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Only thorns

For a fallen star of the smartphone industry, things go from bad to worse

THE signs do not look good. On November 4th, six weeks after BlackBerry said that its biggest shareholder, Fairfax Financial, wanted to take the ailing Canadian smartphone-maker private for $4.7 billion in cash, the sale was called off. BlackBerry instead declared that it would raise $1 billion in debt, convertible into 16% of its shares. Fairfax, a Toronto holding company that focuses on insurance but owns 10% of BlackBerry, is taking a quarter of the issue. Barbara Stymiest, who chairs BlackBerry’s board, called this “a significant vote of confidence in BlackBerry and its future”. The stockmarket called it a flop: the share price, already a fraction of what it once was (see chart), fell by 16%.

Thus BlackBerry ended a “review of strategic alternatives” with no visible alternative strategy—and no chief executive. Thorsten Heins, its boss since January 2012, was unseated. He brought a much-delayed operating system, BlackBerry 10, to market, but this will not make much difference. Although lots of people still carry BlackBerrys, not many of those devices are new. BlackBerrys have not only been squished by Apple’s iPhone (and iPad, to which BlackBerry responded feebly) and by Android devices; they are also being outsold by phones with Microsoft’s Windows. In its latest quarter BlackBerry lost $965m, mostly because of a write-down of unsold phones. Last month it made its BBM instant-message service available as an iPhone and Android app.

Mr Heins has a temporary replacement: John Chen, the former head of Sybase, a software company that he knocked back into shape before selling it to SAP, of Germany, in 2010. Once a permanent chief executive is found, Mr Chen will stay as executive chairman. It is not yet clear whether his background in software is a clue to BlackBerry’s future. He seems keen to keep selling handsets. Roberta Cozza of Gartner, a research firm, thinks BlackBerry should become a “niche player”, focusing on applications and services for companies to which secure communication is especially important. “I don’t think their priority should be hardware at all,” Ms Cozza says.

Mr Chen told Reuters that at Sybase he had “seen the same movie before”. Canadians also know the story. The version they saw involved Nortel Networks, a telecoms-equipment company that was heading for oblivion when Research In Motion (as BlackBerry used to be called) was on the rise. Nortel too was a high-tech source of national pride. It also brought in a turnaround specialist when its fortunes darkened. Alas, the ending was unhappy: it went bankrupt in 2009, albeit bequeathing a pile of patents worth billions. “The demise of Nortel hit the Canadian psyche very hard and the same thing would happen if BlackBerry failed,” says Don Drummond, a former senior civil servant.

It is no comfort that others in the cruelly Darwinian smartphone business have also begun to look like wounded gazelles. On November 5th Taiwan’s HTC reported its first quarterly loss. It added that sales in the first ten months of 2013, at NT$175.5 billion ($5.9 billion), were down by 29% from a year earlier and by 57% from 2011, when HTC was briefly the biggest seller of smartphones in America. HTC has made mistakes, but its chief problem has been having Samsung, with its scale and marketing clout, as a competitor in Android phones.

A third national phone champion, Nokia of Finland, has sold its device division to Microsoft. The other two are battling on alone, HTC apparently out of choice—its chairwoman says it is not for sale—but BlackBerry out of necessity. Its shareholders will be praying that Mr Chen can direct a sequel to “Sybase”, not “Nortel”.

Citi Expects "A Significant Fall In EURUSD" As Currency Wars Escalate

Link to chart and full article : {http://bit.ly/1bhtFXO}

European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

Daimler is set to keep chugging down the Autobahn behind BMW and Audi

AS A corporate motto, “The best or nothing” has a timeless quality. Gottlieb Daimler pasted it on the wall as he went about inventing the modern car in the late 19th century. In 2010 the firm that bears his name adopted it as a slogan. It was as badly timed as a misfiring engine. Mercedes-Benz, Daimler’s car division, already trailing BMW in terms of sales and profitability, saw another Geman premium carmaker, Audi, also start to pull away in the same year (see chart). Yet this year Daimler’s shares have surged by 40%, persuading optimists that the firm is catching up. This week it said its worldwide sales in October had risen 15% year-on-year to a new record.

Dieter Zetsche, Daimler’s boss, is confident. At the Frankfurt motor show in September he reiterated that his firm can become the world’s top premium carmaker by 2020, helped by the launch of a fleet of new models. Before this year’s rally, Daimler’s shares were roughly where they were when Mr Zetsche took over in 2006, whereas BMW’s had doubled.

Mr Zetsche has completed Daimler’s return to its core business of making premium cars after years of costly errors. An attempt in the 1990s to turn it into a transport conglomerate, adding planes, trains and even spaceships to the mix, had ended in failure. Mr Zetsche presided over the demise of Daimler’s stab at becoming a global car giant by merging with Chrysler and allying with Mitsubishi and Hyundai. He sold the American carmaker at a spanking loss, the year after he took over. Fiat of Italy now controls it.

