Concerns about the global economic outlook and continued financial duress spooked bourses around the world, with a number of other factors also adding to investors’ nervousness. In particular, Pimco’s Bill Gross, the manager of the world’s largest bond fund, said the US needed to step up and buy assets to avoid a “financial tsunami” (Bill is renowned for talking his book on occasion!), Dwight Anderson’s big Ospraie commodity hedge fund closed after suffering large losses, and Russia was selling foreign currency reserves to prop up the rouble after foreign capital fled the country following Russia’s invasion of Georgia.

Stock markets and commodities ended the first week of a traditionally bad September deeply in the red, but government bonds and the greenback benefited from the deleveraging and a flight to perceived safety.

An announcement by the US Treasury Department regarding the bailing out and recapitalization of collapsing home mortgage giants Fannie Mae and Freddie Mac seems to be imminent. According to The Wall Street Journal, Congressman Barney Frank, chairman of the House Financial Services Committee, confirmed on Saturday that Treasury Secretary Henry Paulson was planning government intervention to back the troubled GSEs. The detail could be announced as early as today (Sunday), prior to the Asian markets reopening.

Source: Gary Varvel, Slate

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As expected, words such as “bank”, “prices”, “inflation” and “growth” featured prominently in my reading matter.

I have mentioned previously that the mid-July stock market lows need to be sustained in order for the summer rally and the market’s base building to still be in effect. These levels – 10,963 for the Dow Jones Industrial Index and 1,215 for the S&P 500 Index – approached with unnerving speed last week.

Commenting on the current market weakness, Brett Steenbarger (TraderFeed) remarked as follows: “A number of sectors, such as consumer discretionary and even many of the financial shares, remain well above their July lows. It is not at all clear to me that this will be a fresh bear market leg down. I’m open to the idea that this may be an ultimately successful test of the July lows and part of a larger – and quite significant – bottoming process. Participation to the downside will tell the story.”

From across the pond, David Fuller (Fullermoney) added: “… investors have little incentive to channel the large capital pools accumulating in money-market funds back into stock markets. Resistance near the August highs for share indices has checked the rallies. Moreover, many have broken beneath their August lows this week. We have also seen some new lows for the year, reaffirming overall downward trends. Unless stock markets can push back above their August highs, the bear will remain in charge for a while longer.”

The last word goes to Richard Russell (Dow Theory Letters): “Yesterday’s [Thursday’s] stock market action, according to Lowry’s, was a classic 90% downside day. Normally, such days are followed by 2 to 7 days of rally (bounce), and then a continuation of the downtrend. 90% downside days often come in a series of one or more, and after each 90% downside day we look (hope for) a 90% up-day. And that’s where we are now.”

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy
“Global business sentiment has been more or less consistent with a global economy that is near recession since the subprime financial shock hit over a year ago,” according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com. The survey did take on a slightly more upbeat tone at the end of August as pricing pressures abated a bit, sales strengthened somewhat and hiring firmed modestly. Businesses remain most dour in the US, Europe and Japan, and most upbeat in the rest of Asia.

In the US, the September Beige Book report from the 12 Federal Reserve districts indicated slow and weak conditions across nearly all districts. Price pressures for energy and commodities continued to be a factor during July and August across nearly all districts, although pass-through to wages appeared to be minimal, giving the Fed some breathing space in terms of monetary policy for now.

The most important economic data released in the US during the past week concerned the employment situation. Non-farm payroll employment fell by 84,000 in August and the unemployment rate rose to 6.1% from 5.7% in July. Revisions to June and July job numbers tacked on another 58,000 lost jobs. In the first eight months of 2008, on average 76,000 jobs have been lost each month. The decline in payrolls and the rise in the unemployment rate were both larger than expected by consensus forecasts, fueling concerns about the pace of consumer spending in the months ahead.

Summarizing the outlook for US interest rates, Asha Bangalore (Northern Trust) said: “The question is how long before it is widely acceptable to use the ‘R’ word. The recent rally of the dollar and reduction in energy prices have allowed the Fed to watch and wait. That said, the Federal funds rate at 2.0% may have to be reconsidered in the near term if a turnaround is not visible. The September 16 FOMC meeting will most likely end with the Federal funds rate left unchanged at 2.0%.”

Hat tip: Phil’s Stock World

Data releases from the UK, continental Europe and Japan underlined rapidly worsening economies bordering on recession.

The European Central Bank (ECB) kept its main refinance rate on hold at 4.25% at its September monetary policy meeting. Interest rates are at a seven-year high as central bankers are unwilling to relax monetary policy before inflation comes down closer to the bank’s 2% target.

