As in the U.S., working Brits continue to increase their use of quick short-term loans against paychecks to help them weather economic conditions. Unemployment – incidentally a factor which precludes use of payday loans at home and abroad – will be at its worst in 17 years in 2011, according to a report by the Chartered Institute of Personnel and Development. The Institute says that 80,000 jobs in the private sector and 120,000 jobs in the public sector will be eliminated by the end of the year.

Unemployment rates at the beginning of the year were already at 7.9%, and the total jobless numbers put 2.53 million Brits out of work by the end of the first quarter. The increase in 2011 can take that percent up to 9% by December 2011.

Of those who still work, there remains financial stress, particularly where formerly two-earner households are now down to one working person. With costs of housing, utilities, food and insurance relatively constant, those families have taken a hit on their credit scores and consequently find it increasingly difficult to get loans and cash advances from traditional sources, credit card companies and banks. This has led to an increased usage of payday loans or quick short-term loans, which enjoy similar popularity in the U.S., Australia and Canada.

“It’s not like old days,” remarked one former HR professional. “If you had to stand on line in a payday loans store, you might not bother. But the online method of finding quick short term loans has made it infinitely more consumer-friendly and accessible.”

Indeed, those payday loans companies have improved the service offering to consumers in attractive ways. The online application is simple, with no faxing or paper documents required, and users spend only about 12 minutes per transaction. This compares to a two-hour average engagement in traditional bricks-and-mortar payday loans stores.

A spokesperson for the quick short-term loans industry said growth rates for all players are “robust,” but that should not be interpreted as saying borrowers are in economic straits.

“This is the new way to manage household finances during cash shortfalls,” he said. “Where previous generations just rang up charges on a credit card, these working consumers want to manage their debts over the short, not long, term.”

Traders are reacting to this morning’s adjusted GDP report which shows slower growth than originally reported…

Gross domestic product, the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 1.6% from April to June, the Commerce Department said Frid

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If you think the worst is behind us when it comes to the Eurpean debt crisis, Think Again!

Yesterday there were more riots in the streets of Athens as labor unions violently opposed a new proposal that would raise the retirement age and cut payments to pension recipients.  It’s understandable that citizens would be discouraged at losing generous benefits that had been promised for years, but one has to stop and think about how realistic these promises have been.

Whether Greece is able to fulfill the labor union’s expectation of generous payday and retirement benefits or not, the international investing community continues to expect high levels of risk.  The risk of a Greece or Spain default is a very serious issue with global repercussions.  Many European banks have significant exposure to Greek and Spanish sovereign debt, and even the expectation of a default can cause illiquidity as banks refuse to lend to each other and capital ratios are unable to be met.

As a trader in primarily US based companies, the European debt situation is still a major concern.  US markets are increasingly keying off of international events including Austerity programs, Chinese economic reports, and trends in emerging markets.  As correlations between geographical regions increase, I am finding few places where long-term investments make sense right now.  There is just too much risk of loss.

So at this point, the best course of action continues to be one of defense.  Consider holding elevated levels of cash in your account.  If you are comfortable shorting stocks and understand the risk, there are plenty of negative fundamental and technical situations that can be capitalized on.  IRA accounts can consider buying puts or inverse ETFs.

There will eventually be opportunities to buy equities with high levels of conviction.  But today’s market allows for very little confidence and requires patience and risk management regardless of your time horizon and risk tolerance.

Market’s are off sharply Tuesday as investors grapple with numerous economic and political crosswinds.  This morning, traders were greeted with a weaker-than-expected Consumer Confidence report.  The index dropped to 52.9 in June and the May figure was revised lower to 62.7.  According to Bloomberg, this index would need to come in above 90 to truly indicate that the economic rebound was on solid footing.

Reuters blames the weakness on two primary factors.  First, the labor market continues to be soft and consumers are concerned with the employment situation.  Those who have jobs may very well be choosing not to make discretionary purchases and instead build up a savings account in case their employment situation changes.  Obviously those who do not have jobs are even more focused on reining in spending.

The second issue is the European overhang.  While most US consumers don’t actually see significant changes in their lifestyle as a direct result of the European uncertainty, the thought of heavily indebted governments defaulting on sovereign debt is very concerning – especially considering the massive debt the US is currently building.

Additional factors include the real estate market which was artificially propped up by stimulus programs but now appears to be under pressure once again.  If consumers feel that their home value is declining, they are less likely to make large purchases – especially home repairs or remodel projects because there is less justification that these improvements are an “investment.”

Finally, the declining stock market has a very real effect on sentiment.  As consumer see the value of 401(k) holdings, IRA accounts, and traditional investment portfolios decline, it sends a very disturbing negative wealth message.

The end result will likely be contracting multiples on equities and a flight to quality.  Pursuing a conservative investment strategy appears to be the best approach for today and holding significant amounts of cash and potentially inverse ETF positions can help to offset losses in traditional investments.

Note: Below is a guest post courtesy of Michael Trinkle.  Michael represents ForexTraders.com ~ ForexTraders.com is an educational/informative resource center for the currency exchange market. We help people learn, analyze and execute forex trading by providing them with the necessary tools and information needed to be successful.

Enjoy,
ZDS

Lately, almost every financial news network has market analysts talking about the currency markets. At the moment the future of the Euro Dollar is the number one debate. Some say that the European Union needs to exist for efficient trade to take place more freely throughout the E.U. Others have suggested that Greece and the other countries in trouble default on their debt and start anew, without being part of the E.U. If you are a trader looking to play the Euro currency without buying the EUR/USD pair, a good exchange traded fund that will allow you to do this is the Currency Shares Euro Trust, ticker symbol (FXE).

The FXE trades on all the major electronic exchanges. With an average three month volume of over 1.5 million shares traded daily there is more then enough liquidity for traders to trade large orders of this product intraday. The FXE will mimic the price movements of the EUR/USD pair that forex traders would trade, so if as an investor you feel that the Euro will rise buying shares of this ETF will allow you to profit from its appreciation. Likewise if the Euro Falls the ETF will lose value.

At the moment the FXE has been trading between a high of 125.66 and a low of 121.27 over the past week. As you can see by the charts the Euro has been depreciating against the U.S. Dollar since the beginning of the year. In the past month the Greek debt crisis has led to a steeper selloff, bringing more uncertainty into all financial markets.

Traders should be watching the charts in the next few weeks to see if the Euro will regain its footing or fall further. The increased volume that you can see in the histogram on the bottom of the chart indicates that more people have been trading this ETF in the past few weeks. If Greece, Spain and Portugal announce that they are still having debt issues, the Euro and the FXE will fall further.

There is no support below the 121.27 mark that we tested on May 18^th, so a price break below that level on higher volume will indicate another leg down for the price of the Euro. The overall trend has been down since the beginning of the year, making it more probable that we will continue lower. There would need to be a major news story about the Germans backing the future of the European Union and Euro as a currency for it to start to appreciate. The German economy and its strong GDP is the driving force the holds the E.U. together. Germany has the biggest economy in Europe and since they are the most financially stable, they will have to help the other countries with loans to cover their budget shortfalls.

It is never easy for politicians to get their citizens to lend money to other countries that simply do not try and get their budgets under control. Greece is in the process of trying to change their socialistic style of government. As we all can see from the riots on television, this is not going to be an easy transition. If the various governments that comprise the E.U. can get their debt under control before they ask for money to bail them out the Euro has a chance to survive. If we as investors see little progress being made, they Euro will continue to fall. As a trader the best way to profit from the falling price of the Euro is to initiate a short position using the FXE exchange traded fund.

Friday’s dismal retail sales report was largely overlooked as the market continued it’s oversold bounce.  But despite the strength in the broad averages, the fundamental data in the report was concerning for both business owners in the retail sector as well as investors who have bid prices of retail stocks significantly higher over the past few quarters.

