3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

Health Care Reform Won’t Stop This Medical Device Stock

November 12th, 2010

Health Care Reform Won't Stop This Medical Device Stock

Health care reform is going to be unimaginably expensive, costing roughly $1 trillion in the next decade. One of the many ways Uncle Sam plans to raise the necessary cash is with a 2.3% tax on the sale of all medical devices, starting in 2013.

That's obviously unwelcome news for the medical device industry, which makes all sorts of gadgets — from blood sugar meters and thermometers to x-ray machines and artificial hearts — for use by patients, doctors, nurses and other health care professionals. Global medical device sales surpassed $220 billion in 2009, with U.S. medical device firms accounting for more than 40% of that business.

While medical devices are big money, it would be a mistake to underestimate the burden of the new sales

Uncategorized

This Could be a Surprise Sector for Stocks Next Year

November 12th, 2010

This Could be a Surprise Sector for Stocks Next Year

There are so many reasons to dislike housing stocks. Foreclosures continue at an alarming rate, and with a rising tide of empty existing homes, who needs to buy a newly-built home? Yet while the gloomy headlines rule the day, the Philadelphia Housing Sector Index (HGX), which was stuck in a tight trading range for the past three months, is suddenly on the march, rising nearly +8% since the middle of last week. The index actually spiked a day before last week's monthly jobs report, which Nathan Slaughter recently discussed. [Read why he thinks the U.S. will add two million jobs next year -- and how you can profit]

Rising employment is seen by many as a panacea for this long-suffering sector. Yet we've already seen a few false dawns already: The Philly index surged from 95 in late 2009 to 130 in April, only to fall back below 100 a few months later. Now that's it back just above 100, might we re-visit those April highs? And if so, what are the best stocks to play in a resurgent housing sector?

Another lost year for housing
It sure has been a tough six months for the major players: Shares of PulteGroup (NYSE: PHM) are off more than -40%, while Beazer Homes (NYSE: BZH), M/I Homes (NYSE: MHO), Ryland Group (NYSE: RYL) and KB Home (NYSE: KBH) all shed more than -25%. To be clear, few expect to see the housing market post a major upturn next year. Instead, industry bulls would like to see only modest improvements in hopes that the stage would be set for a more sustained in advance in 2012 and 2013.

And there's no doubt that current sector share prices are very cheap in the context of such a possible rebound in 2012 or 2013. We don't need to see the white-hot conditions of 2005, 2006 and 2007 — just a normal healthy housing market. The key would be tame interest rates. Current low mortgage rates, combined with currently low housing prices make home ownership an awfully compelling option — if consumers are feeling more confident, and if interest rates stay low.

If you believe that such a scenario will play out, here are two names to focus on…

Toll Brothers (NYSE: TOL)
This homebuilder may have started to turn the tide, thanks to its exposure to the higher end of the housing market. Toll delivered an unexpected profit in the quarter ended July, and though a seasonal slowdown is expected to lead to more red ink for the October and January (2011) quarters, analysts increasingly think that Toll can stay in the black after that as sales and profits start to steadily rebound.

It will be some time before this or any other housing stock looks cheap on a price-to-earnings (P/E) basis, as industry as profits will be uninspiring until at least 2012 if not 2013. Instead, analysts measure these stocks in relation to book value, and shares, which currently trade at around 1.2 times book value, are likely to rally up to 1.5 times book value according to analysts at UBS — good for a +30% gain from current levels.

That's just a near-term target. If and when the housing rebound is truly underway, shares have considerably more upside, but that may not come before 2012.

D.R. Horton (NYSE: DHI)
Investors have started to bid up shares of this homebuilder in anticipation of this Friday's earnings release. If the last quarter is any guide, D.R. Horton should deliver a rare bit of cheer in the sector. In the quarter that ended in June, the company announced a modest uptick in demand for homes in its medium-priced communities.

D.R. Horton is surprisingly looking to build more houses “on spec,” which means they are starting to build without a firm buyer in hand for each house. It may seem like a risky move, but the company has ample cash to both invest in growth while also pay down debt. The company has paid back $1 billion in debt in the past year.

The decision to keep building has surely paid off, as the company is expected to report full year earnings of $0.73 a share this Friday. (Most other homebuilders continue to shoulder losses). Profits may cool a bit in fiscal 2011, but analysts thinks D.R. Horton's earnings power could approach $2 a share in a few years once housing is back on the mend. EPS averaged $4 in the middle of the past decade, but investors would cheer a rebound to just half that level. If that happens, shares would trade up from a current $12 to around $20.

Action to Take –> It seems counter-intuitive to seek out value in housing stocks when the sector is in such a deep slump. But sector shares have pulled back sharply in the past six months, creating fresh value, and would rotate back into favor if employment trends continue to strengthen on the heels of last Friday's jobs report. In truth, all housing stocks would gain in a housing recovery scenario, but Toll Brothers and D.R. Horton look to be best able to hold their own if 2011 and 2012 bring more of the same.


– 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
This Could be a Surprise Sector for Stocks Next Year

Read more here:
This Could be a Surprise Sector for Stocks Next Year

Uncategorized

Health Care Reform Won’t Stop This Medical Device Stock

November 12th, 2010

Health Care Reform Won't Stop This Medical Device Stock

Health care reform is going to be unimaginably expensive, costing roughly $1 trillion in the next decade. One of the many ways Uncle Sam plans to raise the necessary cash is with a 2.3% tax on the sale of all medical devices, starting in 2013.

That's obviously unwelcome news for the medical device industry, which makes all sorts of gadgets — from blood sugar meters and thermometers to x-ray machines and artificial hearts — for use by patients, doctors, nurses and other health care professionals. Global medical device sales surpassed $220 billion in 2009, with U.S. medical device firms accounting for more than 40% of that business.

While medical devices are big money, it would be a mistake to underestimate the burden of the new sales

Uncategorized

This Could be a Surprise Sector for Stocks Next Year

November 12th, 2010

This Could be a Surprise Sector for Stocks Next Year

There are so many reasons to dislike housing stocks. Foreclosures continue at an alarming rate, and with a rising tide of empty existing homes, who needs to buy a newly-built home? Yet while the gloomy headlines rule the day, the Philadelphia Housing Sector Index (HGX), which was stuck in a tight trading range for the past three months, is suddenly on the march, rising nearly +8% since the middle of last week. The index actually spiked a day before last week's monthly jobs report, which Nathan Slaughter recently discussed. [Read why he thinks the U.S. will add two million jobs next year -- and how you can profit]

Rising employment is seen by many as a panacea for this long-suffering sector. Yet we've already seen a few false dawns already: The Philly index surged from 95 in late 2009 to 130 in April, only to fall back below 100 a few months later. Now that's it back just above 100, might we re-visit those April highs? And if so, what are the best stocks to play in a resurgent housing sector?

