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Junk Bonds Start to Lose Their Luster

“A selloff in junk bonds is fueling fears among some investors that the best days of the bond boom may be in the past.

The spread between the yields on low-rated corporate debt and comparable U.S. Treasurys jumped 0.18 percentage point Wednesday to 4.39 points, its highest level since April.

The action is unusual because junk bonds tend to outperform higher-rated debt such as Treasurys and high-rated corporate bonds when interest rates rise. The yield on the benchmark 10-year Treasury note has risen 0.5 percentage point over the past month.

The selloff of junk bonds this week indicates that many investors who have been pouring money into riskier debt were caught off guard by the pace of the past month’s rise in Treasury yields. Investors who moved into riskier asset classes such as junk bonds because of a lack of high-yielding alternatives may be pulling away from the assets as they position themselves for an eventual return to higher interest rates, which have been held near record lows by robust central-bank support programs, observers said.

“The salad days for risk assets might be drawing to a close,” said Thomas Byrne, director of fixed income at Wealth Strategies & Management LLC. He said the selloff has been driven by investors fleeing from bonds amid chatter that the Federal Reserve might soon begin reducing the scale of its $85 billion monthly bond-purchase program known as quantitative easing.

Typically, the spread between Treasurys and junk bonds narrows as Treasury yields rise, as investors bet that an improving economy will mean fewer defaults on bonds issued by low-rated companies.

But in the past four weeks, not only did premiums on junk bonds not improve much, they recently worsened. Some see that break in the pattern as a potential inflection point in the debt markets…..”

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Brazil Hikes Interest Rates to 8% Hoping to Thwart Inflation

Brazil’s central bank accelerated the pace of interest rate increases, as policy makers step up efforts to slow inflation that forestalled the economy’s rebound in the first quarter.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate 50 basis points to 8.00 percent, matching the forecast of 19 of 57 economists surveyed by Bloomberg. Thirty-eight analysts expected a second straight 25 basis-point increase.

“The committee considers that this decision will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said, according to their statement posted on the central bank’s website.

President Dilma Rousseff’s administration has renewed pledges to slow inflation even as Brazil’s $2.5 trillion economy has expanded less than expected by analysts for five straight quarters. While the government kept borrowing costs at a record low 7.25 percent from October through March and expanded tax cuts to spur activity, stimulus measures have failed to spark growth and driven inflation to the upper limit of the central bank’s target range. Latin America’s biggest economy unexpectedly slowed in the first quarter as higher consumer prices eroded demand.

Swap rates on the contract maturing in July, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 7.56 percent. The real weakened 1.7 percent to 2.1106 per dollar.

‘Timely Way’….”

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Private Loans Contract for a 12th Consecutive Month in the Euro Zone

“FRANKFURT (Reuters) – Loans to the euro zone’s private sector contracted for the 12th month in a row in April, raising pressure on the European Central Bank to take fresh policy action to help lift the bloc out of recession.

Loans fell 0.9 percent from the same month a year ago, ECB data showed on Wednesday, a slightly bigger fall than the mid-range forecast for a drop of 0.7 percent in a Reuters poll of economists.

The ECB, which meets next week, has flooded banks with money but many still remain wary of lending to businesses – particularly in the recessionary periphery of the euro zone – against a weak economic backdrop and uncertain outlook.

Banks granted non-financial firms 18 billion euros less in loans in April than in the previous month, data adjusted for sales and securitizations showed, after a fall of 2 billion euros in March.

“The marked fall in lending to euro zone businesses in April ramps up pressure on the ECB to come up with concrete measures aimed at improving credit availability to companies, especially small and medium-sized ones,” said Howard Archer, economist at Global Insight.

ECB data also showed that loan growth rates vary greatly between euro zone countries, with those hardest-hit by the debt crisis seeing big reductions.

In Spain, lending to firms, excluding banks, fell 8.8 percent from the same month a year earlier. Ireland saw a 5.6 percent decrease, while lending fell 3.3 percent in Greece and 3.5 percent in Portugal.

