To Trade or Not to Trade: A Microsoft Earnings Preview

Microsoft (MSFT) reports fiscal third quarter earnings on Thursday, April 28th, after market close. The whisper number is $0.58, two cents ahead of the analysts estimates. Microsoft has exceeded the whisper number in 28 of the 50 earnings reports we have data.

Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Microsoft presents an earnings trade opportunity.

Since Microsoft reports earnings after market close, it's important to look at after hours trading activity. Over the past four quarters the average price move in after hours trading following their earnings reports is +0.6%, a very limited but positive price move. In other words if you took a long position prior to the past four earnings reports you were on the right side of the trade in two out of four trades.

The average price move during next available intra-day trading (market open to market close) for the past four quarters is -1.6%. A limited and negative price move. The average price move within five trading days for the past four quarters following their earnings reports is -3.2%. Another negative average price move.

Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of -1.3% (intra-day) in one trading day following their earnings report, and price movement of -0.8% in five trading days.

Microsoft has topped the whisper number in the past four quarters, but short term they've lacked a consistent price reaction. In other words, beating the whisper number doesn't always translate to price strength. Although they've topped the whisper number in the past six out of eight quarters, the short term price reaction has been positive in only one of the reports. In the comparable quarter last year, Microsoft topped the whisper number by one cent. The stock lost 0.8% in after hours trading, proceeded to drop another 0.5% during intra-day trading, and fell 26% over the next two and a half months.

Microsoft can be considered a contrarian play when trading earnings. In others words the company tends to see weakness when it tops the whisper, and strength when it misses the whisper in seven out of ten earnings reports.

Other factors that may influence post earnings price movement;

The majority of investors polled are expecting the company to provide a positive outlook:

• Positive 75.0%
• Neutral 25.0%
• Negative 0.0%

Microsoft earnings have historically given investors a positive surprise (by slim margin) as they have exceeded investor expectations more times than missed:

• Beat whisper: 28 qtrs
• Met whisper: 1 qtrs
• Missed whisper: 21 qtrs

Summary: Over the past four quarters Microsoft has topped the whisper number by an average of 5 cents. So the current whisper number is (on average) as expected this quarter as it is four cents ahead of the analysts estimates. The average price movement (after hours) is very limited and negative. The average price movement (post earnings intra-day, long or short term analysis) is negative. There is no consistent reaction to the whisper number, and and the company is considered a contrarian reactor to the whisper number. Data indicates that any long trade taken prior to the earnings report would result in losses. Contrarian investors aside, the negatives outweigh the positives and data indicates Microsoft does not present a viable short term trading opportunity.

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When analyzing the data we collect, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what timeframe (see link in profile to receive alerts). Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

A company's 'reaction' to the whisper number expectation is the key - on average companies that exceed the whisper are 'rewarded', while companies that miss are 'punished' following an earnings report.

Companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

The whisper number is derived from an average of individual investors, floor traders, investment advisors, and market strategists expectations regarding earnings for the most recent quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

U.S. Airways Off 8% As Revenue Growth Slows

While traffic increased in February for U.S. Airways Group, slower revenue growth put pressure on shares.

A slower pace of revenue growth per available seat mile could indicate the airline is having trouble raising prices to offset the rising cost of fuel.

[Editors Note: this quote is a clarification on U.S. Airways revenue:]

“Revenue per available seat mile, which measures how much an airline makes to fly one passenger a single mile, rose 7% in February compared with the same month last year. But that’s less than in previous months. The metric had increased by double-digit percentages since September,” writes the Associated Press.

U.S. Airways (LCC) stock was hovering near $7.02, down 61 cents, or 7.99%. Southwest Airlines (LUV) stock was off nearly 3% in early afternoon trading.� Smaller carrier Hawaiian Holdings (HA) was off 5.6%. But shares of Spirit Airlines (SAVE) were up 2.65%.

In a press release, U.S. Airways said mainline revenue passenger miles for February were 4.3 billion, up 7.9% versus February 2011. Available seat miles, a measure of capacity, rose 5.8% to 5.5 billion.

As we pointed outin a previous post, the latest filings from David Tepper of Appaloosa Management showed he emptied his position in U.S. Airways in recent months.

Tips On How To Succeed In Real Estate Investment

With a bad economy, succeeding in real estate requires a lot. Many people are therefore not that eager to venture in this form of investment. In the article, five basic tips on real estate investment are outlined. The idea here is to make some profits from renting or selling your house.

Tip number one: Make up your mind before you start up. You don’t what to be confused as you make this important decision. Know what you property is geared for. Are you looking for profits in the short term or do you want to rent off the property? These are questions you must answer before you get started.

Tip number two: Do it yourself. Nothing it’s up profits like paying up for services you can perform. For example, services such as answering your phone will eat up profits for no reason. If your investment is bringing in ten thousand dollars and you are using eleven thousand dollars to pay for services; common sense tells you that you losing money. You will discover that there are some services which you can actually do by yourself.

The services of a professional will most likely add some value to your property. This will completely be irrelevant if in the long run you the investor ends up with nothing. Do you homework, find duties that you can do and therefore don’t have to pay for. You will find that you are saving a lot and your profits are intact.

If you find that you can not perfume some of these duties due to time or for whatever reason then, draw an efficient budget. Your time may be limited due to the day job you have on the side. The idea is for you to have some profits in the long run. It makes no sense that a service provider is making more money than you the owner.

Tip number three is using help. No man is an island. You will find that there are things that will cost less in terms of time and money if you delegate. For instance, if you can find a broker or an agent who will sell your house three months sooner than you can, then this is the best option to take.

If you are to succeed in this investment, you must be business minded. Just like any other business making unsound decisions will most likely lead you failure. Exaggerated prices, unrealistic goals and massive losses are the fruits of poor decisions in any business. Make sure that all you decisions are business minded.

Tip five: Keep yourself educated by reading widely attending forums and seminars. Get tips from people who have more experience than you. You will be able to avoid many mistakes especially if you are new to this kind of investment.

With good research, you will be finding better loan rates and better prices when selling to your target buyers. Research on Haliburton real estate also helps you not to under price your property or get exaggerated rates on mortgage. Educating yourself will come in handy as you will know how much you are to expect from any given property.

Need Cottages for sale Haliburton , contact your local professional realtors Whether you have needs on Haliburton Real Estate Agents or property evaluation, we have an expert here to meet your needs.

CEF Weekly: Nuveen Floating Rate Income Fund In Focus

Actionable Items:

• Highest Positive Spread: Nuveen Ohio Dividend Muni Fund (NVJ)
• Lowest Negative Spread: JH Tax Advantaged Global Fund (HTY)
• Focus Stock of the Week: Nuveen Floating Rate Income Fund (JFR)
• Last Week's Focus Stock: Invesco Value Municipal Bond Trust (IIM)

CEF Weekly Review: On average, the 13 closed-end fund (CEF) types registered a share price increase of 1.2% for the week ending 2/3/12. The high-low spread (average percentage price change difference between the highest and lowest fund types) registered this week was broad +4.6% versus +2.2% the previous week. On an aggregate unweighted basis, the weekly average price change for the approximately 600 CEFs in the GrowthIncome database was also up 1.3%.

The PowerShares CEF Income Composite (PCEF), an ETF that invests in taxable income CEFs, increased 0.8% for the week. PCEF is up 6.0% YTD on price appreciation alone. Currently, PCEF's annualized monthly yield is 8.8%. The S&P 500 jumped 2.0% this week with most of the gain coming at the end of the week. The S&P 500 is up a robust 6.9% YTD.

(Click here for YTD CEF Performance. See "Research" Menu; "CEF Weekly Information" tab.)

The Eqcome CEF Fear Index eased for the week on the upside. The average CEF unweighted price increased 1.3% while the average related NAV advanced 1.0%. The VIX dropped 7.7% to 17.10, the lowest it's been in 8 months signaling a relaxed investors' mood towards risk.

CEF Weekly Fund Type Performance: With the exception of LoanPartFnds, all the CEF fund types advanced in terms of average share price. WrldEqFnds surged ahead 3.6% as equity-oriented CEFs beat the average with fixed-income funds falling below. LoanPartFnds, last week leader, sank 1.0% while its respective average NAV advanced 0.7% generating the largest negative PrcNAVSprd of all the CEF fund types.

Quick Read: This week's CEF performance of fund types suggests that investors are willing to accept more risk by tilting towards equity-oriented fund types-as was the case last week. This is confirmed by the low level of the VIX and better economic performance, as referenced by the improvement in unemployment statistics, and temporary euro crisis fatigue.

A Note of Caution: As the equity markets reach an interim peak, we could be setting ourselves up for a temporary pull-back as improving economics are no substitute for solutions to structural fiscal issues both in Europe and here in the U.S. which are only in temporary retreat and require affirmative political action.

Weekly CEF Winners and Losers: The CEFs with the greatest positive PrcNAVSprd for the week were two small Ohio muni funds: Nuveen Ohio Dividend Muni fund and Nuveen Ohio Dividend Advantage Muni Fund (NXI). Eaton Vance Michigan Muni Bond Fund (MIW) also generated a large positive spread. This was against the backdrop of SingleStMuniFnds advancing below the average of the 13 CEF fund types.

