Archive for July, 2010

  • SEC To Have “Significant” Announcement on Goldman at 4:45 pm
    , July 15th, 2010 at 3:42 pm

    Shares of Goldie (GS) are up on speculation that they’ve reached an agreement with the Federales.
    When the news first came out three months, I was not impressed with the SEC’s case. I felt that at most, Goldman would pay a fine.

    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.

    The day the SEC’s case was announced, shares of Goldman plunged from $184.27 to $160.70. I got several emails asking if GS was a buy. I said no. Fortunately, I got that right and GS fell as low as $129.50 on July 1. The stock has bounced back and it’s up again today. The outlook for the stock will be a lot better once this case is out of the way.

  • JPMorgan Profit’s Surges
    , July 15th, 2010 at 11:18 am

    Looks I got another one right. I said to expect a big earnings surprise from JPMorgan Chase (JPM), and that’s what we got. The bank earned $1.09 a share which smashed Wall Street’s consensus of 71 cents a share.
    The problem is that despite the earnings surprise, JPM’s business still has major weak spots:

    Chief Executive Officer Jamie Dimon, 54, said he isn’t satisfied with the results, even though they surpassed the most optimistic analyst’s estimate, because consumer lending charge- offs and late payments remain high. A 7.6 percent decline in revenue prompted Shannon Stemm, an analyst for Edward Jones & Co. in St. Louis, to question whether the profit report masked weakness in JPMorgan’s main businesses.
    “The results beat estimates by so much because of the large reserve release,” Stemm said. “Revenue fell quarter over quarter and year over year, largely driven by weaker investment- banking and fixed-income trading results, which were down because of the volatile trading environment.”

    Whenever a bank releases its earnings, there’s always a debate about quality. Are they properly reserved or not? You can do a lot by messing with your provisions for credit losses. Interestingly, JPM has been buying back stock but a dividend increase is still a ways off.

    Dimon said last month that it may be “too ambitious” to expect a dividend increase by the end of the year. Share repurchases may come first because they don’t have to be sustained like a dividend boost, he said.

    Yes, and share repurchases never have to be filled, just announced. I’m glad to see that retail banking is doing better, but considering how much effort the government has directed towards helping banks, the overall improvement isn’t very impressive. JPM could be a good buy soon, but not yet.

  • Small Investors and the Stock Market
    , July 15th, 2010 at 10:47 am

    Matthew Yglesias has a thoughtful post on the feasibility of democratizing the stock market. The celebrated Investor Revolution hasn’t been all positives for small investors as we’ve replaced defined benefit plans with 401k plans.

    The fact of the matter seems to be, however, that average people have no real ability to invest money in an effective way. I’m a pretty typical 401(k)-holder at this point—a college educated professional who has neither the time, inclination, or competence to do due diligence on the firms I “own” through my investment vehicle.

    If only Americans could somehow access free websites, “blogs” if you will, that provided excellent market-beating advice. Perhaps the government should subsidize these handsome, charming “bloggers” with untold millions.
    Yes, I’m in the oddball column since I actually enjoy this stuff but most folks simply don’t care what stocks do as long as they go up.

    The good news is that I know a person in that situation should invest in index funds rather than try to pick stocks. The bad news is that, per Salmon’s post, it’s not really possible to hedge yourself against tail risk this way.

    The obvious answer is that investors can sit out the market and invest in CDs or Treasuries, which are underrated investment. Or at least they were before the 10-year hit 3%, but then we get back to Matt’s point that small investors aren’t participating in the heart of capitalism which is stock ownership.
    Let’s remember that broad stock ownership is a relatively new phenomenon. The average American didn’t own stocks, they had savings accounts. The emergence of 401k plans came at the same time as the stock market boom which it naturally helped. The public and policy makers were spoiled by an 18-year boom in equities. Once that came to an end, well…then things don’t seem so easy.
    At the peak of the market in 1929, just 2% of Americans owned stock. During the Tech Bubble, it was closer to 50%. That’s a huge change. Even the idea of constantly rising capital gains is fairly new. Stocks used to bounce around their par value and then you’d wait to hear from the board what the dividend was. Now, dividends are dull and everyone puts pressure on management for higher equity prices.

