Monthly Archives: January 2012

Apple (AAPL) and Speed Resistance Lines

Posted on January 31, 2012 by | Leave a comment
As describedin our article on speed resistance lines (SRL) dated September 22, 2011 (found here), Netflix (NFLX) fell below our projecteddownside target of $99.58. Although we thought that the stock would be worthconsidering below such a level, we had to concede that, “...the difficulty may be that thesentiment that pushed the stock price to $298.73 would likely be just theopposite to push the price down.” Assuming the purchase of thestock at $99.58, an investor would have gained 21.10% based on the currentprice of $120.59.
Naturally, wewondered what Edson Gould’s speed resistance lines would say about AppleComputer (AAPL). The very first thing that we look for, to determine speedresistance lines, is the most recent peak in the price.  Because AAPL is continually making new highs,we only need to use the latest price of $455.68 as our starting point.

Based onGould’s work, Apple (AAPL) has a conservative downside target of $230.09 and theextreme downside target is $151.89.  Whenwe ran the same calculations on Netflix (NFLX) in September 2011, we made aseemingly innocuous error.  We overlookedthe fact that NFLX had a lower support line (red line) at the price level of $85.  In this case, we have denoted AAPL’s supportline (also in red line), at $117.05, as a potential downside target for thestock.
As the priceof Apple increases, so too does the SRL lines based on the work ofEdson Gould.  The rampant enthusiasm for AAPLsuggests that the stock isn’t likely to decline to the indicated levels anytime soon.  However, when and if you seeAAPL start to make a swan dive, the levels indicated are reasonable downside targets.

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Posted in AAPL, Edson Gould, NFLX, speed resistance line, William X. Scheinman

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Insurance Watch List: January 27, 2012

Posted on January 29, 2012 by | Leave a comment
The following is one of our personal favorite watch lists.  We started tracking the insurance industry in January 2011 and we're very impressed with the results so far. 
Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild.  The book starts with Shelby Collum Davis investing approximately $50,000 to $100,000 that ultimately grew to $900 million after 47 years.  The strategies employed by Davis seem more accessible to average investors as opposed to Warren Buffett's leveraged strategies and education from Benjamin Graham.

 

 

 

 

NamePriceP/EEPSYieldP/Bpayout ratio% from Low
Alleghany Corp.288.0518.0715.9400.880.00%3.98%
National Western Life Insurance143.27.2819.660.30%0.41.83%10.15%
American National Insurance72.6411.296.444.20%0.5347.83%10.55%
Tower Group, Inc.21.9110.82.033.40%0.8536.95%10.77%
HCC Insurance Holdings, Inc.27.9411.562.422.20%0.9325.62%13.30%
Loews Corp.37.6312.253.070.70%0.798.14%14.38%
XL Group plc20.328.190.722.20%0.6761.11%14.75%
Kansas City Life Insurance32.3613.62.383.30%0.5145.38%15.53%
Sun Life Financial20.1413.631.486.90%0.8293.24%15.75%
Everest Re Group85.1525.563.332.30%0.7657.66%16.09%
Unum Group22.928.012.861.80%0.7114.69%16.23%
Endurance Specialty Holdings37.0870.760.523.20%0.58230.77%17.08%
Willis Group Holdings38.7324.421.592.70%2.5165.41%17.22%
Hanover Insurance Group36.6935.871.023.30%0.67117.65%18.35%

Symbol
Y NWLI ANAT TWGP HCC L XL KCLI SLF RE UNM ENH WSH THG
Watch List Summary
Alleghany Corp. (Y) appears to be an exceptional investment opportunity.  First and foremost, Alleghany Corp. has emerged as the suitor of our current holding of Transatlantic Holdings (TRH).  Even Warren Buffett was turned down by Transatlantic holdings after he lobbed a lowball offer for TRH.  Despite this fact, Alleghany is acquiring Transatlantic Holdings at a price nearly 10% below book value.  This alone suggests that Alleghany has an eye values.   We've been adamant that Transatlantic Holdings was a great value (found here) and is trading 8% below the offer price of $59.79.
The Punchline: Being within 4% of the 52-week low and 12% below book value, Alleghany (Y) is definitely a long-term buying opportunity at $288.  We'd make Alleghany a two part acquisition that comprises 15% of the portfolio when completed.  Keep in mind that the stock has a downside target of $266 based on Dow Theory.

