This from Rude Awakening:

Welcome to “The Great Suppression.” The government keeps trying everything it can to suppress the unfolding economic bust. Whether the Great Suppression succeeds or not is beside the point. What concerns us is that its actions will have consequences in the marketplace. And as investors and speculators, we have to think about what those might be.

It’s sometimes uncanny how history repeats itself. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.” If FDR walked the Earth again, Obama’s stimulus would look familiar.

Over the weekend, we got more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least 2 million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

Our infrastructure stocks have been among our best performers over the past year.

Insituform Technologies (Nasdaq:INSU), for instance, continues to announce new contract wins. (See Rude Awakening from July 23, 2007 – Pipe Down!) The company repairs water and sewer pipes with a trenchless technology that does not require you to dig up the pipes. We’re up about 37% on that, a welcome spot of green in what has otherwise been a tough row.

Ameron Intl. (NYSE:AMN) is another infrastructure play. It has a water pipe business, which ought to benefit from the slew of water projects. Scott Black, of Barron’s Roundtable, had Ameron as one of his stock picks for the year. “In Arizona, Nevada and California, a lot of shovel-ready water projects are waiting for a go-ahead,” Black said.

“Ameron makes wind towers, too, and infrastructure products. It owns 50% of Tamco, which makes steel rebar for highways, bridges and overpasses.”

He also pointed out Ameron’s good backlog. “For each $100 million incremental increase in revenue under an infrastructure bill, based on 22% margins, they’d make $15.3 million after taxes,” he says. “Ameron… is cheap based on both tangible book value and expected earnings. It’s an interesting way to play a pickup in infrastructure in California and the West.”

Others in our portfolio that may see some increase in business thanks to the swell of money from Obama’s bill include Gorman-Rupp (AMEX:GRC). I updated this one in your last issue. GRC makes a variety of pumps. It has exposure to a number of markets affected by the stimulus plan, including municipal water and wastewater systems.

I like Gorman-Rupp for a lot of reasons, as I outlined in the issue. Chief among them is a rock-solid balance sheet — excess cash and no debt — and a good long-term track record. While not stone-cold cheap at 16 times earnings, it’s not a bad price to pay for an unlevered business earning a steady (and resilient) 16% return on capital with good growth opportunities in front of it.

Viterra (TSE:VT), as I mentioned in this column last week (”Investing in Food“), is another very compelling investment. The company, which operates in various aspects of the Canadian grain handling and agribusiness, posted very impressive numbers in the fourth quarter.

In a year which most would rather forget, Viterra’s business shined. For the year, it booked $1.31 in earnings, up 56% from a year ago, thanks to closing the (brilliant) acquisition of Agricore. At today’s price of $9.25, Viterra trades for only 7 times earnings. You’re not going to find many companies putting up those numbers available at 7 times earnings — and Viterra is financially strong.

Viterra generated $400 million in free cash flow in 2008. That on a market cap of just over $2 billion, for a 20% free cash flow yield. There is a lot of room for error when you buy stocks at those kinds of valuations. And the outlook here is still bright if you believe agriculture markets will be strong, as I do.

In today’s Financial Times, there was a story on a new report from the London-based think tank Chatham House. As the FT reports: “The world faces ‘the real risk of a food crunch’ if government does not take immediate action to address the agricultural impact of climate change and water scarcity… ‘Food prices are poised to rise again.’”

This is something I’ve been writing about here and in C&C. I think we’re looking at a strong back half of the year for grain prices as global grain stocks fall. That will be good for a lot of our ag-related names, including Viterra, but also for our irrigation play Lindsay Corp. (NYSE:LNN). (See Rude Awakening from July 4, 2007, “The Most Dangerous Religion.”) The latter is another nice pickup here, with no net debt and trading for less than 10 times earnings.

Irrigation and fertilizers play a big role in boosting yields and producing more food. Viterra, a sort of toll road on grain traffic, also benefits. For now, these stocks look cheap. But the market won’t be able to ignore the numbers as we roll through 2009. Good results and rising grain prices will attract attention.

Already, wheat, corn and soybeans are up 15%, 17% and 22%, respectively, since December. As the FT notes: “In contrast with other raw materials such as oil or aluminum, which have plunged back to the levels of 2002-2005, agricultural commodities are trading higher than they were 12-18 months ago.”

As I write, the S&P 500 is down about 8% in the month of January. Barring a rally, we’re on pace for the worst January on record for the S&P 500 since 1970, when the S&P fell 7.7%. I pass this onto you so you appreciate the historic nature of this market we are in. It’s been difficult to show any gains investing on the long side.

But when you invest in good names with valuable assets and quality businesses, their stock prices will – eventually – reflect the good things going on under the hood.

Source: The Great Suppression

This from Investment U:

I’ll be the first to confess, I flubbed the extent of the downturn in the financial space. Last April, I recommended “backing up the truck” and playing the rebound via the Financial Select Sector SPDR ETF (AMEX: XLF). Instead of a short-term opportunity, it’s turned into a really long-term rebound play.

But as I told members at our Central American meeting in Nicaragua last week, I’m human. I make mistakes. Both in life and investing. Thankfully, I’m not as bad as Wall Street analysts…

Forget Your Broker, Wall Street Analysts are a Bigger Threat

Most people will tell you a bad broker, motivated to increase his net worth by leeching fees off your net worth, is your biggest enemy. Not so. A blind faith in Wall Street analysts poses a bigger threat.

Forget being wrong some of the time. They’re wrong most of the time. Or as a recent MarketWatch article tells it, “If there’s one group of Wall Street denizens that have performed as poorly as bankers in the credit crisis, it’s the equity analysts who cover Corporate America.”

