Big Pharma’s Most Undervalued Stock

September 22nd, 2010

Big Pharma's Most Undervalued Stock

Large pharmaceutical companies have been ignored by investors for some time now. After decades of gangbuster growth and blockbuster drugs to treat depression, high blood pressure and many other common ailments, many are facing competition from generic drugs as the patents protecting the exclusive right to sell these blockbuster drugs expire.

The primary concern for investors in the industry is that these firms will not recover from the resulting loss in revenue. The respective firms are working to address the “patent cliff” in a number of ways, including mergers, divestitures, cost cutting efforts and developing new drugs to offset lost sales.

Eli Lilly's (NYSE: LLY) predicament is among the most dire in the industry — but its approach to making it through is one of the boldest. Its largest drug, Zyprexa, goes off patent next year; Cymbalta, Gemzar and Humalog will expire in 2013; while Evista will expire in 2014. These drugs represented 57% of last year's sales, while three other drugs that account for another 18% of sales will expire in 2016 and 2017. The situation may be dire, but investors have become too negative on its forward prospects.

The company is working on developing new markets and uses for its existing drugs, but it has some serious work to do to get new drugs into the marketplace. At a recent investment conference I attended, Lilly explained that it took its eye off the ball back around 2004 and that it wasn't as focused on drug development as it should have been. This was probably due to the fact that it wasn't overly worried about sales, which have grown nearly +10% annually since that time. But given the current wave of expirations, Lilly has already begun to turn things around, and product development has tripled from 2004's levels in pretty quick fashion.

Currently, more than 40% of Lilly's pipeline is in the Stage 1 development process. This demonstrates that there is quite a bit of work to do to move these drugs further along. But much of the pipeline is focused on biologics, or biotechnology compounds, which are drugs that are notable for being difficult to replicate, even when they go off patent. Lilly has also sought to acquire players in this space, recently acquiring ImClone Systems to gain control of its cancer treatment drugs.

Going forward, Lilly plans to go it alone and is not currently planning any large merger and acquisition activity. It has detailed at least 10 compounds that should be in Phase 3 clinical trials by the end of 2011, which should have a good chance of making it to market, as success rates are much higher once a compound has made it through the first two clinical phases.

Until the top-line environment improves, Lilly is committed to cost savings. The company is currently in the midst of a $1 billion cost cutting campaign, much of which will come from the culling of employee headcount at its headquarters. The company is also cutting back on capital expenditures. Back in 2004, capex was $1.9 billion, but fell to less than $800 million last year. Other initiatives are to improve manufacturing productivity and shift production to more affordable regions throughout the world.

Despite the sales headwinds during the next few years, Lilly has committed to at least maintaining its dividend. The current dividend yield is 5.5% and costs the firm slightly more than $2 billion a year to maintain.

For the full year, Lilly expects high single digit revenue growth and earnings from continuing operations between $4.65 and $4.85 per share. It expects to end the year with $3.5 billion in cash on the balance sheet — more than enough to cover the dividend obligations — and has also been working to pay down debt. Lilly expects to grow earnings in the double digits through 2011.

Action to Take —> Based on current profitability and through next year, Lilly's stock looks like a certifiable steal given its P/E ratio of 9. However, past 2011, earnings will start to reflect the lost sales and should dip below $3.50 per share. But still, based on the current share price, this will still be a low double-digit P/E ratio.

The wild card is new sales, but Lilly has a number of avenues, given its product pipeline and focus on biologics. The company detailed the potential launch of 24 development drugs just as patent expirations peak between 2013 and 2016, and the CEO also recently detailed ambitions in faster-growing emerging markets and animal health products. The company plans to more than double sales in each of these areas.

A commitment to cost cutting is also noteworthy, as is maintaining the dividend, which provides a 5.5% annual yield while shareholders wait for top-line trends to improve. It may take a few more years, but investors should reasonably expect double-digit total returns from the stock, with limited downside risk.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

Big Pharma’s Most Undervalued Stock

September 22nd, 2010

Big Pharma's Most Undervalued Stock

Large pharmaceutical companies have been ignored by investors for some time now. After decades of gangbuster growth and blockbuster drugs to treat depression, high blood pressure and many other common ailments, many are facing competition from generic drugs as the patents protecting the exclusive right to sell these blockbuster drugs expire.

The primary concern for investors in the industry is that these firms will not recover from the resulting loss in revenue. The respective firms are working to address the “patent cliff” in a number of ways, including mergers, divestitures, cost cutting efforts and developing new drugs to offset lost sales.

Eli Lilly's (NYSE: LLY) predicament is among the most dire in the industry — but its approach to making it through is one of the boldest. Its largest drug, Zyprexa, goes off patent next year; Cymbalta, Gemzar and Humalog will expire in 2013; while Evista will expire in 2014. These drugs represented 57% of last year's sales, while three other drugs that account for another 18% of sales will expire in 2016 and 2017. The situation may be dire, but investors have become too negative on its forward prospects.

The company is working on developing new markets and uses for its existing drugs, but it has some serious work to do to get new drugs into the marketplace. At a recent investment conference I attended, Lilly explained that it took its eye off the ball back around 2004 and that it wasn't as focused on drug development as it should have been. This was probably due to the fact that it wasn't overly worried about sales, which have grown nearly +10% annually since that time. But given the current wave of expirations, Lilly has already begun to turn things around, and product development has tripled from 2004's levels in pretty quick fashion.

Currently, more than 40% of Lilly's pipeline is in the Stage 1 development process. This demonstrates that there is quite a bit of work to do to move these drugs further along. But much of the pipeline is focused on biologics, or biotechnology compounds, which are drugs that are notable for being difficult to replicate, even when they go off patent. Lilly has also sought to acquire players in this space, recently acquiring ImClone Systems to gain control of its cancer treatment drugs.

Going forward, Lilly plans to go it alone and is not currently planning any large merger and acquisition activity. It has detailed at least 10 compounds that should be in Phase 3 clinical trials by the end of 2011, which should have a good chance of making it to market, as success rates are much higher once a compound has made it through the first two clinical phases.

Until the top-line environment improves, Lilly is committed to cost savings. The company is currently in the midst of a $1 billion cost cutting campaign, much of which will come from the culling of employee headcount at its headquarters. The company is also cutting back on capital expenditures. Back in 2004, capex was $1.9 billion, but fell to less than $800 million last year. Other initiatives are to improve manufacturing productivity and shift production to more affordable regions throughout the world.

Despite the sales headwinds during the next few years, Lilly has committed to at least maintaining its dividend. The current dividend yield is 5.5% and costs the firm slightly more than $2 billion a year to maintain.

