Archives for May 2011

May 2011 - Money Morning - Only the News You Can Profit From

With a Weak U.S. Housing Market, Is Home Ownership Still a Good Investment?

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Owning a home has long been a goal for many Americans, but now more people consider U.S. homeownership a poor investment choice and are kissing that plan goodbye.

Since the housing market collapsed in 2008, forcing millions of underwater homeowners out of their houses, real estate has become a scary and unreliable investment option.

"The emotional scars left by the collapse are changing the American psyche," Pete Flint, chief executive of real estate Website Trulia.com, told The New York Times. "There was a time when owning a home was a symbol you had made it. Now it's OK not to own."

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Record Low Interest Rates Create Stampede to Issue Corporate Bonds

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With interest rates at or near historic lows, companies have been issuing corporate bonds at a breathtaking pace, setting a weekly record this month.

Excluding financial services companies, corporate borrowing for the week ending May 20 reached $29.7 billion, which beat the previous weekly record of $29.04 billion set last September.

Those rushing to add corporate debt this year include some companies already flush with cash, such as Google Inc. (Nasdaq: GOOG), Microsoft Corp. (Nasdaq: MSFT), and Johnson & Johnson (NYSE: JNJ).

With the U.S. Federal Reserve buying up government debt, yields on such benchmarks as the 10-year Treasury note fell from 3.725% in early February to 3.118% in mid-May. Corporate bonds are priced against Treasuries, so when yields fall on government bonds it makes corporate borrowing cheaper.

The unusually low interest rates make acquiring debt very attractive even for companies with no immediate need for the money.

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Buy, Sell or Hold: American International Group Inc. (NYSE: AIG) Is Not Worth the Risk

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American International Group Inc. (NYSE: AIG) provides insurance services to an international market place. In 2008, the company was bailed out of its positions by the U.S. government, which owned 92% of AIG at its peak.

AIG last week priced new equity, allowing the government to unwind some of its position. The U.S. Treasury sold 200 million shares, or 15% of its AIG stake on Tuesday, but still has 77% ownership of the insurer and another 1.5 billion shares to sell before it is fully out of its investment.

That means this is just the first of many liquidity events. And you don't want to own a stock when you know that a company's largest equity holder is on a mission to get out of its position. Long-term weakness will prevail in this case.

So it's time to "Sell" AIG — until the U.S. government finishes diluting current shareholders by dumping its equity.

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Don't be Fooled: U.S. Banks Aren't as Strong as They Look

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U.S. banks are seeing positive trends in several measures of their health.

That's the good news.

Unfortunately, U.S. banks continue to struggle with some much-more-deeply entrenched problems. Those problems pose a major threat to banking-system health.

And they could even cause the U.S. economy to stumble.

Investors who have been heavily and successfully invested in emerging markets, commodities and precious metals have started to repatriate capital back into the U.S. market in anticipation of domestic growth.

However, to really gauge whether that's the correct move to be making right now, those investors would be wise to keep an eye on U.S. banking trends.

The message here is clear: Don't be fooled by the "official" outlook for U.S. banks – the superficial statistics and their in-depth counterparts tell two very different tales.

Good News for U.S. Banks?

It's important to understand that bank-performance statistics are a compilation of the finances of all reporting U.S. banks. Most of this information comes from statistics provided by the U.S. Federal Reserve and the Federal Deposit Insurance Corp. (FDIC). But, as we'll see shortly, the Top 10 U.S. banks hold more than half of the industry's assets, meaning any of the trend numbers are very likely to be skewed – and in a big way.

The good news for banks – particularly the "too-big-to-fail" giants – is that they are experiencing some real improvements … at least, by some important measures.

First-quarter profits totaled $29 billion, a 67% profit over the same quarter last year and the seventh-consecutive quarter of bottom-line improvements, the FDIC said.

Total net charge-offs in the first quarter of 2011 totaled $33 billion, a 37% decline that also included a hefty 39% drop in credit-card charge-offs.

Non-current loans fell 4.7%. And in the area of money that's "reserved" against possible future loan losses, banks set aside a full $31 billion less in this year's first quarter than they did a year ago.

The big banks have already turned in several quarters of profit improvements – based mostly on such declines in loan-loss reserves. And now those institutions are flaunting some highly positive trends in asset quality, which they say will result in lower-loan-loss provisions in the future.

Finally, as a result of such strong capital improvements at the biggest of banks, average capital ratios reached an all-time high.

But, the bigger picture isn't as bright as might be indicated by some of these good trends.

And here we must understand how some of these apparently upbeat numbers and trends can fool us.

To read on, please click here ...

How to Turn a Tidal Wave of Profit From the Global Shipping Industry

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The shipping industry plays an indispensable role in connecting consumers with their most cherished goods. But many investors unfamiliar with its inner-workings underestimate its potential as a massive profit generator.

Meanwhile, investors who are aware of its importance, and can track the volatile ups and downs of the companies that provide shipping services, frequently score big gains from its oft-repeating profit opportunities.

To get a quick idea of the enormity of worldwide shipping activity, you need only look at the U.S. trade numbers.

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Extreme Weather Conditions to Threaten U.S. Agriculture for Next Decade

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U.S. agriculture is likely to face harsh weather for the next decade, threatening food production and the livelihood of the nation's farmers.

Extreme weather conditions have slammed the United States this spring. Tornadoes and flooding in many U.S. states have killed hundreds and ripped through millions of acres of farmland. Residents of Joplin, MO continued to sift through rubble this week after being hit Sunday by the nation's deadliest tornado since 1953.

Many U.S. towns now have to rebuild from devastating losses, and many farmers are left with a questionable future for their land.

This prompted a reader to ask the Money Morning Mailbag how U.S. agriculture and food prices have been affected by the nation's drastic weather conditions.

What does all the recent weather catastrophes in the United States mean for crops and farmland? Will this add to food prices that are already too high for our own good?

— Rob S.

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Star Hedge Fund Manager Einhorn to Microsoft CEO Ballmer: Time to Go

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Citing the stagnant stock performance of Microsoft Corp. (Nasdaq: MSFT) over the past decade, hedge fund manager David Einhorn publicly called for CEO Steven A. Ballmer to step down and "give someone else a chance."

Einhorn made his comments at the annual Ira Sohn Investment Research Conference in New York yesterday (Wednesday). His Greenlight Capital hedge fund owns about 9 million shares of Microsoft stock.

While the tech-heavy Nasdaq Composite Index has gained 34% over the past 10 years, Microsoft has slumped 25%.

Ballmer was named CEO in January 2000.

"His continued presence is the biggest overhang on Microsoft's stock," said Einhorn, who gained notoriety after betting against Lehman Brothers Holdings Inc. (PINK: LEHMQ) four months before its collapse in 2008.

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