Published by: BMF INVESTMENTS, INC.
Volume 220
January 30, 2007
$120 per Year/ No Charge for Clients
Published by: BMF INVESTMENTS, INC.
Volume 220
January 30, 2007
$120 per Year/ No Charge for Clients
Bullometer = Not very many earnings to report.
This week’s feature: Nighthawk Radiology, Panera Bread Co., and Quanta Services.
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My Commentary The Picks Summary Update Corner Keywords Disclaimers Who is this guy? Contact Barry |
Do All Fiats Have Air Bags?
No, this is not going to be a discussion of automobile safety. I'm sure that Fiats are very good cars and I'm sure they have excellent safety features. No, I want to bring to your attention the term 'fiat' as applied to monetary supply. And, more importantly, the possible safety risks inherent in such systems. Some of you may be familiar with the term 'fiat' and some of you may be thinking that I have taken up a foreign language. Actually, the term 'fiat' has been around a long time and it is the word used to describe a currency that is printed by a government at whim. We would all like to think that our money is worth something. After all, our government prints it and protects it with anti-counterfeiting measures. But think about it. What is our money really worth? A hundred years ago, the dollar was backed by gold. Referred to as the 'gold standard', a dollar was supposed to be worth 1/35 of an ounce of gold pegged at $35 an ounce. Of course, our dollar used to say 'Dollar Bill' meaning that it could be exchanged for the appropriate amount of gold. It was in effect, redeemable. Now of course our money says 'Federal Reserve Note' and it is only redeemable in, well, a very perplexed look from a bank teller. More on that in a minute but the gold standard days were only valid if governments of the world adhered to the rules. Whatever money they generated from their printing presses had to be supported by proportionate amounts of government held gold. Of course, governments being as governments are, they printed what they wanted. History tells us that WWI produced giant deficits for all participants. The US and its European allies printed money for the war effort regardless of gold inventories. That behavior continued after the war because no one wanted to 'pay the piper'. The roaring 20's ensued and the economy was just bubblicious! Too much money always means that too much stuff gets built. Too much money devalues the value of the money and people don't want to hold it. They want to trade it in for perceived assets. Or, they just spend it because money is just raining on them like it was thrown from helicopters above. Fiats have a tendency to produce bubbles and spend-a-thons. And yes, the investment community notices. The stock market of the 20's appreciated and everything seemed fine until France decided to 'put its financial house in order'. To make up for all the money in circulation, the government started selling US dollars and demanded gold in return. In the first few years of the Great Depression, the US lost nearly half of its gold inventories. This of course, devalued the greenback and all the assets denominated in that currency. At the same time, Great Britain decided to revalue their currency higher to reflect the days when currency was actually backed by gold. The party was over. The depression enveloped the world except in China. The Chinese printed money backed by silver. Thus, China was not a deep participant in the fiat economic destruction. History goes on to tell us that the US somewhat baited the Germans into sinking 'merchant' ships which of course, brought us full tilt into WWII. Why? War is a good excuse to print money and when you are defending the national homeland, no one is going to question the money supply or the gold reserves. Indeed, the US economy through the WWII years showed the strongest economic growth we have ever had. Then, the war ended and the process of sopping up the money induced another recession. Then we had Korea and Viet Nam. Until this point, our currency was supposedly backed by gold. In 1973, President Nixon finally abandoned the farce altogether and dropped the gold standard for good. Alas, we could print money at will. Wars cause debts. Governments cover their debts by printing money. When money is printed free of constraints, its value drops. When the value of currency drops, inflation takes root. In the early '80's, the then Fed Chairman, Paul Volker, raised the Fed Funds rate to the 20% range to combat decades of essentially fiat abuse. Inflation was running at over 20% and our currency's value was melting like Joe Biden's Presidential bid with each speech. The Federal Reserve had now gained control over the issuance of currency and at the same time, credit standards were changing. Just as governments used to need assets to back their currency as well as debts, so too did individuals. But, the government needed other ways to line the