This year, the big list of who's naughty and nice won't come from Santa. The International Labour Organization has published its Global Wage Report 2010/11. It's another reminder that workers should expect no glad tidings in the coming year as the recession continues to snowball around the globe.
It wasn't all bad news. Wages are generally on an upward trendline. But in its analysis of national wage data sampled from 115 countries and territories, the ILO reports:
growth in average monthly wages slowed from 2.8 per cent in 2007, on the eve of the crisis, to 1.5 per cent in 2008 and 1.6 per cent in 2009. Excluding China from the aggregate, the global average wage growth drops to 0.8 in 2008 and 0.7 in 2009....
In particular... since the mid-1990s the proportion of people on low pay – defined as less than two-thirds of median wage – has increased in more than two-thirds of countries with available data.
The range of countries that have seen a growth in low-paid workers span the spectrum of "development," including "Argentina, China, Germany, Indonesia, Ireland, the Republic of Korea, Poland and Spain." Paradoxically this growth in the low-wage labor force will be met with Europe's onslaught of harsh austerity measures, which economists predict will not only shred the safety net but also deepen the overall economic contraction (meaning more misery for ordinary people).
Some countries, however, might be getting smarter about rejiggering their economies with a combination of organized labor power and aggressive fiscal policy. For example, the ILO says, departing from policies tried by governments in response to earlier economic crises, half of the surveyed countries this time around "have adjusted their minimum wages either as part of the regular minimum wage review process or with the aim of protecting the purchasing power of the most vulnerable workers." Building on the baseline of economic security provided by government, the ILO finds, "Wages are better aligned with productivity in countries where collective bargaining covers more than 30 per cent of employees."
The United States saw a significant drop in real average weekly earnings from 2007 to 2008, followed by an uptick going into 2009, which the ILO attributes largely to falling consumer prices (increasing relative purchasing power). The U.S. sits near the top of the ILO's list of industrialized countries in terms of the portion of its workforce comprised of low-paid full-time workers (about a quarter of the U.S. labor force compared to six percent in Sweden, for instance).
On both sides of the Atlantic, the oft-maligned public sector again appears to be better shielded from recessionary woes. In most of the surveyed European nations, “nominal earnings in the public sector have risen faster – or fallen less – than earnings in the private sector." Earnings rose faster in the U.S. for state and municipal employees than for private sector employees from March 2008 to 2010.
But the budget axe looms over civil servants. The ILO says “this trend may be reversed in some of the countries that have implemented austerity measures to contain public debt and/or which have signed recent agreements with the IMF.”
In this recession, the bigger they come, the harder they fall. The “advanced" countries that helped drive markets over a cliff have spiraled downward while meeker economies have stayed afloat, according to the wage report. Though global average wages grew substantially over the past decade, the increase was unevenly concentrated:
while wage growth slowed but remained consistently positive in Asia and Latin America, other regions such as Eastern Europe and Central Asia experienced a dramatic fall. Advanced economies experienced a drop in the level of real wages which fell in 12 of 28 countries in 2008 and in seven in 2009.
For the "emerging economies," the psychological ramifications of feeling as though your nation is moving up as opposed to toppling over, are reflected in a new Gallup poll showing economic optimism clustered in less wealthy countries.
Yet the U.K. Guardian's analysis suggested that the global downturn could be a great leveler of sorts. On one hand, writes Vittorio Longhi, the recession will inevitably have an acute impact on the most impoverished, least educated, least politically empowered workers. Relegated to the "3D's" ("dirty, dangerous and demanding" jobs), these are often women, youth, ethnic minorities and members of otherwise marginalized communities.
Still, there's nothing like a crashing economy to concentrate officials' minds on designing a better safety net. Countering the EU's “austerity” mantra, the ILO identifies key areas where lawmakers can coordinate social and labor policies to boost recovery and reduce inequity.
The researchers recommend that on top of a government-mandated wage floor, "there must be a system of wage policies which benefits all workers, irrespective of wage levels, union membership or employment status." For workers higher on the economic ladder, that means stronger collective bargaining and organizing rights at work, especially in "non-standard" sectors like domestic workers. Wage supplements like tax credits need to work in tandem with minimum-wage guarantees to prevent employers from ruthlessly driving down wages.
The ILO report also notes that labor policies cannot be designed in a vacuum. While certain principles of decent work hold true universally, like the benefits of unionization, local patterns of racial, gender and ethnic discrimination must also be addressed to ensure a just recovery.
On that front, the U.S. remains a case study in the shameful entanglement of economic, racial and gender inequalities. Meanwhile a disillusioned underclass has spiraled into virulent jingoism and wingnutty theatrics amid increasing confusion over the root causes of the crisis. Once-privileged citizens of the U.S. and European economies will understandably feel dispirited during this holiday season. But the global wage report suggests it's possible to envision other ways overcoming the economic storm, as long as workers don't get mired in the politics of self-defeat.
By Michelle Chen
Source: In These Times
http://inthesetimes.com
Wednesday, December 22, 2010
Tuesday, December 21, 2010
Euro debt may spark more global jitters
THE Reserve Bank has acknowledged Europe's fast-spreading debt problems are emerging as a threat to the Australian economy and could set off a round of jitters in global credit markets.
The dominance of Europe in discussion at the RBA's last monthly board meeting suggests it is now paying closer attention to how the debt crisis is playing out.
The December 7 meeting was held before last week's move by ratings agency Moody's to cut Ireland's credit rating to three notches above junk.
Advertisement: Story continues below
But minutes of the meeting, released yesterday, suggest the RBA is sticking to its medium-term view of the domestic economy, with growth here underpinned by the continued strength of Asia's key drivers, China and India.
The minutes provide economists with an insight into the central bank's thinking on the factors bearing on monetary policy.
Whether the RBA would have left the cash rate at 4.75 per cent, as it did, on December 7 in the absence of Europe's troubles is not clear from the minutes.
But they show the RBA took into account the banks' super-sized increases in mortgage rates after its 25-basis-point lift in the cash rate last month. The high level of the Australian dollar remains a factor in its thinking.
The board judged current monetary policy conditions as ''mildly restrictive'', though ''appropriate'' given the booming export market and positive outlook for business investment.
While the RBA is widely expected to begin a new round of rate rises next year, economists judged from the tone of the latest minutes that this would not start until April.
''The RBA is 'comfortable' with current policy settings and it could take some time for them to be uncomfortable again,'' said Commonwealth Bank senior economist Michael Workman. He believes the central bank may wait for clear signs of higher inflation and consistently strong jobs growth before lifting rates again.
The RBA also appears to be more relaxed about any signs of an overheating economy, for now at least.
The minutes said improved household savings rates and lower consumer spending had allowed business investment to rise without causing a build-up in inflationary pressures.
While Europe's debt problems provided downside risks to the global economy, the central bank said it was prepared to see how events played out before acting further.
Former Reserve Bank economist Paul Bloxham, now with HSBC, is tipping official cash rates will rise next year.
''If you believe, as we do, that the saving rate won't stay at its current historically high level all on its own- and something will need to restrain it - then you also have in mind that interest rates will need to rise further,'' he said.
By Eric Johnston
Source: www.smh.com.au
The dominance of Europe in discussion at the RBA's last monthly board meeting suggests it is now paying closer attention to how the debt crisis is playing out.
The December 7 meeting was held before last week's move by ratings agency Moody's to cut Ireland's credit rating to three notches above junk.
Advertisement: Story continues below
But minutes of the meeting, released yesterday, suggest the RBA is sticking to its medium-term view of the domestic economy, with growth here underpinned by the continued strength of Asia's key drivers, China and India.
The minutes provide economists with an insight into the central bank's thinking on the factors bearing on monetary policy.
Whether the RBA would have left the cash rate at 4.75 per cent, as it did, on December 7 in the absence of Europe's troubles is not clear from the minutes.
But they show the RBA took into account the banks' super-sized increases in mortgage rates after its 25-basis-point lift in the cash rate last month. The high level of the Australian dollar remains a factor in its thinking.
The board judged current monetary policy conditions as ''mildly restrictive'', though ''appropriate'' given the booming export market and positive outlook for business investment.
While the RBA is widely expected to begin a new round of rate rises next year, economists judged from the tone of the latest minutes that this would not start until April.
''The RBA is 'comfortable' with current policy settings and it could take some time for them to be uncomfortable again,'' said Commonwealth Bank senior economist Michael Workman. He believes the central bank may wait for clear signs of higher inflation and consistently strong jobs growth before lifting rates again.
The RBA also appears to be more relaxed about any signs of an overheating economy, for now at least.
The minutes said improved household savings rates and lower consumer spending had allowed business investment to rise without causing a build-up in inflationary pressures.
While Europe's debt problems provided downside risks to the global economy, the central bank said it was prepared to see how events played out before acting further.
Former Reserve Bank economist Paul Bloxham, now with HSBC, is tipping official cash rates will rise next year.
''If you believe, as we do, that the saving rate won't stay at its current historically high level all on its own- and something will need to restrain it - then you also have in mind that interest rates will need to rise further,'' he said.
By Eric Johnston
Source: www.smh.com.au
Monday, December 20, 2010
THE GLOBAL ECONOMY BETWEEN ECONOMIC SHOCKS? Star hedge fund manager thinks it’s not over
The government tells us America is now out of the Great Recession and that we, and other industrialized nations, are on the way to recovery.
A well-known hedge fund manager disagrees.
