Update Cummins (CMI) in my Jubak’s Picks portfolio

Cummins (CMI) has sold off today—the shares were down 4.3% at the close–after it reported earnings of $2.38 a share and revenue of $4.47 billion for the company’s first quarter.

Those earnings were 18 cents a share above the Wall Street consensus. Revenues were slightly above the Wall Street projection of $4.41 billion.

And the stock sold off?

Three reasons for that, I think.

First, normal sell-on-the-news profit taking. Shares of Cummins were up 32% for 2012 as of the close on April 30. (Cummins is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/the-jubak-picks/ .)

Second, a normal what-have-you-done-for-me-lately sell. Read more

What country does this describe?

The country’s banks are short of capital and will have to go to the financial markets to raise more in 2012—and 2013.

Bank balance sheets have ballooned as a result of lending to real estate developers.

Everyone believes that banks’ official accounts badly understate the number of bad loans on their books.

And, finally, it’s just about impossible in this country to separate bank and government finances.

Spain and Italy? Of course. And you can work your way around Europe adding other names to your list of guesses.

But the country I had in mind was China. China’s banking problem isn’t as far along as that in Europe. Notice that I’m calling it a “problem” rather than a “crisis.” But China’s banking sector is headed toward a crisis—and the government’s efforts to head off that escalation will be one of the major drivers in China’s economic and monetary policy in 2012 and 2013. Want to understand how much stimulus Beijing will pour on its economy—and therefore whether you should be putting money into Chinese stocks or taking it out (and when)?  Take a long look at China’s banks.

If you understand the nature of China’s banking problem, you’ll understand why I believe that China’s government will move sooner rather than later and more aggressively rather than more moderately to stimulate China’s economy. In the short run, China simply can’t afford to let a slowing economy make the problems in its banking sector worse. In the long run? Ahh, a very different question with a much more worrying answer.

Let’s start with the strangest manifestation of the problems in the sector, the need of China’ banks to raise a huge amount of capital. Read more

Novo Nordisk disappoints ever so little and takes a big hit–I’d wait to buy

Stocks that trade at a premium don’t need to do much to disappoint. In the case of Novo Nordisk (NVO in New York and NOVOB.DC in Copenhagen), the world’s largest maker of insulin, the disappointment was sales growth of 13% year-to-year that missed Wall Street projections by a percentage point. Net profit climbed by 15% from the first quarter of 2011. In its guidance the company raised its guidance for full-year 2012 sales growth to 8% to 11% in local currency. EBIT (earnings before interest and taxes) are now projected to grow by at least 10%. That’s a very slight tweak from the earlier guidance for “about” 10%.

After the company reported on April 27 the stock fell 4.3% to close at $144.55 in New York. Aas of 3 p.m. New York time on April 30 the shares were trading at $147.01.

Investors expect more from a stock priced at a big premium to its peers—and that’s exactly how Novo Nordisk is priced. The shares trade at 20.3 times projected 2013 earnings per share, according to Credit Suisse, versus a multiple of 11.2 times earnings for the company’s pharmaceutical peers.

That premium is based on Novo Nordisk’s comparative shelter from the patent expirations and generic competition that threaten sales and earnings at peers such as Pfizer (PFE) or Merck (MRK). And on the growth prospects of the global diabetes market. What has been called, rightly I think, a global epidemic of diabetes has produced an increase in the incidence of diabetes in the United States of 90% between 1995-97 and 2005-2007. That increase, the Centers for Disease Control reported in its study of the growth of diabetes, was a result of an aging population—since diabetes incidence increase with age—and increasing obesity. Those trends aren’t limited to the United States and the World Health Organization estimates that there are now 350 million people in the world with diabetes.

Over the last five years earnings at Novo Nordisk have grown by an average of 24.9% a year. Wall Street now projects average annual growth of 17.5% over the next five years. My guess is that with the stock’s current price-to-earnings ratio investors are actually counting on even more.

