The Original Behavioral Economist

“I’ve been doing the behavioral stuff for 35 years. It’s the basis of investing and economics. It’s only recently that it’s been popularized by academia. They’re reconstituting something in a trivial manner.”

Michael Aronstein doesn’t mince words. The president, chief investment officer and portfolio manager of the MainStay Marketfield Fund has a good thing going in the long-short equity space, due in part to his no nonsense style and the predictable unpredictability of human behavior. And it’s paying off. The fund has five stars, $7.4 billion in AUM, has returned 8.5% annually during the past five years (outdoing 95% of its peers) and is ranked third out of 45 long-short equity funds since inception its in 2007.

Aronstein, his partner Michael Shaoul and the team of analysts look for “ideas investors are acting on that we feel are incorrect.”

“We point to things they own that they shouldn’t be, and things they’re missing that they should,” Aronstein explains. “The markets are influenced by global market trends, but the two really are different. The global macro situation causes distortions in the domestic marketplace that will eventually correct themselves.”

It might sound like a value play, but it’s really anything but. To the contrary, Aronstein looks for growth companies with good balance sheets, those that “might be in controversial industries, but are strong themselves .”

When asked for an example of where this might occur, he immediately points to government statistics, an area he’s been studying for a year and a half.

“If government was subject to Sarbanes-Oxley, the producers of these numbers would be in jail,” he says. “Statistics is the easiest place for government not to spend money, if that’s what they’re looking to do.”

“If you have a story you’re writing about the New York State Legislature that is produced by the New York State Legislature, you wouldn’t need to be too innovative. People tend to be very lazy about taking numbers at face value. They don’t realize that most statistics are an estimate of a guess. When the revisions come out, it very often puts them in the opposite camp of the original conclusions.”

Aronstein says the real value comes in giving a sense of the forces at work in the world.

“Investing is avoiding the major sinkholes that could permanently take you out. We let clients know of the theme of the decade that has matured and is now too dangerous.”

With that in mind, he advises to “short bonds all over the world. The theme that’s matured is emerging-market fixed income. It’s been the most popular product on Wall Street recently.”

He noted the credit expansion “gave him pause in 2010 and 2011,” and we’re at an even higher level of credit exposure than 2003 through 2007, the period just prior to when the markets seized.

So what does he like?

Europe — little surprise given his philosophy.

“We have 25% of the fund in Europe. The north, in particular, is doing better than anybody could have guessed.”

He cryptically concludes that there are “forces that people have come to rely on that will be unseated,” noting energy as an example.

“This unseating will be an unmitigated positive for some and inherently unstable for others. Like the old saying in golf: every swing makes somebody happy.”

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Check out It’s Not Just Active and Passive, but Behavioral Finance That Best Meets Clients’ Needs on AdvisorOne.

Sallie Mae Stays Neutral - Analyst Blog

On Jul 4, 2013, we reiterated our Neutral recommendation on Sallie Mae, Inc. (SLM). The decision was based on the proposed split of the company, which is anticipated to help Sallie Mae navigate through the tough regulatory environment. However, reduced net interest income and higher operating expenses were the downsides.

Why Neutral?

Sallie Mae's first-quarter earnings of 61 cents per share marginally beat the Zacks Consensus Estimate and surpassed the prior-quarter figure by 11%. Over the last 60 days, the Zacks Consensus Estimate for 2013 increased 1% to $2.49, whereas for 2014, it dropped 0.4%. As a result, Sallie Mae currently carries a Zacks Rank #3 (Hold).

To boost the company's long-term growth in the present economic environment, Sallie Mae announced the decision to split the company's present business into 2 parts, namely an education loan management business and a consumer banking business.

We expect the company to benefit from this, as with the division, management's focus will be on Sallie Mae's growing consumer banking business and on tackling its education loan portfolios. Together, these are expected to aid bottom-line growth in the near term.

Moreover, the company's business shift toward private student loans and direct channel loans as well as cost reduction measures – to counter the legislative impact – are positives for the stock. Extensive capital deployment activities also continue to reinforce investors' confidence in the stock.

However, the scope and profitability of Sallie Mae's businesses are exposed to risks arising from legislative and administrative actions. Further, we remain concerned about the run-off of the company's FFELP loan portfolio, which will weigh further on interest income. In addition, the deteriorating credit quality is a negative for the stock.