German lending growth to firms was just above zero, as it recorded a 0.3 percent annual growth rate. Growth in the Netherlands, Finland and France was faster than that.


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Investors Wanting to Get Ahead Should Monitor $FB & Twitter

“Many investors have a hard enough time reading 10-Ks and keeping up with corporate earnings releases. Now they’re going to have to monitor Facebook andTwitter, too.

The Securities and Exchange Commission recently announced dramatic changes that made social media fair game for companies looking for ways to get information out to investors.

How this is all going to work is still the subject of debate with companies, consultants and lawyers. Companies are now considering how they will adopt the SEC’s blessing to use social media as a way to share important company information.

(Read MoreFacebook’s First Year Post-IPO)

But one thing is for sure: Investors will need to reconsider their sources of information and potentially widen the places they go to. Some also worry investors will be overwhelmed if they have to be on the lookout for financial data coming from multiple sources, be it Twitter and Facebook, in addition to traditional places. The concern is that once again, professional investors with the means or tools to survey the expanse of data sources will have the edge.

“The landscape (for investor information) has become more varied,” says Anna Kipchuk, senior director at CEB, a company that consults with companies about disseminating information. Social media “is just one more forum investors will have to be watching.”

No matter what companies ultimately decide to do with social media, investors can start coming up with their strategies to deal with this new world, including:

• Finding out what companies are planning to do. The biggest caveat to the SEC’s permissiveness with social media is that companies must inform investors specifically how they plan to use social media. It’s unclear how companies will relay this information, though.

One likely option investors will need to be on the lookout for would be disclosures at the bottom of earnings news releases, in quarterly reports and annual reports listing the social-media platforms they plan to use and the identifiers, says Joel Greenberg, a partner at law firm Kaye Scholer…..”

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Rising CDS Value Helps European Banks to Plug Capital Shortfalls

“The U.S. mortgage bonds that were exported around the globe and triggered the worst financial crisis since the Great Depression are now helping Europe’s banks and governments repair balance sheets after jumping in value.

Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, is auctioning $8.7 billion of mortgage debt to plug a capital shortfall, a month after Lone Star Funds and Credit Suisse Group AG paid 6.7 billion euros ($8.7 billion) for assets taken over from the failed Belgian bank Fortis. The Netherlands can sell debt from the bailout of ING Groep NV (INGA) at a “decent profit,” Chief Executive Officer Jan Hommen said this month.

While European banks and governments need to sell assets to raise capital or repay taxpayer-funded rescues, investors are seeking riskier, potentially higher-paying securities as central banks globally push down yields on safer debt. With U.S. home prices rising at the fastest pace in seven years, that has turbocharged demand for non-agency bonds, with subprime-backed debt returning 12.7 percent this year after rallying more than 41 percent in 2012, according to Barclays Plc data.

“Fundamentals of housing continue to improve, and the asset class itself continues to shrink in size as borrowers repay debt or default,” said Harrison Choi, a bond manager for TCW Group Inc., which oversees about $131 billion in assets.

HBOS Rescue…”

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Opportunity ? Thailand Makes Moves to Stimulate Growth & Infrastructure Spending

Taiwan will let insurers invest in infrastructure projects and create a NT$1 billion ($33 million) fund to channel money to companies as President Ma Ying-jeou bids to boost growth and revive his flagging popularity.

The island also plans to revise capital-gains tax rules, give cash incentives to trade in old cars for new ones, simplify visa procedures for Chinese visitors and set aside NT$400 million to subsidize energy-saving home appliances including gas stoves and heaters, Premier Jiang Yi-huah said in Taipei today.

Ma, whose disapproval rating of 70 percent this month is at its highest since he took office in May 2008, joins policy makers from Australia to South Korea in moving to aid their economies as the global recovery falters. The island’s statistics bureau last week cut its forecast for gross domestic product growth this year to 2.4 percent from 3.59 percent.

