2010 September | Global Investors

Archive for September, 2010

September 30th, 2010 | Posted by Global Investors

By Roger Nachman

Retirement is on everybody’s minds, whether you are 22 or 62.

You need to start saving for retirement so that you can maintain your lifestyle and not have to worry about running out of cash as you enter your golden years.

As people age, their risk profiles go down and they want their investments to perform above inflation, but not deal with the day to day swings in the markets that leave many of us scratching our heads sometimes.

Using ETFs can help mitigate a lot of the risk of owning individual stocks, while earning dividends and receiving capital appreciation make them attractive to retirees.

Bonds should definitely be in your portfolio as you get older, and there are plenty of ETFs that cater to high grade, corporate bonds. High grade corporate bonds are the most conservative, and are much less likely to be hit in an economic downturn, such as the one the world faced two years ago.

Some ideas for this portion of your portfolio are the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and iShares Barclays MBS Bond ETF (MBB).

Inflation is also a big worry for retirees, as they do not have incomes and raises to count on to fight rising costs.

To counter this, retirees may want to look at adding some inflation protection to their portfolios with a position in SPDR DB International Government Inflation-Protected Bond (WIP). WIP provides exposure to inflation-protected bonds issued by foreign central banks.

Every portfolio should have some equity exposure, even though you are in your golden years, and spend more time looking up tee times than earnings reports. Equity focused ETs such as Vanguard Mega Cap 300 Index (MGC), Vanguard Mid Cap ETF (VO), and Vanguard Small Cap ETF (VB) should make up at least 20% of your portfolio in total, but not so much that it alters your risk profile.

Dividends are a major source of income in retirement, and an ETF like Vanguard Dividend Appreciation ETF (VIG), would be the perfect addition to any retirement portfolio.

Retirement planning can be hard and if you don’t know where to start, a tricky and touchy subject to deal with. These ETFs give retirees the flexibility of knowing that their investments aren’t going to collapse over night, and they can worry about that dogleg left on the 15th hole, instead of how they’re going to pay for their rounds.

Disclosure: No position

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P. Diddy Wears A Kilt (PHOTOS, POLL)

September 30th, 2010 | Posted by Global Investors

P. Diddy got into the Scottish spirit in Glasgow on Wednesday, performing in front of the audience while wearing a kilt. He paired the skirt with a jacket and vest, black hat, calf-high boots, shades and some bling.

Diddy isn’t the only rapper to show off his style savvy. Jay-Z recently took the stage in a hipster cardigan with elbow patches and Kanye West instituted a suits-only dress code for himself and his entourage.

Take a look at Diddy’s kilt and tell us what you think.

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LA Times Raves About Tom Colicchio’s Craft

September 30th, 2010 | Posted by Global Investors

Then came “Top Chef” in 2006, making Colicchio one of the most recognizable chefs in the country. A year later he opened Craft Los Angeles. At this point, he could easily rest on his laurels, relax and let his name bring in the crowds. And yet despite being one of a collection spun off from the original, Craft Los Angeles continues to be a serious restaurant with seriously good food.

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Ten Prominent Defense Stocks That Pay Dividends, Part II

September 30th, 2010 | Posted by Global Investors

<< Click to read Part I

Introduction

In Part I of this two-part series we pointed out how proposed spending cuts by Defense Secretary Robert Gates are designed to hold the growth of the $680 billion defense department budget to only 1% or 2% for the next few years. We further pointed out that these pending spending cuts were casting a shadow of doubt on the stock prices of companies in the aerospace defense industry. Like all general statements, there is a modicum of truth in this point of view. However, like all general statements it is not 100% true.

We’ve often pointed out how dangerous it can be for investors to think in broad generalities rather than deal with specifics. Although the devil is certainly in the details, so is the extraordinary opportunity and potential reward. Therefore, rather than judge defense companies as poor investments in the general sense, this article is designed to illuminate the importance of separating the wheat from the chaff. In other words, the defense budget cut crises for the defense industry may also have created a once-in-a-lifetime opportunity to invest in select companies in this vital sector.

We are going to review 10 major players in the aerospace and defense sector through the lens of our EDMP, Inc. F.A.S.T. Graphs. We’re only going to cover defense companies that pay dividends as dividend paying investment opportunities have, of late, become of great interest to many investors. Even though each of these companies pays a dividend, you will see significant differences in their operating histories, and to a lesser extent, the dividend records of each specific company.

We are going to separate these 10 companies into two broad categories; cyclical businesses and consistent above-average growing businesses. We will examine the cyclical companies first with brief commentary on each, and then move accordingly to the consistent growers. What follows cannot be considered a thorough examination or analysis of these companies. However, we believe you will find the "essential fundamentals at a glance" perspective provided of enormous value. In an instant, we feel you will recognize how well each company has performed as an operating business within their industry and against their peers.

There are important focal points of each historical price and earnings correlated graph (A) which we would like to direct your attention to. First, see the consistency of each company’s earnings results from one year to the next and over each respective time frame measured. This is expressed as the orange line with white triangles, which we call the earnings justified value line. Second, note how the black price line follows and correlates to the earnings line. Third, the blue shaded area represents dividends which are paid out of the earnings, or green shaded area. The dividends are stacked on top for visual perspective. Finally, note the earnings growth rate that is expressed to the right side of each graph. From these earnings and price correlated graphs (A) you can visually experience the importance of earnings results to stock prices and eventually to performance to include dividends.

