AAR Signs MoA With Sikorsky

Yesterday, AAR Corp. (AIR: 25.44 -0.41 -1.59%) signed a Memorandum of Agreement (MoA) with Sikorsky Aircraft Corporation under which the two companies will work together to identify opportunities for expanding their business relationship. In addition to becoming an exclusive supplier of composite interiors for the Sikorsky S-92® helicopter program, AAR will provide precision machining services for S-92 helicopter flooring and a structural component of the H-60 helicopter airframe. The combined value of initial orders is approximately $18.8 million, with potential contract value exceeding $60 million.
 
The MoA represents a formal agreement between AAR and Sikorsky to explore opportunities to align AAR’s diverse engineering, manufacturing, maintenance and parts supply capabilities with Sikorsky’s production and aftermarket support requirements. The fabrication of S-92 Offshore/Airline helicopter composite interiors will be performed by AAR Composites. Precision machining services will be provided by AAR Summa Technologies. Together, these AAR businesses offer a complete range of design engineering and manufacturing services for both advanced composite and metallic aerostructures. This is an important contract for AAR, in terms of expanding its presence in the helicopter market. 

In addition to winning defense contracts AAR has been successful in securing new business with several airline customers. The company won a very significant and meaningful contract to provide supply chain logistics support as a member of the Northrup Grumman team for the United States Air Force KC10 fleet. This is the largest program in the company’s history, which will begin booking revenue for AAR in February 2010, and will be fully operational by the fourth quarter of fiscal 2010. 

We have a Neutral recommendation on the stock.

Snapdragon Enters PC World

Yesterday Qualcomm Inc. (QCOM: 49.47 +0.49 +1.00%) announced that it has entered into an agreement with Hewlett Packard Co. (HPQ: 52.59 +0.39 +0.75%), to design a smartbook based on Qualcomm’s Snapdragon platform. This smartbook will have Google Inc’s (GOOG: 602.02 +7.92 +1.33%) Android operating system. The device will use the Snapdragon QSD8250 chipset with an integrated Scorpion central processing unit which will deliver speed up to 1GHz. The device will also support high-speed 3G wireless connectivity together with WiFi connection. 

Smartbook is a personal digital assistant (PDA) that functions like a mobile phone but resembles a small notebook with a full keyboard. Qualcomm is developing smartbook chipsets based on its state-of-the-art Snapdragon platform technology. A path-breaking initiative of the company is the convergence of mobile computing with the next-generation Snapdragon platform. These chipsets have been designed for PDAs. Using Snapdragon chipsets, the consumers will no longer be required to carry battery chargers along with their laptops. These powerful chipsets will run the computer for 24 hours with just one battery charge while receiving data throughout the day. 

Qualcomm is the largest developer of digital mobile chipsets based on the CDMA wireless technology. This diversification into the computer market will be a logical step forward for the company. The chipset market for computers is primarily dominated by Intel Inc. (INTC: 20.83 +0.23 +1.12%), and Advanced Micro Devices Inc. (AMD: 9.43 -0.04 -0.42%). An agreement with the world’s largest PC maker Hewlett Packard will definitely boost Qualcomm’s effort in this market. 

As of now, over 15 mobile device manufacturers are developing more than 30 Snapdragon-based products. Acer Inc, Samsung Electronics Co. Ltd., and LG Electronics Inc are the notable computer makers who have signed up to use Snapdragon chipsets. Toshiba has already introduced its TG01 smart-phone using the Snapdragon chipset. Several leading software developers have started writing applications for mobile operating system, multimedia player, social networking, and productivity development tools based on the Snapdragon platform.

Motorola Unveils New Smartphone

Motorola Inc. (MOT: 7.76 -0.37 -4.55%) yesterday introduced the latest addition to its smartphone portfolio, the BACKFLIP. This device has its keypad at the back, which can fold out rather than slide out. BACKFLIP will combine the social networking and personalization of MOTOBLUR software with the multitasking performance. Motorola will start shipment of this mobile phone in the current quarter. 

After Cliq and Droid, BACKFLIP is the third 3G smartphone of Motorola. All the three phones are using Google Inc’s (GOOG: 602.02 +7.92 +1.33%) Android software as the operating system. Cliq was introduced in the U.S. by T-Mobile, a division of Deutsch Telekom AG (DT: 14.57 +0.13 +0.90%), whereas Verizon Wireless (VZ: 31.75 +0.02 +0.06%) was the carrier partner for Droid. Industry sources predicted that both Cliq and Droid received favorable market traction. This prompted Motorola to opt for more advanced smartphone like BACKFLIP. Industry rumors also indicated that AT&T (T: 27.10 -0.20 -0.73%) may become the carrier partner for BACKFLIP, although nothing has been confirmed.
 
Motorola is working closely with Adobe Inc. (ADBE: 36.69 -0.20 -0.54%) to bring Adobe Flash Player 10.1 to Motorola’s smartphones as part of the Open Screen Project. Adobe Flash Player on Motorola smartphones will deliver a unique Web browsing experience to users with its rich applications, games and video.
 
Motorola started showing the initial signs of revival with an unexpected profit in its third quarter 2009. We believe effective cost control measures, massive demand for wireless broadband services, and recently introduced high-end 3G smart-phones will support the stock price in the near-term. We reaffirm our Neutral recommendation.

Costco Comp Store Sales Up 9%

Costco Wholesale Corporation (COST: 59.28 -0.43 -0.72%), one of the leading U.S. warehouse club operators, reported December sales of $8.26 billion, up 11% from $7.41 billion in the year-ago period.

Total comparable store sales for the 5-week period ended January 3 were up 9%. Costco posted a 5% comparable store growth in the U.S. and 25% in the International markets. This included a positive impact of rising gasoline prices and a weaker U.S. dollar.

Excluding the above effects, Costco’s comparable store sales in the reported period were up 4%, with 2% growth in the U.S. and 10% growth in the International markets.

For the 18-week period ended January 3, Costco reported net sales of $26.83 billion, reflecting a year-over-year growth of 8%. Comparable store sales were up 5%, with the company posting 2% growth in the U.S. and 17% growth in its international operations.

Excluding the impact of foreign currency translation and gasoline prices, the 18-week period comparable store sales were up 3%. U.S. markets saw growth of 2%, while international market growth was 8%.

Costco currently operates 566 warehouses, including 413 in the United States and Puerto Rico, 77 in Canada, 32 in Mexico, 21 in the United Kingdom, 9 in Japan, 7 in Korea, 6 in Taiwan and 1 in Australia. Over the past few years, the company has been focusing on increasing its presence in the existing markets through continuous investments in new club openings.

Costco faces stiff competition from BJ’s Wholesale Club Inc. (BJ: 33.24 -0.53 -1.57%) and Sam’s Club, a division of Wal-Mart Stores Inc. (WMT: 53.33 -0.27 -0.50%).