For the two Ohio CEFs, price increased 9.4% and 5.5%, respectively, while NAV's each advanced 0.3%. This generated a positive PrcNAVSprd* of 9.2% and 5.2%, respectively. Each recently declared its regular monthly distribution, so the price hikes weren't a function of increased distributions.

Thin Reed: One reason for this performance could be that both Ohio and Michigan have significant exposure to manufacturing and particularly the auto industry which has demonstrated signs of a recovery.

Auto sales in January rose 11% over a year ago to their briskest pace in nearly four years. The annualized sales pace in January was 14.18 million vehicles, up from December's annualized rate of 13.56 million. It was the highest level since May 2008, when the sales rate hit 14.28 million vehicles a year. Additionally, U.S. consumers are paying 11% more for the average new car indicating pent-up demand being unleashed.

Maybe investors felt this was a derivative way to conservatively play the manufacturing and auto recovery as it improves the credit of those states?

The CEF(s) with the greatest negative PrcNAVSprd for the week was the one with the greatest positive spread last week: JH Tax Advantaged Global Fund . HTY's share price plunged 8.1% while its NAV increased 1.1% generating a hefty 9.2% negative PrcNAVSprd. The stock took a header on Tuesday dropping 3.7% on elevated volume of 115,000 shares on three times its 3 month average daily volume.

One of the potential catalysts for the sell-off of HTY is the cut in distribution of another "buy/write" option CEF: Advent/Claymore Enhanced Growth & Income Fund (LCM). LCM cut its quarterly distribution from $0.264 per share to $0.21 per share, a reduction of over 20%.

As mentioned last week, HTY is classified as a member of WrldEqFnds, mostly by the virtue of having "Global" in its moniker, although it is probably a misnomer. Over 50% of its assets are in the U.S. Additionally, HTY employs an option strategy. So, it may be closer to the buy/write CEFs which are included in the OtherFnds type category.

Why HTY stock may get a "dead" cat bounce" this week, I wouldn't recommend it as an investment. (Click here for a hyperlink to the Joe Eqcome's CEF Weekly Insider Report. See "Research" Menu; "CEF Weekly Information" tab.)

CEF Distribution Announcements This Week: The beginning of the month is typically the time distributions are announced.

CEF Focus Stock(s) for the Week: The focus stock for the week is Nuveen Floating Rate Income Fund . JFR, as the name implies, invests in adjustable-rate secured and unsecured senior loans and has three quarters of a billion dollars of total net assets ($773.7 million) while employing leverage of $143 million for an effective rate of around 20%.

JFR's stock price gave up about 2.4% of the previous week's strong gain of 5.0%. There was some heavy volume earlier in the week (Monday and Tuesday) that knocked the stock off its perch.

Since early 2011 JFR has increased its monthly distribution rate four separate times. It is currently generating an annualized monthly rate of 7.3% and it recently announced its most recent distribution of $0.0685 per shares with an ex-distribution date of February the 13th which is far enough out by CEF standards not to materially play into current valuation.

JFR has accumulated approximately $0.10 per share in undistributed net investment income as its average per share earnings has exceeded its distribution rate.

The bulk of JFR's portfolio (90%) is loans to businesses and there is only 11% call exposure each in 2012 and 2013. Additionally, 88.7% are classified as variable rate senior loan interests. The preponderance of the loan turnover will occur in 2014 and 2015. The bulk of the portfolio is in non-investment grade credits with 50% rated "B" or "speculative".

Thesis: Our thesis regarding JFR is that while interest rates are schedule to stay low, the encouraging news regarding the U.S. economy is likely to help improve the credit rating of the underlying credits to which JFR lends and concomitantly the value of its investments. Approximately 30% of JFR's credits are "BB" rated, which is two notches below investment grade. If interest rates are allowed to float higher, this would be the second booster stage for the stock price.

First Trust Portfolios LP in the aggregate own 21.8% of JFR. That position was increased from 18.0% from April of 2010.

Last Week's Focus Stock(s): The focus stock(s) for last week was Invesco Value Municipal Bond Trust . IIM was one of the Invesco advised CEFs that sold-off with regards to a change in its investment policy which dropped the requirement that its bonds must be insured by an insurer with at least an "A" rating.

Overdone? We believed the "sell off" was overdone and a "knee-jerk" reaction to the policy change. The stocks may have been "kicked out" of very conservative portfolio without consideration of the economics.

Average daily volume was 180,000 shares for the 3 days post the announcement for a stock. In comparison, its 3 month average daily volume is 60,800. The stock price dropped 4.6% last week while it's NAV advanced by 0.8%, generating one of the larger negative PrcNAVSprds for the week (5.4%). The Muni ETF (MUB) in comparison was up 2.0% for the week.

IIM stock price was up 4.2% for the week.

[*] All things being equal, price and NAV should move in tandem. A price movement greater than the NAV generates a positive PrcNAVSprd and may be interpreted as negative on a near-term basis and indicate that the stock is overvalued relative to its NAV which in theory is the stock's intrinsic value. The opposite would be true for a negative PrcNAVSprd.

Disclosure: I am long PCEF, IIM, JFR, SPY. I own a diversified portfolio of CEFs and ETFs and amlong stocks in the CEFBig10™ and CEFMuni10™.) The first is a balanced equity-income portfolio (CEFBig10™) and the second a tax-exempt income portfolio (CEFMuni10™).

Utah Medical Products Appears Cheap, But Slow Growth Explains It

Utah Medical Products (UTMD), is cheap relative to its sector, but this is because of its relatively low growth rate. UTMD's recent Femcare acquisition may have destroyed value and synergies are taking longer than expected to come through. It may present a reasonable 3%+ yield opportunity within medical devices, but I would look for a decline to below $24 before adding any new money to the stock to provide a sufficient margin of safety.

Context
UTMD is a solid company in the medical devices sector focused on obstetrics, gynecology, neonatel and blood pressure monitoring. Prior to the Femcare acquisition, revenue was in slow decline, but bolstered by aggressive share repurchases and the company had no debt.

Femcare Acquisition
Then in March 2011, UTMD made a significant acquisition, buying Femcare for approximately $41M. 80% of Femcare's revenue comes from the Filshie Clip, which is a method for women to achieve sterlization. Research suggests the Filshie Clip is a strong product being more effective and more easily reversible than competiting products. Femcare was acquired at 2.5x sales vs. 1.2-2.9x for peer companies within medical devices, so perhaps it's slightly expensive. I am not aware of a precise earnings number for Femcare, but based on its contribution to UTMD in the first 9M post-acquisition that figure may be approximately 22x earnings, which is high relative to 5-25x for a selection of similar medical devices companies. Femcare does give UTMD a greater presence in the UK and Australia vs. its current U.S. base, but as management stated in its most recent earnings release "our progress in achieving some important operating synergies from the combination of the entities has been slower than expected "

Comps and Ratios
Because the Femcare deal closed in late March there should be another $4M of Femcare sales coming through in Q1 2012, which lowers the p/e slightly.

Here I compare UTMD with a few medical device companies that are similar in size (<$1B market cap).

Metric	UTMD (current)	UTMD+Femcare Q1 '12 (est)	CPTS	MMSI	ANGO
Sales growth (organic)	-0.5%*	n/a	-5%	15%	8%
P/E	14.7x	13.8x	5.2x	22.6x	48x
Yield	3.2%	3.2%	0%	0%	0%
P/B	2.6x	2.6x	2.7x	2.0x	0.8x

Source: Google finance and my analysis.
*UTMD's organic growth is estimated after backing out Femcare's estimated revenue contribution of $12M.

Recommendation
UTMD has been shareholder friendly historically, but the Femcare acquisition may have destroyed value and tarnished that reputation. Without an acceleration in organic growth or merger synergies UTMD appears fairly valued, to slightly expensive, based on its flat to declining growth rate. And there are currently no signs that will change. UTMD's 3.2% yield appears safe in the near term given the 47% payout ratio. UTMD is an unexciting hold for those looking for a reasonable yield in medical devices, but I would not add new money at a price above $24 (vs. $30 currently), because a 11x p/e (vs. 14x currently) is more appropriate for UTMD based on the historical growth rate of the company.

Disclosure: I am long UTMD.

Three "Fiscal Cliff" Moves to Make Right Now

The prospects of a "Fiscal Cliff" impasse are causing more nightmares in middle class America than Freddy Krueger did on Elm Street.

But Permanent Wealth Investor Editor Martin Hutchinson has a surprisingly contrarian take on the escalating tempest.

Indeed, when the Obama Administration took a hardline stance yesterday and said it's "absolutely" willing to go over fiscal cliff unless it gets what it wants, Martin made his own feelings crystal clear.

"Let them jump," he said.

Martin's sentiment was based on economics, not politics. There's been so much fear-mongering and political obfuscation that most Americans have lost sight of what's really at stake here, Martin said during one of our talks last week.

"Bill, it's all such rubbish," the former global merchant banker told me. "As I said to you when we first started talking about what's become known as the fiscal cliff, it makes a lot of sense just to go over."

