Why Emerging Markets are Benefiting the Most from QE2

November 17th, 2010

Anyone who contends that Ben Bernanke’s latest round of money printing is not having a material impact on either job growth and/or meaningful investment is clearly not looking hard enough…or in the right place.

While it is true that US equities have, after a rollercoaster fortnight, retreated below their pre-QE2 announcement levels…and while the employment outlook in the US remains stubbornly entrenched in economic reality, much to the chagrin of central planners/bankers with a mandate to achieve “full” employment, Mr. Bernanke’s newly created dollars are, indeed, beginning to find their way into productive capital formation and much needed reinvestment…abroad.

“You’re seeing leakage from quantitative easing,” Stephen Wood, chief market strategist for Russell Investments in New York, recently told Bloomberg. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-US opportunities.”

Readers of these pages are familiar with the recent run up in resource prices and, although a bit of the froth was blown off the commodity cappuccino during the past few sessions, the long-term trend supporting higher resource prices – i.e., voracious demand from emerging markets and the debasement of the dollar in which most of these things are priced – remains in place. But what of the emerging markets themselves? Could Bernanke’s promiscuity at the printing press actually be encouraging the flow of EZ money out of the US and into these foreign markets? Almost certainly.

“The best way to visualize this process,” writes Dr. Marc Faber, editor of the highly-recommended Gloom, Doom & Boom Report and a perennial favorite at our annual investment symposium in Vancouver, “is to think of a huge money- printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.

“Some of these dollars then find their way back to the US and support Treasury bond prices,” continues Dr. Faber, before adding, “But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out.”

Indeed, in the first half of this year, figures compiled by the Commerce Department show that overseas investments by US firms outpaced the rate at which foreign firms invested in the US by an annual rate of about $220 billion. For perspective, back in the first half of 2006, when the US economy was humming along – towards disaster – and the term “quantitative easing” had not yet found its place in the common, politico-doublespeak of the day, the US was a net recipient of funds. The annual net inflow was then about $30 billion.

Such a massive turnaround was not (entirely) lost on policymakers. As Richard Fisher, president of the Federal Reserve Bank of Dallas, pondered in a recent speech, “I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”

Of course, that speech was given in October…long before Bernanke’s QE2 ship set sail.

According to data compiled by Bloomberg, US corporations have issued more than $1.07 trillion in debt year-to-date. On the surface, that might appear to be a good sign. The willingness to go into debt is, in a way, a measure of confidence…or stupidity…or, more likely, a combination of the two. Perhaps, therefore, these companies are raising cash for expansion plans, for research and development and to hire new workers. Wouldn’t that be a good thing for the US economy in general? It would…except that much of that cash will be deployed overseas, where higher growth rates offer a more attractive return on investment. The newswire cites a host of US-based companies taking advantage of this EZ money trade. Here are three of them:

  • Southern Copper, a Phoenix-based mining outfit that raised $1.5 billion in an April debt offering, will use that money to improve and upgrade its facilities…at its mines in Mexico and Peru
  • Cliffs Natural Resources Inc., North America’s largest iron-ore producer, will use part of a $400 million offering to repay debt…associated with a Brazilian mining project
  • Valmont Industries Inc., an Omaha-based light pole and communications outfit, will use the proceeds of a $300 million debt issuance to help fund its $439 million acquisition of Delta PLC…a London-based maker of similar products.

To be clear, this is by no means an indictment of these, or any other, companies looking to shore up or expand their bottom lines by investing overseas. Rather, your editor is simply observing that money – and the companies trying to make it – invariably flows to where it is treated best. And, right now, you can mail a postcard to many of those “best” places without the need to include a US zip code at all.

But none of this should come as any real surprise, Fellow Reckoners. You can’t unleash – and/or promise to unleash – $600 billion worth of liquidity into the US market without some “leakage.” That’s especially true when the pool of growth opportunity in the United States is so very shallow, and the depth of potential in emerging markets is so very great. It’s a bit like trying to fill a thimble with a fire hose…most of the water ends up where it wasn’t intended.

Joel Bowman
for The Daily Reckoning

Why Emerging Markets are Benefiting the Most from QE2 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:
Why Emerging Markets are Benefiting the Most from QE2




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

Why Emerging Markets are Benefiting the Most from QE2

November 17th, 2010

Anyone who contends that Ben Bernanke’s latest round of money printing is not having a material impact on either job growth and/or meaningful investment is clearly not looking hard enough…or in the right place.

While it is true that US equities have, after a rollercoaster fortnight, retreated below their pre-QE2 announcement levels…and while the employment outlook in the US remains stubbornly entrenched in economic reality, much to the chagrin of central planners/bankers with a mandate to achieve “full” employment, Mr. Bernanke’s newly created dollars are, indeed, beginning to find their way into productive capital formation and much needed reinvestment…abroad.

“You’re seeing leakage from quantitative easing,” Stephen Wood, chief market strategist for Russell Investments in New York, recently told Bloomberg. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-US opportunities.”

Readers of these pages are familiar with the recent run up in resource prices and, although a bit of the froth was blown off the commodity cappuccino during the past few sessions, the long-term trend supporting higher resource prices – i.e., voracious demand from emerging markets and the debasement of the dollar in which most of these things are priced – remains in place. But what of the emerging markets themselves? Could Bernanke’s promiscuity at the printing press actually be encouraging the flow of EZ money out of the US and into these foreign markets? Almost certainly.