    What’s more, the flipside of small investors not being able to manage our own investments in a sound way is that having small investors participate in the market can only serve to undermine financial markets’ role in providing corporate governance and allocating capital.
    Now defined-benefit pensions have declined in the private sector for some pretty good reasons. It’s both personally liberating and economically efficient for there not to be an expectation that you’ll work at the same place for decades. But the substitutes we’ve dreamed up—tax subsidies for middle class stock ownership—are regressive and don’t really make sense.

    He’s right. The stock market is a great place to invest but its inherent volatility is extreme for smaller investors. The Dow went nowhere from the mid-1960s until the early 1980s, plus an ugly bear market from 2000 to early 2009—that’s a huge part of a person’s post-retirement lifetime. A millionaire can handle it, but it’s very painful for younger investors.
    I really don’t know if there’s a good answer. If we give people more choices, that’s a good thing but we have to be prepared that they’re now make dumb choices.
    I worked in a brokerage firm with an account for a property management company. Each month, the manual laborers got a small deposit in their 401k from the company. And each month, they all took it out. It was a mockery of the system, but hey, these guys needed the money. They didn’t even know what it was but they knew one thing—it was their money.
    Personally, I’d like to see lower taxes on dividend income, but my argument isn’t one rooted in economic growth. Instead, I think it will reduce the market’s volatility and therefore be more conducive to small investors.

  • Ben Stein Watch
    , July 14th, 2010 at 9:13 pm

    I was checking out the Amazon.com listing for Ben Stein’s latest book, The Little Book of Bulletproof Investing: Do’s and Don’ts to Protect Your Financial Life. This seems to be the latest in the “Little Book” series.
    I haven’t read the book, but the Amazon review lists several do’s and don’t’s which the authors describe. One of them is: “DON’T give any weight to market forecasts. All opinion pro and con is already built into the price of equities today.”
    So the authors seem to be saying, “no, you can’t time the market” which somewhat conflicts with their previous book “Yes, You Can Time the Market!”

  • The S&P 500’s Six-Day Win Streak Comes to an End
    , July 14th, 2010 at 4:06 pm

    The S&P 500 plunged 0.0155% today. This was the first down day since July 2.
    In other words, the Double Dip is back on!
    (Yes, that’s sarcasm.)

  • Walgreens Raises Dividend
    , July 14th, 2010 at 12:43 pm

    I’m glad to see Walgreens (WAG) raise its dividend by 27%.

    Drugstore chain Walgreen Co. says it is boosting its quarterly dividend by 27 percent to 17.5 cents from 13.75 cents.
    The Deerfield, Ill., company will now pay dividends of 70 cents each year, up from 55 cents. Walgreen says its next dividend is payable Sept. 11 to shareholders of record on Aug. 19.
    President and CEO Greg Wasson said the company is confident in its growth plans and its ability to maintain a strong free cash flow.
    Walgreen is the biggest drugstore operator in the U.S. It runs 7,541 stores across the country.

    For years, Walgreens had been one of those “set-and-forget” stocks that consistently outperformed the market. Even though the past decade was unkind to stocks, Walgreens didn’t suffer too much.
    In 2006, the shares began a nasty period of underperformance which I’m not sure is over. This dividend increase eases my worries somewhat.
    The dividend increase also maintains Walgreens membership in the Dividend Aristocrats — S&P 500 stocks that have raised their dividends for 20 straight years or more. Last year, WAG raised its dividend by 22%. This is their 35th straight dividend increase. Not including dividends, the stock is up over 100-fold over the last 30 years.
    Let’s see a computer beat that!

