stock ideas 1/6/2011

Goldman, Intel Are on My Top 10 List for 2011: John Dorfman
Scorned, Now Cheap

In the financial sphere, my choice is New York-based Goldman Sachs Group Inc. The investment bank has been vilified for betting against a mortgage security it created, for high- speed trading and for paying its executives handsomely. These criticisms have helped to whittle Goldman’s stock price down to about $168, which is less than nine times earnings. That’s a low valuation for a talent-rich company.

I like several of the big drug companies, notably Johnson & Johnson. The New Brunswick, New Jersey, company has increased its dividend five times in the past five years. Its stock, which has sold for a median of 18 times earnings the past decade, currently fetches only 13 times earnings.

I think owning some Chinese stocks is desirable for U.S. investors. China’s economy is currently one of the fastest- growing in the world. Its budget is in better shape than ours in the U.S., and its population is younger.

Concrete Advice

One Chinese company I like is China Advanced Construction Materials Group Inc., which produces concrete and provides technical advice for large development and infrastructure projects such as high-speed railroad beds. The company has headquarters in Beijing, but its stock trades on the Nasdaq market in the U.S. It sells for only four times earnings.

Mantech International Corp., located in Fairfax, Virginia, provides information-technology services for the government, especially the military and intelligence agencies. In a world of terrorist threats, this seems a promising niche. The stock has lagged behind the market this year, falling about 14 percent. At about $42, down from a high of more than $61 in 2008, I think it is a good rebound candidate.

stock prices on 1/6/20111
GS $172.55
JNJ $63.23
CADC $5.28
MANT $39.61

How to invest like John Paulson

How to invest like John Paulson

Hedge fund tycoon John Paulson is the man who made his name, and a fortune, betting against subprime mortgages when no one else even knew what they were.

And he's just made three big financial calls that you need to know about.

Speaking to the University Club in New York, he said, first, that gold could go to $2,400 an ounce based on the fundamentals–and that momentum could carry it to $4,000 an ounce. Right now it's around $1,300. Second, he said you should get out of bonds while you can: You're much better off investing in blue chip stocks with good dividend yields than bonds.

And third, he said you should buy a home. Now.

"If you don't own a home, buy one," he reportedly said. "If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home."

(A spokesman for Mr. Paulson did not challenge the accounts of the meeting.)

Among the New York commentariat there's been a lot of head-scratching about Mr. Paulson's take–especially this contrarian stance on housing.

Is he right? If so, what does he know that everyone else doesn't?

Ignore the critics. The odds have to be on his side. The reason is simple: Inflation.

There is a debate raging on Wall Street these days between those warning about deflation and those warning about inflation. We are at, or near, deflation at the moment. It may even get worse before it gets better. But Mr. Paulson sees inflation coming by 2012 or so. Last week, several contrarian money managers I was talking to made the same prediction.

The explanation isn't hard to find.

Forget the usual technical issues economists like to talk about, such as output gaps, labor markets, money supply and the like.

Put simply: We will get inflation because we have to. It doesn't get any more straightforward than that.

We are the most indebted nation in the history of the world.

Data out from the Federal Reserve last week revealed that in the second quarter the total sum of U.S. debts (excluding the financial sector) had risen to a record $35.5 trillion. That is 243% of gross domestic product–barely a smidgen from last year's peak, and off the map by past history. Thirty years ago it was less than 150% of GDP.


The debt orgy has been everywhere. Government debt continues to skyrocket. Corporate debt–contrary to some reports–is rising too. And after two years of brutal retrenchment, defaults and pain, households have managed to slash their debts by a massive, er, 3% from the peak. Household debts are still twice what they were just a decade ago.

There is only one plausible route out of this appalling situation. The government needs inflation. The country needs inflation. That will shrink these debts in relation to the economy, asset prices and incomes.

Deflation would make debts even bigger in real terms. That would be a disaster. We're skirting it at the moment, but it can't be allowed to take hold. That's why Fed chairman Ben Bernanke has just offered more quantitative easing–and if that won't work he'll try something else. Anything else.