From each corresponding chart (B) you will see the performance including the benefit from dividends on each respective company. The important takeaway from these performance charts are how closely the total return that shareholders receive correlates to the operating performance each company achieves. Also, the effect of earnings on dividends is also very apparent.

Five dividend paying cyclical defense stocks

Figures 1A and B below look at Boeing Co. (BA), a leading manufacturer of commercial jet aircraft and military aircraft. As Figure 1A clearly shows, the Boeing Company’s earnings per share results are quite cyclical where earnings can fall for several years in a row, and then rise for several years in a row with no predictable pattern. Moreover, the long-term growth rate of this cyclical company has only averaged 3.8% since calendar year 1992. Also note that Boeing Co. currently trades at 19.2 times earnings and offers a dividend yield of 2.6%. However, as will be seen in Figure 1B, their dividend record of growth has been spotty.

(Click charts to enlarge)

Figure 1A BA 20yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587231652331-Chuck-Carnevale.png" alt="Figure 1A (BA) 20yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 1B below calculates the performance associated with Figure 1A. Note that Boeing Co. shareholder’s closing annualized rate of return correlates closely to the earnings per share growth rate adjusted slightly upward by high valuation. Also, as previously mentioned, the Boeing Co.’s dividend record has been spotty. Fortunately, they have not cut their dividend over this time frame, but went many years without an increase. There is also no consistency in the rate they did increase their dividends by when they did increase them.

Figure 1B BA 20yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587234544535-Chuck-Carnevale.png" alt="Figure 1B (BA) 20yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 2A and B below look at Northrop Grumman Corp. (NOC), a leading maker of airborne systems and designer of electronic warfare items, to name a few of their many aerospace and defense offerings. From Figure 2A it is apparent that Northrop Grumman, although not as cyclical as the Boeing Co. is nevertheless moderately cyclical. Earnings growth seems to come in spurts with moderate interruptions occurring from time to time. Stock price has tracked earnings reasonably well, and Northrop Grumman appears to be historically undervalued with a PE ratio of 9.7 and a dividend yield of 3.1%.

Figure 2A NOC 17yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-12858723710882-Chuck-Carnevale.png" alt="Figure 2A (NOC) 17yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 2B calculates performance associated with Figure 2A. Note how closely Northrop Grumman shareholder’s closing annualized rate of return correlates to their earnings growth rate, once again adjusted by lower starting valuation and even lower ending valuation. Although Northrop Grumman has consistently paid a dividend every year since 1995, they did not increase it until 2004. The increases in their dividend since 2004 relate to and correlate to their earnings growth over that time period.

Figure 2B NOC 17yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587239288374-Chuck-Carnevale.png" alt="Figure 2B (NOC) 17yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 3A and 3B look at Raytheon Co. (RTN), a global provider of air defense systems and missiles. Raytheon’s earnings record should be described as cyclical even though they have consistently increased their earnings since calendar year 2004. From the perspective of the seven-year stretch of strong earnings growth, Raytheon Company’s shares appear to be historically undervalued at a PE ratio 10.3 and a dividend yield of 3.3%. Also, their long-term earnings growth rate of 4.3% is slightly below average.

Figure 3A RTN 20yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587242096146-Chuck-Carnevale.png" alt="Figure 3A (RTN) 20yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 3B calculates the performance associated with Figure 3A. In Raytheon’s case, the correlation between earnings growth and the closing annualized rate of return for shareholders almost perfectly correlates at 4.3%. Their dividend record also tracks earnings very closely as the collapse of earnings for the recession of 2001 caused them to cut their dividend by 25%.

Figure 3B RTN 20yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587244561564-Chuck-Carnevale.png" alt="Figure 3B (RTN) 20yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 4A and 4B look at Lockheed Martin Corporation (LMT), a leading manufacturer of electronics, aeronautics, information systems and missile systems to governments and commercial customers across the world. A review of Lockheed Martin’s earnings record depicts bouts of earnings volatility mixed in with periods of sustained growth. With a current price earnings ratio of 9.7 and a dividend yield of 3.5%, Lockheed Martin appears undervalued based on earnings growth and historically normal valuations.

