Archives for July 2012

July 2012 - Page 13 of 17 - Money Morning - Only the News You Can Profit From

More Bailouts Won't Calm the Stock Market Today

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The stock market today is trying to end its three-day slump after further bailouts were approved for ailing Spanish banks.

European finance ministers met in an emergency meeting in Brussels that ended early Tuesday and agreed to inject up to 100 billion euros ($122.6 billion) into Spanish banks, with 30 billion euros ($36.8 billion) to be available by the end of this month.

European finance ministers in June set aside $150 billion to recapitalize Spain's banks. With the yield on the Spanish 10-year bond still above the critical 7% mark the ministers decided it was time to act again.

The deal aims to prevent Spain itself from needing a full bailout and instead puts pressure on the banks. The terms of the deal also give Madrid until 2014 to comply with the budget deficit standards set by the Eurozone finance ministers.

Previously Spain had been told to cut the amount of its budget deficit to within 5.3% of gross domestic product by the end of 2012. But it will now be given until 2014 instead of 2013 to cut its deficit to below 3% of GDP.

In some good news regarding bailouts, it was reported that $351 million more will be paid back to taxpayers from recent transactions involving banks in the TARP (Troubled Asset Relief Program) bailout. In total there is still some $200 billion left to be returned, most of which comes from Fannie and Freddie.

As investors digest the news from Europe, the second-quarter earnings season is causing many bearish sentiments and a nervous market. Alcoa reported earnings yesterday that were mostly in line with what Wall Street expected, but still very disappointing compared to Alcoa's previous year's earnings.

Following the recent trend Applied Materials (Nasdaq: AMAT) and Advanced Micro Devices (NYSE: AMD) issued lower guidance for the upcoming quarter.

Applied Materials (Nasdaq: AMAT) announced Tuesday morning that its revenue and earnings will fall short of expectations for this quarter and its fiscal year ending in October.

The Santa Clara, CA-based company reported that adjusted earnings per share for fiscal 2012 will fall short of its target range of 85 cents to 95 cents. It also expects sales to be below its previous outlook of $9.1 billion to $9.5 billion for the year.

The company said it will provide a new target range for sales and earnings per share during its August 15 Q3 earnings call when it expects to announce lower financial results for the third quarter ending July 29. Applied Materials said it could cut 15 cents to 20 cents off its full-year adjusted EPS outlook.

Today AMAT is down almost 1.5% as of noon.

Advanced Micro Devices (NYSE: AMD) Monday night preceded the lower guidance by Applied Materials when it announced lower expectations for its second quarter.

Advanced Micro will announce its second quarter results on July 19 and the company now expects sales to decline as much as 11% from the first quarter of 2012 compared to previous expectations of a 3% increase.

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Alcoa Earnings Report Uneasy Start to Second Quarter (NYSE: AA)

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Investors already have a cautious stance in the market amid growing fears about the world's biggest economies, and Monday's Alcoa (NYSE: AA) earnings report didn't help.

The aluminum producer, which always kicks off the earnings season, delivered more of a punt than a kickoff. The Dow bellwether reported an 81.3% drop in profits, as the global slowdown and production cuts weighed on profits.

Reporting after Monday's market close, Alcoa said income from continuing operations came in at $61 million, or 6 cents a share, on revenue just a hair under $6 billion. While significantly lower than the same period a year ago, the lackluster results still managed to beat Wall Street's tepid expectations (analysts were looking for 5 cents on revenue of $5.8 billion).

Chairman and CEO Klaus Kleinfeld said in a statement following the earnings release, "Alcoa maintained revenue strength amid solid liquidity by driving high profitability in our mid and downstream businesses and by reducing costs and improving performance in our upstream businesses."

Contributing to the profit decline was a global glut resulting from stagnant and slowing growth in many areas around the world, especially China.

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GOP Slams President Obama's Taxmageddon Proposal

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Following a spate of moribund economic news and the looming Taxmageddon that could further derail the sluggish U.S. economy, President Obama called on Congress yesterday (Monday) for help.

President Obama proposed that Congress pass a one-year extension of the Bush-era tax cuts set to expire at year's end for households earning $250,000 or less. He suggested letting the cuts expire for the wealthiest bunch.

"We don't need more top-down economics," the president said in an early afternoon press conference at the White House. "We tried that theory…we can't afford to go back to it. That's why I believe it's time for the cuts for the wealthiest Americans, including myself, to expire."

The Bush-era tax cuts, set up as a temporary measure, are due to expire on Dec. 31, meaning if they do the majority of Americans will see a steep rise in taxes overnight. A number of other tax increases are also set to take effect, giving the event the ominous Taxmageddon moniker.

