Junk Science

November 12th, 2010

“The most ignorant remarks ever made by a central banker.”

“When I started my economics studies at 16,” wrote Paul A. Samuelson not long before he died last year at aged 93, “Carlyle was right to call economics a ‘dismal science.’ Thanks to modern science and better economic knowledge, this Malthusian curse has been vanquished. Good modern economics make economics the Hopeful Science. At last!”

Lucky professor Samuelson! Like an aparatchik who joined the shades before 1989, he went to his reward with his delusions intact.

This week, the scientists began to have doubts. Like the pope wondering about the resurrection, or the Mormons questioning the veracity of the angel Moroni, the head of the World Bank, Robert Zoellick, shocked the learned world. It’s time to start discussing a gold-backed currency, he said. Maybe the crown of creation of modern economics – its centrally managed money – was not such a good idea after all.

Like Christianity, the dollar only has value as long as people have faith in it. But that is true of almost every trick up the modern economist’s sleeve. If people stop believing, the spell is broken and they’re worthless.

Two years ago, when the financial world was melting down, we were told that the volcano needed to be appeased. Without immediate injection of funds, the whole system would blow up, they said. Where was the science behind that? The financial system melted down countless times in the past. No central bank came to its aid before the 1930s.

Or how about the corollary article of faith: that the public had to rescue the big banks, a tout prix? It was practically a universal constant – like the Golden mean or Brownian motion. When bankers make profits, it is theirs to keep. When they lose money, the losses are moved onto the public. The US bailed out its banks. Britain, Ireland, and Iceland did the same. But where was the evidence that bank failures were so horrible? During America’s Great Depression 9,000 banks failed. And history is full of the wrecks of banks that were “too big to fail.”

A hick Congressman from one of the corn states once proposed to round off pi to 3 to make it easier for schoolchildren to remember. He must have been joking. In the world of science, water boils at 212 degrees Fahrenheit, at sea level, whether you believe or not. Pi is always a long string of digits. The mathematicians can sweat and shake all they want; it doesn’t change. But modern economists take the joke seriously. They think they can command water to run uphill and reset the Periodic Table with fancier china. That’s why they hate gold: they can’t control it. And it reminds them that they imposters, no more effective than witchdoctors or marriage counselors.

As of this writing, it takes more than $1,400 to buy a single ounce of gold – a new record. Why? Isn’t it obvious? People are losing faith. Last week, the US Federal Reserve said it was creating another $600 billion to buy US Treasury debt. That will mean a total of $2.3 trillion added to America’s monetary footings since the Fed began its QE program almost two years ago. This will also mean that Ben Bernanke has added three times as many dollars to America’s core money supply as ALL THE TREASURY SECRETARIES AND FED CHAIRMEN WHO CAME BEFORE HIM PUT TOGETHER.

“Easier financial conditions will promote economic growth,” wrote Mr. Bernanke, in The Washington Post, “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Where is the proof? Where is the controlled test? Where is the peer review? Such an extravagant assertion ought to be accompanied by extravagant evidence. But there is none at all. Throwing virgins into a volcano would be no less scientific. The virgins appeased the gods; that was the theory. Mr. Bernanke has a voodoo theory too. He says all that new money will make people feel richer…and then they will act richer…and then they will be richer!

John Hussman, also an economist with a loyal following of his own, read Mr. Bernanke’s explanation and pronounced judgment: “the most ignorant remarks ever made by a central banker.” The latest $600 billion gamble may or may not increase stock market prices, he says. Even if it does, it is unlikely to produce the “wealth effect” that Ben Bernanke is counting on. People spend and borrow when they think they have permanent wealth. World stock markets have suffered two major shocks in the last ten years…with no net gains for investors. An increase in stock prices now – driven by the Fed’s printing press – is unlikely to create the kind of expectations that lead people to spend money. Especially when they don’t have any.

Which makes us wonder too. If modern economists are scientists, it makes us suspicious of the rest of them. What about the physicists? The molecular biologists? The archeologists? Are they all quacks too?

Bill Bonner
for The Daily Reckoning

Junk Science 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:
Junk Science




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

Junk Science

November 12th, 2010

“The most ignorant remarks ever made by a central banker.”

“When I started my economics studies at 16,” wrote Paul A. Samuelson not long before he died last year at aged 93, “Carlyle was right to call economics a ‘dismal science.’ Thanks to modern science and better economic knowledge, this Malthusian curse has been vanquished. Good modern economics make economics the Hopeful Science. At last!”

Lucky professor Samuelson! Like an aparatchik who joined the shades before 1989, he went to his reward with his delusions intact.

