A Quick Daily and Weekly View of Apple AAPL at New Highs

September 22nd, 2010

Shares of Apple Inc (AAPL) broke to new highs this week after rallying the last three weeks in a row in a breakout that investors and traders have been expecting was due.

Let’s take a quick look at the structure of the breakout and see what the charts have to say about the stock – and what levels are important to watch for confirmation.

First, the larger-structure Weekly Chart:

Apple has proven to be one of those “Short at your own risk” stocks, and a great lesson in how simple trend analysis can keep  you out of trouble and positioned on the right side of a powerful trend in motion.

Ever since the early 2009 low, Apple shares rose in a stable upward trajectory supported by the 20 week EMA (green).

As long as the price remained above the 20 week EMA, it was a buy, particularly on low-risk pullbacks to the support of the weekly average.

That was then – this is now.  2010 was not as kind to shares of Apple, as the stock traded in a $30 range for most of the year ($240 as support; $270 as resistance).

Remember, price is king and we turn to price insights first.  We then look to confirming indicators – like volume – to give us clues about the health or continued strength of a price move in motion.

While price has been rising, those indicators have been falling, particularly volume, which spiked for the months after April and declined steadily until present.

A classic analysis shows that volume is not necessarily ‘confirming’ this rally – but as long as price continues rising, that doesn’t seem to matter.  It’s a caution sign, but not a “panic” sign by any means.

Now let’s drop to the daily chart for the recent breakout picture:

In prior posts, I’ve been showing the sideways trading range and the reference levels to watch in anticipation of a price breakout.

The $240 level has been a good ‘buy’ area and the $265/$270 area has been a good “take profits” area, but price cannot remain rangebound forever – it has to break out of the range (though up or down, we do not know which until it occurs).

The breakout has been to the upside and shares have responded with the expected initial ‘breakout’ rally as anticipated.

Notice how shares paused initially at $265, shattered above it, then moved sharply up to the next ‘test’ level at $275, paused, then recently shattered above that too.

The short-term key will be the breakout price at $278/$280 for a bullish ’support-shelf’ reference, and as long as the stock remains above this level, it is a buy candidate with bullish expectations (from a chart and trend perspective).

Any move under $275 would be expected to find at least initial support/bounce at $265.

And for upside targets, $300 seems reasonable and would probably give shares at least a temporary pause as buyers take profits… but will probably get right back into the stock if the price rises much above $300, which is why it would be a temporary price level to watch.

Continue watching this breakout for signs of strength or weakness, and watch what happens as we (or if we) trade up to the $300 per share level.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
A Quick Daily and Weekly View of Apple AAPL at New Highs

Uncategorized

A Quick Daily and Weekly View of Apple AAPL at New Highs

September 22nd, 2010

Shares of Apple Inc (AAPL) broke to new highs this week after rallying the last three weeks in a row in a breakout that investors and traders have been expecting was due.

Let’s take a quick look at the structure of the breakout and see what the charts have to say about the stock – and what levels are important to watch for confirmation.

First, the larger-structure Weekly Chart:

Apple has proven to be one of those “Short at your own risk” stocks, and a great lesson in how simple trend analysis can keep  you out of trouble and positioned on the right side of a powerful trend in motion.

Ever since the early 2009 low, Apple shares rose in a stable upward trajectory supported by the 20 week EMA (green).

As long as the price remained above the 20 week EMA, it was a buy, particularly on low-risk pullbacks to the support of the weekly average.

That was then – this is now.  2010 was not as kind to shares of Apple, as the stock traded in a $30 range for most of the year ($240 as support; $270 as resistance).

Remember, price is king and we turn to price insights first.  We then look to confirming indicators – like volume – to give us clues about the health or continued strength of a price move in motion.

While price has been rising, those indicators have been falling, particularly volume, which spiked for the months after April and declined steadily until present.

A classic analysis shows that volume is not necessarily ‘confirming’ this rally – but as long as price continues rising, that doesn’t seem to matter.  It’s a caution sign, but not a “panic” sign by any means.

Now let’s drop to the daily chart for the recent breakout picture:

In prior posts, I’ve been showing the sideways trading range and the reference levels to watch in anticipation of a price breakout.

The $240 level has been a good ‘buy’ area and the $265/$270 area has been a good “take profits” area, but price cannot remain rangebound forever – it has to break out of the range (though up or down, we do not know which until it occurs).

The breakout has been to the upside and shares have responded with the expected initial ‘breakout’ rally as anticipated.

Notice how shares paused initially at $265, shattered above it, then moved sharply up to the next ‘test’ level at $275, paused, then recently shattered above that too.

The short-term key will be the breakout price at $278/$280 for a bullish ’support-shelf’ reference, and as long as the stock remains above this level, it is a buy candidate with bullish expectations (from a chart and trend perspective).

Any move under $275 would be expected to find at least initial support/bounce at $265.

And for upside targets, $300 seems reasonable and would probably give shares at least a temporary pause as buyers take profits… but will probably get right back into the stock if the price rises much above $300, which is why it would be a temporary price level to watch.

Continue watching this breakout for signs of strength or weakness, and watch what happens as we (or if we) trade up to the $300 per share level.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
A Quick Daily and Weekly View of Apple AAPL at New Highs

Uncategorized

Once Again, Gold Confirms Its Uptrend

September 22nd, 2010

Claus Vogt

When the dot com bubble burst and stocks entered a secular bear market, gold did just the opposite and began a secular bull.

As you can see on the chart below, this bull market is doing quite well. In fact, on Monday gold broke out to a new all–time closing high of $1,278.35, thus once more confirming its uptrend.

chart Once Again, Gold Confirms Its Uptrend

And it’s no wonder! The fundamental background for a rising gold price is extremely supportive …

Ever-higher government debts in most parts of the world are accompanied by reckless bailout and stimulus policies. And equally reckless monetary policies are prevalent in Europe, Japan, and the U.S. What’s more, there are absolutely no signs of rethinking these catastrophic policies.

Fed Chairman Ben Bernanke has again made it clear in his speech in Jackson Hole that he is willing to continue his massive money printing. He was reiterating his willingness to use “unconventional monetary measures” to fight whatever the current financial and economic crisis might bring. And I fully trust Mr. Bernanke will hold to this promise.

Gold’s Flashing a
Technical Buy Signal

Generally speaking, new all-time highs are plainly bullish. Yet reluctance to get onboard gold is the widely held attitude …

“It has risen too much already,” is a common objection. “The price is too high,” is another.

Well, both sound like typical excuses for investors who think they’ve missed the train and are now afraid to jump on a bull market in a still unpopular asset class.

It was the same with stocks back in the early 1980s when a secular stock bull market got going …

It took the masses more than 15 years to realize that a big bull market was starring right at them. Unfortunately, many overstayed the party and bought heavily during the beginning of the secular bear in 2000 and the years thereafter.

By the time most investors decide to buy, gold's price will likely be higher.
By the time most investors decide to buy, gold’s price will likely be higher.

I see the same thing happening with gold.

Here we are in a 10-year old gold bull market, but only a very small minority of investors is participating! Just ask your friends and neighbors to find out how unpopular this bull market still is.

I’m absolutely sure that will change during the coming years. There will be a day of recognition when the masses discover how important gold is as an asset class.

Of course, prices will be much higher by then. But that’s the way it is with secular bull markets and investors.

Best wishes,

Claus


About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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Commodities, ETF, Mutual Fund, Uncategorized

Getting Active In Build America Bonds With PIMCO’s BABZ

September 22nd, 2010

On September 21st, PIMCO launched its fourth actively-managed ETF in the US, the PIMCO Build America Bond Strategy Fund (BABZ: 50.70 0.00%). This is the first actively-managed ETF to hit them market from PIMCO, since the launch of the Short Term Municipal Bond Fund (SMMU: 50.58 0.00%) back in January of this year. PIMCO has had this product in filing with the SEC since the early part of this year, and still has two more actively-managed funds that are being planned.

