S&P 500 ETF Going to China

S&P 500-based ETF to be offered to Chinese investors

SAN FRANCISCO (MarketWatch) -- Standard & Poor's said Thursday it has licensed its flagship S&P 500 for an exchange-traded fund based on the index to be made available to investors in China.

"This landmark agreement will allow Chinese investors to directly track the returns of the U.S. equity market while providing an important index solution for their portfolio," S&P said in a statement.

S&P, a unit of McGraw-Hill Cos. (MHP 36.10, +0.32, +0.89%) , said it will license the S&P 500 to Bosera Asset Management Co. for the ETF.

Bosera describes itself on its Web site as "one of the first five fund-management companies established in China," and as "one of the largest asset-management institutions in China, with a complete set of business licenses."

Standard & Poor's said the S&P 500 has nearly $1 trillion directly indexed.

The firm said over 32 ETFs have been launched in six different markets in the past year based on its indices.

"China, as well as all of Asia Pacific, is of strategic importance to Standard & Poor's as we continue to aggressively grow our international index business," the firm said.

This could have a significant impact US equity markets. Capital has been effectively trapped within China for the last couple decades which saw relatively high growth rates. With a private savings rate exceeding 20%, the ability for Chinese citizens to buy American stocks rather than just investments within China seems ground-breaking.

Key ETF Performance Over the Last Year

Awesome chart out of Bespoke Investment Group. Just a great look across markets, sectors, economies, currencies, etc. Bespoke is a phenomenal blog for this type of great research presented in a simple way.

Berkshire Hathaway's Top 15 Holdings

Warren Buffett has a cult-like following after decades of successfully investing capital under the legendary Benjamin Graham's value investing philosophy. I, for one, am a big believer in the style and keep a close eye of Buffett's moves to study his company choices. Below are Berkshire Hathaway's top 15 stock holdings. This list excludes the multitude of fully-owned companies under the empire.

Company	Holding Value	Stake in Company
Coca-Cola	$11.06 billion	8.68%
Well Fargo	$8.81 billion	6.18%
American Express	$6.25 billion	12.72%
Procter & Gamble	$5.48 billion	3.01%
Kraft Foods	$3.97 billion	9.37%
Wal-Mart	$2.04 billion	0.98%
Wesco Financial Corp	$2.04 billion	80.1%
ConocoPhillips	$1.85 billion	3.87%
Johnson & Johnson	$1.74 billion	0.98%
US Bancorp	$1.64 billion	3.61%
Moody's	$862.96 million	13.43%
Washington Post	$717.2 million	18.38%
M&T Bank Corp	$500.34 million	5.68%
Nike	$492 million	1.55%
Costco Wholesale	$321.18 million	1.2%

Proof That Companies Manipulate Earnings

Hat tip The Big Picture

Mathematical Proof: Companies Manage Earnings

The WSJ reports today on a study that confirms what everyone has known for years: That many firms manage their earnings, pulling all manner of shenanigans to beat the street.

The way this form of fraud was detected was rather ingenious: The lower than mathematically expected incidences of the digit “4″ in corporate earnings releases. (“X.4″ to be precise) This simple statistical insight was due to an analysis of normal random distribution. “When the authors ran the earnings-per-share numbers down to a 10th of a cent, they found that the number “4″ appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance.”

Why?

By finagling the 0.4 to a 0.5, accountants then get to round up to the next higher number. Hence, 12.4 cents is “managed” to 12.5, which then becomes rounded to 13 cents per share.

They dub the effect “quadrophobia” — fear of fours.

Here’s the WSJ:

“A new study provides further evidence suggesting many companies tweak quarterly earnings to meet investor expectations, and the companies that adjust most often are more likely to restate earnings or be charged with accounting violations.

The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.

That deeper look showed that companies tend to nudge their earnings numbers up by a 10th of a cent or two. That lets them round results up to the highest cent. Investors often snap up shares of companies that beat earnings expectations, even by a cent, and, likewise, sell off shares of companies that don’t make their numbers.”

I love the euphemism “meet investor expectations” as opposed to the more colloquial “lie cheat and steal.”

It also points out the need for the SEC to develop a Department of Quantitative Analysis filled with math geeks and computers, doing nothing but sifting through data looking for investor fraud. I’d bet they would get more convictions than the rest of the SEC combined. (If someone in the SEC would call me, I’ll help you set it up).

On an unrelated note: The WSJ yet again takes an academic study that proves Wall Street cheats and liars and runs it on a Saturday. Recall the first Option Repricing article they did that that caused quite a ruckus — a Saturday publication as well. If the historical pattern holds, this article will continue to have legs for the next 2 years, eventually leading to resignations and indictments.