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In the News: January 28, 2012

Posted on January 28, 2012 by | 2 comments

High-TechEmployee AntiTrust Litigation (PDF) at Lieff, Cabraser, Heimann & Bernstein,LLP
Apple,Google Must Face Antitrust Lawsuit Over Tech Employee-Poaching Ban atBloomberg
FormerGroupon sales reps countersue over tactics at Reuters
WhatMakes FPA Crescent Tick? at Morningstar
Olympuspanel clears accounting firms of blame in scandal at Reuters
TheFannie and Freddie Chronicles, Cont. at Barron’s
PaulsonDigs Deep Hole, Needs Big Returns To Recoup Losses at Barron’s
Digitalmusic sales top physical sales at CNNMoney
Milkfutures: Better than gold at CNNMoney
FHAsays: It's ok to flip that house at CNNMoney
Yourcell phone is out of your control at CNNMoney
Gold,Silver Move Towards 3-4% Weekly Gains; Time To Sell Miners? at Barron’s
GoldETF almost a sell at MarketWatch
What'sbehind Netflix's 22% spike? at CNNMoney
Is the ETFbubble about to burst? At CNNMoney
GoldIs The Hottest Currency In The World at Forbes
BePrepared To Sell Your Soul If You Use Google at Forbes
MerrillLynch Hit With $1 Million Fine For Employee Note Collections at Forbes
The Big401(k) Match Mistake at Forbes
ThePitfalls Of Variable Annuities at Forbes
FacingSEC Charges, Ex-Fannie Chief Daniel Mudd Resigns At Fortress at Forbes
Whathappens when you walk away from your home? at Reuters
Questioningthe Volcker Rule at The Atlantic

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Thoughts on Gold

Posted on January 28, 2012 by | Leave a comment
A reader says:
“There's a reason Gold is the hottest in the world.Investors are simply losing faith in ALL fiat currencies. Hence, they areturning to one thing that has always been real money - GOLD!”
Our Take:
We don’t know about the far distant future of gold,governments and profligate spending. However, we've always enjoyed a historical perspective on the topic of “realmoney.”  We’ve pulled a few quotes fromRichard Russell’s Dow Theory Letterson the topic of “real money” in the same vein as described above.
“The US is on a treadmill to disaster via the creation ofdebt. In time (and the time is moving very rapidly now) the debt will destroyalmost ALL forms of investments. Gold will withstand the destruction, becausereal money is never destroyed.” 
Dow TheoryLetters.  Issue 736. August 7, 1978. Page5.
“Coming up in a month, a year, a few years (I can’t time it)is the BIG PROBLEM, the problem that I’ve warned about for a long time. How doyou get people to hold paper “money” when they have increasing doubts about itsworth? The answer: you must make it CONVERTIBLE into real money-gold.”
Dow TheoryLetters.  Issue 766. September 26, 1979. Page1.
“My job now seems to be to try to save my subscribers fromthe deceitfulness and greediness of our own Government. So I talk about thetechnical position of gold, of where WC are, of whether gold is still a buy andwhether it will take 900 or 1000 paper dollars to buy an ounce of real moneysay six months or maybe even three months from now." 
Dow Theory Letters.  Issue 774. January 16, 1980. Page 7.
“‘How can the Government ever be bankrupt if it is able to createmoney?’ The answer is that the Government could only be bankrupt if no onewould accept that money. And of course, that possibility is the reason why manysurvivalists will ‘never be without some kind of a position in real money -gold.’” 
Dow Theory Letters. Issue 805.March 25, 1981. Page 3.
“Why could gold be bullish? Two opposing reasons: first,with a potential crisis in the world monetary system, people turn to real moneyas an insurance policy. Gold is real money. Second. With unbearable deficits facingthe US over coming years, politicians will be tempted to ‘print’ (monetize)some of those deficits (and suppose Edward Kennedy gets in in ‘84).”
Dow TheoryLetters. Issue 841. August 11, 1982. Page 6.
Now, we’re not suggesting that the ultimate consequence ofprofligate spending isn’t coming.  Additionally,we’ve made a call for a secular bull market (as opposed to a cyclical bullmarket) in gold on September28, 2010 and silver on September5, 2009 .  However, much of thearguments during and after the peak in the price of gold are the same as today. 
Additionally, nothing has changed that was said about profligatespending at the peak in the price of gold in 1980 or the period from 1981 to1999, a time when the price of gold was in a declining trend.  Therefore, we have little to help us distinguish the difference between huge government spending when gold is rising and when gold is falling.  We're sticking to the view that Dewey and Dakins' assertion that gold vacillates in a 50 to 54-year cycle is right on target (our 2009 review of their work here). 


