How China is Saving This Luxury Retail Icon

September 24th, 2010

How China is Saving This Luxury Retail Icon

The economy stinks.

More than a year after the worst recession since the Great Depression, the economy is sputtering again. Unemployment still hovers at 9.6% and the housing market continues to languish.

Economic growth is so sluggish in fact that the Federal Reserve considers the risk of deflation to be greater than the risk of inflation at this point.

Yet, amidst this stagnation, business is somehow booming for a company that sells wildly expensive and completely unnecessary extravagances.

How can this be?

The main reason is China. More than 20 years of stratospheric economic growth has catapulted Chinese incomes “particularly at the top end,” according to one Oxford University economist. These nouveau riche have risen to the forefront of conspicuous consumers lately as the Chinese economy still booms while Western economies sputter. In London, wealthy Chinese citizens are reportedly spending three to four times more than last year's level in the wealthy shopping districts, outspending even Arab royalty.

The newly rich have always displayed an insatiable appetite for the trappings of luxury, and the Chinese are no different. This new and growing class of big spenders is helping turn bad times into boom times for one of the world's most iconic luxury brands.

Tiffany & Co. (NYSE: TIF), or Tiffany's, is an international jeweler and specialty retailer. The company designs and sells its own distinctive brand of primarily fine jewelry (90% of 2009 sales) as well as china, timepieces, fragrances and other luxury items. Operating since 1837, Tiffany's is one of the world's most recognized luxury brands. The jeweler sells its goods exclusively through its stores and boutiques (as well as the Internet) in more than 20 countries all over the world and at its flagship store located in Manhattan.

Tiffany's world famous “little blue box” high-end brand helps it stand out among the competition and command a price premium.

The company is geographically diversified, as most of sales come from outside the United States. For 2009, sales were generated in the following regions: The Americas (52%), Asia-Pacific (35%) and Europe (12%). The main tenet of Tiffany's growth strategy is to expand in the most promising markets.

Why buy it now?

Tiffany's is as much associated with luxury as just about any other brand in the world, and luxury items have been outselling regular mass market items in this market. For example, Wal-Mart (NYSE: WMT) reported second quarter same store sales that were lower than the year ago quarter. By contrast, luxury department store chain Neiman Marcus recorded a +7.6% rise in second-quarter sales. For a closer comparison, take Zales Corporation (NYSE: ZLC), a seller of lower-priced mass market jewelry. Zales has recorded lower sales so far in 2010 than in 2009, while Tiffany's reported a +9% increase in revenue and profits that were +19% higher in the second quarter versus a year ago.

In fact, the same dynamic has been true within Tiffany's itself. The company reported solid growth in sales of items priced at $50,000 and higher, while sales of items below $500 are slowing. Perhaps wealthier spenders aren't feeling the soft economy as badly or perhaps wealthy Chinese spenders are tipping the balance.

In fact, the company reported that higher profits were driven by strong overseas sales and tourists, both of which bear the fingerprint of wealthy Chinese. The strongest region in the quarter was Asia, led by China, where sales rocketed +21% from last year. Sales increased +8% in the New York flagship store, largely because of Chinese tourists. Sales in Europe increased +14%, largely because of strong sales in the U.K., where the Chinese have reportedly been spending like crazy.

Looking forward, there is good reason for optimism. Tiffany's raised 2010's earnings guidance by $0.05 after the second quarter from $2.60 to $2.65 per share. The jeweler opened seven new stores in Asia in the past year and plans to open seven more before the year is over. The company also said that sales were already up by the low single digits so far in the third quarter.

Tiffany & Co. shares have gained +22% in the past year, and has outperformed Morningstar's jewelry store category by a whopping margin (the category has returned less than +5% in the same period). Yet despite the recent outperformance, Tiffany's multiple of 16 times 2010 earnings is much lower compared to the jewelry store sector's multiple of more than 26. The stock also pays a quarterly dividend that has risen more than +500% in the past decade and now yields about 2.3%.

Action to Take –>Tiffany's operates in what has turned out to be a relatively defensive niche in today's environment — the rich. The stock is about 15% off its recent high, pays a growing dividend and should continue to grow earnings in the “new normal.” The stock is a buy anywhere under $45.


– Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications…

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A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

September 24th, 2010

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

One of the mega growth companies of the past few years is Salesforce.com (NYSE : CRM). Since 2008, sales have spiked from $748.7 million to $1.3 billion. And investors have piled into the stock, which has gone from $34 to nearly $120 since early 2009.

Salesforce.com builds software to help companies improve the results of their sales teams. While this is not new, the company has taken different approach to delivering its solutions through something known as “cloud-computing.” And while much of the gains to be had in this stock have already been made, the good news is that there are other stocks in the sector that are also growing at a rapid clip and should provide nice returns for investors.

To understand cloud-computing, it is important to take a look at the traditional approach to business software. Known as on-premise software, this involves installing complex applications on a company's servers. This means there are large expenses for information technology (IT) systems as well as technical support staff and outside consultants.

On-premise software is far from cheap. A company must pay an upfront licensing fee and then ongoing maintenance fees. So if a company implements an enterprise resource planning (ERP) system — which handles things like the general ledger, inventory, payroll, and so on — the costs can easily amount to several million dollars.

But cloud computing takes a much different approach. First of all, the software is typically installed on the software provider's own servers. The customer simply accesses the software via the Internet. The result is that it is much easier to update the application and there is also no need to invest huge amounts of money on an IT infrastructure.

Even the business model is different. For example, cloud-computing providers charge an ongoing subscription fee, which is usually based on the number of users. For the most part, this is cheaper than the licensing/maintenance approach.

All in all, cloud-computing looks like a disruptive technology, and the market opportunity is enormous. Consider that the International Data Corporation (IDC) pegs the cloud computing market at $16 billion this year and forecasts it to reach $56 billion by 2014.

So what are some top cloud-computing operators that are attractive investment opportunities? Here's a look at three:

1. SuccessFactors (Nasdaq: SFSF) develops business execution software. That is, it helps communicate key strategies throughout an organization and measure the ongoing results.

Since 2008, revenue has grown about +27% each year. For the current year, SuccessFactors is expected to post revenue of $198 million to $200 million and has actually raised guidance twice. More than half of new revenue comes from existing customers, which shows that the software is providing a strong value proposition. SuccessFactors also continues to invest heavily in its technology and has purchased several companies. The company estimates its market opportunity at a whopping $36 billion. It helps that the company's software can scale from small businesses to global enterprises.

2. NetSuite (NYSE: N) develops an ERP system for the cloud. While the market is dominated by large companies like SAP (NYSE: SAP), Oracle (Nasdaq: ORCL) and Microsoft (Nasdaq: MSFT), they have been slow to move to the cloud.

No doubt, this has been a boon for NetSuite. In the latest quarter, revenue increased +17% to $47.1 million, which was above the $45.3 million guidance. A driver for the company is its OneWorld system. This is focused on the needs of global customers who are willing to pay premium prices for a strong ERP system.

As a sign of the growth prospects, NetSuite said it will be boosting expenditures on its platform and also increasing the ranks of its sales team.

3. Taleo (Nasdaq: TLEO) develops a cloud-computing offering for talent management applications, helping with things like recruiting, management and tracking of employees.

