It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar

• American retirement plans have lost as much as $2 trillion, or 20% of their value, in the past 15 months, Peter Orszag, head of the Congressional Budget Office estimated yesterday (Tuesday). “Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working,” Orszag said.

• EBay Inc. (EBAY) said yesterday (Tuesday) that it will cut 10% of its work force and spend $1.3 billion to buy online payment and classified companies, in an effort to offset a slowdown in its web auctions business. The reduction is expected to incur restructuring charges of about $70 million to $80 million, but then save $150 million annually.

• Eli Lilly & Co. (LLY) yesterday (Tuesday) announced it will pay $62 million to 32 states and Washington D.C. to resolve an investigation into its marketing practices, The Associated Press reported. Lilly was accused of marketing its top-selling drug Zyprexa for off-label uses and inadequately disclosing the drug’s side effects to health care providers.

• Morgan Stanley (MS) and Japan’s Mitsubishi UFJ Financial Group Inc. (ADR: MTU) have received regulatory approval for the Tokyo-based bank’s $9 billion investment in the Wall Street firm. The U.S. Federal Reserve and other global regulators approved the deal, MarketWatch reported. Morgan Stanley also received antitrust approval from the U.S. government.

• The International Monetary Fund (IMF) predicted a worldwide economic slowdown in a report prepared for a Group of Seven meeting. “The global economy is entering a major downturn,” the IMF said in the report, dated Oct. 4 and obtained by Bloomberg News. “Many advanced economies are now close to recession, while emerging economies are also slowing rapidly.”

• Wells Fargo & Co. (WFC) will likely buy the bulk of Wachovia Corp. (WB) deposits, Reuters reported, citing an unnamed source. Citigroup Inc. (C) is expected to get 20% – 25% of Wachovia’s total deposits, with the remainder going to Wells Fargo, the news service reported, but cautioned that talks are ongoing and no deal has been finalized.

Source: Global Investing Roundups Wednesday, October 8th, 2008

• Standard & Poor’s yesterday (Monday) reduced the credit rating of Royal Bank of Scotland PLC (ADR: RBS), lowering the rating of both the Edinburgh-based bank’s long-term and short-term debt. “The rating actions reflect Standard & Poor’s expectation that RBS’s financial profile may continue to weaken,” the analysts said, citing a “combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions” in which to shore up its capital, Bloomberg News reported. RBS stock sank over 20% on the downgrade.

• Shares of biotech firm Dendreon Corp. (DNDN) soared 33% yesterday (Monday) on news of a good drug trial. Provenge, Dendreon’s experimental prostate cancer drug, reduced the risk of death in 20% of trial participants, Reuters reported. Dendreon shares gained $1.73 to close at $6.93.

• Eli Lilly & Co. (LLY) announced yesterday (Monday) that it plans to buy ImClone Systems Inc. (IMCL) for $6.5 billion in a deal that values the biotech firm at about $70 share. This latest offer from Eli Lilly beat out Bristol Myers Squibb Co.’s (BMY) competing bid of $62 per share. However, Bristol Meyer’s will receive approximately $1 billion in cash for its 17% stake in ImClone, The New York Times reported.

• AgFeed Industries Inc. (FEED) announced yesterday (Monday) a $10 million share repurchase program to commence immediately. AgFeed, which does most of its feed and hog production business in China, will fund the share buyback with current cash reserves, Trading Markets reported.

• Bank of America Corp. (BAC) yesterday (Monday) reported third-quarter results earlier than planned, and revealed a 68% drop in profit, as well as plans to boost capital by selling stock and halving its dividend. Profit fell to $1.18 billion, or 15 cents per share, for the July-to-September period from $3.7 billion, or 82 cents per share, in the same period last year.

• U.S. Treasury Secretary Henry M. Paulson selected Neel Kashkari, a former Goldman Sachs Group Inc. (GS) executive and current assistant secretary to be the interim head of Treasury’s new Office of Financial Stability, The Associated Press reported. Kashkari will be in charge of the office created by the emergency legislation enacted Friday to fund the largest government bailout. Paulson was the head of Goldman before joining the Bush administration in 2006.

Source: Global Investing Roundups Tuesday, October 7th, 2008

• Eli Lilly and Co. (LLY) is in advanced talks to acquire ImClone Systems Inc (IMCL) for $70 a share, topping a rival bid from Bristol-Myers Squibb Co. (BMY), the Wall Street Journal reported yesterday (Wednesday). Bristol already owns about 17% of ImClone and has submitted an unsolicited $62-a-share bid of its own for the biotech company.