“The best way to visualize this process,” writes Dr. Marc Faber, editor of the highly-recommended Gloom, Doom & Boom Report and a perennial favorite at our annual investment symposium in Vancouver, “is to think of a huge money- printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.

“Some of these dollars then find their way back to the US and support Treasury bond prices,” continues Dr. Faber, before adding, “But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out.”

Indeed, in the first half of this year, figures compiled by the Commerce Department show that overseas investments by US firms outpaced the rate at which foreign firms invested in the US by an annual rate of about $220 billion. For perspective, back in the first half of 2006, when the US economy was humming along – towards disaster – and the term “quantitative easing” had not yet found its place in the common, politico-doublespeak of the day, the US was a net recipient of funds. The annual net inflow was then about $30 billion.

Such a massive turnaround was not (entirely) lost on policymakers. As Richard Fisher, president of the Federal Reserve Bank of Dallas, pondered in a recent speech, “I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”

Of course, that speech was given in October…long before Bernanke’s QE2 ship set sail.

According to data compiled by Bloomberg, US corporations have issued more than $1.07 trillion in debt year-to-date. On the surface, that might appear to be a good sign. The willingness to go into debt is, in a way, a measure of confidence…or stupidity…or, more likely, a combination of the two. Perhaps, therefore, these companies are raising cash for expansion plans, for research and development and to hire new workers. Wouldn’t that be a good thing for the US economy in general? It would…except that much of that cash will be deployed overseas, where higher growth rates offer a more attractive return on investment. The newswire cites a host of US-based companies taking advantage of this EZ money trade. Here are three of them:

  • Southern Copper, a Phoenix-based mining outfit that raised $1.5 billion in an April debt offering, will use that money to improve and upgrade its facilities…at its mines in Mexico and Peru
  • Cliffs Natural Resources Inc., North America’s largest iron-ore producer, will use part of a $400 million offering to repay debt…associated with a Brazilian mining project
  • Valmont Industries Inc., an Omaha-based light pole and communications outfit, will use the proceeds of a $300 million debt issuance to help fund its $439 million acquisition of Delta PLC…a London-based maker of similar products.

To be clear, this is by no means an indictment of these, or any other, companies looking to shore up or expand their bottom lines by investing overseas. Rather, your editor is simply observing that money – and the companies trying to make it – invariably flows to where it is treated best. And, right now, you can mail a postcard to many of those “best” places without the need to include a US zip code at all.

But none of this should come as any real surprise, Fellow Reckoners. You can’t unleash – and/or promise to unleash – $600 billion worth of liquidity into the US market without some “leakage.” That’s especially true when the pool of growth opportunity in the United States is so very shallow, and the depth of potential in emerging markets is so very great. It’s a bit like trying to fill a thimble with a fire hose…most of the water ends up where it wasn’t intended.

Joel Bowman
for The Daily Reckoning

Why Emerging Markets are Benefiting the Most from QE2 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:
Why Emerging Markets are Benefiting the Most from QE2




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

Why True Prosperity Doesn’t Come from a Printing Press

November 17th, 2010

Ooooh…

Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.

Did you pay attention to our “Crash Alert” flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie – that EZ money from the Fed’s printing press will cause stocks to rise, interest rates to go down, and the economy to revive.

It ain’t gonna happen.

Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It’s not. It’s a daredevil maneuver in which the Fed funds about 100% of the US government’s borrowing needs over the next 8 months.

Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities…or emerging markets…or anything else.

But real, genuine, honest-to-God prosperity? By just printing up money?

Nope. Not possible. It’s not that easy.

The risk is that investors may connect the dots. Let’s see… Stocks haven’t made them any money in 10 years. Yields are still down around 2% – so they can’t expect any decent returns from that quarter. And stocks are still expensive – with P/Es close to 20.

So, what can investors expect? Will P/Es go up? We can’t think of any reason why they should. Will stock prices rise? Again, they can do what they want…but we can’t think of any good reason for them to go up.

On the other hand, we can think of several good reasons for them to go down. The best one is this: that’s what markets do. They go from peak to valley…and back to peak. This one was at a record peak in 2000 and then another record peak in 2007…and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed…that valley still lies ahead.

And wouldn’t it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in ’07-’09. Their houses are down 30%…and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven’t saved enough money. So, they’re hoping to make some money now.

Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer…and then, like magic, they ARE richer.

But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?

No one knows. But there is no guarantee that the feds’ gamble will raise stock prices. On the other hand, wouldn’t it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?

Yes it would. Will he do it? We don’t know. But it’s a risk. Stay out of stocks. Buy gold on dips. Be happy.

Bill Bonner
for The Daily Reckoning

Why True Prosperity Doesn’t Come from a Printing Press 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:
Why True Prosperity Doesn’t Come from a Printing Press




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

Why True Prosperity Doesn’t Come from a Printing Press

November 17th, 2010

Ooooh…

Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.

Did you pay attention to our “Crash Alert” flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie – that EZ money from the Fed’s printing press will cause stocks to rise, interest rates to go down, and the economy to revive.