Even with a prolonged high rate of unemployment, Taleo continues to grow its business. In the latest quarter, revenue increased +14.6%. As the economy comes back, expect the growth rate to ramp up even more.

Taleo has also made several smart acquisitions to bolster its offerings. For example, the company recently shelled out $125 million for Learn.com, which is a top provider of learning management tools for employers. With the deal, Taleo was able to pick-up more than 500 customers.

Action to Take –> While these three cloud operators are top performers, I would give priority to NetSuite as an investment. The company has a comprehensive solution, which has taken more than 10 years to build, and the barriers to entry are significant. As NetSuite goes up-market in terms of targeting customers, there should be a nice boost in revenue, which should drive significant returns for investors.

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Read more here:
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Uncategorized

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

September 24th, 2010

A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

One of the mega growth companies of the past few years is Salesforce.com (NYSE : CRM). Since 2008, sales have spiked from $748.7 million to $1.3 billion. And investors have piled into the stock, which has gone from $34 to nearly $120 since early 2009.

Salesforce.com builds software to help companies improve the results of their sales teams. While this is not new, the company has taken different approach to delivering its solutions through something known as “cloud-computing.” And while much of the gains to be had in this stock have already been made, the good news is that there are other stocks in the sector that are also growing at a rapid clip and should provide nice returns for investors.

To understand cloud-computing, it is important to take a look at the traditional approach to business software. Known as on-premise software, this involves installing complex applications on a company's servers. This means there are large expenses for information technology (IT) systems as well as technical support staff and outside consultants.

On-premise software is far from cheap. A company must pay an upfront licensing fee and then ongoing maintenance fees. So if a company implements an enterprise resource planning (ERP) system — which handles things like the general ledger, inventory, payroll, and so on — the costs can easily amount to several million dollars.

But cloud computing takes a much different approach. First of all, the software is typically installed on the software provider's own servers. The customer simply accesses the software via the Internet. The result is that it is much easier to update the application and there is also no need to invest huge amounts of money on an IT infrastructure.

Even the business model is different. For example, cloud-computing providers charge an ongoing subscription fee, which is usually based on the number of users. For the most part, this is cheaper than the licensing/maintenance approach.

All in all, cloud-computing looks like a disruptive technology, and the market opportunity is enormous. Consider that the International Data Corporation (IDC) pegs the cloud computing market at $16 billion this year and forecasts it to reach $56 billion by 2014.

So what are some top cloud-computing operators that are attractive investment opportunities? Here's a look at three:

1. SuccessFactors (Nasdaq: SFSF) develops business execution software. That is, it helps communicate key strategies throughout an organization and measure the ongoing results.

Since 2008, revenue has grown about +27% each year. For the current year, SuccessFactors is expected to post revenue of $198 million to $200 million and has actually raised guidance twice. More than half of new revenue comes from existing customers, which shows that the software is providing a strong value proposition. SuccessFactors also continues to invest heavily in its technology and has purchased several companies. The company estimates its market opportunity at a whopping $36 billion. It helps that the company's software can scale from small businesses to global enterprises.

2. NetSuite (NYSE: N) develops an ERP system for the cloud. While the market is dominated by large companies like SAP (NYSE: SAP), Oracle (Nasdaq: ORCL) and Microsoft (Nasdaq: MSFT), they have been slow to move to the cloud.

No doubt, this has been a boon for NetSuite. In the latest quarter, revenue increased +17% to $47.1 million, which was above the $45.3 million guidance. A driver for the company is its OneWorld system. This is focused on the needs of global customers who are willing to pay premium prices for a strong ERP system.

As a sign of the growth prospects, NetSuite said it will be boosting expenditures on its platform and also increasing the ranks of its sales team.

3. Taleo (Nasdaq: TLEO) develops a cloud-computing offering for talent management applications, helping with things like recruiting, management and tracking of employees.

Even with a prolonged high rate of unemployment, Taleo continues to grow its business. In the latest quarter, revenue increased +14.6%. As the economy comes back, expect the growth rate to ramp up even more.

Taleo has also made several smart acquisitions to bolster its offerings. For example, the company recently shelled out $125 million for Learn.com, which is a top provider of learning management tools for employers. With the deal, Taleo was able to pick-up more than 500 customers.

Action to Take –> While these three cloud operators are top performers, I would give priority to NetSuite as an investment. The company has a comprehensive solution, which has taken more than 10 years to build, and the barriers to entry are significant. As NetSuite goes up-market in terms of targeting customers, there should be a nice boost in revenue, which should drive significant returns for investors.

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Read more here:
A New Tech Revolution Could Lead to Triple Digit Gains for These Stocks

Uncategorized

2 Growth Stocks in a Low-Growth Economy

September 24th, 2010

2 Growth Stocks in a Low-Growth Economy

After a sharp plunge in 2009, many companies are reporting vastly improved results this year. But until the economy is firmly in growth mode, further profit gains may be hard to come by. But a small minority of companies is in the midst of a profit spurt that shows no signs of a slowdown.

I decided to set about to look for these impressive growth stories, screening for companies that are expected to boost profits by at least +40% in 2011. And to whittle the list down, I eliminated any company worth less than $1.5 billion. They must also sport price-to-earnings (P/E) ratios below 12 times next year's projected profits. Lastly, I eliminated banks and financial services companies from the list as analysts have an especially hard time accurately forecasting future profits in this sector.

The 26 stocks that made cut represent some clear themes. A number of them operate coal mines and are now benefiting from improved pricing for coal that should support robust earnings per share (EPS) growth in 2011. In a similar vein, the steel and aluminum producers are also expected to benefit from both higher volumes and better pricing, as I noted in a recent profile of Alcoa (NYSE: AA). [Read: The Best Rebound Play in the Dow]

Outside of those sectors, a few other companies caught my attention, as they are likely to benefit from changing conditions in their industries. Let's take a look…

Navistar (NYSE: NAV)
This maker of trucks, buses, RV chassis and other big rigs has received a bit of luck. Just as its military division is set to slow down after completing a big contract to supply armored vehicles for the wars in Iraq and Afghanistan, its commercial division is kicking into high gear. The economic slowdown of the last few years led truck buyers to hold off on purchases, and as a result, the age of the average truck is near an all-time high, according to analysts at Sterne Agee. In addition, dealer inventories are now quite lean and that's setting the stage for an expected surge in truck orders in 2011, which will be bolstered by ever-tightening emissions regulations.

While the economy was in a funk, Navistar looked to cut costs in every corner of the business. The net result: “Depending on volume, (expectation of 240,000 units for 2011), Navistar expects to achieve a higher level of profitability than during past cycles,” wrote Sterne Agee analysts in a recent report. In the past five years, Navistar has earned a little more than $4 a share on two occasions. Sterne Agee thinks EPS will exceed $5 a share next year, and that shares should trade for 12 times that profit view, with a price target in the low $60s. That represents roughly +50% upside from current levels.

JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that airplanes are flying with fuller loads these days. It's all about supply and demand. Major carriers took many planes out of service in 2008 and 2009, and passenger volumes have begun to rise since then. After being repeatedly burned in past cycles when the major carriers deployed too many planes — right at a time when demand slowed — the whole industry has shown a lot more discipline this time around. It vows to add planes back into the system at a slow pace, making sure that the supply of airline seats remains just below demand levels. And that is enabling the carriers to push through fare increases, which are now roughly +20% higher than a year ago, according to the Airline Transport Association (ATA).

While most airline carriers are in the midst of a nice profit rebound, JetBlue seems to be the biggest beneficiary of the new industry economics. The low-cost carrier is likely to see profits double this year and rise another +40% to +50% in 2011 to around $0.60 a share. But the carrier is getting little credit: Shares are right in the middle of the 52-week range and trade for less than 10 times next year's profits.

After years of torrid growth, JetBlue is likely to settle into a moderate +10% growth phase in coming years (sales growth is more robust this year due to very easy comparisons from 2009 when demand for air travel slumped). But that +10% growth should be sufficient to push profit growth at twice that pace. That's because JetBlue's infrastructure investments are largely completed, and any new revenue is more rapidly flowing to the bottom line.

Shares of JetBlue hit $30 back in 2003 when investors first fell in love with the company's instant popularity among consumers. The investor honeymoon ended a while ago, and shares have lost -80% of their value since that peak even as consumer loyalty to the JetBlue brand remains very strong. Back in 2003, the carrier earned $0.64 a share, but profits have been weak ever since as management continually tinkered with pricing. That tinkering is now complete, which is why analysts expect EPS to finally rebound back to that 2003 peak. If JetBlue can deliver on forecasts, investors are likely to return to this success story.

Action to Take –> One of the charms of low P/E stocks is that they are more likely to hold their own if the market slumps anew and investors first look to shed high P/E stocks. And if the market strengthens, economically-sensitive names like JetBlue and Navistar are likely to find much favor among investors seeking a nice combination of value and growth.


– 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
2 Growth Stocks in a Low-Growth Economy

Read more here:
2 Growth Stocks in a Low-Growth Economy

Uncategorized

2 Growth Stocks in a Low-Growth Economy

September 24th, 2010

2 Growth Stocks in a Low-Growth Economy

After a sharp plunge in 2009, many companies are reporting vastly improved results this year. But until the economy is firmly in growth mode, further profit gains may be hard to come by. But a small minority of companies is in the midst of a profit spurt that shows no signs of a slowdown.

I decided to set about to look for these impressive growth stories, screening for companies that are expected to boost profits by at least +40% in 2011. And to whittle the list down, I eliminated any company worth less than $1.5 billion. They must also sport price-to-earnings (P/E) ratios below 12 times next year's projected profits. Lastly, I eliminated banks and financial services companies from the list as analysts have an especially hard time accurately forecasting future profits in this sector.

The 26 stocks that made cut represent some clear themes. A number of them operate coal mines and are now benefiting from improved pricing for coal that should support robust earnings per share (EPS) growth in 2011. In a similar vein, the steel and aluminum producers are also expected to benefit from both higher volumes and better pricing, as I noted in a recent profile of Alcoa (NYSE: AA). [Read: The Best Rebound Play in the Dow]

Outside of those sectors, a few other companies caught my attention, as they are likely to benefit from changing conditions in their industries. Let's take a look…

Navistar (NYSE: NAV)
This maker of trucks, buses, RV chassis and other big rigs has received a bit of luck. Just as its military division is set to slow down after completing a big contract to supply armored vehicles for the wars in Iraq and Afghanistan, its commercial division is kicking into high gear. The economic slowdown of the last few years led truck buyers to hold off on purchases, and as a result, the age of the average truck is near an all-time high, according to analysts at Sterne Agee. In addition, dealer inventories are now quite lean and that's setting the stage for an expected surge in truck orders in 2011, which will be bolstered by ever-tightening emissions regulations.

While the economy was in a funk, Navistar looked to cut costs in every corner of the business. The net result: “Depending on volume, (expectation of 240,000 units for 2011), Navistar expects to achieve a higher level of profitability than during past cycles,” wrote Sterne Agee analysts in a recent report. In the past five years, Navistar has earned a little more than $4 a share on two occasions. Sterne Agee thinks EPS will exceed $5 a share next year, and that shares should trade for 12 times that profit view, with a price target in the low $60s. That represents roughly +50% upside from current levels.

JetBlue (Nasdaq: JBLU)
If you've traveled by air recently, you've probably noticed that airplanes are flying with fuller loads these days. It's all about supply and demand. Major carriers took many planes out of service in 2008 and 2009, and passenger volumes have begun to rise since then. After being repeatedly burned in past cycles when the major carriers deployed too many planes — right at a time when demand slowed — the whole industry has shown a lot more discipline this time around. It vows to add planes back into the system at a slow pace, making sure that the supply of airline seats remains just below demand levels. And that is enabling the carriers to push through fare increases, which are now roughly +20% higher than a year ago, according to the Airline Transport Association (ATA).

While most airline carriers are in the midst of a nice profit rebound, JetBlue seems to be the biggest beneficiary of the new industry economics. The low-cost carrier is likely to see profits double this year and rise another +40% to +50% in 2011 to around $0.60 a share. But the carrier is getting little credit: Shares are right in the middle of the 52-week range and trade for less than 10 times next year's profits.

After years of torrid growth, JetBlue is likely to settle into a moderate +10% growth phase in coming years (sales growth is more robust this year due to very easy comparisons from 2009 when demand for air travel slumped). But that +10% growth should be sufficient to push profit growth at twice that pace. That's because JetBlue's infrastructure investments are largely completed, and any new revenue is more rapidly flowing to the bottom line.

Shares of JetBlue hit $30 back in 2003 when investors first fell in love with the company's instant popularity among consumers. The investor honeymoon ended a while ago, and shares have lost -80% of their value since that peak even as consumer loyalty to the JetBlue brand remains very strong. Back in 2003, the carrier earned $0.64 a share, but profits have been weak ever since as management continually tinkered with pricing. That tinkering is now complete, which is why analysts expect EPS to finally rebound back to that 2003 peak. If JetBlue can deliver on forecasts, investors are likely to return to this success story.

Action to Take –> One of the charms of low P/E stocks is that they are more likely to hold their own if the market slumps anew and investors first look to shed high P/E stocks. And if the market strengthens, economically-sensitive names like JetBlue and Navistar are likely to find much favor among investors seeking a nice combination of value and growth.


– 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
2 Growth Stocks in a Low-Growth Economy

Read more here:
2 Growth Stocks in a Low-Growth Economy

Uncategorized

Grab HP’s Stock Before it Takes Off

September 24th, 2010

Grab HP's Stock Before it Takes Off

A common pitfall companies encounter has to do with challenging marketplace conditions, be it changing customer habits or competition from rivals that attempt to steal away its business. Others have a habit of self inflicting their wounds.

Changing market conditions, foreign competition, fickle consumers — these are conditions most investors can live with as an excuse for poor performance — to an extent. But when a dominant company continually stumbles over itself because of something as simple and within the realm of control as, say, hiring and firing decisions, its enough to make investors head for the exit.

