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Monthly Archives: March 2012

Upgrades and Downgrades This Morning

Sources

Accenture plc (NYSE: ACN) Raised to Hold at Soc-Gen.

Allscripts Healthcare Solutions (NASDAQ: MDRX) Cut to Neutral at JPMorgan.

BlackRock Inc. (NYSE: BLK) Cut to Equal Weight at Morgan Stanley.

Focus Media Holding Limited (NASDAQ: FMCN) Raised to Overweight at JPMorgan.

Frontline Ltd. (NYSE: FRO) Cut to Underperform at Wells Fargo.

Home Depot Inc. (NYSE: HD) Reiterated Outperform and raised target to $55 at Credit Suisse.

Inergy L.P. (NYSE: NRGY) Started as Outperform at Credit Suisse.

Jarden Corporation (NYSE: JAH) named as Value stock of the day at Zacks.

Kinder Morgan. Inc. (NYSE: KMI) Raised target price to $36 from $32 at Credit Suisse.

LinkedIn Corporation (NYSE: LNKD) Raised to Buy at Goldman Sachs.

Loews Corporation (NYSE: L) named Bear of the Day at Zacks.

Micron Technology, Inc. (NASDAQ: MU) Started as Outperform at RBC.

OpenTable, Inc. (NASDAQ: OPEN) Raised to Buy at Benchmark.

Oracle Corporation (NASDAQ: ORCL) Raised estimates and maintained on Focus List at Credit Suisse.

Royal Gold, Inc. (NASDAQ: RGLD) Raised to Outperform at National Bank.

U.S. Bancorp (NYSE: USB) named as Bull of the Day at Zacks.

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Gapping Up and Down This Morning

Gapping up 

ASGN +24.3%, FSII +14.1%, LXRX +9.1%, CVBF +4%, KKD +3.7%, LGF +3.4%, HIG +3.2%,

ORCL +2%, NLY +1.3%, LNKD +6.4%, OPEN +3.9% , ARUN +2.7%, ACN +0.7%,  NI +1.1% ,

OMN +11.8%, USG +7.5%, KKD +3.7%,  SAI +0.6%, ATU +0.5% ,LLEN +16% ,

YPF +10.1%, CHL +3.9%, MU +1.8%, CAT +0.4% ,MILL+2.2%,

Gapping down

CXS -8.9%, ARIA -3.7%, HERO -3.1%, JBL -2.6%, YGE -2.3%, PWRD -3.5%,

NLSN -0.4%, PHG -3.3%, AGO -4.4%,  BHI -5.1%, JBL -2.6%, GIS -0.7%,

BBL -1.4%, BHP -1%, RIO -0.7%, MT -0.6%, HAL -2.1%, SPN -1.3%, WFT -1.2%,

E -0.8%, STO -0.7%, SLB -0.7%,

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Value Line’s Eisenstadt Sees Stocks at Record Highs During Summer

Source

“While some analysts think that the bull market for stocks may soon grow tired, former Value Line research director Sam Eisenstadt disagrees.

Eisenstadt, who spend 63 years at the firm before retiring in 2009, thinks the Standard & Poor’s 500 Index will reach 1,520 at the end of August, up 8.3 percent from Friday’s close, Marketwatch reports. That wouldn’t quite take the index to its record of 1,565 set in October 2007.

But if the Dow Jones Industrial Average gains 8.3 percent, that would put it at an all-time peak of 14,326.

Eisenstadt uses a variety of economic and financial statistics to form his projection for the market.

The Value Line legend’s track record has been good recently. In mid-December, he forecast a 10 percent rise for stocks in the first six months of 2012. The S&P 500 has gained 12 percent so far this year.

While Eisenstadt has enjoyed plenty of success with his model, he’s made mistakes, just like all market gurus. At the middle of last year, he predicted that the S&P 500 would gain 5.7 percent for the remainder of 2011. Instead it fell 4.8 percent.

Others share Eisenstadt’s current enthusiasm for stocks.

“Fundamentals are improving, corporate profits are rising, and the market has really good upward momentum, Stephen Wood, chief market strategist for Russell Investments, tells Reuters. “I think we still have room to rise.”

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Citi’s Levkovich: Stocks Set to Drop as Indicators Won’t Stay Rosy for Long

Source

“Stocks are on the rise but that could change, as the market hasn’t faced any bad news to test its resolve, while warmer weather is propping up economic indicators but in a temporary fashion that could end soon, says Citigroup Strategist Tobias Levkovich.

Recent declines in the Citigroup Economic Surprise Index suggest economic indicators might not surprise on the upside such as unemployment rates have done lately, Levkovich tells the Wall Street Journal.

