Day Care or Default? – The long-expected decline of an unsustainable economic model

September 28th, 2010

After so much traveling, we’re happy to stay at home this week and do our reckoning here.

This past weekend, we got back from Florida only to depart immediately to a wedding in New York.   The roads are a lot worse in New York than they are in Florida.  Maybe it’s the weather.  Maybe it’s the tax system.  But as you drive up from Maryland, the roads deteriorate as it costs more to drive on them.  You run into more and more potholes and shabby tollbooths as you go north.

That’s not likely to change.  Local governments are going broke.  So are national governments.  The politicians will have to make choices.  Repair the roads…or keep the libraries open?  Day care…or default?

At the wedding was a former Goldman bond trader.  “How long do you think it will be before government debt blows up,” we asked him.  His reply, “no time soon”…more below…

Not much happened on Wall Street yesterday.  The Dow lost 48 points.  Gold went nowhere.

And so far, almost everything that we thought ought to happen is happening.  More or less.  The crisis.  The feds’ reaction.  The market’s lack of reaction to the feds’ over reaction.   Then, the feds’ reaction to the markets failure to react.  One dumb thing begets another.

But so far, government debt market hasn’t blown up.   But even when things happen that we expect, they don’t necessarily happen the way we think they ought to or when we think they should.

We’ve had the crisis we expected.  Then, the feds poured good money in after bad…as expected.   They said the economy would ‘recover.’  Of course, the economy would do no such thing.  Instead, it has only just begun its “Great Correction”  – with high unemployment, falling house prices and treacherous asset markets.  And now Obama and Congress are paralyzed by upcoming elections.  And Ben Bernanke is thinking about Plan B…and hoping it won’t be necessary.

Unemployment is really far worse than the ‘official’ numbers suggest.  The feds take people off the unemployment roles if they go too long without finding another job.  In that regard, this slump is the worst ever.  People wait longer than ever before to find another job.  So more of them slip off the jobless tally before they ever find work.  They are disappeared by fed statisticians.  We haven’t done the numbers ourselves but John Williams of ShadowStats tells us that if they still did the figures the way they did before Clinton-era “adjustments,” we’d have an unemployment rate between 15% and 17%.

Gradually the financial media and investors are catching on.  They’re beginning to realize that this was no ordinary recession…and there won’t be any ordinary recovery either.

The New York Times brought the story to readers this weekend:

“In the old days — before 1990 — American recessions tended to be fairly sharp. But the recoveries, when they came, were also rapid. Laid-off workers were recalled and consumers who had deferred purchases out of fear they might lose their jobs were willing again to buy cars and homes.

“The newer version of recessions — in 1990-91 and 2001 — provided shallower downturns. But the aftermath was also slow and painful. They came to be known as jobless recoveries.

“The National Bureau of Economic Research determined this week that the recession that began in December 2007 ended in June 2009. That made it the longest downturn since World War II, and data had already shown it was the deepest in terms of decline in gross domestic product.

“And now that we know the recovery is more than a year old, it appears that this cycle is combining the worst of both worlds: deep fall followed by slow recovery.”

“There are some aspects of this cycle that have no direct precedent. One is the performance of service industries. For most of the years after World War II, the United States economy became more and more oriented toward service jobs, and both employment and spending rose, whatever the state of the rest of the economy. But this time service businesses suffered, and they have been slow to recover.

“That is particularly true for the industry that bears the most blame for the recession — financial services. The big banks were bailed out — Lehman Brothers excepted — but employment fell sharply during the recession and has continued to decline.

“Another area that is weaker than in previous recoveries is the condition of state and local governments. Working for them was always considered safe, if not particularly rewarding. Neither of the two recessions before the latest one had any significant impact on those jobs.

But in this cycle, governments are facing severe budget shortfalls, and layoffs are accelerating.”

What kind of cruel fate is this, dear reader…when even the zombies on the public payroll aren’t safe from layoffs?  Have the gods turned against us?

And more thoughts…

The Great Correction is good news, as far as we’re concerned.   Finally, the financial gods are kicking the right butts.  You can’t really get rich by spending money.  And you can’t really create prosperity by building houses for people who can’t afford to pay for them.  So to the Bubble Epoque, we say: ‘Goodbye and Good Riddance.”

America needs a correction; it’s getting one.  It was wasting too much of its resources on phony, unsustainable ‘growth,’ while actually going deep into debt.

Why was it doing that?  Well…blame Alan Greenspan…blame the Fed…blame the US Treasury…blame Richard Nixon…blame Milton Friedman and John Maynard Keynes.  They all had a hand in it.

We’re beginning to see more clearly how economists and the feds connived and conspired to rig the system.  The dollar-based monetary system they created has a huge bias towards debt and inflation.  Almost everyone likes it.  And the others don’t know what’s happening anyway…  But has any pure paper money ever survived an entire credit cycle – from the boom years through the bust years – intact?  Nope.  Never.

And now the Great Correction has begun.  And the serious question is: how much of this scam is it going to correct?

We don’t know.  But there’s a lot to be corrected.

*** “Well, I think the bond market is the most misunderstood market in the world.  Everybody is talking about how bonds are the worst place for your money.  But I think they are the best place for your money.”

Speaking was one of the best bond traders in the US.  At least, that was the judgment of other bond traders and industry experts.  We wanted to know more…

“Some of the best investments you can make now are in the bonds of places such as Ireland and Greece.  Everyone thinks they’re going broke.  But they’re not.  The European Central Bank will give them the money to make their payments.  They’re not going to default.

“That’s what is great about bonds.  We’re entering a difficult period for the world economy.  There is simply too much capacity.  This correction is going to take a long time.  People are worried about defaults on sovereign debt?  They can forget about it.  Neither Europe nor America will default.  The central banks won’t let them.  Instead, they will announce a program of long-term deficit reduction.  In return for correcting structural budget problems, European nations will get the money they need to meet their obligations.  These will be pure cash “awards,” not debt.  So their debt won’t increase.  Bond investors won’t have anything to worry about.

“I don’t know if they will actually correct their long-term finances or not.  It depends on the growth rate.  If they can grow their economies fast enough, they may not have a problem.  But whatever problem it is, it is far in the future.  In the meantime, these sovereign bonds will go up.  Because the payers won’t default.  And everything else will go down.  Want some good advice?  Buy bonds.”

Regards,

Bill Bonner,
for The Daily Reckoning

Day Care or Default? – The long-expected decline of an unsustainable economic model 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:
Day Care or Default? – The long-expected decline of an unsustainable economic model




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.

Uncategorized

Flip-Flops-On-The-Ground Research

September 28th, 2010

“Brazil is blessed with enormous reserves of the metals and minerals essential to modern manufacturing… Coal may be the only substance vital to industrial production that is in short supply.”

~ Larry Rohter, Brazil on the Rise: The Story of a Country Transformed

As I write, I’m in Florianopolis, the capital of the state of Santa Catarina, in southern Brazil. “Floripa,” as it is known, is on the landward side of an island, where it can shelter ships from the brunt of the Atlantic Ocean’s powers. Our guide tells us that Portuguese colonists settled here in the 17th century, looking for gold.

