Archive for May, 2010

  • Watch the Market Tumble
    , May 7th, 2010 at 12:01 am


    (Via: TBI)

  • The Buy List Survives
    , May 6th, 2010 at 11:50 pm

    I’m happy to report that our Buy List survived today, bruised but still alive. The average of our 20 stocks was down -3.03% compared with 3.24% for the S&P 500.

    AFL -3.86%
    BAX 0.77%
    BDX -0.97%
    BBBY -4.36%
    EV -5.74%
    LLY -1.94%
    FISV 1.51%
    GILD -2.56%
    INTC -2.99%
    JNJ -2.67%
    JOSB -3.91%
    LUK -4.37%
    MDT -2.65%
    MOG-A -5.16%
    NICK -4.44%
    RAI -3.77%
    SEIC -3.24%
    SYK -1.70%
    SYY -3.74%
    WXS -2.02%

    The only one of our stocks that appeared to be impacted by the glitch was Reynolds American (RAI). Reynolds dropped from $53.55 to $36.35 and rallied to $51.53.

  • WTF!
    , May 6th, 2010 at 11:30 pm

    yahoo050610a.png
    So I head out for a meeting this afternoon and the market goes bananas. I trust you people to take care of these things when I’m not watching.
    Ok, let’s dissect what happened. The market had been drifting lower during the early afternoon. Then at around 2:30, all hell broke loose. At one point the Dow was down 1,000 points (or 998.5 to be exact). The market then staged a furious 650.7-point rally to close down “only” 347.80 points.
    Traders had been worried about Greece, the British election and tomorrow’s jobs report. However, something truly odd was going on. Accenture (ACN), for example, dropped from around $40 a share to a penny. Procter & Gamble (PG) and Philip Morris (PM) were also down sharply without explanation. Six companies traded at $0. Someone had clearly blundered
    As of now, nobody knows exactly what happened but it seems that the computers started to rise up against us. Or more specifically, someone with a fat finger hit the wrong button. There was a rumor that a guy at Citigroup dumped $16 billion worth of S&P futures, instead of the $16 million he was supposed to. Hey, these things happen. Billion…million. Tomay-to…tomah-to.
    What may have happened is that one series of program sells kicked in another serious of sells and it quickly snowballed. The Nasdaq has said that it will cancel hundreds of trades made between 2:40 p.m and 3 p.m. The quote of the day belongs to the WSJ’s Evan Newmark: “Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other. And your money hung in the balance.”
    Bear in mind that on any given day, roughly 50% to 75% of all trades are done through high-frequency trading. The hero of the day turned out to be Jim Cramer. He was on CNBC with Erin Burnett and told viewers, “That’s not a real price. Just go buy Procter & Gamble.”

  • Score One for Efficient Markets!
    , May 6th, 2010 at 1:56 pm

    You better sit down for this one.
    Earlier I mentioned that Fiserv (FISV) started spiking around noon.
    The reason seems to be that Blackstone (BX) and others are in talks to buy Fidelity National Information Services (FIS).
    Yes, they’re confusing the ticker symbols.
    yahoo050610.png
    Or possibly, folks are buying FISV because they think other people will mistake the ticker symbols which will lead to…even more people buying FISV!
    In other worlds, welcome to Wall Street.
    (I should add that the two companies are competitors so some reaction to the buyout should be expected.)

  • The Midday Market
    , May 6th, 2010 at 1:12 pm

    The market started the day with the cyclicals zooming out of the gate. I thought this was a typical reverse reaction day when everything that had been doing poorly suddenly catches fire. But that gave way and the cyclicals are now down with the rest of the market. The S&P 500 has been as low at 1150 today. It seems like only a few weeks ago when we passed through 1150, which, of course, it was.
    Our Buy List is showing a lot of resiliency. The S&P 500 lost -0.66% yesterday but the Buy List gained 0.15%. (Did anyone else jump up on their desk and do the Cabbage Patch when NICK hit $9.20? Um…good, me neither.) So far today we’re only down -0.56% compared with the S&P 500’s loss of -1.02%. So we’re sucking less but it shows you how our stocks can hold up when the cyclicals break down.
    Around noon, shares of Fiserv (FISV) suddenly sprung to life. The stock is up about 6% today. AFLAC (AFL) is back down again today. The stock has been as low as $47 which is a very attractive price.

  • Mark Haines for the Win
    , May 6th, 2010 at 11:12 am

  • This Just In….
    , May 6th, 2010 at 10:49 am

    Banks should make loans to sound borrowers

    Ohhhhh!
    *Smacks Forehead*
    Now they tell us!

  • More on Repurchases
    , May 6th, 2010 at 9:53 am

    I got a number of emails is response to yesterday’s screed against share buybacks. Here’s a thoughtful response from a reader.

    First, I’m a fan of your blog, and read it every day. (I even own some NICK 🙂
    I’m having trouble understanding your antipathy to buybacks.
    If you believed (bear with me) that stocks were always correctly priced, then you would prefer buybacks to dividends for stocks in you taxable accounts because of the tax advantages. And this is true even if the nominal tax levels on dividends and capital gains are the same, because capital gains taxes can usually be deferred for a long time (maybe even forever, for example if you make a lot of charitable contributions), while dividend taxes are impossible to escape.
    But of course stocks are not always correctly priced. In this case, you’d want the firm to buy back stock when the stock was cheap and issue stock when it’s expensive. Since the entire premise of your project is that you can identify cheap stocks, you should be happy to hear that one of your holdings is using their cash to buy back shares which you presumable believe are cheap.
    You are a buy-and-hold investor, who will hold the firm for as long as it’s cheap, so you don’t need to worry about whether the buyback is immediately correctly reflected in the stock price…the buyback will increase earnings-per-share, and this will eventually be reflected in the price.
    This also helps get rid of the excess cash which might otherwise be squandered by the firm. You could also do this via a one-time cash dividend, but then again there would be a big tax hit. You could raise your regular dividend, but then you might find you have to cut it, and firms are reluctant to do that for signaling reasons.
    Of course the problem with buybacks is that firms might do them when the stock is expensive. In theory, executives should be able to use their inside knowledge to do more repurchases when the stock is cheap, but it’s not clear how much that really happens. Also, what is seen as “cheap” changes with the overall level of optimism in the economy.
    But again, since you believe you can identify and hold cheap stocks, you should be happy when one of your holdings makes a purchase of cheap stock on your behalf. What am I missing?

