The $700 Billion Stimulus That Won’t Cost Taxpayers a Dime

November 19th, 2010

The $700 Billion Stimulus That Won't Cost Taxpayers a Dime

It could be just the thing to put an end to the economic malaise.

If enacted, shareholders of dozens — even hundreds — of companies would have to be ready for a tidal wave of stock buybacks and dividend hikes.

And the overall boost to the economy? I think it would lead to billions of dollars in new investment and expansion, creating millions of jobs. It doesn't take much of a stretch to realize that would be a boon for the economy and would send the stock market soaring.

In fact, Washington has done exactly what I'm proposing before — back in 2004. Back then, it added more than $300 billion to the economy, but I think it would be more than double that amount this time around.

That's why I think of it as a $700 billion stimulus package — except that it wouldn't add one penny to the national debt.

It almost sounds too good to be true, but I think everything I've just said could happen in the coming year.
And all that has to happen is Congress needs to see the advantage of allowing companies to repatriate — that is, bring back home to the United States — the cash they hold abroad to avoid U.S. taxes. Corporations are behind the move, unions are behind it, and the incoming Congress members are behind it, too. It's time to get ready.

Tax holiday spells market boon
The truth is, American companies are flush with cash.

At last count, S&P 500 members were sitting on a $2 trillion mountain of liquid reserves. Ordinarily, surplus profits are spent on equipment upgrades, new factories and other such investments, known on the Street as “capex” spending. But right now, the environment is just too uncertain. Any cash not earmarked for dividends and stock buybacks has been hoarded.

And despite having plenty of cash on hand, companies are actively borrowing rather than writing checks from their own account. Walmart (NYSE: WMT), for example, borrowed $3 billion in June and is now planning to sell new bond notes.

That has many investors scratching their heads. Why would companies take on new debt when they already have $2 trillion sitting idle in the bank?

Sure interest rates are low, but half of that cash pile is tied up overseas.

Cisco (Nasdaq: CSCO) reportedly has $30 billion in foreign banks. Johnson & Johnson (NYSE: JNJ) and others have billions more. Unfortunately, the repatriation of foreign profits is subject to a punitive tax of up to 35% by Uncle Sam.

That means the money can't be brought home unless the companies want to see a third of it vanish. So companies are simply letting it sit, choosing instead to borrow from bond investors rather than pay the tax. Microsoft (Nasdaq: MSFT) just borrowed $6 billion even though it has roughly $40 billion in idle cash. Crazy.

Meanwhile, everyone is looking for pragmatic solutions to end the economic malaise and put people back to work. A temporary tax holiday for repatriated profits is gaining ground with politicians, especially the new members of Congress headed to Washington.

It would mean multinationals could bring up to $1 trillion in accumulated income back to the U.S. private sector — where it could be harnessed and invested in countless job-creating projects.

A few weeks ago, Intel (Nasdaq: INTC) unveiled plans for an $8 billion expansion project involving manufacturing facilities in Arizona and Oregon. Construction alone will create upwards of 8,000 new jobs. Instead of being big news, that could be just a drop in the bucket if Congress acted.

Action to Take –> We've tried every emergency fiscal and monetary measure in the book with minimal results. This common-sense approach will work. We know because it has happened before.

When the Homeland Investment Act of 2004 slashed taxes from 35% to 5.25%, companies responded by bringing $315 billion home, much of which was plowed back into the economy. I'd expect this to happen again, only on a much larger scale. And if it does, expect a big rally in the market.


– Nathan Slaughter

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Nathan Slaughter's previous experience includes

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Why Fed Meddling is Only Prolonging the Financial Crisis

November 19th, 2010

Here’s the story:

The Irish caved in. Apparently, they negotiated a deal. They’re going to go for a bailout.

This was all it took to bring stock market investors relief from their bout with temporary sanity. They sent the Dow up 173 points.

The New York Times tells the tale:

Stocks in the United States rose Thursday as expectations grew that Ireland would receive billions of euros from international lenders to rescue its banks, easing concerns about the health of Europe’s financial system.

Shares of General Motors began trading after the company’s initial public offering, the largest in United States history. The shares surged nearly 8 percent after the market opened, and in late trading fell back to $34.07 on the New York Stock Exchange. The stock had been priced at $33 on Wednesday evening.

Ireland has moved more aggressively than many countries to address problems brought on by the financial crisis, but investors have been losing confidence in its banks in recent months, and a Greek-style rescue now appears imminent. On Wednesday, the British government signaled that it could offer Ireland direct financial aid as well.

What are investors thinking? A Greek-style rescue? How about a Titanic-style sea voyage? How about a Little Big Horn-style pony trek?

Greece is still going broke. It is just a matter of time. And now this Irish bailout does the same thing. It postpones the real problem – and makes it worse.

Investors are probably thinking – “everything is under control”…“no need to worry”…“the authorities know what they are doing.”

Well, we’ve got news. The authorities have no idea what they are doing. If the Irish authorities had seen the problem coming they would have forced the banks to straighten up long before 2007. And then, if they had any idea what they were up to, they never would have written the banks a blank check when they got into trouble.

They are just muddling along from one crisis to the next. If the Irish had just let their banks go bust in the first place, they wouldn’t be in this mess, in other words. And if the Europeans would just let Ireland go bust, well…we don’t know what would happen…but we’d like to watch!

Meanwhile, in the US, the municipal bond market seems to be on the edge of chaos lately. It is probably only a matter of time until the Fed starts buying muni bonds as well as US Treasury bonds. Why not? Neither one is good for the money.

State and local governments made promises during the fat years. Now that the lean years are here, they’re having a hard time keeping them. Just like the feds. Just like the Irish. Just like the Greeks.

To their credit the Irish, Greeks, Brits – and others – have begun to make cuts. Even government employees are having their hours or their salaries trimmed.

Not so in America. The process of cutting has barely begun. (About which…more on Monday…)

Meanwhile, a news report tells us that many rust-belt cities are demolishing buildings. Owners aren’t paying property taxes and the buildings are not worth the maintenance it takes to keep them standing.

