With stocks and most commodities in retreat mode since the S&P 500 hit a 2011 high on April 29, ?the cumulative effect of having stocks fall eight of the 12 days since then has begun to infect investor sentiment.
On Tuesday, the market showed a little more fight than in recent days, but complacency (at best) has become the prominent theme.
The S&P 500 dropped less than a half-point to 1329, while the Nasdaq gained a point to 2783. Those relatively flattish results were more representative of the market than the Dow Jones Industrial Average, which fell 69 points, due largely to the selloff in shares of component (The market works back from an opening-bell selloff)Hewlett-Packard (NYSE:HPQ), which dropped?more than 7%?after its earnings report late Monday that included a weak forecast.
Volatility still reigned, as a strong dollar and some work European economic data had set U.S. stocks up for an opening-bell selloff, and at one point the S&P 500 dipped below 1320 for the first time since April 20, while oil, gold and silver all started lower.
However, like everything else market-related these days, swings in either direction are prone to do exactly the opposite, and the dollar’s sharp rally took a break, helping commodities recoup their losses.
Not entirely, however — oil, which had dropped as low as $95.02 a barrel, still settled under $97 a barrel, a drop of 0.5%, while gold and silver fell 0.7% and 1.6%, respectively.
While stocks continue to largely be at the mercy of the dollar-commodities complex, the corporate and economic data weren’t particularly inspiring, including dour notes on housing starts, building permits, and a tepid report from (The market works back from an opening-bell selloff)Wal-Mart (NYSE:WMT) (following one a day earlier from Lowe’s (NYSE:LOW) working as a pesky reminder that the housing market doesn’t seem to offer any short-term sanguinity.
Similarly, the action in bonds, which saw the 10-ye! ar note& #8217;s yield drop to 3.12% (extremely close to its 200-day average), doesn’t exactly dovetail with an optimistic take on what investors expect to gain elsewhere.
On the other hand, stocks did show some fight on an above-average day in trading volume and large-cap financials showed strength, outperforming the market on back-to-back days — a good sign for the bulls.
Given stocks have dropped 2% in a week, a flat-line finish certa
ECB Still Will Boost Rates in September
Emerging-markets valuations have made an extraordinary V-shaped move in the last six months, yet Brazil still looks almost as cheap as it did back in August.
Believe it or not, a big Brazil fund such as EWZ (NYSE:EWZ) has rebounded only about 6% since late August, when the Bovespa had been pounded to a forward P/E of 8.3.
As a result, the improvement in tone has barely brought EWZ back to a P/E of 9 — still far enough below the broad MSCI Emerging Markets valuation of 10 to tempt traders back to this healing-but-still-bruised market.
The question is, can those forward-looking earnings forecasts be trusted?
A slowing global economy will naturally drive analysts to downgrade their Brazilian earnings models to reflect reduced appetite in Asia for iron ore and pulp — China alone accounts for 15% of Brazil s exports.
The answer is to focus on stocks that are less exposed to China. So skip Vale (NYSE:VALE), the second-biggest company on the Bovespa and the largest miner of iron ore in the world. Besides, Vale s mines have been washed out by heavy rain, forcing it to leave 2 million tons of ore contracts unfilled.
We know China is still buying plenty of oil, though, which makes Petrobras (NYSE:PBR) a natural place to start looking. PBR is huge, but it s definitely on an upward trend — up 20% year to date and just cracking the 200-day resistance line in the last few days.
If we hold this line, there’s plenty of room for upside. Before collapsing in the August sell-off, PBR was moving in a comfortable range of $30 to $45 over the last few years.
To get back on that footing again, PBR will need to rally an additional 17%. Meanwhile, the stock is on the cheap side, with a P/E of 8.85, and even with its massive petroleum reserves, it s still priced at maybe 1.05 times book value.
PBR also stands to benefit from the ongoing shif! t in ins titutional portfolios, which were very underweight this stock for a long time. It takes a lot of buying to shift the needle here — we re talking about the fourth-biggest stock in the world — but the needle is definitely moving back in the right direction.
On the domestic side, banks are also relatively immune to the shifting export cycle and are best-positioned to benefit from the local central bank s recent efforts to relax some of the highest inflation-adjusted interest rates in the emerging world.
Still, Brazil seems to have won at least a temporary victory against inflation. The job market is tight, and despite the occasional problem for a fringe lender, credit quality is improving.
With conditions like these to work with, Banco Bradesco (NYSE:BBD) is probably our favorite name in the sector. BBD has it all: improving loan margins, net interest margins and a PEG ratio of just 0.50.
While the P/E is a little rich at north of 10, it still fails to reflect the true value of BBD s loan portfolio. Price to book is all the way down at 0.33.
Compare BBD with Itau Unibanco (NYSE:ITUB) and the choice is clear on just about every measure. ITUB is more richly valued, with a P/E of 11+, trades at 2.45 times book value and a PEG of 1 and even has much worse credit quality than its rival.
So why buy ITUB when you can get BBD? We have yet to hear a good answer.
On last note: Watch the Brazilian real for your next hints on where the Bovespa is headed. The real was one of the worst-performing currencies last year, printing a 10.5% decline against the dollar. But in the last three weeks, it has shaped up as one of the fastest-appreciating currencies in the world.
Institutional traders need to buy reais before they buy Brazilian stocks. If that s what s going on here, the long-looked-for rally could be on the way.
Believe it or not, a big Brazil fund such as EWZ (NYSE:EWZ) has rebounded only about 6% since late August, when the Bovespa had been pounded to a forward P/E of 8.3.
As a result, the improvement in tone has barely brought EWZ back to a P/E of 9 — still far enough below the broad MSCI Emerging Markets valuation of 10 to tempt traders back to this healing-but-still-bruised market.
The question is, can those forward-looking earnings forecasts be trusted?
A slowing global economy will naturally drive analysts to downgrade their Brazilian earnings models to reflect reduced appetite in Asia for iron ore and pulp — China alone accounts for 15% of Brazil s exports.
The answer is to focus on stocks that are less exposed to China. So skip Vale (NYSE:VALE), the second-biggest company on the Bovespa and the largest miner of iron ore in the world. Besides, Vale s mines have been washed out by heavy rain, forcing it to leave 2 million tons of ore contracts unfilled.
We know China is still buying plenty of oil, though, which makes Petrobras (NYSE:PBR) a natural place to start looking. PBR is huge, but it s definitely on an upward trend — up 20% year to date and just cracking the 200-day resistance line in the last few days.
If we hold this line, there’s plenty of room for upside. Before collapsing in the August sell-off, PBR was moving in a comfortable range of $30 to $45 over the last few years.
To get back on that footing again, PBR will need to rally an additional 17%. Meanwhile, the stock is on the cheap side, with a P/E of 8.85, and even with its massive petroleum reserves, it s still priced at maybe 1.05 times book value.
PBR also stands to benefit from the ongoing shif! t in ins titutional portfolios, which were very underweight this stock for a long time. It takes a lot of buying to shift the needle here — we re talking about the fourth-biggest stock in the world — but the needle is definitely moving back in the right direction.
On the domestic side, banks are also relatively immune to the shifting export cycle and are best-positioned to benefit from the local central bank s recent efforts to relax some of the highest inflation-adjusted interest rates in the emerging world.
Still, Brazil seems to have won at least a temporary victory against inflation. The job market is tight, and despite the occasional problem for a fringe lender, credit quality is improving.
With conditions like these to work with, Banco Bradesco (NYSE:BBD) is probably our favorite name in the sector. BBD has it all: improving loan margins, net interest margins and a PEG ratio of just 0.50.
