Portfolio review of the week April 17th 2010

Markets fell heavily yesterday after consistent gains earlier in the week, as Goldman Sachs (GS) posted a 13% drop to $160.7 on fraud charges brought by the Securities and Exchange Commission. The drop was the biggest one day fall in the stock's history. Technology stocks were also in the red with Google (GOOG) dropping $45 dollars or 7.5% to $550 on first quarter results.

The Dow Jones Industrial Average finished Friday down 125 points, or 1.1%, to 11,018. Despite the fall, the DOW showed its seventh week of gains. The S&P 500 Index fell 19.5 points, or 1.6%, to 1,192, below the key 1,200 technical level. The FTSE 100 index dropped 81 points, to 5,744.

The SEC, has accused Goldman Sachs and a London-based executive director, Fabrice Tourre, of failing to disclose information about a synthetic collateralized-debt obligation (CDO), related to subprime residential mortgage-backed securities. It also is said to have not disclosed the role that hedge fund Paulson & Co played in the portfolio-selection process and the fact that the fund was shorting the CDO. Investor's lost around $1 billion in the investment.

On the portfolio front it has been a relatively quiet week as I have trimmed long positions on the run up. Some shorts on the FTSE 100 and DOW placed yesterday morning could have been extraordinarily profitable following the Goldman news but were unfortunately not closed at the lows of the day. Its a waiting game for Contrarian Investor UK at the moment as I'm not rushing to commit extra funds into this market.

GW Pharma (GWP) - The portfolio's largest holding had a good end to the week with a 4.5% rise yesterday despite the market falls to finish at 114p. I am puzzled at what is driving this gain as the approval of the UK and Spanish national licences are not expected for Sativex for some weeks yet. May and June will be the months where the exciting news flow starts to come so its a question of watch and wait. Hopefully this will move up gradually over the next few weeks as the regulatory update in March hugely de-risked this share.

Nighthawk Energy (HAWK) - A short term trade was placed this week on news of a drilling update and director buys. Position closed at 29p.

Ithaca Energy (IAE ) - Following news from the appraisal well on the Stella field in the North Sea a position was initiated but not in the Contrarian Investor core portfolio as this will be a longer term story.

Goldman Sachs charged by SEC with misreporting and drives down financials

The U.S. SEC (Securities and Exchange Commission) has charged Goldman Sachs & Co (GS) and one of its vice presidents with misstating and omitting key facts about a financial product related to subprime mortgages. Goldman shares are currently 20 dollars to $164, and the statement has had a significant impact on the overall market with the DOW industrials currently down 60 at 11,090 and FTSE 100 down 56 at 5,767.


Shorts on the FTSE and DOW placed this morning were closed with this fall.

UK government moves into profit on RBS stake

Royal Bank of Scotland Group PLC (RBS) is up 8% today to 50p as Bank of America Merrill Lynch said the 84%-government owned bank could turn to a profit this year as bad-debt charges and costs fall and margins increase. It thinks RBS shares could double in value over two years on an improved earnings outlook and raising its target price from 45p to 65p. Morgan Stanley also increased its target price on the bank to 50 pence from 40 pence on lower impairments, good asset quality and capital position.

The U.K. government's spent £45.2 billion rescuing RBS in 2009 at an average price of 49.9p.

General Electric beats 1st quarter estimates

General Electric Co. (GE) has just announced that its first-quarter earnings fell 32% to $1.87 billion, or 17 cents a share, and revenue fell 5% to $36.61 billion. From continuing operations it earned 21 cents a share, compared to estimates of earnings of 17 cents a share on revenue of $37.3 billion. Its financial arm, GE Capital, saw its profit drop 41% to $607 million as revenue fell 10%.

The company said it may evaluate additional restructuring that will improve earnings power going forward.

Google earnings rise 35% year on year in first quarter

After the close last night, internet search company Google (GOOG ) said first-quarter revenue was $5.06 billion and net income rose to $1.96 billion, or $6.06 a share, from $1.42 billion or $4.49 a share in the same period in 2009. Excluding special items, earnings for the 1st quarter were $6.76 a share against analyst expectations of $6.60. Google's rate of paid clicks, or the number of times users clicked on its advertisements and generated revenue, rose 15% from the same quarter last year. It had posted 13% growth in paid clicks in the prior fourth-quarter report. Analysts had been looking for first-quarter paid click growth in the range of 12% to 14%.

Some analysts were concerned that it had begun to hire aggressively again in the first quarter, meaning that its total costs and expenses rose to $4.3 billion from $3.6 billion in the same period last year. This drove the share price down 26 dollars to $569, a drop of over 4%, after hours. When out of 27 analysts, 25 have it as buy or overweight this shows the weight of expectation on Google's shares. Although the company beat estimates, the earnings outlook for the rest of the year has moved the share price down. It must be a legitimate concern, whether GOOG can continue driving earnings growth at the same rate if costs rise, its "bread and butter" search engine ads slows down, its exit from China curtails future growth and its acquisitions such as YouTube continue to disappoint in terms of monetization.

