What may not come to mind, though, when you think of America’s 50th state are its energy resources – and specifically, the fact that it gets 77% of its power from oil-fired power plants. That’s a unique statistic within the United States. Coal-fired plants provide 14% of power, and the remaining 9% comes from renewable sources like wind and solar energy.

Suffice it to say, tourism is Hawaii’s largest industry, with agriculture playing a major role, too. And not unlike the rest of the country, the one thing needed to keep it all running smoothly is a reliable source of electricity.

Problem is, Hawaii is dependent on fossil fuels for more than 90% of its power – an issue that became shockingly clear when oil spiked to $147 a barrel last year. As a result, the Hawaiian Electric Company – the state’s main electric utility – was briefly forced to charge users more than 50 cents per kilowatt-hour – over five times the national average.

So what is the state doing to relieve this situation?

Hawaii Treads Down the Renewable Energy Path

For Hawaii, wildly fluctuating oil prices and potential supply disruptions leave it uniquely vulnerable. The state estimates that every 10% increase in oil prices reduces its GDP by 0.5%.

Clearly something had to be done. And there is some good news.

Because of its unique location and physical makeup, the Department of Energy (DOE) estimates that Hawaii can potentially meet 60-70% of its overall energy requirements through the use of renewable energy sources.

And last year, under an agreement between the DOE and the State of Hawaii, long-term plans were set in motion that will result in Hawaii getting 40% of its power from renewable sources by 2030.

This landmark agreement – and its ultimate implementation – is being viewed as a national experiment. If successful, it could ultimately be replicated in other parts of the country. And island nations could benefit, too.

Here’s how the DOE and Hawaii are doing it…

Hawaii’s Four-Track Renewable Energy Plan

A working group including members from both the DOE and Hawaii are addressing four main areas of renewable energy performance:

• End-Use Efficiency: The goal is to achieve zero net-energy use buildings and communities, along with significant reductions in power usage by military bases.

• Electric Generation: Significant expansion of renewable energy at both the state and local levels, and the facilitating of distributed renewable generation on a statewide basis.

• Energy Delivery: Additional grid development and improvements to the existing grid in the form of smart-grid management, as well as grid energy storage that will optimize renewable energy sources.

• Transportation: The formation of a long-term strategy for the implementation of the production, distribution and use of alternative fuels for transportation to acceleration the adoption of electric vehicles.

The group has produced two, five, and ten-year pans that have marked the initial actions necessary in order to kickoff the activities in each of the above energy performance areas.

Putting the Four-Track Plan Into Fast-Track Mode

With an agreement in place, Hawaii’s governor, Linda Lingle, has fast-tracked the plan.

She’s called on privately held California startup firm, Better Place, to install as many as 100,000 electric car-charging stations by 2012 – a project worth $100 million. The goal is to have car-charging stations pop-up all over the Hawaiian islands, with privately held Better Place supplying the batteries and recharging services.

This plan assumes that the major car manufacturers buy into the arrangement So far, Nissan-Renault has agreed to make vehicles that will work with Better Place’s network of stations. And I expect more car companies to announce plans to participate, too.

Of course, all this additional power to charge the cars has to come from the grid – and major grid improvements are already underway.

Supercharging Hawaii’s Electric Project

All of Hawaii’s six separate grids are in the process of being connected together via undersea electric cables. Once in place, Oahu will get its power through them.

And with all the renewable wind power and solar farms being planned as part of the increase in renewable energy generation, managing the fluctuations in supply and demand becomes a more daunting task than it is now.

As a result, General Electric (NYSE: GE) is right in the thick of the plan, developing ways to store energy via batteries and pumped hydro storage. This will allow the Hawaiian Electric Company to smooth out peaks and valleys in its overall energy supply-demand model.

Hawaii’s plan is just now getting underway – 2030 isn’t that far down the road. But as its interim successes become apparent to the rest of the country and the world, companies like GE and Better Place will certainly be in the catbird seat.

Good investing,

Dave Fessler

Source: Hawaii’s Renewable Energy Revolution

You see, as a small-cap investor, you’ve got very different concerns compared to those who only buy and sell blue chips. One of those concerns is order execution. And most likely, it’s something that you haven’t heard about anywhere else…

That’s because for the most part, order execution is a term that’s relegated to the big players – firms like Goldman Sachs and T. Rowe Price that have teams devoted solely to proper order execution. But penny stock investors have many of the same order execution concerns on tiny, thinly traded stocks that the big Wall Street firms do with companies like GE and Microsoft (NYSE:MSFT).

But before we get down to brass tacks, let’s take a look at what order execution means…

Order execution is the process that swings into action when you try to buy or sell a stock. When most investors place an order with their brokers, execution is nearly instant. But when small-caps are concerned, thin trading volume can play havoc with share prices and with your profit or loss.

It’s important to remember that as its name implies, the stock market is a market. That means that stocks move based on supply and demand, and not necessarily their intrinsic value. While that works well for heavily traded stocks like Exxon Mobil  (NYSE:XOM) or Wal-Mart (NYSE:WMT), where thousands of investors keep shares around their fair value by buying and selling millions of shares each day, some small-caps only trade a few hundred shares during any given trading session – some trade even less than that.

As a result, penny stock share prices can sometimes deviate pretty far from where they should be. And while that can provide prescient investors with a whole lot of profit potential, it can also be a big problem for those who don’t protect themselves.

Understanding Bid-Ask Spreads

Like mentioned before, stocks trade in a market. In markets, prices are set by the participants – in this case individual and institutional investors who buy and sell shares of stock. There are two pieces of price information for any stock: the bid, which represents how much investors are willing to pay for a stock, and the ask, which represents how much current shareholders are willing to sell for. When those two numbers intersect, a trade happens.

