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Israel’s Emerging Market

November 30, 2007

The Smart Profits Report: Issue #477
Friday, November 30, 2007

Israel’s Emerging Market: U.S. Markets Deflate As The Tel Aviv Stock Exchange Rises 254% Since 2002
by Karim Rahemtulla, Investment Director & Marc Lichtenfeld, Senior Analyst, Mt. Vernon Research

As the calendar flips to December tomorrow, many investors will be thankful to get rid of a brutal November that has savaged the stock market. For the month, the Dow Industrials finished down 553 points (4%), the S&P 500 lost 64 points (4.1%), and the Nasdaq Composite shed 175 points (6.2%).

It’s hardly surprising really as November saw oil prices leap to another record high over $99 a barrel. This is putting untimely pressure on consumers, as gasoline and home energy costs are rising in the runup to Christmas. The Fed also significantly lowered next year’s GDP growth forecast - from the 2.5% to 2.8% range it projected in July to 1.8% and 2.5% now. There are plenty of other issues, too - from the hellish housing sector to the crushed U.S. dollar. And with the stock market lurching between strong gains and heavy, fear-soaked losses on a daily basis, investors’ heads are spinning.

Most are questioning their holdings - a natural reaction. Some are hedging their bets on a “Santa Claus rally” to bail them out - a pretty naïve approach. But there are things you can do to ease the pain.

And fresh from a trip to Israel’s emerging market, my colleague Marc Lichtenfeld will now show you one way to combat the situation…

Prosperity And Money In Israel’s Emerging Market

Sixty years ago, Israel was mostly swamps and deserts. But today, the progress is nothing short of amazing, with the development there probably rivaled only by India and China. Today, you can sit in a chic café, sipping your latté after putting in a long day of work at Google (Nasdaq: GOOG) or Intel (Nasdaq: INTC).

I just returned from two weeks in the land of milk and honey and it’s intriguing to hear the stories of those who have seen the changes.

For example, my father-in-law recalled how when he visited his brother in Israel in the 1970s, the family asked him to bring hard-to-find staples such as tuna fish. It was so scarce that the eight of them would share one can at a time. In the 1990s, things had become easier, but certain everyday items that we took for granted were still difficult to obtain and my wife would still send Levi’s jeans to her cousins.

So before we left the U.S. this time, we asked what we could bring with us. The response was surprising: “Nothing. We have everything now.” And they do - including a surging stock market.

As we wandered around Tel Aviv, the place has become a model of commerce, industry and creativity. From a glistening new shopping mall that sits at the base of a 52-story office tower to trendy boutiques filled with expensive merchandise, Israel is moving up - and fast. Want a small condo near the Mediterranean Sea? Prepare to pay Manhattan prices.

And it’s not just Israeli citizens enjoying the prosperity. Investors are thrilled with the performance and growth prospects in the Holy Land.

The Tel Aviv Stock Exchange Rises 254% In 5 Years

Over the past year, the Tel Aviv Stock Exchange General Index, which contains all the stocks listed on the exchange, has risen 19.2%. In fact, it’s risen every year over the past five years and has rocketed 254% since the end of 2002. The TA-25, an index of the 25 stocks with the highest market caps, is up a sizzling 27.8% over the past year.

These returns are coming in an economy that chalked up a 6.1% annualized GDP growth rate during the third quarter. Exports shot up 17.8%, beating the 13.1% average of the previous three quarters. It’s even more impressive that the third quarter figure came amid a recent 5% rise in the Israeli shekel versus the U.S. dollar. Exports are usually negatively impacted by a rising local currency.

With that kind of growth, inflation and interest rates must be through the roof, right? Wrong. Economists say the declining dollar (and rising shekel) should put a cap on rates. Despite the strong performance, inflation over the past 12 months was an acceptable 2.5% and is expected to be even lower over the following year.

How To Invest In Israel’s Emerging Market

Israel hosts many companies that are publicly traded in the United States. One of the biggest and most well-known is generic drug giant Teva Pharmaceuticals (Nasdaq: TEVA). But other Israeli firms include software maker Checkpoint Software (Nasdaq: CHKP) and multimedia tools provider NICE Systems (Nasdaq: NICE). They’re available as ADRs for American investors.

As for broader investments, mutual funds aren’t a wise option right now. The Amidex 35 Israel (AMDEX) is the only fund specializing in the tiny country, but it carries exorbitant fees, making it a poor investment choice.

Alternatively, the First Israel Fund (AMEX: ISL) is a closed-end fund that invests in stocks traded on the Tel Aviv Stock Exchange. It’s up around 27% year-to-date. However, it is trading at a 7% premium to net asset value.

Israel’s Emerging Market Carries Short-Term Risk

Of course, even if you only keep half an eye on the news, you’ll know that investing in Israel’s emerging market carries some short-term risk. Surrounded by hostile neighbors, Israel constantly has security issues. It only takes one crazy radical wearing explosives to shatter the peace and increasing affluence that Israel now enjoys.

But even when terrorists strike, Israelis continue to build and prosper. While the past year has been relatively quiet, bombings have occurred every year. If attacks increase, or war breaks out, you could see Israeli stocks impacted in a dramatic way. But the effects are likely to be short-term. Long-term, Israel has proven its resiliency and resourcefulness - and its stocks deserve consideration in the foreign portion of your portfolio.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • America’s major banks continue to write off billions in bad debts. But contrary to popular media opinion, you can actually make money from this battered sector. This is something the world’s smartest, most successful know. Warren Buffett recently bought shares of Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC). And I just issued a recommendation on another bank in the December Xcelerated Profits Report issue. More details here.
  • Many so-called experts are telling folks to run for cover from the “financial storm.” While you can’t prevent millions of other investors from panicking right now, a disciplined, diversified portfolio will certainly pay off in the long run. Do not panic and rush to sell like many others, as it may be an irrational, emotional decision and it’s not the way to make money. The way to make money is not to run away when a fear-ridden, slumping market gives you a chance to buy strong companies at bargain prices, so you can sell higher later on. And if your stop-losses haven’t triggered, don’t pull the trigger! Fundamentally sound companies usually rally back once the dust settles.
  • When you own strong companies for less, using professional investment strategies, you’ll be in a much more satisfying position than most other ordinary investors - throughout both good times and bad. That’s exactly what the team of professional traders at the Xcelerated Profits Report does for investors. The editors have experienced market conditions like this many times before - and will use that experience to guide you through the current minefield. This year, they’ve locked in profits of 100%, 79%, 65%, 55% and 45%… and have current gains of 109%, 50%, 46%, and 45%. It’s the smartest way to invest. For more details, click here to continue.

