This Company Could Help Big Pharma Solve a Major Crisis — and Double Your Money

November 17th, 2010

This Company Could Help Big Pharma Solve a Major Crisis -- and Double Your Money

The standard healthcare pitch for investing in healthcare stocks contains a number of standard components. Among them are favorable demographics due to an aging global population and the favorable impacts of recent U.S. industry legislation that adds millions of patients into the system. These are definite positives, but there are also unique ways for the major players to cut costs.

Outsourcing business functions is a way other industries reduce expenses, and it is becoming a more important theme in healthcare. And unlikely as it may sound, shifting drug development functions to a third party is really catching on…

A primary reason is because drug companies are under the gun. After years of easy growth thanks to hundreds of blockbuster drugs, the industry has hit a dry patch in terms of finding successful drugs to bring to market. The law of large sizes has also taken hold, as the biggest firms now generate billions in sales — so they need an ever-increasing number of drugs to make an impact on total sales. Finally, many blockbuster drugs are seeing their patents expire, a phenomenon known as “the patent cliff,” after which sales plummet as generic versions are released.

Struggles on top-line sales mean that cost cutting has become ever more important for drug companies to push profits forward. Additionally, medicine is entering a more personalized phase, where genomic profiles are made of patients to better position drugs for success in treating diseases and other ailments.

Overall, it's easy to see why firms may want to turn to Ireland-based ICON plc (Nasdaq: ICLR) for help. The company bills itself as one of the larger contract research organizations, or CROs, which basically means that pharma, biotech and medical device firms outsource some of their research functions to ICON. A key function that ICON handles is clinical trials — it now conducts trials for the top 20 pharmaceutical companies in the world. This is an extreme vote of confidence in ICON's business model.

The clinical trial process consists of four phases to determine if a drug compound has efficacy, or effectiveness in the marketplace. Clinical trials that can take up to six years to complete (there are usually even a few years of preclinical research involved before clinical trials can even begin). Altogether, this means that the entire cycle can take up to a decade to complete.

ICON says the pharmaceutical outsourcing industry first got its start in the 1970s and has evolved ever since as healthcare firms have grown more comfortable in outsourcing some of the most important and confidential functions of the drug development process. The benefit of having a CRO firm do this is because CRO firms specialize in clinical trials and therefore are usually more efficient and cheaper.

ICON is in a particularly fortunate position, as it has grown into one of the largest and most respected CRO firms. Organic growth and a steady stream of acquisitions, including the 2009 purchase of Veeda Labs, have continued since the firm was founded in 1990.

This success is in the numbers. In the past decade, ICON has posted annual sales growth of close to +30% and annual earnings growth more than +23%. Stock prices follow fundamentals over the long haul, so this has resulted in fantastic gains for shareholders during this period.

Growth in the past three and five year time frames have been equally impressive. Profit trends have also become more stable in recent times, as ICON has achieved the scale to start generating impressive cash flow. Free cash flow reached $221 million last year, or about $3.70 per share.

Action to Take —> This is certainly a stock worth considering. Free cash flow levels were impressive last year. If ICON can keep these levels of capital generation and manage only +5% growth in the next five years, then the shares can rally more than +80% from current levels. Growth in the double digit range for the next several years means that shares can easily double. And despite counting most major pharma and healthcare firms as clients, ICON's sales were still under $900 million last year, and therefore have plenty more room to run.

– Ryan Fuhrmann

P.S. –

Uncategorized

This Company Could Help Big Pharma Solve a Major Crisis — and Double Your Money

November 17th, 2010

This Company Could Help Big Pharma Solve a Major Crisis -- and Double Your Money

The standard healthcare pitch for investing in healthcare stocks contains a number of standard components. Among them are favorable demographics due to an aging global population and the favorable impacts of recent U.S. industry legislation that adds millions of patients into the system. These are definite positives, but there are also unique ways for the major players to cut costs.

Outsourcing business functions is a way other industries reduce expenses, and it is becoming a more important theme in healthcare. And unlikely as it may sound, shifting drug development functions to a third party is really catching on…

A primary reason is because drug companies are under the gun. After years of easy growth thanks to hundreds of blockbuster drugs, the industry has hit a dry patch in terms of finding successful drugs to bring to market. The law of large sizes has also taken hold, as the biggest firms now generate billions in sales — so they need an ever-increasing number of drugs to make an impact on total sales. Finally, many blockbuster drugs are seeing their patents expire, a phenomenon known as “the patent cliff,” after which sales plummet as generic versions are released.

Struggles on top-line sales mean that cost cutting has become ever more important for drug companies to push profits forward. Additionally, medicine is entering a more personalized phase, where genomic profiles are made of patients to better position drugs for success in treating diseases and other ailments.

Overall, it's easy to see why firms may want to turn to Ireland-based ICON plc (Nasdaq: ICLR) for help. The company bills itself as one of the larger contract research organizations, or CROs, which basically means that pharma, biotech and medical device firms outsource some of their research functions to ICON. A key function that ICON handles is clinical trials — it now conducts trials for the top 20 pharmaceutical companies in the world. This is an extreme vote of confidence in ICON's business model.

The clinical trial process consists of four phases to determine if a drug compound has efficacy, or effectiveness in the marketplace. Clinical trials that can take up to six years to complete (there are usually even a few years of preclinical research involved before clinical trials can even begin). Altogether, this means that the entire cycle can take up to a decade to complete.

ICON says the pharmaceutical outsourcing industry first got its start in the 1970s and has evolved ever since as healthcare firms have grown more comfortable in outsourcing some of the most important and confidential functions of the drug development process. The benefit of having a CRO firm do this is because CRO firms specialize in clinical trials and therefore are usually more efficient and cheaper.

ICON is in a particularly fortunate position, as it has grown into one of the largest and most respected CRO firms. Organic growth and a steady stream of acquisitions, including the 2009 purchase of Veeda Labs, have continued since the firm was founded in 1990.

