Posts Tagged ‘numbers’

More Phony Jobs and Unemployment Numbers

December 9th, 2012

Paul Craig Roberts: Statistician John Williams ( calls the government’s latest jobs and unemployment reports “nonsense numbers.” Read more…

Economy, Government, Markets

Don’t touch these stocks with a ten-foot pole!

June 13th, 2011

Martin D. Weiss, Ph.D.Major stock sectors are now in a race for the bottom.

These are stocks on a rendezvous with their lowest lows reached in the debt crisis of 2008-2009 … sinking back into the danger zone that came with red ink, bankruptcy, and financial ruin for millions of investors.

Hard to believe that could already be happening so soon after the market peaked?

Then consider the 25 stocks I’m going to list for you in a moment, starting with PMI Group, one of the nation’s leading mortgage insurers.

Two and a half years ago, at the height of the financial crisis, this leading mortgage insurer plummeted to a low of a meager 32 cents per share.

But in the weeks and months that followed, Washington worked overtime to inject trillions of dollars into the housing market and convince the world that the Great American Nightmare — the worst real estate crash of all time — was over.

Many Americans, blinded by their faith in “almighty government,” actually fell for it: The housing market stabilized temporarily. The economy recovered a bit. Stocks rallied sharply. And PMI surged, reaching a peak of $7.10 per share last year.

But that was just the prelude to disaster …


In the ensuing months, all of the government’s housing support programs and all the government’s mortgage subsidy initiatives failed.

Nothing the government did could stop wave after wave of mortgage defaults and foreclosures.

And even the government’s massive injections of money into the mortgage market were unable to prevent PMI from crashing again, closing at a mere $1.12 per share in late trading hours this past Friday.

That’s down a sickening 84% from last year’s high!

If you had invested $10,000 in this dog at that time, you’d now have only $1,577 in your account right now.

An Unimportant Company? No!

PMI has historically been a huge player with a pivotal function in the housing finance industry — insuring mortgages against default. But now …

If big mortgage insurers like PMI go out of business or refuse to write new policies, most lenders will refuse to extend mortgage loans to anyone except those who are rich enough to buy a home for cash and don’t need a mortgage to begin with.

Moreover, PMI is on the frontline of the losing battle against a flood of bad mortgages in virtually every region of the United States.

So if this company is drowning and its stock is sinking to zero, you can be quite certain that many other companies downstream — lenders and banks, builders and realtors, REITs and other financials — are likely to face a similar fate.

As I illustrated here last week, nearly all bank and financial stocks are now in a race for the bottom — the only difference being, PMI is “winning” that race.

Just a Technical Correction?

If the housing and mortgage markets were holding up nicely, perhaps you could make that argument stick. But the fact is, all three key facets of this giant sector are coming unglued at the seams —

  1. The finances of homeowners who borrowed the money
  2. The finances of bankers who loaned them the money
  3. And the value of the home itself, the underlying collateral that’s supposed to be tapped when folks run out of money.

This is no small technicality. It’s a fundamental deterioration in the underpinnings of the entire sector.

“Why Can’t the Government Come
To The Rescue Again?” You Ask

For the simple reason that the government itself is ALSO running out of money.

But for argument’s sake, let’s say the government does somehow come up with more funds to pump into housing and mortgages.

OK. So what? What difference is that going to make?

Based on the recent history, the answer should be obvious: Not much!


Remember: No amount of government intervention has been able to prevent home prices from plunging to new lows — even lower than the bottom of March 2009, when homes were selling at deeply distressed prices. (See chart to left.)

Similarly, no amount of government intervention can prevent nearly every sector that touches housing and mortgages from suffering a similar fate.

“Martin’s Too Pessimistic.
Don’t Listen to Him!” Say My Critics

Harry Truman once said. “I never give them hell. I just tell the truth and they think it’s hell.”

That’s what my team and I do.

If anything, we’re optimists. We find the few companies that do have the wherewithal to survive and even benefit. And we see silver linings in this crisis that I’ll be glad to tell you more about in future issues.

Moreover, this is isn’t the first time we have given advance warnings about companies like PMI.

In our Safe Money Report of April 2005, well before the housing bubble peaked, we told our subscribers not to touch PMI Group and 24 other stocks with a ten-foot pole. Here they are:

Aames Investment, Accredited Home Lenders, Beazer Homes, Countrywide Financial, DR Horton, Fannie Mae, Freddie Mac, Fidelity National Financial, Fremont General, General Motors, Golden West Financial, H&R Block, KB Homes, MDC Holdings, MGIC Investment, New Century Financial, Novastar Financial, PHH Group, PMI Group, Pulte Homes, Radian Group, Toll Brothers, Washington Mutual, and Wells Fargo & Company.

(Want proof? Click here for the SMR issue of April 2005 and scroll down to page 10.)

Subsequently, 11 of these 25 companies filed for bankruptcy, were bailed out or bought out.

ALL 25 stocks plummeted, with an AVERAGE loss of 81.3%.

And even after more than two years of stock market rally, investors who bought and held these stocks are deep in the red.

(But whether they rallied or not, our advice to anyone who owns the surviving companies today is the same: Don’t touch them with a ten-foot pole!)

Later, in the financial crisis of 2008, we were the only ones who issued negative ratings and warned well ahead of time of nearly every major firm that subsequently collapsed. We warned about …

* Bear Stearns 102 days before it failed (click here for the proof)

* Lehman Brothers 182 days before (proof)

* Citigroup 110 days before (proof)

* Washington Mutual 51 days before (proof), and

* Fannie Mae 4 years before (proof).

That’s history. What counts most now is that …

It’s “Game Over” for the U.S. “Recovery”

Look. From the outset, we knew the U.S. economic recovery was rigged — bought and paid for by the greatest monetary and fiscal extravaganzas of all time.

We knew that no government, no matter how rich, can create corporate immortality: In the real world, companies are born and companies must die. I’m sure you understood that as well.

We knew that no government, no matter how autocratic, can repeal the law of gravity: When sellers are anxious to sell and buyers are reluctant to buy, prices fall. A no-brainer!

We also knew that no government, no matter how powerful, can stop the march of time: With every second that ticks by, more debts come due, more mortgages go into default, more homes are foreclosed.

And I think you knew, too. But still you ask:

“How Could This Recovery End So
Abruptly and Crumble So Dramatically?”

Answer: As we’ve been telling you all along, it was never a true recovery to begin with:

Preparing Your Investments for an Inflationary Future

May 26th, 2011

Let the boxing match begin!…In the near corner, we find deflation, with its furious fists of debt liquidation and credit contraction… And in the far corner, we’ve got Ben Bernanke’s printing press, with its menacing inflationary uppercut.

Inflation will win this contest eventually, but the match might go the full 12 rounds.

Deflation is no slouch. He packs a mean punch. Borrowers of all types – from single-family mortgage-holders to national governments – are defaulting on their loans…or moving rapidly in that direction. As the weakest of these borrowers fails, asset prices fall and confidence wanes, both of which produce additional defaults. Once this vicious cycle gains fury, all but the strongest – or least leveraged – borrowers endure.

If Greece defaults, for example, Ireland might follow…and so might Portugal and Spain, etc. If Greece defaults, a contagion becomes quite likely, as the folks who are kicking in their tax dollars to the European Central Bank and the IMF begin to realize that their bailouts are futile. Eventually, the taxpayers from relatively solvent nations resist pouring their capital down Greek, Irish or Portuguese rat holes. Eventually, the bailouts end and the defaults – politely known as “restructurings” – begin.

Aware of this grim prospect and fearful of deflationary forces in general, the Central Banks of America and Europe have been counterpunching with various combinations of money-printing, subsidized lending and debt-financed bailouts. In other words, all the classic inflationary responses, plus a few innovations like quantitative easing.

The match between deflation and inflation looks like a draw so far. The global economy is not slipping into a deflationary abyss. On the other hand, inflationary effects are popping up in numerous inconvenient places.

Based on official US data, the Consumer Price Index (CPI) is up 3.2% over the last 12 months, while the Producer Price Index (PPI) is up 6.8%. Both numbers are higher than in recent history, but neither one seems particularly terrifying…on the surface.

When you dig down into the numbers, however, you discover that these inflation rates are accelerating rapidly. During the first four months of this year, the CPI has jumped 9.7% annualized, while the PPI has soared at a 12.8% annualized pace.

Import prices are also rocketing higher – up 2.2% in April, after a 2.6% jump the previous month. Year-over-year, import prices are up a hefty 11.1%. But once again, the trend is accelerating. For the first four months of this year, import prices have increased at a 26.7% annualized rate!

Let’s put these facts and figures into a real-world context. Based on the lowest of these various inflation data, the CPI, the average US wage earner has made no progress whatsoever during the last four years…

US average per capita weekly earnings have increased about 12% since the beginning of 2006. But since the CPI has increased the same amount, that means inflation has wiped out all the growth of weekly earnings.

If, as we suspect, the forces of inflation continue to prevail in this contest, hard asset investments should perform well, at least relative to most other options. But this analysis is not new news to faithful Daily Reckoning readers. It’s probably not even new news to unfaithful Daily Reckoning readers. (You know who you are!)

We’ve been singing the praises of hard assets like gold and silver for many, many years. In fact, we’ve been talking up had assets for so long that our analysis would be growing tiresome by now…if not for the fact that it has been profitable.

Even so, your editor does not wish to grow tiresome to anyone – not to his kids, not to his girlfriend and certainly not to his Daily Reckoning readers. So he will add a nuance to his monotonous “buy hard assets” mantra.

Here goes: If inflation takes hold as we expect, the allocations in your portfolio that are not hard asset investments should, nevertheless, possess hard asset attributes. When allocating to specific stocks, for example, insist that those stocks possess two key attributes:

1) Significant exposure to non-dollar revenues.
2) Significant pricing power, even in an inflationary cycle.

A strong balance sheet and solid cash flow also help.

Eric Fry
for The Daily Reckoning

Preparing Your Investments for an Inflationary Future originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
Preparing Your Investments for an Inflationary Future

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.

OPTIONS, Uncategorized

This Huge Company’s Stock is Ridiculously Cheap

May 9th, 2011

This Huge Company's Stock is Ridiculously Cheap

There's something more to insurance giant Aflac (NYSE: AFL) than just the funny (and wildly successful) duck mascot.

Weighing in at a hefty $26.8 billion market cap, Aflac (originally the American Family Life Assurance Co.) writes supplemental health and life insurance in the United States and Japan. The company's products are marketed through multiple channels in both countries, which add up to 80% of the company's revenue. I'll discuss its distribution model in greater detail later because, to me, that's one of Aflac's greatest strengths — especially as the health care environment in the United States evolves.

The company's products in the United States include cancer policies and various types of health insurance, including accident and disability, fixed-benefit dental and hospital indemnity. Other products include long-term care, short-term disability and ordinary life. In Japan, the products are similar, also including hybrid products and stand-alone, whole-life medical plans.

Leveraging a strong brand and breakout numbers equal investor success…
So while the Aflac duck continues to quack and entertain while strengthening the brand, the numbers do the real heavy lifting. In the past five years, revenue has risen from $14.4 billion to $20.7 billion in 2010, a 12% compound annual growth rate (CAGR). Not too shabby for a company that large. The five-year earnings per share (EPS) growth story is even better: a 13.9% CAGR through 2010. The average annual return on equity (ROE) has come in at a little better than 21%. Typically, 20% and northerly is an indicator of good things.

Thanks to the leftovers of the 2008 financial crisis, there has been some persistent concern for the mortgage-backed securities (MBS) Aflac holds in its investment portfolio. However, the company has done a superior job of risk management by lowering MBS holdings to 1% of the portfolio from 1.5% the prior year.

So far, Aflac has come out of the gate strong in 2011. First-quarter operating EPS came in at $1.63 per share, which handily beat the consensus of $1.41. There was also marked improvement in the company's U.S. business: U.S. sales growth for the first quarter of 2011 was positive for the first time in nine quarters. But keep in mind that the United States represents only 20% of the business. Japan pays the bills, and Japanese sales grew by 13% for the same quarter.

Speaking of Japan, saying “Aflac” and “investing” in the same sentence lately makes the “Nervous Nellies” break out in hives. Is there risk to Aflac's Japanese business thanks to the earthquake and tsunami? Of course there is. Enough to knock the stock back nearly 10% or so (see chart below) in the trading days following the disaster. Shares fell from the $56-55 range to $50 and some change.


Hyperinflation and Double-Dip Recession Ahead

May 6th, 2011

“The US is really in the worst condition of any major economy or country in the world,” says ShadowStats Editor John Williams. In the following interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation.

The Gold Report: Standard & Poor’s (S&P) has given a warning to the US government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What’s the real impact of this announcement?

John Williams: S&P is noting the US government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 5 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the US was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.

There’s good reason for fear about the debt, but it would be a tremendous shock if either S&P or Moody’s Investor Service actually downgraded the US sovereign-debt rating. The AAA rating on US Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With US Treasuries denominated in US dollars and the benchmark AAA security, how can you downgrade your benchmark security? That’s a very awkward situation for rating agencies. As long as the US dollar retains its reserve currency status and is able to issue debt in US dollars, you’ll continue to see a triple-A rating for US Treasuries. Having the US Treasuries denominated in US dollars means the government always can print the money it needs to pay off the securities, which means no default.

TGR: With the US Treasury rated AAA, everything else is rated against that. But what if another AAA-rated entity is about to default?

JW: That’s the problem that rating agencies will have if they start playing around with the US rating. But there’s virtually no risk of the US defaulting on its debt as long as the debt’s denominated in dollars. Let’s say the US wants to sell debt to Japan, but Japan doesn’t like the way the US is running fiscal operations. It can say, “We don’t trust the US dollar. We’ll lend you money, but we’ll lend it in yen.” Then, the US has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you’re looking at US debt denominated in yen, most likely you would have a very different and much lower rating.

TGR: Is there a possibility that people would not buy US debt unless it’s in their currency?

JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar-denominated assets and move into currencies they consider safer. And you’ll see other things; OPEC might decide it no longer wants to have oil denominated in US dollars. There’s been some talk about moving it to some kind of basket of currencies – something other than the US dollar, possibly including gold. This would be devastating to the US consumer. You’d get a double whammy from an inflation standpoint on oil prices in the US because the dollar would be shrinking in value against that basket of currencies.

TGR: Different countries are starting to discuss the creation of an alternative to the USD as reserve currency. How rapidly could an alternative currency appear?

JW: That would involve a consensus of major global trading countries; but just how that would break remains to be seen. Let’s say OPEC decides it no longer wants to accept dollars for oil. Instead, it wants to be paid in yen. It’s done. It’s not a matter of creating a new currency – it’s a matter of how things get shifted around…Part of the weakness in the dollar now is due to the way the world views what’s happening in Washington and the ability of the government to control itself. That’s a factor that may have forced S&P to make a comment. So, even having a weaker economy in Europe would not necessarily lead to relative dollar strength.

