The Chinese IPO Nobody is Talking About

November 20th, 2010

The Chinese IPO Nobody is Talking About

Just a year after going bust, GM (NYSE: GM) showed it can get its groove back. Its IPO was impressive, with a large increase in the price range as well as the number of shares issued. [Read: "GM's Back -- And So Are These Key Suppliers".]

While GM has the advantage of a streamlined operating structure, the company is also getting a nice lift from growth in China. But in light of the competition, there are some lingering concerns that the company will fall back on bad habits.

The good news is that investors have some other ways to participate in the growth of the Chinese auto market. For example, there are several online operators that will likely post substantial growth for some time. In fact, in the midst of all the attention on GM's IPO this week, one of them went public this week.

But first, let's take a look at the key auto trends in China. All in all, the growth in Internet usage continues at a rapid pace. There are currently 384 million Internet users, up from 110 million in 2005. By 2013, the number is projected to reach a staggering 664 million (according to iResearch).

What's more, China is the world's largest auto market, as the country sees gains in income and economic growth. It also helps that there have been significant investments in roadway infrastructure. For 2010, China is expected to post 17.0 million auto sales. But this is forecasted to reach 21.3 million by 2013 (from a report by J.D. Power).

Finally, the Internet is the primary way for Chinese people to research a purchase decision for a car. Just last year, Chinese auto sites attracted 140 million unique users, up from 29 million in 2005. [These three factors make up what Market Advisor editor Nathan Slaughter calls "catalysts " -- overriding trends that power stocks to huge gains.]

OK, so who is the top online operator? It's a company called Bitauto (Nasdaq: BITA). The company issued 10.6 million shares on the Nasdaq exchange for $12 a piece on Wednesday.

Bitauto operates two main sites, bitauto.com and ucar.cn. They provide extensive details, specifications and consumer reviews on new and used cars. There are also content distribution agreements with 63 third-party sites like Tencent, Yahoo China and Tom Online.

As for making money, Bitauto relies on a variety of revenue streams. These include subscriptions from auto dealers, advertising fees and listing fees. There are also high-end digital marketing services and public relations.

And yes, Bitauto has been growing at a torrid rate. For the past nine months, the company posted $44.7 million in revenue, up +53% compared with the past year. While the company generated a $5.1 million operating profit during this period, there was still an overall loss because of the change in value of its convertible bond. Yet this is more of a technical matter, and besides, the IPO proceeds will help provide a more stable base of financing.

Action to Take –> Bitauto definitely has some risk factors. Looking at the prospectus, the company has 41 million shares outstanding at about $12 each. That puts the market cap at $492 million. Assuming the company generates $6 million in operating income this year (which seems reasonable), the forward multiple would be 82. Then again, this is typical for a Chinese IPO.

At the same time, there are signs that the Chinese economy is slowing down. The prime reason is that the government is taking actions to reduce inflation. In other words, the result could be a slowdown in auto sales.

But for investors looking to capitalize on the Chinese auto market, Bitauto is definitely an attractive play. The company should continue to grow at a strong rate and remain the dominant player in the space. And as seen with other Chinese dot-com players like Baidu (Nasdaq: BIDU), the category leaders often continue to bolster their positions over time as well as their valuations. Thus, a +20% to +30% move should be reasonable target for Bitauto's stock price in the next six months.


– Tom Taulli

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Forbes.com. Read more…

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
The Chinese IPO Nobody is Talking About

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The Chinese IPO Nobody is Talking About

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Debt Delenda Est

November 19th, 2010

The subject is debt; it needs to go away.

Debt was the market’s bête noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue.

In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout…but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers’ demands.

Debt is underrated. For one thing, it is more reliable than asset values. The crisis of ’07-’09 wiped out about a third of the world’s equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact. In terms of the cash flow needed to support it, debt actually grew larger.

Central planners can make a recession appear to go away. With enough hot money, they might warm up asset prices or soothe the swelling unemployment rate. But debt doesn’t cooperate. Neither monetary policy nor fiscal policy will make it go away. Debt demands honesty. The debtor has to fess up, admitting that he is a fool or a knave. Either he owns up to his mistake and defaults…or he cheats.

“With all due respect, US policy is clueless,” said German Finance Minister Wolfgang Schauble. “It’s not that the Americans haven’t pumped enough liquidity into the market. Now to say let’s pump more into the market is not going to solve their problem.”

The English speakers conveniently misunderstand the debt problem. The authorities worked hard not to see the debt crisis coming. They made their careers and reputations by not understanding it. Thousands of them work for governments and central banks…if they caught on to the problem now, they’d probably have to resign.

They pretend that the problem is a lack of “liquidity.” Or a failure of capitalism. Or that the regulators dropped the ball. It is none of those things. Each of those problems can be “solved.” Short liquidity? The feds can add some; as much as you want. Did capitalism lose its way? No problem again, the authorities will apply more central planning. Not enough regulation? Are you kidding; adding regulation is what they do best.

The real problem is debt. In Ireland, for example, investors, householders and bankers all lost their heads in the bubble era. Your editor bought a house in Ireland in 2006. He knew perfectly well it was overpriced. He had walked the streets of Dublin. He had seen storefronts offering property, not just in Dublin…but in Dubrovnik. He had heard people say that “property never goes down.”

Now his house is worth about half what he paid for it – if he could find a buyer. There is no reason to expect that house to ever recover – at least in real terms – to the level it was 3 years ago. That wealth has disappeared. Along with it went the banks’ collateral and the value of the debt it backed. It is all dead. It is no more. It has ceased to be. It is past tense. But, rather than let the banks’ bondholders take the losses they deserved – in rushed the financial authorities with guarantees and more credit. Ireland’s deficit rose to a staggering 30% of GDP. Its national debt will rise from 100% of GDP to 120%.

Meanwhile, California is moving closer to bankruptcy – and borrowing more too. The state is $25 billion in the hole, with no plausible plan to get out. The Milken Institute says unfunded pension liabilities will rise to $10,000 per capita by 2013 – the equivalent of an extra $40,000 mortgage for every household. Like Ireland, California cannot pay the debts it has incurred. The federal government will offer a bailout…but with strings attached.

And soon, the bailers will be in trouble too. According to The Wall Street Journal, a combination of 15 major national governments will have to borrow a total of more than $10 trillion next year, to finance deficits and repay maturing bonds. That’s 27% of their total economic output. It also is equal to about twice the entire world’s annual savings.

