Look to This Stock for Clues About the Economy

September 18th, 2010

Look to This Stock for Clues About the Economy

Can you name the oldest stock index still in use? Here's a clue: it's even older than the Dow Jones Industrial Average (DJIA).

Ten points if you guessed the Dow Jones Transportation Average (also known as the Dow Transports). Charles Dow dreamed up the index nearly 130 years ago, as he presumed that the share price movements of transportation-related companies would provide a clear read on the amount of goods being sold (and trafficked) across the country.

(As a side note, Dow also noted the importance of the Dow Transports and the DJIA moving in tandem. If only one was rallying, you shouldn't trust it. This is one of the six tenets of the Dow Theory, which is best left for another day).

Had Dow been around today, he might have stopped focusing on the Dow Transports and simply watched FedEx (NYSE: FDX), the world's largest shipper. As you look at FedEx's stock chart in the last year, you can get a clear read on investor expectations about the economy.

Uncategorized

The Best Global Bank for Your Portfolio

September 18th, 2010

The Best Global Bank for Your Portfolio

I attended an investment conference last week and listened to a number of business updates from leading financial institutions. The vast majority are staying extremely conservative with their lending activities and are waiting for more tangible signs of an economic recovery before they start shifting gears from surviving the credit crisis to growing their operations.

This sentiment is similar across the United States and throughout the world, with the vast majority of big banks taking a wait-and-see approach in regard to the future economic climate. With so many in the industry playing defense, it takes a brave firm to go on the offensive and stand against the crowd.

Banco Santander (NYSE: STD)
is one those rare banks and understands that being bold when others are fearful can be a wonderful strategy for picking up business on the cheap. Santander has succeeded where other banks have failed in two ways: one is through organic growth and aggressively taking on deposits, which forms the capital to make loans and earn a spread in the form of a net interest margin, and the other is through acquiring best-in-class assets during the downturn.

Santander is pursuing both, but focusing on buying market share as more beleaguered banks are desperate to sell assets and raise capital to appease regulations that are requiring more conservative bank balance sheets. Additionally, many made loans that have gone bad and stand little chance of being repaid. As a result, these banks must raise liquidity to shore up their finances.

Santander focuses on commercial banking and boasts 91 million customers through nearly 14,000 branches around the world. As of last year, the bank counted itself as the fourth largest in terms of profitability and by market capitalization. The bank also provides asset management activities and sells insurance.

To give you a feel for just how large and profitable Santander is, last year total assets exceeded 1 trillion euro, or nearly $1.3 trillion based on current exchange rates (the company reports its results in euro). Net income came in at about $12.1 billion while return on equity was very decent at nearly 14%. Its Tier 1 capital ratio (basically a ratio of common and preferred equity, plus some adjustments as a percent of assets) exceeded 10, which is ahead of many peers and leaves the balance sheet in good shape.

Santander should be struggling royally — it is based in Spain, which is reeling with close to 20% unemployment and the bursting of one of the largest housing bubbles in the world. Fortunately, Spain represents only a fraction of its business and is one of nine primary markets, the others of which include Portugal, Germany, the U.K., Brazil, Mexico, Chile, Argentina and the U.S. As such, it is one of the most globally diversified financial institutions in the world.

Santander's acquisition-hungry focus recently led it to Poland, where it won an auction to buy a controlling stake in Polis Bank Zachodni WBK from Allied Irish Banks for $3.8 billion. It has also recently bought business in the U.S., a minority interest in Mexico and bank branches in Germany, and the U.K.

Uncategorized

The Best Global Bank for Your Portfolio

September 18th, 2010

The Best Global Bank for Your Portfolio

I attended an investment conference last week and listened to a number of business updates from leading financial institutions. The vast majority are staying extremely conservative with their lending activities and are waiting for more tangible signs of an economic recovery before they start shifting gears from surviving the credit crisis to growing their operations.

This sentiment is similar across the United States and throughout the world, with the vast majority of big banks taking a wait-and-see approach in regard to the future economic climate. With so many in the industry playing defense, it takes a brave firm to go on the offensive and stand against the crowd.

Banco Santander (NYSE: STD)
is one those rare banks and understands that being bold when others are fearful can be a wonderful strategy for picking up business on the cheap. Santander has succeeded where other banks have failed in two ways: one is through organic growth and aggressively taking on deposits, which forms the capital to make loans and earn a spread in the form of a net interest margin, and the other is through acquiring best-in-class assets during the downturn.

Santander is pursuing both, but focusing on buying market share as more beleaguered banks are desperate to sell assets and raise capital to appease regulations that are requiring more conservative bank balance sheets. Additionally, many made loans that have gone bad and stand little chance of being repaid. As a result, these banks must raise liquidity to shore up their finances.

Santander focuses on commercial banking and boasts 91 million customers through nearly 14,000 branches around the world. As of last year, the bank counted itself as the fourth largest in terms of profitability and by market capitalization. The bank also provides asset management activities and sells insurance.

To give you a feel for just how large and profitable Santander is, last year total assets exceeded 1 trillion euro, or nearly $1.3 trillion based on current exchange rates (the company reports its results in euro). Net income came in at about $12.1 billion while return on equity was very decent at nearly 14%. Its Tier 1 capital ratio (basically a ratio of common and preferred equity, plus some adjustments as a percent of assets) exceeded 10, which is ahead of many peers and leaves the balance sheet in good shape.

Santander should be struggling royally — it is based in Spain, which is reeling with close to 20% unemployment and the bursting of one of the largest housing bubbles in the world. Fortunately, Spain represents only a fraction of its business and is one of nine primary markets, the others of which include Portugal, Germany, the U.K., Brazil, Mexico, Chile, Argentina and the U.S. As such, it is one of the most globally diversified financial institutions in the world.