David Einhorn, co-founder and president of the nearly $7 Billion hedge fund Greenlight Capital believes the global economy is “in a period between crises,” according to a new report in thestreet.com.
The report says Einhorn thinks the global economy is in a period where things for the moment seem relatively stable but that there's still a lot of “unfinished business” from the last crisis that will cause another global crisis.
Einhorn was interviewed on the Charlie Rose Show on PBS last week and predicted that at some point in the future a crisis not unlike the 2008-2009 recession will be triggered by growing problems not in the private sector but in the public sector.
He said on that show, “"I think what we did in the last crisis in resolving it was rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on, I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things…we managed to transfer a lot of the problems sort of from the private sector to the public sector. The problem is that it's such a large problem that eventually, I'm concerned that will eventually threaten the public sector as well.”
Einhorn claims that what happened in the economic crash of 08" is that government papered over the real problems.
“We bailed out a lot of institutions…a lot of people that had positioned themselves incorrectly -- ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it's investors and so forth. And because we weren't willing to go through that, we haven't been able to effectively clean up that mess, and it's created a very, very large budget deficit. And it's created a monetary policy that is extremely easy, and it seems to be perpetuating itself into a way that I think is going to eventually come to a tough spot."
And that tough spot he says, the next recession type event, will be caused this time by countries bankrupting themselves because of huge budget deficits.
Source: Sky valley chronicle
www.skyvalleychronicle.com
A well-known hedge fund manager disagrees.
David Einhorn, co-founder and president of the nearly $7 Billion hedge fund Greenlight Capital believes the global economy is “in a period between crises,” according to a new report in thestreet.com.
The report says Einhorn thinks the global economy is in a period where things for the moment seem relatively stable but that there's still a lot of “unfinished business” from the last crisis that will cause another global crisis.
Einhorn was interviewed on the Charlie Rose Show on PBS last week and predicted that at some point in the future a crisis not unlike the 2008-2009 recession will be triggered by growing problems not in the private sector but in the public sector.
He said on that show, “"I think what we did in the last crisis in resolving it was rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on, I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things…we managed to transfer a lot of the problems sort of from the private sector to the public sector. The problem is that it's such a large problem that eventually, I'm concerned that will eventually threaten the public sector as well.”
Einhorn claims that what happened in the economic crash of 08" is that government papered over the real problems.
“We bailed out a lot of institutions…a lot of people that had positioned themselves incorrectly -- ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it's investors and so forth. And because we weren't willing to go through that, we haven't been able to effectively clean up that mess, and it's created a very, very large budget deficit. And it's created a monetary policy that is extremely easy, and it seems to be perpetuating itself into a way that I think is going to eventually come to a tough spot."
And that tough spot he says, the next recession type event, will be caused this time by countries bankrupting themselves because of huge budget deficits.
Source: Sky valley chronicle
www.skyvalleychronicle.com
Saturday, December 18, 2010
Yearender: Economic growth helps India sit on high tables in int'l community
By Liu Yanan
MUMBAI, Dec. 18 (Xinhua) -- India, the third largest economy in Asia, has managed to sit on high tables like G20 in international community and eyes one permanent seat at United Nations' Security Council, bolstered by its near 9 percent gross domestic product (GDP) growth in 2010.
Indian top decision makers have played an active role in global economic governance, reform of international monetary system and climate change so far this year.
INDIA'S GROWTH STORY CONTINUES
Indian officials and businessmen often said that India's economy was almost insulated from horrible global financial tsunami since 2008, which is still playing out at corners of the globe.
Indian economic growth rebounded from 6.7 percent in fiscal year 2008-2009, and 7.4 percent in fiscal year 2009-2010 thanks to the dominance of domestic consumption and monetary stimulus policies.
The GDP growth even could rise to 9 percent in fiscal year 2010- 2011 starting from April 1, 2010, according to the mid-term economic analysis by the Ministry of Finance.
Earlier this year, Indian Prime Minister Manmohan Singh said he hoped that the country's economy could see 9 to 10 percent growth in the coming 25 years.
Standard Chartered Bank released a report in November, saying that India could grow faster than China as early as 2012 and turn into an economic entity with 30 trillion U.S. dollars by 2030 as the third largest economy in the world.
The Indian government has mapped out a blueprint to channel one trillion U.S. dollars of investment into infrastructure sector within 12th five-year plan period starting from April 2012 in order to reap demographic dividends and improve its productivity.
The impressive economic growth has drawn record-setting 38.27 billion U.S. dollars of investments from foreign institutional investors into its equity and debt market by Dec. 14 this year.
EYEING ACTIVE ROLE IN INT'L COMMUNITY
India pays great importance to the G20 summit and wants to interact with more powers in comparison with smaller club of BRIC countries including Brazil, Russia, India and China, said Kaushik Basu, chief economic adviser at the Ministry of Finance, prior to G20 summit held in Canada's Toronto in June 2010.
Afterwards, India sought to reconcile the tensions between China and the United States on the exchange rate of Chinese currency RMB by calling for dialogue and against protectionism at G20 Summit in Seoul, South Korea, in November this year.
India held a mild but clear stance at the meeting and strived to force ahead Doha Round trade talks despite the lack of enthusiasm from developed economies in the time of recession.
"Now that we've arrived at the 'high table', what is it that we want the 'high table' to do," said Raghuram G. Rajan, an honorary economic advisor to Prime Minister Manmohan Singh.
Rajan called for India to play more proactive role at G20 again from the largely reactive one and resume its role in the era of Non-Aligned Movement in the 1950s.
India also successfully leveraged the BRIC forum to push forward the reform of the international financial bodies and lifted its quota shares from 2.44 percent as the 11th shareholder to 2.75 percent as the 8th one.
India won support from the United States and France for its pursuit of permanent membership of an expanded Security Council when U.S. President Barack Obama and French President Nicolas Sarkozy visited India at the end of 2010.
During the recent visit by Chinese Premier Wen Jiabao to India, Wen stressed that China and India have shared interests and common views on the issue of U.N. Security Council reforms.
"We both maintain that priority should be given to increasing the representation of developing countries," Wen said, "Closer cooperation between our two countries on Security Council reform will help uphold the interests of developing countries and promote democracy in international relations."
Wen said China understands and supports India's desire to play a bigger role in the United Nations, including its Security Council.
"As a fast-growing big country with over one billion people, India should and can play an increasingly important role in international affairs," Wen said.
INFLATION HAUNTS "AAM AADMI"
Although India's economy has been growing rapidly in recent years, its high inflation at home threatens to derail the prospects of near double-digit economic growth in addition of laggard progress in infrastructure both physically and socially.
Inflation tax could plague India's "aam aadmi" (common people) in the coming years due to dependence on imported commodities, vulnerable agricultural sector and structural problems in the economy.
Meanwhile, the India government has caught in between socialist policies for economically weak people and market guidelines in the coming years in a bid to fight inflation, win ballots, lift the poor from poverty and maintain political stability.
Inflation is the most distorted part of India's economy with complex underlying forces, said a retired official at a conference in Mumbai.
Though the wholesale price index has come down to 7.48 percent in November as the lowest so far this year, inflation is still very high and close to economic growth rate.
High inflation has triggered nationwide protests in India in July and marred the credibility of incumbent government's ability to govern the country.
India will have 5 to 5.5 percent of inflation in the medium term resulting from structural causes, said recently Chetan Ahya, a well-known economist in India and South East Asia.
India's inflation will be very high in the next two or three years due to the inflows of cheap money printed in the developed economies, associate director with Angel Commodities Naveen Mathur said recently.
Naveen Mathur estimated that India's inflation will range from 6 to 7 percent next year even domestic fundamentals are fine. "We're bullish on crude oil prices with world economy in recovery and crude oil will be traded above 75 U.S. dollars per barrel even up to pre-crisis levels next year," said Kamlesh Jogi, an analyst with Fortune Equity Brokers in India.
India now imports around 75 percent of crude oil consumption and relies heavily on imported cooking coal and edible oil products.
Additionally, India has to tweak existing rigid labor laws and provide efficient training so that the promising demographic dividend will not become a nightmare to the economy.
Source: Xinhuane
www.xinhuanet.com
MUMBAI, Dec. 18 (Xinhua) -- India, the third largest economy in Asia, has managed to sit on high tables like G20 in international community and eyes one permanent seat at United Nations' Security Council, bolstered by its near 9 percent gross domestic product (GDP) growth in 2010.
Indian top decision makers have played an active role in global economic governance, reform of international monetary system and climate change so far this year.
INDIA'S GROWTH STORY CONTINUES
Indian officials and businessmen often said that India's economy was almost insulated from horrible global financial tsunami since 2008, which is still playing out at corners of the globe.
Indian economic growth rebounded from 6.7 percent in fiscal year 2008-2009, and 7.4 percent in fiscal year 2009-2010 thanks to the dominance of domestic consumption and monetary stimulus policies.
The GDP growth even could rise to 9 percent in fiscal year 2010- 2011 starting from April 1, 2010, according to the mid-term economic analysis by the Ministry of Finance.
Earlier this year, Indian Prime Minister Manmohan Singh said he hoped that the country's economy could see 9 to 10 percent growth in the coming 25 years.
Standard Chartered Bank released a report in November, saying that India could grow faster than China as early as 2012 and turn into an economic entity with 30 trillion U.S. dollars by 2030 as the third largest economy in the world.
The Indian government has mapped out a blueprint to channel one trillion U.S. dollars of investment into infrastructure sector within 12th five-year plan period starting from April 2012 in order to reap demographic dividends and improve its productivity.
