For starters, Intel beat second-quarter earnings estimates by 10 cents a share, as its revenue climbed 12% year-over-year to $8 billion.  Beating earnings estimates is important, but beating on the top line and showing sales growth is even more important in a recession. The reason: It shows that you can do well in spite of a weak economy.

Like most chip stocks, Intel is an economic leading indicator of sorts – a fact that bodes well for the U.S. recovery. Intel said demand actually strengthened as the quarter moved along.  This is the precursor of a much more vigorous third and fourth quarter, which traditionally is when tech companies perform the best.

Adding more fuel to the fire, Intel increased it sales forecast to $9 billion from $8.5 billion and boosted the outlook for its gross margins to the upper end of the 53%-55% range.

One of the big reasons for Intel’s recent progress has been the launch of  Microsoft Corp.’s (Nasdaq: MSFT) Windows 7, which has been well received by many analysts.  Upgrading to Windows 7 from Vista in an existing machine is quite a task. It requires erasing the hard disk and installing the new operating system and all the other software from scratch.

This is different from the traditional incremental upgrades, in which many of the older files remained in place, while the upgrade took care of overwriting and deleting the unnecessary old system files and installing the new ones.  For small companies that have outdated technology, this process is too tedious and it is much more expedient to buy new machines with the new operating system preinstalled.

And there are a lot of old machines with outdated software out there in the business world.  It is not uncommon to see five-year old machines that are not capable of running new resource-intensive applications.  To verify my analysis, I called friends in Fortune 500 companies that manage PCs for their own corporations or for top technology vendors.

The feedback was unanimous in that Vista’s complexity – despite its significant features that were attractive to some specific users – made the operating system an overall disappointment to companies.  The operating system lacked the desired stability and increased maintenance costs.  So the consensus was that corporations would be quick to abandon Vista for Windows 7.

And given the complexity in upgrading existing Vista systems, and the old age of the equipment, it makes sense that many companies would seek to replace entire machines altogether.  So we have the old the “Wintel” symbiosis kicking into high gear.

Also, corporations have cut personnel deeply and need to increase the productivity of their now-overburdened workforce.  Some 70% of employees are not satisfied with their current position, given the additional stress and lack of additional pay.  Therefore, upgrading their technology to make their jobs easier is a high priority.

This won’t be too difficult, because companies’ profits have actually grown 23% in the last two quarters.  With Corporate America now having recapitalized, a new technological wave makes all the sense in the world.

Thus, the argument that the demand pickup is just filling the chain and inventory rebuilding, and that we will be disappointed come January does not seem to hold.  In either case, you will see an outperformance of earnings come the next report, so we should use any downdraft to get into Intel stock.

Also, Intel has regained its technological leadership against Advanced Micro Devices Inc. (NYSE: AMD), despite that fact that AMD is doing well in areas where integrated graphics are important, finally leveraging its acquisition of ATI.

With all cylinders firing, Intel is poised to deliver an upside earnings surprise in the third quarter and blow through estimates in the fourth quarter.  Valuation is cheap compared to the Standard & Poor’s 500 Index, considering the rate of growth that Intel is experiencing and expected to deliver both in the short term and well into next year as Windows 7 deployment motivates sales.

The stock is clearly above the 200-day moving average and seems a bit overbought short term.  So do not chase it. But start buying right away, looking to average down over the next 45 days if possible, averaging up until you reach your full position if it keeps running.

Recommendation: Buy Intel Corp. (Nasdaq: INTC) by averaging into the stock over the next 45 days, thus reducing market risk (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Intel Corp.

Source:  Intel Corp. (Nasdaq: INTC) Is Poised to Top Estimates Over the Next Two Quarters

With that said, a stock breaking above its 200-day moving average should be viewed as a bullish thing.

Take a look at the chart below of Apple (NASDAQ:AAPL).

As you can see, Apple first plummeted under its 200-day moving average back in September. And it went on to drop nearly 50% within three months.

But just recently, in mid-April, Apple popped back above its 200-day moving average. That was almost ten bucks ago.

The lesson should be clear, buying into a stock that’s crossing its 200-day moving average it typically a good idea (pending a little research on your part).

Some stocks recently crossing their 200-day moving averages are BHP Billiton (NYSE:BHP), Advanced Micro Devices (NYSE:AMD), Micron (NYSE:MU), Toyota Motors (NYSE:TM), and Sony (NYSE:SNE).

After all, most mutual funds, exchange-traded funds (ETFs) and managed accounts offer long-only strategies. And why not? After all, the strategy is simple: These portfolio managers buy securities and hope to take advantage of price appreciation.

But the ongoing financial crisis proved those investors wrong – for several reasons. After all, what do you do in a trendless (sideways) market? And what about a declining market?

In either situation, the profit payoff from a purely long portfolio doesn’t figure to be very large. And that’s no surprise. After all, when bear markets arrive – as they periodically do – long-only money managers are typically limited to raising additional cash, or seeking conservative investments with limited downside, meaning the upside potential is also fairly small. And as investors have seen all too often during the current financial crisis, money managers who insist on “fighting the tape” can often generate big losses for their clients.

That’s where long-short investing strategies come into play.

If the markets head up or down, you’re positioned to profit. And given the wild volatility we’ve witnessed in the last year, any investor not playing both sides of the market, simultaneously, quite frankly, deserves it if they drown their portfolio.”

