Take a look at this graph:

One of two things is happening here: either McDonald’s is running its restaurants with incredible efficiency, or the company has found the proper balance of geographic saturation (that is to say, in general McDonald’s franchises are not taking business away from other McDonald’s franchises, a la Starbucks and Subway).  In either (or both) case, this bodes well for the company.

Look for the stock price to rise along with earnings.

Today’s Daily Angle comes from Wikinvest Wire member StockTradingToGo. You can read the full article on the Stock Trading to Go blog.

Numbers never lie, but people sometimes do. Throughout history, accounting frauds have been used to make a business appear healthy and profitable. From Sunbeam to Enron to WorldCom, these frauds went undetected, grew, and eventually destroyed the company.

Although auditors often miss frauds and corporate mangers do their best to conceal them, investors have the potential to detect possible problems. Using publicly available financial statements, we can compare different metrics to determine whether the accounting looks weak and trouble lurks. While these tests do not indicate fraud per se, they are warnings that investors should remain cautious. The five main ratios that may foretell financial danger are:

1. Accounts receivable growth versus sales growth – When a company sells goods or services, it often delivers the product with a promise from the customer that he or she will pay for the item at a future date. This promise creates an account receivable. If we see accounts receivables growing faster than sales it could indicate that the company is extending credit to customers who are not paying or has aggressive revenue-recognition policies. If either of these occurs, we should expect a future charge to reduce income as the low-credit-quality customers cannot pay their bills or the revenue-recognition policy is changed. Some of the more popular frauds involve companies shipping merchandise to consumers that was never ordered and recording the shipment as a sale. This is called channel stuffing. When channel stuffing occurs, we see a large spike in accounts receivable. Investors should look for the ratio of accounts receivable growth to sales growth to be negative as it indicates receivables is growing slower than sales and the company is generating cash from its operating business.

2. Property, plant, and equipment (PPE) as a percent of total assets – PPE represents long-term assets that a company uses to run its business. For Ford the PPE would be a factory and for Goldman Sachs an office building. The ratio of PPE to total assets should be relatively steady over time. Large variances in either direction indicate something is amiss. For example, if we see a large spike in this ratio, it may indicate that a company is capitalizing routine maintenance costs. This pattern was a key part of WorldCom’s accounting fraud. Conversely, a declining ratio may show that a company is not investing in its core business. Were this to occur business is likely to suffer in the future.

3. Accounts payable versus sales growth – When a company receives goods and services, it promises to pay for them at a future date. This promise creates an account payable. If we see accounts payable growing faster than sales, it indicates the company is delaying payment for the goods it receives. At some point in the future, there will be a cash outflow to pay for these goods and the balance sheet will weaken. Investors should expect the ratio of accounts payable to sales growth to be negative, as ballooning accounts payable indicate future cash outflow.

4. Cost of goods sold (COGS) as a percent of sales – COGS represents what a company pays for the inventory it then sells to customers. We should expect the relationship between COGS and sales to be relatively stable as companies adjust their business strategies to market expectations. A large variation in this relationship could indicate accounting regularities.

5. Operating cash flow versus earnings per share (EPS) – GAAP accounting intends to match expenses with revenue. If a company buys inventory it does not take the cost as an expense when the inventory is paid for. Instead, GAAP allows the expense to match the revenue, and recognizes the expense when the item is sold. In theory, this reduces volatility. However, it also creates differences between cash flow and EPS. When the inventory was paid for, cash went out the door and cash flow declined with no effect on EPS. Over time, we should expect this difference to disappear as accounting cycles converge. However, investors should examine the difference as a means of detecting earnings’ quality. If EPS consistently exceeds operating cash flow, it indicates poor earnings quality. Companies with poor earnings quality make poor investments.

These warnings signs are very helpful to investors. When something is awry it does not mean a fraud has occurred, but it does warn us to pay attention. Companies flashing accounting warning signs typically have subpar performance over coming quarters.