That's what Mr. Paulson knows–and what anybody could know if they just take a step back from the day to day details and look at the big picture.

If the government succeeds in stimulating inflation, bonds will be in big trouble. Fixed coupons become a lot less valuable when prices and interest rates rise. At 2.5%, the 10 year Treasury already offers a paltry yield: The risks surely outweigh the rewards. Take profits on your bond funds.

Housing? It isn't just that home prices have fallen a long way. It's also that, if you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now you can borrow for 30 years at around 4.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 3%. That's going to prove an awesome deal if we see inflation again.

As for gold? Mr. Paulson's prediction isn't that extreme. I've seen guesses from perfectly sane people, based on the money supply and other measures, suggesting gold might go even higher.

No one knows, of course. But the bull market seems to be very much alive. And I think there's a chance–a pretty good chance–that gold could be the next Nasdaq.

Naturally, the future is unknown. And most normal people can't afford to risk a lot of their money speculating–especially these days. But you don't want to miss out on a boom.

How should you bet if you think Mr. Paulson's right?

One idea: Instead of wagering a lot of your money on gold, try taking leveraged bets with small stakes. That way you can make plenty of profits if the boom continues, while minimizing your risks if it turns tail. Here are two suggestions.

First, try buying "out of the money call options" on the SPDR Gold Trust. These are simple, if misunderstood, products that can be bought through a regular broker. You can view them like long-odds bets on the GLD booming.

How do they work? Here's an illustration: The GLD, worth one-tenth of an ounce of gold, costs around $127 a share right now. But for just $3.90 a share you can instead buy a call option, good until Jan. 2012, that will give you the unilateral right to buy into the GLD at $180 a share.

If it booms to, say, $300, equivalent to $3,000 an ounce, you can exercise the options and make $120. But if gold plummets, as it has in the past, all you can lose per share is your $3.90 stake.

A second alternative: Take a look at speculative gold mining stocks. They should give you plenty of bang for your buck in a mania. There are funds, such as U.S. Global Investors World Precious Minerals fund, that specialize in smaller mining companies. One intriguing stock is Alaska's NovaGold Resources (NG: 9.25, +0.09, +0.98%). (For more see this MarketWatch story.) A number of rich, powerful investors are involved–including Marc Faber, George Soros, and… John Paulson.

The Adens cautious on current corrections

By Peter Brimelow, MarketWatch
The Adens recommend holding current positions but preparing to sell. Overall, they're distinctly more cautious than when I last looked.

On stocks they write: "The major trend identifier is at 8,965, and if the Dow were to decline and stay below that level, we'd recommend selling. For the other stock indices, their major trend levels are at 952 for the S&P 500; 1,840 for the Nasdaq; and 3,460 on the Dow Transportations. So you'll definitely want to keep an eye on those numbers this month."

The Adens believe that record global debt levels will inevitably translate into hyperinflation, but they also have great respect for the authorities' ability to stave off the inevitable. To gauge how this conflict is playing out, they watch long-term interest rates.

They write: "Bond investors aren't stupid. They see what's going on, and they're moving toward the exits. ... How will we know when it's happening? As we've often discussed, the 4.65% level on the 30-year yield will be our guide. This 80-month average is super long-term and it identifies the mega-trend. If the bond yield rises and stays above that level, it will mark the final confirmation that big inflation is coming, the decline in rates that began in the early 1980s is over, and interest rates are going much higher for years to come."

The Adens' current take on gold: They say that what they call the "C Wave" -- which carried it above $1,200 -- is over, and a "

3 stocks for a stock picker's market

3 stocks for a stock picker's market
The recent rally is impressive but historically not surprising. The Fed's money printing continues, and investor risk-taking has resumed. This all calls for caution.

[Related content: stocks, technology, Bill Fleckenstein, software, wireless]
By Bill Fleckenstein
MSN Money
Given the recent market gyrations and the sloppy and weak trading, I thought I'd home in on the action and examine what clues, if any, that action might afford.


