June 2008 Archives (don barrett)

June 2008 Archives

Fannie Mae Not Be a Good Investment.

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Fannie Mae was created back in 1938 by then President Franklin D. Roosevelt, to provide liquidity for all the people,allthe time and wherever they may be. FNM is a secondary buyer of mortgages and does not originate home loans. FNM is a GSE or government sponsored enterprise which means FNM can borrow funds from the government at less than the going rate to lower the costs of the loan,but are not guaranteed nor funded by the U.S. government. FNM was originally a government agency in 1938,but became a publicly traded company in 1968 and is funded by investors from around the world. In theory FNM takes a bite of the spread between the government loan rate and what FNM actually charges the borrower. FNM also in theory takes about 1/2 per cent of all the secondary mortgages they purchase on the market as a guarantor of principal and interest.
FNM is under a cloud lately and I'm not sure when the sky will clear. FNM as it strives to put low income or subprime borrowers into a residence of their own,the risk and losses for FNM are escalating. They are ignoring the basis of any sensible loan-can you pay it back? The mortgages FNM are sorted into pools of subprime and other sectors such as nonverified income pools. Also,the art of leverage is becoming a serious factor for FNM. A bank can originate a loan without regard to the borrowers means to pay it back,sell it to FNM and then buy another mortgage and sell it to FNM and so on. But,FNM bundles these questionable loans into MBSs or mortgage backed sucurities and sell these to banks or brokerages and you then have the "subprime meltdown". And guess who will be left holding the bag? You and the other tax payers in America. FNM has guaranteed the payment of principal and interest to the loan originator and though not actually guranteed by the Fed. no one thinks FNM will be allowed to collaspe.
I was getting to FNMs current quarterly report and just read what I thought would happen soon-FNM is cutting their dividend.FNM lost $2.2 billion for 1st quarter 2008,FNM actually cut the dividend in December and are cutting it "again'from .35 cents to .25 cennts,and will be raising $6 billion for future writedowns as they expect the housing downturn to continue. FNMs fair value of net assets was down 66% to $12.8 billion due to falling housing prices. And FNMs exposure is deepening as Congress has lowered the amount of required down payment and raised the maximum loan FNM can make and as the housing market falls,FNM and the other government housing loan agencys are taking on a bigger percentage of the mortgage market.
While I think it is a very noble idea for FNM and the other agencys to put everyone in a house,I wish they would add one stipulation-you have to make the payments. Since the beginning of time,man has had to have a place to live. And in the last 3 or 4 centurys you were expected to buy and pay for the home. This program has some successes and people do indeed make their house payments,but an ever widening number don't.
I think there are much better and safer investments available. The dividend will most likely be cut out completely and the share price I would guess is no where near bottom yet.

The Big Three(Toyota,GM,Ford)