Figure 4A LMT 20yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-12858724874655-Chuck-Carnevale.png" alt="Figure 4A (LMT) 20yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 4B calculates the performance associated with Figure 4A. Total shareholder returns that Lockheed Martin’s shareholders received correlates very closely to earnings growth. However, bouts of earnings cyclicality did cause them to cut their dividend on three occasions since 1992.
Figure 4B LMT 20yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587252306104-Chuck-Carnevale.png" alt="Figure 4B (LMT) 20yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 5A and B review Honeywell International (HON), a diversified technology company with about 35% of their total sales in aerospace products. As Honeywell’s recent price correlated graph depicts, the earnings record consists of periods of sustained consistent earnings growth followed by shorter periods of earnings weakness. However, their average earnings growth rate of 9.1% is high by the standards of the other cyclical aerospace and defense companies presented in this article. With a PE ratio of 16.4, Honeywell appears to be fairly valued based on historical precedent and their earnings justified valuation.
Figure 5A HON 20yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587254611934-Chuck-Carnevale.png" alt="Figure 5A (HON) 20yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 5B calculates the performance associated with Figure 5A. Honeywell’s closing annual rate of return to shareholders correlates to earnings growth, adjusted slightly downward based on modestly high valuation at the beginning timeframe 1992. They only had one dividend cut, and over the five-year period calendar year 2000 through 2004 they kept their dividend the same. Otherwise, when they did raise their dividend they were able to do it at double digit rates.
Figure 5B HON 20yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587259408733-Chuck-Carnevale.png" alt="Figure 5B (HON) 20yr. Performance History” hspace=”6″ vspace=”6″ />

Summarizing the Five Cyclicals

From Figures 1A and B through 5A and B above, the long-term relationship between earnings growth, stock price movement, dividends and total return can be visually seen and understood. What each of the above five companies do have in common is the element of cyclicality in their business models. Therefore, it could be easy to draw the conclusion that the aerospace and defense industry is comprised of only cyclical businesses. Also, keep in mind that each of these companies, for the most part, operate in a similar industry and through the same economic conditions and time frames.

Five above-average growing dividend paying defense stocks

Figures 6A and 6B below look at L-3 Communications (LLL) which was thoroughly elaborated upon in Part I of this two-part series. Therefore, we direct the reader to Part I for any additional commentary on this historically fast-growing defense company. However, note that at 9 times earnings, L-3 Communications appears to be undervalued.

Figure 6A LLL 14yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587262418458-Chuck-Carnevale.png" alt="Figure 6A (LLL) 14yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 6B calculates the performance associated with Figure 6A. Although L-3 Communications has only paid a dividend since 2004, the growth of their dividend has correlated very closely to the earnings growth. As previously stated in Part I of this two-part series, L-3 Communications’ strong earnings growth was able to reward their shareholders far in excess of the general stock market as measured by the S&P 500.

Figure 6B LLL 14yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587265008969-Chuck-Carnevale.png" alt="Figure 6B (LLL) 14yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 7A and B below look at General Dynamics Corp. (GD), a leader in aerospace, combat systems, marine systems and information systems and technology. Since calendar year 1995, General Dynamics has been able to generate a very consistent record of earnings growth averaging 13.2%. Nevertheless, a slight slowdown in growth due to defense budget cuts and to a lesser extent the great recession caused what we believe to be a significant overreaction by the stock market. Consequently, we believe that General Dynamics appears historically undervalued and a PE ratio of 9.7 and a dividend yield of 2.7%. Therefore, we believe that General Dynamics represents an interesting opportunity for shareholders seeking growth of capital and an increasing dividend opportunity to research further.

Figure 7A GD 17yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587267491117-Chuck-Carnevale.png" alt="Figure 7A (GD) 17yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 7B calculates the performance associated with Figure 7A. General Dynamics’ shareholders have been rewarded in conjunction with their stellar earnings record even with valuation currently so low. Their dividend record has also been consistent and growing along with their earnings.
Figure 7B GD 17yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587270061727-Chuck-Carnevale.png" alt="Figure 7B (GD) 17yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 8A and 8B look at United Technologies Corp. (UTX), a leading provider of high-tech products and services to the aerospace industry and building systems for both commercial and residential customers. United Technologies Corp. has consistently grown earnings at the above-average rate of 14% per annum. As can be seen in Figure 8A, their earnings did dip during the great recession which caused their stock price to fall dramatically but recovering earnings enabled stock price to quickly recover. United Technologies Corp. appears to be fairly valued today, with a price earnings ratio of 15.3 and a dividend yield of 2.4%.

Figure 8A UTX 17yr. EPS Growth Correlated to Price

<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587272750581-Chuck-Carnevale.png" alt="Figure 8A (UTX) 17yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />
Figure 8B calculates the performance associated with Figure 8A. The shareholders of United Technologies Corp. were rewarded in direct proportion to the earnings growth that the company generated on their behalf. Additionally, again due to consistent earnings growth, United Technologies Corporation was able to raise their dividends at double-digit rates on average since calendar year 1995.

Figure 8B UTX 17yr. Performance History

<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587274860093-Chuck-Carnevale.png" alt="Figure 8B (UTX) 17yr. Performance History” hspace=”6″ vspace=”6″ />
Figures 9A and 9B look at Rockwell Collins Inc. (COL), since calendar year 2003. Rockwell Collins was spun-off from Rockwell Automation on June of 2001, the company designs and manufactures mobile and airborne communication systems and supports the electronics that go into those systems. Figure 9A shows that their operating record over their short existence as an independent company has been consistent and strong. Rockwell Collins has generated above-average results with earnings growing at 13.8% a year. Rockwell Collins Inc. appears to be fairly valued with a PE ratio of 16.5 and a starting dividend yield of 1.7%.
Figure 9A COL 9yr. EPS Growth Correlated to Price

<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587277565213-Chuck-Carnevale.png" alt="Figure 9A (COL) 9yr. EPS Growth Correlated to Price ” hspace=”6″ vspace=”6″ />
Figure 9B calculates the performance associated with Figure 9A. Once again, Rockwell Collins represents an example of the strong correlation between a company’s earnings growth and stock price over time. Also, since calendar year 2004, Rockwell Collins has increased the dividend they pay their shareholders consistent with their earnings growth.

