Back in the 1970s, with interest rates hovering above 10%, investors could earn a lot more money by simply owning bonds instead of stocks. Now, with interest rates at all-time lows in the modern era, the bonds vs. stocks debate is getting turned on its head. With bond yields stuck at low levels, stocks are comparatively much more attractive.

That point has been noted by the Chief Financial Officers (CFOs) at a wide range of blue-chip companies. These companies are increasingly realizing that they can alter their balance sheets to provide some much-needed support to their flagging stock prices. And that's a buy signal you shouldn't ignore.

When leverage is appropriate
For a long time, many companies (especially in the field of high-tech) preferred to hold lots of cash and carry no debt. High cash balances were seen as a sign of strength in case any major economic slowdowns forced companies to burn cash to keep afloat. (Memories of the imploding dot-com bubble of a decade ago die hard.) Yet as we saw in the recent economic crisis, most large tech companies such as Microsoft (Nasdaq: MSFT), Dell (Nasdaq: DELL) and Cisco Systems (Nasdaq: CSCO) stayed profitable. And their massive cash balances suddenly looked like an unnecessary precaution — especially when that cash is earning almost no interest.

So we're now seeing an increasing number of companies issue debt, and that could portend some real gains for per share profits and share prices. To boost earnings per share (EPS), many of these companies are using some of their borrowings to buy back stock. With borrowing costs so low and stocks sporting such low multiples, the math gets pretty compelling as the following example shows…

Each of these companies has similar sales and operating income. While the first has $100 million in cash earning just 2% interest, the other has spent all that cash and borrowed another $100 million at a 4% interest rate in order to buy back $200 million in stock. That move has helped to boost earnings per share by more than +20% as the share count has fallen even faster than net income:

That's precisely what Hasbro (NYSE: HAS) is doing these days. As I wrote back in May:

“(An) improving profit trend led management to embark on plans to issue debt simply to buy back stock. The $625 million plan, announced last month, could reduce the share count -15% by the end of next year. There is a precedent: buybacks reduced shares outstanding by an average of -10% in 2006, 2007 and 2008. Put another way, shares outstanding, which stood at 197 million in 2006, could fall below 140 million by the end of next year.”
[See: A Toy Maker That's Minting Profits]

A bond bonanza
Just this week, U.S. companies have issued more than $50 billion in debt, according to Standard & Poor's. Demand for these bonds is very strong, as rates are low enough to be enticing for bond issuers and high enough to provide a better return than CDs or government bonds. Healthcare firm Allergan (NYSE: AGN) was able to issue 10-year bonds with a yield of just 3.375%.

Home Depot (NYSE: HD) just sold $1 billion in bonds at an interest rate below 4%. What will the home improvement chain do with the proceeds? Buy back stock, just as it has before. The retailer had 2.3 billion shares outstanding in 2004. Six years later, the share count has dropped by 700 million, thanks to ongoing buybacks. That's a sure-fire way to boost earnings per share, and why many expect the company to post sharply higher EPS when the housing market is finally back on track.

Buybacks surging
As companies decide to hang on to less cash, they are increasingly looking to buy back stock. August saw a flurry of new buyback announcements, highlighted by a $10 billion announcement from Hewlett-Packard (NYSE: HPQ). In addition, Lorillard (NYSE: LO), Intuit (Nasdaq: INTU), VeriSign (Nasdaq: VRSN) and Discovery Communications (Nasdaq: DISCA) all announced buybacks of at least $1 billion last month, with many more companies announcing smaller buybacks.

Satellite firm DirecTV (NYSE: DTV) announced plans to buy back $2 billion in stock, which is going to help boost per share profits at a fast pace, as I noted in this article [See: This Company is Raking in the Cash].

Action to Take –> Look for this trend to continue. For a long time, investors assigned little value to excess cash sitting on the balance sheet. But if you come across companies with lots of cash and a depressed stock price, then a buyback may be in the offing. Companies with small amounts of debt that have room to take advantage of low rates and issue more debt could make a similar move. Use the exercise above to figure out what earnings per share would look like if your investment targets sought to buy back stock. If the results are intriguing, then it's a good reason to think about pouncing on the shares.

– 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…

This article originally appeared on StreetAuthority
Author: David Sterman
Why the Cheap Debt Frenzy is Great for Stocks

Read more here:
Why the Cheap Debt Frenzy is Great for Stocks

Uncategorized

Back in the 1970s, with interest rates hovering above 10%, investors could earn a lot more money by simply owning bonds instead of stocks. Now, with interest rates at all-time lows in the modern era, the bonds vs. stocks debate is getting turned on its head. With bond yields stuck at low levels, stocks are comparatively much more attractive.

That point has been noted by the Chief Financial Officers (CFOs) at a wide range of blue-chip companies. These companies are increasingly realizing that they can alter their balance sheets to provide some much-needed support to their flagging stock prices. And that's a buy signal you shouldn't ignore.

When leverage is appropriate
For a long time, many companies (especially in the field of high-tech) preferred to hold lots of cash and carry no debt. High cash balances were seen as a sign of strength in case any major economic slowdowns forced companies to burn cash to keep afloat. (Memories of the imploding dot-com bubble of a decade ago die hard.) Yet as we saw in the recent economic crisis, most large tech companies such as Microsoft (Nasdaq: MSFT), Dell (Nasdaq: DELL) and Cisco Systems (Nasdaq: CSCO) stayed profitable. And their massive cash balances suddenly looked like an unnecessary precaution — especially when that cash is earning almost no interest.

So we're now seeing an increasing number of companies issue debt, and that could portend some real gains for per share profits and share prices. To boost earnings per share (EPS), many of these companies are using some of their borrowings to buy back stock. With borrowing costs so low and stocks sporting such low multiples, the math gets pretty compelling as the following example shows…

Each of these companies has similar sales and operating income. While the first has $100 million in cash earning just 2% interest, the other has spent all that cash and borrowed another $100 million at a 4% interest rate in order to buy back $200 million in stock. That move has helped to boost earnings per share by more than +20% as the share count has fallen even faster than net income:

That's precisely what Hasbro (NYSE: HAS) is doing these days. As I wrote back in May:

“(An) improving profit trend led management to embark on plans to issue debt simply to buy back stock. The $625 million plan, announced last month, could reduce the share count -15% by the end of next year. There is a precedent: buybacks reduced shares outstanding by an average of -10% in 2006, 2007 and 2008. Put another way, shares outstanding, which stood at 197 million in 2006, could fall below 140 million by the end of next year.”
[See: A Toy Maker That's Minting Profits]

A bond bonanza
Just this week, U.S. companies have issued more than $50 billion in debt, according to Standard & Poor's. Demand for these bonds is very strong, as rates are low enough to be enticing for bond issuers and high enough to provide a better return than CDs or government bonds. Healthcare firm Allergan (NYSE: AGN) was able to issue 10-year bonds with a yield of just 3.375%.