This week, the scientists began to have doubts. Like the pope wondering about the resurrection, or the Mormons questioning the veracity of the angel Moroni, the head of the World Bank, Robert Zoellick, shocked the learned world. It’s time to start discussing a gold-backed currency, he said. Maybe the crown of creation of modern economics – its centrally managed money – was not such a good idea after all.

Like Christianity, the dollar only has value as long as people have faith in it. But that is true of almost every trick up the modern economist’s sleeve. If people stop believing, the spell is broken and they’re worthless.

Two years ago, when the financial world was melting down, we were told that the volcano needed to be appeased. Without immediate injection of funds, the whole system would blow up, they said. Where was the science behind that? The financial system melted down countless times in the past. No central bank came to its aid before the 1930s.

Or how about the corollary article of faith: that the public had to rescue the big banks, a tout prix? It was practically a universal constant – like the Golden mean or Brownian motion. When bankers make profits, it is theirs to keep. When they lose money, the losses are moved onto the public. The US bailed out its banks. Britain, Ireland, and Iceland did the same. But where was the evidence that bank failures were so horrible? During America’s Great Depression 9,000 banks failed. And history is full of the wrecks of banks that were “too big to fail.”

A hick Congressman from one of the corn states once proposed to round off pi to 3 to make it easier for schoolchildren to remember. He must have been joking. In the world of science, water boils at 212 degrees Fahrenheit, at sea level, whether you believe or not. Pi is always a long string of digits. The mathematicians can sweat and shake all they want; it doesn’t change. But modern economists take the joke seriously. They think they can command water to run uphill and reset the Periodic Table with fancier china. That’s why they hate gold: they can’t control it. And it reminds them that they imposters, no more effective than witchdoctors or marriage counselors.

As of this writing, it takes more than $1,400 to buy a single ounce of gold – a new record. Why? Isn’t it obvious? People are losing faith. Last week, the US Federal Reserve said it was creating another $600 billion to buy US Treasury debt. That will mean a total of $2.3 trillion added to America’s monetary footings since the Fed began its QE program almost two years ago. This will also mean that Ben Bernanke has added three times as many dollars to America’s core money supply as ALL THE TREASURY SECRETARIES AND FED CHAIRMEN WHO CAME BEFORE HIM PUT TOGETHER.

“Easier financial conditions will promote economic growth,” wrote Mr. Bernanke, in The Washington Post, “…higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Where is the proof? Where is the controlled test? Where is the peer review? Such an extravagant assertion ought to be accompanied by extravagant evidence. But there is none at all. Throwing virgins into a volcano would be no less scientific. The virgins appeased the gods; that was the theory. Mr. Bernanke has a voodoo theory too. He says all that new money will make people feel richer…and then they will act richer…and then they will be richer!

John Hussman, also an economist with a loyal following of his own, read Mr. Bernanke’s explanation and pronounced judgment: “the most ignorant remarks ever made by a central banker.” The latest $600 billion gamble may or may not increase stock market prices, he says. Even if it does, it is unlikely to produce the “wealth effect” that Ben Bernanke is counting on. People spend and borrow when they think they have permanent wealth. World stock markets have suffered two major shocks in the last ten years…with no net gains for investors. An increase in stock prices now – driven by the Fed’s printing press – is unlikely to create the kind of expectations that lead people to spend money. Especially when they don’t have any.

Which makes us wonder too. If modern economists are scientists, it makes us suspicious of the rest of them. What about the physicists? The molecular biologists? The archeologists? Are they all quacks too?

Bill Bonner
for The Daily Reckoning

Junk Science 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:
Junk Science




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

Inflation Hedges

November 12th, 2010

The Federal Reserve recently announced a second wave of quantitative easing — promising to put $600 billion into the markets by buying up U.S. Treasuries. But instead of propping up the economy, the move really just opens the door to a wave of massive inflation.

It could get very ugly, so you need to understand exactly what’s about to happen and how to prepare for it.

Of course, as far as the Fed is concerned, inflation is firmly under control. After all, the core consumer price index — which excludes volatile things like food and energy costs — is very low. So low, in fact, that many investors believe we’re on the verge of a great deflation.

Trouble is, central bankers don’t seem to understand what inflation really is. Rising prices themselves aren’t inflation — they’re merely one of many potential outcomes of inflation.

True inflation is an increase in the supply of money in an economy. As Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.”

So by that classical definition, the Fed injecting $600 billion into the economy fosters inflation. The message is, since we can’t grow our way out of this recession, the Fed will have to try to inflate our way out.

