Archive for July, 2010

• Expect Good Earnings from Intel
  Eddy Elfenbein, July 12th, 2010 at 2:45 pm

  Tomorrow marks the beginning of second-quarter earnings season for the stocks on my Buy List. The first stock to report is Intel (INTC) and I expect to see very good results.
  First, let me fill you in on the story so far. In April, Intel surprised Wall Street when it said it was expecting Q2 revenue of $10.2 billion, plus or minus $400 million. That was well above the Street’s estimate of $9.7 billion. Then in May, the company said that it was “highly confident” that it would achieve its financial goals for the second quarter.
  Wall Street currently expects to see earnings of 43 cents a share. I’m not exactly giving away state secrets when I say that no one expects that. Intel will easily earn over 45 cents a share. The question is, how much over?
  Investors curiously seem to feel that Intel is heavily exposed to the prospects of a double-dip recession. The shares dropped over 23% from their April high to their July low. The good news is that the stock is a solid bargain here.
  Let’s go over some of the numbers. Wall Street currently expects Intel to earn $1.87 a share this year which means the stock is going for about 11 times earnings. That’s cheap right there, but there’s more. The company is sitting on a monster pile of cash, nearly $2.50 a share net. Since cash pays next to nothing, almost all of Intel’s earnings will comes from its operations. If we back out the cash, Intel’s operations are going for less than 10 times earnings.
  Barron’s posted this research piece from Sterne, Agee & Leach. Here’s a sample:

  We are looking for an in-line top-line quarter versus consensus of $10.9 billion (up 8% quarter-over-quarter), our estimates are $11 billion or 52 cents a share. We believe gross margins should improve sequentially as mix shifts with continued strength in notebooks and the key-server market. We continue to see Nehalem Server and strength in notebooks growing 5% to 10% quarter-over-quarter after a strong first-half 2010.
  There are concerns in the supply chain, given the macro commentary with Europe and the state of the consumer. Intel has been a solid execution story, but the macro has been source of concern.

• Upcoming Earnings Reports
  Eddy Elfenbein, July 12th, 2010 at 11:19 am

  With second-quarter earnings season about to begin, here’s a rundown of our Buy List‘s earnings reports.

  Company	Earnings Date	EPS Estimate
  INTC	13-Jul	$0.43
  GILD	20-Jul	$0.87
  JNJ	20-Jul	$1.21
  SYK	20-Jul	$0.80
  BAX	22-Jul	$0.92
  LLY	22-Jul	$1.10
  RAI	22-Jul	$1.29
  AFL	27-Jul	$1.33
  FISV	27-Jul	$0.97
  WXS	27-Jul	$0.65
  BDX	29-Jul	$1.29
  MOG-A	TBA	$0.63
  SEIC	TBA	$0.28
  SYY	TBA	$0.58

  Of the 20 stocks on the Buy List, 16 are “on-cycle” meaning their quarter ends on June 30. Fourteen are listed above. The other two are Leucadia National (LUK) and Nicholas Financial (NICK) which aren’t currently followed by any analysts.

• The Gold Mystery
  Eddy Elfenbein, July 12th, 2010 at 9:45 am

  There’s an odd mystery going on in the world’s gold market. The Bank of International Settlements revealed that it has a huge amount of gold compared with nothing a year ago.
  It turns out that someone sold the BIS the equivalent of one-fifth of the world’s annual production of gold in exchange for $14 billion cash.
  So now the question is, whodunit?
  The implication is that some central bank was desperately short cash and they’re dumping grandma’s silver (well, gold) to bail themselves out.
  The unusual suspects would be central banks in southern Europe. The hitch is that those banks don’t have a lot of latitude in what they can do with extra cash. Another suspect is the International Monetary Fund.

  Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency.

  Sinclair is the person who offered a $1 million bet in April 2008 that gold would rise to $1,650 an ounce by the second week of January 2011. We’re now just six months away.
  At the time, gold was going for $900 an ounce. It’s up to around $1200 so it still needs a good rally to hit Sinclair’s target. Even if he doesn’t get the price right, he did call the rally.
  The problem is that BIS said the deal wasn’t done with a central bank but with a private commercial bank.