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Fed Interest Rates

November 28, 2007

The Smart Profits Report: Issue #476
Wednesday, November 28, 2007

Fed Interest Rates: Depressed Economy, Inflation Fears & A Weak Dollar Present Problems For Fed
By Martin Denholm
Managing Editor, Mt. Vernon Research

Now here’s a fella who likes soundbytes…

He wants to “unclog the plumbing of the financial system.” He wants a “shock-and-awe” Fed interest rates cut to give the U.S. economy and stock market a “huge shot in the arm.” In short, he wants Ben Bernanke and his band of bankers to get really tough and slash interest rates by 1%.

Who the heck is this guy? Jim Cramer? Santa Claus? Clearly, he doesn’t care too much for savers. And as for the U.S. dollar… forget it. Let it tank some more and make it even easier for foreign companies to buy American ones.

Step up, John Ryding, Chief U.S. economist at Bear Stearns (NYSE: BSC), quoted in an interview with BusinessWeek. Does he have a point, or is he completely nuts?

The Stock Market’s 3-Month Bluff

Historically, the worst time of the year to own stocks is September-October, but after sprinting through the fall en route to new highs for the year, the market has simply bluffed giddy investors and lulled them into a false sense of security.

Those who expected stocks to just keep rising have had a seriously rude awakening. As I write, the Dow Industrials are down 7.2% in November, the Nasdaq Composite has shed 9% this month, while the broader S&P 500 is down 7.7%.

Turns out the subprime mortgage meltdown and credit concerns weren’t done with the market, though. And having once basked in the investment world’s warm glow, many banks both in the U.S. and across the world have had to ‘fess up and admit their mistakes, writing off billions of dollars.

I don’t have to say much about the other factors weighing on the economy and stock market: Oil prices racing to $99; gasoline prices at $3.11 a gallon (national average); home energy bills rising; the real estate market in full-on correction mode. Just in time for Christmas, too.

So can the Fed ride to the rescue? And more to the point, should they?

Fed Interest Rates - A 0.25% Cut

The bankers’ final monetary policy meeting of 2007 is set for December 11 and right now, the consensus is that they’ll cut interest rates again, by 0.25%.

This wouldn’t be a great surprise, given that the minutes of the October 31 meeting showed that the Fed saw “substantial downside risks to the economic outlook.” It backed that up last week, slashing its U.S. GDP growth forecast next year from the 2.5%-2.75% range in July to 1.8%-2.5% now, and projected a rise in the unemployment rate from 4.7% in October to 4.9% by Q4 2008.

But predicting the Fed’s moves can be a tough task. The board also thought that the 0.25% October cut, in addition to the 0.5% chop in September, would be enough to fire the economy into life and ease the credit and housing market concerns.

But although all-but one of the bankers voted for the cut, it was still a “close call” amid fears that inflation could easily rise. And recent Fed rhetoric seems to imply that it would rather not cut rates again, and doesn’t want the market to assume that it will do so at the first sign of trouble.

Both Chicago Fed President Charles Evans and Philadelphia Fed President Charles Plosser don’t want another rate cut on December 11, with Plosser today stating: “The markets will have to figure this out. Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks.”

And there’s a big reason why…

Cuts To Fed Interest Rates Are Weakening The U.S. Dollar

The Fed can cut interest rates as much as it wants to, in order to pump some liquidity back into the markets and spark the economy - and it might make investors happy for a while - but in doing so, they risk twisting the knife into the U.S. dollar. Since early September, the Dollar Index has traded under the key 80-point level, with many of the world’s major currencies hitting multi-year or record highs. And each rate cut serves to weaken the dollar’s attractiveness to foreign investors.

What’s more, a weak dollar increases inflationary pressures via commodity prices. Policymakers believe a 1% drop in the dollar equals a 1% rise in oil prices. This has a domino effect, with speculators ditching the dollar in favor of oil and driving the price up for consumers.

Hardly surprising then that it’s a delicate balancing act for the Fed. And it pretty much kills John Ryding’s hope for that “shock-and-awe” rate cut.

European Commission President Jose Manuel Barroso has admitted that the weak dollar poses a problem not just for the U.S., but the rest of the world, with the high euro potentially hurting European exporters. And speaking of the rest of the world…

The Weak Dollar May Spark Foreign Corporate Acquisitions

The low dollar, relative to other major currencies, has also sparked a run on American companies from foreign counterparts. Through the first nine months of the year, the value of U.S. corporate acquisitions from overseas firms hit $257.4 billion, according to Thomson Financial. That’s the highest since 2000.

And it’s more than just acquiring a company. If the trend continues, some are concerned that in addition to Americans losing their jobs, America’s corporate power and independence will diminish, as more foreigners will gain access to the most lucrative, dynamic sectors like technology.

This is a good time to evaluate your portfolio’s diversity and exposure to foreign markets. In the December Xcelerated Profits Report issue (sent to subscribers yesterday afternoon), Investment Director Karim Rahemtulla quoted a statistic from Grant Thornton, who state that by 2050, the so-called “BRIC” nations (the emerging markets of Brazil, Russia, India and China) will account for 44% of global GDP. Make sure you capitalize on the trend.

