HP to Cut 9,000 Jobs
Posted by Eddy Elfenbein on June 1st, 2010 at 2:17 pm

Here’s a post which I’d call “thinking out loud” since I can’t decide where I stand. Hewlett-Packard (HPQ) announced today that it’s cutting 9,000 jobs.

HP will take a $1 billion charge for paying severance and modernizing its data centers to provide more automated services to customers, it said today in a regulatory filing. The Palo Alto, California-based company plans to replace about 6,000 of the eliminated positions with workers in different countries.
“These sets of actions will enable HP to grow better than the market,” Ann Livermore, executive vice president for enterprise business, said today on a conference call. “This is a substantial opportunity for us and something that we think is a good opportunity for our clients as well.”
The job cuts come after HP raised its 2010 forecast last month for the third time since November as results beat analysts’ estimates on a revival in business spending. Chief Executive Officer Mark Hurd has expanded into more profitable services as the recession crimped corporate budgets for equipment. He bought Electronic Data Systems Corp. for $13.2 billion in 2008, vaulting HP to No. 2 in services behind IBM.

I’m a big fan of Mark Hurd. He’s done a great job in turning HPQ around after the disastrous tenure of Carly Fiorina (who will probably win California’s GOP Senate primary one week from today). Turnarounds rarely work but this one has. HPQ earnings have grown steadily over the past few years and the stock has outperformed a dismal market.
My worry is that the company might be taking on more than it can afford. I’m not thrilled with the EDS buy and I hate (HATE) the Palm buy. Still, leadership counts and I’m leaning towards trusting that Hurd knows what he’s doing. And as today’s news shows, the company hasn’t grown complacent.

Depressing Stat of the Day
Posted by Eddy Elfenbein on June 1st, 2010 at 1:25 pm

Here’s the inflation-adjusted total of the S&P 500. Even after an impressive rally, we’re still where we were more than 12 years ago.

ISM = 59.7
Posted by Eddy Elfenbein on June 1st, 2010 at 11:53 am

The Institute for Supply Management’s manufacturing gauge came out today and it was 59.7. Any reading above 50 indicates an improving economy. This was slightly down from the previous report of 60.4.

As I’ve written before, the ISM is one of the best reports for telling us if the economy is in a recession or not. Historically, the tipping point has been around 44-45. Reading below that have come during recessions, and above we’re in recovery. I continue to believe the Federal Reserve will raise interest rates before most people expect.

Debtor Nation
Posted by Eddy Elfenbein on June 1st, 2010 at 11:37 am

The NYT profiles a young woman who just graduated from NYU. She’s $97,000 in debt.
This is a scandal. It’s not merely lousy finance, but it’s also wrong to pile up debt on young people who may not realize the burden they’re placing on their future selves. Here’s what I wrote last year:

Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).
One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.
The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.
The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

Looking at the May Swoon
Posted by Eddy Elfenbein on June 1st, 2010 at 10:26 am

The stock market just finished its worst May since 1940. As it turns out, watching France fall to the Nazis isn’t good for stocks here. Also, watching the euro fall to reality is pretty nasty as well.
Let’s take a closer look at where the market stands today. Here’s the S&P 500 (black line, left scale) along with its earnings (gold line, right scale).

I’ve scaled the two lines at a ratio of 16 to 1 so whenever the lines cross, the market’s P/E Ratio is exactly 16.
Let me add that looking at the market’s P/E Ratio is far from perfect (the future earnings line is, of course, merely forecast), but nevertheless we can gain some insights as to what investors are thinking at the moment.
Two items stand out. The first is that the S&P 500 has fallen below a P/E Ratio of 16 which has generally been its lower bound over the past few years. The second is that the earnings forecast is still very favorable. If stocks keep pace with valuations, then the S&P 500 could easily be over 1400 within 18 months.
This is where the problems come in. It appears that investors are beginning to question the robustness of the recovery. Given the amount of aid needed, that’s certainly understandable. So if the earnings forecast turns out to be overly optimistic, then the whole bullish scenario falls apart.
My feeling is that the bearish cause has been pushed a bit too. Consider that many companies are still maintaining decent guidance. Even the bad guidance isn’t that bad. On Friday, shares of J.C. Penney (JCP) got knocked due to “poor guidance.” I’d agree that JCP is a weak buy right now, but they merely said to expect full-year EPS of $1.64 which was one penny below the Street.
I used JCP as one example, but if the future yellow line is off, then we’re going to have to see much more lower guidance announcements. That simply hasn’t come yet.
This week, we’ll get some news on our Buy List stock, Jos. A Bank Clothiers (JOSB). This company hasn’t missed an earnings forecast in four years. They haven’t given guidance for this year but they have said that they plan to open 30 to 40 new stores. Wall Street expects 71 cents per share which is a nice increase over the 62 cents per share from a year ago. My numbers say it will be close to 75 cents a share.
JOSB is a solid buy. We’ll know more on Thursday (correction: Tuesday) when the earnings report comes out.