For the full year, Lilly expects high single digit revenue growth and earnings from continuing operations between $4.65 and $4.85 per share. It expects to end the year with $3.5 billion in cash on the balance sheet — more than enough to cover the dividend obligations — and has also been working to pay down debt. Lilly expects to grow earnings in the double digits through 2011.

Action to Take —> Based on current profitability and through next year, Lilly's stock looks like a certifiable steal given its P/E ratio of 9. However, past 2011, earnings will start to reflect the lost sales and should dip below $3.50 per share. But still, based on the current share price, this will still be a low double-digit P/E ratio.

The wild card is new sales, but Lilly has a number of avenues, given its product pipeline and focus on biologics. The company detailed the potential launch of 24 development drugs just as patent expirations peak between 2013 and 2016, and the CEO also recently detailed ambitions in faster-growing emerging markets and animal health products. The company plans to more than double sales in each of these areas.

A commitment to cost cutting is also noteworthy, as is maintaining the dividend, which provides a 5.5% annual yield while shareholders wait for top-line trends to improve. It may take a few more years, but investors should reasonably expect double-digit total returns from the stock, with limited downside risk.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

10 Bold Predictions for the Next 12 Months

September 22nd, 2010

10 Bold Predictions for the Next 12 Months

Even as you continually assess current events for any impact on your portfolio, you also need to spend time thinking about what events may be on the horizon. And although none of us has a crystal ball, it's important to try to anticipate the direction of economics, sector activity, politics and virtually any other issues that may affect the investment environment.

The list below contains possible scenarios for the next 12 months that could impact your portfolio in a meaningful way. Some, such as the expectation that individual investors will rotate assets back into the stock market are said with a fairly high degree of conviction, while others such as a subsiding of violence in Mexico, are simply expressed as potential scenarios.

1. New jobless claims fall below 400,000 later in the fourth quarter, and meaningful job creation begins in earnest in 2011 as companies realize that they've squeezed out all possible productivity enhancements and need to re-build depleted workforces. The unemployment rate is slow to fall, as previously discouraged workers start to look for work again. But investors focus on the monthly jobs creation number instead of the actual unemployment rate.

2. Noting the impressive synergies that Delta (NYSE: DAL) derived from its merger with Northwest (which were only belatedly appreciated by investors), investors start to bid up shares of UAL (NYSE: UAL), which will have the surviving ticker in the newly-renamed United Continental Holdings. Investors take note of the fairly low P/E ratios in the sector, even as it has rebounded sharply in the last 12 months. P/E ratios move +50% higher during the next year, as investor concerns about any new economic weakness start to abate. Airlines are able to raise prices only modestly, but passenger volumes per plane, along with capacity increases, continue to grow, setting the stage for a further rebound in profit gains for the sector into 2011 and 2012.

3. Venture capitalists start to get anxious. With pensions and endowments looking to pull some money out of venture capital funds, venture capital firms seek ways to monetize their holdings. As the IPO market remains in a funk, they seek out large public tech companies to buy out at large discounts to recent financing rounds. This extends the tech M&A frenzy, and these deals help set the stage for further gains in tech stocks in 2011.

4. Britain's financial austerity plans are watered down a bit by Parliament, but still lead to an unexpected shock in the U.K.'s economy in 2011 as unemployment rises, labor strikes ensue and the pound starts to lose its safe-haven status. Major British corporate and real estate assets go up for sale, and newly-injected foreign capital sets the stage for a nice rebound, but not for several years. The weaker British Pound also triggers a surge in tourism, one of the country's few bright spots in 2011.

5. States finally stop bleeding, as heavy cost cuts take effect and revenue finally starts to rise at a modest pace. Several states with high debt-levels reach a crisis point in 2011 as federal stimulus support winds down, but most states start to move back toward a balanced budget. Smaller state governments create a local drag on employment in places like Albany, NY, Madison, WI and Sacramento, CA.

6. Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013.

7. Health care reforms begin to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the GOP uses the issue as a political wedge. The signs of a political center emerge after a sharp veer to the right by the GOP in this fall's elections spook moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012.

8. Oil prices start to move toward the $100 mark as global demand starts to meet supply. Airline stocks are still able to rally in this environment (unless oil exceeds $100 per barrel). Natural gas prices rise moderately, but still remain well below the peaks of 2007 and 2008. An increasing number of auto and truck makers announce plans to sell natural gas-powered cars.

9. Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. The Mexican crime surge finally starts to abate with increased help from foreign governments. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation's bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the stock market in 2011 as government economists predict a fiscal crisis for subsequent years.

10. In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.

Action to Take –> On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound from the spring of 2009 to the spring of 2010, investors will need to temper their expectations. Average gains in the +6% to +8% range should be welcomed, especially in the face of tepid fixed income yields. But any market rally that moves the market's gains well above that rate should be a reason to take profits. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will also become a major theme.


– David Sterman

P.S. –

Uncategorized

10 Bold Predictions for the Next 12 Months

September 22nd, 2010

10 Bold Predictions for the Next 12 Months

Even as you continually assess current events for any impact on your portfolio, you also need to spend time thinking about what events may be on the horizon. And although none of us has a crystal ball, it's important to try to anticipate the direction of economics, sector activity, politics and virtually any other issues that may affect the investment environment.

The list below contains possible scenarios for the next 12 months that could impact your portfolio in a meaningful way. Some, such as the expectation that individual investors will rotate assets back into the stock market are said with a fairly high degree of conviction, while others such as a subsiding of violence in Mexico, are simply expressed as potential scenarios.

1. New jobless claims fall below 400,000 later in the fourth quarter, and meaningful job creation begins in earnest in 2011 as companies realize that they've squeezed out all possible productivity enhancements and need to re-build depleted workforces. The unemployment rate is slow to fall, as previously discouraged workers start to look for work again. But investors focus on the monthly jobs creation number instead of the actual unemployment rate.

2. Noting the impressive synergies that Delta (NYSE: DAL) derived from its merger with Northwest (which were only belatedly appreciated by investors), investors start to bid up shares of UAL (NYSE: UAL), which will have the surviving ticker in the newly-renamed United Continental Holdings. Investors take note of the fairly low P/E ratios in the sector, even as it has rebounded sharply in the last 12 months. P/E ratios move +50% higher during the next year, as investor concerns about any new economic weakness start to abate. Airlines are able to raise prices only modestly, but passenger volumes per plane, along with capacity increases, continue to grow, setting the stage for a further rebound in profit gains for the sector into 2011 and 2012.

3. Venture capitalists start to get anxious. With pensions and endowments looking to pull some money out of venture capital funds, venture capital firms seek ways to monetize their holdings. As the IPO market remains in a funk, they seek out large public tech companies to buy out at large discounts to recent financing rounds. This extends the tech M&A frenzy, and these deals help set the stage for further gains in tech stocks in 2011.

