And as goes the semiconductor industry, so goes the U.S. economy.

These days, microchips are present in virtually every type of product – from coffee makers to cars: If it plugs into the wall or takes batteries, chances are good there’s a semiconductor inside.

Given the microchip’s ubiquitous nature, the companies that make them – as well as the companies that make the chipmaking equipment – can be viewed as a kind of leading economic indicator. Companies that intend to produce products down the road have to place orders for chips or for equipment now, meaning an uptick in semiconductor-sector business activity today and represent a jump in broader economic growth tomorrow.

“While most chip companies have as yet cited but modest improvement, and forecasts have been held in check, signs of a strong upturn are brewing that will significantly improve upon higher – but still modest – expectations,” Rick Whittington, an analyst with JSA Research wrote in a Forbes column earlier this summer. “High proprietary chip content stocks are poised for breakout sales and earnings, probably quickly returning to levels before last summer’s plunge.”

While consumer spending remains the chief U.S. economic catalyst, accounting for more than two-thirds of gross domestic product (GDP), business spending remains a crucial contributor – especially at a juncture in which consumer confidence has been flayed. Indeed, business spending has stabilized and will return to growth in 2010, semiconductor and other electronics manufacturers believe. In the meantime, they are ramping up production to meet what they believe is a growing consumer demand.

Microchips are used in a broad scope of products: DVD players, automobiles, calculators, coffee makers and televisions, telephones – as well as such stalwarts as personal computers.

Like other economic indicators, electronic-order levels have yet to traverse the economic neutral zone to break into positive territory (marked by the “year-over-year growth” label) but at least the hemorrhaging is subsiding: Sales of semiconductors in North America in the month of July were $3.1 billion, an increase of 5.9% from June, when sales were $2.9 billion, according to the Semiconductor Industry Association (SIA). The continent’s 8% year-over-year decline is significantly less than the rest of the world’s 18.2%, and was the smallest decline of any major market in the world.

“Sales of consumer products such as netbook PCs and cell phones are supporting the modest recovery that is now under way,” said SIA President George Scalise. “Purchases of information technology products by the enterprise sector continue to be tempered by caution and longer replacement cycles. There is evidence of a return to seasonal industry patterns.”

That evidence was further backed up by trade organization Semiconductor Equipment and Materials International (SEMI), which said North America-based manufacturers posted a book-to-bill ratio of 1.06, meaning that $106 worth of orders were received for every $100 of product shipped.

Inventories for many chipmakers are at a lower level compared to their average level for the past three years, Purchasing.com reported, citing market research firm iSuppli Corp. But with the holiday season approaching and retail inventory levels already lowered by a weak consumer demand in the first half of 2009, chipmakers are once again ramping up production, according to iSuppli analyst Carlo Cireiello.

Semiconductor inventory levels are now at “appropriate levels, down from previously excessive positions,” Ciriello told Purchasing.com. Ciriello forecasted in July that chipmakers would begin building inventories 5.5% in the third quarter and 1% in the fourth.

Semiconductors are used in a broad scope of products: DVD players, automobiles, calculators, coffee makers and televisions, telephones. Money Morning took a look at a few of the bigger players (and related companies) in the industry.

Chipmakers Fuel Business Spending

Intel Corp. (Nasdaq: INTC) reported its first quarterly loss in July, losing $398 million after setting aside $1.45 billion in funds to pay a fine from the European Union, which said Intel used illegal rebates to thwart competitors, Bloomberg News reported. Still, the world’s largest chipmaker saw its sales beat analyst estimates and the company late last month boosted its third-quarter revenue forecast to at least $8.8 billion, from an earlier projection of $8.1 billion.

Before Intel raised its guidance, analysts polled by Bloomberg were expecting sales of $8.57 billion. A compilation of analysts’ estimates by Thomson Financial Network now has the chipmaker’s revenue at $8.93 billion. Intel’s revenue in the third quarter of 2008 was $10.2 billion.

“Intel’s second-quarter results reflect improving conditions in the PC market segment with our strongest first- to second-quarter growth since 1988 and a clear expectation for a seasonally stronger second half,” Chief Executive Officer Paul Otellini said.

The increase in Intel’s sales forecast could be attributed to a rebound in PC orders by consumers in Asia, and Edward Jones & Co. analyst William Kreher says the higher guidance bodes well for the technology industry because Intel is a barometer for spending.

