Avis Budget Group (NYSE:CAR) — A New Stage of Avis-Dollar-Hertz Drama

October 7th, 2010

Avis Budget Group (NYSE:CAR), the New Jersey-based international car and truck rental company, is continuing its three-way mating dance with Dollar Thrifty and Hertz over some possible combination. It appears, so far at least, that Hertz hasn’t quite sweetened the honey pot enough to tempt Dollar Thrifty into a merger.

Here to offer additional insight on the potential M&A alternatives is Agora Financial’s editor of the Strategic Short Report, Dan Amoss.

From his most recent reader update:

“At yesterday’s meeting, Dollar Thrifty shareholders voted to reject Hertz’s bid for the company. Apparently, as reported in the press, many DTG shareholders believe Hertz’s offer substantially undervalues DTG stock. This is laughable. I’d have voted to take the money and run far away from this business, thankful that I’d caught a ride on the great “junk stock” rally of 2009.

“Who knows what these DTG shareholders think of Avis Budget’s (NYSE:CAR) offer, which is only a few dollars per share higher? Perhaps they’ll vote to reject that one, too. Either way, Avis is going to move forward with its offer. It issued a press release announcing its intent to commence a tender offer for DTG shares.

“The consensus view of this M&A drama goes like this: the company that acquires DTG will enjoy a bonanza of earnings driven by synergies and cost cutting. Sure, there will be low-hanging fruit on the cost cutting side. But the consensus view is also ignoring the dangerously boosted leverage of the combined company’s balance sheet. I think the risk of higher financial leverage outweighs the theoretical cost-cutting opportunities.

“If Avis winds up acquiring DTG, I think it’ll be a good development for short sellers. We’d see a more highly levered balance sheet in 2011, right when U.S. GDP flat lines or possibly turns negative. The industry’s fantasy that it can boost rental car pricing in cartel-like fashion presumes that demand will stay constant. Plus, everyone assumes that asset-backed financing for rental fleets will remain tame forever. I’m not so sure about this in an environment of accelerating mortgage defaults and stress at the big banks.

“This drama is not over, and will enter a new stage.”

According to Amoss, DTG shareholders could vote to reject the bid, or antitrust regulators could block a potential CAR and DTG combination. That’s just a basic outline of the situation. To get Amoss’ specific actionable recommendations based on these developments you must sign up for his newsletter, Dan Amoss’ Strategic Short Report, which is available through the Agora Financial reports page, found here.

Best,

Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]

Avis Budget Group (NYSE:CAR) — A New Stage of Avis-Dollar-Hertz Drama 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:
Avis Budget Group (NYSE:CAR) — A New Stage of Avis-Dollar-Hertz Drama




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

Stock Market Leaders Are Now Lagging?

October 7th, 2010

Wednesday’s session closed mixed on the day. The DOW posted a third of a percent gain while the tech sector closed down almost nine tenths of a percent. While technology stocks have been leading the market higher in the recent months, today they took the back seat while the DOW took control.

Take a look at the intraday chart of the SPY price action compared to the tech sector. It’s clear the tech stocks where not in favor today. Some tech stocks that really took a beating today were FFIV, NTAP, APKT and AKAM.

On another note, we are entering earning season and I am wondering if we are going to see a “Sell the New” type of thing again.

The broad market is experiencing a 36 day down cycle which has played a very dominant roll in the market this year. It topped out 9 days ago so we should expect sideways chop or some selling over the next 9 trading session. Because the market is trending up, pullbacks should be shallow.

The market continues to grind its way higher on relatively light volume. I have been waiting several weeks now for the volume to come back into the market but its just not happening. The majority of shares being traded are from banks, funds and day traders as the average investor’s not taking part because of the uncertainty looming. The lack of volume (commitment) to the market from the masses is making the market internals swing from one extreme to another on virtually weekly basis making it more difficult to take advantage of short term extreme sentiment levels.

The current market environment has traders shifting gears to more of a momentum trading strategy to take advantage of trends and this is what I am going to start implementing again as the market expands.

Market Conclusion:
In short, the equities market is in an up trend but looks to be overbought. Also with the downward cycle I don’t think the market will expand here and take off. Rather it will most likely chop around and burn off time until some earnings are released and the cycle bottoms. Unless we get a really sharp reversal down which we have yet to see on the SP500 or DOW, nibbling on small long positions or staying in cash is what I am doing right now.

As for gold, silver, the dollar and oil… Well the dollar continues to lose value on a daily basis which in turn is boosting metals along with crude oil. All four of those investments are over extended but they are trending and not really looking like they want to reverse just yet.

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
Stock Market Leaders Are Now Lagging?




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Stock Market Leaders Are Now Lagging?

October 7th, 2010

Wednesday’s session closed mixed on the day. The DOW posted a third of a percent gain while the tech sector closed down almost nine tenths of a percent. While technology stocks have been leading the market higher in the recent months, today they took the back seat while the DOW took control.

Take a look at the intraday chart of the SPY price action compared to the tech sector. It’s clear the tech stocks where not in favor today. Some tech stocks that really took a beating today were FFIV, NTAP, APKT and AKAM.

On another note, we are entering earning season and I am wondering if we are going to see a “Sell the New” type of thing again.

The broad market is experiencing a 36 day down cycle which has played a very dominant roll in the market this year. It topped out 9 days ago so we should expect sideways chop or some selling over the next 9 trading session. Because the market is trending up, pullbacks should be shallow.

The market continues to grind its way higher on relatively light volume. I have been waiting several weeks now for the volume to come back into the market but its just not happening. The majority of shares being traded are from banks, funds and day traders as the average investor’s not taking part because of the uncertainty looming. The lack of volume (commitment) to the market from the masses is making the market internals swing from one extreme to another on virtually weekly basis making it more difficult to take advantage of short term extreme sentiment levels.

The current market environment has traders shifting gears to more of a momentum trading strategy to take advantage of trends and this is what I am going to start implementing again as the market expands.

Market Conclusion:
In short, the equities market is in an up trend but looks to be overbought. Also with the downward cycle I don’t think the market will expand here and take off. Rather it will most likely chop around and burn off time until some earnings are released and the cycle bottoms. Unless we get a really sharp reversal down which we have yet to see on the SP500 or DOW, nibbling on small long positions or staying in cash is what I am doing right now.

As for gold, silver, the dollar and oil… Well the dollar continues to lose value on a daily basis which in turn is boosting metals along with crude oil. All four of those investments are over extended but they are trending and not really looking like they want to reverse just yet.

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
Stock Market Leaders Are Now Lagging?