Unfortunately, many investors have learned their lessons the hard way for the past year and a half as virtually all classes have declined in value, resulting in sizable losses within their portfolios.

“This environment has exposed the flaws in traditional asset allocation theory, Capital Asset Pricing Model (CAPM), or whatever label you choose to put on it,” said Tom Samuels, managing partner of Houston-based Palantir Capital Management Ltd. and manager of the Palantir Fund, a global all-cap long-short mutual fund. “While Markowitz (Harry) and Sharpe (William) still have their firm believers, sophisticated investors are realizing that they cannot achieve true diversification merely by being long a variety of asset classes.”

Samuels believes the majority of long-only returns are influenced by the direction of the overall markets and that long-short investing strategies provide one of the few ways to achieve true portfolio diversification and risk control.

“Long-short represents the only asset class that can effectively handle both sideways and bear markets,” Samuels said. “The asset class allows investors an opportunity to systematically approach the markets and individual risk parameters differently than being long-only.”

The Long and the Short of a Newly Popular Investing Strategy

A long-short money manager has the ability to both buy and sell stocks to help reduce risk during such less-than-optimal investment environments as a trendless market or even a bear market.

The long-short strategy often serves as a hedge from overly bearish markets by allowing investors to take advantage of upside potential (long positions), while also benefiting from downward movements of certain investments (short positions). In choppy markets – like those of today – the strategy can help investors book some gains as they focus more on capital preservation, and not simply appreciation.

In reality, investors should consider incorporating some form of a long-short approach as part of the overall asset allocation of their portfolios, experts say.

Brian Lipton, founder of Gaithersburg, Md.-based YellowWood Financial Advisors Inc., seeks out investments that are not correlated with traditional stocks and bonds. Lipton views long-short investment products as another piece to the portfolio construction puzzle, and has incorporated hedged equity mutual funds as part of a tactical allocation – a way of reducing exposure to the risk of a long-only securities position.

“We realized long ago that we cannot ‘time’ the markets,” said Lipton. “We typically allocate about 20% to 30% of our equity portfolios in a tactical manner. Hedged equity represents a part of that allocation that helps satisfy certain risk elements and, of course, allocations that reduce long-only exposure in this environment have been beneficial. We have found that hedged mutual funds have been a very good choice during periods of intense volatility and could work well during other times as well.

Lipton’s firm uses one fund that goes long on favored positions, short on out-of-favor positions, and another fund that buys equities and hedges them with short positions on various indexes.

“While the latter fund is 100% hedged today, that percentage could change based on their views of the market environment,” Lipton said. “Security selection is still important.”

Hedging Plays: Make Macro Calls, Dodge Market Falls

At Palantir, Samuels looks for opportunities to hedge long positions, while also seeking profits on the short side. In managing his long-short fund, Samuels will make macro calls on the markets and the economy, micro calls on companies he believes to be either under- or overvalued, and also employs market-neutral arbitrage trades by pairing long and short positions in similar securities.

“Right now, we are short the dollar by owning the [PowerShares DB U.S. Dollar Bearish Fund (UDN)], an unlevered ETF that inversely mimics the movements of the U.S. currency,” said Samuels. “That position represents a macro call against the dollar and the ETF shot up dramatically when the Fed announced its intent to aggressively buy Treasuries to lower rates. Additionally, we believe this short trade provides nice cover as some domestic companies may struggle relative to their international counterparts.”

Samuels’ fund is also betting against U.S. Treasuries through short positions in an ETF that tracks long-term government securities.

“Historically, central banks have had mixed records of holding rates down, particularly when their currencies begin to fade,” Samuels said. “Shorting Treasuries provides an opportunity to make money on that macro call, while also serving as a hedge against certain long industrial and consumer-related domestic equities that may struggle in a rising interest rate environment.”

Dave Walker, YellowWood’s director of operations, points out that his firm has begun using a long-short commodities-based fund as a way of employing this non-traditional investment strategy.

“We have been allocating a portion of certain clients’ portfolios into long-only commodities funds for years, but gains and losses have recently come so fast and furious that we chose to move into a hedged product,” Walker said. “We realize we cannot time these markets on a daily basis by investing long or short. But based upon the trends in the global economy and surrounding specific categories of commodities, a hedged commodities fund allows us to participate in this alternative asset with lower risk and volatility. We will trail indices when there is a quick rebound but, more importantly, we expect to curb the downside.”

Market Neutral Pairs

Palantir’s Samuels explains the pairs trading concept through a hypothetical example.

“The market-neutral pair trades entail buying a company in a high-quality security as measured by free cash flow (FCF), low debt, and [solid] profitability, and simultaneously selling a security in the same sector that we perceive to be [of a] lower quality based on these same parameters,” Samuels said. “Let’s say, we liked Intel (INTC) because of where the company is in its product cycle, its low debt position, and its positive cash flow. Conversely, we recognized that [Advanced Micro Devices (AMD)] maintains considerable debt and its last product introduction was under whelming. In this example, we may choose to go long Intel and short AMD.”

Samuels then discusses an environment that has the overall equity market declining by 30%, with Intel and AMD dropping 25% and 35% respectively.

