Traders have grown increasingly fearful in recent weeks that the powerful surge in the three major U.S. stock indices – one of the strongest in history – may not have been justified because of an ongoing economic recovery that’s not as strong as originally believed.

“There’s no question in my mind that the economy is improving,” Phil Orlando, chief equity market strategist at Federated Investors, told The Associated Press on Friday. “But investors are betting on some sideways consolidation rather than a continuation of a sharp spike in share prices.”

All the major indexes closed the week down for the first time since the week of May 11. The Dow Jones Industrial Average lost 3%, theStandard & Poor’s 500 Index fell 2.6%, and the Nasdaq Composite Index 1.7%.

Stocks returned to the whipsaw trading pattern investors had grown wearily accustomed to in the months before the rally got under way.

Stocks fell early in the week as a handful of weak economic reports – including news that industrial production had fallen for the seventh straight month – contradicted other reports that seemed to depict a gradual improvement in the American economy.

But some modestly upbeat economic reports sent U.S. share prices up a bit on Thursday; one report demonstrated that the overall number of people drawing unemployment benefits fell last week for the first time since the start of January.

But it wasn’t until stocks finished the day mixed on Friday – with financial, retail and tech shares gaining, while energy and utility shares dropped – that the three major indices finished with their first weekly loss since the start of May.

Last week was a loss. And the week before the three key indices each rose less than 1%.

“It’s not going to be a one-way ride,” Keith Walter, portfolio manager of Artio Global Equity Fund, told reporters.

Since periods of powerful market overperformance are usually followed by a period of sharp underperformance, institutional players have been looking for a down week.  Usually, a 40% surge like the one seen in the S&P 500 index takes years to develop, not months.

But here’s the question: Does last week’s market pullback have more to go, or can it still move higher after two consecutive weeks of sideways trading?
The conventional wisdom is calling for a stretch of choppy trading that will last through the summer, a period during which there’s low volume, until July when Corporate America begins announcing second-quarter earnings.

Market Matters

As the Dow finished the week in the “red,” it also turns out that its push into positive territory for the year was relatively short-lived.  Just one trading session beyond the index’s surge into the “black,” traders surveyed the economic landscape, evaluated the new regulatory environment, reconsidered the ballooning deficit (not even including health care) and chose to book some profits.  While the other major indexes remain profitable year-to-date, many investors believe the markets stand at a crossroad as they attempt to determine whether the recent move has been:

• A mere blip on the radar screen, amid a much-longer bear market.
• A much-too-fast run-up for a rebounding economy that that still faces a plethora of challenges.
• The start of a new bull market that simply is taking a week off to digest all the “euphoric” news.

The analysts, TV pundits, and bloggers maintain no shortages of views about the markets’ future direction.  Only time will tell.

As expected, major financial institutions rushed to pay back $68 billion in Troubled Assets Relief Program (TARP) money and get out from under the strong arm of the government.

JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley(NYSE: MS) highlighted the list, while Citigroup Inc. (NYSE: C), Wells Fargo & Co. (NYSE: WFC), and Bank of America Corp. (NYSE: BAC)are among those still seeking Uncle Sam’ approval for every action.
Meanwhile, Standard & Poor’s downgraded 18 related institutions, including a few that paid back the bailout money - BB&T Corp. (NYSE:BBT) and U.S. Bancorp (NYSE: USB) – and warned about the industry’s future

The Obama administration revealed plans for the most significant financial regulatory overhaul since the Great Depression.  The proposal expands the oversight role of the U.S. Federal Reserve, and includes higher capital and liquidity requirements, stricter reviews over hedge funds and certain derivative products, and the creation of a new consumer protection agency.  U.S. Treasury Secretary Geithner detailed the plan before the Senate and was met with mixed (but predictable) reactions…Republicans thought it was excessive, while Dems felt it didn’t go far enough.

If both sides dislike it equally, perhaps it’s a good plan?