Home Depot (NYSE: HD) just sold $1 billion in bonds at an interest rate below 4%. What will the home improvement chain do with the proceeds? Buy back stock, just as it has before. The retailer had 2.3 billion shares outstanding in 2004. Six years later, the share count has dropped by 700 million, thanks to ongoing buybacks. That's a sure-fire way to boost earnings per share, and why many expect the company to post sharply higher EPS when the housing market is finally back on track.

Buybacks surging
As companies decide to hang on to less cash, they are increasingly looking to buy back stock. August saw a flurry of new buyback announcements, highlighted by a $10 billion announcement from Hewlett-Packard (NYSE: HPQ). In addition, Lorillard (NYSE: LO), Intuit (Nasdaq: INTU), VeriSign (Nasdaq: VRSN) and Discovery Communications (Nasdaq: DISCA) all announced buybacks of at least $1 billion last month, with many more companies announcing smaller buybacks.

Satellite firm DirecTV (NYSE: DTV) announced plans to buy back $2 billion in stock, which is going to help boost per share profits at a fast pace, as I noted in this article [See: This Company is Raking in the Cash].

Action to Take –> Look for this trend to continue. For a long time, investors assigned little value to excess cash sitting on the balance sheet. But if you come across companies with lots of cash and a depressed stock price, then a buyback may be in the offing. Companies with small amounts of debt that have room to take advantage of low rates and issue more debt could make a similar move. Use the exercise above to figure out what earnings per share would look like if your investment targets sought to buy back stock. If the results are intriguing, then it's a good reason to think about pouncing on the shares.

– 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…

This article originally appeared on StreetAuthority
Author: David Sterman
Why the Cheap Debt Frenzy is Great for Stocks

Read more here:
Why the Cheap Debt Frenzy is Great for Stocks

Uncategorized

Today's market environment might be uncertain, but one thing is certain: the crowd is flocking to bonds.

In 2009, investors put $375 billion into bond funds, about 14 times more than in 2008 and more than double the previous record in 2002. In the first half of 2010, investors put another $138 billion into bond funds, an astounding four-fifths of the total invested in mutual funds.

This buying spree has sent bond yields plunging near historic lows — the 10-year Treasury yield recently fell to 2.57% and the two-year note recently fell to 0.49%, an all-time low.

The financial crisis and the recent spate of bad economic news have sent investors running for the safety of bonds, but are bonds that safe? Rising interest rates cause bond prices to decline. And, at near all time low levels, interest rates have no place to go but up. [Read: How to Lock in 8% Government Yields]

One well-known investor, however, is not following the crowd. While most investors have been flocking to bonds, Warren Buffett has been going somewhere else. In fact, the legendary investor added huge amounts of this stock to his company's portfolio in the second quarter. [Read: Buffett Bets Big on Health-Care with a Huge Buy]

Johnson & Johnson (NYSE: JNJ) is the world's largest and most diverse health care company. This New Jersey-based giant has operated for more than 120 years in the research and development, manufacture and sale of health care products through more than 250 operating companies located in 60 countries around the world. The company generated $62 billion in revenue in 2009.

But, J&J isn't just a pharmaceutical company. In addition to being geographically diverse, J&J is a world leader in three different health care segments: pharmaceutical, consumer and medical devices and diagnostics. The pharmaceutical segment has several leading drugs including the rheumatoid arthritis drug Remicade. The consumer products division includes household staples such as Listerine, Carefree and Tylenol.

So, why did Buffett buy it now? And why should you buy it now?

It's cheap. The stock is near its 52-week low and trades at just about 12 times earnings, compared to its five-year average multiple of about 16. In addition, J&J's stock currently yields 3.7%. While the short term direction of the market is always uncertain, J&J enables investors to earn quarterly dividends while waiting for one of the world's best companies to rebound from its lows. Meanwhile, a three-year CD is paying about 1.8%.

However, the stock is beaten up for a reason. J&J has had 11 product recalls in its consumer division in the past year. Products such as children's Tylenol, Acuvue contact lenses (overseas), and hip replacement products associated with the company's Mcneil consumer healthcare unit have been recalled for an estimated cost of $600 million in 2010 alone. As a result, J&J lowered its full year 2010 earnings per share guidance by 3% from $4.75 per share to $4.65 per share.

However, with revenue of $62 billion last year, the company can afford the cost of those product recalls, and the consumer products segment will likely gain traction again in 2011. Despite the recalls, lower U.S. and consumer product sales were more than offset by higher international sales in the first half of 2010 and total sales increased +2.3% compared to a year ago. Cost cuts have led to higher net income as well, and earnings per share increased more than +18% in the first half of 2010 to $2.85 per share.

J&J right now is a perfect example of buying a good company cheap. The best time to buy a company of J&J's caliber is when investors shy away and valuations are cheap. The stock underperformed the overall market in 2009 when investors favored more aggressive stocks on the rebound from the Armageddon lows of the financial crisis. This year, the recalls have kept many investors away. But the longer term potential of the company is solid for several reasons.

Defensive industry
While many predict the pace of economic growth in the United States will remain subdued in the years ahead, noncyclical industries such as health care should be a good place to invest. After all, people still buy band-aids and aspirin even when the economy is in the dumps. J&J is also geographically diversified, with half of 2009 sales coming from outside the United States.

Huge growth trends
Worldwide demographic trends will make health care one of the fastest growing industries in the years ahead. Older people require more health care than any other segment of society, and they are getting more numerous and will represent a greater percentage of the population than ever before.

In fact, the fastest-growing segment of the world's population is 65 and older. In the United States, the “baby boomer” generation is just beginning to hit retirement age. Citizens aged 65 and older are expected to comprise 20% of the population by 2030, or one out of five citizens. In addition, as developing nations become wealthier, their large populations will demand more and better health care. About 10% of 2009 sales were generated in the fast growing Asia Pacific and African regions.

