For over a year I have been arguing that more attention needs to be given to the supply side of the equation. Yes, the growth rate of real GDP has been going down and the rate of employment has been going up. But, the rate of inflation, as measured by the rate of increase of the GDP price deflator has not declined since the fourth quarter of 2007. If it were just a demand side problem, this would not be the case.

I focus on the rate of increase in the GDP implicit deflator because of some of the measurement problems associated with the Consumer Price Index, such as the treatment of housing expenses and energy. Certainly, the CPI should be watched, but in dealing with economic aggregates, I prefer the former.

My point has been that if the problems in the economy were all tied to a substantial fall in aggregate demand, then there should have been a more substantial lessening in the rate of price increases. Consequently, my argument has been that something has happened on the supply side of the economy for the numbers to have been reported as they have been.

I would like to point to two areas of the United States economy that indicates that the problems of recovery may be more difficult to overcome than if the dislocation in the economy were just one of inadequate aggregate demand. The first area is that of industrial output; the second area is the labor market.

In terms of the industrial base of the economy I would like to focus upon industrial production and the industrial utilization of capacity. Industrial production has been declining steadily since the start of the recession in December 2007. At that time, industrial production was growing at about a 2.0% year-over-year rate of growth. By April 2008 the year-over-year rate of growth had become negative. The figures for 2009 are
January -10.8
February -11.3
March -12.6
April -12.7
May -13.4

This certainly shows a continuing weakening in the economy. However, taken by itself I don’t think that it carries more meaning than does the decline in the rate of growth of real GDP which has been declining as well.

Combine this performance with the figures on capacity utilization and one gets a different picture. As expected, total industry capacity utilization has dropped substantially in this recession. In December 2007, the figure stood at a little over 80.0%. In May 2009, capacity utilization had fallen to about 68.0%. This is the largest 18 month decline in the post-World War II period.

But, this is not all. The peak in capacity utilization in the past ten years was only slightly more than the December 2007 figure. But, this peak of the last ten years was substantially below the level of capacity utilization for most of the 1990s which was below the peak utilization in the 1970s which was below the peak utilization in the 1960s. That is, it appears as if we have been using less and less of our capacity on a regular basis since the 1960s.

The structure of our industrial base is changing. We can see that in autos, in steel, and in many other parts of our manufacturing base. It appears as if the weakness in our economy is composed of two things: first the cyclical swing in business; but this weakness is on top of a secular decline in our productive ability. The economy is in the process of restructuring!

This shift is also showing up in labor markets. The civilian participation rate in the labor force for the United States rose from the late 1960s into the 1990s when it peaked a little above 67.0%. The civilian participation rate has declined since late 2000 and has remained below 66.2% since 2004. In terms of the number of people who are not participating in the labor market any more, this represents a large number. People have left the labor force in the last five or six years and this trend has, of course, been exacerbated by the recession. Over the past forty years the rise in the participation rate has slowed down or stopped during recessions, but at no time did it decline as it did in the in the past six years.

Of further interest, the Labor Department reported that separations from jobs in April remained relatively constant as they have for the past two years, but the rate of hiring continued to be quite low. In early 2008 the percentage of the labor force that were separated from their jobs was about equal to the percentage that were being hired. Since then separations have exceeded hirings, as might be expected, causing the unemployment rate to rise.

In terms of those that were separated from their jobs, there was a dramatic shift between those that quit their jobs and those that were laid off or discharged from their jobs. The percentage of layoffs and discharges rose dramatically from April 2008 to April 2009 whereas quit levels dropped substantially. That is, although separation rates did not change much at all during this time, the composition of those being separated from their positions experienced a tremendous shift. This is an indication that there is a structural shift in what is happening in the labor markets.

This information leads me to believe that there is a substantial restructuring taking place in the United States economy. And, a structural shift is a supply side issue and not a demand side issue. In fact, demand side responses can just make a bad situation worse by trying to force people back into positions that companies and industries are attempting to eliminate because the world has changed.

The figures on industrial production and capacity utilization seem to indicate that industry is changing and the numbers from the labor market reinforce that conclusion. Pumping up aggregate demand is an attempt to stop this restructuring or, at least, slow it down.

The problem that policymakers’ face is that they, or we, do not know what the new industrial structure is going to look like. It is impossible for anyone to know. People can make guesses, but that is all they are—guesses. And, in situations like this, it is more likely that the guesses will be wrong rather than being right. It’s just that the future is unknown. The need for the United States economy to restructure just adds another “unknown, unknown” to our list of “known unknowns” and “unknown, unknowns.” My guess is that this restructuring is going to take some time and could be sidetracked by huge government deficits and a supportive monetary policy.

Good Article? Pull it from here:
A Walk on the Supply Side

Because of this the issue that seems on the minds of many people is: how is the Fed going to remove all the bank reserves it has pumped into the banking system over the past ten months? The obvious concern is that the recessionary downdraft would turn into an inflationary nightmare. In other words, these people are asking for an explanation of the “exit strategy” the Federal Reserve plans from its policy of preventing a major economic collapse?

Chairman Bernanke spoke to Congress last week to give some assurance that the Federal Reserve knew what it was doing and would, therefore, do what it needed to do as the economy recovered to keep country from experiencing a wicked bout of inflation. I did not sense a lot of confidence that the hypothesized “exit strategy” would unfold as Bernanke stated that it would.

Bernanke also claimed that the United States economy, although it would begin recovering from the recession soon, would not emerge rapidly. Consequently, the Federal Reserve would have to keep its target Federal Funds rate at the present levels for an extended period of time.

There are two immediate concerns with Bernanke’s presentation. First, the Federal Reserve always tends to react to the economic situation. It does not lead economic events. Simply put, the Federal Reserve will not move in advance of any evidence that inflation is picking up. It will follow such evidence. Furthermore, can you see this Federal Reserve taking on Congress by saying that it is tightening up on monetary policy when economic growth is still moderate or just tepid and unemployment rates are above 8% and inflation has not began to accelerate? This Fed does not have that independence from the political side of the government.

Second, even if inflation does begin to pick up speed increasing rapidly enough to cause some concern in financial markets, can you see Congress accepting an inflation target versus a target for faster economic growth. At no time in post-World War II history has the Federal Reserve crossed a presidential administration or a Congress in the early stages of an economic recovery to follow an anti-inflationary period. This starts right with the “Accord” of 1951 to the present. (The Volcker reign at the Fed does not qualify for this as its timing in the economic cycle was not the same.) The Employment Act of 1948, and as modified, still rules as far as Presidents and Congresses are concerned.

Plus there is the concern over the federal deficit. There will be some form of health care coming along, and an energy policy, and other policy initiatives that will continue to put pressure on the budget of the government. The prospect for further large deficits and a rapidly growing national debt is still a reality that must be faced in the next few years. How is the Federal Reserve going to stay independent of all the Government bonds that are going to be coming to market?

This kind of environment will also encourage private borrowing again, both from businesses as well as the consumer. This kind of environment is inflationary like the early 2000s even if price indices like the Consumer Price Index do not rise dramatically. With private debt soaring along with the debt of the government we will have another period of “credit inflation.”