“A properly executed paired trade would have returned 10% to the investor, even as the stock market as a whole lost 30%,” said Samuels. “The long-short manager then has the opportunity to unwind the arbitrage, but only one side at a time, if desired. We may believe AMD is more fairly valued after a drop of 35% and choose to cover our short, while still owning Intel, a high-quality stock that could appreciate should the market rebound. The long-short approach provides us significant flexibility, while the long-only manager has to identify high-quality stocks and then hope that the overall market direction cooperates.”

Client Interaction

YellowWood’s Lipton had not seen sheer panic from his clients – at least not before the Dow Jones Industrial Average recently fell below the 7,000 level.

“For the most part, our clients understand their allocations and we received very few distress calls,” said Lipton. “Nevertheless, we know the concern is there. When the Dow broke below 7,000, some became worried about further significant slides without any apparent market support. We spoke with them more about increasing the hedged positions and they were happy to control the downside better, while giving up a bit of appreciation potential. They were very interested in such investments, particularly given the uncertain environment we are in.”

And these days, a little peace of mind can go a long way.

[Editor's Note: Ron Brounes, CPA, is a regular contributor to Money Morning. A technical financial writer, Brounes, is president of Brounes & Associates, a Houston, Tex.-based consulting firm that provides writing, communications, and educational services for financial services professionals. Back in March, Brounes wrote about how the Obama stimulus package would affect your income taxes.]

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Source: How Long-Short Investing Can Lead to Profits in Today’s Uncertain Markets

[This is the eighth installment of a new series that looks at ways for investors to recover from the U.S. financial crisis. To check out the archive of previous stories in the series, just click here.]

To support the deployment of Intel’s cutting-edge 32-nanometer (nm) manufacturing technology, Intel President and Chief Executive Officer Paul Otellini said the company will upgrade four existing manufacturing sites in Oregon, Arizona and New Mexico to build faster, smaller chips that consume less energy.

The new funding represents the world’s biggest chipmaker’s largest-ever investment for a new manufacturing process and furthers its efforts to distance itself from its would-be rivals.

“We’re investing in America to keep Intel and our nation at the forefront of innovation,” Otellini said in a speech at the Economic Club in Washington, Bloomberg News reported.

“We’re investing in America to keep Intel and our nation at the forefront of innovation

Mr. Otellini’s speech emphasised that Intel was intent on making major investments when most other companies were being forced to scale back.

Boldness is in Intel’s DNA, as the company is known for its strategy of investing during downturns to give it leverage when economies emerge from recession. Since 2002 it has invested $50 billion in capital and research and development in the United States, where it maintains 75% of its production capacity.

Intel’s latest high-performance technology – code-named “Westmere” – will be used in building chip circuitry 32 billionths of a meter across. The tiny, atomic level structures will be 71% smaller than Intel’s current generation of 45 nanometer processors. The chips will also incorporate additional graphics capabilities.

“This is the level of technology where we find the sweet spot for a bunch of new markets we have been aiming ourselves at,” Otellini said in an interview with Forbes. “You’ll start seeing more thin and light products, Apple Air kinds of products,” referring to Apple Inc.’s (AAPL) MacBook Air, the world’s thinnest notebook computer which is powered by an Intel chip.

The move could help Intel grab more market share from rival Advanced Micro Devices Inc. (AMD). Intel had 82% of the market for x86 processors – the ones found in most servers, desktop computers and notebooks – in the fourth quarter of 2008, up from 76% a year earlier, according to Mercury Research. It will also help Intel’s efforts to penetrate other markets such as embedded devices and cell phones.

For its part, AMD won’t shift to 32-nanometer technology until the end of 2010, with volume production beginning in 2011. Although other chip makers like IBM (IBM), Samsung Electronics Company Ltd., Chartered Semiconductor Manufacturing Ltd.(ADR: CHRT ), are sharing 32-nanometer chip technology and could ramp up production as early as the second half of this year, none of them can challenge Intel for control of the PC processor market.

The move continues Intel’s march to the relentless beat of Moore’s Law, which says integrated computer circuits would double in performance every 24 months, coined by  co-founder, Gordon Moore in 1965.

Intel has kept its founder’s legacy intact, setting the pace by building the fastest and smallest chips since the integrated circuit board was invented in 1958.

That provides a powerful advantage to the company, as tech-savvy consumers keep buying new generations of chips to run the latest gaming and other power munching software coming to the market.

“Each time we make this kind of transition people go ‘Big deal, I don’t need more power,’” semiconductor industry analyst Nathan Brookwood told Forbes. “But two years later if you try to take away their newer, faster machines you’ll have to pry it out of their cold, dead hands.”

Source: Intel Defies Layoff Trend – Spends $7 Billion Protecting 7,000 Jobs

“Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don’t think it’s going to work,” Rep. Boehner said yesterday (Sunday) on NBC-TV’s “Meet the Press.” “And so if it’s the plan that I see today, put me down in the ‘No’ column.”

The plan – detailed in a Money Morning report last week – could potentially pass the Democrat-dominated House without Republican support, The New York Times reported. But the stimulus plan will face major opposition when it comes before the U.S. Senate, U.S. Sen. John McCain, R-Ariz., told “Fox News Sunday.”

If at least two Republicans don’t approve the bill, the proposal won’t be able to achieve the majority vote of 60 it needs to be filibuster-proof. McCain said he also plans to vote “No” unless the stimulus bill is changed.