Hence the sell off on the few signs of bumps on Novo Nordisk’s growth path. Read more

It will be hard for global stock markets to keep eyes off France this week. That’s not only because the French election is indeed critically important for the euro and the course of the euro debt crisis—but also because French politics is just so entertaining.

However, there are a few things on the schedule this week worth watching outside of France. The biggest is the U.S. jobs number for April due on Friday, May 4.

What can you say about an election where politicians feel free to call leaders of opposing parties “half-demented” and a “bat” as Jean-Luc Melenchon said of Marine Le Pen? Melenchon, leader of the far-left party that finished fourth in the first round of voting, is supporting Socialist front-runner Francois Hollande. Le Pen, whose far-right party finished third, has not urged her supporters to vote for incumbent Nicolas Sarkozy but a key to the election is how many of those voters swing into Sarkozy’s column in the second and final round head-to-head vote between Hollande and Sarkozy on Sunday, May 6. (Le Pen has called the choice one between the plague and cholera.)

What financial markets will be watching to see is how far the euro bashing in each camp will go. Hollande has called for a renegotiation of the EuroZone’s fiscal responsibility pact. Sarkozy, before the election a key ally of Germany’s Angela Merkel and her fiscal austerity approach to the euro debt crisis, has tacked even further to the right in an effort to win over Le Pen’s supporters with calls for immigration controls that would require scrapping the Schengen agreement that created a 26-country area without internal border controls.

The contest has created a conundrum for Germany’s Merkel. While she would still clearly prefer a Sarkozy victory, as the odds that Hollande will win have climbed, her rhetoric has softened to create a space where a post-Sarkozy France and Germany could still find room to work together. For example, this week while maintaining her insistence that there can be no re-negotiation of the fiscal responsibility pact, she did say that European leaders will discuss a growth pact—a key Hollande campaign plank—at their June summit meeting.

Meanwhile, back in the United States, financial markets will be anxiously awaiting the U.S. jobs and unemployment numbers due on Friday to see if signs of weaker U.S. economic growth in the last week get confirmation. U.S. GDP growth for the first quarter came in at just 2.2% in data released on Friday. That was below the 2.5% consensus among economists and below the 3.0% growth rate in the fourth quarter of 2011. Add that to recent higher-than-expected initial claims for unemployment and today’s bigger than expected drop in the Chicago Purchasing Managers Manufacturing Index and it’s hard to avoid the conclusion that U.S. economic growth is slipping.

Economists surveyed by Briefing.com are looking for the U.S. economy to have added 162,000 jobs in April. Although that would be an improvement from the disappointing weak 120,000 jobs added in March, it would remain below the 200,000-plus jobs created in December, January, and February.

Was the March drop just a one-time thing or a sign that job creation has significantly slowed? If you’re worried about the growth rate in the U.S. economy reported last week, it’s hard to see how a weak jobs number would make you feel better. If relatively few new jobs were created in April that’s like to keep aggregate wage growth near zero again in April. Aggregate wages grew by 0.7% in February creating optimism for higher consumer incomes and therefore faster economic growth.

Update Vale (VALE) in my long-term Jubak Picks 50 portfolio

I’d like to blame the weather. And there is no doubt that weather in Brazil’s rainy season hurt Vale’s (VALE) first quarter earnings reported on April 25.

But when the drop in quarterly earnings is the third consecutive drop in earnings, then I think you can be pretty sure something more serious is going on. (Vale is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ )

What’s most important, though, to investors who have made money on Vale in the past and have been looking to see when they might be able to make money on Vale in the future is that all these quarterly declines in earnings are setting up a potentially good second half for the stock.

Vale, reported net income of $3.83 billion for the quarter. That was down 44% from the record $6.83 billion in net income for the first quarter of 2011. Net income was also down 18% from the fourth quarter of 2011.

Part of the problem was indeed the wet weather. Wet iron ore sells for less than dry ore and Brazil’s heavy seasonal rains reduce production too. Iron-ore production did fall 2.2% in the quarter. Vale’s production costs rose 2% because the company hired more workers to do dredging and maintenance on its mines.

But the bigger problem was falling iron-ore prices on lower demand from Europe. Read more