“President Ma is under pressure to deliver some solutions after economic growth slowed in the first quarter,” said Yang Tai-Shuenn, a political scientist at Chinese Culture University in Taipei. “But I don’t think this would help lift his approval rating or bring real benefits to the economy.”

The Taiwan dollar rose 0.2 percent to NT$29.914 as of 3 p.m. local time. The benchmark Taiexstock index fell 0.2 percent at the close today.

Proposed revisions to capital-gains tax rules include removing the condition that investors will be taxed when the stock index closes at 8,500 points or higher, and reducing the tax rate on investors with NT$1 billion or more in trading volume to 0.1 percent from 2.25 percent. The measures are awaiting legislative approval, and may be passed in the current session without further delays, Jiang said.

Economic Agenda…”

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Chinese Burritos Will Continue to Trade in the U.S. as Document Sharing Agreement Has Been Made

China agreed to give a U.S. regulator access to documents from Chinese accounting firms, moving toward a resolution of a dispute that could have pushed the country’s companies to stop trading on U.S. markets.

The Public Company Accounting Oversight Board, the China Securities Regulatory Commission and China’s Ministry of Finance signed the agreement May 7, the ministry said in a statement on its website today. The deal is a step toward resolving other disputes including one with the U.S. Securities and Exchange Commission, PCAOB Chairman James Doty was quoted as saying by the Wall Street Journal, which reported the agreement earlier today.

The SEC last year accused affiliates of the world’s top four auditing firms of withholding documents from investigators probing potential fraud by China-based companies….”

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Hedge Funds Increase Semi Short Bets

Societe Generale‘s latest guide on Exchange Traded Funds notes a rise of bearish calls on U.S. exchange listed companies in the semiconductor and natural gas sectors. Short interest in both ETFs, Market Vectors Semiconductor ETF (MUTF:SMH) and United States Natural Gas Fund (NYSEARCA:UNG), has risen 391 percent and 243 percent respectively since December 2012.


The semiconductor industry shows cyclical growth with periods of boom driven by developments in thesmartphone industry and pressures from inventory supply. Conforming with this view, Goldman Sachs in its note said that 2013 would be the year for another semiconductor boom. Their report said that the industry has a history of outperforming only once every five years and this could be that year. However their analysis admitted that the under-performance in 2012 was attributable to bearish investor sentiment prevailing in the industry.

Semiconductors Target of hedge funds…”

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Hedge Fund Love Affairs

“After thumbing through the latest quarterly filings from the world’s 50 biggest hedge funds, Factset has published its Q1 Hedge Fund Ownership Report.

“The 50 largest hedge funds increased their equity exposure by over 5% in Q1 2013,” said FactSet‘s Michael Amenta.

Their biggest holdings include popular names in familiar industries like internet search and personal electronic devices.

“While the top 50 hedge fund managers largely increased their exposure to equities, the funds also made significant reductions to their stakes in two successful stocks in 2013: News Corp. (Cl A) and American International Group Inc,” added Amenta.

Factset included its list of stocks most widely held by the 50 biggest funds.  Google was the most popular with 31 one funds betting on the search engine. At the bottom of their list was Icahn Enterprises, which is basically owned by none other than Carl Icahn.

We ranked this list of stocks by number of holders.  We also included the percentage of shares outstanding held by the top 50 funds.  And for your information, we also included the top three hedge funds that hold each of these stocks.

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Australia’s Central Bank Cuts it s Benchmark Interest Rate

“The Reserve Bank of Australia cut its benchmark interest rate to a record low this month to boost businesses weakened by the currency’s sustained strength, even as households reacted to earlier reductions.

“Conditions in the business sector, as assessed in surveys, generally had remained below average, possibly in part because the exchange rate had remained high,” the RBA said inminutes of its May 7 meeting released today in Sydney. “Increasingly, the household sector had shown signs of responding to” lower rates….”