But in the case of Hewlett-Packard (NYSE: HPQ), the crowd has it all wrong. Sure, the soap-opera events surrounding the dismissal of Mark Hurd, HP's former Chief Operating Officer, were embarrassing for the company, but new investors now have a chance to pick up a world-class name for a cheap price.

The most recent snafu from HP relates to the manner in which it ousted Hurd. Apparently, he wasn't as popular inside the company as he was outside. Investors cheered his every move, be it cost cutting or orchestrating sizeable acquisitions, both of which helped sales and profits move forward in impressive fashion.

Past issues have stemmed from the hiring of Carly Fiorina, a high-profile executive from outside the company that oversaw the ambitious purchase of Compaq Computers. Unfortunately, this move and others did nothing to boost the share price and resulted in her sacking within a few years. Shortly after this chain of events, Patricia Dunn, the company's chairwoman, was fired after it was discovered she hired private-eye firms to spy on other board members.

Talk about internal company drama.

The reasons for the sacking of Mark Hurd are not clear and may never be, because the board of directors did not provide a straightforward explanation of why he was let go. Doctored expense reports and a murky relationship with a woman who worked on corporate events for the company were alluded to, but never fully explained. Whatever the real reason may be, it leaves the company without a CEO that appeared to be wildly successful to those outside of the company.

This uncertainty has sent shares of HP to bargain-basement levels. Communication from the board has stated that HP is not dependent on any one individual for its success and refers to an “HP Way” that is meant to define its culture and no-nonsense, team approach to creating and selling technology products and services. Despite the board's dismal track record on communicating with the investment community, it is spot on in this case.

Regardless of the litany of leadership drama at HP, the company's corporate culture appears to be working. HP has been experiencing improving demand in most of its businesses. Revenue during its most recent quarter increased a very healthy +11.4% and reached $30.7 billion on the back of strong trends for its enterprise storage and servers, computers and printers. Service growth was more modest but remained highly profitable. HP also provided a favorable outlook. It expects full-year sales to reach more than $125 billion and earnings from continuing operations of around $4.50 per share. This would represent year-over-year sales growth of almost +10% and earnings growth in the mid-teens.

In addition to the strong organic growth trends, HP has snapped up a number of smaller tech rivals. Bolt-on acquisitions include data-storage firm 3PAR (NYSE: PAR), and software security providers ArcSight (Nasdaq: ARST) and Fortify Software. Healthy cash flow generation is being used on acquisitions, share buybacks and to support a modest dividend.

Favorable market tailwinds and healthy acquisition activity mean HP is unlikely to see any serious disruption to its operations while it searches for a successor. I've had past concerns that the hardware (computer, printers, etc.) divisions are too cyclical and carry low profit margins, but the company has a few years of easy sailing as global economies recover from the credit crisis and companies refresh aging devices to remain competitive.

Action to Take —> At a forward P/E of just over 9, investors are far too pessimistic on HP's future. Near-term negative sentiment from the Hurd firing isn't helping, but does offer an opportunity to pick up the shares on the cheap. Last year, free cash flow ran close to $4.60 per diluted share and illustrates just how much excess capital the company generates.

This also equates to a trailing free cash flow multiple around 9. Applying a more historical multiple in the low teens off of earnings and cash flow suggests upside of at least +40% and doesn't even factor in annual profit growth, which should be at least +10% for the foreseeable future. In my mind, it doesn't really matter who the next CEO will be, or how long he or she remains at the helm — the stock is still a buy.

– 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

Grab HP’s Stock Before it Takes Off

September 24th, 2010

Grab HP's Stock Before it Takes Off

A common pitfall companies encounter has to do with challenging marketplace conditions, be it changing customer habits or competition from rivals that attempt to steal away its business. Others have a habit of self inflicting their wounds.

Changing market conditions, foreign competition, fickle consumers — these are conditions most investors can live with as an excuse for poor performance — to an extent. But when a dominant company continually stumbles over itself because of something as simple and within the realm of control as, say, hiring and firing decisions, its enough to make investors head for the exit.

But in the case of Hewlett-Packard (NYSE: HPQ), the crowd has it all wrong. Sure, the soap-opera events surrounding the dismissal of Mark Hurd, HP's former Chief Operating Officer, were embarrassing for the company, but new investors now have a chance to pick up a world-class name for a cheap price.

The most recent snafu from HP relates to the manner in which it ousted Hurd. Apparently, he wasn't as popular inside the company as he was outside. Investors cheered his every move, be it cost cutting or orchestrating sizeable acquisitions, both of which helped sales and profits move forward in impressive fashion.

Past issues have stemmed from the hiring of Carly Fiorina, a high-profile executive from outside the company that oversaw the ambitious purchase of Compaq Computers. Unfortunately, this move and others did nothing to boost the share price and resulted in her sacking within a few years. Shortly after this chain of events, Patricia Dunn, the company's chairwoman, was fired after it was discovered she hired private-eye firms to spy on other board members.

Talk about internal company drama.

The reasons for the sacking of Mark Hurd are not clear and may never be, because the board of directors did not provide a straightforward explanation of why he was let go. Doctored expense reports and a murky relationship with a woman who worked on corporate events for the company were alluded to, but never fully explained. Whatever the real reason may be, it leaves the company without a CEO that appeared to be wildly successful to those outside of the company.

This uncertainty has sent shares of HP to bargain-basement levels. Communication from the board has stated that HP is not dependent on any one individual for its success and refers to an “HP Way” that is meant to define its culture and no-nonsense, team approach to creating and selling technology products and services. Despite the board's dismal track record on communicating with the investment community, it is spot on in this case.

Regardless of the litany of leadership drama at HP, the company's corporate culture appears to be working. HP has been experiencing improving demand in most of its businesses. Revenue during its most recent quarter increased a very healthy +11.4% and reached $30.7 billion on the back of strong trends for its enterprise storage and servers, computers and printers. Service growth was more modest but remained highly profitable. HP also provided a favorable outlook. It expects full-year sales to reach more than $125 billion and earnings from continuing operations of around $4.50 per share. This would represent year-over-year sales growth of almost +10% and earnings growth in the mid-teens.

In addition to the strong organic growth trends, HP has snapped up a number of smaller tech rivals. Bolt-on acquisitions include data-storage firm 3PAR (NYSE: PAR), and software security providers ArcSight (Nasdaq: ARST) and Fortify Software. Healthy cash flow generation is being used on acquisitions, share buybacks and to support a modest dividend.

Favorable market tailwinds and healthy acquisition activity mean HP is unlikely to see any serious disruption to its operations while it searches for a successor. I've had past concerns that the hardware (computer, printers, etc.) divisions are too cyclical and carry low profit margins, but the company has a few years of easy sailing as global economies recover from the credit crisis and companies refresh aging devices to remain competitive.

Action to Take —> At a forward P/E of just over 9, investors are far too pessimistic on HP's future. Near-term negative sentiment from the Hurd firing isn't helping, but does offer an opportunity to pick up the shares on the cheap. Last year, free cash flow ran close to $4.60 per diluted share and illustrates just how much excess capital the company generates.

This also equates to a trailing free cash flow multiple around 9. Applying a more historical multiple in the low teens off of earnings and cash flow suggests upside of at least +40% and doesn't even factor in annual profit growth, which should be at least +10% for the foreseeable future. In my mind, it doesn't really matter who the next CEO will be, or how long he or she remains at the helm — the stock is still a buy.