One of a kind company
J&J is the world's largest and most diversified health care company and the epitome of a blue chip stock. Here are a few reasons to like the company:

• Mutual Fund, Uncategorized

Today's market environment might be uncertain, but one thing is certain: the crowd is flocking to bonds.

In 2009, investors put $375 billion into bond funds, about 14 times more than in 2008 and more than double the previous record in 2002. In the first half of 2010, investors put another $138 billion into bond funds, an astounding four-fifths of the total invested in mutual funds.

This buying spree has sent bond yields plunging near historic lows — the 10-year Treasury yield recently fell to 2.57% and the two-year note recently fell to 0.49%, an all-time low.

The financial crisis and the recent spate of bad economic news have sent investors running for the safety of bonds, but are bonds that safe? Rising interest rates cause bond prices to decline. And, at near all time low levels, interest rates have no place to go but up. [Read: How to Lock in 8% Government Yields]

One well-known investor, however, is not following the crowd. While most investors have been flocking to bonds, Warren Buffett has been going somewhere else. In fact, the legendary investor added huge amounts of this stock to his company's portfolio in the second quarter. [Read: Buffett Bets Big on Health-Care with a Huge Buy]

Johnson & Johnson (NYSE: JNJ) is the world's largest and most diverse health care company. This New Jersey-based giant has operated for more than 120 years in the research and development, manufacture and sale of health care products through more than 250 operating companies located in 60 countries around the world. The company generated $62 billion in revenue in 2009.

But, J&J isn't just a pharmaceutical company. In addition to being geographically diverse, J&J is a world leader in three different health care segments: pharmaceutical, consumer and medical devices and diagnostics. The pharmaceutical segment has several leading drugs including the rheumatoid arthritis drug Remicade. The consumer products division includes household staples such as Listerine, Carefree and Tylenol.

So, why did Buffett buy it now? And why should you buy it now?

It's cheap. The stock is near its 52-week low and trades at just about 12 times earnings, compared to its five-year average multiple of about 16. In addition, J&J's stock currently yields 3.7%. While the short term direction of the market is always uncertain, J&J enables investors to earn quarterly dividends while waiting for one of the world's best companies to rebound from its lows. Meanwhile, a three-year CD is paying about 1.8%.

However, the stock is beaten up for a reason. J&J has had 11 product recalls in its consumer division in the past year. Products such as children's Tylenol, Acuvue contact lenses (overseas), and hip replacement products associated with the company's Mcneil consumer healthcare unit have been recalled for an estimated cost of $600 million in 2010 alone. As a result, J&J lowered its full year 2010 earnings per share guidance by 3% from $4.75 per share to $4.65 per share.

However, with revenue of $62 billion last year, the company can afford the cost of those product recalls, and the consumer products segment will likely gain traction again in 2011. Despite the recalls, lower U.S. and consumer product sales were more than offset by higher international sales in the first half of 2010 and total sales increased +2.3% compared to a year ago. Cost cuts have led to higher net income as well, and earnings per share increased more than +18% in the first half of 2010 to $2.85 per share.

J&J right now is a perfect example of buying a good company cheap. The best time to buy a company of J&J's caliber is when investors shy away and valuations are cheap. The stock underperformed the overall market in 2009 when investors favored more aggressive stocks on the rebound from the Armageddon lows of the financial crisis. This year, the recalls have kept many investors away. But the longer term potential of the company is solid for several reasons.

Defensive industry
While many predict the pace of economic growth in the United States will remain subdued in the years ahead, noncyclical industries such as health care should be a good place to invest. After all, people still buy band-aids and aspirin even when the economy is in the dumps. J&J is also geographically diversified, with half of 2009 sales coming from outside the United States.

Huge growth trends
Worldwide demographic trends will make health care one of the fastest growing industries in the years ahead. Older people require more health care than any other segment of society, and they are getting more numerous and will represent a greater percentage of the population than ever before.

In fact, the fastest-growing segment of the world's population is 65 and older. In the United States, the “baby boomer” generation is just beginning to hit retirement age. Citizens aged 65 and older are expected to comprise 20% of the population by 2030, or one out of five citizens. In addition, as developing nations become wealthier, their large populations will demand more and better health care. About 10% of 2009 sales were generated in the fast growing Asia Pacific and African regions.

One of a kind company
J&J is the world's largest and most diversified health care company and the epitome of a blue chip stock. Here are a few reasons to like the company:

• Mutual Fund, Uncategorized

A cool $7 billion. That's how much Priceline.com (Nasdaq: PCLN) has picked up in value during the past three months on the heels of a stunning +81% gain in the shares. Don't feel bad for rivals Travelzoo (Nasdaq: TZOO), Expedia (Nasdaq: EXPE) and Orbitz Worldwide (NYSE: OWW) — they've risen anywhere from +15% to +40% as well.

In the most recent quarter, Priceline saw a +60% jump in international bookings and a +20% jump in domestic bookings compared to a year ago. The other online travel firms had similar bullish results.

So if things are looking much brighter than a year ago in the world of business and leisure travel, why have shares of Hertz (NYSE: HTZ) and Avis Budget (NYSE: CAR) slipped roughly -6% in the past three months? Blame it on a summer-long saga that has seen these rivals try to win the affection of Dollar Thrifty (NYSE: DTG). Both firms would stand to gain significant synergies by winning this prize. But the loser would also win, as the whole industry benefits from fewer rental car outlets and fewer price wars. [Read my earlier take on the rental car bidding war]

Demand on the rise
Since I wrote my previous article, industry conditions have improved. Airlines are packing in more passengers and hotel rooms are getting more full. These are usually key harbingers of demand for rental cars. But these two rental car firms are trying to take a sober, quiet stance when discussing industry conditions for fear that Dollar will suddenly seem to be an even bigger prize as industry conditions strengthen.

Unfortunately for them, Dollar has spilled the beans, noting in early August that demand was getting better by the month. Around Memorial Day, analysts thought Dollar Thrifty would earn around $3 a share this year. Now they think EPS will be closer to $4. A more sober tone on the conference calls from Hertz and Avis has led analysts to hold their fire when it comes to upward earnings forecast revisions for those two firms. Yet that is likely to set the stage for an upside earnings surprise when the two firms report results in late October.

Coming to a head
But investors don't need to wait that long. That's because the whole saga between these three suitors/rivals will be addressed next Thursday, September 16th when Dollar Thrifty's shareholders vote whether to accept Hertz's $41 a share offer. Avis' offer is for $48 a share, and it is taking aggressive steps to block that shareholder vote. But since Avis is unwilling to pay a break-up fee if regulators vote against the deal on anti-trust grounds, Dollar Thrifty prefers to go with Hertz's lower offer, simply because of a promised break-up fee.