It ain’t gonna happen.

Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It’s not. It’s a daredevil maneuver in which the Fed funds about 100% of the US government’s borrowing needs over the next 8 months.

Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities…or emerging markets…or anything else.

But real, genuine, honest-to-God prosperity? By just printing up money?

Nope. Not possible. It’s not that easy.

The risk is that investors may connect the dots. Let’s see… Stocks haven’t made them any money in 10 years. Yields are still down around 2% – so they can’t expect any decent returns from that quarter. And stocks are still expensive – with P/Es close to 20.

So, what can investors expect? Will P/Es go up? We can’t think of any reason why they should. Will stock prices rise? Again, they can do what they want…but we can’t think of any good reason for them to go up.

On the other hand, we can think of several good reasons for them to go down. The best one is this: that’s what markets do. They go from peak to valley…and back to peak. This one was at a record peak in 2000 and then another record peak in 2007…and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed…that valley still lies ahead.

And wouldn’t it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in ’07-’09. Their houses are down 30%…and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven’t saved enough money. So, they’re hoping to make some money now.

Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer…and then, like magic, they ARE richer.

But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?

No one knows. But there is no guarantee that the feds’ gamble will raise stock prices. On the other hand, wouldn’t it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?

Yes it would. Will he do it? We don’t know. But it’s a risk. Stay out of stocks. Buy gold on dips. Be happy.

Bill Bonner
for The Daily Reckoning

Why True Prosperity Doesn’t Come from a Printing Press 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:
Why True Prosperity Doesn’t Come from a Printing Press




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

Weak Dollar Could Boost Oil ETFs

November 17th, 2010

As commodities like cotton, wheat and copper have witnessed price surges this year, the actions and decisions of the Federal Reserve combined with sustainable global demand could boost crude oil providing positive price support to the United States Oil Fund (USO), the United States 12 Month Oil Fund (USL), the PowerShares DB Oil Fund (DBO) and the iPath S&P GSCI Crude Oil TR Index ETN (OIL).

The Federal Reserve’s decision to infiltrate the US economy with extra dollars through its purchasing of $600 billion of Treasuries from commercial banks is expected to keep interest rates at near record lows and further weaken the US dollar.  As a result, black gold, which is traded in dollars, is expected to become cheaper and hence more attractive to foreign investors.  History indicates that the US dollar and the price of crude oil hold an inverse relationship; as the dollar depreciates, crude oil tends to witness an inflow of assets, pushing demand and prices up.

Furthermore, as the dollar depreciates, the 12-member cartel known as the Organization of Petroleum Exporting Countries (OPEC), may seek increased oil prices to make up for lost profitability from exporting of oil.  In fact, according to Mark Shenk and Grant Smith of Businessweek, Saudi Arabia’s Oil Minister has already hinted that a range of $70 to $90 a barrel should be satisfactory for consumers, an increase from the world’s largest oil producer’s previous price target of $75 barrel. 

In addition to a weak dollar, global demand of crude is expected to increase. The International Energy Association (IEA) expects global consumption of crude oil to increase from 86.9 million barrels per day to 88.2 million barrels per day in 2011 based on stronger-than-expected economic growth in Europe and industrialized Asia.  In Asia, China’s demand for crude is expected to rise by more than 4 percent next year and India is expected to increase its appetite for crude due to an expanding manufacturing sector.

On the supply side, it appears that there is ample global supply to meet this increased demand; however, stockpiles could eventually start to diminish if OPEC keeps production at its current rates and economic growth supersedes expectations.  With this in mind, a microeconomic imbalance is highly unlikely to emerge in the near term future. 

Although an opportunity seems to exist in black gold, it is equally important to consider the inherent risks involved with investing in such a volatile commodity.  To help mitigate these risks, the use of an exit strategy is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Weak Dollar Could Boost Oil ETFs




HERE IS YOUR FOOTER

Commodities, Uncategorized

Weak Dollar Could Boost Oil ETFs

November 17th, 2010

As commodities like cotton, wheat and copper have witnessed price surges this year, the actions and decisions of the Federal Reserve combined with sustainable global demand could boost crude oil providing positive price support to the United States Oil Fund (USO), the United States 12 Month Oil Fund (USL), the PowerShares DB Oil Fund (DBO) and the iPath S&P GSCI Crude Oil TR Index ETN (OIL).

The Federal Reserve’s decision to infiltrate the US economy with extra dollars through its purchasing of $600 billion of Treasuries from commercial banks is expected to keep interest rates at near record lows and further weaken the US dollar.  As a result, black gold, which is traded in dollars, is expected to become cheaper and hence more attractive to foreign investors.  History indicates that the US dollar and the price of crude oil hold an inverse relationship; as the dollar depreciates, crude oil tends to witness an inflow of assets, pushing demand and prices up.

Furthermore, as the dollar depreciates, the 12-member cartel known as the Organization of Petroleum Exporting Countries (OPEC), may seek increased oil prices to make up for lost profitability from exporting of oil.  In fact, according to Mark Shenk and Grant Smith of Businessweek, Saudi Arabia’s Oil Minister has already hinted that a range of $70 to $90 a barrel should be satisfactory for consumers, an increase from the world’s largest oil producer’s previous price target of $75 barrel. 

