Archives for October 2011

October 2011 - Page 5 of 9 - Money Morning - Only the News You Can Profit From

Kinder Morgan Energy Partners (NYSE: KMP) Buys Out El Paso Corp. (NYSE: EP)

On June 6, I identified El Paso Corp. (NYSE: EP) as a "Buy." The stock at the time was trading at $20.40 share.

Well, on Sunday (Oct. 16), Kinder Morgan Energy Partners LP (NYSE: KMP) said it would buy El Paso for $26.87 a share. That's a 32% premium to the price the stock was trading at at the time of my recommendation. EP stock yesterday (Monday) rose more than 24% to close at $24.45.

The Standard & Poor's 500 Index has slumped nearly 8% since June 6, so readers who followed my advice would have enjoyed a nice rate of return over the last four months, compared to the overall market.

The case that I made for El Paso back in June was a simple one: The company's assets were valued at less than the equivalent assets held by its peers. El Paso at the time was in the process of breaking itself into two parts, so it could unlock some of the trapped value.

Kinder Morgan recognized that, as well, and acted.

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Lenders Put the Lies in Liar's Loans and Bear the Principal Moral Culpability

Global Economic Intersection Article of the Week

A reader has asked several important questions about liar's loans that are critical to understanding the causes of the ongoing U.S. crisis. By 2006, half of all loans called "subprime" were also liar's loans. Roughly one-third of all home loans made in 2006 were liar's loans. The crisis was originally called a "subprime" crisis, but it was always a liar's loan crisis. The reader is correct to inquire about causation and moral culpability.

"Dr. Black, are liar's loans the same as stated income loans? In either case, how do we know whether buyers or loaners put the income for the loan? If most of these reported incomes were entered by borrowers, I would think most of the blame falls on them."

Yes, "liar's" loans are what the industry called "stated income" and "alt-a" loans when they were talking among themselves. Income was the primary category that was "stated" – i.e., listed without any verification as to accuracy – in a liar's loans. Some liar's loans, however, also "stated" employment, assets, and liabilities. "Stated income" is a euphemism for a liar's loans, but it is at least honest about its insanity. Readers get it right immediately – they understand that no honest mortgage lender would make loans on this basis. (I expand on this point below.)

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Despite Global Slowdown, This Chile Fund Will Prosper

Chile's central bank is worried about the global economy. Although it decided to keep its interest rate at 5.25% for now, the bank's board said slowing growth prompted it to consider a rate cut as early as December instead of early next year. But even though Chile sees a slowdown ahead, its gross domestic product […]

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Green Mountain Coffee Roasters (NASDAQ: GMCR) May Be Red Hot but It's Not a 'Buy'

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is one of the hotter stocks in the market right now. In fact, the stock is up 178% since the start of the year.

But if you know what's good for you, you'll steer clear. Green Mountain has shot up so high, so quickly that it has become a victim of its own success.

Let me explain.

Green Mountain started with a single café that roasted beans and sold coffee over the counter to customers in a small town in Vermont. Today, that same company is generating $2.3 billion of revenue.

To put that in perspective, Green Mountain has delivered double-digit net sales growth for the last 27 consecutive quarters. And, since the acquisition of Keurig, it has seen net sales growth of more than 39% for 12 consecutive quarters.

But while compounded growth is the key to long-term success, it also can become a drag on near-term profits.

Often a company feels it must continue to grow simply for growth's sake. And if that's the route Green Mountain takes, then it will find itself in the exact same place Starbucks Corp. (Nasdaq: SBUX) did a couple of years ago.

Indeed, Green Mountain has put so much emphasis on growth that high expectations could negatively impact the company's execution.

And in the economic reality of today, a company that has fixated on hitting lofty growth objectives could be setting itself up for a serious market disappointment.

So Green Mountain Coffee Roasters is "hold" – at least until global growth starts to rebound (**).

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Energy and Materials Will Ride High This Earnings Season... but 2012 is Another Story

The hottest sectors for the third-quarter earnings season, Energy and Materials, should stay on their winning streak through the next quarter, but will get hit by lagging demand from emerging markets in 2012.

The two sectors will report the best results in an earnings season expected to see overall profits by companies in the Standard and Poor's 500 Index rise by 12.6%, with Energy up 43% and Materials up 32%.

Demand for both should remain strong enough in the fourth quarter to give Energy a 25% pop and Materials a 22% jump. But after that, slowing activity in emerging economies, particularly China, will take its toll.

"If you look at the last few quarters, any time companies are talking about where they're seeing the largest growth in sales and earnings, it's typically been China, India, emerging markets," John Butters, senior earnings analyst at FactSet Research Systems Inc. (NYSE: FDS), told Yahoo! Finance. He said that a slowdown in demand would have an "impact on future expectations."

Just last week the price of such commodities as oil, copper and other metals fell when China reported that its trade surplus fell to $14.5 billion in September, down from $17.7 billion in August.

"The concern is that the European debt crisis is hampering the economy in China, and possibly in broader Asia," Bart Melek, head of commodity strategy with TD Securities, told The Wall Street Journal. Investors, he said, "think demand may drop."

Meanwhile, the International Energy Agency (IEA) cut its oil demand forecasts for 2012, though the organization still sees oil demand hitting a record this year.

3Q Earnings Season

Apart from Energy and Materials, the Consumer Discretionary Sector will also do well with 16% growth in the third quarter. The laggards this quarter will be the Utilities sector, which will see earnings fall 1%, Healthcare, which will eke out 2% growth and Consumer Staples, which will see 5% growth.

Yet the overall message is a positive one.

"Overall we are seeing fairly broad-based growth across the sectors," Butters told Yahoo! Finance. "Nine of the ten sectors are expecting growth on the earnings side and all 10 sectors are expecting growth on the revenue side."

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Dividend Stocks: How To Profit From The World's Best Investment Protection

Do you know what the ultimate investment protection is?

It's not gold, and it's certainly not Treasuries.

It's dividend stocks.

Companies that pay consistent dividends are in better fiscal shape than the U.S. government, and the payouts significantly outpace those of Treasuries. The advantage over gold of course is that the yellow metal yields nothing – it's simply a store of value.

And yet dividend stocks also protect against inflation, since profits for the companies behind them tend to rise alongside prices.

To understand the advantages dividends can provide an investor during a down market, just look at the implosion of the dot-com bubble in 2000.

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Corporations Are the Real Winners When it Comes to Free Trade Agreements

Whether the free trade agreements with Colombia, Panama and South Korea create jobs or destroy them is debatable, but one thing is sure: U.S. corporations will reap the most benefit from the deals.

After years of delay, the U.S. Congress on Wednesday approved the free trade agreements – the largest since 1994's North American Free Trade Agreement (NAFTA) – in a rare instance of bipartisan cooperation.

The deals will cut tariffs and open up markets between the United States and South Korea, Colombia, and Panama.

And while the political arguments focused on the deals' impact on jobs and the U.S. economy, U.S. corporations will emerge as the real winners.

That's why Caterpillar Inc. (NYSE: CAT), a frequent beneficiary of past free trade agreements, was one of the first to applaud the deals.

"Once these agreements go in effect, Caterpillar products produced in Illinois and Mississippi and the Carolinas will be able to be exported to Colombia, Panama and Korea duty-free," Bill Lane, the Washington directorfor the heavy equipment maker, told NPR. "That's a big deal."

The Boeing Co. (NYSE: BA) was equally pleased.

"When commerce increases, downstream that turns into aircraft orders. More movement of people and certainly of goods opens up more opportunity to sell aircraft," Ted Austell, a vice president at Boeing, told Reuters.

Many Winners

U.S. President Barack Obama, who had strongly urged Congress to approve the free trade agreements, said a government study showed the South Korea deal alone would benefit machinery and equipment makers, pork and beef producers, and the chemical and plastic products industries.

The sector with the most to gain in the Panama and Colombia deals is the agricultural industry, which had complained that the delay in approving the agreements – negotiations begun under the Bush administration – was costly.

"We can't underestimate how much U.S. agriculture has lost out," Devry Boughner, director of international business relations for Cargill Inc., told Reuters. "Corn, soybeans and wheat exports from the U.S. have gone from a 78% market share in the Colombian market to 28%, owing in part to the fact that Canada got to Colombia first."

Dozens of large corporations and business groups have actively lobbied Congress for years to pass the free trade agreements to gain access to new markets or make their products cheaper and more competitive in existing markets.

Some of the other large U.S. companies that lobbied for the South Korea deal include AT&T Inc. (NYSE: T), Chevron Corp. (NYSE: CVX), Johnson & Johnson (NYSE: JNJ), Microsoft Corp. (Nasdaq: MSFT), Pfizer Inc. (NYSE: PFE), Prudential Financial Inc. (NYSE: PRU) and QUALCOMM Inc. (Nasdaq: QCOM).

The Latin American Trade Coalition, which supported both the Colombia and Panama free trade agreements, included Caterpillar, General Electric Co. (NYSE: GE), Wal-Mart Stores Inc. (NYSE: WMT), Citigroup Inc. (NYSE: C), International Business Machines Corp. (NYSE: IBM) and Oracle Corp. (Nasdaq: ORCL).

Why so much corporate interest in free trade agreements?

"Let me just put it this way," explained Caterpillar's Lane. "About eight years ago they passed the Chile free trade agreement. Caterpillar exports to Chile tripled. These agreements have real-life implications and what they've all done is increase U.S. exports."

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These Three Men Represent Everything That's Wrong with Wall Street

I've already expressed my desire to embrace the Occupy Wall Street movement.
I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve.

But I don't know – and I'm not convinced they do, either.

Still, that doesn't mean we should dismiss them entirely. After all, there are millions of Americans who sense there's something terribly wrong with our capitalist system, but they can't pinpoint exactly what it is either.

But I can.

Bad actors have done bad things to good institutions and our capitalist system. Today, I'm going to let you in on who three of those bad actors are.

You see, part of the problem is that when we think of the "bad guys" on Wall Street, or in Washington for that matter, we don't often think of specific people. We talk about "them" as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.

I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they're using to get away with it.

So, I'm going to start today with three of the biggest perpetrators of the mess we're in.

The Three Bears

There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:

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