Of course, Avis may step in and sweeten the offer before next Thursday. Analysts think the deal still makes sense for either party if Dollar Thrifty received $60 or even $65 a share. Clearly though, Hertz would love to see its $41 a share offer win the day, and has thus far seemed dis-inclined to engage in a real bidding war.

Unless we get even higher bids that diminish the compelling value of a deal, I still think both the winner and loser would benefit. And with shares of both firms trading for about seven times projected 2011 EBITDA, a sharp sector rally could well ensue once this drama is resolved.

Shares of Priceline.com trade for about 20 times EBITDA, while Expedia and Orbitz fetch more than 15 times projected 2011 EBITDA. All of these companies — including the car rental firms — are subjected to the same industry conditions and should eventually move in tandem. The online travel firms will always sport a higher multiple, thanks to their asset-light business models, but the current valuation gap between these two industries is far too wide.

Action to Take –> Hertz and Avis are stuck in a holding pattern. Shares of Avis are slightly more attractive on a P/E basis, but both companies increasingly look set to post robust profit growth in the next few years as the global economy rebounds.

– 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…

This article originally appeared on StreetAuthority
Author: David Sterman
A Disconnect in These Stocks Could Bring a Nice Gain

Read more here:
A Disconnect in These Stocks Could Bring a Nice Gain

Uncategorized

A cool $7 billion. That's how much Priceline.com (Nasdaq: PCLN) has picked up in value during the past three months on the heels of a stunning +81% gain in the shares. Don't feel bad for rivals Travelzoo (Nasdaq: TZOO), Expedia (Nasdaq: EXPE) and Orbitz Worldwide (NYSE: OWW) — they've risen anywhere from +15% to +40% as well.

In the most recent quarter, Priceline saw a +60% jump in international bookings and a +20% jump in domestic bookings compared to a year ago. The other online travel firms had similar bullish results.

So if things are looking much brighter than a year ago in the world of business and leisure travel, why have shares of Hertz (NYSE: HTZ) and Avis Budget (NYSE: CAR) slipped roughly -6% in the past three months? Blame it on a summer-long saga that has seen these rivals try to win the affection of Dollar Thrifty (NYSE: DTG). Both firms would stand to gain significant synergies by winning this prize. But the loser would also win, as the whole industry benefits from fewer rental car outlets and fewer price wars. [Read my earlier take on the rental car bidding war]

Demand on the rise
Since I wrote my previous article, industry conditions have improved. Airlines are packing in more passengers and hotel rooms are getting more full. These are usually key harbingers of demand for rental cars. But these two rental car firms are trying to take a sober, quiet stance when discussing industry conditions for fear that Dollar will suddenly seem to be an even bigger prize as industry conditions strengthen.

Unfortunately for them, Dollar has spilled the beans, noting in early August that demand was getting better by the month. Around Memorial Day, analysts thought Dollar Thrifty would earn around $3 a share this year. Now they think EPS will be closer to $4. A more sober tone on the conference calls from Hertz and Avis has led analysts to hold their fire when it comes to upward earnings forecast revisions for those two firms. Yet that is likely to set the stage for an upside earnings surprise when the two firms report results in late October.

Coming to a head
But investors don't need to wait that long. That's because the whole saga between these three suitors/rivals will be addressed next Thursday, September 16th when Dollar Thrifty's shareholders vote whether to accept Hertz's $41 a share offer. Avis' offer is for $48 a share, and it is taking aggressive steps to block that shareholder vote. But since Avis is unwilling to pay a break-up fee if regulators vote against the deal on anti-trust grounds, Dollar Thrifty prefers to go with Hertz's lower offer, simply because of a promised break-up fee.

Of course, Avis may step in and sweeten the offer before next Thursday. Analysts think the deal still makes sense for either party if Dollar Thrifty received $60 or even $65 a share. Clearly though, Hertz would love to see its $41 a share offer win the day, and has thus far seemed dis-inclined to engage in a real bidding war.

Unless we get even higher bids that diminish the compelling value of a deal, I still think both the winner and loser would benefit. And with shares of both firms trading for about seven times projected 2011 EBITDA, a sharp sector rally could well ensue once this drama is resolved.

Shares of Priceline.com trade for about 20 times EBITDA, while Expedia and Orbitz fetch more than 15 times projected 2011 EBITDA. All of these companies — including the car rental firms — are subjected to the same industry conditions and should eventually move in tandem. The online travel firms will always sport a higher multiple, thanks to their asset-light business models, but the current valuation gap between these two industries is far too wide.

Action to Take –> Hertz and Avis are stuck in a holding pattern. Shares of Avis are slightly more attractive on a P/E basis, but both companies increasingly look set to post robust profit growth in the next few years as the global economy rebounds.

– 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…

This article originally appeared on StreetAuthority
Author: David Sterman
A Disconnect in These Stocks Could Bring a Nice Gain

Read more here:
A Disconnect in These Stocks Could Bring a Nice Gain

Uncategorized

Thanks to the government’s meddlesome ways, the US has again fallen on the World Economic Forum’s ranking of global competitiveness. Historically, the US was reliably ranked number one, but in 2009 it gave up the lead position to Switzerland.

For 2010, America’s slipped again… and this time it’s fallen two slots. The US stayed below Switzerland — which retained its top ranking from last year — but, newly fell behind Sweden and Singapore in that order… no longer even clinching the proverbial bronze medal.

From Bloomberg:

“The U.S. ranked 87th for macroeconomic stability, and American businesses also increasingly questioned the government’s ability to avoid meddling in the private sector and viewed it as a wasteful spender, the forum said. In its index of financial market development, the U.S. fell to 31st from ninth in 2008.

“Switzerland held the premier position in the survey thanks to ranking fourth in the world for its business sophistication and second for its ability to innovate, the WEF said.

“Sweden climbed two slots to second, surpassing Singapore which remained third. Sweden was credited for its transportation and high level of ethical behavior, while Singapore won points for its lack of corruption and for the efficiency of its government.

“Germany, Japan, Finland, the Netherlands, Denmark and Canada rounded out the top 10, the composition of which was unchanged from last year. Among the other Group of Seven economies, the U.K. and France each rose one spot to 12th and 15th respectively, while Italy stayed 48th.”