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Abenomics Increases Speculative Investment in Biotech

“Japanese biotech ventures promising to make jet fuel from algae and to produce synthetic cartilage are soaring in Tokyo trading as cash pumped into the economy by the central bank cascades into speculative investments.

Five of the 10 best-performing stocks this year traded on JASDAQ, which has lower minimum profit requirements than Japan’s main bourse, are biotech firms.

The companies have surged as the Bank of Japan last month voted to double debt-buying to more than 7 trillion yen ($68 billion) a month to achieve 2 percent inflation in two years. Prime Minister Shinzo Abe’s proposal this month to provide 110 billion yen in support to stem cell research over the next 10 years is also helping the shares.

“The market expects quantitative and qualitative easing to continue long term, boosting liquidity and drawing investors to speculative shares like biotech,” said Kazuyuki Terao, chief investment officer at Allianz Global Investors Japan, in an interview. “Abe raised health-care reform as a part of his growth plan and that’s also supporting the buy.”

Japan’s regenerative medicine market will probably increase by 62 times to 1.6 trillion yen by 2030 from 26 billion yen in 2012, the economy ministry estimates.

D. Western Therapeutics Institute Inc., a maker of medicines for glaucoma and blood clots, surged 23 percent today as of the close of Tokyo trading, making it the best performer on the JASDAQ Index this year, soaring 19-fold. The company has formed a partnership with Tokyo-based Wakamoto Pharmaceutical Co. to develop eye treatments.

Algae Fuel….”

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Abenomics Swings the Samurai Sword Once Again

“Japan’s new approach to reflating its economy – termed “Abenomics,” after Japanese Prime Minister Shinzo Abe – involves three components: unprecedented monetary stimulus, a big boost to government spending, and structural reforms designed to make Japanese industry and institutions more competitive.

These are referred to as the “Three Arrows” of Abenomics.

The Japanese government has already announced plans for the first two “arrows” on the fiscal and monetary fronts. Structural reforms, on the other hand, had not yet really come to the fore of the discussion until today.

Overnight, Abe announced some plans. Reuters has the details:

The latest tranche of Japan’s growth strategy will aim to triple infrastructure exports and double farm exports by 2020, as well as boost private investment, Prime Minister Shinzo Abe said on Friday.

The government will set a target for domestic private-sector investment of 70 trillion yen ($687 billion) annually, Abe said in a speech to business executives and academics, the level before the 2008 financial crisis and up about 10 percent from the current figure.

The details, of course, aren’t fully fleshed out…”

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What Can We Learn From the Super Wealthy ?

“F. Scott Fitzgerald wasn’t entirely right. The very rich are different from you and me—but not by much.

new study offers a comprehensive look at the portfolios and investment decisions of several hundred of the wealthiest families in the U.S. Every investor, rich or otherwise, can learn from how these people make the most of their advantages—and from how they mess up.

These households, with an average net worth of roughly $90 million, invest intelligently, for the most part, spreading their bets widely, seldom trading and keeping their investing taxes to a minimum.

But the superrich also commit rookie mistakes. Their approach to diversification might not always be ideal. They chase investment fads like dogs chasing parked cars. They freeze with fear just when bravery is most likely to be rewarded. Maybe the “smart money” isn’t so different from the middle-class “dumb money” that Wall Street likes to mock.

Three economists—Enrichetta Ravina of Columbia Business School, Luis Viceira of Harvard Business School and Ingo Walter of New York University’s Stern School of Business—analyzed the holdings and trades of more than 260 ultrawealthy families between 2000 and 2009. The data came from an unnamed private company that consolidates account information for the wealthy.

What have these rich investors gotten right?…”

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South Korea Cuts Interest Rates to Help Boost Growth

“The Bank of Korea cut interest rates, following the lead of policy makers in Australia, Europe and India this month, as strength in the won and weakness in the yen dim the outlook for the nation’s exports.

Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent, the central bank said in a statement in Seoul today. Six of 20 economists surveyed by Bloomberg News predicted the move while the remainder forecast no change. Kim supported a cut after opposing one last month.