The bid and ask aren’t hypothetical numbers – they represent real outstanding orders.

For any stock, there’s a separation between the bid and the ask, knownas the spread. If someone’s willing to sell shares of Bank of America (NYSE: BAC) for $16.84 and another person’s wiling to buy shares for $16.83, your bid-ask spread is one cent. The spread is kept small by the large number of traders in the stock, who volley back and forth maintaining a tight range for BAC’s share price.

But for a stock that’s more thinly traded, spreads can be huge. That’s a big problem for small-cap investors because a spread that span’s 2% to 3% of a stock’s share price can essentially shear that kind of performance from their position from the get go.

And starting out 3% in the red from the second you buy shares of a stock isn’t a good deal…

When you’re missing out on 3% of every trade, that disadvantage begins to add up big time. But follow these three secrets, and you can ensure that you’re making out on your small-cap trades:

1. Love Liquidity

The best way to avoid being burned by a lack of liquidity is to only trade stocks that have enough trading activity to keep share prices in a reasonable range. And while that may sound limiting to some investors, the truth is that there are ample investing opportunities in small-caps that still see decent trading volume on the market.

As a general rule, if a stock doesn’t trade thousands of shares during any trading day, it’s best to keep your distance.

2. Use a Limit Order

Market orders are a bad idea for small-cap investors. That’s because they automatically execute at the price necessary to make a trade, meaning that every time you initiate a market order to buy shares of stock, you’re rising up to meet the price the seller wants. With huge spreads common in small-caps, market caps are a sure way to lose money from the get go. Instead, use a limit order.

Limit orders are essentially market orders that only execute below a certain price when you’re buying shares, or above a certain price when you’re selling. They’ll help ensure that your entries and exits are happening at prices you set, not the other party.

3. Beware of Promotions

Stock promotion is a popular way for small-cap companies to increase daily trading volume. The practice, which often employs dubious ethics, involves hiring firms that spread good news or sentiment about a tiny stock. But being on the wrong end of that strong sentiment can be a very bad thing. Since volume in small-caps is often so thin, the huge volume surges caused by stock promoters can sometimes move a stock’s share price by more than 20%.

To avoid getting into stocks that are being manipulated, check out promoters’ favorite places – investing message boards and press release websites – for over hyped language that goes beyond what one of the company’s shareholders would spout off. If you see the same language in multiple locations, chances are that a promotion is underway.

The stock market is a tricky enough place to operate. After all, there’s no way to guarantee that the next stock you pick will deliver 100% profits. And there’s no telling whether the company you just added to your portfolio is a sure thing. But even with all of that uncertainty, you don’t have to give away your gains before you place a trade. Now you’ve got three ways to make sure that order execution mistakes don’t squeeze your profits.

Cheers,
Jonas Elmerraji

Source: 3 Secrets to Profitable Small-Cap Order Execution

Video rental king Netflix Inc. (Nasdaq: NFLX) years ago usurped Blockbuster Inc. (NYSE: BBI)’s throne as the No. 1 video rental outlet, but now it’s focused on cementing its status as the market leader as other video rental companies struggle to play catch-up.

Blockbuster, still king of brick-and-mortar rental stores, learned first hand the threat an innovative upstart can pose when it ran up against Netflix’s DVD-by-mail business model.

With movie theater tickets costing upwards of $10 (and that’s not including the popcorn or sodas), Netflix’s $8.99 1-DVD plan with unlimited exchanges and streaming video access represents a decidedly better deal for consumers that are tightening their spending amid rising unemployment and waning confidence.

Netflix celebrated its 10 millionth subscriber in February, noting that it added more than 600,000 net subscribers since the beginning of the year. In its second quarter ended June 30, Netflix said it had a total of 10.6 million subscribers, with paid subscribers representing 98% of the membership. The company expects its total membership to rise to between 11.6 million to 12 million by the end of the year, upping its previous quarter’s guidance of 11.2 million and 11.8 million.

Churn, a measurement of customer cancellations, rose to 4.5% in the second quarter from 4.2% a year ago, Netflix said.

“It could be the economy,” Netflix Chief Executive Officer Reed Hastings said of increasing churn in an interview with The Motley Fool. “It could also be that we make it very easy for subscribers to put their accounts on hold if they go on vacation or don’t have enough money for a month or two. When a subscriber goes on hold, we count that as a cancellation. What you can look at – as a good stable indicator – are net additions. And net additions continue to grow.”

Netflix’s top and bottom lines continue to grow as well. Revenue grew to $408.5 million in the second quarter, up from $337.6 million in the same period a year ago. Profit grew to $32.4 million in the second quarter, up from last year’s $26.5 million.

As subscribers, sales and profit rise, so too does Netflix’s stock. Shares of Netflix have jumped more than 45% since the start of the year, and managed to sidestep the doldrums experienced by the markets in March.

Still, it’s no time for Netflix to rest on its laurels, lest it suffer the same fate as Blockbuster. That’s why CEO Hastings is quietly preparing for the death of DVDs themselves. Ultimately, consumers will one day dump the plastic discs in favor of movies delivered straight over the Internet, Hastings told The Wall Street Journal.

So Hastings, who is a self-proclaimed student of companies that stumble by failing to adapt to technology shifts, is quickly trying to shift Netflix’s business so that more videos are available online.

While Hastings is having success in getting Netflix instant video onto devices, the biggest challenge facing his company is convincing Hollywood executives to license their content. While 12,000 choices may seem like a lot, many are older AAA movies or TV shows, or newer movies that weren’t commercially successful. New releases of hit movies usually take months or even years to appear in Netflix’s streaming video catalog.

