Archive for 2011
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Morning News: September 27, 2011
Eddy Elfenbein, September 27th, 2011 at 5:22 amGlobal Takeover Rebound Falters on European Woes
European Shares Lifted by Euro Zone Debt Plan Hopes
European Loan Growth Quickened in August, Defying Debt Crisis
Strikes Grind Greece to a Halt
France’s Pre-Louis XIV System Helps Cap Debt Costs
S&P Forecasts Strain for China Property Developers
Gold Rallies After Biggest Three-Day Drop Since Lehman Collapse
Geithner Tells Europe to ‘Get On With It’ After Global Chiding Over Crisis
Freddie Mac Loan Deal Defective, Report Says
Sales of New U.S. Homes Fell to Six-Month Low in August
S.&P. Target of Inquiry in Securities
Buffett Spots Fresh Bargain: Shares in His Own Company
Rival Ad-Tech Firms to Become One
Deloitte Sued for $7.6 Billion, Accused of Missing Fraud
JPMorgan Seeks to Move Lehman’s $8.6 Billion Lawsuit
Goldman Sachs Draws Up Deeper Cuts
Jeff Miller: Investors: Prepare to be deceived on the Europe Story
Phil Pearlman: The Tao of Missing a Trade
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SEC May Move Against S&P
Eddy Elfenbein, September 26th, 2011 at 12:47 pmThe staff of the Securities and Exchange Commission is considering recommending civil legal action against Standard & Poor’s over its rating of a 2007 collateralized debt offering.
Collateralized debt obligations, also known as C.D.O.’s, are securities tied to multiple underlying mortgage loans. The securities generally gain value if borrowers repay. But if borrowers default, investors lose money. Soured C.D.O.’s have been blamed for making the 2008 financial crisis worse. Ratings agencies have been accused of being lax in rating the investment.
The S.E.C. staff said it may recommend that the commission seek civil money penalties, disgorgement of fees or other actions.
S.& P. has been under fire for its recent downgrade of United States long-term debt, as well as several bad calls it made leading to the financial crisis and economic meltdown that began in 2008. The unit’s president stepped down last month.
McGraw-Hill Companies, which owns S.& P., said Monday that it received a so-called Wells notice from the S.E.C. on Thursday. A Wells notice is a warning to a company that the commission is considering enforcement action.
S.& P. said it has been cooperating with the commission and plans to continue cooperating on the matter.
Shares of McGraw-Hill ($MHP) are down about 1% today.
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The Plunge in Microsoft’s Valuation
Eddy Elfenbein, September 26th, 2011 at 12:28 pmFor the last 16 months, shares of Microsoft ($MSFT) have mostly been locked in a tight trading range between $24 and $28 per share. The stock has crept out of that range only a few times.
What’s amazing is how far Microsoft’s valuation has fallen (see chart below). The stock dipped below $25 per share today. For the last fiscal year, the computer giant earned $2.69 per share, so that’s a trailing P/E Ratio of 9.3.
Analysts on Wall Street expect earnings for the current fiscal year, ending in June 2012, of $2.86 per share. For the year after that, analysts see earnings of $3.13 per share. So the company is still growing, albeit not like it was 15 years ago.
The chart below shows MSFT’s price over the last ten years along with its earnings-per-share and P/E Ratio. Notice how steeply the P/E Ratio has plunged.
Basically, MSFT has shifted from being a growth stock into being a value stock. It must sound odd to anyone who remembers the go-go days of the 1990s to call Microsoft a “value stock,” but look at the facts.
The company just raised its quarterly dividend by 25% to 20 cents per share. At $25 per share, an 80-cent annual dividend comes yields 3.2% which is more than a 30-year Treasury.
Bear in mind that Microsoft is rated Triple-A while U.S. government debt is not.
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Icahn Pulls Out of Clorox
Eddy Elfenbein, September 26th, 2011 at 11:36 amBillionaire investor Carl Icahn’s withdrawal of his slate of directors for Clorox Co.’s board likely stemmed from his inability to find a potential buyer for the consumer products company, an analyst said Monday.
“We conclude Icahn’s real learning was likely that no strategic acquirer was ready, willing and able,” John San Marco of Janney Capital Markets wrote in a client note.
In a filing with the Securities and Exchange Commission, Icahn said he still thinks selling the company — which makes salad dressing, beauty products and other goods — is the best way to maximize shareholder value but that most shareholders don’t seem to support the idea.
Icahn, known for shaking up struggling companies, had proposed to either sell Clorox or buy it himself for at least $78 per share. The company had dismissed the proposal as not credible. In August, Icahn said he wanted to install himself and 10 other directors on the company’s board.
I can’t say I’m surprised. The stock is currently at $66 per share. This was a waste of time and money for Icahn. The share price of CLX is now lower than where it was before Icahn started this crusade.
This is what I wrote two months ago when CLX was at $74:
In my opinion, these bids over-value Clorox. Wall Street currently expects the company to earn $4.06 per share this fiscal year (which ends next June). That values CLX at nearly 20 times forward earnings. That’s just too rich.
I hate watching boards shoot down offers of over-payment. I doubt an offer like this will come again soon. I’m not sure any competing bids will come along, and Icahn may be forced to pull his offer. If I were a CLX shareholder, I’d get out of the stock right now.
