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NEW YORK (Fortune) — You see them tucked into jeans, donned with leggings, even paired with mini-skirts: the furry, oh-so-soft sheepskin pairs of UGG boots.Teens have idolized the footwear while guys have called the boots ugg-ly, but the brand is a force for shoe company Deckers Outdoor (DECK). Yet there’s concern about how much more UGG can grow.During the second quarter, UGG product sales increased 23% to 74.4 million, well below the 67% jump in revenue that occurred during the first quarter of 2009. The company expects overall sales in the fourth quarter — usually a very busy time for the shoemaker — to decrease 4% because of a shift in sales to the third quarter to accommodate for early deliveries. The news caused analysts to downgrade the stock and share prices to dip.”In our view,” wrote Thomas Weisel analyst Jim Duffy, “signs of maturing growth in the domestic wholesale UGG business heighten the risk profile for shares.” Over the previous two years, Deckers shares have traded at a 17% premium to the apparel/footwear index and a 20% premium to the S&P 500 (SPX).Despite revised positions, Deckers still recorded a 41 million profit during the second quarter and the company raised its full-year revenue outlook, expecting sales to increase 9% over 2008’s revenues of 689 million.0:00
/4:05Kick-start for a boot businessPart of CEO Angel Martinez’s plan to keep UGG sales strong involves turning the brand into more than just a winter luxury. “UGG is simply not just sheepskin boots,” Martinez says. “We’re expanding the brand and evolving it to a broad-based appeal.”The brand has introduced spring and summer lines that included sandals and beach cover-ups. Deckers is also expanding the men’s line; while most women come to UGG for boots, most men seek the brand for its slippers.UGG, which Deckers acquired in 1995, has matured into the crown jewel of the company, outselling its Teva, Simple and other brands. Martinez says part of the demand for UGG comes down to the company’s selective distribution strategy.”We really are careful about over-proliferating our brand,” he says. Of course the fact that there’s only so much of the prime twin-face sheepskin available to make some of the products helps, too.What’s more, Deckers is willing to cut its losses. The Goleta, Calif.-based company put its eponymous line of loafers on hiatus in the 1990s for more than a decade and then decided to pull it.”The Teva brand took off and there just wasn’t enough time or resources for Deckers,” Martinez says. “We tested the concept of the brand coming back, but we didn’t feel it was viable. We learned what we needed to learn and pulled away.”Going forward, Deckers hopes worldwide growth will continue to thrive — international sales increased 37% to 46.5 million during the second quarter this year. And despite some concern of UGG-mania slowing down, Martinez says there’s a new must-have model for the fall. “The Bailey button,” he says. “They’re going to fly off the shelf.”

NEW YORK (Fortune) — The financial crisis has wreaked havoc on many a money manager, but not Samson Capital Advisors, a firm that offers bond and currency investments to endowments and high-net worth individuals and families.Samson’s assets under management have jumped to 6 billion from 3.5 billion at the beginning of 2008, as more investors were drawn to its focus on tax efficiency, wealth preservation, and inflation protection.Samson is perhaps best known for its conservative domestic bond strategies, but its currency investment plan — which is called the Multicurrency Plus Strategy — has also been popular with investors. It was designed to be a piece of a broader investing strategy that protects portfolios from losing value if the dollar weakens. Multicurrency Plus was up, 4.8% after fees in the first half of this year, while the inverse of the U.S. Dollar Index was up 1.5%; it has returned nearly 22% since its inception in 2004, vs. 12.3% for the U.S. Dollar Index.Jonathan Lewis, a founding partner and portfolio manager at Samson, recently spoke with Fortune about why investors should include currencies in their portfolios to be truly diversified, and how much they should allocate to this asset class.Currency rarely gets a mention in conversations about diversification. Why do your clients use it?Everybody has a view on the dollar, but very few people make investment moves based on their views. There is a striking disconnect. Among the world’s major currencies there are significant movements for and against the dollar that create opportunities to add value, and they are largely ignored.There are lots of ways to invest in currencies, including high-frequency trading strategies and currency hedges. Our strategy is for long-term investors. We invest directly in a basket of currencies and adjust our weighting only a few times in a quarter.Because we don’t hedge, we avoid getting whipsawed in an environment where there is no clear trend, like now. Our clients want a long-term vehicle that protects their wealth should the value of the dollar erode, and they are prepared for short term fluctuations.Why not just buy foreign stocks or bonds to hedge against a downturn in the U.S.?Currency investments are not correlated with stocks and bonds, so they help with diversification. While stocks around the world suffered significant losses, currency investments held their value better. And we saw that when the U.S. economy showed serious problems, stocks all over the world fell.When you buy foreign bonds an opinion about the health of that place is expressed; and that is similar to what it means to invest in currencies. But bonds have interest rate risk.Neither stocks nor bonds are direct expression of one’s view on the dollar and neither protect the purchasing power of your portfolio should the dollar decline in value.What is your outlook for the dollar?Given the state of the economy, the