The Case for Buy-and-Hold

John Bogle, founder of The Vanguard Group, has long been a proponent of buy-and-hold, passive index investing. Vanguard offers some of the cheapest index investing around having started an S&P 500 investable product back in the early 1980s. Based on a historical study from 1984 to 2002 conducted by the Bogle Financial Markets Research Center, average investors have performed dismally versus simple passive index investing. Average investors, even while believing they can withstand 20% drawdowns, or 40% drawdowns, and believing they will not buy into hype, have a terrible tendency to sell lows and buy highs. These emotional investment decisions combined with high fees from over-trading result in awful long-term returns.

Source: Bogle Financial Markets Research Center via Investing Caffeine
The vast majority of investors are best-served by holding diversified ETFs with broad exposure. Sure, they will not do well in times of economic contraction but the long-term trend of human innovation is consistent and economies will tend to grow over time. Even the professionals, on average, underperform the index. It is a fact that 80% of mutual fund managers underperform the index in any given year. Add the fact that mutual fund investors consistently chase performance by investing in "hot" funds and selling "cold" funds, actual investor performance is even worse. Use a manager if you know nothing and have no interest learning. Use a manager if you have extra needs like detailed accounting, tax advisory, etc. But, on the whole, the average investor should stop trying to beat the market and simply increase their savings as a way to assure enough money for retirement.

The STUPID Index

With every Tom, Dick and Harry convinced they can take on Goldman's Jim O'Neill and come up with a wittier, edgier, Gen Y/Z BRIC equivalent, Zero Hedge has decided to join the fray. We present the STUPIDs: Spain, Turkey, UK, Portgual, Italy and Dubai. We admit that while the BRICs and some the other more ridiculous sounding acronyms we have seen out there recently are a gauge into various countries' pent up "growth" potential, the STUPID index is merely a countdown to the inevitable sovereign debt implsion that so far has been postponed due to cash printers working on overdrive 24/7. And to make it simple for the armchair acronym specialists, since the index is in CDS, the chart will go up... but not on the pervasive permabullish sentiment.

Source: Zero Hedge

What a brilliant idea! Surely the worst offenders in one index, steer clear investors.

Amazon Blows Out! iPad Kindle-Killer?

Amazon blew out earnings estimates last night with a 71% increase in net income beating estimates by 13 cents totaling earnings per share of $0.85. What a quarter! One of the most interesting pieces of the earnings release came from Amazon CEO Jeff Bezos, who highlighted the success of his company's Kindle electronic reader. "Millions of people now own Kindles," he said in a prepared statement. "We sell 6 Kindle books for every 10 physical books."

Now, that's pretty amazing! What a quick adoption of new technology and a seemingly large jump in reader's appetite for books. This device may indeed make our country smarter ;)

The big question is whether Apple's iPad will be a so-called "Kindle-Killer". We bought a Kindle for my father for Christmas and I have to say it's a pretty darn good product. The Kindle benefits from a lower price, seamless integration with your Amazon account and a week of battery life. Here's a quick comparison on the lowest end of each product.

Specification	Amazon Kindle	Apple iPad
Price	$259	$499
Screen Size	6-inch	9.7-inch
Color?	No	Yes
Touch Screen?	No	Yes
Battery Life	1 Week	10 hours
Supports	e-Books	140,000 iPhone aaps

The difference is clear to me, do you want to read books or do everything else? Frankly, I think the iPad will sell, and sell a lot. But, battery life is a major issue and I think people who already own iPhones may not see the need for the iPad. Plus the no contract seamless nature of the Kindle makes it very attractive to an older, book-reading consumer. Kindle's numbers are impressive. Overall, this product makes me somewhat lukewarm on both products and I don't see any clear winner emerging. Kindle sales will be impacted but I still see huge Kindle sales going forward.

Endowments Chase Performance, Lose Again

Source: New York Times via Crossing Wall Street

Reflecting the difficult financial environment for higher education, university endowments lost an average of 18.7 percent in the last fiscal year, the worst returns since the Great Depression, according to a study of hundreds of public and private institutions.

The study, by the National Association of College and University Business Officers and Commonfund, a nonprofit organization that manages university investments, also found that in the last year, many endowment managers increased the move from traditional fixed-income instruments and stocks into alternative investments like private equity, hedge funds, venture capital and private-equity real estate — all of which performed badly in fiscal 2009.