That’s because Netflix is competing with pay cable channels such as Time Warner Inc.’s (NYSE: TWX) HBO and Viacom Inc.’s (NYSE: VIA) Showtime, which gain exclusive rights to show movies and generally have larger audiences. To get the movies and TV shows consumers want, Netflix will have to boost its licensing spending from the roughly $100 million it spent last year, an anonymous source told The Journal.

“Netflix has yet to show that it has the resources and profitability to be in the markets where licensing is the business policy,” said Warren Lieberfarb, former head of Time Warner’s Warner Bros. home video division.

The company has had some success in the licensing department earlier this year when it inked a deal with Liberty Media Corp. (Nasdaq: LMDIA) to show movies from its Starz pay cable channel.

Netflix’s library of 100,000-plus DVD titles is made possible by the “first-sale doctrine” of U.S. copyright law, which allows buyers of DVDs to lend them out without the consent of studios.

Too Little, Too Late?

It’s difficult to say when Blockbuster’s fall from grace began, but it was somewhere between its well-publicized late fee fiasco and the proliferation of Netflix.

Blockbuster’s operating income at the end of its second quarter in 2004 was $105.3 million. That was just before Netflix entered mainstream consumer consciousness. Blockbuster’s operating income at the end of its second quarter this year was a loss of $1.5 million.

In spite-of an 8.3% industry-wide increase in rental revenue, Blockbuster’s revenue fell 13.3%.

The company blamed the drop partly on reduced inventory as it tries to generate more cash to handle its debt load, the Los Angeles Timesreported.  Although Chief Executive Officer Jim Keyes told analysts in a conference call a renegotiation of a revolving line of credit meant stores would be fully stocked and more aggressively marketed, he admitted last week that didn’t happen.

“Temporarily during the first and second quarter, we put our plans for increased availability on hold,” Keyes said on the call. “We made this change with the recognition that we were also facing new and very aggressive competition who are better capitalized and would likely take share from us as we pulled back.”

Still, Blockbuster is doing everything it can to stay afloat, from closing stores to kiosk deployment.

“We’re deploying as many as 10,000 vending machines by the middle of next year,” Keyes told Bloomberg News in a telephone interview, adding that his company is focused on increasing cash flow rather than boosting sales in a “very challenging credit market.”

Blockbuster’s $250 million revolving line of credit is due on Sept. 30, 2010, and the company has more than $350 million of long-term debt outstanding that it must pay by the end of next year, according to a research note written by Wedbush Morgan Securities Inc. analyst Michael Pachter. Blockbuster had $99 million in cash and equivalents as of July 5, down 36% from $154.9 million on January 4, Pachter said.

“[Blockbuster needs] the credit markets to loosen up and they need to refinance,” Pachter told Bloomberg. “They’re not on track to repay this debt in the time frame they need to, so they’ve got to extend the terms.”

Pachter downgraded his rating on Blockbuster stock from “outperform” to “hold” last week. Blockbuster shares have tumbled more than 44% since the start of the year.

The Little Red Box That Could

Blockbuster was effectively rendered obsolete by Netflix’s quick response to changing technology. But Coinstar Inc.’s (Nasdaq: CSTR) Redbox Automated Retail LLC, which offers consumers new release DVDs for $1 per night, is hoping to avoid a similar fate.

Kiosk vendor Redbox, initially funded by McDonald’s Corp. (NYSE: MCD) and Coinstar in 2002, saw Coinstar acquire its remaining shares in February. The company’s $1-a-night DVD rentals are found in places like McDonalds restaurants, grocery stores, and numerous locations owned by retail giant Wal-Mart Stores Inc. (NYSE: WMT) that that serve at least 15,000 customers a week.

Redbox plans on having 21,000 to 22,000 kiosks throughout the United States by January, up from 13,700 a year earlier. The company’s sales, which were $188.9 million in the second quarter, account for 57% of Coinstar’s overall sales, up from 41% in the same quarter last year. Coinstar’s stock has risen more than 62% since the beginning of the year.

At a time when consumers are strapped, Redbox is perfectly positioned for those looking to save money. But now Hollywood is looking to stunt Redbox’s growth.

Tinseltown accuses Redbox of depressing DVD prices and depriving studios of the same revenue-sharing opportunities they now enjoy with traditional DVD rental houses such as Blockbuster, Reuters reported.

Three studios – News Corp.’s (Nasdaq: NWS) 20th Century Fox Home Entertainment, Warner Bros. and General Electric Co.’s (NYSE: GE) NBC Universal – are vowing to withhold their DVD distribution to kiosks like Redbox until 28 days after they are released.

To counter, Redbox has filed a lawsuit against at least one of the studios, 20th Century Fox.

“At the expense of consumers, 20th Century Fox is attempting to prohibit timely consumer access to its new release DVDs at Redbox retail locations nationwide,” said President Mitch Lowe. “Despite this attempt, Redbox will continue to provide our consumers access to all major new releases including 20th Century Fox titles at our more than 15,000Redbox DVD rental locations.”

Speaking to the LA Times, Lowe said Redbox isn’t a threat to Hollywood, but instead an additional source of income. However, Papi Capital analyst Richard Greenfield disagrees, writing that Redbox’s pricing is a “substantial risk” to the movie industry.

“It sets an ultra-low price point for movie content that will impact consumers’ decision-making process about all forms of movie-related commerce – theater-going, DVD purchase, video-on-demand,” Greenfield wrote.

Of course, distribution withholding and lawsuits aside, if Netflix’s Hastings is right and DVDs do walk the path of oblivion like CDs are now, Redbox will need to adapt and find a way to enter the already-crowded Internet video market.