In line with market expectations, the Bank of England (BoE) decided to keep its key repo rate steady at 5% at its September monetary policy meeting. September marks the fifth consecutive month with no change in the monetary policy rate.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data. This is an exciting addition to “Words from the Wise” and will in future be included regularly.

Source: Yahoo Finance, September 5, 2008.

Next week’s US economic highlights, courtesy of Northern Trust, include the following:

1. International Trade (September 11): The trade deficit is predicted to have widened to $58.5 billion in July from $56.8 billion in June, partly accounting for higher imported oil prices. Consensus: $59.5billion.

2. Retail Sales (September 12): Auto sales rose to 13.7 million units in August from 12.55 million in July. Gasoline prices are likely fell in August. The headline may show a small gain (+0.2%) to reflect the jump in car sales. Excluding autos, retail sales should be soft. Consensus: 0.3% versus -0.1% in July; non-auto retail sales: -0.2% versus 0.4% in July.

3. Producer Price Index (September 12): The Producer Price Index for finished goods is expected to have dropped 0.6% in August, reflecting lower energy prices. The PPI was up 1.2% in July. The core PPI is most likely to have risen by 0.1% after a 0.7% increase in July. Consensus: +0.4%, core PPI +0.2%.

4. Other reports: NFIB survey, Pending Home Sales Index (September 9), Import Prices (September 11], Inventories, Consumer Sentiment Index (September 12).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the trend of the US dollar.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, September 7, 2008.

Equities
Stock markets around the world suffered badly during the past week on the back of the deteriorating global economic outlook, with the MSCI World Index and the MSCI Emerging Markets Index plunging by 5.6% and 8.6% respectively.

Among mature markets, the worst losses were recorded by the UK FTSE 100 (-7.0%), the Canadian S&P/TSX Composite Index (-6.9%), the Japanese Nikkei 225 Average (-6.6%) and the French CAC 40 Index (-6.4%).

The carnage among emerging markets was even worse as illustrated by the declines in markets such as Russia (-10.8%), Taiwan (-10.5%), South Africa (-8.3%) and China ( 8.1%). Gains were few and far between, with Pakistan (+1.5%) and the Philippines (+1.4%) being two of the rare positive spots.

With the exception of the Nasdaq Composite Index (-4.7%; YTD -14.9%), the US stock markets fell by somewhat less than most other bourses as shown by the major index movements: Dow Jones -2.8%% (YTD -15.4%), S&P 500 Index -3.2% (YTD -15.4%) and Russell 2000 Index -2.8% (YTD 6.2%).

Factoring in the past week’s performance, an interesting picture regarding bear market declines emerged, as summarized by Bespoke: “After declining 4.25% on Wednesday, 3.94% yesterday, and 3.75% today, Russia’s RTS Index is now 41.19% below its 52-week high. These declines put it second to last behind China when looking at recent equity market returns for 22 major countries. As shown, China has fallen 64% from its 52-week high last October!

“The declines recently in global equity markets have really been astounding. Japan, Spain, Brazil, India, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. North American countries rank 1, 2, 3 as countries holding up the best. International exposure has never hurt so bad.”

The past week’s sell-off has resulted in all the major US indices trading below their respective 50- and 200-day moving averages, with the exception of the Russell 2000 Index which is still marginally above the 200-day line. Some comfort for the bulls is that the key mid-July lows have not yet been breached by any of the indices.

Click here or on the thumbnail below for a market map, courtesy of Finviz.com, providing a quick overview of the performance of the various segments of the S&P 500 Index over the week.

The major trend in the market last week was a sell-off in many commodity-related groups – oil and gas, gold, aluminum, steel, coal and copper. The drivers of these declines were lower commodity prices and growing investor concern over a global economic slowdown. The diversified metals and mining group was the worst-performing group for the week, declining by 17%. Its single member, Freeport-McMoran (FCX), sold off as the prices of copper and gold declined.

The construction and engineering group (-16%) was the second-worst performer, negatively impacted by economic woes and the fact that many companies in this group have exposure to energy commodity prices.

The regional bank group (+7%) was the best-performing group for the week. As oil and other commodity-related groups declined, there was an apparent rotation into several financial groups, including regional banks.

The home improvement retail group also outperformed, rising by 5%. The group was led higher by its two largest members, Home Depot (HD) and Lowe’s Companies (LOW). An analyst report said that economic forces weighing on home improvement chains were nearing the end of their “trough-like levels” and the early stages of improvement could begin sometime next year.