Happy Memorial Day
Posted by Eddy Elfenbein on May 31st, 2010 at 12:46 pm

Monsanto -7%
Posted by Eddy Elfenbein on May 27th, 2010 at 1:19 pm

Monsanto (MON) is down 7% today on the news of sharply lower guidance. A reader writes:

I wrote you a few weeks ago about MONSANTO. And you were talking about lowered guidance, and how it’s like “cockroaches”, they keep coming out. Well, you were right. Thanks for the tip. I decided to sell shortly afterwards — it was difficult because I felt that I had spent so much time understanding their business and the prospects, but you were right, the stock has no idea I own it.

The point is that companies aren’t like sports teams that can suddenly rally. If there’s one problem you see, there are usually several more you don’t see (like cockroaches).
Just because a stock is down from its highs doesn’t mean it’s cheap. Monsanto missed its last two earnings reports and that was a tip-off to today’s news.

The Calendar Says Buy
Posted by Eddy Elfenbein on May 27th, 2010 at 11:50 am

A few years ago, for reasons unclear, I decided to look at the entire history of the Dow Jones to see how it performed during a typical year. Once I emerged from my dark laboratory, I was able to compile this chart.

We’ve just entered one of the best times for the market. From May 25 to June 12, the Dow has gained an average of 1.27%. From May 25 to September 6, the Dow has gained an average of 4.72%. That’s more than half of the Dow’s entire historic capital gain coming in a little over three months.
On top of that, all of the market’s gains have come on the last four trading days of the month plus the first three of the following month. Outside that, the market is down.

Q1 GDP Growth Revised Lower
Posted by Eddy Elfenbein on May 27th, 2010 at 10:45 am

The government pared back its estimate of first-quarter GDP growth. The original report said the economy grew by 3.2% for the firth three months of the year but now the Feds say it was 3.0%. That’s not a big change but it highlights the issue that the economy isn’t growing nearly fast enough to pull us from the recession.
Compare the last bar on this chart to the long stretch of GDP growth in the late 1990s.

As an investor, this caught my eye:

The latest report showed consumers increased their spending by 3.5%. That was below the previously estimated 3.6% gain but more than double the 1.6% increase of the fourth quarter.

That’s a good sign. Sure enough, this comes out today: Tiffany raises outlook as profit, sales soar. As always, company guidance is key. If you’re a publicly traded company, you don’t want to shout out good news unless you can back it up. If Tiffany (TIF) is doing well, that means the high-end market is recovering.

Excluding one time items, Tiffany earned 48 cents per share, beating Wall Street forecast of 37 cents, according to Thomson Reuters I/B/E/S.
Sales at its stores open at least a year, or same-store sales rose 10 percent, lifted by growing international sales.
In Asia, sales rose 50 percent, while at its flagship store on Manhattan’s Fifth Avenue, sales were up 26 percent.
Overall sales rose 22 percent to $633.6 million during the quarter.
Tiffany raised its full year profit forecast to a range of $2.55 to $2.60 per share, above the average Wall Street estimate of $2.51. Tiffany expects sales to be up 11 percent this year and to open 16 stores.

So they beat estimates by nearly 30% and raised their full-year. I’m not suggesting TIF is a buy, the stock is a bit pricey, but it gives us a clue where business is strong.
The advantage of looking at Tiffany is that its fiscal cycle is slightly off most other companies. Their fiscal calendar ends at the end of January instead of the beginning. This makes sense because they want any lingering Christmas sales in the same reporting period. As a result, today’s report covers February, March and April — whereas the last earnings season for most stocks was for January, February and March. This off-cycle report could mean that consumers are in a better mood than Wall Street thinks.

100 Years Ago — King Edward’s Funeral
Posted by Eddy Elfenbein on May 26th, 2010 at 11:12 pm

This week marks the 100th anniversary of the funeral of King Edward VII. This was an interesting event in world history since it was the last great gathering of European monarchs.
Just about every king or crown prince was invited (see a listing here). In fact, many of them were related to the late king. The soon-to-hated Kaiser was Edward’s nephew. You’d hardly know that in just a few years the whole world these people knew was to be blown apart by the Great War.
King Edward’s funeral is also used as an entry point in George Dangerfield’s book “The Strange Death of Liberal England.” For a student of history, the ceremony serves as a good dividing line between two periods. Two worlds, really. If you want to read really good writing, check out pages 18 and 19 here.
The Library of Congress has some footage of the funeral which I’ve embedded below. Everyone is marching by rank so in the very back of the line is a commoner—the representative of a still-strange form of government—Former President Teddy Roosevelt. This is oddly symbolic because even though the U.S. was at the back of the line, it was about to become the world’s most powerful nation.

I’ve watched this a few times. I can’t be sure but I think TR appears at 4:53 in the lower right part of the screen. Here’s the NYT‘s coverage and it confirms that TR is carrying his overcoat.