possible effects of financial stimulus, and the current state of interest rates, we believe the long-term trend is bearish: If that’s the case, commodities and gold could rally while stock performance might suffer.How do you explain the recent dollar rallies?Whenever there are bumps in the road, as there have been recently, people buy Treasuries. Treasuries are denominated in dollars, so the desire to find a safe haven supports the dollar and challenges non-dollar strategies.But over the long term, the picture is less certain. One thing that determines currency trading is central bank strategies. Currencies generally rally more in countries that are tough on inflation than those that are very lax.Right now our Federal Reserve chairman Ben Bernanke has said that interest rates will be low for a long time, so don’t expect the dollar to outperform. And other countries are trying to figure out how to be less dependent on the dollar.Are you speaking specifically about China?China will play a big role in the fate of the dollar. The head of its central bank, Zhou Xiaochuan, made stark statements this July about the failure of the U.S. financial system. This is not what he wants to see in the world’s reserve currency.Some of that statement was economic analysis and some was political rhetoric, but people do act out of their best interests. Right now it’s in everyone’s best interest to stabilize the U.S. financial system and to sell dollars would only exacerbate problems here. But China’s goal is clearly to diversify away from the dollar at some point in the future.How much of a portfolio should be allocated to currencies?It depends on the investor’s individual view on the dollar. In the absence of a fundamental view, about 5% makes sense for a conservative person looking for diversification. If you believe the dollar will decline your portfolio allocation would be more; and if you think it will rally, your allocation would be less.What does your currency portfolio look like now?We hold a basket of currencies and shift our weighting to reflect the current market. Coming into this year and for most of this year, we had large allocations to the Canadian dollar and the Australian dollar because we believed that central bank easing and stimulus would stabilize the world economy and lead to reflationary concerns. Commodities exporting countries like Canada and Australia benefit in that environment. We were underweight the Yen and the Swiss Franc, which are safe haven currencies.Now that it seems that the recovery may not be as strong as some had hoped, we’ve reduced our growth tilt and increased our exposure to safe haven currencies.

NEW YORK (Fortune) — Arena Resources has pleased investors with rocket-fueled growth, but the oil and gas producer seems to have hit a wall.Falling energy prices have cut into the company’s latest quarterly results, with revenue down 56% and income down 42% from the previous year, while oil prices fell 54% and gas prices dropped 61%. Its stock is down about 21% over the same period.But Tulsa, Okla.-based Arena’s results beat Wall Street expectations as drilling costs fell along with oil prices; and the company had a strong enough balance sheet to weather the downturn. Arena has more than 68 million in cash and a 150 million credit line that it has yet to tap. And it has no long-term outstanding debt, in large part because it funds its acquisitions with cash flow.Now energy prices may be moving in Arena’s favor. The decline in oil consumption that began last year should ease up by the end of 2009, the Energy Information Administration said in its July monthly report; and a rebound in global growth would stabilize and increase demand and prices for oil and gas.”The price of [West Texas Intermediate] crude oil is expected to average near 70 per barrel through the second half of 2009, an increase of about 18 compared with the average for the first half of the year,” the EIA wrote in its report.0:00
/3:08Regulating oil marketsThe EIA predicts that natural gas prices, which are expected to remain below 4 per thousand cubic feet (Mcf) until late this year, should increase to just below 6 per Mcf in 2010 if economic growth increases industrial consumption of natural gas.Against this macroeconomic picture, Arena (ARD) said during its earnings call last week that it plans to increase capital spending in 2009 by 20 million to 85 million in response to the rebound in oil prices. Among other things, it has added a second rig in its largest field, the Fuhrman Mascho field, and is planning 40 more wells there, bringing the number to 120.Every time the price per barrel of oil increases by 1, it generates about 10 cents in incremental cash flow per share, Neal Dingmann, an analyst at Wunderlich Securities, wrote in a recent report. “With costs under 20 [a barrel] to produce oil… we believe Arena provides investors some of the highest exposure to oil price moves.”Arena’s business model allows it to keep production costs low. Rather than spend a lot of money looking for new oil and gas fields, Arena acquires U.S. properties that other companies no longer want to explore, but which still have reserves and can provide immediate cash flow. Since its founding in 2000, Arena has bought oil-and-gas producing fields in Texas, Oklahoma, Kansas, and New Mexico, further explored these proven properties, and extracted even more resources.The company is trading at a price-to-earnings ratio of 16, versus 17 for the S&P 500, according to Morningstar. While Arena’s valuation is only slightly less that of the S&P, it is a substantial discount to the company’s five-year average P/E of 29. The average Wall Street estimate predicts that Arena’s earnings will decline by more than 62% in 2009, but grow by nearly 54% in 2010.For investors who believe that we’re in the midst of a global recovery and that energy consumption is about to zoom higher, now might be a good time to buy Arena.

