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Wednesday, March 30, 2011

You Know What Really Grinds My Gears

Being a former Rhode Island resident I have come to appreciate the good natured ribbing that the creators of Fox’s Family Guy weave in to their episodes. The title of this missive refers to an episode where the main character Peter Griffin gets a job with the local TV station as a “social commentator” about what essentially ticks him off, very similar to the “As Sue sees it” parody on Fox’s Glee, which some of you may be familiar with especially if you have tween or teen kids.

So what is it that is grinding my gears today? Wow that is a loaded question.  Let’s start with one item that I had written about in a prior article. In my article entitled “Gold Doesn’t Have to Weigh A Ton” I discussed the Central Fund of Canada (NYSE : CEF) as a potential way for one to get exposure to bullion that is backed by real allocated assets. Everything has been going along swimmingly with CEF and then we hit a long overdue correction and CEF performs somewhat worse than Streettracks Gold (NYSE:GLD) which as attributable to the fact that CEF tracks both silver (which is more volatile) and gold whereas GLD only tracks the price of gold. Additionally, CEF carries a premium to the actual underlying assets that it represents as there is demand for this closed end fund.

So today it is announced that CEF, under a shelf offering dating back to the end of 2009, is issuing a little over 16 million Class A shares. The offering is at $22.30 a share which would net CEF $360 million. This is where you can hear the gears starting to mesh. If you read the internet message boards and talk to investor’s they do not seem to grasp the fact that this is not a dilutive deal. The proceeds from this sale are going to be used to buy more allocated gold and silver for holding by the fund. This deal allows the fund to grow in size to handle more demand as well as places additional bids in the market while the price of the metals is consolidating their recent runs. Both of the above stated factors will be accretive to CEF holders not the other way around.

The asset the company is purchasing will not affect CEF’s income since that is not what this fund does. Instead CEF is about holding bullion in an allocated liquid form and not income so there is no dilution since each share owns the underlying asset. CEF’s Achilles heel like bullion is that it makes money for you primarily if bullion prices are rising although the premium of this closed end fund can be an extra kicker at times. A common stock holder has to worry about dilution as a company can issue far more stock than the earnings can support at least from a growth and or valuation perspective. When companies dilute by issuing excessive shares the stream of earnings is spread much thinner and consequently the shares tend to fall to bring the valuation in to line as in compressing the PE ratio .

Of course what got me really frosted about this deal is that they announce the offer price well below the market price causing a drop in the price of CEF. Now granted it is temporary just like the last time CEF offered stock through the shelf offering on file, but there is no doubt that with the strength in the metals markets that the entire allotment would have been bought at market price. The fact that ”the big boys” (underwriters) exercised their overallotment of 1.8 million additional shares suggests that the demand is there for sure. Furthermore this issue is not some IPO that the underwriters are going to unload after a quiet period and all the hype brought to you by a squealing Erin Burnett on CNBC the day it can be pawned off on Joe Six Pack.

The underwriters acquired these shares and the overallotment because they know that will get more for them selling them off in the future and they must be confident because they have no CNBC cheerleaders whooping and hollering to hype the shares like let’s say Government Motors (NYSE :GM), I see the public who bought that dog anywhere near the hype period is underwater today. I wrote various missives on my own blog regarding GM that you can read here, here and here if you are so inclined.

In my opinion CEF short changed themselves several million dollars by not pricing closer to the actual market price when they knew full well the strength was present to mop up this offering leaving lots of cash on the table that could have been used to acquire even more underlying assets. That folks “grinds my gears”.

You see the same kinds of things take place in another of my holdings but on a much more frequent basis. I am referring to Annaly Capital Management (NYSE : NLY) which for those of you who are unfamiliar with the issue is a REIT of sorts. They have a special twist on the REIT as they borrow short and buy mortgages playing sort of a spread trade. I know you are thinking what? Is Roger smoking crack? How can he be buying a REIT with real estate the way it is today and all the problems like the “robosigning” scandal and homeowners not paying their monthly payments. Well the twist is that about 85% of Annaly’s portfolio of mortgages is US Government guaranteed for payment meaning that the default risk is pretty well contained. The risk to Annaly and others like them such as Chimera (NYSE : CIM) is not so much mortgage defaults as rising short term rates, since these companies borrow short and lend long so to speak. The short end can rise to some degree but there is a breaking point where the rates will bust the business model that is unless government backed mortgage interest rates rise at least as fast if not faster than short term rate. In the mean time the shares pay a hefty dividend in the neighborhood of 14% which is nothing to sneeze at especially in this market.