In addition to a weak dollar, global demand of crude is expected to increase. The International Energy Association (IEA) expects global consumption of crude oil to increase from 86.9 million barrels per day to 88.2 million barrels per day in 2011 based on stronger-than-expected economic growth in Europe and industrialized Asia.  In Asia, China’s demand for crude is expected to rise by more than 4 percent next year and India is expected to increase its appetite for crude due to an expanding manufacturing sector.

On the supply side, it appears that there is ample global supply to meet this increased demand; however, stockpiles could eventually start to diminish if OPEC keeps production at its current rates and economic growth supersedes expectations.  With this in mind, a microeconomic imbalance is highly unlikely to emerge in the near term future. 

Although an opportunity seems to exist in black gold, it is equally important to consider the inherent risks involved with investing in such a volatile commodity.  To help mitigate these risks, the use of an exit strategy is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Weak Dollar Could Boost Oil ETFs




HERE IS YOUR FOOTER

Commodities, Uncategorized

Bernanke Clips the People’s Coin – From Bakersfield to Burma

November 17th, 2010

Ben Bernanke: The Chauncey Gardiner of Central Banking” examined the Federal Reserve’s November 3, 2010, decision to save the economy by inflating the asset markets. Chairman Bernanke shared his unpardonable rationale for QE2 in the Washington Post, on November 4, 2010. His deadly cruise missiles, QE1 and QE2, were described in “Chauncey Gardiner.”

The subject of CG2 – Chauncey Gardiner, Part 2 – is Bernanke’s ignorance of the United States’ unavoidable association with the rest of the world. The consequence of Federal Reserve money expansion is not only disrupting foreign economies; the backwash from dollars piling up overseas is raising food prices in the U.S.

In his Washington Post commentary, Bernanke never mentioned the dollar, the currency that is being aggressively depreciated by the Federal Reserve. In the Post, Bernanke resorted to “price stability,” a deceptive phrase invented to justify inflating prices, in the present instance, by 2% a year. No Federal Reserve chairman before Bernanke claimed he needed to inflate prices to prevent them from deflating. Congress has not addressed this new coin-clipping mandate of the Fed, nor will it. Bernanke could declare tomorrow that a 5% annual currency debasement is necessary for price stability. This, too, would be met by silence. What is the point of paying the House of Representatives since it does not represent?

Depreciation of the dollar at home is handcuffed to depreciation of the dollar against other currencies. (This is a “competitive devaluation” in which most countries are participating, but the U.S. is the most assertive aggressor.)  Even before the Fed’s announcement of QE2 on November 3, denouncements from overseas warned Bernanke he was about to rouse a new round of anti-Americanism.

On October 13, 2010, the China Securities Journal (an affiliate of the Chinese government’s official news agency Xinhua News) warned: “The U.S. expansionary monetary policy could hijack the global economy, and emerging markets are the most likely to suffer the consequences.” After this and many other declarations from the Chinese, the Congressmen and Senators who demand China cooperate in currency adjustment said and did nothing about the Fed’s QE2 operation. The politicians either want to launch a trade war (goading nationalism could help beleaguered office-holders) or are unable to rub two thoughts together at the same time.

Speaking of the untutored, the (London) Daily Telegraph targeted Bernanke on October 16 when it warned: “America’s attempt to print itself out of trouble…is far from proven [and] could actually make things worse. QE on this scale now being proposed has never been tried. It is beyond the realms even of economic theory.” (In the aftermath of QE2, Germany’s Finance Minister Wolfgang Schaeuble seconded this opinion: “However you look at it, my impression is the U.S. is in a state of desperation.”)

The broadsides did not stop: On October 23, 2010, German Economic Minister Rainer Bruederle addressed both the European Central Bank’s balance sheet and the well advertised intention of the Federal Reserve to commence its attack on the world economy: “An excessive, permanent increase in money [supply] is, in my view, an indirect manipulation of the (foreign exchange) market.” China Commerce Secretary Chen Deming warned on October 26: “Because the United States issuance of [dollars] is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing… problems.”

The flow of Federal Reserve Notes overseas is indeed causing problems. Commodity prices are at all-time or generational highs when quoted in the most overabundant currency on the world, U.S. dollars: natural rubber, synthetic rubber, corn, soy, wheat, cotton, iron ore, steel, and cattle. It is always the case when prices become distorted that shortages develop. Today there are scarcities of palm oil, vegetable oil, soybeans, diesel fuel, engineers, welders, pipe fitters, electricians, and coal. Federal Reserve officials, operating as they do in a theoretical world, certainly did not consider before this latest act the food riots that spread across at least 20 countries in 2006 through 2008, as commodity prices (food, in particular) were doubling and tripling.

Chairman Bernanke is an ignorant man, evident whenever he speaks, but wondrously displayed in comments after his November 3 launch. Bloomberg news described a talk by Simple Ben in Jacksonville, Florida on November 5: “Federal Reserve Chairman Ben S. Bernanke said the central bank must focus on the U.S. rather than overseas economies when trying to spur the recovery by purchasing an additional $600 billion in Treasuries.”