While the P/E is a little rich at north of 10, it still fails to reflect the true value of BBD s loan portfolio. Price to book is all the way down at 0.33.
Compare BBD with Itau Unibanco (NYSE:ITUB) and the choice is clear on just about every measure. ITUB is more richly valued, with a P/E of 11+, trades at 2.45 times book value and a PEG of 1 and even has much worse credit quality than its rival.
So why buy ITUB when you can get BBD? We have yet to hear a good answer.
On last note: Watch the Brazilian real for your next hints on where the Bovespa is headed. The real was one of the worst-performing currencies last year, printing a 10.5% decline against the dollar. But in the last three weeks, it has shaped up as one of the fastest-appreciating currencies in the world.
Institutional traders need to buy reais before they buy Brazilian stocks. If that s what s going on here, the long-looked-for rally could be on the way.
5 prolific Mercedes cars from years gone by
The Mercedes-Benz SSK. The name means Super Sport Kurz, or “Super Sport Short” in German, the model, which was built between 1928 and 1932, was capable of extreme performance, which it realised when it won numerous competitions. At the time, it was one of the most highly regarded sports cars although it was a wheelbase of an early Mercedes-Benz S.
The Mercedes-Benz W125 Rekordwagen was produced in the tail end of the 1930s derived from a recent car at the time. The significant difference was the engine as the Grand Prix race car had a lower engine, a V12, which was able to reduce drag.
The Mercedes-Benz SLR McLaren. This was a collaboration between Mercedes-Benz and McLaren Automotive. The grand tourer was built in England, more specifically Woking, Surrey and Portsmouth. Mercedes-Benz owned almost half of the McLaren Group at the time. The car sold between the years 2003 and 2009. Some commentators said they classed it as a GT.
The Mercedes-Benz S-Class. This series of luxury sedans was a introduced, along with the W116 S-Class in 1972. It continued on from former models who go a long way back, to the mid 1950s. The S-Class is Mercedes-Benz’s flagship and has introduced many of the brand’s technologies such as drivetrain technologies.
The Mercedes-Benz M-Class. This sporty, utility SUV was brought to the market in 1997. However, it was officially listed a 1998 model. Its success didn’t occur overnight but it eventually proved successful in the Us and Mexican markets. With regards to its size it is larger tan a GLK lass but smaller than a GL-Class, a model with a platform that it shares. At one point, it was also being built in Austria, with an eye on he European market. This was before it moved to a part of the US market.
The Mercedes-Benz W125 Rekordwagen was produced in the tail end of the 1930s derived from a recent car at the time. The significant difference was the engine as the Grand Prix race car had a lower engine, a V12, which was able to reduce drag.
The Mercedes-Benz SLR McLaren. This was a collaboration between Mercedes-Benz and McLaren Automotive. The grand tourer was built in England, more specifically Woking, Surrey and Portsmouth. Mercedes-Benz owned almost half of the McLaren Group at the time. The car sold between the years 2003 and 2009. Some commentators said they classed it as a GT.
The Mercedes-Benz S-Class. This series of luxury sedans was a introduced, along with the W116 S-Class in 1972. It continued on from former models who go a long way back, to the mid 1950s. The S-Class is Mercedes-Benz’s flagship and has introduced many of the brand’s technologies such as drivetrain technologies.
The Mercedes-Benz M-Class. This sporty, utility SUV was brought to the market in 1997. However, it was officially listed a 1998 model. Its success didn’t occur overnight but it eventually proved successful in the Us and Mexican markets. With regards to its size it is larger tan a GLK lass but smaller than a GL-Class, a model with a platform that it shares. At one point, it was also being built in Austria, with an eye on he European market. This was before it moved to a part of the US market.
Polo Ralph Lauren Corporation (RL) Closes 2.73% Higher
Shares of Polo Ralph Lauren Corporation (NYSE: RL) jumped more than 3% in today's trading. The stock reached a high of $89.26 in trading, and closed 2.73% higher at $88.12. Volume was up from daily average of 1.01 million to 5.58 million.
Earlier today, Polo Ralph Lauren reported its fourth quarter and fiscal 2010 results. The company reported fourth-quarter net income of $114 million, or $1.13 per share, up from $45 million, or $0.44 per share reported in the fourth quarter of previous year. For fiscal 2010, the company reported net income of $480 million, or $4.73 per share, up from $406 million, or $4.01 per share reported in fiscal 2009. Revenue increased 9% to $1.3 billion in the fourth quarter. For the full fiscal year, revenue fell 1% to $5 billion. The decline has been mainly due to lower global wholesale shipment volumes. In the fourth quarter the company opened three directly operated freestanding stores, while it closed two directly operated freestanding stores. It also took over 16 freestanding stores and 75 concession shop locations in Asia.
Commenting on the results, Ralph Lauren, the company's chairman and CEO, said that in fiscal 2010, the company saw tremendous growth????????? and progress. Lauren said that the successful takeover Asian operations, development of accessories products and opening of several luxury stores were the highlights of fiscal 2010. With more than $1.2 billion in cash and investments on its balance sheet, the company is planning to accelerate investments in growth initiatives during fiscal 2011.
But where will this growth come from? The U.S. market is only just recovering. Consumer spending, the backbone of the U.S. economy, is seeing a rebound. But, it is still way below the pre-crisis levels. Europe is even worse. With all the troubles that the continent has been growing through, it looks like a recovery is a long way off. This leaves the company with just the Asian markets. In fiscal 2010, the company took contro! l of the Asian operations and this gives a signal that it is ready to focus more on these markets. This is a step in the right direction.
The stock has seen a lot of price fluctuations in the past year. It has a 52-week range of $48.07-$95.59. The stock has a beta of 1.60. Currently, the stock is trading above its 50-day and 200-day moving averages.
About BeaconEquity.com
BeaconEquity.com is committed to producing the highest-quality insight and analysis of small cap stocks, emerging technology stocks,hot penny stocks and helping investors make informed decisions. Our focus is primarily on the underserved OTC stocks market, or "penny stock" market, which has traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.
Earlier today, Polo Ralph Lauren reported its fourth quarter and fiscal 2010 results. The company reported fourth-quarter net income of $114 million, or $1.13 per share, up from $45 million, or $0.44 per share reported in the fourth quarter of previous year. For fiscal 2010, the company reported net income of $480 million, or $4.73 per share, up from $406 million, or $4.01 per share reported in fiscal 2009. Revenue increased 9% to $1.3 billion in the fourth quarter. For the full fiscal year, revenue fell 1% to $5 billion. The decline has been mainly due to lower global wholesale shipment volumes. In the fourth quarter the company opened three directly operated freestanding stores, while it closed two directly operated freestanding stores. It also took over 16 freestanding stores and 75 concession shop locations in Asia.
Commenting on the results, Ralph Lauren, the company's chairman and CEO, said that in fiscal 2010, the company saw tremendous growth????????? and progress. Lauren said that the successful takeover Asian operations, development of accessories products and opening of several luxury stores were the highlights of fiscal 2010. With more than $1.2 billion in cash and investments on its balance sheet, the company is planning to accelerate investments in growth initiatives during fiscal 2011.
But where will this growth come from? The U.S. market is only just recovering. Consumer spending, the backbone of the U.S. economy, is seeing a rebound. But, it is still way below the pre-crisis levels. Europe is even worse. With all the troubles that the continent has been growing through, it looks like a recovery is a long way off. This leaves the company with just the Asian markets. In fiscal 2010, the company took contro! l of the Asian operations and this gives a signal that it is ready to focus more on these markets. This is a step in the right direction.
The stock has seen a lot of price fluctuations in the past year. It has a 52-week range of $48.07-$95.59. The stock has a beta of 1.60. Currently, the stock is trading above its 50-day and 200-day moving averages.
About BeaconEquity.com
BeaconEquity.com is committed to producing the highest-quality insight and analysis of small cap stocks, emerging technology stocks,hot penny stocks and helping investors make informed decisions. Our focus is primarily on the underserved OTC stocks market, or "penny stock" market, which has traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.
Is FLIR's Stock Expensive by the Numbers?
Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:
We'll look at the numbers against some competitors and industry mates: L-3 Communications Holdings (NYSE: LLL ) , Lockheed Martin (NYSE: LMT ) , and Honeywell International (NYSE: HON ) .
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
FLIR has a P/E ratio of 18.5 and an EV/FCF ratio of 29.9 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, FLIR has a P/E ratio of 19.9 and a five-year EV/FCF ratio of 23.3.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
FLIR ! has a mi xed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.?
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, FLIR's net income margin has ranged from 13.7% to 20.6%. In that same time frame, unlevered free cash flow margin has ranged from 8.2% to 22.2%.
How do those figures compare with those of the company's peers? See for yourself:
Next, let's figure out...
How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, FLIR has put up past EPS growth rates of 16.5%. Meanwhile, Wall Street's analysts expect future growth rates of 14.8%.
Here's how FLIR compares to its peers for trailing five-year growth:
The pile of numbers we've plowed through has shown us the price multiples shares of FLIR?are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 18.5 P/E ratio, and we see that its price multiples are elevated for companies linked to the defense industry. Its multiples are higher than each of its comps.
However, looking at margins and growth over the last five years, FLIR also beats L-3, Lockheed, and Honeywell. On an absolute basis, its margins are quite impressive.
Although FLIR's price multiples ! are expe nsive, its operational numbers could justify them. Our CAPS community rates FLIR four stars out of five despite the uncertainty of defense budgets. But these initial numbers are just a start. If you find FLIR's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.
- The current price multiples.
- The consistency of past earnings and cash flow.
- How much growth we can expect.
We'll look at the numbers against some competitors and industry mates: L-3 Communications Holdings (NYSE: LLL ) , Lockheed Martin (NYSE: LMT ) , and Honeywell International (NYSE: HON ) .
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
FLIR has a P/E ratio of 18.5 and an EV/FCF ratio of 29.9 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, FLIR has a P/E ratio of 19.9 and a five-year EV/FCF ratio of 23.3.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
FLIR ! has a mi xed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.?
Company | 1-Year P/E | 1-Year EV/FCF | 5-Year P/E | 5-Year EV/FCF |
|---|---|---|---|---|
| FLIR Systems | 18.5 | 29.9 | 19.9 | 23.3 |
| L-3 Communications Holdings | 7.1 | 7.4 | 7.7 | 7.7 |
| Lockheed Martin | 8.8 | 11.3 | 8.9 | 9.4 |
| Honeywell International | 15.7 | 25.0 | 18.3 | 14.5 |
Source: S&P Capital IQ.
Numerically, we've seen how FLIR's valuation rates on both an absolute and relative basis. Next, let's examine...The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, FLIR's net income margin has ranged from 13.7% to 20.6%. In that same time frame, unlevered free cash flow margin has ranged from 8.2% to 22.2%.
How do those figures compare with those of the company's peers? See for yourself:
Source: S&P Capital IQ; margin ranges are combined.
Additionally, over the last five years, FLIR has tallied up five years of positive earnings and five years of positive free cash flow.Next, let's figure out...
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, FLIR has put up past EPS growth rates of 16.5%. Meanwhile, Wall Street's analysts expect future growth rates of 14.8%.
Here's how FLIR compares to its peers for trailing five-year growth:
Source: S&P Capital IQ; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:Source: S&P Capital IQ; estimates for EPS growth.
The bottom lineThe pile of numbers we've plowed through has shown us the price multiples shares of FLIR?are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 18.5 P/E ratio, and we see that its price multiples are elevated for companies linked to the defense industry. Its multiples are higher than each of its comps.
However, looking at margins and growth over the last five years, FLIR also beats L-3, Lockheed, and Honeywell. On an absolute basis, its margins are quite impressive.
Although FLIR's price multiples ! are expe nsive, its operational numbers could justify them. Our CAPS community rates FLIR four stars out of five despite the uncertainty of defense budgets. But these initial numbers are just a start. If you find FLIR's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
I wrote about a stock that's flying under the radar in our brand new free report: "The Stocks Only the Smartest Investors Are Buying." I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.
The Fed, The S&P 500, & Why Gold Is Shining Bright
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (the banks) will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
~ Thomas Jefferson ~
Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level. My last two articles have discussed why I was expecting a top in the coming days and weeks ahead, but prices just continued to work higher.
One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest. If I blow a call I fess up and admit it. When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers and members of my service.
This time is different. I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 Thursday was certainly bearish short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more than Ben Bernanke's pet, but that is a topic for a different time.
I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near. The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.
The daily chart of the S&P 500 Index demonstrates the recent price action that has cont! inued to climb the "Wall of Worry" for several weeks:
S&P 500 Daily Chart
?
The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during Wednesday's press release and press conference.
The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies. The race will not end well. In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains.
Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.
At this point, it seems like Ben Bernanke will do anything to juice equity prices higher. I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing. However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.
As an example, the daily chart of the Dow Jones Industrial Average is shown below. I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs. Furthermore, the Thursday high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.
Dow Jones Industrial Average Daily Chart
?
I have argued for quite some time that the economy and the stock market are two different things. If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.
Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital? We all recognize t! hat the current economy is nowhere near as strong as it was in 2007. But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.
One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher. The NYSE volume over the past 2 months has been putrid when compared to historical norms.
As a trader, I am forced to take risk through a variety of trade structures. However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.
If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal. Let's be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system.
To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:
Current M2 Money Supply
?
The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an "extended period of time (2014)." Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available. If they did, they seemingly would have used them by now.
The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal! Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.
At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.
As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.
Gold Weekly Chart
?
In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.
If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?
~ Thomas Jefferson ~
Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level. My last two articles have discussed why I was expecting a top in the coming days and weeks ahead, but prices just continued to work higher.
One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest. If I blow a call I fess up and admit it. When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers and members of my service.
This time is different. I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 Thursday was certainly bearish short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more than Ben Bernanke's pet, but that is a topic for a different time.
I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near. The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.
The daily chart of the S&P 500 Index demonstrates the recent price action that has cont! inued to climb the "Wall of Worry" for several weeks:
S&P 500 Daily Chart
?
The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during Wednesday's press release and press conference.
The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies. The race will not end well. In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains.
Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.
At this point, it seems like Ben Bernanke will do anything to juice equity prices higher. I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing. However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.
As an example, the daily chart of the Dow Jones Industrial Average is shown below. I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs. Furthermore, the Thursday high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.
Dow Jones Industrial Average Daily Chart
?
I have argued for quite some time that the economy and the stock market are two different things. If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.
Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital? We all recognize t! hat the current economy is nowhere near as strong as it was in 2007. But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.
One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher. The NYSE volume over the past 2 months has been putrid when compared to historical norms.
As a trader, I am forced to take risk through a variety of trade structures. However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.
If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal. Let's be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system.
To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:
Current M2 Money Supply
?
The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an "extended period of time (2014)." Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available. If they did, they seemingly would have used them by now.
The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal! Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.
At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.
As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.
Gold Weekly Chart
?
In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.
If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?
ResMed Inc. Earnings: Keeping the Profitability Streak Alive
ResMed Inc. (NYSE:RMD) reported net income above Wall Street’s expectations for the second quarter. ResMed is a developer, manufacturer and distributor of medical equipment for treating, diagnosing and managing sleep-disordered breathing and other respiratory disorders.
ResMed Earnings Cheat Sheet for the Second Quarter
Results: Net income for ResMed Inc. rose to $62.9 million (42 cents per share) vs. $58.5 million (37 cents per share) in the same quarter a year earlier. This marks a rise of 7.6% from the year earlier quarter.
Revenue: Rose 8.7% to $332.7 million from the year earlier quarter.
Actual vs. Wall St. Expectations: RMD beat the mean analyst estimate of 38 cents per share. It fell short of the average revenue estimate of $339.6 million.
Quoting Management: Peter C. Farrell Ph.D, chairman and chief executive officer, commented, “On a regional basis, revenue in the Americas increased by 12% to $182.5 million over the prior year’s quarter. Revenue outside the Americas was $150.2 million, an increase of 5% over the prior year’s quarter, on both a GAAP and constant currency basis. Our global operating profit for the December quarter was $67.3 million and cash flow from operations was a record $110.6 million, demonstrating excellent operating performance. During the quarter, we also repurchased 4.1 million shares, at a cost of $110.5 million, as part of our ongoing capital management program.”
Key Stats:
Gross margin shrank 1.1 percentage points to 59.7%. The contraction appeared to be driven by increased costs, which rose 11.7% from the year earlier quarter while revenue rose 8.7%.
Revenue has risen the past four quarters. Revenue increased 11.6% to $314.8 million in the first quarter. The figure rose 17.3% in the fourth quarter of the last fiscal year from the year earlier and climbed 12.4% in the thi! rd quart er of the last fiscal year from the year-ago quarter.
The company topped expectations last quarter after falling short of forecasts in the first quarter with net income of 33 cents versus a mean estimate of net income of 35 cents per share.
The increase in profit last quarter comes after net income fell in the previous quarter. In the first quarter, net income declined 10.9% to $50.5 million.
Looking Forward: Expectations for the company’s next quarter results are lower than they have been. Over the past sixty days, the average estimate for third quarter has fallen from 40 cents per share to 39 cents. In the past month, the average estimate for the fiscal year has fallen from $1.55 per share to $1.54 abs.
Competitors to Watch: Allied Healthcare Product (NASDAQ:AHPI), Masimo Corporation (NASDAQ:MASI), Electromed, Inc. (NASDAQ:ELMD), Medtronic, Inc. (NYSE:MDT), Dynatronics Corporation (NASDAQ:DYNT), Thermo Fisher Scientific Inc. (NYSE:TMO), Covidien plc (NYSE:COV), Dehaier Medical Systems Ltd (NASDAQ:DHRM), and CareFusion Corporation (NYSE:CFN).
ResMed Earnings Cheat Sheet for the Second Quarter
Results: Net income for ResMed Inc. rose to $62.9 million (42 cents per share) vs. $58.5 million (37 cents per share) in the same quarter a year earlier. This marks a rise of 7.6% from the year earlier quarter.
Revenue: Rose 8.7% to $332.7 million from the year earlier quarter.
Actual vs. Wall St. Expectations: RMD beat the mean analyst estimate of 38 cents per share. It fell short of the average revenue estimate of $339.6 million.
Quoting Management: Peter C. Farrell Ph.D, chairman and chief executive officer, commented, “On a regional basis, revenue in the Americas increased by 12% to $182.5 million over the prior year’s quarter. Revenue outside the Americas was $150.2 million, an increase of 5% over the prior year’s quarter, on both a GAAP and constant currency basis. Our global operating profit for the December quarter was $67.3 million and cash flow from operations was a record $110.6 million, demonstrating excellent operating performance. During the quarter, we also repurchased 4.1 million shares, at a cost of $110.5 million, as part of our ongoing capital management program.”
Key Stats:
Gross margin shrank 1.1 percentage points to 59.7%. The contraction appeared to be driven by increased costs, which rose 11.7% from the year earlier quarter while revenue rose 8.7%.
Revenue has risen the past four quarters. Revenue increased 11.6% to $314.8 million in the first quarter. The figure rose 17.3% in the fourth quarter of the last fiscal year from the year earlier and climbed 12.4% in the thi! rd quart er of the last fiscal year from the year-ago quarter.
The company topped expectations last quarter after falling short of forecasts in the first quarter with net income of 33 cents versus a mean estimate of net income of 35 cents per share.
The increase in profit last quarter comes after net income fell in the previous quarter. In the first quarter, net income declined 10.9% to $50.5 million.
Looking Forward: Expectations for the company’s next quarter results are lower than they have been. Over the past sixty days, the average estimate for third quarter has fallen from 40 cents per share to 39 cents. In the past month, the average estimate for the fiscal year has fallen from $1.55 per share to $1.54 abs.
Competitors to Watch: Allied Healthcare Product (NASDAQ:AHPI), Masimo Corporation (NASDAQ:MASI), Electromed, Inc. (NASDAQ:ELMD), Medtronic, Inc. (NYSE:MDT), Dynatronics Corporation (NASDAQ:DYNT), Thermo Fisher Scientific Inc. (NYSE:TMO), Covidien plc (NYSE:COV), Dehaier Medical Systems Ltd (NASDAQ:DHRM), and CareFusion Corporation (NYSE:CFN).
Woz loves Android, but iPhone is still good for most in 2012
(gigaom.com) -- My primary phone is the iPhone. I love the beauty of it. But I wish it did all the things my Android does, I really do.
Speaking to Dan Lyons in an article comparing the iPhone to Android devices, Apple co-founder, Steve Wozniak points out the relative limitations of Apple’s iPhone. Woz makes the case made by many smartphone power-users, suggesting the iPhone is still a great device for most people, but with a little effort and understanding, more can be done to an Android phone. Greater customization and user control have always been key selling points for Android devices; both the high-end smartphones and even the low-cost units.
Another interesting tidbit from Lyons’ article: unlike me, Woz prefers the Motorola Droid Razr over the Samsung Galaxy Nexus. Really, Woz? Are you running a custom ROM or are you suggesting that Android 4.0 isn’t as good as its predecessor? Oh well; that’s the beauty of Android: To each his or her own!
Related research and analysis from GigaOM Pro:
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Speaking to Dan Lyons in an article comparing the iPhone to Android devices, Apple co-founder, Steve Wozniak points out the relative limitations of Apple’s iPhone. Woz makes the case made by many smartphone power-users, suggesting the iPhone is still a great device for most people, but with a little effort and understanding, more can be done to an Android phone. Greater customization and user control have always been key selling points for Android devices; both the high-end smartphones and even the low-cost units.
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Related research and analysis from GigaOM Pro:
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Darden Drops As Olive Garden’s Troubles Continue
Olive Garden is a simple restaurant concept that has turned into to be a serious problem for Darden Restaurants (DRI), which owns the chain along with others like Red Lobster and LongHorn Steakhouse.
Today, Darden lowered its EPS projection for the second quarter to 41 cents per share, below analysts’ expectations for 54 cents. The company also lowered its sales and profit forecast for 2012; it now expects EPS to grow 4% to 7%, down from 12% to 15% previously. Sales growth is now projected to come in at 6% to 7%, down from 6.5% to 7.7% previously. Shares fell 11% in morning trading.
Olive Garden’s same-restaurant sales have continued to fall, and the chain is expected to post a 2.5% drop for the current quarter. Same-restaurant sales actually fell 5.7% in November, accelerating from a 2.5% drop in October, according to a Darden release.
