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The One 'Secret' Trait That Makes A Good Stock Great
$388.5 billion is a staggering figure. It's more than the entire economy of Thailand, Denmark, Colombia or the United Arab Emirates.
And it's how much operating cash flow was generated by America's top 12 companies in 2012.
Source: Thomson Reuters
Of course, the old adage "It takes money to make money" applies. Many of these companies need to spend billions of dollars in research, infrastructure and other areas to generate that cash flow, and their actual take-home pay is a lot less. Exxon Mobil (NYSE: XOM), for example, spent more than $34 billion on capital expenditures last year, sapping a considerable chunk of its $56 billion in operating cash flow.
As a bit of silver lining, these companies spend much of that on goods and services offered by other companies, creating a virtuous circle of corporate spending. Here are the top 12 capex spenders of 2013.
Source: Thomson Reuters
The number of oil and gas firms in this group explains why an energy services provider like Schlumberger (NYSE: SLB) sports a $120 billion market value, but is not truly a household name.
The True Measure
Unfortunately, even as many Wall Street analysts wisely avoid a simple focus on net profits, their decision to value stocks in the context of operating cash flow is also mistaken. It's irrelevant that Exxon Mobil generated $56 billion in 2012 free cash flow. After capital expenditures are deducted, free cash flow falls by more than half to $22 billion. It's still an impressive figure, but knocks the oil giant from the leaderboard.
Rather than focus on operating cash flow, check out a company's free cash flow, which is the only bankable source of stock buybacks, dividends, acquisitions and debt pay downs. Indeed some of the top-performing stocks in today's market share some of all of those characteristics. Here's a look at the top 12 companies in America in terms of free cash flow.
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When I was in elementary school, we called a student who got good grades, stayed out of trouble and embraced his or her position as teacher's pet "Goody Two-shoes."
With that in mind, I'd like to introduce you to a company I like to consider the Goody Two-shoes of insurance companies. It takes few risks, performs admirably and is well liked by some of the most upstanding clients around.
Founded in 1945 by two Illinois schoolteachers, Horace Mann Educators (NYSE: HMN) is an $8.5 billion national multi-line insurance company. Just about every penny comes from public K-12 teachers, administrators and their families in the U.S., a market expected to grow 14% by 2020. The auto, property and casualty segment represents 52% of Horace Mann's business, with commission-generating annuities and life insurance accounting for 39% and 9%, respectively.
About 6 million teachers, administrators and support personnel worked in K-12 in the U.S. in 2012. Another 413,000 college students are planning to become teachers, and 1.2 million are retired. That's a big, loyal, responsible, insurance-buying market that blesses Horace Mann with higher-than-average retention rates, a low rate of paid claims and steady growth of its annuity and life insurance products.
The company gets an A-plus on its third-quarter 2013 figures. Its $8.5 billion in total assets as of Sept. 30, a 4.9% year-over-year increase, is supported mainly by a 17.2% increase in annuity income and an 18.4% increase in life insurance income.
Those numbers look great, but what about competition? Horace Mann certainly has its share of general competition with the likes of Allstate (NYSE: ALL), Travelers (NYSE: TRV) and other insurers. However, Horace Mann's roots are firmly planted among teaching communities, and its competitors haven't made a concerted effort to enter its territory.
Because many former educators still active as PTA members or school board members have become independent agents for Horace Mann, they're on the grounds in more than half of the country's public schools. It's a tight-knit community of professionals who take each other's words as gospel, so Horace Mann agents are likely preaching to the choir on many occasions.
The key to keeping Horace Mann's competition at bay is the constant maintenance of close relationships with school districts and teachers organizations. No other insurance company has even tried to impede on this niche, a factor that serves Horace Mann well in the face of potential price wars from larger companies.
The fact that premiums grew 4% in third quarter 2013 on a year-over-year basis to $152.5 million is proof the strategy is working. Retention rates remain solid at 85% in auto and 89% in property. Those numbers, along with strong growth in annuities and life insurance as well as lower-than-expected paid catastrophe claims, prompted the company to increase its full-year earnings guidance from $1.95 to $2.05 a share.
The stock is up 43% this year to date and 59% over the past 12 months. On top of steady growth and healthy earnings, HMN delivers a 2.7% dividend. That's supported by a 28% payout ratio, so management has room to boost the dividend. Currently trading above its 50- and 200-day moving averages, HMN has momentum heading into 2014.
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Get Value And Growth With This Niche Insurer
When I was in elementary school, we called a student who got good grades, stayed out of trouble and embraced his or her position as teacher's pet "Goody Two-shoes."
With that in mind, I'd like to introduce you to a company I like to consider the Goody Two-shoes of insurance companies. It takes few risks, performs admirably and is well liked by some of the most upstanding clients around.
Founded in 1945 by two Illinois schoolteachers, Horace Mann Educators (NYSE: HMN) is an $8.5 billion national multi-line insurance company. Just about every penny comes from public K-12 teachers, administrators and their families in the U.S., a market expected to grow 14% by 2020. The auto, property and casualty segment represents 52% of Horace Mann's business, with commission-generating annuities and life insurance accounting for 39% and 9%, respectively.
About 6 million teachers, administrators and support personnel worked in K-12 in the U.S. in 2012. Another 413,000 college students are planning to become teachers, and 1.2 million are retired. That's a big, loyal, responsible, insurance-buying market that blesses Horace Mann with higher-than-average retention rates, a low rate of paid claims and steady growth of its annuity and life insurance products.
The company gets an A-plus on its third-quarter 2013 figures. Its $8.5 billion in total assets as of Sept. 30, a 4.9% year-over-year increase, is supported mainly by a 17.2% increase in annuity income and an 18.4% increase in life insurance income.
Those numbers look great, but what about competition? Horace Mann certainly has its share of general competition with the likes of Allstate (NYSE: ALL), Travelers (NYSE: TRV) and other insurers. However, Horace Mann's roots are firmly planted among teaching communities, and its competitors haven't made a concerted effort to enter its territory.
Because many former educators still active as PTA members or school board members have become independent agents for Horace Mann, they're on the grounds in more than half of the country's public schools. It's a tight-knit community of professionals who take each other's words as gospel, so Horace Mann agents are likely preaching to the choir on many occasions.
The key to keeping Horace Mann's competition at bay is the constant maintenance of close relationships with school districts and teachers organizations. No other insurance company has even tried to impede on this niche, a factor that serves Horace Mann well in the face of potential price wars from larger companies.
The fact that premiums grew 4% in third quarter 2013 on a year-over-year basis to $152.5 million is proof the strategy is working. Retention rates remain solid at 85% in auto and 89% in property. Those numbers, along with strong growth in annuities and life insurance as well as lower-than-expected paid catastrophe claims, prompted the company to increase its full-year earnings guidance from $1.95 to $2.05 a share.
The stock is up 43% this year to date and 59% over the past 12 months. On top of steady growth and healthy earnings, HMN delivers a 2.7% dividend. That's supported by a 28% payout ratio, so management has room to boost the dividend. Currently trading above its 50- and 200-day moving averages, HMN has momentum heading into 2014.
Risks to Consider: Horace Mann's narrow focus can also be a negative in the event budget cuts and reduced funding for public school districts lead to layoffs. The company doesn't currently have plans to broaden its scope, but it plans to fine-tune its products within education next year.
Action to Take --> HMN met resistance after hitting its high for the year on Oct. 21 of $31.03, pulling back some 10% over the next 10 days. I'd buy the stock once it resumes momentum at that Oct. 21 level.
- Karen Canella
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Everything You Need to Know About 2013
Graphic via Fidelity Investments, great reference:
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How Healthy Is The Economy, Really? This May Be The Only Way To Tell
For many market strategists, the Federal Reserve's multi-trillion-dollar stimulus program has had one huge drawback.
The Fed's massive quantitative easing (QE) programs have rendered what's known as the yield curve utterly useless -- and that's left everyone in the dark as to just how healthy or weak the U.S. economy remains.
The good news: The Fed's looming retrenchment from stimulus will let the yield curve take its natural shape again, helping investors to better navigate a confounding market environment. (Surging stocks and weak economic data do no typically go hand in hand.) You'll be hearing a lot about the yield curve in 2014, so to better understand its looming implications, let's brush up on the concept now.
