Strong earnings growth

Since we last looked at Questcor in early March, the general market direction has shifted, the company has reported earnings, and we've enhanced the data included in the IBD 50, so today we'll see how those all tie together.

• The company reported Q1 results on Tuesday, soundly beating estimates and scoring triple digit gains for both sales and earnings.
• Sales growth accelerated for the 5th straight quarter, and marked a second straight quarter of triple digit increases.
• While earnings growth did not accelerate, it was still very strong at 205%.
• In addition to now being updated in both the Monday and Wednesday editions, the IBD 50 also now includes the average EPS growth rate over the last 3 quarters for each stock. That's because the best stocks tend to have several quarters of strong earnings growth before they launch a big run, and this new feature will help you quickly spot stocks showing that kind of performance.
• After reporting its latest numbers, Questcor's average EPS growth rate over the last 3 quarters now stands at 197%.
• Going forward, analysts see earnings rising 91% this year, followed by a 38% increase in 2013.
• The company's return on equity is a very strong 49%.
• In terms of overall fundamental and technical strength, Questcor scores the highest possible 99 Composite Rating.
• Its Accumulation/Distribution Rating is a B, but that's down from the B+ it had before it reported earnings. Keep a close eye on that to see if institutional investors start to do more selling than buying.

Chart Analysis

Recover our money

“Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.”

Albert J. Nock, 1935

Our press, the glorious fourth estate, the “guardian of our freedoms,” has the visual acuity of Mr. Magoo regarding the Obama Administration. Regarding corruption, they saw no better during the Bush Administration.  Finally, some in this see-no-evil, hear-no-evil press may be undergoing lasik surgery. James Lieber of the Dallas Observer seems to have had successful surgery.

No Justice: We’ve Bailed Out the Banks. When Do We Go After the Crooks Behind Our Financial Collapse?

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?
When Barack Obama donned the crusader’s mantle during the 2008 presidential campaign, his

Fast growing market

Casino game maker Shuffle Master (SHFL) and women's fashions chain Francesca's Holdings (FRAN) wouldn't seem to have much in common.
But a look at their charts shows that both have found support at their 10-week moving averages and may be forming new bases.
Francesca's broke out past a 24.73 buy point in early March and climbed 37% before retreating to its key support level in low volume, a bullish sign.

The company eventually plans to operate 900 boutiques, more than triple the current figure. Earnings

Most economists had forecasted

Markets in Asia rallied in what could be interpreted as relief after North Korea's embarrassing rocket launch failure.
However, China announced GDP growth slowed to 8.1 percent in the first quarter, a deceleration that was sharper than what most economists had forecasted.
England's FTSE 100 is down 0.4%.
France's CAC 40 is down 0.9%.
Germany's DAX is down 0.6%.
Spain's IBEX 35 is up 1.9%.
Italy's FTSE MIB is down 1.2%.
U.S. markets are looking at a lower open with Dow futures currently down 48 points.  Later this morning, we get earnings announcements from Wells Fargo and JP Morgan.

Credit rating could be slashed

Citigroup is scheduled to announce its Q1 earnings Monday morning.
Wall Street is looking for EPS of $1.00 on revenue of$19.8 billion.
However, a bottom line surprise alone won't cut it this earnings season.
On Friday, JP Morgan and Wells Fargo each beat on the top and bottom lines.  But both underperformed the stock market on Friday as their shares sold off.
With Citi's stock price up 27 percent this year, details will be very important.
"Going into 1Q results, we think C...may be better positioned (given upside from cap mkts, expenses and provision expense)," writes Deutsche Bank's Matt O'Connor.

The relation between oil prices

Airlines have incentive to buy new planes as opposed to flying older, less fuel-efficient planes when oil prices are between $80 - $130 per barrel, according to a new Citi report by Jason Gurksy and Jonathan Raviv.
If prices were any lower, then the airlines could just stick to their old gas guzzlers.  If they were any higher, then the airlines wouldn't be able to afford the new planes.
Here are two charts that show the relation between oil prices v/s gross orders in the last 21 years and the relation between oil prices and new aircraft demand.

Economic figures in an unsustainable fashion

If anyone mentions the just-released 3.5% U.S. third quarter GDP growth, just throw this chart in their face. Cash for Clunkers clearly distorted the U.S. economic figures in an unsustainable fashion.
According to the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted 157.6% quarter on quarter. This is completely unprecedented. Vehicle output is clearly going off a cliff next quarter. The question will be how low can the blue line below go.
Next quarter, we won’t just be returning to business as usual for auto output. Don’t forget that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into Q3. Thus Q4 is likely to be very weak since many people who planned to buy a car in Q4 probably took advantage of Clunkers and bought in Q3.

The current crisis is global

“Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.”

Albert J. Nock, 1935

Our press, the glorious fourth estate, the “guardian of our freedoms,” has the visual acuity of Mr. Magoo regarding the Obama Administration. Regarding corruption, they saw no better during the Bush Administration.  Finally, some in this see-no-evil, hear-no-evil press may be undergoing lasik surgery. James Lieber of the Dallas Observer seems to have had successful surgery.

No Justice: We’ve Bailed Out the Banks. When Do We Go After the Crooks Behind Our Financial Collapse?

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?
When Barack Obama donned the crusader’s mantle during the 2008 presidential campaign, his Web-savvy campaign team created  and pushed it on millions of voters. The main video showed the Ichabod Crane-like Charles Keating—the wealthy, politically connected poster child of the ’80s savings-and-loan scandal—in handcuffs.
The Obama video portrayed John McCain as Keating’s stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys are bigger and badder. Today’s corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and former lead lawyer at the Office of Thrift Supervision who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.
Those watching the compelling attack ad (still online) had every reason to believe that Obama’s approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.
This was not to be.

Most economists initially objected to the theory

The piece below by Peter Boettke summarizes what I think about current economics. The Keynesian model or paradigm is wrong and always has been. Two primary reasons it was adopted were 1) the crisis of the 1930s was misunderstood but demanded “action” of some kind and 2) it gave the politicians a license to steal power and money from the citizens. If economics were a physical science where data could refute false hypotheses, it is doubtful that the paradigm would still exist today. Because it isn’t, reason number two became paramount. Most economists initially objected to  the theory, gradually agreeing with it over time. After all, it also provided lucrative rewards for them in terms of higher paying jobs in government and eventually a route to tenure after it dominated university economics departments.
The books referenced below in the fifth paragraph are excellent reads for anyone interested in the flaws and inconsistencies in the so-called General Theory. “The Critics of Keynesian Economics” book is especially insightful because it is a collection of great economists (authors include Jacob Viner, Frank Knight, Garet Garrett, Jacques Rueff, Benjamin Anderson, Frederick Hayek, Ludwig

Foreign resource stocks might do especially well

Peter Schiff adamantly recommends getting out of the dollar. His presentation, if correct, will be devastating for this country and wipe out the wealth of the middle class. All of what he says is correct, although his timing may be off. Furthermore, there is the possibility that our government might change course, although I, like Schiff, feel that unlikely. His recommendation to own “real stuff” is correct. If the stock market goes up, I doubt whether it will keep pace with inflation. The best performing stock market in the world in recent years has been Zimbabwe, but it did not keep pace with their inflation.
So, what to do? If as some believe that the dollar will decline by 50% from here over the next 10 years, then having your funds outside the dollar (in other currencies) would presumably produce a 7% average return per year. Investing in foreign stocks would provide that 7% plus the returns (or losses) obtained in foreign stock markets. Precious metals, as money substitutes, should do well. So should natural resources and other hard assets like land. Foreign resource stocks might do especially well.
None of this is meant to be investment advice. If what Schiff (and I) fear comes true, some of the above might be reasonable investments/hedges. On the other hand, all of the above comments would be 180 degrees wrong if we were to end up in deflation instead of inflation.
Schiff was very emotional, practically begging people to get out of the dollar. I suspect the economy and markets over the next year or two will justify his emotion. Whether his scenario results or not, is the more difficult issue.

Profits sank in loan servicing

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.”
U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
Billionaire George Soros, speaking today at a lecture organized by the Central European University in Budapest, said a “bloodletting” may be coming for leveraged buyouts and commercial real estate.
“The American consumer will no longer be able to serve as the motor for the world economy,” said Soros, 79.
His comments came in the same week that Capmark Financial Group Inc. filed for Chapter 11 bankruptcy protection after originating $60 billion in commercial property loans in 2006 and 2007.
‘Extreme Caution’
Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said in an interview on Bloomberg Radio that he would use “extreme caution” before putting money into commercial real estate, especially office space, because properties are losing tenants.
U.S. office vacancies hit a five-year high of almost 17 percent in the third quarter, while shopping center vacancies climbed to their highest since 1992, according to the property research firm Reis Inc.
“I think it’s going to take quite a while to work itself out,” Ross said.
As of Oct. 15, Ross said he had spent less than $100 million of at least $1.5 billion available to him under the Public-Private Investment Program, an investment pool of private and government money for purchasing distressed assets from financial institutions.
Ross used the funds he spent so far to purchase residential mortgage-backed securities, he said in a Bloomberg Television interview.
Corus Investment
WL Ross was among a group of firms that agreed Oct. 6 to buy $4.5 billion of Corus Bankshares Inc.’s real estate. Starwood Capital Group LLC and TPG led the group to buy the assets of the Chicago-based lender, which was seized by federal regulators Sept. 11 after its investments in construction loans for condominiums went bad.
In 2007, Ross ventured into the declining residential property market, winning an auction for the home-loan servicing unit of Melville, New York-based American Home Mortgage Investment Corp. He agreed to pay between $435 million and $500 million for the right to collect payments and maintain escrow on about $45.3 billion of home mortgages.
Making Lists
Dubbed the King of Bankruptcy by clients during his quarter century at the Rothschild investment bank, Ross entered the U.S. home mortgage business as an increasing number of borrowers quit making payments and profits sank in loan servicing.
“Our methodology is to make a great big list: What’s every thing we can think of that’s either wrong with the industry or that we just plain don’t like about it,” Ross said today.
“Then we start work on another list. If we had control of this industry, what would we do to fix each one of those problems?” he said. “Once we feel that there is a reasonable likelihood that the second chart kind of equals the first chart, that’s when we get ready to do something.”