“Consumers are driving the strength and the relative strength in PCs,” Kreher told Bloomberg. “We do have an expectation that 2010 will bring renewed demand from the corporate sector as well.”

Chipmaker Marvell Technology Group Ltd. (Nasdaq: MRVL) Chief Executive Officer Sehat Sutardja also sees initial growth by consumer products such as cell phones, e-books and mobile Internet devices. Marvell makes chips that are used in everything from computer hard drives to smartphones such as Research in Motion Ltd.’s (Nasdaq: RIMM) BlackBerry and Apple Inc.’s (Nasdaq: AAPL) iPhone.

“Demand for a lot of consumer devices seems to be picking up from six months ago, both in the U.S. and non-U.S., particularly non-U.S.,” Marvell Chief Financial Officer Clyde Hosein said in an interview with Reuters. “That has picked up substantially since the April time frame and continues to improve or maybe accelerate.”

Investing to Build a Better Chip

If the health of microchip firms is a leading indicator of the outlook for the overall economy, then the outlook for semiconductor-equipment manufacturers is a harbinger of what’s to come for chipmaking sector.

The reason is simple: As chips become more powerful, they also become more complex – meaning the chipmaking process becomes increasingly demanding and deft. So before semiconductor firms can ramp up in a big way, they need to invest in the latest and greatest equipment.

That’s where the equipment stocks come into play.

Capital expenditures – known as “capex” in Wall Street parlance – is a closely watched statistic. Chipmaking firms invest in new gear to expand capacity, to move to the newest technology, or both.

Because of the global financial crisis, so-called “capacity utilization” – the number of chips being turned out as a percentage of what those factories are capable of turning out – plunged to 55.6% in the first quarter of 2009 from 89.7% during the same period a year ago, the SIA reported.

And with more than 40% of the industry’s “fab” capacity sitting fallow, new plants aren’t being built – especially since they cost about $3 billion each, TheStreet.com reported. Several of the equipment players have filed for bankruptcy as a result.

Coming into this year, only three semiconductor firms planned to invest more than $1 billion in new equipment: Intel, Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE ADR: TSM) and Samsung Electronics Co. Ltd.

That’s down from eight companies in 2008 and 16 in 2007.

But the tide appears to be turning – and investments will ramp up as the worldwide economy improves. Already, United Microelectronics Corp. (NYSE ADR: UMC) announced it is boosting its outlays for new equipment to $500 million from the $400 million it planned earlier in the year. Chartered Semiconductor will increase capex to $500 million from the $400 million announced earlier this year. That will be an increase from the $349 million the company spent in 2008.

Chartered Semiconductor Manufacturing Co. Ltd. (Nasdaq ADR: CHRT) is boosting its outlay from the $375 million planned early in the year to $500 million now, according to TheStreet.com. And Toshiba Corp will spend $900 million – down from $3.2 billion last year, but still more than many analysts initially expected.

Additionally, U.S.-based equipment firms will benefit from a weaker U.S. dollar, which makes American products cheaper in foreign-currency terms.

One such U.S. firm is longtime industry leader Lam Research Inc. (Nasdaq: LRCX), which is experiencing an improvement in its business despite a loss in its recently reported fourth-quarter results. Those results included better-than-expected revenue.

During the fourth quarter, which ended June 30, the company said “business conditions improved … contributing to Lam’s ability to show improved financial results for the quarter. Shipments and revenues increased as a result of customer investments to add [leading-edge capacity] in both foundry and memory.”

And while business continues to improve, Lam said it hasn’t lost sight of the need to carefully manage cash and to invest considerable care in choosing where to make next-generation strategic investments.

Lam’s shares have surged nearly 42% so far this year, although they remain 21% below their 52-week high of $37.96. The shares closed yesterday at $30.16, up 5 cents each on a day the major U.S. stock indices were down for a fourth-straight day.

Older PCs Set Stage For Hardware Refresh

Dell Inc. (Nasdaq: DELL) Chairman and Chief Executive Officer Michael Dell is on a mission to save his company $4 billion a year.

The company outsourced 40% of its manufacturing as of its second quarter, helping it achieve an 18.7% gross margin that exceeded analysts’ expectations. Dell’s profit of 28 cents a share also beat Wall Street’s estimate of 28 cents.

CEO Dell sees Microsoft Corp.’s (Nasdaq: MSFT) October 22 release of Windows 7, as well as faster processors from Intel, as the ignition for PC and server purchases next year.

