Archive for April, 2010

• Eddy’s Rule on European Monetary Integration
  Eddy Elfenbein, April 29th, 2010 at 10:30 am

  New rule: Everyone with nice beaches, please leave the eurozone.
  (This rule may come in handy if Florida and California are kicked out of the dollar.)

• This Won’t End Well
  Eddy Elfenbein, April 28th, 2010 at 6:21 pm

  
  This is a HUGE mistake:

  Hewlett-Packard Agrees to Buy Palm
  Hewlett-Packard has agreed to acquire Palm for $1.4 billion in cash, uniting two companies that have failed to make much recent headway in the smartphone business.
  H.P. announced its all-cash purchase of Palm just after the financial markets closed on Tuesday, saying it would pay $5.70 a share. Shares of Palm were down during regular trading on Wednesday, closing at $4.63, and rose in early after-hours trading by 27 percent to $5.90. The $1.4 billion price includes the Series B and Series C shares, most of which are owned by Elevation Partners.
  During the last year, shares of Palm have traded as high as $18 a share and as low as $3.65.
  Palm listed $400 million in debt at the end of its third quarter, which H.P. would retire using some of the $592 million in cash that Palm has on hand.

  Let’s look at some of Palm‘s (PALM) recent quarterly results:
  Q1 2008: +0.09
  Q2 2008: -0.07
  Q3 2008: -0.16
  Q4 2008: -0.22
  Q1 2009: -0.12
  Q2 2009: -0.73
  Q3 2009: -0.86
  Q4 2009: -0.40
  Q1 2010: -0.10
  Q2 2010: -0.37
  Q3 2010: -0.61
  That’s not a good tend.
  For those of you keeping score at home, Palm was spunoff from 3Com on March 2, 2000.

  Living up to feverishly high expectations, 3Com’s (COMS) Palm (PALM) division exploded onto the market today, tripling at the open and moving to a high of $165 — up 334% from its offering price of $38 a share. It slid back to around $95.06 by the closing bell, but still stood 150% higher.
  The deal — which also included the private placement of shares to AOL (AOL), Motorola (MOT) and Nokia (NOK) — was co-managed by Goldman Sachs and Morgan Stanley Dean Witter. Palm offered 23 million shares, or a 4% stake in the company.

  At one point, Palm was worth more than 3Com, the company that owned almost all of its shares. Chalk one up for EMH!
  By the way, that $165 bolded above is really $1,650 in today’s shares since the company had a 1-for-20 reverse split followed by a 2-for-1 split. HP is agreeing to buy Palm for $5.70.
  

• AFLAC Holds Greek and Portuguese Bonds
  Eddy Elfenbein, April 28th, 2010 at 3:05 pm

  On AFLAC’s earnings call, the company revealed that it holds $1.75 billion in Greek and Portuguese bonds.

  Aflac Inc., the world’s largest seller of supplemental health insurance, said it holds almost $2 billion of bonds tied to banks in Greece and Portugal, nations that have been cut by ratings firm on mounting debt.
  Aflac has about $1 billion in Greek bank bonds and $750 million issued by Portuguese lenders, Chief Investment Officer Jerry Jeffery said in a conference call today. The insurer also holds about $285 million in Greek sovereign bonds, Jeffery said. Greece is waiting on word of a 45 billion-euro ($59 billion) rescue package from the European Union and the International Monetary Fund after the nation’s credit rating was cut to junk by Standard & Poor’s yesterday. The ratings firm lowered its rating on Greece by three levels to BB+ from BBB+ and warned that investors could recover as little as 30 percent of their initial outlay if it restructures its debt.
  Aflac is “looking very carefully” at limits on sovereign debt, Jeffery said. “I still don’t think it’s predictable what’s going to happen with Greece, but there is enormous pressure being applied by the EU and IMF as we speak. It will be very instructive as to how we proceed.”

• Today’s FOMC Statement
  Eddy Elfenbein, April 28th, 2010 at 2:41 pm

  Here’s today’s policy statement:

  Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
  With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
  In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

• 150 Years of Corporate Bond Defaults
  Eddy Elfenbein, April 28th, 2010 at 2:28 pm

  Here’s a bit of a geeky post. This recent academic paper looks at default rates for corporate bonds over the last 150 years. There are plenty of studies of corporate bond defaults, but none that I know of that go back this far.
  The results of the study are pretty interesting. The researchers found that there have been several episodes of high levels of defaults. These episodes are tightly bunched together and they’re separated by many years of very low default rates. The Great Depression wasn’t nearly as bad as some of the 19th century panics. In fact, default periods are only weakly associated with bad economies.
  The researches also found that bond spreads are about twice the default rate. Plus, spreads don’t have much forecasting ability although stock market returns and stock volatilities do. They found that over the very long haul, corporate bonds fault about 1.5% of the time.

