Review of Barron's -- Dated 5 November 2012

As I write today (so far, both late morning and now early afternoon), my wife has her "Composer of the Month" on (she has a series of best hits from a number of classical music composers), this month is Brahms.  Other than his "Lullaby", I am not familiar with Brahms' work, my wife even described his music as "background music", ohh, harsh!  In recent months we have both enjoyed Beethoven, Grieg and Tchaikovski rather more.

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The Cover Story of this weekend's Barron's is "Best 25 Dividend Funds", which on the face of it comes pretty close to examining a subject that I really want to sink my teeth into soon: income in a low interest environment.

Author Steve Garmhausen got Barron's and Lipper started their screening to exclude income mutual funds that had less than $100 million in assets and lacked a three year record.  That left them with a list of 53 funds, they then pick the top 25, based mostly on three year total return.  The lowest of these 25 funds had a total return of 12.9% (all returns are annualized I believe, although this was not stated in the article), Number One was JPMorgan Equity Income (ticker: OIEIX) with a 15.6% total return.

The lowest return of the 53 had an 8.5% total return, so while there WAS a real difference, I think that "Total Return" is almost a "Random Variable" (defined in my probability textbook as: "A real-valued function defined on the outcome of a probability experiment is called a random variable.", Ross, Sheldon, A First Course in Probability).  I believe this to be true as you RARELY find that anyone outperforms the averages or similar other funds (the JPM fund here was quite middle-of-the-pack in the 10-year total return).

Also, of the 53 funds in Garmhausen's table, just THREE had dividend yields of over 3%, and only 24 had dividend yields higher than 2.1% (which is the S&P 500's yield).

Garmhausend did note that dividend yield was not the only criterion for each fund.  He also noted (as I and many others have mentioned for many months now) that the high dividend yield space is a very crowded trade now.

So, this article solved very little of the "Income Conundrum" (c) that I face, both for myself and for you, my readers.

I found only one real gem in the article: some of the companies (Intel: INTC, ExxonMobil: XOM and Home Depot: HD) have both a reasonable yield and "moat", a sustainable competitive advantage.  I fully understand the concept of a moat, that is what we a re seeking in Peru with our Korean bearings...

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Randall W. Forsyth once again pinch-hits (not "pitch-hits", my error from last week), with his column describing "Politicians and Other Disasters".  Hurricane Sandy and the economic effects, both current and future are still not clear, other than that the GDP will see a bump up as people are put to work (but GDP ignores the "Broken Window Effect" of Frederic Bastiat).

Forsyth notes that the employment numbers are improving, but so slowly that it will take years to get back to where we were before the Bust.

He finishes by noting how uncertain both the election and the markets are likely to be.  Apparently recent stock market performance offers no real clues as to how an election will turn out, nor how elections affect the stock market...

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Kopin Tan ("Streetwise") offers up a prediction that the utility stocks may not do well in coming months, as they have run-up nicely due to high yields and are vulnerable if interest rates go up...

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"Review and Preview" features a piece by Zach Trenholm quoting five high-level names answering thsi question: "What's the most pressing issue for Washington to tackle postelection?"  FOUR of the five responded that reaching an agreement on the budget is No. 1, two came right out and said it must be bipartisan.  [Ed. comment: Yes, I agree, we have to find a way to agree in a bipartisan manner how to cut our long-term spending on the entititlements.]

"He Said:"

"Experts say the entire 2012 election could come down to just eight states: confusion, dismay, depression, apathy, shock, disbelief, despair and anxiety."

-- Jay Leno

Ha ha ha!  Good for Barron's bringing in a little relief here!

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In "Follow-Up", Generac Holdings (GNRC), a maker of high-end electric power generating systems for homes, had a BIG SPIKE last week, due to the hurricane.  The stock has had a big run since Barron's ran a bullish piece on it about a year ago.  Buying it now might be chasing it...

Also in "Follow-Up" Andrew Bary writes that although the hurricane will cost insurers a lot, it will not substantially affect their balance sheets.

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Jim McTague comes back with another article ("The Momentum Favors Romney") that again predicts Romney will win.

(Note that Randall Forsyth wrote that Obama would likely win)

At this point, I really do not know.  The patter I have noted over the last few elections is that the Democrats seem to poll better than the actual election results later show...

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Jonathan R. Laing comes out swinging, hard!, on Radian Group (RDN).  RDN is one of three big players in the private mortgage insurance business, which I know nothing about.  One of its two competitors was seized by state regulators last fall, the other competitor is drowning in red ink.

It looks like Radian has a lot of liabilities coming up as well as little cash.  They are starting to REJECT CLAIMS...

Good for you Mr. Laing for spotting this.  It would have been even better if you had caught caught this turket earlier.  Stay away from RDN.

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Jack Hough writes an interesting piece on earnings estimates and the prospects for four companies that might benefit.

Hough mentions research by University of Texas Accounting Professor Michael Clement who has found that earnings estimates that move AWAY from the consensus tend to be more accurate than those whose estimates are CLOSER to the pack.

"Fortune favors those who dare." (I forget who wrote that)

Recent bold bullish estimates have been made on the below 4 companies:

Celgene (CELG)
GameStop (GME)
Humana (HUM)
Ruth's Hospitality (RUTH)

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Tiernan Ray ("Technology Week") writes that tech stocks have continued to be under pressure (ie, going down) because of bad earnings...  Even purported winners like Cirrus Logic (CRUS), which gets two thirds of it revenue from iPhones and other gadgets.

