Tuesday, March 31, 2009

More Evidence of Pentagon Budget Cuts...Will it Actually Happen?

Yesterday I mentioned Raytheon (RTN) for an investment at these levels. Today, we find a little more news on the subject.

A Senate defense committee chairman says Pentagon budget will include large, painful cuts. Senate Armed Services Committee Chairman Carl Levin said Tuesday that major program cuts will not be pushed off until the 2011 budget, but will be included when Defense Secretary Robert Gates sends his spending plan to the president later this month.

Levin's comments confirmed what many contractors and military leaders have expected, but he offered no details on which programs may be axed. He said Pentagon officials have indicated they will not be able to submit the much-anticipated spending plan by April 21, as initially hoped.

What does this mean? For now, not much. This thesis has been priced into all defense stocks, and thats why I like Raytheon's valution. I'm actually a believer that we spend far too much money on certain aspects of defense, and there would be a lot of ways to intelligently trim the budget. But the government doesn't really work that way. Its more likely to move in larger, more sweeping movements. And although President Obama was in favor of making some major changes, as of right now, he appears to be becoming more conservative in terms of policy (I don't mean fiscally conservative, I mean conservative as in not changing).

So what I mean is that its still unlikely to see a huge cut in defense spending. If significant changes do come, it won't be for a few years and the near term outlook for these stocks, especially Raytheon, remains strong. They just raised their dividend and have a strong balance sheet. I like the stock in the near term.

No current position, but considering.

Monday, March 30, 2009

GM: Does it Matter to the Market?

Today's big news is about GM. I'm not so sure the market reaction has much to do with GM though. We are in a position where if we want to move higher, a pullback was necessary. I'm not convinced that we're out of the woods yet with this market (and surely not with the economy).

I've been doing a little trading lately, but with the market whipping back and forth, it has made it hard to hold onto positions, especially if I set stops too tight.

Picked up some Mosiac (MOS) today on the heels of an analyst downgrade. This stock always has fast money behind it if the market rallies.

A couple of names I've added to the radar:

Diamond Offshore (DO). I used to be a Noble (NE) fan but may be shifting my favorite in the sector. They are both good companies though.

Raytheon (RTN). I think this stock has gotten to low based on "Obama will cut military spending." He's actually ramping up activity right now.

The market has bounced off its lows around 780 a couple of times today. If it breaks below that, I'd expect some more to the downside.

Friday, March 27, 2009

Friday Thoughts

Quite a week. The markets have seen continued strength across almost all sectors. I'm seeing plenty of positive signs on the technical side of things. I've been a little cautious due to the fact that prior to today, there was really no pause, but rather a straight up rally. Obviously there are people interesting in buying stocks, and that's a good thing.

Look at how the market is responding to news, and especially bad news. The market is disregarding bad news. This to me is a major turning point. Just a couple of weeks ago any piece of news was feared because we knew the market reaction would be negative.

On the economic front, there isn't really any sign of improvement. At some point, this will hold back how far the market can advance. Its is likely to set in over the summer, but could happen at any point. We still have some major issues coming up (credit card losses, commercial real estate, more employment trouble) that not many have been addressing. Up until now, the government has been largely focused on the banks and credit markets.

This type of market is a little difficult for me because I typically don't spend much time on technical analysis. This market is all about trading and the technical side of the market. Fundamentals are kind of out the window until we get a clearer economic picture.

In a general sense, its nice to see a pull back today. I doubt many investors want to hold positions over the weekend, given the likelihood of more government intervention or something of the like.

Hopefully you all had a profitable week!

Thursday, March 26, 2009

Does End of Day Strength Mean the Big Boys are Buying?

Interesting take from Bespoke today, as reported at Bloomberg online.

U.S. stocks have their best intraday returns starting at 2 p.m. in New York as institutional money managers begin buying, according to an analysis by Bespoke Investment Group LLC.