And here’s Bloomberg with more news from the homing sector:

Foreclosures on prime fixed-rate mortgages in the US jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers.

The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months, the Mortgage Bankers Association said in a report today. New foreclosures rose to 0.93 percent from 0.71 percent. Both numbers were the highest in the 12 years since the Washington-based trade group started tracking the categories.

“The increase in these plain-vanilla type of loans to the highest numbers ever show us it really is being driven by the economic environment,” [Michael] Fratantoni, [the Mortgage Bankers Association’s vice president of research and economics], said in a telephone interview. “It’s not going to turn around until we get more significant job growth.”

New foreclosures against all types of mortgages, which also include subprime, rose to 1.34 percent, the highest level in a year, according to the report.

Bill Bonner
for The Daily Reckoning

Why Fed Meddling is Only Prolonging the Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why Fed Meddling is Only Prolonging the Financial Crisis




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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List of Fed’s enemies grows longer as bond market carnage spreads

November 19th, 2010

Mike Larson

It’s always gratifying when the mainstream media picks up on a theme you’ve been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we’ve seen in recent days:

“Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase” — Wall Street Journal, November 15

“Under Attack, Fed Officials Defend Buying of Bonds” — New York Times, November 16

“Fed officials defend $600bn stimulus” — Financial Times, November 16

“Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits” — Wall Street Journal, November 16

The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.

Key policymakers are giving rare, on-the-record interviews about QE2′s benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.

Fed Fighting a Losing Battle
Defending the Undefendable!

My take? The Fed is right to worry. I say that because its QE2 program isn’t just not helping. It’s actually hurting the markets.

Take long-term Treasury yields …

As I’ve been pointing out recently, they’ve been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.

Then there’s the mortgage market …

Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed’s policy helping homeowners.

And then there’s the municipal bond market …

It has completely imploded in the past several days. Take a look at this chart of the iShares S&P National AMT-Free Municipal Bond Fund (MUB). It’s one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.

You can see it’s in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it’s made in the past 15 months … in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!

The move doesn’t stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields …

Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They’re also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.

But clearly, the cost of borrowing is now not only going up for Uncle Sam. It’s also rising for governments all over the country, and mortgage borrowers. And it’s starting to inch higher for corporate debtholders.

Opposition Rising in Washington —
and Everywhere Else

As interest rates surge, the opposition to Bernanke's policy intensifies.
As interest rates surge, the opposition to Bernanke’s policy intensifies.

Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it’s too late?

The group, which includes Michael Boskin, a former chairman of the President’s Council of Economic Advisors … Douglas Holtz-Eakin, a former director of the Congressional Budget Office … and Kevin Hassett, a former senior economist at the Fed itself, said:

“We subscribe to your statement in The Washington Post on November 4 that ‘the Federal Reserve cannot solve all the economy’s problems on its own.’ In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

“The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.”

The rising opposition to the Fed is further evidence that the global money war I’ve been worried about is intensifying. It’s proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.

We’ll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.

Until next time,

Mike

P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. And our panel of experts explained why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Read more here:
List of Fed’s enemies grows longer as bond market carnage spreads

Commodities, ETF, Mutual Fund, Uncategorized

List of Fed’s enemies grows longer as bond market carnage spreads

November 19th, 2010

Mike Larson

It’s always gratifying when the mainstream media picks up on a theme you’ve been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we’ve seen in recent days:

“Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase” — Wall Street Journal, November 15

“Under Attack, Fed Officials Defend Buying of Bonds” — New York Times, November 16

“Fed officials defend $600bn stimulus” — Financial Times, November 16

“Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits” — Wall Street Journal, November 16

The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.

Key policymakers are giving rare, on-the-record interviews about QE2′s benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.

Fed Fighting a Losing Battle
Defending the Undefendable!

My take? The Fed is right to worry. I say that because its QE2 program isn’t just not helping. It’s actually hurting the markets.

Take long-term Treasury yields …

As I’ve been pointing out recently, they’ve been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.

Then there’s the mortgage market …

Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed’s policy helping homeowners.

And then there’s the municipal bond market …

It has completely imploded in the past several days. Take a look at this chart of the iShares S&P National AMT-Free Municipal Bond Fund (MUB). It’s one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.

You can see it’s in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it’s made in the past 15 months … in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!

The move doesn’t stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields …

Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They’re also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.

But clearly, the cost of borrowing is now not only going up for Uncle Sam. It’s also rising for governments all over the country, and mortgage borrowers. And it’s starting to inch higher for corporate debtholders.

Opposition Rising in Washington —
and Everywhere Else

As interest rates surge, the opposition to Bernanke's policy intensifies.
As interest rates surge, the opposition to Bernanke’s policy intensifies.

Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it’s too late?

The group, which includes Michael Boskin, a former chairman of the President’s Council of Economic Advisors … Douglas Holtz-Eakin, a former director of the Congressional Budget Office … and Kevin Hassett, a former senior economist at the Fed itself, said:

“We subscribe to your statement in The Washington Post on November 4 that ‘the Federal Reserve cannot solve all the economy’s problems on its own.’ In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

“The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.”

The rising opposition to the Fed is further evidence that the global money war I’ve been worried about is intensifying. It’s proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.

We’ll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.

Until next time,

Mike

P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. And our panel of experts explained why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Read more here:
List of Fed’s enemies grows longer as bond market carnage spreads

Commodities, ETF, Mutual Fund, Uncategorized

The Most Undervalued Stock in India

November 19th, 2010

The Most Undervalued Stock in India

A couple of weeks ago, I wrote an article about India's vast potential for both economic development and profit for investors. ["Read why I think India's a better long-term investment than China"] In that article, I mentioned a few of the standard, well-known Indian stocks, but some of these tend to be expensive, so I wanted to delve deeper into lesser-known Indian stocks that might have greater potential down the road.

My search led me to a common space for well-known Indian stocks (outsourcing), but yet this company that has flown under the radar. Even better, its stock is undervalued and is set to potentially double within a couple years.

