**TRADE ALERT FOR MAY 15TH 2010**
eCrypt Technologies (ECRY.OB) could take off this morning after big news came out this morning that they are launching an international television campaign on CNBC. Consider getting on this before it’s too late!
To find out more about ECRY:
http://finance.yahoo.com/q?s=ECRY.OB
Remember to do your due diligence and set your stop losses to protect your profits
The years between 2008 and early 2010 will long be remembered around the globe as the period of the Great Recession. However, in the US it will be remembered for more than just that: the election of the first African-American President, the passing of monumental legislation such as the American Reinvestment and Recovery Act and the Patient Protection and Affordable Care Act, the START treaty for nuclear non-proliferation, and the moment in time that Americans began to take control of their spending.
It is no secret that consumer spending in the US grinded to a halt over the last two years from its peak in 2007 and although it has made some ground in recent months, it is still at historically low levels. But for investors there are signs of hope and knowing those signs will provide investors with opportunities of prosperity.
Consumer spending is driven by a few factors, but is largely dependent on the employment levels of the population and consumer confidence. The two factors are almost inextricably linked, as during periods of high unemployment, the consumer confidence index trends lower. The key to making a good investment in the consumer products industry is by buying in at the bottom or the moment the industry is starting to see a turnaround.
A general shift in consumer spending has occurred as a result of the dramatic shocks that American consumers felt over the last two years. Consumers are now looking at best value and giving more weight to quality in their decision process of making a purchase. A unique industry that is experiencing promising signs of return is the bedding industry, specifically the specialty bedding industry.
The bedding industry’s fundamentals essentially make this a good and safe consumer product investment in normal cyclical markets. The fundamentals that drive demand are demographics and pent-up replacement. Naturally, a growing population will require more and more mattresses and the medical benefit of getting better sleep has helped shift consumers to more specialty (and higher end) sleep surfaces. I would expect that as housing sales begin to increase again and unemployment levels fall this will be one of the industries in consumer products that will make a stronger than expected recovery.
As the US economy begins to lift itself up out of the Great Recession, there will be many public equity offerings that will accompany the rise in GDP. Public equity offerings are the easiest (and cheapest) way for companies to raise capital for expansion, acquisitions or sponsor/debt pay down. Some of these equity issuances will be first time participants and some will be making secondary offerings and some will be returning as reorganized companies emerging from bankruptcy.
According to JP Morgan, “since 2007, 426 public companies filed for bankruptcy, representing $1.2 trillion in assets.” Not all reorganizations will successfully emerge from bankruptcy as healthy companies and return to the public equity markets, in fact, many will not and there business units or assets will be sold off in order for senior secured lenders to recover value. However, expect that companies such as General Motors will tap into the public equity markets once again over the course of this year and the next.
Determining whether to invest in the offering of a company that has emerged out of bankruptcy has to be on the basis of prudent analysis. There are essential factors that assist investors in forming an investment thesis on whether a reorganized company will perform well. The investor should be analyzing a “combination of cyclical and secular factors”, debt reduction, asset structure shifts and management changes.
A successful reorganized company has the following characteristics:
The first few months following an emergence from bankruptcy and public offering is the narrow timetable for when the investor should decide to invest in a reorganized company in order to maximize return. During this short time period the company will typically experience specifics items that depress their stock price – information access will be limited because of the lack of regular updates; investor skepticism is often observed within the first few months of going public as mainstream investors typically view reorganized companies poorly; lack of research will further limit the information out there as coverage tends not resume for at least one year; and there is expected to be an initial drive down in prices as lenders are quick to sell their holdings to realize a nominal return. A prudent approach could lead to successful returns, which history has shown us to be true during the last recession and rebound of the early 2000s, where the first 12 month gains of publicly traded reorganizations averaged 84% in returns (relative to the S&P).
Last week I attended the 2010 EIA Energy Conference – “Short Term Stresses, Long Term Change†– in Washington DC. The conference was made up of industry types, financial investors and government regulators, which focused on energy-related issues that ranged from US Natural Gas supply to Climate Change policy. The keynote addresses were given by the Secretary of Energy, Steven Chu and the Director of the White House’s National Economic Council, Lawrence Summers.
The EIA (Energy Information Administration) is a non-partisan section of the US Department of Energy that provides statistics, data, analysis on resources, supply, production, and consumption for all energy sources to the public domain. The information provided by the EIA is used for determining pricing and future output of the US and the world and is heavily relied on by the energy industry.
The conference was very informative and I think it would serve investors well to know a few of the key takeaways from the conference.