For instance, well into the credit crunch, they predicted earnings growth of 11.5% for the fourth quarter of 2007. Low and behold, earnings actually plunged 25%, based on Thomson Reuters data. They were off a whopping 36.5%! No rational explanation could explain, let alone justify, such a big miss.

Here’s the most compelling observation, though. According to Ashwani Kaul, the numbers cruncher at Thomson Reuters, the “figures show that analysts tend[ed] to err on the side of the positive when predicting earnings growth.”

But that was then. After being so wrong, for so long, I’m convinced most analysts fear for their jobs… and the pendulum’s swung back the other way. They’re being way too pessimistic now.

Case in point. Analysts’ estimates for the S&P 500 companies rest at their lowest levels for the last four years. In the last month alone, they’ve piled drive expectations into the ground, lowering EPS forecasts for 982 companies.

Companies themselves have even jumped on the pessimism bandwagon. In the third quarter, only 3% raised guidance. While the majority – you guessed it – lowered expectations.

Bottom line, the negative side of the market is getting overcrowded. And for once, I think analysts actually got ahead of the downward spiral.

That’s not so say we won’t have any more repeat performances. But we will certainly get pockets of outperformance. Companies beating expectations, with share prices eventually rebounding to reflect the good news.

Here’s how to play it…

Stock Profits From the Point of Maximum Pessimism

The late Sir John Templeton believed, “The time of maximum pessimism is the best time to buy.” (I agree.) And he did just that.

But he didn’t load up on the market indiscriminately. Instead, he cherry-picked companies trading at cheap valuations, with solid businesses and above average growth prospects.

He was talking about companies like Minnesota-based Fastenal (Nasdaq:FAST). It’s a supplier of nuts, bolts, parts and tools to manufacturers and commercial contractors.

I’ll concede that such a business is unglamorous and mind-numbingly boring. But the fact is, the company’s nearly 700,000 products are vital. They are used to operate and keep up large buildings, campuses and industrial plants, as well as bolt together furniture, appliances and trucks.

Recession or not, demand remains stable for Fastenal’s products. Otherwise, simply put, stuff stops working.

I originally alerted Oxford Club members to this stock in November. It reported earnings yesterday. And guess what? It beat expectations. The company posted a 10% increase in profits and enviable same-store sales growth of 8%.

Moving forward it will continue to grow thanks to four key competitive advantages – unparalleled convenience, market penetration, cost leadership and customization.

Strong insider ownership, double-digit growth opportunities and the most attractive valuation in over a decade (approximately 40% below its historic price-to-earnings ratio) only make the stock more compelling. I still rate it a “Buy.”

Whether you trust my analysis on Fastenal or not, just remember this: Analysts’ earnings estimates resemble a waterfall, cascading lower and lower with each passing week. They’re bound to overshoot the mark.

In many cases, like Fastenal’s, they already did. And that means plenty of bargain stocks exist to profit from the imminent pivot from pessimism to optimism.

Source: Stock Profits from Today’s “Maximum Pessimism”

This from Investment U:

President-elect Obama takes office in less than a week’s time. While many will be watching closely to see how he handles the ongoing financial crisis, I’ll be equally interested to see how he handles a far more ominous one: our ongoing energy and infrastructure crisis.

Regular readers know I believe energy and infrastructure are inextricably combined. We need cheap energy to fuel sustained economic growth. And we need infrastructure in place to move and dispense the energy from its source to its destination. Today I’m going to give you a perfect example of how the two are intertwined, and how one can play off the other to create a positive benefit for all.

In the face of gas prices that are less than half of what they were only a few months ago, it’s easy to think the “oil crisis” has passed. We can all return to “business and life as usual” – revert to our old driving habits – and just pay the lower price at the pump, right?

That would be a huge mistake. The real price we’ll pay will be our continued dependence on foreign oil. Last year, U.S. consumers and businesses spent over $475 billion hard-earned dollars for it.

Higher Gas Prices Are Around The Corner

With today’s lower prices forcing the cancellation or postponement of exploration projects around the world – and OPEC threatening more cuts – higher gas prices are just around the corner.

Just imagine for a minute, if – year after year – we took that nearly half a trillion dollars and reinvested it here. We’d have a stronger dollar, less susceptibility to economic downturns and recessions, and perhaps even a trade surplus as opposed to a trade deficit.

Well there’s one state that’s doing just that, setting an example the rest of the country should follow. As a result of their efforts, a growing percentage of money spent on auto fuel stays here. And car sales there are on fire. You see, these cars don’t burn gasoline. They run on a much cleaner fuel, one that’s found in abundance right here in the United States: natural gas.

We’re behind the natural gas as a fuel for cars curve, however. Worldwide, there are about eight million vehicles operating on natural gas. Here in the United States we only have 116,000. But Utah, with its estimated 6,000 vehicles, is breaking new ground. Even Utah’s Governor Jon Huntsman Jr. converted his state SUV to run on the clean burning fuel.

One word: cost.

Gas Prices In Utah – 85 Cents-A-Gallon

Natural gas prices at the pump in Utah are controlled, and are the cheapest in the nation, at the equivalent of roughly 85 cents-a-gallon. The other big advantage Utah has is the infrastructure to fill the cars. It’s fairly scarce in most other areas of the country.

And while natural gas is widely used in Europe at the consumer level, here its use is relegated to a few fleet vehicles. At the consumer level, it’s the classic Catch-22 situation. Carmakers – with Honda as the only notable exception – aren’t willing to make natural gas powered cars with so few filling stations available.

On the other side, filling stations don’t want to fork over the money to install expensive equipment to compress the gas, something that’s required in order to fill the tank on the car.

As is often the case, government intervention in the form of tax incentives or financing will go a long way towards breaking the logjam. California is leading the way, with legislation that offers a minimum $2,000 rebate to buyers of natural gas fueled cars.