TGR: If the US experiences a continued, or even greater, recession, doesn’t that impact spill over into Canada?

JW: The Canadian economy is closely tied to the US economy, and bad times here will be reflected in bad times in Canada. However, I’m not looking for a hyperinflation in Canada. Its currency will tend to remain relatively stronger than the US dollar. Canada is more fiscally sound; it generally has a better trade picture and has a lot of natural resources. Keep in mind that economic times tend to get addressed by private industry’s creativity and, thus, new markets can be developed. For instance, you’re already seeing significant shifts of lumber sales to China instead of to the US.

TGR: What about the effect on other countries?

JW: The world economy is going to have a difficult time. You do have ups and downs in the domestic, as well as the global, economy. People survive that. They find ways of getting around problems if a market is cut off or suffers. I view most of the factors in Canada, Australia and Switzerland as being much stronger than in the U.S Even when you look at the euro and the pound, they’re generally stronger than in the US. Japan is dealing with the financial impacts of the earthquake. There’s going to be a lot of rebuilding there. But, generally, it’s a more stable economy with better fiscal and trade pictures. I would look for the yen to continue to be stronger. Shy of any short-term gyrations, the US is really in the worst condition of any major economy and any major country in the world and, therefore, in a weaker currency circumstance.

TGR: Then why are media analysts talking about the US being in a recovery?

JW: You’re not getting a fair analysis. There’s nothing new about that. No one in the popular media predicted the recession that was clearly coming upon us, and the downturn wasn’t even recognized until well after the average guy on Main Street knew things were getting bad. We have some particularly poor-quality economic reporting right now. The economy has not been as strong as it advertised. Yes, there has been some upside bouncing in certain areas, but it’s largely tied to short-lived stimulus factors.

Are we really seeing a surge in retail sales? If so, you should be seeing growth in consumer income or consumer borrowing – but we’re not seeing that. The consumer is strapped. An average consumer’s income cannot keep up with inflation. The recent credit crisis also constrained consumer credit. Without significant growth in credit or a big pick-up in consumer income, there’s no way the consumer can sustain positive economic growth or personal consumption, which is more than 70% of the GDP. So, you haven’t started to see a shift in the underlying fundamentals that would support stronger economic activity. That’s why you’re not going to have a recovery; in fact, it’s beginning to turn down again as shown in the housing sales volume numbers, which are down 75% from where it was in normal times.

TGR: But we were in a housing boom. Doesn’t that make those numbers reasonable?

JW: Housing starts have never been this low. Right now, they are running around 500,000 a year. We’re at the lowest levels since World War II – down 75% from 2006 – and it’s getting worse. I mean the bottom bouncing has turned down again. We’re already seeing a second dip in the housing industry. There’s been no recovery there.

In March, all the gain in retail sales was in inflation. Retail sales are turning down. You’re going to see a weaker GDP number for Q111. The GDP number is probably the most valueless of the major series put out; but, as the press will have to report, growth will drop from 3.1% in Q410 to something like 1.7% in Q111.

TGR: You’ve stated that the most significant factors driving the inflation rate are currency- and commodity-price distortions – not economic recovery. Why is that distinction important?

JW: The popular media have stated that the only time you have to worry about inflation is when you have a strong economy, and that a strong economy drives inflation. There’s such a thing as healthy inflation when it comes from a strong economy. I would much rather be in an economy that’s overheating with too much demand and prices that rise. That’s a relatively healthy inflation. Today, the weak dollar has spiked oil prices. Higher oil prices are driving gasoline prices higher – the average person is paying a lot more per gallon of gas. For those who can’t make ends meet, they cut back in other areas.

You also have higher food prices. It’s not due to stronger food or gasoline demand – it’s due to monetary distortions. Unemployment is still high, even if you believe the numbers. I’ll contend the economy really isn’t recovering. At the same time, you’re seeing a big increase in inflation that’s killing the average guy.

Why isn’t there more pressure on the US government to reduce the debt deficit?

JW: When you get into areas like debt and deficit, it’s a little difficult to understand. The average person, though, should be feeling enough financial pain that political pressure will tend to mount before the 2012 election; but whether or not the average person will take political action remains to be seen. I don’t think you have until 2012 before this gets out of control and there’s hyperinflation. It could go past that to 2014, but we’re seeing all sorts of things happening now that are accelerating the inflation process.

TGR: Like the dollar at an all-time low.

JW: If you compare the US dollar against the stronger currencies, such as the Australian dollar, Canadian dollar and Swiss franc, you’re looking at historic lows. You’re not far from historic lows in the broader dollar measure.

TGR: In your April 19 newsletter, you stated, “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial market expectations catch up with the underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results.” What do you mean by “until such time as financial market expectations catch up with the underlying reality?”

JW: A lot of people look closely at and follow the consensus of economists, which is looking at (or at least still touting) an economic recovery with contained inflation. I’m contending that the underlying reality is a weaker economy and rising inflation. I think the expectation of rising inflation is beginning to sink in. Given another month or two, I think you’ll find all of a sudden the economists making projections will start lowering their economic forecasts.

TGR: Do you think economists will shift their outlooks before we get into hyperinflation or a depression?

JW: In terms of economists who have to answer to Wall Street, work for the government or hold an office like the Federal Reserve chairman, by and large, they’ll err on the side of being overly optimistic. People prefer good news to bad news. If Fed Chairman Ben Bernanke said we were headed into a deeper recession, it would rattle the market. People on Wall Street want to have a happy sales pitch. What results may have little to do with underlying reality…According to the National Bureau of Economic Research, the defining authority in timing of the US business cycle, the last recession ended in June 2009. So, this current recession will be recognized as a double-dip recession. The Bureau doesn’t change its timing periods.

I’ll contend that we’re really seeing reintensification of the downturn that began in 2007. Although it’s not obvious in the headline numbers of the popular media, you’ll find that September/October 2010 is when the housing market started to turn down again. That is beginning to intensify. We’ll see how the retail sales look when they’re revised. When all the dust settles, I think you’ll see that the economy did start to turn down again in latter 2010. Somewhere in that timeframe, they’ll start counting the second or next leg of a multiple-dip recession.

TGR: This has been very informative, John. Thank you for your time.


The Casey Research Team,
for The Daily Reckoning

Hyperinflation and Double-Dip Recession Ahead originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

Read more here:
Hyperinflation and Double-Dip Recession Ahead

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.


This Contrarian Stock Pick Could Gain 32% or More

May 2nd, 2011

This Contrarian Stock Pick Could Gain 32% or More

I remember how nutty investors were for shares of the big pharmaceutical companies 15 years ago. Pfizer (NYSE: PFE) had just put the spark back into middle-aged marriages, thanks to its failed blood pressure med that had a surprisingly pleasant side affect. Other companies followed suit with similar remedies.

See, the biggest portion of the U.S. population, the Baby Boomers, were in their early to mid-40s. In five to 10 years, they would need all kinds of drugs in addition to the recreational, gentlemen's vitamins. Blood pressure, cholesterol, anti-inflammatory meds, you name it — Big Pharma was cranking it out.

