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Dell Gets Serious About Tablets
By Surojit Chatterjee, IBTimes.com
Dell (Nasdaq: DELL), the world's No. 2 PC maker, is taking its fledgling tablet-computer business very seriously and will soon launch a new 7-inch device. A 10-inch device, which will challenge Apple's (Nasdaq: AAPL) iPad, will launch next year, a top company executive has revealed.
Speaking to The Wall Street Journal in an interview earlier this week, Dell Greater China President Amit Midha said a tablet device with 7-inch screen will soon join its smaller sibling, the Dell Streak, in stores.
"We'll be launching very, very soon -- within the next few weeks," Midha said in a WSJ report on Thursday.
Last week, Dell CEO Michael Dell showed off the new tablet device at the Oracle Open World event at San Francisco and said the new device will be more powerful than the Streak, a tablet device that runs on Android and doubles as a smartphone. The new 7-inch tablet will be slightly larger than the Streak's 5-inch screen.
However, Dell didn't mention the tablet's price, name, shipping date, or other technical specifications. It will have a similar design to the Streak but is expected to come with a more powerful dual-core Nvidia Tegra 2 processor. The Streak runs on Qualcomm's Snapdragon 1GHz processor. Reports from tech blogs say the new device will also sport 4GB of RAM, 4GB of flash memory (upgradable to 32GB with an SDHC memory card slot), a 1.3-megapixel camera, Wi-Fi, Bluetooth, and a built-in GPS receiver.
But most importantly, the device is expected to come loaded with Google's Android 2.2, unlike the Streak, which originally shipped with Android 1.6.
But Dell apparently isn't happy with just the 7-inch device and is also planning to launch a 10-inch screen tablet that it hopes will give the 9-7-inch iPad a run for its money. Midha didn't mention whether the 10-inch tablet will run on Android but said his company plans to offer several products that will feature Microsoft's Windows OS as well as Google's energy-saving Chrome OS. The 10-inch device, however, isn't expected to launch until next year.
Apple has sold more than 3.5 million iPads since its April launch, and Piper Jaffray analyst Gene Munster said he expects the company to ship a massive 21 million units in 2011. It's no wonder Apple's rivals are burning the midnight oil to emulate the iPad's success and that technology majors including Toshiba, Archos, and Hewlett-Packard have begun selling or announcing their intention to develop iPad-like devices. For instance, BlackBerry maker Research In Motion (Nasdaq: RIMM) launched a tablet device, called the PlayBook, earlier this week, while consumer-electronics giant Samsung said it plans to launch the Galaxy Tab, a tablet device that will run on Android 2.2 and a sport 7-inch screen, in October.
Dell joined the tablet race when it launched the Streak in August. That device includes a 5-megapixel front-facing camera, a rear-facing VGA camera for video calls, 3G phone capabilities, and expandable memory with an SD memory card slot -- all features that many wish the iPad had.
However, it has received a lukewarm response, mainly because of its antiquated operating system (Android 1.6) and its price ($299 with a two year AT&T contract or $549 without). Critics also say it's too big to use as a smartphone and too small to use as a computer.
Shares of Round Rock, Texas-based Dell closed up 0.52% to $13.04 on Friday.
Let the Great Tablet Wars Begin
By Eric Bleeker
Earlier this week, Hewlett-Packard (NYSE: HPQ) executive Todd Bradley took the stage at TechCrunch's Disrupt conference and proclaimed that tablets will become a $40 billion market within the next few years.
The statement sparked a flurry of oohs and ahhs, along with lots of stories on the outsized growth of tablets. But Bradley's comments shouldn't come as a surprise. After all, for weeks we've seen reports that Apple (Nasdaq: AAPL) was ramping up to produce 2 million iPads per month. If that's true, Apple could generate upwards of $15 billion a year from iPad sales alone. Throw in machines based on HP's own efforts with its webOS tablets and an onslaught of tablets based on Google's (Nasdaq: GOOG) Android, and $40 billion within "a few years" seems like a pretty conservative figure.
And so we finally enter a new age of computing. Nearly a decade after Microsoft (Nasdaq: MSFT) declared the emergence of the tablet era, tablets are finally entering the mainstream.
Winners of smartphones; now the winners of tablets
Microsoft's folly when it comes to tablets was in trying to project the desktop-computing experience onto smaller, touch-sensitive devices. It's always been in Microsoft's DNA to provide as many features as possible and give aesthetics a back seat to functionality and wide-ranging compatibility. However, the sweet spot in tablets is in offering consumers a lightweight experience that's optimized for browsing and "good enough" at other tasks, such as writing e-mail or using spreadsheets. The Internet and Web browsers have matured a lot in the past decade, to the point at which they've enabled these kinds of browsing devices.
Despite HP's own ambitions, the two clear front-runners in tablets are Apple and Google. And it's no surprise that the smartphone high-flyers are now seeing the most tablet momentum. The iPhone actually started life as a tablet; Steve Jobs set out to create a tablet earlier last decade but quickly realized that a smaller version of a tablet would work perfectly as a phone.
So now the winners of the smartphone bonanza face a second jackpot, but will this next revolution be as lucrative as the smartphone revolution that preceded it?
A landmine for PC manufacturers?
Even if that $15 billion tablet figure for Apple proves too ambitious, the fact remains that tablets are an enormous growth driver for the company. In fiscal 2009, Apple's total sales for its entire Mac line were less than $14 billion. However, tablets might not have the same outsized effects for Android-based models.
The reasoning is simple: A key differentiator for Android tablets is price. Since Android is distributed freely, there's little to differentiate the phones from one another. And we're already seeing Android tablets scratching the $150 price point. Android's key advantage over the iPad is price and the varying degree of designs. So even if Android tablet sales eclipse the iPad, that doesn't mean higher profits to manufacturers. Besides, even when it's not the per-unit market-share leader (cough … iPhone), Apple's been known to generate outsized products because of its differentiated offerings.
Moreover, tablets aren't succeeding as a result of increased consumer spending on computers in general. In fact, the Consumer Electronics Association expects overall consumer spending on electronics to be flat for 2010. That means that tablet purchases in large part cannibalize spending that would have otherwise gone to netbooks or full-fledged laptops. For major PC manufacturers such as HP, Dell (Nasdaq: DELL), and Acer, designing tablets is more defensive in nature. They're a threat to the companies' existing business.
Where's the value add?
However, for other tablet players that aren't heavily engaged in PC manufacturing, tablets offer a growth opportunity into a previously untapped area of consumer spending.
Take Cisco (Nasdaq: CSCO), for example. The company's been developing a tablet concept called Cius that could act as a "thin client." That means people could use the tablet's Android operating system when performing tasks such as browsing the Internet and then virtually tap into a full-featured work desktop for more demanding tasks. The thin-client idea still faces some technical challenges in the form of bandwidth bottlenecks, but the enterprise adoption of tablets could provide a unique opportunity for Cisco in the coming years.
Speaking of the surprising enterprise adoption of tablets, Research In Motion (Nasdaq: RIMM) could also be well positioned for growing revenues from its PlayBook tablet. Tablets offer an area in which RIM could build a foothold -- not necessarily because of the PlayBook's capabilities, but because of It firms' typically slow adoption of new technologies. RIM devices are already approved for most corporate networks, while larger companies are still testing Android and Apple phones.
In this respect, it was imperative that RIM launched within the current generation of tablets to establish a foothold. Many enterprises are working at an unusually fast pace to allow access for Android and Apple's iOS.
Not many winners
Although the tablet market is growing rapidly, it's important to remember that the devices won't be killing the PC anytime soon. Researcher IDC estimated that 294 million PCs shipped last year. Even if tablets hit sales of 50 million within a few years, they'd still be a relatively thin slice of the overall PC market. For companies such as HP and Dell that are working to diversify away from being low-margin PC sellers, the lost profits from tablets aren't enormous; just don't expect them to contribute to any kind of investing thesis.
Investing in tablet growth is a tricky thing. Apple offers a good entry into the segment as a market leader, but other companies looking to move into tablets -- such as RIM, Cisco, Samsung, and LG -- either are too big for tablets to have an outsized impact, or the chance that their concepts will succeed is fairly low.
The bottom line is that investors looking to profit from any upcoming tablet boom don't have a variety of investing opportunities available from large manufacturers of tablets. The better play on the trend would actually be the chip companies making varying components critical to both tablets and smartphones. With Intel largely absent from the mobile market thanks to the success of ARM Holdings-based processors, a number of processor companies stand to benefit from the segment. Then there are the many companies that provide connectivity and power-management chips critical to tablets.
So even though tablets might be entering the mainstream, don't expect investing profits to follow -- that is, unless you're willing to dive into a patch of chip stocks.
Why AOL Bought TechCrunch
By Surojit Chatterjee, IBTimes.com
AOL (NYSE: AOL) went on a shopping spree earlier this week with a focus to boost its Web content. It scooped up popular tech blog TechCrunch and acquired Web-based social-networking software maker Thing Labs and Web video-syndication company 5min Media.
Though the value of the deal is small -- CNBC sources claim AOL agreed to buy TechCrunch for $40 million, while Business Insider put the number $25 million -- it underscores AOL's plan of building an Internet-content business sustained by advertising.
AOL CEO Tim Armstrong and TechCrunch founder and editor Michael Arrington signed the deal on Tuesday at TechCrunch's Disrupt conference in San Francisco. Although AOL already owns rival tech blog Engadget, Armstrong said the two brands will "operate independently and leverage each other."
AOL's revenue has been slipping ever since it split up with Time Warner (NYSE: TWX) last year. In the most recent fiscal quarter, the company said it incurred a net loss of $1.06 billion, or $9.89 per share, and that revenue slipped by 26% year-over-year to $584.1 million. The primary reason for the decline was falling advertising revenue.
Like Internet rivals Google, Yahoo!, and Microsoft, online advertising revenue accounts for a major portion of AOL's total revenue. However, AOL has struggled to monetize its Web content. For the quarter that ended in June, the company said advertising revenue fell by 27%.
AOL said its U.S. display-advertising business fell by 7% in the quarter ending in June, while international display-advertising business dropped by a whopping 52% as the company scaled down its presence in France and Germany.
The company's search and contextual-advertising business also declined by 28%.
To set itself right, AOL began streamlining its business and sold its ICQ instant-messaging service, digital-ad firm Buy.at, and social-networking site Bebo. The company also has rolled out a new Web mapping service and migrated the majority of AOL mail users to an improved email platform. In August, it renewed a search agreement with Google for five years that expands the companies' decade-long partnership to include mobile search and online video content.
Tuesday's acquisition of Thing Labs will let AOL get its hands on Brizzly applications and include them in its Lifestream social aggregator and publisher, as well as its AIM messaging platform. Brizzly apps allow users to view and post updates to social-networking sites Facebook and Twitter and enable group chat. The founders of Thing Labs, who will join AOL, previously helped create Google Reader.
AOL saw the 5min Media acquisition as a "missing piece in the AOL value chain," as it completes the company's "end-to-end video offering from content creation through syndication and distribution to the consumer experience and monetization."
The 5min Media company owns a library of more than 200,000 videos, covering topics such as fashion, cooking, and fitness, from more than 1,000 media companies and independent video producers.
However, the TechCrunch acquisition is different, in that it will give AOL instant access to the blog's massive stream of online readers. Many of those readers are venture capitalists, angel investors, technology executives, and other high-net-worth individuals. According to comScore, TechCrunch and its network of websites had 3.8 million unique visitors in August, the third highest among technology blogs. The first two were Gizmodo (6.5 million) and AOL-owned Engadget (7.5 million).
The deal will also boost AOL's content portfolio, as it brings into AOL's fold specialized industry websites that TechCrunch owns, such as MobileCrunch, CrunchGear, CrunchBase, and GreenTech.
Most importantly, the deal will boost AOL's editorial operation. Arrington is regarded as a high-profile, outspoken, talented, and passion-driven editor. In fact, part of the deal stipulates that Arrington stays with AOL for at least three years. He has expressed excitement about joining AOL's team and said he would "continue to set the agenda for insight, reviews, and collaborative discussion about the future of the technology industry."
"There are incentives for me and the team to stay," he said.
However, it will be interesting to see how Armstrong manages Arrington, who has chronicled the rise and fall of technology companies and is as feared as he is revered for his unorthodox tactics in the technology world. And Arrington said he has no intention of changing.
"I'm still going to occasionally cause a bit of a ruckus," he said, adding that "we have absolutely no editorial bounds at all."
Arrington is an entrepreneur first, and then a blogger. But according to Engadget founder Peter Rojas, being an entrepreneur could be hard in AOL, which, like any big company, can be "saddled with way too many layers of management."
Shares of New York-based AOL closed up 1.13% to $25.03 on Friday.
These Tech Stocks Will Make Me Rich
By Tim Beyers
Welcome to week 110 of my stock-picking throwdown with Mr. Market. Let's get right to the numbers.
Company
Starting Price*
Recent Price
Total Return
Akamai
$22.23
$50.18
125.7%
Harris & Harris
$6.22
$4.27
(31.4%)
IBM (NYSE: IBM)
$124.01**
$134.14
8.2%
Oracle (Nasdaq: ORCL)
$22.44**
$26.85
19.7%
Taiwan Semiconductor (NYSE: TSM)
$9.35**
$10.14
8.5%
AVERAGE RETURN
--
--
26.14%
S&P 500 SPDR
$121.20**
$114.13
(5.83%)
DIFFERENCE
--
--
31.97
Source: Yahoo! Finance.
*Tracking began on Aug. 7, 2008.
**Adjusted for dividends and other returns of capital.
For both Mr. Market and my tech portfolio, the rally continues. But overall, the market has been stuck in a trading range that's left indexers with little in the way of returns over the past 10 years. "The Lost Decade," we've come to call it.
Investors worried about currency deflation, joblessness, and other forms of economic malaise have taken to commodities, gold in particular. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) co-chairman Charlie Munger had some choice words for this group in a recent speech:
I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk.
Ouch. My Foolish colleague and commodities investor, Christopher Barker, has since responded:
If you have no interest whatsoever in gold, I am not here to attempt to change your opinion. What I do seek is your recognition for the people who bear the ultimate burden of the persistent currency devaluation and reckless fiscal policies that carry sustainable recovery further from our grasp.
Whom do I side with in this debate? Neither. I'm a tech investor. My interest in gold is limited to its conductive capacity.
The week in tech
Furthermore, I'm convinced that tech isn't as susceptible t to the whipsaw nature of the global economy as it might seem. Too many of the tech elite have flush balance sheets that dwarf the market caps of the industry's up-and-comers. For example, Apple's (Nasdaq: AAPL) $24 billion liquid cash balance is enough to buy Netflix (Nasdaq: NFLX) three times over.
Should Apple buy the DVD-rental king? Fools disagree over the stock's value relative to the broader online video market opportunity. Both industry analyst Dan Rayburn and my Foolish colleague Anders Bylund weighed in this week. I also checked the numbers, and what I found convinces me that Netflix will continue to outperform.
Bears will argue that Netflix boasts a crazy valuation, and they're right. There's no way to call a stock priced at more than 60 times trailing earnings cheap. Yet both Dan and Anders concede that Netflix is in the early stages of disrupting the business of video delivery. According to history, it's the disruptors that end up as millionaire-maker stocks.
Look at David Gardner. He produced a decade of 20% returns in the real-money Rule Breaker portfolio by betting on a collection of innovators and then holding them for the long term. Tom Gardner's "simpleton portfolio" was also a 10-year winner. I believe that with my tech portfolio, I will achieve similar success.
Checkup time!
Now let's move on to the rest of today's update:
•Although there's no way to correlate the two events, it's at least interesting that IBM, a fervent supporter and user of open-source software, is on the rise just as Oracle is losing some of the key open-source advocates it acquired with Sun Microsystems. Specifically, several members of the team shepherding the OpenOffice productivity suite broke away from the company this week.
•Taiwanese regulators have approved Taiwan Semiconductor's application to upgrade technology in its plant in Shanghai, Reuters reports. The move could help TSMC better compete with its peers based on the mainland, including Semiconductor Manufacturing International.
There's your checkup. See you back here next week for more tech stock talk.
Get your clicks with more techie Foolishness:
•Is this dot-com superstar about to retire from the market?
•Goodbye, DVDs.
•Here are a few good reasons to avoid BlackBerries in your portfolio diet.
The Case for Shorting General Electric
By Jay Holland, SumZero.com
Jay Holland is a global equity analyst at HNW Capital, a value- and research-driven private investment firm. The below investment thesis was originally posted on SumZero, the leading community for hedge fund and mutual fund investment analysts where professional investors share investment ideas exclusively with one another. Through The Motley Fool, select content from SumZero is now available to individual investors.