NEW YORK (Fortune) — The number of people who have created entirely new categories in retailing can probably be counted on one hand.There’s Sam Walton, whose Wal-Mart Stores were an early pioneer of discount shopping, and Leslie Wexner, who conceived of the “specialty” store with his Limited chain. Add to that list Tom Stemberg, the father of the office supply superstore.Back in 1986, when Stemberg drew up a business plan for Staples (SPLS, Fortune 500), most companies bought their office supplies from mom and pop shops. Today, with 23 billion in sales, Staples dominates the category it helped create.After 16 years as Staples’s CEO and an additional three as chairman, Stemberg — in 2007 — joined the venture capital firm Highland Capital Partners, where he serves today as general partner of its 300 million Consumer Fund. His mission: to provide hot new retail concepts with the early stage financing that was so critical to Staples’ success. Stemberg talked to Fortune recently about the art of investing in retail, as well as the upcoming back-to-school shopping season.What types of companies does the Highland Consumer Fund invest in?We focus on retail and consumer product companies that are in their early lifecycle. The first company we invested in was Lululemon Athletica (the maker of yoga and other workout clothes). We also own a stake in StriVectin (the anti-wrinkle cream) and we just made an investment in Pinkberry (the frozen yogurt chain).You must be crazy to invest in retail right now considering how many retail enterprises are going out of business.It would be easier if the economy were running on all cylinders. But there are still companies that are doing well.0:00
/4:41Staples cuts school supplies pricesWhat signs are you seeing that consumer spending has bottomed?The good thing about retailing is that you get a report card every day in terms of sales figures. I look at sales at stores open at least a year — both for the companies in which we have an investment and for other retailers as well. The sales figures have turned slightly positive — or at least less negative — than they were a year ago.How do you think the back-to-school season will play out?It’s going to be better than people had feared, but not nearly as robust as some of the stock prices would suggest.If back-to-school sales are soft, does that mean retailers should expect a tepid holiday shopping season?I don’t think there is a big correlation between back-to-school and holiday spending. Back-to-school is necessary spending. People buy what they need — shoes, notebooks — and they want to pay as a little as possible for these items.Christmas shopping is way more discretionary and emotional. I think Christmas spending will be stronger than back-to-school spending. As long as unemployment, the stock market, and housing prices hold steady — and inflation doesn’t come into play — the psychology at Christmas will be far better than it is today.Which retailers stand to win and which stand to lose?The strong will get stronger, and the weak will get weaker. Companies that are financially stronger will be able to invest more right now in merchandise and services. In office products, which is an area I happen to know well, Staples will continue to take share from Office Depot (ODP, Fortune 500) and OfficeMax (OMX, Fortune 500).That makes sense. But what about a company like Best Buy? It’s outlived most of its competitors, and yet is still facing headwinds.Best Buy (BBY, Fortune 500) is getting a market share bounce from the closure of Circuit City, but it’s still in a market that is not doing that well. You just don’t have to buy a new 2,000 widescreen TV right now.What other businesses would you stay away from right now?I don’t want to be selling 10,000 diamond rings or 5,000 snowmobiles. I don’t want to be in any business where the purchase can be deferred.Are there any silver linings out there?I look at the Sunday circulars, and promotional activity is extremely aggressive for the back-to-school season. So there is some concern about margin pressure. But that said, retailers have dramatically reduced expenses and have very lean inventories. If there is any tailwind whatsoever in sales, they will be way more profitable than people expect.