Best regards,

Martin Denholm

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Today’s Smart Profits Action Center

  • It wasn’t a buyout… but it was the next best thing. Having been kicked around the Street for weeks, battered and bruised Citigroup (NYSE: C) today received a much-needed cash injection from the Abu Dhabi Investment Authority. The group pumped $7.5 billion into Citigroup in a show of confidence in America’s largest bank and the beaten-down financial sector. The move now makes it Citi’s largest shareholder. Citi’s success in attracting this investment sent the Dow Industrials up 215 points today and boosted Citi’s financial sector competitors on hopes that they may also be able to raise capital. And of course, a weak dollar makes such investment more attractive for foreign firms.
  • Far from running for the exits with ordinary investors, the Xcelerated Profits Report team views the recent market meltdown as a chance to buy great companies at much lower prices. That’s exactly what Investment Director Karim Rahemtulla and technical analyst Jim Stanton have done in the December issue. In fact, like the Abu Dhabi Investment Authority, they’re also investing in the financial sector. To find out how easy (and cheap) it is to receive profitable recommendations from professional traders every month - who are so confident in their picks that they guarantee an 80% win rate on your trades - click this link.

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Black Friday 2007

November 21, 2007

The Smart Profits Report: Issue #475
Wednesday, November 21, 2007

Black Friday 2007: Here’s A Retailer That Could Profit From The Madness Of The Holiday Season
By Martin Denholm
Managing Editor, Mt. Vernon Research

Talk about catapulting from the sublime to the ridiculous…

Tomorrow’s events are pretty straightforward. A little coffee to wake me up, followed by some turkey and wine to put me right back to sleep again! Plenty of relaxing.

Then it all goes a bit nuts. All in the spirit of the season - and a fat serving of good, old-fashioned capitalism, of course. It’s the most important day of the year for the retail sector - a time to catch fire or flame out. I’ve got the story for you - and a potential success story. So, what will you be doing on Black Friday 2007?

Will Black Friday 2007 Give Retailers A Black Eye?

The National Retail Federation says more than 140 million Americans hit the stores on Black Friday 2006, looking to scoop up some serious bargains. (By the way, Black Friday refers to the official start of the holiday shopping season, when retailers hope to sell enough to put them “in the black”). In 2007, even more shoppers are expected to descend on the malls.

I have one word for you: “Uggh!” Don’t get me wrong, I actually like Thanksgiving a lot. I’ve experienced a few since coming over from England (where we unfortunately don’t have anything similar) and it’s probably my favorite holiday.

But one tradition I’ve never understood is why so many people, having barely digested Thursday’s gargantuan meal, then head out to the stores at the crack of dawn the next morning (a day off!) to gorge themselves again - this time on goods.

Folks, just enjoy the time off! Why put yourself through crazy traffic, the parking lot lottery, and the checkout chaos?

I don’t intend to go anywhere near a store on Black Friday 2007. I hate shopping at the best of times and getting up close and personal with hundreds of stressed-out strangers, falling over themselves as they stampede into stores, just ain’t my idea of a good time. The discounts you want will probably still be there in December, as retailers fight desperately for dollars. But I fully expect to see pictures of idiots fighting over merchandise again. Season’s beatings, anyone?

So what do retailers expect?

Pump Pain Leaves Consumers Gassed

In just two years, the retail sector looks to have come full circle. In 2005, holiday season sales jumped by a robust 6.6%. Last year, that figure declined sharply, but still showed a healthy 5.1% increase. In 2007, however, the story is different.

This time in 2006, gasoline prices were around $2.25 a gallon, as oil prices cooled off. But now, the reverse is happening. Despite steadily rising oil prices, the summer didn’t produce the same high gasoline prices. But that’s all changed now, with oil’s march to yet another record high of $99 today and gasoline selling for around $3.10 a gallon - and rising.

The result is that 38% of consumers cite high gasoline prices as the main reason for scaling back their spending this year. More than one-third of respondents said they’d scale back their buying this year, according to a Consumer Federation of America and Credit Union National Association poll. As a result, retailers only expect sales to rise by 4% during the fourth quarter.

As if that weren’t enough, the Chinese are shoving all kinds of nasty materials into kids’ toys, sending parents’ into a spin…

Lead Paint And The Date Rape Drug… Merry Christmas, Kids!

Quite a Christmas conundrum for parents this year. How do you give the kids a good one without hospitalizing them? It might be tough. First, it was dangerous levels of lead paint in toys. Then it was magnets that kids could swallow. Result? A recall of around 21 million toys. Now, it’s a recall of Aqua Dots toys tainted with the date rape drug and reports of kids knocked unconscious after swallowing them.

Okay, words fail me on this one. I’m not even going to attempt to figure out how this could happen. But the fact that all these contaminated toys are in high demand could toss an unexpected wrench in retailers’ hopes this season. A Harris Interactive poll shows that one-third of Americans will buy fewer toys this Christmas, due to safety concerns, with almost half saying they’ll avoid toys made in China. Not good, considering about 80% of all toys are made in China. And how do you explain that disappointment to excited kids?

To compensate, many stores are cutting prices early and often. But this, coupled with consumers’ cutting back on spending, could erode profit margins. So where do you look for retail bargains - both at the store and when investing?

The American Dream This Christmas: Fresh Fashions… Top Quality… Low Prices

You hear a lot about what America’s mega retailers like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) are doing to woo customers - when they’re offering their deep discounts, how much they’re discounting, and how long they’re doing it.

The whole investment world looks at these bellwethers as a guide to the rest of the retail sector. Investors pounce on good news and punish poor numbers. But don’t ignore the so-called “off-price” retailers. I’ve taken a look at these guys and one firm that could do well here is The TJX Companies, Inc. (NYSE: TJX).

Consumers looking to cut back could find some attractive bargains on good quality merchandise at companies like this. TJX already buys some of its inventory from other retailers’ overstock. And after the worst October in 12 years for retail sales, the big boys are looking to shift a ton of excess inventory in a big way. What it can’t sell directly to its customers, it passes off to other retailers like TJX, which is able to gobble it up at much lower prices. So customers get new fashions at bargain prices. And in this season of record oil prices and rising gasoline and home energy prices, that could be just the ticket.

“A Market Full Of Buying Opportunities”

Already, T.J. Maxx is profiting. Despite that ugly October for the overall sector, the firm notched up a 3% same-store sales rise - the second straight month that it beat forecasts. In its 30 years of operation, the T.J. Maxx chain has posted a same-store sales increase in 28 of them.

The upbeat October followed a third quarter that saw revenue increase 6% to $4.74 billion over Q3 2006, leading to an 8% jump in profits to $249.5 million ($0.53 a share).