The impressive economic growth has drawn record-setting 38.27 billion U.S. dollars of investments from foreign institutional investors into its equity and debt market by Dec. 14 this year.
EYEING ACTIVE ROLE IN INT'L COMMUNITY
India pays great importance to the G20 summit and wants to interact with more powers in comparison with smaller club of BRIC countries including Brazil, Russia, India and China, said Kaushik Basu, chief economic adviser at the Ministry of Finance, prior to G20 summit held in Canada's Toronto in June 2010.
Afterwards, India sought to reconcile the tensions between China and the United States on the exchange rate of Chinese currency RMB by calling for dialogue and against protectionism at G20 Summit in Seoul, South Korea, in November this year.
India held a mild but clear stance at the meeting and strived to force ahead Doha Round trade talks despite the lack of enthusiasm from developed economies in the time of recession.
"Now that we've arrived at the 'high table', what is it that we want the 'high table' to do," said Raghuram G. Rajan, an honorary economic advisor to Prime Minister Manmohan Singh.
Rajan called for India to play more proactive role at G20 again from the largely reactive one and resume its role in the era of Non-Aligned Movement in the 1950s.
India also successfully leveraged the BRIC forum to push forward the reform of the international financial bodies and lifted its quota shares from 2.44 percent as the 11th shareholder to 2.75 percent as the 8th one.
India won support from the United States and France for its pursuit of permanent membership of an expanded Security Council when U.S. President Barack Obama and French President Nicolas Sarkozy visited India at the end of 2010.
During the recent visit by Chinese Premier Wen Jiabao to India, Wen stressed that China and India have shared interests and common views on the issue of U.N. Security Council reforms.
"We both maintain that priority should be given to increasing the representation of developing countries," Wen said, "Closer cooperation between our two countries on Security Council reform will help uphold the interests of developing countries and promote democracy in international relations."
Wen said China understands and supports India's desire to play a bigger role in the United Nations, including its Security Council.
"As a fast-growing big country with over one billion people, India should and can play an increasingly important role in international affairs," Wen said.
INFLATION HAUNTS "AAM AADMI"
Although India's economy has been growing rapidly in recent years, its high inflation at home threatens to derail the prospects of near double-digit economic growth in addition of laggard progress in infrastructure both physically and socially.
Inflation tax could plague India's "aam aadmi" (common people) in the coming years due to dependence on imported commodities, vulnerable agricultural sector and structural problems in the economy.
Meanwhile, the India government has caught in between socialist policies for economically weak people and market guidelines in the coming years in a bid to fight inflation, win ballots, lift the poor from poverty and maintain political stability.
Inflation is the most distorted part of India's economy with complex underlying forces, said a retired official at a conference in Mumbai.
Though the wholesale price index has come down to 7.48 percent in November as the lowest so far this year, inflation is still very high and close to economic growth rate.
High inflation has triggered nationwide protests in India in July and marred the credibility of incumbent government's ability to govern the country.
India will have 5 to 5.5 percent of inflation in the medium term resulting from structural causes, said recently Chetan Ahya, a well-known economist in India and South East Asia.
India's inflation will be very high in the next two or three years due to the inflows of cheap money printed in the developed economies, associate director with Angel Commodities Naveen Mathur said recently.
Naveen Mathur estimated that India's inflation will range from 6 to 7 percent next year even domestic fundamentals are fine. "We're bullish on crude oil prices with world economy in recovery and crude oil will be traded above 75 U.S. dollars per barrel even up to pre-crisis levels next year," said Kamlesh Jogi, an analyst with Fortune Equity Brokers in India.
India now imports around 75 percent of crude oil consumption and relies heavily on imported cooking coal and edible oil products.
Additionally, India has to tweak existing rigid labor laws and provide efficient training so that the promising demographic dividend will not become a nightmare to the economy.
Source: Xinhuane
www.xinhuanet.com
Thursday, December 16, 2010
EU leaders meeting amid eurozone jitters
Concerns about the stability of the eurozone are set to dominate a meeting of European leaders in Brussels.
The two-day summit is expected to see an agreement to set up a permanent system for rescuing countries that get heavily into debt.
But there is still much debate about how such a system should operate.
Meanwhile concern over Spain's financial stability continued as it was forced to pay a higher rate of interest in a government bond sale.
Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.
That bail-out followed the 110bn-euro rescue of Greece in May.
Arriving at the summit, Sweden's Prime Minister Fredrik Reinfeldt stressed that beyond crisis management there was a long-term need for EU countries to reform labour markets and boost competitiveness.
Greece's Prime Minister George Papandreou said "the challenge is a collective one now - more integration... and all have to live up to their responsibilities".
'Succeed together'
Issues on the agenda in Brussels include:
* How to change the EU's Lisbon Treaty to allow changes to create a permanent stability mechanism for eurozone members
* Whether to increase the eurozone's 750bn-euro temporary bail-out fund, the European Financial Stability Facility (EFSF)
* The possibility of creating pan-European bonds to boost confidence in the euro.
But even assuming that leaders do agree to the way countries are helped, the slow pace of politics in Brussels means a permanent stability arrangement will not come into force until 2013, says BBC Europe correspondent Matthew Price.
In the meantime they will have to rely on the current temporary mechanism that has already been used to rescue Greece and the Irish Republic, he added.
And analysts have expressed concern that talks will not address a key issue - whether or not investors who have bought bonds in struggling euro nations will have to lose money, or in the language of the financial world, take a "haircut", on their investment between now and 2013.
This was causing "uncertainty" in financial markets, said Carsten Brzeski, a senior analyst at ING.
"This is an inconsistency. The politicians need to address this insolvency issue in the period between now and 2013," he told the BBC.
German caution
French Foreign Minister Michele Alliot-Marie said that the EU had to stop speculators from attacking eurozone countries and would adopt ways to do that at the summit.
And separately the Prime Minister of Luxembourg, Jean-Claude Juncker, said European leaders were determined to do everything to ensure the eurozone's financial stability.
On Wednesday, German Chancellor Angela Merkel stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."
But she has been an opponent of some suggested actions, including increasing the eurozone's euro bail-out fund or introducing euro bonds.
Concerns reflected
In its latest bond auction, Madrid managed to raise 2.4bn euros.
But the yield on the Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - was higher than that on previous auctions of similar bonds.
The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November,
And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.
The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.
Madrid insists it will not need to apply for a bail-out from the EFSF - the temporary rescue scheme funded by the EU and International Monetary Fund.
Downgrade threat
While the demand for Spanish bonds remained oversubscribed, concerns remained about Spain's ability to get affordable funding to refinance its debts and support its banks, said Kathleen Brooks, research director at Forex.com.
And this had wider implications for the single currency, she added.
"Spain is the canary in the coal mine for the survival of the eurozone," Ms Brooks said.
On Wednesday, ratings agency Moody's said it was reviewing Spain's credit rating with a view to downgrading it - warning of problems the country faced in refinancing its debts next year.
Moody's had already cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.
The two-day summit is expected to see an agreement to set up a permanent system for rescuing countries that get heavily into debt.
But there is still much debate about how such a system should operate.
Meanwhile concern over Spain's financial stability continued as it was forced to pay a higher rate of interest in a government bond sale.
Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.
That bail-out followed the 110bn-euro rescue of Greece in May.
Arriving at the summit, Sweden's Prime Minister Fredrik Reinfeldt stressed that beyond crisis management there was a long-term need for EU countries to reform labour markets and boost competitiveness.
Greece's Prime Minister George Papandreou said "the challenge is a collective one now - more integration... and all have to live up to their responsibilities".
'Succeed together'
Issues on the agenda in Brussels include:
* How to change the EU's Lisbon Treaty to allow changes to create a permanent stability mechanism for eurozone members
* Whether to increase the eurozone's 750bn-euro temporary bail-out fund, the European Financial Stability Facility (EFSF)
* The possibility of creating pan-European bonds to boost confidence in the euro.
But even assuming that leaders do agree to the way countries are helped, the slow pace of politics in Brussels means a permanent stability arrangement will not come into force until 2013, says BBC Europe correspondent Matthew Price.
In the meantime they will have to rely on the current temporary mechanism that has already been used to rescue Greece and the Irish Republic, he added.
And analysts have expressed concern that talks will not address a key issue - whether or not investors who have bought bonds in struggling euro nations will have to lose money, or in the language of the financial world, take a "haircut", on their investment between now and 2013.
This was causing "uncertainty" in financial markets, said Carsten Brzeski, a senior analyst at ING.
"This is an inconsistency. The politicians need to address this insolvency issue in the period between now and 2013," he told the BBC.
German caution
French Foreign Minister Michele Alliot-Marie said that the EU had to stop speculators from attacking eurozone countries and would adopt ways to do that at the summit.
And separately the Prime Minister of Luxembourg, Jean-Claude Juncker, said European leaders were determined to do everything to ensure the eurozone's financial stability.
On Wednesday, German Chancellor Angela Merkel stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."
But she has been an opponent of some suggested actions, including increasing the eurozone's euro bail-out fund or introducing euro bonds.
Concerns reflected
In its latest bond auction, Madrid managed to raise 2.4bn euros.
But the yield on the Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - was higher than that on previous auctions of similar bonds.
The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November,
And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.
The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.
Madrid insists it will not need to apply for a bail-out from the EFSF - the temporary rescue scheme funded by the EU and International Monetary Fund.