“We need to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes,” McCain said. “We need to cut payroll taxes. We need to cut business taxes.”

Added McCain: “We need to have a commitment that after a couple of quarters of [gross domestic product] growth that we will embark on a path to reduce spending to get our budget in balance.”

McCain lost the November presidential election to Obama.

That’s not all that’s taking place in what figures to be a busy stretch this week.

The economic calendar will heat up this week as economists get their initial look at U.S. gross domestic product (GDP) data for the 2008 fourth quarter. Needless to say, the results are not expected to be pretty, with analysts predicting a 5% contraction during that final three months of the year.

The report is due out Friday.

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported in early December. This downturn – and the bigger-than-usual job cuts that have resulted – could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010, many economists fear.

The U.S. economy shrank 0.5% in the third quarter, marking the slowing pace since 2001 and continuing a still deepening recession that has wrung the markets since last year. GDP advanced 0.9% in the first quarter of last year and 2.8% in the second quarter, Bloomberg News reported.
Dana Saporta, an economist at Dresdner Kleinwort Ltd. in New York, told Bloomberg projects a 5.4% overall contraction in the fourth quarter. Analysts expect the malaise to carry over well into this year.

The stimulus packages – money spent by the newly departed Bush administration, as well as one planned by the newly installed President Barack Obama – will have a lot to say about how long the U.S. economy stays down. As the Republican opposition comments demonstrate, with Congress (the Democratic members, at least) promising a stimulus package by President’s Day (February 16th), Obama will have his hands full initiating some “give and take” from the dissenters of the current plan.

On Wednesday, U.S. Federal Reserve Chairman Ben S. Bernanke also leads the first Fed policy meeting of the Obama administration though he and his policymaking cohorts have no more wiggle room when it comes to cuts in the benchmark Federal Fed rate.

But the Fed statement should provide insight into the additional measures the central bank has in its arsenal to help jumpstart the economy.

Earnings season also moves forward with energy companies prepared to show the ill-effects of the drop in oil prices.  Exxon-Mobil Corp. (XOM) and Chevron Corp. (CVX) announce late in the week, as does consumer products giant Procter & Gamble Co. (PG).  Amazon.com Inc. (AMZN) also reports quarterly earnings during the week and analysts are speculating whether investors will cheer its results a la Google Inc. (GOOG) or frown along the lines of eBay Inc. (EBAY).

Market Matters

Last Tuesday, Barack Obama took the oath of office (for the first time) and became the 44th president of the United States.  In his inaugural address, President Obama called for “action, bold and swift – not only to create new jobs, but to lay a new foundation for growth.” He then acted “boldly and swiftly” by freezing the pay of high-ranking members of his administration.  One of those potential members, U.S. Treasury Secretary-nominee Tim Geithner, faced the wrath of Congress for his role in the mis-handling of the banking bailout plan and for his failure to pay a mere $34,000 in taxes.  Since the treasury secretary oversees the Internal Revenue Service, certain “rule sticklers” in Congress frowned upon his “careless mistakes.”  Still, he was approved by the Senate Finance Committee and is expected to be confirmed – just in time to oversee the distribution of that next round of Troubled Assets Relief Program (TARP) money.

While Obama begins a new job and tries to “faithfully execute the office” (rather “execute the office faithfully”), a few financial execs are headed for the unemployment line.  John Thain, formerly of Merrill Lynch & Co. Inc. fame/infamy, stepped down or was forced out from his role at Bank of America Corp. (BAC) after failing to disclose dramatic losses prior to the shareholder approved acquisition.

In an effort to stop the negativity – and no doubt to try and protect his own job – BofA Chief Executive Officer Kenneth D. Lewis and several cronies bought more than 500,000 company shares, a move that earned a collective yawn from investors.

Citigroup Inc. (C) will be replacing Chairman Win Bischoff with ex-Time Warner Inc. (TWX) CEO Richard Parsons, and also announced its intent to sell Japan’s Nikko Cordial Securities, a move that confirms that brokerage will no longer be considered a core business.  In other financial news, State Street Corp. (STT) reported a far-worse-than-expected quarter from its asset management business; U.S. Bancorp (USB) announced that profits fell to the lowest level since 2001; Capital One Financial Corp. (COF) posted a huge loss in the quarter and predicted that credit card defaults will only grow in 2009.

Across the pond, Royal Bank of Scotland Group PLC (ADR: RBS) forecast an annual loss above $40 billion which would be the largest ever reported in the United Kingdom.  On the heels of that news, the British government introduced new measures to its bailout plan, including a form of insurance to limit future loan losses.  Investors were hoping that earnings from non-financials would fare better, but Microsoft Corp. (MSFT), eBay, General Electric Co. (GE), Advanced Micro Devices Inc. (AMD) and Xerox Corp. (XRX), among others, disappointed with weak results as well (though Google and Apple offered some bright spots).  Time Warner, Intel Corp. (INTC), and Clear Channel (among others) announced layoffs, proving that most sectors of the economy are hurting.  Non-government arranged deals still exist as Pfizer Inc. (PFE) attempts to acquire pharmaceutical rival Wyeth (WYE) and Mexican billionaire Carlos Slim. Carlos Slim plans to invest $250 million into The New York Times Co. (NYT), The New York Times reported.