What grinds my gears about Annaly is that every time the shares appear to be getting traction and look as if they could move up in value and allow the investor to achieve some capital gains in additional to nice dividend income a secondary offering is announced. What gets me however is yesterday’s news in which Annlay who owns 25% of Cerxus Investment (NYSE : CXS) is buying 5 million shares in CXS’s secondary offering. CXS rejected a bid by Starwood Properties (NASDAQ : STWD) which was at a 20% premium to their share price and instead has opted to go with the secondary priced at $11.50 a share.

Annaly has announced its intention to acquire the 5 million shares at the secondary offering price of $11.50 and resulted in a roughly 4% drop in Annaly. So let me get this straight the omniscient financial media decided that an investment by NLY in to CXS of 5 million shares at $11.50 for a total of $57,500,000 warranted and explained a 4% drop. Dear reader I want you to take a look at the logic here a $57.5 million dollar investment by Annaly represents 4 tenths of one percent of their market cap, even if they had to write it off for a total loss this is tantamount to a rounding error. It frosts me that the market cap could decline by ten times the investment amount and the media would proclaim this as the rationale. Is it possible that they missed the fact that Annaly happened to go ex-dividend with a statement that the dividend was $.62 a share or roughly 4%? Rocket scientists like those so well listened to in the financial media really grind my gears….Think for yourselves people.

This brings me to the next item that grinds my gears which is Japan. No not the country or the people but the investment writers who are advising people to position themselves in Japanese equities. No doubt the continuing saga of the Japan earthquake and tsunami is still fresh in everyone’s mind especially with the nuclear disaster story making headlines on the morning news every day. Although it is not wall to wall coverage of the Japan crisis it does pop up in some way every day. Just yesterday living here in Boston, MA several thousand miles from Japan there aired on local news reports that some radioactive isotopes from Japan had been detected in water samples. This announcement spurred all kinds of talk and worry evident on the local news talk show programs even though the level of radiation detected posed zero harm to any living creatures man included.

Some investment writers have decided that the Japanese stock market is a good investment as many of the Japanese companies have strong fundamentals such as low price to book value a popular metric for value investors. Indeed the Japanese stock market initially tanked right after the big earthquake and has since recovered a portion of those losses and I hope that they do going forward. Just like the old stock market adage states “never try and catch a falling knife”, which is advice well suited to the current state of Japan. The very arguments of valuation and price being made are misleading as there are so many unknowns that could cause both prices and valuation metrics to fall further. I have also heard that one should by Japan because it is such a disliked place to invest and to a contrarian that is all they need to hear, but one could be right and have to wait a long time for the trend to play out while capital could be more productive elsewhere.

The reality of the situation is that things are not under control in Japan and we still don’t know if they will get worse. In my opinion there is no rush to go out and buy Japanese equities as of yet because things have not gone from bad to less bad yet. Sure the Japanese are going to have to rebuild but as I mentioned in my article “Ramblings on Japan and QE” as the economist Henry Hazlitt pointed out rebuilding is not economic growth. The point is that there will be companies that do well in and outside of Japan as a result of the rebuild, but the economy or markets of Japan will probably not fare as well. It upsets me that the media is so irresponsible as to paint this situation with such a broad brush when a fine brush is needed.

In the case of Japan at least the first phase of recovery will be most beneficial to the “picks and shovels” type companies.  One company for you to take a gander at is an old line Japanese firm established in the late 1800’s by the name of Kubota (NYSE ADR : KUB). Kubota manufactures farm and industrial machinery, water and environmental systems and infrastructure products (like steel pipe).