It's little secret that India's primary growth industry is outsourcing. This is where, to save time and cost, companies shift workloads to a third party instead of doing it themselves. Usually this consists of more mundane, basic tasks, but can also consist of more important functions, such as running important information technology (IT) transactions.

The leading firms in the IT space are well known and consist of Wipro (NYSE: WIT), Infosys (Nasdaq: INFY), and certain divisions of conglomerate the Tata Group Companies. The investment tradeoff of being well known is that the stocks are not cheap. Wipro's American Depositary Receipts (ADRs) trade at nearly 30 times forward earnings. Infosys trades for more than 25 times forward earnings.

Outsourcing is an important driver in other industries, too, but for some reason doesn't receive as much as attention in the marketplace. It should, because the advantages that India possesses in the IT sector also carry over to outsourcing in general. Telecom outsourcing is a close relative to IT in general and subject to similar drivers.

This brings us to WNS Holdings (NYSE: WNS). WNS began in 1996 as an in-house division of European airline giant British Airways. It is focused specifically on business process outsourcing, or BPO, for short. Specifically, WNS is involved in BPO activities that span from handling customer calls, providing billing support such as the handling of client sales and payments, as well as taking care of other accounting functions, and all the records that have to be maintained to run the financial supply chain.

Uncategorized

The Safest Dividend in the S&P

November 19th, 2010

The Safest Dividend in the S&P

If you're a longtime subscriber to my free Dividend Opportunities newsletter, you might remember an issue way back in March where I hunted down the safest dividend in the S&P 500.

The response to my article was overwhelming. So I've decided to provide an update — taking the same rigorous metrics I applied before to discover where the safest dividend in the S&P is today.

Thankfully, the draconian cuts that we saw in 2008-2009 seem to be history. Believe it or not, these cuts added up to $52 billion in lost income during 2009 — and that's just the cuts for stocks in the S&P 500. To put that figure in perspective, losing $52 billion would put Warren Buffett into bankruptcy.

Today the news looks much brighter: Standard & Poor's reports that through the first three quarters of 2010, 1,033 companies have increased dividend payments, compared with 707 in 2009. Even so, dividend safety still has its place. During the first three quarters of the year, 117 companies cut their payments.

To make sure you don't have to worry about dividend cuts, I've taken a look at every dividend-payer in the S&P 500 to find the safest yields available right now. Let's see who took home the title…

Safety Criteria #1: Yield
When it comes to yield, it usually takes something above 6% to garner even a second look from me. So I started my search with all the stocks within the S&P 500 that yield above that magic 6% number.

As I suspected, it turns out the common stocks in the S&P 500 don't offer much in the way of yields overall, but you can still find a few individual companies offering attractive payments. (For the record, I typically broaden my income search to include closed-end funds, exchange-traded bonds, master limited partnerships — and a bevy of other asset types — to bring readers of Dividend Opportunities and my premium High-Yield Investing newsletter the most attractive yields.)

In total, eight stocks in the S&P (only 1.6% of the total) yielded 6% or more. Of those, the highest-yielding stock was Frontier Communications (NYSE: FTR), which pays investors 8.4% a year.

With this handful of stocks in focus, I turned to my next metric to uncover the safest dividend: earnings power.

Safety Criteria #2: Earnings Power
It's not uncommon for “sick” stocks to carry high yields. Based on a poor outlook, investors will dump the shares, causing the yield to go up. To combat this potential pitfall, I looked at the one-year growth in operating income for each of the eight stocks with a yield above 6%.

Operating income is the profit realized from the company's day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company's growth than earnings per share, which can be manipulated to show stronger results.

Given the slow recovery in the economy, I searched for companies on my high-yield list able to manage any growth in operating income during the trailing twelve months, indicating the business was still able to thrive after one of the worst recessions in recent memory. After screening for positive one-year growth in operating income, I was left with the four candidates shown in my table:

Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of cash available each quarter against how much is paid in dividends, we can know whether a company can continue paying its current dividend even if conditions worsen.

For the payout ratios, I looked simply at free cash flow during the trailing 12 months, compared to dividends paid. Many investors look at earnings, but earnings can sometimes be misleading. Instead, free cash flow is a measure of cash generated by the company after capital expenditures. This cash can be used for just about anything — expansion, research and development, or most importantly, dividends. Here's what I found:

You can see that all the high-yielders here had payout ratios under 100% based on free cash flow during the last twelve months. However, given cigarette manufacturer Altria's 98% payout ratio, I did find it riskier than the rest of the list. Nearly all its free cash flow was spent on dividends. This doesn't mean the company will cut the payment, but the risk appeared much higher than with the other three members of our list.

Safety Criteria #4: Proven Track Record
To finally nail down what I think is the safest dividend in the S&P, I took a look at the track record of the three stocks left in the running.

I gave special credit to those companies that maintain — and raise — dividend payments through thick and thin. This shows dedication to paying dividends and also that the company will maintain its payment if it hits a rough patch.

Action to Take –> Looking into the track record of each of these companies offered mixed results. Frontier Communications, a telecom provider based in Connecticut, had the lowest payout ratio and highest yield, but the company recently cut its dividend to $0.19 per share from $0.25. This reduced dividend should ensure its safety for the years ahead, but it does leave a sour taste in the mouths of long-time investors.

Apart from Frontier, Windstream Corp. and CenturyLink, both telecom stocks as well, have above-average yields and have demonstrated an ability to cover their dividends under tough economic conditions.

If pressed, I'd have to tip the scale to Windstream, giving favor to its longer track record of paying high yields. But honestly, it looks like all three of these options should provide a high and stable yield for the coming years.


– Carla Pasternak

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak's latest course, The 5 Rules Every Income Investor Has to Know.

Carla Pasternak

OPTIONS, Uncategorized

The Safest Dividend in the S&P

November 19th, 2010

The Safest Dividend in the S&P

If you're a longtime subscriber to my free Dividend Opportunities newsletter, you might remember an issue way back in March where I hunted down the safest dividend in the S&P 500.

