Translation: Sometimes, you can dress something up as much as you want, but it doesn’t change what it really is.

Or in the case of biofuel, what it isn’t.

And to coin a more recent adage, “putting lipstick on a pig” is exactly what biofuel advocates continue to do.

I’m interested in all forms of energy – fossil fuels, renewables, nuclear, etc. And like most Americans, it’s my wish to see us weaned off Middle Eastern oil in my lifetime. For example, in the following ways…

• By moving towards renewable energy resources like wind, solar and geothermal.
• Nuclear fuel is also a viable way to gain greater energy independence – despite the issue of how to store the spent fuel.
• The United States is blessed with a 100-year supply of natural gas – the second-largest reserves in the world.

But biofuels aren’t viable. Here’s why…

The Biofuel Brainwash

A “Greendoggle.”

That’s how I’d describe the misrepresentation of the biofuel industry.

Even with its high greenhouse gas emissions, burning coal represents a better solution than biofuels. Especially when you consider biofuels’ detrimental factors.

Right off the bat, it doesn’t make much sense to take the world’s main food staples – corn, wheat and rice – and turn them into fuel.

But just five years ago, bio-ethanol, bio-diesel and bio-gasoline were billed as America’s solution to imported oil. And all it took to drive prices skyward was dwindling crude oil supplies, rising prices, increasing global demand – and a healthy dose of biofuel hype.

On the surface, biofuels seem like a great renewable energy idea. The argument is that carbon produced from biofuels is “better” than carbon from fossil fuels. Why? Because when the plants (i.e. fuel) are grown, it offsets the carbon production.

Congress bought the hype, passing a law, mandating 35 billion gallons of ethanol production a year by 2017. And to grease the wheels, lawmakers tossed a $0.51 per-gallon subsidy at ethanol producers. Bio-diesel producers received even more – $1 for every gallon produced.

Farmers jumped for joy at the prospect of making some serious dough. Crop rotation plans were dumped in favor of one thing: Corn. And lots of it.

Ethanol production plants popped up across the Midwest. Between 2000 and 2008, the number vaulted from 50 to 140. Sixty more were under construction.

Who knew that America’s solution to imported oil was in U.S. soil all along?

But back the corn truck up…

Biofuel Reality Check

In the quest for energy independence, politicians overlooked a few key details…

• As farmers piled all their resources into growing corn for ethanol, just about every food made with corn rose in price.
• Food producers then found themselves paying three to four times what they paid for corn just a few years before. And they did what any business does: passed the costs along to consumers.
• Aid organizations cut food donations by 50% (more in some cases).

A Wall Street Journal editorial said: “Cornell’s David Pimental and Berkeley’s Ted Patzek found that it takes more than a gallon of fossil fuel to make one gallon of ethanol – 29% more. That’s because it takes enormous amounts of fossil fuel energy to grow corn (using fertilizer and irrigation), to transport the crops, and then turn that corn into ethanol.”

A University of Minnesota study in 2008 was even more sobering: “Converting forests, peat lands, savannas, or grasslands to produce food-based biofuels in Brazil, Southeast Asia, and the United States creates a huge biofuel carbon debt. When land-use changes are taken into account, 17 to 420 times more CO2 is released than the reductions gained when these biofuels displace fossil fuels.”

As demand for corn and other biofuel stocks soared, farmers just started planting corn, ignoring a century’s worth of data on the benefits of crop rotation.

And due to the glut of corn, soybeans, wheat and rice were all in short supply, causing their prices to rise, too.

For example, soybeans had to be grown elsewhere. That turned out to be Brazil. But large-scale deforestation in the Amazon Basin (to increase the available land for soybean production) just adds to the insanity of biofuels.

Speaking of insanity…

The Backwards Way to Boost Biofuel

In Sumatra and Borneo, nearly 10 million acres of forest have been burned to create fields for palm oil plantations for biofuel. In Malaysia and Indonesia, they’re about to erase 25 million acres of prime forest.

There are two things wrong with this…

1. Burning the forest produces 93 times the greenhouse gases that burning the fuel produced on them would.
2. The trees are nearly twice as efficient absorbers of CO2 than the palm plants grown for fuel stock.

The expiration of the $1 per gallon federal biofuel tax credit in January means many biodiesel companies are no longer commercially viable – and might signal the end for this biofuel “Greendoggle” in the United States.

However, some members of Congress are trying to reinstate it. One can only hope that saner heads will prevail.

Good investing,

Dave Fessler

View original at: Investment U

Biofuels: Don’t Let This Alternative Energy “Greendoggle” Fool You

Bayer’s core earnings per share (EPS) came in at €0.90 (approx $1.23) compared to €0.71 (approx. $0.96) in the year-ago period. The Zacks Consensus Estimate during the reported quarter was $1.14. For 2009, the company recorded a 12.7% decline in core EPS to €3.64 (approx $4.96). 2009 earnings were lower due to €766 million of charges associated with certain restructuring measures and litigation. However, the company does not expect to incur these charges in 2010.

The three major segments: Healthcare, CropScience and MaterialScience accounted for 53%, 18% and 26%, respectively of total revenues during the reported quarter. Healthcare and CropScience segment revenues improved by 0.6% and 3.4%, respectively.

The Healthcare segment recorded revenues of €4.16 billion compared to €4.14 billion in the corresponding period last year. Both the divisions of Healthcare – pharmaceuticals and consumer health were almost unchanged from the previous quarter. During 2009, this segment generated a 3.8% rise in revenues to $15.98 billion.

Bayer’s primary market, Europe – accounting for 40% of its Healthcare revenues in 2009 remained almost unchanged compared to 2008. The other markets of North America, Asia-Pacific and Latin America/Africa/Middle East grew 2.7%, 17.5% and 4.2%, respectively.

Revenues from CropScience increased 3.4% to €1.4 billion during the quarter on higher volume although prices came down by 3.6%. New product sales increased 5.2% to €426 million representing 30% of the total portfolio.

Revenues from Crop Protection (division of CropScience) increased 4.7% to €1.17 billion. However, sales of Environmental Science/BioScience dropped 3.1% to €221 million.

Material Science recorded revenues of €2.02 billion, down 1.9% from the year-ago period due to a 17.6% decline in price of the products, but were offset by higher volume.

Although gross cash flow for 2009 declined 12% to €4.6 billion, net cash flow rose 49% to €5.4 billion because of improvements in working capital. The company reduced its net debt to €9.7 billion at the end of the year from €14.2 billion at the end of 2008. However, in 2009, Bayer’s earnings before interest, tax, depreciation and amortization (EBITDA) before special items declined 6.6% to €6.47 billion against its guidance of a 5% fall.

Bayer expects to post more than 5% currency and portfolio adjusted sales growth for 2010 with EBITDA before special items rising towards €7 billion. Core EPS is expected to improve by 10%. We believe growth in the Healthcare business is particularly important for Bayer as it has shifted focus to this area, which accounts for more than 50% of total revenues. We expect the MaterialScience business to pick up in 2010 when the world economy recovers from the current recession.

Zacks Investment Research

Bayer Reports Lower Revenue

While the Services index is still lagging behind the Manufacturing index, which was reported on Monday at 56.5, at least it is rising — the Manufacturing index pulled back (showing a slower rate of expansion than in January, but retains a healthy pace of growth). The overall index bottomed out in November of 2008 at 37.2, so over the longer term there has been a very significant improvement.

Like the Manufacturing index, the Services index is made up of 10 sub-indexes that roughly correspond to the 10 sub-indexes for the Manufacturing survey. The comparison between the two is shown in the table below (from the ISM report: http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Overall, seven of the sub-indexes showed improvement in February and six are above the magic 50 line.

Business Activity Index

The most important of the sub-indexes as a gauge of current economic activity is not surprisingly the business activity index (which is the analog to the production index on the manufacturing side). It posted a 2.6% rise to 54.8. However, the increase was driven by a sharp decline in the percentage of respondents reporting lower activity (20% rather than 30%). The percentage of firms reporting higher activity actually fell as well, to 23% from 26%, while the percentage of firms reporting no change in business activity jumped.

New Orders

The most important leading indicator in the report is New Orders. There the index rose to 55.0, an increase of 0.3 points. There again, the rise was driven by a drop in respondents reporting lower new orders, and a jump in those reporting flat new orders. The percentage of firms reporting higher new orders actually declined.

In between the two (call it a shorter-term leading indicator) is the backlog of orders. There the reading was 46.0, an improvement of 0.5 points. Essentially, the order backlog is contracting, but is doing so at a slower rate.  The same basic story is seen here as well, though the increase is driven by fewer respondents reporting things getting worse, not by an increase in those that say things are getting better.

Employment Index

The employment index is of particular interest given the extremely high rate of unemployment right now (9.7% in January; we will see on Friday where it was in February, most likely about 9.9%). The employment index has been below the 50 line now for over two full years. Here we actually did see an increase in the percentage of respondents that saw things getting better, not just a decline in those saying they are reducing employment.

However, the good news is that it increased a sharp 4.0 points to 48.6. In other words, according to the ISM, the Services sector is still shedding jobs, but is doing so at a much slower pace. In the January employment report, the Bureau of Labor Statistics (BLS) actually measured an increase in service jobs and a small decline in manufacturing jobs. This throws a bit of a question mark on the reliability of the ISM data, unless of course the BLS ends up revising things to show better manufacturing and worse service jobs when the report comes out on Friday.

Overall this was a positive report — nothing to get too giddy about, but it does show that the Services sector of the economy, which is far larger than the Manufacturing sector, is now solidly on the mend. However, the level of improvement indicated by a 53.0 reading is not enough to really move the needle yet in terms of getting the country back to work and repairing the damage that has been done.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

Zacks Investment Research

Institute for Supply Management’s Services Number Better Than Expected

My staff often forwards me letters from readers with the same general complaint about building wealth:

“You give me all these great investment ideas, but where do I get the money to invest in them?”

Ah, there’s the rub. It reminds me of the time a television interviewer asked Chinese billionaire Li Ka-shing to share “the secret of great wealth.”

“Great wealth, very easy,” he said in broken English with a toothy grin. Then frowning and shaking his head he added, “Little wealth, very difficult.”

How true. As Americans are fond of saying, “It takes money to make money.”

So how do you get started?

Most of us know the first two prerequisites:

1. Get educated (or learn a specialized skill).
2. Bust your butt.

But then what? How do you turn this generality into building real independent wealth?

The Seven Common Characteristics of Great Wealth-Builders

That’s where Dr. Thomas Stanley comes in.

As America’s foremost authority on the affluent, he’s conducted decades of research on the habits and characteristics of America’s wealthy.

He’s written several bestsellers including, Marketing to the Affluent and The Millionaire Next Door: The Surprising Secrets of America’s Wealth.

Dr. Stanley points out that the vast majority of millionaires do not have exceptional skills. Most of them do not have hit records. They do not play third base for the Yankees. They did not found a software company in their garage. Instead, they’re people who have worked and saved and invested their money prudently.

In The Millionaire Next Door, Stanley details seven common denominators among those who build wealth successfully:

• They live well below their means.
• They allocate their time, energy, and money efficiently, in ways conducive to building wealth.
• They believe that financial independence is more important than displaying high social status.
• Their parents did not provide economic outpatient care.
• Their adult children are economically self-sufficient.
• They are proficient in targeting market opportunities.
• They chose the right occupation.

In short, your net worth is essentially a result of the choices you make…

Building Wealth: The Difference Between Acting Wealthy and Being Wealthy

To generate significant savings to invest, you need to make the right career decisions, the right lifestyle decisions and the right spending decisions. Building wealth takes forethought. It takes discipline. And it means making hard choices.

Dr. Stanley hammers this message home in his latest book. It’s called Stop Acting Rich… and Start Living Like a Real Millionaire. It’s not a book for debtors and spenders who want compassion and understanding. Rather, it’s a wake-up call for the millions of consumers out there who are living far beyond their means.

Most millionaires – folks with liquid assets of one million dollars or more – are not big spenders. Quite the opposite, in fact.

According to Stanley, the most productive accumulators of wealth spend far less than can afford on homes, cars, clothing, taxes, vacations, food, beverages and entertainment.

On the other hand, the wanna-be’s – people with higher-than-average incomes, but not much net worth) are merely “aspirational.” They buy expensive clothes, top-shelf wines and liquors, luxury cars, powerboats, all kinds of bling and more house than they can comfortably afford.

Their problem, in essence, is that they’re trying to look wealthy. And this prevents them from ever becoming wealthy.

Building Wealth With The “Millionaire Mindset”

The real irony is that most rich people don’t spend this way themselves. Sure, the “glittering rich” do. They have households with a net worth of $10 million or more, because they can comfortably afford it.

But the vast majority of millionaires in the United States:

• Live in a house that cost less than $400,000.
• Are more likely to wear a Timex than a Rolex.
• Generally pay less than $15 for a bottle of wine.
• Have never paid more than $400 for a suit.
• Are more likely to drive a Nissan than a BMW.
• Spend very little on prestige brands and luxury items.

Yes, they’re frugal. But they’re also happy, not to mention financially free. They’re not dependent on their families, employers, or the government. That’s a great feeling.

And they built wealth the old-fashioned way. They maximized their income, minimized their expenditure and religiously saved the difference.

In short, the first step toward building wealth and gaining financial independence is clear: Live beneath your means.

Or, as Dr. Stanley says, “Stop acting rich… and start living like a real millionaire.”