Thesis
General Electric (NYSE: GE) needs capital. If the balance sheet were marked to fair value just considering the items disclosed on the June 30, 2010, quarterly report, the company would have tangible shareholders' equity (book value) of $3 billion to support a tangible asset base of $654 billion. The recent earnings report paints a rosy picture of the ongoing business, which generates strong cash flow relative to its market cap, but a look at the balance sheet is scary.
As of June 30, 2010, tangible shareholder equity or book value equaled $25 billion after deducting goodwill, intangibles, and the goodwill hidden in "assets of businesses for sale" for NBC. (See the table for more detail.)
Note 15 in the 10-Q discloses that "Financial Instruments" are carried at $9.4 billion greater than fair value. If or when the balance sheet is marked to fair value, shareholders' equity will be reduced by this same amount.
Page 69 discloses that the value of the real estate carried on the books is $6.3 billion greater than the estimated fair value. If or when the balance sheet is marked to fair value, this amount will be deducted from shareholders' equity.
Level 3 assets, which are assets with no discernable inputs to determine fair value, were carried on the balance sheet at $21.5 billion. GE does not disclose the nature of these assets, but with its background in fair value disclosure I suggest at least a 30% haircut on this value. This would reduce shareholders' equity by another $6.4 billion.
These reductions in shareholders' equity are the result of the disclosed differences between carrying value and estimated fair value. This does not include the $5.9 billion in impaired loans that are not included in allowances for losses, because management believes that some are recoverable. It does not include any negative predictions for commercial or residential real estate, which would negatively affect the balance sheet.
The balance sheet will look slightly different after the close of the sale of NBC, if approved. This would improve tangible shareholders' equity, because $11 billion of goodwill of the total $22 billion in NBC goes to Comcast (Nasdaq: CMCSA). GE will continue to hold 49% of the joint venture, allowing it to move another $11 billion off its balance sheet for accounting purposes. However, it still retains a substantial economic interest and exposure to this entity. I contend that a true picture of GE's tangible shareholders' equity must include all exposures to goodwill that almost certainly have no value. Goodwill is a plug value that balances the accounts but does not generate cash flows. In the second quarter, GE quietly incurred a $4 billion liability in NBC, which reduced the net asset value (NAV) by the same amount. There was no mention of this reduction in NAV in the presentation.
After the sale of NBC, tangible equity improves to $11.5 billion, which highlights the reason why GE would sell NBC at a loss, to move goodwill off its balance sheet. However, this still seems tiny compared to the stunning $750 billion in assets or $654 billion in tangible assets that it supports. The result is a lofty leverage ratio or tangible asset/tangible book value ratio of 57.
Why is tangible shareholders' equity important? This is the first part of the balance sheet to be hit with an impairment. Of course, many investors only care about the quarterly earnings projections and whether they are met. I will leave an analysis of those earnings to them. This report only considers what I believe the equity market does not care about, but should. However, debt markets care, and for a company addicted to the capital markets, this could be important because it has a ratio of earnings-to-fixed charges of 1.78. In other words, if this were my interest coverage ratio, I would not qualify for a mortgage.
Summary
I do not anticipate GE's bankruptcy, because it owns some good businesses that continue to chug along in this low-interest-rate environment, yet it will surely need to raise capital. This would cap any long-term upside. Most disturbing is the attitude of management, which announced an increase in the dividend at a time when the company desperately needs capital. Recommendation: underperform.
Variant view
Most sell-side analysts only look at the income statement; however, GE Capital is highly leveraged, needs constant access to capital markets, and holds a lot of assets that are deteriorating. If or when the assets are marked to fair value, the company will have to raise capital, diluting the wonderful earnings the company continues to report. This does not seem discounted by the market.
Looking for a Crystal Ball? Try This.
By Seth Jayson (TMF Bent) | More Articles
October 2, 2010 | Comments (1)
There's no foolproof way to know the future for TTM Technologies (Nasdaq: TTMI) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.
A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. These are important steps in separating the pretenders from the market's best stocks. Alone, AR (the amount of money the company owes) and DSO (days worth of sales owed to the company) don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window into the future.
AR that grows more quickly than revenue can suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. So can ballooning DSO. Or they can indicate that the company sprinted to book a load of sales at the end of the quarter, much like used-car dealers do on the 29th of the month. (Sometimes, companies do both.)
Why might an upstanding company like TTM Technologies do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.
Is TTM Technologies sending any warning signs? Take a look at the chart below, which plots revenue growth against AR growth and illustrates DSO.
Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.
The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.
Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.
Company
LFQ Revenue
DSO
TTM Technologies
$310
52
Flextronics International (Nasdaq: FLEX)
$6,566
38
Sanmina-SCI (Nasdaq: SANM)
$1,625
49
DDI (Nasdaq: DDIC)
$68
60
Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.
Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will TTM Technologies miss its numbers in the next quarter or two?
I wouldn't be surprised if it had trouble on the top line during the next quarter or two. For the last fully reported fiscal quarter, TTM's year-over-year revenue grew by 114.7%, and its AR grew by 152.8%. Those are yellow flags, but since TTM recently completed a massive acquisition of Meadville, year-over-year comparisons could be difficult in the coming quarters.
End-of-quarter DSO increased by 17.7% over the prior-year quarter and rose by 21.2% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors who are putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.
What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short and profit when they eventually fall. Which way would you play this one? Let us know in the comments below.
Apps Come Into Their Own
By Gabriel Perna, IBTimes.com
The app culture has arrived.
Technology research firm Parks Associates says that by the end of 2010, we will have downloaded 4.6 billion mobile apps. By 2014, Parks projects, the number will reach 11 billion. App store GetJar, the self-proclaimed second-biggest app store on the planet, said its downloads recently crossed the 1 billion mark.
When you consider that apps were little known just three years ago, these numbers are impressive.
"It's a remarkable growth story," said Kristin Purcell, associate director of research at Pew Internet, which did a study of its own on the growing popularity of apps. According to Pew, 35% of adults have cell phones with apps on them, and 24% actively use their apps. Although most of the growth has come from one segment -- young males -- the growth story is still impressive.
"It's staggering when you realize apps have only been around a few years," she added. "The funny thing is there's still a large segment of the population that doesn't know what they are. Ten percent of the people we asked if they had preloaded apps on their phones didn't know if they had."
Purcell says those findings probably mean that in a few years, apps will become even more widespread among the public. With the growth of smartphones, which Parks says is in the range of 30% to 40% per year, some research firms are predicting that the mobile-app market will triple in value by 2014. Juniper Research sees the app market valued at $25 billion in 2014.
Games rule the app roost. According to a Nielsen study, 61% of people with a smartphone who use apps said they download and play games. This figure ranked higher than any other type of app category. Parks Associates' data showed similar results.
"We asked, 'What type of apps did people download most often?" said Harry Wong, director of mobile research at Parks Associates. "When you look at the results, games were first, then music, then media and social-networking-related apps, and location-based services was fourth." Although the apps themselves might seem trivial, Ilja Laurs, chief executive officer of GetJar, says the app categories showcase different ways developers can get paid in this growing segment.
"There are three ways apps make money for developers: paid apps; advertising within apps, where you get paid per click; and a freemium model, where the app is free but virtual goods within cost money," Laurs said. "For games, the one way to make money that makes sense is paid. A typical person will run a game 10 times and then get bored. Running advertising in games will only lead to 10 to 15 impressions, revenue that would be almost zero."
Laurs said GetJar's research found that 80% of its developers' app revenue came from the paid model. Considering that games are the most popular kinds of apps and that paid is the best way for game app developers to make money, it all seems to add up.
However, Purcell said Pew's data shows that only about half of the app users it surveyed paid for one, and even that figure was surprisingly high. "We had the impression people were only downloading these things because they were free," Purcell said. But she did agree with Laurs on one point: "There is a market for paid apps, but it's just games at this point."
In terms of total revenue , Wong said paid mobile apps will have generated $2 billion this year. He said Parks Associates expects that number to double by 2014. Meanwhile, advertising for free apps generated $215 million this year. By 2014, that number will quadruple to $860 million.
As apps continue to grow in popularity -- and revenue -- developers will find themselves in the catbird seat. Depending on the app-store provider, developers can get 60% to 70% of the revenues their app generates. Typically, the store charges a fee for distribution, billing services, and marketing. But Laurs said GetJar provides a model in which developers can get 100% of the revenue and does not have to pay any fee.
"We allow developers to use any billing they want, and we take 0% from them," Laurs said. "The way we generate revenue is developers can bid for premium visibility in our store. Twenty percent of the space in our app store is reserved for sponsored listings. Developers show off their applications, and once a consumer clicks a sponsored listing; we charge the developer the second lowest bid. That business model is profitable and powerful for us."
This model, Laurs said, is one reason GetJar has been able to differentiate itself from competing app stores and move 100 million downloads per month, a mark that it's set to surpass in October. He also said his app store can support numerous new and old platforms -- something Apple's (Nasdaq: AAPL) App Store and Google's (Nasdaq: GOOG) Marketplace cannot do.
For Laurs, the 30% or 40% fee robs a certain segment of developers: "Someone like The New York Times, who wants an app to promote their news subscription, does not need support from the app store. They are promoting directly to their consumer base that goes on their website and reads their paper. In reality, what happens is that fee is a marketing fee. It's broken economics."
Yet regardless of the model, it seems developers get paid pretty well. Apple has said its App Store has generated more than $1 billion in revenue for developers, and Wong foresees an even more lucrative future for app developers.
"I see a situation where say you're a small app developer, well you can get hired by a brand to develop an app for them," Wong said. "For instance, if Kraft wants an app, they hire a third party, Kraft gets the ad revenue and the third party gets outsourcing work. It's a good spot to be in."
Does the Market Have a New Nifty 50?
By Eric Jhonsa
I'm getting the feeling that we're reliving the '70s again. Maybe disco and bell-bottoms haven't come back in style, but the economy is stagnating, unemployment refuses to go down, oil prices remain high … and the stock market seems to be producing a new version of the Nifty 50. And like the original Nifty 50, it might be just a matter of time before the stocks in the new version suffer a hard landing.
For those wondering, the Nifty 50 was a group of blue-chip, large-cap American stocks that strongly outperformed the broader market in the late 1960s and early 1970s. While American equities at-large moved sideways for much of this era, the Nifty 50 continued to shoot higher, as investors saw them as safe havens they could rely on to deliver earnings growth in the face of economic turmoil. The result was that these companies, which included familiar names such as IBM, Coca-Cola, and McDonald's (as well as some less familiar names such as Lubrizol and Simplicity Pattern), found themselves carrying oversized valuations relative to their peers. P/E ratios above 40 weren't hard to find.
None of this bothered investors, as long as the Nifty 50 stocks could maintain their reputation as unblemished growth stories. But when the recession of 1973 arrived and Wall Street decided that its growth expectations for the Nifty 50 were too optimistic, things got ugly very quickly. The shares of many popular names fell by 70% or more in less than 18 months, and the names that did eventually recover needed more than a decade to do so.
Fast-forward to 2010, and we have a different type of Nifty 50 forming. This time around, most of the richly valued, outperforming names aren't blue-chip large caps but rapidly growing tech companies such as VMware (NYSE: VMW), Amazon.com, F5 Networks, NetApp, Baidu (Nasdaq: BIDU), and Netflix (Nasdaq: NFLX). I suppose you could also include a small number of high-growth food and restaurant stocks, such as Green Mountain Coffee Roasters (Nasdaq: GMCR), for good measure.
As with the Nifty 50 near its peak, the new breed of market outperformers features plenty of names trading at jaw-dropping multiples. VMware sports an enterprise value (market cap minus net cash and investments) that's 47 times its estimated 2011 earnings. Netflix trades at an enterprise value that's 44 times its 2011 estimates. How about salesforce.com? Try 69 times its estimated earnings for its fiscal year ending in January 2012. And Amazon? I guess you could say it's a relative bargain, since its enterprise value is a “mere” 40 times its estimated 2011 earnings.
Perhaps some of these valuations would look a little better if based on future free cash flow rather than on earnings -- salesforce.com, for example, routinely sees quarterly free cash flow that's higher than its quarterly earnings, because of the way it recognizes revenue for subscription payments. But no matter how you cut it, valuations for certain tech stocks have spun out of control. And oddly enough, this speculative frenzy comes at a time when valuations for many prominent tech stocks are still quite reasonable.
Intel (Nasdaq: INTC), for example, trades at an enterprise value of just 8 times its estimated 2011 earnings. Cisco Systems' (Nasdaq: CSCO) enterprise value is a little less than 9 times its estimated earnings for its fiscal year ending in July 2012. Even Apple (Nasdaq: AAPL), long a darling of momentum investors, sports a fairly modest enterprise value-to-2011 earnings ratio of around 14.5 -- and that multiple drops even lower when including cash held in long-term accounts. What we're seeing is a far cry from the 1999-2000 tech bubble, where virtually everything technology-related had a huge multiple.
Instead, it's a lot more like 1972, when investors decided that the only way to make money in a shaky economic environment was to keep riding a handful of growth stocks, no matter how lofty their valuations became. Cisco and Intel can't grow much in a weak economy? No problem. Just keep putting money into Netflix and VMware. Those companies have plenty of growth ahead of them, don't they?
Well, it sure looks that way right now. But if a worsening economy -- or just some factor specific to the company in question -- derails that growth, then look out below. That's the lesson we should learn from the crash of the original Nifty 50. When a group of stocks are priced to perfection, any sign of imperfections will result in their taking it on the chin much worse than stocks with more subdued valuations will. We might have seen a good example in action earlier in the week, when shares of Green Mountain Coffee plummeted by nearly 20% after it was disclosed that the SEC asked for additional information about its revenue-recognition practices.
Considering that the SEC has hasn't yet levied any formal charges at Green Mountain, and that the revenues in question amount to only a small percentage of the company's sales, you wouldn't expect its shares to get hit so hard. But with Green Mountain trading at such a lofty valuation entering this week, a little bad news proved capable of doing serious damage. And if the economy proves to be a little weaker over the next year or two than Wall Street expects it to be, I think that's a story that will repeat itself with many other names in the market's new Nifty 50.
Most Windows Users Still Run XP
By Wolfgang Gruener, Conceivably Tech
Almost one year after the introduction of Windows 7, it appears that the hype has faded. The overall market share of Windows has turned into a slight decline again. Windows 7 is gaining share, but it cannot keep pace with the loss of Windows XP and Vista. Especially Windows XP users seem to be happy with what they have and appear to be rather resistant to Microsoft's (Nasdaq: MSFT) pitches that it is time to upgrade to Windows 7.
It is no secret that Windows users have learned that change is something Windows computers don't like. Often, it is much easier to leave the Windows version that came with a PC as it was and avoid the pain of upgrading. Vista may have been an exception, as the operating system itself was worth the extra pain (or not), while Windows XP was a solid software that works well for the majority of computer users worldwide even today.
New market-share data from Net Applications puts XP's market share at 60.03%, down from 60.89% in the month before. Windows Vista fell from 14.00% to 13.35%, while Windows 7 gained 1.25 points to 17.10%. It is interesting to see that Vista and XP lost a combined 1.51 points in September: The difference between the gain of 7 and the loss of Vista/XP represents 100% of the Windows market-share loss, which was down 0.25 points to 91.08% in September.
Since the launch of Windows 7 in October 2009, the operating system was able to post a net gain of market share in only three months, according to Net Applications, and was hit with a net market-share loss of 1.44 points over the past 11 months. If we believe the data from Net Applications, then Windows 7 has not been able to stop the market-share bleeding of Windows, even if it has slowed a bit: In the past nine months, Windows lost only 0.92 points, while Windows lost 1.14 points in the nine months directly preceding the launch of Windows 7.
Windows XP has dropped in market share from 70.48% to 60.03% since the launch of Windows 7. When Windows 7 was introduced, Windows XP had a 76% share among all Windows users; now it is estimated at 66%. Windows 7 already has a 19% share among all Windows users and is likely to overtake Windows Vista in this discipline within the next two months: Windows Vista never had a greater share among Windows users than 20.35%, according to Net Applications. Vista had a share of 14.66% among all Windows systems that Net Applications counted in September.
Windows XP drops less than 1 point in overall market share every month. Given that it still has about 60% of the overall share, it could take another year until the operating system will drop below 50%, unless some miracle happens or we are finally seeing ancient computer systems in business environments being replaced. It is simply amazing that an operating system that will celebrate its 10th birthday next year is still, by far, the most popular operating system worldwide. To be fair, I should mention that Windows XP is still actively sold and will be kicked to the curb, this time for real, this month: The deadline is Oct. 22.