When the growth of credit exceeds the possible real growth of the economy or if the growth of credit in a particular sector of the economy exceeds the possible real growth of that sector, there is a “credit inflation.” This “credit inflation” can result in an asset bubble as occurred in the housing market earlier this decade where asset prices rose even if “flow” prices, like rents, or, implied rents as estimated for the Consumer Price Index, do not reflect this inflation. In addition, it can result in a substantial deficit in the trade balance and lead to a massive flow of dollars into world financial markets and whether these imbalances in the United States trade deficit will find happy recipients of the dollars, as China gladly seemed to receive dollars earlier on, is a question no one can answer at this time.

There is too much debt already in the financial system and it needs to be reduced. The Fed is trying to do the best it can and I don’t question the “good intentions” of the people that are attempting to get us through this mess. However, the problems are huge and I am not convinced that having good intentions is sufficient to lead us through these times. There is plenty of evidence that there is plenty of pain ahead of us. I am not convinced that Ben Bernanke is the person to create this pain and then lead us through the restructuring of the economy.

The Reappointment of Ben Bernanke to the Chair

There are two reasons I am not in favor of re-appointing Ben Bernanke as Chairman of the Board of Governors of the Federal Reserve System. First, I don’t believe that Bernanke has a plan on how to move the country into the future and I don’t believe that he ever did have a plan to move the country into the future. He was an advocate of “inflation targeting” and a student of the Great Depression. It is not the right time in history to pursue “inflation targeting” and the only thing Bernanke learned from the Great Depression is that if you are going to do something to try and combat a major economic downturn, do it in sufficient magnitude so that no one can say that you erred on the side of doing too little effort.

Second, I believe that the economy is going to have to go through some pain in the near future, a pain that results from the problems related to having too much debt in the economy. To restructure the balance sheets of American finance and industry there are still tough times to go through. I don’t see Ben Bernanke as the inflictor of pain. Paul Volcker was capable of acting in that way and had the personal strength of character to carry it through. Bernanke, in my mind, has neither the ability to inflict discipline on the economy nor does he have the weight of personality to carry it through.

Let’s look at Bernanke’s history. He was complicit with the Greenspan easy money policy that kept interest rates at historically low rates for too long a period of time and created the “credit inflation” that resulted in the housing bubble, the dramatic decline in the value of the United States dollar by about 40%, and the massive flooding of dollars into the world economy. He had no feeling at all for the lending practices in the mortgage sector or for the mess that was evolving in the area of credit derivatives and banking governance. Later on, he continued to follow a policy of fighting inflation when the financial markets were beginning to fall apart. He seemed to react hastily in September 2008 and was not a consistent guide through the bailout of Fannie Mae and Freddie Mac, the collapse of Lehman Brothers, and the strange subsidization of AIG. (See my post of November 16, 2008: http://seekingalpha.com/article/106186-the-bailout-plan-did-bernanke-panic.)

I do not know who should replace Bernanke at this time. All I do know is that we have a new administration and a new economic team. Bernanke, I believe, does not have what it takes to get the financial and monetary situation straightened out. I believe that President Obama needs to appoint his own choice as Chairman of the Board of Governors of the Federal Reserve System.

Good Article? Pull it from here:
The Future of Monetary Policy: The Exit Strategy

Cisco Systems [CSCO: 20.40, +0.14 (+0.69%)] Recent Price $17.04 Value Range 21.86 – $38.41
Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. Cisco Systems, Inc.’s products, which include primarily routers, switches, and products that the Company refers to as its technologies, are installed at enterprises, public institutions, telecommunications companies, commercial businesses and personal residences. In November 2008, the Company acquired Jabber Inc. In January 2009, the Company acquired Richards-Zeta Building Intelligence, Inc

CSG Systems International [CSGS: 18.89, +0.07 (+0.37%)] Recent Price $15.47 Value Range $21.39 – $28

CSG Systems International, Inc. (CSG) is a provider of outsourced solutions that facilitate customer interaction management on the behalf of its clients, generating approximately 95% of its revenues during the year ended December 31, 2007, from the North American cable and Direct Broadcast satellite (DBS) communications markets. The Company’s solutions also support a number of other industries, such as financial services, utilities, telecommunications, and home security. CSG’s solutions manage customer interactions, such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the client’s field technicians to the customer’s home. In May 2008, CSG completed the acquisition of DataProse, Inc.

Forest Laboratories [FRX: 29.17, +1.52 (+5.50%)] Recent Price$26.21 Value Range$51.57 – $64.09

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription, as well as non-prescription pharmaceutical products sold over the counter. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its sales forces, Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Forest Laboratories, Inc.’s products include Lexapro, the Company’s selective serotonin reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate to severe Alzheimer’s disease; Bystolic, its novel beta-blocker for the treatment of hypertension, and Campral, for the maintenance of alcohol abstinence.

Robert Half International [RHI: 22.98, +0.35 (+1.55%)] Recent Price $18.22 Value Range $26.27 – $30.14

Robert Half International Inc. provides specialized staffing and risk consulting services through such divisions as Accountemps, Robert Half Finance & Accounting, OfficeTeam, Robert Half Technology, Robert Half Management Resources, Robert Half Legal, The Creative Group and Protiviti. The Company, through its Accountemps, Robert Half Finance & Accounting, and Robert Half Management Resources divisions, is a specialized provider of temporary, full-time project professionals in the fields of accounting and finance. OfficeTeam specializes in skilled temporary administrative support personnel. Robert Half Technology provides information technology professionals. Robert Half Legal provides temporary, project and full-time staffing of attorneys and specialized support personnel within law firms and corporate legal departments. The Creative Group provides project staffing in the advertising, marketing, and Web design fields

Advance Auto Parts [AAP: 56.26, +0.78 (+1.41%)] Recent Price 33.63 Value Range 10.02 – 12.07

Advance Auto Parts, Inc. (Advance) operates within the United States automotive aftermarket industry, which includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive chemicals for cars and light trucks (pickup trucks, vans, minivans and sport utility vehicles). The Company is a specialty retailer of automotive parts, accessories and maintenance items to do-it-yourself (DIY) and do-it-for-me (DIFM) customers in the United States, based on store count and sales. Advance operates in two business segments: Advance Auto Parts (AAP) and Autopart International (AI). The AAP segment consists of its store operations within the United States, Puerto Rico and the Virgin Islands, which operates under the trade names Advance Auto Parts, Advance Discount Auto Parts and Western Auto. The AI segment consists solely of the operations of Autopart International, which operates as an independent, wholly owned subsidiary.

American Eagle Outfitters [AEO: 13.81, +0.77 (+5.90%)] Recent Price 9.64 Value Range 0.63 – $0.75

American Eagle Outfitters, Inc. is a retailer that operates under the American Eagle Outfitters, aerie by American Eagle and MARTIN + OSA brands. The Company designs, markets and sells its own brand of clothing targeting 15 to 25 year-olds. American Eagle also operates ae.com, which offers additional sizes, colors and styles of AE merchandise and ships to 41 countries worldwide. AE’s original collection includes standards, such as jeans and graphic Ts, as well as essentials like accessories, outerwear, footwear, basics and swimwear under its American Eagle Outfitters, American Eagle and AE brand names. The aerie collection is available in aerie stores, predominantly all American Eagle stores and at aerie.com. The collection includes bras, undies, camis, hoodies, robes, boxers, sweats, leggings, fitness apparel and personal care for the AE girl. MARTIN + OSA is a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories.

