General Mills: Is The King Of Comfort Food Fully Valued?

I recently advised caution on the market while also recommending General Mills (GIS) as a good defensive name in a down market. With brands like Cheerios, Betty Crocker, Pillsbury, Haagen-Dazs and Yoplait, its foods are available on grocery shelves from Miami to Anchorage with a nice dose of international exposure accounting for 20% of revenue.

Forget guns and gold. There’s no more sensible reaction to financial Armageddon than hunkering down inside to gnaw on a tube of cookie dough and scrape the bottom of a pint of Pralines and Cream. In fact, this pick fits well with the burgers, beer and butts strategy I advocated some time ago. So without further ado, here are the fundamentals.

Profitability

Earnings per share have averaged growth of 13.3% annually for the last three ears. They have risen steadily over the last decade and were not materially affected by the Great Recession. Margins have also remained strong in the face of higher input costs with net margins actually rising to 12% in 2011. With operations that began before the television and automobile, General Mills is an extremely profitable operation built on a solid cache of enduring brands.

General Mills' Earnings Per Share:

2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
.67	1.22	.1.38	1.54	1.45	1.59	1.86	1.90	2.24	2.70

Debt

Great businesses typically generate strong cash flows and require little debt financing. I like to see long-term debt less than three times current net earnings. With long-term debt of $5.5 billion and trailing 12-month net income of $1.6 billion, General Mills narrowly misses the mark here. However its strong free cash flow keeps me from being overly concerned.

Return on Equity

Companies that consistently deliver high returns on equity create true wealth for shareholders. Average businesses typically offer a 12% return on equity while great businesses return over 15%.

General Mills Return on Equity (rounded):

2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
25	24	22	23	19	21	22	23	29	31

General Mills' 10-year average ROE is a stellar 24%.

The Dividend

This Dividend Challenger (see David Fish's invaluable list of dividend growth names) currently offers a 3% yield supported by a 52% payout ratio. It has increased its dividend for eight years in a row at an average 11.1% clip over the last five years.

Retained Earnings

I want to own companies that are free to reinvest retained earnings at high rates of return. What I don’t want to see is high research and development costs or capital expenditures in the form of plant and equipment replacement. A look at General Mills' balance sheet reveals that it regularly spends about one third of net income on property, plant and equipment but has no R&D costs. SG&A costs have been rising and should be monitored for margin drag.

Valuation

At $40.79, General Mills sells for a P/E of 17.3, which is a hair higher than its historical average of 16.1. Based on projected growth of 8% annually, its forward PEG ratio is high at 2.1. The valuation is more compelling if we use the current P/E and three-year average growth rate giving us a PEG of 1.3. Strong volume on September 22 leads me to believe that any pullbacks will be well-supported at the $40 level. However I would prefer to wait for a more attractive price before initiating a position since expected returns from current levels are only in the mid single digits.

In the next few weeks, I'll be covering a number of names in the food processing sector. Here's a preview of the players:

General Mills (GIS)								Hormel (HRL)
		Winner				Winner
Kellogg (K)								Campbells Soup (CPB)
				Champion
Heinz (HNZ)								Kraft (KFT)
		Winner				Winner
JM Smucker (SJM)								Nestle (NSGRY.PK)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

January 2011 ETF Performance Report

January started off as a strong month for the markets and exchange traded funds (ETFs), but increasing turmoil in Egypt threatened to derail the progress markets have made. That said, indexes in January were positive for the month.

The Dow Jones Industrial Average rose 2.7% this month. The S&P 500 gained 2.3% and the Nasdaq added 1.8%.

Optimism about the economic recovery that took hold in December continued into the early part of January as first-time unemployment claims slowly declined, consumer spending picked up and the Federal Reserve reiterated confidence in the direction of the recovery.

Widespread government protests in Egypt, however, intensified in the latter days of this month, shaking that confidence. In turn, the concerns pushed safe-haven gold and Treasuries higher once again.

View our complete January Performance Report here (pdf).

Invest your IRA like a pro

NEW YORK (CNNMoney) -- I'm 38 and just rolled $120,000 into an IRA. I'm trying to decide whether I should invest it on my own or pay an investment firm a fee to do it for me. I'm inexperienced, so I really don't even know what information I should factor into this decision. Any suggestions? -- Trevor S.

You've already demonstrated good financial sense by rolling your retirement savings into an IRA.

Many people give in to the temptation to tap into their stash during a job switch rather than roll it over, and this can prove costly. A 2009 Government Accountability Office study showed that a typical 40-year-old who cashes out his 401(k) would end up with 45% less in savings at retirement even if he continued to contribute to a new 401(k) over the next 25 years.

Now, will that good financial sense you displayed in rolling over your IRA carry over to investing it?

Ask the Help Desk your questions about investing

I think the answer is yes. After all, investing on your own doesn't mean you have to pick individual stocks and bonds. There are plenty of mutual funds and ETFs that can help even the greenest of green investors grow their nest egg like a pro.

The easiest way to go -- and the most effective for a newbie -- is to simply invest your $120,000 in a target-date retirement fund. Pick a fund with a date that roughly matches the year you'll retire -- say, a 2040 fund in your case -- and you'll get a ready-made mix of stocks and bonds that's not only right for your age but becomes more conservative as you approach retirement.

Another way to go is to invest in a balanced fund. Much like some pension funds, these funds usually invest 60% of assets in stocks and 40% in bonds, and adheres closely to this mix regardless of what's going on in the financial markets. The idea is that you get long-term growth from stocks and a bit of ballast during periods of market upheaval from the bonds.

Or you could create your own portfolio of stock and bond funds. If you choose this option, I'd recommend using low-cost index mutual funds or ETFs (exchange-traded funds) that track broad market indexes and thus effectively represent the entire stock or bond market with a single fund.

You can find all these options -- target funds, balanced funds, index funds and ETFs -- on our MONEY 70 list of recommended funds.

Of course, if you decide to fly solo, you will have to exercise some judgment. In the case of target-date funds, you'll want to be sure you understand how the fund works, especially how it shifts from stocks to bonds over time.

Best New Money Moves

With a balanced fund, you'll have to decide whether the usual 60-40 stocks-bonds mix is aggressive enough to get the growth you need when you're young, and conservative enough to protect your nest egg as you near and enter retirement.

And to put together a portfolio of stock and bond funds on your own -- even with index funds or ETFs -- requires that you decide on an asset mix, or blend of stocks and bonds, that makes sense for you (although you could use a target-date fund as a guide for that).

But if you find the prospect of going it alone too daunting -- or you prefer some initial guidance -- there are a variety of ways to get professional help.

Many mutual fund families and investment firms, including well-known companies like Fidelity, Schwab, T. Rowe Price and Vanguardoffer advisory services that will put together and manage a portfolio of funds or ETFs, usually for an annual fee (plus the expenses of the funds or ETFs themselves).

Another possibility is a managed account, essentially a portfolio of stocks, bonds, funds or ETFs that's assembled and overseen by a money manager or investment adviser. In the past, managed accounts often required minimum initial investments well into the hundreds of thousands of dollars, these days some firms offer them to investors with $50,000 or less to invest.

Usually, managed-account advisers charge a percentage of assets under management -- say, 1% to 2% -- plus the expenses of the underlying funds, although some charge a fixed flat fee for their services.

And there's the option of hiring a financial planner who will assess your needs and help you invest your IRA and other assets either for an ongoing annual fee or, in some cases, even on a hourly or project basis.

If you decide to get help, you'll certainly want to see in writing how much you'll owe in fees, by which I mean all fees -- advisory, fund and ETF charges and sales commissions, if any.

