March 29, 2007: Insurance, who wins?

As I examine my portfolios, I do have some interesting insurance plays. The iShares Switzerland includes a number of the larger international insurers and is a favorite ETF of mine. I hold a relatively large position in a personal speculation, Convernium (CHR), which has performed as expected and is close to being bought out at a nice premium. Donegal Insurance (DGICA)is another holding of mine that is a prime buyout prospect. I think it is a steal at the current price of $17.00+ -/share.

As an sector, property casualty insurers continue to be risk averse in their positioning of fixed income investments in anticipation of higher interest rates. They may be betting the wrong way. Sub-prime exposure is NOT a significant problem.

If rates rise, companies such as Ace Limited, Max Re, Odessey Re, Ohio Casualty, Partner Re and Transatlantic are vulnerable to as much as an 11% decline in their stock price, according to some analysts.

On the other side of the coin, companies that maintain below average portfolio duration, above average cash and short term investments and above average investment leverage will do very well, indeed. These companies include American Physicians (ACAP), Arch Capital (ACGL), Navigators Group (NAVG), White Mountains (WTM) and XL Capital (XL).

All things being equal, if interest rates rise, many property-related insurance stocks will fall in value. This has been the case for over 25 years. The inverse, thus, is also true. Who wins? You do, with good research starting with the five recommendations above.

March 28, 2007: One stock tidbits:CBS

CBS Corporation (CBS) is in my portfolio(s). Only ego would assume that one blogger would make this large media company stock either rise or fall.

I really like CBS prospects.

First, it is well managed.

Second, CBS will have $2.9B in cash by year's end, despite returning $2.1B of capital to shareholders over the upcoming calendar year. This future cash is incremental to the company's regular quarterly dividend payments and the already completed $1.5B accelerated share repurchase plan.

Third, likely options to spend the excess cash are share repurchases, online content acquisitions,advertising acquisitions or a management-led buyout.

It seems that investors' primary concern is that CBS may use the cash to make a dilutive acquisition, as have other media companies. I do not believe this to be realistic based upon the high quality of management and their desire to maximize shareholder value.History means something.

CBS has, according to one respected analyst, a "rich man's problem". I like this problem!

It is probable the stock may be worth $40.00/share using any of the four likely scenarios. Maybe more, if management would like to own the company outright.

March 27, 2007: Windfall for pipeline MLPs in ethanol

The Internal Revenue Service ruled that ethanol blending can be considered Master Limited Partnership qualified income under tax code section 7704(d)(1)(E). The ruling was given to an unidentified MLP, but the ramifications are huge for alternative energy blends.

This favorable ruling could encourage additional ethanol infrastructure development, and will give all MLPs contemplating investing in ethanol infrastructure the encouragement they need to go forward. Thus, blending ethanol with petroleum product(s) provides a solid growth opportunity.

The three companies set to reap benefits are KMP, VLI and TPP. Each of these companies have a large footprint in refined ethanol product terminals and also have a close proximity to proposed plants.

I like Teppco (TPP) but Kinder Morgan (KMP) can never be diminished due to outstanding management.

All have a nice tax advantaged dividend.

March 26, 2007:Real estate and Aero defense information

Your blogger will be spending time the next two weeks researching and traveling representing myself and other investors with the intention to purchase distressed real estate.California will be first on the agenda. Leaving Friday of this week.

I (and others who know the game) feel that at this stage, real estate has been beaten down to close to bottom and excellent deals are to be had. It is our intent to pick up batches of properties at approximately 20 cents per 2007 appraised value. Some folks (i.e., banks) just HAVE to sell.

Real estate now has a much better short and intermediate potential than stocks and investment grade bonds. As financial planners have little or no expertise in real estate, you can book that they will continue on with the sub-prime talk - missing opportunities left and right that a good Realtor/Broker/Bank foreclosure department could provide clients.

Areo-Defense:

>Senate approved $98B in armed forces supplementals, $2B more than requested.

>Armored vehicles were fully funded.

>The CSAR-X decision has been postponed by the USAF pending further clarification.

>GAO wants Army go-decision on the FCS by 2009. Presently running above planned $164B estimate.

>LLL won the linguist contract through December 2007.

>AH received $103M contract for up-armored HMMWW.

>Japan is considering buying military jets from Boeing (BA). Quantity to be announced.

>BA affirmed 787 development schedule. Rollout on July 8th.

>BEAV priced 10.5 million share offering at $32.

>PCP announced suprise 15% revenue growth.

>Dubai's purchase of Landmark Aviation and Aero-Holding will likely get approval from the investigative congressional panel. This may lead to other takeovers of non-defense specific companies by third world companies of interest.The 1990s all over again!


Stock recommendations are the same as last week, except:

Precision Castparts (PCP) is strongly recommended for consideration based upon new numbers and cost containment.