Good investing,

Alexander Green

View original at: Investment U

Building Wealth: The First Step Toward Gaining Your Financial Independence

Value Line Index — this index uses 1700 stocks so it’s much broader than the narrower S&P 500 or Dow 30 — Up 2.54% this week — Last month down 2.89% but up 1.57% so far this month — Let’s call it recovering

• Barchart’s technical indicators signal a buy on only 5 of the 13 signals for an overall rating of hold
• The Index closed Friday above its 100 day moving average but is still below its 20 and 50 DMA

Barchart market momentum indicator – normally covers approximately 6000 stocks –the percentage of stocks closing above their daily moving averages for various time frames — still weak but improving

• 20 DMA — 42.01% closed above — last week it was only 20.01%
• 50 DMA — 43.42% closed above — last week it was only 35.31%
• 100 DMA — 54.84% closed above — last week it was only 45.63%

Ratio of stocks hitting new highs to stocks hitting new lows for various periods — 1.0+ bullish, 1.0 neutral, below .99 bearish — we have 1 bearish and 2 bullish signals

• 20 day ratio of stocks hitting new highs to new lows — 434/474 = .92
• 65 day ratio of stocks hitting new highs to new lows — 246/209 = 1.18
• 100 day ratio of stocks hitting new highs to new lows — 194/149 = 1.30

Summary – the market shows improving numbers but has still not returned to the level where I feel comfortable. When at least 50% of the stocks are trading above their recent daily moving averages then you have a better than 50/50 chance of having your portfolio increase. There is a lot going on over there in Europe and we seem to be improving faster than they are. Greece is a problem and I’m afraid that we may see problems in Portugal, Spain and maybe even France. My biggest fear is not the economic turmoil but maybe some civil unrest. If there are large numbers of men ages 18-40 unemployed and they begin to blame their governments for their plight we might see riots like we saw in some of the poorer parts of Paris a few years ago. Nothing good can happen during civil unrest. That leads me to my next investment.

Next week’s strategy — Since our economy has a jump on Europe I’m going to short the Euro. I’ll do that by adding 500 shares of EUO – the ProShare Ultrashort Euro ETF - Right now the Euro is at 1.359. Back a few years ago I can remember when it traded at .85. If that happened again since this is a leveraged ETF I could see a gain of up to 120% on this trade.

Wall Street Survivor results — This month I look like a champ so far. The S&P 500 is up .15% and I’m up 4.52% with the next competitor the Motley Fool All Stars up .57%. I’m still down for the lifetime of this contest but I’m trying to catch up. We’ve all seen how rankings can change at the drop of a hat. Wish me luck.

Jim Van Meerten is an investor who writes on financial matters here and on Financial Tides. Please leave a comment below or email JimVan Meerten@gmail.com

Disclosure — I do not hold any positions in the stocks in my Wall Street Survivor portfolio at the time of publication.

View original at: Financial Tides — A Stock Market Investing Newsletter by Jim Van Meerten

Market Financial Tides me a surprise

Most speakers at the Money Show had different opinions on the market, how to play it and what’s in store for the next 6 months but one thing they all agreed on was that earnings, the economy and job numbers are not being properly factored into this market. Things are improving but every time someone in Washington opens their mouth the hot air deflates the market. Is the hot air deflating your portfolio?

Let’s take a step back and see how the market did. As usual I’ll use Barchart for my data.

Value Line Index — I use this index because it contains 1700 stocks making it broader than the narrower Dow 30 or the S&P 500 — this week down by .95%

• Barchart’s technical indicators signal a 40% sell signal — 3 buys, 2 holds and 8 sells
• The index closed Friday below its 20, 50 & 100 day moving averages for the first time in many months

Barchart’s market momentum indicator — approximately 6000 stock are used — the percentage of stocks closing above their daily moving averages for various time frames — above 50% good but below 50% bad — this week all 3 looked bad

• 20 DMA — only 20.08% closed above
• 50 DMA — only 35.45% closed above
• 100 DMA — only 45.78 closed above

Ratio of stocks hitting new highs to stocks hitting new lows for various time periods — 1.0+ bullish, 1.0 neutral, below .99 bearish — this week all 3 time frames were very bearish

• 20 day ratio of new highs to new lows — 278/3660 = .08
• 50 day ration of new highs to new lows — 152/1733 = .09
• 100 day ratio of new highs to new lows — 74/962 = .08

Summary — The market is reacting very negatively to the hot air spewing out of Washington. The improving economy, job numbers and earnings are being overshadowed by the threats coming out of the White House. Isn’t it ironic that Obama took all the campaign handouts from Wall Street, the banks and hedge fund managers and now spends his time demonizing them and telling the common folk how he will punish them. This week I’ll trim non-performing stocks from my portfolios but I’ll hold up replacing them till I see a little bit of support in the market numbers.

Alternative strategy — At the Money Show I ran into 2 of my all time Wall Street heroes — Robert Stovall and Paul Kangas. Both these guys are going strong and still giving us all some productive and sane advice. Since it’s Super Bowl Sunday it might be time to give a return visit to Mister Stovall’s Super Bowl indicator. He’s observed that the winner of the Super Bowl predicts the performance of the market for the rest of the year. If the NFL wins he can look forward to an up market, if the AFL wins the market will perform poorly. Don’t laugh; the indicator has been correct for 34 of the last 43 Super Bowls. Before you go to bed tonight the Bowl game winner will be determined and you’ll know how to play the market. I’m not taking sides, I just want to know whether to go long or short.

Jim Van Meerten is an investor who writes on financial matters here and on Financial Tides. Please leave a comment below or email JimVanMeerten@gmail.com

Disclosure: I have no positions in the stock in my Wall Street Survivor portfolio

View original at: Financial Tides — A Stock Market Investing Newsletter by Jim Van Meerten

Is hot air deflating your portfolio?

The Labor Department reported today that the U.S. economy shed 20,000 jobs last month, weaker than the expected 5,000 gain for the month. Importantly, the unemployment rate fell to 9.7% from 10% last month. The expectation was for the unemployment rate to inch up to 10.1%.

Signs leading up to today’s report were mixed, at best. The fourth-quarter GDP read was a major positive. I will chalk up the ADP report early this week to the positive column as well. Incidently, the ADP appears to have been not that off the mark, after all. On the negative side, we had yesterday’s initial claims report remaining in its three-week uptrend.

On the revisions front, the picture was relatively mixed. The December number was negatively revised: originally we had 85,000 jobs lost in December, which has now been increased to losses of 150,000. But the November number had a positive revision. Recall that the November number was revised last month to a positive job gains of 4,000.

That was, in fact, our first positive monthly jobs number since the start of this recession in December 2007. The November jobs gain number has now been juiced up some more — the current revisions put the November gains at 64,000 jobs instead of only 4000.

Among other positive signs in this report, the average work week increased by 0.1 hours to 33.3 hours. And it continued with the trend of the last few months of continued temporary job creations.

We would typically see these trends play out in a jobs recovery. Companies tend to first increase the work hours of existing workers and hire temporary workers before getting confident enough to start hiring full-time employees. So, while the overall picture still remains quite bad, there are clear signs of improvement.

Zacks Investment Research

U.S. Unemployment Rate Falls to 9.7%

Looking for an exact date as to when Ben Bernanke and his fellow Fed bankers will raise interest rates?

Sorry… I don’t have that for you (I loaned my crystal ball to Miss Cleo for her new infomercial.)

But what I can do is give you a “Road Map to Higher Interest Rates,” which spells out the specific events that should precede the most anticipated hike in history. Follow it and you should be perfectly positioned to profit when the time comes.

(Remember, a few months ago, I introduced SSFRs, an investment that you’ll want to own when interest rates rise.)

So without further ado…

Seven Signs of the End of Free Money

It’s important to remember that the Fed adjusts rates based on inflation expectations. And right now, there’s too much slack in the economy for inflation to be an immediate concern.

In fact, the United States hasn’t seen this much slack – the amount of actual GDP production versus the potential production if all economic resources were being employed – in over 25 years.

And that means the Fed won’t consider a rate hike until these three data points improve:

1. Unemployment: Needless to say, it’s uncomfortably high – and is a key contributor to economic slack at the moment. We’ll need to see a definitive return to growth here. (Remember, the economy added 4,000 jobs in November, only to lose 85,000 in December. And the latest ADP report suggests the losses carried over into January.) Once unemployment peaks, the Fed usually waits at least a year before raising rates.

2. Factory Utilization: If our factories aren’t running at full-tilt, there’s no way the economy is either. That’s the case now, with factory utilization near a record low of around 72%. In the last two decades, the Fed has waited to raise interest rates until factory utilization rebounded to around 80%, so we need to see significant improvement here.

3. Wages: Economic slack also shows up in wage growth. After all, when companies are ferociously cutting costs and employees are worried about simply having a job, raises are virtually non-existent. Given the severity of this downturn, it’s no surprise that wages fell at their fastest pace in 25 years. We need to see a pronounced rebound before the extra money in consumers’ hands prompts the Fed to increase its inflation expectations and, in turn, raise rates.

Watch What the Fed Does, Not What it Says

Beyond the economic data, we need to focus on the Fed’s actions. Every move is intentional, but the bankers don’t always call attention to them in their speeches. I’m convinced that the Fed must do the following before hiking rates:

4. End the Easing: The Fed introduced nearly half a dozen “special liquidity facilities” to navigate the financial crisis. Some included ridiculously cumbersome names like the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity-Facility.

So it only makes sense to unwind these facilities before tightening monetary policy. Four of them expired as planned on February 1. And the program aimed at purchasing $1.45 trillion in mortgage-backed securities will end in two phases – on March 31 and June 30. However, the Fed can extend these programs if necessary, so if it does, that pushes out the timeline for a rate hike.

5. Sop Up Extra Cash (temporarily): Before the Fed hikes rates, it will look to drain extra liquidity out of the system. So look for the bankers to use newly introduced term deposits and reverse repurchase agreements.

The first acts like a traditional certificate of deposit and encourages banks to keep their reserves on deposit rather than lending them out, which would accelerate inflation. The second involves the Fed selling securities from its portfolio with an agreement to buy them back later.

Keep in mind that these are temporary fixes, as the cash is ultimately returned. But the Fed will need to ramp up these special tools before hiking rates.

6. Sop Up Extra Cash (permanently): The amount of excess reserves in the banking system will also require the Fed to remove cash permanently. Expect the Fed to sell some of its long-term securities outright to accomplish this.

7. The Fed Changes Its Policy Statement: Each word in the Fed’s statement is chosen wisely. And at least a month in advance of raising rates, the Fed will need to strike one or two key phrases that have been mainstays throughout the crisis – “exceptionally low” and “extended period.”

In the end, my road map isn’t necessarily sequential. Nor do I think the Fed needs to follow it to the letter before raising rates. Economic conditions are fluid and therefore could prompt a swifter move.

That said, the more items you can tick off, the closer we’ll be to the most heavily anticipated rate hike in history. So start keeping track now.

Good investing,

Louis Basenese

View original at: Investment U

The Road Map to Higher Interest Rates: Seven Signs of the End of Free Money

The quarterly earnings of 25 cents a share outdid the Zacks Consensus Estimate of 20 cents, and surged 66.7% from 15 cents delivered in the year-ago quarter. News Corporation’s quarterly earnings topped the Zacks Consensus Estimate by 25%.

Estimate Revisions & “Avatar”

In the last 30 days, the Zacks Consensus Estimate has shown a substantial increase of 11.1% with 8 out of 19 analysts covering the stock raising their estimates. This was buoyed by the release of blockbuster film “Avatar” from News Corporation’s 20th Century Fox film studio late in the company’s fiscal second quarter 2010. The company booked much of the costs of releasing the film and a small percentage of profit in the quarter.

The profit from the film will begin to roll out in the third-quarter of 2010. The current Zacks Consensus Estimate for third-quarter 2010 is 19 cents a share.

EPS & Revenues

On a reported basis, including one-time items, quarterly earnings came in at 10 cents a share, compared to a loss of $2.45 posted in the prior-year quarter.

After declining 4.1% in first-quarter 2010, News Corporation reported a double-digit jump in the top-line, reflecting recovery in the advertising market. Total revenue rose 10.3% year-on-year to $8,684 million driven by the strength in all major reporting segments: Filmed Entertainment (up 27.8%), Television (up 10%), Cable Network Programming (up 17.7%), Direct Broadcast Satellite Television (up 9.3%), Integrated Marketing Services (up 2.5%), Newspapers and Information Services (up 10%), and Book Publishing (up 24.9%). The Other segment revenue fell 39.8%.

Outlook for 2010

Total operating income, excluding one-time items, soared 44.5% to $1,212 million. Based on the robust second-quarter results and the box office records set by “Avatar,” News Corporation raised its outlook, and now expects fiscal year 2010 operating income to increase in the low 20% range up from high-single digit to low double-digit percentage range previously anticipated. The company also raised its quarterly dividend by 25% to 7.5 cents a share.

Results by Segment

Filmed Entertainment posted a second quarter operating income of $324 million up from $112 million delivered in the prior-year quarter driven by the worldwide theatrical success of “Ice Age: Dawn of the Dinosaurs,” “X-Men Origins: Wolverine” and “Night at the Museum: Battle of the Smithsonian.”

The Television segment reported operating income of $29 million versus a loss of $2 million in the year-ago quarter, reflecting a rise in contributions from the Fox Television Stations (FTS) due to a revival in advertising trends mainly in the telecom and retail sectors, and improved performance at MyNetworkTV, partially offset by lower contributions from FOX Broadcasting Company.