They didn’t find gold, but Floripa has become a favorite spot for wealthy Brazilians. We are staying at a resort on Jurere Beach, which is one of 42 beaches on this 200-square-mile island. Jurere is the best one, apparently, having won a number of awards. Jurere is where the rich stay when they come, and we saw some monster houses that looked like beached cruise ships — one even had a helipad.

This is the southernmost part of our four-city tour through Brazil. We came to Floripa to look at a new project by a group called Txai (pronounced “chai,” like the tea). It is a spectacular piece of property. This project will be open to individuals to buy bungalows, lofts and more.

In the video below, Barb Perriello and I do some boots-on-the-ground investing — or, in this case, flip-flops on the ground — as we check out the views on our way to the beach:

But our topic today is fertilizer. In Sao Paulo last week, I gave a short presentation to a group of readers about a few attractive Brazilian investment themes. I talked about the expanding middle class, which is driving the need for new housing. I talked about Brazil’s dominant position in the global meat trade. I also talked about the case for hard coking coal (also known as met coal)…and about fertilizer.

Brazil, like most emerging markets, needs much more fertilizer than it produces for itself.

Fertilizer demand is also soaring throughout all the large emerging markets. Companhia Vale Do Rio Doce, “Vale,” (NYSE: RIO) is a large Brazilian company that offers a glimpse into Brazilian demand for both coal and fertilizer.

Last Friday, Vale announced that it planned to sell its fertilizer assets in an IPO in the first half of 2011. (Vale will likely retain a stake in the company, but how much is not clear yet.) Vale Fertilizantes, which is the name of the new fertilizer company, will hold all of Vale’s fertilizer assets. Vale is doing this to create value for Vale shareholders by drawing more attention to these things, which are the second biggest revenue generator for Vale, after its more famous iron ore mines.

Vale Fertilizantes has many of Brazil’s best fertilizer assets, which is key because Brazil also imports most of its fertilizer needs. Take a look at this chart:

You can see that Brazil depends on the rest of the world for its fertilizer needs, which keep its mighty agricultural production humming. In particular, note the lack of domestic potash, with 93% of Brazil’s needs coming from outside of the country.

Vale has some good assets outside of Brazil, too. It has, for example, the Bayovar mine in Peru (a joint venture with Mosaic), which is one of the largest phosphate deposits in South America. It also has potash projects in Saskatchewan and Argentina (though I’m not sure how good its deposit is in Argentina. I have my doubts).

In any event, I’m fascinated by the IPO and will keep you posted. Investors may soon have another choice in potash producers. Vale is looking to boost its production of potash tenfold by 2017, which would put it behind only PotashCorp and Mosaic.

In a bigger-picture sense, both of these commodities fit under a broader theory that you will do well to invest in the commodities that the big emerging markets are short of. China, India and Brazil import both hard coking coal and potash — and it looks likely they will import a lot more over the next decade.

Regards,

Chris Mayer,
for The Daily Reckoning

Flip-Flops-On-The-Ground Research 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:
Flip-Flops-On-The-Ground Research




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.

Commodities, Uncategorized

Flip-Flops-On-The-Ground Research

September 28th, 2010

“Brazil is blessed with enormous reserves of the metals and minerals essential to modern manufacturing… Coal may be the only substance vital to industrial production that is in short supply.”

~ Larry Rohter, Brazil on the Rise: The Story of a Country Transformed

As I write, I’m in Florianopolis, the capital of the state of Santa Catarina, in southern Brazil. “Floripa,” as it is known, is on the landward side of an island, where it can shelter ships from the brunt of the Atlantic Ocean’s powers. Our guide tells us that Portuguese colonists settled here in the 17th century, looking for gold.

They didn’t find gold, but Floripa has become a favorite spot for wealthy Brazilians. We are staying at a resort on Jurere Beach, which is one of 42 beaches on this 200-square-mile island. Jurere is the best one, apparently, having won a number of awards. Jurere is where the rich stay when they come, and we saw some monster houses that looked like beached cruise ships — one even had a helipad.

This is the southernmost part of our four-city tour through Brazil. We came to Floripa to look at a new project by a group called Txai (pronounced “chai,” like the tea). It is a spectacular piece of property. This project will be open to individuals to buy bungalows, lofts and more.

In the video below, Barb Perriello and I do some boots-on-the-ground investing — or, in this case, flip-flops on the ground — as we check out the views on our way to the beach:

But our topic today is fertilizer. In Sao Paulo last week, I gave a short presentation to a group of readers about a few attractive Brazilian investment themes. I talked about the expanding middle class, which is driving the need for new housing. I talked about Brazil’s dominant position in the global meat trade. I also talked about the case for hard coking coal (also known as met coal)…and about fertilizer.

Brazil, like most emerging markets, needs much more fertilizer than it produces for itself.

Fertilizer demand is also soaring throughout all the large emerging markets. Companhia Vale Do Rio Doce, “Vale,” (NYSE: RIO) is a large Brazilian company that offers a glimpse into Brazilian demand for both coal and fertilizer.

Last Friday, Vale announced that it planned to sell its fertilizer assets in an IPO in the first half of 2011. (Vale will likely retain a stake in the company, but how much is not clear yet.) Vale Fertilizantes, which is the name of the new fertilizer company, will hold all of Vale’s fertilizer assets. Vale is doing this to create value for Vale shareholders by drawing more attention to these things, which are the second biggest revenue generator for Vale, after its more famous iron ore mines.

Vale Fertilizantes has many of Brazil’s best fertilizer assets, which is key because Brazil also imports most of its fertilizer needs. Take a look at this chart:

You can see that Brazil depends on the rest of the world for its fertilizer needs, which keep its mighty agricultural production humming. In particular, note the lack of domestic potash, with 93% of Brazil’s needs coming from outside of the country.

Vale has some good assets outside of Brazil, too. It has, for example, the Bayovar mine in Peru (a joint venture with Mosaic), which is one of the largest phosphate deposits in South America. It also has potash projects in Saskatchewan and Argentina (though I’m not sure how good its deposit is in Argentina. I have my doubts).

In any event, I’m fascinated by the IPO and will keep you posted. Investors may soon have another choice in potash producers. Vale is looking to boost its production of potash tenfold by 2017, which would put it behind only PotashCorp and Mosaic.

In a bigger-picture sense, both of these commodities fit under a broader theory that you will do well to invest in the commodities that the big emerging markets are short of. China, India and Brazil import both hard coking coal and potash — and it looks likely they will import a lot more over the next decade.

Regards,

Chris Mayer,
for The Daily Reckoning

Flip-Flops-On-The-Ground Research 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:
Flip-Flops-On-The-Ground Research




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.

Commodities, Uncategorized

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”

September 28th, 2010

Better-than-expected is not the same thing as good…

Last Sunday, the offense-challenged Buffalo Bills scored an impressive 30 points against the mighty New England Patriots. Thirty points was double the Bills’ per-game point total from last season, and also double the Patriots’ points-allowed total from last season. So thirty points was definitely much better than expected.

The Bills lost the game – 30 to 38.

Last week, the growth-challenged U.S economy posted a 2% growth in durable goods orders for August and a 7.6% jump in existing home sales. Both reports were better-than-expected. And the stock market welcomed the news with a much better-than-expected response. But the economy is still losing the game.

During the last few weeks, the banter from the financial news play-by-play analysts has upticked from despondent pessimism to cautious optimism. The threat of a double-dip recession is receding, the analysts say, and the economy is slowly recovering.