Since September, the Standard & Poor's 500 Index has on average risen only during the 2 p.m. and 3 p.m. hours in New York, said Bespoke, a Harrison, New York-based firm that manages money for wealthy investors and provides financial research to institutions. Returns were 0.14 percent between 2 p.m. and 3 p.m., and 0.05 percent from 3 p.m. through the close. The worst performance was between the previous close and 10 a.m., according to Bespoke.

“This could be a sign that the institutional money has been doing a lot of buying,” Bespoke co-founder Justin Walters wrote in a report yesterday. “It’s a common belief on Wall Street that the institutional money (smart money) trades at the end of the day, while the individual money (dumb money) trades at the beginning of the day.”

This has been particularly true in this bear-market rally. We've seen strong buying into the close. This might mean more and more hedge funds and the like are buying. This is a good sign. Although the rally is feeling a bit tired, support from this computer buying helps push the market higher. Don't fight the tape.

Wednesday, March 25, 2009

The Case for International Investments

Brett Arends of the Wall Street Journal has an interesting piece out today called Ten Reasons to Invest in Global Funds. Here are a couple of points I found compelling.

1. You have plenty of exposure to the U.S. economy already. You work here. You may own a home here. And so, in most cases, do most of your friends and family. You hardly need to double down.

That's a good point. We don't realize it, but we're all exposed greatly to the U.S. economy. We don't need to plow all of our additional investments into it as well.

4. The U.S. stock market is the biggest and best-known market in the world. Thus, it is more likely to be overvalued than foreign markets. That's bad news for investors. Right now, according to FactSet, the domestic market trades on 1.7 times book value. The rest of the world: 1.1 times.

Not only is the U.S. market most likely to be overvalued, it is the most scrutinized and analyzed. In international and emerging markets, companies and sectors don't catch as much attention as those here. This allows for more inefficiencies in how the market prices things, which can work to your advantage.

To me, one of the largest reasons to invest globally is it's easier than ever. There have always been compelling reasons to invest in other countries, but in the past, it has been difficult for the average investor. Now there are hundreds of ETF's, and many more international stocks are getting issued here as well.

I'm a believer in this thesis, and I have a large portion of my personal investment dollars in international investments.

Tuesday, March 24, 2009

Taking a Look at Geithner's Plan

I'm not a hardcore economist, but I read a lot of commentary on the subject. As far as this crisis goes, I've seen its potential causes be a variety of things, from lack of regulation to low taxation. So when the big news was Geithner's new plan, I made an extra effort to find some good info on the subject. If you don't read Mish's Global Economic Trend Analysis, then you should. Mish did a good overview of the Geithner plan, with some very interesting analysis.

He sums up the root of the crisis in one sentance.

Actually the root cause is simple to understand, micro-mismanagement of interest rates by the Fed, Fractional Reserve Lending, and Congressional spending run rampant.

I tend to agree with that. Basically we set up the system so individuals and corporations could become dangerously over-leveraged. In the mean time, our debt was being carried by foreign investors. Many of these foreign investors are also bondholders in our largest financial corporations. This is one of the main reasons for our government's unwillingness to let these organizations fail. If the foreign investors lose, then we have a bigger problem: they'll stop buying our treasury bills, which means we can't survive.

We now sit in a cycle that will at some point be inflationary, but it may take some time. Here are Mish's thoughts on that.

Once again the hyperinflationists will be screaming at the top of their lungs over this plan. The plan is certainly worth screaming about, but not because it will cause hyperinflation.

Indeed, the real danger is that Geithner's plan will prolong the agony further zombifying taxpayers by saddling them with debt that cannot be paid back, while doing nothing to spur lending.

The chart above in conjunction with changing consumer attitudes toward debt, ensures that hyperinflation is not remotely in the picture. All Geithner is doing is making the problem worse. Tim Geithner is the most dangerous man in America, and Obama is too blind to see it.

So there you have it. We'll continue to monitor this situation and the market's subsequent reaction.

Monday, March 23, 2009

Strong Market...Can it Last?