Operating income at Cable Network Programming jumped 34.8% to $604 million due to a rise in contributions from FOX News Channel, the Fox International Channels, STAR and the Regional Sports Networks.

The Newspapers and Information Services segment reported an operating income of $259 million, an increase of 29.5%. Higher advertising revenue at The Wall Street Journal and a fall in operating expenses were the major drivers.

Book Publishing posted an operating income of $65 million, compared to an operating income of $23 million in the prior-year quarter.

Direct Broadcast Satellite Television (or SKY Italia) posted an operating loss of $30 million, compared to an operating income of $10 million in the prior-year quarter due to the loss of subscribers.

Integrated Marketing Services also reported an operating loss of $414 million, including a litigation charge of $500 million, compared to an operating income of $86 million in the quarter earlier.

Zacks Investment Research

News Corporation Tops Consensus Estimates

The increased preference toward bonds is not surprising given the trends we are seeing in the weekly AAII Sentiment Survey. Bearish sentiment has risen for four consecutive weeks. The current level of bearish sentiment, 36.7%, is six points above the historical average.

Playing a role in increased preference for fixed income was the performance of stocks and events that added to investor uncertainty. During the latter half of January, the S&P 500 fell by nearly 5.5%. At the same time, proposed new banking regulations renewed concerns about how active a role the government is playing.

A reversion to the mean was also a factor. Allocation to individual bonds jumped by four percentage points to 6%. Though the increase is notable, historical allocations to individual bonds have averaged 7%.

Overall, investors switched back to a more defensive stance. Allocations toward bonds and bond funds have been above the historical average of 15% for eight consecutive months. Allocations towards equities (stocks and stock funds) fell to 57%, three percentage points below their historical average.

Cash allocations increased slightly to 19%. The historical average for cash is 25%. The below-average allocation for cash is reflective of the low yields paid by money market funds.

Asset Category Detail for January 2010
Stock Mutual Funds  29.58%      (+0.33%)
Stocks     27.63%      (-6.88%)
Bond Mutual Funds     17.89%      (+2.14%)
Bonds     6.39%      (+3.97%)

Asset Allocation Results for January 2010 :
Stocks Total     57.21%      (-6.55%)
Bonds Total     24.28%      (+6.11%)
Cash     18.51%      (+0.44%)

Historical Averages
Stocks Total     60%
Bonds Total     15%
Cash     25%

The survey and its results are available on-line at: http://www.aaii.com/membersurveys/AssetAllocation/AssetAllocationSurvey.cfm

A copy of this press release is available on-line at: http://www.aaii.com/news/archives/20100201.cfm

If anyone else in your organization would like to be included on the distribution list for this email, please let me know.

Charles Rotblut, CFA
Vice President and AAII Journal Editor
American Association of Individual Investors
P: (312) 676-4337
F: (312) 676-4387
crotblut@aaii.com

http://www.aaii.com

http://twitter.com/charlesrotblut

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AAII Asset Allocation Survey: Bonds Up, Stocks Down

You don’t have to look around too much to find the latest buzz on renewable energy sources and the companies behind them. Since oil prices began rising and the movement toward a cleaner, greener world has gathered pace, they’ve become all the rage.

But it’s important to note that no matter how much momentum the sector builds up, the lack of one key thing could steer this “groundswell of green” into a brick wall.

It’s called the Smart Grid – or, as it’s increasingly being referred to, the “Enernet.” And without it, renewable energy won’t be going anywhere.

That’s why I headed to rural Maryland last week to attend a major conference aimed at tackling the latest renewable energy issues and better harnessing the promising opportunities that the sector has – for America, consumers and investors…

The Future of U.S. Energy Security

Sponsored by the Institute of Electrical and Electronics Engineers (IEEE), which boasts 365,000 members in over 150 countries, the Conference on Innovative Smart Grid Technologies brought together about 700 of the world’s top engineers and scientists from 32 different countries.

It was the first meeting of its kind, held at the secure headquarters of the National Institute of Standards and Technology (NIST) on nearly 600 secluded acres in Gaithersburg, Maryland.

NIST is the keeper of the world’s most accurate time standard. NIST-F1 is a cesium fountain atomic clock, accurate to 1 second in 60 million years. But I wasn’t holed up in Gaithersburg just so I could synchronize my watch.

With its $1.6 billion dollar annual budget, NIST fosters ingenuity and industrial competitiveness by promoting technology, science and standards. Thus, the location was perfect for this meeting.

With regard to the Smart Grid/”Enernet,” NIST is essentially “Clearinghouse Central” for how it’s all going to work. Hundreds of standards – many still under development – will allow the Smart Grid to work as a highly functional system, just like our telecommunications system does today.

The Director of NIST, Dr. Patrick Gallagher, set the tone for the conference:

“The Smart Grid is one of the most important focus areas we have at NIST. The future of U.S. energy security is at stake.

“Smart Grid technologies are essential to enabling the diverse energy supplies we will need in the future.

“It’s [not only] important for NIST, but for the entire community of Smart Grid stakeholders, and for the nation. Just as Congress intended, we’re building a foundation for sustainable growth and future prosperity.”

While at the conference, I had the opportunity to talk with a number of key individuals regarding the Smart Grid. People responsible for designing the framework and setting the standards for it. And they don’t come much more important than this gentleman…

Why This Initiative Will Change the Way We View – And Use – Energy

Aside from the presentations, I managed to grab a few words with Dr. George Arnold – the man chosen by Dr. Gallagher to head up NIST’s Smart Grid initiative:

David Fessler: Dr. Arnold, can you start by telling me a little more about NIST’s role in the development of the Smart Grid standards here in the United States – and why it’s so important?

Dr. Arnold: The Energy Independence and Security Act of 2007 (EISA) has the development of the Smart Grid as a national policy goal. It appointed NIST and gave us the primary responsibility to coordinate standards development. The ultimate goal is to achieve inter-operability of Smart Grid devices and systems across the country.

David Fessler: You mentioned in your opening remarks yesterday that 30 years from now, the Smart Grid will be viewed as the “first great infrastructure project of the 21st century.” How so?

Dr. Arnold: The Smart Grid will fundamentally change how energy is priced, and how we think about and use energy, both at work and at home, and even while we’re driving.

Electricity movement will be more of a dynamic two-way flow as opposed to the static one-way flow we are used to today.

There are currently 130 major Smart Grid projects underway in 45 states. Over 18 million Smart Meters will be installed over the next few years in the United States alone. And that’s just a small part of what the Smart Grid will be.

David Fessler: NIST just announced the release of Version 1.0 of the “Framework and Roadmap for Smart Grid Interoperability Standards.” Can you explain this in layman’s terms?

Dr. Arnold: National and international standards are a critical enabler for the Smart Grid. Without them, you’d have essentially what we have today: 3,100 electric utilities operating alone.

Version 1.0 is the first release of a Smart Grid inter-operability framework, and it contains a roadmap for its further development.

David Fessler: What do you see as the biggest challenge in rolling out the Smart Grid here in the United States?

Dr. Arnold: An educated consumer. In the end, it’s the consumer who’s going to have to pay for the Smart Grid. Unless they see the benefits, they’re not going to spend money on it, or things to connect to it.

In Part 2 of my report from this crucial Smart Grid conference later this week, I’ll bring you my discussions with two more top industry executives, who’ll share their thoughts on exactly how the Smart Grid should be set up… how consumers stand to benefit from it… and why this important sector is set up for investors to profit.

Good investing,

David Fessler

View original at: Investment U

The Smart Grid Initiative: The First Great Infrastructure Project of the 21st Century

Though the rise in bearish sentiment is notable, it should be considered within the context of market conditions. The major indexes declined twice over the over the past three trading days.

Furthermore, bullish sentiment stayed above its historical average for the ninth time out of the past 10 weeks. The survey results show 40% of individual investors expect the markets to rise over the next six months. Bullish sentiment did fall, however, coming in seven percentage points lower than a week ago.

Neutral sentiment was down fractionally to 25.3%.

This week’s AAII Sentiment Survey results:

Bullish: 40.0%, -7.4 percentage points
Neutral: 25.3%, -0.4 percentage points
Bearish: 34.7%, +7.8 percentage points

Long-Term Averages:

Bullish: 39%
Neutral: 31%
Bearish: 30%

The survey and its results are available on-line.

Charles Rotblut, CFA
Vice President and AAII Journal Editor
American Association of Individual Investors
P: (312) 676-4337
F: (312) 676-4387
crotblut@aaii.com

http://twitter.com/charlesrotblut

AAII Sentiment Survey: Bearish Sentiment at a 4-Week High

The improvement reflected a decrease in the proportion of investors expecting the markets to remain flat. Neutral sentiment fell 7.4 percentage points to 25.6%, which is below the historical average of 31%. Neutral sentiment remains in the range held since the start of December, however.

Bearish sentiment rose slightly to 26.9%. This is the third consecutive week that the proportion of individual investors expecting the market to decline over the next six months has been below the historical average of 30%.

Despite the current trend, bullish sentiment remains below a level that would suggest it is at contrarian levels. Rather, the survey’s results imply that individual investors are comfortable with the current market conditions.

The results are not surprising given current market conditions. The CBOE Volatility Index is staying below 20, a sign of complacency on the part of traders. The S&P 500 has not had a daily change of 2% or greater since late November. (It also has not had an intraday move of 2% or more since early December.) At the same, stocks are off to a good start in 2010, with the S&P 500 up 2.81%.

This week’s AAII Sentiment Survey results:
Bullish: 47.4%, +6.4 percentage points
Neutral: 25.6%, -7.4 percentage points
Bearish: 26.9%, +0.9 percentage points

Long-Term Averages:
Bullish: 39%
Neutral: 31%
Bearish: 30%

The survey and its results are available online

Contact:
Charles Rotblut, CFA
Vice President and AAII Journal Editor
American Association of Individual Investors
crotblut@aaii.com
http://www.aaii.com

AAII Sentiment Survey: Bullish Sentiment Rebounds to 47.4%

Let’s talk retirement – and specifically, Individual Retirement Accounts (IRAs).

Simply put, these are accounts that investors set up to save for retirement. They come in various forms, including the two that I’m going to talk about here – traditional IRAs and Roth IRAs.

On the surface, a Roth IRA seems like the best bet, as it allows for tax-free accumulation of profits on your contributions. A great idea, for sure. But there’s a catch: It’s always been restricted to people who earned less than a certain amount. If you earned more, you were forced to use a traditional IRA, where the gains are taxed.

Until now.

A recent change in the tax laws regarding qualifications for Roth IRAs, versus traditional IRAs, should have many folks jumping for joy….

Until this year, you couldn’t qualify for a Roth IRA unless you fell below specific income requirements. But the government has now decreed that anyone can have a Roth IRA, regardless of their income level. Furthermore, if you have a traditional IRA, you can switch it over to a Roth – with all future gains and distributions being tax-free.

Super. Break out the champagne, right?

Not so fast…

The Roth IRA Trap

While spending your hard-earned money tax-free when you retire sounds like a great idea, there are catches. Several catches. And you need to be well-informed before you even think about making the switch to a Roth IRA.

Here are just a couple of issues:

• Government: The government is angling for a lot of cash with this move. Think about the trillions of dollars sitting in retirement accounts. The lure of collecting taxes early on those trillions makes even the sleepiest bureaucrat wake up.
• Tax Implications: Any money you switch from your regular IRA to a Roth will be taxable. This means you’ll pay tax on these funds at the marginal rate over a couple of years.

However, if you’re at the 25% tax rate and you decide to make the switch, the amount you transfer will increase your marginal rate and may push you into the 35% bracket or higher.

Ask yourself this: What will your estimated tax rate be at retirement? If it’s going to be lower and you’re within a few years of retiring, the Roth switch may not be for you.

In addition, the taxes due must come from somewhere. For example…

The Traditional IRA: Switch to a Roth IRA Now Or Pay Later?

Let’s take a traditional IRA with $500,000 in it.

If you switched to a Roth IRA, you’d owe at least $175,000 in taxes at the 35% tax rate. That would leave your investible capital at $325,000. But the pros tell me that you need to pay that $175,000 out of other funds so your IRA is intact and can earn money tax-free without having to spend years getting your principal back to square one. Hmm, now where can I find an extra $175,000 lying around?

The thinking behind making the Roth tax switch now is simple: Taxes are going up (maybe way up, thanks to our lavish spending habits), so better to cough it up now before you really have to hand over some big bucks later.

In fact, it’s not out of the realm of possibility that marginal tax rates will top 50% for the highest earners within a couple of years – something that would make the Roth switch really expensive.

The upside, however, is that tax history doesn’t usually change because of fiscal responsibility, but because of political will. Over the past 40 years, we’ve seen marginal rates decline from over 70% to the low 30% level.

And while we’re on the upward slope today, who knows where we’ll be in 20 years?

Thinking About Switching to a Roth IRA? Consider This…

Taxes might have declined by the time you take a distribution. So scare tactics aside, let’s look at a couple of solutions…

• Status Quo: The easiest thing to do is let your traditional, tax-exempt IRA continue to grow and just pay the taxes at the marginal rate upon distribution. The money you’d have to find to pay the taxes today (compounded at a reasonable rate going forward) would likely make up for a good chunk of what you’d pay in taxes later anyway. And if your rate is lower in the future, you may actually come out ahead if you’re looking at a period of 10 or 20 years.
• Switch in Stages: If you’re going to switch to a Roth IRA, don’t let the government fool you into thinking that you can pay the taxes over the next two or three years. From what I can tell, it’s a gimmick – it wants  the money now.