This success is in the numbers. In the past decade, ICON has posted annual sales growth of close to +30% and annual earnings growth more than +23%. Stock prices follow fundamentals over the long haul, so this has resulted in fantastic gains for shareholders during this period.

Growth in the past three and five year time frames have been equally impressive. Profit trends have also become more stable in recent times, as ICON has achieved the scale to start generating impressive cash flow. Free cash flow reached $221 million last year, or about $3.70 per share.

Action to Take —> This is certainly a stock worth considering. Free cash flow levels were impressive last year. If ICON can keep these levels of capital generation and manage only +5% growth in the next five years, then the shares can rally more than +80% from current levels. Growth in the double digit range for the next several years means that shares can easily double. And despite counting most major pharma and healthcare firms as clients, ICON's sales were still under $900 million last year, and therefore have plenty more room to run.

– Ryan Fuhrmann

P.S. –

Uncategorized

This Recent IPO Could Soar

November 17th, 2010

This Recent IPO Could Soar

The initial public offering (IPO) market continues to heat up with deals coming this week for GM (NYSE: GM), Booz Allen (NYSE: BAH), Caesars Entertainment (NYSE: CZR) and a half dozen other firms. The flurry of deals puts us on track for the most robust quarter for IPOs in more than two years. And looking at the pipeline of new deal registrations, the first quarter of 2011 may be even hotter.

I recently looked at a strategy that uses analyst research to find stocks about to pop. [See: "The Secret Way to Play IPOs"]

Yet that's not the only way to look for upside among recent new deals. You can also scan lists for “broken IPOs,” which are firms that have been public for a short while and are drifting lower while investors focus on more established companies.

Last month, I took a look at top-performing IPOs, as I wrote back then, “many new IPOs take time to find their sea legs and only take off well after their debuts. In fact, every single stock [mentioned in that piece] came out of the gate with a whimper and only started rising many weeks or months after their debut.”

The stocks in the table below are all broken IPOs, each is trading off at least -15% from its IPO offering price. I've pored through the list and found the best rebound candidate.

Complete Genomics (Nasdaq: GNOM)
Any company that struggles to fetch a desired IPO price is a conundrum for investors. On the one hand, a lower-than-expected price is a sign that investor demand just isn't there. On the other hand, you've got a chance to buy a stock at a cheaper price than investment bankers have recently assessed. Case in point, Complete Genomics, which hoped to sell shares for $12 to $14, had to settle for a $9 offering price last Friday, and the stock is now down to $7. That's just half the high end of the expected range of pricing. The weak demand may be due to the fact that rival Pacific Biosciences (Nasdaq: PACB) had just pulled off an IPO weeks earlier, snatching the attention of any fund managers that buy these kinds of companies.

Complete Genomics is involved in DNA sequencing. While other firms like Illumina (Nasdaq: ILMN) and Pacific Biosciences sell equipment to scientists, Complete Genomics acts as a service bureau, performing third-party DNA sequencing services.

Why the tepid IPO reception? Complete Genomics is just starting to generate sales and investors fear that quarterly losses will continue for the next year or two, setting the stage for another round of capital-raising. Ideally, the company would have waited until sales started building and losses started shrinking, but its backers likely balked at putting any more money into the company.

Yet this stock has all the makings of an IPO rebounder, as the firm's underwriters, led by Jefferies, get set to publish initial reports on the company in early December. You can expect to see bullish forecasts of projected sales growth rates, and if you look out far enough, fast-rising profits.

Analysts are likely to note that Complete Genomics' DNA sequencing approach may prove to be very cost-effective and capable of high market share. Industry leader Illumina can analyze an entire sequence of DNA strands for around $10,000 in materials. Complete Genomics thinks it can do it for just $4,500. And over time, prices could drop well below that level, making DNA sequencing for the masses more feasible.

Action to Take –> Keep an eye on new IPOs. They often stumble out of the gate, giving the false impression that they are unworthy investment candidates. Of the recent crop of IPO laggards, Complete Genomics appears to have the greatest potential upside.

With a broken IPO and scant revenues, investors will need to focus on the company's technology value. Complete Genomics is valued at less than $150 million, roughly $20 million less than the money spent developing its technology platform. The revenue profile tells you that this is a risky as a biotech stock. But if the company can make headway in the space, investors may start to make comparisons to Illumina, which is valued at $7.2 billion — 50 times more than Complete Genomics.


– David Sterman

P.S. –

Uncategorized

This Recent IPO Could Soar

November 17th, 2010

This Recent IPO Could Soar

The initial public offering (IPO) market continues to heat up with deals coming this week for GM (NYSE: GM), Booz Allen (NYSE: BAH), Caesars Entertainment (NYSE: CZR) and a half dozen other firms. The flurry of deals puts us on track for the most robust quarter for IPOs in more than two years. And looking at the pipeline of new deal registrations, the first quarter of 2011 may be even hotter.

I recently looked at a strategy that uses analyst research to find stocks about to pop. [See: "The Secret Way to Play IPOs"]

Yet that's not the only way to look for upside among recent new deals. You can also scan lists for “broken IPOs,” which are firms that have been public for a short while and are drifting lower while investors focus on more established companies.

Last month, I took a look at top-performing IPOs, as I wrote back then, “many new IPOs take time to find their sea legs and only take off well after their debuts. In fact, every single stock [mentioned in that piece] came out of the gate with a whimper and only started rising many weeks or months after their debut.”

The stocks in the table below are all broken IPOs, each is trading off at least -15% from its IPO offering price. I've pored through the list and found the best rebound candidate.

