Goldman Charged With Fraud: Is Deutsche Bank Next?

Since the latest news regarding the SEC allegedly charging Goldman Sachs  for defrauding its clients, we have come to the conclusion that there will be more to come.

What is interesting is that this particular scenario was well laid out in Gregory Zuckerman's book The Greatest Trade Ever. In the book, Zuckerman describes in detail how Paulson's team formed its opinions on the current status of the mortgage market and figured out how to profit from their views.

Because the mortgage securitization market was still relatively new, there were not many ways to profit from the demise of real estate or the defaulting of loans other than taking long positions in Credit Default Swaps (which are essentially an insurance product in which a participant can pay a premium in advance to secure full coverage over a pool of assets, in this case mortgages).

The book also describes how in order to increase the size of their bearish position, Paulson and his team approached larger investment banks to ask for their cooperation on packaging pools of mortgages they believed would be the first to fall as soon as the real estate bubble burst. Based on their research they believed mortgages with the latter vintage years of 2005 & 2006 were the most likely to fail. By essentially hand picking each of these types of mortgages and encouraging investment banks to package them and sell the CDO's to clients, Paulson & Co. was then able to take the other side of the trade and buy the Credit Default Swap(Insurance) on that specific pool.

So far Goldman Sachs (GS) is the only investment bank accused of "defrauding investors", because they did not disclose to clients who purchased these CDO's that other parties took part in creating the CDO's: specifically parties that were betting against what they had a hand in creating.

Our view is that Goldman Sachs (GS) was not the only bank participating in this sort of practice. Investment banks are set to receive boatloads in commissions when facilitating these types of transactions, and if others noticed Goldman Sachs (GS) making money off of it, they too would participate.

Because the SEC has been so late to the party throughout the course of this financial meltdown, they are very likely to drag this out and attempt to make a name for themselves. European regulators are likely to do the same in the coming weeks, as they begin to learn that their investment banks may have very well participated in this process. We believe a series of events related to this topic could become a catalyst for pessimism/fear to enter the marketplace and will set the stage for a long needed correction.

We continue to be bearish on the S&P 500 and Deutsche Bank  in the near term. After a healthy correction, we will begin to build positions in companies whose valuations have come back to reality and futures look poised for growth.

Bob Farrell’s 10 Rules For Investing

Today, I would again like to focus on words of investment wisdom that are timeless and especially appropriate as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

Wall Street "gurus" come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and the October 1987 crash.

Farrell retired in 1992, but his famous "10 Market Rules to Remember" have lived on and are summarized below, courtesy of The Big Picture (August 2008) and MarketWatch (June 2008).

1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people's heads. It's easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but also leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the six years prior to the crisis, only to plunge by more than 60%.

As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom
That's why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism", says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that the reflexive rebound is nearing maturity. We have yet to see the long-drawn-out fundamental portion of the bear market.

9. When all the experts and forecasts agree – something else is going to happen
As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"

Going against the herd, as Farrell repeatedly suggests, can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Jakarta Stocks May See Continued Selling

 

 The Indonesian stock market on Friday wrote a finish to the five-day winning streak in which it had collected more than 50 points or 1.6 percent en route to a record closing high. The Jakarta Composite Index fell back below the 2,880-point plateau, and now analysts are expecting to see those losses accelerate when the market opens for business on Monday.

The global forecast for the Asian markets is broadly negative, with financials leading the way lower after the U.S. Securities and Exchange Commission on Friday charged Goldman Sachs with fraud. Commodity prices also remain caught up in that tailspin, as do properties, airlines and steel stocks. The European and U.S. markets finished sharply lower, and the Asian markets are forecast to respond in similar fashion.

The JCI finished modestly lower on Friday as investors locked in gains from the record-setting rally, led to the downside by weakness from the financial sector.

For the day, the index lost 21.86 points or 0.75 percent to finish at 2,878.67 after trading between 2,860.93 and 2,903.28. Volume was 4.89 billion shares worth 3.9 trillion rupiah. There were 120 decliners and 65 gainers.

Among the decliners, Bank Mandiri shed 2.9 percent, while Bank Negara Indonesia lost 2.1 percent, Bumi Resources fell 1 percent and Elnusa plunged 6.8 percent.

The lead from Wall Street calls for heavy damage as stocks saw substantial weakness on Friday, after the SEC filed fraud charges against Goldman Sachs, whipping up a storm of uncertainty in the markets. The major averages all closed sharply lower on the day, snapping a six-session winning streak.

Late in the morning, the SEC charged Goldman Sachs and one of its vice presidents with fraud, sending markets into a tailspin. Goldman stands accused of creating a collateralized debt obligation designed to fail while also shorting the instrument, resulting in a substantial gain for the firm. Shares of Goldman Sachs sank by 12.8 percent on the news and closed at their lowest price in just over six weeks.

Ahead of the news, the markets were focused on earnings, as rising costs at Google (GOOG) and disappointing guidance from Advanced Micro Devices (AMD) prompted initial weakness.

On the economic front, Reuters and the University of Michigan released a report showing a substantial deterioration in consumer sentiment in the month of April, further contributing to early selling pressure.

Meanwhile, the Commerce Department said that new residential construction saw a modest increase in the month of March, while February's data saw a substantial upward revision.

The major averages all saw choppy movement in late-session dealing, remaining well below the unchanged line. The Dow fell by 125.91 points or 1.1 percent to 11,018.66, the NASDAQ slid by 34.43 points or 1.4 percent to 2,481.26 and the S&P 500 tumbled by 19.54 points or 1.6 percent to 1,192.13.

Despite the steep losses on the day, the Dow and the NASDAQ managed to close higher for the seventh straight week. The Dow edged up by 0.2 percent for the week, while the NASDAQ jumped 1.1 percent. On the other hand, the S&P 500 posted a weekly loss of 0.2 percent.