It is unlikely that this will change something dramatically for the market share of Windows XP in the short term, and the fact that Microsoft hosed itself with Windows Vista doesn't help. You could always send Microsoft your ideas on how to get rid of those stubborn Windows XP users and persuade them to upgrade to Windows 7. I believe it was a mistake to pitch Windows 7 as a new operating system, as we know that it was simply a massive patch that finally brought up Windows to the level it should have had in the first place. It was a brave move to sell Windows 7 as a new operating-system release, but if Microsoft really wanted people to upgrade, it would have needed to offer Windows 7 as a free or nearly free update -- sort of a service pack. A smoother upgrade process would also help. Many users are just tired of upgrades that require a lot of effort and come with the notion that the computer may not boot after the upgrade.
Net Applications' data does not reveal who gains from Microsoft's market-share losses. Both Apple's (Nasdaq: AAPL) Mac OS X (5.03%) and Linux (0.85%) are stable, and the only operating system that shows gains is Apple's iOS, which is now at a share of 1.18%.
Editor's Note: Yes, we are keeping an eye on StatCounter's data as well. The analysis firm currently estimates Windows XP's market share at 53.99%, Vista's share at 16.59%, and 7's share at 22.04%. The overall trend reflects Net Applications' trend, even if the absolute numbers are very different. StatCounter's data suggests that XP's share among all Windows systems is about 58%, Vista's share is about 18%, and 7's share is about 24%. The data also indicates that Windows 7 is close to Vista's record market share of 25.28%, which was reached in October 2009.
PS3 Controller Has Little Chance This Christmas
By Wolfgang Gruener, Conceivably Tech
We so wanted Sony (NYSE: SNE) to have a good shot at this year's Christmas season. But Sony has an incredible talent for shooting itself in the foot. The PS3 Move may be the best example yet.
I had doubts about Sony's Move ever since it was announced. The concept just did not feel right from a time-to-market perspective. Before its release, it looked like an attempt to copy Nintendo's (OTC BB: NTDOY.PK) Wii controller and add some Sony touch to it (read our thoughts from E3 here).
A few days ago, I walked into a Best Buy and bought the controller. My opinion has not changed. There are a several giveaways why Move just does not work in its current stage.
This thing makes the iPhone look like a bargain!
I bought the very basic equipment, the starter pack with one controller, the PS3 Eye camera, and the Sports Champions game as well as one extra controller, to enable two-player gaming. In the end, this is a social gaming concept, right? The cost? Try $162, including tax. Bam!
Yup, that would be $162 for essentially two controllers and a cheap game. Did anyone say Microsoft's (Nasdaq: MSFT) $149 Kinect for four players is expensive? Hey, and I didn't even buy two extra controllers, which you would need to play to the controller's full capacity with just two players (some games support two controllers per player). I got no navigation controllers, no fancy attachment, and no charging station. The $162 is the bare minimum -- in some games, that means that you are playing and friends and family members are watching.
There isn't even an extra USB charger cable included. Apple's iPhone is a bargain in comparison.
I am still trying to figure out what makes this controller exactly a $50 controller and nearly twice as expensive as a Wii controller. Honestly, I have no idea. Maybe it's the glowing light-bulb feature that's necessary so that the Eye camera can detect your movements in the dark. If you are on a budget, this is definitely not the controller tech for you. A completely decked-out four-player system will cost you about $400.
It's too complex
Fun was the ingredient that has made the Wii controller a success. I can't see that with the Move. It is essentially the same idea and the same functionality, but it feels too complex, it's over-loaded, and it's over-thought. The controller detects more movements much more accurately, but it left me wanting more. Response times are similar to the Wii.
Sports Champions is not more than Sony's interpretation of Wii Sports. A Wii Sports with more realism, better graphics, and great physics. But is it as much fun as Wii Sports? No. On Sony's PS3, the controller concept feels more limited as well. It appears that archery, bocce ball, volleyball, table tennis, and disc golf pretty much exhaust the moves you can do with this controller.
A constant annoyance is the need for recalibration every time you start a new game. When have you ever needed to calibrate the Wii controller? Exactly.
Kids hate it
My kids have been, so far, dead-on as far as predictions of game trends are concerned. I tend to watch how they adapt to new technologies and how they use it. There are five of them in this household, between the ages of 8 and 11, and they all love our Wii, Microsoft's Xbox 360, and the PS3.
The Move controllers had the advantage of novelty when I brought them home, and the kids were eager to try them. But that novelty wore off after about 30 minutes, and they are now back to playing Wii and using the regular controllers for the PS3.
It turned out that the Move controllers were way too complex for them and they were too inconvenient as game controllers in the end. If they are too complex for the kids, then there is a good chance that there are many more out who will think the same. Perhaps Move just hasn't found the right game yet and there is no title that exploits its potential. If that is the case, then Sony has just screwed up Move's launch. And that is a best-case scenario: It is much more likely that Sony will have to considerably drop the price of Move to turn it into a success. That would mean $100 for a complete system for four players, not $400.
I am not sure what exactly happens in those sales meetings at Sony. If there was someone with a slight touch of reality, Sony would have realized that asking $400 for a controller system is insane.
If you are looking for a novel game-controller concept this Christmas season, Kinect may be the way to go. My recommendation? Wait until Kinect is out and read the first reviews. If Kinect is not what it's promised to be, you can still buy Sony's Move. My bet is that Microsoft will cream Sony this Christmas season. Nintendo is a big question mark.
Cramer's Mad Money - 6 Things You Need to Know From the CEO
Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Friday October 1
What You Need to Know from the CEO
With a slew of earnings in the coming week, Cramer gave viewers advice on what to look for when listening to a company's conference call:
1. Domestic versus overseas sales
2. Dividends. "Cold hard cash coming at you. That's what I want."
3. Market Share: Who's taking a bigger piece of the pie? "I'm not listening to guy who says, listen it's a bad environment... and the guy across the street is doing real well."
4. Who is blaming the government. Cramer said this matters the most with financial stocks - which banks are saying financial regulations are still hitting them hard and which banks are not complaining about pressure and are thriving.
5. Commodity pressure on the price of raw goods. For instance cotton prices are making a huge difference for retail.
6. Forecast for 2011.
Game Plan: Mosiac (MOS), Monsanto (MON), Dupont (DD), Yum (YUM), Costco (COST), Pepsi (PEP)
Cramer discussed the upcoming week, detailing which numbers and earnings reports merit the most attention.
On Monday after the close, Mosiac (MOS) reports. Cramer thinks the fertilizer maker will give information that will help investors understand why the fertilizer space is so crucial. "We are running out of food," said Cramer, who expects Mosiac's report to be "magnificent." There is no reason to be "freaked out" by the huge hit corn prices took this past week. Cramer isn't so thrilled about seed producer Monsanto (MON) which will report on Wednesday, since he expects disappointing sales of Roundup, which has been accused of perhaps causing birth defects. Smartstacks, its hybrid corn seed, has not been meeting its targets for yields. For seeds, Cramer would buy Dupont (DD), which gave terrific outlook at least week's analyst meeting and has a sweet dividend.
The focus on Tuesday will be China and Yum! Brands' (YUM) success in the Middle Kingdom. Cramer's worries about Costco (COST), which reports on Wednesday, are not about its earnings, but about the advance on the stock, since it recently rallied 10 points; "I think Costco's going to have to shoot the lights out just to stay in the game up here." Cramer says the stock is worth buying lower. On Pepsi's (PEP) earnings on Thursday, Cramer expects to hear about worries over raw costs. This might give investors an opportunity to buy the stock below $65. Since the company has been buying back stock and meeting targets, there isn't much else that could bring down the price of the stock.
All of the earnings news may not amount to a hill of beans if the jobs number is not so hot on Friday. Cramer thinks this number will profoundly affect the market from now until the end of the year, but he is optimistic that it will be a strong one.
3 Things to Remember When Evaluating a Company
1. Be Smart about Smart Money. They are often wrong, but chasing hot mutual funds can yield advantages if you know where they are going.
2. Know Your Indicator. It's all well and good to follow the Baltic Dry Index, but keep current on your indicators, make sure you really know what they are measuring, and if they are still a relevant measure.
3. Don't Pay Attention Only to Analysts. Listen to everyone, particularly to people who have the pulse on consumer behavior.
Aerial Footage: Portrait of a Housing Bust
Fantastic set of aerial photos from Google Images (by way of Boston.com’s Big Picture), showing Florida’s developmental disaster.
The images of half finished (and barely started) developments are strangely beautiful, with a geometric symmetry that belies the state of human misery these developments represent: Lost deposits, bankruptcy, misallocated capital.
That an entire nation can be so innumerate as to believe in a mathematical fallacy is weirdly fascinating . . .
Why I Want To Be George Clooney
Posted by Timothy Sykes on Sun 3rd of Oct, 2010 03:00:57 PM
It’s been a truly great week and I congratulate you if you joined me
in profiting on the pump du jour Kraig Biocraft Laboratories (KBLB)
which ran up from an astounding 1 cents/share up to 26 cents/share
purely on blatant stock promotion…my subscribers and I short sold it
nicely as it crashed from 26 cents/share to 9 cents/share as the pump
turned into the inevitable dump…and we profited nearly $10,000….it’s
amazing–it’s the same pattern over and over…look up our recent
success on similar pumps like SSOL and RMCP…all truly beautiful and
more importantly, predictable.
Last week I showed you this new page for my upcoming
seminar in Las Vegas (introverts/gambling-addicts have the option of
attending via live video instead of in person) and many of you signed
up. In fact, there are now over 60 attendees and at this rate, I’m going
to have to start limiting registrations because I don’t want too many
people knowing these proven trading tactics. So you must act fast and reserve
your ticket HERE today
I am also very proud to announce that the #1 ranked trader on Profit.ly, Mr.
John Welsh, who focuses mainly on smallcap biotechs, has just been added
to the speaking lineup, as I wrote in a
post earlier tonight. With the addition of this hugely popular
trader who has made a verified $650,000 in trading profits, there are 10
expert speakers, and 4 out of the top 5 traders out of 1,200 who verify
their trades on Profit.ly…but it gets even better.
On Friday’s LiveStock (tune in HERE live from 1-2PM
EST or watch it on demand later) I announced our 11th expert
speaker–somebody who has never spoken publicly before and after hearing
his presentation, I can confirm that what he’s going to say will not
only give conference attendees an advantage over everyone else in the
penny stock market, but it might just make a few financial headlines
too….truly “edge” creating information from someone who has been on
the inside of many of these penny stock runups.
With 11 proven
traders, award-winning penny stock researchers (TheStreetSweeper gang,
yah!) and industry veterans, I have re-created the superb movie “Ocean’s
11? but instead of a bunch of criminals trying to steal millions from a
Las Vegas casino, “Sykes’s 11? will teach attendees how to legally
plunder the penny stock market…just as we each have for years…and it
just so happens the setting is Mandalay Bay, a rather respectable Las
Vegas casino
I also want you to know that despite my habit of repeatedly
mentioning all my instructional DVD packages and my 4 newsletters, none
of these products will be mentioned at the conference as it will be
purely educational. If I do mention these titles to any conference
attendee, they will get the product 100% free. No Joke.
Trust me, I will not slip up I will be presenting a new, comperehensive and clear cut
plan that will highlight all of my most important lessons learned over
the years along with accounting for many new tactis and regulations to
which I’ve recently and successfully adapted.
And if I do my job, beginners all the way up to veterans will have a definitive guide to
identifying the best trading setups so you won’t need me, my trading
alerts or anymore DVD packages (although specialized knowledge always
helps and all conference attendees receive not just one DVD package, but
2 DVD packages (one of their choice beforehand & one of the
conference itself, complete with a 200+ page instructional manual)
So go visit the conference page and see the updated schedule and if you want to
purchase a ticket, use the coupon code VEGAS2010 to save $500 off the regular price if you attend in person and the code
WEB2010 to save an astounding $700 (yes you still get 2 DVD packages included) and attend via live HD video.
Positive Seasonal Pattern Stocks on Sunday the 3rd of October 2010
Seasonal Patterns found for the following stocks:
Compex Technologies Inc (CMPX) over the next 10 trading days. Look at the seasonal patterns for Compex Technologies Inc in context.
Macrochem Cp (MCHM) over the next 9 trading days. Look at the seasonal patterns for Macrochem Cp in context.
Sentigen Holding Corp. (SGHL) over the next 5 trading days. Look at the seasonal patterns for Sentigen Holding Corp. in context.
Consumer Staples Select Sector Index (IXR) over the next 1 trading days. Look at the seasonal patterns for Consumer Staples Select Sector Index in context.
Cleveland Electric Financing Trust I 9% Cumulative Trust Preferred Securities (CVE1U) over the next 6 trading days. Look at the seasonal patterns for Cleveland Electric Financing Trust I 9% Cumulative Trust Preferred Securities in context.
NYSE Intl 100 Index-mini Val (NYI.MN) over the next 0 trading days. Look at the seasonal patterns for NYSE Intl 100 Index-mini Val in context.
DES.ID (DES.ID) over the next 9 trading days. Look at the seasonal patterns for DES.ID in context.
DJP.IV (DJP.IV) over the next 9 trading days. Look at the seasonal patterns for DJP.IV in context.
FXS.TC (FXS.TC) over the next 1 trading days. Look at the seasonal patterns for FXS.TC in context.
BVS.NV (BVS.NV) over the next 10 trading days. Look at the seasonal patterns for BVS.NV in context.
IGV.IV (IGV.IV) over the next 8 trading days. Look at the seasonal patterns for IGV.IV in context.
IGV.NV (IGV.NV) over the next 9 trading days. Look at the seasonal patterns for IGV.NV in context.
IWB.IV (IWB.IV) over the next 9 trading days. Look at the seasonal patterns for IWB.IV in context.
IWB.NV (IWB.NV) over the next 10 trading days. Look at the seasonal patterns for IWB.NV in context.
IWD.NV (IWD.NV) over the next 10 trading days. Look at the seasonal patterns for IWD.NV in context.
IWF.IV (IWF.IV) over the next 9 trading days. Look at the seasonal patterns for IWF.IV in context.
IWF.NV (IWF.NV) over the next 10 trading days. Look at the seasonal patterns for IWF.NV in context.
IWN.IV (IWN.IV) over the next 9 trading days. Look at the seasonal patterns for IWN.IV in context.
IWN.NV (IWN.NV) over the next 10 trading days. Look at the seasonal patterns for IWN.NV in context.
IWS.NV (IWS.NV) over the next 10 trading days. Look at the seasonal patterns for IWS.NV in context.
IWV.NV (IWV.NV) over the next 10 trading days. Look at the seasonal patterns for IWV.NV in context.
IWW.NV (IWW.NV) over the next 10 trading days. Look at the seasonal patterns for IWW.NV in context.
IWZ.IV (IWZ.IV) over the next 9 trading days. Look at the seasonal patterns for IWZ.IV in context.
IWZ.NV (IWZ.NV) over the next 10 trading days. Look at the seasonal patterns for IWZ.NV in context.
AMB Property Corp. 6.85% Series P Cumulative Redeemable Preferred (AMB.P.P) over the next 6 trading days. Look at the seasonal patterns for AMB Property Corp. 6.85% Series P Cumulative Redeemable Preferred in context.
Crescent Real Estate Equities Company 9.50% Series B Cumulative Redeemable Prefe (CEI.P.B) over the next 10 trading days. Look at the seasonal patterns for Crescent Real Estate Equities Company 9.50% Series B Cumulative Redeemable Prefe in context.
The Hartford Financial Services Group Inc. 6.00% Corporate Units (HIG.P.A) over the next 9 trading days. Look at the seasonal patterns for The Hartford Financial Services Group Inc. 6.00% Corporate Units in context.
Protective Life Corp. 7.25% Capital Securities due June 30 2066 (PL.P.D) over the next 10 trading days. Look at the seasonal patterns for Protective Life Corp. 7.25% Capital Securities due June 30 2066 in context.
Southern Union Company Depositary (SUG.P.C) over the next 8 trading days. Look at the seasonal patterns for Southern Union Company Depositary in context.
EWI.IV (EWI.IV) over the next 10 trading days. Look at the seasonal patterns for EWI.IV in context.
IJS.IV (IJS.IV) over the next 9 trading days. Look at the seasonal patterns for IJS.IV in context.
IYC.IV (IYC.IV) over the next 7 trading days. Look at the seasonal patterns for IYC.IV in context.
JKD.NV (JKD.NV) over the next 10 trading days. Look at the seasonal patterns for JKD.NV in context.
JKE.IV (JKE.IV) over the next 9 trading days. Look at the seasonal patterns for JKE.IV in context.
JKG.IV (JKG.IV) over the next 9 trading days. Look at the seasonal patterns for JKG.IV in context.
JKG.NV (JKG.NV) over the next 10 trading days. Look at the seasonal patterns for JKG.NV in context.
JKL.IV (JKL.IV) over the next 9 trading days. Look at the seasonal patterns for JKL.IV in context.