Complete Genomics (Nasdaq: GNOM)
Any company that struggles to fetch a desired IPO price is a conundrum for investors. On the one hand, a lower-than-expected price is a sign that investor demand just isn't there. On the other hand, you've got a chance to buy a stock at a cheaper price than investment bankers have recently assessed. Case in point, Complete Genomics, which hoped to sell shares for $12 to $14, had to settle for a $9 offering price last Friday, and the stock is now down to $7. That's just half the high end of the expected range of pricing. The weak demand may be due to the fact that rival Pacific Biosciences (Nasdaq: PACB) had just pulled off an IPO weeks earlier, snatching the attention of any fund managers that buy these kinds of companies.

Complete Genomics is involved in DNA sequencing. While other firms like Illumina (Nasdaq: ILMN) and Pacific Biosciences sell equipment to scientists, Complete Genomics acts as a service bureau, performing third-party DNA sequencing services.

Why the tepid IPO reception? Complete Genomics is just starting to generate sales and investors fear that quarterly losses will continue for the next year or two, setting the stage for another round of capital-raising. Ideally, the company would have waited until sales started building and losses started shrinking, but its backers likely balked at putting any more money into the company.

Yet this stock has all the makings of an IPO rebounder, as the firm's underwriters, led by Jefferies, get set to publish initial reports on the company in early December. You can expect to see bullish forecasts of projected sales growth rates, and if you look out far enough, fast-rising profits.

Analysts are likely to note that Complete Genomics' DNA sequencing approach may prove to be very cost-effective and capable of high market share. Industry leader Illumina can analyze an entire sequence of DNA strands for around $10,000 in materials. Complete Genomics thinks it can do it for just $4,500. And over time, prices could drop well below that level, making DNA sequencing for the masses more feasible.

Action to Take –> Keep an eye on new IPOs. They often stumble out of the gate, giving the false impression that they are unworthy investment candidates. Of the recent crop of IPO laggards, Complete Genomics appears to have the greatest potential upside.

With a broken IPO and scant revenues, investors will need to focus on the company's technology value. Complete Genomics is valued at less than $150 million, roughly $20 million less than the money spent developing its technology platform. The revenue profile tells you that this is a risky as a biotech stock. But if the company can make headway in the space, investors may start to make comparisons to Illumina, which is valued at $7.2 billion — 50 times more than Complete Genomics.


– David Sterman

P.S. –

Uncategorized

Bad News: Stocks Are Loved

November 17th, 2010

Bad News: Stocks Are Loved

Pity the average investor. They tend to jump into and out of the stock market at precisely the wrong times. In late August, I looked at the weekly investor sentiment poll conducted by the American Association of Individual Investors (AAII) and noted that most investors feared a big market tumble. [Read that article here]

Historically speaking, you want to start buying stocks when most individual investors are shunning them. And that has once again proven to be the case. Since that August swoon, the S&P 500 has risen +14%. And like clockwork, that impressive performance has turned individual investors from bears to bulls.

In the week ending November 10th, 57.6% of retail investors were bullish, according to the latest AAII poll. That's up +9.3 percentage points from the prior week, and the most bullish reading since January 2007.

So if bearish sentiment is always good for stocks, is bullish sentiment always bad for stocks? I pored over 25 years' worth of data to gauge the market's subsequent returns every time investors were more than 55% bullish. The results are mixed…

An unusual spike
To put that 57.6% bullish figure in context, there have only been three such weekly readings in the past five years. The only time investors were at least 55% bullish in at least 15 weeks in a calendar year were in 2001, 2003 and 2004. Prior to the last decade, investor bullishness was sometimes met with a big sell-off. For example, investors were roughly 60% bullish in August and September 1987, just weeks ahead of the October 19, 1987 Black Monday crash, when the Dow fell more than 500 points.

Investors once again turned extremely bullish again for a six-week span in the spring of 1991, and were rewarded with decent +10% gains in the S&P 500 for the next year. For the most part, investors wouldn't be so bullish again until late 1999, just months before the market topped out in March, 2000. Even as the market tumbled throughout that year, investors remained very bullish, with the sentiment reading above 55% for 17 weeks during the course of the year. That bullishness in the face of a sharply falling market is the major reason why many individual investors sought to steer clear of the stock market for many years after that.

Yet the bullish readings aren't always a harbinger of doom. In the second half of 2003 and throughout 2004, the AAII sentiment index would be at its highest levels for the whole decade. The sentiment reached an all-time record for bullishness with a reading of 71.4% in June, 2003. Those bulls made some nice money: the S&P 500 was up +30% three years later.

Action to Take –> While investor bearishness is a clear-cut buy signal, investor bullishness is not obviously so. The Black Monday crash in 1987 and the Nasdaq meltdown in 2000 came at a time of extreme euphoria. Yet a rebound in optimism in 2003 and 2004 was met with a better fate.

Investors are likely bullish now for a pair of reasons. First, they see recent market gains, and as always, want to join the party after it's been underway for awhile. That's not a good reason to be bullish. Second, just-released consumer confidence data showed a surprising uptick, a notion confirmed by better-than-expected retail sales in October. Rising consumer confidence and retail spending are solid reasons for turning bullish.

Even as you keep an eye out for fresh stock ideas with upside, you may want to take market neutral approaches, such as with a pair trade. [Read my recent article about pair trading here.]


– 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
Bad News: Stocks Are Loved

Read more here:
Bad News: Stocks Are Loved

Uncategorized

Bad News: Stocks Are Loved

November 17th, 2010

Bad News: Stocks Are Loved

Pity the average investor. They tend to jump into and out of the stock market at precisely the wrong times. In late August, I looked at the weekly investor sentiment poll conducted by the American Association of Individual Investors (AAII) and noted that most investors feared a big market tumble. [Read that article here]

Historically speaking, you want to start buying stocks when most individual investors are shunning them. And that has once again proven to be the case. Since that August swoon, the S&P 500 has risen +14%. And like clockwork, that impressive performance has turned individual investors from bears to bulls.

In the week ending November 10th, 57.6% of retail investors were bullish, according to the latest AAII poll. That's up +9.3 percentage points from the prior week, and the most bullish reading since January 2007.