Volatility returns to the markets as the VIX (Chicago Board Option Exchange Volatility Index) surged past the critical 30 mark early in the week, a sign generally associated with stock-market pessimism.  Bonds continued their ongoing roller-coaster ride as some fixed-income investors remained concerned about the global demand for U.S. debt, while others turned to the asset class as a flight-to-quality from riskier securities.

The worries continued as both China and Japan reportedly cut back their treasury holdings in April, a worrisome development considering the upcoming Treasury auctions will add a record $104 billion of government securities to the Street.

Oil hovered around the $70 a barrel level and gas prices increased for 52 straight days as consumers began to feel the pinch just in time for the summer holiday travel season.  Options expiration from “quadruple-witching Friday” brought additional volatility as each major equity index gave back some ground for the week on less-than-favorable reports from the likes of Best Buy Co. (NYSE: BBY) and FedEx Corp. (NYSE:FDX).

Market/ Index	Year Close (2008)	Qtr Close (03/31/09)	Previous Week (06/12/09)	Current Week (06/19/09)	YTD Change
Dow Jones Industrial	8,776.39	7,608.92	8,799.26	8,539.73	-2.70%
NASDAQ	1,577.03	1,528.59	1,858.80	1,827.47	+15.88%
S&P 500	903.25	797.87	946.21	921.23	+1.99%
Russell 2000	499.45	422.75	526.84	512.72	+2.66%
Global Dow	1526.21	1347.38	1,694.76	1,633.70	+7.04%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	2.68%	3.79%	3.79%	+155 bps

Economically Speaking

While U.S. Federal Reserve Chairman Ben S. Bernanke will be gaining enhanced powers under the federal financial system makeover, he must be wondering whether he will be around to experience them.  Despite the unprecedented challenges he has faced over the past few years, U.S. President Barack Obama has been tightlipped about whether he will reappoint Bernanke for another term when the central bank chairman’s current stint expires in January.

“Ben Bernanke has handled his position extraordinarily well under extraordinary circumstances…but I’m not going to make news on that right now,” President Obama said.

Some Fed watchers believe that President Obama has Lawrence Summers, the former U.S. Treasury secretary and present National Economic Council chairman, in mind for the position.

On the economic front, inflation data highlighted the week’s releases as both producer price index (PPI) and the consumer price index (CPI) for May were reported as below expectations.  While certain naysayers pressed forward on the scary “deflation” argument, other naysayers point to the rapid rise in energy prices as proof that the dreaded “I” word is merely lurking on the horizon.

For now, however, inflation is not considered “Public Enemy No. 1″ and economists will focus on housing, labor, and manufacturing for more signs of economic stability.

Turning to housing, new construction climbed by its largest amount in three months and even building permits jumped in May as prospects for the future look more promising.  Bear in mind, however, homebuilding activity still remains more than 45% below last year’s levels.

Industrial production fell more than 1% in May as automakers Chrysler Group LLC and General Motors Corp. (OTC: GMGMQ) continued shutting down plants and limiting production as they initiated their restructuring plans.  While initial jobless claims actually increased slightly in its most recent weekly release, total insurance claims actually fell for the first time in five months.  Still, the labor market remains the primary concern as the economy begins to show some signs of improvement.

On that note, the leading economic indicators (LEI), an index thought to forecast economic activity for the next three to six months, experienced its best showing since March 2004.

Weekly Economic Calendar

Source:  Market Stumble Heightens Worries That Economic Rebound May Not Be That Strong

If you think last week was a big one for the banking sector, this week could blow your mind. The catalyst will come at 10:00 a.m. this Thursday when a House subcommittee meets to discuss the near-term fate of mark-to-market accounting rules.

If the recent surge in calls for temporarily relaxing the market-regulating rules gains traction, we could easily see triple-digit share price gains at some of the nation’s most prominent banks. After all, without mark-to-market accounting, many banks could re-write their balance sheets. Assets that were once written down to nearly zero could be given just about any valuation.

