Archive for April, 2010

• Quote of the Day
  Eddy Elfenbein, April 23rd, 2010 at 11:32 am

  The NYT reports on an IM written by an employee at S&P:

  “We rate every deal. It could be structured by cows and we would rate it.”

  Remember when it was all about bulls and bears, not cows and squids?
  (HT: TBI)

• Precision Castparts +300,000%
  Eddy Elfenbein, April 23rd, 2010 at 7:54 am

  Precision Castparts (PCP) had a pretty good day yesterday. It hit a new 52-week high and it looks like it’s on track for a new all-time high. Here’s a chart of the stock going back to 1974.
  
  Precision Castparts has beaten the S&P 500 by such a dramatic margin that the index looks like a flat line in comparison.

• SEC Employees Watched Porn as Economy Crashed
  Eddy Elfenbein, April 22nd, 2010 at 8:54 pm

  
  So this is why they missed Madoff (…and Stanford and Enron and and Rothstein and WorldCom and…well, you get the point):

  An agency watchdog says senior employees of the Securities and Exchange Commission spent hours surfing pornographic websites on government-issued computers while they were being paid to police the financial system.
  SEC Inspector General David Kotz says in a memo obtained by The Associated Press that the behavior violates agency and government-wide ethics rules.
  The memo reports 33 violations in the past five years — 31 of which took place in the two and a half years since the financial system teetered and nearly crashed.
  It says one supervisory accountant looked at pornographic websites about twice a day and saved images on his SEC computer to view during work hours.

  I hope everyone got their taxes in on time!
  In other news: “Firm used debt proceeds for strippers, payroll”

  The Securities and Exchange Commission filed an emergency enforcement action on Tuesday to halt an alleged fraudulent scheme by two owners of an Albany, New York, brokerage who sold debt in unregistered offerings and used the proceeds for its operations and to hire strippers.
  Chairman Timothy McGinn and President David Smith, owners of McGinn, Smith & Co Inc, sold about $120 million in more than 25 unregistered debt offerings, according to a complaint filed in a New York federal court.
  The proceeds, not enough to repay investors their principal or interest payments, went to supporting the firm’s struggling operations and to meet payroll, the SEC said.
  They also used funds to hire strippers for a “sexually themed cruise” and other personal activities.
  “McGinn and Smith deceived investors about the true purpose behind these offerings,” said Andrew Calamari, associate director of the SEC’s New York regional office. “They falsely promised investors a profitable payday but secretly siphoned off money for their own payroll.”

• Diversity Helped Us Out Today
  Eddy Elfenbein, April 22nd, 2010 at 5:59 pm

  Today was a good lesson on the benefits of diversification. Even though Baxter International (BAX) got severely pounded (-13.3%), our Buy List, as a whole, didn’t do so poorly. All told, we were down -0.20%.
  It’s not great but it could have been a lot worse. Several of our stocks closed at new 52-week highs like Bed, Bath & Beyond (BBBY), Fiserv (FISV), Joe Banks (JOSB), Sysco (SYY) and Wright Express (WXS). Plus, Reynolds American (RAI) and SEI Investments (SEIC) made new highs earlier in the day.
  Joe Banks is now a 51.62% winner on the year for us. Also, if you’re looking for a solid dividend, you might want to check our Reynolds American. The current yield is about 6.3%.
  Finally, Barron’s had some nice things to say about Gilead:

  HIV drugs are Gilead’s bread and butter. The company’s top two HIV treatments — Truvada and Atripla — accounted for 69% of revenue in 2009. Strong demand for the drugs has helped Gilead build a cash hoard of $4.6 billion. Sales of the company’s antiviral products rose 19% in the first quarter.
  But with patent expirations looming over the next decade for the company’s top three HIV drugs, investors are no longer giving the company full credit for its powerful earnings stream. The stock fetches just 11.2 times 2010 estimates.
  Carr says the market is overlooking the company’s recent progress on follow-on drugs to the current regimen. “Assuming development continues to go well, they will be on the market and well established before Atripla patent expiration,” Carr says.
  Gilead is already the dominant leader in HIV treatment. In the U.S., for instance, of the 581,000 patients being treated for HIV, 76% of those patients are on a Gilead product, the company says.
  Gilead’s key advantage is its unique once-a-day HIV pill. “Right now they have the best shot at launching the next two one-pill-once-a-day drugs for HIV,” Carr adds.
  As the company’s pipeline comes into focus over the next year, investors’ confidence in Gilead should improve, driving the price/earnings multiple higher.

• Just So I Have This Right…
  Eddy Elfenbein, April 22nd, 2010 at 2:21 pm

  
  Netflix (NFLX) increased the top end of its full-year guidance by 13 cents per share, and the stock responded by rising 1,500 cents per share. That’s a marginal P/E Ratio of…OMG…and it comes on top of an already richly valued stock.
  I admit I was wrong today and offer my congratulations to the longs. Admitting your errors is important. I haven’t changed my outlook. I still believe Netflix is a Strong Sell and now, only more so.
  There’s an important lesson here and that it’s hard to argue with an irrational mob. Under the Deep Market Truths I posted recently, I wrote “a trend can last much longer than you thought possible.”

