Markets Meet Week With Optimism

Traders remain optimistic after two weeks of stock market gains. U.S. major markets are brushing aside the Greek debt crisis, tighter credit rules in China and a surprise change in the discount rate at the Federal Reserve.

This will be a busy week for news with plenty of news on the  economy, a flurry of retail company earnings reports, and a controversial health care summit.

U.S. stocks are up in the pre-market in anticipation of a positive week, particularly for retail company earnings.

Market Review

In overseas equity markets this morning, major Asian markets were generally higher. Japan’s Nikkei 225 index rose 2.7 percent today on improved export news riding on the shoulders of a weaker yen.

China’s Shanghai Shenzen index dropped 0.6 percent on concerns that the Chinese government would tighten policy significantly in coming months following the People’s Bank of China raising reserve requirements by 50 basis points on February 12. Today was the first day investors in China have been able to react to the news after a week-long Chinese New Year holiday.

Hong Kong’s Hang Seng was higher by 2.4 percent.

South Korea’s Kospi Composite gained 2.1 percent.

The Australian ASX 200 market was up 1.7 percent.

European equity markets advanced on Monday. The German DAX index is higher by 0.3 percent. Britain’s Footsie 100 index gained 0.4 percent.

U.S. stock futures are higher by 0.4 percent in Monday’s pre-market action.

Oil futures are flat this morning, with the March contract trading just under $80 a barrel this morning.

Spot gold is also flat, trading at just over $1,120 an ounce this morning.

Despite the continued debt crisis in the eurozone, the euro was slightly higher versus the U.S. dollar at $1.3619, versus $1.3603 late Friday. The dollar index, a basket of market weighted currencies, is at 80.49 just before U.S. markets open this morning.

Euro Still At Risk

Financier George Soros writes in the Financial Times “A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal, and Ireland. Together they constitute too large of a portion of euroland to be helped in this way.”

Currency traders are also signaling that the euro is likely to continue to drift downward regardless of European Union actions. Aggressive deficit reduction in debt challenged European nations would reduce economic growth. A bailout by Europe would set a precedent for larger countries that could lead to a monetary “printing press” spiral increasing inflation. Either way, the euro is expected to continue moving lower over the long-run against the U.S. dollar.

Obama Proposes Price Controls on Health Insurance

Health insurers are likely to take a hit this week as President Obama is expected to introduce price controls on health insurance premiums as part of a White House revision to the Senate health care reform bill.

The proposal comes on the heels of political criticism of Anthem Blue Cross of California raising health premiums an average of 25 percent. Anthem is a subsidiary of the nation’s second largest health insurance WellPoint Inc. ($WLP). UnitedHealth Group ($UNH) is the largest health insurer by revenue.

This proposal comes in advance of an election-year summit convened by the White House for Thursday, February 25. The summit is controversial because the President wants to start the debate based on the Senate bill while Republicans want to start over on a health care bill.

Economists are skeptical about price controls in general, with a reduction in access to health services and reduced quality of care as likely outcomes of setting prices in markets.

GlaxoSmithKline Drug Safety Concern

GlaxoSmithKline’s ($GSK) shares could take a hit today as the New York Times is reporting that the company’s diabetes medicine Avandia weakens the heart, increasing chances of heart failure. The Times reported, “If every diabetic now taking Avandia were instead given a similar pill named Actos, about 500 heart attacks and 300 cases of heart failure would be averted every month because Avandia can hurt the heart.”

More on the Fed Exit Strategy

Federal Reserve Chairman Ben Bernanke heads to Capitol Hill on Wednesday and Thursday to testify in his semi-annual report on the state of the economy and monetary policy. Given the move in the discount rate last Thursday, everyone will be looking for more clues on the Fed’s exit strategy.

Economic Preview

On the economic front, the U.S. government will auction off $126 billion in notes and bonds today. Observers are curious to see what price and yield the bonds will receive given the recent hike in the Fed’s discount rate from 50 basis points to 75 basis points.
Durable goods orders for January will be released on Thursday. The consensus expectation is for a 1.5 percent jump in durable goods, up sharply from the 0.3 percent increase in December.

The fourth quarter GDP number will be revised on Friday. No change is expected from the preliminary number with a consensus annualized growth rate of 5.7 percent.