Source:CNN

NEW YORK (Fortune) — Gaming companies have taken a huge hit in the current downturn, and their stocks have been crapping out. But with overseas markets booming and a lot of assets hitting the selling block, some industry watchers say it may be time for investors to put their chips back on the table.It’s been a tough year and half for casino companies. A deepening recession, a pullback in business travel, and frozen credit markets have all taken a hefty toll on what was once seen as a recession-proof industry. Gaming revenue has plunged, a number of companies (such as Herbst Gaming, Trump Entertainment (TRMPQ) and Station Casinos) have filed for Chapter 11 bankruptcy protection, and stocks have plummeted across the board, with the higher-profile names losing more than 85% of their value in the past year.”It’s been an unbelievably difficult period — the darkest period for casinos probably in history,” said Bill Lerner, chief executive of research group Union Gaming Group.0:00
/9:00Protecting consumers from banksRecently, however, there have been signs that the sector may have bottomed, with traffic to Las Vegas ticking up between April and May, and senior executives saying the bleeding may have stopped.”Things seem to be stabilizing,” said Steve Wynn, chairman and chief executive of Wynn Resorts, (WYNN) during a conference call last week. Wynn surprised Wall Street: His company posted a second quarter-profit when analysts had been expecting a loss. Earnings were still off 91% from a year ago. “Although not star-studded, it’s better than most people thought, and we’re feeling a little optimistic,” he said.”I think we’re bouncing along a rough bottom,” said Andrew Zarnett, a bond analyst with Deutsche Bank Securities.While he doesn’t expect a significant rebound until the second half of 2010 at the earliest, Sebastian Sinclair, president of Christiansen Capital Advisors, believes gaming companies with stable balance sheets, such as Wynn and Penn National Gaming (PENN), are “undervalued” and poised for potentially explosive growth over the next few years. (Some analysts plan to add Las Vegas Sands (LVS) to the growth list once the company works through some issues with its debt agreements).Wynn’s solid balance sheet makes it an attractive long-term bet, according to Sinclair. The credit crunch is playing havoc on gaming companies with debt coming due, troubled debt agreements or no cash to finish existing projects. Many are feverishly selling off assets to raise money. With its dry powder, Wynn could potentially buy these distressed gaming properties on the cheap.Penn National’s growth potential also comes from its strong balance sheet, according to Sinclair, which gives it the ability to buy distressed assets on the cheap and to move quickly into new states that are expected to legalize gambling in the next few years. Industry observers speculate that many cash-strapped states may start legalizing gambling to cover budget shortfalls. “State budgets are hurting right now, and if you look back to the early 90s, that’s what precipitated the major expansion of gaming that we’ve seen in this country,” he said.How much growth Wynn and Penn enjoy will depend on the speed and scope of the U.S. economic rebound.Then there’s Macau — a market that’s been on fire, generating gaming revenue of 14 billion in 2008, more than double Las Vegas’ 6.13 billion, according to Frank Streshley of the Nevada Gaming Board.Wynn moved into the market after the local government decided in 2002 to end a 40-year monopoly held by casino magnate Stanley Ho and award licenses to other companies.For Wynn and Las Vegas Sands, who each have lavish casinos there, it’s been a windfall, accounting for 61% of Wynn’s adjusted income and 69% of LVS’ in the second quarter, which helped to offset the softness in Las Vegas, says Janet Brashear, a senior analyst at Sanford C. Bernstein.Although gaming activity has slowed in Macau in 2009, largely due to the weakening Chinese economy, the swine flu outbreak, and visa issues, the long-term growth outlook remains heady. “There are about 1.3 billion people in China — that’s almost a quarter of the world’s population” at Macau’s gaming doorstep, points out Clyde Barrow, a casino expert and professor at the University of Massachusetts at Dartmouth. “Its long-term growth potential far exceeds the U.S.”Wynn also expects to unlock some of the “untapped value” from its Macau assets through an initial public offering in Hong Kong, says Thomas Roche, global director of gaming for Ernst & Young. LVS is considering a similar IPO.Wynn, Penn and LVS have rallied from their March lows, but they still remain far from their highs. LVS traded above 148 in October 2007, before plummeting to less than 2 a share in March 2009. “It’s now back up over 8 – so it’s already quadrupled off its low,” says Barrow. “So you can imagine its upside potential. It may never see 150 again, but even if it reaches half that, it has a long way to go.”