A very strong day in the markets today as the major indexes moved 6 to 7 percent. I just read that the S&P is up 23.4% in 11 trading sessions (thanks Mark). That is the snap-back rally that I've been looking for in the past month. The market liked the fact that Geithner and Co. finally showed something resembling a plan. The market is so starved for good news that it will now settle for bad news spun as good news.

This puts investors in a dangerous spot though. Obviously the average investor isn't taking part in this rally. Its all speculators and hedge fund traders with computer trading programs. We are literally building a house with no foundation, and just like a house built that way, this rally could collapse at any time. Bottoming is a process. Maybe it has happened, maybe it hasn't. But I can't fully endorse buying stocks until I see more economic data, and some sign of stability from Washington.

Right now those in charge seem content to borrow more just to escape this mess "on paper." This makes me a bit worried.

So, the call to buy into the market in a small position was a good one, so it seems. I still wouldn't head in full steam. This rally may carry on for some time, especially if there isn't a lot of new news which shocks the market. We'll see what tomorrow brings.

Wednesday, March 18, 2009

Don't Worry About "Catching the Bottom"

There's a lot of noise coming out from market pundits lately. Is this the bottom? Is it time to buy? To that I'd say "turn off the tv." These prognosticators predicted little to nothing of what has happened during the past year, so now is not the time to start listening to them. When the market bounces, as its doing now, there is often some easy money made in the first moves. But this is a dangerous game to play for individual investors. The market can shed these gains as quickly as they came.

Also, most investors are in less stable financial positions that they were a year ago. Its not a time to take extra risk. Its a time to protect cash. There is one exception. If you have a decent amount of time until retirement, you can put some long-term money to work. Think about index funds. This is your best bet for beating inflation over the long term.

If you're looking for more detail about his subject, and specific names to buy, you can read my recent article published at Personal Dividends online magazine.

Also, here's an article on the subject by Brett Arends from the WSJ.

Friday, March 13, 2009

Interesting Reading-Friday

Bank of America Defends Sports Marketing Deals. He shouldn't have to defend this in the first place, but when I hear $1 spent in this creates $10 in revenue and $3 in earnings, I say go for it. Its better than most investments our government ever makes.

Cisco's Foray Into Servers May Trigger New M&A Wave. An interesting development that could change the face of big tech. companies.

Berkshire Hathaway Downgraded by Fitch. Yeah, go ahead and downgrade the ONE company that I can guarantee will not default on its obligations. These ratings companies should carry little weight considering their work in the past few years.

The Future of Oil Prices

This weekend's OPEC meeting should give us an idea where we're at demand wise. Demand for oil and oil products has been slashed in the past six months, and OPEC has been trying to keep up by cutting their production. It hasn't pushed oil prices as high as I'm sure they'd like to see. It also puts companies like Petrobras (PBR) who have major exploration budgets in a tougher spot. To sign drilling contracts at massive dayrates, these companies need something closer to $75/barrel to come out ahead.

Oil prices this low also put pressure on non-OPEC oil producing economies, which have put major investments into new projects in the past couple of years. Think of the Canadian Oil Sands, for example. There is a lot of production cost to extract that oil. Here's some commentary on the subject via WSJ's Environmental Capital Blog:

On Friday, the Paris-based International Energy Agency, the energy-adviser to the world’s rich industrialized economies, radically revised its outlook for non-OPEC oil production this year from growth of about 380,000 barrels a day to zero growth. That’s only a fraction of the size of the output cuts that OPEC has voluntarily committed to already. But unlike OPEC’s deliberations, production declines in non-OPEC countries are generally due to naturally declining fields, not decisions made in Vienna.

The interesting thing about OPEC’s outlook is that the bad news is so evenly spread: Estimates for Canada, Mexico, Norway, Russia, Kazakhstan, and Azerbaijan were all revised downward since last month. In the case of Canada, that’s due to lousy economics: Oil sands aren’t attractive with oil below $50. In other cases, especially Mexico, the revisions are due to rapidly-increasing declines at big fields that just can’t be offset elsewhere.