The Build America Bond Strategy Fund will provide exposure to municipal debt securities that have been issued under the “Build America Bond” program that was created as part of the American Recovery and Reinvestment Act of 2009, more simply known as the “stimulus package”.

Build America Bonds (BABs) are typically issued by municipalities to finance their expenditures. So how are BABs different from traditional municipal bonds? The appeal of the traditional municipal bonds is that their interest income is exempt from federal taxes and from most state and local taxes. This brings favourable tax implications for investors, especially those who are in higher tax brackets. In comparison, income generated from BABs is taxable. However, BABs have their own advantages.

What so good about Build America Bonds?

There are two types of Build America Bonds that have hit the market. The first category of bonds (called “Direct Payment BABs”) have higher than normal interest rates, which are partly subsidised (to the tune of 35% of the interest rate) by the federal government. Due to the subsidy, the issuing municipalities are able to promise high interest rates that are often comparable to corporate bond offerings. For example, one of the first BAB issues to be launched was a $250 million offering from University of Virginia in April 2009 that had a taxable interest rate of 6.22%. However, including the 35% federal subsidy would reduce the effective interest rate for the issuer to 4.03%. So municipalities have been able to attract investors to BABs with every competitive interest rates without having large interest liabilities, thanks to the federal government footing the bill.

The second category of BABs (called “Tax Credit BABs”) provided a federal subsidy of 35% of the interest payable directly to the investors instead, through tax credits. Thus, the bond owner’s tax liability on the interest income is effectively reduced by utilizing the tax credits.

The Direct Payment BABs have been more popular because large institutional buyers, especially tax exempt buyers like pension funds, have been attracted to the higher interest rates; So much so that since the launch of the Build America Bond program, issuance of traditional tax-exempt municipal bonds has dropped. Since the program’s inception, more than $125 billion in BABs have been issued – which represents about 20% of all muni-bond issuance, according to PIMCO.

How can you get your hands on some BABs?

At the moment, there are only two ETFs that provide exposure to Build America Bonds and both of them are passively-managed instruments. The first is the PowerShares Build America Bond Portfolio (BAB: 26.60 0.00%), which tracks the BofA Merrill Lynch Build America Bond Index. The second is the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS: 51.845 0.00%), which tracks the Barclays Captial Build America Bond Index. Both of these funds have an expense ratio of 0.35%, but BAB has been a much bigger success with more than $550 million in assets, compared to $20 million in BABS. Both of these index ETFs are focused on BABs that have maturities of around 20 years.

PIMCO’s Build America Bond Strategy Fund (BABZ) aims to differentiate itself, in a space that is already quite crowded, by offering the potential for active management amongst BABs. BABZ will invest primarily in investment-grade securities, but also has the freedom to invest up to 20% of its assets in high-yield bonds, in search of excess returns. The average maturity of the fund is targeted to match the average maturity of the Barclays Capital Build America Bond Index, plus or minus 2 years. The portfolio manager, John Cummings, will look for bonds that offer attractive current income and are trading at competitive prices. In return for the active management provided, the fund will charge investors marginally more than the passive alternatives, with an expense ratio of 0.45% (after including a 0.10% “expense reimbursement”).

What’s the active management value add?

The argument that PIMCO makes for its actively-managed ETF over the passive alternatives is much the same as that for its other municipal bond ETFs. Issuer-specific credit analysis in the municipal bond space is crucial to be able to avoid owning poor credits, which can be commonplace given the budgetary difficulties many of them are facing.

Active management will also allow the mangers to position the portfolio strategically according to macro changes that they see coming. For example, investors holding the passively-managed BAB ETFs from PowerShares and State Street may be exposed to falling bond values when interest rates eventually rise. This is especially because both those funds have average maturities exceeding 25 years. With BABZ, PIMCO’s managers will have the ability to move the portfolio along the yield curve and utilize duration positioning based on their economic outlook.

Another interesting point is that the Build America Bond Program actually expires on January 1, 2011, meaning that any new issuances of BABs have to be completed before that date. After that, the BABs market will be limited to those bonds that have been issued since 2009 – which is no small number by any means, still. Safe to say that there’ll be sufficient issues available in the secondary markets to provide investment opportunities, until they reach maturity 20 years out. Even then, the US Congress is in the process of considering an extension of the program to December 31, 2012. How that decision plays out will also affect how managers manage BAB portfolios.

ETF

Getting Active In Build America Bonds With PIMCO’s BABZ

September 22nd, 2010

On September 21st, PIMCO launched its fourth actively-managed ETF in the US, the PIMCO Build America Bond Strategy Fund (BABZ: 50.70 0.00%). This is the first actively-managed ETF to hit them market from PIMCO, since the launch of the Short Term Municipal Bond Fund (SMMU: 50.58 0.00%) back in January of this year. PIMCO has had this product in filing with the SEC since the early part of this year, and still has two more actively-managed funds that are being planned.

The Build America Bond Strategy Fund will provide exposure to municipal debt securities that have been issued under the “Build America Bond” program that was created as part of the American Recovery and Reinvestment Act of 2009, more simply known as the “stimulus package”.

Build America Bonds (BABs) are typically issued by municipalities to finance their expenditures. So how are BABs different from traditional municipal bonds? The appeal of the traditional municipal bonds is that their interest income is exempt from federal taxes and from most state and local taxes. This brings favourable tax implications for investors, especially those who are in higher tax brackets. In comparison, income generated from BABs is taxable. However, BABs have their own advantages.

What so good about Build America Bonds?

There are two types of Build America Bonds that have hit the market. The first category of bonds (called “Direct Payment BABs”) have higher than normal interest rates, which are partly subsidised (to the tune of 35% of the interest rate) by the federal government. Due to the subsidy, the issuing municipalities are able to promise high interest rates that are often comparable to corporate bond offerings. For example, one of the first BAB issues to be launched was a $250 million offering from University of Virginia in April 2009 that had a taxable interest rate of 6.22%. However, including the 35% federal subsidy would reduce the effective interest rate for the issuer to 4.03%. So municipalities have been able to attract investors to BABs with every competitive interest rates without having large interest liabilities, thanks to the federal government footing the bill.

The second category of BABs (called “Tax Credit BABs”) provided a federal subsidy of 35% of the interest payable directly to the investors instead, through tax credits. Thus, the bond owner’s tax liability on the interest income is effectively reduced by utilizing the tax credits.

The Direct Payment BABs have been more popular because large institutional buyers, especially tax exempt buyers like pension funds, have been attracted to the higher interest rates; So much so that since the launch of the Build America Bond program, issuance of traditional tax-exempt municipal bonds has dropped. Since the program’s inception, more than $125 billion in BABs have been issued – which represents about 20% of all muni-bond issuance, according to PIMCO.

How can you get your hands on some BABs?

At the moment, there are only two ETFs that provide exposure to Build America Bonds and both of them are passively-managed instruments. The first is the PowerShares Build America Bond Portfolio (BAB: 26.60 0.00%), which tracks the BofA Merrill Lynch Build America Bond Index. The second is the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS: 51.845 0.00%), which tracks the Barclays Captial Build America Bond Index. Both of these funds have an expense ratio of 0.35%, but BAB has been a much bigger success with more than $550 million in assets, compared to $20 million in BABS. Both of these index ETFs are focused on BABs that have maturities of around 20 years.