Figure 9B COL 9yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587279786857-Chuck-Carnevale.png" alt="Figure 9B (COL) 9yr. Performance History” hspace=”6″ vspace=”6″ />

Figures 10A and B look at General Electric Co. (GE), one of the largest and most diversified industrial companies in the world. Although this large conglomerate is not a pure Aerospace and Defense company, the General Electric airplane engine segment is an important player in Aerospace and Defense. General Electric’s price and earnings correlated graph has many interesting stories to tell. The relationship between earnings and stock price is clear, but not perfect. Even though General Electric’s stock price deviated from the earnings justified value line during the mid-90s irrational exuberant period before peaking in calendar year 2000 they inevitably and swiftly reverted to the mean. Therefore, even though their short-term price deviated from earnings, the long-term earnings price relationship is intact. Also, thanks to a large financial services segment the earnings collapse in 2008 in 2009 led to a justified drop in stock price during this time. With a current yield of 2.4% and a price earnings ratio of 14.9, General Electric appears to be reasonably priced as a turnaround story.
Figure 10A GE 20yr. EPS Growth Correlated to Price<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587282719733-Chuck-Carnevale.png" alt="Figure 10A (GE) 20yr. EPS Growth Correlated to Price” hspace=”6″ vspace=”6″ />

Figure 10B calculates the performance associated with Figure 10A. At the end of the day, General Electric shareholders were rewarded consistent with their long-term earnings growth rate. As earnings faltered in 2008 – 2009, General Electric Co. was forced to cut their dividend in 2009 for the first time in a long time. Once again, a testament to the importance of earnings to shareholders returns and to dividend income.

Figure 10B GE 20yr. Performance History<img src="http://static.seekingalpha.com/uploads/2010/9/30/426415-128587285091594-Chuck-Carnevale.png" alt="Figure 10B (GE) 20yr. Performance History” hspace=”6″ vspace=”6″ />

Summarizing the Five Consistent Growers

When you compare the shareholder returns produced by these five consistent growers, to their more cyclical cousins, the importance of individual business results become evident. Most interesting are the effects that earnings records have on dividends. Consistent and reliable earnings performance is an extremely important consideration for those who are investing for and relying upon dividends for income.

The State of the Aerospace and Defense Industry

On July 28, 2010, Zacks Equity Research produced an interesting report on the outlook for the aerospace and defense industry, below are some interesting tidbits gleaned from their review:

“ ..defense spending is the major source of revenue for the top nine global aerospace companies, of which six are based in the US."

“The commercial aerospace market, which plummeted during the economic recession, is expected to revive in the coming years, fueled by the gradual recovery of the global economy.”

"Lockheed Martin Corp. is the biggest recipient of US defense contracts followed by the Boeing Company and Northrop Grumman Corp.”

"At the macro level, a gradual shift in defense spending patterns can be discerned. In response to the asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor."

"The long-delayed $35 billion contract from the U.S. Air Force for aerial tankers remains a major hope for the defense industry. Boeing and Airbus are two major contenders for the contract and a decision from the department is expected later this year."

"Outside of defense, the return of demand in commercial airlines remains a positive for the industry,…. Boeing has secured a big order from air China for jetliners."

Under "weakness" Zacks reported:

"The US Defense Department is planning to reduce the defense budget by $100 billion over the next five years. These cutbacks will impact the big contractors as the lion share of their revenues comes from defense spending."

Under "prospects" Zacks reported:

"The growing international markets in the Middle East, China, India and South America provide an opportunity for defense operators to increase their revenues. Defense expenditure is increasing gradually in India."

"The improvement in the economy is gradually feeding the commercial aerospace market. The passenger as well as cargo traffic is expected increase mid-single -digits on an annual basis from now through 2009 in a recent report published by Boeing. The report suggested that the total demand for jets is expected to be 30,900 between 2010 and 2029 amounting to $3.6 trillion."

Conclusions

Although the aerospace and defense industry is clearly facing some strong headwinds, there are some lights at the end of various tunnels. As can be seen from the earnings correlated graphs above, many of the leading players in this important industry are trading at historically low valuations. In the short run, today’s low valuations may be justified. However, for those willing to take a longer view, today’s low valuations may represent an excellent opportunity to build long-term positions in select companies in this vital industry.

Additionally, for those who are willing to engage in speculative activities, this industry may be of some appeal to them as well. With valuations low on many of these companies, the potential for merger and acquisition activity is high. In the short run, potentially profitable bolt on acquisitions may represent the only short-term avenue for growth available, especially for the bigger players. We believe that the most likely prospects to be acquired are those companies whose businesses are comprised of high-tech intelligence, surveillance, reconnaissance systems and strategic platforms etc.