The stock prices reflected that ambitious optimism: multiples were quite sporty. Well, 15 years ago, most stock multiples were sincerely out of whack, and Big Pharma was no exception. Listening to analysts and chatting with health care fund managers, we were told that if you could buy a big pharmaceutical company like Pfizer or Merck (NYSE: MRK) at a price-to-earnings (P/E) ratio of 24, it was considered a bargain. What a difference a decade and a half makes…

Up until recently, the big drug companies had P/Es at depression-era single digits. There were a bunch of reasons, but the specter of health care reform was one of the primary ones.

Well, the toothpaste can't be put back in the tube: Obamacare's a done deal. And the drug manufacturers did OK on the deal. Now, it's time for investors to go shopping. There's plenty of high quality value around.

My favorite is the venerable and, lately, much maligned Eli Lilly (NYSE: LLY).

Most investors are fearful — that means you should be greedy…
Looking at Eli Lilly, Warren Buffet's words ring true. While the herd wrings its hands, you can pick up shares at a paltry trailing P/E of about 8.5 and a forward P/E of about 8.8.

Why is the herd so nervous? Aside from the fact that they're the herd and that's their job, the somewhat educated reason is patent expiration. Lilly's star anti-psychotic drug, Zyprexa, which contributed $5 billion in revenue in 2010, comes off patent in October of this year. Gemzar, a popular anti cancer drug responsible for $1.1 billion in revenue in 2010, also goes generic this year. But smart companies plan and Lilly is a smart company.

CEO John Lechleiter, is a Lilly-lifer. Starting as a chemist in the research and development (R&D) lab, Lechleiter spent the past 35 years working his way up through the ranks to the top slot. There's little question of his commitment: he lives less than a mile from Lilly's headquarters in downtown Indianapolis and walks to the office daily.

Dr. Lechleiter (he has a doctorate degree in organic chemistry from Harvard University) has set a course that pays homage to what makes a drug company great: developing new drugs. Currently, Lilly has 68 new drugs in the pipeline, 34 of which are in Phase I or II testing or under regulatory review. The other half is almost across the finish line. But all it takes is one blockbuster to knock the numbers over the fence. In 2010, Lilly's R&D spending totaled $4.4 billion, which is roughly 18% of sales for the same period. That's one of the highest R&D-to-sales ratios in the drug industry.

Lilly's peers are making acquisitions to build their respective pipelines, but the company sees more value in developing its pipeline organically. I agree. Meanwhile, other divisions such as veterinary, which is growing sales at 10%, can help pay the bills.

Lilly generates plenty of cash to finance the pipeline. For 2010, the company cranked out $7 billion dollars of operating cash flow, which is more than enough to cover capital expenditures and the dividend, which now sits at a compelling 5.3% yield. Lilly finished up 2010 with nearly $6 billion in cash on its balance sheet.


Consumer Price Inflation on a Diet of Gold and Wheaties

April 26th, 2011

We’ve always wondered why there is so much debate about the rate of inflation. It seems like such a simple thing to track. You go in the store. You buy a box of Wheaties. You write down the price. Next month, you do the same thing. What’s so hard about that?

But what if the box is smaller next month? What if the Wheaties are twice as good? What if you can get the same enjoyment from a box of Wheatie-Puffs at half the price?

What’s the real rate of inflation? It depends on how you figure it. The Labor Department shows consumer price inflation at barely over 2%. John Williams’ ShadowStats puts the figure close to 8%.

We say “close to” and “about” because the numbers are never more than approximations; no point in dressing them up with decimals as though they were precise and reliable.

But comes now MIT University with a project to track prices by monitoring them on the worldwide web. Instead of creating a small sample of prices and checking them periodically, the Billion Prices Project looks at a huge number of prices from all over the web, in real time.

The resulting numbers may not be perfect, but there sure are a lot of them. Using such a huge volume of price information, the Billion Prices Project is probably the most reliable measure of consumer price inflation developed so far.

So, you’re probably wondering… Well, what’s the story? How much consumer price inflation is there?

Over the last 12 months, prices have gone up 3.2%, say professors Alberto Cavallo and Roberto Rigobon, who developed the index.

But get this, the rate of consumer price inflation is speeding up. Annualize the data from the last 3 months and you get 7.4%.

We don’t need to tell you, Dear Reader. If that rate sticks, today’s financial world comes unglued.

By the most recent calculation by the Billion Prices Project, US government bond yields measure only half the rate of consumer price inflation. How could that be? Why would investors buy a bond yielding only half the inflation rate? Are they idiots?

Maybe they are betting that the latest inflation numbers are a fluke. Ben Bernanke said so himself.

“I think the increase in inflation will be transitory,” said the man more responsible for the price hikes than any other living human being.

Mr. Bernanke says gasoline at $4 a gallon…and a box of Wheaties at $5…are features of “global supply and demand conditions.”

Fair enough. Perhaps they are. But what about $1,500 gold? The supply of the yellow metal is barely any greater than it was when it was priced at $1,000 an ounce.

You may say that demand has increased by 50%…but that only introduces a string of other questions. Gold has no uses – other than ornament and money. What happened that would increase demand for it so suddenly? And if something has increased the demand for gold, perhaps that same thing might have affected oil and wheat too.

The feds are insincerely trying to figure it out. They’ve been asked by President Obama himself to look into price increases and report any funny business. Of course, the real funny business is right in plain sight. The Fed has tripled its holdings of private and public debt – and added nearly $2 trillion in extra cash to do it. Most of that money is still frozen in the banking system. But what will happen when things heat up…and it’s multiplied, maybe ten times over? Won’t that cause prices to rise even faster?

Maybe that’s what people are worried about. And to protect themselves, they’re buying tried and true money, traditional money. Because they’re afraid the more modern variety won’t hold up.

“Dollar’s Slide Accelerates,” reports The Wall Street Journal.

As predicted in this space, the feds have failed. Pouring more liquidity onto a saturated marketplace did not work. The economy already had more than enough debt; it didn’t need more.

More debt and dollars did not create a genuine recovery. Instead, they merely drowned millions of ordinary households…

The New York Times has the story:

WASHINGTON – The Federal Reserve ’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

And now, we’ll make another bold prediction. What happens when the QE2 program expires? Probably nothing…at first. But just wait. The Japanese, as usual, are setting the pace. In the two weeks following the tsunami/nuke crisis, they expanded their central bank balance sheet by two and a half times – adding huge new stockpiles of money for the banking system to draw upon.

The US feds won’t be left behind for long.


Bill Bonner
for The Daily Reckoning

Consumer Price Inflation on a Diet of Gold and Wheaties originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2


Read more here:
Consumer Price Inflation on a Diet of Gold and Wheaties

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

Commodities, Uncategorized

Housing Starts Rebound in March

April 21st, 2011

Mike Larson

Housing starts, the number of new residential homes being built and permitted, were just released by the U.S. Commerce Department for March.  While the numbers reflect a rebound, from February’s decline for residential construction, the bounce may not signal recovery. Here’s what the numbers showed:

* Housing starts rebounded 7.2% to a seasonally adjusted annual rate of 549,000 from 512,000 in February. That was a little bit better than the consensus forecast of 520,000. Building permit issuance gained even more — 11.2% to a 594,000 SAAR from 534,000 in February.

* By property type, single family starts gained 7.7% while multifamily construction rose 5.8%. Single family permit issuance rose 5.7% while multifamily permitting spiked 25.2%.

* Regionally, starts rose in most of the country. They gained 5.4% in the Northeast, 27.6% in the West, and 32.3% in the Midwest. Starts fell 3.3% in the South. As for permits, the story was similar. Permit issuance was unchanged in the Northeast, but up 6.3% in the South, 6.9% in the Midwest, and 37.1% in the West.