Beyond that, you also want to ask what else you're getting aside from a portfolio of investments. At the very least, you want an initial evaluation to settle on an appropriate portfolio and periodic updates on performance. (Check out what to ask an investment firm or adviser, from the Securities and Exchange Commission.)

A pro can also assure you end up with a portfolio of investments that makes sense given your goals and risk tolerance -- and boost the odds that you'll stick with that portfolio when the financial markets (and other investors) are going crazy.

Beyond that though, it's important to be realistic. The reason to go to a pro isn't for knock-your-socks-off market-beating returns. Over the long run, most investment managers don't outperform the market averages, and it's nearly impossible to predict in advance those that will.

Bottom line: With a little bit of thought and common sense, most people should be able to invest their retirement savings just as well on their own.

Do you know a Money Hero? MONEY magazine is celebrating people, both famous and unsung, who have done extraordinary work to improve others' financial well-being. Send an email to nominate your Money Hero. 

Millionaire surtax: The go-to tax

NEW YORK (CNNMoney) -- It looks like the millionaire surtax is going down again.

Democrats have pushed for weeks to impose a millionaire surtax to help pay for the cost of extending the payroll tax cut. Republicans have said it would be a job-killer.

On Wednesday night, with time running out before Congress adjourns for the year, it appeared that Democrats were ready to give up in the name of getting a deal done. A source told CNN that Senate Democrats would propose a new plan that did not include the tax. (Read: The latest on negotiations)

The demise of this version of the millionaire tax would not be a surprise. Lawmakers have already voted down a surtax of 5.6%, then 3.25% and most recently 1.9%.

But the idea of taxing the rich will come up again and again next year, since themes of income inequality and tax fairness will be sounded repeatedly on the campaign trail.

Payroll tax cut: What's at stake

Urban Institute resident fellow Howard Gleckman points out that an extra tax on millionaires may make for great politics but it would make for awful policy, although not for the reasons that many in the GOP suggest.

Republicans still cleave to the notion that to ever ask millionaires to pay more in taxes will bring the economy to a screeching halt because it would hurt small business job creation.

But there are problems with that reasoning:

--A very small percentage of tax filers with business income make more than $1 million.

--There is no way to tell how many new jobs those millionaires create.

--And business income can come from activities that don't result in a lot of hiring, such as owning rental property or investing in a partnership.

For Gleckman, a big problem with the millionaire surtax is that it feeds the myth that the super rich can pay for everything. They can't. There are not enough of them.

Payroll tax cut divide: How to pay for it

And by applying a surtax here and a surtax there, soon you're talking serious rate creep -- to levels that could be counterproductive. The higher rates become the more likely it is that the rich will look for ways to avoid paying them.

If the Bush tax cuts expire, the top rate goes to 39.6% and the value of certain deductions goes down. Add in a new Medicare tax for high-income households starting in 2013, and the top rate could approach 50% if Congress passed a 5.6% surtax, Gleckman noted.

Despite the flaws in the parties' strategies -- Democrats always reach first to tax the rich and Republicans always rush to protect them even at the expense of everyone else -- each contains a bit of truth the other side will have to accept sooner or later.

Both the rich and the middle class eventually will have to contribute to efforts to spur the economy and stabilize the federal budget.

"Democrats today can't solve our nation's many budgetary woes primarily by taxing the rich, and Republicans risk alienating the middle class when they try to spare the rich from sharing the additional burdens most Americans soon must bear," former Treasury official Eugene Steuerle wrote in his public policy column "The Government We Deserve."

The rich will have to pay more in taxes, he notes, because even if spending is cut across the board, they won't feel the pinch since they don't rely on government spending to get by.

And the middle class will eventually need to accept some spending cuts and tax increases, Steuerle said, "not because the rich can't pay more, but because most income in the economy resides with that 80 percent of the population that is neither poor nor rich." 

2 Signs That Facebook Is Stronger Than You Think

The following video is part of our "Talking Stocks" series, in which Motley Fool analysts Lyons George and Isaac Pino discuss trends across the investing universe.

Weeks out from its hotly contested IPO, Facebook is still trading well below $30 a share -- and with concerns over its advertising model still dominating the public discourse, that price might not pop anytime soon. In today's edition, Lyons and Isaac go against the grain and discuss two ways that the company investors love to hate is showing serious signs of life. In rebuttal to a Reuters report claiming that 80% of users are impervious to Facebook advertising, the social giant's management team has come out with a comScore report suggesting that its ads produce up to 300% in return on investment for its clients. Toss in an aggressive new real-time bidding exchange borrowed straight out of the Google playbook, and suddenly that path to profitability doesn't seem so far-fetched for Facebook -- or its investors.

Big tech names gather a lot of investor attention, but the truth is that they're playing second fiddle to an even larger revolution in technology. To better prepare investors for this new revolution, The Motley Fool has just released a free report on mobile named "The Next Trillion-Dollar Revolution" that details a hidden component play inside mobile phones that also is a leader in the exploding Chinese market. Inside the report, we not only describe why the mobile revolution will dwarf any other technology revolution seen before it, but we also name the company at the forefront of the trend. Hundreds of thousands have requested access to previous reports, and you can access this new report today by clicking here -- it's free.

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Subpoena For Fed Chairman Ben Bernanke

Daily Market Commentary for March 13, 2012

The Federal Reserve is fighting a subpoena for Fed chairman Ben Bernanke to testify in a civil lawsuit challenging Bank of America's takeover of Merrill Lynch & Co in 2008 (read more at Millennium-Traders.Com)
http://www.millennium-traders.com/news/newscommentary.aspx

Commerce Department on Tuesday reported that retail sales climbed the fastest in five months in February, as rising gasoline prices weren�t enough to choke off U.S. consumers� demand for cars, clothing and other goods. The report said sales rose a seasonally adjusted 1.1% to $407.8 billion last month, with January�s retail sales revised higher to show a 0.6% advance instead of the 0.4% initially reported. December sales were upwardly revised to show a 0.3% gain instead of a previously reported flat performance and excluding autos, sales for February climbed 0.9%. February�s sales climbed a strong but less impressive 0.6%, excluding autos as well as sales at gasoline stations. Monthly gasoline sales jumped 3.3%, the best advance since March, with average gas prices 20 cents a gallon higher at the pump than in January, gasoline stations had a banner month. The Energy Information Administration is expected to knock off $629 from the average natural-gas heating bill this winter, being a reason why consumers may have continued to spend despite the increased pressure at the pump was the unusually warm weather. For the second consecutive month, building materials, garden equipment and supplies dealers saw a 1.4% gain. Sales at clothing and clothing accessory stores climbed 1.8% to a 15-month high as Americans bought spring clothes early. Sales at dealers of motor vehicles and parts bounced back from a January decline to advance 1.6%. February sales data showed furniture and home-furnishing stores with a 1.2% drop, the worst month since April 2011, while department stores� sales rose 1.5%, the best monthly gain since November 2010. Compared to February 2010, retail sales overall rose 6.5% and excluding autos and gas, retail sales were 5.8% stronger. Retail sales aren�t adjusted for price, so with inflation running at around 3%, volumes are up about 3.5% compared to the same month of the prior year.

In January, business inventories climbed as car dealers correctly anticipated a strong pickup in demand, as reported by the Commerce Department on Tuesday. Inventories rose a seasonally adjusted 0.7% to $1.57 trillion, the largest increase since October. December�s inventories were revised higher to show a 0.6% increase from the 0.4% previously reported. The ratio of inventories to sales at the end of January remained at 1.27. The growth in January�s inventories was driven by a 2.6% surge in motor vehicle and parts stockpiles, which helped set the stage for the 1.6% gain in sales of cars and parts for February. Retail inventories grew 1.1%, but growth was 0.4% excluding autos. Rising inventories are usually viewed as a good sign for the economy, as they suggest companies are stockpiling goods in anticipation of selling them at a future date.