Before you grab your heart in mock horror, let us make sure you understand a key point. The feckless crew down in Washington has a lot of folks believing that this whole debate is about dodging the pain - forever. That phony safety pitch is what Martin is referencing with his "rubbish" comment.

"Some of our leaders want us to believe this debate is about avoiding the pain of higher taxes, another recession, a spike in unemployment, an inability of businesses to grow and hire," Martin said. "The truth is that there's no way to avoid the fallout from the fiscal mess this country now faces. We can either accept the pain now, or be forced to face it later. And if we wait, the pain will be far more excruciating than most Americans can even imagine."

Let's look at what Martin means.

To do that, let's use a vastly simplified version of a study by the Congressional Budget Office (CBO) - the agency that provides nonpartisan budgetary analyses to our elected lawmakers.

The term "fiscal cliff" was coined to describe what will happen if a package of Bush Administration tax reductions is permitted to expire, even as a series of spending cuts take effect.

The implication is that the U.S. economy will be shocked into recession - pushed over the "fiscal cliff." What the term doesn't convey is that there would be an accompanying reduction in the U.S. deficit of some significance.

What the CBO did was to create two scenarios - a "baseline" scenario in which the country is toppled over the cliff, and an "alternate" view in which Washington "rescues" (term is mine) America with late-in-the-game compromises.

The results may surprise you, since they run counter to the spin we're getting from Washington.
Under the alternate, or rescue, scenario, Washington dodges the fiscal cliff, most likely avoiding a near-term recession. Taxes and other revenue remain around the historical norm of about 18% of U.S. gross domestic product (GDP). But public debt rises from 69% of GDP in 2011 to 100% by 2021 and to roughly 190% by 2035.

U.S. debt as a percentage of GDP hasn't been that high since it peaked at 109% just after World War II. If we do see such a spike, you can bet it will impact the nation's ability to grow and create jobs.

In fact, a 2010 study conducted by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland - found that for countries with debt-to-GDP ratios "above 90%, median growth rates fall by 1%, and average growth falls considerably more."

Compare that to the CBO's baseline projection, the Nightmare on Main Street scenario that the Beltway SpinMeisters want us to believe should be avoided at all costs.

By implementing the required spending cuts and letting the tax reductions expire, taxpayers would feel a bigger bite and overall federal revenue would rise to 24% of GDP. The higher revenue coupled with the lower spending would lower U.S. debt, interest payments and federal budget deficits for year.

Deficits would fall from 8.5% of GDP in 2011 to 1.2% in 2021. According to the CBO's calculations, the accumulated deficit for the 2013-2022 period would be slashed from $10 trillion to $2.3 trillion - a reduction of $7.7 trillion.

The bottom line under the CBO forecast: We'd probably see the economy slow to near-zero growth in the first half of the New Year, with a rebound to 2% or more in the second six months.

In the long run, however, the big cuts in debt issued each year, interest payments and the worrisome yearly budget shortfalls would lead to much higher growth, and would give this country the economic muscle needed to better compete with such emerging economic leaders as China.

"I agree that we'd probably have a mild recession in the near term - but it would be a mild one because we no longer face a financial crisis," Martin said. "And having a mild recession in the near term because we've taken such pro-active steps to clean up the economy is much preferable to harsher ones that will increase in both frequency and intensity down the road if we let U.S. debt become an even greater imbalance."

Even better: Slashing debt will finally solve the job-creation problem that's been plaguing this country for half a decade.

"By reducing debt, you're reducing what the government sucks out of the U.S. economy - which is very good for small businesses," he said.

So if you believe the two sides will fail to get together, resulting in an impasse that shoves the country over the fiscal cliff, what should you do to get ready? While most investors are panicking, you can celebrate the U.S. economy's good fortune - and your own as well, by making these three moves:

Take Stock of U.S. Stocks: In general, U.S. stocks will likely take it on the chin. That doesn't mean you should dump stocks and run, however. It means the broad market indices will do poorly, so careful stock-picking will carry the day over set-it-and-forget it indexing. Financially sound companies with solid dividends will also stay in style.

Twin Catalysts for U.S. Treasury Bonds: A reduction in debt will be good for the country's credit rating. And that upbeat outlook for America's finances will make U.S. bonds look even more attractive than the offerings of our debt-ridden counterparts overseas. At the same time, the deficit-reduction efforts will result in the U.S. government issuing less debt, reducing supply. The increase in demand coupled with the drop in supply should supercharge U.S. Treasury prices. Martin recommends the iShares Barclays 20+ Year U.S. Treasury Bond Exchange Traded Fund (NYSE: TLT).

Currency King: Martin says the big winner will be the U.S. dollar. It makes complete sense: If we clean up our act so that there's more confidence in our
economy, it follows that there will be a renewed confidence in our currency, as well. Expect the dollar to rally big against other currencies for that reason alone. Plus, the greenback has a correlation coefficient with the U.S. Standard & Poor's 500 Index of negative 0.79, meaning it moves almost perfectly opposite the direction of this key U.S. stock index (and that inverse correlation has been increasing, according to researchers with the Bespoke Investment Group). So if the S&P 500 were to fall, as Martin predicts, the dollar will rally by almost the same magnitude. To capitalize on a projected dollar rally, Martin has two suggestions - depending on how speculative you wish to be. His first suggestion is the PowerShares U.S. Dollar Index Bullish Fund (NYSE: UUP). Although this unleveraged fund tends to trade in a tight range in normal markets. But during times of panic, it can make big moves - and quite quickly, too. It shot from $22.50 to $27 in late 2008 and from $22.75 to $25.75 in a rally in early 2010. For a more-speculative play, take a look at the triple-leveraged PowerShares DB 3X Long U.S. Dollar Index Futures ETN (NYSE: UUPT).

"A shove over the fiscal cliff will create a lot of market hysteria, but those who believe that's the ultimate outcome and position themselves ahead of time will do quite nicely if that happens," Martin concluded. "And, speaking frankly, I hope that's what happens. It would certainly fix a lot of the problems the economy faces and would increase the odds for higher growth going forward. Now if we can only get them to do something about the regulatory environment, too ..."

Related Articles and News:

• Money Morning:
  Five Ways to Turn the Fiscal Cliff Into an Outstanding Investment Opportunity
• Money Morning: Why Obama's Victory Means Higher Gold Prices
• Money Morning: The Double Your Money Secret I Learned Over A Few Crab Cakes
• Money Morning: The "Two Outlooks" for Gold Prices

Are You Watching This Trend at Prestige Brands Holdings?

Margins matter. The more Prestige Brands Holdings (NYSE: PBH  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Prestige Brands Holdings's competitive position could be.

Here's the current margin snapshot for Prestige Brands Holdings over the trailing 12 months: Gross margin is 54.6%, while operating margin is 29.6% and net margin is 7.9%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Prestige Brands Holdings has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Prestige Brands Holdings over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

• Over the past five years, gross margin peaked at 52.9% and averaged 52.2%. Operating margin peaked at 28.1% and averaged 26.9%. Net margin peaked at 11.0% and averaged -4.9%.
• TTM gross margin is 54.6%, 240 basis points better than the five-year average. TTM operating margin is 29.6%, 270 basis points better than the five-year average. TTM net margin is 7.9%, 1,280 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Prestige Brands Holdings looks like it is doing fine.

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• Add Prestige Brands Holdings to My Watchlist.

Apollo Plunges on Revenue Miss, Falling Enrollment

For-profit educator Apollo Group (APOL) beat fiscal fourth quarter earnings expectations but missed on revenue, sending shares down more than 9% after hours.

Apollo posted 52 cents of EPS, 3 cents ahead of expectations. Revenue of $996.5 million missed expectations for $1.01 billion. The company also issued guidance for 2013 that disappointed the Street — Apollo expects to pull in $3.65-$3.80 billion in revenue, versus analysts’ expectations for 4.06 billion.

Enrollment fell at Phoenix University. “For the quarter, University of Phoenix Degreed Enrollment decreased 13.8% to 328,400 and New Degreed Enrollment decreased 13.7% compared to the fourth quarter of fiscal year 2011.”

New degreed enrollment rose by 52,800, below expectations for 58,000 and last year’s 61,200 rise.

Homebuilders Keep Climbing

Stocks of some of the biggest homebuilders had a bumper day yesterday, rising more than 5%. Today, the stocks are continuing to see gains, with PulteGroup (PHM) and M.D.C. Holdings (MDC) up about 2.5%, and Lennar Corp. (LEN) and D.R. Horton (DHI) both up 2%.

Homebuilders are one of the big successes of this year’s stock market — PulteGroup is up 190% in 2012 while Lennar’s shares have doubled. Much of that is rebounding off post-crisis and housing bubble lows, but it’s noteworthy that the SPDR S&P Homebuilder ETF (XHB), up nearly 60% in 2012, is now at multi-year highs:

(If we take the chart back another six months, we’d see levels above today’s prices.)

SanDisk: Morgan Issues “Tactical” Buy; Says Selling Overdone

SanDisk (SNDK) shares are getting a modest lift this morning from Morgan Stanley analyst Atif Malik, who both repeated his Overweight rating on the shares, and issued a brief “tactical” research idea note asserting that the memory chip company’s stock is likely to rally over the next 30 days.