Bed Bath & Beyond [BBBY: 38.43, +1.1225 (+3.01%)] Recent Price$24.00 Value Range $ 8.03 – $9.73

Bed Bath & Beyond Inc. and subsidiaries is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. The Company sells a range of merchandise principally, including domestics merchandise and home furnishings as well as food, giftware, health and beauty care items and infant and toddler merchandise. In March 2007, the Company acquired buybuy BABY. In May 2008, the Company announced the formation of a joint venture with Home & More, S.A. de C.V., a privately held home products retailer operating in Mexico

Brown-Forman Corporations [[BF-B]] Recent Price $48.18 Value Range $8.17 – $10.28

Brown-Forman Corporation manufactures, bottles, imports, exports and markets a variety of alcoholic beverage brands. Its principal beverage brands are Jack Daniel’s Tennessee Whiskey, Southern Comfort, Finlandia Vodka, Herradura Tequila, Gentleman Jack, Jekel Vineyards Wines, Jack Daniel’s Single Barrel, Jack Daniel’s Ready-to-Drinks, Bel Arbor Wines, Bolla Wines, Bonterra Vineyards Wines, Old Forester Bourbon, Canadian Mist Blended Canadian Whisky, Pepe Lopez Tequilas, Chambord Liqueur, Sanctuary Wines, Don Eduardo Tequila, Sonoma-Cutrer Wines, Early Times Kentucky Whisky, Tuaca Liqueur, el Jimador Tequila, Stellar Gin, Five Rivers Wines and Woodford Reserve Bourbon. The Company’s core brand in its portfolio is Jack Daniel’s, which is a spirits brand and American whiskey brand. Its other brands are Southern Comfort and Canadian Mist. Its largest wine brands are Fetzer, Korbel and Bollab.

CLARCOR [CLC: 35.01, +0.07 (+0.20%)] Recent Price $32.82 Value Range $12.18 -$17.86

CLARCOR Inc. conducts business in three segments: Engine/Mobile Filtration, Industrial/Environmental Filtration and Packaging. The Company’s Engine/Mobile Filtration Segment sells filtration products used on engines and in mobile equipment applications, including trucks, automobiles, buses and locomotives, and marine, construction, industrial, mining and agricultural equipment.. The Company’s Industrial/Environmental Filtration Segment centers on the manufacturing and marketing of filtration products used in industrial and commercial processes and in buildings, and infrastructures of various types. The Company’s consumer and industrial packaging products business is conducted, through a wholly-owned subsidiary, J.L. Clark, Inc. (J.L. Clark). In May 2008, the Company acquired a 30% share in BioProcess H2O LLC (BPT), a Rhode Island-based manufacturer of industrial waste water and water reuse filtration systems. The Company acquired 100% of the Keddeg Company on December 29, 2008

Cree [CREE: 54.17, -1.13 (-2.04%)] Recent Price $21.84 Value Range $4.51 – $6.20

Cree, Inc. develops and manufactures semiconductor materials and devices based on silicon carbide (SiC), gallium nitride (GaN) and related compounds. The Company focuses its expertise in SiC and GaN on light emitting diodes (LEDs), which consist of LED chips, LED components and LED lighting solutions. It also develops power and radio frequency (RF) products, including power switching and RF devices. The majority of Cree, Inc. products are manufactured at its main production facility in Durham, North Carolina, in a six-part process, which includes SiC crystal growth, wafering, polishing, epitaxial deposition, fabrication and testing Additionally, it packages certain LED components and power and RF products at its North Carolina facilities, its facility in Huizhou, China and in other foreign countries through the use of subcontractors. It also operates research and development facilities in Goleta, California and Hong Kong. In February 2008, it acquired LED Lighting Fixtures, Inc.

Edwards Lifesciences [EW: 59.96, +1.02 (+1.73%)] Recent Price $61.10 Value Range $16.74 – $21.24

Edwards Lifesciences Corporation (Edwards Lifesciences) is a global player in products and technologies designed to treat cardiovascular disease. The Company focuses on specific cardiovascular opportunities, including heart valve disease, critical care technologies and peripheral vascular disease. The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into five areas: Heart Valve Therapy; Critical Care; Cardiac Surgery Systems; Vascular, and through 2007, Other Distributed Products

Interactive Data Corp [IDC: 0.00, N/A (N/A)] Recent Price$24.42 Value Range $4.90 – $6.34

Interactive Data Corporation is a global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The Company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. It markets and sells its services either by direct subscriptions or through third-party business alliances. Its offerings are developed and delivered to customers through four businesses that consist of its two operating segments: Institutional Services and Active Trader Services. In May 2007, the Company completed the acquisition of the assets comprising the market data division of Xcitek LLC, as well as the market data assets of its affiliate Xcitax LLC. In August 2008, announced the closing of its acquisition of Kler’s Financial Data Service S.r.l. In December 2008, the Company acquired a 79% interest in NTT DATA Financial Corporation

ITT Educational Services [ESI: 55.78, +1.66 (+3.07%)] Recent Price $128.87 Value Range$23.33 – $33.99

ITT Educational Services, Inc. (ITT/ESI) is a provider of postsecondary degree programs in the United States based on revenue and student enrollment. As of December 31, 2007, the Company offered diploma, associate, bachelor and master degree programs to approximately 53,000 students. All of its institutes are authorized by the applicable education authorities of the states, in which they operate and recruit, and are accredited by an accrediting commission recognized by the United States Department of Education (ED). All of its programs were degree programs, except for a few diploma programs offered at six institutes that are being converted to degree programs. As of December 31, 2007, it offered 29 degree programs in various fields schools of study: information technology (IT); electronics technology; drafting and design; business; criminal justice, and health sciences. In October 2008, the Company announced that it has opened its first ITT Technical Institute in Mississippi.

Makita Corporation [MKTAY: 28.725, +0.0149 (+0.05%)] Recent Price $22.81 Value Range $1.71 – $2.00

Makita Corporation (Makita), incorporated on December 10, 1938, is principally engaged in manufacturing and sale of a range of power tools for professional users worldwide. Makita’s power tools consist of drills, grinders and sanders and portable woodworking tools, primarily saws and planers. The Company also produces gardening and household products and provides parts, repairs and accessories. During the fiscal year ended March 31, 2008 (fiscal 2008), approximately 85% of Makita’s sales were outside of Japan. The Company specializes in power tools manufacturing and sales, as a single line of business, and conducts its business globally. As of March 31, 2008, Makita had over 100 service depots outside of Japan. As of fiscal 2008, 28 of these service depots were located in the United States, and 19 of these service depots were located in China.

NIKE Incorporated [NKE: 72.86, +1.00 (+1.39%)] Recent Price $48.68 Value Range $15.83 – $21.46

NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing of footwear, apparel, equipment, and accessory products. NIKE sells athletic footwear and athletic apparel. It sells its products to retail accounts, through NIKE-owned retail, including stores and Internet sales, and through a mix of independent distributors and licensees, in over 180 countries around the world. Its products include running, training, basketball, soccer, sport-inspired urban shoes, and childrens shoes. It also markets shoes designed for aquatic activities, baseball, bicycling, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. On March 3, 2008, the Company acquired Umbro Ltd. (Umbro). On April 17, 2008, it completed the sale of its Bauer Hockey subsidiary.