Unfortunately, that is where the trouble and the opportunity lie.

With current accounting standards, banks must account for their assets, like bundles of mortgages and risky loans, at today’s prices. But nobody really knows what today’s prices are. After all, nobody is buying anything. That means banks have been forced to write down many of their least-liquid assets to nearly zero, the only price they know they could get.

But if the accounting rules are suspended, oh boy, banks could value those same assets at just about any price. Because there is no liquid market, finding a true fair price is nearly impossible. If a bank says its mortgages are worth six trillion dollars that is the price its balance sheet will portray. It will not matter if those same assets are listed as just a million dollars of value today.

Investors want to suspend mark-to-market accounting because it will lift valuations by huge proportions. As soon as the regulation is lifted, corporate accountants can start adding multiple zeros to all sorts of assets. And of course, those zeros would find their way to share prices.

With just one change in regulations, investors would go flooding back into the financial sector and send the equities market surging. It would make Washington look like the savior it has promised to be.

The end of economic trouble?

Of course, the gains would only be temporary. Before too long, the newly created bubble would burst and things would start crashing down once again. Even worse, investors would have no way to tell how accurate the new figures are. Without mark-to-market rules, there is nothing stopping a company from flat-out lying about its valuations. Enron’s books would look like a little, white lie.

Remember, mark-to-market is merely an accounting rule. It simply tells us how to price things on corporate balance sheets. It does absolutely nothing to represent cash flows

Read the full article here: Mark-to-market changes: Don’t count on a solution

No matter how strongly you feel that a stock is going to go up, the minute you put the words to paper, your performance as a stock-picker is there for the entire world to see.

Over the last few months, this has been painfully obvious. The market has gone down the toilet, and our picks and recommendations that we all made a few months ago have likely taken it on the chin, unless it was a bearish recommendation.

I wrote a piece for our sister publication Early to Rise back in early December that suggested it was time to buy shares in some household names that were at the time trading at very low prices. With the absolute carnage in the markets since then, I was sure that the picks I gave were probably down at least as much as the market over that time, maybe a little worse, given some of the names on the list (such as AIG, which took a third government handout on Monday).

Sure enough, there are some ugly numbers on the list. Alcoa (NYSE:AA) is down 32 percent since I made the list, Citigroup (NYSE:C) is down 68 percent, and AIG is down 71%. By comparison, the Dow is down 14.98 percent over this same time period.

Happily, some names on the list have made large jumps since then. Yahoo (NASDAQ:YHOO) is up 34 percent, Sun Microsystems (NASDAQ:JAVA) is up a little over 47 percent, and the big mover is Sprint (NYSE:S), which is up almost 90 percent since then.

To get an overall idea of how you would have done had you invested in the picks, I totaled the share prices for all 16 picks that day and compared them to prices on March 2. You would have spent $84.03 to buy one share of all 16 picks (excluding commissions). Had you sold them this past Monday, you would have gotten roughly $84.54. That’s a small profit, but remember the overall market is down 14.98 percent in the mean time.

Not only would you have beaten the market, but you would have managed to make a small gain. Not too bad in this market.

Looking back at the list, I wouldn’t really change anything. I mentioned that they were speculative plays, and with that, large losses can occur. I would still encourage buying these names, as almost all are still viable companies (AIG is questionable) and still have tremendous upside. Those that have dropped further have even less downside assuming they manage to survive (AIG).

As I mentioned in the original piece, I don’t suggest buying huge amounts of shares, but perhaps picking 10 of the companies and investing $500 into each one. You will only have $5000 invested, and the upside could be huge.

Source: Looking Back

Believe it or not, these “boring” names soared in the early 1970s, reaching a dot-com style peak in 1972.

In 1972, Coke sold for 46 times earnings. And Disney was even more expensive, at 71 times earnings. Then, both stocks lost three-quarters of their value in two years. And these are just two examples. Similar losses occurred throughout the Nifty Fifty.

Looking back on the situation, Forbes magazine said:

The delusion was that these companies were so good, it didn’t matter what you paid for them; their inexorable growth would bail you out.

Obviously the problem was not with the companies but with the temporary insanity of money managers – proving again that stupidity well-packaged can sound like wisdom. It was so easy to forget that no sizable company could possibly be worth over 50 times normal earnings.

But investors soon forgot what Forbes said about earnings, and history repeated in 1999. Coke and Disney soared to over 40 times earnings. Once again, people thought these companies were so good it didn’t matter what you paid for them. But once again, they were wrong…

Today – nine years later – the share prices of Coke and Disney are down. But business at both has grown dramatically… meaning it just might be time to pile money into the Nifty Fifty stocks again…

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Even though its stock price is lower, Disney earns 3.5 times as much as it did in 1999. And Coke’s earnings have doubled.

So with earnings soaring, and the stock prices stagnant, these old Nifty Fifty shares are now cheap again – Disney sells for a price to earnings (P/E) of 13.6 times forward earnings and Coke for 17.

It’s not just Coke and Disney… Earnings for the New Nifty Fifty Index (NFT on www.bigcharts.com) as a group have increased by over 100% since 1999… But the index is down since 1999. As a result, valuations have been cut in half… They’re cheap!

To explain just how cheap, Bloomberg lists the forward P/E ratio of the overall stock market at 16.25 (that’s the S&P 500). But the forward P/E of the New Nifty Fifty Index is only 12.79.

It’s hard to believe the Nifty Fifty won’t return to a premium to the overall market for one simple, brutal reason: Most companies won’t be around in 25 years. But I’d sure bet that in 25 years, families will still take their kids to Disney. And folks will still drink Coke.

I sincerely believe that, after nine years of terrible performance, the New Nifty Fifty stocks will beat the overall market over the next few years, as they simply work their way back to a premium to the overall stock market.

However, I can’t fully endorse buying up all these household names just yet. As you can see from this chart of NFT, the uptrend just isn’t there yet.

I have been burned fighting the trend in the last year. I won’t buck it.

So, do I believe it’s time for the New Nifty Fifty to soar again? Yes. We should be just about there… But wait to see the uptrend before jumping in.

Good investing,

Steve
Source: Time for the Famous Nifty Fifty to Soar Again?

Platinum also bottomed in the first hour of New York trading, but it then found buyers that took it steadily higher, ending at $2006/oz., up $15. Overnight, platinum is sharply higher.

Silver bottomed at the same time as gold, at $16.50, but then it caught fire, shooting virtually straight up past $17.15 by mid-morning, eased back below $17 into the noon hour, but then re-ignited and closed near its intraday high at $17.15/oz., up 35 cents. Overnight, silver has been trending higher.
(Click here for charts)

It was an odd day for the precious metals, as silver decoupled dramatically from gold, registering a sharp increase even as gold continued to struggle. Platinum too outperformed the yellow metal, posting a larger gain.

It had to be a disappointing day for gold bugs as the metal’s performance was anemic even with the usual suspects lined up solidly in its favor: oil climbing steeply and the dollar getting hammered against the euro.

Of silver, the Hightower Report wrote: “With the silver market also getting its share of private bearish price predictions during the trade Thursday it was very impressive to see the market generally favor the upside. In fact, with gold favoring negative ground for most of the session, some of the bull contingent had to be extremely happy with the action today. Perhaps the silver market was garnering some support from the reversal in the Dollar and perhaps the silver market was actually lifted by the up beat macro economic developments from the US. In fact, with favorable initial and ongoing claims, positive May retail sales figures and a soaring equity market, perhaps the silver market was being lifted by improved physical demand expectations.”

That gold lagged the rest of the market was a foregone conclusion to those who believe it will follow the dollar and who shrugged off yesterday’s weakness in the buck.