– 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

Leveraging Junk Debt Off the Charts

September 24th, 2010

The massive door of the Mogambo Bug-Out Bunker (MBOB) was locked, and I was taking a little break, leisurely looking through the periscope/range finder/fire-control module, calmly reconnoitering the perimeter and keeping an eye on the neighbors, watching them acting like they are innocently mowing their lawns and washing their stupid cars, but who are actually spying on me, like I am too stupid to notice their treachery and perfidy.

I see all this an say to myself, “These are the same dolts who are not buying gold, silver and oil with every dollar they have, even after all the time I spent telling them do that very thing! Dolts!”

And, indeed, everywhere I look I see dolts, and so, apparently, does Doug Noland, who, in his Credit Bubble Bulletin at PrudentBear.com, takes a look at what is happening in high-yield bonds. He found that “According to Bloomberg, this week’s $41.7bn of corporate bond issuance combined with about an equal amount from last week pushed two-week debt sales to the strongest level this year. With more than three months to go, year-to-date junk issuance is already well into new record territory.”

“Wow! I whistled to myself. “Record territory! Wow! Paying the highest price to get the lowest yield in history!”

Almost involuntarily, I began a pointless tirade of further scathing commentary on such abject stupidity as to pay a historically high price for very low quality debt to get a historically-low yield when the government is deficit-spending more than 10% of GDP and the Federal Reserve is creating staggering amounts of money, which guarantees inflation! Insane!

Mr. Noland, apparently seeing me spiraling off into Screaming Mogambo Outrage Land (SMOL), thankfully headed me off by noting that The Wall Street Journal reported, to my utter astonishment, that all of this buying of junk debt is all being leveraged, but even worse is that the amount of leverage is Off The Freaking Charts (OTFC)! We’re freaking doomed!

Well, anyway, this “OFTC” thing is how I, a typical paranoid lunatic who sees the horror of inflation in prices every time he sees the inflation in the amount of money being deficit-spent by the government and created out-of-thin-air by the Federal Reserve, interpret the Journal reporting that “Poster children of the mid-2000s credit bubble, leveraged loans are set to have their busiest year since 2008,” which were “at the heart of the credit bubble,” and have now “surged back with surprising speed as investors chasing yield are increasingly willing to finance riskier companies.”

My hands, wrapped around the handles of the periscope, instinctively clenched in terror at the thought of seeking riskier debt – and leveraging the bet! – in the riskiest economic environment that I can imagine, when I accidentally hit the “Fire” button! Oops!

Expecting a massive eruption of firepower, I instinctively cringed and immediately started trying to come up with some plausible denial (“Those weren’t my machine guns!”) or a scapegoat (“Islamic terrorists!”), when the ensuing silence made me realize that I had fortunately forgotten to set the Fire Control Arming Switch (FCAS) to “on,” which I didn’t do because it is all the way over on the other side of the room, making this an instance of pathological laziness and poor work habits paying off!

Of course, you never hear about the upside of incompetence and sloth from your stupid family or your stupid boss, but who are instead always “on your case” about something like getting up off the couch and doing some work, working, and doing things right, and not goofing off, and the ever-popular “paying attention, which is not to mention the blah blah blah.”

My tightened grip was just a hint – a mere hint! – of my paralyzing fear and paranoia cranked up, as in the movie Spinal Tap, to 11, an unbelievable overload of impending doom and hyperinflationary torture brought on by the sheer, staggering dumbosity of Yet More Massive (YMM) amounts of money being created to buy Yet More Massive (YMM) amounts of junk debt, selling at the highest prices of the last zillion years, by taking advantage of the lowest interest rates in that selfsame “last zillion years,” a bizarre interest-rate environment caused by the panicked response of the Federal Reserve at its own egregious mismanagement, all of this even though I know that “dumbosity” is not even a word, but I don’t change it, no matter how stupid it sounds, which shows you how Completely Freaked Out (CFO) I am about the whole thing! We’re freaking doomed!

So, as bad as it is that somebody is buying riskier and riskier debt, in a deteriorating economic environment of pandemic burdensome debt, with consumer prices rising, with massive government deficit-spending and unbelievable amounts of money being created by the monstrous Federal Reserve to make price rises even worse, and even worse, it’s all leveraged!

Alert Junior Mogambo Rangers (JMR) are instantly on alert at the use of the unusual phrase “even worse, and even worse,” which is an obvious Mogambo Secret Code (MSC).

You can pinpoint a rookie JMR by the way they earnestly dial-in their Junior Mogambo Ranger Decoder Rings (JMRDRs) and go through a lot of pointless rigmarole, only to find the message to, “Buy gold, silver and gold!” which is always the same secret message.

The experienced JMR, on the other hand, doesn’t bother, and looks, instead, for the reason for the sudden appearance of a Mogambo Secret Code (MSC), in this case being that these high-risk junk bonds are speculators using their client’s money not to merely buy high-yield debt, but as mere collateral on a loan to borrow many times that amount!

Then Mr. Noland says that, “In the face of enormous supply, corporate bond yields have remained extraordinarily low,” which certainly seems like a paradox to me, which was alarming until I remembered that I am stupid, and everything always seems strange and paradoxical to me.

Then I, despite my tragic handicap, remember the enormous amounts of money being created by the central banks of the world, including our own foul Federal Reserve, just for things like this! Money is everywhere!

Startling myself, my fear of inflation suddenly comes roaring up from the hideous depths of my nightmares, making me jump, a condition not made any easier by Casey’s Daily Dispatch newsletter, where he writes, “debt is the single biggest economic challenge facing the US – and much of the developed world. In time this debt will get resolved, it always does, but it’s not going to be pretty.”

Not going to be pretty, indeed! Pausing only long enough to congratulate Mr. Casey on using “it’s not going to be pretty” as a humorous understatement to the horror of eventual massive defaults, massive unemployment, massive loss of wealth, a collapsed economy, a trashed dollar and hyperinflation, I go helpfully on to note that this seems like the perfect time to bring up the fact that you should be buying gold, silver and oil with a nervous, paranoid mania usually seen in crack addicts and crazy people, because while it certainly won’t “be pretty” for people who do not own gold, silver and oil, it will be for those who do! Whee! This investing stuff is easy!

The Mogambo Guru
for The Daily Reckoning

Leveraging Junk Debt Off the Charts 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:
Leveraging Junk Debt Off the Charts




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

Uncategorized

Leveraging Junk Debt Off the Charts

September 24th, 2010

The massive door of the Mogambo Bug-Out Bunker (MBOB) was locked, and I was taking a little break, leisurely looking through the periscope/range finder/fire-control module, calmly reconnoitering the perimeter and keeping an eye on the neighbors, watching them acting like they are innocently mowing their lawns and washing their stupid cars, but who are actually spying on me, like I am too stupid to notice their treachery and perfidy.

I see all this an say to myself, “These are the same dolts who are not buying gold, silver and oil with every dollar they have, even after all the time I spent telling them do that very thing! Dolts!”

And, indeed, everywhere I look I see dolts, and so, apparently, does Doug Noland, who, in his Credit Bubble Bulletin at PrudentBear.com, takes a look at what is happening in high-yield bonds. He found that “According to Bloomberg, this week’s $41.7bn of corporate bond issuance combined with about an equal amount from last week pushed two-week debt sales to the strongest level this year. With more than three months to go, year-to-date junk issuance is already well into new record territory.”

“Wow! I whistled to myself. “Record territory! Wow! Paying the highest price to get the lowest yield in history!”

Almost involuntarily, I began a pointless tirade of further scathing commentary on such abject stupidity as to pay a historically high price for very low quality debt to get a historically-low yield when the government is deficit-spending more than 10% of GDP and the Federal Reserve is creating staggering amounts of money, which guarantees inflation! Insane!

Mr. Noland, apparently seeing me spiraling off into Screaming Mogambo Outrage Land (SMOL), thankfully headed me off by noting that The Wall Street Journal reported, to my utter astonishment, that all of this buying of junk debt is all being leveraged, but even worse is that the amount of leverage is Off The Freaking Charts (OTFC)! We’re freaking doomed!

Well, anyway, this “OFTC” thing is how I, a typical paranoid lunatic who sees the horror of inflation in prices every time he sees the inflation in the amount of money being deficit-spent by the government and created out-of-thin-air by the Federal Reserve, interpret the Journal reporting that “Poster children of the mid-2000s credit bubble, leveraged loans are set to have their busiest year since 2008,” which were “at the heart of the credit bubble,” and have now “surged back with surprising speed as investors chasing yield are increasingly willing to finance riskier companies.”

My hands, wrapped around the handles of the periscope, instinctively clenched in terror at the thought of seeking riskier debt – and leveraging the bet! – in the riskiest economic environment that I can imagine, when I accidentally hit the “Fire” button! Oops!

Expecting a massive eruption of firepower, I instinctively cringed and immediately started trying to come up with some plausible denial (“Those weren’t my machine guns!”) or a scapegoat (“Islamic terrorists!”), when the ensuing silence made me realize that I had fortunately forgotten to set the Fire Control Arming Switch (FCAS) to “on,” which I didn’t do because it is all the way over on the other side of the room, making this an instance of pathological laziness and poor work habits paying off!

Of course, you never hear about the upside of incompetence and sloth from your stupid family or your stupid boss, but who are instead always “on your case” about something like getting up off the couch and doing some work, working, and doing things right, and not goofing off, and the ever-popular “paying attention, which is not to mention the blah blah blah.”

My tightened grip was just a hint – a mere hint! – of my paralyzing fear and paranoia cranked up, as in the movie Spinal Tap, to 11, an unbelievable overload of impending doom and hyperinflationary torture brought on by the sheer, staggering dumbosity of Yet More Massive (YMM) amounts of money being created to buy Yet More Massive (YMM) amounts of junk debt, selling at the highest prices of the last zillion years, by taking advantage of the lowest interest rates in that selfsame “last zillion years,” a bizarre interest-rate environment caused by the panicked response of the Federal Reserve at its own egregious mismanagement, all of this even though I know that “dumbosity” is not even a word, but I don’t change it, no matter how stupid it sounds, which shows you how Completely Freaked Out (CFO) I am about the whole thing! We’re freaking doomed!

So, as bad as it is that somebody is buying riskier and riskier debt, in a deteriorating economic environment of pandemic burdensome debt, with consumer prices rising, with massive government deficit-spending and unbelievable amounts of money being created by the monstrous Federal Reserve to make price rises even worse, and even worse, it’s all leveraged!

Alert Junior Mogambo Rangers (JMR) are instantly on alert at the use of the unusual phrase “even worse, and even worse,” which is an obvious Mogambo Secret Code (MSC).

You can pinpoint a rookie JMR by the way they earnestly dial-in their Junior Mogambo Ranger Decoder Rings (JMRDRs) and go through a lot of pointless rigmarole, only to find the message to, “Buy gold, silver and gold!” which is always the same secret message.

The experienced JMR, on the other hand, doesn’t bother, and looks, instead, for the reason for the sudden appearance of a Mogambo Secret Code (MSC), in this case being that these high-risk junk bonds are speculators using their client’s money not to merely buy high-yield debt, but as mere collateral on a loan to borrow many times that amount!

Then Mr. Noland says that, “In the face of enormous supply, corporate bond yields have remained extraordinarily low,” which certainly seems like a paradox to me, which was alarming until I remembered that I am stupid, and everything always seems strange and paradoxical to me.

Then I, despite my tragic handicap, remember the enormous amounts of money being created by the central banks of the world, including our own foul Federal Reserve, just for things like this! Money is everywhere!

Startling myself, my fear of inflation suddenly comes roaring up from the hideous depths of my nightmares, making me jump, a condition not made any easier by Casey’s Daily Dispatch newsletter, where he writes, “debt is the single biggest economic challenge facing the US – and much of the developed world. In time this debt will get resolved, it always does, but it’s not going to be pretty.”

Not going to be pretty, indeed! Pausing only long enough to congratulate Mr. Casey on using “it’s not going to be pretty” as a humorous understatement to the horror of eventual massive defaults, massive unemployment, massive loss of wealth, a collapsed economy, a trashed dollar and hyperinflation, I go helpfully on to note that this seems like the perfect time to bring up the fact that you should be buying gold, silver and oil with a nervous, paranoid mania usually seen in crack addicts and crazy people, because while it certainly won’t “be pretty” for people who do not own gold, silver and oil, it will be for those who do! Whee! This investing stuff is easy!

The Mogambo Guru
for The Daily Reckoning

Leveraging Junk Debt Off the Charts 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:
Leveraging Junk Debt Off the Charts




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

Uncategorized

Is the Bull Market in Gold Over?

September 24th, 2010

Gold hit three new record highs last week. This week, following the announcement by the US Fed on Tuesday, it is hitting still more highs…closing in on $1,300 as we write.

Gold should go up with consumer prices. But, for nearly two decades – from 1980 to 1999 – gold went down while consumer and asset prices rose. Now, consumer prices are stable. Yet gold hits new records.

All views on gold are baroque. There’s no line of thought on the subject that doesn’t have a curve in it. Some buyers are loading up on gold because they see a recovery coming. Others are buying it because they don’t. Recovery, say some, will boost consumer appetites, resulting in higher inflation levels and a higher price for gold. The absence of recovery, say others, will cause the Fed to undertake more money printing.

Those who have no opinion on the matter are among gold’s most aggressive buyers. To them, gold looks like a “can’t lose” proposition. If the economy improves, gold rises naturally. If it doesn’t improve, the Bernanke team will force it up.

And if not Bernanke, the Chinese. Gold makes up only 1.7% of China’s foreign exchange reserves. Many analysts believe China is targeting a 10% figure. If so, it would have to buy every ounce the world produces for two and a half years. Or, if it relies on only its own production – China is the world’s largest producer – it would take nearly 20 years of steady accumulation to reach the 10% level.

The metal holding down the 79th place in the periodic table has many uses. People make spoons, forks and bathroom faucets out of it. It’s occasionally used as roofing, or even as a murder weapon; Crassus had molten gold poured down his throat after being captured by the Parthians. And Lenin said he would line the public latrines with it. But the best use ever found for it was as money – as a reliable measure of wealth.