• CarMax Inc. (KMX) said yesterday (Wednesday) that it will layoff more than 600 employees, or 4% of its total work force, as it struggles with harsh credit conditions and low sales, The Associated Press reported. CarMax shares fell 64 cents, or 4.6%, to close at $13.36.

• Shares of IBM Corp. (IBM) tumbled 6% yesterday (Wednesday), their biggest drop in three years, on speculation that the company failed to meet third-quarter expectations. “There’s unconfirmed speculation that they are going to bring down their numbers for the quarter, that they are going to warn,” Tim Ghriskey, chief investment officer at Solaris Asset Management, told Reuters.

• Micron Technology Inc. (MU) yesterday (Wednesday) posted its seventh consecutive quarterly loss with a net loss of $344 million or 45 cents per share for the fiscal fourth quarter. “The global memory market continues to experience severe oversupply and price degradation,” said the memory-chip maker’s Chief Executive Steve Appleton, The Wall Street Journal reported.

• A study released yesterday (Wednesday) by Consumer Reports found that cereals marketed to children in the U.S. often have more sugar and sodium than their foreign-sold counterparts. Post Golden Crisp from Kraft Foods Inc. (KFT) and Kellogg Co.’s (K) Honey Smacks are both 50% sugar by weight, Reuters reported.

• Auto sales in Canada increased 1.7% in September, Bloomberg News reported. Toyota Motor Corp. (ADR: TM) had a 14% increase, which helped offset declines from both General Motors Corp. (GM) and Ford Motor Co. (F). Car sales climbed 5.1% while light truck sales slipped 2.2%.

Source:Global Investing Roundups Thursday, October 2nd, 2008

Floyd Brown says one way of doing this is to rethink the “boring” image of dividend-paying stocks. These stocks can offer great returns and a steady cash flow.

Floyd says there are five pharmaceutical companies offering outstanding dividend yields in a growing sector. And with most negative sentiment already priced into the stocks, downside risk is limited…

This from Investment U:

Fat dividends have attracted me recently to the largest pharmaceutical companies. Ten years ago, these firms were the darlings of growth investors. When Bill Clinton’s plan to reform and socialize medicine was defeated in the early 1990s, the shares of these firms rocketed higher.

However, near the end of the decade shares of many of these stocks stalled and, as a group, their prices have remained stable. But in the following decade, regular increases in the dividends and earnings of the shares have compressed the price-to-earnings and dramatically boosted the dividend yields.

When you approach dividend-paying stocks or companies, gauging their strength is sometimes difficult. Here is one way to know if they are actually going to pump up your returns:

• A common misconception is that a high dividend yield is the most important measure.
• But a yield that is higher than that of other stocks in a sector could actually be a sign of weakness.
• If the firm is in trouble, they could be preparing to cut, or in some cases, cease to pay a dividend.

A high yield preceded major downturns in financial stocks that had gotten in trouble with subprime and other bad loans. The dividends were slashed to improve the liquidity and cash position of the businesses.

The Dividend PayOut Ratio – An Important Indicator

The important indicator for you to watch is not just dividend yield, but the dividend payout ratio. This is the percentage of earnings directed to paying stock dividends, and it shows us if a company can maintain a level or growing annual payment.

For example, Pfizer (NYSE:PFE) currently has a 6.6% yield. With a stock price of $19.11, the firm must pay a dividend of $1.28 to maintain that yield. Last year, Pfizer earned $1.33, and it has a payout ratio of 92% of earnings.

Pfizer generates more than enough profit to continue to pay the dividend, but if the company should stumble more – and make less than $1.28 next year – it would not have the earnings to cover dividends. Then the firm would have to dip into reserves or borrow money to pay the dividend. In such a case, the dividend would be at risk.

The best dividend paying stocks are those that hold the yield steady as they grow. In this case, the dividends are growing year after year, and you benefit from both the capital gains and the cash.

The Top 5 Dividend-Paying Stocks

For decades, buying shares of such franchise players as Coca-Cola (NYSE:KO), Johnson & Johnson, Altria (NYSE:MO) and General Electric (NYSE:GE) have been great dividend-paying stock plays.

In the current market, I like pharmaceutical stocks because the largest have become virtual cash machines. The dividends offer a protection against dramatic drops in share price. In addition to Pfizer…

• Johnson & Johnson (NYSE:JNJ) yields 2.6%
• Novartis (NYSE:NVS) yields 2.6%
• Glaxosmithkline (NYSE:GSK) yields 4.4%
• And Eli Lilly (NYSE:LLY) yields 4.0%.

