But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

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/here%e2%80%99s-why-it%e2%80%99s-time-to-ban-credit-default-swaps/19101 http://www.contrarianprofits.com/articles/here%e2%80%99s-why-it%e2%80%99s-time-to-ban-credit-default-swaps/19101#comments Wed, 15 Jul 2009 14:15:09 +0000 Martin Hutchinson http://www.contrarianprofits.com/?p=19101

Ask U.S. Rep. Maxine Waters, D-CA, about credit default swaps and she’ll offer this warning: Ban them now or expect a reprise of the ongoing global financial crisis – which the derivative securities helped create. When it comes to elected officials, Congresswoman Waters is not one I would typically feel that I have a lot in agreement with.

A representative of a low-income district in Los Angeles, Waters is a senior member of the House Committee on Financial Services and has distinguished herself in the past by her sharp attacks on the financial sector and capitalism in general – what her own Web site describes as her “no-holds-barred style of politics.”

However, Congresswoman Waters’ bill to prohibit credit default swaps – introduced last Friday…

Top financial officials from the Group of Eight (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.

The G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create “a set of common principles and standards governing the conduct of international business and finance,”The Washington Post reported.

In a communiqué called “the Lecce Framework” – which described the strategy for obtaining those goals – the finance ministers called on government leaders to fill in the regulatory gaps that led to the global financial crisis, including breakdowns caused by financial firms that operated in multiple economies.

Strikingly more rigorous initiatives already are being adopted in Europe, where new measures aimed at creating more-rigorous oversight of the credit-rating agencies – especially those involved with creating securitized securities, whose U.S. breakdowns have been identified as a key contributor to the credit crisis. The United States will offer its own broad proposals for “more conservative standards” when it unveils a much-anticipated reform plan to overhaul domestic financial regulation later this week, Geithner said in an interview after the meeting.

The U.S. will include tougher proposed capital standards and oversight for banks, better coordinated oversight of global financial institutions, and improve monitoring and transparency in global derivatives markets,The Post reported.

“Because risk does not respect borders, we will put forward several international proposals in our reform package to help raise standards globally,” Geithner told journalists after the meeting.

With recent rebound in stock markets and a flurry of upbeat economic reports, finance ministers said they were cautiously optimistic about the state of the world economy.

Market Matters

Despite some last minute drama at U.S. Supreme Court, Chrysler LLC closed on its deal with Fiat SpA (OTC ADR: FIATY) and effectively moved beyond bankruptcy.  While Supreme Court Justice Ruth Bader Ginsburg gave the would-be deal-breakers (Indiana pension funds) some false hope, the Supreme Court ultimately disallowed their objections andlet the transaction proceed.

General Motors Corp. (OTC: GMGMQ) announced the hiring of a formerAT&T Inc. (NYSE: T) exec to guide its rebirth and moved closer to selling its Saab unit as it “speeds” through its own restructuring.

In a “sign of financial repair,” the U.S. Treasury Department has granted its blessing to 10 major banks to repay $68 billion in Troubled Asset Relief Program (TARP) loans; JPMorgan Chase & Co. (NYSE: JPM) ($25 bln), Morgan Stanley (NYSE: MS)($10 bln), and American Express(NYSE: AXP) ($3.4 bln) expect to take the plunge in the next few days.

And in a sign of renewed economic strength, Texas Instruments Inc. (NYSE: TXN) raised its outlook for the second quarter amid growing demand for semiconductors.  Meanwhile, Bank of America Corp. (NYSE: BAC) and U.S. Federal Reserve officials took a grilling from (grandstanding) politicos as the “he said/he said” controversy over theMerrill Lynch (NYSE: SAR) acquisition continued.  The Obama administration ended its plan to limit compensation within financials and also is reevaluating prior proposals about consolidating regulatory bodies.

In transactional news, BlackRock Inc. (NYSE: BLK) acquired ETF-giantBarclays Global Investors to form the largest global asset manager.