These activities had distracted Daimler from the business of making classy cars. The entry-level A Class, introduced in 1997 and intended to induce a new generation to the Mercedes brand, was a flop; Smart, a frugal city car, was a financial disaster. A dull mid-range E Class failed to meet buyers’ expectations of a luxury barge. Worse still, the reliability of its cars fell and its reputation for engineering excellence waned.

In the past couple of years Daimler has issued profit warnings even as pricey cars have prospered, outgrowing the market as a whole. Mercedes’s image as a car for the grey-haired has held it back. By concentrating its efforts on saloons, it missed out as BMW and Audi grabbed a share of the hottest new part of the market—SUVs. Meanwhile those competitors also stretched the definition of a premium-segment car by introducing luxurious smaller models.

Daimler is now trying to put that right with its new models. The new GLA, launched at Frankfurt, and a GLK, set for the roads in 2015, will at last give smaller BMW X Series and Audi Q range SUVs some serious competition. In small cars the CLA, a pint-size saloon, is in a niche of its own. The launch of new models in the range-topping S Class will also boost sales.

Daimler is following BMW and Audi in making a broader range of vehicles to suit more tastes. It should improve profitability, which has lagged the consistent 9-10% margins of its two rivals, by reducing its main platforms, the basic underpinnings of its vehicles, from four to two. More standardisation and common parts, and faster development times for new models, should lower costs. But BMW and Audi have similar plans and may well do a better job. Both of Daimler’s German rivals have a more efficient workforce that toils for lower pay. BMW sells 30% more cars with the same number of workers, says Morgan Stanley, a bank.

In China, the world’s biggest market for cars of all price brackets, Daimler arrived late and entered a joint venture with a local firm (as the government requires) on unfavourable terms. BMW outsells Mercedes by 70%; Audi sells twice as many cars. But Daimler has now tidied up a messy dealership network in which outlets selling imports and ones selling locally made cars had competed with each other. Now it needs to speed up the opening of new showrooms in smaller inland cities.

Daimler’s technology, the key to meeting increasingly strict emissions targets, also lags its rivals’. BMW has left it standing with the launch of its new range of electric cars. Catching up will be hard. BMW, controlled by the Quandt family, has steady leadership that can back long-term research and development. Audi can draw on the vast resources of its parent, VW. Harald Hendrikse of Nomura, a bank, sees Mercedes, more sensitive to the whims of investors and the quarterly reporting cycle, as more short-termist and conservative.

Despite its bumpy ride Daimler still has a strong brand and decent revenues from cars as well as a solid truck, van and bus business. And compared with the rest of the global car industry it is nicely profitable. Critics say that Daimler’s bosses are a little disconnected from reality in claiming that the firm will one day lead the pack again. But it is probably a better management ploy than sticking up a sign saying “Third-best or nothing”.

Eike Batista’s shipbuilding company OSX has agreed to file for bankruptcy protection only a week after the collapse of his oil company, marking a new low for the Brazilian tycoon who was once the world’s seventh-richest man. The Rio de Janeiro-based company said late on Friday that its board had approved the decision to file for judicial recovery, as the process is called in Brazil, for its central shipping and service units. The company said it would also replace its chief executive. However, the statement made no mention of OSX’s leasing unit, raising questions of whether the bankruptcy filing would exclude the unit through which it owns three floating oil platforms – the firm’s major assets. OSX’s announcement is another blow for Mr Batista, who lost his status as a billionaire this year and had long been championed in Brazil as one of the country’s most successful entrepreneurs. The move was widely expected after Mr Batista’s oil start-up OGX, OSX’s biggest client, filed for bankruptcy protection on Wednesday last week, triggering the largest corporate default in Latin America. OSX was founded in 2009 to provide equipment for OGX, the flagship of Mr Batista’s oil and mining empire. In 2010 the shipbuilder raised R$2.82bn in an initial public offering, wooing investors with the promise of $30bn in orders from its sister company over the next decade. But OSX has struggled to remain profitable since OGX’s much-hyped wells proved to be failures. OSX shares have dropped about 96 per cent this year, from around R$10 to less than 50 centavos this week. Unlike OGX, OSX reached an agreement with some of its largest creditors before beginning bankruptcy proceedings, pinning down vital funds as it enters the court-led restructuring process. On Wednesday OSX announced it had struck a deal to roll over a loan of R$461m ($202m) for a year with Brazil’s state-run bank, Caixa Econômica Federal, and Santander. However, a filing from OSX could complicate OGX’s bankruptcy proceedings given that OSX is the biggest creditor to OGX. A restructuring document from Blackstone, an adviser to OGX, estimated that OSX was owed $900m but that the full amount being claimed by the services company was $2.6bn. Depending on whether OSX is able to press its full claim, OGX’s debt could grow to as much as $6.68bn from the $5.1bn estimated by Blackstone. Questions over a transfer of $449m from OGX to OSX earlier this year – a key reason behind OSX’s relatively stronger financial position – are likely to dominate talks with creditors. OGX said late on Thursday that it planned to change its name to Oleo e Gas Brasil after the bankruptcy, removing Mr Batista’s trademark ‘X’ which stood for the multiplication of wealth. Local media have reported that another restructuring option under consideration by Mr Batista is a merger between OGX and OSX. Under Brazil’s bankruptcy law, the company’s controlling shareholder leads the restructuring process rather than the creditors, a key and controversial difference to US Chapter 11 proceedings.

