S&P Cuts US Outlook; Markets Overreact

Standard & Poor's cut its outlook on US sovereign debt from "stable" to "negative." Although this was the first time the agency cut its outlook in the 70-year history of the firm, the credit rating remained at AAA.

A negative outlook means that there is 1 in 3 odds that there will be a downgrade within the next two years. Markets were off around 200 bps for most of the morning, until rallying late in the day. The yield on 10-Year US Treasuries touched 3.45% in early morning, but the bond markets took the news lightly, as yields settled down on the day - possibly signalling that the S&P news was not as big of a deal as investors first suspected. Nonetheless, investors surely need to be aware of the rising debt crisis throughout the world, and this is a good place to start.

Interesting Documentary on Chinese Real Estate

The following is a link to an interesting documentary that goes inside urban China to show the booming--yet vacant--Chinese real estate.

Chinese Real Estate: Boom or Bust?

(Respective rights go to SBS Dateline and ETFIdeas)

A Lesson From Warren Buffett...

Warren Buffett recently purchased the market leading specialty chemical company, Lubrizol (NYSE: LZ) at a premium of $135/share. However, Buffett still managed to buy this at value, paying a mere 13x last year's earnings, and 12x forecasts for 2011. This is a classic example of Buffett investing. Brett Arends, of the Wall Street Journal, outlines nine salient theses for LZ:

1. It's lucrative niche.
2. It has a wide economic moat.
3. It's in a dull industry.
4. It has pricing power.
5. It's stable.
6. It benefits from overseas growth.
7. It has low unionization.
8. The stock was reasonably priced.
9. He likes the management.

These are all key investment drivers that every investor should start looking at when doing fundamental analysis of a company (i.e., management, economic moats, valuation).

Here is the link to the Wall Street Journal article:
http://online.wsj.com/article/SB10001424052748703328404576207040639038696.html?mod=sf2tw

Saudi 'Day of Rage'

Tomorrow marks the 'Day of Rage' (3/11/11) that protesters are planning in Saudi Arabia. Fear of more uprisings in the Middle East, specifically in Saudi Arabia, have significantly hurt the overall markets today. Oil recently spiked over $2/barrel in the matter of minutes with an AP report suggesting that Saudi police open-fired on protesters in preparation for the 'Day of Rage.' Given Saudi Arabia is the world's largest exporter of oil, this poses a serious risk for global markets, and is likely to push oil and gas prices up for the next few months.

The events in the Middle East simply prove the linkage between U.S. and foreign markets - we are truly a global economy.

Five Current Thoughts

1. Commodity Inflation: Silver, gold, wheat, corn....its all up, and does not seem to be stopping anytime soon.
2. Crisis in the Middle East: Global uprisings fueled by political and social unrest are gathering through social media sites such as Twitter. The crisis in Libya, for instance, has shot oil prices near the $100 mark and is causing $3-$4 a gallon at the pump, easily.
3. Rising Equity Markets: The Fed's $600 billion in government purchases has increased the money supply back into the hands of investors and subsequently keeping interest rates lower for the time being. This seems to be spurring money into the markets, keeping levels afloat.
4. Artificial Intelligence: IBM's supercomputer, Watson, handily beat Jeopardy's two most successful champions and furthers the case that the exponential growth of computing will soon match the levels of humans.
5. Consumer Confidence: Numbers from the University of Michigan's consumer sentiment were at 77.5, up from 74.2 the prior month. Confidence and sentiment seems to be back on the rise, but I still don't buy the fact that consumers have increased their saving habits - which needs to happen on a more wide scale across the US.   

$20 Amazon Gift Card for $10 (50% OFF)

Check out this great deal at the SlickDeals forum:

http://slickdeals.net/forums/showthread.php?sduid=0&t=2586287

Auto Part Retailers Look Attractive After Pullback

The average age of a car in the United States is rising. It is now just over 10 years, while the average mileage on a passenger car is over 150,000. What does this mean for auto part retailers? Increasing demand and increasing profits. Companies such as AutoZone (AZO), O'Reilly's (ORLY), and Advanced Auto Parts (AAP) have been taking advantage of the increase in demand ever since in the financial crisis of 2008. Consumer confidence went to new lows and it seemed as though no one was willing to buy a new car. Thus, consumers had to stick with their unreliable old vehicles - meaning more visits to auto part specialists for routine check-ups and maintenance. With uncertain economic views and moderate consumer confidence, these specialty shops are seeing continuing increases in margins and higher net incomes.

One interesting aspect of these stocks are their low betas. Beta is a measure of risk, measuring performance in relation to the whole financial market, such as a benchmark like the DowJones or S&P 500. If a stock has a negative beta (i.e. < 0 ), then if the market is going down, then the negative beta stock will typically go up - hence the negative correlation, and vice versa. Average beta for this industry is right around 0.50, meaning a more conservative investment, and a good hedge against market downfalls.

Take a look at these charts after their recent pullbacks - a good entry point in my opinion.

(AZO)

 (ORLY)

(AAP)