The authorities warn about the risk of “contagion.” They sweat to “calm” the markets. But why bother? Debt of this magnitude cannot be repaid. It has gone bad. At least give it a decent burial.

Bill Bonner
for The Daily Reckoning

Debt Delenda Est 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:
Debt Delenda Est




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

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The Madness of Inflating Away the Debt Burden

November 19th, 2010

I get really tired of hearing how “inflation reduces the burden of debt,” which I say is a Gigantic Load Of Hooey (GLOH). And the fact that I say it with a loud, arrogant voice should convince you that I am absolutely correct, beyond the fact that I am obviously some kind of weirdo lunatic in a manic phase of some kind, in which case it would be dangerous to disagree with me about anything.

You can tell that I am scornfully dismissive of anybody who says that “inflation reduces the burden of debt,” because such a scheme only works for a debtor whose income keeps up with inflation AND who pays down the old debts with cash.

Otherwise, I can’t imagine how it would work, and nobody has ever explained it to me, as I would really, really, really like to know how I can borrow money at 5%, and then “reduce the burden of my debt” by borrowing money at 10% (interest rates having gone up in response to the inflation) to pay off the 5% debt just because inflation is high! Wow! Must be part of the “new math”!

The reason I want to know is that my measly little paycheck barely covers subsistence living anymore, and my job is hanging by a thread due to the embarrassing fact that I am an incompetent, untrustworthy, arrogant, gold-bug, gun-nut, Austrian Business-Cycle Theorist, paranoid, greedy, lazy lunatic who is always taking company time to bellyache about how “We’re Freaking Doomed (WFD)!” to be destroyed by inflation since the foul, filthy, fetid Federal Reserve is outrageously creating so (pause) much (pause) freaking (pause) money.

This point was brought home to me in my last Quarterly Employee Evaluation at work, which ended up with me being put back on Probationary Status and having my name tag taken away from me. Now I am again known as a lowly “Trainee.”

The reason is that they have video evidence, thanks to the new security surveillance system they installed, that I seldom actually work, and am usually walking around, urging everyone to buy gold, silver and oil, sometimes adding emphasis by running up and down the hallways yelling about how the Federal Reserve creating so much money so that the odious Obama administration can deficit-spend ridiculously excessive amounts of money, like the video tape segment showing me staggering up the hallway outside my stupid little office, yelling, “We’re freaking doomed!” and obviously drunk as a skunk.

The Human Resources department has transcribed what I said, which is, “We’re freaking doomed! Buy gold, silver and oil stocks, you morons! Buy gold and silver, or you and your precious fiat dollars will be destroyed by inflation caused by the Federal Reserve creating so much excess fiat money, and soon prices will rise so high that you will be destroyed, and your poor starving children will curse you for their poverty and their suffering as you all scratch around in the dirt, desperately looking for tasty bugs and weeds to eat, and as I curse you now for your stupidity and your idiotic leftist proclivities to constantly elect a corrupt government that spends its considerable time coming up with new ways of redistributing money, goods and services, and then deficit-spending $14 trillion more when even that mountain of money proves insufficient, to more and more people in a laughable leftist effort to achieve equal outcomes, and regulating out of existence the very business enterprises that can make enough profit to pay the damned taxes necessary to have such a nanny state! It’s insane! We’re Freaking Doomed! WFD! Do you hear me, you morons? WFD!”

In my own defense, I thought it was pretty coherent and completely correct reasoning, despite the slurring of words and the falling onto the walls, and I so suggested that it indicated a certain sobriety.

So I asked that the phrase “drunken oaf” be stricken from the narrative in my permanent record, but they just smiled at me and said, “We don’t operate that way.”

Then I pointed out that my instructional and entertaining episode cleverly morphed into me imitating an airplane, as evidenced by the video showing me holding out my arms like the wings of a jet airplane, swooping and turning and shooting machinegun bullets “dadadadadadada!” some of which ricocheted with a “Tea-oo! Tee-oo!” sound.

Obviously, imitating a strafing airplane made a lot of logical sense, again indicating my sobriety, as it is the perfect metaphor in respect to my argument that the Federal Reserve and the government are foul, thieving, lying, greedy, corrupt demons from hell who have destroyed this country, the former by creating too, too much money and the latter for deficit-spending it, and for which they each deserve the same fate as King Kong.

Unfortunately, the incriminating videos and my poor showing on the recent Employee Performance Statistical Analysis is what the Human Resources department and my stupid boss wanted to talk about, yammer, yammer, yammer, and I never got a chance to ask them, “How does inflation reduce the burden of your debt?”

Instead, I was forced to merely ponder the mystery of “inflation reducing the burden of debt” as they talked and talked, and pointed out things to each other on different pieces of paper, and every time they stopped talking, I solemnly nodded my head, and then they went on talking again.

Anyway, I never solved the mystery of how inflation reduces the burden of debt, although I am still sure that anyone who thinks otherwise is a real, first-class moron.

But probably not the kind of moron who appreciates the Mogambo Investment Guidelines For Morons (MIGFM), a terrific plan which was designed for utter simplicity and complete lack of decision-making, explaining the MIGFM slogan, “Designed by a moron for morons!”

The utter simplicity is to buy gold, silver and oil when the money supply is being increased by the Federal Reserve merely creating it out of thin air, and doubly so when the federal government was deficit-spending it, and triply so when the Federal Reserve itself is using the money it created to buy the Treasury debt that needs to be bought so that the federal government can deficit-spend it.

It’s so simple that we morons, in our childish delight, say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

The Madness of Inflating Away the Debt Burden originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Madness of Inflating Away the Debt Burden




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

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Looking Back on the Grasshoppers’ Indian Summer

November 19th, 2010

It was as though the winter would never arrive. The slumbering summer stock markets of 2010 lept to life. September recorded the best market month since 1939. In early October, with Wall Street jubilating, it cracked the 11,000 ceiling … a mere 3,000 points shy of its October 2007 high.

Nothing, not even the facts, could mute the summer chirping of gleeful grasshoppers on that ceiling-cracking Friday. Not the Wall Street Journal front-page headline, “Dollar’s Fall Roils World.” Not Bloomberg’s headline, “Payroll Drop in U.S. Exceeds Forecasts.” Nor the fact that 95,000 jobs were lost in September … and that the jobless rate had topped 9.5 percent for 14 straight months – the longest losing stretch since the 1930s. No news was bad news on that buoyant October 7th market day.

The recession was over. The Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of such matters, officially cited June 2009 as the date the recession had “officially” ended.