Big Institutions Bet "All In" On Small Caps {http://bit.ly/19OWi1I} British Pound China Dumb Money Equity Markets Eurozone Exchange Traded Fund Gross Domestic Product NFIB None Reality Russell 2000

Last week, over a year after we first forecast a major short squeeze-driven outperformance of the most shorted small- and micro-cap stocks, none other than Goldman jumped on the "buy the most shorted names" bandwagon, which promptly led us to wonder if the rally in both the most shorted names, and also in the small cap Russell 2000 index, is finally coming to an end.

The reality, as the chart below shows, is that despite 2013's rate-driven headfake, where Russell 2000 stocks have outperformed the S&P in close approximation with the 10 Year yield, whose surge was incorrectly translated as an indication of economic strengthening when it was merely reacting to fears about the Fed's gradual tapering, that the Russell is still solidly outperforming the S&P year to date.

In fact, to many buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios. Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names.

And once again, as so often happens, flows are confused for fundamentals. Because even Goldman edmits that the entire outperformance of the small cap sector is purely due to multiple expansion, not from actual fundamental improvement.

So is the massively overbought small cap sector due for a correction?

With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate. Below is Goldman's David Kostin with his take on what has emerged as the most overbought small cap sector in history:

From Goldman

Investors have cast their ballots, and so far in 2013 the vote goes to small cap US equities. 2013 has been an excellent year for US equities in general, and an even better one for small caps in particular. The Russell 2000 has returned 28% YTD, outperforming the S&P 500 by 370 bp. Its 36% return over the last 12 months ranks a standard deviation above historical averages both in absolute terms and relative to large caps.

Small caps have outperformed large caps in almost every sector. Most notably, Russell 2000 Consumer Staples have returned nearly 40% YTD and outperformed their large cap counterparts by 15 pp. Info Tech is another notable difference, with investors citing the lack of growth among S&P 500 Tech as the reason for the small cap sector’s 33% return and 14 pp outperformance relative to the lagging large cap sector.

The two major drivers of Russell 2000 returns are US economic growth and valuation. We highlighted in April that the prospect for accelerating US GDP combined with undemanding valuation set the stage for strong returns. From May through September, the Russell 2000 returned 14%, outperforming the S&P 500 by 800 bp. After lagging by 300 bp in the last month, however, investors wonder whether the small cap rally is over.

The opposing forces of improving US GDP growth and above-average valuation suggest that the Russell 2000 will post a decent but less impressive return of 6% in the next 12 months. This compares to a historical average of 11% and implies that small caps will trade in line with large caps. We forecast the S&P 500 will reach 1850 in 12 months (also +6%).

One core pillar of small cap performance, growth, remains supportive. We expect US GDP will accelerate above-trend to a 3% pace in 2014 from under 2% this year, and remain at that rate at least through 2016. Strong expectations for earnings growth reflect the economic picture. We forecast 2014 EPS growth of 23% for the Russell 2000 compared with 8% for the S&P 500. Consensus expects earnings growth of 33% and 11%, respectively.

The other major driver, valuation, is the strongest obstacle to small caps, and the most common concern raised by investors. The Russell 2000 P/E multiple has risen 25% YTD, explaining more than 80% of the index return. It now stands above 10-year averages both in absolute terms and relative to the S&P 500. Price/book, our preferred metric for small caps, has similarly risen from a standard deviation below to nearly a standard dev. above average levels during the last two years.

Rising interest rates should be a tailwind for Russell 2000 returns. From a fundamental perspective, small cap borrow costs, and therefore margins and earnings, have a low sensitivity to changes in Treasury yields. Russell 2000 performance relative to the S&P 500 tracked the general path of yields this year, with small caps garnering most of their excess returns as 10-year yields rose from 1.7% in May to nearly 3% in September. Our rate strategists forecast the 10-year will rise to 2.75% by YE 2013 and 3.25% by YE 2014.