JKL.NV (JKL.NV) over the next 10 trading days. Look at the seasonal patterns for JKL.NV in context.
KLD.IV (KLD.IV) over the next 9 trading days. Look at the seasonal patterns for KLD.IV in context.
KLD.NV (KLD.NV) over the next 10 trading days. Look at the seasonal patterns for KLD.NV in context.
PRFQI (PRFQI) over the next 8 trading days. Look at the seasonal patterns for PRFQI in context.
Sun American Bancorp (SAMB) over the next 7 trading days. Look at the seasonal patterns for Sun American Bancorp in context.
Salary.com` Inc. (SLRY) over the next 7 trading days. Look at the seasonal patterns for Salary.com` Inc. in context.
ProShares Ultra Short Consumer Goods (SZK) over the next 8 trading days. Look at the seasonal patterns for ProShares Ultra Short Consumer Goods in context.
ProShares Short Financials (SEF) over the next 4 trading days. Look at the seasonal patterns for ProShares Short Financials in context.
MTB TAX FREE MONEY MARKET PORTFOLIO CLASS A SHS (ATFXX) over the next 2 trading days. Look at the seasonal patterns for MTB TAX FREE MONEY MARKET PORTFOLIO CLASS A SHS in context.
PIONEER TREASURY RESERVE FUND CLASS Y (ITMXX) over the next 9 trading days. Look at the seasonal patterns for PIONEER TREASURY RESERVE FUND CLASS Y in context.
MTB PENNSYLVANIA TAX FREE MONEY MARKET FUND A (MPAXX) over the next 2 trading days. Look at the seasonal patterns for MTB PENNSYLVANIA TAX FREE MONEY MARKET FUND A in context.
SSGA Aggressive Equity Class R (SAERX) over the next 4 trading days. Look at the seasonal patterns for SSGA Aggressive Equity Class R in context.
SSGA Aggressive Equity Fund (SSAEX) over the next 4 trading days. Look at the seasonal patterns for SSGA Aggressive Equity Fund in context.
VALUE LINE AGGRESSIVE INCOME TRUST (VAGIX) over the next 7 trading days. Look at the seasonal patterns for VALUE LINE AGGRESSIVE INCOME TRUST in context.
Aurelian Resources Inc. (AUREF) over the next 9 trading days. Look at the seasonal patterns for Aurelian Resources Inc. in context.
CLAYMORE BRIC ETF (CYMEF) over the next 8 trading days. Look at the seasonal patterns for CLAYMORE BRIC ETF in context.
New World Dev Co Ltd (NDVLY) over the next 8 trading days. Look at the seasonal patterns for New World Dev Co Ltd in context.
Spectris Plc (SEPJF) over the next 10 trading days. Look at the seasonal patterns for Spectris Plc in context.
Uranium Partc Corp (URPTF) over the next 9 trading days. Look at the seasonal patterns for Uranium Partc Corp in context.
New England Service (NESW) over the next 10 trading days. Look at the seasonal patterns for New England Service in context.
Negative Seasonal Pattern Stocks on Sunday the 3rd of October 2010
Seasonal Patterns found for the following stocks:
Dualstar Tech Cp (DSTR) over the next 8 trading days. Look at the seasonal patterns for Dualstar Tech Cp in context.
Delta Air Lines Inc (DAL) over the next 2 trading days. Look at the seasonal patterns for Delta Air Lines Inc in context.
Spirit Aerosystems Holdings (SPR) over the next 8 trading days. Look at the seasonal patterns for Spirit Aerosystems Holdings in context.
First Solar Inc (FSLR) over the next 5 trading days. Look at the seasonal patterns for First Solar Inc in context.
Imax Corp (IMAX) over the next 8 trading days. Look at the seasonal patterns for Imax Corp in context.
Allscripts Healthcare Solution (MDRX) over the next 9 trading days. Look at the seasonal patterns for Allscripts Healthcare Solution in context.
Atlas Energy Inc (ATLS) over the next 4 trading days. Look at the seasonal patterns for Atlas Energy Inc in context.
Quicksilver Resources (KWK) over the next 5 trading days. Look at the seasonal patterns for Quicksilver Resources in context.
Tenaris Sa (TS) over the next 8 trading days. Look at the seasonal patterns for Tenaris Sa in context.
NII Holdings Inc (NIHD) over the next 9 trading days. Look at the seasonal patterns for NII Holdings Inc in context.
Gerdau Sa Ads (GGB) over the next 8 trading days. Look at the seasonal patterns for Gerdau Sa Ads in context.
ICICI Bank Ltd. ADS (IBN) over the next 5 trading days. Look at the seasonal patterns for ICICI Bank Ltd. ADS in context.
Steel Dynamics Inc (STLD) over the next 8 trading days. Look at the seasonal patterns for Steel Dynamics Inc in context.
Frontier Oil Corp (FTO) over the next 5 trading days. Look at the seasonal patterns for Frontier Oil Corp in context.
Companhia Vale Do Rio Doce ADS (VALE) over the next 3 trading days. Look at the seasonal patterns for Companhia Vale Do Rio Doce ADS in context.
Denbury Resources Ltd (DNR) over the next 4 trading days. Look at the seasonal patterns for Denbury Resources Ltd in context.
Priceline.com Inc (PCLN) over the next 4 trading days. Look at the seasonal patterns for Priceline.com Inc in context.
Yahoo! Inc (YHOO) over the next 9 trading days. Look at the seasonal patterns for Yahoo! Inc in context.
Usg Corp (USG) over the next 3 trading days. Look at the seasonal patterns for Usg Corp in context.
Flir Systems Inc (FLIR) over the next 5 trading days. Look at the seasonal patterns for Flir Systems Inc in context.
Sina Corp (SINA) over the next 6 trading days. Look at the seasonal patterns for Sina Corp in context.
Atp Oil & Gas (ATPG) over the next 5 trading days. Look at the seasonal patterns for Atp Oil & Gas in context.
Asymmetrical Motivation & The .299 Hitter
There is a fun mathematical discussion in the NYT Sports section today worth looking at.
It turns out that major league hitters on the verge of a 3 handle batting average — .300 — hit an astounding .463 on their last at bat of the season:
“Two economists at the Wharton School of the University of Pennsylvania, while investigating how round numbers influence goals, examined the behavior of major league hitters from 1975 to 2008 who entered what became their final plate appearance of the season with a batting average of .299 or .300 (in at least 200 at-bats).
They found that the 127 hitters at .299 or .300 batted a whopping .463 in that final at-bat, demonstrating a motivation to succeed well beyond normal (and in what was usually an otherwise meaningless game).
Most deliciously, not one of the 61 hitters who entered at .299 drew a walk — which would have fired those ugly 9s into permanence because batting average considers bases on balls neither hit nor at-bat.”
Its fascinating, but certainly not surprising. The psychological motivations of the pitcher-batter confrontation are the major factor. The batter is extremely motivated, for reasons that are both professional (compensation) and personal (i.e, pride). The pitcher, on the other hand, just wants to get thought the end of season games (especially the ones that don’t matter) without incident, injury etc.
Hence the term, “Asymmetrical Motivation.”
Array Biopharma: A Wall Street Anomaly
by: Ohad Hammer October 04, 2010
Array’s (ARRY) shares keep on fluctuating in the $2.5-$3.5 range, relatively unchanged from the beginning of 2010. It seems that the market is having trouble assessing the real value of the company and its pipeline, which includes 13 (!) drugs in clinical trials. With a market cap of ~$170M, the market puts an average price tag of $13M per asset, a ridiculously low valuation (assuming no value is assigned to the company’s discovery platform). The company’s long term debt (due in 2014) could be partially blamed for this anomaly, but the problem seems to be more related to the company’s business model. The good news is that during the next year the company is looking at multiple events that might change the way Wall Street views Array.
Array’s strength is also its Achilles’ heel: It has too many things going on and the majority of the programs are in early stage development without a clear and fast route to market. In that sense, the situation is very similar to that of Exelixis (EXEL), as I discussed two months ago. In order to get a realistic price tag from Wall Street, both companies must come up with a “killer app”, an indication that represents high probability of success, short time to market and a commercial opportunity of at least $100M. Although Array is not there yet, it could become highly attractive due to three trends: Out- licensing of wholly owned agents, maturation of partnered and proprietary programs and attrition.
Maturing pipeline
Array announced two lucrative licensing deals in the past 12 months. In December 2009, Array outlicensed its glucokinase activator to Amgen (AMGN) in a deal that included an upfront fee $60M and $666M in potential milestones. In April 2010, Array partnered its next-gen MEK inhibitors with Novartis (NVS) for an upfront payment of $45M and potential milestones of $422M. Following the two deals, the company is left with only 4 wholly owned drugs, a reasonable amount for its size.
Array has two large discovery collaborations with Genentech (DNA) and Celgene (CELG) which were signed in 2003 and 2007, respectively. These collaborations may be seen as another validation for the company’s discovery capabilities but very little was known about them. In 2010, the two discovery pacts finally started to bear fruit with the first IND from the Genentech collaboration. Celgene also provided more clarity as it revealed three preclinical programs, the first of which will probably enter clinical testing in the coming months.
In addition, many of Array’s programs are advancing into mid stage clinical trials where their real value can be evaluated. In particular, there are two agents investors should keep an eye on: AZD6244 [MEK inhibitor, licensed to AstraZeneca (AZN)] and ARRY-520 (KSP inhibitor, wholly owned by Array). Both drugs could have important data in the coming months with a potential value creation event for ARRY-520 in December.
Example #1 -AZD6244
AZD6244 is Array’s first generation MEK inhibitor, which was licensed to AstraZeneca in 2003. After years of disappointments, this drug seems to gain renewed momentum owing to a new formulation that provides better exposure as well as a broad development program driven by biomarkers. The drug is also in several combination trials, including an intriguing study with another investigational agent from Merck (MRK).
This MEK inhibitor, together with the one licensed to Novartis, position Array as a leader in the field of MEK inhibitors. Although there are no approved MEK inhibitors, MEK is considered a hot target because it is part of a pathway that is often dysregulated in cancer. As I explained in my last post on Array, the pathway became hot on the heels of spectacular results with Plexxikon’s BRAF inhibitor, PLX4032, which inhibits the same pathway.
The early data with MEK inhibitors, primarily AZD6244, curbed the industry’s enthusiasm for MEK as a target. This was emphasized by the success with Plexxikon’s BRAF inhibitor which was much more effective among BRAF mutated melanoma patients than AZD6244. Since then a lot of new data have emerged, which once again put MEK inhibitors in the spotlight.
In particular, a collection of landmark publications from research groups at Genentech, Plexxikon, Amgen, Memorial-Sloan Kettering Cancer Center and UCSF demonstrated the complexity and potential drawbacks of BRAF inhibitors. It is now well appreciated that BRAF inhibitors are active in cells with BRAF mutations(especially melanoma but also colorectal cancer to some extent) but from that point onwards the picture gets more complex.
Without getting too deep into science, it turns out that RAF inhibitors could paradoxically activate the same pathway they intend to inhibit. In BRAF mutated tumors this differential activity profile is viewed as an advantage, providing a very wide therapeutic window. However, these findings show the limitations of BRAF inhibitors in tumors without BRAF mutation and also cast a shadow over their long term safety profile. These findings imply that MEK inhibitors could have broad utility either in combination with RAF inhibitors, after relapse on RAF inhibitors and most importantly, in patients and settings where RAF inhibitors are deleterious.
It should be noted that there are many different RAF and MEK inhibitors, each one of them could have a totally different activity and safety profile. In addition, the theoretical aspects above could be proven or disproven in future clinical trials for any given drug and the fact that BRAF inhibitors have limitations does not necessarily mean that MEK inhibitors will eventually succeed.
Assuming that MEK inhibition is a valid strategy, Array is well positioned with three promising MEK inhibitors in clinical trials. Other companies with MEK inhibitors include Exelixis (licensed to Genentech), GSK, Merck Serono and Ardea (licensed to Bayer). GSK will publish first data for its compound at ESMO later this month and based on the title of the presentation, investigators are seeing preliminary activity with the compound.
AZD6244 is in several phase II clinical trials, including two randomized studies that will be crucial in determining AZD6244’s potential.
One study is evaluating AZD6244 in combination with Taxotere in lung cancer patients with KRAS mutation. This trial is extremely important because these patients are relatively resistant to Tarceva and are probably not good candidates for BRAF inhibitors. RAS, which is mutated in ~30% of all human cancers, is considered an undruggable target for technical reasons. In light of recent data that shows that RAF inhibitors could have a detrimental effect in these patients, MEK inhibitors remain the last option for inhibiting the RAS-RAF-MEK pathway in RAS mutated tumors.
Another study is in melanoma patients with BRAF mutations in combination with chemotherapy. These patients are considered extremely sensitive to Plexxikon’s PLX4032 as a single agent and the decision to combine AZD6244 with chemotherapy implies that as a single agent it is not potent enough. Nevertheless, recent data from ASCO 2010 included promising preliminary efficacy for the combination in melanoma patients. The combination will probably still be less effective and more toxic than PLX4032 monotherapy but it could be a good option for patients who progress on the drug. Unfortunately, the current study includes first line patients so AstraZeneca will have to run a new trial in PLX4032 treated patients to fully answer this question.
Example #2 - ARRY-520
ARRY-520 is shaping up as an important asset on the heels of an efficacy signal and a potential value creation event at ASH this December. ARRY-520 inhibits KSP (also known as Eg5), a protein involved in cell division which is a hallmark of cancer biology. Several companies have developed KSP inhibitors, including GSK and Merck, but to date results with these agents were disappointing. A wave of next gen KSP inhibitors from Lilly (LLY), Arqule (ARQL) and Array recently entered clinical trials.
Interim results for the drug were presented several months ago at ASCO and showed the drug is safe and active as a single agent in heavily pretreated multiple myeloma patients. Of 20 patients, there was one partial response in a patient with eight prior lines of treatment, 2 minor responses and multiple cases of prolonged disease stabilization. Notably, the PR was still ongoing after more than a year and 5 cases of disease stabilization were ongoing for 4-8 months. The minor responses were also still ongoing but with a short follow up.
Historically, multiple myeloma has been notoriously difficult for targeted agents such as ARRY-520. Multiple antibodies, kinase inhibitors and HDAC inhibitors all generated limited single agent activity in the form of a single digit response rate and several cases of stable disease. Consequently, these agents are being pursued in combination with approved agents, primarily Celgene’s (CELG) Revlimid and Millenium’s (now Takeda (TKPHF.PK)) Velcade. Although incorporation into standard treatment lines represents the biggest commercial opportunity, it involves long and expensive clinical trials. In addition, because Velcade and Revlimid are extremely effective, it is hard to prove efficacy by adding mildly active (even if potentially synergistic) drugs.
Revlimid and Velcade are both extremely effective even after disease relapse but they are not curative. This creates a large patient population of relapsed/refractory patients who are bereft of approved treatment options. As these patients represent the highest unmet need in multiple myeloma, regulators are willing to consider accelerated approval for these patients based on relatively small uncontrolled single arm trials. The unofficial efficacy bar for new drugs in this setting is a response rate of ~25% with a median duration of response of ~6 months although results have to be evaluated for each drug specifically.
Therefore, patients who progress on Velcade and Revlimid represent a fast route to market with very lucrative economics. This is why people got so excited with Onyx (ONXX) following recent data with carfilzomib. According to Onyx’s press release, carfilzomib led to a response rate of 24% and median response duration of ~7 months in heavily pretreated patients. Although Velcade received accelerated approval based on better results (~27.7% response rate and response duration of 12 months) this could still be enough for accelerated approval.
Two other agents which are active but probably not enough to be given as monotherapy are Biotest’s BT-062, an antibody drug conjugate powered by Immunogen’s (IMGN) technology and Immunogen’s wholly owned IMGN901, both discussed here. Due to the limited trial sizes and differences between the studies (dosing schedule, patient population) it is hard to pick a winner between the two. Based on the limited data for the two ADCs, both have some sort of single agent activity in the form of a couple of responses and several cases of disease stabilization.
Looking at the ASCO data for ARRY-520, it seemed that it was going the same path as other targeted therapies but following the recent quarterly conference call and a follow up call I had with CEO Bob Conway and CSO Kevin Koch, the compound still has a shot as a single agent in relapsed/refractory multiple myeloma.
The company intends to present updated results later this year (probably at ASH) which should include an additional ~15 patients. The ASCO data included patients from the dose escalation portion, which means that patients might have received suboptimal doses. According to the company, the MTD has already been reached so at ASH we could get an initial sense of the drug’s activity at the maximal dose. As with any oncology drug, one could expect better activity with higher doses but this is not always the case.
