Trends I'm Watching

Generac (GNRC) Leads the Market in Power Generators for Residences and Small Businesses

Trend: The list of home and office equipment that needs continuous electric power (computers, routers, refrigeration, etc.) continues to grow. 

Benefiting from this trend, Generac sells more home standby generators than all of their competitors combined.

Here's a one year chart for Generac.

 

Generac Reports Third Quarter 2011 Results

Strong demand for back-up power drives substantial increase in sales, profit and cash flow during the quarter WAUKESHA, Wis., Nov 01, 2011 (BUSINESS WIRE) -- Generac Holdings Inc. (NYSE: GNRC), a leading designer and manufacturer of generators and other engine powered products, today reported financial results for its third quarter ended September 30, 2011.   Highlights -   Total net sales increased year-over-year by 49.0% to $239.3 million as compared to $160.7 million in the third quarter of 2010. 60.5% year-over-year growth in Residential product sales. Commercial & Industrial (C&I) product sales up 27.4% compared to prior year. Net income increased year-over-year to $37.4 million as compared to $23.0 million for the third quarter of 2010; Adjusted net income increased 37.8% to $50.6 million from $36.7 million in the third quarter of 2010. Diluted net income per common share was $0.55 per share as compared to $0.34 per share in the third quarter of 2010; Adjusted diluted net income per common share was $0.75 per share as compared to $0.55 per share in the third quarter of 2010. Cash flow from operations in the third quarter 2011 increased 67.3% to $61.0 million as compared to $36.5 million in the prior year quarter. On October 3, 2011, the Company acquired substantially all the assets and certain liabilities of Magnum Products, LLC, funded solely by cash on the balance sheet. (Link: http://investors.generac.com/phoenix.zhtml?c=232690&p=irol-newsArticle&ID=1624088&highlight=)   Note: We may own GNRC at any time.

 

 

Generac (GNRC) Rides Weather and Power Grid Trends

Trend: Generac (GNRC) profits from volatile weather and power outages. Many homes and businesses are buying electric generators to avoid being without electricity.

When I was in Highlands, NC, on the Friday after Thanksgiving, I noticed that a bank building had a Generac generator located beside air conditioning units. Highlands, at 4100 feet elevation, often gets winter storms with snow and high winds.

In late August 2011, hurricane Irene made landfall in the United States. Irene was also the first hurricane to make landfall anywhere along the U. S. East Coast from Florida to Maine since 2005. It was the first truly significant hurricane threat to the northeastern U.S. in two decades and, despite making final landfall there as a strong tropical storm, it was large in size and its impacts were severe in many highly-populated locations at the coast and inland from North Carolina to New England. High winds toppled trees onto power lines — electric power outages for up to a week were common from Virginia to Maine.

What's Wrong with Dell?

Trend: Dell's stock price may be reflecting some ugly information about faulty PCs revealed in a lawsuit.

More unpleasant news about bad corporate behavior. I heard from many sources that Dell PCs seemed to have far more problems in recent years than in their glory years. Now I know why.

Jim Hightower summarizes "Dell Accused Of Hiding Evidence," The New York Times, August 13, 2010":

Take the case of corporate betrayal that Advanced Internet Technologies has brought against Dell, the giant computer corporation. Now in its third year of litigation, AIT's lawsuit accuses Dell of selling at least 11.8 million faulty PCs to business customers, then engaging in a companywide coverup of the problems.

Earlier in the case, it was revealed that Dell's rank-and-file employees knew that the corporation was churning out PCs that were likely to break down, and AIT unearthed an internal email showing that CEO Michael Dell himself was informed of both the flaw and the effort to hide it from investors, customers, and the media. Of course, the email didn't stop the computers from malfunctioning at an unprecedented rate, and angry customers grew angrier as Dell kept dodging its responsibility for fixing the machines. Amazingly, the PC peddler even tried to stiff the law firm it had hired to battle AIT's lawsuit! The firm had 1,000 of Dell's dicey computers, and the company was refusing to fix them until the law firm threatened to sue its own client. Not even "Law & Order" would come up with a plot twist that perverse.

Yet, in another twist, it now appears that Dell has deliberately violated a court order to release internal emails written by top executives, including Michael Dell. Rather than providing the full texts, the corporation only delivered a few snippets that look to be altered and incomplete.

So, with added accusations of evidence tampering, it seems that Dell itself is slowly twisting in the legal wind.

Dell's hubris boomerangs: On October 6, 1997, in a Gartner Symposium, when Michael Dell was asked what he would do if he owned then-troubled Apple Computer, he said "I'd shut it down and give the money back to the shareholders." 

Is the Current Stock Market Rally Sustainable?

Trend: CEO predictions and impressive earnings from multi-national corporations have stimulated a summer 2010 stock market rally.

Mike Larson at Money and Markets describes why the current stock market seems disconnected from the U.S. economy. Excerpts below.

Link: Solving the Mystery of the “Great Disconnect” | Money and Markets.

If you were to climb into a time machine and go back to late 1999 and early 2000, you’d hear corporate executives waxing extremely bullish about their prospects. The heads of Cisco, Intel, Amazon.com, and many others saw nothing but rainbows and blue skies ahead. This continued even as leading economic indicators began to slump.

Sure enough, the economy eventually fell apart. And all those bullish pronouncements proved not to be worth a warm cup of spit!

Or how about Enron and WorldCom?

Those stocks initially soared when their executives said business was booming. But reality came crashing down eventually. Once again, investors who listened to the chatter coming out of corporate boardrooms got their heads handed to them.

What about a more recent example — say, in home building, or mortgage lending? You should go back and listen to the conference calls, or read the transcripts from 2005 or 2006. These guys were falling all over themselves talking about the new paradigm in housing … the surging sales … the soaring prices.

They continued to spout happy talk even as the underlying, empirical economic data and leading indicators began to roll over. Result: Yet another pasting for anyone who listened to the supposedly clued-in execs.

It’s hard not to conclude that corporate America is full of liars, cheats, and charlatans. And in SOME instances, that’s exactly the case. But more is going on here …

For starters, corporate execs extrapolate too much from current trends. If sales are improving or even booming, say, because of the biggest government bailouts and stimulus packages in the history of the world, they tend to view the trend as sustainable. That forms the basis of their forward projections, including the ones given on earnings conference calls.

But that tendency is precisely the most dangerous at turning points in the underlying economy!  

Investors who believe optimistic CEOs — even as the economy is entering a recession — will invariably get killed. Those forward projections will end up being sharply revised, and the companies’ shares will tank.

Here’s something else to consider: CEOs depend on positive market perceptions of their prospects. That’s because most of these guys have thousands and thousands of company shares in their portfolios.

If a corporate CEO came on the phone during a conference call and said: “You know what guys? Business stinks, and it’s getting worse. Better sell your stock … fast!” what do you think would happen?

The stock would tank, and his or her personal wealth would evaporate. So of course most CEOs are going to talk a big game.

In the current economic environment, something else is going on too. The U.S. economy is stuck in the mire. But overseas economies … particularly in Asia … are still doing well.

So multinational companies that have exposure to those healthier regions are temporarily able to offset their lousy U.S. operations with foreign strength. That was definitely the case with FedEx, to cite just one example.

Your Job and Mine: Cut Through the B.S.!

As investors, we have a very important job. We have to cut through the B.S. coming from corporate America and make judgments about what’s REALLY going on — then act on those judgments before the guys in the corner offices around this country tell us: “You know what, you were right.”

When I survey the economic landscape, I see:  

• Consumer confidence falling to multi-month lows,
• Regional manufacturing indices falling off a cliff,
• Banks lending less money, and mortgage and consumer credit plunging, and
• Durable goods orders falling, and job creation completely MIA.

The New Normal for Investing in Asia

Trend: Rising labor costs in China and other emerging economies in Asia will start changing the investing landscape.

Written by Louis Gave of GaveKal, Asia's Paradigm Shift focuses on some major changes occurring in Asian economies and the implications of those changes for investors. As wages start to grow faster than productivity, household consumption will increase to be a key driver of the Chinese economy. Excerpts below.

Link: Asia's Paradigm Shift - John Mauldin's Outside the Box

There can be almost no doubt that the sheer abundance of labor in the past two decades, which made it impossible for workers to bargain for a wage that matched the huge productivity growth being generated in industry, played a crucial supporting role to the processes described by Bai and Qian. But as labor becomes more scarce, wages will have to be bid up until they match or exceed the rate of productivity growth. This is what we are now witnessing all along China's coast (e.g.: Honda, Foxconn, etc...). Once wages grow faster than productivity, the labor income share of GDP will start to grow, and household consumption will begin to assume its rightful place as the main motor of the Chinese economy.

These are not easy times for Asian investors, what with global concerns weighing on markets (US double dip?, EMU solvency?, etc...), unprecedented cyclical adjustments (Asia now leading the tightening cycle), and a very important paradigm shift (the end of cheap labor in China). In the face of so many changes, one must remain nimble, and accept that being stubborn will not pay off. Instead, one has to remain very close to the market, identify where positive momentum is strongest--whether on earnings or share price performance--and question whether the momentum makes macro-sense before participating. Having said this, for us, a few key trends are already emerging. These include:

When Is the Best Time to Buy Gold?

Trend: Gold prices are boosted by the flight to safety and hedging against inflation, while asset liquidation and deflation drive the price down.

Charles Hugh Smith looks at the four forces acting on gold and tries to make sense of recent price action. Click on the link below to read his chronology of trends in gold prices since 2007.

Link: charleshughsmith.blogspot.com

Charles Hugh Smith sees four forces acting on the price of gold. Acting in opposition at times and in concert at other junctures, these forces make a mockery of any simple explanation of gold's wild price action.

1. gold as a safe haven--"flight to safety" in volatile, risk-averse times
2. gold as a store of value and hedge against inflation
3. gold as an asset to be sold to raise cash to pay down debt that is due
4. gold as an asset which becomes less attractive in deflationary eras

Here's the bottom line:

All this suggests that gold's short-term price swings depend on the global financial situation. If deflation is once again foreseen as a risk, and cash must be raised quickly to pay down debt or make interest payments, then recent history suggests gold could swoon as it did in late 2008.

If global economic growth resumes, then gold's long history as a hedge against inflation suggests the current uptrend could continue unbroken until the next global financial panic occurs.

To assume new highs will be reached on a "flight to safety" ignores the lesson of 2008: gold is subject to losing a third of its value in short order if a liquidity crisis forces players to sell anything in their portfolio that still has value to raise desperately needed cash.

Mutual Fund Outflows Are Growing

Trend: The Investment Company Institute reports redemptions have been surging in equity mutual funds.

Andrew Mickey at Q1 Publishing describes the mutual fund outflows that indicates that mutual fund investors want out of the stock market.

Mickey's insight: As history has proven time and time again, mutual fund investors buy and sell at the worst possible times.

Link: Andrew Mickey, Q1 Publishing

The herd is running for the exits.

Mutual fund investors are selling out at a faster and faster pace each week.

The Investment Company Institute, which tracks mutual fund inflow and outflows, reports redemptions have been surging in equity mutual funds. The last week of April, investors put in a net $1.85 billion into stock mutual funds. Since then though, it has been all downhill.

Investors pulled out a net $1.44 billion in the first week of May, $10 billion the next week, $1.1 billion the week after that, and $17.4 billion in the last week of May.

It’s happening all over. Canadian investors pulled out between $1 billion and $1.5 billion from mutual funds in May.

China's Shanghai Composite Index in a Free-fall?