Santander's acquisition-hungry focus recently led it to Poland, where it won an auction to buy a controlling stake in Polis Bank Zachodni WBK from Allied Irish Banks for $3.8 billion. It has also recently bought business in the U.S., a minority interest in Mexico and bank branches in Germany, and the U.K.

Uncategorized

7 Countries that Could Crash in Five Years

September 18th, 2010

7 Countries that Could Crash in Five Years

Every few years, demographers raise their estimate for human longevity. Whereas 70 years old once signified a rapidly ageing body and the early signs of mortal illness, now 70 year-olds run marathons, chop wood and settle for long retirements. Ninety is the new 70. And who could complain about that?

Well, investors might complain. In a number of countries, a rapidly aging society is creating financial burdens that will start to bite within a few years. Fewer young workers paying into the retirement system, coupled with explosive growth in the elderly population looks set to wreak havoc on government balance sheets. And since many governments already carry large debt burdens and will need to roll over their expiring debts with new ones, bond buyers are likely to demand far higher interest rates once they see how difficult it will be for some of these countries to live beyond their means.

Japan serves as a prime example of the demographic time bomb. According to the United Nations' Population Division, Japanese households are having an average of 1.4 children (well below the 2.1 replacement rate), and when this is coupled with restrictive immigration policies, it has led to a steadily rising average age in Japan. Japan's life expectancy, already among the highest in the world at 83 years, could approach 90 in the next few decades, according to the U.N.

As this chart indicates, the United States is on track to have the highest percentage of workers under the age of 65 by 2050, compared with China, Europe and Japan.

Immigration and births are key
One of the main reasons that the U.S. is expected to have an ample percent of its population in 2050 below 65 is its relatively open immigration system and reasonable family size. Yet some countries are likely to suffer from small family sizes (much of Europe, Japan) or restrictive immigration policies (Japan, Australia). In Russia, a combination of small families and a high incidence of premature mortality (often due to alcoholism or environmental factors), is leading to an outright shrinkage in its population, which has already dropped from 150 million to 141 million in the last 15 years and could drop to 130 million by 2030 according to demographers. A shrinking population makes it harder to handle rising government debt loads.

Markets look ahead
But it won't take until 2050 for this time bomb to go off. Government finances are already starting to feel the heat, and the deficits will only deepen unless their economies sharply rebound and we see major entitlement reform in many nations. And few are expecting either of those factors to happen, let alone both. So as debts get rolled over the next few years, look for rising interest rates on government bonds. Which makes matters worse. And as bond concerns arise, equity markets are likely to grow even more skittish. [How to Lock in 8% Government Yields]

Taking a look at the countries with the largest stock markets, here's a quick list of countries that have large government debts as a percentage of GDP:

(These tables don't reflect 2010 and projected 2011 debt levels, and these numbers are likely higher for most of these countries now. U.S. debt levels appear higher, but benefit from a currently over-funded Social Security program).

Now, let's cross-reference those government debt levels with median population ages:

One of things you'll notice when comparing this table to the one earlier, is that median ages are rising quickly. In Japan, the figure was 42.9 in 2005, and is now 44.6. Conversely, countries such as Israel, Brazil and India all have a median age below 30, which will be a real long-term asset — if they can maintain strong education systems that ensure a productive workforce.

Germany is going to be an especially interesting test case. The country's industrial economy is at the heart of its society, and an ageing workforce is less capable of manning the assembly lines.

Low birth rates
As noted earlier, it takes 2.1 children per family just to keep populations stable (immigration notwithstanding). Surprisingly, more than 100 countries fail to meet that threshold, according to the U.N. The dearth of children is especially notable in some of the fast-growing economies in Asia.

The risky 7
In light of these trends, these economies could be headed for real trouble — unless drastic action is taken.

1.

ETF, Uncategorized

7 Countries that Could Crash in Five Years

September 18th, 2010

7 Countries that Could Crash in Five Years

Every few years, demographers raise their estimate for human longevity. Whereas 70 years old once signified a rapidly ageing body and the early signs of mortal illness, now 70 year-olds run marathons, chop wood and settle for long retirements. Ninety is the new 70. And who could complain about that?

Well, investors might complain. In a number of countries, a rapidly aging society is creating financial burdens that will start to bite within a few years. Fewer young workers paying into the retirement system, coupled with explosive growth in the elderly population looks set to wreak havoc on government balance sheets. And since many governments already carry large debt burdens and will need to roll over their expiring debts with new ones, bond buyers are likely to demand far higher interest rates once they see how difficult it will be for some of these countries to live beyond their means.

Japan serves as a prime example of the demographic time bomb. According to the United Nations' Population Division, Japanese households are having an average of 1.4 children (well below the 2.1 replacement rate), and when this is coupled with restrictive immigration policies, it has led to a steadily rising average age in Japan. Japan's life expectancy, already among the highest in the world at 83 years, could approach 90 in the next few decades, according to the U.N.

As this chart indicates, the United States is on track to have the highest percentage of workers under the age of 65 by 2050, compared with China, Europe and Japan.

Immigration and births are key
One of the main reasons that the U.S. is expected to have an ample percent of its population in 2050 below 65 is its relatively open immigration system and reasonable family size. Yet some countries are likely to suffer from small family sizes (much of Europe, Japan) or restrictive immigration policies (Japan, Australia). In Russia, a combination of small families and a high incidence of premature mortality (often due to alcoholism or environmental factors), is leading to an outright shrinkage in its population, which has already dropped from 150 million to 141 million in the last 15 years and could drop to 130 million by 2030 according to demographers. A shrinking population makes it harder to handle rising government debt loads.