As always, comprehensive and thorough research and analysis is recommended. We hope this series has provided a good starting point and foundation to assist interested investors. A careful review of the price and earnings correlated graphs presented in this article is offered as a good place to begin.

The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Disclosure: Long LLL, UTX at the time of writing.

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GOP Congressman: ‘Premature’ To Commit To Supporting Boehner For Speaker

September 30th, 2010 | Posted by Global Investors

As Democrats ramp up their attacks on House Minority Leader John Boehner – who’s presumed to be in line to become House speaker if Republicans take over the majority – not all rank-and-file Republicans are ready to commit to supporting Boehner as speaker.

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How Long Can GLD Remain Overbought?

September 30th, 2010 | Posted by Global Investors

By Brad Zigler

Six trading days and counting. That’s how long the SPDRs Gold Shares Trust (NYSE Arca: GLD) has been overbought.

Not that this condition hasn’t cropped up before. Since its debut in 2004, trust shares have tipped the needle into the overbought red zone 18 times. (Make that 19, counting the current market.)

So, what does "overbought" mean?

This condition—usually a precedent to a price pullback—arises when a security’s (or commodity’s) cost rises to such a degree that an oscillator moves above its upper band.

"Okay," you say, "So what’s an oscillator?"

An oscillator is a momentum indicator used to identify short-term price extremes. For example, the Relative Strength Index (RSI) is one such oscillator that compares the magnitude of a security’s recent gains to the magnitude of its recent losses, then converts the result into a number ranging from 0 to 100.

When an RSI reads 70 or above, that indicates a security is "overbought"; with an RSI at 30 or below, a security would be considered "oversold."

Notice that the price action of the SPDR Gold Trust—like gold itself—has pushed its RSI above 70 for the past six trading days.

Now, oscillators like the RSI tend to be poor trade triggers in markets that are strongly trending. They can show a market as either overbought or oversold, even while it continues to trend. But for GLD—and bullion—there’s a strong link between an oversold RSI and near-term sell-offs.

Here’s a compendium of RSI-indicated overbought periods for the SPDR Gold Trust and the price consequence one week later:

Overbought Periods For SPDR Gold Trust (GLD)

Start	End	Trading Days	Price 1 Week Later
20-Jun-05	21-Jun-05	1	-1.0%
11-Aug-05	12-Aug-05	1	-2.0%
16-Sep-05	20-Sep-05	3	0.0%
21-Nov-05	12-Dec-05	14	-4.5%
03-Jan-06	04-Jan-06	1	2.8%
13-Jan-06	17-Jan-06	1	0.9%
17-Apr-06	19-Apr-06	2	-0.2%
02-May-06	12-May-06	8	-7.8%
06-Sep-07	01-Oct-07	17	-1.9%
15-Oct-07	16-Oct-07	1	0.1%
26-Oct-07	29-Oct-07	1	2.1%
02-Nov-07	09-Nov-07	5	-5.4%
08-Jan-08	14-Jan-08	4	-1.5%
25-Jan-08	28-Jan-08	1	-3.0%
28-Feb-08	03-Mar-08	2	-0.1%
12-Oct-09	14-Oct-09	2	-0.4%
09-Nov-09	02-Dec-09	16	-7.0%
06-May-10	13-May-10	5	-3.9%
16-Sep-10		6 (to date)

Over the past five years (more than 1,250 trading days), GLD was overbought for just 85 days, not counting the current run. The average time spent in this state was five days, so today’s excursion is already "above average."

There’s a direct relationship between the duration of GLD’s overbought status and the likelihood of a subsequent sell-off. Generally speaking, the longer the period, the greater the resulting price decline.

Here’s why …

Of the 18 times GLD has been overbought, 13 of those, or 72 percent, resulted in lower prices a week out. That’s a statistically significant percentage.

Seven of these were one-day incidents resulting in a mean decline of 0.4 percent. Basically, this means one-day trips into overbought land aren’t very predictive of sell-offs—at least significant sell-offs within a week of the overbought period.

But multiday visits are different. There’ve been 11 incidents where overbought conditions persisted for more than one day. The mean price dip a week after these conditions were resolved was 3.0 percent. Measured on a time-weighted basis—that is, accounting for the duration of each overbought period—the average decline was 4.1 percent.

The fact that the time-weighted average decline exceeded the unweighted mean points to a link between the duration of the overbought status and ensuing price breaks.

This relationship is confirmed when you filter out the two-day periods, leaving only the longer lingerings in overbought status. For excursions longer than two days, the time-weighted average sell-off was 4.5 percent.

So, what can you take away from this?

Well, GLD simply being overbought—even for more than two days—isn’t necessarily a tripwire for a short position if you’re bearish or for a buy-in if you’re bullish. If you’re technically oriented, you’d need to look for confirming signs in other momentum oscillators, or a test of the bullish price trend line.

But, once such a confirming signal is generated, the odds favor the trader or investor shopping for a lower GLD price.

There’s a break in GLD’s—and bullion’s—price due soon. We’re six days into the current overbought status. If you figure that the longest overbought period on record for GLD is 17 trading days, we ought to be looking for a sell-off within the next 11 trading days or so.