What Kind Of Slope?
Bond investors typically demand a higher interest rate for longer-term securities. After all, in an uncertain world, longer time horizons bring a greater chance that something can go wrong. (And if we're talking about bonds, then we're talking about the corrosive effects of inflation or an expectation of much higher bond issuance by Uncle Sam and others.)
So a yield curve is simply the slope of interest rates on short- to mid- to long-term bonds. A healthy yield curve implies an economy poised for growth, and typically looks like this:
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Hot Links: Kiss It Goodbye
Stuff I?m Reading this Morning?
A high level sector look at what top hedge funds bought and sold leading into Q4. (FactSet)
Pros polled by Bloomberg are big-time worried about a bubble. (Bloomberg)
Samsung gets nailed in patent suit, forced to pay $290 million to Apple, which has absolutely no idea what to do with more cash at the moment. (NYP)
All kidding aside, Marissa hasn?t done much to improve Yahoo?s core business, the stock price is 75% ?Asian assets? and 25% her. (CNNMoney)
Dan Loeb buys stake in Japan?s Softbank as a way to play Alibaba?s IPO. Details here: (Reuters)
Using Holiday Sales Forecasts as an Investment Tool is Pointless (YourWealthEffect)
Paulson?s gold hedge fund is now down 63% year-to-date yet is still capable of generating hilarious headlines. (Bloomberg)
The fact that Wall Street guys are still passing around Pessimism Porn charts says we?re not quite in a bubble yet. (BusinessInsider)
Finra is cracking down on ?high risk? or ?rogue brokers? (WSJ)
Ken Fisher: If the broker-dealers get control of the RIA world via regulatory oversight, kiss your ass goodbye. (ThinkAdvisor)
How Wall Street?s changed since the crisis, great chart. (CNBC)
$48M in cocaine washes ashore in Japan (NYP)
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Up 650%, Is This Tech Stock About To Crash?
One of the coolest things about the stock market is that money can be made regardless of the direction of a stock. I've often heard investors lament that they missed a sharp upward move.
Often, these same investors will commit the investing sin of chasing stocks that have made extreme short-term moves to the upside in the hope of momentum carrying shares even higher. While upward momentum can and does take stocks higher, more often than not, prices will quickly retrace the upward spike.
This leaves the stock chasers jumping from one hot stock to the next, wondering why many of their investments are losers.
One solution to this dilemma is to learn how to short. Shorting allows investors to profit from downward moves in price. For those of you unfamiliar with shorting stocks, my recent article on shorting biotech stocks describes the method. The same tactic can be applied to any stock, regardless of sector.
Stocks that have spiked higher often drop in price. This is particularly true if the increase is due to questionable news, hype or other dubious reasons. Just like the stock chasers, short sellers scan the market for stocks that have soared higher in a short time.
Next, these rocketing stocks are researched to determine whether the move was warranted and will be sustained. Sometimes the move is in reaction to a real event, but the shares simply become overextended. Other times, the upward move will be due to hype or any number of questionable reasons. These are the ideal short candidates.
Keep in mind that stocks can simply keep climbing higher, no matter how dubious the reasons. This is why stop-loss orders are critical when shorting.
I think InterCloud Systems (Nasdaq: ICLD) looks like an ideal short candidate of the overextended variety. Its share price recently spiked from a low of $2.20 to a high of $16.69 in just the past week. That's a gain of more than 650%.
InterCloud is a global provider of cloud, managed and professional consulting services for technology companies. It helps support the operation of enterprise, fiber optic, Ethernet and wireless networks. The stock moved from the OTC market to the Nasdaq on Oct. 31 after raising $5 million in a public stock offering.
A massively successful third quarter is what fueled the upward spike. The company reported that revenue increased by 448%, to $16.2 million; gross profits hit $5.5 million, crushing the $1.2 million from a year ago; and net income was $0.26 a share, compared with a loss of $2.16 a share a year ago. While these are compelling numbers, I think the share price increase is unsustainable, primarily due to the daily chart pattern.
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Watch Those Monetary Aggregates! Call me a nerd, but instead of spending my Sund
Watch Those Monetary Aggregates!
Call me a nerd, but instead of spending my Sundays watching football, I pour over data analyzing the monetary aggregates. That?s a tough thing to say for someone whose dad was a lineman on the University of Southern California?s legendary 1947 junior varsity football team.
This is so I can gain insights into the future performance of assets classes. What I am seeing these days is not just unusual, it?s bizarre. Call it a double reverse, a Hail Mary, and a Statue of Liberty all combined into one.
You can clearly see the impact of QE2 at the end of 2010 on the chart below, which caused the monetary base to explode and triggered a six month love fest for all risk assets. Hard asset prices, like energy, commodities, the grains, and precious metals did especially well, leading to fears of resurging inflation. This prompted the European Central Bank to commit a massive policy blunder by raising interest rates twice. The US dollar (UUP) was weak for much of this time.
When quantitative easing ended in June of that year, not only did the base stop growing, it started shrinking. Hard assets rolled over like the Bismarck, and gold peaked in August. No surprise that when you take away the fuel, the fire goes out. And guess what else happened? The dollar began an uptrend that continues unabated.
So what happens next? Given the continuing strength of the economic data, I think that the prospects of a taper have been greatly diminished. Not only has it been taken off the back burner, the flame has been extinguished and the pot put back into the cupboard.
Needless to say, if this trend continues it will have an inflationary impact on the global economy as a whole, and ?RISK ON? assets specifically. It?s simply a question of supply and demand. Print a lot more dollars and you create a supply shortage of other assets, forcing bidders to pay up.
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Watch Those Monetary Aggregates
!
Call me a nerd, but instead of spending my Sundays watching football, I pour over data analyzing the monetary aggregates. That?s a tough thing to say for someone whose dad was a lineman on the University of Southern California?s legendary 1947 junior varsity football team.
This is so I can gain insights into the future performance of assets classes. What I am seeing these days is not just unusual, it?s bizarre. Call it a double reverse, a Hail Mary, and a Statue of Liberty all combined into one.
You can clearly see the impact of QE2 at the end of 2010 on the chart below, which caused the monetary base to explode and triggered a six month love fest for all risk assets. Hard asset prices, like energy, commodities, the grains, and precious metals did especially well, leading to fears of resurging inflation. This prompted the European Central Bank to commit a massive policy blunder by raising interest rates twice. The US dollar (UUP) was weak for much of this time.
When quantitative easing ended in June of that year, not only did the base stop growing, it started shrinking. Hard assets rolled over like the Bismarck, and gold peaked in August. No surprise that when you take away the fuel, the fire goes out. And guess what else happened? The dollar began an uptrend that continues unabated.
So what happens next? Given the continuing strength of the economic data, I think that the prospects of a taper have been greatly diminished. Not only has it been taken off the back burner, the flame has been extinguished and the pot put back into the cupboard.
Needless to say, if this trend continues it will have an inflationary impact on the global economy as a whole, and ?RISK ON? assets specifically. It?s simply a question of supply and demand. Print a lot more dollars and you create a supply shortage of other assets, forcing bidders to pay up.
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Watch Out for the Jobs Trap
We are about to get some wild, seasonal gyrations to the jobs numbers, and I think you will be well advised to know about them in advance.
A large part of our economy is moving online more rapidly than most people and governments realize. According to ComScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the last November-December holiday period, an all-time high.
I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.
Much of this migration is being captured by FedEx and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. FedEx (FDX) hired 10,000 temporary workers to deal with the last Christmas surge in 2012, a gain of 18% over the same period the previous year. UPS added a stunning 55,000, a 10% increase.
Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.
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Barchart.com's Chart of the Day - AmerisourceBergen (ABC) for Nov 21, 2013
The Chart of the Day is AmerisourceBergen (ABC) is the Chart of the Day. I found the stock by sorting the New High List for frequency then used the flipchart feature to find the chart I liked. Since the Trend Spotter signaled a buy on 9/9 the stock has gained 18.90%.