No doubt, the housing market tried to pick itself up off the mat in March. Starts and permits both bounced after a dismal performance in February, with relatively widespread regional gains. But this tired old boxer isn’t going to get back in the ring for a title bout anytime soon. Tougher mortgage qualification standards, competition from cheap “used” houses and condos, and the anemic economic rebound are all continuing to pressure new home builders. So it’s more than likely that will keep a lid on construction and permitting activity inhibiting recovery for the foreseeable future.

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

Read more here:
Housing Starts Rebound in March

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

2 Stock Picks from the Best Mutual Fund on the Planet

April 19th, 2011

2 Stock Picks from the Best Mutual Fund on the Planet

Risk equals return. It's one of the most widely-held maxims in investing and, if you look at the numbers, the sentiment rings true. Stocks have returned about 9.5% a year since 1926, according to Ibbotson & Associates, clearly better than the roughly 5.5% return bonds have delivered annually during that time. And bonds have surely beaten cash, which returns nothing.

Even within one asset class such as stocks, the maxim holds true — the riskier the stock, the higher the potential return. That's surely the case if you look at the Fidelity Advisor Leveraged Company Stock Fund (Nasdaq: FLSAX), the top-performing mutual fund in the diversified U.S. category in the past 10 years according to Morningstar, returning an annual average of 15%. The fund's secret: embrace companies with plenty of debt, as their inherent riskiness leads many investors to shun them. As cash flow builds at these debt-laden firms, these companies can pay off debt, attracting investors that had shunned them previously and sending share prices higher.

Piggybacking with the pros

Fidelity's Tom Saviero has been running this fund since 2003, and though he's a bit chastened by the 2008 meltdown, he still prefers companies with ample debt loads. ON Semiconductor (Nasdaq: ONNN), which is the fund's largest holding, is a perfect example. The company just completed a major acquisition of Sanyo's Japanese semiconductor business by adding to its debt load. But the acquisition should sharply boost sales and profits for ON.

ON makes an incredibly wide range of chips that go into everything from mobile computing devices to cars. This is a semiconductor play on the broadening advances in technology, not just on one industry such as memory or microprocessors. Sanyo, which operated three major fabrication plants in Japan, could never really achieve profits in the industry and wanted out. ON, eyeing the large Japanese market, wanted in. ON's management realized it could acquire all of the legacy products, shutter a great deal of Sanyo's manufacturing capacity, and ultimately generate much better margins than Sanyo could. As analysts at DA Davidson note, “leveraging its scale, one of ON's competitive advantages has been the ability to successfully integrate strategic acquisitions of complementary semiconductor suppliers.”

The Sanyo deal represents ON's 10th acquisition in the past 10 years, and is the second-largest, at $480 million, behind a $900 million purchase of AMIS Holdings in 2007. Much of the Sanyo deal is being paid for with a loan from Sanyo — just the kind of debt leverage that the Fidelity Advisor Leveraged Company Stock Fund likes to see.

Analysts expect big things from the Sanyo deal, which could increase sales by 50%. Sanyo had operating margins below 2%, but ON thinks it can boost that figure to 10% in four to six quarters. If that happens, analysts think EPS (earnings per share) will jump from $1 this year to $1.30 in 2012. DA Davidson sees shares rising from $9.30 to $17, or 14 times their 2012 profit forecast. Needham thinks a multiple of 10 is more appropriate, and sees shares rising more modestly to $13.

A word of caution: The Japanese earthquake will hurt first quarter results, as ON has already discussed with analysts. But if the problems extend into the current quarter, then shares may stay range-bound until the acquired Sanyo operations are fully off the ground. This may explain why shares have slumped 20% in the past two months.

Housing would be a kicker

Operations at Owens-Corning (NYSE: OC), another key holding of the Fidelity fund, are already humming along right now, and with an eventual upturn in the housing market, this stock could really get going. About 2% of the fund is tied up in this company. Saviero likely appreciated this name for its balance sheet, which still carries more than $1.6 billion in debt, and

Mutual Fund, Uncategorized

Cash on Hand…An Investors’ Best Friend

April 4th, 2011

Warren Buffett’s annual letter to shareholders came out recently. This is probably one of the most anticipated shareholder letters in the financial world. Everyone wants to know what the Oracle’s take on the world is. Also, because Berkshire is so large and spread across so many sectors – it owns 80-plus businesses now – his thoughts may give some insight into how the economy is doing.

His letter was the most optimistic letter we’ve seen in awhile – and maybe ever. Buffett said things such as “There is an abundance of [opportunity] in America” and its “best days lie ahead.”

Looking at his businesses, you can see from where that optimism might spring. Iscar, which makes metal tools, enjoyed a 41% increase in sales from a year ago. TTI, an electronics distributor, saw sales jump 45%. Burlington Northern, the railroad, reported a 43% jump in profits. And on and on it goes.

Forced to pick one indicator to judge the health of the economy, Buffett said it’d be rail car loadings. In 2010, rail car loadings were up 7.3% over 2009, which was the largest percentage increase since we have data (1988).

He also offered up the prediction that the housing market would recover within a year. A few of his businesses, such as carpet maker Shaw, are still way below where they were a few years ago.

So there you go. The Oracle is optimistic.

Now, I’ve learned a lot from Warren Buffett over the years. Studying his career is a must for investors. After all, he may be the greatest investor of all time. But this cheerfulness doesn’t sit well with me. I’m seeing too much of it everywhere. Perhaps Buffett will be right when looked at over a period of years. But in the near term, I see a lot of things that give me pause.

Some of these are just unassembled fragments, but consider…

The IPO market is off to its best start ever, according to Dealogic. So far, there has been $26 billion raised in new listings. And there is a backlog of $48 billion. So essentially, insiders are selling stock to public shareholders, who, so far, have lapped it up like hungry dogs.

Insiders are also selling stock of already public companies at a brisk rate. Insider selling itself is not a profitable signal to follow. In fact, academic studies have shown time and again that insider selling is not a worthy predictive signal. That makes sense because insiders can sell for all kinds of reasons. (This is in contrast to insider buying, which is a profitable signal to follow.) And we did get a very bearish level of insider sales last November, which did not materialize into a market correction of any kind. But it is unsettling, nonetheless. Insider sales outnumber insider buys by a ratio of nearly 40-to-1. Bad.

If things were so rosy, would that ratio be so high?

Then, there is the surging price of grains and oil. The high price of food is a major destabilizing force in emerging markets, where there are large pools of poor people who spend a great deal of their income on food. When food prices rise 25% in India over a few months, that’s going to have an outsized effect.

This matters for investors because the market so far has floated on a sea of good earnings. And if you dig into those earnings, you can’t help but notice how many companies are reporting wonderful results because of booming business in Brazil or Russia or China or some such place. Emerging markets helped drive earnings. By contrast, the results from the US and Europe and Japan have enjoyed more muted recoveries.

I worry that the rising cost of food and raw materials will dampen those results in the coming quarters. So that’s bad.

So I think it’s a good time to be careful. In fact, Buffett had some very good advice in his letter when he started to talk about the effects of borrowed money.

“The fundamental principle of auto racing is that to finish first, you must first finish,” he writes. Using lots of debt makes finishing iffy. The Oracle continues:

“Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”

Of course, this math applies to investing in stocks, which is why it is important to look at financial strength and balance sheets, as we do. Maybe we haven’t made as much money as we might have in the past two years if we had bet on more speculative, less ably financed companies. But over the long haul, we’re following a surer path. (And we’ve done pretty darn well as it is.)

