Archive for April, 2010

• Sector Performance
  Eddy Elfenbein, April 27th, 2010 at 2:42 pm

  Bespoke has a handy round-up of how the S&P 500 sectors have performed over the past few years:
  
  The important lesson for investors is to see how much less volatile the consumer staples are (these are the stocks that are the opposite of cyclicals). Staples tend to fall the least and rally the least.
  Here’s a listing of the 41 stocks in the S&P 500’s Consumer Staples sector. I’ve included each stock’s dividend yield:

  ADM	Archer-Daniels-Midland	2.13%
  AVP	Avon Products	2.67%
  BF-B	Brown Forman	2.05%
  CAG	ConAgra Foods	3.27%
  CCE	Coca-Cola Enterprises	1.27%
  CL	Colgate-Palmolive	2.52%
  CLX	Clorox	3.12%
  COST	Costco	1.21%
  CPB	Campbell Soup	3.12%
  CVS	CVS Caremark	0.96%
  DF	Dean Foods	0.00%
  DPS	Dr Pepper Snapple	1.79%
  EL	Estee Lauder	0.83%
  GIS	General Mills	2.81%
  HNZ	H.J. Heinz	3.68%
  HRL	Hormel Foods	2.14%
  HSY	The Hershey Company	2.71%
  K	Kellogg	2.84%
  KFT	Kraft Foods	3.90%
  KMB	Kimberly-Clark	4.33%
  KO	Coca-Cola	3.31%
  KR	Kroger	1.65%
  LO	Lorillard	5.11%
  MJN	Mead Johnson Nutrition	1.78%
  MKC	McCormick & Company	2.65%
  MO	Altria Group	6.66%
  PEP	Pepsico	2.79%
  PG	Procter & Gamble	3.05%
  PM	Philip Morris	4.73%
  RAI	Reynolds American	6.69%
  SJM	J.M. Smucker	2.26%
  SLE	Sara Lee	3.19%
  STZ	Constellation Brands	0.00%
  SVU	SuperValu	2.34%
  SWY	Safeway	1.57%
  SYY	Sysco	3.24%
  TAP	Molson Coors	2.22%
  TSN	Tyson Foods	0.81%
  WAG	Walgreen	1.57%
  WFMI	Whole Foods Market	0.00%
  WMT	Wal-Mart Stores	2.23%

• Watch The Senate Hearings Live
  Eddy Elfenbein, April 27th, 2010 at 9:55 am

  You can see the Senate testify before Goldman Sachs here.
  Wait, I might have that backwards. It’s getting hard to tell.
  Here are live blogs from:
  TBI
  WSJ
  NYT
  FT
  Reformed Broker
  Dealbreaker
  
  Guardian
  Simon Johnson at PBS
  This is a perfect opportunity for a Godfather 2-like scene when Frank Pentangeli testified before the Senate. Fab starts reading his testimony and Blankfein walks in with Fab’s brother Olivier and takes a seat in the back row. Then Fab suddenly recants: “Abacus? I never heard of an Abacus.”

• Wright Express’ Earnings
  Eddy Elfenbein, April 27th, 2010 at 9:32 am

  One more Buy List stock reported earnings this morning. Wright Express (WXS) said it earned 61 cents per share for its first quarter which was four cents better than Wall Street’s expectations. In February, Wright said to expect Q1 earnings between 53 and 58 cent per share so they’re doing even better than their own forecasts. The company’s revenues rose 22.3% to $83.8 million which was just shy of expectations.
  Wright said that Q2 earnings should range between 61 and 66 cents per share. For all of 2010, Wright sees earnings-per-share coming in between $2.39 and $2.54. This is a big increase from the earlier range of $2.26 to $2.46.
  Bottom line: This was a very good report. The strange thing about Wright is why its shares didn’t do anything for the first few months of the year. Going back to last September to up until a few weeks ago, WXS mostly bounced between $28 and $32. Then two weeks ago, out of the blue, WXS started to break out. Who knows what traders are thinking? The shares are down again this morning. That’s OK, I can deal with folks who don’t see a bargain. Wright Express continues to be an excellent buy.
  After the closing bell, AFLAC (AFL) is due to report. This is one of my favorite Buy List stocks. The consensus estimate is that AFLAC will earn $1.32 a share.
  

• What Letter Would You Give This Chart?
  Eddy Elfenbein, April 26th, 2010 at 1:45 pm

  On Friday, the government will release its initial report on first-quarter GDP growth. The economy has grown for the last two quarters but it’s been far short of what should be expected when you emerge from a nasty recession.
  Economists and market-watchers are debating what letter the recovery will look like — will it look like a V, a U or possibly a W? Here’s what the Real GDP chart looks like, but I’ve added a guess for Friday’s data point (3.6% growth).
  
