Alan's Finance Blog

The Stock Market Is Not Physics: Part I

By Elliott Wave International

The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.

Here is Part 1 of the series. Check back in a few days to read Part 2, or you can download your free copy of the Independent Investor eBook here.

See if you can answer these four questions:

1. In 1950, a good computer cost $1 million. In 1990, it cost $5000. Today it costs $1000.
   Question: What will a good computer cost 50 years from today?
2. Democracy as a form of government has been spreading for centuries. In the 1940s, Japan changed from an empire to a democracy. In the 1980s, the Russian Soviet system collapsed, and now the country holds multi-party elections. In the 1990s, China adopted free-market reforms. In March of this year, Iraq, a former dictatorship, celebrated a new democratic constitution.
   Question: Fifty years from today, will a larger or smaller percentage of the world’s population live under democracy?
3. In the decade from 1983 to 1993, there were ten months of recession in the U.S.; in the subsequent decade from 1993 to 2003, there were 8 months of recession. In the first period, expansion was underway 92 percent of the time; in the second period, it was 93 percent.
   Question: What percentage of the time will expansion take place during the decade from 2003 to 2013?
4. In 1970, Reserve Funds kicked off the hugely successful money market fund industry. In 1973, the CBOE introduced options on stocks. In 1977, Michael Milken invented junk bond financing, which became a major category of investment. In 1982, stock index futures and options on futures began to trade. In 1983, options on stock indexes became available. Keogh plans, IRAs and 401k’s have brought tax breaks to the investing public. The mutual fund industry, a small segment of the financial world in the late 1970s, has attracted the public’s invested wealth to the point that there are more mutual funds than there are NYSE stocks. Futures contracts on individual stocks have just begun trading.
   Question: Over the next 50 years, will the number and sophistication of financial services increase or decrease?

Observe that I asked you a microeconomic question, a political question, a macroeconomic question and a financial question.

Trend Extrapolation
If you are like most people, you extrapolated your answers from the trends of previous data. You expect cheaper computers, more democracy, an economic expansion rate in the 90-95 percent range, and an increase in financial sophistication.

It appears sensible to answer such questions by extrapolation because people default to physics when predicting social trends. They think, “Momentum will remain constant unless acted on by an outside force.” This mode of thought is deeply embedded in our minds because it has tremendous evolutionary advantages. When Og threw a rock at Ugg back in the cave days, Ugg ducked. He ducked because his mind had inherited and/or learned the consequences of the Law of Conservation of Momentum. The rock would not veer off course because there was nothing between the two men to act upon it, and rocks do not have minds of their own. Earlier animals that incorporated responses to the laws of physics lived; those that didn’t died, and their genes were weeded out of the gene pool. The Law of Conservation of Momentum makes possible our modern technological world. People rely on it every day. Despite its use in so many areas, however, it is inapplicable to predicting social change. For most people in most circumstances, the proper answer to each of the above questions is, “I don�t know.” (Socionomics can give you an edge in social prediction, but that’s another story.)

The most certain aspect of social history is dramatic change. To get a feel for how useless — even counterproductive — extrapolation can be in social forecasting, consider these questions:

1. It is 1886. Project the American railroad industry.
2. It is 1970. Project the future of China.
3. It is 1963. Project the cost of medical care in the U.S.
4. It is 1969. Project the U.S. space program.
5. It is 100 A.D. Project the future of Roman civilization.

In 1886, you would have envisioned a future landscape combed with rail lines connecting every city, town and neighborhood. Small trains would roll around to your home to pick you up, and a network of rail lines would help deliver you to your destination efficiently and cheaply. Super-fast trains would make cross-country runs. You could eat, read or sleep along the way.

Is that what happened? Would anyone have predicted, indeed did anyone predict, that trains in 2004 would often be going slower than they did in 1886, that they would routinely jump the tracks, that they would be inefficient, that they would have little food and few sleeper cars, that the equipment would be old and worn out?

In 1970, the Communist party was entrenched in China. Over 35 million people had been slaughtered, culminating in the Cultural Revolution in which Chinese youths helped exterminate people just because they were smart, successful or capitalist. Would anyone have imagined that China, in just over a single generation, would be out-producing the United States, which was then the world’s premier industrial giant?

In 1963, medical care was cheap and accessible. Doctors made house calls for $20. Hospitals were so accommodating that new mothers typically stayed for a week or more before being sent home, and it was affordable. Would anyone have guessed that forty years later, pills would sell for $2 apiece, a surgical procedure and a week in the hospital could cost one-third of the average annual wage, and people would have to take out expensive insurance policies just in case they got sick?

In the space of just 30 years, rockets had gone from the experimental stage to such sophistication that one of them brought men to the moon and back. In 1969, many people projected the U.S. space program over the next 30 years to include colonies on the moon and trips to Mars. After all, it was only sensible, wasn’t it? By the laws of physics, it was. But in the 35 years since 1969, the space program has relentlessly regressed.