Source: Hot Stocks: Netflix Finds Success in Innovation, While Other Video Rental Companies Fight For Survival ]]> http://www.contrarianprofits.com/articles/hot-stocks-netflix-finds-success-in-innovation-while-other-video-rental-companies-fight-for-survival/19974/feed 1 http://www.contrarianprofits.com/articles/investment-news-briefs-tuesday-august-18-2009/19970 http://www.contrarianprofits.com/articles/investment-news-briefs-tuesday-august-18-2009/19970#comments Tue, 18 Aug 2009 15:00:04 +0000 Money Morning Staff http://www.contrarianprofits.com/?p=19970 Japan’s Economy Grows; Home Builder Confidence Up; New York Manufacturing Rises; Credit Card Defaults Stabilize in July; MSNBC Buys “Hyperlocal” News Aggregator; Reader’s Digest Files for Bankruptcy; Lowe’s Profit Falls 19%

• Japan’s economy is once again growing, with its gross domestic product (GDP) rising 3.7% in the second quarter. A rebound in exports to China and a large stimulus program helped Japan bounce back from contraction that, at an annualized rate of 11.7%, was more than double that of the United States’ in the first quarter. Officials at Japanese companies think the nation’s worst recession since World War II is nearly over, according to a survey released last weekend.

• The National Association of Home Builders/Wells Fargo confidence index rose to 18 this month, a…

Call it an earnings season hangover. Call it profit taking. Or call it a technical reverse. Just don’t call it a good day on Wall Street.

With the equities market down by over 1% at the moment, investors who got in at the recent highs are wondering what in the world they may have gotten themselves into. A slew of the markets most-popular investments of late are taking it square on the chin.

General Electric (NYSE:GE) is down by over 3%. Harley Davidson (NYSE:HOG) is down by nearly 3.5%. And Chevron (NYSE:CVX), a TFN Strategic Trader short position, is down by another 1.2% today after dropping by an equal proportion tomorrow.

The breadth of the decline is wide and getting even wider.

If you read my commentary yesterday, you know the downturn is far from a surprise. Even better, you know how bullish I am on Asian markets.

Just to prove the potential in Asia, I want to look at a winner in China’s growing economy.

While the rest of the world contemplates just how an economy can grow without the creation of new jobs, companies like SmartHeat Inc. (NASDAQ:HEAT) are producing record-breaking earnings.

No artificial growth here

Although China is not on a politically motivated, Al Gore-type environmental kick, there is no doubt the expanding country is working to clean up its smog-filled air. Companies like SmartHeat are taking full advantage of the initiative.

SmartHeat works to build a variety of heat exchangers and temperature meters. Its products allow companies to increase their heating efficiency, which helps lower heating costs and reduces emissions.

While this morning’s earnings report from the company has plenty of useful information, one line by the company’s CEO, James Jun Wang, stands out:

“The current economic slowdown has significantly increased customer awareness towards utilization of energy savings equipment from which we are a primary beneficiary. SmartHeat is well positioned to potentially reap significant benefits from the world’s economic recovery.”

The company backed up the statement with a revenue figure that grew by 125% from this time last year. While $12.5 million is a miniscule figure in today’s world of billion-dollar conglomerates, the fact that the company managed to turn the income into a profit of $2.6 million (up 257%) solidifies the idea that SmartHeat is far from a speculative play.

The company has a high-demand profit and is profiting from it.

Going forward, SmartHeat has boosted its full-year outlook and expects the Asian recovery to treat the company well. Next quarter, Wang expects revenue of $35 million, almost three times last quarter’s figures.

Shareholders have been treated well by the bullish news, with the stock up by double-digit proportions today.

With such quickly growing figures, the markets are naturally going to have a tough time determining the company’s fair value.

Right now, using the old earnings figures, the company has a price-to-earnings ratio of about 35. But when I plug in the estimated $15.5 million in annual earnings announced this morning, that critical figure drops to just 14.7, high but not too high.

To include the high-flying growth in the valuation equation, we have to divide the P/E figure by its anticipated earnings growth. In this case, the company earned $6.3 million in 2008, giving us a denominator of about 150.

Crunching the numbers, it gives us a PEG of an ultra-low 0.01, making shares of SmartHeat well worth the $9.75 they are currently trading for… if the earnings predictions come true.

Take a look at the company and see what you. Just don’t say we don’t ever give you anything for free.

Source: A Hot Stock in a Cool Market

If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you’re speculating, our guess is that you’ll get a better deal if you wait.

Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas – that’s what the Case-Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.

Herewith, four reasons why:

First, as you know, this is a depression. It will probably be long. And deep. You wouldn’t know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar – anticipating inflation – fell to $1.44 per euro.

But that’s what bounces are supposed to look like. They look good enough so that people mistake them for the real thing… and get suckered into more losses.

Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap…

Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we’re only half way through the foreclosure process. There are more than 18 million empty houses in America. A news report yesterday told of a 32-storey apartment building in Florida with only one lonely tenant.

And still coming up are more refinancings… more drowning homeowners … and more people giving up on homeownership altogether. The bubble era created new households at the rate of 1.2 million per year. Practically every one of them wanted to get in on the housing boom. Now, there are only 500,000 new households per year. And few of them still believe that housing is the route to wealth. At the current rate, it will take many years to fill up all America’s empty houses.

Third, incomes are falling. Property crashed because people with average incomes could no longer afford to buy the average house. Now, they can afford even less. Ken Rogoff estimates that the consumer needs 6-8 years to pay his debts down to a more reasonable level. Part of that deleveraging process will mean getting rid of heavy mortgage debt – one way or another.

Fourth, there are too many houses that are too big… and in the wrong places.. Big houses were a status symbol in the bubble years. Now they’re a symbol of extravagance and error. Plus, they’re expensive to own. People will want to dump them – even if they can afford them. There was far too much building in the outlying suburbs of the sand states too – Arizona, Nevada, California and Florida. Those houses may have to be abandoned as people are forced to move closer to where the work is.