4. Britain's financial austerity plans are watered down a bit by Parliament, but still lead to an unexpected shock in the U.K.'s economy in 2011 as unemployment rises, labor strikes ensue and the pound starts to lose its safe-haven status. Major British corporate and real estate assets go up for sale, and newly-injected foreign capital sets the stage for a nice rebound, but not for several years. The weaker British Pound also triggers a surge in tourism, one of the country's few bright spots in 2011.

5. States finally stop bleeding, as heavy cost cuts take effect and revenue finally starts to rise at a modest pace. Several states with high debt-levels reach a crisis point in 2011 as federal stimulus support winds down, but most states start to move back toward a balanced budget. Smaller state governments create a local drag on employment in places like Albany, NY, Madison, WI and Sacramento, CA.

6. Individual investors finally start to re-enter U.S. equities in a major way in 2011 as the need to build savings in the face of looming retirements becomes a major consumer concern, and rising savings levels that are getting paltry yields in CDs or bond funds get put back into the market. The market rallies in the first half of 2011, as the third year of a presidential cycle is usually quite good for stocks and economists start to look ahead to moderate growth in 2012 and 2013.

7. Health care reforms begin to take effect, with unexpected positive and negative results. Major programs are modified, but not repealed, even as the GOP uses the issue as a political wedge. The signs of a political center emerge after a sharp veer to the right by the GOP in this fall's elections spook moderate Republicans. Bipartisan legislation starts to gain traction again as the GOP realizes that a centrist approach is the only chance the party has to take back the White House in 2012.

8. Oil prices start to move toward the $100 mark as global demand starts to meet supply. Airline stocks are still able to rally in this environment (unless oil exceeds $100 per barrel). Natural gas prices rise moderately, but still remain well below the peaks of 2007 and 2008. An increasing number of auto and truck makers announce plans to sell natural gas-powered cars.

9. Latin America finally sheds its reputation as a region of only upper and lower classes, and finally gets credit for a fast-growing middle class. This in turn leads to a continued influx of global investment, setting the stage for further market gains in Brazil, Colombia and Chile in 2011. The Mexican crime surge finally starts to abate with increased help from foreign governments. A pick-up in the U.S. economy gives a corollary boost to Mexican importers. But the Mexican government faces a renewed crisis when declining oil revenue forces it to sharply curtail staff at Pemex, the nation's bloated national oil company. The projected long-term drop in oil output at aging fields leads to a sharp drop in the stock market in 2011 as government economists predict a fiscal crisis for subsequent years.

10. In the final quarter of 2011, the housing market finally springs to life as emboldened home buyers jump in after seeing housing prices start to rise. Housing prices will take a number of years to return to pre-recession levels, and housing starts will also remain below their peak, but still start to trend higher in 2012, 2013 and 2014.

Action to Take –> On balance, these factors are largely positive and should set the stage for moderate gains for equity investors. But after the strong rebound from the spring of 2009 to the spring of 2010, investors will need to temper their expectations. Average gains in the +6% to +8% range should be welcomed, especially in the face of tepid fixed income yields. But any market rally that moves the market's gains well above that rate should be a reason to take profits. As noted above, tech stocks, airline stocks and housing stocks would all benefit from an improving economy. To the extent the dollar starts to weaken, export-focused multinationals will also become a major theme.


– David Sterman

P.S. –

Uncategorized

5 Chinese Stocks with Unlimited Potential

September 22nd, 2010

5 Chinese Stocks with Unlimited Potential

Investing in China has not been for the faint of heart. Shares of major companies have surged and fallen in repeating cycles during the past few years. But take a step back and note that China's economic growth has only been going one way — up. China has had a remarkable run and years of robust economic growth have enabled it to move into the top tier of global economies in terms of GDP.

Thanks to the laws of bigness, China's future economic growth is unlikely to be as impressive. But thanks to very heavy investments in infrastructure, China is now well-equipped to handle a sustained period of solid economic growth — perhaps in the +4% to +5% range. That's a rate that we here in the United States can only envy.

The key then is to not simply focus on Chinese stocks that are doing great right now, but instead look for Chinese companies that stand to do well over time — that means companies focused on China's emerging middle class. As the ranks of the Chinese middle class swell, look for growing spending on health care, retail goods and tourism, along with sustained advances in agricultural yields and energy efficiency.

Ctrip.com (Nasdaq: CTRP)
With rising disposable income comes the urge to travel, and Chinese citizens are increasingly venturing out, either elsewhere in China or throughout Asia. And they're increasingly using the Internet to research and book flights and hotels. But this is not yet a mature business. Less than 30% of the Chinese population is currently online, compared to more than 70% in countries such as Korea, Japan and Singapore, according to global communications firm Fleishmann-Hillard.

How large is the potential travel market? During the late September/early October holidays, roughly 200 million Chinese are expected to hit the road (mostly to go back to their home region). That's nearly the entire population of the United States. And according to analysts at Brean Murray, 10% of Chinese travelers now use the Internet to arrange travel plans — roughly 20 million people. That figure is expected to rise to 60 million in 10 years.

Ctrip.com is seen as the best pure play in the online booking space (along the lines of Expedia (Nasdaq: EXPE)), and has considerable brand recognition in this fast-growing area. Web portal Taobao.com has vowed to overtake Ctrip.com eventually, but there's ample room for both of these firms to flourish.

As for major hotel chains, Home Inns & Hotels (Nasdaq: HMIN) has established a national network of lodgings, along the lines of Holiday Inn or Best Western. China Lodging (Nasdaq: HTHT) has similarly built an impressive national footprint. However, both of these stocks are awfully expensive based on trailing and current earnings. This is a case where it may be wise to wait for a pullback, so you may want to put these names on your watch list.

The ad market builds
Chinese consumers are bombarded with advertising pitches at every turn. But companies are realizing that the scatter-shot approach isn't helping to truly establish brands in consumers' minds, so they are turning to specialized agencies that have more targeted ad campaigns tied in across several types of media. Sina.com (Nasdaq: SINA) has emerged as a leader in the space. The company's range of tools, both offline and offline, are considered to be very innovative, which has enabled Sina.com to quickly build a large base of Chinese and foreign clients that are looking to get a foothold in China.

The market for Sina.com's services slowed earlier this year, and sales growth is expected to cool to about +10% in 2010. But recent results have been much more encouraging, leading analysts to expect a +20% rebound in sales next year. Over the long haul, investors should expect solid +10% top-line growth and more impressive bottom-line results.

Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, noting that it is morphing from a supplier of global kitchen appliance firms into a solid brand in its own right in China. Growth has ranged from steady to spectacular: sales are likely to double this year and grow another +25% in 2011. Longer-term, sales growth is likely to moderate in step with China's decelerating GDP growth.

Shares of Deer hit almost $18 last fall and can now be had for less than $10, even as earnings per share (EPS) estimates have steadily risen during that time frame. The company's balance sheet is helping to support shares, as management has recently announced a series of stock buybacks. This is a solid, unsexy play on the Chinese consumer.

Cars, cars and more cars
Chinese consumers have quickly grown to love their cars. And the nascent Chinese auto industry aims to capitalize on that demand and also eventually export to other markets — if quality standards can be boosted. It's hard to find U.S.-traded shares of any Chinese auto makers, but Wonder Auto Group (Nasdaq: WATG) is a backdoor play, providing a wide range of auto parts to the big auto makers. The company makes everything from alternators to seat belts to airbags. And as is the case with Deer Consumer Products, exports are also part of the picture, which explains why the auto parts sector has been growing even faster than the auto sector itself.

Water treatment
China's water woes have been widely chronicled. The country's pro-industrial policies led to epidemic levels of pollutants being dumped into the country's major waterways. Regulatory efforts are finally starting to take root, but it will be many years before the water from major rivers is truly potable. But China is aggressively building filtration plants to at least clean up the dirty water so it is fit for consumption. The Chinese government is increasingly turning to companies like Duoyuan Global Water (NYSE: DGW). This company makes a range of filtration products, water softeners and ultra-violet sterilization equipment.

Shares plunged more than -40% on September 13 when Duoyuan Printing (NYSE: DYP) owned up to some accounting problems. The two companies are unrelated except that they have the same Chairman. As of now, Duoyuan Global Water simply looks guilty by association. If the company can avoid accounting troubles in coming months and auditors continue to give it a clean bill of health, shares should move back up off current lows. More importantly, the company's products should see considerable demand for the foreseeable future.

Action to Take –> These are just a few of the stocks that investors looking at China should be researching. In many respects, the theme is even more important than specific stock selection. China's economy has become too large to ignore, and many China-focused companies will see a very long period of sales and profit growth.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
5 Chinese Stocks with Unlimited Potential

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5 Chinese Stocks with Unlimited Potential

Uncategorized

5 Chinese Stocks with Unlimited Potential

September 22nd, 2010

5 Chinese Stocks with Unlimited Potential

Investing in China has not been for the faint of heart. Shares of major companies have surged and fallen in repeating cycles during the past few years. But take a step back and note that China's economic growth has only been going one way — up. China has had a remarkable run and years of robust economic growth have enabled it to move into the top tier of global economies in terms of GDP.

Thanks to the laws of bigness, China's future economic growth is unlikely to be as impressive. But thanks to very heavy investments in infrastructure, China is now well-equipped to handle a sustained period of solid economic growth — perhaps in the +4% to +5% range. That's a rate that we here in the United States can only envy.

The key then is to not simply focus on Chinese stocks that are doing great right now, but instead look for Chinese companies that stand to do well over time — that means companies focused on China's emerging middle class. As the ranks of the Chinese middle class swell, look for growing spending on health care, retail goods and tourism, along with sustained advances in agricultural yields and energy efficiency.

Ctrip.com (Nasdaq: CTRP)
With rising disposable income comes the urge to travel, and Chinese citizens are increasingly venturing out, either elsewhere in China or throughout Asia. And they're increasingly using the Internet to research and book flights and hotels. But this is not yet a mature business. Less than 30% of the Chinese population is currently online, compared to more than 70% in countries such as Korea, Japan and Singapore, according to global communications firm Fleishmann-Hillard.

How large is the potential travel market? During the late September/early October holidays, roughly 200 million Chinese are expected to hit the road (mostly to go back to their home region). That's nearly the entire population of the United States. And according to analysts at Brean Murray, 10% of Chinese travelers now use the Internet to arrange travel plans — roughly 20 million people. That figure is expected to rise to 60 million in 10 years.

Ctrip.com is seen as the best pure play in the online booking space (along the lines of Expedia (Nasdaq: EXPE)), and has considerable brand recognition in this fast-growing area. Web portal Taobao.com has vowed to overtake Ctrip.com eventually, but there's ample room for both of these firms to flourish.

As for major hotel chains, Home Inns & Hotels (Nasdaq: HMIN) has established a national network of lodgings, along the lines of Holiday Inn or Best Western. China Lodging (Nasdaq: HTHT) has similarly built an impressive national footprint. However, both of these stocks are awfully expensive based on trailing and current earnings. This is a case where it may be wise to wait for a pullback, so you may want to put these names on your watch list.

The ad market builds
Chinese consumers are bombarded with advertising pitches at every turn. But companies are realizing that the scatter-shot approach isn't helping to truly establish brands in consumers' minds, so they are turning to specialized agencies that have more targeted ad campaigns tied in across several types of media. Sina.com (Nasdaq: SINA) has emerged as a leader in the space. The company's range of tools, both offline and offline, are considered to be very innovative, which has enabled Sina.com to quickly build a large base of Chinese and foreign clients that are looking to get a foothold in China.

The market for Sina.com's services slowed earlier this year, and sales growth is expected to cool to about +10% in 2010. But recent results have been much more encouraging, leading analysts to expect a +20% rebound in sales next year. Over the long haul, investors should expect solid +10% top-line growth and more impressive bottom-line results.

Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, noting that it is morphing from a supplier of global kitchen appliance firms into a solid brand in its own right in China. Growth has ranged from steady to spectacular: sales are likely to double this year and grow another +25% in 2011. Longer-term, sales growth is likely to moderate in step with China's decelerating GDP growth.

Shares of Deer hit almost $18 last fall and can now be had for less than $10, even as earnings per share (EPS) estimates have steadily risen during that time frame. The company's balance sheet is helping to support shares, as management has recently announced a series of stock buybacks. This is a solid, unsexy play on the Chinese consumer.

Cars, cars and more cars
Chinese consumers have quickly grown to love their cars. And the nascent Chinese auto industry aims to capitalize on that demand and also eventually export to other markets — if quality standards can be boosted. It's hard to find U.S.-traded shares of any Chinese auto makers, but Wonder Auto Group (Nasdaq: WATG) is a backdoor play, providing a wide range of auto parts to the big auto makers. The company makes everything from alternators to seat belts to airbags. And as is the case with Deer Consumer Products, exports are also part of the picture, which explains why the auto parts sector has been growing even faster than the auto sector itself.