PIMCO’s Build America Bond Strategy Fund (BABZ) aims to differentiate itself, in a space that is already quite crowded, by offering the potential for active management amongst BABs. BABZ will invest primarily in investment-grade securities, but also has the freedom to invest up to 20% of its assets in high-yield bonds, in search of excess returns. The average maturity of the fund is targeted to match the average maturity of the Barclays Capital Build America Bond Index, plus or minus 2 years. The portfolio manager, John Cummings, will look for bonds that offer attractive current income and are trading at competitive prices. In return for the active management provided, the fund will charge investors marginally more than the passive alternatives, with an expense ratio of 0.45% (after including a 0.10% “expense reimbursement”).

What’s the active management value add?

The argument that PIMCO makes for its actively-managed ETF over the passive alternatives is much the same as that for its other municipal bond ETFs. Issuer-specific credit analysis in the municipal bond space is crucial to be able to avoid owning poor credits, which can be commonplace given the budgetary difficulties many of them are facing.

Active management will also allow the mangers to position the portfolio strategically according to macro changes that they see coming. For example, investors holding the passively-managed BAB ETFs from PowerShares and State Street may be exposed to falling bond values when interest rates eventually rise. This is especially because both those funds have average maturities exceeding 25 years. With BABZ, PIMCO’s managers will have the ability to move the portfolio along the yield curve and utilize duration positioning based on their economic outlook.

Another interesting point is that the Build America Bond Program actually expires on January 1, 2011, meaning that any new issuances of BABs have to be completed before that date. After that, the BABs market will be limited to those bonds that have been issued since 2009 – which is no small number by any means, still. Safe to say that there’ll be sufficient issues available in the secondary markets to provide investment opportunities, until they reach maturity 20 years out. Even then, the US Congress is in the process of considering an extension of the program to December 31, 2012. How that decision plays out will also affect how managers manage BAB portfolios.

ETF

Exploiting Bernanke, Part Two of Two

September 22nd, 2010

Currencies everywhere were devaluing against tangible assets and necessities. Corn prices doubled between April 2006 and January 2008.  The principal cause was energy: ethanol, fertilizer, water, transportation. The best topsoil in North America had eroded from 18 to 10 inches over the past 50 years. The erosion would have been much greater without fertilizers.  More fertilizer, which might slow topsoil erosion, needed more energy. Potash Corporation from Canada expected the cost of producing potash fertilizer would rise by nearly 70% in 2007 due to increased demand for food and fuel. Cambridge Energy Research Associates estimated the worldwide cost to produce oil and natural gas (labor and equipment) had risen 53% since 2004. In some cases the rising costs had led producers to scrap exploration. Exxon estimated the cost of building a gas-to-liquids plant in Qatar at $3 billion in 2004. Estimates in 2007 were $18 billion. The joint project of Exxon and Qatar was dropped.

The United States has imported more than it has exported for decades. Central banks, such as China’s, collect dollars from its domestic exporters (from whom Americans had bought goods). The Chinese exporters are handed yuan in exchange for dollars by the central bank. This causes a rising supply of yuan in the local economy. Incomes rise. Necessities improved (more chicken and less rice was eaten) and the Chinese bought machines long considered part of the furniture to Westerners – air conditioners, refrigerators and televisions. China needed more energy.

These permutations of inflation, as they reentered the United States, were understood by Harry Landis and non-college graduates, even if Fed staffers with their “expert judgment” could not comprehend the damage.

On November 7, 2007, Bernanke demonstrated that he had no understanding of inflation. In testimony, Congressman Ron Paul accused Bernanke of a loose money policy that was devaluing the dollar and causing consumer prices to rise. According to the Fed chairman, this was not the case: “If somebody has their wealth in dollars, and they’re going to buy consumer goods in dollars, for the typical American, then the deval-, the decline in the dollar, the only effect it has on their buying power is it makes foreign goods more expensive.” This extraordinary demonstration of ineptitude was barely mentioned by the same group that thought the spelling of “potato” was of national importance.

On the same day, the Marxist president of Venezuela, Hugo Chavez, showed he understood economic claptrap better than the U.S. media, establishment economists, and the Wall Street publicists who regularly appear on Bubble TV. Chavez addressed an OPEC gathering: “Don’t you see how the dollar has been in free-fall without a parachute? The empire of the dollar has to end.” The next day, the Archaeological Survey of India announced it would no longer accept dollars for admission to the Taj Mahal The dollar had fallen 12% against the rupee since the beginning of the year.

Oil moved above $90 a barrel in October 2007: the number of dollars needed to buy a barrel of oil had risen from around $40 to $95 since the beginning of 2005. Prices across the U.S. were rising, including – maybe most importantly – manufacturing costs. The Associated Press reported that over 3.2 million factory jobs had been lost in the U.S. since 2000, many of those jobs going to countries with cheaper costs. Wilbur Ross, long-time veteran in the buyout business, was interviewed by the Financial Times in April 2007. He noted the amount of debt used in private-equity acquisitions was at an all-time high, “a very dangerous phenomenon,” with only a few making fortunes at the expense of many: “The danger isn’t so much inequality as that we’re gradually losing the middle class from the population [which is] one of the big contributors to social stability and the relative political stability of the country.”

The commercial banks supplied much of the financing for buyouts. The Federal Reserve chairman could have slowed this to a crawl. The Fed has the authority to reduce reserve ratios of the banks. This was not discussed.

In March 2008, 91% of Americans polled were concerned about inflation. Commodity markets boomed. Rice prices passed their all-time high, which had been set in 1973. Costco and Sam’s Clubs in California rationed rice purchases.

On June 9, 2008, Chairman Bernanke stated “[t]he Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing from growth as well as inflation.” Two weeks later, the

University of Michigan found consumers expected prices to rise 7.7% over the next year. Bernanke, before Congress on July 15, 2008, admitted “inflation expectations have moved higher.” He reassured the politicians: “[L]onger-term inflation expectations remain reasonably well anchored.”Given his July 2007, explanation of how the Federal Reserve thinks about inflation (see above), it is obvious he was talking through his hat.

Oil peaked at $147 a barrel in July 2008. In August 2008, the chairman told the world’s leading economists in Jackson Hole, Wyoming that inflation should moderate later in the year due to “well-anchored inflationary expectations” and the “increased stability of the dollar.” (The dollar had been rising for all of six weeks.) When had he discovered the dollar’s influence on inflation? The day before his Jackson Hole appearance, the U.S. Department of Agriculture projected 2008 food costs would be the highest in 20 years.

By the summer of 2008, the U.S. was submerging in the financial crisis, of which Chairman Bernanke has shown no more understanding than of inflation. Prices retreated but are rising again.

In August 2010, the U.N. Food and Agricultural Organization announced its (international) food index has risen 16% over the past year and is at the highest since 1990. Global meat prices are at a 30-year high. Lamb prices are at their highest since 1973. Wheat and corn prices are rising at their fastest pace since 1973, a year of severe price and social disruption. In April 1973, Time reported that “[p]rofessional thieves are increasingly hijacking meat trucks.”  False rumors of a rice shortage led frantic Californians to drag 50-pound bags of rice from supermarkets to their cars.

Official U.S. government consumer price index (CPI) numbers have not been mentioned until now. They are important to investors since the monthly calculations, offered to the public as a single number by the media, are taken at face value by the learned financial scholars who are interviewed on TV. The calculations though are a negation of the truth.

It would have been difficult to find the CPI number that was announced when Bernanke was making his comments. The Bureau of Labor Statistics (BLS), which calculates the numbers, states on its website that the press releases (on its website archive) are not the same as the releases that were sent on the corresponding date (for instance, in June, 2006). The BLS has replaced the earlier numbers with newer, revised figures.

Since they have not yet been revised, we can compare a recent distortion between BLS numbers and a more candid approximation at reality. On August 13, 2010, the BLS announced the “index for all items less food and energy rose 0.1 percent in July” 2010. Dropping down the page, the agency claimed food prices fell -0.1% in July. J.P. Morgan analysts conduct supermarket surveys, comparing 33 current to past prices. They recently found that, in the Virginia area, food prices at Wal-Mart have risen 5.9% over the past year.