If you take a look at Kubota’s website you can see that their product line up is very well suited to what Japan needs to rebuild. Although they have some larger earth moving equipment they appear to concentrate on the smaller end of the machinery spectrum so I would consider them to be complimentary to CAT or JOYG. Not every project in Japan will require the “monster” machines produced by the likes of CAT or JOYG. They have a pretty good sized niche they can play in and niches can be highly profitable.

In one of my former lives I ran a machine manufacturing company that produced hot chamber die casting machines. The company I ran was a niche player because we produced machines in the low to mid tonnage range. The tonnage refers to the amount of hydraulic pressure used to squeeze the two halves of the die together as the molten metal is injected under pressure. The bigger the casting the higher the tonnage required. Being in the low to mid tonnage range afforded us a slice of the market virtually ignored by the major players and as a result the margins were very good since there was not a significant amount of competition to push prices down.

As I alluded to earlier Kubota is a multiline manufacturer and their spectrum of products fit the recovery theme very well and other divisions can provide infrastructure and rebuilding products. So while they cannot compete head to head with CAT or JOYG in the large machine space they have many other facets that will also be in high demand. Additionally their valuation metrics stack up very well against the likes of Caterpillar (NYSE :CAT), John Deere (NYSE: DE) or even my favorite Joy Global(NASDAQ : JOYG). Kubota is a local Japanese company and stands to benefit from its proximity to the disaster, market presence, local name recognition and potential government largesse. Moreover, on a valuation basis Kubota is attractive as it is trading for 1.4 times book value versus the American competitors that all trade for 6 times book. Additionally, Kubota sports a 55% debt to equity which is lower than all but JOYG who clocks in at 26%. Kubota’s PEG ratio is 1.15 which suggests that the company is under priced.

From a chart perspective, Kubota was developing a nice chart and then the disaster struck. Kubota’s stock price has corrected and is working on a base to try and recapture the 50 day moving average. Even with the events that occurred Kubota barely pierced its 200 day moving average and quickly bounced above it indicating to me that “strong hands” were not deterred from holding on to or even buying more of the shares. At this moment I cannot recommend Kubota because I believe that the stock needs to back and fill more of the price action to allow time for a proper base to form. I would put Kubota on my watch list and once it crosses back over the 50 day moving average on good volume an entry position could be initiated.

Friday, March 18, 2011

Ramblings About Japan And QE

The world is a mess that is for sure. If you are inclined to watch the History Channel you have undoubtbly seen shows like the “Nostradamus Effect”, 2012 and others that posit the notion of the world entering in to an Armageddon scenario. Looking at what is transpiring in Japan one could get the feeling that the end of the world has begun almost like you see on the aforementioned shows.

Before I go on I just want to state the obvious that all of our thoughts and prayers go out to our friends in Japan. That said, the media coverage outside the business world regarding Japan has focused on the nuclear meltdown problem, but once again from an ethnocentric point of view.

It fascinates me that whether you watch the reports on TV or listen to talk radio very large percentage of the reporting is not about the situation in Japan but focuses on America and our own nuclear reactors. Of course in the wake of what happened in Japan we should be taking the time now to evaluate our own plants and see what the vulnerabilities are especially in light of the current disaster.

One should be note that it was not the earthquake that took out the plants but instead the after affect Tsunami that damaged the redundant systems diesel generators which power the cooling systems. The plants themselves survived unscathed and had the backup power generators been protected better against tsunamis we probably would not even be discussing this issue.

As a result of the devastation in Japan the markets have reacted as expected to the downside. Many in the media are calling for an end to the commodity bull market as well as the end of QE. Frankly I don't think these arguments hold water.

Let's start with the commodity bull market. The argument is that with the Japanese manufacturing offline due to the disaster that the demand for commodities will be dented and apparently this also affected demand from all corners of the globe. The argument on its face seems like a good one but it is not reality. China and the rest of Asia along with the US and Europe are not going to stop consuming and will still require commodities.

The argument also fails to take in to consideration that Japan is going to require something along the lines of the Marshall Plan to rebuild. The rebuilding of Japan is going to require a great many things namely various commodities. Furthermore, at the moment the country is in crisis mode and sure production has fallen off but this is temporary. I believe people have a very myopic view of Japan and this leads to the narrow-minded thinking like the prior argument.

