IMF Gold Sales – Much Ado About Nothing
February 26th, 2010 | Posted by goldFinmarket, a Russian news agency, reported that China has confirmed the intention to purchase 191.3 tons of gold from the International Monetary Fund at an open auction. The author came out an hour later to state that she did not have confirmed official sources, although the IMF declined to comment.
Many investors, myself included, considered the IMF gold sales to be much ado about nothing. I figured that if the IMF really did offer up physical gold, China or another country would step up eagerly to reduce their exposure to increasingly toxic fiat dollars. I still feel this to be the case, but certainly understand why Chinese authorities would not want the news leaked before the purchase. They could be forced to pay a much higher price for those 191 tonnes if the market moves first. However the dust settles on this story, I believe precious metals are certain to make new highs before the end of the year.
World central banks started to increase their gold reserves after prices on gold began to climb in 2001. The IMF sells gold within the scope of a program to diversify sources of income and achieve an increase in lending.
The IMF announced an intention to sell 403.3 tons of gold in accordance with the adequate decision made by the board of directors of the fund in September of 2009. India, Mauritius and Sri Lanka purchased about 212 tons of the amount at the end of 2009. India purchased most – 200 tons.
China’s interest in international trade is connected with the development of the nation’s economy, as well as with the growing consumer demand in the country.
“Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market. China is interested in the development of the domestic consumer market,” the agency reports.
Article Source.
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Why China’s Rumored IMF Gold Purchase, If True, Would Be Highly Significant
February 26th, 2010 | Posted by goldA yet to be verified story from Rough & Polished, a Moscow based website, reported that China had “confirmed its decision to acquire 191.3 tons of gold auctioned by the International Monetary Fund.” Of course, until official confirmation comes from China, no one will really know if this story is true or not. However, if true, here’s why this story would be hugely significant to the gold market.
One, such a purchase would give more validity to the theory that China, with a vested interest in the price of gold today, is willing to intercede and support gold prices whenever they are being attacked by the US Federal Reserve and Bank of England through their manipulation of fraudulent gold futures markets in London and New York.
Two, it would further support exposing the gold futures markets in London and New York as nothing more than a gold fractional reserve playground that allows the western banking cartel to manipulate gold prices. The last available Commitment of Traders reports indicated that the Commercials were short 663.83 metric tonnes of gold. This position is supposed to be fully deliverable by the Commercials should the offsetting longs ask for delivery. Even though the Commercials very likely hold some of the offsetting longs through spread positions, that short position still represents a ton (no pun intended) of gold – gold, that according to COMEX regulations, must be available for physical delivery.
However, if an incredibly large tonnage of physical (not paper) gold were really available for purchase on the COMEX, why would China feel an urgency to take delivery of a mere 191.3 tonnes of gold now through the IMF? Could it be because India “scooped” them the last time the IMF made a gold sale and China does not wish to be left twisting in the wind again with very little physical gold available for delivery in the global futures markets? If the China IMF gold story were true, the above would be plausible reasons for China acting now rather than later.
Remember, last week in my article “IMF Gold Sales v. the Alchemy of Gold Futures”, I stated,
”If you were India, China or the United Arab Emirates and you wanted to buy 200 tonnes of gold at the price established in futures markets, but you knew that there was no possible situation whereby 200 tonnes of gold would ever be delivered to you via the futures markets, what would you do? Would you buy 200 tonnes of gold in the futures markets only to know that you would suffer a default of this delivery and likely be forced to pay a much higher price in the future or would you try to arrange to buy 200 tonnes of gold NOW from the IMF or another Central Bank? Of course, you would choose the latter tactic.”
If it turns out that this story is true, then apparently the Chinese government agrees with me. Also remember that China, as the world’s largest producer of gold, is likely to keep the vast majority of its future gold production in house. Thus if China is still turning to the outside market to buy its gold to buttress its gold reserves in addition to its internal production, then this story is very bullish for the long-term future of gold.
Three, if this story is later confirmed to be true, only an inside Chinese source could have leaked this story. No inside source would have leaked this story unless the deal had already been sealed, as such information pre-sale would be very detrimental to China as it would lead to a higher purchase price. If this story is true, this again, lends credence to the theories that China now serves as a very important counter to the gold price suppression schemes of the western banking cartel. Remember, as recently as five years ago, the western banking cartel essentially faced ZERO opposition to its price suppression schemes in gold and silver. Thus, the emergence of a powerful opposition force would be a huge development to the gold market.
Finally, if this story were confirmed, then this event would likely allow gold as well as mining stocks to form a bottom in preparation for a move higher. Though the agents of the western banking cartel always like to paint gold supporters as a fringe lunatic movement that perpetually believe gold is heading to $10,000 an ounce tomorrow, this is the farthest possible representation of reality. I have always found supporters of gold to be among the most well informed people in the world in regard to understanding how stock market and futures manipulation schemes operate versus those that remain blind to this reality.
