Archive for April, 2008

• 12% After-Tax Munis
  Eddy Elfenbein, April 14th, 2008 at 2:00 pm

  Thanks to the collapse of the auction rate securities market, there are some bargains in munis. Bloomberg writes:

  Puerto Rico’s tax-free AAA 2024 general obligation bonds are paying 12 percent, equivalent to an 18.5 percent yield on taxable issues. That compares with rates of 4.3 percent for 10-year U.S. Treasuries and 10.5 percent for corporate high- yield, high-risk debt, according to indexes compiled by Merrill Lynch & Co.

• Looking at Earnings Season
  Eddy Elfenbein, April 14th, 2008 at 10:27 am

  First-quarter earnings announcements will kick into high gear this week, and it’s not going to be pretty. We already had bad news from General Electric (GE) and that put the entire market in a bad mood on Friday. This is especially interesting to note because GE is about as close as a company gets to being an index fund. Their operations are so vast and diversified across several industries. There was also bad news at Alcoa (AA) and UPS (UPS).
  When looking at the entire market, I prefer to follow the estimates for operating earnings. This isn’t always the cleanest number but I think it’s a good way to compare true business performance. According to S&P, the S&P 500’s operating earnings fell by over 30% in the fourth quarter. But I should add that these results were heavily impacted by the huge losses in the financial sector. To add some context, the loss in that sector was over 140% greater than the gain from one year before. But there was also considerable weakness in other areas like consumer discretionary (homebuilders) and material stocks.
  According to S&P, earnings for the first quarter are expected to decline by another 5% (note: This estimate hasn’t been updated in a few days and I expect it to be a bit lower). However, the breadth of the earnings decline is much wider than last quarter’s when so much bad news came from financial stocks. Here’s a look at the operating earnings estimates for the first quarter.
  Utilities………………….41.2%
  Financials………………30.4%
  Energy………………….23.5%
  Materials……………….12.2%
  Industrials………………6.8%
  Tech………………………0.8%
  Telecom…………………-0.2%
  Discretionary…………..-5.8%
  Staples………………….-8.5%
  Healthcare……………..-50.0%
  Today, David Kostin of Goldman Sachs commented on first-quarter earnings by saying “early signs are awful.” Yep, that pretty much sums it up. He also expects to see lower guidance going forward and I suspect he’s right. According to Bloomberg, Wall Street expects earnings growth of 11% for the entire year and I think that’s far too high. Estimates have been cut almost continuously since the beginning of the year.
  So where are the good earnings? It’s still a bit early to say, but I’m interested in tech and health care and fortunately, two heavyweights report tomorrow. The Street expects Johnson & Johnson (JNJ) to earn $1.20 a share, which is just a bit above the $1.16 it made last year. In fact, if you adjust for inflation, that’s not much of a gain at all. Intel (INTC) is expected to earn 25 cents a share, which is below the 27 cents of the Street’s consensus. If either company surprises to the up or down side, it could have a ripple effect on the markets.
  This Thursday, three of our Buy List stocks report; Danaher (DHR), Harley-Davidson (HOG) and Stryker (SYK). Danaher and Stryker tend to be fairly consistent with their earnings reports. Both stocks should report decent numbers and I’m not expecting a major surprise or shortfall.
  Harley-Davidson, however, is the wild card. The stock has trended downward for nearly 18 months. The stock has lost more than 50% of its value, but Harley has a loyal following. If there’s good earnings news, then Harley could be a great bargain at this price. Unfortunately, there are too many questions and not enough answers right now. The Street is looking for 77 cents a share. If earnings come in at 80 cents or more, Harley-Davidson is definitely a stock to consider.