Also on Friday, existing home sales for January will be released. Economists are estimating the annualized sales rate was 5.5 million last month.

Earnings Review

This week has several major retail earnings reports on the heels of disappointing first quarter guidance from the world’s largest retailer Wal-Mart ($WMT) last week. The company reported adjusted earnings of $1.17 per diluted share, beating analyst estimates of $1.12 last week. JC Penney also beat the street with $1.02 in profits per share on expectations of 82 cents per share.

Home improvement giant, Lowe’s Companies ($LOW) reported 14 cents per share profits this morning before the market opened with analyst estimates of 12 cents per share. The company indicated costs cutting and modest sales improvement boosted fourth-quarter profits. The company also forecast first-quarter earnings guidance short of analyst expectations, with first-quarter earnings of 27 to 29 cents per share. Analysts were forecasting 33 cents per share.

Constellation Energy ($CEG) reported fourth-quarter earnings of 30 cents a share, missing street estimates of 31 cents per share. The company reaffirmed its guidance of $3.05 to $3.45 a share for 2010 and provided 2011 guidance of $3.45 to $3.85 a share profits.

Earnings Preview

Nordstrom ($JWN) is scheduled to report later today after the market closes with analysts expecting earnings per share of 79 cents per share.

Forest Oil Corp. ($FST) is forecast to report earnings of 61 cents a share in the fourth quarter.

Home Depot ($HD) will report on Tuesday before the market opens with expectations of 17 cents per share. Also reporting earnings early on Tuesday is Macy’s ($M) with a per share target of $1.32 and Target ($TGT) with expectations of $1.16 profits per share.

TJX Companies ($TJX) will release earnings on Wednesday before the market opens. Current consensus earnings estimates are for 91 cents per share.

Kohl’s ($KSS) will report on Thursday before the market opens with earnings expectations of $1.37 per share.

Human Genome ($HGSI) is expected to report after the close on Thursday with consensus estimates of minus 11 cents per share.

Dryships ($DRYS) is expected to report after the close on Thursday with consensus estimates of minus 23 cents per share.

On Friday before the market opens, Ship Finance ($SFL) is expected to report earnings per share of 48 cents per share.

Frontline Limited ($FRO) will also report on Friday with expectations of 11 cents per share.

Other companies reporting earnings this week include the Gap ($GPS), Chico’s ($CHS), Barnes & Noble ($BKS), Safeway ($SWY), Blockbuster ($BBI), Office Depot ($ODP), and Saks ($SKS).

Google 3Q Earnings Preview: Give Me a Beat!

Internet search giant, Google Inc. (GOOG) is scheduled to report its third quarter 2009 results after the market closes on Thursday, October 15. Expectations for the company are extremely high.  Google may not have trouble beating the street in this exuberant third quarter earnings season. However, coming on the heels of Intel’s (INTC) earnings beat yesterday, Google may not meet investor’s lofty expectations for a super blow out earnings number.

Consensus estimates are for Google to post per share profits of $5.40 on revenues of $4.23 billion, a large jump from $4.92 earnings per share for the same quarter one year ago. Google stock hit a 52-week intraday high today of $535.58 on expectations of a much better performance than  analysts predict. Google’s share price has been moving well above both the 50-day and 200-day moving averages since mid-July. The share price closed today at $535.32.

Google’s share price has outperformed the Nasdaq 100 Index ETF (QQQQ) 74 to 45 percent year-to-date and is up 85 percent since the March 9 market low. Google’s market cap is $169.5 billion.

Google still makes 97 percent of its money from online ads despite high profile expansion into applications and telecommunications markets. The online advertising market shows signs of recovering after a brutal economic downturn. Economic recovery is what many investors are looking at in bidding up Google’s share price. A weaker U.S. dollar should boost Google’s earnings as well. More than half of Google’s revenue comes from outside the United States. Investors are also expecting cost center YouTube to soon be a profit center.

Google is very confident in its future. Chief Executive Eric Schmidt declared last week that the worst of the recession is now over. Schmidt declared advertisers are expected to increase online spending in the next few months. He also says Google will be hiring. Analysts are forecasting that Google’s earnings and share price will climb higher over the next few quarters and assume Schmidt is correct in his projections.