Paychex [PAYX: 25.89, +0.39 (+1.53%)] Recent Price $26.93 Value Range$4.55 – $6.26

Paychex, Inc. (Paychex) is a provider of payroll and integrated human resource and employee benefits outsourcing solutions for small to medium-sized businesses in the United States. The Company’s Payroll and Human Resource Services product lines offer a portfolio of products and services that help clients to meet their payroll and human resource needs. Its Payroll services are provided through either its Core Payroll or Major Market Services, and include payroll processing, payroll tax administration services, employee payment services, and other payroll-related services, including regulatory compliance. Paychex’s Human Resource Services primarily include human resource outsourcing services, which include Paychex Premier Human Resources and its Professional Employer Organization; retirement services administration; workers’ compensation insurance services; health and benefits services; time and attendance solutions, and other human resource services and products.

Raytheon [RTN: 45.47, +0.41 (+0.91%)] Recent Price $47.80 Value Range 12.68 – $19.58

Raytheon Company designs, develops, manufactures, integrates, supports and provides a range of technologically advanced products, services and solutions for governmental customers in the United States and worldwide. The Company operates through six business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems (IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services (TS). During the year ended December 31, 2007, the Company completed the sale of Raytheon Aircraft Company (Raytheon Aircraft) and Flight Options LLC (Flight Options), two former operating commercial aviation businesses. In October 2007, the Company acquired Oakley Networks, Inc., a privately held technology company based in Salt Lake City, Utah, which provides cyber security and data leakage prevention systems. In April 2008, the Company acquired SI Government Solutions. In July 2008, the Company acquired Telemus Solutions, Inc

Rockwell Collins [COL: 57.01, +0.66 (+1.17%)] Recent Price $38.90 Value Range $12.94 – $15.93

Rockwell Collins, Inc. (Rockwell Collins) is a player in providing design, production and support of communications and aviation electronics for military and commercial customers worldwide. The Company’s products and systems are primarily focused on aviation applications. Its Government Systems business also offers products and systems for ground and shipboard applications. Rockwell Collins also provides a range of services and support to its customers through its network of service centers worldwide, including equipment repair and overhaul, service parts, field service engineering, training, technical information services and aftermarket used equipment sales. Rockwell Collins operates in multiple countries. Rockwell Collins serves its worldwide customer base through its Commercial Systems and Government Systems business segments. On November 24, 2008, Rockwell Collins acquired SEOS Group Limited. In April 2008, the Company completed the acquisition of Athena Technologies, Inc.

Strayer Education [STRA: 149.59, +2.67 (+1.82%)] Recent Price $222.04 Value Range $15.89 – $23.60

Strayer Education, Inc. is a post-secondary education services corporation. The Company offers academic programs through its wholly owned subsidiary, Strayer University, Inc., both in traditional classroom courses and through Strayer University Online. The Strayer University is an institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration at 47 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, D.C., via the Internet through Strayer University Online, providing its working adult students a program offering over the Internet. It also owns Education Loan Processing, Inc. (ELP), which was organized to administer the Company’s student loan portfolio. As of December 31, 2007, the Company had more than 32,087 students enrolled in its programs.

- Ronald Sommer

Disclosure: This article was taken from the website Measured Approach with the permission of the original author.  Please refer to the original author for disclosure information. We hold a position in FRX.

How do you put a happy face on that? Easy, according to the folks at Casey Research. “However, the current correction is likely to prove beneficial longer-term with the pullback offering investors a chance to enter the market,” Moore said.

Meanwhile, “The market focus this week will be on the summit of BRIC countries tomorrow,” Barclay’s Capital analysts wrote, referring to Brazil, Russia, India and China by the common acronym.

The meeting in Russia, to which the US was pointedly not invited but did include the “re-elected” President of Iran, is expected to focus on the world monetary crisis and the dollar’s role in it.

Some think the countries may be preparing a call for a new international reserve currency, although whether they would have enough economic clout to push that remains to be seen.

Those interested in accumulating some of the precious metals version of “Natural Resources” might consider the gold and silver ETF [GLD: 122.325, +0.635 (+0.52%)] and [SLV: 19.2226, +0.2626 (+1.39%)] or the Market Vectors Gold Miners ETF [GDX: 53.56, +0.71 (+1.34%)].

Crude oil dipped on Monday and hit an intraday low of $69.58 a barrel on the Globex. On Tuesday as I write this it’s back to $71 a barrel.

One might have expected something of a rally off of the post-election turmoil in Iran, but that was downplayed in favor of concern over the supply glut.

“The first reason [for the oil retreat], of course, is the resurgent dollar,” said Phil Flynn, of Alaron Trading. “Then we got the Empire State manufacturing number that was much worse than expected, and that put pressure on oil.”

The Empire State index fell to negative 9.4 in June from negative 4.6 in May, indicating the downturn is widening to affect more firms, according to a report released yesterday by the New York Federal Reserve Bank.

[We are becoming more of a "Black Swan Investor" which is explained in our special report, "Fives Secrets to Creating Wealth in a Financial Crisis" which you can subscribe to by going to our home page and submitting your name and email in the sign-up section of the right-top quandrant of the home page.]

The bigger picture: “Stocks of oil are high all around the world — which suggests that on a supply/demand basis, oil prices should fall,” said James Williams, of WTRG Economics. “However, crude prices are supported because investors are using oil as a hedge against the dollar and inflation.”

This doesn’t mean we won’t see wild price swings in oil and the oil ETF [USO: 33.36, +0.41 (+1.24%)] in the weeks and months ahead. We might see a trading range develope between $60 on the downside and $75 on the topside.

“Commodities in general are seeing pressure as funds and individuals seem to feel that everything is overbought at this point,” said Zachary Oxman, managing director at TrendMax Futures. And, “Oil specifically seems strongly overbought.”

Commerzbank analysts concurred, writing that, “As the market was pricing in a rapid economic recovery, we think that the probability of a significant correction, taking place as early as in the coming weeks, is very high.”

But, of course, analysts have been saying that for weeks now, and crude has stubbornly resisted any big move to the downside.

Today brings the Energy Information Administration’s closely-watched stockpile report, and inventories are apt to decline again, says Linda Rafield, Platts senior oil analyst.

If you’re looking for a Natural Resources Exchange-Traded Fund that focuses mainly on energy, take a look at the iShares S&P North American Resources Fund [IGE: 32.99, +0.27 (+0.83%)].

IGE seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P North American Natural Resources Sector Index.

Over 79% of the holdings are in the energy sector, and includes names like Apache [APA: 90.71, -1.75 (-1.89%)], Canadian Natural Resources [CNQ: 33.545, +0.175 (+0.52%)], Chevron [CVX: 77.12, +0.35 (+0.46%)], ConocoPhillips [COP: 54.22, +0.16 (+0.30%)] and Schlumberger [SLB: 56.11, +0.93 (+1.69%)].

As of the end of April the only precious metals company in the “top ten holdings” happened to be Barrick Gold [ABX: 45.1625, -0.1675 (-0.37%)].
Concerning ENERGY AND THE NATURAL RESOURCES MARKET
Last Saturday Frank Holmes of US Global Investors wrote the following review which is very insightful.

