Posted by Davy Bui on July 2nd, 2008 in Market Commentary

Bloomberg reports on teens cutting back on clothes purchases amid higher gas prices and worsening job prospects.  Back in May, I posted a quick note on American Eagle Outfitters (or click here for the full valuation report in pdf format).  In my report, I was a little squishy on my assessment of AEO due to the uncertain outlook for the American economy going forward.  Many money managers assume that this downturn will be brief/shallow and after it’s over, the US economy will be back to its spend-foolish ways — they’re extrapolating the last 20 years into the future.   I am skeptical of this on both micro and macro levels.

On the micro level, AEO is nearing saturation point with their core market.  The flagship stores are pretty much everywhere already.  Their new brands haven’t gained much traction and the few (aerie) that are showing signs of life do not expand their core demographic.

On the bigger picture, the US may be approaching its inflection point.  Everyone (except Dick Cheney) recognizes that a deficit economy is not sustainable and while the endpoint has been called many times in the past, it will eventually come.  The conditions of the downturn we are now experiencing have the potential to set us up for a recalibration of the American economy, which we desperately need — things like moving away from negative savings, adjusting suburbia (or eliminating it altogether) in the face of peak oil, fashioning a reasonable response to globalization, fixing the healthcare system which stymies businesses and families alike, investing in infrastructure, properly incentivizing consumption (as opposed to basically subsidizing it), etc.  If this transition is now happening, AEO could be a bad stock to park money for some time.

On the question of “is it different this time?”, I’ll point out a report that got far less coverage than warranted.  Last week, Warren Buffett stated the US economy was in stagflation and didn’t know when it will recover.  While I heard one idiotic pundit say this is a contrarian signal to buy US stocks, the truth is Buffett, who, BTW, is one of the great unrecognized “market timers” — witness his timing on liquidating his hedge fund on the eve of the 70’s bear markets, his purchase of silver in the late 90’s, his US dollar call in the early part of this decade — gets it right far more often than not.

Couple this with Bill Gross’ plea for “President Obama” to open a $1 trillion dollar deficit to rescue the US economy and it’s clear that investors now live in interesting times.

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Posted by Davy Bui on June 30th, 2008 in Enlightened-American Portfolio

Heavy weighting in commodities and precious metals powered the portfolio to a winning June and a 18.4% gain for the 1st half of 2008, compared to losses of -12.8% for the S&P 500 and -14.4% for the DJIA. My non-commodity positions (foreign telcos, GE, ACAS) have suffered along with the broader market but those are meant to be long-term, high-yield positions (each yielding at least 5%) so patience will be required for those picks (or perhaps they can be harvested for tax-loss purposes later in the year).

I completely exited my Agnico-Eagle (AEM) position in June. While I’m almost certain that AEM will rise ever further in the near future, I just couldn’t justify holding on a valuation basis. Unlike Chesapeake Energy (CHK), Agnico-Eagle has not added substantially to its reserves since I opened the position and so the only driver for increasing NAV is higher gold prices. I follow a value-based philosophy and selling discipline is one of the hardest areas of investing. Value investors are often cursed with the problem of buying/selling too soon — I may as well get used to it. That position logged over 100% gains in little more than a year and qualifies for favorable tax treatment.

Going forward, navigating these markets will be tougher. While I believe in the long-term strength of the commodities story, there is little opportunity at these levels to find bargains in those sectors. I am still waiting for a good-sized pullback to add to positions in oil, gold, agriculture, etc. but it is highly possible that the train has left the station. In time, the oil story will be viewed as one of the easiest no-brainer investment opportunities of this decade but as a value investor, I cannot lose my head and chase the story.

As such, I am finding interesting prospects coming into my range in other out-of-favor sectors like big pharma, consumer durables and the like. These sectors don’t have the massive tailwind of peak oil to boost returns and cover any mistakes so I’m treading cautiously for now. As the saying goes, it will be a stock-picker’s market — margin of safety always. As of now, I have a 35% cash weighting.

In his old partnership letters, Warren Buffett continually emphasized that his main objective was to outperform during down-markets. Buffett much preferred years where he was down -5% compared to the market’s -10% rather than years where he was +10% to the market’s +5%. Bear markets are where investors really show their mettle. He also stated that you need 3 years minimum to begin judging someone’s track record and preferably closer to 10 or more years.

While I am obviously pleased that the portfolio has escaped the market carnage so far, at 1.5 years track record, I remain cognizant of the distinct possibility (likelihood even, if you believe EMT/MPT) that the results are more attributable to luck or a fortuitous call on commodities than any superior skill or analysis on my part (however, I will take credit for my rather prescient calls on the recently completed Euro 2008 tournament, picking all 8 quarterfinalists as well as picking the tourney winner). As such, I am endeavoring to double my vigilance and research for the back half of 2008 and the potentially treacherous markets ahead.

As always, take in everything with a healthy dose of skepticism (even in my blog), do your own due diligence and arrive to your own conclusions. These are my (foolish) opinions only and YMMV.

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Posted by Davy Bui on June 26th, 2008 in Uncategorized

As a result of the hacking last night, some technical work will have to be done on the site.  You may notice a few strange things, such as the blog being offline or seemingly rolled back to last week.  Please bear with me.  I expect that everything will be back to normal by the beginning of next week.  Until then, be careful — it’s a dangerous world out there!

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Posted by Davy Bui on June 26th, 2008 in Enlightened-American Portfolio, Stock Research

Racing is a fairly apt description but more on that below. First, an update from Q1 2008 (all figures US$ unless noted):

• The company burned $7M during the course of operations in Q1 2008, more than doubling last year’s cash burn. Because MFN is not yet in production, looking at the total cash burn number is important. Here we see the company drew $6M from its credit facility during Q1 and burned through $15.5M total, including operations and capex. The company’s cash balance, as of Q1 2008, stands at $5.5M with $44M remaining in its credit facility.
• On the balance sheet, the company’s liquidity position is starting to run a little close to the flesh. See above for cash balance. Total debt jumped 12.3% due to the credit draw. What’s interesting to note is that the company has $13.2M in receivables, the vast majority of which are VAT refunds due from the Mexican government for construction of the Dolores mine. About $10M cash was paid to the company subsequent to the release of the Q1 results so there’s a little breathing room.
• Obviously, a company with no production and burning cash is going to show a loss. Other than a 2% increase in shares outstanding, the income statement didn’t have much of note.

Other items of note from subsequent updates:
Continue reading this post…

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Posted by Davy Bui on June 26th, 2008 in Market Commentary

I don’t know if the Plunge Protection Team really exists but if there is, I guess today would be the day.  The Dow has fallen below its March lows and supposedly, the powers-that-be will want to maintain some sort of bottom or other to maintain confidence in the markets.

I wholeheartedly acknowledge that financial markets are managed to some extent (free markets, my ass) and it would not surprise me at all if the PPT did exist.  The close will definitely be interesting to watch.

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Posted by Davy Bui on June 25th, 2008 in Uncategorized

The blog was hacked tonight and I spent a couple of hours to get it back online.  Seems like we’re back up and running.  Feel free to email me if you notice anything fishy while browsing the site.

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