Malik notes that the stock has traded off 15% recently, “making short term valuation much more compelling.” He contends the stock is oversold, and that risk-reward looks attractive.

Malik contends that smart phone makers are planning to increase NAND purchases in early July after a seasonally slow June; he also notes that Samsung’s decision to make its facility in Austin a logic rather than NAND fab caps supply. He notes that the stock has dropped to under 10x his 2011 EPS estimates, versus a historical average of 15x-25X.

SNDK is up $1.14, or 2.7%, to $43.78.

Does Whiting Petroleum Miss the Grade?

Margins matter. The more Whiting Petroleum (NYSE: WLL  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Whiting Petroleum's competitive position could be.

Here's the current margin snapshot for Whiting Petroleum over the trailing 12 months: Gross margin is 76.3%, while operating margin is 46.4% and net margin is 27.9%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Whiting Petroleum has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Whiting Petroleum over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

• Over the past five years, gross margin peaked at 75.0% and averaged 70.9%. Operating margin peaked at 40.8% and averaged 27.2%. Net margin peaked at 22.8% and averaged 13.3%.
• TTM gross margin is 76.3%, 540 basis points better than the five-year average. TTM operating margin is 46.4%, 1,920 basis points better than the five-year average. TTM net margin is 27.9%, 1,460 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Whiting Petroleum looks like it is doing fine.

• Add Whiting Petroleum to My Watchlist.

China is heading for Stagflation

 

 

Economists use the term �stagflation� to describe an economy that experiences high inflation while its growth falters�a paradoxical term, as inflation and economic growth are usually positively correlated. When it comes to China, the term is even more paradoxical as the country has been growing by leaps and bounds.

Statistics coming out of China recently confirm that the country may be heading to some sort of stagflation. Economic growth is slowing down, while inflation remains high.  Last Saturday, The China Federation of  Logistics and Purchasing (CFLP) announced that nonmanufacturing sector slowed down sharply, with the non-service Purchasing Manager�s Index (PMI) dropped from 57.7 in October to 49.7 in November.

The slow-down in the non-manufacturing sector follows a similar slow-down in the manufacturing sector, as announced last Thursday; the manufacturing PMI dropped to 49 in November from 50.4 in October� a contraction that comes at time inflation is still running above 5.5 percent.

China�s stagflation complicates economic policy, posing dilemmas to policy makers.  An effort to stimulate economic growth by raising bank reserves and by boosting infrastructure spending will worsen inflation (as it is currently underway), while an effort to curtail inflation will lead to slower growth. But what does Chinese stagflation mean for investors?

For investors in Chinese equities, stagflation isn�t good, especially when expectations run high. Slow growth certainly affects negatively corporate sales and profitability. High inflation is usually positive for corporate revenues, but only for companies that can raise prices ahead of cost�usually State-Owned Enterprises like PetroChina (PTR) and Sinopec (SHI).

For investors in commodities, a prolonged Chinese stagnation means lower demand and prices for commodities, especially industrial commodities.  This means that the rally in commodities may have to pause for a while, if not end, at least in the near term. Conservative investors may want to trim positions in commodity ETFs like GLD,SLV, OIH, and FCX, especially after their recent run up. Aggressive investors may want to establish short positions.

Disclosure: Active investor. May take long or short position in any stock or fund mentioned.

Also read, Why China�s Red Big Bubble is Ahead of US

Markets Erase Early Losses, End Mixed

• Dow Jones Industrial Average down 29.74 (-0.23%) to 13,008.53
• S&P 500 up 0.48 (+0.04%) to 1,369.58
• Nasdaq Composite Index up 1.42 (+0.05%) to 2,957.76

GLOBAL SENTIMENT

• Nikkei down 2.78%
• Hang Seng down 2.71%
• Shanghai Composite flat
• FTSE-100 closed

Stocks reversed earlier losses, largely finishing with small gains to just lower despite election results in Europe this weekend that cast new doubts over the region's ability to resolve its fiscal problems. Financial stocks led the turnaround, with crude oil and energy stocks climbing back near even for the day and helping lift most of the major market indices out of the red. Shares of technology and consumer companies also ended higher.

Stocks in Asia and Europe began sliding overnight in response to Socialist Francois Hollande yesterday beating incumbent French President Nicolas Sarkozy nearly 52% to 48% and Greek voters siding with anti-bailout candidates. Hollande previously has voiced opposition to various pieces of current efforts to fix the region's sovereign debt crisis and instead has said the European Central Bank needs to do more.

Greek voters largely rejected pro-austerity candidates in parliamentary elections this weekend, leaving the two major parties in a difficult position as they work to form a coalition government and continue the spending cuts needed to ensure the continuation of rescue funds.

Crude oil also fell after the European elections, sliding to a four-month low near $96 a barrel before rebounding to settle at $97.94 a barrel, down 55 cents. June gold also ended lower at $1,638.60 an ounce, down $6.10. But July copper finished with a 5.25-cent gain to settle at $3.7735 per pound. July silver settled at $30.12 an ounce, down 31 cents, while June natural gas was up 5.7 cents to $2.336 per 1 million British thermal units.

In a light day for economic news, consumer credit shot up during March at the fastest rate since late 2001 as credit-card use, and student and car loans ballooned, data from the Federal Reserve showed on Monday. Total consumer credit grew by $21.36 billion - more than twice the $9.8 billion rise that Wall Street economists surveyed by Reuters had forecast. That followed a revised $9.27 billion increase in outstanding credit February.

In company news, Berkshire Hathaway (BRK.A) shares finished about 1.5% higher after the financial conglomerate held its annual shareholder meeting in Omaha this weekend. The biggest news out of the conference this year was that CEO Warren Buffett saying he had considered acquiring a $22 billion company earlier this year and is still looking for an equal sized deal.

Dollar General (DG) shares rose about 1% on trader speculation it was the Berkshire target.

Also, Tyson Foods (TSN) closed about 3% higher after reporting a 4% increase in net income to $166 million, or $0.44 per share, beating the $0.39 predicted by analysts polled by FactSet. Revenues rose 3% to $8.3 billion.

Vertex Pharmaceutical (VRTX) finished up more than 55% after announcing favorable results in a Phase II study of a combination of two drugs seen as a treatment for cystic fibrosis.

UPSIDE MOVERS

(+) GTSI, To Be Acquired By UNICOM Systems Through Cash Tender Offer

(+) INSM, FDA lifts hold on company's lung drug.

(+) CECO, Regulator removes "show cause" directive for accreditation.

DOWNSIDE MOVERS

(-) NBG, Greek Election Results.

(-) CTSH, Sees Q2, FY11 Revs Falling Short.

(-) AIG, Treasury Department selling $5 billion stake for $30.50 a share.

Market Share Concerns on Cisco’s Outlook

Cisco (CSCO) released earnings last week and lowered its revenue guidance for next quarter as well as for its fiscal year 2011 based on a slowdown in public spending. Cisco competes with Juniper (JNPR), Alcatel-Lucent (ALU) and Tellabs (TLAB) in the routing and switching businesses.

We currently forecast that Cisco will maintain its dominant market share in excess of 70% for the routing and switching businesses, but if it lost 5% share in each of these businesses due to its higher exposure to the public sector, this would translate to around 4-5% downside to our lowered price estimate.

As a result of the company’s weaker guidance, we have lowered our price estimate for Cisco’s stock to $24.04, which is about 20% above the current market price.

Weak Public Sector Spending

Unlike its enterprise business, the public sector business has slowed considerably for Cisco. The company stated that for Q1 2011 fiscal year, public sector order growth was a modest 6% versus enterprise order growth of 16%, on a year over year basis. [1]

Most of this slowdown was caused by significant reductions in public spending. Facing budget deficits, the US, Japan and some Central European countries reined in its IT spending more than expected. Cisco stated that it will continue to face these challenges over the next few quarters, and we believe this holds negative implications for its market share outlook.

Market Share Outlook

As Cisco’s products tend to be more expensive compared to its competitors, public budget constraints will continue to hurt Cisco’s order growth in coming quarters as officials look for cheaper alternatives.

We estimate that about 20% of Cisco’s product revenues come from the public sector.[2] According to industry analysts, Cisco has higher exposure to the government sector compared to its competitors. Therefore its higher relative dependence on public spending could result in combined market share losses if other segments continue to outpace public spending.

Currently we forecast a largely stable market share for Cisco’s routers and switches units. However, if its market share declined by 5% in both segments versus our expectations, our price estimate could see additional downside of 4% to 5%.

In these charts, you can see how changes in market share forecasts impact our price estimates.

Notes:

Taken from latest earnings transcript

Based on 22% order share figure mentioned in latest earnings transcript

Disclosure: No position

Stifel: YRC Could Be Bankrupt This Weekend

As mentioned earlier, some analysts believe transport logistics firm YRC Worldwide (YRCW) can still find a way to carry out a debt-for-equity swap and avoid bankruptcy.