So if bearish sentiment is always good for stocks, is bullish sentiment always bad for stocks? I pored over 25 years' worth of data to gauge the market's subsequent returns every time investors were more than 55% bullish. The results are mixed…

An unusual spike
To put that 57.6% bullish figure in context, there have only been three such weekly readings in the past five years. The only time investors were at least 55% bullish in at least 15 weeks in a calendar year were in 2001, 2003 and 2004. Prior to the last decade, investor bullishness was sometimes met with a big sell-off. For example, investors were roughly 60% bullish in August and September 1987, just weeks ahead of the October 19, 1987 Black Monday crash, when the Dow fell more than 500 points.

Investors once again turned extremely bullish again for a six-week span in the spring of 1991, and were rewarded with decent +10% gains in the S&P 500 for the next year. For the most part, investors wouldn't be so bullish again until late 1999, just months before the market topped out in March, 2000. Even as the market tumbled throughout that year, investors remained very bullish, with the sentiment reading above 55% for 17 weeks during the course of the year. That bullishness in the face of a sharply falling market is the major reason why many individual investors sought to steer clear of the stock market for many years after that.

Yet the bullish readings aren't always a harbinger of doom. In the second half of 2003 and throughout 2004, the AAII sentiment index would be at its highest levels for the whole decade. The sentiment reached an all-time record for bullishness with a reading of 71.4% in June, 2003. Those bulls made some nice money: the S&P 500 was up +30% three years later.

Action to Take –> While investor bearishness is a clear-cut buy signal, investor bullishness is not obviously so. The Black Monday crash in 1987 and the Nasdaq meltdown in 2000 came at a time of extreme euphoria. Yet a rebound in optimism in 2003 and 2004 was met with a better fate.

Investors are likely bullish now for a pair of reasons. First, they see recent market gains, and as always, want to join the party after it's been underway for awhile. That's not a good reason to be bullish. Second, just-released consumer confidence data showed a surprising uptick, a notion confirmed by better-than-expected retail sales in October. Rising consumer confidence and retail spending are solid reasons for turning bullish.

Even as you keep an eye out for fresh stock ideas with upside, you may want to take market neutral approaches, such as with a pair trade. [Read my recent article about pair trading here.]


– 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
Bad News: Stocks Are Loved

Read more here:
Bad News: Stocks Are Loved

Uncategorized

Why I’m Shorting the Safest Investment in the World

November 17th, 2010

Why I'm Shorting the Safest Investment in the World

I've always had a contrarian streak.

Conventional wisdom is more a jumping off point for me than it is an anchor for my investment decisions. And I've found it usually pays off handsomely to follow my own research rather than Wall Street's.

Case in point: In the spring of 2007, I put a sizable chunk of my personal portfolio into certificates of deposit (CDs) and the iShares Barclays 7-10 Year Treasury ETF (NYSE: IEF). It was the first time in my more than 25 years of investing that I bought anything to do with Treasuries.

I was worried about the health of the financial system and the possible spillover of the subprime crisis into the general economy, even as most pundits were whistling past the graveyard. By the summer of 2007, I wondered if I had overreacted. Even as the largest U.S. subprime lender, New Century Financial, filed for bankruptcy and HSBC (NYSE: HBC) wrote down more than $10 billion in bad mortgage loans, the stock market was still humming along.

In fact, by July 2007 I was actually losing money on my Treasury position. A few months later, however, I was happy I had stuck to my plan.

Come the fall of 2007, investors began to seek out the classic safe haven of Treasuries, slowly driving up the price of IEF. In total, I booked a nice +22% profit when I sold IEF at the beginning of 2009.

That's not a particularly huge score. But compared with the roughly -40% drop in the S&P 500 over that time, it felt like a windfall. That's what being a contrarian can do for you.

And believe it or not, I'm feeling contrarian again about Treasuries… but this time it's different.

That was then, this is now

It's easy to understand why the price of Treasuries was high back then. In 2008, we saw notable bankruptcies across many industries as the financial crisis ensued. We saw the epic collapse of AIG, Bear Sterns and Lehman Brothers. Big retailers like Circuit City and Linens 'n' Things closed their doors. And General Motors and Chrysler were teetering on the edge.

Few investments seemed safe. Investors flooded into Treasuries — considered the safest investments in the world — to simply ride out the storm. It didn't matter how little they yielded.

Oddly enough, Treasuries are still trading at highs. For instance, IEF traded at a high of $100.31 on December 18, 2008. On Monday it closed near $97 per share.

I'm feeling just as I did back in the spring of 2007. Treasuries feel mispriced. But instead of trading on the low side as they did back in 2007, they seem very high for the current economic conditions.

Now, I don't believe the U.S. Federal Reserve is going to raise interest rates soon. In fact, they tried to damper them with the recent announcement of quantitative easing.

Nor do I believe the economy is going to overheat, by any means. Employers aren't rushing to hire. But I do feel the investing and economic landscape has significantly changed from the crisis-ridden times when investors had to settle for a 2.5% 10-year Treasury yield.

Action to Take –> With all this in mind, I decided to do something last month that again went against the grain and against the conventional wisdom: I showed my Stock of the Month subscribers an easy way to short Treasuries, and did just that in my newsletter's $100,000 real-money portfolio.

And in my research, I even found a number of respected bond players and investment managers that were coming to similar conclusions. They were either selling large chunks of their Treasuries positions or outright shorting them.

Still, with quantitative easing on the horizon, my call seemed somewhat out of the box at the time. But it has paid off well: my subscribers and I are up +10% since October.

Keep in mind that shorting Treasuries is not risk-free by any means. If we were to see another downturn, I'd expect investors to pile into the securities, raising their price and hurting my position.

But at this point my move is paying off nicely, even if it is against the grain.

