10 percent.

·         Strong demand and profitability across all commercial business segments drove consolidated GAAP operating income of $1.1 billion, or 7.3 percent of revenue. Non-GAAP operating income was $1.3 billion, a 61 percent increase and 8.2 percent of revenue.

·         Client profitability improved notably in the second half of the year driven by solid supply-chain performance, lower input costs and improved product quality. The company’s product availability improved 37 percent and order-to-delivery times improved 33 percent over the previous year.

·         For the full year, client revenue grew 14 percent to $33.7 billion driven by a continuing corporate refresh cycle.

·         Dell Services revenue grew one percent to $1.9 billion as the company delivered on its first-year revenue and cost-synergy targets associated with the successful integration of Perot Systems. The services organization now has annual revenue of $7.7 billion.

·         The company is making sustained organic and inorganic investments to build its intellectual property and provide customers optimal, open and affordable solutions. Among these investments are the recently completed acquisitions of SecureWorks Inc., a provider of information-security services; Boomi, which offers a Software-as-a-Service platform to ease data exchange between cloud-based and on-premise applications; and Insite One, a leader in cloud-based medical archiving solutions.

Business Units and Regions:

·         Large Enterprise revenue was $4.7 billion,  up 12 percent from a year ago.  Operating income was $502 million, or 10.7 percent of revenue and a 26 percent sequential increase. Enterprise solutions and services revenue was $1.9 billion, a 5 percent increase, with server revenue up 14 percent.  Revenue from desktop and laptop computers grew 20 percent as the strong client refresh among large corporate accounts continued.

·         Public revenue was $4 billion, a 4 percent increase driven by strong server and storage sales. Operating income for the quarter was $366 million, or 9.2 percent of revenue. For the full year, Public delivered strong performance with operating income of $1.5 billion, or 8.8 percent of revenue. Server revenue growth of 13 percent and storage growth of 12 percent balanced demand decline for desktop and laptop computers.

·         Small and Medium Business revenue was $3.7 billion, up 12 percent to its highest level in two years. SMB had another quarter of record profitability, with operating income hitting $450 million in the quarter, or 12 percent of revenue. Server revenue was up 22 percent and storage revenue was up 20 percent. Revenue for desktop computers and mobile devices increased 10 percent. During the quarter, Dell added the Vostro V130 ultraportable laptop for mobile entrepreneurs.

·         Consumer revenue was $3.3 billion, up 11 percent sequentially but, as expected, down year over year by 8 percent relative to a strong Windows 7 launch last year. Operating income was $69 million, or 2.1 percent of revenue. Dell introduced the Inspiron duo, which has a unique flip-hinge design to combine the simplicity of a tablet and the functionality of a laptop with full keyboard.

·         Asia-Pacific and Japan revenue grew 17 percent, EMEA increased 3 percent and the Americas were up 3 percent. Revenue in Brazil, Russia, India and China (BRIC) grew 21 percent and represents 13 percent of total company revenue. For the full year, revenue in those countries was up 38 percent.

Quotes:

Michael Dell, chairman and chief executive officer: “I’m very pleased with our fiscal year results and the strong performance we’re seeing in our commercial businesses. We remain focused on developing and acquiring new technologies and capabilities, and our IT solutions portfolio has never been stronger. Customers are now seeing Dell in a fresh light, and we’re heading into the new year with strength and optimism.”

Brian Gladden, chief financial officer: “Our outstanding fourth quarter and full-year results align well with our long-term value creation framework, and we’re pleased with the sustainable operational improvements we’ve made across the company, including in our consumer business. With our strong cash flow, solid balance sheet and improving overall profitability, we believe we are well positioned to deliver strong performance for our shareholders.”

Company Outlook:

For its fiscal-year 2012, Dell expects revenue growth of 5 to 9 percent, non-GAAP operating income growth of 6 to 12 percent, and continued strong execution on cash flow with cash flow from operations exceeding net income. In its first quarter of fiscal-year 2012, Dell expects normal seasonal declines in its consumer and public businesses and, as such, a slight sequential decline in revenue.

FusionIQ Timing Signal ... Cool Stuff !!

Kraft Foods misses earnings cites, rising inflation ...

Kraft Foods Inc., (KFT) the world’s second-largest food company, lowered its full-year earnings forecast because of rising commodity costs.   Kraft, led by Chief Executive Officer Irene Rosenfeld, cited surging commodity costs and “persistent consumer weakness in many markets,” according to the statement. Food and beverage companies such as Kraft, Sara Lee Corp. and General Mills Inc. have raised prices on many products to cope with rising costs of wheat, corn and sugar.