We might be able to trade a bounce in oil stocks if OPEC cuts much more than expected, but as of right now, its looking doubtful.

There is likely pressure from world leaders not to do anything which will cause oil prices to spike. Not sure how much influence that may have as OPEC countries' economies have been hurt largely because of dropping oil prices.

The takeaway here? It appears OPEC might not have as much power as previously thought. The last time they cut production, many (including this blogger) thought that oil prices would rise more than they did. Maybe demand destruction is too strong for them to counteract, at least at this point.

WSJ: Cuomo, Frank Seek to Link Executive Pay, Performance

Today's piece in the Wall Street Journal caught my eye:

New York State Attorney General Andrew Cuomo is in discussions with Rep. Barney Frank and other lawmakers on a plan to tie Wall Street pay to the long-term performance of the firms.

Mr. Frank (D., Mass.), chairman of the House Financial Services Committee, and other prominent Democrats appear to back such a plan, though no legislation has been introduced.

"We plan to put laws into effect, no question," said Mr. Frank. "We have to address this 'heads I win, tails I break even' issue."

This is the problem with the government getting too involved with the private sector. Executive pay is approved by the shareholders, not the government. Were executives making too much? Yes. Were shareholders misled about what they made? Maybe. Do shareholders need better ways to control executive pay? Sure. So let congress work on ways in which it will be easier for SHAREHOLDERS to monitor pay of executives of their companies. I understand that right now, the government is a major shareholder in many banks, but according to their plan, they won't be for long.

I'm not interested in the government controlling pay for the long term. It isn't their job to determine what is "fair." They have the ability to increase taxes, and that should be as far as it goes.

If Barney Frank and his friends are interested in controlling executive pay based on their determination, then I have an idea too. Lets let the American people (or the taxpayers-which isn't all Americans) decide what Congress makes! In a year where people saw their pay cut drastically, and many thousands lost their jobs, one group voted to give itself a raise. You guessed it, it was the U.S. Congress.

WSJ Article.

Thursday, March 12, 2009

Interesting Reading-Thursday

Bank of America Expects to Post Full-Year 2009 Profit. Yeah, okay. Or maybe they're just trying to save their stock.

Household Net Worth Plunges 18% in 2008. At least Americans are saving again. But just don't save too much.

Americans Retain Optimism in Recession. This is why the US won't stay down for long.

The Rules of Roth. A good overview of the one the best investment accounts out there. If you qualify and don't have one, get one.

Positive News From the Banks?

Hey, the market is moving higher on consecutive days. Can anyone remember what it feels like? It is certainly nice to see, although I still have my doubts as to the substance behind it. We're seeing some positive news from the banks. Something didn't seem right in the memo from Citigroup saying they are running a profit in 2009. I'd be interested to see where those numbers are coming from. Now, Bank of America's CEO said today that they won't need any more capital. But lets face it, we can't believe that. These guys are doing anything in their power to save their stock right now. If their stock stays above water until things bounce back, then they can make it. Who cares if they tell a few stretchers about their capital positions? Perception is reality.

No matter where its coming from, stocks are rising. Even if no reason other than they got too cheap. The only sector I see not rising is agriculture.

Am I a buyer of this rally? Yeah, a little bit. I'm not going in with everything, but I think its okay to dip a toe in. Will we go lower? Likely. But the downside risk is much lower than a few months ago.

I wrote a new article for Personal Dividends magazine today about risk tolerance and investing for retirement. Click here if you're interested.

Wednesday, March 11, 2009

Interesting Reading-Wednesday

45 Percent of World's Wealth Destroyed Says Blackstone CEO. I remember writing a piece when Blackstone went public thinking "is this the top of the market." Blackstone is a huge symbol of this crisis-all created with leverage.

Paulson May Have Made $428 Million Shorting Lloyds. No one profited more from the crisis than this guy.

Stanford's Island Empire Emplodes as Antigua Grabs Properties. Its been a heck of a year for Ponzi schemes.