pockets of individuals so they could launder, launder, launder! Uh, I mean spend, spend, spend. You see, freshly printed money has to have some way to get into the economy undetected by foreign eyes who might cry 'foul' thus resulting in the sequence of selling, devaluing, inflating, and recessing. So, along came credit cards, ATMs, and the stock market. To complete the ultimate fiat economy, the Federal Reserve was given free reign. Funny, this pseudo- government entity is not a part of the US government. Yet, they have absolute power over printing our money! So, how does a government print money without risking devaluation on the world stage? The obvious sign of too much money in circulation is inflation. You know - inflation is too much money chasing too few goods. One way to attack the problem is through globalization. If an economy has trouble producing enough goods, it can bring in more workers who will work on the cheap. Where could we get all those workers and how in the world could we bring them to our country? Yeah, folks, we are not going to 'stop' illegal immigration any time soon. I don't give a rat's behind what the politicians tell you on the campaign trail, it ain't gonna' happen. Well, not unless those workers migrating to the US come in demanding higher wages. Egad! The other way to cover the trail of a fiat is to deny the effect. If fiat economies ultimately produce too much inflation, we can simply deny that inflation exists. We can adjust the formulas. We can manufacture the data. It is like stepping on the bathroom scales only to find that we have gained a few extra pounds. Instead of cutting back on our food intake, we simply adjust the balance of the scales down before we step on. Problem solved! Take the case of oil. We all know that oil has doubled in price over the past few years. Yet somehow, as pervasive as oil is in its uses throughout our economy, it hasn't stoked the fires of inflation. The current Fed Chairman, Mr. Bernanke, has instituted his own measure of inflation that he calls the PCE (Personal Consumption Expenditures). This is a measure of all the things we consume minus anything that goes up in price. Shazam! Gone! We have gone from adjusting the bathroom scales before we step on them to simply picking a weight that we want to see and then locking the needle on that weight! Friends, I cover this in my book but inflation is dead. So is 'investing'. We are in a new era where data is manufactured to fit the policies. Ultimately, fiat systems are exposed. France and Great Britain brought the house of cards down in 1930. Who wants to go first now? We are all complicit. Heck, China is apparently way ahead of us in currency printing. Their economy continues to grow at or near double digits and inflation is never in the picture. At the same time, they are kind enough to sop up a large chunk or our debt even though their entire economy is about the size of Germany. The point is, they need us as much as we need them. Go to Wal-Mart and try and find something not made in China! For perspective, if Wal-Mart were an economy, they would be larger than Saudi Arabia. No, the Chinese aren't going to blow the whistle. Heck, they are busy making the whistle! If you really want to see the effects of a fiat economy on a currency, take a look at Iraq. When we rolled into Iraq, we stopped their printing presses. Their currency, the dinar, would soon die like the confederate dollar. At least that's what the 'jeniouses' running the American show thought. We came in throwing twenty dollar bills at the Iraqis hoping they would embrace the new American currency. The Iraqis weren't that stupid. After all, only an idiot would think that someone could just run some paper through a printing press, call it money, and assign a value to it. No, supply and demand took over. Since dinars were no longer rolling off the presses, they therefore had a finite supply. Since dollars were pouring out of every printing press available, apparently even including those in North Korea, their supply was infinite. The Americans' assumption that the dinar would become worthless couldn't have been further wrong. In fact, the dinar doubled in value in a few short months and is still the preferred currency. So, every fiat currency eventually has a problem. When will ours come? No one knows but when it does, I doubt the air bag will deploy in time. And, if our currency is a fiat, our stock market is propelled by that fiat. Where does that leave our stock market? La-ti-da - let's set the scales where we want to believe and buy some more stocks!
Now for the picks!
NIGHTHAWK RADIOLOGY (NA) NHWK $26
Chart
PANERA BREAD CO. (NA) PNRA $58
Chart
QUANTA SERVICES (N) PWR $21
Chart
In Summary...
Two buys and one short means this is still a dicey market. But, as long as governments around the world continue to support the stock market, it makes sense to stay invested. Good luck and may your pockets bulge with Franklins!