ETF, Uncategorized

Why I’m Shorting the Safest Investment in the World

November 17th, 2010

Why I'm Shorting the Safest Investment in the World

I've always had a contrarian streak.

Conventional wisdom is more a jumping off point for me than it is an anchor for my investment decisions. And I've found it usually pays off handsomely to follow my own research rather than Wall Street's.

Case in point: In the spring of 2007, I put a sizable chunk of my personal portfolio into certificates of deposit (CDs) and the iShares Barclays 7-10 Year Treasury ETF (NYSE: IEF). It was the first time in my more than 25 years of investing that I bought anything to do with Treasuries.

I was worried about the health of the financial system and the possible spillover of the subprime crisis into the general economy, even as most pundits were whistling past the graveyard. By the summer of 2007, I wondered if I had overreacted. Even as the largest U.S. subprime lender, New Century Financial, filed for bankruptcy and HSBC (NYSE: HBC) wrote down more than $10 billion in bad mortgage loans, the stock market was still humming along.

In fact, by July 2007 I was actually losing money on my Treasury position. A few months later, however, I was happy I had stuck to my plan.

Come the fall of 2007, investors began to seek out the classic safe haven of Treasuries, slowly driving up the price of IEF. In total, I booked a nice +22% profit when I sold IEF at the beginning of 2009.

That's not a particularly huge score. But compared with the roughly -40% drop in the S&P 500 over that time, it felt like a windfall. That's what being a contrarian can do for you.

And believe it or not, I'm feeling contrarian again about Treasuries… but this time it's different.

That was then, this is now

It's easy to understand why the price of Treasuries was high back then. In 2008, we saw notable bankruptcies across many industries as the financial crisis ensued. We saw the epic collapse of AIG, Bear Sterns and Lehman Brothers. Big retailers like Circuit City and Linens 'n' Things closed their doors. And General Motors and Chrysler were teetering on the edge.

Few investments seemed safe. Investors flooded into Treasuries — considered the safest investments in the world — to simply ride out the storm. It didn't matter how little they yielded.

Oddly enough, Treasuries are still trading at highs. For instance, IEF traded at a high of $100.31 on December 18, 2008. On Monday it closed near $97 per share.

I'm feeling just as I did back in the spring of 2007. Treasuries feel mispriced. But instead of trading on the low side as they did back in 2007, they seem very high for the current economic conditions.

Now, I don't believe the U.S. Federal Reserve is going to raise interest rates soon. In fact, they tried to damper them with the recent announcement of quantitative easing.

Nor do I believe the economy is going to overheat, by any means. Employers aren't rushing to hire. But I do feel the investing and economic landscape has significantly changed from the crisis-ridden times when investors had to settle for a 2.5% 10-year Treasury yield.

Action to Take –> With all this in mind, I decided to do something last month that again went against the grain and against the conventional wisdom: I showed my Stock of the Month subscribers an easy way to short Treasuries, and did just that in my newsletter's $100,000 real-money portfolio.

And in my research, I even found a number of respected bond players and investment managers that were coming to similar conclusions. They were either selling large chunks of their Treasuries positions or outright shorting them.

Still, with quantitative easing on the horizon, my call seemed somewhat out of the box at the time. But it has paid off well: my subscribers and I are up +10% since October.

Keep in mind that shorting Treasuries is not risk-free by any means. If we were to see another downturn, I'd expect investors to pile into the securities, raising their price and hurting my position.

But at this point my move is paying off nicely, even if it is against the grain.

ETF, Uncategorized

3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

November 17th, 2010

3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

Since the financial crisis in 2008, corporate executives have taken a cautious approach to making big decisions. This has been especially the case with mergers & acquisitions (M&A).

But according to a recent survey from Thomson Reuters and Freeman (a consulting firm), it looks like 2011 is shaping-up to be a boom year. The forecast is for more than $3.0 trillion in transactions on around the globe in 2011. Consider that 2007 saw $4.3 trillion in deals.

Why the rebound? There are several reasons. First of all, companies need to find new sources of growth. No doubt, M&A is an effective way to do this.

What's more, the cost for acquisitions is fairly cheap, in light of rock-bottom interest rates. The result is that it does not take much savings and operational improvement to get attractive returns on acquisitions.

Of course, an M&A surge will be beneficial for investors, since most deals happen at a premium to their market values. Yet there are certainly some risks — after all, it can be incredibly difficult to pinpoint buyout targets. [See: "36% Gains From a Takeover -- and Two More Stocks That Could Follow"]

Despite this, there are still some ways to play the M&A game:

1. Focus on the hot spots
The Thomson survey shows that the key industries that are prime targets for takeovers include real estate, financial services and emerging markets. As for the first two, these sectors have been generally out of favor. In other words, a buyer is really looking for a way to expand its footprint at a good valuation.

And yes, the emerging markets are the opposite, since valuations have been frothy. But for large companies, it is a must-have area to expand business, so valuations may continue to be robust as deal making heats up.

A good way to invest on these themes is to focus on exchange-traded funds (ETFs). Some options include Vanguard Emerging Markets ETF(NYSE: VWO), SPDR KBW Regional Banking ETF (NYSE: KRE) and SPDR Series Trust SPDR Homebuilers (NYSE: XHB).

2. Merger arbitrage (aka “Merger arb”)
Merger arbitrage is actually a low-risk way to invest in M&A. The approach is to focus on mergers that have already been announced. For example, suppose that Microsoft (Nasdaq: MSFT) has agreed to purchase Salesforce.com (NYSE: CRM) in an all-stock deal. In many cases, the buyout price will be higher than the current price of the target.

The main reason is that there is a risk that the deal may not get done. This may be because of antitrust problems, negotiation problems and so on.

Thus, a merger-arb fund will evaluate the risks and see if there is enough return to justify an investment. While this sometimes falls apart, it tends to have a good track record — especially when the M&A market is active.