Energy prices continued the upward trek as an International Energy Agency suggested that global demand for 2009 would be stronger than previously predicted.  On the supply side, a BP PLC (NYSE ADR: BP)report showed that global reserves fell in 2008, the first such decline in 10-years.  Crude surged past $72 a barrel for the first time this year as traders analyzed the supply/demand issues in conjunction with the ongoing prospects for an economic recovery.  Likewise, gas prices rose again (for 42 straight days) to above $2.60 per gallon nationally and consumers began to feel the pinch at the pumps as summer travel season arrives.  Inflation anyone?

Economically Speaking

Economists are at it again.  With little substantive data on the calendar,The Wall Street Journal announced results of its latest forecasting survey and a majority of respondents expect the recession to end by late summer (though the subsequent recovery may not be as swift as many had hoped).  About half even believe the Fed will be inclined to raise the benchmark Federal Funds rate (from virtually 0% today) by the middle of 2010.  Despite the potential for an economic rebound, the labor market is expected to remain weak as unemployment is projected to climb just below 10% by the end of the year.

On the inflation front, the rapid rise in oil prices does not seem to be worrying most economists surveyed (or they simply have not been paying attention), as they pegged the price of crude at $72 a barrel by December 2010, very close to today’s level.

Retail sales rose in May for the first time in three months, though much of the increase reflected rising gasoline prices which is bad news for a consumer-driven economy. Discretionary spending seems to be going to the gas pumps rather than for household or luxury items.  Still, consumer sentiment is improving as the latest Reuters/University of Michigan confidence index rose to its highest level in nine months.

The trade deficit jumped for the second month in a row as oil imports climbed, also the result of higher crude prices.  Home foreclosures actually declined in May, a positive sign for housing, though its elevated level was still the third highest ever reported.  The Fed “Beige Book“ was released during the week and the messages were mixed, at best.  While certain regions of the country have begun to experience resurgence in economic activity (or, at least, less contraction), others remained quite weak and ongoing challenges in the labor markets threaten to hinder any sustained recovery.  Despite the recent increase in interest rates, many Fed watchers do not expect the policymakers to commit to additional Treasury and mortgage-related securities purchases at the next open market committee meeting.

Weekly Economic Calendar

Source: G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

The much-hyped 10-year note auction Wednesday got a lukewarm reception from global buyers. As you can see, when the auction began at 1 p.m., investors quickly demanded a 4bps hike in the underlying yield — according to Morgan Stanley, the biggest markup at an auction’s outset since May 2003.

That helped bump the yield on the 10-year as high of 4.0%, its highest since October. Traders definitely made themselves heard — worries about debts and deficits in the U.S. are back in the spotlight. But we wouldn’t say it was in renegade vigilante fashion. 4% is a point of historic buying support for the 10-year… it’ll capture our interest again when that level is tested.

And what a coincidence… the very day of this highly anticipated bond auction, Russia and Brazil both announced they’d soon be selling $20 billion in U.S. Treasuries in exchange for IMF bonds.

It’s a smart move…each nation gets to diversify out of the dollar (the IMF will pay these bonds back with a basket of global monies) and send a clear signal to the U.S. government. But their leaders can hide behind altruistic intentions: “This support is important to help end the international financial crisis,” said Brazilian finance minister Guido Mantega. Since the money will go to the IMF’s emergency fund, Brazil and Russia get to look like generous, globally cooperatave players…even if their only intention is to get the hell out of U.S. Treasuries.

Coupled with India and China’s recent call to sell U.S. bonds for IMF paper, that’s $80 billion in U.S. debt to be sold…just what the struggling market needs.

Look for more bond turbulence today: The Treasury will spew $11 billion in 30-year bonds, another auction likely to elicit an unpleasant response. Attentive bond observers will recall last month’s long bond auction, which was given a “dismal reception,” in Reuters’ words. Since then, yields on the 30-year bond have climbed as high as 4.83%, its highest level since October 2007.

Source: Bond Bubble Burps Again

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household — thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total U.S. tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.
Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed — U.S. Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in U.S. paper are “very safe.”
“I doubt the Chinese believed him,” says the man, the myth, the legend Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former U.S. Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

”It all comes down to the fact that the U.S. needs China more than the other way around.”
General Motors, once the backbone of U.S. manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in U.S. history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north.
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the U.S. government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing or Tokyo.
Sign of the times… GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citi is the former owner of Travelers, which it spun off in 2002.
The market baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.
“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebacher Society.

