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

September 28th, 2010

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

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

The Bills lost the game – 30 to 38.

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

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

But is it?

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

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

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

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

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

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

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

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

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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




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

Uncategorized

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

September 28th, 2010

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

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

The Bills lost the game – 30 to 38.

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

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

But is it?

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

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

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

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

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

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

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

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

Eric J. Fry
for The Daily Reckoning

The Problem with Cautious Optimism – When “Better than Expected” is still “Worse than Desired.” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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




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

Uncategorized

A Hazard of Buying Bond Funds Now

September 28th, 2010

Nilus Mattive

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

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

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

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

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

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

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

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

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

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

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

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

September 28th, 2010

Date Launched: Aug 9, 2010

Further Links: Website, Prospectus

Investment Strategy:

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

Portfolio Managers:

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

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

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

The Numbers:

Expense Ratio – 0.55%.

Average Volume – 181,176 shares

Average bid-ask spread: 0.14%

What’s special about it?

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

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

Analysis:

Positives –

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

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

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

Negatives –

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

ETF

How to Profit from North America’s New Oil Boom

September 28th, 2010

How to Profit from North America's New Oil Boom

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

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

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

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

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

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

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

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

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

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

– StreetAuthority Contributor
Sumit Roy

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

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

Read more here:
How to Profit from North America’s New Oil Boom

Uncategorized

How to Profit from North America’s New Oil Boom

September 28th, 2010

How to Profit from North America's New Oil Boom

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

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

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

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

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

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

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

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

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

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

– StreetAuthority Contributor
Sumit Roy

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

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

Read more here:
How to Profit from North America’s New Oil Boom

Uncategorized

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

September 28th, 2010

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

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

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

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

The positives:

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

The negatives:

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

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

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

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

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

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

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

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

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

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

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


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
Is This Well-Known Media Stock Worth a Second Look?

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

Uncategorized

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

September 28th, 2010

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

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

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

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

The positives:

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

The negatives:

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

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

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

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

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

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

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

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

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

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

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


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
Is This Well-Known Media Stock Worth a Second Look?

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

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How To Profit From All-Time High Gold Prices

September 28th, 2010

How To Profit From All-Time High Gold Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fundamentally, NEM appears to have strong growth potential.

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

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

The earnings outlook is equally upbeat.

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

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

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

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

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

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

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

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How To Profit From All-Time High Gold Prices

September 28th, 2010

How To Profit From All-Time High Gold Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fundamentally, NEM appears to have strong growth potential.

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

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

The earnings outlook is equally upbeat.

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

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

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

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

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

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

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

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

September 28th, 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

– StreetAuthority Contributor
James Brumley

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

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

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

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

September 28th, 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

– StreetAuthority Contributor
James Brumley

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

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

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

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The Cost of Fed Incompetence

September 27th, 2010

I have grown old yelling at my neighbors and family members to buy gold, silver and oil, to little-to-no avail, and I can see that they are getting bored with my same old million reasons why they should, and how their deliberate inaction only proves their stupidity, which I never tire of pointing out, so they can’t say that they “didn’t know” that they were stupid.

So, recently, I was standing in the street outside of Griswald’s house, telling Old Man Griswald how he was an idiot for not buying gold, silver and oil as the only rational defense against the inflationary horror unleashed when his own stupid government (that he and his loathsome Leftist friends elected over and over again) was deficit-spending so unbelievably much money, dutifully created by the foul Federal Reserve, which is a complete failure as an institution if ever there was one, having destroyed 98% of the buying power of the US dollar since the Fed’s inception in 1913 by creating too much money and credit, when their original purpose was to “keep prices stable,” to which I cynically laugh in Sneering Mogambo Rebuke (SMR) “Hahahaha!”

You can probably imagine that I was, as usual, getting pretty worked up by my long harangue, and I was just getting to my famous angry summation of, “If you don’t buy gold, silver and oil with all your money, then you are making the Biggest Freaking Mistake (BFM) of your life, you moron!” when, suddenly, Griswald himself opened the door!

He hollered out how the biggest mistake he ever made was to choose to live in a place so near to me, and how I am some kind of weirdo, gun-nut, gold-bug bozo.