  • First Intel, Next Up is JPMorgan Chase
    , July 14th, 2010 at 11:56 am

    Frankly, the Intel (INTC) surprise wasn’t that hard to figure out. I think the next candidate for a big earnings surprise is JPMorgan Chase (JPM).
    The case for the monster bank, however, is a bit harder than Intel’s. First is that JPM is indeed a monster bank — they have over $2 trillion in assets. Second is that the Street hasn’t been anywhere close to getting JPM’s earnings right over the past few quarters. These big banks can be a bit of a black box. We never know exactly what Dimon & Co have been doing until the numbers come out. I’m certain Greece hasn’t been pleasant but I just don’t know how much so.
    The Street is expecting earnings of 71 cents a share for Q2 which is slightly less than what they made for the first quarter. If there are more clues of a double-dip, it will be found in the numbers for these large banks. The bank also faces some special taxes and charges. The good news is that fixed-income trading should do very well. There’s nothing quite like a steep yield curve to bail out a bond trader. Think of it as a government bailout under another name.
    There’s also the case that JPM is the first of the big banks to report. If they hit it big, we can expect the other banks to do well. This may also have a broad impact if it causes the double dip thesis to fade.
    What would be truly inspiring is if JPM announced a big-ass dividend increase. Back when the world was falling apart, the bank slashed its quarterly dividend from 38 cents a share to just five cents a share. Their balance sheet is plenty strong to bring it back to, say, 25 cents a share. But if they did, it would be major news that the banks are confident again.

  • Artificial Intelligence Is Beating Genuine Ignorance
    , July 14th, 2010 at 10:43 am

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    Er…I’m a little skeptical but it is in the Wall Street Journal:

    With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Most investors trying the approach are using “machine learning,” a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future. It is used by tech companies such as Google Inc. to match Web searches with results and NetFlix Inc. to predict which movies users are likely to rent.
    Digits
    One upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks. Run by a small team of twentysomething math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor’s 500-stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund. Like many hedge funds, its goal is to beat the broader market year after year.
    “It’s pretty clear that human beings aren’t improving,” said Spencer Greenberg, 27 years old and the brains behind Rebellion’s AI system. “But computers and algorithms are only getting faster and more robust.”

  • Intel SMASH!!
    , July 13th, 2010 at 5:18 pm

    Yes readers, every so often I get one right. Yesterday I said that Intel (INTC) would easily beat Wall Street’s earnings estimates and I was right.
    The Street was looking for 43 cents per share. I said they’d top 45 cents share. The correct answer: 51 cents per share. Make no mistake, this was an outstanding quarter for Intel. The stock is up about 6.7% after-hours.

    Intel, the world’s No. 1 chipmaker, said revenue in the three months ended June 26 totaled $10.8 billion, compared with $8 billion in the year-earlier period and the $10.25 billion expected by analysts polled by Thomson Reuters I/B/E/S.
    “In a quarter where people expected relatively strong performance, they beat that pretty handily and set a good forecast. They seem unaffected by the negativity that’s impacting equities,” said Charter Equity Research analyst Edward Snyder.
    The company posted net income of $2.9 billion, or 51 cents a share, versus a net loss of $398 million, or 7 cents a share, in the second quarter of 2009, when Intel’s results included a $1.4 billion fine by the European Commission.
    Analysts had expected earnings of 43 cents per share in the second quarter.
    Intel said its gross profit margin in the second quarter was 67 percent, compared with the 64 percent expected by analysts.
    Looking forward, Intel estimated revenue in the third quarter of $11.6 billion, plus or minus $400 million, exceeding the $10.92 billion expected by analysts.

    I don’t have all the numbers, but here’s some guesswork. Thanks to Intel’s bullish sales forecast, the Street will probably peg this year’s EPS at $2 (give or take). The company’s net cash position is about $2.50 per share. So if the stock goes for 14 times this year’s earnings, which is quite reasonable, plus the cash, then Intel is a $30 stock.

  • The Market Extends Its Gains
    , July 13th, 2010 at 12:33 pm

    The stock market is having another strong session. It’s too early to say but I think Doug Kass may be right, the market has made its low for the year.
    I’m particularly glad to see that AFLAC (AFL) is over $49 a share. I’m slightly concerned that today’s rally is heavily weighted towards cyclicals because I don’t think that group will be leading the market over the next year.
    The numbers look good: All 20 of our stocks are currently up for the day. After dipping in the red, the Buy List is back in the black for the year. Excluding dividends, we’re up about 2% for the year.
    On the news front, the government announced that the trade deficit unexpectedly widen in May. Imports and exports rose to the highest level since 2008. Alcoa (AA) is doing well today after it reported decent earnings, although I don’t see much to like in the stock. To me, the real drama will come when Intel (INTC) reports after today’s close. Only recently has Intel started to perk up.
    Lastly, I see that Amedisys (AMED), which was a star stock last decade, is having troubles this decade. The home health and hospice care provider said that earnings were going to come in below expectations. Wall Street analysts are jumping ship. How quickly fortunes can change.