Fixed-interest instruments
Increasing risk aversion and a flight to safety pushed global government bond yields sharply lower during the past week.

The ten-year US Treasury Note declined by 18 basis points to 3.65%, the UK ten-year Gilt yield by 10 basis points to 4.38% and the German ten-year Bund yield by 14 basis points to 4.03%.

Bond yields are increasingly taking their cue from investors’ worries about a global economic recession, whereas the threat of inflation is subsiding as shown by the declining trend since March in the Lehman US Treasury Inflation Protected Securities ETF (TIP).

Emphasizing the importance of the direction of bonds, Richard Russell (Dow Theory Letters) said: “… I’m watching the bond action intently. If the bonds believe ‘things are getting better’, they’ll head down. If bond investors continue to be worried about the outlook, they’ll buy the currently low-yielding Treasuries, with 10-year notes now yielding only 3.66%.”

Currencies
The US dollar maintained its upward path during the past week, supported by the view that interest rate differentials may increasingly favor the greenback as data from the UK, continental Europe and Japan are weakening relative to the US.

The past week saw the US dollar rising against the euro (+3.2% – an eleven-month high), the British pound (+3.6%), the Swiss franc (+1.7%), the Australian dollar (+1.2%) and the Canadian dollar (+0.5%).

However, the US currency declined by 1.9% against the Japanese yen as risk aversion triggered the unwinding of carry trade transactions funded by the low-yielding yen.

The currencies of commodities producers came under strong selling pressure as commodities slipped further. Examples include the Australian and New Zealand dollars that declined by 5.5% and 4.9% respectively against their US counterpart. The Aussie dollar was also weakened by the Reserve Bank of Australia lowering its key interest rate by 25 basis points to 7.0% – the first cut in seven years.

The histogram below shows the performance of a number of currencies since the beginning of 2008, indicating the US currency is now in positive territory after a gain of 3.0% YTD.

Commodities
The continued unwinding of commodity positions savaged the Reuters/Jeffries CRB Index, shown by the week’s 6.5% plunge. 22.4% of the Index’s value has been wiped out since its record peak of July 2 – just more than two months ago.

Regarding the outlook for crude oil, David Fuller (Fullermoney) said: “Today, I see no evidence that crude oil has bottomed in what I regard as a lengthy medium-term correction, meaning a minimum of several months and up to two or possibly even three years. … we could easily see a retest of $100 this year, with an outside chance of a temporary overshoot, taking us close to $80.”

The chart below shows the damage of the past week’s movements for various commodities:

Now for a few news items and some words and charts from the investment wise that will hopefully assist with navigating our portfolios through the treacherous investment waters. But always remember Earl Nightingale’s words: “Wherever there is danger, there lurks opportunity; whenever there is opportunity, there lurks danger. The two are inseparable. They go together.” (Hat tip: The Kirk Report.)

Source: McClatchy

The New York Times: US rescue seen at hand for two mortgage giants
“Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

“The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

“It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

“Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

“A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

“The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.”

Source: Stephen Labaton and Andrew Ross Sorkin, The New York Times, September 6, 2008.

(more…)

View original at: Investment Postcards from Cape Town

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(FCX) Words from the (investment) wise for the week that was (September 1 – 7, 2008)

It stands to reason that in order to be a successful investor, it is important to distance yourself from the herd mentality and to take objective decisions based on fundamental reasons.

The typical behaviour of investors is linked to the so-called investor psychology cycle (courtesy RMB Unit Trusts), as illustrated below.

Before seeking to apply the cycle to the present stock market situation, let’s consider a short definition of each of the stages.

Contempt: According to the cycle, a bull market typically starts when a market is at a low and investors scorn stocks.

Doubt and suspicion: They try to decide whether what they have left should be invested in a safe haven such as a money market fund. They have burnt their fingers with stocks and vow never to invest again.

Caution: The market then gradually starts showing signs of recovery. Most investors remain cautious, but prudent investors are already drooling at the possibility of profit.

Confidence: As stock prices rise, investors’ feeling of mistrust changes to confidence and ultimately to enthusiasm. Most investors start buying their stocks at this stage.

Enthusiasm: During the enthusiasm stage, prudent investors are already starting to take profits and get out of the stock market, because they realise that the bull market is coming to an end.

Greed and conviction: Investors’ enthusiasm is followed by greed, which is often accompanied by numerous IPOs on the stock market.

Indifference: Investors look beyond unsustainably high price-earnings ratios.

Dismissal: As the market declines, investors show a lack or interest that quickly turns to dismissal.