Instead, consider switching over a longer period of time, transferring just enough each year, so that your tax bite doesn’t vault you into some ungodly high tax bracket. For example, if you have $500,000 to switch, transfer $50,000 a year over 10 years and pay the tax on that amount – it’s a lot more manageable. Check with your accountant that there are no future restrictions on switching your IRA in this way. If not, why do it all at once?

The bottom line: The Roth IRA switch is good news, but it’s nothing to write home about. If it was, I assure you the government wouldn’t be pushing it so hard!

Good investing,

Karim Rahemtulla

P.S. Please note that this column is just to bring the Roth IRA subject to your attention. Make sure you check with your accountant before you do anything.

View original at: Investment U

IRAs and Roth IRAs: What You Need to Know Before You Make This Retirement Account Switch

Capital shortfalls are always met with cost-cutting measures. Period.

And when the credit markets froze up last year, cash became harder to come by than a popsicle stand in the desert.

On the personal level, plans for upscale amenities like country club memberships, Jacuzzis and granite countertops were quickly tabled…

Manufacturing and industry saw the cuts come mostly in the form of layoffs. (The unemployment rate is expected to stay near 10% throughout most of the year.)

Exploration companies had fewer mines go on-line.

Retailers collectively cut their inventory to historical lows.

Farmers skimped on fertilizer, presenting a particularly unique opportunity for profits.

You see, you can only hold the purse strings on fertilizer for so long before the depleted ground yields less grain. Forget supply and demand, we’re talking about Mother Nature here.

But that’s exactly the situation we find ourselves in.

As the global economy revs up again, and food demand rises, we’re looking at a full-blown supply shock in the grains market (corn, soybeans and wheat). Throw in the under-the-radar – but very real – worldwide water shortage, and the situation gets even dicier.

(The upcoming issue of The Oxford Club Communiqué will have my full report.)

From a fundamental point of view, grain prices look to be a sure bet to appreciate in the year ahead. When the technicals jive too, we’ll get word from our commodities expert, Lee Lowell. But today, Lee has a different commodities offensive cued up, specifically the best ways to play gold, oil and the orange juice market.

Ahead of the tape,

Robert Williams

View original at: Investment U

Put this Commodity at the Top of Your Wish List

Wholesale Inventories are expected today at 10:00 AM EST. Wholesale Inventories had increased by 0.3% in October to the $379.6 billion level and were down by 13.5% from a year ago. Wholesale Sales had increased by 1.2% in October to $326.2 billion. Sales of durable goods were up by 0.8% and sales of nondurable goods were up 1.6% over the month. The Inventory/Sales ratio was at 1.16, compared to 1.22 recorded a year ago

Consumer Credit figures are to be released today at 3:00 PM EST. Consumer credit decreased at an annual rate of 3.25 % in the third quarter of 2009. Revolving credit decreased at an annual rate of 7.25%, and non-revolving credit decreased at an annual rate of 1%. In October, consumer credit decreased at an annual rate of 1.75%.

Upcoming Releases
Wholesale Inventories (01/08 at 10:00 AM EST)
Consumer Credit (01/08 at 3:00 PM EST)
Trade Balance (01/12 at 8:30 AM EST)
Treasury Budget (01/13 at 2:00 PM EST)

Zacks Investment Research

December Unemployment at 10% – Economic Highlights

Upcoming Releases
Unemployment Rate (01/08 at 8:30 AM EST)
Wholesale Inventories (01/08 at 10:00 AM EST)
Consumer Credit (01/08 at 3:00 PM EST)
Trade Balance (01/12 at 8:30 AM EST)

Zacks Investment Research

Jan 7: Initial Jobless Claims Up – Economic Highlights

Though there was a notable increase in the number of respondents expecting the markets to stay essentially flat, we are seeing a glimpse of sustained optimism on the part of individual investors. This is particularly evident in the spread between the bulls and bears, which has been in double digits during four out of the last eight weeks.

The trend confirms the data we are seeing in our Asset Allocation Survey. As of the end of December, individual investors had a 64% allocation to stocks and stock funds. (This is a two-year high.) Allocations to bonds/bond funds and cash were each 18%.

It should be stated that none of these numbers indicate irrational exuberance. Rather, they suggest hope on the part of individual investors that economic conditions are improving.

This week’s AAII Sentiment Survey results:

* Bullish 41.0%, down 8.2 percentage points
* Neutral 33.0%, up 5.1 percentage points
* Bearish 26.0%, up 3 percentage points

Long-Term Averages:

* Bullish: 39%
* Neutral: 31%
* Bearish: 30%

The survey and its results are available online

Contact:
Charles Rotblut, CFA
Vice President and AAII Journal Editor
American Association of Individual Investors
crotblut@aaii.com
http://www.aaii.com

AAII Sentiment Survey: Bullish Sentiment Falls, But Stays Above Historical Average

After another brutal year, the auto industry summoned up some end-of-year strength in 2009, with analysts projecting annualized sales of cars and trucks to top 11 million in December.

If that number holds true, it would mark the second-best month of 2009 behind August’s government-assisted sales burst. It would also beat the December 2008 sales figure of 10.3 million, plus a month-to-month increase over the 10.9 million sales seen in November 2009.

BMW, Ford, Honda, Toyota’s Lexus and General Motors’ soon-to-be-gone Saturn and Pontiac brands all experienced higher-than-expected returns in December, as customers were willing to buy without government rebates. Incentive programs from dealers also enticed customers.

But can one month really indicate an improved market for the year ahead?

The Auto Industry: 2010… And Beyond

Bargain prices for used cars, lower interest rates and improved economic data have pushed consumers back to dealerships. But confidence is key – and it’s still lacking, due to factors like the continuing housing market woes and high unemployment.

And while December’s auto sales numbers are certainly positive, they pale in comparison to the trend a year ago when the popularity of SUVs led to sales topping 17 million in the 1990s.

Nevertheless, there is cause for auto optimism in 2010. Estimates call for sales to hit 11.4 million this year, rising as high as 13 million in 2011, despite consumer hesitation on large purchases.

And if the U.S. economy gets back on track in a more definitive way, that should help the healing process in the auto industry.

Good investing,

Sheena Martin

View original at: Investment U

Can The Battered Auto Sector Mount a Real Recovery In 2010?

GM has revealed that its joint venture with Shanghai Automotive Industries Corp. (SAIC) has shown a sales rise of 63.3% to 727,620 units. Further, the automaker’s joint venture with SAIC and Wuling became China’s first automaker to exceed 1 million units in annual sales in 2009. Sales in SAIC-GM-Wuling joint venture rose 63.9% to 1.06 million vehicles.

The Chinese auto industry has been the apple of Beijing’s eye, basking in incentives for car owners to shift to more environment-friendly and fuel-efficient cars. Although the domestic automakers (especially small car manufacturers) received most of the incentives, foreign automakers benefited from them as well.

The collapse in the U.S. auto industry in 2009 was somewhat offset by the surging sales in China, making a stark shift in global vehicle volumes that was much quicker than anyone had expected. All these have led several global automakers, including GM, to strengthen their foothold in China’s fast-growing market in order to drive sales amid slack demand elsewhere.

In 2009, GM’s corporate operations in China saw a rapid expansion. The company launched a ground-breaking science laboratory and a vehicle safety research center in the country. GM also plans to expand in other parts of Asia with the help of Chinese automakers. Its joint venture with SAIC has announced to launch a new venture in India to produce and sell cars.

Zacks Investment Research

General Motors Sees Impressive China Sales

Last year left investors hoping for positive change, and they certainly seemed to have gotten it in 2009.

Though the Dow plummeted to a bruising low of 6,547 in March, the major U.S. indexes have since largely reflected a more upbeat attitude.

Just yesterday, the Dow closed at 10,548.51, the Nasdaq sat at 2,291.28 and the S&P 500 set the financial world into a tizzy by fully retracing 50% of what it had previously lost.

Even the job market got some good news on Tuesday, when CareerBuilder.com polls showed that a full fifth of employers plan to add full-time employees in the coming year (as compared to 14% for 2009… with only 9% foreseeing further cuts).

Emerging markets including China, India and Brazil all recovered nicely, as did most major European and Asian stocks – all in all painting a rosy picture for 2010.

But pictures can be deceiving. And this one shows some serious hidden and not-so hidden flaws in both the U.S. and the larger global economy.

U.S. Woes Lie Just Underneath the Surface

The U.S. has had its fair share of problems, but rather than fix them, it seems to have covered them up.

Yes, the housing market has shown signs of recovering, with prices stabilizing and even rising. But that’s because the government devised tax credits to tempt homebuyers into the market… especially first-time owners.

Not only is that an artificial prop, but that kind of “incentive” already got us into trouble before, when we encouraged spending that U.S. citizens perhaps couldn’t really afford.

And beneath the promise of job openings lies the following facts about coming employer trends according to CareerBuilder.com:

• 37% do plan to hire workers, but that’s only to replace underperforming or unsatisfactory current employees.
• 57% expect to raise current employee salaries… down from 65% last year.
• 37% mentioned cutting benefits, including medical coverage, matching 401k contributions and bonuses.

Overall, that means consumer spending on clothes, cars, jewelry, electronics, etc. won’t be rising anytime soon, and it may even fall further, especially if inflation hits.

With the amount of money the government has and is still printing and spending, inflation could hit anytime after Federal Reserve Chairman Ben Bernanke allows interest rates to rise.

And most experts know the U.S. is in trouble too, hence the reason why Steven Hess, Moody’s Investor Service’s lead analyst for the U.S. said:

“The AAA rating of the U.S. is not guaranteed.  So if they don’t get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.”

Global Problems Contribute to Uncertain Future

The Unites States isn’t the only one in trouble either…

Just look at the once envied Dubai, which the world recently learned was laden with debt. It didn’t have a prayer of handling on its own. The neighboring Abu Dhabi stepped in with a $10 billion loan, but that doesn’t mean Dubai is instantly cured by any means.

Meanwhile, Greece had its credit rating cut to A- by Standard & Poor’s in January, and then again earlier this month by Moody’s from A1 to A2. And Mexico had the markets buzzing for the same reasons around the same time.

Even Australia, which never technically entered a recession, admits that it might still face a bumpy road ahead.

IG Markets institutional dealer Chris Weston in Sydney summed it up best by saying: “Market psychology, at least in the short term, is relatively positive. We are in a seasonal sweet spot and I think we will trade higher in January, but we will need a strong earnings season or we will see a correction.”

The 2010 Forecast

Those warning signs point to some kind of drop in the future. But with global markets largely showing bullish or bullish consolidation patterns, it’s difficult to know when stocks will reflect those negative factors.

So a word to the wise: Keep a close eye on what’s really going on… not just the reassuring headlines that mask more serious problems. And set trailing stops whenever possible, so that when the time comes, you won’t lose the farm.

But don’t pull out of the markets either. They still have further to go in at least the short term.

Good investing,

Jeannette Di Louie

View original at: Investment U

Get Ready for 2010: What You Need to Know Before You Start Investing

GM made this unusual incentive plan for dealers instead of customers, as it no longer wants to linger for buyers. The automaker plans to clear the inventory as soon as possible as it looks forward to wind down the brands by 2010.

Pontiac was introduced by GM in 1926 and was sold in the U.S. , Canada and Mexico. Saturn was officially launched in 1990. The brands’ sales dropped last year as the auto market dried up.

As part of its restructuring efforts during the bankruptcy process in June, GM has revealed its plan to get rid of the unprofitable brands including Saab, Saturn, Pontiac and Hummer. The automaker scaled its products down to four core brands: Chevrolet, Cadillac, Buick and GMC.

Among the four brands, a tentative sale agreement of Hummer to a Chinese construction machinery maker has been reached. However, the automaker has till date not been able to shed the other three brands.

Zacks Investment Research

General Motors Offers Unusual Incentives to Clear Lots

If you want to bank on a reliable market opportunity, you’d better pay close attention. January is just around the corner and a trend known as the “January Effect” gives your money potential to multiply.

In a phenomenon commonly known as the “January Effect” stocks tend to surge in January more than any other month, and now investors hold their breath to see if this January follows suit.

Since 1971, January has ranked No. 1 for stock performance on the Nasdaq and S&P 500. And it ranks No. 2 on the Dow Jones Industrial Average.

So what are the odds that this historical trend will hold up next month? Quite frankly, they are good for three main reasons:

• The market recently experienced renewed vigor in the markets – sparked by positive economic data – that will amplify the January Effect. Most significant is the impressive 3.5%-plus preliminary GDP report for the third quarter, which has investors excited.
• Better yet, the Dow Jones Industrial Average is up about 60% from March lows, and the broader market is up 10% since October 1. The momentum is there.
• Also fueling the rally are continued low interest rates. Fed Chairman Ben Bernanke made it clear to investors that he is going to keep interest rates low until there is further proof of economic recovery.

Simply put, combining recovery, momentum, and loose monetary policy means investors can expect a strong rally in the beginning of the New Year with the January Effect holding up to historical trends.

Ahead of the tape,

Sheena Martin

View original at: Investment U

Will the “January Effect” Prove Faithful This Year?

Consumer Confidence increased to 52.9 in December, less than the 53.5 expected, but an improvement from November which was revised to 50.6.  Assessment of current day conditions worsened while the short-term outlook and labor market showed to be more promising..

