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November 24, 2009 - Largest U.S. refiner Valero now Permanently Shutting Capacity

Tue, 24 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

Valero Energy has announced it is shutting down its Delaware City Refinery. This is a major news announcement because refiners should be seen as a canary in the coal mine for end-user demand and Valero is one company in the oil patch which has been loath to cut workers to improve the bottom line. This announcement is an indicator that, despite a technical recovery, the economy still has major obstacles to overcome.

Business Wire reports:

Valero Energy Corporation (NYSE:VLO) announced today it intends to permanently shut down its Delaware City refinery due to financial losses caused by very poor economic conditions, significant capital spending requirements and high operating costs. The shutdown will affect approximately 550 employees at the plant.

Valero notified refinery employees today of the impending shutdown, and will immediately begin negotiations with the refinery’s unions regarding the effects of the plant closure and the employees’ severance packages. A safe and orderly shutdown of the refinery will commence immediately. Valero remains committed to its marketing businesses in the Northeast and will continue to reliably supply its customers, partially through higher throughput rates at the company’s other refineries.

“The decision to permanently close the Delaware City refinery was a very difficult one,” said Valero Chairman and CEO Bill Klesse. “We have spent the last year diligently trying to avoid this situation, and I have worked closely with Gov. Markell in an effort to find a different outcome. Earlier this fall, we shut down the gasifier and coking operations in an attempt to improve reliability and financial performance, but the refinery’s profitability did not improve enough. Additionally, we have sought a buyer for the refinery, but feasible opportunities have not materialized. At this point, we have exhausted all viable options.

“We realize that the decision to close the refinery affects many employees, their families, and the community. We are thankful to our employees for their service, and we will treat them fairly during this difficult period.”

In the fourth quarter of 2009, the company expects to report a pre-tax charge of approximately $1.7 billion to $1.8 billion, or $2.00 to $2.15 per share after taxes, related primarily to asset impairment, employee severance and other shutdown costs. The company estimates the cash portion of the pre-tax charge will be in the range of $125 million to $150 million. The current and historical financial results of the affected operations will be shown as discontinued operations in the company’s financial statements.

The new CEO Bill Klesse came to Valero via Ultramar Diamond Shamrock (UDS), which Valero acquired at the top of the market in 2001. So, company ethos may be different than under Bill Greehey who was very committed to community. And Delaware City is an old Getty/Shell-Motiva oil refinery and a legacy asset of Blackstone-controlled Premcor, the company run by former Tosco head and Salomon Brothers commodities trader Tom O’Malley. So, it was not core to Valero’s operations. Valero already cut staff there in September. And the Shell-Motiva JV had serious operating difficulties with the asset before offloading it to Premcor.

Nevertheless, this was a refinery which has been upgraded significantly to process less expensive heavy, sour crude oil. The fact that Valero is laying off workers and shuttering the entire site tells you that the situation is bad. They are saying in effect “we cannot continue to operate at a loss through this business cycle.” If Valero can’t make money, no oil refiner can.

I see this in a macro context as a sign of cyclically weak end-user demand. I do think peak oil is for real but the world is awash in oil and oil products right now. Witness the recent post by FT Alphaville’s Izabella Kaminska, which points to a glut of distillate entering the season of high distillate demand.

Continue reading this post on the Credit Writedowns blog...

Full Disclosure: Author has owned owned shares and call options in Valero and other refiners for a number of years, but sold all positions in 2007.

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November 23, 2009 - Eight Companies Rewarding Investors with Higher Payments

Mon, 23 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com.

Most investors believe that successful dividend investing consists of identifying the highest yielding stocks in the market and then generating double digit returns on investment each year. The problem with this strategy it that it often overlooks the fact that such dividend yields are most often unsustainable in the long run. A much better strategy that could eventually produce double digit yield on cost to investors is dividend growth investing. Using this strategy a patient investor accumulates a diversified portfolio of stocks which have a long history of consistently growing dividends. The positive factor is that any investor can implement this strategy, especially now that brokerage commissions are almost zero.

As long as an investor is willing search for the best stocks that fit their criteria and do the work, focusing on dividend growth stocks should pay off in the long run. I identified the following dividend raisers for the past week.

Automatic Data Processing, Inc. (ADP), which provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers, increased its quarterly dividend by 3% to 34 cents per share. The increased cash dividend marks the 35th consecutive year in which this dividend aristocrat has raised its dividend. . The stock currently yields 3.10%. (analysis)
MDU Resources Group (MDU) operates in six segments: Electric, Natural Gas and Oil Production, Construction Services, Pipeline and Energy Services, Construction Materials and Contracting, and Other. The company increased its quarterly dividend by 1.60% to 15.75 cents per share. MDU Resources Group is a dividend achiever, which has raised distributions for 19 years in a row. The company also boasts 72 consecutive years of uninterrupted quarterly common stock dividend payments. The stock currently yields 2.80%.
Tennant Company (TNC), which engages in the design, manufacture, and marketing of cleaning solutions, increased its quarterly dividend by 6% to 14 cents per share. Tennant Company is a dividend champion, which has raised distributions for 38 years in a row. The stock currently yields 1.90%.
Vodafone Group (VOD), which is engaged in providing service, such as voice, messaging, data and fixed line and others, increased its interim dividend by 3.5% to 2.66 pence per share. The final dividend for 2009 was 5.2 pence/share. Vodafone Group is an international dividend achiever, which has raised distributions for over one decade. The stock currently yields 5.80%.
DeVry Inc. (DV), which owns and operates DeVry University, Advanced Academics, Ross University, Chamberlain College of Nursing, and Becker Professional Review, increased its annual dividend by 25% to 20 cents per share. DeVry Inc. started paying dividends in 2006 and has been raising distributions consistently ever since. The stock currently yields only 0.30% however:"The dividend increase and continuation of the share repurchase program reflect our strong financial position and outlook for the future," said Daniel Hamburger, DeVry’s president and chief executive officer. "We will continue to put our students first and invest in academic quality, which we believe leads to sustainable, long term growth and increased shareholder value.”
Span-America Medical Systems, Inc. (SPAN), which engages in the manufacture and distribution of various polyurethane foam products for the medical, consumer, and industrial markets in the United States and Canada, increased its quarterly dividend by 2.2% to 47 cents per share. Span-America Medical Systems doesn’t have a consistent history of raising distributions however. The stock currently yields 2.20%.
Baxter International Inc. (BAX), which develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions., increased its quarterly dividend by 12% to 29 cents per share. Baxter International Inc. has only started raising distributions since 2007. The stock currently yields 2.00%.
AmerisourceBergen Corporation (ABC), a pharmaceutical services company, offers drug distribution and related services to healthcare providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada, increased its quarterly dividend by 33% to 8 cents per share. AmerisourceBergen Corporation has raised distributions since 2005. The stock currently yields only 1.00%.

Checking the weekly pulse of dividend growers is an important part of the dividend investor’s routine. It is generally a bullish sign when a company which has raised distributions for over 3 decades keeps raising them even through a recession. It also might help investors in identifying any future dividend growth stories, before they become mainstream holdings.

Full Disclosure: Author is long Long ADP

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November 20, 2009 - How Far Can Dollar Rise on Bernanke Comments?

Fri, 20 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Kathy Lien of KathyLien.com and FX360.com. You can read the full article on her blog.

Bernanke’s support for the U.S. dollar and Federal Reserve President Lacker’s comment this week that the central bank is paying close attention to the value of the greenback has driven the buck higher against all major currencies. The last time Bernanke surprised the market with a comment on currencies was back in June. According to the following chart, the EUR/USD fell 4 percent in the 2 weeks following Bernanke’s comment. However after a month of consolidation, the uptrend resumed. I am a long term USD bear (see my artice Why The Dollar Could Fall Another 5-7 Percent) but as a trader first and analyst second, I know that uptrends do move in straight lines. Shaking out the shorts are needed to get some fresh blood into the markets. Interestingly enough, a 4 percent drop in the EUR/USD would take the currency to 1.44, the former breakout zone. I think any drop will be limited to 1.4650-1.47.

Technical chart of the EUR/USD with Bernanke's comments highlighted

Take a look at the chart and make your own judgement.

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November 19, 2009 - USA Today: China Pushes Solar, Wind Development

Thu, 19 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Mark H of FundMyMutualFund.com. You can read the full article on the Fund My Mutual Fund blog.

Just something to keep your eye on as your politicians promise you that the US will be the world leader in green tech jobs. In fact they will have to layer countless more debt on your children and grandchildren for temporary "green jobs", to make this mirage come true - for a while. Most likely this promise will come next spring as the next massive stimulus is pumped to the masses to create "green jobs" retrofitting buildings and such. Meanwhile, ask where the production is and what work we will be left with after we borrow money from China to create temporary jobs. (Nov 2, 2009: Lack of Green Energy Manufacturing Capability in US Means 84% of Stimulus Goes to Foreign Firms.)

Remember, Japan and Germany are a decade ahead of us as we decided daytrading homes was the real way to prosperity as a nation... and China is subsidizing every form of green energy.

Just this week I saw two separate Chinese firms (both of which we've owned in the past) pledging to build plants in the US as "political" cover... Suntech Power (STP) in solar and A-Power Energy (APWR) in wind.

Gov. Jan Brewer on Monday announced plans for a Chinese-owned solar panel maker to build its U.S. headquarters and a manufacturing plant in the Phoenix area, propelling one of the nation's sunniest states toward a bigger global presence in the renewable energy industry. Suntech Power Holdings Co. said it expects to start building photovoltaic panels at the facility by the third quarter of 2010. The company, which has more than 9,000 employees, expects to eventually employ 250 or more people at the plant.

By doing so, they can clap their hands that they are creating jobs (hundreds!) in the US - collect money from the federal government (which in reality is their own government's money, just passing through the US government after we borrow it) while 99% of the production is back in the home country. But hey we get some assembly jobs here, and some great photo opportunities for some governors.

Continue reading this article on the fund my mutual fund blog...

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November 18, 2009 - John Paulson's Hedge Fund Buys Citi, Drops Goldman

Wed, 18 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Richard Wilson of HedgeFundBlogger.com. You can read the full article on Richard’s blog.

John Paulson's hedge fund trades attract a lot of attention because of his ability to profit in downturns. Last year, Paulson made about $2 billion largely by betting that the housing market would crash and this year he has been taking big stakes in struggling banks. In Q2 2009, it was revealed that Paulson was purchasing significant shares of Bank of America and his fund's latest filing shows that he has bought 300 million shares of Citigroup.

In addition to his investment in partly government-owned banks, it's also interesting to see the stocks that Paulson has sold. Last quarter, Paulson sold his entire stake in Goldman Sachs and also sold shares in JPMorgan Chase & Co.

“If you are guided by what happened to these companies, you would have to think Citigroup is the most problematical of the major banks,” said Warren Marcus, who ran the bank research department at Salomon Brothers Inc. during the 1970s. “Maybe there is a perception that Citi over time has got a better upside than some of the others.”

Armel Leslie, a spokesman for Paulson & Co., declined to comment on the holdings. The firm has about $29 billion under management that it invests in four strategies: merger arbitrage, event-driven trading, credit and financial services.

Paulson ranked second in fund-manager earnings last year, according to Institutional Investor’s Alpha Magazine. His Credit Opportunities Fund soared almost sixfold in 2007 through wagers that subprime mortgages would sour. He started the Paulson Recovery Fund in 2008 to invest in financial firms hurt by mortgage writedowns. Source

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November 17, 2009 - 100Gbps Edges Closer With Multivendor Test

Tue, 17 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Rob Powell of TelecomRamblings.com. You can read the full article on Rob’s blog.

For many in the telecommunications industry, commercial 100Gbps can’t get here fast enough, but it is coming! Today at the SC09 conference in Seattle, a coalition of made up of Juniper Networks (JNPR), Infinera (INFN), Level 3 Communications (LVLT), Internet2, and ESNet demonstrated a multivendor 100Gbps routing and optical network. This group has been working steadily together since last November. In this case of course, we are talking about the 10×10Gb version of 100G, which requires fewer technical advances and will probably come first.

The test involved a new 10×10GbE physical router card from Juniper which they announced yesterday. A 100G test signal was sent from Seattle to Portland and back via Infinera gear over the Internet2 and Level 3 networks – which of course are the same intercity fiber route, but still. Now, this is not a 100G wavelength solution, it is about delivering a 100GbE product to customers using a network with a whole lot of 10G pipes bundled together. But since it doesn’t have to wait for them to work out the kinks in the 100G native wavelength model, it is probably closer to commercial viability.

So when do we see that commercial product then? Who will be the first to offer a 100GbE intercity connection to someone other than a trade show audience? Perhaps we will see something by springtime?

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November 16, 2009 - Outlook for Precious Metals

Mon, 16 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Tim Iacono of TheMessThatGreenspanMade.Blogspot.com. You can read the full article on Tim's blog.