But don’t expect see its affect on prices for awhile. The Fed can control the amount of money in the system. But it can’t control what happens to that cash next.

That is, it can’t force banks to lend it out. It can’t force consumers or corporations to spend it. Without their cooperation, the velocity of money slows down to a crawl — and stagnant money has no effect on consumer prices.

But at some point, people realize their dollars are losing value, especially if there are rock-bottom interest rates. There will be a sudden urge to put their money into things with better yields… or to at least spend their dollars before they become worth even less.

The surge in spending increases money velocity — fast.  And just as quickly, prices increase. Forget the CPI jumping to 6%… it could easily go to 12%…or 25%…or 100%.

Then there are the people holding U.S. Treasuries to consider.

America is going to need to borrow an additional $1.6 trillion this year. And then keep borrowing $1 trillion-plus for years and years to come. There are no surpluses — ever again — in any plausible budget forecasts.

As you probably know, a good portion of that money will come from tax revenues. But the recent elections seek to lower those taxes. And if spending doesn’t follow suit, the government will need to rely even more on bondholders.

But what will the bondholders make of this? How long will they keep buying U.S. government debt before they worry about the government’s ability to pay it back? What if they see inflation increasing? (As inflation increases, their returns plummet because each dollar they receive is worth less.)

What if the Fed buying decreases bonds’ value? And what if the bondholders revolt — becoming the dreaded “bond vigilantes” — dumping their bonds and using the proceeds for other, more lucrative investments?

Exactly how it will play out is beyond the scope of the Daily Reckoning. Besides, we don’t know. But we do know what investments make the best inflation hedges.

Gold is at the top of the list. It’s what people always buy when they fear a crack-up in the monetary system. And that’s part of the reason the yellow metal is hitting historic highs.

Currently, you see ads for companies offering to buy your gold — in exchange for paper dollars. If people knew what was coming, they’d hold onto every piece of gold they own.

Another place to put your dollars while they still have value is Asia. The continent’s fast-growing economies promise strong returns as the America wanes.

Our favorite stock markets are China, India and Vietnam. And the preferred sectors are precious metals (of course), energy and industrials. Together these are likely to generate superior long-term returns.

Michael McLeod
for The Daily Reckoning

Inflation Hedges 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:
Inflation Hedges




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

Inflation Hedges

November 12th, 2010

The Federal Reserve recently announced a second wave of quantitative easing — promising to put $600 billion into the markets by buying up U.S. Treasuries. But instead of propping up the economy, the move really just opens the door to a wave of massive inflation.

It could get very ugly, so you need to understand exactly what’s about to happen and how to prepare for it.

Of course, as far as the Fed is concerned, inflation is firmly under control. After all, the core consumer price index — which excludes volatile things like food and energy costs — is very low. So low, in fact, that many investors believe we’re on the verge of a great deflation.

Trouble is, central bankers don’t seem to understand what inflation really is. Rising prices themselves aren’t inflation — they’re merely one of many potential outcomes of inflation.

True inflation is an increase in the supply of money in an economy. As Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.”

So by that classical definition, the Fed injecting $600 billion into the economy fosters inflation. The message is, since we can’t grow our way out of this recession, the Fed will have to try to inflate our way out.

But don’t expect see its affect on prices for awhile. The Fed can control the amount of money in the system. But it can’t control what happens to that cash next.

That is, it can’t force banks to lend it out. It can’t force consumers or corporations to spend it. Without their cooperation, the velocity of money slows down to a crawl — and stagnant money has no effect on consumer prices.

But at some point, people realize their dollars are losing value, especially if there are rock-bottom interest rates. There will be a sudden urge to put their money into things with better yields… or to at least spend their dollars before they become worth even less.

The surge in spending increases money velocity — fast.  And just as quickly, prices increase. Forget the CPI jumping to 6%… it could easily go to 12%…or 25%…or 100%.

Then there are the people holding U.S. Treasuries to consider.

America is going to need to borrow an additional $1.6 trillion this year. And then keep borrowing $1 trillion-plus for years and years to come. There are no surpluses — ever again — in any plausible budget forecasts.

As you probably know, a good portion of that money will come from tax revenues. But the recent elections seek to lower those taxes. And if spending doesn’t follow suit, the government will need to rely even more on bondholders.

But what will the bondholders make of this? How long will they keep buying U.S. government debt before they worry about the government’s ability to pay it back? What if they see inflation increasing? (As inflation increases, their returns plummet because each dollar they receive is worth less.)

What if the Fed buying decreases bonds’ value? And what if the bondholders revolt — becoming the dreaded “bond vigilantes” — dumping their bonds and using the proceeds for other, more lucrative investments?