Several other macro factors that supported small cap outperformance of large caps this year may become headwinds in 2014. The Russell 2000 has historically outperformed the S&P 500 during periods of accelerating EPS growth, expanding P/E multiples, and a strengthening dollar. We expect S&P 500 EPS growth to decelerate to 8% in 2014 from 11% this year, and that P/E multiple expansion has largely run its course. The current S&P 500 forward multiple of 15x is in line with our year-end 2014 forecast level. Our FX strategists expect USD to weaken against EUR and GBP but strengthen relative to JPY during the next 12 months.

The Russell 2000’s leverage to domestic growth boosted the index this year but may be a detriment as growth in foreign markets improves. Roughly 80% of Russell 2000 sales are derived domestically compared with 66% for the S&P 500. This benefitted the small cap index earlier this year as investors worried about growth in Europe and Asia. Both data and sentiment have improved, however; Eurozone and China PMIs are back above 50, and regional equity markets have responded.

Positioning also poses a risk to small cap performance. Small cap mutual fund and ETF flows have totaled $22bn (5% of AUM) YTD, putting 2013 on pace to be the strongest year on record. Institutions are currently $6bn net long Russell 2000 futures, the largest position since the data start in 2006. Leveraged funds have a modest $2bn net short, a decline from their $2bn net long earlier this year but enough to rank in the 85th percentile historically.

Micro data are also mixed. 81% of Russell 2000 companies have reported 3Q results. 41% of firms beat on earnings by at least a standard deviation of consensus estimates, 25% missed, and the average surprise was 3%. These metrics are all in line with the 10-year historical average. In 3Q the NFIB Small Business Optimism Index averaged its highest level since 2007, but remains well-below average levels prior to the crisis. According to the survey, revenue growth concerns are fading, and respondents continue to point to government requirements as their most important problem.

--> Allianz's stock already has priced in concerns that rising interest rates will hurt its asset-management gem, Pimco. Its shares could return 20%, dividends included, in a year.

The well-capitalized German insurer isn't getting sufficient credit for its lucrative asset-management business, headlined by U.S. bond giant Pimco. How to unlock value.

At first glance, Allianz looks like a no-nonsense German insurer. Lift the hood, however, and you'll find a thriving asset-management business that contributes about 30% of the company's annual profit, on a mere 6% of sales.

At the heart of this business lies Pimco, the world's biggest fixed-income manager, with nearly $2 trillion of assets and a venerable investment record built by co-founder Bill Gross. Yet the market, fearful of a rise in interest rates, is giving Allianz insufficient credit for Pimco—and the asset-management unit generally—based on the stock's current price/earnings multiple.

At 124.25 euros, Allianz (ticker: ALV.Germany) trades for 9.3 times next year's consensus earnings estimate of €13.38 ($18), roughly in line with European competitors Zurich Insurance (ZURN.Switzerland) and Aegon (AGN.Netherlands). Asset managers typically sport price/earnings multiples of 17, however. If investors were to value the asset-management business for 17 times estimated 2014 earnings, Allianz's shares would trade closer to €155.

The simplest way to unlock the value of the asset-management unit would be to carve out Newport Beach, Calif.-based Pimco, which accounts for 84% of non-insurance-related assets under management, via a spinoff or initial public offering, as some investors have advocated. But Allianz so far has rejected the idea. Chief Financial Officer Dieter Wemmer said on a conference call in August that Pimco, which the insurer bought in 2000, is "fully integrated in Allianz activities" and "contributes very strongly to the overall well-being of the company."

Allianz executives declined to speak with Barron's.

Enlarge Image image JPMorgan Cazenove, a U.K. investment bank, thinks Allianz could trade up to €144 a share in 2014, a 16% increase above Friday's close, assuming Pimco stays in the fold and the company's shares continue to sport a conglomerate discount. JPMorgan calculates its target price by applying a 14 price/earnings multiple to 2015 estimated post-tax asset-management earnings of €2.53 billion; a 10.5 multiple to estimated property and casualty insurance earnings of €3.85 billion, and a 10 multiple to life and health insurance earnings of €2.17 billion. It then subtracts debt and other costs, adjusts for minority interests, and divides the result by Allianz' 454 million shares outstanding. Add the company's 3.6% dividend yield, and investors could see a total return next year approaching 20%.

BASED IN MUNICH, Allianz is one of the world's largest life insurers and asset managers, serving 78 million customers in 70 countries. Continental Europe accounted for 63% of last year's revenue of €106.4 billion, and 57% of group operating profit of €9.5 billion. Allianz earned €11.40 a share in 2012 and is on target to earn €13.20 this year, after posting third-quarter earnings of €3.19 a share Friday, beating consensus estimates of €2.97. The company raised its target for full-year earnings to "slightly above €9.7 billion," the upper end of its previous range.

