when the yield curve flattens

In moderation, a little inflation is not all that bad — as the Fed reminded us when it was still worried about deflation. Inflation can boost sales, profits, employment and incomes, thus giving the recovery a needed lift.

Too much inflation can be problematic, for reasons you well know. To keep inflation from getting out of hand, the Fed will start tightening up, boosting short-term rates in the process.

The yield curve will then begin to flatten. Once it inverts — when short rates go above longs — that’s when it’s time to bail out of stocks, and prepare for the next recession

Invest in recovery

Jim Lowell

Feb. 1, 2011, 12:01 a.m. EST
Invest in recovery
Commentary: Buy emerging markets where you can


Finally, while everyone is saying the end of the small-cap run is upon us, I think seeking out emerging-growth stocks here that can grow to go global in five or more years makes sense (now at a slight discount to the most recent high water mark). I like the actively managed Fidelity Stock Selector Small Cap /quotes/comstock/10r!fdscx (FDSCX 19.49, +0.12, +0.62%) .

While this fund has been around since 1993, it has undergone not only numerous manager changes, but a few key management, objective and strategy changes, too. Currently, its team-managed crew looks for Russell 2000-like capitalization ranges domestically and globally for their best picks. With under 200 issues, it’s concentrated and, perhaps because of the various changes the fund has seen over the years, it’s off the grid of most investors. It’s a $1.4 billion fund with 20% in tech, 20% in financials, 14% in consumer discretionary and industrials, and 12% health care. As I have written here before, thanks to the emergence of the global consumer, I think health care is the emerging growth and emerging market play of the decade. That thread and theme runs through all the picks above.

The best laid plans...

The best laid plans...
Commentary: Don’t bet all or nothing on any adviser or system
By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch)

Rchard Russell made a remarkable confession earlier this week.

He said that he finds the financial markets to be so inscrutable that trying to time them is close to futile. He says that he’s therefore decided to invest a good chunk of the accounts he manages in a mutual fund that has a static allocation to several uncorrelated asset classes.

Russell, of course, is the grandaddy of the investment advisory industry, having continuously published his Dow Theory Letters advisory service since 1958, more than 50 years ago. He has seen more bull and bear markets than almost any of the rest of us, and he has the cynicism that is borne of witnessing innumerable new strategies and approaches that have come onto the investment scene to great fanfare and then ultimately failed.

As an illustration of the mixed and divergent signals the market is sending, Russell writes: “I recently read the works of A. Gary Shilling and Bob Prechter’s Elliott Wave Forecast, and they provide really convincing reasons as to why we’re going into deflation. I read Larry Edelson and a dozen other advisors and they provide excellent reasons why we’re heading into hyperinflation.”

I sympathize with Russell’s argument. As fate would have it, I read his comments while at the World Money Show in Orlando, where I will be giving a couple of workshops. After listening to some of the other workshops at this conference, I was convinced that I’d be a fool to have any exposure whatsoever to the equity markets. Upon listening to other workshops, in contrast, I concluded that I should mortgage the house to put everything into the stock market.

Unfortunately, examining these advisers’ track records goes only so far in helping us decide which of these viewpoints is correct. Even among the advisers with the very best long-term performances, there still is widespread disagreement.

The first step towards wisdom in this business is to recognize that your chosen adviser might get it all wrong — no matter how good his track record and how cogent his reasoning. This seems like an utterly banal thing to say, and yet if we are willing to follow its logic, you reach a very provocative conclusion.

The late Harry Browne, the one-time investment newsletter editor who became the Libertarian Party’s candidate for president in the 1990s, was one adviser who was willing. In his book “Why The Best-Laid Investment Plans Usually Go Wrong,” Browne pleaded with readers not to bet all or nothing on any one adviser, no matter how good his or her record, or any sure-fire market timing system that allegedly “can’t” go wrong.

Browne continued: “Almost nothing turns out as expected. Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisers with records of phenomenal success fail to deliver when your money is on the line, the best investment analysis is contradicted by reality. In short, the best-laid investment plans usually go wrong. Not sometimes, not occasionally — but usually.”

Browne’s idea was to invest in a basket of asset classes, each one of which has a low correlation with the others. As a result, when any one of the asset classes is performing poorly, there is a good chance that the others will at least be holding their own — if not actually appreciating in value. Brown coined the name “permanent portfolio” to describe this approach, since it makes no changes other than periodic rebalancing.