BBBY Reports Stronger Q3

Bed Bath & Beyond Inc. (BBBY: 42.03 +0.09 +0.21%) recently reported better-than-expected third quarter 2009 results with double-digit growth in both the top-line and the bottom-line.

The company’s quarterly earnings of 58 cents a share was below the Zacks Consensus Estimate of 62 cents, but was up 71% year-over-year from 34 cents reported in the prior-year quarter.

Net sales for the quarter increased 10.8% to $1.97 billion compared to the prior-year quarter. Comparable same-store sales increased 7.3% from the prior-year quarter.

During the quarter, the company opened 16 Bed Bath & Beyond stores, 7 buybuy BABY stores, 4 Christmas Tree Shops, and 1 Harmon Face Values store. The company also closed one Bed Bath & Beyond store. Additionally, through a joint venture, the company operates two stores in the Mexico City market under the name “Home & More.”

The company has a consolidated store space of 33.4 million square feet, reflecting a 5.7% increase from the prior-year quarter.

Gross margin for the quarter expanded 226 basis points (bps) to 41.1% versus 38.9% in the prior-year quarter. The increase was driven by decreases in inventory acquisition costs and coupon redemption as a percentage of sales, which was partially offset by a shift in the mix of merchandise sold to lower margin categories.

The operating margin expanded 478 (bps) to 12.4% from 7.7% in the prior-year quarter.

The company had cash and cash equivalents of $854 million and capital expenditures were $109 million for the quarter.

Based on the third quarter results, management provided earnings guidance for the fourth quarter and full fiscal year 2009. For the fourth quarter, the company expects earnings in the range of $0.67 to $0.71 per share. Full year earnings are expected to be in the range of $2.11 to $2.15 per share.

Brazil To Benefit From The New Carry Trade?

We had more probing higher in the non-dollar currencies only to see the gains wipe away at the end of the day, yesterday. Still, as I told a radio audience in Oregon yesterday, traders, investors, etc. still believe the euro (EUR) is worth more than the dollar by quite a bit… Gold also gave back some gains overnight…

Speaking of the euro… The European Central Bank (ECB) has already shrunk their balance sheet by 9.5%. Talk about being more credible than the Fed… The Fed, on the other hand, is increasing their balance sheet, and Freddie and Fannie now have “unlimited” coffers in which to reach for more bailout funds. So if they need bailing out, their balance sheet is awful, which means that the Fed will be buying those toxic assets to get them off the books of Fannie and Freddie…

I’m telling you now, so you can hear me later… The Federal Reserve is evil. Talk about the axis of evil… That axis is right here in the Fed Reserve!

OK… I’m going to stop there. I have other things to talk about… Oh, why don’t we talk a little about deficit spending here in the US? That’s always a “happy” topic, NOT!

Government deficits have caused the US savings rate to turn negative for the first time since the Great Depression, and the gap is widening even as households and companies put away more money than ever before.

Deficit spending by the government reduced net savings at an annual rate of $1.33 trillion in the third quarter of last year. State and local government deficits widened the gap by another $14.9 billion. At the same time, personal and corporate savings increased by a record $983 billion… All according to Bloomberg…

So… You see, folks… I told you… While it is prudent for us to save and not spend what we don’t have… Unless the government goes along and does the same, the damage to the country’s finances will continue.

Hmmm… Sounds like a good place to hop off that subject, and take a look at what’s going on around the world.

Well, what have we here? Looks like somebody let the cat out of the bag in Brazil… Just when traders were getting the bejeebers scared out of them with the Sovereign Wealth Fund buying dollars and selling reals (BRL), they see this news…

Standard Chartered Plc. Just printed a report calling for interest rate hikes in Brazil to 11.5% THIS YEAR! In a recent Bloomberg survey, the median estimate for Brazilian rates this year was 10.5%… So… Even if we only see the median estimate, and not the 11.5% Standard Chartered Plc. is forecasting, Brazil will still enjoy a HUGE rate differential to the rest of the world… But most importantly, the dollar.

In fact, Standard Chartered Plc. also said that they believe the real will benefit from carry trades… The dollar will be sold at its über-low rate, and the real will be bought with its über-high rate…

If that’s the case, then the Brazilian Sovereign Wealth Fund, has their work cut out for them in their attempts to keep the real from getting stronger versus the dollar!

But get this! Brazilian traders, who weren’t a part of the Bloomberg survey, think Brazilian rates will go to 12.7% this year! WOW! So, in any case, the interest rates in Brazil will be going higher in 2010… Of course, didn’t I tell you that, months ago?

This is important stuff, folks… I mean look at how the Aussie dollar (AUD) has recovered in three 25 BPS rate hikes… Imagine the rate hikes that need to take place in order to take Brazilian internal rates from 8.75% to 10.5% or 11.5% or even the 12.7%.

PIMCO, the largest bond fund in the world, announced earlier this week that they were reducing their exposure to US debt… Yesterday, Bill Gross of PIMCO, was on the TV here, talking about US Treasuries, and how he would rather buy a German bund (treasury) than a US Treasury, for the Fed is still implementing quantitative easing, whereas the ECB has begun to shrink their balance sheet… Two completely different directions for these two central banks.

I’m telling you this now, so you can listen to me later… Treasury yields are going to rise in 2010, causing huge losses for holders of existing Treasuries… Are you still holding them?

The Fed’s last FOMC meeting minutes were printed yesterday afternoon… Seems there was some debate on the subject of asset purchases… Some wanted to boost or extend security purchases, while one Fed Head sought a reduction of the asset purchases. And apparently we have some Pfennig readers among the Fed Heads, as a few of them expressed their concern that the Fed’s “extraordinary stimulus” is presenting “risks”… (That’s central bank parlance for “inflation”!)

So… In all, we had nothing but discussions in trying a balancing act.

Handcuffs… That’s what houses are to people looking for jobs. Used to be, if you could find a job in another city or state, you just moved, and took the job… But now… With homes so far under water from the original mortgage closing prices, there’s no way a “pick up and move” scenario can exist… So, this is another problem that the housing meltdown has caused… Handcuffs.

Well… The Japanese Finance Minister put knife in the back of the yen (JPY) last night with comments like, “it would be nice if yen weakened more” and that he “must work with the Bank of Japan to bring yen to appropriate levels” and that “many Japanese firms favor yen around 95”. That was like a HUGE SIGN TO TRADERS TO SELL YEN! Now, I don’t know if the Finance Minister will carry out this threat to direct the Bank of Japan to intervene and sell yen, but the threat alone is enough to scare the bejeebers out of yen buyers!

In Australia, overnight, retail sales for November (isn’t it awful that these things are so far behind?) simply blew the forecasts out of the water! November retail sales printed at +1.4% (the forecast was for a 0.3% increase!)