“We will not have a double-dip recession at all. I see our businesses coming back almost across the board. I am a huge bull on this country,” exulted Grasshopper-in-Chief, Warren Buffett, “America’s most beloved investor,” according to Forbes magazine, which ranks billionaires for numbers of billions and also for belovedableness.

In full Indian Summer delirium, the “best and brightest” and richest of grasshoppers appeared incapable of believing that winter was on its way, even though the signs were everywhere.

Unemployment kept rising, GDP was slowing, the trade deficit worsening, and despite trillions already squandered on ineffective stimulus programs, the Fed signaled it would keep pumping even more trillions into the economy in the belief that what didn’t work before would somehow work later.

The dollar was falling like autumn leaves. Unintended or not, what the Fed’s money dumping policies had achieved was to devalue the currency. Couldn’t the grasshoppers see the consequences?

Commodities Prices Soar as US Dollar Hits 10-Month Low

The US dollar tumbled to a 10-month low against a basket of currencies yesterday, lifting oil prices and driving up gold to a record high.

The dollar has been weakened by concern in global financial markets that the Federal Reserve will soon embark upon a programme of quantitative easing (QE) – asset purchases – in order to rescue a floundering economic recovery.

Investors, fearing the world’s most powerful central bank will soon pump more dollars into the financial system, have fled from the greenback for the safety of gold and crude oil futures.  Gold prices rallied to record highs of $1387.10 an ounce yesterday before falling back to around $1375.

Silver, oil and copper also rose in value on the back of dollar weakness. Since commodities are priced in dollars, they are more of a bargain for traders who buy them with foreign currencies.  (Herald Scotland, 15 Oct 2010)

The aftermath of a plummeting dollar was as predictable and ineluctable as winter following autumn. The defining element was the price of gold. And it was not only Fed policy that was driving it higher.

“War” had been declared!

“We are experiencing a currency war,” said Brazilian Finance Minister Guido Mantega. “Devaluing currencies artificially is a global strategy.”

In an effort to juice exports, nations vied with each other to see who could devalue their currencies the most. What an ingenious concept – printing cheap paper!

For exporters, at least it held open the possibility of providing a temporary boost. But for everyone else, it simply meant that it would take more paper to buy what less paper used to buy. That’s what you get when you devalue the currency.

The world was flooded with cheap paper. It was very, very easy to understand why gold prices were going higher and why they would continue to go higher still.

Regards,

Gerald Celente
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Trends Journal, which is published by Gerald Celente. The Trends Journal distills the ongoing research of The Trends Research Institute into a concise, readily accessible form. Click here to learn more about and subscribe to The Trends Journal.]

Looking Back on the Grasshoppers’ Indian Summer 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:
Looking Back on the Grasshoppers’ Indian Summer




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

The $700 Billion Stimulus That Won’t Cost Taxpayers a Dime

November 19th, 2010

The $700 Billion Stimulus That Won't Cost Taxpayers a Dime

It could be just the thing to put an end to the economic malaise.

If enacted, shareholders of dozens — even hundreds — of companies would have to be ready for a tidal wave of stock buybacks and dividend hikes.

And the overall boost to the economy? I think it would lead to billions of dollars in new investment and expansion, creating millions of jobs. It doesn't take much of a stretch to realize that would be a boon for the economy and would send the stock market soaring.

In fact, Washington has done exactly what I'm proposing before — back in 2004. Back then, it added more than $300 billion to the economy, but I think it would be more than double that amount this time around.

That's why I think of it as a $700 billion stimulus package — except that it wouldn't add one penny to the national debt.

It almost sounds too good to be true, but I think everything I've just said could happen in the coming year.
And all that has to happen is Congress needs to see the advantage of allowing companies to repatriate — that is, bring back home to the United States — the cash they hold abroad to avoid U.S. taxes. Corporations are behind the move, unions are behind it, and the incoming Congress members are behind it, too. It's time to get ready.

Tax holiday spells market boon
The truth is, American companies are flush with cash.

At last count, S&P 500 members were sitting on a $2 trillion mountain of liquid reserves. Ordinarily, surplus profits are spent on equipment upgrades, new factories and other such investments, known on the Street as “capex” spending. But right now, the environment is just too uncertain. Any cash not earmarked for dividends and stock buybacks has been hoarded.

And despite having plenty of cash on hand, companies are actively borrowing rather than writing checks from their own account. Walmart (NYSE: WMT), for example, borrowed $3 billion in June and is now planning to sell new bond notes.

That has many investors scratching their heads. Why would companies take on new debt when they already have $2 trillion sitting idle in the bank?

Sure interest rates are low, but half of that cash pile is tied up overseas.

Cisco (Nasdaq: CSCO) reportedly has $30 billion in foreign banks. Johnson & Johnson (NYSE: JNJ) and others have billions more. Unfortunately, the repatriation of foreign profits is subject to a punitive tax of up to 35% by Uncle Sam.

That means the money can't be brought home unless the companies want to see a third of it vanish. So companies are simply letting it sit, choosing instead to borrow from bond investors rather than pay the tax. Microsoft (Nasdaq: MSFT) just borrowed $6 billion even though it has roughly $40 billion in idle cash. Crazy.

Meanwhile, everyone is looking for pragmatic solutions to end the economic malaise and put people back to work. A temporary tax holiday for repatriated profits is gaining ground with politicians, especially the new members of Congress headed to Washington.

It would mean multinationals could bring up to $1 trillion in accumulated income back to the U.S. private sector — where it could be harnessed and invested in countless job-creating projects.

A few weeks ago, Intel (Nasdaq: INTC) unveiled plans for an $8 billion expansion project involving manufacturing facilities in Arizona and Oregon. Construction alone will create upwards of 8,000 new jobs. Instead of being big news, that could be just a drop in the bucket if Congress acted.

Action to Take –> We've tried every emergency fiscal and monetary measure in the book with minimal results. This common-sense approach will work. We know because it has happened before.

When the Homeland Investment Act of 2004 slashed taxes from 35% to 5.25%, companies responded by bringing $315 billion home, much of which was plowed back into the economy. I'd expect this to happen again, only on a much larger scale. And if it does, expect a big rally in the market.


– Nathan Slaughter

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Nathan Slaughter's previous experience includes

Uncategorized

The $700 Billion Stimulus That Won’t Cost Taxpayers a Dime

November 19th, 2010

The $700 Billion Stimulus That Won't Cost Taxpayers a Dime

It could be just the thing to put an end to the economic malaise.

If enacted, shareholders of dozens — even hundreds — of companies would have to be ready for a tidal wave of stock buybacks and dividend hikes.