Ben is deaf to anger that has been directed against the U.S. since his latest dollar dump. The gathering trend towards rising trade barriers, capital controls and protectionism shifted into a higher gear after the Fed’s announcement. This is not good for the United States. These tendencies did not work out well for the U.S. in the 1930s and that was a time when the world admired America. The insistence of his fellow, establishment economists to still call Bernanke “an expert on the Great Depression” shows this so-called profession is gurgling its death rattle.

After his Jacksonville address, Bernanke was asked how his duplicitous description of inflation (it is too low) could be true given “skyrocketing” commodities prices. The disoriented cosmonaut replied that rising commodity prices are “the one exception” to a broad reduction in inflationary pressure. He went on to say the “excess slack in the economy” will make it “difficult for producers to push through higher prices to consumers.”

It will be difficult for producers to stay in business if they don’t. Over the past year, the price of wheat has increased 74%; corn: 14%; oats: 68%; heating oil: 29%; gasoline: 25%; pork: 60%; coffee: 27%; beef: 18%; sugar: 44%; copper: 37%; and cotton: 66%.

Some companies have been unable to pass on costs. Kimberley Clark, Wendy’s/Arby’s Group, and CKE restaurants (among many others) announced third quarter 2010 profits fell even though total sales rose. Squeezing profits out of companies contracts the job market; it does not “spur” it. Some companies, including General Mills, McDonalds, and many supermarket chains have raised their prices, in defiance of Bernanke’s contention that it will be “difficult for producers to push through higher prices to consumers.”

It is the consumers who can least afford who suffer the most from rising commodity prices, especially since personal income in the U.S. continues to fall, as it did once again in September, 2010. According to the Bureau of Labor and Statistics, the 20% of Americans with the lowest wages spend nearly 60% of their after-tax income on food and energy. The highest 20% of earners spend about 10% of their after-tax income on these necessities.

Only a celebrity economist could think rising commodity prices will be “contained.” (A reminder of Federal Reserve Chairman Ben Bernanke’s consistent record of being wrong: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” – March 28th, 2007). UPS just announced it is increasing shipping rates by 4.9%. College tuitions for 2010-2011 rose 7.0% at 4-year public colleges. Holiday airfares in 2010 are expected to be 18% higher than a year ago (FareCompare.com).

Like coin-clippers of yesteryear, Bernanke denies any wrong doing. In the Post, he claimed inflation is so low it is “unhealthy.” But this is one of the gravest crimes one can commit against the People. (Coin-clipping was the practice of clipping small amounts of gold or silver from each coin and then selling the shavings.) We have become so refined, the crime goes unmentioned. It was not always so.

In 1278, King Edward I raised the penalty for coin clipping to execution. There were 298 offenders who were hung for offenses against “our Lord the King’s Coin.” Under Queen Elizabeth I in 1576, “a goldsmith named Thomas Green was drawn from Newgate to Tyburn, and was there hanged, beheaded, and quartered for the clipping of gold and silver coins.” On June 21, 1776, Phoebe Harris was burned at the stake, at Tyburn, for High Treason. The specific crime was coin clipping. A crowd of 20,000 gathered to watch. The odor from her body smoke left some spectators gasping.

The People – from Bakersfield to Burma – should settle for the disestablishment of the Federal Reserve and send Ben and his silly friends back to college campuses where they can teach students who are silly enough to believe their disgraceful professors whose empty-headed curriculum they will someday teach.

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.]

Bernanke Clips the People’s Coin – From Bakersfield to Burma 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:
Bernanke Clips the People’s Coin – From Bakersfield to Burma




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

Commodities, Uncategorized

Bernanke Clips the People’s Coin – From Bakersfield to Burma

November 17th, 2010

Ben Bernanke: The Chauncey Gardiner of Central Banking” examined the Federal Reserve’s November 3, 2010, decision to save the economy by inflating the asset markets. Chairman Bernanke shared his unpardonable rationale for QE2 in the Washington Post, on November 4, 2010. His deadly cruise missiles, QE1 and QE2, were described in “Chauncey Gardiner.”

The subject of CG2 – Chauncey Gardiner, Part 2 – is Bernanke’s ignorance of the United States’ unavoidable association with the rest of the world. The consequence of Federal Reserve money expansion is not only disrupting foreign economies; the backwash from dollars piling up overseas is raising food prices in the U.S.

In his Washington Post commentary, Bernanke never mentioned the dollar, the currency that is being aggressively depreciated by the Federal Reserve. In the Post, Bernanke resorted to “price stability,” a deceptive phrase invented to justify inflating prices, in the present instance, by 2% a year. No Federal Reserve chairman before Bernanke claimed he needed to inflate prices to prevent them from deflating. Congress has not addressed this new coin-clipping mandate of the Fed, nor will it. Bernanke could declare tomorrow that a 5% annual currency debasement is necessary for price stability. This, too, would be met by silence. What is the point of paying the House of Representatives since it does not represent?

Depreciation of the dollar at home is handcuffed to depreciation of the dollar against other currencies. (This is a “competitive devaluation” in which most countries are participating, but the U.S. is the most assertive aggressor.)  Even before the Fed’s announcement of QE2 on November 3, denouncements from overseas warned Bernanke he was about to rouse a new round of anti-Americanism.