You are looking, aren’t you?

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Ten Prominent Defense Stocks That Pay Dividends, Part I

September 30th, 2010 | Posted by Global Investors

There is a lot of uncertainty regarding the future of the defense industry under the Obama Administration and Defense Secretary Robert Gates. Proposed efficiency initiatives call for a realignment of defense spending indicating only modest growth in the defense budget of 1% to 2% over the next few years. “Learning to do more without more” is the battle cry of the current administration.

The stock market does not like uncertainty, therefore, many leading defense stocks have come under a lot of selling pressure driving valuations to low levels not seen in years. However, not every company in the defense industry is on sale today. One of the prime objectives of this two-part series is to review well-known companies in the defense industry that offer a dividend yield. It will be up to the investor to draw their own conclusions regarding the investment merit of any specific company.

A Necessary Evil

There exists a lot of controversy and contradictory views regarding how much we should spend on defense. On the other hand, it is hard to argue with the unfortunate reality of a world where wars are being waged and terrorism proliferates. Questions about efficiency are different than those about necessity.

A strong defense is an undeniable necessity in today’s world. Therefore, our country and the rest of the world needs a strong and vibrant defense industry in order to protect world freedom and, ironically, maintain peace. Consequently, there is little doubt regarding the future existence of companies operating in the defense industry, only the future growth rate is in question.

As this article will point out there are many differences between the operating histories of individual companies that operate in the defense sector. Some are very cyclical while others have long histories of consistent growth of earnings and dividends. In total we will cover 10 prominent companies in the Aerospace and Defense sector that pay dividends. Their dividend yields will range From low of 1.7% to a high of 3.5%.

In this Part 1 of our two-part series we will feature L-3 Communications (LLL) and provide a more in-depth analysis of this investment-grade company that we believe is being unfairly punished by today’s market action. In Part II, we will cover the other nine examples solely through the lens of our EDMP, Inc. F.A.S.T. Graphs™. This first example is offered to illustrate the importance of conducting thorough analysis. The EDMP, Inc. F.A.S.T. Graphs™provide a great starting point, but should never be the final word. However, they can help the investor decide whether further research is worthwhile in pursuing.

L-3 Communications: Low valuation, strong dividend equal opportunity

L-3 Communications is the sixth largest defense contractor in the United States. As previously mentioned fears of cuts in our defense budget under the Obama Administration have driven the price, and we believe the valuation of L-3 Communications’ stock to unjustifiably low levels. This is in spite of numerous company announcements of being awarded new contracts and several strategic acquisitions that promise to be immediately accretive to earnings. Therefore, we believe the market is grossly under-pricing this financially strong high-quality enterprise.

In May 2010 we published a similar article touting the virtues of this large-cap blue chip when valuations were higher than they are today. In that article we provided a comprehensive analysis of the company and the prospects for growth of each of its four primary business segments. Since, generally speaking, very little has changed regarding your views on L-3 Communications’ vital and important role in keeping our country safe and strong, we refer you to this article (New Insight and a Growing Dividend Make L-3 Communications an Undervalued Opportunity). Consequently, today’s article will focus on the few specific changes that have taken place since our May review.

September 27, 2010, Zacks Equity Research reported that L-3 Communications was awarded the following contract:

September 27, 2010

The U.S. Air Force has awarded a $29.4 million contract to L-3 Communications Holdings Inc. (LLL – Analyst Report) effecting modifications to four MC-130W aircrafts. Under the contract, L-3 Communications’ subsidiary TCS Inc. will install a precision strike package on the aircrafts. The MC-130W aircraft was originally developed by Lockheed Martin Corporation (LMT – Analyst Report) for use by the special operations forces for their missions.

This announcement by Zacks Equity Research on September 27, 2010 follows a series of promising press releases from L-3 Communications since our May 10, 2010 article. We feel the following headlines speak for themselves, however, the complete stories can be found on L-3 Communications’ website under press releases. In our opinion, these press releases should have led to an increasing stock price for L-3 Communications instead of a drop.

September 21, 2010
L-3 Acquires 3Di Technologies, LLC, Expands Secure Satellite Communications Capability

September 16, 2010

L-3 Awarded Contract to Add GPS Capabilities to U.S. Army’s IPADS Equipment

September 14, 2010

L-3 Awarded DINFOS Services Contract by Department of Defense

August 30, 2010

L-3 Nova Engineering Awarded $52.8 Million Contract with the DoD for Tactical Remote Sensor Systems

August 26, 2010

L-3 GCS Awarded $170 Million Contract from U.S. Special Operations Command

August 9, 2010

L-3 Acquires Airborne Technologies, Incorporated, Expands Unmanned Aircraft Systems Capability

July 19, 2010

L-3 WESCAM Awarded $200 Million Contract from U.S. Air Force

July 19, 2010

L-3 Receives Order for Eight Additional C-27J JCA

July 14, 2010

L-3 Announces a New $1 Billion Share Repurchase Program”

Important fundamentals at a glance

Figure 1 below looks at L-3 Communications through the lens of our EDMP, Inc. F.A.S.T. Graphs™ since the company went public in May of 1998. L-3 Communications became a separate entity as a result of being sold off after the merger between Loral Corporation and Lockheed Martin (LMT). Clearly, L-3 Communications has consistently grown earnings at a very high rate (orange line with white triangles). Note that the company instituted a dividend in calendar year 2004 (light blue shaded area).