And the overall boost to the economy? I think it would lead to billions of dollars in new investment and expansion, creating millions of jobs. It doesn't take much of a stretch to realize that would be a boon for the economy and would send the stock market soaring.

In fact, Washington has done exactly what I'm proposing before — back in 2004. Back then, it added more than $300 billion to the economy, but I think it would be more than double that amount this time around.

That's why I think of it as a $700 billion stimulus package — except that it wouldn't add one penny to the national debt.

It almost sounds too good to be true, but I think everything I've just said could happen in the coming year.
And all that has to happen is Congress needs to see the advantage of allowing companies to repatriate — that is, bring back home to the United States — the cash they hold abroad to avoid U.S. taxes. Corporations are behind the move, unions are behind it, and the incoming Congress members are behind it, too. It's time to get ready.

Tax holiday spells market boon
The truth is, American companies are flush with cash.

At last count, S&P 500 members were sitting on a $2 trillion mountain of liquid reserves. Ordinarily, surplus profits are spent on equipment upgrades, new factories and other such investments, known on the Street as “capex” spending. But right now, the environment is just too uncertain. Any cash not earmarked for dividends and stock buybacks has been hoarded.

And despite having plenty of cash on hand, companies are actively borrowing rather than writing checks from their own account. Walmart (NYSE: WMT), for example, borrowed $3 billion in June and is now planning to sell new bond notes.

That has many investors scratching their heads. Why would companies take on new debt when they already have $2 trillion sitting idle in the bank?

Sure interest rates are low, but half of that cash pile is tied up overseas.

Cisco (Nasdaq: CSCO) reportedly has $30 billion in foreign banks. Johnson & Johnson (NYSE: JNJ) and others have billions more. Unfortunately, the repatriation of foreign profits is subject to a punitive tax of up to 35% by Uncle Sam.

That means the money can't be brought home unless the companies want to see a third of it vanish. So companies are simply letting it sit, choosing instead to borrow from bond investors rather than pay the tax. Microsoft (Nasdaq: MSFT) just borrowed $6 billion even though it has roughly $40 billion in idle cash. Crazy.

Meanwhile, everyone is looking for pragmatic solutions to end the economic malaise and put people back to work. A temporary tax holiday for repatriated profits is gaining ground with politicians, especially the new members of Congress headed to Washington.

It would mean multinationals could bring up to $1 trillion in accumulated income back to the U.S. private sector — where it could be harnessed and invested in countless job-creating projects.

A few weeks ago, Intel (Nasdaq: INTC) unveiled plans for an $8 billion expansion project involving manufacturing facilities in Arizona and Oregon. Construction alone will create upwards of 8,000 new jobs. Instead of being big news, that could be just a drop in the bucket if Congress acted.

Action to Take –> We've tried every emergency fiscal and monetary measure in the book with minimal results. This common-sense approach will work. We know because it has happened before.

When the Homeland Investment Act of 2004 slashed taxes from 35% to 5.25%, companies responded by bringing $315 billion home, much of which was plowed back into the economy. I'd expect this to happen again, only on a much larger scale. And if it does, expect a big rally in the market.


– Nathan Slaughter

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Nathan Slaughter's previous experience includes

Uncategorized

Why Fed Meddling is Only Prolonging the Financial Crisis

November 19th, 2010

Here’s the story:

The Irish caved in. Apparently, they negotiated a deal. They’re going to go for a bailout.

This was all it took to bring stock market investors relief from their bout with temporary sanity. They sent the Dow up 173 points.

The New York Times tells the tale:

Stocks in the United States rose Thursday as expectations grew that Ireland would receive billions of euros from international lenders to rescue its banks, easing concerns about the health of Europe’s financial system.

Shares of General Motors began trading after the company’s initial public offering, the largest in United States history. The shares surged nearly 8 percent after the market opened, and in late trading fell back to $34.07 on the New York Stock Exchange. The stock had been priced at $33 on Wednesday evening.

Ireland has moved more aggressively than many countries to address problems brought on by the financial crisis, but investors have been losing confidence in its banks in recent months, and a Greek-style rescue now appears imminent. On Wednesday, the British government signaled that it could offer Ireland direct financial aid as well.

What are investors thinking? A Greek-style rescue? How about a Titanic-style sea voyage? How about a Little Big Horn-style pony trek?

Greece is still going broke. It is just a matter of time. And now this Irish bailout does the same thing. It postpones the real problem – and makes it worse.

Investors are probably thinking – “everything is under control”…“no need to worry”…“the authorities know what they are doing.”

Well, we’ve got news. The authorities have no idea what they are doing. If the Irish authorities had seen the problem coming they would have forced the banks to straighten up long before 2007. And then, if they had any idea what they were up to, they never would have written the banks a blank check when they got into trouble.

They are just muddling along from one crisis to the next. If the Irish had just let their banks go bust in the first place, they wouldn’t be in this mess, in other words. And if the Europeans would just let Ireland go bust, well…we don’t know what would happen…but we’d like to watch!

Meanwhile, in the US, the municipal bond market seems to be on the edge of chaos lately. It is probably only a matter of time until the Fed starts buying muni bonds as well as US Treasury bonds. Why not? Neither one is good for the money.

State and local governments made promises during the fat years. Now that the lean years are here, they’re having a hard time keeping them. Just like the feds. Just like the Irish. Just like the Greeks.

To their credit the Irish, Greeks, Brits – and others – have begun to make cuts. Even government employees are having their hours or their salaries trimmed.

Not so in America. The process of cutting has barely begun. (About which…more on Monday…)

Meanwhile, a news report tells us that many rust-belt cities are demolishing buildings. Owners aren’t paying property taxes and the buildings are not worth the maintenance it takes to keep them standing.

And here’s Bloomberg with more news from the homing sector:

Foreclosures on prime fixed-rate mortgages in the US jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers.

The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months, the Mortgage Bankers Association said in a report today. New foreclosures rose to 0.93 percent from 0.71 percent. Both numbers were the highest in the 12 years since the Washington-based trade group started tracking the categories.

“The increase in these plain-vanilla type of loans to the highest numbers ever show us it really is being driven by the economic environment,” [Michael] Fratantoni, [the Mortgage Bankers Association’s vice president of research and economics], said in a telephone interview. “It’s not going to turn around until we get more significant job growth.”

New foreclosures against all types of mortgages, which also include subprime, rose to 1.34 percent, the highest level in a year, according to the report.