Buffett also writes about a letter he found written by his grandfather to his son in 1939. “Ernest never went to business school – he never, in fact, finished high school – but he understood the importance of liquidity as a condition for assured survival,” Buffett writes.

Old Ernest gave his son Fred very good advice. He writes: “Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash… Thus, I feel that everyone should have a reserve.”

Buffett says Berkshire customarily keeps at least $20 billion on hand, “so that we can both withstand unprecedented insurance losses…and quickly seize acquisition or investment opportunities, even during times of financial turmoil.”

It’s a good way to run a business. It’s a good way to run your personal finances. And it’s a good way to run a portfolio.

So my advice to you is to keep a cash reserve.

As a long-term investor, I might share some of Buffett’s optimism. When I look over our names, I see a lot of people doing great things that could create substantial wealth this year and in the years to come.

At the same time, I think this market has a little air under it. I would never advocate selling simply because of a guess about the market’s direction. Calling tops and bottoms is a fool’s errand. But I do know that finding bargains is getting harder. Many valuations are full. Keep a cash reserve so that you are ready to take advantage of new opportunities when we get the inevitable dip in the market.


Chris Mayer,
for The Daily Reckoning

Cash on Hand…An Investors’ Best Friend originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and introduced his new book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas.

Read more here:
Cash on Hand…An Investors’ Best Friend

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.


USDA Crop Report and You

April 3rd, 2011

The USDA released its planting projections for the coming spring and statistics for inventories of stored grain.   These reflect farmers planting intentions and the current picture for grains on hand. 

Planned Acreage (million acres):

  • Corn: 92.2 vs. 91.7 — Up 5% year-over-year, becoming the second highest planted acreage in the U.S., only behind the 93.5 million acres planted in 2007.

  • Soybean 76.6 vs. 76.9 — Down 1%, yet the third largest planting on record.  

  • Wheat 58.0 vs. 57.30 — Up 8%

  • Cotton: 12.6 vs. 13.2 — Up 15%

Stocks (Billion bushels):

  • Corn: 6.52 vs. 6.701 — Down 15%

  • Soybean: 1.25 vs. 1.20 — Down 2%

  • Wheat: 1.42 vs. 1.39 — Up 5%

While acres planted will increase, there is concern about the decrease in stored grain inventories. US consumption and exports to countries such as China, that are hoarding grain to meet their own consumer needs, mean there may be a squeeze between supply and demand. 

The USDA report triggered price increases as everyone from farmers to ethanol producers watched.  Without a doubt, the increase in commodity prices will be passed onto consumers who will continue to see higher food prices at the supermarket.  And, a larger portion of everyone’s budget will be going to food. Don’t just think corn and cereal, but meat and milk prices will be affected too.  Not pretty for the average person.

The impact of price increases in food may also affect the federal incentives supporting ethanol production.  Federal subsidies are set to expire at the end of 2011, and Congress is likely looking at the bio-fuel policy as they seek ways to reduce the budget deficit.

But, these numbers, especially corn, are indeed bullish for some agricultural related industries. As a drop in supply with more acreage set to be planted could be a boom for farm equipment manufacturers, fertilizer producers and food processers.

This is not only important for investors with agricultural exposure, it also must be taken in the context of what higher grain prices mean globally …

A lot of what is going on in the Middle East and North Africa started because of higher grain prices — and inflation. And in the long run higher prices could be the fuel that keeps the unrest going.  

We’ll continue to pay attention to the numbers and keep you informed.

Read more here:
USDA Crop Report and You

Commodities, ETF, Mutual Fund, Uncategorized

IN FOCUS: Peritus High Yield ETF (HYLD)

March 31st, 2011

Launch Date: November 30, 2010

Links: Website, Factsheet, Prospectus

Investment Strategy:

HYLD is an actively-managed ETF that aims to generate high current income with capital appreciation being a secondary goal. The fund achieves this through investments in high yield debt securities which provide good yields on principal. The fund is sub-advised by Peritus Asset Management which takes a “value-based, active credit approach” to selecting investments in the high yield market. The managers intentionally avoid the new issue market and focus on finding opportunities in the secondary market. The managers also have the flexibility to utilize US Treasuries as a way to hedge the portfolio during times of market stress.

As of March 20th, the portfolio was very well diversified across sectors with allocations to high yield bonds across 20 sectors in all. The largest allocation was a 14% weight to the Oil & Gas sector. The largest allocation to an individual bond was 5.22% to United Refining bond maturing in 2018, yielding 10.5%. Given the generally higher yields within the junk bond space, it doesn’t come as a surprise that the SEC yield is high at 7.44%. The average duration of the fund was about 3 years.

Portfolio Managers:

Peritus Asset Management serves as the sub-advisor to HYLD. The portfolio managers making the day-to-day decisions are:

Timothy Gramatovich, Chief Investment Officer – Mr. Gramatovich is the co-founder of Peritus and has been involved in the high yield space for 25 years.

Ronald Heller, CEO & Senior Portfolio Manager – Mr. Heller is the co-founder of Peritus and oversees the portfolio management and trading activities.

The Numbers:

Net Expense Ratio – 1.35% (with a fee waiver of 0.02%)

Market Cap – $23.4 million

Average Daily Volume –  5,515 shares

What’s special about it?

1. There are already several index ETFs that provide investors with passive exposure to the high yield space, such as the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK). However, HYLD will be the first ETF to provide exposure through an actively-managed fund. The high yield space is definitely one where there is a lot of potential value add that can be derived through active management, given the wide disparity in credit quality amongst issuers.

2. Having the ability to increase allocation to US Treasuries also provides the fund managers with a tool to manage downside risk. High yield bonds are definitely one of the riskier and more volatile asset classes which tends to get hit hard during market downturns. In those situations, having the ability to reduce exposure to the high yield space in an active fund can be crucial.


The Active Bear ETF has only been on the market for 4 months, a period too short to make a fair assessment of an active manager. The fund is benchmarked to the Barclays US High Yield Index. The 4 month performance chart below compares the market price performance of HYLD to its index counterparts, HYG and JNK, which provide passive exposure to the high yield space. Taking the yield component into account, HYLD has a 30-day SEC yield of 7.44%, compared to 6.31% for HYG and 6.56% for JNK.

The prospectus provides a longer performance history for a composite of funds that are managed by Peritus according to a mandate similar to HYLD. The Peritus High Yield Composite, as of Dec 31, 2009, had returned 85% over the previous 1 year, while the Barclays Capital US High Yield Index returned 58%. Since inception in 2000, the composite has returned 10.38% versus 8.21% for the index.


Positives –

- As mentioned, the ability to apply discretion to the selection of high yield bonds is quite valuable in this space as the credit quality of junk bond issuers can vary significantly. As such, holding a portfolio supported by some credit research would appear to better off than having exposure to every bond in an high yield index. In the case of HYLD, the benefits of active management seem to show up in the fund’s outperformance.

Negatives –

- The portfolio still has a relatively short performance history and given that the fund only launched in Nov 2010, investors do not yet have a sense of how the managers and the portfolio will perform in more difficult market environments when high yield bonds tend to suffer the most.