In order to get the data presented in a large medical meeting, companies must not disclose the data prior to presenting them. Still, based on remarks during the call, it was obvious Array is seeing additional responses with the drug and this was confirmed in the conversation I had with the company’s management. Another interesting statement was that the drug takes up to 3-4 months to reach maximal effect, which implies that some of the cases reported at ASCO as stable disease or minor response could have improved to an objective response.
Another interesting aspect of the trial is the potential utility of biomarkers for patient selection. The current study includes all comers but the company is evaluating potential biomarkers to predict response, which could guide future trials. My impression from the conversation is that although there is reason for optimism, it is still very early and the biomarker issue remains an open question.
Important catalyst at ASH
Results for ARRY-520 next December could be an important catalyst for Array, depending on the data. A single digit response rate will put the drug in the growing list of agents that have to be combined with other drugs and undergo long and expensive clinical program. On the other end of the spectrum will be a 20-25% response rate, which could make the drug very interesting. A response rate of ~15% will require the company to identify and validate biomarkers for patient selection in future trials if it wants the drug to become approved as a single agent.
The acquisition of Proteolix by Onyx last year demonstrates the high demand for good myeloma drugs. The acquisition included an upfront payment of $276M as well as over $500M in future milestone payments. At the time of the transaction, the recent potentially pivotal results were still unavailable, so it is safe to assume that had the acquisition taken place today, the price would have been higher. Last month, Onyx sold the Japanese rights for the drug in a $339M deal with Ono Pharmaceuticals (OPHLF.PK) that included a $59M upfront payment. Ono owns the ex US rights for MDX-1106, which is one of the most promising oncology drugs in development, as discussed in a previous entry.
Array recently announced plans to start phase II trials for ARRY-520 both as monotherapy and in combination with Velcade. This decision insinuates that the unpublished results merit further evaluation as a single agent. This is in contrast to other targeted agents for multiple myeloma which advanced to phase II only as part of a combination regimen. Even if Array shows comparable response rate and duration of response to those of carfilzomib, it will probably need to run a large phase II trial to for the drug to be considered for accelerated approval . One advantage ARRY-520 has over carfilzomib is its novel mechanism of action and the ability to be combined with Velcade, as opposed to carfilzomib that competes directly with Velcade.
It looks like the market ascribes very little value to this drug, just like the rest of Array’s pipeline, so the downside going into ASH is limited. Another clinical program that could surprise to the upside is ARRY-614 for MDS, with first data also expected at ASH.
Summary and portfolio update
In summary, there is a big gap between Array’s present value and its market cap. As a small cap biotech, Array is still very speculative, but with 13 drugs in clinical testing and multiple potential value creation events down the road, it looks like a very cheap speculative investment.
Unfortunately, Friday’s positive news on ARRY-380 prevent me from adding a new position in Array as I can only make changes on Sundays assuming no meaningful data are published after market close. As a result, I plan to add more Array to the portfolio next week as part of a write up on Seattle Genetics (SGEN).
Kimberly-Clark for the Long Run
by: World's Best Stocks October 04, 2010
According to the press release of July 23, 2010 related to the Q2 2010 earnings of the company, Kimberly-Clark Corporation (KMB) expects EPS for the fiscal year 2010 in a range of $4.57 to $4.77. We take this opportunity to analyze the past of KMB in order to figure where the value of the stock could be in 10 years.
KMB the Corporation is a global company focused on a better life through product innovation and building its personal care, consumer tissue, K-C Professional & Other and health care brands. The Corporation is principally engaged in the manufacturing and marketing of a wide range of essential products to improve people's day-to-day lives around the world.
At $65.03, KMB is trading at 11.22% from its all-time high of $73.25 reached on December 4, 2000. Approximately 10 years after the stock hit its all-time high, it’s still possible to invest in the stock at an 11% discount from that top. In a more recent past, the stock reached another peak of $72.79 on June 5, 2007, meaning the stock is trading today at 10.66% from that level.
KMB is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of KMB is measured by its beta ratio of only 0.44, which signifies that the stock has a theoretical volatility 56% lower than the market.
We compared the return of KMB with the market (SPY) from the years 1994 to 2010 YTD (as of October 1). All paid dividends are included in the return but not the 2 spin-offs made by KMB over that period.
Civil year
Kimberly-Clark Corporation
Market (SPY)
1994
4,18%
0.33%
1995
73.13%
37.71%
1996
20.17%
22.35%
1997
7.65%
33.35%
1998
14.94%
28.49%
1999
24.26%
20.32%
2000
10.32%
-9.70%
2001
-13.84%
-11.78%
2002
-18.65%
-21.54%
2003
27.26%
27.88%
2004
13.98%
10.54%
2005
-6.70%
4.70%
2006
17.13%
15.61%
2007
5.11%
5.16%
2008
-20.67%
-36.38%
2009
25.31%
26.05%
2010 (as of October 1)
5.09%
4.28%
An investment made in KMB on December 31, 1993 had a return of 298.95% on October 1, 2010, while an investment in the market (SPY), for that same period, had a return of 210.23%. If we look at the last 10 years, an investment made in KMB on December 31, 1999 had a return of 28.47% on October 1, 2010, while an investment in the market, for that same period, had a return of -7.12%. Again, all the paid dividends are included in these returns but not the 2 spin-offs made by KMB.
As you can see, over the 17 periods observed, KMB outperformed the market 6 times. Despite the fact that KMB and the market are far from having the same theoretical volatility, they had similar return per year (+/- 3%) 8 times over 17 periods. KMB underperformed the market only 3 times.
Let’s have a look at the past EPS, dividend per share and payout ratio of KMB in the first table and at the dividend growth in the second one. (All amounts are split adjusted for the 2-for-1 stock split of April 3, 1997 and the 2-for-1 stock split of January 3, 1992)
Year
Diluted EPS
Dividend per share
Payout Ratio
1991
$0.79
$0.725
91.77%
1992
$0.27
$0.82
303.70%
1993
$0.42
$0.84
200.00%
1994
$1.36
$0.875
64.34%
1995
$0.06
$0.895
1491.67%
1996
$2.48
$0.915
36.90%
1997
$1.61
$0.95
59.01%
1998
$2.11
$0.99
46.92%
1999
$3.11
$1.03
33.12%
2000
$3.31
$1.07
32.33%
2001
$3.05
$1.11
36.39%
2002
$3.22
$1.18
36.65%
2003
$3.33
$1.32
39.64%
2004
$3.61
$1.54
42.66%
2005
$3.28
$1.75
53.35%
2006
$3.25
$1.92
59.08%
2007
$4.09
$2.08
50.86%
2008
$4.04
$2.27
56.19%
2009
$4.52
$2.38
52.65%
2010
$4.67 (estimated)
$2.58
53.73% (TTM)
Year
Dividend growth
1991 to 1992
13.10%
1992 to 1993
2.44%
1993 to 1994
4.17%
1994 to 1995
2.29%
1995 to 1996
2.23%
1996 to 1997
3.83%
1997 to 1998
4.21%
1998 to 1999
4.04%
1999 to 2000
3.88%
2000 to 2001
3.74%
2001 to 2002
6.31%
2002 to 2003
11.86%
2003 to 2004
16.67%
2004 to 2005
13.64%
2005 to 2006
9.71%
2006 to 2007
8.33%
2007 to 2008
9.13%
2008 to 2009
4.85%
2009 to 2010
8.40%
The 2010 estimated EPS of $4.67 reflects the middle of the guidance of the company for the full year, which is $4.57 to $4.77 per share, after adjustments for the one-time charge related to adoption of highly inflationary accounting in Venezuela.
From 1996 to 2010 (2010 estimated), the compound annual growth rate was 4.62% for the company’s EPS. If we take 1991 as a starting year, the company increased its dividend each year since 1991. The compound annual growth rate of dividend of KMB has been 6.91% from 1991 to 2010 and in a more recent past, 8.70% from 1999 to 2010, which is excellent.
The average payout ratio for the years 1996 to 2010 has been 45.97%. We can clearly see an uptrend in the payout ratio of the company, which matches the fact that the company increased its dividend at a higher rate than its EPS growth rate over the last 10 years. At this rhythm, the payout should continue to increase.
With an annual dividend of $2.64, a TTM EPS of $4.69, a payout ratio of 53.73%, the company has flexibility to increase the dividend and this one is safe. The current yield of KMB is 4.06% while the current yield of the market is 1.92%.
As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year to ensure their long term potential growth. Here are the Kimberly-Clark Corporation’s sales by year from 1991 to 2009. We have also included 2010 TTM.
Year
Sales
1991
$11,627,900,000
1992
$12,024,200,000
1993
$11,646,800,000
1994
$11,979,200,000
1995
$13,788,600,000
1996
$13,149,100,000
1997
$12,546,600,000
1998
$12,297,800,000
1999
$13,006,800,000
2000
$13,982,000,000
2001
$14,524,400,000
2002
$13,566,300,000
2003
$14,348,000,000
2004
$15,083,200,000
2005
$15,902,600,000
2006
$16,746,900,000
2007
$18,266,000,000
2008
$19,415,000,000
2009
$19,115,000,000
2010 TTM
$19,587,000,000
The compound annual growth rate of the sales of KMB has been 2.80% over the period 1991-2009. This is not an impressive annual growth rate but if we analyze the sales by geographic area since 1995, we can clearly see an encouraging trend: The proportion of the sales of KMB coming from foreign markets increased over time comparing to the sales coming from US & Canada. In 1995, the sales from foreign markets accounted for 28.89% of the total sales of the company, while in 2009, the sales from foreign markets accounted for 45.49% of the total sales. The company will profit from the growing emerging markets.
Here, you will find a table of Kimberly-Clark Corporation’s sales by geographic area.
Geographic Area
2009
2005
2000
1995
North America (US & Canada)
54.51%
58.83%
67.06%
71.11%
Europe, Asia, Latin America & Other
45.49%
41.17%
32.94%
28.89%
Let’s have a look at the historic P/E of KMB.
Year
P/E at year-end
1991
25.97
1992
91.09
1993
53.25
1994
16.49
1995
632.17
1996
18.01
1997
29.27
1998
25.20
1999
20.92
2000
21.36
2001
19.61
2002
14.74
2003
17.74
2004
18.23
2005
18.19
2006
20.91
2007
16.95
2008
13.05
2009
14.10
2010 YTD
13.87 (TTM)
The current TTM P/E of KMB is 13.87. Over the period 1996-2010 YTD, we have 15 periods of P/E with an average of 18.81. We can clearly see over the period that the P/E of KMB is not necessarily constant and the trend is downwards. The actual TTM P/E is well below the average of 18.81 but it is not a sign that the stock is cheap because the company has evolved in the past decade to become a more mature company that focuses on the dividend payments for its shareholders. Usually, income stocks have lower P/E than growth stocks.
For the measure of the profitability, KMB has a TTM profit margin of 10.56%. The TTM operating margin is 15.13%. By comparison, the average TTM profit margin and TTM operating margin for the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) are 12.30% and 18.98% respectively. KMB is below the industry.
For the measure of the financial strength, the MRQ current ratio is 1.03 for KMB. The company has a MRQ debt/equity ratio of 1.12. The average MRQ current ratio of the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) is 0.94. KMB is above.
The better way to predict the future is to look at the past; this is why we analyzed the past of KMB. Now, we will use the past to extrapolate what would be the return in 10 years of an investment made in KMB today.
We previously saw that from 1996 to 2010 (2010 estimated), the compound annual growth rate has been 4.62% for the company’s EPS. The compound annual growth rate for the company’s dividend has been 6.91% from 1991 to 2010. In a more recent past, the compound annual growth rate for the company’s dividend has been 8.70% for the period 1999-2010. For our scenario, let’s presume that the company will grow its EPS by 4% and continue to increase its dividend by 7% per year in the next 10 years.
Year
Estimated EPS (growth of 4%)
Estimated dividend (growth of 7%)
2010
$4.67 (estimated)
$2.58 (already paid)
2011
$4.86
$2.76
2012
$5.05
$2.95
2013
$5.25
$3.16
2014
$5.46
$3.38
2015
$5.68
$3.62
2016
$5.91
$3.87
2017
$6.14
$4.14
2018
$6.39
$4.43
2019
$6.65
$4.74
2020
$6.91
$5.08
The investor who invests in KMB could pocket an estimated income of dividend of $38.13 until December 31, 2020 assuming a 7% growth of the dividend of the company per year. Here are 2 possibilities of the value of the stock price at the end of 2020, assuming different P/E ratios based on an EPS growth of 4% per year and an investment in KMB based on the current price of $65.03.
With a P/E of 12: EPS of $6.91 X 12=$82.92;
Return: 86.14% (paid dividends included) (Compound annual return of 6.41%)
With a P/E of 14: EPS of $6.91 X 14=$96.74;
Return: 107.40% (paid dividends included) (Compound annual return of 7.56%)
Based on a dividend in 2020 of $5.08 and an EPS of $6.91, that would give the company a payout ratio of 73.52% and a yield of 5.25% to 6.13%, assuming our 2 P/E scenarios of 14 and 12 (stock price in 2020 of $96.74 or $82.92).
In order to justify our valuation scenarios, we analyzed today’s 5 mature companies with high payout ratios to check if their current P/E and their current yield match our future expectations for the valuation of KMB.
Company
Payout Ratio
P/E TTM (As of October 1, 2010)
Yield (As of October 1, 2010)
AT&T, Inc. (T)
77.21%
13.40
5.83%
American Electric Power Co., Inc. (AEP)
68.18%
14.97
4.64%
Consolidated Edison, Inc. (ED)
70.12%
14.30
4.92%
Altria Group, Inc. (MO)
83.13%
14.33
6.39%
Lorillard, Inc. (LO)
64.62%
12.93
5.62%
Even if these companies are mature, they have current P/E in the range of 13 to 15, and current yield between 4.64% and 6.39%. After this analysis, we feel comfortable with our scenarios of P/E between 12 and 14, even if the company has a high payout in the future.
The fundamentals of the company are all great: low volatility, the stock is trading at 11.22% from its all time high of $73.25, excellent past return of the stock compared to the market, current yield at 4.06%, safe and rising dividend, growing EPS at anticipated records levels, growing sales on a long period with a higher proportion coming from foreign markets and finally, correct P/E.
Moreover, assuming our scenario of the growth rate of the company’s EPS and dividend for the coming years, the potential return would be in the range of 86.14% to 107.40% by the end of 2020 (compound annual return of 6.41% to 7.56%). Finally, assuming an annual dividend of $5.08 in 2020, the yield of the investor who invested in the stock at $65.03 would be 7.81% at that moment and should continue to increase over time: that is the reward of long term investing.
Participating in the revenues of companies who surround us in our everyday lifestyle is an excellent investing philosophy, and KMB is an excellent option in that matter.
Source for industry group and company description: Morningstar, Inc.
From ‘Avatar’ Playbook, Pro Teams Use 3-D Imaging
In the endless quest for athletic advantage, a handful of major league baseball teams are engaged in an elaborate, largely clandestine race to master an advanced imaging technology that some baseball officials think could influence the way athletes of all ages train, perform and recover from injuries.
The technology, which has also drawn strong interest from some professional and college football teams, is an unlikely hybrid. It combines the technology that captures the human gestures at the core of three-dimensional animations like “Avatar” with advanced sensors, biomechanics and orthopedic research on the most powerful and least damaging ways to hurl a ball, swing a bat or simply run like the wind.
Essentially, the technique produces a full, three-dimensional representation on a computer that can be viewed from any direction, run forward and backward, and analyzed to calculate precise limb angles and accelerations, stresses on joints, ball speeds and the G-forces that produce them.
The technique, called motion capture, has become a recognized tool for helping athletes and nonathletes recover from injuries, said Chris Bregler, an associate professor of computer science and director of the Movement Lab at New York University.
“It’s just a matter of time before it goes into not just sports medicine but making a team better,” Dr. Bregler said.
With little public notice, motion capture technology has caught on in an increasing range of athletic endeavors. In one permutation, a company found a way to create the illusion that a football player was immersed in an EA Sports Madden-style video game. This allows an athlete to train against life-size animations whose movements are based on statistics of specific opponents. The real player — while wearing 3-D goggles — runs, jukes and throws as the EA Madden characters chase him.
Researchers have also used similar technology to create and transmit life-size images of dancers, allowing people in two locations, say New York and Los Angeles, to practice dancing together. A version of the technique called tele-immersion has also been used for a kind of “distance coaching,” in which a coach in one location can watch a team perform drills in three dimensions in another location. This has been particularly helpful to elite wheelchair-basketball teams, which find it difficult to travel.
Operating largely in secrecy, a few baseball teams have begun using the technology on a large scale with the hope of avoiding injuries, adjusting pitchers’ motions and batters’ swings and even helping players in slumps. At least three teams — the Boston Red Sox, the San Francisco Giants and the Milwaukee Brewers — are recording dozens of players, according to trainers, doctors, and technicians familiar with the work.