“The size of the installed based of old hardware has never been greater,” Dell said in a conference call with analysts. “I’m here to tell you there’s going to be a refresh cycle next year. It’s not going to come in the first month or the second month, but over the course of the year.”

Dell remains confident that a majority of its business customers are deferring purchases and will accelerate IT spending to take advantage of technology improvements like Windows 7 and Microsoft’s Office 2010, according to Chief Financial Officer Brian Gladden.

“This acceleration remains predicated on an improving economy and related improvements in customer profits and government tax receipts,” Gladden said.

For Hewlett-Packard Co. (NYSE: HPQ), its earnings of 91 cents a share narrowly beat Wall Street estimates of 90 cents, and Chief Executive Officer Mark Hurd sees stabilization, but was reluctant to say the bottom has been reached.

“Business is stabilizing, and we are confident that HP will be an early beneficiary of an economic turnaround and will continue to outperform when conditions improve,” Hurd said.

Both H-P and Dell have already credited consumers in Asia for a rebound in orders in PCs, Bloomberg reported.

Source: Semiconductor and Electronics Makers Anticipate a Bounce in Business Spending Next Year

Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE:AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains,MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according toBloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

“Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters,” Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity.  Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC)reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and LehmanBrothers Holdings Inc. (OTC: LEHMQ) failures.  Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode.  Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner.  In fact, natural gas plunged to a seven-year low.

Economically Speaking

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation.  For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing.  New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006.  Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed.  Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward.  Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months.  Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Weekly Economic Calendar

Source: Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors ]]> http://www.contrarianprofits.com/articles/soaring-prices-for-aig-fannie-and-other-financial-stocks-sending-mixed-messages-to-investors/20240/feed 0 http://www.contrarianprofits.com/articles/weak-consumer-data-saps-wall-st-gains/20219 http://www.contrarianprofits.com/articles/weak-consumer-data-saps-wall-st-gains/20219#comments Fri, 28 Aug 2009 17:00:25 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=20219 U.S. stocks gave up most of their gains on Friday after initially spiking to 10-month highs as weak consumer sentiment data offset an upbeat forecast from chipmaker Intel and better-than-expected profit from computer maker Dell.

A Reuters/University of Michigan survey showed consumer confidence fell to its lowest in four months in August on worries over high unemployment and dismal personal finances, though the mood improved from earlier this month.

The Nasdaq was buoyed after Intel Corp raised its outlook for third-quarter revenue and Dell Inc , the world’s No. 2 personal computer maker behind Hewlett-Packard Co , posted a strong quarterly performance and several brokerages raised their price target on the stock.

The PHLX semiconductor index <.SOXX> rose 2.2 percent, while Dell shot up 4 percent…

– thanks chiefly to three key factors. Indeed, executives said that Apple:

• Is gaining market share in its computer business, while PC rivals are losing ground.
• Once again obliterated forecasts in its iPhone business.
• And continues to see growth in its company-operated retail unit – at a time when many retailers are literally running on fumes.

Apple said earnings zoomed 15% in its fiscal third quarter – the best non-holiday quarter in the company’s history – at a time when virtually every other major electronics manufacturer is looking at slumping sales and market-share performance.

Apple’s business “continues to hold up really well in this tough economy,” Shaw Wu, an analyst at Kaufman Bros., told Bloomberg News.

Take computers. Apple’s computer business is defying trends in the category. Overall, industry PC shipments slumped between 3% and 5% during the April-June quarter. And market leaders Hewlett-Packard Co. (NYSE: HPQ) and Dell Inc. (Nasdaq: DELL) showed declines in PC sales of 19% and 27% respectively in their last reported quarters.

But Apple said that computer sales grew 4% following its June price cuts on some of its popular laptops. The company also said it sold 2.6 million Macs in the just-finished quarter, a jump of 18% from the quarter that ended in late March. One key: About half of the consumers who purchased Macs in one of the company-run Apple retail stores had never before owned an Apple computer, the company said.

While Apple’s Mac platform has made modest gains on Microsoft Corp.’s (Nasdaq: MSFT) Windows in the first half of the year, Apple seems just fine with not being the best-selling player in the market.