Japan is an archipelago with land area roughly the size of California, so to think that every company will halt production there is naive at best. Imagine if there was a great earthquake in Los Angeles and large portions of LA County were destroyed, does this mean that manufacturers in more fortunate areas say in San Francisco will stop production for other than the necessary time. An argument could be made that Japan will end up importing as much if not more commodities of all types from copper, iron to food and this will put an elevated floor under prices for the foreseeable future.

At the same time I have heard many calls that the current disaster will be beneficial to Japan's economy because of all the rebuilding activity. I do believe that there will be benefactors from the rebuild but it will not be Japan primarily. Just as in Henry Hazlit's ,”Economics In One Lesson” , he discusses the fallacy of economic growth by repairing a shopkeepers broken window. The thesis in a nutshell is that a young punk breaks a shopkeeper's window and as a result of this economic activity is fostered since the shopkeeper has to replace the window. While it is true that the shopkeeper will end up paying the glass supplier and the workman but this is not creating true economic growth. The bottom line is the money the shopkeeper spent was not productive in the long run and also prevented him from using it towards more productive ends like business expansion or bringing in new products. Japan in this case is the shopkeeper and the billions or even trillions needed to recover will only bring them back to where they were not create a boom, at least not for them.

The flip side of this is that there will be many commodities and companies that will benefit from the disaster. Among the companies that should benefit would be the likes of Caterpillar (NYSE: CAT), Joy Global (NASDAQ: JOYG), Shaw Group (NASDAQ: SHAW), Fluor (NYSE: FLR) and many others associated with design, engineering, construction, equipment and general rebuilding. In regards to commodities the same holds true Japan is going to require lots of cooper, steel, food and other materials for rebuilding and sustenance.

Companies from around the world will benefit from these needs, but it does not mean world GDP growth as some have implied but instead either maintain current pace or a smaller than expected decline. Moreover, depending on the path that Japan chooses will mean either they rebuild their moribund economy to remain the way it was or they utilize the current disaster to restructure. If the current situation is used to restructure their economy and write off the bad debts that are an albatross, Japan could emerge in a few years stronger than ever even with its aging demographics, but that is a big if.

As for QE (Quantitative Easing) I do not believe the FED in their statements that they will end QE in June because of their “as conditions dictate” language. There have been many times stretching all the way back to the Greenspan FED where we were told one thing and the FED did or believed another, just think back to this past August. Prior to August all we heard was “we don't need further QE” then poof everything changed with Bernanke's August Jackson Hole speech. This time will be no different for a couple reasons and Japan's situation plays a key factor in this thinking and will dictate conditions or at least give the excuse. I believe that the FED will dip in to their bag of euphemisms and come up with some new term to describe what they are doing with monetary policy or they will just use the tried and true cloak and dagger method but with both “invisible hands”.

QE will morph in to something else. Why will QE morph? It will morph because the FED wants to manage inflation expectations since everybody and their brother knows by now that QE is inflationary. Yes I know if you remove the “volatile food and energy” factors inflation remains low, but who really believes any of these figures any more, only the guy living under the rock in the GEICO advertisement.

You have to ask yourself, who do these figures benefit? If inflation were truly low it would be good for all of us, but deceptively covering up the true rate can only benefit government and those who get their hands on money especially freshly printed money first(IE Wall Street). The Government “needs” to maintain the illusion of low inflation to keep rates low, because if they did not then things that are indexed to inflation would shoot up costing the government even more to finance. For example, COLA adjustments to social security would rise, as would rates on TIPS(treasury inflation protected securities). More importantly the rate the government would have to pay for money would increase as bonds would have to carry higher rates there by accelerating the deficit. An additional problem is government debt that is short in duration rolling over and needing to be refinanced. This year alone the government needs to roll over some $2 Trillion in 2 – 10 year debt and this is on top of the projected budget shortfall of $1.6 Trillion. What is the old saying “a trillion here, a trillion there and soon you are talking about real money”. The point is that rolling over $2 plus trillion in to new bonds at higher rates exacerbates the deficit and also leads to further rate rises, a vicious cycle. You can see why Bill Gross doesn't want anything to do with Treasuries. The government is spending $1.6 Trillion it does not have and rolloing over another $2 Trillion for a total of $3.6 Trillion, while its revenues are $2.2Trillion. You could not run your household or a corporation like the government or you would be bankrupt.