“At Olive Garden, we’re addressing the erosion in one of the brand’s essential attributes, its value leadership in casual dining,” said Chairman and CEO Clarence Otis. “In working to re-establish that historical value advantage, Olive Garden more strongly emphasized containing check growth this quarter than in prior periods, and that was reflected in its promotion and in-restaurant merchandising tactics. This helped temper the guest count decline for the quarter, but not as much as expected.As a result, there was more earnings pressure than anticipated.”
Today, Darden lowered its EPS projection for the second quarter to 41 cents per share, below analysts’ expectations for 54 cents. The company also lowered its sales and profit forecast for 2012; it now expects EPS to grow 4% to 7%, down from 12% to 15% previously. Sales growth is now projected to come in at 6% to 7%, down from 6.5% to 7.7% previously. Shares fell 11% in morning trading.
Olive Garden’s same-restaurant sales have continued to fall, and the chain is expected to post a 2.5% drop for the current quarter. Same-restaurant sales actually fell 5.7% in November, accelerating from a 2.5% drop in October, according to a Darden release.
“At Olive Garden, we’re addressing the erosion in one of the brand’s essential attributes, its value leadership in casual dining,” said Chairman and CEO Clarence Otis. “In working to re-establish that historical value advantage, Olive Garden more strongly emphasized containing check growth this quarter than in prior periods, and that was reflected in its promotion and in-restaurant merchandising tactics. This helped temper the guest count decline for the quarter, but not as much as expected.As a result, there was more earnings pressure than anticipated.”
Favorite Large Bank Picks For Jan-2012
Yesterday, major regional banks (fourteen in number) sported gains of almost 1.16 percent, collectively. Among these banks, Bank of America's share price gained the least ($0.18), while? M&T Bank Corp's share price gained the most ($3.8).
Share price gains were surprising given that the Federal Reserve proposed steps to strengthen regulation and supervision of large bank holding companies with consolidated assets equal to or greater than $50 billion or those designated to be systemically important. The proposals include risk-based capital and leverage requirements implemented in two phases that would include subjection to the Fed's capital plan rule that requires firms to develop annual capital plans, conduct stress tests, and maintain adequate capital ratios, as well as a proposal issued by the Fed to implement a risk-based capital surcharge based on the framework and methodology developed by the
Basel Committee on Banking Supervision. Firms would also be subjected to annual stress tests. Credit exposure of a covered financial firm would be limited to a single counterparty as a percentage of the firm's regulatory capital. The Fed noted that it is proposing that firms would need to comply with many of the enhanced standards a year after they are finalized. Requirements related to stress tests would take effect shortly after the rule is finalized.
Compliance with Fed's proposals would not only increase regulatory costs but would also limit strategic options for these banks. So Fed's announcement should have had a negative impact. Yesterday that didn't happen but would surely happen as the market digests the import of Fed's proposals. This should lead to adjustments, positive on some and negative on some other, in the share prices of these fourteen banks. Though I am not giving the workings of the detailed share price impacts, nevertheless I will pick my favorite stocks among these fourteen.
Fifth Third Bancorp? (NASDAQ:FITB)
Fifth Third! 's capit al position is already well in excess of established standards, likely standards, and most peers. Holding company cash is currently sufficient for more than 2 years of obligations. Minimal holding company or bank debt maturities until 2013, so need for new capital at above peer average cost of marginal capital is minimal. Fifth Third has completely exited all crisis-era government support programs and it is one of the few large banks that
have no TLGP-guaranteed debt to refinance in 2012. In addition, it has no direct European sovereign exposure; total exposure to European peripheral borrowers is less than $0.2 billion and gross exposure to European banks less than $0.3 billion.
I expect FITB share to test $15.5 and establish $15 in January 2012.
State Street Corporation? (NYSE:STT)
STT has two powerful platforms for growth namely State Street Global Services ($21.5 trillion in assets under custody and administration), and State Street Global Advisors (1.9 trillion in assets under management). Nearly 78 of its top 100 clients use both asset servicing and asset management and they account for about 35% of total management fee revenue (YTD 2011).
As of end September 2011, STT's tier 1 common ratio was 16 percent,which is significantly higher than 12.5 percent for The Bank of New York Mellon Corporation? (NYSE:BK), and 11.8 percent for Northern Trust Corporation? (NASDAQ:NTRS). Moreover, even under Basel III, STT's tier 1 common ratio was 11.7 percent, which is significantly higher than 6.5 percent for The Bank of New York Mellon Corporation (NYSE:BK), and 11.8 percent for Northern Trust Corporation (NASDAQ:NTRS).
I expect STT share to test $50 and establish $49 in January 2012.
Other stocks that I think could benefit include SunTrust Banks, Inc.(NYSE:STI), U.S. Bancorp (NYSE:USB), and JPMorgan Chase & Co. (NYSE:JPM).{$end}
Share price gains were surprising given that the Federal Reserve proposed steps to strengthen regulation and supervision of large bank holding companies with consolidated assets equal to or greater than $50 billion or those designated to be systemically important. The proposals include risk-based capital and leverage requirements implemented in two phases that would include subjection to the Fed's capital plan rule that requires firms to develop annual capital plans, conduct stress tests, and maintain adequate capital ratios, as well as a proposal issued by the Fed to implement a risk-based capital surcharge based on the framework and methodology developed by the
Basel Committee on Banking Supervision. Firms would also be subjected to annual stress tests. Credit exposure of a covered financial firm would be limited to a single counterparty as a percentage of the firm's regulatory capital. The Fed noted that it is proposing that firms would need to comply with many of the enhanced standards a year after they are finalized. Requirements related to stress tests would take effect shortly after the rule is finalized.
Compliance with Fed's proposals would not only increase regulatory costs but would also limit strategic options for these banks. So Fed's announcement should have had a negative impact. Yesterday that didn't happen but would surely happen as the market digests the import of Fed's proposals. This should lead to adjustments, positive on some and negative on some other, in the share prices of these fourteen banks. Though I am not giving the workings of the detailed share price impacts, nevertheless I will pick my favorite stocks among these fourteen.
Fifth Third Bancorp? (NASDAQ:FITB)
Fifth Third! 's capit al position is already well in excess of established standards, likely standards, and most peers. Holding company cash is currently sufficient for more than 2 years of obligations. Minimal holding company or bank debt maturities until 2013, so need for new capital at above peer average cost of marginal capital is minimal. Fifth Third has completely exited all crisis-era government support programs and it is one of the few large banks that
have no TLGP-guaranteed debt to refinance in 2012. In addition, it has no direct European sovereign exposure; total exposure to European peripheral borrowers is less than $0.2 billion and gross exposure to European banks less than $0.3 billion.
I expect FITB share to test $15.5 and establish $15 in January 2012.
State Street Corporation? (NYSE:STT)
STT has two powerful platforms for growth namely State Street Global Services ($21.5 trillion in assets under custody and administration), and State Street Global Advisors (1.9 trillion in assets under management). Nearly 78 of its top 100 clients use both asset servicing and asset management and they account for about 35% of total management fee revenue (YTD 2011).
As of end September 2011, STT's tier 1 common ratio was 16 percent,which is significantly higher than 12.5 percent for The Bank of New York Mellon Corporation? (NYSE:BK), and 11.8 percent for Northern Trust Corporation? (NASDAQ:NTRS). Moreover, even under Basel III, STT's tier 1 common ratio was 11.7 percent, which is significantly higher than 6.5 percent for The Bank of New York Mellon Corporation (NYSE:BK), and 11.8 percent for Northern Trust Corporation (NASDAQ:NTRS).
I expect STT share to test $50 and establish $49 in January 2012.
Other stocks that I think could benefit include SunTrust Banks, Inc.(NYSE:STI), U.S. Bancorp (NYSE:USB), and JPMorgan Chase & Co. (NYSE:JPM).{$end}
SEC to appeal rejected Citigroup settlement
NEW YORK (CNNMoney) -- The Securities and Exchange Commission is appealing a federal judge's decision last month to toss out a proposed $285 million mortgage securities fraud settlement between the agency and Citigroup.
Federal judge Jed Rakoff ruled on Nov. 28 that the deal between the SEC and Citi was "neither fair, nor reasonable, nor adequate, nor in the public interest" and ordered the case to proceed to trial in July 2012.
He said that the settlement announced in October, under which Citigroup (C, Fortune 500) neither admitted nor denied the SEC's allegations, deprived the public "of ever knowing the truth in a matter of obvious public importance."
The SEC argued in a statement Thursday that the ruling "inadvertently harms investors by depriving them of substantial, certain and immediate benefits."
"We believe the court was incorrect in requiring an admission of facts -- or a trial -- as a condition of approving a proposed consent judgment," said the agency. It argued Rakoff's ruling would set a new standard for settlements that would be difficult to reach and that it is at odds with established practice.
The SEC said the $285 million proposed settlement, "while less than investor losses, represents most of the total monetary recovery that the SEC itself could have sought at trial. An SEC settlement does not limit the ability of injured investors to pursue claims for additional relief."
Rakoff said in his ruling that given the damage done to financial markets by the alleged actions by Citigroup, a greater level of transparency is needed.
The SEC's pattern of allowing big banks to reach settlements without admitting or denying wrongdoing, Rakoff added, has been "hallowed by history, but not by reason."
Citigroup did not have an immediate reaction to the SEC's appeal. At the time of Rakoff's ruling, a spokeswoman for the banking giant said it respectfully disagreed with the decision.
"In the event the case is tried, we would present substantial factual and legal defenses to the charges," she added.
The SEC alleged that in 2007, Citi created and sold a mortgage-related collaterialized debt obligation, or CDO, called Class V Funding III.
According to the SEC complaint, one CDO trader characterized the asset group in internal communications as "a collection of dogshit" and "possibly the best short EVER!"
Can Wall Street thrive again?
In marketing materials, however, the assets were described as "attractive investments rigorously selected by an independent investment adviser," Rakoff's decision said.
After marketing the CDO, Citi then took a short position -- or bet against -- the security as the housing market deteriorated, bringing in a net profit of $160 million for the bank. Meanwhile, investors lost more than $700 million.
The SEC has settled a string of similar complaints in recent months, including agreements with Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).
Rakoff, though, has been a thorn in the agency's side in recent years, rejecting a proposed $33 million settlement in 2009 between the SEC and Bank of America (BAC, Fortune 500) over allegations that BofA lied about bonuses for Merrill Lynch & Co. employees following the firms' merger.
That settlement ! was late r revised upward to $150 million, which Rakoff reluctantly approved, calling it "half-baked justice at its best."
Shares of Citi (C, Fortune 500) closed down 0.5% in trading Thursday.
Federal judge Jed Rakoff ruled on Nov. 28 that the deal between the SEC and Citi was "neither fair, nor reasonable, nor adequate, nor in the public interest" and ordered the case to proceed to trial in July 2012.
He said that the settlement announced in October, under which Citigroup (C, Fortune 500) neither admitted nor denied the SEC's allegations, deprived the public "of ever knowing the truth in a matter of obvious public importance."
The SEC argued in a statement Thursday that the ruling "inadvertently harms investors by depriving them of substantial, certain and immediate benefits."
"We believe the court was incorrect in requiring an admission of facts -- or a trial -- as a condition of approving a proposed consent judgment," said the agency. It argued Rakoff's ruling would set a new standard for settlements that would be difficult to reach and that it is at odds with established practice.
Big bank SEC settlements: Toothless face-savers?
"Courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide," said the agency.The SEC said the $285 million proposed settlement, "while less than investor losses, represents most of the total monetary recovery that the SEC itself could have sought at trial. An SEC settlement does not limit the ability of injured investors to pursue claims for additional relief."
Rakoff said in his ruling that given the damage done to financial markets by the alleged actions by Citigroup, a greater level of transparency is needed.
JPMorgan pays $153 million to settle mortgage case
"[I]n any case like this that touches on t! he trans parency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Rakoff, a U.S. district judge in Manhattan, wrote in his decision.The SEC's pattern of allowing big banks to reach settlements without admitting or denying wrongdoing, Rakoff added, has been "hallowed by history, but not by reason."
Citigroup did not have an immediate reaction to the SEC's appeal. At the time of Rakoff's ruling, a spokeswoman for the banking giant said it respectfully disagreed with the decision.
"In the event the case is tried, we would present substantial factual and legal defenses to the charges," she added.
The SEC alleged that in 2007, Citi created and sold a mortgage-related collaterialized debt obligation, or CDO, called Class V Funding III.
According to the SEC complaint, one CDO trader characterized the asset group in internal communications as "a collection of dogshit" and "possibly the best short EVER!"
Can Wall Street thrive again?
In marketing materials, however, the assets were described as "attractive investments rigorously selected by an independent investment adviser," Rakoff's decision said.
After marketing the CDO, Citi then took a short position -- or bet against -- the security as the housing market deteriorated, bringing in a net profit of $160 million for the bank. Meanwhile, investors lost more than $700 million.
The SEC has settled a string of similar complaints in recent months, including agreements with Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).
Rakoff, though, has been a thorn in the agency's side in recent years, rejecting a proposed $33 million settlement in 2009 between the SEC and Bank of America (BAC, Fortune 500) over allegations that BofA lied about bonuses for Merrill Lynch & Co. employees following the firms' merger.
That settlement ! was late r revised upward to $150 million, which Rakoff reluctantly approved, calling it "half-baked justice at its best."
Shares of Citi (C, Fortune 500) closed down 0.5% in trading Thursday.
Buy, Sell or Hold: The Clorox Co. (NYSE:CLX) Is Cleaning Up
The Clorox Co. (NYSE:CLX) on Thursday reported net earnings of $171 million on sales of $1.52 billion for the fourth quarter of fiscal year 2010 ended June 30, compared to net earnings of $170 million on net sales of $1.5 billion the year prior.
This continued the company's trend of improvement. But more importantly, the bulk of Clorox's profit and margin growth came from its international unit, and the firm projected an expansion in earnings per share of at least 10% to 14% for next fiscal year.
Boring is beautiful when you're dealing with consumer staples, since share prices improve with incremental increases in sales and margins. In Clorox's case, this has meant taking advantage of low rates and dependable cashflow to finance expansion plans. But the good news is that the high financial leverage results in an exorbitant return on equity.
This continued the company's trend of improvement. But more importantly, the bulk of Clorox's profit and margin growth came from its international unit, and the firm projected an expansion in earnings per share of at least 10% to 14% for next fiscal year.
Boring is beautiful when you're dealing with consumer staples, since share prices improve with incremental increases in sales and margins. In Clorox's case, this has meant taking advantage of low rates and dependable cashflow to finance expansion plans. But the good news is that the high financial leverage results in an exorbitant return on equity.
Clorox's strong cashflow affords the company very comfortable debt coverage ratios. Its level of debt to earnings before income tax, depreciation and amortization (EBITDA) has declined in the last three years from 3.3-times to 2.2-times, improving its creditworthiness. Clorox's interest coverage ratio (EBITDA to interest expense) also has improved strongly, to 8.96-times from 6.27-times. This trend has warranted an improvement in the firm's credit rating outlook, which in the investment grade is BBB+ to stable.