Congress has legislation it will be considering this year that offers tax credits to consumers and producers alike, and mandates to install pumps at service stations across the country. The goal? Have the nation’s consumer fleet 10% powered by natural gas within 10 years.

Energy and Infrastructure Plays With a Natural Gas Bent

U.S. natural gas production remained stagnant for nearly nine years, and then in 2007, abruptly increased 9%. Improved drilling technology accounts for a large portion of the increase. Horizontal drilling and fracturing is fast becoming the preferred method of producing gas from difficult geological formations like shale.

And there’s plenty of it: Big shale deposits include the Marcellus, Bakken, Haynesville, Barnett and Woodford. Navigant Consulting, an industry consultant, estimates natural gas production can be ramped at least 50% to 30 trillion cubic feet per year between now and 2020, if necessary.

A simple way to play the gas game is to bet on one of the big producers, like:

• Chesapeake Energy (NYSE: CHK)
• Anadarko Petroleum (NYSE: APC)
• Or BP, PLC (NYSE: BP)

Once the gas is brought to the surface, it has to be distributed through our nation’s pipeline network. And that’s currently being expanded at a rapid rate to meet growing gas demand, primarily from utility customers. Take a look at three of the largest natural gas pipeline infrastructure companies in the United States:

• Kinder Morgan (NYSE: KMP)
• El Paso (NYSE: EP)
• Williams (NYSE: WMZ)

In summary, natural gas-burning vehicles represent a clean alternative to fossil fuels, and a good bridging solution until improved batteries enable meaningful numbers of plug-in electric hybrids. All the companies mentioned stand to score big if a serious natural gas auto mandate gets underway. And we’ll all be the better off for it.

Source: The Gas Prices Rollercoaster: Why Energy & Infrastructure Are Inextricably Combined

This from Today’s Financial News:

Last night, I sat down at the kitchen table and realized I was a bit lopsided. I checked to see if the chair was broken. It checked out.  I sniffed my glass of water to make sure it wasn’t tainted. It was alcohol free.

It turns out my overstuffed wallet was the culprit. My worn-out leather companion has slowly grown to nearly two inches in thickness. The growth cannot because of an accumulation of greenbacks. You have a better chance of finding a moth infestation than more than forty bucks in cash in my back pocket.

The culprit was a collection of gift and membership cards. As I started digging through the mess, I uncovered memories I had long forgotten, like my membership to a local gym. I called to see if it was still active. The kind lady that answered the phone told me the gym closed over two years ago. No wonder I have not been going.

As my stack of “throw-away” cards grew to over an inch in thickness, I hesitated when I got to my Blockbuster (NYSE:BBI) membership card. I hadn’t used the thing in at least a year, but had a tough time convincing myself that would be a long-term trend. After all, I am recently married and that means I will be spending a lot more time at home, snuggling on the couch. Ugh…

In the end, I decided to experiment and toss the rectangular piece of plastic into the hopper that will ensure it is buried for all of eternity. I think I made the right decision.

The Internet killed the video star

Blockbuster is in a ferocious industry battle. The video-rental company was doing fine, even leading its industry, until Netflix (NASDAQ:NFLX) came along and changed the rules of the game.  No longer do consumers have to get in their cars and shell out four or five bucks for a movie that is due back in a couple of days. Thanks to Netflix, they are delivered straight to a subscriber’s door.

Blockbuster enjoyed nearly half of the industry’s “store” business, but cannot get anywhere close to a leadership position in the industry’s new monthly subscription business. Netflix dominates with nearly three-quarters of the $2.2 billion industry’s total sales.

Blockbuster has tried to keep up with the mail-based subscription industry, but as it was not able to obtain a position as a first-mover, its brand is rarely associated with the industry. Just as brands like Kleenex, Google and Xerox became synonymous with their products so has Netflix. It has become a strong and relentless competitive advantage for the company.

But now the industry is changing once again and Blockbuster is desperate to take the lead. Check out any of the latest in television or set-top products at the Consumer Electronics Show and you will see one thing. Almost all of them have Internet connections. A broadband-enabled TV is the way of the future.

At least that is what Blockbuster hopes.

Earlier today, the company announced a deal with Sonic Solutions (NASDAQ:SNIC), a $35 million company specializing in digital video software and products. Through Sonic’s CinemaNow video library and Blockbuster’s own digital content offerings, the companies are working to beat Netflix to the downloadable movie leadership position.

Netflix has the advantage. It has been offering online video downloads since 2007. Subscribers can download videos to their computers, Xbox systems and the company has a deal with TiVo (NASDAQ:TIVO) that sends movies straight to a TV set.

Blockbuster wants to follow the same route, but offer the content to even more digital devices hooked to the Web. It is going to be an interesting battle.

Playing for keeps

The real question is not what devices or technology the company’s should use. What investors need to know is if there is room for more than one player in this industry.

Just like the satellite-radio industry, the world of downloadable movies has high fixed costs and little in the way of variable costs. That means if the subscribers are spread over too many competitors, individual profits will remain low and we will see a wave of consolidation. Again, just look at Sirius XM (NASDAQ:SIRI).

But if one company emerges as the winner, it will be able to fend off competition because newcomers will not be able to afford the initial technology costs. That is why Netflix and Blockbuster are fighting so hard while this industry is in its infancy. The winner will secure a huge long-term revenue stream.

Right now, it is anybody’s battle to win. Netflix has the better brand, but it appears Blockbuster has the superior technology. Traders would be wise to look beyond these two companies and look at the firm’s making it all happen, like Sonic or even TiVo.

For investors looking to break into an industry of the future, this is a fantastic opportunity. Share prices are cheap and the profit potential can only grow from here. All you have to do is pick the winner.

Source: Want to get rich? Invest in the company that can dominate your entertainment

This from Penny Sleuth:

On Monday morning, the sun was shining extra bright for one Southern Californian firm. The small specialized health care business of Advanced Medical Optics (NYSE:EYE) experienced a truly perfect day. At least, its investors did.