While fairly new, there are several merger arb ETFs. One just came out within the last month: the Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE: CSMA). It is a passively-managed fund that is based on a sophisticated merger arb index composed by Credit Suisse.

Another ETF to consider is the IQ ARB Merger Arbitrage ETF (NYSE: MNA).

3. Boutique investment banks
These companies can have volatile revenue and earnings, but keep in mind that several mega deals can result in huge fees for boutique investment banks.

When the M&A market heats up, earnings can definitely pile up. Consider Lazard (NYSE: LAZ). In the latest quarter, the firm saw its deal advisory revenue spike +29% to $160.7 million. Just think what will happen if 2011 turns out to be a stellar year for deal making…

Lazard has also been making strides with its asset management business. This unit grew +32% in the latest quarter. Yet the main driver will be the deal business. And Lazard has a global investment-banking platform with some of the best professionals in the business.

Action to Take –> Investing in ETFs can be an effective way to benefit from the merger wave. However, the returns can be hum-drum because merger-arb focuses on low-risk opportunities.

So if you're looking for big returns, a better approach is to invest in a company like Lazard. The company should continue to post strong revenue and earnings growth for the next couple years. At the same time, Lazard is trying to reduce its compensation costs. But more importantly, the shares trade for a decent valuation of 2.4 times revenue.


– Tom Taulli

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Forbes.com. Read more…

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

Read more here:
3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

ETF, OPTIONS, Uncategorized

3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

November 17th, 2010

3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

Since the financial crisis in 2008, corporate executives have taken a cautious approach to making big decisions. This has been especially the case with mergers & acquisitions (M&A).

But according to a recent survey from Thomson Reuters and Freeman (a consulting firm), it looks like 2011 is shaping-up to be a boom year. The forecast is for more than $3.0 trillion in transactions on around the globe in 2011. Consider that 2007 saw $4.3 trillion in deals.

Why the rebound? There are several reasons. First of all, companies need to find new sources of growth. No doubt, M&A is an effective way to do this.

What's more, the cost for acquisitions is fairly cheap, in light of rock-bottom interest rates. The result is that it does not take much savings and operational improvement to get attractive returns on acquisitions.

Of course, an M&A surge will be beneficial for investors, since most deals happen at a premium to their market values. Yet there are certainly some risks — after all, it can be incredibly difficult to pinpoint buyout targets. [See: "36% Gains From a Takeover -- and Two More Stocks That Could Follow"]

Despite this, there are still some ways to play the M&A game:

1. Focus on the hot spots
The Thomson survey shows that the key industries that are prime targets for takeovers include real estate, financial services and emerging markets. As for the first two, these sectors have been generally out of favor. In other words, a buyer is really looking for a way to expand its footprint at a good valuation.

And yes, the emerging markets are the opposite, since valuations have been frothy. But for large companies, it is a must-have area to expand business, so valuations may continue to be robust as deal making heats up.

A good way to invest on these themes is to focus on exchange-traded funds (ETFs). Some options include Vanguard Emerging Markets ETF(NYSE: VWO), SPDR KBW Regional Banking ETF (NYSE: KRE) and SPDR Series Trust SPDR Homebuilers (NYSE: XHB).

2. Merger arbitrage (aka “Merger arb”)
Merger arbitrage is actually a low-risk way to invest in M&A. The approach is to focus on mergers that have already been announced. For example, suppose that Microsoft (Nasdaq: MSFT) has agreed to purchase Salesforce.com (NYSE: CRM) in an all-stock deal. In many cases, the buyout price will be higher than the current price of the target.

The main reason is that there is a risk that the deal may not get done. This may be because of antitrust problems, negotiation problems and so on.

Thus, a merger-arb fund will evaluate the risks and see if there is enough return to justify an investment. While this sometimes falls apart, it tends to have a good track record — especially when the M&A market is active.

While fairly new, there are several merger arb ETFs. One just came out within the last month: the Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE: CSMA). It is a passively-managed fund that is based on a sophisticated merger arb index composed by Credit Suisse.

Another ETF to consider is the IQ ARB Merger Arbitrage ETF (NYSE: MNA).

3. Boutique investment banks
These companies can have volatile revenue and earnings, but keep in mind that several mega deals can result in huge fees for boutique investment banks.

When the M&A market heats up, earnings can definitely pile up. Consider Lazard (NYSE: LAZ). In the latest quarter, the firm saw its deal advisory revenue spike +29% to $160.7 million. Just think what will happen if 2011 turns out to be a stellar year for deal making…

Lazard has also been making strides with its asset management business. This unit grew +32% in the latest quarter. Yet the main driver will be the deal business. And Lazard has a global investment-banking platform with some of the best professionals in the business.

Action to Take –> Investing in ETFs can be an effective way to benefit from the merger wave. However, the returns can be hum-drum because merger-arb focuses on low-risk opportunities.

So if you're looking for big returns, a better approach is to invest in a company like Lazard. The company should continue to post strong revenue and earnings growth for the next couple years. At the same time, Lazard is trying to reduce its compensation costs. But more importantly, the shares trade for a decent valuation of 2.4 times revenue.


– Tom Taulli

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Forbes.com. Read more…

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

Read more here:
3 Ways to Cash-in on the $3 Trillion Merger Wave Next Year

ETF, OPTIONS, Uncategorized

State Street Latest To Eliminate Derivatives From Active ETFs

November 17th, 2010

State Street Global Advisors (SSgA) is the latest to amend its application for actively-managed ETFs with the SEC to remove the usage of derivatives from the portfolio management process. SSgA first made the original filing with the SEC to launch actively-managed ETFs in Sep 2009, more than a year ago. That application would have allowed the planned funds to invest without limitation in derivative instruments including futures, options and swaps.

