Archives for August 2011

August 2011 - Page 6 of 10 - Money Morning - Only the News You Can Profit From

Why It's Time to Buy Google Inc. (Nasdaq: GOOG)

By announcing its plans to buy Motorola Mobility Holdings Inc. (NYSE: MMI) yesterday (Monday), Google Inc. (Nasdaq: GOOG) is forcing me to make a statement that I never thought I would make: It's time to buy Google.

The $12.5 billion deal will see Google acquire the phone-making half of the Motorola Inc. spin-off that took effect in January. Google is paying $40 a share in cash – about a 63% premium to Motorola Mobility's closing price on Friday. The deal – which Google says will help it "supercharge" its Android smartphone business – will close late this year or early in 2012.

I used to look at Google as the next Microsoft Corp. (Nasdaq: MSFT). But Google has achieved a status that Microsoft shot for – and missed: It's become an online leader and a factor in the everyday life of consumers. Google also has massive growth potential available, and hasn't quit trying to grow.

And that's a good reason – perhaps the best reason – to own Google today and into the future.

Google's purchase of Motorola Mobility will showcase this potential. It positions Google to pair Motorola smartphones with its Android software and compete against iPhone-maker Apple Inc. (Nasdaq: AAPL).

However, Google's new purchase does a lot more than dangle a bigger slice of smartphone market share – and this reason is why I finally decided Google is a "Buy." (**).

Motorola Mobility: All About the Patents

The game-changing benefit for Google in the Motorola Mobility deal is the intellectual property Google is picking up. We are talking about 17,000 patents in this purchase.

A stronger patent portfolio allows Google to reduce royalty costs by using cross-licensing agreements with handset makers. And it protects the Android smartphone market from getting slammed with patent fees (and lawsuits) as sales continue to climb.

The number of Android-software-powered phones jumped 300% last quarter.

Motorola Mobility's patent portfolio will enable Google to move to hardware design for its Android phones. That will give Google both the phone operating system and the intellectual property to act as a gatekeeper in the mobile space.

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How to Find Energy Company Value in a Schizophrenic Market

The market remained highly volatile as we wound up last week. But the reason for that chaos seemed to be shifting from U.S. debt concerns back to the condition of credit in Europe.

Debt contagion in Western Europe was the primary reason for last week's market dives. The focus is now the condition of European banks – a disquieting shift when you remember the cause of the market slide beginning in late 2008…

Then, the credit crunch was enveloping economies worldwide. Banks could not get overnight funds from other banks, so access to business loans dried up, and the prospects of deep recession (or worse) led the worries in the United States and Europe.

At least the banking system is much better off this time around (even though financial institutions continue to withhold trillions of dollars from the flow of credit).

Now comes word that French banks may have the same endemic problems already identified in their counterparts elsewhere in Western Europe. If the trouble is real – and last week's actions by Asian banks do render credence to it – that will guarantee further turbulence in trading markets.

So much for Standard & Poor's example of France as the model for setting the U.S. debt house in order.

Actually, why anybody still lends any credence to these fiscal alchemists on sovereign debt matters is beyond me. The sub-prime collateral mortgage obligation catastrophe indicates they are not so hot on the private issuance side, either. Ultimately, whether the debt bubble is buried in commercial bank ledgers or in the public budget does not change the issue. It will have the same net effect when it bursts – disaster.

We should demand some accountability for rating agencies to understand what they are reviewing and forecasting. Otherwise, I would be about as successful with a Ouija Board.

One other matter before I stop kicking this dead horse…

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A U.S. Double-Dip Recession? Why George Soros is Wrong

In an interview with Der Spiegel, investing legend George Soros says the Standard & Poor's downgrade of the U.S. credit rating means that it's more likely than ever there will be a U.S. double-dip recession.

But here's the thing.

He's wrong.

As much as we respect Soros as an investor, barring an outside shock, a U.S. double-dip recession isn't in the cards. Not for now, at least.

And we can prove it.

To find out how, you need to read Martin Hutchinson's analysis in today's (Tuesday's) issue of Private Briefing.

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U.S. Gold Standard Debate Heats Up on 40th Anniversary of "Nixon Shock'

When U.S. President Richard M. Nixon announced on Aug.15, 1971 that the United States would no longer adhere to the gold standard – the mechanism that fixed the U.S. dollar's value to that of gold − the move was cheered.

The Dow Jones Industrial Average jumped nearly 4%, and The New York Times gushed, "We unhesitatingly applaud the boldness with which the President has moved."

But now, 40 years later, there is a new gold-standard debate and the decision is being examined anew.

Proponents say the move had to be made, since the gold standard needlessly restricted the U.S. Federal Reserve's ability to manage the money supply, particularly during times of economic distress.

To critics, however, the once-heralded decision has lost much of its former luster. They say that abandoning the gold standard has served only to devalue the dollar, making everything else comparatively more expensive.

Here at Money Morning we've talked about the implications of the gold standard debate, as well as how our readers can capitalize on gold as a safe-haven investment – especially given the "yellow metal's" ever-increasing value versus the dollar.