Freefall May Continue For Thai Shares

The Thai stock market has finished lower in two straight sessions - bisected by a three-day break for the Songkran Festival - and has plunged more than 50 points or 7 percent in the process. The Stock Exchange of Thailand fell below the 740-point plateau, and now investors are bracing for continued selling pressure when the market kicks off trade on Monday.

The global forecast for the Asian markets is broadly negative, with financials leading the way lower after the U.S. Securities and Exchange Commission on Friday charged Goldman Sachs with fraud. Commodity prices also remain caught up in that tailspin, as do properties, airlines and steel stocks. The European and U.S. markets finished sharply lower, and the Asian markets are forecast to respond in similar fashion.

The SET finished sharply lower on Friday, thanks to continued political tensions between the government and the red shirt protestors who want to see immediate new elections. Energy stocks led the market lower, while the financials also were weak.

For the day, the index plunged 24.74 points or 3.25 percent to finish at the daily low of 736.16 after peaking at 750.61. Volume was 2.653 billion shares worth 29.763 billion baht. There were 301 decliners and 62 gainers, with 95 stocks finishing unchanged.

Among the decliners, energy giant PTT was down 3.52 percent, while PTT Exploration and Production shed 1.37 percent, PTT Chemical lost 3.32 percent, Siam Concrete plunged 5.95 percent, coal producer Banpu eased 0.67 percent, Siam Commercial Bank declined 4.12 percent and Kasikornbank plummeted 7.88 percent.

The lead from Wall Street calls for heavy damage as stocks saw substantial weakness on Friday, after the SEC filed fraud charges against Goldman Sachs, whipping up a storm of uncertainty in the markets. The major averages all closed sharply lower on the day, snapping a six-session winning streak.

Late in the morning, the SEC charged Goldman Sachs and one of its vice presidents with fraud, sending markets into a tailspin. Goldman stands accused of creating a collateralized debt obligation designed to fail while also shorting the instrument, resulting in a substantial gain for the firm. Shares of Goldman Sachs sank by 12.8 percent on the news and closed at their lowest price in just over six weeks.

Ahead of the news, the markets were focused on earnings, as rising costs at Google (GOOG) and disappointing guidance from Advanced Micro Devices (AMD) prompted initial weakness.

On the economic front, Reuters and the University of Michigan released a report showing a substantial deterioration in consumer sentiment in the month of April, further contributing to early selling pressure.

Meanwhile, the Commerce Department said that new residential construction saw a modest increase in the month of March, while February's data saw a substantial upward revision.

The major averages all saw choppy movement in late-session dealing, remaining well below the unchanged line. The Dow fell by 125.91 points or 1.1 percent to 11,018.66, the NASDAQ slid by 34.43 points or 1.4 percent to 2,481.26 and the S&P 500 tumbled by 19.54 points or 1.6 percent to 1,192.13.

Despite the steep losses on the day, the Dow and the NASDAQ managed to close higher for the seventh straight week. The Dow edged up by 0.2 percent for the week, while the NASDAQ jumped 1.1 percent. On the other hand, the S&P 500 posted a weekly loss of 0.2 percent.

Japanese Market Trades Weak On Wall Street Cues, Stronger Yen

The Japanese stock market is down sharply on Monday with investors indulging in some heavy selling across the board following a setback on Wall Street last Friday on the back of the U.S Securities and Exchange Commission slapping fraud charges on Goldman Sachs. A stronger yen is also contributing to the decline in Tokyo.

The benchmark Nikkei 225 index plunged below the 11,000 mark for the first time since March 29, and is currently trading at 10,911, down 191.2 points or 1.73% from its previous close.

Banking, automobile and construction stocks are mostly down in the red with notable losses. Electric power, gas, retail and pulp & paper stocks are trading mixed.

Sumitomo Trust & Banking is down as much as 4%. Sumitomo Mitsui Financial, Mizuho Trust & Banking, Mizuho Financial, Mitsubishi UFJ Financial, Shinsei Bank, Resona Holdings, Chiba Bank and Shizuoka Bank are also down with notable losses.

Shares of Toyota Motor Corp. declined following an announcement from the company on Friday that it will recall 740,000 Sienna minivans sold in the U.S. and Canada. Hino Motors, Nissan Motor, Isuzu Motors, Honda Motor, Suzuki Motor and Mitsubishi Motor are also trading lower.

Japan Tobacco, Nomura Holdings, Inpex Corp., Daiwa Securities, Mitsui, Dowa Holdings, Konica Minolta, Sumitomo Metal, Nippon Light Metals, Fujitsu, Heiwa Real Estate, Advantest and Aeon are all trading in negative territory with notable losses.

Shares of KDDI Corp. tumbled to a year-to-date low after the company said its group net profit likely sank 5% on the year to 212.5 billion yen for the year through March.

In the currency market, the U.S. dollar traded in the upper 91 yen zone in early deals in Tokyo, slightly down from Friday's closing levels. The yen is currently trading at 92.08 to the U.S. dollar.

Among other markets in the Asia-Pacific region, Australia, Shanghai, New Zealand, Singapore, South Korea and Taiwan are down with notable losses. Malaysia is also trading weak. Markets across the region closed firmly lower on Friday.

On Wall Street, stocks declined sharply on Friday, as the Securities and Exchange Commission brought fraud charges against Wall Street giant Goldman Sachs, whipping up a storm of uncertainty in the markets. The major averages all closed sharply lower on the day, snapping a six-session winning streak.

The SEC charged Goldman Sachs and one of its vice presidents with fraud, sending markets into a tailspin. Goldman stands accused of creating a collateralized debt obligation designed to fail while also shorting the instrument, resulting in a substantial gain for the firm.

The Dow ended lower by 126 points or 1.1% at 11,018.6, the Nasdaq declined 34.4 points or 1.4% to 2,481.3 and the S&P 500 tumbled by 19.5 points or 1.6% to 1,192.1.