There are also a couple of more technical reasons why the Case-Shiller numbers may be erring on the bright side: seasonal adjustments and a changing mix of houses sold. But our guess is that real house prices – adjusted for inflation – will continue going down for many more years.

You want to see deflation? Go to Tokyo City in London. The restaurant chain says it is going to give its food away for free. Customers will pay for drinks plus 2 pounds 50 pence for service.

Meanwhile, in Tokyo itself prices are falling – again. The Japanese have had on-again, off-again deflation for the last 20 years… ever since their stock market crashed in 1989.

Hey, what’s the matter with those Japanese? Don’t they know about stimulus?

Hold on there, pilgrim. What the Japanese don’t know about stimulus ain’t worth knowing. They’ve stimulated their economy so much that their government debt now measures 200% of GDP. And what did they get for all that stimulus? Did it get their economy moving?

Are you kidding? Now, the latest news tells us that they also have the highest jobless rate in 6 years. And the latest figures show the inflation rate NEGATIVE. In fact, never has the inflation rate been lower.

*** Nissan announced an electric car. Shares soared.

*** Jobless benefits are running out for 1.5 million unemployed Americans, says a New York Times report.

*** And here a commentary by David Pauly on what Wall Street is doing about low earnings – lying!

“Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know… .

“In analyst speak, Intel Corp. (NASDAQ:INTC) wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

“After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

“As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.
“Google (NASDAQ:GOOG), according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.

“Viacom Inc. (NYSE:VIA.B), an entertainment company, this week reported second-quarter net income of $277 million, or 46 cents a share. Analysts had estimated profit as if money Viacom paid out in severance in the period wasn’t the real thing. On that basis, Viacom earned 49 cents a share, beating the average estimate by 1 cent.

“Time Warner Inc. (NYSE:TWX), a rival of Viacom for entertainment dollars, said it earned $519 million, or 43 cents a share, in the quarter. Analysts insist Time Warner earned 45 cents, excluding, according to Bloomberg data, costs related to litigation and asset sales. Lawyers must work for nothing.

“By similar Wall Street reckoning, the expense of cutting jobs and selling an asset that reduced McGraw-Hill Cos. (NYSE:MHP) second quarter earnings per share by 10 percent was immaterial.

“Analysts also say investors should ignore $129 million that Textron Inc. (NYSE:TXT), maker of small airplanes, helicopters and golf carts, charged against net income in the latest quarter. Included was the cost of shutting a plant for an eight-seat jet Textron decided not to build.

“General Electric Co. (NYSE:GE), which makes jet engines and electric power equipment and has a financial services arm, had a second- quarter profit of 24 cents a share. GE and the analysts emphasized earnings from continuing operations, which at 26 cents a share, exceeded their estimate by 2 cents. A $194 million loss from discarded businesses was discarded.”

And so on… and so on…

*** “As You Like It” was as we liked it – lively, bawdy, and raucous. It is not Shakespeare’s finest play – or so the critics say. But it has some marvelous dialogue. “All the world is a stage… ” is the most memorable.

Our hostess had set up a stage on the lawn and put out a hundred or so chairs for guests. But by the time we sat down it had begun to rain. The chairs were wet. A Frenchman gallantly wiped off Elizabeth’s chair. Your editor sat down in a puddle… and the play began…

The rain continued throughout the performance. Some spectators – perhaps those who listened to the weather forecast – came equipped with parkas and anoraks. We had an umbrella, which we held over our heads throughout the performance.

Despite the drippy conditions in the bleachers, a good time was had by all. The English actors who performed the play were real pros. They enlivened the set with music and acrobatics, moving the story forward 4 centuries to the days of Peace & Love and strawberry fields forever. We never quite got the connection… but it seemed to work, somehow.

After the play was over, we retired to a stone barn for soup and dessert. There, we met neighbors whom we only see once a year – in August. Among them was a dear Daily Reckoning reader.

“I’m glad I bought gold when I did,” he said. “It was $600 or so at the time. So I made a gain on the gold. But the important thing was that I wasn’t caught in that sell-off in stocks last year.

“What do you think gold is going to do now?”

“Probably, it will go down,” we replied.

“So, you’re selling your gold?”

“No… we’re holding on… It’s too risky to sell it.”

*** “Of course, that’s the big question,” Elizabeth began on the drive home.

“What’s the big question?”

“About whether the world is just a stage. It’s really a question of free will. About whether we do things because we think them through ourselves, or whether we just play our roles.

“I suppose it’s related to the ‘Great Man’ theory of history… the idea that people actually determine history, rather than play their parts in it… ”

“It’s probably like all the great questions… that is, both true and untrue at the same time. I mean, Louis 14th couldn’t have been Louis 14th if there hadn’t been a Louis 13th… and if France hadn’t been the leading country of Europe… and if it hadn’t been the peak of the monarchic age.

“And Rommel couldn’t have led a Blitzkrieg in WWII if the tank hadn’t been invented in WWI… .

“In both cases, it appears that Shakespeare was right… that the roles were already there, just waiting for someone to play them… ”

“Yes, but I wonder if that is true… or as completely true as it looks. The fellow who took over from Lenin didn’t have to be a monster, did he?”

“I don’t know. If he hadn’t been so ruthless some other guy probably would have purged him out… sent him to the gulag. Once a revolution gets started, the most violent and ruthless groups seem to take over. So, I guess you could say that even there… the role must be played… ”

“Does that apply to our personal lives, too? Are we just playing roles? You are pretending to be my husband. I am pretending to be your wife. We are pretending to love each other. Is that all there is to it?”