Upcoming Releases
Crude Inventories (12/30 at 10:30 AM EST)
Initial Claims (12/31 at 8:30 AM EST)
Construction Spending (01/04 at 10:00 AM EST)
ISM Manufacturing Index (01/04 at 10:00 AM EST)

Zacks Investment Research

Dec 29: Consumer Confidence Up – Economic Highlights

General Motors has decided to discontinue its Swedish brand, Saab Automobile, after talks failed with a Dutch automaker, Spyker Cars, to sell the unit. The Detroit automaker was struggling hard to conclude the sale by the end of this month.

A few days back, Beijing Automotive Industry Holding Group (BAIC) – China’s fifth largest automaker – had agreed to buy powertrain, engine and gear-box technology for Saab’s 9-5 and 9-3 sedans technology at an undisclosed price. At that time, GM was planning to liquidate other assets associated with Saab, including its headquarters, which involves more than 3,000 jobs in Sweden.

However, GM was eyeing other bidders for Saab, who might be interested in buying out the complete operation, including its production hub in Trollhattan, Sweden. Earlier this year, Shanghai Automotive Industry Corp. (SAIC) intended to acquire a stake in the unit, teaming up with Swedish luxury sports car maker Koenigsegg.

However, that deal did not work out. Later, BAIC agreed to provide financing to Koenigsegg, who pulled out of a tentative deal to buy the unit last month.

The Saab closure would cost 3,400 jobs worldwide. The brand has 1,100 dealers, whom GM has promised to honor warranties after the closure.

In 1989, GM acquired a 50% stake and management control of Saab for $600 million after the brand’s split from Swedish truck maker Scania. In 2000, GM bought the remaining ownership of the brand for $125 million. However, the automaker had never been successful with the brand.

GM has put the Saab unit up for sale after it pulled through a bankruptcy funded by the U.S. government in July. The automaker is currently focusing on its remaining four core brands – Chevrolet, Cadillac, Buick and GMC.

Zacks Investment Research

General Motors Shuts Down Saab

We all know why the dollar is in the cellar right now. We also know why it’s expected to continue right through to the basement floor:

• Massive budget and trade deficits.
• Ultra-low interest rates. (Zero on the short end.)
• $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid.
• Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U.S. economy.

There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Here’s why…

Two Reasons for a Dollar Rebound

There are two main forces that could drive the dollar higher:

• All the problems mentioned above are already well recognized and priced into the greenback.

• Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldn’t imagine Internet stocks doing anything but soaring higher. Five years ago, they couldn’t imagine real estate doing anything but barreling down the same one-way street. Record lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down.

When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point – and an opportunity. This is no exception.

Commentators seem to forget that all currency values are contingent. You can’t just look at fundamentals in the United States. You have to look at them abroad, too.

And there isn’t much out there right now that’s terribly positive…

America’s Fellow Heavyweights Have Problems, Too

Take Europe, for example…

• Eurozone: In the third quarter, the 16-nation Eurozone grew at a 1.5% annual rate. The U.S economy, by comparison, grew at 3.5%. European consumers and most business sectors are still feeling the pain from the deepest recession since the 1930s. The continent is likely to be the weakest region for global expansion next year, according to Julian Callow, Chief European Economist at Barclays Capital in London.
• United Kingdom: This is no bastion of strength, either. Europe’s biggest economy outside the Eurozone is still in recession, due to overly indebted British households and tight credit. British GDP contracted at an annualized 1.6% in the third quarter.
• Japan: The world’s second-largest economy has its own problems, too. At 172% of GDP, Japan’s government debt is by far the largest among rich nations. What’s more, it’s expected to reach 200% next year – and hit 300% within a decade. Rising social security costs and the weak economy are the primary culprits.

The new government there is trying to prevent a double-dip recession by spending even more. But with government debt soaring to records, talk of new stimulus measures is already pushing up long-term rates and threatening to curtail the impact of fresh spending.

Bet on the Dollar in 2010

Recognize that Europe and Japan are hardly experiencing heady economic growth and great fiscal probity. Most are bogged down economically and running fiscal deficits as bad as ours.

And personally, when the whole world is in this big a mess, I’ll take the greenback over the euro, the pound, or the yen. My bet is in 2010, so will most world currency investors.

Virtually no one is expecting it, but the dollar is likely to climb 20% against the euro and the pound next year and 15% against the yen.

Hedging is fine, of course. But if you have too much exposure to foreign-currency denominated bonds, CDs, or bank accounts, rein it in.

Good investing,

Alexander Green

View original at: Investment U

Why the Dollar Will Soar in 2010

Last week, General Motors (hereafter, GM) has entered discussions with BAIC about a partial sale of assets associated with Saab. The current deal has relieved GM to liquidate other assets associated with Saab, including its headquarters, which involves more than 3,000 jobs in Sweden.

BAIC showed its interest in Saab in order to upgrade its own technology and expand production. Due to the lack of in-house brands, BAIC has decided to set up production in China based on an older generation of Saab vehicles.

According to the deal, BAIC will buy the rights to some powertrain, engine and gear-box technology for Saab’s 9-5 and 9-3 sedans. The production equipment for 9-5 would be moved to China eventually to produce BAIC’s own brand of cars. Saab engineers would help BAIC to integrate the technology into the Chinese company’s cars.

Earlier this year, Shanghai Automotive Industry Corp. (SAIC) intended to acquire a stake in the unit, teaming up with Swedish luxury sports car maker Koenigsegg. However, the deal did not work out. Later, BAIC agreed to provide financing to Koenigsegg, who pulled out of a tentative deal to buy the unit last month.

GM has put the Saab unit up for sale after it pulled through a bankruptcy funded by the U.S. government in July. The automaker is currently focusing on its remaining four core brands – Chevrolet, Cadillac, Buick and GMC.

Zacks Investment Research

China Automaker Buys General Motors’ Saab

As I mentioned briefly in this column a couple of days ago, the next technology boom is upon us.

It’s one borne out of the shift to 4G broadband – and it’s a catalyst that could help lead the United States economy out of recession.

The development is significant because it gives companies an opportunity to perfect previous products, while rolling out enhanced innovations. The improved technologies will also allow for faster processing and expanded capabilities for PCs, notebooks and handheld electronics, along with further customizations and upgrades.

With new gadgets set to hit stores over the next few weeks and 235 million new smartphones coming to the market in 2010, this could result in more jobs. Keep in mind that innovation is the primary driver of economic growth in today’s knowledge-based economy. It opens up new fields of jobs in manufacturing, service, and management.

Although innovation has suffered over the past year, as companies have focused on cost-cutting (for more on this, check out Robert Williams’s analysis), the future looks bright.

From the March 9 bottom, technology sector shares jumped about 70%, compared with 60% for the broader S&P 500. And forecasts show that telecom, software and the technology hardware areas are all expected to rise over the next two years, with software enjoying an 85% jump in 2010.

Spurring this demand is venture capital. In fact, venture capitalists poured enough money into software development over the past quarter to make it the third-highest recipient of venture capital.

As we head into 2010, the sector clearly has plenty of investment appeal. I’ll detail specific opportunities in future columns.

Sheena Martin

View original at: Investment U

The Next Technology Boom: Why Innovation Will Blast Us Out of the Recession

BAIC showed its interest in Saab in order to upgrade its technology and expand production. Due to its lack of in-house brands, the automaker has decided to set up production in China based on an older generation of Saab vehicles, including the 9-5 and 9-3 models.

The partial sale of the Saab technology would imply a liquidation of other assets held by the brand, including its headquarters, threatening more than 3,000 jobs in Sweden. However, General Motors (hereafter, GM) is eyeing other bidders, who might be interested in buying out the complete operation of Saab, including its production hub in Trollhattan , Sweden . The Swedish government is also aiding in the conclusion of the sale.

Earlier this year, Shanghai Automotive Industry Corp. (SAIC) intended to acquire a stake in the unit, teaming up with Swedish luxury sports car maker Koenigsegg, which did not work. Later, BAIC agreed to provide financing to Koenigsegg, who pulled out of a tentative deal to buy the unit last month.

GM has put the Saab unit up for sale after it came through a bankruptcy funded by the U.S. government in July. The automaker is currently focusing on its remaining four core brands – Chevrolet, Cadillac, Buick and GMC. Time is running out for GM as it is required to conclude the deal by the end of this month. In this situation, a partial sale and liquidation seems to be the best answer.
Zacks Investment Research

General Motors to Offload Saab Technology

The fundamentals of investing in crude oil are changing.

Tuesday marked the fifth straight day that oil futures fell on the NYMEX, extending their losing streak to the longest in five months. Oil is now cheaper than it’s been since the first week of October.

On December 2, West Texas crude oil stood at $76.60 per barrel. But less than a week later, it had fallen to under $73 – almost a 5% drop…

Such movement indicates weak fundamentals. Inventories are already overfilled and analysts expect last week’s report to show a 600,000 to 800,000-barrel build in crude stocks.

In addition, those same analysts project a rise of 1.8 million barrels in gasoline stocks, compared to last week’s four-week, petroleum average coming in at just 18.5 million barrels per day – the lowest level since July 10.

That means supply outweighs demand by about 18-fold at a time when crude oil is finally starting to move based on supply and demand. Hardly a bullish sign for the commodity.

The Dollar Weighs In

If it’s lucky, crude oil prices might see a little bump higher during the holiday season. But prices could fall below $70 shortly after the New Year, especially considering the U.S. dollar’s movement these days.

As worldwide investors continue to worry about credit in Greece and Dubai, equities have taken a hit and the U.S. dollar has advanced. In fact, the Dollar Index had its biggest gain in 11 months on December 4.

And when the Federal Reserve eventually raises interest rates, that would likely push the dollar higher and send oil lower, since they normally move in opposite directions.

With that ominous cloud hanging over the market, investors are trying to lock in profits by exiting their long oil positions before the end of 2009.

And with good reason: Without financial institutions propping up the market, expect oil prices to continue to decline.

Sheena Martin

View original at: Investment U

Oil Prices Retreat as Key Players Abandon the Market

Nonfarm Productivity for the 3rd quarter was revised to an 8.1% gain, lower than the preliminary estimates of a 9.5% gain. Nonfarm productivity increased by 6.9% in the 2nd quarter of 2009, after an increase of 0.3% in the 1st quarter this year, after it fell by 0.6%in the 4th quarter of 2008 and increased by 1.5% in the 3rd quarter of 2008. This was the largest gain in productivity since the third quarter of 2003, and reflects a 2.9 percent increase in output and a 4.8 percent decline in hours worked.  Unit Labor Costs were revised downward to a 2.5% decline in the 3rd quarter, revised downward from preliminary estimates of a 5.2% decrease and the expected 4.2% decline, following a 5.9% decrease in the figure from the 2nd quarter, revised downward from a 5.8% decline.

Upcoming Releases
Unemployment Rate (12/04 at 8:30 AM EST)
Non farm payrolls (12/04 at 8:30 AM EST)
Factory Orders (12/04 at 10:00 AM EST)
Average Hourly Earnings (12/04 at 8:30 AM EST)

Zacks Investment Research

Dec 3: Initial Claims Down – Economic Highlights

It’s no secret that the gold and oil markets have boomed this year.

However, while gold continues to climb, hitting a high of $1,218.40 per ounce this week, oil keeps hitting a brick wall. Over the past month, crude has traded in a range between $75 and $82 per barrel and currently sits at $77.50.

What gives?

Put simply, oil and gold prices don’t necessarily move in harmony.

The key difference is that while oil is a fuel that is used for many different products, gold is a proxy for currency. But there are two other big ones…

• Investors are looking to distance themselves from an increasingly limp dollar – and gold serves that function much better than oil.
• Oil prices are much more sensitive to the effects of supply and demand than gold.

And that explains why the yellow metal is outpacing oil by 90% over the past three months.

To a fundamental trader, oil is merely a feedstock for refineries. It churns out heating oil, jet fuel, diesel and gasoline. And right now, traders know that supply and demand don’t support $80 per barrel oil.

On Wednesday morning, for example, the U.S. Department of Energy announced that crude inventories jumped by 1.4 million barrels last week. Plus, storage is filled to the max. And despite the winter heating season, it hasn’t dented inventories yet.

On the flip side, fundamentals don’t bog down gold prices as much. The fact that gold is used as a hedge against a weak dollar (and other unfavorable geopolitical events) makes supply/demand dynamics less significant.

Plus, whenever news like Dubai’s recent debt default hits, people get anxious. And when that happens, they flock to gold, not oil.

So given the current catalysts within each market, don’t be surprised if gold continues to outshine oil. But take notice… the pendulum will always swing back.

Sheena Martin

View original at: Investment U

Breaking Down the Disparity Between Oil and Gold Prices

Other economic highlights today include: Pending Home Sales grew by 3.7% in October; Construction Spending decreased 0.4% in October.

Upcoming Releases
Fed’s Beige Book (12/02 at 2:00 PM EST)
Crude Inventories (12/02 at 10:30 AM EST)
Initial Claims (12/03 at 8:30 AM EST)
ISM Services Index (12/03 at 10:00 AM EST)

Zacks Investment Research

Dec 1: ISM Manufacturing Down – Economic Highlights

So is your portfolio built to profit in this new landscape? Or are you still mostly in cash? Or worse yet, are you still holding on to the same stocks that collapsed during the bear market, hoping they will eventually get back to breakeven?