Major European markets closed markedly lower on Friday. The U.K.'s FTSE 100 index lost 1.4%, while the German DAX index and the French CAC 40 index declined by 1.8% and 1.9% respectively.

Oil prices fell sharply on Friday with an unexpected decline in U.S. consumer sentiment and the fraud charges slapped on Goldman Sachs dampening the mood. Light sweet crude for May delivery settled at US$83.24 a barrel, down US$2.27 on the session.

Global Stock Market Capitalization Hits 20-Month High In March 2010

According to data from the World Federation of Exchanges, world stock market valuation reached a 20-month high of $49.1 trillion in March, the highest level since July 2008. Compared to last March, world markets have gained 55.4% in value, led by strong annual, triple-digit gains from Brazil (102%), India (125%), Turkey (131%), and Japan (104%).

From the February 2009 bottom of $28.6 trillion, world stock market capitalization has gained more than $20 trillion, and has increased by 72%. From the all-time December 2007 high of about $61 trillion, the world stock markets lost about $30 trillion in value in 14 months through February 2009, and $20 trillion of that loss has been regained through March of this year. Although world stock market value is still down $10 trillion from the peak, it should be noted that there is $29 trillion more of stock market wealth today ($49 trillion), than in 2002 ($20 trillion).

Asian Markets Down With Notable Losses

 Tracking cues from Wall Street, where stocks declined on Friday following the U.S Securities and Exchange Commission slapping fraud charges on Goldman Sachs, Asian stock markets are trading notably lower on Monday. With reports of Goldman Sachs facing a potential backlash in Europe and other parts of the globe following the U.S. regulator's charges against the company, the mood has turned quite bearish in the Asian region.

The Australian market is down sharply with stocks cutting across several sectors reeling under selling pressure.

Energy, materials, financial and industrial stocks are among the prominent losers. Property trusts, utilities and consumer staples stocks are also mostly down in negative territory.

The benchmark S&P/ASX 200 index, which tumbled to around 4,914, is currently trading at 4,918, down 66.7 points or 1.3% from its previous close. The broader All Ordinaries index is down 65.3 points or 1.3% at 4,942.

Among bank stocks, ANZ Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation are trading lower by 0.9%-1.3%. Macquarie Group shares are trading lower by about 2.6%.

ANZ Banking Group Ltd has announced that it has completed the acquisition of The Royal Bank of Scotland's Taiwan businesses, and would operate them from Monday under a new Chinese name - Au Sheng Yin Hang. ANZ said the acquisition included the ABN AMRO Private Banking business in Taiwan.

Top miners BHP Billiton, Rio Tinto and Newcrest Mining are down 1.5%-1.8% from their previous closing prices. Among other stocks in the materials space, Bluescope Steel, Fortescue Metals and Orica are down with notable losses. Lihir Gold and Incitec Pivot are also trading weak.

Among energy stocks, Woodside Petroleum is down 0.8% and Santos is trading lower by 1.6%, while Oil Search and Origin Energy are down with marginal losses.

Leighton Holdings, Wesfarmers, WorleyParsons and Woolworths are down with notable losses.

Shares of UGL Limited are down 1.6% despite an announcement from the company that its rail division has secured new freight rolling stock and wagon orders with Queensland-based rail operator QR Ltd, valued at A$100 million. The orders include four C44ACi locomotives and 160 QHBH freight wagons for operation in the Hunter Valley, in NSW, and 200 VCB freight wagons for operation in Queensland's Bowen Basin.

In the currency market, the Australian dollar opened more than a cent lower as investors chose to tread cautiously after news of charges being laid against US bank Goldman Sachs. In early trades, the Aussie was quoting at US$0.9212-US$0.9216, down almost a percent from Friday's close of US$0.9303-US$0.9308. The Australian dollar is currently trading at 0.9209 to the U.S. dollar.

The Japanese market is down sharply with investors indulging in some heavy selling across the board. A stronger yen is also contributing to the decline in Tokyo.

The benchmark Nikkei 225 index plunged below the 11,000 mark for the first time since March 29, and was down 200.85 points or 1.81% at 10,901.33 at the end of the morning session.

Banking, automobile and construction stocks are mostly down in the red with notable losses. Electric power, gas, retail and pulp & paper stocks are trading mixed.

Sumitomo Trust & Banking is down as much as 4%. Sumitomo Mitsui Financial, Mizuho Trust & Banking, Mizuho Financial, Mitsubishi UFJ Financial, Shinsei Bank, Resona Holdings, Chiba Bank and Shizuoka Bank are also down with notable losses.

Shares of Toyota Motor Corp. declined following an announcement from the company on Friday that it will recall 740,000 Sienna minivans sold in the U.S. and Canada. Hino Motors, Nissan Motor, Isuzu Motors, Honda Motor, Suzuki Motor and Mitsubishi Motor are also trading lower.

Japan Tobacco, Nomura Holdings, Inpex Corp., Daiwa Securities, Mitsui, Dowa Holdings, Konica Minolta, Sumitomo Metal, Nippon Light Metals, Fujitsu, Heiwa Real Estate, Advantest and Aeon are all trading in negative territory with notable losses.

Shares of KDDI Corp. tumbled to a year-to-date low after the company said its group net profit likely sank 5% on the year to 212.5 billion yen for the year through March.

All Nippon Airways shares drifted lower as many of Europe's busiest airports remained closed and many flights have been canceled due to clouds of ash from a volcanic eruption in Iceland.

In the currency market, the U.S. dollar traded in the upper 91 yen zone in early deals in Tokyo, slightly down from Friday's closing levels. The yen is currently trading at 92.08 to the U.S. dollar.

The South Korean market is trading in the red with investors tracking cues from Wall Street and pressing sales in banking, technology and oil stocks.

The benchmark KOSPI index, which edged up to around 1,720 after tumbling to 1,708 at the start, is currently down 23.4 points or 1.36% at 1,711.

