Archive for January, 2009

• The Stimlus Bill Nears $900 Billion
  Eddy Elfenbein, January 28th, 2009 at 4:48 pm

  If you’re interested, here’s all 647 pages of the bill. Honestly, some parts of it are a bit dull.
  The WSJ has a nice graphic on who gets what.
  A vote should come later this evening.

  “I would love to not have to spend this money,” Mr. Obama said, according to individuals familiar with the president’s meetings with Republicans. Mr. Obama defended the plan, they said, but suggested he’d be open to new ideas to help small businesses, and that changes could come after the House vote.
  “We’re not going to get 100% agreement, and we might not even get 50% agreement,” Mr. Obama told reporters after he left the Senate Republican lunch. “But I do think that people appreciate me walking them through my thought processes on this.”

• Becton, Dickinson’s Earnings Report
  Eddy Elfenbein, January 28th, 2009 at 3:55 pm

  Today is another good day for our Buy List. I have one earnings report to pass along. Becton, Dickinson (BDX) earned $1.26 a share for its first quarter which is a nice increase from the $1.07 a share it made for last year’s first quarter. The Street was expecting $1.16 a share.

  In the biosciences segment, sales rose 11% on demand for clinical and research instruments. Sales were down in the medical segment by 2% as strong sales of insulin delivery products were more than offset by a drop in surgical systems products and an expected decline in prefillable devices in the U.S.
  Becton Dickinson Chief Executive Edward Ludwig said earlier this month that the company hasn’t felt the economic squeeze thus far, though he did note concern that hospital budget constraints will slow device makers. While acknowledging these strains, he also noted many of Becton’s medical products are very basic items – like surgical blades or catheters. Though no primary demand disruptions have been seen, the company is carefully controlling costs.
  Analysts are also keeping a keen eye on resin prices for signs of a possible retreat. High oil prices last summer boosted the cost of resins, which are used to make plastic syringes, as well as plastic dishes used in diagnostic tests and other laboratory equipment. The company spent about $230 million in resins in the last fiscal year, which was up $30 million from the prior year.

  The company also said it expects growth this year from 9% to 11%. That seems like a nice increase to me, but I think the Street was expecting more so the shares are down today.

• The Fed: More of the Same
  Eddy Elfenbein, January 28th, 2009 at 2:57 pm

  Odd isn’t it that the Fed used to rule the world, now the central bank seems to be fighting to stay relevant. You really can’t cut rates when they’re at zero or next to zero. Sure they can print money, just ask Zimbabwe, but that’s pretty much all they can do. The problem is getting the banks to do something with that money.
  Here’s the Fed’s statement:

  The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
  Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
  In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
  The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

  It’s the usual five-paragraph statement:
  1. What they did
  2. The economy
  3. Inflation
  4. Monetary policy
  5. The vote
  Some initial thoughts. The line is the second paragraph about “gradual recovery in economic activity will begin later this year” is a bit surprising. I can’t say I’m so optimistic.
  The fourth paragraph is the key because it describes what they’re doing which is basically continuing some of their earlier efforts. I’d like to see the Fed buying 10-year notes, and Jeffery Lacker apparently agrees.
  Well get a feel for how the market is responding this week when some commercial paper from companies like GE comes due. If they go back to the Fed, it’s not a good sign. If they don’t need to, then these programs might be working.
  I think the Fed is trying to convince the Street that it’s not out of ammo. This new programs seems to be having an effect. How much it’s doing or is it worth it, is debatable.

• Stimulus Bill Follies
  Eddy Elfenbein, January 28th, 2009 at 11:53 am

  I find it remarkable that Obama has something like a 70% approval rating and large majorities in both house, yet the terms of the debate seem to be shifting against him. The bill should still pass, but I’m struck by hard it’s been for the Obama team.
  The Wall Street Journal editorial board, if you can imagine this, doesn’t like it:

  We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There’s even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.
  In selling the plan, President Obama has said this bill will make “dramatic investments to revive our flagging economy.” Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.
  Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. As Peter Orszag, the President’s new budget director, told Congress a year ago, “even those [public works] that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”
  Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

• Stryker’s Earnings
  Eddy Elfenbein, January 28th, 2009 at 12:38 am

  After the bell, Stryker (SYK) reported Q4 EPS of 74 cents which is in line with estimates. Sales rose 3.6% to $1.72 billion. The company said that EPS for 2009 will range between $3.12 and $3.22. The company earned $2.83 for 2008 so that’s growth of 10% to 13%…not bad for a depression. Last month, the company increased its dividend by 21%.
  Here’s the earnings call transcript from Seeking Alpha. Also, here’s the recent EPS trend:
  2002: $0.88
  2003: $1.12
  2004: $1.43
  2005: $1.75
  2006: $2.02
  2007: $2.40
  2008: $2.83
  2009: $3.12 to $3.22 (est)
  Six months ago, I wrote: “I like Stryker a lot but I wouldn’t mind seeing it cheaper.” Well, the stock is 38% cheaper.
  Since Stryker’s IPO, the stock is up 49,160%. Berkshire Hathaway (BRKA) is up “only” 45,222%.

• Pfizer & Wyeth
  Eddy Elfenbein, January 27th, 2009 at 9:26 pm

  Now that Pfizer (PFE) and Wyeth (WYE) are getting together, I wanted to take a quick look at the long-term performance of both stocks. They’re done pretty well. Since the beginning of 1982, Pfizer’s stock is up 1,346.4% while Wyeth is up 875.4% (neither figure includes dividends). For comparison, the S&P 500 is up 589.1%.
  
  Interestingly, both stocks peaked nearly ten years ago on the same day, April 12, 1999.

• The Most Predictive Factor: Momentum
  Eddy Elfenbein, January 27th, 2009 at 12:37 pm

  Mebane Faber posts about Richard Tortoriello’s book, Quantitative Strategies for Achieving Alpha.

  In the more than 40 single factors he tested from 1987-2006, guess which factor was most predictive?
  Momentum.

  This isn’t a surprise to me. I think the power of momentum is one of the great mysteries of finance. Why has it been so successful and can it make me money?
  Mebane also notes the limitations of quant analysis. Right now, everyone is working from the same data so how can anyone gain an advantage?

• Credit Default Swaps
  Eddy Elfenbein, January 27th, 2009 at 10:44 am

  Peter J. Wallison writes “Everything You Wanted to Know about Credit Default Swaps–but Were Never Told.” This comes on the heels of Gretchen Morgenson’s recent column, “Time to Unravel the Knot of Credit-Default Swaps.”

• Thain Doing His Part
  Eddy Elfenbein, January 27th, 2009 at 10:13 am

  According to the New York Post, while dining recently, John Thain, “loudly told the waiter, for all to hear, ‘under the circumstances with this tough economy, I think I’ll have tap water.'”
  Going by his recent track record, I’m guessing he offered to pay $3.7 billion for the tap water.

• Dividends Being Cut at Fastest Pace in 50 Years
  Eddy Elfenbein, January 27th, 2009 at 9:54 am

  Bank of America (BAC) recently cut its annual dividend from $1.28 a share to four cents. (Why even keep it?) Of course, now that you’re on Uncle Sam’s bailout list, it’s hard to justify send profit checks to your owners. Dividends had made a big comeback in recent years, now it looks like the trend is in the other direction:

  Already this year, seven companies in the Standard & Poor’s 500 index have decreased their dividends, removing some $12 billion from shareholders’ pockets in the coming months. On Monday, Pfizer became the latest blue-chip company to do so.
  These cuts serve up another hit to shareholders who have already been battered by the steep declines in the stock market. That is especially true of retirees, who tend to be attracted to so-called “widows and orphans” stocks that provide them with a steady cash flow.
  If the trend continues, this will be the worst year for dividend cuts since 1958, when annual payments fell by 8.4 percent, according to new research from S&P.
  “It is easy to say this is going to be the worst in 50 years, but the bigger question is whether it is going to be much worse than that,” said Howard Silverblatt, senior index analyst at S&P.