Figure 1 L-3 14yr. EPS Growth Correlated to Price

Figure 2 below looks at L-3 Communications since calendar year 2004, the year they instituted their first dividend. This illustrates that L-3 Communications has evolved from a fast-growing growth stock into a dividend paying, slower growing investment grade blue-chip. However, based on the low price the market is capitalizing their earnings at, you would think the business was failing. We believe the stock market is miss-appraising this quality company’s true fundamental value.

Figure 2 L-3 8yr. EPS Growth Correlated to Price

In order to provide a striking contrast, Figure 3 below features Nike Corporation (NKE) a well-known large-cap blue-chip with similar fundamentals (earnings and dividends), however, with an entirely different valuation applied to its stock price. Even though the shoe industry is entirely different than the aerospace and defense industry, the operating results for Nike look very similar to the operating results of L-3 Communications.

Figure 3 NKE 8yr. EPS Growth Correlated to Price

If you covered up the names and took away the black price line on both Figures 2 and 3, and compared these two graphs based solely on fundamentals, logically you would expect the company in Figure 2 (L-3 Communications) with a higher growth rate and greater dividend yield to be the most valuable of the two. Therefore, it’s befuddling to us that the market is capitalizing Nike’s earnings at over 19.4 times while only capitalizing L-3′s earnings at 8.8 times. Furthermore, this is even more illogical, when you consider that the prospects for future earnings growth of both companies, is also very similar.

A dollar’s worth of earnings from L-3 Communications should be worth no more or no less than a dollar’s worth of earnings from Nike. Oh, the peculiar illogic of Wall Street never ceases to amaze us. The following Warren Buffett quote illuminates our confusion:

Maybe grapes from a little eight acre vineyard in France are really the best in the world, but I always had a suspicion that about 99% of it is in the telling and about 1% of it is in the drinking.

Figure 4 calculates the performance associated with Figure 1 above. As you can see, even though the market is capitalizing L-3’s current earnings at a historically low level, their long-term operating performance has nevertheless rewarded their shareholders in excess of the S&P 500.

Figure 4 L-3 14yr. Performance History

Thesis for Growth

The following excerpts of key slides that L-3 Communications presented at the Morgan Keegan & Co., Inc. 2010 Security, Safety and Defense Conference on August 11, 2010 summarize their opportunity:

Summary

L-3 Communications appears to be a very well-positioned defense contractor due to its highly diversified non-platform focus, strong backlog and shareholder-friendly management team. The company has a very strong balance sheet, improving margins and free cash flow generation per share that is greater than earnings per share. Therefore, we feel their earnings are of the highest quality.

After the passing of highly regarded CEO Frank Lanza, the reins were handed over to CFO Michael Strianese. At first it appeared that L-3 Communications’ legacy of growth through acquisition was abandoned under the new CEO. However, more recently that appears to have changed as L-3 Communications has already announced three accretive acquisitions thus far in 2010. Because of the experience of Michael Strianese as L-3′s CFO, we feel that fears of integration risk are overblown.

Final Thoughts

In Part II we will present EDMP, Inc. F.A.S.T. Graphs™ on nine additional companies in the aerospace and defense industry. We will look at Northrop Grumman Corp. (NOC), Lockheed Martin Corp., General Dynamics Corp. (GD), General Electric Company (GE), Raytheon Co. (RTN), United Technologies Corp. (UTX), Boeing Co. (BA), Honeywell international Inc. (HON) and Rockwell Collins Inc. (COL). We are hopeful you will find the exercise enlightening.

Disclosure: Long LLL, NKE, UTX. The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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Into The Lion’s Mouth: ETF Pullback Choices

September 30th, 2010 | Posted by Global Investors

A week ago, the weekly ETF Pullback model I introduced on Seeking Alpha a couple of months ago moved from a primarily fixed-income orientation to what I saw an opportunistic way to flex some cyclical muscle mainly through real estate and a dash of preferred stock. This week, the portfolio has shifted around a bit but with essentially the same orientation.

Here are the current ETFs:

iShares MSCI Malaysia (EWM)
iShares Cohen & Steers Realty (ICF)
PowerShares Fin. Preferred (PGF)
iShares FTSE NAREIT Residential Plus (REZ)
Vanguard REIT ETF (PSK)

Here’s last week’s list:

Credit Suisse High Yield Bond (DHY)
iShares FTSE NAREIT Residential Plus (REZ)
Market Vectors Indonesia (IDX)
SPDR DJ Wilshire REIT (RWR)
SPDR Wells Fargo Preferred Stock (PSK)

As I said last week, I don’t expect to be in any of these ETFs long enough to enjoy the overall good yield produced by this portfolio. Instead, last week’s holdings as well as the ones I’m rotating into this week continue to serve primarily as a play on the economy. The main variation (besides a switch from Indonesia to Malaysia) is an increased tendency to stick our heads into the mouth of the economic lion. We went from two REIT-oriented ETFs to three. And in terms of preferred stock, we went from general exposure to a financial sector focus. Two years ago, I thought it might take till Y2.1K before I’d consider doing that!

