2007 The Year of The Pig

In a recent poll produced by the Associated Press and AOL News, Americans are very bearish for 2007. Here are some of the poll results:

*Sixty percent believe that we will have a terrorist attack in 2007.

*Ninety percent beleive we are in store for higher gas prices.

*Seventy percent of those polled believe the United States will have a major natural disaster.

*Eighty percent of people believe that the minimum wage will be raised from $5.15 to a higher level. There has been no increase since 1997.

My thoughts on these poll results are that the risk of a terrorist attacks looms over the economy and another event like 9-11 would have a dramatic impact on the economy over the short term but we have proven the ability to withstand such a shock to the system. All portfolios should have some type of insurance to protect against the "black swan" type of event. Such insurance should cost a portfolio no more than 2% of the value of the portfolio and it should be able to return 5-10% should a major sell-off occur.

Gas prices are heading lower as too many people are bearish here. However, as a country we need to begin to develop concrete policies to handle the eventual fact that demand is rising worldwide and supply is finite. We will see $100 a barrel for West Texas Crude but not in 2007.

The minimum wage will become a reality in 2007 and Bush cannot cave into raising taxes in 2007 if he is going to enact this change. A combination of a higher minimum wages and new taxes would drive the U.S. economy into a recession. Instead President Shrub needs to focus on earmarks and entitlement spending cuts not seen since "The Gipper" was in office.

That's it for now. Hope everyone has a safe New Year's night and best of luck in 2007. My 2007 New Year's Resolution is to write more often, find interesting subjects to write on and focus on the big picture.

SEC Caves Into Corporations on Stock Options and Unrest in China

SEC Caves Into Corporations on Stock Options and Unrest in China and the future of the Yuan.

In July, the SEC handed down new requirements on how companies were handling the reporting of executive compensation via stock options. Now the SEC has modified those rules to the benefit of companies away from the institutional investors. Floyd Norris gave a great summary in today's The New York Times and we note it appeared on the A1 and then rolled to page 5 of the business section. May could have missed this story if they read on line of glanced at the business section headlines.

Companies will now change the way they report grants to make it more complicated to understand. Grants or stock options to the heads of corporate America will now seem smaller than they really are given how they will be measured. Last summer companies were required to disclose more and compile it in a summary compensation table. The December change will change the measurement to be amortized over a period of time.

As an example, if a C.E.O. got a $20 million dollar options grant the entire amount would appear in the summary table. Now only the portion applicable to the current year will appear and then it will appear in subsequent years making the tracking extremely difficult. The kicker here is the separate standard for executives retiring. It reads like another government regulation that no one can really understand. Even the usually eloquent Floyd Norris had a tough time with the document. The bottomline is it will be more difficult for the average investor to really understand how the executives are being compensated. For this, the SEC should be scolded.

Moving onto the issue of China, we picked up some great intelligence from one of my favorite clients. He notes that the visit by Federal Reserve Chairman Bernanke and Treasury Secretary Paulsen paved the way for the floating of the Yuan. We will continue to let our dollar fall in value so that when we ask the Chinese to float their currency the impact will be less. If the dollar appreciated, such a floating would leave a bad taste in the mouth of the Chinese leaders. So when the dollar continues to head so understand what is coming. The die is cast.

Also added was that there are increasing number of demonstrations in China that are failing to be reported by Chinese or the western press. However, Beijing cannot keep this quiet because the power of the internet is so great. Village protests are reported to hit 80,000 this year. Domestic unrest is China's largest issue for 2007. The big issue is land owners being forced to turn over land without the proper compensation. This unrest could wreak much greater danger to the Yuan than a devaluation if the civil unrest were to escalate into an Iraq type siutation. 2007 could be an interesting year as we enter The Year of the Pig.

Kohl's To Enter a Tough Stretch

Here is a piece we wrote for Jefferson Research the other week on Kohl's Department Stores. Retailers have been having a tough time as they are weak traditionally on a seasonality basis for a few more days. If and that is a BIG "if" the shoppers came through, then our thesis of weakness for Kohl's may have to change. For the time being this is an overvalued stock.

