Archive for April, 2010

• Markets and Politics
  Eddy Elfenbein, April 13th, 2010 at 10:27 am

  One of the big mistakes market watchers make is to assume that the stock market is political. This is what I call Dan Gross’ Disease. Otherwise bright people assume every bounce and tick in the market is a political pronouncement that, as it turns out, proves their side right. Larry Kudlow has the acute form of DGD.
  Richard Nixon was once asked what he would do if he wasn’t president. Nixon said that he’d probably be on Wall Street buying stocks. This led one old-time Wall Streeter to say that he’d also be buying stocks if Nixon weren’t president.
  The market is of course influenced by public policy. Don’t get me wrong on that. But politics isn’t about policy. Usually, the most damage is done by a public policy that’s hardly controversial at the time. Lots of people like to blame Greenspan’s low rates for the housing bubble, but those moves weren’t broadly criticized at the time. Gold was still tame and bonds yield fell. The government fully applauded lower lending standards.
  Paul Krugman posts a nice jab at an old quote from Larry Kudlow saying that the stock market is a validation of the president’s (Bush) policy so the recent rally must approve of Obama. I’m not sure if Krugman believes that or is simply poking at Kudlow. With much of today’s political commentary, the snark is the point.
  The assumption is that the politicians are like players on a football field and the stock market is a scoreboard. It’s really the other way around. What the politicians say and do is a better measurement of how well the market has performed.

• New All-Time High for the Buy List
  Eddy Elfenbein, April 12th, 2010 at 6:47 pm

  Thanks to new 52-week highs from several of our stocks like Fiserv (FISV), Joe Banks (JOSB), Leucadia National (LUK) and SEI Investments (SEIC), the Buy List reached another new high today.
  For the year, the Buy List is up 11.73%. Including dividends, we’re up 12.19% compared with 7.89% for the S&P 500.
  Combining all the Buy Lists going back to 2006, we’re 28.94% to the S&P 500’s 5.00%.

• VIX Hits 33-Month Low
  Eddy Elfenbein, April 12th, 2010 at 1:03 pm

  The Volatility Index (^VIX) dropped down to 15.32 today which is the lowest it has been since July 2007.
  There seems to be a widespread assumption that lower volatility is good and higher volatility is bad. I’m not so sure. When the financial crises started to get serious, the VIX was only in the teens. It soared during the fall of 2008, and it was still very high one year ago when stocks were a great bargain.
  I looked at the numbers last year and found that a lower VIX isn’t strongly correlated with better returns, although there was some out-performance when the index is very low (i.e., less than 13).

• Bove Meets Hegel, Nietzsche, Rousseau and Leibniz.
  Eddy Elfenbein, April 12th, 2010 at 12:46 pm

  Crain’s New York features the only article you’ll read today where banking analyst Dick Bove cites Hegel, Nietzsche, Rousseau and Leibniz.

  Renowned banking analyst Dick Bove is calling on Bank of America to break itself up. In a Friday report, he dutifully backed up this idea with the sorts of numbers Wall Street types often use to show the bank’s different components are worth more separate than together.
  Much more interestingly, he also cited BofA’s failure in living up to the teachings of 19th century German philosopher Georg Wilhelm Friedrich Hegel.
  Mr. Hegel is best known for his work on dialectics, which says that an event, for instance the Protestant Reformation, triggers an forceful opposing event (the Counter-Reformation), and eventually the phenomena combine, or synthesize, to produce an improved state of being. (In fact, Catholic and Protestant Europe did learn to live together, more or less agreeably). By the way, this school of thought was an important foundation for Karl Marx.
  Mr. Bove, a Rochdale Securities analyst who clearly has read up on Idealist philosophers, says that BofA fails to meet the Hegelian test.
  “In a Hegelian cycle, events keep returning to the same place. However, that position is always higher and somewhat better than in the prior cycle due to the accumulated wisdom gained from prior cycles,” he wrote. “However, [BofA] shows no evidence of having learned anything from the past cycles….It gets back to the same position but at a lower point in the cycle.”
  Although he didn’t cite Nietzsche’s concept of the eternal recurrence, Mr. Bove may well have had that in mind when pointed out that last year BofA’s stock was trading for the same price it fetched in 1982 and its dividend payout appears to be the same.
  In a best of all possible worlds—a phrase coined by 18th century philosopher Gottfried Leibniz—Mr. Bove argues that BofA’s different businesses would be spun off as independent entities. These newly independent companies, surely stocked with the sort of Ubermenschen in management that Friedrich Nietzsche would appreciate, would lead shareholders to greater heights than BofA could. Mr. Bove pegged BofA’s break-up value at $53 a share.
  An analyst for some 40 years, Mr. Bove is known for his forthright views that distinguish him from many other analysts, though sometimes his work resembles Jean-Jacques Rousseau’s Reveries of a Solitary Walker.
  A BofA spokesman had no comment.