Brown’s idea eventually manifested itself in a mutual fund, the Permanent Portfolio Fund /quotes/comstock/10r!prpfx (PRPFX 45.94, +0.05, +0.11%) . It is into this fund that Russell says he’s putting a good deal of the accounts he manages.



Seven best funds for 2011
Commentary: Consider these standouts when freshening your 401(k
By Jeff Reeves

Best conservative fund

What if you are one of the many investors who doesn’t want to take more risk than necessary with their retirement cash, settling for a little less profit in the boom times to keep you safe when things go south? If that’s the case, consider a mutual fund with a name that says it all: the flagship Permanent Portfolio Fund /quotes/comstock/10r!prpfx (PRPFX 45.94, +0.05, +0.11%)

Permanent Portfolio is a family of funds, but the PRPFX fund is their most conservative offering. The investment seeks to preserve your retirement funds in tough times while cashing in on hard assets and income investments. The portfolio’s top holdings include gold, silver, Swiss francs and bonds, foreign real estate and natural resource stocks. As you can see, your money isn’t going to evaporate in these picks — unless some disaster wipes away nearly every investment option out there, and then we all will have much bigger problems.

In fact, if you want to know how stable this fund is, look at its worst three-month return on record — an 18% decline recorded as the U.S. economy cratered, while index funds like Vanguard Total Stock Market /quotes/comstock/10r!vtsmx (VTSMX 33.23, +0.05, +0.15%) tallied losses of more than 30%.

The Permanent Portfolio Fund is open to new investors with a mere $1,000 buy-in and boasts Morningstar’s top five-star rating. Its expense ratio is a reasonable 0.82%.

EMC & HPQ

High Tech + Large Cap + Strong Momentum = Buy Pullbacks on These 5 Stocks
MC Corporation (EMC): 25.69



Accelerated technology spending by companies eager to jumpstart growth has boded well for the largest maker of data storage computers. EMC saw its 4th quarter jump 61% as it beat Wall Street’s expectations on both revenue and earnings.

The future looks promising for EMC as companies continue to upgrade current technology and also invest in data-storage technology as they understand cost savings realized by embracing cloud computing, Management expects EMC to gain share in the data storage marketplace.

Analysts have raised their 2011 earnings estimates following the company’s earnings call. Consistent earnings with high profit margins contribute to a strong ROE. Positive money flow activity and a strong price trend vs. the broader market contribute to a bullish price/volume activity.

The stock is back to its high before the 2008 collapse which could provide short-term resistance. However, given its position in one of the most critical technology areas and the momentum it has gathered, we believe such resistance will be short lived and should be viewed as an opportunity to buy on the dip.

Hewlett-Packard Company (HPQ): 47.43



HP, like a troubled superstar player on a championship team, does everything (well, mostly everything) right on the field and wrong off it. While memories of ex-CEO Carly Fiorina and her ouster are still in the present, we now have to digest the ouster of another ex-CEO Mark Hurd.

However, despite all the noise, HP continues to execute much better than many of its peers and competitors on the field. Whether it is gaining market share in the waning PC market, teaming up with Verizon to introduce a 4G LTE notebook, or flexing its muscles in the cloud computing marketplace, it continues to “invent” and grow.

Despite posting consistent earnings with high profit margins and generating strong ROE, HPQ lost 30% in less than 3 months from its 52 week high in May to its 52 week low in August amid the Mark Hurd scandal, losing 20% in August alone following the CEO’s resignation. Since then, the stock has recovered 25% and is back to Mr. Hurd’s preresignation days but still 10% off its 52-week high. The current board is completely revamped following the replacement of many of Hurd’s directors.

The fundamentals of the company seem to be intact. A low projected P/E ratio on 2011 earnings suggests that shares are undervalued at current levels. Analysts are bullish on the company’s 2011 prospects and have raised their estimates. All these factors result in a very bullish rating. We believe that with new management team now in place and the Mark Hurd scandal a story of the past, HPQ will resume focus on business opportunities and growth rather than personalities.

About the author: Marc Chaikin Inventor of the Chaikin Oscillator & Managing Partner at Chaikin Stock Research LLC. To learn more about Marc Chaikin and his actionable decision making tools for self-directed investors called "Chaikin Power Tools" visit: www.ChaikinPowerTools.com. Marc utilizes the...

Buffett's tips for new investors

The world's most famous investor lays out his basic principles in this year's annual letter to Berkshire Hathaway shareholders.
1You recommend this100%You don't recommend this0%Shared 122 times
Related topics: investing strategy, Warren Buffett, General Electric, value stocks, stock market

Every few years, critics say Warren Buffett has lost his touch. He's too old and too old-fashioned, they claim. He doesn't get it anymore. This time he's wrong.

