Thursday, November 15, 2012

Contrarians call on RIMM

by Benj Gallander and Ben Stadelmann, editors Contra the Heard

Contra the HeardAs hard core contrarians, we've been asked about Research in Motion (RIMM) a zillion times. We have acknowledged that its been on our watch list, and that in many ways it was a compelling prospect.

But the assessment was always that there was no hurry to take a position. That long wait has ended and we have now purchased the shares.

There is loads of analysis floating around about this company, picking apart everything from trends in inventory for various carriers to computations on the value of the portfolio of wireless patents.

That´s all important, but this purchase decision was based more on an appraisal of the bigger picture.

RIM´s demise has been so relentlessly newsworthy, it often seems that predicting its death has become a national sport. Such vehement condemnation is usually reserved for oil or cigarette companies.

 In the case of the Blackberry their offense seems to be more in the category of a fashion crime. So a key criteria was to wait until RIM´s problems were no longer front page news and for the piling on frenzy to abate. There are still plenty of negative stories, but they have mostly retreated to the business section.

Another important sign occurred in September when revenue for the quarter of $2.9 billion handily exceeded analysts´forecast of $2.5 billion.

The conventional wisdom was that many more subscribers would leave the fold due to a lack of new product. Instead subscriptions increased, bolstered by improvements in overseas markets.

Normally, we don't put much weight on an up tick in a single quarter, but for RIM this broke a very long string of deteriorating results that could not even meet reduced guidance. We also must note that having $2 billion plus in the bank and no debt is the kind of thing that still excites us.

Arguably the largest risk is that the corporation has essentially bet the farm on the roll out of a new suite of products next March.

If BB10 is a flop, it´s hard to see any kind of viable Plan B. In that scenario RIM could be carved up and sold for its salvage value. Estimates vary widely, but something in neighborhood of $6 a share seems conservative, though that would still be a crapshoot.

The view here is that if it receives at least mildly positive reviews, RIM will have an excellent opportunity to sell to its 80 million strong subscriber base that has been deprived of new product for ages.

If CEO Thorsten Heins can continue to drive innovation with its smartphones, and not get distracted by escapades such as the Playbook fiasco, then some positive momentum can be built. If that happens, then the shorts, who have had all the fun over the past couple of years, will start to feel the heat.

Setting a sell target is exceedingly difficult. Previous highs are virtually meaningless; RIM´s early domination of the smartphone business cannot be replicated.

However if the enterprise can maintain its reputation for excellent security (they just won security clearance from the U.S. government for the BB10) while producing stylish and functional devices for a global audience, a return to the $22-$25 range is feasible.

Palladium ETF Bolstered on Largest Shortage in a Decade

It could be time for the palladium exchange traded fund to shine as mine strikes, safety stoppages and supply cuts create the biggest palladium shortage in over a decade.

Labor disputes in South Africa and production cuts and depleting inventories in Russia will lead to a supply deficit of 915,000 ounces of palladium, the largest disparity between supply and demand since 2000, reports Nicholas Larkin for Bloomberg. In comparison, there was a 1.26 million ounce surplus in 2011.

“It’s unlikely that supplies of either platinum or palladium are going to rise,” Jonathan Butler, publications manager at Johnson Matthey, said in the article. “We’re assuming that demand is going to remain robust for both metals. Overall, we’re positive on investment demand, that conditions will remain favorable.”

Palladium futures rose 4.6% during Tuesday trading on the new data.

Palladium is used in gasoline automobile for autocatalysts to convert emissions into less harmful substances.

“For palladium, we see some further growth in autocatalyst demand,” specialist chemicals company Johnson Matthey, the maker of one in three autocatalysts, said in the article, projecting autocatalyst demand for palladium will rise 7.5% to a record 6.48 million ounces this year.

Johnson Matthey estimates palladium prices will average $650 per ounce over the next six months, with a range of $550 to $750 per ounce, Platts reports. Palladium currently sits at around $634 per ounce.