You see, Abbott Laboratories (NYSE:ABT) announced that it intends to acquire AMO for $22 per share in cash. That’s about 149% above it’s $8.85 Friday close. It took 18 years for the S&P 500 to bring those kinds of gains. Seriously, you’d have had to invest in February 1991 to realize a 149% gain today.

Most investment advisors compare their expected returns to benchmark indexes like the S&P 500 or the Dow Jones. Even small-cap specialists compare their gains to the Russell 2000. But, why in the world would you want to wait 18 years to grow your money, when there are investments you can buy on a Friday afternoon and cash out on Monday for the same return.

So the question before us is: how can you double your money like AMO investors?

AMO is a rare case when investors oversold a company’s stock and a large competitor takes advantage. To benefit from cases like these, you need to find similar scenarios. Let’s walk through AMO’s story…

Finding a Mega Value

AMO sells vision-correction technologies and products for a wide variety of patients. For instance, no one sells more LASIK surgical devices – used in more than 90 percent of all U.S. refractive surgical procedures – than AMO. The company also holds the number two spot in the cataract surgical devices market and the number three position in the contact lens products market.

Now, without serious research there’s simply no way for me to tell you any more than that. Frankly, I don’t know much about this industry, and since the jump already occurred, I don’t need to.

But apparently, Abbott Laboratories did do that research and figured that AMO was still a buy at a 148% premium. The point is, Abbott realized how important it was to control the top spots in these fields.

Over 60% of 60+ year olds have cataracts. In the next 11 years, the number of 60+ year olds globally is expected to increase 43%. Simply put… the older you are, the more chances you’ll need AMO’s technologies. And with more older people than ever, the demand is rising. You don’t have to be an eye expert to realize what Abbott was thinking.

On top of a great looking future, AMO was also incredibly cheap just last week. Abbott is basically paying a total $2.8 billion for a company that produces $1.1 billion in revenue per year. In just two and a half years, the company’s revenue will merit the investment.

Sure, it’s not a highly profitable company yet, but it is in the black. AMO is already turning a profit, which is just another stream of income for Abbott even before synergies are realized.

Back to how this affects you…

If you know what to look for, you can be in on the next AMO. Below is a quick list of criteria to look for when searching for a buyout candidate:

• Value – are the company’s price-to-earnings, price-to-sales, and price-to-cash flow ratios low?
• ROI – has the company made smart investment decisions? Will there be a lot of useless intangible assets lying around that would disinterest a potential owner?
• Industry – is the company in a growing or contracting industry? Is it an industry that is conducive to mergers and acquisitions?
• Profit – is the company profiting already, or at least have a profitable horizon?
• Debt – is the company carrying high debt? Would a potential buyer use the debt situation to lower its buying price?
• Synergy – is the company’s business model flexible, and can a potential buyer save costs by synergizing departments?

Of course, each company is different, and each acquisition is different. It takes some serious studying to find great buyout candidates. But done right, and you can save yourself 18 years of waiting around in the stock market. If you find the right candidate, you might just multiply your money in hours, not years.

Source: How to Find a Buyout Candidate

This from Taipan Daily:

I’ve got an interesting stat for you concerning unemployment. It doesn’t predict recessions or crashes mind you, just presidential elections.

Seems that our economy has a really tiny window of tolerance in this area. Looking back about as far as the modern records go, I noted that anytime unemployment is over 7% (deflationary) or below 4% (inflationary), the party in power loses the White House.

I was starting to wonder if this rule would hold up, when today’s announcement of 7.2% unemployment came across my wire service feed. My friend Christian Dehaemer says that “A: it happened after the election; and B: the statistical string is too short to generate any reasonable presumptions.”

Still the rule is holding up better than most.

Oil’s Big Bounce begins on January 21st

In just days, two key conditions for soaring petroleum prices coincide for the first time in history.

Here’s how you could play it for 190 times your money or more…

More Guesstimates

Other folks with other rules are also tossing their wizard’s hats in the ring: Boston Fed Reserve Bank President Eric Rosengren claims that he sees the recession deepening in the first half of 2009, but showing signs of improvement shortly thereafter.

Parsing through his notes, Rosengren seems to think that folks will bank their relative gains from fiscal stimuli and falling home and energy prices for the first few months of the year. But come summer, or perhaps early fall, some of that largesse will finally begin to flow to (surviving) retailers.

Others are putting out a less optimistic timeline. Both Justice and I always look forward to Nouriel Roubini’s comments, as he was one of the few mainstreamers whose ideas on the dangers of our profligate ways jibed neatly with our own.

Mr. Roubini is calling for a two-year recession with unemployment rising to 9% and a GDP falling a cumulative 5%. Since we have already seen one year and a drop of around 1.6%, Roubini figures the recession will last through to 2010, with GDP drops each quarter totaling some 3.4%.

The Law of Averages Gets a C-Minus

Finally, there is a stat chart floating about the financial blogosphere (I believe that this is the very first time I have every typed that word without gagging: It is a new century indeed) noting that the average duration for recessions from 1948 through 2001 was a little over 10 months.

More importantly for stock guys and gals, it points out that in nine out of 10 recessions, the stock market sets a bottom about halfway between the beginning and end of the recession.

So let’s see how this all adds up: if the average is 10 months, then the average corner ought to come around the five-month mark. Hmmm: doesn’t quite seem to work this time around, as we are already at the 12-month mark for the recession, and we haven’t seen a real corner yet.

Come to think of it, it didn’t quite work last time around either: The 2001 recession was only eight months long (as least so far as Washington is willing to report), and came smack dab in the middle of a crash that lasted about three years.