But is it?

The only problem with cautious optimism is the optimism part. The caution is warranted. The better-than-expected durable goods orders, for example, were still pretty dismal – today’s durable goods orders remain lower than they were five years ago and much lower than they were three years ago.

True enough, say the Wall Street analysts, but you’ve got to look at capital goods orders – the subset of the capital good reports that, in the words of the Associated Press, “is considered a good proxy for business investment planning.”

Okay, so let’s look. What we see is a data series that has bounced off the bottom of very depressed levels, but is stalling well below optimal levels.

Existing homes sales also came in better-then-expected, or “above consensus,” as the Wall Street folks like to say. According to a survey of Wall Street economists, existing homes sales were supposed to increase 7.1% from July’s record-low sales number. Instead, sales jumped a better-than-expected 7.6%…to the second-worst level of the past ten years.

Maybe the economy is improving, but the better-than-expected reports that have been crossing the newswires lately are very far from good. The chart below shows one very clear picture of the difference between better-than-expected and genuinely good.

Here in the U.S., existing home sales have rebounded from disastrous to merely awful. Meanwhile, down in the booming Brazilian economy, home sales have progressed from strong to stronger.

These contrasting housing market trends correlate very closely with the contrasting trends of U.S. and Brazilian economic growth. During the last three years, the U.S. economy has produced zero net GDP growth. The Brazilian economy, meanwhile, has grown about 4% per year. This contrast offers just one glimpse into the compelling investment profile of Brazil…and of the Emerging Markets in general.

Last week, your editors here at the Daily Reckoning extolled the virtues of Emerging Market economies and investments. Continuing this theme in today’s edition of the Daily Reckoning, Chris Mayer, editor of Mayer’s Special Situations, provides a few thoughts on Brazil…from Brazil.

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” 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:
The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”




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.

Uncategorized

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”

September 28th, 2010

Better-than-expected is not the same thing as good…

Last Sunday, the offense-challenged Buffalo Bills scored an impressive 30 points against the mighty New England Patriots. Thirty points was double the Bills’ per-game point total from last season, and also double the Patriots’ points-allowed total from last season. So thirty points was definitely much better than expected.

The Bills lost the game – 30 to 38.

Last week, the growth-challenged U.S economy posted a 2% growth in durable goods orders for August and a 7.6% jump in existing home sales. Both reports were better-than-expected. And the stock market welcomed the news with a much better-than-expected response. But the economy is still losing the game.

During the last few weeks, the banter from the financial news play-by-play analysts has upticked from despondent pessimism to cautious optimism. The threat of a double-dip recession is receding, the analysts say, and the economy is slowly recovering.

But is it?

The only problem with cautious optimism is the optimism part. The caution is warranted. The better-than-expected durable goods orders, for example, were still pretty dismal – today’s durable goods orders remain lower than they were five years ago and much lower than they were three years ago.

True enough, say the Wall Street analysts, but you’ve got to look at capital goods orders – the subset of the capital good reports that, in the words of the Associated Press, “is considered a good proxy for business investment planning.”

Okay, so let’s look. What we see is a data series that has bounced off the bottom of very depressed levels, but is stalling well below optimal levels.

Existing homes sales also came in better-then-expected, or “above consensus,” as the Wall Street folks like to say. According to a survey of Wall Street economists, existing homes sales were supposed to increase 7.1% from July’s record-low sales number. Instead, sales jumped a better-than-expected 7.6%…to the second-worst level of the past ten years.

Maybe the economy is improving, but the better-than-expected reports that have been crossing the newswires lately are very far from good. The chart below shows one very clear picture of the difference between better-than-expected and genuinely good.

Here in the U.S., existing home sales have rebounded from disastrous to merely awful. Meanwhile, down in the booming Brazilian economy, home sales have progressed from strong to stronger.

These contrasting housing market trends correlate very closely with the contrasting trends of U.S. and Brazilian economic growth. During the last three years, the U.S. economy has produced zero net GDP growth. The Brazilian economy, meanwhile, has grown about 4% per year. This contrast offers just one glimpse into the compelling investment profile of Brazil…and of the Emerging Markets in general.

Last week, your editors here at the Daily Reckoning extolled the virtues of Emerging Market economies and investments. Continuing this theme in today’s edition of the Daily Reckoning, Chris Mayer, editor of Mayer’s Special Situations, provides a few thoughts on Brazil…from Brazil.

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” 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:
The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.”




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.

Uncategorized

A Hazard of Buying Bond Funds Now

September 28th, 2010

Nilus Mattive

A number of us here at Weiss have been warning you about the dangers of buying bonds in this ultra-low-interest-rate environment, especially longer-dated U.S. Treasuries.

But as I recently told my Dad’s Income Portfolio subscribers, I think mainstream investors are still ignoring the risks they’re taking with bonds, particularly when it comes to fixed-income mutual funds and exchange-traded funds.

And this topic is so important that I want to explore it a little more today with you. After all …

Investors Have Been Snapping Up
Bond Funds at a Record Pace Lately

According to the Investment Company Institute, investors were net sellers of stock market mutual funds in the first seven months of this year, withdrawing more than $30 billion.

At the same time, they plowed a net $273 billion just into taxable bond funds!

Now, as I’ve told you before in these pages, there are myriad problems with allocating a large portion of new money to bonds in this environment:

First, you are essentially locking in historically low interest rates.

Second, your bond’s yield has zero chance of ever going up.

Third, if interest rates rise or the investment herd suddenly sours on bonds for some other reason, you can experience capital losses, too!

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

IN FOCUS: WisdomTree Emerging Markets Local Debt Fund (ELD)

September 28th, 2010

Date Launched: Aug 9, 2010

Further Links: Website, Prospectus

Investment Strategy:

ELD is an actively-managed ETF that tries to achieve its investment objective of income and capital appreciation by investing at least 80% of assets into local debt denominated in emerging market currencies. The fixed income securities the fund will invest in will be issued by emerging market governments, government agencies and corporations. The likely countries where the fund will invest include Brazil, Chile, Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, South Korea, Thailand and Turkey. The fund will allocate more investments to countries with larger and more liquid debt markets and the exposure to any single country is limited to 20%. ELD’s investments will span across investment-grade and non-investment-grade securities, with average portfolio duration between 2-7 years.

Portfolio Managers:

Mellon Capital Management will be the sub-advisor to the fund. Mellon Capital has assets of about $170 billion under management. Day-to-day management will be conducted by the following portfolio managers:

David C. Kwan – Managing Director at Mellon Capital since 2000. He has also been Head of the Fixed Income Management Group since 1994 and has 18 years of investment experience.

Lisa Mears O’Connor – Managing Director at Mellon Capital since 2010. She manages Mellon Capital’s active fixed income team and has over 17 years of investment experience.

The Numbers:

Expense Ratio – 0.55%.

Average Volume – 181,176 shares

Average bid-ask spread: 0.14%

What’s special about it?

1. First off, what makes ELD within the Active ETF space is that it is the only fund to provide exposure to fixed-income instruments outside of the United States and specifically in emerging markets.

2. Another important differentiating point for ELD, compared to other ETFs that provide exposure to emerging market debt, is that ELD invests in local currency denominated debt, as opposed to USD denominated debt.