Another lost year for housing
It sure has been a tough six months for the major players: Shares of PulteGroup (NYSE: PHM) are off more than -40%, while Beazer Homes (NYSE: BZH), M/I Homes (NYSE: MHO), Ryland Group (NYSE: RYL) and KB Home (NYSE: KBH) all shed more than -25%. To be clear, few expect to see the housing market post a major upturn next year. Instead, industry bulls would like to see only modest improvements in hopes that the stage would be set for a more sustained in advance in 2012 and 2013.

And there's no doubt that current sector share prices are very cheap in the context of such a possible rebound in 2012 or 2013. We don't need to see the white-hot conditions of 2005, 2006 and 2007 — just a normal healthy housing market. The key would be tame interest rates. Current low mortgage rates, combined with currently low housing prices make home ownership an awfully compelling option — if consumers are feeling more confident, and if interest rates stay low.

If you believe that such a scenario will play out, here are two names to focus on…

Toll Brothers (NYSE: TOL)
This homebuilder may have started to turn the tide, thanks to its exposure to the higher end of the housing market. Toll delivered an unexpected profit in the quarter ended July, and though a seasonal slowdown is expected to lead to more red ink for the October and January (2011) quarters, analysts increasingly think that Toll can stay in the black after that as sales and profits start to steadily rebound.

It will be some time before this or any other housing stock looks cheap on a price-to-earnings (P/E) basis, as industry as profits will be uninspiring until at least 2012 if not 2013. Instead, analysts measure these stocks in relation to book value, and shares, which currently trade at around 1.2 times book value, are likely to rally up to 1.5 times book value according to analysts at UBS — good for a +30% gain from current levels.

That's just a near-term target. If and when the housing rebound is truly underway, shares have considerably more upside, but that may not come before 2012.

D.R. Horton (NYSE: DHI)
Investors have started to bid up shares of this homebuilder in anticipation of this Friday's earnings release. If the last quarter is any guide, D.R. Horton should deliver a rare bit of cheer in the sector. In the quarter that ended in June, the company announced a modest uptick in demand for homes in its medium-priced communities.

D.R. Horton is surprisingly looking to build more houses “on spec,” which means they are starting to build without a firm buyer in hand for each house. It may seem like a risky move, but the company has ample cash to both invest in growth while also pay down debt. The company has paid back $1 billion in debt in the past year.

The decision to keep building has surely paid off, as the company is expected to report full year earnings of $0.73 a share this Friday. (Most other homebuilders continue to shoulder losses). Profits may cool a bit in fiscal 2011, but analysts thinks D.R. Horton's earnings power could approach $2 a share in a few years once housing is back on the mend. EPS averaged $4 in the middle of the past decade, but investors would cheer a rebound to just half that level. If that happens, shares would trade up from a current $12 to around $20.

Action to Take –> It seems counter-intuitive to seek out value in housing stocks when the sector is in such a deep slump. But sector shares have pulled back sharply in the past six months, creating fresh value, and would rotate back into favor if employment trends continue to strengthen on the heels of last Friday's jobs report. In truth, all housing stocks would gain in a housing recovery scenario, but Toll Brothers and D.R. Horton look to be best able to hold their own if 2011 and 2012 bring more of the same.


– 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
This Could be a Surprise Sector for Stocks Next Year

Read more here:
This Could be a Surprise Sector for Stocks Next Year

Uncategorized

3 Stocks You Should Bet Against

November 12th, 2010

3 Stocks You Should Bet Against

Short sellers must always stay on their toes. Any time the market is in rally mode — as it has been the last few months — they need to unwind their short bets, lest the rising market inflict untold pain. They tend to typically pile back into these closed short positions once they think a rally has begun to end. So it pays to take a fresh look at some of the most heavily-shorted stocks, if you believe that the recent rally has grown tired. Renewed short selling in these names could quickly push them back down.

Looking at the most recently available data, I found three heavily-shorted stocks that could be ripe for a fall.

Sprint (NYSE: S)
Simply looking at the recent quarterly results from this mobile telecom service provider, you'd probably think its shares are fairly valued with perhaps a bit of upside. But short sellers see an albatross around this company's neck that threatens to damage its balance sheet or sharply inflate its share count. And either of those events could push the stock, form a current $4, closer to the $3 mark.

Sprint has been heavily investing in an ultra-fast wireless technology through its 54% ownership of Clearwire (Nasdaq: CLWR). Even as Sprint has poured several billion dollars into Clearwire over the years, that might not be enough, as Clearwire just announced that money is quickly running out. That's a risk I highlighted in my negative profile of Clearwire back in August.

It may be hard to find any new investors as Clearwire seeks fresh capital (perhaps up to $3 billion). So to keep it afloat, Sprint may be on the hook to write another large check to partially aid in the capital rescue efforts. Sprint has ample cash, but also has its own debts to think about. The carrier will need to pay off a $1.6 billion bond in January, and has an additional $18 billion in long-term debt to worry about as well.

Short sellers are betting that Sprint will look to issue fresh equity or take on more debt to raise cash for Clearwire, and the potential dilution or increased balance sheet risk would likely put a hurt on Sprint's shares. However, this is a finite short play. Keep an eye on how Clearwire resolves its financing mess. If it can do so — with or without Sprint's help — and Sprint's shares hold their own, then it's likely time to cover the short position.

The St. Joe Company (NYSE: JOE)
This stock was a long-time favorite of value players, as its massive stake of undeveloped real estate in Northwest Florida was a potential gold mine. Many assumed that developers would pay top dollar to create a new Martha's Vineyard in a region known as the “Redneck Riviera.”

Well, St. Joe sat and sat on much of that land, until the Florida housing bubble burst. Now, short sellers think the company's land holdings need to be written down to reflect their current value, and they suspect it will be a very long time before St. Joe will be able to realize any high value for its land. In the mean time, the company is slowly selling off land just to cover operating expenses and may not have nearly as attractive a real estate portfolio down the road if the Florida economy takes a long time to recover.

Yet it's the expectation of the need for write-downs that is the real near-term threat. Short sellers have been piling on to this notion, ever since it was proffered by fund manager David Einhorn at last month's Value Investing Congress. If St. Joe does feel compelled to write down the value of its assets (with some forecasters predicting a -25% haircut), then shares would surely take a hit. So this is a pretty clear short play.

Keep an eye on management's decision. If and when it decides to write down assets, you'd probably want to close out positions. If management doesn't do so by the end of the first quarter, it probably never will. Then again, there's not a lot of risk sitting on this short position, as few positive catalysts exist in the next six months.