Another Rule That Works Every Time

I am not really in a position to tell you for a fact how long this recession will last. But I do have an unerring system for calling crashes and corners.

I’ve shown it to you before: I overlay a seven-month and 13-month average on top of the S&P 100. When the faster seven-month line crosses under the slower 13-month line, it’s a crash. And I am not talking some little localized dip here, but rather a full-on bear market.

It may be simplistic but it works every time. It also calls real rallies with the same unerring accuracy: When the fast line crosses over the slow line, we are in for a pretty good time for the next couple of years.

Maybe not a perfectly straight line up: heck it’s not like this thing predicts wars in the Middle East or typhoons in Malaysia or any such foolishness. But it is an unerring summation of the long-term intentions of millions of investors.

No Bottom Yet, But That Doesn’t Mean No Opportunities

And what it tells me is that we have not seen the bottom yet. Indeed those two key averages are as far apart as they have been in the recorded history of this system. In fact, we haven’t even seen an initial signal, wherein share prices cross up and over the fast average.

So when can folks start to buy stocks? And what should they buy? Come on, that’s all you really want to know, right?

Since everyone else is making educated guesses, I suppose I can extrapolate just a touch without going off the ranch. Throw on a couple of long-term trend lines and a probable bottom shows up some time around mid-July 2009. With any luck, at all, we should see stocks trend upward for the next two to four years after that point.

Hold Your Nose for a Year or Five

As for what to buy and when to buy it, I suppose it all depends on your tolerance for volatility.

If you are willing to buy now and hold your nose till, say, 2012, I suppose you could buy most any of the surviving finance stocks. I know some pretty smart guys who are picking up shares of American International Group (NYSE:AIG) right now, figuring on quadrupling their holdings over the next half a decade.

On the same theme, I suppose Ford (NYSE:F) looks like it will be the survivor amongst the big three American automakers. It actually doesn’t want a bailout from Washington right now, just access to the same sort of lines of credit any large manufacturer needs to survive in the modern era of just-in-time inventories.

A Better Short-Term Bet

Looking to the shorter term, I favor putting a toe in the water now with call options against some the companies that will be immediate recipients of President-elect Obama’s stimulant efforts. In WaveStrength Options Weekly, Bryan and I recently recommended Granite Construction Inc. (NYSE:GVA), a smallish infrastructure contractor that is positioned to rake a fair share of Washington’s “Really New Deal.”

With some luck, and several billion of Washington’s fancy new dollars, GVA investors stand to make a 75% gain between now and mid-July.

However, without a genuine buy signal under my belt, I am still recommending that portfolios remain weighted to the short side overall.

And personally, I very much hope that the folks who call the stock market bottoms at the midpoint of recessions are really wrong this time around, as that would indicate a grueling three-year recession on par with the worst modern history has offered up.

I really don’t have that much room on my couch.

Source: Handicapping Recessions and Rallies for Fun and Profit

This from Money Morning:

Research in Motion Ltd. (Nasdaq:RIMM) – maker of the ubiquitous BlackBerry – is likely to consolidate and increase its market share.

Almost all of our “Buy, Sell or Hold” recommended stocks started out on the right foot here in the New Year.  And our strategy of building up a position gradually up to year-end – to avoid the downward pressure of tax-loss selling, and other volatility – seems to have worked. This has left some cash on the sidelines to take advantage of any sell-offs that are sure to come in the first quarter.

In this environment, plagued with uncertainties, we are going to focus on companies that have bulletproof balance sheets (meaning they require no outside financing), enjoy a sustainable competitive advantage, regularly record high profit margins, and execute their strategies well.

The Waterloo, Ontario-based Research in Motion meets all of these requirements and pops up in our quantitative and qualitative screens prominently. And it helps a lot to have seen this Canadian company handily beat its third-quarter results.

RIMM has a solid, highly defensible franchise in its core market, the enterprise mobile phone segment. You see, the Blackberry line of smartphones has become the “must-have” gadget of managers in Corporate America. And not just because it’s a cool sign of corporate status – the phones are true productivity enhancers among corporate systems managers.

I called the experts just to verify this.  First, I queried a friend who runs systems for a Fortune 50 firm. For obvious reasons, my friend requested anonymity, both individually and for the company.

“If I had to implement a system now, the BlackBerry is the safest choice,” my friend explained.

And because the BlackBerry was specifically designed for this audience – a lucrative market segment – the device features many capabilities that just aren’t available in competing products. And if they are available, the features aren’t as well integrated into those rivaling devices.

To further buttress my research, I also called my good friend Brenda Lewis, a principal with the Greenwich, CT-based Transactions Marketing Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.

Lewis is an independent thinker and isn’t “married” to any particular technology, and she was equally bullish: “RIMM has been innovative – ahead of IT officers’ requirements in security and in their ability to accommodate corporate applications.”

And not only did she confirm the technological edge and superior capabilities that the Blackberry platform has over the competition, she went on to elaborate on a market rumor that has been going around for some time – that Microsoft Corp. (Nasdaq:MSFT) will buy RIMM.

“The probability of Microsoft acquiring RIMM is exceptionally low,” Lewis said.

I am not sure I concur, since the Windows and Blackberry market shares would comprise a very small percentage of the overall market.  Earlier in 2008 the market shares were hit by:

“lack of personal discretionary income in most markets.”
She was right.

Subsequently, industry researcher Gartner Inc. (NYSE:IT) predicted that global sales of mobile phones would dip between 1.0% and 4.0% – even with 308 million mobile phones being shipped in the third quarter. Gartner’s forecast was consistent with a forecast by IT researcher IDC.  IDC predicted a drop of more than 2% globally, despite a 9.0% sales pickup in smartphones for 2009.