Today’s Daily Angle comes from Andrew Snyder of Wikinvest Wire blog Contrarian Profits. Read the full article on the Contrarian Profits Blog

 

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View the full PALM chart at Wikinvest

The cell phone industry is making big moves. Palm’s new phone release is taking its share price down. While speculation over Steve Jobs and the iPhone is creating its own problems for Apple.

Yesterday was a pretty dismal day on Wall Street. With thoughts of surging interest rates, an unstoppable rise in unemployment levels and bank fears remaining high, plenty of investors are taking their recent gains and heading back to the sidelines.

With the S&P plunging below the 930 level yesterday and volatility on the rise, it was not a day to put a news release on the Street, especially if it contains less-than-stellar news.

Palm (NASDAQ:PALM) is learning the lesson the hard way today. After releasing its highly anticipated Pre over the weekend and promptly selling out of just about every phone it had available (about 50,000 units), its shares are down by close to 10%.

The hot-selling left 15,000 Pre buyers on a waiting list, but it is opening Palm to increased pessimism. Investors are worried the company will not be able to deliver phones to the market fast enough to fight off fierce competition from rivals, especially strong market leaders like Apple (NASDAQ:AAPL).

There is likely nobody sweating Palm’s productions problems more than Sprint (NYSE:S). The company has just six months to be the exclusive seller of the Pre phone. After that, Verizon (NYSE:VZ) and its army of wireless customers will have access to the product.

Customers that do not get locked into Sprint’s network between now and then will have ample opportunities to check out Verizon’s offering. Sprint needs Palm to deliver every phone it can.

Is the Apple ripe?

Then, of course, there is the 800-pound gorilla, Apple’s iPhone. The phone with a seemingly unlimited amount of downloadable applications has taken the market by storm, making Apple a dominant player in thecell-phone market, a notion that was unthinkable just a few years ago.

But it proves one heck of a good point.

The cell-phone industry is product driven. Produce a high-demand product and a company can be catapulted to the top of a fickle industry. Just because Apple is in charge now, does not mean it will stay that way.

It will be interesting to see what the next generation of the iPhone will bring. Fortunately, we will find out soon enough. Apple and its conference are generating plenty of headlines this week.

As investors, there are multiple ways to play the situation. With volatility on the rise, well-played options contracts will certainly lead to strong profits. But even without the leverage of derivatives, investors can expect to have multiple double-digit profit opportunities.

Palm may be down by 9%, but the move is certainly not finished. One hint of positive news could reverse the action. Or a single press release can turn it into a long-term trend.

Apple is teetering as well. The iPhone has created a lot of buzz. It will be hard for the company to live up to current standards if the economy does not make the fast rebound that was priced into the markets over the last few weeks.

And then, of course, there is always the risk associated with Steve Jobs’ health. Talk about a wild card.

The point is today’s action has created multiple trading opportunities. Take advantage of big, psychological market swings. In the long run, the market is rational and will work itself out. But all too often (like today), emotions make for wicked short-term mistakes.

Take advantage of them.

Today’s Daily Angle comes from Wikinvest Wire member Kathy Lien of KathlyLien.com and FX360.com. Read the full article on Kathy’s blog.

The biggest story in the currency market this week is news that Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This means that the U.K. now has a 1 in 3 chance of losing its prized AAA rating. I have written an extensive article on what this could mean for the British Pound and if the threat is serious on FX360.com.

Instead, I think it is more interesting to talk about whether the U.S. could be the next country to receive a credit warning. According to the comments by the S&P, their fear is that debt in the U.K. could hit 100 percent of GDP in the near term. Yet the U.K. is not the only country to be up to their ears in debt. The IMF released a report in April that projects U.K. debt load to be at 66.9 percent of GDP compared to 70.4 percent for the U.S. and 69 percent for the Eurozone. The following chart shows the IMF’s estimated government debt as a percentage of GDP and it is clear that the U.K. is not running the highest debt load (click on image to enlarge).

&P is starting to examine more G10 nations and there is a decent chance that the U.S., Germany, France, Italy, and Japancould come under review as well. There are major consequences to downgrading U.S. debt or even just putting on credit watch. I think that a physical downgrade of U.S. or U.K. is unlikely. The U.S. dollar is the global reserve currency and S&P may not have the guts to say that the “Emperor has no clothes.” This is one area where being reactive rather than proactive can actually benefit S&P.