This is another piece of data that goes on the “pro” side of the ledger that we’re using to track data that could lead the Reserve Bank of Australia (RBA) to hike rates once again next month. So far, we’ve got an increase in home sales, and retail sales… With nothing on the “con” side…

One would have thought that this phenomenal retail sales figure from Australia would light a fire under the Aussie dollar to get it higher versus the US dollar… And it did – at first – with the Aussie dollar driving as high as 0.9268… But profit taking has pulled the rug out from under the Aussie dollar in the European session, bringing it back to 0.9175.

Jeff Rubin, who accurately predicted oil’s surge during the last decade, expects crude to reach $90 a barrel this quarter, and $100 by year’s end, according to Bloomberg, this morning…

Hmmm… I just did a video on Tuesday about oil, and made the case for a much higher oil price… Again… Ahead of the crowd…

It will be a pain for us here in the US to have oil at $100 again, but it will be all seashells and balloons for the Canadian dollar/loonie (CAD)… So, there you go… You can use the loonie as a hedge!

Then there was this… OK… Remember last year when I tried to make a case on CNBC about the Plunge Protection Team (PPT) and I was ambushed? Mocked? Made fun of? Well… Yesterday, I saw a story on MarketWatch about a trader who believes that the PPT is responsible for the stock market’s rise in 2009… Let’s listen in on a snippet of the story…

“The source of approximately $600 billion net new cash necessary to lift the market’s overall capitalization by $6 trillion last year could not be identified by TrimTabs, Charles Biderman founder and chief executive of Trim Tabs, said. The money, he said, didn’t come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.

“We know that the US government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?”

There was another guy saying the same thing, yesterday, but I can’t find that story right now, so I’ll go on… And say once again… I saw this stuff last year, but was mocked, told to make a movie out of my claim of a PPT supporting stocks… I wonder what will come out of this?

To recap… The non-dollar currencies and gold saw their gains yesterday reduced in the overnight session. I think it had more to do with the whipping the yen got from the Japanese Finance Ministe.. Nobody likes to see a major currency like yen get sold by its central bank… And the other non-dollar currencies will struggle if that goes on. And finally, there was a lot of talk about the real being on the buying side of a new carry trade, as interest rates go higher in Brazil this year.

Cephalon’s Nuvigil Under Pressure

Cephalon Inc.’s (CEPH: 63.01 -0.50 -0.79%) Nuvigil remains under pressure as yet another generic company is seeking to market a generic version of the drug. Watson Pharmaceuticals, Inc. (WPI: 39.41 -0.29 -0.73%) recently confirmed that it has filed an abbreviated new drug application (ANDA) with the US Food and Drug Administration (FDA) seeking approval to market its generic version of four dosage strengths (50 mg, 100 mg, 150mg, 200 mg, and 250mg) of Nuvigil.
 
Watson believes it is first to file on the 100 and 200 mg dosage strengths, which means that it will enjoy 180 days of generic market exclusivity on the approval and launch of these dosage strengths.
 
As expected, Cephalon has filed a lawsuit against Watson so as to prevent the latter from launching its product prior to the expiration of U.S. Patent No. 7,132,570.  The lawsuit has been filed under the provisions of the Hatch-Waxman Act, which means that the FDA cannot grant final approval for up to 30 months or until final resolution of the matter before the court, whichever occurs earlier. 
 
We note that Watson is not the only company seeking to launch a generic version of Nuvigil. Teva Pharmaceuticals (TEVA: 59.34 +2.50 +4.40%) and Actavis are also seeking approval for their generic versions of Nuvigil. Cephalon has filed patent infringement lawsuits against both companies.
 
Nuvigil (armodafinil) is indicated for the improvement of wakefulness in adults who experience excessive sleepiness (ES) associated with treated obstructive sleep apnea (OSA), shift work sleep disorder, also known as shift work disorder (SWD), or narcolepsy. 
 
Nuvigil is a follow-on version of Provigil (modafinil), which contributed about 50% to revenues in 2008. With Provigil slated to face generics from 2012, Cephalon is looking to protect its sleep franchise sales by switching patients to Nuvigil.
 
Given the importance of Cephalon’s sleep franchise, the filing of a patent infringement lawsuit against Watson was in-line with expectations. We expect Cephalon to vigorously defend its patent. Cephalon has a three-year period of marketing exclusivity for Nuvigil that extends until June 15, 2010. The entry of generic versions of Nuvigil would have a devastating impact on sales.
 
We currently have a Neutral recommendation on Cephalon. We expect investor focus to remain on Cephalon’s emerging oncology pipeline, Amrix, and the conversion of patients to Nuvigil.

Fred’s Comp Store Sales Improve

Fred’s Inc. (FRED: 10.35 -0.26 -2.45%) reported total sales of $209.3 million for December 2009, up 4% from $201.4 million in December 2008. Comparable store sales for the month increased 1.3%. This was an improvement compared to the comparable store sales growth of 1% reported in the third quarter. The company had posted flat comparable store sales in December 2008.

Fred witnessed increased customer traffic, continued pharmacy department script growth and better clearance of seasonal inventory during the reported month. Moreover, the company was successful in executing its expanded layaway program, which experienced an increase of approximately 320% over last year. As a result, the company managed to reduce its per-store inventory at the end of December by 7% from the year-ago level. The other factor that drove the inventory reduction was better merchandise planning.

For the first eleven months of the current fiscal year, Fred posted $1.66 billion in sales, which was down 1% from $1.673 billion in the comparable period last year. Year-to-date, comparable store sales increased 0.5%. Excluding closed stores, total sales from ongoing stores increased 1% in the 2009 year-to-date period versus the year-ago period.

As per the guidance provided during the third quarter conference call, fourth quarter net sales are expected to increase in the range of 1% to 3% compared to last year. Quarterly earnings are expected to be in the range of 17 cents to 24 cents per share, while annual earnings for fiscal 2009 are expected in the range of 62 cents to 69 cents per share.

11 Corporate Bonds Yielding 8% Or More

Given the moderate economic recovery, the outlook for corporate bonds has improved dramatically. On one hand, the rate of defaults initially anticipated during the apocalypse in early 2009 will surely be much lower than feared. Conversely, bond prices have rallied, bringing many double-digit yield opportunities back to earth. However, there are still several recognizable blue-chip names with decent ratings (BBB and better) that exceed 8% yield with the opportunity for upside on the bond price as the economy recovers further. As outlined in a similar high yield bond list from June 2009, none of 15 high yielders highlighted have defaulted or show near term solvency risk.

Below, I’ve selected 11 blue-chips worth a look. With the long-term return of stocks around 8-10% (depending on which study you look at, how dividends are reinvested, etc.) and with stocks coming off the most prolific rally in our generation (S&P500 up 65% from pivot bottom), the prospect of a steady 8% yield with price appreciation to boot isn’t too shabby.