All these are outstanding yields for growing firms. Pfizer grew revenue 9.4% last quarter. JNJ grew 8.7%, Novartis grew 14.7%, Glaxo grew 3.5% and Lilly grew 11.20% in the last quarter.

While a number of these drug firms have been under pressure from market perceptions of slow growth, shallow pipelines of new drugs and patent expirations, these negatives are already priced into the shares. 

Investing in dividend stocks is not a sexy investment strategy, but it can be one of the most profitable. By following the “show me the money” mantra, these cash machines can start improving your portfolio and deliver outstanding returns.

Source: 5 Pharmaceutical ‘Cash Machines’

Lilly has been distributing Posilac, which has been on the market since 1994, for Monsanto under an exclusive agreement and hopes this deal will enable it to expand its veterinary health offerings.

“You’d assume the controversy is part of the price, so there must be some other reason Lilly wants this asset,” Charles Anthony Butler, an analyst for Lehman Brothers Holdings Inc. (LEH) in New York, told Bloomberg News. “Maybe it’ll help them sell other products to those farmers. Animal health as a component for all pharma companies is a business they want to grow.”

While Lilly’s motives for the purchase remain unclear, it’s a smart move for Monsanto.

Growing consumer opposition to the use of hormones in dairy products has been swelling over recent years. Sales of such products are already outlawed in Canada and parts of the European Union.

In the United States, leading grocer The Kroger Co. (KR), coffee-chain Starbucks Corp. (SBUX) and the largest domestic milk processor Dean Foods Co. (DF) all refuse to use milk that contains rBST.

This recent sale is part of Chief Executive Officer Hugh Grant’s plan to sell-off Monsanto’s smaller animal units in order to concentrate company efforts on Monsanto’s popular crop-agriculture product lines, which include Roundup-brand herbicide, as well as modified corn and soybean seeds.

Divesting this controversial asset can only help Monsanto bolster its international reputation. Shares gained $5.22, or 4.63% yesterday (Wednesday), to close at $118.08.

Meanwhile, Lilly’s stock shed $0.39, a decline of 0.82%, to close at $47.41.

Source: Monsanto Sells Off Controversial Milk-Hormone Unit to Focus on Seed Product Lines

Take Lipitor – the world’s best-selling cholesterol drug – for example. Each $3 Lipitor pill only costs Pfizer about $0.25 to make. So the company collects 90% profit margins.

One way the drug industry has learned to reap those outsized rewards with less risk is through “me-too” drugs. Me-too drugs are essentially copycats – like generics but with fat margins.

For example, after Pfizer’s (PFE) Viagra wowed the market, Eli Lilly (LLY) and Bayer jumped into the fray. Now the market has three drugs – Viagra, Cialis, and Levitra – to treat the same condition. Viagra and Cialis fetch more than $1 billion per year. Levitra, the laggard, still generated $500 million in 2007 sales.

But the me-too well is running dry. These days, the FDA won’t approve new drugs unless they offer a clear advantage over what’s already on the market. Recently, me-too drugs vying to compete with Merck’s Januvia (a diabetes drug) and Gardasil (a cervical cancer vaccine) faced serious setbacks. Neither drug satisfied the FDA’s higher standards.

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Now a new class of drugmakers is taking a slightly different tack: They pick existing drugs and make them better. So a company might make a drug available as a pill rather than an injection. Or it might change a three-pill daily regimen into a once-a-day routine.

These so-called “specialty pharma” companies start with what works and go from there. With thousands of drugs on the market, specialty pharmas have no shortage of lucrative products to choose from. Here’s an example of how it works

Until recently, many schizophrenics had to struggle with a complex dosing routine that included capsules of Risperdal (a popular treatment option). So Alkermes (ALKS), one of the biggest specialty pharma outfits, collaborated with Johnson & Johnson, Risperdal’s maker, to create Risperdal Consta.

The new version is a bimonthly injection, and it generates more than $1.2 billion in revenue a year. Besides Alkermes, investors can choose from a handful of pure-play specialty pharma outfits

Specialty pharmas boast profit margins almost as big as the brand-name drug business 70% or higher. And by modifying drugs the FDA has already cleared, they take on much less risk.