Of course if we could get our debt under control and start reducing it or at the very least take serious steps to do so it would help a great deal in diffusing this problem. The reality is that we are not doing the things needed to achieve deficit control or reduction. Originally the deficit this year was supposed to be $1.1 Trillion, but the GAO has now come out and stated it will be more like $1.6 Trillion so assumptions of the deficit and any reduction are out the window. Even with the great Tea Party election sweep the republicans are battling to reduce the budget by $60 Billion which is a pittance and will not achieve anything in either confidence of or actual deficit reduction. Just yesterday it was reported that the debt jumped $72 Billion as the House voted to extend the budget and cut spending by $6billion. I am sure dear reader, even the most economically illiterate among us can see that the ratio of cuts to debt\spending is grossly out of whack. As this was being reported, Tim “Turbo Tax” Geithner, took to the media and admonished congress that they must raise the debt limit or “suffer catastrophic consequences”. Of course what Timmy should have been saying you must raise the debt limit to only further postpone catastrophic consequences? There is no will to fix the problem and few places to cut unless we alter what government's role is and what we expect. As it stands between Social security, Medicare, defense and some other areas that are untouchable accounts for 80% of the budget.

Of course the nonexistent inflation that QE drove has appeared mainly outside the US at least until recently. QE is the reason that counties like China and Brazil are raising rates to combat all the “hot” money that has been pouring in to their countries. The FED by QE and purchases of Treasuries has been keeping rates suppressed far below equilibrium and this has caused the old adage to play out in spades. “Money flows to where it is treated best” and in this case the economies of the emerging markets have been on the receiving end as our rates are too low. The low rate environment has also had the consequence of weakening our currency. The icing on the cake is our national, state and municipal debt burden which may be better than Greece's at least for the moment, but our economy is proportionally like comparing the empire state building to and ant hill (no offense to Greece).

The world is waking up to the fact that the US has issues and it is showing up in interesting ways. For example while the dollar has rallied somewhat during the current disaster unfolding in Japan it has not really demonstrated its leading role as a safe haven like the past. In fact the dollar was out performed by the Swiss Franc in this crisis. Now granted the Swiss Franc is a smaller currency and less flows would be needed to move it up than the dollar but the point is the dollar did not act as in the past.

Due to the sheer size of our debt is there is less of a group lining up to buy treasuries and keep yields down in the 2 - 10 year range that the FED wants to control. The Chinese are buying less, PIMCO's (World's Largest Bond Fund) Bill Gross has dumped out of all US Treasuries and is not buying more all of which is problematic for the FED. Gross has looked at the situation the US finds itself in and asks a simple question “who will buy the debt?”. His answer was to vote with his money and get out because he believes that there will be less and less buyers going forward. This is a pretty significant development to me as this is no ordinary investor but the “Bond King” and he is not interested in Treasuries because what he doesn't say is that the FED will be the only buyer in the future contributing to the inflationary environment rendering bonds a poor investment.

Now add to the mix the Japan disaster and you have a government that is no longer in a position to buy more treasuries meaning that there will be a decline in the coverage ratio at best and a shortfall at worst. Add to the lack of buying the fact that Japan holds about $885 Billion in treasuries and suddenly finds themselves in a position of needing cash to rebuild, stabilize their markets and defend their currency. Just like an investor on margin they may sell something of value like the treasuries to offset the margin call that is their economy. Moreover, the Japanese are injecting Trillions of Yen in to their economy effectively printing money in an effort to deal with the disaster. I d do not fault the Japanese for monetizing given the situation, but just how bad are things in the US when Japan announces that they will pour Trillions of Yen in to the market and it strengthens against the dollar. Additionally, I would not underestimate the FED using a backdoor QE to help the Japanese. What you don't think the FED would do such a thing? This FED has demonstrated that it is willing to do anything whether it is in their mandate or not and they have been given a pass on everything allowing the “leviathan” to continue to grow and become more complicated and tangled. In the last crisis the FED lent to the likes of Harley Davidson and foreign banks and insurance companies as well as European governments, so why would they not push QE out to the Japanese?