The big decline cast new doubts about the strength of the economic recovery.  Consumer spending accounts for 70 percent of total economic activity.  Economists are concerned that households will start trimming outlays as they continued to be battered by high unemployment and a swoon in stock prices. ~AP

Certain retail stocks have already begun to price in a slowdown in retail sales…  For instance, Abercrombie & Fitch (ANF) has already lost 30% of its market value from its high in April.  Still, other expensive apparel companies such as Lululemon Athletica (LULU) are still trading near their highs and appear to be vulnerable.

The decline in May sales reached 1.2% which was the largest decline since September and the first significant piece of negative news for retailers.  I would be more inclined to sell (or short) any rallies in the retail sector.  Investors will likely place a lower multiple on these stocks given the uncertainty ahead and the significant risk the that US consumer will continue to pinch pennies and reduce spending.

For any remaining employment optimists, the comments out of Washington from Ben Bernanke are certainly troubling.  Last night the Federal Reserve Chairman sat down with Sam Donaldson (ABC) to discuss the state of the US economy.  His words were less than encouraging:

The unemployment rate is still going to be high for a while, and that means that a lot of people are going to be under financial stress

Last week, the employment report was released and was quite a disappointment to most traders.  While government hiring increased as a result of new census workers coming online, the private sector is still struggling to create new jobs.  Since each new government job must be funded by taxpayer revenues or additional borrowing, the number of new census workers isn’t exactly a benefit to the system as a whole.

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Optimists might point to the declining unemployment rate as evidence that the picture is brightening.  But the actual decline in unemployment is more a result of a smaller workforce as the statisticians reduced the denominator of “employable workers.”  This is much more of a statistical magic trick than a true improvement in the employment picture.

Last night, Bernanke also seemed to be hedging his words carefully and possibly hinting at an impending rate increase – which would likely constrain growth:

The Fed chief reiterated yesterday that the central bank’s “extended period” of a record low interbank lending rate is conditioned on high unemployment, low inflation and stable price expectations.

“We have right now a very accommodative, very easy monetary policy,” Bernanke said. “We can’t wait until unemployment is where we’d like it to be” or inflation gets “out of control” to tighten credit, he said.

(Bloomberg)

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So at this point it appears the market fear is pricing in an increasing possibility of a double dip recession – which would be very difficult to endure given the high level of government debt and the relatively high level of unemployment heading into this period.

Investors should continue to be cautious, employ strict risk control measures, and be willing to hold cash positions.  The market continues to be very turbulent and long-only investors are likely to have much better prices for buying a bit farther down the road.

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This morning’s unemployment report is being viewed as a positive data point with the number of initial claims dropping by 10,000.  However, with the total adjusted number checking in at 453,000, a 10k drop is not really a significant decline.  Analysts had been expecting the number to drop more and hit 450,000 for the month.

Unemployment has been an important issue, and one that has been difficult to tackle.  Despite many stimulus projects aimed at improving the unemployment picture, workers are still finding it challenging to find jobs.  This from a Reuters report on the data:

Although the economy has now grown for three straight quarters following the worst downturn since the 1930s and the recovery is broadening, stubbornly high unemployment is eroding President Barack Obama’s popularity…  While other indicators support views the labor market recovery is firming, claims for jobless benefits remain above levels usually associated with sustainable employment growth.

While the jobless report is helpful in determining the state of employment in the US, most eyes will be turned to the more popular Employment Report which will be released tomorrow.  The expectation is for non-farm payrolls to have increased 513,000 in May – much of which is due to the census hiring.

Employment is an important part of any economic recovery because it directly affects the well being and sustainability of the population.  While the US could experience nominal GDP growth as an eventual product of stimulus spending, without a sustained resurgence of private jobs, the recovery will quickly run into substantial challenges.

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According to Bespoke, Tuesday’s market action was the second worst start to June in the last 50 years.

Only the first trading day of June 2002 was worse with a decline of 2.48%.  Below we highlight all first days of June that have been down over the last 50 years.  We also provide the index’s performance through the end of the month.  For Junes that have started the month down, the S&P has averaged a rest-of-month decline of 0.53%.

Take a look at the table and you will see the closest two data points led to some very rough returns.

Considering the fact that we just completed the worst May in 50 years, it is clear that the market is vulnerable and investors  (professional and retail alike) are pairing back their risk exposure and looking for safety.

Consumers remain under pressure and if inflation and/or  unemployment statistics begin to tick higher, the pain will be felt not just on Wall Street but more importantly on Main Street.  Investors should be looking for defensive businesses that can survive and even thrive in a weak environment for consumers. Direct payday lenders like First Cash Financial (FCFS) and Cash America (CSH) may be worth watching as they have backed off in recent months but are fundamentally still relatively strong.

From time to time, I allow readers to send me a guest post on timely subjects.  With the potential for rising inflation, investors should consider precious metals as a hedge for the purchasing power of their portfolio.  You can find more from Bob Kirtley at Gold-Prices.biz…

We will kick off with a review of the charts for gold, silver and the gold bugs index, the HUI, in an attempt to see where we are now and just where we might go from here. However, to put the charts into context we need to take into consideration the surrounding political, economic and investment landscape. These are volatile times with the financial markets in turmoil as what were perceived to be sound and secure governments now toil under the strain of their own excesses. The borrow and spend philosophies are coming back like a bad penny, to haunt not just those who caused this mess, but also for the rest of us, who are expected to clear it up. The follies vary from mis-management to corruption, resulting in people taking to the street to protest the latest craze of austerity and belt tightening.

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Society, in general, has high expectations in terms of their standard of living and the mere thought of it heading lower is not acceptable to them. Take state pensions, for example, millions of people are expecting it to be there for them when they retire, however, the pensions cupboard is empty and therefore the concept of sitting back as the cheques roll in is well and truly dead in the water. We need to start protecting ourselves now, don’t wait, make it the number one priority to put your independence at the top of your ‘To Do’ list.

Taking a quick look at the above gold chart we can see that the sell off in gold prices of $60.00/oz has now steadied and gold appears to be set to continue its rally. Note both the 50 day and the 200 day moving averages are climbing gently in support. The RSI has turned north and the STO has just made a crossover, which is usually a positive sign.

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Next we have the HUI which is making steady progress despite the volatility and is now perched just above the 200dma. Looking at the technical indicators we can see the RSI has turned north just above the ‘30? level and that the STO has also turned up having dipped below ‘20?, again all positive for the gold and silver mining producers.

Turning to silver we can see that the pull back looks to have run its course so we are looking for silver prices to head to higher ground. The technical indicators are now out of the overbought zone thus reducing the selling pressure on silver and allowing it the space to resume its advance.

In conclusion we are of the opinion that the precious metals should once again be bought, gold, silver and their associated stocks. As a word of warning though, its still not clear to us whether or not the stocks will go down in the face of a broader market sell off should it occur. So go gently and make your acquisitions on a ‘layered’ basis. Finally, we are considering the purchase of a number of options trades which should be profitable during the next move up, which we believe to be imminent.

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The last few weeks have been difficult for many retail stocks – and particularly challenging for investors in the recent IPO of Express Inc. (EXPR).  After being offered to the public at $17.00 per share, the stock has lost about 15% of its value and hit a new low in light trading this morning.  Express is a specialty apparel chain with 573 retail locations spread across the United States.  Originally a part of Limited Brands (LTD), the majority of the company was purchased by Golden Gate Private Equity Inc. in 2007.  The IPO is the first step for the private equity company to cash in on its 3-year investment.