  To me it looks like a U. Or maybe a backwards J. I dunno. Possibly another letter?

• Buy List Earnings This Week
  Eddy Elfenbein, April 26th, 2010 at 12:52 pm

  Five of our Buy List stocks will report earnings this week. Here they are along with Wall Street’s consensus:

  AFLAC	AFL	27-Apr	$1.32
  Wright Express	WXS	27-Apr	$0.57
  SEI Investments	SEIC	28-Apr	$0.27
  Becton, Dickinson	BDX	29-Apr	$1.23
  Fiserv	FISV	29-Apr	$0.97

• What If the Fed Delivers a Surprise Rate Increase?
  Eddy Elfenbein, April 26th, 2010 at 11:38 am

  The stock market continues to climb. The S&P 500 has made up all it lost after the Goldman news, and we’re on our way to the highest close since Lehman Brothers went belly up.
  My feeling has been that as long as interest rates are low and profits are growing, then the market will rally. Still, the market is nearing B-Day. This will be the day when Ben Bernanke and the Federal Reserve finally decide to raise interest rates. The futures market currently thinks the Fed will have rates at 0.25% sometime this summer (that’s really not much of an increase since the current range is 0% to 0.25%) and 0.5% by the end of the year.
  But what if the Fed decides to surprise everyone by raising rates by 50 basis points or more before? This would be a dramatic move. Gold would plunge and the stock rally might halt in place. The benefit for the Fed is that it’s not much of a move but it would send a strong signal to investors that the economy is getting better and that the central bank is determined to unwind its dramatic policy moves of the past two years.
  I doubt a surprise rate hike would have a long-term impact of stock prices, but it would certainly change the tone of the market. A surprise hike is a long shot, but it’s not out of the question. No one can ignore the fact that earnings have been improving quite dramatically. This has been a great earnings season so far. Profits are running 22% ahead of estimates and this is leading analysts to raise their forecasts:

  The earnings upgrades come as income beats Wall Street estimates at the fastest rate ever for the third time in four quarters. More than 80 percent of the 173 companies in the S&P 500 that reported results have topped estimates, compared with 79.5 percent in the third quarter and 72.3 percent in the three- month period before that, Bloomberg data show.

  It looks very likely that the S&P 500 is on track to earn $80 for 2010 and possibly $95 for 2011. That’s my view but UBS is even more optimistic. They just upgraded their target for the S&P 500 to 1,350. They see EPS coming in at $92 for this year and $100 for 2011. UBS writes: “Moreover, the “junk trade” has re-emerged, with the most economically-sensitive companies and lower quality stocks outpacing the broader market.”
  This is exactly what I noted last week.
  One final note, Netflix (NFLX) is up another $8 a share today. I think I know how this story ends. I just don’t know when the last act will start.

• Barron’s: Fiserv Could Jump 20% From Here
  Eddy Elfenbein, April 26th, 2010 at 7:32 am

  Fiserv (FISV), one of our Buy List stocks, gets some love from Barron’s:

  Earnings are on track to rise to $4 per share this year from $3.66 in 2009, and to gain nearly 10% in 2011 to $4.44, placing the price/earnings multiple at 13.4 times 2010 projections and 12.1 times 2011 expectations. (Per-share earnings are reported “as adjusted” for the adding back of goodwill amortization, for a clearer gauge of the underlying business.) This is cheap for such a high-quality, industry-leading business, which merits a multiple equal to or better than the Standard & Poor’s 500’s 15-plus times ’10 forecasts. Also, it suggests at least 20% upside for Fiserv shares.
  Because Fiserv’s business is so steady, many investors value it on free cash flow, which has exceeded reported earnings in recent years — a favorable trend. Free cash flow hit $668 million in 2009, up from $603 million in ’08. The company is guiding Wall Street to expect more than $700 million this year. With a market value of $8.2 billion, investors are getting a free-cash-flow “yield” of nearly 9%, at a time when corporate-bond investors are happy to accept 5% or 6%. The stock historically has traded above 14 times free cash flow. With nearly $5 a share of free cash penciled in for 2011, that multiple suggests a price target near 70.

  The next earnings report is due this Thursday after the bell. The Street is expecting 97 cents per share, up from 88 cents a year ago. Here are the annual EPS results for the past few years:
  2003: $1.61
  2004: $1.92
  2005: $2.31
  2006: $2.53
  2007: $2.66
  2008: $3.29
  2009: $3.66
  That’s what I like to see — nice steady increases. I think EPS for 2010 will come in around $4.05, give or take. Fiserv is an excellent buy.
  