“Our goal is not to build the most computers; it’s to build the best,” Cook told analysts in the conference call. “At this point, we don’t see a way to build a great product for this $399, $499 [price point],” referring to the rise in popularity of sub-$500 netbooks, which are smaller, lightweight laptop PCs that are designed primarily for navigating the Internet.

Sales of the company’s popular iPhone continue to defy analyst estimates: Apple moved more 5.2 million iPhones in its third quarter ended June 30, more than sevenfold of last year’s 717,000. There are two driving forces behind the huge jump: The release of the iPhone 3GS in June, and the simultaneous price cut of the 8-gigabyte 3G model to $99.

In the quarterly conference call Tuesday, Apple execs would not break down sales of each model, citing competitive reasons. However, the 3GS model, which sold more than 1 million units in its first weekend, remains in short supply and Apple is “working very hard” to fill demand, Chief Operating Officer Tim Cook told investors.

In the midst of a global downturn, the performance of Apple’s company-operated retail chain is enough to make rivals turn green. Even in the face of Microsoft opening stores this fall near Apple’s retail locations and tightening consumer spending, Apple is seeing modest sales growth at its 258 stores, six of which were opened in the last quarter. Retail sales rose to $1.47 billion in the quarter, compared to $1.44 billion in the same quarter last year.

Apple remains on track to open 25 stores in its fiscal year ending September 30, Chief Financial Officer Peter Oppenheimer said.

Apple easily exceeded Wall Street’s expectations for its third quarter, reporting a net income of $1.23 billion, or $1.35 a share, on revenue of $8.34 billion. That compares to a net income of $1.07 billion, or $1.19 a share, on revenue of $7.46 billion in the same quarter last year.

Analysts were expecting earnings of $1.17 a share on revenue of $8.20 billion.

Looking ahead, Apple’s forecast is for earnings of $1.18 to $1.23 per share on revenue of $8.7 billion to $8.9 billion. The company’s guidance is conservative when matched up with Wall Street’s average earnings estimate of $1.30 per share on $9.05 billion in sales.

Much has been made of Apple’s huge cash reserves, now at $31.1 billion. “Our investment priority for the cash continues to be preservation of capital, which has served us well in the current environment,” said Oppenheimer, who added that in the current quarter Apple did make a $500 million payment to Toshiba Corp. for the manufacturing of the flash memory that is found in many of Apple’s products, including the iPhone.

While acquisitions made by Apple are rare, if it does make any, it will likely be for a small company that can easily be integrated into its existing projects.

Although Apple has long been one of Wall Street’s high-tech darlings, analysts continue to warm to the company’s current game plan, and are upgrading its stock – a potentially bullish development for existing shareholders, or for investors considering a move into Apple shares.

Canaccord Capital Corp. said Apple’s decision to add video functionality to the iPod lineup is “very positive” as it expands its market into the low-end camcorder area, according to bloggingstocks.com. Canaccord also views the launch of the iPhone 3GS in all countries by the end of this year as another strong potential catalyst for Apple sales and profits.

Canaccord boosted its rating on Apple’s shares to “Buy” from “Hold.” It also raised its target price from $150 to $200.

Shares of Apple climbed 3.45% yesterday (Wednesday), or $5.23 to close at $156.74.

Source: Hot Stocks: Three Reasons Apple is Bucking the Recession

With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C)or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO),McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq:AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await.  As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days.  Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.

Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street.  Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations.  After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out.  CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others.  But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations.  A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters.  Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq:DELL) warned that lower margins are impacting its operations andGoogle Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE:MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (07/10/09)	Current Week (07/17/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	8,146.52	8,743.94	-0.37%
NASDAQ	1,577.03	1,835.04	1,756.03	1,886.61	+19.63%
S&P 500	903.25	919.32	879.13	940.38	+4.11%
Russell 2000	499.45	508.28	480.98	519.22	+3.96%
Global Dow	1526.21	1,629.31	1,561.11	1,664.23	+9.04%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.30%	3.65%	+141 bps

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul.  Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data.  Stocks surged early on the Goldman news and soared right through the technology reports.  Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts.  Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades.  Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending.   Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges.  Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength.  Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year.  Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal).  The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

Weekly Economic Calendar

Source: Market Recoils as CIT Edges Toward Bankruptcy

Source: Investment News Briefs Tuesday, July 14, 2009

Google Inc. (Nasdaq: GOOG), not satisfied owning the search engine market, yesterday (Wednesday) revealed it is going to assault Microsoft Corp. (Nasdaq: MSFT) on the turf it has dominated for two decades: the operating system (OS).