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

How to Short Treasuries: With Yields this Low, Trade of the Century?

October 7th, 2010

Treasury Yields continue to drift lower, breaking new records weekly it seems.  Many attribute the current rate to investors baking in a substantial Quantitative Easing measure (dubbed QE2) to the tune of $500 Billion to $1 Trillion, as well as some substantial announcements out of Japan recently on their QE program. Even high yield muni bonds are seeing prices rise while yields continue to drop flying in the face of municipalities teetering on the brink of bankruptcy nationwide.  There are a few forces at work here driving near term Treasury yields lower, but cause for concern of a spike later.

Factors Driving Treasury Yields Lower:

  • QE2 Anticipation – already practically built in
  • Specter of Sustained Period of Deflation
  • Lack of Ability of Fed to Increase Rates due to Poor Economy, High Unemployment
  • Political pressure to keep rates low to spur housing and economic recovery

Why Treasury Yields Will Eventually Spike:

  • This Bubble Trade will unwind eventually, as they all do.
  • Out of Control Deficits will demand higher interest rates from buyers
  • Implied Inflation rate on TIPS increasing in outer years
  • 10-Yr Treasury normally at 300 bps above Real GDP. 10 Yr below 2.5% Now.  Latest GDP was positive 1.6%.  Significant deviation from the mean.
  • All Western currencies are Devaluing (See what Precious Metals and Gold ETFs are Telling us)

How to Short Treasuries

Based on the sheer magnitude of the problems in the country and the momentum of this trade, there’s no telling when we’ll see an exodus from Treasuries, but few would disagree that we will eventually see a reversal and 2.4% on the 10-Year is not sustainable.  While I can now get 3.625% on a 15 year mortgage (insane but true, see for yourself), there is scant evidence the housing market is improving.  The problem with shorting anything is the timing.  If you’re too early to the game and go short, you may be squeezed out.  If you buy a leveraged inverse Treasury ETF, you may lose money even in a flat market (due to value decay of leveraged ETFs).  However, with proper risk management and strategies, there may be one that fits for you.  Perhaps a combination of selling short long leveraged Treasury ETFs or perhaps it’s buying options on these ETFs.  Maybe you have a pivot point at which you believe a particular duration Treasury cannot exceed.  Calculate that ETF price point and you can sell a call at that stike.  There are numerous ways to be effectively short on treasury bonds and those are just a few.  Regardless of your strategy, here are several Treasury ETFs to choose from:

(TBF) ProShares Short 20+ Year Treasury (2x)
(PST) ProShares UltraShort 7-10 Year Treasury (2x)
(TBT) ProShares UltraShort 20+ Year Treasury (2x)
(TMF) Direxion 30 year Treasury Bull 3x ETF
(TMV) Direxion 30 year Treasury Bear 3x ETF
(TYD) Direxion 10 year Treasury Bull 3x ETF
(TYO) Direxion 10 year Treasury Bear 3x ETF
(TWOL) Direxion 2 year Treasury Bull 3x ETF
(TWOZ) Direxion 2 year Treasury Bear 3x ETF
(LBND) PowerShares DB 25+ Year Treasury Bond Bull 3x ETF
(SBND) PowerShares DB 25+ Year Treasury Bond Bear 3x ETF

What’s Your Preferred Play to Short Treasuries?

ETF, OPTIONS

How to Short Treasuries: With Yields this Low, Trade of the Century?

October 7th, 2010

Treasury Yields continue to drift lower, breaking new records weekly it seems.  Many attribute the current rate to investors baking in a substantial Quantitative Easing measure (dubbed QE2) to the tune of $500 Billion to $1 Trillion, as well as some substantial announcements out of Japan recently on their QE program. Even high yield muni bonds are seeing prices rise while yields continue to drop flying in the face of municipalities teetering on the brink of bankruptcy nationwide.  There are a few forces at work here driving near term Treasury yields lower, but cause for concern of a spike later.

Factors Driving Treasury Yields Lower:

  • QE2 Anticipation – already practically built in
  • Specter of Sustained Period of Deflation
  • Lack of Ability of Fed to Increase Rates due to Poor Economy, High Unemployment
  • Political pressure to keep rates low to spur housing and economic recovery

Why Treasury Yields Will Eventually Spike:

  • This Bubble Trade will unwind eventually, as they all do.
  • Out of Control Deficits will demand higher interest rates from buyers
  • Implied Inflation rate on TIPS increasing in outer years
  • 10-Yr Treasury normally at 300 bps above Real GDP. 10 Yr below 2.5% Now.  Latest GDP was positive 1.6%.  Significant deviation from the mean.
  • All Western currencies are Devaluing (See what Precious Metals and Gold ETFs are Telling us)

How to Short Treasuries

Based on the sheer magnitude of the problems in the country and the momentum of this trade, there’s no telling when we’ll see an exodus from Treasuries, but few would disagree that we will eventually see a reversal and 2.4% on the 10-Year is not sustainable.  While I can now get 3.625% on a 15 year mortgage (insane but true, see for yourself), there is scant evidence the housing market is improving.  The problem with shorting anything is the timing.  If you’re too early to the game and go short, you may be squeezed out.  If you buy a leveraged inverse Treasury ETF, you may lose money even in a flat market (due to value decay of leveraged ETFs).  However, with proper risk management and strategies, there may be one that fits for you.  Perhaps a combination of selling short long leveraged Treasury ETFs or perhaps it’s buying options on these ETFs.  Maybe you have a pivot point at which you believe a particular duration Treasury cannot exceed.  Calculate that ETF price point and you can sell a call at that stike.  There are numerous ways to be effectively short on treasury bonds and those are just a few.  Regardless of your strategy, here are several Treasury ETFs to choose from:

(TBF) ProShares Short 20+ Year Treasury (2x)
(PST) ProShares UltraShort 7-10 Year Treasury (2x)
(TBT) ProShares UltraShort 20+ Year Treasury (2x)
(TMF) Direxion 30 year Treasury Bull 3x ETF
(TMV) Direxion 30 year Treasury Bear 3x ETF
(TYD) Direxion 10 year Treasury Bull 3x ETF
(TYO) Direxion 10 year Treasury Bear 3x ETF
(TWOL) Direxion 2 year Treasury Bull 3x ETF
(TWOZ) Direxion 2 year Treasury Bear 3x ETF
(LBND) PowerShares DB 25+ Year Treasury Bond Bull 3x ETF
(SBND) PowerShares DB 25+ Year Treasury Bond Bear 3x ETF

What’s Your Preferred Play to Short Treasuries?