Exactly how it will play out is beyond the scope of the Daily Reckoning. Besides, we don’t know. But we do know what investments make the best inflation hedges.

Gold is at the top of the list. It’s what people always buy when they fear a crack-up in the monetary system. And that’s part of the reason the yellow metal is hitting historic highs.

Currently, you see ads for companies offering to buy your gold — in exchange for paper dollars. If people knew what was coming, they’d hold onto every piece of gold they own.

Another place to put your dollars while they still have value is Asia. The continent’s fast-growing economies promise strong returns as the America wanes.

Our favorite stock markets are China, India and Vietnam. And the preferred sectors are precious metals (of course), energy and industrials. Together these are likely to generate superior long-term returns.

Michael McLeod
for The Daily Reckoning

Inflation Hedges 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:
Inflation Hedges




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

The Real Effects of Printing Money and Creating Debt

November 12th, 2010

“Debt delenda est,” we told our audience in London this morning. “This is a debt story. It’s not a liquidity story. It’s not a ‘capitalism has failed’ story. It’s not a regulatory story. It’s the story of debt. Too much debt. Too much to pay back.

“So how does the story develop? That’s what we’re watching. Ultimately, when you have too much debt, there’s no point in refinancing it. There’s no point in rescheduling it. There’s no point in delaying the inevitable. You need to destroy the bad debt. As fast as possible.”

The Dow was down 73 yesterday. Where is the follow through?

Hmmm… The Fed promises $600 billion to speculators. Alan Greenspan, writing in yesterday’s Financial Times, says the Fed is out to lower the value of the dollar. Ben Bernanke says the Fed wants to increase asset prices.

And still stocks don’t go up. They go down.

What is the meaning of it?

The whole idea of pumping money into the bond market – Bernanke admitted himself – was to get asset prices up. What else could it be?

Higher asset prices are supposed to make people feel richer. Then, they’re supposed to act richer. What do rich people do? They spend money! And before you can say “prestidigitation” they WILL be richer.

How exactly does that work? Oh never mind the details…it’s…like…magic!

Ben Bernanke, one of the world’s leading economists…and certainly the most powerful economist in the world says it works.

Do you believe it, dear reader?

We don’t. If you could make people richer simply by printing money well, heck, we’d print it night and day. Maybe even weekends too.

But of course, it doesn’t work.

So what DOES all that money printing do? Well, that’s what we’re going to find out.

One thing it doesn’t seem to do – at least not yet – is the very thing it was supposed to do: raise asset prices. Instead, investors seem to be wary. It is as if they didn’t trust it.

And why should they? Investors aren’t stupid. They can put two and two together. Sometimes. They know as well as we do that all this money printing MIGHT do is to create a speculative, short-term bubble. As it looks now, they don’t seem to have an appetite for that kind of thing.

So, as near as we can tell, our Great Correction hypothesis is still the best explanation of what is going on. The US (and other nations) went into bubble mode in the 2002-2007 period. The bubble blew up. And now they’re paying the price. It will take years to clean up the damage – even under the best of circumstances. With Bernanke and the Feds doing even more mischief, it could take decades.

But the big risk is that the Feds will make so many mistakes…and such big mistakes…that it will be impossible to correct them in a calm, orderly way.

The private sector can fix itself up. All the feds have to do is to get out of the way. The banks and corporations that can’t stand on their own two feet will fall down; we’ll be better off without them. That’s the way it has always worked. The markets can destroy bad debt. They don’t need any help from the feds.

It won’t be painless. It may not even be fast – about 7 to 10 years was our estimate. But if it is allowed to happen, the economy can once again get on solid ground.

But enter the feds…the ever earnest, world-improving meddlers…power-mad and reckless. They really believe the economy would be much better if it would just do as they say. “Stop destroying debt,” they tell us.

So, they stopped the wobbly banks from going bust. They saved Fannie and Freddie – at a cost of a third of a trillion dollars, according to the latest estimate from the Federal Housing Finance Agency.

They pumped. They bailed. They jury-rigged. And they commanded.

“Let there be light,” they say. And darkness covers the economy.

The economy responds to these commands – just like any economy would respond to such central planning: it slumps and gets worse.

While the private sector cuts debt, the feds add to it. This latest $600 billion from the Fed sounds like free money. But it is debt. These are Federal Reserve Notes they’re issuing. They are claims against the wealth of the US government directly and against taxpayers indirectly. If you have these notes, you can exchange them for goods and services. They’re lawful tender…it says so right on the green paper. You can use this “money” to get toaster ovens or granite countertops…or a cup of coffee.