• President Obama’s Speech
  Eddy Elfenbein, April 22nd, 2010 at 12:24 pm

  Here’s the text of the speech President Obama gave today at Cooper Union:

  It’s good to be back in the Great Hall at Cooper Union, where generations of leaders and citizens have come to defend their ideas and contest their differences. It’s also good being back in Lower Manhattan, a few blocks from Wall Street, the heart of our nation’s financial sector.
  Since I last spoke here two years ago, our country has been through a terrible trial. More than 8 million people have lost their jobs. Countless small businesses have had to shut their doors. Trillions of dollars in savings has been lost, forcing seniors to put off retirement, young people to postpone college, and entrepreneurs to give up on the dream of starting a company. And as a nation we were forced to take unprecedented steps to rescue the financial system and the broader economy.
  As a result of the decisions we made – some which were unpopular – we are seeing hopeful signs. Little more than one year ago, we were losing an average of 750,000 jobs each month. Today, America is adding jobs again. One year ago, the economy was shrinking rapidly. Today, the economy is growing. In fact, we’ve seen the fastest turnaround in growth in nearly three decades.
  But we have more work to do. Until this progress is felt not just on Wall Street but Main Street we cannot be satisfied. Until the millions of our neighbors who are looking for work can find jobs, and wages are growing at a meaningful pace, we may be able to claim a recovery – but we will not have recovered. And even as we seek to revive this economy, it is incumbent on us to rebuild it stronger than before. That means addressing some of the underlying problems that led to this turmoil and devastation in the first place.

  (more…)

• Don’t Pity Goldman’s Victims
  Eddy Elfenbein, April 22nd, 2010 at 11:54 am

  John Carney has a great piece in the Daily Beast pointing out that the alleged victims of Goldman Sachs were hardly victims:

  The crucial question in the SEC’s case against Goldman is whether Rhineland should have been told that Paulson was ultimately the short-seller in this deal or that he had played an important role in selecting the securities that went into Abacus. While it’s not clear that in 2007 anyone would have been worried about a little-known hedge fund being short a deal if they weren’t already worried about Goldman being short, Rhineland certainly should have asked how the portfolio was constructed.
  So why didn’t Rhineland—or the managers who controlled it from Dusseldorf—make these inquiries? Most likely, because IKB was playing the game even more aggressively.

  Fortunately, David Letterman has Goldman’s Top 10 excuses:
  

• J&J’s Amazing Dividend Streak Continues
  Eddy Elfenbein, April 22nd, 2010 at 10:39 am

  Johnson & Johnson (JNJ) just announced its 48th straight annual dividend increase. The company is raising its quarterly dividend by 10.2%, increasing it from 49 cents per share to 54 cents per share. I’ll give Alan Brochstein credit for getting it right on the nose. The stock now yields 3.3%.
  As I pointed out earlier, a person who bought JNJ 25 years ago is now getting close 100% a year just in dividends.
  

• Baxter Drops on Lower Guidance
  Eddy Elfenbein, April 22nd, 2010 at 10:16 am

  We had two more earnings reports from our Buy List this morning. I’ll start with the good. Reynolds American (RAI), the tobacco company, reported Q1 earnings of $1.11 per share which was four cents better than expectations. Revenue grew by 3.4% which was also better than the Street’s expectations. More importantly, Reynolds reaffirmed its full-year forecast of $4.80 to $5 a share, so we’re talking about a forward P/E of around 11. The stock also pays a very rich dividend of 90 cents a quarter which translates to a yield of 6.4%. Reynolds continues to be a very good buy.
  The major blow to the Buy List comes today from Baxter International (BAX). The earnings report wasn’t so bad, 93 cents a share which was inline. The problem was that they lowered full-year expectations from the previous range $4.20 to $4.28 per share to $3.92 and $4 per share. For Q2, BAX sees earnings ranging between 90 and 93 cents per share. The Street was expecting $1.06 per share. Ouch! This is a very disappointing report.
  Finally, Netflix (NFLX) continues to embarrass me and anyone else with common sense. The stock is up 14% this morning. The stock reminds me of a mighty ocean-going vessel steaming its way through the chilly waters of the North Atlantic. Nothing can stop it now!
  

• Tea Party Anyone?
  Eddy Elfenbein, April 22nd, 2010 at 8:58 am

  From the New York Times‘ (NYT) earnings report:

  Income Taxes
  The Company’s effective income tax rate was 65.6 percent in the first quarter. The high tax rate for the quarter was driven by a $10.9 million one-time tax charge for the reduction in future tax benefits for retiree health benefits resulting from the recently issued federal health care legislation. Excluding the charge, the Company’s effective income tax rate was 39.3 percent in the first quarter.
  In the first quarter of 2009, the Company recognized a pre-tax loss of $75.4 million but only an income tax benefit of $1.2 million. The tax provision was unfavorably affected by significant losses at the New England Media Group, for which only a minimum state tax benefit was recognized due to a Massachusetts law change, and various nondeductible losses. These items were partially offset by a $12 million adjustment to reduce the Company’s reserve for uncertain tax positions.