World oil reserves fell for the first time in ten years, according to BP’s annual Statistical Review of World Energy. Concurrently, the International Energy Agency (IEA) also stated that global energy investment is “plunging.” Projects worth $170 billion have been cancelled so far this year, equating to a loss of 2 million barrels per day (bpd) of oil production capacity. This is a concerning development given that the IEA forecasts global petroleum demand to rise from 85 million bpd in 2006 to 107 million bpd by 2015.
Strength

* The IEA revised its global oil demand forecast upward to 83.3 million bpd. Additionally, the Department of Energy’s EIA recently increased its global crude demand estimate.
* May imports of unwrought copper & copper products into China increased 6 percent sequentially and 113 percent from a year ago to 422,666 metric tons.
* The American Iron & Steel Institute said steel utilization rates increased for the week ended June 6. This is the sixth consecutive week, with the rate at 47.1 percent versus the prior week of 46.2 percent, but down from last year’s 91 percent.

Weakness

* BHP announced that it has settled benchmark metallurgical coal prices at prices around $128 per metric ton, which is approximately 55 percent lower than last year but in line with previous indications.
* Global stainless steel production declined more than a third to 4.8 million metric tons during the first quarter of 2009 according to the International Stainless Steel Forum.
* Gold Fields Minerals Services estimates that China’s consumption of copper should rise by 4.9 percent this year. However, even if that figure were to be 11.2 percent, the world would still face a surplus of copper in 2009.
* Canada’s principal energy producers have lowered their estimate of oil-sands output for the third time in a year, due to project delays and cancellations caused by falling crude prices and scarce available credit. Oil-sands production is now expected to come in at 1.9-2.2 million barrels per day in 2015.

Opportunity

* Iraq is looking to boost the output of its southern oil fields by as much as 500,000 barrels of oil per day by 2011. There are currently ongoing talks with major foreign companies to solicit help in reaching the goal.
* The Nigerian National Petroleum Corporation intends to increase Nigeria’s natural-gas production by 5 billion cubic feet per day or 147 percent by 2013. The country expects to spend $5 billion in the natural gas sector beginning this year in an effort to double its power-generation capacity to 6,000 mega watts.

Threat

* The IEA has calculated that investment in over 2 million barrels per day of oil and over 1 billion cubic feet of gas have been cancelled in the last six months. It is warning that sustained lower investment could lead to a spike in prices in only a couple years.

We are all hoping for a correction in Natural Resources prices this summer. Although I’m trying to be careful what I wish for, in the longer-term any corrections will most likely be looked at as favorable accumulation points.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! – Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

- Marc Courtenay

Disclosure: The author is long GLD and SLV. This article was taken with permission from Check the Markets. All other disclosure questions should be referred to the original author.

Why? Not only because the fundamentals these days are enormously complicated, whether we are speaking of the stock markets, the bond markets, or the commodities markets, but because there are so many factors beyond our control and knowledge.

The “usual suspects” come to mind. The exchange specialists, the large instutional traders, the big financial firms with their trading desks, and now we are all competing with the Federal Reserve and the U.S. Treasury, who appear to be able to buy and sell anything they decide to whenever they want. Isn’t that your perception as well?

So none of us can effectively “time the markets”. We can look back with 20/20 hindsight and see where the markets have been. The main good that does is it tells us when something is historically cheap or expensive.

I heard a pundit on CNBC telling people yesterday (Thursday) that “…the stock market is overpriced, and when the S&P hits 1,000 you should short the market.” I assume he would use investment vehicles like the “shorting ETFs” such as [SH: 51.51, -0.32 (-0.62%)], [DOG: 50.64, -0.10 (-0.20%)], [SBB: 36.25, -0.25 (-0.68%)], and [SKF: 21.08, -0.17 (-0.80%)]. How can he say that so dogmatically? When to take the risk of shorting a market is a very difficult, risky call that isn’t appropriate for everyone.

That is why many investment analysts write that “the trend is your friend” and that we shouldn’t commit ourselves to an investment until that trend is “established”. Would someone please tell me the short answer to how you do that?

The technicians like to use the Moving Averages and all those supposedly reliable sophisticated “indicators”, but are they truly reliable enough to have a better than 50-50 chance of being right (and conversely of being wrong!). How many of them hit close to the stock market bottom during the March 8-9 time period?

Then there are commodities like precious metals and energy. Investors seem to like supply and production reports to gauge when to buy or sell.I was reading Gary Gordon’s interesting article (see the link below). Some of the comments were surprising to me.
http://seekingalpha.com/article/142830-a-nickel-etn-for-your-thoughts?source=email

The idea that some report on the current supply of oil or natural gas would be a reliable enough piece of information to base a decision on whether to buy or sell an ETF like [USO: 33.36, +0.41 (+1.24%)] or [UNG: 6.309, +0.04 (+0.64%)] hasn’t been accurately proved to me over the past 12 months.
Remember when they were telling us that the reason oil went to nearly $150 is because the demand was so badly outstripping the supply and we were in the throes of “Peak Oil”? A few months later oil had “magically” dropped by 70%. Later we found out there had been a great deal of speculating and manipulation that drove the price way up and way down.

So if you had the foresight, courage and conviction to buy when everyone was selling oil (especially true in the period between Dec.2008 and the end of February 2009) you’d be taking some profits off the table right now with huge gains to celebrate.

When it comes to the supply issues with natural gas, I’m a bit astounded at the apparent naivete of many of the comments at the end of Gary’s article. Yes, recent storage data does speak of current oversupply, but that could change over the summer and perhaps that’s what some traders are anticipating.

Like so many commodity markets, manipulation, computer-triggered programs and other collaboration by the big traders (the ones who can move a lot of money in and out of the market through exchanges like the COMEX in a NY minute) still play a predominant role (in my opinion). Come on people, it isn’t an “all-or-nothing” opportunity.

No one knows what the “big players” are going to do next, and, we’ve all seen those so-called “reliable supply numbers” change all of a sudden or be altered by the approach of the first hurricane in the Gulf of Mexico.

I remember when oil was below $40 a barrel and all the supply reports were screaming “excess” and “over-supply” and the talking-heads were saying that we had too much oil for the next 12 to 18 months. Then the story suddenly changed. Remember?

Sure enough, when the major market movers decided to move the oil price up, all of a sudden it started heading north and recently hit $73 a barrel, all on the perceived “green shoots” hope and hype. Give me a break!

If you think you can find the bottom in the natural gas market (or any investment market for that matter), all I can say is “good luck”!  I’d rather accumulate when a commodity,stock, bond, ETF, or mutual fund is historically cheap then pretend I can trust supply figures and my own sense of timing.

As my regular readers probably know, this very topic is why I wrote a free report titled “Five Secrets for Creating Wealth in a Financial Crisis” which you can receive by going to the home page in towards the upper right quadrant. You’ll see sign-up and submit boxes. Just fill them in and submit and we will send you the free report.

Sadly, many of the best secrets, including how to be a “Black Swan Investor” are not widely talked about and that is why I included that as one of the “Secrets” in my report.

Warren Buffett isn’t the only one who has learned the hard way that we “should be greedy when everyone is fearful, and fearful when everyone is greedy”. But why don’t the Uber-Investors remind us that “it doesn’t have to be all-or-nothing”.

We can be systematic sellers when “everyone is greedy” and systematic buyers when “everyone is fearful” and prices are plunging. That’s why I wrote the recent article on the strategy of accumulating and being, like Jeremy Grantham puts it, “market neutral” during volatile times like these.