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If you look back in history the American automobile was the king of the road for the 20th century. Ford,Chevy,AMC,Buick,Oldsmobile and others have made some of the most collectible cars in the world. The 40 Ford coupe,68 Roadrunner with a hemi, 66 Corvette, GTOs,Buick Gran National and you can go on and on with some of the greatest road machines ever built. Powerful and fast filled the bill for most Americans for at least 50 or 60 years. And not to slight the foreign automobiles such as Porche,Mercedes,BMW and some others made some fine automobiles and still do for that matter. But,nothing compares to a big block Chevy with about 500 horses,4 speed and posi-trac. I have a 89 Mustang with a 302,5 speed,4:10 gears,headers,aluminum heads,750 Holly double pumper and the car is a monster. When you kick the 4 barrel in and run it through the gears to about 100 MPH it gives me goose bumps. On the downside the Mustang gets about 7 or 8 miles to the gallon.
Times have changed and the American automobile manufactures haven't changed with the times. I am old enough to remember .25 cents a gallon gas. But that was close to forty years ago. Some of the foreign auto makers saw the light years before the used to be Big Three woke up. They made some attempts through the years. How many of you can remember the Chevetts,Pintos,Vegas and other attempts American auto makers made at fuel efficient autos back in the 70s. After the 70s and the gas shortages,American auto makers seemed to go back to the same mold as before.In the last 10 or 15 years GM and Fords biggest successes have been the Explorer,Silverado,dualies and crew cabs. None of these vehicles were made for fuel milage and now that we have $4 dollar a gallon gas,sales have died. A used gas guzzler is almost impossible to sale and when you can sell one you will lose 30 or 40% from what the vehicle was worth a few months ago.
So,who is at fault? The American driver has to bear some of the blame as they were buying these gas guzzlers. But the brunt of the fault lies with the American auto makers. It is part of any business to stay current and to try and forsee any changes coming or anything that may effect your business model in the future. Where was the management and designers for the used to be Big Three? They have been a sleep at the wheel and they have let the Toyotas,Kias and the other foreign auto makers leave them in their dust. I live a couple of hours from the Georgetown,Kentucky Toyota plant that makes the most popular car made for several years now the Toyota Camry. The Toyotas are built here with American labor and I would say they are some of the best designed and fuel efficient cars on the road.
In my article on Ford and the 50 million shares purchased by Kerkorian a month or two ago,I sais then that Ford and GM had better wake up GM today said the gas guzzlers aren't selling and they may have to make some changes. GM today hit I think a 28 year low for their stock and it isn't very hard to figure out why. The writing has been on the wall for many years now and are Ford and GM too late. Ford seems to be in better shape,but thats due to international sales. GM just had to deal with a UAW strike that cost them billions and UAW now will have several thousand less union members due to buyouts and the announced closing of 4 GM plants.
I assume both will survive and will turn things around sometime,but in the meantime I see no reason to buy their stock. Sorry Mr. Kerkorian

Is Borders Group Bordering on Disaster?

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I gave my opinion on Borders Group a few days ago and I didn't like the changes they were making. First,they were firing Amazon to run their e-commerce site themselves and I just don't think they can operate their site and get better results than Amazon did. Amazon has done e-commercing for years and they know all the ins and outs of this business and it will be a learning experience for Borders Group.
Then today I saw the news where Borders Group was selling some or all their international businesses for $110 million and the international stores were the only sites to show any growth.
Now they have their domestic sights where sales declined last year.
Borders group shares moved up a point or so today,but I am still Leary of Borders Group. They sold the most profitable part of their business,the international stores,and now must rely on domestic sales which are slowing. I also read today where Borders Group had to get $45 million in emergency funding to stay afloat earlier this year. So,in my opinion Borders Group may be bordering on serious financial trouble.

American Airline-Come Fly with Me.

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I borrowed the "Come Fly with US" from one of the many airlines that through the years have soared from coast to coast and sometimes across the Atlantic or Pacific Oceans. Delivering their loads of tourists,business travelers and always the military personnel around the world. And many of these airlines were loosing money as they shuffled their passengers and crews from point A to point B. High labor costs,high fuel cost and competition from the other airlines have been the demise of many airlines through the years. I can't remember the company that used the "Come Fly with Me" phrase,but more than likely they are no longer in the airline business.
It seems like every industry has their down times,but the travel industry seems to have more than their share of down times. The U.S. steel industry almost died in the 70s due to Japanese steel,but the steel industry seems to be rebounding. The U.S. auto makers have struggled at different times through the years,but their situation has never been as bad as they currently find themselves in. The U.S. auto makers are being slammed by foreign competition and their own ineptness to make a suitable vehicle for the American consumer.
The airline industry is currently drowning in their own jet fuel and the speculators are driving them to the brink of disaster. High oil and other commodities are not scarce as we have been led to believe. Do you remember the rice shortage and the doubling of rice prices and even the rationing of rice recently. Rice was rationed here for a day or two and the evening news was telling us the world is starving and then suddenly rice came from every nation in Asia. Thailand had tons and tons of stored rice and they then offered it to any nation who needed it. And as rice prices soared due to the hyping by the media,someone was making a lot of cash. The airline industry is being held hostage by the speculators and I don't know what the final outcome will be. These people line up on the news and CNBC and tell you the U.S. isn't cutting back on gas consumption and it's just not true. Myself and everyone I know have cut back on energy consumption for years now and I think most in the U.S. have followed suit. The U.S. has so much oil and we are banned from drilling for it. Brazil just found 1 of the largest oil reserves ever discovered and this site was going to be one of the most expensive sites to drill for the oil. Costs for recovering this oil will run about "$30 a barrel" It cost $30 to drill and by the time it hits the shores here it's $130 a barrel. So,we have no current shortage of oil at this time.
The high cost of oil is already making most people reduce their energy consumption one way or another. The airlines are making some changes to try and survive . They are parking the 747s as they are the most inefficient jets in their fleets and a very simple thing that saves a lot of fuel,slowing down. The U.S. will I hope soon lower the speed limits on the interstates,which would save a huge amount of gas or diesel fuel.
And now lets turn to American Airlines,that all of this has been leading to. What is going to make or break AMR is fuel cost. AMR and the other airlines all are trying to reduce the dependence on fossil fuel as every company and every citizen in the U.S. is trying to cope with this rising expense of energy. AMR and the other airlines will adapt and reduce this expense as much as possible. I still think the oil market is a huge balloon,ready to explode and I can hardly wait for it to happen. In the meantime the airline industry will struggle and some may not survive.
AMR may be strong enough and efficient enough to survive. But,the longer this bubble lasts the more casualties there will be in the airline industry and the trucking companies will start to fold and the energy costs will rise till the bubble pops!!! I think when the bubble bursts soon,AMR may weather the storm and survive and return to profitability.

SXE-IT for Big Brother

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Stanley is a company that I owned some shares of last year and sold last year. Stanley turned out to be one of my best holdings and I had kind of forgotten about it. I happened to run up on SXE last night while doing some research and after reading the news on SXE,they have been busy and I think the company has made some good acquisitions.
SXE provides information technology(IT) and a vast array of other services mainly to the U.S.goverment and it's agencys.SXE is based in Arlington,Viginia and currently employs about 3,600 personnel. SXE just announced today they have bought Oberon,which is a engineering intelligence and IT services provider. SXE is estimating Oberon will add around $80 in additional revenue for 2008. In 2007 SXE acquired Techrizon another IT company. In the 4th quarter 2007 SXE signed a 5 year,$570 million contract with the State Department's Bureau of Consular Affairs/Passport Services. SXE was working on this contract last year and they were successful in landing this contract,largest in the company's 42 year history.
On May 14 of this year SXE reported record earnings for the 4th quarter 2008. The 4th quarter revenue was up 49%(39% was organic growth) Y-O-Y to $173 million. Fiscal year revenue for 2008 was up 48%(37% was organic growth) to $604 million.Diluted earnings of .33 cents for the 4th quarter 2008 and $1.12 for fiscal 2008.
Stanley has shown some tremendous growth organically and their acquisitions should be a major source of income for 2009. I think Stanley is a company that can ride these troubling times out better than most company's. Stanley does "Virtually all their business with the Federal government or some agency of the federal government" With the Federal government paying Stanley's bill,I think they are in a very nice situation and I would recommend this company to everyone.