The index is a weighted average that illustrates gaps between economic data and the consensus expectations beforehand.

Unseasonably warm weather this winter has also boosted indicators by bringing construction projects online ahead of schedule, which is good for employment, although overall demand for construction isn’t changing, just the timing is.

“Investors have yet to witness any clear negative numbers to generate new concerns,” Levkovich says, adding “it is fair to suspect some of these issues will show up in coming months,” the Journal reports.

“The preponderance of the evidence still argues for a market pullback.”

High gasoline prices may weigh down consumer demand figures as well.

The Dow Jones Industrial Average is trading above 13,100 while the broader S&P 500 index is above 1,400, both impressive figures, according to market observers.

“We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven’t been this bullish for a long time,” says Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas, according to Reuters.”

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Doug Kass: Stocks Are Now Overvalued

Source

“Despite apparent good news on several fronts, the U.S. equities market is overvalued by 5 percent from Friday’s close above 1,400 on the S&P, says hedge fund manager Doug Kass, and faces a tough climb to improve in the year ahead.

A better jobs outlook, apparently fewer problems in Europe and the likelihood that investors will enter the equity market late could help stocks, of course, but Kass has a more jaundiced perspective of the entire scenario.

“I view both the more optimistic economic and profit forecasts as well as the outgrowth of elevated price targets with some skepticism — just as I suggested that Wall Street’s dour outlook of three months ago was too pessimistic,” he writes on TheStreet.com.

Among the obstacles ahead, Kass finds the United States driving off a “monetary cliff” when the Fed ends its current easing program, then again at the end of 2012 when tax rates rise and spending is necessarily cut.

Kass doesn’t see the job market puffing itself up much more, and corporate earnings should level off, too, he says.

Add to that election uncertainties and any number of “black swans,” including the oil price, and you end up with a market that is, in his view, overvalued now.

A recession is out of the question, but the growth to come won’t enough to hold up stock prices, he predicts.

In the meantime, China appears to be hitting the brakes hard, which has implications for the global economy. Australian mining giant BHP Billiton Chairman Jacques Nasser told investors that the company is reviewing major spending plans, reports The Australian Financial Review.

China is a large buyer of commodity metals, particularly iron ore. BHP is reconsidering a $20 billion mine and ports project in Western Australia in light of slowing Chinese demand.”

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Government Math: ‘Throwing Money @ the Pentagon’

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“If you’ve been fretting about faltering math education and falling test scores here in the United States, you should be worried based on this campaign season of Republican math.  When it comes to the American military, the leading Republican presidential candidates evidently only learned to add and multiply, never subtract or divide.

Advocates of Pentagon reform have criticized President Obama for his timid approach to reducing military spending.  Despite current Pentagon budgets that have hovered at the highest levels since World War II and 13 years of steady growth, the administration’s latest plans would only reduce spending at the Department of Defense by 1.6% in inflation-adjusted dollars over the next five years.

Still, compared to his main Republican opponents, Obama is a T. rex of budget slashers.  After all, despite their stated commitment to reducing the deficit (while cutting taxes on the rich yet more), the Republican contenders are intent on raising Pentagon spending dramatically.  Mitt Romney has staked out the “high ground” in the latest round of Republican math with a proposal to set Pentagon spending at 4% of the Gross Domestic Product (GDP).  That would, in fact add up to an astonishing $8.3 trillion dollars over the next decade, one-third more than current, already bloated Pentagon plans.

Nathan Hodge of the Wall Street Journal engaged in polite understatement when he described the Romney plan as “the most optimistic forecast U.S. defense manufacturers have heard in months.”

In fact, Romney’s proposal implies that the Pentagon is essentially an entitlement program that should receive a set share of our total economic resources regardless of what’s happening here at home or elsewhere on the planet.  In Romney World, the Pentagon’s only role would be to engorge itself. If the GDP were to drop, it’s unlikely that, as president, he would reduce Pentagon spending accordingly.

Rick Santorum has spent far less time describing his military spending plans, but a remark at a Republican presidential debate in Arizona suggests that he is at least on the same page with Romney.  In 1958, the year he was born, Santorum pointed out, Pentagon spending was 60% of the federal budget, and now it’s “only” 17%.  In other words, why cut military spending when it’s so comparatively low?

Of course, this is a classic bait-and-switch case of cherry-picking numbers, since the federal budget of 1958 didn’t include MedicareMedicaid, theEnvironmental Protection Agency, or the Occupational Safety and Health Administration.  The population was 100 million less than it is now, resulting in lower spending across the board, most notably for Social Security.  In fact, Americans now pay out nearly twice as much for military purposes as in 1958, a sum well in excess of the combined military budgets of the next 10 largest spending nations.

