Friday, December 3, 2010

A Hated Stock You Might Just Love

Here’s a stock you don’t usually hear about until spring rolls around: H&R Block, Inc. (NYSE: HRB), the tax preparation and consulting outfit, which reports earnings after the bell on Tuesday, Dec. 7.

Let’s just say that it hasn’t been a great year for HRB. In fact, had an article Tuesday noting that HRB is among the 10 worst performing stocks of 2010 (it’s No. 3) with a return of -43%. Ouch. And analysts expect the company to post a loss of 38 cents per share this quarter after a 36-cent loss last quarter.

So what is there to like about HRB?

Well, here’s the thing. Despite all the negativity, the company has managed to beat the past four earnings estimates. And the stock has done pretty well after each report, gaining ground in the subsequent week by an average of just under 3%.

Perhaps the stock performs well because expectations can’t get much lower. Along with the earnings estimate, short interest is robust and just 1 of 6 analysts recommends buying the stock.

On the charts, HRB is on a nice run, having gained about 25% off its October low (that underscores how lousy the rest of the year has been). The shares are currently sitting atop their 20-day and 50-day moving averages, trendlines that bullishly crossed for the first time in seven months. (more)

Keith Schaefer: Pushing the Boundaries

The Energy Report: Keith, the Oil and Gas Investment Bulletin primarily covers the Canadian oil and gas (O&G) industries. What's newsworthy north of the border right now for our U.S. readers?

Keith Schaefer: The shale-oil revolution is still going full force, particularly around the high-profile Bakken area. We're hearing that new areas are opening up, expanding what were previously considered the boundaries of the Bakken. The main area of the Bakken is in southern Saskatchewan, but now it's been shown that it's productive right down to the U.S. border. It's also going over as far as Alberta. The Bakken is potentially very productive in Alberta.

There are new staking rushes that are happening. A lot of the juniors are leading the way and they are getting some great land positions. That's setting the average retail investor up for a lot of new plays where they can make some money.

TER: Why are companies exploring these areas now?

KS: The shale-oil revolution started in the Bakken in about 2002 and continued for five years, then the market crash hit. For two years, none of these companies has done much exploration work. They only drilled the land they already had that had no exploration risk. (more)

‘Shock and Awe’ in Precious Metals

Earlier this month, precious metals investors witnessed arguably the most concerted take-down of the precious metals sector since the Crash of ’08. First, investors were lathered-up into a mania, after World Bank head Robert Zoellick planted a piece in the Financial Times where he feigned interest in having a gold standard re-instituted.

Then the ambush took place.

This time, China was clearly participating as the ‘tag-team’ partner of the U.S. government. It began by raising reserve requirements for its banks – a move always seen as restraining the growth of an economy (and reducing commodities demand). Then the Chinese government leaked word that it was “planning interest rate increases” (even more bearish for commodities), all within the span of a couple of days.

What launched the “ambush”, however, was the utterly unprecedented move by the CME Group (owner of the Comex exchange) to radically increase margin requirements for silver halfway through a trading session. Clearly, the intent was to get precious metals investors as over-extended as possible – and then to “drop the hammer” on them at literally the best (i.e. most-damaging) moment.

This was immediately followed by yet another increase in bank reserves by China’s government, mere days after the previous reserve-increase was announced. With the U.S. having already taken radical action to curb commodities markets, it is simply not plausible that the Chinese government suddenly decided that further tightening was necessary. Instead, this was a move purely intended to generate more downside momentum in commodities by China, the world’s largest consumer of those commodities (including precious metals). And when those moves still did not generate the downward momentum desired by these market-manipulators, the CME Group announced yet another reduction of “margin” – this time for both gold and silver. (more)

State Default Risk Levels

On Monday we highlighted the recent spikes in default risk for some of the problematic European countries. So what has default risk for states done recently? We were able to track down 5-year CDS prices for 16 states, and we highlight their current prices in the table below. While California probably comes to mind as the state that's in the most trouble, Illinois actually has the highest default risk according to investors. To insure $10,000 worth of Illinois debt for 5 years, a buyer would have to pay $291.30 per year. The cost for California is only slightly lower at $287.20. Michigan ranks third, followed by New Jersey, New York, Nevada, and then Florida. Of the 16 states that we found CDS prices for, Texas, Virginia, Maryland, and Delaware have the lowest risk of default. (more)

How The FDIC Shuts Down Failed Banks - Official Video

Mortgage tax break in the crosshairs

( -- Don't even think of touching the mortgage interest tax deduction in the midst of a fragile housing market.

That was the immediate response of the housing industry, which has come out with guns blazing against the presidential deficit commission's proposal to overhaul the coveted tax provision.

"We will fight this proposal," said Joe Stanton, chief lobbyist for the National Association of Home Builders. "From everything we've read, it will end up being a tax hike."

Charged with finding ways to reduce the nation's exploding federal debt, the bipartisan debt panel recommended Wednesday a wide range of controversial spending cuts and tax changes that would slash $4 trillion in deficits over the next 10 years.