“As we have documented in recent weeks, the list of U.S. macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

If you seek a better, richer life through macroeconomic awareness, you’ll be right at home in the Richebacher Society. Get in, here.
Like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze:
China’s manufacturing sector expanded for the third month in a row in May, its government reports today. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.
Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number.
The dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.
Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the U.S. dollar. Break out the black crepe and armbands of mourning for the U.S. dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is — believe it or not — leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Heh, get your ticket here: Byron’s latest special report on precious metals investing.
Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?
“I’m a raving fan, but sometimes you guys get misled a bit,” writes a reader in response to Robert Gordon’s call that the recession has bottomed.

“The so-called ‘ultimate indicator’ of recession ends of the four-week moving average of initial jobless claims is hardly as accurate as suggested. It is true that it does turn down typically, just as a recession ends from the retrospective declaration of that recession, but it is NOT true that every time the four-week moving average of initial jobless claims turns down during a recession, the recession ends.

“In the ’81-’82 recession, the indicator turned down from over 500k four times before a correct signal — in December ’81, February 82, May 82, June 82, and finally at the real ultimate peak in October 82. In the 1990 recession, it turned down in January of ’91, before its ultimate peak in April 1991.

“In the 2000 recession, it turned down in June 2001 from high levels, to give a false signal before peaking in October 2001, although many other recession indicators suggest that the recession went on for far longer than in the graphic you presented.

“Virtually every recession therefore has witnessed false signals of at least one and often many times before the ultimate peak in initial claims and before the later declared end of the recession. Why would this time be any different — particularly in view of the potential for auto mess to lead to accelerated claims?”

The 5: We agree… guess we didn’t lay the skepticism on thick enough when we introduced the idea. Glad to hear you’re a fan.

Source: Your Share of the Debt, GM Dies, Silver Still a Buy, A Pivot Point and More!

But by the end of the month, Immelt’s resolve had collapsed under the weight of the global financial crisis and his company announced its first dividend cut since the Great Depression. GE slashed its payout by more than two-thirds, from 31 cents to 10 cents per share.

GE is not alone. Companies typically abhor dividend cuts, as they are widely viewed as a sign of desperation. But lean times – like those we’ve experienced in the past year and a half – have left even the proudest U.S. firms with little recourse.

By cutting its dividend, GE will save about $9 billion a year.

The 117-year old American icon was joined by a record number of companies that issued dividend cuts in the first quarter of 2009. Companies slashed a total $77 billion from investor payouts in the three months ended March 31. For the first time since 1955, dividend cutbacks actually outweighed dividend increases.

“While the number of dividend decreases is at a record high, the number of increases has set a new record low,” said Standard & Poor’s Chief Index Analyst Howard Silverblatt.  “The average has been for every 15 increases there is one decrease.  Now it is three increases for every four decreases.”

The long list of businesses that have cut their dividends reads like a “Who’s Who” of Corporate America.  Bank of America Corp. (NYSE: BAC), Citigroup (NYSE: C), Motorola Inc. (NYSE: MOT), CBS Corp. (NYSE: CBS), and Pfizer Inc. (NYSE: PFE) were among the victims.

Now that even America’s proudest, most-reliable labels have reduced their payouts, it’s hard to tell exactly which companies will be the next to cut their dividends. But here are some simple rules to follow when looking for a safe place to invest your money for long-term dividend growth.

Three Rules for Dividend Investing

Dividends remain a critical element of investing success, Money Morning Investment Director Keith Fitz-Gerald has repeatedly said. That’s especially true in the uncertain, whipsaw market conditions that have dominated since last fall.

According to Fitz-Gerald, one study by Ned Davis Research is particularly telling, noting that dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005. Non-dividend paying stocks, in contrast, posted gains of just 4.1%.

Other experts say there are three rules to follow in order to identify companies whose dividend payouts are likely to remain in place – or even grow.

