Chart o? the Day: Bond Fund Flows are Hilarious

This is BlackRock?s chart of the week, it shows you how fearful fund investors have become about the potential for rising rates ? they?re voting with their mutual fund inflows / outflows:

That?s quite a change of pace from this beauty of a contrary indicator, posted weeks before the bond market top in July of 2012 (flagged by Barry):

Even with the rapid rise in new and exciting technological devices, one thing's for sure: People love watching TV. It doesn't matter when or where -- or on what device.

The companies that provide the infrastructure for viewing content across a large and growing variety of devices are frequently overlooked. Harmonic (Nasdaq: HLIT), a market leader in video-on-demand services, is one such company.

Harmonic has many opportunities to expand its market share, especially with the proliferation of video on demand and high-definition TV. Yet the biggest opportunity for Harmonic is in the expansion of pay-TV services in international markets. The emergence of the global middle class is leading the demand for pay-TV services, which has compelled providers to expand their content offerings.



Harmonic sells high-performance video infrastructure products that enable content providers to efficiently create and deliver a full range of video services to consumer devices, including TVs, PCs, tablets and smartphones. Its revenues are generated from selling video processing solutions to various media companies and providers, including broadcasters (HBO, NBC, ESPN), satellite providers (Dish (Nasdaq: DISH), DirecTV (Nasdaq: DTV)), telcos (SingTel, Vodafone (Nasdaq: VOD)), cable providers (Charter (Nasdaq: CHTR), Cox, Comcast (Nasdaq: CMCSA)) and new media (Amazon.com (Nasdaq: AMZN)).

International satellite, cable and telco providers are increasing their capital spending to expand their video offerings. In the grand scheme of things, there are thousands of media and broadcast companies around the world, many outside the U.S. Most need to upgrade their infrastructure -- particularly to HD -- and that's where Harmonic comes into play.

Harmonic counts three of the top five broadcasters in the U.S. as customers. In terms of providers, Comcast, the largest cable company, already accounts for 16% of total revenue. Its competitors Time Warner Cable (NYSE: TWC), Cox, Cablevision (NYSE: CVC) and Charter are all Harmonic customers.

Harmonic is also tapping the $2 billion market of so-called converged cable access platforms, which seeks to put all services -- video, data and so on -- on the same IP platform. Harmonic's first product in the space, the NSG Pro, is nearly set for release, and the company already has its first multi-million-dollar order.

Harmonic has a pristine balance sheet, with $169 million in cash, or $1.68 a share, a

Merrill?s quant strategy group unveils their favorite ten stocks for 2014, one from each sector?

Our favorite stock ideas for 2014
We provide a list of 10 S&P 500 stocks for 2014 ? one from each of the 10 GICS
sectors. These stocks align with our themes for the year-ahead 2014 and our
quantitative work. This list is intended for the full year, meaning we do not provide
updates intra-year. To come up with our stock ideas, we used the following criteria:

1. S&P 500 stocks which are Buy-rated by BofAML fundamental analysts

2. Review of metrics for favorable valuation, quality, dividend growth or cash
deployment, foreign exposure, GDP sensitivity, fund ownership vs. S&P 500
weighting, BofAML vs. consensus EPS expectations, and/or qualifications
based on other themes in our Year Ahead outlook, such as the potential for
self-help via operational turnarounds, divestitures, etc.

3. After identifying the stocks consistent with the criteria above, we also considered
the views of our fundamental analysts in choosing the stocks for the list.
See the table below for details on our 10 stocks.

They say investing in the stock market is all about forward thinking. That's certainly the case with the biotech sector. A biotech's pipeline can mean the difference between boom and bust.

The Medicines Co. (Nasdaq: MDCO) is a global biotech company with seven drugs in the pipeline that could prove to be big hits in the acute and intensive care hospital product market. The company's key legacy product and top revenue generator, Angiomax, continues to bring in profits, and in addition to its robust in-house development pipeline, the company also recently teamed up with two major drug companies and made a key acquisition -- all of which should only further accelerate its growth.

The biggest factor keeping Medicines below what I consider its fair value is its ongoing lawsuit with Hospira (NYSE: HSP). In 2010, Hospira sued to market its generic version of Angiomax before Medicines' patents expire. A decision is expected next year, but regardless of the outcome, Medicines could lose its Angiomax exclusivity as soon as mid-2015.

What many investors are missing is that Medicines appears to have a bright future despite its legal fight over Angiomax, thanks to the clinical successes within its pipeline. When Angiomax does lose exclusivity, Medicines will already be a diversified biopharma company.

What's more, over 90% of Medicines' sales come from the U.S., so there is considerable opportunity for international expansion. Medicines is focusing its sales and marketing efforts to faster-growing markets overseas, establishing operations where it can commercialize its other legacy products as well as other products in development.