Challenges from Microsoft (MSFT) to Google’s dominance in the internet search business  creates little competition for Google in the near term. In June, Microsoft renamed their search engine “Bing.“  The  Bing challenge is muted thus far. Google still dominates the search engine market with 70 percent of market share compared to 16 percent for Yahoo Inc. (YHOO) and 9 percent for Microsoft.

A more interesting challenge is Microsoft’s deal with Yahoo Inc., to use Microsoft’s technology to process search requests and manage search advertising on Yahoo’s U.S. web site. The deal still has to pass regulatory review in the United States. Google is answering this deal with the development of a computer-operating system of their own designed to compete against Microsoft’Windows.

Since the beginning of the year, Google’s shares have climbed about 58 percent. In 2008, Google’s shares dropped nearly 56 percent compared to a 38 percent decline in the Standard & Poor’s 500 index.

Google’s shares are now trading at 21 times consensus 2010 EPS estimates, below valuations of other companies in the search engine industry. As the leading online advertiser, Google’s share price should continue to rise over the next 12 months. The company could even reach the $700 a share level if the global economy gains sufficient strength toward the end of 2010.

How Much Longer Can AmREITs Fly High?

Back on June 26 of this year, I suggested to readers here that they may want to look more closely at high yielding agency mortgage backed real estate investment trusts (AmREITs). I pointed out in the article that as a group, a divergence between AmREITs and the S&P 500 index ETF (SPY) had developed during the previous two weeks.

The grey vertical line just before July 9 on the chart below is the point in time when I asked the question, “Are high yielding AmREITs ready to run?” Looking back, it is now clear that this divergence was sustainable and AmREITs were indeed “ready to run.”

Source: ValueForum

Let’s look at how the six companies in the AmREIT group have done. Since the closing price on the first day of the next week the article was published (June 29), the SPY has gained 15.5 percent. The table below shows that American Capital Agency (AGNC), Annaly Capital Management (NLY), Anworth Mortgage Asset (ANH), Capstead Mortgage (CMO), Hatteras Financial (HTS), and MFA Financial (MFA) have all outperformed the SPY, some spectacularly.

The leading gainer in the group, American Capital Agency with a 34 percent total gain, followed closely by Annaly Capital Management with a 30 percent total gain. Annaly also happens to be the largest in the group by market capitalization and the most liquid.

Source: ValueForum

Note: The total return with dividend reinvestment plan (DRIP) column includes actual dividend payments distributed between June 29, 2009 and September 22, 2009. Estimated annualized yield includes likely non-recurring dividend payments for AGNC.

In fact, an even larger divergence developed between the AmREIT group and the SPY as five of the six companies hit 52-week highs yesterday. The sixth, Hatteras Financial missed a new high by 5 cents. The AmREIT group gained an average of 3.3 percent yesterday compared to the SPY which gained about 0.6 percent.

Driving these gains were several bullish dividend declarations. On Monday, Annaly Capital declared a quarterly dividend of $0.69 per share. Yesterday, Hatteras Financial announced a $1.15 per share quarterly dividend and American Capital Agency Corp. declared a $1.40 quarterly dividend payment.

The following chart shows yesterday’s closing price, performance, and share volume for each of the six companies in the group.

Source: Self Directed Investor

Dividend hungry investors will take note that the estimated annualized yields for this group of AmREITs range from 10 to 20 percent. Healthy distribution of dividends seem likely to continue as the Federal Reserve appears to be in no hurry to raise short-term rates amid a bottoming economy and forecast for a jobless recovery.

Remember, AmREITs take advantage of the spread inherent in the yield curve, borrowing short term at low-cost while investing in high-yielding, longer term mortgage securities issued by Fannie Mae, Freddie Mac and other government sponsored enterprises. The greatest risk is if the yield curve flattens as the economy recovers and the Federal Reserve decides to raise the Fed Funds rate. Funding risk, related to systemic risk, is also a possibility if the short term credit markets fail.

The question now is whether recent divergence between AmREITs and the SPY signal even higher future returns for AmREIT shareholders. As long as the Federal Reserve remains reluctant to raise the Fed Funds and Discount rates, AmREITs look like a very good bet.

But remember, even if the Federal Reserve does raise short-term rates, it may not put an end to AmREIT oversized returns. If long-term interest rates are rising along with short-term rates, a favorable spread can be preserved for the group. The key to an exit strategy in AmREITs is to keep an eye on the yield curve and its spread.