1. History Repeats Itself: Look for companies that have a history of raising their dividend.  For some organizations, dividend growth is a top priority and their track record will show that.  Although GE is clearly an exception, if a company has consistently raised its dividend for decades at a time, it will likely continue to do so.
2. Earnings vs. Payout: Research is key when investing in any stock. When looking at companies that offer a dividend, a good question to ask is: “What does the company pay per share versus its assets and earnings?”  Dividend payouts cannot grow if a company’s earnings do not grow, so check a company’s earnings history.
3. Black-and-Blue Stocks: Avoid stocks whose earnings have been hammered. While in today’s market most stocks are beaten down, stocks valued below $10 a share are generally there for a reason.

Three Companies That Are Unlikely to Cut Their Dividend

NYSE Euronext (NYSE: NYX): NYSE Euronext is a diverse exchange group that offers a 4.69% dividend yield, making it an extremely attractive investment opportunity. While the company was hit hard during the beginning of the recession (trading at over $100 a share to a meager $25.59 as of yesterday’s close), it still shows strength for long-term investment.

“The dividend is intact for 2009 and we have no plans to change it,” NYSE Euronext Chief Executive Officer Duncan Niedereaur said during a recent appearance on the 1,000th episode of CNBC’s “Mad Money.”

NYSE Euronext completed its takeover of the American Stock Exchange (AMEX) in October.  And the company has seen a tremendous improvement in its overall trading activity over the past month. Its cash equity business is up 11% on a month-over-month basis, and its U.S. consolidated equity volumes were close to record levels at 12.3 billion shares.  That’s a 48% increase from last year, and a 12% jump from February.

Additionally, the U.S. Securities and Exchange Commission (SEC) recently had a hearing and ruled unanimously in favor of reinstating five rules against short selling following the guidelines of the former “Uptick Rule.”  This ruling is important to the Big Board’s growth because short sellers helped drive down share prices.

The recession that’s plagued the markets over the past year and a half has severely diminished trading volumes, and therefore the profits of the New York Stock Exchange. The newly established rules on short selling can only make the company stronger.

“We are a three-year-old public company,” CEO Niedereaur said. “Long-term prosperity for this company is based on fairly run markets and the reinstatement of the uptick rule is a major plus for this company.”

Johnson & Johnson (NYSE: JNJ): Johnson & Johnson is a strong company with a solid dividend that yields 3.51%. Its stock remains undervalued, down 23% from its 52-week high of $72.76 a share.

Johnson and Johnson is the quintessential dividend growth stock. Its dividend has grown 14.10% on average every year since 1999.  A growth rate that high means the company’s dividend is doubling about every five years.  This has been the pattern since 1974.

Last year, JNJ’s revenue was $63.7 billion, producing a net profit of $13 billion – an increase of 22% from 2007.

JNJ’s most recent acquisition of Mentor Corp. (NYSE: MNT), a global supplier of medical products for the cosmetic-surgery market, gives JNJ the opportunity to compensate for a decline in its pharmaceutical sector (the unit has cut more than 900 sales jobs and is dealing with drug-approval  issues).

“Mentor will become the cornerstone of a broader Johnson & Johnson strategy for aesthetic medicine – serving both consumers and medical professionals,” Johnson & Johnson Chairman Gary Pruden said in a statement. “We will use our combined strengths and experience to build a market-leading aesthetic business that capitalizes on Johnson & Johnson’s broad-based commercial capabilities, worldwide surgical care footprint, and clinical scientific capabilities.”

The Proctor & Gamble Co. (NYSE: PG): Proctor & Gamble offers a healthy dividend of $1.60 a share, yielding 3.26%. At $54.02, its stock down 26.5% from its 52-week high of $73.57 share.

P&G is another example of a classic dividend growth stock:  It has been raising its dividend for the past 55 years. For 10 consecutive years, P&G has delivered its shareholders an annual average return of 3.10%.  Since 1973, dividend payments have doubled every seven years.

Proctor & Gamble offers branded consumer goods that branch off into three global markets: Beauty, household care, and health and wellness. Many common household items come from this company, such as Gillette Co. shaving products, Tide laundry detergent, Pampers baby diapers and Bounty paper towels, to name a few. During troubled times, a stock such as this is often a nice defensive play, since families are unable to do without these items.

