Author Archives: NLObserver Team

Dexia: So What’s in a Name

In the last financial crisis, we came across a company named Cerberus Capital.  Those who started Cerberus Capital had to know the kind of connotation that would be invoked with a name based on a three-headed dog that guards the gates of the underworld from those who wished to escape.  For some, Cerberus Capital’s involvement in Chrysler and GMAC seemed inescapable for the U.S. government during their bailouts of the auto and banking industry. 

Currently, a Belgium bank named Dexia Group is attempting to find a way out of its financial problems.  Apparently, Dexia is holding an enormous amount of Greek debt that could possibly go bust.   Without a plan from France, Belgium and Luxembourg, Dexia threatens to bankrupt many towns and cities in France as well as depositors in Belgium and Luxembourg. 
Like Cerberus Capital, we wonder what is in the name.  So it should comes as no surprise when we looked up what the meaning of Dexia is.  Here are the Wikipedia definitions of what Dexia is:
Dexia is a genus of tachinid flies in the family Tachinidae. Most larvae are parasitoids of beetles (Scarabaeidae).”
Since the above definitions of Dexia was relatively obscure, we looked up what a parasitoid is.  Again, Wikipedia’s definition is as follows:
A parasitoid is an organism that spends a significant portion of its life history attached to or within a single host organism in a relationship that is in essence parasitic; unlike a true parasite, however, it ultimately sterilises or kills, and sometimes consumes, the host. Thus parasitoids are similar to typical parasites except in the more dire prognosis for the host.”
Cornell University’s Guide to Natural Enemies of North America defines parasitoids, in part, as:
Insect parasitoids have an immature life stage that develops on or within a single insect host, ultimately killing the host…”
We can only wonder if Dexia, the Belgium bank, will ultimately lead to killing the hosts, in this case France, Belgium, Luxembourg  or even the European Union as we know it.
More about Dexia from
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In the News: October 9, 2011

Europe on the Brink at The Atlantic
In Praise of Dumbphones at The Atlantic
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Nasdaq 100 Watch List: October 7, 2011

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
ILMN Illumina, Inc. 27.18 31.39 0.87 0 4.25 0.00%
QGEN Qiagen N.V. 12.65 23 0.55 0 1.21 0.16%
BMC BMC Software, Inc. 36.98 14.61 2.53 0 4.39 1.01%
LIFE Life Technologies Corp. 36.82 18.95 1.94 0 1.56 4.31%
TEVA Teva Pharmaceutical 36.75 10.51 3.5 2.10% 1.41 5.00%
FSLR First Solar, Inc. 59.74 10.18 5.87 0 1.52 7.29%
PAYX Paychex, Inc. 27.11 18.44 1.47 4.70% 6.3 7.92%
VOD Vodafone Group Plc 26.25 11.22 2.34 7.30% 1.01 7.98%
URBN Urban Outfitters, Inc. 23.29 15.77 1.48 0 2.91 8.48%
GOOG Google Inc. 515.12 18.58 27.72 0 3.19 8.90%
NFLX Netflix, Inc. 117.21 29.74 3.94 0 19.38 8.90%
CTXS Citrix Systems, Inc. 54.94 31.09 1.77 0 3.93 9.42%
FISV Fiserv, Inc. 53.38 17.51 3.05 0 2.46 9.50%
VRSN VeriSign, Inc. 29.69 6.62 4.49 0 N/A 9.96%
HSIC Henry Schein, Inc. 61.09 16.25 3.76 0 2.21 9.97%
Watch List Summary
It appears that Illumina (ILMN) has come full circle since last appearing on our Nasdaq 100 Watch List on December 19, 2009 (found here).  At the time, Illumina (ILMN) traded at $27.88.  The stock rose as high as $79.40.  In our September 23, 2011 article (found here), as Illumina crept back onto our watch list at $41.67, we said, “while ILMN is still nearly 50% above the December 19, 2009 price, the possibility exists that all the gains that were made could disappear in short order.  Between our last posting and now, ILMN has managed to lose all of the gains that were accrued from December 2009.  We’re now actively accumulating shares of ILMN with the expectation that the share price will decline by approximately 50% from the current level.
Pharmaceutical Product Development (PPDI) has announced that they have accepted an all cash offer of $33.25 per share by the Carlyle Group and Hellman & Friedman (article here).  Pharmaceutical Product Development (PPDI) was on our September 11, 2009 watch list (found here).  Of the four companies on that list, only one has not been bought out.  Cephalon (CEPH), Genzyme (GENZ) and now Pharmaceutical Product Development Inc. (PPDI) have been acquired.  Although we’re not unaccustomed to stocks on either of our Dividend or Nasdaq 100 watch lists being bought, this is the first time that 75% of the companies on a single list were acquired by another institution.  We’d like to offer up the holdout, Stericycle (SRCL), to anyone willing to help us accomplish a grand slam.
Watch List Performance Review
The following is a performance review of the Nasdaq 100 Watch List from October 18, 2010:

  •  Apollo Group, Inc. (APOL): +16.79%
  • Urban Outfitters, Inc. (URBN): -24.87%
  • FLIR Systems, Inc. (FLIR): +0.50%
  • Intel Corporation (INTC): +15.37%
  • Adobe Systems (ADBE): -9.97%
  • Nasdaq 100 (NDX): +5.01%
The performance of the five companies on the Nasdaq 100 list from last year underperformed the Nasdaq 100 by -5.45%.  Only two stocks, Apollo Group (APOL) and Intel (INTC) managed to eke out gains in the last year.  Apollo Group was a considerable surprise to us since we believed that the stock should have been dropped from the Nasdaq 100 at the time of the annual re-ranking of the index in December 2010.
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Slittare: Italy’s credit rating