As central banks around the world move to counter currency appreciation, the won’s 24 percent jump against the yen in six months is hampering South Korean exporters of autos and electronics and aiding their Japanese rivals. In Seoul, ruling New Frontier Party floor leader Lee Hahn Koo yesterday urged a “more active role” for the BOK, adding to political pressure that the central bank resisted last month.

“Japan’s policies must have played a very big role in today’s decision,” said Huh Kwan, a Seoul-based fixed-income trader at Korea Investment & Securities Co., one of South Korea’s 20 primary dealers. “The cut can be seen as action to ease a worsening impact on exports.”

The won was little changed against the dollar, trading at 1,086.65 as of 11:44 a.m. in Seoul. The Kospi stock index rose 0.8 percent.

China, Australia

Across the Asia Pacific region, data gave a mixed picture. China reported inflation below the government’s 3.5 percent target and the steepest decline in producer prices in six months, highlighting weakness in the world’s second-biggest economy. Australian employers added more than four times as many jobs as analysts estimated, sending the local currency higher…..”

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Portugal Readies Itself to Sell Bonds for the First Time Since the 2011 Bailout

Portugal is selling 10-year (GSPT10YR) bonds for the first time in more than two years as it seeks to regain full access to debt markets following its 2011 bailout.

The new securities due in February 2024 may yield 400 basis points more than the mid-swap rate, according to a person familiar with the matter who asked not to be identified because they’re not authorized to speak about it. Investors have so far indicated interest in excess of 4 billion euros ($5.23 billion), though the offer size of 3 billion euros will not be increased, the person said….”

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The Aussie Falls as Australia Cuts Benchmark Interest Rates

“The Reserve Bank of Australia cut its benchmark interest rate to a record low, driving down a currency that has damaged manufacturing and boosted unemployment.

Governor Glenn Stevens reduced the overnight cash-rate target by a quarter percentage point to 2.75 percent, saying in a statement that the Aussie’s record strength “is unusual given the decline in export prices and interest rates.” Eight of 29 economists predicted the seventh cut in the past 19 months, while money markets had seen about a 50-50 chance.

“The board has previously noted that the inflation outlook would afford scope to ease further,” Stevens said. “At today’s meeting the board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy.”

He joins global counterparts in embracing record-low rates in an economy where inflation is contained, mining spending is predicted to crest, and credit growth remains subdued. Stevens is aiming to rebalance growth as mining regions in the north and west thrive and manufacturers in the south and east struggle.

“It’s a seminal decision to put a 2 in front of a decimal point for interest rates, and the RBA has decided to maintain its easing bias,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney who predicted today’s decision. “The currency has been the thorn in their side and the inflation data was the catalyst to act on the exchange rate concern.”

Currency Reaction

The Australian dollar fell to $1.0199 at 5:19 p.m. in Sydney, from $1.0238 before the decision. Three-year government bond yields dropped to as low as 2.47 percent, the least since Oct. 16. The benchmark S&P/ASX 200 Index (AS51) pared a loss of as much as 0.7 percent to close 0.2 percent lower….”

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France Declares Austerity Dead as Germany Offers Flexibility

“French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies.

“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said yesterday on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”

The gap between the French Socialist finance chief’s view and the election-year positioning of Germany’s Wolfgang Schaeuble underscores the divergence between their economies and the wrangling that has marked the crisis fight since Francois Hollande replaced Nicolas Sarkozy as French leader a year ago.

Coalition lawmakers in Germany are pushing back against the two-year extension for France to meet European Union deficit rules floated by Olli Rehn, the EU economic and monetary affairs commissioner.

“We made it clear to our government, the chancellor and finance minister that in the case of France a one-year delay to 2014 to fulfill the euro’s deficit rules is the absolute limit for us,” Norbert Barthle, budget-policy spokesman for Schaeuble’s Christian Democratic Union, said in a May 3 telephone interview from his constituency in southwestern Germany. “France must show that it’s willing to tackle structural reforms.”