ETF, OPTIONS

The Maryland Millionaire Exodus

October 6th, 2010

Expatriation. It’s happening. Thousands of people are picking up stakes and leaving. They’re leaving their high-tax home states.

“I’m outa here. I’ve had enough,” said a friend at dinner last week. “[Maryland Governor] O’Malley thinks he can tax us all he wants. But I don’t have to put up with it. I can move. We bought a place in Florida.

“He probably thinks it doesn’t matter. What’s a single taxpayer, more or less? That’s not going to change the outcome of an election. But I’m taking my business with me. I’ll set up shop in Florida. I don’t have to be in Maryland. I can get crab cakes in Miami too.”

What had set him off was an article in The Wall Street Journal. “Millionaires Go Missing: Maryland’s fleeced taxpayers fight back.”

The WSJ:

Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

However, there were two things that Maryland politicians didn’t count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). “By April 2009, one-third of the millionaires have disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year – even at higher rates.

What the WSJ failed to mention was that 6.25% isn’t the end of it. There are local taxes too. And in Baltimore City and Montgomery County, for example, the additional local taxes bring the total take up to nearly 10%.

If you have $100,000 of taxable income, in other words, you pay almost $10,000 for the dubious privilege of living in Baltimore rather than, say, some low-tax city in the Sunbelt.

In our own business, we have an office in Baltimore and one in Florida. We can’t move our entire business to Florida, but more and more we hear from employees in Baltimore who want to move to Florida. So the business moves…organically, naturally. And when we create new businesses we put them in Florida, rather than in Maryland.

We already see the results of this and similar policies in Baltimore. People who create wealth tend to live outside the city…or move out. In the city limits, zombies have taken over – with a high percentage of cities’ populations on government payrolls or various forms of welfare. They’re less interested in creating wealth than they are in redistributing it to the shuffling, mouth-breathing masses.

The city’s largest employer, for example, Johns Hopkins, is a private institution. And a great one, from what we’ve heard. But it is hardly independent of the zombies. Much of its research and operating budgets are funded by the government.

Regards,

Bill Bonner
for The Daily Reckoning

The Maryland Millionaire Exodus 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 Maryland Millionaire Exodus




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 Maryland Millionaire Exodus

October 6th, 2010

Expatriation. It’s happening. Thousands of people are picking up stakes and leaving. They’re leaving their high-tax home states.

“I’m outa here. I’ve had enough,” said a friend at dinner last week. “[Maryland Governor] O’Malley thinks he can tax us all he wants. But I don’t have to put up with it. I can move. We bought a place in Florida.

“He probably thinks it doesn’t matter. What’s a single taxpayer, more or less? That’s not going to change the outcome of an election. But I’m taking my business with me. I’ll set up shop in Florida. I don’t have to be in Maryland. I can get crab cakes in Miami too.”

What had set him off was an article in The Wall Street Journal. “Millionaires Go Missing: Maryland’s fleeced taxpayers fight back.”

The WSJ:

Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

However, there were two things that Maryland politicians didn’t count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). “By April 2009, one-third of the millionaires have disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year – even at higher rates.

What the WSJ failed to mention was that 6.25% isn’t the end of it. There are local taxes too. And in Baltimore City and Montgomery County, for example, the additional local taxes bring the total take up to nearly 10%.

If you have $100,000 of taxable income, in other words, you pay almost $10,000 for the dubious privilege of living in Baltimore rather than, say, some low-tax city in the Sunbelt.

In our own business, we have an office in Baltimore and one in Florida. We can’t move our entire business to Florida, but more and more we hear from employees in Baltimore who want to move to Florida. So the business moves…organically, naturally. And when we create new businesses we put them in Florida, rather than in Maryland.

We already see the results of this and similar policies in Baltimore. People who create wealth tend to live outside the city…or move out. In the city limits, zombies have taken over – with a high percentage of cities’ populations on government payrolls or various forms of welfare. They’re less interested in creating wealth than they are in redistributing it to the shuffling, mouth-breathing masses.

The city’s largest employer, for example, Johns Hopkins, is a private institution. And a great one, from what we’ve heard. But it is hardly independent of the zombies. Much of its research and operating budgets are funded by the government.

Regards,

Bill Bonner
for The Daily Reckoning

The Maryland Millionaire Exodus 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 Maryland Millionaire Exodus




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 Incredible Two-Day Jump in US Treasure Debt

October 6th, 2010

Things are getting so, so, so weird that I was locked inside the Mogambo Bunker Of Panic (MBOP), looking through the periscope to keep a vigilant watch for the social explosion outside that was coming, I figured, so, so soon, with my finger on the trigger of something fully loaded and reassuringly .45 caliber, and a slice of yummy pizza in my one free hand to keep my energy level up via the universal Magic Of The Pepperoni (MOTP).

To show you that I am not over-reacting like the hyper-excitable, gun-nut, gold-bug, Austrian school of economics kind of weird guy that I actually am, here is an example of the corrupt, game-playing crap going on with the Federal Reserve and the Treasury: On Wednesday, 9/29/10, the national debt was $13.466 trillion. The next day, 9/30, it goes to $13.561 trillion. Again, “the next day,” 10/1, the start of the new federal fiscal year, it rises to $13.610 trillion!

This $144 billion is a staggering lot of borrowing that, somehow, happened in Two Freaking Days (TFD)! This is $72 billion per day! This is the government borrowing – per day! – almost $240 for every man, woman and child in the Whole Freaking Country (WFC)! Gaaaahhhh!

The scream at the end of the previous paragraph is Secret Mogambo Code (SMC) to alert all Junior Mogambo Rangers (JMRs) to buy more gold, silver and oil as fast as they can, because of this kind of monstrous liquidity injection by governmental deficit-spending, made possible by a crazily irresponsible Federal Reserve literally creating the money necessary, and then, committing a central-banking sin known as “monetizing the debt,” the Fed used the money to buy the debt that the government wanted to sell!! Gaaaahhhh!

As many have deciphered by now, the concluding “Gaaaahhh!” of the previous paragraph, combined with the double exclamation points of the previous sentence, is surely more Secret Mogambo Code (SMC), available only to Junior Mogambo Rangers (JMRs), although you can probably figure out what is Freaking Me Out (FMO), which is always the same thing FMO, making that whole Secret Mogambo Code (SMC) thing just another piece of Stupid Mogambo Crap (SMC), as implied by their identical acronyms.

Anyway, this $144 billion in additional federal debt, accumulated in Two Freaking Days (TFD), is, annualized at this astounding rate for each of the government’s roughly 250 working days per year, an outrageous $18 trillion a year! This incomprehensible sum is about $5 trillion more than the entire GDP of America! And more than half of GDP is already composed of government spending right now! We’re Freaking Doomed (WFD)!