A week removed from the blockbuster announcement that the Reserve Bank of India had purchased 200 tonnes of gold from the IMF, precious metals continued their ascent, gold making fresh all-time highs last week at just over $1,120 before ending the week with a gain of about $20 at $1,118 an ounce. Silver posted a modest gain, up from $17.39 an ounce to $17.42 an ounce.

The view that central banks will continue to be net buyers of gold rather than net sellers (as has been the case for about the last twenty years) has many calling the Indian purchase at $1,045 an ounce the "new floor" for the gold price.

That would certainly seem to make sense at least for the near-term as market analysts speculate on which central bank might be next to buy IMF gold while hearing the U.S. Federal Reserve and international G20 representatives stress that it is far too early to begin removing the massive liquidity and stimulus that have seemingly rescued the world from another Great Depression.

The recent rise in the gold price has obviously been aided by a weakening U.S. dollar but, with unemployment set to go even higher over the next six months, there is little reason to think that the Fed will do anything to bolster the currency during that time.

Rumors swirled last week that the Reserve Bank of India may have sold U.S. Treasuries to fund its recent gold purchase and there is growing unease amongst countries that maintain dollar "pegs" for their currencies as they have to print more of their own currency to buy dollars and maintain that peg.

As for silver, it is interesting to note that inventory at the iShares Silver Trust ETF (NYSEArca:SLV) continues to rise, surging in recent days to a new all-time high with the addition of 200+ tonnes as shown below.

Creation and Redemption of SLV shares compared to the price of Silver.

Meanwhile, inventory at the world's most popular gold ETF, SPDR Gold Shares ETF (NYSEArca:GLD), remains below levels seen at mid-year.

It should be an interesting period ahead for both gold and silver since, going back to very early in the decade, there has been a repeating two-year pattern for the metals that can been seen in the gold chart below. Since 2002, prices have peaked at new highs early in the even numbered years - in 2004 at $425, in 2006 at $725, and, most recently, in 2008 at $1,035.

In many ways, recent events are shaping up to be a repeat of this pattern which, based on the previous peak-to-peak gains would imply a gold price somewhere north of $1,300 early next year.

Gold prices per ounce with even-year peaks highlighted.

Of course, any sharp rebound in the dollar (which some are still loudly predicting) would reverse this trend very quickly.

There were some truly odd goings on in Vietnam over the last week or so that, for those who pay attention to this sort of thing, really adds to the case for a much higher gold price, perhaps sooner rather than later. After seeing a surge in buying in gold bullion in recent years, particularly after inflation soared to nearly 20 percent in early-2008 and investors looked to preserve their wealth, the government banned imports of the metal.

Gold continues to be traded in the country, however, due to the limited supply, it has developed its own local market that, last week, saw bullion trading at about $60 higher than in global markets. After markets went "crazy" (see this account in Vietnam.net), the government announced that it would resume imports of the metal and premiums are now reverting quickly to more normal levels.

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November 14, 2009 - The 10 Most Profitable Banks in India

Sat, 14 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member David Hunkar of TopForeignStocks.com. You can read the article on David’s blog.

Earlier this week we looked at the The Top 10 Banks in India based on Assets. In this post, lets review the most profitable banks in India based on 2008 Net Income.

India’s 10 Most Profitable Banks/Financial Institutions based on Net Income in 2008:

S.No.	Bank	Net Income in Thousands of US $ (as of Dec, 2008)
1	State Bank of India	2,193,163.00
2	ICICI Bank Limited	663,347.00
3	Punjab National Bank	614,694.00
4	Bank of India	605,331.00
5	Bank of Baroda	470,099.00
6	HDFC Bank Ltd	442,069.00
7	Citibank NA	426,554.00
8	Power Finance Corporation Limited	386,684.00
9	Canara Bank	380,970.00
10	Standard Chartered Bank India	374,280.00

Source: BankScope

State-owned banking giant State Bank of India is the most profitable bank followed by ICICI Bank (IBN). State Bank of India generates more than three times the profits of ICICI.

It is interesting to see Citibank (C) in this list. While the Citibank in the U.S. has to be bailed out by US taxpayers from collapse, Citibank subsidiaries in other countries have been performing well such as the Citibank division in India. The other foreign bank in the list is the British-based Standard Chartered Bank. The presence of these two foreign banks in the ranking shows the success of their Indian operations in the difficult environment last year.

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November 12, 2009 - An Introduction to the Balance Sheet: Current Assets

Thu, 12 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Benjamin Clark of ModernGraham.com. You can read the full article on the Modern Graham Blog.

This article is the second week’s lesson in the ModernGraham Academy beginner’s course, An Introduction the the Balance Sheet. The ModernGraham Academy is a place to learn about the basics of investing, with an emphasis on the ModernGraham approach.

What are Current Assets?

Current Assets are the assets of a company that can be considered to have short-term liquidity. That is to say, the assets that the company could potentially sell in the very near future and turn into cash. Current assets are very important to consider when evaluating a company. Having a good amount of current assets can help a company handle day to day operations.

Here are some of the main types of current assets, and some things to consider about each type.

Cash – Cash is the most important and easiest to understand type of current asset. Cash is made up of all funds in the company’s bank accounts. Cash is the most liquid asset in the world. A company with a lot of cash has versatility to make large purchases on short notice. As a result, if a company suddenly raises a large amount of cash, intelligent investors will be prepared for the company to make a purchase of some sort.
Short-term investments (cash equivalents) – In addition to cash, a company often has short-term investments including small equity positions. Assets fall into this category when they are considered very liquid but take at least a little bit of effort in order to fully translate them into cash.
Receivables – Most companies use the accrual-basis for accounting. As a result, income is recorded as a receivable in the period it is received. These receivables are considered a current asset, because it is likely they will be received and turned into cash in the near future. One consideration for this area is the possibility of bad debts and many companies account for this by reducing the receivables figure by a provision for doubtful accounts.
Inventory – possibly the most scrutinized of all the current assets, inventory is considered to be current because it is much more liquid than the non-current assets. The problem is that it cannot always be transferred into cash very easily. It is possible that a company would not be able to sell all inventory in a short period of time, or (more likely) would have to sell the inventory at a steep discount to speed the sale, resulting in an actual value lower than what is report on the balance sheet.
Prepaid expenses – Similar to receivables, prepaid expenses are not an actual asset but rather an asset based on the accrual method of accounting. However, they are considered to be a current asset for the balance sheet because they could potentially be exchanged for cash in the form of a refund of the good or service that was pre-paid.

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November 11, 2009 - IEA World Energy Outlook: Declining Investment Threatens Recovery

Wed, 11 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Jason Simpkins of Wikinvest Wire members MoneyMorning.com. You can read full article on the Money Morning blog.

Declining investment and a lack of progress on alternative energy development could lead to sharply higher oil prices in the decades ahead, the International Energy Agency (IEA) said in its 2009 World Energy Outlook.

The IEA for the past year has warned that the financial crisis was undermining investment in energy development. The advisor to 28 developed nations says the financial crisis is already responsible for a $90 billion drop in worldwide oil and natural gas investment, which is 19% below last year’s levels.

“Falling energy investment will have far-reaching and, depending on how governments respond, potentially serious consequences for energy security, climate change and energy poverty,” said the IEA.

The decline in energy supplies combined with a sharp rise in prices could “undermine the stability of the economic recovery,” it added.

Investment in alternative energy has been particularly hard hit and the failure of governments to make progress on a comprehensive plan to cut global carbon emissions could exacerbate demand for traditional fuels.

Investment in renewable resources has fallen by about one-fifth this year, compared to 2008, the IEA said. Investment would have fallen as much as 30% had it not been propped up by government stimulus plans.

Officials from about 190 countries around the world are scheduled to meet in Copenhagen in December to discuss restrictions on carbon emissions in a deal that will succeed the Kyoto Protocol, which expires in 2012. However, developed and developing nations have routinely clashed over such regulations and little progress was made in last weekend’s Group of 20 (G20) summit leading up to the meeting in Copenhagen.

“The meeting turned out to be a mostly irrelevant sideshow on the way to the Copenhagen talks,” Richard Dixon, a director of environmental group WWF Scotland, told Bloomberg News.

The IEA estimates that $1.1 trillion needs to be invested each year from now until 2030, for a total of $26 trillion, just to meet energy demand on current growth trends. If governments adopt plans to limit greenhouse gas concentrations in the atmosphere to 450 parts per million of carbon dioxide (CO2) equivalent, an additional $10.5 trillion needs to be invested over that time period.

Without that added investment, energy needs won’t be met and energy prices will subsequently rise.

The IEA expects oil prices to average $100 a barrel by 2020 and $115 a barrel by 2030.

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November 10, 2009 - Don't Be Fooled By High P/E Values

Tue, 10 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Saj Karsan of BarelKarsan.com. You can read the full article on Saj’s blog.

As the market has risen throughout most of this year, many market observers have noted that P/E values are looking rather inflated from a historical standpoint. But of course, earnings are lower than usual this year due to reduced revenue that was caused by financial shocks. So as investors, should we be willing to pay a higher P/E for now, on the assumption that earnings will soon pick up?

When considering the market in the aggregate, this is a very difficult question to answer. Some companies will have cost structures that prove too rigid, and will therefore be unable to adapt to a lower revenue environment. Other companies, on the other hand, will have flexible cost structures or will see revenue continue to grow, despite the downturn. But to determine which of these forces will exert more pull on the market's earnings in the coming quarters is not only extremely difficult, but unnecessary: unless you're trying to value the entire index, you don't have to answer this question for the market in the aggregate. Instead, you can try to answer this question for individual securities, which are much easier to understand.

For example, consider Key Tronic (KTCC), a manufacturer of electronic devices. The company has a P/E of 23, which makes it appear overvalued. But earnings are down because year-over-year quarterly revenue is down 15%. However, the company has little in the way of debt, and has the vast majority of its operating leases coming due in the near-term, giving it further flexibility in reducing its costs. Operating expenses are down 17% this year, and the company sees sales starting to rebound in January of 2010. In fact, based on KTCC's past margins and returns on assets (which it should be able to return to by continuing to cut costs and with a modest recovery in revenues in the years to come), it appears to trade at a normalized P/E much, much lower than the 23 that stock screeners currently display. (KTCC is a stock we've previously discussed on Barel Karsan.)

Determining whether the market is over- or under-valued is a difficult exercise indeed. But by focusing only on those companies for which it is easier to compute earnings (circle of competence), and ensuring that companies trade at discounts to those earnings (margin of safety), investors put themselves in positions to profit in the long-term whether the aggregate market offers potential or not.

Disclosure: Author has a long position in shares of KTCC

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November 9, 2009 - Holiday Shopping Tips For Gold Stocks

Mon, 09 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Hard Assets Investor. You can read the full article on the Hard Assets Investor Blog.

You'd think last month's earnings releases would have given a boost to gold stocks, since four of the five components of the NYSE Arca Gold Miners Index (GDM) reporting posted positive results. Yet, going into the last week of October, miners' stock prices slumped, only to emerge at the end even lower.

Of course, you could have said virtually the same thing about gold itself, but stock losses were tenfold the slippage in bullion. The exchange-traded fund tracking the miners' index—the Market Vectors Gold Miners ETF (NYSE:GDX)—gave up 9.3 percent last week, while the value of the metal-holding SPDR Gold Shares Trust (NYSE:GLD) eased only 0.9 percent.

So why should good news produce such bad results?

Well, to a certain extent, there's truth behind the old adage "buy on the rumor, sell on the fact." There were whispers on the Street—some good, some not—about the miners' numbers.

Agnico-Eagle Mines Ltd. (NYSE:AEM), for example, was expected to put up per-share earnings of 20 cents for its third quarter; before its earnings report, the company's stock traded above $68. Analysts then started talking up a 19-cent figure. When the company posted an 11-cent loss, however, traders marked down Agnico's shares by more than $15.

Disappointment with poor financial results is understandable, but even the miners' good news went unrewarded. Newmont Mining Corp. (NYSE:NEM) blew the doors off analysts' earnings guesses, taking in 79 cents a share after the sell side forecasted earnings of only 57 cents. Newmont's price reaction? Shares slumped nearly $2.00 before settling halfway up the $43 handle.

A similar scene played out when Barrick Gold Corp. (NYSE:ABX) announced a 54-cent-per-share operating profit. The Street had been eyeing a 47-cent profit before hedging charges, and rewarded company shareholders with a 3 percent haircut.

Likewise, Gold Fields Ltd. (NYSE:GFI) and Eldorado Gold Corp. (NYSE:EGO) both turned in results that met or exceeded Street expectations, only to find sellers anxious to work their share prices lower.

But rumors don't tell the whole story.