Downgrade threat
While the demand for Spanish bonds remained oversubscribed, concerns remained about Spain's ability to get affordable funding to refinance its debts and support its banks, said Kathleen Brooks, research director at Forex.com.
And this had wider implications for the single currency, she added.
"Spain is the canary in the coal mine for the survival of the eurozone," Ms Brooks said.
On Wednesday, ratings agency Moody's said it was reviewing Spain's credit rating with a view to downgrading it - warning of problems the country faced in refinancing its debts next year.
Moody's had already cut Spain's sovereign debt rating from the top, triple-A rating to Aa1 in September.
Gulf of Mexico leak: BP shares hit over legal move
BP shares have fallen after the US said it was suing the oil giant for alleged violations of federal safety laws over the Gulf of Mexico oil spill.
The lawsuit asks BP and and eight other firms be held liable without limitation for all clean-up and damage costs.
The Deepwater Horizon drilling rig explosion in April killed 11 workers and spilled millions of barrels of oil over several months.
BP's shares in London were trading down 1.7%.
BBC business editor Robert Peston said that drop had taken the edge off a recent strong run in BP shares.
But he added: "Investors plainly believe that the nature of the Department of Justice's case against BP hasn't increased potential liabilities for the company in a fundamental way."
BP said that it would respond to the claims later, adding the action did not constitute "any finding of liability or any judicial finding that the allegations have merit".
The oil leak became the worst environmental disaster in US history.
And BP has set aside $39.9bn (£25bn) to cover the costs stemming from the disaster.
But our business editor said that if BP were found to be grossly negligent, the costs it faced could rise significantly.
It could potentially add almost $16bn to the penalties BP would have to pay under the US Clean Water Act, he said.
And it would make it "perhaps impossible" for BP to recover costs it is incurring in the clean up and restitution from its co-owners of the Macondo Well, Anadarko and Mitsui, he added.
Precautions
The lawsuit charges the companies under the US Clean Water Act and Oil Pollution Act.
US Attorney General Eric Holder said the complaint alleged that "violations of safety and operational regulations" caused the explosion on 20 April.
The companies named in the lawsuit are BP Exploration and Production Inc, Anadarko Exploration & Production LP, Anadarko Petroleum Corporation, MOEX Offshore 2007 LLC, Triton Asset Leasing GMBH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc, Transocean Deepwater Inc and insurer QBE Underwriting Ltd/Lloyd's Syndicate 1036.
The key accusations are:
* Failing to take necessary precautions to keep the Macondo well under control in the period leading up to the 20 April explosion
* Failing to use the best available and safest drilling technology to monitor the well's conditions
* Failing to maintain continuous surveillance
* Failing to use and maintain equipment and material that were available and necessary to ensure the safety and protection of personnel, equipment, natural resources and the environment
"We intend to prove that these defendants are responsible for government removal costs, economic losses and environmental damages without limitation," Mr Holder said.
"As investigations continue, we will not hesitate to take whatever steps necessary to hold accountable those responsible for this spill."
BP said it would continue to co-operate with government inquiries and fulfil its commitments to clean up spilt oil in the Gulf.
Halliburton, the company that cemented the Macondo well, and Cameron International, which provided equipment for the well, was not targeted in the lawsuit.
Transocean disputed the charges brought by the government, saying that it should not be held liable for the actions of others.
"No drilling contractor has ever been held liable for discharges from a well under the Oil Pollution Act of 1990," the company said in a statement.
"The responsibility for hydrocarbons discharged from a well lies solely with its owner and operator."
Source: BBC
www.bbc.co.uk
The lawsuit asks BP and and eight other firms be held liable without limitation for all clean-up and damage costs.
The Deepwater Horizon drilling rig explosion in April killed 11 workers and spilled millions of barrels of oil over several months.
BP's shares in London were trading down 1.7%.
BBC business editor Robert Peston said that drop had taken the edge off a recent strong run in BP shares.
But he added: "Investors plainly believe that the nature of the Department of Justice's case against BP hasn't increased potential liabilities for the company in a fundamental way."
BP said that it would respond to the claims later, adding the action did not constitute "any finding of liability or any judicial finding that the allegations have merit".
The oil leak became the worst environmental disaster in US history.
And BP has set aside $39.9bn (£25bn) to cover the costs stemming from the disaster.
But our business editor said that if BP were found to be grossly negligent, the costs it faced could rise significantly.
It could potentially add almost $16bn to the penalties BP would have to pay under the US Clean Water Act, he said.
And it would make it "perhaps impossible" for BP to recover costs it is incurring in the clean up and restitution from its co-owners of the Macondo Well, Anadarko and Mitsui, he added.
Precautions
The lawsuit charges the companies under the US Clean Water Act and Oil Pollution Act.
US Attorney General Eric Holder said the complaint alleged that "violations of safety and operational regulations" caused the explosion on 20 April.
The companies named in the lawsuit are BP Exploration and Production Inc, Anadarko Exploration & Production LP, Anadarko Petroleum Corporation, MOEX Offshore 2007 LLC, Triton Asset Leasing GMBH, Transocean Holdings LLC, Transocean Offshore Deepwater Drilling Inc, Transocean Deepwater Inc and insurer QBE Underwriting Ltd/Lloyd's Syndicate 1036.
The key accusations are:
* Failing to take necessary precautions to keep the Macondo well under control in the period leading up to the 20 April explosion
* Failing to use the best available and safest drilling technology to monitor the well's conditions
* Failing to maintain continuous surveillance
* Failing to use and maintain equipment and material that were available and necessary to ensure the safety and protection of personnel, equipment, natural resources and the environment
"We intend to prove that these defendants are responsible for government removal costs, economic losses and environmental damages without limitation," Mr Holder said.
"As investigations continue, we will not hesitate to take whatever steps necessary to hold accountable those responsible for this spill."
BP said it would continue to co-operate with government inquiries and fulfil its commitments to clean up spilt oil in the Gulf.
Halliburton, the company that cemented the Macondo well, and Cameron International, which provided equipment for the well, was not targeted in the lawsuit.
Transocean disputed the charges brought by the government, saying that it should not be held liable for the actions of others.
"No drilling contractor has ever been held liable for discharges from a well under the Oil Pollution Act of 1990," the company said in a statement.
"The responsibility for hydrocarbons discharged from a well lies solely with its owner and operator."
Source: BBC
www.bbc.co.uk
Saturday, December 11, 2010
10 best stocks for 2011
Investors' fears that a bear market will return (and linger) has made for some bargains - and this group should thrive even if inflation returns.
Opportunity in growth stocks
Despite a gain of more than 10% in the S&P 500 over the past three months, there's still a real buying opportunity in growth stocks: Our 10 best for 2011 are expected to bolster their profits an average of 61% next year -- vs. 14% for the S&P -- and yet they trade at an average 12 times next year's earnings, vs. 13 times for the S&P.
Our selections this year are slanted toward commodities. Exposure to oil, chemicals, and fertilizer should provide protection against a falling dollar or an outbreak of a 1970s-style rise in inflation, which we think is a bigger threat than a double-dip recession. (We've also made some contrarian selections, including one housing-related stock.)
Mosaic
Market cap: $30.2 billion
2009 Revenue: $10 billion
P/E ratio: 15.4
Dividend yield: 0.3%
Ticker: MOS
As corn goes, so go the makers of fertilizer. That's good news for Mosaic, whose stock has had an 89% correlation with corn prices (if 100% means mirroring them exactly) during the past five years, according to SIG Susquehanna agriculture analyst Don Carson. The price of corn has jumped 25% over the last 12 months, and inventories are at their lowest since 1995. The reason: Heavy rains and scorching heat caused the2010 harvest to decline 4% from 2009 -- even as demand rose, with ethanol now consuming 41% of the U.S. corn crop and growing wealth in developing countries leading to increased food consumption.
Mosaic is up only 11% for the year, which means it has some catching up to do. And with analysts expecting a 48% earnings rise in 2011, the stock (which trades at 15.4 times those estimated profits) seems primed to flourish.
Mosaic enjoys other catalysts for greater sales of its main fertilizer products, phosphate and potash. According to a recent Merrill Lynch report, China -- which accounts for 20% of phosphate exports -- may soon restrict its sale outside that country, creating potential opportunity for Mosaic to increase its market share elsewhere in the world. Meanwhile BHP Billiton's failed bid to buy Potash Corp. of Saskatchewan and the acquisition of Potash One by German fertilizer company K S Aktiengesellschaft underscore potash's statusas "a commodity you want to be invested in," says Jennifer Dowty, portfolio manager of the John Hancock Global Agribusiness Fund, which has a large position in Mosaic.
Because the cost of building a potash mine can run into the billions, supply tends to lag well behind demand. Potash prices have tripled since 2004, and the International Fertilizer Association is expecting demand to grow 4.5% a year in coming years. Such fundamentals validate Mosaic's decision four years ago to invest heavily in expanding existing mines in the U.S. and Canada. Mosaic's potash production capacity has grown 10% since 2006 and is expected to increase another 60% between now and 2020. And as it rises, the company's stock seems likely to follow.
Agrium
Market cap: $12.6 billion
2009 Revenue: $9.1 billion
P/E ratio: 11.8
Dividend yield: 0.1%
Ticker: AGU
The basic argument for Agrium is similar to Mosaic's: Increased production of biofuels combined with rising global food demand means more need for fertilizer. But with Agrium that's only half the story.