On October 13, 2010, the China Securities Journal (an affiliate of the Chinese government’s official news agency Xinhua News) warned: “The U.S. expansionary monetary policy could hijack the global economy, and emerging markets are the most likely to suffer the consequences.” After this and many other declarations from the Chinese, the Congressmen and Senators who demand China cooperate in currency adjustment said and did nothing about the Fed’s QE2 operation. The politicians either want to launch a trade war (goading nationalism could help beleaguered office-holders) or are unable to rub two thoughts together at the same time.

Speaking of the untutored, the (London) Daily Telegraph targeted Bernanke on October 16 when it warned: “America’s attempt to print itself out of trouble…is far from proven [and] could actually make things worse. QE on this scale now being proposed has never been tried. It is beyond the realms even of economic theory.” (In the aftermath of QE2, Germany’s Finance Minister Wolfgang Schaeuble seconded this opinion: “However you look at it, my impression is the U.S. is in a state of desperation.”)

The broadsides did not stop: On October 23, 2010, German Economic Minister Rainer Bruederle addressed both the European Central Bank’s balance sheet and the well advertised intention of the Federal Reserve to commence its attack on the world economy: “An excessive, permanent increase in money [supply] is, in my view, an indirect manipulation of the (foreign exchange) market.” China Commerce Secretary Chen Deming warned on October 26: “Because the United States issuance of [dollars] is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing… problems.”

The flow of Federal Reserve Notes overseas is indeed causing problems. Commodity prices are at all-time or generational highs when quoted in the most overabundant currency on the world, U.S. dollars: natural rubber, synthetic rubber, corn, soy, wheat, cotton, iron ore, steel, and cattle. It is always the case when prices become distorted that shortages develop. Today there are scarcities of palm oil, vegetable oil, soybeans, diesel fuel, engineers, welders, pipe fitters, electricians, and coal. Federal Reserve officials, operating as they do in a theoretical world, certainly did not consider before this latest act the food riots that spread across at least 20 countries in 2006 through 2008, as commodity prices (food, in particular) were doubling and tripling.

Chairman Bernanke is an ignorant man, evident whenever he speaks, but wondrously displayed in comments after his November 3 launch. Bloomberg news described a talk by Simple Ben in Jacksonville, Florida on November 5: “Federal Reserve Chairman Ben S. Bernanke said the central bank must focus on the U.S. rather than overseas economies when trying to spur the recovery by purchasing an additional $600 billion in Treasuries.”

Ben is deaf to anger that has been directed against the U.S. since his latest dollar dump. The gathering trend towards rising trade barriers, capital controls and protectionism shifted into a higher gear after the Fed’s announcement. This is not good for the United States. These tendencies did not work out well for the U.S. in the 1930s and that was a time when the world admired America. The insistence of his fellow, establishment economists to still call Bernanke “an expert on the Great Depression” shows this so-called profession is gurgling its death rattle.

After his Jacksonville address, Bernanke was asked how his duplicitous description of inflation (it is too low) could be true given “skyrocketing” commodities prices. The disoriented cosmonaut replied that rising commodity prices are “the one exception” to a broad reduction in inflationary pressure. He went on to say the “excess slack in the economy” will make it “difficult for producers to push through higher prices to consumers.”

It will be difficult for producers to stay in business if they don’t. Over the past year, the price of wheat has increased 74%; corn: 14%; oats: 68%; heating oil: 29%; gasoline: 25%; pork: 60%; coffee: 27%; beef: 18%; sugar: 44%; copper: 37%; and cotton: 66%.

Some companies have been unable to pass on costs. Kimberley Clark, Wendy’s/Arby’s Group, and CKE restaurants (among many others) announced third quarter 2010 profits fell even though total sales rose. Squeezing profits out of companies contracts the job market; it does not “spur” it. Some companies, including General Mills, McDonalds, and many supermarket chains have raised their prices, in defiance of Bernanke’s contention that it will be “difficult for producers to push through higher prices to consumers.”

It is the consumers who can least afford who suffer the most from rising commodity prices, especially since personal income in the U.S. continues to fall, as it did once again in September, 2010. According to the Bureau of Labor and Statistics, the 20% of Americans with the lowest wages spend nearly 60% of their after-tax income on food and energy. The highest 20% of earners spend about 10% of their after-tax income on these necessities.

Only a celebrity economist could think rising commodity prices will be “contained.” (A reminder of Federal Reserve Chairman Ben Bernanke’s consistent record of being wrong: “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” – March 28th, 2007). UPS just announced it is increasing shipping rates by 4.9%. College tuitions for 2010-2011 rose 7.0% at 4-year public colleges. Holiday airfares in 2010 are expected to be 18% higher than a year ago (FareCompare.com).

Like coin-clippers of yesteryear, Bernanke denies any wrong doing. In the Post, he claimed inflation is so low it is “unhealthy.” But this is one of the gravest crimes one can commit against the People. (Coin-clipping was the practice of clipping small amounts of gold or silver from each coin and then selling the shavings.) We have become so refined, the crime goes unmentioned. It was not always so.

