Wednesday, July 25, 2007

Latin America "nationalization" hitting corporate bottom lines

The nationalization trend in Latin America is starting to show up on Wall Street earnings reports. In the long term, this will have the impact of dragging down the entire market in the region and all the outside business operations associated with it.

The most recent examples include ConocoPhillips net income dropping off 94% due to the confiscatory activities of Hugo Chavez's government in Venezuela. HNR (Harvest Natural Resources) also reported a loss after not being able to recognize equity earnings from Venezuela.

It can only be expected that this trend will get worse moving forward into 2007. Investors should consider slowly moving out of their Latin American investments over time; and take a close look at natural resource stocks they hold which may be significantly impacted by the policies of Hugo Chavez in Venezuela, Evo Morales in Bolivia, and Rafael Correa in Ecuador.

Venezuela charge hits ConocoPhillips earnings

Wednesday, July 18, 2007

Dark Pools - Is Consolidation Coming?

The number of dark pools have doubled to over 40 since the start of last year. The success of these alternative trading venues shows excellent prospects for this industry; but the sheer number of firms is a sign that some consolidation will occur. Obviously all 40 firms will not be successful as independent entities in the long term.

The most likely survivors are those backed by large brokerage consortiums. LeveL and Bids have reached an average combined daily trading volume of 50 million shares. LeveL was created by Citi, Credit Suisse, Fidelity Brokerage, Lehman Brothers and Merrill Lynch late last year. Bids was launched in spring and backed by twelve brokerage firms, including Citi, Credit Suisse, Lehman and Merrill Lynch. Notice that some firms have backed more then one single Dark Pool electronic trading venue.

There is an expectation of increased regulatory scrutiny of Dark Pools because they operate outside the scope of the public market, and may undermine individual investors causing them not get the best prices for their trades. This may add increased oversight and costs that will help drive consolidation in the Dark Pool industry.

Similar to how the multitude of ECNs consolidated over time, the expectation is that a similar set of mergers will occur with the Dark Pool firms.

Trading volumes rise in dark pools

Monday, July 9, 2007

Shanghai Index Double Top

It certainly appears that the Shanghai Index has formed a traditional double top. The first top being the peak, and the second top being an unsuccessful attempt to drive beyond the original peak. The index is now down 13% from its height and appears to be diving through the support level.

Not a compelling technical picture for any bulls touting the Chinese market. I expect the situation will only go downhill from here.

Thursday, July 5, 2007

Is It Time To Look At HomeBuilder Stocks Again?

Who wants to catch the falling knife?

The stocks are hitting 52w lows hard.... is all the bad news priced into these homebuilder stocks now? The P/E on many of the builder stocks is now under 10. All have recently reported dismal quarters. These firms are carrying a real burden in a huge amount of land based debt and bloated inventory. Using historical multiples to valuate homebuilders may be difficult when these firms are showing recent losses; valuating the firms on the basis of expected annual revenue does not improve the picture.

Is all the bad news priced into these stocks?

For those thinking about putting on a thick iron gauntlet and catching the falling blade, I would consider taking a look at some of the stronger homebuilder candidates. Ryland (RYL), Toll Brothers (Tol), and KB Home (KBH) may have the edge on some of the others due to improved inventory situations and financial restructuring. Beazer (BZH), Lennar (LEN), DR Horton (DHI), and Centex (CTX) appear to be more risky candidates. Hovnanian (HOV) is questionable due to their high debt load and impairments. This recent article outlines some of these concerns regarding HOV starting on page 3.

Builders Have Further to Fall

Beazer is in chaos recently after the firing of their Chief Accounting Officer on top of their operational issues:
Fall of the House of Beazer

The recent perspective of Citigroup on homebuilders is:
Homebuilders Slide After Citgroup Downgrade

Sometimes downgrades are sign that it is time to buy-in. There is a suddenly a large amount of negative press for homebuilders; some recent examples include:
Builders Still Have Further To Fall

Home Inventories, Land Investments Hold Risk for Builders

Suddenly it is nearly impossible to find a positive article about homebuilders. Does this mean that it is time to buy; when fear is paramount and "blood is flowing in the streets" for builders?

However as a cautionary tale - Before you rush to call your broker to place a buy order - Here is today's example of a bad call from early in 2007. This article is from a "real estate expert" on the in February states that homebuilder stocks would have "as much as a 50% pickup over the next six months" and the time to buy is "now". Of course since February, homebuilder stocks have sunk like the Titanic.
It's Time to Buy Homebuilder Stocks

Is all the recent negative press a sign that it is time to consider jumping back into homebuilders. Does the press have it wrong or right. Is it time to try to catch this falling knife?