Greed, fear, and gullibility often get in the way of the retail investor. That is why many “older and more experienced” investment writers appreciate the disciplined approach which often includes dollar-cost-averaging on the buy-side and trailing stop-losses on the sell-side.

Investment ideas, supply reports, analysts opinions and “hot tips” can often burn holes in our pockets and our pocket-books. Keeping our emotions out of our investment decisions (which helps us with the “wisdom of doing nothing” most of the time) and having disciplines that we believe in can be our best approach.

“If you don’t stand for something you’ll fall for anything” is a saying that is as true as ever when it comes to being an investor or a speculator. This summer is a good time for each of us to do a personal “reality-check” on that subject and to examine our approach with more care (not fear) then ever before. I wish you good fortune and outstanding success!

- Marc Courtenay

Disclosure: The author is long UNG. This article was taken with permission from Check the Markets. All other disclosure questions should be referred to the original author.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! – Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Petrohawk [HK: 15.725, +0.255 (+1.65%)] is exactly the type of high risk/high reward company that could help investors take full advantage of the coming upside in the energy markets. Petrohawk does employ a decent amount of leverage as they have about $2.4B in debt on only about $3.9B in stockholders equity. Obviously, the company’s estimates depict favorable statistics, but there is a reason there was a run on the stock that sent it below $9 a share from a $55 52-week high. Management fell into the same trap which many other natural gas companies did at the height of the market. Going forward Petrohawk will have to deal with the mistakes of issuing too much debt after thinking prices would never fall low again. The long term debt Petrohawk has outstanding ranges from 7.125% to 10.5%, and the company is going to have to execute at a high level in order to stay solvent.

Being as subjective as possible, I believe it is a good idea to give you both the good and bad. Fortunately for Petrohawk, I think there is more good than bad. The natural gas properties that Petrohawk controls are those with some of the highest margins in the industry. The company reports that in Q3 2008 their operating costs averaged at $0.92 per Mcfe (thousand cubic feet equivalent) which is better than most of its competitors. Currently, only about 10% of Petrohawk’s 1.42 Tcfe proved reserves are from the Haynesville Shale, the natural gas formation that is considered by many to be the best in the United States. Petrohawk estimates that the Haynesville Shale could potentially make up over 55% of the company’s 20.3 Tcfe resource potential. What makes Petrohawk unique is that most natural gas exploration and production companies don’t have fifteen times the resource potential compared to proved reserves, and I believe the market isn’t correctly pricing in this untapped potential.

Management has taken a number of steps to move the company on a more conservative track, mainly through hedging activities. Petrohawk has a little less than 65% of their 2009 production hedged and these types of exploration and production companies are the ones investors should focus on during 2009 while natural gas spot prices remain extremely depressed. The near term catalysts for any price appreciation are not visible, although the future’s curve is pricing in a spot price over $5.75 before the end of 2010. These companies like Petrohawk with large hedged positions will have large cash gains during their earnings reports. It is impossible to tell how large these gains will be because there will be some defaults in the counter parties of Petrohawk due to the financial crisis, but most of these counter parties should be reliable. The disclosure isn’t as great as investors would like on the issue of derivative counter parties, but judging by industry norms we should be looking at probably more than 90% of contracts to remain honored.

Petrohawk is up over 150% off of its 52-week lows, but it is still less than 40% of its 52-week high. Expecting a run up back to $55.00 is naïve, but there is still a lot of room for upside.  This is one of the plays where the standard fundamentals such as P/E must be ignored because the estimates will be way off from reality no matter what. Petrohawk earned $0.49 in fiscal year 2008 and while it might take a while to get back to these levels, it is reasonable to expect earnings per share growth to average well over 25% from these depressed levels at the end of fiscal year 2009 based on Petrohawk’s Haynesville Shale assets alone. The risk is still fairly high at this point and the chance of the stock getting cut in half or doubling over the course of the next full year is probably about the same.

The rest of this free research report “Stocks For An Economic Recovery” which includes commentary on all sectors is available for download at the following link.

Consumer Discretionary – [APOL: 44.60, +1.21 (+2.79%)] YTD: -25.52%, [MCD: 74.96, +0.42 (+0.56%)] YTD: -11.69%, [COH: 38.12, +0.68 (+1.82%)] YTD: 25.32%, [XLY: 31.70, +0.47 (+1.50%)] YTD: 11.22%

Our consumer discretionary sector has lagged thus far in 2009, and this was mostly due to having two very defensive and conservative type plays in Apollo Group and McDonald’s.  Coach has been a great surprise this year with consumer spending down so drastically, but the fundamentals at year end were much healthier than the stock price and as you can see from the price appreciation it was a screaming buy.  McDonald’s has reported good earnings and carries a solid dividend but hasn’t kept pace up to this point, but that is likely to change if the recession is prolonged through the end of this year.  As more people are laid off each month, Apollo stands to benefit from individuals going back to school for new skills who are looking for an affordable education.

Consumer Staples – [SJM: 59.62, -0.13 (-0.22%)] YTD: -5.41%, [KR: 20.29, +0.23 (+1.15%)] YTD: -17.38%, [WMT: 51.68, +0.48 (+0.94%)] YTD: -10.56%, [XLP: 27.065, +0.115 (+0.43%)] YTD: -4.65%

Consumer staples has been one of the quieter sectors this year after it steadily outperformed the market in 2008.  Smuckers has been in line with the composite while Kroger has fallen sharply due to competition with other grocery stores like our third pick, Wal-Mart.  Wal-Mart was getting very expensive at the end of last year, but there is a premium on the cash flows of a company that is arguably the most stable and consistent in the world.  Our consumer staples is another sector that would benefit from a sustained recession.

Energy – [NE: 32.88, -0.45 (-1.35%)] YTD: 40.07%, [NOV: 39.61, +0.42 (+1.07%)] YTD: 47.46%, [APA: 90.71, -1.75 (-1.89%)] YTD: 14.13%, [XLE: 53.42, +0.31 (+0.58%)] YTD: 8.52%

One of our best performing sectors has been energy.  After oil and natural gas prices dropped more than 70% from their highs, it was very evident that many of the names in the sector were oversold, especially the smaller names and the names in the services sub-sector.  Noble and National Oilwell Varco both fall into this category as companies with excellent free cash flow that were oversold when the markets priced in oil staying at $30 for a sustained time period.  Apache bring excellent Southeast Asian natural gas exposure to the table, and the companies recent earnings and the rebound in natural gas prices has done wonders for the stock.

Financials – [GS: 138.98, -0.76 (-0.54%)] YTD: 65.41%, [MS: 25.47, +0.06 (+0.24%)] YTD: 78.26%, [TRV: 50.10, -0.21 (-0.42%)] YTD: -14.12%, [XLF: 14.145, +0.0635 (+0.45%)] YTD: 3.99%

By far our best sector relative to its benchmark has been financials, and this has been due to our index having no exposure to the big banks.  Goldman Sachs and Morgan Stanley both passed the stress tests with flying colors and are in line to be two of the first companies to pay back the TARP funding when the government allows firms to capitalize privately again.  Travelers has outperformed many of its insurance peers as their real estate exposure is less toxic than its competitors.