March 23, 2007: Snooping around the homebuilding stocks

Any time a group of politicians decides to hold hearings on a national menace (their view, not mine), I look at the situation as a signal to investigate on my own. I assume that the political posturing is usually at the end of a problem, and not the beginning. News cycles, ditto.

Home builders, hand-in-hand with sub prime mortgages, have been beaten like rented mules over the past couple of months. For good reasons. Now, I think it is time to look beyond and see what the future holds for the stronger plays in the home building industry.

That said, there has been a noted increase in shorts on home builder stocks, as well as furniture companies and financials in the sub-prime swamp. I believe that the home builders' shorts will have to cover by mid-summer (and shorts are actually down since September 06), when it is possible that the Fed may lower interest rates a notch.

Here is my list of housing stocks and their minions that stand to benefit first from the rebound:

Fortune Brands (FO)
Interline Brands (IBI) -MY PERSONAL FAVORITE
Lennar (LEN)
M.D.C. Holdings (MDC)
M/I Homes (MHO)
NVR (NVR)- BARELY MADE THIS LIST
Standard Pacific (SPF)
Stanley Works (SWK)

This is a small list, but I did not want to minimize problems with the industry. Bad things will happen to financially weak or management poor companies.

March 22, 2007: Rendering an alternative energy stock/Part.3.5

Today,I read a review of a fairly comprehensive New York/ London Alternative Energy Conference held yesterday involving some old and new players in the global warming game. Granted, everyone in attendance had something to gain from assumption of the global warming prediction(s). I remain a skeptic to a degree, pun intended.

What I am in favor of is energy independence from rogue states. Thus the global warming goals and national defense goals have many things in common, IMO.

First, a few comments from transcript readings of the conference:

I, and more than a few analysts believe that we are only at the start of a multi-year, possibly multi-decade, global investment cycle in low-carbon generation and lower energy intensity.

Wind is the most economical, especially in the US (GE best US bet).

Solar continues fast growth in spite of higher costs. Solar thin film is the most advanced.

Gas to liquids is a more compelling energy source than I had thought. Cheniere (LNG) is the play here.

Bio fuel discussions focused on how the next generation of technology could avoid the bio fuels competing with food chain for feed stocks, which leads me to a little know stock which shows excellent prospects:

NOVA Biosource Fuels (NVBF) trading at $2.60/share on decent volume takes animal fats and renderings and processes them into bodiesel fuel using a proprietary technique. The key to NVBF's advantage is the ability to use feed stocks which are high in free fatty acids. Feed stocks which are low in free fatty acids such as soybean oil and corn are extensively used in the human food industry, and therefore much more expensive than feed stocks with limited applications in human food due to high free fatty acids. NVBF claims its final biodiesel product is also cleaner than that produced by conventional biodiesel methods because NVBF distills the fuel as the final step in the production process.Importantly, NVBF has a cost advantage in this process which means it is the ONLY biodiesel manufacturer in the US which is profitable without the $1.00/gallon US federal government subsidy, though it still receives this fee.

NVBF offers a very different and highly profitable angle compared to seed-based ethanol.A company in Finland (Neste Oil) has a similar, slightly less efficient rendering process. Smithfield Foods (SFD) has an extensive biofuels operation, but uses a somewhat archaic process that draws the ire of local residents. You can research NVBF at www.novabiosource.com

March 21, 2007: Tax paralysis/what and why?

MONEY MAGAZINE has a current article regarding,in part, what you need to keep and for how long for Federal Tax reasons. I just completed my set of taxes (TurboTax Professional Home and Business).Perhaps this summary might assist you make prudent tax history decisions.I recommend you read the entire issue. It is excellent recreational reading this month (April,2007).

The IRS has up to three years from when you file to look for errors on your return and up to six years to audit you. There is no limit if fraud is involved.


A few document and holding period times:

Tax returns and proof of filings should be held forever, in case you are audited, and to have a history of your finances.

Documents that support your tax return should be held for six years. In case you are audited, the IRS typically has only three years to examine your return for mistakes, but the window becomes unlimited if there is a suspicion of deliberate misconduct.

Receipts should be held until the warranty expires for big purchases and for six years for deductible expenses. You need to establish proof of purchase for warranties, to track deductible expenses for the current year's tax return and to support those write-offs in case of a future audit.

Stock, bond and mutual fund confirmations should be held for six years after you sell if you have a gain, and six years after you claim a loss if you had a loss.
You need to prove to the IRS how you accounted for the gains or losses.

Medical bills should be held one year, or six years if you deduct medical expenses. If you itemize, you must have proof in case of an audit.

Pay stubs should be held until your W-2 arrives. You should confirm the information against your W-2 summary.

401K and IRA investments should be kept until your year-end summary arrives. Check your summary carefully against the statement. Keep the statement for your long-term files.

Bank statements should be kept until year end and longer to confirm your 1099. And longer still for tax audit purposes (six years).