It seems the hypothesis that ad spending was going to increase substantially in 2010 is playing out. Companies such as ITV in the UK are already seeing the benefits of this rebound in their share prices with it touching 69p today, 20p higher than the point in March when Sky offloaded its stake. Frustrating to have sold out at 60p!

Mobius's Top Ten investment tips

I liked this story from Times Money Central June 2009 which lists Templeton Emerging Markets' Guru, Dr. Mark Mobius top ten investment tips:

1. Keep an eye on value
Is a share selling for below its book value? What is the relationship between the earnings and the price?

2. Don’t follow the herd
Many of the most successful investors are contrarian investors. Buy when others are selling and sell when others are buying.

3. Be patient
Rome was not built in a day and companies take time to grow to their full potential.

4. Dripfeed your money into the market
No one knows exactly where markets are going so dripfeed your money into the market by making regular investments. That way you will average out the ups and downs of the market.

5. Examine your own situation and your appetite for risk
You should not go into equities if you are the type of person who is nervous every time you read a stock market report.

6. Diversify your portfolio
You must never put all your eggs in one basket unless you have a lot of time to watch that basket - and most of us don’t.

7. Don’t listen to your friends or neighbours when it comes to making investment decisions
Your own situation is different from everyone else’s so you should be making the decisions.

8. Don’t believe everything you read in newspapers, because things tend to be exaggeratedDon’t be swayed by headlines and look at what is going on behind the scenes.

9. Go into emerging markets because that is where the growth is
Emerging markets have consistently grown much faster than the developed countries in virtually every year since 1988.

10. Look at countries where populations are relatively youngCountries with young populations are going to be the most productive in future years.

Ithaca Energy tucked away into SIPP for medium term

Yesterday's news on the early appraisal of the North Sea Stella field indicating that its reserves are much higher than anticipated was good news for Ithaca Energy (IAE). Last week it announced its first profit of $7.9 million on revenues of $111 million, after a loss of $30.4 million (£19.7 million) in 2009. The results were driven by a 50% share of 7,083 barrels of oil per day production from the Beatrice and Jacky fields in the North Sea. Earnings estimates for 2010 are $0.36 per share and $58.7 million. At the current share price of £1.62 ($2.44) this puts Ithaca on a forward p/e of 6.8.

The company has no debt and $30 million of cash. It plans to develop its Athena field and acquire other North Sea assets in what it considers to be a buyer’s market for undeveloped discoveries. The Stella field will come on stream in 2012 with reserves up to 20 million barrels and it is possible that further upgrades of the field's reservoir will be forthcoming.

Although I do not anticipate too much further share price appreciation in the short term after the 10% rise yesterday, I have bought Ithaca in my SIPP (Self Invested personal pension) since the next couple of years should see earnings move up sharply. Though Ithaca can be volatile as it is traded on both the Toronto Stock Exchange and AIM in the U.K. from a fundamentals and momentum point of view this company ticks the boxes.

Ithaca Energy issues positive statement from Stella North Sea field

Ithaca Energy (IAE) announced today that drilling in their North Sea field Stella had found more oil than expected and confirming its viability meaning the company's reserves could be increased by up to 25%.
Ithaca's chief exploration officer Nick Muir said "The field is clearly even more significant than we thought and the results of this well and the test have exceeded all our expectations,"

The company said that it now knows the reservoir has a total hydrocarbon column of more than 820 feet, confirming oil more than 500 feet lower than that found in previous wells, and establishing the reservoir as 'fill to spill', meaning connected hydrocarbons are present throughout.

Following the news it looks like Ithaca's prospects look increasingly positive, though drilling will not start until 2012. Despite the despite 10% increase today to 162p the shares still look good value.

S&P breaks through key technical barrier

It was a fifth day of gains on Wall Street last night with strong results from Intel (INTC) and JP Morgan (JPM) driving the Dow Industrials to 11,123, up 103 points, the highest rise since March 5th. The S&P 500 broke through the key 1200 barrier, its highest since September 2008, to finish 13 points higher at 1,211.

The FTSE 100 is up marginally to hit 5,800,  like the S&P 500, the highest since September 2008 when Lehman Brothers filed for Chapter 11 bankruptcy.

Intel first quarter results boost tech stocks

After the close last night, Intel Corp. (INTC) on reported a large rise in first-quarter profit as strong sales of PC's and server chips helped the company. The company reported a profit of $2.4 billion, or 43 cents a share versus expectations of 38 cents, and compared with a profit of $629 million, or 11 cents a share, in the same period in 2009. Revenue was $10.3 billion, up from $7.1 billion in the same quarter the previous year versus analyst estimates of $9.8 billion. Revenue in the PC Client group, the company's largest business unit, rose 43% to $7.67 billion compared with the same quarter last year.

Intel Chief Executive Paul Otellini said "A year ago at this time, the industry was in the midst of a sharp correction with many expecting it to continue for an extended period,but we saw signals of it bottoming then and now a year later the industry is nearly fully recovered."

The shares rose 4% after hours to $23.67. Intel also issued a better-than-expected sales forecast for the second quarter of $10.2 billion and raised margin expectations.