Bill Bonner
for The Daily Reckoning

Why Fed Meddling is Only Prolonging the Financial Crisis 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 Fed Meddling is Only Prolonging the Financial Crisis




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

List of Fed’s enemies grows longer as bond market carnage spreads

November 19th, 2010

Mike Larson

It’s always gratifying when the mainstream media picks up on a theme you’ve been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we’ve seen in recent days:

“Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase” — Wall Street Journal, November 15

“Under Attack, Fed Officials Defend Buying of Bonds” — New York Times, November 16

“Fed officials defend $600bn stimulus” — Financial Times, November 16

“Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits” — Wall Street Journal, November 16

The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.

Key policymakers are giving rare, on-the-record interviews about QE2′s benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.

Fed Fighting a Losing Battle
Defending the Undefendable!

My take? The Fed is right to worry. I say that because its QE2 program isn’t just not helping. It’s actually hurting the markets.

Take long-term Treasury yields …

As I’ve been pointing out recently, they’ve been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.

Then there’s the mortgage market …

Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed’s policy helping homeowners.

And then there’s the municipal bond market …

It has completely imploded in the past several days. Take a look at this chart of the iShares S&P National AMT-Free Municipal Bond Fund (MUB). It’s one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.

You can see it’s in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it’s made in the past 15 months … in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!

The move doesn’t stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields …

Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They’re also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.

But clearly, the cost of borrowing is now not only going up for Uncle Sam. It’s also rising for governments all over the country, and mortgage borrowers. And it’s starting to inch higher for corporate debtholders.

Opposition Rising in Washington —
and Everywhere Else

As interest rates surge, the opposition to Bernanke's policy intensifies.
As interest rates surge, the opposition to Bernanke’s policy intensifies.

Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it’s too late?

The group, which includes Michael Boskin, a former chairman of the President’s Council of Economic Advisors … Douglas Holtz-Eakin, a former director of the Congressional Budget Office … and Kevin Hassett, a former senior economist at the Fed itself, said:

“We subscribe to your statement in The Washington Post on November 4 that ‘the Federal Reserve cannot solve all the economy’s problems on its own.’ In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

“The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.”

The rising opposition to the Fed is further evidence that the global money war I’ve been worried about is intensifying. It’s proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.

We’ll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.

Until next time,

Mike

P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. And our panel of experts explained why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Read more here:
List of Fed’s enemies grows longer as bond market carnage spreads

Commodities, ETF, Mutual Fund, Uncategorized

List of Fed’s enemies grows longer as bond market carnage spreads

November 19th, 2010

Mike Larson

It’s always gratifying when the mainstream media picks up on a theme you’ve been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we’ve seen in recent days:

“Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase” — Wall Street Journal, November 15

“Under Attack, Fed Officials Defend Buying of Bonds” — New York Times, November 16

“Fed officials defend $600bn stimulus” — Financial Times, November 16

“Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits” — Wall Street Journal, November 16

The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.

Key policymakers are giving rare, on-the-record interviews about QE2′s benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.

Fed Fighting a Losing Battle
Defending the Undefendable!

My take? The Fed is right to worry. I say that because its QE2 program isn’t just not helping. It’s actually hurting the markets.

Take long-term Treasury yields …

As I’ve been pointing out recently, they’ve been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.

Then there’s the mortgage market …

Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed’s policy helping homeowners.

And then there’s the municipal bond market …

It has completely imploded in the past several days. Take a look at this chart of the iShares S&P National AMT-Free Municipal Bond Fund (MUB). It’s one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.

You can see it’s in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it’s made in the past 15 months … in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!

The move doesn’t stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields …

Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They’re also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.

But clearly, the cost of borrowing is now not only going up for Uncle Sam. It’s also rising for governments all over the country, and mortgage borrowers. And it’s starting to inch higher for corporate debtholders.

Opposition Rising in Washington —
and Everywhere Else

As interest rates surge, the opposition to Bernanke's policy intensifies.
As interest rates surge, the opposition to Bernanke’s policy intensifies.

Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it’s too late?

The group, which includes Michael Boskin, a former chairman of the President’s Council of Economic Advisors … Douglas Holtz-Eakin, a former director of the Congressional Budget Office … and Kevin Hassett, a former senior economist at the Fed itself, said:

“We subscribe to your statement in The Washington Post on November 4 that ‘the Federal Reserve cannot solve all the economy’s problems on its own.’ In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

“The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.”

The rising opposition to the Fed is further evidence that the global money war I’ve been worried about is intensifying. It’s proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.

We’ll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.

Until next time,

Mike

P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. And our panel of experts explained why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.

If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Read more here:
List of Fed’s enemies grows longer as bond market carnage spreads

Commodities, ETF, Mutual Fund, Uncategorized

The Most Undervalued Stock in India

November 19th, 2010

The Most Undervalued Stock in India

A couple of weeks ago, I wrote an article about India's vast potential for both economic development and profit for investors. ["Read why I think India's a better long-term investment than China"] In that article, I mentioned a few of the standard, well-known Indian stocks, but some of these tend to be expensive, so I wanted to delve deeper into lesser-known Indian stocks that might have greater potential down the road.

My search led me to a common space for well-known Indian stocks (outsourcing), but yet this company that has flown under the radar. Even better, its stock is undervalued and is set to potentially double within a couple years.

It's little secret that India's primary growth industry is outsourcing. This is where, to save time and cost, companies shift workloads to a third party instead of doing it themselves. Usually this consists of more mundane, basic tasks, but can also consist of more important functions, such as running important information technology (IT) transactions.

The leading firms in the IT space are well known and consist of Wipro (NYSE: WIT), Infosys (Nasdaq: INFY), and certain divisions of conglomerate the Tata Group Companies. The investment tradeoff of being well known is that the stocks are not cheap. Wipro's American Depositary Receipts (ADRs) trade at nearly 30 times forward earnings. Infosys trades for more than 25 times forward earnings.

Outsourcing is an important driver in other industries, too, but for some reason doesn't receive as much as attention in the marketplace. It should, because the advantages that India possesses in the IT sector also carry over to outsourcing in general. Telecom outsourcing is a close relative to IT in general and subject to similar drivers.

This brings us to WNS Holdings (NYSE: WNS). WNS began in 1996 as an in-house division of European airline giant British Airways. It is focused specifically on business process outsourcing, or BPO, for short. Specifically, WNS is involved in BPO activities that span from handling customer calls, providing billing support such as the handling of client sales and payments, as well as taking care of other accounting functions, and all the records that have to be maintained to run the financial supply chain.