We are doomed for allowing the Federal Reserve to create so much more fiat money, which creates inflation in prices, which is why I probably noticed, in Barron’s, that the new Gross Domestic Product Deflator for the second quarter of 2010 is a laughably-low 1.9%, which is almost double the previous quarter’s also-laughably-low 1.0% inflation!

By this rude disrespect and outright loathing I mean inflation – by the most conservative of estimates of inflation that can be cooked up – is still growing by 90% in one quarter! Inflation is growing at 1,303% a year, compounded? Yikes! Yikes! Yikes!

Okay, I admit I am being stupidly simplistic, overly dramatic and acting irresponsibly in every sense of the word, in that I am writing this Stupid Mogambo Crap (SMC) at my desk when I should be working, but I am surely going to get fired anyway, so what’s the point, ya know what I mean?

Obviously I am wasting my time, and your time, in being silly, especially in light of everyone else thinking that 2% inflation is OK, it certainly seems OK with Congress and with most egghead academic economists, while I am the only guy who is freaked out by it.

And I haven’t heard much of a gasp from any of them about Ben Bernanke, chairman of the Federal Reserve, now “targeting” monetary policy to achieve a suicidal 5% inflation in prices! Insane!

So, here at the end, here at the “bust” part of the boom-bust cycle, it looks like it will be a race! How exciting!

So which will it be? Will the price of gold go so high so quickly that I can tell my boss that I quit, and how I am thrilled to wash my hands of this stupid company, its stupid employees and stupid customers always calling me hurtful names like “incompetent bonehead,” with which I totally disagree, and “lazy, gold-bug moron,” which is a little nearer the truth.

And as a lazy, gold-bug moron, all I do is simply buy gold, silver and oil when the Federal Reserve is acting so insanely irresponsible, especially so that the federal government can desperately deficit-spend, and doubly-especially when the money concerned is around 10% of GDP!

With horrifying facts like that screaming at you, “We’re freaking doomed!” buying gold, silver and oil is, “Whee! This investing stuff is easy!” in all its glorious action! Whee!

The Mogambo Guru
for The Daily Reckoning

The Incredible Two-Day Jump in US Treasure Debt 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 Incredible Two-Day Jump in US Treasure Debt




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 Incredible Two-Day Jump in US Treasure Debt

October 6th, 2010

Things are getting so, so, so weird that I was locked inside the Mogambo Bunker Of Panic (MBOP), looking through the periscope to keep a vigilant watch for the social explosion outside that was coming, I figured, so, so soon, with my finger on the trigger of something fully loaded and reassuringly .45 caliber, and a slice of yummy pizza in my one free hand to keep my energy level up via the universal Magic Of The Pepperoni (MOTP).

To show you that I am not over-reacting like the hyper-excitable, gun-nut, gold-bug, Austrian school of economics kind of weird guy that I actually am, here is an example of the corrupt, game-playing crap going on with the Federal Reserve and the Treasury: On Wednesday, 9/29/10, the national debt was $13.466 trillion. The next day, 9/30, it goes to $13.561 trillion. Again, “the next day,” 10/1, the start of the new federal fiscal year, it rises to $13.610 trillion!

This $144 billion is a staggering lot of borrowing that, somehow, happened in Two Freaking Days (TFD)! This is $72 billion per day! This is the government borrowing – per day! – almost $240 for every man, woman and child in the Whole Freaking Country (WFC)! Gaaaahhhh!

The scream at the end of the previous paragraph is Secret Mogambo Code (SMC) to alert all Junior Mogambo Rangers (JMRs) to buy more gold, silver and oil as fast as they can, because of this kind of monstrous liquidity injection by governmental deficit-spending, made possible by a crazily irresponsible Federal Reserve literally creating the money necessary, and then, committing a central-banking sin known as “monetizing the debt,” the Fed used the money to buy the debt that the government wanted to sell!! Gaaaahhhh!

As many have deciphered by now, the concluding “Gaaaahhh!” of the previous paragraph, combined with the double exclamation points of the previous sentence, is surely more Secret Mogambo Code (SMC), available only to Junior Mogambo Rangers (JMRs), although you can probably figure out what is Freaking Me Out (FMO), which is always the same thing FMO, making that whole Secret Mogambo Code (SMC) thing just another piece of Stupid Mogambo Crap (SMC), as implied by their identical acronyms.

Anyway, this $144 billion in additional federal debt, accumulated in Two Freaking Days (TFD), is, annualized at this astounding rate for each of the government’s roughly 250 working days per year, an outrageous $18 trillion a year! This incomprehensible sum is about $5 trillion more than the entire GDP of America! And more than half of GDP is already composed of government spending right now! We’re Freaking Doomed (WFD)!

We are doomed for allowing the Federal Reserve to create so much more fiat money, which creates inflation in prices, which is why I probably noticed, in Barron’s, that the new Gross Domestic Product Deflator for the second quarter of 2010 is a laughably-low 1.9%, which is almost double the previous quarter’s also-laughably-low 1.0% inflation!

By this rude disrespect and outright loathing I mean inflation – by the most conservative of estimates of inflation that can be cooked up – is still growing by 90% in one quarter! Inflation is growing at 1,303% a year, compounded? Yikes! Yikes! Yikes!

Okay, I admit I am being stupidly simplistic, overly dramatic and acting irresponsibly in every sense of the word, in that I am writing this Stupid Mogambo Crap (SMC) at my desk when I should be working, but I am surely going to get fired anyway, so what’s the point, ya know what I mean?

Obviously I am wasting my time, and your time, in being silly, especially in light of everyone else thinking that 2% inflation is OK, it certainly seems OK with Congress and with most egghead academic economists, while I am the only guy who is freaked out by it.

And I haven’t heard much of a gasp from any of them about Ben Bernanke, chairman of the Federal Reserve, now “targeting” monetary policy to achieve a suicidal 5% inflation in prices! Insane!

So, here at the end, here at the “bust” part of the boom-bust cycle, it looks like it will be a race! How exciting!

So which will it be? Will the price of gold go so high so quickly that I can tell my boss that I quit, and how I am thrilled to wash my hands of this stupid company, its stupid employees and stupid customers always calling me hurtful names like “incompetent bonehead,” with which I totally disagree, and “lazy, gold-bug moron,” which is a little nearer the truth.

And as a lazy, gold-bug moron, all I do is simply buy gold, silver and oil when the Federal Reserve is acting so insanely irresponsible, especially so that the federal government can desperately deficit-spend, and doubly-especially when the money concerned is around 10% of GDP!