It is a pharmaceutical services companies serving the United States, Canada and selected global markets. Servicing both pharmaceutical manufacturers and health care providers in the pharmaceutical supply channel, the Company provides drug distribution and related services designed to reduce costs and improve patient outcomes. It's service solutions range from pharmacy automation and pharmaceutical packaging to pharmacy services for skilled nursing and assisted living facilities, reimbursement and pharmaceutical consulting services, and physician education.
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The Top Stocks Share This 'Secret' Trait
$388.5 billion is a staggering figure. It's more than the entire economy of Thailand, Denmark, Colombia or the United Arab Emirates.
And it's how much operating cash flow was generated by America's top 12 companies in 2012.
Source: Thomson Reuters
Of course, the old adage "It takes money to make money" applies. Many of these companies need to spend billions of dollars in research, infrastructure and other areas to generate that cash flow, and their actual take-home pay is a lot less. Exxon Mobil (NYSE: XOM), for example, spent more than $34 billion on capital expenditures last year, sapping a considerable chunk of its $56 billion in operating cash flow.
As a bit of silver lining, these companies spend much of that on goods and services offered by other companies, creating a virtuous circle of corporate spending. Here are the top 12 capex spenders of 2013.
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Profit From The Shale Boom With 2 REITs Yielding Up To 7.6%
One of the boldest energy predictions of the past 10 years is about to become reality.
According to the International Energy Agency, the U.S. will eclipse Russia and Saudi Arabia and become the world's top oil producer by 2015. And looking forward, that trend is going to accelerate, with the agency saying that booming production has the U.S. on track for energy independence in 20 years.
But while that bullish trend will give energy companies a big boost, it's also going to have a huge effect on local and regional economies. High-production states such as North Dakota, South Dakota and Nebraska already enjoy the lowest levels of unemployment in the country. And as energy companies continue to add tens of thousands of new employees, those strong local and regional economies will fuel record demand for temporary housing, permanent housing and commercial real estate.
That's why I'm bullish on a little-known group of real estate investment trusts (REITs) that are exclusively focused on strong regional economies in position to profit from the North American shale boom.
Not only do these REITs have the ability to produce big gains, but they also carry some of the industry's biggest yields that are more than double the yield of the 10-year Treasury.
And that is creating a big opportunity for investors.
Here are two high-yield regional REITs ready to profit from the North American shale boom.
Investors Real Estate Trust (NYSE: IRET)
Investor Real Estate Trust is a mixed bag of commercial and residential assets, owning and operating multi-family residential properties and medical, retail and industrial properties. The REIT is a direct play on some of the strongest regional economies, with operations in a dozen states across the upper Midwest and the Rockies.
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My Secret To Lasting Dividend Income
The main character in Kurt Vonnegut, Jr.'s 1965 book, God Bless You, Mr. Rosewater, is an eccentric philanthropist. He thinks it's unfair that babies don't all start with an equal playing field.
"I think it's a heartless government that will let one baby be born owning a big piece of the country, the way I was born, and let another baby be born without owning anything." To rectify this perceived injustice, he sends one share of stock to each newborn child in the country.
Wouldn't that be a nice start.
Don't get me wrong. I know a single share of stock doesn't amount to much. Even a share of $1,000-plus Google (Nasdaq: GOOG) stock wouldn't go too far if you had to live off of it.
But there is a well-known way that you can stretch your investment -- even if it starts as a single share -- to where it can more than provide for any needs you might have.
Unfortunately, it's my experience that not too many investors take advantage.
The Secret to Lasting Income
So how can you make your investment -- no matter how small initially -- turn into something that you can actually afford to live on? Simple: Reinvest its dividends.
I know. It's not groundbreaking. But are you actually doing it?
Unless you absolutely need the cash now, reinvesting is invaluable.
Dividends are one of the most powerful wealth-building tools in an investor's arsenal because of the phenomenon of compounding. By reinvesting your dividend checks (instead of cashing them), you can buy more shares, which lead to even larger dividend checks. These larger checks can then be used to buy even more shares and so on. In time, even a small stake in such stocks can grow into a tidy sum.
(Reinvesting your dividends is a cinch. In fact, many dividend payers do it automatically -- and if they don't, just give your broker a call and he'll take care of it for you in a matter of seconds.)
Take a look at my chart to see what happens to a $20,000 investment earning a 7% annual yield that's reinvested.
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Thursday links: uncomfortable valuations
Quote of the day
Aswath Damodaran, ?The more comfortable you are in valuing a company, the less point there is to doing that valuation.? (Musings on Markets)
Chart of the day
The rough year for TIPS. (WSJ also CBP)
Markets
Energy stocks have disengaged from the price of crude oil. (Charts etc.)
We may have already seen the bottom in gasoline prices. (Time)
Is there a Friday the 13th effect in the stock market? (Priceonomics Blog)
Strategy
On finding investment ideas. (Aleph Blog)
On the appeal of autopilot investment programs. (Unexpected Returns)
Portfolio rebalancing is not a one-size-fits-all deal. (Capital Spectator)
Companies
Why Black Friday sales have leaked into the middle of November. (Daniel Gross)
To say that Brookfield Asset Management?s ($BAM) financials are complicated would be an understatement. (SIRF)
The battle over Odyssey Marine Exploration ($OMEX). (Business Insider)
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Remember Crocs? This Retailer May Suffer A Similar Fate
Years ago, as I was strolling on a beachside boardwalk, I looked around and realized I was the only person in my area not wearing Crocs (Nasdaq: CROX), the somewhat ugly plastic shoes that had become all the rage. Clearly, these folks were not alone: Sales of Crocs soared from $14 million in 2004 to $355 million in 2006.
Even though sales would rise another 139% in 2007 (to $847 million), investors who bought in while growth remained above 100% learned a terrible lesson. All fashion fads end -- sometimes very badly.
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Goldman: Four Ways to Find Value in a Fairly Valued Market
From David Kostin?s GS Portfolio Strategy Research note this morning:
Target: S&P 500 will rise 6% and reach 1900 at year-end 2014
Our forecast return reflects 8% growth in EPS to $116 coupled with an
essentially flat forward P/E multiple near 15x. Looking further ahead,
extended growth in sales, earnings, and the economy will lift the P/E to 16x
and S&P 500 will reach 2100 by year-end 2015 and 2200 by year-end 2016.
Path: Drawdown risk rising after 40% rally with no correction
S&P 500 has soared 26% YTD. The median expected drawdown equals 6%
in the next three months and 11% during the next 12 months. Drawdowns
of these magnitudes from the current level would equate to 1700 and 1600.
We estimate a 67% probability of a 10% drawdown at some point in 2014.
Fundamentals: Improving US economy and rising earnings
US GDP growth will accelerate to 3% in 2014. Fed taper will start in March.
Buybacks and dividends will grow by 25% to $960 billion and account for
45% of cash usage by S&P 500 firms in 2014, the highest share since 2007.
Four strategies for a stock market trading at fair value
(1) Russell 1000 Growth will outperform Russell 1000 Value as earnings
growth decelerates; (2) Firms with low recent capex but high ROIC that will
grow investment spending in 2014 are positioned for sustainable growth;
(3) Firms with high buyback yields will benefit as cash returns to investors;
(4) Firms with high degree of operating leverage will benefit most from
acceleration in sales growth.
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Follow Up Buffett's Bet On Big Oil With This Pairs Trade
Pairs trading, once mainly a strategy for institutions, became possible for individuals with the advent of the Internet, thus giving all traders access to a wealth of real-time information and online brokerages.
It is a market-neutral strategy that takes advantage of a certain imbalance in the stocks, funds, bonds, commodities or currencies in focus. In other words, it does not depend on the broader market making a directional move.
Pairs trading involves a long position and a short position in a pair of highly correlated assets, and the strategy is thought to lower risk because it creates a natural hedge.
Traditionally, investors would look for two stocks in the same sector, preferably in the same subsector, that showed good positive correlation. Therefore, if the two stocks were to diverge, a pairs trader would buy the stock of the underperforming company and sell short the stock of the outperforming company. The trade would be profitable if the spread between the two stocks narrowed (that is, the stocks' prices again moved closer together). Looked at this way, pairs trades are simply market bets on a mean-reversion move.
Another pairs trading strategy is to bet on the continued outperformance of one stock versus another. Today's pairs trading idea is to go long Exxon Mobil (NYSE: XOM) and short Chevron (NYSE: CVX).
