Archives for August 2011

August 2011 - Page 5 of 10 - Money Morning - Only the News You Can Profit From

By Downgrading Google Inc. (Nasdaq: GOOG), S&P Gets it Wrong - Again

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Standard & Poor's Equity Research downgraded the shares of Google Inc. (Nasdaq: GOOG) from "Buy" to "Sell," saying the merger with Motorola Mobility Holdings Inc. (NYSE: MMI) will likely "negatively impact" Google's growth.

S&P also cut its target price for Google shares to $500 from its earlier target of $700.

Needless to say, we think S&P got it wrong – again. (Don't forget, it was another unit of S&P that downgraded U.S. debt earlier this month. That downgrade, to be really credible, should have been announced several years ago, during the height of the global financial crisis.)

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Two Easy Ways to Save Your Wealth From 1970s-Style Stagflation

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The year was 1973.

I was just a toddler, so I couldn't fully appreciate the next-generation Camaro that had just come out or the release of the new Pontiac Firebird Formula.

But of course, very few remember 1973 as the year of the Firebird or Camaro. That's because something else was brewing that would push the U.S. economy off a cliff.

An organization that most Americans had not yet heard of called the Organization of Petroleum Exporting Countries (OPEC) was about to flex some muscle, and punish the U.S. economy.

OPEC Tries to Get Revenge on America

In 1973, the U.S. government re-supplied the Israeli military during the Yom Kippur war. The decision-makers at OPEC didn't like that one bit. So they decided to get even.

As payback, they significantly cut back the flow of oil to the United States.

This cutback in oil production from OPEC lasted until March of 1974. This, along with other factors, helped to slow down our economic growth while inflation soared. Up until that point, economists had said "high prices" and "sluggish growth" were nearly impossible.

But there it was: a new phenomenon known as stagflation.

With oil prices rising, corporations had to pay more to transport their goods. They had to raise prices to cover transportation costs. Suddenly everything Americans bought cost more − practically overnight.

The economy went south. Corporate profits slowed, and stocks went into a two-year bear market. Companies also had massive layoffs, and unemployment rose to 8.8%.

Meanwhile, the new fiat dollar slumped in value.

All this happened just because some oil bigwigs decided to decrease our oil supply. After all, prices only rise either because demand increases or the supply decreases (or both). In this case, it was the decreased oil supply.

These problems persisted for quite some time, too. You see, even though the oil embargo was over in March of 1974, gas prices continued to soar until March of 1981. In today's dollars, the peak price was equivalent to $3.41.

Back in the 1970s there wasn't much the average person could do to fend off the effects of stagflation on their personal finances. Americans either had to sit in cash or watch their stock portfolios bleed money.

Same Stagflation, Different Market

Today's markets are shockingly similar to the 1970's stagflation. We have the same sluggish growth, and the same rising prices.

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It's Not Just Congress - the System Has Failed

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Sandra Bloom is in a frustrating position, and she feels stuck.

She put faith in people to do some work for her – and they've failed.

Not only did they fail to fulfill promises, they've created a bigger mess than the one they were supposed to fix.

Like many Americans, Bloom hoped the U.S. Congress would improve the country's struggling economy this year. Instead, she watched elected leaders squabble and finger-point while the U.S. credit rating was downgraded and federal debt climbed past $14 trillion.

"I am so angry at Congress for the way it is not doing its job," Bloom wrote in an e-mail to Money Morning. "There is no longer any attempt to do what is best for the country, no attempt to compromise."

Bloom shared her thoughts on what's wrong with Congress in response to a dismal CBS News/New York Times poll in early August that revealed 82% of Americans disapprove of the way Congress is doing its job – the highest disapproval rating since polling began in 1977.

This was on the heels of a USA Today/Gallup Poll in Julythat showed just 7% of Americans believed their representatives in Washington were negotiating in good faith when it came to the debt-ceiling debate.

We asked you, our readers, just what's wrong with Congress – and the overwhelming majority emphatically agreed: Elected representatives are only out for their own interests, not those of the people.

"All they have been doing is playing chicken to see who blinks first, and the American public is the loser," said Bloom. "They would rather one side's ideas be defeated than accomplish any meaningful legislation."

That could mean it's time for a change.

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The (New) Truth About Oil

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Traditionally, demand levels would determine the overall condition of the oil market. Supply (and the investment required for that supply) would be based upon what demand told us.

Actually, oil never reflected the demand-supply relationship as well as other sectors of the market. Oil has an irritating habit of not reflecting what it should in the dynamics of market play. Until recently, petroleum economists would comment (or lament) about the demand inelasticity of oil. That means, due to the lack of available alternatives (especially in transportation), demand for oil products would not decline as the price rose.

Such a relationship has certainly been tested over the last several years. The New York market price for West Texas Intermediate benchmark crude (WTI) moved from a $147.27-per-barrel high in July of 2008 to below $33 by the end of that year, only to rise again to almost $114 by the end of April of this year. It's moved back down to the $85-$90 range since then.

We did witness some demand destruction in the summer of 2008, and then (to a much lesser extent) in the spring of this year, with the rise of prices at the pump to well over $4 a gallon.

Yet what must be remembered is the simple fact that developed countries no longer call the shots in oil demand.

This is now – officially – a global market.