In a blog posting, the Mountain View, Calif.-based company introduced the Google Chrome Operating System, which shares the same name as the web browser it introduced in September. Google expects the OS to be available in the second half of 2010, and it initially will run onnetbooks, or low-cost laptops designed for Internet access. The company is working with multiple manufacturers such as Acer Inc., Hewlett-Packard Co. (NYSE: HPQ) and Toshiba Corp. to bring Chrome OS-backed netbooks to the market, Google said.

No. 1 computer seller H-P told the Dow Jones Newswires that it is “studying” the Chrome OS.

“We want to assess the capability it may have for the computer and communications industries,” said H-P spokeswoman Marlene Somsak.

Dell Inc. (Nasdaq: DELL) is also giving consideration to Chrome OS.

Analysts were mixed on the news.

“There is a possibility that the new OS can break the paradigm Microsoft and Intel created over the past 20 years,” aid Yukihiko Shimada, a computer analyst at Mitsubishi UFJ Securities Co. told Bloomberg News. “There is plenty of business opportunity for Google in this market.”

However, FBR Capital Markets Corp. (Nasdaq: FCBM) analyst David Hilal said Google could capture some share on the netbook front, but could find it tough to get beyond that.

“I really don’t picture Google going upstream to laptop or PC market,” he said in an interview with MarketWatch.com. “They may try, but that is a much tougher row to hoe.”

Comparing the Chrome OS to its Chrome web browser, Google said it is “going back to the basics and completely redesigning the underlying security architecture of the OS so that users don’t have to deal with viruses, malware and security updates. It should just work.”

The move represents a natural progression for Google, which for years has been experimenting in applications beyond its search. Its most successful experiment is undoubtedly Gmail, which earlier this week left its beta phase after five years. Since Gmail’s inception, the company produced Google Apps, which gives users a central location for calendar, word processing and spreadsheet applications-all of which are compatible with Microsoft Office applications.

Google Apps, a prime example of cloud computing, allows for a more consistent collaboration between users: Instead of emailing attachments, the document will be on a central server where anyone with permission can access edit it within the web browser from any computer.

Chrome OS will utilize the same “cloud” that Google Apps is using. For app developers, “the web is the platform,” Google said. This will give Chrome OS a competitive advantage over the top three operating systems on the market right now (Windows, MacOS and Linux) because any app that runs in the Chrome OS will also run on the others.

“We hear a lot from our users and their message is clear-computers need to get better,” Google said. Whether Google can make an impact on the quality of computers is an entirely different issue. It faces a steep uphill battle against not only Microsoft, but also Apple Inc. (Nasdaq:AAPL), which is slowly eroding Microsoft’s commanding lead in the OS market.

Last November, Microsoft’s Windows OS market share dropped to 89.6%according to market research firm Net Applications. That marked the first time the OS held less than a 90% share of the market. In May, that share was down to 87.8%, while Apple’s MacOS was up to 9.8% from November’s 8.9%.

The news of a Google OS could ice its relationship with Apple, where Google Chief Executive Officer Eric Schmidt has a seat on the board of directors. The two companies have already been competing on the mobile phone front with Google’s Android OS competing with Apple’s iPhone.

In November 2007, when Google announced it would develop the OS for a line of T-Mobile USA Inc. phones, some analysts were surprised that Schmidt would remain on the board of operations at both companies.

In May, The New York Times reported the Federal Trade Commission launched an inquiry into the close ties of the two boards. And now with the Chrome OS news, respected tech site CNET is calling for Schmidt to step down from Apple’s board.

When Chrome OS is released, it will mark the third major front in its war with Microsoft. The other two are cloud applications and search.

Microsoft is attempting to chip away at Google’s ubiquitous search engine with its newly launched Bing search engine. To a lesser extent, Google competes with Microsoft with its Chrome web browser (which has 1.8% of the market share in May versus Microsoft Internet Explorer’s 65.5%) and on the mobile phone front, pitting its Android OS against Windows Mobile.

Chrome OS, an open source project that will have its code readily available for anyone to see-will be free, Google spokesman Eitan Bencuya told Money Morning in an e-mail. This strategy removes an important barrier for many and will likely serve as a funnel to Google’s other products and lucrative ads.