AmREITs are currently in a very favorable steep yield curve environment that could last for at least another year. Moreover, valuations are not high by historical standards. AmREITs are a great option for income investors who are willing to manage the risk of a flattening yield curve and able to tolerate unlikely “funding risk.”

I recommend—again—that readers look more closely at AmREITs to see if they might fit into your portfolio.

Full disclosure: Long AGNC, NLY, ANH, CMO.

Self Directed Investors – 6 Things We Want from IROs

Investors are still reeling from the string of failures in the regulatory regime and financial markets over the past decade. We have lost trust in government regulators, corporations and our financial advisers. This is a key trend and presents an opportunity for investor relations officers (IROs) to improve how investors view their company.

A direct result of the loss of trust is that a growing percentage of us are moving away from passive investing to self directed investing. Self directed investors want respect, equal access to information and transparency from companies where we invest our hard earned money.

Can You Blame Us?

We’ve seen corporate scandals at Enron and WorldCom, the collapse of industry giants like Lehman Brothers & Bear Stearns, the failure of diversification and rebalancing to protect our nest eggs, the failure of buy and hold over the past decade, record portfolio losses and the Bernie Madoff scandal. Discussions in Washington D.C. about holding wayward companies accountable to the government are met with cynicism. The loss of trust by investors in government, corporations and financial advisers has spurred an exodus of people from traditional brokers to online brokers. More of us are making the jump from passive investors to self directed. We trust ourselves when it comes to managing our money and no one else.

Who Are Self Directed Investors?

Self directed investors rely on our own research and contacts to get the latest information on companies. We go beyond company earnings reports and websites. We call IROs, CFOs and even CEOs and seek out anyone who can assist us in getting a comprehensive understanding of a company’s financial position, strategies and outlook. Many of us are working or retired professionals (physicians, lawyers, engineers) turned investor. Some of us are retired CFOs and CEOs, who know plenty about your industry and your company.

Self directed investors have different resources, financial goals, objectives and strategies. Some have low six figure accounts, some seven figure—and some even have eight figure accounts. Some are dividend hounds. Others are looking for the proverbial “ten-bagger.” Some use swing and position trading techniques. Many adopt a combination of strategies. As a group, we share the goal of reaching financial success on our own terms. We are confident in our abilities—comfortable using the Internet and online brokers.

What Do We Want?

So what exactly do self directed investors want from IROs and the companies they represent? These six things:

1. Obey the law and live within the spirit of Reg FD. That means providing equal access to information that analysts and fund managers routinely receive on key material questions. Analysts and fund managers enjoy plant tours and access to nuanced information through personal interactions with senior management. Offer something similar that reaches a wider audience such as videos of plant tours, online calculators to help investors play “what if” scenarios with things like book value, EBITDA, enterprise value, return on capital, return on investment, etc.

2. Call us back and respond to our emails. Treat us with respect. We are owners of the company. In the case of smaller companies, we may be large shareholders in regular communication with other large shareholders. We share what we learn with one another.

3. Provide regular news updates—good and bad—on the progress of significant projects. There is no excuse for going several months without a news update on ongoing projects.

4. Present all material information in earnings releases, not just selected information. We don’t think you are complying with Reg FD if you announce material information on a conference call and not in a press release.

5. Update your website in a timely fashion and highlight material information above the fold on your home page within an hour of significant developments. Any governmental or legal inquiry or adverse action should be highlighted on the web page immediately.

6. If your company pays a dividend, provide online guidance for regular ex-dividend dates. If you don’t know, a range of dates is sufficient. After announced, provide the amount of the dividend. Provide a historical table of past dividends and pay out rates going back at least five years.

How Can We Help IROs?

In a world of emerging social media, active self directed investors are increasingly influencing the market perception of your company. We seek out and talk to other self directed investors and post our impressions on blogs, Twitter and password protected social media sites. We have no hesitation in vouching for your company if we feel we’ve been treated fairly and honestly by IROs and company officers. Self directed investors can also provide a loyal shareholder base as your company earns a reputation for equal access to information and transparency.

In short, self directed investors can be real assets for expanding your company’s investor base—a win-win proposition for self directed investors and IROs.