Denial: Then they reach the denial stage where they regularly affirm their belief that the market definitely cannot fall any further.

Fear, panic and contempt: Concern starts to take a hold and fear, panic and despair soon follow. Investors again start scorning the market and once again they vow never to invest in stocks again.

In order to determine where in the stock market cycle we find ourselves, the challenge is to identify the prevalent stage of the psychological cycle. I would, for starters, argue that we are on the right-hand side of the curve, but how far down the slippery slope sentiment has declined is less clear. It would seem that we are possibly in the region of the “denial”/“fear”/“panic” phases. Although enduring investor panic and fear have not really set in, the January, March and July sell-offs did witness climatic, albeit short-lived, bouts of despair.

Time will tell whether we are dealing with a typical investor psychology cycle and how it will play itself out. It does, however, seem that we are at not at the “contempt” stage yet, i.e. when investors scorn shares en masse and a bull market typically starts.

I do believe we are still in a primary bear market where stock markets are, at best, faced with a prolonged convalescence period characterized by sub-optimal returns. Whether significant further declines will take place from these levels and valuations overshoot to bargain levels, triggering bouts of panic and fear, is anybody’s guess.

However, in the short term I give the nascent stock market rallies the benefit of the doubt provided the mid-July lows are sustained. For any rally to become more enduring will require further base building – possibly wearing investors out to the point of contempt – and an eventual shift in central bank policy to targeting GDP growth rather than inflation.

View original at: Investment Postcards from Cape Town

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Investor Psychology Cycle – Are We “There” Yet?

What looked attractive last month, now looks overvalued, or further due diligence has proven it to contain some warts.

Such is the case with stocks that enter and exit my Top 5 as constant fluctuations in both price, market conditions, and business fundamentals constantly alter the investment thesis.

Today I wanted to give you a heads up on some of the stocks that I was watching for possible inclusion into the PeakStocks.com portfolio, specifically ones that are high on my list, and most likely to be added as formal recommendations in the weeks to come as they reach desirable price points, and present wonderful opportunities for long term investors.

Please note that my Top 5 Stocks for September aren’t yet formal recommendations.

I have more due diligence that I have to perform on them, but they are compelling enough with the research that I have done to be at the absolute top of my list.

I’ll break down this post into 2 parts:

• Let’s Start With What We Know: Let’s first quickly take a look at the current stocks in the portfolio, and what actions, if any, should be taken
• Top 5 Stocks for September: The latest companies that I am high on, and why

Let’s Start With What We Know

My top picks from my own portfolio

Before we get into the new names that are on my list, let’s first take a look at the names in my portfolio, and how I feel about them:

GeoEye Inc. (NASDAQ: GEOY): GeoEye is a leading provider of global space-based and aerial imagery and geospatial information.

GeoEye’s imagery is used in a broad array of applications that include: government monitoring and surveillance, intelligence gathering, construction planning, scientific research such as environmental monitoring, and the online mapping industry via Google (NASDAQ: GOOG), Yahoo! (NASDAQ: YHOO), Microsoft (NASDAQ: MSFT) and other partners.

I think that GeoEye represents one of our best opportunities for capital appreciation due to the recent downturn in the stock, as well as market overreaction to their latest earnings announcement, and delays in launch of GeoEye-1, now scheduled to launch September 4th, 2008.

Several upcoming catalysts including a successful launch and check-out of GeoEye-1, and higher analyst coverage of the company (there are now 4 analysts that cover GeoEye vs. 1 previously), will bring more attention to the company, and stock.

If you’ve got new money to invest, GeoEye is my #1 recommendation for new money.

New to the GeoEye story?

• Read my initial buy recommendation here.
• or listen to my EXCLUSIVE interview with GeoEye’s management team here.

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AuthenTec (NASDAQ: AUTH): AuthenTec is the world’s leading provider of fingerprint sensors and solutions to the wireless, PC and Access Control Markets.

AuthenTec’s sensors are the only sensors in the world that are patented to read below the surface skin layer, to where your true fingerprint resides.

AuthenTec went public last year at $11 per share, and now sits significantly below those levels, while in the meantime, they have continued to execute flawlessly, and have improved their business in every single meaningful way.

In fact, AuthenTec’s last quarterly earnings and analyst conference call was strong as usual, with some great insights into the company, and management’s expectations for the coming year.

You can read my full earnings and conference call breakdown here.

While I’ve commented before that shares of AuthenTec will never look “cheap”, they have now become “cheaper” and are at a fantastic risk/reward valuation.

This company is growing fast, has met or beaten analysts earnings estimates every single quarter as a public company, and continues to execute at a high level.

I highly recommend new money be put into shares of AuthenTec right away.

New to the AuthenTec story?

• Read my last company update here.

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AAR Corp. (NYSE: AIR): AAR Corp. is a diversified company that provides products and services to the aviation, aerospace, and defense industries worldwide. It operates in four segments: Aviation Supply Chain; Maintenance, Repair, and Overhaul (MRO); Structures and Systems; and Aircraft Sales and Leasing.

AAR has gotten slammed to the mat along with most other stocks in the Aerospace and Defense sector over the last year or so.

But as I wrote recently, AAR is being unfairly punished for what is going on around it, and is still executing extremely well even within this difficult environment with higher oil prices, and cut-backs in the airline industry.

You can read my full analysis on the company’s last quarter and fiscal year results here.

Needles to say, even in today’s environment in the Defense and Aerospace industry, AAR’s valuation is extremely attractive.

In fact, AAR is approaching its book value of about $15.09 per share!

Couple that with recent insider buying of the company stock, and you can see that we might be approaching a bottom here.

Those with a long term investment horizon would do well to visit the AAR story, and start a position here as AAR is a best-in-breed company that will be one of the first to rise in price when strength returns to this battered industry.

New to the AAR story?

• Read my last company update here.

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uWink Inc. (Nasdaq: UWKI.OB): uWink, Inc. is an entertainment and hospitality software development company that develops casual, interactive, social games, in addition to licensing the rights to those games and their proprietary touch-screen ordering and gaming interface to restaurants, entertainment venues and the hospitality industry.

uWink also owns and operates three restaurants under the uWink brand name that utilize this technology.

The company’s CEO is Nolan Bushnell, the founder of Atari Inc. (OTC: ATAR.PK) and Chuck E. Cheese (NYSE: CEC), and what uWink is doing with their proprietary software should lead them to a huge market in a few year’s time.

uWink’s last quarterly earnings and sales dropped significantly from the previous year, but need to be taken into context, and mask the true potential of this tiny company.

I explain this in full detail in my lastest post on uWink.

I think uWink, while a risky stock, is a great investment for new money, or for additional money if you already own shares, especially at today’s prices.

New to the uWink story?

• Read my last company update here.

• Warning: uWink trades with very high bid/ask spreads. Learn how to protect yourself from getting screwed by the market makers.

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Top 5 Stocks for September

The following stocks are not formal recommendations, but are the highest on my watch list right now.

They are listed in no particular order.

• E-House (China) Holdings Limited (NYSE: EJ): E-House (China) Holdings Limited provides real estate agency services, real estate brokerage services, and real estate consulting and information services in the People’s Republic of China.

E-House primarily offers real estate agency services to real estate developers of residential properties.

The company also provides real property brokerage services, and intends to provide listing and brokerage services, which include sales and rentals.

E-House focuses its secondary real estate brokerage services in three metropolitan areas within China, including Shanghai, Wuhan, and Hangzhou, as well as in Hong Kong and Macau.

Its real estate consulting services include land acquisition consulting and real estate development consulting; and other consulting services to investors interested in purchasing businesses with land or other real estate assets, as well as to banks, real estate trade associations, and governmental property and planning agencies.

The company’s real estate information services comprise the CRIC system, which supports its primary and secondary real estate services, and consulting and information services. The CRIC system consists of real estate sales data in China covering information on land, residential, office, and commercial spaces, as well as real estate related advertisements.

I have been watching this stock for quite awhile, and have watched is fall precipitously in that time.

Most recently, E-House has reported earnings that were in-line with expectations, and decreased their earnings outlook for the rest of this year.

In turn, analysts have also cut their sales and earnings estimates, and at the same time E-House has approved a share buyback plan for $20 million as the company’s shares continue to get hammered along with anything having to do with China now.

While the market has beaten up this stock as a result of the rise in interest rates in China and the perception that the housing market there will slow as a result, I believe that E-House looks attractive at these price levels, and pending further investigation on my part, is sufficiently buffered from these potential problems in the Chinese real estate market.

Why I Like the Company: Founder/CEO with a huge stake in the company; recent insider buying, company authorized share repurchase program, low stock price/valuation; continued growth prospects in an expanding market despite possible “slowing” of Chinese economy; great margins, cash flow, etc.; great market presence and amazing growth potential both on the top and bottom line.

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• PROS Holdings, Inc. (NYSE: PRO): PROS Holdings, Inc. provides pricing and revenue optimization software to several different industries worldwide.
  