Gold Stocks: The Hybrid Investment

The important thing to remember about gold stocks is that they represent hybrid investments. Like any equity, a portion of their returns will reflect traders' sentiments about the issuers' financial prospects, as well as its management team, the general equity market conditions and other idiosyncratic factors. The rest can be attributed to the market's disposition toward gold. Therefore, gold miners in essence serve two masters: the gold market and the stock market. In the aggregate, 54 percent of the returns chalked up by gold stocks is "passive"; that is, directly ascribable to gold. Of course, the influence of gold upon individual issues varies, but that variance is vitally important in shaping investor expectations.

Gold Miners Index Component Three-Year Relative Share Price Performance

When selecting stocks, investors often look at an issue's MPT (modern portfolio theory) statistics, such as beta and alpha. Beta measures the variance in a stock's price history relative to a market benchmark; simply put, beta tells an investor how volatile that stock's price trajectory is likely to be. Alpha, on the other hand, represents the stock's return in excess of the market and of the risk-free yield on Treasury securities; alpha informs the investor how much excess return—positive or negative—has resulted from that stock's volatility differential in the past.

Investors can often find MPT statistics for individual stocks published by market newsletters or on Web-based financial platforms. Investors should know, however, that they're not getting the whole story about gold miners' risk from these figures.

Click here to continue reading this article on Hard Assets Investor.

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November 7, 2009 - Today's the Day for Gold Bugs

Sat, 07 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Contrarian Profits. You can read the full article on the Contrarian Profits Blog.

Today’s the day. If you have ever hunted for undersea gold, you likely know Mel Fisher’s famous mantra. The great shipwreck hunter used the line thousands of times before it became the undeniable truth on the day he uncovered the “Atocha mother lode.”

While this week's record-breaking surge in gold prices is not likely to create $450 million in newfound wealth for any singular investor, it is the day gold bugs have been waiting for.

Thanks to surprising news that India’s central bank shelled out some $6.7 billion to get its hands on 200 metric tons worth of the International Monetary Fund’s (IMF) gold stash, the bullion market is on fire today.

Why is this good news?

Several reasons. First, since India’s name is on the receipt, China will have to wait in line to get its gold from the IMF. It’s either that or tread ever so carefully into the volatile spot market.

You see, the IMF’s sale is nothing new. It announced months ago its plans to unload 403.3 metric tons of the golden precious metal into the market.

However, most investors thought China, with its desperate need to diversify its holding of American greenbacks, would be the chief buyer.

But this week's news proves otherwise. It turns out India is on a diversification spree of its own, desperate to hedge against any unfavorable moves in the American dollar.

With just $200 tons left, there is not much gold left for other nation’s to get their hands on. $7 billion worth of cash is nothing for a country like China that right now holds nearly a trillion dollars worth of reserves.

The market’s logic for sending prices higher today is simple supply and demand. With less surplus available from the IMF, countries looking to diversify will have to hit the spot market.

Higher demand equals higher prices.

I have been writing about China’s growing commodities carry trade for months now.

It is the process where Beijing (and now India, evidently) uses its pile of increasingly depreciating dollars to buy commodities. It then sits on the commodities for a bit and sells them at a premium in the domestic currency.

This phenomenon alone creates fantastic commodities market bullishness.

But for gold longs, the timing of today’s announcement from the IMF could not have been better. It meshes perfectly with the increasing volatile equities market.

Not only can gold bugs raise prices due to increased diversification demand, but they can also raise their asking price due to increased flight to safety.

With the American market looking weaker by the minute and unemployment just about ready to climb into double-digit territory, gold just may be the one asset worth more in six months than it is today.

While an intraday surge of nearly $25 may appear as a major move after the incremental adjustments we have seen over the past few weeks, it represents a mere 2% change in the assets value.

Let me tell you, there is a lot more where that came from.

» Read more

November 6, 2009 - Today's the Day for Gold Bugs

Fri, 06 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Contrarian Profits. You can read the full article on the Contrarian Profits Blog.

While this week's record-breaking surge in gold prices is not likely to create $450 million in newfound wealth for any singular investor, it is the day gold bugs have been waiting for.

Why is this good news?

You see, the IMF’s sale is nothing new. It announced months ago its plans to unload 403.3 metric tons of the golden precious metal into the market.

However, most investors thought China, with its desperate need to diversify its holding of American greenbacks, would be the chief buyer.

But this week's news proves otherwise. It turns out India is on a diversification spree of its own, desperate to hedge against any unfavorable moves in the American dollar.

The market’s logic for sending prices higher today is simple supply and demand. With less surplus available from the IMF, countries looking to diversify will have to hit the spot market.

Higher demand equals higher prices.

I have been writing about China’s growing commodities carry trade for months now.

This phenomenon alone creates fantastic commodities market bullishness.

But for gold longs, the timing of today’s announcement from the IMF could not have been better. It meshes perfectly with the increasing volatile equities market.

Not only can gold bugs raise prices due to increased diversification demand, but they can also raise their asking price due to increased flight to safety.

With the American market looking weaker by the minute and unemployment just about ready to climb into double-digit territory, gold just may be the one asset worth more in six months than it is today.

While an intraday surge of nearly $25 may appear as a major move after the incremental adjustments we have seen over the past few weeks, it represents a mere 2% change in the assets value.

Let me tell you, there is a lot more where that came from.

» Read more

November 5, 2009 - CAUTION: The Market Rally is Over

Thu, 05 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member StockTradingToGo. You can read the full article on the Stock Trading to Go blog.

Done, finished! Any investor who is buying into this market dip thinking that the next 4 – 6 weeks are going to be up up and away needs to drop back down to earth. The S&P 500’s close under the 50 day moving average is the last brick in the bulls wall of support.

Some fun facts for you to consider:

Out of the last nine trading sessions on the S&P 500, six have been distribution or heavy distribution days.
Bye bye 20 day moving average support.
Bye bye 50 day moving average support.
There were 9 stocks down for every 1 up in last Monday's heavy volume session.

A great chart by Dave Singer also shows the massive rising wedge that has been forming (Note chart is of the Dow Jones and is from this past Tuesday, October 27th):

Dave Singer's Technical Chart (click to enlarge)

These rising wedges are traditionally very bearish and this time around is no exception. It is hard to tell if the Dow closed out of this wedge formation as of last week's close so keep a close eye on this potential formation breakdown.

Also, check out the Volatility Index at the top of this article which has spiked nearly 30% in the last four sessions.

I want to clarify that I am simply calling the rally since March as over and that we can see downside pressure for the short term, 4 – 6 weeks max. If we see the rising wedge collapse to the downside, MACD confirmation, etc. then that may turn this retracement into a different scenario with darker possibilities.

Overall though cash is back to being king. In fact I am back in 100% cash as of last week. Last time I went 100% cash was back in August of last year and we all know what happened after that.

Stay smart out there!

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November 4, 2009 - The Growing Debt Divide

Wed, 04 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Michael Panzner of Financial Armageddon. You can read the full article on Michael’s blog.

Just as there is more than one way to skin a cat (apologies to the animal lovers out there), there are myriad ways to illustrate the extent of the economic and financial mess we are in.

As a fan of simple graphs that tell a powerful story, I couldn't resist the urge to highlight two charts featured in a recent post by the Sudden Debt blog, entitled "A More 'Personal' Look At Debt":

It is common enough to look at debt as a percentage of GDP, DPI, etc. but that's so... impersonal. So here are a couple of (very scary) charts that look at things from a dollars per person perspective (click on charts to enlarge).

Debt per person and GDP per person (click to enlarge)

Debt per person and Disposable Personal Income per person (click to enlarge)

Note: the Total Debt used to construct these chart does NOT include debt of the financial sector so as to avoid any double counting (e.g. a mortgage inside a CDO), even at the cost of somewhat understating the crush of debt. It's bad enough, anyway.

» Read more

November 3, 2009 - US personal income data for September shows pullback

Tue, 03 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

The data released this morning by the U.S. Department of Commerce’s Bureau of Economic Analysis on personal income somehow managed to show weakness in income and consumption as well as savings. I see this as proof that Americans are not saving and hence not deleveraging, but they are also so income constrained that their consumption should not be expected to increase markedly either. This points to a mild recovery.

The numbers from September show a significant decline in consumption from the cash-for-clunkers juiced August numbers.

Personal outlays — PCE, personal interest payments, and personal current transfer payments — decreased $48.8 billion in September, in contrast to an increase of $138.2 billion in August. PCE decreased $47.2 billion, in contrast to an increase of $139.8 billion.

If you take out August and cash-for-clunkers and look back at June and July, September’s consumption numbers are up a tick (annualized $10.53 trillion in personal outlays versus $10.44 trillion for July and $10.42 trillion for June).

So consumers are spending money. You can see this in the savings data as well.

Personal saving — DPI less personal outlays — was $355.6 billion in September, compared with $307.0 billion in August. Personal saving as a percentage of disposable personal income was 3.3 percent in September, compared with 2.8 percent in August.

3.3 percent is higher than 2.8 percent but it is a lot lower than 5.9 percent, which is where things were in May. I took this issue up at length in my post, “Americans are not increasing savings” earlier this month saying:

Savings rates averaged 9% through 1982. They were consistently above 7% through 1992. Since then, savings rates have collapsed. From Jan 1969 to November 1997 (comprising all monthly data since record-keeping began), the 10-year average savings rate was higher in every single month than the 5.9% savings rate achieved in May 2009.

So 2.8% is ridiculously low and inadequate to meet Americans’ needs in terms of reducing debt and Baby Boomers’ preparing for retirement. Absent asset-price appreciation as a source of savings, we are going to be in for some tough sledding in a few years. Clearly, record low interest rates are reducing the propensity to save.

On the other hand, incomes are still constrained. The BEA reports:

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis...

Real disposable income decreased 0.1 percent in September, compared with a decrease of 0.2 percent in August. Real PCE decreased 0.6 percent, in contrast to an increase of 1.0 percent.

This puts personal income on par with Aug 2007 levels, as income is being reduced by high unemployment.

My analysis says the data are pointing to a mild recovery on the back of consumer spending which is being spurred by low interest rates. As a result, savings are now going back down to dangerously low levels. This mix is a direct result of policy decisions made in Washington, which are designed to recreate the pre-crisis status quo ante. Thus far, they have been successful.

» Read more

November 2, 2009 - US personal income data for September shows pullback

Mon, 02 Nov 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

The numbers from September show a significant decline in consumption from the cash-for-clunkers juiced August numbers.

So consumers are spending money. You can see this in the savings data as well.

On the other hand, incomes are still constrained. The BEA reports:

Real disposable income decreased 0.1 percent in September, compared with a decrease of 0.2 percent in August. Real PCE decreased 0.6 percent, in contrast to an increase of 1.0 percent.

This puts personal income on par with Aug 2007 levels, as income is being reduced by high unemployment.

» Read more

October 30, 2009 - Will Rise In September Retail Sales Carry into Holidays?

Fri, 30 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Bob Blandeburgo of Wikinvest Wire members MoneyMorning.com. You can read the full article on the Money Morning blog. The article was originally published at the beginning of October, but as we head into November the questions raised in the article become more pressing.

Retail sales rose in September for the first time in 13 months, fueling hopes that the worst is behind retailers that head into the holiday season better prepared for a tough economic environment.

Three reports were unanimous that sales gained, but to different degrees: Market research firm Retail Metrics Inc. said sales rose 1.1% last month, Thomson Reuters tallied a rise of 0.6% and a tally by International Council of Shopping Centers (ICSC) and Goldman Sachs Group Inc. (NYSE: GS) showed a 0.1% increase.

“Let the retail recovery begin,” said Michael Niemira, chief economist at ICSC. “This is the start of a better performance and better fundamentals.”

Retailers such as Target Corp. (NYSE: TGT), Aeropostale (NYSE: ARO) and Kohl’s Corp. (NYSE: KSS) raised their guidance for the current quarter ending October 31. But the encouragement was reserved as it pertains to the fiscal holiday quarter that starts next month for most retailers. Fundamentals key to consumer confidence – particularly unemployment, which rose to 9.8% last month – are still serious concerns.

“While our outlook for the third quarter has improved, we remain cautious in our expectations for fourth quarter results in both of our business segments,” said Gregg Steinhafel, Target’s chairman, president and chief executive officer.

Of course, retailers didn’t have to do much to beat last year’s September, which was relatively poor.

“You want to be careful how much you’re reading into the improved numbers,” Michael McNamara, vice president for research and analysis at SpendingPulse, an information service by MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards in an interview with The New York Times.

For instance, jewelry sales increased 1.2% last month, McNamara said, “but that is still about 5% lower than we were in September 2007 and about 10% lower than the sector was in September 2006.”

“In some respects the sector has turned the clock back to 2005 sales,” he said.