SSgA is just one of the many issuers that has had this experience with the SEC with regards to Active ETF applications. Numerous other fund companies have yet to receive exemptive relief to launch actively-managed ETFs which they applied for many months ago. There are now more than 25 distinct companies that have applications for new actively-managed ETFs filed with the SEC. Since the SEC launched its investigation into derivative usage within ETFs back in March 2010, many of these issuers have gone on to modify their applications to exclude the usage of derivatives, so as to avoid excessive SEC scrutiny and hopefully expedite the approval process. Just some of the companies that did this include the likes of JP Morgan, Market Vectors and Legg Mason.

SSgA’s initial plans are for the launch of actively-managed target date funds, where SSgA Funds Management would be the investment advisor to the funds. The strategy pursued by the proposed Active ETFs would be similar to existing target date mutual funds. The funds would try to achieve their objective by investing in underlying ETFs and will be managed according to an asset allocation strategy that becomes increasingly conservative over time. Like all other actively-managed ETFs in the US, the funds would provide information on any change in portfolio composition on a T+1 basis. A unique aspect to these ETFs is that each will invest in a “Master Fund” that invests in underlying ETPs, instead of holding the securities directly. This “master-feeder” structure has been designed to save costs because it is anticipated that aside from the planned Active ETFs, other funds in the future could also hold shares of the Master Fund.

ETF, Mutual Fund, OPTIONS

State Street Latest To Eliminate Derivatives From Active ETFs

November 17th, 2010

State Street Global Advisors (SSgA) is the latest to amend its application for actively-managed ETFs with the SEC to remove the usage of derivatives from the portfolio management process. SSgA first made the original filing with the SEC to launch actively-managed ETFs in Sep 2009, more than a year ago. That application would have allowed the planned funds to invest without limitation in derivative instruments including futures, options and swaps.

SSgA is just one of the many issuers that has had this experience with the SEC with regards to Active ETF applications. Numerous other fund companies have yet to receive exemptive relief to launch actively-managed ETFs which they applied for many months ago. There are now more than 25 distinct companies that have applications for new actively-managed ETFs filed with the SEC. Since the SEC launched its investigation into derivative usage within ETFs back in March 2010, many of these issuers have gone on to modify their applications to exclude the usage of derivatives, so as to avoid excessive SEC scrutiny and hopefully expedite the approval process. Just some of the companies that did this include the likes of JP Morgan, Market Vectors and Legg Mason.

SSgA’s initial plans are for the launch of actively-managed target date funds, where SSgA Funds Management would be the investment advisor to the funds. The strategy pursued by the proposed Active ETFs would be similar to existing target date mutual funds. The funds would try to achieve their objective by investing in underlying ETFs and will be managed according to an asset allocation strategy that becomes increasingly conservative over time. Like all other actively-managed ETFs in the US, the funds would provide information on any change in portfolio composition on a T+1 basis. A unique aspect to these ETFs is that each will invest in a “Master Fund” that invests in underlying ETPs, instead of holding the securities directly. This “master-feeder” structure has been designed to save costs because it is anticipated that aside from the planned Active ETFs, other funds in the future could also hold shares of the Master Fund.

ETF, Mutual Fund, OPTIONS

Telling Trend Reversals: The Dollar and Bonds

November 17th, 2010

Claus Vogt

In last week’s Money and Markets column, I wrote about Bernanke’s quantitative easing policy. The goal of the policy is to create higher stock and housing prices by pushing the dollar and interest rates down.

So how is the Fed’s plan going? Let’s start with the …

Euro/Dollar

The day after the Fed announced it would buy another $600 billion in Treasury bonds with newly created money, the euro broke out of a short-term consolidation in what seemed to be a continuation of an uptrend that began in June.

But one day later this move proved to be a false breakout with the euro falling from 1.4282 to 1.3587 as of this past Monday. That is a huge move in only seven trading days! And now the euro’s high in the wake of the Fed’s announcement looks like the last hurrah of the rally off June’s low.

As you can see in the EUR/USD chart below, the euro made a double-top in 2008. Ever since, there have been lower highs and lower lows. The 200-day moving average is still declining thus confirming the euro’s longer term downtrend.

Euro/Dollar 2000 – 2010

chart1 Telling Trend Reversals: The Dollar and Bonds

Source: www.decisionpoint.com

The lower panel of the chart shows the price momentum oscillator. Recently this indicator shot up above two. Readings as high as this have historically been followed by larger corrections or trend reversals.

And I can’t see any reason why it should be different this time. Especially since sentiment indicators towards the dollar have reached very high bearish readings.

Now let’s turn to the bond market …

Treasury Bonds Are Firing Back

My next chart shows 30-year Treasury bond yields. After the Fed’s decision to implement QE2, yields started to rise and prices started to sink. Not what the Fed wants … and surely bad news for the U.S. housing market.

chart2 Telling Trend Reversals: The Dollar and Bonds

Technically this development may be a very important one …

Long-term Treasury rates hit a low in December 2008. At the end of August 2010 they marked a secondary low, well above the former one. This may turn out to be a huge bottom formation, thus signaling the reversal of a secular downtrend that began in 1981.

The Stock Market Could Be Next to Reverse

A stronger dollar and rising interest rates are not good for stocks. Now we have both! So in my opinion, these two reversals are probably a harbinger for what’s to come for the stock market.

chart3 Telling Trend Reversals: The Dollar and Bonds

The S&P 500 chart above shows a potential double-top forming. If I’m right, the next bear market may have started a few days ago.

Best wishes,

Claus

P.S. Last week on Money and Markets TV, we broke down what’s already been a momentous month in America … and how you can take advantage of the opportunities in the markets created by this month’s events.

If you missed that episode — or would like to see it again at your convenience — it’s available at www.weissmoneynetwork.com.

Related posts:

  1. Make the Trend Your Friend with Bond ETFs
  2. Get Aboard the Trend in Consumer Spending with Sector ETFs
  3. Five Signs Telling Me the Bear Market Is Back

Read more here:
Telling Trend Reversals: The Dollar and Bonds

Commodities, ETF, Mutual Fund, Uncategorized

Telling Trend Reversals: The Dollar and Bonds

November 17th, 2010

Claus Vogt

In last week’s Money and Markets column, I wrote about Bernanke’s quantitative easing policy. The goal of the policy is to create higher stock and housing prices by pushing the dollar and interest rates down.