If you’re feeling a little uncertain about your current investment strategy, you’re not alone. Many investors have watched the market rebound without a meaningful rebound in their financial well being. But, that’s not an excuse to leave it that way.

Now is the Time to Act

There is no better time than now to re-build your portfolio to profit in the days ahead. If you have a stock selection process that has helped you outpace the market in years past…then feel free to stop reading this article because you are all set.

For the rest of you, might I suggest a process we use here at Zacks Investment Research that looks at 6 different factors. Each one individually will help you pick better stocks. However, when you combine them together it creates a huge advantage for the investor.

This process lies at the heart of our Zacks Elite service, which has consistently outpaced the market since inception in 1996. This stock selection process is called the Zacks Method for Investing.

The 6 Criteria for Picking Great Stocks (aka The Zacks Method for Investing)

1. Valuation – Study after study proves that stocks with low valuations will outperform the market over the long haul. Therefore, we prefer companies that are trading with P/Es and Price to Book (P/B) multiples below their peers.
2. Management Effectiveness – We evaluate the fiscal health of the company, with a particular emphasis on how effectively it is managed. Our research shows that Return On Equity (ROE) is the best measure of this. So we seek out companies generating an ROE that is superior to their industry peers.
3. Recent Analyst Upgrades – Our research clearly shows that stocks that have recently received a recommendation upgrade from brokerage analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher.
4. Best Industries – Even the best-looking stock will underperform the market if it’s in an out-of-favor industry. That is why we overweight stocks from the best industries, and sectors. And there is no better guide to choosing the right groups than the Zacks Industry Rank, which focuses on the earnings estimate revisions for all the stocks in the industry.
5. Attractive for the Long Term – We look for stocks with a Zacks Recommendation of “Outperform”. This is a very effective long-term indicator that suggests a stock is likely to beat the market over the next 6 months. The main ingredient behind the Zacks Recommendation is positive changes in a company’s earnings estimates.
6. Timeliness – There is no better timeliness indicator than the Zacks Rank. We look for Zacks #1 Rank (“strong buy”) and Zacks #2 Rank (“buy”) stocks. These signals tell us that now is a good time to get into the stock. Just like the Zacks Recommendation it focuses on stocks with the best earnings estimates.

(You probably noticed that items 4, 5 and 6 all concentrated on earnings estimate revisions. Why? Because our founder Len Zacks proved many years ago that this is the most powerful force impacting stock prices. So we have found a number of ways to harness that information to pick better stocks no matter what direction the market is headed.)

Where to Find This Information?….Where to Find the Stocks Too!!!

The first 3 of these criteria are free and widely available from Zacks.com and other investment websites. If you just concentrated on these elements you would be much better off than you are now.

The last 3 criteria are proprietary to Zacks Investment Research and only available through our premium subscription services. Adding these 3 elements to the free ones above will put an almost unfair advantage in your hands.

The best way to tap into all 6 elements is through our Zacks Elite service. Our Focus List portfolio is currently filled with 43 stocks that have the right stuff for the long haul. Plus we have a Timely Buys portfolio that currently has 11 stocks set to outperform over the next one-to-three months. I invite you to see all of these stocks through a free trial to Zacks Elite. Just click the link below.

Zacks Elite Free Trial

Best, Regards,

Steve
Stephen Reitmeister
Executive VP, Zacks Investment Research

Zacks Investment Research

6 Criteria for Picking Great Stocks

David Fessler has a sector that warrants your attention. But first, I want to officially raise a red flag in another market.

Something’s amiss in the municipal bond market. Year-to-date, “munies” have behaved more like momentum stocks than their intended purpose of providing a safe yield.

Consider this: A handful of closed-end muni funds have averaged a 46% return so far this year.

The rally, of course, was borne out of the financial crisis, when investors and institutions alike went furiously scrambling to safety.

The novice move was into cash. But the smart money flowed strategically into the bond market. And a lot of the action was in municipal bonds. (The junk bond market is similarly overheated.)

What’s noteworthy, however, is that when the market’s sanity returned in March, the muni rally chugged on. Counterintuitive, to say the least.

So what gives? The stimulus package.

Specifically, sales of “Build America Bonds,” created under President Obama’s economic stimulus package, rose 28% in the third quarter, as municipalities chased the bonds’ abilities to lower interest costs.

More than $51 billion of such bonds have been issued since their inception.

“The federal government pays sellers 35% of their interest cost. The subsidy is needed by states coping with an 8.2% annual decline in tax collections in the first half,” according to a Bloomberg report.

Clearly, the bonds are propping up the muni market. (The effect they’re having is quite intriguing. But beyond the scope of this article.)

For now, just take note that the federal Build America subsidy is only available for bonds issued by before midnight on December 31, 2010. Beyond that, all bets are off. (Can you say “thud?”)

Ahead of the tape,

Robert Williams

View original at: Investment U

406 Days Until This Market Crashes

With interest rates resting at historic lows, we can all agree they will eventually rise.

And when they do, you’ll want to make sure you own something called Senior Secured Floating Rate bonds.

I know… these under-the-radar bonds aren’t headline makers. But please don’t let their relative obscurity – they’ve only been around since the early 1980s – convince you to overlook them.

Senior Secured Floating Rate bonds (SSFR) are actually ideally suited for the current environment and deserve a place in every investor’s portfolio. Here’s why…

The Problem With Most Bonds & Interest Rates

When it comes to bonds, the equation is simple: As interest rates decline, the value of bonds goes up. Unfortunately, however, the inverse is also true – as interest rates rise, the value of bonds declines.

And don’t kid yourself, here. We’re not talking about a minor decline in value. Even a subtle increase in interest rates will wreak havoc on the value of bonds.

Take U.S. Treasuries, for example. A mere 1% rise in the Fed funds rate will lead to an 8.5% decline in the value of 10-year Treasuries. And a 2% rise would cause a 17% price drop, according to Barclays Capital.

If you invest in bonds, you don’t want any part of that rout. So what’s the solution? That’s where SSFR bonds come in…

Senior Secured Floating Rate Bonds – Breaking Down the “S,” “S” and “F”

Despite an intimidating and long-winded name, Senior Secured Floating Rate bonds are quite simple:

• “Senior”: This refers to bondholders’ position in the event of liquidation. They’re the first in line to collect.
• “Secured”: This means the bond is backed by specific collateral, such as a company’s cash, accounts receivables, inventory, buildings, equipment, trademarks, or patents. This characteristic results in much higher recovery rates in the event of a bankruptcy. According to Credit Suisse, recovery rates on senior loans since 1995 average 70 cents on the dollar, compared to 43 cents for typical junk bonds.
• “Floating”: This is the most important part. “Floating” refers to the interest rate on the bonds. They simply reset or “float” every 30 to 90 days by a pre-determined amount (the spread) to reflect changes in a base interest rate, like the U.S. Federal Funds Rate or the London Interbank Offered Rate (LIBOR).

For example, if the benchmark LIBOR is 3% and the bond promises to pay 2% more than LIBOR, the interest rate will initially be set at 5%. Ninety days later, if LIBOR increases to 3.5%, then the interest on the bond will reset to 5.5%, and so on.

Meanwhile, a fixed-interest rate bond, paying 4% at the outset, will never pay more than 4%, regardless of how high (or fast) interest rates climb.

This isn’t rocket science. But this simple adjustment means SSFRs aren’t subject to significant price erosion as interest rates rise. And that’s why they exhibit a rare negative correlation with most bonds.

In short, no other type of bonds can offer the same preservation of capital and higher income. However, as with all investments, you need to make sure you execute the right strategy…

How to Invest in Senior Secured Floating Rate Bonds the Right Way

Before you buy individual Senior Secured Floating Rate bonds, it would be remiss of me to not warn you about the risks. Namely, if the company that issues an SSFR goes belly up, so could your entire investment. Although recovery rates average 70 cents on the dollar, that’s not a guarantee.

That’s why I recommend you spread your risk and go with a well-diversified, closed-end fund that invests in hundreds of Senior Secured Floating Rate bonds at once. Such an approach ensures the impact of any bankruptcy is minimal. It also provides daily liquidity.

You can easily search for available funds at www.closed-endfunds.com. Simply click on the “Advisor Search” tab in the left-hand column. Then on the next page, in the “Classifications” drop-down box, select “Loan Participation Funds.”

In the end, even the village idiot knows interest rates are headed higher. Such inevitability makes now the perfect time to position your portfolio to profit from it.

Good investing,

Louis Basenese

View original at: Investment U

Senior Secured Floating Rate Bonds: The Best Investments to Own When Interest Rates Rise

When I saw the latest cover of BusinessWeek – “Why the Commercial Real Estate Crisis Looks So Scary” – I immediately fired off a text to my friend and Investment U colleague, David Fessler.

“We scooped ‘em by six whole months,” I texted.

Dave’s been tracking (and cautioning us about) the commercial real estate market for the better part of a year now. (You can read Dave’s June article on the commercial real estate fallout or his April article on the commercial real estate sector.)

“Last year, commercial real estate sales fell off a cliff, plunging 73%… But it’s going to get worse… much, much worse,” asserted Dave, months ago.

He nailed it. The market is indeed cracking.

BusinessWeek reported that $6.4 billion worth of commercial real estate investments didn’t qualify for refinancing during the first 10 months of this year. And 30 U.S. cities now have over $1 billion in troubled commercial loans versus only eight in such cities a year ago.

The percentage of delinquent commercial mortgage securities sits near 4%. (It was less than 2% when Dave penned his first article.)

What’s particularly ominous, however, is that collectively, banks are holding roughly $1.7 trillion in commercial loans on their books.

Worse still, roughly $1.4 trillion in derivatives – you know, the financial weapons of mass destruction that crashed the residential market – underlie the loans, too. Ugh. Should the market for these securities go bust, we could all be on the breadline within a month.

But don’t move all your assets offshore yet. With little fanfare, the Fed just intervened.

We’ll give a full report as the situation warrants. For now, just make sure you don’t own one of the overvalued stocks discussed in Marc Lichtenfeld’s article.

Ahead of the tape,

Robert Williams

View original at: Investment U

Where’s That Cracking Sound Coming From?

Everyone likes to talk about stock market winners. No one likes to talk about losers. Perhaps especially those of us who pick stocks for a living. But buy enough stocks and you’re bound to have some losers. And that’s okay.

Intelligent investing is about managing risk, not running from it. Avoid volatility altogether with money markets and T-bills and you risk not meeting your investment goals. Turn a blind eye to volatility, on the other hand, and your portfolio will give you a kick in the pants.

The solution is two-fold:

1. Understand that taking risks inevitably means some investments won’t pan out. Recognize this and you’re far less likely to run to cash, or throw in the towel on a practical, long-term strategy.
2. Cut your losses and let your profits run.

You do this by running a trailing-stop behind each individual stock position, let me explain…

Where to Place Your Trailing Stops

How far behind should you place the trailing stop?

• For longer-term investors, 25% is about right.
• For short-term traders, 15% is closer to ideal.

Why the difference? Running trailing stops is an art, not a science. Your goal is to run the trailing stop as close as you can without getting knocked out by a stock’s day-to-day, or week-to-week volatility.

Short-term traders are looking to nip a lot of smaller gains. Longer-term investors – partly to avoid short-term capital gains taxes – prefer to place a trailing stop where they’re likely to hold their stocks longer and perhaps score even bigger gains down the road.

The system is straightforward…

Trailing-Stops Made Simple

Let’s say you get filled at $20 a share. If you’re using a 25% trailing-stop, place a sell-stop at $15. If the stock moves up to $30, your sell-stop should be moved to $22.50. And so on. This protects your profits.

And please don’t tell me you don’t have time to adjust your stops. If you can’t watch your portfolio, you really shouldn’t be trading individual stocks.

If you’re busy, however, one solution is Tradestops.com. The service sends you a text message – to your cell phone or e-mail account – alerting you any time one of your stocks closes below your selected stop. (Visit www.Tradestops.com for details.)

But trailing stops don’t just protect your profits. They also protect your principal. This is equally important.

Protect Your Principal With A Trailing Stop Discipline

You never want to let a small loss turn into an acceptable loss.

For example, if you take a 20% loss on a stock, you only need a 25% gain to be made whole again. However, if you let a stock drop 50% before selling it, you need to earn a 100% gain to restore your capital.

And if you’re even less disciplined in cutting your losses and you let a stock fall 75% before selling it, you need a 300% return on the proceeds to get back to your starting point. That’s not easy.

In short, don’t fall in love with your stocks. They won’t love you back. Our motto is this: Marry your sweetheart, not your stocks.

Using a trailing stop provides a discipline. It may sound cliché when I tell you that you need to cut your losses and let your profits run. But there’s a reason for it.

It’s true.

Good investing,

Alexander Green

View original at: Investment U

Trailing Stops Made Simple

America’s refining companies are under severe financial pressure.

As the recession has blanketed the markets, demand for petroleum products has collapsed, causing refiners to scale back production.

And a bill currently working its way through Congress could also have an adverse effect. Democrats support less reliance on foreign crude, but the hotly debated Climate Change bill would do just the opposite. The burden of carbon cap-and-trade provisions for refiners makes it reasonable for U.S. companies to consider moving production overseas.

Why? Because foreign refiners will enjoy a significant cost advantage. Assuming even a modest carbon allowance of $26 per ton, the American refining industry will be spending an additional $58 billion annually.

And recent studies put this closer to $100 billion per year for U.S. refiners by 2015 for 2,000 million credits.

Some may suggest that Europe’s refining industry is already capped by the European Union, yet the industry still thrives. So why are carbon restrictions in the United States so much more onerous?