To dispel the notion that gold supporters never recognize and play the downside of rapid downward corrections in precious metal, on February 22nd, more than 10 hours before New York markets opened, I sent an alert to my subscribers in which I stated,
“Even if gold futures rise as high as $30 a day in Asia today [gold futures were up $9 an ounce at the time in Asia], a selloff in London and New York today or tomorrow [February 22& 23, 2010], given the action in gold futures and gold stocks last week, would still not surprise me one bit. Of course, if this happens, and I think it is likely to happen, then we could see some more weakness in gold stocks to begin this week before they resume their rise.”
And this is exactly what has happened thus far. Though we are not yet out of the woods in terms of this current gold and silver correction, the China story, if confirmed, could be the trigger to put in the bottom for this current correction.
Of course, if this story later turns out to be unfounded, then it may trigger a continued temporary, albeit likely brief, further slide in gold prices. In conclusion, though on the surface China’s yet to be confirmed purchase of gold from the IMF seems to be just a passing note unworthy of attention, if it turns out to be true, we may very well look back at this event as marking a crucial turning point in the gold market.
Disclosure: No position
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With continued worries over budget crises in the “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) and their rapidly deteriorating fiscal conditions, the future of the euro zone’s common currency has been called into question. Most of attention has focused on Greece, where double digit budget deficits threaten to grind the government to a halt and spread throughout the region. While some are pushing for a Greek bailout, others worry about the signal this action might send to other troubled economies across the Mediterranean. Greece’s richer counterparts certainly aren’t happy about the idea of a bailout, especially in Germany where in a recent poll 53% demanded that Greece be thrown out of the euro zone if they can’t solve their problems without outside funding.
Some are even calling for the end of the euro or are pushing for stronger members, such as France and Germany, leave the common currency before it drags down their economies too. On the other end of the spectrum, some economists have proposed that weaker countries, such as Spain, could actually benefit from leaving the euro zone. Such a move would permit a devaluation that would instantly increase global competitiveness and spur the national economy.
All of these concerns have chipped away at the value of the euro since hiting a 52 week high of $1.51 in late November. In fact, the euro has lost more than 10% against the dollar since the first of the year. While there are some obvious beneficiaries to a weak euro, such as PowerShares DB USD Index Bullish Fund (UUP), weakness in the currency could potentially impact several other ETFs as well. Below, we highlight five ETFs that could be impacted by the euro’s future.
As the second largest exporter in the world and by far the largest exporter in the EU, Germany stands to greatly benefit from a weaker euro. As the French Finance Minister recently pointed out, a weak euro is good for exporters, and Germany’s inclusion in the euro zone has likely prevented exports from becoming uncompetitive in the global markets. EWG contains 51 firms that are based in Germany and some of its largest holdings include industrial giants and exporters. Siemens (9.9%), pharmaceutical giant Bayer (7.4%), and BASF (6.9%) all have big allocations in the fund. For sectors, the largest is financials at 18.6% but industrials, materials, and consumer discretionary firms combine to make up nearly 40% of the fund.
Many destinations in Europe are among the most popular in the world for tourism, and a weak euro makes sightseeing in Paris or Rome much more attractive to American consumers. A stronger dollar could also slice into oil prices, which would boost profits for airlines. One option to play this trend is FAA, which focuses on passenger airlines around the world. Even though the fund has allocations to European and Asian airlines, the vast majority of its assets, 75%, are in American airlines that could benefit from a cheaper euro zone.
Recently, there has been talk of sharply downgrading Greek debt below its current rating of BBB+. This could push Greek debt below the investment grade threshold, which would have a devastating effect on interest rates in Greece. Furthermore if the trouble spreads to other, larger countries, such as Italy and Spain, it could further drag down the euro and make investors wary of investing in euro-denominated bonds. This could cause an exodus from EU bonds for the relative safety of U.S. Treasuries. TLT focuses on long-term treasury bonds, which in addition to benefiting from potential deflation stand to gain the from increased fears over the state of the euro zone. Of course, TLT and other long-term bond ETFs will also be impacted (perhaps more significantly) by the Federal Reserve’s actions.
A falling euro makes goods from Europe less expensive in foreign currencies, which will make it easier for consumers, especially in North American and emerging Asian countries, to consume luxury goods. This could boost sales for the many luxury firms that are based in continental Europe, particularly those that generate a major portion of their revenue from overseas. ROB focuses on these luxury goods with a global scope, holding 32 different securities, the vast majority of which are in the consumer discretionary sector. As far as European holdings go, ROB has 27.9% in France, 12% in Germany and 7% in Italy. With emerging Asian consumers and a weaker euro making the products of nearly 45% of this fund’s holdings cheaper, the future could be bright for ROB and its European exporters.
When the euro was strong relative to the dollar, we saw a slew of hostile takeovers from European companies, such as the acquisition of Anheuser-Busch by Belgian beer giant InBev (BUD). A strong dollar may result in a reversal of this trend that will see a wave of U.S. buyouts of European companies (Kraft’s (KFT) Cadbury (CBY) plan indicates this may already be under way). If M&A activity does ramp up, MNA could become an interesting play. This ETF that seeks to achieve capital appreciation by investing in global companies for which there has been a public announcement of a takeover by an acquirer. The fund does this by owning certain announced takeover targets, with the goal of generating returns that are representative of global merger arbitrage activity. In addition, the fund includes short exposure to global equities as a partial equity market hedge, currently in the form of the ProShares Ultrashort MSCI EAFE (EFU).
Disclosure: No positions at time of writing
About the author: Eric Dutram
ETF Study: Liquidity Explained
February 26th, 2010 | Posted by etfA new study about exchange traded funds (ETFs) tries to shed light on how common notions of liquidity in ETFs are not determinants on the true liquidity of an ETF. By having the right know-how, an investor may move large positions through the ETF market with relatively little impact.
It is most commonly asserted that investors should avoid funds with fewer than $100 million in assets and average daily trading volume of lower than 100,000 shares, comment Paul Daley, Phil Dorencz and Dan Bargerstock for IndexUniverse. But is it really that simple? For their study, they try and define true liquidity of ETFs as a combination of the ETF’s average daily trading volume and the average daily trading volume of the underlying securities. [Creation and Redemption Explained.]
ETFs are said to trade in an arbitrage or derivative market. The value of ETFs come from the value of the securities that underlie them. Underlying securities have values that are determined in an outright market, and the ETF’s value is expressed in relation to those securities. Deviation from the arbitrage-free price in the ETF provides an opportunity for profit to those savvy enough to take advantage of the deviation. [What Is ETF Liquidity?]
An ETF arbitrage process involves a creation/redemption process. Authorized participants, or APs, can “create” or “redeem” shares of the fund, thereby increasing or decreasing the number of shares outstanding in the market to accommodate shifting demand for the fund. APs create new shares of an ETF by swapping a basket of securities to the ETF sponsor for an equivalent value of newly created fund shares, and the AP can turn in ETF shares for securities. If the fund shares are trading at a discount to the fund’s net asset value (NAV), an AP buys the basket at NAV and shorts the fund shares above NAV at the same time. The AP would then exchange the basket for fund shares to cover its short position and lock in a profit.
For more on the results of the study, visit the story at Index Universe.
Max Chen contributed to this article.
About the author: Tom Lydon
10 Overvalued Closed-End Funds
February 26th, 2010 | Posted by etfBased on the average historical premium/discount of 595 closed-end funds (CEFs) with 5 or more years of continuous operations, the following 10 CEFs (table below) have the largest deviation from their average historical premium/discount.
If these stocks were to gravitate to their historical mean, all other things being equal, the average share price would decline 23.1%.
The average premium/discount spread (current discount – average historical discount) for all 595 CEFs was 2.7%. The average for the 10 CEFs in the table below is 29.4%. 
(Click to enlarge)
Gravitation to the Mean: One powerful investment trend is called “gravitation to the mean.” In the case of CEFs, this simply means that over the long-haul these stocks will have a tendency to move towards their average historical premium/discount.
Commonality of Composition: Four of the top 10 CEFs listed above are sponsored by Pimco, and two are Cornerstone related funds. In a yield barren investment environment, investors seeking income have pushed up the share prices of CEFs with high distribution yields. They’ve done this with little regard for the share price relationship to its NAV and apparently without concern regarding the composition of the distribution.
And the Losers Are: In the case of both Cornerstone funds (CRF) and (CLM) and the Gabelli Utility Trust (GUT), the distributions are made up almost entirely of return-of-capital (ROC) distributions. The column “DistrYld” in the table is the total distribution including net investment income, capital gains and ROC. The column entitled “DistrYldNII” excludes estimated ROC. In the case of the aforementioned CEFs, the DistrYldNII is sub -1% return-on-investment. The balance just gives you your own money back.
Pimco: Pimco manages four of the 10 CEFs with the largest deviation from their respective means. One could possibly understand why investors might be comforted by that fact. Additionally, Pimco CEFs are still generating an attractive yield after the ROC distribution is eliminated from the distribution calculation (DistrYldNII).
An Investment Mystery: However, the two Cornerstone funds that are selling at a premium are an investment mystery. There appears to be no investment thesis to support their premiums other than nominal yield.
Particularly puzzling is the Cornerstone Total Return Fund (CRF). The fund has only $21 million dollars in assets; its investment portfolio is essentially large cap stocks, which you could buy cheaper and with more liquidity in the S&P 500 EFT (SPY); its return-on-investment yield of less than 1% (DistrYldNII); it’s thinly traded (average daily volume 20,000 shares). Yet it trades at a 45% premium versus its average year-end historical premium of 3.6%. Based on this information alone, CRF should be selling at a significant discount to NAV—not at a premium.
Bringing in the Calvary: Additional support for this position is provided by a Wall Street Journal article entitled: “High Yields Aren’t Always a Good Thing” (2/20/10). It spoke of investors chasing nominal high-yields of CEFs with large premiums.
One of its focuses was on Gabelli Utility Trust (GUT). It noted that while 90% of its distribution was a ROC, it still traded at a 60% premium. The following quote is from that article by GUT’s manager, Mario Gabelli on those very topics:
One could argue whether that’s good or bad. But I personally think the premium is unsustainable. It’s off the wall.
I wonder if Bill Gross would agree with Mario’s conclusion regarding Pimco’s CEFs in the table above.
Caveats: The return-of-capital portion of a CEFs distribution is typically estimated during the year in which it is made and is then finalized at year’s end. The ROC calculations could change materially upon closing of the 2009 books for these CEFs. Additionally, using a shorter, uniform average historical premium/discount rather than since inception for each of the CEFs may have produced different results.
Disclosure: No positions
About the author: Joe Eqcome
Why Investors Are Watching Short Treasury ETFs
February 26th, 2010 | Posted by etfYesterday’s moves aside, leveraged ETFs that seek to profit when Treasury prices decline have done well this month as investors continue to worry about big deficits, further rate hikes, inflation and rampant spending.
Rising interest rates and the threat of inflation has bond investors, for the most part, fleeing the scene. John Spence for MarketWatch says the following types of funds are letting investors bet against the longer-dated Treasury shares, which could get hit as the Federal Reserve hikes rates in the future:
Last week, the Federal Reserve upped the emergency loan rates they charge banks. While these rate hikes don’t affect consumers or corporations, the move did put investors on alert for an eventual reality: someday, record low rates are going to go back up. When they do, billions that have been stashed in Treasuries during the financial crisis could be lost. Enter short Treasury ETFs.
Rate hikes could be far off, though. Federal Reserve Chairman Ben Bernanke reiterated on Wednesday that the central bank wouldn’t raise them until the economy was on firmer ground.
Leveraged and inverse ETFs are not for everyone. They’re meant to reflect the daily moves of the market; to hold them longer is to risk them veering further away from their benchmarks. This effect is heightened in volatile markets.
About the author: Tom Lydon
7 ETFs for Latin America’s Recovery
February 26th, 2010 | Posted by etfLatin America isn’t content to just sit back and let the recovery happen to its ETFs. The region is taking matters of growth into its own hands, joining forces with Caribbean nations to discuss forming a bloc that would promote better economic well-being.
The Getulio Vargas Foundation (FGV) and the Institute for the Economic Research at the University of Munich have conducted a study and found that Latin America has entered a period of “good” recovery, according to People’s Daily Online.
Latin America registered an Economic Situation Indicator (ICE) of 5.6 in January 2010, compared to 5.2 in October – ICE levels go from one to nine and any figure above a five represents positive economic signals. Latin American countries that registered an ICE above 5.0 include Brazil at 7.8, Chile at 7.4, Peru at 7.3, Uraguay at 7.0 and Argentina at 5.3.
With that, representatives of 32 countries are meeting in Cancun, Mexico in an attempt to create a regional organization that excludes the United States and Canada, reports Tracy Wilkinson for The Los Angeles Times. The new bloc is expected to promote better integration and shared economic development among Latin American and Caribbean countries.
For more information on Latin America, visit our Latin America category. If you’re interested in investing in Latin America, take a look at the ETFs below. Narrower funds may give you more pure-play exposure to various countries in the regions, while the broader ones lower your overall risk.
Max Chen contributed to this article.
About the author: Tom Lydon
Stock Picks: AIG, Palm, Wynn Resorts, Fluor
February 26th, 2010 | Posted by stock2-26-2010 American International Group Inc.: Standard & Poor’s equity analyst Catherine Seifert maintained a hold recommendation on shares of American International Group Inc. (AIG) on Feb. 26.
AIG, the insurer rescued by the U.S., posted a fourth-quarter loss on Feb. 26 on charges tied to paying down its bailout debt and boosting commercial insurance reserves. The net loss of $8.87 billion, or $65.51 a share, narrowed from $61.7 billion, or a reverse-split adjusted $458.99, a year earlier when AIG posted the biggest loss in U.S. corporate history. The operating loss, which excludes some investment results, was $53.23 a share, missing the $3.94 average loss estimate of three analysts surveyed by Bloomberg.
Seifert said in a posting on the S&P MarketScope service that AIG’s fourth quarter operating loss per share of $52.53, vs. a $287.69 loss one year earlier, and full-year $46.40 loss, vs. a $395.28 loss, reflected numerous unusual items excluded from her operating EPS estimates of $2.00 for the fourth quarter and $3.51 for all of 2009.
“Our takeaway from these results is that AIG’s core insurance units remain weak, and that a high degree of execution risk remains in AIG’s turnaround strategy, the analyst wrote.
Seifert cut her price target on the shares by $2 to $30, under the assumption that AIG trades at a discount to its stated book value. Seifert said she believes AIG’s tangible common equity, which was a deficit of $162.06 per share at Sept. 30, is still negative.