The takeaway for me is that despite the talk that the commodity bull is over and QE is ending in June, it is all just talk. We are in a situation similar to that of the French who had the Assignat as their currency. The French of the late 1700's had huge debt and their solution was to print currency, which lead to conditions improving for a period. Then as today the officials began to remove the punchbowl and conditions would worsen so the printing presses would be flipped on again. As Mark Twain once said “History does not repeat but it sure does rhyme” and so it is today. The FED is keenly aware that the economy would slide without QE and as in the past they will talk tough but take the easy road just as the French did. Unless we begin to get serious about restructuring Government and really controlling our deficits QE will not be over.

In fact Jim Rickards, presented a case that the FED's balance sheet has gotten so large that they will now be collecting some $750 billion a year in maturing debt which can be used to purchase new debt to continue the cycle. The amount of money that the FED will be collecting each year is roughly equivalent to ¾ of the 2 – 10 year debt issued each year assuming the deficts spending stays at $1 Trillion. There will be those that argue this is not inflationary because they are not printing, true but they are suppressing interest rates and thereby cheapening our currency. The cheapening of the Dollar is inflationary as we import so much and our currency will not buy as much as before. Moreover, the FED's ability to purchase the debt will be impacted because the deficit number is not $1trillion as Mr. Rickards suggests but it is running higher ($1.6 Trillion) and the net result is the FED will have to come up with the Dollars for the overage. I believe that QE or whatever they will call it will be with us for a long time and as Mr. Rickards suggests.

Thursday, March 3, 2011

Ode To Joy Global (JOYG)

Yesterday Joy Global (NASDAQ: JOYG) the manufacturer of a wide variety of equipment for the mining industry reported their 4th quarter earnings which came in 11 cents below expectations. For many of JOYG's investors there was not joy in Mudville so to speak. The company saw income growth of 34% year over year which is nothing to sneeze at especially in this market, however, their ability to meet or exceed analysts' lofty earnings projections were impacted by a variety of factors beyond the company's control.

On the one hand JOYG is a global company that derives its sales from just about every corner of the world be it the US, Australia, China, India and beyond. A result of JOYG's global reach is that they can benefit from currency discrepancies by selling their products in to some areas where the currency is stronger effectively giving their bottom line a boost.

The flip side is that some of the currency advantage is offset by higher input costs as they rely on raw materials priced in US Dollars to make their products. All in all it is a convoluted chain to follow and does have an effect on JOYG but management appears to be aware of the issues and therefore I believe they can manage the risk effectively.

One of the items they cannot manage is what the mining industry calls “Force Majure” , which is a legal term of French derivation and translates loosely to superior force. A Force Majure is declared under contract when an act of God or something beyond the reasonable control of the participants occurs and the contractual obligations cannot be fulfilled on time. I am sure dear reader that you are well aware of the massive flooding that has taken place in Australia where multiple companies declared Force Majure and as a result did not take delivery of some equipment from JOYG there by impacting the quarter's earnings.

If you are a trader then you are disturbed by JOYG's miss and would dump the stock accordingly, but if you are an investor then you need to look with a different lens. JOYG has many things in its favor and appears to me to be a very good if not volatile investment with a beta of about 2.2. I consider myself to be a theme and trend style investor and I like to look for scenarios that play out over time as I cannot sit by the computer watching tick by tick to make a trade as it would drive me insane.

One of the themes I like to play is what I call the “Arms Dealers”. If you think about it dear reader, in a war there are generally two sides engaged in battle and each expends tremendous energy and money to achieve their objective. Granted at the end of the war the “spoils go to the victor”, but who profits from the war? In general a lucrative and highly profitable position is that of the arms dealer as they are not involved directly in the fighting but instead are supplying the highest bidder. I view many companies as falling in the “arms dealer” category and JOYG fits this bill quite well.

