Saturday, November 19, 2011

Orexigen Resurrects Rejected Obesity Drug

Orexigen Therapeutics(OREX) is restarting development of its rejected obesity drug Contrave after U.S. regulators agreed to allow the company to conduct a potentially shorter follow-up clinical trial.

The U.S. Food and Drug Administration rejected Contrave last February, citing concerns about the risk the drug posed to the cardiovascular health of patients. FDA told Orexigen that Contrave would not be re-considered for approval without the company running a large, expensive and time-consuming study to assess the drug's heart-safety risk.

Orexigen appealed the FDA's decision and Tuesday announced that it had won some concessions from regulators. Orexigen is still required to conduct a follow-on heart-safety study of Contrave, but FDA will allow the company to resubmit for approval if an interim analysis of the safety study comes back clean.

Orexigen estimates it will take less than two years to run the Contrave safety study through the planned interim analysis, based on enrollment of less than 10,000 obese patients. The company plans on meeting with FDA to nail down a final study design with the hopes of starting the study in the first half of 2012.

That timelines sets up a potential second FDA approval decision on Contrave in 2014.

Japanese drug maker Takeda is Orexigen's North American partner for Contrave. Orexigen said Tuesday it will seek a deal to partner the drug in the rest of the world.

Orexigen ended the second quarter with $70 million in cash. The company did not say how much it expects the Contrave safety study to cost, but it's widely assumed that the company will need to raise money -- either by selling additional stock or partnering the drug -- in order to pay the cost of the new study.

Contrave is a combination pill consisting of two approved drugs, naltrexone and bupropion.

Vivus(VVUS) and ! Arena Pharmaceuticals(ARNA) are also trying to resubmit obesity drugs for approval after FDA rejections last year.

Orexigen shares were up 2 cents to $1.49 in late Tuesday trading.

>To contact the writer of this article, click here: Adam Feuerstein.

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Home Healthcare Investors Should Heed Lessons Learned By For-Profit Education Industry

Tuesday's news that three home healthcare providers - Amedisys (AMED), Gentiva Health (GTIV) and LHC Group (LHCG) - could face criminal prosecutions for allegedly "gaming" the Medicare system dealt a devastating blow to all three stocks. In response to the fears of a probe based on the Congressional report released this weekend, Amedisys has dropped 22% in the last two days; GTIV 45%, and LHCG by 12%.

The carnage in the impacted stocks also spread to other home providers - Almost Family (AFAM) dropped 11% on Monday - and hospitals such as Tenet Healthcare (THC) and Kindred Healthcare (KND), though much of that damage was mitigated in Tuesday's trading.

The news was just the latest in a difficult year for home health care companies and their stocks. The federal debt ceiling deal on August 1 hammered stocks across the sector, as fears abounded of Medicare cuts from the so-called "supercommittee" charged with finding budgetary savings in the absence of a negotiated budget deal. A few weeks earlier, the Center for Medicare and Medicaid Services proposed a 3.35% cut in the Medicare reimbursement rate for home health services in 2012. (This was actually a less painful cut than many feared, though the new negative publicity toward the sector may limit lobbying efforts and put an increased cut on the table.)

The continued pressure on the sector's top line has weighed on stock prices. Here's the YTD chart for the industry's four largest publicly traded companies:

Click to enlarge

Lincare Holdings (LNCR) in blue; Chemed (CHE) in red; Amedisys (AMED) in green; LHC Group (LHCG) in yellow; S&P 500 in brown. Chart courtesy Yahoo Finance.

The slide in stock prices has created some eye-catching fundamentals. GTIV now trades at a P/E of 2, AMED 4, and LHCG 6.5, with all three stocks at least at a five-year low.

But value investors looking in the bargain bin should be very careful, and hee! d the le sson of another government-reliant industry: the for-profit education sector. For-profit education companies receive around 90% of their revenue from the federal government - a percentage similar to that of home health care agencies - through Pell Grant and subsidized loan programs. The sector had been flailing for over a year - falling 40% as a whole - before, on June 2, long-awaited regulations were passed by the Department of Education. For-profit colleges spiked 17% before closing the day up 12%. Investors cheered the demise of potentially "draconian regulations" and improved clarity. From Reuters:

A watered down rule for the U.S. for-profit education industry ends more than a year of uncertainty that has weighed on the colleges and their stocks, and sets the stage for renewed earnings growth and potential industry consolidation ... Analysts said the latest changes were a big win for the for-profit industry, which has been under the cosh for more than a year as the government sought tougher regulation.

The relief didn't last long. Three days later, the Arizona Republic reported that a number of state attorneys general were investigating the schools, and that a multi-state class-action lawsuit was possible. Democratic Senator Tom Harkin, disappointed with the proposal, convened hearings on the industry in response. In August, the Department of Justice filed a whistleblower lawsuit against Education Management (EDMC), alleging that the company ignored federal regulations against compensating recruiters for the quantity, rather than quality, of students admitted. In September, two other senators called CEO Wallace Boston of American Public Education (APEI) to testify in relation to for-profit colleges' treatment of veterans and active-duty members of the military. The White House Office of the Inspector General piled on a week later, with a report alleging a "serious vulnerability" in online education (government-! speak fo r alleged fraud), and for-profit education shares fell further. A day later, the Republican-controlled House made the industry a bipartisan target, recommending cuts in the Pell Grant program, a key revenue source for the industry.

The cumulative impact of the regulatory action crushed for-profit education stocks. Here's the three-month chart of the Bloomberg US For-Profit Education Companies Index:

Click to enlarge

USEDU 3-month chart; courtesy Bloomberg

The sector has taken a one-third haircut in three months, with the drop over 35% from peak to trough.

The pattern is repeating. In July, when the 3.35% cut was proposed by CMS, Reuters ran an analysis entitled: "New rules won't put healthcare on life support," with the following quote:

"The 2012 proposal is likely better than most investors' expectations ... this should signal investors that CMS is not aggressively 'going after' the industry as many fear," Ellen Spivey of Stephens Inc said.

"It is not the worst case scenario. The cut could have been 5-7%."

Shares of the top home health providers have dropped by 20-30% in the last six months, dragged down by the increased scrutiny and uncertainty.

Sound familiar? It's the same logic used to promote for-profit education stocks after the release of "favorable" regulations. The markets had priced in the worst, the argument goes. With the worst off the table, the stocks are bound to rise.

Yet the analysts are missing two important points about government-reliant sectors.

First, when the government has you in its sights, it is very difficult to wriggle free. For-profit colleges have, in three months, faced subpoenas, hearings, potential subsidy cuts, and/or investigations from all three branches of the federal government and a number of state attorneys general, including members of both parties. ! Does any one doubt that home health care companies - or any Medicare provider, for that matter - will not face the same pressures from the same variety of sources? Once a reimbursement is cut, why won't the CMS - or Congress, or the budget supercommittee - add on, since it's clear that the providers weren't bankrupted by the initial reduction in reimbursements? Once investigations are launched, why won't another branch, or another state, or another sub-committee, launch a new one, piggy-backed on the revelations of the prior probe? Arguing that "the worst is over" for home healthcare stocks, or that regulatory interference is somehow "priced in" by the recent declines, is a very dangerous assumption, particularly in this political climate.

Secondly, and more importantly going forward, businesses in these sectors have no one left in the political system to defend them. Democrats - particularly the more liberal-leaning in the party - are traditionally less indulgent of, or far more hostile to, business interests than Republicans, depending on your point of view. Yet the GOP-- the traditionally stalwart defender of corporate interests, for good or evil, again depending on your point of view - has made deficit-cutting such a priority as of late that their protection of corporate subsidies can no longer be taken for granted. Considering all the talk about a "broken political system" and the rise of partisanship, it seems we should at least thank Medicare providers and for-profit college operators for giving Republicans and Democrats common cause.

This ray of hope for our political climate (please note, I'm being sarcastic) should send chills up the spine of investors in home healthcare stocks right now. Yes, the valuations look good, on paper. In the spring, valuations looked good for many of the for-profit stocks whose investors have seen losses of 30-60%.

Home healthcare stocks are a target right now - in an election year, no less. The regulatory and reimbursement pres! sures wi ll not end. Ask investors in for-profit colleges what that kind of pressure can do to one's portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Here’s Why Google’s Staff is Shrinking

Larry Page, Google��s (NASDAQ:GOOG) chief executive, returned to the top job in April and has since dropped more than 25 projects, saying they were not popular enough. Striving to keep Google up to speed, he masterminded?Google��s biggest deal by billions, the $12.5 billion Motorola Mobility bid, a bold move that positions the company to enter the hardware business. Founded in 1998, Google (NASDAQ:GOOG)?is not yet 15, but in tech years, it is an aging giant that moves a lot slower than it did when it was a hot start-up.

It is losing employees to the new, hotter start-ups, and is being pushed around by government regulators and competitors like Facebook, Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), which are all vying for people��s online time. ��Ever since taking over as C.E.O., I have focused much of my energy on increasing Google��s?velocity and execution, and we��re beginning to see results,�� Mr. Page told analysts recently. Mr. Page, an engineer by training and personality has borrowed from the playbooks of executives like Steven P. Jobs and Mayor Michael R. Bloomberg, he has put his personal imprint on the corporate culture, from discouraging excessive use of e-mail to embracing quick, unilateral decision-making. The most significant change at the company is the killing of projects Mr. Page deems unworthy.

��He��s certainly been active,�� said Mark Mahaney, an analyst covering Google (NASDAQ:GOOG)?at Citigroup. ��Whether he��ll be active and successful, we don��t know,�� according to Yahoo Finance.