Water treatment
China's water woes have been widely chronicled. The country's pro-industrial policies led to epidemic levels of pollutants being dumped into the country's major waterways. Regulatory efforts are finally starting to take root, but it will be many years before the water from major rivers is truly potable. But China is aggressively building filtration plants to at least clean up the dirty water so it is fit for consumption. The Chinese government is increasingly turning to companies like Duoyuan Global Water (NYSE: DGW). This company makes a range of filtration products, water softeners and ultra-violet sterilization equipment.

Shares plunged more than -40% on September 13 when Duoyuan Printing (NYSE: DYP) owned up to some accounting problems. The two companies are unrelated except that they have the same Chairman. As of now, Duoyuan Global Water simply looks guilty by association. If the company can avoid accounting troubles in coming months and auditors continue to give it a clean bill of health, shares should move back up off current lows. More importantly, the company's products should see considerable demand for the foreseeable future.

Action to Take –> These are just a few of the stocks that investors looking at China should be researching. In many respects, the theme is even more important than specific stock selection. China's economy has become too large to ignore, and many China-focused companies will see a very long period of sales and profit growth.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
5 Chinese Stocks with Unlimited Potential

Read more here:
5 Chinese Stocks with Unlimited Potential

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This Dow Stock is Overvalued by at Least 25%

September 22nd, 2010

This Dow Stock is Overvalued by at Least 25%

Cyclical stocks have always been tricky for investors. At the bottom of an economic cycle, they can appear to have fairly high price-to-earnings (P/E) ratios as investors look ahead to better times. When the cycle improves and approaches a peak, the P/E multiple then tends to shrink as investors brace for an earnings downdraft. That's why a company like U.S. Steel (NYSE: X) can trade for 30 or 40 times profits during bad times, but end up trading for only six or seven times profits when earnings growth has maxed out.

In that light, it's a bit curious that shares of Boeing (NYSE: BA) trade for 13 times next year's earnings. Because by my math, 2011 could wind up being a peak year for Boeing, and profits look set to slump in subsequent years. Don't blame the economy. For the broader economy — and many cyclical stocks — the economic cycle has only just begun to turn and we may not see a peak until the middle of the decade. Boeing is peaking for an entirely different reason. One of its core markets is about to flatten out and then shrink. And the other market is about to see a sharp spike in competition.

A sea change at the Dept. of Defense
In recent weeks, Defense Secretary Robert Gates has made it increasingly clear that his department will have to tighten its belt along with everyone else. For now, that means the never-ending budget increases in defense spending will need to come to a halt. And after the war in Afghanistan concludes, defense spending could start to fall at a steady clip. During the past 10 years, spending at the Department of Defense has gone up an average of +6.4% every year. That works out to an +86% increase in the past 10 years. That looks set to reverse course, unless we enter into another war. In the 1990s, defense spending reductions were called a “peace dividend.” This time, those spending cuts could be known as “budget saviors.”

Boeing's defense business, which represents half of company sales, focuses on weapons and aircraft capabilities, intelligence and surveillance systems, communications architectures and extensive large-scale integration expertise. Demand will always remain for these types of items, but Boeing is already seeing certain potentially lucrative programs get cut from the budget. And the process is just getting started. “Based on our reading of the 2010 Quadrennial Defense Review (QDR), we believe long-term major development programs will come under more scrutiny, and therefore we expect to see more disciplined spending on these programs in the future,” note analysts at Imperial Capital. In addition, Boeing is the fourth-largest vendor to the Department of Homeland Security (DHS), with $2.3 billion in sales last year. The DHS budget is also at risk of a pullback in spending as industry analysts increasingly agree that the DHS has become bloated and unwieldy.

Commercial airline competition heats up
For many years Boeing and Airbus enjoyed a virtual stranglehold in the commercial aerospace market. But in the last decade, Canada's Bombardier and Brazil's Embraer (NYSE: ERJ) developed impressive new planes, cannibalizing market share in the regional jet category.
[Read: This Unknown Brazilian Stock Could Unseat Two Global Powerhouses]

Boeing and Airbus' grip on the jumbo jet market has been untouched and is likely to remain that way. But the market for smaller planes is about to get a lot more crowded, creating real competition for the Boeing 737 and the Airbus 320. Industry publication AirInsight recently noted that: “New entrants for the 150-seat market segment in China, Russia and potentially Japan will have an impact on Airbus and Boeing. While we don't expect these programs to be particularly successful outside the home markets, these domestic sales will significantly eat into the market shares of Airbus and Boeing.”

Action to Take –> Boeing can still count on a fairly hefty backlog in each of these divisions. So sales and profits are unlikely to plummet once a peak has been reached. Instead, look for orders in both divisions start to slump, beginning in 2011. That should lead to a steady downdraft in backlog, which is the key metric that most investors focus upon. As noted, Boeing is entering the peak phase of its cycle, and this business should be worth no more than 10 times peak earnings — implying nearly -25% downside.


– 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 Dow Stock is Overvalued by at Least 25%

Read more here:
This Dow Stock is Overvalued by at Least 25%

Uncategorized

This Dow Stock is Overvalued by at Least 25%

September 22nd, 2010

This Dow Stock is Overvalued by at Least 25%

Cyclical stocks have always been tricky for investors. At the bottom of an economic cycle, they can appear to have fairly high price-to-earnings (P/E) ratios as investors look ahead to better times. When the cycle improves and approaches a peak, the P/E multiple then tends to shrink as investors brace for an earnings downdraft. That's why a company like U.S. Steel (NYSE: X) can trade for 30 or 40 times profits during bad times, but end up trading for only six or seven times profits when earnings growth has maxed out.

In that light, it's a bit curious that shares of Boeing (NYSE: BA) trade for 13 times next year's earnings. Because by my math, 2011 could wind up being a peak year for Boeing, and profits look set to slump in subsequent years. Don't blame the economy. For the broader economy — and many cyclical stocks — the economic cycle has only just begun to turn and we may not see a peak until the middle of the decade. Boeing is peaking for an entirely different reason. One of its core markets is about to flatten out and then shrink. And the other market is about to see a sharp spike in competition.

A sea change at the Dept. of Defense
In recent weeks, Defense Secretary Robert Gates has made it increasingly clear that his department will have to tighten its belt along with everyone else. For now, that means the never-ending budget increases in defense spending will need to come to a halt. And after the war in Afghanistan concludes, defense spending could start to fall at a steady clip. During the past 10 years, spending at the Department of Defense has gone up an average of +6.4% every year. That works out to an +86% increase in the past 10 years. That looks set to reverse course, unless we enter into another war. In the 1990s, defense spending reductions were called a “peace dividend.” This time, those spending cuts could be known as “budget saviors.”

