Archive for April, 2010

• The Lack of Bad News Could Be…Bad News
  Eddy Elfenbein, April 17th, 2010 at 8:31 pm

  We’re still early in fourth-quarter earnings season and Wall Street has already had a nice rally this year. The S&P 500 put on nearly 15% between February 8 and this past Thursday. We could be headed for a cooling off period. Paul J. Lim notes in the New York Times that the market may be getting a tad too optimistic about earnings.

  John Butters, an earnings analyst at Thomson Reuters, noted that more often than not, companies that are likely to fall short tend to pre-announce their results, in part to lower the market’s expectations.
  Historically, two companies pre-announce bad news for every company that hints at better-than-expected results to come. But at the moment, Mr. Butters said, the ratio is just 1.1 to 1 — which means that far fewer companies than usual are preparing the market for disappointment.
  That may sound like a positive sign, but it isn’t. Oddly, when the pre-announcement ratio has been this low over the last decade, it “corresponds with a decline of about 6 percent in the S.& P. 500 during the earnings season,” Mr. Kleintop said. It may be that without an early warning of trouble, investors become too ebullient, leading to market declines later.

  Here’s a look at the S&P 500 along with its earnings. The S&P 500 is the black line and it follows the left scale. The earnings are the yellow line and they follow the right scale. The two lines are scaled at a ratio of 16-to-1, so whenever the lines cross, the P/E Ratio is exactly 16.
  
  The future earnings are, of course, just a forecast. Be careful not to read too much in this chart. The point I want to show you is that the market has rallied and it’s been due to a surge in earnings that’s expected to continue.
  If that yellow lines continues its sharp upward trend, then the market is still very cheap and we have nothing to worry about. We ought to assume that the black and yellow lines will converge over time.
  The hitch is that this is all predicated on a very strong earnings environment. We shall know more when we’re a little older.

• Goldman, the SEC and a Whiteboard
  Eddy Elfenbein, April 17th, 2010 at 3:17 pm

  Paddy Hirsch of Marketplace explains L’affaire Tourre.
  

• Lies, Damn Lies and Government Statistics
  Eddy Elfenbein, April 17th, 2010 at 2:24 pm

  Wall Street is a place that runs on numbers. But, as Carl Bialik explains in his most recent column, the numbers that we get from the government are far fuzzier than many people realize.
  For example, when the government tells us how many jobs were created or lost last month, it’s really just an estimate—and a very broad estimate at that. The most recent report said that 134,000 jobs were lost during February, but the Bureau of Labor Statistics really only says that it’s 90% confidence that actual number was somewhere between a loss of 500,000 and a gain of 200,000. That’s an enormous spread.
  A lot of people like to blame the government or cite a political agenda. Sure, that’s certainly there, but even without it, collecting economic stats is a tricky business. The national economy consists of millions and millions of people making many decisions every day. It’s hard to boil down something so complex to just a few hard numbers.
  There’s another issue of the government making countless revisions to its data. The GDP growth figure for the third quarter of 1983 has been revised ten times since it first came out. The most recent revision was just a few months ago.
  This is why the data I like to rely most is price data from the markets—stock prices, bond yields, spreads and commodity prices. Of course, marker prices have their own biases as well.
  When you face the fact that so much time and energy goes into debating the economy, and truthfully we can’t say what it’s doing with a high degree of confidence, it’s rather disquieting. Imagine watching a football game and neither you nor anyone else has any idea what the score it. That’s a lot of economics.

• Friday Is Here
  Eddy Elfenbein, April 16th, 2010 at 4:41 pm

  OK, folks. I’ve had enough of Goldman Sachs, the SEC and CDOs for one day. The market is closed, the weather is great outside, time to enjoy the day.
  Who else but the Boss can cure your Friday blues?
  

• G-Day Sell-Off
  Eddy Elfenbein, April 16th, 2010 at 4:34 pm

  Overall, I have to say that I’m not terribly impressed with the SEC’s case against Goldman Sachs (GS). Perhaps there’s more to it, but it seems pretty weak to me. My guess is that Goldman will eventually write a $200 million check to the feds, maybe less. To add some perspective, GS lost about $12 billion in market cap today. That could buy the New York Times (NYT) more than six times over.
  Today was another good day for the Buy List. By that, I mean we did less worse than the rest of the market. The S&P 500 dropped below 1,200 to close at 1192.13 for a loss of -1.61%. The 20 stocks on the Buy List lost an average of 0.91%. That’s a very nice outperformance for one day. For the year, the Buy List is up 13.05% (not including dividends) compared with the S&P 500’s gain of just 6.91%.
  Nicholas Financial (NICK) got to another new high of $8.67 although it closed down slightly. Of our 20 stocks, only Gilead Sciences (GILD) and Wright Express (WXS) were up today. Wright had been one of our laggards but it woke up this past week. The stock is at a new 52-week and it’s due to report earnings on April 27. Here’s a list of some of our upcoming earnings reports.