  Clearly, the spokesman is a Stoic.

• Calling the Recession Over
  Eddy Elfenbein, April 12th, 2010 at 11:00 am

  The NYT has a good article on the issue of NBER officially declaring the recession over. I hear lots of people talking about the possibility of a double-dip. Even if that happens, I would have to view that as a separate cycle.

  There is no formula for defining a recession, even though it is often casually described as two consecutive quarters of economic contraction. The committee relies on interpretation to determine the beginning or end of one.
  The last time it made such a cautious statement was in December 1990, when it said that a recession had most likely begun between June and September but that it could not make a determination until the contraction was sufficiently long and deep; the committee announced four months later that the recession had started in July 1990.
  It seems nearly certain that the present recession will end up lasting longer than the 16-month recessions of 1973-75 and 1981-82. They had been the longest downturns since the 43-month period from 1929 to 1933 that was the first phase of the Great Depression.
  The committee, created in 1978, has assigned the start and end dates of economic contractions for every business cycle since 1854. It has long emphasized that it looks only backward, and does not make forecasts or predictions.

  I recently looked at the data and found that the ISM is the among the best predictors of what the committee will do. Once the ISM Composite Index crosses 44, the odds that we’re still in a recession drop dramatically. We’ve now been above that every month since June 2009.
  
  Note that the last shaded area isn’t official. NBER has said the recession began in December 2007, but we haven’t heard on its ending just yet.

• 2011 S&P 500 Earnings Estimate
  Eddy Elfenbein, April 12th, 2010 at 10:41 am

  Howard Silverblatt, the top numbers guy at Standard & Poor’s, has pegged 2011 consensus earnings estimates for the S&P 500 at $93.55. Some have the consensus even higher. If that’s correct, then this market is still on the inexpensive side.
  One major caveat is that we shouldn’t a great deal of faith in an earnings projection so far away. In March of 2009, Goldman said that the S&P 500 would earn just $40 for the entire year. Instead, it was $57.

• Upcoming Earnings Dates
  Eddy Elfenbein, April 12th, 2010 at 10:28 am

  Here are some upcoming earnings dates and EPS estimates for stocks on the Buy List:

  Intel	INTC	13-Apr	$0.38
  Eli Lilly	LLY	19-Apr	$1.10
  Gilead	GILD	20-Apr	$0.95
  Johnson & Johnson	JNJ	20-Apr	$1.28
  Stryker	SYK	20-Apr	$0.78
  Baxter	BAX	22-Apr	$0.93
  Reynolds American	RAI	22-Apr	$1.06
  Aflac	AFL	27-Apr	$1.32
  Becton Dickinson	BDX	29-Apr	$1.23
  Fiserv	FISV	29-Apr	$0.97

• Merger Monday
  Eddy Elfenbein, April 12th, 2010 at 10:05 am

  One of the signs of a good market is the willingness of mergers and acquisitions. This often means that there’s plenty of money out there and stocks are still cheap. Today’s merger news is the probably the catalyst that has pushed the Dow over 11,000 this morning.
  For example, the California Pizza Kitchen (CPKI) said that its board has authorized a “strategic review.” That’s a fancy way of saying “the bidding starts…NOW.” Personally, I don’t quite understand many of these theme restaurants but they seem pretty popular so what do I know?
  The other news is that Cerberus Capital Management LP is buyingDynCorp International (DCP) for $1.5 billion. The deal represents a 49% premium for DynCorp’s stock. Not bad.
  The biggest news is the marriage proposal between Mirant (MIR) and RRI (RRI). The new company will have the hideously ugly name GenOn Energy. I’m going to factor in a 10% price discount based on the name alone. Still, I expect to see more mergers in this space.

• Bernanke Warns
  Eddy Elfenbein, April 8th, 2010 at 8:10 am

  
  Bernanke warns of U.S. debt
  Ben Bernanke Warns of Deficit
  Bernanke warns US economy still faces ailing housing and employment
  Bernanke warns on homes, jobs
  Bernanke warns Congress – Hands off the Fed!
  Bernanke warns of need for monetary tightening
  Bernanke Warns Against Narrowing Fed Focus
  Bernanke Warns Deficits Threaten Financial Stability
  Bernanke warns about creating new bubbles
  Bernanke warns growth is fragile
  Bernanke Warns of “Formidable Headwinds”
  Freak Power Outage Puts Alan Greenspan in the Dark
  Here’s more and more and more and more.

• Tax Day Is Coming
  Eddy Elfenbein, April 7th, 2010 at 11:16 pm

  But nearly half the country pays no Federal income tax:

  The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.
  The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.
  “We have 50 percent of people who are getting something for nothing,” said Curtis Dubay, senior tax policy analyst at the Heritage Foundation.