Unusually, the universities with endowments over $1 billion had the greatest decline, an average of 20.5 percent. Harvard, Yale and Stanford, the wealthiest universities, all lost more than 26 percent of their endowment values.

This is a shocking mismanagement of funds. The endowment managers fell victim to age old blunders of chasing performance of previous years and shifting allocations into "falling knife" sectors of the economy. Hedge funds did very well in 2008 but underperformed somewhat in 2009. An average 18.7% decline is awful when the S&P 500 gained 28.8% for the year. And, funds only lost 3% in 2008, when the market lost 41%! "Institutions with endowments greater than a billion dollars had 61 percent of their investments in such alternatives last year"--perhaps trying to be too creative? It is quite amazing the blunders were so widespread and the "smartest" of the funds did the worst.

$499?! That'll Sell!

The long-awaited release of Apple's new tablet device, dubbed the iPad, arrived today. The iPad looks like a giant iPhone and seems likely to me to sell like bananas! Nobody on the Street was looking for a sub-$500 price with expectations generally around the $1,000 level. This price point makes the iPad a very reasonable alternative to a desktop PC with great mobile capabilities. This is a game-changer and I reiterate my bullishness on the shares as my analysis did not include the upside earnings power of yet another great device. There are some risks of cannibalization of Apple's core product (iMac accounting for 40% of sales) but I am very excited about the product overall.

Is Google Misstepping?

Hat tip Jesse Felder of My Back Pages

It's been a big week for the "Big G." First the company introduced the official Google phone, dubbed "nexus one." It was designed by Google and is manufactured in partnership with HTC (and is number one on my personal wish list). It is also being sold directly by Google and unlocked so that it can be used on a variety of networks, an obvious boon to users but a snub of its main Android partner, T-Mobile.

Now that the company is competing with the handset manufacturers AND shunning the wireless providers by refusing to choose an exclusive partner there has been speculation that Google may have an interest in establishing a wireless business of its own. Why the company would want to dilute its phenomenally profitable, core business in this way is beyond me.

Today, we find out that Google has applied for federal approval to establish an energy trading arm to better manage the company's burgeoning needs. So Tuesday they want to be WorldCom; Friday they want to be Enron. What's next? A massive hedge fund?

This sounds to me like a company with more cash than they know what to do with. The company's management has a duty to shareholders to put this cash to use in the most effective way possible. Instead of these new initiatives, the company could have bought back a huge chunk of stock last Spring when it traded below $300 or started paying out a fat dividend.

Surely, the return on capital of these new ventures won't be nearly as high as the company's core business. And if it turns out that Google's no better than your average wireless provider or energy trader, shareholders should hold the company accountable.

I have often wondered how far the monetization well goes in the online search engine business but Google has repeatedly showed me I have undervalued it time and again. The growth has been phenomenal.

Yet, Jesse makes a great point about Google's outsized cash position, $22 billion as of September 2009. Quite often, companies fail to effectively put cash to work on new initiatives. While Google with its nearly 20,000 employees has created and purchased some of the best programs on the web (Gmail, Reader, YouTube, Picasa, etc.), investments into a wireless grid and an energy trading arm seem far-fetched. Are they missteps? Only time will tell.

Why This Is Not a New Secular Bull Market

Hat tip David Rosenberg of Gluskin Sheff via Zero Hedge

This chart is a little too convincing, just depressing to the regular investor. Just tell the Fed to keep printing so stocks can go higher!

Seinfeld Puts It Best

Bet this resonates after the last decade of returns... or lack thereof!

Recent Trade Ideas' Performance

While it's certainly foolish to equate a bull market with genius stock picking ability, I do want to highlight 3 of my recent trade ideas. All are up nicely to begin the trade and I believe more upside will come in time.

These are all 1-year ideas but they have showed nice gains off the bat. All these trades could be executed in a variety of ways but based on the closing price on the day of my post, the stocks have performed as such:

Link

Link

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2000s Decade Recap

Hat tip Slope of Hope

The $7 Billion Payday

Hat tip Crossing Wall Street

Ever heard of David Tepper? His hedge fund made $7 billion this year, of which Mr. Tepper will keep about $2.5 billion for himself. The funds secret was to beat against American falling into a second Great Depression.

Through February and March, Mr. Tepper scooped up beaten-down bank shares as many investors were running for the exits. Day after day, Mr. Tepper bought Bank of America Corp. shares, then trading below $3, and Citigroup Inc. preferred shares, when that stock was under $1. One of his investors insisted more carnage loomed. Friends who shared his bullish beliefs were wary of aping his moves amid speculation that the government was about to nationalize the big banks.