Korea Exchange Bank, Woori Finance, Shinhan Financial and KB Financial are trading lower by 2.4%-2.8% from their previous closing prices.

Among technology stocks, heavyweight Samsung Electronics is down 1.6%, Hynix Semiconductor is trading lower by about 1.5% and LG Electronics is down with a loss of 1.2%, while LG Display LCD is trading lower by 2.5%.

In the shipping space, STX Pan Ocean and Daewoo Shipbuilding are down with modest losses, while Hyundai Heavy Industries and Samsung Heavy Industries are up in positive territory with marginal gains.

Among automobile stocks, Kia Motor and Hyundai Motor are up with modest gains, while Ssangyong Motor is down by about 1%.

Oil stocks SK Holdings and S-Oil are down 1.7% and 1% respectively. KEPCO is down with a loss of about 1.6%. Steel, airlines and telecommunications stocks are also trading weak.

Among other markets in the Asia-Pacific region, Shanghai, Hong Kong, Indonesia, Singapore, New Zealand and Taiwan are down with their key indices losing between 1.2%-1.8%. The Malaysian market's KLSE Composite index is down 0.5% from its previous close. Markets across the region closed firmly lower on Friday.

On Wall Street, stocks declined sharply on Friday as the Securities and Exchange Commission brought fraud charges against Goldman Sachs, whipping up a storm of uncertainty in the markets. The major averages all closed sharply lower on the day, snapping a six-session winning streak.

The SEC charged Goldman Sachs and one of its vice presidents with fraud, sending markets into a tailspin. Goldman stands accused of creating a collateralized debt obligation designed to fail while also shorting the instrument, resulting in a substantial gain for the firm.

The Dow ended lower by 126 points or 1.1% at 11,018.6, the Nasdaq declined 34.4 points or 1.4% to 2,481.3 and the S&P 500 tumbled by 19.5 points or 1.6% to 1,192.1.

Major European markets closed markedly lower on Friday. The U.K.'s FTSE 100 index lost 1.4%, while the German DAX index and the French CAC 40 index declined by 1.8% and 1.9% respectively.

Oil prices fell sharply on Friday with an unexpected decline in U.S. consumer sentiment and the fraud charges slapped on Goldman Sachs dampening the mood. Light sweet crude for May delivery settled at US$83.24 a barrel, down US$2.27 on the session.

Who Else Wants Ex-Sector ETFs?

 

The ETF industry continues to demonstrate impressive growth, both in assets and number of products. Already in 2010 more than 60 new ETFs have hit the market, putting this year on pace to shatter last year's product development record. This surge in product offerings has led some to lament that the industry has reached (or even blown past) a saturation point, pointing to the increasingly granular and esoteric funds that have popped up in recent years. Some degree of contraction in the ETF industry in 2010 is likely–in fact it's begun already–but there are still a lot of good ideas coming out of ETF issuers. The VIX ETNs from iPath are a great example (they have aggregate assets of more than $1.5 billion), as are several of the ETFs to launch over the last year (see the Most Successful New ETFs of 2009).

And there are still some interesting stones that remain unturned. No one has brought to market an automotive ETF, one of the several glaring opportunities we see in the current ETF lineup. Several of the world's largest and most unique economies aren't covered by U.S.-listed ETFs, and there seem to be opportunities for improvement on other popular funds as well.

There is no shortage of ideas under consideration–there are more than 500 ETFs in registration–but it never hurts to have a few more ideas out there. So here's another: a line of "ex-sector" ETFs.

Inspired By The Islamic ETF

When analyzing the performance of the various faith-based ETFs during the first quarter of 2010, one outlier immediately jumps out. The gains delivered by the FaithShares products (based on indexes constructed in compliance with Christian, Baptist, Catholic, Lutheran, and Methodist values) were all fairly consistent (and all better than , while the Dow Jones Islamic Market International Index Fund  lagged about 500 basis points behind. That's a significant single-period gap, but there's a relatively simple explanation.

JVS is based on the Dow Jones Islamic Market International Titans 100 Index, a benchmark that consists of stocks that meet Islamic principles. According to the fund's Web site (emphasis added), "excluded businesses include alcohol, conventional financial services (banking, insurance, etc.), casinos and gambling, pornography, tobacco manufacturers, pork related products and weapons companies." So the explanation for the relatively poor performance becomes clear; financials surged in the first quarter of the year, but JVS, which is effectively an ex-financials ETF, missed out on this bump.

So here's the step-by-step instructions for a new ETFs (actually for nine of them):

1. Start with SPY
2. Remove all of the financial stocks
3. Repeat for energy, technology, consumer discretionaries and staples, utilities, materials, and industrials

The result is a line of "ex-sector ETFs" that offer diversified exposure to the U.S. economy with the exception of one particular sector. It would be an easy way to underweight a particular sector while retaining balanced exposure to the rest of the market.

Cephalon Buys Generic Drug Co.

Cephalon, Inc.  recently announced the completion of its acquisition of Mepha AG, a privately-held Swiss generic drug company, for CHF 662.4 million (approximately $615.4 million). This acquisition marks Cephalon's entry in the generics market.

This deal is in-line with Cephalon's goal to reduce its dependence on its central nervous system (CNS) franchise for long-term growth. The company's CNS franchise, which consists of Nuvigil, Provigil and Gabitril, is its primary growth driver. However, Provigil is slated to face generic competition from 2012 and Nuvigil is facing patent challenges from generic players like Teva  and Mylan

As such, Cephalon is looking to supplement long-term growth by acquiring/in-licensing products. The Mepha acquisition will not only allow Cephalon to enter the generic drug market, it will also allow the company to expand its footprints in ex-US territories including emerging markets which represent significant opportunity for growth. Cephalon expects to double the size of its international business.