There is no question that this is a sound strategy with interest rates so low. A few years from now, as interest rates normalize and the cost of debt goes up, this strategy will be more costly. But, by that time, the company's effort to improve its earnings/debt ratio will have put it in a better position to face higher borrowing costs.
Of course, there's more to Clorox's recent success than shrewd borrowing.
In the past two years the company has set out to recover the slight profit ! margin e rosion brought on by the economic disaster. And in that time, Clorox has recovered much its lost market share through disciplined cost cutting, better pricing power and lower commodity prices. You see, in this business, little differences add up. That means careful marketing, advertising, distribution and cost controls, as well as an optimal financing structure are of paramount importance. And that's precisely where Clorox has excelled.
For example, Clorox is already number two in U.S. market share, behind The Procter & Gamble Co. (NYSE: PG). In fact, Clorox is ranked in the top two in almost every one of its key brands. And those brands represent 88% of the company's total portfolio.
While double-digit earnings growth is achievable via growth in both its core U.S. operations and in its international units, do not expect miracles. The likely range for outperformance or underperformance is relatively small at first sight. Yet, the relatively low weight of international sales within the company and a proven capacity for successful and profitable innovation make its objectives achievable. There is some room for upside surprises with both new products and developments in fast-growing emerging economies.
Clorox concentrates some 71% of its international presence in home cleaning and bleach and laundry products in Latin America. And the fact that Asia today represents only 5% of sales is actually a plus, since it leaves lots of room for improvement in the long term. So, we have a superbly managed marketing company, with plenty of room to grow internationally.
This success is the result of a carefully managed process that prioritizes margin and market share expansion, allocating resources based on economic profit. We expect continued margin improvement through the continuation of relentless cost savings initiatives, information technology investment, and innovation. In addition, market s! hare imp rovement will come from the launching of carefully targeted products - the emphasis being in value and superior customer perception.
Health and wellness are key themes that will drive future growth. Clorox has very sophisticated market segmentation, product positioning and overall marketing strategy in these sectors. It is bound to deliver results, based on their proven track record.
Earnings momentum is at its back due to a mix of carefully tested marketing and financial initiatives. The stock is valued at 13-times earnings at a nice discount to the Standard & Poor's 500 Index. Its Price/Earnings/Growth (PEG) ratio is high at 1.43, though not disqualifying.
We can overpay a little for growth that we are pretty certain lies ahead. And Clorox offers an attractive 3.4% dividend yield. That dividend is easily sustainable at a dividend payout ratio of only 47%. In fact, it was just raised by 10% in May.
Technically, the stock is almost "boringly" bullish. Its 200-day moving average shows a very steady upward slope. At just over $64 a share Clorox is sitting right near its 50-day moving average and in the middle of the Bollinger bands, in an oversold condition. This bodes very well for an entry point.
However, the stock also is approaching the 2007 all-time high, so it should start showing some short-term resistance. So what is the investment proposition?
With this type of stability and high dividend yield, Clorox should be a core holding in any portfolio that is not purely speculative. Rather than sitting in ten-year U.S. Treasury bonds, we can sit on Clorox stock, get paid much more and have the upside of a first-class equity that can actually adjust prices up if inflation becomes a problem.
If we see some resistance here, we could run a short-term covered-call strategy: Buy the stock and sell some out of the money calls on it. The one-month calls we sell lower our entry poi! nt in th e stock by the amount of premium we collect and would probably expire worthless. The traditional risk-minimization strategy is to dollar-cost average into the stock over the next couple of months.
Recommendation: Dollar-cost average into The Clorox Co. (NYSE:CLX) on a weekly basis over the next two months (**).
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in The Clorox Co.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
There is no question that this is a sound strategy with interest rates so low. A few years from now, as interest rates normalize and the cost of debt goes up, this strategy will be more costly. But, by that time, the company's effort to improve its earnings/debt ratio will have put it in a better position to face higher borrowing costs.
Of course, there's more to Clorox's recent success than shrewd borrowing.
In the past two years the company has set out to recover the slight profit ! margin e rosion brought on by the economic disaster. And in that time, Clorox has recovered much its lost market share through disciplined cost cutting, better pricing power and lower commodity prices. You see, in this business, little differences add up. That means careful marketing, advertising, distribution and cost controls, as well as an optimal financing structure are of paramount importance. And that's precisely where Clorox has excelled.
For example, Clorox is already number two in U.S. market share, behind The Procter & Gamble Co. (NYSE: PG). In fact, Clorox is ranked in the top two in almost every one of its key brands. And those brands represent 88% of the company's total portfolio.
While double-digit earnings growth is achievable via growth in both its core U.S. operations and in its international units, do not expect miracles. The likely range for outperformance or underperformance is relatively small at first sight. Yet, the relatively low weight of international sales within the company and a proven capacity for successful and profitable innovation make its objectives achievable. There is some room for upside surprises with both new products and developments in fast-growing emerging economies.
Clorox concentrates some 71% of its international presence in home cleaning and bleach and laundry products in Latin America. And the fact that Asia today represents only 5% of sales is actually a plus, since it leaves lots of room for improvement in the long term. So, we have a superbly managed marketing company, with plenty of room to grow internationally.
This success is the result of a carefully managed process that prioritizes margin and market share expansion, allocating resources based on economic profit. We expect continued margin improvement through the continuation of relentless cost savings initiatives, information technology investment, and innovation. In addition, market s! hare imp rovement will come from the launching of carefully targeted products - the emphasis being in value and superior customer perception.
Health and wellness are key themes that will drive future growth. Clorox has very sophisticated market segmentation, product positioning and overall marketing strategy in these sectors. It is bound to deliver results, based on their proven track record.
Earnings momentum is at its back due to a mix of carefully tested marketing and financial initiatives. The stock is valued at 13-times earnings at a nice discount to the Standard & Poor's 500 Index. Its Price/Earnings/Growth (PEG) ratio is high at 1.43, though not disqualifying.
We can overpay a little for growth that we are pretty certain lies ahead. And Clorox offers an attractive 3.4% dividend yield. That dividend is easily sustainable at a dividend payout ratio of only 47%. In fact, it was just raised by 10% in May.
Technically, the stock is almost "boringly" bullish. Its 200-day moving average shows a very steady upward slope. At just over $64 a share Clorox is sitting right near its 50-day moving average and in the middle of the Bollinger bands, in an oversold condition. This bodes very well for an entry point.
However, the stock also is approaching the 2007 all-time high, so it should start showing some short-term resistance. So what is the investment proposition?
With this type of stability and high dividend yield, Clorox should be a core holding in any portfolio that is not purely speculative. Rather than sitting in ten-year U.S. Treasury bonds, we can sit on Clorox stock, get paid much more and have the upside of a first-class equity that can actually adjust prices up if inflation becomes a problem.
If we see some resistance here, we could run a short-term covered-call strategy: Buy the stock and sell some out of the money calls on it. The one-month calls we sell lower our entry poi! nt in th e stock by the amount of premium we collect and would probably expire worthless. The traditional risk-minimization strategy is to dollar-cost average into the stock over the next couple of months.
Recommendation: Dollar-cost average into The Clorox Co. (NYSE:CLX) on a weekly basis over the next two months (**).
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in The Clorox Co.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
Former SEC Exam Chief Walsh: SEC Whistleblower Program 'Showing Traction'
The former chief counsel at the Securities and Exchange Commission’s exam division, John Walsh, has formed a Whistleblower Response Team with several of his colleagues at the law firm Sutherland Asbill & Brennan to help firms develop whistleblower response programs as Walsh says the SEC’s “initiative is beginning to show traction.”