In 100 A.D., would you have predicted that the most powerful culture in the world would be reduced to rubble in a bit over three centuries? If Rome had had a stock market, it would have gone essentially to zero.

Futurists nearly always extrapolate past trends, and they are nearly always wrong. You cannot use extrapolation under the physics paradigm to predict social trends, including macroeconomic, political and financial trends. The most certain aspect of social history is dramatic change. More interesting, social change is a self-induced change. Rocks cannot change trajectory on their own, but societies can and do change direction, all the time.

Learn to Think Independently — Download Your Free Independent Investor eBook “The Stock Market is Not Physics” is just one report in the more than 100 page, two-volume Independent Investor eBook. You’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market. Download Your Free eBook Now.

Avoid the Dead Money Strategy

Dear Sovereign Investor,

Give me a few minutes and I can change the way you look at investing.

In the pursuit of profits in the stock market, investors always seem to want to get in on the “the next Microsoft” or “the next Wal-Mart.” Instead, they often end up buying Microsoft and Wal-Mart and other big names after the magic is gone.

They can’t see what’s happening tomorrow, so they stick to what worked yesterday – and hope the fire reignites.

It’s largely a dead-money strategy, because once a company reaches a certain stage, the growth that made it famous is gone. It essentially becomes a utility racking up cash and spitting it back out as dividends. But the share price barely budges.

That’s not necessarily bad if you’re an income investor. But it’s not good if you are seeking the fast growth that made companies like Microsoft and Wal-Mart stand apart.

To profit from those kinds of companies, you need to have an advantage, an indicator that puts you onto the right path.

The Path to the Hottest Long-Term Trends

Everyone prognosticating the future ultimately claims that their crystal ball is cracked.

Mine is not.

I can tell you with 100% accuracy that demand for milk, dairy and soy is on the rise among the emerging-world’s new consumers. I can assure you without doubt that beer, palm oil and plastic consumption shadows rising wealth. I know with certainty that people who move from poverty onto the lowest rungs of the middle class spend their first additional discretionary dollars on protein such as chicken, fish and pork.

Best of all, it’s easy to profit from these assurances.

Just about any trend you can think of – from the 1950s fascination with hula-hoops to rising demand for better hygiene products among the new consumer class – follows what’s known as an S-curve, named for the shape of the letter.

It is as perfect an indicator as you will find – a divining rod of profits that can’t help but lead you to the hottest, long-term trends.

Take a look at the chart below. The red line depicts the curve we care about …

This particular S-curve shows how sales per capita rises alongside GDP – in essence, a depiction of consumer spending going up as a country’s economy expands. But I’ve thrown a few notes onto the chart to show you what’s really important about the S-curve.

Notice the three zones – Warm-up, Hot Zone, Cool-down. And notice there’s a take-off point and a point of saturation.

To explain how all of these pieces come together, consider the history of Wal-Mart. It perfectly exemplifies the S-curve and how you can use it to create real wealth in your portfolio.

Wal-Mart began in the 1960s as a tiny, Arkansas retailer with a novel idea – bring big-box stores with discounted prices to small-town America, where the retailing culture of the day insisted big stores couldn’t survive because local populations were too small.

Yet Wal-Mart proved the know-it-alls wrong and began to open additional stores with great success. The retailer was in its warm-up zone.

The company hit its take-off point when it launched its initial public offering in 1970 … and for the next 29 years Wal-Mart was in the hot zone. The shares – at a split-adjusted price of just $0.008 – rose more than 864,000%, ultimately topping out at $69.69 on Dec. 28, 1999.

It was on that day that Wal-Mart hit its saturation point.

Ever since then, the stock has been dead money, orbiting within a narrow band around the $50 mark. The business is fine. It kicks off huge cash flow that will fund ever-larger dividend payments. But the growth that makes investors long for “the next Wal-Mart” is long gone.

There’s Money to be Made
Everywhere on the S-Curve

It’s easy with hindsight to pick on Wal-Mart. But the fact is, had you been an active investor in the 1970s, the 1980s, or even the 1990s, you would have known (depending on what decade you were in) that retailing was either taking off in America or had become a huge part of the American consumer/cultural landscape. And you could have made big profits owning retailers like Wal-Mart that were obviously winning.

Heck, even if you’d waited until the summer of 1998 to finally get onboard the Wal-Mart story you would have still more than doubled your money.

Anywhere between take-off and saturation profits await.

When you know the trends of the day, those are the S-curves that will generate the huge profits of tomorrow. Find the key companies that are playing a big role in those trends (and they’re not hard to find), and then invest with an eye towards patience.

Wal-Mart’s hot-zone run, after all, was not a smooth, uninterrupted 45-degree ascent from left to right. It was choppy. At one point Wal-Mart’s shares fell more than 50%.

But those who held on, resolute in their belief that the American consumer trend was still strong … those people turned a modest investment into generational wealth.