It happened during the dot-com bubble, when Buffett was mocked for refusing to join the party. And it happened again during the recent financial crisis. As the Dow Jones Industrial Average ($INDU) tumbled below 7,000, Buffett came under fire for having jumped into the crisis too early and too boldly, making big bets on Goldman Sachs Group (GS, news) and General Electric (GE, news) during the fall of 2008, and urging the public to plunge into shares.

Now it's time for those critics to sit down for their traditional three-course meal: humble pie, their own words and crow.



Diversify your portfolio

Class A shares of Buffett's investment vehicle, Berkshire Hathaway (BRK.A, news), slumped to nearly $70,000 in early 2009 but have since rebounded to above $12,000, as those bets on GE and Goldman have paid off.

Anyone who took Buffett's advice and invested in the stock market in October 2008, even through a simple index fund, would have been up about 30% two years later.

This is nothing new, of course. Anyone who held a $10,000 stake in Berkshire Hathaway at the start of 1965 has about $80 million today.

Inside the Berkshire Empire

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How does he do it? Buffett explained his beliefs to new investors in a recent annual letter to stockholders:

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."

Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Buffett wrote.

"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S & P in some years that were positive for the market, we have consistently done better than the S & P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."

Timely advice from Buffett for turbulent times.

This article was reported by Brett Arends for The Wall Street Journal.


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Citrix: Strategic Issues Overshadow Upbeat

Citrix: Strategic Issues Overshadow Upbeat Earnings ReportAfter investigating the networking sector a couple weeks ago, I was intruiged by Citrix (CTXS). Let me start off by saying that Citrix Systems Inc. is a great company. They have been a leader in their sphere for years, and their growth has been phenomenal. Couple that with the fact that they just had a great Q4, and one might call me crazy for issuing a sell recommendation on this company.

However, I am firm in my beliefs that no matter the story behind a company, you have to combine that with the right price to call it a good investment. Some highly priced companies do this with explosive growth, competitive edge and proprietary technologies. Some companies individually break this rule and sometimes the market disproves this rule over the short to medium term, but I think it in the long run value prevails.

Citrix Systems has had a competitive advantage in terms of application virtualization for some time now. They have been the best option for companies hoping to run an application from a central server with XenApp, and also from remote locations using Access Essentials. Their technologies are applicable across a wide variety of operating systems, including Windows, which made them unique in this sphere; many competitors bundle desktop and application virtualization into one package.

Because of this flexibility, CTXS has a strong relationship with Microsoft (MSFT), which it relies upon to avoid direct competition with companies like VMware (VMW), who focus on more complicated holistic server infrastructures. Recently, VMW released their earnings, which beat but were tempered by soft guidance on margin outlook. Their CFO, Mark Peek said (see conference call transcript here):

The IT spending environment improved dramatically compared to 2009, and we were able to capitalize.
However, the caveat with their earnings call was a flat margin for 2011. Could CTXS be caught in the same boat? Let’s take a look at their earnings and see.

Earnings
See the earnings press release here.

Q4 Financial Summary: In reviewing the fourth quarter results of 2010, compared to the fourth quarter of 2009:

•Product license revenue increased 17 percent;
•Revenue from license updates grew 13 percent;
•Online services revenue grew 16 percent;
•Technical services revenue, which is comprised of consulting, education and technical support, grew 40 percent;
•Revenue increased in the Americas region by 27 percent, the EMEA region by 7 percent and the Pacific region by 15 percent;
•Deferred revenue totaled $779 million, compared to $619 million on December 31, 2009;
•GAAP operating margin was 21 percent for the quarter, and non-GAAP operating margin was 28 percent for the quarter, excluding the effects of amortization of intangible assets primarily related to business combinations, stock-based compensation expense and costs associated with the 2009 restructuring program;
•Cash flow from operations was $179 million, compared with $178 million in the fourth quarter of 2009; and
•The company repurchased 1.9 million shares at an average price of $65.90.
Annual Financial Summary: In reviewing 2010 results compared to 2009 results:

•Product license revenue grew 15 percent;
•License updates revenue grew 13 percent;
•Online services revenue grew 17 percent;
•Technical services revenue, which is comprised of consulting, education and technical support, grew 31 percent;
•Revenue increased in the Americas region by 20 percent, the EMEA region by 8 percent, and the Pacific region by 21 percent;
•GAAP operating margin was 17 percent for fiscal 2010, and non-GAAP operating margin was 26 percent, excluding the effects of amortization of intangible assets primarily related to business combinations, stock-based compensation expense and costs associated with the 2009 restructuring program.
•Cash flow from operations was $616 million for fiscal 2010 compared with $484 million last year; and
•During fiscal 2010, the company repurchased 8.3 million shares at an average price of $53.14.
Financial Outlook for Fiscal Year 2011: Citrix management expects to achieve the following results during its fiscal year 2011 ending December 31, 2011:

•Net revenue is expected to be in the range of $2.10 billion to $2.14 billion;
•GAAP diluted earnings per share is expected to be in the range of $1.78 to $1.84. Non-GAAP diluted earnings per share is expected to be in the range of $2.29 to $2.33, excluding $0.34 related to the effects of amortization of intangible assets primarily related to business combinations, $0.45 related to the effects of stock-based compensation expenses, charges recorded in conjunction with the company’s 2009 restructuring program, if any, and $(0.24) to $(0.34) for the effect of the differential between the GAAP and non-GAAP tax rates and tax effects related to these items.
By all estimates, a solid quarter. Revenue growth was solid all across the board, and their per share earnings guidance of $2.29-2.33 beat the street's estimate of $2.28. The other strategic issues surrounding Citrix are what I feel overshadow this upbeat earnings report.

Noteworthy Strategic Items
Microsoft - The Elephant in the Room: I find issue with CTXS’s strategic positioning in the market right now. They have positioned themselves as a technology leader in application services, especially in Windows based virtualization efforts. However, very soon they may come head to head with MSFT as a potential rival. Microsoft has made not made it a secret that their entrance into the cloud would include application virtualization. Combine this with the fact that CTXS relies on Windows for a competitive edge, and I am not convinced this relationship can hold up in the long term. Right now it is working but five - or even three - years from now I wouldn’t be so sure.

Acquisition Target: It has been whispered that Citrix could make a good acquisition target for a variety of firms with piles of cash that want to play in the cloud. Their technology would provide any larger company with the foundation to compete immediately with anyone in this market, and could also create synergies if combined with the right partner.

Insider Selling, CTXS 10b5-1 Plan Sales: Insider trading is generally not a leading indicator for stock performance. Executives need to sell stock for anything from liquidity to diversification, and since options make up a large portion of salaries for these employees, turning those into cash is a natural progression.

However, there is one type of insider selling that is generally considered a negative sign in the eyes of the market. That is the 10b5-1 plan. With this type of sale, you can enter into a transaction agreement, but then rescind that agreement even if you come across insider information. The SEC says that insider trading must involve an actual transaction of shares. According to InsiderMonkey, companies with large 10b5-1 filings have experienced abnormal negative returns of 70 basis points a month.

Buy/Sell Analysis
Valuation: Given the advantages Citrix still claims and their history of strong results, I have to be careful about handicapping them too much for strategic reasons that could change. Nonetheless, even using appropriate growth assumptions without any penalty for a failing relationship with Microsoft, I still can only justify a price floor of $34 and a ceiling of $55 for Citrix. This is around where they were trading in mid October 2010.

However, their abnormal returns over the S&P for 2010 were incredible. They have also recently been trading near their five year high (which is not a sell indicator, just a fact). Citrix’s growth in the coming years will be high simply because of the expansion of the cloud. However, I feel their technological moat is no longer significant enough to warrant such a premium. The erosion of technological superiority will allow competitors to leverage their solutions in a way that will eat at Citrix’s market share. The thought of an acquisition could be appealing, but that is only a whisper in the wind at this point in time.

Ratios: Their ratios are a mixed bag. From a liquidity standpoint, they look perfectly healthy. Their current ratio has been constant for the last five years and they hold no long term debt. They generate free cash flows in excess of five hundred million, and should be able to cover any short term obligations. Their margins and return ratios had been decreasing since 2005, but recovered slightly in 2010. Their profit margin was the most notable increase, moving from 11.83% in 2009 to 14.78% in 2010. I believe this is due in part to the growth of their technical services (40% in Q4 and 31% in all of 2010) which include consulting and technical support, traditionally high margin items.

From a relative perspective, their price to earnings is almost double what it was in 2008/2006 (~46 currently versus 24.2 in 2008 and 26.78 in 2008). However, their price to book and price to sales have increased at a less alarming rate.