The IPO was managed by Merrill Lynch / Bank of America (BAC) and Goldman Sachs (GS). With such a diverse retail and institutional platform, one would have expected the shares to be placed in the hands of long-term investors and priced at a discount to allow for an initial increase in the share price.  But the environment for retail stocks has been extremely difficult and institutional investors have been offloading risk at a steady pace this month.  At this point it seems that the selling shareholders got the better end of the deal – liquidating part of their position at $17.00 per share.

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According to the terms of the prospectus, there were roughly 16 million shares sold to the public of which 10.5 million were primary (sold by the company to raise  capital) and 5.5 million were sold by private shareholders.  However, when looking more carefully at the deal, this statistic is a little misleading…

Express essentially DID receive $170 million in proceeds from the deal which it used to reduce outstanding debt.  However, it should be noted that the outstanding debt is actually owed to several subsidiaries of the private equity firm that purchased the brand in 2007.  So after passing briefly through Express’s balance sheet, the funds will then be distributed to the selling shareholders in the form of a debt repayment.  Express will be left with $368 million in long-term debt and roughly $67 million in cash.  The pro-forma balance sheet has stockholders equity at $89 million – which implies a 413% debt to equity ratio – not exactly a solid balance sheet.

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But despite the shaky circumstances with which this stock began its publicly traded days, I expect EXPR to find a floor near $14 and begin to trade higher.  One of the primary reasons is because only a small portion of the stock was actually liquidated in the IPO transaction.  Sixteen million shares were sold to the public, but the number of shares outstanding is closer to 89 million.   That means Limited Brands and Golden Gate Private Equity still hold the majority of the stock and will see the market value of their investment rise and fall with the fortunes of the stock.

Once a private equity firm has begun to liquidate its position, they usually don’t wait too long to follow up by selling the remaining shares.  With the negative reaction to EXPR’s stock there is even more of an incentive for the company to find a “graceful” way of exiting this position.  So it may sound counter intuitive, but one of the best ways for Golden Gate to liquidate the rest of its position is for the company to step in and support the price of EXPR – and if they are going to take this action they need to act quickly!

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Supporting the stock at this time when the market is attempting to rebound will be key.  If EXPR begins to trade back towards the $17.00 IPO price and holds a stable pattern, then Golden Gate stands a better chance of selling its remaining shares in a secondary offering.  But if the stock is allowed to fall from here, there will likely be no market for quite some time.  So the stakes are high and the amount of capital at risk is not trivial.

It may be a little too cute on the trading side, but with retail names showing some relative strength over the past few days, I expect EXPR to be good for a trade higher.  The potential return is somewhere in the neighborhood of 10% to 12%.  But this can be painted against a relatively low-risk backdrop.  If I were to enter the trade later this week, I would place a stop just below $14.75 or so – exiting the trade if the rebound in EXPR doesn’t take place immediately.  Setting up a short-term trade in an improving market with capped risk is one of the better ways to play a short-term rebound and I think the general negative sentiment in the retail area could be temporarily lifted as the illusion of financial stability comes back into this market.

FD: Author does not have a position in any stocks mentioned in this article.

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Despite the market carnage, shares of Gentiva Health Services Inc. (GTIV) are up sharply this week.  The strength is primarily due to the fact that GTIV reached an agreement over the weekend to acquire Odyssey Healthcare Inc. (ODSY) for $27.00 in cash.

Typically, when a cash acquisition takes place and the target company is bought out at a price above its current market value, the shares of the acquiring firm trade lower.  This is because the market has placed an expected value on the target company (represented by its former share price) and the acquiring company is paying a premium to complete the purchase.  The only way the market would reward the acquiring firm for paying a premium is if investors believe that the combination will be worth more than the sum of its parts.

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In this case, investors are pleased with the purchase and believe that Gentiva will be able to create a stronger company as a result of the combination.  The deal values ODSY at $912.3 million dollars and is expected to close in the third quarter.  Both of the companies’ boards have agreed to the deal and it is unlikely shareholders will oppose the transaction, given the positive effect it had on both company’s stock.

The Odyssey deal is not the first acquisition Gentiva has made this month.  Last week, the company acquired United Home Care Group – a private home healthcare firm based out of Louisiana.  For competitive reasons, the terms and conditions of this transaction were not disclosed.  UHCC had revenues of $7.8 million in 2009 so it is a relatively small bolt-on acquisition, but could be instrumental in helping GTIV build out its geographic footprint.

The combined company will provide hospice care to an expected 14,000 patients and will be active in 30 states.  Analysts are expecting combined annual revenue of $1.8 billion, and the most recent estimates are for earnings of $2.71 for 2010.  So at this point, shareholders are willing to pay just over 10 times earnings for what appears to be a very stable and well managed practice.

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Challenges To consider

There are two issues that need to be carefully weighed before making an investment in GTIV.

First, the company will need to raise a significant amount of debt capital to complete the transaction.  Since the deal is a cash transaction, GTIV will be borrowing an additional $1.1 billion and already has a guarantee from Bank of America (BAC), Barclays PLC (BCS), and the financing arm of General Electric (GE).  At this point it looks like the financing is a sure thing, but given the turbulence in the market I think investors should at least consider a small chance that the financing dries up if we have a severe dislocation in the financial sector.

Secondly, GTIV was one of four companies that received a letter from the Senate Finance Committee asking for information on the necessity of medical visits.  The implied accusation is that the company could have increased its number of visits in order to qualify for more Medicare reimbursements.  The home health industry is a necessary part of our healthcare system and actually saves money for the Medicare program, but the regulatory issues and the possibility for fines and restrictions should be considered.

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Given these two concerns, I still believe GTIV offers an exceptional value for investors.  If the company is able to complete the transaction, increase growth projections, and prove to regulators that its practices are sound; investors are likely to pay a higher multiple to own the company.  A PE of 15 would increase the stock by 50%, and if earnings projections are revised higher the gains could be even stronger.  Given the potential for growth and knowing the risks involved in owning this company, I will be looking for attractive spots to add a bit of exposure.

FD: Author does not have a position in any stocks mentioned in this article.

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For-profit education companies have faced more than their share of scrutiny over the last several years.  With high profile fraud cases, and rising concern that taxpayers are footing the bill for student loans that are less likely to be repaid, the business of education has been under pressure.

Often, companies in a particular sector are all painted with the same brush for a period of months (or even years) until the dust settles and individual companies with strong business models are able to stand out against their competition.  With regulations regarding loans to students of for-profit education companies likely to be completed this year, investors may get the chance to see which of these companies are likely to continue to thrive, and which carry significant risk.

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At issue is the ability of graduates to find gainful employment and therefore repay student loans which are typically federally insured.  Grand Canyon Education Inc. (LOPE) will likely hold up well under this scrutiny and could rise sharply once the regulatory uncertainty clears.  Low tuition rates keep student loans manageable for graduates, and the fact that the educator has a campus with many of the social draws of a larger university helps student retention and graduate rates (which are likely to be a key measure under regulation)

Earlier this month, the company announced first quarter earnings which appeared to be very constructive.  Revenues grew by 61% to $89.3 million and earnings came in at $0.25 per share.  This is an increase of 127% over earnings from last year as enrollment continues to grow sharply.

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LOPE is in good financial condition with a cash balance of $97.9 million – up a full $34.8 million in just the last quarter.  Looking closer at the balance sheet, the majority of assets are tangible which increases the quality of the financial picture.  On the liability side, the largest current liability is “Deferred revenue and student deposits” which is essentially cash collected from students for services that have yet to be performed.  While properly classified as an accounting liability, the $45 million will almost surely flow to the income statement as the education company enters subsequent quarters.  The only long-term debt is roughly $25 million in notes payable.

The future looks bright for the company as management issued strong guidance.  In the second quarter enrollment is expected to grow to 36,500 to 37,500 – an increase of 32% to 36%.  Revenues should grow by 47% to 49% and EPS should be between 23 and 24 cents.  for the full year, revenue should fall in a range of $397 to $405 million, enrollment should finish the year between 47,000 and 49,000 and management expects to earn $1.21 to $1.27 per share.