The same opportunities are out there right now, in stocks markets around the world where the new consumer class is taking off. All you have to do is follow the S-curve, and it will lead you unerringly to profits.

Until next time, keep a global view …

Jeff D. Opdyke
Editor, Emerging Market Strategist

The Personality of Stock Market Waves

The Personality of Stock Market Waves

Elliott waves don’t merely reflect prices plotted over time. Each wave
has its own “personality.” Listen to this video by EWI’s Wayne Gorman
to learn more about the psychology behind the waves and how it affects your
investment decisions.

This video was taken from the free Club EWI video series: Learn the Why,
What and How of Elliott Wave Analysis. This 3-video series is a great way
to get started with the Wave Principle. You can get these videos free with
a Club EWI Membership.

Watch your free videos now >>

Already a Club EWI member? Access
the video series Learn the Why, What and How of Elliott Wave Analysis here.

The Worst Stock Pickers in the World

Looking for some simple guidance on what stocks to buy or sell?

Well, Wall Street is more than happy to help.

In fact, big banks in Wall Street employ hundreds of equity analysts who spend countless hours analyzing stocks. These highly educated analysts then issue very clear “buy” and “sell” recommendations.

So when a bunch of Wall Street Analysts have a “buy” rating on a particular stock, obviously you should be buying, right?

Wrong!

The reality is the weatherman is better at predicting the future than most Wall Street analysts. These highly paid experts are horrible at picking stocks.

Take now, for example. At the moment, Wall Street analysts all hate one emerging market in particular. Personally, I can’t wait to grab some shares in it…

When Analysts Say “Sell”, it’s Time to Buy

Recent data from Bloomberg proves you could have outperformed the stock market just by buying stocks the mainstream analysts hated the most.

Since the market bottomed in March of 2009, stocks with the best ratings rose 73% on average. That may sound great, but considering the market has risen 100% since then, that’s a pretty lame performance.

On the other hand, stocks that had the worst ratings rallied by 165%.

Analysts’ favorite sectors for 2010, healthcare and technology, were among the worst performers across 10 industries in the S&P 500. These losers gained less than 10%. Meanwhile, out-of-favor sectors, like banks and real estate firms, gained at least twice as much.

This is just one more reason to disregard all those so-called “great stock tips” coming from Wall Street.

Don’t get me wrong. These Wall Street types are pretty smart people. But when all analysts give a specific stock a “buy” rating, it means everyone is already in love with it. When that happens, there aren’t a lot of investors left to buy and push the stock up higher.

The other side of the coin is that when all analysts hate a particular stock, there’s a great potential for outperformance.

Right now analysts hate one of my favorite emerging markets: Brazil.

Why Everyone Hates
One of My All-Time Favorite Markets

Wall Street analysts are now giving Brazilian stocks the fewest “buy” ratings in history. In other words, Latin America’s biggest equity market is out-of-favor.

That’s interesting considering everyone was in love with Brazil up until recently. It was one of the best performing markets in 2009. But it has been moving sideways for the past year or so, while stocks rallied here in the U.S.

Why did these Wall Street guys change their minds?

Like many other emerging markets, Brazil is struggling with rising inflation. Its Central Bank has started a series of rate hikes to cool down the booming economy. So analysts are concerned higher interest rates will slow consumer demand.

The fact that analysts don’t like Brazil now is telling me it’s time to buy. But I see two other reasons to buy now, especially if you’re a long-term investor.

The Perfect Time to Buy

Analysts are right about higher interest rates pushing stocks lower. But that’s already priced into the market. In fact, that explains the underperformance of Brazilian stocks.

But these rate hikes will soon come to an end.

The Brazilian Central Bank has increased the benchmark lending rate by 1% to 11.75% this year. Local economists expect rates to finish 2011 at 12.5%, bringing this cycle of rate hikes to an end.

So interest rates will peak soon. History has shown that it’s always a good time to start accumulating a country’s stocks once rate increases come to an end. The chart below shows that whenever rates peak, stocks rally.

End of Interest Rates Hikes is Good News for Stocks

It’s also hard to not like the Brazilian market when it’s this cheap.

Brazilian stocks are trading at a price to earnings (P/E) ratio of only 10.6. Compared to the U.S. market, sitting at 13.4, that’s incredibly cheap. In fact, Brazilian stocks generally trade at a ratio 22% higher.

Anyway you look at it, the Brazilian market is trading at a discount. Usually, you only see these types of discounts when there’s something fundamentally wrong with Brazil.

On the contrary, Brazil now has a growing middle class, thriving commodity exports, and exposure to rising oil prices with their booming oil reserves. Not to mention it’s also hosting the next football World Cup and Olympics.

These are all reasons why Brazilian stocks are on my buy list this year. For Americans, there are easy ways to buy Brazilian stocks through both ADRs and ETFs.

