Tuesday, November 16, 2010

Europe Stumbles Blindly Towards Its 1931 Moment

¹²Europe Stumbles Blindly Towards Its 1931 Moment

It is the European Central Bank that should be printing money on a mass scale to purchase government debt, not the US Federal Reserve.
It was a grave error for Germany's Angela Merkel and France's Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder 'haircuts' at this delicate juncture Photo: EPA

By Ambrose Evans-Pritchard, Telegraph.co.uk | 16 November 2010

Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe. If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt— the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.

"Does the ECB understand the concept of contagion"? asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece. "If that is not enough to worry about financial contagion, what is? The ECB's lack of action begs the question as to whether it is fulfilling its financial stability mandate," he said. That is a polite way of putting it.

The eurozone's fiscal fund (European Financial Stability Facility) is fatally flawed. Like Alpinistas roped together, an ever-reduced core of solvent states are supposed to carry the weight on an ever-widening group of insolvent states dangling beneath them. This lacks political credibility and may be tested to destruction if— as seems likely— Ireland is forced to ask for help. At which moment the chain-reaction begins in earnest, starting with Iberia.

It was a grave error for Germany's Angela Merkel and France's Nicolas Sarkozy to invoke the spectre of sovereign defaults and bondholder "haircuts" at this delicate juncture, ignoring warnings from ECB chief Jean-Claude Trichet that such talk would set off investor flight from high-debt states. EU leaders have since made a clumsy attempt to undo the damage, insisting that the policy shift would have "no impact whatsoever" on existing bonds. It would come into force only after mid-2013 under the new 'bail-out' mechanism. Nobody is fooled by such a distinction.

"This is a breath-taking mixture of suicidal irresponsibility and farcical incoherence," said Marco Annunziata from Unicredit. "If by 2013, countries like Greece, Ireland and Portugal are still in a shaky position, any new debt issued will carry exorbitant yields. The EU would then have to choose between a full-fledged, open-ended bail-out, and reneging on the promise that existing debt would not be restructured. Will German voters then accept higher taxes to save their profligate neighbours?"
In May it was enough for the EU to announce a €750bn 'safety-net' with the IMF for eurozone debtors. Bond spreads narrowed. A spike in economic output— led by Germany's rogue growth of 9% (annualised) in the second quarter— beguiled EU elites into believing that monetary union had survived its ordeal by fire. It had not, and this time they will have to put up real money.

Sadly for Ireland, events have snowballed out of control. Confidence has collapsed before Irish export industries— pharma, medical devices, IT, and backroom services— have had time to pull the country out of its tailspin. Premier Brian Cowen— who presides over a budget deficit of 32% of GDP this year— still insists that 'no rescue is needed'. "We have adequate funding right up until July," he said. Mr Cowan must know this is not enough. Funding for Irish banks has evaporated, and with it funding for Irish firms.

As we learn from leaks that "technical" talks are under way on the terms of any EU bail-out, it can only be a matter of weeks, or days, before Ireland has to tap EFSF— for €80bn to €85bn, says Barclays Capital. Portugal is in worse shape than Ireland. Total debt is 330% of GDP. The current account deficit is near 12% of GDP (while Ireland is moving into surplus). Portuguese banks rely on foreign wholesale funding to cover 40% of assets.

The country has been trapped in perma-slump with an over-valued currency for almost a decade. Successive waves of austerity have failed to make a lasting dent on the fiscal deficit, yet have been enough to sap the authority of the ruling socialists and revive the far-Left. Former ministers are already talking openly of the need for an EU-IMF rescue.

It is hard to see how Portugal could avoid being sucked into the vortex alongside Ireland. Europe and the IMF would then face a cumulative bail-out bill of €200bn or so. That stretches the EFSF to its credible limits.

The focus would shift instantly to Spain, where economic growth stalled to zero in the third quarter, car sales fell 38% in October, a 5% cut in public wages has yet to bite, and roughly 1m unsold homes are still hanging over the property market. The problem is not the Spanish state as such: the Achilles Heel is corporate debt of 137% of GDP, and the sums owed to foreign creditors that must be rolled over each quarter.

The risks are obvious. Unless 'core' EMU countries [[Germany, maybe France?,: normxxx]] raise fresh funds to boost the collateral of the rescue fund, markets will not believe that the EFSF has the firepower to stand behind Spain. Will Germany's Bundestag vote more funds? Will the Dutch? Tweede Kamer, where right-wing populist Geert Wilders now holds the political balance, adamantly opposes such help, and might well use such a crisis to launch a bid for power.

Moreover, it is far from clear what would happen if Italy were forced to provide its share of a triple bail-out for Ireland, Portugal and Spain. Italy's public debt is already near the danger point at 115% of GDP. It is also the third-largest debt in the world after that of Japan and the US. French banks alone have $476bn of exposure to Italian debt (BIS data).

While Italy has kept a tight rein on spending, it is not in good health. Growth has stalled; industrial output fell 2.1% in September; and the Berlusconi government is disintegrating. Four ministers resigned on Monday.

It is clear by now that IMF-style austerity and debt-deflation is not a workable policy for the high-debt states of peripheral Europe, since it cannot be offset by the IMF 'cure' of devaluation. The collapse of tax revenues has caused fiscal deficits to remain stubbornly high. The real debt burden has risen further.

The ECB is the last line of defence. It can halt the immediate Irish crisis whenever it wishes by buying Irish bonds. Yet, instead of pulling out all the stops to save monetary union, the bank is winding down its emergency operations and draining liquidity. It is repeating the policy error it made by raising rates into the teeth of the crisis in July 2008.

Yes, the ECB is already propping up Ireland and Club Med by unlimited lending to local banks that then rotate into their own government debt in an internal "carry trade". And yes, the ECB is understandably wary of crossing the fateful line from monetary to fiscal policy by funding treasury debt. Bundesbank chief Axel Weber might fairly conclude that it is impossible at this stage to reconcile the needs of Germany and the big debtors.

If the ECB prints money on the scale required to underpin the South, it would set off German inflation, destroy German faith in monetary union, and perhaps run afoul of Germany's constitutional court. If EMU must split in two, it might as well be done on Teutonic terms. All this is understandable, but is Chancellor Merkel really going to let subordinate officials at the ECB destroy Germany's half-century investment in the post-war order of Europe— and risk Götterdämmerung?



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

The Cliff

¹²The Cliff
Click here for a link to ORIGINAL article:

By John P. Hussman, Ph.D. | 15 November 2010
All rights reserved and actively enforced.

Last week, the return/risk profiles that we estimate for stocks, bonds and even gold declined abruptly, based on the metrics we track. We don't know how long this shift will persist, but at present, investment risk appears to have spiked considerably, and our estimates of prospective market returns have deteriorated. The abruptness of the shift in market conditions is exemplified by the weakness observed in Irish, Greek and Spanish debt, as well as the plunge in municipal bonds. Particularly, as Barry Ritholtz observes, in CA issues— see the chart below— which was steep enough to erase nearly a full year of progress in just three days.

Click Here, or on the image, to see a larger, undistorted image.