“No… no… that’s very different… ”

“How so?”

“I don’t know… but when I say I love you, it comes out of my soul like smoke from a sacred volcano… ”

“What does that mean?”

“I don’t know… I just like the sound of it… ”

Source: More Empty Houses in America

When the U.S. Commerce Department on Friday said the U.S. economy contracted at a 1% annual pace in the second quarter, the report was actually seen as good news: It was a slower decline than in each of the two prior quarters, and economists had expected a contraction of 1.5%.

“This is good news,” Nariman Behravesh, an economist with IHS Global Insight Inc. (NYSE: IHS), told The San Francisco Chronicle.

But here’s the wild card: Although government spending did increase during the April-to-June quarter, only about 7.7% – $60.4 billion – of U.S. President Barack Obama’s stimulus package had actually made its way into the U.S. economy by June 30, the quarter’s official conclusion. Of that total, the largest component went to U.S. states to help defray the jump in Medicaid costs, CNNMoney.com reported.

Much of the $43 billion in stimulus tax relief – including the “Making Work Pay” tax credit for individual workers – also took effect during the second quarter, CNNMoney said.

At this point, it’s really difficult to “see how the effect of stimulus has been very large,” Edward Lazear, an economics professor at Stanford’s Graduate School of Business – who served as an advisor to former U.S. President George W. Bush – told CNN. “Very little has gone out.”
And that’s the problem.

In short, it looks like we’re already experiencing an economic rebound – without the Obama stimulus having really even kicked in … yet. In fact, the impatience over the continued U.S. malaise, the slowness of the economic turnaround and the fact that when growth does return we’re almost assured of a “jobless recovery” actually has some Washington legislators already pushing for a second stimulus.

That means the economy will be in rebound mode when nearly three-quarters of a trillion dollars in stimulus money starts to flow in. Dumping all that money into an already-growing economy won’t just serve as a simple tailwind that gives the economy a gentle push; it will be more like the head-snapping start followed by the thunderous charge down the quarter mile that we see from one of the supercharged Top Fuel Funny Cars driven by National Hot Rod Association (NHRA) star John Force. (From a standing start, Top Fuel Funny Cars cover a quarter mile in less than five seconds at speeds well in excess of 325 miles per hour).

And there’s only one outcome from that scenario – rampant inflation. In fact, U.S. consumers are probably headed for the worst bout of inflationsince the 1980s. And that makes the so-called “exit strategy” of U.S. Federal Reserve Chairman Ben S. Bernanke all the more important.
To be sure, the Obama stimulus has given the economy a bit of a boost. So far:

• The states have deployed what stimulus money they have received, which helped fuel the biggest surge in state and local spending since 2007.
• Some early pieces of the stimulus – such as the $25 increase in unemployment benefits – have allowed consumers to spend more.
• And one economist – Economic Policy Institute’s Josh Bivens – said Obama stimulus money may have boosted growth by as much as three percentage points during the second quarter.

But other economists say that – given the environment – the second-quarter GDP numbers were much too strong. After all, business spending dropped 8.9% and hours worked fell 7%. Somehow that doesn’t translate into a mere 1% drop in GDP. That latter figure will most certainly be revised downward in the future.

Unless or until that happens, look for the third quarter GDP statistics to give us a better picture of the U.S. economy’s health. Complaints that the promised stimulus money isn’t getting where it needs to be have Obama’s economic team working overtime to iron out the problems that keep cropping up.

Mark Thoma, an economics professor at the University of Oregon, toldCNNMoney that “the third quarter will be a critical time period for assessing the stimulus package.”

And for assessing the inflation threat – which Money Morning has repeatedly warned is a very real threat. Gold, commodities, and other hard assets will be key holdings. The same is true for dividend-paying stocks. And make sure to go global – the best growth prospects will continue to be overseas.

Market Matters

A report by the New York Attorney General’s Office claims the initial nine institutions that received Troubled Asset Relief Program (TARP) money paid out $33 billion in bonuses in 2008.  Of particular note, Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC) rewarded a combined 900 employees (combined) with bonuses of at least $1 million, despite having received $45 billion each in government aid (and that doesn’t count the $3.6 billion Merrill Lynch & Co. Inc. employees received).  Imagine how much they would have made if the companies were actually doing well?

While President Obama continued his road trip across America to promote health care reform, a group of conservative Democrats (Blue Dogs) came up with their version of a bill, but offered no timetable for completion.

Meanwhile, regulators pushed forward with proposed rules aimed at reducing speculation in the marketplace and focused on so-called “naked” short selling and on lpacing strict limits on commodities contracts.

In corporate news, deals were the theme of the week.  Microsoft Corp. (Nasdaq: MSFT) made amends with Yahoo! Inc. (Nasdaq: YHOO) and forged a 10-year partnership to cut into Google Inc.’s (Nasdaq:GOOG) share of the Internet search business. And International Business Machines Inc. (NYSE: IBM) is expanding its software empire with the purchase of SPSS Inc. (Nasdaq: SPSS) for $1.2 billion.

On the earnings front, energy companies highlighted the week’s reports and the results were not pretty (though were expected).  On a positive note, Motorola Inc. (NYSE: MOT) surprised analysts by reporting an unexpected profit, while offering a promising outlook, and Deutsche Bank AG (NYSE: DB) continued the favorable trend among (previously depressed) financials by posting strong earnings on solid investment banking operations.

Investors digested the mixed earnings news and chose to focus more on the positives.  Despite a temporary setback in China (5% index decline before encouraging comments by its central bank), the Dow Jones Industrial Average moved higher late in the week after General Electric Co. (NYSE: GE) was upgraded to a “Buy” by a major analyst, a sign of an improving climate.  The Nasdaq Composite Index even flirted with 2,000 for the first time since October 2008, and theStandard & Poor’s 500 Index edged closer to 1,000, a level not seen since last November.