Merkel’s Campaign…”

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India Cuts Interest Rates to Spur Growth

India cut interest rates for a third straight meeting to revive growth, extending the only reduction in borrowing costs among major emerging nations this year.

Governor Duvvuri Subbarao lowered the repurchase rate to 7.25 percent from 7.50 percent, theReserve Bank of India said in Mumbai today, as 33 of 40 analysts in a Bloomberg News survey predicted. One forecast 7 percent and the rest no change after quarter-point reductions in both January and March….”

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$GOOG Invests $125 Million in Lending Club

“Peer-to-peer lending platform Lending Club is announcing a huge new investor today: Google. Google and existing investor Foundation Capital have put $125 million in Lending Club, which was valued at $1.55 billion in the round. As part of this investment Google will take an observer seat on the Lending Club Board alongside existing Board members including Kleiner Perkins’ Mary Meeker, ex-chairman and CEO of Morgan Stanley John Mack and former U.S. Treasury Secretary Larry Summers.

The investment by Google came as part of a secondary transaction whereby new and existing investors acquired shares from existing investors. Last year, Lending Club raised $17.5 million from Kleiner Perkins, bringing its total outside investment to just under $100 million. Because this is a secondary round, there is no new money being raised, as Google and Foundation are buying out existing early investors.

Lending Club, which brings together lenders and borrowers who want to cut out banks in the process of investing among peers, has facilitated a total of $1.65 billion in loans. In the last quarter, Lending Club saw $350 million in loans made through the platform, and has generated 22 consecutive quarters of positive returns. Lending Club expects to issue $2 billion in loans this year alone.

The company’s wholly-owned subsidiary LC Advisors, an SEC Registered Investment Advisor, has launched several funds in the last 2 years and now has more than $450 million in assets under management….”

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So What are Hedge Funds Buying These Days ?

“Several weeks after the end of each fiscal quarter, the SEC requires hedge funds and many other major investors to file 13Fs which disclose many of their long-equity positions in U.S. stocks as of the end of that quarter. These filings come shortly after an investor buys 5% of a company’s outstanding shares, and can therefore provide initial ideas from these investment managers for further research. Here are five stocks which hedge funds have bought recently:

Billionaire George Soros reported a position of over 17 million shares in J.C. Penney JCP +2.99% , the troubled retailer backed by Bill Ackman’s Pershing Square. Revenue fell 25% in J.C. Penney’s most recent fiscal year compared to the previous one, with resulting operating losses of about $1 billion; the CEO recently left the company following what has been a failed turnaround.

Wall Street analysts are forecasting continued net losses this year and next year, though the consensus is that the company will improve over that time frame. Soros’s involvement is interesting, but we still wouldn’t consider J.C. Penney a buy right now.

Blue Mountain Capital Management, which is managed by Andrew Feldstein and Stephen Siderow, had not owned any shares on Lexmark LXK +0.03% at the beginning of 2013, but has since purchased 3.6 million shares, giving it 5.6% of the company.

Lexmark rose after its first-quarter results beat expectations, even though revenue was down 11% vs. a year earlier and earnings-per-share (EPS) fell by 36%. The sell-side is bullish, with the stock trading at eight times forward-earnings estimates, though we would be skeptical of their optimism. We would note that Lexmark pays a dividend yield of 4.7% at current prices and dividend levels.

Billionaire Ken Griffin’s Citadel Investment Group has bought additional shares of Halcon Resources HK -11.20%, giving the fund a total of over 18 million shares in its portfolio. Halcon is a $2.5 billion market cap oil-and-gas-exploration-and-production company; despite the fact that its production mix is about 70% oil (which currently has a more favorable market environment than natural gas), it experienced an operating loss in 2012 due to higher costs. The forward-earnings multiple is only nine, but we think that we would prefer to look at other shale E&P companies such as Continental CLR -0.74%  and KodiakKOG -1.89% …..”

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