U.S. Trade Representative Ron Kirk announced Tuesday that the U.S. has requested talks with China at the World Trade Organization about China's export restrictions on certain rare-earth minerals. The talks are the first step in a WTO dispute settlement process and if the matter is not resolved in 60 days, the U.S. can ask the WTO to set up a dispute settlement panel. Additionally, the European Union and Japan asked for talks with China on the rare minerals, tungsten and molybdenum. "China continues to make its export restrains more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these minerals throughout the global marketplace," Kirk said in a statement. China lost a similar WTO case on its export limits on magnesium and zinc, in January. The Obama administration has recently taken a tougher stance with China on economic issues.

The Labor Department on Tuesday reported job openings at U.S. workplaces declined to 3.46 million in January from 3.54 million in December. Job openings rose 21% compared with the prior year with private openings having increased 23% to 3.11 million and government openings rose to 352,000 from 325,000. When the recession began in December 2007, there were nearly 4.3 million jobs open. In January, with nearly 12.76 million unemployed people, there were nearly 3.7 potential job seekers for each opening, roughly the same as in December. In January of 2011, there were about 13.92 million unemployed people - about 4.9 potential seekers per opening. The number of separations, such as quits and layoffs, fell slightly in January to 3.94 million from 4.02 million in December. Total number of hires decreased to 4.16 million from 4.19 million.

The following is the text of the announcement made by the Federal Open Market Committee Tuesday: �Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.� The following is the text of the announcement made by the Federal Open Market Committee Tuesday: �Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.�


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European Stocks Firm

European stock markets rose Monday, after a successful sale of French Treasury bills reassured investors in the wake of the country's credit downgrades late Friday.

The session was investors' first opportunity to react to Standard & Poor's cut to the credit ratings of nine euro-zone nations, including France, Italy and Spain, although speculation of the moves had swirled late Friday.

U.S. markets were closed, subduing trade.

The benchmark Stoxx Europe 600 index rose 0.8% to finish at 251.12, its first gain in four sessions and its highest close since Aug. 3. Among national benchmarks, France's CAC-40 index gained 0.9% to 3225.00 and Germany's DAX index added 1.3% to 6220.01. The U.K.'s FTSE 100 index rose 0.4% at 5657.44.

The S&P action, which affected nine euro-zone nations, including France, Austria, Italy and Spain, had been widely expected since early December.

"It is now being seen as a positive development, as euro-zone governments and the European Central Bank are now likely to put more efforts in resolving the European financial crisis and therefore increasing the likelihood of success [in future measures]," said Markus Huber, head of German sales trading at ETX Capital.

After European markets closed, S&P said it was downgrading the European Financial Stability Facility to double-A-plus, from triple-A, noting that its ong-term debt instruments are no longer fully supported by triple-A-rated guarantees. The EFSF on Tuesday will auction €1.5 billion ($1.90 billion) in six-month debt to help finance its Irish and Portuguese funding programs.

Portuguese borrowing costs rose sharply Monday as some investors were forced to sell their government bond holdings after the S&P downgrade to "junk" status. The yield on the two-year and five-year government bonds rose more than two percentage points to yield 13.49% and 16.80%, respectively, while the 10-year benchmark rose by just over 1.50 percentage points to yield 13.55%, according to Tradeweb.

France, which lost its triple-A status from S&P, raised €8.59 billion from its sale of Treasury bills across three maturities. The average accepted yield was slightly lower than at the last sale.

Among individual stocks, Carnival plunged 16% in London after its Costa Concordia cruise ship ran aground off the coast of Italy on Friday night, claiming at least six lives. The cruise company said the incident could cost between $85 million and $95 million in lost earnings.

Lundin Petroleum skidded 14% in Stockholm after the Swedish oil and gas firm said that oil resources at its Avaldsnes discovery off the coast of Norway may be lower than first estimated.

Richemont rallied 2.8% in Zurich after the luxury-goods group reported a 24% surge in sales for the October-December quarter after seeing solid growth across all regions.

In the currency markets, the euro dropped on the EFSF downgrade but then recovered some of the losses. It traded at $1.2661 in midafternoon North American trade, down from $1.2677 late Friday in New York, and at ¥97.19, from ¥97.56, after falling to a fresh 11-year low of 97.03 yen in Asian trade. The dollar was fetching ¥76.76 yen, up from ¥76.56.

Sterling was unchanged at $1.5317, and the dollar rose to 0.9547 Swiss francs, from 0.9522 francs.

Printed in The Wall Street Journal, page C7

Economic Forecasters, the Bulls: Fisher XXXXXX & More—a Slide Show

It's the Bears vs. the Bulls, but this playing field is economic prognostication.  AdvisorOne presents a slide show of some of the noted economic pessimists and optimists. Last week we let the Bears run wild, this week the Bulls get their turn.

 

KEN FISHER
CEO, Fisher Investments Inc.

 

The billionaire investor says the biggest U.S. companies will lead global stocks in 2011, even as returns diminish after a 21-month bull market.

Fisher, who is known for making bold, often contrarian predictions, told Bloomberg Television in January that “America will do better than the rest of the world. People will move away from small cap and emerging markets and more toward boring things that evidence quality.”

The Standard & Poor’s 500 Index has risen 93% from its March 2009 low and companies reported better-than-estimated earnings. The MSCI Emerging Markets Index advanced 134%, while the Russell 2000 Index of small companies rallied 130% during that period.

“I do not think the bull market is over, but I expect this year to be frustrating for almost everyone,” Fisher said. “This is a year where returns are likely to be disappointing to bulls and bears alike.”

Charge! Well, sort of.

 

 

 

Currency Diversification Through Foreign Real Estate

It is often the case that foreign property buyers make their purchases using the coin of the realm, and then rent it out for part of the year to acquire an income stream in local currency. This is a good bet, especially when the world is in such clear financial trouble and one can never guess where the next safe haven investment will be. Expats are fond of using rental income to fund their vacation time in their chosen foreign location in places like Brazil and Colombia. In Medellin, Colombia, part-time rentals net an average yield of 8% after expenses, which can help offset costs when the owners are in town. For more on this continue reading the following article from International Living.

When you buy international real estate you can generate income in another currency.

All your eggs aren’t in one basket. If the value of your dollar goes down, for example, you might be very happy to have an income stream in Brazilian reais…or Colombian pesos.

Diversification…particularly in turbulent times…is just plain common sense.

If you only want to use your home abroad for part of the year…you could use your rental income from the rest of the year to fund your lifestyle when you visit.

The city of Medellin, Colombia is a place where you could do this.

Medellin is an extremely pleasant place to spend time, especially the leafy high-end area of El Poblado. This is a great place to sip coffee or enjoy a nice meal in the shade next to one of the many streams that babble down the hillside.

Bright sunshine and temperatures in the low 70s are typical of the weather you can expect year-round. This area is convenient. Compact. I got around mostly by foot. At 5,000 feet, the altitude is comfortable and the sunshine fresh on your face.

This area of El Poblado is upper middle class. Even in this prime area, 190 million Colombian pesos ($102,000) could buy you a 1,000-square-foot condo with views to the valley and outside space.

Because the price is low…even with modest rents, yields could be strong.

Real estate here is priced in the Colombian peso. While some foreign owners quote rents in euros or dollars, the main rental market is priced in pesos. As with buying in any non- dollar denominated market, you are exposed to exchange rate fluctuations.