For a different perspective, Stifel Nicolaus’s David Ross thinks the company’s headed for bankruptcy anyway. Today’s extension of the deadline for the debt swap is the last extension, he argues, pointing out the company has to pay $19 million in fees and interests on debt tomorrow, which it won’t be able to do without getting access to its bankers’ $106 million in additional liquidity.

If the company doesn’t get the debt swap done tonight, it could close its doors as early as this weekend.

But even if the exchange goes through and the interest gets paid, “we believe the company may still burn through all of its cash and borrowing capacity in the next two months, as customers are getting increasingly nervous about having their freight stranded in YRC’s network.”

YRC “will be open for business as usual on Monday,” YRC spokesperson Suzanne Dawson said in an emailed statement.

YRC shares closed down 5 cents, or 4%, at 99 cents.

0.985

-0.045 (-4.38%

Changes, Changes: Surf the ‘Landing Page’

Folks, in the ongoing revamp of our Barron’s blogs, you may have noticed that if you click on an article from the Barron’s home page, you will now arrive at the specific article. This is a change from days of old, when clicking a link brought you to the “landing page,” the main blog page where you can scan all of the articles.

But have no fear: if you like the landing page, you’re just a click away. Click on the blog title above, “Tech Trader Daily,” and you’ll be taken to the normal landing page where you can scan to you heart’s content.

Fin

Stock Market Divergence Alert

I posted an article on Friday, stating that the stock market still had a bullish bias, but that breadth was deteriorating. Breadth indicators are also useful tools to assess the inner workings of the market’s rallies or corrections, and are used to identify strength or weakness behind market moves such as the nascent rally, i.e. to assess how the bulls and the bears are exerting themselves.

Let’s consider a specific measure of stock market “internals”: The number of S&P 500 stocks trading above their respective 50-day moving averages has declined to 80% from 93% in October (see bottom panel of the chart below). In order to be bullish about the secondary trend, one would expect the majority of stocks to be above the 50-day line.

However, the fact that fewer stocks are now above their 50-day moving averages than in October means that a smaller number of stocks are participating in the rally. In the meantime, the S&P 500 has been scaling new highs for the move. This is known as a so-called bearish divergence – a phenomenon investors should be mindful of, especially given the overbullish sentiment levels, although it is not a stand-alone timing indicator.

Click to enlarge:

Source: StockCharts.com

The bulk of the index constituents, 86.4%, are trading comfortably above their 200-day averages. As long as this number holds above 50%, a primary bull market remains intact. However, a short-term reaction to clear some of the froth is likely and should be factored into investors’ decision-making.

John Hussman (Hussman Funds) summarized the situation as follows:

In short, it’s not impossible that specific features of the current market could make investors more tolerant of rich valuations, or more careful to demand conservative ones. Regardless, my impression is that a decade from today, investors will view the present time as a relatively undesirable moment to put investment capital at risk.

Disclosure: None

American Axle & Manufacturing Holdings Misses on Revenues but Beats on EPS

American Axle & Manufacturing Holdings (NYSE: AXL  ) reported earnings Feb. 3. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Dec. 31 (Q4), American Axle & Manufacturing Holdings missed slightly on revenues and beat expectations on earnings per share.

Compared to the prior-year quarter, revenue expanded and GAAP earnings per share shrank.

Gross margins increased, operating margins dropped, net margins dropped.

Revenue details
American Axle & Manufacturing Holdings reported revenue of $605.6 million. The eight analysts polled by S&P Capital IQ expected sales of $617.4 million. Sales were 3.8% higher than the prior-year quarter's $583.3 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions.

EPS details
Non-GAAP EPS came in at $0.48. The 11 earnings estimates compiled by S&P Capital IQ predicted $0.39 per share on the same basis. GAAP EPS of $0.41 for Q4 were 13% lower than the prior-year quarter's $0.47 per share.

Source: S&P Capital IQ. Quarterly periods. Figures may be non-GAAP to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 17.5%, 20 basis points better than the prior-year quarter. Operating margin was 8.0%, 70 basis points worse than the prior-year quarter. Net margin was 5.1%, 90 basis points worse than the prior-year quarter.

Looking ahead
Next quarter's average estimate for revenue is $759.5 million. On the bottom line, the average EPS estimate is $0.57.

Next year's average estimate for revenue is $2.79 billion. The average EPS estimate is $2.02.

Investor sentiment
The stock has a two-star rating (out of five) at Motley Fool CAPS, with 191 members rating the stock outperform and 124 members rating it underperform. Among 86 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 50 give American Axle & Manufacturing Holdings a green thumbs-up, and 36 give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on American Axle & Manufacturing Holdings is hold, with an average price target of $13.40.

Over the decades, small-cap stocks, like American Axle & Manufacturing Holdings, have provided market-beating returns, provided they're value priced and have solid businesses. Read about a pair of companies with a lock on their markets in "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Click here for instant access to this free report.

• Add American Axle & Manufacturing Holdings to My Watchlist.

Performance of Annaly and MFA vs. Other Asset Classes

Due to my own cautiousness regarding the market right now, I have shifted a greater percentage of assets into mortgage REITs (mREITs). My basic thesis is that the US debt ceiling deal, coupled with eurozone problems, is going to lead to a retraction of money in the real economy that will result in interest rates remaining subdued in the US. This will make mREITs an attractive investment class. In my previous article, I noted four mREITs with significant insider buying that I particularly like, including MFA Financial (MFA).

This push into mREITs has led me to examine how well they have performed versus other asset classes in the past, particularly other dividend-paying stocks. I decided to look at the performance of Annaly Capital (NLY) and MFA Financial over a 14-year period.

The reason I chose MFA and NLY is primarily because these are the only two major mREITs I have found a lot of long-term data on. For this reason, there is some selection bias here, so it’s important to note that these two securities do not represent the performance of a broader class of mREITs. In any case, I compared both stocks to US treasury bonds, the S&P 500, the Russell 2000, gold, commercial property REITs, and utility and energy stocks over the same period of time.

My selection of stocks for this exercise includes Vornado Realty Trust (VNO), Simon Property Group (SPG), and Cousins Properties (CUZ) in the commercial REIT sector. For oil/gas/energy stocks, I took at a look at dividend-stalwart Exxon (XOM). For utilities, I examined Excelon (EXC) and NextEra Energy (NEE), which was formerly known as Florida Power & Light.

My methodology for this exercise was to assume that the investor reinvests all dividends back into the common stock at the end of each calendar year. For instance, if XYZ company pays $1.00 in dividends in 2000, and the stock sells for $10.00 on December 31, 2000, then we would buy 1/10 of a share of XYZ company at that date.

One assumption I should mention is that I calculated returns through the end of 2011, based on the assumption that current prices and dividends would hold. Quite simply it was easier to calculate 14-year returns rather than 13.58333-year returns.

The results of this exercise are summarized below:

[Click to enlarge]

The Results

While I expected NLY to perform well, I was rather surprised to see that it outperformed every other security on the list by a long shot. With a 938% compounded return, it beats out second place Simon Property Group by a considerable amount. This is not a criticism of SPG, as its performance was quite outstanding at 651%; particularly impressive given the real estate market crash.

MFA Financial, likewise, performed well with a 423% compounded total return. That puts it in fifth place on this list, only trailing NLY, SPG, EXC at 463%, and gold, which only recently passed MFA with a 464% return.

While both MFA and NLY performed relatively well, it’s important to remember that most securities on this list performed well. I’ve deliberately selected well-known companies that generally have good track records. MFA and NLY held their own against these companies.

Versus the Market Indices

During my 14-year timeframe, the S&P 500 returned a dismal 69.4%, less than the 83.5% performance of the 10-year Treasury bond. I estimated the return on the Russell 2000 to be a bit higher, around 124%.

Exxon and NextEra Energy both outperform both indexes by a considerable amount with 238% and 205% returns, respectively. So even if they are some of the lesser performers on the list, they still did phenomenally well compared to the broader market. This re-emphasizes the fact that this isn't an arbitrary group; NLY and MFA perform well against some of the best-of-the-best. Their performances look even more impressive versus the broader market indices in the same time frame.

While I do not believe you can say this represents how mREITs overall have performed (as many mREITs have gone the way of the dodo in the past few years), it does show how a well-run mREIT can create a ton of shareholder value over a long period of time.

Disclosure: I am long MFA.

Green Mountain, Knight Capital Up Almost 20%

Shares of Green Mountain Coffee Roasters Inc. (GMCR) and Knight Capital Group Inc. (KCG) were up almost 20% in premarket action Wednesday, as investors cheered Green Mountain’s surprisingly good results and reacted to a takeover offer for Knight Capital.

Green Mountain’s been trading hotsince its results came out last night, while Knight Capital shares popped this morning after news broke that Getco Holding Co. had an offer for the firm that values each share at $3.50, 41% above Friday’s closing price.

Elsewhere, retailers were seeing action, as shares of Express Inc. (EXPR) rose 12% after it reported better-than-expected results, while Costco Wholesale Corp. (COST), up 4%, led the Standard & Poor’s 500 index after it beat November sales forecasts and announced a special dividend.

Update: As Bloomberg reports, Getco’s offer for Knight Capital may spark a bidding war for the firm with Virtu Financial.