In July 2010, Chairman Bernanke appeared before the Congressional Committee on Banking, Housing and Urban Development. He stated: “Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year.” He went on to make a statement that collected several hackneyed phrases of the sort that official bureaucrats use to disguise what they are thinking, assuming they do think: “At some point, however, the Committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures.” He finished: “Near-term inflation now looks likely to be a little lower.”

In July 2010, police in Homestead, Florida, “said thieves are striking at farms, stealing produce to sell on the black market.” Three weeks later, in West Philadelphia, a four-year-old boy was “swallowed” by the sewer system after a manhole cover had been stolen. The Associated Press reported: “In 2008, the department began installing locks on some of the 76,000 manhole covers in the city but still officials are looking at options. ‘We’re also looking into alternative materials to where [sic] they won’t be attractive for the scrap yards’ “. (The four-year old lived.) In San Francisco, federal detention centers are “slowly filling up with a new type of criminal… a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge electrical wire.”

The Court’s Conclusion

To conclude: dismiss Bernanke and discussions about the Federal Reserve. Commodity prices are rising and time is better spent reading the Northern Miner and watching the Prairie Farm Report than Bubble TV. This is not a prediction that commodity prices can be extrapolated in a predictable upward path, but that investors will be able to make money by exploiting the vast ditch between the Federal Reserve’s false world and reality.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

Exploiting Bernanke, Part Two of Two 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:
Exploiting Bernanke, Part Two of Two




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.

OPTIONS, Uncategorized

Exploiting Bernanke, Part Two of Two

September 22nd, 2010

Currencies everywhere were devaluing against tangible assets and necessities. Corn prices doubled between April 2006 and January 2008.  The principal cause was energy: ethanol, fertilizer, water, transportation. The best topsoil in North America had eroded from 18 to 10 inches over the past 50 years. The erosion would have been much greater without fertilizers.  More fertilizer, which might slow topsoil erosion, needed more energy. Potash Corporation from Canada expected the cost of producing potash fertilizer would rise by nearly 70% in 2007 due to increased demand for food and fuel. Cambridge Energy Research Associates estimated the worldwide cost to produce oil and natural gas (labor and equipment) had risen 53% since 2004. In some cases the rising costs had led producers to scrap exploration. Exxon estimated the cost of building a gas-to-liquids plant in Qatar at $3 billion in 2004. Estimates in 2007 were $18 billion. The joint project of Exxon and Qatar was dropped.

The United States has imported more than it has exported for decades. Central banks, such as China’s, collect dollars from its domestic exporters (from whom Americans had bought goods). The Chinese exporters are handed yuan in exchange for dollars by the central bank. This causes a rising supply of yuan in the local economy. Incomes rise. Necessities improved (more chicken and less rice was eaten) and the Chinese bought machines long considered part of the furniture to Westerners – air conditioners, refrigerators and televisions. China needed more energy.

These permutations of inflation, as they reentered the United States, were understood by Harry Landis and non-college graduates, even if Fed staffers with their “expert judgment” could not comprehend the damage.

On November 7, 2007, Bernanke demonstrated that he had no understanding of inflation. In testimony, Congressman Ron Paul accused Bernanke of a loose money policy that was devaluing the dollar and causing consumer prices to rise. According to the Fed chairman, this was not the case: “If somebody has their wealth in dollars, and they’re going to buy consumer goods in dollars, for the typical American, then the deval-, the decline in the dollar, the only effect it has on their buying power is it makes foreign goods more expensive.” This extraordinary demonstration of ineptitude was barely mentioned by the same group that thought the spelling of “potato” was of national importance.

On the same day, the Marxist president of Venezuela, Hugo Chavez, showed he understood economic claptrap better than the U.S. media, establishment economists, and the Wall Street publicists who regularly appear on Bubble TV. Chavez addressed an OPEC gathering: “Don’t you see how the dollar has been in free-fall without a parachute? The empire of the dollar has to end.” The next day, the Archaeological Survey of India announced it would no longer accept dollars for admission to the Taj Mahal The dollar had fallen 12% against the rupee since the beginning of the year.

Oil moved above $90 a barrel in October 2007: the number of dollars needed to buy a barrel of oil had risen from around $40 to $95 since the beginning of 2005. Prices across the U.S. were rising, including – maybe most importantly – manufacturing costs. The Associated Press reported that over 3.2 million factory jobs had been lost in the U.S. since 2000, many of those jobs going to countries with cheaper costs. Wilbur Ross, long-time veteran in the buyout business, was interviewed by the Financial Times in April 2007. He noted the amount of debt used in private-equity acquisitions was at an all-time high, “a very dangerous phenomenon,” with only a few making fortunes at the expense of many: “The danger isn’t so much inequality as that we’re gradually losing the middle class from the population [which is] one of the big contributors to social stability and the relative political stability of the country.”

The commercial banks supplied much of the financing for buyouts. The Federal Reserve chairman could have slowed this to a crawl. The Fed has the authority to reduce reserve ratios of the banks. This was not discussed.

In March 2008, 91% of Americans polled were concerned about inflation. Commodity markets boomed. Rice prices passed their all-time high, which had been set in 1973. Costco and Sam’s Clubs in California rationed rice purchases.

On June 9, 2008, Chairman Bernanke stated “[t]he Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing from growth as well as inflation.” Two weeks later, the

University of Michigan found consumers expected prices to rise 7.7% over the next year. Bernanke, before Congress on July 15, 2008, admitted “inflation expectations have moved higher.” He reassured the politicians: “[L]onger-term inflation expectations remain reasonably well anchored.”Given his July 2007, explanation of how the Federal Reserve thinks about inflation (see above), it is obvious he was talking through his hat.

Oil peaked at $147 a barrel in July 2008. In August 2008, the chairman told the world’s leading economists in Jackson Hole, Wyoming that inflation should moderate later in the year due to “well-anchored inflationary expectations” and the “increased stability of the dollar.” (The dollar had been rising for all of six weeks.) When had he discovered the dollar’s influence on inflation? The day before his Jackson Hole appearance, the U.S. Department of Agriculture projected 2008 food costs would be the highest in 20 years.

By the summer of 2008, the U.S. was submerging in the financial crisis, of which Chairman Bernanke has shown no more understanding than of inflation. Prices retreated but are rising again.

In August 2010, the U.N. Food and Agricultural Organization announced its (international) food index has risen 16% over the past year and is at the highest since 1990. Global meat prices are at a 30-year high. Lamb prices are at their highest since 1973. Wheat and corn prices are rising at their fastest pace since 1973, a year of severe price and social disruption. In April 1973, Time reported that “[p]rofessional thieves are increasingly hijacking meat trucks.”  False rumors of a rice shortage led frantic Californians to drag 50-pound bags of rice from supermarkets to their cars.

Official U.S. government consumer price index (CPI) numbers have not been mentioned until now. They are important to investors since the monthly calculations, offered to the public as a single number by the media, are taken at face value by the learned financial scholars who are interviewed on TV. The calculations though are a negation of the truth.

It would have been difficult to find the CPI number that was announced when Bernanke was making his comments. The Bureau of Labor Statistics (BLS), which calculates the numbers, states on its website that the press releases (on its website archive) are not the same as the releases that were sent on the corresponding date (for instance, in June, 2006). The BLS has replaced the earlier numbers with newer, revised figures.