Even gold is not perfect as money. During the years following the Spanish conquest of their New World territories, for example, gold flooded back into the Iberian Peninsula. Soon there was much more gold than the other forms of wealth it was meant to represent. Each incremental ounce of gold was disappointing. It bought only a fraction as much as it had before this monetary inflation began. And had you bought it in 1980 you would have seen 90% of your purchasing power disappear before the bottom finally came. Even today, you still would not be back at breakeven. The price of gold will have to almost double from today’s level to reach its inflation-adjusted high of 1980.

But this is what makes gold very different from other money. If you happen to have a billion-Mark note from the Weimar Republic or a trillion dollar note from Zimbabwe, you can hold onto that paper until hell freezes; its value will never return. Gold, on the other hand, will never go away. And when the post-1971 monetary system cracks up, gold is likely to return to its 1980 high…and keep going.

Over the centuries, mankind has often experimented with alternatives to gold. Driven by larceny or desperation, base metal and paper were tried on many occasions. Paper was particularly promising. You could put as many zeros on a piece of paper as you wanted, creating an infinite supply of “money,” as Ben Bernanke once noticed, at negligible cost. But the experiments all ended badly. People realized that money gotten at no expense was only gotten rid of at great cost. Given the ability to create “money” at will, a central banker will sooner or later create too much.

But one generation learns. The next forgets.

By 1971, Americans had forgotten everything they ever knew about money. Richard Nixon cut the final link between the US dollar and gold.

At first, it looked as though investors hadn’t noticed. But then began a great bull market in gold that took the price from $43 to $850. And just then, when investors were most sure that paper dollars would soon be worthless, a remarkable thing happened. Paul Volcker intervened. He made it clear that if the dollar were to go the way of all paper, it wouldn’t be on his watch. Inflation rates fell, along with gold.

Whatever shards of monetary wisdom were still lying on the ground intact in 1971 have since been ground to dust. Now, Ben Bernanke strives as diligently to destroy the dollar as Paul Volcker did to protect it. And another generation awaits a whack on the knuckles.

Regards,

Bill Bonner
for The Daily Reckoning

Is the Bull Market in Gold Over? 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:
Is the Bull Market in Gold Over?




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

Is the Bull Market in Gold Over?

September 24th, 2010

Gold hit three new record highs last week. This week, following the announcement by the US Fed on Tuesday, it is hitting still more highs…closing in on $1,300 as we write.

Gold should go up with consumer prices. But, for nearly two decades – from 1980 to 1999 – gold went down while consumer and asset prices rose. Now, consumer prices are stable. Yet gold hits new records.

All views on gold are baroque. There’s no line of thought on the subject that doesn’t have a curve in it. Some buyers are loading up on gold because they see a recovery coming. Others are buying it because they don’t. Recovery, say some, will boost consumer appetites, resulting in higher inflation levels and a higher price for gold. The absence of recovery, say others, will cause the Fed to undertake more money printing.

Those who have no opinion on the matter are among gold’s most aggressive buyers. To them, gold looks like a “can’t lose” proposition. If the economy improves, gold rises naturally. If it doesn’t improve, the Bernanke team will force it up.

And if not Bernanke, the Chinese. Gold makes up only 1.7% of China’s foreign exchange reserves. Many analysts believe China is targeting a 10% figure. If so, it would have to buy every ounce the world produces for two and a half years. Or, if it relies on only its own production – China is the world’s largest producer – it would take nearly 20 years of steady accumulation to reach the 10% level.

The metal holding down the 79th place in the periodic table has many uses. People make spoons, forks and bathroom faucets out of it. It’s occasionally used as roofing, or even as a murder weapon; Crassus had molten gold poured down his throat after being captured by the Parthians. And Lenin said he would line the public latrines with it. But the best use ever found for it was as money – as a reliable measure of wealth.

Even gold is not perfect as money. During the years following the Spanish conquest of their New World territories, for example, gold flooded back into the Iberian Peninsula. Soon there was much more gold than the other forms of wealth it was meant to represent. Each incremental ounce of gold was disappointing. It bought only a fraction as much as it had before this monetary inflation began. And had you bought it in 1980 you would have seen 90% of your purchasing power disappear before the bottom finally came. Even today, you still would not be back at breakeven. The price of gold will have to almost double from today’s level to reach its inflation-adjusted high of 1980.

But this is what makes gold very different from other money. If you happen to have a billion-Mark note from the Weimar Republic or a trillion dollar note from Zimbabwe, you can hold onto that paper until hell freezes; its value will never return. Gold, on the other hand, will never go away. And when the post-1971 monetary system cracks up, gold is likely to return to its 1980 high…and keep going.

Over the centuries, mankind has often experimented with alternatives to gold. Driven by larceny or desperation, base metal and paper were tried on many occasions. Paper was particularly promising. You could put as many zeros on a piece of paper as you wanted, creating an infinite supply of “money,” as Ben Bernanke once noticed, at negligible cost. But the experiments all ended badly. People realized that money gotten at no expense was only gotten rid of at great cost. Given the ability to create “money” at will, a central banker will sooner or later create too much.

But one generation learns. The next forgets.

By 1971, Americans had forgotten everything they ever knew about money. Richard Nixon cut the final link between the US dollar and gold.

At first, it looked as though investors hadn’t noticed. But then began a great bull market in gold that took the price from $43 to $850. And just then, when investors were most sure that paper dollars would soon be worthless, a remarkable thing happened. Paul Volcker intervened. He made it clear that if the dollar were to go the way of all paper, it wouldn’t be on his watch. Inflation rates fell, along with gold.

Whatever shards of monetary wisdom were still lying on the ground intact in 1971 have since been ground to dust. Now, Ben Bernanke strives as diligently to destroy the dollar as Paul Volcker did to protect it. And another generation awaits a whack on the knuckles.

Regards,

Bill Bonner
for The Daily Reckoning

Is the Bull Market in Gold Over? 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:
Is the Bull Market in Gold Over?




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

SP500 Levels to Watch and Market Realities You Should Know

September 24th, 2010

Days like this remind us of Mark Douglas’ “market realities” as explained in Trading in the Zone – specifically, “The market can do anything!”

Let’s take a look at the current structure of the S&P 500, note the most important levels to watch, and go back to a reminder about market realities as they exist currently – fighting these realities could be very costly.

First, the S&P 500 Daily Structure:

Let’s start first with the key technical levels to watch.

As I mentioned in last night’s subscriber report, we had at least a decent chance of supporting off the confluence level at 1,120 – though I certainly did not envision such a powerful rally forming off that support.  Wow.

As it is, confluence support held – so far.

For reference, the support is the 1,130 level from the price breakout, and the coming convergence of the 200d SMA (very important) at 1,117 and the 20 day SMA (less important – green) at 1,115.

It’s a buy as long as we’re above there.

Confluence resistance, as I see it, exists at the 1,145 level or more generally, 1,150.

Any move back above 1,150 sets the short-term goal to 1,170 which could occur quickly.

I mentioned this earlier in my “Game-Changer at 1,130” post where I defined the upside targets.

So here we are back at 1,150 playing the “Will 1,150 hold or not?” game.

Which brings me to my next point – dealing with current market realities.

From what I’m picking up on in the trading community, a lot of traders are having great difficulty right now because they were positioned short under 1,130 and thought there was no way possible the market could break above 1,130.

The first thing to say is to hark back to Mark Douglas’ teachings that “Anything Can Happen.”  It can – and often does.

Traders who approached this major technical resistance line from a perspective of:

“Hmm.  I know that it’s resistance, but I have to be open to the possibility that it might break, which means I’ll take stops and then perhaps get long to play for the upside break”

fared far superior than traders who viewed this test of 1,130 as an absolute brick wall that HAD to turn the market lower.

Having an open mind and planning objective “IF/THEN” statements often trumps bias and ‘absolutes’ about what the market must or must not do.

The reality now is that as long as the market is above 1,130, further bullish potential remains.  Remaining short above 1,130 might be a dreadfully painful experience, particularly if resistance at 1,150 ALSO breaks.

If it comes down to holding a stubborn opinion versus following what the the market is actually doing (as opposed to what it should be doing)… my bet’s on the market every time.

If you’ve not read Trading in the Zone, I – along with many traders – strongly suggest reading that timeless classic.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
SP500 Levels to Watch and Market Realities You Should Know

Uncategorized

SP500 Levels to Watch and Market Realities You Should Know

September 24th, 2010

Days like this remind us of Mark Douglas’ “market realities” as explained in Trading in the Zone – specifically, “The market can do anything!”

Let’s take a look at the current structure of the S&P 500, note the most important levels to watch, and go back to a reminder about market realities as they exist currently – fighting these realities could be very costly.

First, the S&P 500 Daily Structure:

Let’s start first with the key technical levels to watch.

As I mentioned in last night’s subscriber report, we had at least a decent chance of supporting off the confluence level at 1,120 – though I certainly did not envision such a powerful rally forming off that support.  Wow.

As it is, confluence support held – so far.

For reference, the support is the 1,130 level from the price breakout, and the coming convergence of the 200d SMA (very important) at 1,117 and the 20 day SMA (less important – green) at 1,115.

It’s a buy as long as we’re above there.

Confluence resistance, as I see it, exists at the 1,145 level or more generally, 1,150.

Any move back above 1,150 sets the short-term goal to 1,170 which could occur quickly.

I mentioned this earlier in my “Game-Changer at 1,130” post where I defined the upside targets.

So here we are back at 1,150 playing the “Will 1,150 hold or not?” game.

Which brings me to my next point – dealing with current market realities.

From what I’m picking up on in the trading community, a lot of traders are having great difficulty right now because they were positioned short under 1,130 and thought there was no way possible the market could break above 1,130.

The first thing to say is to hark back to Mark Douglas’ teachings that “Anything Can Happen.”  It can – and often does.

Traders who approached this major technical resistance line from a perspective of:

“Hmm.  I know that it’s resistance, but I have to be open to the possibility that it might break, which means I’ll take stops and then perhaps get long to play for the upside break”

fared far superior than traders who viewed this test of 1,130 as an absolute brick wall that HAD to turn the market lower.

Having an open mind and planning objective “IF/THEN” statements often trumps bias and ‘absolutes’ about what the market must or must not do.

The reality now is that as long as the market is above 1,130, further bullish potential remains.  Remaining short above 1,130 might be a dreadfully painful experience, particularly if resistance at 1,150 ALSO breaks.

If it comes down to holding a stubborn opinion versus following what the the market is actually doing (as opposed to what it should be doing)… my bet’s on the market every time.

If you’ve not read Trading in the Zone, I – along with many traders – strongly suggest reading that timeless classic.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
SP500 Levels to Watch and Market Realities You Should Know

Uncategorized

More on the Multi-Asset Class ETF Portfolio

September 24th, 2010

Yesterday’s post, Diversification, Momentum and Sidestepping the 2008 Panic, brought such a positive response that I thought a brief follow-up is in order.

In the chart below, courtesy of ETFreplay.com, I show how the Multi-Asset Class ETF Portfolio I referred to yesterday performed on a month to month basis, this time using the ETFreplay’s Portfolio Moving Average timeline tool. The chart is really a table which shows all of the ETFs and the results of the moving average rule which determined whether to be long or in cash for each month of the period covered. The far right portion of that graphic also shows where the each of the individual ETFs currently stands relative to their selected (in this case it was six months) moving average.

Commodities, ETF, Uncategorized

When Gold Goes Up

September 24th, 2010

“Gold is saying something,” writes Bloomberg columnist Mark Gilbert.

What’s it saying? Nobody knows. Well, at least nobody who works at The Daily Reckoning. We listen. We hear. But we still don’t know what the hell gold is talking about. The yellow metal is speaking in riddles.

Yesterday, gold spoke again. It rose $4 to a new record high of $1,296. Tomorrow, it will probably hit yet another record – possibly over $1,300.

In the conventional wisdom, gold is telling us to watch out. Inflation is coming. Either the regular kind…the kind that comes with “growth”…or the kind that comes with the “hyper” modifier. Almost everyone likes the regular kind. Almost no one likes the hyper kind.

But being the contrary coots that we are, we’re inclined to think that there will be many a slip between the cup of $1,300 gold and the puckered lips of gently rising inflation levels.

Watch out, dear reader, watch out.

Not that we’re dissing gold or sassing the goldbugs. Not at all. We think it’s going to $1,500…and then to $3,000. But next week?

Don’t know. We have to keep listening…trying to interpret the whispers.

There’s something all together too obvious and too easy about the gold market now. It just goes up. Year after year. Maybe it’s a trap.

In 2000, there was a crash in dot.coms. The whole magic of the tech bubble suddenly disappeared. And guess what? Gold went up.

In 2001, the War on Terror began. And guess what? Gold went up again.

And again in 2002. And 2003. And 2004.

By 2005, the world economy was in the throes of a massive financial bubble. Everything was going up. Gold went up too.

In 2006, the US had a major housing bubble on its hands. Gold went up.

In 2007, the housing bubble started to lose air. Gold went up.

In 2008, Wall Street stared into the abyss. Lehman Bros. went broke. The feds took over housing finance, auto-making, insurance, commercial lending…and gold went up.

In 2009, the feds went all out to try to engineer a recovery. The Fed ballooned its balance sheet by $1.2 trillion. The federal budget went into deficit by nearly one and a half trillion. Still, gold went up.

And what’s this? The recession officially ended more than a year ago. Housing and unemployment are still limping. De-leveraging is still underway (David Rosenberg calls it a “depression”)…and go figure. Gold is still going up.

Is there anything that can stop gold from going up?

We don’t know. But many smart people are coming to the conclusion that they can’t lose with gold. If the economy recovers…gold is a cinch to go up along with inflation. If the economy falters…gold will go up when the Fed comes to the rescue with more printing press money.

And then, there are the Chinese. God knows they like gold. And they don’t have much of it. If they’re behind this gold market it could last for another 20 years.

So gold is a “can’t lose” investment.

We like gold. But we don’t like “can’t lose” investments. What to do?

Bill Bonner
for The Daily Reckoning

When Gold Goes Up 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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When Gold Goes Up




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

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