Archive for February, 2009

• Donaldson’s Earnings Streak Set to End
  Eddy Elfenbein, February 26th, 2009 at 1:26 pm

  Today is a sad day for lovers of high-quality stocks. Donaldson (DCI) lowered its 2009 EPS forecast to a range of $1.70 to $1.90, which means that the company will almost certainly end its 19-year streak of delivering record earnings.
  Donaldson isn’t very well known, but it’s a remarkable company. Their market cap is about $2 billion and they’re in the S&P 400 Mid-Cap Index (^MID). Donaldson is the filtration business which is about as dull as they come.
  Last year, the company earned $2.12 a share and the outlook for this year (the fiscal year ends in July) was a range of $2.16 to $2.36. So even before today, the streak looked to be in jeopardy.
  For the second quarter, Donaldson earned 43 cents a share which was a mere penny a share more than last year’s Q2. Net income was actually down, but the company has fewer shares outstanding.
  I’m not particularly worried about Donaldson. I don’t think they’re in any more trouble than anyone else. I was also happy to see this nugget from their press release:

  In addition, since a significant portion of our pay is ‘at risk’ and paid based on our actual financial performance, executive officer compensation is expected to be reduced by 30 to 50 percent this year due to lower incentive payouts. In addition, officer base salaries have been frozen at January 2008 levels.

  Here’s a look at Donaldson’s stock along with its EPS line in blue. The two axes are scaled at 20 to 1.
  
  Here’s the earnings streak:

  Year………….Sales……………..EPS
  1990…………$422.9……………$0.19
  1991…………$457.7……………$0.21
  1992…………$482.1……………$0.23
  1993…………$533.3……………$0.26
  1994…………$593.5……………$0.30
  1995…………$704.0……………$0.37
  1996…………$758.6……………$0.42
  1997…………$833.3……………$0.50
  1998…………$940.4……………$0.57
  1999…………$944.1……………$0.66
  2000…………$1,092.3…………$0.76
  2001…………$1,137.0…………$0.83
  2002…………$1,126.0…………$0.95
  2003…………$1,218.3…………$1.05
  2004…………$1,415.0…………$1.18
  2005…………$1,595.7…………$1.27
  2006…………$1,694.3…………$1.55
  2007…………$1,918.8…………$1.83
  2008…………$2,232.5…………$2.12

• WSJ: Stocks Drop to 50% of Peak
  Eddy Elfenbein, February 25th, 2009 at 4:34 pm

  The Wall Street Journal notes that the S&P 500 is now half of its peak. This is the only the second time in history that has happen. The first time was the grandaddy — 1929.
  Bespoke writes:

  Ultimately in the bear that started in 1929, the S&P 500 dropped a whopping 86.19% from its all-time high. This low occurred 679 trading days after the all-time high was reached, or about two years and nine months. The current decline has lasted one year and four months.
  But by far the most depressing aspect of the 50%+ decline back in the 1930s was how long it took for the index to make a new all-time high. Following the peak in 1929, the S&P 500 went 6,251 trading days before hitting a new all-time high 25 years later.

  I’m a glass-is-half-full kind of guy so can’t we turn that around? If the market does fall by 86%, think of the buying opportunity!

• P/E Ratios Don’t Need to Be Cyclically Adjusted
  Eddy Elfenbein, February 25th, 2009 at 1:40 pm

  The Cyclically Adjusted Price/Earnings Ratio (or CAPE) has been getting a lot of attention lately. It was originally developed by Benjamin Graham, and Robert Shiller has been the latest proponent.
  In today’s Financial Times, John Authers writes:

  Long-term measures of value are also finely poised. Take the cyclical price/earnings ratio, which compares share prices with average earnings during the past decade, rather than to the most recent year’s earnings. This evens out bumps in earnings multiples caused by the profit cycle, and has proved to be a great market timing vehicle – highs and lows for this metric have overlapped almost perfectly with highs and lows for the market.
  Robert Shiller, the Yale university economist, has done much to popularise the measure. According to his calculations, it makes US stocks look distinctly cheap. The cyclical p/e, at 13.38 entering this week, is below its average since 1870 of 16.34. It is also at its lowest since 1986.
  However, this should not be treated as a short-term buying signal because cyclical p/es have dropped to as low as 6 at the bottom of previous bear markets. This would imply that stocks could fall 50 per cent more, before hitting bottom.

  I don’t think adjusting earnings multiples for the economic cycle is a sound idea. The obvious reason is that stock prices are themselves cyclical. I dispute Authors points that CAPE has been “a great market timing vehicle.” In fact, I think it’s been pretty bad.
  According to data off Professor Shiller’s website, when the market’s CAPE was below 21, the market returned 1.35% annualized and adjusted for inflation. When it was above 21, the market did slightly better, growing by 1.82% annualized and adjusted for inflation.
  For the unadjusted 12-month P/E Ratio, the market grew by 1.79% when it was below 21, and it contracted by -1.29% when it was above 21. In other words, the traditional P/E Ratio told you a lot more about how well the market was valued.
  Neither metric, however, comes close to the easiest—momentum. If the market fell in the previous month, then it has continued to fall by an annualized and adjusted for inflation rate of -8.36%. If the market has been rising, then it continues to grow by a rate of 10.09%.