How long can the market rally last?
Heading into earnings season, I expressed my belief that most companies were set up to win at "beat the number," which they did. What I was curious to see was how the market would respond, and, in essence, the good news was sold.

Thus I think there's a decent probability that we'll go into some sort of trading range for a while. Whether that turns out to be for a long while or becomes the start of a top, I don't know.

If we do slip into a trading range, I would be somewhat shocked if that resolved itself with a big move to the upside, though given the money printing that continues, I wouldn't rule out that possibility. Consequently, although I am open to the idea of looking for stocks to short, I intend to be extra-cautious.

Right now, I have no reasons to take short positions other than the macroconomic ones, including debt and unemployment, that I've written about before. That backdrop aside, the monetary backdrop is not conducive to shorting stocks because of all the money printing going on.

Even if the market turns out to be rangy or exhibits somewhat of a downward bias, it's possible, in light of the money printing, that some stocks will do OK to well while others will do OK to poorly.

Buying in single packages, not bulk
Thus my long positions in a few non-money-printing-beneficiary companies -- e.g., Microsoft (MSFT, news, msgs), Novatel Wireless (NVTL, news, msgs) and Eli Lilly (LLY, news, msgs) -- as I think we could experience, for the time being, a market of stocks rather than a stock market. (Read "The trouble with techs right now" for more on Lilly and tech stocks in general. I also discussed this outlook in a recent appearance on CNBC; watch the video here.)

In other words, we might witness the evolution of a true stock picker's market for the first time in years, rather than the market's being essentially "all one trade," which has been my view.

We'll see how this plays out, but I thought it was worth introducing some of those ideas as food for thought.


Referring to the market rally of 1930, he points out that if that market could bounce as much as it did, with as little help as it got from the Federal Reserve and the government in terms of large stimulus, then it's no surprise we've seen the rally that we've seen.

His outlook for the market: It's just a guess, but he thinks it might face some tougher going early next year.

"It is hard for me to see what will stop the charge to risk-taking this year," Grantham wrote. "With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen.


"Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. . . . My guess, though, is that the U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 ($INX) level of 1,098 on Oct. 19)."

In summary, Grantham believes there is unfinished business on the downside, though he does not think we need to make a new low. His road map seems to be not terribly different from what my current thoughts are. Perhaps that means some variation of that theme will play out -- unless it doesn't.

Windows' 7th heaven
In Microsoft's earnings report last week, the company did far better than most people expected. Even though I was thinking Microsoft might possibly do a bit better than expected, I was surprised at how much better it did. What it will accomplish over the next year or so is pretty much ordained, though.

When you think about the fact that 40% of revenue is derived from a product that for close to a decade has basically been a dry hole (that being the operating system) and that now the company has a really fine product release (Windows 7), you can see how the future looks bright. (Microsoft is the publisher of MSN Money.)

Video: Bull market or bust? Fleckenstein's view

But when you add in that all of Microsoft's major products will see new versions released in the next year and that the company has some interesting new products as well, coupled with the fact that it has cut expenses, I believe Microsoft can do well regardless of the world economy.

Obviously, if the economy is strong, that will benefit the company, but if it's not particularly strong, the company will still do just fine. So, barring some stupid upside move in Microsoft, my ownership of that stock will probably be on autopilot for the next year, though I might have to change my mind down the road.

It has been amazing to me to watch the "dead fish" trip over themselves to avoid MSFT over the past year. I just wish I'd been even bolder when I first started talking about Microsoft a year ago, when it was half the price it is today. Of course, that's the way investing usually is. You never own enough of the winners, even if they look like reasonably safe layups.

At the time of publication, Bill Fleckenstein owned long positions in Microsoft, Eli Lilly and Novatel Wireless.

A tech stock to own now

A tech stock to own now

You may know this company for its stock that soared, then collapsed. It won't ascend like a rocket again, yet it should hold plenty of appeal for conservative investors.
[Related content: stocks, technology, EMC, earnings, Jon Markman]
By Jon Markman
MSN Money

If you tweet or use Facebook, e-mail or instant messaging, you are to blame for creating the largest pile of permanent waste in the history of mankind. Nice going.