Boeing's defense business, which represents half of company sales, focuses on weapons and aircraft capabilities, intelligence and surveillance systems, communications architectures and extensive large-scale integration expertise. Demand will always remain for these types of items, but Boeing is already seeing certain potentially lucrative programs get cut from the budget. And the process is just getting started. “Based on our reading of the 2010 Quadrennial Defense Review (QDR), we believe long-term major development programs will come under more scrutiny, and therefore we expect to see more disciplined spending on these programs in the future,” note analysts at Imperial Capital. In addition, Boeing is the fourth-largest vendor to the Department of Homeland Security (DHS), with $2.3 billion in sales last year. The DHS budget is also at risk of a pullback in spending as industry analysts increasingly agree that the DHS has become bloated and unwieldy.

Commercial airline competition heats up
For many years Boeing and Airbus enjoyed a virtual stranglehold in the commercial aerospace market. But in the last decade, Canada's Bombardier and Brazil's Embraer (NYSE: ERJ) developed impressive new planes, cannibalizing market share in the regional jet category.
[Read: This Unknown Brazilian Stock Could Unseat Two Global Powerhouses]

Boeing and Airbus' grip on the jumbo jet market has been untouched and is likely to remain that way. But the market for smaller planes is about to get a lot more crowded, creating real competition for the Boeing 737 and the Airbus 320. Industry publication AirInsight recently noted that: “New entrants for the 150-seat market segment in China, Russia and potentially Japan will have an impact on Airbus and Boeing. While we don't expect these programs to be particularly successful outside the home markets, these domestic sales will significantly eat into the market shares of Airbus and Boeing.”

Action to Take –> Boeing can still count on a fairly hefty backlog in each of these divisions. So sales and profits are unlikely to plummet once a peak has been reached. Instead, look for orders in both divisions start to slump, beginning in 2011. That should lead to a steady downdraft in backlog, which is the key metric that most investors focus upon. As noted, Boeing is entering the peak phase of its cycle, and this business should be worth no more than 10 times peak earnings — implying nearly -25% downside.


– 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 Dow Stock is Overvalued by at Least 25%

Read more here:
This Dow Stock is Overvalued by at Least 25%

Uncategorized

Homebuilder ETFs Likely To Fall

September 22nd, 2010

The Commerce Department recently announced that housing starts rose 10.5% last month to an adjusted annual rate of 598,000, giving positive price support to the SPDR S&P Homebuilders ETF (XHB), the iShares Dow Jones Home Construction (ITB) and the PowerShares Dynamic Building/Construction ETF (PKB).  

In general, housing starts are an important indicator of activity in the real estate markets and as starts increase, future construction generally remains healthy.  However, the opposite in this recent surge in new home construction is likely to prevail due to supply and demand imbalances and eventually hinder the real estate markets. 

An excess of supply is likely to be seen in the coming months as the massive number of home foreclosures, repossessions and properties sitting on bank’s balance sheets are expected to hit the market.  This imminent surge in supply is anticipated to push inventories of existing homes close to 12 months, if not even higher. 

Furthermore, demand for residential real estate is not likely to see a significant uptick any time soon.  Although the Federal Reserve has pushed lending rates to near record lows, many are unable or unwilling to take advantage of these low interest rates.  Additionally, companies still remain reluctant to increase headcount even though many are posting increased profits and have an abundance of cash.   At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected, and the only way to fix this is through the stabilizing of the labor markets.  It’s awfully difficult to obtain a mortgage — or better yet, keep paying a current mortgage — without a job.

As a result, the supply and demand imbalance in the housing markets is likely to cause the recent big swing seen in housing starts to be reversed in the coming months, resulting in negative price support for homebuilders. 

As mentioned above, ETFs that are likely to be influenced by microeconomic forces in the real estate markets include:

  • SPDR S&P Homebuilders (XHB), which includes numerous holdings that are directly correlated to the performance of the residential real estate sector such as Williams-Sonoma Inc () and flooring company Armstrong World Industries (AWI)
  • iShares Dow Jones Home Construction (ITB), which includes homebuilders like D.R. Horton Inc. (DHI), Pulte Group (PHM) and Lennar Corp. (LEN) in its top holdings.
  • PowerShares Dynamic Building/Construction ETF (PKB), which includes DR Horton, Home Depot (HD) and Lowe’s (LOW) in its top holdings.

Disclosure: No Positions

Read more here:
Homebuilder ETFs Likely To Fall




HERE IS YOUR FOOTER

ETF, Real Estate, Uncategorized

Homebuilder ETFs Likely To Fall

September 22nd, 2010

The Commerce Department recently announced that housing starts rose 10.5% last month to an adjusted annual rate of 598,000, giving positive price support to the SPDR S&P Homebuilders ETF (XHB), the iShares Dow Jones Home Construction (ITB) and the PowerShares Dynamic Building/Construction ETF (PKB).  

In general, housing starts are an important indicator of activity in the real estate markets and as starts increase, future construction generally remains healthy.  However, the opposite in this recent surge in new home construction is likely to prevail due to supply and demand imbalances and eventually hinder the real estate markets. 

An excess of supply is likely to be seen in the coming months as the massive number of home foreclosures, repossessions and properties sitting on bank’s balance sheets are expected to hit the market.  This imminent surge in supply is anticipated to push inventories of existing homes close to 12 months, if not even higher. 

Furthermore, demand for residential real estate is not likely to see a significant uptick any time soon.  Although the Federal Reserve has pushed lending rates to near record lows, many are unable or unwilling to take advantage of these low interest rates.  Additionally, companies still remain reluctant to increase headcount even though many are posting increased profits and have an abundance of cash.   At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected, and the only way to fix this is through the stabilizing of the labor markets.  It’s awfully difficult to obtain a mortgage — or better yet, keep paying a current mortgage — without a job.

As a result, the supply and demand imbalance in the housing markets is likely to cause the recent big swing seen in housing starts to be reversed in the coming months, resulting in negative price support for homebuilders. 

As mentioned above, ETFs that are likely to be influenced by microeconomic forces in the real estate markets include:

  • SPDR S&P Homebuilders (XHB), which includes numerous holdings that are directly correlated to the performance of the residential real estate sector such as Williams-Sonoma Inc (WSM) and flooring company Armstrong World Industries (AWI)
  • iShares Dow Jones Home Construction (ITB), which includes homebuilders like D.R. Horton Inc. (DHI), Pulte Group (PHM) and Lennar Corp. (LEN) in its top holdings.
  • PowerShares Dynamic Building/Construction ETF (PKB), which includes DR Horton, Home Depot (HD) and Lowe’s (LOW) in its top holdings.