“Supplies will contract mainly because of lower sales of Russian state stocks, forecast to drop by over 500,000 oz compared with last year, to 250,000 oz, while recycling will be constrained by subdued PGM prices,” Johnson Matthey said in a report. “Gross palladium demand is predicted to rise to 9.73 million oz, driven by a return to positive net physical investment and higher autocatalyst purchasing.”
The ETFS Palladium ETF (PALL) was up 4.5% over the past three months but down 7.3% year-to-date.


Canadian Pacific Railway Limited (NYSE: CP)

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Canadian Pacific Railway Limited, through its subsidiaries, operates as a transcontinental railway providing freight transportation services, logistics solutions, and supply chain expertise in Canada and the United States. It transports bulk commodities, including grain, coal, sulphur, and fertilizers; merchandise freight; finished vehicles and automotive parts; forest products, which include wood pulp, paper, paperboard, newsprint, lumber, panel, and oriented strand board; and industrial and consumer products comprising chemicals, energy, and plastics, as well as mine, metals, and aggregates. The company provides rail and intermodal transportation services over a network of approximately 14,700 miles serving the principal business centers of Canada, from Montreal to Vancouver, British Columbia; and the Midwest and Northeast regions of the United States. Canadian Pacific Railway Limited was founded in 1881 and is headquartered in Calgary, Canada.

To review Canadian's stock, please take a look at the 1-year chart of CP (Canadian Pacific Railway Limited) below with my added notations:
1-year chart of CP (Canadian Pacific Railway Limited)
After pulling back from March until June, CP has been in a steady trend higher. Along the way, CP has formed a nice trend line of support (blue). Always remember that any (2) points can start a trend line, but it's the 3rd test and beyond that confirm its importance. Obviously CP's trend line is very important to the stock since it has been tested on multiple occasions. That trendline support is currently approaching $90.

McAlvany Weekly Commentary

Post Election: Gold Likes Obama, Stocks Don’t

About this week’s show:
-The markets signalled Obama win before polls opened
-What is stagflation? And why you should care
-Inflation’s are caused by unpayable government debt

Breakout at Home Depot

by Leo Fasciocco, editor Ticker Tape Digest

Leo FascioccoOur latest featured breakout stock is Home Depot (HD), which broke out from a seven-week flat base, carrying the stock to a 13-year high.

The stock's push higher came against a weak stock market and was triggered by better than expected earnings.

HD reported net from operations for the fiscal third quarter ended October came in at 74 cents a share, excluding a special item.

That topped the Street estimate of 70 cents a share and also the highest estimate of 72 cents a share. A year ago, HD earned 63 cents a share.

For the upcoming fiscal fourth quarter ending January of 2013, analysts predict a 21% gain in net to 60 cents a share from 50 cents a year ago. The highest estimate on the Street is at 65 cents a share.

The company is benefiting from good demand and the recent storms in the East. And we see good chances for an upside earnings surprise.

This fiscal year ending in January of 2013 analysts are forecasting a 20% jump in net to $2.97 a share from$2.47 a year ago. The stock sells with a price-earnings ratio of  21. We see that as reasonable.

Going out to fiscal 2014, the Street is calling for a 14% improvement in net to $3.39 a share from the anticipated $2.97 this fiscal year.

Over the last 12-months, the stock has appreciated 52% versus a 15% gain for the S&P 500 index. The stock has been a very good big cap play.

Technically, HD trending higher from 46 back in June to a peak near 63 in October. It then set up a flat base.

The basing work was done above a rising 50-day moving average line showing the stock is in a strong up trend. The breakout comes with a gap move. The expansion in volume shows good institutional buying.

The stock's momentum indicator is strongly bullish and the accumulation - distribution line has been trending higher overall for the past few months.

Overall, we see HD as a conservative big cap play. We are targeting the stock for a move to $71. A protective stop can be placed near $59.70. 

Faber: Middle East Will Blow Up and Affect Markets: Video

S&P 500 Drops through Support

The S&P 500 was attempting to hold near the low formed last week that came on the heels of the post-election collapse in the US stock markets.

It just so happens that the low was in the very near vicinity to the critical 50% Fibonacci Retracement Level of the entire rally of the late May/early June swing low.

It bounced away from that level yesterday but today, down it went.

The index is now poised to drop all the way to the next Fibonacci retracement level, the 61.8% level, or the 1340-1344 region.