Economically Speaking

A rather slow week on the economic calendar last week allowed investors time to focus on the earnings data.  Housing starts fell for the sixth straight month and building permits, a predictor of future activity, dropped to the lowest level ever reported.

The never-ending layoff announcements continued to hinder the labor picture as jobless claims surged far more than expected.  In China, GDP rose by 6.8% in the fourth quarter, a number that would have prompted parades in this country. In China, however, those numbers confirm dramatic slowdowns in the world’s third-largest economy.

The “weak” report means that growth for all of 2008 came in as 9%, the first year since 2002 that China’s growth rate fell below double-digits.

Weekly Economic Calendar

Source: Financial Crisis Challenges Escalate as Republicans Announce Plans to Oppose $825 Billion Obama Stimulus

But that is old news.  You are here because you want a forward outlook, not a rehashing of what happened last week.  But I bring up the major earnings from the past week to make a point.  The expectations for Alcoa (NYSE:AA) were still relatively high and they dropped sharply.  Expectations for J.P. Morgan were pretty low and they beat, but got taken down by the industry (guilt by association).  Intel warned, came in at expectations and jumped three percent the next morning.

The point is that earnings reports boil down to one thing: EXPECTATIONS.  Looking at the expectations for this season, due to the current economic crisis, overall expectations are much lower than in recent quarters.

This week we have a number of big tech stocks reporting and the expectations are definitely coming down.  Just to put it into perspective, I made the following table that shows the companies reporting and the current consensus estimate for earnings this quarter.  I have also included the estimates from 30 days ago as well as the estimates from 90 days ago.

As you can see, the expectations have declined sharply in the last 90 days.  Have they come down enough?  That remains to be seen and it will likely be case dependent.

If you look at the analysts rankings on these five stocks, the analysts love Google (NASDAQ:GOOG), Apple and IBM.  They hate AMD and EBay.

So the two of the five that stand the best chance of beating estimates are AMD and EBay.  This doesn’t mean you should rush out and buy them before earnings are announced, but should these two beat estimates, they have the best chance to move sharply higher.  Thanks to the negative sentiment toward them.

Earnings are a tough thing to play, but if you do your homework—looking at analysts’ rankings, short interest ratios, put/call ratios—you can tilt the odds in your favor.  I recommend to most people that they wait until after the earnings are announced, but if you insist on getting in ahead of the report, do it with options (lower cost of entry) and make small allocations to the trades.

I don’t make earnings plays in my K.I.S.S. Service, but I do occasionally have a trade on when earnings come out.  I almost always take profits off the table before the earnings report comes out and leave a little exposure so that if the stock goes my way, I can really juice my gains.  Meanwhile, if the stock goes against me, the pain is negligible because of taking profits off the table on a portion of the trade.

Good luck and good trading,

Rick

Source: Earnings Season Ramps Up This Week; Expectations Are Considerably Lower

The U.S. recession may just now be entering full swing, but storm clouds have been gathering for more than a year and many companies have already trimmed payrolls. Now, the goal for many companies is to prepare for an economic rebound by finding ways to keep the their skilled productive labor intact.

“More companies are exploring alternatives to layoffs,” John A. Challenger, chief executive of consulting firm Challenger, Gray & Christmas, told BusinessWeek. “If they can keep people on until the business turns around, the company would be in much better shape to ramp up quickly.”

Dell Inc. (DELL) employees, for instance, recently received a memo from Chief Executive Officer Michael Dell asking them to take some time off without pay. The company has already met its previously stated goal of cutting employee payrolls by 10%, but the memo said there would be more layoffs unless other cost-cutting measures, like unpaid leave, weren’t effective.

Other companies throughout Silicon Valley have joined Dell in elongating the holiday.
Hewlett-Packard Co. (HPQ), Cisco Systems Inc. (CSCO), Advanced Micro Devices Inc. (AMD), Texas Instruments Inc. (TXN), Adobe Systems Inc. (ADBE) and Computer Sciences Corp. (CSC) are among the industry heavyweights to be taking a break, with some closed from today until January 5.

Maria Guidice, owner of San Francisco-based Web design firm Hot Studio Inc., told the New York Times that when the dot-com bubble burst in 2000 many companies, including hers, immediately slashed payrolls but that tactic was painful and counterproductive.

“In 2000, it was like ‘cut the heads,’” she told The Times. But things are different this time around.

“Our No. 1 priority is to keep people employed and to do that we’re going to bank the money and keep it for when we need it,” Guidice added. “I know some people are super bummed, but they understand we’re trying to keep the workforce intact.”

California’s technology giants aren’t the only ones pursuing alternative cost-saving measures to save jobs, either. Across the country, in Towanda, PA, Global Tungsten & Powders is encouraging its 1,000 employees to take leave without pay in an effort to preserve manpower, The New York Times reported.

“We have a very skilled and competent workforce and the last thing we want to do is lose them when we’re assuming this economy is going to come back,” Craig Reider, the company’s director of human resources, told The Times in an interview.

The number of U.S. workers who normally work full-time but now clock fewer than 35 hours per week has soared 72% in the past year according to the Bureau of Labor and Statistics. The agency said the number of such employees climbed from 1.49 million in November 2007 to 2.57 million in November 2008.