Disclosure: No Positions

Read more here:
Homebuilder ETFs Likely To Fall




HERE IS YOUR FOOTER

ETF, Real Estate, Uncategorized

Which Way for Stocks? Bonds Give a Clue

September 21st, 2010

Sherlock Holmes sometimes solved great problems just by lolling around in his smoking jacket and puffing at his pipe for hours. In “The Man With the Twisted Lip,” Holmes solves the case with ease without leaving his flat.

An incredulous Mr. Bradstreet asks, “I wish I knew how you reach your results.”

Holmes replies: “I reached this one by sitting upon five pillows and consuming an ounce of shag.”

In that spirit – sans pillows and tobacco – it seems I’ve spent a lot of time this week sitting around reading odd stuff and mulling over clues. I did find some clues in the bond market that tell us where the stock market may go next.

You’ll be surprised at what these clues say.

They come from a look back at history. One analyst found that when the beauty contest between stocks and bonds sets up as it does today, bonds get destroyed. “For the third time since the 1850s,” he writes, “30-year rolling real bond returns are near equity returns, and on both previous occasions, multi-decade bond bear markets followed.”

And for stocks? Well, this same fellow deduces from the same history that stocks could rise 30% or more as inflationary expectations rise.

Before you scoff at this outbreak of optimism, consider that this is from one of the great students of bear markets. He knows their ways and histories. Heck, he wrote a book about them, The Anatomy of the Bear. And he thinks we’re in a secular bear market for stocks now. (“Secular” being a cherished Wall Street fancy dan word. It means “long-term.”)

So who is this guy and what gives?

Let me preface this discussion by saying that I don’t usually like to guess about where the stock market may go next. We simply play the ball where it lies, like an honest golfer. Besides, in my investment letter, Capital & Crisis, we don’t buy the stock market. We buy specific stocks. I think it is infinitely more useful to spend my time looking at specific stocks and to just be picky about what we buy.

Still, I sometimes like to think about the great ebb and flow of market movements. Today is one of those days.

Anyway, the analyst quoted up top is Russell Napier, the global macro strategist for CLSA, an investment firm. He lays out his case in a report titled “It’s Not the Economy, Stupid.” Napier shows that relative to bonds, US stocks are cheaper now than at any time in the past 50 years. He speculates that this is probably due to widespread fears of a “double-dip” recession. “But unless that double dip produces a 60%-plus decline in earnings,” Napier writes, “equities are cheap.”

Of course, we can’t rule anything out, and Napier doesn’t. But Napier writes that “at these relative valuations, investors have consistently made material positive returns in every period since the late 1950s. Yield compression alone could push US equities up more than 30%, and if inflation concerns increase, gains could well exceed this.”

Now, before you declare the man insane, I think there is some merit to what he is saying. And it comes with a powerful qualifying comment, which I’ll get to below.

But here is the key…

Napier compares bond yields with stock dividend yields. Dividend yields on stocks are very close to those of 10-year Treasuries. This situation last existed from December 2008 to May 2009. Investors who bought stocks then did well. You otherwise have to go back to June 1962 to find such a narrow gap. Again, investors who bought then cashed in as stocks rose 26% over the next 12 months. There are other historical examples.

As Napier writes, “Investors have consistently made good profits at the current yield gaps and ratios since 1958.”

In any event, this is where we are.

Napier’s qualifier is that he’s making a relatively short-term call. Longer term, he says stock valuations ought to decline as bond yields rise. In the early going, though, stocks often rise. As he writes, “This is likely to be the beginning of a very long bear market in bonds, but there is much in the historical record to show that equity prices can continue to rise in the early stages of a bond bear market.”

I won’t tackle that historical record. I will add that valuations can come down without stock prices dropping. Earnings can rise and stock prices can rise more slowly. This is what we’ve seen this year, as the market overall showed much-improved earnings, but the stock market is pretty much where it began the year.

Long term, Napier is not fond of stocks. He simply recognizes the ability to make large gains even in the context of a downward-sloping market. As he points out, the 1970s were an awful time to buy and hold stocks. Yet the 1970s also produced some of the best one-year holding periods for stocks. “Another such great opportunity now presents itself for the nimble and the bold,” Napier writes.

In short, bonds look sunk; but as for stocks, there is room to run. We’ll see if this clue-deducing is as good as Sherlock Holmes’.

Chris Mayer
for The Daily Reckoning

Which Way for Stocks? Bonds Give a Clue 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:
Which Way for Stocks? Bonds Give a Clue




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

Which Way for Stocks? Bonds Give a Clue

September 21st, 2010

Sherlock Holmes sometimes solved great problems just by lolling around in his smoking jacket and puffing at his pipe for hours. In “The Man With the Twisted Lip,” Holmes solves the case with ease without leaving his flat.

An incredulous Mr. Bradstreet asks, “I wish I knew how you reach your results.”

Holmes replies: “I reached this one by sitting upon five pillows and consuming an ounce of shag.”

In that spirit – sans pillows and tobacco – it seems I’ve spent a lot of time this week sitting around reading odd stuff and mulling over clues. I did find some clues in the bond market that tell us where the stock market may go next.

You’ll be surprised at what these clues say.

They come from a look back at history. One analyst found that when the beauty contest between stocks and bonds sets up as it does today, bonds get destroyed. “For the third time since the 1850s,” he writes, “30-year rolling real bond returns are near equity returns, and on both previous occasions, multi-decade bond bear markets followed.”

And for stocks? Well, this same fellow deduces from the same history that stocks could rise 30% or more as inflationary expectations rise.

Before you scoff at this outbreak of optimism, consider that this is from one of the great students of bear markets. He knows their ways and histories. Heck, he wrote a book about them, The Anatomy of the Bear. And he thinks we’re in a secular bear market for stocks now. (“Secular” being a cherished Wall Street fancy dan word. It means “long-term.”)

So who is this guy and what gives?

Let me preface this discussion by saying that I don’t usually like to guess about where the stock market may go next. We simply play the ball where it lies, like an honest golfer. Besides, in my investment letter, Capital & Crisis, we don’t buy the stock market. We buy specific stocks. I think it is infinitely more useful to spend my time looking at specific stocks and to just be picky about what we buy.

Still, I sometimes like to think about the great ebb and flow of market movements. Today is one of those days.

Anyway, the analyst quoted up top is Russell Napier, the global macro strategist for CLSA, an investment firm. He lays out his case in a report titled “It’s Not the Economy, Stupid.” Napier shows that relative to bonds, US stocks are cheaper now than at any time in the past 50 years. He speculates that this is probably due to widespread fears of a “double-dip” recession. “But unless that double dip produces a 60%-plus decline in earnings,” Napier writes, “equities are cheap.”