Failing to hold there, it should retrace the entirety of the rally meaning that we could very well be looking at a drop through the 1300 level on down towards 1275 or lower.

The onus is now on the bulls to hold the next level of support at 1340 if they have any chance of regaining the near term advantage, which clearly lies with the bears.

The myth of energy independence

As long as we run our economy on oil, we'll still be vulnerable to the world market. 
This just in: The United States is about to be the new Saudi Arabia. Not the Saudi Arabia of wind, or natural gas, or some other nerd energy source nobody fights wars over, but of old-fashioned oil!
That's an easy conclusion to draw from reading the International Energy Agency's report, which projects that the U.S. will replace Saudi Arabia as the world's top oil producer by around 2020, lending a massive dose of establishment cred to the idea that North America is en route to energy independence within the next decade or so. Assuming that the prediction is right, this is the sort of news that can, and will, be easily misconstrued -- probably in Congress by people responsible for setting our national energy policy. Because here's the thing: While we may soon produce as much crude as Saudi Arabia, we will not actually have the same power over world markets as Saudi Arabia, and thus oil will continue to be a political, and financial pain in our side.

To keep it simple, here a few key points if you hear the Saudi Arabia line.

(1) We'll NEVER Be Like Saudi Arabia 
Saudi Arabia is special for three reasons. First, it has the world's second-largest proven oil reserves, behind Venezuela. Second, it pumps more crude each day than any other nation. Third -- and this is the important fact about Saudi Arabia -- what gives it enormous sway over the international oil market is that it could pump more if it chose.

As a net oil exporter, the country's only goal is to maintain a stable market that yields that maximum profit per barrel. It accomplishes this by leaving a couple million barrels of oil a day untouched as an insurance policy. That way if, say, a major pipeline explodes in Africa, or Iran decides to drop mines along a major oil shipping route, the country can increase its production and calm everybody down. At the same time, if oil's price drops too low, the Saudis and the rest of OPEC can choose to drop production further to stabilize prices.

Even if we do eventually outproduce Saudi Arabia, we won't be able to get the world oil market under our thumb. We don't have a compliant state-owned oil company that the president can dial up and we're going to need whatever oil we produce domestically, along with imports from Canada and Mexico. We're not going to get to be the conductor for the global oil market like the Saudis have been in the past.

(2) More Drilling Won't Make Us Energy Independent
In short, producing a ton of oil in the United States isn't going to insulate us from the rest of the globe. Mexico and Canada still aren't going to give our refineries any special neighbors-only discounts. Nor are the privately run oil companies pumping out crude in North Dakota, Texas, and the Gulf of Mexico. And because oil is a mostly fungible commodity traded worldwide, what happens to supply and demand in one corner of the planet impacts prices everywhere. If China and India start growing wildly again, or some sort of war causes prices to spiral, we won't be immune.

This isn't to say that producing more oil doesn't have it's advantages. It will bring more money and jobs into the states where rigs are popping up. It will shrink our import tab and also keep a cap on prices as developing countries grow and get thirstier for fuel. Beyond that, it will shrink the power of OPEC a bit. After all, the more oil that's around, the harder it is for any one country, or group of countries, to manipulate the market. These are real benefits that shouldn't be undersold. But we shouldn't act as if an oil boom will be our geopolitical or economic salvation.

(3) The Key Is Still Conservation 
This can't be repeated enough: We can't drill our way to oil independence. But by conserving our usage, we can insulate ourselves from rising gas prices. Here's the IEA's economist talking to the New York Times:
Dr. Birol said the agency's prediction of increasing American self-sufficiency was 55 percent a reflection of more oil production and 45 percent a reflection of improving energy efficiency in the United States, primarily from the Obama administration's new fuel economy standards for cars. He added that even stronger policies to promote energy efficiency were needed in the United States and many other countries.
If we want to stop buying oil from places other than Canada and Mexico, we need to cut our usage. Same deal if we don't want to see prices spike as 1.3 billion Chinese inch closer to our standard of living. The scary thing is that more oil we produce, and the more our economy comes to rely on hydrocarbons, that harder it will be politically to promote sane green energy policies that actually get us to that goal. There's nothing like short-term profits to make you forget your long term interests.