Last week, in my article “Could America Really Lose Its Triple A Rating?,” I said:

“I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations. ”

 

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As of Wednesday, copper prices have fallen for five days straight, the longest losing streak since the tumultuous period in mid-December when it appeared the whole world was about to come to an end and surging demand for Treasuries pushed the ten-year yield to what can only be described as the “freakishly low” level of 2.0 percent.

Hey, look. Yields are falling again…

Often moving in the opposite direction of the trade-weighted dollar as part of the general “inflation trade”, or, after the plunging prices seen over the last year, what would be better described as the “re-flation trade”, the metal usually doesn’t do very well when the dollar is strengthening against other currencies.

Hey, look. The dollar is surging today…

The world’s most widely used metal, called Dr. Copper because it has a PhD in economics and possesses an uncanny ability to predict future expansions and contractions, now appears to be questioning its recent assessment of the economy after feeling quite optimistic for months.

That much is clear in the chart at right.

Actually, from the looks of the chart, Dr. Copper seems to have first spotted a rebound back in December but wasn’t sure until mid-February, still about three weeks in advance of the same rebound being detected by equity markets in early-March.

Of course, much of the good doctor’s recent outlook had to do with what’s been going on in China where the government has been stockpiling the metal to be used for infrastructure projects later in the year.

Unlike the U.S., most of China’s stimulus money is being spent on building stuff.

Some say that China’s central bank has been involved in the copper purchases somehow and that it has fistfuls of dollars it desperately wants to exchange for something other than dollars. To be sure, that is an understandable position to take. It’s nice to own more gold, a point that was made clear with the recent announcement of the doubling of their gold reserves, but you can build a lot more stuff with copper than with gold.

All of this may be confusing Dr. Copper a bit.

Up until a few weeks ago, it seemed clear that the global economy was on the mend, but there is much more uncertainty now.

The doctor will surely provide an update when one is ready.

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View the full Silver Deliv 5/09 chart at Wikinvest

Gold declined from Hong Kong through the first hour of New York trading on Monday, shedding about $15, rallied back until the noon hour, but then fell right through the Globex to finish at $906.20/oz., down $6.80. Overnight, gold has fallen off.

Platinum really hit the skids, plummeting straight through with little interruption, ending at $1140, down $35. Overnight, platinum is sharply lower.

Silver fared much better than its sister metals and, even though it too peaked in early far East trading, it managed to hold above $13 all the way through the Comex, before easing on the Globex to close at $12.90/oz., up a penny. Overnight, silver has fallen steeply.

Precious metals fanciers couldn’t have been too disappointed with yesterday’s action, given that silver held steady and gold fell only modestly in the face of both a rising dollar and slumping oil.

Most of the market talk yesterday centered on China’s surprise announcement late last week that it has been quietly building its gold reserves for years. And though officially it has bolstered stockpiles by 34 million ounces, many observers believe that the actual figure could be much higher than that.

Even if we’re getting the straight dope, “The Chinese government’s decision further demonstrates the leadership it is increasingly taking and its public recognition of gold’s proven role as a store of value and portfolio diversifier,” wrote Aram Shishmanian, CEO of the World Gold Council.

Julian Phillips, of Goldforecaster.com, went further: “By publicizing this information one has to ask, are they going to buy local supply in larger quantities? Will they take all the local production? If so this will mean a drop in supplies to the open market of a substantial amount. This will be extremely gold positive!

“It will also mean that not only is Russia buying around 4 tonnes a month for reserves but China is effectively buying over 6 1/2 tonnes of gold a month for reserves. Now add to that that the Central Bank Gold Agreement signatories are selling around 1 tonne of gold a month, with one signatory buying gold now, then it shows that Central Banks of importance are favoring gold far more than before. This does reflect [as the Bundesbank President said] that ‘gold is a useful counter to the swings in the $.’

“Certainly if the I.M.F. is to sell gold [not a foregone conclusion!] at an auction as they did in the past, then I would expect a central bank like Russia or China to be a buyer, at market prices. The implications for gold returning to a monetary role [reserve asset in support of currencies] are tremendous and gold price positive.”

Phillips then cautioned that, “If [gold] has such a role in the future then the possibility of governments taking over the gold market rears it ugly head.”

The economy is in turmoil, governments are in unrest, our banks are insolvent. In these troubling times, where can an investor turn for strength, stability, and girth of returns? The Dong. If you had invested in the Dong (the currency of Vietnam) one year ago, your money would have grown over 10% during one of the most tumultuous economic periods in history. Compare that to the S&P 500’s decline of 38% over the same period, and it’s easy to see why some people just can’t get enough of the Dong. While the US and other world economies have deflated, performing flaccidly in the wake of a world-wide recession, the Dong has remained strong, engorging investors with profits week after week, night after night, and sometimes in the morning before the opening bell. During the trading day, in after-hours markets, over the counter, in pink sheets, it doesn’t matter; in trading sessions circumscribed or uncircumscribed, the Dong has been rock-solid.  

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Of course, the Dong has had its nay-sayers; analysts who said it couldn’t stay up, that it might not always perform, that it wouldn’t keep thrusting ahead. Yes, the short sellers would have had you believe that the Dong was bound for an embarrassing collapse. But in the end, time has demonstrated that it’s simply not satisfying to go short on the Dong.

The Dong may not be for everyone - the volatile ups and downs might wear out a timid investor - but even those with a low risk tolerance stand to make gains if they play it safe. For example, taking a spread position on the Dong can provide a hedge against premature or erratic movements. Or, if you’re unfamiliar with the history of the Dong and want to avoid direct exposure, a targeted or diversified currency ETF can provide a protective barrier to reduce your risk.

Granted, the Dong can’t stay up forever. Past performance suggests a forthcoming climactic spike, coupled with a surge in liquidity, and an ultimate shrinking of returns. As with any investment, when it comes to the Dong, the key is to know when to pull out.

Disclosures: Long Dong

Today’s Daily Angle comes from Wade Hansen and his staff at LearningMarkets.com. You can read more on the Learning Markets Website.

Stop Looking at the Value of the Dow Jones Industrial Average (DJIA)!

Has the stock market hit bottom? Have stocks found support? When will prices stop falling?

Stock traders ask these questions every day, but they keep looking in the wrong place to find the answers. Investors seem to be transfixed on the value of theDow Jones Industrial Average (DJIA), but the value of the Dow isn’t going to tell you when the stock market has found a bottom—at least not until well after the fact, that is. You need to look at other indicators to determine when the stock market is going to find a bottom and start moving higher if you don’t want to miss the initial surge. In this article, I’ll cover five such indicators.

I referred to these indicators as “secret” indicators in the title, but I don’t mean secret as in a “wall-street-fat-cats-conspiracy” kind of secret. I mean secret as in an “individual-investors-tend-not-to-know-about-these-indicators” kind of secret. But once you are done with this article, you will know about these indicators and how to use them.

Here are the five indicators you can use to help you determine when the stock market is likely to form a bottom:

• TED Spread
• Baltic Dry Index
• NYSE Margin Debt
• Bullish Percent Index
• Short Interest

The first two indicators look at the health of the global economy, and the last three look at what the major players in the stock market are actually doing with their money. So let’s get started.

TED Spread

The TED Spread gives you a snapshot of how healthy the global credit market is. The credit market is going to have to thaw and begin functioning in a healthy manner before the stock market can truly rebound and begin climbing again.

The TED spread measures the difference between the yield on the 3-month Treasury Bill (T-bill) and the value of the eurodollar futures contract—which is based on the 3-month LIBOR rate. To calculate the TED spread, you simply subtract the yield on the 3-month T-bill from the value of the eurodollar contract. For instance if the value of the eurodollar contract is at 3.75 percent and the yield on the 3-month T-bill is at 2.25 percent, the TED spread is 1.50 percent, or 150 basis points (3.75 - 2.25 = 1.50).