BHP Billiton Ltd. (BHP) Steps up Oil and Gas Exploration, says Unit President

BHP Billiton Ltd. (NYSE: BHP) said Monday it is embarking on an acquisitions program to expand its business while the recent market selloff of global assets has reached attractive levels.

The Australia-based global miner also said the Gulf of Mexico oil-spill crisis has impacted some of its projects there, cutting top-line growth from its previous guidance of 10 per cent growth for the year ending June 10.

�We have not spent much time externally. But we are now spending more time externally,� BHP’s petroleum president Michael Yeager said. �As we grow our capabilities … this powerful balance sheet that we have is an enormous tool.�

�And when you combine our health and strength, with some slowness in the market area, it is something that we do not want to let pass us by,� Yeager added.

Yeager said to Reuters that BHP petroleum unit decided to restart its exploration program, but he didn�t comment further about the intentions of BHP�s other commodities units.

One possible acquisition involves speculation surrounding BHP�s smaller rival Woodside Petroleum Ltd., which partners with the Aussie giant in important projects in multiple regions throughout the world, including projects in Australia and the Gulf or Mexico.

Gulf of Mexico

Yeager said the Gulf of Mexico projects continue to be impacted by the oil spill at the British Petroleum (BP) Macondo well, which BHP responded with diverting two of its four drilling rig�which were slated for its own Atlantis and Mad Dog fields�to help containment operations at the spill site.

BHP said it intends to develop the Atlantis oil field despite uncertainties of the future of the Gulf, saying it remains committed to the region, and seeks the potential for significantly expanded revenue from its operations there.

“We are confident that our long-term strategy will not be impacted. If anything, we will look to see if there are any opportunities to see what else we can do,” Yeager said.

BHP�s major concern regarding the Atlantis oil field is the potential political response to the Gulf spill from many U.S. legislators and President Obama who seek an investigation into safety issues at the platform. BHP has a 44 per cent stake in the project, and BP has the rest.

According to BHP�s latest filing, its petroleum business accounts for approximately 25% of its combined earnings.

About BeaconEquity.com
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UBS: Big Fine, Little Impact

"I need you to keep it as low as possible. If you do that, whatever you want. I'm a man of my word." So said one trader at UBS (NYSE: UBS  ) to a colleague at another brokerage house in his attempt to manipulate the London interbank offered rate, or Libor: the fundamental interest rate that so many of the world's financial products use as their own benchmark interest rate.

Blaring hypocrisy duly noted, the $1.5 billion fine American, Swiss, and British authorities are doling out �because of such behavior will have little effect on the Swiss banking giant. And in a year that we've seen fine after fine levied against the world's biggest banks, many of which stem from bad behavior somehow related to the financial crisis, it's worth asking what the point of such fines are: whether they're having any real effect, or are just becoming another operating expense?

Another day, another giant fine
A hefty $1.2 billion will go to the U.S. Department of Justice and the Commodity Futures Trading Commission, and $212 million will be paid to the Financial Services Authority, a record amount for the U.K. regulatory agency. Switzerland's regulatory authority, Finma, will receive $64 million.��UBS's Japanese subsidiary actually pled guilty to wire fraud, which hasn't happened to any bank in more than 10 years.�

If you recall, the Libor rate-rigging scandal burst into the news in June of this year, when Barclays (NYSE: BCS  ) agreed to pay $450 million to U.S. and U.K. authorities on charges its traders had tried to manipulate Libor to boost profits. The scandal even brought down Barclays larger-than-life CEO Robert Diamond, who resigned his position because of it.�

The year of living expensively
Just last week HSBC (NYSE: HBC  ) agreed to pay $1.92 billion to the Justice Department to settle charges that it laundered money for Mexican drug cartels and Middle East terrorist financiers. Standard Chartered, another British banking giant, also coughed up $327 million to the Justice Department for violating sanctions and doing business with Iran, this on top of the $340 million it already paid in August to New York State's Department of Financial Services for the same transgressions.�

I've lost track of all the American banks sued by prosecutors this year, but two immediately come to mind: the Manhattan district attorney's suit against Bank of America (NYSE: BAC  ) for alleged mortgage-lending abuses dating back to the pre-crash era, announced at the end of October�, and a suit by the same office against JPMorgan Chase (NYSE: JPM  ) for alleged mortgage fraud perpetrated by its Bear Stearns unit, also announced in October. �

I have a dream
So where does this leave the banks? UBS has more than $916 billion in cash on its balance sheet. Yes, in relative terms, $1.9 billion is a big fine, but it will hardly hinder the Swiss banking giant's ability to do business. Barclays has $1.3 trillion in cash on hand. What's $450 million up against that? JPMorgan was unarguably hurt worse by its own London Whale trading incident, which has cost the bank at least $5.8 billion this year, than by any lawsuits. Behemoth B of A is hardly going to be taken down by regulatory fines, either. What, then, is the point of all this?

Good question. Regulators and prosecutors need to do something to justify their existence, to show the public that misdeeds are being punished. But, of course, you don't want the punishment to go too far. You don't want to fine the banks big enough amounts to actually cause them to collapse, as that would just cause worse mayhem.

At this point, these fines could be viewed more and more as simply operating expenses for the banks, the cost of doing business. Is there an alternative? Iceland famously tried and convicted ex-Prime Minister Geir H. Haarde, who was in office at the time of the financial crash�, and two days ago announced that Larus Welding, CEO of one of Iceland's biggest banks, is being indicted over crisis-related behavior. That won't happen here, but it's fun to dream.

Thanks for reading and for thinking. Got big banks on the brain? Check out The Motley Fool's brand-new report on Bank of America. In it, our analysts give you a thorough detailing of the superbank's prospects along with three reasons to buy and three reasons to sell. Just�click here�for full access.

�

5 Holiday Stock Picks Sure to Please Investors

Holiday sales have been a bright spot in an otherwise depressing economy. That means some stocks may outperform others when the final tally is registered at the end of this month.

Most retailers' November sales exceeded analysts' estimates, helped by the Black Friday weekend, which accounts for as much as a quarter of the month's total. That weekend kicked off the holiday season with sales jumping 16%, according to the National Retail Federation. Cyber Monday extended those gains as online sales soared 22%.

See if (AMZN) is in our portfolio

The dip in the stock market has created a buying opportunity, as investors may be more pessimistic than they should be. History also shows that equities may generate gains this month. Below are five companies that are benefiting from a strong holiday season.Amazon(AMZN)Not only is online shopping earning a greater share of consumers' wallet, Amazon has a deadly weapon this year: the Kindle Fire. Priced at $199, it's cheaper than Apple's(AAPL) iPad, and appeals to the value-oriented consumer. With high unemployment and depressed wages, more Americans are shopping for cheaper versions of almost everything these days.Amazon was a big winner on Black Friday, saying sales of its Kindle reader quadrupled from last year. The e-commerce giant also noted that its Kindle Fire tablet is still the most popular item on its Web site since its launch last month. Given such momentum, Amazon is set to beat analysts' sales estimates in the fourth quarter. Loyalty fostered by the Kindle and increased conversion to Prime membership, a service that provides free shipping for an annual fee, will help drive sales. Still, the stock isn't cheap -- it trades at 60 times forward-year earnings estimates. But most analysts are expecting the stock to rise to at least $220, with some calling for $270. It's now at $197. Content on this page requires a newer version of Adobe Flash Player.

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TJX Cos.(TJX)

Americans trading down means off-price retailer TJX, which operates T.J. Maxx, Marshalls and HomeGoods, is getting richer. The retailer posted a better-than-expected sales increase in November and showed an improvement in trends at its TJX Europe division, which is in the midst of a restructuring, for the second month in a row. While not a big player in the Black Friday frenzy, TJX's sales held up even though unseasonably warm weather hurt its rivals. That bodes well for December sales trends, especially for gift items.Despite hitting a new high yesterday, the stock still only trades at 13 times forward earnings estimates. Earnings are expected to grow 14% to 15% next year.Macy's(M)Macy's has been gaining market share with the success of its My Macy's, which matches merchandise to local tastes. Black Friday weekend was very strong for the department store, helping November sales beat analysts' estimates.Apparel sales have been week so far this year, but the company has shown strength in accessories, handbags, shoes and menswear. When the cold weather returns, sales of coats, gloves other winter categories will follow, boosting sales over the next few months. AccuWeather.com is expecting a cold and snowy winter in the Midwest and Northeast, the two regions where Macy's has most of its stores.Macy's stock has had a nice run this year, up 21%, but only trades at a multiple of 10 times next year's earnings. As a market-share gainer, with robust online sales, and the added benefit of luxury retailer Bloomingdale's, Macy's is poised to beat earnings forecasts in the fourth quarter. Macy's isn't only one of America's favorite holiday shopping destinations, it's also a great holiday stock pick.Content on this page requires a newer version of Adobe Flash Player.