Yield % - Company - Rating (Fitch)
8.1 ——–HUMANA— BBB
8.1 ——–SUNOCO—- BBB
8.2 ——–WHIRLPOOL-BBB
8.3 ——–DISCOVER—BBB
8.3 ——–INTL PAPER-BBB
8.4 ——–ALCAN——-BBB
8.5 ——–DOW CHEM.–BBB
8.5 ——–ALTRIA——BBB
8.7 ——–VALERO—–BBB
9.0 ——–SIMON PRTY-A
9.3 ——–MOTOROLA-BBB

If interested in any of these issues specifically, you should be able to search your online broker’s available issues. Often times, rather large sums are required for a bond purchase. Alternatively, rather than putting large sums into one particular issue, you should check out a High Yield Bond ETF which is currently yielding 9.8%. If seeking tax-free income, there are some good Muni Bond ETFs that don’t yield quite as much, but on a tax equivalent basis, high bracket investors may be snatching these up with tax rates anticipated to increase as part of Obama’s agenda.

Disclosure: No position in any bond issues. Author does hold High Yield Bond ETF cited.

Parasites, Bureaucracy And Soviet Boots

The real economy declines. The parasites multiply. See chart below…

First, a look at the markets:

Stocks went nowhere yesterday. Maybe the feds had taken the day off; MarketWatch charges them with manipulating share prices.

Gold, however, staged a $17 rally. The correction in the gold market may be over. Or it may not. This market has more surprises in store; we’re certain of it.

“I think you’re wrong about something,” begins a letter from a Dear Reader. “You act as though government spending were always a crime, a sin, or at least a waste of money. In fact, soldiers working for the US government protect the country. Roads make it possible for you to drive from Bethesda to Baltimore (I don’t envy you there). Even the paper pushers are necessary; bills need to be paid. Retirees need their checks. Government spending may be inefficient, but it is still a real contribution towards GDP.”

Our pen pal is correct. Government employment includes thousands of honest people doing honest work. Some of it is useful. The trouble is, since it is not subject to market pricing, you never know how useful it is. When is something worth doing? When people will voluntarily pay you for it. How do you know when you should do more of it? When the risk-adjusted profit you make from doing it exceeds the rate you could get from lending your money to the government, risk-free. Why are so many people willing to lend the government money now? Because the rate of return from other investments is so low…and the risk is so high.

Markets are constantly discovering how useful and desirable things are. Prices change all the time. One thing rises…another thing falls…always directing producers and consumers towards the best use of their money.

But government highways, wars, and bureaucracies aren’t priced by markets. So you never know what they are worth. In a real war, a country may be willing to pay its last dime to beat back the enemy. But what about ‘wars of choice’ such as Iraq and Afghanistan? How much are they really worth? No one knows. And no one really cares. They become just a few more government programs…eternally sucking away resources from the real economy. There are dozens…hundreds…of government programs set up during the Great Depression that are still alive. Each one has grown year after year…and each one now employs thousands of well-paid workers. And each worker not only gets his salary check, he also gets health care and retirement benefits…and he needs an office to work in and a place to park his car. And what is he doing? What would happen if he stopped doing it? No one knows.

But here at The Daily Reckoning we can take a guess. Ninety percent of Washington could take a hike…and life would go on as well or better than it was before.

Out of 10 government employees, probably 2 do useful things…things that we would willingly pay for if they weren’t done for us by the government, though we would almost certainly pay less for them than they cost us now. Five others do things that are not worth doing at all – things that are purely wastes of money. And the other three do things that destroy wealth…things that actually make the situation worse. Those three are economists. Or lawyers. Or who-knows-what.

Of course, people in the private sector do stupid things too. Just look at the fellows writing subprime mortgage contracts. Or the fellows performing rap music. Or the fellows selling televisions. But, hey, that’s just our opinion. Let the market (the consumer) decide! It’s not up to us. Thank God.

By and large, in the private sector people get what they want…and what they’ve got coming. People who waste money soon don’t have any to waste. People who make bad business or bad investment decisions go broke. Mistakes are self-correcting…unless the government steps in!

In the public sector, it ain’t so. Mistakes are self-perpetuating. The last thing a bureaucrat wants is for his mission to disappear. If he is fighting illiteracy, it is a fair bet that fewer children will learn to read. If he is fighting poverty, it is a fair bet that more people will be poor. If he is fighting terrorism, put your money on terrorism.

Failure is rewarded with bigger budgets, while success is self-extermination.

So, as the percentage of the economy dictated by the government increases, so does the waste, the inefficiency, and the counter-productivity. As the Soviet Union discovered, you can increase GDP by government order…but all you get is a whole lot of nothing. We traveled to Russia at the end of the Soviet period. By then, Russians had been reduced to unimaginable poverty. All they had to sell tourists was equipment looted from the army. We bought a pair of leather boots for one US dollar. Best buy we ever made. We still wear them, 20 years later. Two weeks ago they kept us from losing a leg, when we slipped while cutting up a tree with a chain saw. The saw cut into the boot but didn’t even scratch our leg.

Why is this little discussion of government spending important? Because it is ‘the rest of the story.’ Economists are pushing government spending as a substitute for private spending…and government jobs as a replacement for jobs lost in the private sector. Nearly 5 million jobs were lost in 2009 – almost every one of them in the private sector.

But here come the feds to the rescue:

Getting That Vacant Look

Many of the government efforts to help the housing market, such as the Fed buying up fully one quarter of all the mortgage-backed securities backed by Fannie Mae (FNM: 1.15 -0.03 -2.54%), Freddie Mac (FRE: 1.45 -0.05 -3.33%) and Ginnie Mae, as well as the “first time” homebuyer tax credit, are designed to move people from being renters to being owners. But while there are some ancillary benefits to neighborhoods of most people owning rather than renting, it really does not solve the problem.

What it does is cause there to be a lot of vacant apartments. In addition, a large number of formerly foreclosed-upon houses have been bought up by cash investors who plan on renting out those houses rather than living in them themselves.

The net result is that there is a glut of rental living space on the market. According to real estate research firm Reis, the apartment vacancy rate rose by 0.1 point in the fourth quarter to 8.0%, and is up from 6.7% a year ago. It is also the highest level of vacant apartments in the 30 years that Reis has been tracking the data.

An empty apartment is simply a deadweight loss for a landlord. In an effort to fill apartments up, they have been dropping rents, and especially effective rents (i.e. including things like a month of free rent when you re-sign your lease, replacing the carpet, etc.). According to Reis, rents declined by 0.7% in the fourth quarter and by 2.3% for all of 2009. Their data however, only covers the 79 largest rental markets.

Looking at the Numbers by Location

Jacksonville, FL had the highest apartment vacancy rate at 14.4%. The biggest increase over the course of 2009 was in Tucson, AZ, where the rate jumped by 3.1% to 10.5%. So far, the declining rents have not really been picked up by the government in its CPI calculations. Those numbers have been just effectively flat over the last year, not declining.

