Loonie closes at 12-month low

The Canadian dollar closed below 96 cents US at a 12-month low Friday, as traders moved into more widely traded U.S. dollar denominated securities.

The loonie's official Bank of Canada close was 95.40 cents US, down 1.07 cents. It hasn't been that low since Sept. 8, 2010.

It has lost 1.74 cents this week.

Markets are concerned that a slowing global economy will hurt exporting countries such as Canada.

The drop came even as Statistics Canada reported the economy registered a modest gain in July, with gross domestic product rising 0.3 per cent, which met economists' expectations.

The GDP rise followed a 0.2 per cent increase in June and translated into annualized growth of 2.3 per cent.

The U.S. dollar strengthened amid another round of doubt that European officials can find a solution to the government debt crisis.

Canada’s dollar has also fallen against other major currencies.

In two months, the loonie has fallen by seven per cent against the Bank of Canada’s index of six currencies used by the country’s biggest trading partners.

"It is impossible to ignore the accelerating weakness in the Canadian dollar; our base case remains that as long as risk aversion remains high, it is likely that the Canadian dollar will struggle," Camilla Sutton, chief currency strategist at Scotia Capital, wrote in a report.

"In order for risk aversion to drop significantly, markets will need a better solution for Europe (one that includes a framework for an orderly default for Greece, bank recapitalization and a plan to ring-fence contagion)," Sutton said.

"We expect this before year end and accordingly, believe we will see the Canadian dollar retrace some of its losses into year end; however, for now the near-term outlook continues to darken."

On Wednesday, the Bank of Montreal predicted Canada’s currency will fall to 93 cents over the next three months amid slowing global growth, the increasing market nervousness over Europe’s debt crisis and as commodity prices continue to decline.

The loonie's highs and lows (intraday):With files from The Canadian Press Accessibility Links

View the original article here

Check Out Of Starwood Before Off-Balance Sheet Loophole Closes

Account­ing rules pro­vide large loop­holes for asset-inten­sive busi­nesses, and the off-balance sheet oper­at­ing lease loop­hole is one of the biggest.

By exploit­ing the off-balance sheet oper­at­ing lease loop­hole, Star­wood Hotels & Resorts Worldwide was able to omit nearly $1 bil­lion in debt from its balance sheet in 2010, $200 mil­lion (20% of the total) of which was added in 2010.

As shown in the fig­ure below, Starwood’s reported net income diverges rather sharply from the eco­nomic earn­ings of the business in its most recent fiscal year.

In addi­tion to over­stat­ing account­ing earn­ings, the large amount of hidden debt cre­ates two red flags for investors:

Free cash flows are about $200 mil­lion worse than they appearReported debt and lever­age are under­stated by nearly $1 billion

I always pair my analy­sis of the true cash flows of a busi­ness with val­u­a­tion of the stocks. It is pos­si­ble for a com­pany to be ter­ri­bly unprof­itable but a good stock if the future cash flow expec­ta­tion reflected in its val­u­a­tion are low enough.

To jus­tify its cur­rent price ~$57, Star­wood would have to grow its after-tax cash flow (NOPAT) by over 20% compounded annu­ally for 11 years. Those are some high expectations…not just the high level of growth but also the long dura­tion of expected growth.

The high­est level of top-line growth achieved by Star­wood in the last 10 years is 17% in 2002. Only once in the last 10 years has the com­pany gen­er­ated con­sec­u­tive years of double-digit rev­enue growth (16% and 11% from 2005 to 2006).

A stock price val­u­a­tion that implies 11 con­sec­u­tive years of 20% growth in NOPAT is too high for most com­pa­nies, espe­cially a hotel in a global econ­omy that is expected to be rather weak for the fore­see­able future.

With no future profit growth, the value of Starwood’s stock is closer to $2 per share. Though I do not nec­es­sar­ily expect Star­wood will achieve no future profit growth, I think the no-growth value pro­vides impor­tant per­spec­tive on how much growth is priced into the stock and how much risk investors take by hold­ing it.

The fig­ure below sug­gests that investors in HOT’s stock could be in for some trou­ble if his­tory repeats itself. The last time Starwood’s reported earn­ings over­stated its eco­nomic earn­ings by more than 15%, the stock fell over 70%, from the mid $60s to under $20 per share.

I also expect that Starwood’s earn­ings over­state­ment will revert to more nor­mal lev­els because com­pa­nies can only bend the rules so much before break­ing them. In addi­tion, Starwood’s understate­ment of leverage will no longer be possible when FASB is expected to change the accounting rules and force companies to report operating lease liabilities on balance-sheet. This change is expected to occur in the next year or so, and it will close the off-balance sheet debt loop­hole.

Star­wood is one July’s most dan­ger­ous stocks and gets my “very dan­ger­ous” risk/reward rat­ing. There is lots of down­side risk given the mis­lead­ing earn­ings while there is lit­tle upside reward given the already-rich expec­ta­tions embed­ded in the stock price. More details on my rat­ing and a free report on HOT are here.

In a busi­ness where investors make money by buy­ing stocks with low expec­ta­tions rel­a­tive to their future poten­tial, HOT fits the pro­file of a great stock to short or sell.

Special Offer: Drink up huge profits with Jim Oberweis.  He’s the guy who had subscribers into Baidu at $8 and who rode Hansen Natural (maker of Monster drinks) for a 1,200% gain. Click here for four stocks to buy and sell now…in the Oberweis Report.

I also rec­om­mend sell­ing the fol­low­ing ETFs because of their “dan­ger­ous” rat­ing and expo­sure to HOT. Note the per­centile ranks show where each ETF stands among the 375+ U.S. Equity ETFs we cover, where 100% cor­re­sponds to the highest-rating.

Pow­er­Shares S&P 500 High Beta Port­fo­lio (SPHB) – 8th percentileiShares Morn­ingstar Mid Growth Index Fund (JKH) – 33rd percentileVan­guard Mid-Cap Growth ETF  (VOT) – 34th percentile

View the original article here