Tuesday, October 23, 2007

Tech Wreck

We've had ongoing weakness in profits for much of the technology sector so far this reporting season. But the sound of all the earnings misses has been drowned out by a handful of rapidly-growing companies with high multiples and even higher expectations. Jim Cramer of CNBC infamy has dubbed them the Four Horsemen. GOOG, RIMM and AAPL produced big numbers to feed the Nasdaq frenzy but the 4th horseman stumbled badly after the close today.

AMZN delivered strong revenue growth and beat profit expectations slightly - which was fine. Then they dropped a bombshell with their guidance.

Operating income is expected to be between $221 million and $291 million, or grow between 12% and 48% compared with fourth quarter 2006.
First problem is the range is wide enough to drive a truck through. That tells you they have no real idea what is going to happen - rarely a good sign. Second problem is that expected EPS growth for 4Q is 100% year over year. At the top of their guidance, they only fall short by half. At the bottom of the range, their profit growth will be one-eighth of expectations. That kind of miss is really bad and potentially disastrous for a high-flyer like AMZN.

What is important here is that the miss by Amazon will force people to look at what is actually happenning to earnings in technology and not just a few hyped up names. When they do look, they will see a rather ugly picture behind the hype. Almost every major technology company to report so far has had serious problems - either revenue shortfalls or forward-looking weakness as reflected in guidance. Many of them are big, even dominant players in their sector. Here's a partial list:

Texas Instruments - analog semis and digital signal processors
Broadcom - WiFi and other communications chips
Altera - PLDs (key components in telecom and networking gear)
Linear Tech - analog and mixed-signal semis
Microchip - microcontrollers for consumer and industrial applications

Ericsson - cellphones and cellular network gear
Alcatel/Lucent - communications equipment
IBM - weak hardware demand

Many of the semiconductor companies are telling us that 4th quarter revenues will be weaker than last quarter. That is the opposite of the normal seasonal pattern, suggesting a significant weakening of underlying demand. These chipmakers' customers are a very broad cross-section of the global technology sector and encompass tech's A-list, so the weakness is broad-based as well.

For months, the question has been "if a tech company falls in the forest, will it make a sound?" The answer has been a resounding NO. Now we're about to find out what happens when one falls in the front yard and crushes the house.

Monday, October 22, 2007

Special News Bulletin

Hello Avid Readers-

On October 20th, 2007 the 1998 Mercedes C280 of which this site is dedicated to was officially saved. This blog is dedicated to this event with....

The Top 5 Reasons Why the W202 Mercedes Kicks Ass!

1. The Bloodline
The W202's bloodline is quite prestigious. Before the W202 came into fruitation, the car's predecessor was the 190E. This car is number 10 on a recent Top 10 Greatest Mercedes' List http://cars.uk.msn.com/News/Top_ten_article.aspx?cp-documentid=544788
190E 2.3-16 (1983)
Mercedes 190E 2.3-16
Mercedes 190E 2.3-16
The W201 series was introduced in 1982 to sit below the E-Class range and was quickly dubbed the 'Baby Benz'. By Mercedes own admission the car was 'massively over-engineered', the company spent £600 million on its development. That hewn from solid quality did mean the car wasn’t a fireball however. To remedy this Mercedes called in the wizards from Cosworth to breathe on the basic 2.3-litre four cylinder engine. Thanks to double overhead camshafts and a light alloy, 16-valve cylinder head the engine produced 185bhp, 72 horses more than the stock motor. The car set three speed records at Nardo in August 1983, averaging 154mph over 50,000km.
Now, this was the W201. The C280 is the W202 , and is legendary in German DTM racing. Read the Race History portion of this site for more info!