U.S. Companies Pull Out of Retirement Contributions. One of the many untold tragedies of this crisis. Also, how about those who spent their life saving, who've now moved to cash in retirement, and have to live of the U.S. dollar which will just erode in the next few years?

More Proof Inflation is Coming

With the massive amounts of money our government keeps committing, I've been a believer that inflation, in some form, is coming. Some of the market's best minds share that view, and today we have some more predictions:

Pacific Investment Management Co. which runs the world’s biggest bond fund, joined investors Warren Buffett and Marc Faber in saying inflation will quicken, sounding a warning for Treasury investors.

U.S. government and Federal Reserve efforts to snap the recession will increase costs for goods and services as soon as 2010, Pimco said in a report today on its Web site by Chris Caltagirone and Bob Greer. Commodity producers are also delaying projects, which may limit supply and lead to higher prices when global growth resumes, according to Pimco.

“Inflation will rise,” Pimco said. Treasury securities that give investors protection against higher prices in the economy are “attractive now.”

Pimco is among a growing list of investors who are warning that programs to counter the U.S. slump will increase consumer prices as the economy starts to revive. Investor Jim Rogers, author of the books “Hot Commodities” and “Adventure Capitalist,” said this week U.S. policies will hurt conventional Treasuries, those that don’t offer inflation protection.

I'm interested in buying inflation protected securities, or TIPS, at some point in 2009. In issues like these, I like to use ETFs. Take a look at ishares' fund (TIP), with a 0.2% expense ratio. If you're looking for a diversified bond ETF with low costs, look no further than Vanguard's Total Bond Market ETF (BND), currently yielding 4.64%.

Disclosure: Author owns BND.

Article via Bloomberg.

Tuesday, March 10, 2009

When You Can Make the Market Go Up...Change the Rules

More news of regulators meddling with the market again. First, the uptick rule:

The U.S. Securities and Exchange Commission may act as early as next month to consider a proposal to reinstate the uptick rule, a source familiar with the matter said on Tuesday.

Earlier on Tuesday, Democratic Rep Barney Frank, the chairman of the influential House Financial Services Committee, told reporters he was hopeful that the uptick rule would soon be reimposed.

New SEC Chairman Mary Schapiro has previously said the agency would consider whether to reinstitute the uptick rule, which forces short sellers to sell at a price higher than the previous trade.

Then, mark to market. For now, they're saying no change, but I wouldn't be surprised if something happens. Although if we made it this long, they might just stick with it:

The U.S. Securities and Exchange Commission is not planning to suspend the controversial mark-to-market accounting rule that has forced banks to report billions of dollars in asset write-downs, a source familiar with the matter told Reuters on Tuesday.

Rumors have circulated that the U.S. government was planning a temporary suspension of the accounting rule, which requires financial services companies to value assets at current market prices.

My take: I don't believe anything Barney Frank says or does. But that's beside the point. Beyond that, I'm not against the uptick rule. I don't think it creates anything unfair in the market. Remember last fall when short selling was banned? All of this disruption of the market isn't a good policy in my opinion.

Mark-to-market is a little different. I was never a huge fan of this system. It basically takes a worst-case-scenario look at these balance sheets because the market for so many securities wasn't there. To me, writing down all those assets as worthless caused more panic than the potential good it did. Thus the need for bank bailouts, leading to more panic and market losses etc. Not all of those assets are worthless. It does allow for a clearer look into what the banks were holding, but just because we want to know what they have doesn't mean we need to make up a value of what they're worth.

Most of this has a feeling of those in charge doing anything they can to drive stocks higher. The market works. Don't mess with it. But that's just one guy's opinion.

Reuters articles:

Mark to Market

Today's Market/CNBC

Nice to see the market rallying today. Its due to a combination of things. Bernanke's speech exuded much more confidence and calming tone than I've seen in awhile. When he talks in that nervous voice, I don't think anyone feels great. Also, Citi's CEO said they are profitable so far this year. I'd like to see how he determined this, but if its true, great.