We are excited about the future as we continue to match the needs of the changing economy to relevant programs that both traditional and non-traditional students continue to seek out and benefit from. ~Brian Mueller, CEO

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Shares of the stock are not particularly cheap, trading at a forward PE of 21.  But with the exceptional growth rate, analysts expect 2011 income to approach $1.68 per share in 2011 which puts the stock at a 2 year PE of 15.5.  Of course it is difficult to extrapolate growth out for several years, but with an exceptional student retention rate, it is easier to project longer-term earnings for LOPE.  Analysts are typically bearish on the education sector at this point due to the regulatory issues in play.  So it is likely that the current expectations are conservative and future growth could turn out to be much more attractive.

LOPE appears to be ready to break out of a tight range formed in the last few weeks.  Relative strength ratings have been improving as the market has been weak but LOPE has held its gains relatively well.  Buying at the current price near $26 with a stop around $23.50 would allow traders to set up a position with limited risk and the potential for much larger gains.  So despite the uncertainty in the education industry, LOPE looks to be a good trading opportunity.

FD: Author does not have a position in LOPE

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Just over a month ago, we took a look at Metals USA Holdings Corp (MUSA) after it’s IPO.  The private equity firm Apollo Group was the primary beneficiary with a convoluted transaction where MUSA would issue primary shares (with the capital proceeds paid to the company) but would then be required to make a payment to Apollo Group which basically represented the capital from the IPO price.

This transaction seemed bound to be a poor deal for investors who were really just funding Apollo’s exit.  And sure enough, the stock dropped from the offering price of $21 down to Wednesday’s closing price of $14.80.  That means investors in the actual IPO lost nearly a third of their capital over just about six weeks.  Of course, the economic weakness and concern in Europe has helped to speed up the decline.

Market conditions continue to improve, as we see increases in customer inquiries and order volumes.  Raw material prices continue to rise and metal prices are following.  ~Lourenco Goncalves, CEO

Analysts are expecting the company to earn $1.16 per share this year compared to a loss of 52 cents last year.  In 2011, the expectations are for earnings of $1.94.  So at the current price below $15.00, investors can pick the stock up for 13 times this year’s earnings and less than 8 times next year’s expectations.  Of course those estimates aren’t a given, but at this point the risks seem more contained with the stock trading at such a discount to the IPO price.

The prospect for the company to be acquired shouldn’t be overlooked.  With MUSA’s market cap now approaching a half billion (from above) the company is well within the reach of larger metal conglomerates wishing to increase their business lines.  Heck, Apollo Group could step in and buy the company again pocketing about $250 million and still owning the same company it started with before the transaction.

Fears of deflation and weak demand cannot be simply overlooked.  But traders who bought on the IPO have likely pressured this stock down to a place where it makes fundamental sense to own.  Investors will have to be patient, but could see a significant return if they weather volatility and hold the stock for 6 to 12 months.

High debt levels may continue to cause concern, but this is standard operating procedure for the capital intensive metal industry.  The company has a healthy level of inventories, productive property and equipment, and has reduced costs to allow for healthy cahs flow into the business.  So despite the macro headwinds, I would cover shorts at this point and consider picking a few spots to add exposure cautiously.

FD: Author does not have a position in MUSA

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A lot has happened since May 4th when I penned a negative article on First Solar Inc. (FSLR).  My expectation was that the crisis in the Euro-Zone would have a material effect on stimulus for solar projects, which in turn would hurt the solar stocks which are so dependent on these subsidies.  Since that time, FSLR has dropped from $143.72 to near $106 today, and many other stocks in the sector are down substantially more.

The concerns in the solar industry are certainly valid.  Europe has been one of the primary champions of alternative energy and Germany & Spain have been especially beneficial with their generous programs to help defray costs for installing environmentally friendly energy sources.  Without these stimulus programs, the demand for solar products could be significantly cut – and with excess capacity in the industry pricing may continue to suffer…

But how far is too far?  The Claymore Global Solar Index (TAN) pictured below is off 43% from its 2010 high and many individual stocks have experienced much wider losses.  Investors in the sector appear panicked and willing to sell at any price regardless of the fundamental value of the individual companies.

This type of environment can create attractive opportunities for the scrupulous and patient investor.  While the trend is negative and selling  could continue, several stocks are entering a range where it makes sense to allocate a small amount of long-term capital with the possibility of realizing very large returns when the sector rebounds.

Trina Solar Ltd. (TSL) is off more than 40% in just the last three weeks.  At $15 per share, the company looks like a good risk considering earnings are expected at $2.12 for this year and $2.35 for 2011.  Even if these earnings levels were cut in half, the stock would still have a low multiple relative to it’s long-term growth prospects.

In the fourth quarter, the company shipped 163.7 MW of solar product and saw its revenue increase to $313 million (over $216 million in the fourth quarter 2008). Gross margins increased to 32.6% which is impressive given the fact that average sales prices per watt dropped from $3.61 in the fourth quarter of 2008 to $1.90 in Q4 2009.

Debt levels are under control with total debt of $585 million and cash on hand of $478 million.  In 2010, the company expects Germany and Italy to make up less than half of total sales which is an improvement from past years.  However, the dependence on these two countries certainly does pose a risk to investors which is why the stock is so cheap today.

The company will announce first quarter earnings on May 25 before the market opens.  Investors will be listening carefully to understand what trends are in play and what feedback management is getting from customers.  The stock is currently in a place where even bad news could easily spark a rally.  Investors are expecting the worst and so something at or slightly better than “the worst” could quickly drive share prices higher.

Long-term, the entire solar industry could benefit from the wake of BP’s giant oil spill.  Environmental concerns will likely drive tighter regulations for fossil fuels, and generate more demand for alternative means such as solar energy.  Short-term concerns are weighing down the market, but in the long run we could easily look back on the summer of 2010 as an excellent buying point for solar stocks.

FD: Author does not have a position in any stocks mentioned in this article.

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Times are good for IntercontinentalExchange Inc (ICE).  The company is experiencing tailwinds from regulatory proceedings along with increased volatility in the market which drives heavier trading.  On May 5, ICE announced first quarter earnings and the news was largely positive.

Revenues for the first quarter came in at $282 million which is good for a 22% increase.  Earnings were up 25% at $1.36 per share as the company benefited from strong trading in commodity and energy trading.  ICE has pioneered the concept of “clearing” over-the-counter (OTC) trades – or acting as a third party guarantor to both sides of these trades.

Increasing volatility in equity and fixed income markets in the second quarter should be a benefit to ICE as well with futures on its acquired Russell contracts adding additional revenue.  While weakness in equity markets and investor aversion to risk could be a negative for ICE’s PE multiple, the added revenue and earnings from this volatility should support the stock price and even lead to additional gains for investors.

One of the most exciting opportunities in front of ICE right now is the ability to clear Credit Default Swaps (CDS) for financial institutions.  These transactions will likely face heavy regulations in the coming months as the liabilities and tangled web of counter-parties were instrumental in causing the financial crisis of 2008.  ICE should be one of the front-runners for clearing these transactions, adding stability and confidence to the market while collecting lucrative clearing fees for its services.

In the first quarter, revenues for executing and clearing CDS transactions totaled $43 million.  That figure is only up 13% from 2009, but could grow quickly as dealers will likely soon be forced to clear these transactions through ICE or The CME Group (CME).  Because of the huge capital requirements to participate in the clearance business, barriers to entry are high and ICE and CME should be able to act as a virtual duopoly in the market.

A Culture of Acquisitions

IntercontenentalExchange has been able to put up stellar growth in no small part due to management’s ability to identify attractive acquisition targets, structure exceptional deals, and then effectively integrate its purchases into the ICE fold.