While the bleeding at retailers may not have stopped, it has likely slowed as leading indicators such as the financial markets and consumer sentiment show improvement. The Standard & Poor’s 500 Index has risen more than 55% since its March lows, while the Reuters/University of Michigan Index of Consumer Sentiment was up to 73.5, its highest level since the start of 2008.

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October 29, 2009 - Fed Authorized 100% Payout by AIG on CDS

Thu, 29 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Yves Smith of Naked Capitalism. You can read the full article on NakedCapitalism.com

Wow, I should not be surprised, but this is a stunner nevertheless.

It had generally been assumed that the AIG payouts of 100% on credit swaps (when the insurer was under water and bankrupt companies do not satisfy their obligations in full) was the result of some gap in oversight plus traders at AIG exercising discretion (they were unhappy about bonus rows and had reason to curry favor with dealers, who were potential employers).

The article makes clear that AIG had been negotiating to settle on the swaps prior to getting aid from the government, and was seeking a 40% discount. The Fed might not have gotten that much of a discount, but there was clearly no need to pay out at par.

This massive backdoor subsidy to the likes of Goldman, DeutscheBank was authorized by Geithner while he was at the New York Fed.

From Bloomberg:

[Elias] Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar....

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations....

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III...

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made.....

“In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” [Donn] Vickrey [of financial research firm Gradient Analytics Inc.] says…..

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

As Vickrey indicates, the fact that this was a backdoor rescue means the Fed is acting as an extra budgetary vehicle of the Treasury. This is a violation of the Constitution and shows how patently false the Fed’s claims of independence are.

Continue reading this article on the Naked Capitalism Blog...

» Read more...

October 28, 2009 - Five Dividend Stocks for Long-term Dividend Growth

Wed, 28 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com

In Six Dividend Stocks for current income I provided a list of higher yielding dividend stocks, which investors could use for current income. With a high current yield, the stock list could provide a decent stream of dividend income for retired individuals. There lies another problem however.

Most younger investors tend to ignore dividend stocks, which typically are mature, slower growing companies with dependable cashflows a portion of which are distributed back to investors. Younger investors view these dependable income stocks as boring and too slow moving, which don’t have anything better to do with their cashflows but send them back to owners in the form of dividends. Instead these investors prefer investing in growth stocks with high price earnings ratios and high expectations for growth. While most companies that distribute a portion of their profits in the form of dividends realize that double-digit growth cannot last forever, most growth stocks sell at rich valuations, supported by analysts who have perfected the art of predicting high growth rates for decades to come. As soon as the music stops, these growths stocks stumble, dragging investors fortunes with them.

On the other hand the dividend stocks would have kept growing, albeit at a slower pace, and would have kept sending a higher stream of dividend income to shareholders, to be used at their own discretion. Many investors do not realize that unlike capital gains, dividends are real cash that bolsters your return. Dividends have also accounted for 40% of the annual average total returns of the S&P 500 over the past century. A company, which grows its dividend year after year, could end up paying a double-digit yield on cost to long-term investors over time.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity. Thus dividend stocks, which consistently grow their payments, should be in every investor’s portfolio, irrespective of their age. A stock that regularly grows its distributions provides an inflation proof source of income, which is much more reliable than the [[Consumer Price Index], on which TIPs (TIP) rely on.

A stock could afford to consistently raise distributions by selling products, which have a strong brand image, and thus are not easily substituted by others. Examples of such companies include Procter & Gamble (PG), Clorox (CLX), Pepsi Co (PEP), Wal-Mart (WMT) and Emerson Electric (EMR).

The Clorox Company (CLX) manufactures and markets a range of consumer products such as bleaches; cleaning products; water-filtration systems and filters; auto-care products; plastic bags, wraps, and containers; Over the past decade the company has managed to boost earnings per share at a rate of 13.60% annually. Clorox has paid uninterrupted dividends and increased payments to common shareholders every year for 31 years. Dividends have increased at an average rate of 8.60% annually since 1999. Check my analysis of the The Clorox Company (CLX).

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company has been able to increase earnings at an average rate of 8.40% annually over the past decade. Emerson Electric Co. has increased payments to stockholders for 52 consecutive years. The ten-year dividend growth rate is 7% per annum over the past decade. Check my analysis of Emerson Electric Co. (EMR).

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. The company manufactures, sells, and distributes Pepsi-cola beverages and is enhancing its distribution channels through its acquisition of key bottlers. The company has been able to increase earnings at an average rate of 9.90% annually over the past decade. PepsiCo has been consistently increasing its dividends for 36 consecutive years. Dividend payments have increased by an average rate of 13.50% annually since 1999. Check my analysis of PepsiCo, Inc. (PEP).

The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. The company has been able to increase earnings at an average rate of 12.20% annually over the past decade. Procter & Gamble has been increasing its dividends for the past 53 consecutive years. Dividend payments have increased by an average of 10.90% annually over the past 10 years. Check my analysis of Procter & Gamble (PG).

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International. The company has managed to deliver an impressive 11.60% average annual increase in its EPS. Wal-Mart Stores has consistently increased dividends every year for 35 years. Dividends have increased at an average rate of 18.90 % annually since 1999. Check my analysis of Wal-Mart Stores, Inc. (WMT).

While these companies are poised to deliver strong long-term dividend growth, don’t throw caution away. These stocks should be a part of a diversified dividend portfolio with at least 30 components in it.

Full Disclosure: At the time of writing, author is long CLX, EMR, PEP, PG and WMT

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October 27, 2009 - Verizon Has Solid Q3

Tue, 27 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Rob Powell of TelecomRamblings.com. You can read the full article on Rob’s blog.

Telecommunications giant Verizon (VZ) reported earnings yesterday morning, and like AT&T last week there weren’t many surprises. Total revenues of $27.3B were slightly above expectations, as were adjusted earnings per share of $0.60. There was no iPhone of course, but the net increase of 1.2M wireless subscribers was a bit higher than expected. Verizon is gearing up to challenge the iPhone with phones based on Google’s Android in the fourth quarter, but even with a big launch it will be a while before that could be relevant. I doubt very much if Verizon’s Droid series will do the iPhone that much damage, but really all it has to do to be successful is reduce churn by giving Verizon subscribers an upgrade path to a similar device.

On the other hand, they do have FIOS whose subscribers continue to grow steadily with another 191K FIOS TV and 198K total subscribers added during the quarter. That’s 3.3M total FIOS subscribers now, which is becoming quite substantial, and they still expect to have FIOS pass 15M homes by the end of the year. Growth from FIOS has helped the mass markets portion of Verizon’s wireline business hold relatively steady this year, even as the Global Enterprise and Global Wholesale revenues have declined by over 5%. They didn’t say much about that last bit of course, prefering to emphasize a 1% increase in ‘worldwide sales of strategic business services’ above last year’s levels. But as with AT&T, that’s PR for you.

As I said, overall no real surprises here. Verizon’s results are a fairly linear extrapolation of current trends, with a touch of economic optimism thrown in. In other words, while signs of a failing recovery may yet emerge during this earnings season, they did not do so today.

» Read more

October 26, 2009 - It's the World's Hottest Market, and it Isn't China

Mon, 26 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Martin Hutchinson of Wikinvest Wire members MoneyMorning.com. You can read the full article on the Money Morning blog.

Which global economy grew at an annual rate of 11% in the second quarter, and will report a second-consecutive double-digit advance when it reports today?

Hint: It isn’t China.

But you are looking in the correct part of the world.

The economy in question is South Korea, which has enjoyed an astonishing rebound since it reached a recessionary bottom last winter. One factor in particular should nurture this rebound: The Korean economy wasn’t pulled down by the U.S.-led subprime mortgage crisis, which infected many foreign banks that invested in mortgage-backed securities – the Asian Tiger was pole-axed by a collapse in world trade in the first three months of this year.

At the nadir in March, South Korean exports were down 40% from the same point in 2008. The banking system also had a liquidity crisis that required a government bailout – not because of investments in toxic U.S. derivatives, but because of similarly lackluster credit card loans and dodgy mortgage rubbish of its own.

The South Korean won declined by 40% against the dollar during the 12-month-stretch that ended in February. It has since recovered about half that drop, so it remains undervalued.

But the overall outlook is highly upbeat. From its low point in December 2008, the Korea Composite Stock Price Index (KOSPI) is up 65%. Exports have recovered, particularly on the back of surging demand from China – a trading partner that is growing a bit more slowly than Korea, but that has considerably more muscle with 27 times the population.

Click here to read the full article on the Money Morning Blog.

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October 23, 2009 - Potash (POT) Breaks Out

Fri, 23 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Mark H of FundMyMutualFund.com. You can read the full article on the Fund My Mutual Fund blog.

As with gold 6 weeks ago, as with oil 2 days ago, now comes the liquidity chasing one of the few laggard areas... agriculture. Potash (POT) is breaking out in almost identical fashion to the other 2 commodities mentioned.

Technical chart of Potash Corporation (POT)

Last Thursday we saw a story that potash inventories declined for a 3rd consecutive month, although still at 142% above the 5 year average. However, by the time they get closer to average - these stocks most likely will have run a long way.

Potash Corp of Saskatchewan (POT) said on Thursday North American potash inventories declined for a third consecutive month, but inventories at the manufacturer level continue to remain well above average.
Potash inventories had risen steadily through the first-half of 2009, despite major production cuts, as farmers concerned by exorbitant pricing and hurt by the credit crunch had deferred fertilizer application.
In July, India signed contracts to import the bulk of its annual potash requirements at $460 a tonne, well below last year's contract price of more than $600 and the spot market price of $700 at the time.
The new Indian contract has brought some international buyers back into the market, but many buyers and distributors still remain on the sidelines and are waiting for Chinese importers to finalize their annual contract, as they believe that potash prices could fall further.
In a set of graphical data posted to its website, Potash Corp also indicated that potash spot market pricing was almost flat at just under $500 per tonne in September.

With a bevy of bad news in this sector for 6+ quarters, sellers may finally be exhausted. Or it simply could be the case of the underperformers as Ben Bernanke's money looks for the next thing to inflate. Can't tell anymore how much of these moves have to do with actual fundamentals and how much is so much paper currency chasing fixed amount of stock certificates. Let's keep an eye on what price the Chinese offer for potash; if its favorable it might set the stage for the next bull run in fertilizer. (still among our favorite long term themes).

Technical Chart of Mosaic Company (MOS)

Earnings will be released this morning and apparently no one has any fear going into the report since technicals are all that matter in this market.

For momentum based traders the Potash (POT) breakout is one they love to chase - let's see if Mosaic (MOS) joins its big brother. A move over $56 is what one would want to see here.

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October 22, 2009 - Dow Industrial Average’s Top 3 Dividend Companies

Thu, 22 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Benjamin Clark of ModernGraham.com. You can read the full article on the Modern Graham Blog.

Dividends are one of the key components of any solid investment strategy. Benjamin Graham taught that companies that pay dividends are often worthy of further research. Looking at the Dow Jones Industrial Average components, these 3 companies seem to be the best bet for a second look by dividend investors.

PFE – Pfizer Inc – 5.40% dividend yield. Pfizer passes our tests for the defensive and enterprising investors with a strong balance sheet. It’d be nice if the earnings were growing a little bit more, but they have been very stable at least. Our valuation model puts a price of $25 on the company, which puts it at approximately a 28% discount to the value. Click here for analysis on PFE from Modern Graham
JNJ – Johnson & Johnson - 3.14% dividend yield. Johnson and Johnson passes the tests for the enterprising investor but fails for the defensive investor due to the price to book ratio being a little on the high side. The earnings growth has been strong over the last 10 years and we value it at $97. Click here for analysis on JNJ from Modern Graham
PG – Proctor & Gamble – 2.92% dividend yield. Proctor & Gamble has had very strong earnings growth, causing it to pass the test for the defensive investor despite some balance sheet issues (poor current ratio and a lot of debt compared to the current assets). We value the company at about $107. Click here for analysis on PG from Modern Graham

As a reminder, all intelligent investors should do their own research prior to making any purchase and should not rely on anything read on the internet. That goes for speculators and unintelligent investors as well!

Full Disclosure: At the time of writing, author is Long PFE.

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October 21, 2009 - Housing Starts Flatline

Wed, 21 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Tim Iacono of TheMessThatGreenspanMade.Blogspot.com. Read the full article here.

It appears there was good reason for Monday's dimming confidence by homebuilders - according to today's report(.pdf) from the Commerce Department, housing starts and permits for new construction have flattened out at severely depressed levels.

Graphic from TheMessThatGreenspanMade.com

Housing starts increased modestly, from an annual rate of 587,000 in August to 590,000 in September, however, the gain would not have occurred if not for a downward revision to the August data from 598,000.

In a way, this is reminiscent of a few years ago when there were huge downward revisions to prior data and, each month, gains would be reported when comparing new unrevised data to previous data that had been revised, all part of a clear and persistent downward trend.