We’re opting for the view that goldexperiences good times and bad rather than the view that our nation is comingto an end.  After all, the redemption ofour gold, as with all forms of insurance, is not something that we look forwardto.

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Posted in Dow Theory Letters, gold, Richard Russell, Silver, Simmons First National

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Posted on January 21, 2012 by | Leave a comment
Source: Watterson, Bill. The Calvin and Hobbes Lazy Sunday Book. Universal Press Syndicate/Andrews and McMeel. 1989. page 49.

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Nasdaq 100 Watch List

Posted on January 20, 2012 by | Leave a comment
Below are the Nasdaq 100 companies that are within 15% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.
Symbol Name Price P/E EPS Yield P/B % from Yr Low
BMC BMC Software, Inc. 34.01 13.93 2.44 N/A 3.74 7.56%
DTV DIRECTV 43.03 13.41 3.21 N/A N/A 8.06%
CHRW C.H. Robinson Worldwide, Inc. 67.66 26.33 2.57 2.00% 8.92 8.60%
NTAP NetApp, Inc. 36.85 22.46 1.64 N/A 3.54 11.67%
SYMC Symantec Corporation 16.79 19.1 0.88 N/A 2.69 12.38%
INFY Infosys Limited 52.29 18.09 2.89 1.10% 5.03 13.38%
EXPE Expedia, Inc. 31.04 9.21 3.37 3.60% 1.59 13.78%
VOD Vodafone Group Plc 27.76 13.16 2.11 3.60% 1.07 14.19%
WYNN Wynn Resorts, Limited 115.47 26.95 4.28 1.80% 5.66 14.30%
Watch List Summary
NetApp (NTAP) has fallen 39.61% from the high of $61.02 on February 11, 2011.  The low of October 2009 acts as a significant downside support since it is aligned with the long rising trendline from the 2002 low. According to Dow Theory, the current downside targets are $28.02, $22.52 and $17.02. Based on the current price of $36.85, NTAP could fall by 53% in the worst case scenario. According to Dow Theory, NTAP has  upside targets of $44.52, $50.02 and $55.52.
The Punchline: After a 39% decline in price, NetApp (NTAP) is a prime candidate for a two transaction  purchase.  The first purchase should take place starting at $30.  The second purchase should take place around $23.47.  Based on the market capitalization of NTAP may actually be a buyout candidate.
Symantec (SYMC) has declined by 19.07% from the high set on May 12, 2011.  Dow Theory ascribes downside targets of $15.08, $14.91 and $13.30.  When considering the worst case scenarios, SYMC has a downside risk of either -25.62% if the stock falls to the 2010 low of $12.34 or -39.42% at the 2009 low. Both cases  present reasonable risk/reward scenarios. The upside target is $18.67.
The Punchline:  SYMC seems like an opportune purchase for reasonable gains over next year. Consideration of a single purchase with a larger percentage of the portfolio is most ideal.  A sort of "one-and-done" with the acceptance of the downside risk of -40% is in order for SYMC.
Wynn Resorts (WYNN) has extreme downside risk. Based on Dow Theory, WYNN has just fallen below the first of three support levels at $115.47.  The next downside target, based on the Dow Theory 50% principle is $74.76 which is 35% below the current price. Our expectation is that WYNN has a high probability of falling to $74 with $64 and $40 as reasonable downside targets.
 The Punchline: The volatility profile for WYNN is only for those willing to accept extreme downside risk. "Investors" in WYNN should break their transaction up into at least 3 trades.
Watch List Performance Review
In our ongoing review of the Nasdaq 100 Watch List, we have taken the stocks from our list of January 23, 2011, based on the closing price of January 21, 2011(found here), and have checked their performance one year later. The companies on that list are provided below with the closing prices from January 21, 2011 to December 20, 2012.
Symbol Name 2011 2012 % change
CEPH Cephalon, Inc. 59.64 81.5 36.65%
CSCO Cisco Systems, Inc. 20.73 19.92 -3.91%
QGEN Qiagen N.V. 18.56 15.42 -16.92%
TEVA Teva Pharmaceutical  52.86 45.83 -13.30%
ATVI Activision Blizzard, Inc 11.25 12.22 8.62%
average 2.23%
Nasdaq 100 2268.32 2437.02 7.44%
 The Watch List from last year underperformed the Nasdaq 100 by a wide margin.  Only Cephalon (CEPH) and Activision (ATVI) were able to keep pace with the index.  Teva Pharmaceutical (TEVA) and Qiagen (QGEN) took the large hit among the top five stocks.