With horrifying facts like that screaming at you, “We’re freaking doomed!” buying gold, silver and oil is, “Whee! This investing stuff is easy!” in all its glorious action! Whee!

The Mogambo Guru
for The Daily Reckoning

The Incredible Two-Day Jump in US Treasure Debt 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.”

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The Incredible Two-Day Jump in US Treasure Debt




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

Looking for Value in September’s Biggest Losers

October 6th, 2010

Looking for Value in September's Biggest Losers

With reward comes risk. That's the painful lesson learned by biotech investors last month. Investors in Arena Pharma (Nasdaq: ARNA), Idenix Pharma (Nasdaq: IDIX), AMAG Pharma (Nasdaq: AMAG) and Vical (Nasdaq: VICL) all saw their investments plunge by nearly a fourth– or more — thanks to bad news on the drug approval front. Of the top four losers in the Russell 2000 last month, all are in biotech — an industry for which you've got to have a strong stomach.

Company (Ticker) Recent Price September Loss 52-Week High 52-Week Low Catalyst
Arena Pharma (Nasdaq: ARNA) $1.54 -76% $8.00 $1.51 FDA spurns company's anti-obesity drug
Idenix Pharma (Nasdaq: IDIX) $3.14 -48% $6.11 $1.81 Setback in Hepatitis C trials
AMAG Pharma (Nasdaq: AMAG) $17.85 -32% $52.49 $16.70 Disappointing results for anemia drug
Vical
(Nasdaq: VICL)
$2.21 -29% $4.43 $2.20 Poor results from blood-vessel growth drug
Flagstar Bancorp (NYSE: FBC) $1.86 -26% $7.85 $2.91 False start on a capital raise
Genoptix
(Nasdaq: GXDX)
$14.39 -20% $39.00 $13.51 Pre-announced tepid Q3 results
Virginia Commerce Bank (Nasdaq: VCBI) $4.81 -17% $7.69 $3.01 Being acquired by Discover

Arena looks unlikely to rebound, as the FDA made it clear that Arena's weight-loss drug offered too little help for dieters. And in a similar vein, AMAG's iron-boosting drug for the treatment of anemia may be in deep trouble, as recent clinical trials have revealed troublesome reactions. And that's often a kiss of death with the safety-conscious FDA.

Yet Idenix Pharma may emerge as a rebound candidate. The company is testing a pair of drugs for the treatment of Hepatitis C. One drug yielded minor liver concerns (though those quickly abated) while the other drug appeared to work just fine. Trouble is, Idenix would like to use the two drugs in concert.

Hepatitis C is considered to be one of the largest causes of illness for which no permanent cure exists. That's why a range of companies are pursuing remedies in clinical trials. Bristol-Myers Squibb (NYSE: BMY) paid nearly $900 million in early September to acquire Zymogenetics (Nasdaq: ZYMO) for its promising, but unproven, drug pipeline.

Right now, Idenix Pharma thinks the recent issues are merely a delay, and the company hopes to resume clinical testing by year end. As a near-term milestone, the company is expected to release a lot more clinical trial information in late October, and as much of the data is expected to be relatively positive, this stock could see a nice pop on the heels of that event.

The outlook for Vical is the least clear of this group. The company's drug (licensed to Sanofi-Aventis (NYSE: SNY)) did not fare well in tests to see if it could create new blood vessels to help increase blood flow to distressed limbs. But the company has several promising drugs that are being tested earlier in the clinical process, and some analysts think this latest setback will be forgotten if those other drugs can make headway in clinical trials.

Flagstar's dilution problem
Michigan-based Flagstar Bancorp (NYSE: FBC) likely shot itself in the foot. The bank needs to shore up its capital base and had hoped to quietly raise $600 million through an equity offering. But word got out and existing investors ran for the hills, as their positions in the bank would suddenly become very diluted. Now, with shares shedding a quarter of their value in the past few weeks, the bank needs to figure if such an offering is still a good idea.

Flagstar doesn't actually need $600 million to cover its losses — it instead wanted to build up a small war chest to make local acquisitions. With shares now below $2, management has likely had a change of heart. In fact, it increasingly appears as if Flagstar will sit tight and muddle through with a less-than-ideal balance sheet. In fact, shares rose roughly +3% on Friday as investors realized that such an equity offering is unlikely in the near-term. Shares look pretty enticing trading at about a fourth of book value.

Virginia Bancorp (Nasdaq: VCBI) had seemingly learned the dangers of unexpected dilution. The company's stock surged more than +20% in late July after it announced plans to cancel an equity raise. But management later had a change of heart and pulled off a $10 million equity financing late in September. Shares are off more than -20% since September 21. With the deal done, it may actually be safe to re-enter this name, as it is now selling at 60% of book value.

Genoptics (Nasdaq: GXDX)
I took a look at this maker of blood-diagnostic testing kits back in June after its shares had slid nearly -20% to around $18. [Read more here]

At that time, I cautioned that the company my see even more near-term weakness as “a new sales staff will need several more quarters to start gaining traction.” Adding concern, the health care sector is seeing cost-containment pressures and competition is starting to build.

Sure enough, the company recently announced another quarterly shortfall, and shares recently touched an all-time low dating back to its late 2007 IPO. At this point, this has become a deep value play with half of the market value being accounted for in cash. And while per share profits are under pressure, they are likely to remain north of $1. As a result, shares have likely found a floor at current levels and could start to rebound over the winter as the company's new sales staff gains further traction. It's not yet time to buy this name, but shares are certainly worth monitoring.

Action to Take –> The only names you should bottom-fish here are the two banks and Idenix. Both banks trade well below book value and are likely to rebound once investors realize how much they were oversold. Idenix still has many potential positive milestones ahead of it, though as with any biotech, it is a high risk play.


– 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
Looking for Value in September's Biggest Losers

Read more here:
Looking for Value in September’s Biggest Losers

Uncategorized

Looking for Value in September’s Biggest Losers

October 6th, 2010

Looking for Value in September's Biggest Losers

With reward comes risk. That's the painful lesson learned by biotech investors last month. Investors in Arena Pharma (Nasdaq: ARNA), Idenix Pharma (Nasdaq: IDIX), AMAG Pharma (Nasdaq: AMAG) and Vical (Nasdaq: VICL) all saw their investments plunge by nearly a fourth– or more — thanks to bad news on the drug approval front. Of the top four losers in the Russell 2000 last month, all are in biotech — an industry for which you've got to have a strong stomach.