“It’s [Ben] Bernanke” who drove down gold, said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. “He has basically said the other day that interest rates are going up. If the dollar is going higher, gold is going lower.”

Period? Uh uh, says James Moore, of TheBullionDesk.com, who wrote that “as inflation becomes an increasing issue globally and credit market issues resurface, investors are likely to increase their demand for safe-haven assets such as gold.”

Source: Gold Lags Other Precious Metals – Potential Propping up of Dollar Blamed

This will see small companies, whether on the main market or AIM, offered the chance to pay £10,000 for a year’s worth of independent research prepared by one of three firms, Argus Research from New York, Chicago’s Pipal Research and our very own International Investment Research Plc.

Naturally I am pleased to see the LSE at least acknowledge that the share prices of small companies often bear no relation to the performance of the business itself, and that this is a real concern not only for investors but also for the many small companies that want to be able to issue new shares at a fair price.

But will this new measure really offer ‘huge value’? After all independent research is not new.

Filling the gap

In the old days a company’s stockbroker was responsible for writing research notes, partly to inform the market and partly to drum up some business for itself. Finding that the illiquidity of small companies defeated this latter purpose, many stockbrokers have simply abrogated this responsibility to the disgust, I might add, of many of their clients.

Into this gap have stepped a number of independent research houses such as Edison and Hardman that will write research notes to order, for a fee of something in the region of the £10,000 that the LSE is charging for its new service.

Nobody, of course, really believes that this research is truly independent. The researcher will be briefed by the company, and the research note will be vetted before it is published. If an ‘independent’ research firm has ever thanked a client for the commission by publishing a sell recommendation, I haven’t seen it.

The new venture sounds slightly different. The research note will be written by one of the three appointed firms ‘on a pre-determined allocation basis’ which I assume means that the company itself does not get to choose which of these three it will be. And ‘the research will consist of comprehensive factual information and analysis’ and ‘will not be investment advice and will not make recommendations.’

This immediately raises one question. Will companies be prepared to pay £10,000 for a research note over which they apparently have no control, and which does not conclude with a recommendation for the shares? A second question concerns the contents of these notes.

Apart from ‘comprehensive factual information’ we are promised that ‘the research providers have agreed to share common methodologies and produce reports that follow a uniform presentation format, in order to facilitate cross-company and cross sector comparisons by investors.’

Some bright spots

I like the sound of a common methodology, although I wait to see how this will enable us to compare the merits of, for example, an oil explorer and a software provider. But how much new information will these notes bring to investors?

The basis of the LSE’s initiative is that there is a lack of information about small companies; that more information will mean that more opinions are formed; that more opinions will lead to more trading in the shares; and that the result will be a more accurate pricing of small company shares.

However, there has been a massive increase in the amount of information that is available to investors in the last few years – but it seems to have done very little for the pricing of small company shares.

Whereas two or three years ago it could be quite hard to get hold of information about small companies, today just about each one has a very comprehensive web-site, featuring a description of its activities, past copies of annual and interim reports, biographies of the directors, and sometimes broker research notes. Indeed, my very own articles from Red Hot Penny Shares have been known to appear on company websites.

So companies have made a big effort to inform the market and if it has had no effect it can only be for one of three reasons. Either very few people are actually reading it – as I am sure is the case. Or the huge increase in the number of small companies trading on the LSE has simply overwhelmed the market’s capacity to absorb all that it should know about them – which I also think is the case.

Or people have been reading this information, but simply don’t believe that it tells the full story.

It is of course inevitable that companies do not publish negative information about themselves, either via a corporate website or via a note written by an ‘independent research house.’

What intelligent investors really want to see is an informed assessment about a company’s product written perhaps by an industry specialist, and a suitably cautious and sober assessment of its position vis-a-vis competitors.