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The Time Has Come For California Water Services (CWT)

Posted on January 19, 2012 by | 1 comment

CaliforniaWater Services Group (CWT) has finally arrived at the point that we’veanticipated for the last 2 years.  OnJanuary 3, 2010, we submitted an investment observation that CWT would continueto trade in an established 6-year range that had been identified for at least4 other periods.  Just as a debrief, inthe 2010 piece (found here), we said the following periods traded in 6-year ranges afterbreaking out of the previous range:

  • 1976to 1982

  • 1985to 1993

  • 1993to 1997

  • 1997to 2004

  • 2005to 2011

In a January 1,2011 piece (found here), we reiterated our view on CWT by saying the following:
“…based oncycle analysis, the prospects of CWT making a substantial move above the priorhigh would be between 2011 and 2012.”
As we enter2012, we’re of the view that this is the year that California Water ServicesGroup will break above the 2006 and 2009 highs of $23.  Those interested in buying this stock shouldacquire large quantities and be prepared for the downside risk.  We are reiterating our downside targets at:
  • $17.28
  • $13.70
  • $10.52
Finally, a boilerplatedisclaimer that should be considered for any water utility stock.  Although water is critical to life, stock investorsneed to understand that companies in the water industry aren't a "surething." The biggest reason for this is that when and if water becomes “scarce,”government regulators will step in to take over (nationalize) what shouldotherwise be sold at the most profitable price (thereby curbing wastefulconsumption.) There is literally an upside cap on profitability to a companylike this due to the critical importance of the resource being sold.
Additionally,CWT should be considered a relatively risky stock because of its low dailytrading volume. With a 3-month average volume of 220,000 shares, this stock maynot be suitable for investors who are concerned about getting the "best" price.  However, collecting the current dividend yield of 3.40% should provide some consolation for the wait to rise above $23 in 2012.

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Posted in California Water Service, CWT, Dividend Achievers, dividends, water utilities

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2011 Performance Review

Posted on January 16, 2012 by | Leave a comment
Below is a charting of howour investment portfolio performed against the S&P 500 index and the30-year Treasury based on the January 3, 2011 rate (foundhere).
As with our 2010 performance (foundhere), the 2011 portfolio experienced far less volatility than the S&P500 Index and did not fall into negative territory throughout the year.  Our end of year return was +6.20% compared tothe S&P 500’s no change for 2011.   We continue to lean on holding high levels ofour funds in cash.  Our average cash holdingsthroughout 2011 was 42.41% , based on end of month figures.
Our new target rate for 2012 is set at a mind-numbing low of2.98%, based on the January 3, 2012 30-year Treasury rate (foundhere).  Below is the annualperformance of our portfolio since the end of 2005:

Year Dow S&P 500 Nasdaq NLO Portfolio
2006 16.29% 15.74% 9.52% 18.30%
2007 6.43% 5.46% 9.81% 19.80%
2008 -33.84% -37.22% -40.54% 14.35%
2009 18.82% 27.11% 43.89% 36.65%
2010 11.02% 14.32% 16.91% 7.14%
2011 5.53% 0.00% -1.80% 6.20%

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NLO Dividend Watch List: January 13, 2012

Posted on January 15, 2012 by | Leave a comment
We begin the year with an impressive move upward in the S&P 500 index. Two weeks have passed and the market has gained 2.5% despite the financial trouble that continues to brew in the Europe. Our 2012 dividend list has 25 companies that are within 11% of the 52-week low.