On the earnings call, CEO Carol Meyrowitz called the market “full of buying opportunities” and revealed that, “The level and quality of goods out there is amazing.” The firm raised its fourth-quarter earnings guidance from 57-59 cents per share to 58-60 per share.

Not only that, it announced plans to add 1,000 new stores to its existing 2,500 in the U.S. (T.J. Maxx, Marshalls, HomeGoods, A.J. Wright and Bob’s Stores in the northeast), the U.K. and Ireland (under T.K. Maxx) and its Canadian chain called HomeSense, which will expand into the U.K. and Germany next year.

Please note, this is not an actual recommendation - just some food for thought as you digest. Hope your Thanksgiving doesn’t involve sitting in a traffic jam, or enduring crowds and delays at a mall or airport!

Martin Denholm

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Today’s Smart Profits Action Center

  • If consumers don’t manage to heave themselves off the couch to hit the bricks-and-mortar stores on “Black Friday,” there’s always the Internet. Monday is “Cyber Monday” - the biggest online shopping day of the year - and a BIGresearch survey for Shop.org says 54.5% of office workers (68.5 million people) will shop online, up from 50.7% in 2006 and 44.7% in 2005. Not surprisingly, mall-shy men like me account for 57% of the total.
  • I could do without the constant TV updates on the state of the nation’s travel tie-ups. The local news crews love this time of year just like they love severe weather. Gives them a quick ‘n easy story. Airport officials are asking fliers to “pack neatly” and “de-clutter hand luggage.” Seriously? I think most adults know how to pack a bag and to be honest, I don’t even know what “de-cluttering” one’s hand baggage means or entails.
  • Receive profitable recommendations from a dedicated team of professional traders every month - and win on 80% of your trades… guaranteed. Click this link for more details.

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Retail Services

November 14, 2007

The Smart Profits Report: Issue #473
Wednesday, November 14, 2007

Retail Services: Here’s What To Expect In The Retail Sector’s Most Critical Two Months
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research

There are few things I enjoy less than going to the mall. It’s right up there with a visit to the doctor, hearing my young children whine, and eating bad meatloaf. So you can imagine my glee this weekend when my wife informed me that the whole family was going to the mall to run some errands.

However, unlike most men who share my misery and sit forlornly with their wife’s purse as they wait for her to emerge from the dressing room, I try to use the time productively. I conduct what is known in the business as “channel checks.” A channel check is simply retail lingo for observing activity and trends within retail services.

While I’m waiting for the missus, I look at the number of shoppers, employee activity and the layout of the store. Sometimes, I chat with staff in order to get a read on where business is brisk and which stores need to hear the register ringing more often.

Then, next time I’m in the office, I conduct further research into the retail service to see if what I witnessed is a trend in the company and/or sector, or if it’s just an anomaly. And at this time of year, retailers depend on a heavy flow of feet into their stores more than any other time. The November-December holiday season period is without doubt the most critical period for the retail sector, since companies rely on it for about half their annual revenues.

Higher Prices Squeeze Consumers… Lower Prices Squeeze Margins

Based on what I saw, shoppers are still around. Yes… gasoline, energy and food costs are rising and the purse strings may be tightening as a result, but customers haven’t shut off the tap completely. They’re just searching harder for sales, and retail stores will have to compete fiercely to lure in the bargain-hunters. But shifting stock at lower than desired prices could squeeze profit margins.

I’m not just talking about clothes retail services here. I suspect the casual dining and restaurant segment will suffer worse than fashion retailers this season. Rising energy and commodity prices combined with a stretched consumer makes it tough to grow margins and profits. And stretched consumers will give up a meal at Red Lobster before denying little Timmy a merry Christmas. I believe IHOP (NYSE: IHP) and Darden (NYSE: DRI) are particularly vulnerable.

Let’s take a look at a few other Main Street retailers…

Nordstrom Retail Services Heading North

Nordstrom (NYSE: JWN): If the store that I visited is any indication of the broader trend for the company, then it will do well this season. The store was packed. Usually, there is a pianist playing classical music, but they swapped mellow for mashing this weekend as a DJ spun lively tunes that gave the store a festive atmosphere. The cosmetic counter was particularly crowded.

The thing about Nordstrom is that it caters to an already-moneyed crowd that should feel less impact from rising gasoline, home energy and food prices. After all, the customer driving her BMW 3 Series Sports Coupe probably isn’t all that concerned with $3 gas. She’ll still make the trip to Nordstrom, which is known for excellent customer service.

Nordstrom’s earnings are expected to grow 8% this year.

On the other side of the coin…

Empty Stores… Empty Registers… And A Bleak Winter For This Firm

Dillard’s (NYSE: DDS): Nordstrom’s prospects couldn’t contrast more with Dillard’s. You could have shot a cannon through the store I was in without inflicting any casualties. In fact, it might have livened up the place. The store was so dreary with drab holiday decorations stuck back in a faraway corner of the store, you’d never know it’s supposed to be the most wonderful time of the year.

Don’t get me wrong, I find it a bit ridiculous that holiday decorations are up before the Halloween pumpkins have gone soft. But consumers want to shop in a store that’s bright and energetic. Dillard’s wasn’t. Same-store sales in October slumped by a disastrous 7%, extending the chain’s already rough year - and it looks like a lean holiday season is on tap.

The fresh downturn comes after a solid merchandising effort revived the struggling retail service’s fortunes over the past few years, despite gloomy forecasts that wrote the company off for dead. However, it now appears to have plateaued. Earnings and sales are expected to be down this year and flat next year.

I believe rising prices and the sharp slowdown in the housing market will make it a tough quarter for retail sector stocks in general. But I expect Dillard’s to be hit especially hard.

Now for a potentially “hot” play…

Retail Services Fighting For Fickle Teens

While out and about, I was surprised to see perennial retail loser Hot Topic (Nasdaq: HOTT) crowded with customers. Facing fierce competition from the likes of Pacific Sunwear (Nasdaq: PSUN), Aeropostale (NYSE: ARO), American Eagle (Nasdaq: AEO) and Abercrombie & Fitch (NYSE: ANF), this teen retailer has endured its share of woe over the past few years. Its stock has tanked by 76% over the past three-and-a-half years. Same-store sales have declined for seven consecutive months. And full-year sales are expected to be down.