Pella Corp., an Iowa-based manufacturer of windows, is instituting a four-day workweek for a third of its 3,900 employees, BusinessWeek reported.

“Our contention is, consumer confidence will rebound,” said Pella Senior Vice President Chris Simpson. “If there’s a [government] stimulus package of some kind, we think people are going to respond.”

A stimulus package being drummed up by the incoming Obama administration is rumored to cost roughly $800 billion, for instance.

Other companies, like Motorola Inc. (MOT), are cutting back salaries, but so far, pay cuts do not seem to be widespread. Labor Department figures indicate the average hourly pay for about 80% of the work force grew by 3.7% last month from November 2007.

John Challenger, of Challenger Gray & Christmas, says that the effort to save jobs is not just a fad, or a case of companies living in denial, but a shift in modern corporate ethos that is not only more humane, but more economical.

“People are measured and ‘metricked’ to a much greater degree,” he told The Times, “So companies know that when they’re cutting an already taut organization, they’re leaving big gaps in the workforce.”

Company Layoffs: More Companies Trim the Fat without Trimming the Workforce

This from Money Morning:

There is no doubt that the global economic environment presents a very bleak outlook.  The National Bureau of Economic Research (NBER) last week announced that the U.S. economy has been in a recession since last December – a situation that appears to be getting worse, given that the economy lost half a million jobs lost half a million jobs in November. Interestingly, the market traded up both those announcements.

On Nov. 24, Hewlett-Packard Co. (NYSE:HPQ) reported a quarterly profit of $1.03 a share, exceeding analysts’ estimates of $1.01 a share.  Hewlett-Packard almost doubled its revenue from technology services from last year because of its acquisition of Electronic Data Systems Corp. earlier this year, and a 21% increase in quarterly sales of notebook computers and a 10% rise in personal computer sales.

You read that right: Hewlett-Packard recorded a big jump in three key business areas – during a recession.

These impressive results are due to Hewlett-Packard outperforming its peers with superior products and exemplary execution. What’s more, Hewlett-Packard has been an early adopter of some of the fastest chips for servers – the “Shanghai” chip by Advanced Micro Devices Inc. (NYSE:AMD), which just leapfrogged the offerings of arch-rival Intel Corp. (NASDAQ:INTC) in terms of both speed and market share.

In its core printer and server business units, Hewlett-Packard actually experienced a slight contraction in businesses.

The key to Hewlett-Packard’s better-than-expected results is the large proportion of recurring services and supplies, which are much less vulnerable to a contraction in economic activities.  You need to keep your systems running with the up-to-date software and maintenance services and you need to keep buying ink for your printers.  This recurrent income smoothes out earnings and is a blessing for companies like Hewlett-Packard, International Business Machines Corp. (NYSE:IBM), Automatic Data Processing (NASDAQ:ADP) and others, which benefit greatly from such sustainable income streams.

In this light, Hewlett-Packard’s management not only blew away its earnings estimates, but also came out with a much stronger-than-expected guidance.  Well, the market was overbought that day and the stock sold off the next day.  The word dropped by some was that the analyst community did not believe Hewlett-Packard’s rosy outlook.  But the reality is that the market had anticipated Hewlett-Packard’s strong results and bid up Hewlett-Packard’s stock ahead of the announcement.

So far so good, but what about the future?  Mark V. Hurd, Hewlett-Packard’s president, expects to be able to cut $1 billion in expenses in 2009 from redundancies from the EDS acquisition that he will be eliminating.  And Hurd has shown a strong track record in this sense since he took the helm in 2005.

So the question is how much faster Hurd can cut costs to compensate for the reduction in economic activity, in case things keep getting worse as they very likely will in the first quarter of 2009.  But there is some hope that the incoming Barack Obama Administration will add to the aggressive monetary and fiscal stimulus already approved and only partially implemented by the current administration.  In any case its positive effects are only starting to be seen.

And the other question is how much downside has the market already discounted in Hewlett-Packard’s shares, which are down 38% from their 52-week high of $52.90. Well, with a trailing Price/Earnings (P/E) ratio of only 10.0 and a P/E to Growth Rate (PEG) ratio of 0.7 for this very resilient profit stream in a company characterized for flawless execution, Hewlett-Packard is a steal.  This can also be said for most of the market, which is in panic state, taking refuge in government bonds yielding almost zero.

This last phenomenon has been referred to by Mohamed El Arian, co-Chief Executive Officer of PIMCO as a U.S. Treasury bubble. And in times of panic, it is a good idea to buy.  So I will unequivocally recommend buying HPQ in increments.  I would buy one-fifth of my position on weak days prior to year end – accumulating half our position – leaving the last half for purchase in the first quarter of 2009.

ACTION TO TAKE: BUY Hewlett-Packard Co. (NYSE: HPQ), but do so with some care. Purchase two-thirds of your position between now and year-end, and the final third during the first quarter of the New Year.

Source: Buy, Sell or Hold: Hewlett-Packard is Ready for Takeoff

This from Investment U:

Value investors, consider this your warning… With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” – stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

Value Stocks & Value Traps

In theory, a value stock is a beaten-down company that’s:

• 1. Cheap compared to its earnings, its competitors and/or some other relevant benchmark
• 2. Poised for a turnaround.