Among the proposals was a major change to the mortgage interest deduction, which costs the Treasury Department an estimated $131 billion a year. (more)

CHART OF THE DAY: Global Food Prices About To Break An All Time High

Inflation in emerging markets is hitting food prices hard, and now we have raw data from the UN to confirm.

The latest report from the UN Food and Agricultural Organization shows prices are back at 2008 levels, and have increased for five months in a row.

The data evaluates 55 different food commodities, so it's a pretty broad gauge of world costs.

Whether or not costs are high enough yet to lead to a world food crisis remains to be seen, but further inflationary pressures on emerging markets, where there are the most mouths to feed, will remain a threat.

Pimco's Gross: US Must Revive Manufacturing to Thrive

The United States must reclaim its position as a manufacturer of goods that meet global demand in order to restore the country's economic health, says Bill Gross, co-chief investment officer of Pimco.

Both politicians and voters are failing to address the key problems facing the U.S. economy, said Gross, who oversees more than $1 trillion in assets at Pimco, operator of the world's biggest bond fund.

"Politicians and respective electorates focus on taxes or healthcare when the ultimate demon is a lack of global demand and the international competitiveness to thrive," Gross said in his monthly investment outlook note to clients, which was posted on Pimco's website.

Gross offered simple advice to restore the U.S. economy's long-term health: "Stop making paper and start making things," by replacing U.S. government bonds with American cars, steel, iPads, airplanes, or corn — "whatever the world wants that we can make better and/or cheaper."

Economies around the world are competing for a share of a "diminishing growth pie," said Gross, who added that the policies of developing nations "are oriented toward export to debt-laden developed nations instead of internal consumption." (more)

Economic Ruination in Three Words or Less

If you want some bad news, then Doug Noland, in his Credit Bubble Bulletin at, has some for you. He reports that that “Global yields are on the rise.”

I was going to make a complimentary comment about how cleverly Mr. Noland conveyed such bad news in only five words; “Global yields are on the rise.”

Then I noticed that I could be more concise than Mr. Noland, a rare triumph for me, with “Bond prices falling,” which is only three words.

Then I noticed, with some alarm at the schizophrenic overtones, that I could eclipse myself with, “Bonds collapsing” which could be further reduced to the one-word synopsis, “Doom!”

I can say “Doom!” because this means that the gigantic, towering, incalculable, worldwide glut of bonds have all gone down in value, handing the owners of the bonds unrealized losses, which are just the start of a long string of losses to more and more people as interest rates continue to rise because inflation in prices will rise with the rise in central-bank money creation. (more)

FINALLY... Energy Gives a Buy Signal!

One of the things I periodically check is the twelve-month relative performance for the various S&P 500 sectors relative to the broad index. This type of analysis can give clues to out-of-favor investments that may be due for a bounce or in-favor investments that may be a bit stretched on the upside. In essence, it helps provide good contrarian plays for overweighting or underweighting sectors. I smooth the data and then look for buy or sell crossing points in the moving averages for when to shift in or out of a sector. For example, I received a very timely sell signal on energy on August 15th 2008 and have waited for a buy signal ever since. FINALLY, after nearly two years we have a buy signal on the 12-month relative performance differential for energy, which came on August 8th 2010. While the buy signal was given nearly four months ago there is still likely more outperformance by the energy sector relative to the S&P 500 ahead.

As mentioned above, I like to periodically look at how the 12-month relative performance spread for the S&P 500 sectors are doing and commented upon it in an article written back in April of this year called, "Revisting The Dual-Edged Sword of Investing: Risk vs. Reward”. From my vantage point at the time, I saw two key sectors that stood out as the most attractive buying opportunities: telecommunications and energy. In regards to telecommunication, the following commentary and chart from the April article were highlighted:

Laggards—More reward than risk at this juncture
At the other end of the relative performance extreme are sectors traditionally viewed as defensive or less tied to the general economy than cyclical sectors. What absolutely takes the prize as top underdog is the S&P Telecommunication sector, which has grossly underperformed the S&P 500 by the widest margin in more than two decades. The sector sports the highest dividend yield (5.81%) of all S&P 500 sectors as well as the third lowest trailing P/E (13.58), making it a bargain among its sector peers. (more)

Can the Bulls Keep the Rally Going?

U.S. stocks jumped from the opening as better economic news and more stable European markets encouraged investors to trade in safety for equities and better performance. And where just a day before the headlines spelled doom and gloom, yesterday’s pre-opening economic reports were all positive.

The latest ADP employment change data showed that private payrolls expanded by 93,000 in November versus an expected increase of 58,000, for the best improvement in payrolls in three years. The Q3 productivity report showed that non-farm productivity increased by 2.3%, up from Q2′s 1.9%, but just a bit off of the 2.4% expected. And construction spending increased 0.7% versus the consensus of a 0.5% decline.

The announced improvements in the U.S. economy had much to do with the opening rally, but even more buying came about as a result of better economic data from both Europe and China, and strong markets in both areas. Comments from European Central Bank President Jean-Claude Trichet seemed to stifle fears of more debt contagion in the euro zone.

The ECB said that it will take more assertive action focusing on the nations that are slower to participate in a recovery. At one point, a rumor spread that the U.S. Federal Reserve would also be coming to the aid of Europe, but that was later denied. (more)