But the more of this “money” there is…the fewer goods and services are available to it. Simple, huh?

A classic case, right? The dollar goes down; the price of stuff goes up.

Private debt goes down. Public debt goes up. And then, the markets destroy public debt too.

Bill Bonner
for The Daily Reckoning

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

Read more here:
The Real Effects of Printing Money and Creating Debt




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

3 Insider Stocks That Could Pop

November 12th, 2010

3 Insider Stocks That Could Pop

As earnings season winds down, insider activity heats up. That's because insiders (classified as company executives, directors and beneficial owners) get the green light to buy or sell their company's stock on the open market once earnings have been released. (That window remains open until the quarter has ended). So it's no surprise to see a recent sharp spike in insider buying.

Earlier this week, I noted that Bill Gates, classified as an insider at AutoNation (NYSE: AN) because of his large investment in the company, has continued to aggressively purchase shares. [Read the article here.]

Let's take a look at three other stocks with heavy recent insider buying.

Devon Energy (NYSE: DVN)
This oil and gas driller always seems to raise investor concerns. In 2008, investors shunned its shares since Devon lacked exposure to the sudden plethora of emerging natural gas fields found in the U.S. Southwest and in Appalachia. In 2009, investors fretted that Devon wasn't investing enough money to boost output in coming years. Then, when Devon announced a plan for major asset sales later in 2009, investors feared that management would simply use that cash to make unproductive acquisitions.

Yet as we sit here in late 2010, Devon is looking far wiser than investors assumed. The company's lack of exposure to those promising natural gas fields now looks savvy, considering natural gas prices are so low. The company's asset sales came in at prices higher than most expected, yielding $8 billion in cash for the company. And instead of using that cash to make new deals, management is boosting internal investments in existing properties — especially those that have a higher exposure to oil than gas.

Most importantly, Devon is focusing on boosting shares, paying off $1.7 billion in debt and buying back $1 billion in stock (with plans to buy $2.5 billion more in 2011). UBS thinks Devon will buy back lots more stock in 2012 and 2013 as well, as its balance sheet is now one of the strongest in the industry.

All these moves should ultimately boost per share profits. “With the completion of the asset sale program, Devon has repositioned its operations to have a lower risk profile and a lower cost structure, as well as materially strengthening its balance sheet. This should boost Devon's long-term production growth,” note analysts at UBS. And rising production growth, which management recently outlined for 2011, could be a key catalyst for shares. Rising production should help boost cash flow from $6.8 billion in 2011 to $8.5 billion in 2012, according to Goldman Sachs. Throw in a lower share count, and that growth should be more evident on a per share basis. And with oil prices on the rise, cash flow projections could move yet higher. ["Why 2011 Could be the Year of the Oil Comeback"]

Meanwhile, shares trade for less than five times projected 2011 cash flow. That's too low a multiple, according to company CEO John Richels, who recently increased his ownership stake by 53,000 shares.

PharmAthene (AMEX: PIP)
When this small biotech recently decided to raise $15 million, insiders and other large shareholders didn't hesitate to pull out their checkbooks. (That qualifies as an insider buy according to those that watch insider moves). Their bullishness is understandable. For starters, the company looks increasingly likely to prevail in a lawsuit against SIGA Technologies (Nasdaq: SIGA) regarding marketing rights to a drug that treats smallpox — yielding a potential massive windfall. (SIGA recently received a $2.8 billion order from Uncle Sam, and PharmAthene may be legally due some of that money due to a 2006 agreement that is being contested).

Secondly, PharmAthene is also vying to become a key provider of a next generation anti-anthrax drug to the U.S. military. The U.S. government has been helping to fund development of this drug, which would likely sell for a third of the price of an existing drug sold by Emerging BioSciences (AMEX: EBS).

A positive resolution to either of these drugs would likely be worth at least $6 to $7 to shareholders. If PharmAthene scores on both counts, then shares could zoom to $15 from a current $3. To be sure, the current weak share price implies investor cynicism on these developments. But shares certainly look to be a worth a modest position in light of the considerable potential upside.

QLT (Nasdaq: QLTI)
Major investors in this small firm focused on eye disorders continue to increase their positions. Nearly two million shares have been acquired by two outside investors and three insiders in the past six months, capped off by a recent $1 million purchase by Axial Capital Management. Those purchases were purchased in the $5 to $6 range.

C.K. Cooper's Jeff Cohen thinks that may be a wise move. He thinks the stock is worth $12 on a sum-of-the-parts basis, noting the company's nearly $200 million in cash accounts for nearly two-thirds of the company's market value. Throw in royalties due to QLT, along with an estimated value of drugs and medical devices in its pipeline, and Cohen thinks the stock is a double. Those insiders presumably share that view.

