Friday, December 22, 2006

AG Edwards Just Another Asset Manager

A.G. Edwards, Inc. (NYSE: AGE) announced results for the third quarter and first nine months. Earnings improved substantially which usually is a good sign. The press release included very little commentary about operations or market conditions. But the results must be very real, look at the whopping income tax increase of 89% in the recent quarter and 65% in the nine months YTD.

Asset management and service fees are becoming increasingly more important as they surge past commissions. This normally would mean more stability of income. The question becomes how do they rank in the performance measurement game. Investors should be able to do simple arithmetic and compare performance. To produce results will A.G. Edwards start to take risks to beat the averages and look good when easily compared to similar offerings? In the meantime look for a cultural conflict as AGE wrestles with the required change.

Thursday, December 21, 2006

China May Start Clamping Down on Bio-Fuels

China has started clamping down on the use of corn and other edible grains for producing bio-fuels according to a recent report by Inter-Press Service. China's biofuel industry is booming thanks to voracious demand for energy to power the country's high-flying economy. China has been encouraging the use of bio-fuels as it reduces dependence on foreign oil and also helps alleviate environmental problems. Government planners had hoped that by 2020 15% of transportation fuels would be from Green sources. In China that is huge.

However China is experiencing surging food prices which affects rich and poor. Corn prices have surged 20%. Grain stocks are experiencing shortages and the government is selling from wheat reserves.

Yang Jian, director of the development planning department under the Agriculture Ministry, has been quoted as saying "We have a principle with biofuel: it should neither impact the people's grain consumption, nor should it compete with grain crops for cultivated land,"

The implications are increased oil imports for China. At the same time the recently announced deal between Archer Daniel Midland (NYSE:ADM), Wilmar (Singapore:WIL) and the Kuok Group with its China orientation looks very different after one week. Despite China’s food shortage the timing is strangely suspicious.

Wednesday, December 20, 2006

Fedex Should Sell Kinkos and Buy an Energy Company

Fedex Corporation (NYSE:FDX) reported diluted Q2 EPS of $1.64 vs. $1.53 for the comparable quarter last year. Ground package volume increased 14% which should make the teamsters stronger as they work to organize and negotiate better wages.

The Kinkos operation reported disappointing results as revenues actually declined and operating margins shrunk in half to a miniscule 1.5%. The only clear reason for Fedex to want Kinkos is to capture package volume at the ground level and maintain market share. Most of Kinkos has nothing to do with Fedex’s core competencies so it is not surprising that they are not getting it right. The press release has some corporate speak about retraining, refocusing on core resources and sales work force reorganization. Management has stepped on the gas and opened 86 new units in the first half and promises to open 200 new units during Fiscal 07. No mention of closures. As Kinkos becomes larger Fedex may have to reconsider their co-dependency problem and spin this one out while retaining a strategic relationship.

Fuel charges also dropped dramatically in Q2 contributing to very positive results. But as any airline knows this is a fleeting benefit, which frequently disappears with the next geo-political problem. Overall YTD fuel costs are still up 11%. Fuel charges are problematic. Fedex is still small enough and has the financial clout to buy into an energy company and control their fuel costs. Fuel is vastly more important than photocopies.

Tuesday, December 19, 2006

Goldcorp's Small Exploration Budget

GOLDCORP INC. (NYSE:GG - News) forecast production of approximately 2.8 million ounces of gold in 2007 at an anticipated total cash cost of $150 per ounce. By-product assumptions used to forecast cash costs are silver at $10 per ounce and copper at $3 per pound.

The exploration expense for 2007 is forecast at approximately $55 million or 10% of the current cash position. Split almost evenly with $23 million in Canada and $22 million in Mexico. This seems anemic but admittedly the cap-ex budget of $750 million exceeds cash therefore financing will be required and how much is left for exploration.

Gold and mineral companies are frequently acquisition oriented. Goldcorp’s signal is that they will allow others to explore and they will show up in the last minute after the risk and heavy lifting has been done.

Has Goldcorp become just a gold developer with substantial production? If so the stock price should reflect gold prices and hedge activities if any. So why invest directly and take-on the risk of corporate problems or the inevitable environmental problem that usually befuddles mining operators. Gold may be played more efficiently.

Monday, December 18, 2006

Value Line Shares Forecast Market

Value Line, Inc. (NASDAQ:VALU - News) reported Q2 results and net income was up 10% from the comparable Q2 last year. Can Value Line be used as a market forecast proxy or do you actually have to buy the services. The main revenue growth driver was licensing fees up 75% for the comparable periods, albeit the growth was based on smallish but optimistic product offerings. No management comment about future growth was offered.

But the old mainstay of periodicals and publications revenues was down 5% and related expenses down 4% with the resulting margin squeeze. Value Line also claims to have spent more money (up a whopping 16%) on marketing campaigns and fees to third parties to drive in more business. These campaigns are usually targeted at the individual investor. The campaigns did not seem to work.

Within the electronic publishing category, revenues were flat and paper revenues declined in keeping with all the usual experiences of North American Media. Retail subscribers were down but institutional investor subscription growth offset.

Mark Hulbert (you should know who he is) recently commented “Perhaps the most widely known of these newsletters is the Value Line Investment Survey, which is one of the best-performing of any of the newsletters tracked by the Hulbert Financial Digest over the past three decades....This newsletter has not made any recommendation in its model portfolios since early October, and in the months before that it dramatically cut back on the number of transactions it recommended. This represented a big shift, because in prior years the newsletter's model portfolios were quite actively traded.”

Could it be that the action addicted investor category now finds Value Line advice boring and is changing to more adrenaline pumped advisories? Institutions hopefully are less frenetic and therefore value intellectually honest analysis and opinions.

Could it also be that the market is similar to a roller-coaster ride? We are the top of a very large rise and just cannot figure out what the next sequence will be. If the newsletter is good at predicting and cannot identify something to buy that’s bad for the market. If the newsletter is good at predicting and cannot identify anything to sell that’s good for the market.

Therefore has Value Line issued a market neutral signal.