Wednesday, June 22, 2011

The Rising Tide Of Sovereign Risk

Sometimes we all lose site of the forest for the trees. In the case of sovereign risk, the trees are currently the PIGS in the Eurozone:

The PIGS go marching upward

I think it is useful to take a step back and see how sovereign risk overall, as measured by credit default swap levels on governments, has increased since the financial crisis. The CDS levels might not have been completely accurate in 2007, but I think the magnitude of change over the last few years is indicative of the increased risk of government debt as private sector liabilities have been transferred to the public sector:

Not many countries garner investor faith…

The important question to ask is how the deteriorating credit profiles of developed countries will affect all investment classes. As pointed out by Scott Mather of PIMCO:

In reality, peripheral Europe is distracting people from problems in the much larger developed world. And, I argue, one cannot escape sovereign debt issues simply by moving into other asset classes, because equities, real estate and all other investments will be affected if sovereign debt of a nation deteriorates.

It is an interesting dilemma for investors because there seem to be few, if any, safe havens.

4 Packaging Plays to Box Up Big Profits as the Economy Rebounds: MWV, CCK, GPK, GEF

Graham Packaging (NYSE:GRM), which develops plastic containers for consumer products, launched an IPO early last year. But investors were not impressed with GRM stock. Graham Packaging priced the deal at $10 a share, which was well below the $14-$16 price range. And then newly-minted GRM stock treaded water.

Well, things certainly perked-up this year for Graham Packaging. In April, Graham received a buyout offer from Silgan (NYSE:SLGN). Then in the past few weeks, New Zealand’s Rank Group joined the fray, making its own bid for GRM stock. The shares of Graham stock are now trading at $25.89. Yes, you don’t have to play high-fliers like LinkedIn (NYSE:LNKD) to make money on IPOs.

However, is this Graham Packaging transaction an isolated event or a start of a new trend in the packaging industry? I think it’s the latter. Keep in mind that the packaging industry tends to outperform when the economy is shaky. No doubt, the recent reports show that the US has hit a “soft patch.” Essentially, packaging has the advantage of being focused on the food and beverage industries, which tend to have stable demand profiles.

Another driving force will be acquisitions. Such deals often allow for substantial cost savings, which can help boost margins.

So what are some packaging stocks to consider? Here’s a look at four: MeadWestvaco(NYSE:MWV), Crown (NYSE:CCK), Graphic Packaging (NYSE:GPK) and Greif (NYSE:GEF).

MeadWestvaco (NYSE:MWV): This is a global packaging powerhouse. Although, much of its manufacturing footprint is in the US.

MeadWestvaco has a large consumer business, with mega customers like Proctor & Gamble(NYSE:PG). The segment provides a nice source of recurring revenues. But the company also has business in other areas like chemicals, office products health care.

Interestingly enough, MeadWestvaco also has massive land holdings, which is a nice source of cash. At the same time, the company has an overfunded pension. This is definitely rare in the manufacturing world.

Crown (NYSE:CCK): The company is the dominant manufacturer of metal packaging, such as for aerosol and beverage cans. It is a global operation, with an extensive footprint in Europe as well as the emerging markets.

The customer base includes some of the world’s largest consumer companies, such as Pepsi(NYSE:PEP) and Coca-Cola (NYSE:KO). Of course, they will be consistent sources of revenues for the long haul.

Moreover, with its large footprint in emerging markets, Crown is actually a growth story. This should provide a nice boost to the company’s earnings power.

Crown has also been savvy by using long-term supplier contracts. This has helped to provide lower costs for raw materials like aluminum.

Graphic Packaging (NYSE:GPK): This is a top provider of paperboard packaging for food and beverage products. The company has leading positions in coated-recycled boxboard and specialty bag packaging.

In the latest quarter, Graphic Packaging posted a 0.3% decline in sales. But the company was able to increase its pricing to deal with the lower volumes. What’s more, income from operations increased by 15.1 to $68.6 million.

There has been a drag on operations because of the negative weather. But this should be a temporary thing and volumes should improve in the coming quarters.

Greif (NYSE:GEF): The company develops a wide assortment of packaging products like steel containers and containerboard. There are also services for blending and filling.

Based on the latest quarterly results, Greif has returned to its peak levels for revenue and EBITDA. Then again, the company has a proprietary management approach — called the Greif Business System — which has been helpful in generating cost savings and efficiencies.

The company has also been aggressive with acquisitions. For example, it struck 12 deals last year.

Yet in light of Greif’s strong platform and growth prospects, it would not be surprising that it becomes a target for a buyout.

Secrets of Successful Traders. Turn $1000 Into $1.9 Million In 1.7 yrs Trading Stocks

BNN: Top Picks

Jeffrey F. Olin, President & CEO, Vision Capital Corporation, shares his top picks.

Egon Von Greyerz And James Turk Video – Discussing Gold Price Targets

Interesting new video interview with James Turk and Egon von Greyerz discussing gold as a means of preserving wealth, their respective gold price targets, their views on currencies, especially Switzerland and the Swiss Franc’s role as a safe haven currency.

A few of the topics they touch upon:

  • Gold and its international money status
  • Inflation / Hyperinflation
  • Gold price targets
  • Gold’s role as a safe haven / tangible asset
  • Gold as a means of preserving wealth
  • Why owning physical gold stored outside the banking system is a must

The Hidden Cost of Home Ownership

The following is a guest post from MD of Studenomics. He is releasing a brand new eBook today on making the decision if you should buy or rent a home in your 20s. This quick read is the best investment that you can make when it comes to helping you decide if right now is the right time to buy or rent.

When it comes to buying a home we’re all well informed of the costs that go along with this purchase. We understand that you need to pay taxes, pay for moving costs, deal with loading your place up with furniture, pay the lawyer, and deal with many other expenses. There’s one more expense that we don’t really factor in.

What’s this hidden cost of home ownership? It’s TIME. Time is a ownership cost that most of us rarely factor in when we decide if we should rent or buy a home in our 20s. We run all of the financial calculations and crunch all of the numbers. What we don’t do is think about the time that we’ll now have to invest as a new home owner.

Why is time such a hidden cost when it comes to home ownership?

  • You’re going to have to wake up an hour earlier in the winter to shovel your driveway.
  • You’re going to have to spend a Friday night raking leaves in your backyard.
  • You’re going to spend time on fixing up rooms and customizing them to your expectations.
  • You’re going to have to spend an afternoon waiting for the cable guy to show up to fix your internet connection.

Simply put you’re going to have to spend lots more time on your new home than you ever did with your rental. When you rent a place you don’t really have to deal with anything at all. As a renter you just deal with your own basic household chores. The rest of the work or anything that breaks down gets delegated to the landlord of the unit. The renter simply calls the landlord to deal with most issues around the place.

What if you don’t want to invest all of this time into your new property?Well then you have two clear options for how you can avoid this heavy capital investment:

  1. Outsource the work. You can always pay someone else to do the work. You can hire a landscaping company shovel your snow in the winter and mow your lawn in the summer. You can also outsource all other household related tasks. The obvious benefit here is that you can save yourself lots of down. The downfall is that it’s going to cost you even more money.
  2. Avoid the work. You can also attempted to avoid the household work. We all have that one home in the neighborhood that always looks like a complete mess. The benefit here is that you don’t have to worry about investing time or money into tasks around the task. The obvious setback is that your home won’t be attractive at all.

As you can see there’s going to be a heavy time requirement when you decide to buy a new home. Once the euphoria of owning a home fades away, you’re going to be stuck with all of these new tasks on your plate.

Is there any other solutions to the time investment required with your property? You can either enjoy the work or think of it as an investment. Enjoying the work can become really easy because after a while, mowing your lawn on a summer morning can be a great feeling. The investment part comes into play when you start to perform upgrades on your house. In the process of upgrading your home, you can improve its market value when you plan on selling it eventually.

As a young professional are you ready to invest all that time into your new home? Would you rather outsource these tasks?

Jay Taylor: Turning Hard Times Into Good Times

What’s In Store for the Markets? What’s In Store for America?

click here for audio HOUR #1 HOUR#2

Chatter from Floor Says Oil Going to $85

The next 30 days could be a "turning point" for oil prices, a top commodities trader told CNBC Monday, adding that the price of light, sweet crude could soon fall to $85 a barrel.

West Texas Intermediate [CLCV1 93.74 -0.43 (-0.46%) ] broke a key technical level when it recently closed below $95 a barrel, said Richard Ilczyszyn, senior market strategist at Lind Waldock. The close below that level "opens the window" for another $10 to the downside, he explained. Therefore, he thinks $85 to $95 is the new established range.

To Ilczyszyn, oil prices recently went up too much, too fast. With few developments in the Middle East, a "slightly" stronger U.S. dollar and equities pulling back, the market realized oil prices didn't need to be so high, he said. So he thinks oil will continue to take its $10 to $15 premium off throughout the next 30 to 60 days.

Is Lower Oil Really a Good Thing?

As crude fell to its lowest level in more than four months on Monday, the "Fast Money" traders debated what it means for the economy.'s Pete Najarian thinks it's good for the economy. Consumers couldn't survive on $4 a gallon for gasoline, he said. With lower gas prices, consumers are able to spend money elsewhere, which might be why consumer discretionary stocks rose on Monday.

Chevron [CVX 101.59 1.68 (+1.68%) ] and Exxon [XOM 80.57 0.86 (+1.08%) ] performed well, too, despite oil going lower. To Najarian, that says there's a "calm period" coming. Now that oil has broke through the $92 level, he thinks it could fall to the $80s. Over time, he thinks that will be a positive for the market.

Brian Kelly of Kanundrum Capital, however, said lower oil prices doesn't help the economy in the long run. To him, lower oil prices suggests weak demand. China is the largest consumer of oil, so if oil is falling, that means China's economy slowing down. For his part, Kelly doesn't think oil is going down because of less demand. He thinks China isn't slowing down.

One reason for lower oil, Najarian said, might be that there is less rebellions in the Middle East. Kelly agreed that risk is coming off.

Marc Faber: The world is 'grossly underweight gold'

Economist Marc Faber warns investors that America needs to go through "a devastating crisis" before a meaningful recovery can begin.

Given his Dr Doom moniker it is hardly surprising that Faber is once-again bearish on the US economy, yet his track record commands respect – he called both the bust and the subsequent stock market rally.

Comparing an economy to a human body, he tells US financial paper Barron's that "there are periods when rest is required. In economic terms, that is a recession". Faber thinks the economy still needs a long rest.

He points out that America's debt problem hasn't gone away – it has just been switched from the private to the public sector. The only way to reduce public debt would be "to impose a flat tax and cut government expenditures by 50%". But only a disaster could make that happen.

As for US-listed companies, they've already had their disaster. The 2009/10 recovery means US markets look OK in dollar terms - but look at them in terms of Swiss francs, Australian dollars, Japanese yen, gold or silver and they're down 50% to 80% since 2007.

This has made US equities and properties "inexpensive relative to other countries, but they aren't the bargain of the century". Indeed, they could be due a correction of up to 30% from here, warns Faber. If you have to invest, go for consumer staples and healthcare stocks.

More important, says Faber, is to own some gold. "Not to own gold is to trust the value of paper money and the government's integrity. No one in his right mind could trust the US government any more."

The 65-year-old also dismisses claims that gold investing is becoming a bubble. The world is actually "grossly underweight gold" but "flooded with US dollars".