The response to my article was overwhelming. So I've decided to provide an update — taking the same rigorous metrics I applied before to discover where the safest dividend in the S&P is today.

Thankfully, the draconian cuts that we saw in 2008-2009 seem to be history. Believe it or not, these cuts added up to $52 billion in lost income during 2009 — and that's just the cuts for stocks in the S&P 500. To put that figure in perspective, losing $52 billion would put Warren Buffett into bankruptcy.

Today the news looks much brighter: Standard & Poor's reports that through the first three quarters of 2010, 1,033 companies have increased dividend payments, compared with 707 in 2009. Even so, dividend safety still has its place. During the first three quarters of the year, 117 companies cut their payments.

To make sure you don't have to worry about dividend cuts, I've taken a look at every dividend-payer in the S&P 500 to find the safest yields available right now. Let's see who took home the title…

Safety Criteria #1: Yield
When it comes to yield, it usually takes something above 6% to garner even a second look from me. So I started my search with all the stocks within the S&P 500 that yield above that magic 6% number.

As I suspected, it turns out the common stocks in the S&P 500 don't offer much in the way of yields overall, but you can still find a few individual companies offering attractive payments. (For the record, I typically broaden my income search to include closed-end funds, exchange-traded bonds, master limited partnerships — and a bevy of other asset types — to bring readers of Dividend Opportunities and my premium High-Yield Investing newsletter the most attractive yields.)

In total, eight stocks in the S&P (only 1.6% of the total) yielded 6% or more. Of those, the highest-yielding stock was Frontier Communications (NYSE: FTR), which pays investors 8.4% a year.

With this handful of stocks in focus, I turned to my next metric to uncover the safest dividend: earnings power.

Safety Criteria #2: Earnings Power
It's not uncommon for “sick” stocks to carry high yields. Based on a poor outlook, investors will dump the shares, causing the yield to go up. To combat this potential pitfall, I looked at the one-year growth in operating income for each of the eight stocks with a yield above 6%.

Operating income is the profit realized from the company's day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company's growth than earnings per share, which can be manipulated to show stronger results.

Given the slow recovery in the economy, I searched for companies on my high-yield list able to manage any growth in operating income during the trailing twelve months, indicating the business was still able to thrive after one of the worst recessions in recent memory. After screening for positive one-year growth in operating income, I was left with the four candidates shown in my table:

Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of cash available each quarter against how much is paid in dividends, we can know whether a company can continue paying its current dividend even if conditions worsen.

For the payout ratios, I looked simply at free cash flow during the trailing 12 months, compared to dividends paid. Many investors look at earnings, but earnings can sometimes be misleading. Instead, free cash flow is a measure of cash generated by the company after capital expenditures. This cash can be used for just about anything — expansion, research and development, or most importantly, dividends. Here's what I found:

You can see that all the high-yielders here had payout ratios under 100% based on free cash flow during the last twelve months. However, given cigarette manufacturer Altria's 98% payout ratio, I did find it riskier than the rest of the list. Nearly all its free cash flow was spent on dividends. This doesn't mean the company will cut the payment, but the risk appeared much higher than with the other three members of our list.

Safety Criteria #4: Proven Track Record
To finally nail down what I think is the safest dividend in the S&P, I took a look at the track record of the three stocks left in the running.

I gave special credit to those companies that maintain — and raise — dividend payments through thick and thin. This shows dedication to paying dividends and also that the company will maintain its payment if it hits a rough patch.

Action to Take –> Looking into the track record of each of these companies offered mixed results. Frontier Communications, a telecom provider based in Connecticut, had the lowest payout ratio and highest yield, but the company recently cut its dividend to $0.19 per share from $0.25. This reduced dividend should ensure its safety for the years ahead, but it does leave a sour taste in the mouths of long-time investors.

Apart from Frontier, Windstream Corp. and CenturyLink, both telecom stocks as well, have above-average yields and have demonstrated an ability to cover their dividends under tough economic conditions.

If pressed, I'd have to tip the scale to Windstream, giving favor to its longer track record of paying high yields. But honestly, it looks like all three of these options should provide a high and stable yield for the coming years.


– Carla Pasternak

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak's latest course, The 5 Rules Every Income Investor Has to Know.

Carla Pasternak

OPTIONS, Uncategorized

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks — and You Should, Too

November 19th, 2010

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks -- and You Should, Too

The ranks of “super-investors” are few, highlighted by the likes of Warren Buffett, George Soros and Carl Icahn. Investors like to track their every move.

Smart investors should also watch the moves of David Einhorn, who runs Greenlight Capital. He started with just $1 million in 1996, has made more than +20% a year for his clients, and now manages billions. He's made his name on some high-profile short sales such as Lehman Brothers and Allied Capital (NYSE: AFC). But he's also done quite well on the long side of his portfolio. That's why I review his latest holdings to see what he's buying and selling. In his latest mandated 13-F filing, Einhorn is loading up on two stocks that trade below book value. Here's why.

Ingram Micro (NYSE: IM)
Ingram is the world's largest distributor of computers, printers, scanners, copiers and other tech products, with operations across the globe. It's not a sexy business, but it sure is profitable. During the past three years, Ingram has generated nearly $1 billion in cumulative free cash — right at a time when the economy has been pretty lousy. With recent tweaks to the business, management believes that annual free cash flow could exceed $500 million if global sales rise at a moderate pace.

All that cash flow has created a balance sheet on steroids, as gross cash now stands at more than $1 billion and tangible book value sits at $19.18 a share — nearly +10% above the current stock price. If the company can indeed generate $500 million in annual cash flow in coming years, then book value per share would rise about $3 a share every year, creating annual returns of nearly +20%.

To be sure, Einhorn, who just bought more than $300 million of Ingram's stock, isn't looking for swing-for-the fences returns. Shares are unlikely to move up past the $23 to $25 mark even in a better economy. So this stock may only have +25% to +35% upside during the next few years. But that potential upside is matched by very limited downside thanks to that rock-solid balance sheet.