  This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.
  In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.
  This would add an extra layer of anonymity. “So the BIS swaps look like a tripartite transaction,” writes Adrian Douglas of the Gold Anti-Trust Association. “The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.”

• Vatican Posts Loss
  Eddy Elfenbein, July 12th, 2010 at 9:20 am

  A Major European-based financial organization posts its third consecutive annual loss.

  The effects of the global financial crisis put the Holy See’s budget in the red for the third consecutive year, the Vatican said in a statement on Saturday.
  The Holy See ended the year 2009 with a loss of 4.1 million euros (5.2 million dollars), compared to its loss of 911,514 euros in 2008. In 2007 it had lost nine million euros.
  Over the course of the year, the Vatican spent 254.2 million and had income of 250.1 million euros.
  In 2009, the Vatican absorbed “the negative fluctuations that had been suspended in 2008,” the statement said.
  Vatican Radio said that the Holy See would have posted a profit, had it not been for the absorption of 2008 losses.
  Donations from churches around the world to the Holy See, also known as Peter’s Pence, grew to 82.5 million dollars, compared to 75.8 million dollars in 2008.
  The largest donations came from the United States, Italy and France, the statement said.

• The Big Mac Index
  Eddy Elfenbein, July 12th, 2010 at 8:51 am

  
  The Palm Beach Post looks at the Big Mac Index which gauges how much a Big Mac costs in different countries around the world. The Economist has been tracking the Big Mac Index since 1986.
  The idea behind the index is that you can tell how a strong or a weak a country’s currency truly is by looking at how much the massive McDonald’s (MCD) hamburger costs. As it turns out, the cost varies a lot by country.
  In the United States, the average price for a Big Mac is $3.58. In China, however, which is often criticized for manipulating its currency, a Big Mac goes for the equivalent of $1.83. That’s nearly half of what it costs here. In Norway, a Big Mac will set you back $6.87.
  So is there any value to the Big Mac Index? Apparently, there is:

  While the Big Mac Index is a novel way to look at what a dollar buys from one country to the next, it also has proved strikingly accurate at foreshadowing changes in currency, University of Florida Professor Dave Denslow said.
  “If the Big Mac Index says that a currency is undervalued, it tends to appreciate,” Denslow said.
  That’s exactly what happened with the Chinese currency, though pressure from U.S. and European governments probably weighed more heavily of the minds of Chinese officials than the word of a British business publication.
  Last month, just days before the G-20 Summit, China announced that it will revalue the yuan.

• Estimates for Q2
  Eddy Elfenbein, July 10th, 2010 at 9:13 pm

  With second quarter earnings season about to begin, here are the EPS growth and sales growth estimates from S&P:

  Sector	EPS Growth	Sales Growth
  Energy	81.61%	36.47%
  Materials	91.38%	16.75%
  Industrials	7.97%	4.73%
  Discretionary	46.00%	3.68%
  Staples	1.78%	3.26%
  Health Care	12.11%	12.74%
  Financials	251.57%	-23.12%
  Technology	62.86%	16.47%
  Telecom	213.57%	-0.52%
  Utilities	6.79%	7.43%
  S&P 500	42.49%	5.51%

  The good news is that earnings are growing faster than sales. The means that profit margins are expanding. The warning sign is that margin-expansion can’t continue forever. At some point, sales growth needs to pick up.

• Monty Python’s Soccer
  Eddy Elfenbein, July 10th, 2010 at 4:29 pm

  In honor of tomorrow’s World Cup final, I give you this classic from Monty Python.
  
  It occurred to me that given a match-up between the Netherlands and Spain, this same skit could be done with painters (“Rembrandt to Van Gogh, pass to Vermeer.”)

• Geither Supports 20% Tax Rate on Dividends and Capital Gains
  Eddy Elfenbein, July 9th, 2010 at 10:05 am

  Good news for investors. Treasury Secretary Tim Geithner says the White House supports a 20% tax rate on dividends and capital gains. There was concern that they were looking to raise these rates to 39.6%.

  Congress currently is planning to extend most of the Bush breaks – particularly those for middle-income earners – for some period, perhaps only a year or two. But budget rules that lawmakers passed earlier this year anticipated the Bush-era breaks for higher income earners would expire immediately. That would mean the tax on dividends for higher earners would return to the pre-Bush ordinary income rate. That rate is expected to rise to 39.6% next year.