Here’s how Google’s stock closed the week:

  • Google Inc. (NASDAQ:GOOG): The shares recently traded at $608.35, up $13.27, or 2.23%. They have traded in a 52-week range of $473.02 to $642.96. Volume today was 3,977,320 shares versus a 3-month average volume of 3,450,950 shares. The company’s trailing P/E is 20.74, while trailing earnings are $29.34 per share. Get the most recent company new! s and st ock data here >>

Investing Insights: Is Starbucks Becoming a Bigger Beverage Brand?

U.S. Market Trades In Mixed Note; Hot Stocks Of The Day: HNZ, BA, HIBB, EK

The U.S. market remained volatile during the afternoon session Friday after suffering heavy losses a day before, as investors kept a close watch on European stock and government bond markets ahead of data on leading economic indicators.

The Dow Jones industrial average rose 0.39 percent or 45.63 points to trade at 11,816.67. The Nasdaq Stock Market Inc. composite index slipped 0.07 percent or 2.01 points to trade at 2,586.15. The Standard & Poor's 500 index was down 0.25 percent or 3.11 points to trade at 1,219.24. Among other major indices, the New York Stock Exchange composite index gained 0.41 percent or 30.16 points to trade at 7,304.31. The American Stock Exchange composite index was up 0.53 percent or 11.76 points to trade at 2,248.32.

Hot Stocks of the Day: HNZ, BA, HIBB, EK

HJ Heinz Co. (NYSE: HNZ) reported net income of $237 million, or $0.73 per share in its fiscal 2012 second quarter, versus $251 million, or $0.78 per share last year. Analysts had forecasted EPS of $0.80 for the company. Sales in the quarter ended October 26, 2011 grew to $2.83 billion. Shares were down 2.03 percent, or $1.07, to trade at $51.75.

Boeing Co. (NYSE: BA) announced that Indonesia's Lion Air has committed to a deal for 230 airplanes at a list price of $21.7 billion. It's the largest commercial-airplane order ever in Boeing's history by both dollar volume and total number of airplanes. Shares of BA gained 0.44 percent, or $0.29, to trade at $66.38.

Hibbett Sports Inc. (Nasdaq: HIBB) reported 27 percent increase in its FY 2011 Q3 net income to $16 million, or $0.59 a share, from $12.6 million, or $0.44, in the year-earlier quarter.?Sales rose to $185.2 million from $167.4 million. Analysts had! estimat ed a net profit of $0.51 a share of profit on $180 million of sales. Shares gained 3.18 percent, or $1.37, to trade at $44.51.

Eastman Kodak Co. (NYSE: EK) plans to sell its online photo-sharing business. It has approached photo-sharing websites, competitors, private-equity firms and retailers about buying the unit, which enables users to store their digital photos and print them out into scrapbooks, cards and calendars for a fee.

Shares were down 1.68 percent, or $0.02, to trade at $1.17.

Currencies and Commodities:

In the world of currency, the US dollar lost 0.38 percent against the Japanese yen, 0.40 percent against the British pound, and 0.81 percent against the euro.

Commodities traded in a positive note today with oil adding 0.65 percent to trade at $99.46 per barrel. Gold prices were up 0.94 percent to trade at $1,736 per ounce. Among major indices, the DJ-UBS Commodity rose 0.344 percent, and the Reuters-Jeffries CRB gained 0.38 percent.

Global Market:

The European markets traded in negative note today European Central Bank chief Mario Draghi called upon Europen policymakers to act fast to get resolve the bloc's debt crisis. Great Britain's FTSE 100 lost 0.76 percent or 41.14 points to 5,382. Germany's DAX was down by 0.02 percent, or 1.09 points to 5,849.08, and France's CAC40 lost 0.16 percent or 4.87 points to 3,005.42.

In the Asian market, China's Shanghai Composite closed lower by 1.89 percent, or 46.48 points to 2,416.56. Hong Kong's Hang Seng fell 1.73 percent or 326.24 points to 18,491.23. Japan's Nikkei 225 was down 1.23 percent or 104.72 points to close trading at 8,374.91. India's BSE 30 Sensex lost 0.55 percent, or 90.20 points to close at 16,371.51! .

Sector Scan:

The basic materials sector emerged as the market's best performing sector by the afternoon session after adding 0.94 percent during the session. Among major movers in the sector, Ultrashort Basic Materials ETF (NYSEArca: SMN) rose 6.57 percent or $1.23 to trade at $19.94. Dow Jones U.S. Basic Materials ETF (NYSEArca: IYM) was down 3.27 percent or $2.17 to trade at $64.23. Among major stocks, shares of Mosaic Co. (NYSE: MOS) rose 2.70 percent or $1.37 to trade at $52.13. Shares of CF Industries Holdings, Inc. (NYSE: CF) gained 4.43 percent or $6.56 to trade at $154.75. Shares of Stillwater Mining Co. (NYSE: SWC) were up 0.09 percent or $0.01 to trade at $10.58.


3 Commercial REITs That Will Make You Money, 2 That Won't

REITs pay out 90% of their REIT net income by way of dividends to shareholders. With the economy looking weaker than it has for some time, here we look at 5 REITS that concentrate on commercial properties and mortgages:

Apollo Commercial Real Estate (ARI): Shares are trading around $12.40, as against their 52-week trading range of $11.79 to $17.14. At the current market price, the company is capitalized at $255.37 million. Earnings per share for the last year were $1.12. It paid a dividend of $1.60 last year (a yield of 12.90%).

The company announced a 12-month share repurchase program in August that will see $35 million of shares bought back. This was just after it had announced a 29% increase in its second quarter operating earnings. Shares have been pulled back from their year high as investors have shied away from equity investments. But Apollo’s earnings growth should remain strong through the next twelve months and support the dividend. The company is indicting its confidence with its share repurchase program, and investors should follow suit.

Getty Realty Coporation (GTY): Shares are trading at $15 at the time of writing, against their 52-week trading range of $13.41 to $32.20. At the current market price, the company is capitalized at $498.24 million. Earnings per share for the last fiscal year were $1.66, placing the shares on a price-to-earnings ratio of 9. It paid a dividend of $1.00 last year (a yield of 6.70%).

Getty Realty operates mostly in the leasing of retail gas stations and convenience stores. Its largest tenant is Cambridge Petroleum Holding Inc, a small niche player. It is behind in rental payments, and observers are concerned by its creditworthiness. This calls into question a large part of Getty’s earnings. Until this matter is resolved, I see no upside for the shares. Avoid.

Starwood Poperty Trust (STWD): ! Shares a re trading at $16.70 at the time of writing, at the low end of their 52-week trading range of $15.89 to $23.67. At the current market price, the company is capitalized at $1.56 billion. Earnings per share for the last fiscal year were $1.61, placing the shares on a price-to-earnings ratio of 10.42. It paid a dividend of $1.76 last year (a yield of 10.50%).

Starwood is seeking to continue its securitization program, having completed the securitization of $154.4 million of four mortgages at the end of August. It now has around $120 million of loans left, which are targeted for securitaization. The completion of this process should shield it from any marked economic downturn and resulting defaults. Earlier in the month, the company announced plans to repurchase up to $100 million of its own shares. A company that is protecting its earnings, whilst at the same time showing confidence in its strategy. Buy.

Whitestone REIT Class shares (WSR): Shares are trading around $11.20 at the time of writing, as against their 52-week trading range of $10.05 to $14.94. At the current market price, the company is capitalized at $122.88 million. Earnings per share for the last fiscal year were $0.11, placing the shares on a price-to-earnings ratio of 98.16. It paid a dividend of $1.14 last year (a yield of 10.20%).

Whitestone owns and leases out around 40 properties in the Texas region. It has cash of $57.78 million, and debts of just $103.05 million. Its long-term leasing agreements should protect earnings going forward, which are expected to come in at around $0.94 per share this year, and then rise to around $1.20 the year after. This should underpin the dividend, though longer term profitability will be driven by the performance of the retail economy over the next three to five years. For those confident in a strong economic turnaround, the shares are a buy. For others, they are best left alone.

Redwood Trust Inc (RWT): Shares are trading around $10.50 at the time of writing, as against their 52-week trading range of $10.09 to $17.16. At the current market price, the company is capitalized at $827.20 million. Earnings per share for the last fiscal year were $0.76, placing the shares on a price-to-earnings ratio of 13.83. It paid a dividend of $1.00 last year (a yield of 9.50%). Redwood’s portfolio of commercial and residential real estate loans and securities is being attacked from all directions. Firstly, the economic climate is not conducive to its core businesses: a slowdown will mean more defaults on residential mortgages, and hardship for the commercial sector. Further, short-term interest rates are being pushed higher by the Fed’s Operation Twist. This will place pressure on Redwood’s loan book margins. If the Fed’s attempts to kick start the economy work Redwood’s profits will increase accordingly, though it is too early to say with any confidence. Avoid for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Market Recap: Stocks Rally as U.S. Economic Data Overshadows Sovereign Debt Crisis

Markets closed up on Wall Street today: Dow +0.14%, S&P +0.48%, Nasdaq +1.09%, Oil +1.31%, Gold +0.19%.

On the commodities front, Oil (NYSE:USO) climbed to $99.43 a barrel. Precious metals were also up, with Gold (NYSE:GLD) climbing to $1,781.80 an ounce while Silver (NYSE:SLV) rose 1.58% to settle at $34.56.