In 1278, King Edward I raised the penalty for coin clipping to execution. There were 298 offenders who were hung for offenses against “our Lord the King’s Coin.” Under Queen Elizabeth I in 1576, “a goldsmith named Thomas Green was drawn from Newgate to Tyburn, and was there hanged, beheaded, and quartered for the clipping of gold and silver coins.” On June 21, 1776, Phoebe Harris was burned at the stake, at Tyburn, for High Treason. The specific crime was coin clipping. A crowd of 20,000 gathered to watch. The odor from her body smoke left some spectators gasping.

The People – from Bakersfield to Burma – should settle for the disestablishment of the Federal Reserve and send Ben and his silly friends back to college campuses where they can teach students who are silly enough to believe their disgraceful professors whose empty-headed curriculum they will someday teach.

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.]

Bernanke Clips the People’s Coin – From Bakersfield to Burma 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:
Bernanke Clips the People’s Coin – From Bakersfield to Burma




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

3 Chinese Rebound Stocks

November 17th, 2010

3 Chinese Rebound Stocks

It's been a tough year for Chinese stocks that trade in the United States. Many of them have sold off — and stayed cheap — even as they sport impressive growth rates and low valuations. Thanks to a sharp drop on Friday on renewed concerns about an overheating economy, these cheap stocks have become even cheaper.

To be sure, the Chinese economy faces hurdles on its path to higher GDP. [See "5 Landmines for Chinese Stocks in 2011"]

Nevertheless, even as investors stay focused on near-term challenges, the long-term opportunities remain as robust as ever, a message perhaps lost when you look at 52-week stock charts of many China-based firms, a number of which are now off more than -40% from their 52-week high.

I've pulled together a short list of beaten-down names. Let's take a closer look at some potential rebound candidates.

China XD Plastics (Nasdaq: CDXC)
China XD is the largest supplier of modified plastics to the burgeoning Chinese automotive industry. The company had its first full year of operations in 2007 and is on track to post more than $200 million in sales this year — a +65% jump from 2009. Yet China HD has soured with investors recently after seeking to sell more shares to raise fresh capital. Shares fell nearly -20% in early October on that announcement and have never recovered.

Serial capital-raising has been a major negative for many Chinese companies, as they don't understand U.S. investors' predilection for one-and-done capital-raising. To be fair, that capital raise has a good purpose: the company's manufacturing capacity will increase +35% in 2011. And that should propel earnings per share (EPS) from an expected $0.50 this year to more than $0.80 next year, despite the recent share dilution. Shares currently trade for less than seven times projected 2011 profits.

The real catalyst for this stock will be management's announcement that cash flow can cover any future expansion plans. For now, shares appear to have found a floor and should move back into favor next year as investors once again focus on the growth dynamics of the robust Chinese auto market.

China Security & Surveillance (NYSE: CSR)
How do you analyze a company that is winning loads of new business but keeps reporting tepid sales? That's the conundrum faced by investors with China Security & Surveillance, which continues to build a massive backlog on the heels of new contract wins. But those contracts are stretched out over an extended period of time, so the company has lagged revenue forecasts for four straight quarters. Sales will likely still grow an impressive +25% this year, but that's half the forecasted growth rate expected earlier in the year.

The third quarter brought more of the same. Sales growth, due to the timing of some contracts, was just +14% compared with a year earlier, but backlog shot up from $213 million at the end of June to more than $400 million.

As a quick recap, China Security & Surveillance is one of the leading suppliers of security gear to companies and governments in China. The company is benefiting from a government-mandated “safe-city” program that seeks to deploy banks of video cameras, traffic management systems and emergency response systems in China's 200 largest cities.

As is the case with China XD Plastics, China Security & Surveillance has soured investors with its serial capital raising efforts that dilute existing shareholders. The number of shares outstanding shot up from 53 million a year ago to a recent 88 million. That led to a recent -30% quarterly drop in EPS, even though net income was +50% higher than a year ago. Management anticipates only modest growth in shares outstanding next year, which should enable EPS to move toward the $1.15 mark. Shares trade for just five times that forecast. That multiple won't stay that low in 2011 — if management can refrain from diluting shares further and if it can deliver sales results that finally meet or exceed forecasts.

Deer Consumer Products (Nasdaq: DEER)
Deer makes kitchen appliances for global brands like Stanley Black & Decker (NYSE: SWK) and is now ramping up domestic sales by steadily building its brand among Chinese consumers. I've written about Deer several times before, always noting that the company is a solid grower and nicely profitable. Shares have risen more than +50% since I last visited this stock in August, yet they still look cheap.

Deer announced impressive third quarter results last week, highlighted by a +108% jump in sales and a +125% jump in net income. Thanks to recent contract wins, Deer expects EPS to grow more than +30% in 2011 to around $1.10 to $1.20. Shares trade for around 10 times that view. This remains, in my view, as the best play on the rising Chinese middle class.

Action to Take –> China XD Plastics and China Security & Surveillance are extremely cheap due to dilution concerns that should abate. Deer, while not quite as cheap, still looks very undervalued in the context of long-term growth. All three of these stocks look like long-term winners, and should garner more investor appreciation in 2011.