But even in a generally cautious environment for wireless devices, this pickup in smartphone sales bodes well for the rulers of the space: Apple Inc. (Nasdaq:AAPL) and Research in Motion. Apple had been outpacing RIMM in sales the quarter before, but RIMM’s launching of three new “must have” Blackberry models should pay some major dividends. The BlackBerry Storm – RIMM’s first touch-screen smartphone – is a direct counterpunch to Apple’s iPhone 3G, which allegedly poses some security risks that become problematic in the corporate environment.  And the Storm, together with the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 will probably propel RIMM as the major market share gainer in the market in the current quarter, as evidenced by the success of the Storm on Black Friday.

In fact, with this early success already well underway, RIMM projected a large increase in revenue this quarter, to as much as $3.3 to $3.5 billion.  Both Apple and RIMM trail mobile device king Nokia Corp. (NYSE ADR:NOK) in market share. With its focus on the consumer – and not the corporate – market, Nokia leads the world with a 40% market share in the smartphone market, followed by Apple with 17% and Research in Motion with 15%.  So the bottom line for both Apple and RIMM is that they will gain market share from Nokia and other makers in a smartphone market that is growing at a 9.0% annual clip.
Research in Motion is poised to do very well for the follow reasons:

• It’s selling into a market segment that’s continuing to grow at a hefty single-digit pace.
• It is technologically dominant in the big-spending corporate market.
• It stands to boost its market share in both the overall smartphone segment and in the corporate segment.
• It has three new models on the market in the BlackBerry Storm the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 – which should enable it to snag additional market share.

All in all, these factors and others should enable Research in Motion should do well in this quarter, and throughout this year in general – despite the negative developments in the global economy.

RIMM shares bottomed at about $36 on Dec. 3, the day it downgraded its outlook. It has rallied some 20% from that quick bottom and has since been repeatedly testing these levels.  At these levels, the stock is already back to the range out of which it started 2007 and proceeded to log in a 250% climb.

Research in Motion shares closed Friday at $41.92, and have traded as high as $148.13 in the past 52 weeks.

So with all the aforementioned competitive advantages, the stock correction that seems to have run its course and a valuation that results in the lowest PEG (Price/Earnings to Earnings Growth Rate) ratio among its comparable peers (Apple, Nokia and Microsoft), RIMM is a compelling buy.

Recommendation: Buy RIMM shares immediately. But don’t purchase your entire intended position all at once. Leave some firepower to buy a second block of shares during a strong pullback in the stock or in the general market – should one occur – or after the company reports results from the current quarter.

Source: Buy, Sell or Hold: Research in Motion is Poised to Dial up Profits

This from Taipan Daily:

I’d like to talk to you about prison for a moment.

Now, don’t start panicking or checking your Rolodex for your attorney’s number. I am not looking to prosecute anyone (nor be prosecuted myself for that matter) any time in the near future.

It’s just that jails have been cropping up a bit as I look about the investing scene these days. Sort of a theme, as it were.

The Smartest Guys in the Room Get Burned

For one, there’s that fellow Bernard Madoff.

You know the guy: former Nasdaq head and current indictee suspected of scamming $50 billion off our best and brightest. He’s put in at least an hour or two of cell time over the last few weeks.

Fortunately, Madoff was able to gin up $10 million in bail money, so now he is safely ensconced at home. They are calling it house arrest. I doubt Bernie is on anyone’s “A-list” invite-wise, so he probably wouldn’t be going out much anyway.

There’s talk about the Street that the Feds are trying to claw back cash from the folks who profited from Big Bernie’s decade-long Ponzi scheme. The idea is that these gains are as ill-gotten as any street level drug dealer’s.

Seems to me there’s a bit of a double standard there. Any “gains” Madoff delivered up are tainted, and properly belong to his victims… but the Feds are perfectly willing to accept $10 million in bond from the same purse.

The Latest Fall Guys

Actually, the whole Madoff scandal is a bit of a godsend for Washington/Wall Street. Each major collapse cycle has to have its “fall guys” – some big names that the G-men can pin to the wall so as to prove they’re on the case.

In fact, these prosecutions usually break down into two specific categories: one big company and one big name.

Last time around the big company was Enron, and the big name was Martha Stewart.

This time around, the big cheese slated for cell time is most certainly Madoff. I am betting that the celebrity name will be Dallas Mavericks owner Mark Cuban, who – much like Stewart – is in dutch with the Man for selling several grand in tech company shares ahead of bad news.

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Forget the Raisin Still: I’ve Got Cold Mojitos

The slammer is intruding into the public conscience in all sorts of odd ways.

The red-hot Liberty Hotel in downtown Boston, for example, brags that its granite walls and barred windows were originally designed in 1849 by a famous Beacon Hill architect, Gridley Fox James Bryant… and a prominent Yale-trained penologist, one Rev. Louis Dwight.

Why the odd team? In its previous incarnation, this four-star joint was Boston’s infamous Charles Street jail.

Some things never change: a stay there still comes with a nice view of the Charles River. The bar at the Liberty claims to be booked for weeks in advance, mostly by twenty-somethings excited about drinking martinis and dancing the night away in jail. (But nursing their hangovers in the comfort of their own home.)

While I might possibly consider staying there the next time I’m booked into downtown Bean Town for a conference, I am not particularly inclined to recommend this (or any) hotel as a buy in the current environment.

When “Risk-Free” is a Bad Thing

But that doesn’t mean that we can’t pursue this thread a little further.

President-elect Obama is warning that unemployment could very well hit 10% if Congress does not authorize another massive infusion of imaginary dollars. Ten percent unemployment is a figure that has been coming up quite a bit lately, with many prominent students of such things warning of the same, and a few speculating that we may very well already be there.

It’s really quite hard to say for sure, as Washington has done its level-best to obscure the actual number of people without jobs. The trick here is to remove entire cadres of job seekers from the lists who have been out of work too long – the logic being that they can no longer expect to find jobs and are therefore no longer legitimately “unemployed.”