Analysis:

Positives –

- Many emerging economies are currently on a much more solid footing than the developed markets, thanks primarily to lower sovereign debt loads and better overall fiscal health. As such, investing in emerging market debt provides an important diversifying option to investors who might have most of their fixed-income holdings concentrated in developed economies.

- The fact that ELD invests in debt denominated in local currency rather than in USD means that investors are able to get exposure to two systematic factors. First is the credit exposure to foreign sovereigns and second is the currency exposure to that currency. So the fund will help investors diversify not only their debt exposure away from developed country debt but also their currency exposure, away from the USD.

- Active management of the portfolio will also play a factor because not all emerging market sovereigns will be equally credit worth and in-depth credit analysis would be very necessary to identify the fundamentally strong issuers from the weak ones. This compares well with a passive emerging market ETF that would own all issues that are part of the index it follows, whether good or bad.

Negatives –

- Naturally, as with any sort of exposure to emerging markets, ELD’s investments come with the risk of volatility and strong declines, especially when there is flight to quality akin to what happened in late 2008.

ETF

How to Profit from North America’s New Oil Boom

September 28th, 2010

How to Profit from North America's New Oil Boom

Any casual observer of the energy markets is probably aware that during the past two years, a bit of dichotomy has developed between natural gas and crude oil.

On the one hand you have a global commodity — a transportation fuel whose price has been well-supported by robust demand from emerging markets such as China. On the other hand you have a domestic fuel, consumed primarily to satisfy heating and cooling needs.

If you haven't already guessed, the global fuel is crude oil, while the domestic fuel is natural gas.

The stark differences between oil and gas don't stop there. Indeed, crude oil has always been a global commodity, while natural gas has always been a domestic commodity. What has changed is the outlook for energy supply. Oil is becoming ever-scarcer and more expensive to extract. Highlighted by the latest BP Gulf of Mexico disaster, companies have to go to more and more challenging environments to find and produce oil. In the case of natural gas, breakthroughs in technology, specifically with regard to horizontal drilling and hydraulic fracturing, have enabled producers to find and exploit vast new resources which were not considered economically viable in the past.

As one might expect, the combination of strong emerging market demand and scarce supply has served to keep crude oil prices relatively high, while the abundant supply picture for natural gas has considerably weakened prices for the fuel. The oil to gas ratio, which measures how expensive oil prices are relative to natural gas prices, has recently been fluctuating between 15 and 20, compared the 10-year average of 9.3. The ratio, which serves little practical purpose due to the inability for oil consumers (drivers such as you and me, for instance) to switch to natural gas, is nevertheless a good illustration of the new landscape of the energy sector.

What if investors could take advantage of this paradigm shift? Recall that natural gas supply has grown enormously in large part due to advances in drilling technology. What if companies could harness this new technology to find and produce more oil?

That brings us to EOG Resources (NYSE: EOG), a leader in the new, early-stage North American oil boom. The company has accumulated vast holdings of oil shale in places such as the Bakken, Barnett Combo, and Eagle Ford shale fields, among others. For those familiar with the various natural gas shale formations, some of those names may sound familiar. That's because, in addition to oil, these plays contain enormous amounts of natural gas. In fact, the Barnett Shale is currently the largest natural gas producing field in the United States. But while other companies were busy searching for more natural gas within these and other plays, EOG was searching for oil, in large part because management anticipated the weakening of gas fundamentals.

EOG estimates that it has accumulated resource potential of nearly 1.7 billion barrels of oil equivalent in addition to 29 trillion cubic feet of natural gas. While the company is still predominantly a natural gas producer, it is rapidly transforming into an oil producer, and is set to benefit from the resulting higher margins from this transition. Overall production growth during the next two years will average +20%, while oil production growth will average +52.5%. Notably, liquids production (oil plus NGLs) will represent nearly 46% of total production in 2012, up from 22% in 2009.

Action to Take –> EOG's impressive growth in oil production should translate into equally impressive returns for shareholders. Total production growth of +44% in the next two years combined with higher margins from a greater proportion of oil output, means that operating cash flow may increase as much as +77% in this time period. Importantly, these figures are based on a flat $75/bbl oil and $5/mcf gas price deck. Furthermore, the company maintains a pristine balance sheet, with only $14 a share in debt, for a debt-to-capitalization ratio of 15.7%.

The market has yet to adequately price these robust fundamentals into EOG's shares. The firm is valued at a mere four times 2012 debt-adjusted cash flow versus the peer group average of 5.9. That's a +66% return if the stock were to just catch up to the sector average. If anything, EOG should be trading at a premium valuation due to its above-average growth and vast holdings of oil resources. Investors should consider adding EOG Resources to their portfolios before the market wises up.

– StreetAuthority Contributor
Sumit Roy

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

This article originally appeared on StreetAuthority
Author: Sumit Roy
How to Profit from North America's New Oil Boom

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How to Profit from North America’s New Oil Boom

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How to Profit from North America’s New Oil Boom

September 28th, 2010

How to Profit from North America's New Oil Boom

Any casual observer of the energy markets is probably aware that during the past two years, a bit of dichotomy has developed between natural gas and crude oil.

On the one hand you have a global commodity — a transportation fuel whose price has been well-supported by robust demand from emerging markets such as China. On the other hand you have a domestic fuel, consumed primarily to satisfy heating and cooling needs.

If you haven't already guessed, the global fuel is crude oil, while the domestic fuel is natural gas.

The stark differences between oil and gas don't stop there. Indeed, crude oil has always been a global commodity, while natural gas has always been a domestic commodity. What has changed is the outlook for energy supply. Oil is becoming ever-scarcer and more expensive to extract. Highlighted by the latest BP Gulf of Mexico disaster, companies have to go to more and more challenging environments to find and produce oil. In the case of natural gas, breakthroughs in technology, specifically with regard to horizontal drilling and hydraulic fracturing, have enabled producers to find and exploit vast new resources which were not considered economically viable in the past.

As one might expect, the combination of strong emerging market demand and scarce supply has served to keep crude oil prices relatively high, while the abundant supply picture for natural gas has considerably weakened prices for the fuel. The oil to gas ratio, which measures how expensive oil prices are relative to natural gas prices, has recently been fluctuating between 15 and 20, compared the 10-year average of 9.3. The ratio, which serves little practical purpose due to the inability for oil consumers (drivers such as you and me, for instance) to switch to natural gas, is nevertheless a good illustration of the new landscape of the energy sector.

What if investors could take advantage of this paradigm shift? Recall that natural gas supply has grown enormously in large part due to advances in drilling technology. What if companies could harness this new technology to find and produce more oil?

That brings us to EOG Resources (NYSE: EOG), a leader in the new, early-stage North American oil boom. The company has accumulated vast holdings of oil shale in places such as the Bakken, Barnett Combo, and Eagle Ford shale fields, among others. For those familiar with the various natural gas shale formations, some of those names may sound familiar. That's because, in addition to oil, these plays contain enormous amounts of natural gas. In fact, the Barnett Shale is currently the largest natural gas producing field in the United States. But while other companies were busy searching for more natural gas within these and other plays, EOG was searching for oil, in large part because management anticipated the weakening of gas fundamentals.

EOG estimates that it has accumulated resource potential of nearly 1.7 billion barrels of oil equivalent in addition to 29 trillion cubic feet of natural gas. While the company is still predominantly a natural gas producer, it is rapidly transforming into an oil producer, and is set to benefit from the resulting higher margins from this transition. Overall production growth during the next two years will average +20%, while oil production growth will average +52.5%. Notably, liquids production (oil plus NGLs) will represent nearly 46% of total production in 2012, up from 22% in 2009.

Action to Take –> EOG's impressive growth in oil production should translate into equally impressive returns for shareholders. Total production growth of +44% in the next two years combined with higher margins from a greater proportion of oil output, means that operating cash flow may increase as much as +77% in this time period. Importantly, these figures are based on a flat $75/bbl oil and $5/mcf gas price deck. Furthermore, the company maintains a pristine balance sheet, with only $14 a share in debt, for a debt-to-capitalization ratio of 15.7%.

The market has yet to adequately price these robust fundamentals into EOG's shares. The firm is valued at a mere four times 2012 debt-adjusted cash flow versus the peer group average of 5.9. That's a +66% return if the stock were to just catch up to the sector average. If anything, EOG should be trading at a premium valuation due to its above-average growth and vast holdings of oil resources. Investors should consider adding EOG Resources to their portfolios before the market wises up.

– StreetAuthority Contributor
Sumit Roy

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

This article originally appeared on StreetAuthority
Author: Sumit Roy
How to Profit from North America's New Oil Boom

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How to Profit from North America’s New Oil Boom

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Is This Well-Known Media Stock Worth a Second Look?

September 28th, 2010

Is This Well-Known Media Stock Worth a Second Look?

In the debate between growth and value investors, it's usually a contest between high growth and higher valuations and low growth and very low valuations. But what should investors do with a company that is seeing revenue and cash flow actually shrink? It's been a longstanding question dogging the newspaper industry.

In a worst-case scenario, cash flow turns outright negative and bankruptcy has been the only option. For the New York Times Co. (NYSE: NYT) and Gannett (NYSE: GCI), things have not been quite that dire, and bankruptcy is quite unlikely. But is there any reason to search for value in these industry survivors? The short answer: a qualified yes.

In this piece, I'll focus squarely on the New York Times, although many of the conclusions may apply to Gannett as well. There's no need to re-hash all of the twists and turns at the Times, but it's helpful to pit the positives against the negatives.

The positives:

  • Rising national market share as regional rivals sharply re-trench and cede important national coverage to The New York Times and a few other outlets
  • A strong and growing web presence thanks to nytimes.com and about.com
  • Sharply falling newsprint prices, thanks to falling demand
  • Activist investors barking at the door
  • Perceived trophy status, thanks to a still-strong brand

The negatives:

  • A virtual implosion on the classified ad market that is unlikely to ever rebound
  • A website that is so good that it is cannibalizing circulation sales, especially since it is 100% cheaper than the print version
  • Far lower online ad rates when compared to print ad rates
  • A decision by advertisers to move toward online and broadcast outlets
  • Still high-fixed costs, thanks to an extensive and well-compensated newsroom
  • A continuing drop in media buyout values, as evidenced by the fact that Washington Post Co. (NYSE: WPO) recently sold Newsweek for pocket change.

Investors chose to focus on the investment positives in 2009, as shares rose from a low of $4 to $14. But the long-term concerns again rule the roost, and shares have lost nearly half of their value in the past eight months. Where shares go from here hinges on a bold experiment that will get underway in January. That's when The New York Times will throw up a wall and start charging for full access to its website.

It has become conventional wisdom that online versions of newspapers must be free. But as News Corp.'s The Wall Street Journal has proven, you can have it both ways. Online readers of the WSJ get a discounted rate for the print version, largely to reflect the savings associated with printing and distribution. Recall that Rupert Murdoch floated plans to make the online version of the WSJ free to boost traffic and ad rates, but that never happened. Murdoch soon realized that online advertising can never match circulation revenue.

Of course, the Times already tried to charge for content once by putting its editorial page writers behind a wall. That half-hearted attempt was a mistake and led readers to only consume the remaining 85% of daily content that was still open to the public.

In a world where The New York Times remains a must-read for New Yorkers and an increasingly important source of news for those outside the New York area as well, the paper will find that it remains indispensable. For that matter, according to Alexa.com, 35% of all NYT online readers come from outside the U.S., where physical delivery isn't even an option.

Let's do the math. The New York Times has roughly 12 to 15 million unique visitors to its site in any given month. As the paper will allow partial free access to casual surfers, traffic and ad revenue can remain at reasonable levels. Let's assume that only 500,000 readers are willing to pay $100 a year for full online access (which is the same price as the online WSJ). That works out to be $50 million in incremental revenue. The math is similar if the NYT charges $50/year and gets one million subscribers. These numbers are simply a guess at this point. And that $50 million may not cut it in light of lost revenue on the print side.

Maybe these estimates are too conservative. How many of us will be willing to pay? I know I will, as I cannot survive without my daily fix of what is still arguably the best news media organization in the world. But the analogy to The Wall Street Journal's WSJ.com may not apply. That publication is a must-read in the business community and subscriptions are often covered by employers. That won't be the case with nytimes.com.

We'll soon find out what kind of demand exists for a paid online subscription. In a best-case scenario, subscriptions exceed what are now fairly low expectations and the nytimes.com becomes quite profitable (especially when you consider that it has no printing and delivery costs). Indeed, the initiative would have to be so profitable that it more than offsets the lost revenue from print subscriptions that are cannibalized. And that's no sure thing.

In a worst-case scenario, response is tepid and subscription levels are below forecasts even as traffic to the site plummets, killing online ad revenue. Right now, analysts are modeling for a modest fall in profits next year, largely due to rebounding newsprint prices. Few expect to see a return to the last few years, when sales fell -3%, -8% and -17% in 2007, 2008 and 2009, but it's not clear that assumptions of flat revenue for the next few years are reasonable. That's why shares have sold off and trade for less than four times projected 2011 EBITDA. It is very rare that a company with such a strong brand and market share to trade that cheaply. Then again, being the best house in a very bad neighborhood is nothing to brag about.

Action to Take –> Despite these obvious negatives, investors need to closely watch this coming experiment. It will likely be a number of months before we can draw firm conclusions, but the New York Times Co. is one of the few media companies that can possibly effectively monetize its content online.

If shares fall further, closer to the $5 mark, then shares would be extremely tempting considering that this newspaper publisher still throws off more than $100 million in annual free cash flow. At that price, the drumbeat of activist investors and deal-makers would grow larger.


– 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
Is This Well-Known Media Stock Worth a Second Look?

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Is This Well-Known Media Stock Worth a Second Look?

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Is This Well-Known Media Stock Worth a Second Look?

September 28th, 2010

Is This Well-Known Media Stock Worth a Second Look?

In the debate between growth and value investors, it's usually a contest between high growth and higher valuations and low growth and very low valuations. But what should investors do with a company that is seeing revenue and cash flow actually shrink? It's been a longstanding question dogging the newspaper industry.

In a worst-case scenario, cash flow turns outright negative and bankruptcy has been the only option. For the New York Times Co. (NYSE: NYT) and Gannett (NYSE: GCI), things have not been quite that dire, and bankruptcy is quite unlikely. But is there any reason to search for value in these industry survivors? The short answer: a qualified yes.