Analysts expect Allianz to earn €13.38 a share in 2014, and €13.67 in 2015.

Insurance companies have been out of favor with investors in recent years, and life insurers, in particular, have struggled to generate attractive returns in a low-interest-rate world. European insurers additionally face uncertainty due to long-overdue solvency rules that will determine how much capital they need to hold. Allianz is well capitalized, with a solvency ratio—a measure of capital versus exposure to market risk—of 177%. The European Union's expected minimum capital ratio is 100%.

Allianz's property and casualty business has been building this year on the strength it exhibited in 2012, when revenue in Germany increased for the first time in several years. Unusual flood and hail storms in Germany during the summer are expected to pave the way for higher premiums. Property and casualty profit is up 10% through the third quarter, compared with a 6.7% decline in the life and health-insurance business.

INVESTOR ANXIETY ABOUT Pimco centers primarily on fears that interest rates will rise when the Federal Reserve tempers its bond-buying program, possibly next spring. The firm's flagship $248 billion Pimco Total Return fund (PTTAX), managed by Gross, had a record $32.5 billion in net outflows this year through Oct. 31. Analysts note that Pimco's fixed-income products are likely to retain their long-term appeal, however, for pension funds and insurers seeking to match income to liabilities, and that the manager continues to diversify into equity, multi-asset, and customized mutual and exchange-traded funds, which carry higher profit margins than traditional fixed-income offerings.

A bigger concern arguably is Gross' continued tenure. He is 69, and Pimco has made him rich; in September, Forbes estimated his wealth at $2.2 billion, ranking him No. 252 on its Forbes 400 list. So far Gross, a Barron's Roundtable member who serves as co-chief investment officer, has given no hint of slowing down, while Pimco's bench has been strengthened by the 2007 return of Mohamed El-Erian as chief executive and co-chief investment officer, and the success of several younger managers.

ONE THING ALLIANZ investors can look forward to is the prospect of higher dividends. The company targets a payout ratio of 40%, but could afford to pay out 60%, given its capital cushion. An enhancement of that magnitude would lift the yield to nearly 6.5% based on estimated earnings. Chances are, it would lift the stock price, too.

Lifting the Odds for a Market Melt-Up

Why Ed Yardeni likes auto makers, asset managers, biotech, defense, and oil and gas equipment.

Four mornings a week, clients and members of the press receive The Yardeni Research Morning Briefing, an e-mail filled with well-reasoned views about the economy and financial markets that are refreshingly devoid of attitude and as solid as Ed Yardeni himself. One recent piece of counsel—that the bull market would not be derailed—paid off in spades for anyone who listened.

Yardeni, 63 years old, has been dispensing advice for more than 30 years, as an analyst at the Federal Reserve, chief economist at E.F. Hutton and Prudential Securities, chief investment strategist at Deutsche Bank, and now president and chief investment strategist of Yardeni Research. Throughout his career, Yardeni has watched two kinds of screens: market data and feature films, which he reviews for clients. Last week, we asked him about both.

Barron's: What's with the movie reviews?

Enlarge Image image Ken Schles for Barron's "Investors have learned that any time you get a selloff, you want to be a buyer. The trick to this bull market has been to avoid getting thrown off." -- Ed Yardeni Yardeni: I've been doing it since my career began in the early 1980s. My wife and I would see a movie on Friday, so I'd add a short review at the tail end of my economic and financial outlook for the Monday meeting on Wall Street. I'd have ratings of three pluses all the way down to three minuses. I often tried to relate the movies to markets or human behavior, or see how they're reflected in the movies. As an investment strategist, you gotta open your eyes to different disciplines. At the end of the day, this is all about forecasting human behavior. The more you see movies, read literature, interact, figure out what makes people tick and what's important to them, the better you are at forecasting.

So, the Standard & Poor's 500 will hit 2014 in 2014.

I'm looking for $110 a share in S&P 500 earnings this year, $120 a share next year, and $130 a share in 2015. So, with relatively reasonable assumptions on valuations, or about 15.5, you get a year-end target of 2014. As I've been writing, my main fear is that we have nothing to fear, so we might actually get there ahead of schedule.

You worry about a melt-up, a swift and unsustainable rally. How will we know we're in one?

Plenty of stocks and industries have gone nearly vertical in recent weeks. Investors are inured to bad headlines; they see so much liquidity around the world. Since the beginning of the year, I've been forecasting 60% probability of a rational exuberance scenario, 30% melt-up, and 10% meltdown. I'm still there, but I'm wavering and leaning toward the melt-up. Like the Fed, I'm data dependent. I've set up various parameters to watch. I look at Investors' Intelligence—the number of bullish investment advisors divided by bearish. It recently shot up to 3.54. That tells you there aren't too many bears left, and that the market is overbought and at least prone to a correction.