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Gold Continues Its Plunge
Eddy Elfenbein, September 26th, 2011 at 10:40 amThanks to the Fed’s Operation Twist, gold continues to fall:
Gold is often sold off as a means of raising dollars when funding conditions deteriorate, much as they did in late 2008 with the onset of the credit crunch that ensued from banks withholding lending because of their concern over counterparty exposure to toxic U.S. mortgage-backed assets.
“Gold is one of the few assets that remains in positive territory this year, in a sense it is one of the last assets standing, and because of this as investors head for cash they sell the assets that have performed. Essentially gold is a victim of its own success as liquidity trumps,” wrote UBS analyst Edel Tully in a note.
Silver came under fire, falling by as much as 16 percent at one point in the day and set for its worst three-day fall on record, having lost more than 25 percent in this period.
The spot price was last down 6.7 percent at $29.00 an ounce, its lowest since last November.
Platinum fell by 3 percent to $1,559.25 an ounce, its lowest since May last year, while palladium recovered from an earlier 5.0-percent fall to trade up 0.4 percent on the day at $637.22 an ounce, around its lowest since last October.
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Berkshire Hathaway to Buy Back Shares
Eddy Elfenbein, September 26th, 2011 at 10:17 amAs I’ve said many times, I’m not a fan of share buybacks. My view is that companies ought to focus on their businesses and not waste their time trying to financially engineer a higher share price.
When in doubt, excess cash flow should go to investors in the form of dividends. If investors then wish to buy more stock, that’s their decision. I hope that someday the tax fund is more favorable to that decision. I also think companies often use share buybacks to mask the extent to which they’ve diluted their stocks with executive stock options.
As such, I was surprised to see that Berkshire Hathaway ($BRKA) has announced a share repurchase. The stock has been hit hard lately so there’s been more pressure on the company to do something. Berkshire has said that it will spend no more than a 10% premium of book value on share repurchase of the A and B shares.
Berkshire is currently sitting on a war chest of $38 billion. Sometimes I wonder if having too much cash is a problem for companies. It’s as if the giant piggy banks distort their vision and they think they have to spend it all. This leads to poor acquisitions or countless share repurchase programs. The only benefit I see is that they generate positive press releases.
This repurchase is an interesting and surprising move coming from Buffett. He has said that it’s harder for him to see promising acquisition candidates given Berkshire’s size. The company said it won’t have its cash position fall below $20 billion.
The shares are up about $5,000 today.
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Morning News: September 26, 2011
Eddy Elfenbein, September 26th, 2011 at 5:17 amEurope Stews on Greece, and Markets Sweat Out the Wait
German Government Confident on Euro Rescue Fund
Tokyo Shares End Down; Nikkei Hits 29-Mo Low On Weaker Euro
PBOC’s Zhou Says ‘Too Early’ to Decide How to Aid Europe
Euro Remains Above Average Amid Debt Concerns
Polish Zloty Goes From First to Worst Amid Crisis
As Sides Dig In, Panel on Deficit Has an Uphill Fight
UBS in ‘Disarray,’ Ermotti Named Interim CEO
Record Dividends Lure Morgan Stanley to Asia as Equities Drop
Netflix Secures Streaming Deal With DreamWorks
Samsung’s Legal Woes Threaten to Crimp Tablets, Chips
Boeing Sees 787 as Jet Lineup’s ‘Backbone’ With Delay Set to End
Chevron, Partners Approve $29 Billion LNG Project
Anglo-Dutch Publishing Group Reed Elsevier to Buy Accuity
Europe Plan In Works Is A Game Changer
Joshua Brown: This Trend is Nobody’s Friend
Epicurean Dealmaker: A Victim of Soycumstance
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BOATLIFT, An Untold Tale of 9/11 Resilience
Eddy Elfenbein, September 25th, 2011 at 1:25 pm -
Emanuel Derman on the Perils of Pragmamorphism
Eddy Elfenbein, September 24th, 2011 at 11:52 amModels are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. They are graven images, useful but not very accurate.
Models tell you only what something is more or less like. Theories tell you what something actually is.
In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact.
Therefore the similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance.
The world is not a model.
Read the whole thing.
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Gold Crashes
Eddy Elfenbein, September 23rd, 2011 at 5:31 pmOn September 6th, the spot price of gold hit an intra-day high of $1,920.94 per ounce. Today, gold crashed over $100 per ounce. This was the third-largest daily percentage loss of the last 20 years.
Gold slumped more than 6 percent at one point — its biggest slide since the financial crisis in 2008 — to hit early-August lows as this week’s losses accelerated. The sell off came even as stock and oil markets stabilized after Thursday’s rout.
Adding to Thursday’s losses, gold is down almost 9 percent over the last two days, while silver has lost nearly 25 percent. In the case of gold particularly, it was the third-sharpest daily loss in the past 20 years.
“I’m sure talk of hedge fund liquidation is helping to pressure things, though there’s no confirmation of any single fund selling,” said Jonathan Jossen, an independent COMEX trader.
Despite its steep losses this week, gold remained up 16 percent year-to-date, thanks to gains from earlier months. But silver turned negative, with the spot price down almost 1 percent for the year.
By 2:45 p.m. EDT, the spot price of bullion was down 5.5 percent at $1,641 an ounce, after falling to a session low under $1,628. The move was more than 5 standard deviations beyond the normal one-day change. At $127 an ounce, the intraday move was the biggest on record in dollar terms.
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