In short, there is a tremendous amount of capital and attention being paid to the energy debate and until we solve our energy crisis, money will continue to flow into new technologies and there will continue to be investment opportunities. The energy investment landscape is very similar to the technology investment landscape of the 1990s. It is entirely accurate to declare that not all of the current energy technologies will survive and become a big the next big thing, but some will and the opportunity to invest in the leader should never be disregarded.
It was almost inevitable that healthcare reform would pass under the current administration. As we all know, there has been a lot of hysteria around the great debate for more than a year. It has been a long battle and a hard fought process and yet still, few people actually understand the impact it will have on the economy.
Currently, healthcare costs are a huge burden on small business owners and individuals that pay for their own insurance and healthcare. In addition, hidden costs of healthcare place huge burdens on hospitals struggling to stay afloat, as they have to treat patients in the emergency room, whether or not they have insurance. These hidden costs are ultra visible to healthcare providers but are invisible to the average consumer. Despite all the additional services the healthcare bill will bring to the average American healthcare user, it will probably have the greatest impact on the hospital industry in a positive way.
As it stands today, hospitals have very narrow margins due to several issues 1) Medicare reimbursement rates 2) Insurance reimbursement rates 3) Personal bankruptcies and 4) Emergency room service. These issues often force hospitals to close down or sell to the state, as they cannot generate sufficient cash flow to service their debt. Firstly, a large percentage of hospitals generate most of their revenues from Medicare and the reimbursement rate is the rate at which Medicare will reimburse the hospital for a specific procedure. The remainder of the cost is billed to the patient. As healthcare costs rise, Medicare reimbursement rates have actually decreased and more of the cost has been passed on to the patient. Some doctors have chosen to not accept Medicare patients as a result and it wouldn’t have a significant negative effect on hospitals if medical insurance filled the void and reimbursed hospitals, but that is not the case. Medical insurance reimbursement rates are steadily on the decline as the rate is loosely pegged to Medicare reimbursement rates, which means that less money is spent on a patient’s treatment, which enables the insurance company to increase profits as insurance premiums increase. The third issue is that of personal bankruptcies related to healthcare, which affect more Americans than any other form of bankruptcy. As individuals file for bankruptcy and fail to pay the hospital for their treatment the hospital has to write-down the lack of payment as an expense, which has a direct effect on their cash flow and bottom line. Finally, emergency room service severely affects the profitability of a hospital as patients (even those with insurance) claim to be uninsured and as the hospital has a responsibility not to turn anyone away, the hospital is forced to provide a service and incur a non-billable expense by doing so.
The language in the healthcare bill will prevent more hospitals from going bankrupt and refocus insurance money on the patient instead of insurance company profits. The mandate to purchase insurance will limit the amount of write-downs that the hospital incurs while treating patients in the emergency room. As a result of the healthcare bill hospitals will become better investments and healthcare costs could potentially decline as hospitals won’t be forced to mark-up prices in order to make up for lost revenue.
If you have watched or read any business news network or financial newspaper in the last 3 months then you will be well aware of the environment of vastly differing opinions surrounding the US economic recovery. Some of these opinions offered are made by intelligent economists such as Simon Johnson of MIT, Mark Zandi of Moody’s, Joseph Stiglitz of Columbia and Nouriel Roubini of NYU, however some are made by politicians that seem to ignore evidential facts and figures and point blame at each other’s parties. The fundamental rule for analyzing data is to set politics aside as politics hinder one’s objective ability to discover conclusions and make sound forward-looking decisions.
It is without question now that the Troubled-Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA) helped save the US economy from falling off a cliff and reversed the downward trend. TARP allowed for the largest banks in the US—also the largest backbone of the American economy (unfortunately), not to go bankrupt, which would have caused severe paralysis. ARRA first lessened the impact of the unemployed by aiding states already struggling to pay unemployment benefits, kept hundreds of thousands of teachers, firemen and policemen from losing their jobs due to a substantial shortage in tax revenue and is currently funding construction projects in 48 states around the country. The majority of the ARRA funds will be spent this year, which will further accelerate the US economic recovery.
In February we learned that GDP increased 5.7% in the fourth quarter of 2009, which was a high follow-up quarter to the 2.2% increase the US saw in the third quarter of 2009. More recently, we were given some positive figures by the Commerce Department, which reported that February retail sales increased a seasonally adjusted 0.3% from a month earlier and excluding auto sales that figure was 0.8%. In perspective, this change represents a 4% increase over the same period last year. Manufacturing has also increased as companies have focused spending on re-stocking their depleted inventories. However, despite these positive signs there is still real weakness in the economy, especially in the real estate market and unemployment rate. Housing starts are still low and the unemployment rate remains at half-century highs. These issues are serious concerns but unemployment usually lags general growth indicators, which means that companies start to hire when they see results and determine that their businesses need to expand. The residential real estate market lags unemployment figures as the industry is dependent on a population’s reoccurring income.