The good news today is that, as shown clearly in the chart above, there's not much room to move down from current levels of home building that are still about 75 percent below the 2005-2006 peak, remaining near all-time lows. From year-ago levels, housing starts are down 28.2 percent.

Blowup of above chart

Permits for new construction fell 1.2 percent in September, from an annual rate of 580,000 to 573,000 and as is the case for housing starts, have clearly flatlined over the last five months, a point that should be quite clear to see in the enhanced image to the right from the larger graphic above.

While this is not necessarily bad news for the housing market in general since, if there's one thing that we don't need right now it's more housing inventory coming onto the market, it is certainly not an indication of a resumption to more normal levels of residential construction that would create a few jobs and boost economic growth.

The downward revisions to previous data and the fact that permits - a leading indicator for new home construction - appear to be weaker than housing starts do not bode well for a sustainable rebound in this sector.

It's no wonder that home builders are clamoring for an extension and expansion of the home buyers' tax credit that, according to news yesterday morning, has had more than its share of fraud.

Somehow, just throwing money at the bursting housing bubble doesn't seem to be fixing it...

» Read more

October 20, 2009 - The S&P's Price to Book

Tue, 20 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Saj Karsan of BarelKarsan.com. You can read the full article on Saj’s blog.

Investors will often look at the P/E ratio of the S&P 500 in order to gauge how expensive stocks are. Earnings, the denominator of that equation, are quite volatile, however. In a year like this one, where massive write-downs plague income statements, it is difficult to determine the market's true earning power.

Another method to gauge investor sentiment, though not nearly as popular, is the market's price to book ratio. Unlike earnings, book values are not nearly as volatile (unless of course, you are an over-leveraged bank), and therefore they can give us a decent indicator of how the market is valuing company assets. Courtesy of Comstock Partners, here is the price to book value of the S&P 500 over the last 30 years (original version here):

S&P 500 P/B Ratio over the last 30 years.

There are a couple of interesting observations to note in the above chart. First, on a price to book basis, during this recession the market did not fall to the depressed levels seen in the late 1970s. Second, the market's price to book value currently appears to be fairly close to its 30-year average (denoted by the horizontal blue line), despite the fact that the outlook for economic growth appears tepid.

Of course, there are a number of factors that make historical comparisons of price to book values difficult. Accounting methods of how book value is calculated have changed over the years, with an increasing trend towards making book value better reflect market value. Furthermore, there has been a shift when it comes to industries in the S&P 500, with manufacturing companies playing a decreasing role while knowledge-based companies (e.g. software, consulting, other services etc.), where hard-assets are not a determining factor, comprise a larger portion of the index.

For the above reasons, long-term comparisons of historical price to book ratios can be problematic. Nevertheless, investors can look at the price to book ratio over recent periods as a decent gauge of investor sentiment. Clearly, price to book ratios fell dramatically from their 2008 highs, but a large rally has resulted in a recovery of a significant portion of those losses. The above chart won't tell you where the price to book ratio will go, but it will tell you that investor sentiment has recovered to a large extent and that downside risks have increased as a result.

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October 19, 2009 - San Francisco Leads Detroit In CMBS Delinquencies for Apartment Properties

Mon, 19 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member REITWrecks.com. You can read the full article on the REIT Wrecks blog.

San Francisco, once considered one of the strongest commercial real estate markets in the country, had one of the largest increases in overall CMBS default rates in the second quarter of 2009, up 444 basis points to 5.15% (and yes, this was even worse than Miami). Detroit was still the worst performing market, with an overall CMBS default rate of 5.62%, up 562 basis points from Q1. However, San Francisco’s multi-family sector now has a CMBS default rate of 21.7%, which is almost double the 12.93% multi-family delinquency rate in Detroit.

CMBS Delinquency and Default Rates by Metropolitan area

The amazingly high default rate in multi-family is being driven by just one buyer. Well known for not only paying top dollar (over 20 times gross rents) but also for pursuing, shall we say, aggressive re-tenanting programs, this buyer actually pocketed 75% of all San Francisco apartment properties that traded in 2007. And who is surprised? At 20 times gross rent, anybody who wasn't selling was living under a rock. About $1.2 billion was "invested" from 2003 through early 2008, financed primarily with two year, interest-only, cross collateralized debt complete with personal guarantees. And who was this buyer?

The answer is UBS, which has already taken back about 1,500 units, and CIM, which bought the senior debt on 24 properties from Credit Suisse. This is only the tip of the iceberg though, and so far only about 700 units have actually been sold to new buyers. San Francisco apartment brokers, who were only too happy to cheer 20 GRMs on the way up, are now complaining publicly about comps that are "artificially low". Predictably, the view on that side of the fence is not that this guy overpaid, but that he simply over-levered! That aside, I'll give you one guess where prices in San Francisco are heading:

Price Fluctuations for Multi-Family Homes, 1995 - 2009

Despite the mess in San Francisco now, the S&P/Case-Shiller Index for Bay Area multi-family prices shows a 10.83 percent growth rate from the year of its inception (1995) through 2002. Growth in prices was strongly influenced by the Bay Area's healthy population growth, and as a result growth in Bay Area multi-family prices far outstripped the S&P/Case-Shiller Index for the top 10 metropolitan areas over the same period.

Unlike some cities in the Lone Star state, for example, where increased supply typically rises to the occasion, Bay Area multi-family prices have been influenced by a fundamental supply and demand imbalance even before the credit/real estate hysteria of 2003 through 2006. Between 1987 and 2002, the Bay Area population increased by 18 percent. The growth was fairly evenly spread over nine Bay Area counties, with Solano County having a growth rate of 28 percent, which was the highest growth rate in the area. The largest population growth in terms of total residents occurred in Santa Clara County, which added 301,000 people, followed by Alameda County and Contra Costa County, both of which added approximately 250,000 people. Combine that with natural and political barriers to unfettered new development, and Northern California doesn't look so awful even if you're a Bears fan.

Granted, the current San Francisco foreclosure saga is far more interesting than plodding through Bay Area demographic statistics. But when all those "artificially low" comps get set, is there any place you'd rather be with your money?

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October 16, 2009 - Uranium's Tough Outlook

Fri, 16 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Hard Assets Investor. You can read the full article on the Hard Assets Investor Blog.

Back in May this year, HardAssetsInvestor.com featured a story about an under-the-radar bull market in uranium. After having fallen along with everything else in the credit meltdown, uranium was beginning to show some strong gains in the first quarter, rising to $51/lb from the high 30's.

But then something strange happened: The bull market fell apart. Even as the global economy began to recover, boosting equity and commodity prices more or less across the board, the price of U3O8 plunged during the summer, falling around 15 percent.

In September, uranium spot prices fell an additional 7 percent, dragging down the price of the yellowcake powder to its lowest levels since March, at $42.75/lb.

While it is common for uranium prices to fall during the summer periods, such a big fall is worrying for producers of yellowcake, given that it was already 60 percent below its June 2007 peak before the summer.

For some companies, the scenario of continued lower prices has translated into production cuts and layoffs. For example, privately held Encino, Texas.-based Mesteña Uranium has had to terminate 90 employees, and reduce production by a quarter, to 650,000 lbs a year.

"The global nuclear renaissance has been put on hold," Paul Goranson, Mesteña's vice president and operations chief, told The Statesman recently. "We ramped up [on employees], but we've had to cut them back fast."

Larger firms have also had their ups and downs. Despite a rise this year, shares of Cameco, the world's second-biggest uranium miner, have been volatile. Analysts are concerned that the company will not hit annual production targets of 20.1 million lbs, after output in the second quarter dropped 27 percent, to 3.8 million lbs.

Situation: Abnormal

Toronto-based Paradigm Capital analyst David Davidson is one of those analysts. "To hit the target, things really have to go normal," Davidson told Bloomberg in August. "And for Cameco, things haven't often gone normal."

To complicate matters further, it's difficult to know for sure whether there is much value lying around in the uranium equity space right now, since the bulk of uranium producers have soared along with the rest of the stock market since March. For example, year-to-date Cameco has jumped around 70 percent, while the world's largest uranium miner Rio Tinto has more than doubled.

In the nuclear energy ETF space, performances are similarly strong. Market Vectors Nuclear Energy (NYSE: NLR), iShares S&P Global Nuclear Energy Index (Nasdaq: NUCL) and PowerShares Global Nuclear Energy (NYSE: PKN) have all risen in line with broader indexes, by 18 to 25 percent.

While it's true that there is somewhat of a commodity bull market getting under way, uranium prices remain relatively weak, not to mention unstable. The U.S. Department of Energy recently stated that it will transfer $200 million of excess government uranium to the United States Enrichment Corp. The move would effectively flood the market for uranium with excess supply and harm prices, similar to the way the introduction of former Soviet uranium did in the early 1990s.

"The loss of mining and mining-related jobs in Wyoming and elsewhere will be a direct outcome of the Department's present course," wrote Wyoming Gov. Dave Freudenthal in a letter to U.S. Energy Secretary Steven Chu petitioning for a veto of the transfer last Monday. "Given the already softening commercial market, I find it hard to envision that a determination of ‘no adverse material impact' can be achieved relative to these transfers."

Click here to continue reading this article on Hard Assets Investor.

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October 15, 2009 - Debt Coverage for Sustainable Dividends

Thu, 15 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

When you decide to get a loan from your bank, one of the most important questions they have is what your income has been, rather than provide a list of your assets and debts. Only when you provide a proof that you could service a new line of credit, would your banker provide you with a loan.

One method that I prefer is comparing annual earnings before interest and taxes to the amount of annual interest expense paid. While this ratio would vary for different types of enterprises, it should never the less provide an important glimpse to a company’s ability to service its debts when its trended over several years.

I highlighted the coverage ratios for the 51 components of the Dividend Aristocrats Index. Some of the members of this dividend basket have already cut distributions so I expect them to be booted out by the end of 2009. You can find the list, which includes company name, ticker, industry, as well as the past 3 years worth of coverage ratios for each company, here on the Dividend Growth Investor Blog.

Dividend investors should generally look for a higher coverage ratio of interest payments. A lower coverage indicates that a decline in earnings could generally make it difficult for the company to service its debt, which could not only jeopardize its dividend payments but also could lead to bankruptcy down the road.

Full Disclosure: At the time of writing, the author of this piece had a long position in most of the stocks mentioned in the list.

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October 14, 2009 - Time to Scale Back Market Exposure

Wed, 14 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member StockTradingToGo. You can read the full article on the Stock Trading to Go blog.

Investors approach the market differently. Some rely upon complex technical patterns and others simple patterns. Some turn to fundamental values and others use big picture ideas. Regardless of the approach taken, we all look to apply our ideas to the markets and search for opportunities.

Much has been written over recent months how the current rally is not supported by either an improving economy or stocks offering compelling values. The result is a market based on momentum. Being able to focus on one factor of market strength increases our chance of spotting reversals.

Momentum can be viewed by studying charts. At times investors use complex charting patterns. However, on other occasions simplicity works best. Having seen the market drop for two consecutive weeks, I believe we have reached the point where a simple story best illustrates the investment climate.

Technical chart of the DJIA. (Click to enlarge)

Read any investment article and you will see comments about how the market has rallied too far from the March lows and must head lower. However, these same writers never discuss the drop from the peak. I am one of the few who have stressed that the rally looks so large because the drop was so severe. In fact, taking a view of the entire bear market, the Dow’s recent gains are nothing more than a bounce in an ongoing slide.

Within this bounce, I have been fixated on the 38% retracement level of 9,465. When the market was rallying from the July low, it took weeks for this resistance level to be broken (black arrow). Once resistance was broken, it became support and was needed to stop any market decline. That support now looks destined to fall (red arrow).

Were the Dow to close below 9,465 it would be ominous for equity markets worldwide. An immediate downside target would become 8,600 (red box). Given the strong correlation of markets during the rally, a falling Dow would take many international indices with it.

Click here to continue reading this article on the Stock Trading To Go Blog

Disclosure: At the time of its writing, the author o this article was long EWA, EWU, EWZ, and IOO.

» Read more.

October 13, 2009 - September Hedge Fund Performance Bodes Well

Tue, 13 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Richard Wilson of HedgeFundBlogger.com. You can read the full article on Richard's blog.

Although hedge funds performed slightly worse than equity markets last month, hedge fund performance still improved. The first three quarters of 2009 are the best in 12 years and, if the last quarter is anything like the first, hedge funds will have made an incredible recovery following one of the worst financial collapses.

Hennessee co-founder Charles Gradante said hedge funds are worried about the market's rally in light of the economy's contraction. "Liquidity is driving this market, and that is likely to continue with more than $3 trillion on the sidelines," he said. "However, liquidity-driven markets eventually dry up."

The emerging-markets index had the biggest gain among the sectors tracked by Hennessee, posting a 5% rise. Only one index, the short-biased index, saw a decline; it fell 3.1%.

