Inflation or Hyperinflation? - The Merk Mutual Funds

Axel Merk does a good job of explaining how our belief that the Fed will inflate leads to inflation. The Fed must do more than talk before I will believe otherwise. Since its creation, it has done nothing but destroy the value of the dollar, rewarding borrowers and hurting savers.

http://www.merkfund.com/merk-perspective/insights/2009-06-24.html
Sent from my Verizon Wireless BlackBerry

Harvard Cuts Risk, Loses Bond Managers - WSJ.com

One interesting tidbit from the article is that Harvard now has a net cash position instead of margin.

They are also shying away from investments that aren't as liquid, such as hedge funds and private equity, and keeping more under their own control, as opposed to placing it with outside managers. .

I consider these prudent moves for anyone. You don't want to be in a position where you are forced to sell.
http://mobile2.wsj.com/device/article.php?CALL_URL=http://online.wsj.com/article/SB124568674308337519.html?
Sent from my Verizon Wireless BlackBerry

U.S. Unemployment Benefit Rolls Fall; Claims Rise

I wonder what impact people dropping off the rolls due to reaching the maximum time on unemployment is?

June 18 (Bloomberg) -- The number of Americans receiving claims for unemployment benefits dropped for the first time since January, adding to evidence the job market is starting to thaw.

The number of people collecting unemployment insurance plunged by 148,000 in the week to June 6, the most since November 2001, to 6.69 million, the Labor Department said today in Washington. Initial claims rose by 3,000 to 608,000 in the week ended June 13, in line with forecasts.

The average number of claims over the last four weeks fell to the lowest level in four months, an indication that the U.S. economy is stabilizing after the worst recession in half a century. Even so, companies are likely to be slow to hire new employees, sending unemployment rates higher, analysts said.

"Companies will start pulling back on the pace of job cuts in coming months," John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey, said before the report. "We've seen jobless claims peak."

Treasuries dropped to their lows of the day after the report, sending yields on benchmark 10-year notes up to 3.76 percent at 8:41 a.m. in New York from 3.69 percent late yesterday. Futures on the Standard & Poor's 500 Stock Index rose 0.3 percent to 908.40.

Economists' Forecasts

Economists forecast claims would rise to 604,000, according to the median of 40 estimates in a Bloomberg News survey, from a previously reported 601,000 a week earlier. Estimates ranged from 586,000 to 632,000.

The four-week moving average of initial claims, a less volatile measure, fell to 615,750, the lowest level since February, from 622,750.

The jobless rate among people eligible for benefits dropped to 5 percent in the week ended June 6 from 5.1 percent.

Last week's data coincides with the week the Labor Department conducts its monthly payrolls survey.

Forty-five states and territories reported an increase in new claims for the week ended June 6, while eight had a decrease.

The government is scheduled to release its June payrolls report July 2.

The Federal Reserve said last week said the U.S. downturn may be slowing in almost half of its regions though a "weak" labor market persists.

'Continued to Be Weak'

"Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling," the Fed said in its Beige Book business survey. Some employers were freezing or cutting wages or reducing workers' benefits and hours, the report said.

Still, "several districts saw signs that job losses may be moderating," and staffing firms "reported some modest signs of recovery," the Fed said.

Fed policy makers are scheduled to meet again next week on the direction of monetary policy.

News Corp.'s MySpace social-networking unit fired almost 30 percent of its staff to save money in response to falling advertising sales and gains by larger rival Facebook Inc.

Bankruptcies at General Motors Corp. and Chrysler Group LLC may also inflate benefit rolls for weeks to come. Chrysler, which resumed production at one plant this week, may not open some facilities until late July.

Chrysler likely will reopen its plants on a staggered schedule and some will be open only a week or two before the company's annual two-week shut down that begins July 13, said Dianna Gutierrez, a company spokeswoman. She declined to release the start-up dates for its individual plants.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

===
Sent from Bloomberg for Blackberry. Download it from the Blackberry App World!
Sent from my Verizon Wireless BlackBerry

Black Swan Trader Bets Reputation on Inflation - WSJ.com

I think the chance of very high inflation is higher now than at any time in the past 30 years. The economy can be stagnant and we can have simultaneous inflation. Just look at Zimbabwe.