"I felt like I was alone," Mr. Tepper recalls. On some days, he says, "no one was even bidding."

The bets paid off. A resurgent market has helped Mr. Tepper's firm, Appaloosa Management, gain about 120% after the firm's fees, through early December. Thanks to those gains, Mr. Tepper, who specializes in the stocks and bonds of troubled companies, manages about $12 billion, a sum that makes Appaloosa one of the largest hedge funds in the world.

My Thoughts: Is he a genius or just plain crazy? With the entirely unknown variable of possible nationalization, Tepper certainly took on risk. Yet, since the end of the world only happens once, you should never bet on it. The rebound trade has been brilliant.

RPB Rebuts AAPL for Short-Term

Steve Warshaw over at Record Price Breakout has a great rebuttal to my posting on Apple earlier this week. He combines a number of different technical indicators to conclude that AAPL will likely turn down and retrace to the $177 area in the short-term. He believes this will be a good place to start accumulating shares. My analysis is for a 1-year price target of $300 but the well-timed execution of that idea in the short-term can add percentage points to the overall return. Check it out!

More Upside in Apple Inc. (AAPL)

Stock: Apple Inc. (AAPL)

Fundamental Story:

Apple is an elite company managed by the brilliant, Steve Jobs. Jobs brought AAPL back from near-bankruptcy in the mid-90s and reinvented the company three times over. Apple has four main product lines: iMac (44% of FY08 sales), iPod (28%), iTunes (10%) and iPhone (6%).

iMac
Apple introduced the iMac in 1998 as part of its turnaround campaign in the personal computer market. Recent growth rates have begun accelerating with US market share of under 3% just a few years ago to now 8% of the market (about 3.3% worldwide). Macs seem to create significant customer loyalty and once a person "makes the switch", they do not seem to return. Apple's moves into the portable music player market and the cell phone market have helped increase iMac sales. iMac, with 8% of the US personal computer market, could be close to reaching critical mass and has the potential for a strong momentum upswing in sales if a major tipping point in consumer acceptance occurs. Microsoft's releases of Vista and Windows 7 have been met with lukewarm reviews and customers may be hungry for something truly new and original in the computer operating systems space. Jobs would not surprise me if he initiated a major push for innovation in this market.

iPod & iTunes
The iPod hit the market in 2001 and almost immediately exploded. Apple is dominating the portable music player market selling 9.2 million iPods in FY08. The large growth in iPods continues to fuel downloadable music sales now accounting for a surprising 10% of total sales. Apple took on the music piracy market by force filling the void well by offering low-priced songs to end users. In this way, record companies at least earn something and the consumer stays within the bounds of the law. Continued growth is likely as the iPod becomes the device of choice.

iPhone
The iPhone is just simply a better phone. The innovations in this arena are quickly stealing market share from a myriad of competitors. With the product just two years old, there is still great room for growth. The iPhone sold 13 million units in just over a year on its debut. Continued success is likely with a new push coming from the second-generation, iPhone 3G. Apple now has agreements to sell the iPhone in over 70 countries.

Apple has yet to become a major global name giving it incredible room for growth. For FY08, 45% of sales were from the US, 23% from Europe and 19% from Japan. A major foray into Asian markets could continue stoking growth in the company. Jobs, working with chief designer, Jonathan Ive, has created products with incredible aesthetic appeal and truly innovative features. These products carry a great deal of momentum in sales that has only hiccuped during the 2008 recession. As global growth resumes, Apple will be a major beneficiary.

Apple carries $24 billion in cash on its balance sheet with absolutely no long-term debt. This financial condition gives Apple unparalleled flexibility to pursue new initiatives into the global arena and product improvements. The company touts a 5-year growth rate in sales of 34% on improving margins producing 75% growth in net income. The year 2009 produced below 5-year average growth registering 17% growth in earnings per share.

On trailing 12-month earnings per share, Apple trades at 31 times earnings. Assuming a 20% growth rate for 2010 as the economy rebounds globally, Apple trades at 26 times forward earnings of $7.55 per share. With that, Apple has a relatively mild PEG of 1.3. Given its earnings momentum the shares could trade much closer to a PEG of 2 before being considered expensive. A PEG of 2 on 20% growths values the stock at over $300 per share.

Technical Story:

Apple is one of the very few stocks trading at all-time highs while the market remains 40% below highs made in October 2007. This shows high relative strength and indicates strong buying interest. Continued upside in global markets should push Apple shares much higher. A strong breakout to new highs should bring technical breakout momentum traders into shares. Stocks are either trending or consolidating from a very basic point-of-view. Apple has trended all year but more recently entered a consolidation after pushing through previous all-time highs in October. Now may be a risk-to-reward time to pick up shares below $190 before a push to new highs and continued upside momentum.

Buying Best-of-Breed Financial

Stock: JP Morgan Chase & Co. (JPM)

Fundamental Rationale:

JP Morgan Chase is a top-notch financial institution and the best-of-breed universal bank in America. The collapse of the investment banking arena has shifted major market shares in various banking services to the survivors and particularly JPM, Goldman Sachs and Morgan Stanley. JPM has already repaid the $25 billion TARP loan freeing it of intrusive government regulation. Its well-timed acquisitions of Bear Stearns and Washington Mutual at bargain prices with government guarantees should be accretive to earnings in the coming quarters. The Bear Stearns acquisition gives JPM leading market share in global prime brokerage and the Washington Mutual takeover expands JPM's presence is the Western United States. From a management persepctive, Jamie Dimon is exactly the man investors want in charge. As a straight-talking, traditional banker with nearly ten years of CEO experience heading major banking institutions, Dimon has kept the firm conservative and consistent while others chased profits and destroyed themselves.

JPM maintained profitability throughout 2008 recording only two negative quarters in earnings per share for a relatively mild 34 cents in losses in Q3 and Q4 2008. The company recorded $0.80 per share for Q309 and analysts expect EPS of $0.77 per share for Q409. The stock currently trades at 18 times 2009 earnings. With a continuation of these more normalized Q3 and Q4 earnings into 2009 and a modest 10% EPS growth rate (below 9-year average rate) JPM trades at 12 times forward earnings. JPM can easily trade for 15 times earnings given historical averages, and this is likely a modest multiple given its increasing market share and solid reputation going forward. At 15 times forward earnings, JPM would trade at $51.50, a 23% rise over today's closing price.

Technical Rationale:

Shares of JPM have found solid buying interest at the $40.50 level five times now creating a significant support level. Today's surge higher shows strength as other financials were treading water and Citigroup saw selling after announcing its TARP repayment plans. This divergence made me notice today. JPM has trended lower at a steady, controlled pace since it made its highs for the year in the middle of October. I bought an initial position today against the $40.50 support level and will look for a high volume move through the descending trendline this week. A confirmed break will indicate that the two-month trend has changed. JPM will then have the possibility of restarting its major uptrend and achieving my fundamental targets.

I am cautious of the trade being so easy with support holding this nicely. I would not be surprised to see a breakdown through $40.50 and technicians jumping in calling it a head-and-shoulders reversal pattern. Given the underlying fundamentals I find a significant downturn in shares unlikely and I would look for compelling entries should this happen.

This is not a recommendation of a buy or sell transaction. The stock may or may not be entered by TWS Investments. This website is not intended as an advisory service.

Giving Credit to Buffett's Ability to Pass

Buffett deserves a great deal of credit for the deals he passed on during the Panic in 2008. Often, investors flush with cash struggle to hold back on anything that looks promising. Buffett's poise and rigid discipline kept him out of potentially disastrous deals proving that many times less is more. The deals he did go in on were not perfectly timed, but yet they have been successful for the most part so far.

Crude Drops, Airlines Rocket Higher, DAL Jumps 14% Friday

Crude oil broke down out of its high-level price consolidation dropping 8% for the week. The price of oil could no longer hold up after several weeks of greater-than-expected supply shown in the Department of Energy's weekly inventory data. Crude actually showed a small draw this week but the large increase in distillates inventory overshadowed this data point. A continued bounce in the dollar gaining 1% for the week also took its toll on all dollar-priced commodities acting as the final straw to break the back of oil prices. I was stopped out of my long DBO position for an 8% loss as crude fell back below $70 per barrel. The technical picture looked decent on this trade for a momentum move to the upside but fundamental support never materialized to fuel a breakout after I entered.

The airlines jumped on Friday after crude oil prices broke the psychological $70 level confirming the breakdown in the commodity. Other news out of some key airlines shows that the survivors in the industry are attempting joint ventures and closer coordination on flights to increase efficiency. This could be a great sign of a slowing in the ruinous competition seen in the last decade. My note on Delta Air Lines on Tuesday appears well-timed as DAL jumped 14% for the day and added another 4% after hours. A huge uptick in daily volume confirms significant buying interest. Granted, DAL is in the midst of a strong momentum move and my note came after a 20% move higher in the preceding 2 weeks. Also, my arguments on the airlines are intended for use in a long-term, fundamental investment and not in a 1-week trade. Yet, starting off with an 18% cushion on an investment is always nice.