Palm Inc.: BMO Capital Markets analyst Tim Long maintained an underperform rating on shares of Palm Inc. (PALM) on Feb. 26.
Palm, the maker of the Pre phone, said after the close of trading Feb. 25 that sales this year will be “well below” its forecast because customers aren’t buying devices as quickly as expected. The company had initially projected sales of at least $1.6 billion for the year ending in May. Revenue in the fiscal third quarter will be $310 million at most, Palm said. Analysts projected $409.3 million, according to the average estimate in a Bloomberg survey.
In a Feb. 26 note, Long said that Palm’s update third-quarter revenue guidance was well below his estimate of $379 million and even further below the Wall Street consensus view of $425 million. Long also noted that Palm indicated that fiscal 2010 revenues would fall below its previously forecasted range of $1.6 billion to $1.8 billion.
Long said he believes the company expected Verizon Wireless to drive increased revenue in the second half of fiscal 2010. “[w]e believe sell-through has lagged because carrier promotion was limited, and Palm is shipping what is essentially a six-month old device [the Pre] with limited differentiation,” the analyst said. Long added that he thinks Palm now has “sizeable” channel inventory issues at Sprint and Verizon, “which will make for an even tougher fourth-quarter as their lineup ages”.
The analyst lowered his pro forma estimates for fiscal 2010 to a loss of $1.36 per share from a loss of $1.04; and for fiscal 2011 to a loss of $1.11 per share from a loss of 87 cents. He also lowered his price target on the shares to $5 from $9.
Wynn Resorts Ltd.: Oppenheimer analyst David Katz reiterated an outperform rating on shares of Wynn Resorts Ltd. (WYNN) on Feb. 26.
Wynn Resorts, the casino company founded by Steve Wynn, reported fourth-quarter earnings on Feb. 25 that missed analysts’ estimates after Las Vegas room rates tumbled. Excluding some items, profit of 8 cents a share fell short of the 14-cent average of 12 analysts’ estimates compiled by Bloomberg. The company reported a net loss of $5.22 million, or 4 cents, compared with loss of $159.6 million, or $1.49 a share, a year earlier, which included additional tax costs.
Wynn Resorts’ quarterly results were in line with his expectations for weakness in Las Vegas and strength in Macau, Katz said in a Feb. 26. “We maintain our thesis that the Las Vegas Strip will remain pressured over the next 12-24 months, given the inflow of supply from the opening of CityCenter and economic weakness,” he wrote.
Despite the unstable environment on the Las Vegas Strip, Katz said he believes that Wynn’s exposure to the Macau market provides strong earnings in the present and future growth opportunities. He also said the company’s recently completed Hong Kong IPO positions it as “the best capitalized casino company in the industry”.
The analyst increased his price target to $74 from $73.
Fluor Corp.: R.W. Baird analyst Andrea Wirth lowered a rating on shares of Fluor Corp. (FLR) to neutral from outperform on Feb. 26.
On Feb. 25, Fluor, the largest publicly traded U.S. construction company, lowered its 2010 earnings forecast. Earnings per share this year will be $2.80 to $3.20, lower than an earlier forecast of $3.20 to $3.60, the company said in its fourth-quarter earnings report. Analysts projected $3.42, the average of 18 estimates in a Bloomberg survey.
Wirth said in a Feb. 26 note that the company’s fourth-quarter earnings per share of 82 cents compared with her estimate of 92 cents and the 88 cents consensus estimate of Wall Street analysts, noting lower profitability vs. her expectations. Wirth noted that the company’s backlog declined 4.5% sequentially, below management’s expectations for “meaningful reacceleration”. Wirth said Fluor cut 2010 EPS guidance by 12% at the midpoint to $2.80 to $3.20, vs the $3.46 Wall Street consensus view.
Wirth said Fluor’s margins are also expected to be negatively impacted as the company continues to thrive in the lower-margin mining sector, but will continue to see declining revenue in the relatively higher-margin oil and gas sector.
The analyst cut her price target on the shares to $47 from $59.
Picks of the Week: Apple, Home Depot, Kraft, Lowe’s
February 26th, 2010 | Posted by stock2-26-2010 Notable Wall Street analyst opinions on stocks in the news for the week of Feb. 22-Feb. 26:
Feb. 22
Lowe’s Cos.: Oppenheimer analyst Brian Nagel maintained an outperform rating on shares of Lowe’s Cos. (LOW) on Feb. 22.
Lowe’s, the second-largest U.S. home-improvement retailer, posted fourth-quarter profit on Feb. 22 that exceeded analysts’ estimates. Net income rose 27% to $205 million, or 14 cents a share, from $162 million, or 11 cents, a year earlier. Analysts projected 12 cents, the average of estimates in a Bloomberg survey.