On the NYSE, hundreds of stocks achieved new 52-week highs, but ended down on the week, with technical evidence suggesting a uniform reversal from a "high pole" buying climax. The percentage of bullish investment advisors reached 48.4%— the highest since the April peak, while the AAII sentiment poll shot to 57.6% bulls— the highest since 2007. Our bond market measures shifted to an unfavorable status for yield pressures, putting the stock market in an overvalued, overbought, overbullish, rising-yields conformation despite QE2, which as anticipated, has been met with fairly eager offers from bondholders.

Whenever one evaluates market conditions, the entire context matters. Various economic and market indicators provide only partial views— much like the group of blind men who identified an elephant as a snake (trunk), a spear (tusk), a fan (ear), a tree (leg), a wall (side), and a rope (tail), depending which part they touched. While various positive indicators can be identified, what matters to us is the full context. In stocks, we have overvalued, overbought, overbullish, rising yield conditions. In bonds, we have unfavorable yield levels and now unfavorable yield pressures. In precious metals, conditions are mixed, so the negative overall conditions in that market at present are somewhat more subtle and may be short-lived.

I don't want to make a fanfare of these concerns. They are simply the average implications we observe based on historical market relationships— even in post-war data. Longer-term, based on our standard methodology, we estimate that the S&P 500 is priced to achieve sub-5% returns, albeit with significant risk, for every horizon out to a decade. Treasury securities are clearly priced to deliver similarly low returns. It's possible that internals will improve sufficiently to shift the expected return/risk profiles we observe in stocks, bonds and precious metals. For now, we are tightly defensive.

The Cliff

I've reviewed the valuation conditions of the stock market extensively in recent months, emphasizing that stocks are not a claim on a single year's earnings, but rather on a whole stream of future cash flows that will be delivered to investors over time. At present, investors and analysts who focus on simple price/earnings multiples (rather than modeling the entire stream of cash flows) are placing themselves at tremendous risk, because simple P/E multiples are being distorted by unusually wide profit margins. Part of this can be traced to weak employment conditions, which have held down wages and salaries. But there is more to the story— the rebound in profit margins also reflects a heavy contribution from financials (which may be more indicative of accounting factors than sustainable earnings), as well as the tail-end of stimulus spending.

The chart below underscores the relationship between high current profit margins and poor subsequent earnings growth. The blue line shows U.S. corporate profits as a percentage of GDP (left scale), which is currently just over 8% and at the highest level since 2007. The red line depicts subsequent 5-year growth in profits, but on an inverted right scale (higher values are more negative). In effect, it should not be a surprise if present levels of corporate profits are followed by negative profit growth over the coming 5 years. Indeed, the 2009 burst of stimulus spending is most probably the only factor that has prevented profit growth from being negative over the most recent 5-year period.

Click Here, or on the image, to see a larger, undistorted image.

Municipal bond investors are clearly re-evaluating the prospects for additional fiscal stimulus from the federal government. Indeed, many state and local governments (as well as health and disability service providers that benefited from stimulus dollars), are beginning to talk about "the cliff"— an abrupt reduction in revenues due to the loss of current stimulus funding which has been used to bridge existing budget shortfalls. My impression is that equity investors face a similar "cliff" which they may not have adequately recognized yet.

The essential point is that stocks are much more richly valued than simplistic P/E multiples would suggest. Investors may pay a heavy price if they fail to adjust valuations for the level of profit margins. The only proper way to value stocks is in relation to measures of sustainable, long-run, full-cycle financial performance.


From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal 'stimulus' to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as 'Maiden Lane' that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.

It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it— what we have said to lenders is, 'here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make you whole' (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).

Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders 'whole' while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.

Memo to Ben Bernanke— throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?

The proper way to deal with a major debt crisis— indeed, the only way nations have ever successfully dealt with major debt crises— is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.

Market Climate

As noted above, the Market Climate for stocks last week was characterized by an overvalued, overbought, overbullish, rising-yields conformation that has historically been unusually hostile to stocks. The Market Climate in bonds likewise shifted last week, to a condition of unfavorable yield levels and upward yield pressures. The Strategic Growth Fund and Strategic International Equity Fund are tightly hedged. Strategic Growth holds a staggered strike position where our put strikes are generally quite close to the existing level of the market, and Strategic International Equity has less than 10% of unhedged market exposure, though only a portion of the Fund's currency risk is hedged (currency fluctuations typically represent only a fraction of the total variance of international equity investments). Strategic Total Return presently carries a duration of less than 1 year, with about 1% of assets in precious metals shares, 2% in utility shares, and 1% in foreign currencies.

These investment positions will change as market conditions evolve over time. As I noted last week, post-1940 data now includes a wide enough range of conditions— major recessions, inflation, deflation, expansion, bubbles, crashes, credit crisis, terrorism, war, and peace— that it should provide a representative basis on which to set investment expectations without appealing to Depression-era data. For more than a decade, investment conditions have been largely "out of sample," first on a valuation basis, and then on the basis of major credit strains that had never been observed in the postwar period. Whether it proves effective or not in hindsight, the appropriate response to events that have no context in one set of data is to find an alternative sample of data that is more representative. Though it's likely that we'll continue to see outcomes that have no counterpart in post-1940 data, I do expect that the postwar dataset is sufficiently encompassing that we can put last year's "two data sets" problem behind us.

It bears repeating that $850 billion of QE2 ($600 billion, plus $250 billion funded by bailed-out Fannie Mae and Freddie Mac securities) will not even absorb the new issuance of U.S. Treasury securities over the coming year. That means, in turn, that holders of existing Treasury securities will, in equilibrium, have to continue holding Treasury securities. The only effect of QE2 will be to change the maturity profile— not the overall quantity— of Treasury debt held by the public. At the same time, it will create an enormous overhang of what will effectively be "new issuance" of Treasuries at some future point if/when the Fed reverses its position. Long-term Treasury investors tend to be more forward looking than long-term stock market investors because the stream of payments is known perfectly. It's doubtful, aside from brief rounds of hot potato and musical chairs, that these investors will be moved in any persistent way by the Fed's manipulation.

— -

Prospectuses for the Hussman Strategic Growth Fund, the Hussman Strategic International Equity Fund, and the Hussman Strategic Total Return Fund, as well as Fund reports and other information, are available by clicking here.

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Monday, November 15, 2010

Speculative Phase Of Gold Bull Lies Ahead

Speculative Phase Of Gold Bull Lies Ahead

By Richard Russell | 15 November 2010

Richard Russell is not only the preeminent expert on Dow Theory, he is one of the most prolific newsletter writers (Dow Theory Letters) and thanks to his epic longevity, will hopefully go on to break records for many years to come. The "Oracle of the Dow" is not omniscient, unfortunately. Otherwise, we mere mortals could simply follow his sage advice to riches.

He was definitely in fine form in the summer of 2000 when he prophesied that "we're in the first phase of a bear market that could be long, tedious, grinding and very painful. Before it's over, I believe we'll see big pools of money moving out of stocks and into cash".