In contrast, a value-trap is simply:

• A beaten-down company that’s cheap compared to its earnings, its competitors and/or some other relevant benchmark
• That never quite turns around.

Unfortunately, no formula exists to calculate when, or if, a turnaround will ever occur.

10 Questions To Help Value Investors

These 10 questions should help any value investor. And ultimately, keep you out of most value traps…

1. Is there a near-term catalyst? First things first, if there’s nothing on the horizon – like a new product launch, key marketing arrangement, a shake-up of the executives, the conversion of a massive order backlog, etc. – we shouldn’t bother. Companies and stocks need catalysts in order to advance. If none exist in the next 12 to 18 months, chances are the stock will be stuck in neutral, or worse, reverse.
2. What are insiders doing? Nobody knows the company – and its future prospects – better than the insiders. If they’re not salivating over the “cheap” prices and backing up the truck, we shouldn’t either.
3. Is the company addicted to debt? Too much debt magnifies the impact of tough times. As sales decrease, interest payments take up more and more of the company’s earnings. Not to mention, unwinding leverage is a time-consuming process. So even if the company boasts new, fiscally responsible management, beware. Or as Warren Buffett observes, “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”
4. Does the dividend yield seem too good to be true? Value investors love to tout they “get paid to wait” for a turnaround. Granted, many stocks do maintain their dividends through a downturn. But countless others don’t. They slash or cancel them altogether, just to stay in business. No matter how tempting, tread carefully when the dividend yield hits double-digit levels.
5. Is the company just as “cheap” based on the future? At first glance Eastman Kodak (NYSE: EK) appears dirt cheap, trading at a price-to-earnings (PE) ratio of 2.96. But don’t be fooled. Or get too easily excited. Remember, the PE ratios cited on most financial websites are historical. And as investors, we don’t care what a company was worth… we care about what it will be worth. So before you buy, make sure the stocks forward PE ratio is similarly attractive. (FYI – Eastman’s is not. It trades at 27 times forward earnings. Hardly cheap.)
6. Which direction is the company’s market share headed? A general economic slowdown is one thing. But when a company’s losing market share, too, that’s an indication that a competitor has a better mousetrap. And while economic growth is cyclical, market share is not. Even if the economy or industry turns around, chances are the company’s market share won’t.
7. Does the company operate in a highly cyclical or moribund industry? If you go hunting in a highly cyclical industry (like semiconductors) you’re asking for trouble. Same goes for industries destined for obsolescence (like print media). To win with these stocks, you need both the company’s misfortunes and the industry’s to reverse course.
8. How’s the free cash flow? Earnings can be massaged, manipulated or completely fabricated. But cash cannot. So make sure free cash flow is stable, or growing. If nothing less, it provides management with a little wiggle room, or margin of error when considering ways to speed up a turnaround.
9. Is the stock liquid enough? Just like insiders provide support to share prices, so do institutions (mutual funds, pension plans, hedge funds, etc). Both groups can move stocks prices quickly and significantly. However, many institutions can’t or won’t buy stocks trading for less than $10, with a market cap below $1 billion and/or that don’t trade several million dollars worth of shares each day. Without the potential for institutional ownership, a quick rebound in prices becomes less likely.
10. Does the company have a sustainable competitive advantage? For a stock to turnaround we need the company to thrive, not survive. That’s not possible without a sustainable competitive advantage. So stick to companies like Apple (Nasdaq: AAPL) that are light-years ahead of the competition in terms of design, market share, new product offerings and/or technology.

In the end, don’t kid yourself. Detecting a value trap is no easy task. Even the best investors occasionally get snared. Think Bill Miller (with Countrywide and Freddie Mac (NYSE: FRE)) and Carl Icahn (with Yahoo! (Nasdaq: YHOO) and Advanced Micro Devices (NYSE: AMD)).

But at the very least, these 10 questions will ensure you never buy blindly, or on price alone.

Source: Value Investors – Beware The Value Traps

Bear in mind that each new economic report, earnings statement, news report or trading session represents a new opportunity for fear and uncertainty to reemerge.

Fortunately, next week’s economic calendar remains quite light, although retailers may just weigh in with “doom-and-gloom” holiday predictions.  Earnings season may be weak as well (with even more pessimistic outlooks), so investors should not overreact even if Texas Instruments Inc. (TXN), Halliburton Inc. (HAL), Amazon.com Inc. (AMZN) and others fail to meet expectations.  Volatility should continue and the days of triple-digit index moves (often up and down in the same day) may be here for a while.

So try not to get so overwhelmed with the seemingly never-ending challenges and uncertainties: The credit crisis, weak economy, plunging stock market, presidential election, etc.  Take everything one day at a time. The government actions are starting to thaw out the credit concerns and lending/borrowing should return to a somewhat normal level in due time. Declining energy and commodities prices should improve the inflation picture, which will help the consumer and allow the U.S. Federal Reserve to better focus on the struggling economy. Stocks tend to be leading indicators and often begin to rise even when the economy remains in the midst of a recession. The election (regardless of the victor) represents a new beginning, a new direction, a new attitude, and hopefully renewed confidence.