I tell you what: I consider myself an honest man, but if I were told such a thing, I would be sorely tempted to acquire a pistol or two and avail myself of whatever source of portable wealth I could find. Hey: we all gotta eat, eh?

Certainly there is no doubt that entrenched joblessness leads to hopelessness, and hopelessness leads to spikes in crime. When you have no hope, risk/reward becomes an inane concept. No wonder the idea of jail is cropping up so much these days – there are so many folks queuing up for a cell for a night, a year, or even a decade.

Go Directly to Jail

Readers might care to capitalize on this nascent trend by looking into shares of commercial jails. Florida-based Geo Group (NYSE:GEO) comes to mind as a prominent up-and-comer in this field of endeavor, with some 53,144 “beds under management” (a polite euphemism borrowed from the folks in health care).

Now, GEO is a bit smaller then most of the companies that I look at, with a market cap just a hair under $1 billion. But it is steadily improving itself by bringing more and more “beds” under management (14% in the last quarter alone). And, unlike so many other businesses, they are indeed thriving in this criminally competitive market.

Net income is up 25% between 2007 Q3’s $12.7 million (25 cents/share) and 2008 Q3’s $15.9 million (31 cents/share). Profits over the same stretch rose 34 cents per share, beating expectations by 4 cents.

It’s a fair bet that GEO will continue its growth without terribly much trouble, what with states coming up so short these days and need so obviously growing. The current share price as I sit to write is $18.90. Gains of 20% per quarter should be easy to maintain, and a double by summer is certainly not out of the question.

Source: Turning Prison Into Profit (Without Going to Jail)

This frm Money Morning:

In an appearance on NBC’s “Meet the Press” on Sunday, Wal-Mart Stores Inc. (NYSE:WMT) Chief Executive Officer H. Lee Scott Jr. said the recession is changing consumer-buying habits.

What Scott didn’t say is that Wal-Mart is perfectly positioned to capitalize on those changes.
“The No.1 issue today is [consumers'] concern about their job,” Scott said during the nationally televised interview. And because of that concern, Scott said consumers are making some of the following changes:

• In the discounter’s “pharmacy group, we have increases in prescription drugs, but not at the same rate it was. What we’re seeing is an increase in self-treatment.”
• Cash-strapped shoppers also are making different food choices, meaning Wal-Mart is “seeing an increase in food storage as people are cooking more at home.” Consumers are “using leftovers more extensively,” and buying more frozen food.
• Even the owners of small businesses are altering their buying patterns to better manage their cash flow, by shopping more frequently, but by buying less than usual during each visit, Scott said. For instance, restaurant owners stop in more often and buy a day’s supplies at a time, which stretches out that cash flow and reduces spoilage.

At a time when the U.S. retail sector is in the throes of its worst stretch in years, Wal-Mart may be the one retailer that investors want to own. The world’s largest retailer, Wal-Mart last month reported a 10% jump in its third-quarter earnings per share. The company’s sales jumped 10%.

That performance is a big part of the investment case for Wal-Mart: Here we are, a year into a recession, and Wal-Mart, a retailer, is posting a double-digit gain in profits, and a healthy single-digit increase in sales.

This apparently counter-intuitive trend is actually a typical phenomena reserved for market leaders who also enjoy cost leadership in their own industry.

Let me explain.

In any industry – and especially one in which one firm’s wares can be easily substituted by those of a rival (which is very true of retailing) – the key to survival is to have a cost advantage over the competition. As demand falters, the low-cost player is able to under-price its rivals, attract additional traffic, gain market share and thrive, while the weakest players get squeezed right out of the business.

In the retail sector, this is playing out like a Harvard Business School case study.  For November, Wal-Mart’s comparable-store sales increased 3.4%, while most of its competition saw actual sales declines. Even consumer-products king Procter & Gamble Co. (NYSE:PG) is showing that its sales through Wal-Mart are increasing, while sales through other retailers are down.

Wal-Mart’s unrivaled ability to buy in huge volumes allows it to obtain extremely favorable pricing from its suppliers.  If those suppliers want to deal with Wal-Mart, they must accept the razor-thin margins the retailer affords them. Any supplier that even thinks about balking need only remember what happened to Rubbermaid Inc.

Back in the early part of the 1990s, in what is now regarded as a classic example of the market power that Wal-Mart was able to amass, consumer-products giant Rubbermaid Inc. found that rising oil prices were forcing up the cost of the ingot-like plastic balls that served as the raw material for its ubiquitous plastic storage tubs. Following what was then standard industry procedure, Rubbermaid tried to pass those higher expenses along to Wal-Mart in the form of higher product prices.

But Wal-Mart, known for its “falling prices” philosophy, not only balked – it fought back. It not only refused to pay the higher prices, it ordered Rubbermaid to find ways to cut the prices of its wares – even in the face of steeply rising raw materials prices.

When Rubbermaid refused, Wal-Mart slashed the amount of shelf space devoted to the Rubbermaid products, and gave the space to a little-known, privately held firm called Sterilite Corp., which had started life as a maker of plastic shoe heels that had the sad propensity to melt. So Sterilite switched to making plastic containers for the home.

Rubbermaid never recovered, and in 1999 it was forced to merge with Newell Inc. to form Newell Rubbermaid Inc. (NYSE:NWL). Rubbermaid remains the No. 1 maker of plastic storage containers. But after having come out of almost nowhere, Sterilite is today No. 2.

So in addition to being the “channel commander” – with an ability to dictate terms and prices to suppliers – Wal-Mart’s very lean cost structure and high efficiency from its highly-optimized logistics operation allows it to minimize corporate fat like no other and translate those savings into low pricing for its customers. With Wal-Mart’s sophisticated integrated sourcing-and-distribution system, competing on cost across the board against them is simply not possible for any of its competitors.