Utility bills should be kept until the end of the year to track usage if you deduct a home office.

Credit card statements need only be kept one month. However, I never throw mine out as they provide a useful record of transactions and are proof of purchase. Your credit card company(s) should keep your records on line.

March 20, 2007: Coal opine and Aero defense tidbits

I deliberately left coal out of the three part series on alternative fuel investments and prospects. Although coal is our most pollutant energy source in relative terms, many experts feel that technology will have to be developed to transform and/or clean burn this resource - mainly because there is so much of it lying around ready to be mined and used.

Coal is NOT dead. Analysts at Credit Suisse First Boston predict that US coal producers will benefit, over time.

The push towards alternative energy sources will move the electricity cost curve higher over time. This means coal will fetch a higher price and thus likely also expand R&D for clean coal technologies.

The abundance of coal (worldwide) coupled with the economics of coal may indicate that it will remain a significant source of future energy needs. Although alternative energy sources will tap into the present coal market and reduce the percentage of coal power plants, etc., the higher costs of these energies will make way for a significant coal presence in future energy projects.

Some clean coal technologies on the horizon include gasification, carbon sequestration, integrated gasification combined cycle (IGCC) power plants, etc.


Although coal stock prices are likely to stagnate (at best) this year, the long term outlook is anything but bleak. I recommend no coal companies at present, but come fall, it might be worth the time to assemble a list of coal stocks to research.



AERO-DEFENSE

> Remember my Deepwater critique last month? The Coast Guard has wisely stripped the Fast Response Cutter-B (58 ships) program from its Deepwater project. The Coast Guard will manage the program internally and mind their own store. NOC/LMT screwed this up but they will have time to rectify problems in the program and retain the work. Sen John Kerry wants the whole Deepwater program rebid. He's a small man living high on the hog with legacy money, and has nothing to offer the Coast Guard program except heavy handed rhetoric. Most lawmakers from both sides of the aisle see this and will not further delay this vital Homeland Security program.

> The Navy is progressing with its LCS-3 program, benefitting LMT.

> BA is looking to re-configure its new 737 with different interior cabin seating configurations that may extend production into the middle of the next decade.

> American Airlines will likekly replace its aging MD80s with Boeing 737-800s.

> Continental ordered five BA 787s, ALAFCO ordered twelve 787s and sic 737s and Volga Dnepr ordered five 747-8Fs, totaling 4.5B for BA.

> Mighty AIRBUS did sell 22 SAS350s to Aeroflot. Rumor has it that they almost gave the planes away.


Recommending the usual suspects:

BE Aerospace (BEAV)
Goodrich (GR)
Precision Castparts (PCP)
Spirit Aerosystems (SPR)
Boeing (BA)
Easterline Technologies (ESL)
DynCorp (DYN)
General Dynamics (GD)
Lockheed Martin (LMT)

March 19, 2007: Alternative energy and conservation: Part three/North American stock picks

PART THREE:


In the past two segments of investing in alternative energy and conservation, I have attempted to give a world perspective on the issue, with appropriate stock picks. With this post, i will add a few comments and then list stocks that are well situated to promote and profit from the alternative energy and conservation movement.

Although I believe the global warming crowd may be sipping a little too much Kool-Aid, there is merit towards trying to improve the quality of life without damaging the economies and creature comforts that we all work hard to achieve. Thus, the balance is struck:

Without comment, here are the list of stocks for you to research and claim or toss as you see fit. I hope you enjoy looking into all of the stocks in this three part series as much as I had fun looking into this area, amidst the hoopla of sub-prime loans and the collapse of the du jour sector of the day.

Canadian Solar (CSIQ)
Active Power (ACPW)
ADA-ES, Inc. (ADES)
Advanced Micro Devices (AMD)
AGCO (AG)
Air Products and Chemicals (APD)
Alternative Fuel Systems (AFX)
American Superconductor (AMSC)
Anardarko Petroleum (APC)
Apache Corp. (APA)
Archer Daniels Midland (ADM)
Aventine Renewable Energy (AVR)
Baldor Electric (BEZ)
BorgWarner (BWA)
Bunge (BG)
Capstone Turbine (CPST)
Carmanah Techologies (CMH)
Cataytica Technologies (CMH)
Chesapeake Energy (CHK)
Clean Air Power (CAP)
Color Kinetics (CLRK)
Cooper Industries (CBE)
Corning (GLW)
Cree (CREE)
Cypress Semiconductor (CY)
DAIS Analytic (DLYT)
Deere (DE)
Emerson Electric (EMR)
EOG Resources (EOG)
Evergreen Energy (EEE)
Fairchild Semiconductor (FCS)
Fluor (FLR)
Foster-Wheeler (FWLT)
Fuel System Solutions (FSYS)
Fuel Tech (FTEK)
General Electric (GE)
Headwaters (HW)
Hexcel (HXL)
Infrasource Services (IFS)
Intel (INTC)
Intermagnetics General Corp (IMGC)
International Fuel Technology (IFUE)
International Rectifier (IRF)
ITC Holdings (ITC)
Itron (ITRI)
Johnson Controls (JCI)
Linear Technology (LLCT)
Manhattan Scientifics (MHTX)
Maxwell Technologies (MXWL)
McDermott (MDR)
MEMC Electronics (WFR)
MGP Ingredients (MGPI)
Monsanto (MON)
O2Micro International (OIIM)
OM Group (OMG)
ON Semiconductor (OMNN)
ORMAT Technologies (ORA)
Pacific Ethanol (PEIX)
Pike Electric (PEC)
Power Integrators (POWI)
Power-One (PWER)
Praxair (PX)
Quanta Services (PWR)
Rockwell Automation (ROK)
SPX Corp. (SPW)
Starmet Coporation (STMT)
SulphCo, Inc. (SUF)
Ultralife Batteries (ULBI)
United Technologies (UTX)
Universal Display Corp. (PANL)
UQM Technologies (UQM)
URS Corporation (URS)
VeraSun Energy (VSE)
Viaspace (VSPC)
Whirpool Corporation (WHR)
Wildbrush Energy (WBRS)
Williams Companies (WMB)
XTO Energy (XTO)
Zolteck Companies (ZOLT)


Coal will be addressed tomorrow, along with Aero Defense news as warranted.

March 17, 2007: Alternative energy, part duex

PART TWO:


This portion of the post deals with my opinions on different types of alternative fuels, and the "best bet".

The thirty stocks listed yesterday represent the "world's best" thirty alternative fuel selections. Many of these are out of reach of American investors, but we do have a multi-national readership here, which needs to be catered to now and then.


Here is my opinion of each alternative fuel:

NUCLEAR: Nuclear capacity should increase by as much as 60% over the next fifteen years. Alstrom (ALSO.PA), ABB Ltd. (ABB.ST) and Shanghai Electric Group (600021.SS) have the best exposure. Uranium is a beneficiary. Cameco (CCJ) is the stock to own.

SOLAR: At present, this is a high cost alternative, but R&D is exploding in this field and a better extraction technology is sure to come forth. China has announced it will have 2,000MW of solar power by 2020 vs. 60MW today. Beneficiaries include Q-Cells (QCEG.DE), SunPower (SPWR) and Tokuyama (4043.T).

WIND: This is economical power with oil at $70/barrel. EDF Energy Nouvelles (EEN.PA)
and Iberdrola (IBE.MC) are best.

BIOFUEL: This is not economical in Europe and most of North America at present.It is more suited to tropical areas Cosan SA Industria e Commericio (CSAN3.SA) producing ethanol in Brazil, is competitive at $35/barrel. Palm Oil plays are under-reported by analysts. Two companies with impressive palm oil plays are IOI Corporation (IOIB.KL) and Golden Hope Plantation (GHOP.KL). With bio fuels, agricultural productivity will need to rise, and the best situated companies are Deere (DE) and Kubota (6326.T)

and the best:

SAVE THE ENERGY ON SITE! The IEA estimates that 80% of the reduction in emissions will come from demand-side efficiencies. More efficient light bulbs, air conditioning,jet engines, cars, electricity transmission and distributive systems are a few of many themes. Boeing (BA), BorgWarner (BWA), Continental (CONG.DE), Johnson Controls (JCI) and Schneider (SCHN.S) offer exposure here.


The rest:

Gas-to-Liquids/Coal to Liquids known as GTL and CTL are older technologies that throw off a lot of CO2. If a conversion plant is located close to the mouth of the source, it is reasonably cost competitive. Liquid gas terminals are being built in the SE US in anticipation of this source. Cheniere (LNG) is a pure play. Odds are it may never reach full potential.

Geothermal: Outside of Iceland and parts of California, it is not a feasible energy source for any larger size population. No investment recommended here.

Biomass: Industrial and agricultural waste products has a certain allure, but the technology emits large quantities of CO2 at present. One interesting play is Smithfield Foods (SFD) which seems determined to use all, and I mean ALL, of the hog.

Wave: This technology may hold future promise, but wave power is still very much in the R&d Phase and no stocks are recommended at this time.


I have lengthened this posting to three parts. The third and final part will be an extensive roster of North American companies that are in harmony with the theme and are more easily accessed by American investors.

March 16, 2007: Alternative/renewable energy: possible scam/ probable profits

PART ONE:


Global warming? Hardly. Running out of oil? Not a chance for a LONG time. Coal too dirty? Only with old technologies. Nuclear power doomed to kill millions? More individuals will be killed by Prius autos driven by movie stars on drugs. Lots of money to be made in alternative and renewable energy? You bet!!

The rise of alternative and renewable energy is being driven by the combination of higher-for-longer oil prices, increasing social and political consensus on the need to tackle carbon emissions and climate change, and the changing legislative landscapes that accompany this.

Alternative energy is a hot topic and a broad one. Appropriate stocks are worldwide in scope. Importantly, in my view, the stocks that feature greater energy efficiency are more lucrative from the investor perspective than those on the supply side tilting towards renewable power generation.

Using research by myself and others (especially the great analysts at CSFB, whom are now expanding their efforts in this realm), here are consensus top picks for your consideration:
Some cannot be purchased in the US, except through new E*Trade global stock accounts.
Others have ADRs or thinly traded OTC counterparts. Research which best suits your needs.

Solar:
Q-Cells AG (Europe)
Renewable Energy Corporation (Europe)
Sino-American Silicon (International)
SunPower Corporation (US)

Biofuels:
Cosan SA Industria Commericio (International)
Golden Hope Plantations Bhd. (International)
IOI Corporation Bhd. (International)

Utilities:
EDF Energies Nouvelles SA (Europe)
EDF (Europe)
Fortum (Europe)
FPL Group (US)
Iberdroia SA (Europe)

Capital Goods:
ABB Ltd. (Europe)
Aistom (Europe)
BorgWarner Inc. (US)
Continental AG (Europe)
General Electric (US)
Johnson Controls Inc. (US)
Kubota Corporation (International)
Schneider Electric Corp. (Europe)
Shanghai Electric Group (International)
Siemens (Europe)
Spirax-Sarco Engineering Plc. (Europe)

Heavy Goods:
Boeing (US)
Deere and Company (US)
Impala Platinum Holdings, Ltd. (International)

GTL:
Sasol Ltd. (International)

Nuclear:
Cameco (US)

Natural Gas:
BG Group Plc. (Europe)

PART TWO WILL OFFER COMMENTARY AND AN EXTENSIVE LIST OF NORTH AMERICAN STOCKS WITH SYMBOLS FOR ADDITIONAL INVESTMENT IDEAS ON THIS THEME.

March 15: Mortgage delinquency and foreclosure data-this may shock stocks

I examined some data released tonight from the Mortgage Banker's Association's National Delinquency Survey. Delinquencies for all loans in the fourth quarter increased 4.95%. Year or year, delinquencies deteriorated 4.70%. This represents the highest level in several years.

The level of mortgages that entered foreclosure increased to a record level nationally at 0.57%. The previous peak was 0.49% in 2002.

The deterioration in overall delinquency rates is likely going to inflict economic pain in the quarters ahead, despite continued job growth. Wit home prices under pressure in the face of increased regulatory scrutiny and a significant amount of ARM resets expected, I am concerned of the systemic risks to housing as the mortgage liquidity crisis unfolds. It is possible that the large amount of foreclosed units slated to hit MLS listings in the next 2-5 months implies that total inventory provided by the NAR could be price cut more than -20%. Furthermore, if the employment situation were to come under pressure as a result of the current housing situation, the delinquency trends would be further exacerbated.

In short, I strongly urge readers to consider bailing out of retail stocks,large US banks that are non-diversified, credit card companies, home builders and building supply companies. In addition, playing defense with your portfolio and further allocating resources to Japan (strong currency), Switzerland (ditto) and Singapore (ditto) through pure currency plays or through ETFs of those countries may be looked at. I am not spreading fears of a depression, or even a severe recession. What we are faced with will be rising negative sentiment and emotional redemption of mutual finds and ETFs, and 'sticker shock" as stocks prices drop in the above industries.


An MRI today confirmed what I suspected. A knee problem will almost surely require routine surgery. I have been researching "global warming" stocks for a few weeks and hopefully will have a timely report tomorrow, if the pain killers don't dull everything. I hope you will enjoy the findings. It was fun doing the research.

March 14, 2007: Credit Cards: making sub-prime mortgages look pristine

With the glare of publicity on sub-prime mortgages, I thought it would be interesting to peek into the credit card industry and see what they were up to. Remember, in 2002, the so-called "sub-prime" credit card bubble caused a temporary panic in the financial markets.

The 2007 mail volume forecast for credit card solicitation is 8.5 billion pieces, an increase of 5% from 2006. The industry response rate was 42 basis points in December, up 7 basis points from November.

The credit card industry continued its heavy reliance on 0% teasers. Most mail solicitations included a 0% balance transfer teaser rate.

Top mail issuers are, in order of volume, HSBC, Capital One, Chase, Bank of America, Ciibank, WaMu, Discover, Am Ex, Barclays and First Premier.

Citibank was the heaviest user of 0% balance transfers, with 84% of mail volume containing 0% transfer offers.

Fixed rate card mailings declined to 18% of all offerings in January, 2007.

HSBC has aggressively increased their mail volume with 117 million pieces, up 99% from a year ago.

Capital One had 93 million mail pieces and continues to push 0% balance transfers.

Chase had 72 million mail offerings. 69% of Chase's balance transfer offers had a 0% teaser attached.