2. The Race History of the W202
The Chart- DTM Champions (1987-1996)
Year 1st 2nd 3rd
1996 (ITC) Flag of Germany Manuel Reuter
Joest Racing Opel Calibra
Flag of Germany Bernd Schneider
AMG RacingMercedes-Benz C-Class
Flag of Italy Alessandro Nannini
Alfa Corse Alfa Romeo 155
1995 (ITC) Flag of Germany Bernd Schneider
AMG RacingMercedes-Benz C-Class
Flag of Denmark Jan Magnussen
AMG RacingMercedes-Benz C-Class
Flag of the United Kingdom Dario Franchitti
AMG RacingMercedes-Benz C-Class
1995 (DTM) Flag of Germany Bernd Schneider
AMG RacingMercedes-Benz C-Class
Flag of Germany Jörg van Ommen
ZakspeedMercedes-Benz C-Class
Flag of Germany Klaus Ludwig
Team Rosberg Opel Calibra
1994 Flag of Germany Klaus Ludwig
AMG RacingMercedes-Benz C-Class
Flag of Germany Jörg van Ommen
ZakspeedMercedes-Benz C-Class
Flag of Italy Nicola Larini
Alfa Corse Alfa Romeo 155
1993 Flag of Italy Nicola Larini
Alfa Corse Alfa Romeo 155
Flag of Germany Roland Asch
AMG RacingMercedes-Benz 190E
Flag of Germany Bernd Schneider
AMG RacingMercedes-Benz 190E
1992 Flag of Germany Klaus Ludwig
AMG RacingMercedes-Benz 190E
Flag of Denmark Kurt Thiim
Zakspeed Mercedes-Benz 190E
Flag of Germany Bernd Schneider
AMG RacingMercedes-Benz 190E
1991 Flag of Germany Frank Biela
AZR Audi V8
Flag of Germany Klaus Ludwig
AMG RacingMercedes-Benz 190E
Flag of Germany Hans-Joachim Stuck
SMS Competition Audi V8
1990 Flag of Germany Hans-Joachim Stuck
SMS Competition Audi V8
Flag of Venezuela Johnny Cecotto
Schnitzer Motorsport BMW M3
Flag of Denmark Kurt Thiim
AMG RacingMercedes-Benz 190E
1989 Flag of Italy Roberto Ravaglia
Schnitzer Motorsport BMW M3
Flag of Germany Klaus Niedzwiedz
Eggenberger Ford Sierra
Flag of France Fabien Giroix
Schnitzer Motorsport BMW M3
1988 Flag of Germany Klaus Ludwig
Grab Racing Ford Sierra RS500
Flag of Germany Roland Asch
BMK Mercedes-Benz 190E
Flag of Germany Armin Hahne
Wolf Concept Ford Sierra RS500
1987 Flag of Belgium Eric van de Poele
Zakspeed BMW M3
Flag of Germany Manuel Reuter
Ringshausen Ford Sierra RS500
Flag of Germany Marc Hessel
Zakspeed BMW M3
Note the 1-2-3 finish in 1995 for the W202, and the success of the 190E.
3. It is not a Volvo.
The Car to the left is not a volvo. Its a Mercedes-Benz. This is reason 3 why the C280 kicks ass. Volvo did not sweep DTM racing. They were too busy racing Yachts up each others asses.

4. Those Crazy Germans put a V8 into the Chassis
In 1998, AMG developed a new top model for the C-Class, the C 43 AMG. The Beast was powered by a smoother 4.3 L V8 which produced 302 hp at 5850 rpm, with a torque of 410 302 ft·lbf peaking at 3250 rpm. The C43 was also available as a station wagon, making it a pretty ballsy station wagon. 4200 AMG units were produced, with only 25 C 43 vehicles of the 2000 model year imported to the US. A C36 existed since 1996, but it wasn't nearly as nuts.

5. The Baby Benz Lives On
With its S-Class derived styling, various trims at various prices, the W202, which appeared in 1993, outsold the first generation W201 (190E) by 45%. The car dominated German Racing, spawned this website, and is now on a quest for High Mileage Certification. 155k is the goal!

Plus....its not a Volvo!


Sunday, October 21, 2007

Reserves, Profits and Multiples

One of the key problems with valuation in the stock market today is the difficulty of determining actual profits are trying to compare the numbers that are reported to previous years where different standards were used. Many bulls have tried to tell me that I should buy because the S&P 500 is selling at a P/E of only 16x 2008 earnings. Well, there are a ton of problems with that statement so let's just cover the fatal flaws.

First, I don't know what 2008 earnings are going to be and neither do they. They are using a guess as the denominator to get that multiple. The number we do have is the historical reported numbers and based on that the multiple is 18x, significantly higher.

Second, 18x is very expensive and even 16x is far from cheap. 16x would be a normal peak multiple over the business cycle. 18x would be extreme territory normally. During the 20th century, the P/E for the S&P 500 has exceeded 18x on a sustained basis 3 times: the late 1920s, the mid 1960s and the late 1990s. Each of them was followed by epic bear markets. Not a good set of precedents.

Each of those periods also featured prolonged (multi-year) periods of high earnings growth. We had the same thing this time in 2004-05 but EPS growth has fallen from 18% to 0% while equity indexes make new highs. Dangerous? You bet! In the past stocks rolled over shortly after earnings growth started to slow down. This time they refuse to roll over even when the slowdown is about to go to negative growth.