Markets look ahead
But it won't take until 2050 for this time bomb to go off. Government finances are already starting to feel the heat, and the deficits will only deepen unless their economies sharply rebound and we see major entitlement reform in many nations. And few are expecting either of those factors to happen, let alone both. So as debts get rolled over the next few years, look for rising interest rates on government bonds. Which makes matters worse. And as bond concerns arise, equity markets are likely to grow even more skittish. [How to Lock in 8% Government Yields]

Taking a look at the countries with the largest stock markets, here's a quick list of countries that have large government debts as a percentage of GDP:

(These tables don't reflect 2010 and projected 2011 debt levels, and these numbers are likely higher for most of these countries now. U.S. debt levels appear higher, but benefit from a currently over-funded Social Security program).

Now, let's cross-reference those government debt levels with median population ages:

One of things you'll notice when comparing this table to the one earlier, is that median ages are rising quickly. In Japan, the figure was 42.9 in 2005, and is now 44.6. Conversely, countries such as Israel, Brazil and India all have a median age below 30, which will be a real long-term asset — if they can maintain strong education systems that ensure a productive workforce.

Germany is going to be an especially interesting test case. The country's industrial economy is at the heart of its society, and an ageing workforce is less capable of manning the assembly lines.

Low birth rates
As noted earlier, it takes 2.1 children per family just to keep populations stable (immigration notwithstanding). Surprisingly, more than 100 countries fail to meet that threshold, according to the U.N. The dearth of children is especially notable in some of the fast-growing economies in Asia.

The risky 7
In light of these trends, these economies could be headed for real trouble — unless drastic action is taken.

1.

ETF, Uncategorized

5 Regional Banks Headed for a Turnaround

September 18th, 2010

5 Regional Banks Headed for a Turnaround

The banking industry still has a rocky road ahead of it as it struggles to shake the hangover headache from the financial meltdown that tipped the U.S. economy into recession.

A quick check of the Federal Deposit Insurance Corp.'s website paints a schizophrenic picture of the industry's health:

  • The roster of failed banks this year is rising as the credit crisis continues to play out, with 118 going under through August, compared with the 140 that were shuttered in all of 2009.
  • The number of banks still at risk to fail increased to 11% of FDIC-insured institutions, the agency reported recently. The “problem” bank list is at its highest level since 1992, rising to 829 from 775 in the same quarter the year before.
  • While loan-loss reserves declined for the first time since late 2006, nearly two-thirds of banks increased their reserves in the period. Still, total reserves fell -4.5% or $11.8 billion, as many large banks cut back on their loan-loss provisions.
  • Yet the banking industry had $21.6 billion in profits for the three months ended June 30th, significantly better than the net loss of $4.4 billion in the second quarter of 2009.

FDIC Chairman Sheila Bair warned: “Given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves.”

For some who invest in financial services stocks, traditionally it's the “too big to fail” blue-chip banks or nothing. And while the big boys are turning profits again, flying below the radar through the maelstrom of the meltdown are some well-managed regional banks. They steered clear of many of the problems that got so many of their brethren, big and small, into trouble.

According to Goldman Sachs, there's been a -10% drop in bank loans in the past two years, one of the biggest contractions seen in more than three decades. That means banks wishing to grow, must do so by acquiring other banks. This sets up a scenario for takeovers and continued consolidation, which can lead to a tidy profit for investors.

Let's take a look at five regional banks, in no particular order, that continue to hold their own despite the sluggish recovery and shaky credit conditions. All generally operate in different geographical regions:

Huntington Bancshares (Nasdaq: HBAN) is based in the heart of the rust belt — Columbus, Ohio — a particularly notable region with some solid banks showing potential for growth as the economy recovers.

Founded in 1866, Huntington operates more than 600 banking offices, including one in Hong Kong. However, it has stuck mostly to Ohio and the surrounding states, and has clung to commercial lending in troubled times — offering a recent commitment as a source of capital for small businesses.

The company delivered a surprise profit of $10.4 million in the most recent quarter, and has a decent 12.5% Tier 1 capital ratio, a measure of strength used by regulators.

Hudson City Bancorp (Nasdaq: HCBK), with headquarters in Paramus, N.J., has 131 branches in the New York metropolitan area. Hudson City has delivered consistent earnings the past four quarters, and shows an attractive dividend yield of about 5.0% and a P/E ratio of 10.6.

Consistency is the name of the game for Hudson City, and research during the past several years shows that reported earnings are almost always right on target, hitting expected estimates — something almost unheard of given the fluid conditions in the banking industry during the financial crisis.

Analysts appear to find the bank's loan portfolio appealing, and the name of its primary subsidiary — Hudson City Savings Bank — expresses its emphasis on savings, residential mortgages and other consumer services.

SunTrust Banks (NYSE: STI)
is an Atlanta-based bank, a super-regional with 1,675 branches throughout the Southeast. Not exactly a tiny regional, SunTrust is the 10th-largest U.S. bank, with $170.7 billion in assets, according to SNL Financial.

Hanging over its head is $2.5 billion in TARP money that has to go back to Uncle Sam, so analysts have a mixed view of its potential for investors. With the Southeast being its home base, SunTrust has struggled with troubled loans in Florida and elsewhere. One point in its favor is that SunTrust has lapped up failed institutions during the past two years, broadening its operating base and possibly positioning for the day when the recovery really does take place and consistent economic growth reappears.