Trans-Atlantic Holdings (NYSE: TRH)
Companies that are in the business of providing insurance to other insurers (known as re-insurers) need to keep lots of cash on hand in case clients need them to pay up. But this firm, with $13.3 billion on hand, may be carrying too much cash. After all, potential liabilities are less than $10 billion. How did the company get so much cash? By generating at least $600 million in free cash flow in each of the past seven years.

And with all that cash gaining almost no interest, Trans-Atlantic has no choice but to pay out dividends (which offer a paltry 1.6% yield) or buy back stock. Trans-Atlantic is focusing on the latter, having just announced another $200 million buyback program. And as the share count keeps shrinking, per share profits rise. Analysts expect this re-insurer to earn more than $6 a share in 2011, and shares trade for about eight times that forecast.

But Mr. Einhorn is likely here for the balance sheet, not the income statement. Trans-Atlantic carries $4.3 billion in shareholder's equity, well ahead of the company's $3.2 billion market value. (Said another way, the stock trades for just 74% of a book value of $69 a share.) As an added kicker, if and when interest rates start to rise, all of that sidelined cash will generate hefty streams of interest income.

Action to Take –> Mr. Einhorn is known for some high-profile aggressive bets, but some of his more low-key plays such as Ingram Micro and Trans-Atlantic Holdings are equally intriguing. Neither is likely to make you rich, but they look like solid “safe” plays with nice upside.


– David Sterman

P.S. –

Uncategorized

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks — and You Should, Too

November 19th, 2010

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks -- and You Should, Too

The ranks of “super-investors” are few, highlighted by the likes of Warren Buffett, George Soros and Carl Icahn. Investors like to track their every move.

Smart investors should also watch the moves of David Einhorn, who runs Greenlight Capital. He started with just $1 million in 1996, has made more than +20% a year for his clients, and now manages billions. He's made his name on some high-profile short sales such as Lehman Brothers and Allied Capital (NYSE: AFC). But he's also done quite well on the long side of his portfolio. That's why I review his latest holdings to see what he's buying and selling. In his latest mandated 13-F filing, Einhorn is loading up on two stocks that trade below book value. Here's why.

Ingram Micro (NYSE: IM)
Ingram is the world's largest distributor of computers, printers, scanners, copiers and other tech products, with operations across the globe. It's not a sexy business, but it sure is profitable. During the past three years, Ingram has generated nearly $1 billion in cumulative free cash — right at a time when the economy has been pretty lousy. With recent tweaks to the business, management believes that annual free cash flow could exceed $500 million if global sales rise at a moderate pace.

All that cash flow has created a balance sheet on steroids, as gross cash now stands at more than $1 billion and tangible book value sits at $19.18 a share — nearly +10% above the current stock price. If the company can indeed generate $500 million in annual cash flow in coming years, then book value per share would rise about $3 a share every year, creating annual returns of nearly +20%.

To be sure, Einhorn, who just bought more than $300 million of Ingram's stock, isn't looking for swing-for-the fences returns. Shares are unlikely to move up past the $23 to $25 mark even in a better economy. So this stock may only have +25% to +35% upside during the next few years. But that potential upside is matched by very limited downside thanks to that rock-solid balance sheet.

Trans-Atlantic Holdings (NYSE: TRH)
Companies that are in the business of providing insurance to other insurers (known as re-insurers) need to keep lots of cash on hand in case clients need them to pay up. But this firm, with $13.3 billion on hand, may be carrying too much cash. After all, potential liabilities are less than $10 billion. How did the company get so much cash? By generating at least $600 million in free cash flow in each of the past seven years.

And with all that cash gaining almost no interest, Trans-Atlantic has no choice but to pay out dividends (which offer a paltry 1.6% yield) or buy back stock. Trans-Atlantic is focusing on the latter, having just announced another $200 million buyback program. And as the share count keeps shrinking, per share profits rise. Analysts expect this re-insurer to earn more than $6 a share in 2011, and shares trade for about eight times that forecast.

But Mr. Einhorn is likely here for the balance sheet, not the income statement. Trans-Atlantic carries $4.3 billion in shareholder's equity, well ahead of the company's $3.2 billion market value. (Said another way, the stock trades for just 74% of a book value of $69 a share.) As an added kicker, if and when interest rates start to rise, all of that sidelined cash will generate hefty streams of interest income.

Action to Take –> Mr. Einhorn is known for some high-profile aggressive bets, but some of his more low-key plays such as Ingram Micro and Trans-Atlantic Holdings are equally intriguing. Neither is likely to make you rich, but they look like solid “safe” plays with nice upside.


– David Sterman

P.S. –

Uncategorized

The Best Oil Stock for the Next Decade

November 19th, 2010

The Best Oil Stock for the Next Decade

Everything is pointing toward higher energy prices in the next several years.

First, there's supply and demand.

Worldwide demand for energy is increasing. In fact, the Outlook for Energy estimates that global demand for energy will soar +35% from 2005 to 2030. The increase will be fueled by growing industrialization and higher living standards in emerging markets. For example, China overtook the United States as the world's largest automobile market in 2009, with sales of 13.6 million cars and is expected to purchase 100 million vehicles by 2020.

While demand for energy is increasing, the supply of oil is dwindling. In the U.S., domestic production of oil peaked in 1970 at about 9.5 million barrels of oil a day and declined to about 5.1 million by 2006. Currently, the planet is estimated to have 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, but current consumption is all but certain to increase.

Then, there's the falling dollar.

Oil and other forms of energy are denominated in dollars when they are traded, so their price increases as the dollar weakens. As the U.S. continues to wrack-up unprecedented amounts of debt, many forecast that the U.S. dollar will lose value in the months and years ahead.

We recently had a preview of the effect of rising demand and a falling dollar on oil prices. Industrialization exploded in emerging markets during the past decade and the U.S. Dollar Index (an index of the U.S. dollar measured against a basket of the world's currencies) plunged more than -40%, from 120 in 2002 to under 71 by 2008. Consequently, the price of a barrel of oil increased from less than $20 in 2002 to greater than $140 by 2008.

In short, energy prices seem perfectly situated to rise significantly in the years ahead.