So it’s really a no-brainer to buy – even if the financial geniuses on Wall Street haven’t caught on yet.

Mark my words: It won’t take too long for investors to fall in love with Brazil again. But in the meantime, this is the perfect opportunity to buy this scorned market.

Remember: once all analysts have “buy” ratings on Brazil, it will be too late.

Best Regards,

Evaldo Albuquerque,
Editor, Exotic FX Alert

Two Stocks that are on the up

These two stocks popped onto our radar screen today thanks to our Trade Triangle technology.

In this short video you will see exactly how to best use our Trade Triangles and with just a few clicks, you’ll be spotting winning trades in minutes.

Some of you may have heard of these two stocks, but the chances are that they have been flying under the radar for the other 99% of traders. The good news is that our Trade Triangle technology is programmed to spot big moves when they begin, not months later after the market has moved and you are kicking yourself for not getting in sooner.

Today’s educational video shares with you how to get the most out of the markets in the least amount of time. I hope you enjoy it.

As always our videos are free to watch and there are no registration requirements. All we ask in return is that you tell your friends about MarketClub and this video and leave your comments on our blog.

http://www.ino.com/info/682/CD3336/&dp=0&l=0&campaignid=3

All the best and enjoy the video.

Adam Hewison
President of INO.com
Co-founder of MarketClub

The Fastest Doubling of the S&P 500 Since the Great Depression!

Since its low in March 2009 the S&P 500 Index has doubled. Last week The Wall Street Journal stated that it was the fastest doubling since 1936. That rally began in March 1935 and reached the 100 percent gain mark in 501 days. The red vertical line in the chart below depicts the start of the rally.

This time the market needed a bit longer to double … 707 days.

What the Journal did not mention was what happened afterwards. Let’s fill that gap, since the rest of this story is as interesting as the first part …

Immediately after the index doubled in 1936 a short-term correction followed. But then the rally reassured itself. It lasted another seven months and gained 15 percent. However, that was the end of the party as you can see in top panel of the chart.

The S&P 500 experienced 40 percent slump the following year. But the final low of this bear market came as late as 1942. Many analysts conclude that 1942 marked the real end of the Great Depression.

An Interesting Analogy

I see an interesting analogy here since the bull market of 1936-1937 followed the most severe financial crisis in U.S. history, and the current rally follows the second-most severe one.

In 1936 hopes ran high that the crisis was over and a sustainable recovery had started. But as it turned out the economic slump was only interrupted. Another grave economic downturn started in May 1937 and lasted until June 1938 with GDP declining 3.4 percent. Only the outbreak of WWII put an end to the Great Depression.

As in 1936 hopes are again running high that the Great Recession and the associated crisis is over and that a sustainable rally has started. This may also turn out to be a false hope. Why?

Well, the underlying problems of overindebtedness have not been solved — not even addressed. Quite to the contrary. All that has happened is the government stepping in and shifting some of the most pressing debt loads of financial institutions from the private sector to the public sector.

That’s not a solution; it’s kicking the can down the road!

Fundamental Valuations Are High

Now look at the middle and bottom panels of the above chart. The middle one shows the price/earnings ratio, the second one dividend yields. Both are time honored measures of valuation. First you can easily see that current valuations are very high.

Then compare 1937 to today. In 1937 the price earnings ratio was a tad lower than now. But the dividend yield was higher at 3 percent then vs. 1.7 percent today. Obviously, the stock market is no healthier now than it was in 1937.

Let’s summarize the main points: In the mid-1930s the stock market and the economy were recovering from a major crisis, and the stock market was clearly overvalued. The majority of market participants and economists were sure a sustainable recovery had just begun.

Their hopes were quickly dashed.

Will it be different this time around? Probably not because we’re in the same boat today: Recovering from a major crisis, an overvalued stock market and high expectations.

Plus there are other signs warning of a high risk environment …

Fund Managers Fully Invested,
Short Interest Drops;
Insiders Selling Stock!

First, mutual fund managers are again fully invested with an average cash quote of a mere 3.5 percent. This is the lowest reading since this data series began in 1988. Only once before — in March/April 2010, just before a 20 percent correction — has this indicator been so low. Even at the major highs of March 2000 and October 2007 fund managers were more cautious than now.

Second, the NYSE Short Interest Ratio has fallen from 4.1 in December to a very low 2.6. This ratio measures the total outstanding shares sold short divided by the average daily volume for the last month. Its interpretation is twofold …

A low short interest ratio is a sign of widespread bullishness or at least complacency. Even more important is the fact that short sellers are potential buyers in case of a market slump. To realize their gains they have to buy back the shares sold short. So the massive decline in shares sold short means there will be fewer buyers in the future.

Third, financial insiders are massively selling the stocks of their companies. Alan Newman of Crosscurrents shows that 68 sellers were matched by just four buyers. And the ratio of shares sold to shares bought was 855.