Update Corner
Money Management Moment
Keywords
*F-Span
Disclaimers
3rd qtr. results reported 12/07/06
Sales: $25m vs. $12m
Income: $5.5m vs. minus $13m
EPS: $.18 vs. minus $1.12
P/E: 32 Gth: 87% Profit: 22%
Nighthawk's business is performing radiology services principally to the emergency medical staffs in the US. Nighthawk's staff is US educated and trained but then they are relocated around the globe. That way, when x-rays are performed in the middle of the night in US emergency rooms, they are electronically sent and read by a radiologist working somewhere in the world where it is daytime. The stock is barely a year old and the company is now profitable. I think it is buyable for aggressive investors if the price appreciates above $27.
3rd qtr. results reported 10/24/06
Sales: $204m vs. $158m
Income: $10m vs. $11m
EPS: $.34 vs. $.37
P/E: 45 Gth: minus 6% Profit: 5%
This is the popular bread specialty restaurant that you have probably seen in your area. I have never eaten in one but earnings are stagnating. The same thing happens to all retailers. Their growth is pushed by new stores and you can only grow with new stores for so long. Chart wise, it looks like they are completing the last shoulder of a bearish head and shoulders. If so, this is a short sell when the price breaks the neckline at $47.
3rd qtr. results reported 11/3/06
Sales: $528m vs. $552m
Income: $22m vs. $13m
EPS: $.17 vs. $.11
P/E: 27 Gth: 41% Profit: 4%
Quanta Services is a company that takes advantage of the 'out-sourcing' trends of our modern economy. Specifically, they design, install, and maintain electric power networks, natural gas networks, and telecommunication networks. They lay cable not only for communications companies but also for cable television companies and government entities. Its all about infrastructure and this may be the year of infrastructure. As you can see from the chart, it has been a steady performer. Thus, we have a buy.
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I know the readers of this newsletter must be getting fed up with the media's assertion that the annual GDP for 2006 came in at 3.4% - 'surprising' to the upside. I have written for months, if not years, that GDP will always be reported at the 3.5% mark. Am I the world's most omnipotent economist? No, I just know a con job when I see one. Consider this from 1/11/07 reported on an Internet news site: The February crude contract closed down 3% on Wednesday after a government report showed big increases in supplies of distillates and gasoline in the latest week. That overshadowed a seventh-weekly decline in crude inventories. Apparently others are beginning to question the current state of government reported data. Phil Flynn is a respected, experienced, and knowledgeable oil analyst and responded with this: "The report reflects that we live in a strange world where we have no winter," said Alaron's Flynn. "We live in a world where you can produce less gasoline than the week before, use more, import less and still have supplies rise." Crude futures finished Thursday around 15% below the end-of-2006 price. Mission accomplished. Fiat currencies allow for one more thing. If you have enough money, you can sell down the commodities markets including oil. All you need is a lot of freshly printed money and an ignorant public. But, now you know. That's what I think!
BMF Investments, Inc. has become an SEC registered Investment Advisory (RIA) company. What does that mean for our clients? One thing I anticipate is more variety in money management choices. We are now clearing our trading through TD Ameritrade Institutional. This will give our clients access to more information about their portfolios. Don't be afraid to tell your friends that we are growing. In fact, we will be re-locating our office at the end of February to an office near Lowe's Motor Speedway on NC 29. Growth is a good thing. We all have to keep moving forward. Sometimes that requires us to sign more paperwork but it is all for one reason - to provide the best quality advisory services that our clients deserve!
*Bullometer
This is a gauge of the market condition based on top performing companies and their earnings growth rate/price-to-earnings relationship. I run a program on my earnings database to separate the fast growers from the rest of the pack. A good indication of an undervalued company is a growth rate that is twice the P/E multiple or more. I also filter for companies growing at four times the P/E and sum the total number to compare against the previous months total. An increase in this number generally indicates a climate of accelerating earnings and is positively bullish.
A span of time that mimics recession that is induced by a Federal Reserve blunder of economic misjudgment.
The views of the above are of this writer. The information herein is derived from sources believed to be accurate and up to date. Charts courtesy of StockCharts.com.
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