On February 18, 2009, we wrote an article titled “When Paper Has No Value.” In that article, we highlighted West Germany’s $2 billion bailout of Italy in 1974 that was backed by the value of Italy’s gold holdings. Regarding the use of gold as collateral we said the following:
No nation wants to actually resort to this feature first, because as one nation dips its toes in the water all subsequent nations will follow in its path at ever higher gold prices. It is only the last nation in the pool, with sizable gold reserves, that benefits the most from using gold as collateral. The first nation in the pool becomes the sacrificial lamb. Unfortunately, desperate times call for desperate measures.”
We couldn’t help but notice that Moody’s credit rating for Italy was downgraded three notches on October 4, 2011 (found here). There are three primary reasons given for the downgrade of Italy’s debt:
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.
In Italian, the word slittare means to slide or to be postponed. This was the term that was used to describe Italy’s economic woes that led to the loan using gold as collateral in 1974. Depending on its usage, slittare encapsulates the problems faced by Italy today. The increase in long-term debt is the postponement of the inevitable and the increased downside risk to economic growth points to a further slide. The third issue mentioned by Moody’s, implementation risk, only adds to why the first and second reasons will only grow.
Like it was in 1974, Germany is currently in the position of having to buttress European nations as the “lender of last resort.” We’re wondering which nation will be the first to pledge their gold reserves as collateral in exchange for a loan to avoid collapse. It will be desperate times when a nation pledges their gold reserves for the purpose of a loan. However, when this does occur, it will set the ball in motion that will inexorably create a floor in the price of gold.

The Coming Precious Metals Dividend War

On September 9, 2009 we wrote an article titled “Silver Should be the Focus.” In that article, we cautioned readers to “be mindful of the coming competitive dividend war between precious metal companies. I remember one, now defunct, gold company that paid out their dividend in actual gold. These are all gimmicks to lure investors in at a time when the rule of the day should be ‘head to the exits.’
The first salvos of the coming war to attract investors to precious metal stocks have be initiated.In April 2011, Newmont Mining (NEM) started what they deemed … the industry's first and only dividend policy linked directly to the realized gold price…"Naturally, this isn’t the first time that gold linked dividends has taken place, but it sells really well to those unfamiliar with gold stocks and their dividend policies.On September 19, 2011, Newmont Mining (NEM) announced a further enhancement of their “first ever” gold linked dividend policy with the following changes:


The enhanced policy will continue to link the quarterly dividend rate to changes in the gold price but will also provide an additional step up of 7.5 cents per share when the Company's realized gold price for a quarter exceeds $1,700 per ounce and a further step up of 2.5 cents per share (10 cents in total compared to the existing policy) when the Company's realized gold price for a quarter exceeds $2,000. At average realized gold prices below $1,700 per ounce, the current dividend policy remains unchanged. Newmont's quarterly gold price-linked dividend payments are based on the Company's average realized gold price for the preceding quarter.”
Not to be outdone, Hecla Mining (HL) announced on September 20, 2011 that they would have a dividend that is linked to the price of silver.Hecla’s silver-linked dividend policy is as follows:


The initial quarterly dividend under the policy is expected to be $0.03 per share of common stock ($0.12 per year), if Hecla's average realized silver price for the third quarter is $40.00 per ounce. All dividends, including those in the third quarter, would increase or decrease by $0.01 per share ($0.04 annually) for each $5.00 per ounce incremental increase or decrease in the average realized silver price in the preceding quarter.”
Newmont Mining (NEM) and Hecla Mining (HL) are soon to be joined by a crowded field of precious metal companies that are going to progressively up the ante.It will soon be indistinguishable as to who has the most sensible dividend policy and who has a compounding “money” losing machine.The race to offer attractive dividend payments has help from an unexpected source.
Unlike past precious metal bull markets, gold and silver stocks have stiff competition for investment capital in the form of gold and silver ETFs.In fact, more money is being plowed into the combined gold and silver ETFs than the stocks that have actual claims on getting the metal out of the ground.This presents a challenge for precious metal stocks that would normally issue shares in acquisition of other gold companies or expand their operations.In order to get the share price up, a competitive environment of dividend increases will lead many companies to ruin in an effort to attract new investors.
As described in our 2009 recommendation silver, one gold or silver company is going to “jump the shark” and make their dividend payments in the actual metal.When that time comes, it will be fair warning to protect your positions, though this may be indistinguishable to ebullient gold bugs at the time.
The single best dividend policy that we’ve seen among gold stocks, was held by Homestake Mining [HM] as describe in our October 31, 2010 profile of Homestake (found here).By 1933, Homestake had a 53-year history of continuous dividend payments.Not surprisingly, Homestake was among the 2% of gold stocks that rose in value from 1924 to 1932 due, in part, to their amazing dividend policy.
Because we’re in the early stages of a gold bull market, there is little attention being paid to the quality of the dividend policy.Gold and silver linked dividend policies appear advantageous when the price of the commodity is going up.However, such a policy can imperil a poorly managed company as the average price declines.
The most effective antidote to becoming collateral damage in the coming dividend war will be to buy the gold and silver stocks that are members of the Philadelphia Gold and Silver Stock Index or the Amex Gold Bug Index.Ironically, institutional support, by being the member of an index, will allow gold and silver stocks to survive hard times where others will unnecessarily falter.
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