Company (Ticker) Recent Price September Loss 52-Week High 52-Week Low Catalyst
Arena Pharma (Nasdaq: ARNA) $1.54 -76% $8.00 $1.51 FDA spurns company's anti-obesity drug
Idenix Pharma (Nasdaq: IDIX) $3.14 -48% $6.11 $1.81 Setback in Hepatitis C trials
AMAG Pharma (Nasdaq: AMAG) $17.85 -32% $52.49 $16.70 Disappointing results for anemia drug
Vical
(Nasdaq: VICL)
$2.21 -29% $4.43 $2.20 Poor results from blood-vessel growth drug
Flagstar Bancorp (NYSE: FBC) $1.86 -26% $7.85 $2.91 False start on a capital raise
Genoptix
(Nasdaq: GXDX)
$14.39 -20% $39.00 $13.51 Pre-announced tepid Q3 results
Virginia Commerce Bank (Nasdaq: VCBI) $4.81 -17% $7.69 $3.01 Being acquired by Discover

Arena looks unlikely to rebound, as the FDA made it clear that Arena's weight-loss drug offered too little help for dieters. And in a similar vein, AMAG's iron-boosting drug for the treatment of anemia may be in deep trouble, as recent clinical trials have revealed troublesome reactions. And that's often a kiss of death with the safety-conscious FDA.

Yet Idenix Pharma may emerge as a rebound candidate. The company is testing a pair of drugs for the treatment of Hepatitis C. One drug yielded minor liver concerns (though those quickly abated) while the other drug appeared to work just fine. Trouble is, Idenix would like to use the two drugs in concert.

Hepatitis C is considered to be one of the largest causes of illness for which no permanent cure exists. That's why a range of companies are pursuing remedies in clinical trials. Bristol-Myers Squibb (NYSE: BMY) paid nearly $900 million in early September to acquire Zymogenetics (Nasdaq: ZYMO) for its promising, but unproven, drug pipeline.

Right now, Idenix Pharma thinks the recent issues are merely a delay, and the company hopes to resume clinical testing by year end. As a near-term milestone, the company is expected to release a lot more clinical trial information in late October, and as much of the data is expected to be relatively positive, this stock could see a nice pop on the heels of that event.

The outlook for Vical is the least clear of this group. The company's drug (licensed to Sanofi-Aventis (NYSE: SNY)) did not fare well in tests to see if it could create new blood vessels to help increase blood flow to distressed limbs. But the company has several promising drugs that are being tested earlier in the clinical process, and some analysts think this latest setback will be forgotten if those other drugs can make headway in clinical trials.

Flagstar's dilution problem
Michigan-based Flagstar Bancorp (NYSE: FBC) likely shot itself in the foot. The bank needs to shore up its capital base and had hoped to quietly raise $600 million through an equity offering. But word got out and existing investors ran for the hills, as their positions in the bank would suddenly become very diluted. Now, with shares shedding a quarter of their value in the past few weeks, the bank needs to figure if such an offering is still a good idea.

Flagstar doesn't actually need $600 million to cover its losses — it instead wanted to build up a small war chest to make local acquisitions. With shares now below $2, management has likely had a change of heart. In fact, it increasingly appears as if Flagstar will sit tight and muddle through with a less-than-ideal balance sheet. In fact, shares rose roughly +3% on Friday as investors realized that such an equity offering is unlikely in the near-term. Shares look pretty enticing trading at about a fourth of book value.

Virginia Bancorp (Nasdaq: VCBI) had seemingly learned the dangers of unexpected dilution. The company's stock surged more than +20% in late July after it announced plans to cancel an equity raise. But management later had a change of heart and pulled off a $10 million equity financing late in September. Shares are off more than -20% since September 21. With the deal done, it may actually be safe to re-enter this name, as it is now selling at 60% of book value.

Genoptics (Nasdaq: GXDX)
I took a look at this maker of blood-diagnostic testing kits back in June after its shares had slid nearly -20% to around $18. [Read more here]

At that time, I cautioned that the company my see even more near-term weakness as “a new sales staff will need several more quarters to start gaining traction.” Adding concern, the health care sector is seeing cost-containment pressures and competition is starting to build.

Sure enough, the company recently announced another quarterly shortfall, and shares recently touched an all-time low dating back to its late 2007 IPO. At this point, this has become a deep value play with half of the market value being accounted for in cash. And while per share profits are under pressure, they are likely to remain north of $1. As a result, shares have likely found a floor at current levels and could start to rebound over the winter as the company's new sales staff gains further traction. It's not yet time to buy this name, but shares are certainly worth monitoring.

Action to Take –> The only names you should bottom-fish here are the two banks and Idenix. Both banks trade well below book value and are likely to rebound once investors realize how much they were oversold. Idenix still has many potential positive milestones ahead of it, though as with any biotech, it is a high risk play.


– 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
Looking for Value in September's Biggest Losers

Read more here:
Looking for Value in September’s Biggest Losers

Uncategorized

These Bad Boy Investments are Perfect for This Market

October 6th, 2010

These Bad Boy Investments are Perfect for This Market

Here's the thing about sin: though ugly, it tends to roll on in any economy.

This fact is a huge benefit to companies that deal in vice. When searching for investments in a slow-growth or uncertain economy, investors often look to defensive industries such as healthcare, food and utilities. After all, people still get sick and need to eat and stay warm regardless of the state of the economy.

But, it's seldom mentioned that people consistently do something else in any economy — drink and smoke. In fact, vice just might be the most defensive business of all.

Stocks in the cigarette and beer industries seem to keep on making profits and the stocks keep going up regardless of what the market is doing. While the S&P 500 is lower now than it was 10 years ago, Morningstar's cigarette industry category soared at a remarkable average of more than +21% a year for the past 10 years. The Beverage-Brewer (beer) category returned an average of about +16% per year for the same period.

And the outperformance is continuing.

Stocks of cigarette companies are up +24% so far this year and the beer stocks are up a lofty +41% on average, compared to less than +4% for the S&P 500.

While the recovery sputters in an environment even the Federal Reserve calls “unusually uncertain”, investors (without a moral objection) might find a profitable port in the storm from the world of vice.

Bad Boys worth a look
Phillip Morris International (NYSE: PM) is the second largest tobacco company in the world (next to China National Tobacco, which has a near monopoly). The cigarette giant owns seven of the world's 15 leading brands, including the iconic Marlboro brand, Parliament, Lark, Chesterfield and others. Operating in 160 countries, Phillip Morris International has a whopping industry-leading 15.4% market share of the international market outside the United States, and 26% not including China.