January 13, 2012

Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
TR Tootsie Roll Industries Inc  23.63 3.55% 32.82 0.72 0.32 1.35% 44%
BCR CR Bard, Inc. 85.45 5.75% 21.97 3.89 0.76 0.89% 20%
JW-A John Wiley & Sons Inc. 44.59 6.45% 15.65 2.85 0.80 1.79% 28%
CHRW C.H. Robinson Worldwide  66.73 7.11% 25.96 2.57 1.32 1.98% 51%
WAG Walgreen Co. 32.63 7.55% 11.02 2.96 0.90 2.76% 30%
BDX Becton, Dickinson and Co. 74.91 7.64% 13.33 5.62 1.80 2.40% 32%
CWT California Water Service 17.94 7.75% 18.31 0.98 0.62 3.46% 63%
WST West Pharmaceutical 38.29 7.86% 21.15 1.81 0.72 1.88% 40%
OMI Owens & Minor, Inc. 27.96 8.08% 15.71 1.78 0.80 2.86% 45%
ANAT American National Insurance 71.06 8.14% 11.03 6.44 3.08 4.33% 48%
CLX Clorox Co. 68.03 8.38% 19.61 3.47 2.40 3.53% 69%
AVP Avon Products, Inc. 17.52 8.89% 10.31 1.70 0.92 5.25% 54%
MATW Matthews International Corp.  31.19 9.17% 12.68 2.46 0.36 1.15% 15%
KO Coca-Cola Co 66.99 9.30% 12.31 5.44 1.88 2.81% 35%
AROW Arrow Financial Corp.  23.58 9.67% 12.75 1.85 1.00 4.24% 54%
BMO Bank of Montreal 56.92 9.82% 11.07 5.14 2.73 4.80% 53%
BMS Bemis Co Inc 29.89 9.85% 15.02 1.99 0.96 3.21% 48%
CAH Cardinal Health, Inc.   41.25 9.91% 16.11 2.56 0.86 2.08% 34%
TGT Target Corp. 49.82 10.03% 11.59 4.30 1.20 2.41% 28%
PEP PepsiCo Inc. 64.4 10.09% 16.14 3.99 2.06 3.20% 52%
WTR Aqua America Inc 21.26 10.27% 21.47 0.99 0.66 3.10% 67%
T AT&T Inc 30.07 10.55% 15.26 1.97 1.76 5.85% 89%
SJW SJW Corp. 23.11 10.73% 19.42 1.19 0.69 2.99% 58%
NFG National Fuel Gas Co. 49.35 10.87% 15.97 3.09 1.42 2.88% 46%
CATO Cato Corp. 23.98 10.97% 10.90 2.20 0.92 3.84% 42%
25 Companies






Not much movement has occurred since our last watch list on December 23, 2011.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from January 14, 2011 and have check their performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2010 Price 2011 Price % change
ABT Abbott Laboratories 46.89 55.43 18.21%
CL Colgate-Palmolive Co. 78.31 88.52 13.04%
CLX Clorox Co. 63.98 68.03 6.33%
LLY Eli Lilly & Co. 34.91 39.94 14.41%
KMB Kimberly-Clark Corp. 63.64 72.7 14.24%



Average 13.25%





DJI Dow Jones Industrial 11,787.38 12,422.06 5.38%
SPX S&P 500 1,293.24 1,289.09 -0.32%

Disclaimer

On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.


Please consider donating to the New Low Observer. Thank you.