Hot Feature: NYPD Disbands Occupy Wall Street Camp Ahead of Massive City-Wide Demonstration

Today’s markets were up because:

1) Europe. Stocks opened lower today as bonds yields in Europe climbed. While Italian bond yields have been climbing, reaching a euro-era record last week, it was the news that yields in neighboring Spain and France were also on the rise that worried investors today. Yields on Spain’s 10-year bond have climbed to about 6.3%, and France’s bond yields are now around 3.67%.

2) U.S. Markets gained ground in the afternoon as positive economic data in the U.S. temporarily overshadowed the sovereign debt crisis in Europe. Retail sales rose 0.5% in October, beating expectations, while the New York manufacturing index unexpectedly returned to positive territory after five months in the red, and producer prices declined 0.3% in October following a 0.8% rise in September.

3) Nasdaq. The tech-heavy Nasdaq outperformed the S&P 500 and the Dow today as Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Cypress Semiconductor Corp. (NASDAQ:CY) climbed ! higher. Berkshire Hathaway��s recent 13-F filing showed it had purchased Intel, while Cypress is riding the Halo effect of Buffet��s buy. Apple shares rebounded from losses last week as suppliers for its new ��15-inch ultra-thin notebook model�� started shipping components.

BONUS: Will the FHA Need a Taxpayer Bailout?

Bemis Company Inc. Third Quarter Earnings on Deck

S&P 500 (NYSE:SPY) component Bemis Company, Inc. (NYSE:BMS) will unveil its latest earnings on Wednesday, October 26, 2011. Bemis Company is a manufacturer of flexible packaging products and pressure-sensitive materials for customers worldwide.

Bemis Company, Inc. Earnings Preview Cheat Sheet

Wall St. Earnings Expectations: The average estimate of analysts is for net income of 58 cents per share, a rise of 1.8% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from 63 cents. Between one and three months ago, the average estimate moved down. It has been unchanged at 58 cents during the last month. Analysts are projecting profit to rise by 0.9% versus last year to $2.10.

Past Earnings Performance: The company beat estimates last quarter after falling short in the prior two. In the second quarter, the company reported profit of 51 cents per share versus a mean estimate of net income of 50 cents per share. In the first quarter, the company missed estimates by 5 cents.

Wall St. Revenue Expectations: On average, analysts predict $1.37 billion in revenue this quarter, a rise of 6.2% from the year ago quarter. Analysts are forecasting total revenue of $5.34 billion for the year, a rise of 10.3% from last year’s revenue of $4.84 billion.

Analyst Ratings: Analysts seem relatively indifferent about Bemis Company with four of seven analysts surveyed maintaining a hold rating.

A Look Back: In the second quarter, profit fell 9% to $54.3 million (51 cents a share) from $59.6 million (54 cents a share) the year earlier, but exceeded analyst expectations. Revenue rose 7.9% to $1.37 billion from $1.27 billion.

Key Stats:

The decrease in profit in the second quarter broke a streak of three consecutive quarters of year-over-year profit increa! ses. Net income rose 66.4% in the first quarter, more than twofold in the fourth quarter of the last fiscal year and 71.4% in the third quarter of the last fiscal year.

Revenue has risen the past four quarters. Revenue rose 29.6% in the first quarter from the year earlier, climbed 37.8% in the fourth quarter of the last fiscal year from the year-ago quarter and 44% in the third quarter of the last fiscal year.

Competitors to Watch: Sonoco Products Company (NYSE:SON), Sealed Air Corp. (NYSE:SEE), Rock-Tenn Company (NYSE:RKT), AptarGroup, Inc. (NYSE:ATR), Amcor Limited (AMCRY), and Can Tho Sadico Joint Stock Corp (NYSE:SDG).

Stock Price Performance: During September 22, 2011 to October 20, 2011, the stock price had risen $1.51 (5.2%) from $29.21 to $30.72. The stock price saw one of its best stretches over the last year between June 24, 2011 and July 1, 2011 when shares rose for six-straight days, rising 6.1% (+$1.93) over that span. It saw one of its worst periods between July 21, 2011 and August 2, 2011 when shares fell for nine-straight days, falling 9.2% (-$3.10) over that span. Shares are down $1.20 (-3.8%) year to date.


The Week Ahead: Can the Bulls Stay in Charge?

Tuesday’s drop gave investors an excellent entry point for what looks like a sustained rally. Of course, certain groups appear better than others at the moment, writes senior editor Tom Aspray.

It was another headline-driven week for the markets, as last Tuesday’s plunge in reaction to uncertainty in the Euro debt plan shook the confidence of even some bullish investors.

As I noted last week, the market was quite overbought, so a correction was likely. But it was sharper than I expected.

The market is now awaiting the confidence vote in Greece, which will be completed late Friday, and concerns have been growing over Italy since Prime Minister Silvio Berlusconi turned down funding from the IMF on Friday. The Italian bond and stock markets were not convinced, and once again came under pressure.

Though Tuesday’s losses were quite severe, if you look at the charts the pullback looked fairly normal. In many cases, Tuesday’s decline just filled the gaps from the previous week, which is pretty normal from a technical standpoint.

The MF Global debacle also shook the confidence of investors. After many years in the market, I am still surprised that this type of mismanagement within a financial organization can still go on undetected. The highly leveraged position in euro debt held by MF Global was shameful, and unfortunately it is the employees and customers of MF Global who bear the brunt of the pain.

Certainly, the battle between the bulls and the bears continued, and it is likely that many weak longs were taken out of them market last Tuesday. Stocks finished the week lower for the first time in five weeks.

However, last Thursday’s strong gains in reaction to the surprise rate cut by the ECB put the bulls back in charge. On Friday, stocks edged higher from the early weakness to close well off the lows, which was encouraging.

The good signs came in spite of the disappointing employment rep! ort. And while the number of new jobs missed expectations, the upward revisions in the prior months were positive. This suggests that we may see further upward revisions.

Most economists have now given up on the double-dip scenario, though many are staying out of the markets due to concerns over Greece (and now Italy), as well as the impending deadline for the supercommittee.

The markets took the lack of a definitive final communiqué from the G20 meeting pretty well. It does seem that the IMF will have emergency funding in place quickly if needed.

The daily chart of the E-mini S&P futures shows that last Tuesday’s decline held above the key 38.2% Fibonacci retracement support at 1,204.75. A close back below this level would put the bears back in charge. This would project a drop down to the 50% support at 1,178.75.

The futures closed well off the lows, so the bears are likely a bit nervous. It appears that much of the action over the past two weeks has been in the futures; volume was especially high on October 27. This was likely portfolio managers belatedly jumping into the market…but one wonders how many were stopped out last Tuesday, as they quickly had sharp losses.

As I noted in today’s in-depth technical review of the stock market, sentiment did reach an extreme in early October, but now there are fewer bears. They need to get much more bullish before it is a concern, and typically it takes several months for the sentiment to shift from one extreme to the other.

There were some interesting numbers on money flow last week. It seems as though investors are now willing to accept more risk. It was reported that $25 billion moved out of money market funds, which was the highest since August. Another $3.5 billion went into emerging-market equities. The last time the flows were that high was in April.

Money also flowed out of the Treasury market. As I noted a last week, a shift from bonds to equities could provide fuel for even a stronger ! stock ra lly. If these trends continue over the next few weeks, they could have intermediate-term significance.

Other economic data was mixed. Retail sales were a bit lower, though some stores like Kohl’s (KSS) exceeded estimates.

Forecasts for consumer spending during the holidays are still low, but I continue to think that the actual figures will beat analysts’ expectations. I still like the retail sector, and think it can continue to move higher until we get closer to the holidays.

This week is fairly light for economic news. The most notable numbers come at the end of the week. Thursday, of course, we have weekly jobless claims, as well as the international trade and Import/Export prices. This is followed on Friday by the latest readings on consumer sentiment, which is probably the biggest report of the week.

Monti’s Plans for Italy Win Vote of Confidence in Senate

Mario Monti and his government of technocrats won their first vote of confidence on Thursday after the recently sworn-in prime minister presented an ambitious program to stimulate economic growth before the Italian Senate, urging lawmakers to set aside politics in favor of national unity and responsibility as Italy and Europe face a moment of “serious emergency.”

Monti, an economist and former European Commissioner, said his government would work to change Italy’s labor market and pension system, fight tax evasion, and make it easier for businesses to grow. Monti also urged Europe to consider the risks involved in leaving Italy to its own fate.

��The future of the euro depends on what Italy does in the next few weeks. Partly, not only, but partly,�� said Monti, warning that ��the end of the euro would unravel the single market, its rules, its institutions, and would take us back to where we were in the 1950s.��

Monti urged Italian lawmakers to back his “government of national commitment,” shortly after which his government won a confidence vote in the upper house of parliament by a landslide, 281 votes to 25. Only one party, the right-wing Northern League, withheld its support from Monti, who faces a second vote in the lower house — the Chamber of Deputies — on Friday.

In presenting his plan for economic reform, Monti told Italians to expect to make sacrifices in the coming months, but pledged those sacrifices would be fair and evenly spread. Such changes would involve changes to the labor market, welfare benefits, and pension and fiscal systems.

Addressing what he considered to be a fundamental cause of Italy’s slow growth, Monti said his government would work to grant young people and women greater access to the workplace. ��They are the two great wasted resources of the country,�� he said.

Monti’s two-pronged course of action would include measures to restore market confidence in Italy in the short term, as we! ll as in vestments in structure changes that would help in the long term.

Some of Monti’s proposed long-term projects include deregulating closed professional guilds, thus opening them to competition, and improving the efficiency of public sector services.