Natural gas represents 80% of the cost of manufacturing Agrium's primary product, nitrogen fertilizer -- and the price of natural gas has fallen 50% since 2008. With U.S. gas production rising because of massive, recently exploited "shale gas" fields in Louisiana, Pennsylvania, and Texas, the International Energy Agency expects a gas "glut" to further depress prices in 2011.
Agrium's costs are dropping -- but that isn't the case for many of its competitors. Natural gas is difficult to transport, so new supplies in North America don't have much impact on prices elsewhere. "That gives Agrium a real competitive advantage," says mutual fund manager David Jordan, whose Agrium shares are among the largest positions in his Tributary Growth Opportunities Fund. Agrium's competitors in Eastern Europe are paying prices twice as high. Indeed, according to a Citigroup report on shale gas and its impact on the chemical industry, Agrium is the best positioned of all major fertilizer companies to benefit from the falling price of natural gas.
Agrium is not only a manufacturer of fertilizer but a retailer of it as well, as the company operates a 1,200-location chain of farm-product stores in six countries. This, says Richard Kelertas, an ag sector analyst at Canada's Dundee Securities (Agrium is headquartered in Calgary), allows the company to capture more of the spread between falling production costs and rising retail prices. "It's also a stable business with better margins," Kelertas says, noting that customers are buying not just products but services. "If the farmer is spending a lot of money on specialty seeds and fertilizers, he's not going to want to have inefficient application systems."
Agrium's earnings are on pace to jump 60% in 2010, and analysts are expecting another 44% bump next year -- giving Agrium's stock a forward P/E of 11.8.
Dow
Market cap: $36.1 billion
2009 Revenue: $45 billion
P/E ratio: 12.8
Dividend yield: 1.9%
Ticker: DOW
Cheap natural-gas prices are also a boon for Dow Chemical, which uses a key gas byproduct to make ethylene, a building block for the chemicals used to make plastic, rubber, paint, pharmaceuticals, detergents, and countless other products. "They've gone from being in the 80th percentile in terms of cost of production to the 20th percentile," says fund manager Tom Marsico, who counts Dow as a top 10 holding in his Marsico Focus and Marsico Growth funds.
Dow's business mix is improving too. In 2009, Dow acquired Rohm & Haas, a maker of specialty chemicals used heavily by the tech industry. The deal, which was announced just before the financial crisis began to unfold, got off to a rough start: Kuwait pulled out of a joint venture that was supposed to provide part of the financing. Forced to finance the $19 billion purchase on its own, Dow's stock took a beating from which it still hasn't fully recovered.
Nevertheless, by helping Dow broaden its portfolio -- which now includes chemicals used to make LED lighting, semiconductors, solar panels, and screens for TVs and smartphones -- Rohm & Haas has not only boosted Dow's earnings but also helped make them less cyclical. (As a bonus, Marsico thinks Dow may be on the verge of collecting a billion-dollar settlement from Kuwait, ending a dispute over the Rohm & Haas financing.)
Dow is also making hay in its agrosciences division; boosted by new Smartstax hybrid corn seeds that Dow co-developed with Monsanto, the division's operating profits are on pace to rise 14% in 2010 and another 16% next year, according to Credit Suisse analyst John McNulty.
Companywide, Dow's gross margins have improved from 13% to 19% over the past two years. Long-term debt has been pared by $4 billion. And analysts expect 2011 earnings to be up 32% -- on the heels of a 212% earnings improvement this year. (Granted, 2009 was a disaster.) Best of all, Dow's stock isn't priced to reflect the growth company it has become. The share's forward P/E is just 12.8. Says Marsico: "This is now a stock with a real long-term tailwind."
Transocean
Market cap: $21 billion
2009 Revenue: $12 billion
P/E ratio: 9.2
Dividend yield: N.A.
Ticker: RIG
The disaster that killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico didn't just crush BP's stock. It also sank shares of offshore driller Transocean, which owned and operated the Deepwater Horizon (which BP had leased). The rig was insured for $560 million -- already paid to Transocean -- but investors feared the company would be held liable for billions in cleanup costs and restitution.
Transocean maintained that its contract with BP shields it from liability. BP disagreed. So Transocean published the contract: BP "shall assume full responsibility for and shall protect, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination ... without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]." BP even indemnified Transocean against "gross" negligence or "any other theory of legal liability" claimed by plaintiffs or regulators.
Most analysts now agree the early worries were overblown. "We think that the company is well indemnified against blowout-related liability," writes Stifel Nicolaus analyst Thaddeus Vayda. He has an $82 price target for Transocean shares, up 22% from the current $67.
We think Transocean's upside is even greater, despite increased scrutiny of offshore drilling and the Obama administration's decision to reverse its expansion of gulf exploration. Oil prices have risen 17% since May as global demand has rebounded to 2007 levels. Weakness in the West has masked voracious demand in China and India. As North America and Europe recover, the return of triple-digit oil seems likely. Meanwhile production isn't keeping up with demand. All of that means a greater need for deepwater drilling. And consider this: There's a correlation between the price of oil and the value of the long-term contracts oil companies sign to lease Transocean's drilling rigs. Transocean earned $16.57 per share back in 2007 (when oil prices averaged $64). Apply its current 9.2 P/E ratio to those earnings, and you've got a $150 stock.
Royal Dutch Shell
Market cap: $108 billion
2009 Revenue: $278 billion
P/E ratio: 8.3
Dividend yield: 5.5%
Ticker: RDSA
Offshore drillers like Transocean tend to be the energy sector's more volatile stocks. If wild rides aren't your thing, consider Royal Dutch Shell. "Buying this stock is kind of like buying a utility with a call option on oil prices," says Greg Padilla, co-manager of the Nuveen Tradewinds Global Resources fund, which owns a significant Shell stake. Padilla means that as a compliment, but we'd go further. Yes, the stock has attributes that conservative investors favor, such as low debt and $28 billion a year in free cash flow. Shell's 5.5% dividend yield is higher than Chevron's (3.6%) or Exxon Mobil's (2.5%). It trades at a bargain 8.3 P/E, a shade below the 9.1 average for its peer group (and well below the S&P 500's 13).
But Shell is also a growth story. Analysts expect it to increase profits at a higher rate than any of its Big Oil brethren over the next two years. The reason? Many of them are struggling to find enough new oil to offset depletion in old wells. By contrast, Shell is expanding reserves and pumping up production. "They're one of the few majors with significant production growth," says Ben Fischer, portfolio manager of the Allianz NFJ International Value Fund.
The key has been Shell's hefty investment in research and development, typically higher than that of any other oil company. Next year, for example, Shell will open a $19 billion plant in Qatar that uses state-of-the-art technology (backed by 3,500 Shell patents) to convert Qatar's abundant natural-gas supplies into 260,000 barrels a day of diesel and other liquid fuels.
Shell has another advantage: geography. Much of the world's oil and gas is located in countries that are politically unstable, riddled with violence, or run by corrupt politicians (and sometimes all of the above). Perhaps burned by its experiences in places like Nigeria, Shell is now placing some of its biggest bets on unconventional oil-and-gas production in ultrastable countries such as Australia, Canada, and the U.S. "People tend to look at Royal Dutch Shell as a safe place to get a dividend yield, which it is," says Fischer. "But it has a really good set of strategic initiatives going for it too."
Lennar
Market cap: $2.8 billion
2009 Revenue: $3.1 billion
P/E ratio: 25
Dividend yield: 1.1%
Ticker: LEN
Lennar is one of the nation's largest homebuilders -- which hasn't been anything to boast about. It has careened from earning $1.4 billion in 2005 to a loss of $417 million in 2009, and its stock has swooned from $67 to $15 a share.
So why recommend Lennar? Consider the big picture. Between 1959 and 2007, housing starts in the U.S. averaged 1.5 million a year, a figure propelled by a potent force: Historically there have been 1 million to 1.5 million new households formed in the U.S. every year. But since the end of 2008, housing starts have averaged 575,000 a year. "It's unbelievable -- housing starts have been near 50-year lows for two years," says Karl Case, the Wellesley College economics professor who started sounding the alarm about the real estate bubble back in 2004.
Yes, foreclosures and inventories of unsold homes continue to be a drag on home prices -- and Lennar is a stock that will require patience -- but the market seems to be clearing. Inventories have declined for four consecutive months and are now down 25% since 2008. Harvard's Joint Center for Housing Studies expects 1.2 million household formations per year through 2015. Case thinks demand could soon outstrip supply, which would lead to higher prices. Analyst Stephen Kim of Alpine Funds is more optimistic: "There's no question you're going to see a snap-back in the housing market."
Moreover, Lennar has a history of making lemonade from real estate lemons. During the S&L crisis in the early 1990s, it made a small fortune buying distressed properties at 30¢ or 40¢ on the dollar and then reselling them for 50¢ or 60¢. The operation was so successful it was eventually spun off into a separate company -- LNR -- that was acquired for $3.8 billion. The brains behind LNR was Jeffrey Krasnoff, and he's now back at Lennar running a new distressed real estate unit called Rialto. Michael Winer, manager of the Third Avenue Real Estate Value Fund and a Lennar shareholder, thinks Rialto can cash in even without an immediate rebound in home prices. Says Winer: "This is a stock that could move very quickly. By the time everybody believes there's a recovery underway, it'll be too late. Lennar could already be up 40% or 50%."
East West Bancorp
Market cap: $2.6 billion
2009 Revenue: $880 million
P/E ratio: 12.9
Dividend yield: 0.2%
Ticker: EWBC
Like every other regional bank, East West Bancorp was hammered by the financial crisis. But unlike many competitors, East West owned up early to its problem loans. The Pasadena-based commercial bank raised $200 million and set aside $140 million in loan-loss provisions during the first half of 2008 -- before the bottom fell out of the credit markets.