The implications are huge. Families living paycheck to paycheck, or unemployment check to unemployment check, will be even more strapped. The result is an almost certain recession.

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Central Banks are the Problem

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The Libor scandal is about to get a whole lot worse.

And that's the good news…

Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.

And that's bad news for central banks around the world.

Well, actually, it could be good news, as in really good news, if it's the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world's big banks.

First the good news.

It's already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on "panels" that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) "fixings" (not my word, but actually the established nomenclature for what it apparently is that they do… as in "fix" rates). And it's all under the auspices of the British Banking Association.

What's good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.

Still don't get why that's good news?

Because it's proof there are crooks out there.

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How Light Will Make the Web 85,000 Times Faster-and Power Blazing Fast Computers

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Since the dawn of the Internet, millions of users have dreamed of getting true high-speed connections.

Well, fasten your seat belts folks…

A new breakthrough promises to provide Web and other computer networks links that are 85,000 times faster than what we have today.

No, that's not a misprint. But it is so fast it's hard to get your mind around-especially for those of you who remember using phone lines to surf the web.

Back then it seemed you could take a break, paint your house, cut the grass and clean the kitchen — and still get back to your computer before it finished downloading a photo.

Forget video. That sounded like a sci-fi fantasy.

Admittedly, it's gotten quite a bit faster since then. Over the past decade millions of users around the U.S. have joined the broadband revolution. It's now becoming standard to link to the Web at speeds of at least 10 megabits per second, or about 175 times faster than dial up.

But even at those speeds, the magnitude of the change I'm describing is hard to fathom. But I'll try.

Think of it this way: If dial up was a one-story home, then today's broadband would stand almost twice as tall as the Empire State Building.

Yet, to equal what I'm calling Ultimate Broadband–or 85,000 times faster than what we have now– you'd have to string Empire State Buildings 1.3 times around the entire surface of the Earth!

Internet Speeds Beyond Belief

It works using twisted beams of infrared light.

Now you know why this innovation will be so crucial for the future of broadband communication and entertainment.

Having just upgraded my home theater, I can speak from personal experience. Super-fast connections are what's driving the next wave of home entertainment and data services.

And here's the thing: you won't need wires to take advantage of these incredible speeds.

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WellPoint (NYSE: WLP) Rides the Obamacare Profit Wave Even Higher

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Merger Monday lived up to its moniker today with news that WellPoint Inc. (NYSE: WLP), one of the largest U.S. health insurers, inked a deal to acquire Amerigroup Corp (NYSE: AGP).

The $4.9 billion deal would make the Indianapolis-based company the top private manager of Medicaid benefits.

The strategic move underscores WellPoint's bid to shore up its Medicaid business following the recent Supreme Court decision upholding Obamacare. The combined company will have a Medicaid business presence in 19 states, the largest in the nation.

The transaction is expected to close in early 2013. Under the terms of the all-cash deal, WellPoint will pay a lofty $92 a share for all outstanding shares of Amerigroup, a nearly 43% premium to the company's closing price prior to announcement.

WellPoint CEO Angela F. Braly said in a statement, "We believe that this combination will create an industry in the government sector serving Medicaid and Medicare enrollees. This is an opportunity to capitalize on the strengths of both companies to better serve our members and position our companies for future growth as the health insurance industry changes."

WellPoint has been on a buying spree of late. In May, the company purchased contact lens retailer 1-800-Contacts, and last year it picked up CareMore, a provider of managed care for the elderly.

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Four Things Suppressing Crude Oil Prices Today

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The collapse of talks between Iran and the "Big 6" (the five permanent members of the UN Security Council plus Germany) should have accelerated international crude oil prices.

And yes, they are higher.

But the real spike hasn't hit. Not yet.

The rising crisis atmosphere in the region and the genuine possibility that a fourth round of talks between the two sides will not even take place should have renewed the upward movement.

That hasn't taken place yet, either.

Oil prices are caught between the normal dynamics of geopolitical concerns – which push prices north – and continuing concerns over a global economic slowdown – which results in lowering expectations.

Now, this limbo is a delicate balance; it could change in a matter of hours.

We are likely to see a short-term rise Monday evening if the Norwegian oil and gas sector strike is not averted. Labor negotiations between Norway's oil workers and employers over pay and pensions failed – yet again – yesterday. The country is now just hours away from the first complete shutdown of its oil industry in decades. (Already, the strike has cut oil output by 13%, according to Reuters.)

Then there are the figures coming out from the Energy Information Administration (EIA) on Wednesday, which will almost certainly show a drawdown on U.S. inventories. Normally, that would also push up prices.

However, absent an Iranian move against the Strait of Hormuz or a major refinery accident somewhere in the world, the rise will be less than usual.