Source:CNN

(Fortune Magazine) — The economic downturn has been hard on information technology outsourcing firms, which in recent years had relied on Wall Street for growth.Some, like 26 billion Infosys Technologies (INFY), expect to post their first-ever sales declines this year. Research firm Gartner forecasts IT spending to fall by 6% this year to 3.2 trillion.But one firm is emerging from this slump in style, and analysts expect its stock to rise even after recent gains.Cognizant Technology Solutions (CTSH), the only major U.S.-based outsourcing and offshoring firm, announced Tuesday a 36% rise in second-quarter earnings to 141 million. The stock jumped more than 10% during the day.Like its rivals, most of Cognizant’s employees are based in India. But where many India-based outsourcing firms have been hurt this downturn by the decline of low-level financial work, such as processing mortgage applications, Cognizant has grown.”I’m a firm believer that when we look back at this recession, whether it’s 12 months or 24 months from now … [we'll] say it was a key turning point for Cognizant to differentiate itself,” said COO and CFO Gordon Coburn in a recent interview from his New Jersey office. Coburn expects sales to grow by 11.5% this year, boosted by strong clients like J.P. Morgan Chase and a booming health-care business.The secret of Cognizant’s success is twofold. First, most of Cognizant’s business comes from mid-level outsourcing work — e.g., testing a bank’s new trading software. It fills the sweet spot between the most basic offshored work (like call centers) and the top-tier outsourced consulting work dominated by IBM (IBM, Fortune 500) and Accenture (ACN).”We’re in the best of both worlds,” says Coburn.Cognizant’s other secret is avoiding fads. When some IT firms loaded up on Y2K work in 1999 — then went bankrupt soon after projects dried up — Cognizant was already exiting the market. It did the same before e-business projects vanished after the tech bubble burst.”They’ve resisted the temptation to go after easy business,” says Ajay Krishnan, who manages the Wasatch Ultra Growth Fund (WAMCX) and owns Cognizant shares.Krishnan believes Cognizant, which had sales of 2.8 billion last year, has plenty of room to grow in what he estimates to be a 700 billion market for technology consulting and software management.Margin ControlUBS analyst Jason Kupferberg notes that 15-year-old Cognizant has long kept margins at 19 to 20% and reinvested excess profits back into its business. That means earnings were crimped in the boom years, but it also means that before the downturn, Cognizant had trained employees in new areas of demand like healthcare to replace lost sales from Wall Street.”I’m not talking about some new decision they made when they saw the economy imploding,” Kupferberg says, “I’m talking about a general strategy and mindset that they’ve employed for as long as they’ve been public. Now they’ve got stronger client relationships than some of the India-based firms.”A recent concern for investors has been Cognizant’s heavy reliance on financial services. Nearly half its sales last year came from the troubled sector.In part, Cognizant has been lucky. Only a small percentage of revenues came from defunct banks like Lehman Brothers and Washington Mutual. “Dancing between the raindrops,” is how Kupferberg describes its. And one of its largest clients is JPMorgan Chase (JPM, Fortune 500), which is emerging as Wall Street’s most powerful bank.Financial services revenues were flat in the most recent quarter after falling just 2% in the first quarter, “which was pretty much unprecedented [and positive,]” Kupferberg notes.Still, Cognizant is likely to grow sales less than 50% in 2009 for the first time in three years. Analysts like Morningstar’s Swami Shanmugasundaram are asking where future growth will come. “This model is not going to work forever,” he says.For now analysts say Cognizant looks like a smart buy. The stock trades at 20 times estimated earnings for the next four quarters, well below its five-year median of 35.Citigroup’s Ashwin Shirvaikar expects profits of 1.68 a share in 2009 and 1.88 in 2010 Cognizant is the only IT services stock he rates a buy. “They’re a pure play on IT offshoring, the only real mega-trend this entire decade,” he says.And he predicts Cognizant will pick up more business at the end of this year, when banks and others look to save costs heading into the 2010 budget-making season. Says Shirvaikar: “You’re going to see a lot of IT contracts then.”