(In Brazil members of Real Estate Trend Alert have done well on the currency side of the equation on top of the asset appreciation we have enjoyed. But let me be clear on one thing: I’ll leave foreign exchange predictions to others. That’s not my beat.)

Yields in Medellin from short-term rentals are strong. If you buy a unit here and make it available for short-term rental, you could net 8%.

This means that your 190 million peso condo could generate more than 1.3 million pesos ($700) a month in income after you have paid your bills (excluding any income tax liability). Short-term rental demand is strong from visiting expats. Or, you could rent long-term to a visiting executive from the resources industry.

Foreign investment in Colombia doubled the first half of last year versus the previous year. The major resource players are flooding back in as Colombia becomes more stable. Wealthy Colombians are keeping more of their money in the country. I saw this first-hand last year at the beach resorts near Santa Marta, where Colombians from Medellin, Bogota…and Colombians living in the U.S….were snapping up pre-construction condos.

Eight years ago they were buying in Panama and Miami. Now they are keeping their pesos in places like Medellin.

Eaton Corporation: A Sound Investment For The Season

For the value investor with a longer-term horizon, the recent market correction has beaten down some stocks to attractive levels. One that has moved to the forefront of my screen is Eaton Corporation (ETN).

Eaton Corporation is a diversified power management company. It is engaged in the manufacturing of electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use, and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety.

Eaton Corporation (ETN) One-Year Price and Volume w/ 50 and 200-Day MAs

(Click to expand)

General Investment Thesis

ETN has strong fundamentals, an excellent management team, and a global footprint positioned for growth in key industries: automotive, trucks, and commercial aerospace. The technical charts are on the on the upswing. In addition, the company pays investors a good dividend.

Let's explore this company in some more detail.

The Fundamentals

I like to start by reviewing the balance sheet. This is a strength at Eaton. CEO Sandy Cutler and his staff have demonstrated good capital and debt management.

The debt-to-equity and debt-to-capital ratios are 46 and 30 percent, respectively. I consider these sound figures. A D2E ratio under 50 percent is a positive. Eaton adds gloss to these figures as long-term debt has been stable over the years.

A return-on-assets ratio of seven percent is in-line with peers in the Machinery industry.

The current ratio of 1.7 coupled with $2.59 a share in cash on hand indicates strong liquidity.

Moving on to the income statement, ETN has booked gross margins of 33 percent, well in-line with the competition. Revenue has increased by 4 percent a year over the past five years. This is laudable given the severe business contraction during the 2008-09 Great Recession.

Notably, Eaton management does not miss earning estimates. Going back to 2008, the company has beaten the Street eight times and met forecasts on the remainder. I like to see an experienced management team that makes the mark on guidance consistently.

Cash flows have been solid. However, 2011 has shown a dip in Operating Cash flows, largely due to increases in Working Capital. Reviewing filings and conference calls, I am comfortable with the situation. Eaton has embarked upon a number of initiatives that have driven up these figures with the intent of building long-term investment value. If one backs out changes in Working Capital from the cash flow figures, the bottom line numbers are acceptable. Free Cash Flow is adequate to cover a generous dividend. The current yield is a respectable 3.23 percent. This is at least 120 basis points better than a 10-year U. S. Treasury bond.

Other valuation measures I like to review include Equity / Assets, ROCE (Return on Capital Employed) and EBIT (Earnings Before Interest and Taxes) / EV (Enterprise Value). Using these metrics, Eaton passes the hurdles for a good value investment.

The E / A ratio is 0.45. Benjamin Graham, the father of value investing, offered that a deep value company should an E / A ratio of 0.50. Eaton is close to this marker.

ETN has a six-month ROCE of 6.4 percent. An annualized rate over 12 percent is a strong indication of a management team's ability to generate shareholder returns. For reference, the 2010 full-year ROCE calculation was 10 percent; this is the benchmark for top corporate entities.

As an alternate check, I like to use EBIT / EV. This six-month figure is 4.6 percent, nudging the annualized 10 percent marker to designate another screen for good value stocks.

The Technical Charts

While I tend to focus upon the fundamentals, I do like to review the charts for entry / exit points and to spot trends.

Eaton Corporation reached very oversold levels in early October. Since bouncing off support at $34 a share, the stock has rallied to over $42; nearly a 25 percent increase. This has far outpaced the bounce in the S&P500.

The one-year MACD has turned decidedly bullish. The indicator line crossed over the signal line in early October and has now crossed the “zero” line, another positive development. Meanwhile, the share price has broken well above the 50-day moving average on good volume.

Looking for a bit more perspective, the two-year weekly Slow Stochastic and RSI (Relative Strength Indicators) studies have moved out from oversold levels.

Additional Investment Story Lines

Eaton's board of directors has a history of raising the dividend. The five-year dividend growth rate is 11.7 percent. The ten-year growth rate is likewise nearly 12 percent. Over the years, dividends represent a sizable portion of the investors' total return. If maintained, a double-digit dividend growth rate means the investor would see a doubling of the dividend payout in less than seven years.

The most recent earnings conference call was particularly upbeat. There was no indication of management backing off the full-year EPS guidance. Indeed, it raised such guidance three times this year, despite the uncertainties in the global markets. Over the past three months, analysts following the company have raised 2011 EPS forecasts, and only lowered the 2012 forecast by a few cents per share.

The Bottom Line

Eaton Corporation appears to have rebounded from panic lows and now sits comfortably above its 50-day moving average. For those looking to take a position in the stock, I suggest prudence after a big short-term run up. I do not advocate chasing this stock, but wait for the shares to “come in.” No need to hurry for any stock that has moved so far, so fast, on little specific corporate news or earnings. Indeed, the market has been trecherous. I am not convinced it's blue skys ahead.

Third quarter earnings are due on October 24. I would not try to buy the stock without a pullback and game the earnings.

That said, I believe there is still value left in ETN shares. The stock traded over $52 a share just a few months ago before getting crushed along with many other cyclicals. I suggest this was much overdone in the case of Eaton.

Using a 2011 EPS estimate of $4.00 a share and a 14X P / E multiple, I arrive at a target price of $56. The average five-year P / E is nearly 20X.

The current consensus 2012 EPS is $4.50. Management will talk in detail about 2012 earnings and business expectations upon the earning conference call. I will be listening closely to their guidance.

Under the assumptions that EU banking system does not collapse, the U. S. does not relapse into a major recession, and China maintains reasonable economic growth, this equity offering has significant upside potential. Even if the global economy weakens (but does not tank), ETN should maintain, at minimum, flat 2012 versus 2011 EPS. Placing a conservative 12X multiple on the shares, the stock price target remains $48. Adding a generous dividend simply allows the value investor to get paid while waiting.

Disclosure: I am long ETN.

Stocks Are Going Lower, Deflation Assets Higher

No one can predict where the stock market is headed, but there are numerous sound methods to make probabilistic forecasts. We have two market models, the Bull Market Sustainability Index (BMSI) and the 80-20 Correction Index. Both models currently have readings that align with the early stages of past bear markets (2000 and 2007). Both models tell us the odds favor lower lows in stocks rather than higher highs. As we outline below, the asset class winners and losers on Monday, October 3, also favor bearish outcomes.

Given the technical and fundamental backdrop, we noted a defensive bias was prudent on August 3, when the S&P 500 closed at 1,260; the close on Monday was 1,099. Since we outlined ominous present day parallels to 2000/2008 on August 12, the similarities have become even more pronounced. The most concerning development in the last two weeks has been the market’s shift to a deflationary bias. In a September 11 article, we presented the table below and stated the markets may be entering a deflationary phase similar to what occurred in the period August-November 2008.