Zions Bancorporation (Nasdaq: ZION)
is headquartered in Salt Lake City, operating 500 offices in nine states. Its Tier 1 capital ratio is about 12.6%, which is far above the 5% level that regulators want to see.

But what happened in August? Shares declined -17% after reporting a $135 million second-quarter loss, which came on top of a $24 million first-quarter loss. Not pretty. And there is $1.5 billion in TARP money that has to go back to the government.

Uncategorized

5 Regional Banks Headed for a Turnaround

September 18th, 2010

5 Regional Banks Headed for a Turnaround

The banking industry still has a rocky road ahead of it as it struggles to shake the hangover headache from the financial meltdown that tipped the U.S. economy into recession.

A quick check of the Federal Deposit Insurance Corp.'s website paints a schizophrenic picture of the industry's health:

  • The roster of failed banks this year is rising as the credit crisis continues to play out, with 118 going under through August, compared with the 140 that were shuttered in all of 2009.
  • The number of banks still at risk to fail increased to 11% of FDIC-insured institutions, the agency reported recently. The “problem” bank list is at its highest level since 1992, rising to 829 from 775 in the same quarter the year before.
  • While loan-loss reserves declined for the first time since late 2006, nearly two-thirds of banks increased their reserves in the period. Still, total reserves fell -4.5% or $11.8 billion, as many large banks cut back on their loan-loss provisions.
  • Yet the banking industry had $21.6 billion in profits for the three months ended June 30th, significantly better than the net loss of $4.4 billion in the second quarter of 2009.

FDIC Chairman Sheila Bair warned: “Given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves.”

For some who invest in financial services stocks, traditionally it's the “too big to fail” blue-chip banks or nothing. And while the big boys are turning profits again, flying below the radar through the maelstrom of the meltdown are some well-managed regional banks. They steered clear of many of the problems that got so many of their brethren, big and small, into trouble.

According to Goldman Sachs, there's been a -10% drop in bank loans in the past two years, one of the biggest contractions seen in more than three decades. That means banks wishing to grow, must do so by acquiring other banks. This sets up a scenario for takeovers and continued consolidation, which can lead to a tidy profit for investors.

Let's take a look at five regional banks, in no particular order, that continue to hold their own despite the sluggish recovery and shaky credit conditions. All generally operate in different geographical regions:

Huntington Bancshares (Nasdaq: HBAN) is based in the heart of the rust belt — Columbus, Ohio — a particularly notable region with some solid banks showing potential for growth as the economy recovers.

Founded in 1866, Huntington operates more than 600 banking offices, including one in Hong Kong. However, it has stuck mostly to Ohio and the surrounding states, and has clung to commercial lending in troubled times — offering a recent commitment as a source of capital for small businesses.

The company delivered a surprise profit of $10.4 million in the most recent quarter, and has a decent 12.5% Tier 1 capital ratio, a measure of strength used by regulators.

Hudson City Bancorp (Nasdaq: HCBK), with headquarters in Paramus, N.J., has 131 branches in the New York metropolitan area. Hudson City has delivered consistent earnings the past four quarters, and shows an attractive dividend yield of about 5.0% and a P/E ratio of 10.6.

Consistency is the name of the game for Hudson City, and research during the past several years shows that reported earnings are almost always right on target, hitting expected estimates — something almost unheard of given the fluid conditions in the banking industry during the financial crisis.

Analysts appear to find the bank's loan portfolio appealing, and the name of its primary subsidiary — Hudson City Savings Bank — expresses its emphasis on savings, residential mortgages and other consumer services.

SunTrust Banks (NYSE: STI)
is an Atlanta-based bank, a super-regional with 1,675 branches throughout the Southeast. Not exactly a tiny regional, SunTrust is the 10th-largest U.S. bank, with $170.7 billion in assets, according to SNL Financial.

Hanging over its head is $2.5 billion in TARP money that has to go back to Uncle Sam, so analysts have a mixed view of its potential for investors. With the Southeast being its home base, SunTrust has struggled with troubled loans in Florida and elsewhere. One point in its favor is that SunTrust has lapped up failed institutions during the past two years, broadening its operating base and possibly positioning for the day when the recovery really does take place and consistent economic growth reappears.

Zions Bancorporation (Nasdaq: ZION)
is headquartered in Salt Lake City, operating 500 offices in nine states. Its Tier 1 capital ratio is about 12.6%, which is far above the 5% level that regulators want to see.

But what happened in August? Shares declined -17% after reporting a $135 million second-quarter loss, which came on top of a $24 million first-quarter loss. Not pretty. And there is $1.5 billion in TARP money that has to go back to the government.

Uncategorized

Take a Peek at What the Wall Street’s Short-Sellers are Doing

September 18th, 2010

Take a Peek at What the Wall Street's Short-Sellers are Doing

Although investors typically seek out stocks that are poised to rise, they also need to closely monitor what's happening among short-sellers. These short-sellers often identify red flags well before Wall Street analysts or the financial media spot them. And if you are long a stock that is heavily shorted, you'll need to dig deeper to try to find out why. (For example, you can go back to archived version of the most recent conference call to listen to what concerns arose during the Q&A).

Twice a month, the Nasdaq and the New York Stock Exchange issue updated information about stocks that are heavily shorted. You can find that data on their websites, shortsqueeze.com, or in the Market Data section of The Wall Street Journal.

Here's a key breakdown of the short interest lists you need to know:

  • Biggest Short Positions — Stocks on this list are not necessarily there because they are in trouble. Instead, they may simply be seen as a negative bet on the broader stock market or a particular sector. In the most recent data, three of the most five heavily shorted investments are index plays such as the S&P 500 ETF (NYSE: SPY). But you should glance at the list to see if any companies stand out. For example, casino operator MGM Resorts (NYSE: MGM) is the eighth most heavily shorted stock on the NYSE, even though the company's $4.5 billion market value puts its squarely in mid-cap status.