Uncategorized

The Safest Dividend in the S&P

November 19th, 2010

The Safest Dividend in the S&P

If you're a longtime subscriber to my free Dividend Opportunities newsletter, you might remember an issue way back in March where I hunted down the safest dividend in the S&P 500.

The response to my article was overwhelming. So I've decided to provide an update — taking the same rigorous metrics I applied before to discover where the safest dividend in the S&P is today.

Thankfully, the draconian cuts that we saw in 2008-2009 seem to be history. Believe it or not, these cuts added up to $52 billion in lost income during 2009 — and that's just the cuts for stocks in the S&P 500. To put that figure in perspective, losing $52 billion would put Warren Buffett into bankruptcy.

Today the news looks much brighter: Standard & Poor's reports that through the first three quarters of 2010, 1,033 companies have increased dividend payments, compared with 707 in 2009. Even so, dividend safety still has its place. During the first three quarters of the year, 117 companies cut their payments.

To make sure you don't have to worry about dividend cuts, I've taken a look at every dividend-payer in the S&P 500 to find the safest yields available right now. Let's see who took home the title…

Safety Criteria #1: Yield
When it comes to yield, it usually takes something above 6% to garner even a second look from me. So I started my search with all the stocks within the S&P 500 that yield above that magic 6% number.

As I suspected, it turns out the common stocks in the S&P 500 don't offer much in the way of yields overall, but you can still find a few individual companies offering attractive payments. (For the record, I typically broaden my income search to include closed-end funds, exchange-traded bonds, master limited partnerships — and a bevy of other asset types — to bring readers of Dividend Opportunities and my premium High-Yield Investing newsletter the most attractive yields.)

In total, eight stocks in the S&P (only 1.6% of the total) yielded 6% or more. Of those, the highest-yielding stock was Frontier Communications (NYSE: FTR), which pays investors 8.4% a year.

With this handful of stocks in focus, I turned to my next metric to uncover the safest dividend: earnings power.

Safety Criteria #2: Earnings Power
It's not uncommon for “sick” stocks to carry high yields. Based on a poor outlook, investors will dump the shares, causing the yield to go up. To combat this potential pitfall, I looked at the one-year growth in operating income for each of the eight stocks with a yield above 6%.

Operating income is the profit realized from the company's day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company's growth than earnings per share, which can be manipulated to show stronger results.

Given the slow recovery in the economy, I searched for companies on my high-yield list able to manage any growth in operating income during the trailing twelve months, indicating the business was still able to thrive after one of the worst recessions in recent memory. After screening for positive one-year growth in operating income, I was left with the four candidates shown in my table:

Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of cash available each quarter against how much is paid in dividends, we can know whether a company can continue paying its current dividend even if conditions worsen.

For the payout ratios, I looked simply at free cash flow during the trailing 12 months, compared to dividends paid. Many investors look at earnings, but earnings can sometimes be misleading. Instead, free cash flow is a measure of cash generated by the company after capital expenditures. This cash can be used for just about anything — expansion, research and development, or most importantly, dividends. Here's what I found:

You can see that all the high-yielders here had payout ratios under 100% based on free cash flow during the last twelve months. However, given cigarette manufacturer Altria's 98% payout ratio, I did find it riskier than the rest of the list. Nearly all its free cash flow was spent on dividends. This doesn't mean the company will cut the payment, but the risk appeared much higher than with the other three members of our list.

Safety Criteria #4: Proven Track Record
To finally nail down what I think is the safest dividend in the S&P, I took a look at the track record of the three stocks left in the running.

I gave special credit to those companies that maintain — and raise — dividend payments through thick and thin. This shows dedication to paying dividends and also that the company will maintain its payment if it hits a rough patch.

Action to Take –> Looking into the track record of each of these companies offered mixed results. Frontier Communications, a telecom provider based in Connecticut, had the lowest payout ratio and highest yield, but the company recently cut its dividend to $0.19 per share from $0.25. This reduced dividend should ensure its safety for the years ahead, but it does leave a sour taste in the mouths of long-time investors.

Apart from Frontier, Windstream Corp. and CenturyLink, both telecom stocks as well, have above-average yields and have demonstrated an ability to cover their dividends under tough economic conditions.

If pressed, I'd have to tip the scale to Windstream, giving favor to its longer track record of paying high yields. But honestly, it looks like all three of these options should provide a high and stable yield for the coming years.


– Carla Pasternak

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak's latest course, The 5 Rules Every Income Investor Has to Know.

Carla Pasternak

OPTIONS, Uncategorized

The Safest Dividend in the S&P

November 19th, 2010

The Safest Dividend in the S&P

If you're a longtime subscriber to my free Dividend Opportunities newsletter, you might remember an issue way back in March where I hunted down the safest dividend in the S&P 500.

The response to my article was overwhelming. So I've decided to provide an update — taking the same rigorous metrics I applied before to discover where the safest dividend in the S&P is today.

Thankfully, the draconian cuts that we saw in 2008-2009 seem to be history. Believe it or not, these cuts added up to $52 billion in lost income during 2009 — and that's just the cuts for stocks in the S&P 500. To put that figure in perspective, losing $52 billion would put Warren Buffett into bankruptcy.

Today the news looks much brighter: Standard & Poor's reports that through the first three quarters of 2010, 1,033 companies have increased dividend payments, compared with 707 in 2009. Even so, dividend safety still has its place. During the first three quarters of the year, 117 companies cut their payments.

To make sure you don't have to worry about dividend cuts, I've taken a look at every dividend-payer in the S&P 500 to find the safest yields available right now. Let's see who took home the title…

Safety Criteria #1: Yield
When it comes to yield, it usually takes something above 6% to garner even a second look from me. So I started my search with all the stocks within the S&P 500 that yield above that magic 6% number.

As I suspected, it turns out the common stocks in the S&P 500 don't offer much in the way of yields overall, but you can still find a few individual companies offering attractive payments. (For the record, I typically broaden my income search to include closed-end funds, exchange-traded bonds, master limited partnerships — and a bevy of other asset types — to bring readers of Dividend Opportunities and my premium High-Yield Investing newsletter the most attractive yields.)

In total, eight stocks in the S&P (only 1.6% of the total) yielded 6% or more. Of those, the highest-yielding stock was Frontier Communications (NYSE: FTR), which pays investors 8.4% a year.

With this handful of stocks in focus, I turned to my next metric to uncover the safest dividend: earnings power.