Bank of America had 72 million mail offerings with 0% balance transfers on 78% per cent of the mailings.

Citibank had 71 million credit card mail offerings with 84% of the solicitations having a 0% balance transfer.

Washington Mutual had 53 million credit card solicitations, with 54% containing 0% balance transfers.

Discover had 50 million mail solicitations with 97% offering a 0% teaser transfer rate.

American Express had 40 million mail credit card solititations with 54% being 0% transfers.

WHY IS THIS NOT BEING REPORTED IN THE MEDIA? This may be a larger scandal than the in vogue sub-prime mortgage situation.

With 24% of Americans accepting a new credit last year alone, the pent up credit card bubble is a potential disaster.

Still, many analysts have Buy ratings on Bank of America (BAC), Capital One (COF), Citigroup (CITI), and Morgan Stanley (MS).

I don't buy it. Should you?

March 13, 2007: Sub-prime tidbits and Swire Pacific

I will do a mini-mea culpa regarding sub-prime financing. As I looked into the situation from the angle of total financial immersion out of curiosity, some facts head slapped me.

First off, it is not just a sub-prime issue. A good portion of the mortgage market is at risk of a significant adjustment from tightening credit and increased regulatory scrutiny. The areas of most concern are stated income affectionately called Liar's loans, high CLTV/piggyback and interest only/negative amortization loans. The proliferation of these mortgages has been been highest in former real estate hotbeds such as (surprise), California, Nevada, Arizona and Florida. These states have also accounted for the lion's share of builder profits and many retailer's profits as well.

Countrywide, Option One and Wells Fargo have announced plans to discontinue many risky products - especially the stated income program (Liar's mortgage). Freddie Mac will cease buying sub-prime ARMs that qualify buyers at a teaser rate.

Thus, approximately 21% of the loan business is drying up. The drop in new home construction may thus be 35-45% nationwide. This is a LOT higher than I thought. However, there is a sense that tighter criteria will bring a more logical and orderly mortgage business model henceforth. It is possible that the Fed may even lower interest rates to help ease the situation in mid-summer of this year.

Headwinds from deteriorating credit will impact supply and pricing conditions. Thus, if you are a first-time home buyer with good credit, you have a Goldilocks scenario, low interest and large builder discounts.

Foreclosures are expected to maintain a heavy hand throughout much of the nation with many short sales from banks anxious to rid real estate from their books.

Finally, the tightening liquidity and more stringent appraisals put current builder backlogs at considerable risk for fallout, which should lead to another surge in cancellations and additional spec inventory on the market. This situation will be felt throughout the entire market and lead to a possible 20% DECLINE in home prices over the next twelve months.

$300B (36%) of sub-prime loans are set to adjust upward in 2007. Many dramatically so, from teaser rates. Wal-Mart's reliable monthly customer survey results indicate that overall financial well-being has become the number one concern of its customers. Wal-Mart thinks that housing obligations are likely contributors to this concern.

Analysts at Credit Suisse First Boston state that Costco, Target, Nordstrom and Saks are most exposed.to this downdraft of credit.Don't ask me why...ask CSFB.

In total, IMO, resets of sub-prime and alternate mortgages represent a challenge to sustaining consumer spending at all levels.

Thus, except for Wal-Mart, you may want to forget about the retail sector for the near and intermediate term.

One bright spot are non-US banks stepping in with sub-prime money, albeit with more stips as I mentioned in an earlier blog post. Another is that the fallout may confined in large part to the aforementioned states. California, Arizona, Nevada and Florida will be painful for home builders and retailers if the statistics presented are correct.

CSFB is the source of critical and timely data for this post.

On brighter side (unless you are Airbus), China announced it will be building its own aircraft with a target date of 2010 for the first model to 2020 for full production. Investors may want to take a look at Swire Pacific, a Chinese conglomerate with hands in everything from soda pop distribution to aircraft repair and retrofit. It trades very thin at SWRAF. When E-Trade opens up their trading desk overseas to individual investors, Swire Pacific will be one of the first stocks I will consider for purchase. www.swirepacific.com

March 10, 2007: Aero defense and commercial air tidbits

House Democrats are scrambling to appease the far left fringe of their Party and begin to assemble a bill to provide exit strategy from Iraq before a satisfactory resolution is obtained. Cut and Run, Inc.

AH received a $40.7M contract from FRPT (Force Protection) for production of the Cougar armored vehicle as part of the USMC WRAP program. All work in '07.

China is reported to increase military spending by at least 18% annually. DoD expert's look on this as an almost 30% increase military hardware. Almost all is offensive-capable.

ESL beat the street earnings estimate by a notch.

Airbus announced losses of E768M compared to looses of E450M last year. It expects substantial losses this year.

Shanghai Airlines selected GR (Goodrich) electric braking systems for its new Boeing 787s.