But since then Russell has had an especially tough time with deciphering the stock market. Especially so these past few years. He was bearish for some time but then in May 2007 Russell switched to the bullish camp and pronounced that "an unprecedented world boom lies ahead." It would seem that Russell has basically given up on trying to time the market's gyrations, writing recently that "the stock market is too unsettled, too questionable, for me or my subscribers to assume an all-out bullish or bearish position."

But he continues to be an unabashed gold bull. This is the one market he has been pounding the table about for quite a long time and he has been absolutely correct. To my chagrin, it took me far far too long to realize that gold is indeed in a secular gold bull market. And, of course, the next thought after that is the dread that I will 'overstay' the market.

Russell puts those thoughts to rest writing recently:

"I'm going on the thesis that the highly speculative phase of the gold bull market lies ahead. Now I'm depending on my experience with other bull markets:
  1. Most great bull markets go higher and further than almost anybody thinks possible.
  2. Most bull markets progress in three psychological phases.
  3. I believe the first phase of the gold bull market has passed. It's over. This is the phase where students of great values take their initial positions.
  4. I believe we are now deep into the second phase [[§oand nearing the end of that phase?§c: normxxx]] of the gold bull market. This is the phase where the institutions and funds join in the bull market show.
  5. Often, more money is made in the third or 'speculative' phase of a bull market than is made in the first and second phases combined. This can mean that the late-comers to bull markets often make a fortune, more than those who had the courage to buy early in the game, but they have to have fortitude to sit in the highly volatile second/third phases.
  6. Obviously, I could be wrong, but I believe that gold and silver are both still a buy.
  7. I've said this before, but I'll repeat it. You do not trade in-and-out in a confirmed primary bull market. You take an early position and add to your position as the bull market progresses.
  8. Great bull markets don't usually provide marvelous entry points. Those who are waiting for the ideal or "safe" place to enter the bull market in precious metals may have a long and frustrating wait.
  9. In a great primary bull market, you just "shut your eyes and buy."
  10. Are you buying right or are you buying wrong? Great bull markets tend to bail you out of your mistakes. Perfect timing is nearly impossible in a great bull market. You're either in or you're out.
  11. Great or fabulous primary bull markets may come along once or maybe twice in a generation. I believe the bull market in precious metals is just such a one— a once-in-a-generation bull market. We may never see another one to match this one in our lifetimes.
  12. I started writing Dow Theory Letters 52 years ago in 1958. Three times I've staked my reputation and my business on a bullish market call.

    The first instance was in 1958, when I told my subscribers that the third phase of the bull market lay ahead, and it was time to load up on stocks. I said so in my first Barron's article. That call and that article put me in business. I thank Barron's late, great editor Bob Bleiberg (who had faith in me and went out on a limb for me).

    In late-1974 at the end of that horrendous bear market, I told my subscribers that I thought the bear market was over, and it was time to buy stocks.

    In the year 2000 I told subscribers that I thought the bear market in gold was over, and that it was time to buy what was left of the gold stocks and
    "put 'em away". I told my subscribers that we should treat the gold shares (many under five dollars) as perpetual warrants. "Buy 'em and forget them."
  13. Lucky thirteen. I'm confirming what I said in 2000. Buy gold and silver, put 'em away and sit tight. The great speculative phase of the precious metals bull market lies ahead. My advice is concentrated in four words— "Buy, and be patient."

Looking at the very long term chart of gold, the base at the millennium is apparent, as is the unrelenting march of the secular bull market. While it does deviate from time to time away from the long term trend, it quickly returns to it. Right now we are above the trend but not at an extreme point that has historically lead to regression to the mean:

Currently the price of gold is trading at 16.3% premium relative to its 200 day moving average. Historically tops have corresponded with a premium of 20%+ so we still have some room the upside in this most recent cycle. And as Russell so eloquently puts it, quite a ways still from the "highly speculative phase".

10 Market Bubbles That Could Soon Burst

10 Market Bubbles That Could Soon Burst

By Charles Wallace | 15 November 2010

The president of the Minneapolis Federal Reserve, Navayana Kocherlakota, recently published a paper in which he argues that government guarantees helped fuel the bubble in real estate. While his paper was largely aimed at prescribing solutions to this problem, it raises the question: What other bubbles are lurking out there in the global economy? We asked several experts and to our surprise, they had a long list:

1. Gold. The price of gold bullion has risen from $294 an ounce in 1998 to $1,404 today, an increase of 377%. "It's the biggest, baddest bubble of them all," says Robert Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Gold has no intrinsic value. A telltale indicator that gold is a bubble: incessant cocktail party chatter about buying gold and endless TV commercials offering to buy gold jewelry. The SPDR Gold Trust ETF (GLD) is up 28% since the beginning of the year.

2. Real estate in China. Chinese real estate prices are up only 9.1% this year, which may seem more frothy than bubbly. But rising prices are generating rising demand, which is a clear sign of a bubble, says Vikram Mansharamani, whose book, Boombustology: Spotting Financial Bubbles Before They Burst, will be published early next year. The participation of amateur investors like waiters and maids in the property boom is a clear sign of a property bubble in China. The fact that developers are building more apartments than there are buyers is another giveaway.

3. Alternative energy. Solar technology is still uneconomic, yet governments all over the world are subsidizing solar energy firms. "There are plenty of people who shouldn't be in the solar energy industry who are," says Mansharamani. Do we really need 250 venture-capital-backed solar cell companies? The Market Sectors Solar Energy ETF (KWT) had a 100% gain this year, before dropping back.

4. Commodities. Blame it on the weather, China or the Fed, but commodities have shot higher in recent months. Wheat is up 60% this year, and other food commodities like corn have also risen dramatically. "The focus is on the food category for bubbles," says Wiedemer, but industrial metals like copper are also very frothy.

5. Apple (AAPL). OK, everybody loves their iPad and iPhone (except if they live in New York or San Francisco, where signal strength is a problem). But Apple shares are up 1,200% since 2001, which has to come close to being the definition of a bubble. "Apple is a high-fashion company," says Wiedemer. "If CEO Steve Jobs either leaves or dies, I think they will have trouble maintaining that incredible fashion sense, and as such it's time will go," he says.

6. Social networking. Sure, Facebook has 500 million members, but what is that worth? Some estimates put the company's market value as high as $35 billion, but shares in these social networking companies are not listed and are so far only traded by a few insiders. Twitter, with almost no income, is said to be worth $1.5 billion, and LinkedIn is also estimated to be trading at a market value of $1.4 billion. "There aren't any anchors or valuation methods to guide investors in terms of valuation," says Mansharamani. "When you have that lack of clarity, almost anything is possible". Many in the tech world try to figure out what these companies might be worth some day far in the future and then discount that back to some reasonable price today. Remember Boo.com?

7. Emerging market stocks. As an asset class, these shares have risen 146% in the past two years. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Barton Biggs, the former Morgan Stanley Asset Management chairman who accurately predicted the U.S. stock market bubble in the late 1990s. These countries, such as Indonesia, Australia, Russia and Brazil, are growing wildly even though there's no growth in the world economy. Much of their gains is backed by commodity prices, which are also a bubble (see item No. 4). "I have every reason to believe this will turn into a bubble," says Mansharamani.