On October 3, when stocks were hit hard, the short list of winners included an S&P 500 short (SH), the U.S. dollar (UUP) and Treasuries (TLT), which aligns well with the deflationary period in 2008 (compare the table above to the table below). Just as they were hit hard in 2008, consumer staples (XLP), utilities (XLP) and emerging markets (EEM) took big hits on October 3.

The important takeaway from the table above is the conviction of buyers and sellers on October 3. Both S&P 500 shorts and the dollar gained on roughly 2.5 times their average daily trading volume, which shows a strong desire to own these assets. The strong desire to get out of consumer staples, utilities and emerging markets was evident in their way-above-average trading volume on October 3. Gold (GLD) and silver (SLV) both lost money during the deflationary period in 2008 (see “If Dollar Continues to Rally” table above). While gold and silver posted impressive gains on October 3, their trading volume was well below average, which means buyers lacked strong conviction to own precious metals. The moral of the story is Monday’s trading session had a distinct deflationary bias, which is bearish for stocks and commodities.

On August 22 we penned Dip Buyers Beware: Odds Favor Lower Lows In Stocks, based on a probabilistic forecast. The article postulated the early August S&P 500 intraday low of 1,101 and the closing low of 1,118 would both be exceeded in a bearish manner. Monday we closed below both levels. The concerns we had on August 22 still apply to the market, which means the odds continue to favor lower lows in stocks. During bear markets we should expect strong countertrend rallies, but the longer-term bias remains to the downside. As outlined on September 22, the 22 reasons the S&P 500 is headed below 1,050 remain valid. Consequently, we will continue to hold shorts (SH), the dollar (UUP) and Treasuries (TLT) until the odds of higher highs in stocks become more favorable.

If you do not have a detailed plan in place to protect your investment portfolio, now is the time to take action; not in two days, not in two weeks, not in two months – now. If the markets defy the odds and find their footing, you can throw away your defensive contingency plans. If the markets follow the path of least resistance, which is down, those plans may help you sleep in the months ahead. It cannot hurt to do some “what if the S&P 500 drops below 1,000” planning.

Disclosure: I am long SH, TLT, UUP.

Show Me the Money, GameStop

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That�s what we do with this series. Today, we�re checking in on GameStop (NYSE: GME  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully-reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, GameStop generated $703.2 million cash while it booked net income of $403.0 million. That means it turned 7.3% of its revenue into FCF. That sounds OK.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at GameStop look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully-reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 10.7% of operating cash flow coming from questionable sources, GameStop investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 6.8% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 20.7% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

• Add GameStop to My Watchlist.

Darden: Olive Garden Finally Contributes More Than Breadsticks

For well over a year, Darden Restaurants (DRI) has struggled to jumpstart falling sales at its Olive Garden restaurants, which account for almost half of the company’s revenue. In the first quarter, the company finally being seeing some results.

Darden posted 86 cents of EPS, 2 cents ahead of expectations.

Darden has worked to convince consumers that Olive Garden is affordable, offering more deals and changing marketing tactics. Same-restaurant-sales rose 0.3% in the quarter, the first rise after five quarters of declines. Lower food and beverage costs also helped spur profits.

But Darden certainly isn’t out of the woods. Olive Garden’s same-restaurant-sales were flat in August (Hurricane Isaac stripped 0.3% from results, the company said), and traffic to the restaurant fell in both June and August.

In addition, Red Lobster continues to lag, posting same-restaurant-sales decline of 2.6% in the quarter. The company blamed the drop on a difficult comparison with last year’s strong numbers.

“Red Lobster’s sales held up well given the exceptional same-restaurant sales results in last year’s first quarter and its margins expanded, Olive Garden had meaningful sales and margin improvement and LongHorn Steakhouse and the Specialty Restaurant Group continued to have good sales momentum,” said� Chairman and CEO Clarence Otis in a statement.� “We also benefited from our diverse food basket, with a decline in seafood costs on a year over year basis moderating the significant spike in the cost of beef.”

But investors were clearly heartened by the positive changes at Olive Garden. Shares are up 4.5% in morning trading.

Should You Invest in Groupon, LinkedIn and Other Hot Social Media Stocks?

The social media freshmen are entering their sophomore year. LinkedIn (Nasdaq: LNKD), Groupon (Nasdaq: GRPN) and Zynga (Nasdaq:ZNGA) have shaken off the post-IPO jitters, so now investors have the clearest picture yet of how large these companies can grow in the coming quarters and years. [block:block=16]I've written before about the dangers of investing in IPOs right out of the gate, especially for these social-media darlings. But now that the proverbial smoke has cleared, can we can get a clear view of the path ahead for these companies, and are shares even worth your investment? As a quick recap, LinkedIn, which operates a social media website for professionals, has been surging after fourth-quarter results were released. Meanwhile, daily-deal website Groupon and Zynga, which makes popular social media games for Facebook, pulled back after their numbers came out. Still, none of these stocks are bargains in terms of projected near-term results. Each stock trades for at least 50 times projected 2012 earnings and at least five times projected 2012 sales. Take a look at the table below. I've included other recent IPOs for comparison's sake.   At this point, investors need to ask themselves three key questions: •  Is each company building a sustainable platform to avoid becoming just another flash in the pan? •  What kind of five-year growth are they capable of achieving? •  And what will profits look like when they reach maturity? A real business model? With a market value of just under $11 billion, Groupon is the most richly-valued business model here. And perhaps for reasons associated with a possible need to raise capital in coming quarters, Wall Street's analysts are generally effusive about the company's long-term prospects.   Is this business model here to stay? Not only are Groupon's dozens of rivals working to steal market share in many local markets, but the merchants that use the service are expected to absorb a loss on these deals (or at best a miniscule profit), and they can hardly be considered to be willing long-term participants. The whole point of a Groupon promotion is to be a teaser, bringing in new customers who may not have visited the store before. It is not a way for companies to figure out how to lose money on every sale. To me, this still seems like a circa-2011/2012 business model that people will be reminiscing about by mid-decade. Yet the current large market value seems to ignore this possibility. It's also worth noting that Groupon, which used very aggressive accounting prior to the IPO, appears to continue to pump up its numbers. For example, the company derives a cash flow figure that capitalizes many costs that should be immediately expensed. That $0.83 a share 2013 profit forecast is a fiction only accountants could love. At least LinkedIn has the feel of a real business tool and not just a social fad. The site now helps people represent themselves in a way that personal blogs once did, and is seen as an essential tool for anyone who believes that social networking is a path to career advancement. And due to the automated nature of its business model, LinkedIn is positioned to generate solid profit margins as sales rise, unlike Groupon, which must pay an army of staffers to oversee all of the deals that are offered. Zynga may be the most dubious long-term business model. Not only does the company need to keep coming up with winning games (as existing popular games can have a fairly short shelf life), but the company is vulnerable to consumers deciding they want to spend their time on other leisure pursuits than Facebook games. It's not so troubling that Zynga trades for 37 times projected profits. It's that the company is worth $8.5 billion. In contrast, Hasbro (NYSE: HAS), which is a member of my $100,000 Real-Money Portfolio, has been in business since 1923 and had $4.3 billion in sales in 2011, yet is valued at about half as much as Zynga. In other words, Zynga is worth twice as much as Hasbro. On an equivalent price/2012 sales basis, Zynga is worth six times more than Hasbro. And unlike Hasbro, Zynga now looks like a great growth story, but I've got a hunch that Hasbro will still be an important toy and game maker long after Zynga has flamed out. What kind of growth? The second question is hardest for investors to gauge. In the early phase of the life cycle, these  companies can double sales annually. By the time they are prepping for an IPO, sales are rising 50% annually. A year or two after the IPO, 30% growth looks to be sustainable. But it's completely unclear whether these companies are only in the early innings of growth or actually a lot closer to the end. Groupon is expected to have $3 billion in sales by 2013. Does the company's market really grow beyond that? Or does anyone who wants to use Groupon already doing so by then? Is Zynga at risk of not growing at all if it fails to deliver hot new gaming titles? Investors should be asking these questions, although you rarely see them in analysts' reports. To be fair, Wall Street analysts have no idea either, so they simply pencil in strong growth in perpetuity. What kind of profits? I'm a fan of LinkedIn's business model, but am reflexively cautious about any recent IPO that is already worth $9 billion. Let's say you're bullish on the stock and think it will rise from the current $90 to $145 in the next five years (which is about 10% annual compound growth). And let's assume LinkedIn meets the current expectations for 2013, boosts sales by 20% in each of the next three years, and EPS rises by 25%. Here's what LinkedIn would be doing by 2016... At $145 a share, the company would be valued at around $14.3 billion, or more than six times projected 2016 sales. Said another way, the stock would be valued at almost 70 times projected 2016 profits. Even if the stock price went nowhere and sat at $90, then shares would still be worth more than 40 times 2016 profits. Risks to Consider: These are frothy stocks and they may be unwise to short if the market "melts up" from here. Tips>> These are exciting companies that have quickly built a sizeable following, but it's crucial not to confuse their popularity among consumers with their real-world valuations. These companies should grow at a fast pace in 2012, but their stocks are quite vulnerable to the eventual, inevitable cool-down in growth that all businesses see as they reach maturity.