Longer term, I tend to disagree with Mr. Einhorn. Florida is on its heels right now, but as I brace for another tough New York state winter, I dream of an eventual stake in Florida, as thousands of other northerners likely do. Down the road, Florida will once again become the real estate development capital of the country, and once the state starts to get back on its feet, St. Joe may be a solid play for longs.

Barnes & Noble (NYSE: BKS)
The bearish bets just keep on rising at the nation's largest bookseller. Shorts boosted their stake in Barnes & Noble roughly +5% in the last two weeks of October to 11.1 million shares, and it would take the equivalent of 29 trading sessions to unwind the bearish positions, the sixth-largest “days to cover” ratio of all publicly-traded companies. [I laid out the bear case against Barnes & Noble back in August. You can read that article here.]

Since then, it has become increasingly clear that e-books are starting to take away market share from traditional paper-based books. And the e-books biz increasingly looks to be dominated by Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL), not Barnes & Noble.

Since my last look at Barnes & Noble in August, analysts have subsequently altered their fiscal (April) 2012 outlook from a small profit to a small loss. And since then, no other suitors have emerged for the company, even as it is considered to be “in play.” Netflix (Nasdaq: NFLX) has Blockbuster (OTC: BLOAQ.PK) on the ropes, and rivals look similarly ready to make life just as bad for Barnes & Noble. That's why shares look so ripe to short sellers.

Action to Take –> These three companies are in short sellers' cross hairs, yet each has a specific investment thesis in place. Investors need to stick to that thesis if they choose to short these stocks. If Sprint is able to ride out the Clearwire mess, if St. Joe's indeed writes down its real estate without taking a big hit, and if Barnes & Noble somehow funds a buyer, you'd do well to cover your short positions straight away.


– David Sterman

P.S. –

ETF, Uncategorized

3 Stocks You Should Bet Against

November 12th, 2010

3 Stocks You Should Bet Against

Short sellers must always stay on their toes. Any time the market is in rally mode — as it has been the last few months — they need to unwind their short bets, lest the rising market inflict untold pain. They tend to typically pile back into these closed short positions once they think a rally has begun to end. So it pays to take a fresh look at some of the most heavily-shorted stocks, if you believe that the recent rally has grown tired. Renewed short selling in these names could quickly push them back down.

Looking at the most recently available data, I found three heavily-shorted stocks that could be ripe for a fall.

Sprint (NYSE: S)
Simply looking at the recent quarterly results from this mobile telecom service provider, you'd probably think its shares are fairly valued with perhaps a bit of upside. But short sellers see an albatross around this company's neck that threatens to damage its balance sheet or sharply inflate its share count. And either of those events could push the stock, form a current $4, closer to the $3 mark.

Sprint has been heavily investing in an ultra-fast wireless technology through its 54% ownership of Clearwire (Nasdaq: CLWR). Even as Sprint has poured several billion dollars into Clearwire over the years, that might not be enough, as Clearwire just announced that money is quickly running out. That's a risk I highlighted in my negative profile of Clearwire back in August.

It may be hard to find any new investors as Clearwire seeks fresh capital (perhaps up to $3 billion). So to keep it afloat, Sprint may be on the hook to write another large check to partially aid in the capital rescue efforts. Sprint has ample cash, but also has its own debts to think about. The carrier will need to pay off a $1.6 billion bond in January, and has an additional $18 billion in long-term debt to worry about as well.

Short sellers are betting that Sprint will look to issue fresh equity or take on more debt to raise cash for Clearwire, and the potential dilution or increased balance sheet risk would likely put a hurt on Sprint's shares. However, this is a finite short play. Keep an eye on how Clearwire resolves its financing mess. If it can do so — with or without Sprint's help — and Sprint's shares hold their own, then it's likely time to cover the short position.

The St. Joe Company (NYSE: JOE)
This stock was a long-time favorite of value players, as its massive stake of undeveloped real estate in Northwest Florida was a potential gold mine. Many assumed that developers would pay top dollar to create a new Martha's Vineyard in a region known as the “Redneck Riviera.”

Well, St. Joe sat and sat on much of that land, until the Florida housing bubble burst. Now, short sellers think the company's land holdings need to be written down to reflect their current value, and they suspect it will be a very long time before St. Joe will be able to realize any high value for its land. In the mean time, the company is slowly selling off land just to cover operating expenses and may not have nearly as attractive a real estate portfolio down the road if the Florida economy takes a long time to recover.

Yet it's the expectation of the need for write-downs that is the real near-term threat. Short sellers have been piling on to this notion, ever since it was proffered by fund manager David Einhorn at last month's Value Investing Congress. If St. Joe does feel compelled to write down the value of its assets (with some forecasters predicting a -25% haircut), then shares would surely take a hit. So this is a pretty clear short play.

Keep an eye on management's decision. If and when it decides to write down assets, you'd probably want to close out positions. If management doesn't do so by the end of the first quarter, it probably never will. Then again, there's not a lot of risk sitting on this short position, as few positive catalysts exist in the next six months.

Longer term, I tend to disagree with Mr. Einhorn. Florida is on its heels right now, but as I brace for another tough New York state winter, I dream of an eventual stake in Florida, as thousands of other northerners likely do. Down the road, Florida will once again become the real estate development capital of the country, and once the state starts to get back on its feet, St. Joe may be a solid play for longs.

Barnes & Noble (NYSE: BKS)
The bearish bets just keep on rising at the nation's largest bookseller. Shorts boosted their stake in Barnes & Noble roughly +5% in the last two weeks of October to 11.1 million shares, and it would take the equivalent of 29 trading sessions to unwind the bearish positions, the sixth-largest “days to cover” ratio of all publicly-traded companies. [I laid out the bear case against Barnes & Noble back in August. You can read that article here.]

Since then, it has become increasingly clear that e-books are starting to take away market share from traditional paper-based books. And the e-books biz increasingly looks to be dominated by Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL), not Barnes & Noble.

Since my last look at Barnes & Noble in August, analysts have subsequently altered their fiscal (April) 2012 outlook from a small profit to a small loss. And since then, no other suitors have emerged for the company, even as it is considered to be “in play.” Netflix (Nasdaq: NFLX) has Blockbuster (OTC: BLOAQ.PK) on the ropes, and rivals look similarly ready to make life just as bad for Barnes & Noble. That's why shares look so ripe to short sellers.

Action to Take –> These three companies are in short sellers' cross hairs, yet each has a specific investment thesis in place. Investors need to stick to that thesis if they choose to short these stocks. If Sprint is able to ride out the Clearwire mess, if St. Joe's indeed writes down its real estate without taking a big hit, and if Barnes & Noble somehow funds a buyer, you'd do well to cover your short positions straight away.