You will most likely see the TED Spread narrowing before the stock market finds a bottom. (Learn more about the TED Spread in this and article on Learning Markets.)

Baltic Dry Index

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The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials. The fact that the Baltic Dry Index focuses on raw materials is important because demand for raw materials provides a glimpse into the future. Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be increasing. Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should be decreasing.

The Baltic Dry Index (BDI) is a measure of what it costs to ship raw materials—like iron ore, steel, cement, coal and so on—around the world. The Baltic Dry Index is compiled daily by The Baltic Exchange. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different shipping routes around the globe. Once they have obtained these numbers, they compile them and find an average.

You will most likely see a surge in the value of the Baltic Dry Index—showing a surge in production—before the stock market finds a bottom. (Learn more about the Baltic Dry Index in this video and article on learning markets.)

NYSE Margin Debt

The NYSE Margin Debt number gives you an idea of how confident stock traders are in the prospect of stocks increasing in value.

Buying stocks using borrowed money from your broker is called buying stock on margin. Every month, the New York Stock Exchange (NYSE) releases numbers showing how much money was borrowed on margin to buy stocks on the NYSE.

As you can imagine, the amount of stock bought on margin is extremely large, but the total number fluctuates quite a bit based on how confident traders are. When stock traders are confident, they borrow more on margin. When stock traders are less confident, they borrow less on margin.

You will most likely see an increase in margin borrowing once the stock market finds a bottom. (Learn more about the NYSE Margin Debt numbers in this video and article on Learning Markets.)

S&P 500 Bullish Percent Index

The S&P 500 Bullish Percent Index gives you a much broader picture of just how many stocks are moving higher than you can get by looking at the value of the Dow Jones Industrial Average or the S&P 500.

The S&P 500 Bullish Percent Index is a point-and-figure chart that derives its value from the point-and-figure charts of the 500 stocks that comprise the S&P 500. Here’s how it works:

• If an increasing number of those 500 stocks are showing buy signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving higher.
• If an increasing number of those 500 stocks are showing sell signals on their point-and-figure charts, the S&P 500 Bullish Percent Index will be moving lower.

You will most likely see a broad number of stocks—not just a few select shares—increasing in value once the stock market finds a bottom. (Learn more about the S&P 500 Bullish Percent Index in this video and article on Learning Markets.)

Short Interest

Monitoring the short interest in the stocks you are interested in buying will give you a good idea what the investor sentiment toward those stocks is.

Short interest is the number of shares that investors are currently short on a particular stock.

For instance, if stock traders shorted 15 million shares of a company and then covered 5 million shares by buying the stock back, the current short interest would be 10 million shares (15 million - 5 million = 10 million).

You will most likely see the short interest in major stocks decline once the stock market finds a bottom. [Learn more about Short Interest in this video and article on Learning Markets.)

Conclusion

While no indicator is a magic bullet for identifying a market bottom, monitoring a few broad economic indicators can give you a good idea of how healthy the global economy and the stock market are.

After all, stocks go up when the companies represented by those stocks do well, and companies tend to do well when the global economy is healthy and functioning correctly.

 
 

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Monday morning, the Financial Times released a draft of the G20 communique or “statement” that will be unveiled on Thursday (and reprinted on my blog). It contained no new fiscal stimulus or comment on currencies.

This exacerbated the rally in the U.S. dollar which was already shooting higher on the fear of GM or Chrysler bankruptcy. Trouble in the auto sector is weighing heavily on the market as the U.S. government moves to overhaul the automakers. Top that off with strong repatriation related demand for the Japanese Yen and it helps to understand why the best performing currencies today are the U.S. dollar and Japanese Yen. Last week on my blog, I talked about how the EUR/USD is on its way to 1.31. We came very close to that level Monday morning (19 pips to be specific). With no relief in sight, there is a good chance that we could see the currency pair test and break that level once again.

Take a look at the US Dollar and Japanese Yen’s performance on Monday:

US Dollar (source: Bloomberg)

Japanese Yen (source: Bloomberg)

Continue reading this post on Kathy’s blog