   

Rosenfeld went on to say “We expect the operating environment to remain challenging,”   Kraft fell as much as 61 cents, or 1.9 percent, to $30.50 in extended trading, after closing at $31.11 in New York Stock Exchange composite trading.  Net income at the maker of Oreo cookies and Cadbury chocolate fell to $540 million, or 31 cents a share, from $710 million, or 48 cents, a year earlier. Excluding some items, profit was 46 cents a share.

Fairholme Fund Taking Care of Business

I’m not inclined to bet against Bruce Berkowitz, recently voted manager of the decade.

Hat tip to colleague Josh Brown.

http://blogs.wsj.com/deals/2011/02/09/st-joe-for-sale-short-sellers-lose/

Russell Brewer, Partner

Fusion Analytics Investment Partners, LLC

214-270-2175

[email protected]

S&P 500 Earnings Tally ....

Here is an update on what the earnings picture has looked like so far for S&P 500 Companies

POSITIVE SURPRISES:    249/352 = 70.7%

% of Surprises:                                                  EPS Differences (Actual-Estimate):

(0% to 10%):                       147                         (1 cent):                               41

(10% to 20%):                    57                           (2 cents):                             31

(20% to 30%):                    16                            (3 to 4 cents):                    38

(30% to 40%):                    10                            (5 to 9 cents):                    63

(40% to 50%):                     4                             (10 to 19 cents):                46

(more than 50%):             14                           (20 to 49 cents):                26

% chg NM                            1                              (50 cents or more):            4

0% SURPRISES:           24/352 = 6.8%

NEGATIVE SURPRISES:     79/352 = 22.4%

% of Surprises:                                                  EPS Differences (Actual-Estimate):

(-10% to 0%):                     47                           (-1 cent):                             18

(-20% to -10%):                 8                               (-2 cents):                          13

(-30% to -20%):                 7                               (-3 to -4 cents):                12

(-40% to -30%):                 2                               (-5 to -9 cents):                14

(-50% to -40%):                 5                               (-10 to -19 cents):           14

(less than -50%):              8                               (-20 to -49 cents):             8

% chg NM                            2                              (-50 cents or less):            0

The Return of Affordable Housing?

Housing prices return to pre-bubble levels, unfortunately most can no longer qualify for a mortgage.

http://online.wsj.com/article/SB10001424052748703313304576132291585938656.html?mod=WSJ_hp_LEFTTopStories

Delivering the Message on Social Media

The Wall Street Journal discusses how investment firms are getting the message to investors using social media.

http://online.wsj.com/article/SB10001424052748703909904576051991054593486.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird

Fusion Media Alert

Tonight Fusion’s own Barry Ritholtz will be a guest on CNBC’s Fast Money starting at 5pm EST.

  

Our Dallas Office will be closed today ... its snowing lol !!

UPS 4th quarter profit up 48% ... raises guidance ...

On Tuesday United Parcel Services Inc. (UPS) delivered a 48% rise in fourth-quarter profit and raised its forecast for record full-year earnings.  The largest domestic package delivery company also boosted its buyback program after making a substantial year-end pension contribution and flagged further expansion in emerging markets to challenge rivals such as FedEx Corp. (FDX), which had raised its own 2011 guidance in December.  UPS saw higher profit margins in domestic and international services despite the impact of poor weather, and boosted margins as it passed on higher fuel costs through surcharges. It plans to buy back around $2 billion in stock this year.

Scott Davis, chairman and chief executive, described the quarter as "extraordinary" on a post-earnings' call and pointed to improved consumer confidence and a slightly brighter employment picture.  Fourth-quarter earnings topped expectations and the forecast for per-share earnings this year of $4.12 to $4.35 compared with the consensus of $4.18. Revenue and margins are also expected to rise. Its shares were recently up 2.9% at $73.70 in pre-open trade, with FedEx up 2% at $92.09.

While this is very good news we will be watching to see how markets react here after UPS’s solid numbers.  If we are in a true corrective mode then after the initial wave of buying we would expect to see bids fade later in the trading session.  Lately good earnings news (such and Google and Amazon) have been sold into as traders and portfolio managers bought well in advance of these good earnings and have been using the strength on earnings reports to sell.   We will be looking to see if that trend still holds true again today.  If it does this would only further support the idea that in the near term the markets want to go down some.