If these newly appointed research houses can provide these perspectives they could make a useful contribution. But the old problem remains – will small companies be prepared to pay £10,000 for a note that draws attention to their weaknesses? And if not, is it worth having these ‘independent’ notes written in the first place?
Regards,

Tom Bulford
for The Penny Sleuth

Source: The London Stock Exchange Listens to the Sleuth

And these aren’t the best of times. So why are there 153 companies with a P/E ratio of over 100 (according to the search I did on my Yahoo stock screener)?

I didn’t go through every one of these companies. But going through about half of them, I found that just a few earned their high P/E ratios because of strong growth fundamentals.

Usually, it was because earnings have fallen faster than the price. eBay (EBAY) is a good example. Its earnings have dropped 65% over the past 12 months. But its price has only dropped 8 percent from a year ago. Its P/E ratio is 99. eBay has gotten more expensive from having a bad year, not a good year.

UPS is another super-expensive stock. Its P/E ratio is 173. Its earnings have gone down 89 percent over the last year. During the same period, its price has actually increased by 3.4 percent. It’s true that UPS shares look overbought, but why even buy this stock on the dip?

It’s not only U.S. stocks that are getting a rich valuation from earnings falling faster than share prices. Deutsche Telecom (DT) from Germany followed this same pattern. DT’s earnings dropped 82 percent this past year. Its P/E ratio is 91. Telefonica de Argentina (TAR) is another overseas example. With a P/E ratio of 91, its earnings dropped 67 percent over the past 12 months.

Do any of these highly priced companies actually deserve their rich valuation? There are rare exceptions to this pattern and one comes from overseas. Baidu is China’s Google. Its P/E ratio is 127. But it also grew its earnings over the past year by 95 percent. Phoenix-based First Solar’s (FSLR) P/E ratio is 110. But its earnings grew over 1,000 percent last year.

Investing in stocks with P/Es of over 100 has always been a risky proposition. It’s hard to sustain such a high valuation for long. Google was one of the few that managed to do it. But even mighty Google’s valuation has fallen back to earth. Its P/E is now just over 40.

At one time, you could have argued that Google’s ultra-fast growth in revenue and earnings warranted such a high P/E ratio. With very few exceptions, the current crop of super-expensive companies can make no such claim.

That which does not kill us makes us stronger.
Friedrich Nietzsche

They must have noticed that we’ve entered into a recession. Aren’t they worried about their own earnings? With consumer spending slowing, who’s going to buy their products and services?

We know for a fact that companies are nervous because business spending is down. And if “nervous” is too strong a word, at least they’re uncertain enough about the future that they’ve put many of their purchases on hold.

Yet, the oil tanker company in one of my trade service portfolios – Tsakos Energy Navigation (TNP) – is treating the credit crunch like a gift from heaven.  Some shipping companies have lost the financing they were counting on to pay for new tankers. And TNP plans on taking full advantage of these canceled orders by scooping up these ships at huge discounts.

Then there’s the REIT in my INCOME portfolio. (This is a brand new recommendation I’ve made to my paid subscribers. I’m not allowed to reveal the name of this company at this time.). It’s pretty small. Its market cap is less than a billion dollars. Yet, it’s drooling over the current market. It has a generous credit line underwritten by a half-dozen banks. And when it uses that up, it plans on pulling in some joint-venture partners to help it buy up bargain-priced property with cap rates of 9-11 percent right now.

Neither of these companies are blue chippers with deep pockets. But they will more than survive the economic crisis we’re in. They’ll get bigger and stronger. And, as a result, their share prices should shoot up.

These companies are out there. Among the gloom and doom, their CEOs are saying bring it on. We’re ready. We’re going to come through this bigger and stronger. Their annual and quarterly reports give the same message, though more muted and qualified, as these reports tend to be.

Of course, companies love to spin. So some of this will be bluster. But if you’re too cynical and unwilling to dig a little deeper, you’re going to miss out on some great opportunities.

Money makes the world go around
The world go around
The world go around
Money makes the world go around
It makes the world go ‘round.
Cabaret: “Money”

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