That's because right now, four things are tempering the oil price rise:

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Earnings Season Begins in the Stock Market Today

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Friday's negative jobs report is hanging over the stock market today as the markets opened lower Monday morning. Investors will look to corporate earnings of major companies this week as the second-quarter earnings season unofficially begins.

Even though some major companies such as Research in Motion Ltd. (Nasdaq: RIMM) and Nike Inc. (NYSE: NKE) have recently announced earnings, Alcoa (NYSE: AA) unofficially kicks off the market's second-quarter earnings.

Investors hope that earnings do not follow the disappointing trend set by RIMM and NKE, but many other companies have already issued lower guidance for the upcoming quarter. This does not bode well for the economy which is trying to shrug off manufacturing, jobs and consumer confidence reports that all point towards "Recession 2013."

Many analysts expect earnings to be weak across the board. Corporate profits are starting to feel the sting of economic concerns overseas and at home.

Later this week JPMorgan Chase (NYSE: JPM) and Well Fargo (NYSE: WFC) report their earnings as well as Google (Nasdaq: GOOG).

Troubles in Spain continue to impact the confidence of investors as the yield on the Spanish 10-year bond crossed the 7% mark again.

Along with Alcoa here are some other companies in the news today.

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This Gold Prices Cycle Shows We're Headed for a Rise

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The recent slide in gold prices has left investors puzzled over why the metal is not acting in the way it was intended: a safe haven from economic uncertainty.

But as Martin Grubb, managing director of investment for the World Gold Council, explained in a recent commentary for MarketWatch, it is not all that unusual for gold to experience a delayed reaction to macroeconomic events.

That's because gold is one of the very few assets that retains its value during tumultuous economic times. It is often the go-to holding investors sell when they need to raise cash, want liquidity, or are faced with margin calls. So events can trigger a gold sell-off and knock down prices before sending them soaring.

Grubb referenced Black Monday 1987 as a perfect example. The infamous day rocked markets the world over. Many feared it was a "financial Armageddon" as billions of dollars were erased from stock prices during the month of October.

Gold, instead of rising as market participants looked for safe haven assets, dropped as it was sold to raise cash to bolster accounts. It hit as low as $390 in the months that followed before rising to $484 by the end of 1988.

An even more extreme example of gold's liquidity role was the 1997-1998 Asian currency crisis. The Korean won was unacceptable in currency markets, so the Korean government stepped in and bought gold from locals in exchange for interest-bearing won-denominated bonds.

The Korean government sold the 250 tonnes of gold it received in the international market and was able to service its debt with the sales.

A more recent example of gold's initial sell off in a financial crisis is the Lehman Brothers bankruptcy in September 2008. Despite the bank's failure marking the credit crunch kick off, gold initially fell for a couple months as investors sold it for cash. Then it started a bull run that ran the price up 156% in three years.

Grubb wrote that we are currently in the infancy stage of a new crisis and gold's legendary behavioral pattern is repeating itself.

The precious metal is being liquidated to meet margin calls. In addition, it is believed the yellow metal is being lent into markets to provide ailing European banks with much needed liquidity.

"As a result, gold is not yet reacting to the worsening euro zone news and its current behavior is much like its behavior prior to and shortly after the Lehman bankruptcy," Grubb wrote.

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Don't Let Wall Street Play You For a "Fool"

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If you're like me when you go out shopping, you look for deals. You watch for sales. And you search out bargains. Why pay full price when you can get the same item at a hefty markdown?

That's an economic concept known as "price elasticity." This "rule" essentially says (and I'm dramatically oversimplifying this) that when the price of a product rises, demand for it falls.

But here's the part of this "law" that I really find fascinating: When it comes to the "real-world" products and services that you and I purchase, there are no exceptions.

Except for the stock market.

Time and again during my 30-year career as a financial journalist, I've watched this play out.

When stocks are cheap, nobody wants them (by "nobody," I'm referring to individual investors). But once stocks move, and the higher they go, the more individual investors want to buy them.

Need an example? Think back to the dot-com madness of 1999 and 2000; the higher they soared, the more investors had to have them.

Economists refer to this exception to the law of price elasticity of demand as the "bandwagon effect." But there's a better term: The "Greater Fool Theory," which demonstrates how Wall Street uses the retail investor.

That's right … uses. Those experts have labeled this as the Greater Fool Theory because there's always some other ("greater") fool to unload the stock on – at least until the retail investor decides not to play.

You see, the retail investor is the designated loser – the ultimate "Greater Fool."

Think of it as a game of musical chairs – but one in which the outcome is predetermined: Wall Street investment banks set this game up so the retail investor gets left holding the bag.

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