Since they have not yet been revised, we can compare a recent distortion between BLS numbers and a more candid approximation at reality. On August 13, 2010, the BLS announced the “index for all items less food and energy rose 0.1 percent in July” 2010. Dropping down the page, the agency claimed food prices fell -0.1% in July. J.P. Morgan analysts conduct supermarket surveys, comparing 33 current to past prices. They recently found that, in the Virginia area, food prices at Wal-Mart have risen 5.9% over the past year.

In July 2010, Chairman Bernanke appeared before the Congressional Committee on Banking, Housing and Urban Development. He stated: “Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year.” He went on to make a statement that collected several hackneyed phrases of the sort that official bureaucrats use to disguise what they are thinking, assuming they do think: “At some point, however, the Committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures.” He finished: “Near-term inflation now looks likely to be a little lower.”

In July 2010, police in Homestead, Florida, “said thieves are striking at farms, stealing produce to sell on the black market.” Three weeks later, in West Philadelphia, a four-year-old boy was “swallowed” by the sewer system after a manhole cover had been stolen. The Associated Press reported: “In 2008, the department began installing locks on some of the 76,000 manhole covers in the city but still officials are looking at options. ‘We’re also looking into alternative materials to where [sic] they won’t be attractive for the scrap yards’ “. (The four-year old lived.) In San Francisco, federal detention centers are “slowly filling up with a new type of criminal… a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge electrical wire.”

The Court’s Conclusion

To conclude: dismiss Bernanke and discussions about the Federal Reserve. Commodity prices are rising and time is better spent reading the Northern Miner and watching the Prairie Farm Report than Bubble TV. This is not a prediction that commodity prices can be extrapolated in a predictable upward path, but that investors will be able to make money by exploiting the vast ditch between the Federal Reserve’s false world and reality.

Regards,

Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan's perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

Exploiting Bernanke, Part Two of Two 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:
Exploiting Bernanke, Part Two of Two




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.

OPTIONS, Uncategorized

The Best Rebound Play in the Dow

September 22nd, 2010

The Best Rebound Play in the Dow

September has been a wonderful month for stocks. The S&P 500 Index, for example, has risen in 10 of the past 13 sessions, rebounding to levels seen last May, before the bears took the reins. Shares are rising on expectations that we're increasingly likely to avoid a double-dip recession, and with a little momentum on the jobs front (and eventually the housing front), animal spirits could conspire to help push economic growth rates back up to respectable levels by the second half of next year or 2012. And if history is any guide, that economic strength could feed on itself, and set the stage for even more robust growth in 2013 and 2014.

Of course, serious problems remain and Washington will have to find a way to truly lead rather than follow if it is to restore confidence. But there are simply too many positives to ignore, including: cash-rich balance sheets, still-solid profit margins, newly-expanding trade opportunities in Latin America and Asia thanks to growth in key countries in those regions, and with a little luck and finesse, a slightly weaker dollar that could materially boost U.S. exports.

In that context, investors need to make sure they have exposure to companies that stand to benefit from rising economic fortunes in developed and emerging markets. Yet many blue chips have moved up off of their lows and already discount an eventually brightening outlook. But one Dow component, although struggling right now and trading on the cheap, should represent massive upside once business improves. I'm talking about Alcoa (NYSE: AA), the world's largest aluminum producer. It's much reviled, but wheezing back to life.

My colleague Paul Rolfes recently laid out a logical bear case for Alcoa. [See: This Stock Could Disappear from the Dow] And he's right. The company's dividend is paltry, and most analysts rate the stock as a “hold.” But it's important to know that analysts rate stocks on current operating trends, and have a lousy track record of looking out a year or two. Even when they turn bullish and raise their rating, they only boost their price target by a small amount, and then keep raising it again and again. That's how I believe Alcoa will play out, either later this year or in the first half of 2011. Here's why…

Darkest before the dawn
Massive aluminum smelters cost huge sums of money to build and operate. So when demand slumps, those heavy costs can eat up any potential profit. Alcoa's 2009 results were nothing short of dismal. Sales fell -31% and operating margins, which had hit 16% just two years earlier, fell to 8%. Since then, management has had to cut costs wherever possible (37,000 jobs have been shed since 2008) while awaiting a rebound in sales. That process has just begun.

Alcoa lost nearly $400 million last December and lost another $100 million in the March, 2010 quarter, but was able to finally move back into the black in June, generating operating profits of about $230 million. The volume of aluminum produced rose +4% sequentially. Business still stinks, but less so than before.

More than likely, results will remain subpar (relative to historical peaks) for at least another year or two. But my favorite investor maxim clearly applies here: “The market always looks ahead.” Alcoa's stock is now trading on anticipated 2011 results, but come this winter, they will start to trade on anticipated 2012 results.

And by 2012, Alcoa should see a solid turn in two key metrics. Demand for aluminum should rebound, thanks in part to ever-rising content of aluminum in autos and planes. And the spot prices for aluminum should also start to bounce back from recent lows. That combination should help revenue rise at least +10% in 2012, and since this is such a high fixed-cost business, profits should rebound at a far better pace.

On Alcoa's most recent conference call, Chief Financial Officer Charles McLane noted that costs are likely to remain in check, even as demand rebounds. “We are not only holding head count levels, but are also driving restructuring this quarter that will result in further reductions.” The company's labor costs should remain firmly in check for several years to come as the United Steelworkers Union agreed to major concessions in its most recent multi-year contract.

China is the swing factor for Alcoa. Chinese aluminum production surged in 2008, creating a global glut right at a time when demand started to crater. The Chinese government has since decided to cut back production on this energy-intensive product. (Alcoa's energy costs are the lowest in the business, thanks to a building spree in the last decade that placed new factories where energy is cheap and reliable, such as Iceland, Trinidad & Tobago and several locations that have abundant hydro-electric power).

Chinese aluminum factories have started to throttle back output. The surplus of Chinese aluminum available for the spot market fell from 400,000 tons in March to 200,000 tons in June, and has apparently fallen further since then. Alcoa's management notes that more than 1 million tons of production has been taken off-line in China in the third quarter.

Action to Take –> Alcoa kicks off earnings season in about three weeks. At that time, management is expected to talk about typical seasonal weakness seen every fall, but management's cost-cutting efforts, coupled with a newly-restrained China, could be the real focus of the conference call. If so, this stock may finally start to get up off the mat.

Coming up with a future profit target for Alcoa is a bit tricky. The company typically earned $1.50 to $2 a share in normal years, and EPS exceeded $3 during an industry boom in 2007. There's no reason to expect boom conditions to return, but “normal” results could be seen within a few years. Yet Alcoa has taken so many costs out of the business, that EPS should be nicely higher on “normal revenue,” perhaps in the $2.25 to $2.50 range.

When the global economy — and Alcoa — is back on its feet, shares could easily trade up to 10 times profits, or $22 to $25. That's a double from current levels, though still below the $30 to $40 range seen in 2006 and 2008. There are other Dow components that will also solidly benefit from an improving global economy, but none are as beaten down as this one.


– 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
The Best Rebound Play in the Dow

Read more here:
The Best Rebound Play in the Dow

Uncategorized

The Best Rebound Play in the Dow

September 22nd, 2010

The Best Rebound Play in the Dow

September has been a wonderful month for stocks. The S&P 500 Index, for example, has risen in 10 of the past 13 sessions, rebounding to levels seen last May, before the bears took the reins. Shares are rising on expectations that we're increasingly likely to avoid a double-dip recession, and with a little momentum on the jobs front (and eventually the housing front), animal spirits could conspire to help push economic growth rates back up to respectable levels by the second half of next year or 2012. And if history is any guide, that economic strength could feed on itself, and set the stage for even more robust growth in 2013 and 2014.

Of course, serious problems remain and Washington will have to find a way to truly lead rather than follow if it is to restore confidence. But there are simply too many positives to ignore, including: cash-rich balance sheets, still-solid profit margins, newly-expanding trade opportunities in Latin America and Asia thanks to growth in key countries in those regions, and with a little luck and finesse, a slightly weaker dollar that could materially boost U.S. exports.