Healthcare – [ABT: 50.3799, +0.1099 (+0.22%)] YTD: -15.21%, [TEVA: 51.435, +0.325 (+0.64%)] YTD: 3.43%, [GILD: 33.18, +0.16 (+0.48%)] YTD: -13.94%, [XLV: 28.81, +0.06 (+0.21%)] YTD: -3.62%

Another sector that has lagged in 2009 is healthcare, although this could turn around very quickly.  Teva is the world’s largest generic company and stands to benefit a lot under President Obama’s new healthcare spending plans.  Abbott and Gilead are both leaders in their respective sub-sectors, and any rebound in healthcare will see these names outperform some of their smaller peers.  Gilead’s work on HIV drugs has been groundbreaking, and its exposure to this market will help them to be one of the fastest growing large healthcare companies for years to come.

Industirals – [NOC: 57.33, +0.76 (+1.34%)] YTD: 12.21%, [FLR: 47.335, +0.995 (+2.15%)] YTD: 0.67%, [AME: 44.40, +0.20 (+0.45%)] YTD: 9.47%, [XLI: 29.62, +0.31 (+1.06%)] YTD: 0.38%

The industrials sector took it on the chin in 2008 but is starting to show the signs of an early recovery in 2009.  Some of the rebound was due to President Obama’s stimulus plan, as seen with Fluor, while another portion of the rebound was due to fundamentals sitting at historically attractive levels.  Ametek’s strategy of using acquisitions for growth obviously won’t play out in 2009 but in the near future the company could find smaller competitors at extremely cheap valuations.  Northrop Grumman remains one of the big four defense contractors and has a number of reliable government contracts to help its revenues remain steady over the next few years.

Information Technology – [CERN: 76.29, +0.56 (+0.74%)] YTD: 48.32%, [SY: 0.00, N/A (N/A)] YTD: 32.66%, [WU: 16.40, +0.16 (+0.99%)] YTD: 24.83%, [XLK: 21.315, +0.095 (+0.45%)] YTD: 10.90%

Information technology has been one of the best sectors to be in during 2009.  The rebound in IT started before all of the other sectors and has only slowed recently.  Our index had exposure to many smaller names that have skyrocketed in 2009 because of their exposure to niche sub-sectors.  Cerner stands to benefit tremendously from President Obama’s healthcare plans and could see growth rates well over 25% for years to come.  Western Union has safe revenues from transaction services and Sybase excels in their small niche as demand increases for mobile information solutions.

Materials – [PX: 86.07, -0.58 (-0.67%)] YTD: 23.25%, [GEF: 57.907, -0.163 (-0.28%)] YTD: 47.29%, [AGU: 71.40, +0.78 (+1.10%)] YTD: 32.43%, [XLB: 32.24, +0.27 (+0.84%)] YTD: 17.85%

By a wide margin the best sector so far this year has been materials, which coincidentally was one of the worst performing sectors in 2008.  This is another sector where depressed commodity prices led to valuation that made no sense even in a severe recession.  Packaging company Greif gave our index exposure to a small portion of the composite that well outperformed its peers in 2009 based on fundamentals alone.  Praxair is one of the two most profitable companies in the gases space and Agrium has made aggressive moves in 2009 to boost shareholder confidence.

Utilities – [WGL: 36.08, -0.31 (-0.85%)] YTD: -5.51%, [ED: 48.02, -0.22 (-0.46%)] YTD: -2.03%, [FPL: 0.00, N/A (N/A)] YTD: 13.57, [XLU: 31.3672, -0.1128 (-0.36%)] YTD: -6.13%

Even with their lofty dividends, the utilities stocks were able to keep pace through the first third of 2009.  WGL and Consolidated Edison have chugged along steadily, but Florida Power and Light has been the real star this year.  They are owners of the most envious wind generation portfolio in the country and have extensive build-out plans over the course of the next few years.  Again, this is a company that will no doubt benefit from President Obama’s stimulus plan and his plan to move to renewable energy sources as quickly as possible.

Outlook

We will continue to track this picks for the rest of the year and by no means are chalking this one up as a win just yet even with our hot start.  At this point we remain cautiously bullish on our companies and fairly neutral on the market over the short term mainly because the rally has occur so quickly.  If you want to read extremely detailed analysis about these 27 companies you can visit the following link and download our newsletter free of charge.  We will be releasing a new newsletter later this week entitled “Stocks For An Economic Recovery” that will highlight stocks that stand to benefit the most when the economic data begins to turn around.  Lastly, we would like to thank all of our readers and newsletter subscribers for their continued support through these tough economic and financial times.  Best of luck investing!

- Charles W. Petredis

Disclosure: The mutual fund the author manages has long positions in MCD, WMT, NE, APA, GS, XLF, ABT, TEVA, GILD, FLR, AME, CERN, PX, ED, and FPL.  The authors family has long positions in MCD, WMT, NE, NOV, APA, ABT, CERN, XLY, XLP, XLE, XLF, XLV, XLI, XLK, XLB, and XLU.  The author has long positions in APA, and NE.

Taking a look at Chesapeake’s earnings, you can see exactly how the situation could be easily manipulated.  Chesapeake’s “earnings” came in at a loss of $5.75B dollars, or a loss of $9.63 per share if you use GAAP accounting metrics.  These GAAP accounting metrics were used to add roughly $6B dollars in losses to Chesapeake’s quarter directly from the value of their unproduced reserves dropping due to the front month spot price of natural gas falling over the course of the quarter.  This makes absolutely no sense in my mind, and it seems that the market is catching on that these funny accounting metrics don’t work for energy companies (as well as a number of other sectors but that is a completely different story for another day).  By the current GAAP accounting rules, exploration and production companies are taking write downs for reserves that may or may not be produced for another 10 years or longer, marking these reserves to the current spot market prices for commodities.  The most important point is that these losses are non-cash losses and do not have and effect on the continuing operations of these exploration and production companies. Chesapeake’s “real” operating results came in at $0.46 per diluted share when analysts were looking for $0.49 per diluted share, still a $0.03 miss but not a fictitious $10.12 miss from analyst estimates.

Chesapeake has and will remain a very volatile stock, but taking a look at what happened over the course of this week is laughable.  Chesapeake closed last week at $20.89.  Monday it shot up 9.24% to $22.82 in anticipation of the companies earnings release after the bell that day.  After the “$10.12 miss” Chesapeake plummeted 10.60% on Tuesday all the way down to $20.40.  From Tuesday’s close to the close on Friday Chesapeake moved all the way back to $23.84 for a gain of 16.86% from the bottom of the week on Tuesday and a gain of 14.12% overall on the week.  This doesn’t sound like the normal pattern for a company who just “lost $6B” for the first quarter. Seems to me as if the market was fooled for one day, but quickly realized that the press got the tone of the earnings release entirely wrong.

I have two main ideas for how the market can deal with this problem.  Firstly, they can considering not using GAAP accounting standards when it comes to the reserves of these exploration and production companies to avoid this huge misconception.  This will be something to keep an eye on when energy prices do rise again and these exploration and production companies are reporting “gains” on their reserve values inflating their real earnings numbers.  The other solution would be to make the GAAP accounting reserves pro-rated at the current spot market curve for the commodity.  For example, instead of listing all of the natural gas reserves at $4.00 per Mcfe (thousand cubic feet equivalent), why not list this months production at that spot price and the following months production at the respective spot rates going into the future, which will generally be higher than the current front month contract.  This method would be a much more accurate reflection of the reserves real value, but I still believe even this would be sub par because commodity spot prices are too volatile to use when valuing reserves.  The key is to not believe everything you read and to make sure you are getting the real numbers when gathering your financial news.