“Today we reach a little more than half of the world’s 6.7 billion consumers,” Proctor & Gamble CEO Alan G. Lafley recently told BusinessWeek. “We want to reach another billion in the next several years, and much of that growth is going to be in the emerging markets, where most babies are being born and where most families are being formed. We see growth across our entire portfolio.”

Since 61% of P&G’s sales come from outside the United States, a weaker dollar is going to be a large factor in this company’s success.  A weaker dollar makes U.S. made exports cheaper for foreign consumers to buy. While the company is timid about its earnings and fears that business conditions may have slowed from last year, the Cincinnati-based company raised its dividend in March.  From an investment-research standpoint, increasing dividends despite expectations of a decreased consumer market is typically a good sign.

Source: Three Dividend Plays That Can Offer Stability in the Face of Uncertain Financial Markets

• Crude oil yesterday (Wednesday) rose above $62 a barrel, a six-month high, after the U.S. government released a report that showed inventories fell below forecasts. “The big drops in both crude and gasoline are very bullish,” Nauman Barakat, senior vice president of energy at Macquarie Futures USA Inc., told Bloomberg. “If people were surprised by how fast crude oil moved from $50 to $60, they will be really shocked by how quickly the market will hit $70.”

• The courtship of General Motors Corp.’s (NYSE: GM) Opel unit is down to three potential suitors – Italy’s Fiat SpA (OTC ADR: FIATY), Canadian-Austrian car parts group Magna International Inc. (NYSE: MGA) and investment firm RHJ International, Reuters reported. GM has a June 1 deadline to restructure and raise capital if it wants to avoid a forced bankruptcy.

• Brazil is on the mend from its biggest economic drought and may grow as much as 4% in the second half of the year, Itau Unibanco Banco Multiplo SA’s (NYSE ADR: ITU) Chief Executive Officer Roberto Setubal said at a conference in New York. “Our economy is showing very strong signs of recovery,” Setubal said, Bloomberg reported.  “The pace of growth is already there, and I believe we will see a very strong second semester in Brazil.”

• Target Corp. (NYSE: TGT) and BJ’s Wholesale Club, Inc. (NYSE: BJ) reported better-than-expected earnings for the first quarter. Target did so by reining in expenses and inventory. BJ’s – which raised its first-quarter forecast earlier this year – cited higher-than-expected merchandise sales and margins, Reuters reported.

• President Barack Obama is expected to quickly sign a bill imposing sweeping new limits on the credit card industry passed by Congress yesterday (Wednesday), Reuters reported.  The House of Representatives voted 361-64 to approve the bill as adopted on Tuesday by the Senate, in a major win for the president and congressional Democrats.  The so-called “Consumer’s Bill of Rights” would strictly limit credit card issuers’ ability to raise interest rates on cardholders’ existing balances and to charge certain fees.

• California voters yesterday (Wednesday) struck down five measures backed by Republican Governor Arnold Schwarzenegger and the Democrat- led legislature that were intended to shore up the state’s finances. With the governor expecting California to have $21 billion less than it needs over the next 13 months, the most-populous U.S. state is on the verge of running out of cash for the second time this year after the ballot measure defeat added $6 billion to the budget deficit, Bloomberg reported.

• Wall Street securities brokers are not expected to rehire many of the workers let go during the global financial meltdown, a New York City fiscal monitor said in a gloomy report released yesterday (Wednesday). The Wall Street firms will replace only a small number of the lost jobs by 2013 even if the industry returns to profitability next year, the city’s Independent Budget Office said in the report, according to Reuters.

• A group of Indiana pension funds filed court papers late yesterday (Wednesday) objecting to a plan to auction Chrysler LLC’s assets and said a U.S. District Court judge should rule on the legality of the sale, Bloomberg reported.  The pension funds, which hold first lien debt of the automaker, asked U.S. Bankruptcy Judge Arthur Gonzalez in New York to block the sale, claiming the plan is illegal and infringes their rights.  The funds are also asked for appointment of a trustee to run Chrysler.

Source: Investment News Briefs  Thursday, May 21, 2009