Action to Take –> Of these plays, Devon Energy is the “safe” play, with potential +20% to +40% upside in the next year or two. QLT could be a potential double and even comes with impressive downside support, thanks to that hefty cash balance. PharmAthene looks quite risky, but could really take off if it benefits from its small pox or anthrax drugs.


– David Sterman

P.S. –

Uncategorized

3 Insider Stocks That Could Pop

November 12th, 2010

3 Insider Stocks That Could Pop

As earnings season winds down, insider activity heats up. That's because insiders (classified as company executives, directors and beneficial owners) get the green light to buy or sell their company's stock on the open market once earnings have been released. (That window remains open until the quarter has ended). So it's no surprise to see a recent sharp spike in insider buying.

Earlier this week, I noted that Bill Gates, classified as an insider at AutoNation (NYSE: AN) because of his large investment in the company, has continued to aggressively purchase shares. [Read the article here.]

Let's take a look at three other stocks with heavy recent insider buying.

Devon Energy (NYSE: DVN)
This oil and gas driller always seems to raise investor concerns. In 2008, investors shunned its shares since Devon lacked exposure to the sudden plethora of emerging natural gas fields found in the U.S. Southwest and in Appalachia. In 2009, investors fretted that Devon wasn't investing enough money to boost output in coming years. Then, when Devon announced a plan for major asset sales later in 2009, investors feared that management would simply use that cash to make unproductive acquisitions.

Yet as we sit here in late 2010, Devon is looking far wiser than investors assumed. The company's lack of exposure to those promising natural gas fields now looks savvy, considering natural gas prices are so low. The company's asset sales came in at prices higher than most expected, yielding $8 billion in cash for the company. And instead of using that cash to make new deals, management is boosting internal investments in existing properties — especially those that have a higher exposure to oil than gas.

Most importantly, Devon is focusing on boosting shares, paying off $1.7 billion in debt and buying back $1 billion in stock (with plans to buy $2.5 billion more in 2011). UBS thinks Devon will buy back lots more stock in 2012 and 2013 as well, as its balance sheet is now one of the strongest in the industry.

All these moves should ultimately boost per share profits. “With the completion of the asset sale program, Devon has repositioned its operations to have a lower risk profile and a lower cost structure, as well as materially strengthening its balance sheet. This should boost Devon's long-term production growth,” note analysts at UBS. And rising production growth, which management recently outlined for 2011, could be a key catalyst for shares. Rising production should help boost cash flow from $6.8 billion in 2011 to $8.5 billion in 2012, according to Goldman Sachs. Throw in a lower share count, and that growth should be more evident on a per share basis. And with oil prices on the rise, cash flow projections could move yet higher. ["Why 2011 Could be the Year of the Oil Comeback"]

Meanwhile, shares trade for less than five times projected 2011 cash flow. That's too low a multiple, according to company CEO John Richels, who recently increased his ownership stake by 53,000 shares.

PharmAthene (AMEX: PIP)
When this small biotech recently decided to raise $15 million, insiders and other large shareholders didn't hesitate to pull out their checkbooks. (That qualifies as an insider buy according to those that watch insider moves). Their bullishness is understandable. For starters, the company looks increasingly likely to prevail in a lawsuit against SIGA Technologies (Nasdaq: SIGA) regarding marketing rights to a drug that treats smallpox — yielding a potential massive windfall. (SIGA recently received a $2.8 billion order from Uncle Sam, and PharmAthene may be legally due some of that money due to a 2006 agreement that is being contested).

Secondly, PharmAthene is also vying to become a key provider of a next generation anti-anthrax drug to the U.S. military. The U.S. government has been helping to fund development of this drug, which would likely sell for a third of the price of an existing drug sold by Emerging BioSciences (AMEX: EBS).

A positive resolution to either of these drugs would likely be worth at least $6 to $7 to shareholders. If PharmAthene scores on both counts, then shares could zoom to $15 from a current $3. To be sure, the current weak share price implies investor cynicism on these developments. But shares certainly look to be a worth a modest position in light of the considerable potential upside.

QLT (Nasdaq: QLTI)
Major investors in this small firm focused on eye disorders continue to increase their positions. Nearly two million shares have been acquired by two outside investors and three insiders in the past six months, capped off by a recent $1 million purchase by Axial Capital Management. Those purchases were purchased in the $5 to $6 range.