Weighed down on the rankings thanks to its heavy debt load, Greece is the lowest positioned EU country. It fell 12 places from last year and now checks in at the 83rd spot. Ouch. The US, with its rising debt and deficit, is poised to make a similar move at some point in the future without drastic budget changes. American’s ranking was also hurt by its lack of macroeconomic stability, deteriorating institutional environment, weakened financial markets, and its unsound banking system… for which the US is now ranked 111th.

You can read more details in Bloomberg’s coverage of slipping US competitiveness.

Best,

Rocky Vega,
The Daily Reckoning

Dropping Like a Rock… the US Continues to Lose its Competitive Edge 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:
Dropping Like a Rock… the US Continues to Lose its Competitive Edge

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

Thanks to the government’s meddlesome ways, the US has again fallen on the World Economic Forum’s ranking of global competitiveness. Historically, the US was reliably ranked number one, but in 2009 it gave up the lead position to Switzerland.

For 2010, America’s slipped again… and this time it’s fallen two slots. The US stayed below Switzerland — which retained its top ranking from last year — but, newly fell behind Sweden and Singapore in that order… no longer even clinching the proverbial bronze medal.

From Bloomberg:

“The U.S. ranked 87th for macroeconomic stability, and American businesses also increasingly questioned the government’s ability to avoid meddling in the private sector and viewed it as a wasteful spender, the forum said. In its index of financial market development, the U.S. fell to 31st from ninth in 2008.

“Switzerland held the premier position in the survey thanks to ranking fourth in the world for its business sophistication and second for its ability to innovate, the WEF said.

“Sweden climbed two slots to second, surpassing Singapore which remained third. Sweden was credited for its transportation and high level of ethical behavior, while Singapore won points for its lack of corruption and for the efficiency of its government.

“Germany, Japan, Finland, the Netherlands, Denmark and Canada rounded out the top 10, the composition of which was unchanged from last year. Among the other Group of Seven economies, the U.K. and France each rose one spot to 12th and 15th respectively, while Italy stayed 48th.”

Weighed down on the rankings thanks to its heavy debt load, Greece is the lowest positioned EU country. It fell 12 places from last year and now checks in at the 83rd spot. Ouch. The US, with its rising debt and deficit, is poised to make a similar move at some point in the future without drastic budget changes. American’s ranking was also hurt by its lack of macroeconomic stability, deteriorating institutional environment, weakened financial markets, and its unsound banking system… for which the US is now ranked 111th.

You can read more details in Bloomberg’s coverage of slipping US competitiveness.

Best,

Rocky Vega,
The Daily Reckoning

Dropping Like a Rock… the US Continues to Lose its Competitive Edge 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:
Dropping Like a Rock… the US Continues to Lose its Competitive Edge

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

Over the past few years, investors have been searching for investment tools that are “outside the box” to boost returns and add diversification, which has enabled quantitative exchange traded funds (ETFs) to grow at an exponential rate. 

In and of itself, the vast majority of ETF assets are still held in traditional beta funds which track well-known benchmarks like the S&P 500, the Russell 2000 or the MSCI Emerging Markets Index.  In fact, the SPDR S&P 500 (SPY), the iShares Russell 2000 Index (IYW) and the iShares MSCI Emerging Markets (EEM) continue to remain the most actively traded ETFs and make up a significant percentage of total assets that are invested in ETFs.

However, some ETF providers, like PowerShares, First Trust and Claymore have taken their offerings a step further by utilizing fundamental analysis and other quantitative methodologies to generate excess returns by identifying securities which are set to outperform the broader markets and experience above-average capital appreciation. 

One such ETF is the PowerShares Dynamic Large Cap Value Portfolio (PWV), which is designed to evaluate large-cap stocks and seeks to replicate the Dynamic Large Cap Value Intellidex Index, which is designed to select companies poised to outperform broad market benchmarks while maintaining consistent stylistically accurate exposure.   PWV boats Verizon Communications (VZ) and Coca-Cola Company (KO) as its top holdings.  Over the past three years, PWV has outperformed its competitor, the iShares Russell 1000 Value Index (IWD), which is a beta fund that tracks the Russell 1000 Value Index, by nearly 10 percent.

Another notable mention is the Claymore/Zacks Mid-Cap Core ETF (CZA), which utilizes quantitative methodologies to identify a group of roughly 100 securities that have the potential to outperform the Russell Midcap Index or the S&P 500 MidCap 400 Index.  Over the past year, CZA has outperformed both the SPDR S&P MidCap 400 (EDY) and the iShares Russell Midcap Index Fund (IWR) by nearly 5% and 6%, respectively. 

A third ETF that utilizes fundamental analysis is the First Trust Health Care AlphaDEX (FXH).  FXH is linked to the StrataQuant Health Care Index that determines holdings by rankings on growth factors such as sales to price ratios and 12-month price appreciation as well as value factors such as cash flow to price, return on assets and book value to price.  Furthermore, the stocks that are selected in the Index are further split into quintiles based on their ranking, with the top ranked quintile receiving a larger weight within the index.   FXH, which has a heavier concentration on mid-cap growth orientated health care securities than either the iShares Dow Jones US Healthcare (IYH) or the Healthcare Select Sector SPDR (XLV) and has outperformed both IYH and XLV over the past year by nearly 12% and 13%, respectively.   

Although these three ETFs which utilize quantitative methodologies to choose their holdings appear to be outperforming their respective broader markets, it is equally important to consider the risks that they carry.

A good way to protect against these risks is the use of an exit strategy which identifies specific price points at which downward price pressure is likely to exist.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Three Quant ETFs Outperforming Their Respective Markets

HERE IS YOUR FOOTER

ETF, Uncategorized

While much talk of hot Latin American economies has focused around the Frontier Markets up 22% on the year, Colombia’s ETF (GXG) is up even more on the year, just breaching a 50% gain for the year.  This, in a roughly flat to down market for most developed world bourses.

About the Colombia ETF

The Global X/InterBolsa FTSE Colombia 20 ETF is the only broad-based ETF for Colombia.  While some ADRs are available on US exchanges like Banco de Colombia (CIB), this ETF incorporates 20 top names and it also carries the ability to invest up to 20% of its assets in derivatives like futures, swaps and options, as well as stocks that aren’t included in the underlying FTSE Colombia 20 Index.  The ETF carries an expense ratio of 0.86%.  The top holdings are concentrated in Energy and Financial Services with contributions from Consumer Products and Commodities industries.