This could be due to the BLS numbers covering the entire country, not just the 79 largest markets. However, 79 markets covers most of the areas where there are significant numbers of people living in apartments. So it seems like the BLS numbers are simply behind the curve, or there is something very wrong with the methodology that Reis, or the BLS, is using. However, the comments coming from the large publically traded REITs that specialize in apartments, such as Apartment Investors (AIV: 16.86 -0.40 -2.32%) and Equity Residential (EQR: 33.35 -0.43 -1.27%), would tend to support what Reis is saying.

The Importance of Rent (& Suspect Methodology) 

Rents are extremely important. Direct rent paid to landlords has a 5.7% weighting in the CPI. More significantly is that Owners Equivalent Rent (OER), which is how the government tracks housing for inflation tracking, makes up almost 24% of the CPI. Thus together they make up more than 30%. Since rents are neither food nor energy, they make up an even bigger (almost a 40% share of the core CPI).

The BLS methodology for tracking OER is very suspect. It simply conducts a telephone survey of homeowners and asks them what they think it would cost them to rent an equivalent home across the street. I suspect that for the vast majority of responders, the answer would be just a wild guess. After all, many subdivisions don’t have a lot of people renting in them, and most long-term homeowners don’t make a habit of calling rental agents to find out what it would cost to rent in their area. The data for apartment rentals are a bit more solid, as the big landlords would be in a pretty good position to know. Thus you should be very suspicious if OER is diverging significantly from “rent” rent.

Facts on the Ground & Government Involvement

Not only have government policies been encouraging people to move out of apartments (or rented houses) and buy their own place, but there are still a significant number of new rental units coming on line. A big apartment complex is not built overnight, so many of the projects that were approved and funded right before the credit crisis are now coming on line. In addition, many projects that were originally planned to become condos have instead been turned into rental units. And as I mentioned before, large numbers of houses that had been foreclosed upon are being turned into rental units.

Renting a house or an apartment is a pretty good substitute for owning a house or a condo. A house is an asset, and the value of an asset is determined by the stream of cash flows the asset will bring in the future, discounted back to the present. What are the cash flows that your little bungalow gives you? Why, the rent you avoided paying (minus, of course, the cash outflows you have like taxes and maintenance).

While government actions can prop up house prices for a little while by handing out $8,000 checks to people who buy a home (which tends to get split with the person selling the home) and by holding down mortgage rates through massive buying of mortgage-backed paper, it is not going to be a permanent fix. This is especially true if those actions simply result in lower rents, which effectively undermine the cash flows that the asset value is dependent on.

The logic of attempting to bolster home prices is reasonable. After all, the single biggest factor in people continuing to pay their mortgages is if they have equity in the house. If the mortgage balance is $150,000 and the house is worth $200,000, you would have to be pretty stupid to stop paying. Even if you got laid off and didn’t have the cash to pay, it would still make sense to just sell the house rather than let the bank take it from you.

However, if the mortgage balance is $200,000 and the house is only worth $150,000, why would you continue to pay, even if you were still employed and had the cash to do so? Yes, there are plenty of non-economic factors that come into play, such as a feeling that you made an agreement and have a moral obligation to live up to it (trust me, the bank does not feel the same way, nor do big commercial real estate players).

However, a mortgage is a secured loan, and you don’t have to pay legally, at least if you have not refinanced. But if you don’t, the bank takes the house. It could be that if you had to sell your house you could not buy another house in the same town and school district, and would have to put up with pleas of “you are ruining my life” from your 14-year-old daughter if she had to change schools as a result. Those little marks on the wall showing how the kids have grown each Christmas or birthday also have value to many people. However, there is a limit to the value of those non-economic considerations. This is especially true if you are both underwater AND unemployed.

What’s Problematic in the Long Run

Stabilizing housing prices is a good thing, but I think the effort will ultimately be futile in the long run, especially if the efforts to do so simply result in more vacant rental properties. Ultimately what needs to happen is that the rate of household formation has to increase. Part of that is simply due to population growth, but population growth is not the whole story on household formation by a long shot.

People have to feel they can afford to have a place of their own. That means jobs. A good-paying, steady job is what will get the 26-year-old college graduate to finally move out of Mom and Dad’s basement. A good job is what will get the family that is living with friends or siblings after they got foreclosed on back into their own place.

Housing is also something we consume: the ultimate durable good, if you will. Just like people who are making minimum wage usually have to ride the bus, or drive around in an old clunker instead of a new BMW, so too they can’t afford to buy a big house, or even rent their own place. They have to double (triple, quadruple?) up.

In the housing bubble, the relationship between housing prices and both rents and incomes got way out of whack, as is shown in the two graphs below (from http://www.calculatedriskblog.com/search/label/House%20Prices) and are now back to reasonable levels. They are not, however, particularly low, even with the housing bust, and have both started to increase again in recent months.

That rebound is due to all the extraordinary government support for the market, and that support cannot last forever. I strongly suspect we will have another leg down in housing prices later this year. Not as severe as what we saw in 2008 and early 2009, but a decline nonetheless.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.

The Trade Of The Century

When you think about hot commodities right now, you probably don’t think of water. Yet the price of water in some parts of the world is rising…sometimes very quickly. Take California, for example.

Mark Swatek is CEO of Southwest Water Co., a water utility that serves California and the Southwestern US. You may accuse him of talking his book when he says: “One of the fastest growing commodity prices is the price of metropolitan water [in Southern California].”

It may be an exaggeration, but not by much. Since 2007, the Metropolitan Water District of Southern California has increased its water rates from $574 an acre-foot to $781 an acre-foot – a 36% increase. (An acre-foot is the amount of water needed to flood a plain of one acre to a depth of one foot – or about 326,000 gallons.)

More increases are on the way. The MWD has approved an increase to $811 an acre-foot by January 2010 and another increase to $985 by 2011. That would mean a 71% increase in five years. Despite these increases, water is still too cheap in Southern California.

“This is a resource that has been underpriced for 50 years,” says Keith Brackpool, CEO of Cadiz, a water development company based in LA. (More on Cadiz below.) Even with the increases, a consumer might pay $10 a day for power and only $3 for water. “You pay more in Manhattan, and Manhattan isn’t a desert.”

Speaking of Manhattan… As I write these words, I’m at the Grand Hyatt on 42nd Street in Manhattan, near Grand Central Station. I’m here for the Gabelli Water Investment Summit, where about 10 different companies in the water business make presentations to a roomful of analysts and money managers.

These presentations give you a good look at what’s happening in water – everything from water utilities to desalination, from irrigation to flow valves. It’s hard to listen to these companies and think there isn’t a water crisis unfolding. It may be under the radar in some places, but in others it’s already a full-blown crisis.

