October 2011 Archives - 2/9 - Money Morning - Only the News You Can Profit From
SIPO Stocks: How to Profit From the Money Machine Wall Street Hopes You Won't Discover
They're called "SIPO" stocks.
They pack a massive profit punch.
And they're one of Wall Street's best-kept secrets.
In fact, Wall Street's faceless investment banks would be just as happy if you didn't know that SIPO stocks existed.
That's why it took an ex-Wall Streeter like Shah Gilani to break the silence, and to bring these stocks – and the profit opportunity they represent – right to you.
"SIPOS are as close to an entrepreneur's fantasy as you can get, without the uncertainties that come with their cousins – IPOs," says Gilani, a retired hedge-fund manager and Money Morning columnist whose investigative essays have helped thousands of Main Street investors dodge Wall Street's ruinous cons. "If you're looking for relatively low risk, deep value and multiple paths to profitability for the company and your investment, SIPOS are virtually in a category all by themselves."
That's why Gilani has created a new advisory service (click here to find out more) that's designed to exploit this hefty profit play – albeit one with a surprisingly low-risk profile.
An Unlikely New Supporter for Alternative Energy
During a biofuels conference at Mississippi State University last week, Navy Secretary Ray Mabus announced that his branch would be leading the charge to lessen the U.S. Department of Defense's (DOD) dependence on fossil fuels.
This involves a rather large chunk of traditional fuel usage.
On average, the federal government consumes about 2% of the fossil fuels used in the United States – and the DOD accounts for about 90% of that.
With the Obama administration emphasizing a move to alternative and renewable fuel sources, Mabus is signaling that the military is on board – sort of.
The Trouble with Foreign Oil
As a former governor of Mississippi and ambassador to Saudi Arabia, Secretary Mabus knows something about the position of oil in American foreign policy.
He noted during the conference that, for every $1 rise in the cost of crude oil, the Navy has to come up with at least $32 million.
So when the Libyan crisis hit earlier this year, and oil spiked $30 a barrel, that translated into almost $1 billion of additional costs to the Navy. It's no wonder, then, that Mabus is committed to meeting 50% of the Navy's onshore and fleet fuel needs with non-fossil sources by 2020.
Additionally, in what is now mantra from both sides of the political aisle, reliance on foreign oil sources presents a national security problem.
"When we did an examination of the vulnerabilities of the Navy and Marine Corps, fuel rose to the top of the list pretty fast," Mabus said. "We simply buy too much fossil fuel from actual and potentially volatile places. We would never allow some of these countries we buy fuel from to build our ships, our aircraft, our ground vehicles – but because we depend on them for fuel, we give them a say in whether our ships sail, our aircraft fly, our ground vehicles operate."
The push seems serious enough, and it does reflect similar statements coming from other branches of the military.
But questions remain: What are the alternative sources? How much volume can each genuinely give to the effort? And what are the possible drawbacks of such alternatives?
Biofuels to the Rescue
From the Navy's perspective, biofuels have shown some serious promise.
In certain theaters of operation, bio additives are already in use for both jet fuel and lighter vessel options. And the initial results have been quite encouraging.
Look Out for La Niña: Two Ways to Profit From this Seasonal Weather Shift
If you follow the commodity markets, you know that weather can have a dramatic effect on your investments.
A flood, drought, hurricane, tornado, or even something as simple as the changing of the seasons can be a game changer.
For example, flooding along the Mississippi River earlier this year damaged roughly 3.6 million acres of U.S. cropland. Arkansas lost about 1 million acres, with Illinois, Mississippi, Missouri and Tennessee also affected. The floods hurt about 2 million acres of cornfields, affected upwards of 40% of the nation's rice crop, and drove wheat prices to historically high levels.
Surprises like these aren't confined to the United States, either.
Thailand this year experienced its worst floods in more than a half-century. Thailand is the world's largest rice exporter, and flooding may have wiped out as much as 14% of the country's paddy fields, potentially erasing the predicted global glut.
Meanwhile, droughts in China- another major rice producer – affected 16.1 million acres of farmland.
As a result, rice, a food staple for half the world, has been this year's best-performing agricultural commodity.
You might say that weather is impossible to predict, but you'd only be half right. Modern meteorology, while by no means perfect, can give us an idea of what to expect from shifting weather patterns. And if you know what to look for, you can cash in on some amazing trading opportunities.
For instance, right now, there's no weather pattern more vital – and potentially profitable – than La Niña.
La Niña is characterized by unusually cold ocean temperatures in the Equatorial Pacific, compared to El Niño, which is characterized by unusually warm ocean temperatures in the Equatorial Pacific.
During a La Niña year, winter temperatures are warmer than normal in the Southeast and cooler than normal in the Northwest.
In fact, La Nina is what brought dry winter conditions to China's grain belt and extreme rains to Australia earlier this year.
And it's not done yet. So here's what you need to know going forward.
We Warned You Not to Buy Bank Stocks – And Here's Why
If you weren't convinced before, hopefully you've seen the light now: Don't buy bank stocks.