(Fortune Magazine) — Today’s market is particularly tough for individual investors. Stocks have been wildly volatile, bonds offer low yields, and the experts caution that even when the economy recovers, growth will be weak and inflation a threat.Under conditions like these, world allocation funds may have a distinct advantage. Rather than focusing on one type of investment, they are free to search the globe for opportunities and move nimbly in and out of different types of assets.World allocation funds can buy anything from blue-chip U.S. stocks to esoteric assets like Japanese inflation-protected securities, emerging-markets bonds, European dividend swaps, and gold bullion. Some also sell stocks short.The flexible approach pays off in the long run: While the S&P 500 (SPX) has lost 1% (annualized) over the past five years, the average global allocation portfolio has gained 5%. “Because we have a broad authority to look for mispriced assets,” says Ben Inker, manager of Evergreen Asset Allocation, “we have opportunities to make money in areas that many investors never think about.”When evaluating world allocation funds, says Jeff Tjornehoj, a senior analyst at Lipper, check how they’ve performed over several market cycles to make sure that strong performance numbers are not just the result of one or two lucky bets (good advice when choosing any fund).Bridget Hughes, an associate director at Morningstar, says the actual composition of each fund is not as important as who is at the helm. “It’s less of a bet on the breakdown of assets and more about the particular manager,” she says. “Because [the funds] are so flexible, you’ve got to put a lot of trust in whoever is running them.”For that reason, one of her top choices is BlackRock Global Allocation, which has 28 billion in assets. Its manager, Dennis Stattman, has run the fund since its inception in 1989; over that time the fund has returned an average of 11% a year. The fund has a 5.25% sales charge and annual expenses of 1.1%. Stattman “takes a top-down approach,” says Hughes, meaning he looks for investments that will benefit from global trends.As the credit crisis hit last year, Stattman guided the fund away from riskier equities and bonds and suffered a 21% loss, compared with a category-average drop of 28%. At the end of 2008 he began upping his stake in equities, where he now has 53% of his assets.Because he thinks the U.S. consumer will continue to struggle with debt, he’s overweight on Asian stocks as well as domestic sectors that have higher dividend yields, like telecom and health care. He also holds Treasury Inflation-Protected Securities, or TIPS, and gold. “The governments of the world are spending more money than they’re taking in,” he says, “so we have long-term inflationary expectations.”At first glance, International Value Advisers’ Worldwide looks untested – the fund launched in October 2008. But its manager, Charles de Vaulx, was the former head of First Eagle’s massive Global Fund, where he labored under the tutelage of renowned French value investor Jean-Marie Eveillard.After leaving First Eagle, de Vaulx brought a number of his associates with him and quickly attracted more than 1 billion in assets to the Worldwide Fund. So while it’s difficult to evaluate IVA’s performance so far (the fund started with a huge cash position and is up 13% in its first 10 months, vs. -7% for the category), de Vaulx’s consistent success at First Eagle bodes well for the future. It has a 5% sales charge and annual expenses of 1.4%.Since launching IVA Worldwide, de Vaulx has profited from a number of smart moves, such as buying USO, the oil ETF, and beaten-down Japanese stocks like Makita and Canon. The fund has since snapped up U.S. equities – de Vaulx prefers cash-rich tech companies like Microsoft and Dell – and better-quality high-yield bonds in the U.S. and Europe.Like Eveillard’s, de Vaulx’s investing style is conservative, but he says he’s moving in and out of assets more quickly than usual these days. “Our turnover is lower than most,” he says, “but because there’s so much volatility right now, we’re being more nimble.”Despite a tough 2008, when it fell 26%, Ivy Asset Strategy still has one of the best long-term records in the world allocation category, earning an annualized 14% over the past five years – triple the group average for that time – and 8% since manager Mike Avery started at the fund in 1997. It has a 5.75% sales charge and annual expenses of 1%.Avery’s losses last year came largely from bullish bets on global cyclicals. He unwound those positions, moving most of the fund’s assets into cash. Lately, though, he’s put the money back to work in stocks, which now represent 70% of the portfolio. The theme behind that move, he says, is China: “The best growth prospects are stocks that sell to their emerging middle class.”Avery owns shares of financial services companies like China Construction Bank and multinationals like Visa, which he thinks will benefit from China’s growing credit card use. He admits there are some attractive Chinese consumer products stocks he can’t yet buy because of foreign trading restrictions. It seems even go-anywhere funds have their limits.

Source:CNN

NEW YORK (Fortune) — Oil prices hit their highest level in a month Monday on hopes that the U.S. economy was finally on the road to recovery. Still, that recovery is taking a lot longer than oil traders had hoped. Prices are nowhere near their all-time high of 147 a barrel a year ago.Longer-term, what does this continued softness at home mean for the direction of prices? Our guess is less than you’d think.It’s been some time since U.S. demand was the primary driver of global oil prices.Between 2000 and 2008, U.S. oil consumption actually declined 1.5%. What drove oil prices ever higher was skyrocketing energy demand from developing nations such as China and India.Oil consumption rose 64% and 38% respectively, in those countries from 2000 to 2008. So when the global recession took a whack out of the emerging markets — at one point the International Energy Agency was predicting oil consumption in China would actually decline in 2009 — oil prices plummeted.That’s why the latest news out of China bodes well for oil investors (and bodes ill for gas-price-weary consumers). Chinese oil consumption increased 5.2% in the second quarter of 2009, a significant turnaround from the first quarter when consumption there fell 3.1%, according to Barclays Capital. Barclays now expects oil, which has since rebounded to about 72 a barrel, to reach 85 next year. Barclays also predicts a 70% increase in U.S. natural gas prices.0:00
/3:08Regulating oil marketsAnother bullish indicator, believe it or not, is Washington’s obsession with oil futures trading. If Congress or the CFTC forces through stiff curbs on futures trading by so-called “speculators” — i.e. investors who use futures to bet on future price movements but don’t buy actual oil — it may lead to higher, not lower, oil prices over the long term.Why? Imagine you’re an oil company CEO thinking about drilling a new oil well that won’t produce until 2011. Given the high upfront costs of drilling, you’re going to be more likely to undertake the project if you can use the futures market to lock in oil prices in 2011 that will justify your drilling costs. The buyer on the other end of your futures trade is probably an investor — someone who will commit to paying you 75 a barrel for oil in 2011 because he believes actual price in 2011 will be even higher.However, if fewer investors are allowed to take the other side of your trade, you will have a harder time locking in a good price for your 2011 oil. That could make it harder for you to justify the upfront cost of building the new well. Less investment in new oil wells means less future supply, and less supply means higher oil prices.”It depends on what they do,” Tim Rochford, chairman of Oklahoma oil company Arena Resources, says about curbs that Congress or the CFTC could slap on speculators. “If it were a drastic move, I don’t think there’s any question it could interfere with small and mid-size companies’ ability to hedge and therefore interfere with future development or capital expenditures.”One way to play all this would be simply by buying an exchange traded fund that tracks the price of oil, such as United States Oil Fund (USO). Keep in mind, however, that these funds typically invest in oil futures, which means their operations could be affected by any crackdown on oil speculation.A more traditional oil play is Chevron (CVX, Fortune 500), which is down 9% this year. Currently 69 a share, Chevron boasts a 3.9% dividend yield, and given the company’s expected production growth, it is well positioned to benefit from a rise in oil prices, according to a report by JP Morgan oil analyst Michael LaMotte. LaMotte’s price target for Chevron: 85 a share.

NEW YORK (Fortune) — eBay’s core business of online auctions is struggling. Traffic has dropped as consumers favor websites with set prices, such as Amazon.com and Walmart.com. The stock is off nearly 70% since 2004.However, investors got some good news July 22 when eBay’s earnings and revenue beat Wall Street’s expectations.Analysts said the surprise results were the result of changes eBay (EBAY, Fortune 500) made in 2008 when it altered its listing fees to encourage fixed-price sales, revamped its ratings system to reward top sellers, and improved its search engine.It looks like eBay’s turnaround plan is taking hold, but can the changes revive the auction giant for the long term? We asked two analysts for their take.Bull: Sandeep Aggarwal, Collins Stewart”As we expected, eBay beat second quarter estimates largely due to its marketplace business. Our own recent survey showed that eBay’s turnaround initiatives are working. For example, the new fee structure encourages sellers to offer the more popular fixed-price items. In the quarter the fixed-price format accounted for nearly half of marketplace’s sales.”And eBay’s new search function rewards sellers who offer free shipping, which buyers love — we estimate that more than a third of items now include free shipping, up from low single digits last year. The way search results are now presented also makes it easier for buyers to find the right items.”The second quarter was the second in a row that eBay beat Wall Street’s expectations. This largely happened due to the growth acceleration in its marketplace for the first time after seven quarters of declines.”Though management mentioned that the transformation of eBay Marketplaces is a long-term process and they are encouraged by the early signs of improvement, we think eBay has already addressed many of the most important aspects, such as encouraging free shipping, search favoring the best sellers, more buyer protection, and a series of fee changes.”And eBay’s PayPal business continues to outperform eBay’s overall net revenue growth. eBay reminded that they can double PayPal’s business in three years and that’s largely due to PayPal’s growth in merchant stores besides eBay. PayPal growth on and off eBay is pretty impressive.”Overall, these changes will result in higher sales, better margins, and more satisfied buyers and sellers. Wall Street is under-appreciating the impact of these moves. We expect the stock to rise to 25 in the next year.”Bear: Jeetil Patel, Deutsche Bank”We maintain our “sell” rating on shares of eBay. While investors may be excited with near-term stabilization, a drop in operating profits of 14% year over year and limited profit upside would suggest that eBay’s business still remains challenged. The longer-term structural issues still persist at the company, as measured by gross sales declines and higher seller costs.”The biggest issue eBay faces is that consumers have other e-commerce alternatives, including Amazon.com (AMZN, Fortune 500) and Bestbuy.com (BBY, Fortune 500) — especially for mainstream retail goods, which now represent 50% to 60% of eBay’s product mix.0:00
/5:10PayPal will be bigger than eBay”In our view the new initiatives haven’t done much. On eBay, shoppers have to scroll through pages of inventory to find the right camera. Amazon may have two or three versions. eBay is forcing the buyer to do all the work. The lifeblood of eBay is demand, and underlying user traffic is declining.”To compensate, eBay raised sellers’ fees. That’s driving sellers away. Sellers can earn higher profits at Amazon and other sites. We don’t think most investors have recognized that, so eBay’s stock price is still too high.”We continue to think that eBay still has to invest aggressively in demand (via marketing), a concept that may be difficult to defend as off-line retailers spend online to take advantage of lower-priced online media buys.”One of the big themes facing eBay is that ad rates have steadily moved higher for six or seven years. eBay’s ability to buy advertising is diminishing fairly dramatically. In other words, if ad prices go up by 10%, and eBay is not going to adjust its ad budget to reflect a 10% price increase, you run into a challenge.”We increased our price target for the stock by three dollars after the second-quarter earnings, but still expect shares to fall to 15.”