In football, the Green Bay Packers tested an early version of the system, according to officials with a company involved in developing the technology, and a motion capture laboratory was recently built on the campus of the New England Patriots in Foxborough, Mass.
The Foxborough program is part of the Massachusetts General Hospital Sports Performance Center, located in a large health clinic next to the Patriots’ stadium. The program, which also involves research at the Massachusetts Institute of Technology, is led by Dr. Eric Berkson, an orthopedic surgeon and team doctor for the Red Sox. He provided a glimpse of the system on the condition that he would not discuss his work for the Red Sox.
Inside the cavernous laboratory, Phil McCarthy, a lanky young amateur pitcher from Old Dominion University in Virginia who had been recruited for the demonstration, went methodically through his workout, throwing fastballs, changeups, curveballs and a dipping split-finger pitch. About 75 small white globes were stuck to his body as if he had contracted some alien disease. Above him was a ring of 20 high-speed cameras, each glowing an eerie scarlet, capturing images of the reflective globes with an infrared strobe.
The disembodied cloud of globes appeared on a large video screen, and then — flash! — a computer program connected the dots, and a sketchy but biomechanically exact twin of Mr. McCarthy appeared on screen. His windup and delivery had been captured in three dimensions, with enough detail to calculate the stress on his wrist and the angular velocity of his shoulders.
Although the Red Sox declined to discuss their use of the technology, a physician on the project, Jim Zachazewski, said: “They are a very data-driven team. This will help to take that to the next level.”
Some sports insiders predict that once the programs become more widely known, they could set off a technology race and give younger, technically savvy coaches a new edge over traditionalists.
Bill Schlough, the chief information officer for the San Francisco Giants, declined to let reporters see his team’s system or even confirm its location, but he said: “There are some coaches that see it as some sort of hocus-pocus. Are there going to be a lot of coaches like that left in 20 years? I doubt it.”
He added: “It’s not the holy grail. It’s another tool in our arsenal to improve performance.”
Trainers and team doctors are still grappling with how to use the overwhelming amount of information the analysis provides. But if an athlete is captured when healthy and performing with peak effectiveness, a second recording can effectively let the athlete “step inside” himself or herself after an injury or a slump, compare the two sequences and reveal in precise detail what has changed and how to focus rehabilitation.
By capturing dozens or even hundreds of players, teams hope to better understand mechanical problems — say, a pitching motion that puts too much stress on an elbow — and correct them before an injury occurs, said Jason Long, a biomedical engineer at the Medical College of Wisconsin Sports Medicine Center in Milwaukee, which operates a motion capture system that is used by the Brewers.
The Brewers’ pitching coach, Rick Peterson, said, “It’s getting an M.R.I. of a pitching delivery — you see everything that’s going on, how efficient the kinetic chain is.” Mr. Peterson is a co-founder of 3P Sports, a company that analyzes amateur pitchers’ motions through video.
Mr. Peterson said that at least three Brewers pitchers — Yovani Gallardo, Randy Wolf and John Axford — had made adjustments based on the motion capture system, and that “some other pitchers have had velocity increases in the minors, too.”
Perhaps the most tantalizing and hotly debated possibility is that the data will help trainers and coaches crack the code of a nearly perfect swing or the safest throwing motion and improve the performance of healthy players. But whatever the ultimate uses, the technology opens an analytic universe that is not available with standard video.
“They’re the automobile versus the bicycle,” said Glenn S. Fleisig, the director of research at the American Sports Medicine Institute in Birmingham, Ala., where much of the research that forms the basis for the new work has been done over the years. Experts in motion capture think that even with the latest initiatives, athletes are still only scratching the surface of the technology.
One of the most sophisticated applications is the system that enables football players to essentially practice against “a virtual defense,” said Rob Moore, the vice president and chief technology officer for EA Sports. “He’s getting the reps in without getting the physical punishment.”
A digital technology company called XOS produced at least two facilities, one at Marshall University in Huntington, W.Va., and another at the University of Arizona, although teams have found them cumbersome to use. XOS has terminated that program, focusing instead on a laptop-based trainer that has proved more popular, the company said.
All of these new possibilities have sparked questions on whether they could help college teams evade rules on how much athletes may train with coaches, although an N.C.A.A. spokesman indicated that no immediate concerns had been raised.
Peter Bajcsy, a research scientist at the University of Illinois and the National Center for Supercomputing Applications, said that whatever its other uses, the technology offered an unparalleled medium for capturing great athletic performances.
“If we don’t record Michael Jordan doing a slam dunk today, a hundred years from now, nobody will know how he moved,” Dr. Bajcsy said.
This story originally appeared in the The New York Times
Stocks: Bracing for a rocky October
By Blake Ellis, staff reporterOctober 3, 2010: 11:54 AM ET
NEW YORK (CNNMoney.com) -- Stocks closed out the best September in 71 years last week, but don't break out the champagne yet. October trading is likely to be choppy as uncertainty looms over the market.
September's run-up was spurred by economic readings that managed to beat painfully low expectations, said Alec Young, equity strategist at S&P Equity Research.
"The psychology and expectations about the economy had just gotten so depressed in August and double-dip fears were prevalent, so we got a relief rally in September when economic reports started coming out that weren't great but just weren't as bad," he said.
That relief is now subsiding amid a new wave of uncertainty about the economy ahead of the the government's monthly employment report, the first wave of corporate earnings and November's midterm elections.
But while that uncertainty is likely to stifle further rallies, it doesn't mean the market won't gradually make its way higher, Young said.
"The 9% months are over," said Young, referring to the S&P's 8.7% spike in September, its biggest September gain since 1939. "We're likely to continue seeing this upside, but it will be more like a slow grinding higher, not sprinting higher."
Jobless recovery?: Investors will be looking to a slew of reports on employment this week for hints of how "jobless" the recovery really is.
On Wednesday, payroll services firm ADP is expected to report that employers in the private sector added 18,000 workers to their payrolls in September after cutting 10,000 in the previous month. Outplacement firm Challenger, Gray & Christmas issues its report on planned job cuts in September.
The government's weekly jobless claims report comes out Thursday, with 455,000 Americans expected to file new claims for unemployment, after 453,000 were filed in the previous week.
And the most closely watched reading on employment is due Friday. Employers aren't expected to have added or cut any jobs in September after cutting 54,000 jobs in August. The unemployment rate is expected to have risen to 9.7% from 9.6%.
Midterm elections: The stomach churning ahead of the midterm elections -- which could bring with it new regulation and tax policies -- is likely to keep investors from jumping in, said Brian Battle, director of Performance Trust Capital Partners.
"Everyone takes their bets off the table before an election because of three levels of uncertainty," said Battle. "The first unknown is if conservatives re-take the House or Senate, the second is if they do, what their policies are going to be and whether they get them voted on, and the last thing is whether Obama vetoes it."
Earnings: The uncertain political climate is also causing businesses to exercise caution, said Battle.
"If Republicans do take the House, that will be good for companies and good for the markets because it will be a very pro-business environment," said Battle. "But until we have that clarity, it's really tough for corporations to make business decisions and project future earnings without knowing what tax policies and regulation will look like."
Corporate earnings kick off this week, with results from Alcoa, Costco and PepsiCo on deck.
Monday: The National Association of Realtors' pending home sales index, a measure of sales contracts for existing homes, is due before the start of trading and is expected to have risen 1% in August after rising 5.2% in July.
Factory orders are due from the Commerce Department. Orders are expected to have fallen 0.4% in August after rising 0.1% in July.
Tuesday: The Institute for Supply Management's services sector index for September is due in the morning and is expected to have edged up to 51.8 from 51.5 in August. Any number above 50 indicates growth in the sector.
Wednesday: In addition to reports on employment from ADP and Challenger, the U.S. government's weekly crude oil inventories report is due in the morning.
Costco is scheduled to release its third-quarter results before the opening bell. Analysts are expecting the company to post earnings of 95 cents a share.
A report from the Mortgage Bankers Association on the number of applications for mortgages is also on tap.
Thursday: In addition to the Department of Labor's report on jobless claims, the August consumer credit report from the government is due in the afternoon.
Credit is expected to have fallen by $3 billion after slipping $3.6 billion in July.
PepsiCo is on tap to report earnings before the start of trading. Economists expect the company to book earnings of $1.22 a share.
After the market close, Alcoa is slated to release its third quarter results, expected to report earnings of 6 cents a share.
Friday: In addition to the big jobs report, the Commerce Department releases the wholesale inventories report in the morning. Inventories are expected to have risen 0.4% in August after jumping 1.3% in July.
Racial predatory loans fueled U.S. housing crisis: study
By Nick Carey
CHICAGO | Mon Oct 4, 2010 12:22am EDT
CHICAGO (Reuters) - Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.
Predatory lending typically refers to loans that carry unreasonable fees, interest rates and payment requirements.
Poorer minority areas became a focus of these practices in the 1990s with the growth of mortgage-backed securities, which enabled lenders to pool low- and high-risk loans to sell on the secondary market, Professor Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University and PhD candidate Jacob Rugh, said in their study.
The financial institutions likely to be found in minority areas tended to be predatory -- pawn shops, payday lenders and check cashing services that "charge high fees and usurious rates of interest," they said in the study.
"By definition, segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be underserved by mainstream financial institutions," the study says.
Redlining is the practice of denying or increasing the cost of services, such as banking and insurance, to residents in specific areas, often based on race.
The U.S. economy is still struggling with the effects of its longest recession since the 1930s, which was triggered in large part by the housing crisis, which was in part triggered by the crash of the subprime loan market.
Subprime lending refers to loans made to consumers with poor credit and others considered higher risk. They tend to have a higher interest rate than traditional loans.
The study, which used data from the 100 largest U.S. metropolitan areas, found that living in a predominantly African-American area, and to a lesser extent Hispanic area, were "powerful predictors of foreclosures" in the nation.
Even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans, according to the study.
"As a result, from 1993 to 2000, the share of subprime mortgages going to households in minority neighborhoods rose from 2 to 18 percent," Massey and Rugh said.
They said the U.S. Civil Rights Act should be amended to create mechanisms that would uncover discrimination and penalize those who discriminated against minority borrowers.
The study is published in the October issue of the journal.
(Editing by Paul Simao)
U.S., UK raise terrorism threat level in Europe
By Caren Bohan and Kylie MacLellan
WASHINGTON/LONDON | Mon Oct 4, 2010 1:43am EDT
WASHINGTON/LONDON (Reuters) - The United States and Britain warned their citizens on Sunday of an increased risk of terrorist attacks in Europe, with Washington saying al Qaeda might target transport infrastructure.
The U.S. State Department issued a warning directed at American citizens traveling in Europe, without singling out any specific countries, saying tourists should proceed with caution.
Britain raised the terrorism threat level in its advice for citizens traveling to Germany and France to "high" from "general." It left the threat level at home unchanged at "severe," meaning an attack is highly likely, and said it agreed with the U.S. assessment for the continent as a whole.
The moves came after a week in which a number of European officials had broadly confirmed media reports that new intelligence indicated possible attacks on the continent.
Western intelligence sources said militants in hide-outs in northwest Pakistan had been plotting coordinated attacks on European cities, the plans apparently surviving setbacks from a September surge in drone strikes and an arrest.
The plot involved al Qaeda and allied militants, possibly including European citizens or residents, the sources said. In Washington, U.S. officials said Osama bin Laden and the top al Qaeda leadership were likely behind the plot, adding that the decision to issue the alert was based on an accumulation of information, rather than a specific new revelation.
Some security officials have drawn comparisons to the brazen Mumbai attacks in 2008 that targeted city landmarks such as luxury hotels and a cafe and killed 166 people.
The U.S. State Department travel alert said public transportation systems and other tourism-related facilities could be targets, noting that past attacks had struck rail, airline and boat services.
"The State Department alerts U.S. citizens to the potential for terrorist attacks in Europe," it said in an advisory on its website.
A U.S. official said President Barack Obama held meetings on Friday night and Saturday morning about the European security threat and was briefed on the situation again on Sunday morning.
The alert was posted on the State Department website at http:/travel.state.gov/travel/cis_pa_tw/pa/pa_europe.html.
Europe is worried about how reports of the threats might affect tourism. The U.S. alert falls short of a more severe one in which the State Department might have warned citizens against traveling to Europe. Instead, the alert urges them to take precautions when they do travel.
"We're not saying don't travel to Europe. We are not saying don't visit ... major tourist attractions or historic sites or monuments," Patrick Kennedy, undersecretary of state, told reporters on a conference call.
Said U.S. tourist Tom Steier: "You should take these threats seriously, but right now I feel very safe in Paris."
CONSTANT REVIEW
French Foreign Ministry spokesman Bernard Valero said France had taken the U.S. warning into account: "The terrorist threat remains high in France ... the alert level remains unchanged at red," he said. That is the second highest level.
While anti-terror measures have been mobilized, French Interior Minister Brice Hortefeux told reporters late on Sunday that "We shouldn't be in denial."
"There are several bits of information that have come to light in the last few days, which is what the Americans are confirming today," he said.
A spokesman for Britain's Foreign and Commonwealth Office (FCO) declined to detail why the travel advice for France and Germany had been updated. "Like other large European countries, they have a high threat of terrorism, which is reflected in our updated advice."
Advice is under constant review and draws on a variety of sources, the FCO said.
A new potential threat was outlined last week in media reports, partially confirmed by European officials, that Europe could be the target of attacks.
European Union counter-terrorism coordinator Gilles de Kerchove said the plot showed the continent had to do more to impede extremists going overseas to train.
Sweden raised its terrorism threat level on Friday, although it said it was still lower than in other European countries and an attack was not believed to be imminent.
The last successful large-scale militant attacks in Europe were the July 2005 suicide bombings on London's transport system, which killed 52 people. Bombers killed 191 people on trains in Madrid in March 2004.
(Writing by Peter Graff; Editing by Jon Boyle and Philip Barbara)
Verizon to Refund Millions of Customers for False Charges
Verizon Wireless said Sunday it will pay up to $90 million in refunds to 15 million cell phone customers who were wrongly charged for data sessions or Internet use, one of the largest-ever customer refunds by a telecommunications company.
The company’s statement came as Verizon Wireless held talks with the Federal Communications Commission about complaints of unauthorized charges and after questions about a possible settlement of an F.C.C. investigation into the issue.
Verizon [VZ 32.89 0.30 (+0.92%) ] said in its statement that 15 million customers either will receive either credits ranging from $2 to $6 on their October or November bills or, in the case of former customers, refund checks.
In its statement, Verizon Wireless said that the charges affected customers who did not have data usage plans but who were nevertheless billed because of data exchanges initiated by software built into their phones or because of mistaken charges for inadvertent episodes of Web access.
In the last three years, the F.C.C. has received hundreds of complaints from Verizon Wireless customers who said they were charged for data usage or Web access at times when their phones were not in use or when they mistakenly pushed a button that was preprogrammed to instantly active the phone’s Web browser. Beginning in 2009, The New York Times and The Plain Dealer of Cleveland, among other publications, reported that customers had been complaining of the charges but had often been ignored by Verizon Wireless.
People close to the settlement talks who spoke on the condition of anonymity said they expected the refunds to total more than $50 million.
“Verizon Wireless values our customer relationships and we always want to do the right thing for our customers,” Mary Coyne, deputy general counsel for Verizon Wireless, said in the statement.
The announcement of the refunds might not end the issue for Verizon. People close to the talks said the F.C.C. had been pressing the company to enter into an agreement to pay a penalty for the unauthorized charges, which would serve as a deterrent for companies that might discover similar circumstances but fail to alert customers in a timely manner.
This story originally appeared in the The New York Times
Fed's Plosser cautions against policy easing: report
SINGAPORE | Mon Oct 4, 2010 3:34am EDT
SINGAPORE (Reuters) - The Federal Reserve must not launch a new round of asset purchases without setting out what it wants to achieve through the policy, the Financial Times quoted Philadelphia Fed President Charles Plosser as saying.
His comments contrast with those of New York Fed chief William Dudley and Chicago Fed President Charles Evans, who in the clearest calls yet said on Friday that more easing was needed unless the economic outlook improves.
Expectations that the Fed might ease policy as soon as its next meeting on November 2-3 have put downward pressure on the dollar and supported U.S. Treasuries.
But Plosser reiterated his concerns over further easing.
"I think that before we engage (in further quantitative easing) we need to be very clear about what it is we're trying to do, how we're going to go about doing it, how we're going to measure whether we're effective at it or not, and how we're going to communicate that," he told the FT in an interview published on Monday.
The FT did not say when the interview was conducted.
Plosser has been outspoken in expressing concern about the massive expansion of the Fed's balance sheet, which has doubled from pre-crisis levels as a result of recession-fighting efforts.