Take a Peek at What the Wall Street’s Short-Sellers are Doing

September 18th, 2010

Take a Peek at What the Wall Street's Short-Sellers are Doing

Although investors typically seek out stocks that are poised to rise, they also need to closely monitor what's happening among short-sellers. These short-sellers often identify red flags well before Wall Street analysts or the financial media spot them. And if you are long a stock that is heavily shorted, you'll need to dig deeper to try to find out why. (For example, you can go back to archived version of the most recent conference call to listen to what concerns arose during the Q&A).

Twice a month, the Nasdaq and the New York Stock Exchange issue updated information about stocks that are heavily shorted. You can find that data on their websites, shortsqueeze.com, or in the Market Data section of The Wall Street Journal.

Here's a key breakdown of the short interest lists you need to know:

  • Biggest Short Positions — Stocks on this list are not necessarily there because they are in trouble. Instead, they may simply be seen as a negative bet on the broader stock market or a particular sector. In the most recent data, three of the most five heavily shorted investments are index plays such as the S&P 500 ETF (NYSE: SPY). But you should glance at the list to see if any companies stand out. For example, casino operator MGM Resorts (NYSE: MGM) is the eighth most heavily shorted stock on the NYSE, even though the company's $4.5 billion market value puts its squarely in mid-cap status.

The Next Great Oil Powerhouse

September 18th, 2010

The Next Great Oil Powerhouse

A seldom mentioned emerging market country is nurturing a future oil giant.

Few are aware that Columbia is a growing and dynamic economy. Many people think of Columbia as a violent and lawless place dominated by drug cartels, or perhaps even confuse it with Socialist Venezuela. But, the truth is Columbia has come a long way. [Read: Forget BRIC: Buy These Emerging Economies Instead]

After nearly 30 years of drug-related violence, a new pro-business government and a U.S.-supported crackdown have vastly improved conditions in the past decade. Since 2002, terrorist acts are down -84%, kidnappings have dropped -88% and the homicide rate is the lowest in 22 years. Columbia's crime rate is now lower than that of many U.S. cities.

As a result, Columbia is attracting more investors and domestic spending is on the rise. In fact, GDP has grown +5% in the first half of 2010 (compared to +1.6% in the second quarter in the U.S.) and the market has reacted. The Columbian exchange-traded fund (ETF), Global X/InterBolsa FTSE Colombia 20 ETF (NYSE: GXG), has soared +48% so far in 2010 and was the No. 1 performing country specific ETF for the year as of July 30th.

Columbia is rich in natural resources, including one of the largest deposits of oil and gas in Latin America. There are just two Columbian ADRs trading on the New York Stock Exchange, but luckily, one of them has been on fire…

Ecopetrol (NYSE: EC)
is Columbia's largest integrated oil company, and is also the fourth largest oil major in Latin America. The company focuses on exploration and production, but is also involved in refining and transportation. About 90% of the firm is owned by the state.

Ecopetrol explores for oil and gas across Colombia and is expanding internationally through exploration partnerships in Brazil, Peru, and the United States (Gulf of Mexico). As of the end of the first quarter, Ecopetrol had reserves of 1.9 billion barrels of oil equivalent (BOE), 71% of which is oil and 29% gas. The company's production for the quarter was 83% oil and 17% gas.

The company, like the country, is looking to the future.

Ecopetrol has hyper-aggressive plans to expand and become a major international oil giant. It plans to invest a whopping $80 billion on expansion in the next 10 years and forecasts dramatic production and reserve gains in a relatively short period of time. The company is targeting daily production growth of +27% in 2011 (from Spring 2010 levels) and reserve growth of +68% by 2015 and more than +200% by 2020.

The market apparently likes the growth of the company, as well as the Columbian growth story: Ecopetrol's stock has returned more than +70% so far this year. This is no small feat considering Morningstar's Independent Oil and Gas category has returned a paltry +2% year-to-date.

The company should be able to afford the grand $80 billion expansion plans. Most of it (62% to 67%) will be financed with cash generated from earnings, and the rest from debt and new issuances. The company had virtually no debt and about $2 billion in cash and short term investments at the end of the first quarter.

However, this company is extremely vulnerable to the price and demand for oil and gas. In 2009, net income fell -43% from 2008 as energy demand and prices plummeted amidst the financial crisis and recession. But, as world economies have recovered, so have Ecopetrol's earnings. Profits in the second quarter of 2010 rocketed an amazing +137% compared to the year ago quarter, and first half profits increased +64% compared to a year ago.

Ecopetrol also pays a solid dividend. There are usually several payments every year, and dividends during the past 12 months have totaled $1.36, translating to a solid 3.5% yield even after the run up in the stock's price. Dividends are paid in Columbian Pesos and converted to dollars for American investors, so there is some currency risk. However, the superior economic growth in Columbia bodes well for the Columbian Peso, which has already soared +16% against the dollar in 2010.

Despite its expansion plans and the emergence of the Columbian economy, Ecopetrol's performance will be tied to energy prices. The long term growth in worldwide demand for oil and gas as well as oil's increasing scarcity portend well for the longer term. However, a slowdown in world economies and falling energy prices could hurt Ecopetrol's performance and stock price just like any major oil company.

Action to Take –> At this point, Ecopetrol encompasses several likely trends going forward. It is an aggressive way to play growing demand and higher prices for energy. It is also a hedge against inflation and a falling dollar that provides exposure to a fast growing emerging market.