On April 30, the company announced the acquisition of Climate Exchange which is a leader in the trading of emissions market.  Climate Exchange operates the European Climate Exchange (ECX), the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE).  Although the cap and trade bill has taken a back seat as far as media attention is concerned, ICE’s opportunistic acquisition could turn out to be a major revenue driver in years to come.

Emissions trading should fit naturally into ICE’s portfolio of products since the company has built such a strong presence in the energy trading arena.  The acquisition has the feel of a “hedge” as an increase in carbon restrictions could cause some of the company’s energy markets to eventually see lower volumes.  But the emission contracts will likely offset the potentially lower volume and the contracts can naturally be marketed to the company’s existing large clients.

Below is a great graphical representation of the company’s historical revenue growth.  Acquisitions have been an instrumental part of this process, but unlike some conglomerates who have grown at the expense of shareholders, ICE has been disciplined in its process to make accretive purchases – adding to shareholder value At 21 times forward earnings, the stock is not necessarily cheap.  But keep in mind that most analysts do not factor in the effect of acquisitions in their models.  ICE management will almost certainly continue to take advantage of future opportunities, and with a strong balance sheet the company has plenty of flexibility to pursue these options. Increasing volatility in financial markets will likely persist beyond just a few weeks time.  We are living in historical times on many levels.  The financial crisis in Europe threatens to spread to other regions.  BP’s oil spill and the resulting cleanup and regulations could wreak havoc on energy prices.  Political unrest remains a major international threat – and all of these issues should lead to volatile price swings in many different markets. ICE has a broad product offering and should capture significant revenue from traders and hedgers seeking to exploit or protect themselves from these dislocations.  The future looks bright for this exchange and I will be looking for opportunistic price points to once again own this industry leader. FD: Author does not have a position in any stocks mentioned in this article. Enjoy this article? Sign up for the ZachStocks Newsletter, Your source for Sound Market Commentary, Growth Stock Analysis and Successful Investment Strategies

Credit and Debit card issuers, along with transaction processors were sharply lower on Friday after a Senate vote included restrictions on the fees that can be charged for these transactions.  The vote essentially allowed the measures to be included in the Financial Reform bill and the regulations could have a dramatic impact on the profits for many of the companies involved.

Transaction Processors

The two most important companies affected by this bill are Visa Inc. (V) and Mastercard Inc. (MA).  Both stocks were down sharply on the news – and both traded on heavy volume indicating institutional selling was extreme.

Visa is currently trading at about 20 times expected earnings for the year ending September, 2010 which is not an extremely rich multiple.  But the technical pattern is very sobering with Visa dropping below the 200 day average on huge volume.  Most investors are banking on the fact that Visa will see long-term growth rates near 20% as international expansion generates revenue growth – primarily from emerging markets.  But the US is a significant portion of the company’s established business and if the senate bill cuts down on fees for debit and credit cards in the US, it will likely lead to at least some pricing power in international markets as well.

Mastercard is in a similar position except for the fact that the stock has a much lower multiple.  When it appeared that consumer spending would be constrained as a result of higher unemployment, many analysts argued that Mastercard and Visa would continue to generate large profit increases with little risk.  The fact that these companies do not take on credit risk was a major benefit as opposed to the banks who actually lend to consumers and face the risk of default.  If the transaction fees are more heavily regulated and margins are constrained, that may significantly reduce the appeal of these companies to investors.

Discover Financial Services (DFS) is one of the short positions currently held in the ZachStocks Newsletter Portfolio.  Currently, we have a 4.4% profit in the position and I expect that number to increase over the next few weeks.  Analysts are expecting 309% profit growth in 2011 as the company faces fewer defaults and the economy becomes stronger.  But as the financial reform bill makes its way through the legislative process, there could easily be more unfavorable surprises for lenders like DFS – and the uncertainty abroad doesn’t help matters either.

The pattern on American Express Co. (AXP) looks quite disturbing as the stock has given back all the gains from its breakout in April, and volume was strong on the gap lower Friday (although not nearly as pronounced as Visa and Mastercard).  AXP has a significant debt level which is not a concern when markets are functioning properly, but could become a much bigger issue if liquidity freezes up and delinquencies rise.  A PE of 13.5 is not exceptionally expensive, but if analysts expectations for 2010 turn out to be aggressive, the intensity of selling could pick up.

What’s in YOUR wallet? Capital One Financial Corp (COF) has put together an incredible marketing effort.  But their earnings are just a shadow of what they once were.  With one of the biggest portfolios of consumer loans and credit lines, COF is finding itself square in the cross-hairs of regulators and may very well operate in a confined industry for years to come.  Don’t expect profit to grow significantly after 2010 unless the economy rebounds more strongly than even the most bullish economists expect.  The stock appears vulnerable after giving back gains from its most recent breakout and I wouldn’t be surprised if the current estimates prove too aggressive.

The bottom line is that regulatory uncertainty is a cloud that will continue to hang over companies associated with credit and debit transactions.  Long-term, regulations could eventually backfire on consumers, shutting down the availability of credit lines and inadvertently helping business lines such as payday cash advances.  The financial reform bill could be just as damaging as the healthcare bill when it comes to some of the key financial companies.   Surely, something needs to be done to protect consumers – and many of these companies have lost all sense of decency and ethics when dealing with their customers.

Regardless of what may look like reasonable (or even attractive) multiples, I wouldn’t take long positions in these stocks right now, and any rebound next week could serve as an opportunity to test some small short positions.  Given how far these stocks have rallied in the last several quarters, some profit taking is entirely possible, and significant declines could end up causing panic and additional selling.

Author has a short position in the ZachStocks Newsletter portfolio

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With the crisis in Europe still on the radar (despite a Trillion dollar rescue package), investors have become more concerned about inflation.  The beauty of the Euro when it was created was that individual governments didn’t have the ability to print their own currency.  The expectation was that this would cause governments to be more conservative since they must actually match revenue to debt service costs – or at least be able to attract needed capital through issuing new bonds.

But as it turns out, the multi-country currency experiment is turning out to be a flop with the trillion dollar package to bail out Greece and other distressed countries likely to continue to put pressure on the purchasing power of the euro, and highlights the dangers of fiat currencies around the world.

The package was initially welcomed with the Euro bouncing quickly in hopes that the package would restore order to the beleaguered economical landscape.  But in short order, the euro once again gave up ground to the dollar.  I don’t have a lot of experience trading currencies, but both from a fundamental and technical perspective, the Euro looks to be in real danger.

Gold is Becoming the Currency of Choice

It may sound archaic, but gold is a currency that has been able to stand the test of time, and is once again stepping up as an increasingly accepted storage of value.  From Europe to Asia to the US, investors are becoming less comfortable with the value of paper currencies and looking for ways to protect the purchasing power of nest eggs.  I am seriously considering adding precious metal positions to the ZachStocks Newsletter portfolio as the pattern on gold and silver is very attractive.

Many of the world’s top money managers have been accumulating gold positions in anticipation of this phenomenon and while the “buy gold now” commercials are often cheesy and misleading, individual investors can take positions in gold related securities which may be very beneficial in protecting assets such as retirement accounts, education trusts, or simple investment accounts.

How to take money and emotion out of the gold market.

The most common way for individual investors to gain exposure to gold is by buying the SPDR Gold Trust (GLD).  This is an etf which seeks performance related to the spot price movement of gold bullion.  Alternatively, investors can buy the iShares Silver Trust (SLV) which is hitting a new 52-week high as I write.

For more sophisticated investors, there is the opportunity to buy futures contracts which can offer leverage and allow you to hedge a greater portion of your assets while only putting up a small amount of collateral.  Options are another vehicle which require a thorough knowledge of how the vehicles work, but can give the investor attractive exposure.  Please make sure that you understand the risks and trading dynamics before taking a position in options or futures.

The Relationship to the US Dollar

Several months ago, gold prices were trading with a negative correlation to the US dollar.  This simply means that when the dollar was stronger, gold had a tendency to sell off, and the opposite was true as well.

The relationship makes sense because if investors have less confidence in the dollar, they might hold gold as a storage of value instead.

Today, however, gold is rising in lockstep with the dollar (see chart above).  The US dollar is strong compared to other currencies, primarily because of the weakness of the euro.  At the same time, gold is strong because of a “flight to safety” where investors are looking for the most stable place to protect the value of their savings.

The point is that both the dollar and gold are attracting scared money.  But if and when the dollar begins to fall, that will likely cause even more strength for precious metals.  Right now, metals are rising on their own merit – regardless of currencies.  But if the US dollar weakens, metals (which are priced in dollars) will become even more valuable.

So despite the fact that precious metals are already at historically high levels, it makes sense to have some exposure in today’s uncertain environment.  I would recommend setting aside a particular dollar amount that you are willing to invest in metals, and taking the next few months to slowly put that capital to work.  You won’t get the best price with every purchase, but you could average into a strong position and experience the benefits of holding hard assets whose value is not subject to a printing press.

FD: Author does not have a position in GLD

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Shares of Priceline.com Inc. (PCLN) are off sharply in early trading after the company announced earnings for the first quarter.  On the surface, the numbers were strong.  Revenue for the first quarter eclipsed a half-billion coming in at $584.4 million.  This is a 26.5% increase over revenue for the first quarter of 2009.  Earnings were even more impressive with EPS at $1.70, good for a 56% increase.  The earnings figure beat consensus estimates by 4 cents, but the revenue came in about 2% below expectations.

While the historical numbers should be viewed positively (although analysts have become accustomed to the company actually beating expectations), the forward guidance was concerning.  Management is guiding investors to expect earnings between $2.50 and $2.70 for the second quarter.  This is an important quarter for the company given travelers tendency to book summer vacation trips.  Revenue is expected to increase 18% to 23% which is significantly below the 25.8% average expectation.

Guidance for the second quarter still reflects growth for the company, but challenges are certainly pressuring that growth:

The Iceland volcano caused widespread disruptions in air travel which resulted in a significant increase in hotel room cancellations for our Booking.com business. Civil unrest in Thailand has substantially impacted hotel room reservations in Thailand, which is a key market for Agoda and Booking.com’s Asia business. Lastly, sovereign debt concerns in Europe have resulted in a significant decline in the value of the Euro as compared to the U.S. dollar which adversely impacts our financial results as expressed in U.S. dollars. ~Jeffery H. Boyd, CEO

Priceline’s stock price has been extremely volatile over the last week.  This is in stark contrast to the sustained positive move which investors have enjoyed for well over a year.  After setting a low near $45 in December of 2008, the stock has rallied more than 500% to its recent high above $270.  And despite the sharp increase, the earnings multiple is not overwhelmingly expensive at this time.

Using the forward consensus earnings expectations of $11.21 for this year (which will likely be reduced after the earnings report), the stock is trading at just 18 times forward earnings.  But while that number may appear reasonable, I expect these expectations to be reset lower and potentially continue to be adjusted as we move through the year.

Debt issues in Europe are almost certain to continue to be a problem.  Yesterday (Monday) the Euro made very little progress against the dollar despite the fact that a $1 trillion dollar bailout package was put into play.  If the Euro can’t rally on this type of stimulus, then it is difficult to see what would pull it out of its decline anytime soon.

On top of that, the global consumer’s confidence may quickly be shaken as we deal with sharp volatility in the market again.  For over a year, a rising stock market (both domestically and abroad) has led to consumer confidence, and in turn has helped to propel consumer spending on many luxuries including travel.  Businesses have become more active travelers too as liquidity and corporate spending has become relaxed.

But if those trends are reversed, PCLN could be very vulnerable to a sharp decline.  If earnings for this year turn out to be 10% above 2009 and 2011 experiences the same type of growth, the market could easily use a lower multiple in the neighborhood of 12 which would yield a stock price closer to $112.  And if earnings actually decline in 2010 or 2011 the stock could fall much farther.

At this point it appears that the risks in owning PCLN far outweigh the possible returns.  While shorting outright at this juncture may be difficult (given intense volatility) active traders could consider selling out of the money calls (and possibly puts too) to capture volatility premiums.  Before engaging in this type of trade, make sure you understand the risks of selling options and have a plan in place to offset your losses if the stock moves against you.

If PCLN rallies back towards the 50 day average, aggressive traders could take a shot at shorting the stock with a tight stop.  The environment is changing for this successful travel business and I expect more weakness in the coming quarters.  As an alternative, investors could also consider shorting Ctrip.com International (CTRP) which could be under pressure both from weakening travel as well as less robust growth in the Chinese economy.

FD: Author does not have a position in PCLN

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Shares of Blue Nile Inc. (NILE) have broken decidedly lower after the company issued its first quarter earnings report last week.  Sure, the overall market was weak and helped add emphasis to the decline, but the outlook for this speculative retail stock continues to be anything but shiny.  We continue to hold a significant short position in the ZachStocks Newsletter portfolio as the outlook does not appear to justify the price.

First quarter earnings came in roughly in-line with expectations at $0.16 per share.  This was good for a 23% increase over the earnings figure for last year.  Revenue narrowly missed expectations with sales coming in at $347.5 million as opposed to expectations at $348.9 million.  The difference is minuscule, but the failure of NILE to beat expectations is what will catch investors eye and likely cause concern.

Similarly, the guidance issued by management came in roughly in-line with expectations as management expects to generate $1.01 in earnings this year.  At Friday’s close – even after the sharp decline – NILE’s shares were still trading at nearly 50 times the expected earnings for this year.  It appears investors are still expecting great things out of the online jeweler.

Despite the perception of the jewelry industry collecting thick profit margins, Blue Nile appears to make a very small profit relative to its sales levels.  While the company selectively displays a 21.3% gross profit margin for the first quarter, the overhead expenses significantly reduce profits.  Total net income was $2.4 million compared to sales of 74.1 million – so investors realize just a 3.2% profit margin on the company’s sales.

Given the high multiple on the stock, I would expect a much larger return on company revenue.  Despite the luxury image, Blue Nile is basically a commodity retailer – buying diamonds and other jewelry, and turning it around at a small increase in price.  And without a showroom and pushy sales staff that is usually present in brick and mortar distribution networks, NILE can only compete on a price basis.  Basic economics say that this type of business must focus on volume instead of price – and sketchy sales growth over the last two years, the high stock multiple seems unjustified.

There are certainly some positive issues that could eventually help to support the stock.  NILE is sitting on an ample supply of cash with virtually no debt.  The company finished the first quarter with $47.2 million in cash.  Management has been using the cash to repurchase stock – and over the first quarter the company repurchased 292,100 shares at an average price of $52.04.

Usually, I would be a fan of a company using cash to repurchase shares.  The net result is a lower share count which can be accretive to investors.  But with the company also paying $50 for every dollar expected in earnings this year, the purchase price appears steep even for a company buyback.

Today’s broad rally in the market may be a gift for traders interested in shorting NILE but those who missed the break last week.  As I write, shares are up 2.5% on very light volume.  But looking at a larger picture, the stock broke below key support areas near $54 last week and is likely to test the February lows at $45 in the near future.

Ultimately, I believe NILE could trade back in the low twenties with an outside chance at dropping to “teenage” status.  If investors begin to realize that the middle class consumer is having difficulty, and correctly view NILE as a company that caters to normal working people instead of a luxury demographic, shares could begin trading at a multiple that is more akin to a low-margin retailing business.