Monday Options Recap

Sentiment

Stocks are higher on Columbus Day. The table was set for early gains on Wall Street after leaders from France and Germany reached agreement about bank bailout plans over the weekend. Germany’s DAX led an advance across the Eurozone with a 3 percent rally and the euro rallied more than 2 percent against the buck. Hopes for the global economy helped send crude oil prices up $2.39 to $85.37 per barrel and gold gained $39.7 to $1,675.50 an ounce. Meanwhile, with fifteen minutes left to trade, the Dow Jones Industrial Average has added 271 points and the tech-heavy NASDAQ gained 68.5. CBOE Volatility Index (.VIX) lost 2.04 to 34.16. Trading in the options market is light, with 6.8 million calls and 6.8 million puts traded so far.

Bullish Flow

Alcoa (AA) unofficially kicks off the third quarter earnings reporting season tomorrow and there's not much in the recent options order flow that suggests players are bracing for a big move in the aluminum maker. 34,000 calls and 17,000 puts traded on the stock so far. Shares are up 26 cents to $9.96 and Weekly (10/14) $10 calls are the most actives. 5900 traded. October 10, 11 and 12 calls are seeing interest as well. The Weekly 10 and 9 are the most active put options in Alcoa today. The flow looks like the typical pre-earnings action, with a modest amount of optimism being reflected in the heighted call activity and the 2 percent decline in implied vols (61). The stock has performed well in recent days and is up 17.9 percent from the 52-week lows set a week ago.

Celgene (CELG) adds $3.34 to $66.29 after RBC upgraded the stock to Outperform from Sector Perform. The firm cites product pipeline, earnings growth, and valuations for the upgrade. Shares are rallying and options volume in the biotech is 6,260 calls/180 puts. Most of the action has been in smaller sizes. The top trade is a 287-lot of Oct 65 calls on the 94-cent bid. Oct 67.5 calls, which are 1.8 percent OTM and expire in 11 days, are the most actives. 2,657 traded (51 percent Ask). Nov 67.5, Oct 70, and Nov 65 calls are seeing interest as well. Implied volatility is up 3 percent, but at relatively low levels of only 33 percent. The stock has performed well lately, up 27.9 percent over the past two months and touching new 52-week highs near $67 today.

Bearish Flow

Sprint (S) is one of only five losing stocks in the SP500 and option volume is triple normal pace with nearly 100K contracts trading and calls leading puts nearly 4:1. May 3.5 calls lead the most actives, with 10K trading and an average price of 27.8cents. ISE data confirms this flow is opening customer seller intiated and with shares near 2.21 and an S&P ratings watch, it may reflect a view that Sprint will have a tough time regaining $6 highs seen this past summer.

Implied volatility Mover

Harbin Electric (HRBN) is down and implied volatility in its options is up, as some investors might be skeptical about the company’s ability to complete the $24 per share in cash LBO. The SEC approved the buyout in late-September. Shares are down $1.17 to $20 and today’s options volume in the Chinese electrical equipment company is 11K calls/24K puts. The top trade is a Nov 10 – 18 put spread, apparently bought at $2.10, 3000X. Dec 24 calls, Oct 10 puts, and Weekly 13 puts are the next most actives, Implied volatility is up 31 percent and elevated at 140 — certainly not consistent with a “done deal” relative to the LBO.

New Day, Old Bickering on Taxes Between Obama, GOP

By Jim Kuhnhenn

WASHINGTON -- New day, old bickering between President Barack Obama and congressional Republicans. Obama used his Saturday radio and Internet address to finger GOP lawmakers for a stalemate that could increase taxes on Americans next year. A leading Republican senator cast the president and his Democratic Party as obstructionists who want to place the tax burden on businesses during an economic slowdown. Obama pressed the Republican-controlled House to extend Bush-era tax cuts for households making $250,000 or less while letting lower rates on wealthier taxpayers expire and go up. The Democratic-controlled Senate narrowly passed such a measure this past week; the House is not expected to follow suit. "Instead of doing what's right for middle-class families and small-business owners, Republicans in Congress are holding these tax cuts hostage until we extend tax cuts for the wealthiest Americans," Obama said. Responding on behalf of the congressional GOP, Utah Sen. Orrin Hatch, the top Republican on the Senate Finance Committee, said Obama's plan would do more harm to the economy and criticized him with almost identical language. He called for extending current tax rates for all taxpayers and spending 2013 overhauling and simplifying the tax code. "Raising taxes as our economy continues to struggle is not a solution, and the majority of Americans and businesses understand that," Hatch said. "The president and his Washington allies need to stop holding America's economy hostage in order to raise taxes on those trying to lead our economic recovery." The competing views frame today's Washington political debate and the presidential contest. With the economy standing as the main issue on voters' minds, Obama, rival Mitt Romney and lawmakers of both parties are engaged in brinkmanship and political test votes ahead of the November election and the Dec. 31 deadline when the Bush-era tax rates expire.

Obama used his address to take a rare swipe at Romney, even though he didn't mention his challenger by name.

"Republicans in Congress and their nominee for president believe that the best way to create prosperity in America is to let it trickle down from the top," he said. "They believe that if our country spends trillions more on tax cuts for the wealthy, we'll somehow create jobs -- even if we have to pay for it by gutting things like education and training and by raising middle-class taxes. They're wrong." Saturday's dueling addresses come a day after the government reported that weak consumer spending held growth to an annual rate of just 1.5% in the second quarter. That was lower than the 2% rate of the first quarter and less than what's necessary to help drive down the unemployment rate, now stuck at 8.2%. The White House budget office on Friday also predicted that the economy for this year will grow at a modest 2.6% annual rate and that the jobless rate will average 8%. It forecasts 2.6% growth next year, down from the 3.0% it predicted in February. ___ Online: Obama address: www.whitehouse.gov GOP address: http://www.youtube.com/gopweeklyaddress >To order reprints of this article, click here: Reprints

Molex Passes This Key Test

There's no foolproof way to know the future for Molex (Nasdaq: MOLX  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Molex do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Molex sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company	LFQ Revenue	DSO
Molex	$936	78
Harris (NYSE: HRS  )	$1,460	54
TE Connectivity (NYSE: TEL  )	$3,911	63
Amphenol (NYSE: APH  )	$1,033	71

Source: S&P Capital IQ. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Molex miss its numbers in the next quarter or two?