• Mahler’s Symphony 5: mvt. 4
  Eddy Elfenbein, April 11th, 2008 at 7:34 pm

• So this Banker Walks Into a Bar
  Eddy Elfenbein, April 11th, 2008 at 11:04 am

  Who knew the Fed was so darn funny.
  Well OK, not that funny, but the central bank released its transcripts from 2002 and I’ve collected some highlights.
  —
  MR. STOCKTON. Thank you, Mr. Chairman. I was impressed at the last meeting with the creative language used by many members of the Committee to describe the economic outlook. So this morning I thought I’d try my hand at explaining the forecast using some of that language. To begin with the current quarter, I can report that—as the saying apparently goes—there has been about as much pumpkin as we had earlier anticipated though there is clearly less pumpkin now than in the third quarter.
  CHAIRMAN GREENSPAN. It turned out to be seedy.
  —
  MR. MCTEER. Mr. Chairman, I’m going to miss Jerry Jordan’s anecdotes and vignettes, but I might note that in this case I think he’s behind the curve. We’ve already done the research and found that forklifts are indeed a leading indicator, but backhoes are a lagging indicator.
  CHAIRMAN GREENSPAN. It’s still a very uplifting thing.
  From November 6, 2002
  —
  MR. MOSKOW. For instance, the corrugated box industry, which had been showing signs of strength, now has flattened out, you could say. Or you could say that those manufacturers now view the box as half empty rather than half full.
  —
  CHAIRMAN GREENSPAN. You say that with a smile? For the official record, we will indicate that he smiled.
  —
  Moreover, we had a fascinating exchange at our recent advisory council meeting between the steel workers’ union leader and one of the country’s leading duck farmers. The issue was how retaliation to the steel tariffs by some of our trading partners is hurting other subsidized industries.
  CHAIRMAN GREENSPAN. What a “fowl” thought!
  —
  MR. JORDAN. Actually we were in Covington, Kentucky, so there were a lot of references to what it was like over half a century ago when the Chairman played with a band there. In fact, it was pretty exciting.
  CHAIRMAN GREENSPAN. I don’t know if I should admit to this, but in the back room there were very peculiar things going on.
  —
  MS. BIES. However, since I still have a house in Memphis for sale, I’m less inclined to believe that there’s a widespread bubble.
  MR. GRAMLICH. Is that house for sale?
  MS. BIES. Oh yes.
  VICE CHAIRMAN MCDONOUGH. Still.
  CHAIRMAN GREENSPAN. Are you bidding?
  MR. GRAMLICH. No, I’m just pointing out that there’s a bubble.
  —
  MR. BERNANKE. Mr. Chairman, I appreciate your analysis. I’m just wondering how you’re going to get all of that in the statement!
  CHAIRMAN GREENSPAN. I wrote it in disappearing ink!
  —
  CHAIRMAN GREENSPAN. Okay, I’ll try my best. I can’t guarantee that what I say will always come out the way I want it to. But I’ve been around long enough that I can put more words into fewer ideas than anyone else I know!

• The Final Frontier
  Eddy Elfenbein, April 11th, 2008 at 10:17 am

  The theme for today is bankruptcies. Frontier Airlines (FRNT) is filing for bankruptcy. Until a few minutes ago, I was an embarrassed shareholder of Frontier. The stock had done so poorly that I had basically ignored it in my portfolio. It was part of my first tracking list in 2005 before I formalized my Buy List at the beginning of 2006. Now I’ve just taken a 95% loss. Let us never speak of this again.

• Linens ‘n Things Expected to File for Bankruptcy
  Eddy Elfenbein, April 11th, 2008 at 10:03 am

  One of Bed Bath & Beyond‘s (BBBY) major competitors, Linens ‘n Things, seems to have come to the end of the road. The WSJ said that the company is expected to file for bankruptcy protection by Tuesday.
  Two years ago, the company was part of a private equity buyout from Apollo Management, which has filed to go public (or as DealBook calls it, an Un-IPO). Bed Bath & Beyond is down a bit this morning but I don’t see how a competitors’ bankruptcy can be all that bad.

• Deep Inside an SEC Filing
  Eddy Elfenbein, April 9th, 2008 at 9:05 pm

  Ever heard of CHDT Corp. (CHDO)?
  Me neither.
  Anywho, I was reading their 10-K (page 29) and I came across this under the discussion of country risks.

  While dramatic anti-trade shit in Chinese policy or laws would seem to be clearly against the best interests of China and its current economic trends, China has a central government with the authority to make such changes.

  It’s true. That shit would be so totally fucked up.