Did you ever wonder how airlines and other industries like hotels and cruise lines, can change prices on the fly so quickly to maximize profits and adjust to customer demand?

Well, PROS is one of companies that provides this service to many different companies in several industries all over the world.

PROS offers a set of integrated software products that enables enterprises to apply pricing science to determine, analyze, and execute optimal pricing strategies.

The company’s software products support pricing decisions through the aggregation and analysis of enterprise application data, transactional data, and market information.

PROS sells and markets its software products primarily through its direct sales force to customers in manufacturing, distribution, services, hotel and cruise, and airline industries.

I love everything about this company, and have been watching them since their IPO last year.

The stock currently sits below it’s IPO price of $11 per share, and the company just instituted a share repurchase program for $15 million.

Why I Like the Company: Wonderful high margin/cash flow business with recurring revenue stream; cutting edge and proven technology; great balance sheet and high insider ownership; while not “cheap” valuation has gotten more attractive.

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• Zhongpin, Inc. (HOGS): Zhongpin, Inc., through its subsidiaries, engages in the meat and food processing and distribution business primarily in the People’s Republic of China.

If you are noticing a theme here, it is not by accident.

China is still growing fast, regardless of the inflation and recent stock market turmoil there which has seen the major indices fall by over 50% this year.

It seems that anything China is toxic nowadays, but as with all things, once investors return looking for growth it will be companies like Zhongpin that will garner the most attention.

The rise of the middle class in China is increasing demand for more meat products, with pork being one of the major staples of this trend.

Zhongpin offers chilled and frozen pork products; pig by-products and various meats; and prepared meats, such as sausages, hams, and Chinese cured hams, as well as fruit and vegetable products, including asparagus, sweet corn, broccoli, mushrooms, lima beans, strawberries, and capsicum under Zhongpin brand name.

Its customers include international or domestic fast food companies, export-registered processing factories, school cafeterias, factory canteens, army posts, and national departments, as well as retail outlets, including supermarkets.

The company sells its products directly, as well as through a network of agents, showcase stores, and network stores.

I would not hesitate to add multiple Chinese companies to my portfolio and between HOGS (I love that ticker!) and E-House (EJ), I believe we are looking at two good ones.

Why I Like the Company: One of the largest pork producers in China; expanding rapidly; macro trend towards higher meat consumption in Chinese diets as more and more Chinese reach middle class; profitable with high insider ownership; great valuation/stock price; consistent execution and results by management.

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• BJ’s Restaurants, Inc. (BJRI): BJ’s Restaurants, Inc. owns and operates casual dining restaurants in the United States.

It operates restaurants under the BJ’s Restaurant & Brewery brand name, which includes a brewery within the restaurant; BJ’s Restaurant & Brewhouse, which receives the beer it sells from its breweries or an approved third party craft brewer of proprietary recipe beers; and BJ’s Pizza & Grill, which is a smaller format, full service restaurant.

As of August 05, 2008, BJ’s Restaurants owned and operated 78 casual dining restaurants.

While it is certainly not the best of times to be investing in restaurant chains, I think that it is prudent to start looking at some of the best-in-breed players and more importantly for us, the fastest growing restaurant concepts.

BJ’s offers an innovative and broad menu featuring award-winning, signature deep-dish pizza complemented with generously portioned salads, appetizers, sandwiches, soups, pastas, entrees and desserts including their famous Pizookie dessert.

In addition, at most locations, BJ’s features award-winning handcrafted beer to go along with highly detailed, contemporary decor and usually includes a bank of TV’s, including several high definition flat panel televisions for patrons to enjoy while they eat.

I won’t go out on a limb and say that BJ’s restaurant concept is unique and can’t be duplicated, but as it stands now, this company is growing extremely fast, and is profitable, even in the down economy, with same-store sales declining slightly or remaining flat, while most other restaurant chains are suffering steep losses and same-store sales declines.

This is doubly remarkable considering that BJ’s has more than half of their locations in the depressed California market and says a lot about the restaurant concept and value proposition to its customers.

While the stock price has come down from about $20 per share to about $10 now, I still feel that there may be some more downside to come, but this is one of my favorite names in the restaurant space that bears keeping a close watch on.

Why I Like the Company: Rapidly expanding restaurant concept that offers a great value proposition and great food to customers; insiders including the CEO have been buying stock all the way down; the company is profitable; the company is in the early stages of its growth cycle with over 20% growth in both profits and sales expected over the next several years.