Other Stocks Worth Considering

Other financial institutions that are performing better than Sallie Mae include Capital One Financial Cor! p. (COF), Discover Financial Services (DFS) and Regional Management Corp. (RM). All these stocks carry a Zacks Rank #2 (Buy).

What Does Wall Street See for MEDNAX's Q2?

MEDNAX (NYSE: MD  ) is expected to report Q2 earnings around July 30. Here's what Wall Street wants to see:

The 10-second takeaway
Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict MEDNAX's revenues will increase 18.4% and EPS will grow 11.5%.

The average estimate for revenue is $532.0 million. On the bottom line, the average EPS estimate is $1.36.

Revenue details
Last quarter, MEDNAX logged revenue of $502.7 million. GAAP reported sales were 19% higher than the prior-year quarter's $422.6 million.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
Last quarter, EPS came in at $1.10. GAAP EPS of $1.10 for Q1 were 12% higher than the prior-year quarter's $0.98 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Recent performance
For the preceding quarter, gross margin was 30.6%, 100 basis points worse than the prior-year quarter. Operating margin was 18.2%, 60 basis points worse than the prior-year quarter. Net margin was 11.0%, 40 basis points worse than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $2.16 billion. The average EPS estimate is $5.45.

Investor sentiment
The stock has a five-star rating (out of five) at Motley Fool CAPS, with 173 members out of 180 rating the stock outperform, and seven members rating it underperform. Among 62 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 60 give MEDNAX a green thumbs-up, and two give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on MEDNAX is outperform, with an average price target of $91.00.

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Is Regal Beloit's Cash Machine Empty?

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Regal Beloit (NYSE: RBC  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Regal Beloit generated $257.4 million cash while it booked net income of $196.4 million. That means it turned 8.2% of its revenue into FCF. That sounds OK.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Regal Beloit look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With questionable cash flows amounting to only 4.9% of operating cash flow, Regal Beloit's cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 3.2% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 26.3% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

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How Lowe's Hopes to Become No. 1

On Wednesday, Lowe's (NYSE: LOW  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Lowe's has played the role of sidekick to industry leader Home Depot (NYSE: HD  ) for a long time, with Home Depot having earned a spot in the Dow Jones Industrials while Lowe's has languished behind. Yet despite having a market cap just half Home Depot's size right now, Lowe's has plenty of growth opportunities that could help it catch up with its archrival. Let's take an early look at what's been happening with Lowe's over the past quarter and what we're likely to see in its quarterly report.

Stats on Lowe's

Analyst EPS Estimate	$0.51
Change From Year-Ago EPS	16%
Revenue Estimate	$13.45 billion
Change From Year-Ago Revenue	2.2%
Earnings Beats in Past 4 Quarters	3

Source: Yahoo! Finance.

Did Lowe's earnings get chilly this quarter?
Analysts have largely stuck by their views on Lowe's earnings, cutting just a single penny from their estimates for the just-ended quarter and the current fiscal year. The stock has done fairly well, rising about 8% since mid-February.

Lowe's has a much longer history of serving the home-improvement market than many investors realize. Even though the company has seen plenty of up and down cycles, Lowe's has managed to earn a spot among the Dividend Aristocrats by raising its annual dividend every single year for the past half-century. More recently, Lowe's has accelerated its dividend growth pace, with its payout having almost doubled in just the past five years.

But Lowe's hasn't done a good job of matching up against Home Depot's strength. While Home Depot has incorporated better use of its workers' skill sets and greater use of innovative technology to help improve efficiency and boost profits from its commercial customers, Lowe's has faced the headwinds of weakness in the appliance space and other pure do-it-yourself project materials.

Moreover, some investors worry that the huge run-up in Lowe's stock price already indicates overheated expectations for the retailer. Earlier today, Oppenheimer downgraded the stock, maintaining its favorable price target on Lowe's but removing its buy rating in advance of the earnings release.

Still, Lowe's expects the good times to continue and is taking steps to capitalize, with plans to hire 9,000 permanent part-time employees. CEO Robert Niblock believes that the recent rebound in home prices is finally making customers willing to spend on improving their homes, and it expects to see greater remodeling activity in the near future.

In Lowe's earnings report, look closely at the impact of a fairly cold start to the spring season on its sales of garden and outdoor materials. Wal-Mart (NYSE: WMT  ) already identified the weather as a factor in its weak quarterly report, and many of its stores have extensive lawn and garden offerings. If Lowe's follows suit, it could prove to be the catalyst that sends the stock falling from its heights, at least temporarily.

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Kimberly-Clark Reports First-Quarter Earnings

Consumer products manufacturer Kimberly-Clark  (NYSE: KMB  )  reported first-quarter earnings today that came in $0.02 short of consensus estimates while generally meeting top-line expectations.

Kimberly-Clark recorded revenues of $5.32 billion in the quarter that ended March 31, a 1.5% increase over last year's $5.24 billion, and pretty much in line with Wall Street's estimates of $5.36 billion. On the bottom line, the company generated $531 million, or $1.36 per share, up 15% from the year-ago figure but just shy of the $1.38-per-share estimate on a GAAP basis.

On an adjusted basis, however, excluding charges for costs related to its pulp and tissue restructuring actions, earnings per share were $1.48, a first-quarter record. Last year the company undertook changes to its consumer and professional businesses in western and central Europe where it will exit the diaper business while divesting or exiting some lower-margin businesses, mostly in the consumer tissue market. Italy's diaper business will remain unaffected.

Kimberly-Clark chairman and CEO Thomas J. Falk believes the consumer products company is off to a good start for the year, and noted, "As a result of our strong first quarter performance, we are raising our full-year outlook for adjusted earnings per share while we continue to invest for long-term success.  We are optimistic about our plans and believe that execution of our global business plan strategies will generate attractive returns to shareholders."

Kimberly-Clark now anticipates adjusted earnings for 2013 to be $5.60 to $5.75 per share, up 7% to 10% compared to adjusted earnings per share of $5.25 in 2012. It previously targeted adjusted per-share earnings of $5.50 to $5.65 for 2013.

In the first quarter, personal care segment sales rose 1% and were up 3% organically, while consumer tissue sales were up 4%. Both segments rose as a result of rising volumes and improved pricing, offset in part by the European changes noted above. Its K-C professional segment saw sales fall both here and abroad, and the health care division suffered a 2% decline in sales as higher manufacturing costs and increased expenses pushed the business lower.

link

Pentagon Spending Screeches to a (Near) Halt

Maybe there's something to this whole "sequestration" phenomenon after all -- because for all intents and purposes -- and certainly in comparison with recent trends -- Department of Defense spending has come to a screeching halt in recent days. On Wednesday, for example, DoD issued a grand total of three new contracts, totaling a mere Pentagon pittance of just $44.4 million.

Privately held Beechcraft Defense, still feuding with Embraer (NYSE: ERJ  ) over a contract award for fighter planes in Afghanistan, got a consolation prize of sorts. The $28.6 million firm-fixed-price contract extension it won Wednesday, to service Iraqi Air Force T-6 training aircraft through Dec. 31, was the largest award the DoD gave out Wednesday. A large step down from that one was an $8.3 million award to BAE Systems' (NASDAQOTH: BAESY  ) Maritime Services Division to supply "Archerfish neutralizers (destructor, mine neutralization, Airborne EX64 Mod 0 Archerfish)" as part of an upgrade to U.S. Navy MK-105 AMCM Magnetic Mine Sweeping systems produced by Exelis (NYSE: XLS  ) . BAE's expected to complete performance on this contract by September 2014. Finally, Comtech Telecommunications (NASDAQ: CMTL  ) subsidiary Comtech EF Data won at $7.5 million cost-plus-incentive-fee, cost-plus-fixed-fee, firm-fixed-price contract to supply Advanced Time Division Multiple Access Interface Processors -- Ethernet devices to be used by the U.S. Navy to connect ship, shore, and submarine platforms. Work on this contract will be complete by April 24, unless contract options are extended. In that case, the completion date could move out to March 2018, and the contract value could rise to $28.4 million.

Few Believe Gold Can Shine

By Poly

This is a special report from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%. 