- Charles W. Petredis

Disclosure: The fund the author manages, the author, and the author’s family are all long CHK.

Noble released earnings after the closing bell on April 22nd,  13 days ago.  The consensus across twenty-two analysts that cover the stock was that Noble would report earnings of $1.46 when they in fact reported earnings of $1.58, not including a $0.04 charge-off due to the disposal of an old rig.  This 11% earnings surprise was preceded by surprises of 8.2%, 7.5%, and -1.5% over the last three quarters.  What is more surprising is that even after the earnings beat and management commenting that their guidance was in line if not better than expected, analysts adjusted their estimates down on the stock.  Seven days ago before analysts made their adjustments, analysts had Noble earning $6.21 in fiscal year 2009 and $5.59 in fiscal year 2010.  Today’s estimates are $6.32 for fiscal year 2009 and $5.49 for fiscal year 2010.  Basically the net effect was after Noble beat by $0.16 excluding extra-ordinary items analysts only raised their full year guidance by $0.11 which equates to the analysts lowering their guidance on the final three quarters of fiscal year 2009 by a combined $0.05.  This was followed up by knocking $0.10 off of their average fiscal year 2010 guidance.

In the analyst’s defense, the wide range of estimates throws off the averages and makes the collective body look much worse than it probably actually is over time.  The 2009 estimates range from $5.59 to $6.95 while the 2010 estimates range from a staggeringly low $3.96 all the way up to $7.77 (With thirty-two and thirty-seven analysts respectively making these predictions).  After what I saw in the conference call and from the financial statements, I’m inclined to believe that the analysts making these predictions probably should not be paid to do so.  Digging into the numbers provides a ton of evidence against lowering Noble’s full year guidance for 2009.

Operating revenues were up 4.03% from Q1 2008, a period in which the price of crude oil averaged $100 to $120 as opposed to the $35 to $55 that crude averaged in Q1 2009.  This to me screams that Noble’s revenues are not as highly correlated to a high crude prices as people originally thought.  I understand that many of the companies contracts were set in place previous to the quarter beginning and oil tanking, but over 45% of Noble’s drilling revenue comes from jackup rigs that have contracts reset often, in many cases during the course of one year or less.  During Q1 2009 97.35% of revenues came from contract drilling services as opposed to 92.62% of revenue during Q1 2008.  I believe these earnings are cleaner than they were in the previous quarter because they include less revenue from what I consider to be more extraneous sources that may not be part of continuing operating activities going into the future.

Noble increased their profit margin from 44.60% in Q1 2008 to 46.23% in Q1 2009, and that does not include the more than $12 million dollars that was spend on the disposal of the rig.  Noble decreased their debt as a percentage of total capitalization from 14.9% in Q4 2008 to 11.7% in Q1 2009.  The only negative in the financial statements to be found was the average rig utilization rate, which dropped from 94% in Q1 2008 to 86% in Q1 2009.  This, however, was countered by a startling 18.65% increase in average contract dayrate from Q1 2008 to Q1 2009 moving the average from $163,000 per day per rig to $194,000 per day per rig.

On top of all this the company completed their move from the Cayman Islands to Switzerland in order to lower their tax rate while repurchasing roughly 1.7 million shares at and average cost of $25.28, roughly 20% below the current share price.  Noble’s current share repurchase program has 16.6 million shares remaining.  The big kicker to all of this is that Noble currently has a $10.6 billion dollar backlog and this number should be expected to grow over the long run.  My best guess at why analysts are shaky on Noble would be their exposure to Mexico.  Mexico is obviously in horrible shape financially, and their contracts come from PEMEX, the Mexican Government-owned oil company.  I don’t believe Mexico is in a position where default is even a possibility after receiving a $47 billion dollar line of credit from the IMF which Mexico stated it did not intended to use.  On top of that if the events of 1982 are any lesson for investors it should be expected that the United States won’t let Mexico default.  This risk aside, the only huge risk for Noble is that of oil prices remaining extremely depressed below their current values.  Too many factors play into crude oil pricing to predict the future, but with the loose fiscal and monetary policy of the United States my gut feeling would be that the dollar will probably move downwards over time sending oil higher, regardless of changes in supply and demand.  Even with these two risks, I’ll spend my money long Noble until someone can convince me of more glaring problems that are not based on speculation.

- Charles W. Petredis

Disclosure: The Fund the author is associated with, the author, and author’s family are all long NE.

Southern Company

Southern Company is one of the largest electricity producers in the United States, distributing to approximately 4.3 million customers. When I first wrote about this company back in October, it appeared to be positioned extremely well for the turmoil that was occurring in the market. It boasted a Beta of just 0.39, ROE of 14.18%, and a dividend yield of 4.69%. On top of this, the company estimated positive EPS growth for both 2008 and 2009. All of these numbers were favorable and gave very little reason to expect anything but success from this company. However, I think there are a few reasons why Southern has underperformed the Utilities SPDR [XLU: 31.3672, -0.1128 (-0.36%)] by around 9% since last October. The company remained relatively flat through the rest of the year, but has suffered significantly so far in 2009. Southern is down nearly 20% year-to-date, which can mainly be attributed to the decline in the housing market and the overall economy. Decline in the housing market directly affects this company, as it is a major distributer to residential areas. The company reported first quarter earnings on April 29th and beat expectations by one cent. This may be a sign that the housing market is beginning to rebound, but I expect Southern Company to realize very little EPS growth this year. It is hard to say exactly why this company has suffered recently, and I expect them to rebound slowly because of their proven track record of constant returns.

Equitable Corporation

EQT Corporation, which was formerly known as Equitable Resources, operates in the Appalachian region and engages in natural gas production, distribution, gathering and processing, transmission, and storage. It holds extremely large positions in the Lower Huron, Cleveland, and Marcellus Shales. I was initially drawn to this company for a number of reasons, the very attractive ROE of 18.46% and ROI of 8.14%, but more importantly EQT was positioned so well for success moving into the future. It had committed between $900 million and $1 billion to Capital Expenditures for 2009 while its Midstream segment realized tremendous growth in 2008. This has been rewarded by the market, as Equitable is up around 6% YTD, which is approximately 9% higher than the Energy SPDR [XLE: 53.42, +0.31 (+0.58%)]. Equitable Corporation reported earnings on April 30th of $0.55 cents per share, which is down from $0.57 cents per share for that same period last year. This can be attributed to a decrease in revenue that came as a result of lower commodity prices. Although revenue will probably continue to fall throughout 2009, there is plenty of reason to believe that this company will rebound in 2010 and continue its success.

Tying It All Together

There is a lot that can be taken away from comparing the performance of these two stocks. I always would have considered an electric utility to be a lot more stable than a natural gas producer. However, the overall market recession and suffering housing market has greatly affected Southern Company. It is impossible to predict what is going to happen in the future, but even after writing this, I am still attracted to high dividend utility stocks. EQT Corporation, on the other hand, is definitely a stock that should not be ignored. It is hard to say how it will perform throughout the rest of this year because of commodity prices, but it is positioned so well for the future that I still think it is a great long term play.

-Mark Kinsella

Disclosure: None