Who will benefit?

ExxonMobil Corporation (NYSE: XOM) is the largest publically traded company in America and the world's largest public oil and gas company. The company explores, produces and refines oil and gas all over the world. It operates facilities or markets products in most of the world's countries, searches for energy on six continents, and is the world's largest refiner.

Why ExxonMobil?

The world is frantically searching for more oil in increasingly hard to reach places, such as miles under the sea and from rock and sand. In addition, the search for and development of alternatives to oil such as natural gas, coal, nuclear, wind and solar continue in haste. ExxonMobil, with its far-ranging geographical diversity, expertise and deep pockets is perhaps the world's most able company to meet the task.

This goliath has 80 billion barrels of oil equivalent in a diverse resource base that includes conventional oil, liquid natural gas (LNG), unconventional oil and gas (sources that are difficult to harvest using conventional drilling techniques) and oil sands. The company has more than 130 production projects in virtually every corner of the world and generated more than $300 billion in revenue in 2009.

While 2009 year end reserves consisted of 62% oil, Exxon continues to diversify its asset base and position itself to benefit as the world moves toward cleaner burning fuel. In June of this year, ExxonMobil purchased Houston-based XTO Energy in a $41 billion deal. XTO's portfolio consists of vast reserves of natural gas primarily from unconventional resource basins in the United States.

Why buy it now?

The stock has already started moving. It's up +18% in the past three months. Third quarter earnings were fantastic, as profits soared +55% higher than the year ago quarter. The company benefited from higher overall volume of +11%, driven by a +49.5% boost in natural gas volume primarily due to the XTO acquisition. Refining volume also nearly quadrupled from the year ago levels as demand for specialty chemicals has increased in the recovery.

Exxon's sheer size enables it to operate at lower costs and higher margins than most of its competitors. In addition, resource nationalism is becoming more common as many emerging market countries are reluctant to let private companies exploit their resources. Instead, they seek partners, of which Exxon, with its huge resources and 100 years of expertise, is a likely choice.

Action to Take –> While smaller energy companies may ultimately provide higher returns in the months and years ahead, they can be a wild ride as energy prices rise and fall. Exxon, however, can whether rocky times in this unpredictable industry. What better way to make sure you capitalize on the powerful long term trends than with the biggest and the best? At 12 times earnings, Exxon still sells below the industry average and can be purchased at current prices.


– Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.

Uncategorized

The Best Oil Stock for the Next Decade

November 19th, 2010

The Best Oil Stock for the Next Decade

Everything is pointing toward higher energy prices in the next several years.

First, there's supply and demand.

Worldwide demand for energy is increasing. In fact, the Outlook for Energy estimates that global demand for energy will soar +35% from 2005 to 2030. The increase will be fueled by growing industrialization and higher living standards in emerging markets. For example, China overtook the United States as the world's largest automobile market in 2009, with sales of 13.6 million cars and is expected to purchase 100 million vehicles by 2020.

While demand for energy is increasing, the supply of oil is dwindling. In the U.S., domestic production of oil peaked in 1970 at about 9.5 million barrels of oil a day and declined to about 5.1 million by 2006. Currently, the planet is estimated to have 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, but current consumption is all but certain to increase.

Then, there's the falling dollar.

Oil and other forms of energy are denominated in dollars when they are traded, so their price increases as the dollar weakens. As the U.S. continues to wrack-up unprecedented amounts of debt, many forecast that the U.S. dollar will lose value in the months and years ahead.

We recently had a preview of the effect of rising demand and a falling dollar on oil prices. Industrialization exploded in emerging markets during the past decade and the U.S. Dollar Index (an index of the U.S. dollar measured against a basket of the world's currencies) plunged more than -40%, from 120 in 2002 to under 71 by 2008. Consequently, the price of a barrel of oil increased from less than $20 in 2002 to greater than $140 by 2008.

In short, energy prices seem perfectly situated to rise significantly in the years ahead.

Who will benefit?

ExxonMobil Corporation (NYSE: XOM) is the largest publically traded company in America and the world's largest public oil and gas company. The company explores, produces and refines oil and gas all over the world. It operates facilities or markets products in most of the world's countries, searches for energy on six continents, and is the world's largest refiner.

Why ExxonMobil?

The world is frantically searching for more oil in increasingly hard to reach places, such as miles under the sea and from rock and sand. In addition, the search for and development of alternatives to oil such as natural gas, coal, nuclear, wind and solar continue in haste. ExxonMobil, with its far-ranging geographical diversity, expertise and deep pockets is perhaps the world's most able company to meet the task.

This goliath has 80 billion barrels of oil equivalent in a diverse resource base that includes conventional oil, liquid natural gas (LNG), unconventional oil and gas (sources that are difficult to harvest using conventional drilling techniques) and oil sands. The company has more than 130 production projects in virtually every corner of the world and generated more than $300 billion in revenue in 2009.

While 2009 year end reserves consisted of 62% oil, Exxon continues to diversify its asset base and position itself to benefit as the world moves toward cleaner burning fuel. In June of this year, ExxonMobil purchased Houston-based XTO Energy in a $41 billion deal. XTO's portfolio consists of vast reserves of natural gas primarily from unconventional resource basins in the United States.

Why buy it now?

The stock has already started moving. It's up +18% in the past three months. Third quarter earnings were fantastic, as profits soared +55% higher than the year ago quarter. The company benefited from higher overall volume of +11%, driven by a +49.5% boost in natural gas volume primarily due to the XTO acquisition. Refining volume also nearly quadrupled from the year ago levels as demand for specialty chemicals has increased in the recovery.

Exxon's sheer size enables it to operate at lower costs and higher margins than most of its competitors. In addition, resource nationalism is becoming more common as many emerging market countries are reluctant to let private companies exploit their resources. Instead, they seek partners, of which Exxon, with its huge resources and 100 years of expertise, is a likely choice.

Action to Take –> While smaller energy companies may ultimately provide higher returns in the months and years ahead, they can be a wild ride as energy prices rise and fall. Exxon, however, can whether rocky times in this unpredictable industry. What better way to make sure you capitalize on the powerful long term trends than with the biggest and the best? At 12 times earnings, Exxon still sells below the industry average and can be purchased at current prices.


– Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.

Uncategorized

GM’s Back — And So Are These Key Suppliers

November 19th, 2010

GM's Back -- And So Are These Key Suppliers

As GM (NYSE: GM) celebrates an impressive re-entry into the public markets, investors are chewing over a clear theme. Both GM and Ford (NYSE: F) are far healthier companies, with much leaner cost structures and the ability to generate sharply improved profit margins as industry volumes rebound. In their shadow, key auto parts suppliers are also now in fighting shape after being bruised and battered in the economic freefall of 2008. The new adage for the industry: “what doesn't kill you makes you stronger.”

How bad did it get for these auto parts suppliers? Domestic auto makers produced 15-16 million cars and trucks every year from 2001 to 2007. That figure fell to 12.5 million in 2008 and just 8.5 million in 2009. Years of steady profits were offset by massive losses in 2008 and 2009, and a number of these firms flirted with bankruptcy. For a short while, many of their stocks traded below $1. In a testament to just how much they have changed, all of the key players are likely to be nicely profitable again this year, even though the industry will produce just 11.5 million units.

Looking ahead into 2011 and 2012, industry unit volumes are expected to rebound to 12.5 million and 13.5 million, respectively, according to Citigroup. And that could prove to be conservative. That's because domestic auto makers are starting to take back market share, which means a rising swell of business for the firms that make seats, transmissions, suspensions and the like.

Shares of auto suppliers have rallied sharply in the past year, but remain very reasonably priced in relation to earnings

GM exposure
With GM's successful IPO in the news, customers may start to flock back to the auto maker in droves, now that they see it as healthier. That hasn't been the case recently. Ford announced that October sales rose +19% from a year ago, while many other auto makers also posted double-digit gains. GM saw a more modest +3.5% sales boost in October.

As a self-professed car nut, I had been a big fan of Ford Motor, noting that its new models were compelling and should yield market share gains. [Read my analysis here]

These days, I'm starting to pay closer attention to GM as it starts to build out its impressive new product portfolio. The Buick division is a big hit in China, Cadillac is unveiling a strong set of new cars that can go head-to-head with anything made in Germany, and the Chevy and GMC truck divisions should eventually see a major profit rebound when the U.S. construction industry picks back up.

But rather than buying shares of GM, you might want to focus on the auto parts suppliers with the greatest exposure to this erstwhile titan. Shares of many of these names remain cheap, and a resurgent car market could lead these stocks to nice gains.

Here are a few key names…

If you're talking about GM's pickup trucks, then you're talking about Lear (NYSE: LEA), which makes seats and electrical systems for GM's GMT 900 truck platform. Lear has been on a tear lately, delivering quarterly profits that were more than twice as high as analysts had expected in each of the past two quarters. A -$2.00 a share loss in 2009 is likely to morph into an $8.00 a share profit this year. A little back-of-the-envelope math that assumes industry volume hits 14 million by 2013 could yield earnings per share (EPS) north of $12 for Lear. Shares trade for just seven times that view.

American Axle (NYSE: AXL) has even greater exposure to GM, with more than two- thirds of its business from the company. (It was once an in-house division at GM.) The company makes axles and drivetrains, primarily for large vehicles. The company has also handily exceeded forecasts in each of the past two quarters and also notes that backlog is rising fast. That led JP Morgan to recently upgrade shares to overweight, with a $14 price target — +25% above current levels. Yet the analysts note that shares could surge closer to the $20 mark within a few years as GM's sales volume rebounds. They add that American Axle is on track to boost EBITDA +30% next year to around $370 million, and it could hit $500 million within a few years.

Action to Take –> Tenneco (NYSE: TEN) and Johnson Controls (NYSE: JCI) also have a high degree of exposure to GM. As noted earlier, all of the shares in this sector have rallied throughout 2010, and would be vulnerable to a pullback if auto and truck sales don't continue to rebound in 2011 as many expect.

Stocks in this group appear quite inexpensive, especially in terms of potential EBITDA generation. How auto industry sales fare in the next few years will determine how much more upside these stocks have.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
GM's Back — And So Are These Key Suppliers

Read more here:
GM’s Back — And So Are These Key Suppliers

Uncategorized

GM’s Back — And So Are These Key Suppliers

November 19th, 2010

GM's Back -- And So Are These Key Suppliers

As GM (NYSE: GM) celebrates an impressive re-entry into the public markets, investors are chewing over a clear theme. Both GM and Ford (NYSE: F) are far healthier companies, with much leaner cost structures and the ability to generate sharply improved profit margins as industry volumes rebound. In their shadow, key auto parts suppliers are also now in fighting shape after being bruised and battered in the economic freefall of 2008. The new adage for the industry: “what doesn't kill you makes you stronger.”

How bad did it get for these auto parts suppliers? Domestic auto makers produced 15-16 million cars and trucks every year from 2001 to 2007. That figure fell to 12.5 million in 2008 and just 8.5 million in 2009. Years of steady profits were offset by massive losses in 2008 and 2009, and a number of these firms flirted with bankruptcy. For a short while, many of their stocks traded below $1. In a testament to just how much they have changed, all of the key players are likely to be nicely profitable again this year, even though the industry will produce just 11.5 million units.

Looking ahead into 2011 and 2012, industry unit volumes are expected to rebound to 12.5 million and 13.5 million, respectively, according to Citigroup. And that could prove to be conservative. That's because domestic auto makers are starting to take back market share, which means a rising swell of business for the firms that make seats, transmissions, suspensions and the like.

Shares of auto suppliers have rallied sharply in the past year, but remain very reasonably priced in relation to earnings

GM exposure
With GM's successful IPO in the news, customers may start to flock back to the auto maker in droves, now that they see it as healthier. That hasn't been the case recently. Ford announced that October sales rose +19% from a year ago, while many other auto makers also posted double-digit gains. GM saw a more modest +3.5% sales boost in October.