Its pipeline is where the company's greatest growth potential lies, and Medicines has a couple of promising candidates in clinical trials. The company plans to file for FDA approval for its oritavancin drug, designed to fight acute skin infections, in the current quarter and for European Medicines Agency approval next year. Medicines has already filed for FDA approval of its anti-platelet cangrelor drug -- which is expected to be one of the company's biggest sellers next year and in 2015 -- and is hoping for approval by mid-2014. The company will file for approval of Cangrelor in Europe this quarter, with approval also expected next year.

Beyond Medicines' in-house pipeline, the company also recently partnered with two major drugmakers. As part of its global collaboration agreement with AstraZeneca (NYSE: AZN), Medicines will co-promote the oral tablet anti-platelet medicine Brilinta in the U.S. Its other partnership is a collaboration with Alnylam Pharmaceuticals (Nasdaq: ALNY) to develop and make therapeutic products targeting the proprotein convertase subtilisin/kexin type 9 (PCSK9) gene, which plays a prominent role in the body's production of cholesterol.

On the acquisition front, Medicines completed its purchase of ProFibrix in August after reviewing the Phase III clinical trials of ProFibrix's lead product, Fibrocaps, This product, still being developed, is expected to help stop bleeding during surgery. Medicines paid $90 million in cash, with another $140 million contingent on hitting development milestones. Medicines estimates Fibrocaps could produce peak sales of $300 million; this figure could rise if Medicines receives approval of a spray device it's developing for delivering Fibrocaps.

So Medicines is making progress in diversifying revenues. The company projects its new products can deliver revenue growth of 20% through 2018. Its newly launched products currently account for less than 5% of revenues, but this number is expected to jump above 45% in just a couple of years.

Risks to Consider: Shares have rallied more than 70% in the past year on anticipation of these new drugs coming to market, so most of MDCO's potential gains may have already been realized. There's also Medicines' possible early loss of exclusivity on Angiomax, its biggest earner, to consider.

Action to Take --> Based on a 2016 sales estimate of roughly $1 billion, Medicines is trading at an enterprise value-to-sales ratio of 2, compared with the industry average of over 3. Given the company's robust pipeline, there's no reason to believe it won't be trading in line with the industry in a couple of years. Analysts expect Medicines' earnings per share to grow at a compound annual growth rate of 31.5% over the next five years, compared with an expected average CAGR of 20% for the industry. An EV/sales multiple of 3 on 2016 sales estimates puts the upside at $55 a share.

Stuff I?m Reading this Morning?

November Non-Farm Payrolls comes out this morning at 8:30 am. It will be the most important jobs report of all time, as usual. The only preview you need is here: (BusinessInsider)

Commodities suck, time to buy? (FT)

Everyone calls bullshit on Mulally not joining Microsoft. (Barrons)

Sheila Bair looks at the $4.1 trillion BlackRock and sees nothing but systemic risk. (Fortune)

Is the sleeping giant finally awakening? Some ETFs to play China with. (ETFTrends)

Stop giving yourself opportunities for failure. (AbnormalReturns)

Richard Bernstein?s latest: The biggest themes of 2014. (BusinessInsider)

On the insanely competitive guest-booking environment on financial TV (who the fck are these guests that are being fought over? I can?t even imagine.) (BusinessInsider)

Top Ten Highest Paid CEOs of 2013 (TIME)

For a trader, Jerry sure knows an awful lot about how the economy works. Great primer here: (ArmoTrader)

Meb Faber unpacks a well-known quantitative sector rotation model, is impressed with its simplicity. (MebFaber)

Jon Stewart vs Blackstone is kind of interesting? (Fortune)

Nelson Mandela Becomes First Politician To Be Missed (Onion)

My book, Backstage Wall Street, available at Amazon

When I was a little kid in the early 1950?s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died in the wool Republican, said the former president was a dictator and a traitor to his class, who trampled the constitution with complete disregard. Candidates Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that, not only would my life be ruined, so would my children?s lives. As a six year old, this disturbed me deeply, as it appeared that just out of diapers, my life was already pointless. Grandpa continued his ranting until a three pack a day Lucky Strike non-filter habit finally killed him in 1977. He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer.

What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world. So what ever happened to the despised, future ending Roosevelt debt?

In short, it went to money heaven. And here I like to use the old movie analogy. Remember, when someone walked into a diner in those old black and white flicks? Check out the prices on the menu on the wall. It says ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?

That is where the Roosevelt debt went. By the time the 20 and 30 year Treasury bonds issued in the 1930?s came due, WWII, Korea, and Vietnam happened, and the great inflation that followed. The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a cheap steak at Outback cost $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch? Bond owners, who received, minimal, and often negative real, inflation adjusted returns on fixed income investments for three decades. In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as ?certificates of confiscation? during the seventies.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued future currencies. This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds have had a terrible start, and things are about to get much worse.
The 30-year Treasury bond suffered horrific losses during the May rout, with yields rocketing from 2.5% to 4%. That means it has already lost its coupon for the year, and then some. Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.
The scary thing is that we could be only six months into a new 30-year bear market for bonds that lasts all the way until 2042. This is certainly what the demographics are saying, which predicts an inflationary blow off in decades to come that could take short term Treasury yields to a nosebleed 18% high. That scenario has the leveraged short Treasury bond ETF (TBT), which has just leapt from $58 to $79, soaring all the way to $200.
Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now headed substantially up. The old resistance level at 1.95% now becomes support. That targets a new range for bonds of 1.90%-2.90%, possibly for the rest of 2013.

