Thursday Dec 14, 2006

Cheaper by the dozen

Taipan Group's Dynamic Market Alert

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Cheaper by the dozen

by J. Christoph Amberger

The U.S. stock index posted some handsome gains in early trading as Costco reported that first-quarter profit rose 10%.

Whether this came as a surprise to analysts is uncertain. I, however, was as prepared for the news as I am for our monthly American Express statement, the only card they’ve been accepting at Costco for years. Because there is a distinct correlation between Costco’s profitability and the frequency that line items under the header “Costco” appear on the statements.

(There is yet another indicator: Our cellphone bill. Whenever the best wife of ‘em all heads out to our area’s temple of bulk-rate goodness, I have to make sure I remain in the vicinity of a telephone, as half the purchase decisions will require my input.)

Net income generated off our light bulb, toilet tissue, canned ravioli, dried food, furniture and DVD purchases climbed to $236.9 million, or 51 cents a share from $215.8 million, or 45 cents, a year earlier. Revenue, including membership fees, grew 9.4% to $14.2 billion in the three months ended November 26.

Costco stock rose 3.2% to $54.88 in early trading and is up almost 10% this year.

Since the appetites and feeding habits, especially those of my boys, are gaining on an almost daily level, I believe we’ll be spending Costco into profitability next quarter as well.

-- In the November issue of Taipan, I highlighted the incredible potential of Icelandic bonds as a prime income vehicle in any portfolio. After a swift and massive decline of the Icelandic kronur in spring, a result of the global capital shifts that were turning out of the carry trade back into blue-chip stocks, the kronur has regained most of the ground it lost against the U.S. dollar.

With the decline of the speculative attractiveness of the carry trade for the last couple of months, I think most of the downside risk for the Icelandic currency is contained. Even the trigger that had provided the spark for the last sell-off, an unfavorable rating of Iceland’s economy based mainly on the country’s new debt levels, appears to have lost its ability to spark another decline.

Chuck Butler, author of the Daily Pfennig, writes:“Iceland continues to be the ‘whipping boy’ of the Fitch Ratings Agency. However, with Fitch’s last comments about Iceland, the kronur was able to hold onto its gains that have been put on the books since May.

“The krona continues to see activity on the other side of the ‘carry trade’ with Japanese yen acting as the ‘funding currency.’ As long as the carry trade exists, the kronur will be underpinned, with a bias to strengthening as the dollar continues to weaken.”

The attraction of Icelandic bonds and Icelandic interest rates is the high yield of 12.01% APY. With inflation still running above 7%, the Central Bank should keep rates at current levels as we head into 2007.

If you’re able to purchase Icelandic bonds without too much trouble, you should do that right now. But, as I discovered during my meeting with EverBank’s Frank Trotter last Tuesday, there is an even easier way to siphon high Icelandic yields into your income portfolio.

I was, of course, aware that EverBank had been offering kronur-denominated CDs for about a year. (We at Taipan have been recommending them since they were Mark Twain Bank and one of the few, if not only, banks in the United States that would enable normal investors like you and me to profit from high international exchange rates in FDIC insured CDS, checking and savings accounts.)

Frank admitted that the plunge in the kronur last spring had hit hard. But those investors who staid with the program were able to make up most of the short-term drop in value by the subsequent rise in the kronur’s valuation and, of course, the high yield rate.

EverBank’s Icelandic krona Single Currency CD is offered in a three-month term only, with a $10,000 minimum and FDIC insurance of up to $100,000. Some currency conversion fees apply when converting to/from foreign currency to U.S. dollars. Their rates as of 11/17/2006: 12.01% APY on an interest rate of 11.50%.

To learn more and apply for the Iceland krona CD offered by EverBank, visit their Web site.

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Earnings Announcements for December 15, 2006

J2 Global Communications Inc and Star Gas Partners are releasing earnings. 

Unlock Dates for December 2006 

12/25/06 – J. Crew Group Inc is unlocking 18.8 million shares.
12/25/06 – Replidyne is unlocking 4.5 million shares.
12/26/06 – Aventine Renewable Energy is unlocking 9.058 million shares. 

Upgrades and Downgrades

Charming Shoppes upgraded by Matrix Research from Hold to Buy.

MetLife upgraded by Bear Stearns from Peer Perform to Outperform.

BEA Systems upgraded by JMP Securities from Market Underperform to Market Perform.

Peabody Energy upgraded by JP Morgan from Underweight to Neutral.

Eldorado Gold downgraded by RBC Capital Markets from Top Pick to Sector Perform.

Imperial Oil downgraded by Canaccord Adams from Buy to Hold.

Digital River downgraded by Credit Suisse from Outperform to Neutral.

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- Jay Leno, Dec. 13, 2006

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