Both companies operate in the same sector (energy), as well as in the same subsector (integrated oil companies). Not surprisingly, their stocks have historically moved in tandem. Looking at the weekly chart of XOM (blue) and CVX (red), we can see the positive historical correlation between the two.
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Hot Links: Tapered
Stuff I?m Reading this Morning?
Everyone?s talking about this massive Goldman forex trading loss from the no-taper Fed meeting. (ValueWalk) and (Reuters) and (WSJ)
How to play a potential bank rally as rates go higher. (ETFTrends)
Goldman?s 10 themes for 2014. (PragCap)
SAC?s employee number one under the microscope this week at the never-ending insider trading trial. (DealBook)
David Merkel peels back the curtains a bit, here?s how he generates investment ideas. (AlephBlog)
Another day, another bullshit artist with a stock-picking software system. (BrokeandBroker)
Why not tie the taper to deficit reduction? (DrEdsBlog)
The world?s most powerful computer is being wasted on Bitcoin. (Gizmodo)
Whoa ? 70% of SnapChat users are female. Wait, actually that makes sense? (Digits)
REMINDER: Backstage Wall Street is now on Kindle!
The Reformed Broker
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Warren Buffett vs the Salad Oil Swindler, November 1963
The below is an amazing and true story written by Bryan Taylor, Ph.D. and Chief Economist for*Global Financial Data. I?ve asked one of the site?s proprietors, Ralph Dillon, to allow me to guest-post it here on TRB.
The tale you are about to read weaves together a fascinating and obscure financial scandal with the death of JFK, I hope you enjoy it!
- JB
***
Fifty years ago, John F. Kennedy was assassinated on Friday, November 22, 1963 in Dallas, Texas. The assassination not only shocked the nation, but shook the stock market as well. However, very few people have heard about The Great Salad Oil Swindle which nearly crippled the New York Stock Exchange that weekend. Officials at the NYSE took advantage of the closure of the exchange to keep the crisis caused by the swindle from spreading further. Here is what happened at the NYSE while the nation focused on the President?s funeral.
Salad Oil, Cornered and Quartered
The Great Salad Oil Swindle was carried out by Anthony ?Tino? De Angelis, who traded vegetable oil (soybean oil) futures which was an important ingredient in salad oil. De Angelis had previously been involved in a swindle involving the National School Lunch Act and the Adolph Gobel Co. When it was discovered that he had overcharged the government and delivered over 2 million pounds of uninspected meat, he ended up bankrupt. Con-men don?t stop being cons, they just try to learn from their mistakes and make more money the next time around.
Tino de Angelis had learned that government programs were a way to make easy money, so he started the Allied Crude Vegetable Oil Refining Co. in 1955 to take advantage of the U.S. Government?s Food for Peace program. The goal of the program was to sell surplus goods to Europe at low prices. Initially, De Angelis sold massive quantities of shortening and other vegetable oil products to Europe, and when this worked, he expanded into cotton and soybeans.
By 1962, De Angelis was a large enough player in commodity markets that he thought he could corner the soybean oil market, allowing him to make even more money. Always the schemer, De Angelis?s plan was to use his large inventories of commodities as collateral to get loans from Wall Street bank and finance companies. Buying soybean oil futures would drive up the price of his vegetable oil holdings, which would increase both the value of his inventories and allow him to profit from his futures contracts. De Angelis could use these profits not only to line his own pockets, but to pay his staff, make contributions to the community, and in one case, pay the hospital bill of a government official.
American Express had recently created a new division that specialized in field warehousing, which made loans to businesses using inventories as collateral. American Express wrote De Angelis warehouse receipts for millions of pounds of vegetable oil, which he took to a broker and discounted the receipts for cash. This proved to be an easy way to get money, so De Angelis began falsifying warehouse receipts for vegetable oil he didn?t have.
American Express sent out inspectors to make sure that De Angelis had the vegetable oil that acted as collateral, but what they didn?t know is that many of the tanks were filled mostly with water with a minimum of oil floating on the top to fool the inspectors, or that some of the tanks were connected with pipes to other tanks so the oil could be transferred between tanks when the inspectors went from one tank to the other.
If American Express had done their homework, they would have realized that De Angelis?s reported vegetable oil ?holdings? were greater than the inventories of the entire United States as reported by the Department of Agriculture. Unsatisfied with the American Express loans, De Angelis was able to get additional loans from Bunge Ltd., Staley, Proctor and Gamble, and The Bank of America. By the time the swindle collapsed, De Angelis had gotten loans from a total of 51 companies.
No Salad Today
As a result of attempted bribery, delivery mistakes, and other factors, the inspectors were eventually tipped off about De Angelis?s fraud. Allied Crude was supposed to have $150 million in vegetable oil as collateral, but only had $6 million. When the inspectors found water in the tanks, and not oil, the gig was up.
The futures market crashed. Soybean oil closed at $9.875 on Friday, November 15, at $9 on Monday and $7.75 on Tuesday, November 19, wiping out the entire value of the De Angelis loans. As you might guess, De Angelis?s company had been losing money all along, and the loans were used to cover these mounting losses. De Angelis?s goal was to sell out at the top and cover all of his losses, but of course, his plan didn?t work out that way. The crash of the soybean oil market in November 1963 is shown below.
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This 'Safe Oil' Stock Is Gushing Cash Flow
Here at StreetAuthority, we're constantly on the lookout for stocks worthy of our Top 10 Stocks advisory -- and a stock doesn't attain that status by accident.
One energy company in particular is a perennial Top 10 Stocks favorite. I profiled this company two years ago, calling it "the safest oil stock to buy." The results since then haven't been bad at all.
Including dividends, investors who held shares of ConocoPhillips (NYSE: COP) enjoyed a compound annual growth rate of 31.8%, handily outperforming the S&P 500 Index's rate of 27.3%.
One might think that COP's chart indicates its run is done. Quite the contrary.
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A Value Guru Is Loading Up On These 2 Biotech Stocks
"There's no shame in holding cash."
It's a refrain you hear from many fund managers these days after witnessing the market grind ever higher. And no hedge fund manager has uttered that phrase more than Baupost Capital's Seth Klarman. The legendary value investor has actually started returning money to clients, finding few real bargains in this market.
But when Klarman does spot an investment opportunity, he goes big. Lately, he's been building sizable stakes in a pair of young companies that few would consider to be deep value plays. They are contrarian plays from a contrarian investor.
Idenix: A Blockbuster Or A Blowup?
An estimated 150 million people are infected with hepatitis C, making it one of the most widespread diseases in the world for which current treatments are considered to be inadequate. Though there are current treatments such as Interferon, a recent Wall Street Journal article noted that "a growing number of people infected with hepatitis C are putting off therapy, choosing instead to roll the dice and wait for a new generation of drugs to become available."
First out of the gate is Gilead Sciences (Nasdaq: GILD) and its sofosbuvir drug, which got a 15-0 thumbs-up last month from an FDA advisory panel. AbbVie (Nasdaq: ABBV) is expected to seek FDA approval for its own hepatitis C drug in 2014.
But Klarman thinks Idenix Pharmaceuticals (Nasdaq: IDIX), with its hepatitis C drug candidate IDX20963, could be the blockbuster in this market. He started buying shares of Idenix in 2011, and thanks to ongoing buying efforts (including a purchase of 3 million shares in this year's third quarter), now owns nearly 30 million shares, worth roughly $135 million at current prices. That makes him the company's largest stockholder.
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Be Uncle Sam's Landlord And Get A 7% Yield
For a landlord, there's absolutely no better tenant than this one.
Every year, the 12,000 employees at the U.S. government's General Services Administration (GSA) are tasked with spending roughly $66 billion dollars on all of the goods and services needed to keep our government running. The biggest expense: real estate. Although Uncle Sam owns nearly 10,000 buildings, he's also the nation's largest renter.
The government never bounces a rent check, and tends to look for long-term, stable leases. And as it turns out, renting to the government is quite profitable. A top landlord to Uncle Sam throws off sterling cash flow, which translates into a rock-solid 7% dividend yield for investors. That's a lot of reward for little risk.
