Monday, May 17, 2010

BAGAKOAA May 17, 2010 A bad shift in money flow


May 17, 2010 A bad shift in money flow

This week’s Barron’s is yet again another great issue. The cover story is about all the US companies having gobs of cash. If you have been following the blog I have been harping on this subject. American companies have more cash on hand than since World War II. They like many Americans are wary as to where to deploy that cash. The article reviews many cash rich companies and explains which ones might go on the acquisition trail, which might be acquistionable, which might throw new or larger dividends, and which might buy back shares. And what do we call that boys and girls? It’s the trifecta of shareholder’s yield.

I will be kicking the tires on the list and let you if I pick up any new positions and what they are. I suggest you do get a copy of this week’s magazine. There is also a lot of coverage about the Euro and other currencies. What do I think? I just bought a new position on a short Euro ETN called DRR. It is a volatile bet on more downside of the Euro. I do not suggest anybody but crazy people put anything but Vegas money on this.

Here is why. In a recent survey done by Bloomberg asking how many money managers are long on the Euro, only 3 of 600 said yes. Now that should be an argument for my pick DRR. But I always get concerned when there are too many people in the pool. Everybody is in this pool.

Also, UBS had a piece out today (Thanks Tim) and there are some reality checks about the Euro imploding. Without plagiarizing too much and thanks to a similar article in Barron’s by Kopin Tan indicates that Spain, Portugal and Greece account for less than 20% of the Euro GDP. Healthy economies with significant outside customers like Germany and France will keep the Euro a viable currency, but the short term, 6-18 weeks, the Euro is in trouble. I am going to watch the DRR until the Euro hits about 1.10 US then I might switch to a long Euro ETN. Until then, Gold (GLD) and Silver (SLV) seem like a place to park a little money as well as playing the volatility with some VXX.

Gold will need to have an increase in demand to get to some of the outrageous values being talked about. It is interesting to note that there is a massive “dishoarding” of the metal in India and they know gold. If they are selling, we might be near a short term peak. If the European Central Bank starts copying the US and gets the printer cranking out more Euros, look for gold to go up. Remember the demand or perceived value of gold must rise higher than the adjustment for currency exchanges impacting the dollar. You can see the dollar go up against the Euro and see the price of gold decline, but that does not mean it is less valuable. (OK I read that twice and even I am confused, but you all are much smarter than I).

OK, I don’t know what to do with Flowserve FLS. I really like this stock, but it is hitting my sell threshold of down 8%. FLS is one of the world's leading providers of fluid motion and control products and services. Customers use fluid motion and control products to regulate the movement of liquids or gases through processing systems in their facilities. Its fundies are sexy and they seem to execute well. Their ROE is 27% (Read ROE ROE ROE your boat in the blog), but the oil spill, the drop in the Euro, and the drop in oil prices (mostly due to the bump in the dollar) is driving this nice stock to a point where its Multiple is below 10 which make its very very cheap. Do I head my own advice and bail at 8% or do I move my stop south and ride it out?

A few months back I was telling you that savings rates had loosened up a bit from its post WW II high of 7.2% to the mid 3s. Keep in mind that prior to the 07-09 recession (as it is now being called) personal savings rates were below 2%. Well in the last three weeks, we have seen a shift of monies out of equities and back on the sidelines. The journal reported a 16.2 billion dollar shift of moneys from stocks to money market accounts and saving account holding creeping up again.

Also when I prognosticated the 1335 in the S&P by years end 2010 (See the post from Jan 3, 2010), it was based upon the real estate market stabilizing and consumers getting back in the game. It appeared that we had both for a while (February 19-May 7), now both data points are in question. Consumers seemed to have entrenched again and there is no over whelming support for a true stabilization of real estate values.

I am concerned but not bearish at this point. There are some great economic fundamentals out there. We just need to wait for the rest of the world to figure out what we already know. It’s shopping time in the market.

Salve Lucrum


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