California is a good case study where the water crisis is in bloom. Brackpool pointed out a number of challenges California faces. Here are three:

• Supply limitations – In 2007, a federal judge put limits on the amount of water taken out of the Sacramento-San Joaquin Bay Delta. The problem was as the water flows down from the Sierra Mountains, it also flows through an estuary before it reaches the state’s water supply. And the estuary was depleted due to excessive pumping, which endangered some fish native to the river. In any case, the system is delivering only 40% of capacity now. At this point, even several wet years won’t get it back to 100%

• Drought – This is pretty well-known, but California just had its third consecutive dry year. Current reservoir levels are at all-time lows

• Aging infrastructure – The system is no longer capable of supporting the increased population without significant investment.

To combat these problems, the state has done a number of things, including those price increases I mentioned above. Yet because water is still so cheap, the increased water rates have not had much of an effect on water use so far. There is also an $11.1 billion water bond that will provide funds for storing water. And there is a search for new supplies of water. But as Brackpool says, “We’ve picked all the low-hanging fruit. The next frontier requires a large extension ladder.”

This is where Brackpool’s company, Cadiz, comes in. Brackpool was quick to say that there was no single solution to the water crisis. Instead, there will be many ideas – conservation, desalination and more. “Assets like ours have a role to play in the quiver full of arrows called solutions.”

Cadiz has an interesting story, and one that could be very rewarding for shareholders. Cadiz owns 45,000 acres – about 70 square miles – in eastern San Bernardino County. Its property lies at the base of a 1,300-square-mile watershed. It sits on top of one of Southern California’s largest natural reservoirs. Rain and snowfall drain down the Fenner Valley to Cadiz’s property. The water continues its journey to two natural dry lakes… and eventually evaporates.

Cadiz has a plan to capture this water – to basically conserve the water before it evaporates in the dry lakes. The Cadiz water project will store the water and deliver it to Southern California users via a conveyance pipeline and pumping station. It’s a $240 million project that will conserve 50,000 acre-feet of water per year.

The quality of the water is superb. “Better than most bottled waters,” Brackpool says.

For 20 years, Cadiz has been growing melons, squash, peppers, grapes and more in the fertile soil nourished by the groundwater under its property. This 1,600-acre farming operation is impressive in photos. You see these big squares of green in the middle of a desert, almost as if they’ve been painted on the earth. You can actually see them when you’re flying in and out of LAX. However, the real value creation story here is not in farming, but in monetizing the water assets.

Cadiz as a water play, though, is still a young bird yet to fly. Construction of the project won’t begin until the first quarter of 2011, at the earliest. The company won’t finish completion until the third quarter of 2012.

That’s a little distant for my tastes, and there are still some environmental hurdles Cadiz must clear before it can proceed. Nonetheless, I like the story and the asset. It’s well worth keeping an eye on, as I intend to do. The ticker symbol is CDZI.

At the conference, I also heard Robert Sprowls speak. Sprowls is the CEO of American States Water, another California utility. His firm owns groundwater resources of 118,000 acre-feet of water. Asked to put a value on that portfolio, Sprowls said that water rights in the region go for $3,000–$7,000 an acre-foot. He ventured a guess of $5,000 per acre for his company’s water rights – in the middle of that range – which would yield a value of $590 million for the water rights portfolio.

As American States Water – which has substantial assets beyond the water rights – is worth only about $930 million in the marketplace, this piqued my interest. However, it is difficult to turn these water rights into cash when you are a regulated utility. It’s not likely the regulators are going to let shareholders walk off with a haul without sharing it with the ratepayers.

“It’s a difficult issue,” Sprowl conceded, “but we’re still thinking about it.” In any event, Sprowls’s benchmark valuation for water rights was useful information if only to show how valuable water rights are.

The best way to own water rights is to own PICO Holdings (NASDAQ:PICO). It owns water rights mostly in Nevada and Arizona, some worth as much as $45,000 per acre-foot. I estimate PICO’s water rights alone are worth $700 million – and you get rest of the company for practically nothing, as the market values PICO only for $732 million as I write. It has nearly $200 million in cash. So just cash plus water rights more than cover your investment. And these water rights appreciate in value over time. PICO’s stock price simply does not reflect the intrinsic value of its assets.

California, by the way, is no longer a hostile state for the water utilities as far as rates are concerned. Those water increases I quoted up top ought to be evidence enough of that. In 2005, California made major changes to its policies, which I won’t detail here. The end result: “California is great now,” as one analyst – a 10-year veteran of water utilities – put it to me. “It is more likely now that water utilities will earn good returns on capital.”

The handful of publicly traded California water utilities may well be good investments now. Most trade below the acquisition multiples paid for the last 10 significant takeovers of water utilities. The low end of that range is about 2.5 times book value. The nearby chart shows you the discounts in these stocks based on this estimate of private market value, or PMV:

Water worries extend far beyond just California and the American West, as you know if you’ve read this letter for any length of time. Beyond the ideas mentioned above, the summit served to reinforce my view that water will be a good place to be in the years ahead.

Cold Snap In The US Lighting A Fire Under Energy Complex And Agri-Commodities

A relentless surge of cold weather is slamming nearly every country in the Northern Hemisphere, disrupting travel, threatening crops and driving energy and commodity prices higher as investors look for ways to cash in.

In the United States, crude oil is trading near a 14-month high. Natural gas and heating oil prices have also surged, as the U.S. shivered under the onslaught of an arctic express that sent temperatures plummeting below zero across two-thirds of the country. Even Florida growers try to protect orange groves from overnight freezing temperatures.

The cold snap is one of the nation’s most widespread since January 1985, according to meteorologists at Accuweather.com. While the cold is expected to ease slightly starting Thursday, this winter is on track to be one of the coldest in the past two decades, Ken Reeves, director of forecasting operations at Accuweather told The Wall Street Journal.

The arctic chill has truckers hauling freight across the U.S.A. scrambling to keep their engines running by supplementing diesel fuel with high-octane distillates.

“Once the temperature hits 32 degrees (fahrenheit) or below, truckers have to cut their diesel fuel with kerosene or their engine blocks can freeze,” said Dr. Kent Moors, a Money Morning Contributing Writer, and an advisor to the American Trucking Association, said in an interview.

Even aluminum and copper prices rose in response to the poor weather, as investors worried that production in China would be curtailed.

“The weather is cold everywhere in the Northern Hemisphere, with Europe getting walloped and China as well,” Anthony Nunan, an assistant general manager for risk management at Mitsubishi Corp. in Tokyo told Bloomberg News.

Beijing reported the coldest morning in almost four decades. Temperatures were at or below freezing across most of northern and central France, sinking as low as 24 degrees in Paris. London’s Gatwick airport suspended flights to clear runways of snow. Local U.K. governments said some were running short of de-icing sand and salt.

In fact, K+S AG Europe’s biggest potash producer, said factories producing de-icing salt are running at full capacity and it’s struggling to meet sudden demand with northwestern Europe in the grip of a prolonged cold snap.