Microsoft is set to debut its latest version of Windows, Windows 7 on October 22. Market research firm International Data Corp. (NYSE: IDC) expects Windows 7 to become the dominant OS by 2012.
Shares of Google were boosted 1.48% by the news yesterday, closing at $402.49, up $5.86.

Hot Stocks: Google Fires Shot Across Microsoft’s Bow with New Operating System ]]> http://www.contrarianprofits.com/articles/google-fires-shot-across-microsoft%e2%80%99s-bow-with-new-operating-system/18922/feed 0 http://www.contrarianprofits.com/articles/return-on-equity-roe-find-explosive-momentum-stocks-with-this-financial-ratio/17436 http://www.contrarianprofits.com/articles/return-on-equity-roe-find-explosive-momentum-stocks-with-this-financial-ratio/17436#comments Tue, 02 Jun 2009 20:40:52 +0000 Dr. Scott Brown http://www.contrarianprofits.com/?p=17436 Green Mountain Coffee Roasters produced a return of over 113% this year alone. When powerful momentum stocks are charging upwards, it can be difficult to know when to get on board. But it’s not as difficult as you would believe.

If you want the inside track on the best momentum stocks with ultra-explosive gains, throw on your “x-ray glasses” and focus on one of the most useful financial ratios around.

It’s called return on equity (ROE), but in many ways it tells us so much more.

ROE is one of the best measures of a corporation’s profitability. It shows you how much profit the company generates with the money shareholders have invested. Let me show you how to easily pull this number out…

GM has lost an aggregate $82 billion in the past four years even as it slashed production capacity, nameplate brands – and more than 100,000 U.S. jobs. It needs to cut another 19,000 workers by 2012 to bring its domestic employment down to 72,500 jobs.

GM on Saturday passed a major milestone ahead of a bankruptcy filing planned for today (Monday) as the deadline passed for bondholders to accept an exchange offer brokered by the Obama administration.

As of late Saturday night, GM would not comment on how many investors had tossed in their support for the debt-for-equity swap that would have them surrender $27 billion in corporate bond debt in return for as much as 25% of a restructured GM. However, the company did say this enhanced deal already had the support of investors who held 35% of GM’s bonds. The deadline passed at 5 p.m. Saturday.

Fund managers and analysts told Reuters that that it was possible that this enhanced  bond offer could have attracted a majority of the GM bond investors by the deadline. Under the new offer, bondholders would have a recovery of around 9 cents on the dollar, up from an estimate of zero to 5 cents under the previous offer. GM bondholders last week rejected a proposal that would have given them a 10% stake in a reorganized GM.

“The warrants and the improved capital structure make for an improved recovery for bondholders,” Brian Johnson, an analyst for Barclays Capital PLC (NYSE ADR: BCS), told the news service. “In terms of the bankruptcy process, we expect the likely bondholder assent to smooth the process.”

The United Auto Workers union (UAW) on Friday cleared the way to the bankruptcy filing when it overwhelmingly approved a new labor pact that lets GM slash costs.

GM has struggled in recent years to compete, hurt by its truck and SUV-dominated vehicle line-up and a deep plunge in U.S. vehicle demand.

Market Matters

In the holiday-shortened work week, investors searched for  the tonic needed to escape the “excessive” volatility that still exists in the markets.  How did that cure-all work out?  In three consecutive sessions, the Dow Jones Industrial Average jumped 193, plummeted 173, and finally rebounded 104 points.  Meanwhile, the yield on the 10-year U.S. Treasury, the perceived safe-haven for risk-averse investors, soared by 30 basis points during the week and its declining value prompted many to rethink their “flight-to-quality” strategies.  After the recent talks that Standard & Poor’s Inc. may cut its rating on UK debt, investors began speculating that the mass domestic borrowings (to rescue virtually every industry and near-bankrupt company) will take its toll on US debt ratings as well.  While Moody’s Investors Service Inc. (NYSE: MCO) offered a bit of confidence by proclaiming the Aaa rating remains “stable,” it did leave the door open for a future downgrade. Fortunately, the week’s treasury auctions were generally well-received, though investors remain cautious that demand may subside in the future as the deficit balloons.  Stocks followed bonds for a change as traders unloaded equities on weakness in fixed income, only to buy again after the favorable auctions (among other news).  And the volatility continued.

With its bankruptcy filing, GM is merely taking a step to following in Chrysler LLC’s footsteps. Chrysler hopes to move beyond its own bankruptcy as a judge considers its restructuring via the Fiat SpA (ADR OTC: FIATY) deal.