• Fabulous Fab’s conflicted love letters
  Eddy Elfenbein, April 26th, 2010 at 7:17 am

  Oh wonderful. Everything I didn’t want to know about Fabrice:

  Fabrice Tourre and his girlfriend talked like a couple very much in love.
  They emailed back and forth about how they wanted to curl up in each other’s arms and how they looked forward to tender moments together. Tourre, a Goldman Sachs bond trader, also wrote in the emails of the impending collapse of the subprime mortgage market and how he was masterminding ways at Goldman to make money from it.
  Little did they know that three years later these very personal emails written through Tourre’s Goldman Sachs e-mail account would become part of one of the biggest investigations into the subsequent financial crisis.
  …
  “It’s bizarre I have the sensation of coming each day to work and re-living the same agony – a little like a bad dream that repeats itself,” Tourre writes. “In sum, I’m trading a product which a month ago was worth $100 and which today is only worth $93 and which on average is losing 25 cents a day …That doesn’t seem like a lot but when you take into account that we buy and sell these things that have nominal amounts that are worth billions, well it adds up to a lot of money.”
  He added, “When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invent telling yourself: “Well, what if we created a “thing”, which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?”) it sickens the heart to see it shot down in mid-flight… It’s a little like Frankenstein turning against his own investor ;)”
  Tourre, 28 when he wrote the emails, reflects on the strangeness of being so young, yet being in such a critical role with pressures from those above him at the firm to make money.
  “… I am now considered a “dinosaur” in this business (at my firm the average longevity of an employee is about 2-3 years!!!) people ask me about career advice. I feel like I’m losing my mind and I’m only 28!!! OK, I’ve decided two more years of work and I’m retiring.”

  That last part was about the only thing he got right.

• Stiglitz on Skidelsky on Keynes
  Eddy Elfenbein, April 24th, 2010 at 8:08 pm

  Here’s a good weekend read. This is Joseph Stiglitz’s review of Robert Skidelsky’s Keynes: The Return of the Master. Here’s a snippet:

  It has become a commonplace to say, in the aftermath of the Great Recession, that ‘we are all Keynesians now.’ If this is so, then Keynes’s great biographer, Robert Skidelsky, should have much to say about the recession, its causes and the appropriate cures. And so indeed he does. I share with Skidelsky the view that, while most of the blame for the crisis should reside with those in the financial markets, who did such a poor job both in allocating capital and in managing risk (their key responsibilities), a considerable portion of it lies with the economics profession. The notion economists pushed – that markets are efficient and self-adjusting – gave comfort to regulators like Alan Greenspan, who didn’t believe in regulation in the first place. They provided support for the movement which stripped away the regulations that had provided the basis of financial stability in the decades after the Great Depression; and they gave justification to those, like Larry Summers and Robert Rubin, Treasury secretaries under Clinton, who opposed doing anything about derivatives, even after the dangers had been exposed in the Long-Term Capital Management crisis of 1998.
  We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.

  Check out the whole thing.

• Felix Salmon: Goldman Sachs’s reputation is tarnished
  Eddy Elfenbein, April 23rd, 2010 at 10:47 pm

  Writing in the Washington Post, Felix Salmon says that the SEC’s charges against Goldman Sachs have tarnished the firms reputation.

  The SEC, in making its complaint public instead of trying to quietly settle with Goldman, has used its subpoena power to put an end to the firm’s reputation once and for all. Among other things, the agency uncovered a series of damningly glib e-mails from a trader who referred to himself as “the fabulous Fab.”
  And so far, Goldman’s desperate response has only made matters worse. It tried to paint a veteran saleswoman as someone who couldn’t understand simple e-mails about corporate structure. It used the word “sophisticated” 18 times in a single document, trying to shift the blame onto the victims of its scheme, because, well, they were sophisticated. And when its general counsel came onto its quarterly earnings call last Tuesday, he refused to answer most questions. The overriding impression Goldman is creating is one of a panicked company caught with its pants down — not of a professional banking organization rising effortlessly above the fray.
  Goldman’s clients have known for years that the long-term-greedy investment bankers of the past were being marginalized by the short-term-greedy traders who have taken over the company’s upper echelons. But the company’s mystique overwhelmed this knowledge. Clients flocked to Goldman anyway, sometimes against their better judgment.
  They won’t be doing that anymore: Goldman’s competitors will make sure of it. On the Friday that the SEC charges were announced, and again on the following Sunday, Blankfein left voicemail messages for all the firm’s employees, saying, in his characteristically combative way, that Goldman would fight the charges.

  Ultimately, what a bank sells is trust so once you lose that, you’re out of business. Still, I think Felix overstates the case against Goldman. This isn’t over by along shot and Goldy still has a large reservoir of respect and admiration on Wall Street.
  I’ve said before that Goldman has become the SEC’s “Great White Defendant.” I don’t think Goldman is a Buy but I wouldn’t sell them short either, literally or figuratively.