“The cold weather is hitting a lot of the more populated areas, such as western and northern Europe, a lot of the eastern U.S.,” Bob Tarr, a meteorologist at Accuweather, told Bloomberg in a telephone interview. “It’s a rare pattern and unusual to see this cold weather affecting a number of major population centers and persisting for about three weeks.”

And things are expected to stay cold for the near future. The Climate Prediction Center of the National Weather Service forecast below-normal temperatures from Texas to Maine through Jan. 17.

Besides snarling travel and making life generally unpleasant, the cold weather has implications for investors - especially those focused on commodities. The Dow-Jones UBS commodity index on Tuesday traded as high as 145.11 in trading a 12-month high.

Energy Prices Surge

Energy consumption tends to rise significantly during extreme cold weather. In the record cold winter of 1976-77 additional energy consumption cost $3.8 billion in 1980 dollars, including increased costs for electricity, natural gas, fuel oil, and coal.

During the present cold spell, frigid temperatures in the United States are expected to boost the country’s heating demand to 21% above normal, with demand in the Northeast - which consumes about four-fifths of U.S heating oil - 11% above average levels, Bloomberg reported.

The increase in demand has the energy complex on the rise across the board. Oil prices rose to a 14-month of $83.52 in New York trading yesterday (Wednesday) and heating oil prices are hovering around $2.20 a gallon, their highest levels since mid-October.

“Oil prices are on a cold-weather rally, with heating oil demand seen rising for the next few weeks amid forecasts for temperatures for much of the country to be much below normal in that period,” Andy Lebow, broker at MF Global Ltd. (MF: 6.86 +0.03 +0.44%) in New York told Reuters.

Natural gas prices will probably rise not only on the back of the cold snap, but also may be affected by a pickup in mergers and acquisitions activity, Moors said.

The United Staes uses about 1.2 trillion cubic feet of natural gas in a normal year, according to Moors. Even though the country has about 3.8 trillion cubic feet of natural gas in storage, he believes we used about 800 billion cubic feet in December alone, and the country could use in excess of 2.5 trillion cubic feet during this season.

“But with a 100 year supply on hand I expect gas prices to rise only gradually to say $6 to $7 per thousand cubic feet,” Moors said.

In the short term, Moors singled out diesel fuel as the “one to watch.”

Crop Prices On The Rise

Prices for agricultural products are also likely to heat up as the chill sets in.

In the winter of 1983-84, a single cold snap around Christmas destroyed over $1 billion of the citrus crop in Florida. Louisiana lost 80% of its citrus crop, Tennessee estimated $15 million in agriculture losses and Texas experienced hundreds of millions of dollars in crop damage according to the National Oceanic and Atmospheric Administration.

This week, waves of Arctic air hammered central Mississippi, Alabama and the Florida Panhandle , where farmers were scrambling to save strawberries and tomatoes as temperatures dipped into the 20s. Hard freeze warnings covered the region Tuesday, according to the National Weather Service.

Even parts of the country that are used to subzero temperatures are likely to suffer some damage. About 500 million bushels of corn are stuck under snow in North Dakota, South Dakota, Minnesota, Nebraska and Wisconsin, according to Martell Crop Projections, Bloomberg reported. Corn prices surged to their highest levels in three months on Monday rising above $4.35 a bushel.

Winter wheat crops in the central Plains states may also dry up due to a combination of low snow cover, which normally insulates the plant sprouts, and very cold air forecasters said.

But while the Climate Prediction Center of the National Weather Service is forecasting normal to above-normal temperatures later this week from Michigan to Nebraska, in citrus-growing areas of Florida and Texas, farmers prepared for a long week trying to protect their crops.

Parts of central Florida could see lows below freezing nearly every day this week. In Polk County - between Tampa and Orlando - temperatures were in the high 20s and strawberry farmers turned on sprinklers to create an insulation of ice for the berries.

“The problem now is that we have a weeklong freeze predicted,” Ted Campbell, executive director for the Florida Strawberry Growers Association told Bloomberg. “It’s an endurance test.”

Andrew Meadows, a spokesman for Florida Citrus Mutual, a trade organization based in Lakeland, told Bloomberg it would be “a nerve-wracking night” for growers.

Although the purest play on a citrus freeze is the orange-juice futures contract, which jumped 3.1 cents yesterday, risk averse investors might prefer to capitalize on weather-related agricultural losses by taking a closer look at the Deutsche Bank AG managed Power Shares DB Agricultural (DBA: 26.88 +0.08 +0.30%) exchange-traded fund (ETF), the ELEMENTS Rogers International Commodity Agriculture (RJA: 8.05 +0.06 +0.75%) ETN, or the Van Eck Market Vectors Agribusiness ETF (MOO: 47.20 +0.62 +1.33%).

Pervasive Narrows Guidance

recently narrowed its guidance for the second quarter. The company now expects revenues to come between $11.5 million and $11.7 million compared to the previous guidance of revenues between $11.0 million and $12.0 million. Earnings per share (EPS) are now projected between $0.06 and $0.07 compared to the earlier projection of $0.05 – $0.08.
 
Pervasive expects to generate $2.3 million of cash flow from operating activities. The company repurchased approximately 204,000 shares for $1.0 million and still has approximately $6.6 million authorized repurchase funds remaining under its $10.0 million stock repurchase program announced in March 2009.
 
Pervasive’s lastest product Pervasive DataRush generated $0.1 million of revenues in the second quarter. The company earlier reported results for the first quarter which was in line with expectations. For the fiscal third quarter, Pervasive expects revenues between $11.0 million and $12.0 million. Earnings per share (EPS) are anticipated to come around $0.07. Achieving and maintaining consistent profitability in turbulent times has been the underlying theme in the Pervasive story. The company has succeeded in achieving growth in both top and bottom lines by focusing on growth drivers, including accretive M&A opportunities. 

Headquartered in Austin, Texas, Pervasive provides data management and integration software products to small- and mid-sized enterprises through a well-developed channel of independent software vendors, value-added resellers and system integrators. Its solutions enable customers to manage, integrate, analyze and secure their data.

Autodesk Settles Lawsuit

Autodesk, Inc. (ADSK: 26.26 +0.78 +3.06%) announced the settlement of a lawsuit against Dassault Systèmes SolidWorks Corp. (SolidWorks) pending in the U.S. District Court for the Northern District of California. Autodesk had alleged that SolidWorks inappropriately used its trademarks AutoCAD and DWG in 2008.

However, SolidWorks made counterclaims against Autodesk. SolidWorks is a unit of Dassault Systèmes S.A, a 3D design software maker. To resolve the matter, Autodesk and SolidWorks have each agreed to dismiss all claims by entering into a confidential settlement agreement. Moreover, management did not give any details of the settlement, but said that all claims between the two rivals were dismissed.

Autodesk develops 2D and 3D model-based design and documentation products. The company’s principal products include AutoCAD and AutoCAD LT software (2D horizontal products), which accounted for 36% of total revenues in fiscal 2009.