Considering that Gold has risen $80 off its low and the precious metals Miners have screamed higher, it's surprising how little bullish cheering we've heard.  My discussion forum, Bull & Bear Talk, is very sensitive to Gold, but has barely seen an uptick in traffic during this move.  In past moves out of Investor Cycle Lows, Bull and Bear Talk has had an immediate surge in traffic and a significant rise in the number of excited posts.

This is just a small sampling of sentiment, but I think it's telling.  We've had a 3 year bear market in Gold that has battered and beaten the bulls into complete submission.  All speculative interest and fond memories of the past bull market have been completely erased.  This lack of interest was evident in the recent 3rd test of the bear market low – the volume and volatility was much lower than during the first two retests.  The bear market has achieved its goal – to clear sentiment on a longer timeframes and lay the foundation for a real change in trend.  The view of Gold and its sentiment on longer timeframes is a picture perfect example of the ebb & flow of Cycles.

The $40 “recognition day” last week was obviously more than enough confirmation to declare a new Daily Cycle (Daily Cycle is 24-28 trading days), but it was powerful enough for declaration of a new Investor Cycle (Investor Cycle is 22-26 Weeks) as well.  This is the development we've patiently waited for.  However, on shorter time frames, Gold has pushed the Daily Cycle into an extremely overbought state, so a $20 or more retracement is possible.

This is only a problem for short term traders; a decision to take a new position now at such overbought levels could mean entering just as the market cools off.  Nobody ever said that trading is easy, and determining when to enter a fast-moving asset is a frequent dilemma.  Getting the trend right is only part of the challenge.  Gold's 1st Daily Cycle typically rallies until day 18-20 before topping, so on day 13 here we're likely to see another push higher before Gold turns down into its 1st Cycle Low.  There is no way of knowing how powerful the remainder of the Cycle will be, but the average 1st Daily Cycle adds 10%.  If that happens this time, Gold will top at around $1,364.

While the prescious metals Miners are looking good, Silver looks potentially explosive.  Traders were caught flat footed and overly short, as is often the case at Investor Cycle Lows.  The current 5% surge has come primarily on short covering, and Silver's massive short position will need to be reversed.  The process of unwinding has only just begun, and it should provide enough fuel for Silver to move closer to the $23 level.

Beyond short covering, speculators will determine where Silver eventually tops.  If price continues to rise, speculators should begin to jump on the bandwagon and it will be interesting to see how far Silver gets pushed in the current Investor Cycle.  From a historical standpoint, it's very common to see Silver rally at least 20% – and typically close to 30% – in any given Investor Cycle.  In some cases, it did so while overbought for almost the entire move.  A similar move now would put Silver near $26, a level that tests former support.

I hope people keep their emotions contained while seeing these potential price projections.  I'm not a believer in picking targets, especially ones 20%-30% above current levels, because doing so can serve to fuel a trader's bias while diverting focus from the price action at hand.  It can also encourage a “can't lose” mentality and a tendency to over-trade or overleverage a move.  This can lead to being whipsawed out of positions and to undue stress even as positions do well.  Trading is more about execution that anything else, and proper timing (Cycles) of the markets is a key to success.

From an Investor Cycle standpoint, we've yet to break the bear market trend-line.  That's OK, because Gold is the slowest in this sector to react and it's only 14 days into what should be a 6 month Cycle.  What a new Investor Cycle shows, however, is the potential ahead – a normal Investor Cycle can add up to 20% in gains before topping out.

From a technical standpoint, the $1,500 area stands out as a potential top for Gold's coming move.  At $1,500, Gold would test a key bear market resistance level and the point where bulls unsuccessfully mounted a defense.  For the investors who trade on the Investor Cycle timeframe, we've finally got the turn and confirmation we've patiently waited for.  All of that said, however, please remember that in investing, there are no guarantees.  I will never stop repeating this phrase.  But with a confirmed new Investor Cycle in play, the odds have dramatically shifted and the bulls should now be calling the action.

The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report.  The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, and US Bond Cycles.  Along with these reports, members enjoy access to two different portfolios and trade alerts.  Both portfolios trade on varying timeframes (from days, weeks, to months), there is a portfolio to suit all member preferences.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Commodities Previews Markets Trading Ideas

Originally posted here...

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