In my previous postings we have devoted considerable attention to investment opportunities relating to the economy turning south again and I want to present some investment areas that will provide returns if the economy further accelerates. As I mentioned earlier, GDP, retail sales and manufacturing figures have shown strong growth, which is good news for the logistics and shipping industries. American exporters and importers are experiencing positive growth and this fuels the demand for transportation. The general consensus in the logistics industry, which includes all forms of trucking, rail and airfreight, is that the bottom has been hit and shipment counts are improving. If these trends continue then 2010 will be the year of the rebound for these companies. In regards to the shipping industry, rates are significantly off their peaks (which was basically a bubble), but the companies present themselves as good investment opportunities as international trade growth will heavily rely on their capacity, and if the Administration can make good on its goal to double American exports in five years, this industry will see a return to historical highs. It is fundamentally important to follow the facts and figures regarding investment opportunities because that is the only way that an investor can be sure of a positive return.
Last week I blogged about what Greece meant to the European Union (and thus the world) and I believe it is necessary to provide an update to what is happening before continuing on to another topic. As a result of Greece’s necessary steps to reduce it’s budget deficit by €4.8 billion through increasing taxes and reducing government spending, the market has begun to stabilize in Europe with the expectation that Greece will not fail. On Thursday, one day before Greece’s Prime Minister George Papandreou is scheduled to meet Germany’s Chancellor Angela Merkel, Greece was able to raise a 10-year €5 billion bond offering that was three times over-subscribed. The capital raise is a good sign that confidence is returning to Greece. However, Greece still has a lot of ground to cover and it will only be able to do so with a blessing of the European Union. It is a tragedy that Greece and other European countries (with the help of Goldman Sachs) had to hide their large debt burdens in order to be a member of the Euro currency community, but that’s a separate issue.
The looming multi-trillion dollar question here is one that carries significant impact around the globe. And that is the question of what to do with unfunded entitlements? Countries and companies are facing extremely large unfunded liabilities, especially in the current economic climate. Lower revenues and increasing pension and healthcare costs are placing significant stress on the current system and on future generations. Fundamentally, if pension plans cannot pay for themselves, they could potentially fail if there is a shortfall in expected revenue. Private pensions are largely linked to the stock market and can be heavily weighted in an employer’s stock and thus more at risk of a downturn when the economy enters into a recession. In many larger corporations, the company matches or contributes to your retirement plan. Typically, a contract is entered into where the company has an obligation to meet a specific financial contribution. Pre-bankruptcy General Motors’ pension scheme cost the company an average of $3,000 more per vehicle built than that of their competitors, which in the end, is essentially what drove General Motors to bankruptcy. Over the previous two decades companies have had relatively easy access to credit markets, which allowed them to borrow in order meet their pension obligations. But, times are changing and even US states and countries, especially developed countries, face similar crises with increasing pension obligations and a declining tax base.
A recent report released by Pew Research, indicates that US states face at least $1 trillion shortfall for their pensions and retirement benefits. These systems need to be dramatically reformed in order to save states from holding themselves financially hostage. The state of California is the best example of the state of affairs that is crippling governments from providing education, security and healthcare funding. And without dramatic legislation, taxes will have to be significantly increased and a dramatic reduction in social services will have to be implemented. Local governments will be forced to embrace pension-reducing policies, which will be a policy that will hurt their own pockets. The longer they wait the larger the problem will become.
On the federal level, the US Government is facing growing Social Security, Medicare and Medicaid costs that are expected to consume 56% of total budget outlays in 2011. If nothing is done to curtail meaningful expenditures or increase the tax base over the long term, the US Government could potentially face a similar problem to that of Europe and governments around the world will be forced to make the decisions that Greece has had to make.
Followers of the financial markets remember what happened to Lehman Brothers during the two weeks leading up to its collapse and sub sequential shock to the global economy. The question is: has the world learned lessons on how to handle this type of crisis?