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4-Year Cycle Update

Posted on January 10, 2012 by | Leave a comment
On June14, 2010, we wrote an article titled “AMarket Cycle Worth Observing.”  Inthat article, we proposed that there was significant validity in the beliefthat the stock market ebbs and flows in a 4 to 4 ½ year cycle.
In aneffort to make our point, we provided examples from Charles H. Dow, co-founderof the Wall Street Journal, and Richard Russell editor of the Dow Theory  Letters (www.dowtheoryletters.com).  The examples were drawn from the late 19thand 20th century.  The purposeof connecting such disparate periods was to show that regardless of the changein times, some attributes of the stock market remain intact.
In ourclosing paragraph on the 4-year cycle we said the following:
“If my observations on thistopic are correct, then we have at least until January 2011 to June 2011 beforethe half cycle is complete. Afterwards, the market would either trade in arange or establish a well-defined bottom in accordance with the 4 to 4 ½ yearmarket cycle.”
Ourarticle of June 14, 2010 came after an -11% decline in the Dow Jones IndustrialAverage.  Subsequent market action led tothe Dow Jones Industrial Average rising +25.71%.  Coincidentally, the Dow Industrials peaked onApril 29, 2011 at 12,810.54 with two failed attempts at reaching new highs inJuly 2011.
Because we’rewithin 9 months of the second half of the 4-year cycle, we believe that thereis approximately another year to go of the stock market continuing to trade ina range or reaching an ultimate low.  
For themarket to trade in a range we expect that the Dow Jones Industrial Average doesnot exceed the high of 12.810.54 by more than 10% while not falling below10,655.30.  If both the Dow Industrialsand Dow Transports exceed their respective highs we would view such action as anew cyclical bull market.  Our downsidetarget for an ultimate low on the Dow Jones Industrial Average is tentativelyset at 8,540.36.
Althoughgiving our prognostication one year in advance (as indicated in an April 2010posting below), we were off by only one month for the last peak in the market. Furthermore, the evidence suggests that the 4-year cycle is still inplay.  We feel that an appropriateinvesting strategy can be constructed around this concept.  If investing in stocks is a must, then we’drecommend considering the relatively undervalued current and former dividendincreasing stocks from our latest dividend list below.
Symbol
Name
Price
P/E
EPS
% Yield
Price/Book
% from Low
TR
Tootsie Roll
23.77
32.82
0.72
1.40
2.03
4.12%
BCR
C.R. Bard, Inc.
85.81
22.05
3.89
0.90
3.96
6.14%
BDX
Becton, Dickinson
74.24
13.22
5.62
2.50
3.26
6.70%
JW-A
John Wiley & Sons
44.77
15.7
2.85
1.80
2.66
6.88%
CWT
California Water Service
17.83
18.29
0.98
3.40
1.64
7.09%
OMI
Owens & Minor
27.8
15.61
1.78
2.90
1.93
7.46%
CLX
Clorox Company
67.76
19.54
3.47
3.60
-116.98
8.64%
WST
West Pharmaceutical
38.55
21.28
1.81
1.90
1.85
8.73%
FRS
Frisch's Restaurants
20.27
22.93
0.88
3.30
0.8
9.92%
·        April2010 Dow Projection Analysis

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Posted in 4 1/2 year, 4 year, Charles H. Dow, Dow Theory Letters, Richard Russell

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Crime and Punishment

Posted on January 8, 2012 by | Leave a comment
The state of our financial markets rests firmly on its credibility.  However, it would not be surprising if few individual investors felt that there was no credibility in the current system.  A perfect example is the recent case of MF Global.  MF Global isn’t just a firm that was poorly managed, it also had the misfortune of “not properly segregating client’s accounts.”  This means that MF Global mixed their customers money with the firm’s money.

It turns out that MF Global was betting big on European debt at the same time the European debt was imploding.  As MF Global files for bankruptcy, a sizable portion of customer funds has gone unaccounted for.  However unlikely it may be, the regulators and those in charge of MF Global should be severely reprimanded.

As further proof of the problem we’re faced with, the recent fine levied by the Accountancy& Actuarial Discipline Board, in London, against PricewaterhouseCoopers(PwC) goes a long way to explain how MF Global and many other investment firms manage to violated seemingly simple rules. PwC was fined $2.17 million for not “…properly segregating an average of$8.6 billion of client funds” as reported by Bloomberg News (article here).

To put this fine into perspective, $2.17 million is 0.03% (3/100ths of 1%) of $8.6 billion.  Imagine if the penalty for robbing a bank of one million dollars was $300.  There would definitely be much more bank robberies if this were the case.  The current maximum penalty for robbing a bank is $250,000 and 20 years in prison. Based on this penalty, the robbers would have to try getting away with a minimum of $833 million before such action seems “feasible.”

Regardless of the amount stolen and depending on the circumstances, convicted bank robbers could easily face the maximum penalties of $250,000 and 20 years in prison.  Although there is no accounting for the logic of bank robbers, there appears to be plenty of logic for investment and accounting firms.

This brings us back to those who are responsible for enforcing the rules, the regulators.  If the Accountancy & Actuarial Discipline Board(AADB) and Public Company Accounting Oversight Board (PCAOB) cannot set meaningful penalties for the crimes committed, then such penalties will be considered a legitimate cost of doing business instead of a penalty.  So much for the credibility of the markets.