I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Molex's year-over-year revenue grew 4.3%, and its AR dropped 0.9%. That looks OK. End-of-quarter DSO decreased 5% from the prior-year quarter. It was down 4.8% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

• Add Molex to My Watchlist.
• Add Harris to My Watchlist.
• Add TE Connectivity to My Watchlist.
• Add Amphenol to My Watchlist.

Germany’s Merkel Calls for Greek Debt Buy-Back, Swap

As pressure mounted to come up with a solution to the Greek debt crisis, German Chancellor Angela Merkel called for private investors to kick in. Strategies being discussed include several options, such as a repurchase of bonds or a swap in which they are exchanged for cuts in face value.

Reuters reported that Merkel said Sunday, "The more we can involve private creditors now on a voluntary basis, the less likely it is that we will have to take next steps." She did not specify what those next steps might entail. However, losses by private investors are beginning to look inevitable.

Wolfgang Franz, head of Germany's "wise men" economic advisers to the government, said that the very size of Greece's debt made it "inevitable and justified" that private bondholders absorb some losses. He was quoted saying over the weekend, "One possibility would be that the current EFSF euro rescue mechanism swaps—at a significant discount—Greek bonds into bonds it issues and guarantees."

European officials and private bondholders have been discussing for three weeks ways in which Greece might get a second bailout, but there has been no agreement. The commercial bank lobby said on Sunday, however, that talks were progressing. In a short statement, the Institute of International Finance said, "Progress has been made and the discussions are continuing," adding that the talks centered around "several options related to Greece's financing needs and longer-term debt sustainability."

A summit meeting is planned for Thursday in Brussels, according to an announcement made by European Council President Herman Van Rompuy last week. Merkel has said she will not attend unless a rescue plan has been developed, despite the fact that she characterized the meeting as "urgently necessary." She was quoted saying, "I will only go there if there is a result."

Plenty of obstacles litter the road to a solution, not the least of which is the opposition of the European Central Bank (ECB) to any solution that involves a default rating for Greece; ratings agencies have said they would regard involvement of private investors, voluntary or not, as a default since the likelihood of their participation as truly voluntary is highly doubtful.

There is a ray of hope, however; Jean-Claude Trichet, president of the ECB, put forth the notion that there might be a way in which a default could be managed smoothly. If the ECB stopped accepting defaulted bonds as collateral, countries would have to come up with some other form of acceptable collateral. He was quoted saying, "The governments would then have to step in themselves to put things right ...The governments would have to take care the Eurosystem is presented with collateral that it could accept."

Why James Hardie Industries May Be About to Take Off

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized.

Is the current inventory situation at James Hardie Industries (NYSE: JHX  ) out of line? To figure that out, start by comparing the company's figures to those from peers and competitors:

Company	TTM Revenue Growth	TTM Inventory Growth
James Hardie Industries	5.6%	14.5%
CRH (NYSE: CRH  )	5.6%	(5.1%)
Vulcan Materials Company (NYSE: VMC  )	(1%)	0.5%
Cemex (NYSE: CX  )	0.9%	3.7%

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. TTM = trailing 12 months.

How is James Hardie Industries doing by this quick checkup? At first glance, not so great. Trailing-12-month revenue increased 5.6%, and inventory increased 14.5%. Over the sequential quarterly period, the trend looks healthy. Revenue grew 5.7%, and inventory dropped 1.5%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

What's going on with the inventory at James Hardie Industries? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, work-in-progress inventory was the fastest-growing segment, up 58%. On a sequential-quarter basis, each segment of inventory decreased. Although James Hardie Industries shows inventory growth that outpaces revenue growth, the company may also display positive inventory divergence, suggesting that management sees increased demand on the horizon.

Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.

I run these quick inventory checks every quarter. To stay on top of the inventory story at your favorite companies, just use the handy links below to add companies to your free watchlist, and we'll deliver our latest coverage right to your inbox.

• Add James Hardie Industries to My Watchlist.
• Add CRH to My Watchlist.
• Add Vulcan Materials Company to My Watchlist.
• Add Cemex to My Watchlist.

Best Trading Software – Discovering Trading Advancements

The investment into the forex trading system is one of the most promising opportunities that are found for a person who is looking to make investments in the stock market. Here, an individual can invest in one of the most highly advertised investment opportunities surrounding the purchase and trade of foreign currencies.

For the individual who is unaware of this trade, your goal is to purchase currencies in the expectation of other currencies increasing or decreasing in value so that you can find financial gain from this currencies value change. This is a market which is covered by several different media outlets which attracts several investors to buy taking into account the high volume and quality of relevant information available.

Though, one of the weaknesses that does exist with investing in the financial opportunity of the Forex Trading System is discovered with the demand on an individual’s time, when you invest in the system of foreign exchange you’re basically looking to regularly compare and evaluate the various economies of countries across the globe.

The 24 hour demand that is found with this market makes it hard for few people to take full advantage of this investment opportunity when they also have to incorporate work, family, sleep and many other distractions which take you away from Forex Trading System watching. So to overcome this weakness in your trading abilities, it becomes important to find resources to aid you in your investing goals.

One of the best opportunities which exist with the investment strategies of the Forex Trading System is found with the investment into the best Forex Software. Many people view trading software as an educational tool that provides no real value beyond furthering your education.

While its true that the best Forex Software does represent an incredible value in educating your investment efforts, it also offers you the one of a kind opportunity of investment automation. In the business environment one of the best business values has been found with online automation and with the best Forex Software, that opportunity has been made possible to the on-line investor.

Using your knowledge of the Forex Trading System, the education provided by the software and with the on-line tools available, an individual could generate a program which would purchase and sell foreign exchange currencies based on the rules you create to follow. With this one of a kind automation opportunity a person can be actively trading online in every available market irrespective of time or date. This opportunity generated by the very best Forex Software will eliminate the time weaknesses that exist with most traders and empower them to find new ways to boost their financial return even when they’re sleeping.

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A Perfect World? In Name Only

Is there a Chinese company whose accounting can be trusted? Increasingly the answer is leaning toward no, as yet another Chinese name bit the dust yesterday on as-of-now unconfirmed allegations of wrongdoing by its CEO, Michael Chi.

Perfect World (Nasdaq: PWRD  ) came under heavy scrutiny yesterday stemming from allegations that its CEO purchased a 20% stake in 178.com without first disclosing it to the Securities and Exchange Commission. If that wasn't bad enough, it's alleged that 178.com purchased ads from Perfect World at above-market rates without disclosing the link between the two companies. There are claims that the U.S. judiciary department has launched an investigation against Perfect World.

As of now, Perfect World has denied the allegations as false, and if the past handful of fraud allegations are any clue, we can likely expect a rebuttal letter from the company within days. Shares of online gaming rivals SINA (Nasdaq: SINA  ) and Sohu.com (Nasdaq: SOHU  ) also felt the brunt of the accounting allegations against Perfect World and traded down slightly while the overall market indexes ticked higher. Like Perfect World, SINA and Sohu compete online for advertisers' dollars in China.

The problem is that whether these allegations are true or false, it's yet another step in confirming that Chinese accounting either cannot be trusted or will not be trusted until it conforms to the same standards we have in the United States. Even that wouldn't prevent fraud completely, but many would agree it's a step in the right direction.

What is clear is that these allegations have already done damage to a company that already guided earnings lower in September. Like many other Chinese names, Perfect World appears cheap on paper, and that was the main reason I chose the company as a Mid Cap to Rule Them All in July. Since that selection, however, the stock has been on a precipitous decline despite reporting a 22% revenue increase over the year-ago period in its latest quarter.

Without anything tangible to trust other than unaudited financial results, which have been anything but trustworthy from Chinese companies of late, I'm increasingly turning back to the States for possible ways to play the gaming industry. If you want a forward earnings similar to Perfect World but want to shop stateside, Take-Two Interactive (Nasdaq: TTWO  ) could be worth a look. Trading at a forward P/E of just 6 and less than a year away from its next big release, Grand Theft Auto V, it could provide the value and trust you're looking for in the gaming sector.

For now, we simply watch and wait for Perfect World's response and pray that we have not witnessed yet another case of blatant fraud. My fingers are crossed -- your move, Perfect World.

If you're interested in a company that you won't cause you to sleep with one eye open, I invite you to download our latest special report, "The Next Trillion-Dollar Revolution," which highlights a company that could set the tone in technology over the next decade. Best of all, this report is completely free for a limited time, so don't miss out.

Why Should We Ignore Coal Consumption?

In recent weeks rail freight data has been looking more positive for intermodal freight, while carloads are stagnating. There seems to be a school of thought that because the amount of coal being shipped is well down in previous years, we should ignore coal and only examine rail coarload volumes ex-coal. I haven't read a well argued justification for this; arguments seem to be framed solely at producing a set of data that conforms to a certain narrative. In any case there are many other categories of rail freight that are not looking good at the moment; so why stop at coal if you want to massage data?

If coal freight movements are down, doesn't it follow that coal consumption and power generation are probably down? Isn't a decline in electricity usage indicative of a struggling economy? Unfortunately there is a 3-4 month lag in obtaining information about energy usage, but as on November 2009 the trend was consistent with many other metrics.



And coal remains a significant contributor to our energy consumption:



So why should we ignore coal?

Disclosure: No positions

Safe Plays in ‘Unsafe’ Oil and Gas

The Jed Clampett days of finding oil — accidentally in the case of the old Beverly Hillbillies clan leader — are a distant past. No longer can an oil company find elephant fields in someone�s backyard and easily pull the crude out.

To meet rising global energy demand and dwindling conventional supplies, energy companies have been scrambling to find new sources of production. With oil�s sustained high prices, the industry has turned to a variety of unconventional sources to met future demand. From offshore fields in Ghana and Mozambique to oil sands deposits in Canada, these finds have become more profitable. And while political, environmental and financial risks to developing these supplies abound, investors who bet on them — carefully — could be handsomely rewarded.

For example offshore Greenland, central Sub-Saharan�Africa and Eastern Siberia�aren’t exactly traditional places to search for crude oil and natural gas, but they could be the best ways to satiate growing energy demand. Analysis done by oil service firm Schlumberger (NYSE:SLB) estimates that an additional 36 million barrels a day of oil will be required over the next two decades. Most of this will have to come from these unconventional assets.

The potential is huge for firms willing to take on the risks inherent in these regions. Geologists at the U.S. Geological Survey estimate that the Arctic Circle contains nearly 25% of the world’s undiscovered energy reserves, or about 90 billion barrels of oil and 1.7 trillion cubic feet of natural gas. Africa’s proven oil reserves have steadily increased by 116%, since 1989, and the region now boasts 13% of the world’s oil reserves. Greenland is home to more than 31 billion barrels of oil-equivalent (BOE), and Southeast Asia is one of the most active areas of offshore exploration in the world, rivaling even the Gulf of Mexico.

Potential Riches With Plenty of Risks

However, tapping these unconventional finds does come with some unconventional risks. Business environments in several of these regions aren�t exactly ideal. After spending billions on equipment and infrastructure, BP (NYSE:BP) saw its investment crumble when Russian natural gas giant Rosneft pulled the plug on their deal.

In Africa, members of the Movement for the Emancipation of the Niger Delta, have continually attacked and kidnapped oil rig crews from explorations and production firms such as Chevron (NYSE:CVX) and London based Afren Oil. Nationalization fears and environmental concerns are highly prevalent as well.

For the average retail investor, the long-term opportunities in tapping these unconventional assets offer a great play. But with the potential risks, betting on one horse may not be a good idea. Van Eck is planning an unconventional oil and gas ETF, which would bet on firms that are associated with the exploration, development, extraction, production and/or refining of these assets. Unfortunately, the filing doesn’t contain any real info on when it�ll begin trading.

Investors can achieve some level of exposure with Guggenheim�s Canadian Energy Income ETF (NYSEARCA:ENY). The fund tracks 30 different Canadian oil sands and heavy oil companies. Investors gain access to some of Canada�s unconventional energy assets, which are also exploding in popularity. Top holdings include Suncor (NYSE:SU) and Enerplus (NYSE:ERF), and the fund yields a healthy 3.54%.

A Familiar Strategy

Perhaps the best way for investors to add some global unconventional oil plays to their portfolio lies in a method they should already be comfortable with: investing in the oil supermajors. For example, Norwegian giant Statoil (NYSE:STO) not only has assets in the frozen North Sea but has added new fields in the deep waters off Surinam and has expanded into Canadian shale.

Exxon (NYSE:XOM) recently negotiated acreage in Kurdistan and Liberia, and it has signed an initial�$3.2 billion agreement to explore for oil in the Russian portion of the Arctic Ocean. By picking the majors, investors can gain valuable diversification benefits and minimize the political risks. The iShares S&P Global Energy (NYSEARCA:IXC) is the easiest way to add a basket of the major integrated energy firms to a portfolio.

With energy demand and prices still rising, the future of energy production is clearly in the many unconventional and hard-to-reach sources of supply. For investors, betting on the supermajors, either individually or through the iShares S&P Global Energy, could be the best way to spread out the risks while drilling for profits.

Wells Fargo to pay $148M fine for Wachovia misdeeds

NEW YORK (CNNMoney) -- Wells Fargo agreed Thursday to pay $148 million to various federal authorities to settle charges that Wachovia Securities, which it purchased in 2008, engaged in bid rigging and other illegal practices in the municipal bond market.

Under the agreement, Wells Fargo is paying $46 million to the Securities and Exchange Commission. Separate settlements with the Justice Department, office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general total $102 million.

Authorities said Wachovia fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico over an eight year period from 1997 through 2005. They say Wachovia won some bids through a practice known as "last looks" in which it obtained information from the bidding agents about competing bids.

"Wachovia won bids by playing an elaborate game of 'you scratch my back and I'll scratch yours,' rather than engaging in legitimate competition to win municipalities' business." said Robert Khuzami, director of the SEC's division of enforcement, in a statement Thursday.

Wells Fargo's attorneys signed the settlement agreement neither admitting nor denying wrongdoing in the case.

"Wells Fargo is pleased to have fully resolved this investigation of Wachovia Bank," said the bank's statement. The bank said the employees involved in the illegal activity are no longer with the company.

Wells Fargo had previously settled related civil litigation for $37 million.

The SEC has now reached settlements totaling $673 million from its ongoing probe of corruption in the municipal bond industry. Among the previous settlements were $228 million from JPMorgan Chase (JPM, Fortune 500), $160 million from UBS (UBS) and $137 million from Bank of America (BAC, Fortune 500).

Wells Fargo (WFC, Fortune 500) purchased Wachovia in the fall of 2008 when it was on the brink of failure, winning a bidding war with Citigroup (C, Fortune 500), which the FDIC had originally tapped to buy Wachovia and keep it from joining the list of failed major financial firms that fall.