8. Small tech companies. It's only been a decade since the tech bubble burst, but cash-rich large tech companies are gobbling up smaller firms without regard to price. For example, Hewlett-Packard (HPQ) got into a bidding war with Dell (DELL) over computer storage company 3Par and ended up paying a whopping $2.4 billion, 325 times the firm's earnings before interest, taxes, depreciation and amortization.

9.The U.S. dollar. Although the dollar is down 10% against the euro so far this year, Wiedemer believes the greenback is firmly in bubble territory. He believes it will pop when foreigners stop buying U.S. assets such as stocks and bonds. "Foreigners say, 'I'm worried about inflation— you're going to pay me back in dollars worth less than when I invested'". While China may hold its dollar bonds forever, he says, pension funds in Japan and insurance companies in Europe will start dumping dollars as U.S. inflation climbs.

10. U.S. government debt. "When this bubble pops you're out of bubbles— nothing is too big to fail any more," says Wiedemer. The debt bubble is growing very rapidly and will continue to grow, he says. Basically, there's no way the U.S. government can ever pay back the $13.7 trillion it currently owes (mainly to foreigners), and eventually they will stop buying. The bubble pops when the government has trouble selling its debt— just like Ireland and Greece are experiencing at the moment. Instead of borrowing money, the government starts printing money, which is what's happening now. The Fed's balance sheet has gone from $800 billion in 2008 to $2.2 trillion, and the central bank just announced it was printing another $600 billion. Says Wiedemer: "The medicine starts to become poison."

The Nouveau Poor: Recession Shadows America's Middle Class

¹²The Nouveau Poor: Recession Shadows America's Middle Class

By Marc Pitzke, Der Spiegel | 15 November 2010
Translated from the German by Christopher Sultan

American society is breaking apart. Millions of people have lost their jobs and fallen into poverty. Among them, for the first time, are many "middle-class" families. Meet Pam Brown from New York, whose life changed overnight.

The crisis caught her unprepared. "It was horrible," Pam Brown remembers. "Overnight I found myself on the wrong side of the fence. It never occurred to me that something like this could happen to me. I got very depressed."

Brown sits in a cheap diner on West 14th Street in Manhattan, stirring her $1.35 coffee. That's all she orders— it's too late for breakfast and too early for lunch. She also needs to 'save' money.

Until early 2009, Brown worked as an executive assistant on Wall Street, earned more than $80,000 a year, lived in a six-bedroom house with her three sons. Today, she's long-term unemployed and has to make do with a tiny one-bedroom in the Bronx. It's only luck that she's not outright homeless.

"One thing came after another— boom, boom, boom," Brown recalls. "I kept getting up and dusting myself off, but I could never get ahead again. I spiraled further and further into the abyss". Her voice is trembling now. "I've done everything America told me to do. I went to school. I've never been to jail. I've kept my nose clean. My kids are great kids."

She laughs a sarcastic laugh. "And now?"

Wall Street Up, Incomes Down

Pam Brown is one of millions of Americans who, during the recession, tumbled from their idyllic middle-class existence to near-poverty— or beyond. For many, like Brown, the downfall is a Kafkaesque odyssey, a humiliation hard to comprehend. Help is not in sight: their government and their society have abandoned them.

Wall Street is preoccupied with chasing new profits again. Yet for large sections of the nation, that old myth of 'working your way up', of "bootstrap" success and its ultimate prize, homeownership, has evaporated. The "middle class", America's backbone, is crumbling. The American Dream has turned into a nightmare.

Last year the US poverty rate reached 14.3 percent, 1.1 percent higher than in 2008. Almost five million Americans skidded below the poverty line ($22,050 annual income for a family of four), many from hitherto sheltered circles, where poverty was a foreign word. The number of long-term unemployed keeps rising. Worst off are families with children. Every fifth child in the US lives in poverty today.

"The situation was bad before, don't get me wrong," Bich Ha Pham, research director with the Federation of Protestant Welfare Agencies (FPWA), a welfare organization in New York City, told SPIEGEL ONLINE. "But this time, it could happen to anybody."

And nobody seems to care. Poverty wasn't an issue during the midterm elections— and it won't be an issue now that the 'spendthrift deficit hawks' of the Republican Party have reclaimed the House of Representatives.

"Nothing's going to happen," Curtis Skinner, head of Family Economic Security at the National Center for Children in Poverty (NCCP), told SPIEGEL ONLINE. The political swing to the right, Skinner fears, is "extremely hurtful" and "absolutely disastrous" to the interest of the weakest. Indeed, what Washington is debating now is not more help for the poor— but extending the former President George W. Bush's tax cuts for the rich.

It wasn't long ago that Pam Brown, too, rarely worried about those who fell through the social safety net— or even feared that fate for herself. "I wish I had been more engaged," she says now. "Wall Street gives you such a comfort with its bonuses. I didn't understand the stringency of your life not being your own anymore, of losing control like that."

How this could have happened is a cautionary tale about the dark side of the 'affluent' society. That's where Brown lived happily for a long time— until the floor fell out from under her feet.

Downsized Jobs And Privatized Welfare

It fell out despite her exemplary resume. Raised in modest circumstances, the African-American woman managed to get ahead on her own. She attended high school in the Bronx and college in Brooklyn, after which she started as an intern at Citigroup. Soon she joined her boss, a 'wealth manager', on the trading floor of the New York Stock Exchange, then moving on with him to Morgan Stanley, then HSBC, then Barclays.

As executive assistant, Brown had a front row seat "watching capitalism work". She had her "pulse on what was going on" in Wall Street finance, leaving her convinced that "everything is possible". Not least for herself: She was about to buy the house where she rented from her landlady.

But just as they were moving on to Bank of America, her boss died of a heart attack— at the height of the financial crisis. The bank took on Brown as a temp, then sold her division to French BNP Paribas and 'downsized' her job. At the same time, her marriage fell apart.

And so she ended up on the street, having to provide for her sons Said, 15, Yusuf, 20, and Malik, 21, all by herself. It was a devious trap. Since Brown only had worked as a temp for Bank of America, she couldn't claim unemployment insurance. It was a straight line to the ranks of the poor, hungry and welfare rolls.

"It was very difficult to identify myself as poor," she says. She recognized her own "little individual prejudices" against people on welfare, the shame and stigma that came with it. "I learned compassion— the hard way". This hard way turned into an odyssey. Instead of finding a job soon, Brown got entangled in the maze of the US welfare system.

Bill Clinton's "Welfare Reform" of 1996 'privatized' welfare in the US, turning it into a for-profit business. Nowadays, welfare seekers have to adhere to such strict criteria that "a large number of applicants will have their applications denied, mainly because of purported non-compliance with certain requirements," the FPWA recently found in a study. Many others would just give up.

Brown wasn't spared either. First the agencies couldn't determine how much help she was due. Then, because of a still-unresolved 'computer error', her cash allowance was denied completely. She now gets just $242 in food stamps and $400 in rent subsidy per month. Every payment requires a new "application," for which she has to produce dozens of documents.

'We're in a Crisis'

The food stamps last about two weeks. Beyond that, Brown has to rely on soup kitchens or private welfare organizations, like the West Side Campaign Against Hunger (WSCAH), which runs a food pantry and provides counselors and cooking programs in a church basement on West 86th Street in Manhattan. "There's been an enormously dramatic increase in clients," says WSCAH Executive Director Doreen Wohl.

"This is the worst it has been in our 31-year history. We're in a crisis." The white-haired lady is standing in the little "supermarket" where the needy can choose food by a point system— grains, proteins, vegetables, fruit, milk. The demand is so high their meat freezer looks plundered.

For Pam Brown, last winter was the worst. One day she ran out of food completely and had to go through trash cans. She fell into a deep depression. Her son Malik finally got her out of it by dressing up as Santa Claus. The toughest part is watching her kids suffer. "Parents should fulfill their children's dreams," she says. "Instead, my sons are pulling me through."

Odd Jobs

Economists claim things are 'looking up'. Brown doesn't feel any of that. To this day she spends up to eight hours a day, several days a week, in the waiting room of a "Job Center," her neatly printed resume in her bag, only to be sent to dead-end training programs and interviews leading to nothing. "There are no jobs," she realized. "Too many people, not enough jobs."

In the meantime, she feels treated like cattle. "They don't know what to do with educated people like me," she days of her overwhelmed social workers. "They're looking for the angry black or Latino woman."

She did have two jobs, temporarily. A real estate firm employed her for a week to help out with a project. "I was able to buy soap, toilet paper, dish dertergent, and I wasn't washing my clothes on a washboard anymore," she remembers. And last winter, she "swept and shoveled" the streets for the New York City Sanitation Department— in a dark, remote corner of the Bronx, underneath the expressway, with parked rigs and "condoms all over the place… I was scared for my life."

She would be homeless if it weren't for her lenient landlady. But the house is up for sale, and she isn't sure how the next owner will handle it. Brown is terrified of homeless shelters. Just the other day she went to visit a girlfriend in a shelter: "It was like jail, with steel bars and a curfew". Her friend had lost her home in spite of her MBA.

The waiter refills her coffee. Brown takes a sip and apologizes for her grievances. "No matter what," she says. "I will not allow this to take away my optimism in the human spirit". Then she's off, to another interview. Who knows.

Where Does The Money Go!?!

Click Here, or on the image, to see a larger, undistorted image.

Thursday, November 11, 2010

20 Stocks With Big Insider Selling

¹²20 Stocks With Big Insider Selling
Click here for a link to ORIGINAL article:

By Roberto Pedone | 10 November 2010

The selling being done by corporate insiders of S&P 500 companies seems to have momentum that is just unstoppable. According to a report out of Blooomberg.com, the week ending Oct. 29 saw one of the highest amounts of corporate insider selling in S&P 500 companies on a weekly basis for all of 2010. A total of $662 million in stock was sold in the open market last week— and a paltry $1.6 million was purchased— by the people who know the most about the future prospects of their companies.

The buyers once again aren't buying anywhere near the dollar amount of stock that the sellers are selling. Last week, the most significant insider buying was seen at American Express (AXP), Procter & Gamble (PG) and QLogic Corp (QLGC). Insiders at American Express purchased 20,000 shares, or $787,658 worth of stock, at an average price of $39.38. Insiders at Procter & Gamble bought 6,423 shares, or $407,534 worth of stock, at an average share price of $63.45, and insiders at QLogic bought 10,000 shares, or $169,300 worth of stock, at an average price of $16.93.

These three buys just aren't enough for me to get excited about corporate insider buying. Not one purchase even came in above $1 million. This continues to show that insiders at S&P 500 companies have little to no interest in buying stock in their companies. On the other hand, insiders continue to sell stock like crazy. Here's a look at some of the S&P 500 stocks with the largest amount of insider selling.

Enterprise software player Oracle (ORCL), which saw the largest amount of insider selling last week, is not a new name to the insider-selling list. Corporate insiders at Oracle sold 7.8 million shares, or $210.9 million worth of stock, at an average price of $28.95. The insiders at Oracle are apparently taking advantage of selling their stock into strength, with shares trading very close to its 52-week high of $29.71. But my take, since Oracle has shown up so many times on the insider-selling list in recent weeks, is that Oracle insiders probably don't see a ton of upside left in their stock.

It's also worth noting that the guy who would know the most about the company, CEO Lawrence Ellison, continues to be a big seller of the stock. From a technical standpoint, shares of Oracle have been struggling for the past two weeks with getting above $30 a share, while at the same time, insiders have been dumping stock regularly. Now, this doesn't mean the stock can't go higher, but if the Oracle insiders continue to flood the market with supply it will continue to leave an overhang on the shares.

Personally, I would have a hard time pulling the trigger from the long side on Oracle when insiders are selling so much stock— and so persistently. For me, the insider selling at Oracle is moving the stock into "red flag" territory. Another tech name that saw big insider selling last week was Apple (AAPL). Corporate insiders at Apple sold 197,125 shares or $60.5 million worth of stock, at an average share price of $306.72.

So far year-to-date, Apple shares are up 47%, but the stock is currently trading about 9 points off its 52-week high of $319 a share. My take is that Apple insiders are also taking advantage of the strength in their stock to book some profits. From a technical standpoint, I wouldn't get concerned about the price action in Apple unless the stock broke below some key support at around $300 a share. If you're a bull on the stock, then I would definitely want to see Apple take out its pre-earnings highs of $319 sometime in the next few months.

Three more large tech players that showed up on the insider selling list last week were storage player EMC (EMC), network infrastructure company Juniper Networks (JNPR) and information technology king IBM (IBM). Insiders at EMC sold 999,847 shares or $21 million worth of stock at an average share price of $21.08. Insiders at Juniper Networks sold 577,500 shares or $18.3 million worth of stock, at an average price of $31.76 and insiders at IBM sold 101,046 shares or $14.2 million worth of stock, at an average share price of $140.57.

It's worth noting that the Juniper's chairman of the board Scott Kriens was one of the big sellers at that company. And the chairman, president and CEO of EMC, Joseph Tucci, was also a significant seller. I never like to see such 'significant' insiders dumping a lot of stock.

Even more insider selling was seen among well-known tech names such as cloud computer players Citrix Systems (CTXS) and Salesforce.com (CRM). Insiders at Citrix Systems dumped 150,000 shares, or $9.1 million worth of stock, at an average share price of $60.98. Insiders at Salesforece.com sold 70,670 shares, or $8 million worth of stock, at an average share price of $113.64.

What's interesting here is that all of these companies, as well as Oracle, operate in the information technology sector. Could this heavy selling among so many IT leaders be a 'tell' that this sector is going to see a slowdown a lot sooner than many market players are expecting? Only time will tell, but it sure isn't a confidence-building move by these insiders to be dumping so much stock all at the same time.

One new name that showed up on the insider-selling list was manufacturer of complex metal components and products Precision Castparts (PCP). Insiders at Precision Castparts sold 181,300 shares, or $24.7 million worth of stock, at an average share price of $136.07. This stock has been another big winner year-to-date, with shares up around 30%. What I really don't like about the insider selling at PCP is that the chairman and CEO Mark Donegan was one of the top sellers.