HedgeFund.net said funds' returns were up 2.7% in September, as total assets under management rose 3% to $1.948 trillion, with performance accounting for much of the increase. Investor flows were positive again for the fifth straight month. So far this year, its hedge-fund aggregate index is up 17% so far this year, the best increase in 12 years.

Hedge funds are continuing to rebound from their worst-ever year in 2008. Funds on average lost about 20% last year, though that was far less than the decline for major stock averages.

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October 12, 2009 - September Hedge Fund Performance Bodes Well

Mon, 12 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Richard Wilson of HedgeFundBlogger.com. You can read the full article on Richard's blog.

The emerging-markets index had the biggest gain among the sectors tracked by Hennessee, posting a 5% rise. Only one index, the short-biased index, saw a decline; it fell 3.1%.

Hedge funds are continuing to rebound from their worst-ever year in 2008. Funds on average lost about 20% last year, though that was far less than the decline for major stock averages.

» Read more

October 9, 2009 - Consumer Credit Falls 4.4% From Year Ago Levels

Fri, 09 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

The Federal Reserve has just released the most recent data on consumer credit. The data show outstanding consumer credit falling to $2.47 trillion in August from a December 2008 peak of $2.59 trillion – on a non-seasonally adjusted (NSA) basis. That is down 4.4% from the year ago period, continuing the acceleration of the year-on-year change that has been in place for 15 straight months. The seasonally-adjusted data tells an even worse story.

Clearly, consumers are not off to the races. Nevertheless, the NSA data do show a tiny pickup in overall consumer credit, although you have to go to the third decimal place to see it (from $2.460 trillion in July to $2.467 trillion in August. You also have to question the seasonal adjustments given where we are in the business cycle. So I am not using this data set.)

I was especially interested in the Federal Reserve’s data on Q3 consumer credit since I just crunched the numbers on their quarterly data and found that deleveraging in the household sector was not preceding as quickly as I had assumed (if at all).

What I am looking for is a sign of how consumer credit is proceeding as compared to output. But since we don’t have any monthly output data, we’ll have to wait. I will just comment on the trend.

Year on Year Consumer Credit Growth (adjusted for Inflation); click to enlarge

The trend is down. Because of the decline in higher than normal inflation in 2008, we saw two peaks in year-on-year growth in credit. The first was August 2007 right before the recession began, when, adjusted for inflation, total consumer credit was growing 3.6% year-on-year. This went negative, reaching a trough of –1.5% in August 2008. Before climbing to a second peak of 1.5% in December. Since then, the wheels have fallen off the cart and we are now down 2.9% year-on-year adjusted for inflation (all of the figures are NSA).

But, remember nominal GDP is down 2.4% year-on-year through Q2. That is the key here. When one makes a comparison of nominal GDP to consumer credit, there had been little deleveraging through Q2 2009. Moreover, since prices are still falling (NSA CPI is –1.5% year-on-year through August), the change in nominal GDP will be lower than real GDP for Q3.

It is still not clear to me that debt levels, when measured as a percentage of GDP are decreasing significantly. I am, therefore, much less sold on the prospect of a secular deleveraging in the household sector than I was yesterday.

And since consumer credit is much more volatile than mortgage-related debt and a much smaller percentage of household debt, I am more interested in how the mortgage market is doing. Right now, mortgage applications are through the roof because of ridiculously low interest rates.

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October 8, 2009 - Goldman Sachs: The "Smart" Money?!

Thu, 08 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Michael Panzner of Financial Armageddon. You can read the full article on Michael’s blog.

U.S. stocks rebounded Monday, aided by a rally in financials. Why was the group strong? Because a team of analysts at a well-known Wall Street firm upgraded the large banks sector. And why did they do that? Bloomberg gives us the lowdown in "Wells Fargo, Biggest U.S. Banks Raised by Goldman":

Wells Fargo & Co., JPMorgan Chase & Co. and the biggest U.S. banks were raised to “attractive” from “neutral” by Goldman Sachs Group Inc., which said share prices don’t reflect prospects for earnings growth.

“We believe this difference in earnings power hasn’t been fully reflected in share prices,” New York-based analysts led by Richard Ramsden wrote in a note to clients today. “We estimate that normalized earnings for large banks are 39 percent higher than in 2007 despite the 36 percent decline in share prices.”

Wells Fargo, based in San Francisco, was upgraded by Goldman to “buy” from “neutral” after its tangible assets per share increased 70 percent in the second quarter. “The reason is simple: Wells bought Wachovia at a depressed price,” Ramsden said. Banks have increased earnings with acquisitions that will add to earnings over the “long term,” he said.

Wow, pretty powerful stuff, eh? Then again, maybe not. You see, if you go back and look at what Goldman said in late-January, when most bank stocks were trading at far lower levels than they are now, the firm wasn't exactly upbeat on the group. Again, Bloomberg had the details in "U.S. Banks May Be the ‘New Utilities,’ Goldman Says":

Large U.S. banks risk becoming the “new utilities” as governments introduce greater regulation and force lenders to increase capital ratios, Goldman Sachs Group Inc. analysts said.

Return on equity at the biggest U.S. banks will be limited by higher capital requirements and greater regulatory controls, analysts led by Richard Ramsden in New York said in a report to clients today. The measure of how effectively banks invest earnings may shrink to between 10 percent and 12 percent, from the 15 percent banks generated between 1990 and 2006, they said.

U.S. Bancorp was cut to “sell” because the Minneapolis- based company, while “a good bank,” is already highly valued, the analysts wrote. Goldman also re-instated its sell rating on Citigroup Inc., saying “investors should avoid the stock given no core earnings power clarity.”

Bank of America Corp. was cut to “neutral,” the same rating given Morgan Stanley, Wells Fargo & Co. and PNC Financial Services Group Inc. The analysts recommend buying JPMorgan Chase & Co., which they said may show earnings improvement as the economic cycle turns.

Large banks, particularly Citigroup, U.S. Bancorp and Bank of America, have “thin” capital cushions compared with Goldman’s estimates for losses in the industry, the note said.

Not long after, the shares began a sharp recovery, and those crackerjack Goldman analysts probably felt pressure to reconsider. In May, after the sector had rallied more than a third from when the firm had issued its negative call, the banks team bit the bullet -- sort of -- as Bloomberg reported in "Goldman Sachs Upgrades Large U.S. Banks to 'Neutral":

Goldman Sachs Group Inc. upgraded large U.S. banks to “neutral” [Note to Bloomberg editor: might be helpful if readers knew the prior rating], saying strong mortgage and capital markets earnings will likely continue into the second quarter and new capital raised reduces leverage.

U.S. trust banks were upgraded to “attractive,” as the Goldman Sachs analysts led by Richard Ramsden determined revenue will recover from the first quarter. The analysts also raised their recommendation for U.S. credit card companies to “neutral” and reiterated their “cautious” stance on U.S. regional banks, which are “not out of the woods yet.”

Bank of America Corp., the biggest U.S. bank by assets, has more than tripled in New York Stock Exchange trading since hitting a low on March 6, while JPMorgan Chase & Co., the second largest, has more than doubled in the period. Regulatory stress tests of the 19 biggest U.S. lenders led firms to raise more than $100 billion in capital, the Goldman analysts said.

Unfortunately, Goldman's relative lack of enthusiasm for large bank shares -- after all, they were neutral -- meant that those who took their advice to heart likely missed the subsequent double-digit percentage rally in the sector.

In sum, while markets cheered Monday's news that Goldman Sachs -- who many consider to be the "smart money" -- was upgrading the large banks, based on their track record so far this year, shouldn't investors have been selling those shares -- and the overall market -- instead?

» Read More

October 7, 2009 - The Five Stocks to Watch this Week

Wed, 07 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Jason Simpkins of Wikinvest Wire members MoneyMorning.com. You can read the full article on the Money Morning blog.

The earnings season that began yesterday (Tuesday) is shaping up to be an important one, as it could have a significant impact on a struggling stock market rally.

Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.

Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.

The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will be of particular interest to investors.

Yum! Brands Inc.

The Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take (in fact, by the time this is published they should have issued their press release).

As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurant company. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.

Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.

Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.

By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.

KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.

Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.

“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.

An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.

Yum! shares should trade at a premium to their peer group and could climb nearly 25%, the analyst said.

Read Money Morning's Breakdown of the other four stocks on the Money Morning Blog.

» Read more

October 6, 2009 - Plans to Move Away from Dollar Pricing of Oil?

Tue, 06 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Yves Smith of Naked Capitalism. You can read the full article on NakedCapitalism.com

Many US commentators blithely asset that the US does not need to worry about the reserve currency status of the dollar, since there is allegedly no ready substitute. Yet those arguments ignore the fact that there has already been movement away from the greenback. The Globe and Mail in early 2008 noted:

A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”

Another chip away at the dollar’s standing is a effort underway by the Gulf States plus China, Russia, Japan and France to denominate oil sales not in dollars but a basket of currencies. Note this is not completely novel; Iran’s oil sales to Japan are quoted in yen.

From the Independent (hat tip reader John D):

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars...

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

The explicit linking of security issues in the Middle East and the desire of a lot of countries to more away from the dollar as reserve currency is troubling, and the Independent also reads this as a thinly veiled threat:

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy... The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold...

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East...

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

» Read more

October 5, 2009 - The Canadian Dollar and the Bank of Canada

Mon, 05 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Kathy Lien of KathyLien.com. You can read the full article on her blog.

The Bank of Canada is growing increasingly uncomfortable with the strength of their currency.

In July, the Canadian dollar skyrocketed because of the central bank’s unusual optimism, but in September, the BoC toned things down significantly. At the time, they said as long as inflation does not skyrocket, interest rates will remain unchanged until the second quarter of 2010. However last week, the BoC took things one step further. Canadian Finance Minister Jim Flaherty proposed an expansion of mortgage buy-backs to C$125 Billion or $116.4 Billion, which represents a return to easier monetary policy. The proposal comes on the midst of comment by Governor Mark Carney who claims the recovery is not “self-sustainable” and is a mere consequence of unconventional measures.

Last Friday, Carney also said he would provide more stimulus if needed while Deputy Governor Longworth said the currency Is a risk to economic recovery. Although we do not expect intervention from the Bank of Canada, if the Canadian dollar continues to rise, the BoC could grow more dovish.

» Read more

October 2, 2009 - The Commodity Index Reborn

Fri, 02 Oct 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Lara Crigger of Hard Assets Investor. You can read the full article on the Hard Assets Investor Blog.

As readers of HardAssetsInvestor.com know, the Commodity Futures Trading Commission spent all summer pushing for tighter regulation of commodity ETFs, which the agency blames (rightly or wrongly) for running up energy prices last year.

For the CFTC, it's not a question of whether they should impose new regulations, but how much: Position limits, tighter regulation of swaps contracts and higher capital and margin requirements for derivatives are all possibilities currently on the table.

Exactly what shape the new rules will take will be decided later this fall, but already the debate has sent convulsions throughout the industry. Several futures-based exchange-traded products, like the U.S. Natural Gas Fund (NYSE Arca: UNG) and the iPath DJ-UBS Natural Gas ETN (NYSE Arca: GAZ), suspended the creation of new shares (although UNG has recently reopened). And at least one product, the PowerShares DB Crude Oil Double Long ETN (NYSE Arca: DXO), was entirely liquidated.

But what about the indexes themselves? After all, an ETF is really only as good as the index it tracks, and if commodities indexes don't evolve, how then can the products?

Last week, several indexing companies announced their ideas for new commodities benchmarks, making it clear they didn't plan to wait around for the CFTC to get its act in gear. But will any of their approaches work?

The CRB Index, Redefined

Last week, Thomson Reuters and Jefferies & Co. launched a revamped version of their famous CRB Index that focused not on commodity futures, but equities.

The original Reuters-Jefferies CRB Index, one of the most widely followed indices around, tracks 19 futures contracts from across the commodities spectrum, including crude oil, natural gas, industrial and precious metals, and softs.

In comparison, the new benchmark, the Thomson Reuters/Jefferies In-The-Ground CRB Global Commodity Equity Index, tracks 150 commodity producers and distributors worldwide. It includes equities of 50 energy companies, 35 agricultural producers, 35 industrial metals firms and 30 precious metals companies. The fund's associated ETF, sponsored by ALPS Funds, launched last week under the ticker CRBQ. (Check out the CRBQ prospectus here.)

CRBQ definitely isn't the first equity-based commodity fund: It has competition from existing broad-based ETFs like Van Eck's Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP), and iShares' S&P North American Natural Resources Sector ETF (NYSE Arca: IGE).