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• CPI Aerostructures Inc. (AMEX: CVU): CPI Aerostructures, Inc. engages in the contract production of structural aircraft parts for the United States Air Force and other branches of the U.S. armed forces as a prime contractor or subcontractor for other defense prime contractors.

The company, as a prime contractor, offers skin panels, leading edges, flight control surfaces, engine components, wing tips, cowl doors, nacelle assemblies, and inlet assemblies for military aircraft.

As a subcontractor, it offers various pods, modular and structural assemblies for military aircraft; and various kits and assemblies for the S-92 civilian helicopter, as well as operates as a subcontractor to prime contractors in the production of commercial aircraft parts.

This is a really small company that trades about 7,000 shares daily, and of course as a result, no analysts cover the stock, but I like the fact that insiders have been buying more shares in the company on the open market, signaling good things ahead.

I can’t take credit for finding this little company, as it was brought to my attention by a gentleman by the name of Robert Blumenthal on Seeking Alpha.

You can read his entire post on CPI here.

He does an excellent job in describing the company in more detail, and also how management expects growth to really accelerate in the coming years with increased contracts garnered for their products and services.

Normally I would be a little gun-shy in recommending another play in the Aerospace and Defense sector, but I feel this company deserves a hard look, and gives us much different exposure than other companies in this sector.

Why I Like the Company: Tiny hidden gem with accelerating growth, profit and fundamentals; reasonable stock price/valuation; recent insider buying; management projects large growth as a result of increased contracts in the coming 2-3 years.
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Bottom Line

While this is not a definitive and comprehensive list of every company that I watch and am interested in, these present the most compelling argument for inclusion sooner rather than later.

Once again, my Top 5 Picks for September are NOT formal recommendations, and after digging around, they may never become formal recommendations, but this will give you a heads up if you are looking for some interesting companies to get started researching on your own, or that you might be hearing about soon.

View original at: PeakStocks.com

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(MRO) Top 5 Stocks for September 2008

Firstly, a very topical quote about the economic situation: “The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced if the nation doesn’t want to go bankrupt. People must again learn to work, instead of living on public assistance.”

Take a guess who said this? Bernanke? Paulson? Somebody from Congress? Wrong! The credit goes to … wait for it … Cicero, who issued this warning in 55 BC! (Hat tip: Jim Sinclair’s MineSet.) If only we would learn from the lessons from history!

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

Economic reports

Source: Yahoo Finance, August 22, 2008.

In addition to the FOMC releasing the minutes of its August 5 meeting, next week’s economic highlights in the US, courtesy of Northern Trust, include the following:

1. Existing Sales (August 25): Sales of existing homes are predicted to have risen in July (market consensus) after a 2.6% drop in June. The elevated inventory of unsold homes does not support this forecast. Consensus: 4.94 million versus 4.86 million in June.

2. New Home Sales (August 26): Sales of new homes fell by 0.6% in June. A larger drop is likely in July, given the large number of unsold new homes. The market consensus is a small decline again. Consensus: 525,000 versus 530,000 in June.

3. Durable Goods Orders (August 27): Durable goods orders (+0.5%) are expected to show an increase mainly due to aircraft orders which fell sharply in April and June and posted a small gain in May. Bookings of defense items probably fell after two monthly gains. Orders of non-defense capital goods excluding aircraft may have dropped in July. Consensus: 0.1% versus +0.8% in June.

4. Real GDP (August 28): An upward revision of real GDP growth for the second quarter is expected (2.5% versus 1.9% advance estimate). A narrowing of the trade gap in June is the primary reason for the upward revision. This report will contain corporate profits which have dropped in five of the last six quarters. Consensus: 2.7%.

5. Personal Income and Spending (August 29): The earnings and payroll numbers for August point to only a small decline in personal income (-0.1%). Auto sales fell to annual rate of 12.55 million from 13.7 million in June. Non-auto retail sales have been soft. Inflation-adjusted consumer spending is predicted to have declined again after a 0.2% drop in June. Consensus: Personal income -0.1%, nominal consumer spending +0.1%

6. Other reports: Consumer Confidence (August 26), Consumer Sentiment Index and Chicago PMI (August 29).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the UK, Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, which way the US dollar is going to move and how strongly.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, August 24, 2008.

There are a vast number of imponderables investors need to deal with in these troubled times, reminding me of Voltaire’s words: “Common sense is not so common.” Hopefully the words and charts from the investment wise below will assist in making profitable investments. But be careful of convicted opinions, err on the side of conservatism and invest/trade lightly.

That’s the way it looks from Cape Town.

Source: Slate

John Authers (Financial Times): Obama vs McCain
“The summer phony war for the US presidency is about to end. What do markets tell us about the race for the White House?