As a rule, I never like to see the most knowledgeable person at a company selling large amounts of stock. And to me, it doesn't matter if it's the exercising of options or an open market sale of stock. Corporate insiders book profits at a certain level for a reason, and that reason usually isn't because they see a ton of upside in the future. Of course, it's always important to see how much of their overall stake in the company the insiders have sold, and you should evaluate the timing of any sale on a stock chart.

From a technical standpoint, shares of Precision Castparts are running into some overhead resistance at around $141 share. In order for the uptrend in this stock to continue, it will need to take out that resistance level— or a selloff back towards previous support around $135 to $133 could be in the cards.

The bottom line: Insider selling isn't a tell-all indicator. I like to look at it as a trend indicator, where if the trend in selling is consistent and the buying is not showing up, then it should be viewed as a red flag. That is the current trend we're seeing right now, no doubt, but that doesn't mean that stocks are about to fall off a cliff. Often the insiders can be a bit early in the timing of their sales.

To see more stocks with heavy insider selling, including McDonald's (MCD), Coca-Cola (KO) and Apollo Group (APOL), check out the Top 20 S&P Stocks With Big Insider Selling portfolio on Stockpickr.

M O R E. . .


¹²Ten Companies That Will Never Recover From Their Mistakes

By Douglas A. Mcintyre | 10 November 2010

Most companies that fail over time do so because of a series of modest mistakes made by generations of management. Markets shift and corporations are slow to adapt. Strategic acquisitions, which could change a company's future for the better, are ignored or passed up. And, perhaps most common of all, a company begins to decline because it loses the creative spark of its founder or the input of employees that are the company's creative engine.

The firms on the 24/7 Wall St. list of companies that will never recover from their mistakes are all still in business. Each firm was a leader in its industry, if not the leader, but made a critical error or errors that destroyed their chance to have a brighter future. For want of a nail, …the kingdom was lost.

Motorola did not produce a product that leveraged the huge success of its RAZR handset, a product that propelled the company to the No.2 position among cellphone manufacturers worldwide. Boston Scientific decided that it was not enough to be a large and highly successful company. Instead, it bought another company to be even larger…. Blockbuster believed that video rental stores would remain the dominant way to distribute DVDs. It did not see that the DVD industry [[and, thanks to Netflix, its entire business model: normxxx]] was faltering.

It is easy to say that good management never makes disastrous strategic errors. But, the results of good management may be, in part, a product of luck. GM's prospects fell apart while rivals VW and Toyota did well. Did GM fail to see something on the horizon that its rivals did? [[Based on the unanimous opinions of the government conservators sent in to rescue them— they didn't have a clue!: normxxx]] Or was GM unlucky because its home base was the US where the labor movement was powerful and mediocre quality, heavy cars with large engines sold well [[until they didn't: normxxx]]?

There are ten companies on this list. The fortunes of each have been badly damaged. Whatever the reason, what each lost is irretrievable.

1. Motorola

The handset company sold 50 million of its Razr handsets in two years and 110 million over four years. The company shipped 12 million units in the third quarter of 2005 alone. The success of the Razr made Motorola the No.2 handset company in the world in the second half of 2006, behind perpetual leader Nokia.

Motorola failed to use its huge advantage in the early days of higher end handsets to become one of the leaders in the emerging 'smartphone' business, which is now dominated by Apple and Research In Motion. Today, it must also compete against larger companies with stronger balance sheets such as Nokia, LG, and Samsung. These corporations are aggressively pushing for global smartphone market share. Motorola's new Android-based handset cellphones sell well, but the momentum the company lost in 2007, 2008, and 2009 means that it will never be more than a niche supplier.

Motorola's sales hit $42.9 billion in 2006 and the company made more than $4 billion. Motorola's revenue, which included discontinued operations, was $4.9 billion in the most recent quarter of 2010. On that same basis, the company made only $109 million. Motorola is on a pace to reach $20 billion in revenue and $400 million in net income this year. Motorola's stock traded for over $26 in late 2006. The shares change hands at about $8 today. The DJIA is up 10% over the last five years. Motorola is down more than 60%.

Today, Motorola's leadership has disappeared, and it struggles near the bottom tier of an extremely competitive market. Motorola shipped only 8.3 million handsets in the second quarter of 2010. In comparison, Nokia shipped more than 90 million in the same period. More forcefully, handset manufacturers shipped 346 million units worldwide in the most recent quarter.

Also Read: The E-Commerce Assault on the Cell Phone

2. GM

In 1962, the largest of the Big Three sold more than 50% of the cars bought in the US. That number is less than 20% in most months today. The reasons for the decline run into the dozens, but there are a few that are most important.

GM did not forcefully respond to the Japanese imports which began to reach the US in real numbers in the 1970s. The Japanese cars got better gas mileage than GM vehicles in a period when US drivers were worried about fuel costs. American car companies, GM included, also wrongly assumed that domestic buyers would always think that Japanese vehicles would be of 'lower quality' than American vehicles.

GM never forcefully addressed its rapidly rising labor expenses [[nor the clearly discernable quality superiority of the Japanese products: normxxx]]. The average cost per hour to employ a GM blue-collar worker rose well above those of Japanese rivals during the 1990s. GM could have gone through a painful nationwide strike to challenge the UAW to bring down labor costs.

Such a move would have been risky. But such risk was not nearly as significant as building a worker cost base that could not be sustained. The high costs were particularly problematic in light of falling market share in years like 2008 and 2009 when US car sales slowed.

[ Normxxx Here:  And, its eventual, belated moves to address the quality issues were never more than half-hearted tokenism intended largely for PR effect which fooled neither its workers nor the buying public.  ]
GM also decided to 'diversify' in the early 1980s. It bought tech outsourcing company EDS from Ross Perot in 1984 [[a doomed merger if ever there was one, considering the beaurocratic culture of GM and the individualistic culture of EDS: normxxx]]. GM became a large defense contractor in 1985 when it acquired Hughes Aircraft and merged it with its Delco division. Both acquisitions were major failures.

GM is no longer the world's largest car company. That distinction belongs to Toyota. In the US market Ford and Toyota sell nearly as many vehicles each month as GM does.

3. MGM

The studio company, founded in 1924, recently filed for bankruptcy. It has produced some of the most famous films in history including "Gone With The Wind" and most of the James Bond movies. The Metro-Goldwyn-Mayer library of movies includes more than 1,400 titles.

The most extraordinary mistake that the firm made was a 2005 leveraged buyout through which several media companies and private equity firms Providence Equity Partners and TPG took control of the studio. MGM took on more than $4 billion of debt in the process and never generated adequate cash flow to support it. MGM has recently been the target of raider Carl Icahn and other investors who have hoped to buy the company's assets at a huge discount.

The recent Chapter 11 filing by the company will allow a number of creditors to exchange equity for debt. The new structure means that MGM will probably make a very modest number of films a year to keep down costs— perhaps a half a dozen. This is a tremendous drop from the production schedule that the company had in its prime.

The greatest error that the MGM made was to assume that its large film library would fuel sufficiently huge DVD sales to cover the firm's debt. This worked in the very early stages after the 2005 buyout, but as the DVD business collapsed and more films moved to TV video-on-demand and Internet streaming, MGM's major source of revenue quickly eroded.