• Lowe’s or Home Depot
  Eddy Elfenbein, April 28th, 2010 at 1:56 pm

  An emailer asks me: “Lowe’s (LOW) or Home Depot (HD)?”
  Ooohh, this is a toughy. Both are excellent companies and both have done extremely well over the past 13 months. This means that both have probably made the vast majority of their “easy gains” this cycle.
  I would say that Lowe’s and Home Depot are very nearly tied. Both stocks go for almost exactly 19 times this year’s estimate. I’ll give a slight edge to Home Depot since their recent earnings reports have exceeded expectations by a nice margin.
  

• SEI Investment’s Q1 Earnings
  Eddy Elfenbein, April 28th, 2010 at 10:57 am

  We have just one Buy List earnings report. SEI Investments (SEIC) reported Q1 earnings of 31 cents per share. Although this was four cents better than estimates, traders seem displeased. The shares are currently down about 5%.
  I’m not sure why the stock is down. Perhaps this is just a near-term sell-off. Today’s report clearly shows that SEIC’s business is bouncing back. The company earned $1.36 per share on 2007. That dropped to $1.22 in 2008 and 94 cents last year. The business is now running well ahead of last year’s result (they made just 18 cents per share in last year’s first quarter). I shouldn’t be too worried about SEIC pulling back. The stock had been making new highs consistently.
  I think SEIC has a good shot of making $1.30 a share this year which means it’s still reasonably priced (but not a screaming bargain).
  Strangely, AFLAC (AFL) opened nicely this morning but is now in the red. The company reported earnings yesterday.
  Tomorrow we’ll have earnings reports from Fiserv (FISV) and Becton Dickinson (BDX).

• Kling on the Senate Hearings
  Eddy Elfenbein, April 28th, 2010 at 9:41 am

  Arnold Kling sums it nicely:

  Too bad somebody at Goldman could not have called out a Senator. It must have been tempting to say, “Look. You can’t make a market by bending over backwards giving buyers every reason not to buy and sellers every reason not to sell. Sophisticated investors understand how we operate. Just like everybody who goes to play blackjack understands that some of the cards are dealt face down. You can complain that you think all the cards should be face up, but that would totally change the game. Do you hold to such high standards in your election campaigns? Do you think your disclosure of the consequences of your votes is honest? Do you disclose how lobbyists told you to vote? Do you go out of the way in your campaigns to give people all the possible reasons not to vote for you? You want to tell me about my responsibility to my clients? How would you like to hear my opinion about your responsibility to your constituents?”

• AFLAC’s Earnings
  Eddy Elfenbein, April 27th, 2010 at 4:17 pm

  After the bell, AFLAC (AFL) reported first-quarter operating earnings of $1.41 per share. With insurance companies, it’s more important to focus on operating earnings since net earnings can be heavily influenced by investments. The Street was looking for $1.32.
  This is what AFL had to say about guidance:

  With one quarter of the year complete, we continue to believe we are positioned for another year of solid financial performance. Although challenges posed by weak economic conditions clearly persist, particularly in the United States, we still believe our goal for increasing operating earnings per diluted share is reasonable and attainable. As such, our goal remains an increase of 9% to 12% this year in operating earnings per diluted share, excluding the impact of the yen. If the yen averages 90 to 95 to the dollar for the full year, we would expect reported earnings to be in the range of $5.24 to $5.56 per diluted share. Using that same exchange rate assumption, we would expect second quarter operating earnings to be $1.33 to $1.38 per diluted share.

  The stock is at $52.41 and they see full-year EPS coming in between $5.24 and $5.56. That’s a forward P/E Ratio of 9.4 to 10. AFLAC is a very good buy.

• Putting Today In Perspective
  Eddy Elfenbein, April 27th, 2010 at 3:30 pm

  The Dow is off about 150 right now. I see that people are concerned.
  My how we forget what real volatility looks like!
  Here’s a look at the daily changes in the Dow since the beginning of 2008:
  
  Update: The Dow closed down 213 points.