Monti also said his government would probably have to reintroduce a property tax on first homes, while also rooting out tax evaders, a task Monti said would lead to the reduction of fiscal pressure on businesses and fixed-income employees and pensioners.

Sticking to his promise that sacrifices would be fair and evenly spread, Monti said cuts to the costs of elected officials, as well as public administration, would be “unavoidable.”

Monti’s speech, his refusal to sanitize the harsh truth of Italy’s economic challenges, was a breath of fresh air for Italians, as former Prime Minister Silvio Berlusconi, right up to his resignation, tended to downplay the situation. As recently as two weeks ago, Berlusconi said Italy was a wealthy country where “restaurants are full of people.”

Conversely, Monti presented a picture of an economy with higher youth unemployment than in other European countries, with wealth disparately distributed between a wealthier north and a poorer south, and with growth lagging for the last decade.

Consisting mostly of academics, bankers, top-level civil servants — all experts in their fields — and not a single politician, Monti expressed his hope that the apolitical nature of his government would be able to help Parliament regain a measure of concord and “reconcile citizens and institutions to politics.”

Friday, November 18, 2011

The True Cause Of America¡¯s Troubles

Are you wondering why the U.S. economy has now stagnated �� despite the largest government stimulus, bailouts, stimulus, and money printing of all time?

Are you puzzled why the real income of American households has just suffered its worst plunge in recorded history �� despite the so-called "recovery" of 2009-2011?

Do you want to know why it now takes 40.5 weeks for the average unemployed worker to find a new job �� also the worst in recorded history?

And are you flabbergasted by the utter failure of the U.S. Congress to do anything about trillion-dollar federal deficits for years to come?

Then, let me tell you precisely what's causing this mess.

The fundamental source of the nation's troubles is DEBTS that are far larger and more destructive than Washington admits.

Indeed, the U.S. government is covering up the magnitude of the nation's debt disasters with three major deceptions:

Debt Deception #1
Washington Excludes the Massive
Debts of Federal Government Agencies

"As long as the government's debt burden is under 100 percent of GDP," they say, "we can handle it. It's only when it surpasses the 100 percent threshold that we'll be in danger."

True or false?

Let's look at the numbers:

??U.S. GDP is $14.6 trillion. And ��

??According to the Federal Reserve's Flow of Funds, U.S. Treasury debts outstanding are $9.7 trillion.

??So that means the debts are well under the 100 percent danger threshold, right?

Wrong! The authorities conveniently ignore a massive $7.6 trillion of additional government debts that have piled up on the books of U.S. government agencies, such as Fannie Mae and Freddie Mac.

These agencies were created by the U.S. government, have always been controlled by the U.S. government, and now, after the federal bailouts of the last ! debt cri sis, are even owned by the U.S. government.

How in the world anyone could possibly exclude their debts from the U.S. government's books is beyond me. And yet that's precisely what Washington does.

Add those debts to the government's total burden �� and guess what! Instead of $9.7 trillion in U.S. government debts outstanding, the actual total comes to $17.3 trillion �� a whopping 118.3 percent of GDP!

How bad is that?

Well, back in 1970, about eight months before President Richard Nixon devalued the dollar and abandoned the gold standard, all U.S. government debts (even including government agencies) was only 32.9 percent of GDP.

Now, at 118.3 percent, the nation's debt load is nearly FOUR times worse �� in an economy that's far less competitive than it was in the 1970s.

Moreover, at 118.3 percent of GDP, the U.S.

government now has roughly the same horrendous debt burden as Greece had before its collapse and as much as Italy has today!

Debt Deception #2
Wall Street and Main Street Are
Also Swimming in Excess Debts

The current debate in Washington seems to be focused almost exclusively on U.S. government debts and deficits. ?

However, the debt burden of U.S. households, local governments, and corporations is also the biggest in history.

In fact, throughout more than two centuries of American history, total U.S. debts (including BOTH public and private sectors) almost never exceeded 200 percent of GDP; and when it did, it was invariably a cause for grave alarm.

Now, it has mushroomed from 154 percent of GDP in 1970 to a nosebleed level of 360 percent of GDP this year.

Needless to say, this is a massive, inescapable burden that pervades nearly every aspect of American life �� via mortgages, credit cards, bank loans, municipal debt, and corporate debts of all kind.

Debt Deception #3

Since 2009, the giant U.S. engine for the creation of new PRIVATE-sector credit has utterly collapsed.

Sure, the federal government and its agencies continue to borrow money at a torrid pace �� to finance their massive deficits. But ��

In nearly all U.S. sectors outside of the federal government, instead of new credit being created, old credit is being destroyed.

I have never seen this happen before in my lifetime! Nor did my father, J. Irving Weiss.

Dad began compiling statistics on the creation of new credit in the early 1940s. And he introduced his methodology to the Federal Reserve's research department soon after World War II, which they later adopted, calling it the Flow of Funds.

So if anyone could have been in a position to track this phenomenon, Dad would have been the one. But he told me �� emphatically and repeatedly �� that in all the years he tracked it, he never saw a sustained, outright NET contraction of credit.

was robust and booming: At its peak in 2006, the U.S. added a net of $3.5 trillion in new mortgages, consumer credit, and other nonfederal debts.

And in 2007, it added another $3.3 trillion, according to the Fed's Flow of Funds.

Then, suddenly, in 2008, banks began cutting back on new loans. Hundreds of billions of mortgages went into foreclosure. And combined, the net overall expansion of credit outside of the federal government plunged by a shocking ! 83 perce nt from the prior year �� to a meager half-trillion dollars!

Can you imagine that?

Think about what the impact would have been of an 83 percent plunge in the stock market �� or in any sector of the economy!

Yet here you had precisely that kind of a collapse in THE most fundamental source of stimulus for the U.S. economy �� credit!

But if that sounds bad, wait till you hear the rest of the story ��

In 2009, as millions of Americans defaulted on their mortgages, auto loans, or credit cards �� and as thousands of banks tightened up their lending standards for new credit �� we actually witnessed a massive liquidation of private credit.

When the dust settled, the Fed tabulated a net destruction of credit to the tune of $1.99 trillion in mortgages, consumer credit, bank loans, and other nonfederal debts.

It was literally the biggest decline of credit outstanding in recorded history.

If it ended there, it would have been bad enough. But it didn't. The credit carnage continued in 2010 and is still taking place now in 2011:

All told, in the 30 months between January 1, 2009 and June 30, 2011, the U.S. has witnessed the net destruction of nearly $3.2 trillion in nonfederal credit.

Remember: Credit is the stuff that drives the U.S. economy �� that millions of American families are addicted to in order to maintain their spending habits and lifestyle �� that businesses count on to keep their sales and earnings flowing.

So now do you understand why the economy is stagnating? It's quite simple when you think about it:

Washington is hogging nearly all the new credit available to finance its out-of-control deficits. But nearly everyone else is sucking hind teeth or, worse, getting kicked out of the pen entirely!

No wonder households are suffering such huge income declines despite the "recovery"!

No ! wonder i t's taking an average of 40.5 weeks for folks losing their job to find a new one!

No wonder Congress is hopelessly deadlocked on budget fixes! With households and small businesses already suffering massive credit withdrawal, no politicians in their right mind would to go to their home district to impose even more pain.

Today In Commodities: Is The System Flawed?

The longer this despicable situation goes unresolved with MF Global the larger effect we see on the commodities market and overall financial system. We hope to see a resolution in the coming weeks.

Crude is roughly $5 off its highs and we are operating under the influence that an interim high was reached this week. We are advising clients to be selling rallies and see Crude closer to $90 than $100 in the coming weeks. That being said, we would expect the distillates to continue moving south in the short run as well. A potential triple bottom is in the making in natural gas but we are reaching trying to find a bottom. Wait for evidence or, if picking a bottom, have tight stops. We expect to end the week lower, near the bottom of the recent trading range for the last four weeks. We remain mildly bearish expecting lower ground, however clients have moved to the sidelines as clients had options that were decaying due to the sideways trade.

Gold held the 50 day MA for the second day in a row. Gold will close the week lower by approximately $65/ounce . We expect an additional $50-80 decline in the weeks to come; trade accordingly. The 40 day MA that had previously served as support should now act as resistance; in December at $32.50. Silver has lost roughly $3/ounce; we expect $2-3 more in the coming weeks. Mixed bag in currencies as the dollar is approaching overbought levels. We suggest moving to the sidelines on any futures positions.

Cotton lost 7% in the last two days dragging prices to four month lows. We missed a short entry and will be looking to establish bearish trades next week on a bounce; trade accordingly. The sentiment remains bearish in grains -- in corn, wheat and soybeans. Note the head and shoulders formation in corn that on a breach of the neckline could indicate a major break; trade accordingly.

Live cattle broke 1.65% ! today dr agging prices to three week lows. Another 1.5-2.5% and clients will be looking to re-establish bullish trades. This would also fill the gap in the chart in February from late September. Lean hogs have gained six out of the last seven sessions lifting prices to three week highs. We would remain long thinking we get a probe to the contract highs in the coming weeks.

Risk disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results

If nothing else, get a little perspective from last week's drop

gold bubbleI know better than to say ��I told you so�� (see ��Gold: Has the Bubble Finally Burst?�� from early last week). The market gods tend to be jealous and vengeful and appear to take great pleasure in humbling the arrogant. So I know better than to tempt them.

Besides, even after last week��s bloodletting, gold still is one of the best-performing assets of 2011; the September selloff did little more than erase August��s parabolic surge. And, in the interests of full disclosure, I��ve been on the record as a gold bear since it crossed the $1,200 mark (it was at about that point that the gold bull market entered the theater of the absurd with such novelties as ATM machines that dispense gold ingots).