4. Gannett

Gannett was once regarded as one of the most innovative media companies in the world. It started USA Today in 1982. The paper became the most widely circulated daily in the US.

The largest newspaper chain in the US had a stock price of $62 in 2007. The share price is now under $12. Gannett had revenue of $8 billion in 2006 and had net income of over $1.7 billion each year from 2002 to 2006. In the third quarter of this year, Gannett had revenue of only $1.3 billion, and net income of just $101 million.

Gannett's mistake was not unlike that of other newspaper chains. It took too long to realize how rapidly news consumption patterns would change and move to the Internet. It was late to market with a major national news site like CNN.com or MSNBC.com. Gannett did not take advantage of its size and cash flow five years ago, when it could have bought a growing Internet company like MySpace. Although, the MySpace purchase has not worked for News Corp, that may be due as much to poor product management and lack of innovation as anything else.

Gannett's management failed to look forward and realize that the print media industry's prospects were beginning to dim.

5. Moody's

It says a great deal when Warren Buffett buys a significant stake in a company and then sells much of that position only a short time later. He invested in Moody's because it was one of the leaders of the rating industry and had been for a century. Along with S&P, it was the 'gold standard' of its industry.

Moody's has been blamed for misrepresenting the independence of its rating of mortgage-backed securities. The rapid drop of the value of these securities was the major cause of the credit crisis. Referring to the ratings on subprime paper, The Week reported that the head of the US Congressional Financial Crisis Inquiry Commission said "flipping a coin would have been five times more accurate in making an investment decision than trusting Moody's ratings of sub-prime backed securities before the credit crunch". The magazine added, "Of the (sub-prime backed) securities given the highest AAA-rating in 2006 by Moody's, 89 per cent were downgraded to junk status in a year."

There was no one in the management of Moody's at the time that these ratings were offered to investors who did not know that independence and integrity were the most critical values for the company's success. This is true with all securities that Moody's rates— its action with sub-prime paper had the effect of calling all of its research into question. In early 2007, Moody's shares traded above $73. Today the stock sits just above $26. The "trust" issue will dog the company into the future. [[No investor today would rely on a Moody's rating; its rating's "Value Added" on any security is virtually nil.: normxxx]]

6. Blockbuster

The video rental giant is destined to make any list of companies which took a wrong turn that cost it its entire franchise. The once dominant force in the industry recently went through a Chapter 11 to restructure its debt. Blockbuster held the lead position in the distribution of feature content for nearly a decade. It was the top retailer of VHS and then DVD products and held a significant enough part of that market that there was no clear second place competitor.

Blockbuster's business began to falter and it lost money in 2002, 2003, and 2004. Raider Carl Icahn gained de facto control of the company in 2005 to turn it around, but the trends in the industry had already moved toward DVDs-by-mail. Netflix took a lead in this business which became insurmountable even after Blockbuster launched its own mail service. The delivery of digital entertainment has since moved to streaming premium content over the Internet directly to people's homes, a business in which Blockbuster has never gained a significant presence.

7. Level 3

The company has one of the largest data networks in the US with 67,000 miles of wire and fiber which can deliver voice and video via broadband across most of the country. The firm's technology is unrivaled. A number of cable and telecom companies have been Level 3 customers. Level 3 is also one of the key networks for Voice over IP, which is rapidly replacing standard landline telecom service for millions of people.

Level 3's strategic error was that the company did not stick to its core competency. The firm became as much an M&A machine as an operating company which left it with more than $9 billion in long-term debt. Level 3, however, did not have the cash flow to cover such a large obligation [[and especially not upon entering into a serious recession: normxxx]].

Management always had the same excuse about its performance. Acquisitions had 'not performed well'. These also cost the parent company management's time and integration expenses. Level 3's lack of focus allowed its former customers— large telephone and cable companies— to flank it in the delivery of data to the 160 cities that it serves.

A focus on operations rather than building the company through buyouts would have allowed management to take advantage of the most advanced data infrastructure in the world. Level 3's stock was above $6.50 in early 2007. It now trades for $.89.

8. Boston Scientific

Boston Scientific was one of the leading medical device companies in the world with a huge market share in the "less invasive medical device market". It was also highly profitable. The company posted earnings of $1.6 billion on revenue of $5.6 billion in 2005.

In early 2006, the Boston Scientific board and executives implemented a seemingly 'sure-fire' strategy. If it bought another sizable company within its industry, it would markedly increase its dominance of the industry and hence its margins tremendously. Boston Scientific paid $27.2 billion in cash and stock for Guidant, outbidding Johnson & Johnson. But, the buyout increased the Boston Scientific debt eight-fold to $6 billion.

Boston Scientific hit some bumps as government studies questioned the the effectiveness of its own products. And, to compound the problems with the buyout, Guidant products began to have quality-related problems, which made the acquisition even more troublesome and excessively costly. Guidant became a tremendous burden less than two years after the transaction. As Morningstar pointed out at the time, "Lingering quality problems and more product recalls from the acquisition of Guidant could amount to more bumpiness through 2008."

From 2006 to 2008, Boston Scientific posted total losses of $4.5 billion. The combined company also showed no growth in revenue or meaningful expense savings. Boston Scientific has taken a large, successful business and, in a bid to become the single dominant corporation in the medical device industry, it ruined its own balance sheet and bought a firm with significant product problems. Boston Scientific shares were above $25 before the Guidant deal. They now change hands for well under $7.

9. Abercrombie & Fitch

The specialty retailer did a poor job of judging its market beginning in early 2009. Its clothes were aimed at older teens and college aged customers. Abercrombie & Fitch kept margins high because it had built a powerful brand which allowed it to charge premium prices for its products. Although it had competition, Abercrombie believed its brand could overcome the need to ease prices when same-store sales began to drop. But the plunge was unprecedented.

Same-store sales dropped nearly 30% in 2008 and in 2009 and have only just begun to recover. Abercrombie & Fitch's stock traded between $60 and $80 from 2005 to the summer of 2008. At that point, it became clear to Wall St. that consumers may have viewed the retailer as a merchant of premium clothing, but that the teen buyer was not willing to pay a large premium price for similar products available elsewhere.

Lower priced retailers had begun to copy Abercrombie styles and marketing practices. Shares fell to $15 in late 2008. Abercrombie is a clear example of a company which misread the willingness of its customer to stay with the brand when that brand had become relatively too expensive.

10. Office Depot

There are three major companies in the retail office supply business: Office Depot, Office Max, and Staples. Over the last five years, the share price of Staples has been relatively flat. The share price of Office Max is down about 35%. Office Depot's stock is down over 80%.

Office Depot never took advantage of its brand or retail experience to develop a beachhead overseas. In contrast, almost a quarter of Staple's sales are from outside the US. This failure cost Office Depot dearly.

The margins at all three of the office supply retailers were pressed by the recession. More importantly, big-box retailers like Sam's Club and Costco moved into office supplies and used their broad purchasing power to offer lower prices. Office Depot could not turn to overseas operations which have helped a number of companies like Walmart in recent years to offset a slowdown in its home market.