Going forward, Cephalon will serve all three types of pharmaceutical markets — proprietary branded, generic and branded generic. Mepha specializes in innovative dosage formulations and markets both generic and branded generic products. Mepha sells more than 120 products in 50 countries and recognized sales of about CHF 400 million in 2009. Moreover, Mepha's pipeline consists of about 50 chemical entities which could hit the market over the next five years.

For 2010, the company expects adjusted net income in the range of $518 - $533 million on total revenues of $2.610 - $2.690 billion.

We currently have a Neutral recommendation on Cephalon. We believe that the company will continue pursuing similar deals going forward. Over the past few quarters, Cephalon has been looking to expand into new therapeutic areas to drive long-term growth. Besides the recently concluded Mepha acquisition, Cephalon also completed its acquisition of Ception Therapeutics and Arana Therapeutics.

The company has also acquired rights to Lupuzor from ImmuPharma for the treatment of systemic lupus erythematosus and signed an option agreement to buy the assets of BioAssets Development Corporation.

Wynn Abandons Philly Project

Wynn Resorts Ltd.  has abandoned its plan of a casino project construction in Philadelphia, Pennsylvania.

Last Thursday, the company announced that it had terminated all agreements and negotiations related to its potential investment in the Foxwoods Casino project in Philadelphia. The project was slated for the Philadelphia waterfront.

Though the legalization of table games in Pennsylvania had attracted Wynn Resorts, management said that the particular project was not suitable for the company. This particular project in Philadelphia has gone through too many problems, both political and financial, since its approval.

However, Wynn Resorts remains right on track and is expected to open its second property, Encore at Wynn Macau, later this month. The company is completing the construction of this project, which is a further expansion of Wynn Macau. This will add a fully integrated resort hotel to Wynn Macau, including approximately 410 luxury suites and four villas along with restaurants, additional retail space and additional gaming space.

Wynn Resorts reported fourth quarter earnings of 8 cents per share, which missed the Zacks Consensus Estimate of 12 cents. The company had earned 7 cents per share in the year-ago quarter.

For the fourth quarter of 2009, net revenues were $809.3 million, up 31.7% from the prior-year period. The increase was driven by a solid performance of its Macau operations and a full-quarter contribution from its Encore property in Las Vegas.

Toyota Continues With Incentives

 

Toyota Motor  has decided to continue with its big promotions for auto sales until May 3, 2010. The automaker is overwhelmed by the huge response to its incentives, which includes cheap leases, zero-percent financing for 5 years and free maintenance for 2 years for return customers on most of its line-up.

The incentives have pushed Toyota's sales up 41% to 186,863 vehicles in March despite its largest ever safety recall of 8.5 million vehicles in recent months. The automaker saw strong sales of even its recalled models, Corolla, Camry and RAV4. Sales of RAV4 more than doubled, while that of Corolla rose 33% and Camry jumped 41%. The automaker grabbed a market share of 17.5% during the month, up from 15.5% in the year-ago month.

According to Autodata Corp., Toyota's incentive during the month increased 46% to $2,310 per vehicle compared with GM's incentive of $3,174 per vehicle (down 19% year-over-year) and Ford's incentive of $3,035 per vehicle (down 2% year-over-year).

Toyota has revealed that it will continue to offer cheap leases on as many as 8 of its models, including the Camry, Corolla and RAV4. It has also expanded its 2-year free maintenance program to all customers, instead of return customers in March. However, the automaker has reduced the coverage under its zero-percent financing offers to 6 models from 8.

So far, Toyota has recalled 8.5 million vehicles from around the world related to problems such as faulty accelerator gas pedals, slipping floor mats and defective braking systems. The recall included favorites such as the 2010 Prius hybrid and Toyota Camry.

Toyota has been slapped with dozens of lawsuits due to the recall. The value of claims under the lawsuits is estimated to reach about $4 billion, reflecting an average loss of $600 per vehicle.

To make matters worse, the U.S. government has imposed the highest-ever fine of $16.4 million on Toyota, accusing it of a deliberate delay in recalling the vehicles by hiding its defects even though manufacturers are legally obligated to notify the U.S. safety regulators within 5 business days if they come to know of a safety defect.

Toyota may succeed in winning back consumer confidence through these incentives, but there is a pitfall. If extended over a long period, the incentives may pull down the company's profit margin.

UPS Gets A Neutral Rec

We are initiating coverage on the shares of United Parcel Service  with a Neutral recommendation. United Parcel Service serves as a proxy for the economy because of the volumes and diversity of the goods shipped by the company.

Though the company has suffered from the recession over the past year-plus, an improving global economy with an increase in trade in international shipping is expected to fuel growth. U.S. industrial production, which is expected to rise going forward, will drive the company's volume growth.

United Parcel Service has taken a number of steps to counter the prospect of falling revenues, including the consolidation of operating districts, a reduction in air segments and the elimination of certain package handling operations. It is also streamlining its domestic district and regional operating structure to improve performance within its U.S. small-package operations. The new structure is expected to be in place by the second quarter of 2010.

Though the net savings impact during 2010 is expected to be minimal as a result of related expenses such as relocation costs, for 2011 and beyond the company expects an annualized benefit of roughly $0.10 per share.

Within the U.S. domestic hub, United Parcel Service completed the first phase of a multi-year expansion of the fully automated Worldport air hub in Louisville, Kentucky. With the completion of this expansion next year, Worldport's sort capacity will be 416,000 packages per hour, a 37% increase. This expansion would enable more cost-effective package processing and improved network efficiencies.

Currently, the most significant impact on United Parcel Service is the global economic slowdown, hurting revenues and margins. This is affecting the company in a number of ways. First, volumes are falling, as demonstrated by the fourth quarter 2009 drop in consolidated average daily package volume of 0.2%, with the steepest decline of 2.9% in the U.S. Ground segment. Second, reduced fuel surcharges and lower average weight per piece caused the average revenue per piece to drop 4.0%, with the largest declines in U.S. Domestic Next Day Air (14.3%) and Deferred (12.3%). With the economy recovering at a snail's pace, we expect pressure on growth in the near term.