(Reporting by Kazunori Takada; Editing by Neil Fullick)
Pakistan militants vow more attacks on NATO supplies
By Kamran Haider
ISLAMABAD | Mon Oct 4, 2010 5:06am EDT
ISLAMABAD (Reuters) - Pakistan's Taliban on Monday vowed more attacks on tankers transporting fuel to NATO troops in Afghanistan, a move likely to prolong the closure of a vital supply route and further strain ties with ally Washington.
Angered by repeated attacks by NATO helicopters on militant targets within its borders, Pakistan blocked one of the supply routes for NATO troops in Afghanistan after one strike killed three Pakistani soldiers last week in the western Kurram region.
The incursions and the sealing of the supply route, now in its fifth day, have heightened tensions between the United States and Pakistan, whose long alliance is often uneasy.
Senior police officer Mirwaiz Niaz said at least a dozen gunmen opened fire on tankers on the outskirts of Islamabad on Sunday, killing three guards. They then set fire to 13 vehicles.
Taliban militants claimed responsibility for the attack.
"Our mujahideen have carried out this attack. We will continue such attacks all over the country to avenge drone attacks and attacks by foreign forces inside Pakistani territory," Taliban spokesman Azam Tariq told Reuters by telephone from an undisclosed location.
The CIA has escalated drone strikes against al Qaeda-linked militants in Pakistan's northwest, with 21 attacks in September alone, the highest number in a single month on record.
Civilian casualties caused by the missile-carrying pilotless drones have infuriated many Pakistanis and made it harder for the government to cooperate with the United States.
The strikes preceded warnings by Britain and the United States of an increased risk of terrorist attacks in Europe, with Washington saying al Qaeda might target transport infrastructure.
Western intelligence sources said militants in hide-outs in northwest Pakistan had been plotting coordinated attacks on European cities, the plans apparently surviving setbacks from drone strikes and an arrest.
Pakistan will re-open the supply route for coalition troops in Afghanistan once public anger over the NATO incursions across the border from Afghanistan eases and security improves, the foreign ministry spokesman said on Sunday.
Control of supply routes to Afghanistan give Pakistan considerable leverage over the United States, which is scrambling to contain a raging Taliban insurgency in Afghanistan before it starts withdrawing troops in July of 2011.
Analysts say Islamabad can't afford to antagonize for too long an ally that provides $2 billion in military aid each year -- vital for Pakistan's own fight against homegrown Taliban.
But citing security concerns for the route closures allow Islamabad to register its displeasure with the Americans without risking a public backlash for a government that is already unpopular for its handling of August's flood disaster.
Pakistan is under heavy U.S. pressure to crack down harder on militants in the northwest of the country near the Afghan border, parts of which are described as a global hub for extremists.
A senior Pakistani intelligence official said there may be up to 20 Britons in tribal areas in the northwest training with militants, but that there was scant information on them.
"This is a concern to us, yes," the official said. "We have very limited ability to look into North Waziristan and South Waziristan. Primarily because more than 50 of our sources have been ceremonially butchered."
"At one time, it (the area) was like a black hole to us."
Now, the official said, Pakistan relies primarily on electronic intercepts and eavesdropping to gather intelligence on militants in the area.
(Additional reporting by Chris Allbritton and Faisal Mehmood in Islamabad, and Saud Mehsud in Dera Ismail Khan; Writing by Michael Georgy; Editing by Chris Allbritton and Miral Fahmy)
Attractive Stocks Likely to Be Takeover Targets: John Dorfman
October 03, 2010, 9:15 PM EDT
By John Dorfman
Oct. 4 (Bloomberg) -- Before I became an investment manager 13 years ago, I spent a decade as a reporter at the Wall Street Journal. I had a rival at another newspaper who frequently wrote about takeover rumors.
One day he filed a story saying that Coca-Cola Co. might buy Wendy’s, the fast-food chain. Coca-Cola responded with a statement, which I framed and have held onto all these years. The Atlanta-based soft-drink giant said that its policy was not to comment on such speculation, and that in this case it wanted to add that the reporter “does not have a clue.”
People who invest based on unconfirmed reports about possible mergers or acquisitions often do themselves a disservice. If even well-connected pundits are often wrong, imagine how far you can go astray if you act on such gossip, whether it comes from friends, acquaintances or stockbrokers.
It’s natural to try to pick stocks that will become takeover bait. If you succeed, it can be very lucrative: purchases usually occur at a 20 percent to 70 percent premium over the previous day’s trading price.
And now is a good time to seek out such opportunities. The third quarter was the busiest for M&A activity in two years.
The best way to play this game is to invest in companies whose financial characteristics make them attractive to potential buyers. Frequently these are stocks you would be happy to own even if no deal were imminent.
Finding Targets
Last week, I ran a screen to identify such situations.
I looked for companies with an enterprise value no more than six times Ebitda. Enterprise value is the market value of a company’s stock, plus the total of its debt. It gives an approximation of what one company must pay to acquire another.
Ebitda is earnings before interest, taxes, depreciation and amortization. Some investors consider it a truer representation of a company’s value than earnings under generally accepted accounting principles, or GAAP earnings.
For most purposes, I usually prefer GAAP earnings because I consider interest, taxes and depreciation real things, not phantoms. In takeover situations, however, Ebitda may be a better measure.
An acquirer may not care much about those factors because they may be nullified or changed after the acquisition. For example, the buyer might pay off the target company’s debt, and not have to worry about interest charges thereafter.
Key Characteristics
To make sure my potential takeover targets were not too big or too small for acquirers’ taste, I restricted my search to U.S. companies with a market value from $500 million to $5 billion.
I also looked for ones that sell for 15 times earnings or less, have cash or safe short-term investments of at least $50 million, and have debt less than stockholders’ equity.
Those characteristics make a company more attractive to a potential acquirer -- and they are good things to see even if no one comes courting. When I ran the screen, 75 companies made the cut.
Several were for-profit education companies: ITT Educational Services Inc. of Carmel, Indiana; Education Management Corp., based in Pittsburgh; Career Education Corp. in Hoffman Estates, Illinois; and Corinthian Colleges Inc. of Santa Ana, California.
Opportunities Pop Up
Another is Washington Post Co., which is known as a media company yet gets more than half its revenue from its Kaplan Higher Education unit.
Education stocks have been popping up on value screens for weeks. They are cheap because the U.S. government may end aid to schools whose students are too slow repaying federally backed education loans, or whose students have low job-placement rates.
In response to criticism that they recruit students indiscriminately, including some who have little chance of benefiting from their programs, several for-profit schools have begun no-fee provisional enrollment programs or instituted special training sessions to enhance the study skills of entering students.
The biotech firm Cephalon Inc. is the largest company on the list, with a stock-market value of about $5 billion. Based in Frazer, Pennsylvania, its drugs treat pain, cancer and central nervous system disorders. The company’s most successful product is Provigil, a drug that combats narcolepsy.
Attractive Valuations
A few years ago I sold Cephalon shares short, betting on a decline. At that time the stock was expensive, trading at 20 to 40 times earnings. I was also concerned about off-label use of Provigil by truck drivers and others trying to induce wakefulness. I’m still concerned that if the U.S. regulators crack down, Provigil would quickly lose a lot of its sales, but valuations are now favorable with the stock priced at 11 times earnings.
Information-technology stocks that look like potential takeover candidates include Teradyne Inc., a North Reading, Massachusetts-based maker of semiconductor test equipment; Tech Data Corp., a Clearwater, Florida, distributor of technology products; and Malvern, Pennsylvania-based Vishay Intertechnology Inc., which makes transistors, capacitors and other electronic components.
Disclosure note: I have no long or short positions in the stocks discussed above, personally or for clients. Four stocks that I own did make the 75-stock list: Endo Pharmaceuticals Holdings Inc. of Chadds Ford, Pennsylvania; GT Solar International Inc. of Merrimack, New Hampshire; Mirant Corp. of Atlanta; and Rowan Cos. in Houston. Most of these have been discussed in previous columns.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
--Editors: Steven Gittelson, Charles W. Stevens.
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To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
RVs' Return May Indicate Consumer Recovery
Following a sales plunge in 2008 and 2009, recreational vehicle manufacturers are finding some traction this year with cheaper, greener models. Towables outpace motor homes
By Ben Steverman
Sales at leading recreational vehicle (RV) maker Thor Industries (THO) are on the road to recovery after being slammed by high gas prices, scarce credit, and recession-racked consumers. U.S. consumers are favoring less expensive and more fuel-efficient models, analysts and industry experts say.
Americans' willingness to spend, if not splurge, on so-called second homes on wheels could in turn provide a clue to positive trends in the broader economy.
"The RV industry is a great leading indicator for the overall health of the economy," says Kathryn I. Thompson, founder of Thompson Research Group in Nashville, Tenn. Over the last decade, manufacturers have produced an average of 309,000 RVs a year, according to the Recreation Vehicle Industry Assn.
On Sept. 28, Thor, the largest U.S. maker of recreational vehicles, reported a 51 percent jump in last quarter's sales from a year ago. Profit rose 64 percent, with net income exceeding by 16 percent the estimates of analysts surveyed by Bloomberg.
The recession took its toll on the industry. In March 2009, two of the largest RV makers—Monaco Coach and Fleetwood Enterprises—filed for bankruptcy protection.
looser credit, not greater demand
On Sept. 24, the RVIA released August data showing that the 177,300 RVs shipped to dealers so far in 2010 had exceeded levels at this point in 2009 by 70 percent. In 2009, the number of RVs shipped to dealers was 58 percent below the 390,500 RVs shipped in the peak year of 2006, according to the RVIA.
A key factor in the RV recovery has been credit, says Mac Bryan, vice-president of the RVIA. Because of the credit crisis, neither consumers nor dealers could borrow to buy RVs, which in the case of motorized homes can cost at least $200,000. Much of the improvement in 2010 does not reflect a "change in demand, but an improvement in financing in vehicles," Bryan says, as the financial crisis has eased and banks have reentered the RV financing market.
So far in 2010, the rebound in actual retail demand has been "fairly modest," says Bret Jordan, an analyst at Nashville-based investment firm Avondale Partners. "The retail consumer never really came back in a big way," says Jordan, who is based in the firm's Boston office.
There are, however, signs that this could be changing. "After a tenuous summer, the season ended well," Robert W. Baird analyst Craig Kennison wrote on Sept. 29 while unveiling the results of a survey of 104 RV dealers.
Baird's survey showed that some parts of the RV industry are doing better than others. Sales of motor homes—RVs with engines cost significantly more than trailer RVs—rose 8 percent to 10 percent in the third quarter of 2010. Towable RVs, meanwhile, jumped 16 percent to 18 percent.
Trading down to towable RVs
Consumers are deciding on towable RVs partly because of cost, but also because extra features have made them competitive with motor homes, Jordan says. A "high-end towable vehicle" can cost $60,000 while a high-end motor home with a diesel engine can be $200,000. Many new towable trailers now feature so-called "slide-outs"—portions of the trailer that can be expanded when parked to increase living space. "You're getting comparable living space" to motor homes, he says, adding: "There is a lot of utility in towables for the cost."
In 2006, pricier motor homes made up 14.3 percent of all recreational vehicles produced. So far in 2010, that share has fallen to less than 10 percent.
"You are seeing the trade-down effect," Thompson says. "People aren't necessarily giving up the RV lifestyle but they're choosing less-expensive products." RVs priced below $150,000 are "doing "OK," she says, while "anything below $100,000 is doing the best."
According to Thompson, such trends could hurt Winnebago Industries (WGO), the motor home maker headquartered in Forest City, Iowa. They could favor Thor, for which towable RVs made up 70 percent of sales last quarter, she says. A maker of RVs under the Airstream, Dutchmen, Komfort, CrossRoads, and other brand names based in Jackson Center, Ohio, Thor announced on Sept. 17 the acquisition of Heartland Recreational Vehicles, another specialist in towable RVs, for $100 million in cash and 4.3 million shares of Thor stock—or a total value of $247 million based on the recent share price. On Oct. 1, Thor said it would boost its quarterly dividend, from 7¢ to 10¢ per share.
big extra: additional flat-screen TV
Winnebago shares are down 14 percent so far in 2010, while Thor shares are up 9 percent.
To make cheaper RVs more attractive to consumers, manufacturers have piled on extra "bells and whistles," Jordan says, like including three flat-screen televisions, instead of just two.
In response to the volatility of gas prices in recent years, RV manufacturers have made their products more fuel-efficient. "We're seeing a great deal of attention [paid] to the greening of the RV," Bryan says. RVs are being made of lighter materials and the efficiency of furnaces, air conditioners, water heaters, and other appliances has been improved, he says.
There are further recent indications of returning retail demand. The Pennsylvania RV and Camping Show, an annual event held in Hershey, Pa., bills itself as "America's largest RV show." The exhibition, from Sept. 13-19, saw record attendance that was up 9 percent from last year and the number of RV units on display rose 43 percent.
Tiffin Motorhomes, a privately held RV company based in Red Bay, Ala., told show organizers that sales were 44 percent higher than last year.
"People had been holding back on purchases and now they were ready to buy," says Heather Leach, marketing and education director at the Pennsylvania RV and Camping Assn.
RV dealer: Customers remain "leery"
Exposure to the U.S. consumer is just one factor that makes the RV industry a good economic barometer, Thompson says. The industry is also affected by important credit trends, including the availability of short-term credit for dealers buying inventory and of long-term credit for customers buying RVs. The industry is also a good window into factors that affect U.S. manufacturing, such as raw material and labor costs.
The economic environment continues to concern the industry. Consumer spending rose 0.4 percent in August, according to data released Oct. 1 by the U.S. Commerce Dept. According to an unidentified RV dealer quoted in a Sept. 7 survey by Thompson Research Group: "Customers [remain] leery, kind of careful about everything."
Nonetheless, industry participants say they are confident about the RV's long-term appeal, especially as Baby Boomers retire and younger Americans seek affordable vacations. "Assuming gas prices remain reasonably affordable, it's a cheap way to have a vacation," Jordan says. "It's cheaper than a second home."
Park campgrounds are as busy as ever, Bryan says, a fact that underscores the appeal to Americans of the RV lifestyle. According to the National Park Service, the number of RV campers at National Parks rose 6.8 percent from 2008 to 2009. "Recreational vehicles have a very bright future," Bryan says.
Steverman is a reporter in Bloomberg's Chicago bureau.
Europe stocks lose ground; Sanofi in focus
Auto stocks under pressure; Swiss banks rise after capital decision
By Simon Kennedy, MarketWatch
LONDON (MarketWatch) — European shares moved lower at the start of the week, with deal news again grabbing the headlines as Sanofi-Aventis launched a hostile bid for Genzyme.
The Stoxx Europe 600 index /quotes/comstock/22c!sxxp (ST:SXXP 257.78, -1.31, -0.51%) fell 0.5% to 257.88.
The U.K.’s FTSE 100 index /quotes/comstock/23i!i:ukx (UK:UKX 5,564, -29.35, -0.53%) dropped 0.3% to 5,575.39, the French CAC 40 index /quotes/comstock/30t!i:px1 (FR:PX1 3,655, -37.37, -1.01%) fell 0.9% to 3,660.17 and the German DAX 30 index /quotes/comstock/30p!dax (DX:DAX 6,150, -61.33, -0.99%) slipped 0.8% to 6,157.97.
Shares in Sanofi-Aventis /quotes/comstock/24s!e:san (FR:SAN 48.07, -0.22, -0.45%) /quotes/comstock/13*!sny/quotes/nls/sny (SNY 33.12, -0.13, -0.39%) dropped 1.3% in Paris after the group launched an $18.5 billion hostile bid for Genzyme Corp. /quotes/comstock/15*!genz/quotes/nls/genz (GENZ 70.88, +0.09, +0.13%) , but didn’t lift the value of the bid from the $69 a share that Genzyme had previously rejected.
In other deal news, Premier Foods PLC /quotes/comstock/23s!e:pfd (UK:PFD 18.08, +1.87, +11.54%) jumped over 11% in London after saying it has received an approach for its meat-free food business, which includes the Quorn branded range of vegetarian meals.
Shares in satellite-navigation-equipment group TomTom /quotes/comstock/24s!e:tom2 (NL:TOM2 5.25, +0.20, +4.03%) rose 4.3% in Amsterdam after reports that it had turned down a number of takeover approaches.
Banking stocks were mixed Monday.
Credit Suisse Group /quotes/comstock/06p!csgn-otc (CH:CSGN 42.10, +0.32, +0.77%) /quotes/comstock/13*!cs/quotes/nls/cs (CS 43.24, +0.68, +1.60%) rose 1% and UBS /quotes/comstock/06p!ubsn (CH:UBSN 16.66, 0.00, 0.00%) /quotes/comstock/13*!ubs/quotes/nls/ubs (UBS 17.12, +0.09, +0.53%) rose 0.6% after both Swiss lenders said they would be able to meet tough new proposals from Switzerland on capital requirements.