Still, it would only be appropriate if last week��s action did mark the top. The market gods might indeed have a twisted sense of humor, and Donald Trump��s high-profile blustery rant that immediately preceded the crash would have been a good opportunity for divine smite. After Trump accepted $176,000 in gold bullion as a security deposit from a new tenant, he announced loudly that ��It��s a sad day when a large property owner starts accepting gold instead of the dollar. �� If I do this, other people are going to start doing it, and maybe we��ll see some changes.�� (See ��Trump��s New Gold Standard��)

Whether other people follow in The Donald��s footsteps and accept gold as collateral remains to be seen, but if they do, they no doubt will require a few more ounces given the drop in price.

The question on everyone��s mind is ��What now?�� Does the gold rout continue from here, or can gold bugs look forward to a nice bounce this week?

According to precious metals site, the spot price of gold has continue! d its do wnward drift, falling to $1,606 per ounce in Hong Kong early Monday trading. And while anything can happen once the larger American markets open, there is reason to believe this correction has a way to go.

Gold��s parabolic rise in August prompted the CME Group to raise margins on its gold and silver futures contracts on Friday by 21.5% and 15.6%, respectively. Given the recent price action and the uncertainty coming out of Europe, speculators are not likely to risk margin calls with aggressive bullish bets on the yellow metal at the moment. Furthermore, with the end of the year fast approaching, portfolio managers who have profited handsomely from gold��s rise are more likely to take profits than to add to their positions.

But perhaps most damaging is the psychological angle. Both market professionals and retail investors alike have been attracted to gold for its perceived status as a safe haven. But after the wild ride that the price of gold has seen during the past month, its credibility as a haven is almost laughable. What good is fire insurance that disappears the moment your house actually catches fire?

When global markets violently sold off last week, investors fled to the U.S. dollar and to U.S. Treasuries for safety. Yes, that same fiat dollar that gold bugs love to hate and those same U.S. Treasuries that just got downgraded last month by Standard & Poor��s. It appears that when the situation gets dire enough, ideology goes out the window.

These are all shorter-term concerns, of course. But the long-term picture is even worse. Let��s review some of the points that I��ve made during the past year:

  1. The inflation so many feared in the wake of Bernanke��s 2008 doubling of the monetary base never materialized. And guess what — it��s not going to. Anyone who cared to consult a history book would have seen that the bursting of property and credit bubbles are generally followed by deflation, not inflation. This certainly was ! the case in post-1990 Japan, the best historical example we have. Gold��s alleged value as an inflation hedge will be of little use in a decade of stagnant prices.
  2. The dollar isn��t being replaced as the international reserve currency anytime soon. This is not some misty-eyed, patriotic support of my native land��s currency. No, to the contrary. America��s monetary policy is misguided, and the fiscal policy coming out of Congress and the White House is criminally incompetent and damaging. But, to adapt Winston Churchill��s quote on democracy, ��the dollar appears to be the worst currency �� except for every other currency conceived.�� As grave as America��s problems are, they pale in comparison to those facing the euro zone and Japan. And no matter how much perennial presidential candidate Ron Paul might fancy it, there will be no return to a global gold standard. Given currency supplies, a return to a gold standard almost certainly would mean massive deflation and high unemployment. That is a political nonstarter, even in the age of the Tea Party.
  3. Let us not forget that gold is not really an ��investment�� in the classic sense. Unlike a stock, bond, rental property, piece of productive farmland or even a piece of artwork that can be lent out for viewing, gold produces no income, nor does it create anything of value. It��s a shiny trinket. And its value as a shiny trinket has been under attack for quite some time now. Gold��s use for jewelry purposes has been nearly cut in half during the past decade, while its hoarding for ��investment purposes�� has risen by a factor of 65 (see ��Gold Climax��). Meanwhile, many high-quality, dividend-paying stocks — companies that will survive financial Armageddon — are trading at valuations not seen in decades. (see ��Wintel: The Buy of the Decade��)

Again, I��m not calling the top of the gold bubble. I��ve been down that rabbit hole. I��ve angered the market gods before, and they have punished me.

Still, the short-term case for g! old is q uestionable at best, and the long-term case even worse. We might have seen the high-water mark in the price of gold for the next 30 years. Or, this simply could be a much-needed correction in a much longer secular bull market. Only time will tell.

But investors should use last week��s gold-price plunge to get a little perspective — and maybe a little humility too. Gold is not a safe haven. It��s not even an investment. It��s a high-risk speculation that��s had a great run. And that run, if it hasn��t already, will come to an end.

Charles Lewis Sizemore, CFA is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: ��3 Safe Emerging Market Stocks for a Shaky Market.��

Amazon Kindle Books Hit Libraries

Amazon (AMZN) officially launched its e-book lending library.

The e-commerce giant boasts 11,000 participating libraries that will make Kindle books available.

"When you borrow a Kindle public library book, you'll have access to all the unique features of Kindle books, including real page numbers and Whispersync technology that synchronizes your notes, highlights, and last page read," Amazon said on its Web site. "After a public library book expires, if you check it out again or choose to purchase it from the Kindle store, all of your annotations and bookmarks will be preserved."

Barnes & Noble (BKS)and Sony (SNE)>already offer a similar service for their e-readers.

In other e-reader news, RadioShack(BKS) said it will begin selling Barnes & Noble's Nook on Oct. 3. The device will start at $139.

-- Written by Jeanine Poggi>To follow the writer on Twitter, go to

Buffett Goes Whole Hog Into IBM

Warren Buffett revealed?a big purchase of IBMstock, couching it in his familiar language of favoring companies with durable competitive advantages.? In IBM's case, the purported advantage is the loyalty of the company's IT clients to its services.? What else about Big Blue could have caused Mr. Buffett to shed his long-held aversion to owning technology stocks?? I'll offer a theory.?

I noted months ago that Mr. Buffett's recent investments reveal bets on?oil scarcity?(Lubrizol) and crony capitalist bailouts (Bank of America).? IBM can be seen as a similar play on those control systems that will prove necessary for a global population faced with energy scarcity and a transition to neofeudalism.? IBM is a leading provider of smart meter integration services for utilities.? You may not have heard much about the smart meter revolution but that's okay.? Smart meters are going to hear a lot about you.? These are devices that monitor the power consumption in each utility customer's home.? Utilities expect to be able to predict demand for energy at a household level and offer customized?incentives targeted to each family's consumption patterns.? The smart grid will know exactly how long each of your electric appliances is turned on.? Data on the types of appliances households?own and how they are used is invaluable to marketers.?

A bet on Big Blue is more than a bet on the low-hanging fruit of intelligent IT and?energy conservation.? It's a wager that smart grids and the erosion of privacy they represent will be a windfall for technology companies.? Data service providers like IBM will store and sell data on consumer lifestyles to companies that want to know how you use everything in your home.? Mr. Buffett is a smart man indeed if he is betting on a trend toward more global controls on individual lifestyles.?

Full disclosure:? No position in IBM at this time.?

Pepsi Profit Rises on Higher Volume

PepsiCo (PEP)shares are bubbling over this morning after the beverage-and-snack giant reported better than expected third-quarter earnings and revenues.

Shares were up 2.7% at $62.59 in early trading after the reported a 4.1% rise in third-quarter profits as volume rose.

The company reiterated its full-year guidance for high-single digit earnings growth, but lowered its expectations for the benefit from foreign exchange rates. This suggests expectations for slightly better growth from the underlying business.

The beat came despite a 21% jump in costs, which Pepsi managed to offset with higher prices.

Pepsi reported a profit of $2 billion, or $1.25 a share, up from $1.92 billion, or $1.19 a share, a year earlier. Core earnings, which exclude merger charges and mark-to-market losses or gains, rose to $1.31 a share from $1.22. Revenue surged 13% to $17.58 billion.

Analysts polled by Thomson Reuters had been forecasts core earnings of $1.30 a share on revenue of $17.18 billion.

Operating margin dipped to 16.5% from 18%, amid higher costs.

Pepsi’s Americas drinks business posted small volume growth, its soda business didn’t fare as well. Non-carbonated beverages led the volume growth, posting a mid-single-digit increase in non-carbonated beverages, including a 9% increase in Gatorade.

Obama Courting Another Recession

Stocks are dropping like stones tossed into a summer lake, and the economy dances along the precipice of a second recession.

The U.S. economy is imploding, thanks to incompetence in Washington and arrogance on Wall Street. President Obama is hardly the victim of his predecessor's mistakes as much as his own decisions.

The Great Recession was caused by an imbalance of demand between the United States and Western Europe, on the one hand, and China and other Asian economies, on the other. The latter maintain rigged and undervalued currencies -- essentially, those restrict conversion of their currencies into dollars and regularly purchase U.S. dollars to keep their currencies and exports cheap in western markets. They also impose all manner of high tariffs and restrictions on western exports into their markets.

During the Bush years, the U.S. trade deficit more than doubled to 5% of GDP -- thanks to growing imports from China and expensive oil. When dollars earned by producing goods in the United States go abroad to purchase imports but do not return to purchase exports, either inventories build and layoffs result, or Americans must consume more than they produce.

During the final years of the Bush expansion, Americans consumed on a grand scale. Led by China, Asia and Middle East exporters purchased U.S. securities with dollars from their trade surpluses, and New York bankers happily recycled those into creative mortgages that pushed U.S. real estate to unsustainable values. The bankers profited grandly, selling mortgage-backed securities to foreign and U.S. investors they knew would fail.