– David Sterman

P.S. –

ETF, Uncategorized

Veteran’s Day Sell-Off

November 12th, 2010

So… It seems that most of this selling of the currencies and precious metals happened yesterday, while I was out observing Veteran’s Day… It was like a scene from September 2008, with all the risk assets of stocks, currencies, and commodities all being thrown into the same barrel and shot full of holes! With the US banks closed, the volume was limited here in the US and I think that played into the nastiness of the sell-off of the risk assets.

Even gold, which when I signed off yesterday was up $14, lost a ton! Gold sold off $21, but the real sell-off was $35, given it WAS up $14 at one time! I received a request from an interviewer to answer a question yesterday about gold… The question was whether gold is in a bubble… I fired off an answer, well, as fast as my fingers can tap out a message on my phone! Basically, I said this… No… I do not feel gold is in a bubble… Here’s the test I use… I was in a restaurant with a buddy… I said that I could stand up and ask who in the restaurant owned gold, and I bet there would be no one, or maybe a smattering of hands in the air… Until that changes, I don’t see gold in a bubble…

So, a $21 or $35 sell-off provides cheaper levels to buy this morning, now doesn’t it? It certainly does, Ollie!

I was asked on a panel I participated with last week in Cabo, what could bring gold down?

My friend and colleague at the Sovereign Society, Eric Roseman, answered first, and said interest rates… But not the first or second or even the third 25 basis point rate hike that the Fed is likely to do… Real interest rate spreads over other countries…

I then took the microphone, and talked for the next 10 minutes it seemed like… I’m sure it wasn’t, or else the moderator, Mr. Van Simmons, would have cut me off! But what I said was that yes, big interest rates could cut off gold, but I wouldn’t be so quick with that, as in 1981 when gold was climbing to near $900, interest rates in the US were around 18%… But, that was a different time…

What I think could cut gold off at the knees is another financial meltdown… Or… the opposite… In other words, it could very well be that we go in a straight line to the moon from here, and our unemployment problem reverses, no more QE, deficit spending stops, and so on…

So… Basically… I don’t see any of those three happening for some time, and that should be a good thing for gold, eh?

The G-20 meeting concluded without any major agreements to do much of anything… G-20, Schmee 20! Just a big boondoggle! Here’s what the final communiqué said… The G20 agreed “to move toward more market-determined exchange rates and shun competitive devaluation”, but at the same time endorsed “macro prudential steps to fight capital inflows by emerging market economies with overvalued FX rates”.

In G-20 parlance, that last statement simply means that the G-20 would endorse Capital Controls, which, in my feeble gray matter tells me that the two thoughts are contrasting… But what else would be new for these guys at G-20?

The US proposal to limit or set targets for Current Account levels got watered down, big time to no more than a line to, “develop indicative guidelines to spot big current account imbalances”…

While in Seoul, our President took a swing at the Chinese once again, and accused them of “intentionally undervaluing the yuan” (CNY)… Hmmm, let’s look at the scorecard, should we? The Chinese renminbi has gained 28% verus the dollar since dropping the peg in July of 2005… The dollar index has dropped 14% since that same time… So, in reality, the renminbi has done more to correct imbalances than the dollar has!

But that doesn’t play well with the administration or lawmakers here… For it’s far easier to point blame at someone else than to own up to your problems and tackle them… So… we continue to point at China, when in reality we should be sending them fruit baskets every month, for buying as much of our debt as they do! Sure, it was an such easy game to play, now they need a place to hide away, they sell us their low cost things, and then take the money and buy Treasuries… But… That’s all changing right before our eyes, folks… The US recession saw to that!

So… We have all that going for us this morning… NOT!

The Irish bond problems continue to weigh heavily on the euro (EUR) this morning as spreads have really widened… Let’s use Ireland as an example as what will happen here eventually… Ireland runs their deficit spending up to levels that begin to scare the bejeebers out of bond buyers, and the bond buyers balk at buying any more Irish bonds (debt)… So what does Ireland do? Well, they have to widen the spread versus German and US bonds… This makes the Irish bonds more attractive… But you know me… I’ve said this for years. You can put lipstick on a pig, but you’ve still got a pig!

There was a back room deal at the G-20 meeting between France, Germany, Italy, Spain and the UK (and others) on the Irish debt problem… Afterward, a joint statement was issued that pledged support for Ireland… This statement immediately brought Irish bond spreads in by 40 basis points! WOW!

When I turned on the screens this morning, the euro was trading 1.3685, and as I was typing my fat fingers to the bone, I watched the euro rise to 1.3725, and I thought to myself… We could have a “healing Friday” for the currencies… But, then just as quickly as the single unite moved to 1.3725, it fell right back to 1.3685! So much for that healing Friday, eh?

There’s only one piece of data in the data cupboard this morning, and it’s the U. of Michigan Consumer Confidence for the first two weeks of November… The index is expected to jump 2 figures to 69… Hmmm, I’ve got a thought on that… I guess the election results last week probably played into this jump to 69… But I guess the trumped up gains in jobs probably will carry the ball here…

I saw yesterday that China had printed their latest report on Consumer Inflation, which showed a rise of more than 4%… Now, there are reports that maybe adjustments are being made to hide the true rate of inflation. A think tank, the Chinese Academy of Social Sciences, published an article saying that for the past five years the inflation rate had been understated by more than 7%…

See… I told you China was becoming more like a capitalist country! They are now hiding their true inflation rate, just like we do here in the US! It’s all about making people “feel good”… Here, there and everywhere!

Well… The news from Wednesday about Mexico allowing (maybe) their pension plans to buy commodities only lasted about 24 hours, as the commodities were sold off big time all day and all night… And that means the commodity currencies also got sold off! Both the Aussie dollar (AUD) and Canadian loonie (CAD) lost the parity handle respectively, and don’t look very strong going into the last trading day of the week. (Of course, when I say they don’t look very strong, it’s all relative, right? I mean, if I told you 6 months ago that both the Aussie dollar and loonie were going to be trading at 99-cents on November 12, 2010, you would have been fitting me for a white suit!)

German growth slowed in the third quarter, after posting record growth in the second quarter… Exports cooled in the third quarter… Guess what? Well, in the third quarter, the euro went from 1.18 to 1.40… I guess that would have a lot to do with exports cooling down, eh? I have further thoughts on this in the “Then there was this…” portion of the letter in a bit…

I see the President was telling people in Seoul that “deflation is a huge danger to the US”… I shake my head in disgust, as our officials keep harping about deflation, when we have food prices and commodities going higher and higher! And… This love affair our central bank has with growing inflation… Folks, two years ago I told you all to start a journal to record all the historic things that were happening, so that one day, you could sit down with your grandkids, and tell them exactly what happened, and why it is that they now have tax burdens, less freedoms, and no purchasing power… And this deflation talk is another entry to your journal… Sure we saw deflationary asset prices, but except for housing, those asset prices have recovered… If the government would go back to pre-1990 methodology for calculating consumer inflation, they wouldn’t be talking about deflation!