But the company is so universally panned that it might just be worth keeping an eye on as an under-the-radar turnaround play. I’ll continue to monitor this company and let you know if I see anything substantial.

That’s all for now. I will be on vacation for the next two weeks. While I hope to get plenty of rest and relaxation (who am I kidding? I have two kids, aged six and three), I’ll be visiting an area of the world that is chock full of great growth companies: Israel. I plan on coming home with a bucket full of new ideas to share with you.

I wish you and your family a wonderful Thanksgiving. I’ll speak to you again in December.

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • While many companies struggled to attract consumers during a third-quarter that saw the subprime mortgage sector collapse, extending the wider real estate downturn, as well as rising oil prices, Wal-Mart (NYSE: WMT) had no problem. The world’s largest retailer heads into the holiday season with strong momentum, following an 8% rise in third-quarter profits to $2.86 billion ($0.70 per share) on mammoth revenues of $91.95 billion. Not only that, it raised its full-year profit guidance. The recipe for the company’s success? Tight control over inventory, expenses and prices - and in particular, a return to its core strategy of low price leadership after an unsuccessful attempt to market to higher-income consumers in the apparel and home furnishings areas.
  • And the holiday blitz has already started. The company has launched discounts on selected items, advertising them as similar to what shoppers will find on “Black Friday” (the day after Thanksgiving).
  • In response to yesterday’s solid earnings announcement, investors sent Wal-Mart shares up $2.65 (6.1%) to close at $45.97. Recently, Xcelerated Profits Report editor Lee Lowell showed readers how to buy the retail giant at the price they wanted, rather than plowing in “at the market” and paying more than necessary. Not only that, they got paid for doing so. The secret lies in a simple, professional investment strategy. Find out how to “accelerate” your profits here.

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Crude Oil Prices

November 12, 2007

The Smart Profits Report: Issue #472
Monday, November 12, 2007

Crude Oil Prices: Here’s What An Industry Insider Says Is Next For The Runaway Oil Market
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research

I guess this is what Goldman Sachs meant when the bank predicted a “super spike” for crude oil prices.

It was April 1, 2005 when the world’s biggest brokerage and highly respected investment bank predicted this for the oil market, boldly forecasting $105 a barrel by 2007.

Many people scoffed and accused Goldman of scaremongering. But as crude oil prices race towards $100, the bank’s projection is looking uncanny and investors are searching for clues. Are we ever going to see $50 again? Or is the next stop $150?

For answers, I turned to the frontlines…

Crude Oil Prices Says $95… But The Fundamentals Say $60

Having known Paul since we were four years old, he’s one of my closest friends. And when it comes to oil, he’s also the best market analyst I know. Although he doesn’t work for an investment firm, he does run one of the largest heating oil companies on the East Coast.

So with crude oil prices shooting to a record $98.62 on Wednesday - a 47% surge since the end of May - he’s obviously a very valuable source of information for me right now - and for you, too.

I asked him where he thinks oil prices are headed next and he confirmed that the fundamentals only support $60 oil. While there are still clear supply and demand issues, what we’re seeing at the moment is more the result of rampant speculation, as billion-dollar hedge funds have bid up the price to crazy levels.

And at the mention of these private partnerships, Paul grew impassioned…

Hedge Funds Turn Up The Heat On Oil Prices

“Everyone gets upset with Exxon (NYSE: XOM) and the other Big Oil firms for making all this money,” he said. “But at least they’re producing something. These hedge fund guys are making billions from the market and don’t do anything other than push oil prices higher. Essentially, hedge fund managers are asking me to collect money from Mr. and Mrs. Smith and send it to them.”

Simply put, the equation centers on supply and demand. Just like a stock, the more buyers there are, the higher the price goes. One U.S. congressman blames oil pit traders for driving the price up so high. Eventually, however, these guys will stop bidding, start taking profits, and the market will correct.

But investors want to know when this could happen and how far the market could drop. Don’t expect much. Even though Paul believes the oil market is experiencing prime bubble conditions, he notes that demand is still strong at $90 a barrel.

And if you’re holding out for a return to $50 oil, forget it. He states: “I don’t think we’ll see $50 oil unless there’s a global economic meltdown. People can buy hybrids and energy efficient appliances, but that only puts a tiny dent in demand. We need to see half the amount of planes in the sky and the BRIC countries (Brazil, Russia, India and China) to experience a significant slowdown.”

Speaking of demand, how are American customers reacting to the price spike?

A Winter Of Discontent

I asked Paul if he’s seeing a drop-off in demand, given that he must pass the higher prices on to his customers.

“Not really. Just like people still need drive their cars, they also need to heat their homes.” And this winter is shaping up as a winter of discontent for Americans. Gasoline prices are rising, with the national average price per gallon already around $3 a gallon.

And as we noted last week, the U.S. Department of Energy says heating oil costs will climb this winter, too…

  • Oil heating costs will jump 22% over 2006 this winter. That’s an extra $319.
  • Natural gas prices are set to climb by 10% ($78).
  • Electricity costs will rise 4% ($32). Almost one-third of U.S. homes use electricity for heat.
  • Propane costs will increase 16% ($221).

Averaging out the costs for all types of fuels, Americans will pay $977 to heat their homes this winter - 10% more than the $889 last season. And even if the Fed cuts interest rates again, it probably won’t provide enough relief.

Bad Things Come In Threes… And Heating Oil Costs Have Tripled

With heating oil costs rising, Paul is noticing that customers are taking longer to pay. He tells me that a few years ago, a 400-gallon delivery typically cost his customers around $400. Today, it’s over $1,200.

As he explains, this is a problem. And companies like his need to adjust and be flexible: “When customers get a bill that’s three times higher than a few years ago, they call us and say, ‘how about I pay you half now and half next month?’ I understand their situation and I really have no choice. If I say no, they’ll go to one of my competitors. So as a result, margins suffer.”

But while Paul says he’s extending more credit to struggling consumers, his vendors aren’t doing the same for him. It’s not just his customers who are paying three times more for oil… it also costs him three times more than it did a few years ago. But his credit line remains the same, meaning he has to pay (and borrow) more up front. So his cost is going up, too.

