Watching China

PayPal had Q2 revenue of $602 million and is on track to reach 2008 revenue of $2.5 billion and and somewhere around $3.3 billion in 2009. This implies a 2009 top-line growth rate of 32% which would be a modest deceleration from current rates and assumes PayPal will continue to be able to counterbalance lower growth rates on-EBAY with an ever-increasing proportion of business coming from Merchant Services.

PayPal's operating margin (excluding options) is expected to come close to 20% in 2009. This would yield 2009 pro-forma operating income of $660 million and tax-adjusted pro-forma earnings of around $500 million. If we assume a forward P/E multiple of 30x (restricting PEG to under 1.0x) we get a current valuation of roughly $15 billion.

In the first half of 2008, according to a Ministry of Commerce release Thursday, investment flows from Hong Kong to the mainland rose by 95% over the same period last year, to $23.4 billion.  Interestingly enough, the number of projects declined by 8.2%, to 6,900.  I suppose it is possible that the average size of each project has more than doubled, but given the large number of projects, I think this is extremely unlikely.  So why the discrepancy?  According to an article in Thursday’s Xinhua:

There has been all kinds of trouble since yesterday afternoon for MEMC Electronic Materials (WFR), maker of silicon wafers and raw polysilicon used int he semiconductor and solar sectors.

For starters, the company whiffed Q2. Revenue of $531.1 million was well short of Street estimates of $557.9 million. Non-GAAP profits of 92 cents a share missed the Street consensus of $1 by 8 cents. MEMC noted that the results were a bit below the bottom of its targeted range.

Hifn, Inc. (HIFN)

F3Q08 Earnings Call

Financial Times: “Banks rally in face of gloom”

For its part, Reuters was completely undone, and tried to ignore the stocks’ moves altogether: “Wachovia, other banks post dismal results,” it simply said, with no mention until the sixth paragraph that “dismal results” or no, Wachovia’s stock price was zooming. The stock closed the day up nearly 30%; the S&P Financials overall rose by 8.4%.

Yesterday was a very good day!

We had oil fall all the way to $125 as NYMEX hostage-takers cannot dump enough barrels to stop yet another net inventory build, this time with 2.4Mb of distillates and 2.8Mb of gasoline being added to the stockpiles despite refineries running at just 87% of capacity.  Predictably there was a 1.5Mb draw in crude - that’s what happens when you don’t order any but we weren’t buying it for a minute and laughed off the post-inventory pump as we were able to clean up on the XLE, XME and USO bets that we discussed in Tuesday’s wrap-up.  We had a lot of nice plays yesterday and I did a portfolio review last night in lieu of the wrap-up.  We’re very pleased with the move in commodities and the dollar is close to breaking the 50 dma at 73 - a great combination.

Stamps.com Inc. (STMP)

Q2 2008 Earnings Call

One would think that the equity markets in Saudi Arabia and other Middle Eastern countries would be soaring along with oil.  But a quick look at the Emerging Middle East & Africa ETF (GAF), along with Saudi Arabia's Tadawul Index proves otherwise.  While Saudi Arabia saw big gains from '02 to '06, its index has struggled since then. 

Looking at the first chart below, the first run-up in oil from $20 to $80 seemed to benefit Saudi Arabia significantly, but the second run-up from $60 to $140 hasn't done anything.  While the Middle East & Africa ETF (GAF) hasn't been around that long, it has done nothing since it began trading back in early 2007.

First Place Financial Corp. (FPFC)

F4Q 2008 Earnings Conference Call

It is no secret that for various reasons, Americans have recently cut back on their spending. Since cars are big-ticket items, this drop in spending has manifested itself with utmost clarity in the auto retail space. U.S. motor vehicle sales were down some 18% in June year over year. As a result, many car retailers have been punished in the market.

Could this create a buying opportunity? Often, cyclical downturns allow long-term investors to pick up decent companies at bargain prices. In the case of auto retailers, when the economy returns to normal, people may not buy trucks and SUVs at the same pace as they had a couple of years ago, but we can nevertheless expect vehicle sales to recover from their current lows. Unfortunately, it's difficult to determine just how long a downturn will last.

Prices of Treasury coupon securities have surged in overnight trading and the yield curve has  reversed its recent flattening trend as weak economic data has prompted a shift of funds into shorter maturity bonds. Economic data released in various venues overnight suggests pervasive global economic weakness.The yield on the benchmark 2 year note has dropped 6 basis points to 2.72 percent. The yield on the 5 year note has dropped 4 basis points to 3.45 percent. The yield on the benchmark 10 year note has declined 2 basis points to 4.09 percent and the yield on the Long Bond has dropped 1 basis point to 4.67 percent.