Then there is the quality of the profits themselves. The financial sector and banks in particular are quite problematic. The NY Times has done excellent coverage on the severe depletion of loss reserves at the big banks.

Some investors seem to think that banks’ current share prices reflect whatever grim earnings news remains ahead for the sector. But anyone who thinks that we have hit bottom in the increasingly scary lending world is paying little mind to the remarkably low levels of reserves that the big banks have set aside for loan losses. Indeed, loss provisions as a percentage of total loans held for investment plummeted to a historic low in the second quarter of 2007, the most recent period for which comprehensive figures are available.

Yep, we're heading into a major default crisis and banks have the lowest reserves ever. That's not a problem or anything that the Fed and Treasury want us to worry about. But the weak reserves have allowed financials to over-report profits for the last several years. Time to correct that and the price will be weak profits and for some, losses instead for the forseeable future. And I'm supposed to be interested in paying extreme peak multiples for inflated financial sector profits? No thanks.

Wednesday, October 17, 2007

The Top 5 Differences Between German and Italian Cars

Cars, like women (minus the whole crazy aspect), vary when they are from different parts of the world. For example, the general perception with American cars is that, like the nation's populace, grow exponentially every year in terms of gas guzzling and power. Thinking along these lines, The Autoblog presents the Differences Between German and Italian Cars.

1. Italian Cars cannot be pushed to their limit.
Apparently, you can beat a German car like a red-headed stepchild and the sicko will beg for more.They are masochists, just begging for more pain. On the other hand, Italian cars are like Paris Hilton on The Simple Life- You put it to work, it bitches and moans, breaks a nail (or a clutch) and calls it a day. Winner- German

These two pictures are one in the same

2. Italian Cars are Sexier
Well, there is a reason that these Ferraris cannot be pushed- they are too friggin' beautiful to drive. You wouldn't put a supermodel (that you owned and paid 100,000k for nonetheless) to run laps for 24 hours in a row would you? Fuck no! German cars, while a favorite of the Autoblog staff, are like Female Softball players- some are hot, others are just burley, strong women with big shoulders that have something to prove. Case in point- the Audi R8 and the VW Bug. Can't have that big ball of ugly on the roster, sorry fellas. Consistency gives this battle over to the Italians.
Winner- Italian Cars

3. German Cars Are The New York Yankees of Racing

Italy won 13 Le Mans victories, winning 5 in a row, with their last one being in 1964. Germany took home 26 victories, with a streak of 7, (they also had a streak of five in the 1980s with driver Jacky Ickx at the helm) with their last victory being 2007. Uhh that kind of speaks for itself, I don't even have a witty remark.
Winner- German Cars

4. Mugello Vs. The Nurburgring

Thunder and the forgeries of Birmingham, England birthed heavy metal. The Ghettos of NYC, L.A. and St. Louis fueled Rap. Mugello and the Nordschielfe are the testing grounds for Italian and German cars respectfully. Mugello is a decent track too, with its smooth curves, long straights. You can tell it was designed by Italians, the people of art, culture and fine food. The 'Ring on the other hand screams German- Cold, precise and narrow. Its been dubbed the Green Hell by drivers- driving on that thing at above 65mph is basically suicide. Its 12 miles long. Nazi's designed this thing- its torture, and the tracks incredibly badass nature gives this one to the Germans
Winner- German Cars

5. Ferrari and Masarati will Get you Laid More Than A Porsche or BMW

Watch any 80's movie. What is the douchebag badguy in the multicolored tie with the oily ponytail driving? Yup- a Porsche 911. Or is that a Mercedes. What did the Detectives in Miami Vice drive? A Ferrari Testarossa. What about Magnum P.I.- Yup- a Ferrari Daytona. Italian cars are an instant lay with the female species because any douche can drive a bimmer, while someone kickass owns a Ferrari, because they are dick enough to build one less than is in demand. Besides- its a friggin' Ferrari!
Winner - Italian Cars

So... The winner is the Aryans of the auto world. Germany can outrun, outdrive and basically have its way with any manufacturer it wants, without even having to take it out to dinner (except France as of late.... damn Peugot).

Ironic fact of the day- Enzo Ferrari wanted to build the Ferrari F40 as a return to Ferrari dominanated racing. Turns out that the factory didn't back it up...so much for a dying mans dream eh?


Tuesday, October 9, 2007

Why SaveMyBenz hates Volvos

We hate Volvos. Now, with that out of our way, here is why.