So why are the insiders of Goldman Sachs, Wells Fargo, JPMorgan, Morgan Stanley, American Express, Citigroup, and US Bancorp selling like mad? They apparently have some doubts in the health of the current rally — at least insofar their own money is concerned.

You don’t have to sit on the sidelines if the market takes the header I see coming …

One way to profit from a declining market is with an inverse ETF, like ProShares Short S&P500 (SH). This fund seeks daily investment results that correspond to the inverse of the daily performance of the S&P 500 Index. That means you stand to make 1 percent for every 1 percent the Index drops.

Want another pointer?

Get a copy of my new book, The Global Debt Trap. You’ll learn more critical background information about asset bubbles, money printing, opportunistic central bankers, and government debt and what this all means for your financial health.

Best wishes,

Claus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Profit with stocks as easy as opening an email?

A buddy of mine just told me this amazing story and once I found out
how much money he made, I knew I had to pass the information on
to all of my subscribers and website visitors immediately!

So here’s the deal:

He was searching through his favorite forum and saw this post
from a guy with the username “chronus”.

Chronus was bragging about how he stumbled across a website 2
weeks ago about a newsletter called “Stunning Stocks”.

This newsletter has been running for years and the average return
on each stock is 105.67%. This guy “Chronus” went on to explain how
he’d invested in the last 3 stocks recommended and had so far earned
$1937.24

Apparently he gets an email from Stunning Stocks every Sunday and he
downloads the latest stock recommendation… then watches as his
investment doubles in the next few days.

My friend asked him for the web address where he could subscribe to the
service but Chronus wouldn’t give it out.

He said he was lucky to be in the last 500 subscribers allowed and that only
86 spaces were left as he posted. But he said he wouldn’t let go of this secret.

So….my friend emailed him through the forum, being as nice and as friendly
as possible. And, after going back and forth with Chronus over email, my friend
had built up a good rapport with him.

In one of the emails, Chronus said that there were only 54 places left to be
a newsletter subscriber and then he gave my friend the link!

Amazing- huh?!

My friend immediately signed up (there were only 39 spaces left at that point) and,
based on what he’s told me, it sounds like Stunning Stocks is a goldmine!

Right now he’s got $867.98 in his Scottrade account, after an initial investment
of $300.00.

Needless to say, I’ve already signed up for one of the last spots and I
wanted to give all of my subscribers the opportunity to do the same.

Just click on the link below to secure your spot, if there are any left:

http://alinv.stunstock2.hop.clickbank.net

Happy Trading!

3 Stocks that Could Plunge if Oil Surges Above $100

Want a peek at this summer’s headlines? Then just watch the action in the oil market. The price of oil has been rising steadily for nearly two years, and it’s coming close to the point of inflicting real pain on many businesses. If current trends continue, we may be talking about $4 for a gallon of gasoline by spring, and surging home heating oil costs later in the year.

In many respects, the United States can tolerate $70 oil, or even $90 oil. But at $100 or even $110, so many companies will start speaking of profit-margin pressures. And profit margins are the key factor behind many strategists’ forecasts for continued stock market gains in 2011. This is why you should be worried, even if you don’t own oil stocks in your portfolio.

Up until now, stocks have been rallying in tandem with oil prices. That’s quite unusual. We’ve been in a rare period where rising economic activity has been good for both assets.

Yet if history is any guide, further oil price spikes will tend to deflate stock prices. Here are three stocks in particular that simply cannot withstand oil prices above the $100 mark.

AMR (NYSE: AMR)
All of the major airlines are in far better shape than a few years ago. Surging oil prices really hammered them in 2007, and a sharp drop in air travel kept shares down in 2008. Yet during the past two years, lower oil costs and rising demand have helped the Amex Airline Index (AMEX: XAL) to triple in value. Further gains will be hard to come by as the cost of jet fuel will likely be well higher in 2011, and no carrier is more vulnerable than AMR, the parent of American Airlines.

While other carriers have slowly migrated to more fuel-efficient fleets of planes, AMR’s cash crisis forced it to stick with older inefficient planes. The typical plane is 15 years old, nearly twice the average age of planes being flown by carriers such as JetBlue (Nasdaq: JBLU) or Southwest (NYSE: LUV). Just how bad would it get for AMR if oil prices surged? Analysts currently think the carrier will lose a modest amount of money in 2011 if oil prices stay at $90. But at $100 oil, AMR might lose upwards of $1.50 a share. And $110 oil would translate into an earnings per share (EPS) loss of around $3. Make no mistake, any further spikes on oil prices will start to push AMR’s shares down below the 52-week low of $5.86.

[More from David Sterman: "Forget Exxon: Buy This Stock Instead"]

Darden Restaurants (NYSE: DRI)
This operator of restaurant franchises such as Red Lobster, Olive Garden and Longhorn Steakhouse has staged an impressive rebound, with shares doubling in less than two years. But rising energy costs would inflict pain in several ways.