Lufkin Industries-Dry Whole or Gusher

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Lufkin Industries was founded in 1902 and is located in Lufkin,Texas. LUFK is a company that had operated in three divisions:Oil Field,Power Transmission,and Trailer Divisions. LUFK is closing their least profitable segment:Trailer Division. LUFK reported .05 cents per share positive earnings from the closeout of their Trailer Devision.
The Oil Field Division manufactures and maintains attifical reciprocating rod lift equitment,they
maintain and repair pumping units,and this division also installs and maintains computer systems to control pumping and analytical services for pumps,and they also have a foundry to make the castings for these pumps.
The Power Transmission Division designs,manufactures,and services speed increasing and speed decreasing gear boxes fot the oil industry. LUFK offers field repair services for their own products as well as their competitors equitment.
The Trailer division made dry-box,flatbed,and dump trailers These trailers were marketed mainly in North America and many of these trailers are on the road today.
Since Lufkin has eliminated their trailer division they now must rely solely on the petroleum industry to make it henceforth. I think the oil industry has commited a grave error here. Or let me say the oil industry or speculators are making a grave mistake. Oil usage or gasoline usage in the U.S. has been declining for many months. I just read today the scapegoat for the oil companys or speculators,China,imports of oil dropped 4% in March,2008. Maylasia,Singapore,and some of the other Asian countrys have stopped the subsidies they were paying for high priced oil products and I think this will have a great impact on future oil prices. Congress looked into my target the oil speculators and found they were having some impact on oil prices. When it was announced that Congress was looking inti this prices dropped several dollars a barrel and the day they said oil speculators were not breaking the law,oil prices shot back up. If you look at Ford and GM they finally have decided to make more efficient vehicles. And this isnt going to die like past events where as soon as gas prices drop everyone goes back to the same bad habits. This year we will have several solar companys doing over $1 billion dollars in sales and I look for them to gain more momentum. T.Boone Pickins,an oil man,is investing a huge amount of capital in a wind farm in Texas. And it won't be the government leading us out of this mess,it will be private investors lookin past the tip of their noses and seeing what has to happen.
LUFK is looking for even greater things in 2008. The power transmission segment has a current backlog of over $234 million for oilfield products. LUFK currently has almost no debt and about $7 dollars per share in cash. LUFK has raised guidance for 2008 with projected earnings in the $5.10 to $5.30 range per share. LUFK recently increased their dividend from .20 to .25 cents which amounts to over 1% per year. LUFK has a lot of things going their way,but let me ask you one question. If oil drops to between $90-$100 dollars will LUFK look so bright. I think oils ligitimate price today should be around $100 and with the backlash oil companys are stirring up,oil may go lower than that in the near future. It is such a shame this country has fallen so far that some illiterate clown can breakwind on the other side of the planet and oil jumps $5 or $10 dollars a barrel.

Coal-The Other Black Gold II

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I originally wrote a post on Arch Coal and the coal industry in the U.S. on May 26 and I went back and checked and Arch has gained about 15%. A couple of other coal companies I have watched are ICO and JRCC and as I'm a big chart watcher both of these companies and I would guess most coal companies have some very impressive charts. Coal is the other black gold and the U.S. will be in the drivers seat this time. The U.S. is getting crushed by oil prices now,but as far as coal we will be in the drivers seat. In fact the U.S. is shipping some vast amounts of coal now. Arch Coal is already shipping vast amounts of coal now and projected domestic and foreign use of coal will be exploding for years to come.
The EIA(Energy Information Administration) estimates that the DRB(Demonstrated Reserve Base) in the U.S.is 491 billion tons.The U.S. has more coal reserves than natural gas or oil.Due to land ownership and other obstacles about 264 billion tons of coal is recoverable.And the type of mining makes a great difference on the per cent of coal actually recovered. Underground mining only recovers about 40% of existing coal and surface mining recovers about 90% of the existing coal.
The EIA estimates the worlds coal reserves at 998 billion tons recoverable coal and the EIA estimates that at the current rate of production these reserves will last for 164 years! The other lovely thing about coal is where the most of the coal reserves are located. The U.S. has the lions share at about 27% of all the proven coal reserves.Russia follows with 17%,China with 13%,and Australia with 9%. And guess what percentage the Middle East has. Zero,zip,nada. As the Middle East has no coal the worlds energy picture is going to make a drastic change and this change puts the U.S. in the drivers seat!

Casey's General Store-No Mudville Here!