• Ditch the Home Mortgage Deduction?
  Eddy Elfenbein, February 25th, 2009 at 12:10 pm

  Ed Glaeser says it’s time to do away with the home mortgage interest deduction. His five reasons are:
  Problem #1: Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets.
  Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets.
  Problem #3: The deduction is wildly regressive.
  Problem #4: The deduction encourages people to buy larger, single-family detached homes, and that increases carbon emissions and pushes people out of cities.
  Problem #5: The home mortgage interest deduction is poorly designed to encourage homeownership, which is, after all, the alleged desideratum.

• The Wisdom of John Pilger
  Eddy Elfenbein, February 25th, 2009 at 10:54 am

  Two quotes from the vanguard of the proletariat:
  The New Statesmen, November 15, 1999:
  “No one can doubt [the Milosevic’s regime’s] cruelty and atrocities, but comparisons with the Third Reich are ridiculous.”
  The Guardian, February 3, 2003:
  “The current American elite is the Third Reich of our times.”
  Oliver Kamm has more.

• Eaton Vance’s Earnings Plunge
  Eddy Elfenbein, February 25th, 2009 at 9:51 am

  Shares of Eaton Vance (EV) are up modestly this morning. The mutual fund company reported Q1 earnings of 21 cents a share, which is a big drop from the 46 cents it made during last year’s first quarter. The silver lining is that Wall Street was expecting 19 cents a share. Revenues dropped from 28%, from $289.8 million to $209.5 million. This is going to be a rough year for Eaton Vance, but few stocks have the long-term record they do. The stock is worth holding, and it also carries a nice 4% yield.

• Dogbert Keeps It Real
  Eddy Elfenbein, February 25th, 2009 at 9:22 am

  

• “Well That Day of Reckoning Has Arrived”
  Eddy Elfenbein, February 25th, 2009 at 12:46 am

  The president lays out his plans:

  First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running.
  Second, we have launched a housing plan that will help responsible families facing the threat of foreclosure lower their monthly payments and re-finance their mortgages. It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford, but it will help millions of Americans who are struggling with declining home values – Americans who will now be able to take advantage of the lower interest rates that this plan has already helped bring about. In fact, the average family who re-finances today can save nearly $2000 per year on their mortgage.
  Third, we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.
  I understand that on any given day, Wall Street may be more comforted by an approach that gives banks bailouts with no strings attached, and that holds nobody accountable for their reckless decisions. But such an approach won’t solve the problem. And our goal is to quicken the day when we re-start lending to the American people and American business and end this crisis once and for all.
  I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, CEOs won’t be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet. Those days are over.
  Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside. But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade. That would be worse for our deficit, worse for business, worse for you, and worse for the next generation. And I refuse to let that happen.
  I understand that when the last administration asked this Congress to provide assistance for struggling banks, Democrats and Republicans alike were infuriated by the mismanagement and results that followed. So were the American taxpayers. So was I.
  So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you – I get it.

• Home Prices Post Biggest Drop in 21 Years
  Eddy Elfenbein, February 25th, 2009 at 12:42 am

  From BusinessWeek:

  The S&P/Case-Shiller U.S. National Home Price Index plunged 18.2% during the final quarter of 2008, the biggest annual decline in the closely watched index’s 21-year history.
  Separately, for the month of December alone the Case-Shiller 20-City Composite Index fell 18.5% compared with the previous December, also a record decline. The most severe declines were in Phoenix, Las Vegas, and San Francisco, which all dropped by more than 30% in December compared with December 2007.
  But the financial crisis has helped to spread the pain across the nation. Other cities that were holding up relatively well until recently are now seeing a quickening pace of declines. The year-over-year price decline in the New York metro area, which is at the center of the financial meltdown, was 9.2% in December, compared with 8.6% in November and 7.7% in October. Home prices in Charlotte, a major banking hub, fell by 7.2% in December. In October, Charlotte prices fell at just 4.4% compared with a year earlier. And home prices were actually increasing on an annual basis as recently as March 2007.

• Market Returns by Days of the Week
  Eddy Elfenbein, February 25th, 2009 at 12:06 am

  Here’s a look at market returns by days of the week. I did this last year but now I have more data including Saturdays. There was actually trading on Saturdays up to the early 1950s.
  
  Here’s the breakdown: From 1932 through Monday, Wednesday was the best day of the week. In fact, Wednesday beat the four days (and Saturday) combined. Not including dividends, the S&P 500 returned 2,179% on Wednesdays, 502% on Thursdays, 244% on Tuesdays, 175% on Thursdays and an ugly -98.5% on Mondays.
  Let me add what I hope is an obvious point—these stats don’t mean anything. It’s just fun trivia. You really can’t build a workable trading strategy around these numbers. We’re also talking about results of nearly 80 years of data. Even starting 20 years ago, Monday suddenly becomes the second-best day.
  A few other points to mention. When Saturday trading was around, it was a great day. The market returned 389% on Saturdays from 1932 to 1952. Plus, even when there was Saturday trading, the market was often closed on Saturdays over the summer.
  Statistically, the only really noticeable standout is the awful performance on Mondays. As I said, even that has diminished in recent years.
  As strong as Wednesdays have been, they recently came through an awful stretch. The S&P 500 dropped on 10 straight Wednesdays this past fall. And they were big drops—the losing streak knocked one-third off the Wednesday’s historic return.
  The S&P 500 is in the negative on Monday, Tuesday, Thursday and Saturday. The market’s entire return has come just on Wednesday and Friday. Here’s a look at Wednesday against the rest of the week: