Wednesday, February 4, 2009

Consumer Staples: Not a Refuge in a Bear Market/Spend more Money on SEC Enforcement/Accuray/Job Losses/Obama Pay Plan

This is a link to a discussion about Synta Pharmaceuticals' chart at Stockpick 

The SEC is in need of a thorough housecleaning in its enforcement division.  Markopolos is going to let them have it today in testimony before Congress on their total failure to investigate Bernie notwithstanding repeated warnings about his operation. WSJ 

There are areas of federal spending that would prove beneficial for the long term.  One category would be to spend more money hiring better people to work in the enforcement division of the SEC. Michael Lewis pointed out the problem of the SEC revolving door in an opinion column that everyone needs to read. NYT (and my comments on some of his points: Weekend Reading Recommendations on Financial articles)

The second category would be hiring more federal prosecutors who would focus on Wall Street's criminal activities.  The current system is simply not working.  I previously suggested spending as much as 500 million more dollars to fund the hiring and staffing of this special division within the Justice Department which would include a variety of experts in the detection and prosecution of white collar financial fraud. Functional Equivalence in Bond Trading/Hedge Funds & Independent Adminstration 

The slide in consumer staple stocks like Pepsico, P & G, and Coca Cola proves that they are not a refuge in a bear market.  By refuge, I mean a security that does not go down in value. Kraft reported earnings this morning that missed the consensus estimate by a penny.  More importantly, Kraft trimmed its 2009 forecast due to a variety of factors, including currency exchange which is adversely impacting all multinationals now.  Another problem is increased pension costs which is another typical issue due to the market crash. Kraft also lowered its revenue forecast from 4% growth before the impact of currency exchange to 3%, and part of this lowered forecast has to do with consumer substitution. I previously sold my position in Kraft and I am not adverse to buying it back at a price lower than my last buy. SOLD KRAFT/GOP & GUNS IN BARS/ EBAY/ KEN LEWIS AND RICHARD PARSONS/DRYSHIPS (and the buy is discussed at: Buy of Kraft Food and Partial Sell of LNC Postion) I will not  address whether to buy Kraft back for a couple of weeks, however, until I see how the price adjusts to today's news. Sara Lee also cut its forecast. I have not owned that one in a very long time.  

There is an ETF that I previously owned that contains a good sample of global consumer staple stocks.  iShares S&P Global Consumers Staples Sector Index Fund (KXI): Overview 

If I am going to buy an ETF for this sector, it might as well contain both foreign and domestic stocks in it.  Some of the foreign stocks include such stalwarts as Nestle, Diageo, Danone and Uniliver. P & G is the largest position at close to 10%.  This ETF also has Wal Mart as does the one which only contains consumer staple stocks in the S & P 500. Snapshot - Select Sector SPDRs  I mention these only to make a point about consumer staples in a bear market.  KXI was at around 60 last June and now it is hovering around 45.  Compared to what has happened to the general market, that is good.  But it is still around a 25% slide in value and that is not a refuge. My Loomis Sayles bond funds were similarly not a refuge. 

Accuray (ARAY) is one of the stocks on my small cap monitor list.  It makes Cyberknife, a robotic radiosurgery system.  This device, which costs around 3 million, basically allows certain tumors to be treated with precision and less invasively. It recently reported earnings of 2 cents on an 11% rise in revenue. Reuters

Total revenue for its fiscal 2nd quarter, ending 12/27/08, increased to 52 million. Market cap is about 333 million at a price of $6, and the cash available is 154.7 million (cash & short and long term investments).  Ten Cyberknife systems were installed in the last quarter bringing the total installed base to 155 systems. Seeking Alpha The company also announced 60 layoffs in its U.S. workforce. The number of patients treated with this system grew 30% in the U.S, a 43% increase worldwide in lung cancer patients and a 54% increase in prostrate patients.  The company got some of its cash hung up in auction rate securities but reached a settlement requiring the seller to pay par value for them beginning in 6/2010. As an accounting issue, this required a 2 cent charge to other income in the quarter current.  More about CyberKnife is explained in the last annual report. 

While I am certainly impressed with CyberKnife,  I am concerned about the level of profitability and whether or not the company will be able to add new products other than upgrades to this existing product.   Accuray does seem like it might be a tempting acquisition target for a larger company in the medical device area, such as Intuitive Surgical.  ISRG 

I do not currently have a position in Accuray and have never owned it.  I certainly would not buy it based on my ruminations that it really needs to be part of a larger company. 

Obama's pay cap of $500,000 for executives in firms receiving taxpayer bailout funds will certainly provoke howls of injustice among the titans and wizards of high finance.  The plan will apparently allow more than 500 grand to be paid as long as the additional amount is in stock that has to be held until the government is paid back.  Those who shill for the Masters of the Universe, like the WSJ, will be up in arms claiming that the socialists are going to kill capitalism as we know it. I would just add that the wizards have put a stake in the heart of capitalism and have apparently not learned anything from their mistakes. Apparently, they believe in socialism themselves, as in socializing the risk and privatizing the rewards.  Many apparently believe that rewards should be given for failure on a mammoth scale. Judging from the parties that they throw for themselves after receiving taxpayer monies, and the bonuses handed out when their firms have lost money, possibly they are in need of some adult supervision for a couple of years. I would add a caveat that the pay restriction may cause many of these firms to tell the government to shove it, which is okay with me. 

ADP reported 522,000 job losses in January. WSJ It would be reasonable to predict an acceleration of job losses during the current quarter as more companies adjust production to demand. It would be difficult for this kind of information to surprise me anymore. For those who write for or frequent the newsbusters web site, who ardently believe the "mainstream" media spread financial doom and gloom last year just to beat Sarah and her running mate and is continuing to do it now to insure the passage of the stimulus plan, then the increase in the job losses will be a stunning surprise.  For those of us who have money at stake, we can not look for information, particularly unreliable opinions based on erroneous information, that confirm our previously formed beliefs.  As Nassim Taleb would say, that turkey had a high opinion of humans who housed and fed him for 1000 days.  Everyday confirmed the turkey's belief  about the kindness of humans who only had his best interest in mind until that day, just before thanksgiving, where to his surprise he was killed and eaten. Well, I try my best not to be eaten which means my mind has to be open and attuned to all information without filtering it, at least to the extent that is possible for a fallible human being.  I have started reading Taleb's other book which is available in paperback, "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets".  He makes some really interesting points.  But, as I have said, I have many disagreements with him relating to a human's ability to assess risks and the absolute character of his theories about Black Swan events.  

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