I'm talking about Government Properties Income Trust (NYSE: GOV), a real estate investment trust (REIT) that leases more than 10 million square feet spread across 82 buildings, mostly to the public sector. (Roughly 68% of revenues are derived from the U.S. government, another 20% from state governments, 7% from the private sector, and 5% from the United Nations).
A sample of tenants includes:
-- The Centers for Disease Control (CDC) in Atlanta
-- Many of the Federal Bureau of Investigation's (FBI) satellite offices
-- A U.S. Army Logistics Center
-- The state of Oregon's capital complex
Apparently, business is good. While the national office building vacancy rate hovers at around 14.8%, according to Reis.com, this landlord has a vacancy rate around 7%. Equally important, this REIT's vacancy rate tends to be stable in any economic climate compared to commercial office buildings, which saw a spike in the vacancy rate up to the 18% to 20% range when the U.S. economy slowed in 1987, 1991, 2002 and 2009.
And GOV's key tenant is staying put. In the most recent quarter, the average lease renewal was for a term of 20 years.
With government spending under pressure, it's fair to wonder if GOV might start to see government tenants consolidate into fewer office spaces. "We really are not seeing impact specifically on our properties from sequester," noted CEO David Blackmon on a recent conference call, adding that "the buildings we have in the D.C. market tend to be relatively strategic to the government tenants. So fortunately for us, it hasn't had a real effect on occupancy at our portfolio."
Wondering how can GOV afford to pay out such robust dividends? The answer lies in the company's judicious use of debt leverage. Thanks to locked-in cash flows, GOV can borrow at low interest rates, and a debt-to-EBITDA ratio of 3.5 means that a little equity goes a long way. Over the past three years, GOV has generated net profit margins in excess of 20%. In contrast, Boston Properties (NYSE: BXP), the country's largest office REIT, has net profit margins in the 10% to 15% range.
Minimal organic growth
To be sure, the government's need for office space is likely to remain stable, but isn't expected to grow in coming years.
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How To Invest In The Most Precious Commodity On Earth
"Water, water everywhere, nor any drop to drink."
This line from Samuel Taylor Coleridge's poem "The Rime of the Ancient Mariner" is apropos not only for those lost at sea but for the Earth in general.
The Earth is indeed the "water planet," with more than 70% of its surface covered with the liquid. However, more than 97% of this water is unusable salt water, meaning freshwater accounts for less than 3% of the world's supply. Of that total, more than 70% is frozen, resulting in a very limited supply of usable freshwater. Only 0.007% of all of Earth's water is available for human use.
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BAML: Here comes the big bank breakout I?ve been talking about the idea that ban
BAML: Here comes the big bank breakout
I?ve been talking about the idea that banks would / should lead the market into the next leg of the rally for a few weeks now. It appears that this breakout for the big bank stocks ? which had been trapped at resistance since July ? has already gotten underway. While most traders reference the XLF financial sector SPDR ETF when talking about bank stocks, the KBW Index is really the grandaddy, the old school traders? standard.
Here?s BAML?s ace technical strategist Stephen Suttmeier with an important call on that index:
The KBW banks Index (BKX) is consolidating within the rising channel from late 2012 and is set up for a breakout that would set up a rally to channel resistance at 74-75. A break above 67 for the BKX would would complete the bullish consolidation?
Also, a steepening of the yield curve (10-year Treasury yields minus 2-year Treasury yields) tends to coincide with stronger relative price performance for the BKX vs. the S&P 500.
Here?s Stephen?s chart of the yield curve vs the BKX : S&P 500 ratio:
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General Motors (GM) Relaunches Colorado, JCP Announces Loss, and more
Stocks remained relatively unchanged on Wednesday as U.S. retail sales were up in October. The Commerce Department announced that sales were up 0.4% in October surpassing economists expectations of a 0.1% increase. The increase in retail sales was the largest gain in nearly four months. One element dragging on the index was gasoline sales. They were at the lowest levels in over two years. This was partially attributed to the cheaper price of gasoline resulting in a lower price tag at the pump. Fuel sales were down 0.6% in October. When subtracting gas, sales were up 0.5%. Gennadiy Goldberg, a strategist with TD Securities, said, ?The stronger retail sales figure were driven by solid performance of furniture (1.0%) and electronics (1.4%) sales during the month. Clothing sales and eating and drinking also rose 1.4% and 1.0%, respectively.We believe stronger performance of these categories may have been a factor of consumers using the savings from lower gasoline prices to finance additional purchases or of retailers clearing inventories. If the former is true, with gasoline prices likely to remain contained in the near-term, we may see stronger consumption trends persist over the next few months.? There was also a revise of September?s sales data from the original decline of 0.1% to a flat 0.0%.
General Motors (GM) announced they will re-innovate their small pickup truck, the Chevrolet Colorado. GM revealed the model at the Los Angeles Auto Show on Wednesday morning. The new model has very little in common with the older version; the 2015 Colorado weighs in roughly 900 pounds less than the original model and is 16 inches shorter. It comes with bike racks and other modern accessories that GM hopes will attract ?lifestyle buyers,? as the company calls them. They are aiming to create their success of the company?s well known Forester SUV. Sales of the smaller SUV are up nearly 61% in the past two years. Alan Batey, senior vice president of Global Chevrolet, said, ?If there was a brand, a domestic brand, that could fill that space and really provide those types of things, we thought Chevy was a good place to do it.? GM are also looking to attract those individuals who need a smaller truck, one that is not as big as the Silverado or the GMC Sierra. Batey continued to say, ?We didn?t want to just create a really pretty truck that?s accessorized but can?t do anything.?
J.C. Penney (JCP) announced that their net income loss for the third-quarter was more than they were expecting. The company reported a net loss of $489 million, or $1.94 per share. This is a substantial loss compared to this time last year when net income dropped $123 million or $0.56 per share. The company did say that sales for the coming quarter are still encouraging. J.C. Penney is expecting to have more than $2 billion in liquidity at the end of this year. Shares of the stock were still trading higher as expectations remained high for positive comparable-store sales in the fourth-quarter.
That?s all for the day.
All the best,
Jack Aubrey, Oakshire Financial
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General Motors (GM) Relaunches Colorado, JCP Announces Loss, and more
Stocks remained relatively unchanged on Wednesday as U.S. retail sales were up in October. The Commerce Department announced that sales were up 0.4% in October surpassing economists expectations of a 0.1% increase. The increase in retail sales was the largest gain in nearly four months. One element dragging on the index was gasoline sales. They were at the lowest levels in over two years. This was partially attributed to the cheaper price of gasoline resulting in a lower price tag at the pump. Fuel sales were down 0.6% in October. When subtracting gas, sales were up 0.5%. Gennadiy Goldberg, a strategist with TD Securities, said, ?The stronger retail sales figure were driven by solid performance of furniture (1.0%) and electronics (1.4%) sales during the month. Clothing sales and eating and drinking also rose 1.4% and 1.0%, respectively.We believe stronger performance of these categories may have been a factor of consumers using the savings from lower gasoline prices to finance additional purchases or of retailers clearing inventories. If the former is true, with gasoline prices likely to remain contained in the near-term, we may see stronger consumption trends persist over the next few months.? There was also a revise of September?s sales data from the original decline of 0.1% to a flat 0.0%.
General Motors (GM) announced they will re-innovate their small pickup truck, the Chevrolet Colorado. GM revealed the model at the Los Angeles Auto Show on Wednesday morning. The new model has very little in common with the older version; the 2015 Colorado weighs in roughly 900 pounds less than the original model and is 16 inches shorter. It comes with bike racks and other modern accessories that GM hopes will attract ?lifestyle buyers,? as the company calls them. They are aiming to create their success of the company?s well known Forester SUV. Sales of the smaller SUV are up nearly 61% in the past two years. Alan Batey, senior vice president of Global Chevrolet, said, ?If there was a brand, a domestic brand, that could fill that space and really provide those types of things, we thought Chevy was a good place to do it.? GM are also looking to attract those individuals who need a smaller truck, one that is not as big as the Silverado or the GMC Sierra. Batey continued to say, ?We didn?t want to just create a really pretty truck that?s accessorized but can?t do anything.?