Never mind that your messages are ethereal wisps of digits and electrons and that 99% of them are useless a few seconds after they are created. They are 0s and 1s that will be stored on some disk drive somewhere whether you want them or not, ready to be retrieved by your grandkids, prosecutors and historians for all eternity.

A slew of companies have emerged in recent years to manage all of this digital excess, but one stands head and shoulders above the rest. And, amazingly, it is what investors call a "fallen angel," a once-great outfit that has fallen on hard times and yet has the capacity to rise again.

That company's shares may be the one stock that conservative investors need to own for the next few years, particularly those who are a little shy about the rapid recovery in share prices and the uncertainty of the global economy. Its value is already so bombed-out that everyone who wanted to sell it has fled, and now it's owned mostly by new investors who have taken a shine to its slightly scuffed appearance and are ready to dream again about how great it can be.

The company is data-storage specialist EMC (EMC, news, msgs), and I know it's going to be familiar to a lot of people, for good and for not-so-good reasons. Here's why it's so notorious, and why it is such a good bet now.
'90s nostalgia
During the 1990s, which I believe we are about to repeat, EMC shares put in one of the greatest advances in market history. The stock rose 65,450% from January 1990 to December 1999. Ten thousand dollars invested at the start of the decade was worth $6.5 million at the end, if you'd had the foresight and patience to keep it through booms and busts. Which, let's face it, would have been tough. I don't know about you, but every time I have a 10,000% gain, I feel like taking profits.

What happened next at EMC was not a unique story. Excessive optimism crept into entrepreneurs' animal instincts, so new competitors crowded into its space with lower-cost offerings, and the ensuing price war crushed its profit margins. EMC, which was always known to have one of the best sales forces on the planet to go with its great product offerings, managed to annihilate those latecomers with brusque dispatch, but the damage was done: Once the pricing genie is out of the bottle, it's almost impossible to stuff it back in.

So after that amazing decade, EMC shares began a breathtaking collapse. And now, the once-godlike stock has tripped on leaden feet to fall 80% since the start of this decade. At the stock's peak, expectations got so out of whack with reality that investors were willing to pay more than 100 times earnings -- a superhigh price-earnings multiple of 125. But in the multiyear collapse, those expectations dwindled into a pit of despair, until the P/E multiple hit 10 in February. It's now around 18, based on my estimate of next year's earnings.

That is very cheap for a company of this caliber with potential to grow 20%. You see, companies such as Procter & Gamble (PG, news, msgs) get a forward-looking P/E of 14, and the detergent maker is not going to grow much more than 5% next year, if that much.

EMC may be tarnished, but it has already begun to sparkle a little bit in a few corners. What will make it worth your hard-earned dollars over the next few years?

Expectations are still fairly low, which is always the key to future success in the market. Most analysts expect the company to earn 84 cents a share next year, which would amount to fantastic 32% growth over 2009. But I actually think that's too low coming out of a very low base and that the company has a very good shot at earning $1.10 a share next year.

Growing again, steadily
Here's why EMC will grow: All indications from the marketplace suggest the company enjoyed a very solid September with its elite roster of Fortune 100 customers with stiff data-storage needs, which will allow it to report better-than-expected results Oct. 22. And reports from the field also suggest that the current quarter has already started off with a bang, as customers are finally loosening budgets that were severely tightened during the recession and replacing old equipment with the technology that will permit improved retrieval of every work, play and medical twitch of your increasingly digital lives.

That's the long-term picture. Short-term results will be driven by better gross margins (net income before taxes) due to manufacturing efficiencies and a lower cost structure in the wake of head-count reduction of 7%, around 2,400 EMC workers. Analysts estimate that every 1% reduction in operating expenses results in 2 cents per share to the bottom line.

Both of these elements are important, but the biggest boost will come from better sales, because a company like this needs to keep innovating and creating more reasons for customers to pick up the phone and buy its equipment.