There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates, and spending it all. In effect, it never has to pay it back, but enables us to reap immediate benefits.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:

$1 trillion ? new Interstate freeway system

$1 trillion ? additional infrastructure repairs and maintenance

$1 trillion ? conversion of our transportation system to natural gas

$1 trillion ? construction of a rural broadband network

$1 trillion ? investment in R&D for everything

The projects above would create 5 million new jobs quickly and end the present employment crisis. Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese.

How did my life turn out? Was it ruined, as my grandfather predicted? Actually, I did pretty well, as did the rest of my generation, the baby boomers. My kids did OK too. Grandpa was always a better historian than a forecaster. But did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows borrowing binges.

When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 36 years later, and the subcontinent is poised to overtake China?s white hot growth rate.

My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country?s total GDP is only a quarter of China?s $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.

Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.

India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.

But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it?s going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.

A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That?s why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.

India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China?s 30 year old ?one child? policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.

There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People?s Congress in 2013 could lead to posturing and political instability which the markets could find unsettling. India is the world?s largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.

I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).

December 6, 2013 ? Quote of the Day

?Money will always flow towards opportunity, and there is an abundance of that in America?.America?s best days lie ahead? said ?Oracle of Omaha?, Warren Buffet, CEO and the largest shareholder in Berkshire Hathaway.



go to the Mad Hedge Fund Trader's website

My top 6 watches for Friday. Trade with us free for 2 weeks. Start here.
GMO ? similar setup to watch like PEIX did recently coming off lows. Risk for me is if the higher low fails AND if you decide to give it space, Max pain is if November low fails.

There are some 75 million small and midsize businesses around the world. If they plan on competing in an increasingly connected world of mobile devices and e-commerce, they'll all need to have an online presence.

More than three-fourths of these 75 million SMBs don't have a basic website -- so this market is grossly underserved. Endurance International Group (Nasdaq: EIGI), which recently went public, is looking to change this.

Endurance is one of the U.S.'s top hosting companies, with a number of brands, including HostGator and Bluehost. Since its October IPO, EIGI is up 10%, and a number of positive aspects make the company a compelling growth investment.

Endurance estimates its share of the SMB website market at 5%, which means there's a lot of room for growth. But the company offers more than just website hosting. Endurance's variety of products and services -- including Web hosting, on-demand computing, security, marketing solutions and site analytics -- is relatively unrivaled in the space, allowing it to serve a broad array of companies.

In addition to the services listed above, Endurance also has its Mojo Marketplace product, which allows companies to develop software solutions and sell them to any number of Endurance's 3.4 million subscribers. Mojo Marketplace allows SMBs to buy the latest website templates, plug-ins, logos and scripts from some of the most popular open-source applications, like WordPress, Joomla, PrestaShop, Concrete5 and Drupal.

With companies looking to expand their presence in an increasingly competitive market, Endurance is in a great position to capitalize. Small and midsize businesses are expected to be spending $96 billion a year on cloud-based services by 2015, representing a compound annual growth rate of 28% since 2012.

Endurance can increase its revenue in two ways: by growing its subscriber base -- which it can accomplish as the market grows and through greater market penetration -- and by boosting its average revenue per subscriber. The company's roughly 3.4 million subscribers spent an average of $13.01 during the second quarter. The ability to upsell its customers to products with higher revenue per subscription is one of Endurance's most important growth drivers.

The company also could increase subscriber revenue through cross-selling its products. Its recent acquisitions, including HostGator, present the opportunity to cross-sell its other products to those subscribers. And its subscribers and customers are a loyal bunch, as seen in its stellar 99% retention rate.

Endurance has relied on word-of-mouth marketing for advertising, but the company plans to increase its marketing spending to help drive sales.

Driving Endurance higher should be the rising level of small businesses, more specifically, the increase in businesses that will be looking to boost their online presence. A continued rebound in the economy should help loosen SMBs' purse strings and further drive revenue for Endurance.

Endurance currently trades at an enterprise value-to-sales multiple of less than 6 and less than 4.5 when using 2014 sales estimates. This is on the low end among the major software-as-a-service (SaaS) companies: Salesforce.com trades at a multiple of 8.9, Proofpoint 6.3, Splunk 22.7 and ServiceNow 16.7. Given Endurance's scalable revenue model and ability to generate cash, a multiple of 6.5 for 2014 sales -- which yields a $22 price target -- is justified.

Risks to Consider: Endurance is dependent on SMB spending, which means it relies heavily on the broader economy. Any setback in the economic recovery could mean a decline in revenue.

Action to Take --> Buy Endurance for nearly 70% upside to $22.

- Marshall Hargrave