Phillip Morris International is the international division spun off by Altria (NYSE: MO) in 2008. The spin off freed the company from a host of legal and regulatory hurdles that face Altria, while capturing the growth in international markets. The company generated 42% of first half 2010 revenue in fast growing emerging markets, and has a huge 30% average market share in the top 10 emerging market countries excluding China.

Although highly defensive, the cigarette industry is not immune to economic conditions as smokers quit or buy cheaper brands in a soft economy. The company estimates worldwide cigarette volume will decrease about -2% in 2010. But, the company estimates its own sales volume to increase about +3% to +4% for the year because of exposure to emerging markets.

Phillip Morris International is an absolute cash cow that generates free cash flow of 30% of net revenue (a figure among the highest for large multinational companies). The company just increased the quarterly dividend +7.4% and the stock now pays a solid 4.6% yield.

Boston Beer Company (NYSE: SAM) is the fourth largest brewer in the United States and the largest domestic producer of craft beer with its flagship Sam Adams brand. Craft beer is differentiated from mass produced beer in that it is defined as any beer that sells less than two million barrels per year. Beer drinkers are increasingly choosing the more unique and rich taste of craft beer.

Craft beer has been the fastest growing category in alcoholic beverages. While liquor and mainstream beer sales fell during the recession, craft beer sales increased +6% in 2008 and +5% in 2009. In the first half of 2010, craft beer sales have increased +9% from last year, compared to a year-over-year decrease for mainstream beer sales of -2.7%.

Boston Beer has plenty of room to grow. While net income more than doubled between 2005 and 2009, the company is still relatively small with 2009 revenue of just $415 million. Boston Beer is well-positioned financially, as it has (as of June 30th) $54 million in cash and no debt.

The stock has soared +80% during the past year and +43% year to date, but it still sells at just under 24 times earnings, which is lower than the beer category average and lower than its average multiple for the past five years.

Action to Take –> Both Phillip Morris International and Boston Beer should continue to generate strong earnings in either a good economy or a bad economy. The resilience of these companies makes them ideal investments in today's environment. Both stocks can be purchased at current prices.


– Tom Hutchinson

P.S. –

Uncategorized

These Bad Boy Investments are Perfect for This Market

October 6th, 2010

These Bad Boy Investments are Perfect for This Market

Here's the thing about sin: though ugly, it tends to roll on in any economy.

This fact is a huge benefit to companies that deal in vice. When searching for investments in a slow-growth or uncertain economy, investors often look to defensive industries such as healthcare, food and utilities. After all, people still get sick and need to eat and stay warm regardless of the state of the economy.

But, it's seldom mentioned that people consistently do something else in any economy — drink and smoke. In fact, vice just might be the most defensive business of all.

Stocks in the cigarette and beer industries seem to keep on making profits and the stocks keep going up regardless of what the market is doing. While the S&P 500 is lower now than it was 10 years ago, Morningstar's cigarette industry category soared at a remarkable average of more than +21% a year for the past 10 years. The Beverage-Brewer (beer) category returned an average of about +16% per year for the same period.

And the outperformance is continuing.

Stocks of cigarette companies are up +24% so far this year and the beer stocks are up a lofty +41% on average, compared to less than +4% for the S&P 500.

While the recovery sputters in an environment even the Federal Reserve calls “unusually uncertain”, investors (without a moral objection) might find a profitable port in the storm from the world of vice.

Bad Boys worth a look
Phillip Morris International (NYSE: PM) is the second largest tobacco company in the world (next to China National Tobacco, which has a near monopoly). The cigarette giant owns seven of the world's 15 leading brands, including the iconic Marlboro brand, Parliament, Lark, Chesterfield and others. Operating in 160 countries, Phillip Morris International has a whopping industry-leading 15.4% market share of the international market outside the United States, and 26% not including China.

Phillip Morris International is the international division spun off by Altria (NYSE: MO) in 2008. The spin off freed the company from a host of legal and regulatory hurdles that face Altria, while capturing the growth in international markets. The company generated 42% of first half 2010 revenue in fast growing emerging markets, and has a huge 30% average market share in the top 10 emerging market countries excluding China.

Although highly defensive, the cigarette industry is not immune to economic conditions as smokers quit or buy cheaper brands in a soft economy. The company estimates worldwide cigarette volume will decrease about -2% in 2010. But, the company estimates its own sales volume to increase about +3% to +4% for the year because of exposure to emerging markets.

Phillip Morris International is an absolute cash cow that generates free cash flow of 30% of net revenue (a figure among the highest for large multinational companies). The company just increased the quarterly dividend +7.4% and the stock now pays a solid 4.6% yield.

Boston Beer Company (NYSE: SAM) is the fourth largest brewer in the United States and the largest domestic producer of craft beer with its flagship Sam Adams brand. Craft beer is differentiated from mass produced beer in that it is defined as any beer that sells less than two million barrels per year. Beer drinkers are increasingly choosing the more unique and rich taste of craft beer.

Craft beer has been the fastest growing category in alcoholic beverages. While liquor and mainstream beer sales fell during the recession, craft beer sales increased +6% in 2008 and +5% in 2009. In the first half of 2010, craft beer sales have increased +9% from last year, compared to a year-over-year decrease for mainstream beer sales of -2.7%.

Boston Beer has plenty of room to grow. While net income more than doubled between 2005 and 2009, the company is still relatively small with 2009 revenue of just $415 million. Boston Beer is well-positioned financially, as it has (as of June 30th) $54 million in cash and no debt.

The stock has soared +80% during the past year and +43% year to date, but it still sells at just under 24 times earnings, which is lower than the beer category average and lower than its average multiple for the past five years.

Action to Take –> Both Phillip Morris International and Boston Beer should continue to generate strong earnings in either a good economy or a bad economy. The resilience of these companies makes them ideal investments in today's environment. Both stocks can be purchased at current prices.


– Tom Hutchinson

P.S. –

Uncategorized

Wall Street’s Hands are Tied — and That’s a Good Thing

October 6th, 2010

Wall Street's Hands are Tied -- and That's a Good Thing

In recent weeks, stock market pundits have been wrestling with a curious phenomenon. Trading activity has fallen sharply, which these market-watchers presume to mean that investors have lost interest in stocks. Mom-and-pop investors have likely become more gun-shy this year. But the main culprit for lower trading volumes: Wall Street's own trading desks.

Recent regulations have forced major investment banks to shrink divisions that have used house money to bet on the stock market. Some firms like Bank of America (NYSE: BAC) are getting out of the business altogether. These “prop trading” desks had been a solid source of profits, and Wall Street is surely sorry to see them go.