And consumers know it.

As Wal-Mart CEO Scott noted in his “Meet the Press” interview, even with gasoline prices way down, consumers are hunkering down.  With unemployment already at 6.7% – and rising fast – the increasing ranks of the unemployed and underemployed alike have already slashed their spending.  And even the folks who have kept their jobs are worried – and are acting accordingly.

The drop in home prices and the evisceration of savings and retirement brought on by a bear market that’s vaporized some $6 trillion in shareholder wealth add the final brush strokes to what was already a very dark economic portrait. Consumer confidence has plunged, and consumers are keeping their wallets in their pockets, partly to boost savings.

It’s an environment in which consumers and companies alike are well advised to employ a defensive mindset every bit as aggressive as the Pittsburgh Steelers. But not Wal-Mart. Instead, the retailing giant has gone on the offensive and is attacking the marketplace with the gusto that’s more like the Drew Brees-led New Orleans Saints.

In short, even though so many consumers are employing a back-to-basics mindset, as CEO Scott described, Wal-Mart isn’t sticking with just food and consumer staples. The chain is taking advantage of troubles in the electronics marketplace with the bankruptcy of Circuit City Stores Inc. (OTC:CCTYQ) and is even making huge inroads in electronics against Best Buy Co. Inc. (NYSE:BBY).

For example, Wal-Mart is marketing both the Apple Inc. (Nasdaq:AAPL) iPhone and Google Inc. (Nasdaq:GOOG) G-Phone. It’s also is resorting to proactive advertising of discounts through text messages and other aggressive tactics in order to highlight its discounted merchandise and bring customers to its stores. Needless to say, the strategy is working extremely well.

But what about the change in leadership?  Neither I nor most of the analyst community expected the recent announcement that Scott, 59, would be stepping down as the retail giant’s CEO, effective Feb. 1. But Scott is being succeeded by Michael T. “Mike” Duke, 58, head of the company’s overseas operations, and an executive with substantial global experience. So I am both comforted and optimistic.

I see continuity in Wal-Mart’s core strategies and, if anything, an invigorating shot into Wal-Mart’s overseas strategies.

In fact, this executive shift should play out extremely well for Wal-Mart. With the announcement of its record fourth-quarter sales and earnings back in February, Wal-Mart Stores Inc. (WMT) became the world’s first $100 billion retailer. With an increasing penetration of China, and continued, unabated success even in emerging market countries such as Mexico that have been affected the most by the ongoing U.S. financial-crisis-spawned recession, Wal-Mart is ready to reap the growing benefits of its international foray.

Next year, while the world’s most-advanced economies will be barely growing in the aggregate, emerging economies will post growth of between 3% and 8%, led by China. This should enable the retailer’s overseas sales to climb by as much as 10%, in spite of the global turmoil.

In conclusion, the U.S. recession should translate into increasing market share gains for Wal-Mart here at home, while an increasing penetration into the much-faster-growing economies abroad will help propel both the top and bottom lines for the company. With a Price/Earnings (P/E) ratio of 15 and a very-low EBITDA multiple of only eight, this defensive profit play is poised to continue delivering capital appreciation and market outperformance in the New Year, despite a very difficult backdrop.  Wal-Mart should be a core stock in virtually every portfolio.

ACTION TO TAKE: BUY Wal-Mart Stores Inc. (NYSE:WMT), but do so with some care. Buy half a position today and leave some powder dry to complete the position in the first quarter of the New Year, since volatility will remain with us for some time to come. **

Source: Buy, Sell or Hold: For a Defensive Stock, Wal-Mart Plays a Great Offense

This from Investor’s Daily Edge:

What is my top pick for 2009? It is a new Exchange Traded Fund from a group called Direxion Funds. The people at Direxion have taken ETFs to a new level they are offering funds that have triple the leverage of the underlying index.

What does this mean? It means that if you have one of these ETFs and the index goes up one percent in a day, this ETF will go up three percent. If the index goes down one percent the ETF goes down three percent. This is great leverage like you might get with long-term options, only these ETFs don’t have an expiration date.

There are only four bullish funds and four bearish funds. The funds are bullish or bearish on the Russell 1000, the Russell 2000, the Russell 1000 Energy Index and the Russell 1000 Financial Services Index.

Here is a table with the eight funds offered:

I like the Large Cap Bull 3x Shares ETF (NYSE:BGU) for my top pick in 2009. As I laid out in last week’s IDE article, “If History Repeats Itself, You Will Want to Be In The Market For The Next Six Months”. I look for the markets to improve dramatically over the next 12 months and I look for the big cap names to be the biggest beneficiary of the market improving.

I don’t necessarily think we will see a 42 percent gain over the next six months like we saw in 1974, but even if it goes up 25 percent over the next year, the BGU will gain 75 percent. After the performance of 2008, I think anyone would be happy with a 75 percent gain in 2009.

I am going to take minute to toot my horn. I have done fairly well with my long-term predictions over the last couple of years. In 2007, I predicted that copper would move higher and I gave IDE readers Southern Copper as a pick. The stock went up exactly 100 percent over the course of the year.

In September 2007, I predicted that retailers would suffer dramatically because of the credit crisis. The S&P Retail Index has declined from 500 in September ‘06 to a low of 207 last month.

This past April, I put out a special report called “The Sun Sets On Oil”. I was a little early on this one as oil continued to climb up until July, but after peaking at 146 in July, oil has fallen over 70 percent in the last five months.

I don’t make these predictions based on making readers feel better. I make my predictions based on how the markets have behaved in the past and the overall sentiment toward that particular market. I believe that the only way you can see huge shifts in the market is when almost all investors are thinking alike and you have to go against that crowd mentality. All of the previously mentioned predictions were made based on being a contrarian.

Source: Think Big In 2009