It's probably better to look at valuation. If we saw the market zoom up to 17 to 19 times next year's estimated earnings of $120 a share, that would be a melt-up situation that's vulnerable to a very nasty correction. One trigger would be the Fed taking note of the possibility of a speculative bubble. I doubt they would do anything radical with quantitative easing or the fed-funds rate, but they still have the power to raise margin requirements. And clearly there's talk out there by people like Bill Gross and Larry Fink and Warren Buffett, saying there are slim pickings out there for anybody looking for undervalued stocks. The headlines are getting bullish. The excitement about initial public offerings means a frothy environment that often coincides with melt-ups. If we're going to melt up, that doesn't mean you sell here. You may want to participate. But you have to worry about the downside. The greater the multiple, the more downside there is between the value of the stock and its underlying earnings.

How should people be positioned in the last two months of the year?

Since the beginning of the bull market, there have been pretty fierce corrections, and you'd have had to be an extraordinarily insightful investor to get out in front and get back in at the bottom. I'm sticking with my target. My concern is that between now and the end of January, the market could really move a lot higher, just in time for [incoming Federal Reserve chief] Janet Yellen to have to figure out what she wants to do about the Fed contributing to a bubble environment in the equity markets. Her press conference will be March 19. It's hard to say what she will say. The Fed officials are in a real predicament because they kept telling us they're data dependent, and at the same time, they're saying they don't trust the data, particularly the unemployment rate.

What will the data tell us?

The purchasing-manager survey and regional survey by the Fed look good. I could see the unemployment rate falling to 7% in February. They would have that data for the March meeting. If the market is a lot higher, they will really have to start tapering. Yellen has a real job ahead of her in exiting from this period of ultra-easy policy. I don't think it's in her DNA to walk away from ultra-easy policy. If she is forced to start tapering by events like a lower unemployment rate and a stronger stock market with elements of a bubble, she'll make it clear that the Yellen-led Fed will keep fed funds near zero for quite some time. So the problem with a melt-up is it really creates a mess for monetary policy and forces the Fed to react in such a way that it will lead to a significant correction in the spring. I would put 30% odds on that.

Tell us about the trauma of 2008 and why it still matters.

We are all humans and adapt our behavior to the most recent events, especially dramatic ones. 2008 was a professional near-death experience for lots of people. The business community, in formulating its plans, is still incorporating the possibility of a crisis like we had in 2008. It is operating very conservatively even though profits are at record highs. Pimco has called it the new normal.

It has been very bullish for stocks, because that behavior has led to record profits—record cash flow used to buy back shares. Corporate treasurers bought back $1.6 trillion of shares for their S&P 500 companies since the first quarter of 2009 and paid out $1 trillion of dividends. The new normal also kept the lid on inflation because labor markets are slack. It has also given a tremendous boost to the new industrial revolution, where companies use technology to boost productivity and keep a lid on labor costs.

Now, policy makers responded to the trauma of 2008 by pledging they would do whatever it takes to avoid another Lehman-style calamity. Most famously, Mario Draghi did so in July 2012. Central banks have put serious cash to work. So why aren't businesses more relaxed, if they're back-stopped by the central banks? The answer is that the policies the central banks have adopted are so out there, so unconventional, so reckless, they don't trust it will end well. One study done by the Federal Reserve of San Francisco concluded that if it weren't for policy uncertainty, the unemployment rate would have been down to 6.5% at the end of 2012. Unemployment is clearly driving Fed policy.

Buying Power Stock buybacks have driven the market sharply higher since the financial crisis.

Enlarge Image image I have met a lot of institutional investors I call "fully invested bears" who all agree this is going to end badly. Now, they are a bit more relaxed, thinking it won't end badly anytime soon. Investors have anxiety fatigue. I think it's because we didn't go over the fiscal cliff. We haven't had a significant correction since June of last year. We had the fiscal cliff; they raised taxes; then there was the sequester, and then the latest fiscal impasse. And yet the market is at a record high. Investors have learned that any time you get a selloff, you want to be a buyer. The trick to this bull market has been to avoid getting thrown off.

What should people own?

I don't do individual stocks. This market has been driven by consumer discretionary, finance, and industrials. I would stick with them. You go with what's going, which can be dangerous, of course, if suddenly we have something really significant to worry about. But for outperformance, some sectors are auto manufacturing and parts, asset managers, biotechnology, aerospace and defense, air freight and logistics, data processing and outsourced services, and oil-and-gas equipment and services.

How about housing?

There's a lot of pent-up demand, but it's still hard to get a mortgage; mortgage lenders are still shy about lending. That goes back to the trauma of 2008. That's why we haven't seen housing starts recover more significantly, and because there's a shortage of housing relative to demand, we've seen home prices recover smartly. It's a slow recovery. I don't have a problem with home builders, but other opportunities are less volatile.