In that context, investors need to make sure they have exposure to companies that stand to benefit from rising economic fortunes in developed and emerging markets. Yet many blue chips have moved up off of their lows and already discount an eventually brightening outlook. But one Dow component, although struggling right now and trading on the cheap, should represent massive upside once business improves. I'm talking about Alcoa (NYSE: AA), the world's largest aluminum producer. It's much reviled, but wheezing back to life.

My colleague Paul Rolfes recently laid out a logical bear case for Alcoa. [See: This Stock Could Disappear from the Dow] And he's right. The company's dividend is paltry, and most analysts rate the stock as a “hold.” But it's important to know that analysts rate stocks on current operating trends, and have a lousy track record of looking out a year or two. Even when they turn bullish and raise their rating, they only boost their price target by a small amount, and then keep raising it again and again. That's how I believe Alcoa will play out, either later this year or in the first half of 2011. Here's why…

Darkest before the dawn
Massive aluminum smelters cost huge sums of money to build and operate. So when demand slumps, those heavy costs can eat up any potential profit. Alcoa's 2009 results were nothing short of dismal. Sales fell -31% and operating margins, which had hit 16% just two years earlier, fell to 8%. Since then, management has had to cut costs wherever possible (37,000 jobs have been shed since 2008) while awaiting a rebound in sales. That process has just begun.

Alcoa lost nearly $400 million last December and lost another $100 million in the March, 2010 quarter, but was able to finally move back into the black in June, generating operating profits of about $230 million. The volume of aluminum produced rose +4% sequentially. Business still stinks, but less so than before.

More than likely, results will remain subpar (relative to historical peaks) for at least another year or two. But my favorite investor maxim clearly applies here: “The market always looks ahead.” Alcoa's stock is now trading on anticipated 2011 results, but come this winter, they will start to trade on anticipated 2012 results.

And by 2012, Alcoa should see a solid turn in two key metrics. Demand for aluminum should rebound, thanks in part to ever-rising content of aluminum in autos and planes. And the spot prices for aluminum should also start to bounce back from recent lows. That combination should help revenue rise at least +10% in 2012, and since this is such a high fixed-cost business, profits should rebound at a far better pace.

On Alcoa's most recent conference call, Chief Financial Officer Charles McLane noted that costs are likely to remain in check, even as demand rebounds. “We are not only holding head count levels, but are also driving restructuring this quarter that will result in further reductions.” The company's labor costs should remain firmly in check for several years to come as the United Steelworkers Union agreed to major concessions in its most recent multi-year contract.

China is the swing factor for Alcoa. Chinese aluminum production surged in 2008, creating a global glut right at a time when demand started to crater. The Chinese government has since decided to cut back production on this energy-intensive product. (Alcoa's energy costs are the lowest in the business, thanks to a building spree in the last decade that placed new factories where energy is cheap and reliable, such as Iceland, Trinidad & Tobago and several locations that have abundant hydro-electric power).

Chinese aluminum factories have started to throttle back output. The surplus of Chinese aluminum available for the spot market fell from 400,000 tons in March to 200,000 tons in June, and has apparently fallen further since then. Alcoa's management notes that more than 1 million tons of production has been taken off-line in China in the third quarter.

Action to Take –> Alcoa kicks off earnings season in about three weeks. At that time, management is expected to talk about typical seasonal weakness seen every fall, but management's cost-cutting efforts, coupled with a newly-restrained China, could be the real focus of the conference call. If so, this stock may finally start to get up off the mat.

Coming up with a future profit target for Alcoa is a bit tricky. The company typically earned $1.50 to $2 a share in normal years, and EPS exceeded $3 during an industry boom in 2007. There's no reason to expect boom conditions to return, but “normal” results could be seen within a few years. Yet Alcoa has taken so many costs out of the business, that EPS should be nicely higher on “normal revenue,” perhaps in the $2.25 to $2.50 range.

When the global economy — and Alcoa — is back on its feet, shares could easily trade up to 10 times profits, or $22 to $25. That's a double from current levels, though still below the $30 to $40 range seen in 2006 and 2008. There are other Dow components that will also solidly benefit from an improving global economy, but none are as beaten down as this one.


– 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
The Best Rebound Play in the Dow

Read more here:
The Best Rebound Play in the Dow

Uncategorized

My Top-Rated Trade for the Week

September 22nd, 2010

My Top-Rated Trade for the Week

My top-rated stock this week (out of more than 6,000 stocks and ETFs) is a basic materials company that focuses on industrial metals, minerals and oil and gas. In general, I like the basic materials segment of the global economy and even more so when the companies in this segment are headquartered in either Australia, Canada or Brazil — three countries blessed with an abundance of natural resources and strong emerging economies.

And although my 90-day global forecast data (see more on this in my Mastering the Markets newsletter this week) is providing an early warning that the likelihood of a -10% correction is building, there are plenty of signs that the market could continue to move higher in the near term.

A bull-trending market is generally positive for basic material stocks. As you can see from my time-cycle forecast for the sector (below), this market segment looks to be trending higher for the next couple of months (although some downward pressure is forecasted for late October).

In my rules-based trading book, “10: The Essential Rules for Beating the Market”, I talk about the importance of buying fundamentally strong stocks; especially if faced with the likelihood of strong market volatility. Fundamentally strong stocks tend to have better staying power in falling markets. In the case of this week's pick, this stock has the highest combined score for fundamentals and technicals, making it a great candidate for potential profit.

My top pick for this week is BHP Billiton Ltd (NYSE: BHP). BHP is an Australian-based company engaged in the exploration for and production of: crude oil, liquefied natural gas, bauxite, alumina, aluminum, copper, silver, lead, zinc, uranium, diamonds, titanium, potash, nickel, iron, manganese and coal. If you like the industrial metals and minerals segment of the global economy, BHP should be a definite consideration.

BHP's fundamentals are strong:

  • The growth rate for total sales for the most recent quarter versus the same quarter a year ago comes in at +38.1%. This compares to the metal mining industry's average growth rate of +21.6% and the S&P 500's average growth rate of +10.5%.

    ETF, Uncategorized

My Top-Rated Trade for the Week

September 22nd, 2010

My Top-Rated Trade for the Week

My top-rated stock this week (out of more than 6,000 stocks and ETFs) is a basic materials company that focuses on industrial metals, minerals and oil and gas. In general, I like the basic materials segment of the global economy and even more so when the companies in this segment are headquartered in either Australia, Canada or Brazil — three countries blessed with an abundance of natural resources and strong emerging economies.

And although my 90-day global forecast data (see more on this in my Mastering the Markets newsletter this week) is providing an early warning that the likelihood of a -10% correction is building, there are plenty of signs that the market could continue to move higher in the near term.

A bull-trending market is generally positive for basic material stocks. As you can see from my time-cycle forecast for the sector (below), this market segment looks to be trending higher for the next couple of months (although some downward pressure is forecasted for late October).

In my rules-based trading book, “10: The Essential Rules for Beating the Market”, I talk about the importance of buying fundamentally strong stocks; especially if faced with the likelihood of strong market volatility. Fundamentally strong stocks tend to have better staying power in falling markets. In the case of this week's pick, this stock has the highest combined score for fundamentals and technicals, making it a great candidate for potential profit.

My top pick for this week is BHP Billiton Ltd (NYSE: BHP). BHP is an Australian-based company engaged in the exploration for and production of: crude oil, liquefied natural gas, bauxite, alumina, aluminum, copper, silver, lead, zinc, uranium, diamonds, titanium, potash, nickel, iron, manganese and coal. If you like the industrial metals and minerals segment of the global economy, BHP should be a definite consideration.

BHP's fundamentals are strong:

  • The growth rate for total sales for the most recent quarter versus the same quarter a year ago comes in at +38.1%. This compares to the metal mining industry's average growth rate of +21.6% and the S&P 500's average growth rate of +10.5%.

    ETF, Uncategorized

Big Pharma’s Most Undervalued Stock

September 22nd, 2010

Big Pharma's Most Undervalued Stock

Large pharmaceutical companies have been ignored by investors for some time now. After decades of gangbuster growth and blockbuster drugs to treat depression, high blood pressure and many other common ailments, many are facing competition from generic drugs as the patents protecting the exclusive right to sell these blockbuster drugs expire.

The primary concern for investors in the industry is that these firms will not recover from the resulting loss in revenue. The respective firms are working to address the “patent cliff” in a number of ways, including mergers, divestitures, cost cutting efforts and developing new drugs to offset lost sales.

Eli Lilly's (NYSE: LLY) predicament is among the most dire in the industry — but its approach to making it through is one of the boldest. Its largest drug, Zyprexa, goes off patent next year; Cymbalta, Gemzar and Humalog will expire in 2013; while Evista will expire in 2014. These drugs represented 57% of last year's sales, while three other drugs that account for another 18% of sales will expire in 2016 and 2017. The situation may be dire, but investors have become too negative on its forward prospects.

The company is working on developing new markets and uses for its existing drugs, but it has some serious work to do to get new drugs into the marketplace. At a recent investment conference I attended, Lilly explained that it took its eye off the ball back around 2004 and that it wasn't as focused on drug development as it should have been. This was probably due to the fact that it wasn't overly worried about sales, which have grown nearly +10% annually since that time. But given the current wave of expirations, Lilly has already begun to turn things around, and product development has tripled from 2004's levels in pretty quick fashion.

Currently, more than 40% of Lilly's pipeline is in the Stage 1 development process. This demonstrates that there is quite a bit of work to do to move these drugs further along. But much of the pipeline is focused on biologics, or biotechnology compounds, which are drugs that are notable for being difficult to replicate, even when they go off patent. Lilly has also sought to acquire players in this space, recently acquiring ImClone Systems to gain control of its cancer treatment drugs.

Going forward, Lilly plans to go it alone and is not currently planning any large merger and acquisition activity. It has detailed at least 10 compounds that should be in Phase 3 clinical trials by the end of 2011, which should have a good chance of making it to market, as success rates are much higher once a compound has made it through the first two clinical phases.

Until the top-line environment improves, Lilly is committed to cost savings. The company is currently in the midst of a $1 billion cost cutting campaign, much of which will come from the culling of employee headcount at its headquarters. The company is also cutting back on capital expenditures. Back in 2004, capex was $1.9 billion, but fell to less than $800 million last year. Other initiatives are to improve manufacturing productivity and shift production to more affordable regions throughout the world.

Despite the sales headwinds during the next few years, Lilly has committed to at least maintaining its dividend. The current dividend yield is 5.5% and costs the firm slightly more than $2 billion a year to maintain.

For the full year, Lilly expects high single digit revenue growth and earnings from continuing operations between $4.65 and $4.85 per share. It expects to end the year with $3.5 billion in cash on the balance sheet — more than enough to cover the dividend obligations — and has also been working to pay down debt. Lilly expects to grow earnings in the double digits through 2011.

Action to Take —> Based on current profitability and through next year, Lilly's stock looks like a certifiable steal given its P/E ratio of 9. However, past 2011, earnings will start to reflect the lost sales and should dip below $3.50 per share. But still, based on the current share price, this will still be a low double-digit P/E ratio.

The wild card is new sales, but Lilly has a number of avenues, given its product pipeline and focus on biologics. The company detailed the potential launch of 24 development drugs just as patent expirations peak between 2013 and 2016, and the CEO also recently detailed ambitions in faster-growing emerging markets and animal health products. The company plans to more than double sales in each of these areas.

A commitment to cost cutting is also noteworthy, as is maintaining the dividend, which provides a 5.5% annual yield while shareholders wait for top-line trends to improve. It may take a few more years, but investors should reasonably expect double-digit total returns from the stock, with limited downside risk.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

Big Pharma’s Most Undervalued Stock

September 22nd, 2010

Big Pharma's Most Undervalued Stock

Large pharmaceutical companies have been ignored by investors for some time now. After decades of gangbuster growth and blockbuster drugs to treat depression, high blood pressure and many other common ailments, many are facing competition from generic drugs as the patents protecting the exclusive right to sell these blockbuster drugs expire.

The primary concern for investors in the industry is that these firms will not recover from the resulting loss in revenue. The respective firms are working to address the “patent cliff” in a number of ways, including mergers, divestitures, cost cutting efforts and developing new drugs to offset lost sales.

Eli Lilly's (NYSE: LLY) predicament is among the most dire in the industry — but its approach to making it through is one of the boldest. Its largest drug, Zyprexa, goes off patent next year; Cymbalta, Gemzar and Humalog will expire in 2013; while Evista will expire in 2014. These drugs represented 57% of last year's sales, while three other drugs that account for another 18% of sales will expire in 2016 and 2017. The situation may be dire, but investors have become too negative on its forward prospects.

The company is working on developing new markets and uses for its existing drugs, but it has some serious work to do to get new drugs into the marketplace. At a recent investment conference I attended, Lilly explained that it took its eye off the ball back around 2004 and that it wasn't as focused on drug development as it should have been. This was probably due to the fact that it wasn't overly worried about sales, which have grown nearly +10% annually since that time. But given the current wave of expirations, Lilly has already begun to turn things around, and product development has tripled from 2004's levels in pretty quick fashion.

Currently, more than 40% of Lilly's pipeline is in the Stage 1 development process. This demonstrates that there is quite a bit of work to do to move these drugs further along. But much of the pipeline is focused on biologics, or biotechnology compounds, which are drugs that are notable for being difficult to replicate, even when they go off patent. Lilly has also sought to acquire players in this space, recently acquiring ImClone Systems to gain control of its cancer treatment drugs.

Going forward, Lilly plans to go it alone and is not currently planning any large merger and acquisition activity. It has detailed at least 10 compounds that should be in Phase 3 clinical trials by the end of 2011, which should have a good chance of making it to market, as success rates are much higher once a compound has made it through the first two clinical phases.

Until the top-line environment improves, Lilly is committed to cost savings. The company is currently in the midst of a $1 billion cost cutting campaign, much of which will come from the culling of employee headcount at its headquarters. The company is also cutting back on capital expenditures. Back in 2004, capex was $1.9 billion, but fell to less than $800 million last year. Other initiatives are to improve manufacturing productivity and shift production to more affordable regions throughout the world.

Despite the sales headwinds during the next few years, Lilly has committed to at least maintaining its dividend. The current dividend yield is 5.5% and costs the firm slightly more than $2 billion a year to maintain.

For the full year, Lilly expects high single digit revenue growth and earnings from continuing operations between $4.65 and $4.85 per share. It expects to end the year with $3.5 billion in cash on the balance sheet — more than enough to cover the dividend obligations — and has also been working to pay down debt. Lilly expects to grow earnings in the double digits through 2011.

Action to Take —> Based on current profitability and through next year, Lilly's stock looks like a certifiable steal given its P/E ratio of 9. However, past 2011, earnings will start to reflect the lost sales and should dip below $3.50 per share. But still, based on the current share price, this will still be a low double-digit P/E ratio.

The wild card is new sales, but Lilly has a number of avenues, given its product pipeline and focus on biologics. The company detailed the potential launch of 24 development drugs just as patent expirations peak between 2013 and 2016, and the CEO also recently detailed ambitions in faster-growing emerging markets and animal health products. The company plans to more than double sales in each of these areas.

A commitment to cost cutting is also noteworthy, as is maintaining the dividend, which provides a 5.5% annual yield while shareholders wait for top-line trends to improve. It may take a few more years, but investors should reasonably expect double-digit total returns from the stock, with limited downside risk.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

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10 Bold Predictions for the Next 12 Months

September 22nd, 2010

10 Bold Predictions for the Next 12 Months

Even as you continually assess current events for any impact on your portfolio, you also need to spend time thinking about what events may be on the horizon. And although none of us has a crystal ball, it's important to try to anticipate the direction of economics, sector activity, politics and virtually any other issues that may affect the investment environment.

The list below contains possible scenarios for the next 12 months that could impact your portfolio in a meaningful way. Some, such as the expectation that individual investors will rotate assets back into the stock market are said with a fairly high degree of conviction, while others such as a subsiding of violence in Mexico, are simply expressed as potential scenarios.

1. New jobless claims fall below 400,000 later in the fourth quarter, and meaningful job creation begins in earnest in 2011 as companies realize that they've squeezed out all possible productivity enhancements and need to re-build depleted workforces. The unemployment rate is slow to fall, as previously discouraged workers start to look for work again. But investors focus on the monthly jobs creation number instead of the actual unemployment rate.

2. Noting the impressive synergies that Delta (NYSE: DAL) derived from its merger with Northwest (which were only belatedly appreciated by investors), investors start to bid up shares of UAL (NYSE: UAL), which will have the surviving ticker in the newly-renamed United Continental Holdings. Investors take note of the fairly low P/E ratios in the sector, even as it has rebounded sharply in the last 12 months. P/E ratios move +50% higher during the next year, as investor concerns about any new economic weakness start to abate. Airlines are able to raise prices only modestly, but passenger volumes per plane, along with capacity increases, continue to grow, setting the stage for a further rebound in profit gains for the sector into 2011 and 2012.

3. Venture capitalists start to get anxious. With pensions and endowments looking to pull some money out of venture capital funds, venture capital firms seek ways to monetize their holdings. As the IPO market remains in a funk, they seek out large public tech companies to buy out at large discounts to recent financing rounds. This extends the tech M&A frenzy, and these deals help set the stage for further gains in tech stocks in 2011.

4. Britain's financial austerity plans are watered down a bit by Parliament, but still lead to an unexpected shock in the U.K.'s economy in 2011 as unemployment rises, labor strikes ensue and the pound starts to lose its safe-haven status. Major British corporate and real estate assets go up for sale, and newly-injected foreign capital sets the stage for a nice rebound, but not for several years. The weaker British Pound also triggers a surge in tourism, one of the country's few bright spots in 2011.

5. States finally stop bleeding, as heavy cost cuts take effect and revenue finally starts to rise at a modest pace. Several states with high debt-levels reach a crisis point in 2011 as federal stimulus support winds down, but most states start to move back toward a balanced budget. Smaller state governments create a local drag on employment in places like Albany, NY, Madison, WI and Sacramento, CA.

6. Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013.

7. Health care reforms begin to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the GOP uses the issue as a political wedge. The signs of a political center emerge after a sharp veer to the right by the GOP in this fall's elections spook moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012.

8. Oil prices start to move toward the $100 mark as global demand starts to meet supply. Airline stocks are still able to rally in this environment (unless oil exceeds $100 per barrel). Natural gas prices rise moderately, but still remain well below the peaks of 2007 and 2008. An increasing number of auto and truck makers announce plans to sell natural gas-powered cars.

9. Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. The Mexican crime surge finally starts to abate with increased help from foreign governments. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation's bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the stock market in 2011 as government economists predict a fiscal crisis for subsequent years.

10. In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.

Action to Take –> On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound from the spring of 2009 to the spring of 2010, investors will need to temper their expectations. Average gains in the +6% to +8% range should be welcomed, especially in the face of tepid fixed income yields. But any market rally that moves the market's gains well above that rate should be a reason to take profits. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will also become a major theme.


– David Sterman

P.S. –

Uncategorized

10 Bold Predictions for the Next 12 Months

September 22nd, 2010

10 Bold Predictions for the Next 12 Months

Even as you continually assess current events for any impact on your portfolio, you also need to spend time thinking about what events may be on the horizon. And although none of us has a crystal ball, it's important to try to anticipate the direction of economics, sector activity, politics and virtually any other issues that may affect the investment environment.

The list below contains possible scenarios for the next 12 months that could impact your portfolio in a meaningful way. Some, such as the expectation that individual investors will rotate assets back into the stock market are said with a fairly high degree of conviction, while others such as a subsiding of violence in Mexico, are simply expressed as potential scenarios.

1. New jobless claims fall below 400,000 later in the fourth quarter, and meaningful job creation begins in earnest in 2011 as companies realize that they've squeezed out all possible productivity enhancements and need to re-build depleted workforces. The unemployment rate is slow to fall, as previously discouraged workers start to look for work again. But investors focus on the monthly jobs creation number instead of the actual unemployment rate.

2. Noting the impressive synergies that Delta (NYSE: DAL) derived from its merger with Northwest (which were only belatedly appreciated by investors), investors start to bid up shares of UAL (NYSE: UAL), which will have the surviving ticker in the newly-renamed United Continental Holdings. Investors take note of the fairly low P/E ratios in the sector, even as it has rebounded sharply in the last 12 months. P/E ratios move +50% higher during the next year, as investor concerns about any new economic weakness start to abate. Airlines are able to raise prices only modestly, but passenger volumes per plane, along with capacity increases, continue to grow, setting the stage for a further rebound in profit gains for the sector into 2011 and 2012.

3. Venture capitalists start to get anxious. With pensions and endowments looking to pull some money out of venture capital funds, venture capital firms seek ways to monetize their holdings. As the IPO market remains in a funk, they seek out large public tech companies to buy out at large discounts to recent financing rounds. This extends the tech M&A frenzy, and these deals help set the stage for further gains in tech stocks in 2011.

4. Britain's financial austerity plans are watered down a bit by Parliament, but still lead to an unexpected shock in the U.K.'s economy in 2011 as unemployment rises, labor strikes ensue and the pound starts to lose its safe-haven status. Major British corporate and real estate assets go up for sale, and newly-injected foreign capital sets the stage for a nice rebound, but not for several years. The weaker British Pound also triggers a surge in tourism, one of the country's few bright spots in 2011.

5. States finally stop bleeding, as heavy cost cuts take effect and revenue finally starts to rise at a modest pace. Several states with high debt-levels reach a crisis point in 2011 as federal stimulus support winds down, but most states start to move back toward a balanced budget. Smaller state governments create a local drag on employment in places like Albany, NY, Madison, WI and Sacramento, CA.

6. Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013.

7. Health care reforms begin to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the GOP uses the issue as a political wedge. The signs of a political center emerge after a sharp veer to the right by the GOP in this fall's elections spook moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012.

8. Oil prices start to move toward the $100 mark as global demand starts to meet supply. Airline stocks are still able to rally in this environment (unless oil exceeds $100 per barrel). Natural gas prices rise moderately, but still remain well below the peaks of 2007 and 2008. An increasing number of auto and truck makers announce plans to sell natural gas-powered cars.

9. Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. The Mexican crime surge finally starts to abate with increased help from foreign governments. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation's bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the stock market in 2011 as government economists predict a fiscal crisis for subsequent years.

10. In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.

Action to Take –> On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound from the spring of 2009 to the spring of 2010, investors will need to temper their expectations. Average gains in the +6% to +8% range should be welcomed, especially in the face of tepid fixed income yields. But any market rally that moves the market's gains well above that rate should be a reason to take profits. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will also become a major theme.


– David Sterman

P.S. –

Uncategorized