Okay, so I know you’re probably not going to throw a pity party for a guy who owns an oil company (although it is a family-owned business with 100+ employees). But it’s a good illustration of the impact that expensive oil is having on everyone.

So where to from here?

Higher Oil Prices May Break Wallets, But These Three Investments Could Help

Long before higher oil prices kicked in and sent shockwaves throughout consumers’ wallets, Americans were already heavily in debt. They still are. And times could get worse as maxed out consumers struggle to make ends meet each month.

While the subprime mess gets all the press these days, the average “man on the street” is feeling the burn. Credit card debt now total a record $915 billion in the U.S. Even the banks are worried. American Express (NYSE: AXP) recently saw its credit card division loss reserves jump by 44%. And Citigroup’s (NYSE: C) beleaguered management said the increase in balances and first time cash advances is a sign of economic stress.

Keep watching CNBC and you’ll hear all about the impact of high oil prices on the U.S. economy every 7 seconds or so. They can’t stop talking about it. And if indeed the market is in the midst of a speculative bubble the way my friend describes, I fear energy prices are headed even higher. The thing about bubbles is that they tend to inflate much more than people expect. That’s true whether we’re talking about oil, dotcom stocks, or even Dutch tulips.

Where it stops, nobody knows. But I have a feeling crude oil is not going to recede in a meaningful way for quite some time.

If you’re looking for a simple way to profit from both oil and the rise of alternative energy as crude oil prices head higher, consider ETFs. Among the most common:

  • U.S. Oil Fund (NYSE: USO): Tracks the price of oil prices directly.
  • PowerShares Wilderhill Clean Energy Fund (NYSE: PBW): Tracks the performance of the Wilderhill Clean Energy Index, investing in companies focused on producing clean energy and environmental conservation. The stock hit a 52-week high of $26.49 yesterday.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • Despite another negative day for the stock market today, for once, crude oil prices weren’t responsible for the selloff. The oil market ended a record-setting week on a quiet note today, trading relatively flat (in the mid $95 a barrel area) for most of the session. But with both the latest Producer Price Index data and Consumer Price Index numbers due out next Wednesday and Thursday respectively, we should have more idea of exactly what kind of impact oil’s surge is having on the nation’s manufacturers and consumers. Be prepared for volatility and make sure your stop-loss/trailing-stops are in place.
  • Have you made money on the red-hot oil market? Many investors have - but sometimes, it’s tough to know which investments offer the best risk-reward ratio - even in a market that keeps climbing. That’s why the team of professional traders at the Xcelerated Profits Report not only positions investors in the right sectors and stocks, but also goes a step further than ordinary investors by showing exactly how the pros make “accelerated profits.” Technical and quantitative analyst Jim Stanton did just that with BP (NYSE: BP) earlier this year, giving readers two ways to play the company. Result? A 45% profit in less than three months. To find out more, click here to continue.

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iPhone Release Date

November 8, 2007

The Smart Profits Report: Issue #471
Thursday, November 8, 2007

iPhone Release Date: Apple & O2 Launch The iPhone In The U.K.
By Martin Denholm
Managing Editor, Mt. Vernon Research

Ladies and gentlemen… time to crank up that hype machine again with the latest iPhone release date - It’s iDay in the U.K.

  • Friday, June 29, 2007 - 6:00 PM, United States: The not-so poor huddled masses camp out. The cops patrol the scene. And as the clock strikes six, the stampede begins.
  • Friday, November 9, 2007 - 6:00 PM, United Kingdom: Get ready for a similar situation - except this time, it’s a few thousand miles away, the accents are different, and people have coats on.

A little less than five months after its much-ballyhooed iPhone hit the U.S., Steve Jobs and his fellow Apples are taking their fancy gizmo to Britain.

And when it comes to whipping people into a frenzy, these guys are masters. Sticking with the same marketing strategy that worked well for the U.S. iPhone release date, the company is again building the excitement with a dramatic countdown to 6:00 PM Friday.

“Hey, Britain… the iPhone is groundbreaking. It’s an iPod. It’s got Internet and e-mail. It’s got a pretty cool touchscreen (buttons are so 2006, you know?) Oh, and we also tossed a phone in there, too!” But will Brits be disappointed that it doesn’t make a cup of tea?

Let’s take a look at the iPhone release date, Apple’s U.K. partner, and the firms that aim to challenge the iPhone…

O2: It’s Not Just Oxygen, You Know

Over the past few years, O2 has made rapid progress in the British mobile phone market.

Right now, it’s engaged in a fierce battle with Vodafone, Orange and T-Mobile for market share. It’s a close contest, but O2 recently leapfrogged Orange as the country’s most popular network. It now boasts about 17.78 million subscribers - the largest base in the U.K.

So when Apple went looking for the “British AT&T” (i.e. an exclusive iPhone carrier), it sparked a scramble to secure the lucrative contract. Apple wanted the U.K. badly, but with the uncertainty of a foreign market and all four major mobile operators bunched tightly together, it was far from a clear-cut decision.

So it went on a few dates with them all, even teasing them to the point where they all believed they had a deal with Apple at one stage. Ultimately, though, Apple hooked up with O2 - in particular, Matthew Key, the 44-year old CEO of O2 UK.

Key has made the company No. 1, and the passion and determination with which he pursued the iPhone and sealed the deal. Well, that and dishing a big chunk of change back to Apple…

£269, Please Guv’nor

At £269 (US$560) a pop, the iPhone is actually cheaper than the U.S. version when it launched for $600. But having now discontinued the 4GB version and slashed the price of the 8GB model, an iPhone in the U.S. now costs $399. So if I were in England, I’d wait until Apple lowers the price there, just like it did 11 weeks after the U.S. release date.

As AT&T did, O2 has hired extra staff to cope with iPhone release date demand. Its sole iPhone retail partner, Carphone Warehouse, has also recruited more manpower. This is where the deal could get a little tricky for O2.