C.K. Cooper's Jeff Cohen thinks that may be a wise move. He thinks the stock is worth $12 on a sum-of-the-parts basis, noting the company's nearly $200 million in cash accounts for nearly two-thirds of the company's market value. Throw in royalties due to QLT, along with an estimated value of drugs and medical devices in its pipeline, and Cohen thinks the stock is a double. Those insiders presumably share that view.

Action to Take –> Of these plays, Devon Energy is the “safe” play, with potential +20% to +40% upside in the next year or two. QLT could be a potential double and even comes with impressive downside support, thanks to that hefty cash balance. PharmAthene looks quite risky, but could really take off if it benefits from its small pox or anthrax drugs.


– David Sterman

P.S. –

Uncategorized

Avoid Big Oil — Here’s a Better Option

November 12th, 2010

Avoid Big Oil -- Here's a Better Option

$138 billion — that's the enormous sum earned by the five largest oil companies back in 2008 when crude oil prices surged to all-time highs near $150 per barrel. Exxon Mobil (NYSE: XOM) alone earned more than $45 billion, a figure which now stands as the record for profit earned by any U.S. corporation in history.

But that's the past, and as any seasoned investor is well aware, markets are forward-looking. What matters isn't the $150 oil price of 2008 or the $85 price of today, but rather the price several months or even several years down the line, depending on your investment timeframe.

With that in mind, there are many reasons to believe oil prices will be higher in the future than they are today. But I'm not here to repeat the bullish oil thesis that some of my colleagues and I have already made. Instead, I want to explain why an investment in the largest oil companies is one of the worst ways to profit from a move higher in crude oil prices.

At first glance, this may seem counterintuitive. How could a company that produces a lot of oil be a bad way to cash in on rising oil prices? To understand why, investors need to consider that bigger is not necessarily better in the oil industry. In fact, it is a handicap in a world in which oil reserves are becoming scarcer.

Let me explain. As oil companies produce crude, two things happen: reserves are depleted and overall output declines. This phenomenon is often referred to in the industry as a treadmill in which companies must continuously drill more wells to maintain production, while finding new reserves to replace depleted reserves.

When oil is abundant and easily accessible, this is no problem. But in today's environment, when companies have to look in some of the most volatile regions of the globe to find new oil reserves, this becomes a real burden — and the bigger the oil producer, the bigger the burden.

In the past several years almost all of the oil majors have struggled to replace their reserves and maintain output levels. The best performer, Chevron (NYSE: CVX), has seen its production grow by an average of +1.9% in the past five years. Exxon Mobil, by contrast, has seen production fall by an average of -1.8%.

Uncategorized

Avoid Big Oil — Here’s a Better Option

November 12th, 2010

Avoid Big Oil -- Here's a Better Option

$138 billion — that's the enormous sum earned by the five largest oil companies back in 2008 when crude oil prices surged to all-time highs near $150 per barrel. Exxon Mobil (NYSE: XOM) alone earned more than $45 billion, a figure which now stands as the record for profit earned by any U.S. corporation in history.

But that's the past, and as any seasoned investor is well aware, markets are forward-looking. What matters isn't the $150 oil price of 2008 or the $85 price of today, but rather the price several months or even several years down the line, depending on your investment timeframe.

With that in mind, there are many reasons to believe oil prices will be higher in the future than they are today. But I'm not here to repeat the bullish oil thesis that some of my colleagues and I have already made. Instead, I want to explain why an investment in the largest oil companies is one of the worst ways to profit from a move higher in crude oil prices.

At first glance, this may seem counterintuitive. How could a company that produces a lot of oil be a bad way to cash in on rising oil prices? To understand why, investors need to consider that bigger is not necessarily better in the oil industry. In fact, it is a handicap in a world in which oil reserves are becoming scarcer.

Let me explain. As oil companies produce crude, two things happen: reserves are depleted and overall output declines. This phenomenon is often referred to in the industry as a treadmill in which companies must continuously drill more wells to maintain production, while finding new reserves to replace depleted reserves.

When oil is abundant and easily accessible, this is no problem. But in today's environment, when companies have to look in some of the most volatile regions of the globe to find new oil reserves, this becomes a real burden — and the bigger the oil producer, the bigger the burden.

In the past several years almost all of the oil majors have struggled to replace their reserves and maintain output levels. The best performer, Chevron (NYSE: CVX), has seen its production grow by an average of +1.9% in the past five years. Exxon Mobil, by contrast, has seen production fall by an average of -1.8%.

Uncategorized

The Best Income Stocks to Hold Forever

November 12th, 2010

The Best Income Stocks to Hold Forever

The numbers have grown so large over the years, it's hard for me to believe sometimes.