OK… I’ve got to stop right there with that discussion, as I could feel my blood pressure rising…

Then there was this…

German Chancellor Angela Merkel said a US proposal for the Group of 20 nations to limit national trade surpluses has been rejected. Major exporting nations, including Germany and China, opposed the measure, which was backed by US President Barack Obama. “The competitiveness of individual market players should not be undermined by political limitations,” Merkel said.

Limit trade surpluses? What kind of nonsense is that? Once our republic was the largest creditor nation in the world, and that was all from trade surpluses! (That, and the fact that our government was limited!) I’m a trade surplus junkie, and so should this country be!

To recap… The risk assets traded September 2008 style yesterday and overnight with all three, currencies, commodities and stocks getting sold like funnel cakes at a state fair. Ireland’s bond/debt problems are weighing heavily on the euro, although a pledge to support Ireland from some G-20 members have removed some of the weight. German third quarter growth weakened from the second quarter’s record pace. The commodity currencies also got sold with both the Aussie dollar and loonie losing a full cent…

Chuck Butler
for The Daily Reckoning

Veteran’s Day Sell-Off 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:
Veteran’s Day Sell-Off




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

Commodities, Uncategorized

Veteran’s Day Sell-Off

November 12th, 2010

So… It seems that most of this selling of the currencies and precious metals happened yesterday, while I was out observing Veteran’s Day… It was like a scene from September 2008, with all the risk assets of stocks, currencies, and commodities all being thrown into the same barrel and shot full of holes! With the US banks closed, the volume was limited here in the US and I think that played into the nastiness of the sell-off of the risk assets.

Even gold, which when I signed off yesterday was up $14, lost a ton! Gold sold off $21, but the real sell-off was $35, given it WAS up $14 at one time! I received a request from an interviewer to answer a question yesterday about gold… The question was whether gold is in a bubble… I fired off an answer, well, as fast as my fingers can tap out a message on my phone! Basically, I said this… No… I do not feel gold is in a bubble… Here’s the test I use… I was in a restaurant with a buddy… I said that I could stand up and ask who in the restaurant owned gold, and I bet there would be no one, or maybe a smattering of hands in the air… Until that changes, I don’t see gold in a bubble…

So, a $21 or $35 sell-off provides cheaper levels to buy this morning, now doesn’t it? It certainly does, Ollie!

I was asked on a panel I participated with last week in Cabo, what could bring gold down?

My friend and colleague at the Sovereign Society, Eric Roseman, answered first, and said interest rates… But not the first or second or even the third 25 basis point rate hike that the Fed is likely to do… Real interest rate spreads over other countries…

I then took the microphone, and talked for the next 10 minutes it seemed like… I’m sure it wasn’t, or else the moderator, Mr. Van Simmons, would have cut me off! But what I said was that yes, big interest rates could cut off gold, but I wouldn’t be so quick with that, as in 1981 when gold was climbing to near $900, interest rates in the US were around 18%… But, that was a different time…

What I think could cut gold off at the knees is another financial meltdown… Or… the opposite… In other words, it could very well be that we go in a straight line to the moon from here, and our unemployment problem reverses, no more QE, deficit spending stops, and so on…

So… Basically… I don’t see any of those three happening for some time, and that should be a good thing for gold, eh?

The G-20 meeting concluded without any major agreements to do much of anything… G-20, Schmee 20! Just a big boondoggle! Here’s what the final communiqué said… The G20 agreed “to move toward more market-determined exchange rates and shun competitive devaluation”, but at the same time endorsed “macro prudential steps to fight capital inflows by emerging market economies with overvalued FX rates”.

In G-20 parlance, that last statement simply means that the G-20 would endorse Capital Controls, which, in my feeble gray matter tells me that the two thoughts are contrasting… But what else would be new for these guys at G-20?

The US proposal to limit or set targets for Current Account levels got watered down, big time to no more than a line to, “develop indicative guidelines to spot big current account imbalances”…

While in Seoul, our President took a swing at the Chinese once again, and accused them of “intentionally undervaluing the yuan” (CNY)… Hmmm, let’s look at the scorecard, should we? The Chinese renminbi has gained 28% verus the dollar since dropping the peg in July of 2005… The dollar index has dropped 14% since that same time… So, in reality, the renminbi has done more to correct imbalances than the dollar has!

But that doesn’t play well with the administration or lawmakers here… For it’s far easier to point blame at someone else than to own up to your problems and tackle them… So… we continue to point at China, when in reality we should be sending them fruit baskets every month, for buying as much of our debt as they do! Sure, it was an such easy game to play, now they need a place to hide away, they sell us their low cost things, and then take the money and buy Treasuries… But… That’s all changing right before our eyes, folks… The US recession saw to that!

So… We have all that going for us this morning… NOT!

The Irish bond problems continue to weigh heavily on the euro (EUR) this morning as spreads have really widened… Let’s use Ireland as an example as what will happen here eventually… Ireland runs their deficit spending up to levels that begin to scare the bejeebers out of bond buyers, and the bond buyers balk at buying any more Irish bonds (debt)… So what does Ireland do? Well, they have to widen the spread versus German and US bonds… This makes the Irish bonds more attractive… But you know me… I’ve said this for years. You can put lipstick on a pig, but you’ve still got a pig!

There was a back room deal at the G-20 meeting between France, Germany, Italy, Spain and the UK (and others) on the Irish debt problem… Afterward, a joint statement was issued that pledged support for Ireland… This statement immediately brought Irish bond spreads in by 40 basis points! WOW!

When I turned on the screens this morning, the euro was trading 1.3685, and as I was typing my fat fingers to the bone, I watched the euro rise to 1.3725, and I thought to myself… We could have a “healing Friday” for the currencies… But, then just as quickly as the single unite moved to 1.3725, it fell right back to 1.3685! So much for that healing Friday, eh?

There’s only one piece of data in the data cupboard this morning, and it’s the U. of Michigan Consumer Confidence for the first two weeks of November… The index is expected to jump 2 figures to 69… Hmmm, I’ve got a thought on that… I guess the election results last week probably played into this jump to 69… But I guess the trumped up gains in jobs probably will carry the ball here…

I saw yesterday that China had printed their latest report on Consumer Inflation, which showed a rise of more than 4%… Now, there are reports that maybe adjustments are being made to hide the true rate of inflation. A think tank, the Chinese Academy of Social Sciences, published an article saying that for the past five years the inflation rate had been understated by more than 7%…

See… I told you China was becoming more like a capitalist country! They are now hiding their true inflation rate, just like we do here in the US! It’s all about making people “feel good”… Here, there and everywhere!