New short positions should likely place a buy-stop order above $56 as a rally back up to this level would call the timing into question.  When trading short positions, stops are important as capital should be protected and losses managed.  At this point I view the trade as risking roughly $5.00 for the potential to capture $25 on the decline.  The risk appears overwhelmed by the opportunity for this name to trade substantially lower.

FD: Author has a long position in the ZachStocks Newsletter portfolio

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Successful investors are always keenly aware of the current trend.  It’s important to understand what kind of environment one is working with.   Whether looking at broad economic trends, the action of domestic or international stock markets, or the trading tone of the individual sector; it is important to look at a stock’s behavior in context with the environment.

So in today’s market with managers taking risk off the table and equities under distribution, it’s encouraging to see Syniverse Holdings Inc. (SVR) making a new recovery high.

Shareholders are celebrating after the wireless voice and data company announced non-GAAP earnings of $0.45 per share for the first quarter.  Income was up over 30% from last year and revenue trends were higher as well.  The company booked revenue of $149 million (a 36.8% increase) helped in part by the company’s acquisition of messaging assets last year.

Syniverse has three primary business lines:

• Roaming Services – accounted for 45% of the first quarter revenue.  SVR has seen increased volumes across several different solutions offered within the division
• Messaging Services – accounted for 32% of first quarter revenue.  The recent acquisition contributed 41.8 million of new revenue
• Network Services – accounted for 23% of first quarter revenue.  This service is experiencing moderate declines as the company focuses on growing the other areas of its business.

Investors appear to be most excited about the 2010 guidance issued with the first quarter report.  Management expects full year revenue to come in between $605 and $625 million compared to just $483 million in 2009.  Cash Net Income is expected to be between $124 million and $131 million.  With the current share count at 69.4 million shares, that leads to a range of $1.79 to $1.89 per share.

Analysts are currently expecting 2010 earnings at $1.83 but we may see that number adjusted over the next few days as analysts update their reports.  Even assuming this conservative number is accurate, the stock is currently trading for less than 12 times forward earnings – a welcome discount in an environment that has experienced arguably too much speculation.

One reason investors might be placing a discount on Syniverse is the somewhat leveraged balance sheet.  The company is sitting on about $600 million in long-term liabilities, while the majority of assets on the balance sheet are goodwill and other intangible assets.  Still, with $95 million in cash, and $180 million in net working capital, the company should have plenty of liquidity.

Competition may be fierce in the telecom industry, but with the low stock price to earnings, Syinverse could turn out to be an attractive acquisition target.  Syniverse operates in 160 different countries, so its geographic footprint would be attractive to a larger wireless service company.  The company’s technology is in high demand and could presumably be integrated into a larger firm’s platform.

Regardless of the long-term destiny for the company, Syniverse is likely to continue to outperform the market as the company is growing earnings and investors are anxious to participate in the strength.  I would recommend buying today’s breakout and placing a stop below $19.  Over the next several quarters, SVR could impress analysts and the stock could benefit from both increases in estimated profits as well as price multiple expansion.

FD: Author does not have a position in SVR

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Shares of First Solar Inc. are off more than 4.5% today as the broad market takes on water and growth investors are punished.  The stock has had a very strong run over the past few months, rising 50% from the low set on February 25th.  The company recently announced earnings of $2.00 per share for the first quarter on revenue of $568 million.  Revenue was up 36% which impressed analysts and management increased guidance for the full year due to strong European demand for its cells.

However, despite the positive outlook and strong execution, I’m concerned that  FSLR could find itself in a trading range – or worse, in a negative trend as investors shy away from growth companies which rely on European customers.

With the financial world’s attention focused on the problems in Greece, and the growing concern that contagion could quickly spread to Spain, Italy, Ireland and Portugal, European commerce could quickly come under pressure.  Germany has been one of the few stalwarts of strength, but even the fiscally conservative country could find itself with serious losses as the government is faced with the task of bailing its neighbors out.

To be sure, the crisis in Europe is nowhere near contained, and it is difficult to handicap the potential danger, and the ways that mounting sovereign debt could affect the broad global economy.

Germany has had one of the most liberal solar stimulus programs, encouraging the use of alternative energy and helping to boost the profits of solar companies that operate across Europe.  My understanding is that stimulus programs were already in the process of being wound down before the crisis truly became big news in Europe.  Now that Germany is more likely to be on the hook for a huge bailout, the stimulus programs are even more likely to be curbed – which could have a material effect on sales levels for solar manufacturers across the board.

As you can see in the chart below, Germany makes up a significant amount of projected demand for solar energy

First Solar is not particularly expensive given its strong profits and past record of growth.  But at 22 times current estimates for 2010 earnings, investors are pricing in robust growth which may be much more of a challenge as the European crisis evolves.  On top of that, FSLR appears to be on the acquisition trail as it announced a purchase of NextLight Renewable Power and could make additional purchases with its leveraged balance sheet.

There are a few positive issues that could help support the price of FSLR.  For starters, the company has little debt which will likely give the firm a competitive advantage if we enter another difficult period for solar.  In this case, acquisitions might be a strong benefit to the long-term value of the company as cash-starved competitors could sell out for attractive discounts as they would be unable to remain solvent under heavy debt loads.

Also, there is the BP oil spill which may add to pressure for more “safe” energy sources.  If oil drilling comes under tougher sanctions, we may see higher demand for solar energy as a result.  Such a move would benefit the entire industry and with FSLR as one of the leaders, it could receive higher levels of new orders.

But today, it appears the safest bet on FSLR is for a lower price.  Speculation is being punished and the solar industry is certainly one with high risks and cloudy visibility.  Investors are likely to bail out of these growth positions until the environment becomes clearer and until that happens FSLR shares could easily lose a third of their value to trade back down to the lows from February.

FD: Author does not have a position in FSLR

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Investors in BJ’s Restaurants Inc. are optimistic souls.  After all, the company has been able to show strong earnings even through the financial crisis, opening new stores during a time when consumer spending was very much in question.  And as discretionary purchases have grown over the past few months, the stock has become even stronger, testing its pre-crisis high near $27.50.

Pizza and beer are a good combination and BJ’s appears to have perfected the art of offering an exceptional neighborhood “feel” while still expanding the number of locations to 94 at last count.  Over the last four quarters total revenue has increased anywhere from 9% to 19% (year-over-year).  The strength is both due to existing restaurants seeing improving sales, and new restaurants coming online.

In the first quarter, BJRI opened two new locations.  Management is guiding for an additional 2 openings this quarter with expectations of four new stores in the third quarter and another 2-3 in Q4.  So for the full year, there will be 10 to 11 new stores in play and generating revenue for the company.

While management seems pleased with the rate of growth, I am worried that investors are setting themselves up for disappointment when it comes to the future growth of the company (and the stock price).  Expanding by 10 to 11 new stores is hardly a “high-growth” rate of openings – basically an 11% to 12% store base expansion.  This rate would be good for a well-established chain like Applebee’s, but is not very impressive for a small pizza chain with high hopes.

Don’t get me wrong – I believe that in the current retail environment, it makes a lot of sense for a company like BJ’s to be very conservative in how many stores they open.  If consumer spending becomes weaker as a result of high unemployment and the potential for stimulus measures to decline, then BJ’s will want to keep a higher cash balance and be very selective about where it opens new stores.

But investors appear to be much more aggressive in their growth assumptions.  Currently, the stock is trading at 36 times expected earnings for this year.  This during a time when same-store-sales are increasing by just 4.4% and most of the growth should come from new locations, not from better revenue in existing locations.  In fact, management recently unveiled a new menu with smaller items at lower prices.  The decision may help the company keep customers loyal, but will likely result in lower profit margins for the entire firm.