Walsh, a 23-year veteran of the SEC where he played a key role in creating the Office of Compliance Inspections and Examinations (OCIE), including serving as OCIE’s chief counsel, said in a statement that the SEC’s Whistleblower program, which the agency expanded under Dodd-Frank, is beginning to “see results.”
Walsh cites the November report issued by the SEC detailing the first seven weeks of the Whistleblower program that found that between Aug. 12 and Sept. 30, the SEC received 334 whistleblower tips, an average of nearly 48 per week.
The SEC report notes that the most common complaint categories were market manipulation (16.2%), corporate disclosures and financial statements (15.3%), and offering fraud (15.6%). The commission received whistleblower submissions from individuals in 37 states, as well as from several foreign countries, including China (10) and the United Kingdom (nine).
“Senior SEC officials have stated publically that they are now receiving high-quality information,” Walsh said. “As a result, we believe it is critical that companies receive the most up-to-date information and proper counsel to effectively respond to whistleblower claims as they emerge.”
Other members of Sutherland’s Whistleblower response team are Cynthia Krus, Allegra Lawrence-Hardy, and Holly Smith. The legal team will help clients create effective whistleblower response programs, respond to whistleblower claims, and defend against SEC enforcement actions and civil litigation.
Walsh, the former associate director and chief counsel at OCIE, retired from the agency at the
end of September, and joined Sutherland’s Financial Services Group and Securities Enforcement and Litigation Team in Washington, D.C., on Oct. 1.
In August, the SEC launched a web page that allows individuals to report a violation of the federal securities laws and apply for a financial award. The whistleblower program provides a monetary incentive of between 10% and 30% of sanctions the SEC collects for whistleblowers who voluntarily provide the agency with original information that leads to a successful SEC action with sanctions exceeding $1 million.
While 170 applicable enforcement judgments and orders issued from July 21, 2010 through July 31, 2011 included the imposition of sanctions exceeding the statutory threshold of $1 million, the SEC explained in its report, because the 90-day application period had not passed with respect to any of these actions as of the end of the fiscal year, applications for awards had not yet been processed. Accordingly, the commission did not pay any whistleblower awards during fiscal year 2011.
Walsh, a 23-year veteran of the SEC where he played a key role in creating the Office of Compliance Inspections and Examinations (OCIE), including serving as OCIE’s chief counsel, said in a statement that the SEC’s Whistleblower program, which the agency expanded under Dodd-Frank, is beginning to “see results.”
Walsh cites the November report issued by the SEC detailing the first seven weeks of the Whistleblower program that found that between Aug. 12 and Sept. 30, the SEC received 334 whistleblower tips, an average of nearly 48 per week.
The SEC report notes that the most common complaint categories were market manipulation (16.2%), corporate disclosures and financial statements (15.3%), and offering fraud (15.6%). The commission received whistleblower submissions from individuals in 37 states, as well as from several foreign countries, including China (10) and the United Kingdom (nine).
“Senior SEC officials have stated publically that they are now receiving high-quality information,” Walsh said. “As a result, we believe it is critical that companies receive the most up-to-date information and proper counsel to effectively respond to whistleblower claims as they emerge.”
Other members of Sutherland’s Whistleblower response team are Cynthia Krus, Allegra Lawrence-Hardy, and Holly Smith. The legal team will help clients create effective whistleblower response programs, respond to whistleblower claims, and defend against SEC enforcement actions and civil litigation.
Walsh, the former associate director and chief counsel at OCIE, retired from the agency at the
end of September, and joined Sutherland’s Financial Services Group and Securities Enforcement and Litigation Team in Washington, D.C., on Oct. 1.
In August, the SEC launched a web page that allows individuals to report a violation of the federal securities laws and apply for a financial award. The whistleblower program provides a monetary incentive of between 10% and 30% of sanctions the SEC collects for whistleblowers who voluntarily provide the agency with original information that leads to a successful SEC action with sanctions exceeding $1 million.
While 170 applicable enforcement judgments and orders issued from July 21, 2010 through July 31, 2011 included the imposition of sanctions exceeding the statutory threshold of $1 million, the SEC explained in its report, because the 90-day application period had not passed with respect to any of these actions as of the end of the fiscal year, applications for awards had not yet been processed. Accordingly, the commission did not pay any whistleblower awards during fiscal year 2011.
Stocks Attractive to Traders Today in 2012: BLK, JCI, UNP, MS, UNH, KCG, EGHT
CEO Laurence D. Fink of BlackRock, Inc. (NYSE:BLK), wants corporations to adopt shareholder friendly practices, according to Bloomberg. The company holds at?a minimum?5% of the shares of 2,400 companies worldwide. In letters to 600 of the firm’s biggest holdings,?Fink wrote?that BlackRock seeks to “engage in dialogue” with management to address issues that will be raised this year at shareholder meetings.
Shares of Johnson Controls, Inc. (NYSE:JCI) are trading 8.09% lower today, with consensus?of $44.03B. Johnson Controls lowers their Euro assumption to $1.30 from $1.35,?having seen Europe auto production at 20.1M units, +1.5%.
Versus a consensus of $5.06B,?Union Pacific Corporation (NYSE:UNP) reports Q4 revenue of?$5.1B.
Shares of Morgan Stanley (NYSE:MS) are trading 4.5% higher today, as the company is rumored to be cutting senior banker and trader pay 20%-30%, according to?Bloomberg. Sources with knowledge of the plan were cited.
Shares of UnitedHealth Group Inc. (NYSE:UNH) are trading 2.97% lower today, after?FY12 revenue $107B-$108B vs. consensus $108B is being projected.
Shares of Knight Capital Group Inc. (NYSE:KCG) are trading 9.28% higher today, following reports of Q4 revenue $341.3M vs. consensus $312.47M. Q4 Electronic Execution Services projects revenue $40.6M vs. $37.1M. And Market Making revenue is projecting?$187.4M vs. $111.0M.
Shares of? 8×8, Inc. (NASDAQ:EGHT) are trading 24.11% higher today, after it was revealed that business customer churn decreased to a record low of 2.0%, compared to a churn rate of 2.2% in the same period in 2011 and 2.1% in the 2012. Ending Q3 with 27,677 business customers, 8×8 reported Q3 revenue $23.3M vs. consensus $22.09M.
Shares of Johnson Controls, Inc. (NYSE:JCI) are trading 8.09% lower today, with consensus?of $44.03B. Johnson Controls lowers their Euro assumption to $1.30 from $1.35,?having seen Europe auto production at 20.1M units, +1.5%.
Versus a consensus of $5.06B,?Union Pacific Corporation (NYSE:UNP) reports Q4 revenue of?$5.1B.
Shares of Morgan Stanley (NYSE:MS) are trading 4.5% higher today, as the company is rumored to be cutting senior banker and trader pay 20%-30%, according to?Bloomberg. Sources with knowledge of the plan were cited.
Shares of UnitedHealth Group Inc. (NYSE:UNH) are trading 2.97% lower today, after?FY12 revenue $107B-$108B vs. consensus $108B is being projected.
Shares of Knight Capital Group Inc. (NYSE:KCG) are trading 9.28% higher today, following reports of Q4 revenue $341.3M vs. consensus $312.47M. Q4 Electronic Execution Services projects revenue $40.6M vs. $37.1M. And Market Making revenue is projecting?$187.4M vs. $111.0M.
Shares of? 8×8, Inc. (NASDAQ:EGHT) are trading 24.11% higher today, after it was revealed that business customer churn decreased to a record low of 2.0%, compared to a churn rate of 2.2% in the same period in 2011 and 2.1% in the 2012. Ending Q3 with 27,677 business customers, 8×8 reported Q3 revenue $23.3M vs. consensus $22.09M.
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