    It’s hard for me to argue against this because everything he says is correct. My stand against share buybacks is far more primal. I just want the cash, and I’m happy to leave the theory stuff to someone else.
    If it’s not advantageous tax-wise, fine—change the law. If the stock is still cheap, fine—give me the dividend and I’ll decide if I want to reinvest it or not. I just want the money.
    David Berman, who writes the terrific Market Blog for the Globe and Mail, writes:

    Mr. Elfenbein’s argument would be a lot stronger if he could show that companies are notoriously bad at timing share buybacks – that is, buying their own stocks at high prices and therefore wasting their money.
    According to Standard & Poor’s, companies in the S&P 500 bought $47.8-billion (U.S.) worth of shares in the fourth quarter of 2009, up more than 37 per cent from the previous quarter. However, this is still well below the frenzy of buyback activity in 2007, a year that coincided with a peak in the S&P 500 before the onslaught of the financial crisis.
    Companies, it seems, like their own shares when they’re pricey.

    For me, it’s a point of principle (and principal, for that matter). I don’t want the companies I own to be in the business of timing their stock. That’s my job. Their job is to run the business and make as much money for me as they lawfully can. I’m the owner. Let me worry about what to do with the profits.
    Another reader writes:

    I definitely agree with you on preferring dividends compared to repurchases, at least in 99% of cases. You cited the case of Cisco, which has spent tens of billions to no apparent effect. The more pernicious thing about repurchases is that many companies only use them to soak up the equity dilution from option issuance to employees. Yet billions of dollars are spent on repurchases, without actually shrinking the float. Take a look at the recent Goldman Sachs quarter; they spent a couple of billion buying back 13.2 million shares to offset option issuance, but actually had 16 million more average shares outstanding (basic) and 6 million more shares outstanding (diluted) at the end of the quarter, compared to the end at Dec. 31/2009.
    I’m not sure if all companies are now required to report EPS including option issuance as compensation expense; if they are, that’s fine. But if they’re not, then companies get to boost EPS too, by diverting an expense item into the balance sheet item of retained earnings.
    Give me the dividend!

    This is an excellent point. I don’t mind executives being compensated with stock, but share repurchases make it very easy for them to mask shareholder dilution.

  • Leucadia’s Earnings
    , May 6th, 2010 at 9:04 am

    Yesterday, Leucadia National (LUK) reported its earnings results. I almost have to place an asterisk next to Leucadia. The company is, shall we say, reserved about corporate communications. If you want to see what I mean, this is the company’s website. Yes, that’s the whole thing.
    Let me back up and explain. Leucadia is very similar to Warren Buffett’s Berkshire Hathaway except it’s about one-thirtieth the size. The stock has done about as well as Berkshire over the last few decades. The big difference is that the owners, Ian Cumming and Joseph Steinberg, are extremely media shy. The company owns a grab bag of companies involves in several industries. It’s not an easy stock to evaluate. Leucadia has no analyst coverage and the earnings reports are celebrated by very thin press releases.
    This is what they had to say yesterday:

    Leucadia National Corporation today announced its operating results for the three month period ended March 31, 2010. Net income attributable to Leucadia National Corporation common shareholders for the three month period ended March 31, 2010 was $191,479,000 or $.78 per diluted common share as compared to net loss attributable to Leucadia National Corporation common shareholders for the three month period ended March 31, 2009 of $(140,007,000) or $(.59) per diluted common share.

    If you want to check out the details of their business, you can read the latest 10-Q. It’s fairly detailed. I’m pleased to note that Leucadia has a stake in AmeriCredit (ACF) which is in the lucrative field of financing for used cars.
    Here’s a Barron’s article on Leucadia from 2008.
    big.chart050610.gif

  • The Crossing Wall Street Tax Code
    , May 6th, 2010 at 8:58 am

    I want to thank everyone who participated in our weekend poll, “How much federal income tax should a family of four that makes $25,000 pay?” We had over 600 responses.

    This is the fifth time we’ve run that poll. The other income values we used were $40,000, $100,000, $250,000 and $1 million.

    Using some interpolation, I tried to find the median vote for the tax rate for each poll. Here’s what we have:

    $25,000: 2.66%
    $40,000: 8.31%
    $100,000: 16.33%
    $250,000: 22.69%
    $1,000,000: 28.23%

    So the collective wisdom favors a progressive income tax. (Please note that this is not necessarily my opinion, it’s what the poll said.)

    Using a little math, we can make a three-bracket tax code that links the data above. It looks like this:

    The first $21,249 is tax free.
    $21,249 to $74,266 is taxed at 17.79%
    $74,266 to $250,000 is taxed at 26.93%
    Above $250,000 is taxed at 30.08%

    There are lots of ways to connect the poll results, and without more data, the three-bracket result is the simplest. We could add a fourth bracket to make things a bit more realistic. For example, if we added a 10% bracket at around $18,000, then a 20% bracket at $28,000, we could push the 27% bracket to $85,000 while leaving $250,000 and over at 30%. That’s just one example.

    I didn’t have any larger point I was trying to prove with the poll. I was simply curious about what our readers thought.