I am, of course, cleverly rebutting his every point by reminding him that he is an idiot for not buying gold, silver and oil because of that, you know, government deficit-spending thing, and how the Fed is creating so much new money, which increases the money supply, which makes prices go up, which makes people upset, which leads to disquieting things like the French Revolution, and the Russian Revolution, and people like him getting destroyed financially.

I even reminded him that the M2 measure of the money supply is up about $400 billion in the last 12 months, and even though the monetary base was up only about $220 billion, taking it to $1.987 trillion.

And, of course, I mentioned how the Federal Reserve is back to increasing Total Fed Credit (the fabled magical fairy-dust credit that becomes many, many times bigger when it finally becomes money, adds to the money supply and causes the misery of price inflation), which took this particular stinking load of lies and fraud up another $2.7 billion last week, taking the Fed’s total “cost of Fed incompetence” to a staggering $2.289 trillion. So far.

Well, you can take Griswald off of your list of People Scared And Buying Gold (PSABG), but there are apparently plenty more who are not, particularly Europeans, as we learn from the Northwest Territorial Mint’s newsletter that the World Gold Council (WGC) reported recently that “during the last two years there has been an ‘extraordinary increase’ in the retail demand for physical gold products in Europe,” which must be significant because “European demand represented 40% of global demand for gold in 2009.” Global!

Now, I am second-to-none in raw xenophobia, paranoia or conspiracy theorizing, especially as concerns Europeans, which is a phobia somewhere on the Mogambo list of the Top 100 Scary Things (T100ST), probably categorized somewhere below “Werewolves” but above “Total strangers who seem to hold a grudge against me, talk about me behind my back, and plot against me,” which, I note for the record, is what foreigners do!

I can’t help but notice that foreigners are always talking in some foreign language which I can’t understand, which proves – proves! – that they are talking about me and hatching ways to hurt me, or else they would speak in English so that I could understand them. Can’t you see how it all fits together? It’s obvious!

Well, I can tell by the stunned expression on everyone’s faces that they do NOT “see how it all fits together.” After an embarrassing silence that seemed like an eternity, with everyone looking at me with a mixture of disgust and disbelief on their faces, finally the spell was broken when the Mint went on that in the second quarter of 2010, Europe was still “the source of 35% of the world’s demand for small gold bars and coins,” whereas just two years ago, European demand for gold had been only a “relatively insignificant” 7% of global demand.

And since nothing in the macroeconomic environment has changed except to get worse, then the soon-to-be panicked buying of gold and silver by people and institutions worldwide will hand Huge Freaking Profits (HFP) to those who buy these magical metals now at bargain levels, which makes it so easy that you giggle with delight, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

The Cost of Fed Incompetence 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 Cost of Fed Incompetence




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

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The (Unofficial) Beginning of the Double Dip Recession

September 27th, 2010

Today, we take a belated bow for calling the “official” end of the recession… by declaring a “double dip” to be unofficially under way.

Last week, the National Bureau of Economic Research (NBER) declared the Great Recession ended in June 2009. Turns out, looking back, we called it in real-time — relying on a single obscure indicator.

It’s called “capacity utilization” — that is, all the plant, equipment and other resources business have at their disposal, and what percentage of it businesses are actually putting to work.

On June 17, 2009, we pointed out that “over the last 40 years, a bottom in capacity utilization has marked the precise end of recessions.”

“Having no interest in real-time forecasting,” we followed up on Aug. 14, 2009, “the NBER won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007.

“Heh,” we concluded “by the time the NBER calls an end to this one, we might have begun another.

And so it goes. Today, we can hardly be precise about when it started. We can only say we believe the “double dip” is already under way.

One “tell” of the double dip: The horrible numbers reflecting private-sector investment. We brought you this last Tuesday, but it’s worth revisiting. The “growth” in GDP that’s come about since June 2009 owes almost entirely to growth in government spending — mostly in the form of transfer payments.

Meanwhile, gross domestic private investment has shrunk from 17.3% of GDP at the recession’s start to 11.3% last year. Worse still is that the majority of that figure is devoted to simply repairing and maintaining existing plant and equipment… and how it’s growing.

Investment in new plant and equipment made up an already low 40% of gross domestic private investment at the start of the recession. Last year, it was a paltry 3.5%.

Capital has gone on strike. What’s it doing instead?

“Talking heads are gushing over the piles of cash on corporate balance sheets,” grouses Dan Amoss this morning. “But how is this good for shareholder value? Since when have big corporations done intelligent things with cash?

“Most of the time, they haven’t. Instead, they overpay for their stock repurchases and overpay for acquisitions.”

And overpay the same folks who are making those decisions.

Right on cue, Standard & Poor’s reports that S&P 500 companies increased their stock buybacks during the second quarter by 221% compared to a year earlier — the fourth quarter in a row that buybacks have grown. 257 of the companies in the index — more than half — took part in buyback programs during Q2.

“No CEO wants to take the career risk of aggressively deploying capital when acquisition targets are dirt-cheap,” Dan surmises. Again on cue, there were a flurry of acquisition announcements just today…

  • Wal-Mart is offering $4.3 billion for South Africa’s Massmart
  • Anglo-Dutch conglomerate Unilever is buying Alberto-Culver, the maker of beauty products, for $3.7 billion
  • Southwest Airlines will fork over $1.4 billion to buy AirTran.

“High corporate cash balances don’t reflect a healthy economy,” Dan asserts. “Companies that hoard cash aren’t expanding. If they’re not expanding, they’re not going to hire new employees.

“It doesn’t help that Congress made hiring more expensive with the health care law and countless other layers of bureaucratic red tape. Weighed against a mountain of debt and other liabilities — both on- and off-balance sheet liabilities — corporate cash balances are much less impressive.”

The second indication we’ve already begun another recession: M3 money supply.

M3 is the broadest possible measure of money in the system including cash, savings accounts, money market funds, etc. The Federal Reserve stopped tracking M3 in 2006 because they say they no longer find it useful.

John Williams of Shadowstats.com, however, has stayed on top of it, easily collecting the data needed to make this prognostication:

“M3 rising to the upside does not necessarily signal and economic upturn,” says Williams, explaining the lines on the graph above. “Yet whenever annual growth in M3 has turned negative, a recession always has followed, usually within six-nine months.”

Real M3 generated a signal in December 2009 for a downturn. How much time has elapsed? Oh, about nine months.

“The current weakness,” says John, “will eventually gain official recognition as the second down leg of a double-dip recession.”

“We are now at a state where,” Alan Greenspan said Friday, sounding almost lucid, “excluding World War II, we are in the worst shape of relationship between borrowing capacity and debt, I suspect, since 1791…

“We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk… In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem.

“Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious depression. And my basic — I said ‘depression.’ I meant recession.

“My problem, basically, is that economists can’t make these forecasts.”

Good thing we’re not economists, eh?

Addison Wiggin
for The Daily Reckoning

The (Unofficial) Beginning of the Double Dip Recession 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 (Unofficial) Beginning of the Double Dip Recession




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

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Opt Out of Social Security

September 27th, 2010

“The Social Security Trust Fund is misnamed. It cannot be trusted, and it is not funded.”

–Former US Comptroller General David Walker, July 2010.

If David Walker – who was essentially the US government’s accountant from 1998-2008 – can make jokes like that about Social Security, we’re in trouble. Indeed, as we noted in our essay “The End of Social Security as We Know It”, the Social Security Trust recently began paying out more than it is taking in. Over the next 75 years, the Fund will require an additional $5.4 trillion to pay for scheduled benefits.

Given the deplorable fiscal condition of the Social Security Trust Fund, some forward-looking Americans are asking, “Why can’t I just opt out?” Even middle-aged members of the Baby Boom generation are wondering if there will be any Social Security left for them when the time comes…and if they wouldn’t be better off abandoning the government’s mandatory retirement plan.

So can you opt out? In a word, yes.

How Do You Feel About a Horse and Buggy?

It’s true; you can opt out of Social Security…if you belong to a fiercely independent religious culture like the Amish.

Back in 1954, when the Social Security Administration first began taxing and covering “agricultural workers,” the Amish took issue with Social Security’s forced participation. The program, also known as Federal Old Age, Disability and Survivors Insurance, is a pretty brash affront to the Amish credo. Not only are the Amish famous for “taking care of their own,” but the whole concept of insurance goes against their faith. As people extremely serious about God’s plan, they don’t take kindly to a government-mandated hedge against His prerogative.