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Apple

Apple has what seems to be an endless line of consumers willing to buy its products, with iPhones, iPads and MacBook Airs among the top items on many Christmas wish lists. Deutsche Bank conducted a study over Black Friday that pointed to robust demand for all three items, and Piper Jaffray said Apple stores sold 68% more iPads per hour compared with the same period last year.Apple has indicated that it expects to set a new record for iPad shipments in the December quarter, helped by very strong sales overseas. Notably, this is a period that also benefits from an extra week (14 weeks versus the usual 13). What's more, IBM CoreMetrics said 14.3% of all shopping on Black Friday was done on a mobile device, with Apple leading the way. The iPhone was the No. 1 device used and the iPad was No. 2. Investors have been concerned that the passing of Steve Jobs, a third-quarter earnings miss and a big run in the stock this year limits more gains in the stock. Regardless, Apple should have a successful holiday, and revenue and profit will follow. Coach(COH)Luxury retailers are expected to fare well this holiday season. Wealthy customers haven't stopped shopping all year, while the less-affluent have been more cautious on discretionary spending. November sales at Saks and Nordstrom exceeded analysts' estimates. That bodes well for other high-end retailers.Coach has had solid sales momentum, which will continue through the holiday season with the frequent delivery of new products to stores and increased marketing. Morgan Stanley says a focus on gift items and smaller impulse items such as wristlets will buoy sales unlike in other years. Content on this page requires a newer version of Adobe Flash Player.-- New York.>To follow the writer on Twitter, go to Lindsey Bell.

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Corporate Pensions: Many Won’t Be as Lucky as Heinz Employees

Despite the recent large equity rally, the S&P is just flat for the year, in sharp contrast to a median S&P 8% pension actuarial investment assumption, while 10-year bonds yield 2.64%, a long way from the needed 5.8% median discount rate assumption.

Continued monthly job losses and a weak housing market are not the stuff of bull markets. Although these metrics are most often viewed as lagging indicators, with cash flow from operations adjusted for normalized working capital (to eliminate a bit of financial engineering) showing tepid growth, the outlook for the consumer, the backbone of any long-term expansion, must be viewed as very uncertain.

Regarding pensions, if you don’t think contributions into defined benefit plans are significant, take a look at the retirement expense versus the actual cash contributions for HJ Heinz (HNZ) during its past 5 fiscal years, shown in the table and chart below:

Heinz had been paying out benefits in the $150MM range, yet, it wasn’t until 2009 the Board recognized it was under-contributing to its plans. Although for P&L purposes during 2009 and 2010 it recognized a combined $115.3MM in pension expense, it actually contributed $675 MM. During its latest fiscal year, its pension contribution was 62% of net income.

During 2010, the large outflow was financed, in part, by hard-working of the balance sheet, without which cash flow from operating activities would have been considerably below the prior year. Also, HNZ set up a receivable securitization facility from which it received $84 MM and brought in an additional $48 MM from a total return swap.

The liability of its pension plan was directly responsible for these financial engineerings, events which are sure to be emulated by other firms. But other firms may not have the flexibility of Heinz.

One would think given HNZ’s stepped-up contribution, it would be in the clear, especially given, in its 10K it shows its plans are currently over-funded. After all, it expects to contribute just $50MM or so this year.

This is not the case however, as its actuarial assumptions are not in touch with today’s financial environment. Its discount rate, at 5.6%, reflects a settlement yield which is just not available given current yields, although its discount rate is slightly lower than the median S&P firm. HNZ’s 8.1% long-term investment assumption, however is slightly higher than the 8% S&P 500 median assumption, odd given their 58% exposure to equities. We would thus adjust HNZ’s cash flow from operating activities lower to reflect this reality, just as HNZ was overstating its historic cash flows prior to last year’s contribution.

While HNZ is a stellar producer of free cash flow and should have little problem servicing its plans, financial realities must be reflected by cash flow and credit analysts who should not rely on reported data for plan assessment. Given HNZ’s estimated $150MM in annual benefit payments and $750MM underfunding when using more realistic assumptions, we would penalize annual cash flow from operations by $75MM this fiscal year from what is reported.

In almost all cases, cash flow needs to be adjusted. It also impacts firm valuation and cost of capital, regardless of credit strength.

Disclosure: No positions

Are You Watching This Trend at Kelly Services?

Margins matter. The more Kelly Services (Nasdaq: KELY.A  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Kelly Services's competitive position could be.

Here's the current margin snapshot for Kelly Services over the trailing 12 months: Gross margin is 16.6%, while operating margin is 1.3% and net margin is 1.2%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Kelly Services has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Kelly Services over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

• Over the past five years, gross margin peaked at 17.7% and averaged 16.7%. Operating margin peaked at 1.6% and averaged 0.6%. Net margin peaked at 1.1% and averaged -0.2%.
• TTM gross margin is 16.6%, 10 basis points worse than the five-year average. TTM operating margin is 1.3%, 70 basis points better than the five-year average. TTM net margin is 1.2%, 140 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, Kelly Services looks like it is doing fine.

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Looking at the PMI Numbers

For the most part, we are finding that the inventory restocking cycle has been working its way through the economy. With the help of stimulus funds, there has been a definitive restart to the manufacturing industry. This has helped to show that this :statistical recovery is doing well.

But, as we are keenly aware of, without a significant increase to the workforce, this will come slow halt sooner than later.

From Briefing.com:

The Chicago PMI, which is compiled by the Institute for Supply Management – Chicago and Kingsbury International, Ltd., posted a surprise increase from 61.5 in January to 62.6 in February. The consensus estimate called for a decline to 59.7. The index remained strong on all fronts. While the rate of growth in production and new orders declined in February, the indices both remained above 60 at 65.2 and 62.2, respectively.

Even if growth continues to slow at its current pace, it would take at least 6 months before production and new orders turn negative. Employment growth slowed, but remained above the 50 threshold at 53.0. Backlogs posted significant growth for the third consecutive month as the index increased from 54.3 to 58.5.

Illumina Stock Drops as Roche Walks

What goes up must come down. It�s a lesson that Illumina�s (ILMN) shareholders are learning this morning following news that Swiss drug giant Roche (RHHBY) has decided not to extend its tender offer for the gene mapping company.

At $42.65 a share, Illumina fell more than 3% or $1.35 in morning market action, bouncing back after having fallen more than 9%�during pre-market trading.

Roche is offering $51 a share for Illumina�and was pushing its own board slate at the company�s annual meeting Wednesday morning in the hopes of erasing a poison pill Illumina adopted as protection against Roche�s hostile bid.

But Roche says a preliminary estimate shows that Illumina�s shareholders have re-elected the incumbent board. And while it holds �Illumina and its management in very high regard but, with access only to public information about Illumina�s business and prospects, we do not believe that a price above Roche�s offer for Illumina of $51.00 per share would be in the interest of Roche�s shareholders,� CEO Severin Schwan said in a release.

Illumina has been battling Roche�s offer, describing itself as the �Apple of genomics.�

Illumina�s share price has been falling over the last month. And Tuesday�s close of $44 a share was below the $44.50 a share Roche initially offered back in January.

China Leaders Promise Reform, Spending if Needed

BEIJING (AP) -- China's new Communist Party leaders are promising reforms aimed at reducing reliance on exports and more spending if needed to prop up a shaky economic recovery.

In the first statement of their economic goals since taking power in November, the new party leaders pledged continuity Sunday with long-term plans aimed at nurturing self-sustaining growth and raising incomes. There was no indication of plans for major changes or new stimulus.

They promised to support domestic consumption, the growth of small businesses that generate jobs and more migration by rural residents into expanding cities to find better-paid jobs.

The new party general secretary, Xi Jinping, and other leaders are under pressure to overhaul an economic model based on exports and investment that delivered three decades of rapid growth but is running out of steam. Companies and political analysts are watching to see how far they are willing to go in remodeling the state-dominated economy.

In the shorter term, they also need to keep a recovery from China's deepest economic downturn since the 2008 global crisis on track.

Party leaders promised a "proactive fiscal policy" and "prudent monetary policy" in a statement distributed by the official Xinhua News Agency at the end of a two-day annual planning meeting. That refers to willingness to boost government spending if needed and to keep credit easy so long as inflation stays low.

The world's second-largest economy is limping out of the slump that pushed growth to a three-and-a-half-year low of 7.4% in the latest quarter but weak November trade data suggested the rebound might be faltering.

The World Bank and other analysts say Beijing needs to curb dominant state companies and promote service industries and consumer spending to keep incomes rising. They say without prompt action, growth might slow abruptly, leaving China stuck at middle-income levels.

Possible reforms face potential opposition from state companies that might see their privileges diminished and have influential allies in the party.

"If China does not change its strategy, it risks falling into the 'middle income trap'," Robert Zoellick, former World Bank president, said in a speech at a Beijing business conference last week.

In a tacit acknowledgement of possible obstacles, Sunday's statement said change would require "greater political courage and wisdom."

The new leadership promised to "accelerate structural reform," open markets further and encourage efficiency, though they gave no details of possible changes. It said "enhancing quality and efficiency of economic growth" will be a "central task."

Factory output, consumer spending and other indicators are improving in the current quarter but analysts say a recovery is likely to be gradual and too weak to drive a global rebound without improvement in Europe and the United States.

Data last week showed November trade deteriorated sharply following a rebound that started in August. Export growth plunged to 2.9% over a year earlier from October's 11.6%. Imports were flat, down from October's 2.4% growth.