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Posted in AADB, Arthur Andersen, Deloitte and Touche, Enron, MF Global, PCAOB, PwC

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In the News: January 7, 2012

Posted on January 7, 2012 by | Comments Off on In the News: January 7, 2012


·        SECChanges Policy on Admissions of Wrongdoing at Barron’s
·        ApolloHits 52-Week High; For-Profit Educators Jump at Barron’s
·        S&P500 Ends Heart-Stopping Year Down 0.003% at Barron’s
·        MetLife’sDeposit Sale Unlocks Opportunities, Says Analyst at Barron’s
·        FedShould Fine Mortgage Servicers That Broke Law, Raskin Says at Bloomberg
·        KnuckmanLikes Gold and Favors Gold Miners’ ETF (Audio) at Bloomberg
·        AmgenMay Join Gilead as Biotechs Seek Acquisitions to Grow at Bloomberg
·        TheGoogle Interview Cheat Sheet at BusinessWeek
·        PwCFined $2.17 Million by U.K. Regulator Over JPMorgan Client-Money Audit atBloomberg
·        ThievesDefy Death to Tap Metal Price Boom as U.K. Cracks Down at Bloomberg
·        InsurersProfit From Health Law They Spent Millions to Fight at Bloomberg
·        ReinsurancePricing Subdued Even After 2011’s Disaster Record at Bloomberg
·        ApartmentVacancies in U.S. Decline to a Decade Low as Rental Rates Climb atBloomberg
·        Insurers’2011 Catastrophe Losses Reached Record on Japan, Munich Re Says atBloomberg
·        Denny’sWill Raise Menu Prices in 2012 to Offset Food Costs at Bloomberg
·        Buffett’sDefense No Match for S&P 500’s Flat Line in 2011 at Bloomberg
·        WorldwideSemiconductor Sales Fell 2.4% Nov Vs. Oct., SIA Says at Bloomberg
·        ReinsuranceRate Increase to Focus on Loss Areas, Willis Re Says at Bloomberg
·        Quiz:How Dysfunctional Is Your Workplace? at BusinessWeek
·        AMissouri Town's Sweet Dreams Turn Sour at BusinessWeek
·        AShifting Market Stings Chinese Homeowners at BusinessWeek
·        Bewareof ETFs on Steroids at BusinessWeek

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NLO Dividend Watch List: December 30, 2011

Posted on January 4, 2012 by | Leave a comment
The S&P 500 ended the year at precisely where it started. The Dow, however, ended up nearly 6% for the year.

Our list from last year (December 31, 2010) posted an average gain of 9.5% which is considerably better than the overall market. This brings us to the end of the year watch list for 2011. As it stands, there are 22 companies this year versus 10 companies from last year. There is considerably less concentration compared to our list from last year. Below are the 22 companies ending our 2011 watch list:

December 30, 2011

Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
TR Tootsie Roll Industries Inc  23.67 3.72% 32.88 0.72 0.32 1.35% 44%
FRS Frisch's Restaurants, Inc 19.4 5.21% 22.05 0.88 0.64 3.30% 73%
BMO Bank of Montreal 54.81 5.75% 10.66 5.14 2.74 5.00% 53%
BCR CR Bard, Inc. 85.5 5.82% 21.98 3.89 0.76 0.89% 20%
JW-A John Wiley & Sons Inc. 44.4 5.99% 15.58 2.85 0.80 1.80% 28%
LM Legg Mason, Inc.  24.05 6.37% 14.66 1.64 0.32 1.33% 20%
SCHW Charles Schwab Corp. 11.26 6.63% 16.81 0.67 0.24 2.13% 36%
WST West Pharmaceutical 37.95 6.90% 20.97 1.81 0.72 1.90% 40%
EXPD Expeditors Intl of Washington 40.96 7.08% 22.63 1.81 0.50 1.22% 28%
GS Goldman Sachs Group, Inc.   90.43 7.31% 13.76 6.57 1.40 1.55% 21%
BDX Becton, Dickinson and Co. 74.72 7.37% 13.30 5.62 1.80 2.41% 32%
OMI Owens & Minor, Inc. 27.79 7.42% 15.61 1.78 0.80 2.88% 45%
CAH Cardinal Health, Inc.   40.61 8.21% 15.86 2.56 0.86 2.12% 34%
AVP Avon Products, Inc. 17.47 8.58% 10.28 1.70 0.92 5.27% 54%
WAG Walgreen Co. 33.06 8.97% 11.17 2.96 0.90 2.72% 30%
AROW Arrow Financial Corp.  23.44 9.02% 12.67 1.85 1.00 4.27% 54%
UTX United Technologies Corp. 73.09 9.30% 13.71 5.33 1.92 2.63% 36%
BMI Badger Meter, Inc. 29.43 9.57% 18.28 1.61 0.64 2.17% 40%
CWT California Water Service 18.26 9.67% 18.63 0.98 0.62 3.40% 63%
CLX Clorox Co. 66.56 9.91% 19.18 3.47 2.40 3.61% 69%
MATW Matthews International Corp.  31.43 10.01% 12.78 2.46 0.36 1.15% 15%
BMS Bemis Co Inc 30.08 10.55% 15.12 1.99 0.96 3.19% 48%