So in the late ’50s, the Amish started their resistance to Social Security. Naturally, they were quiet and reasonable about it. Some put money into a bank account and insisted the government place a lien on it. At least that way, some Amish thought, they weren’t voluntarily paying into the program. Others signed a petition and sent it to Capitol Hill. But, naturally, the IRS paid no attention. The IRS kept insisting that FICA taxes be remunerated…until eventually many Amish just stopped paying.

The whole conflict came to its climax in 1961 when the IRS went after one of these “delinquents,” Valentine Byler. Long story short, he owed over $300 in back Social Security taxes, so the IRS repo’ed three of his six horses. No kidding. (At one point in this fiasco, Reader’s Digest reported a judge berating the government’s representatives, “Don’t you have anything better to do than to take a peaceful man off his farm and drag him into court?” Apparently not.)

To the Amish’s credit, they kept resisting the FICA tax, insisting that it violated their 1st Amendment right to practice religion free of government interference. Byler’s story, as you can imagine, was a real hit with the media and within a few years the IRS caved under public pressure. In 1965, the government passed a law that allowed US citizens to opt out of Social Security.

Of course, only a small minority of Americans can legally stop paying Social Security taxes and strike their beneficiary status. In order to qualify for the IRS’s exemption, you must:

  • Convince them you are part of a religion that is “conscientiously opposed to accepting benefits of any private or public insurance that makes payments in the event of death, disability, old age or retirement.”
  • Have a ranking official of this religion authorize that you are a true believer
  • Prove that your religion has been established – and continually opposing insurance – since at least 1950.

So unless you are Amish, Mennonite, Anabaptist or part of another very small religious sect, odds are you’re stuck paying (and receiving) Social Security for the foreseeable future. Still, we won’t fault you for trying: Look around for Form 4029…you’ll have to file with the IRS if you seek Social Security exemption. Be careful what you wish for…exemption might be the swan song for your life, auto and health insurance, too.

Learn from the Amish

Even though your opt-out chances are slim to none, there’s plenty to learn from the Amish battle against Social Security.

1) This story should serve as a reminder of what the whole program really is: insurance. When FDR first introduced Social Security in 1935, he said it would “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” It was never intended to be a program in which nearly everyone paid in and nearly everyone expected to be fully paid out…even though that is what it has become today.

We suspect that kind of insurance language will return. The rich – who are so exceptionally unpopular these days – might soon be reminded they are not “average” and that Social Security was not designed to supplement their fat 401(k)s. (Whether that is in any way ethical, or even what qualifies you as “rich” in America, is a debate for another Daily Reckoning.) At the least, expect this cash-strapped government to raise the wage base for the Social Security tax or institute a benefits means test in the near future.

2) The framework of Social Security is flexible. There are plenty of people alive in America today who were around before this program even existed. Those same people saw it amended and reformed many times in the ’30s, ’40s and ’50s. Exceptions have been made along the way. And in 1983, under the Greenspan Commission, the government gave Social Security yet another dramatic reform.

Thus, there is no reason to think Social Security can’t be amended again, for better or for worse. Maybe the government, like it did in the ’80s, will change the rules and hike taxes, raise the retirement age and reduce benefits. Or if you are as persistent as the Amish, perhaps you can influence legislation in your favor. (Your odds increase dramatically if you own or control a large multinational corporation.)

3) Most importantly, like the Amish, expect a self-sufficient retirement. “The best revenge is living well,” the saying goes. Thus the best way to survive the plight of the Social Security Trust Fund is to not need it in the first place. Take a page from the Amish playbook and minimize your taxes…contribute the most you can to your company’s tax-deferred 401(k) plan. Better still, enroll in a self-directed 401(k), where you can invest in stable, dividend-yielding companies that might compound your returns. A few of those companies might even have a dividend reinvestment plan (DRIP) where you can use those quarterly payments to reinvest in the underlying stock… That’s a double serving of perfectly legal tax evasion.

There’s something to be said for the Amish way of taking care of your own, too. Their lifelong financial planning doesn’t just revolve around their individual net worth, and neither should yours. If there’s money to spare, set up some tax-deferred accounts for family members. Not only could it empower them, but depending on your situation, you might be able to alleviate your own tax burden at the same time. They’ll thank you 10-20 years from now, when David Walker’s joke isn’t quite so funny.

Regards,

Ian Mathias
for The Daily Reckoning

Opt Out of Social Security 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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Opt Out of Social Security




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