J.C. Penney (JCP) announced that their net income loss for the third-quarter was more than they were expecting. The company reported a net loss of $489 million, or $1.94 per share. This is a substantial loss compared to this time last year when net income dropped $123 million or $0.56 per share. The company did say that sales for the coming quarter are still encouraging. J.C. Penney is expecting to have more than $2 billion in liquidity at the end of this year. Shares of the stock were still trading higher as expectations remained high for positive comparable-store sales in the fourth-quarter.
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Bankruptcy Looms For This BRIC Nation -- Here's What To Avoid
In early 1997, the world was in awe of the record growth of Southeast Asia's "tiger economies" as markets opened and foreign investors rushed to fund new ventures.
However, by January 1998, stock markets across the region had lost as much as 70% of their value, and the crisis had spread to the rest of the emerging world. Even behemoth Russia wasn't immune, defaulting on its debt that same year.
Such massive and rapid growth relied on a constant influx of dollars to fund deficits and pay higher amounts of foreign debt. At the first sign of economic cracks, foreign investors withdrew their accounts, leading to a plunge in currencies and leaving the region's governments unable to pay debt denominated in now more expensive dollars.
Now it seems another emerging market has not learned much from that episode -- and may be doomed to repeat it soon.
A Financial Crisis With A Latin Flair
Latin America escaped the most recent crisis in 2008, with the region managing 4.5% growth in 2010. The iShares Latin America 40 (NYSE: ILF) jumped 120% in the two years after the March 2009 lows, outperforming the S&P 500 Index by 40%. Housing prices have increased dramatically for more than a decade, and credit for homeownership flows like water.
From my vantage point in Colombia, I talk to investors regularly -- and few want to acknowledge that trouble could be on the horizon. The Colombian national soccer team made the World Cup selection for the first time in six years, regional economies are strong, and Brazil is hosting two major events in the next three years.
And that brings us to the tipping point.
Athens Calling
In 2004, the world marveled as the Olympics returned to its Greek homeland in Athens. Greece spent $16 billion on those Summer Games, 10 times the original budget, in hopes that tourist dollars would pay the bills when they came due. Four years later, Greece was bankrupt; nearly a decade later, the country has just entered its sixth straight year of recession with a 28% unemployment rate.
Now Brazil has won the right to host the 2014 World Cup and the 2016 Summer Olympics. The country is spending more than $14 billion on World Cup projects, $3.3 billion of which will be spent on stadiums that are unlikely to have much real economic use after the games. The largest stadium being built, the Estadio Nacional, will hold 70,000 spectators. In comparison, the entire 57 games of the recent regional championship brought in only 50,000 people.
Brazil bid a $14.4 billion budget for the 2016 Olympics, equal to about 4% of the country's total tax revenue of $338 billion. If the 2007 Pan American Games, held in Rio de Janeiro, are any indication, the budget for the World Cup and the Olympics could be dwarfed by cost overruns. The Pan Am games were originally budgeted to cost $177 million with final estimates topping $1 billion for the event, over budget by sixfold.
Even if the cost overrun for the 2016 Games is not as bad as the Pan Am games, it will almost definitely run over budget. Every Olympiad since 1960 has gone over budget, by an average of 179% in real terms. That overrun would put the Brazil Olympics at $25.8 billion. Add this to World Cup spending of at least $20 billion, and Brazil's fiscal position looks precarious at best over the next few years.
Brazil desperately needs infrastructure spending, and some of the event budgets will be put to good economic use. The problem is that the lasting benefit accounts for only a small portion of the total spending.
An Unsustainable Path
Inflation in Brazil has begun to take hold, with consumer prices jumping 5.8% last month from a year ago. This is well above the central bank's 4.5% target and likely means that the 9.5% benchmark interest rate will continue upward. With the surge in public spending on the Cup and the Games, inflation is unlikely to moderate, but higher rates could choke off other business spending. Lower economic growth will hit tax revenues and the public burden could become unsustainable.
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Bankruptcy Looms For This BRIC Nation -- Here's What To Avoid
In early 1997, the world was in awe of the record growth of Southeast Asia's "tiger economies" as markets opened and foreign investors rushed to fund new ventures.
However, by January 1998, stock markets across the region had lost as much as 70% of their value, and the crisis had spread to the rest of the emerging world. Even behemoth Russia wasn't immune, defaulting on its debt that same year.
Such massive and rapid growth relied on a constant influx of dollars to fund deficits and pay higher amounts of foreign debt. At the first sign of economic cracks, foreign investors withdrew their accounts, leading to a plunge in currencies and leaving the region's governments unable to pay debt denominated in now more expensive dollars.
Now it seems another emerging market has not learned much from that episode -- and may be doomed to repeat it soon.
A Financial Crisis With A Latin Flair
Latin America escaped the most recent crisis in 2008, with the region managing 4.5% growth in 2010. The iShares Latin America 40 (NYSE: ILF) jumped 120% in the two years after the March 2009 lows, outperforming the S&P 500 Index by 40%. Housing prices have increased dramatically for more than a decade, and credit for homeownership flows like water.
From my vantage point in Colombia, I talk to investors regularly -- and few want to acknowledge that trouble could be on the horizon. The Colombian national soccer team made the World Cup selection for the first time in six years, regional economies are strong, and Brazil is hosting two major events in the next three years.
And that brings us to the tipping point.
Athens Calling
In 2004, the world marveled as the Olympics returned to its Greek homeland in Athens. Greece spent $16 billion on those Summer Games, 10 times the original budget, in hopes that tourist dollars would pay the bills when they came due. Four years later, Greece was bankrupt; nearly a decade later, the country has just entered its sixth straight year of recession with a 28% unemployment rate.
Now Brazil has won the right to host the 2014 World Cup and the 2016 Summer Olympics. The country is spending more than $14 billion on World Cup projects, $3.3 billion of which will be spent on stadiums that are unlikely to have much real economic use after the games. The largest stadium being built, the Estadio Nacional, will hold 70,000 spectators. In comparison, the entire 57 games of the recent regional championship brought in only 50,000 people.
Brazil bid a $14.4 billion budget for the 2016 Olympics, equal to about 4% of the country's total tax revenue of $338 billion. If the 2007 Pan American Games, held in Rio de Janeiro, are any indication, the budget for the World Cup and the Olympics could be dwarfed by cost overruns. The Pan Am games were originally budgeted to cost $177 million with final estimates topping $1 billion for the event, over budget by sixfold.
Even if the cost overrun for the 2016 Games is not as bad as the Pan Am games, it will almost definitely run over budget. Every Olympiad since 1960 has gone over budget, by an average of 179% in real terms. That overrun would put the Brazil Olympics at $25.8 billion. Add this to World Cup spending of at least $20 billion, and Brazil's fiscal position looks precarious at best over the next few years.
Brazil desperately needs infrastructure spending, and some of the event budgets will be put to good economic use. The problem is that the lasting benefit accounts for only a small portion of the total spending.
An Unsustainable Path
Inflation in Brazil has begun to take hold, with consumer prices jumping 5.8% last month from a year ago. This is well above the central bank's 4.5% target and likely means that the 9.5% benchmark interest rate will continue upward. With the surge in public spending on the Cup and the Games, inflation is unlikely to moderate, but higher rates could choke off other business spending. Lower economic growth will hit tax revenues and the public burden could become unsustainable.
Brazil 2014 Budget
Ministry of Planning and Budget
The government already spends 43% of its annual budget on debt and interest payments with only 6% going to education and health programs.
Now squeeze out upward of $45 billion of spending (13% of the budget) for the World Cup and Summer Olympics and huge cuts will need to come from somewhere or a default is imminent.
The value of the local currency, the real, has already fallen more than 12% this year, and higher inflation plus weak economic growth could cause it to fall further. This could lead to problems paying the country's dollar-denominated debt -- much like what happened during the Asian crisis of 1997. The country has been able to raise funds fairly easily, with a recent $7 billion 2025 offering -- but will it be able to pay the money back?
In recent research by Wells Fargo Securities, Brazil ranked fifth of 28 countries deemed most vulnerable to a crisis. The research focused on credit growth, ability to meet dollar demands on foreign debt and the exchange rate. Brazil ranked second on the list for highest increase in private sector debt to GDP since 2009, signaling that recent growth in loans may be too rapid.