Conclusions
Citrix is a great company. They have been aggressively repurchasing shares. They have growth potential, but that is coupled with some potential strategic roadblocks. I feel that investors have already cooked in phenomenal growth for the next five years into the price of this stock, and I cannot justify that price with my assumptions.

If there were to be a run on the stock, and it returned to October 2010 levels, then I’d be more comfortable making an investment. However, at the $67 price level, I think Citrix is too expensive.





PIMCO Corporate Opportunity Fund: One Stellar, Sustainable Yield
by Frank Constantino
I came across the fund in Barron's 2011 Roundtable (part 2); All Over The Map, January 22nd. The Pimco Corporate Opportunity Fund (PTY) is managed by Bill Gross, Founder and Co-Chief Investment Officer of Pimco. PTY was listed as one of two picks from Bill Gross in the article. Let's look at the details of the fund.

Pimco Corporate Opportunity Fund

PTY seeks current income and capital appreciation. The fund invests in US dollar-denominated corporate debt obligations and other corporate income producing securities. Normally, the fund will have an average credit quality that is investment grade. PTY currently yields 7.3%.

PTY currently has a Morningstar Rating of five stars for three years, five years, and overall performance. Morningstar rates the fund as having average historic risk with high historic performance. PTY is up 24% over the last twelve months.

PTY currently holds $1.1 billion in assets and is actively managed by Bill Gross.

Top Ten Holdings


Name Maturity Date Percent of Holdings
Amer Intl Grp FRN 05/15/68 2.60%
Bay Area Toll Auth 7.043% 04/01/50 2.30%
Riverside Calif Elec Rev Rev Bds 7.605% 10/01/40 2.30%
Amer Intl Grp 8.25% 08/15/18 2.00%
Cobank Acb Pfd 144A -- 1.80%
Citigroup Cap Xxi FRN 12/21/77 1.50%
Gsr Mtg Tr 2006-1f CMO 6% 02/25/36 1.50%
Rabobank Nederland 144A FRN 06/30/19 1.30%
Panamsat Corp New 6.875% 01/15/28 1.30%
Ppl Pfd -- 1.30%

Portfolio Assets
Domestic Bonds 64.70%
Cash 20.96%
Foreign Bonds 9.95%
Preferred Stock 4.20%
Foreign Stock 0.12%
Other 0.06%

It is important to note that PTY uses leverage, currently at about 37%. This means that because the fund borrows at low short-term rates to purchase longer dated assets, a spike in short-term rates could hurt performance. I don't see short-term interest rates rising substantially in 2011.

Micron Technology (MU, news), "the flying pig

If I had to describe the tendency or inclination of the market so far in 2011 (as opposed to its "mood," a rather squishier concept), it would be toward speculation, as all flavors of weak, expensive, or questionable companies continue to ramp higher.

There is no better example than my well-worn barometer, Micron Technology (MU, news), "the flying pig." For those who don't know, during the late 1990s stock mania, and even for a bit of the real-estate bubble, Micron stock would soar even as the price of its major product, DRAM, was collapsing (which is what the price of dynamic random access memory has always done).



What are the best ways to invest in gold?

I nicknamed Micron "the flying pig" because I thought that if a stock like that could rally (as it has at various improbable junctures), anything was possible.

Once again, Micron has taken wing -- the stock was up almost 25% before pulling back some recently -- as folks hope that DRAM prices will sprint higher one day soon. (DRAM prices have declined about 40% in recent months.)

That view is held despite the fact that the world is completely enthralled with tablets, which don't use DRAM, and everyone seems to think that PCs are dead. They aren't, and Windows 7 by Microsoft (MSFT, news) will lead to a pretty substantial refresh cycle for businesses. But that won't be enough to help Micron. (Microsoft owns MSN Money.)

To DRAM the impossible DRAM
Nonetheless, Micron's management has apparently once again convinced the dead-fish analyst community that we are going to see a huge rise in the price of DRAM, which ought to be wonderful for Micron.



Bill Fleckenstein
This is probably the most hilarious version of an old yarn that I have seen spun at least 30 times in the past 20 years. But in today's environment, it is working.

Obviously, crazy things like this happen routinely in markets, and there are countless other wild stories revolving around tablet devices, cloud computing, rare earth metals and other concepts that are in vogue right now. But to me, none represents how speculative the environment has once again become more than Micron.

For the time being, if Micron's stock price can rise -- given that the backdrop for the story has never been worse -- then anything truly is possible, and it just shows how completely futile it has been to try to be short stocks, betting they will go down.