That paid off, allowing East West to acquire the assets of two failed rivals from the FDIC at fire-sale prices. The FDIC even agreed to cover more than 80% of losses on the acquired loans and real estate. "I don't think the FDIC would have looked as favorably on the transactions if East West didn't already have its own portfolio in order," says George Henning, manager of the Pacific Advisors Small Cap Fund, which counts East West as a top-five holding.
The bank's results are heading in the right direction. East West recorded third-quarter profits of 27¢ a share vs. a 91¢ loss in the third quarter of '09. Analysts expect next year's earnings to climb 51%, above the 11% growth projected for East West's peer group. The bank is better capitalized than its competitors, according to a Sterne Agee report, and its percentage of nonperforming loans is lower -- 3.1% vs. 5.1%. Despite all this, East West's stock trades at 12.9 times projected 2011 earnings, a significant discount to the 19 P/E of its peers.
It's not just the numbers that look good. East West's demographics are attractive too. With the two FDIC transactions, East West is now believed to be the largest Chinese-American-focused bank in the country. (In addition to its 131 branches in the U.S., the bank also has three branches in China.) According to a recent Ariel/Hewitt study, Asian Americans boast a savings rate 19% higher than the national average. The median household income among Asian Americans is $65,469, vs. $49,777 for the entire U.S., and the number of Asian-owned businesses in the U.S. is growing at twice the national rate.
That helps explain why East West boasts a return on equity four times higher than the median regional bank, and why its shares seem likely to appreciate.
Royal Caribbean
Market cap: $8.7 billion
2009 Revenue: $5.9 billion
P/E ratio: 12.6
Dividend yield: N.A.
Ticker: RCL
After a stormy period, the sailing has lately been -- dare we say it? -- smooth for Royal Caribbean. The cruise company was pounded by the Great Recession, with earnings dipping from $2.68 to 75¢ per share between 2008 and 2009. Now leisure spending is recovering, and Royal Caribbean is benefiting from the fact that cruises have always cost less than comparable land vacations. The company's earnings are on pace to rise 168% in 2010. By comparison, operating earnings at Disney's theme parks and resorts fell 7% during Walt Disney Co.'s fiscal year that ended Oct. 2.
The recovery in vacation spending has been stronger in Europe than in the U.S., but that hasn't been a hindrance for Royal. "A hotel builder makes a big capital commitment and hopes that the geography works. If it doesn't, they're in big trouble," says Ken Kuhrt, an analyst and fund manager at Ariel Investments, which owns 2.5 million RCL shares. "Royal Caribbean simply comes up with new itineraries and moves its assets to wherever they're going to get the greatest return." By 2012, 50% of the cruise line's passengers will be international, according to William Blair analyst Sharon Zackfia, up from 25% five years ago.
Based on current bookings and the early success of its new Oasis of the Seas cruise ship (and her just-launched sister, Allure of the Seas), Royal Caribbean has said it expects 2011 earnings to surpass its previous record of $3.26 a share, which would mean profit growth next year of at least 62%. The two new ships boast 5,400 rooms -- vs. 3,600 for rival Carnival's biggest vessel -- as well as zip lines, water parks, and 3-D movie theaters. "People are willing to pay a premium to be on these new ships," says Kuhrt. "They're assets nobody else has -- it would take three years if somebody wanted to build a comparable ship."
The stock, now $40 a share, is trading at a modest 13 times 2011 earnings, but Kuhrt thinks it deserves a P/E closer to 17, which was Royal Caribbean's average valuation from 1997 to 2007. That translates to a stock price of $54 -- just the sort of gain that could fund a pleasant holiday.
Entropic
Market cap: $750 million
2009 Revenue: $116 million
P/E ratio: 11.7
Dividend yield: N.A.
Ticker: ENTR
Every stock portfolio needs one swing-for-the-fences bet on the latest gotta-have-it gadget or technology. San Diego-based Entropic is our pick. The company makes semiconductor chipsets that operate a home-networking system known as MoCa. That's the technology behind the multiroom DVR players -- marketed ad nauseam by DirecTV and Verizon FiOS -- that allow you to record a TV show in one room and then watch it in another.
DirecTV and FiOS already install MoCa in their new HD set-top boxes, and the three leading cable companies -- Comcast, Time Warner Cable, and Cox Communications -- have announced plans to add Entropic chipsets to theirs in 2011. If multiroom DVR capability does become standard on new HD set-top boxes -- and that's where the market seems headed -- the payoff for Entropic would be enormous. It currently controls 85% of the MoCa market. It can even afford to cede some share to Broadcom, as analysts anticipate it will, since the overall market for MoCa chipsets is expected to grow at a 35% to 40% annual rate over the next three years.
Chris Retzler, manager of the Needham Small Cap Growth Fund, sees another opportunity. He envisions a day in which Entropic chipsets are built into TVs, home stereos, game consoles, and Blu-ray players too, allowing for easy sharing of audio and video content across home networks. (In other words, if the kids are playing Wii downstairs on the TV that is connected to your Blu-ray player, you could still pop in a movie and watch it on the upstairs TV.) That could make Entropic a takeover target. "The opportunity for Entropic is enormous," says Retzler, whose fund owns 100,000 shares of Entropic.
Analysts expect 43% earnings growth from Entropic next year. Normally you'd have to pay a hefty premium for a tech stock with this kind of growth potential, but Entropic is priced more like a value stock: At $9 a share, it trades at 11.7 times projected 2011 earnings. Investors seem unduly alarmed by the competitive threat posed by Broadcom and perhaps by the jump in its stock price -- more than 200% this year. But we think it still has plenty of room to run.
Apple
Market cap: $284 billion
2009 Revenue: $43 billion
P/E ratio: 15.7
Dividend yield: N.A.
Ticker: AAPL
At $315 a share and up 47% for the year, Apple looks expensive. We thought so when we wrote about it in September. But after poring over Apple's recent financials, we're now convinced it's cheaper than it appears and that sales of the already hot iPhone and the iPad are set to go stratospheric. A concern we raised was Apple's vulnerability to a key misstep -- such as the iPhone 4 antenna problem that grabbed headlines this past summer. Yet during the July-to-September quarter, iPhone sales thrashed expectations, skyrocketing 91% vs. the same period last year.
What's astounding is that Apple did it with one hand tied behind its back. The iPhone isn't yet sold via the dominant wireless carriers in the U.S., China, Japan, and South Korea. Once Apple sheds exclusivity deals such as AT&T's in the U.S., iPhone sales should get a huge boost. Industrywide, smartphone sales increased 96% last quarter, according to Gartner Research. Apple's market share doubled in Canada and France once the top carriers started selling the iPhone.
Then there's the iPad. Apple sold 3.3 million of the tablet computers in its first three months, surpassing the debuts of both its own iPhone and the netbook category. Don't bet on a sophomore slump: Sales of iPhones and netbooks rose 246% and 155%, respectively, in their second year, says Bernstein Research.
Analysts predict Apple will earn $19.85 a share in the 2011 calendar year (up from $16.73 in 2010), which translates to a price/earnings ratio of 15.7. Sure, this is higher than the S&P 500's 13 P/E, but Apple's earnings have increased an average of 45% over the past three years, while the S&P's earnings have declined 4% per year.
Moreover, Apple's P/E is arguably inflated. Its free cash flow -- money actually flowing into company coffers -- is 14% higher than its reported net income, notes Bernstein analyst Toni Sacconaghi. Apple has over-reserved for U.S. taxes on foreign profits, but, according to Sacconaghi, the company is moving to reduce that, which will have the effect of boosting Apple's reported earnings and reducing its P/E. "The stock is definitely not overpriced," says Sacconaghi, "especially not for a company so well positioned in such fast-growing markets."
Source: CNN
www.snn.com
Opportunity in growth stocks
Despite a gain of more than 10% in the S&P 500 over the past three months, there's still a real buying opportunity in growth stocks: Our 10 best for 2011 are expected to bolster their profits an average of 61% next year -- vs. 14% for the S&P -- and yet they trade at an average 12 times next year's earnings, vs. 13 times for the S&P.
Our selections this year are slanted toward commodities. Exposure to oil, chemicals, and fertilizer should provide protection against a falling dollar or an outbreak of a 1970s-style rise in inflation, which we think is a bigger threat than a double-dip recession. (We've also made some contrarian selections, including one housing-related stock.)
Mosaic
Market cap: $30.2 billion
2009 Revenue: $10 billion
P/E ratio: 15.4
Dividend yield: 0.3%
Ticker: MOS
As corn goes, so go the makers of fertilizer. That's good news for Mosaic, whose stock has had an 89% correlation with corn prices (if 100% means mirroring them exactly) during the past five years, according to SIG Susquehanna agriculture analyst Don Carson. The price of corn has jumped 25% over the last 12 months, and inventories are at their lowest since 1995. The reason: Heavy rains and scorching heat caused the2010 harvest to decline 4% from 2009 -- even as demand rose, with ethanol now consuming 41% of the U.S. corn crop and growing wealth in developing countries leading to increased food consumption.
Mosaic is up only 11% for the year, which means it has some catching up to do. And with analysts expecting a 48% earnings rise in 2011, the stock (which trades at 15.4 times those estimated profits) seems primed to flourish.