Safety Criteria #2: Earnings Power
It's not uncommon for “sick” stocks to carry high yields. Based on a poor outlook, investors will dump the shares, causing the yield to go up. To combat this potential pitfall, I looked at the one-year growth in operating income for each of the eight stocks with a yield above 6%.

Operating income is the profit realized from the company's day-to-day operations, excluding one-time events or special cases. This metric usually gives a better sense of a company's growth than earnings per share, which can be manipulated to show stronger results.

Given the slow recovery in the economy, I searched for companies on my high-yield list able to manage any growth in operating income during the trailing twelve months, indicating the business was still able to thrive after one of the worst recessions in recent memory. After screening for positive one-year growth in operating income, I was left with the four candidates shown in my table:

Safety Criteria #3: Dividend Coverage
No measure of dividend safety carries as much weight as the payout ratio. By comparing the amount of cash available each quarter against how much is paid in dividends, we can know whether a company can continue paying its current dividend even if conditions worsen.

For the payout ratios, I looked simply at free cash flow during the trailing 12 months, compared to dividends paid. Many investors look at earnings, but earnings can sometimes be misleading. Instead, free cash flow is a measure of cash generated by the company after capital expenditures. This cash can be used for just about anything — expansion, research and development, or most importantly, dividends. Here's what I found:

You can see that all the high-yielders here had payout ratios under 100% based on free cash flow during the last twelve months. However, given cigarette manufacturer Altria's 98% payout ratio, I did find it riskier than the rest of the list. Nearly all its free cash flow was spent on dividends. This doesn't mean the company will cut the payment, but the risk appeared much higher than with the other three members of our list.

Safety Criteria #4: Proven Track Record
To finally nail down what I think is the safest dividend in the S&P, I took a look at the track record of the three stocks left in the running.

I gave special credit to those companies that maintain — and raise — dividend payments through thick and thin. This shows dedication to paying dividends and also that the company will maintain its payment if it hits a rough patch.

Action to Take –> Looking into the track record of each of these companies offered mixed results. Frontier Communications, a telecom provider based in Connecticut, had the lowest payout ratio and highest yield, but the company recently cut its dividend to $0.19 per share from $0.25. This reduced dividend should ensure its safety for the years ahead, but it does leave a sour taste in the mouths of long-time investors.

Apart from Frontier, Windstream Corp. and CenturyLink, both telecom stocks as well, have above-average yields and have demonstrated an ability to cover their dividends under tough economic conditions.

If pressed, I'd have to tip the scale to Windstream, giving favor to its longer track record of paying high yields. But honestly, it looks like all three of these options should provide a high and stable yield for the coming years.


– Carla Pasternak

P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak's latest course, The 5 Rules Every Income Investor Has to Know.

Carla Pasternak

OPTIONS, Uncategorized

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks — and You Should, Too

November 19th, 2010

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks -- and You Should, Too

The ranks of “super-investors” are few, highlighted by the likes of Warren Buffett, George Soros and Carl Icahn. Investors like to track their every move.

Smart investors should also watch the moves of David Einhorn, who runs Greenlight Capital. He started with just $1 million in 1996, has made more than +20% a year for his clients, and now manages billions. He's made his name on some high-profile short sales such as Lehman Brothers and Allied Capital (NYSE: AFC). But he's also done quite well on the long side of his portfolio. That's why I review his latest holdings to see what he's buying and selling. In his latest mandated 13-F filing, Einhorn is loading up on two stocks that trade below book value. Here's why.

Ingram Micro (NYSE: IM)
Ingram is the world's largest distributor of computers, printers, scanners, copiers and other tech products, with operations across the globe. It's not a sexy business, but it sure is profitable. During the past three years, Ingram has generated nearly $1 billion in cumulative free cash — right at a time when the economy has been pretty lousy. With recent tweaks to the business, management believes that annual free cash flow could exceed $500 million if global sales rise at a moderate pace.

All that cash flow has created a balance sheet on steroids, as gross cash now stands at more than $1 billion and tangible book value sits at $19.18 a share — nearly +10% above the current stock price. If the company can indeed generate $500 million in annual cash flow in coming years, then book value per share would rise about $3 a share every year, creating annual returns of nearly +20%.

To be sure, Einhorn, who just bought more than $300 million of Ingram's stock, isn't looking for swing-for-the fences returns. Shares are unlikely to move up past the $23 to $25 mark even in a better economy. So this stock may only have +25% to +35% upside during the next few years. But that potential upside is matched by very limited downside thanks to that rock-solid balance sheet.

Trans-Atlantic Holdings (NYSE: TRH)
Companies that are in the business of providing insurance to other insurers (known as re-insurers) need to keep lots of cash on hand in case clients need them to pay up. But this firm, with $13.3 billion on hand, may be carrying too much cash. After all, potential liabilities are less than $10 billion. How did the company get so much cash? By generating at least $600 million in free cash flow in each of the past seven years.

And with all that cash gaining almost no interest, Trans-Atlantic has no choice but to pay out dividends (which offer a paltry 1.6% yield) or buy back stock. Trans-Atlantic is focusing on the latter, having just announced another $200 million buyback program. And as the share count keeps shrinking, per share profits rise. Analysts expect this re-insurer to earn more than $6 a share in 2011, and shares trade for about eight times that forecast.

But Mr. Einhorn is likely here for the balance sheet, not the income statement. Trans-Atlantic carries $4.3 billion in shareholder's equity, well ahead of the company's $3.2 billion market value. (Said another way, the stock trades for just 74% of a book value of $69 a share.) As an added kicker, if and when interest rates start to rise, all of that sidelined cash will generate hefty streams of interest income.

Action to Take –> Mr. Einhorn is known for some high-profile aggressive bets, but some of his more low-key plays such as Ingram Micro and Trans-Atlantic Holdings are equally intriguing. Neither is likely to make you rich, but they look like solid “safe” plays with nice upside.


– David Sterman

P.S. –

Uncategorized

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks — and You Should, Too

November 19th, 2010

A Wall Street Superinvestor Just Bought These Two Dirt Cheap Stocks -- and You Should, Too

The ranks of “super-investors” are few, highlighted by the likes of Warren Buffett, George Soros and Carl Icahn. Investors like to track their every move.

Smart investors should also watch the moves of David Einhorn, who runs Greenlight Capital. He started with just $1 million in 1996, has made more than +20% a year for his clients, and now manages billions. He's made his name on some high-profile short sales such as Lehman Brothers and Allied Capital (NYSE: AFC). But he's also done quite well on the long side of his portfolio. That's why I review his latest holdings to see what he's buying and selling. In his latest mandated 13-F filing, Einhorn is loading up on two stocks that trade below book value. Here's why.