For a time, the proceeds from churning property and second mortgages permitted Americans to use their homes as ATMs and consume much more than they produced. In a nutshell, that permitted a $700 billion trade imbalance and full employment -- the economic equivalent of a perpetual motion machine.

When the house of cards collapsed, the Great Recession resulted. Until oil and trade policy are fixe! d and th e banks made to serve the public purpose and shareholders, as opposed to the interest of traders and senior management, the U.S. economy can't recover.

President Obama has done just about everything in his power to make matters worse.

He has dramatically slowed development of U.S. oil and gas development at a time when China, rich with dollars from currency market intervention, is driving up the price of all commodities. He has failed to "do business" with Chinese mercantilism. The trade deficit continues to pull down domestic demand, but this time there is no housing boom

He has left the worst perpetrators of the financial crisis, New York bankers, safe in their perches -- trading away and contributing to candidates sympathetic to the status quo. Those have found new outlets for their energy and no longer want to make bad loans and sell securities backed by those to unwitting investors.

New York banks enjoy, too much, recycling and trading all those Asian and Middle East dollars, and the big paydays that result, to support real changes in our trade, energy and banking policies. With the support of the Wall Street Journal, bankers are trying desperately to finance either the election of another President sympathetic to their views or the reelection of Obama. Consider the Journal's recent pillory of Mitt Romney for advocating realistic trade policies toward China.

And so it goes, the Fed vainly tries to resuscitate a failing U.S. economy, but until we get a President who will drill for oil, tax the conversion of dollars into yuan to offset Beijing's currency market intervention, and split commercial banking from other financial activities on Wall Street, we are simply not getting out of this mess.

Insurers Could Lose $10 Billion from Thai Floods: Berkley

By Andrew Bary

The recent flooding in Thailand could result in over $10 billion of losses for the global insurance industry, according to William Berkley, the chief executive of W.R. Berkley (WRB), a Greenwich CT-based property and casualty insurer.

Speaking at a Manhattan lunch, Berkley said the Thai losses could run as high as $25 billion. One affected company, Western Digital (WDC), a maker of disk drives with significant production in Thailand, said last month that 14,000 factories in Thailand have been flooded or damaged.

Berkley said insurers probably will pay significant claims for business interruption insurance. Its very difficult to get a flooded plant operational, he said, adding that the Thai insurance losses would be big numbers.

It has been a tough year for insurers when it comes to natural disasters, with numerous major catastrophes including the Japanese earthquake and Midwestern storms in the spring.

Berkley also reiterated his view that pricing is turning higher in the P&C sector and the trend should continue into 2012. Berkley noted in its third-quarter profit release that its average premium increase in the quarter was 3% and Berkley said today that pricing could be up 5% to 8% at year-end from late 2010. He said the P&C industry needs higher pricing to offset low interest rates and weak results from underwriting in recent years.

Berkley shares are up 7 cents at $34.71 today and have risen 27% this year, pacing a strong P&C sector as investors bet that favorable pricing trends will continue and lead to better financial results starting next year.

3 Deals to Watch: Crude, Coal and Diet Pills

ConocoPhillips (COP) Wednesday said it sold $2 billion worth of pipeline assets in two separate deals, which are a continuation of up to $20 billion in divestitures expected by 2012.

ConocoPhillips said it will be selling its 16.55% stake in Colonial Pipeline to Canadian pension fund Caisse de Dpt et Placement du Qubec for $850 million. The Houston -based company will also be selling its ownership of Seaway Crude Pipeline to Enbridge (ENB) for up to $1.15 billion. In a separate statement, Enbridge said it would use the purchase to reverse the direction of crude oil flows on the Seaway pipeline and transport oil from the delivery point of West Texas Intermediate in Cushing, Oklahoma to the Gulf Coast.

"These two sales of non-core pipeline assets are important components of our $15-20 billion divestiture program for the years 2010-2012," said Al Hirshberg, a senior vice president at ConocoPhillips in a statement announcing the deal.

With the deals, ConocoPhillips has accomplished roughly $10.5 billion in divestitures since 2010. In 2009, ConocoPhillips first announced a program to divest $10 billion of non-core oil assets like refineries and pipelines by 2011. With Wednesday's pipeline sales, it looks like the company's hit its target and added up to another $10 billion in sales expected by the end of 2012.

52-Week Lows: Miners and Banks Dominate the List

Wall St. Watchdog reveals information about 35 stocks that hit 52-week lows in today��s trading. Note that this list excludes all stocks with a market capitalization less than $10 billion:

  1. JPMorgan Chase & Co. (NYSE:JPM): Down 5.92% to $30.34. JPMorgan Chase & Co. provides global financial services and retail banking. The Company provides services such as investment banking, treasury and securities services, asset management, private banking, card member services, commercial banking, and home finance. JP Morgan Chase serves business enterprises, institutions, and individuals.
  2. KB Financial Group, Inc. (NYSE:KB): Down 3.04% to $33.15. KB Financial Group, Inc. is the holding company for Kookmin Bank. The Bank attracts deposits and offers commercial banking services. Kookmin offers mortgage and home equity, consumer and corporate loans; credit cards; securities investment and trading services; investment banking; investment advice; foreign exchange services; and insurance.
  3. Korea Electric Power Corp. (NYSE:KEP): Down 2.11% to $9.29. Korea Electric Power Corporation (KEPCO) generates, transmits, and distributes electricity to South Korea for a variety of uses. The Company also builds and operates hydro-power, thermal-power, and nuclear power units in South Korea.
  4. Mobile Telesystems OJSC (NYSE:MBT): Down 3.06% to $13.95. Mobile TeleSystems provides mobile telephone services in Russia and the former Soviet Union. The Company uses the GSM 900/1800 standard, operating throughout Russia and throughout Belarus, Ukraine, and Uzbekistan.
  5. Morgan Stanley (NYSE:MS): Down 8.6% to $13.82. Morgan Stanley, a bank holding company, provides diversified financial services on a worldwide basis. The Company operates a global securities business which serves individual and institutional investors and investment banking clients. Morgan Stanley also operates a global asset management business.
  6. Arcelor Mittal (NYSE:MT): Down 3.68% to $16.47. ArcelorMittal produces steel. The Company manufactures cold rolled, electrogalvanized and coated steels, slabs, special quality bars, and wire rods. Arcelor Mittal has steel making operations in Europe, the Americas, Asia, and Africa.
  7. Petroleo Brasileiro (PBR-A): Down 3.93% to $22.48.
  8. POSCO (NYSE:PKX): Down 5.55% to $84.94. POSCO manufactures various types of steel products. The Company produces hot rolled steel, cold rolled steel, stainless steel, and other forms of steel. The products are mainly used for automobile, construction, and shipbuilding industries.
  9. Research In Motion Limited (NASDAQ:RIMM): Down 5.24% to $21.54. Research In Motion Limited (RIM) designs, manufactures, and markets wireless solutions for the worldwide mobile communications market. The Company provides platforms and solutions for access to email, phone, SMS messaging, Internet, and Intranet-based applications.
  10. Rio Tinto plc (NYSE:RIO): Down 6.25% to $51.29. Rio Tinto PLC is an international mining company. The Company has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock, diamonds, talc and zircon. Rio Tinto’s various mining operations are located in Australia, New Zealand, South Africa, the United States, South America, Europe, and Indonesia.
  11. Shinhan Financial Group Co. Ltd. (NYSE:SHG): Down 5.17% to $67.71. Shinhan Financial Group Co., Ltd., a holding company, provides a full range of consumer and commercial banking-related financial services. The company’s main businesses include banking, securities brokerage, trust banking, and assets management to individuals, businesses, and other financial institutions.
  12. Suncor Energy Inc. (NYSE:SU): Down 3.85% to $27.95. Suncor Energy, Inc. is a integrated energy company focused on develop! ing the Athabasca oil sands basin. The Company extracts and upgrades oil sands into refinery feedstock and diesel fuel, explores for, develops and produces natural gas, refines crude oil and markets a range of petroleum and petrochemical products, and operates crude oil pipelines and retail petroleum stations.
  13. Teck Resources Limited (NYSE:TCK): Down 6.67% to $33.88. Teck Resources Ltd. is an integrated natural resource group with activities in mining, smelting, and refining. The Company mines zinc, copper, molybdenum, gold, and metallurgical coal in the United States, Canada, Peru, and Chile. Teck also produces refined metals, specialized metal products, and other products.
  14. Talisman Energy Inc. (NYSE:TLM): Down 3.32% to $13.67. Talisman Energy Inc. is an independent oil and gas producer. The Company has operations in North America, the North Sea, and Indonesia. Talisman is also conducting exploration in Southeast Asia, Algeria, Qatar, Colombia and Trinidad.
  15. Tenaris SA (NYSE:TS): Down 5.5% to $27.81. Tenaris S.A. manufactures seamless steel pipe products on a global basis. The Company also provides pipe handling, stocking, and distribution services to the oil and gas, energy, and mechanical industries. In addition, Tenaris supplies welded steel pipes for gas pipelines in South America.
  16. Grupo Televisa SA (NYSE:TV): Down 2.79% to $18.11. Grupo Televisa S.A. is the largest media company in the Spanish-speaking world, and a major player in the international entertainment business. It has interests in television production and broadcasting, programming, direct-to-home satellite services, publishing and publishing distribution, cable television, radio production, show business, feature film and internet portal.
  17. UBS AG (NYSE:UBS): Down 2.81% to $11.07. UBS AG is a wealth management, investment banking, and asset management firm. The Company provides a variety of financial services to individuals, ! institut ions, corporations, governments, and financial intermediaries around the world.
  18. Vanguard MSCI Emerging Markets ETF (NYSE:VWO): Down 3.81% to $38.68. Vanguard Emerging Markets ETF is an exchange-traded fund incorporated in the USA. The Fund seeks to track the performance of the MSCI Daily TR Net Emerging Markets USD Index. The Fund invests its assets in the stocks that make up the Index, holding each stock in the same proportion as its weighting.