I guess we can actually make a subjective case for that.

Although the REITs are all general real estate (shopping center, offices, apartments, storage, etc.), we might still look to the S&P/Case-Shiller Home Price Indices as a broad barometer of the sentimental heart of real estate: single family homes.

Figure 1

click to enlarge

We’re seeing some ups and downs with a general tendency to rise off the bottom. Note, too, that the index is based on two-month old (i.e. late-July) data and even those transactions reflect prices agreed to and handshakes that occurred several months before that. With unemployment still high, housing remains at risk, but for now, it looks like we’re no longer in free fall and we have been seeing tendencies in Washington and in the banking sector to improvise ways to avoid a reprise of 2008.

It’s worth repeating that none of the ETFs in this week’s list are direct plays on single-family housing. But we’re at the point now where the factor most likely to drive housing, the general economy, also serves as a key driver for other kinds of real estate as well as the general health (and ability to pay preferred dividends) of firms in the finance sector.

We could debate on and on whether the economy really is on the mend, but actually, that’s not necessary. That’s the beauty of one-week rebalancing. All I need is for most investors to think the economy is on the mend for another week. Next Thursday, I’ll re-run the model and refresh the portfolio. This is a nice change of pace for someone like me, whose roots lie in fundamental investing.

APPENDIX

To create this model, I started with a very broad-based ETF screen I created in StockScreen123.com.

Eliminate ETFs for which volume averaged less than 10,000 shares over the past five trading days
Eliminate HOLDRs (I don’t want to be bothered with the need to trade in multiples of 100 shares)
Eliminate leveraged and short ETFs (I think of these as hedging tools rather than standard ETF investments of even trading vehicles)

Then I sorted the results and select the top 5 ETFs based on the StockScreen123 ETF Rotation – Basic ranking system, which is based on the following factors:

120-day share price percent change – higher is better (15%)
1-Year Sharpe Ratio – higher is better (15%)
5-day share price percent change – lower is better (70%)

The idea of using weakness as a bullish indicator is certainly not new. But often, it’s an add-on to other factors that, on the whole, emphasize strength. Here, the weakness factor is dominant, with a 70 percent weighting.

This model is designed to be re-run every week with the list being refreshed accordingly. I trade through FolioInvesting.com, where I pay a flat annual fee rather than a per-trade commission, so I don’t care about the fact that turnover form week to week is often 80%-100%. If you want to follow an approach like this but do have to worry about commissions, the strategy tests reasonably well with three ETFs, or even with one. (Cutting the number of ETFs is far preferable to extending the holding period.)

Figure 2 shows the result of a StockScreen123 backtest of the strategy from 3/31/01 through 7/22/10.

Figure 2

Figure 3 covers the past five years, a very challenging market environment that witnessed the fizzling of many strategies that had succeeded for a long time.

Figure 3

Disclosure: Long EWM, ICF, PGF, REZ, PSK

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Carly Schwartz: Stiff & Vague Meets Engaging & Informed

September 30th, 2010 | Posted by Global Investors

I’ll admit it. I had a hunch Jerry would emerge victorious over eMeg at last night’s debate. He’s such a dynamic person to swap opinions with around the office, I could only imagine how he’d appear in a larger arena.

But I was pleasantly surprised by just how compelling and capable our candidate appeared next to his opponent. Throughout the conversation, Jerry remained authentic, direct, colorful, and engaging, while eMeg came off stiff, canned, and even nervous at times.

After spending a significant time researching eMeg’s pledge to abolish the capital gains tax, I’m pleased Jerry brought up the issue more than once. You can read about how dangerous this would be for California in an earlier blog post; in a nutshell, such a measure would provide even more tax breaks for the wealthiest residents while drying up funding for resources extremely important to the rest of the state, such as education and health care.

View full post on The Full Feed from HuffingtonPost.com

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Jose Andres Eats LA: Koreatown, Wolfgang, & Nobu

September 30th, 2010 | Posted by Global Investors

Via NBC LA: The lovably jocular Spanish Chef Jose Andres (of The Bazaar at the SLS Hotel) gave a passionate defense of Los Angeles dining to NBC LA food blogger Carole Nixon, chastising self-deprecating Angelenos for not appreciating the amazing and diverse food scene in the city.

Angelenos tell me all the time, ‘eh, we don’t have such good food here.’ And I look at them and say, ‘How arrogant, I’m sorry.’ But I say it in a nice way. I think LA is full of places, it’s surround by good quality and low price points to high-end price points. LA is one of my favorite cities in the world.

His own personal favorites places to eat: Pizzeria Mozza, Umami and “anything Wolfgang, anything Nobu.” His daughters love grilling their own meat at Koreatown restaurants (although Andres couldn’t name just one favorite), and he’s looking forward to whatever “my boy Voltaggio” has up his sleeve in the coming months. Of the LA restaurant world, he summed up: “Oof! So many to choose from. It’s really hard.”

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