AutoCAD is the company’s largest revenue-generating product and is a fully automated design and drafting platform utilized by architects, engineers and other design professionals to manage workflow and the total design process.

The company continues to build momentum through its flagship product – AutoCAD, which is a traditional driver of the stock. Longer term, we believe that the success of the AutoCAD subscription program and annual upgrades for AutoCAD should lead to increased visibility and reduced volatility for revenue and earnings.

However, Revenues from 2D horizontal and vertical products declined 37% year over year in the third quarter of 2009 and decreased marginally from the previous quarter. Moreover, combined revenue from AutoCAD and AutoCAD LT declined 39% year over year in the third quarter of 2010.

Although the company has a strong market position in the “mainstream” CAD market, it faces competition from Dassault Systemes. Moreover, the company competes against Adobe Systems Inc. (ADBE: 36.69 -0.20 -0.54%), Apple Inc. (AAPL: 211.98 +1.40 +0.66%), Avid Technology (AVID: 12.81 +0.06 +0.47%), Sony (SNE: 30.41 +0.61 +2.05%) and Thomson Reuters (TRI: 33.49 +0.45 +1.36%).

Business As Unusual

It’s business as unusual here in Asia; unusual compared to business in the West, that is.

For every spender in the West, there are ten savers in the East. For every Wal-Mart shopper and Snuggie-clad sofa surfer in the US, there exists a team of manufacturers in Viet Nam…and Cambodia…and right here in Taiwan, toiling away to improve their workaday lot. And as the West goes borrowing, the East goes lending…for now, anyway. It’s the yin and the yang, if you will.

Markets in this region are, for the most part, continuing along the same trajectory from where they left off at the end of last year: Higher. Japan’s Nikkei 225, which represents one half of Bill Bonner’s Trade of the New Decade – is up… Hong Kong’s Hang Seng is up… Korea’s Kospi, China’s CSI 300, the Aussie All Ords… Up, up, up!

Of course, it’s not really a New Year here yet. Not technically. Chinese New Year celebrations take place according to the lunar calendar. This year they fall in mid-February, right when Westerners are exchanging Valentine’s Day cards. This quaint cultural oddity provides more than simply a loophole opportunity to renege on your New Year’s Eve resolutions twice in the same “year.” It is also serves as a reminder of the “Westernization” of the East and of the gradual but persistent changing of the tides, the steady flow of money and power from the developed, to the developing, from the already-emerged, to the emerging.

Foreign investor capital is flooding back into this region as risk appetite grows again in the West. As we noted in a recent DR Weekend Edition:

“In the three quarters leading up to March of 2009, widespread economic meltdowns in the West saw some $262 billion vacuumed out of Asia’s red hot ‘tiger’ economies as beleaguered funds in The City, Wall Street and elsewhere repatriated capital to meet crushing margin calls closer to home. However, over the past six months, almost all of that cash ($241 billion) has found its way back to Asian shores.”

Nothing goes up indefinitely, of course. Just ask your local real estate broker if you don’t believe us. And nothing goes up, or down, in a straight line either. The free-and-easy monetary policies around the world facilitating this surge in liquidity will end eventually. Then it will be a matter of who has the biggest savings accounts…and the biggest resource reserves…and the biggest gunships and stealthiest stealth bombers.

But for now, at least, the trend is clear. Where once the world looked to the American consumer to buoy the delusional “spend-your-way-to-riches” economic model, they now look to consumers in China and emerging markets to pick up the slack. Can they spend like Americans? And, perhaps more importantly, do they even want to? It is probably still too early to tell. We’re yet to see anyone in Asia lazy enough to dress in a blanket with arms…but we’ll let you know as soon as we do.

 

Does The Size Of Your Portfolio Matter?

In the natural resource and precious metals sectors there are literally thousands of companies available from which to choose to include in one’s portfolio. There are a lot of great companies and some, well, questionable choices. Screening out favorites might mean subscribing to several investment services and listening to the views of professionals. Then you must decide on how many of these companies in which to actually purchase shares.

All investors whether novice or professionals need to consider the size of their portfolios. What is big and what is small will depend on many factors.This is going to sound so simple but it is essential to the discussion as to whether 10, 20, 50 or 100 positions is right for you.

Factors to be considered:

1. The amount of monies you have to invest

This is one of the first questions to ask, ‘how much money will you be investing in the natural resource sector’? Whether you have $5,000, $10,000, $100,000 or a million makes a huge difference, in my opinion.

Diversification - investors must not put all of their eggs in one basket but yet you do not want to spread your money so thin by buying too many positions. One analyst suggests a portfolio of 10 stocks, while another recommends investing no more than 5% in any one position.

As a rule of thumb, I would suggest the following guidelines:

Amount of Money To Be Invested Number of Positions

$5,000 4

$10,000 4 - 6

$100,000 10 - 20

$1,000,000 20 - 50

The objective is to have enough money in each position so when we have a great up move that we will be greatly rewarded, but at the same time, in the event of negative news we are not over committed to any one position. A delicate balance, if you will, of your investment dollars with the number of positions you own.

2. Your time available to research and stay abreast of your investments

How much time do you devote to your investments? This is another significant issue in the size of your portfolio. If you only have a few hours a week or less, you must only carry a few positions as you will not have sufficient time to follow the price movements and news with a large portfolio.

If you have 6 to 8 hours a week or more to spend in following your portfolio then this would argue for you to have a larger portfolio.

3. Your skills of managing these investments

We all have different skills in life; some of us pay close attention to details while others do not. It is important for you to know yourself and what you are good at. If you are not a detail person then perhaps you would be more comfortable with a smaller portfolio.

I have several friends that when I ask, “do you still own xyz gold”? Their immediate reply is “I don’t know.” I get so frustrated. How in the world can you expect to make money and be a successful investor if you don’t even know what you own as well as what you paid for the shares or warrants?

You must build a portfolio in any one of the popular online charting services which will allow you to keep up with all of your positions, prices, news, etc and this must be done using the Canadian symbols, not the U.S. symbols on these junior mining shares and/or warrants.

Amazingly, this will allow you to see within minutes each day the prices and stay abreast of all of the news stories on your companies and greatly relieve you of many hours of time. Also, you now know exactly what you own and keep this current by verifying your current holdings with your brokerage firm. If you want to follow additional companies that you don’t currently own, great, but do so in a ‘watch list’, to be kept separate from your actual holdings.

Using these steps above will allow you to maintain a larger portfolio with ease.

Personally, I have about 90 different positions in the natural resource and mining sector in the common shares and long-term warrants on companies which I strongly believe will perform exceptionally well in the coming 18 to 24 months. I don’t recommend this size of a portfolio to others but it works for me and I am very comfortable with my positions.

In the final analysis only you can decide what the correct size portfolio is for you taking into account all of the factors outlined above.

If you would like to know more about warrants, we encourage you to visit our website for an in-depth discussion of warrants, many examples, how to trade warrants and much more.