More ominously, protests against corruption and the high price of the World Cup erupted in Brazil this year. Ultimately, I think the burden from the games will result in a change in the government and a default on debt. State-controlled Petrobras (NYSE: PBR) could be hardest hit as the government wipes out shareholders to prop up the debt situation. Shares are already down 70% from the 2009 high but could fall much further.
With presidential elections looming next year, Brazilian politicians will probably follow the typical playbook of boosting social spending to win re-election and worrying about the bills later. This may temporarily stave off a collapse, but the situation becomes more dire and inescapable as we look to 2015 and beyond.
Metals miner Vale (NYSE: VALE) has rebounded from its low this year but could also fall victim to the government's need for funds. The shares may be supported over the next year on infrastructure spending, but the long-term outlook is negative.
Beyond individual Brazilian companies, a bankrupt Brazil would almost certainly throw the rest of Latin America into a regional recession. The country accounts for more than 40% of the regional economy and imports more than $26 billion in goods and services from Latin American countries. In the same Wells Fargo study, six of the top 10 countries most vulnerable to crisis are in Latin America, with Colombia, Argentina, Peru, Chile and Mexico also seen as at risk.
Risks to Consider: Shares of the largest Brazilian companies are not expensive at 14 times trailing earnings and could get a boost from infrastructure spending in the short term. Investors may miss out on some rebound pricing but would do well to avoid a possible major crash in the long term.
Action to Take --> Spending ahead of the presidential election in 2014 may drive the economy for another year, but I would avoid Brazilian companies as long-term investments. Keep an eye on spending for the Cup and the Games to signal when you may want to take profits on other stocks from the region. A collapse of the government might not cause world markets to buckle, but it would definitely affect regional names and probably emerging markets across the globe.
- Joseph Hogue
StreetAuthority.com
StreetAuthority spends over a million dollars on research each year and employs a team of experts across the U.S. and Canada. Before joining, these experts worked as senior analysts for Wall Street firms, financial advisors, investment relations presidents, and business reporters for major newspapers. As a result, they're able to uncover rare, profitable and compelling investing opportunities that you aren't likely to find anywhere else. Their research is presented in simple, easy-to-understand language without the typical Wall Street double talk.
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Dave Landry's Market in a Minute - Wednesday, 11/20/13
Random Thoughts
The Ps ended slightly lower. So far, their recent breakout remains intact and they only appear to be pulling back.
When it comes to the indices, it is a bit of a tale of two markets.
The Quack doesn't look quite as good. It sold off a bit on Tuesday. This action puts it back below its recent breakout levels. On a net net basis, it hasn't made any forward progress in nearly a month.
The Rusty got hit the worst. It lost over ?%. It too hasn't made any forward progress (net net) in quite a while.
The action in the Rusty is indicative of what happened internally. Most stocks and sectors got hit fairly hard.
Things are getting a little mixed.
Although they ended lower, areas such as Defense, Transports, Manufacturing, and Retail only appear to be pulling back from their uptrends.
Some areas like Drugs and Health Services (which actually ended slightly higher on Tuesday) have pulled back to prior breakout levels.
The Semis got whacked fairly hard. This action keeps them sideways at best.
A few big up days would be just what the Dr. ordered to get this now mixed market moving.
Longer-term things still look pretty good. When things get a little iffy, I like to plot the 50day moving average as a reference. In general, this will help to keep you on the right side of the market. This is especially true if you use the concept of slope (positive) and "daylight" (lows greater than the moving average).
So what do we do? I still think that it is too early to fight the longer-term trend, especially with the market just off of new highs. Sure, fire off a short if you really like the setup (we are short NCR) but the main focus should still be on the long side. This doesn't mean you should load the boat. I'm still not seeing a tremendous amount of setups. I am seeing a few Trend Knockouts (TKOs, email me if you need the pattern). I like this pattern (especially when the stock closes poorly) when the market becomes questionable because the stock will really have to rally to trigger---i.e. the stock will have to prove itself. If the market stays mixed or rolls over then there is no trigger. No trigger, no trade.
Click here to watch today's Market in a Minute.
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Barchart.com's Chart of the Day - Hibbett Sports (HIBB) for Nov 19, 2013
The Chart of the Day is Hibbett Sports (HIBB). I found the stock by sorting today's New High List for frequency then used the flipchart function to find a stocks with momentum I like. The stock gained 24.97% in the last quarter and since the Trend Spotter signaled a buy on 10/1 the stock gained 10.84%
It is a rapidly-growing operator of full-line sporting goods stores in small to mid-sized markets predominantly in the southeastern United States. Hibbett's stores offer a broad assortment of quality athletic equipment, footwear and apparel at competitive prices with superior customer service.
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Buy Wood.
GMO is out with its latest monthly asset class real returns forecast for this month. The system is largely predicated on mean reversion and so you?ll typically see the most loved sectors projected to have the worst returns (US small caps this go-round) for the future period. Barry and I are huge fans of Jeremy Grantham, James Montier and the rest of the thought leadership cabal at GMO, we always take their insights as important food for thought.
What?s notable in this month?s edition is how no asset class is projected to be able to even meet their long-term equity return measurement of 6.5% real (inflation-adjusted). The asset class they?d appear to be most constructive on for the seven year period, emerging market stocks, doesn?t even get you halfway there. But they see high potential returns for timber, which would fly in the face of the idea that paper is already dying in our tablet-based economy. My kids will be headed to school with iPads in a year or two, we?re told, not textbooks. And it?s pretty hard to find a waiter or waitress taking orders on a pad in cutting-edge Brooklyn.
Sometimes a secular downtrend will appear to be a cyclical one at first. Timber may be exactly that ? unless you tell me we?re going to see another massive homebuilding wave this decade.
Anyway, here?s the forecast chart:
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When Will This Bull Market End? Look To This Simple Strategy For An Answer
While prices are rising, investors need to maximize their gains. When prices turn down, investors need to minimize their losses.
The problem many investors face is worrying about a bear market during the bull market. Worries can be stopped by switching to cash, but then investors miss gains, and failing to take advantage of market gains destroys potential wealth.
We do believe that it is OK to worry about the state of the market. However, we don't believe it is OK to act on those worries without a plan. Investment actions should be based on plans that react to the market, and the 10-month moving average (MA) is the simplest way we know to do this.
Before we explain why, this chart of the SPDR S&P 500 ETF (NYSE: SPY) can help highlight the importance of this indicator.
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Hot Links: Rally Into the Crash
Stuff I?m Reading this Morning?
?Actually, economists CAN predict financial crises.? ? so what, they just don?t feel like it? I don?t understand? (Bloomberg)
Meanwhile, scientists brawled with Fama over the legitimacy of economics the other night. Six dead, four wounded. (Economix)
JPMorgan?s $13 billion selfie. (HighNetWorld)
Heidi Moore?s take on the record settlement and what it means. (Guardian)
Why JPMorgan might have gotten a good deal in the end. (DealBook)
For investors, Coal is the new Tobacco. (Bloomberg)
?and Frontier Markets are the new Emerging Markets. (Morningstar)
There?s Type A Personalities and then there?s this guy: (VanityFair)
The modern mariachi band in Mexico comes strapped with bazookas and sht. (Wired)
$1.2 million in gold bars found stashed in Boeing 737′s bathroom (NBCNews)
REMINDER: Backstage Wall Street is now on Kindle!
The Reformed Broker
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Ringing the Register with the Aussie This is our 13th consecutive closing profit
Ringing the Register with the Aussie
This is our 13th consecutive closing profitable position, and 19th consecutive profitable Trade Alert when you include our remaining open positions. I have only seven more winners to go before I break my old record of 25.
Since I strapped on this trade last week, the (FXA) has popped a full 1 ? points to the upside. It?s tough to say where these options are really trading, they are so illiquid and the spreads so wide. If you didn?t do the trade at all, just consider this part of your educational effort.
However, the Currency Shares Australian Dollar Trust December, 2013 $89-$91 bull call spread was marked at their maximum possible value of $2.00 by the market makers at last night?s close. So I am going to take the hint and close the position. At this price we have harvested 75% of the potential profit, and we still have a full month to run before the December 20 expiration.
Yes, I should have been more aggressive, moving the strikes closer to the money, farther out in expiration, and bigger in size. But it?s always easy to say that about your winners.