Money Morning Global Investing Strategist Martin Hutchinson first warned it was time to bail on bank stocks on Aug. 17. He said the sector was headed for a "catastrophic decline."
"Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up," said Hutchinson. "In other words: The risks related to bank stocks are as present as they ever were – just the profitability is missing."
Hutchinson was right on with his call. Anyone who heeded his warning saved themselves from the losses U.S. banks have since sustained.
Share prices for many big U.S. banks tumbled in the period between the publication of Hutchinson's article and yesterday's (Wednesday's) market close. Bank of America Corp. (NYSE: BAC) lost 11.6%, Goldman Sachs Group Inc. (NYSE: GS) fell 9.3%, JPMorgan Chase & Co. (NYSE: JPM) 6.5%, and Morgan Stanley (NYSE: MS) 2.2%.
The Standard & Poor's Financials Sector Index now is down more than 18% for the year. Global bank stocks have hit their lowest valuation in 40 years.
And this industry's stock losses are just the beginning of the price pain.
Poor Earnings Reflect Banks' Struggle
Hutchinson pointed to key factors that would weigh on bank profits, like trading losses, decreased lending, and the overhang of dead mortgages.
This season's dismal bank earnings have supported Hutchinson's forecast.
- Gold Prices Back on Track for $2,500 an Ounce
Do Bullish Investors Have an Ace in the Hole?
Right now, there are planes full of travelers heading to Las Vegas with dreams of striking it rich. These starry-eyed gamblers would greatly improve their odds by learning how to count cards.
Yet, as we learned in the movie "21", where six MIT students team with Micky Rosa to become expert card counters and "bring down the house," this highly illegal technique carries dire consequences.
You may not be able to count cards at the blackjack table, but counting historical trends of the stock market and discovering inflection points are not only legal strategies, they are essential to successful investing.
One "card" worth counting is the Purchasing Managers' Index (PMI), which measures the manufacturing strength of any given country. A rising PMI indicates a growing economy and is considered a leading indicator.
There are three different types of indicators: coincident, lagging and leading. PMI is considered a leading indicator, meaning its movement historically occurs three to six months before the market reacts.
In China, the PMI just crossed above the three-month moving average. Historically, there's a 67% probability that Hong Kong and China stocks, as measured by the Hang Seng Composite Index, will trade higher over the following three months when this happens. So far in October, the index is up 3.2%, and if this historical trend is sustained, we should see continued positive performance.
The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)
I've made no secret of my aversion to Treasury bonds. Yields right now are irrationally low, and thus do not accurately reflect U.S. credit risk.
And since inflation is already running higher than bond yields – and is likely to rise even further – Treasuries offer an inadequate return at best, and at worst, a capital loss if sold before maturity.
Even Treasury Inflation Protected Securities (TIPS) aren't as safe as you might think.
Fortunately, the U.S. Treasury is finally thinking about issuing something useful: Floating rate notes (FRNs).
If the Treasury does end up issuing FRNs, and the pricing is reasonable (and the U.S. Treasury still has a credit rating better than junk bonds), then you should seriously consider buying some.
Don't Trust TIPs
Floating rate debt issues are not that common here, but there have been many in Europe. They were even more common in my early banking days in the 1970s – when interest rates were generally rising.
FRNs have one great advantage over fixed-coupon bonds: If interest rates go up, fixed-coupon bonds go down, sometimes by a lot if the bonds have a long time to maturity.
For example, if 30-year interest rates rise from 4% to 5%, the trading price of a 30-year bond ($100 face value) will drop to $84.48. If you were to sell at that point, you'd lose 15% of your principal – the equivalent of nearly four full years worth of interest.
However, a floating rate note on a good credit rating should always trade near par. If short-term interest rates go up from 1% to 5%, the note will pay 5% in the next interest period, so it will still trade close to par. That means you have principal protection as well as interest rate protection.
Theoretically, TIPS should offer similar protection. And they do if interest rates always stay at the same margin above inflation. But in periods like the present, interest rates trade below inflation, so the price of TIPS gets bid up above par.
Today, 10-year TIPS yield only 0.19% and 30-year TIPS yield only 1.00%. Since real bond yields in normal markets should be in the 2% to 3% range, there is potential for the loss of principal here. Indeed, in real terms there is a certainty of loss of principal – the "on-the-run" 30-year TIPS trade at a price above $128, so over the next 30 years you are bound to turn $128 into $100 in real terms – not a good deal.
Sidestepping Uncle Sam
Additionally, there is another problem with TIPS: The government sets the price index to which TIPS are linked. And if you think the government is too honest to fudge the price statistics to make its debt cheaper, I have some sad, disillusioning news for you.
Layoffs at U.S. Companies Portend Poorly for 2012 Prospects
Anticipating a sluggish economy for the rest of this year and into 2012, several major U.S. companies have set aside money to pay for possible layoffs and plant closures.
Such moves will help corporations maintain earnings growth, but will add pressure to the U.S. unemployment rate, which for more than two years has been stuck around 9%.
Some analysts worry that the talk of layoffs at some U.S. companies could trigger others to consider cutting positions, which in turn would cause further damage to an already stagnant economy.
"In many ways, this is part of the negative feedback loop," Deane Dray, an analyst at Citigroup Global Markets, told The Wall Street Journal. "Once you start head-count reductions and plant closures, you are adding to the unemployment, you are adding to the anxiety in the market."
Of course, it's not the job of chief executives to worry about what impact their decisions have on the overall economy. And having lived with an economy that just can't seem to climb very far out of recession, many CEOs feel it necessary to prepare for a challenging future.
"We all read the headlines," Danaher Corp. (NYSE: DHR) Chief Executive Larry Culp said last week during an earnings conference call. "It's better to be prepared and ready for what may come than to postpone what we think is a very prudent action."
Danaher said it would increase its fourth-quarter restructuring budget to $100 million – twice its previous amount.
Likewise, United Technologies Corp. (NYSE: UTX) raised its restructuring budget by a third to $300 million, and Honeywell International Inc. (NYSE: HON) said it would use $300 million it gained from a divestiture for restructuring.
United Technologies, which has already cut $188 million so far this year, says it is determined to hit its 10% earnings growth target for 2012.
"We're going to continue to push them to get toward 10%, and we're doing the restructuring now," United Technologies Chief Financial Officer Greg Hayes said on his earnings conference call last week. "We're doing whatever we can to try and make sure that that happens."
Jobs Under Siege
Many job cuts already were in the works well before the latest talk of restructuring.
As recently as this past summer, Merck & Co. Inc. (NYSE: MRK) announced that it planned to shed 13,000 workers by 2015; Lockheed Martin Corp. (NYSE: LMT) announced plans to cut 6,500; Cisco Systems Inc. (Nasdaq: CSCO) 6,500; Research in Motion Limited (Nasdaq: RIMM) 2,000; and Goldman Sachs Group Inc. (NYSE: GS) 1,000.
"These layoffs were very broad-based. Many of these companies are iconic companies, well known, big names," John Challenger, CEO ofChallenger Gray & Christmas Inc. told CNBC. "This is what precipitates out when you have an economy that is stalling."
According to Challenger, September was the worst month for announced layoffs in the United States in over two years, with both private and public sector employers slashing 115,730 workers — more than double the number let go in Sept. 2010.
Even companies not talking about layoffs have lowered their expectations for the fourth quarter, and in many cases, for 2012 as well.
- An 'Average' Return on Stocks Means You're Losing Money
The Market's Next 1,000-Point Move
Stuart Varney, host of the aptly named and very highly rated "Varney & Co." program on Fox Business, put the following question to me in his usual direct style: "Will we have an agreement on Wednesday out of Europe and what will that mean for the markets?"
Yes, I began, we probably will – but for all the wrong reasons, and it will never last.
There are three reasons why:
1. You have 27 nations that now have to agree to review what, in effect, is the treaty that holds the European Union (EU) together. That's not conducive to anything even remotely resembling quick decision-making.
2. What's happening in Europe is much the same thing happening here, in that the debt situation has become government at the people rather than for the people or even by the people. That means politicians are still smoking in bed while the house is burning.
3. They have to say something to avoid contagion but that's already baked into the cake if you examine the cost of credit-default swaps (CDS). The data suggests traders are now turning their crosshairs on Italy, Portugal and Spain even as leaders work towards a solution. So recapitalizing the banks to the tune of a few hundred million euros is but a one-shot deal; the continued thing to focus on is the near-complete lack of fiscal discipline at the government level.
The bottom line: This is not over by a long shot. In fact, I expect it to drag on well into next year.
Still, in the short-term, the next 1,000 points the market moves in either direction are going to be the direct result of whatever "solution" comes out of Europe tomorrow (Wednesday).
The better we understand this situation as a nation and as investors, the better off we'll be.
A Misguided Mission
At issue is the very nature of the "recapitalization." The fact is Europe's debt has gotten to the point that it can no longer be sustained.
Much like our own debt situation here in the United States, there are many causes, including completely incompetent government, irresponsible decision-making, feckless leadership and paltry economic growth.
Citizens on both sides of the Atlantic understandably have had enough.
But the problem is that the policies that led Europe to this point were decades in the making. So it's unreasonable to expect them to go away any time soon even if the EU announces a solution on Wednesday.
Furthermore, the use of comparatively healthy public balance sheets to shore up irresponsible banks and speculative trading houses is a big mistake that removes the free hand of risk that is a required element of capitalism.
Now, this could come to a quick resolution – if the politicians would stop their meddling. Yes, companies would fail, banks would fail, and the markets would take the brunt of it on the chin.
But – like Iceland, which fabulously ignored international advice and undertook a complete reboot – the sooner we take our medicine, the sooner we can begin healing.
It's not too late, but whether it becomes too late is a question for the world's central bankers and policymakers who have yet to become serious enough about what's needed.
The Downward Spiral
Barring any sort of massive economic growth, neither the EU nor the U.S. can make a dent in the debt cycle and the stuff eventually will hit the fan.
When it does, there are four ways out: