Monday, January 4, 2010

Morning Note...

Happy New Year!  Am I the only one simply stunned by the fact that the turn of the century – 2000 – was ten years ago?  Wow…

Futures +80bps this morning - making back most of the late sell-off from December 31st – on China’s impressive manufacturing reading (the highest levels in five years) and USD weakness (-65bps).  Bernanke yesterday defended our current low interest rate policy, and went so far as to defend that of his predecessor Alan Greenspan.  Speaking in Atlanta, he claimed that low interest rates were not to blame for previous bubbles, but rather lax regulation.  In other words, monetary policy – as promoted by the Fed – was not to blame for past ills (inferring they will also not be to blame for future ills) but rather regulatory policy (in the form of lax mortgage standards, etc).  However, Bernanke also “cracked the door open a bit more to the idea or raising interest rates if a new financial bubble emerges” (WSJ).  In geopolitical news, the US and the UK closed embassies in Yemen for fear of a terrorist attack.  Oil is higher this morning as a cold snap affects much of the U.S.  ISM manufacturing data will be released at 10am today.  Auto sales will be released tomorrow, and retail sales will be released Thursday, and will give us a solid read on holiday sales, which have been whispered to be quiet good, despite poor weather in the Northeast.  This week’s bellwether event will be Friday’s official nonfarm payrolls reading and the subsequent unemployment report.  A gain of 40k jobs is expected, and the unemployment rate is expected to remain around 10%.  In other news, bond giant PIMCO announced they will trim US and UK debt exposures and is cautious on corporate debt.  In corporate news, TWC and NWS reached an agreement to continue to air Fox networks on the TWC network.  Overseas, Novartis exercised an option to acquire Nestle’s stake in Alcon, the world’s largest eye-care company, for $40B.  London Times reports KFT may up its bid for CBRY LN. 

According to the WSJ, global M&A activity was down 22% in 2009 (vs. 2008) but the recent Q4 showed some signs of life.  As per GSCO, “we have healthy credit markets, healthy equity markets and the economy is stabilizing…this should mean the M&A market in 2010, absent any shock, will be superior to 2009.”  For those who believe in seasonal/calendar predictability, January is a big month:  Since 1950, January has accurately predicted the year’s outcome with a more than 90% accuracy ratio. If the S&P is up for the full month of January, the rest of the year has been up, as well. The First Five Days of January historically have been a reliable indicator of what the coming year will look like. If the market has been up after the first five days, the year produced gains more than 80% of the time.  Interesting BBERG story out of economists Robert Shiller and Karl Case, who predict “prime” mortgages may be the next shoe to drop:  An increase in mortgage defaults among prime borrowers in 2009 is likely to accelerate this year, slowing the real estate recovery even as Americans become more optimistic about the economy, said Robert Shiller and Karl Case, the economists who created the S&P/Case-Shiller Home Price Index. “There will be continuing foreclosures, and not just subprime, it will be prime mortgages,” Shiller, a professor at Yale University, said in an interview. “This is creating a huge shadow inventory of homes that are still owned, but they’re going to be on the market in the next year or so.” The number of prime mortgages overdue by at least 60 days more than doubled in the third quarter from a year earlier to 838,000, according to a Dec. 21 report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Unemployed homeowners struggling to pay their bills will default on their home loans and increase foreclosures, Shiller and Wellesley College’s Case said.

FT positive WMT article.  BCAP ups BA.  DBAB ups CVI, DK, FTO, SUN, TSO, VLO.  GSCO ups UPL.  JPHQ ups BEC, IART.  BARD ups CTCT, CYBX, EW, HTLD, INTC, PDCO, THOR, UPS, VOLC, YDNT.  WELA ups ACL, FPL, BRCM.  OPCO cuts CHK.  JPHQ cuts HNSN, MELI, WMGI.  OPCO cuts WCG.  BARD cuts BSX.  UBSS cuts EAT.  CSFB cuts EXPE, SYT.  UBSS ups LVS, MS, WYNN.  OPCO positive NOK.  BNP ups RBS.  CITI ups UNH.  CHK enters JV with Total SA. 

Asia mixed overnight.  Europe +1%.  USD -65bps.  Oil +250bps.  Gold +250bps.

Brightpoint News

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
CHESAPEAKE ENERG       27.64    +6.8 %  491832
TESORO CORP               14.20    +4.8 %  27818
MORGAN STANLEY         30.81    +4.09% 252647
FREDDIE MAC                1.53      +4.08% 232201
SUNOCO INC                  27.00    +3.45% 4480
FANNIE MAE                  1.22      +3.39% 627740
CB RICHARD ELL-A         14.00    +3.17% 141186
TITANIUM METALS         12.91    +3.12% 1450
NEWMONT MINING         48.78    +3.11% 29332
UNITEDHEALTH GRP       31.41    +3.05% 84229
MICRON TECH                10.88    +3.03% 104084

Today’s Trivia:  According to Amnesty International, what European country has the most guns, per capita?