Of course, in a field of innumerates, Santorum’s claim undoubtedly falls into the category of rhetorical flourish.  It’s unlikely that even he was suggesting we more than triple Pentagon spending — the only way to return it to the share of the budget it consumed in the halcyon days of his youth.  (Keep in mind that profligate Pentagon spending in that era ultimately prompted President Dwight D. Eisenhower to coin the term “military-industrial complex.”)  Still, Santorum clearly believes that there’s plenty of room to hike military spending, if we just slash genuine entitlement programs deeply enough. He would undoubtedly support a Pentagon budget at Romney-esque levels, as would Newt Gingrich based on his absurd claim that the Obama administration’s modest adjustments to the Pentagon’s record budgets would result in a “hollowing out” of the U.S. military.

Mitt Romney at Sea

But let’s stick with the Republican frontrunner (or stumbler).  What exactly would Romney spend all this money on?

For starters, he’s a humongous fan of building big ships, generally the most expensive items in the Pentagon budget. He has pledged to up Navy ship purchases from 9 to 15 per year, a rise of 50%. These things add up.  A new aircraft carrier costs more than $10 billion; a ballistic missile submarine weighs in at $7 billion or more; and a destroyer comes with a — by comparison — piddling price tag of $2 billion-plus.  The rationale for such a naval spending spree is, of course, that all-purpose threat cited these days by builders of every sort of big-ticket military hardware: China.

As Romney put it late last year, if the U.S. doesn’t pump up its shipbuilding budget, China will soon be “brushing aside an inferior American Navy in the Pacific.”  This must be news to former Secretary of Defense Robert Gates, who noted in a May 2010 speech to the Navy League that the fleet is larger than the next 13 navies combined — 11 of which, by the way, belong to U.S. allies.  As for the Chinese challenge, much has been made of China’s new aircraft carrier, which actually turns out to be a refurbished vessel purchased from Ukraine in 1998 and originally intended to be a floating casino. It would leave the U.S. with only an 11 to 1advantage in this category.

It’s true that China is increasing the size of its navy in hopes of operating more freely in the waters off its coast and perhaps the contested South China Sea (with its energy reserves), but it is hardly engaged in a drive for global domination.  It’s not as if Beijing is capable of deploying aircraft carriers off the coasts of California and Alaska.  In the meantime, Romney’s shipbuilding fetish doesn’t add up.  It’s as ludicrous as it is expensive.

Romney is also a major supporter of missile defense — and not just the current $9-$10 billion a year enterprise being funded by the Obama administration, primarily designed to blunt an attack by long-range North Korean missiles that don’t exist.  Romney wants a “full, multi-layered” system.  That sounds suspiciously like the Ronald Reagan-style fantasy of an “impermeable shield” over the United States against massive nuclear attack that was abandoned in the late 1980s because of its staggering expense and essential impracticality.

If the development of Romney’s high-priced version of a missile shield were again on the American agenda, it would be a godsend for big weapons-makers like Boeing, Lockheed Martin, and Raytheon, but would add nothing to the defense of this country.  In fact, it stands a reasonable chance of making things worse.  Given the overkill represented by the thousands of nuclear warheads in the American arsenal, the prospect of a nuclear missile attack on the United States is essentially nil.

As arms experts like Dr. Theodore Postol of the Security Studies Program at the Massachusetts Institute of Technology have pointed out, in the utterly unlikely event of a massive nuclear missile attack, Romney’s plan would bevirtually useless.  There’s just no way to provide a near-perfect defense against thousands of warheads and decoys launched at 15,000 miles per hour.  The only reasonable defense against nuclear weapons would be to get rid of them altogether, a course suggested by scores of retired military leaders, former defense officials, and heads of state.  Even Henry Kissinger has joined the “go to zero” campaign, supporting a far more sensible approach to the nuclear dilemma than Romney’s fantasy technical fix.

The Romney anti-missile program would, however, do more than just waste money.  It would restore the Bush administration’s plan to emplace a long-range anti-missile system in Europe officially aimed at Iran but assumedly capable of taking out Russian missiles as well.  Given that the Obama administration’s far more limited plan for Europe has already caused consternation among Russia’s leaders, imagine the harsh reaction in Moscow to the over-the-top Romney version.  It could put an end to any hopes of further U.S.-Russian nuclear reductions — a significant price to pay for a high-tech boondoggle with no prospect of success.

