Weekly update

From the weIMG newsletter:

The week that was:
Employers in the U.S. added fewer jobs than forecast in December, confirming Federal Reserve Chairman Ben S. Bernanke’s view that it could take “four to five more years” for the labor market to completely mend. Payrolls increased 103,000, less than the median projection of 150,000 in a Bloomberg News survey, Labor Department figures showed yesterday in Washington. The jobless rate fell to 9.4 percent, partly reflecting a shrinking workforce as discouraged Americans stopped looking for work. Federal Reserve Chairman Ben S. Bernanke said the unemployment rate will probably fall slowly even with a pickup in U.S. growth this year, signaling no change in the central bank’s monetary stimulus.

Facebook Inc., one of the world's hottest technology companies, gave the clearest sign yet that it is preparing to take itself public sometime next year, as it revealed new details in a 100-page document sent to a select group of potential investors. Frenzied investor interest in the deal, offered solely to Goldman partners and handpicked clients of the securities firm, has put a stamp of approval on the $50 billion valuation of Facebook implied by its agreement with Goldman and Digital Sky Technologies for a $500 million infusion from the two companies. As a private company, Facebook isn't required to report its revenue, profits or losses, and executive compensation, as publicly traded companies must do. Crossing the threshold triggers the SEC's filing requirements, even if a company's shares don't trade publicly. Such companies must register as a reporting company within 120 days after the end of year in which the limit is breached. At that point, companies typically conclude that they might as well go public, listing their shares on an exchange and cashing in if the offering succeeds. Facebook's current fiscal year ends on Dec. 31, making its disclosure deadline the end of April 2012. The Securities and Exchange Commission has begun examining whether disclosure rules for privately held firms need to be rewritten as a result of recent deals allowing investors to buy shares in Internet companies such asFacebook Inc. and Twitter Inc., according to people familiar with the situation.

Stocks:
U.S. stocks advanced for the sixth straight week, the longest streak since April, as stronger-than- estimated employment and service sector data lifted confidence in the world’s largest economy.

The Standard & Poor’s 500 Index fell yesterday after a Labor Department report showed the nation added fewer jobs than forecast and two banks lost a foreclosure case. Bank of America Corp. and Hewlett-Packard Co. led gains in the Dow Jones Industrial Average, as the lender climbed 6.8 percent after settling loan disputes. Alcoa Inc. rallied 6.7 percent after Deutsche Bank AG raised the stock to a “buy” and Jim Cramer named it 2011’s “top stock.”

The S&P 500 climbed 1.1 percent to 1,271.50 in the five days ended Jan. 7, the biggest weekly gain in four weeks. The benchmark gauge for U.S. stocks jumped on Jan. 5 to 1,276.56, its highest close since Sept. 2, 2008. The Dow added 97.25 points, or 0.8 percent, to 11,674.76.

Bonds:
Treasury five-year notes had the first back-to-back weekly gains since October as U.S. payrolls grew less than forecast and Federal Reserve Chairman Ben S. Bernanke said the labor market’s recovery will be gradual. Yields on the notes touched the lowest level in two weeks yesterday after Labor Department data showed nonfarm payrolls expanded by 103,000 last month, versus a median forecast of 150,000 in a Bloomberg News survey. The Treasury will sell $66 billion in securities next week in the year’s first note and bond auctions.

Company bond sales in the U.S. reached a record this week and relative yields on investment- grade debt shrank to the narrowest since May as money managers boosted bets economic growth is gaining momentum. Issuance soared to $48.5 billion, eclipsing the $46.9 billion raised in the week ended May 8, 2009, as General Electric Co.’s finance unit sold $6 billion of notes in the largest offering in 11 months, according to data compiled by Bloomberg. Investment-grade bond spreads narrowed to 162 basis points, or 1.62 percentage points, more than Treasuries, Bank of America Merrill Lynch index data show.

Appetite for corporate debt is growing after annual sales topped $1 trillion for the second consecutive year as the securities return more than Treasuries. Service industries expanded at the fastest pace since May 2006, signaling the U.S. economy is poised to accelerate. While employers added fewer positions in December than forecast, the jobless rate has dropped to the lowest in 19 months.


End of week bond yields:
3 Month yield = 0.12%, up 2 bps from last week.
3 Year yield = 0.98%, down 1 bps from last week..
5 Year yield = 1.96%, down 4 bps from last week.
10 Year yield = 3.32%, up 4 bps from last week.
30 Year yield = 4.48%, up 15 bps from last week.

Weekly update - Jan 24, 2010

from the weIMG newsletter

Well, nothing will take the wind out of a bull market's sails like an announcement from the President that banks will no longer be permitted to use their own capital to trade, or invest in hedge funds or private equity funds. They will continue to be able to trade and operate funds for the benefit of clients, but not themselves. The broad equity market index, S&P500, lost 5.1%, from a 15-month high, in three days of trading since the plan was announced.

Another debate sparked in Washington this week regarding a nomination that until recently seemed all but certain. Current Fed Chairman Ben Bernanke has been nominated by President Obama for a second term, but two Senate Democrats announced this week that they will oppose the confirmation. Senators Dodd (Democrat, Connecticut) and Gregg (Republican, New Hampshire), both of whom are on the Senate Banking Committee, came out over the weekend to voice their support and predict Bernanke's confirmation.

Kinda makes you wonder if the financial capital is still New York, or if it has moved southwest about 200 miles to Washington D.C.

Stocks:
As mentioned above, stocks took a beating this week. Equities rose on strong earnings reports Monday and Tuesday but then fell off a cliff after the announcement of the regulatory plans. On the week the S&P500 fell 3.9%, the Dow shed 4.1%, and the Nasdaq dropped 3.6%.

In global economic news - Chinese authorities indicated Wednesday that they will begin to slow lending in order to contain runaway economic growth. This is bad news for global growth as China has been the growth engine pulling the rest of the world out of the recession.

Some notable earnings news:
A rare disappointment from Google sent its shares tumbling. Earnings beat estimates but investors were disappointed with the outlook. GOOG lost 5.7% on Friday, and 5.1% on the week.
GE profit beat estimates boosting the stock to open Friday about 4% higher than Thursday's close, but it could still not escape the general selloff and lost 2% on the week.
JPMorgan also beat estimates, reporting EPS of $0.74 versus consensus of $0.61, but the stock nonetheless fell 10% on the week.
See article #4 for an overview of bank earnings.

Bonds:
Risk aversion pulled investors away from equities and into bonds, sending yields lower across the board.
End of week bond yields:
3 Month yield = 0.02%, down 2 bps from last week.
2 Year yield = 0.79%, down 7 bps from last week.
5 Year yield = 2.34%, down 8 bps from last week.
10 Year yield = 3.61%, down 7 bps from last week.
30 Year yield = 4.53%, down 5 bps from last week.

What to look for next week:
9am Monday - Existing Home Sales
9am Tuesday - Consumer Confidence
1:15pm Wednesday - Fed Funds Rate Announcement
7:30am Thursday - Durable Goods Orders
7:30am Friday - Q3 GDP Final Revision

Weekly update - December 20, 2009

Stocks:
Tech led the Nasdaq higher but the Dow and S&P500 fell this week.
S&P500 closed at 1,102.47 down -0.36%.
Dow closed at 10,328.89 down -1.36%.
Nasdaq closed at 2,211.69 up 0.98%.

The yield curve flattened as long term bond yields fell and short term yields climbed. The 30-year dropped 4 bps to 4.46% and the 10-year shed 9 bps to 3.45%. The 6-month was flat at 0.14% and the 3-year gained 1 bp to 1.31%.

What to look for next week:
7:30am Tuesday - Q3 GDP Revision
9am Tuesday - Existing Home Sales
7:30am Wednesday - Personal Income & Outlays
9am Wednesday - New Home Sales
7:30am Thursday - Durable Goods Orders

(U.S. equity markets close early Thursday - 1pm eastern - and are closed Friday for the Christmas Holiday)

Weekly update - December 13, 2009

From weIMG newsletter:

Stocks:
US equities were mostly flat as the year end approaches. On the week:
S&P500 closed at 1,106.41 up 0.04%.
Dow closed at 10,471.50 up 0.80%.
Nasdaq closed at 2,190.31 down -0.18%.

Bond yields continue to tick higher. The 30-year gained 9 bps to 4.50% while the 10-year gained 6 bps to 3.54%.

What to look for next week:
7:30am Tuesday - Producer Price Index
8:15am Tuesday - Industrial Production
7:30am Wednesday - Consumer Price Index
7:30am Wednesday - Housing Starts
**1:15pm Wednesady - FOMC Announcement - "0% - 0.25% for an extended period" would be a safe bet.

Weekly update - December 6, 2009

From the weIMG newsletter:

The week that was:

After taking Thanksgiving week off, regulators shuttered six banks on Friday. The largest, AmTrust in Cleveland, had about $9 billion in assets and is the fourth largest bank to fall this year. In total the six banks had $13.4 billion in assets and the FDIC estimates that the loss to its insurance fund will be about $2.4 billion.

Stocks:U.S. equities continued their upward march this week, spurred on by economic data that continue to point to signs of a recovery. The major news this week was the employment situation. Only eleven thousand jobs were lost, compared to consensus of one hundred thousand. Beyond that, the unemployment rate actually ticked down, from 10.2% to 10.0%. Fears from the Dubai World default also subsided as it appears that the losses will be limited and it did not set off a chain reaction of defaults.
All this good news, or lack of bad news, sent the S&P500, Dow, and Nasdaq up 0.9%, 0.8%, and 2.6% respectively.
There was significant news in terms of M&A this week. Comcast and GE struck a deal for the former to acquire a majority stake in NBC Universal. See article attached regarding this deal. In addition, Apple acquired online music company Lala and Kraft bypassed Cadbury management and took its bid directly to shareholders.

Bonds:Yields jumped as Friday's employment report led investors to believe that the Fed may have to start tightening its monetary policy sooner than expected. The 30, 10, 5, and 2 year Treasury yields jumped 19, 27, 22, and 16 bps to 4.39%, 3.47%, 2.24%, and 0.84%, respectively. The three month yield doubled to 0.02%.

What to look for next week:
7:30am Thursday - International Trade Balance
7:30am Friday - Retail Sales
8:55am Friday - Consumer Sentiment

Weekly Recap - November 29, 2009

(from Chicago Booth Investment Management Group)

The week that was:

Bank regulators gave the industry a break and did not close any banks last week. Without a doubt, the major finance and investing news this week came from Dubai. Dubai World, the state-owned investment conglomerate, announced that it would delay debt payments. The announcement sent shockwaves around the world as it seemed to confirm fears of a bubble forming in emerging markets. On Thursday, while U.S. markets were closed for Thanksgiving, most equity markets around the world plunged about 3%. Safe trades dominated, strengthening reserve currencies of the US Dollar and the Japanese yen and sending credit default swaps substantially higher. When US markets opened for a shortened trading day on Friday, much of the panic had calmed and though US equities opened about 2% lower they ended the day about 1.7% lower than Wednesday's close. Europe's indexes recovered about 1% on Friday. Net global declines were notable on the week, but no catastrophic. See attached article #2 for a global summary.
On Sunday the UAE central bank announced that it would provide credit facilities to local and international banks in the Emirates.

What to look for next week:
9am Tuesday - ISM Manufacturing Index (55 consensus. A reading > 50 indicates growth)7:30am Friday - Employment Situation (consensus is for 100k job losses, and 10.2% unemployment rate)

Report on M&A activities

Source: IBD 06.01.09

Investor's Business Daily reports on June 1st edition that M&A activity is set to rise by the second half of 2009, citing midmarket experts who see an upsurge led by distress sales. The impact of credit crunch is still persistent, but fading away. 

Weekly recap - June 7 2009

from weIMG newsletter

The week that was:
It was all about unemployment this week. On Wednesday the ADP report came in line closely with expectations, but on Friday the official employment report showed that job losses slowed to just 345,000 from 539,000 the previous month. Enthusiasm for this improvement was tempered by the jump in the unemployment rate to 9.4%, the highest in 25 years. Remember those bank stress tests from a few weeks ago? Well, the unemployment rate used for the 'worst case scenario' was 8.9%. Oops. No wonder the Treasury is forcing banks to raise more capital than initially required following the stress tests.

Equities:
This week we saw a continuation of the rally that just won't die. On the week the S&P500 gained 2.3%, the Dow (with its new makeup - GM and Citi are out, Cisco and Travelers are in) gained 3.1%, and the Nasdaq climbed 4.2%. Year to date now only the Dow is in negative territory, but just barely, down .1%. The S&P500 and Nasdaq are up 4.1% and 17.3%, respectively.

Palm released the Pre this week, which it hopes will compete with the Iphone. Leading up to the release, the stock has been surging. PALM closed the week up 6.6% at 13.00, but is up a whopping 323% on the year.

Bonds:
Yields on Treasuries continue to push higher leading to speculation that the Fed may be compelled to restart purchasing long-dated securities to keep the yields low. The 30-year yield climbed 32bps to 4.66% and the 10-year climbed 39bps to 3.86%. Not surprisingly then, the aggregate bond index ETF fell about 2%.

What to look for next week:
Thursday 7:30am - Retail sales

Weekly recap

From the weIMG newsletter

The release of results from the long-awaited bank stress tests have been delayed until Thursday, but word has leaked that Citi needs another $10 billion. Three more banks were taken over Friday, one of which, Silverton Bank in Atlanta, could cost the FDIC $1.3 billion from its reserves. The first reading for Q1 GDP came in worse than expected at -6.1% (annual rate) versus consensus of 5.0%. Investors cheered the data however because of a significant decline in inventories indicating that companies will have to begin increasing output to keep up with demand.

Equities:
Stocks ended the week higher with the S&P500 up 1.3%, the Dow up 1.7% and the Nasdaq up 1.5%. On the year the S&P500 is down 2.8%, the Dow down 6.4% but the Nasdaq is up 9.0%. Some lucky investors were able to make almost 300% in a matter of a couple hours on Tuesday. Biotech company Dendreon was scheduled to release test results for a prostate cancer treatment drug at 12:30pm Tuesday. Minutes before the release a massive sell order hit the market immediately pushing the stock from $25 to under $8. The Nasdaq halted trading on the shares to investigate. The results of the drug turned out to be positive and the stock reopened in after hours Tuesday back at $25.

Bonds:
Yields on Treasuries jumped significantly this week as an appetite for risk began to lure investors away from risk-free assets. The 30-year ended the week yielding 4.09% and the 10-year ended at 3.17%. This marks the first time since mid-November that the 30-year yield has topped 4%. High yield bonds had a good week with the ETF JNK gaining 3%. At its current price this ETF yields about 15%.

What to look for next week:
Next week is slow as far as data are concerned. The most significant release will be Friday morning with the release of the employment situation for April. Consensus is for 630k new job losses, a slight improvement over last month's 663k losses. Consensus unemployment rate is 8.9%.

Weekly update - April 19 2009

from the weIMG newsletter

Fed chief Bernanke says we are seeing "green chutes" of economic growth, President Obama echoes that notion but warns there is still more pain ahead. A couple of these green chutes are growing from seeds of lower than expected new jobless claims and higher than expected consumer sentiment. The jobless claims still spell trouble ahead however as it is still north of 600 thousand. Some economists see the unemployment rate continuing to rise into 2010, even if the recession officially ends this year.

Goldman Sachs, JPMorgan Chase, Wells Fargo, and Citigroup have all trumpeted very strong earnings for the first quarter. There are caveats to these earnings however. Most, if not all, of the gains have arisen from trading activities while credit losses still mount even though the accounting rules have been relaxed. Continued profits from these activities are highly unlikely to be sustained going forward. Credit losses on the other hand will probably continue as foreclosures are beginning to mount among even good (non-subprime) borrowers. MIT professor Simon Johnson posted a good commentary on these bank earnings on his blog The Baseline Scenario. Read it here - http://baselinescenario.com/2009/04/16/new-day-new-bank-same-story/


Equities:
This week marked the sixth successive weeks of gains for equities. The Dow posted a 0.6% gain, the S&P500 climbed 1.5% and the tech-heavy Nasdaq rose 1.2%. Year to date the Dow and S&P500 are both down (7.4% and 3.7%, respectively), but the Nasdaq is up 6.1%. REIT stocks posted the strongest gain this week, up 5.5%; an interesting climb considering that General Growth Properties filed the one of the largest real estate bankruptcies in history on Thursday. Other strong performing classes included European stocks, up 4.7% and US corporate junk bonds, up 4.0%. This week's laggard was crude oil, down 3.7%.

The IPO market received a jolt Friday as Rosetta Stone, the language instruction provider, surged 40% on its first day of trading. Shares priced at $18 before trading in the open market and then quickly jumped to over $25 Friday, and climbed even higher to close at $28.25. The IPO is just the fourth in 2009, but three of those have occurred in April.

Bonds:
The aggregate bond market was little changed from last week's close, with the Barclays Aggregate Bond ETF up 0.2%. Treasuries were also mostly flat, making up some lost ground late in the week. The 10-year yield was flat closing the week at 2.93%, whereas the 30-year climbed slightly from 3.76% to 3.79%.

Weekly update - April 5, 2009

from the weIMG newletter

World leaders convened in London for the G20 summit and pledged to do whatever is necessary to fix the global economy. In the meantime, most media sources are trying to convince the public that the worst is behind us. On Friday the employment report came out and showed that an additional 663k jobs were lost in March, bringing the total losses to over 5 million and the unemployment rate to 8.5%, the worse in 25 years.

Equities
Stock indexes rallied significantly in March. The Dow, Nasdaq, and S&P500 were up 3.1%, 5.0%, and 3.3% for the week and 14%, 18%, and 15% for the month, respectively. The Nasdaq has even pulled into positive territory for 2009, up about 2%. The top corporate news for the week was an earnings blowout by BlackBerry maker Research in Motion and a looming bankruptcy for General Motors. RIMM stock surged 32% and GM lost 42%. As a BlackBerry owner with iPhone envy, your narrator is considering a short position in RIMM.

Bonds
Two weeks ago the Fed announced that it would begin purchasing long-dated Treasury securities, immediately sending yields down and prices up. The rally in the equities markets however has begun to entice some investors back into riskier investments. After briefly dipping below 3.5% the yield on the 30-year Treasury rebounded and closed the week at 3.72%. The yield on the 10-year also ended the week higher at 2.91%. The TED spread continues to fall, generally a good indicator for thawing credit markets. The spread currently stands at 96bps.


What to look for next week:
It is a slow week for economic data, but keep an eye out for the international trade balance on Thursday. Consensus is for net trade balance of $36 billion net deficit, a six year low. The slowing economy and strengthening dollar have resulted in US consumers buying up fewer imports.

New ETF - IQ Hedge Multi-Strategy (QAI)

The Vanguard of alternative investing is here. IndexIQ, the alternative investment ETF pioneer, has launched this week a new ETF, called the IQ Hedge Multi-Strategy Tracker ETF (NYSE Arca: QAI).

According to the press release – available here – QAI seeks to replicate the returns on the IQ Multi-Strategy Index, before fees and expenses. The index attempts to replicate the risk-adjusted return characteristics of the collective hedge funds and uses multiple investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income, arbitrage, and emerging markets.

The QAI is an ETF of ETF’s. According to the fact sheet, the ETF doesn’t invest directly in hedge funds, but rather in the underlying ETF’s , which the press release says they are widely available and liquid. The ETF will bring together the convenience of the ETF’s with the access to alternative investments.

Its top ten holdings are (as of 12/31/2008):

-                   AGG – iShares Lehman Aggregate Bond Fund – 21.57%

SHY – iShares Lehman 1-3 Year Treasury Bond Fund – 19.55%

EEM – iShares MSCI Emerging Markets Index Fund – 11.59%

HYG – iShares iBoxx       High Yield Corporate Bond Fund – 8.43%

BND – Vanguard Total Bond Market ETF – 6.38%

DBV – PowerShares DB G10 Currency Harvest Fund – 5.61%

SHV – iShares Lehman Short Treasury Bond Fund – 4.56%

JNK – SPDR Lehman High Yield  - 3.98%

EFA – iShares MSCI EAFE Index Fund – 2.93%

VWO – Vanguard ETF Emerging Markets – 2.92%

The Asset Allocation as of 12/31/2008

Short – term bonds – 28.56%

Broad bonds – 27.95%

International Equity – 17.44%

High Yield bonds – 12.41%

Currencies – 8.08%

Commodities – 1.7%

International bonds – 1.19%

TIPS bonds – 1.18%

US Equity (inverse) – 0.97%

Real Estate – 0.51%

The IQ Hedge MS index shows a correlation with the S&P 500 in the range of 0.20 (April ’07) to 0.82 (November ’08). The ETF itself seeks low correlation with the equity market.

Backtesting the ETF for the past 5 years shows that $10,000 invested five years ago have grown to about $13,500 today, in stark difference with the $9,700 you would get had you invested in the S&P 500 Index over the same period.

Some of the features and benefits:

• -       Seeks performance similar to overall hedge fund universe
  
• -       Seeks low correlation to equity markets
  
• -       Lower fees than the typical hedge funds
  
• -       Intra-day liquidity
  
• -       Portfolio transparency
  
• -       No manager-specific risks (although the underlying ETF’s have manager specific risk)
  
• -       Rules based approach
  

Index data:

Index Symbol – IQHGMS

Alpha (vs. S&P 500) – 6.7%

Beta (vs. S&P 500)  – 0.41

Sharpe Ratio – 0.43

Correlation (vs. S&P 500) – 0.73

 

 

Weekly update - March 8, 2009

From weIMG newsletter:

Employment numbers topped this week's economic news. Another 651,000 jobs (US, non-farm) were lost in February pushing the unemployment rate up to 8.1%, the worst since the Volcker recession of the early 1980's. A more broad gauge of unemployment which includes part-time workers seeking full-time employment puts the unemployment level at 14.8%. That's more than 1 of every 7 employable persons. Ouch.

In the meantime productivity is actually up. Anyone with a macroeconomics course under their belt should not be surprised by this. Employers slash the workforce and make remaining employees to produce more per employee. Eventually, these workers will demand additional compensation for their increased productivity, incomes go up, the AD curve shifts out, firms increase hiring, and we return to equilibrium. Sounds simple, right, but how long until it all unfolds?

Equities
Just how many new "worst weeks of 2009" will we have? Bank worries, unemployment numbers, continued housing troubles….take your pick, stocks just keep going down. Sparing the repetitive commentary, here is the weekly, year-to-date, and "from peak" performance of the major US indexes:

S&P500: week = -7.03%; YTD = -24.34%; from peak = -56.34%
Dow: week = -6.17%; YTD = -24.49%; from peak = -53.21%
Nasdaq: week = -6.10%; YTD = -17.96%; from peak** = -54.75%

**For the Nasdaq the "from peak" return is from October 2007; not from the high of the dot com bubble. The Nasdaq is currently down 74% from the bubble peak reached March 10, 2000.

Bonds
At least we have returned to normalcy in the Treasury market. Treasuries posted solid gains this week thanks to the turmoil in the equity markets. The yields on the 10 and 30 year fell to 2.83% and 3.50% from 3.04% and 3.72%, respectively.

The TED spread reflected investors' preference for safe Uncle Sam debt over that of corporations. The spread climbed to 110 basis points from 102 the prior week. For historical reference, the TED spread typically ranges from 20 to 50 basis points under normal conditions. It peaked over 450bps last October. Click the link below for TED spread chart, then click the 5 year button, it gives a pretty good indication of just what a mess we are in.
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

What to look for next week:
Capitulation…hopefully.
Thursday morning - Retail Sales - Consensus is for a drop of 0.5%. Did you know retail sales were actually up last month? It seems this positive nugget got buried by the other apocalyptic headlines.
Friday morning - Consumer Sentiment - Consensus is for a slight drop to 55 from 56 in January.
Friday morning - International Trade Gap - The net imbalance is expected to shrink from $40B in January to $38B for February.

Weekly update - February 21, 2009

from the weimg newsletter

The week that was:

Equities:
Yet another dismal week for equities. US markets were closed Monday in honor of President's Day, but on Tuesday they opened up about 2% down from Friday's close; and then they just steadily declined the rest of the week with a minor (about 1%) recovery in the last few hours of trading on Friday. Consensus seemed to be that the declines were due primarily to continued worries about the banks. Talk and rumors of nationalizing the banks picked up steam late in the week. On Friday, Senate Banking Chairman Chris Dodd even said that some banks may have to be taken over for a "short time."

Most big banks are hitting new lows. Citi (C) lost 22% on Friday to close at $1.95. In erratic trading, Bank of America lost only 4% to close at $3.79, but much higher than its intraday low of $2.53. Not even the great Oracle himself is immune - Berkshire A shares were down $1600 to $77,000 and have lost about 20% of their value already in 2009. This doesn't bother Mr. Buffet himself, he claims to pay no attention to the stock price (see article attached).

The tumultuous week brought the Dow to a new bear market low, a level not seen since 2002. The Nasdaq and S&P500 have a bit more room before hitting their lows of November 21 last year. By far this was the worst week yet of 2009, each of these indexes lost over 6%.

How is the rest of the world doing?
2009 Year to Date performance of major global indexes:
USA - S&P500: -15%
UK - FTSE: -12%
Germany - DAX: -17%
France - CAC: -15%
Japan - Nikkei: -16%
Hong Kong - Hang Seng: -12%
Singapore - Straits Times: -9%
India - Sensex: -8%

Treasuries:
Stocks go down treasuries go up. Treasury prices climbed higher pushing the yields on the 10 and 30 year notes down to 2.77% and 3.57% from 2.88% and 3.68% the prior week, respectively. Thus, not a good week for TBT and PST. The flight to safety has even pushed gold to over $1000 an ounce.

What to look for next week:
Thursday - Durable Goods Report
Friday - Consumer Sentiment and Revised Q4 GDP

Top Financial Advisers - Barron's Feb 9 2009

In this week’s issue of Barron’s, the focus is on the top financial advisers in the country. In times like these, it’s a good idea to see what the leaders in the financial advisory services are thinking and how they go about positioning their clients’ investments to take advantage of the downturn, and maybe the upturn, once the markets will turn around. For the past ten years, the stock market returns are zero. Where do we go from here and what financial instruments seem poised to gain in the next three to five years? Very few of the top financial advisers – the top ranked one in each state – advise investments in stocks; most of them favor high-quality corporate bonds, or Treasuries. If they do look into stocks, then the names most often used are the likes of Johnson & Johnson (ticker: JNJ), Coca Cola (KO), 3M (MMM) or Colgate-Palmolive (CL). These are the low-hanging fruits – safer securities offering good returns.

After the big scare of last year, the affluent investors are looking for this year? Transparency and liquidity, coupled with safety tend to be the choices of 2009.

Barron’s has profiled the top financial adviser in each state. Let’s go through the list and select the ones with good advice for us.

“If we can help clients by reaching out to other clients, we’ll do that”, says Robert Runkle of Merrill Lynch, representing Alabama. Connecting people is an important job of the financial adviser, as he brokers the information flow between his clients. As for an investment idea, Mr. Runkle likes high-quality corporate bonds.

From Alaska, the top performer is Tom Konop of Smith Barney. His advice is that “the guy in the suit may not be the one with the money” as his clients include fishermen, oil roughnecks, wilderness pilots and hunting guides. His recommendations are buying munis and selling Treasuries.

The Arizona representative, James Pupillo of Citi Institutional Consulting, lives by a simple rule: “If you can control the risk in portfolios, the returns will come.” He seeks opportunities overseas, where “many countries still need basic things like running water, electricity and telephone service”. “The businesses that innovate and deliver these products will prosper”, he says.

Mark Curtis of Smith Barney is a financial adviser from California. His advice is summed up this way: “Laser in on the client’s focus, and don’t get confused by how much money you will make on an individual investment.”

Timothy Kneen of UBS Financial Services is from Colorado and his focus is on low-correlated assets, investments that are unlikely to move in the same direction simultaneously. His belief is “regression to the mean”, where returns will come back to their averages over time. He thinks that emerging markets and high-grade corporate bonds are due for a rebound.

Jeff Erdmann of Merrill Lynch – Connecticut – starts every conversation with an in-depth lifestyle and cash-flow analysis. Reduce your book your business to include smaller number of families in order to develop deeper relationships with them. Always ask about their children, to see the family dynamics.

Marvin McIntyre, Smith Barney – District of Columbia – “To do your job right, you have to be an extraordinary listener. You have to have empathy for your client.” The conversations go beyond investing, from finding a summer job for a kid or a contractor for a house renovation. Preserving wealth is job #1. “One of the most important things we want to do is protect the client’s lifestyle.” “We start by giving the client sufficient cash flow to retire. Whatever else happens on the growth side isn’t devastating if it doesn’t work in the short term.”

Louis Chiavacci, Merrill Lynch – Florida – Work in teams, with a tax expert and a bond specialist. Disclosure is key, make sure the clients understand every element of risk.

James Hansberger, Smith Barney – Georgia – “All growth in my life has come from adversity.” “Just because there has been a tremendous storm in the markets, you don’t get away from the basics.” Investors should focus on businesses which are able to build their businesses from good cash flow and low debt levels. Some companies in the biotech and data-processing areas fit that profile and could provide excellent returns in the next few years.

Mike Strada, Morgan Stanley – Hawaii – “If you think it might be time to reduce sail, you should already be up there doing it.”

Robert Rathbone, Wachovia Securities, Idaho – specialized in fee-based asset management, builds in depth client relationship and steers clear of the commission-based business of selling individual stocks. Today’s environment offers investors and aspiring advisers a rare opportunity, because the prices so low that the market looks poised for dramatic appreciation, comparable to the years following 1974 and 1981. “somebody getting into the business now has a high probability of looking good in five to ten years.”

Scott Magnesen, Morgan Stanley, Illinois – serves more than 3,000 families. His philosophy: think long term and invest in high-quality instruments: Treasuries, top-notch bonds, mutual funds, utilities and blue-chip stocks. Each time a CD approaches maturity, Magnesen picks up the phone and calls the client. “Bad decisions are made in volatile markets. When the market turns, it will reward you in spades.”

John Cooke, Wachovia Securities – Indiana – His clients get rigorous net-worth assessments twice a year. “We make sure that the clients are diversified, have high-quality investments, and that the managers we are using for them don’t have any problems.””It has been one of the scariest years for anyone in the profession. But during these times, your clients need you even more.”

Edmund Nasief Jr., UBS Financial Services, Kentucky – advisers and their clients often have much in common, they are in sync. Today’s events in the market will scar investors for long time, just as the Great Depression did in the 1930’s.

Kevin Knobloch, JP Morgan, Louisiana – “Diversification in the past four months didn’t work, unless you were in Treasuries or cash.””That doesn’t mean asset allocation is a failed theory. We’ll see it work once again.”

Michael Boyson, Smith Barney, Maine – “Long term, we find the prices of great companies here pretty attractive. But credit has to come back before stocks can come back”

Tom Hill, Smith Barney, Maryland – Inflation is coming, not this year, or the next, but it will come. “Corporate America is on sale.” His prediction: Stocks will bottom in the spring, ahead of a fourth-quarter economic recovery.

Raj Sharma, Merrill Lynch, Massachusetts – sees opportunities in credit markets, dividend-paying stocks and energy, tech and emerging-market shares. “Our job is not to make clients wealthy. Our job is to make sure they stay wealthy.”

Robert Stulberg, Merrill Lynch, Michigan – keeps as low a profile as possible; takes customers only by referral and concentrates only on an unglamorous investment niche: municipal bonds. Very discrete, he goes to extreme lengths to protect investors’ privacy. “Your doctor is your most important professional relationship. We’re next.”

Peter Eckerline, Merrill Lynch, Minnesota – used to sell peepholes for three months before joining Merrill Lynch, to get used to rejection. Now, he is trying to be a partner to his clients, helping them to do everything from picking a car to starting an effective charity. The market crash has strengthened his client relationships. Lately he favors municipal bonds, which he thinks provide attractive yields, and Treasury inflation-protected securities.

Michael Dowell, Smith Barney, Mississippi – his secret is to understand the nooks and crannies of each client’s finances. Check the facts of each financial instrument of your client. He has long favored fixed-income instruments, beginning two years ago to recommend managed futures accounts that capped losses at single digits.

Andrew Laszlo, Morgan Stanley, Montana – “I prefer to deal with good and interesting customers, not just people with money.”

Ron Carson, Carson Wealth Management, Nebraska – adheres to fundamentals, but uses some technical analysis, especially of insider transactions. He says, “Technical information simply tells you about the fundamental information that is not widely known to the marketplace”

Tom Sedoric, Wachovia Securities, New Hampshire – dual degree in finance and psychology. Everyone thinks they’re risk tolerant investor until a bear market. People should be honest with themselves when it comes about money.

Richard Mercil, Merrill Lynch, North Dakota – preaches a methodical approach with clients, educating them on potential scenarios and options. Continue to educate, and you’ll win.

August Cenname, Merrill Lynch, Ohio – “When people are lost in the jungle, they realize they need a guide.” People don’t need a guide through a walk in the park. Now, he is taking a defensive approach to managing clients’ investments. Preserve wealth and generate cash flow. Growth is not a realistic expectation now. Hosting family meetings for clients, to get everyone together and talking.

Joey Sager, Wachovia Securities, Oklahoma – “We’d love to beat the market, but that’s secondary to meeting our clients’ expectations.”

Steve Spence, UBS Financial Services – drawing from his experience negotiating the sale of publicly traded companies, he views each portfolio transaction like a corporate acquisition, by how much cash the investment can generate. Started buying beaten-up oil stocks in November.

Saly Glassman, Merrill Lynch, Pennsylvania – “Clients are interested in preserving their wealth and leaving a legacy.”

Robert Vingi, Wachovia Securities, South Carolina – helping clients doesn’t necessarily mean investing their money. He will advise the clients to pay down debt and build a cash cushion before they invest with him. He likes TIPS and bonds with maturities of five years or less. He also likes gold as an inflation hedge, and finds munis an “incredible bargain”. He also likes oil, other metals and other heavy equipment makers. He tries to identify themes, and ideas that are actionable on those themes.

Gordon Wollman, Cornerstone Financial, South Dakota – maintains client loyalty with monthly seminars and frequent email communications. “Every time the market takes a big dip, we send out some type of communication to let clients know what we are suggesting they do.”

Michael Gilbert, Gilbert Advanced Asset, Tennessee – shifted clients into corporate bonds, and bought into the S&P 500 index. “If you can keep your hands off your portfolio for 10 years, you’ll probably outperform everybody.”

William Corbellini, Merrill Lynch, Texas – forged relationships with investment bankers. His game plan: determine the cash-flow needs, then nail the asset allocation. In current market, underweight financials and overweight defensive stocks, such as consumer staples. “By the time this recession is declared officially over, the great majority of the rise in stock prices will have already occurred.”

John van Wagoner, Merrill Lynch, Utah – his job is about asking questions and listening, diagnosing clients’ needs and then prescribing. His guardedly optimistic prognosis for the economy calls for a bumpy ride nevertheless, but a recovery should be in place by year-end. His advice: keep 6-12 months of liquidity needs in cash; focus on yield through high-quality bonds and dividend-paying stocks.

Tom Wilkins, Merrill Lynch, Vermont – “I try to keep the investment very simple, so that clients can understand.”

Phil Scott, Merrill Lynch, Washington – “investors get myopic” they believe that the markets continue their downtrend and they lose all their money. “Things are cheap, but they might get cheaper. It’s a good time to look, so long as you think longer-term”

Casey Robinson, Morgan Stanley, West Virginia – “returning phone calls and responding to clients’ fears are vital in the current market. Basic compassion, he says, can go a long way. “You have to be able to relate proper decision-making in terms the clients are comfortable with, and be prepared to address their emotions.”

Andrew Burish, UBS Financial Services, Wisconsin – “We try to produce an absolute return, so we don’t care what S&P 500 is doing.” He says there is a bubble in Treasuries, so he is moving his clients into high-grade corporate bonds.

 

 

Weekly Recap - December 21, 2008

This past week was quite quiet, not to say plain boring. There was no rally, no deep dive of any of the indexes, nothing to keep us from doozing off while watching the ticker tape. If it wasn’t for Madoff, with his Ponzi scheme, there would be nothing to remember.
Speaking of Madoff, here is what Clarence W. Barron, the founder of Barron’s newspaper, said in 1920, when he denounced the original Ponzi scheme: “This neglect in our educational system leaves the people’s financial education to the sensational press, to socialistic propaganda and to designing politicians. It permits schemers to defraud the small earner and small investor through making him believe that capital accumulations and great fortunes are matters of speculation or public robbery.” Barron’s – the newspaper – wrote a skeptical note on Madoff back in 2001, questioning his secretive tactics.
So let’s take a yawn – sorry, look – at the major indices and how they fare this past week. The DJIA closed at 8579.11, down 0.59%, Nasdaq closed at 1564.32, up 1.53% and S&P500 closed at 887.88, up 0.93%. That’s it! So, with nothing to talk about last week, everybody turned to predict the outlook in 2009. And the opinions abound. After a 2008 which had investors on their toes, ready to throw in the towel, or the shoe, everybody is hoping for a much calmer 2009. It must be the exhaustion talking, because I read somewhere that 1929 looked just like 2008. Brrrr!!
Because optimism is the most important of the humanly traits, let’s cross our fingers and take peek into what’s expected from 2009. Tall order, no less! The economists expect a deeper economic slide, and traders are waiting for companies to report their messy fourth-quarter earnings starting in February. There are three powerful forces that will keep investors guessing and markets volatile: the ongoing and unpredictable government intervention, the process of deleveraging, and the impact of the economic contraction on corporate profits. As the volatility will come down from its peak, so is the correlation between stocks, which will allow for a clear differentiation between winners and losers. Some dubbed 2009 “the stock picker’s paradise”. As the expectancy for growth increases, the first beneficiaries could be the technology and small stocks – Nasdaq rallied 13% in four weeks.

The Cash Bubble and the January Effect
We are probably in a cash bubble, as investors paid the government to keep their money safe. The “cash is king” mentality is all the rage now, and it may soon join the list of bubbles that burst over Wall Street, including stocks, oil, agricultural commodities and subprime mortgages. A lot of traders are buying – or debating doing so – bullish calls on stocks and sectors. The more battered the security the better. They see options as a cost-effective way to balance the risk that the market could worsen in 2009, rather than improve, while ensuring they do not miss any rallies. They are selling richly priced calls, and using the proceeds to lower the costs of buying stocks. One Credit Suisse derivatives strategist, is advising clients to sell calls against Exxon Mobil (XOM), which he says is the “T-bill of equities”. Exxon has a free cash flow of $37 billion, the highest in the S&P 500. Many investors, in their flight to safety, have bought Exxon recently, and it appears to be overbought. Selling January 85 call against the stock may be a good way to cash in the exuberance. The economy gives us good reasons not to part with cash. Conditions will worsen if the consumers don’t start consuming again. Rising unemployment is also a major risk factor. However, it is difficult to find another point in the modern time when investor sentiment was more negative than today. Three-month realized volatility of the S&P500 Index was recently 71.86% surpassing the high of 68% set during the Great Crash of 1929. A short term swing on the optimist side will see a great deal of cash reinvested. Jon Najarian, co-founder of optionmonster.com, said cash is so high on the sides that it could stress the financial system when reinvested, saying that “it could be the biggest January effect ever”. Now that’s a good way to start 2009.

Still in the Bear Territory
The bear market doesn’t go away that fast. So while a retracement may be in the cards, looks for the exit points while the rally lasts.In this information age we are all inundated by data, forecasts and opinions. Some based their forecasts on life experiences, statistical analysis, historical references, or even just opinion. In the end some will be correct, and most will be incorrect. To pick and choose among the various resources is a matter of personal preference. Yet, to pick and choose too many resources will result in information overload. We can all agree, economically these are treacherous times. Banks are dysfunctional, credit lines are tight, businesses that relied on ever expanding credit are failing, unemployment is rising, and deflationary pressures are everywhere. We can all also agree that this is a cyclical economic downturn and not just an equity bear market. In the past century all cyclical bear markets have displayed similar characteristics. First, the equity market loses 50% of its value. Second, there is a 50% retracement of the entire bear market. Third, the final downleg. We label these three events are Primary waves A, B and C. The 1937-1942 cyclical bear market: lost 50% in a year, retraced 50% in a few months, and then took three years to retest the lows. The 1929-1932 bear market: crashed 50% in a matter of months, retraced 50% within a few months, and then continued to decline for the next two years until the market lost about 90% of its value. Technically, the main difference between the two cyclical bear markets is the 1929-1932 bear market continued to make new lows for the next two years after the initial 50% decline. While the 1937-1942 bear market went sideways for a few years, and only made new lows at the end. Our current cyclical bear market has already declined 50%, but has yet to retrace 50% of that decline. The retracement may be underway now, as the market has already rallied 24% off its recent lows. When the retracement does complete, Primary waves A and B will have completed, and then Primary C will be underway. Only then can we estimate the potential total damage to the equity market. Prior to these two events occurring, many forecasters are just making educated guesses. Should the bear market stall we'll enter a 1937-1942 scenario. Should the bear market start making lower lows, 1929-1932. The 1929-1932 bear market displayed some characteristics of its own. More on this should the need arise. When this bear market does complete its 50% retracement, to remain in equities would be a high risk venture.

Company of the Week - Masimo Corp

Masimo.com
Ticker: MASI
Share price: $25.53
12-month sales: $293 million
5-year profit growth rate: 49%

The company’s new product, called SpHb, does real time blood test, without the blood. It tracks hemoglobin levels in blood without drawing any. The results don’t reach the levels of a lab test, but they provide many crucial uses, such as telling right away if the patient who just had surgery is suffering any internal bleeding, or telling a doctor when to administer a blood transfusion and how much to transfuse. It also detects anemia. The real advantage of SpHb for doctors is the real time aspect, as opposed to drawing blood, send it to the lab, and wait for the results few hours later. The SpHb is still in beta phase with a full launch expected early next year. The potential market for the product is around $1B, quite a bump for Masimo, which sales last year were $293 million.
Masimo’s original, and still dominant, product line is a pulse oximeter, which measures oxygen levels in the blood. They are the pinching plastic clothespin the doctors put on your fingers when you’re in the hospital. The competition is much larger Covidien (Ticker: COV), but Masimo is steadily taking market share from it, and currently sits at 27%, vs. Covidien’s 60%. In the third quarter, oximetry sales grew faster than some analysts predicted, and since the market is mature, it was almost entirely due to market-share gains.
The major differentiating factor is the algorithm inside of Masimo’s unit, which allows for higher sensitivity toward patient movement, and results in lower number of false readings.
The analysts have arrived at the $1 billion figure by counting the potential U.S. hospitals market. More than 400 million hemoglobin tests are done annually, and more than half of those are outside hospitals.
The firm’s business model is the “razor-blade” model: give away the razor, sell them the blades. Masimo gives away or loans its monitors n exchange for a five-year contract to supply its disposable sensors, which only fit Masimo’s devices. This has given the firm an installed base of more than half a million, plus a steady revenue stream. The company has more add-ons in the works. Late next year, it plans to launch Acoustic Respiration Monitoring, a device which can alert hospital staff to slowdowns or seizures in a patient’s breathing. In the third quarter, profit beat analysts’ view by rising 22% over the prior year to 22 cents a share. Sales increased 21% to $78.1 million. In the fourth quarter, analysts expect profit to decrease somewhat, due to lower royalties, higher research and development costs. In 2009, though, they expect 15% profit growth to 82 cents a share, accelerating to 35% the year after that.

Weekly Recap - December 8, 2008

The recession of 2008 became official last week. According to the announcement Monday by the Business Cycle Dating Committee of the National Bureau of Economic Research, the recession began last December, which means it has already lasted 12 months. The average recession in the U.S. lasts about 10 months, so the good news is that this current recession has gone on longer than the past two recessions – in 2001 and in 1990-1991 – each eight months long. The news last week came both good and bad. We took solace at the news of recession declared, as we hope that the call often comes after a recession has peaked. In the ‘good news’ category was the fact that the U.S. government may force rates on new mortgages down to 4.5% to revive the housing market, and Europe has slashed interest rates to 2.5% from 3.25%. In the ‘bad news’, there are plenty. Manufacturing contracted in November by the fastest pace in 26 years, and 533,000 people were laid off – bringing jobs cut in the past three months to more than 1.25 million.
The Dow ended the week off 194, or 2.2% to 8635. The S&P500 gave up 20, or 2.3% to 876; it is 16% above an 11 ½ -year low reached on Nov. 20 and 44% below its 2007 peak. The Nasdaq Composite Index fell 26, or 1.7%, to 1509, while the Russell 2000 lost 12, or 2.6%, to 461. The economy may still go worse before it will improve, especially if the Americans continue to lose jobs and the government fails to repair consumer confidence, both likely events.

Inflation Rebound
Rather than betting on rebound in growth, a smarter bet would be on rebound in inflation, according to Don Rissmiller, economist at Strategas Research Partners. The government is fighting deflation by flooding the markets with cheap money, increasing the odds for inflation. When inflation returns, energy and basic-material stocks could lead the market once again, and resource-rich countries like Canada, Australia and Brazil could prosper. Shorting Treasuries and buying TIPS, or Treasury inflation-protected securities, might be the purest way to hedge against eventual inflation.

Option Strategies: Buy-Write
Options traders try to convert volatility into money. “Buy-writing” is a classic strategy that refers to buying a stock and selling, or writing, an out-of-money call on it, and it helps traders to harness volatility. The “buy-write” lowers the cost of buying the stock by the amount received for selling the call, and it also serves like a modest hedge. The strategy’s benchmark is the Chicago Board Options Exchange’s S&P500 BuyWrite Index, or BXM. In October, it had its largest monthly gain in 20 years – 8.1% - well above its two-decade average of 1.7%.To successfully implement this strategy one needs discipline.
Here are the rules, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist:
• Stock selection is primary, getting a premium is secondary. Pick stocks that you want to own, not calls that you want to sell.
• Never invest more than 10% of your capital in a buy-write. Leverage cuts two ways.• Sell slightly out-of-the-money calls to leave room for upside profit potential.
• Let time work for you. You can sell three- to six- month calls for higher premiums.
• Don’t annualize returns. Focus on the potential return for the trade’s actual duration; annualized returns are rarely earned.
• Ignore theoretical values. Expensive options stay expensive longer than expected, and vice versa. The current correction has shown that volatility, which always reverts to its mean, may not do so when expected.
• Don’t sell the call and try to buy the stock at a better price. This leaves you with a “naked call” and unlimited market risk. Enter buy-writes simultaneously. A net debit order is entered for any combination of prices to buy a stock and sell a call that equals your desired debit ($30 stock price less $3 option price equals $27 net debit).
• If stock fundamentals change, sell the stock and buy back the call.
• If you can earn a high percentage of the maximum profit before expiration, do it. Waiting for the last 10% to 15% of premium often means risking everything for no more than an incremental gain.
This strategy of “buy-write” gives investors a way to handle panic and use the market fear to their advantage.

Other news of the week:
• U.S. Shed 533,000 Jobs in November – on a percentage basis, that was the worst decline in 28 years and far worse than expected. Also, Sept. and Oct. job losses were revised sharply higher, lifting ’08 job cuts to 1.91 mil. The jobless rate hit a 15-year high of 6.7%. It would have climbed more, but many people simply stopped looking for work.
• Mortgage Delinquencies Jump – The share of home loans behind on payments rose to 6.99% in Q3 vs. Q2’s 6.42%. 20% of subprime loans are delinquent, but prime mortgage woes are rising as the recession affects more people. New foreclosure activity dipped as governments and lenders try to keep people in homes.
• Crude Oil Dives 7% to 4-year Low – The January crude contract is at $40.81 a barrel – 72% off the July peak – as the jobs report boded ill for energy demand. The Int’l Energy Agency also cut global oil-demand forecasts again. Natural gas tumbled 5% to $5.74 per mil Btu. Retail gas prices should fall to $1.60 a gallon, given the current gasoline futures.
• Fed Begins Buying Agency Debt – It bought $5 bil of Fannie Mae, Freddie Mac and Federal Home Loan Banks debt as part of a new $600 bil program to support mortgages and housing. Since the plan was announced Nov. 25, mortgage rates have plunged, triggering a refinancing boomlet. Also, the Treasury is legally bound to inject capital into Fannie and Freddie if needed, the Justice Dept. ruled.
• Consumer Borrowing Fell in Oct – Consumer credit outstanding declined $3.5 bil to $2.578 bil, the Fed said, the latest evidence of reined-in spending amid accelerating job losses and economic gloom. Borrowing rose a revised $6.7 bil in Sept and fell $6.4 bil in August. In Oct., credit card and other revolving debt fell $181.6 mil. Auto and other nonrevolving debt fell $3.4 bil

Company of the Week - November 30, 2008 - Emergent Biosolutions, Inc.

What? An anthrax vaccine company? Yes, apparently there is big business here, at least for now. We might have forgotten about the whole anthrax debacle from 2001, but the government hasn’t. The Rockville, MD based Emergent has the only, the sole, the one vaccine approved in the U.S. for the deadly disease. Over the last decade, it has sold 30 million of its Bio Thrax vaccine to the government, mostly to the Department of Defense and the Department of Health and Human Services. About 2 million of these doses have gone to the troops. The rest have gone to strategic stockpiles to be used in case of a bio-chemical attack. The government is buying the vaccines as fast as the company can make them. They don’t want to be caught flat-footed in case a crisis develops again.
In the past year, the company has signed two large contracts to deliver more than 33 million dosages of the vaccine over the next three years at $25 a piece. The price will increase to $27 if the life of the vaccine can be extended to 4 years, as opposed to 3 years as it is today. This gives insight to company’s earnings until 2011, analysts say, which is valuable in today’s markets.
The race is also to secure government contracts for the next generation of the anthrax vaccines. Emergent is one of the companies in the run to produce a vaccine with faster immunity and fewer risks or side effects. The market could be huge. The government set aside $5.6 billion in 2004 under its Project BioShield to develop and stockpile next generations vaccines.
Emergent also has other products in its pipeline. It is working on two drugs to treat the anthrax toxins for people already infected. It also has two botulinum vaccine in development and other vaccines or treatments for typhoid, tuberculosis, Chlamydia and hepatitis B.
It’s also working to acquire other capabilities. Earlier this year, Emergent tried to buy Protein Sciences and its promising flu vaccine that is in the late stages of testing and approval. The deal is now in the hands of lawyers and there is doubt if it will go through however. The guidance posted by Emergent after its third quarter did not reflect any revenue from Protein Sciences.
The third-quarter earnings per share of 34 cents are up 240% from one year ago. Analysts polled by Thomson Reuters had expected just 18 cents. Sales were up 30% to $56.6 million. For the year the company expects earnings per share between 70 cents and 83 cents. The consensus is 77 cents.
The company’s future is not certain. There is no guarantee that it will win the race for the next generation vaccine, but it may get part of the contracts. Also, having one customer is dangerous. But there are many worse customers than Uncle Sam, in this current environment.

Weekly Recap - November 30, 2008

Back to normality? Some would say so, especially after the convincing rally for the past five days… ok, four and a half. Stocks jumped 18% in the four days leading to Thanksgiving, and they may establish a bottom, reinforcing hopes that the worst is over. The Dow Jones Industrial Average Index and the S&P500 have had their best five-day rally since the Great Depression. It could be that the government attempts to prop up an ailing financial system work? OK, keep your fingers crossed.
Dow Jones Industrials index closed at 8829.04, up 9.73% for the (short) week. S&P 500 climbed up to 896.24, for a weekly gain of 12.03% and Nasdaq closed at 1535.57, up 10.92%.
Next week may bring some down days. The history says the best five-days rallies were often followed by retreats averaging 2.4% over the next five days, according to Bespoke Investment Group.
There are reasons to be optimistic about the future. First, this is the human nature, and second, there are signs we can count on. China’s stock market, down 72% since 2007 peak, has recently recouped 11%. In the U.S., energy stocks have begun to outperform the S&P 500 since late-October. The markets may take a blow if there is another credit crisis blossoming somewhere (CMBS, maybe?) but we’ve gotten quite pessimistic lately. The public sentiment is really dismal. Hear this: the word of the year – “bailout” – according to Merriam-Webster, due to the highest lookups on its online dictionary. The VIX has made a lower low on November 20 at 81, which is less than its previous low, at 90. This means the panic is exhausting.

*Black Friday*
It’s called Black Friday because this is supposed to be the day when retailers are getting back to making a profit for the year. Well, early data shows that the holiday shopping season got off to a great start, much better than last year. Sales during the day after Thanksgiving rose 3% to $10.6 billion (preliminary data) compared to $10.3 billion last year. The data comes from 50,000 outlets tracked by ShopperTrak RCT Corp, a Chicago based firm. Now, that’s good, but a reason may be the deep discounts the retailers throw at consumers, to lure them into the stores. I think the holiday will still be one of the weakest ever, because the contraction in spending is still there, and the season is shorter – 27 days till Christmas compared to 32 last year.

*Thinking of buying Citi? Flip a coin. *
If you enviously watched Citi going from $3.11 to $8.29 in just one week, kicking yourself because you haven’t bought it then, you are not alone. But it will still be wiser to wait until the smoke clears until buying some shares. Yes, the shares are cheaper than dirt at $8.29 a piece, if you think that Citi will earn more than $2 per share later. The company has yet to prove itself that it can survive, let alone thrive, after receiving the lifeline from the government last week. Citi had to write down a staggering $44 billion since the third quarter of 2007, mostly because of the bad investment in the mortgage debt. As part of the rescue plan, the Treasury will invest $20 billion in Citi preferred stock via the Troubled Asset Relief Program, or TARP.
If you’re still keen to invest in Citi, despite its formidable challenges, you may be better served buying calls options. As of November 26, the premium for a January 2010 call with a strike price of $10 was around $2.65.