Dynegy, Duke Energy and Progress Energy Weigh on Utility Stocks: DYN, NRG, CPN, DUK, PGN, XLU

Electric utility (NYSE:XLU) shares were depressed with Dynegy Inc. (NYSE:DYN) falling over 10% today before the big rally. Other shares declining in the sector most of the day were NRG Energy (NYSE:NRG), Calpine Corp (NYSE:CPN), and Duke Energy (NYSE:DUK).

Investing Insights: Utility ETFs: The Top 5 Exchange Traded Funds for Your Utility Investing List.

One reason weighing on these stocks is the Federal Energy Regulatory Commission��s unfavorable outlook on the proposed $26 billion merger between Duke Energy (NYSE:DUK) and Progress Energy (NYSE:PGN). The merger would create the nation��s biggest electric utilities, but regulators are questioning the public benefits of the deal on the one hand, and monopolistic outcomes on the other.

The federal commission said Friday it agreed with New Bern, a community of 30,000, 120 miles southeast of Raleigh, that the proposed merger “will increase already excessive levels of market concentration” in Duke’s (NYSE:DUK) and Progress’ (NYSE:PGN) service areas, particularly in Eastern North Carolina.

Thursday, November 17, 2011

Financial services, building industry stocks top the list

?Get Out Before It��s Too Late

Despite high unemployment, a shaky U.S. economy with talk of a double-dip recession, and more debt crises in Europe, stocks enjoyed one of the best Octobers on record. However, with earnings of most of the big movers of the S&P 500 now reported, the focus of investors has again turned to Europe, and the picture is not good. In addition to the massive problems in Greece, Spain and Italy, China��s inflation rate has caused their leaders to tighten credit, which could have a nasty impact on the West.

The names on this month��s list of stocks to sell are from sectors that will be negatively impacted by the continuing problems in Europe, along with another slowdown in the United States and Asia. Banks and financial services are high on the list of those that would be hit again. But building industry stocks, especially those that have rallied recently, are also subject to heavy selling. And companies that have been beneficiaries of the early run for solar power are now paying the price of oversupply and competition.

Here is our list of stocks to sell in November:


Stock to Sell #1 – Altera Corp. (ALTR)

Semiconductor company Altera Corp. (NASDAQ:ALTR) reported Q3 earnings that came in below revised analysts�� estimates, so estimates for Q4 and 2012 have been lowered.

The stock recovered from its low of almost $30 in late September, and broke into its former recovery channel triggering a stochastic buy signal. However, it is approaching significant resistance at its 200-day moving average above $40 and insiders have been strong sellers. Sell ALTR at the market since a further advance is unlikely.

Chart Key


Stock to Sell #2 – Goldman Sachs (GS)

Goldman Sachs (NYSE:GS) is recognized as one of the world��s leading investment banking and securities firms. But legal, economic and market conditions have resulted in three years of lower earnings, and recent investigations by the government have led to more declines and heavy insider selling.

The recent jump in price reversed down at the bearish resistance line and triple-top at around $117, and the stock fell to its 50-day moving average (blue line). Note the strong sell signal from the stochastic. A break of the blue line would most likely lead to a test of its low. Sell GS at the market. Alternatively, you could write calls or buy puts to protect current holdings. The downside target for GS is under $90.

Chart Key


Stock to Sell #3 – Bank of America(BAC)

Bank of America (NYSE:BAC) provides a range of banking and non-banking financial services and products in the United States and abroad. The international financial crisis drove the banking sector to extreme lows and BAC crumbled to almost $5 in early October.

The stock made a slow recovery back to its bearish resistance line at over $7, but late in October, it reversed and fell below its 50-day moving average (blue line). Note the strong sell signal from the stochastic. And the stock has been the subject of very strong insider selling.

Present owners may wish to hold the stock for a long-term recovery, but should sell calls on present positions or buy put options. The downside target for BAC is $5.

Chart Key


Stock to Sell #4 – Capstead ! Mortgage Corp. (CMO)

Self-managed real estate investment trust (REIT) Capstead Mortgage Corp. (NYSE:CMO) earns income from investing in leveraged portfolios of residential mortgage pass-through securities. Recent data indicates that holders of prime jumbo mortgages are at risk, and analysts have recently decreased their target for CMO and other mortgage REITs. Thus, the high dividend yield of CMO and its price could fall.

The stock rallied from a low of $10 in October to over $12, but is approaching a significant zone of resistance between $12 and $13. Sell this and other mortgage-based REITs on rallies.

Chart Key


Stock to Sell #5 – Ryland Group (RYL)

Ryland Group (NYSE:RYL) is among the largest of the U.S. homebuilders and has an extensive mortgage operation. S&P sees Ryland ��surviving the current downturn in the housing market,�� but they also see prolonged weakness in the sector. The company is ��cash poor�� and at a disadvantage to its competition.

The recent recovery to its bearish resistance line at $14 gives current holders an opportunity to recover some of their losses, but a further meaningful advance is unlikely until the overall housing market recovers. Note the strong sell signal from the stochastic and the near-term support line at $13. Expect a sell-off to the next support zone at $10 to $11.

Chart Key

Stock to Sell #6 – SunPower Corp. (SPWRA)

SunPower Corp. (NASDAQ:SPWRA) reported a Q3 loss and reduced its outlook for 2011. Intense foreign competition has resulted in a huge loss for the California-based solar panel maker. Oversupply, especially from Asia, has driven many solar companies out of business, and SunPower is attempting to reorganize i! nto othe r businesses in order to combat the trend. But such a move in a slow economy will be difficult, and the stock��s price will probably break its low.

In early November, the stock fell from a recovery high at its 50-day moving average (blue line). Note the strong sell signal from the stochastic and strong insider selling. Sell SPWRA at the market.

Chart Key

Why Sometimes I Hate Being Right: Amazon Will Go Lower

Just last week, I advised investors to be careful with 6 stocks going into earnings: Apple (AAPL), Amazon (AMZN), Baidu (BIDU), Cree (CREE), Netflix (NFLX), and Intuitive Surgical (ISRG). So far, I am right on 4 of 5, only missing on Intuitive, with Baidu still to report. Netflix plunged on Tuesday, and Amazon will likely do the same on Wednesday. Today I'm going to focus on the dismal report from Amazon.

Before I get into the report, let me give you the paragraph on Amazon from my above mentioned article.

"A couple of weeks ago, I wrote an article praising Amazon as a company but saying I couldn't agree with the stock's valuation. At that point, Amazon was around $225. It is now north of $240. And in that time frame, analyst estimates for the stock have come down another penny or two for both 2011 and 2012. Amazon is trading at about 76 times 2012 earnings, and that's a lot. Additionally, gas prices are down about 15 cents a gallon over the past month. They are on the rise back up however, with oil and gas futures prices rising in recent weeks; we have seen some pullback at the pump. These extra couple of weeks of lower gas prices probably encouraged some more store trips, and although the impact on Amazon's revenues will probably be minor, it's still something to note. Gas prices are still up 23% over last year, which does favor Amazon, but if they stay near $3.50 people might just go out more. Remember, the national average was about $3.70 for most of the summer, and we were close to $4.00 earlier in the spring. Like many of its peers, Amazon is up 20% over the past two weeks in this recent market rally. A pullback into next Tuesday's (25th - after the bell) earnings would be welcomed, but like I've said before, I would be very cautious if this name heads higher in the next week. At some point, this P/E number will catch up to the stock. The stock is up $30 over the past 90 days, but 2012 earnings es! timates have gone from $3.79 to $3.20. Be careful at these lofty levels."

Now I don't have inside information, and I'm not claiming I know everything, because I don't. But here is why Amazon was such a red flag:

Forward P/E 7/25 8/25 9/25 10/25
EPS 2012 $3.80 $3.25 $3.21 $3.20
Share Price $213.49 $192.03 $223.61 $227.15
Forward P/E 56.18 59.09 69.66 70.98

Over the last 3 months, Amazon has seen its share price run up despite estimates coming down heavily for 2012. Today's Forward P/E number would be even higher if you take out the $10 loss we saw during the day. The price was just too high. A $40 billion dollar company trading for 70 times next year's expected earnings just doesn't seem right. And considering that number was at 56 just three months ago, you can see why Amazon was on my "be careful" list.

So why do I say Amazon is already the next Netflix? Because Amazon is running a business that operates at or below supermarket level margins. You think I'm crazy? Take a look at grocery store company Supervalu (SVU). Amazon's operating margin is at, or in this past quarter, below, those of Supervalu. Amazon's profit margins aren't mu! ch highe r. Now, people will come at me saying expenses were high this quarter as they rolled out their new Kindle Fire tablet and other devices. While that may be true, it wasn't as if their margins were going to increase over last year's. So here are the main reasons why Amazon is going away, and fast.

1. Margins are too low:

Margins 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011
Gross Margin 24.51% 23.47% 20.32% 22.82% 24.09% 23.46%
Operating Margin 4.11% 3.54% 3.66% 3.27% 2.03% 0.73%
Profit Margin 3.15% 3.06% 3.21% 2.04% 1.93% 0.58%

While Amazon's gross margins were flat year over year, both the operating and profit margins too a dive. While Amazon continues to grow its revenues at an astounding clip, it's profits are not growing that much, if any. In fact, look at the 3rd quarter over the past couple of years.