Recently, the industry has far outperformed the general market These five stocks are up 3.5% over the last three months, while the S&P is down 8%. I’ve been busy digging through the short list in search of the best company. If you are looking for a low-risk way to get in on the lucrative drug business, this is a great place to start.

Good investing,

George Huang, editor, S&A FDA Report

Source: Where to Earn Monopoly Profits, Minus the Risk

On Wednesday morning, the Fed Beige Book comes out. The market looks at this report to see if there is any hint of economic improvement. Last month, three districts reported softer economic activity, four reported slower growth, and the remaining five reported stable activity. I would expect the “softer” or “slower” growth to spread to the districts that reported “stable” activity, as the economy will likely sputter for a while longer.The Existing Home Sales report for June comes out on Thursday, and is expected to show a decline of 50,000 homes sold compared to May. The previous two months the report has managed to beat expectations. I expect it to beat the estimate again this month.

The New Home Sales report comes out on Friday and the market is expecting it to show a decline of 7,000 units. This report has also managed to beat expectations for the last two months, and I also expect it to beat expectations again this month.

The other report of note this week is Durable Orders for June. In May, the report showed no gain, and is expected to post a 0.10 percent gain this month. I am not sure if reports are ever issued in smaller increments, but a 0.10 percent gain is about as small as it gets while still being considered a gain. This report wouldn’t surprise me if it comes in negative, as durable goods orders for the past few months may have been fueled by stimulus checks, which have likely run their course and aren’t being spent in any significant amount anymore.

Earnings Calendar:
Monday: MRK, TXN
Tuesday: CAT, DD, YHOO
Wednesday: BA, ATT, PFE, PEP, BUD, AMZN
Thursday: LLY, F

Source: A Full Week of Economic and Earnings Reports

Take the above chart of Eli Lilly (LLY:NYSE).

On April 11, we saw weakness in LLY. Officially, it had failed to rise above long-term support. After trading flat, it was destined to fall. At that time, LLY traded for $52.37 per share.

So we shorted it. And sat patiently.

Seven trading days later, LLY reported earnings. They were good, but failed to meet analysts’ expectations. So LLY dropped $2.48 per share! The news backed up the technical picture.

By that time, LLY was trading around $49.05 per share. LLY stock had fallen 6.34%… but we made much more than that on a short play!

The power of Death Cross Trader gives you the ability to make 10 times your money on a stock’s fall. Very easily, readers of Death Cross Trader made gains of 58% on LLY’s 6.34% drop.

If you don’t want to take my word for it, just listen to DCT subscriber D.H.

He wrote in to say that he “entered the LLY play 10 cents higher but still made a nice profit and I have made back the cost of your service and more in only 2 weeks!”

With a recession in place and stocks continuing to fall from historic highs, it’s time to learn how to double your money in a matter of days, or even triple your money in a month by betting against the biggest stocks on the market.

Ann Sosnowski

Editor, Death Cross Trader

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When the moment is right, will you be ready? A lot of men are about to be. Any time. Any day. Every day, in fact. That’s because the Food & Drug Administration is expected to grant Eli Lilly (NYSE: LLY) approval for a daily version of its erectile disfunction drug, Cialis. This comes after the European Commission approved it in June.

Okay, first things first: Who the heck are these guys married to? Seems to me they have lofty and unreasonable expectations!

But it’s not just in the boudoir where expectations are high. The stock market lives on expectations. And at this time of year, many of them are unreasonable, too. For investors like us, it means we have to navigate a tricky minefield.

Here’s how to do it, I’ve said it here before – and I’ll say it again. I can’t stress to you enough how important it is to have a contrarian investing approach.

The Market Loves Forward Growth Not Past Results

The market is a forward-looking mechanism. Forget “What have you done for me lately?” Investors want to know, “What are you going to do for me tomorrow?” For the most part, stock valuations are based on forward growth and earnings, not on past results.

If you don’t believe me, just take a look at the next time a stock gets crushed – despite meeting or beating analysts’ earnings expectations. If a company does so, but also provides future earnings guidance that is below estimates, it’s Goodnight Irene!

This exact scenario actually happened yesterday to Crocs (Nasdaq: CROX), the makers of those funky foam shoes that everyone seems to be wearing. Propelled by the immense popularity of the shoes, the stock had soared from $37.50 a year ago today to $74.75 on Wednesday.

Happy Halloween, right? Not so much. Shares got absolutely mauled yesterday, plunging $27.01 (36.1%) to close at $47.74.

What could possibly have happened to cause such a drop? Did the CEO get arrested for cooking the books? Did somebody find lead paint in their new pair of Crocs?