Market Matters

So much for less government.  With the presidential election at the homestretch, the candidates pushed their respective plans to rescue the economy in an attempt to appeal directly to Main Street folks like Joe the Plumber (basically more tax cuts vs. “spread the wealth”).  The bailout moves continued as U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. (a self-proclaimed free-market capitalist, if there ever was one) announced that the government would invest $250 billion into the nation’s banks to stabilize the financial system.  Proponents refused to label it as”nationalization.” But don’t tell that to the pundits on Fox News this past weekend: Some went as far as to question whether the U.S. government is embracing full-fledged “socialization.”

The Federal Deposit Insurance Corp. (FDIC) will be expanding its insurance program on non-interest bearing accounts, a move designed to assist small businesses. Throughout Europe and Asia, similar moves also were approved, as the global efforts appeared to be well coordinated.  The Swiss National Bank took over about $60 billion of bad assets from UBS AG (UBS), leaving the institution with one of the cleanest balance sheets around.  Morgan Stanley (MS) received a $9 billion investment from Mitsubishi Bank UFJ Financial Group Inc.  (ADR: MTU), giving the Japanese giant a 21% interest in one of the last remaining domestic financial super-powers (and at better terms than initially negotiated).  JPMorgan Chase & Co. (JPM) posted an 84% decline in third quarter profits (which still somehow bested analysts’ pessimistic expectations).  Likewise Wells Fargo & Co. (WFC), Citigroup Inc. (C), and Merrill Lynch & Co. Inc. (MER) (still under its pre-Bank of America Corp. (BAC) brand) suffered through “challenging” quarters, to say the least, and their short-term outlooks do not look any better. (Bring on those direct government investments).

While the technology sector struggles from dire expectations of future corporate IT expenditures, eBay Inc. (EBAY), Google Inc. (GOOG), Intel Corp. (INTC) and International Business Machines Corp. (IBM) all announced relatively strong quarters – IBM even “pre-announced” its strong results – and chipmaker Advanced Micro Devices Inc. (AMD) reported a narrower-than-expected loss.

Intel, IBM and AMD were all three topics of Money Morning’s new “Hot Stocks” feature, which chronicles the prospects of companies that are in the news.

Microsoft Corp. (MSFT) apparently still thinks a deal to acquire Yahoo! Inc. (YHOO) would make “economic sense,” though that $33 a share offer most likely would no longer apply for a stock trading below $13 a share.  General Motors Corp. (GM) intensified its merger talks with Chrysler Corp. and continued to explore sale options for its Hummer unit. But does $70 a barrel oil make those cool gas-guzzlers look attractive again?

Speaking of oil prices, the “black gold” plummeted to its lowest level in 13 months as prospects for a recession – or worse – continued to dampen energy demand.  Goldman Sachs Group Inc. (GS) became the first to predict a decline as far as $50 a barrel, ironically just a few months after its analysts called for $200 oil over the next two years.  The 50% percent slide in prices has prompted a panicking Organization of the Petroleum Exporting Countries (OPEC) to schedule an emergency meeting on Friday in Vienna, Austria. It will be the cartel’s 150th meeting. Gas prices are following in step as they pushed downward – in some areas through $3 a gallon, a 25% drop from the $4.11-per-gallon highs set in July.

Even so, as Money Morning reported, Merrill Lynch sees oil at $150 a barrel and gold at $1,500 an ounce, though its analysts provided no time frame.

Volatility continued as triple-digit-daily moves remain the norm.  Last Monday, the Dow Jones Industrial Average broke its eight-day (2,400 point) losing streak with a 936-point gain, its largest ever recorded.  Profit-taking and hedge fund redemptions followed, though bargain hunters reemerged at week’s end (until the final hour of trading).  The limited investor confidence was a welcome sign after the mass hysteria of the past weeks.

The credit markets seem to be slowly (but surely) recovering with the government actions, though some banks remain hesitant to lend and businesses and consumers have been slow to borrow.  Then again, given time, more government just may work.

Economically Speaking

At this point, there should be no real surprises in terms of weak economic data.  However, when September retail sales was reported as down 1.2% (for the third consecutive month) and the Philly Fed survey plunged to its worst showing in 18 years, investors were surprisingly caught off guard.  While the “official” definition of a recession is two consecutive quarters of negative growth, many analysts claim the country is already mired within one’s midst and the numbers will continue to reflect such weakness well into 2009.  The Fed Beige Book depicted that each region of the country is struggling and U.S. Federal Reserve Chairman Ben S. Bernanke did not rule out an additional rate cut at (or before) the Fed’s late October meeting.  Housing starts fell to the lowest level in 17 years and many believe that any recovery must start with a rebound in this long-suffering sector.  In fact, construction activity has plunged over 30% since September 2007.  (Could the next government intervention involve some direct mortgage relief for ailing homeowners?).

Now for some positive news (for a change).  The inflation picture is starting to look more promising as falling energy and other commodity prices begin to work their way through the U.S. economic system.  The wholesale inflation gauge – known a the producer price index, or PPI, fell for the second straight month, and consumer prices remained flat from August as gasoline prices slowly retreated.  Bear in mind, just a few short months ago, inflation was high on the Fed’s radar screen as Bernanke and friends were forced to tackle a weak economy and rising prices.  While the Fed’s “challenges” are far from over, talks of higher rates have disappeared and policymakers can focus all their energies on repairing the sluggish economy. 

Source: Here’s Why the Stock Market Relief of Late Last Week May Not Last