Well, seeing that we broke below 5/8th this morning, I figured that I might as well add my comments on the market, Asian flu, and Alanco.
First of all, I'm currently pessimistic about the Dow, the S&P, and the large caps in general when it comes to big earnings increases this year. Not that there's anything wrong with them. Not that they're terminally ill or even mildly sickly. It's all just a result of the strong dollar and the collapsing currencies in Asia due to the Asian flu. It's nothing all that mystifying. To me, it's just the natural ebb and flow of the world economy. Our economy gets strong, the dollar gets strong, exports become more expensive, imports become cheaper, competition for the consumer's dollar increases with the influx of lower cost imports, prices drop, domestic production slows, profits are squeezed, unemployment increases, the economy weakens, the dollar weakens, and then the whole process starts all over again in reverse. I've never taken an economics course in my life, mind you, but this seems obvious to me.
Yet, it doesn't necessarily mean that *this* market is going down the drain. More and more money is still being invested whether it be in stocks, bonds, money markets, what-have-you. Beside the short term fact that people will be investing their year-end bonuses over the next month or two, we still have the age demographics of the population, the aging boomers, that will continue to desperately invest as a group into the stock market for at least the next 15 years before they start taking money out of the market upon their retirement. That money has to go somewhere.
If you're a true long term investor and you dollar-cost-average into your portfolio at specified intervals, then maybe you can afford to ignore the Asian flu and just keep doing what you're doing.
For the rest of us who are foolhardy enough to try to maximize our returns by anticipating to next sector rotation (and you have to look no further than the technology sector to realize that, yes, this is a rotational market), we have to figure out where the money will flow. Obviously, Asian market exposure must be minimized. In fact, the strength of the dollar hurts most companies that export their products overseas and have competition from lower priced imports. This rules out most of the large caps. This hurts the domestic automotive industry. This hurts the domestic computer and chip industry. Exported steel, forget about it. And I'm sure that you could come up with numerous other examples.
So who does this help? For one, our economy is still strong, so we must look at companies with minimal international exposure. The price competition from imports will help consumers (ever see "Made in Japan", "Korea", "Hong Kong", or "Taiwan" on labels before? Well, guess who's products will now be cheaper.) Lower prices, low interest rates, and currently low unemployment will help consumers and most likely the retail sector, especially with appliances and electronics. Low interest rates will help with new housing starts, thus boosting that whole sector. More affordable computers due to foreign price competition will put more boxes into the hands of the public, which will increase the need for software domestically (that's a very American industry). That should also put more people on-line, with all of its ramifications. The favorable exchange rate will increase foreign travel. And another thing that can't be overlooked is the deflationary pressure that the strong dollar will have on the wholesale prices paid for commodity type raw materials that would be used in the manufacturing sector, thus decreasing costs and increasing profit margins. Have I given you any investment ideas yet?
In general, I'd have to say that the one area of the market that would benefit the most in the current economic landscape would be the small-caps. Why? They are, by definition, smaller companies. Small companies in general have not developed to the point where they would have large exposure to international markets. Many are only marginally profitable, or not profitable at all, and will require additional financing to grow, be it from loans, corporate bonds, or additional stock. Here is where the current low interest rates are most beneficial. These small cap companies can secure financial without giving away the farm through interest payments and, in-so-doing, have less of a reliance on issuing more stock and diluting the value of the paper already being held by the current shareholders.
OK...I've rambled on enough. How does all of this effect Alanco? It has been predicted that next week, Alanco will release their 10-Q for the last quarter and will report their first positive earnings ever. All of this on the strength of fried finger foods. Tell me what pepper poppers for sale in Wal-Marts and movie theaters have to do with Asian flu? Answer: Nothing. The Fry Guy division is very much insulated from such nonsense. I visited a Wal-Mart food court during the holiday shopping season and I can tell you that business was booming. At 9PM on a weeknight, there were some 30 or more hungry shoppers (and employees) seated in the food court eating our golden fried delights. I also like a bundling of products (a value-meal approach) that the Radio Grill is now using. Instead of just ordering fries or just ordering onion rings as was the approach a year ago, you could now get a burger (not an Sgt. Fry Fun Food) along the fries and a coke for one bundled price, or a pork sandwich, with onion rings and a coke. It's a subtle difference, but it does get more food units into the fryers and we get paid per order. I also had no problem ordering pepper poppers. Last year when I visited the food court, they were always sold out of poppers. Maybe they've also solved their distribution problems. And don't overlook what I've already said about potential strength in the retail sector. That should keep floor traffic up. Overall, Fry Guy looks bright and will reduce, if not eliminate the need for further financing.
As far as CDSI, that's another story. CDSI right now is nothing BUT China. Sure, currency conversion will hurt results. But to be honest, there isn't that much currency to convert right now. Besides, CDSI in China is being developed by what amounts to a Chinese company which, though the profits siphoned off may be less, may help keep start-up costs down as Alanco Beijing tries to gain acceptance of this new technology. Currency concerns aside, there is still a need to clean up the Chinese environment. Acid rain does not go up and down with the Hang Seng. And in a twisted sense, the weakness in Asian currencies will make all other competitive environmental solutions expensive as well, thus giving CDSI a slight edge because it is in general a lower-cost option.
Overall, I'd say Fry Guy is a "+" for the near term and a "+" for the long term. CDSI is a wash for the short term with the potential of being a "++" for the long term.
These are just the opinions of a frustrated Alanco investor that's hoping to make up for last year. As always, your mileage may vary.
Any predictions for the upcoming earnings? |