A Federal Deposit Insurance Corp. (FDIC) report showed that banks earned $7.6 billion in profits in the first quarter, rebounding from the first quarterly loss for the industry in 18 years.  Before executives could award themselves (excessive) bonuses, the report added that the number of institutions considered “problem” climbed from 252 to 302 and said that delinquencies rose across most loan types.

In other corporate news, Microsoft Corp. (Nasdaq: MSFT) is set to launch “Bing,” its upgraded search engine on June 3 and Yahoo! Inc. (Nasdaq: YHOO) remains open to a partnership (after last year’s failed buyout) if offered a “boatload of money.”  Costco Corp.’s (Nasdaq: COST) earnings fell by more than analysts expected; Dell Inc. (Nasdaq: DELL) continued to struggle from a decrease in IT spending; Time Warner Inc. (NYSE: TWX) plans to spin-off AOL by year-end.  The Organization of the Petroleum Exporting Countries (OPEC) met and held production levels steady, though crude prices surged above $66 a barrel for the first time in six months and prices now stand almost twice as high as its mid-February level.

Economically Speaking

A recent survey by the National Association for Business Economics showed that 93% of the respondents believe the recession will end in 2009, with almost 75% of them seeing a third-quarter recovery. Still, most feel the rebound will be slow to develop as unemployment continues to climb (the survey says it will average 9.1% this year).   The results also predict gross domestic product (GDP) to contract by 1.8% in the second quarter, before turning positive (though ever-so-slightly) over the latter six months of the year.  By comparison, the first quarter GDP revision was reported as down 5.7%, a modest rebound from the 6.1% initially released, though weaker than many prior forecasts and still reflective of some pretty dire domestic economic conditions.

Since the consumer accounts for two-thirds of the activity within the economy, analysts point to some favorable sentiment data as further proof that the recession is nearing an end.  In May, the Conference Board said that consumer confidence experienced its best showing in eight months, while the Reuters/U of Michigan Index also posted stronger results.  Renewed activities should be welcome news to retailers and manufacturers alike, some of whom will be counted on to resume hiring over the next few months as they reap some rewards to their bottom lines.

April housing data also highlighted the week’s economic releases as both new home (+0.3%) and existing home sales (+2.9%) posted gains.

However, the inventory of unsold properties continued to climb and the median sales prices fell from already weak levels.  Delinquencies remain on the rise as 12% of all homeowners have fallen behind on their mortgages and foreclosures rates on even the prime borrowers (with decent credit) have surged in recent times.  Even though housing still has a way to go before the “worst of times” officially will be considered over, some early signs of a rebound in activity may be emerging.

Weekly Economic Calendar

Source: Bankrutpcy Will Let General Motors Move Forward

This from Lee:

In this globalized world, it’s no surprise to see the world’s financial markets intertwine in some fashion. That’s why we continue to see volatility run at much higher levels – be it in the stock market or commodities sector.

In the past, the physical and agricultural commodities have typically had very loose ties to the movement of the stock market. After all, why would the falling share price of Dell Inc. (Nasdaq: DELL) have anything to do with the price of corn or sugar? Ordinarily, no reason at all – but it’s not as simple as that any more…

A Changing Commodities World

The commodities world has changed in recent years – and if you know how to play volatility to your advantage, it’s changed for the better. Here are just three quick reasons why…

1. Instead of farmers merely using the commodities markets to hedge their crop, commodities have become more of a speculative game today.
2. It’s become very easy to trade commodities with a click of a mouse today.
3. Commodities are now seen as a viable and valuable portion of investment portfolios.

As a result of these three reasons, commodities are more subject to large money flows into and out of markets. With more individuals holding more commodities, they can sell off just like any other asset. And this can occur at the same time and with the same force as it does in the stock market.

In particularly volatile, and often irrational, markets like the current one, once the herd mentality takes over, the true fundamental value of crops can get unceremoniously shoved to the back burner in favor of what the crowd is doing.

In any event, the markets seem to have decided which direction they’re going to head in: Down…

Remarkable Value Amid The Market’s Rubble

Speaking of that irrationality I just noted, that’s pretty much the only way to sum up the price of numerous top-quality blue-chip stocks today. Many are trading at 15-year lows, with some even under $10.