  A 20% tax rate is an increase from the current 15% rate but it’s a lot better than what it could have been

• “The Hooters of the Internet”
  Eddy Elfenbein, July 9th, 2010 at 9:42 am

  Bloomberg has a nice profile of Henry Blodget and The Business Insider, a website which has been generous enough to link to me many times. The profile runs over 4,000 words and, to coin a phrase, it’s both fair and balanced.
  Due to Blodget’s past history, which I won’t go into here, he’s not terribly well-liked in many quarters. However, those feelings seem to carry over into an overly harsh reaction to his attempt to build a profitable website.

  While time seems to have dispersed the mob of torch-wielding villagers seeking to barbecue Blodget over his perceived Wall Street sins, a new rabble of critics has gathered, furious about what his new media venture says about the future of the news business. The big knocks can be summed up by “WTF-Businessinsider.com,” a 31/2-minute videotaped rant posted online in June by a 37-year-old performance artist named Loren Feldman, whose site 1938 Media is known for skewering Internet personalities with online puppet shows. “When does embarrassment set in for any of you guys?” Feldman shouts in the video, apparently enraged by the fact that a senior-level TBI reporter had to consult Wikipedia to identify the legendary management expert Peter Drucker. Feldman sums up the criticisms, familiar to Blodget and all of his competitors: that TBI “scrapes” content, i.e., much of what the site posts is actually just repurposed news from other websites; that TBI uses gimmicks to generate Web traffic, including Web slide shows, which require viewers to click through several times. A typical recent example: “18 Awesome Wall Streeters and the Celebrities They (Apparently) Look Like.”
  Blodget sees nothing to apologize for. Is there really value in creating stories like “15 Ways Justin Bieber Is Taking Over the World,” just because people will click on it, I ask him. “There’s no question about that,” says Blodget, who has a habit of listening to every question while flashing a megawatt smile. “Every minute, we’re watching the click rate of every story we have on the site. Part of the job of our editors is recognizing that what we’re trying to do is create content that people want to read….And I’m under personal pressure to build a self-sustaining business. Without that, we disappear.”

  Blodget apparently believes he ought to try a different approach from the failing strategy currently employed by most traditional media. Critics say that TBI is far too superficial which doesn’t make much sense to me. I’ve never understood the sacredness which media professional attach to their profession,
  News has always been raucous and entertaining. Blodget and TBI have a sense of the fun that major financial outlets sorely lack. (Don’t even get me started on the Economist.) Most of all, I think critics are upset that it’s working.

• Sorry Folks, There’s No Such Thing as the PPT
  Eddy Elfenbein, July 8th, 2010 at 3:54 pm

  After the stock market crashed in 1987, Ronald Reagan did what presidents like to do, he created a commission to look at what went wrong. The commission was formally called the President’s Working Group on Financial Markets.
  Ever since it was created, conspiracy theorists have had a field day. They’ve taken this small and not-very-important fact and somehow interpreted it to mean that the government, in the form of the Federal Reserve, buys stock to support the market.
  They refer to the Working Group as the Plunge Protection Team, or the PPT (get it?). They continue to hold to this belief even though it makes no sense, there’s absolutely zero evidence for it and if it did exist, it hasn’t worked very well.
  This morning, CNBC interviewed Damon Vickers of Nine Points Capital. He said that the markets are looking very dicey “unless the Plunge Protection Team comes in.” (See 2:38.)
  
  I’m afraid investors don’t realize how nuts this statement truly is. At 3:20, Joe Kernan rightly pressed him and even assumed Vickers was joking about the PPT. Vickers said “absolutely not” and goes to embarrass himself and his firm further by confusing the moves made by the government during the crisis with secret market manipulation.

  I don’t think it’s totally out of the realm of possibility. I mean they’re out there buying Citicorp (sic) and Fannie Mae and Freddie and shoring up the economy when the economy is weak, why wouldn’t they be active in the S&P futures?

  Well…because the moves are completely different and buying S&P 500 futures makes no sense at all. Since Mr. Vickers is a bear, his argument is even more bizarre since he believes the PPT is both real and incompetent.
  (Via: Gregory White)