For starters, its client base would be paying a lot more to fill up gas tanks. The difference between filling a tank at $2.50 a gallon versus $4 a gallon is about $30. That’s money that has otherwise been spent dining out. In addition, Darden incurs energy costs throughout its supply chain, from the fuel used by agricultural suppliers, to the diesel burned by delivery trucks that may look to once again look to add fuel surcharges as they had done the last time oil spiked in price.

Right now, analysts think Darden will boost sales around 6% in fiscal (May) 2012, with profits growing at twice that clip. But downward revisions to those forecasts appear inevitable. Right now, it’s the surging cost of food — most notably beef and seafood — that will pressure margins in coming quarters. At a recent analyst day, Darden expressed plans to trim costs to offset some of the cost pressures and expressed plans to raise menu costs. Passing on those cost increases to customers at a time when gasoline prices are rising will be difficult to master.

Shares may start to feel the heat before those trends play out. A very difficult winter, highlighted by above-average snow and below-average temperatures in the eastern half of the United States (a trend which is expected to continue through February), looks increasingly set to crimp reported sales for Darden and its peers such as Brinker International (NYSE: EAT). Rising energy costs, rising food costs and traffic-sapping weather make you wonder why shares are within a point of their all-time high.

GM (NYSE: GM) and Ford (NYSE: F)
I’m very curious to hear what GM has to say about its 2010 fourth-quarter results (the date for the announcement has not yet been released). As I noted a few weeks ago, analysts at Morgan Stanley are predicting a very strong quarter. [They think it can jump 150%]

And they stand by that view, even after Ford’s disappointing quarterly results.

But regardless of how recent results are trending, rising oil prices would be a real disaster for both of these companies. Even as investors focus on all of the new fuel-efficient cars coming out of Detroit, industry profits are still rising on the backs of high-margin pick-up trucks. Sales have rebounded nicely for these trucks, and 6% sales growth in 2011 for each firm is predicated on truck sales rising even higher. In GM’s case, it’s a big factor behind forecasts for EPS to surge more than 40% this year.

In December, GM noted that truck sales rose 28% from a year earlier. That surely helps the bottom line, as trucks can deliver $4,000 to $8,000 in profits, depending on how they are configured. On the plus side, if home construction ever gets going, demand for trucks by contractors could really pump up GM’s numbers. But a spike in oil prices would work against that factor as well as put a brake on broader economic growth.

Action to Take –> On a purely fundamental basis, oil prices need not rise any higher. Supplies are ample and demand remains below levels seen a few years ago. But the International Energy Agency (IEA) recently noted that it expects global oil demand to expand by 1.4 million barrels a day or 1.6% year-over-year in 2011. The projected increase will be driven entirely by emerging markets, which underscores the greatest risk to the U.S. economy: that oil prices could rise even before the U.S. economy builds a true head of steam if emerging economies stay hot.

Now is an important time to assess the potential impact of rising oil prices on your portfolio. The stocks mentioned above would likely feel the heat of rising oil prices even more deeply than most other companies, but it’s important to keep this in mind for all the stocks you own.

–David Sterman

Posted by David Sterman, StreetAuthority Investor Update

The 5 Most Valuable Stocks on the Planet

Oil, technology, minerals and banking. Those are the industries that are host to the world’s most richly-valued companies. In fact, with a market cap of more than $250 billion, these companies are larger than the gross domestic product (GDP) of countries such Portugal, Egypt or Chile.

I’ll tell you how you can profit from these titans of industry in a minute, but first, take a look at the five most valuable stocks on the planet…

Joining this exclusive club is quite an honor, but you can be kicked out at any time. GE (NYSE: GE) was worth roughly $600 billion a decade ago, the biggest company in the world at the time, and now it doesn’t even rank in the top 10. Microsoft (Nasdaq: MSFT) eventually overtook GE, but has since fallen to No. 6 in the world.

Just below Microsoft resides Brazil’s energy titan Petrobras (NYSE: PBR) and the China Construction Bank (OTC BB: CICHF) isn’t far behind. [My colleague Ryan Fuhrman thinks Petrobras could be the first $1 trillion stock]

The fact that four of the nine largest companies in the world reside in China or Brazil should tell you we live in a changed world.
A Crystal ball into the future

How will this list look five years from now? Well, a look at each of the top companies’ prospects gives us a pretty idea about tomorrow’s titans — and how you can profit.

[More from David Sterman: "The Stock I Told You About Tuesday is Already up 96%"]

1. Exxon Mobil (NYSE: XOM)
The odds are against this energy company retaining its top spot, for one simple reason: buybacks. Shares outstanding peaked at 6.9 billion and have been falling ever since, to less than five billion currently. Management intends to stick with that plan, and the share count could fall below four billion in the next five years. Shares would need to rise about 25% simply to offset that trend, and that’s not assured because this is now a slow-growth company. (2010 sales are likely to be on par with sales levels back in 2006). Then again, a fresh “Super-spike” in oil prices would give a solid boost to shares. But surging oil prices have a way of creating conditions for a pullback as demand gets choked off.