Ingram Micro (NYSE: IM)
Ingram is the world's largest distributor of computers, printers, scanners, copiers and other tech products, with operations across the globe. It's not a sexy business, but it sure is profitable. During the past three years, Ingram has generated nearly $1 billion in cumulative free cash — right at a time when the economy has been pretty lousy. With recent tweaks to the business, management believes that annual free cash flow could exceed $500 million if global sales rise at a moderate pace.

All that cash flow has created a balance sheet on steroids, as gross cash now stands at more than $1 billion and tangible book value sits at $19.18 a share — nearly +10% above the current stock price. If the company can indeed generate $500 million in annual cash flow in coming years, then book value per share would rise about $3 a share every year, creating annual returns of nearly +20%.

To be sure, Einhorn, who just bought more than $300 million of Ingram's stock, isn't looking for swing-for-the fences returns. Shares are unlikely to move up past the $23 to $25 mark even in a better economy. So this stock may only have +25% to +35% upside during the next few years. But that potential upside is matched by very limited downside thanks to that rock-solid balance sheet.

Trans-Atlantic Holdings (NYSE: TRH)
Companies that are in the business of providing insurance to other insurers (known as re-insurers) need to keep lots of cash on hand in case clients need them to pay up. But this firm, with $13.3 billion on hand, may be carrying too much cash. After all, potential liabilities are less than $10 billion. How did the company get so much cash? By generating at least $600 million in free cash flow in each of the past seven years.

And with all that cash gaining almost no interest, Trans-Atlantic has no choice but to pay out dividends (which offer a paltry 1.6% yield) or buy back stock. Trans-Atlantic is focusing on the latter, having just announced another $200 million buyback program. And as the share count keeps shrinking, per share profits rise. Analysts expect this re-insurer to earn more than $6 a share in 2011, and shares trade for about eight times that forecast.

But Mr. Einhorn is likely here for the balance sheet, not the income statement. Trans-Atlantic carries $4.3 billion in shareholder's equity, well ahead of the company's $3.2 billion market value. (Said another way, the stock trades for just 74% of a book value of $69 a share.) As an added kicker, if and when interest rates start to rise, all of that sidelined cash will generate hefty streams of interest income.

Action to Take –> Mr. Einhorn is known for some high-profile aggressive bets, but some of his more low-key plays such as Ingram Micro and Trans-Atlantic Holdings are equally intriguing. Neither is likely to make you rich, but they look like solid “safe” plays with nice upside.


– David Sterman

P.S. –

Uncategorized

The Best Oil Stock for the Next Decade

November 19th, 2010

The Best Oil Stock for the Next Decade

Everything is pointing toward higher energy prices in the next several years.

First, there's supply and demand.

Worldwide demand for energy is increasing. In fact, the Outlook for Energy estimates that global demand for energy will soar +35% from 2005 to 2030. The increase will be fueled by growing industrialization and higher living standards in emerging markets. For example, China overtook the United States as the world's largest automobile market in 2009, with sales of 13.6 million cars and is expected to purchase 100 million vehicles by 2020.

While demand for energy is increasing, the supply of oil is dwindling. In the U.S., domestic production of oil peaked in 1970 at about 9.5 million barrels of oil a day and declined to about 5.1 million by 2006. Currently, the planet is estimated to have 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, but current consumption is all but certain to increase.

Then, there's the falling dollar.

Oil and other forms of energy are denominated in dollars when they are traded, so their price increases as the dollar weakens. As the U.S. continues to wrack-up unprecedented amounts of debt, many forecast that the U.S. dollar will lose value in the months and years ahead.

We recently had a preview of the effect of rising demand and a falling dollar on oil prices. Industrialization exploded in emerging markets during the past decade and the U.S. Dollar Index (an index of the U.S. dollar measured against a basket of the world's currencies) plunged more than -40%, from 120 in 2002 to under 71 by 2008. Consequently, the price of a barrel of oil increased from less than $20 in 2002 to greater than $140 by 2008.

In short, energy prices seem perfectly situated to rise significantly in the years ahead.

Who will benefit?

ExxonMobil Corporation (NYSE: XOM) is the largest publically traded company in America and the world's largest public oil and gas company. The company explores, produces and refines oil and gas all over the world. It operates facilities or markets products in most of the world's countries, searches for energy on six continents, and is the world's largest refiner.

Why ExxonMobil?

The world is frantically searching for more oil in increasingly hard to reach places, such as miles under the sea and from rock and sand. In addition, the search for and development of alternatives to oil such as natural gas, coal, nuclear, wind and solar continue in haste. ExxonMobil, with its far-ranging geographical diversity, expertise and deep pockets is perhaps the world's most able company to meet the task.

This goliath has 80 billion barrels of oil equivalent in a diverse resource base that includes conventional oil, liquid natural gas (LNG), unconventional oil and gas (sources that are difficult to harvest using conventional drilling techniques) and oil sands. The company has more than 130 production projects in virtually every corner of the world and generated more than $300 billion in revenue in 2009.

While 2009 year end reserves consisted of 62% oil, Exxon continues to diversify its asset base and position itself to benefit as the world moves toward cleaner burning fuel. In June of this year, ExxonMobil purchased Houston-based XTO Energy in a $41 billion deal. XTO's portfolio consists of vast reserves of natural gas primarily from unconventional resource basins in the United States.

Why buy it now?

The stock has already started moving. It's up +18% in the past three months. Third quarter earnings were fantastic, as profits soared +55% higher than the year ago quarter. The company benefited from higher overall volume of +11%, driven by a +49.5% boost in natural gas volume primarily due to the XTO acquisition. Refining volume also nearly quadrupled from the year ago levels as demand for specialty chemicals has increased in the recovery.

Exxon's sheer size enables it to operate at lower costs and higher margins than most of its competitors. In addition, resource nationalism is becoming more common as many emerging market countries are reluctant to let private companies exploit their resources. Instead, they seek partners, of which Exxon, with its huge resources and 100 years of expertise, is a likely choice.

Action to Take –> While smaller energy companies may ultimately provide higher returns in the months and years ahead, they can be a wild ride as energy prices rise and fall. Exxon, however, can whether rocky times in this unpredictable industry. What better way to make sure you capitalize on the powerful long term trends than with the biggest and the best? At 12 times earnings, Exxon still sells below the industry average and can be purchased at current prices.


– 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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