EMC has used the recent fallow period to become the leader in a niche called network-attached storage, which was just a small part of its business five years ago. It has since muscled its way past smaller rivals to become the top vendor, with 36% market share -- about 5 percentage points more than its top competitor, according to calculations from analysts at Broadpoint AmTech.

The majority of its revenue in the storage-area-network space comes from its high-end Symmetrix line, which provides companies with faster access to data because it utilizes solid-state drives with an industry-leading reliability promise of 99.999% -- known as the five nines standard.

And, finally, EMC has retained a large stake in VMware (VMW, news, msgs), a spun-off unit that sells the hottest infrastructure enhancement going for companies trying to save money today: virtualization software. Because most computer servers at companies normally run at a lousy utilization rate of 15%, this software allows them to get more computing power for less money -- the key selling point. VMware is virtually the only company that Fortune 100 companies use for this service, and EMC owns 83% of it.
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Skeptics will say that EMC has seen its best days and that growth will be modest going forward -- and I don't disagree. This is not going to be one of those stocks that rockets 100% a year over the next couple of years, like some of the recommendations I made earlier in the spring and summer.
Find top-rated stocks

Find top-rated stocks

But we're talking about one tech company that can still grow 15% to 20% a year and has the potential to see its price-earnings multiple expand by 5% a year because the need for storage is the only thing in technology that is truly growing exponentially. And that's thanks to all those tweets, Facebook posts, e-mails and instant messages that I mentioned a moment ago -- not to mention the Obama administration's lust to put all medical records in a digital format in the next half-decade.


Figure that EMC, now trading around $18 a share, can get back to about $35 over the next three years with any kind of tailwind from the improving global economy, back to where it traded in 2001. Its rivals IBM (IBM, news, msgs) and Hewlett-Packard (HPQ, news, msgs) have already made that journey, and as long as you keep creating data, it'll keep creating profits.
Fine print
Check out EMC's products and services here and here. Learn more about Broadpoint AmTech here. Learn about virtualization software here. . . . It's great to see the casinos charge back after their weak spring. On May 14, I recommended Las Vegas Sands (LVS, news, msgs) and Multimedia Games (MGAM, news, msgs) around $8 and $2.75, respectively. (See "In an economic desert, signs of life.") They closed Friday at $18.05 and $5.02. . . . For more ideas like this as the market rally progresses, check out my daily newsletter, Strategic Advantage (membership required).

At the time of publication, Jon Markman owned shares of the following company mentioned in this column: Hewlett-Packard.

Charts Will Save You A Fortune

These Three Charts Will Save You A Fortune
By: Tom Dyson
Contributing Editor
Daily Wealth

Published: October 5, 2009

Russell Napier, a well-known stock market historian, studied market tops and bottoms over the last 100 years and showed corporate bonds tend to lead the stock market by several months at important turning points.

When this bond fund starts falling, you should exit the stock market, but until then, you have a green light to speculate...

LQD has turned lower in the last four trading sessions. Please keep an eye on this chart. If it breaks below 103, immediately exit the stock market. A large decline may be imminent.

LQD isn't the only indicator I follow to track the health of the market. I also watch the British pound...



The British pound is one of the most important financial indicators in the world. Britain was at the epicenter of the credit crisis. It had a huge housing and mortgage bubble... even bigger than the housing bubble in the U.S. Britain also had a huge banking and finance bubble. In this bubble, London became the world's largest financial center. Finance represents almost 10% of Britain's GDP.

In other words, the pound is the perfect symbol for housing and financial excess. When the pound is rising, it means the pain is subsiding and the storm clouds are breaking. When the pound is falling, financial misery is increasing.

Here's the chart of the pound. On Friday, the pound broke down to new four-month lows.

Here's another bearish development. Commodities are falling in terms of gold...

Gold is a safe haven. People turn to gold when they're afraid of financial chaos. But when they're optimistic, people use more energy, eat more food, and live in bigger houses. These activities require industrial commodities like oil, copper, aluminum, and corn.