The Dow ended July with its best monthly performance since October 2002.  Japanese stocks moved to their highest levels in about 10 months and European equities soared to nine-month highs.  Bond investors breathed sighs of relief as a record $115 billion Treasury auctions came to a close and foreign bankers emerged as buyers on the final day.

Economically Speaking

Has Fed Chairman Bernanke suddenly become Mr. Optimist these days? Early in the week, he proclaimed that the financial debacle ultimately would produce favorable results as “not only will we will be back on track, but the economy will be stronger than it had been before this started.”  He also urged Congress to move forward with a regulatory reform package to ensure that such dire times will not be repeated.

The Fed’s Beige Book showed that the economy remained weak, though signs of stabilization and improvements in manufacturing, housing, and even labor are occurring across several regions of the country.  Some districts reported enhanced corporate hiring, particularly within the healthcare and technology sectors.

The afore-mentioned second-quarter GDP report was better than expected, giving yet another indication that the recession is drawing closer to an end.

Still, it’s a much deeper recession than most realized: For the first time since records have been kept (1947), economic activity has declined for four consecutive quarters.  New homes sales skyrocketed in June by 11%, the fourth increase in the last six months, and home prices even climbed on a month-over-month basis for the first time since July 2006 according to the S&P Case-Shiller index.

Durable good orders fell in June, though once the volatile transportation category was removed from the statistic, orders actually increased.  Consumer confidence fell in June, as ongoing pressures on the labor markets brought continued concerns and many Americans are refraining from major purchases (now and for the foreseeable future).

On the other hand, jobless claims rose in the most recent week, though analysts pointed to discrepancies from the auto industry.   Looking at the four-week moving average as a better gauge, claims for unemployment benefits actually fell to the lowest level since January and continuous claims unexpectedly declined, as well.

Weekly Economic Calendar

Source: Why the Obama Stimulus Has Us on a Collision Course with Inflation

Companies posting solid results before the bell included AON Corp and industrial conglomerate Tyco International Ltd .

Goldman Sachs raised its recommendation on GE to “buy,” saying comments made by the chairman of a key congressional committee suggests a decreased chance of a break up of the finance arm of the diversified industrial manufacturer.

U.S. House Financial Services Committee Chairman Barney Frank in an interview with Bloomberg late on Wednesday suggested there was broadening support for regulatory reform that would not mandate the separation of GE Capital, Goldman analysts said.

GE shares rose 5.5 percent to $12.94 before the bell.

“A lot of this is a follow up of the resilience we’ve seen in the market over a couple of weeks. The clear sentiment is to be buying on any dips,” said Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey.

“We get buying into the close on a consistent basis. The trend right now is higher. We have earnings improving, and that’s giving people the reason buy.”

S&P 500 futures rose 6.6 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures climbed 53 points, and Nasdaq 100 futures were 8.5 points higher.

Investor sentiment was also buoyed by signs that the global recession is abating following upbeat economic reports from Europe.

European stocks were up more than 1 percent after data showed July euro zone economic sentiment rose to its highest level in eight months, while German unemployment unexpectedly fell for the first time in July.

International Paper Co posted a 40 percent drop in second-quarter profit but said the worst of the economic downturn had passed, and it was seeing improvements in some markets. . IP shares rose 3.3 percent to $19 in premarket trading.

Motorola Inc shares rose 3.5 percent to $6.80 before the bell after the mobile phone maker swung to a quarterly profit.

Exxon Mobil Corp shares fell 1 percent after it reported second-quarter earnings.

The U.S. economic calendar includes the weekly report on initial jobless claims at 8:30 a.m. (1230 GMT). A Reuters survey of economists forecast claims to have risen to 570,000 from 554,000 the previous week.

Also on the calendar is a record $28 billion 7-year note auction from the U.S. Treasury, which could make investors cautious on the heels of poor demand for two government auctions this week.

NEW YORK, July 30 (Reuters)

Is General Electric Co. (NYSE: GE) poised to be the next U.S. player scuttled by the worldwide credit crisis?  Or is the onetime-bellwether conglomerate on track for a major corporate turnaround – the kind of rebound that will restore the company’s global muscle while providing investors with a shot at double- or even triple-digit gains?

With a bold move it made yesterday (Tuesday), the Fairfield, CT-based GE is doing all it can to make that second scenario come true.

Since the global credit crisis, Wall Street gloom-and-doomers have continually predicted that GE’s financial-markets exposure – courtesy of its massive GE Capital Corp. financing units – would cause the once-admired U.S. blue chip firm to share the same fates as American International Group Inc. (NYSE: AIG), Lehman Brothers Holdings Inc., or The Bear Stearns Cos. Inc., all one-time heavyweights whose exposure to “toxic” financial assets sealed their doom.

So GE yesterday opened GE Capital’s books up to Wall Street, hoping the bold move would stifle investor fears that the financing would continue to struggle, or that it would need to be separated from is parent, as the Obama administration has suggested.

The upshot: While some investors and analysts weren’t swayed – and believe the problems remain and that GE merely bought some time – others now believe the company has a new, and much-sharper strategic focus, one that could richly reward investors who have the courage to bet on GE now.

Even with the continued speculation that GE Capital still may require a cash infusion in the future, the changes that GE has already made are enough for the company’s stock to double over the next three years, says Jack De Gan, chief investment officer of Harbor Advisory Corp., a Portsmouth, N.H.-based wealth-management firm.