A Tighter Grip on Restrictions of Domestic Refiners

The House and Senate climate bills put a tighter grip on restrictions of domestic refiners compared to Europe.

The primary complaint is that U.S. refiners are responsible for purchasing emission credits for “stationary” emissions. This means emissions from the refinery itself, plus those from the fuel combustion that occurs later.

For instance, if Shell’s refinery produces gasoline, Shell must buy credits for emissions from the refinery during production of the gasoline and for emissions released from the gasoline when I go to a Shell gas station to fill my tank.

As you can see, this isn’t a bill that really protects America’s energy security, or bodes well for America’s refining companies.

Sheena Martin

View original at: Investment U

American Refiners Have a Problem – And the Government is Making it Worse

Total revenues tumbled 4.1% year on year to $7,199 million due to fall in Television (down 7.7%), Direct Broadcast Satellite Television (down 4.3%), Newspapers and Information Services (down 17.7%), Book Publishing (down 1.6%) and Other (down 44.4%) segments, offset by rise in Filmed Entertainment (up 20.8%), Cable Network Programming (up 10.5%) and Integrated Marketing Services (up 3.1%) segments.

However, significant cost-cutting initiatives taken by management and robust performance at Filmed Entertainment and Cable Network Programming segments have boosted the operating income by 9.3% to $1,042 million. Management expects fiscal 2010 operating income to increase within a high-single digit to low double-digit percentage range.

Filmed Entertainment posted a record first quarter operating income of $391 million, up 55.8% led by the box-office receipts of more than $880 million till date, due to the worldwide theatrical success of Ice Age: Dawn of the Dinosaurs.

Operating income at Cable Network Programming jumped 41.4% to $495 million due to rise in contributions from FOX News Channel, the Fox International channels, STAR, the Regional Sports networks and Big Ten Network.

News Corporation, which owns The Wall Street Journal, New York Post, Times of London, Sydney Daily Telegraph, and The Australian posted a decline of 81.3% to $25 million in operating income at its Newspapers and Information Services segment due to fall in advertising revenue.

Television segment operating income fell 54.2% to $38 million due to a fall in contributions from the Fox Television Stations and FOX Broadcasting Company on account of the slump in the advertising demand, mainly in the automotive and movie segments.

Direct Broadcast Satellite Television segment operating income tumbled 22.4% to $128 million due to increased programming costs. Operating income at the Integrated Marketing Services segment climbed 7.4% to $73 million.

The Book Publishing segment posted operating income of $20 million, compared to an operating income of $3 million delivered in the prior-year quarter.

News Corp. is a diversified media company with operations carried in the United States, the United Kingdom, Continental Europe, Australia, Asia and Latin America.

Zacks Investment Research
View original at: Zacks.com News Feed

News Corporation Tops Consensus Estimates

Jeremy Grantham, president of investment management firm GMO LLC, has been getting a lot of press lately.

At the market’s top, he warned of an impending bear market. At the bottom in March, he forecast a historic rally. Today, he says the market is 25% overvalued.

Should you be worried? Perhaps not.

Let’s start with Grantham’s track record. He’s made a couple of good calls lately. But does he get it right all the time? Of course not. No one does.

But even if he’s right, it wouldn’t necessarily be negative. It all depends on your time horizon. Here’s why…

How Long-Term Investors Can Benefit From A Bear Market

If you own stocks on margin, call options, or LEAP options, a market downturn could be devastating. A 50% decline in the value of a fully margined account would erase your equity. Your options could expire worthless.

Who benefits from a bear market? The obvious answer is short sellers and put option buyers.

But others benefit, too. Primarily long-term investors.

A new study by T. Rowe Price shows that those who began systematically investing in equities in severe bear markets made out “significantly better” than investors who began in bull markets.

Take 1929, for example, the year that kicked off the Great Depression…

• From 1929 to 1938 – one of the worst 10-year periods in history – the S&P 500 returned minus 0.9% annually.
• Yet if you began investing $500 a month in 1929 and kept it up for 30 years, your total return was 960%.
• If you did the same thing starting in 1970 – the start of one of the other worst decades in market history – you’d have fared even better: up 1,753%.

These investors did more than twice as well as those who invested the same way at the beginning of the go-go 1980s and 1990s.

What can we take from this?

The Buffett Approach

Bear markets are no friend of short-term traders with an optimistic bent. But they’re the great ally of long-term investors.

Warren Buffett put it this way in one of Berkshire Hathaway’s annual reports:

“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you’re going to buy a car from time to time, but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the hamburgers they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

This makes perfect sense for young investors, but how about those approaching retirement?

What to Do If You’re An Older Investor

They might welcome this development, too. A man or woman in good health retiring at 65 today faces the very real prospect of spending nearly three decades in retirement. In short, you need growth as well as income.

And retirees?

For them, it’s a different story.

Retirees stand to lose the most. The closer you are to cheating the actuarial table, the less your portfolio should be invested in stocks.

But for everyone else, Jeremy Grantham’s prediction – if true – could well be a blessing in disguise. Even if it almost never feels like it.

Good investing,

Alexander Green

View original at: Investment U

What If Jeremy Grantham is Right?

Company Description

Bio-Rad Laboratories, Inc., together with its subsidiaries, engages in the manufacture and supply of products and systems for the healthcare industry worldwide. The company was founded in 1952 and has a market cap of $2.54 billion.

Shares of BIO have almost doubled in the last 6 months, helped by a rebound in the global economy and better than expected 2nd-quarter results, reported on August 4.

Second-Quarter Results

Sales were down 5.6% from last year to $427.2 million, but earnings came in strong at $1.37 per share, 34 cents ahead of the Zacks Consensus Estimate. The company has beat in each of the last 3 quarters by an average of 25%.

Bio Rad added that it had a strong cash and cash equiviliants position of $533.5 million at the end of the quarter.

Estimates Advance

After word of the good quarter hit the Street, estimates ticked higher, with the current year adding 15 cents and advancing to $4.58 per share. The next-year estimate is pegged at $4.86, a respectable 6% growth projection.

Valuation

Based on the current-year estimate, this stock trades with a P/E mutliple of 20X, a slight premium to the overall market.

The Chart

Shares of BIO have almost doubled in the last 6 months after bottoming out with the market in early March. Take a look below.

Zacks Investment Research
View original at: Zacks.com News Feed

Bio-Rad Laboratories – Beat in Each of the Last 3 Quarters by an Average of 25%

The first public retirement pension scheme was created by Otto von Bismarck in Germany back in 1880.

Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States.

Back then, the number of retired people wasn’t considered a threat to future funding. For example, the life expectancy of American men in 1935 was 76.9. So workers relying on the plan for retirement wouldn’t receive much each month and weren’t expected to live long enough to drain the system.

And when the Social Security system was founded, the typical U.S. retiree at age 65 could expect to live another 11.9 years. But times have changed and we’re facing a crisis…

A Demographics-Induced Debt Crisis

If today’s official projections are right, by 2040, the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full Social Security benefits. And tomorrow’s workers would wait even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics…

“When an entire society ages,” suggest Arnott and Casscells, “… the thing that matters most is the ratio between workers to retirees. Unfortunately, the aging of the Baby Boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees – one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100% to 250% of GDP. It’s essentially a “hidden debt” far greater than official public debt.

And unlike in the private sector, these debts aren’t amortized as expenses over 30 to 40 years. Under normal conditions, economies don’t run such crushing deficits. They only do so in crisis mode.

In 2008, the annual cost of Social Security benefits represented 4.4% of GDP. But by 2034, that number is projected to increase to 6.2% of GDP. We won’t see a decline until 2050 when the figure is forecast to drop to about 5.8% of GDP, where it will remain at that level.

But debt isn’t the only problem…

Healthcare: The 800-Pound Gorilla

In addition to retiring Baby Boomers’ existing doubts and insecurities, U.S. healthcare costs are expected to rise by 7% of GDP over the next 40 years – more than twice as fast as other developing nations.

That’s exacerbated when you consider that the “old old” – those aged 80 and over – are predicted to rise sharply through 2050. This will dramatically increase long-term care costs, as well as disability, dependence and healthcare expenses.

In fact, official projections say that by 2030, the U.S. government will be spending more on nursing homes than it spends on Social Security today.

As Victor Fuchs, an economist who studies the healthcare industry, says: “Although people justifiably worry about Social Security, paying for old folks’ healthcare is the real 800-pound gorilla facing the U.S. economy.”

When you add in projections for Medicare and Medicaid expenditures to Social Security, it could raise the total cost to more than 50% of payroll taxes.

Shoring Up Social Security & Reigning In Reform

Between 2005 and the fall of 2008, we chronicled the efforts of David Walker, the former Comptroller-General of the United States, and Bob Bixby, Executive Director of the Concord Coalition, to shore up the Social Security and Medicare systems and reign in reform.

The project yielded a feature length documentary film – I.O.U.S.A. – which earned us a trip to the Sundance Film Festival in January 2008 and another to the Critic’s Choice Awards in Los Angeles a year later.

We published a best-selling companion book of the same title in late 2008. The numbers we presented in both are truly mind-boggling. But in many ways, the project was dated the moment we released it to the public.

• Medicare: The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of Medicare and Medicaid ever closer.

On May 13, 2009, for example, Medicare Trustees report warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than they predicted in 2008.

The problem is that since last year, the program has paid out more than it collects in taxes, due in part to a deep-rooted recession. In fact, in order for the hospital fund to pay its scheduled benefits over the next 75 years, Medicare would have to deposit $13.4 trillion into an interest-earning account today. That’s $1 trillion higher than last year’s estimate.

As it stands, the program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimate that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

• Social Security: For Social Security, the reform options are relatively well understood but the choices are difficult. However, the trustees say that while Social Security’s financial standing decreased more sharply than Medicare in 2008, Medicare remains at greater risk of insolvency and a much bigger challenge.

Its cost growth can be contained without sacrificing quality of care… but only if growth in general healthcare costs are more contained. But either way, it’s essential that action is taken soon, particularly to control healthcare costs.

In short, the report concluded that the financial difficulties facing Social Security and Medicare pose serious challenges.

So can the United States hold onto its AAA credit rating?

Uncle Sam’s Grades Are Dropping

“The U.S. government has had a “AAA” credit rating since 1917,” says David Walker, now president and CEO of the Peterson G. Peterson Foundation and quoted in the Financial Times.

But following the release of the trustees report, he continues, “… it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating…

• While comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
• Failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating business is… well… corrupt. The agencies responsible for dishing out these sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that hung us all out to dry in 2007.

But of course, mortgage-backed securities get an “AAA,” so rest assured… if Wall Street can buy an “AAA” rating, Uncle Sam surely can, too.

But even Moody’s is starting to hedge its bets. It’s since created three subdivisions within its “AAA” rating: resistant, resilient and vulnerable. Look at it as a corporate way of saying, “the good, the bad, and the ugly.” And while the United States isn’t among the worst of the bunch, it’s certainly not the best.

Good investing,

Bill Bonner and Addison Wiggin

View original at: Investment U

The Problem With Social Security: An Ever Expanding & Crippling Debt Bubble Facing America

If you walked into a department store and saw a fabulous cashmere sweater marked down from $375 to $199, you might be tempted to buy it.

And if you saw it priced at $99, you might feel you were getting an irresistible bargain. Perhaps you are.

But stocks are not sweaters.

A good trader doesn’t average down – that is, buy more – as a stock plummets in price (although there is one exception to this rule, as I’ll explain in a moment).

Whenever you see a stock that is plunging in a flat or rising market, it’s a warning sign that something is wrong.

Why You Shouldn’t Try to Catch a Falling Knife

You may not know what the problem is that is causing the stock to fall.

• It could be that sales are down.
• Perhaps the company has lost a major customer.
• Expenses could be rising unexpectedly.
• A new competitor has emerged and is taking market share, or driving down profit margins.

You may not know the reason for sure until the company makes some kind of public announcement. But by then, the stock could be substantially lower. Why do shares decline before any corporate announcement? Because bad news often filters into the market through customers, suppliers, employees, competitors, or analysts.

As a rule, a stock taking a swan-dive in a rising market is no blue light special. Averaging down on a losing position has the potential to leave a short-term trader throwing good money after bad. Ask any shareholder of Lehman Brothers, Bear Stearns, or AIG.

However, there’s an exception to this rule…

The One Time When You Should “Average Up”

The exception is when a company reports superb results – outstanding growth in both sales and earnings – but the broader market is declining.

When investors get scared or nervous and the market averages plunge – taking shares of healthy, growing companies down, too – that’s the time to buy these companies on price weakness.

For example, dozens of stocks in our Oxford Club and VIP trading service portfolios have scored big double- and triple-digit gains since we bought them during the market meltdown in the fourth quarter of 2008 and the first quarter of this year.

And since this rally has been relatively smooth, as well as historic, we haven’t stopped out of many positions. Most of our shares are still rising.

However, good traders don’t just let their winning positions run. They also add to them, a technique called “averaging up.”

The Best Way to “Average Up”

This may go against every frugal bone in your body. After all, averaging up means increasing your average cost per share.

But it may also mean that you have a greater amount of money invested – and your final profits should be larger.

On your initial purchase, a good rule of thumb is to put in half the amount of money you intend to invest. After the stock rises 5%, put in another 25%. Assuming it rises another 5% – or approximately 10% from your initial entry point – invest the final 25%. Then run your trailing stop based on your average purchase price.