In this piece, I'll focus squarely on the New York Times, although many of the conclusions may apply to Gannett as well. There's no need to re-hash all of the twists and turns at the Times, but it's helpful to pit the positives against the negatives.

The positives:

  • Rising national market share as regional rivals sharply re-trench and cede important national coverage to The New York Times and a few other outlets
  • A strong and growing web presence thanks to nytimes.com and about.com
  • Sharply falling newsprint prices, thanks to falling demand
  • Activist investors barking at the door
  • Perceived trophy status, thanks to a still-strong brand

The negatives:

  • A virtual implosion on the classified ad market that is unlikely to ever rebound
  • A website that is so good that it is cannibalizing circulation sales, especially since it is 100% cheaper than the print version
  • Far lower online ad rates when compared to print ad rates
  • A decision by advertisers to move toward online and broadcast outlets
  • Still high-fixed costs, thanks to an extensive and well-compensated newsroom
  • A continuing drop in media buyout values, as evidenced by the fact that Washington Post Co. (NYSE: WPO) recently sold Newsweek for pocket change.

Investors chose to focus on the investment positives in 2009, as shares rose from a low of $4 to $14. But the long-term concerns again rule the roost, and shares have lost nearly half of their value in the past eight months. Where shares go from here hinges on a bold experiment that will get underway in January. That's when The New York Times will throw up a wall and start charging for full access to its website.

It has become conventional wisdom that online versions of newspapers must be free. But as News Corp.'s The Wall Street Journal has proven, you can have it both ways. Online readers of the WSJ get a discounted rate for the print version, largely to reflect the savings associated with printing and distribution. Recall that Rupert Murdoch floated plans to make the online version of the WSJ free to boost traffic and ad rates, but that never happened. Murdoch soon realized that online advertising can never match circulation revenue.

Of course, the Times already tried to charge for content once by putting its editorial page writers behind a wall. That half-hearted attempt was a mistake and led readers to only consume the remaining 85% of daily content that was still open to the public.

In a world where The New York Times remains a must-read for New Yorkers and an increasingly important source of news for those outside the New York area as well, the paper will find that it remains indispensable. For that matter, according to Alexa.com, 35% of all NYT online readers come from outside the U.S., where physical delivery isn't even an option.

Let's do the math. The New York Times has roughly 12 to 15 million unique visitors to its site in any given month. As the paper will allow partial free access to casual surfers, traffic and ad revenue can remain at reasonable levels. Let's assume that only 500,000 readers are willing to pay $100 a year for full online access (which is the same price as the online WSJ). That works out to be $50 million in incremental revenue. The math is similar if the NYT charges $50/year and gets one million subscribers. These numbers are simply a guess at this point. And that $50 million may not cut it in light of lost revenue on the print side.

Maybe these estimates are too conservative. How many of us will be willing to pay? I know I will, as I cannot survive without my daily fix of what is still arguably the best news media organization in the world. But the analogy to The Wall Street Journal's WSJ.com may not apply. That publication is a must-read in the business community and subscriptions are often covered by employers. That won't be the case with nytimes.com.

We'll soon find out what kind of demand exists for a paid online subscription. In a best-case scenario, subscriptions exceed what are now fairly low expectations and the nytimes.com becomes quite profitable (especially when you consider that it has no printing and delivery costs). Indeed, the initiative would have to be so profitable that it more than offsets the lost revenue from print subscriptions that are cannibalized. And that's no sure thing.

In a worst-case scenario, response is tepid and subscription levels are below forecasts even as traffic to the site plummets, killing online ad revenue. Right now, analysts are modeling for a modest fall in profits next year, largely due to rebounding newsprint prices. Few expect to see a return to the last few years, when sales fell -3%, -8% and -17% in 2007, 2008 and 2009, but it's not clear that assumptions of flat revenue for the next few years are reasonable. That's why shares have sold off and trade for less than four times projected 2011 EBITDA. It is very rare that a company with such a strong brand and market share to trade that cheaply. Then again, being the best house in a very bad neighborhood is nothing to brag about.

Action to Take –> Despite these obvious negatives, investors need to closely watch this coming experiment. It will likely be a number of months before we can draw firm conclusions, but the New York Times Co. is one of the few media companies that can possibly effectively monetize its content online.

If shares fall further, closer to the $5 mark, then shares would be extremely tempting considering that this newspaper publisher still throws off more than $100 million in annual free cash flow. At that price, the drumbeat of activist investors and deal-makers would grow larger.


– 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
Is This Well-Known Media Stock Worth a Second Look?

Read more here:
Is This Well-Known Media Stock Worth a Second Look?

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How To Profit From All-Time High Gold Prices

September 28th, 2010

How To Profit From All-Time High Gold Prices

As anxiety over U.S. economic performance increases, so too does the price of gold.

Surging to more than $1300 per ounce, the precious metal hit a new record the September 20th trading week, following news that the Federal Reserve may undertake quantitative easing to combat the threat of deflation.

With all-time high bullion prices, many gold mining stocks are getting a boost.

One of the most attractive gold mining stocks is Newmont Mining (NYSE: NEM). As the world's second largest gold producer, NEM is the only gold company in the S&P 500 Index.

The miner is attractive because its major properties are located in politically stable countries where taxes are low and infrastructure is solid. As a result, its mining developments are likely to continue without political disruption or turmoil. Newmont is also the most cost efficient miner of its peers, meaning that for every ounce of gold extracted, the company pockets that much more profit. These profits are helping drive up the share price.

With shares hitting a 20-year high this week, NEM still appears to have plenty of room to run.

Between January 2008 and May 2010, the stock formed an inverted head and shoulders pattern.

The left shoulder (labelled “LS” on the chart) formed between January and August 2008 as the stock bounced between $56 resistance and $41 support.

After falling through $41 support on three separate occasions between October and November 2008, NEM touched a low near $20.79. This triple bottom became the head (labelled “head”).

Surging off this low, NEM began a major uptrend. The right shoulder (labelled “RS”) formed between June 2009 and May 2010 as NEM moved to a high near $56, fell to support near $42, then once again tested key resistance near $56.

In June 2010, NEM bullishly broke resistance — and the inverted head and shoulders pattern. At this time, the stock briefly tested a small shelf of resistance near $62.50 before pulling back near $56.

However, during the summer months, NEM once again began trending higher. During the September 20th trading week, NEM successfully tested and broke resistance near $62.50. In doing so, the stock completed a long-term ascending triangle pattern.

Now testing the upper Bollinger band, which intersects at $64.64, NEM is currently above the rising 10- and 30-week moving averages.

With no recent overhead resistance in sight, NEM could test its all-time high near $76. The measuring principle — which is calculated by adding the height of the inverted head and shoulders to breakout level — projects a somewhat higher price target of roughly $84 ($52-$20 =$32; $52 +$32=$84). [Read more in detail: Principles of Technical Analysis: The Complex Head and Shoulders Pattern]

The indicators are bullish. MACD has just given a buy signal. The MACD histogram is beginning to expand in positive territory.

Relative strength index (RSI), which has been on a major uptrend since becoming deeply oversold in October 2009, is still rising. At 64.1, it is approaching deeply overbought levels, but is not yet there.

Stochastics is still on a buy signal and is approaching, but has not yet become highly overbought. However strong stocks can become and stay overbought for long periods of time.