But while this may cause some investors to throw a big pity party, if you believe in the long-term viability of the markets, putting some of your money to work today while everyone else is selling, it could present one of the greatest buying opportunities in a lifetime.

As for commodities, they will continue to trade on long-term fundamentals such as crop-growing cycles, weather patterns, herd size, supply and demand, etc. And there are some terrific opportunities here, too. So let’s get to it…

OPEC’s Winter Move Might Not Play Out Till Summer

In July 2008, the oil market began a downtrend that is still going strong today. The black stuff continues to make new lows, interspersed with quick bouts of short-lived upside rallies.

But once the price hits the descending moving averages (see chart below), the market gets knocked down again.  The combination of large oil supplies and waning worldwide demand has kept oil on the defensive, with $25 a barrel still in many analysts’ sights.

Three months on from OPEC’s supply cuts, we’re still waiting for the decision to factor into the market. At the moment, the farther-dated oil futures contracts are still moving lower in tandem with the front-month futures contracts.

I don’t think we’ll see the cuts make a dent in the market until at least June, so it looks like status quo for oil for the time being.

Two Ways To Play Our Bullish Outlook On Natural Gas

In a word… bullish.

That’s my take on the natural gas market, as the front-month futures contract has dipped below the pivotal long-term support area of $4.500 per MMBtu – a solid support level since late 2002.

At current levels, I continue to have a long-term bullish outlook. So how can you play the market?

1. Bullish trades involving long-dated, limited-risk options strategies (like option credit spreads) on natural gas futures options contracts, which trade on the NYMEX.
2. Invest in the Natural Gas exchange traded fund UNG that trades on the New York Stock Exchange.

I currently hold bullish natural gas positions in my Instant Money Trader and Triple Zone Profit Trader service that we run.

Knowing how the market can react to the upside with the threat of cold winters in the Northeast (where a majority of natural gas is consumed) and possible damaging hurricane activity on natural gas rigs in the Gulf of Mexico, I feel bullish plays here have a great risk/reward profile.

When You See The Dip… Buy

Amid all the financial market’s doom and gloom, one of the lone bright spots comes from a sector that we’ve mentioned as a pocket of strength for several weeks here.

It is, of course, the metals market – home to stalwarts like gold and silver.

Since December 2008, both have bounded along and made large upside moves. April gold futures have now crossed the watershed $1,000 per ounce mark – an area not seen since July 2008 – while May 2009 silver futures have managed to pop through $14.50 an ounce – silver’s first foray to that level since August 2008.

In mid-December, we noted that the gold and silver markets were beginning to look tradable again after washing out the speculative selling that had knocked the sector down from its all-time highs in July 2008.

With more “rational” investing now in these markets, and with global stock markets and economies still in turmoil, it continues to keep hard assets like gold and silver as the “go-to,” en vogue safe haven play.

Since we’ve already reached our near-term gold price forecast from the my previous column, plus our silver price outlook, too, we now believe that investors should step into bullish plays on large pullbacks in the gold and silver markets. It’s a strategy that should serve you well for the rest of 2009.

Look for gold to re-test the $865 area, while silver should re-test the $12.00 per ounce level.

And the way to play it…?

Other than looking at limited-risk option strategies from the COMEX futures options market, you can invest in the gold and silver markets through shares in ETFs like the SPDR Gold Trust (NYSE: GLD), Market Vectors Gold Miners (NYSE: GDX), or iShares Silver Trust (NYSE: SLV). You can also play options on these ETFs.

Drifting Below Support… And Creating Better Value

Having touched support levels that we thought would hold, the coffee and cotton markets have continued to drift lower. This will create an even better level to go long from and we’re just waiting for both markets to find a level that sticks.

With A Big Move Back Down, OJ Is Setting Up A Great Potential Entry Point

Lastly, I want to show you a long-term chart for orange juice futures.

This is another market we’ll be watching closely, as it’s now just about retraced the big upside move it made since the wave of hurricanes hit the Southeastern portion of the United States, beginning in 2004.

Each year, during late spring/early summer, the OJ speculators come out of the woodwork, trying to capitalize on potential disaster trades.

If OJ futures can re-touch the lows of 2004, it could be a great place to put in a low-risk bullish trade that aims to take advantage of any disruptions to the orange juice crop from this season’s hurricanes.

Lee Lowell

Source: Investing in Commodities: 3 Reasons Why Commodities Have Changed