Ensuring a Cost-Overrun Presidency

If you were hoping that, with an eye to fighting yet more disastrous wars in the Greater Middle East like the $3 trillion fiasco in Iraq, the U.S. would raise ever larger armies, then Mitt’s your man.  While Secretary of Defense Leon Panetta’s latest plan would reduce the Army and Marines by about 100,000 over the next five years — essentially rolling back the increases that were part of the post-9/11 buildup — the former Massachusetts governor would double down by adding 100,000 more troops to present force levels.

His rhetoric and the bona fides of his neoconservative advisors suggest that one place President Romney might send those bulked up forces would be to Iran as “boots on the ground.”  He has repeatedly claimed that, if President Obama is re-elected, Iran will get a nuclear weapon, and has asserted that if he is elected it will not.  He has mocked the president for not being “tough enough” on the Iranians and implied that a Romney administration would consider force a go-to option against that country, rather than a threat meant to back up a diplomatic strategy.

Keep in mind that if Romney were to follow through on these costly undertakings and others like them, it would only add to the good old-fashioned waste and fraud that’s the norm of Pentagon contracting these days.  As former head of the Joint Chiefs of Staff Admiral Mike Mullen pointed out, the post-9/11 national security spending binge played havoc with any sense of fiscal discipline at the Pentagon, eliminating the need to make “hard choices” or “limit ourselves” in significant ways.  In his former position as Pentagon procurement czar, Under Secretary of Defense Ashton Carter acknowledgedthat “in a decade of ever-increasing defense budgets… it was always possible for our managers… when they ran into a technical problem or a difficult choice to reach for more money.”

Romney’s Republican math would ensure that this will continue.  Defense giants like Lockheed Martin, whose F-35 combat aircraft has more than doubled in price over original projections, must be salivating at the prospect of another cost-overrun presidency, which would result in soaring profits and few punishments.

And let’s not forget the “spend more” brigades in the Republican House, led by Armed Services Committee Chairman Howard “Buck” McKeon (R-CA).  Having received more than three quarters of a million dollars in campaign contributions from weapons contractors since 2009, he has never met a weapons system he didn’t like.  Under a Republican administration, McKeon and his pork-barrel pals in Congress would have free rein to jack up spending on weapons and personnel with little concern for the impact on the deficit.

If a Republican president were to follow through on his campaign pledges, massive Pentagon increases and a dogged resistance to raising revenues would also result in major hits to every other item in the federal budget, from education to infrastructure.  According to a report by the Center on Budget and Policy Priorities, the Romney budget plan could cut domestic discretionary programs by as much as 50% over the next 10 years.

In an April 1967 speech against the Vietnam War, Martin Luther King assailedthe buildup for that conflict as a “demonic destructive suction tube” that drew “men, money, and skills” away from solving urgent national problems.  Romney’s military buildup would waste far more money than was expended during the Vietnam years.  His presidency would exceed King’s worst nightmare.  When will someone ask him to explain his fuzzy math?

William D. Hartung is the director of the Arms and Security Project at the Center for International Policy, a TomDispatch regular (where this column originally appeared), and the author of Prophets of War: Lockheed Martin and the Making of the Military-Industrial Complex. “

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‘The Bear’s Most Compelling Argument’ is on Falling Margins

Source

“The latest letter from GMO portfolio strategist James Montier tries to explain the source of ultra-high corporate profits in the midst of a mediocre recovery

You can read his letter here. We summarize it here, though the basic gist is that corporate profits are being fueled by unusually large deficits.

The source of profits aside, the big lesson for investors is summarized in the title, which is: What Goes Up Must Come Down!

Indeed, Montier presents what on the surface appears to be one of the bears’ most compelling arguments, which is that no matter how much the economy is recovering, or how cheap stocks seem to be, margins are just ridiculously high now, and have to come down.

This is the money chart right here.

Click to enlarge…

 

 

So not only are margins already historically high, but analyst projections anticipate them going even higher.

If you’re bullish on stocks, what’s your answer?

A few ideas we can think of:

  • PE multiples will expand, ergo margin pressure isn’t a problem at these levels (This is an argument that Citi’s Tobias Levkovich has made).
  • Stocks are still very cheap on an equity risk premium basis (i.e. compared to how expensive Treasuries are).
  • Growth will surprise to the upside. In particular, rising wages and employment will improve the topline, cancelling out margin pressure.
  • Margins are on a secular uptrend (there’s some evidence for this) and so historical levels don’t matter.