JOYG's mining equipment is marketed under both he P & H name as well as JOY. They are an old-line player and the company has been in business since 1884 meaning that they have had to navigate through many business cycles. If you travel to a mining or construction site there is a high probability that you will see JOYG equipment in use. I am sure dear reader that you are well aware of scramble for natural resources of all kinds (think congress and rare earths for example) much of which requires mining to obtain. Additionally, there is the build out in China, India and other countries looking to industrialize and bring their economies in to the 21st century. JOYG's competitors include Caterpillar (NYSE: CAT) who recently acquired JOYG's more direct competitor Bucyrus International (NASDAQ:BUCY). The market for the types of equipment manufactured by JOYG and CAT is vast and growing as a result of geo-economic and geopolitical motivations; so I believe that there is plenty of room for all the players to expand. There are other players around the world like privately held Mitsubishi and Korea's Komatsu Ltd (NASDAQ PINK SHEET : KMTUY.PK), but as stated before the equipment pie is plenty big.

One of the issues for JOYG this quarter was input costs, however, as was noted on the conference call that these costs could be passed along going forward. Moreover, as of this point in time JOYG is sporting a $2.18 Billion backlog for new equipment which is a 52% improvement year over year and it is across all business lines showing sector strength. JOYG also upped their guidance from $5 to $5.30 per share to $5.10 to $5.40.

The bottom line is that after the tremendous report from BUCY the specter of disappointment for JOYG's report was set. The traders took their cue yesterday and dumped shares, but investors can take solace in the following facts. Investors are getting an opportunity to buy a growing player on a dip as a result of the disappointment. Investors should be looking at longer term and recognize that JOYG is firing on all cylinders and management believes so as well otherwise they would not have guided expectations up.

JOYG also fares well on its metrics as a growth company. The market cap is $9.7 Billion, so it is large enough to be a sizable player but the market cap is not bloated leaving room for expansion. Many companies run in to the law of large numbers when their market cap becomes too large, meaning that it is much more unlikely for a $500 billion dollar market cap to be come $1 trillion rather than a $10 billion to grow to $20 billion. Additionally JOYG's margins are very healthy at 33% gross margins and 20% operating and are better than CAT's at 26.5% and 9.4% respectively. On a PE basis JOYG is close to CAT and BUCY but it is lower than both at the moment meaning that JOYG is less richly priced than its peers.

It is not just this author that recognizes the potential of JOYG as it was very recently added to the S & P 500. The inclusion in the index caused a huge spike in volume as all the index funds had to buy the shares to reflect the change. Even with the miss and subsequent sell off in JOYG yesterday the chart did not sustain any real damage. While JOYG dropped and came close to the 50 day Moving Average it did not even pierce it before buying came in and lifted the shares. The shares rallied back to close at $94.32 and which was above the open price of $94 and suggests that the bulls were able to overcome the bears selling pressure. JOYG closed on high volume with what could be described as a doji with upside bias on a candlestick chart. A doji generally indicates price indecision as to the direction of the underlying security and I believe that this is a result of the traders and MOMO (momentum players) guys dumping while those with a view longer than a chart tick are buying and or holding. I was a buyer of shares yesterday as I believe that JOYG will continue upward since the space they play in is both growing and new demand appears to be crawling out from under every rock, pun intended. I am looking for a 20% move up to around the $115 area where I will evaluate the prospects again. As always I will use a mental downside stop, this time at $86.48 in case my thesis is incorrect.



As a side note, if you have the chance you should check out the new documentary fillm being released on DVD on 3/8/2011 titled "Inside Job". This film was nominated for an Oscar in the documentary catergory and takes a look at the history of the events leading up to and through the financial meltdown of 2008 and forward. There is a interview on the financialsense website(MP3 Here ) that is worth a listen and gives you a preview of what is contained on the DVD. If you do get it be sure to have as many people view it as possible since it will clear up a lot of what happened leading the US in to the finacial disaster and it will make who ever watches it pretty angry about what happened and how little has been done to fix anything. The "Inside Job" DVD is available on Netflix (NASDAQ: NFLX) so add it to your queue today so it will ship out to you right after release.