Well… The news from Wednesday about Mexico allowing (maybe) their pension plans to buy commodities only lasted about 24 hours, as the commodities were sold off big time all day and all night… And that means the commodity currencies also got sold off! Both the Aussie dollar (AUD) and Canadian loonie (CAD) lost the parity handle respectively, and don’t look very strong going into the last trading day of the week. (Of course, when I say they don’t look very strong, it’s all relative, right? I mean, if I told you 6 months ago that both the Aussie dollar and loonie were going to be trading at 99-cents on November 12, 2010, you would have been fitting me for a white suit!)

German growth slowed in the third quarter, after posting record growth in the second quarter… Exports cooled in the third quarter… Guess what? Well, in the third quarter, the euro went from 1.18 to 1.40… I guess that would have a lot to do with exports cooling down, eh? I have further thoughts on this in the “Then there was this…” portion of the letter in a bit…

I see the President was telling people in Seoul that “deflation is a huge danger to the US”… I shake my head in disgust, as our officials keep harping about deflation, when we have food prices and commodities going higher and higher! And… This love affair our central bank has with growing inflation… Folks, two years ago I told you all to start a journal to record all the historic things that were happening, so that one day, you could sit down with your grandkids, and tell them exactly what happened, and why it is that they now have tax burdens, less freedoms, and no purchasing power… And this deflation talk is another entry to your journal… Sure we saw deflationary asset prices, but except for housing, those asset prices have recovered… If the government would go back to pre-1990 methodology for calculating consumer inflation, they wouldn’t be talking about deflation!

OK… I’ve got to stop right there with that discussion, as I could feel my blood pressure rising…

Then there was this…

German Chancellor Angela Merkel said a US proposal for the Group of 20 nations to limit national trade surpluses has been rejected. Major exporting nations, including Germany and China, opposed the measure, which was backed by US President Barack Obama. “The competitiveness of individual market players should not be undermined by political limitations,” Merkel said.

Limit trade surpluses? What kind of nonsense is that? Once our republic was the largest creditor nation in the world, and that was all from trade surpluses! (That, and the fact that our government was limited!) I’m a trade surplus junkie, and so should this country be!

To recap… The risk assets traded September 2008 style yesterday and overnight with all three, currencies, commodities and stocks getting sold like funnel cakes at a state fair. Ireland’s bond/debt problems are weighing heavily on the euro, although a pledge to support Ireland from some G-20 members have removed some of the weight. German third quarter growth weakened from the second quarter’s record pace. The commodity currencies also got sold with both the Aussie dollar and loonie losing a full cent…

Chuck Butler
for The Daily Reckoning

Veteran’s Day Sell-Off 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:
Veteran’s Day Sell-Off




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

Commodities, Uncategorized

Bernanke QE2 Program Backfiring! Global Money War Intensifying!

November 12th, 2010

Mike Larson

The reviews are coming in fast and furious — and they’re downright terrible!

I’m not talking about the latest romantic comedy or action movie. I’m talking about the reviews of the Federal Reserve’s quantitative easing, or “QE2,” program! Get a load of these comments …

From the central bank president of Brazil, Henrique Meirelles: “Excess liquidity” resulting from QE2 is creating “risks for everyone” …

From the vice foreign minister of China, Cui Tiankai: “Many countries are worried about the impact of the policy on their economies. It would be appropriate for someone to step forward and give us an explanation” …

From the finance minister of Germany, Wolfgang Sch

Commodities, ETF, Mutual Fund, Uncategorized

Mutual Fund Companies Hoping Active ETFs Don’t Take Off – David O’Leary, CIO AER Advisors

November 12th, 2010

ActiveETFs | InFocus spoke with David O’Leary, who is the Chief Investment Officer for AER Advisors. AER is the portfolio manager behind two actively-managed ETFs from PowerShares which were one of the first Active ETFs to be launched in the US in 2008. The first is the Active AlphaQ Fund (PQY) and the second is the Active Alpha Multi Cap Fund (PQZ). David speakes to us about Active ETFs managed by AER Advisors, whether the transparency requirements of Active ETFs affect day-to-day management and what it’ll take for Active ETFs to take off.

Email readers should click here and hit the play button below to listen to the full audio interview. Alternatively, find the transcript of the interview below.

DavidOLeary.mp3

========================

Shishir Nigam – ActiveETFs | InFocus: Tell us a little about yourself and how AER Advisors entered the ETF space?

David O’Leary – AER Advisors: Well, I started in the investment business in 1973 and worked as an analyst for a bank and then managed money in the late 70s, early 80s, and then worked on the sell side of the street with a company called Fox-Pitt Kelton. And then I ended up at Fidelity in the early 1990s and developed a research capability, proprietary research, that I thought was pretty valuable. I left there in 1994 and started a company called Alpha Equity Research and we began to offer institutional research to mutual funds, hedge funds and pension funds.

In the early 2001-2002, we decided that our research was a good fit with ETFs and in 2003 we started the process of filing of the first application for active exchange-traded funds with the SEC. Using our proprietary research, we started an affiliate company called AER Advisors and went through that process for about 5 years and then in late 2007, we got word that we were going to be approved. In early 2008, we realized we needed a lot of marketing help, so we decided to sell the first exemptive application for active equity ETFs to PowerShares and we became the sub-advisor for the first two that were launched – the AlphaQ Fund and the Alpha Multi-Cap. We’re coming up on the 3rd anniversary of the launch of those two funds.

When worked on the application, we had the idea of coming with a whole family of funds and we have about 75 portfolio strategies that we have trademarked. Unfortunately, PowerShares sold out to Invesco. Invesco has decided not to really utilize the application to its fullest. PowerShares is more concentrating on doing index products using S&P indices. 3-4 months ago, they came out with a series of small-cap index products and in the last couple of days they announced another 5 or 6 S&P index products. So they really haven’t utilized the active application the way we had hoped. But we’re still sub-advising the two funds and we are talking to other mutual fund companies interested in getting into the business because we do have this capability to do a lot of different products.

Shishir: As the portfolio manager behind the very first group of actively-managed ETFs in the US, what challenges did you face in bringing these products to market?