To close the position just put in a limit order for the entire spread at $1.95 and wait for the market to come to you, even if it is for a few days. It is impressive how much they are crushing volatility in the options markets in the run up to the Thanksgiving holidays, so you should eventually get done.
Then you can plow the money back into other trades, such as buying global stocks and commodities, and shorting bonds and the yen. You can also buy back the Aussie on the next two-point dip.
I still believe that we are in bull mode for the Aussie longer term, and that we should make it above par, or $1.00, next year. The recent reforms announced by China (FXI) last week certainly remove any doubt about the northward direction.
It all provides fresh rocket fuel for the global synchronized recovery in 2014, which I have been predicting since the summer. A parallel pop in Australian stocks (EWA) confirms this view. So if you aren?t in the options and own the (FXA) outright, I?d hang in there.
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Ringing the Register with the Aussie
This is our 13th consecutive closing profitable position, and 19th consecutive profitable Trade Alert when you include our remaining open positions. I have only seven more winners to go before I break my old record of 25.
Since I strapped on this trade last week, the (FXA) has popped a full 1 ? points to the upside. It?s tough to say where these options are really trading, they are so illiquid and the spreads so wide. If you didn?t do the trade at all, just consider this part of your educational effort.
However, the Currency Shares Australian Dollar Trust December, 2013 $89-$91 bull call spread was marked at their maximum possible value of $2.00 by the market makers at last night?s close. So I am going to take the hint and close the position. At this price we have harvested 75% of the potential profit, and we still have a full month to run before the December 20 expiration.
Yes, I should have been more aggressive, moving the strikes closer to the money, farther out in expiration, and bigger in size. But it?s always easy to say that about your winners.
To close the position just put in a limit order for the entire spread at $1.95 and wait for the market to come to you, even if it is for a few days. It is impressive how much they are crushing volatility in the options markets in the run up to the Thanksgiving holidays, so you should eventually get done.
Then you can plow the money back into other trades, such as buying global stocks and commodities, and shorting bonds and the yen. You can also buy back the Aussie on the next two-point dip.
I still believe that we are in bull mode for the Aussie longer term, and that we should make it above par, or $1.00, next year. The recent reforms announced by China (FXI) last week certainly remove any doubt about the northward direction.
It all provides fresh rocket fuel for the global synchronized recovery in 2014, which I have been predicting since the summer. A parallel pop in Australian stocks (EWA) confirms this view. So if you aren?t in the options and own the (FXA) outright, I?d hang in there.
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Follow Up to Trade Alert ? (IWM) November 19, 2013
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Further Update to: Trade Alert -(IWM)
Buy the Russell 2000 iShares (IWM) December $113-$116 bear put spread at $2.54 or best
Opening Trade
11-19-2013
expiration date: 12-20-2013
Portfolio weighting: 10%
Number of Contracts = 39 contracts.
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Newspaper Stocks Are Hot -- But For How Long?
The Old Gray Lady is looking a lot younger these days.
Less than five years after desperately needing a costly $250 million capital infusion from Mexican billionaire Carlos Slim, The New York Times Co. (NYSE: NYT) has staged a remarkable rebound. Shares have nearly doubled in the past two years, handily surpassing the S&P 500 Index. Rival Gannett (NYSE: GCI), publisher of the USA Today, has fared even better.
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Life Stem Genetics Shares Surge on Financing, Deal News (LIFS)
Earlier this month I brought your attention to a young company called Life Stem Genetics, plying its trade in the burgeoning realm of stem cell therapies. Trading over-the counter under the symbol (LIFS), the company had recently received a $500,000 round of financing to help execute its business plan of rolling out an international chain of ?all-purpose? stem cell treatment clinics.
Once a highly controversial avenue of medical research, stem cell therapy is just beginning to reach critical mass, providing new ways to treat previously untreatable diseases and ailments, including diabetes, Parkinson?s disease, eye disorders, spinal cord injuries and cancer. Current estimates say that the existing market for stem-cell therapies is easily in the multi-billion dollar range, and that may be conservative.
The first stage in the therapeutic use of stem cells is ?harvesting? a patient?s own stem cells ? one of the services that Life Stem Genetics provides. In a spa-like setting, patients undergo a four-hour stem cell extraction procedure. The company has also developed and tested a proprietary regenerative procedure to promote spinal, joint, organ health and longevity by using the patient?s own platelet rich blood cells and ASCs, and plans to offer stem cell storage, and other regenerative medical treatment options.
When I first wrote about Life Stem in early November the company had announced its intention to build a base of affiliate clinics in the U.S. and internationally, designed to both extract stem cells and help treat the wide spectrum of diseases that stem cells can benefit. Since that time, Life Stem has been aggressively pursuing its business plan by announcing a series of deals that have served to generate steady buying interest in LIFS shares.
On Tuesday, Life Stem announced that it has secured an additional $500,000 in financing, closing its previously announced private placement. The financing deal involved the issuance of 1,000,000 units of LIFS stock and warrants at a price of $1 per unit. Each unit of the private placement consists of one common share of company stock and one warrant to purchase an additional common share of the company at $1 per Warrant Share for a period of one year. If and when all of the warrants are exercised, the company will realize up to an additional $1.0 million in proceeds.
The financing announcement was preceded by two pending new deals that mark the beginning of Life Stem?s roll-out of its services in established clinics worldwide. On November 13 the company announced the signing of a Letter of Intent (LOI) with a clinic in Dhaka, Bangladesh, to add the company?s stem cell therapies to its existing line-up of wellness procedures.
One week earlier Life Stem announced a more significant deal?the signing of an LOI with an undisclosed health and wellness chain in Canada. According to Life Stem management, the announcement of the organization?s identity is set to take place in approximately 10 days upon signing of the definitive agreement. The LOI between both parties will enable the company to provide stem cell therapy to individuals who would derive benefit from such treatments using LSG?s procedures and practices. Life Stem confirmed that the company operates in excess of 25 health/medical clinics in various locations throughout Canada.
In addition to these deals, the company has been actively expanding its board and management team. At the end of last week Life Stem announced that it had named its Regenerative Specialist, James Vanden Bosch, Chief Medical Stem Cell Specialist. Vanden Bosch has performed thousands of stem cell treatments, has published prolifically on the subject, and is often called upon to provide expert commentary. Earlier in the month, Life Stem had announced the addition of Dr. Shirin Rostamkalaee, an expert on wound healing, bone grafting, and reconstructive surgery, to its newly expanded Executive Advisory Board.
LIFS shares began trading in late October, making their debut in the $1.06 ? $1.07 range on thin trading volume. Volume gradually picked up in subsequent sessions, and has been surging to new heights in recent dealings?along with LIFS share price.
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Life Stem Genetics Shares Surge on Financing, Deal News (LIFS)
Earlier this month I brought your attention to a young company called Life Stem Genetics, plying its trade in the burgeoning realm of stem cell therapies. Trading over-the counter under the symbol (LIFS), the company had recently received a $500,000 round of financing to help execute its business plan of rolling out an international chain of ?all-purpose? stem cell treatment clinics.
Once a highly controversial avenue of medical research, stem cell therapy is just beginning to reach critical mass, providing new ways to treat previously untreatable diseases and ailments, including diabetes, Parkinson?s disease, eye disorders, spinal cord injuries and cancer. Current estimates say that the existing market for stem-cell therapies is easily in the multi-billion dollar range, and that may be conservative.
The first stage in the therapeutic use of stem cells is ?harvesting? a patient?s own stem cells ? one of the services that Life Stem Genetics provides. In a spa-like setting, patients undergo a four-hour stem cell extraction procedure. The company has also developed and tested a proprietary regenerative procedure to promote spinal, joint, organ health and longevity by using the patient?s own platelet rich blood cells and ASCs, and plans to offer stem cell storage, and other regenerative medical treatment options.
When I first wrote about Life Stem in early November the company had announced its intention to build a base of affiliate clinics in the U.S. and internationally, designed to both extract stem cells and help treat the wide spectrum of diseases that stem cells can benefit. Since that time, Life Stem has been aggressively pursuing its business plan by announcing a series of deals that have served to generate steady buying interest in LIFS shares.