“If the prediction markets run by the University of Iowa and Intrade are right, Barack Obama is the frontrunner, but no “sure thing”. His chances are between 58.4% (Intrade) and 59.6% (Iowa). These odds had been as high as 72.2%.

“National polls suggest the markets are too optimistic about Mr Obama. They show the race narrowing in recent weeks, with John McCain improving. A poll of national polls by pollster.com puts Mr Obama’s lead at 45.2% to 43%. The trend favours Mr McCain.

“But state-by-state surveys favour Mr Obama. By pollster.com’s reckoning, 260 votes in the electoral college are strongly behind him or leaning his way. He needs 270 to win.

“Trends in the ‘battleground’ states favour Mr Obama. In Florida, Mr McCain’s lead is down to 1.4 percentage points, according to pollster.com, having once been as high as 7 percentage points. Strong advances by Mr Obama over the summer have seen him overtake Mr McCain in Ohio and Virginia. The markets’ odds are a best effort to reconcile contradictory signals from national and state polls.

“The elections seem to be all about the economy. Mr McCain’s Intrade chances of winning bottomed on the same day that the S&P 500 bottomed last month. Mr Obama’s chances hit their peak a day after the oil price reached a top.

“Mr McCain’s rise in national polls may be chiefly a reaction to easing pressure on pump prices, an economic variable that is very visible to voters.

“On Thursday crude oil shot back above $120 a barrel as traders took fright at the tension caused by the missile deal between the US and Poland.

“Conventional wisdom has it that added international tension is good for the Republicans. Not if it raises the oil price.”

Source: John Authers, Financial Times, August 21, 2008.

Richard Russell (Dow Theory Letters): On the eve of world deflation
“I believe we are on the eve of world deflation. I pulled out a headline from the August 5 Wall Street Journal headline – ‘INFLATION PACE IS FASTEST IN 17 YEARS’.

“Forget it, this is history – this is not what’s happening in the market. From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling – big money, sophisticated money, is cashing out, raising cash, preparing for world deflation. This is probably why Lowry’s Selling Pressure stays at its high, smart money is selling into the stock market, day after day. They’re raising cash in preparation for the hard times when deflation is in the saddle.

“Deflation is ushering in the new strong dollar. Big money sees deflation and the lower rates that go with deflation. Look, if you have five million dollars and you are only receiving 2% in interest on your money, that’s only an income of hundred thousand dollars on your five million. Big money realizes that in a deflation you need a mountain of cash to keep up your lifestyle.

“What I see is a coming world deflation, and I believe that’s the message the markets are sending. What’s the best stance in a deflationary situation? Lots of cash, and safe, solid, investments. Two areas that fit that requirement – US dollars and US Treasury paper. What happens to stocks during deflationary times? They’re sold to raise cash. What happens to business in deflationary times? It’s crushed by ever-lower prices. What happens to the average citizen who’s loaded with debt during deflationary times? They’re battered unmercifully, as income buys less and less and as debt crushes them. What happens to assets during deflationary times? They’re worth less and less and their sale brings in fewer and fewer dollars. Isn’t the price of gold and oil already telling us that?

“I just finished reading The New York Times, Los Angeles Times and Barron’s and there isn’t a hint of what I’m writing about above in any of these publications. Unfortunately, these coming deflationary times will come as a complete surprise to most people.”

Source: Richard Russell, Dow Theory Letters, August 18, 2008.

[Editor: Richard suffered a mild stroke a few days ago. Our thoughts are with him and we wish him a speedy recovery. Richard, we need your wisdom to assist us in these unsettled times!]

View original at: Investment Postcards from Cape Town

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Words from the (investment) wise for the week that was (August 18 – 24, 2008)

In spite of the fact that oil has recently traded lower from its high of $147 a barrel, prices are still very high compared to historical norms. This dynamic continues to translate into big profits for energy company, and that was apparent when unit reported impressive second-quarter results on Aug 5.

Second-Quarter Results

Revenue increased 29% from last year to $370.1 million. Net income jumped to $94.1 million, up from $65.6 million last year, a 43% gain. This produced earnings of $2.00, ahead of analyst expectations by one penny.

Unit has surprised and beaten analyst estimates in each of the last four quarters, having done so by an average of four cents, or 2.79%.

Unit said that it was able to achieve a 21% increase in its total oil and natural gas production, and has 115 of its 131 drilling rigs currently under contract, an 88% utilization rate.

Analyst Estimates

With oil prices remaining high, analysts have upgraded the earni