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I have to admit I'm not very familiar with Casey's General Stores. Casey's are primarily located in Iowa,Missouri,and Illinios,but with over 1400 locations one may very well be in your neighborhood. The information I have read makes me think Casey's isn't much different from any of the other neighborhood convenient stores,but Casey's I think are delivering better results than some of the other store chains.
Casey's has the gas,hotdogs,chips,and the usual sandwiches,but the results tell me there must be something else. Even in these troubling times Casey's seem to be moving right along.
The atmosphere can't be much different or any better than Cracker Barrel,of which I have dined in and bought some of their merchandise. So we'll delve into the financials and the next time I'm in Indiana I'll visit a Casey's as I think they have about 24 locations there.
At first glance on a day when the Dow is down 220 points,Casey's actually closed at $25.30 up .91 cents. Casey's reported 4th quarter and 2008 annual earnings on June 11th. We'll look at the 2008 annual earnings as this will give us a clearer picture of Casey's financial situation. For 2008 Casey's netted $1.68 per share,but I noticed only .28 cents for the 4th quarter. The report I'm reading was posted by Business Wire and it breaks sales into different categories.
Casey's sets annual goals for each category,so we'll start with gasoline. First let me say the old tale that gas outlets operates on 2 or 3 cents per gallon profit was exactly that,a tale. Casey's set goals for 2008 on gas to increase sales by 2% with a average 10.7 cents per gallon profit and they reported very nice numbers.Casey's averaged a net of 13.9 cents per gallon and gross profit rose to $169.9 million on gas sales only.
Casey's set some lofty goals for groceries and other merchandise. The goal was to increase same store sales by 4.3% and average a net margin of 32.2% on products sold. Casey's exceeded those goals with same store sales up 7.3% and a margin of 33.1% on average. Casey's store rang the registers to the tune of $942 million and gross profit was up 11.9% to $311.9 million.
For prepared food and fountain drinks Casey's set goals of an 8.4 % same store sales increase with an average margin of 62%. Not bad!. They bettered those goals with a same store sales increase of 9.8% on an average margin of 62.3%. Total sales for this category were up 12.8% to $301 million and gross profit was up 13.4% to $188 million.
Casey's had an ambitious goal of acquiring 50 stores and building 10 new stores. Due to a challenging business environment for 2008 Casey's acquired 12 stores and built none. They will continue to expand as properties become available.
Casey's has again set some lofty goals for 2009 and I feel they will meet them. The business environment for this year hopefully will improve and either way Casey's will grow. Also,at the June annual meeting Casey's raised their quarterly dividend to 7.5 cents per share.

ELAN CORP-HYPE or HOPE?

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Elan Corporation is a neuroscience based biotechnology company located in Ireland and the U.S. ELN operates in two segments,Biopharmaceuticals and Elan Drug Technologies.The biopharmaceuticals segment is engaged in the research of drugs for the treatment of Alzheimers,Parkinsons,multiple sclerosis,Cronh's disease,and chronic pain. The Elan segment is involved in drug optimization and clinical trial management.
Before we delve into ELNs latest entry bapineuzumab,to fight Alzheimer's disease,I would like to show what is involved in bringing a drug from the discovery to when the new drug may be marketed.
After a new drug is discovered the first step is preclinical studies to establish a scientific basis to show the drug is reasonably safe and that it may be effective in treating a particular disease. Then the drug enters Phase I which is the first time the drug is administered to humans and this phase is just to test for risks and possible side effects. Phase I will usually have less than 100 volunteers. Phase II usually enrolls several hundred volunteers with the actual condition to set dosage requirements and to look for signs of effectiveness on the condition. Phase III trials enroll several hundred to several thousand volunteers at different sites to test the effectiveness and safety of the drug and this data is what the FDA will use in deciding to approve a drug.Phase IV is used after a drug is approved for marketing to monitor the health of the individuals using the new drug and to monitor how effective the drug has been on the treatment of the condition.
ELNs new drug bapineuzumab has just entered Phase III and may not be marketed until 2010. Although ELN has several drugs on the market,bapineuzumab has the potential to be a blockbuster for ELN. Currently in the U.S. there are 5.2 million Alzheimer sufferers and over 26 million worldwide and this number is projected to grow to over 106 million by 2050. The Alzheimer's Association reports there are currently 150 clinical studies on Alzheimer's being conducted.
Even though ELNS new drug has had mixed results,the stock hit a 52 week high of $35.96 Friday. It is my opinion based on Lens current drug portfolio and the fact that bapineuzumab may not be on the market until 2010 I would not be an investor in ELN at this time. My view is that ELN is at a 52 week high and between now and the marketing of bapineuzumab in 2010 or so ELN will be going for less than the current $36 price. I would also say that bapineuzumab may very well be a blockbuster for ELN as we near 2010 but I would put my capital to work in other places for now and keep a close eye on ELN and bapineuzumab for results on the Phase III trials.

don barrett

don barrett

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