On the production side, of course, it has been a global market for more than 50 years. The primary reserves are located in the Middle East, the former Soviet Union and offshore in places stretching from Vietnam and Australia to the Arctic basin. The supply side, therefore, has been global for some time.

But now the demand component also is global in scope. This changes everything, as you'll see. And there's even a way to track this new (and more accurate) demand for oil.

Three "Crude" Shifts

By fixating on U.S. demand, analysts exhibit an out-of-date tendency. The description of the American market as "having less than 5% of the world's population yet consuming 25% of the world's energy" no longer has the impact it once did.

Yes, the United States remains one of the two largest end users internationally (the other being China). But the spike in demand now is coming from developing parts of the world. As demand figures move laterally in North America and Western Europe, they are accelerating elsewhere.

Three elements are leading to this rise.

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New Obama Job Creation Plan Coming Next Month

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Faced with a stagnating economy, U.S. President Barack Obama intends to unveil a job creation plan and deficit reduction proposal shortly after Labor Day, Sept. 5. The Obama job creation plan is expected to include proposals on middle-class tax cuts, new infrastructure spending, and ways to assist the long-term unemployed. For now, the White House […]

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Emerging-Market Stocks Hit Historic Lows: Don't Miss Your Chance to Load Up

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Thanks to the wild market swings of the past month, emerging-market stocks are trading at historic lows. That means investors have a rare opportunity to load up on stocks at valuations they wouldn't see under normal circumstances.

If we were talking about a sell-off that was based on fundamentals, that might be a warning sign. But what we've seen instead is the irrational dumping of companies that actually are poised to see their profits grow.

Take a look.

The stock-market sell-off that's pushed the Dow Jones Industrial Average down 9% in the past month has rubbed off on emerging-market stocks. The MSCI Emerging Markets Index, which tracks market performance in developing economies, has slipped 12% this month – its worst slide in three years. After falling as low as 990, it's now trading around 1,010, 28% below its 20-year average.

This puts emerging-market stocks near record-low valuations, and with their high-growth outlook it's time for investors to scoop them up at bargain prices.

"We've been pecking away at things as they decline," billionaire investor Wilbur Ross, chief executive officer of WL Ross & Co., told Bloomberg Television. There's "plenty that's attractive in the emerging markets. Buying stocks at today's prices over a couple of years' time period will prove to be a uniquely rewarding experience."

Misleading Valuations

Current emerging-market valuations are at their lowest level since March 2009, but companies are worth much more than share prices reflect. The latest prices imply these companies will lose about 20% of earnings over the next year, according to Morgan Stanley (NYSE: MS), when in reality they're poised for growth.

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It's Time to Bail on Bank Stocks

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There was a time when bank stocks actually looked like good investments. And many, having racked up big gains over the past two years, proved to be just that.

But sadly, U.S. banks no longer offer the value and profit-making potential they did immediately following the financial collapse. In fact, they're actually heading for what could be a catastrophic decline.

Let me explain.

On February 18, 2009, I wrote a piece that said bank stocks should not be written off.

I observed at the time that the best U.S. banks had huge business strengths that were not fully undermined by the financial crisis. So I advised investors buy shares of the best among them.

As it turns out, that recommendation may have been too timid.

That is, most bank stocks – including some of the weakest and least investment-worthy – have surged since my article's publication.

Even following a lukewarm second quarter and last week's market meltdown, the top six banks – Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS) – are in a relatively impressive position.

Take a look for yourself:

  • Goldman Sachs stock is up about 22%.
  • Bank of America is up 30%.
  • JPMorgan is up about 49%.
  • And Wells Fargo is up 55%.

Only Citigroup, down about 13%, and Morgan Stanley, down 20%, have seen their stock plunge.

But in light of this remarkable run up, and the disastrous pitfalls that lie ahead, now is the time to bail on bank stocks.

Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up.

In other words: The risks related to bank stocks are as present as they ever were – just the profitability is missing.

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The Google-Motorola Deal: Winners and Losers

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Every tech company with a stake in mobile computing will feel the ramifications of Google Inc.'s (Nasdaq: GOOG) plan to buy Motorola Mobility Holdings Inc. (NYSE: MMI) for $12.5 billion.

Google partners could well become rivals, while the other major players in the mobile computing arena, such as Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT) and Research in Motion (Nasdaq: RIMM) all will be affected – some negatively, but some positively.

The new partnership also could inspire other merger and acquisition activity in the sector, between large, cash-rich companies and small, struggling ones.

Let's take a look at how the Google-Motorola deal, which was announced on Monday, will alter the mobile computing landscape, company by company:

Google: A Mixed Bag

Primarily, Google bought Motorola to acquire its vast patent portfolio to better defend its mobile operating system, Android, from a rising number of patent lawsuits.

"Motorola has a strong patent portfolio which will help protect Android from anti-competitive threats from Microsoft, Apple and other companies," Google CEO Larry Page said in Monday's conference call.

Although most of the lawsuits have been aimed at handset makers such as HTC Corp. (OTC: HTCXF), Samsung Electronics LTD (PINK: SSNLF), and Motorola, the common thread was Android. Microsoft focused on collecting licensing fees for each handset, while Apple's strategy was to halt the sale of devices competing with its own iPhone and iPad products.

The typical defense to patent lawsuits is another patent lawsuit, but you need to possess a broad portfolio to do that. Google, which had a mere 700 patents before, will add Motorola's 24,000 patents to its arsenal.

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