So how is the Fed’s plan going? Let’s start with the …

Euro/Dollar

The day after the Fed announced it would buy another $600 billion in Treasury bonds with newly created money, the euro broke out of a short-term consolidation in what seemed to be a continuation of an uptrend that began in June.

But one day later this move proved to be a false breakout with the euro falling from 1.4282 to 1.3587 as of this past Monday. That is a huge move in only seven trading days! And now the euro’s high in the wake of the Fed’s announcement looks like the last hurrah of the rally off June’s low.

As you can see in the EUR/USD chart below, the euro made a double-top in 2008. Ever since, there have been lower highs and lower lows. The 200-day moving average is still declining thus confirming the euro’s longer term downtrend.

Euro/Dollar 2000 – 2010

chart1 Telling Trend Reversals: The Dollar and Bonds

Source: www.decisionpoint.com

The lower panel of the chart shows the price momentum oscillator. Recently this indicator shot up above two. Readings as high as this have historically been followed by larger corrections or trend reversals.

And I can’t see any reason why it should be different this time. Especially since sentiment indicators towards the dollar have reached very high bearish readings.

Now let’s turn to the bond market …

Treasury Bonds Are Firing Back

My next chart shows 30-year Treasury bond yields. After the Fed’s decision to implement QE2, yields started to rise and prices started to sink. Not what the Fed wants … and surely bad news for the U.S. housing market.

chart2 Telling Trend Reversals: The Dollar and Bonds

Technically this development may be a very important one …

Long-term Treasury rates hit a low in December 2008. At the end of August 2010 they marked a secondary low, well above the former one. This may turn out to be a huge bottom formation, thus signaling the reversal of a secular downtrend that began in 1981.

The Stock Market Could Be Next to Reverse

A stronger dollar and rising interest rates are not good for stocks. Now we have both! So in my opinion, these two reversals are probably a harbinger for what’s to come for the stock market.

chart3 Telling Trend Reversals: The Dollar and Bonds

The S&P 500 chart above shows a potential double-top forming. If I’m right, the next bear market may have started a few days ago.

Best wishes,

Claus

P.S. Last week on Money and Markets TV, we broke down what’s already been a momentous month in America … and how you can take advantage of the opportunities in the markets created by this month’s events.

If you missed that episode — or would like to see it again at your convenience — it’s available at www.weissmoneynetwork.com.

Related posts:

  1. Make the Trend Your Friend with Bond ETFs
  2. Get Aboard the Trend in Consumer Spending with Sector ETFs
  3. Five Signs Telling Me the Bear Market Is Back

Read more here:
Telling Trend Reversals: The Dollar and Bonds

Commodities, ETF, Mutual Fund, Uncategorized

IN FOCUS: PIMCO Build America Bond Strategy Fund (BABZ)

November 17th, 2010

Date Launched: Sep 20, 2010

Links: Factsheet, Website, Prospectus

Investment Strategy:

BABZ is an actively-managed ETF that provides investors with exposure to taxable municipal debt securities issued under the Build America Bond program. The fund invests in investment-grade debt and provides daily transparency of holdings. PIMCO conducts issuer-specific credit analysis to analyze each issuer in order to avoid municipalities with deteriorating credit quality. The active management pursued by the portfolio managers enables the portfolio composition to change when credit conditions change.  At the date of writing, the fund held 37 different securities which had an average duration of 13.22 and an average maturity of 28.5 years. BABZ had a 30-day yield of 5.17%. The fund does not utilize any derivatives and does not invest in options, futures or swaps. The benchmark for the actively-managed fund is the Barclays Capital Build America Bond Index.

Portfolio Managers:

PIMCO serves as the investment manager of MUNI. PIMCO has more than $940 billion in assets under management as of Sep 30, 2009.

Danford O. Peterson – Senior Vice President at PIMCO, joined PIMCO in 2010 before which he served as Vice President at Goldman Sachs in the municipal bond trading group.

The Numbers:

Current Market Cap – $21.7 million

Expense Ratio – Capped at 0.45% till Oct 31, 2011 (by contractual agreement), 0.57% without fee waiver.

Average Volume – 18,634 shares

What’s special about it?

1. There are only 3 ETFs in the US that provide exposure to the Build America Bond sector. BABZ is the only fund that provides active management in the space in ETF form. The other two index ETFs are the PowerShares Build America Bond Portfolio (BAB) and the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS).

2. BABZ managers can pick and choose which issuers they want exposure to through Build America Bonds and are not obliged to own the bonds just because they are part of the index. This discretion shows in the number of securities held by the fund. Where BABS held 93 securities and BAB held a whopping 301 securities, BABZ held only a select 37 securities.

Analysis:

Positives –

- Considering the relatively poor fiscal condition of various municipalities around the US due to budget deficits, active management in this space may be necessary to avoid holding onto each and every Build America Bond, regardless of the credit quality of the issuer.

- Unlike index bond ETFs, which depend on the rating agencies for credit analysis, PIMCO analyzes each municipality’s fundamentals and BABZ provides access to that expertise.

Negatives –

- BABZ has a marginally higher expense ratio which is 10 basis points more than the 0.35% expense ratio that BAB and BABS have. However, that 10 basis point difference may be justified given that investors are getting an actively-managed portfolio in return, as opposed to a passive one.

- The performance of BABZ in its short history has been nothing to call home about. While the Build America Bond sector as a whole has declined by about 7%, BABZ has not been able to beat its index counterparts as shown in the chart below.

Performance to Date, compared to the PowerShares Build America Bond Portfolio (BAB) and the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS):

ETF, OPTIONS

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