What’s Driving Colombia Stock Market Performance?

While it’s played out to people familiar with Colombia’s resurgence in recent years, people often associate Colombia with drug trafficking, kidnappings and murders.  Unfortunately, this reputation may reside for years, but for the educated investor, that’s just fine – a market mispricing if you will.  The country has very much turned around under pro-growth, pro-business leadership.

I have a co-worker who’s actually looking to move there and he’s already speculating in real estate (Gringo slum lord aspirations).  He’s traveled there several times recently, done his homework and this is ripe for the picking in his estimation.

Anecdotes aside, the infrastructure’s improving, banks weren’t over-leveraged and burnt by America’s subprime junk like much of Europe, and the trajectory for the economy is up, not flat/declining like most developed nations are looking at in the new normal of austerity from dumb stimulus spending and stagnant growth.  Consensus GDP growth for Colombia is pegged at about 5%.  Both mining and retail are strong, leading the boom.  What’s nice in contrast to other frontier markets is that inflation is rather tame at close to 2%, so consumers aren’t strapped.

The pro-business sentiment growing with Colombia is further evidenced by the landslide victory of the pro-business platform leader Santos in the recent election following Uribe’s end of his 2 terms.  His plans include setting up additional free trade alliances with Peru, Chile and others.  While the Free Trade Agreement with the US was largely defeated due to protectionism in the US a few years back, it wouldn’t be unreasonable to see this revisited with a more right-leaning Congress post mid-terms if and when it becomes more clear that current policies aren’t working.  Surely, Chavez is watching and even Castro made a surprise admission in a recent interview that the Cuba financial model isn’t working.

Key Drivers for Future Price Gains

Primarily, markets hate uncertainty.  And with the recent election win and further stability in-country with respect to FARC paramilitary conflicts and economic strength, that uncertainty has been largely resolved.  Next, a rising consumer class is driving internal revenues and then exports of gold, iron and other hard commodities lends itself to the similar story we’re seeing in other resource rich countries, which is fast growth and a growing middle class.

Disclosure: Author is long GXG

Commodities, ETF, OPTIONS, Real Estate

I keep seeing things, scary things, terrifying things characterized as “for the first time ever,” like Tyler Durden of zerohedge.com writing that “As per the August 31 DTS statement, the US ended the month with a new all-time record of $13.45 trillion in debt, an increase of $210 billion from the beginning of the month (or $225 billion in public debt, net of intragovernmental holdings). With just 30 days left in fiscal year 2010, the US has added $1.54 trillion in the eleven months ended August 31, a monthly average increase of $140 billion. As a point of reference, the US has received $1.53 trillion in withheld income tax over the same period, confirming that the US continues to issue more than one dollar in debt for every dollar it receives via income tax revenue,” all of which are new records of one kind or another! Gaaaah! I am screaming in outrage and fear!

Martin Hutchinson of the Bear’s Lair lays it right out there, too, with “Combining the Worst” in that “both new home sales and existing home sales for July dropped by double-digit percentages to levels never seen in the history of the series.”

The worst ever! Even my little pea-brain can see the significance in this! Wow!

Then, perhaps trying to calm me down, he admits that maybe “ever” is kind of a relative term, in that “While for existing homes the series dates back only to 1999, for new homes it dates back to 1959.”

It worked! I realized that new houses have always gone up in price for the last half century because inflation was a fact-of-life for half a century because the government deficit-spent for half a century and the Federal Reserve created the money needed for a half a century, which only proves that Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, is a malevolent demon from hell who has destroyed us by creating So, So Much Money (SSMM), and we ought to track this man down and punish him relentlessly!

Well, you can see that Mr. Hutchinson does not want to get into a weird, hate-filled discussion about tracking people down and exacting vengeance with mob-rule mentality, and he tries to bring the discussion back around to home sales by saying that the result is that “the decline in new homes sales tells us that 50 years of growth has been wiped out in that market”!

Wow! A half-century, gone!

And all of this misery, and people owing more on the house than their house is worth, is at a time that the “Case-Shiller 20-city house price index” is still 47% above the January 2000 value! In fact, “house prices are still about 5-8% above their long-term average in terms of incomes,” which seems surprising in light of all the negative press of the decline in house prices over the last few years!

With a sense of horror, I realize that, sure enough, this 47% increase in house prices “matches the consumer price rise during the period”! Gaaahhh! 47% inflation in consumer prices over 10 years!

This means, to my Sheer Mogambo Outrage (SMO), that all things cost about 47% more than they did in 2000, which is a compounded 3.9% inflation per year, which is not only historically horrifying, but is about half of the real inflation rate Right Freaking Now (RFN), which is above 8%, as calculated by John Williams at shadowstats.com!

In short, We’re Freaking Doomed (WFD), and the only way I can find to be “un-doomed” is to buy gold, silver and oil with every penny you can scrape up before that penny loses most, or all, of its purchasing power.

And I say this not because I am a smug, know-it-all loudmouth who loves the sound of his own voice and tricking people into believing that I know what I am talking about, but because if there was another way to preserve wealth against governmental debasement of the currency in the last 4,500 years of history of governments debasing currencies, I would have probably heard about it.

But just mindlessly buying gold, silver and oil makes investing so easy that you say, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Are New Home Prices Rising? Nope, That’s Just Inflation. 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:
Are New Home Prices Rising? Nope, That’s Just Inflation.

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

Palo Alto, CA – September 9, 2010 – SmartStops.net (www.smartstops.net), announced today the launch of the performance comparison calculator. The calculator analyzes the historical performance of equities comparing a buy and hold approach to one following a risk mitigation strategy.  In addition to total return, risk exposure and opportunity costs are also quantified and the results presented in simple visual diagrams. When the entire risk/reward equation is taken into account, the under performance of buy and hold becomes more apparent.

Factors analyzed and returned by the calculator include:

• Total Return
• Lowest Investment Value Over the Period
• Opportunity Cost
• Return Per Day In The Market And Exposed To Risk

“Investors typically make buying decisions based on the risk/reward analysis of a particular equity.  Unfortunately, the risk exposure does not remain constant over time”, explains Chuck LeBeau, Director of Analytics.  “Our goal at SmartStops is to make investors of all levels more aware of changes in their risk exposure, enabling them to make timely and informed decisions that protect assets and improve returns.”