In stocks I recommend companies that will have pricing power in such an environment, and will pass their profits along to shareholders. Some commodity exposure seems prudent, maybe 5-10% of a portfolio.

http://mobile2.wsj.com/device/article.php?CALL_URL=http://online.wsj.com/article/SB124519615631521063.html?
Sent from my Verizon Wireless BlackBerry

Buy 3, Sell 1, Portfolio Problems at Icarra

Ambassadors Group, Inc. (EPAX) profits by partnering with a non-profit, People to People, to send Americans on educational foreign trips. It pays a 2.75% dividend, and is currently under-valued due to the depreciating dollar and conerns over terrorism. It has a $328 million market cap at $16.74/share, 16% Pre-Tax Earnings Yield, and over 100% Pre-Tax Return on Capital.

Thomas Group, Inc. (TGIS) is a consulting firm that gets most of its revenues from the US Navy. It pays a 5.35% dividend with a payout ratio just under 60%. At $7.48/share, it has a market cap of $82 million, an EY of 18%, and ROC over 100%.

Trident Microsystems, Inc. (TRID) makes chips for LCD and Plasma televisions for major companies such as Samsung, Sony, and Phillips. An options backdating scandal and competition from low-cost makers have brought the price down, and the stock is currently trading at $5.82/share, with a market cap of almost $350 million, an EY of 27%, and ROC over 100%. The company pays no dividend.

On a bookkeeping note, it looks like my portfolio at Icarra.com has lost most of my recent transactions, so I'll work on correcting those and look into setting up the tracking portfolio somewhere else.

I found the ticker for DEBS, which has moved to a German exchange. It's now known by DE1.BE. It was picked 1 year ago, so will be sold this week.

Selling 1 Losing Pick After 1 Year, Holding 1, Selling a Winner

Biovail (BVF), CCA Industries (CAW), and EPIQ Systems (EPIQ) have all lost money since being picked last December. I personally believe Biovail is still a good investment and hold it in my real-money portfolio, but it has been a loser. On the Magic Formula site, it's still listed as one of the top 25 picks, so it can be held for another year. It looks like Icarra is still down (it's been down for 3 days now, at least), so I can't update my portfolio there, but consider CAW and EPIQ sold.

Update 12/19
Well, it looks like EPIQ had a 3:2 split 6/8/07, so it's actually returned over 40% in the past year. So I'm ending up selling 1 winner after a year and 1 loser.

3 High-Yielding Picks

The recent sales in my Magic Formula portfolio, tracked at Icarra.com, have resulted in a cash position of $5126. Money market rates are dropping with Federal Reserve rate cuts. Zecco's CSAXX money market fund is now yielding just over 4%. However, the Magic Formula website is currently recommending 3 stocks that have yields higher than that, plus the potential for capital appreciation. Monday, December 3rd, I'll buy $500 worth of each of these 3 companies in my Icarra portfolio.

• Pacer International Inc (PACR) is currently yielding 4.4%, at $13.76 per share. It has a market cap just under $500 million and an Earnings Yield of 17%. It was trading as high as $30 a year ago, but there is concern for its future outlook, as it may be squeezed between its customers and supplier. Pacer is an intermodal freight shipper that will be renegotiating its contracts with the railroads from 2011 to 2015, and will be facing increased prices at that time. If currently high trucking prices come down in the future, Pacer will lose customers to its competition.
  
  
• Idearc, Inc. (IAR), the phone directory company, is currently yielding 7.3%, at $18.92 per share. It has a $2.8 billion market cap and EY of 12%. It traded as high as $38 in the past year, since its spinoff from Verizon (VZ). A recession could hurt its business, and its outlook for the future is clouded by the potential for local search competition from Google (GOOG) and Yahoo (YHOO).
  
  
• Wayside Technology Group, Inc. (WSTG), a software company, is currently yielding 5.6% at $10.70 per share. It has almost $4 per share in cash. Revenues have declined with competition for VMWare business, so the stock has been punished.
  