The stock is selling at a relatively high 28 times 2010 forecasted earnings.

ETF, Uncategorized

The Next Great Oil Powerhouse

September 18th, 2010

The Next Great Oil Powerhouse

A seldom mentioned emerging market country is nurturing a future oil giant.

Few are aware that Columbia is a growing and dynamic economy. Many people think of Columbia as a violent and lawless place dominated by drug cartels, or perhaps even confuse it with Socialist Venezuela. But, the truth is Columbia has come a long way. [Read: Forget BRIC: Buy These Emerging Economies Instead]

After nearly 30 years of drug-related violence, a new pro-business government and a U.S.-supported crackdown have vastly improved conditions in the past decade. Since 2002, terrorist acts are down -84%, kidnappings have dropped -88% and the homicide rate is the lowest in 22 years. Columbia's crime rate is now lower than that of many U.S. cities.

As a result, Columbia is attracting more investors and domestic spending is on the rise. In fact, GDP has grown +5% in the first half of 2010 (compared to +1.6% in the second quarter in the U.S.) and the market has reacted. The Columbian exchange-traded fund (ETF), Global X/InterBolsa FTSE Colombia 20 ETF (NYSE: GXG), has soared +48% so far in 2010 and was the No. 1 performing country specific ETF for the year as of July 30th.

Columbia is rich in natural resources, including one of the largest deposits of oil and gas in Latin America. There are just two Columbian ADRs trading on the New York Stock Exchange, but luckily, one of them has been on fire…

Ecopetrol (NYSE: EC)
is Columbia's largest integrated oil company, and is also the fourth largest oil major in Latin America. The company focuses on exploration and production, but is also involved in refining and transportation. About 90% of the firm is owned by the state.

Ecopetrol explores for oil and gas across Colombia and is expanding internationally through exploration partnerships in Brazil, Peru, and the United States (Gulf of Mexico). As of the end of the first quarter, Ecopetrol had reserves of 1.9 billion barrels of oil equivalent (BOE), 71% of which is oil and 29% gas. The company's production for the quarter was 83% oil and 17% gas.

The company, like the country, is looking to the future.

Ecopetrol has hyper-aggressive plans to expand and become a major international oil giant. It plans to invest a whopping $80 billion on expansion in the next 10 years and forecasts dramatic production and reserve gains in a relatively short period of time. The company is targeting daily production growth of +27% in 2011 (from Spring 2010 levels) and reserve growth of +68% by 2015 and more than +200% by 2020.

The market apparently likes the growth of the company, as well as the Columbian growth story: Ecopetrol's stock has returned more than +70% so far this year. This is no small feat considering Morningstar's Independent Oil and Gas category has returned a paltry +2% year-to-date.

The company should be able to afford the grand $80 billion expansion plans. Most of it (62% to 67%) will be financed with cash generated from earnings, and the rest from debt and new issuances. The company had virtually no debt and about $2 billion in cash and short term investments at the end of the first quarter.

However, this company is extremely vulnerable to the price and demand for oil and gas. In 2009, net income fell -43% from 2008 as energy demand and prices plummeted amidst the financial crisis and recession. But, as world economies have recovered, so have Ecopetrol's earnings. Profits in the second quarter of 2010 rocketed an amazing +137% compared to the year ago quarter, and first half profits increased +64% compared to a year ago.

Ecopetrol also pays a solid dividend. There are usually several payments every year, and dividends during the past 12 months have totaled $1.36, translating to a solid 3.5% yield even after the run up in the stock's price. Dividends are paid in Columbian Pesos and converted to dollars for American investors, so there is some currency risk. However, the superior economic growth in Columbia bodes well for the Columbian Peso, which has already soared +16% against the dollar in 2010.

Despite its expansion plans and the emergence of the Columbian economy, Ecopetrol's performance will be tied to energy prices. The long term growth in worldwide demand for oil and gas as well as oil's increasing scarcity portend well for the longer term. However, a slowdown in world economies and falling energy prices could hurt Ecopetrol's performance and stock price just like any major oil company.

Action to Take –> At this point, Ecopetrol encompasses several likely trends going forward. It is an aggressive way to play growing demand and higher prices for energy. It is also a hedge against inflation and a falling dollar that provides exposure to a fast growing emerging market.

The stock is selling at a relatively high 28 times 2010 forecasted earnings.

ETF, Uncategorized

This Sector’s Mountain of Cash Could Soon Line Your Pocket

September 18th, 2010

This Sector's Mountain of Cash Could Soon Line Your Pocket

Texas Instruments (NYSE: TXN) just got with the program. The company announced Friday morning that it will increase its existing stock buyback program by $7.5 billion and modestly boost its dividend.

Suddenly, using hefty cash balances to buy back stock or boost dividends is all the rage in the sector, and the chip giant wants in on the action. I took a look at this trend last week and since it shows no signs of abating, it's time to look at all the cash-rich tech companies to see how a stock buyback or a dividend move would impact their stock. [See: Why the Cheap Debt Frenzy is Great for Stocks]

I ran a screen to find the largest tech stocks that have at least $1 billion in net cash. I then also looked at their cash flow levels, and by combining cash and cash flow, looked to see how much they represented as a percentage of a company's market value. (Did you know that nearly half of Yahoo!'s (Nasdaq: YHOO) market value is accounted for in cash and cash flow?)

By using this as a yardstick, companies could theoretically reduce their share count by that percentage. For example, eBay (Nasdaq: EBAY) could afford to buy back 31% of its stock, and then simply let the cash balance rebound as future cash flow pours in.