Many buy and hold investors are asking themselves today, what if I had sidestepped the Toyota recall incident (TM) or the BP oil rig disaster (BP)?  How much would my investment performance have improved?  The SmartStops Risk Monitoring service detected abnormal trading patterns and issued risk alerts in the early stages of both of these events.  The performance comparison calculator shows the benefit of acting on these alerts and taking protective action to sidestep these periods of above normal risk. SmartStop risk alerts are published on over 4,000 equities and ETFs and the performance comparison calculator is accessible at http://smartstops.net/PublicPages/SmartStopsOnDemand.aspx.

About SMARTSTOPS.net

SMARTSTOPS.net is dedicated to helping investors of all levels be more aware of changes in their risk exposure enabling timely decisions that protect assets, improve returns and provide peace of mind.  SmartStops.net portfolio monitoring and risk alert services start at just $9.95 per month. For more information visit us at http://smartstops.net or contact us at info@SMARTSTOPS.net.

Media Contact:

Shelley Gould

877-654-7766

media@smartstops.net

Read more here:
SmartStops.net’s New Historical Performance Calculator Reveals The Shortcomings of Buy & Hold

HERE IS YOUR FOOTER

ETF, Uncategorized

Mainstream thinking tends to produce mainstream results. The outliers of human behavior and consequence – for better or for worse – tend to reside outside of the mainstream…out on the thin tails of the probability curve.

Out on those distant tails, you might find the creative genius of a Bill Gates or a Thomas Edison…or of that Chinese guy who invented gunpowder. On the other side of the curve, you might find the incomprehensible perspective of a Pol Pot or a Hernando Cortes…or of that woman who underwent 31 operations over 14 years so that she could look like “Barbie.”

Then, occasionally, you find those individuals like Vincent van Gogh who were so idiosyncratic that you can’t really say which thin tail they would occupy.

But, by definition, most of us live our lives where most of us live our lives – i.e., somewhere near the mainstream. That’s mostly a good thing. It is safe, comfortable, and conducive to a lengthy and well socialized existence. Out on the Serengeti, for example, the “outliers” usually become lunch…or if they’re lucky, dinner, a little later in the day.

But mainstream thinking and mainstream behavior also possesses a very dark side. It lacks insight. It shuns self-examination. It repels intellectual honesty and creativity. Mainstream thinking, therefore, can sometimes nurture more detritus than a petri dish; more dysfunction than a sanitarium. In Ages past, mainstream thinking has nurtured idiocies as innocuous as the periwig or as horrific as the virgin sacrifice.

In 1923, Sir Winston Churchill rebuked one particularly horrific manifestation of the mainstream thinking of his day:

“Accusing as I do without exception all the great Allied offensives of 1914, 1916 and 1917, as needless and wrongly conceived operations of infinite cost, I am bound to reply to the question – What else could have been done?

“And I answer it, pointing to the Battle of Cambrai, ‘This could have been done.’ [I.e., using tanks and other armored vehicles]. This in many variants, this in larger and better forms ought to have been done, if only generals had not been content to fight machine-gun bullets with the breasts of gallant men, and think this was waging war.”

Nearly one century later, many generals of many armies remain just as content as ever to fight machine-gun bullets with the breasts of gallant men. We here in the West believe ourselves to be slightly more enlightened. Maybe we are; or maybe today’s generals simply confuse hi-tech weaponry and body armor with “strategy.” Maybe they confuse “safer” with “safe”…while also confusing “can” with “should.”

But one fact is indisputable: No matter how sophisticated the weaponry and armor, inside the uniform you will still find a man or woman with a life to lose. A second fact is also indisputable: An unarmed 18-year old who watches TV in his living room – without a scrap of body armor, mind you – tends to live longer than his fully armed, and amply protected counterparts on a battlefield.

Over in the financial battlefield, a similarly dangerous form of mainstream thought tends to dominate. “You can’t really know the future,” the financial mainstream insists, “so the best bet is just to charge ahead. Buy and hold!”

These generals direct their troops to lock and load and charge the hill. Don’t worry about the barrage of risks that might blow bigger holes in your net worth than a rocket through a Humvee. Your best protection is just to diversify and charge ahead.

This advice is, of course, hogwash. Diversification provides very little protection when the bullets start flying. In fact, as the events of 2008 made very clear, diversification merely adds to the diversity of casualties on the battlefield.

The safest course of action is to avoid the battlefield entirely. But of course, that course of action never wins a war. The second best course of action is to ignore the generals. Avoid mainstream thought. Avoid the tyranny of groupthink. Edge toward the thin tails of investment guidance and thinking. And don’t be afraid to admit that black is black or that white is white.

Here’s a tip: If something looks risky, it probably is. Here’s another tip: if someone’s investment outlook seems illogical, it probably is.

If you study the ingredients that produce the success of the world’s best investors, you usually find one or more of the following traits:

1. Patience. They are neither afraid of doing nothing, nor afraid of waiting for the positive outcome they anticipate.

2. Selectivity. They never buy “the market.” They always buy specific opportunities that offer a specific risk-versus-return profile.

3. Independence. Mainstream thought is of no consequence to them.

Fortunately for most of us, investment success does not require extraordinary genius, but it does require contempt for mainstream advice and groupthink.

Eric Fry
for The Daily Reckoning

Successful Investing in a Market Dominated by Groupthink 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:
Successful Investing in a Market Dominated by Groupthink

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

Mainstream thinking tends to produce mainstream results. The outliers of human behavior and consequence – for better or for worse – tend to reside outside of the mainstream…out on the thin tails of the probability curve.

Out on those distant tails, you might find the creative genius of a Bill Gates or a Thomas Edison…or of that Chinese guy who invented gunpowder. On the other side of the curve, you might find the incomprehensible perspective of a Pol Pot or a Hernando Cortes…or of that woman who underwent 31 operations over 14 years so that she could look like “Barbie.”

Then, occasionally, you find those individuals like Vincent van Gogh who were so idiosyncratic that you can’t really say which thin tail they would occupy.

But, by definition, most of us live our lives where most of us live our lives – i.e., somewhere near the mainstream. That’s mostly a good thing. It is safe, comfortable, and conducive to a lengthy and well socialized existence. Out on the Serengeti, for example, the “outliers” usually become lunch…or if they’re lucky, dinner, a little later in the day.

But mainstream thinking and mainstream behavior also possesses a very dark side. It lacks insight. It shuns self-examination. It repels intellectual honesty and creativity. Mainstream thinking, therefore, can sometimes nurture more detritus than a petri dish; more dysfunction than a sanitarium. In Ages past, mainstream thinking has nurtured idiocies as innocuous as the periwig or as horrific as the virgin sacrifice.