Nope. Crocs actually beat analysts’ third-quarter earnings estimates and then raised full-year earnings guidance. Woo-hoo! Break out the champagne! On second thought, keep it on ice. The problem was that Crocs didn’t raise guidance high enough to meet analysts’ lofty expectations.

Tough break for them – and for shareholders. So how do we protect ourselves from unreasonable expectations?

Wanna Cash In? Have A Contrarian Investing Approach

I can’t begin to tell you how important it is to have a contrarian investing approach. If the fickle market loves a stock too much, you can bet that the majority of analysts will slap a fat “buy” rating on it, coupled with pie-in-the-sky earnings projections. They did exactly this for eToys back in the dot com boom days (and I still have the analyst report to prove it) that promised the company would be a “category killer” with huge profit assumptions. But the only thing eToys killed was its shareholders.

But if you invest in stocks that are out of favor, you’re likely to avoid those gut-wrenching 30% falls that result from failing to meet estimates. After all, out of favor stocks already have low expectations. So when they miss estimates, Wall Street simply shrugs it off and says, “What did you expect?” They barely give it a second thought.

But let me tell you something: Those stocks’ declines are far less than their well-loved counterparts.

The Father Of Contrarian Investing

David Dreman is known as the “father of contrarian investing.” And to prove how effective this contrarian investing approach is, he conducted a study that showed stocks with price-to-earnings (P/E) ratios in the bottom 20% (unloved) were down just 0.1% for the full year after they had a negative earnings announcement.

Alternatively, well-loved stocks with P/E ratios in the top 20% endured an 8.9% drop.

While that proves the point, how do we avoid or mitigate the risk that comes from earnings announcements? The simple solution is to use sell-stops. This eliminates emotion from your sell decisions.

Many times, investors freeze up when one of their stocks is plummeting. Emotions and pride take over and they can’t seem to sell while prices are falling. Instead, they wait for the rebound to kick in and end up watching the stock tank further. It’s a great way to lose money.

Use a stop-loss! When you do, the sale is automatically triggered when the stock hits a preset price that you’ve determined in advance (this can be anything – but is usually 20% or 25% lower than your entry price). This way, it’s much easier to cut your losses and move on to the next investment instead of waiting for your stock to bounce back.

But in a stock world where expectations can be so high, how do you get around this without paying over the odds and losing money? There’s a professional strategy for it…

Steer Clear Of Analysts High Expectations

If some analyst has clearly placed overly high expectations on a certain company, you should probably steer clear until the price declines to a more comfortable level for you.

But while most ordinary investors simply do this and then move onto the next candidate, there’s a way you can actually walk away with some money while you wait.

I employed this contrarian investing approach on a flourishing medical device company for Xcelerated Profits Report subscribers in the most recent issue. And my colleague Lee Lowell has also used it twice in recent months.

In my case, I liked the prospects of the company, but because the stock had taken off recently, I argued that there was actually too much optimism. This made buying the stock outright a much riskier bet.
Instead, I suggested selling put options at a lower strike price, thus giving the buyer the right to sell us the shares at that strike price. If the stock retreats to that level, we’ll own it at the lower price we wanted. Not only that, we get to keep the premium that we received for selling the put. And if the stock continues to rise, we still don’t buy it, but we do keep the premium.
Bottom line: We like the company but we don’t chase it when the share price goes up. But we do get free money for trying to own it at the price we want.
Today, the company I recommended issued a stellar earnings report. It really knocked the cover off the ball. However, the stock didn’t rise that much because those expectations I talked about a moment ago were already sky-high.

Find out what this company is here. And if you want to know what this approach is – and how to employ it in your investing – check out today’s “Action Center” below.

Know The Expectations… Know The Limits

When you’re evaluating stocks, make sure you use all your regular methods of due diligence:

Look at the company’s fundamentals,
See what the technicals show you,
Know what projects/products it has and what its future prospects are.
But make sure you also understand what kind of results Wall Street analysts are predicting.
As much as we like to make fun of them for being a bunch of lemmings, it’s their estimates that the Street uses as a guidepost as to whether a company is missing, meeting or exceeding expectations.

Yep, life would be much simpler if expectations were more reasonable – whether we’re talking about individual relationships like a marriage, diplomatic relations between countries or the stock market. But understanding and knowing how to deal with those expectations, especially the unreasonable ones, can keep you out of trouble – with your spouse and your portfolio.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld