Be Wary of United First Financial

A person I met through the Greater Brunswick Area Chamber of Commerce (GBACC) has started to sell financial services through a third-party provider. She said that people could pay off their mortgage sooner and save money using her services. I did some investigating and found many of these companies to be a pyramid scheme with high upfront costs and little added value to mortgage holders.

See this article below from Kiplingers:

http://www.kiplinger.com/magazine/archives/2008/05/prepay_mortgage.html

Short-term Bottom Is In

Good earnings from Wells Fargo and a drop in oil prices have led to a great rally in the financial stocks today. Expect this rally to continue for the next month as stocks are way oversold and short interest and pessimism are at record highs.

Oil, agriculture, and metals all headed lower today. These stocks will be bargains in the next couple of weeks and can be picked up at good prices soon.

Financial Stocks Continue Lower

IndyMac bank was taken over by the Feds this weekend, and regional bank stocks continue to move lower. National City (NCC), Washington Mutual (WM), and Wachovia (WB) look like they are on the ropes with shares below $10 today. Investor pessimism is at record levels, but still no signs of a bottom.

Money flows continue to move towards metals, agriculture, and energy. As one investor has said, anything that can fall on your foot is something one should invest in today.

Dick Bove, a respected financial analyst who has been right about predicting the fall in the financial stocks has said that much of the decline in companies such as Citigroup (C) and Bank of America (BAC) has been overdone.

Unfortunately the financial stocks will not find a bottom until confidence starts to move up. Confidence will head higher when job losses shrink and end which will probably eventually occur in 2009. Until then, it will be a painful 6 to 9 months minimum ahead.

Commodity Prices Exacerbated by Weakness in Financials

Commodity prices are being exacerbated by weakness in the financial stocks. Every time bad news comes out on a U.S. financial firm, commodity prices head higher as investment managers sell financial stocks and hide in commodities. Oil is definitely overpriced at $145 per barrel, but the price of oil will not decline until financial stocks stabilize at the end of 2008 or 2009.

This is not necessarily speculation as much as finding a place to hide when the U.S. economy heads south. bankruptcies increase and the dollar falls.

Stop Losses Important

Today the markets are falling to new lows thanks to worries about Fannie Mae and Freddie Mac. It looks likes these stocks will go to zero at this point on lack of liquidity and overleverage.

Even though market sentiment is the lowest in years, creating a very bullish sign, it would be best to wait for Fannie and Freddie to hit zero and be recapitalized before dipping toes back into the market at this time.

Time for Summer Rally!

The stock market has been oversold over the past weeks with major bargains across all sectors.

Even the weakest sectors including financial, aerospace, retail, and REITs have been sold beyond any reasonable targets.

Bottom fishing in high quality names is a good strategy at this time.

Names to consider include Bank of America (BAC) in the financial space, United Technologies (UTX) in the aerospace sector, Target (TGT) in the retail sector, and Felcor Suites (FCH) in the hotel REIT sector.

Commodity and International Exposure is The Place to Be

The best opportunities in the market right now involve international and/or commodity exposure.

My favorites that are less volatile that I think would be great are:

COP - ConocoPhillips - one of the largest oil/gas production andrefining companies in the U.S. The stock is trading at $78.50. Earnings are estimated at $10.55 for 2008 and $10.77 for 2009.

SBS - Companhia de Saneamento de Estado de Sao Paolo - This is thewater and waste treatment utility for Sao Paolo, Brazil. The company's earnings estimates keep rising thanks to growth abroadand the devaluation of the US dollar. The stock is trading around $46 with earnings for 2008 estimated at$5.82 and 2009 at $6.31. Very good value. I have a target price of $64 for the shares.

CPO - Corn Products International - US based corn processing company(no ethanol) makes corn syrup, food additives, and biodegradeableplastic as I mentioned to you a while back. The stock is trading at$37.55 with earnings estimates that are rising with 2008 projected at$2.82 and 2009 at $3.24. 40% of the company's revenue comes fromoutside of the U.S. I have a conservative target price of $45 for the shares.

TEF - Telefonica S.A. - $137 Billion telecommunications firm based in Madrid, Spain with services in Spain, Europe, and Latin America.Trades at $87.50 a share with 2008 estimates of $7.80 and 2009earnings of $9.08. This stock is down from its high of $103. Solid, dominant company. The shares may go lower if the rest of the worldslows with the U.S., but shares trade cheaper than either Verizon or AT&T relative to potential for growth.

UN - Unilever NV - $94 Billion consumer company based in theNetherlands. Owns brands including Ben and Jerry's, Breyer's,Klondike, Popsicle, Lipton, Hellman's mayo, Dove Soap, SlimFast andothers. They have been improving operations and are trading at only15x this year's estimated earnings which is great value for a large food company such as this one.

General Electric blowup a surprise

General Electric (GE) disappointed Wall Street with its first earnings miss since 2003 on Friday.
Shares dropped 13% and the outlook was not positive. The stock is a good proxy for the U.S. economy given its diversified revenue in financial, healthcare, entertainment, and industrial businesses.

The stock is a good long-term hold given its diversified business and 3.4% dividend.
However the shares do not look like they will go back up to recent levels anytime soon.

The GE miss is a proxy for diversifying investments outside of the U.S. right now.

I have some recommendations in a follow-up post.

Where are all of the good jobs?

Since Google ramped up their hiring over the last 4 years, there has not been a fast growing company to carry the torch to continue high quality job growth.

On the contrary, large companies with well paying jobs have been continuing to trim payrolls in the name of efficiency. Telecommunications companies continue to consolidate.

Investment banking and financial firms are cutting people and costs. Mergers and acquisitions continue in many industries creating greater efficiencies but with a lack of long-term investment or job growth.

The trend will only reverse when:
(1) the U.S. dollar declines low enough to encourage jobs to return to the U.S. that had been shipped overseas.
(2) the next wave of innovation begins creating a wave of growth

Yahoo! Rejection of Microsoft Bad for Shareholders?

Yahoo! rejected Microsoft's buyout offer over the weekend.

With the U.S. economy continuing to weaken and advertising slumping, many people are worried that Yahoo! may be hurting its shareholders by rejecting Microsoft's initial offer and playing a game of chicken with other bidders to get a better bid.

Businessweek summarizes the situation nicely in the article below:

http://www.businessweek.com/technology/content/feb2008/tc20080211_848555.htm?campaign_id=yhoo

Buffett Plan to Save Muni. Bond Market is a Joke

Warren Buffett is proposing to buy from the bond insurers $800 Bil. worth of municipal bond insurance from them. By buying from them their safest insurance, he would only be weakening these companies further, creating a worse situation for the bond insurance market and the financial markets while putting extra money in his pocket.

I agree with the thoughts of Mark DeCambre in the article from TheStreet.com linked below:

http://www.thestreet.com/story/10403198/1/buffetts-not-insurers-only-hope.html

Lenders Demanding Larger Deposits

Morgage Insurer MGIC reported a $1.5 Bil. loss for the 4th Quarter on higher home delinquincies and payouts.

Starting March 3, MGIC said it will require at least 5 percent down on homes in so-called restricted markets. They include the entire states of Arizona, California, Florida and Nevada and major metro areas such as Washington, D.C., Detroit, Chicago, Boston and Atlanta.

Stock Market will Stabilize When...

The U.S. Stock Market will stabilize when people believe that asset prices including homes and commercial real estate stop declining.

Currently the financial markets are in turmoil because many loans have been taken out on residential homes and commercial real estate where the value of the asset has dropped and is now worth less than the loan.

Lenders are concerned that borrowers will walk away from the asset used as collateral for the loan, leaving them to hold the bag and pick up the pieces.

I do not believe that asset prices will stabilize until 2009 at the earliest.

Utilities Look Undervalued Here

Slowing growth for the U.S. is hitting the stocks of electric utlities and telecommunications companies hard. These sectors pay high dividends (3-5%) relative to treasury bonds and cash, providing a safer alternative to riskier parts of the stock market.

Some suggestions for this space include:
Electric Utlities - SCANA (SCG) and El Paso Electric (EE)
Telecommunications - Verizon (VZ) and AT&T (T)

Stocks & ETFs versus Mutual Funds

A good reminder on CNBC concerning the purchase of stocks & ETFs versus mutual funds.

Stocks and ETFs trades take 3 business days to clear versus mutual fund trades which take 1 day to clear.

Why is this important?

If one sells a stock or ETF and buys a mutual fund the same day, there will be insufficient funds in the brokerage account to purchase the mutual fund because the stock or ETF transaction needs another 2 days to clear.

Car Rental Agencies Commodity Business

Car Rental companies are a dime-a-dozen and are very sensitive to economic conditions as shown by the weak results from Dollar Thrifty (DTG) yesterday.

From Barron's yesterday: "Car rental companies have fallen sharply Monday, with Hertz (HTZ) and Avis Budget Group (CAR) in the wake of the profit warning from rival Dollar Thrifty (DTG) which issued a profit warning late Friday. Trying to sneak downbeat earnings guidance past this market is generally about as successful as trying to camouflage that ugly dent in the passenger-side door of the Fiesta you’re returning. Analysts are insisting the selloff of names like Avis is unwarranted, because, unlike Dollar’s leisure-travel market, Avis is a commercial-fleet operator, and thus not exposed to the same market conditions. No buyers for that argument, though."

I rented a car last spring to attend a wedding one weekend and was amazed how cheap the rental was. I may be wrong, but it seems to me like prices for car rentals have not changed much over the last few years.

Stick to investments in hotels and hotel REITS where there is differentiation among properties and greater control over the supply of hotel rooms in many competitive markets.

Bargain basement recommendations for hotel REITs include Felcor Suites (FCH) and Ashford Hospitality (AHT).

Consumer Non-Discretionary Stocks Cheap Here

Consumer non-discretionary stocks look undervalued here.

My favorites in this space include:

Unilever (UL) (UN) Forward P/E: 14.58
Proctor and Gamble (PG) Forward P/E: 16.92
Sara Lee (SLE) Forward P/E: 13.48

Upside targets for these stocks are 10-20% from current levels.

Each of these stocks also pay dividends from 2-3% per year as well.

Lack of Innovation Hurting U.S.

The U.S. domestic economy is getting hurt by major productivity improvements and the lack of new technological innovations that resulted in major job creation in the past.

U.S. corporations are more efficient than ever resulting in record profits, but unfortunately this efficiency has meant that fewer people are needed to run these companies.

New industries and innovations need to drive U.S. job growth. Unfortunately since Google and Facebook, there has not been major new industries or innovations in recent years that have resulted in major increases in employment.

Our country can only support so many teachers, healthcare workers, and government workers.

If the U.S. does not continue to innovate, we will ultimately lose our place as the most admired economy in the world.

Cost of Manufacturing in China Going Up

Expect inflation in Chinese produced goods to hit the U.S. in a big way over the next year.

Great article below:

http://www.smartchinasourcing.com/china-competitiveness/cost-of-manufacturing-in-china.html

Be Wary of Google Stock

Google stock closed below $500 per share for the first time since August 2007 today.

Google is exhibiting major heartburn over the proposed merger of Microsoft and Yahoo!.
Google owns the search market with close to 60% market share.
Yahoo! and Microsoft combined would have 35% market share in search providing a solid competitor to Google where no solid competitor exists today

Google stock looks like it has peaked and is ready to continue to move lower for the following reasons:
1. Technically the chart pattern in Google is weak with major support levels recently crossed.
2. With close to 60% market share in search, Google has reached its growth limits
3. Google has been on a hiring spree, hiring lots of new employees while the core talent exits the company, cashing out their stock options
4. Google is spending gobs of money on initiatives with little payback potential such as alternative energy and open wireless access that have little to do with their core software technology strengths.