In 1923, Sir Winston Churchill rebuked one particularly horrific manifestation of the mainstream thinking of his day:

“Accusing as I do without exception all the great Allied offensives of 1914, 1916 and 1917, as needless and wrongly conceived operations of infinite cost, I am bound to reply to the question – What else could have been done?

“And I answer it, pointing to the Battle of Cambrai, ‘This could have been done.’ [I.e., using tanks and other armored vehicles]. This in many variants, this in larger and better forms ought to have been done, if only generals had not been content to fight machine-gun bullets with the breasts of gallant men, and think this was waging war.”

Nearly one century later, many generals of many armies remain just as content as ever to fight machine-gun bullets with the breasts of gallant men. We here in the West believe ourselves to be slightly more enlightened. Maybe we are; or maybe today’s generals simply confuse hi-tech weaponry and body armor with “strategy.” Maybe they confuse “safer” with “safe”…while also confusing “can” with “should.”

But one fact is indisputable: No matter how sophisticated the weaponry and armor, inside the uniform you will still find a man or woman with a life to lose. A second fact is also indisputable: An unarmed 18-year old who watches TV in his living room – without a scrap of body armor, mind you – tends to live longer than his fully armed, and amply protected counterparts on a battlefield.

Over in the financial battlefield, a similarly dangerous form of mainstream thought tends to dominate. “You can’t really know the future,” the financial mainstream insists, “so the best bet is just to charge ahead. Buy and hold!”

These generals direct their troops to lock and load and charge the hill. Don’t worry about the barrage of risks that might blow bigger holes in your net worth than a rocket through a Humvee. Your best protection is just to diversify and charge ahead.

This advice is, of course, hogwash. Diversification provides very little protection when the bullets start flying. In fact, as the events of 2008 made very clear, diversification merely adds to the diversity of casualties on the battlefield.

The safest course of action is to avoid the battlefield entirely. But of course, that course of action never wins a war. The second best course of action is to ignore the generals. Avoid mainstream thought. Avoid the tyranny of groupthink. Edge toward the thin tails of investment guidance and thinking. And don’t be afraid to admit that black is black or that white is white.

Here’s a tip: If something looks risky, it probably is. Here’s another tip: if someone’s investment outlook seems illogical, it probably is.

If you study the ingredients that produce the success of the world’s best investors, you usually find one or more of the following traits:

1. Patience. They are neither afraid of doing nothing, nor afraid of waiting for the positive outcome they anticipate.

2. Selectivity. They never buy “the market.” They always buy specific opportunities that offer a specific risk-versus-return profile.

3. Independence. Mainstream thought is of no consequence to them.

Fortunately for most of us, investment success does not require extraordinary genius, but it does require contempt for mainstream advice and groupthink.

Eric Fry
for The Daily Reckoning

Successful Investing in a Market Dominated by Groupthink 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:
Successful Investing in a Market Dominated by Groupthink

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

As I have observed many times, stem cell therapies hold enormous promise for curing disease and repairing tissue. Stem cell science even has the potential to stop or reverse the aging process – at some point. The companies like BioTime Inc. (AMEX:BTIM) that I have recommended to the subscribers of the Breakthrough Technology Alert are expanding their ability to grow the tissues of the human body from their stem cell lines.

While stem cells clearly have the capacity to create transformational therapies, the short-run challenge is to solve the details for particular therapies. Fortunately, that challenge is being met. Astonishing new therapies are racing forward. The repair of damaged tissues and the complete replacement of failed organs with new ones grown from compatible stem cells are on a rapidly approaching horizon. And they’re coming not a moment too soon.

One of the new medical fronts being opened is in the regeneration of damaged bone. By weight, human bone is an amazing material, stronger than steel. It is not only strong, but also somewhat flexible. Bone has an internal structure that takes maximum advantage of the strength of its primary component, calcium phosphate.

The unique features of human bone structure have long spawned attempts at biomimetics, which means “mimicking life.” For example, the description of the internal structure of the head of the thighbone in the 1850s by German paleontologist Hermann von Meyer influenced architecture. One example is the lattice structure of the Eiffel Tower.

Unlike steel structures, bone has one enormous advantage. It is capable of self-repair when damaged. As we age, however, we tend to lose bone density and strength. As we age, we are less able to heal damaged bone. In a sense, you could say the problem is not so much that we age; it is that we lose the ability to regrow. In large part, this is due to the reduction in endogenous stem cells needed to repair the damaged bone. Another part of the problem is a dearth of available growth factors that promote healing in older people. These molecules send signals to cells, telling them to grow and repair damaged bone.

The current standard of care for damaged bone repair uses bone grafts donated from a different part of the patient’s body. The donor bone is usually taken from the hip, or from one of the leg bones. Of course, this procedure has the disadvantage of creating a second surgery site on the body, along with all of the attendant expenses and risks of complication and infection.

A recent study found that after a year, 10% of the patients that have this autograft harvest procedure had clinically significant pain at the donor site. An additional 44% reported some kind of pain at the donor site. Prior to the harvesting procedure, the site was, of course, healthy. In many bone repair procedures, however, these grafts are necessary. A material is required to fill the void in the damaged bone, which also provides an environment for the bone to heal.

But one of the most promising new regenerative technologies would eliminate the need for those bone grafts. This technology utilizes a kind of bioactive “mortar” that can be applied to the site of a bone injury. Once applied, the mortar mimics the regenerative behavior of healthy bone mass, thereby repairing the injured site. Think of how a mason slaps mortar between bricks and you get a rough idea of how effective this technology could be. Clinical trials of this process show that it is at least as effective as bone grafts. However, the data also showed fewer infections, fewer serious adverse events and fewer surgical complications.

With all potential applications taken into account, this breakthrough product could represent an enormously profitable opportunity for the small biotech company that developed it. In the United States alone, total bone grafting procedures are a $4 billion annual market. Meanwhile, this same product offers promise for treating sports injuries like rotator cuff repairs and chronic tendon problems like tennis elbow or plantar fasciitis.

With the huge demographic shift caused by the baby boomer generation’s aging, “regenerative therapies” will become an enormous business opportunity. Companies and investors that develop these therapies will strike gold.

The Great Age of Regenerative Medicine is upon us. Are you ready?

Patrick Cox
for The Daily Reckoning

No More Bones to Pick 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:
No More Bones to Pick

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