But the new Reuters/Jefferies index does mark the first equity-based benchmark launched specifically as a reaction to the CFTC's moves. It's "an alternative for investors looking for exposure to commodities without exposure to the commodities futures market," said Art Hogan, chief market strategist at Jefferies & Co, to the WSJ last week. On paper, it's not a bad idea: A pick-and-shovel commodities index does avoid the volatility common to the derivatives market, and it places any ETFs tracking it outside the reach of the CFTC. Plus, in some cases, equities are the only way to score exposure to illiquid or difficult-to-access markets, like coal or steel.

But equities-based commodities ETFs have their own issues to contend with—namely, equity risk. As Larry Swedroe pointed out in last week's interview, equity-based funds tend to correlate higher to equities than to commodities. Stock-based ETFs simply aren't the "pure plays" on commodities that many investors are looking for.

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Related Funds:

Related Commodities:

September 30, 2009 - The 7 Places Canada's Best Economist is Parking his Cash

Wed, 30 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Contrarian Profits. You can read the full article on the Contrarian Profits Blog.

David Rosenberg, chief economist for Gluskin-Sheff, is a contrarian with a superior intellect than our own. That’s why we hang on most every word he says.

Throughout the “sh*t hitting the fan” events of last fall, and the subsequent policy response, we’ve listened intently on what this Canadian had to say. The picture he paints today is one of bearish conviction. That’s exactly the reason he’s come under recent criticism as his ilk of ivory tower economists have started calling an end to this recession.

Though we don’t think he has anything to prove, he released a special report reaffirming his key points. You can read it in full here. But if you don’t have the time to peruse the twenty-two page (slightly wonkish) document, we’ve broken down the basic takeaway for you.

The equity markets have moved too far, too fast, and a correction is coming. Rather than buy into this rally, you should look at commodities. That’s because David believes that since 2001, commodities took off on a secular bull market run.

Also, rather than hold US dollars, Rosie bets that the Canadian buck is a safer bet due to Canada’s smaller national debt (26% of GDP vs. 62% in the US), smaller budget deficit (-3.4% of GDP vs. -11.2% in the US), stronger banking sector (no Canadian bank needed a bailout), lower unemployment, and an economy more reliant on commodity exports like lumber, oil, natural gas and precious metals.

But the scariest–for holders of US dollars—forecast Rosie makes is that the US has yet to use a power policy tool: the devaluing of the greenback.

As Obama continues to take pages out of FDR’s playbook, he’s yet to devalue the dollar as FDR did in 1933. Rosenberg doesn’t say that the US policy wizards will directly devalue the dollar. Rather, he thinks it will happen by the expansion of the Fed’s balance sheet and the creation of freshly printed dollars.

We think he’s dead on about this call. The US’s “strong dollar” policy has become the latest oxymoron to enter the American vernacular. There is only one direction the value of the US dollar is going over the long-term—down.

Where exactly should you invest amidst this economic malaise? Here are the seven places to park your cash. Not surprisingly, our favorite precious metal tops the list.

1.) Gold

2.) Commodities

3.) The Canadian dollar

4.) Resource sectors of the stock market

5.) US sectors that have high foreign exposure (materials, tech, staples, healthcare)

6.) Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

7.) Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed income returns)

» Read more

September 29, 2009 - McDonald’s Delivers Strong Dividend Growth

Tue, 29 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com

Several companies raised distributions last week. The most notable raiser was fast food chain McDonald’s (MCD), which surprised investors with a 10% dividend increase. This marked the 33rd consecutive annual dividend increase for this Oak Brook, Illinois based dividend aristocrat.

McDonald's Chief Executive Officer Jim Skinner said,

"So far in 2009 we've returned nearly $4.0 billion to shareholders through dividends and share repurchases, bringing total cash returned since the beginning of 2007 to about $15.5 billion. With today's dividend increase, we expect to end the year near the high end of our three-year, $15 billion to $17 billion total cash return target."

Skinner continued, "This achievement reflects the success of our better, not just bigger strategy, which has helped drive sales, profits and, ultimately, cash from operations. Going forward, our philosophy on our use of capital remains unchanged. Our first priority is to reinvest to grow our business and enhance shareholder value. After these investment opportunities, we expect to return all of our free cash flow over the long term through dividends and share repurchases -- while maintaining a strong financial foundation. Today's dividend increase underscores our confidence in the long-term strength of our business and ongoing commitment to returning cash to shareholders."'

The golden arches have definitely weathered the economic storm relatively unscattered, with monthly sales consistently marking comparable gains. I recently added to my position in McDonald’s (MCD), as I believe that the company posseses strong dividend growth characteristics. The company has more than doubled its dividends since 2006.

Several other companies announced increase in distributions:

Lockheed Martin Corporation (LMT) increased its quarterly dividend by 10.50% to 63 cents per share. Lockheed Martin Corporation has increased its quarterly dividend in each of the past six years. The stock currently yields 2.90%.

Sanderson Farms, Inc. (SAFM), an integrated poultry processing company, increased its quarterly dividend by 7% to 15 cents per share. Sanderson Farms, Inc. doesn’t follow a path of regular annual dividend increases that I prefer in a dividend stock.

ConAgra Foods, Inc. (CAG), increased its quarterly dividend by 5% to 20 cents per share. This is the third dividend increase for ConAgra Foods, Inc. since the company cut its distributions in 2006. The stock currently yields 3.50%.

Chimera Investment Corporation (CIM), which invests in residential mortgage backed securities (RMBS), residential mortgage loans, real estate-related securities, and asset backed securities (ABS), increased its quarterly dividend by 50% to 12 cents per share. Chimera Investment Corporation is a relatively short dividend history, which started in 2007. The dividend payment seems to be fluctuating a lot, which is not something to have when you try to live off your income streams. The stock currently yields 11.80%.

Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed by a U.S. Government agency or issued by a U.S. Government-sponsored entity, increased its quarterly dividend by 4.5% to $1.15 per share. Despite the fact that Hatteras Financial Corp. has only been around since 2008, its dividends have been pretty stable. The stock currently yields 13.90%.

Triangle Capital Corporation (TCAP), which is a private equity and venture capital firm specializing in buyouts, change of control transactions, acquisitions, growth financing, and recapitalizations in lower middle market companies, announced that its board has approved a 2.5% increase in dividends to 41 cents/share. Triangle Capital Corporation has increased quarterly dividends ever since it went public in 2007. The stock currently yields 14.10%.

I would be careful with the last three stocks mentioned, as they distribute most of their earnings out to shareholders, and thus have to depend on stock sales in order to keep growing the business. More stock sales dilute existing shareholders’ interests and could spell trouble if the capital markets freeze for one reason or another. Successful dividend investing is more than just chasing the highest dividend stocks – it’s more about finding a stock that has adequately covered dividends, whose business model could support future dividend increases.

Disclosure: Author is long MCD.

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September 28, 2009 - McDonald’s Delivers Strong Dividend Growth

Mon, 28 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Dividend Growth Investor. You can read the full article on DividendGrowthInvestor.com

McDonald's Chief Executive Officer Jim Skinner said,

Several other companies announced increase in distributions:

Disclosure: Author is long MCD.

» Read more

September 25, 2009 - 11 Facts for Shorting Stocks Every New Investor Must Know

Fri, 25 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member StockTradingToGo. You can read the full article on the Stock Trading to Go blog.

Thinking about shorting a stock for the first time and betting against the market? Consider these 11 points first featured today over at TradingMarkets (link) before you give it a go:

1. Risk – While with buying a stock you can only lose your investment, with shorting you can lose a whole lot more. Buy a $20 stock and watch it go to zero and you lose 100% of your investment, but short a $20 stock and watch it go to $100 and you just lost 500%.

2. Finding a Stock – Not all stocks can be shorted, so make sure to trade with a good online broker to give you the most flexibility.

3. Liquidity – Only short stocks that are highly liquid to make sure you can get out of the position when you want to.

4. Outstanding Short Position – If 10 – 20% of the company’s shares are already being shorted then the bad news is already out and other investors are already hopping onboard the bear train. These types of stocks are prone to short squeezes (explained further down, point #8) and should be pursued with extreme caution.

5. Margin Account – No margin account means no shorting stocks (read our article 9 Tips For Successful Margin Trading).

6. Margin Calls – Make a bad short and your broker may issue a margin call. Since they are lending you funds they have no interest in watching you lose 500% and then not be able to pay them back. A margin call forces you to either deposit more cash into your account or be automatically closed out of the position.

7. Early Sale – If the original owner decides to sell the stock you are borrowing against then you must replace it (note this is extremely rare so can really be ignored).

8. The Short Squeeze – If a lot of buyers come in all at once and cause a stock to jump in price then all the shorts rush to cover as quickly as possible. A short squeeze is when a stock has a large outstanding short position and good news causes a mad dash to cover shares. Not fun for an investor who is short.

9. How to Cover – Make sure when covering the position you fill out the trade ticket correctly. Look for the option, “buy to cover”.

10. Dividends and Taxes – You don’t get to keep stock dividends, they are paid to the actual share owner, and furthermore all profits are short term capital gains so don’t expect to get a tax break by holding over a year.

11. USE STOP LOSSES – This is a golden rule for shorting stocks and I am adding it here as the 11th fact. If you dont use stop losses you will end up getting burned! Step a profit to loss ratio and stick to your rules.

» Read more

September 24, 2009 - Down is the New Up

Thu, 24 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Michael Panzner of Financial Armageddon. You can read the full article on Michael's blog.

As far as I can tell, most analysts now concede that the bursting credit and real estate bubbles played a key role in bringing about the devastating downturn of the past two years.

Logically, that would suggest that a sustainable recovery is going to require some degree of stability -- no, normalcy -- in these two areas. Yet by most accounts, credit markets are on life support, dominated by the Federal Reserve and banks with broken business models that are somehow too big to fail.

Meanwhile, the residential property market is still being propped up by all sorts of subsidies -- for more on this, see "Policy and Housing: Someone’s Gotta Give!"-- and the supply-side of the equation remains an ongoing concern, if reports like the following from Reuters, "U.S. Mortgage Delinquencies Set Record," are anything to go by:

High U.S. unemployment keeps pushing up the rate of mortgage delinquencies, which could in turn drive personal bankruptcies and home foreclosures, monthly data from the Equifax Inc credit bureau showed on Monday.

Among U.S. homeowners with mortgages, a record 7.58 percent were at least 30 days late on payments in August, up from 7.32 percent in July, according to the data obtained exclusively by Reuters.

August marked the fourth consecutive monthly increase in delinquencies, and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the rate was 3.44 percent, Equifax data showed.

The rate of subprime mortgage delinquencies now tops 41 percent, up from about 39 percent in each of the prior five months.

The results, which correlate with consumer bankruptcy filings, suggest U.S. homeowners remain under financial stress despite signs of improving sentiment and fundamentals in the U.S. housing market.

In addition, the commercial property market is looking dicey again, as Bloomberg reveals in "Moody’s Property Index Resumes ‘Steep’ Fall in July":

Commercial real estate prices in the U.S. resumed a “steep decline” in July after showing signs of leveling off in June, Moody’s Investors Service said, as credit restrictions curtail lending and push landlords toward default.

The Moody’s/REAL Commercial Property Price Indices fell 5.1 percent in July from the month before, Moody’s said today in a statement. The index is down almost 39 percent from its October 2007 peak. The decline in June was 1 percent.

Commercial property sales this year may fall to an 18-year low. This latest set of numbers suggests no letup in that trend, said Neal Elkin, president of Real Estate Analytics LLC, a New York firm that partners with Moody’s in producing the report.

“We are still vulnerable to moves on the downside,” Elkin said in a telephone interview. “As time passes, the distress and the stress among those who need to sell is growing.”

Elkin cited figures from Real Capital Analytics Inc., whose data are used in compiling the report, showing the portion of sales classified as “troubled” -- those properties in or close to default -- almost doubled to 23 percent in July from March.

That’s “something we’ve never seen,” Elkin said.

Sales this year through July totaled about one-third of the year-earlier number, Moody’s Managing Director Nick Levidy said in the statement. The market averaged about 375 sales a month this year compared with almost 1,100 a month last year, he said.

Office sale prices fell 23 percent from a year ago in New York, 27 percent in San Francisco and 22 percent in Washington, according to the report.

South Affected

Prices of apartment buildings in the U.S. South have seen some of the steepest value declines, according to the report. Apartment prices in the region dropped 44 percent in the 12 months through June, almost twice the nationwide decline of 24 percent, and are now about half what they were two years ago.

Florida apartment values tumbled 40 percent in a year, the report said.

“That’s eye-popping,” Elkin said. The decline is being caused in part by “a ripple effect” from the overbuilding of condominiums in those markets, many of which are now competing as rentals, he said.

In sum, it seems like those who see signs of light at the end of the tunnel need to look a bit more carefully at what's really there.

» Read more

September 23, 2009 - The origin of the U.S. dollar as legal tender and its link to Depression

Wed, 23 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward’s blog.