We've reviewed many companies last week and nothing materially changed therefore we suggest readers revisit our posting from December 23, 2011 for watch list summary.

Last Year Review

We've suggested the following asset allocation for the 10 stocks. If one was to follow that conservative allocation with 51% in cash, one would end up with a gain of 4.3% excluding dividends.

Disclaimer

On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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Nasdaq 100 Watch List: December 30, 2011 (revised)

Posted on January 1, 2012 by | Leave a comment

Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.

Symbol Name Price P/E EPS Yield P/B % from low
BMC BMC Software, Inc. 32.78 13.43 2.44 N/A 3.65 1.83%
ORCL Oracle Corp. 25.65 14.11 1.82 0.90% 3.1 3.76%
VMED Virgin Media Inc. 21.38 68.53 0.31 0.70% 4.99 4.19%
SYMC Symantec Corp. 15.65 17.8 0.88 N/A 2.54 4.75%
CTRP Ctrip.com 23.4 19.93 1.17 N/A 3.09 4.79%
LRCX Lam Research 37.02 7.67 4.82 N/A 1.89 6.35%
EXPE Expedia, Inc. 29.02 8.61 3.37 3.90% 1.49 6.38%
BRCM Broadcom Corp 29.36 17.68 1.66 1.20% 2.57 6.42%
SRCL Stericycle, Inc. 77.92 30.92 2.52 N/A 5.66 6.67%
EXPD Expeditors Int'l of Was 40.96 22.63 1.81 1.20% 4.46 7.08%
DTV DIRECTV 42.76 13.33 3.21 N/A N/A 7.38%
AMZN Amazon.com 173.1 91.25 1.9 N/A 10.19 7.79%
CA CA Inc. 20.22 11.86 1.7 1.00% 1.74 8.62%
AVGO Avago Tech. 28.86 13.18 2.19 1.60% 3.57 9.24%
WYNN Wynn Resorts 110.49 25.79 4.28 1.80% 5.32 9.37%
MSFT Microsoft Corp. 25.96 9.44 2.75 3.10% 3.68 9.77%
NTAP NetApp, Inc. 36.27 22.1 1.64 N/A 3.42 9.91%

Watch List Summary

Broadcom (BRCM) has fallen to a one-year low recently, the stock is also near a two-year low.  According to Dow Theory, BRCM is considered at fair value at $30.72.  The remaining Dow Theory downside targets for this stock are $25.17, $21.47 and $17.77.  With the stock trading slightly more than double the 2009 low, the company and its fundamental allow for purchases to be made in two stages.

The Punchline: Broadcom is a strong company in a strong industry that is experiencing consolidation, thereby reducing the number of competitors.  Consider buying BRCM in two stages, once at the current price and again at any price below $25.17.

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the stocks from our list of January 7, 2011 (found here) and have checked their performance one year later. The companies on that list are provided below with the closing prices from January 7, 2011 to December 30, 2011.

Symbol Name Jan-11 Dec-11 % change
ISRG Intuitive Surgical 267.4 463.01 73.15%
CEPH Cephalon 60.32 81.49 35.10%
CSCO Cisco Systems 20.97 18.08 -13.78%
APOL Apollo Group 37.98 53.87 41.84%
AMGN Amgen 56.98 64.21 12.69%
Average  29.80%
^NDX Nasdaq 100 2276.7 2277.83 0.05%

Even with the underperformance from Cisco (CSCO), our watch list from the beginning of last year exceeded the Nasdaq 100 Index by a wide margin.

Disclaimer:
On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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