- The daily trading volume in HYLD and the current asset base of $23 million is not very encouraging for new investors. Investors do not need to worry about significant price impact if they want to trade a large block of shares, since the ETF’s market maker has the ability to create or redeem shares. However, due to the low volume, investors might face a higher than normal bid-ask spread.


IN FOCUS: Active Bear ETF (HDGE)

March 28th, 2011

Launch Date: January 26, 2011

Links: Website, Factsheet, Prospectus

Investment Strategy:

HDGE is an actively-managed ETF that looks for capital appreciation through shorting domestic US equities, making it a short-only fund. The fund is sub-advised by Ranger Alternative Management which utilizes a bottoms-up, fundamental, research driven security selection process. The managers rely on forensic accounting to look for companies that have low earnings quality or use aggressive accounting intended to mask operational deterioration and superficially enhance earnings. Other catalysts that play into security selection include downward estimate revisions and reduced guidance.

As of March 24th,2011, the portfolio’s largest short position was Netgear Inc, which had a -5.8% weight. Other than Netgear, top five holdings included Whirlpool Corp (-5.5%), (-5.29%), General Motors (-5.16%) and VMWare Inc (-4.81%). The sector exposure was also well diversified with Consumer Goods and Consumer Services being the largest shorts near the end of January. The average position size in the portfolio is typically between 2% – 7%, with between 20 and 50 holdings.

Portfolio Managers:

Ranger Alternative Management serves as the sub-advisor to HDGE. The portfolio managers making the day-to-day decisions are:

John Del Vecchio – Portfolio Manager/Principal

Brad H. Lamensdorf – Portfolio Manager/Principal

The Numbers:

Net Expense Ratio – 1.85% (with a fee waiver of 0.03%)

Market Cap – $46.0 million

Average Daily Volume – 136,933 shares

What’s special about it?

1. HDGE is the very first short-only active ETF to be launched in the US. It provides investors with a unique proposition and investment strategy that they usually do not have exposure or access to. Most investors essentially have long-only exposure and HDGE provides them with an alternate to take advantage of the down-side when markets are under stress.

2. By virtue of its mandate, HDGE has to identify poor companies and not good companies that the vast majority of portfolio managers focus on. This requires a very different skill set and portfolio managers behind HDGE rely on forensic accounting as the tool to find bad companies.


The Active Bear ETF has only been on the market for 2 months, a period too short to make a fair assessment of an active manager. However, the 3 month performance chart below of HDGE (green line) versus the S&P500 (blue line) shows the expected inverse relationship.

The prospectus provides the historical performance of a fund comparable to HDGE, the Ranger Alternative Fund that has been run by the sub-advisor since Oct 2007. Up till March 31, 2010, that portfolio had 1 year returns of -38.47%, compared to the S&P500 return of 49.77%. Since inception though, the fund has returned 16.55%, while the S&P500 has returned -8.01%.


Positives –

- HDGE clearly provides investors a good option if they are looking for a hedge for their long-only exposure. With a short-only portfolio, the portfolio will benefit when the market is under stress and other components of an investor’s portfolio might be performing poorly.

- The recent performance since launch and the historical performance of the comparable portfolio has been good in times that it should be and the managers cannot be faulted for performing poorly when the equity markets are going strong. The investment mandate of the portfolio, by definition, means underperformance during positively trending markets. However, they outperform the market significantly during periods like 2008 and early 2009.

Negatives –

- As with any portfolio hedge, there is a cost to hedging. With HDGE, that cost is the underperformance of the portfolio during good times. Now, whether the amount of underperformance during good times is enough to justify the cushion provided to investor portfolios by the outperformance during bad times, is something that investors have to decide for themselves.

- Many of HDGE’s top 10 short candidates over its short time in the market have been the high beta, high momentum names like VMware, Amazon, and Netgear. Names like these tend to move several times the market averages both in up and down markets. This could make the portfolio performance quite volatile with the fund’s fortunes really depending on the general market direction.

Disclosure: No positions in above-mentioned names.

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Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Etfshub is not an investment advisor, neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on EtfsHub is intended to endorse or promote any company or its products. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here. Similar Posts:

Read more here:
IN FOCUS: Active Bear ETF (HDGE)

Shishir Nigam is the founder of ActiveETFs | InFocus (, which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.

Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on EtfsHub is intended to endorse or promote any company or its products. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.


Rising Inflation Turning Up the Heat on Central Bankers!

March 25th, 2011

Mike Larson

A hilarious thing happened earlier this month. The President of the New York Fed, William Dudley, tried to justify the Federal Reserve’s easy money policy.

In a speech before the Queens Chamber of Commerce, he claimed inflation wasn’t a problem, noting as one example that:

“You can buy an iPad2 that costs the same as an iPad1 … you have to look at the prices of all things.”

The response from the crowd? Utter disbelief! One person in the crowd referenced the rampant food inflation we’re seeing by asking Dudley,

“When was the last time, sir, you went grocery shopping?”

Another quipped,

“I can’t eat an iPod!”


I can’t believe the claptrap the Fed is peddling either! Former Goldman Sachs economists like Dudley and his Ivy League-educated boss Ben Bernanke may say (at least publicly) that inflation is under control. But the rest of us in the Real World know that’s bupkis.

Gas. Food. College. Heck, Diet Coke! It’s all getting more expensive.

More importantly, the OFFICIAL data is now confirming what you and I are seeing every day. That’s turning up the heat on central bankers worldwide — with important investment ramifications for you.

Don’t Look Now, but Inflation
Gauges Are on the Rise!

We get three major inflation reports every month here in the U.S. — one each on import prices, producer prices, and consumer prices. So what did the latest figures show?

* Import prices jumped 1.4 percent in February from January. That easily topped forecasts, and it was the fifth month in a row where prices rose by more than 1 percent. Imports cost 6.9 percent more than they did a year earlier, the fastest inflation rate in nine months. And imported food shot up the most in any month since the government began tracking in 1977!

Last month import prices leaped higher than had been expected.

* Producer prices surged 1.6 percent, the biggest monthly gain since June 2009! Wholesale goods and services are now rising in price at a 5.6 percent year-over-year pace, the most in almost a year. Further up the pipeline, intermediate goods rose in price at the fastest pace since July 2008 while crude goods jumped another 3.4 percent.

* Consumer prices jumped 0.5 percent, the most in 20 months! Price increases at the “core” level are also picking up, rising by two-tenths of a percent for two months in a row. That’s something we haven’t seen since the fall of 2009.

Then earlier this week, we learned that U.K. inflation surged to 4.4 percent in February. That was faster than the 4.2 percent expected by economists, and the worst reading in any month since October 2008. Consumer inflation in the 17-nation euro zone is also picking up. At 2.4 percent in February, it’s now comfortably above the European Central Bank’s 2 percent “limit.”

Market Sands Shifting as
Price Pressures Increase

Look, central bankers can try to stick their heads in the sand for a while when the numbers take a turn for the worse. That’s what U.S. policymakers — and their developed world counterparts in the euro zone and U.K. — were doing for a while.


But our foreign counterparts are showing increasing signs of breaking ranks. That’s leading to speculation the ECB could hike rates as soon as next month, with the U.K. not far behind in July.

Here in the U.S., Bernanke is still (yes, STILL!) dragging his feet. But the yield curve continues to flatten as I predicted several weeks ago. And investors are continuing to bet against him in the interest rate futures market.

So why should this matter to you?

Interest rate hikes will likely push stock prices down.

Well, I wouldn’t be surprised to see risk assets like stocks get hit as slightly tighter monetary conditions get priced in. I also continue to believe the dollar is vulnerable.