Yesterday's Answer:  December 31st marked the first New Year’s Eve “Blue Moon” since 1990.

Best Quotes:   Finding Prospects Among the 10 Least-Liked Stocks: John Dorfman
2010-01-04 02:00:00.5 GMT

Commentary by John Dorfman
     Jan. 4 (Bloomberg) -- To make good profits in the stock market, it pays to go against the crowd.
     One way I force myself to do this is by focusing periodically on the 10 stocks least popular with investors, as measured by their price-to-earnings ratios. The P-E ratio is simply a stock’s price divided by its earnings per share for the past four quarters.
     Stocks with very low ratios are, almost by definition, scorned by investors. But over the past 10 years I have found them to be a fruitful field of stocks that might achieve dramatic gains. They are often off the beaten path and little followed by analysts.
     I wrote about these stocks from 1999 through 2007 and called them “The Robot Portfolio.” Now I prefer the more descriptive term Low P-E Outliers.
     In looking at these stocks, I eliminate those with debt greater than stockholders’ equity (to reduce the chance of
bankruptcy) and focus on ones with a market value of $500 million or more. As of Dec. 30, 1,261 stocks met those two qualifications. Here are the 10 with the lowest P-E ratios.
     The cheapest is BreitBurn Energy Partners LP, a publicly traded master limited partnership (MLP) based in Los Angeles that acquires and develops gas and oil properties. It trades for about three times earnings.

                         Dividend Quashed

     Why is BreitBurn so cheap? MLPs are usually income vehicles, but BreitBurn suspended its dividend in April to comply with loan covenants. The dividend used to be 52 cents a quarter. Optimists hope the payout will be restored in the second quarter of 2010. Pessimists say it may take much longer.
The company says it will “re-establish distributions when leverage has been reduced to acceptable levels.”
     Also, BreitBurn is being sued by its largest shareholder, Quicksilver Resources Inc. of Fort Worth, Texas, in a dispute that BreitBurn says is over “working control” of the company.
     The bullish case is that BreitBurn has a rich pool of energy assets, with gas and oil reserves in Michigan, California and elsewhere. I believe BreitBurn will eventually restructure its debt and resume dividend payments. I consider the stock a good speculation at $11 or less.
     Four other outliers, all based in Houston, are also energy companies. Plains Exploration & Production Co., with a P-E of about four, has much of its oil and gas reserves in and off the coast of California, and may benefit if Governor Arnold Schwarzenegger succeeds in reviving oil drilling off the coast.
Famed hedge fund manager George Soros is a major shareholder.
Trading at less than book value (corporate net worth per share), the stock looks appealing to me.

                              More Energy

     EV Energy Partners LP, which is an oil and gas MLP, has a P-E of about four. The company provides good dividend income, but I am a bit put off by it since it sells for more than four times revenue.
     I’ll pass on Linn Energy LLC, with a P-E of five, as the company has posted losses in three of the past five years.
     Gulfmark Offshore Inc., with a P-E of six, operates a fleet of supply vessels that ferry men and equipment to and from offshore rigs, mostly in the North Sea and Southeast Asia. I like it, even though the supply-boat business tends to be volatile.
     Conseco Inc., an insurer in Carmel, Indiana, with a P-E of five, sells life insurance and policies covering long-term care and cancer among other products. Only one of six analysts who cover the stock says to buy it. I like to be contrarian, but Conseco doesn’t excite me.

                        Against the Crowd

     I prefer Atlanta-based Mirant Corp., with a P-E of five.
The company owns electric power generating stations. Only two of
11 analysts consider it a buy, but I would go against the crowd.
Mirant beat Wall Street’s profit estimates in 2006 through 2008.
It earned a 28 percent return on equity in 2008, a tough year for many companies. And its stock sells for only about half of book value.
     Earthlink Inc., an Internet service provider also based in Atlanta, has a P-E of five. I fear it is a value trap. The company’s earnings declined 42 percent in the third quarter, and its subscriber base has been shrinking. It specializes in dial- up service, which continues to lose market share to broadband.
     Concord, North Carolina-based Speedway Motorsports Inc.
which has a P-E of five, owns auto-racing tracks and sponsors and promotes car races. Lack of earnings growth in recent years has crippled the stock, which has fallen to about $17 from more than $43 in 1999. I think shares will rebound in 2010. In my opinion, Speedway, as a mature company, should raise its dividend, aiming to get the yield up to 4 percent or more from the current 2 percent.

                          Lindner Family

     American Financial Group Inc., located in Cincinnati, has a P-E multiple of six. I find this insurer’s stock attractively cheap, at below book value and 0.7 times revenue. Stay away if you don’t like family-dominated companies, though. Chairman Carl Lindner Jr. and his relatives control the corner offices and about 24 percent of the shares.
     Disclosure note: Personally and for clients, I own shares of Mirant. I have no long or short positions in the other stocks discussed in this week’s column.

     (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.)

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