• Ugh….
  Eddy Elfenbein, April 9th, 2008 at 4:26 pm

  Bed Bath & Beyond (BBBY) just reported that it earned 66 cents a share for its fourth quarter.
  Here are the earnings results going back a few years:

  Quarter	Sales	Gross Profit	Operating Profit	Net Profit	EPS
  May-99	$356,633	$146,214	$28,015	$17,883	$0.06
  Aug-99	$451,715	$185,570	$53,580	$33,247	$0.12
  Nov-99	$480,145	$196,784	$50,607	$31,707	$0.11
  Feb-00	$569,012	$238,233	$77,138	$48,392	$0.17
  May-00	$459,163	$187,293	$36,339	$23,364	$0.08
  Aug-00	$589,381	$241,284	$70,009	$43,578	$0.15
  Nov-00	$602,004	$246,080	$64,592	$40,665	$0.14
  Feb-01	$746,107	$311,802	$101,898	$64,315	$0.22
  May-01	$575,833	$234,959	$45,602	$30,007	$0.10
  Aug-01	$713,636	$291,342	$84,672	$53,954	$0.18
  Nov-01	$759,438	$311,030	$83,749	$52,964	$0.18
  Feb-02	$879,055	$370,235	$132,077	$82,674	$0.28
  May-02	$776,798	$318,362	$72,701	$46,299	$0.15
  Aug-02	$903,044	$370,335	$119,687	$75,459	$0.25
  Nov-02	$936,030	$386,224	$119,228	$75,112	$0.25
  Feb-03	$1,049,292	$443,626	$168,441	$105,309	$0.35
  May-03	$893,868	$367,180	$90,450	$57,508	$0.19
  Aug-03	$1,111,445	$459,145	$155,867	$97,208	$0.32
  Nov-03	$1,174,740	$486,987	$161,459	$100,506	$0.33
  Feb-04	$1,297,928	$563,352	$231,567	$144,248	$0.47
  May-04	$1,100,917	$456,774	$128,707	$82,049	$0.27
  Aug-04	$1,273,960	$530,829	$189,108	$120,008	$0.39
  Nov-04	$1,305,155	$548,152	$190,978	$121,927	$0.40
  Feb-05	$1,467,646	$650,546	$283,621	$180,980	$0.59
  May-05	$1,244,421	$520,781	$150,884	$98,903	$0.33
  Aug-05	$1,431,182	$601,784	$217,877	$141,402	$0.47
  Nov-05	$1,448,680	$615,363	$205,493	$134,620	$0.45
  Feb-06	$1,685,279	$747,820	$304,917	$197,922	$0.67
  May-06	$1,395,963	$590,098	$148,750	$100,431	$0.35
  Aug-06	$1,607,239	$678,249	$219,622	$145,535	$0.51
  Nov-06	$1,619,240	$704,073	$211,134	$142,436	$0.50
  Feb-07	$1,994,987	$862,982	$309,895	$205,842	$0.72
  May-07	$1,553,293	$646,109	$154,391	$104,647	$0.38
  Aug-07	$1,767,716	$732,158	$211,037	$147,008	$0.55
  Nov-07	$1,794,747	$747,866	$203,152	$138,232	$0.52
  Feb-08	$1,933,186	$799,098	$259,442	$172,921	$0.66

• Irony Overload
  Eddy Elfenbein, April 9th, 2008 at 1:55 pm

  Here’s a report from Bear Stearns on falling business optimism.
  (Via: RCM)

• Stocks Against Bonds
  Eddy Elfenbein, April 9th, 2008 at 1:31 pm

  I recently received the latest Ibbotson Yearbook in the mail the other day. If you’re not familiar with it, the book is a great source for long-term returns of different asset classes (click here for more info).
  What I find interesting is that the spread between the returns of stocks and bonds really isn’t that much. I think would surprise many investors that boring bonds have held their own. Over the last 40 years, stocks have beaten bonds by a final score 10.5% to 8.4%.
  The difference is theoretically due to greater risk for stocks. (Note: This is different from the usual equity risk premium which looks at stocks versus T-bills. Here I’m looking at stocks and long-term corporate bonds.)
  Here’s a chart I made of stocks and long-term corporate bonds. The only difference is that I stretched out the bond returns by 2% a year.
  
  These two lines have tracked each other remarkably closely. In the 1970s, bonds took a big lead over stocks, and in the late 1990s, stocks shot ahead of bonds. Besides that, it’s been pretty close. You can also see that the market rally of the 1980s really wasn’t much of a bubble, nor is today’s market out of whack by historical standards.
  Let me add that I do not think this is a good way to time the market.