I’d use the “relief rally” we’ve seen in the wake of the Japanese quake and nuclear crisis to lighten up on stock market risk. I’d also look to hedge currency risk in my fixed income portfolio using investments such as the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG). Foreign bonds tend to rise in value when the dollar falls because each interest or principal payment remitted in a foreign currency translates into more dollars as it’s repatriated.

Oh, and if a Fed official shows up in YOUR town to talk policy? Feel free to heckle all you want! These guys don’t know what the heck they’re talking about when it comes to inflation.

Until next time,


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Rising Inflation Turning Up the Heat on Central Bankers!

Commodities, ETF, Mutual Fund, Uncategorized

It’s All About Housing

March 23rd, 2011

As I was sitting here looking at the calendar, I noticed that next week brings us to the end of March…and then it dawned on me that we’re already staring at the end of the first quarter. Simply amazing, where does the time go? It was a fairly uneventful day as there wasn’t much in the way of data to interpret or any market moving events, so most assets remained in a relatively tight range. I guess I should quit stalling and jump right in.

While only a handful of the major economies had any economic reports hit the airwaves yesterday, the US only had a couple of minor events. As I mentioned yesterday, the FHFA house price index (Federal Housing Finance Agency) was expected to re-affirm housing data that we saw a couple of days ago that didn’t show any bright spots. We saw the same disappointing data as prices came in below expectations by falling 0.30% from December and 3.9% from this time last year.

This data measures transactions of homes financed with mortgages backed by Fannie Mae or Freddie Mac. It was the same old rhetoric as to the cause, which would be foreclosures remaining at high levels that add to the already high supply of homes in the market. The fact that about 23% of homeowners with mortgages had negative equity in the fourth quarter acts like concrete shoes that’s keeping housing submerged. That is awfully close to 1 in 4 mortgages being underwater.

We also had manufacturing in the Richmond Fed district slow quite a bit more than expected, down to 20 from a figure of 25 back in February. Manufacturing has remained one of the few bright spots here in the US, but I guess last month was tough in that region. Maybe it was the weather, but in either case, this can be a volatile report so no need to spend much time on it.

We have a couple of things to look at this morning as weekly mortgage applications and new home sales are released. The mortgage application report can be all over the place and is highly sensitive to interest rates, so looking back to where the 10-year yields were trading, I would say look for a higher figure. While this does provide some insight as to expressed demand for a refi or purchase, there are many other reports that provide better data.

One of those reports would be the new home sales figures that we’ll also see out this morning. Again, same old story. Mounting foreclosures are causing problems as cheaper priced distressed homes that have been previously owned detract from sales of brand new homes. Builders have also cut back on the new home supply so home construction should remain on the low side. I think the majority of homebuilders aren’t very hopeful that 2011 is going to turn out much better than 2010.

The best performing currencies on the day were again the commodity currencies. While gold and silver didn’t do much of anything, they did stay on the high side as gold was trading around $1,425 and silver around $36.30 when I was packing my things to go home last night. Any increase in the Middle East tensions would look to be short-term price drivers.

Moving over to oil, we did see this commodity move higher on the day. While we currently have two cooks in the kitchen, which would be the tensions in Libya/Middle East and events in Japan giving direction, prices ended the day at $104. Increasing optimism out of Japan sent oil higher, as the markets looked past current events and more toward the rebuilding stages, which would boost demand for many commodities. Reports are also out that Japanese refineries are processing more oil that previously expected.

The dollar index traded in a tight range as it remained in the mid- to low-75 handle, bouncing from the low of 75.25, and held steady at the lowest levels since December 2009. Since the euro (EUR) accounts for a big proportion of the dollar index, the exchange rate hovering around 1.42 was certainly a contributor. Since risk tolerances have been rising, it looks as though the markets are seeking higher yielding currencies or economies where rates are at least in a position to rise.

One of the other nations that had some economic data to talk about was South Africa, whose rand (ZAR) appreciated the most on the day. Its 0.70% rise against the dollar was due to the fourth quarter current account deficit falling to the lowest level in seven years. The deficit fell to 0.6% of GDP from 3.1% in the third quarter and has narrowed from a figure of 7.1% in 2008. This has been a point of contention along with an overall unstable fundamental base as a whole for investors for quite some time.

I guess the big question mark now deals with the sustainability of this going forward. A closer look at the numbers show us that export volumes actually slowed in the fourth quarter, but its value rose by 5.5%. Couple that with import volumes shrinking for the first time in over a year as economic demand slowed, and we get the significant move that we saw. While it was positive news and is better than the alternative, we still see too much risk associated with the rand.

While the Australian (AUD) and New Zealand (NZD) dollars finished in second and third place respectively, the other currencies that did end the day on the positive side were all lumped together. Moving on to the United Kingdom, we saw inflation surprise on the upside and the pound (GBP) trade up to 1.64 for the first time since January 2010. The higher inflation has investors speculating as to when the BOE will finally raise interest rates. Economists were starting to price in a rate hike as soon as July instead of the previous estimate of August.

The CPI for February rose to 4.4%, which was higher than the estimate of 4.2% as well as the January figure of 4%, and represents the fastest pace in over two years. Consumer inflation is now more than double the government’s 2% target, and with commodity prices continuing to rise, there doesn’t seem to be much relief. Retail price inflation, a measure of the cost of living used in wage negotiations, rose to 5.5% and marked the fastest rise in almost 10 years. The UK is in a tough position because something has to be done about inflation but the economy isn’t exactly in a place to deal with higher interest rates.

Looking at one of the currencies that actually lost on the day, the Canadian dollar (CAD) had mixed results from their economic reports yesterday. We saw February leading indicators surprise on the upside by rising 0.8% to a nine-month high which was led by higher stock prices and manufacturing. The disappointment was the result of January retail sales as the aggregate figure and the measure less autos came in lower than expected.

If we take automobiles out of the equation, retail sales actually broke even from December, but it was still disappointing. The fact that oil was higher on the day helped limit the loss yesterday to around 0.25%. As I mentioned at the beginning, most of the currencies remained in a tight range all day, so I think investors will want to see more reports to get a better gauge of where the Canadian consumer actually stands.

Other than that, we had some trade figures from Switzerland that came out as well. The trade surplus widened to $2.8 billion in February as exports rose 4.2% due to higher demand from Europe and the Asian economies. As always following a positive report, we had the SNB making statements that downplayed the economy in an attempt to bring less light to the situation and hopefully make investors think twice about buying the currency. I wouldn’t say it’s working very well as the franc (CHF) trades at 7-year highs.

As I came in this morning, there really wasn’t any direction either way in overnight trading as everything is sitting where I left them last night. The Swiss franc has seen about a 0.50% gain and has risen the most against the dollar, so it looks as though risk aversion might pick up today. Other than that, the pound sterling is bringing up the rear so far today as the BOE minutes were released from their last meeting and showed policy markers voted 6-3 to keep rates on hold so thoughts of an imminent rate hike have subsided for the moment.

To recap… We had more housing figures yesterday, which was yet another report showing a decline in home prices, and we get to see the colors of February new home sales today. The commodities, led by oil, continued to pull the currencies along for a ride and the dollar index traded in a very tight range. The South African current account deficit narrowed by the most in 7 years, British inflation now lies at more than double their target, and Canada has mixed results.

Mike Meyer

for The Daily Reckoning

It’s All About Housing originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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It’s All About Housing

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

Commodities, Uncategorized

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