By deciding that the US market was the only one that really mattered, Office Depot almost guaranteed that its growth rate would eventually turn to a sales contraction. [[The office product market is peculiarly sensitive to recession; in any HQ cost cutting exercise, the first thing cut are office supplies.: normxxx]]

Also Read: Fedex Capitalizing On Growth Trends In India


¹²Four Smacked-Around Stocks Likely To Rise Again

By John Dorfman | 10 November 2010

Stocks that have been smacked around often make the best buys. I regularly compile a 'casualty' list of stocks that have been beaten up in the previous quarter, and that I think have excellent recovery potential. This fits with my favorite investment technique, which is to buy stocks of good companies on bad news that I believe is temporary.

The Standard & Poor's 500 Index rose 11 percent in the third quarter. A quarterly decline of 10 percent was enough to relegate a stock to casualty status this time. Among approximately 2,100 U.S. stocks with a market value of $500 million or more, 92 were down 10 percent or more in the third quarter. Most of them flunked my basic value criteria: a stock price 15 times earnings or less, and debt less than stockholders' equity.

Among the 19 banged-up stocks that met my criteria, I recommend four. Let's start with Sanderson Farms Inc. The Laurel, Mississippi-based chicken producer was down 15 percent in the third quarter, and 18 percent since I recommended it Feb. 21.

Clearly, my recommendation was badly timed. A poor U.S. harvest contributed to a 53 percent increase in the spot price of No. 2 yellow corn in the past eight months. High prices for feed grains make the lives of chicken farmers harder.

Tough Times

Also, the economy hasn't rebounded as strongly as I thought it would. My notion that people would buy more chicken proved premature. It's still Hamburger Helper time.

I jokingly define the 'long term' as that period of time over which I am proven right. In the case of Sanderson Farms, I think that day will still come. Over the next few years I believe corn prices will moderate, and some measure of prosperity will return to the U.S.

Today, Sanderson Farms shares sell for about $42, which works out to less than nine times earnings and 0.5 times revenue. Those valuations make me feel very comfortable.

The price ratios at Skechers USA Inc. are even better: six times earnings and 0.5 times revenue. A year ago I said it would be a "small mistake" to buy Skechers. Since then the stock has dropped about 12 percent while the S&P 500 has gained about 12 percent.

Following a 36 percent decline in the third quarter, I consider Skechers is a better buy than it was when I wrote about it earlier. Analysts expect earnings to climb to about $2.90 a share this year compared with $1.16 in 2009. The Manhattan Beach, California, company had a hit with Shape-Ups, an athletic shoe that promised to help customers "get in shape without setting a foot in a gym". Now the No. 2 U.S. sneaker maker behind Nike Inc., Skechers is opening more stores this year, bringing its total to about 300.

Amedisys Inc., the largest U.S. home-nursing provider, fell 46 percent in the third quarter. Propelling the drop were allegations that the Baton Rouge, Louisiana, company may have improperly billed Medicare. The company is suffering through investigations by the Securities and Exchange Commission, the U.S. Justice Department and the Senate Finance Committee. I predict the controversy will end in a negotiated settlement.

Amedisys will probably pay a fine, but not one that cripples the company. Health care in the U.S. is too expensive. Amedisys and its competitors help to reduce the need for hospitalizations, thus saving the health-care system a lot of money. When it comes to cost containment, I see this company as part of the solution, not part of the problem.

Legal Trouble

Amedisys had a 21 percent return on equity last year and has reported profits in 11 consecutive years. In the past five years, its earnings per share rose at a 29 percent annual clip. Yet because of its legal woes, the stock now sells for less than six times earnings.

Beckman Coulter Inc., located in Brea, California, makes laboratory instruments and supplies. For the past five years, it has sold, on average, for 18 times earnings. Today investors can buy it for 14 times earnings. The stock fell 19 percent in the third quarter, hit by a triple whammy.

In June the company received a warning letter from the U.S. Food and Drug Administration concerning failure to pre-clear one of its medical-test products. In July it announced earnings that fell short of analysts' expectations. And in September, Chief Executive Officer Scott Garrett resigned.

The circumstances surrounding Garrett's departure were unclear. The company said that his leaving was "not related to one event or issue". A search for a successor is underway. A year from now, I suspect that all three of those adverse events will be forgotten.

Disclosure note: I own shares in Amedisys personally and for clients. I have no long or short positions in the other stocks discussed in today's column.

Wednesday, November 10, 2010

Here's How You'll Know Bernanke's QE2 Has Failed

¹²Credit Suisse: Here's How You'll Know Bernanke's QE2 Has Failed

By Business Insider | 10 November 2010

Credit Suisse actually believes that the Fed's fresh round of quantitative easing will prove far more successful than its numerous skeptics are forecasting. The firm's Andrew Garthwaite believes that if we see U.S. inflation expectations rise at a moderate rate, a yield curve with a sharp steepening point 2-3 years out, a strong rebound in auto sales, or just a stabilization of housing prices over the next year, then it will be clear that QE is working. However… here are the warnings signs of QE's failure:
Credit Suisse's Andrew Garthwaite:

If real bond yields start to rise significantly, on the back of worries about future sovereign risk or potential losses for foreign owners of US bonds due to a weaker dollar (bearing in mind
50% of US government bonds are held by overseas investors, down from 55% two years ago). We would not worry if nominal yields rise slightly as long as inflation expectations are rising more, allowing real bond yields to fall.

For now, this continues to be the case (nominal 10-year bond yields have moved to
2.7%, from their trough of 2.4% at the beginning of October). Ironically, a funding problem in the US may in part be caused by foreign central banks selling their holdings of treasuries but then this would require them to revalue their currencies against the dollar, something they are unwilling to do.

If inflation expectations start to rise meaningfully above 4% (the level at which equities have in the past started to de-rate). The irony here is that the Fed is aiming to push up inflation expectations, to engineer low real rates— however, if they are too successful in doing so, this might scare markets and lead to increased worries within the FOMC that current policy is inconsistent with the goal of price stability.

The Fed's favourite measure is the 5-year forward implied inflation rate at
2.7% (while our US fixed income strategist, Carl Lantz, believes that the 30-year breakeven inflation rate— currently 2.6%— is a more appropriate measure of inflation expectations as they are not distorted by the Fed's asset purchase program— which is concentrated in the 5-10y maturity buckets).

If the dollar fell too far. We think that ultimately QE would become unsustainable if the dollar weakened to a level that caused the Fed to worry about inflation. Each
10% off the dollar trade-weighted typically adds about 0.2% to inflation, according to our US economists, yet core inflation is currently at 0.8%, 0.7pp below the lower end of the Fed target band (1.5-2%).

Thus, technically, a further
20-25% depreciation of the dollar (10% has already happened since June) would alter the inflation outlook sufficiently for the Fed to change course (see Appendix 1 for details)— and this is without taking into account the fact that, according our models, core CPI inflation could fall to zero (given an output gap of 3.2% on OECD estimates).

If the oil price rose significantly, that would undo some of the benefits of QE. Yet, so far, the oil price has remained surprisingly subdued (it is up just
9% year-to-date— and just 4% in SDR terms).