Customer contracts run for 18 months and range from £35-55, with unlimited Internet access. But some say that in giving 40% of the revenues back to Apple, as well as paying a portion to Carphone Warehouse (despite having many O2 stores and acquiring The Link last year to boost its presence, O2 had to bring in Carphone Warehouse to aid distribution), Matthew Key overpaid for the iPhone contract. One rival even labels it a “madly money-losing deal,” but Key says the number is off base and dismisses the fears.

Entranced By The “Invention Of The Year?”

Matthew Key is O2 UK’s former CFO, who transformed London’s Millennium Dome from a financial black hole (it received numerous government bailouts totaling well over £1 billion over its first few years) into a viable concert venue, now called “The O2.” This has greatly helped O2’s image, as well as Key’s reputation - underlined when Apple execs recently visited the arena and signed the iPhone deal with O2 just days later.

Key states that the arena deal was actually more challenging than the iPhone because the arena had never worked as a moneymaking concept. That’s not the case for the iPhone. In fact, he’s so confident that he expects about three-quarters of British iPhone customers to transfer from other networks.

But he’s certainly giving a lot back to Apple. A “madly money-losing deal?” Time will tell. O2 has also spent heavily to install the Edge technology on its network for the iPhone. Yes, the company’s network is pretty strong, and no doubt Key is hoping that the iPhone boosts O2’s profile enough to generate not only iPhone sales, but also other O2 products. But company bigwigs had better hope Key’s gushing praise for the iPhone (which Time magazine called the “invention of the year” last week) now translates into profits.

But both O2 and Apple are going to face an immediate challenge…

An iPhone Release Date Hack Attack?

It’s no surprise to me that such a sought-after device has awakened the hackers before the iPhone release date. When the iPhone launched in the U.S., some immediately tried to crack the code and find out exactly what is in the iPhone, how it works, and how to break the exclusive deal with AT&T.

Same thing in Britain. Hackers have pledged to unlock the iPhone from the O2 network “within hours” of its release and make it available to other networks, according to a story in The Guardian.

In an interview with the Daily Telegraph, Key admits this is a concern - and a problem that has already cost Apple millions of dollars in lost revenue, as hackers have twice cracked the U.S. iPhone, meaning about 250,000 owners haven’t signed the exclusive contract with AT&T. If hackers fulfill their promise in the U.K., Apple and O2 could suffer.

The iPhone also faces pressure from competitors…

Will Two “V’s” Equal Victory?

  • Vodafone: As I mentioned in my last iPhone column, having backed away from the iPhone deal, Vodafone quickly found an alternative. One of O2’s biggest rivals has launched MusicStation - a music subscription service for the company’s 17 million British customers.Available on Vodafone handsets (with a new range of “smart phones” from Nokia and Samsung that offer faster web browsing than the iPhone), the service charges £1.99 a week for unlimited music downloads from major record labels. It also offers more flexibility than the iPhone, given that it’s 3G-compatible and available on multiple networks.
  • Verizon: Vodafone’s American subsidiary, Verizon Wireless, is also offering an Apple alternative in the U.S. Trying to grab a slice of the annual $155 billion mobile phone market, it’s launched the Voyager. Made by LG, the first notable feature is that it looks a lot like the iPhone. But in response to criticism that frequent texting and e-mailing can be tricky on the touchscreen iPhone, the Voyager offers both a touchscreen and traditional keypad. This is important, since the Voyager is geared towards those who use messaging frequently. And while it doesn’t have an 8GB memory built in, it does have an 8GB memory card that slides into the phone. This is also important, given that it also targets the fast-growing music and video areas.However, Verizon’s Voyager and Holiday Collection phones aren’t due out until the end of the month. This is pretty sluggish on Verizon’s part, since it will miss a critical part of the holiday season sales period (over Thanksgiving), as well as most of the fourth quarter, which historically sees the heaviest phone activation rates. The company also hasn’t announced prices yet.

As the holiday shopping season gets underway, I plan to have more for you on the retail sector shortly, plus a few other stories I’m working on. So stay tuned.

Best regards,

Martin Denholm

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Today’s Smart Profits Action Center

  • One of the key iPhone features is its touch-sensitive screen. No buttons here - users just guide their finger over the icons and the device responds to the touch. This is one of the fastest-growing, cutting-edge technologies on the market today - poised to rise from $900 million in 2006 to $1.5 billion by 2008. The Xcelerated Profits Report team has tracked the growth of the industry since late 2005. Back then, it positioned readers in Immersion (Nasdaq: IMMR) - an industry leader that owns 600 major patents and has already beaten off Microsoft and Sony when the companies infringed on the patents.
  • While not part of the iPhone, Immersion has licensed its patented technology to Nokia, Samsung and LG, as well as 3M Touch for gaming systems. We think Motorola could be next to sign up. And given that Immersion’s current Chairman of the Board, Jonathan Rubenstein worked for Apple from February 1997 to April 2006 as Senior Vice-President of its iPod division, a future collaboration with Apple is possible. Immersion’s force-feedback, vibrating technology (known as haptics) is also a part of Sony’s PlayStation, which makes the gaming experience more realistic and interactive. The company’s lucrative medical division makes responsive technology that helps train surgeons. And its TouchSense technology is also used in car navigation systems.

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Contrarian Investing Approach

November 2, 2007

The Smart Profits Report: Issue #470
Friday, November 2, 2007

Contrarian Investing Approach: How To Avoid Market Landmines When High Expectations Crush Stocks
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research

When the moment is right, will you be ready? A lot of men are about to be. Any time. Any day. Every day, in fact. That’s because the Food & Drug Administration is expected to grant Eli Lilly (NYSE: LLY) approval for a daily version of its erectile disfunction drug, Cialis. This comes after the European Commission approved it in June.

Okay, first things first: Who the heck are these guys married to? Seems to me they have lofty and unreasonable expectations!

But it’s not just in the boudoir where expectations are high. The stock market lives on expectations. And at this time of year, many of them are unreasonable, too. For investors like us, it means we have to navigate a tricky minefield.

Here’s how to do it, I’ve said it here before - and I’ll say it again. I can’t stress to you enough how important it is to have a contrarian investing approach.

The Market Loves Forward Growth Not Past Results

The market is a forward-looking mechanism. Forget “What have you done for me lately?” Investors want to know, “What are you going to do for me tomorrow?” For the most part, stock valuations are based on forward growth and earnings, not on past results.