Lastly, I was curious about potential dividend yields. In the past, tech companies usually loathed dividends because they were a sign that management no longer had compelling uses for the company's cash, which meant that growth opportunities were lacking. By now, we all know that the days of high-growth have ended (except for Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and a few others).

A few companies offer paltry dividends with meager yields (except for Intel's more impressive 3.4% payout), but all of these companies could offer fairly hefty dividends simply based on cash flow and leave their hefty cash balances intact. Symantec (Nasdaq: SYMC), Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) could offer dividend yields in excess of 8%. More likely, these companies would seek to have lower payout ratios, so I looked at what kind of dividends could be offered up if these companies paid out 60% of their annual cash flow in dividends. For most of these companies, that would translate into a dividend yield in the 4% to 5% range. Not bad, but not overly impressive either.

With coming tax changes that hike the capital gains rate on dividends, companies may look to go the buyback route instead. [Read: What Could Happen to Your Favorite Income Spots]

Looking at the column “cash flow as % of market cap,” these companies could look to use all of their cash flow to buy back stock, leave the cash balance intact, and in the cases of Dell, HP and several others, could reduce the share count by more than 10% annually. That's just what HP is doing with its recently-announced $10 billion buyback. Microsoft (Nasdaq: MSFT) is rumored to have similar plans afoot.

What are the implications of a 10% annual share buyback? Well, at a minimum, it boosts earnings per share (EPS) by a commensurate amount. So a company that is only growing profits by +5% would see per share profits grow by +15%.

Action to Take –> Although firms like Dell and Yahoo have ample financial firepower relative to their market value, I'm especially intrigued by Symantec, which is now the largest standalone software security vendor, now that Intel has agreed to acquire McAfee (NYSE: MFE). The company also possesses a hefty data storage division, thanks to a 2005 acquisition of Veritas.

Symantec's shares now trade for half the value that they traded when that deal was announced, because the company has never been able to derive major synergies from the two divisions. But on a standalone basis, each of these businesses would hold real value to a suitor, and Symantec should look to shed one and focus on the other. Analysts seem to focus on a potential full buyout of the company. Jefferies thinks shares would fetch $19 or $20 if that happens, while UBS recently boosted its rating on Symantec to “buy” with a price target of $20 under the assumption that Symantec is “in play.” But I think a sale of one part of the business if more likely.

Even without any moves, Symantec is still quite undervalued, trading at 10 times next year's profits, and management should seize on that. It could buy back nearly 15% of its stock every year simply out of cash flow. Sales growth is expected to be flat in the current fiscal year, but based on very recent trends, are expected to rise more than +5% next year. That should fuel slightly higher bottom-line growth, and when coupled with a large buyback, could again make Symantec a real EPS growth story.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
This Sector's Mountain of Cash Could Soon Line Your Pocket

Read more here:
This Sector’s Mountain of Cash Could Soon Line Your Pocket

Uncategorized

This Sector’s Mountain of Cash Could Soon Line Your Pocket

September 18th, 2010

This Sector's Mountain of Cash Could Soon Line Your Pocket

Texas Instruments (NYSE: TXN) just got with the program. The company announced Friday morning that it will increase its existing stock buyback program by $7.5 billion and modestly boost its dividend.

Suddenly, using hefty cash balances to buy back stock or boost dividends is all the rage in the sector, and the chip giant wants in on the action. I took a look at this trend last week and since it shows no signs of abating, it's time to look at all the cash-rich tech companies to see how a stock buyback or a dividend move would impact their stock. [See: Why the Cheap Debt Frenzy is Great for Stocks]

I ran a screen to find the largest tech stocks that have at least $1 billion in net cash. I then also looked at their cash flow levels, and by combining cash and cash flow, looked to see how much they represented as a percentage of a company's market value. (Did you know that nearly half of Yahoo!'s (Nasdaq: YHOO) market value is accounted for in cash and cash flow?)

By using this as a yardstick, companies could theoretically reduce their share count by that percentage. For example, eBay (Nasdaq: EBAY) could afford to buy back 31% of its stock, and then simply let the cash balance rebound as future cash flow pours in.

Lastly, I was curious about potential dividend yields. In the past, tech companies usually loathed dividends because they were a sign that management no longer had compelling uses for the company's cash, which meant that growth opportunities were lacking. By now, we all know that the days of high-growth have ended (except for Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and a few others).

A few companies offer paltry dividends with meager yields (except for Intel's more impressive 3.4% payout), but all of these companies could offer fairly hefty dividends simply based on cash flow and leave their hefty cash balances intact. Symantec (Nasdaq: SYMC), Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ) could offer dividend yields in excess of 8%. More likely, these companies would seek to have lower payout ratios, so I looked at what kind of dividends could be offered up if these companies paid out 60% of their annual cash flow in dividends. For most of these companies, that would translate into a dividend yield in the 4% to 5% range. Not bad, but not overly impressive either.

With coming tax changes that hike the capital gains rate on dividends, companies may look to go the buyback route instead. [Read: What Could Happen to Your Favorite Income Spots]

Looking at the column “cash flow as % of market cap,” these companies could look to use all of their cash flow to buy back stock, leave the cash balance intact, and in the cases of Dell, HP and several others, could reduce the share count by more than 10% annually. That's just what HP is doing with its recently-announced $10 billion buyback. Microsoft (Nasdaq: MSFT) is rumored to have similar plans afoot.

What are the implications of a 10% annual share buyback? Well, at a minimum, it boosts earnings per share (EPS) by a commensurate amount. So a company that is only growing profits by +5% would see per share profits grow by +15%.