Tactical Wheeled Vehicles for the armed forces were analysed and it appears that the Humvees have approximately 81% of useful life remaining, Medium trucks have approximately 20% useful life remaining and Heavy trucks have approximately 38% useful life remaining. This bodes well for Oshkosh (OSK) which produces a good number of trucks for the armed forces.

STOCKS TO WATCH:

BE Aerospace (BEAV)
Goodrich (GR)
Precision Castparts (PCP)
Spirit Aero Systems (SPR)-recently added to my list
Trans Digm Group (TGD) - newly added to my list
Boeing (BA)
Esterline Tech (ESL)
Armor Holdings (AH)
DynCorp (DYN)
General Dynamics (GD)
Lockheed Martin (LMT)
Northrup Grumman (NOC) - a strike at a NOC shipyard does not appear significant
Oshkosh (OSK)

Personal congratulations to four recently promoted Captains and Major in the USAF, and a battle-tested USCG Lt. Anonymous you will remain.

March 7, 2007: Crunch time stock picks

Many of us are reviewing stocks to look at in a new cycle of volatility (real or imagined). Without going into a long discourse, two brokerage houses have recommended a few stocks to their institutional clients. One is unnamed, the other is CSFB.

Here is the list which receive strong buys. Just released:

Activision (ATVI)
Air Products and Chemicals (APD)
BE Aerospace (BEAV)
Best Buy (BBY)
Boeing (BA)
Bunge (BG)
Caterpiller (CAT)
Charles Schwab (SCHW)
Chicago Bridge and Iron (CBI)
Cisco Systems (CSCO)
Comcast (CMCSA)
Denbury Resources (DNR)
General Electric (GE)
Google (GOOG)
Harman International (HAR)
Hershey (HSY)
JP Morgan (JPM)
Life Time Fitness (LTM)
National Oilwell Varco (NOV)
Owens and Minor (OMI)
QUALCOMM (QUAL)
Schering-Plough (SGP)
Sonus Networks (SONS)
Southwest Airlines (LUV)
Target (TGT)
Wal-Mart (WMT)

Note that these are generally best of breed stocks. These are good ideas for further research on your part. It is easy to freeze and do nothing but fret over your portfolios during times like these. The institutions are not standing still - nor should you.

March 6, 2007: Aero defense stocks: bits and pieces

Pictures: Chinese military, US military, Oshkosh military truck (example), Oshkosh fire truck (worldwide reputation for excellence)


The old saying, "the best defense is a good offense" is not lost on the Chinese, who have dramatically increased their strategic offensive weapons program(s). This has planners within our military highly concerned. Speed reigns supreme as we play catch-up to Chinese surprises, such as the attempted blinding of our spy satellites with sophisticated laser weapons. There is no doubt - zip, zero, nada - that unless we move on a fast track with 21st century weapons, the year 2015 will be the time we are no longer the dominant military in the world. To have a communist state number one puts the democracies at risk, even moreso than 1939, the year of the Nazi/Soviet Treaty of Friendship which led to the carving up of Poland and worse.

>The GOA upheld a protest by LMT and UTX of the multi-billion USAF CSAR-X program, which had been won by BA. Indefinite hold.

>Latest tranche of MRAP awards went to GD/FRPT, OSK and privately held Protected Vehicles, Inc. As predicted on this blog, the exclusivity of FRPT was not going to occur with this program. The armed services have divided the production between several capable companies to ensure fast delivery of vehicles to protect our armed forces from most roadside bombs.

>The Army National Guard has submitted a $24B unfunded request to Congress including $5B for FMTVs and $1.6B for Humvees.

> Democratic Sen. Conrad's $20B defense cut proposal was shot down by both party leaderships.

>The Army LOGCAP 4 award is now expected to be finalized by mid-summer to early fall.

>Boeing (BA) posted 51 orders in February cashing out at over $8B vs. 25 in 2006.

>BE Aerospace won a $250M contract for OE/Retrofits.

>Airbus approved another restructuring plan, amidst strikes by German workers, which is said to mirror Boeing's strategy of outsourcing, etc. Hooray.

>UPS has killed their order to purchase 10 A-380 Airbus aircraft.

>Japan Airlines (JAL) is considering buying many more Boeing 777s and 787s at the expense of Airbus.