1. Volvo's Engines are Mechanical Freakshows
Five Cylinder engines are not natural. Engines should be in divisible by twos- 4 Cylinder, V6, V8, V12. None of this T5 bullshit. What the hell?! Manufacters claim that a 5 is inherinatly smoother than a 4, but c'mon. Frankie the Mechanic does not want to work on a Swedish 5 when he can work on more orthodox engine with six friggin' cylinders. Anywho...Volvos are the anti-savemybenz brand...and Top Gear, with their various destruction of Volvo Estate Wagons seems to agree. (Youtube Top Gear and Volvo for my case in point. Besides their use of 5 cylinder engines.

. They are a disgrace to their Viking Heritage.
Volvo is as badass as Melissa Etheridge. Their ancestors however...are the Vikings. Yea...the guys lead by Thor... with his Hammer of the Gods. In our minds, the Swedes of yesteryear didn't give a flying fuck about safety, because they are too busy trying to restrain themselves from shoving a lightning bolt up their enemies ass, all while listening to Manowar. Vikings didn't need the first 3-point safety belts, and neither do you.

3. They are Ugly.
It kind of speaks for itself. I always thought Swedes were supposed to be sexy.=====>

4. They would rather race Yachts than Cars
We understand that Volvo is a multi-faceted company that produces all sorts of mechanical engines, but jesus christ- race some more cars! Volvos have "sport" trims on their ugly, crappy products, but hmm I guess they don't back up the moniker where their little sport badges are.

5. Volvos are driven by Starbucks loving Soccer Moms Without a Soul.
Does The Motherfucking Stig drive a Volvo? No. He is too busy driving a real car. Does the Transporter ditch his Audi for a Volvo? No. Volvos are driven by Soccer moms who can't tell a clutch fan assembly from a headlight. Man are we pretentious! And bold! Look at that above statement. Damn. Or the "Safety Conscious." Hmm. Those people should be busy worrying about the eco-footprint or something. I want my cars sharp, full of steel, and oh so dangerously powerful.

Well...this is it on why we hate Volvos. They annoy us for the above reasons and countless more. We hope Ford just decides to sell them to Vikings who shove their hammers in their tailpipes.


Sunday, October 7, 2007

Global Reversal

It's been a few weeks and there's been a bit of excitement surrounding the Fed. But from an economic and credit standpoint, it's largely "sound and fury, signifying nothing." Risk spreads are still wide, lots of high-grade and few low-grade bonds are being issued, market rates (all but the shortest maturities) are higher not lower. Sure, stock markets are rallying on the promise of inflation but the Fed may not be able to deliver, especially since only the Bank of Japan is using the same playbook.

If you look closely, the recent past is very similar to the 1970s. We have rising inflation everywhere, though masked this time using statistical manipulation in the First World. Inflationary credit excess driving unsustainable demand for all kinds of stuff. This benefits rising industrial exporters (Japan then, China now) and commodities producers (OPEC, Chile, Brazil, Canada, Australia, Texas, Alberta and various African nations). We experienced a co-ordinated global boom then, just as now and for the same reasons. In fact, we are currently experiencing the highest sustained rate of global GDP growth since the early 1970s - not a terribly auspicious precedent.

Even with cuts in the Fed funds target rates, the US economy seems to be well along the road to a severe recession. Housing can only be described as collapsing. To those who argue that prices haven't come down much, you are correct - that comes later. Prices are sticky in housing since the average market participant is poorly informed. Price declines often continue well after a bottom in sales and construction. Just given what's happened already, we can look forward to 18-24 months of falling prices.

Predictably, lending against depreciating collateral isn't terribly popular and the initial effects of less EZ credit are being seen in the first small drops for consumer spending and retail sales. The declines would have been worse without rapid growth of credit card balances.

The Federal Reserve reported that consumer credit rose at an annual rate of 5.9 percent in August, the biggest increase since a 7.9 percent jump in May.

The increase was led by an 8.1 percent leap in revolving credit, the category that includes credit card loans.

This will get much worse for at least a year. With consumer spending now accounting for an unprecedented 72% of the economy, the vulnerability to a consumer spending slowdown is obvious. Of course American consumers have been spending money they don't have for the last 5 years and the engine for excess spending - the housing bubble has been sputtering and has now shut down.

What's fascinating is that similar dynamics are now being seen overseas. Many nations have experienced simultaneous housing bubbles and their associated wealth effects. A number of them are now rolling over in credible imitations of the US housing market of 2006. What ties them all together is credit. Live by the (credit) sword, die by the sword. It hasn't hit the inflation boom economies yet but it very likely will.

UK Builders
UK Lenders
New Zealand

There's evidence of housing rolling over in such diverse locations as Sri Lanka, the Baltic States and Thailand. Once again, the only common thread is a deflating global credit bubble.