I have been very interested in the concept of legal tender of late because of the revelation this summer that the State of California was issuing I.O.U.’s to honour its debts instead of paying in U.S. Dollars, which are legal tender and I.O.U.’s from the U.S. government (see posts here and here). What I found most interesting about the California case was how the I.O.U.’s allowed a state experiencing a depression and prohibited from printing money to settle debts. Given the similarities between California and Ireland, I felt this could be a model for that state (see post here).

The question was: how can a government without the levers of the money printing press use money as an escape-hatch in a depressionary environment? So to answer that question, I wanted to look at the origins of legal tender laws in the U.S.. When the United States was established, the U.S. Constitution outlined the basic framework through which government – both state and federal – could act on behalf of America’s citizens. Nowhere in the U.S. Constitution was legal tender mentioned, and this is a bone of contention still amongst those who see the Federal Reserve as an illegitimate institution. Below, I want to outline a brief (and hopefully non-ideological) history of how the greenback became legal tender in the United States. I have some related comments at the end on Depressions and their lasting consequences on politics and history.

The Constitution

The Constitution mentions the word money in three sections (8, 9 and 10) of Article 1. Below are the individual citations as they pertain to Congress acting on behalf of the federal government:

Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow Money on the credit of the United States; To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

Section 9 is no longer applicable, but here it is.

Section. 9. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

In Article 1, Section 10 of the Constitution, the authorities regarding money and taxation for individual states are outlined. It states:

Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws; and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

You have probably noticed that nowhere in here was the term ‘legal tender’ used. Why? The intention was to allow anyone to issue coins and notes backed by gold or silver. In fact, foreign coins backed by gold and silver were accepted in the U.S. because 80 percent of money in circulation in the U.S. pre-1800 was foreign.

Click here to continue reading this article on the CreditWriteDowns blog.

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September 22, 2009 - High Quality Stocks Ready to Take the Lead in the US Market

Tue, 22 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Jon D. Markman of Wikinvest Wire members MoneyMorning.com. You can read the full article on the Money Morning blog.

With the major U.S. stock market indices trading at recent highs, there is new evidence that the most recent phase of the advance was fueled by the lowest-quality stocks. But now it looks like higher-quality companies may be ready to take the lead: These shares will emerge from their slumber, causing the Standard & Poor’s 500 Index to advance by as much as 12.5% from current levels.

Let’s take a look at the big picture.

U.S. stocks weren’t scared by a quadruple-witching session on Friday as some of the market’s multi-month laggards pushed the indexes to another round of new highs. The Dow Jones Industrial Average gained 0.4%, the S&P gained 0.3%, the tech-laden Nasdaq Composite Index gained 0.3%, and the Russell 2000 gained 0.4%.

Normally, we expect much more volatility as traders try to push stocks around to maximize the value of their options contracts. It’s typically a battle as the big Wall Street banks work to dampen price movements to make sure the maximum numbers of derivatives end up worthless. But this time the key battle of the quarter was over tens of billions of dollars worth of S&P 500 put contracts that bears had written earlier in the summer with the expectation that the big-cap U.S. stock index would finish lower this month.

The contracts ended up so far out of the money - burning a huge amount of bears’ capital - that there just wasn’t that much to fight about. Bears’ resources are more depleted now, so the expectation will be that they won’t have the ammo or courage to be as bold going into the rest of this month and next quarter.

The news flow was light Friday with no new economic releases. We did see some fireworks early in the day as the bears targeted smaller, high-beta stocks however. As a result, all the major indices except the Dow dipped into the red before bulls counterattacked. In the end, it was the ninth positive finish out of the last 11 trading days, a performance that matches the rapid rise last witnessed in July.

At the sector level, consumer staples were the best performers as the Staples Select SPDR (NYSE: XLP) climbed 1.3% thanks to a 3.2% rise in The Procter & Gamble Co. (NYSE: PG). The great – but beaten-down – maker of toothpaste, toilet paper, and laundry detergent was the Dow’s best performer. Laggards on Friday included energy, healthcare, and industrial stocks.

Volume increased dramatically as 2.3 billion shares traded on the New York Stock Exchange (NYSE: NYX). This was a level of activity we haven’t seen since June. It was caused in large part by quarterly rebalancing of the indices maintained by Standard & Poor’s as mutual funds and other institutional investors adjusted their portfolios to account for the shifts.

Click here to continue reading this article on the MoneyMorning blog...

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September 21, 2009 - Bank of America: 40% of Junk Bonds to Default by 2013

Mon, 21 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Yves Smith of Naked Capitalism. You can read the full article on NakedCapitalism.com

During the tense months of the crisis, every so often there would be a story on the looming threat of mounting corporate debt defaults. With more than half the corporate bonds rated junk, thanks to highly-levered takeovers, it wasn’t hard to imagine that a protracted economic bad spell could lead to a lot of defaults.

A related issue that has not gotten the press it deserves is that the novel feature of the binge of late-cycle merger loans, “cov lite” deals, will make the damage worse. Normally. companies that borrow heavily have to agree to meet certain requirements (covenants) like maintaining a minimum net worth. If the debtor breaches those stipulations, the lender can accelerate the debt, meaning demand it be repaid immediately. That does not necessarily happen, but the acceleration clause allows the creditor to renegotiate the obligation in light of the borrower’s deteriorating financial condition, and that can include tough measures like asset sales or a restructuring, or forcing the company into Chapter 11.

What happens in the new world of cov-lite? Well, the company goes to hell and the borrowers can’t do much to intervene. The result is if the company continues to decay, it will wind up in bankruptcy, but later and therefore in a weaker state than if the creditors had forced it into bankruptcy sooner. That means the odds of a successful structuring are lower, and more companies will wind up liquidating. Thus not only will defaults reach new post-war highs, but recoveries are likely to be lower.

From Reuters (hat tip reader John D):

About 40 percent of all U.S. junk bonds outstanding in late 2008 will likely default by 2013... By contrast, the cumulative five-year default rate was about 30 percent in the last two default cycles...

The worst recession since the 1930s has already pushed defaults to double-digit rates. According to Standard & Poor’s, the default rate rose to 10.4 percent in August from less than 1 percent in 2007 as the recession and credit crunch left companies unable to pay off debt.

De-leveraging by consumers and financial institutions and fiscal problems at federal and state governments will slow the economic recovery, keeping defaults high, Bank of America said. Failure of the “shadow banking system” to reinvent itself will also contribute to high defaults, it said, referring to hedge funds and other non-bank institutions that fueled the last credit boom.

Defaults will also be triggered by hundreds of billions of dollars of debt coming due, especially in 2013 and 2014, Bank of America said. About $361 billion of high-yield loans come due in those two years alone, or 72 percent of the total outstanding, the bank estimated in an earlier report.

Bank of America in December had forecast that the junk bond default rate could peak at 17 percent in the second quarter of 2010, the worst since the Great Depression. Thanks to numerous government lifelines, including near-zero interest rates, it now expects the default rate to peak at 12.8 percent in the fourth quarter this year.

However, defaults will remain higher than normal and peak again at 8.5 percent in late 2012, the bank estimated. Even by 2013, the default rate will still be around 6 percent, much higher than the sub-4-percent levels usually seen at the end of a default cycle, Bank of America said...

Many so-called distressed debt exchanges are only postponing defaults and will also contribute to the second wave, the bank said. In a distressed debt exchange, companies buy back debt at steep discounts, usually replacing it with longer-maturity debt. About 40 percent of distressed debt exchanges typically default anyway within three years, the bank said.

» Read more

September 16, 2009 - The Fallacy of Earnings Per Share

Wed, 16 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Saj Karsan of BarelKarsan.com. You can read the full article on Saj’s blog.

Too many investors blindly incorporate earnings per share (EPS) as a primary component of their valuations. EPS gets multiplied by a P/E multiple, or it is used as a base for growth rate multipliers to be discounted back to present value. However, for several reasons, investors must avoid using such short cuts in company valuations.

First of all, EPS can fluctuate wildly from year to year. Writedowns, abnormal business conditions, asset sale gains/losses and other unusual factors find their way into EPS quite often. Investors are urged to average EPS over a business cycle, as stressed in Security Analysis Chapter 37, in order to get a true picture of a company's earnings power.

EPS, averaged or otherwise, still does not provide adaquate information regarding a company's debt levels. Two companies could have the same EPS, but one could be capitalized with 99% debt while the other could have 0% debt. While the earnings to the shareholder is the same in both cases, one company is extremely risky and susceptible to bankruptcy should anything unexpected occur. To factor in debt levels, investors are encouraged to value a company based on its operating earnings (instead of its EPS) and subtract debt obligations from this value, and compare debt/equity values.

Finally, EPS does not give adaquate information regarding dilutive securities that have not yet been converted into common shares. "Diluted EPS" is a required reporting component of an income statement, but it only incorporates those options that are above water. For example, if a company has 100,000 shares that have averaged trading at $2.00/share, and 500,000 options outstanding at an exercise price of $2.01/share, not a single one of these options will be recognized in the diluted EPS calculation, despite the fact that these securities are potentially extremely dilutive! To avoid this trap, investors must subtract the value of options outstanding from the arrived at intrinsic value of the company.

EPS is a quick and easy way to refer to a company's earnings. It does not, however, serve as a replacement for prudent analysis of a company's true earnings power and obligations.

» Read more...

September 10, 2009 - The Top 10 Global Food and Beverage Companies

Thu, 10 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member David Hunkar of TopForeignStocks.com. You can read the full article on David's blog.

The U.S. food giant Kraft Foods (KFT) has made a £10.2bn bid ($16.7 billion) to acquire Cadbury (CBY), the most famous confectionery company of U.K. The deal values Cadbury at 745 pence a share. (Note:1 British Pound (£)= 100 pence)

Cadbury’s board quickly rejected the offer saying that the deal undervalues the company. Some of the large shareholders including Legal and General, one of U.K.’s top investment and insurance services company, are backing the board. Shareholders want at least 800 pence a share. Now other companies such as Nestle and Hershey may join the battle for the control of Cadbury. If Kraft is successful with this takeover bid, the global food industry will be changed forever. So what are the largest food and beverage companies in the world?

The Dow Jones Food & Beverage Titans 30 Index contains the leading companies in the global food and beverage sector. As of August 31, 2009 the index is up 14.38%. Last year when financials were down heavily, this index lost 25.85%. The top 10 components are listed below:

Company: Nestle S.A. (OTC: NSRGY)
- Country: Switzerland
- Current Yield: 3.02%
Company: Pepsi (PEP)
- Country: USA
- Average Annual Earnings Growth (5 years): 9.44%
Company: Coca-Cola Co (KO)
- Country: USA
- Average Annual Earnings Growth (5 years): 7.08%
Company: Monsanto Co. (MON)
- Country: USA
- Current Yield: 1.29%
Company: Unilever N.V. (UN)
- Country: The Netherlands
- Current Yield: 5.11%
- Average Annual Earnings Growth (5 years): 11.59%
Company: Diageo Plc (DEO)
- Country: USA
- Current Yield: 4.57%
- Average Annual Earnings Growth (5 years): 3.04%
Company: Kraft Foods Inc. (KFT)
- Country: USA
- Current Yield: 4.13%'
- Average Annual Earnings Growth (5 years): (8.94%)
Company: Unilever Plc (UL)
- Country: U.K.
- Current Yield: 4.56%
Company: Danone S.A. (OTC:DANOY)
- Country: France
- Current Yield: 3.13%
Company: Anheuser-Busch InBev (EBR:ABI)
- Country: Belgium
- Current Yield: No regular dividends paid

Cadbury’s portfolio includes brands like Bourn Vita, Dairy Milk, Halls, Trident, etc. These brands are highly popular in many emerging countries especially in the former British colonies. Any acquirer of Cadbury is sure to benefit from its brand values.

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September 6, 2009 - Ciena Shows Some Muscle

Sun, 06 Sep 2009 00:00:00 GMT

Today’s Daily Angle comes from Wikinvest Wire member Rob Powell of TelecomRamblings.com. You can read the full article on Rob’s blog.

Network equipment provider Ciena (CIEN) reported its fiscal third quarter earnings yesterday morning, providing the latest update on the state of the economy in telecom. The equipment providers have taken the brunt of the recession, as carriers have cut back on the capex that has been their lifeblood. But this quarter, Ciena finally managed to turn the tide with sequential growth with revenues of $164.8M from $144.2M last quarter. That’s really quite decent, I think analysts were only looking (hoping) for the low 150’s. Adjusted net loss of $0.05 was also better than anyone seems to have expected.

Nevertheless, the company remains cautious about the future, offering guidance for revenue at similar levels in the fiscal fourth quarter. That shouldn’t surprise anyone, the worst thing they could do right now would be to overpromise, and fortunes in this sector can turn on a dime. It is amazing just how sensitive equipment stocks are to the economy, Ciena’s quarterly revenues this time last year were some $253M, just as the bottom started to fall out.

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