Sunday's statement gave no indication the leadership plans to depart from the party's official annual economic growth target of 7.5% through 2015.

It promised to support the orderly growth of cities, a key element in raising incomes by allowing migrants from the countryside to look for better-paid urban jobs.

The leadership pledged to increase domestic demand, though it gave no details of how it will do that.

Companies are under pressure to help boost consumer spending by putting more money in workers' pockets through wage hikes. Other changes require longer-term effort, such as freeing up money in household budgets by raising government spending on schools, health care and other social programs.

Sunday's statement promised one step in that direction: more spending on building affordable housing and other initiatives aimed at spreading money to China's poor.

Earlier statements by the new leadership suggested they want to narrow China's yawning and politically sensitive wealth gap between an elite who have benefited from economic reform and the poor majority.

The new party Politburo pledged this month to pursue both economic growth and "social harmony and stability."

The government is due to release a long-awaited report this month on proposals for policy changes to narrow the wealth gap.

link

Is a Revenue Miss Coming for Titan International?

There's no foolproof way to know the future for Titan International (NYSE: TWI  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can, at times, suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Titan International do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Titan International sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Titan International's latest average DSO stands at 52.9 days, and the end-of-quarter figure is 51.9 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Titan International look like it might miss its numbers in the next quarter or two?

The raw numbers suggest potential trouble ahead. For the last fully reported fiscal quarter, Titan International's year-over-year revenue grew 1.5%, and its AR grew 6.8%. That looks ok, but end-of-quarter DSO increased 5.2% over the prior-year quarter. It was up 10.3% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

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Dow Stocks Fall on Threat of a Veto

When Speaker of the House John Boehner proposed "Plan B" and said that it would pass the House of Representatives tomorrow, he did two things: Delay the�possibility�of a compromise and put the President in the hot seat.

The plan calls for keeping taxes the same for all Americans except for those making more than $1 million a year. President Obama, however, said that he would veto the bill if it came across his desk with tax increases only for those breaking the $1 million threshold. He previously asked for the threshold to be set at $250,000, but recently increased that number to $400,000 after Republicans agreed to the $1 million mark. The bill is slated for a vote in the House �tomorrow,�and if it passes, Republicans could blame any future issues pertaining to the fiscal cliff on the President and his party.

Regardless of the outcome, the whole voting and�veto�process is simply wasting precious time, and�that's�why investors sent the Dow Jones Industrial Average (INDEX: ^DJI  ) for a ride lower today.

�At the closing bell, the index sat down 98 points or 0.74%, at 13,251. Also, 22 of the Dow's 30 components were in the red. This afternoon, I explained why General Electric (NYSE: GE  ) , Alcoa (NYSE: AA  ) , and American Express (NYSE: AXP  ) were all moving lower.�Click here to read about those companies, or stick around to learn about what's new with a few other Dow stocks that fell today.

A few Dow losers
Shares of both Dow telecommunications giants�Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) both dropped by 1.12% and 1.25%, respectively, even though both companies released positive news today. Verizon announced that its joint venture with Coinstar's Redbox DVD rental service will soon expand its trial DVD streaming service to the general public. The streaming video service will compete directly with Netflix, as the subscription-based streaming video market heats up. �

As for AT&T, the Federal Communications Commission approved the company's purchase of the 2.3 GHz Wireless Communications Service airwaves from a number of companies. AT&T plans to use this band for its 4G network. AT&T has fallen behind rival Verizon in the 4G service, and could quickly regain some ground with this purchase. �

But as you can see by the share price drops of both companies, investors didn't really care about the good news today, as fears of the U.S. falling off the fiscal cliff drove most buy/sell decisions today.

Shares of Merck� (NYSE: MRK  ) �dropped by 1.31% after its experimental drug for lung cancer missed its main goal in a trial. It has given a good deal of attention to this drug, and had ambitions of it becoming the company's next $1 billion-a-year drug. It has been an 11-year process to develop this drug, and this most recent setback could ultimately cost Merck hundreds of millions of dollars in research and development.�

For nearly 100 years, Merck's cutting-edge research has led to a number of medical breakthroughs. Today, however, this pharma stalwart is staring down a steep patent cliff and facing generic competition for its top-selling drug. Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century? To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of our�brand-new premium research report�today. Senior biotech analyst Brian Orelli, Ph.D., walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by�clicking here.

Federal Reserve Exit Watch: Part 8

(For the previous post in this series click here, for the first post click here.)

Looking at the Federal Reserve statistics these days is rather boring. As has been reported over the past month or two, the Fed has gotten its balance sheet in position for the “great undoing.” And, now it is just waiting.

One can divide the Fed’s balance sheet into three components: the “regular” portion which is roughly equivalent to the asset side of the balance sheet of the Fed in the “good old days”; the portion of the balance sheet that consists of line items related to the “new” facilities created to combat the financial collapse; and the “liability” side of the balance sheet which includes Treasury deposits and reverse repos, the account the Fed has stated it will use in the “undoing” of the excess reserves it has injected into the banking system.

The “regular” portion of the Fed’s statement now represents over 90% of the assets of the central bank. Almost $2.0 trillion of these assets are in the form of securities that the Fed has purchased on the open market and holds outright. The only real movement here is in the Fed’s holding of mortgage-backed securities which, on March 3, 2010, amounted to slightly more than $1.0 trillion. The Fed has stated that this account will reach $1.25 trillion by the end of March.

The Federal Reserve has added, net, $175 billion of the mortgage-backed securities to its portfolio over the last 13-week period, roughly $70 billion in the last four weeks.

In terms of the “new” facilities, the Fed is letting these items run off as the assets run off, are written off, or are sold. Over the last 13 weeks, since December 2, 2009, these accounts have declined by slightly more than $100 billion. Over the past month, since February 4, 2010, they have declined by $30 billion.

Overall, therefore, the Federal Reserve has supplied roughly $76 billion to the building of reserve funds over the last 13 weeks and slightly more than $30 billion over the last 4 weeks. Rather a non-event if you ask me.

In terms of factors absorbing reserve funds, the interesting item here is the Supplementary Financing Account of the United States Treasury. I wrote about this account on February 24, 2010 for it seems to be something that the Fed/Treasury is also planning to use during the “undoing”. For more on this see my blog post.

What has happened in this account is that it has been increasing. It reached a low early this year at $5.0 billion, as the Congress had to approve an increase in the federal debt limit. Since February 4, 2010 this account has increased by $20.0 billion. The Federal Reserve announced that an agreement had been reached with the Treasury Department that the Fed will borrow $200 billion from the Treasury and leave the cash on deposit at the central bank. As explained in my post, this borrowing will be used by the Fed to help it “undo” excess reserves in the banking system. It seems as if the Fed is starting to build up this facility slowly so as not to be disruptive to the banking system.

If we combine all the factors supplying reserve funds to the banking system and factors absorbing funds from the banking system we find that commercial bank’s Reserve Balances with Federal Reserve Banks increased by roughly $70 billion in the last four weeks and over the last 13 weeks: thus, very little changed in the banking system over the last quarter of a year.

If we look at the statistics from the banking system itself, we see that excess reserves in the banking system rose by about $110 billion.

What the Fed did, as it has for an extended period of time now, went directly into the excess reserves of the banking system. Commercial banks, as a whole, are just sitting on their hands and doing nothing. This allows the Fed to do all its repositioning in order to prepare for the “great undoing” without throwing any more uncertainty into financial markets.

The Federal Reserve is still “sitting on the fence”. Its dilemma is that the banking system still remains extremely week…except, of course, for the big banks. For more on this see two of my recent posts: “The Struggles Continue for Commercial Banks” and “The Banking System Continues to Shrink". The Fed cannot move too fast to remove excess reserves from the banking system for fear that this “undoing” may result in many more bank failures among the small- to medium-sized banks.

Of course, the economy remains weak and the Fed has used this excuse for not removing reserves from the banking system and raising short-term interest rates. This may be a cover for their real concern over the systemic weakness of the small- and medium-sized banks in the United States.

On the other side there is the continuing fear over the possibility that sooner or later the excess reserves in the banking system will turn into bank loans which will result in an expansion of the money stock measures which will result in a worsening of inflation. With over $1.1 trillion in excess reserves in a banking system that used to carry less than $100 billion in excess reserves there is substantial doubt that the Fed can smoothly remove all of these reserves thereby preventing possible inflation or even hyperinflation. Nothing like this has ever been experienced in history before.

So, we sit and wait.

The good news is that things within the banking system seem quiet now. The FDIC continues to close banks without major disruptions to banking markets or local economies. The focus of financial markets seems to be on Greece, Spain, Italy, the Euro, and California, New York and other political entities. That is good for the banking system!

Some have pointed to a potential problem arising from the sale of assets recently conducted by the FDIC. The argument is that now that these assets have a price, will other banks have to “mark-to-market” similar assets that they carry on their balance sheet? And, if they have to mark these assets to market, will this speed up the number of banks actually failing or force banks that seem to be doing OK into insolvency?

In the circumstances we now find ourselves, boring is good! Let’s hope it stays boring. Or hope that the situation becomes even more boring.