As a self-professed car nut, I had been a big fan of Ford Motor, noting that its new models were compelling and should yield market share gains. [Read my analysis here]

These days, I'm starting to pay closer attention to GM as it starts to build out its impressive new product portfolio. The Buick division is a big hit in China, Cadillac is unveiling a strong set of new cars that can go head-to-head with anything made in Germany, and the Chevy and GMC truck divisions should eventually see a major profit rebound when the U.S. construction industry picks back up.

But rather than buying shares of GM, you might want to focus on the auto parts suppliers with the greatest exposure to this erstwhile titan. Shares of many of these names remain cheap, and a resurgent car market could lead these stocks to nice gains.

Here are a few key names…

If you're talking about GM's pickup trucks, then you're talking about Lear (NYSE: LEA), which makes seats and electrical systems for GM's GMT 900 truck platform. Lear has been on a tear lately, delivering quarterly profits that were more than twice as high as analysts had expected in each of the past two quarters. A -$2.00 a share loss in 2009 is likely to morph into an $8.00 a share profit this year. A little back-of-the-envelope math that assumes industry volume hits 14 million by 2013 could yield earnings per share (EPS) north of $12 for Lear. Shares trade for just seven times that view.

American Axle (NYSE: AXL) has even greater exposure to GM, with more than two- thirds of its business from the company. (It was once an in-house division at GM.) The company makes axles and drivetrains, primarily for large vehicles. The company has also handily exceeded forecasts in each of the past two quarters and also notes that backlog is rising fast. That led JP Morgan to recently upgrade shares to overweight, with a $14 price target — +25% above current levels. Yet the analysts note that shares could surge closer to the $20 mark within a few years as GM's sales volume rebounds. They add that American Axle is on track to boost EBITDA +30% next year to around $370 million, and it could hit $500 million within a few years.

Action to Take –> Tenneco (NYSE: TEN) and Johnson Controls (NYSE: JCI) also have a high degree of exposure to GM. As noted earlier, all of the shares in this sector have rallied throughout 2010, and would be vulnerable to a pullback if auto and truck sales don't continue to rebound in 2011 as many expect.

Stocks in this group appear quite inexpensive, especially in terms of potential EBITDA generation. How auto industry sales fare in the next few years will determine how much more upside these stocks have.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
GM's Back — And So Are These Key Suppliers

Read more here:
GM’s Back — And So Are These Key Suppliers

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Before Hyperinflation Dollar to Become World’s “Weakest Currency”

November 19th, 2010

Yesterday, JPMorgan & Chase Co. reported its anticipated impact of $600 billion in additional quantitative easing on the dollar, which will be devastating. JPMorgan finds it likely loose monetary policy could cause the dollar to collapse below 75 yen and become the weakest of planet’s most-traded currencies.

According to Bloomberg:

“The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets. U.S. policy makers may take additional easing steps following the $600 billion bond-purchase program announced this month depending on inflation and the labor market, he said.

“’The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,’ Sasaki said at a forum in Tokyo yesterday. ‘The dollar can’t avoid the status as the weakest currency.’

“…The U.S. currency has declined against 12 of its 16 most-traded counterparts this year, according to data compiled by Bloomberg.”

Sasaki fingers a widely-shared concern, that the $600 billion QE2 program is quite possibly just the second in a long line of “additional easing steps.” Already QE1 failed to achieve its objectives and yet the Fed’s at it again, implementing a program that cements Bernanke’s ignominious legacy, as DR founder Bill Bonner recently described:

“…the US Federal Reserve said it was creating another $600 billion to buy US Treasury debt. That will mean a total of $2.3 trillion added to America’s monetary footings since the Fed began its QE program almost two years ago. This will also mean that Ben Bernanke has added three times as many dollars to America’s core money supply as ALL THE TREASURY SECRETARIES AND FED CHAIRMEN WHO CAME BEFORE HIM PUT TOGETHER.”

Will the dollar weaken? It seems only possible that it must. You can read more details in Bloomberg’s coverage of how JPMorgan predicts the dollar is set to become the world’s “weakest currency.”

Best,

Rocky Vega,
The Daily Reckoning

Before Hyperinflation Dollar to Become World’s “Weakest Currency” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Before Hyperinflation Dollar to Become World’s “Weakest Currency”




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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Four ETFs To Watch As China Fights Inflation

November 19th, 2010

As inflationary concerns continue to loom in China, the nation’s government is making moves to curb to fight this rise in prices, which could potentially influence the iShares FTSE/Xinhua China 25 Index Fund (FXI), the Global X China Financials ETF (CHIX), the SPDR S&P China ETF (GXC) and the Claymore/AlphaShares China All-Cap ETF (YAO).

In the month of October, the consumer price index in the world’s second largest economy rose to 4.4 percent year over year driven primarily by a 10.1 percent rise in food prices.  This increase in prices has resulted from an influx of money supply in the Chinese economy due to the nation’s expansionary monetary policies which enabled its banks to increase lending. 

A devastating effect of this increase in prices could be a sharp uptick in the basic cost of living which potentially could result in social unrest and mayhem.    To prevent this from emerging, China’s government is raising interest rates, implementing tighter control on bank lending, forcing banks to hold more capital reserves and allowing the Yuan to appreciate faster.   

As China continues to take steps at curbing inflation, potential consequences could be limiting domestic output by producers leading to a shortage in consumer goods and a decline in exports which could put the brakes on China’s overall economic growth, which could influence the aforementioned ETFs.

  • iShares FTSE/Xinhua China 25 Index Fund (FXI), which allocates nearly 47.8% of its assets to the Chinese financial sector
  • Global X China Financials ETF (CHIX), which is a sector specific play on the Chinese financial sector
  • SPDR S&P China ETF (GXC), which allocates 32.36% of its assets to financials and 7.44% to consumer discretionary
  • Guggenheim China All-Cap ETF (YAO), which allocates 33.7% of its assets to financials and nearly 5.5% to consumer discretionary.

Disclosure: No Positions

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Four ETFs To Watch As China Fights Inflation




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