Your thoughts? “

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Goldman: Stocks to Begin a ‘Steady Upward Trajectory’

“Goldman Sachs Group Inc. said stocks will probably begin a “steady upward trajectory” over the next few years as any declines in economic growth are already reflected in share prices.

“Given current valuations, we think it’s time to say a ‘long good-bye’ to bonds, and embrace the ‘long good buy’ for equities as we expect them to embark on an upward trend over the next few years,” Peter Oppenheimer, chief global equity strategist at Goldman Sachs in London, wrote in a report today.

The prospects for returns in equities versus bonds “are as good as they have been in a generation,” he wrote.

The Stoxx Europe 600 Index (SXXP) is trading at 11.2 times estimated earnings, compared with an average of 11.8 over the past five years, according to data compiled by Bloomberg. The index dropped 11 percent last year as policy makers tried to stop Greece’s sovereign-debt crisis from spreading.

“Periods of sustained falls in the market are typically better times to buy for the long run,” Oppenheimer wrote. “Partly, of course, this is also a function of valuations typically improving after a period of sustained losses in the market. Nonetheless, the key point is that in particularly bad economic periods, once the news is fully priced, investment outcomes tend to improve.”

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Dark Pools Get a Global Leg Up as JPM and Instinet Inc. Join Dark Forces

Source 

“Instinet Inc., a New York-based alternative trading-venue operator, and JPMorgan Chase & Co. (JPM), have agreed to link their Asia-Pacific (MXAP) dark pools, giving clients access to each other’s platforms in Hong Kong, Japan and Australia.

Instinet’s clients can access 22 dark pools, private trading venues that don’t publicly display prices, in Asia, including 13 from individual brokers, Glenn Lesko, chief executive officer in Asia for Instinet told Bloomberg News in a telephone interview March 20. JPMorgan spokeswoman Marie Cheung confirmed the contents of an Instinet press release announcing the agreement.

Less than 2 percent of transactions in Asia occur through dark pools, according to Investment Technology Group Inc. (ITG), a New York-based brokerage. Dark pools account for 13.5 percent of trading in the U.S. and 4.6 percent of shares changing hands in Europe, according to data compiled by Rosenblatt Securities Inc.

“There is proliferation of new pools in the region,” Lesko said. “JPMorgan is one of the bigger brokers with lots of liquidity in Asia that’s getting their dark pool going. We’re looking to help them by providing our flow into there and reciprocally, we we would benefit from their liquidity.”

Earlier this month, Instinet announced that it would introduce another of its electronic-trading platforms, VWAP Cross, into Hong Kong and Europe. The tool uses the so-called volume-weighted average price, in which orders are matched from buyers and sellers who are willing to wait for the market to generate a price over time.”

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Australian Government Forecaster Expects Iron Ore to Fall 8.5% on a Slowing China

Iron ore may decline 8.5 percent this year as global output increases and growth in Asian steel production slows, according to a government forecaster in Australia, the world’s biggest exporter.

Prices may average about $140 a metric ton in 2012 from $153 last year, the Bureau of Resources and Energy Economics said in a report today. Shipments from Australia may climb 12 percent to 493 million tons in 2012, it said.

Steel output growth in China has slowed as the fastest- growing major economy puts greater focus on consumers rather than building projects, BHP Billiton Ltd. (BHP), the world’s biggest mining company, said yesterday. Shares in Vale SA (VALE3), the largest iron-ore producer, fell the most in a week after BHP’s comments. While China’s near-term growth is slowing, iron-ore output significantly lags consumption, Rio Tinto Group (RIO) said yesterday.

“Over the remainder of 2012, iron-ore prices are forecast to ease as production increases from new projects in Australia and growth in Asian steel production weakens,” the Canberra- based bureau said. “Further price decreases are expected to be limited by an expected reduction in exports from India.”

Shares in Melbourne-based BHP dropped for a second day, losing 1.7 percent to A$34.70 in Sydney. Rio Tinto, the second- largest iron-ore exporter, dropped 0.4 percent to A$65.34. Vale, the biggest shipper, fell 0.8 percent yesterday…”

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Asia Sold Off Last Night on Weak Commodity Prices and a Strong Euro

“U.S. equity index futures advanced, commodities gained and the dollar weakened before data that may show U.S. home sales near a two-year high and after Oracle Corp. (ORCL) beat profit estimates.

Standard & Poor’s 500 Index futures added 0.2 percent as of 10:51 a.m. in London, signaling the equity gauge may climb for the fourth time in five days. The Dollar Index (DXY) fell 0.1 percent. The Standard & Poor’s GSCI (SPGSCI) gauge of commodities advanced 0.2 percent….”

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