NEW YORK (Fortune) — On one hand, Federated Investors’ Market Opportunity Fund had a good year: In a market where nearly every mutual fund got clobbered, it beat 95% of its competitors in 2008 and topped the S&P 500 by an astounding 30 percentage points.Led by longtime manager and contrarian Steve Lehman, the fund used smart currency bets and put options on index exchange-traded funds that increase in value when indices fall.But for Lehman, who believes in absolute returns (gains in any market), there was little to celebrate: The Market Opportunity Fund fell by 7%. “We still lost money,” he said in a recent interview from his Pittsburgh office. “It was a disappointment.”The 1.5 billion fund is off to a hot start in 2009, up 6% year to date as Lehman and partner Dana Meissner focus on gold, agriculture, and energy stocks. As a global multi-asset allocation fund, its holdings can shift between nearly any asset class — U.S. and international stock markets, currencies, commodities, and cash.In years past Lehman was labeled a perma-bear by market watchers, and earned the moniker “House bear” from colleagues. But his early admonishments of the credit bubble and historically outsized corporate profits have proved prescient. “I’ve positioned the portfolio for what I think will be a very difficult bottom here in the U.S. market and I’m waiting,” he told a reporter in September 2006.0:00
/3:17Weak dollar worriesWhat does he see now for U.S. stocks? A long recovery. “Buy and hold is dead at least until the next bull market,” he says. After U.S. consumers and business racked up record debt levels, Lehman expects stocks to underperform for years. He says the S&P 500 (SPX) is greatly overvalued and points to the fact that the average stock in the index traded at 1.6 times book value at the end of June, well above previous recession levels of below 1. He expects the index to bottom out near 500 (it’s now at 970.)”We are in a secular bear market, Lehman says, and “stocks tend to have 15-20 year cycles.” He expects a U.S. recovery to follow a similar pattern to the Japanese market from 1989 to 2003. During that period it had three major rallies with gains of 40% apiece. “But over the entire period, the decline was 70%. If you buy and hold you’re going to come out behind.”And he warns against buying into a U.S. recovery and consumer discretionary stocks, which led the markets’ spring rally. “We’re short on restaurants and retailers, because the U.S. consumer is tapped out,” he says.Lehman thinks retailers in particular are troubled. “A number of retailers have very large lease obligations that they’re on the hook for years to come — that’s on top of their reported debt. It’s a very cluttered business. Ideally you want to [invest in] areas where there hasn’t been capacity increases, which was true in commodities.”The fund’s biggest holdings as of June 30 include Yamana Gold (AUY), a Canadian gold miner; PowerShares DB Agriculture Fund (DBA), which follows a Deutsche Bank commodities index; and Kinross Gold (KGC), another Canadian gold miner. The rest of the top ten reported equity holdings are energy drillers, gold miners, and agricultural equipment manufacturers. More than half the fund’s assets are in cash equivalents as Lehman waits for new opportunities.Down the road, he sees an opportunity in gold stocks. Lehman has cut back his gold-related holdings to 12% of the fund because prices rose too much in the last rally to make gold attractive, but he’s waiting to buy more and long-term, he’s very bullish. He notes that the gold market is relatively small, and it would only take a slight increase in China’s gold reserves — which he points out are nearly nonexistent — or those of institutional investors for a strong increase.”It would take a very small shift in allocation preferences in favor of gold to have a huge increase in demand relative to the supply of gold,” he says. Lehman won’t say if he sees China increasing its reserves, but he says,”We’re positioned for a higher price of gold down the road.”So what’s a retail investor to do? Lehman’s answer: Leave it to the pros. “It’s never been more difficult [to invest],” he says, “and it will remain more challenging than ever. Unless someone really has a flare for investing and enjoys doing it, I would say don’t waste your time.”