Prediction: ExxonMobil’s market value will be less than $400 billion five years from now.

2. Apple (Nasdaq: AAPL)
I’m in the minority on the prospects for this hot tech stock. The fickle world of consumer electronics means that it’s hard to stay on top of the mountain for an extended period. (Just ask Sony (NYSE: SNE) or Microsoft). It’s impossible to deny Apple’s near-term momentum, stellar brand and stoked balance sheet (The cash pile has just grown to $60 billion). In all likelihood Apple will power even higher in coming weeks and months, as most analysts have very lofty price targets. But as the year plays out, shares are at risk. Investors are expecting a tremendous surge in iPad sales in 2011, after an already-stellar 2010, and any shortfall to current forecasts combined with the uncertainty surrounding Co-founder and CEO Steve Jobs’ health would punish the stock.

Prediction: Apple’s market value works its way toward the $400 billion mark before starting a long and steady decline that puts it back in Google (Nasdaq: GOOG) and Microsoft territory (i.e. below $250 billion).

3. Industrial and Commercial Bank of China
Even if the world’s largest bank failed to grow in coming years, it still looks poised to rise in value. That’s because it increasingly looks as if China’s yuan will appreciate 15%, 20% or even 25% at some point down the road. [Read why investors should be worried...]

A 20% move in the currency would push ICBC’s market value above $300 trillion. Of course the fate of the Chinese economy will also play a role. The country’s breakneck economic growth has not come without cost. Media reports note that China is sitting on a vast oversupply of newly-built apartment complexes, a number of which stand empty.

And who would be left holding the bag if real estate developers default on loans? ICBC and its banking peers. That could push the bank’s market value down in coming quarters. But over the long-term, further growth in the Chinese economy looks inevitable, simply based on projections of rising per capita income.

Prediction: ICBC’s market value swells to more than $400 billion at some point in the next five years, thanks to economic growth and currency appreciation.

4. PetroChina (NYSE: PTR)
To meet China’s insatiable energy needs, PetroChina has been on a spending spree, snapping up energy fields on virtually every continent. Were it not for domestic concerns about energy security in the United States, PetroChina would likely have already been a very active buyer of U.S. energy plays. As is the case with ExxonMobil, rising energy prices would help to boost this company’s value. Shares, which trade for $140, spiked to $263 in October 2007 when oil prices hit an all-time high of $140 a barrel. A repeat of that scenario would take PetroChina’s market value north of $350 billion.

Prediction: A continuing acquisition spree helps PetroChina to overtake Exxon Mobil in four to five years as the world’s largest publicly-traded energy concern.

5. BHP Billiton (NYSE: BHP)
BHP’s exposure to a wide range of commodities helped this stock rise 150% in 2010. Commodity prices are rising on expectations that global economic growth will accelerate in 2011 and 2012 and demand will outstrip supply for many metals and minerals. But it’s hard to make a case for a much higher spike in commodity prices. After all, firming prices have led to production increases in past economic cycles, capping any further gains. And as noted above, the Chinese economy may experience a hangover in the future, which would dramatically alter the supply and demand equation.

Prediction: Shares of BHP Billiton continue to appreciate — but a much more modest pace, and the company’s market value fails to crack the $300 billion barrier.

Action to Take –> The Industrial and Commercial Bank of China could occupy the No. 1 perch five years from now. Google, Petrobras and China Construction Bank are knocking on the door. One of these firms is likely to end up on the leader board five years from now. My money is on Petrobras. The oil giant’s massive R&D program should eventually set the stage for surging cash flow. [Read more of Ryan's excellent analysis of Petrobras here]

–David Sterman

Source: StreetAuthority

The Most Undervalued Stocks in the World

If you think the “lost decade” of stock returns seen in the United States since 2000 is bad, you probably haven’t been paying attention to Japan.

Japan’s stock market officially peaked on December 29, 1989, and has yet to recover more than 20 years later. But many companies in the country have continued to do well despite the suffering of the overall stock market. Japanese stocks used to be expensive, with the average stock trading for a price-to-earnings (P/E) ratio of nearly 50 at the market peak in 1989, and an eye-popping 70 as the bursting of the bubble hit earnings in the mid-1990s. Valuations have declined since, and are now trading for an average P/E of 15.6.

Japanese stocks have fallen to levels only seen a couple of times since its market peaked. The market fell to more reasonable levels earlier this decade and perked up during the apex of the financial crisis on optimism that Japan was “decoupling” with the United States. But the Japanese market has again fallen back to earth. This makes Japan one of the most appealing stock markets in the world.