Shorting BJ’s may be a bit of a dangerous game because the float is very small (only 14 million shares are actively traded), which could lead to a “short squeeze.”  This occurs when too many short sellers have negative positions and the stock begins to rise.  At times like this, traders can feel trapped as they are forced to buy back shares which lead to higher prices.  But after a short squeeze in less-than-liquid names like BJRI, the opposite can easily occur with the stock dropping sharply as fundamental metrics lead to a much lower price.

Based on my concern for  the retail sector, along with my respect for the company and the conservative approach management is taking, I believe BJRI could easily command a multiple of 20 times this year’s earnings.  Unfortunately, that metric would bring the stock to about $13.60 which would be a significant decline from current levels.

Aggressive traders might want to consider buying puts on the restaurant chain which would allow for the volatility associated with a smaller-illiquid name, but still give traders an opportunity to capitalize on a potential decline in the stock.  The July 22.5’s look attractive to me, trading at 85 cents.

The environment for today’s retail investor is quite treacherous.  With high expectations for growth and inflated prices, there is plenty of room for disappointment – resulting in lower prices.  I would avoid long positions in the group, but if you must have exposure, be sure to keep close stops or hedge against potential losses.  Once earnings season is over, there is a good chance many of these high-momentum names will back off quickly.

FD: Author does not have a position in BJRI

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When trading in an environment with extended prices and significant macro risks, even value and growth investors need to be particularly cognizant of technical trends.  For months, the retail industry has been trading higher as the US consumer has provided much more strength than expected.  Whether this strength comes from strategic defaults, lower savings rates, or government stimulus initiatives, the bottom line is that retail outlets have seen growing sales and at least a temporarily healthier environment.

But this week, the retail index has fallen a bit behind the broad market action, which makes me concerned that the sector may be losing its leadership.  Tuesday was a difficult day for nearly every sector as Greek worries led to a sell-off in widely held growth names.  It was completely normal for retail to be hit especially hard because the industry has become a “high beta” or more volatile area for traders.

As stocks rebounded on Wednesday and Thursday, however, retail as a whole had very little strength.  If managers were really putting more capital back into speculative issues, one would expect retail to have been back to it’s Monday highs by the end of the day yesterday.  As it stands, early Friday, the SPDR S&P Retail (XRT) was back down nearly to the lows set at the close on Wednesday.

If retail is weakening as a sector of choice for growth managers, then there will likely be many dynamic stocks which make for good short opportunities within the sector.  Lululemon Athletica (LULU) is one that looks particularly interesting.

The yoga-inspired athletic apparel company has been growing its retail presence from what used to be primarily a Canadian chain – to a well established US presence.  The chain appeals primarily to up-scale athletic women (although the company’s men’s concepts are starting to pick up traction) with high prices that assure fat profit margins and a certain quality premium perceived by clients.

Many of the textiles incorporate seaweed which is supposed to be soothing for skin, and the company prides itself on offering much more than just apparel.  Lululemon typically employs professional trainers to serve customers, ensuring that customers pick out the perfect items for their own workout regimen, and offering training tips and guidelines along the way.  For LULU customers, the shopping experience is just as important as the products they walk out of the store with.

While the concept has been very successful and I have owned the stock for gains shortly after the IPO, LULU is now trading at a multiple that warrants concern.  Investors are expecting strong 30% plus growth for the next two years which will be easy for management to hit if the consumer really is organically stronger.  But if consumer spending is propped up by government stimulus or strategic defaults, the whole house of cards could come crashing down.

At this point it looks like the risks of a softening retail market are too big to ignore.  At the same time, the technical pattern on LULU is also very concerning.  After topping out over two weeks ago near $45, the stock has lost a good bit of value on heavy volume.  And it looks like there could be further weakness in store.

In early February as the market was dealing with the last correction, LULU bottomed at $25.75.  At the time, investors were worried that a weak consumer could crimp growth or even cause retail earnings to contract.  Once those fears were alleviated, the industry traded sharply higher – due in part to temporary effects of stimulus and mortgage defaults.

Once it becomes clearer that the consumer is not as healthy as commonly perceived, analysts will likely ratchet down their estimates – and investors could also cut back the multiples they are willing to pay for equities.  If 2012 estimates for LULU were cut from the current $1.39 to just $1.18 (only a 15% decrease) and investors paid a still robust multiple of 20, the stock price would fall more than 30% to $23.60.

Based on the price action of LULU, and the potential for estimates and multiples to shrink, I would recommend a short position with a tight stop.  Obviously, the bulls could still step back in and support the market and retail stocks particularly.  But it appears the risk of further weakness trumps the optimism we have experienced for so long.

FD: Author has a short position in Client Accounts

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Last week several homebuilder stocks rallied sharply as the market continued to advance to new recovery highs and managers shrugged off the “Goldman Risk” which had overshadowed traders for a single day.  Several nationwide developers broke out of multi-month ranges on strong volume, indicating that institutional managers were allocating a significant amount of capital to the sector.

Since most homebuilders are still operating at losses with huge inventories of homes and land, and stifling levels of debt, the move indicates that institutional investors are very optimistic about the nation’s economic recovery.  It will take a significant increase in wealth, along with a much better employment picture for the lofty prices on most homebuilders to be justified.

But just as the euphoric trading was catching the eye of momentum and breakout traders, Tuesday ushered in a new dynamic for growth and speculative issues.  The catalyst was renewed concern over a default of Greek debt, but the broad effect was a move away from risk by a large number of influential traders.  While the benchmark indices took on water, homebuilders quickly gave up gains from last week’s breakout and now look vulnerable to fall much further.

KB Home (KBH) builds single family homes, condos, and townhomes in 10 states across the US.  The stock had recently broken out above a consolidation area at $18.00 and immediately added more than 10% to top out near $20.  But the “risk off” trading on Tuesday negated the breakout and caused investors to lose nearly the entire gain from the previous week.  Speaking as a trader myself, this kind of volatility would cause me to re-think a long position even if I was confident in the company’s fundamentals.

As it stands, KBH isn’t exactly in great shape fundamentally, and significant risks are still in place.  Quarterly revenue numbers continue to decline although doing so at a decreasing rate.  Still, the company has reported major losses totaling $2.64 per share in the last year alone.  Analysts expect the company to lose “only” 89 cents per share this year which ends November 30, and then a gain of $0.65 is projected for the following year.

Even if the 2011 guestimates turn out to be accurate, the stock is still trading at nearly 30 times forward earnings – a difficult multiple to justify given the losses and risk of a stall in the economic rebound.  During the last quarter management tried to paint a pretty picture of the housing market, but reading between the lines it appears there is still significant concern:

Encouraging data in recent months suggest that a number of housing markets may be stabilizing or starting to rebound, though we do not yet see, in many respects, a sustained nationwide recovery.  While the pace is likely to be uneven in the months ahead, we currently expect housing market conditions to follow a generally positive trajectory throughout this year and into 2011. ~Jeffrey Mezger, CEO

With Europe continuing to be a significant red flag (I don’t think US investors realize how our fortunes could be closely tied to the international events) and US unemployment stubbornly high, I believe a rally in the homebuilding sector is premature.  We have already seen how quickly the homebuilders can give up gains when managers decide to reduce their risk levels.  Imagine what would happen if managers truly kept this mindset for more than just a single day.  In this case, I would expect homebuilders, retail stocks, many China plays, and a few other speculative sectors to take on water.

The ZachStocks Newsletter has a short position in another related homebuilder.  This luxury builder has recently had to write down the value of its land inventory which has a negative effect on book value.  I’m expecting a 20% decline in this stock along with similar negative action for the entire sector.  So if you are long homebuilders, it may be worth lightening exposure on today’s strength.  The temporarily higher prices may provide a decent short entry, and at the very least, investors should have an exit or hedging strategy in place to carefully manage the risk.

FD: Author does not have a position in KBH

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