It seems that in our current market place we are divided into two teams – winners and losers. But instead of competition being held on a balanced playing field, where skill and position decide the outcome of the game, we have a game that is more like American Gladiators, where one team is made up of contestants and the other team is made up of gladiators. Gladiators do not compete against competitors, but instead act as blockers or impediments designed to stop competitors from achieving any type of goal. The American Gladiator arena is basically how the market for Credit Default Swaps (CDS) has been operating. The buyers of CDS, specifically buyers who don’t own the underlying security, are trying to be blockers of Greece achieving its goal of stabilization, as they stand to make a significant winning if Greece is unable to recover and subsequently defaults.
A default by one Euro country could be disastrous for all European countries and this is because of contagion. Contagion is ultimately what led to the currency crisis during the 1990s in emerging economies. The effect on the market occurs because investors begin to treat securities that are similar as identical comparisons, which leads to major sell-offs in indices and underlying securities that are related to the original security. If Greece defaults, investors will look to withdraw from the rest of Europe’s PIIGS (Portugal, Italy, Ireland, Greece and Spain) because they will view these countries as equally susceptible to the risk of default. As a result, the European Union economic zone would risk collapse as after time investors will start to pull away from stronger countries within the European Union. The best recent example of this is what happened to Goldman Sachs during 2008. Goldman Sachs was never at risk of collapsing and they are (and were arguably) the most stable bank within the financial institutions industry and yet their risk of default increased and their stock began to fall simply because weaker financial institutions were beginning to default. Europe has an obligation to itself to rescue Greece and put it on the right track to stability, as it risks its own demise if Greece fails. The European Union, International Monetary Fund and European Central Bank are expected to save Greece if their government makes difficult, but appropriate budgetary choices. If they succeed in staving off a collapse then Europe will be stronger for having done so, as the world would’ve just watched a coordinated effort across the continent to address real concerns, something that many would argue Europe has not done since the birth of the European Union.
The Euro currency has so far been the only real victim in this Greek drama, as it has fallen 3% over the past month. Gyrations in currencies often bring positive effects and negative ones. A falling Euro is good for the European export market as it makes their goods more competitive around the globe, however it is generally bad for the European import and consumer market as cheap discretionary goods become more expensive. The area where this could cause the largest dent to the European consumer is that of energy costs. A significant portion of the natural gas that Europe consumes comes from Russia and the already high fuel prices in Europe could increase further as a result of a weaker currency.
The US has experienced a weakening currency over the last 8 years, which has led to higher energy prices in the domestic market, but it has also benefitted our recovery, as US exports are very competitive in the global market. The relative strengthening that the US dollar has been experiencing is because of a greater global uncertainty (on a relative basis) in other developed countries. If the Greek crisis has shown anything at all from a US perspective, it’s that the US treasury market is still very robust and is considered to be the safe currency. But in saying that, we must remain cautious because if Europe cannot contain the Greek crisis, which ends up causing the Europe crisis, we must be wary that the sentiment does not spread to the US. If there are signs of a collapse, leap into the stable investments such as gold and US treasuries to protect yourself from what could be called the double dip.
December 16, 2009 – The Troubled Asset Relief Program (TARP) was initiated to save the United States, as well as the world, from a complete financial meltdown that would have certainly lead to a depression, which would have been comparable to the Great Depression of the 1930s.
After all this time, we know the story of how we got here and we are still struggling to get out of it. However, a lot of progress has been made since Q4 2008. Although, banking institutions are still going out of business (133 so far this year) and the FDIC has slipped into the red for the second time in the agency’s history, the economy has stabilized with the help of TARP. The financial markets have more or less normalized and the financial services industry has retuned to producing strong profits. The actions taken by former US Treasury Secretary Hank Paulson in October 2008 were necessary in bringing the market back into a more stable trading period. The Treasury forced “too big to fail†institutions to accept TARP money in order to prevent another market shock, which would have sent the economy into a steeper tailspin. This collective action, concealed the worst banks from the best banks and prevented another Lehman Brothers collapse from happening.
Since then, the “too big to fail†institutions have been racing to pay back their share of TARP funds. Goldman Sachs was the first of the top eight initial institutions and the others have since followed culminating with the December 14th announcement that Citi and Wells Fargo are repaying $45 billion in TARP funds. This is good news for the US government and for the US taxpayer because the government can get out of the business of owning banks. However, this is not necessarily good news for the investor looking to put capital to work in these institutions.