If you don’t believe me, just take a look at the next time a stock gets crushed - despite meeting or beating analysts’ earnings expectations. If a company does so, but also provides future earnings guidance that is below estimates, it’s Goodnight Irene!

This exact scenario actually happened yesterday to Crocs (Nasdaq: CROX), the makers of those funky foam shoes that everyone seems to be wearing. Propelled by the immense popularity of the shoes, the stock had soared from $37.50 a year ago today to $74.75 on Wednesday.

Happy Halloween, right? Not so much. Shares got absolutely mauled yesterday, plunging $27.01 (36.1%) to close at $47.74.

What could possibly have happened to cause such a drop? Did the CEO get arrested for cooking the books? Did somebody find lead paint in their new pair of Crocs?

Nope. Crocs actually beat analysts’ third-quarter earnings estimates and then raised full-year earnings guidance. Woo-hoo! Break out the champagne! On second thought, keep it on ice. The problem was that Crocs didn’t raise guidance high enough to meet analysts’ lofty expectations.

Tough break for them - and for shareholders. So how do we protect ourselves from unreasonable expectations?

Wanna Cash In? Have A Contrarian Investing Approach

I can’t begin to tell you how important it is to have a contrarian investing approach. If the fickle market loves a stock too much, you can bet that the majority of analysts will slap a fat “buy” rating on it, coupled with pie-in-the-sky earnings projections. They did exactly this for eToys back in the dot com boom days (and I still have the analyst report to prove it) that promised the company would be a “category killer” with huge profit assumptions. But the only thing eToys killed was its shareholders.

But if you invest in stocks that are out of favor, you’re likely to avoid those gut-wrenching 30% falls that result from failing to meet estimates. After all, out of favor stocks already have low expectations. So when they miss estimates, Wall Street simply shrugs it off and says, “What did you expect?” They barely give it a second thought.

But let me tell you something: Those stocks’ declines are far less than their well-loved counterparts.

The Father Of Contrarian Investing

David Dreman is known as the “father of contrarian investing.” And to prove how effective this contrarian investing approach is, he conducted a study that showed stocks with price-to-earnings (P/E) ratios in the bottom 20% (unloved) were down just 0.1% for the full year after they had a negative earnings announcement.

Alternatively, well-loved stocks with P/E ratios in the top 20% endured an 8.9% drop.

While that proves the point, how do we avoid or mitigate the risk that comes from earnings announcements? The simple solution is to use sell-stops. This eliminates emotion from your sell decisions.

Many times, investors freeze up when one of their stocks is plummeting. Emotions and pride take over and they can’t seem to sell while prices are falling. Instead, they wait for the rebound to kick in and end up watching the stock tank further. It’s a great way to lose money.

Use a stop-loss! When you do, the sale is automatically triggered when the stock hits a preset price that you’ve determined in advance (this can be anything - but is usually 20% or 25% lower than your entry price). This way, it’s much easier to cut your losses and move on to the next investment instead of waiting for your stock to bounce back.

But in a stock world where expectations can be so high, how do you get around this without paying over the odds and losing money? There’s a professional strategy for it…

Steer Clear Of Analysts High Expectations

If some analyst has clearly placed overly high expectations on a certain company, you should probably steer clear until the price declines to a more comfortable level for you.

But while most ordinary investors simply do this and then move onto the next candidate, there’s a way you can actually walk away with some money while you wait.

I employed this contrarian investing approach on a flourishing medical device company for Xcelerated Profits Report subscribers in the most recent issue. And my colleague Lee Lowell has also used it twice in recent months.

  • In my case, I liked the prospects of the company, but because the stock had taken off recently, I argued that there was actually too much optimism. This made buying the stock outright a much riskier bet.
  • Instead, I suggested selling put options at a lower strike price, thus giving the buyer the right to sell us the shares at that strike price. If the stock retreats to that level, we’ll own it at the lower price we wanted. Not only that, we get to keep the premium that we received for selling the put. And if the stock continues to rise, we still don’t buy it, but we do keep the premium.
  • Bottom line: We like the company but we don’t chase it when the share price goes up. But we do get free money for trying to own it at the price we want.

Today, the company I recommended issued a stellar earnings report. It really knocked the cover off the ball. However, the stock didn’t rise that much because those expectations I talked about a moment ago were already sky-high.

Find out what this company is here. And if you want to know what this approach is - and how to employ it in your investing - check out today’s “Action Center” below.

Know The Expectations… Know The Limits

When you’re evaluating stocks, make sure you use all your regular methods of due diligence:

  • Look at the company’s fundamentals,
  • See what the technicals show you,
  • Know what projects/products it has and what its future prospects are.
  • But make sure you also understand what kind of results Wall Street analysts are predicting.

As much as we like to make fun of them for being a bunch of lemmings, it’s their estimates that the Street uses as a guidepost as to whether a company is missing, meeting or exceeding expectations.

Yep, life would be much simpler if expectations were more reasonable - whether we’re talking about individual relationships like a marriage, diplomatic relations between countries or the stock market. But understanding and knowing how to deal with those expectations, especially the unreasonable ones, can keep you out of trouble - with your spouse and your portfolio.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • With the market again struggling against credit concerns and the fear the Fed has spent all its monetary policy bullets, it’s imperative that you protect yourself against losses. Make sure you have an exit plan and know the points at which you’ll sell your stocks. The market is awash with emotion right now - but there are simple ways you can avoid getting carried away with the rush. Set your stop-losses and stay disciplined and remember that you worst loss on any stock shouldn’t be any more than 1% to 2% of your overall portfolio account.
  • On the buy side, let’s say you’ve done all your research on a company’s prospects and are ready to buy its shares. But there’s a problem. The price is too high. Most ordinary investors would just walk away and wait for it to drop. But the pros know that there’s a very simple, effective and profitable way they can do this and get paid while they wait. Smart Profits Report contributing editor Lee Lowell has outlined exactly how anyone can execute this “cash back” strategy like a pro in this step-by-step report: “How to Receive Instant Cash Payments for ‘Locking In’ Lower Prices On Your Favorite Stocks.” For more details, check out this link.

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