The ostensible reason for these new regulations is that it makes the whole financial system less risky. If there firms aren't putting their own money at risk, they are less likely to fail. For the rest of us, the demise of prop trading is a clear positive. That's because Wall Street has just lost the incentive to save the best ideas for itself for a while.

Just ask Goldman Sachs (NYSE: GS). Even as Goldman was telling clients to buy slumping housing stocks and bonds in 2008, its own prop trading desk was betting against housing — kind of like a used car dealer pawning a lemon off on you.

The decision to shrink or exit the prop trading business won't deal a sharp blow to the major banks. The prop trading divisions typically account for just 8% to 10% of revenue, and since their results can be very volatile, analysts don't tend to assign a high value to their profit streams. Nevertheless, the fact that consensus earnings forecasts for Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and Bank of America have held up even as its increasingly clear that banking and trading business has slowed in recent months should give you pause. Each of these firms is expected to report quarterly results during the next two weeks, and their shares may be vulnerable to a reduction in forecasts.

The steady wind down of trading at many prop trading desks is already being felt as trading volume is clearly slumping. IBM (NYSE: IBM), for example, traded less than six million shares daily, on average, in August and September. That represents the lowest volume of the year, which is not necessarily a bad thing for large company stocks. But lower volume means that bid and ask spreads on micro-caps and small cap stocks may be a bit wider than usual (as volume in a stock rises, market makers compete more aggressively to fill stock orders and the bid/ask spread shrinks). So it makes sense to place a limit order rather than market orders on these smaller stocks.

Shrinking volume
As noted earlier, declining trading volume is viewed as a sign that individual investors have lost interest in stocks. But the exchange-traded fund (ETF) phenomenon brings that into question. Many exchange-traded funds have seen a commensurate rise in trading volume that roughly offsets the trading volume of individual stocks. For example, the SPDR S&P 500 ETF (NYSE: SPY) used to trade less than 75 million shares per day back in 2005. By 2007, that figure routinely exceeded 100 million and it now averages more than 200 million. [6 Rules ETF Investors Must Know]

The shift away from stock picking and toward ETFs tells you that stocks in a specific sector are more likely to move in lock-step, at least in the short-term, as these ETFS buy and sell all of the components in tandem. For investors with a medium to long-term time horizon, stock-picking is still a winning strategy as fundamental factors like sales and profit growth will always be the long-term determinant of stocks.

Action to Take –> The demise of the individual investor is a current theme playing out among market pundits. Don't you believe it. As the economy sputters back to life in 2011 and 2012, stocks are likely to find newfound favor as they remain cheap by historical standards. The fact that trading volume is light right now simply gives you more time to sharpen your best research ideas. And as noted earlier, Wall Street may be feeling some pressure from changing business trends, but that's not necessarily a bad thing for you.


– 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
Wall Street's Hands are Tied — and That's a Good Thing

Read more here:
Wall Street’s Hands are Tied — and That’s a Good Thing

ETF, Uncategorized

Wall Street’s Hands are Tied — and That’s a Good Thing

October 6th, 2010

Wall Street's Hands are Tied -- and That's a Good Thing

In recent weeks, stock market pundits have been wrestling with a curious phenomenon. Trading activity has fallen sharply, which these market-watchers presume to mean that investors have lost interest in stocks. Mom-and-pop investors have likely become more gun-shy this year. But the main culprit for lower trading volumes: Wall Street's own trading desks.

Recent regulations have forced major investment banks to shrink divisions that have used house money to bet on the stock market. Some firms like Bank of America (NYSE: BAC) are getting out of the business altogether. These “prop trading” desks had been a solid source of profits, and Wall Street is surely sorry to see them go.

The ostensible reason for these new regulations is that it makes the whole financial system less risky. If there firms aren't putting their own money at risk, they are less likely to fail. For the rest of us, the demise of prop trading is a clear positive. That's because Wall Street has just lost the incentive to save the best ideas for itself for a while.

Just ask Goldman Sachs (NYSE: GS). Even as Goldman was telling clients to buy slumping housing stocks and bonds in 2008, its own prop trading desk was betting against housing — kind of like a used car dealer pawning a lemon off on you.

The decision to shrink or exit the prop trading business won't deal a sharp blow to the major banks. The prop trading divisions typically account for just 8% to 10% of revenue, and since their results can be very volatile, analysts don't tend to assign a high value to their profit streams. Nevertheless, the fact that consensus earnings forecasts for Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and Bank of America have held up even as its increasingly clear that banking and trading business has slowed in recent months should give you pause. Each of these firms is expected to report quarterly results during the next two weeks, and their shares may be vulnerable to a reduction in forecasts.

The steady wind down of trading at many prop trading desks is already being felt as trading volume is clearly slumping. IBM (NYSE: IBM), for example, traded less than six million shares daily, on average, in August and September. That represents the lowest volume of the year, which is not necessarily a bad thing for large company stocks. But lower volume means that bid and ask spreads on micro-caps and small cap stocks may be a bit wider than usual (as volume in a stock rises, market makers compete more aggressively to fill stock orders and the bid/ask spread shrinks). So it makes sense to place a limit order rather than market orders on these smaller stocks.

Shrinking volume
As noted earlier, declining trading volume is viewed as a sign that individual investors have lost interest in stocks. But the exchange-traded fund (ETF) phenomenon brings that into question. Many exchange-traded funds have seen a commensurate rise in trading volume that roughly offsets the trading volume of individual stocks. For example, the SPDR S&P 500 ETF (NYSE: SPY) used to trade less than 75 million shares per day back in 2005. By 2007, that figure routinely exceeded 100 million and it now averages more than 200 million. [6 Rules ETF Investors Must Know]

The shift away from stock picking and toward ETFs tells you that stocks in a specific sector are more likely to move in lock-step, at least in the short-term, as these ETFS buy and sell all of the components in tandem. For investors with a medium to long-term time horizon, stock-picking is still a winning strategy as fundamental factors like sales and profit growth will always be the long-term determinant of stocks.

Action to Take –> The demise of the individual investor is a current theme playing out among market pundits. Don't you believe it. As the economy sputters back to life in 2011 and 2012, stocks are likely to find newfound favor as they remain cheap by historical standards. The fact that trading volume is light right now simply gives you more time to sharpen your best research ideas. And as noted earlier, Wall Street may be feeling some pressure from changing business trends, but that's not necessarily a bad thing for you.


– 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
Wall Street's Hands are Tied — and That's a Good Thing

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Wall Street’s Hands are Tied — and That’s a Good Thing

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