In the LTL market, the U.S. recession has shrunk shipments and pressured pricing due to an increased competition as carriers reduced prices to defend market share. Near-term LTL operating environment will likely remain soft due to the lower demand for freight forwarding products and services. Thus we expect the profitability of United Parcel Service's Supply Chain & Freight segment to remain under pressure at least through the first half of 2010.

Yields continue to be hurt by the company's changing business mix due to growth in lower revenue businesses, such as the domestic Saver product (priced 10%15% less than the next-day AM business) and shorter routes and lighter-weight freight in the international market, as well as slowing volume growth in the higher margin next-day air.

United Parcel Service has a high pension funding liability of $2.4 billion for 2010. The contribution to the pension plan will dent cash from operations and will pressure earnings. This concern led Standard and Poor's to confer a negative rating outlook on the company's long-term rating.

United Parcel Service earns a major portion of its revenue from international operations, which has been growing faster than that of the U.S. It has built a strong network in Europe, Asia, Canada, Latin America and the Caribbean through significant investments over several decades. The Asian region, particularly India and China, are witnessing improved demographic and economic trends remain a high growth area. The company has steadily increased air service between the U.S. and Asia over the last few years and is eyeing a greater market share in these two fastest growing economies of the world. United Parcel also remains upbeat about its European operations.

From the balance sheet perspective, we believe United Parcel Service stands strong with fiscal 2009 year ending cash and marketable securities of $2.1 billion and shareowners' equity of $7.7 billion. The company carries short-term credit ratings of "P-1″ and "A-1+" and long-term credit ratings of "Aa3″ and "AA-", from Moody's and S&P, respectively.

The company has a stable outlook from Moody's; however, subsequent to the year-end, S&P changed its outlook for the company from "stable" to "negative" on concerns of high pension liability. The company also raised its quarterly dividend by 4.4%, which confirms management's clear visibility about the expectation of a strong operating performance, going forward.

Stock Investing: Know Your Risk Tolerance

 

Each one of us is a unique person, with investment philosophies that most likely differ from our friends, neighbors, and others in the investment community. So it's absolutely critical to know yourself, and understand your risk tolerance. Especially since the two emotions of fear and greed tend to drive the majority of investment decision making. When it comes to fear, we don't want to lose our money. But we want to make money, and that is where greed comes in. Those aren't bad emotions to have - we just need to keep them in check.

As I discussed in Small Cap Investor Daily last week, the liquidity issues associated with small-cap investing are unavoidable. However, these are manageable through application of the right stock order formats, diversification, proper timing of decisions, and averaging techniques. If investors have a single complaint or concern about small caps, it inevitably relates to the volatility of these stocks and their perceived risk.

Dealing with this price volatility is equally as challenging as picking the right stock. Stop-loss and trailing stop orders can only go so far in protecting you against the market conditions so often experienced in highly volatile small cap stocks. You have to ensure that the selections you make are appropriate matches for your personal risk-tolerance level.

Making it Personal

Personal risk tolerance is different for everyone and far more complicated than the common belief that all investors are the same: They want profits but not losses. On examination, you quickly realize that risk tolerance is more complex, and just as important, it changes as your investment exposure, age, income, and experience all evolve.

Risk tolerance varies based on many factors, and no two people are going to be identical in how they define this for themselves. These factors include:

1. Age.Most people understand that the longer the time to retirement, the more risks they can afford to take. And the shorter that time, the more they need to preserve capital. Although these generalizations are true, your age has more to do with risk than just counting the number of years to retirement.  You also will want to consider your priorities, based on your age. For example, you might be looking forward to eventually breaking out of the corporate grind and starting your own business; if you are planning for this, you might have a target date in mind, and this certainly affects the level and degree of risk you are willing to take.

2. Income and assets. Your current level of income and assets directly influences risk as well. If you have adequate income to put aside a sizeable dollar amount each month to invest (your disposable income), then you are naturally going to be able to live with greater risks than others. Some people barely get by on their income and cannot afford any risk. Your assets also play a part. If you have considerable assets, this affects how you look at risk. If you own a home and have a mortgage, the cash flow including that mortgage payment affects risk; if you own your home free and clear, the investment possibilities are greater and your risk horizon can expand as well.

3. Experience and knowledge. The degree of your own experience and knowledge is very important in deciding your appropriate level of risk tolerance. The greater your experience, the better you comprehend the direct relationship between risk and profit potential, and the greater your knowledge as an investor, the less fearful you are of otherwise unknown risks. These two working together-experience and knowledge-define how risk tolerance is going to evolve as your exposure changes, your income and assets grow, and your life situation changes over time. The past experience of each investor also impacts that outlook and risk tolerance. For example, investors who have survived a bear market and experienced a recovery in the stock market are likely to be more tolerant the next time stocks head lower. And those inexperienced investors who have never been through the bad times are more likely to throw in the towel when the going gets tough.

4. Investing venue. You may invest differently in your personal accounts than you do in your IRA or other retirement plan. You may also adopt different risk postures when buying stocks directly versus buying shares in a mutual fund. This is true even when some stocks have lower market risk than some mutual funds. It is wise to understand how the venue affects your attitude toward risk, and how this reality might distort your perception of risk tolerance.

5. Tax situation. If your income is higher than average, your income tax burden is always on your mind when you invest. The tendency is to seek investments with tax-deferral provisions, to defer selling profitable positions until the following year, and even to seek investments with less potential just to keep the tax burden down. The tax burden is aggravated when you are subject not only to federal taxes, but also to high state taxes or even a municipal income tax. Be aware of how positioning yourself as a small-cap investor will affect your tax liabilities, but don't allow tax considerations to affect how you otherwise make risk evaluations, pick stocks, and time your buy and sell decisions.