[More from Ryan Fuhrmann: "5 Stocks That Could Win in the Digital Age" ]

A key reason for this appeal is Japan’s economy is geared toward exporting. Unfortunately, the strong yen has hurt sales by making Japanese goods and services more expensive to foreign markets. However, this is just a near-term blip and a number of Japanese firms that are global leaders are likely to continue growing robustly over the long haul. Going forward, the yen should come back down and make Japanese exports more competitive. Over the long run, currency fluctuations tend to cancel out, and Japan will stand out for supplying a growing world economy with automobiles, industrial components, apparel, and related goods and services.

Here are five appealing ways to gain exposure to Japan right now.

1. Toyota Motor Corp. (NYSE: TM)
Business: Auto manufacturing
Current P/E: 19.5

Toyota is well known to U.S.-based investors. The most recent global recession hit car sales badly and the company also got itself mixed up in a high-profile recall of thousands of cars over allegations of sticking accelerators, which damaged its reputation as a top-quality manufacturer. As a result, sales were hit rather significantly and earnings have cratered, but both are in recovery mode, making Toyota a definite rebound play.

Sales for 2011 are projected to rise more than 15% and reach more than $236 billion. Earnings could hit more than $4 a share in a year or two. To indicate the earnings recovery potential, note that earnings reached nearly $13 a share back in 2007, before the economy and product quality issues torpedoed the bottom line.

2. Fast Retailing (OTC: FRCOY)
Business: Retail
Current P/E: 21

Fast Retailing is an undisputed growth company that is blanketing the world with its popular UNIQLO clothing stores. It operates a number of other retail concepts — including the Cabin brand in Japan and the Theory brand in both Japan and the United States — and competes on a global scale with stores throughout the United States, Europe and Asia. The company has ambitious plans to open more than 1,000 stores in China in the next decade and plans to grow into one of the largest apparel retailers on the planet. Fast Retailing has a reputation for selling fashionable clothing at very low prices and therefore appeals to a vast market of cost-conscious consumers.

Financial details are a bit more difficult to find, given the company only issues financial statements in Japan. Sales have grown more than 16% in each of the past five years and profits are up almost 13% annually during this period. Returns on equity are very high and hit nearly 23% in 2010. At a P/E of close to 21, the valuation may not fit the profile of bargain stock, but given the growth profile, rising earnings should easily offset the fact that the multiple is above-average. In other words, a couple of years of rapid earnings growth will lower the P/E, and the stock will follow fundamental improvements over the long haul. Fast Retailing could be worth paying up for given its robust growth outlook.

3. Nippon Telegraph and Telephone Corp. (NYSE: NTT)
Business: Telecom
P/E : 10

NTT is Japan’s dominant phone company and controls about half of the Japanese market. Given the firm’s fixed-line focus, sales growth has been modest in recent years, but profits have grown steadily at more than 7% each year in the past decade. Weak core growth has been easily supplemented by its 57% stake in NTT DoCoMo, NTT’s wireless subsidiary.

In other words, investing in NTT is similar to investing in AT&T (NYSE: T) or Verizon (NYSE: VZ) stateside. The firm’s stated dividend yield is a bit more modest at just over 3%, but the P/E ratio is very modest at less than 10, which means the company doesn’t have to grow much to earn returns for shareholders. Earnings are likely to continue to improve because of cost-cutting measures and growth at DoCoMo. In addition, there is downside protection, given the firm dominates its market.

4. NTT DoCoMo Inc. (NYSE: DCM)
Business: Telecom
P/E ratio: 12

Investors with more of a growth bias may just prefer holding shares of NTT DoCoMo instead of its stodgier parent. DoCoMo also controls about half of the Japanese wireless market. It was the first company in the world to roll out a 3G network, but has since fallen behind by failing to introduce a 4G network fast enough. It appears to be getting its mojo back with the launch of the next generation of wireless technology. Profits are already high, and a return to sales growth could bring life back into the stock. The P/E ratio is quite reasonable at less than 12, and the stated dividend yield of 3.5% is also above average.

5. A general bet on Japan Inc.

Rather than ferreting out individual stock opportunities, investors may prefer to bet on Japan overall, given it has many large firms that successfully compete on a global scale. The MSCI Japan Index Fund (NYSE: EWJ) exchange-traded fund (ETF) is among the best passive approaches, as it provides a low fee way to gain exposure to Japan’s leading companies. Toyota is the top holding, along with a few financial players among the top 10.

Fidelity offers a number of actively-managed options, including Fidelity Japan (Nasdaq: FJPNX) and Fidelity Japan Smaller Cos. (Nasdaq: FJSCX). Both have performed firmly ahead of their benchmarks during the past five years.

Action to Take —> When investing internationally, it generally pays to go with the largest players that operate on a global scale. In terms of Japanese stocks in particular, there are plenty of options and the country has appeal given the stock market is offering some of the most attractive valuations of the past 20 years. If allowed only one choice, my money would be on Toyota, because it has a couple of key ways to boost earnings and will continue to grow briskly in the largest markets in the world.

by Ryan Fuhrmann, StreetAuthority Investor Update