One Year Update

My first Magic Formula transactions were November of 2006. So now, one year later, let's see how those initial picks have performed (average return for these is 3%):

OVTI +20%
FCX +50%
ASPV +40%
ADDL -28% (Icarra has no data for ADDL after Jan 2007, so it's treated as sold)
PNCL +60%
FTO +50%
WNR +18%
PWEI -9% (Bought out)
NATH +29%
NOOF -38%
OPMR -55%
MRGE -77%
EGY -41%
UNTD +24%

ASPV is still on the Magic Formula list, so it hasn't been sold. UNTD will be sold as after 11/21, following the rule of holding winners more than a year.

Four Options for September

Four Options for September

Here are four buy recommendations from the Magic Formula list of the top twenty-five companies. The first two do not pay a dividend, but the last two do.

• Korn/Ferry International (KFY)
  An executive search company, with over 5% net profit margin and growing, and best of all, no debt. The current credit crunch shouldn't impact them. I don't think the threat of a recession on the horizon will hurt KFY. When times are hard, companies will be even more willing to pay up for talent. KFY is $22.21/share, giving a market cap of over $1 billion, with an 11% pre-tax Earnings Yield, and Return On Capital over 100%.
  
  
• ICF International (ICFI)
  ICFI is a consultant to various US government departments. I don't foresee cuts in government spending any time soon, no matter who is elected President or who controls Congress. The company is young, growing fast, and profitable (over 5% net profit). It has low debt, so it doesn't have to try to borrow in the current credit crunch. It has a market cap of $350 million with a current price of $24.63, an EY of 16% and ROC of over 100%.
  
  
• Gevity HR (GVHR)
  Gevity HR is, as the name implies, a specialist in Human Resources. They are undergoing a complete restructuring right now, so the gamble here is that this will work. GVHR pays a 3% dividend while investors wait for the turnaround. The company has a poor record on corporate governance. GVHR's price has been cut in half over past couple of months, but it may have bottomed now. They have no debt, but it's still a risky dividend play, with the uncertainty over the shift in strategy. It's
  currently $11.52/share, with a market cap of $280 million, a EY of 12% and ROC of over 100%.
  
  
• Biovail (BVF)
  Already in my Magic Formula portfolio, Biovail is at an attractive buy point again, with a 7% dividend (this is a Canadian company, so they will take a portion of it off the top, making it about 6% for an American investor). Since the arrival of the new CEO, the company has better stewardship and a fatter dividend. Concerns over a recent Non-Approval Letter due to study designs, not safety or efficacy have dropped the stock price back into "buy" territory. They have enough cash to continue the dividend, even with this setback.
  

Disclosure: I own shares of Biovail (BVF).

Take a Ride with FreightCar America

FreightCar America (RAIL) has a market cap just over $600 million, a pre-tax Earnings Yield of 46%, and a pre-tax Return on Capital over 100%.

The company makes railroad cars, primarily for carrying coal. Coal production, and therefore, orders for new railcars, is down recently. However, new coal-burning plants are coming online soon and aging railcars will need to be replaced with FreightCar's new lighter aluminum cars that can carry more coal. There's also the potential for sales to China.

RAIL pays a nominal annual dividend of $0.24/share, and its shares are currently $50.26, giving a yield of less than half a percent.

Cherokee in the Bargain Bin

Cherokee (CHKE) has a Pre-Tax Earnings Yield of 9%, a Pre-Tax Return on Capital of over 100%, and a Market Cap of $325 million. It licenses clothing brands to retailers such as Target (TGT) and has high gross margins.

It dropped significantly from $48 to just over $36 last month and is now at $36.54 per share. It pays an annualized dividend of $3, or 8.2%, at the current price. The recent drop is due to a decline in profits and loss of 2 licensing agreements for Mossimo and Carrefour, giving us a buying opportunity until these revenues are replaced. Director Jess M. Ravich recently bought 15,000 shares at $37.93, more than doubling his stake in CHKE.

This looks like a classic Magic Formula stock, a great company that is temporarily out of favor.

PWEI Merger Completed

PWEI, purchased in November, completed its merger on 6/22. Shareholders will receive $33.50 per share, a 7% loss from the original purchase price of $35.95. This has been reflected in my Icarra portfolio.