Although these financial institutions are comparable in size and scope they certainly are not equal. It is no surprise that the banks that repaid their TARP package the quickest are the highest earning and today’s most fiscally sound financial institutions. However, even when the best-equipped banks announced that they were re-paying their TARP funds their stocks did not increase dramatically.Â
As an investor, it is important to not lose sight of the fundamentals of financial stocks. Re-paying the TARP shouldn’t be the decisive factor that brings the investor back into the market. The repayment of TARP really only enables the bank to lift the pay restrictions connected to management. It does not make the financial institution free of government oversight, since the government regulates the industry. In fact, government regulations are expected to tighten with the passage of the financial regulatory reform bill, which was passed by the House of Representatives last week. The fundamentals that investors should be looking at are the banks’ business models, capital ratios and book values. These fundamentals have improved in some of the banks since they re-payed TARP because of the earnings that they have generated. However, the immediate impact of raising capital to replace the government’s investment is a dilutive to current shareholders. The capital raise also causes a decline in the banks capital ratios and book values.
On December 3, 2009, gold reached a record high of $1,226.10, as investor fears about the US economy and speculation in the weakness of the dollar grew. Since then the Labor Department released its November jobs report that showed the fewest job cuts since the recession began in December 2007. The November jobs report showed the economy only lost 11,000 jobs compared to the 125,000 job losses that were expected. As a result of positive indicators in the economy, gold has experienced it’s largest two-day drop during the Dec. 4-5 period since Oct. 2008. This reaction can be expected as investors see signs of a recovery and would like to realize their returns. However, there are still some factors that continue to put upward pressure on the price of gold.
Inflation
Gold has long been viewed as an inflationary hedge and if the increase in global financial liquidity, due to historically low interest rates, begins to take a larger hold we can expect investors to continue to pursue gold as an inflation hedge over the long term. Gold is likely to remain at high levels until inflationary worries are relaxed. Globally, gold is not necessarily an inflationary hedge as many currencies have appreciated relative to the price per oz. of gold. Some of these countries include South Africa and Australia (recently raised interest rates), which are the number one and number two gold producers, respectively.
Stability
The global gold buying spree also has been brought on by volatility in the marketplace. It has in a sense become the high growth treasury bill. When there are signs of volatility in the market place investors flock to the assets that hold their value over the long term and precious metals, especially gold, has become that asset. In November Paul Mercier, the deputy director general of market operations at the European Central Bank, said at the London Bullion Market Association conference, “…gold is no longer important from a monetary point, but is important as an asset. Gold makes sense as a contributor to risk diversification. Even if some central banks continue to sell and there is a new potential seller with the IMF, I wouldn’t conclude that gold holdings in central banks will decline in the coming years.” Currently, there is a lot of uncertainty in the global environment due to increasing global deficits, a thriftier US consumer, a high unemployment rate and a change in tax policy.
Supply & Demand
Supply & demand conditions will also put upward pressure on gold prices in the near term as production declines and countries such as India or China pursue more gold reserves (recently India bought 200 tons of gold from the IMF). Mine production is expected to remain low in the near term but pick up again in the medium term as companies successfully ramp up their gold production and rely on more efficient technology, which yields more gold from the mine. As a greater supply becomes available, gold prices are expected to decline. Returning to the near term, if the recent appetite for gold remains at its current level or increases with another 200-ton purchase of gold from the IMF, gold prices can be expected to rise above their record highs.
The New Normal
Is a surge likely to continue in gold prices? Or is the market currently experiencing a commodity bubble, which will likely lead to a collapse in prices as the global economy recovers? There has been speculation of gold reaching the $3,000/oz mark. Recently David Tice, a market strategist at Federated Investors, offered his outlook on the possibility of gold reaching $3,000/oz. His investment thesis is based on an increase in emerging market gold reserves. On CNBC he explained “the emerging markets generating all the free reserves only have 2.2 percent of the reserves in gold, where the developed countries have 38 percent. If [the emerging markets] increase their percent to 5 percentage points, gold could go to $2,000 to $2,500 easily.†He speculates that two years from now gold would reach $3,000/oz as fear will increase and “there will be a global currency disaster aheadâ€. The potential for a bursting bubble is also a relevant investment thesis as many see gold as an overbought asset that has increased in value too quickly and is likely to burst as global stability returns to the marketplace and the dollar appreciates. As an investor, it’s important to understand the short-term pressures and the medium to long-term pressures on gold prices. The supply of gold is declining in the near term, interest rates remain low and the global economy continues to see signs of weakness, which could lead to further increases in gold prices. In the medium to long-term we can expect the miners to increase gold production to try and take advantage of high prices, which will in effect increase supply and put downward pressure on the asset. Currently producers have not been ale to take advantage of the high prices as they have seen a decline in production. In addition, if we see more positive indicators of a global recovery there could be a rapid sell off as investors move quickly back into other areas of the market.
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