Fundamentally, NEM appears to have strong growth potential.

In late July, Newmont reported strong second-quarter results, although, admittedly, they were below analysts' expectations. With record gold prices and higher production rates, revenue increased +37.5% to $2.2 billion, compared to $1.6 billion in the year-ago quarter.

For the full 2010 year, analysts project revenue will increase +22.1% to $9.4 billion, compared to $7.7 billion in 2009. With continued strength in gold, by 2011, analysts project revenue will increase another +3.2% to $9.7 billion.

The earnings outlook is equally upbeat.

With strong demand for gold, second-quarter earnings more than doubled to $0.77, compared to $0.35 in the year-ago quarter.

For the full 2010 year, analysts expect earnings to increase +28.7% to $3.59, compared to $2.79 in 2009. By 2011, earnings should increase an additional +11% to $3.99.

With a strong growth outlook, Newmont recently declared a +50% quarterly dividend increase. The company will now pay a quarterly dividend of $0.15 per share, for a yield of just under 1% ($0.60/$63.40).

In addition to strong growth potential, Newmont is attractively valued in comparison to its peers.

The company's price-to-sales (P/S) ratio is 3.5. Its price-to-book ratio (P/B) is 2.7. By comparison, AngloGold (NYSE: AU) has a much higher P/B of 5.5, while Barrick (NYSE: ABX) has a P/S of 4.8.

Newmont is also cash rich, with $3.7 billion in cash and equivalents. This liquidity should give Newmont the financial freedom to continue exploring new mining operations.

Action to Take–> Given NEM's attractive valuation, solid growth potential and strong technicals, I recommend

Uncategorized

How To Profit From All-Time High Gold Prices

September 28th, 2010

How To Profit From All-Time High Gold Prices

As anxiety over U.S. economic performance increases, so too does the price of gold.

Surging to more than $1300 per ounce, the precious metal hit a new record the September 20th trading week, following news that the Federal Reserve may undertake quantitative easing to combat the threat of deflation.

With all-time high bullion prices, many gold mining stocks are getting a boost.

One of the most attractive gold mining stocks is Newmont Mining (NYSE: NEM). As the world's second largest gold producer, NEM is the only gold company in the S&P 500 Index.

The miner is attractive because its major properties are located in politically stable countries where taxes are low and infrastructure is solid. As a result, its mining developments are likely to continue without political disruption or turmoil. Newmont is also the most cost efficient miner of its peers, meaning that for every ounce of gold extracted, the company pockets that much more profit. These profits are helping drive up the share price.

With shares hitting a 20-year high this week, NEM still appears to have plenty of room to run.

Between January 2008 and May 2010, the stock formed an inverted head and shoulders pattern.

The left shoulder (labelled “LS” on the chart) formed between January and August 2008 as the stock bounced between $56 resistance and $41 support.

After falling through $41 support on three separate occasions between October and November 2008, NEM touched a low near $20.79. This triple bottom became the head (labelled “head”).

Surging off this low, NEM began a major uptrend. The right shoulder (labelled “RS”) formed between June 2009 and May 2010 as NEM moved to a high near $56, fell to support near $42, then once again tested key resistance near $56.

In June 2010, NEM bullishly broke resistance — and the inverted head and shoulders pattern. At this time, the stock briefly tested a small shelf of resistance near $62.50 before pulling back near $56.

However, during the summer months, NEM once again began trending higher. During the September 20th trading week, NEM successfully tested and broke resistance near $62.50. In doing so, the stock completed a long-term ascending triangle pattern.

Now testing the upper Bollinger band, which intersects at $64.64, NEM is currently above the rising 10- and 30-week moving averages.

With no recent overhead resistance in sight, NEM could test its all-time high near $76. The measuring principle — which is calculated by adding the height of the inverted head and shoulders to breakout level — projects a somewhat higher price target of roughly $84 ($52-$20 =$32; $52 +$32=$84). [Read more in detail: Principles of Technical Analysis: The Complex Head and Shoulders Pattern]

The indicators are bullish. MACD has just given a buy signal. The MACD histogram is beginning to expand in positive territory.

Relative strength index (RSI), which has been on a major uptrend since becoming deeply oversold in October 2009, is still rising. At 64.1, it is approaching deeply overbought levels, but is not yet there.

Stochastics is still on a buy signal and is approaching, but has not yet become highly overbought. However strong stocks can become and stay overbought for long periods of time.

Fundamentally, NEM appears to have strong growth potential.

In late July, Newmont reported strong second-quarter results, although, admittedly, they were below analysts' expectations. With record gold prices and higher production rates, revenue increased +37.5% to $2.2 billion, compared to $1.6 billion in the year-ago quarter.

For the full 2010 year, analysts project revenue will increase +22.1% to $9.4 billion, compared to $7.7 billion in 2009. With continued strength in gold, by 2011, analysts project revenue will increase another +3.2% to $9.7 billion.

The earnings outlook is equally upbeat.

With strong demand for gold, second-quarter earnings more than doubled to $0.77, compared to $0.35 in the year-ago quarter.

For the full 2010 year, analysts expect earnings to increase +28.7% to $3.59, compared to $2.79 in 2009. By 2011, earnings should increase an additional +11% to $3.99.

With a strong growth outlook, Newmont recently declared a +50% quarterly dividend increase. The company will now pay a quarterly dividend of $0.15 per share, for a yield of just under 1% ($0.60/$63.40).

In addition to strong growth potential, Newmont is attractively valued in comparison to its peers.

The company's price-to-sales (P/S) ratio is 3.5. Its price-to-book ratio (P/B) is 2.7. By comparison, AngloGold (NYSE: AU) has a much higher P/B of 5.5, while Barrick (NYSE: ABX) has a P/S of 4.8.

Newmont is also cash rich, with $3.7 billion in cash and equivalents. This liquidity should give Newmont the financial freedom to continue exploring new mining operations.

Action to Take–> Given NEM's attractive valuation, solid growth potential and strong technicals, I recommend

Uncategorized

This Year’s Best Stocks You’ve Never Heard Of

September 28th, 2010

This Year's Best Stocks You've Never Heard Of

There's an old Wall Street adage: “Buy what you know.” It's not bad advice, as it points investors toward stocks they can reasonably assess. For the year so far, though, sticking with what you know would have kept most investors clear of the market's best performing industry, as none of its stocks are household names.

The good news is that it's not too late to tap into this uptrend. Indeed, given the nature of the business model, it may never technically be too late.

And what's this hot group? The Internet service, software and support providers. As a group, they're up by more than +50% this year and still going strong.

The description likely conjures up names like AOL Inc. (NYSE: AOL) or Comcast Corp. (Nasdaq: CMCSA), both of which are well-known players among casual, at-home Web surfers. Those two don't quite fall into the “Internet service software and support” category, though.

Rather, the group in question includes the likes of F5 Networks (Nasdaq: FFIV), EasyLink Services Intl. (Nasdaq: ESIC) and AboveNet (Nasdaq: ABVT). These technology specialists provide a variety of Internet-related services to organizations with some heavy-duty connectivity needs, solving problems that retail ISPs couldn't even begin to address — things such as e-commerce, traffic flow management and cloud computing security (ensuring authorized users of Internet-based software and information services are the only ones accessing it). Think of them as the backbone of corporate-level connectivity.