Recommended defense stocks that should hold up well during a reasonable correction:

BE Aerospace (BEAV)
Goodrich (GR)
Precision Castparts (PCP)
Boeing (BA)
Esterline Tech. (ESL)
Armor Holdings (AH)-- very close to full value now
DynCorp (DYN)
General Dynamics (GD)
L-3 Communications (LLL) -- very close to full value/possible legal issues
Lockheed Martin (LMT)
Northrup Grumman (NOC)
Oshkosh (OSK)

Pick one? BE Aerospace
Pick another? Goodrich
Trifecta? Oshkosh on weakness (under 50)

March 5, 2007: Sub-prime is not divine, a trip down memory lane

I suspect that the markets may continue to drift downwards today. Regarding the sub-prime hysteria, we have been there and done that before. A banker friend graciously e-mailed me several articles from the "SUB-PRIME COLLAPSE OF 2002". We have shot memories. And the large financial institutions and hedge funds have even shorter - or selective - memories on this topic. Not surprisingly, Goldman-Sachs, Merrill Lynch and other large diversified financial behemoths are in the thick of the mess. As I wrote on February 23rd and several times before, we are in a mess. But the mess is solvable as the final victims of the sub-prime Ponzi scheme purge their bad loans, take a hit on their share price and move on.

This is NOT a collapse, IMO. This is another example of not lending to individuals who cannot, or will not pay. The juiced interest on these loans are not worth it.Let them earn a secured credit card and learn life's lessons about responsible financial management. A mortgage? Forget about it. Rent.

"The days of getting credit...with poor credit or no credit history are numbered. The so-called "sub-prime" credit ....market which has never been in tested in a recession, has deteriorated at such a rapid pace over the past year it has caught regulators and issuers by surprise.

"Sub-prime" usually refers to consumers with credit scores below 560. "Sub-prime " includes consumers with little or no credit history, consumers who may have filed bankruptcy within the past ten years, those who have a terrible track record over the past seven years of paying their bills on-time, or consumers currently carrying way too much debt for their income level.

The credit industry began to target this group of consumers during the early 1990s ...(with high rates)...However, the new breed of "sub-prime" credit cards required little, if any, security deposit.

When the economy went sour last summer, "sub-prime" holders began to stop paying their...bills. Presumably many of the consumers were faced with reduced income......Some of the issuers of sub-prime debt were writing off losses in the 15-17% range versus the industry loss rate of 6.5%.

As a result....issuers have been burned badly. "Sub-prime" lending lead to the shut down of NextCard and the unravelling of Providian.......This month The credit Store announced it was in big trouble and may have to close operations.....

The collapse of the "sub-prime" ....market has made government regulators increasingly concerned over the risky business practices of these issuers. This month, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision developed account management and loss allowance for ....lending. The draft guidance would apply to all institutions under the agencies supervision that offer credit....programs.

Most of the issuers involved in sub-prime credit...have pulled back their marketing. Consumers with no credit or credit problems will have to get ....(credit)...the old fashioned way."

SOURCE: CardTrak: "LOUSY CREDIT-FORGETABBOUTIT!" ---AUGUST 2002

This article focused on credit over and above mortgages.

March 2, 2007: How CSFB views the markets

I have great respect for the worldwide research team put together by CSFB. With so many top notch analysts going for the big money in hedge fund positions, Credit Suisse First Boston has maintained loyal and talented staff, IMO.


CSFB stands by their 2007 forecast of 1,500 S&P and 430 DJ EuroStoxx for 2007.

Valuations are attractive, especially relative to other financial classes.

The macro environment is still very supportive. 2/3 of the rise in earnings has been structural.

Consensus that the recent fluctuations are "not May 2006". Recommend buying quality growth stocks. European capital goods stocks look rich.

Two thirds of the improvement in Return on Equity is caused by sustainable factors.

Five main positives about the global market strategy:
1. Inflation is less of a problem
2. Lead indicators are stabilising in the US.
3. Global policy on rates is loose. Real rates globally are just 2%
4. Global growth is very broadly based. Excessive growth of fixed income investments and housing investment growth has been corrected (I'LL SAY...!). China alone will grow at at least 10% per year for the next several years to create 15 million jobs, accommodating rural and urban migration.
5. Corporations appear not to be repeating the mistakes of previous cycles (borrowing too much and over-investing). Corporate balance sheets are in excellent shape.

CSFB's tactical indicators are better than May 2006.

CSFB's main over weights for the next six months are life insurance companies, banks in Europe and GEM, technology globally. mining, plays on the emerging market consumer, and a small overweight of integrated oil and US Telecoms. Buy best of breed, CSFB states.

If an investor wishes to be defensive, CSFB recommends consideration of SAB Miller, Inbev, Veolia, Tesco,Roche, Quinetiq, Avon, Estee Lauder, AIG, United Health and Gilead Science.

If one is looking for valued growth, CSFB recommends BMW, RR. KBC,SAN,ING,Allianz, Hikma,Pearson, Kazakmys, SGS, Ericsson, Sage, Omnicorn, Disney, Texas Instruments, Harley Davidson and Microsoft.

The emerging markets that may be most vulnerable to a current account deficit include the Baltic States, Hungary and Turkey.

CSFB states that into the recent weakness in commodity prices is expected to be short lived due to continued need in the emerging markets, especially Frontier markets and China.

I do not agree with some of CSFB stock selections, but I have noted with interest their excellent track record of analysis regarding the big picture. And the big picture looks good. Very good.