So the relationship between gold and industrial commodities is an excellent barometer of fear and greed in the stock market. When commodities fall against gold, there's fear in the air. But when they rise against gold, people are growing optimistic.

This chart shows the price of gold set against the CRB Index of commodities. This barometer led the stock market by three weeks in March, when the bull market started.

In September, the commodity-gold ratio broke down to a new four-month low. It hasn't made a new low for three weeks. But watch this one. There may be misery coming in the stock market if it makes a new low...

If you invest in the stock market, you need to follow the performance of these three charts. They're among the best gauges of fear and greed in the market. As their prices go, so goes the stock market.

Right now, these charts are hinting at a new downtrend. My advice, hold off on making new buys, cut your most risky positions, and tighten your stop losses.

-- Tom Dyson
Contributing Editor

Now if only I knew this then Rules to avoid a bear

Rules to avoid a bear
First is the fact that bad things happen in bear markets. The Sept. 11, 2001, attacks happened after a bear market was well under way. The Great Depression happened after a bear market had begun. The collapse of Lehman, Bear Stearns, Washington Mutual, Fannie Mae and Freddie Mac all happened during a bear market. The Nixon impeachment hearings that helped kill the market in 1974 happened during a bear market. So really, the first order of business is to avoid the bear.
This is easily done using one very simple timing rule that I have recommended often in the past, as it has worked for at least the past 60 years: Get out of the market when the Standard & Poor's 500 Index ($INX) ends a month at a level below its 12-month average. Don't return until it closes a month above the one-year average. Using this rule, you were out of the market after December 2007 at 1,468 on the S&P 500, and did not return until after July, at around 987. You're not out at the top or in at the bottom, but you still avoid a 32% collapse. If you want to get out and in sooner, with slightly higher risk, use the 10-month moving average instead; in the present case, you'd be out on Dec. 1, 2007, and back in on June 1, 2009.
Using this simple rule, the Lehman collapse was just a curiosity for you rather than a calamity. As for individual stocks, Clews' cane approach is less straightforward. You cannot buy right away, as panics are seldom over quickly. In most cases, you can wait at least a few weeks after an event that's large enough to break out of the financial news section onto the front page of newspapers, because you must wait for negative psychology to jar the shares of the most-admired companies out of the hands of suddenly frightened longtime holders. As a rule, my research shows that the stocks you buy should be at least 40% off highs immediately prior to the start of the emotional event.
Many famous companies fit this description in the two months after the Lehman collapse, and almost all are much higher now. IBM (IBM, news, msgs) fell to 40% off its pre-Lehman high at $72 in November; it's close to $120 now. Amazon.com (AMZN, news, msgs) was 40% off at $51 in October; it's around $80 now. DuPont (DD, news, msgs) fell 40% to $25.50 in November; it's around $31 now. Cisco Systems (CSCO, news, msgs) fell to $14.40 in November; it's about $21 now. Goldman Sachs (GS, news, msgs) dropped to $53 in October; it's $163 now. The 40% rule works in most cases of severe panics. Buying will feel so wrong at the time, but if you want to get well ahead of the crowd at emotional lows, you must accept the risk when others shun it.
No downturn on the horizon
I'm telling you this not to be a smart aleck, but to help you prepare for next time. And there most definitely will be a next time within our lifetimes. I do not think, though, that it will be as soon as the bears would have you believe. Every time that a 12-month-average buy signal has been given after a bear market of a year or more, the ensuing up move has itself lasted at least a year -- and more often three or four.

The primary reason: The government and central bank response to a calamity like the Lehman Bros. collapse and panic is typically so powerful and over the top that the monetary infusion cycle -- fiscal stimulus and superlow interest rates -- that ensues is much more persistent than anyone expects.

Robert Drach, a veteran analyst who has been researching these cycles for the past 40 years from his base in Florida, believes that the current monetary infusion cycle will exceed the last similar one that extended roughly from 1991-99. He's expecting that the major indexes will ultimately advance at least 450% from their lows, which would put the S&P 500 at 3,000 in the next 10 years. See you then.