I've been saying for weeks now that we're due for a bear market rally. This appears that it could be a start. This doesn't necessarily mean we've formed a bottom because there are a lot of unknowns, especially with employment, but its a welcome change.

I watched CNBC this morning for the first time in quite awhile. I continue to be astouned by how much cheerleading goes on over there. They are great in reporting news, but their commentary is just about worthless. I know its a diffficult job when you have to talk about the market daily, and people demand opinions, but all they do is talk about the coming stock rally. Its the same message I've seen when I've watched it in the past and stocks we're much higher. I find this sort of thing pretty much unwatchable. I get 99% of my news online, and plan to keep it that way.

I'm still interested in the same sectors. Agriculture, infrastrucutre, oil. Thats about it.

Hopefully the strength can hold for awhile.

Monday, March 9, 2009

Jim Rogers Still Bullish on Commidities

Not this this is surprising, but Jim Rogers is still bullish on commodities. In an economy where the prices of most assets in decline, the most predictable products would be hard assets.

Rogers added he remains bullish on agriculture and that commodities are “the only area of the world economy I know which is benefiting.” He said he owns “some” gold and silver, and regards silver as “cheaper.”

Water, power and other infrastructure companies’ shares are favored because their earnings are less vulnerable during the global slowdown, Rogers said.

“We’re having a shift to people who produce real goods,” Rogers said. “Those are the people who are going to be in charge. The farmers are going to have the Lamborghinis in the future, not the brokers on Wall Street.”

As someone who spends a lot of time researching investment ideas, believe me that there isn't a lot out there that's attractive right now. A case can be made for earnings to be eroded in almost any sector. Companies guiding higher and raising dividends are almost non-existent. One company, which is in the agriculture sector is Monsanto (MON). They continue to say they're performing well, but you'll pay a premium for the stock at 17x earnings. Why should we pay a premium for any stock in an environment with this much uncertainty? Just because there is nowhere else to put our money? No thanks.

I do like the sector, but it doesn't mean I'm willing to overpay for the stocks. I like Potash (POT) and Mosaic (MOS) basically as much as Monsanto, and I'm looking to create a position in any of these stocks at the right price.

I do believe inflation is coming. I'm in favor of owning inflation protected securities, as well as a various basket of commodities, including agriculture and oil.

Bloomberg article link.
Disclosure: none.

Friday, March 6, 2009

The Path Ahead?

I'd like to say the market is going to turn around eventually. But you can go ahead and look; I've been saying it for awhile. The bottom line is that it isn't happening. How low can it go? Definitely lower. The problem now if you're trying to gauge market strength on the DJIA (which many do, but its a poor indicator due to it being a price-weighted index based. Out of the 30 stocks in the index, we now have a handful of stocks trading in the single digits which limit their effect on the index as a whole) it will be difficult to rally. The stocks most likely to reverse course, the financials, are now priced so low that they cant move the index like the IBM's and Exxons of the world.

But thats just a single example. As a whole, its clear the economy is getting worse. The employment data today cemented that. The political response is one of major uncertainty. I've said it before, and I'll say it now. The market hates uncertainty. Right now, we're drowning in it. The policy response feels like they don't know what they're doing. They are throwing everything that have against the wall, hoping something sticks. Hearing Buffett say the economy is in shambles isn't suprising, but was a little interesting that it came from him. He is a master at naviagting the market, and I listen to what he has to say.

I am interesting in buying, but don't feel like I need to do it yet. What is the catalyst to move us higher, aside from the absurd amount stocks have fallen? The economy is in tough shape, our new administration is spending like crazy, our policy of bailing out failing instituions isn't working, and one of the best reasons, high dividend yields, is being eroded as companies are cutting them to horde cash.

I have no idea how farther stocks will fall, but I can say that this will pass. It could be awhile, but those who are patient here will probably be paid off.

Have a great weekend! Spring is coming!