Thursday, February 3, 2011

Where Are the Bargains in This Market? MCD, CAG, PG

The market continues to forge higher, and the Dow finally made a decisive close over the psychologically important 12,000 mark this week. The mini-panic Friday, which was caused by the unrest in Egypt and elsewhere in the Middle East, seems to be a distant memory. But is that all we’re going to see of a “correction”?

It’s possible, but it’s hard to believe that a seven-month, 27% run in the S&P 500 would give back less than 2%, and then only for a single day!

More likely, the market will follow an erratic, see-saw pattern over the next few weeks, lunging higher for a day or two at a time, then quickly selling off. I still think the hedgers among us will get a decent chance to make some money playing the short side. My preferred hedging vehicle is the ProShares UltraShort QQQ Fund (NYSE: QID), below $10.45 with a stop 10% below your entry point.

Is anything worth buying at these rarified levels? Obviously, you’ve got to be extra careful. Ben Bernanke’s ZIRP (zero interest-rate policy) has distorted — that is, inflated — the prices of hundreds of stocks, making it hard to find true bargain stocks.

However, a few blue chips continue to offer good potential for double-digit returns over the next 12 months. I would single out McDonald’s (NYSE: MCD) at $77 or less, ConAgra (NYSE: CAG) at $23 or less, and Procter & Gamble (NYSE: PG) at $63 or less. Buy them in that order.
A Cheap Emerging Market

Overseas, India stands out as one of the world’s best values. The Bombay market has dropped 14% since Nov. 5. During the same period, the S&P gained nearly 7%. Of course, India has its share of economic problems. Inflation is flaring up, food prices in particular, forcing the central bank to raise interest rates six times in 2010 and again last week.

At only 13 times trailing earnings, though, the Indian market now sells at a significant discount to our own — and I don’t have to tell you which country is likely to grow faster over the next five, 10, 20 years. In my judgment, this is a rare opportunity to build a stake in India on the cheap. Buy the PowerShares India Portfolio (NYSE: PIN) at $24.50 or less.

McAlvany Weekly Commentary

The Next Decade: An Interview with George Friedman

A look at This Weeks Show: - Does America have the will to be an Empire?
- Tactical traps vs. long term strategic thinking
- The balance of power in Europe, the Middle East, & Asia

About the Guest: George Friedman, Ph.D., is an internationally recognized expert in security and intelligence issues relating to national security, information warfare and computer security. He is founder, chairman and Chief Intelligence Officer of STRATFOR, (Strategic Forecasting Inc.) a private intelligence company that provides customized intelligence services for its clients. Click Here

Order the Next Decade Today: Click Here

Kiplinger's Personal Finance - March 2011

read more here

Chart of the Day: GDP & Debt

Faber: Global Inflation Far Higher Than Official Data Read more: Faber: Global Inflation Far Higher Than Official Data

The latest official inflation data show that consumer prices rose 1.5 percent in the U.S. last year, while they increased 2.4 percent in the euro zone for the year ended in January. Marc Faber, publisher of the Gloom, Boom and Doom report, says don’t believe those numbers.

Inflation totals 5 percent to 8 percent in the United States and slightly lower in Europe, he tells CNBC.

“I guarantee you … the annual (U.S.) cost of living increases are more than 5 percent, and the Bureau of Labor Statistics (which computes the consumer price index) is lying,” Faber says.

“Inflation is much higher than what they publish. I would imagine for most households it’s between 5 and 8 percent in the United States, and in Western European countries maybe a little bit lower — 4 or 5 percent.”

Inflation isn’t just a problem in the developed world, Faber explains. High food prices will cause political turmoil in Pakistan just like they have in Egypt, he says.

“You may not have the problem in Saudi Arabia and the Emirates, because there the governments can heavily subsidize food. But I’m particularly worried that what has happened in Egypt will happen in Pakistan.”

Not everyone is concerned about U.S. inflation. "Although growth appears to be picking up, there is still very little reason to be concerned about rising prices," Jim Baird, an economist at Plante Moran Financial Advisors, tells The Associated Press.

6 Penny Stocks to Buy for the Biotech Boom These stocks offer low price but not extraordinary risk

There is a boom in biotech stock picks right now, thanks to innovative technologies and cutting edge treatments that allow small companies to tap into big revenue with just a single pill and FDA approval. Biotech stocks can bleed money for a short period of time, but with just one successful trial these unprofitable penny stocks can see soaring share price and buyout offers from big pharma.

And most importantly, deliver big gains to stock owners.

Of course, there is big risk in biotech investing too. If a company doesn’t have a proven track record or good management and research staff, a penny stock in this sector can collapse and leave you with nothing.

That’s why I apply some high standards to cheap biotech stocks — they must be listed on a major exchange like the NASDAQ, NYSE or AMEX, they must have a proven track record of earnings or sales success, and they have to have quantitative buying pressure backing them up.

Here are six such biotech stocks that make the grade, and could be breakout buys for investors:

Rexahn Pharmaceuticals (RNN)

Clinical stage pharmaceutical company Rexahn Pharmaceuticals (AMEX: RNN) is developing and seeking to deliver cures for cancer and disorders of the central nervous system. Over the past 12 months, this penny stock has soared an impressive +123%, compared to a gain of +18% for the Dow Jones in the same time frame. The stock has shown growth potential as of late too, and is up +32% over the past three months. (more)

Sugar Jumps to 30-Year High on Australia, India Supply Concerns

Sugar futures surged to a 30-year high on mounting concern that global supplies will trail demand following crop damage in Australia and India, two of the world’s leading producers.

Cyclone Yasi, which pounded the coast of Australia’s Queensland state, may cause the sugar industry losses starting at A$500 million ($504 million), a growers group said. Output from India may be less than predicted after heavy rains, a producer organization said. Prices have more than doubled since the end of June.

“The cyclone is the story,” said Jason Cole, a broker at Starsupply Renewables SA in Geneva. An extended rally will depend on the severity of the damage, he said.

Raw sugar for March delivery climbed 1.35 cents, or 4 percent, to settle at 35.31 cents a pound at 2 p.m. on ICE Futures U.S. in New York. Earlier, the price reached 36.08 cents, the highest for a most-active contract since November 1980. (more)

Silver Eagle Sales Hit Their Second-Highest Ever

We knew it would be a record… But the question remained: by how much?

The US Mint sold 6,422,000 Silver Eagles in January 2011 – half as many as were sold in the previous record-setting month of November 2010.

There are a few nattering nabobs who say the figures are skewed because the Mint credited some December sales to January. So what? If you add up December and January sales and average them, you still get the second-highest monthly total ever…right behind November 2010.

Fact is demand is intense.

After just one week, Canada’s biggest bullion bank sold out its limited stock of 100-ounce silver bars. Now ScotiaMocatta has no silver bars to sell in any size. One ounce, 5 ounces, 100 ounces and the kilobars – all gone.

For its part, the spot price of silver remains in “consolidation mode” – down this morning to $28.35. Gold is fetching $1,337 this morning. (more)

David Goguen: Finding Real Value in the Ground

The Gold Report: When you spoke with The Gold Report last November, you said you were looking for undervalued plays. Valued by what measure? The value unrecognized by the Street, or value that has yet to be developed and driven out of the ground in the form of ounces?

David Goguen: I think it's a combination of both of those things. It will be defined differently depending what category you're examining. In the case of advanced explorers, it could be a rapidly growing resource where the full scale and potential are not yet fully recognized in the marketplace. For emerging producers, value will be found very classically in that time period when the company is two-thirds of the way through a project build and not generating a lot of catalyst-rich news. That results in a bit of a sleepy period when oftentimes we see the share price drift to levels that represent very good value.

TGR: Gold has pulled back a bit. Are you currently telling your clientele this is a good time to buy gold mining stocks?

DG: Absolutely. We feel the gold price is going to be very well supported above the $1,100/oz. level, and we feel that the margins being afforded to gold producers in this $1,200–$1,300 gold environment have not been properly reflected in the valuations for these companies. There's still a sense that the gold price isn't sustainable at these levels, so there's a hesitation in the valuations being afforded to these junior producers. Therefore, they're trading at 3x–5x cash flow when, in fact, higher valuations are merited. These juniors are generating strong cash flow. (more)

The History Of Mideast Oil Crises In 3 Simple Charts

More Investors Position for Possibility of U.S. Default

The net notional amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust & Clearing Corp. figures.

The increase suggests investors are becoming more nervous about the quality of U.S. debt. It also threatens to cast a pall over the notion that Treasuries are risk-free assets investors should run to for haven from other instruments.

The net notional of credit default swaps bought and sold on U.S. debt rose from $2.67 billion to just over $3 billion between Jan. 14 and Jan. 21, according to DTCC data updated Tuesday. The gross notional rose from $16.1 billion to $17.2 billion, or 6.8%.

When it comes to credit default swaps—more commonly known as CDS—gross notional refers to the amount of protection bought or sold in the aggregate. Net notional values are a more precise reflection of the amount of money that would change hands between net sellers of CDS protection and net buyers in a default.

Meanwhile, the cost of CDS on U.S. debt has risen 25% over the past month, to around 0.50 percentage point from 0.40 percentage point in early January, according to data provider Markit. A price of 0.50 percentage point translates to €50,000 (about $70,000) a year to insure €10 million of U.S. sovereign debt for five years, meaning the cost has risen by €10,000 a year over that period. (more)

Why Investors Should Exercise Extreme Caution

Tuesday, both the Dow Jones Industrial Average and the S&P 500 closed above psychologically important barriers. For the Dow it was the 12,000 mark and for the S&P it was 1,300. But the climb to new highs held more than psychological significance since it reversed what appeared to be a negative technical signal on Friday, and set the stage for further gains.

What the Markets Are Saying

Despite an overbought market condition, rising oil prices, and Middle East governments in chaos, stocks rallied to new highs. The threats to the political stability of Egypt, Jordan, Yemen and even Saudi Arabia were ignored as investors focused instead on an improving U.S. economy. The report that triggered the buying was the Institute for Supply Management’s index of manufacturing activity, which rose to levels not seen since May 2004.

As unlikely as it seemed, the Dow’s January peak of 12,020 was overcome by noon. And so now the focus turns to the S&P 500 since, even after smashing the barrier at 1,300, it must crush the overhead that dates from August 2008, at 1,313. This is the line that most technicians mark as the beginning of the major bear market that ended in March 2009. And many are of the opinion that the penetration of it could lead to another rush to buy stocks.

Admittedly the March 2009 number, a technical barrier that is two and a half years old, may only have significance to finicky technicians. But the current significance of the world’s dangerous political scene cannot be ignored. And yet U.S. stocks are pushing ahead in complete disregard of what could lie ahead.

What should we do when markets rally in the face of such overwhelmingly bad news? Should we cast aside our normal technical tools and just go with the trend or stick with the methods that have historical accuracy?

In mid-December, when I announced my annual targets, many readers thought that they were overly optimistic by a wide margin. But in less than six weeks, the Dow industrials are a mere 760 points (6.3%) from that goal, and the S&P 500 is only 92 points (7%) away from it. The irrationality of a run of this magnitude on volume, which is puny by any standard, should jolt us back to reality. The world’s largest stock market is being controlled by just a few buyers. Meanwhile, other global markets, and especially emerging markets, have failed to keep pace, and our own Dow Jones Transportation Average is in a confirmed short-term downtrend.

Mark Arbeter, S&P’s chief technician, said, “Despite the hoopla over the DJIA crossing 12,000 and S&P 500 breaching 1,300 this week, we see mounting cracks in the dam. Many indices in the U.S., as well as globally have failed to follow the DJIA and S&P 500 over the last week, and we see this as a major warning that a pullback or correction is near. In addition to the non-confirmations by many indices, we are also seeing plenty of divergences with respect to market internal data. At the same time, price momentum is overbought on a daily and weekly basis, and market sentiment is tilted very heavily toward the bullish camp. This, to us, all adds up to a 5% to 10% decline in the major indices over the next month or two.”

With the exception of very quick bullish trades, I suggest extreme caution. When this market turns south, there will not be enough room to accommodate those seeking the exits.