Intel's results are a good sign for PC related, software and semi-conductor stocks such as Microsoft, Hewlett Packard, AMD and ASML.

Soros warns of Greek death spiral

The man that "broke the Bank of England" George Soros,  has said that Greece still faces the danger of a “death spiral” because the cost of borrowing in the euro region’s rescue package is too expensive.

At a meeting yesterday he said "If you start charging very high rates as the market does in anticipation of solvency then that pushes you into insolvency. If they don’t they have then to tighten even further, then your tax receipts go down and the economy goes further into tanking and then you go into a death spiral. That is the danger that is still remaining. The consequences of Greece leaving the euro would be the disintegration of the euro,” Soros said. “The disintegration of the euro would take a very long way toward the disintegration of the European Union.

On April 11 the Euro zone countries agreed a 30 billion-euro ($41 billion) aid package to Greece which gave it loans at 5 percent.

Nighthawk Energy directors buy encouraging

Nighthawk Energy (HAWK) has moved up sharply since the weekend with two RNS's catching the eye. Yesterday's announcement confirmed that several "sweet spots" in the shale had been identified on 3D seismics. Secondly this morning a RNS stating that several directors including the MD David Bramhill had purchased stakes between 50,000 and 100,000. HAWK' s share price is currently up 8% at 28p to buy. 


The fact that the Scottish Widows (Lloyds) stock sale overhang has now cleared means that the positive momentum is likely to continue.

Alcoa starts earnings season and disappoints on revenues

European markets are broadly flat this morning after yesterday's news on the Greek bail out by the Euro zone countries.

After the close last night, aluminium producer Alcoa (AA) kicked off the U.S. quarter one earnings season with a loss of $201 million, or 20 cents a share and a profit of $10 cents a share excluding exceptionals which was in line with expectations. In the same quarter in 2009, Alcoa reported a loss of $497 million,  59 cents a share. However, revenue came in worse than expected at $4.9 billion versus $4.15 billion a year ago but below estimates of $5.24 billion.

Alcoa CEO Klaus Kleinfeld said "Our markets are gradually improving and both policy trends and consumer sentiment bode well for aluminum demand," he said, citing the new U.S. fuel-efficiency and emissions regulations for vehicles. "In addition, a growing number of customers are requesting sustainable products. Factors like these play to aluminum's superior advantages as a light, strong, versatile and infinitely recyclable material."

This may be the pattern of this earnings season with companies meeting expectations on the bottom line through cost cutting. The challenge is going to be driving top line revenues and Alcoa's results from Q1 show that this remains a significant hurdle despite the signs of the global economic recovery.

U.S. Q1 earnings season kicks off tomorrow

Alcoa (AA) starts the U.S. first quarter earnings season with Intel, Google also due to report this week.

Tricks of the Market Makers

On the London Stock Exchange (LSE) there are Market Makers for many smaller companies and less heavily traded shares. Market Makers are financial institutions who have agreed with their clients (the quoted company) and who have been approved by regulators to “make a market” in the shares of the client. Their role is to guarantee a market in a particular share so that investors can buy and sell easily i.e. they make a lightly traded share more liquid. They in effect assume some risk in return for the chance of the profit on the spread by acting as the middleman. Each stock always has at least two market makers and they are obliged to deal. Even if no other trader on the other side of the trade at a particular time, market makers will guarantee to buy and sell the shares in which they make markets. They make their money through the difference between the buying and selling price, the so called bid-offer spread. The bid price for a stock is the price at which the market maker is currently willing to buy, or is bidding for, shares. The ask price is where the market maker is currently willing to sell, or is asking for, shares. The bid price is always lower than the ask price so the market maker can make money on the spread.

Market Makers are not supposed to allow themselves to go short, but in process of making a market they may well find themselves short of a stock. If this situation they can purchase from another Market Maker, move the price to get the shares from sellers of the stock or borrow the shares from an institutional investor. Therefore a market maker can make money in both rising or falling markets, as long as they correctly predict which way a stock's price will move. The more actively a share is traded the more money a Market Maker makes so they will try and encourage trading of a particular stock by moving the price up or down to bring buyers or sellers into a market.

Some tricks of the Market Makers

1. An institution places a big order for a stock. The market maker doesn't have enough stock to complete the transaction so he has two options 1) drop the price to trigger sales 2) increase the price to trigger sales. If the price is dropped other buyers may be tempted in and the market maker may still be short of stock and owe the institution shares it is guaranteed to provide. So sometimes for no apparent reason the stock price drops dramatically, a so called "tree shake" to trigger stop losses and allow the market maker to pick up the stock he needs. 

2. If a particular share rises dramatically on an announcement, market makers sell stock to meet these orders and sometimes they sell these buyers stock they don't actually own in anticipation that they'll able to pick up stock more cheaply in the future to meet these buy orders when the share price reverses down. By gathering shares at a lower price they can meet the obligations of the buyers at a profit. This is why the share price can often drift down for days or week after a big announcement so that the Market Maker can guarantee that they can deliver all the shares they have promised by triggering sales.