• Hawkins Inc. (HWKN)
  Eddy Elfenbein, April 16th, 2010 at 1:30 pm

  I often encourage investors to seek out smaller, underfollowed companies. It’s hard to get an edge on Wall Street when you’re buying a stock that’s followed by 30 or more analysts. In fact, there are tons of high-quality companies that are completely ignored by Wall Street.
  If you do a little homework, you can be as well-informed as anyone on a small stock. Most investors never think of calling the company and asking questions. Well, you’re the owner! You’re certainly allowed. A lot of times, good companies are more than happy to discuss their business. (How often does someone call you asking about your job?)
  One company that I’ve followed for many years is Hawkins Inc. (HWKN). Talk about unloved! Barely anyone follows widdle Hawkins. Yet, this has been an outstanding stock for decades! (BTW, I’m not recommending the stock. I’m just using them as an example.)
  Hawkins is a specialty chemical company based in Minnesota. So if you’re in, say, Fargo and you need a shipment of sodium hydroxide, well..these are the boys to call. They’ve been around for many years and the company is largely in family hands. They do what they do, and they do it well.
  The odd thing about Hawkins is that they used to split their stock almost every, but by small amounts. You’d get a 10%, 15% or 20% stock dividend each year. As a result, the nominal share and dividend price didn’t move much, but the stock really did very well.
  Here’s a look at Hawkins’ long-term performance. That flat line is the S&P 500, meaning HAWK beat the market so badly that you can barely see it in comparison. For another comparison, the blue line is Coca-Cola (KO).
  
  20,000 Freakin’ Percent! In specialty chemicals! The historical return is even better since Hawkins has probably averaged a higher dividend yield over time. Yet, no one has heard of these guys.
  The stock has become a lot more popular recently, but even two years ago, the shares would occasionally spend an entire day without seeing a single trade. There was an 18-month stretch around 2004-05 when the stock didn’t leave $12 a share.
  Owning a stock like Hawkins is about as close as you can get to being in private equity but actually own a publicly traded stock. Shares of Hawkins trade very little and the volatility is exceptionally low. To many investors, that’s a bad thing. Not to me.

• Breaking: Goldman Plunges on SEC Investigation
  Eddy Elfenbein, April 16th, 2010 at 10:56 am

  Shares of Goldman Sachs (GS) are getting smacked on the news that the SEC is investigating the firm. Here’s the complaint from the SEC. Can you guess when the news came out?
  
  I’ve looked through this and it’s not nearly as bad as it appears. At most, I’m guessing Goldman will have to pay a fine. I share Henry Blodget’s take.

• Friday Morning News
  Eddy Elfenbein, April 16th, 2010 at 8:43 am

  BofA reports earnings of $3.2 billion. They’re getting better but they’re far from strong.
  GE beat their estimates! Their horrible, horrible estimates.
  UnitedHealth’s CEO bags $100 million from stock options. Yes, $100 million!
  Oracle (ORCL) is buying Phase Forward (PFWD). Expect more of these buys. Larry has $17 billion in cash to play with.
  Barbie pushes Mattel (MAT) to a profit of seven cents a share. They lost 14 cents a share a year ago. Math is apparently getting easier.
  Good news: Sony Ericsson makes profit of 21 million. Bad news: In euros.
  Goldman Sachs (GS) director is stepping down.Too insider tradery.
  Housing permits rose more than expected last month.

• Money Magazine’s Best Buy-and-Hold Blogger
  Eddy Elfenbein, April 16th, 2010 at 8:05 am

  Money Magazine has just come out with a list of the 100 Best Moves You Can Make With Your Money. I’m honored to be named at #5 — the Best Buy-and-Hold Blogger.
  If you’re new to the site, you can read more about us here, and be sure to check out our Buy List here. We’re well on our way toward beating the market for the fourth straight year! You can also follow us on Twitter here.

• Proxy Battle Forming at Denny’s
  Eddy Elfenbein, April 15th, 2010 at 2:39 pm

  I have to admit that I’m not a big fan of Denny’s (DENN), but I’m almost always sympathetic to any proxy battle. There aren’t nearly enough of these.
  Stock certificates aren’t just pieces of paper, they’re legal ownership in a company. If the owners don’t like how the company is being run, they have every right to try and make a change. The incumbent board usually acts offended by a proxy battle which I never understand.

  Spartanburg-based Denny’s Corp. issued a scathing response Wednesday to a group of investors waging a proxy fight against the company’s executive leadership.
  In a letter to shareholders, Denny’s slammed members of the Committee to Enhance Denny’s, saying they are “playing fast and loose with the truth,” and pursuing their own personal interests rather than the company’s.
  On Tuesday, the group issued its own letter to shareholders more than a month after first publicizing its views in a news release. The letter blasted leadership on a number of issues, including the company’s declining stock price, drop in guest traffic, failure to grow system-wide restaurants and ceding the top market spot to competitor IHOP.
  “To this date, there still has been no formal communication from this group despite the fact that the company proactively reached out to them directly in response to their public filings,” Denny’s said in its letter. “Instead, these very recent stockholders chose to launch a costly and distracting hostile proxy contest in the hopes of changing the company’s course to pursue actions that we believe serve only their own narrow interest and not those of Denny’s stockholders.”
  Led by investment firms Oak Street Capital Management and Dash Acquisitions, the group owns 6.3 percent of the company’s outstanding shares.
  Shareholder voting rights allows for investors to state their case for change once they obtain 5 percent interest.