Margins 3Q 2006 3Q 2007 3Q 2008 3Q 2009 3Q 2010 3Q 2011
Gross Margin 23.80% 23.36% 23.43% 23.36% 23.47% 23.46%
Operating Margin 1.73% 3.77% 3.61% 4.61% 3.54% 0.73%
Profit Margin 0.82% 2.45% 2.77% 3.65% 3.06% 0.58%

Amazon's margins are back to 2006 territory. In that quarter, Amazon did $2.3 billion in revenues, and closed out the quarter trading at $32.12. It did almost $11 billion in the most recent quarter, and the stock closed the quarter at $216 (the stock is below $200 in after hours).

So, in just 5 years, the stock has jumped 7 times, but revenues are up just 4.7 times, and operating income has only doubled. To me, that does not show the sign of a winning business. Again, people will come at me with the one time expenses. Okay, so let's say that they matched last year's quarter of $268 million in operating income. That still would only be an operating margin of 2.46%. I just don't see how this company can sustain such a lofty valuation with little to no earnings. Let's also not forget the Kindle Fire. It is a nice tablet offering, and may take a few customers away from Apple and the IPad. It will fuel the next stage of r! evenue g rowth, but not earnings growth. Amazon currently sells the Fire for $199, with many believing the true cost is anywhere from $190 to $210. At best the margins are okay, at worst, they are losing money on it. They better hope that they don't have to drop the price anytime soon, or it will become a huge loss leader.

2. The guidance was cut:

Amazon announced 4th quarter revenue guidance in the range of $16.45 to $18.65 billion. The midpoint of that range is $17.55 billion, well below the $18.1 billion analysts were currently expecting. The new Kindle products may do well, but it seems that people may actually go out to the malls this year for their holiday shopping, despite higher gas prices than last year.

Analysts were expecting 4th quarter EPS of 84 cents per share, which equates to net income of about $380 million for the quarter. That ain't happening. Amazon guided their operating income range from a loss of $200 million to a gain of $250 million. They may not even do 1 cent of profit in the quarter, let alone 84.

How bad is that operating profit number? In the fourth quarter last year, they did $474 million, their best quarter ever I believe. The midpoint of this quarter's guidance is just $25 million. Ouch. Even if they hit the top end of the range, their 2nd half of 2011 operating income would be just $329 million. The first half of 2011 came in at $523 million.

Remember that $3.20 currently expected for 2012? Good luck with that! Amazon was expected to do $1.95 this year, and in the first nine months they have only done $0.99. They'd need to do $0.96 next quarter, which is well above the $0.85 current expectations, and like I said before, they are lucky if they do a penny in the fourth quarter.

3. If anyone cares, they did miss on the 3rd quarter:

Why do I say if anyone cares? Well, it's all about the future, not the past. Netflix beat on both the top and bottom line. But their guidance was terrible, so the stock dro! pped.

Amazon actually missed for the quarter. Revenues of $10.88 billion were slightly below the $10.93 billion forecasted, and EPS was just 14 cents, barely more than half of the 24 cents expected.

So where was the trouble? Well, both North American and International sales increased by 44%. However, NA operating income was down by 23% year over year, and International was down 46%. This led to a 35% overall decline.

It also didn't help the bottom line that Amazon's provision for income taxes was $67 million on just $130 million of pre-tax profit. That's a tax rate of 51.5%. Ouch!

4. My final recommendation:

I'm always willing to buy from Amazon, but I've never been able to justify their lofty valuation. I am completely serious when I say that Amazon needs a Netflix-type repricing. When you do $11 billion in revenues for a quarter, you should be able to produce more than $63 million in net income.

That leads me to my price target for 2012. Before this ugly report, as I've mentioned before, analysts were expecting $3.20 in EPS, and $64.81 billion in revenues. That's still impressive revenue growth if you figure they will do roughly $48 billion in revenues this year.

Let's say they can hit next year's revenue target. In fact, the Kindle Fire will be great, so I'll give them credit for $65 billion. If you take that $3.20 in earnings based on the current share count, that's net income of $1.456 billion. That would imply a 2.24% profit margin. I'm not confident that they can do that.

So I'll give them a 2% profit margin on $65 billion in revenues. That works out to $2.85 in EPS. We're currently expecting $3.20, although that number is likely to come down in the coming weeks. And that 60-70 multiple they've been trading at lately, not going to happen. I think it comes down to 50. Now you could argue that the multiple stays higher at 60. I'll just lower my EPS number in that case. But for now, let's use those numbers. That gives us my final price t! arget fo r 2012.

2012 Price Target: $142.50

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seven Bear Stocks In Consumer Cyclical Products- Q3 Update




Company Name


Rel Str


52 Week

52 Week




Wacoal Holdings









Leggett & Platt









Ford Motor Cred








Toyota Motor Co


















Cherokee Inc.









Liz Claiborne








  • Though potential gain appears to be alluring, the probability of upside trade gains are limited.

Wacoal Holdings Corp. (ADR)?? (Nasdaq:WACLY)

Wacoal Holdings Corp. is the world's largest m! anufactu rer of intimate apparel and is based in Japan. The company operates in Japan, Hong Kong, Singapore, France, the U.S. and the U.K. As of March 31, 2011, it operated 123 stores, including 16 factory outlet stores, as well as 23 Peach John retail stores.

I take a bearish stance on the stock as the company couldn't meet its 3-year medium-term management plan, which set out net sales of ��180 billion (for year ended March 2010) and operating income of ��15.3 billion as numerical targets for the fiscal year. The company couldn't meet the target even in the year ended March 2011. I don't think the company would be able to do that even in fiscal 2012/13.

Leggett & Platt Inc.?? (NYSE:LEG)

It is a diversified manufacturer that conceives, designs and produces a wide range of engineered components and products that can be found in most homes, offices, retail stores and automobiles. LEG's business is organized into five business segments. Residential furnishings (52 percent of 2010 sales; 54 percent in 2009) consists of bedding, home furniture and consumer products, and fabric and carpet underlay. The commercial fixturing and components segment (16 percent; 16 percent) consists of fixture and display and office furniture components. Industrial materials (15 percent; 15 percent) consists of wire and tubing, while specialized products (18 percent; 15 percent) consists of automotive, machinery and commercial vehicles.[Default U1]?

I shun the stock as I believe it is overvalued and that it will significantly underperform its industry. Market correction could produce significant losses.

Ford Motor Company?? (NYSE:F)

Ford is the second largest U.S. motor vehicle manufacturer. It produces cars and trucks, and many of the vehicles' plastic, glass and electronic components, and replacement parts. It also owns a 3.5 percent stake in Mazda Motor Corp. Financial services include Ford Motor Credit (automotive financing and insurance) and American Road Insur! ance Co.

I wouldn't recommend the stock until the company resumes dividend payments. The recent price losses could mean the company is not progressing well on renewing contract talks with the United Auto Workers.

Toyota Motor Corporation (ADR)?? (NYSE:TM)

Toyota Motor is the world's largest vehicle manufacturer based on sales and production volume. It is usually the most profitable automotive company based on net income. Each Toyota Motor ADS represents two shares of common stock. However, these strengths are partially offset by anticipated deterioration in the company's financial performance and potential erosion of its market share due to extended cuts in production resulting from shortages of parts following the earthquake and tsunami of March 11, 2011.

Plans by Toyota Motor Corp.'s Australian operations to launch a new model Camry could be delayed because of strike action by workers over a pay dispute.

Guess? Inc.?? (NYSE:GES)

Guess? Inc. designs, markets, distributes and licenses its lifestyle collections of contemporary apparel and accessories for a style-conscious 18-to-32-year-old target audience of men and women around the world. In addition to wholesale and retail distribution channels, GES operates in 67 countries via its licensing and distributor partnerships. Apparel and accessories design teams are located in California in the U.S., and in Florence and Bologna, Italy. As of July 30, 2011, GES operated 490 stores in the U.S. and Canada and 218 stores in Europe, Asia and Latin America; licensees and distributors operated another 757 stores outside of the U.S. and Canada.

I think the stock will take a hit as it is likely to underperform its industry significantly. [Default U2]?

Cherokee Inc.?? (Nasdaq:CHKE)

It is a global marketer and manager of a portfolio of lifestyle brands it owns or represents. It licenses the Cherokee, Sideout and Carole Little brands and related trademarks and other brands i! n multip le consumer product categories and sectors. As of January 29, 2011, the company had 30 continuing license agreements covering both domestic and international markets.

CHKE's EPS growth over the last ten-year period is unattractive at -8.9%. It is currently trading at a P/B ratio of 7.92.

Liz Claiborne Inc.?? (NYSE:LIZ)

Liz Claiborne Inc. (LIZ) engages in the design and marketing of a range of apparel and accessories worldwide. The company designs and markets a global portfolio of retail-based premium brands, including Juicy Couture, Kate Spade, Lucky Brand and Mexx. It also has a group of department store-based brands with consumer franchises, including the Liz Claiborne and Monet families of brands, Mac & Jac, Kensie, Dana Buchman, and the licensed DKNY Jeans, DKNY Active and DKNY Men's brands. LIZ operates in three segments: domestic-based direct brands; international-based direct brands; and partnered brands.

Poor operating performance, weak credit metrics (current ratio of 0.92; and long-term debt of $548.0 million vs net current assets of negative $52.7 million), make me take a bearish stance. The company operates in a highly competitive apparel industry and is subject to fashion risk.