On Wednesday we noted that Robert W. Baird & Co lowered Kohl's (KSS) from Outperform to Neutral. It is funny that they still have a $79 price target and the stock was at $71.89 with a neutral rating. Since we wrote this, the stock has moved to $69.82. We would hate to see what a buy looks like. But then again RobertW. Baird & Co is in Kohl's back yard of Wisconsin and who would want to offend a neighbor around the holiday season. They sighted tough comps for next year as the reason for the rating change.

We note the current Jefferson Torpedo Alert rating is a CAUTION (3).
The last filing is Q3 of 2006. Earnings are due in early to mid February. For January 2007 the company is expected to earn $3.26 and $3.84 in January 2008.

Earnings for January 2006 were $2.43. The growth rates for these years are 34% 2006 to 2007 and 17% for 2007 to 2008. The current P/E for January 2007 is 22. The P/E Ratio for 2008 is 19. If estimates are too high, then one could expect this stock to get hit in 2007. Clearly, the stock is priced to perfection.

The major reason Kohl's has done so well is that the orchestrated a very effective turnaround that is now complete. The turnaround has seen the stock move from $45 to a peak of $75. This represents a move of 67%. In searching the web, we note that several blogs are pointing to heavy discounting by Kohl's. Jefferson sees issues with liquidity driven by a decrease in cash. It looks like some more detailed analysis could be done on Kohl's as the bloom is off the rose.

Last we note that short sellers have given up on this stock and the technical are now rather mixed.

Stock Option Probes Do Not Matter Anymore

What a week! They just keep on coming. More and more companies are announcing that they are either a.extending their stock option review and delaying filings or b.announcing new investigations. No one cares. Examples include SIGM, MNST and RIMM among others.

It is amazing. Often stocks under investigation are near all time highs, like Research In Motion (RIMM), and no cares that the way these stocks got to such valuations is by beating numbers that may never have existed. Yet, when they do restate they are not punished for their acknowledgement but rather rewarded with a nice slap on the back. The inmates ARE running the asylum.

We believe this WILL end badly as the investing public comes to the conclusion that yes the stock market is rigged by the corporate big dogs who have no ethics or moral conscience.

We need more corporate leaders who were of my Dad's generation- those born in the 1930s that ran our great country until the past five to 10 years. The current corporate leaders should be ashamed of how they handed out stock options and manipulated earnings.

International Markets Look Vulnerable

With less than three weeks of trading left in 2006, are the international markets vulnerable? It looks that way. Most markets sold off on Tuesday and we will see what Wednesday brings. The potential threats of protectionism may be just that, threats. However, the possibility that Paulson and Bernanke visiting China signals the beginning of a new protectionist policy must be considered.

Remember Clinton is more of a Republican than Bush and given the inability of Bush to comprehend Economics 101 he could support traditional Democratic policies of tough trade talk. This would be scary. In a certain respect, tough trade talk makes sense when you consider the rather egregious copyright and patent violations of the Chinese.

Meltdowns often occur after political missteps occur. We would sell international funds or go short the EFA. Could investors get some coal instead of presents for Christmas?

Noble Ambitions

It was my goal to write several times a week when I started this page. Oh well?!? Here is another attempt to relauch my writing efforts! Thoughts will be a combination of politics, stock market analysis, stories of interest and life lessons.

My thought with today's post is to do a quick review of what I have gotten right and wrong in my prior posts! We will start with the most recent post and work my way backward in 2006.

*On May 6, 2006 I wrote that Medifast (MED) could be the next Nutri Systems (NTRI). Since then the stock has moved from $12.70 to $13.23. Correct. Seven months later and we will remove this idea as active especially given Jefferson's Torpedo Alert sees trouble ahead with cash flow.

*On May 5, we wrote no action in Iran by the United States until post election. Correct. Iran and the Middle East currently seem to be watching how Iraq shakes out before increasing their actions.

*On April 11th, we said time to sell this buy recommendation at $39 and the stock sold off to a low of #33.62. Schwing! It has now moved to $43.70. Correct.

Other posts that were written in 2005 and 2004 take a similar approach. One should write to throw out interesting ideas and seek to continue working on a communication skill that in the 21st Century is going by the wayside- the art of writing.

From time to time, we may also post pieces of commentary we write for www.21stcenturyalert.com and James DiGeorgia as well as for BFG Outlier Research with my boys George Brandon and Mike Foley. For now, Audere est facare!