Of course, we can’t rule anything out, and Napier doesn’t. But Napier writes that “at these relative valuations, investors have consistently made material positive returns in every period since the late 1950s. Yield compression alone could push US equities up more than 30%, and if inflation concerns increase, gains could well exceed this.”

Now, before you declare the man insane, I think there is some merit to what he is saying. And it comes with a powerful qualifying comment, which I’ll get to below.

But here is the key…

Napier compares bond yields with stock dividend yields. Dividend yields on stocks are very close to those of 10-year Treasuries. This situation last existed from December 2008 to May 2009. Investors who bought stocks then did well. You otherwise have to go back to June 1962 to find such a narrow gap. Again, investors who bought then cashed in as stocks rose 26% over the next 12 months. There are other historical examples.

As Napier writes, “Investors have consistently made good profits at the current yield gaps and ratios since 1958.”

In any event, this is where we are.

Napier’s qualifier is that he’s making a relatively short-term call. Longer term, he says stock valuations ought to decline as bond yields rise. In the early going, though, stocks often rise. As he writes, “This is likely to be the beginning of a very long bear market in bonds, but there is much in the historical record to show that equity prices can continue to rise in the early stages of a bond bear market.”

I won’t tackle that historical record. I will add that valuations can come down without stock prices dropping. Earnings can rise and stock prices can rise more slowly. This is what we’ve seen this year, as the market overall showed much-improved earnings, but the stock market is pretty much where it began the year.

Long term, Napier is not fond of stocks. He simply recognizes the ability to make large gains even in the context of a downward-sloping market. As he points out, the 1970s were an awful time to buy and hold stocks. Yet the 1970s also produced some of the best one-year holding periods for stocks. “Another such great opportunity now presents itself for the nimble and the bold,” Napier writes.

In short, bonds look sunk; but as for stocks, there is room to run. We’ll see if this clue-deducing is as good as Sherlock Holmes’.

Chris Mayer
for The Daily Reckoning

Which Way for Stocks? Bonds Give a Clue 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:
Which Way for Stocks? Bonds Give a Clue




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

P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy

September 21st, 2010

The FreeCreditReport.com commercials are always hilarious. The nation’s fiscal mess… not so much. But, sometimes a little laughter helps to ease the pain.

Appropriately, this parody of the “New Car” ad stars several of America’s biggest credit-wreckers-in-chief: Fed head Ben Bernanke alongside Treasury Secretaries Hank Paulson and Tim Geithner. Times may change, but their money-printing solutions stay the same… at least inconsistency is one of few skills this team ain’t lacking.

This clip was originally written and produced at Flinch Studio for the Blog Maverick website, but came to our attention via a recent post on The Big Picture.

P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy 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:
P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy




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

Uncategorized

Is the Recession Really Over? The NBER Seems to Think So…

September 21st, 2010

Unless you’ve been buried under a pile of stock market profits over the past 24 hours unable to breathe or reach your TV set, you know the National Bureau of Economic Research (NBER) – the nonprofit body based in Cambridge, Mass., that has been assigning dates to recessions since…1929 – declared the Great Recession over and done with in June 2009.

GDP Change from Start of Recession

Total duration of the Great Recession: 18 months, eclipsing the previous postwar record of 16 months set in 1973-75, and again in 1981-82.

Although, “economic activity is typically below normal in the early stages of an expansion,” navel gazers at the NBER reluctantly admit, “it sometimes remains so well into the expansion.”

How did the ‘recovery’ such as it is come about? Let’s take a look at the nittys:

  • Government spending grew from 20.6% of GDP at the start of the recession to 25.4% in the second quarter of this year, according to the Commerce Department’s Bureau of Economic Analysis
  • Increasing transfer payments – 99-week unemployment benefits, etc. – account for 73% of that growth. At least with the New Deal we got some bridges and dams to show for it. Now Uncle Sam just pays people to sit at home, eat Cheetos and watch Jersey Shore
  • In contrast, gross domestic private investment has shrunk from 17.3% of GDP at the start of the recession to 11.3% last year.

And a good portion of that last figure goes just for repair and maintenance of the existing capital stock. Investment in new factories and equipment – i.e., real growth – represented 40% of gross domestic private investment in 2006.

Last year, capital investment was a mere 3.5%.

“Thus,” concludes Independent Institute scholar Robert Higgs, “net private investment did not simply fall during the recession; it virtually disappeared.”

So much for a productive recovery and worthwhile use of stimulus money. No chance of a double-dip recession after all that paper cash flushed down the toilet.

Addison Wiggin
for The Daily Reckoning

Is the Recession Really Over? The NBER Seems to Think So… originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Is the Recession Really Over? The NBER Seems to Think So…




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

Uncategorized

Is the Recession Really Over? The NBER Seems to Think So…

September 21st, 2010

Unless you’ve been buried under a pile of stock market profits over the past 24 hours unable to breathe or reach your TV set, you know the National Bureau of Economic Research (NBER) – the nonprofit body based in Cambridge, Mass., that has been assigning dates to recessions since…1929 – declared the Great Recession over and done with in June 2009.

GDP Change from Start of Recession

Total duration of the Great Recession: 18 months, eclipsing the previous postwar record of 16 months set in 1973-75, and again in 1981-82.

Although, “economic activity is typically below normal in the early stages of an expansion,” navel gazers at the NBER reluctantly admit, “it sometimes remains so well into the expansion.”

How did the ‘recovery’ such as it is come about? Let’s take a look at the nittys:

  • Government spending grew from 20.6% of GDP at the start of the recession to 25.4% in the second quarter of this year, according to the Commerce Department’s Bureau of Economic Analysis
  • Increasing transfer payments – 99-week unemployment benefits, etc. – account for 73% of that growth. At least with the New Deal we got some bridges and dams to show for it. Now Uncle Sam just pays people to sit at home, eat Cheetos and watch Jersey Shore
  • In contrast, gross domestic private investment has shrunk from 17.3% of GDP at the start of the recession to 11.3% last year.

And a good portion of that last figure goes just for repair and maintenance of the existing capital stock. Investment in new factories and equipment – i.e., real growth – represented 40% of gross domestic private investment in 2006.

Last year, capital investment was a mere 3.5%.

“Thus,” concludes Independent Institute scholar Robert Higgs, “net private investment did not simply fall during the recession; it virtually disappeared.”

So much for a productive recovery and worthwhile use of stimulus money. No chance of a double-dip recession after all that paper cash flushed down the toilet.

Addison Wiggin
for The Daily Reckoning

Is the Recession Really Over? The NBER Seems to Think So… originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Is the Recession Really Over? The NBER Seems to Think So…




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

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