Mosaic enjoys other catalysts for greater sales of its main fertilizer products, phosphate and potash. According to a recent Merrill Lynch report, China -- which accounts for 20% of phosphate exports -- may soon restrict its sale outside that country, creating potential opportunity for Mosaic to increase its market share elsewhere in the world. Meanwhile BHP Billiton's failed bid to buy Potash Corp. of Saskatchewan and the acquisition of Potash One by German fertilizer company K S Aktiengesellschaft underscore potash's statusas "a commodity you want to be invested in," says Jennifer Dowty, portfolio manager of the John Hancock Global Agribusiness Fund, which has a large position in Mosaic.
Because the cost of building a potash mine can run into the billions, supply tends to lag well behind demand. Potash prices have tripled since 2004, and the International Fertilizer Association is expecting demand to grow 4.5% a year in coming years. Such fundamentals validate Mosaic's decision four years ago to invest heavily in expanding existing mines in the U.S. and Canada. Mosaic's potash production capacity has grown 10% since 2006 and is expected to increase another 60% between now and 2020. And as it rises, the company's stock seems likely to follow.
Agrium
Market cap: $12.6 billion
2009 Revenue: $9.1 billion
P/E ratio: 11.8
Dividend yield: 0.1%
Ticker: AGU
The basic argument for Agrium is similar to Mosaic's: Increased production of biofuels combined with rising global food demand means more need for fertilizer. But with Agrium that's only half the story.
Natural gas represents 80% of the cost of manufacturing Agrium's primary product, nitrogen fertilizer -- and the price of natural gas has fallen 50% since 2008. With U.S. gas production rising because of massive, recently exploited "shale gas" fields in Louisiana, Pennsylvania, and Texas, the International Energy Agency expects a gas "glut" to further depress prices in 2011.
Agrium's costs are dropping -- but that isn't the case for many of its competitors. Natural gas is difficult to transport, so new supplies in North America don't have much impact on prices elsewhere. "That gives Agrium a real competitive advantage," says mutual fund manager David Jordan, whose Agrium shares are among the largest positions in his Tributary Growth Opportunities Fund. Agrium's competitors in Eastern Europe are paying prices twice as high. Indeed, according to a Citigroup report on shale gas and its impact on the chemical industry, Agrium is the best positioned of all major fertilizer companies to benefit from the falling price of natural gas.
Agrium is not only a manufacturer of fertilizer but a retailer of it as well, as the company operates a 1,200-location chain of farm-product stores in six countries. This, says Richard Kelertas, an ag sector analyst at Canada's Dundee Securities (Agrium is headquartered in Calgary), allows the company to capture more of the spread between falling production costs and rising retail prices. "It's also a stable business with better margins," Kelertas says, noting that customers are buying not just products but services. "If the farmer is spending a lot of money on specialty seeds and fertilizers, he's not going to want to have inefficient application systems."
Agrium's earnings are on pace to jump 60% in 2010, and analysts are expecting another 44% bump next year -- giving Agrium's stock a forward P/E of 11.8.
Dow
Market cap: $36.1 billion
2009 Revenue: $45 billion
P/E ratio: 12.8
Dividend yield: 1.9%
Ticker: DOW
Cheap natural-gas prices are also a boon for Dow Chemical, which uses a key gas byproduct to make ethylene, a building block for the chemicals used to make plastic, rubber, paint, pharmaceuticals, detergents, and countless other products. "They've gone from being in the 80th percentile in terms of cost of production to the 20th percentile," says fund manager Tom Marsico, who counts Dow as a top 10 holding in his Marsico Focus and Marsico Growth funds.
Dow's business mix is improving too. In 2009, Dow acquired Rohm & Haas, a maker of specialty chemicals used heavily by the tech industry. The deal, which was announced just before the financial crisis began to unfold, got off to a rough start: Kuwait pulled out of a joint venture that was supposed to provide part of the financing. Forced to finance the $19 billion purchase on its own, Dow's stock took a beating from which it still hasn't fully recovered.
Nevertheless, by helping Dow broaden its portfolio -- which now includes chemicals used to make LED lighting, semiconductors, solar panels, and screens for TVs and smartphones -- Rohm & Haas has not only boosted Dow's earnings but also helped make them less cyclical. (As a bonus, Marsico thinks Dow may be on the verge of collecting a billion-dollar settlement from Kuwait, ending a dispute over the Rohm & Haas financing.)
Dow is also making hay in its agrosciences division; boosted by new Smartstax hybrid corn seeds that Dow co-developed with Monsanto, the division's operating profits are on pace to rise 14% in 2010 and another 16% next year, according to Credit Suisse analyst John McNulty.
Companywide, Dow's gross margins have improved from 13% to 19% over the past two years. Long-term debt has been pared by $4 billion. And analysts expect 2011 earnings to be up 32% -- on the heels of a 212% earnings improvement this year. (Granted, 2009 was a disaster.) Best of all, Dow's stock isn't priced to reflect the growth company it has become. The share's forward P/E is just 12.8. Says Marsico: "This is now a stock with a real long-term tailwind."
Transocean
Market cap: $21 billion
2009 Revenue: $12 billion
P/E ratio: 9.2
Dividend yield: N.A.
Ticker: RIG
The disaster that killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico didn't just crush BP's stock. It also sank shares of offshore driller Transocean, which owned and operated the Deepwater Horizon (which BP had leased). The rig was insured for $560 million -- already paid to Transocean -- but investors feared the company would be held liable for billions in cleanup costs and restitution.
Transocean maintained that its contract with BP shields it from liability. BP disagreed. So Transocean published the contract: BP "shall assume full responsibility for and shall protect, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination ... without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]." BP even indemnified Transocean against "gross" negligence or "any other theory of legal liability" claimed by plaintiffs or regulators.
Most analysts now agree the early worries were overblown. "We think that the company is well indemnified against blowout-related liability," writes Stifel Nicolaus analyst Thaddeus Vayda. He has an $82 price target for Transocean shares, up 22% from the current $67.
We think Transocean's upside is even greater, despite increased scrutiny of offshore drilling and the Obama administration's decision to reverse its expansion of gulf exploration. Oil prices have risen 17% since May as global demand has rebounded to 2007 levels. Weakness in the West has masked voracious demand in China and India. As North America and Europe recover, the return of triple-digit oil seems likely. Meanwhile production isn't keeping up with demand. All of that means a greater need for deepwater drilling. And consider this: There's a correlation between the price of oil and the value of the long-term contracts oil companies sign to lease Transocean's drilling rigs. Transocean earned $16.57 per share back in 2007 (when oil prices averaged $64). Apply its current 9.2 P/E ratio to those earnings, and you've got a $150 stock.
Royal Dutch Shell
Market cap: $108 billion
2009 Revenue: $278 billion
P/E ratio: 8.3
Dividend yield: 5.5%
Ticker: RDSA
Offshore drillers like Transocean tend to be the energy sector's more volatile stocks. If wild rides aren't your thing, consider Royal Dutch Shell. "Buying this stock is kind of like buying a utility with a call option on oil prices," says Greg Padilla, co-manager of the Nuveen Tradewinds Global Resources fund, which owns a significant Shell stake. Padilla means that as a compliment, but we'd go further. Yes, the stock has attributes that conservative investors favor, such as low debt and $28 billion a year in free cash flow. Shell's 5.5% dividend yield is higher than Chevron's (3.6%) or Exxon Mobil's (2.5%). It trades at a bargain 8.3 P/E, a shade below the 9.1 average for its peer group (and well below the S&P 500's 13).
But Shell is also a growth story. Analysts expect it to increase profits at a higher rate than any of its Big Oil brethren over the next two years. The reason? Many of them are struggling to find enough new oil to offset depletion in old wells. By contrast, Shell is expanding reserves and pumping up production. "They're one of the few majors with significant production growth," says Ben Fischer, portfolio manager of the Allianz NFJ International Value Fund.
The key has been Shell's hefty investment in research and development, typically higher than that of any other oil company. Next year, for example, Shell will open a $19 billion plant in Qatar that uses state-of-the-art technology (backed by 3,500 Shell patents) to convert Qatar's abundant natural-gas supplies into 260,000 barrels a day of diesel and other liquid fuels.
Shell has another advantage: geography. Much of the world's oil and gas is located in countries that are politically unstable, riddled with violence, or run by corrupt politicians (and sometimes all of the above). Perhaps burned by its experiences in places like Nigeria, Shell is now placing some of its biggest bets on unconventional oil-and-gas production in ultrastable countries such as Australia, Canada, and the U.S. "People tend to look at Royal Dutch Shell as a safe place to get a dividend yield, which it is," says Fischer. "But it has a really good set of strategic initiatives going for it too."
Lennar
Market cap: $2.8 billion
2009 Revenue: $3.1 billion
P/E ratio: 25
Dividend yield: 1.1%
Ticker: LEN
Lennar is one of the nation's largest homebuilders -- which hasn't been anything to boast about. It has careened from earning $1.4 billion in 2005 to a loss of $417 million in 2009, and its stock has swooned from $67 to $15 a share.
So why recommend Lennar? Consider the big picture. Between 1959 and 2007, housing starts in the U.S. averaged 1.5 million a year, a figure propelled by a potent force: Historically there have been 1 million to 1.5 million new households formed in the U.S. every year. But since the end of 2008, housing starts have averaged 575,000 a year. "It's unbelievable -- housing starts have been near 50-year lows for two years," says Karl Case, the Wellesley College economics professor who started sounding the alarm about the real estate bubble back in 2004.