David: The launch of the products was actually pretty smooth. We launched on NYSE Arca and in the first couple of months we started to put on quite a bit of assets – I think at one point, the two funds were up to about $30 million in assets. And then the bear market hit and the funds dropped significantly – I think they dropped about 50% from their peaks – and obviously, the desire to own equity product by the public and by institutions dried up. And then because of the market decline, PowerShares never really got the marketing of Active ETFs going, they never really pushed them in advertising. So the whole idea kind of died on the vine. Also in that period, the SEC approved the ProShares and Direxion products and I think a lot of the buyers of ETFs that might have bought our products are fooling around with these aggressive, leveraged ETFs and its muddied the waters. You’ve also had a lot of new entrants into the business although we do have the largest active equity ETF which is the PQY, which has about $25 million of assets in it. It has very good performance and really should be a lot larger than it is.

In terms of the administration, the ETF products – the structure of it – works wonderfully in terms of portfolio management and the price of the ETF trades very close to the net asset value. So the whole arbitrage mechanism has worked great – very satisfied with that, very satisfied with the liquidity, very satisfied with the PowerShares platform and the website. We send them a notice of the changes and they execute them off their trading desk, which has worked out extremely well. I would say this has worked exactly the way we had hoped and the only disappointment we have is that we don’t have a lot more products on the market.

Shishir: The Active AlphaQ Fund (PQY) has gotten some positive attention as being one of the few Active ETFs that has been able to outperform its benchmark in both up and down markets. Could you describe the fund’s investment strategy and what has helped its success?

David: The PQY invests in the 50 highest rated – using our proprietary research – NASDAQ 100 stocks. Every week, we screen and take the 100 largest NASDAQ traded stocks by market cap and we use that as the universe to pick 50. Unfortunately, the good and bad news is that the benchmark, the NASDAQ 100 – 20% of that is Apple. We’re limited to a 3% maximum in any one stock. So as an example, in the last year we were up 13-14% and we’re beating the NASDAQ 100. If you limited Apple to 3% of the NASDAQ 100, it’s only up 4-5% this year. So, if the NASDAQ 100 used the same rule that we do for the maximum weighting in any one stock, we’d be about 10% ahead of the benchmark. So Apple, because it’s done so well, in the last couple of years we’ve outperformed the NASDAQ 100 even with Apple and I think the underlying performance has been quite good.

On a weekly basis, we just screen out those 100 stocks and when we started out we took the 50 highest ranked stocks and then every week if something drops below a 60% ratings – which in our proprietary rating is the difference between a buy and a hold – if there’s another stock within that universe that has a higher NOW rank, we drop the one that has come out of the universe and we put in another stock. In that fund, the turnover is probably running around a 100%, maybe a little bit less in the last 6 months.  It’s been performing well and we haven’t had to make a lot of changes.

Shishir: So the underlying proprietary strategy that we’re talking about, is this something that’s more fundamentally driven, more momentum driven or a combination?

David: About 60% of the weighting is related to actual money flow in the individual company. We’re measuring up volume minus down volume and looking at it relative to the float of the individual names. We want to stay in companies that have buy pressure and avoid companies that have a lot of sellers in them. And about 40% of the weighting that we put on it is related to the fundamentals of the company – sales growth, profit margins. We don’t do any forecasting, we use consensus earnings and we’re looking for companies that have the highest growth, highest profitability and lowest price/earnings ratio. And so the combination of the money flow plus the fundamental part of it is how we come up with the rating on each individual company.

Shishir: Many traditional mutual fund managers see actively-managed ETFs as the start of a race to the bottom for fee levels in active funds – similar to what they have witnessed in the index space. Why did AER Advisors decide to package their strategy as an Active ETF?

David: Since we were in the research business and didn’t have any legacy mutual fund business to worry about, we thought the fees available on Active ETFs – somewhere around 75-85 basis points – was pretty attractive, given the fact that the cost of administering the fund was relatively low. You basically get the same investment management fee on an Active ETF that you would on a mutual fund but you don’t have a lot of the expenses associated with the mutual fund.

The direct sale of equity mutual funds really has declined very significantly in the last 4-5 years and, with the exception of Vanguard, most of the assets for equity shops are coming from load-based funds, many of which have 6% loads and 2% fees and back-end loads, short-term trading fees. Sometimes when you buy an equity mutual fund, you pay 8 or 9% in fees in the first year and I just think that’s a very unattractive business over time. That’s the attraction of the Active ETF business – that you can get an equivalent professional management, diversified Active ETF that’s equivalent to an equity mutual fund, get all the upside and pay a lot less in fees than you would. But the mutual fund industry’s problem is, again with the exception of Vanguard, they only generate assets by paying out huge fees which really are to the detriment of the customer. That’s one of the reasons why there are several mutual fund families that are talking to us about doing Active ETFs as they realize that over time the SEC could take away the 12b-1 fee, they could put more limitations on front-end loads and the more they do that the more they’ll cut into the profitability of the equity mutual fund product. So I think you’ve seen a lot of the major mutual fund families moving aggressively to filing applications for Active ETFs. A lot of them really don’t have the research capability that we do to do a lot of different products and so they may be limited to one or two or three.

Our approach is, sort of like the Van Eck approach, where you pick certain spots and get a universe – as an example, solar stocks. We could do an active solar ETF that would use the underlying index ETF as the universe and pick maybe 20-25 stocks within that universe. So we could do a lot of different specialty active ETFs, as opposed to a large-cap growth, a large-cap value, a small-cap growth etc. The big mutual fund companies tend to do the style-box approach and we don’t do that. We’re going after niches.

But I do think one of the reasons that Active ETFs have not taken off in a big way is there are many equity mutual fund families that feel the ETF product is a threat to their fee base. And so they’re continuing to push product through their broker-sold, load part of the business and hoping that the Active ETF business doesn’t take off. It will take off, it’s just a matter of time.

Shishir: Having managed an active portfolio with daily transparency for 2.5 years now, does that level of transparency lead to fears of your strategies being copied?

David: The potential for that always exists. However, I do think one of the main attractions of ETFs is that an individual investor or an institution, especially the algorithmic traders, can decide what part of the market they want to be in and do one trade that has high liquidity as opposed to doing 50 trades to replicate the underlying portfolio. So on one hand, there is a risk that somebody could buy the same stock and not bother buying the ETF. On the other hand, with one trade you buy a whole basket of stocks and for the amount of fees that are being charged versus the brokerage commissions you’d have to pay to buy the whole 50 stocks, I think many people would rather have the convenience of buying the individual ETF. I have not heard of anybody that’s trying to replicate our existing ETFs and I know people look for the changes we make. We email the changes to PowerShares during the day and PowerShares executes the trades on market on close. We don’t trade during the day, so whatever the investor sees at the end of the day – if they went in tonight at 6 o’clock let’s say, whenever PowerShares updates the website – they’re getting the portfolio that will be traded at the beginning of the day tomorrow. And it’s worked out extremely well. I was concerned about the transparency issue but having been managing it for a couple of years now, I really am not concerned about it at all. It’s kind of like the game people try to play with changes to the S&P 500 or changes to the Russell 2000 – they try to guess what they are.