Now, fess up — have you heard of all, or any, of those companies?

There's no shame if you haven't, given that most investors and more than a few professional stock-pickers are in the same boat. Yet, considering their performance, it's a group all investors may want to become more familiar with very soon simply because of the numbers and nature of the business.

Making money in a robust economy is nice, but not particularly challenging. Making money in a lousy economy — like the one we were stewing in for much of 2007 and all of 2008 — is a little more impressive. Making almost as much money in 2008 as you did in 2006 is practically a miracle, but that's exactly what F5 Networks managed to do despite being smack dab in the middle of a recession. The company brought home $1.02 per share in 2006, $0.90 in 2007, and $0.89 in 2008. Those are results most other companies would have loved to been able to produce at the time, never even mind the fact that F5 posted a record-breaking EPS of $1.68 in 2009.

AboveNet wasn't up and running in 2007, but since it got the ball rolling in the first quarter of 2008, we've seen similar earnings growth trends through the middle of 2010. More of the same is anticipated through 2011.

So what is it about these two companies that allowed them to sail through the recession as if it weren't happening and then keep on soaring as the recession faded?

F5 and AboveNet, along with EasyLink and many of their peers, have effectively recession-proofed their operations by (1) entrenching themselves in their client companies' daily operations (to the point of indispensability), and (2) offering a service that draws recurring revenue for “ongoing services rendered.”

And that's the beauty of the business model. Whereas an auto manufacturer sells one car to one customer without knowing when that buyer may want to buy another vehicle, the Internet software and support providers collect predictable and recurring fees for continually managing an aspect of another corporation's operation.

F5 (which by the way is the year-to-date leading stock for the group, up nearly +94%) is a prime example of how sweet such a business model can be. While the industry as a whole has seen a general earnings growth trend, F5 Networks has sequentially upped its per-share earnings in each of its past five quarters. It's also sequentially improved per-share earnings in 10 of the past 11 quarters, the first five of which overlapped with the latter part of the recession.

It's what the old-schoolers would call a cash cow.

Action to Take –> Value-conscious investors may have a tough time getting on board F5 Networks over AboveNet. The former is sitting on a P/E of more than 60 (though it's coming down), while the latter boasts a trailing P/E of less than 6.0. In that light alone, AboveNet is the no-brainer choice. When you factor projected growth rates in, though, F5 Networks makes its way back into the mix.

As for other stocks one could use to tap into the Internet service support/software (and recurring-revenue) theme, they're out there to be sure. Some of them may even offer more attractive recent numbers. The problem is, they all either lack history, are small to the point of being shaky or are foreign equities that are tough to keep good tabs on.

Investors would be better off sticking with either AboveNet or F5. Perhaps a little of both — the best of both worlds — is the solution.

– StreetAuthority Contributor
James Brumley

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

This article originally appeared on StreetAuthority
Author: James Brumley
This Year's Best Stocks You've Never Heard Of

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This Year’s Best Stocks You’ve Never Heard Of

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This Year’s Best Stocks You’ve Never Heard Of

September 28th, 2010

This Year's Best Stocks You've Never Heard Of

There's an old Wall Street adage: “Buy what you know.” It's not bad advice, as it points investors toward stocks they can reasonably assess. For the year so far, though, sticking with what you know would have kept most investors clear of the market's best performing industry, as none of its stocks are household names.

The good news is that it's not too late to tap into this uptrend. Indeed, given the nature of the business model, it may never technically be too late.

And what's this hot group? The Internet service, software and support providers. As a group, they're up by more than +50% this year and still going strong.

The description likely conjures up names like AOL Inc. (NYSE: AOL) or Comcast Corp. (Nasdaq: CMCSA), both of which are well-known players among casual, at-home Web surfers. Those two don't quite fall into the “Internet service software and support” category, though.

Rather, the group in question includes the likes of F5 Networks (Nasdaq: FFIV), EasyLink Services Intl. (Nasdaq: ESIC) and AboveNet (Nasdaq: ABVT). These technology specialists provide a variety of Internet-related services to organizations with some heavy-duty connectivity needs, solving problems that retail ISPs couldn't even begin to address — things such as e-commerce, traffic flow management and cloud computing security (ensuring authorized users of Internet-based software and information services are the only ones accessing it). Think of them as the backbone of corporate-level connectivity.

Now, fess up — have you heard of all, or any, of those companies?

There's no shame if you haven't, given that most investors and more than a few professional stock-pickers are in the same boat. Yet, considering their performance, it's a group all investors may want to become more familiar with very soon simply because of the numbers and nature of the business.

Making money in a robust economy is nice, but not particularly challenging. Making money in a lousy economy — like the one we were stewing in for much of 2007 and all of 2008 — is a little more impressive. Making almost as much money in 2008 as you did in 2006 is practically a miracle, but that's exactly what F5 Networks managed to do despite being smack dab in the middle of a recession. The company brought home $1.02 per share in 2006, $0.90 in 2007, and $0.89 in 2008. Those are results most other companies would have loved to been able to produce at the time, never even mind the fact that F5 posted a record-breaking EPS of $1.68 in 2009.

AboveNet wasn't up and running in 2007, but since it got the ball rolling in the first quarter of 2008, we've seen similar earnings growth trends through the middle of 2010. More of the same is anticipated through 2011.

So what is it about these two companies that allowed them to sail through the recession as if it weren't happening and then keep on soaring as the recession faded?

F5 and AboveNet, along with EasyLink and many of their peers, have effectively recession-proofed their operations by (1) entrenching themselves in their client companies' daily operations (to the point of indispensability), and (2) offering a service that draws recurring revenue for “ongoing services rendered.”

And that's the beauty of the business model. Whereas an auto manufacturer sells one car to one customer without knowing when that buyer may want to buy another vehicle, the Internet software and support providers collect predictable and recurring fees for continually managing an aspect of another corporation's operation.

F5 (which by the way is the year-to-date leading stock for the group, up nearly +94%) is a prime example of how sweet such a business model can be. While the industry as a whole has seen a general earnings growth trend, F5 Networks has sequentially upped its per-share earnings in each of its past five quarters. It's also sequentially improved per-share earnings in 10 of the past 11 quarters, the first five of which overlapped with the latter part of the recession.

It's what the old-schoolers would call a cash cow.

Action to Take –> Value-conscious investors may have a tough time getting on board F5 Networks over AboveNet. The former is sitting on a P/E of more than 60 (though it's coming down), while the latter boasts a trailing P/E of less than 6.0. In that light alone, AboveNet is the no-brainer choice. When you factor projected growth rates in, though, F5 Networks makes its way back into the mix.

As for other stocks one could use to tap into the Internet service support/software (and recurring-revenue) theme, they're out there to be sure. Some of them may even offer more attractive recent numbers. The problem is, they all either lack history, are small to the point of being shaky or are foreign equities that are tough to keep good tabs on.

Investors would be better off sticking with either AboveNet or F5. Perhaps a little of both — the best of both worlds — is the solution.

– StreetAuthority Contributor
James Brumley

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

This article originally appeared on StreetAuthority
Author: James Brumley
This Year's Best Stocks You've Never Heard Of

Read more here:
This Year’s Best Stocks You’ve Never Heard Of

Uncategorized

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