Action to Take –> Although firms like Dell and Yahoo have ample financial firepower relative to their market value, I'm especially intrigued by Symantec, which is now the largest standalone software security vendor, now that Intel has agreed to acquire McAfee (NYSE: MFE). The company also possesses a hefty data storage division, thanks to a 2005 acquisition of Veritas.

Symantec's shares now trade for half the value that they traded when that deal was announced, because the company has never been able to derive major synergies from the two divisions. But on a standalone basis, each of these businesses would hold real value to a suitor, and Symantec should look to shed one and focus on the other. Analysts seem to focus on a potential full buyout of the company. Jefferies thinks shares would fetch $19 or $20 if that happens, while UBS recently boosted its rating on Symantec to “buy” with a price target of $20 under the assumption that Symantec is “in play.” But I think a sale of one part of the business if more likely.

Even without any moves, Symantec is still quite undervalued, trading at 10 times next year's profits, and management should seize on that. It could buy back nearly 15% of its stock every year simply out of cash flow. Sales growth is expected to be flat in the current fiscal year, but based on very recent trends, are expected to rise more than +5% next year. That should fuel slightly higher bottom-line growth, and when coupled with a large buyback, could again make Symantec a real EPS growth story.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
This Sector's Mountain of Cash Could Soon Line Your Pocket

Read more here:
This Sector’s Mountain of Cash Could Soon Line Your Pocket

Uncategorized

Gold – All About the Dollar?

September 17th, 2010

Gold is suddenly all about the dollar again. Or so you might think. The race to debase only looks set to raise gold’s global appeal still further…

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency’s forex fluctuations.

Tuesday then brought the first of this week’s three new record highs. Only the Indian rupee, to date, has suffered a similar fate.

What next? History says to expect further dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the dollar and gold moving in opposite directions.

Gold vs. US Dollar Index

But that doesn’t mean non-dollar investors won’t also see fresh gains or highs in gold, however – not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

“There’s certainly investor nervousness about monetary policy around the world since the yen intervention,” as Mitsubishi’s new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

“A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that.”

The Bank of Japan is now actively selling yen to buoy the dollar, while the Bank of England has held real sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May’s Greek deficit crisis, France and Germany would rather see a weak than strong euro, while Beijing’s new “flexibility” – a prelude, perhaps, to its new yen buying strategy – has so far delivered only a 1.4% rise in the yuan’s dollar value since June.

That’s barely a ripple compared with the yuan’s 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

Bullion Vault's Global Index

Longer-term, as you can see, gold’s bull market to date hasn’t really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world’s money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world’s top 10 currencies, weighted by size of economy and starting at 100 on New Year’s Day 2000). And most critically for traders trying to second-guess the dollar gold price, throughout 2010 to date – and also across the last four decades as well – gold’s correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).

Regards,

Adrian Ash
for The Daily Reckoning

Gold – All About the Dollar? 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:
Gold – All About the Dollar?




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

Gold – All About the Dollar?

September 17th, 2010

Gold is suddenly all about the dollar again. Or so you might think. The race to debase only looks set to raise gold’s global appeal still further…

After its longest run of moving in tandem with the trade-weighted Dollar Index since midsummer 1991 (45 trading days; average correlation +0.58), the gold price in dollars resumed its commonly-assumed relationship with the greenback last Friday, moving opposite to the currency’s forex fluctuations.

Tuesday then brought the first of this week’s three new record highs. Only the Indian rupee, to date, has suffered a similar fate.

What next? History says to expect further dollar-led gold action ahead, at least in the headlines. Because any approach of the strong, positive correlation achieved this summer is typically followed by a stretch of strong negative correlation, with the dollar and gold moving in opposite directions.

Gold vs. US Dollar Index

But that doesn’t mean non-dollar investors won’t also see fresh gains or highs in gold, however – not with gold continuing what remains a powerful long-term uptrend against all major currencies, and not with central banks everywhere desperate to devalue their own money against the greenback.

“There’s certainly investor nervousness about monetary policy around the world since the yen intervention,” as Mitsubishi’s new precious metals strategist Matthew Turner (formerly at the VM Group) tells Reuters.

“A lot of people are sensing a race to the bottom by central banks to print more of their currency, to reflate their economies, and gold is getting support from that.”

The Bank of Japan is now actively selling yen to buoy the dollar, while the Bank of England has held real sterling interest rates below zero for 24 months running. Whatever the political rhetoric during May’s Greek deficit crisis, France and Germany would rather see a weak than strong euro, while Beijing’s new “flexibility” – a prelude, perhaps, to its new yen buying strategy – has so far delivered only a 1.4% rise in the yuan’s dollar value since June.

That’s barely a ripple compared with the yuan’s 4.8% rise of Q1 2008, and nothing against the 5.5% rise in the kiwi, 8.7% rise in the Aussie, or 15% rise in the Swissie of the last 3 months.

Bullion Vault's Global Index

Longer-term, as you can see, gold’s bull market to date hasn’t really been about any particular currency. It really is about all of them.

Gold has quadrupled and more against all the world’s money since the start of 2000, as our Global Gold Index shows. (It maps the daily gold price in the world’s top 10 currencies, weighted by size of economy and starting at 100 on New Year’s Day 2000). And most critically for traders trying to second-guess the dollar gold price, throughout 2010 to date – and also across the last four decades as well – gold’s correlation with the Dollar Index is statistically insignificant (+0.02 and minus 0.15 respectively).

Regards,

Adrian Ash
for The Daily Reckoning

Gold – All About the Dollar? 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:
Gold – All About the Dollar?




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

Commodities, Uncategorized

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