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Comparing Sovereign Ratings to Reality

Global Economic Intersection article of the week. Introduction I never had much use for financial ratings. I view them as second best reference points for lazy financial sector workers and people who are unable to research investment possibilities on their own. And as we learned in the recent banking collapse, the raters have no idea […]

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European Union Debt Crisis Stings France, Putting U.S. Banks at Risk

While investors in the United States have been preoccupied with the debt-ceiling crisis and volatile stock markets, the European Union debt crisis has worsened.

Now France is under suspicion, and if its debt troubles spiral out of control, then there's a good chance the country will take U.S. banks down with it.

Despite denials from the major ratings agencies, some believe France could be in danger of losing its AAA credit rating, just as the United States did recently.

In fact, it was Standard & Poor's unprecedented downgrade of the United States that put investors on notice that no nation was safe. France became a target because many of its large banks hold a lot of debt from troubled nations like Greece, and because France has a lot of debt of its own.

The cost of insuring French sovereign debt via credit default swaps edged up last week as rumors swirled and concerns accelerated.

French sovereign debt has grown alarmingly quickly, rising from just 64% of its gross domestic product (GDP) in 2007 to 85.3% of GDP this year, according to International Monetary Fund (IMF) estimates.

A weakening French economy – on Friday the French statistics office reported that second quarter GDP growth was zero – and inadequate government policies have added to investor jitters about the country's ability to repay its debt.

"We've been really cautious, and the sovereign crisis is now escalating," Philip Finch, global bank strategist for UBS AG (NYSE: UBS), told The New York Times. "It boils down to a crisis of confidence. We haven't seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible."

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Kraft Foods Inc.'s (NYSE: KFT) Spin-off Strategy Will Unlock Value for Investors

Kraft Foods Inc. (NYSE: KFT) is about to unlock a lot of value for patient investors.

I chose Kraft Foods as my first "Buy, Sell or Hold" pick of 2011 as a hedge against inflation. At the time the world was looking at food inflation caused by fires in Russia, rains in Australia, and droughts in China.

The move paid off. In a market that had dropped by as much as 20% in the last two weeks, Kraft is still up about 8% since my recommendation.

Kraft is the very definition of slow, stable value, and in times of fear and uncertainty, nothing is more defensive than food. That is exactly why I recommended the stock at the beginning of the year, and why I believe it's a "Hold" today.

But that's not all. A recent development has given investors yet another reason to hold on to Kraft.

Kraft Foods – which is currently the second-largest global-food company, behind only Nestle SA – announced on Aug. 4 it was going to split into two.

It's going to separate its global snacks operations from its North American grocery business, creating two independent companies.

One company will include its European and developing markets units and will hold brands like Oreo cookies and Cadbury chocolates; it will have revenue of $32 billion.

Meanwhile, the North American grocery business, with revenue of $16 billion, will include such brands as Oscar Mayer processed meats and Kraft macaroni and cheese.

The news was a surprise since Chief Executive Officer Irene Rosenfeld – who favors big companies – said just 18 months ago that "scale is a source of great competitive advantage."

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Lack of Panic Suggests More Market Downside to Come - And Buying Opportunities After That

According to the Bloomberg News, the recent sell-off has scraped a staggering $3 trillion from U.S. markets and a whopping $8 trillion from global markets between July 22 and Monday of this week.

And still the pros aren't panicking, which suggests to me there's more downside ahead – a lot more.

Indeed, I see the very real possibility that we could re-test the bear-market lows of March 2009.

You can dismiss this warning if you wish. But having navigated global financial markets for more than 20 years, I've learned that sentiment is one of the most powerful indicators of all – perhaps the most powerful indicator.

So the fact that the pros – including our politicians (I think everyone now understands that Wall Street and Washington are linked at the hip) – haven't panicked in the face of this bloodbath suggests one thing: They believe they understand the risks that we face – and that's almost a de facto indication that they don't.

You can analyze all the data you want, run through the market fundamentals and gaze at your technicals until you're in a chart-pattern-induced coma.

At the end of the day, the direction the markets move is entirely dependent on how people feel.

And that, my friends, is the classic definition of market sentiment.

How do we know?

When it comes to professionals, we can turn to the Investors Intelligence Survey, which evaluates marketing-timing signals from professional-investment newsletters nationwide. As of Tuesday, the bulls represented 47.3% – and the bears held their own, with 23.7%. That compares with the prior week's data, which showed 46.3% in the bullish camp and 24.7% of the bearish persuasion.

Or the AAII Investor Sentiment Survey, which attempts to measure the percentage of individual investors that are bullish, bearish or simply neutral on the markets. For the week ended Aug. 20, it's pretty balanced – with 33.4% bullish, 21.8% neutral and 44.8% bearish.

Both are far from the extreme readings that are typically associated with market reversals – either to the downside or, as many investors are now wondering, to the upside.

On May 2, I stated in a Money Morning column that "even the most strident pessimists had become optimists." Therefore, I was extremely concerned about the downturn that has led us to where we are today. That's the sort of extreme I am talking about – when everybody goes to one side of the boat.

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