What are your thoughts about bonds?

The Yellen Fed will continue the same policy as the Bernanke Fed. Even if they taper, they might lower the threshold on unemployment—the rate at which they talk about tightening—from 6.5% to 5.5%. The Yellen Fed will do its utmost to keep short-term rates near zero for 2014 and 2015 and even into 2016. They are likely to be forced to do some tapering, so I think 2.5% to 3% is the range for the 10-year for the next couple of years. Inflation will stay at 1% to 2%. We won't see much action in the bond market.

And the rest of the world?

Some of my accounts are saying, "If you're looking for a place to invest where revenues, margins, and valuation have been weak, and there's potential for upside, then Europe is the place." It has had quite a run already. But the data recently is not that compelling. It shows Europe hit bottom, and the recovery is a very slow one. As for Japan, I'm skeptical there is a lot more upside. I'm not sure we can compare Shinzo Abe with Ronald Reagan or Margaret Thatcher. I think he will disappoint in his ability to reform the labor markets and agriculture and other areas. If he doesn't deliver, then the market may have already rallied as much as it's going to.

Then there are emerging markets—those that make money by exporting commodities and those that make money by exporting manufactured goods produced by cheap labor. Labor costs have been going up a lot. In China, they've been raising minimum wages for the past few years. So margins are getting squeezed over there. In Bangladesh and South Africa, labor is still cheap but not as cheap as a few years ago. A lot of that labor will increasingly be replaced through automation and robotics. Google announced at the beginning of the year that Google Glass will be produced not in China but in Santa Clara, Calif. Then with the commodity producers, I think the supercycle that began in December 2001, when China entered the World Trade Organization, is over. I'm not saying commodity prices are going down. But if they stay flat, that will squeeze margins for a lot of these countries.

Lastly, any movie recommendations?

We just saw 12 Years a Slave, which was hard to watch; the violence was unrelenting, made you see a bit of the constant terror slaves lived under. You get educated, suffer a little, empathize. I would give the Oscar to Chiwetel Ejiofor for this movie. And Cate Blanchett did a great job in Blue Jasmine, playing what Bernie Madoff's wife might have gone through.

Thanks, Ed.

Barron’s Summary: positive on DVN, ALV.DE; cautious on TWTR and 3D printer names

Cover story: Special retirement report takes a deep look at long-term care insurance and how to choose a policy, noting the benefits generally outweigh the high costs; two key factors to take into account are when a person applies and the benefits chosen, with the best age for buying being the mid-50s to the early 60s; Story looks at the so-called 4% rule for withdrawing money from savings during retirement, noting low rates and longevity have changed the thinking on retirement withdrawals.

Features: 1) Positive on Allianz: German insurer isnt getting sufficient credit for its lucrative asset-management business, headlined by U.S. bond giant Pimco, and could return 20%, dividends included, in a year. 2) Positive on firms with strong free cash flow: HBI, IP, LLL, XRX shares look healthier than they appear based on the fact paper profits understate the amount of free, spendable cash they bring in. 3) Positive on DVN: Company has been hit by plummeting natural gas prices, new effort to search for more oil could pay off in 2014 with 25% rise in share price.

Tech Trader: Cautious on TWTR: Story suggests comparisons to GOOG at this stage are futile, since the search giant was profitable when it went public, and Twitter isnt expected to report an operating profit until 2015; Companys small float of only 13% of its stock left $1.3B on the table, the fourth-largest gap on record.

Trader: - Cautious on DDD, SSYS, XONE, VJET: 3-D printing stocks are up sharply and trade at rich valuations, and though theres a lot of hope in each, even investing in all four doesnt mean a buyer will bag a winner; - Cautious on AEO: Retailer has a history of steady sales growth and has remained profitable; selloff may be overdone, and downside risk is mitigated by the dividend yield, inexpensive valuation, and solid balance sheet.

Small Caps: Positive on GLF: Boom in offshore drilling has led to uptick in demand for companys vessels, and as revenue and earnings rise, shares could rally another 30%.

Follow-Up: - Cautious on TSLA: Automaker still faces troubles meeting demand due to limited supplies of lithium-ion cells and efforts to improve their efficiency, as well as concern over second incident of a Model S catching fire; Cautious on IEP: Carl Icahns firm has gained a stunning 169% this year, but units trade at a significant premium to their estimated net asset value of about $78.

Mutual Funds: Interview with Chuck Akre, Portfolio Manager, Akre Focus, who focuses on companies that employ shareholder-friendly management that puts cash to good use (top ten holdings: MCO, MA, CFX, AMT, MKL, DLTR, DTV, V, ROST, AMTD); Investors who buy into focused funds approach should be comfortable with periods of underperformance, or even with some all-out uglieness, since every decision is magnified, for better or worse; Interview with Ed Yardeni, President and Chief Investment Strategist at Yardeni Research, who says Investors Intelligence, the number of bullish investment advisors divided by bearish, shows the market is overbought and at least prone to a correction.

European Trader: Europes central bank trimmed a key interest rate Thursday in a bid to prevent a sustained period of low inflation from destabilizing a fragile economic recovery; - Positive on Ryanair: Recent plunge in share price is a buying opportunity for carrier that generates lots of cash while European legacy airlines struggle.

Asian Trader: Positive on TM, Nissan, HMC: Falling yen has given Japanese automakers a pricing advantage in foreign markets they havent enjoyed in years, with Toyota and Honda the best bets for investors as global demand for cars rises.

Emerging Markets: Before getting into frontier markets, investors should be aware of shortcomings, such as the fact they arent liquid or diversified enough to provide protection in times of trouble.

Commodities: Any dip in production of natural gas will likely be short-lived, and price rises throughout the winter probably would be related to bursts of demand brought on by cold weather rather than shrinking supply.

Streetwise: MSs Adam Parker sees little reason to doubt the bull market, and with corporate debt burden pushed out to 2016 and beyond and companies wary about spending, all pullbacks are buying opportunities, until that changes.

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2022 Qatar World Cup Best Held Nov-Dec: FIFA President Blatter 2013-11-09 14:53:40.669 GMT

By Robert Tuttle Nov. 9 (Bloomberg) -- Tournament in Jan and Feb ‘not possible,’ would conflict with Winter Olympics, FIFA President Sepp Blatter told reporters in the Qatari capital Doha. * Qatar will amend its labor laws to protect workers: Blatter * Qatar will step up labor inspections: Blatter * Blatter says he discussed worker rights in meetings with Qatar’s Emir Tamim bin Hamad Al Thani, Prime Minister Sheikh Abdullah bin Nasser bin Khalifa Al Thani and labor ministry representatives * NOTE: FIFA will wait until next year to decide on dates for 2022 World Cup in Qatar amid concern summer temperatures will be too high * NOTE: Qatar has come under scrutiny over treatment of foreign laborers after the Guardian reported Sept. that 44 Nepalese workers died between June 4 and Aug. 8 amid “appalling labor abuses” in the country

For Related News and Information: First Word scrolling panel: FIRST<GO> First Word newswire: NH BFW<GO>

To contact the reporter on this story: Robert Tuttle in Doha at +974-4452-8148 or rtuttle@bloomberg.net

Tatas drop $1.9bn bid for Orient-Express

MUMBAI: More than a year after it made an offer to buy Orient-Express Hotels, Tata Group's flagship hospitality company Indian Hotels Co (IHCL) withdrew its $1.86-billion bid for the London-based group amid concerns about the worsening global hospitality slump, taking pressure off chairman Cyrus Mistry.

Ever since IHCL, India's largest hotel operator, approached Orient-Express with a buyout proposal, its management had adamantly refused all Tata Group's overtures. It was in 2007 when IHCL had for the first time evinced interest in the Bermuda-registered company.

The Orient-Express board's continuous refusal to entertain the offer from the Tatas, the current economic environment as well as the Indian chain's changed priorities triggered the withdrawal, IHCL said in a statement. IHCL owns 6.9% stake in Orient-Express and said that it would look at various options with regard to this holding. IHCL added that it will continue to engage with Orient-Express regarding its investment and may also look at acquiring more shares of the luxury chain.

In October 2012, IHCL, best known for operating the Taj chain, made an "unsolicited" offer at $12.63 per share to acquire 93.1% in the luxury trains-to-hotels-to-cruises company. The Tatas had also roped in Ferrari chairman Luca Montezemolo and former Orient-Express CEO Paul White to broker the deal with the NYSE-listed company's board. But the latter rejected the offer, saying that it was not considering a sale.

IHCL's withdrawal of offer for Orient-Express will ease its burden as it is going through a tough period and has been clocking losses for some quarters now, said an industry observer.

In a meeting on Friday, IHCL's 10-member board decided not to pursue the transaction and all contracts that were entered into to facilitate the bid have been cancelled, the statement said.

IHCL has seen a record decline in its investment in Orient-Express since it first checked into the British hotels group six years ago. Its stake is worth $106 million (Rs 664 crore at current Re-$ exchange rate) based on Orient-Express' Friday trading price.

The operator of Taj Mahal Palace in Mumbai and the Pierre Hotel in New York said that global recessionary conditions eroded the value of its investment and for the quarter ended March 31 it had recognized an impairment of Rs 373 crore in its investment in Orient-Express.