However, Allied Irish Banks /quotes/comstock/30b!aib (IE:AIB 0.45, -0.02, -5.06%) /quotes/comstock/13*!aib/quotes/nls/aib (AIB 1.41, -0.01, -0.70%) dropped around 7%, extending its heavy losses from the previous week, when regulators said it would need to raise even more capital, which could leave the government with a significant majority stake in the bank.
Spain’s Banco Santander /quotes/comstock/06x!e:san (ES:SAN 9.08, -0.02, -0.24%) /quotes/comstock/13*!std/quotes/nls/std (STD 12.58, -0.08, -0.63%) was down 0.9% after being downgraded to neutral from buy at Nomura, which cited continued macroeconomic risks in the bank’s home market.
Among other movers, auto stocks were lower across the board, with BMW /quotes/comstock/11e!fbmw (DE:BMW 48.25, -1.27, -2.57%) dropping 1.9%, Daimler /quotes/comstock/11e!fdai (DE:DAI 44.27, -1.03, -2.27%) down 2% and Peugeot /quotes/comstock/24s!e:ug (FR:UG 24.22, -0.63, -2.52%) down 1.6%.
Oil and gas stocks were also lower as crude-oil prices edged down.
Cairn Energy /quotes/comstock/23s!e:cne (UK:CNE 447.50, -9.60, -2.10%) was one of the biggest fallers in the sector, dropping 2% in London, while BP /quotes/comstock/23s!a:bp. (UK:BP. 431.10, -9.40, -2.13%) /quotes/comstock/13*!bp/quotes/nls/bp (BP 41.95, +0.78, +1.89%) slipped 1% after strong gains in the previous few sessions.
The airline sector also fell on Monday, but Irish airline Aer Lingus /quotes/comstock/23s!e:aerl (UK:AERL 1.04, -0.01, -0.48%) bucked the trend. Aer Lingus rose 0.5% in Dublin after it said it appointed Andrew Macfarlane chief financial officer.
Simon Kennedy is the City correspondent for MarketWatch in London.
Sanofi in hostile $18.5 billion Genzyme bid
Sanofi’s $69-a-share tender offer expires Dec. 10
By Aude Lagorce, MarketWatch
LONDON (MarketWatch) — Sanofi-Aventis SA on Monday launched a hostile $18.5 billion bid for Genzyme Corp. after the U.S. biotech company spurned its earlier friendly approaches.
Sanofi-Aventis /quotes/comstock/13*!sny/quotes/nls/sny (SNY 33.12, -0.13, -0.39%) /quotes/comstock/24s!e:san (FR:SAN 48.08, -0.20, -0.41%) , France’s largest drug maker, started a tender offer to acquire all outstanding shares of Genzyme /quotes/comstock/15*!genz/quotes/nls/genz (GENZ 70.88, +0.09, +0.13%) for $69 each in cash, citing Genzyme’s “unwillingness to engage in constructive discussions.”
The offer expires on Dec. 10.
Earlier this summer, Sanofi approached Genzyme with an offer at the same level and tried to initiate talks. At the end of August, Genzyme rejected the offer, saying it substantially undervalued its prospects, and accused Sanofi of being “opportunistic.”
In a statement Monday, Sanofi said that a meeting between the firms’ chief executive officers on Sept. 20 proved “unproductive.”
It added that recent conversations with shareholders have revealed that they were growing “frustrated" with Genzyme’s “persistent refusal” to have “meaningful discussions” regarding Sanofi’s approach.
“Sanofi is committed to a transaction with Genzyme, and we believe that our offer reflects both Genzyme’s upside potential and its current operational challenges,” Sanofi CEO Christopher Viehbacher said in a statement.
Genzyme was once regarded as a blue chip among the biotech sector, but its shares took a plunge last year after manufacturing issues at one of its key plants led to worldwide shortages of two of its best-selling products.
At least one major Genzyme shareholder, Carl Icahn, has publicly hinted he would be interested in selling his stake if the price was right.
Icahn started building his position last year when Genzyme’s production problems made headlines. Icahn’s representatives currently hold two seats on the company’s 13-member board.
Sanofi is keen to do a deal to support revenue growth as some of its biggest-selling products, such as the blood thinner Plavix and the cancer drug Taxotere, face competition from generic medicines.
But it has vowed to be “disciplined” in its pursuit of Genzyme, and stressed it is not prepared to go to any length to acquire the company.
Sanofi shares fell 1.3% in morning trading in Paris.
Genzyme shares closed at $70.88 on Friday.
Plosser Voices Concern Over Further Easing
The US Federal Reserve must not launch a new round of asset purchases without setting out what they are meant to achieve, the president of the Philadelphia Fed has warned in an interview with the Financial Times.
“I think that before we engage (in further quantitative easing) we need to be very clear about what it is we’re trying to do, how we’re going to go about doing it, how we’re going to measure whether we’re effective at it or not, and how we’re going to communicate that,” said Charles Plosser, who opposes a second round of quantitative easing – nicknamed “QE2” – at this point.
Mr Plosser’s comments highlight one of the main concerns of QE2 sceptics at the Fed: that the central bank will make an implicit promise to use asset purchases to manage the unemployment rate, which they do not believe it can successfully do.
The Federal Reserve is pondering whether to restart asset purchases after the economic recovery slowed to a pace that leaves inflation below its comfort zone and unemployment stuck at 9.6 percent.
Mr Plosser is one of a number of sceptics at regional Fed banks but they are unlikely to sway the rate-setting committee if chairman Ben Bernanke argues for action.
Mr Plosser’s remarks also show that debate at the Fed over how to communicate QE2 – if it goes ahead – is at least as intense as over how large it should be.
That is because the effects of QE2 would be shaped by perceptions about what the Fed intends to do in the future.
In a speech last week, William Dudley of the New York Fed said that adopting a more explicit inflation goal, like the numerical targets used in countries such as the UK, could complement further asset purchases.
Mr Plosser is a long time proponent of inflation targeting and said that he would be willing to consider asset purchases if they were tied to such a goal and necessary to achieve it.
Mr Plosser has further grounds for his opposition to QE2 at this point.
First, his own forecast is that inflation will rise towards 2 percent in 2011, and he is less concerned by the risk that growth or inflation will weaken further than some of his colleagues.
Second, he doubts the efficacy of QE2 in bringing down long-term real interest rates, and the effect of lower long-term rates on unemployment.
“Long-term rates have already come down over 100 basis points since the spring and we did nothing.
So what makes us think that another 20 basis points is going to make any difference whatsoever?” he said.
Third, he worries about whether the Fed will be able to withdraw the extra funds that it supplies to banks smoothly when the time comes.
Finally, he does not think that the cost of disinflation or deflation is too high, provided that the public continues to expect inflation in the future.
“One month or two months of deflation really isn’t the end of the world.”
Cheap Debt for Corporations Fails to Spur Economy
By: Graham Bowley
The New York Times DiggBuzz FacebookTwitter More Share
As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.
Companies like Microsoft [MSFT 24.38 -0.11 (-0.45%) ] are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves.
The development presents something of a chicken-and-egg situation: Corporations keep saving, waiting for the economy to perk up — but the economy is unlikely to perk up if corporations keep saving.
This situation underscores the limits of Washington policy makers’ power to stimulate the economy.
The Federal Reserve has held official interest rates near zero for almost two years, which allows corporations to sell bonds with only slightly higher returns — even below 1 percent.
But most companies are not doing what the easy monetary policy was intended to get them to do: invest and create jobs.
The Fed’s low rates have in fact hurt many Americans, especially retirees whose incomes from savings have fallen substantially.
Big companies like Johnson & Johnson [JNJ 61.75 -0.21 (-0.34%) ], PepsiCo[PEP 67.00 0.56 (+0.84%) ] and I.B.M. [IBM 135.64 1.50 (+1.12%) ] seem to have been among the major beneficiaries.
“They are benefiting themselves by borrowing and keeping this cash, but it is not benefiting the economy yet,” said Dana Saporta, an economist at Credit Suisse in New York.
American corporations have been saving more money since the financial collapse of 2008.
But a recent rush of blue-chip bond offerings — including a $4.75 billion deal last month by Microsoft, one of the richest companies in the world — has put even more money in their coffers.
Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.
When will they start spending that money — in particular, by hiring? That is part of what has become the great question of this long, jobless recovery: When will corporate America start to feel confident enough to put its cash to work, building factories and putting some of the nation’s 14.9 million unemployed to work?
Businesses are holding on to their protective cash cushions, worried perhaps that the economy could slip back into recession or at least grow too lethargically to make an investment worthwhile.
The nation’s corporations will be strong, well capitalized and ready to act aggressively when executives finally decide it is time to expand their businesses.
After running up sharply every quarter since mid-2008, the ratio of cash holdings to assets by corporations fell slightly for the first time in the second quarter of this year.
Although investment in factories and plants still languishes, companies have spent some money on investment in new equipment and software. That spending grew at an annualized rate of more than 20 percent in the first two quarters of this year.
But economists say that such investment is still below its peak before the financial crisis. In addition, many of the new machines and computers may be replacing older machines companies put off retiring in the recession.
Businesses are playing catch-up, and little expansion is occurring.
“They may actually be using this new investment to be more efficient and cut jobs,” said Michael Gapen, an economist at Barclays Capital. “The mix of signals right now is still telling corporations to sit tight and wait.”
Mr. Gapen said those signals included the direction of the housing market, the outcome of midterm election, the effects on the economy as the fiscal stimulus wears off and any changes in tax policy.
They are deciding, “Why don’t we just wait until the first quarter of next year?” he said.
The cheap money may be having yet another effect unintended by policy makers eager to cut the nation’s 9.6 percent unemployment rate.
Several of the corporations borrowing billions on bond markets are using the money to put their own financial house in order rather than to create jobs.
Microsoft said it was using some of its money to buy back shares, other companies are locking in longer-term borrowing, and some of the new borrowing is financing an increase in mergers and acquisitions.
All of this may enrich the corporations’ shareholders and cut company costs in the long run, but it does not necessarily lead to more jobs and it does not represent the big investments in growth that could fuel a sharp economic recovery for everyone.
“They are still holding on to more cash in the same way that Noah built the ark,” said David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “It is very telling.”
In the case of Microsoft’s bond offering, one factor might have been avoiding a big tax bill, said Richard J. Lane, who analyzes Microsoft for Moody’s.
If Microsoft had needed cash, it could have pulled some from its operations abroad, but “borrowing new money on the debt markets is now cheaper than bringing its own money back from overseas,” Mr. Lane said.
Microsoft’s offering was only its second; its first was last year. The second offering included three-year debt at an interest rate of 0.875, among the lowest on record for that type of borrowing.
According to the financial data provider Dealogic, United States companies have borrowed $488 billion on the American high-yield and investment grade bond markets so far this year, 7 percent more than businesses borrowed during all of 2009, and on track to at least match the $589 billion borrowed in the boom year in 2007, which was the highest on record.
Smaller companies continue to have trouble borrowing, and most of the new financing is limited to bigger corporations. Their borrowing spree is in contrast to America’s households, which continue to cut their debt and consumption.
Perhaps unsure of the recovery, like the corporations hoarding cash, Americans are saving far more than they have in years, and some economists fear that consumers’ frugality will further hobble growth.
One of the biggest corporations to borrow recently, the DuPont Company, said it was using the cheaper money to lock in borrowing over a longer period.
“The current low interest rate environment provides DuPont a great opportunity to refinance our long-term debt at lower rates,” it said in a statement.
Conditions have become so good that some companies are borrowing money they will not have to repay until the next century.
In August, the railroad Norfolk Southern Corporation [NSC 59.02 -0.49 (-0.82%) ] borrowed $250 million in 100-year bonds at an annual rate of 5.95 percent.
Robin Chapman, a spokesman, said, “Opportunistic borrowing is a good way to characterize this.” He said that the company was seeing a “slow and steady pickup” in rail traffic but that any hiring the company was doing was to replace workers lost through attrition.
Other companies are borrowing to finance acquisitions. PepsiCo borrowed recently to help pay for the takeover of two bottling plants. Hertz [HTZ 10.01 -0.58 (-5.48%) ] borrowed $300 million for its bid to buy a rival car rental company, Dollar Thrifty [DTG 49.86 -0.28 (-0.56%) ].
Economists say it is rational for companies to seize the opportunity to borrow at low interest rates and to buy back shares.
But Guy LeBas, a fixed income strategist at Janney Montgomery Scott in Chicago, said, “It is not particularly beneficial for economic conditions.”
This story originally appeared in the The New York Times
Premier Foods rallies; London market drops
Wolseley climbs after bullish broker note, oil stocks under pressure
By Simon Kennedy, MarketWatch
LONDON (MarketWatch) — Premier Foods was one of the few bright spots in a broadly lower U.K. market Monday after the company said it had received approaches for its vegetarian food business.
The announcement sent shares of mid-cap Premier Foods /quotes/comstock/23s!e:pfd (UK:PFD 18.10, +1.89, +11.66%) soaring nearly 12% on the London Stock Exchange.
The FTSE 100 index /quotes/comstock/23i!i:ukx (UK:UKX 5,556, -36.78, -0.66%) was down 0.5% at 5,566.02 as the oil majors and mining stocks moved lower.
In a brief statement, Premier Foods said it “remains open-minded about disposals” and that its has received an unspecified number of approaches for its meat-free business, which includes the Quorn brand of vegetarian foods and meals.
Plumbing and heating products supplier Wolseley PLC /quotes/comstock/23s!e:wos (UK:WOS 1,624, +42.00, +2.66%) was another gainer, rising 2.2% after analysts at Credit Suisse started coverage of the group with an outperform rating.
The broker said margins should recover over the next couple of years and added that the group’s minimal exposure to government-funded projects should help reduce the impact of public spending cutbacks.
Oil and gas stocks were lower across the board, with Royal Dutch Shell /quotes/comstock/23s!e:rdsa (UK:RDSA 1,922, -22.50, -1.16%) /quotes/comstock/13*!rds.a/quotes/nls/rds.a (RDS.A 61.78, +1.48, +2.45%) down 0.9% and BP PLC /quotes/comstock/23s!a:bp. (UK:BP. 431.00, -9.50, -2.16%) /quotes/comstock/13*!bp/quotes/nls/bp (BP 41.95, +0.78, +1.89%) dropping 1.6%.
The fall for BP came after its shares rebounded around 9% over the course of the previous week.
Mining stocks also dropped. Xstrata /quotes/comstock/23s!a:xta (UK:XTA 1,217, -25.00, -2.01%) was down 1.3% and Kazakhmys /quotes/comstock/23s!e:kaz (UK:KAZ 1,437, -24.00, -1.64%) slipped 0.9%.
Satellite telecommunications group Inmarsat PLC /quotes/comstock/23s!e:isat (UK:ISAT 642.50, -26.00, -3.89%) was the biggest faller on the benchmark index.
The stock dropped 2.8% after a report in the Sunday Times (of London) newspaper that the group’s biggest shareholder, Harbinger Capital, wants to cut its stake to around 20% from 30% to raise cash for other investments.
Simon Kennedy is the City correspondent for MarketWatch in London.
U.S., Britain issue travel alerts for Europe
Attacks could be indiscriminate, U.K.’s Foreign Office warns
By William L. Watts, MarketWatch
LONDON (MarketWatch) — The United States on Sunday warned of the potential for terrorist attacks in Europe and urged travelers to be vigilant, while Britain upgraded its assessment of terror threats in Germany and France.
The alert issued by the State Department urged U.S. citizens traveling in Europe to “take every precaution to be aware of their surroundings and to adopt appropriate safety measures to protect themselves when traveling.”
The department warned that “current information suggests that al Qaeda and affiliated organizations continue to plan terrorist attacks,” noting that European governments have taken action to guard against attack. Read the travel alert.
Britain’s Foreign Office, meanwhile, warned there is a “high threat” of terrorism in Germany and France, up from its previous warning of a “general threat.”
“Attacks could be indiscriminate, including in places frequented by expatriates and foreign travellers,” the Foreign Office assessment said.
Neither London nor Washington formally urged travelers to avoid traveling in Europe. The U.S. alert falls short of an official “travel warning,” which advises citizens not to undertake certain types of foreign travel.
U.S. officials said they were not advising Americans against traveling to Europe, but were urging vigilance
The U.S. alert followed a probe that started in August, when U.S. intelligence officials picked up nonspecific threat information from multiple sources, The Wall Street Journal reported.
The probe has prompted a search for a suspected hit team that may be planning a commando-style attack similar to the one seen in Mumbai, India, in 2008.