“They are shrinking the balance sheet at GE Capital much faster than anticipated at the last ‘deep-dive’ meeting, which is, I think, the reason the shares are up,” De Gan told CNBC-TV in an interview.

GE’s shares rose 20 cents each, or 1.62%, to close at $12.52, although they traded as high as  $12.70. De Gan’s price prognostication isn’t out of line; a double from here would take GE’s stock up to about $25 – not far below their 52-week high of $30.39.

The Low-Flying High-Finance Unit

GE’s finance unit, which once accounted for nearly half of the company’s overall business, suffered an 80% drop in profit in the second quarter and has dragged the company’s stock to its lowest level since the mid-1990s. Despite the hemorrhaging, its losses in areas such as real estate and consumer lending were relatively small.

GE is under pressure to separate its industrial unit from GE Capital, as outlined in a white paper on financial regulatory reform by the Obama administration.
“The loophole for special-purpose credit card banks creates an unwarranted gap in the separation of banking and commerce and creates a supervisory ‘blind spot’ because Federal Reserve supervision does not extend to the credit card bank holding company,” the paper said.

But yesterday, in a Webcast that GE used to help tell its upbeat story to investors, GE revealed that its GE Capital financing arm no longer needs to raise additional capital in order to navigate the continuing fallout from the worst economic downturn in more than 60 years, and also said that this still-crucial business unit has stopped issuing commercial paper through the Federal Deposit Insurance Corp.’sTemporary Liquidity Guarantee Program (TLGP).

GE Capital Chief Executive Mike Neal, who appeared on the Webcast, told investors that the finance unit was operating just as detailed back in March. The projections outlined then were based on the U.S. Federal Reserve’s “baseline” economic scenario, which were a key – though controversial – element of the much-discussed  “bank stress tests” conducted by the Obama administration and the nation’s central bank.

“We’re fairly close to where we thought we would be with the base case,” said Neal. “We don’t see any need to raise external capital.”

GE Capital is projected to earn $2 billion to $2.5 billion this year. The baseline scenario is the more conservative of two scenarios outlined by the Fed last spring as government officials performed federally mandatedstress tests on the nation’s largest banks. The scenario called for a maximum unemployment rate of 8.8% and a gross domestic product (GDP) contraction of 2% in 2009.

GE is trying to reduce the corporate importance of its financing arm, and is making progress. GE Capital’s total assets were valued at $557 billion at the end of June, down from $600 billion last year, according to apresentation the company gave to investors. GE’s goal is to reduce the division’s total worth to about $400 billion in the future. The company is on track to have total investments down to $450 billion by the end its next fiscal year.

Does GE Need a Dance Partner?

Still, many analysts aren’t convinced, particularly since the nation’s unemployment rate hit 9.5% in June – meaning the assumptions the company used for its longer-term projections are all wrong.

“There are parts of the [GE Capital] portfolio that of course would give someone pause and concern,” Steven Winoker, an analyst for Sanford C. Bernstein & Co. LLC, told Reuters.

Another analyst said GE is simply buying time for its financial unit, which will ultimately have to be spun off.

“This isn’t any more about a decision: it’s about when it’s implemented,”Sterne Agee’s Nicholas P. Heymann told TheStreet.com.

Even De Gan, the bullish Harbor Advisory CIO, concedes some risk remains. The company’s near-term future carries the most risk, because of GE Capital’s real estate holdings, he said in the CNBC interview. GE right now has about $5 billion in unrealized losses that it expects to absorb through earnings over the next three years. If that market doesn’t rebound, the company might not be able to follow through with its plan, he says.

But De Gan told interviewers that this risk appears to have already been factored into the current stock price. The bottom line: Someone who opts to make GE a multi-year investment could end up watching as the company’s shares march back up toward the $30 level.

There is also speculation that GE is seeking an eventual partnership with a lender. A shrinking business would make GE Capital more attractive for banks looking to buy a stake in the division. Heymann expects GE to eventually partner with a large bank such as HSBC Holdings PLC (NYSE ADR: HBC).
GE Capital refutes any assertions about a possible partnership.

“I don’t know what the scenario would be where we would entertain that,” Chief Financial Officer Keith Sherin said in the Webcast.
”I’m not focused on that.” CEO Neal added. “I don’t think anybody here is.”

Other analysts are more optimistic.

“The Treasury [Department's] suggestions are just that, so far, with new regulatory rules probably several iterations away from a final version,” Sanford Bernstein’s Winoker wrote in a recent report.

Winoker also noted that if GE were forced to break off its finance arm, it would have five years in which to do so.

Source: Hot Stocks: As Wall Street Debates GE’s Future, Could Turnaround Plan Cause Shares to Double? ]]> http://www.contrarianprofits.com/articles/hot-stocks-as-wall-street-debates-ge%e2%80%99s-future-could-turnaround-plan-cause-shares-to-double/19520/feed 0 http://www.contrarianprofits.com/articles/wall-st-dips-on-profit-quality-worries/19171 http://www.contrarianprofits.com/articles/wall-st-dips-on-profit-quality-worries/19171#comments Fri, 17 Jul 2009 15:55:41 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=19171 U.S. stocks fell today, Friday, on worry over the quality of corporate profits after General Electric Co. missed quarterly estimates, discouraging investors after a four-day run-up in Wall Street.

GE’s profit fell by almost half as the slump that has gripped its finance and media businesses took hold of its heavy industrial units, and shares of the conglomerate tumbled 6 percent to $11.66.

Shares of Google fell nearly 3 percent to $430 after news that the weak economy and a slump in advertising spending took a toll on revenue growth at the Internet giant. Its results, posted late on Thursday, beat Wall Street expectations, however.

With companies such as Intel Corp and Goldman Sachs Group posting strong quarterly results earlier in the week, investors had been eager…