I think the real attraction of the ETF product is somebody can say I want to buy $100,000 of this product, do one trade and own 50 stocks. You go to a place like Fidelity or other brokers, you can do one trade for $7.95 and own 50 stocks. So the convenience and liquidity of the ETF I think is the main attraction. In addition to that, to the extent that we do a good job picking the stocks and the fund performs well, then the buyer can focus more on creating a portfolio of ETFs that fulfills their needs rather than trying to figure out what stocks they want to own. The volatility of individual companies I think is more brutal today than it’s ever been. When somebody reports bad earnings, the stock is down 15% in a heartbeat and so an individual investor who might be fooling around with 5 or 10 or 15 stocks runs of the risk of owning and taking one of those home.

The other side of that is that one of the concerns about the transparency issues, is that if a manager might like to trade during the day, the market makers don’t really know what the value of the portfolio is adjusting for those trades because they are not reported until night time. In our case, we’re doing market on close and I’ve found that small changes in the portfolio are much better than continually trading during the day. Once the portfolio is in place, we make very small adjustments to the names that we own and in most cases, if something goes wrong, the stock is down so fast that you can’t make changes anyway. Even if you were trading during the day, the price changes so fast that it’s really almost a waste of time. The work that I’ve done suggests that it’s almost a coin flip, whether trading market on close impacts the performance positively or negatively, versus trading during the day. So I really don’t think it’s a big issue.

Shishir: You said most of the trading is done at market on close (MOC) for you fund. Does that result in greater market impact, because you’re trying to compress all your trades and finish all your trades by the end of the day?

David: We’re doing market on close, so we get whatever the closing price is. The advantage of that is the market maker doesn’t have a lot price risk with changes during the day because if the portfolio makes a change during the day and the market maker doesn’t know about it until 6 o’clock and it blows up, the market maker has exposure to the extent they’re carrying inventory. Under our system, it’s included in the final pricing of the product, so there might be risk the next day in adjusting but at least there’s not the front-running of the market maker. We don’t do that at all.

Shishir: What do you think it will take for PowerShares’ actively-managed ETFs and Active ETFs in general to start gaining greater traction amongst investors?

David: I think it just takes promotion. I’ll give you a perfect example. Putnam, a year or so ago, came out with a family of absolute return funds and Bob Reynolds went on, did a lot of advertising, came on and talked about it on CNBC and Bloomberg. The press, if you read the press reports, they didn’t believe it was a good idea and it wouldn’t work. Putnam has taken in $2 billion of assets on those absolute return funds. They’ve been very very successful, even though they’re load products. They kind of broke new ground in offering absolute return funds to the public. That’s what Active ETFs need – they need somebody like a Bob Reynolds at Putnam who has a face, who has the ability to project into the public, who can go onto the shows and have articles written and have the public relations behind him. And it also needs to have – in the case of absolute return, they had 4 products, there was a 1% over T-bills up to a 7% over T-bills. The same thing needs to happen with Active ETFs, you need to have a family of products, 10 or 12 or 20 products. Then you can come out and say this covers most of the major niche parts of a person’s portfolio and we as a major mutual fund company have put our capital up and our brand up and we think this is a great idea. That’s the sort of promotion that’s not occurring right now.

Shishir: That’s fantastic, thanks a lot for chatting with us David. It was good having you.

David: Very good.

ETF, Mutual Fund

Diwali, Dollars and Gold

November 12th, 2010

November 5 marked the beginning of Diwali festival in India and the next stage in gold’s seasonal patterns. The five day “Festival of Lights” is a major Hindu holiday and involves the lighting of small clay lamps (diyas) filled with oil to signify the triumph of good over evil. During Diwali, lights illuminate every corner of India and fireworks light up the skies.

Activities during these five days include worship, many feasts, spending time with families and exchanging gifts. The latter is a big driver of gold demand.

Traditionally, Indians are very sensitive to fluctuating gold prices but it appears they are adjusting to the concept of higher gold prices. Last year, China surged ahead of India in terms of jewelry demand until Diwali reignited retail demand in India.

It also didn’t hurt that India’s central bank bought 200 tons of gold around $1,000 an ounce. This put a floor under gold and changed the mentality of retail buyers who had been waiting for a pullback below $1,000. In fact as of June 2010, Indian jewelry demand was only off 2 percent on a year-over-year basis despite gold reaching new record highs. A report from the Bombay Bullion Association says that Indian gold imports rose to 43 tons, an 18 percent increase from the same time last year.

India isn’t the only place that jewelry demand is picking up. According to the World Gold Council’s most recent Gold Demand Trends report, jewelry demand experienced its smallest decline since early 2008 during the second quarter of this year.

Gold as an investment has been grabbing headlines and is certainly a key factor in overall demand. However, demand for gold jewelry is still the king. In 2009, retail investment and ETFs totaled 1,348 tons of gold—39 percent of total demand. However, jewelry demand, which was at its lowest level in 10 years, totaled 1,759 tons—51 percent of total demand.

This is important because as retail buyers of gold grow more accustomed to gold’s current price levels, demand should increase and provide a tailwind for higher prices.

With the Federal Reserve’s announcement of its second quantitative easing (QE2) initiative, it’s a good time to update you on some data I’ve shared with you several times. This chart shows gold’s appreciation in major currencies since 1999. As you can see, currency devaluation has a dramatic effect on gold’s performance in that particular currency.

The past few months have been very rough for the dollar.

Since June 1 through November 5, gold prices have jumped 1.2 percent in Japanese yen terms and 2.6 percent in British pound terms. Gold prices in euro terms have actually dropped 1 percent during that time period.

In dollar terms, it’s a much different story. Gold prices in U.S. dollars have jumped 13.4 percent since June 1. Most of this appreciation came after the Federal Reserve announced its intention for a second round of quantitative easing. The Federal Reserve’s recent announcement was both larger ($600 billion) and longer (until June 2011) than many had anticipated.

The long-term depreciation effect this plan will have on the dollar could be a catalyst for higher gold prices all the way into next summer.

Another upside is a weaker dollar makes high-quality American products more attractive to export. We can expect rising exports over the next six months to help our unemployment numbers and boost our economy.

I wish all a Happy Diwali and the blessings of fortune, luck, riches and generosity.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Diwali, Dollars and Gold 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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Diwali, Dollars and Gold




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