Monday, October 3, 2011

The Best "Below Book" Stocks to Own Right Now

When the economy is growing, you need to focus on income statements, looking for signs that sales and profits can grow at a heady clip. In tougher economic times, investors pivot over to the balance sheet, looking for areas of support to gauge how much further a stock might fall. And there's no truer gauge of a company's balance sheet strength than its tangible book value (also known as "shareholder's equity," minus any goodwill).

In theory, a stock should never be worth less than a company's stated book value. In reality, investors often sell a stock without noticing the balance sheet, and the tangible book value can become much more valuable than the company's stock price. Back in 2002, dozens of solid companies suffered just such an ignominious fate. Yet by 2004 many of these "below book" stocks rebounded sharply.

It's happening again. The recent market rout has created a veritable bonanza of "below book" names. I've weeded out all financial services stocks, and still managed to come up with nearly two dozen stocks that now trade well below tangible book value.

Importantly, there's little reason to think that book value will shrink in these challenging economic times. Every stock on this list was profitable last year and is expected to be profitable in 2011 as well. Those profits should boost book value even further.

Of course you'll need to get a sense of what assets are on the balance sheet to truly verify that the board of directors could gain top dollar for the assets if the company was to be liquidated (which is the real base scenario for "below book" names). As an example, you should question the value of oil refiners such Valero Energy (NYSE: VLO) and Marathon Oil (NYSE: MRO). The energy sector is awash in too much oil refining capacity, so if these companies looked to sell their refineries, they'd likely get a lot less for them than what they paid to build them -- which is the value carried on the balance sheet.

In a similar vein, you might want to cross Great Plains Renewable Energy (Nasdaq: GPRE) and Sunpower (Nasdaq: SPWRA) off of your list. These companies have poured millions of dollars into facilities that can produce ethanol, and solar panels, respectively. Demand for each of these products is now weaker than many previously forecasted, rendering their manufacturing facilities less valuable in the eyes of potential purchasers.

Yet other companies have verifiably attractive assets. Much of JetBlue's (Nasdaq: JBLU) airline fleet is quite young and very fuel efficient. If the carrier was put up for sale, rival airlines could afford to pay a nice premium to the current share price and get an attractive fleet. As an added bonus, JetBlue holds the rights to many attractive gates at major East Coast airports, and yet it doesn't even list their value on the balance sheet. Although Delta (NYSE: DAL) remains as my favorite current airline stock, Jetblue's below book valuation is awfully tempting.

Two more stocks to buy
It's unusual to find a large blue chip on this list, but with $55 billion in annual sales, Bunge (NYSE: BG) surely qualifies. This company is involved in a wide range of agricultural businesses, from fertilizer sales to oilseed processing to wholesale sales of cooking oil. Business is solid right now -- the company has topped quarterly profit estimates by an average of 25% in the past four quarters, and (earnings per share) EPS is likely to be a record $6.50 this year. Shares are getting little affection, though, recently falling in tandem with the broader market. In fact, at a recent $59, the stock is 17% below tangible book value and an even broader discount to Merrill Lynch's $79 target price. They figure shares are worth 10.5 times their 2012 EPS forecast of $7.50.

Another favorite book value play of mine right now remains Micron Technology (Nasdaq: MU). About a month ago, I told you of Micron's strong position in the areas of memory and storage for the next generation of tablet computers and smart phones.

That transition is still underway, and quarterly results (and the stock price) are currently being constrained by tepid results in the company's legacy DRAM business. In its fiscal fourth quarter (ended August), Micron lost $0.14 a share, below analysts' forecasts, due to recent weakness in DRAM pricing. That net loss obscures the fact Micron still generated $354 million in operating cash flow in the quarter.

More importantly, tangible book value stands at a very healthy $8.15 billion, 42% higher than the company's current market value. In response to the lagging valuation, Micron is using its $2.2 billion cash balance to buy back stock. I still think shares of Micron are headed beyond the stated book value and toward $12. At that price, shares would trade for five times projected 2012 free cash flow of $1.5 billion, on an enterprise value basis.

Risks to Consider: Below-book stocks lack catalysts, except that they're cheap. If any of these companies failed to maintain profitability, then accumulating losses would erode book value.

Smart Money - October 2011

Smart Money - October 2011
English | PDF | 100 pages | 41.7MB

SmartMoney comes to you straight from the editors of the Wall Street Journal, the best financial reporters in the business. Every issue brings you the information you need to know to deal with markets and protecting your wealth. Turn to SmartMoney for no-nonsense advice you can put into action.

read it here

Are Silver & Copper Prices Predicting a Global Recession?

Silver and copper have recently been going through their own private bear markets. Since the open on September 1st, silver futures have sold off by more than 25%. During the same time frame, copper futures sold off by around 24%. Both metals are extremely oversold, but lower prices are still possible.

Are the bear markets in copper and silver an attempt to warn market participants that slower economic condition are ahead? Are equities going to take a huge hit on slower future growth?

The notion that lower copper prices will precede a stock market selloff is generally an unfounded allegation. Recently Jason Goepfert of produced the follow table illustrating the returns of the S&P 500 immediately following a bear market in copper over the past 25 years:

The chart above is additional proof that a massive selloff in copper does not necessarily have a major impact on the returns for the S&P 500. However, I would remind readers that volatility in commodities generally precedes volatility in equities.

Precious metals may be getting close to a possible intermediate term bottom. Silver and copper futures are extremely oversold based on a variety of indicators. However, the key to future price action likely will revolve around the price action in the U.S. Dollar Index.

The U.S. Dollar Index has been ripping higher throughout most of September. The rally in the Dollar is placing pressure on risk assets such as equities, precious metals, and oil. The daily chart of the U.S. Dollar Index is shown below:

So far the U.S. Dollar Index has been held back by the $79 price level which has been acting as resistance, but if prices can breakout above recent highs it would not be shocking to see the U.S. Dollar Index test the 80 – 82 price range in the near future. A breakout would likely put additional pressure on silver and copper prices. The two charts below illustrate the recent correlation between silver and copper prices and price action in the U.S. Dollar Index:

Silver : Dollar Correlation

Copper : Dollar Correlation

Additionally the S&P 500 could break below the August lows and oil could follow suit if the Dollar continues to work higher above recent resistance. If October turns out to be an ugly month for risk assets as pundits have predicted, then the U.S. Dollar will likely perform relatively well in the intermediate future.

Clearly there is political risk coming from Europe which could alter price action in risk assets in a variety of ways. Financial markets are volatile across the board and large intraday price swings are becoming common place.

In many cases the headlines will have more impact than the fundamentals or the technicals in this type of trading environment. However, the longer term support and resistance levels should hold sway even during times of exacerbated volatility. The weekly charts of silver and copper futures are shown below:

Silver Weekly Chart

Copper Weekly Chart

Clearly the price action in silver and copper in late August and throughout September has been ugly. Both metals are oversold in nearly every time frame, however if the Dollar continues to strengthen we could see deeper declines in both silver and copper prices as illustrated in the charts above.

Currently fundamentals and technical analysis cannot be relied upon solely when making trading decisions. However, the longer term support and resistance levels derived from the charts above give informed traders areas that offer solid risk / reward exits for profit taking and entries for those looking to get long silver and copper.

Trading Conclusion:

The data provided above regarding equity returns after a bear market in copper are sufficient enough to state that lower copper prices do not necessarily project lower domestic equity prices in the United States. With that said, the correlation between the price of copper and the IShares FTSE China 25 Index Fund (FXI) is irrefutable. Lower prices recently in copper are directly correlated in the price action of the FXI China Index fund as shown below:

FXI China Index Fund : Copper

The recent price action in the FXI China Index fund is ugly to say the least. As shown above, if the U.S. Dollar continues to strengthen copper, silver, and the FXI will likely continue to trade lower. Clearly the recent price action in Chinese markets is concerning for domestic equity investors, but an economic statement released earlier today is an ominous signal in the immediate future for U.S. equity investors.

On Friday the ECRI (Economic Cycle Research Institute) came out with a statement that the U.S. economy is headed for a new recession that the U.S. federal government cannot prevent. Data is starting to show signs that a new recession is not only possible, but quite likely in the near future. One of the key underlying assets to monitor for future clues about price action in risk assets is the U.S. Dollar. In coming weeks and months, I will be monitoring the U.S. Dollar closely. I think it would be wise if you did as well. Headline risk is increasingly high!

Pierre Lassonde: Gold Correction Over, Expect $10,500 Gold

from King World News:

With so much worry surrounding the gold and silver markets, today King World News interviewed legendary Pierre Lassonde, to get his thoughts on what to look for going forward. Pierre is arguably the greatest company builder in the history of the mining sector. He is past President of Newmont Mining and past Chairman of the World Gold Council and current Chairman of Franco Nevada. When asked what to expect going forward for gold, Lassonde responded, “Two weeks ago I was the keynote speaker at the London Bullion Market Association Annual Meeting meeting in Montreal. Gold at the time was close to $1,900 and in my speech I said don’t be surprised to see a correction in the gold price of up to 20% over the next few months because I think it’s overdue. I didn’t know that it was going to happen in two weeks, but it did.”

Pierre Lassonde continues: Read More @

Morgan Stanley Seen As Risky As Italian Banks In Swaps Market

Morgan Stanley (MS), which owns the world’s largest retail brokerage, is being priced in the credit- default swaps market as less creditworthy than most U.S., U.K. and French banks and as risky as Italy’s biggest lenders.

The cost of buying the swaps, or CDS, which offer protection against a default of New York-based Morgan Stanley’s debt for five years, surged to 488 basis points as of 4:20 p.m. in New York, or $488,000, for every $10 million of debt insured, from 305 basis points on Sept. 15, according to prices provided by London-based CMA. Italy’s Intesa Sanpaolo SpA (ISP) had CDS trading at 422 basis points, andUniCredit SpA (UCG) at 426, the data show. A basis point is one-hundredth of a percent.

“The CDS spreads are making investors and creditors nervous” about Morgan Stanley, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates the company’s stock “outperform,” in an e-mail.

The price of Morgan Stanley credit-default swaps continued to climb earlier this week even when the firm’s shares rose. The stock, which yesterday jumped 6.6 percent, today dropped $1.58, or 10 percent, to $13.51 in New York Stock Exchange composite trading, the biggest drop in the 81-company S&P 500 Financials Index. Shares are down 50 percent since the start of the year.

Implied Risk

Moody’s Analytics, an arm of Moody’s Investors Service that’s separate from the company’s credit-rating business, said in a report yesterday that Morgan Stanley’s CDS prices imply that investors see the bank’s credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody’s Investors Service.

By comparison, Bank of America Corp. (BAC) and France’s Societe Generale (GLE) SA, which have CDS trading at 421 basis points and 340 basis points respectively, have prices that imply a rating of Ba1, higher than the implied rating on Morgan Stanley, said Allerton Smith, a banking-risk analyst at Moody’s Analytics in New York.

Mark Lake, a spokesman for Morgan Stanley in New York, declined to comment.

Morgan Stanley was the biggest recipient of emergency loans from theFederal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group Inc., now the biggest shareholder, and the U.S. Treasury, which it repaid with interest.

2008 Peak

While the price of Morgan Stanley’s credit-default swaps is at the highest level since March 2009, it’s nowhere near the peak reached in 2008. On Oct. 10 of that year, the annual price for five-year protection rose to the equivalent of 1,300 basis points, according to data provided by CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.

The credit-default swaps market can be thinly traded, and the recent jump in prices may reflect no more than a single big counterparty seeking to hedge contracts, said Hintz, a former Morgan Stanley treasurer. Morgan Stanley, one of the biggest traders of CDS among U.S. banks, doesn’t make a market in its own swaps, according to Smith of Moody’s Analytics.

The CDS market has features “that may not exist in other markets like the bond market or the equities market,” Smith said in a telephone interview. Having fewer participants trading in the Morgan Stanley name could result in a “disproportionate spread movement,” he said.

Trading Volume

The daily average trading volume in Morgan Stanley shares over the last three months is 27 million shares, according to data compiled by Bloomberg. By contrast, a three-month studyreleased this week by the Federal Reserve Bank of New York found that most single-name CDS trade less than once a day, while the most active trade more than 20 times per day.

Trading in Morgan Stanley credit-default swaps has risen to 257 contracts last week, compared with 187 for Goldman Sachs Group Inc. (GS), according to the Depository Trust & Clearing Corp. That compares with a weekly average of 73 trades in Morgan Stanley and 91 in Goldman Sachs in the six months that ended on Aug. 26, DTCC data show.

There was a net $4.6 billion of protection bought and sold on Morgan Stanley debt as of Sept. 23, according to DTCC. Even with the higher trading volume, investor skittishness in the face ofEurope’s sovereign debt crisis may be leaving few market participants willing to sell CDS protection to meet the demand for hedges, said Hintz.

“With the EU teetering, few other firms are going to jump in and write CDS on a global capital markets player like MS,” Hintz said in his e-mail, referring to the European Union and to Morgan Stanley’s stock-market ticker symbol.

Trading Decline

The rise in Morgan Stanley’s CDS prices may also relate to an expected decline in third-quarter trading revenue or to the company’s exposure to French banks, Smith said.

Ruth Porat, the bank’s chief financial officer, said at an investor conference on Sept. 13 that the fixed-income trading environment in the third-quarter was worse than 2010’s fourth quarter, when Morgan Stanley posted its lowest debt-trading revenue since the 2008 crisis. The company, led by Chief Executive Officer James Gorman, 53, reported second-quarter revenue from both investment banking and fixed-income trading that beat rival Goldman Sachs for the first time on record.

Morgan Stanley had $39 billion of cross-border exposure to French banks at the end of December before accounting for offsetting hedges and collateral, according to an annual filing with the U.S. Securities Exchange Commission. Cross-border outstandings include cash deposits, receivables, loans and securities, as well as short-term collateralized loans of securities or cash known as repurchase agreements or reverse repurchase agreements.

‘Galloping Wider’

While Morgan Stanley hasn’t updated those figures, Hintz estimated in a Sept. 23 note to investors that the bank’s total risk to France and that country’s lenders is less than $2 billion when collateral and hedges are included. Morgan Stanley currently has zero exposure to France, including French banks, after hedges and collateral are factored in, according to a person close to the firm.

As of June 30, Morgan Stanley had about $5 billion of funded exposure to Greece, Ireland, Italy,Portugal and Spain, which was reduced to about $2 billion when offsetting hedges were accounted for, according to a regulatory filing. The company also had about $2 billion in overnight deposits in banks in those countries and about $1.5 billion of unfunded loans to companies in those countries, the filing shows.

“Their spreads just are galloping wider,” Smith said. “Is it rational that Morgan Stanley CDS spreads would be wider than French bank CDS spreads if the concern is exposure to French banks? I don’t think that makes perfect sense.”

Bond Yield Climbs

Goldman Sachs, which like Morgan Stanley converted from a securities firm to a bank in 2008, had $38.5 billion of gross cross-border exposure to French banks as of June 30, according to a regulatory filing. The firm’s five-year credit-default swaps traded at 330 basis points as of 4:20 p.m., according to CMA.

Morgan Stanley’s 10-year debt has also shown signs that investors are growing concerned. The yield on the company’s $1.5 billion of 5.5 percent senior unsecured notes that comes due in July 2021 has climbed to 6.57 percent from 5.46 percent on Sept. 15, according to prices reported by Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

That’s still lower than the 6.76 percent yield on 4.125 percent bonds issued by Intesa Sanpaolo that come due more than a year earlier, in April 2020, according to Bloomberg data.

‘Very Sensitive’

Morgan Stanley’s reliance on the debt markets, instead of depositors, to provide funding for its assets may be one cause of concern, some analysts said. Morgan Stanley and Goldman Sachs, which were the second-biggest and biggest U.S. securities firms before converting to banks, both got less than 10 percent of their funding from depositors as of June 30, according to company filings with the SEC.

By contrast, Bank of America and JPMorgan Chase & Co. (JPM), the two largest U.S. banks by assets, funded more than half of their balance sheets with retail deposits at the end of June, filings show.

“The market is just very sensitive to anybody considered to be wholesale funded,” John Guarnera, a financial analyst at Societe Generale in New York, said in a Sept. 23 telephone interview. “If you’re a bank, you can fall back on the fact that you have a strong retail deposit base. Morgan Stanley has deposits, but not like you’d see out of a BofA or a JPMorgan.”

Stunning Plunge in COMEX Commercial Silver Net Short Positions

The CFTC just released its commitments of traders (COT) report at 15:30 ET for trader’s positions as of the close on Tuesday, September 27 and the data show a stunning drop in the large commercial net short positions in both gold and in silver futures.


For example, as silver fell $7.88 or 19.8% Tues/Tues, from $39.76 to $31.88, traders classed by the CFTC as “commercial” reduced their collective net short positioning (LCNS) by an extremely large 16,446 contracts to show 24,262 contracts net short. This, while the open interest fell by 10,089 to 102,014 open.

Just below is our graph for the commercial net short positioning for silver futures on the COMEX.


Source CFTC for COT, Cash Market for silver.

Not since November of 2008, during the heat of the 2008 Panic, has there been a smaller commercial net short position for silver futures. We can say that as of Tuesday, the largest, best funded and presumably the best informed commercial traders of silver futures had taken the price downdraft opportunity to very strongly reduce their short bets for the second most popular precious metal.

We will have more commentary on this unusually large reduction in commercial net short positioning, including a 30,945-contract reduction in the LCNS for gold futures, in the technical graph comments for Vultures, which we intend to complete by the usual time this weekend.

(Ed. Note added at 16:35 ET. The last time the combined commercial traders were this "small" on the short side of silver futures, November 25, 2008, the price of silver then was $10.33 the ounce. Therefore, with silver at $31.88 on Tuesday, having tested as low as $26.04 in panic liquidation selling the day before, we can say that commercial traders had about as much confidence in the price of silver going lower as they did at $10.33 silver three years ago.

Incidentally, for Vultures, the relative commercial net short positioning also plunged to a very low and usually bullish 23.8% of all COMEX contracts open - the lowest LCNS:TO since October of 2008. (Graph below.) This is a very bullish COT report for silver. Let's see if the market "gets" that in the days and weeks ahead.)


***Further notes added at 18:31 ET: ***

Factoids about this unusually large reduction in commercial net short positioning for discussion purposes.

Silver LCNS

-16,446 contracts net short is the largest 1-week drop in large commercial net short positioning (LCNS) since February 14, 2006 (-25,048 contracts then, with silver then $9.22).

24,264 contracts net short is the lowest LCNS since November 25, 2008 (LCNS was 23,682 then with $10.33 silver).

23.8% is the lowest relative commercial net short positioning since October 21, 2008 (23.2% then with $10.10 silver).

As silver fell a net 19.8% Tues/Tues the large commercial traders reduced their net short bets by 40.4%. To find a larger 1-week drop percentage wise we have to go all the way back to March 25, 2003 (-47.7% then with $4.39 silver).

The largest portion of the net short reduction was by the Producer/Merchants, the category which includes bullion banks. They covered or offset 11,213 down to 33,563 contracts net short – the lowest net short position for the Big Sellers since December 9, 2008 (32,878 contracts net short then with $9.83 silver).

Swap Dealers, the “other commercial” traders, increased their net long positioning for silver futures by 5,233 to 9,301 contracts net long. They more than doubled their net long position in other words.

102,014 is the lowest open interest for COMEX silver futures since August 25, 2009 (101,539 then with $14.28 silver).


Since September 6 (3 reporting weeks) gold has declined a net $224.95 or 12% (from $1,874.87 to $1,649.92 Tuesday) while the large commercial net short positioning (LCNS) fell by 61,031 contracts or 26.8%.

166,683 contracts net short is the lowest LCNS since May 5, 2009 (160,445 then with $896.75 gold).

465,414 is the lowest COMEX open interest for gold since February 1, 2011 (462,907 then with $1,341.10 gold).

Since August 2, (gold $1,659.23), gold drove up to test the $1,920s and round tripped back to about $1,650 for this COT report. As it did the large commercial traders got the heck out of 42% of their net short positioning (from 287,634 to 166,683 contracts net short). So, in effect, since August 2 gold has dropped a net $9.31 or 0.6% but the large commercial net short positioning plunged a net 120,951 contracts or 42%. – Gold is very close to where it was August 2, but the commercials are hugely less net short, 12.1 million ounces less net short at virtually the same price today.

Producer/Merchant’s reduced their net short positioning by 19,531 or 10.7% for the week.

Swap Dealers were down to just 4,270 contracts net short gold, having covered or offset 11,414 contracts for the week. Swap Dealers have reduced their collective net short gold positioning by a stunning 87,424 contracts or 95% just since August 2.

465,414 is the lowest open interest for gold since February 1 (462,907 then with $1,341.10 gold).

That is all for now, but there is more to come.

US Economic Calendar For The Week

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Oct 310:00 AMISM IndexSep-50.050.550.6-
Oct 310:00 AMConstruction SpendingAug--0.6%-0.5%-1.3%-
Oct 33:00 PMAuto SalesSep-NA4.1M3.97M-
Oct 33:00 PMTruck SalesSep-NA5.5M5.43M-
Oct 410:00 AMFactory OrdersAug--0.3%-0.1%2.4%-
Oct 57:00 AMMBA Mortgage Index10/01-NANA+9.3%-
Oct 57:30 AMChallenger Job CutsSep-NANA47.0%-
Oct 58:15 AMADP Employment ChangeSep-50K48K91K-
Oct 510:00 AMISM ServicesSep-
Oct 510:30 AMCrude Inventories10/01-NANA1.915M-
Oct 68:30 AMInitial Claims10/01-400K401K391K-
Oct 68:30 AMContinuing Claims09/24-3700K3725K3729K-
Oct 78:30 AMNonfarm PayrollsSep-50K63K0K-
Oct 78:30 AMNonfarm Private PayrollsSep-90K90K17K-
Oct 78:30 AMUnemployment RateSep-9.1%9.1%9.1%-
Oct 78:30 AMHourly EarningsSep-0.1%0.2%-0.1%-
Oct 78:30 AMAverage WorkweekSep-34.334.234.2-
Oct 710:00 AMWholesale InventoriesAug-0.5%0.6%0.8%-
Oct 73:00 PMConsumer CreditAug-$7.0B$7.0B$12.0B-