Yes, foreclosures and inventories of unsold homes continue to be a drag on home prices -- and Lennar is a stock that will require patience -- but the market seems to be clearing. Inventories have declined for four consecutive months and are now down 25% since 2008. Harvard's Joint Center for Housing Studies expects 1.2 million household formations per year through 2015. Case thinks demand could soon outstrip supply, which would lead to higher prices. Analyst Stephen Kim of Alpine Funds is more optimistic: "There's no question you're going to see a snap-back in the housing market."
Moreover, Lennar has a history of making lemonade from real estate lemons. During the S&L crisis in the early 1990s, it made a small fortune buying distressed properties at 30¢ or 40¢ on the dollar and then reselling them for 50¢ or 60¢. The operation was so successful it was eventually spun off into a separate company -- LNR -- that was acquired for $3.8 billion. The brains behind LNR was Jeffrey Krasnoff, and he's now back at Lennar running a new distressed real estate unit called Rialto. Michael Winer, manager of the Third Avenue Real Estate Value Fund and a Lennar shareholder, thinks Rialto can cash in even without an immediate rebound in home prices. Says Winer: "This is a stock that could move very quickly. By the time everybody believes there's a recovery underway, it'll be too late. Lennar could already be up 40% or 50%."
East West Bancorp
Market cap: $2.6 billion
2009 Revenue: $880 million
P/E ratio: 12.9
Dividend yield: 0.2%
Ticker: EWBC
Like every other regional bank, East West Bancorp was hammered by the financial crisis. But unlike many competitors, East West owned up early to its problem loans. The Pasadena-based commercial bank raised $200 million and set aside $140 million in loan-loss provisions during the first half of 2008 -- before the bottom fell out of the credit markets.
That paid off, allowing East West to acquire the assets of two failed rivals from the FDIC at fire-sale prices. The FDIC even agreed to cover more than 80% of losses on the acquired loans and real estate. "I don't think the FDIC would have looked as favorably on the transactions if East West didn't already have its own portfolio in order," says George Henning, manager of the Pacific Advisors Small Cap Fund, which counts East West as a top-five holding.
The bank's results are heading in the right direction. East West recorded third-quarter profits of 27¢ a share vs. a 91¢ loss in the third quarter of '09. Analysts expect next year's earnings to climb 51%, above the 11% growth projected for East West's peer group. The bank is better capitalized than its competitors, according to a Sterne Agee report, and its percentage of nonperforming loans is lower -- 3.1% vs. 5.1%. Despite all this, East West's stock trades at 12.9 times projected 2011 earnings, a significant discount to the 19 P/E of its peers.
It's not just the numbers that look good. East West's demographics are attractive too. With the two FDIC transactions, East West is now believed to be the largest Chinese-American-focused bank in the country. (In addition to its 131 branches in the U.S., the bank also has three branches in China.) According to a recent Ariel/Hewitt study, Asian Americans boast a savings rate 19% higher than the national average. The median household income among Asian Americans is $65,469, vs. $49,777 for the entire U.S., and the number of Asian-owned businesses in the U.S. is growing at twice the national rate.
That helps explain why East West boasts a return on equity four times higher than the median regional bank, and why its shares seem likely to appreciate.
Royal Caribbean
Market cap: $8.7 billion
2009 Revenue: $5.9 billion
P/E ratio: 12.6
Dividend yield: N.A.
Ticker: RCL
After a stormy period, the sailing has lately been -- dare we say it? -- smooth for Royal Caribbean. The cruise company was pounded by the Great Recession, with earnings dipping from $2.68 to 75¢ per share between 2008 and 2009. Now leisure spending is recovering, and Royal Caribbean is benefiting from the fact that cruises have always cost less than comparable land vacations. The company's earnings are on pace to rise 168% in 2010. By comparison, operating earnings at Disney's theme parks and resorts fell 7% during Walt Disney Co.'s fiscal year that ended Oct. 2.
The recovery in vacation spending has been stronger in Europe than in the U.S., but that hasn't been a hindrance for Royal. "A hotel builder makes a big capital commitment and hopes that the geography works. If it doesn't, they're in big trouble," says Ken Kuhrt, an analyst and fund manager at Ariel Investments, which owns 2.5 million RCL shares. "Royal Caribbean simply comes up with new itineraries and moves its assets to wherever they're going to get the greatest return." By 2012, 50% of the cruise line's passengers will be international, according to William Blair analyst Sharon Zackfia, up from 25% five years ago.
Based on current bookings and the early success of its new Oasis of the Seas cruise ship (and her just-launched sister, Allure of the Seas), Royal Caribbean has said it expects 2011 earnings to surpass its previous record of $3.26 a share, which would mean profit growth next year of at least 62%. The two new ships boast 5,400 rooms -- vs. 3,600 for rival Carnival's biggest vessel -- as well as zip lines, water parks, and 3-D movie theaters. "People are willing to pay a premium to be on these new ships," says Kuhrt. "They're assets nobody else has -- it would take three years if somebody wanted to build a comparable ship."
The stock, now $40 a share, is trading at a modest 13 times 2011 earnings, but Kuhrt thinks it deserves a P/E closer to 17, which was Royal Caribbean's average valuation from 1997 to 2007. That translates to a stock price of $54 -- just the sort of gain that could fund a pleasant holiday.
Entropic
Market cap: $750 million
2009 Revenue: $116 million
P/E ratio: 11.7
Dividend yield: N.A.
Ticker: ENTR
Every stock portfolio needs one swing-for-the-fences bet on the latest gotta-have-it gadget or technology. San Diego-based Entropic is our pick. The company makes semiconductor chipsets that operate a home-networking system known as MoCa. That's the technology behind the multiroom DVR players -- marketed ad nauseam by DirecTV and Verizon FiOS -- that allow you to record a TV show in one room and then watch it in another.
DirecTV and FiOS already install MoCa in their new HD set-top boxes, and the three leading cable companies -- Comcast, Time Warner Cable, and Cox Communications -- have announced plans to add Entropic chipsets to theirs in 2011. If multiroom DVR capability does become standard on new HD set-top boxes -- and that's where the market seems headed -- the payoff for Entropic would be enormous. It currently controls 85% of the MoCa market. It can even afford to cede some share to Broadcom, as analysts anticipate it will, since the overall market for MoCa chipsets is expected to grow at a 35% to 40% annual rate over the next three years.
Chris Retzler, manager of the Needham Small Cap Growth Fund, sees another opportunity. He envisions a day in which Entropic chipsets are built into TVs, home stereos, game consoles, and Blu-ray players too, allowing for easy sharing of audio and video content across home networks. (In other words, if the kids are playing Wii downstairs on the TV that is connected to your Blu-ray player, you could still pop in a movie and watch it on the upstairs TV.) That could make Entropic a takeover target. "The opportunity for Entropic is enormous," says Retzler, whose fund owns 100,000 shares of Entropic.
Analysts expect 43% earnings growth from Entropic next year. Normally you'd have to pay a hefty premium for a tech stock with this kind of growth potential, but Entropic is priced more like a value stock: At $9 a share, it trades at 11.7 times projected 2011 earnings. Investors seem unduly alarmed by the competitive threat posed by Broadcom and perhaps by the jump in its stock price -- more than 200% this year. But we think it still has plenty of room to run.
Apple
Market cap: $284 billion
2009 Revenue: $43 billion
P/E ratio: 15.7
Dividend yield: N.A.
Ticker: AAPL
At $315 a share and up 47% for the year, Apple looks expensive. We thought so when we wrote about it in September. But after poring over Apple's recent financials, we're now convinced it's cheaper than it appears and that sales of the already hot iPhone and the iPad are set to go stratospheric. A concern we raised was Apple's vulnerability to a key misstep -- such as the iPhone 4 antenna problem that grabbed headlines this past summer. Yet during the July-to-September quarter, iPhone sales thrashed expectations, skyrocketing 91% vs. the same period last year.
What's astounding is that Apple did it with one hand tied behind its back. The iPhone isn't yet sold via the dominant wireless carriers in the U.S., China, Japan, and South Korea. Once Apple sheds exclusivity deals such as AT&T's in the U.S., iPhone sales should get a huge boost. Industrywide, smartphone sales increased 96% last quarter, according to Gartner Research. Apple's market share doubled in Canada and France once the top carriers started selling the iPhone.
Then there's the iPad. Apple sold 3.3 million of the tablet computers in its first three months, surpassing the debuts of both its own iPhone and the netbook category. Don't bet on a sophomore slump: Sales of iPhones and netbooks rose 246% and 155%, respectively, in their second year, says Bernstein Research.
Analysts predict Apple will earn $19.85 a share in the 2011 calendar year (up from $16.73 in 2010), which translates to a price/earnings ratio of 15.7. Sure, this is higher than the S&P 500's 13 P/E, but Apple's earnings have increased an average of 45% over the past three years, while the S&P's earnings have declined 4% per year.
Moreover, Apple's P/E is arguably inflated. Its free cash flow -- money actually flowing into company coffers -- is 14% higher than its reported net income, notes Bernstein analyst Toni Sacconaghi. Apple has over-reserved for U.S. taxes on foreign profits, but, according to Sacconaghi, the company is moving to reduce that, which will have the effect of boosting Apple's reported earnings and reducing its P/E. "The stock is definitely not overpriced," says Sacconaghi, "especially not for a company so well positioned in such fast-growing markets."
Source: CNN
www.snn.com
Subscribe to:
Posts (Atom)