Uncategorized

The Best Income Stocks to Hold Forever

November 12th, 2010

The Best Income Stocks to Hold Forever

The numbers have grown so large over the years, it's hard for me to believe sometimes.

Uncategorized

3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

3 Consumer Rebound Stocks to Own Now

November 12th, 2010

3 Consumer Rebound Stocks to Own Now

The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.

Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.

Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainably heavy load, and companies are less likely to fret that we're headed back toward the dreaded “double-dip” recession.

All signs point to “help wanted” signs popping up with more frequency next year. My colleague Nathan Slaughter has taken a more in-depth look at the employment picture, and has a pair of intriguing staffing stocks he's getting behind. [Read Nathan's article here]

You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit…

Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.

When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.

Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.

Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.

Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now — if you believe the consumer will start to stir back to life in 2011.

Citi Trends (Nasdaq: CTRN)

Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.

Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

Forget Apple, Buy this Stock Instead

November 12th, 2010

Forget Apple, Buy this Stock Instead

In a recent interview with Money magazine, finance guru Roger Ibbotson stated that, as an investor, what is “most relevant to you is whether and how you're doing something different from what everybody else is doing.”

For those not familiar with Roger Ibbotson, he is worth getting to know, as he is one of the foremost authorities on the market. The firm he founded, Ibbotson Associates, publishes an annual edition of a yearbook that has become the primary resource for historical returns for stocks, bonds and other securities.

His stance definitely qualifies him as a contrarian investor. As a fellow contrarian, I find it difficult to determine how investors believe they can make money by owning a stock like Apple Inc. (Nasdaq: AAPL). Sure, I'm kicking myself for not owning any shares as they made their meteoric rise from below $8 per share in early 2003, but, as the saying goes, past returns are certainly not a guarantee of future returns.

At current prices, Apple will need to grow sales and profits in the double digits for another decade. I came to this conclusion by using a discounted cash flow analysis to back the growth expectations baked into the stock at the current price. This also takes into consideration the recent cash flow levels generated by the company and my need to make at least +10% on a stock annually in order to considerate it a buy.

This means that Apple's stock market capitalization will need to grow from just under $300 billion to almost $900 billion within a decade. Soon after that it will become a trillion dollar firm. If you believe that will happen, then be my guest in remaining or becoming a shareholder. In my mind, Apple's recent level of growth will be very difficult to repeat in the years ahead. And the fact that investor sentiment is almost unanimously bullish (out of 53 analysts, 49 have “buy” recommendations) means there is much more downside risk than upside potential.

Nokia (NYSE: NOK), on the other hand, only has nine “buy” recommendations out of the 33 analysts currently covering the stock. There is no question that this bearishness is warranted, even though Nokia has the highest market share of the global cell phone market, because Apple and other smart phone providers are literally eating Nokia's lunch.

Nokia controls about a third of the market worldwide but is lagging badly in the smart phone space. However, its recent product offering in the space , the N8, has received positive reviews, and new CEO Stephen Elop is said to be streamlining a corporate culture known for being overly bureaucratic and subsequently too slow in introducing new phones and operating systems to market. Recent data points suggest he is already starting to right the ship, as the latest quarter saw Nokia post the highest growth in terms of smart phone shipments during the quarter. Its Ovi operating system is also getting positive reviews.

Nokia also has its sights set on a mass market that few in the industry will be able to profitably exploit: developing markets. The company's global distribution network will allow it to reach international markets that don't currently have the means to afford smart phones and similar high-tech gadgets. A recent study estimated that two thirds of the world's 4.6 billion cell phone users live in emerging markets. Nokia already controls 34% of the market and can turn a profit on a huge market by charging only a few of dollars per monthly subscription.

Action to Take —> A big investment merit for Nokia is that the bar is set low in terms of its future success. At a current share price under $11, the market is only discounting a little over +5% annual profit growth during the next decade. I find this much easier to digest than Apple's double-digit expectations. If Nokia can return to double-digit growth reminiscent of its heyday as it grew to be the most dominant firm in the industry, then its shares can appreciate at least +50%.

The downside risk for Nokia is also much more limited. The market isn't currently projecting much success for the company's smart phones or overall growth going forward, so about the worst that can happen is the stock remains flat while investors collect a hefty current dividend yield of about 3.8%. For Apple, the downside is a double-whammy — profit slides and the earnings multiple swiftly contracts as growth and momentum investors flee the stock as fast as they can.

The upside for Nokia is no guarantee, but the reasons are compelling. And going against conventional wisdom is the only way you're going to make money over the long haul in the market.

Uncategorized

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