Trend: The ETF for the iShares FTSE/Xinhua China 25 Index (FXI) is down 12 percent in the last four weeks.

Dr Wish at the Wishing Wealth blog highlights the steep decline in China's Shanghai Composite Index below.

Link: China in Free-fall

Every once in a while the charts become so bad that they scare me.  I check a number of market indicators every night and was concerned by the current steep decline in the Shanghai Composite Index.  The weekly  chart (and monthly chart, not shown) are very ominous.  After a major decline (almost 70%) from 2007 to 2008, this index began a rebound in which it almost doubled from the bottom, until August of 2009. Since its August top, the Index declined and made another failed attempt to rise, topping out in November, 2009.  It then declined again and made one last feeble attempt to rise, topping out in April 2010.  When that rally failed, the Index broke down below prior support and now appears to be in a free-fall.  Where it will stop is any person’s guess, but we do know that China’s government is trying to cool the economy.  In the U.S., when the Fed tries to cool the economy from a boom, it usually ends with disastrous consequences for the market.  While I think a crashing China would have disastrous consequences for the rest of the world that has been banking (pun intended) on China to help the world recover from its recession, I can still look for a way to profit from  the decline in this Index, if it continues.  I have therefore purchased a little of FXP, the Ultra Short ETF that tracks the daily performance of the FTSE/Xinhua China 25 Index. FXP is designed to rise twice as much as this Index falls. I know these ultra ETF’s can be very volatile and I therefore bought a few shares with the idea of adding to my position if the decline continues.  What caught my attention was the largest weekly volume of trading in FXP the last few weeks as it started to rise.

The Ramifications of Bailouts in Europe

Trend: Financially strong governments are buying the bonds of debt-stricken governments to try to maintain stability. The threat of financial instability ripples through equity markets, increasing volatility and uncertainty.

John Mauldin discusses why Europe's leaders suddenly decided to buy Greek bonds

Basically, the leaders of Europe marched to the edge of the abyss, looked over, decided it was a long way down, and did an about-face. It was no small move, as they shoved almost $1 trillion onto the table in an “all-in” bet.

Above all, this is a move to buy time. There is enough in this fund to purchase all the expected debt of Greece, Portugal, and Spain for three years. The money could actually last a lot longer, as Spain might not need to tap the fund for some time.

What this Euro-TARP does is take money from mostly good credit and give it to weak credit. It will crowd out private savings that go into private enterprise (which is where jobs come from) and put it to unproductive uses in the government debt of weak countries.

Is Gold Rebounding?

Link: Major players in the hedge fund world and many analysts expect gold prices to increase about 15% in the next year.

BusinessWeek reports that gold prices are expected to rise. Perhaps the money created to rescue governments deeply in debt will give precious metals a boost. As for hedge funds, watch what they do, not what they say in press releases.

Link: Money Report - BusinessWeek.

George Soros has helped drive up gold prices by more than doubling his bet in a market even he calls a "bubble." Soros Fund Management, which oversees about $25 billion, increased its investment in SPDR Gold Trust (GLD), the world's largest exchange-traded fund for gold, by 152% in the fourth quarter, a Feb. 16 Securities & Exchange Commission filing shows. Goldman Sachs (GS), Barclays Capital (BCS), and HSBC Holdings all predict more gains in gold before any bubble bursts.

Goldman expects the metal, trading around $1,113 an ounce, to hit $1,235 in three months and $1,380 in 12 months.

HSBC says it may peak at $1,300 this year.

While prices have fallen 8.2% since reaching a record $1,226 on Dec. 3, 15 of 22 analysts in a Bloomberg survey see gold reaching a new high, with the median forecast predicting a 15% advance to as much as $1,300 an ounce in 2010. Gold is up about 22% in the past 12 months and the same amount since the start of the third quarter, when Soros accumulated 2.44 million shares of SPDR Gold Trust.

By Nicholas Larkin and Pham-Duy Nguyen