6. Family situation. Your family situation also affects the degree of risk you are willing and able to assume. A young, single professional with plenty of income, no mortgage payment, and many years before even thinking about retirement will probably have a vastly different risk-tolerance level than a married investor with a spouse, children, mortgage, and car payments, who has no immediate prospects to free up disposable income during the next few years.

7. Major life events. I know that all of us have to change our risk profile based on the major changes in our lives. These include graduating from college, landing the first job, getting married, buying a home, having a child, paying off a mortgage, starting your own business, paying for a child's college education, and retiring. All of these are positives. On the negative side, life events can include bankruptcy, divorce, loss of a job, poor health, and the death of a loved one. Some of these events can be mitigated through insurance, while others are unavoidable and cannot be planned for, but when they occur, they certainly change your risk profile in significant ways.

Small-cap stocks tend to be much more volatile than large-cap stocks, so understanding risk tolerance is especially important for the small-cap investor. At the end of the day, you are the one making the decision to buy and sell stocks. So make investment decisions with your personal risk tolerance in mind, because it is likely different than the risk tolerance of others in the investment community.

Stock Picks: Level 3 Communications, China Digital TV, GigaMedia

 

Level 3 Communications has been trading in an ascending triangle pattern since June 2009 which is bullish, however the stock must break above $1.77 with conviction. If LVLT can break through this level, I expect to see a strong upside move. Stay tuned!!!

 

China Digital TV Holding - After a week of profit taking the stock on Friday closed at $7.35. The technical daily chart looks really bullish as the 50-day moving average has just crossed on top of 200-day moving average to form Golden Cross. A few more positive session could bring MACD back above 0 meaning bull market. The stock is holding up very well above $7,24, which leads me to believe there will be a big upside move soon. The stock needs to break through Tuesday's high of $7,68 for this upside move. STV is a fast moving stock, which means I will be watching it closely next week.

China Digital TV Holding Co., Ltd., through its subsidiaries, provides conditional access (CA) systems to digital television markets in the People's Republic of China. Its CA systems consist of smart cards and head-end software for television network operators, as well as terminal-end software for set-top box manufacturers, which enable digital television network operators to control the distribution of content and value-added services to their subscribers and block unauthorized access to their networks. The company licenses its set-top box design to set-top box manufacturers and sells advanced digital television application software, such as electronic program guides and subscriber management systems to digital television network operators. China Digital TV Holding Co. sells its CA systems and digital television application software to television network operators, including cable, satellite, and terrestrial television network operators and enterprises that maintain private cable television networks within their facilities. As of December 31, 2008, China Digital TV Holding Co. had installed CA systems at 200 digital television network operators in 27 provinces, autonomous regions, and centrally administered municipalities. The company was founded in 2004 and is headquartered in Beijing, the People's Republic of China.

GigaMedia  has rested for a few days after a nice recent pop, and the volume behavior which has accompanied this action is excellent. The daily chart of the stock is showing a continuation pattern in this case to the upside although 3,24 offers a good resistance. $3.11 support is holding and GIGM bulls are trying to push through 3,24 barrier that corresponds to the top of the large bull flag formed since 3,34s highs. My suggestion is to focus on the break. In addition, the short interested has decreased to a nice number -15,55%.

GigaMedia Limited provides gaming software and services to the online gaming industry in the People's Republic of China, Taiwan, Hong Kong, and Macau. It operates through two segments, Gaming Software and Service, and Online Game and Service. The Gaming Software and Service segment develops and licenses online poker and casino gaming software solutions and application services primarily for continental European markets. This segment offers online gaming software, online gaming management tools, and application and consulting services. The Online Game and Service segment operates play-for-fun games online, and provides related services for online game players. This segment offers a portfolio of online games, including MahJong, a traditional Chinese tile game; MMORPG, an Internet-based computer game; advanced casual games; and card, chance-based, and simple casual games. The company offers its products and services to online poker and casino markets. It has strategic alliance with Access China Holding Limited, Numen Soft Co. Ltd., and Gorilla Banana Entertainment Corp. GigaMedia Limited was founded in 1997 and is headquartered in Taipei, Taiwan.

Other stocks to watch:

Earnings Announcements for Monday

Acme United - ACU
Adams Express - ADX
Agria Corporation - GRO
AIR INDS GROUP INC - AIRI.PK
ALCOA Inc - AA
AMCON Distributing - DIT
America West Resources, Inc. - AWSR.OB
AmeriServ Financial, Inc. - ASRV
Arrow Financial - AROW
ARTS WAY MFG INC - ARTW
ASAT Holdings Limited - ASTTY.PK
ASCENDAS REAL ESTATE INVT TRUS - ACDSF.PK
ASCOTT RESIDENCE TRUST - ACTRF.PK
AsiaInfo Holdings - ASIA
BANK MUTUAL CORP NEW - BKMU
Biomerica - BMRA.OB
BKF Capital Group, Inc. - BKFG.PK
Brookline Bancorp - BRKL
C&D Technologies, Inc. - CHP
C-Chip Technologies Corporation - AVNY.PK
Cano Petroleum, Inc. - CFW
Capitol Bancorp - CBC
Century Bancorp A - CNBKA
CHINA SHENHUA ENERGY CO LTD - CUAEF.PK
CHINA SOLAR & CLEAN ENRGY SOLS - CSOL.OB
China Southern Airlines - ZNH
CINTEL CORP - CNCN.OB
Citizens First Bancorp - CTZN.PK
ClearPoint Business Resources Inc - CPBR.PK
CLST HLDGS INC - CLHI.PK
Comm Bancorp - CCBP
Community Trust - CTBI
Consolidated-Tomoka Land - CTO
Convera - CNVR.PK
CVB Financial - CVBF
DCB FINANCIAL CORP - DCBF.OB
DEI Holdings, Inc. - DEIX.PK
DPAC Technologies Corp. - DPAC.OB
Duckwall-ALCO Stores - DUCK
Dynacq Healthcare, Inc. - DYII
ECOTALITY INC - ETLE.OB
EMAK Worldwide Inc. - EMAK.PK
First South Bancorp - FSBK
FIRST ST FINL CORP FLA - FSTF.PK
Frischs Restaurants - FRS
FUQI INTERNATIONAL INC - FUQI
GEELY AUTOMOBILE HLDGS LTD - GELYY.PK
GLOBAL ENTMT CORP - GNTP.OB
GREEN BANKSHARES INC - GRNB
GREENHUNTER ENERGY INC - GRH
GUARANTY BANCORP DEL - GBNK
Heartland Express - HTLD
IDAHO FIRST BANK MCCALL IDAHOIDFB.OB
Immtech InternationalIMMP.PK
INDEX OIL & GAS INCIXOG.PK
INFOLOGIX INCIFLG
Intellipharmaceutics International Inc.IPCI
International Fight League, Inc.IFLI.OB
Interplay EntertainmentIPLY.OB
INTERVEST BANCSHARES CORPIBCA
IR Biosciences Holdings, Inc.IRBS.OB
Jaco ElectronicsJACO.PK
JADE ART GROUP INCJADA.OB
JB Hunt Transportation - JBHT
KINDER MORGAN MANAGEMENT LLC - KMR
Lakeland Industries - LAKE
Lattice, Inc. - LTTC.OB
Liquidmetal Technologies - LQMT.OB
Magal Security Systems - MAGS
Matrix Service - MTRX
Meridian Resource - TMR
Mesabi Trust CBI - MSB
Myers Industries - MYE
National Bankshares - NKSH
Omtool, Ltd. - OMTL.PK
OPTIONABLE INC - OPBL.OB
ORAMED PHARM INC - ORMP.OB
Orleans Homebuilders - OHBIQ.PK
P&F Industries - PFIN
PacWest Bancorp - PACW
Peoples Financial Corporation - PFBX
PET DRX CORPORATION - VETS
PICC PROPERTY AND CASUALTY CO - PPCCF.PK
Polycom Incorporated - PLCM
PowerVerde, Inc. - PWVI.OB
Preferred Bank - PFBC
PREMIER SVC BK RIVERSIDE CALIF - PSBK.OB
PT Arpeni Pratama Ocean Line Tbk - PTPMF.PK
RegeneRx Biopharmaceuticals, Inc. - RGN
ROYAL STD MINERALS INC - RYSMF.OB
Saker Aviation Services, Inc. - SKAS.OB
SEDONA Corporation - SDNA.OB
Shun Tak Holdings Ltd - SHTGF.PK
Signalife Inc. - SGN
SINGAPORE EXCHANGE - SPXCF.PK
Sinopec Shanghai Petrochemical Company Limited - SHI
State Bancorp, Inc. - STBC
Stella International Holdings Ltd - SLNLF.PK
STRATOS RENEWABLES CORPORATION - SRNW.PK
Suffolk Bancorp - SUBK
THAI STANLEY ELECTRIC THAILAND - TSETF.PK
THE BK HLDGS - TBHS.PK
The First Bancorp, Inc. - FNLC
THE9 LTD - NCTY
Track Data- TRAC.PK
TRM Corporation - AEMI.OB
USA Truck - USAK
Vasomedical Inc. - VASO.OB
Volt Information Sciences - VOL
Weis Markets - WMK
Winmark Corporation - WINA
WIRELESS AGE COMMUNICATIONS IN - WLSA.PK
Xcorporeal, Inc - XCRP.PK
Young Broadcasting - YBTVQ.PK
Z-Trim Holdings, Inc. - ZTHO.OB
Zanett, Inc. - ZANE
ZHONGHE CO LTD - ZHONF.PK

List of stocks whose chart is displaying a cup and handle formation

EGLE - Eagle Bulk Shipping
PHM - Pultegroup Inc
CIEN - CIENA Corporation
MDT - MEDTRONIC INC
PFG - PRINCIPAL FINANCIAL
TXT - TEXTRON INC
STT - STATE STREET CORP
ATML - Atmel Corporation
FLR - FLUOR CORP
TOL - TOLL BROTHERS INC
COV - Covidien Plc
KWK - Quicksilver Resources
VRTX - Vertex Pharmaceutical
CMS - C M S ENERGY CORP
CL - COLGATE-PALMOLIVE C
CB - CHUBB CORP
WM - WASTE MANAGEMENT INC
SCHN - Schnitzer Steel Ind.
EWU - WEBS United Kingdom
PRE - PARTNER RE LTD
CVH - COVENTRY HEALTH CAR
BEN - FRANKLIN RESOURCES INC
MTH - Meritage Homes
CTAS - Cintas Corporation
PSEC - Prospect Cptl Cp
NVE - SIERRA PACIFIC RESO
FMER - FirstMerit Corporation
LUK - LEUCADIA NATIONAL CORP
FOE - FERRO CORP
SWI - SolarWinds
ELNK - EarthLink, Inc.
HCC - H C C INSURANCE HLD
REGN - Regeneron Pharmaceutical
NTES - Netease.com, Inc.
SI - SIEMENS A G ADR
AGNC - American Capital Ag
TSU - Tim Participacs
ETY - Eaton Vance TxMngd
EVV - EATON VANCE LTD DUR
AEIS - Advanced Energy Ind
HMC - HONDA MOTOR CO LTD
HRBN - HARBIN ELECTRIC INC
ALSK - Alaska Communications
CAST - GREAT WALL ACQUISIT
JOE - ST JOE CORP
TWI - TITAN INTL INC
CASY - Casey's General Sto
ABD - ACCO BRANDS CORP
MEA - METALICO INC
AEA - ADVANCE AMER CSH AD
SVVS - Savvis Cp
TDS - Telephone & Data S
AXE - ANIXTER INTL INC
YZC - YANZHOU COAL MNG CO