Icarra Portfolio

I've set up a tracking portfolio at Icarra.com. It's more advanced than just a spreadsheet like I've been using, including charts and comparisons to different benchmarks.

Magic Zecco Portfolio at Icarra

For simplicity's sake, I'm just using transactions of $500 for each stock, even though this results in fractional shares. The portfolio has no transaction costs, but this is the case with Zecco anyway.

Two Tech and Biotech Companies for June

• Intevac (IVAC) has dropped into bargain territory lately, at $19/share. The company makes sputtering equipment for manufacturing hard drives and low-light imaging technology for night-vision goggles, sensors and cameras. It has a $400 million market cap, with Earnings Yield of 17% and Pre-Tax Return on Capital over 100%.
  
  
• ViroPharma (VPHM) has a $1 billion market cap, (at $14.60/share) and an EY of 15%. Can it repeat its success with Vancocin before profits from it are threatened by generic competition?
  

Buy In May and Go Away?

Once a useful idea like "Sell in May and go away" has become a commonplace, penetrating the mind of the masses, it becomes useless. It has lost its power. Value investors, and especially Magic Formula investors, must be willing to move when they see a bargain. We can't be contrary just to be different. We don't run into a burning building because people are fleeing in terror. We do, however, want to pick through the ashes and see if anything good has survived. And so it is with the stocks today:

• Intevac (IVAC) has a market cap of $446 million. It produces sputtering equipment for manufacturing computer disks as well as imaging sensors, and recently dropped on lowered guidance. It has 16% EY and over 100% ROIC. It's currently trading at $21.05. Will the company be able to maintain its ROIC? That's the question. Seagate is its main customer and they have reduced capital spending.
  
  
• Mocon (MOCO) has a market cap of $59 million. It specializes in measuring gases and chemical compounds. It has a dividend yield of 2.75%, EY of 11%, and ROIC of 75-100% pre-tax. It recently announced some bad news: though profits were up 5%, income was down dramatically due to the opening of a support office in China. It's $10.90 a share.
  
  
• Williams Controls (WMCO) makes electronic throttles for big rigs in China. It's a small company, with a market cap of just $132 million at $17.83/share. It has a 12% EY and 75-100% ROIC. In this case, we're fleeing the burning building of the US and checking into Hotel China. The place is crowded, but management is expanding. Please don't mind the mess.
  
  

The Magic Formula strategy is to buy these stocks and check on them in a year, not watch them every day.

Market Swoon = Full Bargain Bin

The recent market swoon has resulted in a few new names on the Magic Formula list, large and small. These two seem the best bargains.

• Axcan Pharmaceuticals (AXCA) specializes in gastroenterology. Each member of its sales force generates an average of $2.5 million in revenue. It has a $740 million market cap, with an 11% Pre-Tax Earnings Yield and over 100% Pre-Tax ROC. It's currently $16.11 a share, with no dividend. Urso and Canasa lose patent protection this year, but they have other products that can make up the loss, like Pylera, and another drug in trials for gastroesophageal reflux disease.
  
  
• Motorola (MOT) has a market cap of over $44 billion, with a 12% EY. It's currently $18.47
  
  
  
  

Avici Systems

Avici Systems (AVCI) just appeared on the Magic Formula list after posting a net profit for the 4th Quarter last week. It has a 25% Earnings Yield and greater than 100% Return on Capital.

Barrett Business Services Inc

Barrett Business Services Inc (BBSI) is the latest company to make the Magic Formula list, with a pre-tax Earnings Yield of 11% and pre-tax Return on Capital of greater than 100%. It's currently $24.02/share with a market cap of $270 million.

Latest Recommendation: Lam Research (LRCX)

This semiconductor stock has dropped 15% since the middle of January and appeared on the list of the top 25 stocks just this week.

Other Magic Formula Blogs - Lessons Learned

• A writer describes his lessons learned after one year of Magic Formula Investing. He advises not deviating from the formula.
  
• Another writer examines what happens to Magic Formula stocks that have dropped 20%. I've seen this with several of the Magic Formula stocks I bought (like Freeport-McMoran), but it has already recovered and paid a dividend, as well. FDG, EGY and OVTI are still down 12-26%, but I'm hanging on.