Almost every sector is getting hit in tech-land, Ray mentions Sony (SNE), JDS Uniphase (JDSU, you remmeber them, they were going to be the Number One most valuable company by market value...) and Gartner (IT).

He finishes with comments on Microsoft (MSFT) which apparently has had a fairly successful roll-out of its new Windows 8 software (I read somewhere recently that it was buggy).  He then writes that we have to see if PC sales will follow in the weeks ahead...  And that it is smartphones and tablets that re big now, running on something other than Windows...

+ 1, Tiernan Ray!

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"CEO Spotlight" this weekend is about Warren Stephens, the head of family-owned Stephens, Inc. of Little Rock, Arkansas.  Fleming Meeks writes of the company's history (including the important facts re their not suffering during the financial crisis, they were not leveraged...) as well as Warren's earlier life before returning to Arkansas.  He put in his dues elsewhere.

Warren Stephens:

-- admires Alan Mulally, CEO of Ford, because he too no bailout money
-- likes golf (he built is own high-end private course there in Arkansas)
-- collects art (1100 pieces)

And here is a quotation:

"It's ironic that [Warren] Buffett doesn't think there should be any change in the estate-tax law, but he's putting all of his money where it won't be taxed."

[Ed. note: For some time now, I have not admired Warren Buffett, despite his enriching many investors who signed on to Berkshire Hathaway and did very well]

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Gene Epstein ("Economic Beat") drills down into the details of recent jobs numbers, it probably TAKES an economist to do this!

Epstein writes that the recent job gains have been much less significant than advertised.  If job gains continue at their present (recent) pace, it will take two more years to get back to peak private-sector employment.  He finishes:

"If President Obama wins re-election Tuesday, it will be despite the economy, not because of it."

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Editor Thomas Donlan is unhappy with both presidential prospects as well as how elections are run as well as how Congress functions.  Well, my guess is that NONE of his three complaints will be addressed or fixed (he suggests that a realistic reform might be to water-down the ability of Senators to filibuster, I doubt that will happen either).

Donlan then makes a suggestion in a shorter piece: that government STOP aiding people who choose to build in high-risk zones (shorelines vulnerable to hurricanes, people living on major earthquake fault-lines, etc.).  YES, I agree.  Let the private sector handle this one: if people want insurance for living in high risk areas, then they should pay for it!  What's wrong with that?

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This weekend's Barron's offers a special (but small) section on Brazil, similar to what they did a year ago.  Brazil has recently slowed somewhat, in large part due to China slowing down.  And this has meant that their stock market has badly lagged (growing but 2.9% year to date) almost everyone else has grown (S&P is up about 11%).

Writer Christopher C. Williams suggests a number of funds and ETFs for investing in Brazil and is BULLISH on Brazil (growing middle-class).

Reshma Kapadia interviews four Brazil experts who offer up a variety of Brazilian stocks and bonds.  Banks and consumer stocks are the main companies that these four guys suggest taking a look at buying.

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In the Market Week section, Vito J. Racanelli walks us through the short but (net) flat week in stocks.  Racanelli later goes on to write bullish remarks on railroad CSX (CSX) and bearish remarks on Westport Innovations (WPRT), who has all their money on natural gas powered diesel engines.  The problem with WPRT is that they have put in a lot of money into this, with no results (profit) to date.  They have competition in this space (including might Cummins (CMI))...

Jonathan Buck ("European Trader") writes a bullish piece on French glass and construction materials supplier Saint-Gobain (SGO.France). They have cut costs and capacity, and apparently management has caught the religion of better responding to market conditions.

Assif Shameen ("Asian Trader") writes that Hong Kong residential property is very expensive, one of the most expensive cities in the world.  He quotes two other analysts of Hong Kong who suggest that commercial property (and related) stocks might be a better bet.

Reshma Kapadia ("Emerging Markets") writes of huge recent interest among investors to buy bonds from developing markets. She notes that three analysts are saying that while caution might be in order (China), that there still are opportunities to buy higher yielding bonds overseas.  She suggests that mutual funds might be a better bet re this complex but newly popular arena of placing money...  [Ed. note: Maybe Ameru Trading del Peru S.A. ought to issue some debt, LOL!]

Michael Aneiro ("Current Yield") writes that municipal bonds from areas affected by Hurricane Sandy may not suffer much.  But, S&P are keeping an eye on them...  Aneiro recaps the change in the 10-Year treasury yield to 1.735% this week from 1.749% last week.  Again, I find that last sentence of Aneiro's columns (recapping the change in 10-Year bonds) to be helpful, and I hope he continues to do that.

Jerry A. DiColo ("Commodities Corner") writes that US crude oil may slip further from its current $84.86 per barrel (from its $99 high in September), at least in part due to the hurricane...

Insiders (seven of them) at Goldman Sachs sold some $40 million of shares last week.  Rats jumping off the ship?  Insiders sold some $38 million at Millennial Media Inc (MM, who?) and $30 million at Honeywell Int'l. (HON).

The Mighty Peruvian Sol moved up the tiniest amount they can show (1% of one US cent), but, hey, up is up!

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Verdict: If you need more information on any of the above, then BUY this issue!