The 2 year/10 year spread has moved wider by 4 basis points to 137 basis points. That understates the move. The market has shifted to the new 2 year as the benchmark. So we are now using the July 2010 issue. The roll from June to July is about 5 basis points. The yield on the retired benchmark is about 5 basis points lower. If we were still comparing to that issue the spread would be 5 basis points wider at 142 basis points.

It is official! Bill Gates has to be the most charitable man alive. Now, he is providing a chunk of his assets to help out ailing Autonation (AN). Sure he takes a nice piece of the company and if you look at the history of this once darling/roll-up king, you will realize that this may be actually approaching a bottom.

Whether it is a brilliant move or a plan for a tax write-off is still not known, but it does appear that Autonation’s CEO Michael Jackson seems to have a plan for cost cutting and working within this difficult environment. Do we follow Gates into this without any thought? Do we then follow Lampert as he has been continuing to add to his holdings (40% now)? Maybe not.

This article originally appeared on The DIV-Net on July 16, 2008.

Diversified conglomerate General Electric (GE) announced its second quarter earnings this past Friday. According to GE's finance unit, GE money's profits fell 9% while the consensus estimate was for profits in that unit to drop 15-20%. Its Infrastructure unit's earnings, on the other hand, were up 24%. Overall, the company met expectations by posting nearly flat earnings growth over the same quarter in 2007. Revenue actually rose 11% to $46.9 billion.

Earlier this week, I shared the background and overall asset allocation for my recently introduced “Conservative Growth/Balanced Model Portfolio.”  You can refer back to the article or visit my website to learn more.  As I stated in the previous article, the equity component of the portfolio is overweight relative to the S&P 500 in the Industrial, Consumer Discretionary and Financial Sectors.  I previously shared my basis for taking these exposures.  Yesterday, I reviewed my selection of an Energy stock, Chevron (CVX) that qualified for inclusion.  In this post, I would like to take share my reasons for including three Industrials:  Administaff (ASF), Carlisle Companies (CSL), and Illinois Tool Works (ITW).

ASF is a member as well of the Top 20 Model Portfolio. It focuses on HR services, providing small businesses with outsourced payroll, health benefits and many other services.  Based in the Houston area, the company has significant exposure to Texas, which I think is a good thing these days.  Other geographic concentrations are balanced.  The company focuses on leading smaller businesses and has little exposure to financial services.  The employees of their customers tend to be professional/technical (not labor). 

Below we highlight the performance of the 30 Dow stocks both year to date and since the recent low on 7/15.  Bank of America (BAC) is up the most since last Tuesday at 80.5%, followed by General Motors (GM) (48.5%), AIG (AIG) (45.8%), JPMorgan (JPM) (35%), and Home Depot (HD) (16.6%).  The rally back in BAC puts it down just 19% year to date.  GM and AIG, however, are still down more than 40% in 2008. 

Wal-Mart (WMT) continues to be the best performing stock in the index year to date at 22.22%.  WMT is followed closely by IBM (IBM) (19.8%), and the only other stocks in the green year to date are only up 2% or so (DD, MCD, JNJ). 

The recent downturn in the U.S. economy is weighing down economies across the globe, but the country feeling the fallout the strongest is just across our southern border. Mexico’s economy is heavily dependent on the U.S.: Around four-fifths of Mexico’s exports are destined for America; Mexicans working in the U.S. send enough money home to account for about 2.5% of their country’s GDP; almost half of foreign direct investment in Mexico came from the U.S. last year; and the country imported $134 billion in goods from the U.S. in 2007.

But despite the interconnectedness of the neighboring economies, Mexican stocks have fared surprisingly well so far in 2008. iShares MSCI Mexico ETF (EWW), which invests in several dozen stocks from Mexico’s sole stock exchange, was down only a fraction of a percentage point year to date on July 18, even as the S&P 500 lost nearly 15% for the same period. Moreover, while many Mexican stocks have dropped sharply, the country has so far avoided the kind of dramatic, broad market declines that many emerging economies have experienced. The relative stability in Mexican markets helped EWW jump to position four on the ETF Momentum Tracker rankings table last week, after spending the previous six weeks ranked sixth.