Archive for June, 2010

  • Stocks and Hemlines
    , June 1st, 2010 at 5:29 pm

    retuhskgld.bmp
    The New York Times reports that lower hemlines are in. Devotees of the Hemline Theory believe that hemlines tend to be follow the opposite of equity prices.

  • At Least It’s a Profit
    , June 1st, 2010 at 5:07 pm

    The Buy List is positive for the year…by 14 basis points!!
    But we’re still over 400 points ahead of the market.

  • HP to Cut 9,000 Jobs
    , June 1st, 2010 at 2:17 pm

    Here’s a post which I’d call “thinking out loud” since I can’t decide where I stand. Hewlett-Packard (HPQ) announced today that it’s cutting 9,000 jobs.

    HP will take a $1 billion charge for paying severance and modernizing its data centers to provide more automated services to customers, it said today in a regulatory filing. The Palo Alto, California-based company plans to replace about 6,000 of the eliminated positions with workers in different countries.
    “These sets of actions will enable HP to grow better than the market,” Ann Livermore, executive vice president for enterprise business, said today on a conference call. “This is a substantial opportunity for us and something that we think is a good opportunity for our clients as well.”
    The job cuts come after HP raised its 2010 forecast last month for the third time since November as results beat analysts’ estimates on a revival in business spending. Chief Executive Officer Mark Hurd has expanded into more profitable services as the recession crimped corporate budgets for equipment. He bought Electronic Data Systems Corp. for $13.2 billion in 2008, vaulting HP to No. 2 in services behind IBM.

    I’m a big fan of Mark Hurd. He’s done a great job in turning HPQ around after the disastrous tenure of Carly Fiorina (who will probably win California’s GOP Senate primary one week from today). Turnarounds rarely work but this one has. HPQ earnings have grown steadily over the past few years and the stock has outperformed a dismal market.
    My worry is that the company might be taking on more than it can afford. I’m not thrilled with the EDS buy and I hate (HATE) the Palm buy. Still, leadership counts and I’m leaning towards trusting that Hurd knows what he’s doing. And as today’s news shows, the company hasn’t grown complacent.

  • Depressing Stat of the Day
    , June 1st, 2010 at 1:25 pm

    Here’s the inflation-adjusted total of the S&P 500. Even after an impressive rally, we’re still where we were more than 12 years ago.
    image949.png

  • ISM = 59.7
    , June 1st, 2010 at 11:53 am

    The Institute for Supply Management’s manufacturing gauge came out today and it was 59.7. Any reading above 50 indicates an improving economy. This was slightly down from the previous report of 60.4.
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    As I’ve written before, the ISM is one of the best reports for telling us if the economy is in a recession or not. Historically, the tipping point has been around 44-45. Reading below that have come during recessions, and above we’re in recovery. I continue to believe the Federal Reserve will raise interest rates before most people expect.

  • Debtor Nation
    , June 1st, 2010 at 11:37 am

    The NYT profiles a young woman who just graduated from NYU. She’s $97,000 in debt.
    This is a scandal. It’s not merely lousy finance, but it’s also wrong to pile up debt on young people who may not realize the burden they’re placing on their future selves. Here’s what I wrote last year:

    Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).
    One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.
    The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.
    The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

  • Looking at the May Swoon
    , June 1st, 2010 at 10:26 am

    The stock market just finished its worst May since 1940. As it turns out, watching France fall to the Nazis isn’t good for stocks here. Also, watching the euro fall to reality is pretty nasty as well.
    Let’s take a closer look at where the market stands today. Here’s the S&P 500 (black line, left scale) along with its earnings (gold line, right scale).
    image947.png
    I’ve scaled the two lines at a ratio of 16 to 1 so whenever the lines cross, the market’s P/E Ratio is exactly 16.
    Let me add that looking at the market’s P/E Ratio is far from perfect (the future earnings line is, of course, merely forecast), but nevertheless we can gain some insights as to what investors are thinking at the moment.
    Two items stand out. The first is that the S&P 500 has fallen below a P/E Ratio of 16 which has generally been its lower bound over the past few years. The second is that the earnings forecast is still very favorable. If stocks keep pace with valuations, then the S&P 500 could easily be over 1400 within 18 months.
    This is where the problems come in. It appears that investors are beginning to question the robustness of the recovery. Given the amount of aid needed, that’s certainly understandable. So if the earnings forecast turns out to be overly optimistic, then the whole bullish scenario falls apart.
    My feeling is that the bearish cause has been pushed a bit too. Consider that many companies are still maintaining decent guidance. Even the bad guidance isn’t that bad. On Friday, shares of J.C. Penney (JCP) got knocked due to “poor guidance.” I’d agree that JCP is a weak buy right now, but they merely said to expect full-year EPS of $1.64 which was one penny below the Street.
    I used JCP as one example, but if the future yellow line is off, then we’re going to have to see much more lower guidance announcements. That simply hasn’t come yet.
    This week, we’ll get some news on our Buy List stock, Jos. A Bank Clothiers (JOSB). This company hasn’t missed an earnings forecast in four years. They haven’t given guidance for this year but they have said that they plan to open 30 to 40 new stores. Wall Street expects 71 cents per share which is a nice increase over the 62 cents per share from a year ago. My numbers say it will be close to 75 cents a share.
    JOSB is a solid buy. We’ll know more on Thursday (correction: Tuesday) when the earnings report comes out.