In a Feb. 22 note, Nagel said he looked “very favorably” upon the better-than-expected fourth-quarter results, noting that sales trends at the chain accelerated from prior periods and “presumably improved through the quarter”. Nagel said better than forecast gross margins suggest a sales mix shift to more profitable products, and that improving sales trends more than offset somewhat higher expenses.
“We look upon LOW’s new $5 billion share repurchase authorization as a significant vote of confidence from management and the board,” said Nagel.
The analyst has a 12-18 month price target of $32 on the shares.
Schlumberger Ltd.: Morgan Stanley analyst Ole Slorer maintained an overweight rating on shares of Schlumberger Ltd. (SLB) on Feb. 22.
On Feb. 21, Schlumberger, the world’s largest oilfield-services company, said it will buy Smith International Inc. for about $11 billion in an all-stock transaction, gaining sole ownership of the biggest drilling-fluids provider. Smith (SII) holders will get 0.6966 Schlumberger share for each share they hold, the companies said in a statement. Based on Schlumberger’s Feb. 19 closing price, the purchase is valued at $11 billion.
Slorer said in a Feb. 22 note that he believes Smith is a “natural fit” for Schlumberger. The analyst said the Smith acquisition will position Schlumberger as the dominant service company in deepwater and global shale gas developments –”two pillars of the next energy cycle, in our view”. The analyst does not expect a second suitor to make a rival bid for Smith.
Slorer said he would use short-term weakness in Schlumberger stock as an opportunity to accumulate the shares in what he expects to be a “highly accretive” transaction over the long run. He anticipates the transaction will close before the end of 2010, as announced by Schlumberger.
The analyst has a $130 price target on Schlumberger shares.
Feb. 23
Home Depot Inc.: Bank of America Merrill Lynch analyst Alan Rifkin reiterated a buy rating on shares of Home Depot Inc. (HD) on Feb. 23 after the largest U.S. home-improvement retailer reported a fourth-quarter profit that topped analysts’ estimates and raised its dividend for the first time since 2006.
On Feb. 23, Home Depot said net income totaled $342 million, or 20 cents a share, in the three months ended Jan. 31, compared with a loss of $54 million, or 3 cents, a year earlier. Excluding some items, earnings were 24 cents a share, above the 16 cent average of 25 estimates compiled by Bloomberg.
Rifkin said in a note that the company’s earnings per share excluding items were 9 cents ahead of his 15 cents estimate, and above the company’s earlier guidance of 13 cents. He noted that gross margin increased 32 basis points to 34.41%, while the company’s earnings before interest and taxes (EBIT) margin increased 52 basis points to 4.99%.
Rifkin said Home Depot posted same-store sales growth of 1.2%, vs. his -4% estimate. , marking the first positive comparison since the first quarter of 2006. He estimates that store traffic increased 2.9%, while the average sales ticket declined 1.7%, to $50.01.
The analyst said Home Depot management expects 2010 earnings per share (EPS) of $1.79, a 15.5% increase, with same-store sales growth of 2.5%. Reflecting better-than-expected fourth-quarter results and the company’s 2010 outlook, Rifkin raised his EPS estimates for 2010 to: $1.79 from $1.75; for 2011 to $2.12 from $2.00; and for 2012 to $2.35 from $2.25.
The analyst said Home Depot remains one of his top picks for 2010. He has a $35 price target on the stock.
Kraft Foods Inc.: Credit Suisse analyst Robert Moskow said on Feb. 23 that the firm was reinstating coverage on shares of Kraft Foods Inc. (KFT) with an outperform rating.
In a note, Moskow said he was forecasting EPS of $2.15 for 2010 and $2.45 for 2011, both above the respective Wall Street consensus estimates of $2.10 and $2.31. The analyst said he finds “the risk-reward attractive because of potential upward momentum in operating margins over the next 12 months fueled by acquisition synergies”. Kraft is in the process of acquiring British confectioner Cadbury.
“Kraft plus Cadbury is now a $50 billion company with much more scale and exposure to developing markets,” the analyst wrote.
Moskow has a price target of $35 on the shares.
Feb. 24
Apple Inc.: Kaufman Bros. analyst Shaw Wu reiterated a buy rating on shares of Apple Inc. (AAPL) on Feb. 24.
In a note, the analyst said that based on his industry and supply chain checks, “[w]e are picking up that supplies of MacBook Pro in the distribution channel are becoming fairly limited at two to three weeks vs. a more normal four to six weeks”. Wu said he believes this could be due to strong demand “and/or a pending product refresh” as inventory levels are worked down.
Wu also said he has noticed that Intel is shipping in volume its next-generation of mobile processors, codenamed Arrandale, based on its Nehalem architecture for servers. The new mobile architecture features “much better performance through hyper-threading and turbo mode, battery life, and weight characteristics, which we believe give AAPL engineers more room to further differentiate the MacBook Pro”, said Wu. “We believe new Mac models could ship in the March quarter, or at the latest the June quarter”.
The analyst said he believes a refresh of the MacBook Pro makes sense, as the last time it was updated was in June 2009 and its entry-level $1,199 model has some overlap with the $999 MacBook, which was refreshed in October 2009 ahead of the holiday selling period.
“We continue to believe that Apple is positioned to outperform in this tough macroeconomic environment with its defensible strategic and structural advantages and its vertical integration,” Wu wrote.
The analyst has a $253 price target on the shares.
Medco Health Solutions Inc.: BMO Capital Markets analyst Dave Shove reiterated his outperform rating on shares of Medco Health Solutions Inc. (MHS) on Feb. 24.
Medco, the largest U.S. pharmacy benefits manager by revenue, said on Feb. 23 that fourth-quarter earnings rose 24% as the company’s more-profitable business supplying mail-order generic drugs expanded. Net income climbed to $341.5 million, or 70 cents a share, from $274.4 million, or 54 cents a share. Earnings excluding one-time items were 76 cents a share, beating the average estimate of 75 cents from 26 analysts surveyed by Bloomberg. The company reaffirmed fiscal 2010 earnings per share (EPS) guidance of $3.28-$3.38.
Shove said in a note that Medco produced a “solid” fourth-quarter performance, contributing to record results in fiscal 2009. He noted that “80% of 2010 renewals have been completed, generic penetration continues to grow, and new sales are still rolling in”. He said the company continues to invest in new business platforms to fuel future growth.
“We like the story, we like the model, and we really like the earnings trajectory,” Shove wrote. His forecasts call for EPS estimates of $3.34 for 2010 and $4.10 for 2011, representing earnings growth of 15% and 23%, respectively.
The analyst also reiterated his $80 price target on the shares.
Feb. 25
Goodyear Tire & Rubber Co.: KeyBanc Capital Markets analyst Saul Ludwig maintained a buy rating on shares of Goodyear Tire & Rubber Co. (GT), the biggest U.S. tiremaker, on Feb. 25.
In a note, Ludwig said that the company’s fourth-quarter 2009 earnings per share (EPS) of 14 cents, reported on Feb. 18, topped his estimate of 4 cents. “In general, there were no major 4Q09 surprises, but rather than dissecting 4Q09 further, we believe what lies ahead is much more important,” the analyst wrote.
Ludwig noted that on Feb. 24, the company promoted Richard J. Kramer to chief executive officer to replace Robert J. Keegan, who will remain as executive chairman. “Kramer is smart, has strong interpersonal skills, is strong in finance and has exceptional support from his team members at GT,” Ludwig wrote. “We view this expected promotion of Mr. Kramer to CEO as a positive move for GT and its management team”.
Important factors in the company’s earnings for 2010 will be its ability to price its products to offset raw material cost increases in the second half of the year and its success in mitigating currency devaluation in Venezuela, Ludwig said. He said improving demand, low fill rates (i.e., shortages) and inventories at 10-year low levels “will pave the way for GT — and its competitors — to increase prices this spring”. The analyst also noted favorable potential for several new, higher margin products.
Ludwig lowered his 2010 EPS estimate from $1.00 to $0.85. His first-quarter 2010 estimate remains a loss of 7 cents; he set an initial estimate for 2011 of $1.50 EPS.
“We remain positive in our view toward GT,” Ludwig said. He maintained his $19 price target on the shares.
Limited Brands Inc.: Cowen & Co. analyst Laura Champine reiterated a neutral rating on shares of Limited Brands Inc. (LTD) on Feb. 25.
On Feb. 24, the owner of Victoria’s Secret and Bath & Body Works chains reported fourth-quarter profit excluding some items of $1.01 a share. The average analyst estimate in a Bloomberg survey was 99 cents a share.
In a note, Champine said that Limited’s fourth-quarter EPS was four cents ahead of her estimate, on previously announced same-store sales growth of 1% vs. a 10% decline one year earlier. She said Limited’s gross margin of 40.8% was 90 basis points higher than her estimate.
“We believe that tighter inventory management limited the need for the massive markdowns seen in Q4 [of 2008] and boosted merchandise margins,” Champine said. “[W]e would not expect to see any meaningful operating expense leverage in FY10″.
Champine said Limited’s management expects first-quarter operating EPS to be 5 cents to 10 cents on total company same-store sales growth of 2%; the company’s guidance for fiscal 2010 stands at $1.40 to $1.60. Limited also revised its February same-store sales outlook from flat to a high single-digit to low-double-digit increase, which may imply “very strong” Valentine’s Day sales this year, the analyst said.
Champine raised her first-quarter operating EPS estimate by 2 cents to 6 cents and expects operating EPS of $1.44 in fiscal 2010, 2 cents above the Wall Street consensus view. Her fiscal 2011 operating EPS estimate of $1.52 is 11 cents below the consensus view.
Feb. 26
American International Group Inc.: Standard & Poor’s equity analyst Catherine Seifert maintained a hold recommendation on shares of American International Group Inc. (AIG) on Feb. 26.
AIG, the insurer rescued by the U.S., posted a fourth-quarter loss on Feb. 26 on charges tied to paying down its bailout debt and boosting commercial insurance reserves. The net loss of $8.87 billion, or $65.51 a share, narrowed from $61.7 billion, or a reverse-split adjusted $458.99, a year earlier when AIG posted the biggest loss in U.S. corporate history. The operating loss, which excludes some investment results, was $53.23 a share, missing the $3.94 average loss estimate of three analysts surveyed by Bloomberg.
Seifert said in a posting on the S&P MarketScope service that AIG’s fourth quarter operating loss per share of $52.53, vs. a $287.69 loss one year earlier, and full-year $46.40 loss, vs. a $395.28 loss, reflected numerous unusual items excluded from her operating EPS estimates of $2.00 for the fourth quarter and $3.51 for all of 2009.
“Our takeaway from these results is that AIG’s core insurance units remain weak, and that a high degree of execution risk remains in AIG’s turnaround strategy, the analyst wrote.
Seifert cut her price target on the shares by $2 to $30, under the assumption that AIG trades at a discount to its stated book value. Seifert said she believes AIG’s tangible common equity, which was a deficit of $162.06 per share at Sept. 30, is still negative.
Palm Inc.: BMO Capital Markets analyst Tim Long maintained an underperform rating on shares of Palm Inc. (PALM) on Feb. 26.
Palm, the maker of the Pre phone, said after the close of trading Feb. 25 that sales this year will be “well below” its forecast because customers aren’t buying devices as quickly as expected. The company had initially projected sales of at least $1.6 billion for the year ending in May. Revenue in the fiscal third quarter will be $310 million at most, Palm said. Analysts projected $409.3 million, according to the average estimate in a Bloomberg survey.
In a Feb. 26 note, Long said that Palm’s update third-quarter revenue guidance was well below his estimate of $379 million and even further below the Wall Street consensus view of $425 million. Long also noted that Palm indicated that fiscal 2010 revenues would fall below its previously forecasted range of $1.6 billion to $1.8 billion.
Long said he believes the company expected Verizon Wireless to drive increased revenue in the second half of fiscal 2010. “[w]e believe sell-through has lagged because carrier promotion was limited, and Palm is shipping what is essentially a six-month old device [the Pre] with limited differentiation,” the analyst said. Long added that he thinks Palm now has “sizeable” channel inventory issues at Sprint and Verizon, “which will make for an even tougher fourth-quarter as their lineup ages”.
The analyst lowered his pro forma estimates for fiscal 2010 to a loss of $1.36 per share from a loss of $1.04; and for fiscal 2011 to a loss of $1.11 per share from a loss of 87 cents. He also lowered his price target on the shares to $5 from $9.
February 25th, 2010 | Posted by goldBy Brad Zigler
There are always three possible trends for a market at any given time: up, down or sideways. Experienced traders appreciate the fact that markets often tread water before making substantial and sustained moves up or down.
Gold’s no exception. Within its broader bull market, the yellow metal has spent a lot of time dithering. After gold’s March 2008 peak, for example, bulls had to wait 20 months for a new high. In the interim, gold prices sagged to interim lows, but not so much as to break the longer-term uptrend.
Gold’s recent market action and the lack of fresh price impetus seem to be setting up yet another bout of vacillation. The accumulation we’ve been seeing since the beginning of the month has faded into distribution as prices have sagged.
We’re also seeing that weakness reflected in prices for the SPDR Gold Shares Trust (NYSE Arca: GLD). That’s piqued the interest of option traders who think a sideways market puts time on their side.
SPDR Gold Shares Trust
When you consider what an option is, it’s really nothing more than the grant of time. Time for a market to move in a certain direction through a certain price point within a certain time. The buyer of the option gets the time from the seller.
Buyers, naturally, believe an option’s underlying asset will move through the contract’s strike price before expiration. To make money, the market must move. Call buyers must see prices rise and put buyers must see prices decline.
Option sellers, on the other hand, profit in complementary scenarios. Call sellers get to keep their premium if asset prices decline; writers of puts gain when prices rise. But sellers also make their premiums when markets—how shall I put it?—dither. Sideways markets that keep calls and puts out of the money ring the option grantors’ cash registers.
December GLD calls struck at $120 were selling for $5.80 a share this morning, while December puts with a $100 strike price were bid at $5.75. Selling this pair of options—a package known as a short strangle—puts a $1,155 premium in a writer’s pocket and effectively dares GLD to break out, either to the upside or the downside in the next 10 months. If gold, and by extension GLD, um, dither, the options expire worthless and the premium becomes pure profit to the seller.
Risky business? Sure. And nobody should entertain notions of selling options short without being fully cognizant of the consequence of being wrong. An upside breakout could put you uncomfortably short GLD; a plummet in GLD’s price, on the other hand, could make you a buyer of a declining asset.
Still, you have to consider the odds. Right now, strangling GLD looks pretty attractive.
Author’s Disclosure: none
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