– 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
3 Chinese Rebound Stocks

Read more here:
3 Chinese Rebound Stocks

Uncategorized

3 Chinese Rebound Stocks

November 17th, 2010

3 Chinese Rebound Stocks

It's been a tough year for Chinese stocks that trade in the United States. Many of them have sold off — and stayed cheap — even as they sport impressive growth rates and low valuations. Thanks to a sharp drop on Friday on renewed concerns about an overheating economy, these cheap stocks have become even cheaper.

To be sure, the Chinese economy faces hurdles on its path to higher GDP. [See "5 Landmines for Chinese Stocks in 2011"]

Nevertheless, even as investors stay focused on near-term challenges, the long-term opportunities remain as robust as ever, a message perhaps lost when you look at 52-week stock charts of many China-based firms, a number of which are now off more than -40% from their 52-week high.

I've pulled together a short list of beaten-down names. Let's take a closer look at some potential rebound candidates.

China XD Plastics (Nasdaq: CDXC)
China XD is the largest supplier of modified plastics to the burgeoning Chinese automotive industry. The company had its first full year of operations in 2007 and is on track to post more than $200 million in sales this year — a +65% jump from 2009. Yet China HD has soured with investors recently after seeking to sell more shares to raise fresh capital. Shares fell nearly -20% in early October on that announcement and have never recovered.

Serial capital-raising has been a major negative for many Chinese companies, as they don't understand U.S. investors' predilection for one-and-done capital-raising. To be fair, that capital raise has a good purpose: the company's manufacturing capacity will increase +35% in 2011. And that should propel earnings per share (EPS) from an expected $0.50 this year to more than $0.80 next year, despite the recent share dilution. Shares currently trade for less than seven times projected 2011 profits.

The real catalyst for this stock will be management's announcement that cash flow can cover any future expansion plans. For now, shares appear to have found a floor and should move back into favor next year as investors once again focus on the growth dynamics of the robust Chinese auto market.

China Security & Surveillance (NYSE: CSR)
How do you analyze a company that is winning loads of new business but keeps reporting tepid sales? That's the conundrum faced by investors with China Security & Surveillance, which continues to build a massive backlog on the heels of new contract wins. But those contracts are stretched out over an extended period of time, so the company has lagged revenue forecasts for four straight quarters. Sales will likely still grow an impressive +25% this year, but that's half the forecasted growth rate expected earlier in the year.

The third quarter brought more of the same. Sales growth, due to the timing of some contracts, was just +14% compared with a year earlier, but backlog shot up from $213 million at the end of June to more than $400 million.

As a quick recap, China Security & Surveillance is one of the leading suppliers of security gear to companies and governments in China. The company is benefiting from a government-mandated “safe-city” program that seeks to deploy banks of video cameras, traffic management systems and emergency response systems in China's 200 largest cities.

As is the case with China XD Plastics, China Security & Surveillance has soured investors with its serial capital raising efforts that dilute existing shareholders. The number of shares outstanding shot up from 53 million a year ago to a recent 88 million. That led to a recent -30% quarterly drop in EPS, even though net income was +50% higher than a year ago. Management anticipates only modest growth in shares outstanding next year, which should enable EPS to move toward the $1.15 mark. Shares trade for just five times that forecast. That multiple won't stay that low in 2011 — if management can refrain from diluting shares further and if it can deliver sales results that finally meet or exceed forecasts.

Deer Consumer Products (Nasdaq: DEER)
Deer makes kitchen appliances for global brands like Stanley Black & Decker (NYSE: SWK) and is now ramping up domestic sales by steadily building its brand among Chinese consumers. I've written about Deer several times before, always noting that the company is a solid grower and nicely profitable. Shares have risen more than +50% since I last visited this stock in August, yet they still look cheap.

Deer announced impressive third quarter results last week, highlighted by a +108% jump in sales and a +125% jump in net income. Thanks to recent contract wins, Deer expects EPS to grow more than +30% in 2011 to around $1.10 to $1.20. Shares trade for around 10 times that view. This remains, in my view, as the best play on the rising Chinese middle class.

Action to Take –> China XD Plastics and China Security & Surveillance are extremely cheap due to dilution concerns that should abate. Deer, while not quite as cheap, still looks very undervalued in the context of long-term growth. All three of these stocks look like long-term winners, and should garner more investor appreciation in 2011.


– 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
3 Chinese Rebound Stocks

Read more here:
3 Chinese Rebound Stocks

Uncategorized

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

November 17th, 2010

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

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

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

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

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

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

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

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

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

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

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

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

– Ryan Fuhrmann

P.S. –

Uncategorized

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

November 17th, 2010

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

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

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

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

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

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

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

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

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

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

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

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

– Ryan Fuhrmann

P.S. –

Uncategorized

This Recent IPO Could Soar

November 17th, 2010

This Recent IPO Could Soar

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

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

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

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

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

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

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

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

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

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

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

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


– David Sterman

P.S. –

Uncategorized

This Recent IPO Could Soar

November 17th, 2010

This Recent IPO Could Soar

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

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

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

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

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

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

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

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

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

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

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

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


– David Sterman

P.S. –

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Bad News: Stocks Are Loved

November 17th, 2010

Bad News: Stocks Are Loved

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

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

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

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

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

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

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

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

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

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


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
Bad News: Stocks Are Loved

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Bad News: Stocks Are Loved

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