The advantage of this system is that you have less money invested in stocks that don’t pan out. And more money invested in those that do.

Over time, this will be a big factor in determining your success as a trader.

Good investing,

Alexander Green

View original at: Investment U

Why Great Traders Average Up, Not Down

Anemic. Stagnant. Plodding.

Pick your favorite… it doesn’t matter. They all describe the state of the British and Eurozone economies.

Two weeks before the official third quarter U.K. GDP figure is released, the National Institute of Economic and Social Research (NIESR) delivered a somber verdict. The group says it actually didn’t grow at all, confounding those who said the economy started growing again.

Cue a fresh round of some good, old-fashioned British grumbling.

The culprit: a 2.5% fall in industrial production in August, as oil demand dropped. Still, neutral is better than reverse – a gear that Britain had driven in for 2009 up to that point, posting a 2.4% first-quarter slump and 0.6% second-quarter decline.

It’s not alone either. Its European neighbors are also backpedaling. The latest quarterly figure from Eurostat shows that the 16-nation region posted a 0.2% contraction – its fifth straight quarterly decline.

On the bright side, however, that second quarter performance was a vast improvement on the 2.5% slump during the first three months of 2009, as the figures showed power hitters, Germany and France, returning to positive growth, while Portugal, Greece, the Czech Republic, and Poland have also come out of recession.

The European Central Bank’s (ECB) response?

Notoriously inflation-conscious members of the ECB certainly aren’t about to rock the boat by touching interest rates anytime soon.

The bankers left the base rate at 1% (the lowest in its 10-year history), with President Jean-Claude Trichet arguing that although the region appears to be “stabilizing… uncertainty remains high.”

Hopelessly Out of Touch

In response to the NIESR figures in Britain, Liam Byrne, Chief Secretary to the Treasury, demonstrated exactly why many people across the world love to ridicule their elected officials, with the nonsensical belief that the biggest risk to an economic recovery was complacency.

Really? How about despondency instead? When you’ve got an economy on its knees and people losing their jobs, I hardly think that’s grounds for complacency.

The Bank of England (BoE) certainly isn’t complacent. At its latest monetary policy meeting, the nine-member panel not only kept interest rates at 0.5% for the seventh straight month, it also said it will complete its unprecedented £175 billion ($278.3 billion) cash injection into the economy (by buying commercial paper) in November.

The question now is what the BoE will do when this happens. Analysts are looking for the bank to issue some guidelines about how it plans to scale back this “quantitative easing,” given that if it wants to increase the £175 billion limit, the Treasury will have to authorize it first.

This comes amid fears that show the program hasn’t had the desired effect in spreading much additional stimulus into the economy, but rather that banks and other financial institutions are simply stashing the money away.

Reminds me of a certain famous line from Gordon Gekko in the movie, “Wall Street”: Greed is good.

Best regards,

Martin Denholm

View original at: Investment U

Two Sagging Economies – Two Laid-Back Banks

Dow components Bank of America (BAC), General Electric (GE), IBM (IBM), Intel (INTC) and Johnson & Johnson (JNJ) are scheduled to release third-quarter results. Joining them will be Goldman Sachs (GS) and Google (GOOG). In total, we have confirmed reports from 72 companies, 29 of which are in the S&P 500.

There will be quite a bit of economic data published, including CPI and industrial production and capacity utilization. We will also get the minutes from the September Fed meeting, which will be scrutinized for any talking points about the pace of the recovery.

• Wednesday: September retail sales, Fed minutes, August business inventories, weekly crude inventories, weekly mortgage applications
• Thursday: September Consumer Price Index (CPI), October Philadelphia Fed survey, weekly initial jobless claims, weekly natural gas inventories
• Friday: September industrial production and capacity utilization, preliminary October University of Michigan sentiment

Both Council of Economic Advisers Chair Christina Romer and Federal Reserve Vice Chairman Donald Kohn will speak at the National Association for Business Economics’ Annual Meeting in St. Louis on Tuesday. Romer has a morning presentation and Kohn will speak in the afternoon. Also on Tuesday, New York Federal Reserve Bank President William Dudley will talk to the Institute of International Bankers.

Fed Governor Daniel Tarullo will testify before a House subcommittee on Wednesday afternoon. His testimony will focus on the state of the banking industry. Dallas Federal Reserve Bank President Richard Fisher will appear at a conference in Dallas on Friday. The conference is co-sponsored by SMU’s business school.

Though Monday is Columbus Day, both the stock and futures markets will operate on normal hours.

Though stocks are poised to continue the rally, a good reaction to the third-quarter results will be required to get the Dow firmly above 10,000. The key will be whether business conditions improved enough to enable companies to surpass both revenue and earnings forecasts.

Keep in mind the number of reports will jump substantially next week.

Companies That Could Issue Positive Earnings Surprises

Fairchild Semiconductor International (FCS) has topped expectations for 4 consecutive quarters. Another positive surprise could be in works as 4 analysts recently raised their third-quarter profit projections. These revisions have pushed the Zacks Consensus Estimate a penny higher to 7 cents per share. The most accurate estimate is even more bullish at 9 cents per share. FCS is scheduled to report on Thursday, Oct 15, before the start of trading.

More than half of the covering analysts raised their third-quarter profit forecasts on Goldman Sachs (GS) over the past 30 days. These revisions resulted in a 63-cent upward revision in the Zacks Consensus Estimate, to $4.07 per share. The most accurate estimate is even more bullish at $4.16 per share. Last quarter, GS beat expectations by $1.41 per share. Goldman Sachs is scheduled to report on Thursday, Oct 15, after the close of trading.

The third-quarter Zacks Consensus Estimate for Google (GOOG) has risen 2 cents over the past 30 days to $4.66 per share. Positive revisions by about a quarter of the covering analysts are behind the optimism. The most accurate estimate is even more bullish at $4.72 per share. Google has topped expectations for 4 consecutive quarters. Google is scheduled to report on Thursday, Oct 15, after the close of trading.

Five analysts have raised their third-quarter profit forecasts on Intel (INTC) during the past 4 weeks. Due to the fact that more than 30 analysts cover INTC, the changes did not move the Zacks Consensus Estimate from its current level of 27 cents per share. They did, however, result in a slightly more bullish most accurate estimate of 28 cents per share. The semiconductor company has topped expectations during 3 out of the last 4 quarters. Intel is scheduled to report on Tuesday, Oct 13, after the close of trading.

Companies That Could Issue Negative Earnings Surprises

Safeway (SWY) has missed expectations for 4 consecutive quarters. Recent earnings estimate cuts by 2 analysts suggest another disappointment could be forthcoming. The revisions pushed the Zacks Consensus Estimate down a penny to 31 cents per share. The most accurate estimate is more bearish at 28 cents per share. Safeway is scheduled to report on Thursday, Oct 15, before the start of trading.

Charles Rotblut, CFA is the senior market analyst for Zacks.com.

Earnings Calendar

Here is a list of companies that we have confirmed will report during the week of Oct 12 – 16. Prices are as of Thursday’s, Oct 8, market close.

BTO = Before The Market Open, AMC = After The Market Close

Zacks Investment Research
View original at: Zacks.com News Feed

(BAC) Earnings Preview for Oct 12-16 – Large-cap Companies Will Dominate the Earnings Headlines This Week

We believe that IBM’s long-term revenue growth potential is limited and remain cautious on currency fluctuation, which is taking a toll on sales and may be critical to earnings expansion over the next two years. While we do believe that cost-cutting initiatives and share repurchases will substantially increase earnings, we do not see the company catching up on its top-line growth.

We expect revenue to decline by 7.8% in the current year, primarily due to low growth in some segments, continued decline in hardware and rising pressures on the services business.

In the most recent quarter, IBM’s sales were down across the board and total revenue declined 13.3% (down 7% when adjusted for currency) year over year, impacted by a strong US dollar as well as the global recession.

While we are impressed by the company’s strong liquidity position, operational efficiency and improving profitability (IBM raised its 2009 EPS outlook from $9.20 to $9.70), near-term visibility remains low given the lack of long-term customer signing growth.

Moreover, pricing pressure from rivals like Hewlett-Packard (HPQ), Dell Inc. (DELL), Microsoft (MSFT), Cisco (CSCO) and Oracle (ORCL) have hurt IBM’s business. Higher profit on lower revenue indicates that the quality of IBM’s products may deteriorate and damage its brand in the long term.

Currently, IBM trades at 12.4X its 2009 earnings, a discount to the peer group average. The company’s PEG ratio of 1.34 indicates slow growth. Over the last five years, IBM shares have traded in a range of 9.4X to 19.6X the trailing 12-month earnings. Thus, it is trading at the low-end of the range at present.

We do believe that IBM is fundamentally a sound company and has a strong market position but are wary of near-term bumps. We anticipate that the overall demand environment would limit the stock’s relative appreciation in the future.

Zacks Investment Research
View original at: Zacks.com News Feed

(IBM) IBM Cut to Neutral from Outperform

“Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

“Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.”

“Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

The key difference is that the Fed sees the economy picking up rather than merely leveling out. They note the continued improvement in the financial markets. This is true not only for the stock market, which is up almost 7% since the last meeting, but also in things like credit spreads.

They note the upturn in the housing market, which they did not do last time around. They note that fixed investment is going down, but at a much slower rate, which is the first step towards a turnaround. Most of the rest of the first paragraph is the same.  This is the most upbeat Fed statement in a long time.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”

The Fed seems ever less worried about near-term inflation than last time around. While I think that we will still see upward movement of commodity and energy prices (well obviously not today, with oil down hard following higher-than-expected inventory levels). This could lead to higher headline inflation, but low core inflation.

There is simply too much slack in the economy to see inflation rocket higher. There is no way for the wage side of a wage price spiral to take hold. Also keep in mind that rent and owners equivalent rent make up almost 40% of core CPI, and it seems more likely that rents will fall than rise over the next year or so.

“In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

“To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

“As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

“As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities.

“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions, and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

Fed Funds are not going up — not now, not next meeting, or the meeting after that. I would be greatly surprised if they were to raise them at any time before the fourth quarter of 2010, and then only gradually and cautiously.

Historically, the Fed does not raise rates until well after the unemployment rate has peaked, even in a shallow recession. This one has been anything but shallow. It is likely that the unemployment rate will not peak until well into next year and will be well over 10% when it does. It would be very irresponsible for the Fed to strangle the recovery by moving too soon.

The size of the asset buying programs was maintained, but they decided to stretch out the mortgage-backed and agency paper buy until the end of the first quarter, rather than by the end of the year. This would prevent a disruption in the market from the Fed no longer being in the market.

The slowdown is a bit of a concession to those who think that the Fed has been going overboard on its easy money policy, but not much of one.  By the end of the program, the Fed will own almost 25% of all the Fannie (FNM) and Freddie (FRE)-backed paper outstanding.

The big question for next year is: what are they going to do with all that paper. At what point do they start feeding it back out into the market, or do they just plan to sit on it forever? Stretching out the program will also help the housing market so that the end of the artificial price support for mortgage backed paper, and thus artificially low mortgage rates, does not come right at the same time as the end of the “first time” home buyer tax credit.

“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.”

“Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.”

Everyone agreed.

Overall this was a very upbeat Fed statement. Growth is coming back, no near-term threat of inflation and the financial markets are improving. Low interest rates for as far as the eye can see. I suspect that the market should like it.

The foreign exchange market might have been looking for some evidence that the Fed was going to reverse course and start to tighten up, but they didn’t get it. Pressure on the dollar is more likely to cause headline inflation to go up than core inflation to rise. I think the Fed is more concerned with core inflation.

Zacks Investment Research
View original at: Zacks.com News Feed

(FNM) Fed: Growth, No Near-Term Inflation

Management noted that the company continues to be challenged by weak economic conditions, the credit crisis in the financial markets and extremely low investment rates of return. On the positive side, Paychex said this was the first quarter in the last four sequential quarters that the company did not have a noticeable decline in checks per client.

President and Chief Executive Officer Jonathan J. Judge added, “We have remained steadfast in providing excellent customer service and investing in our business, while continuing to control expenses. Our financial position remains strong with significant cash and total corporate investments and no debt as of August 31, 2009.”

Zacks Investment Research
View original at: Zacks.com News Feed

(PAYX) Paychex Results Report In Line With Estimates

Ford Motor has announced the launch of production of its small car, Figo, in India in the first quarter of 2010. The decision was backed by a $500 million investment in the company’s existing Maraimalai Nagar, Chennai, plant for expansion. The company has committed to invest more than $950 million in total in the plant. The expansion will make India one of the company’s strategic production hubs, with output potential doubled to 200,000 vehicles annually.

The Chennai plant has already been producing Ford models — including the Ford Ikon, Ford Fiesta, Ford Fusion and Ford Endeavor — for the Indian market only. However, Figo — priced at $10,000 — will be produced for both Indian and international markets.

Ford has also revealed a plan to open its third assembly plant in China with its Chinese partner, Chongqing Changan Automobile. The company already manufactures the Focus, Fiesta and other sedan models in China in a tie-up with Chongqing Changan Automobile and Japan’s Mazda. Its current car manufacturing capacity in China is 447,000 units per year.

Ford will open the new plant based in the southwestern Chinese city of Chongqing. This will push up annual production capacity in the nation by at least 150,000 units.

We continue to recommend the shares of Ford as Neutral with a target price of $8.

Zacks Investment Research
View original at: Zacks.com News Feed

(F) Ford Expands Asian Operations