Archive for September, 2010

  • Morning News: September 21, 2010
    , September 21st, 2010 at 9:31 am

    Worst Over in Global Poll Pointing to Reduced Market Returns
    Airline Profits Expected to Soar This Year
    SAIC of China Weighs Buying Stake in G.M.
    Irish, Spanish, Greek Auctions Calm Investor Nerves
    H.P. Settles Lawsuit Against Hurd
    President Obama Defends Actions on Economy
    Corporate Political Giving Swings Toward the GOP
    Generation Y Giving Cars a Pass

  • Charlie Munger at the University of Michigan
    , September 20th, 2010 at 2:09 pm

    Ever wonder why Warren and not Charlie is the public face of Berkshire?

    Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”
    “You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”
    Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.”
    “Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Munger said. “So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”
    Germany was unable to stabilize its financial system in the 1920s, and, Munger said, “We ended up with Adolf Hitler.”

    Here’s the video.

  • AFLAC Upgrade
    , September 20th, 2010 at 1:16 pm

    Barron’s has Sandler O’Neil’s upgrade of AFLAC (AFL):

    We are upgrading shares of Aflac to Buy from Hold and are increasing our price target to $63 from $54 following a recent analyst day in Tokyo.

    We believe that sales of third-sector supplemental-type insurance products will continue to have growth in Japan given the country’s aging population, increasing out-of-pocket medical expenses for consumers, and a government cancer-awareness initiative.

    Aflac’s sales through the bank channel will continue to increase over time, and Aflac has more bank distribution relationships than any of its competitors. The bank channel will account for an increasing proportion of Aflac’s sales.

    Aflac’s new product sales appear to have continued their upward trajectory, although year-over-year comparisons will be challenging due to significant sales growth in second-half 2009. The child-endowment product will continue to have strong sales, and we expect cancer products will begin to reverse recent declines in sales.

    The margins for the child endowment product are a little better than we had thought — management stated margins are about 5% and are similar to medical products.

    We are adjusting our 2010 operating earnings-per-share estimate to $5.45 up from $5.44 to account for incremental strength in the Japan operations. We are also increasing our 2011 EPS estimate to $6.00 from $5.95 to account for stronger results in the Japan segment. Consensus EPS estimates are currently $5.46 and $5.99 for 2010 and 2011, respectively.

    The stock broke $53 this morning.

  • Momentum: Not Monthly, but Daily
    , September 20th, 2010 at 1:08 pm

    Andrew Haldane of the Bank of England recently had a remarkable chart showing the success of momentum investing. Being in the market the month following an “up” month has historically creamed a buy-and-hold strategy.
    The problem is that the data was wrong. Well, not wrong exactly but it was the wrong data. Haldane was using a monthly average for the index instead of the close. When you use the close, the chart looks very different.
    Still, historically there’s been a very strong momentum effect. Instead of looking at monthly totals, I once looked at daily changes. The stock market has done very well on days following “up” days, and it’s done poorly on days following “down” days.
    I found that the market’s entire capital gain has come on days following +0.64% or more gains. That’s only about 20% of the time. The other 80% of the time, the market is net flat. “Half the market’s gain came on day’s following 3.2% up moves. On average, that happens slightly less than once a year.”
    While this strategy has been very successful historically, the impact has faded greatly over the past 15 to 20 years.

  • Gold Adjusted for Inflation
    , September 20th, 2010 at 12:19 pm

    Despite the rally, gold is still well below its value from 30 years ago.

    Gold is still far below its inflation-adjusted high after a record rally, and at least one indicator suggests the precious metal won’t approach that peak any time soon.
    The CHART OF THE DAY shows the gold price relative to January 1980, when the metal reached $873 an ounce. Yesterday’s record close in New York trading equals $454.88 an ounce in real terms, reflecting an increase in the U.S. consumer price index, according to data compiled by Bloomberg.
    Gold would have to rise above $2,435 an ounce to exceed its high from three decades ago, based on the CPI’s current reading. That’s 91 percent higher than the closing price of $1,272.20 in New York trading yesterday.

  • The ISM Told Us
    , September 20th, 2010 at 11:54 am

    I’ve often said that the monthly ISM index has been a pretty reliable indicator of when NBER dates recessions. This time around, the ISM was slow in telling us when the recession started but was pretty good on getting the end.

    The subject of recession dating is quite literally academic — it depends on what you call a recession. Here’s NBER’s official statement on how it pinpoints a peak and trough in the economic cycle.

    fredgraph092010.png

    I’ve found that the tipping point on the ISM index is about 44.4. According to NBER, the recession began in December 2007 when the ISM was still around 50. It danced around 50 until the financial crisis of that September.

    The ISM jumped from 43.2 in May 2009 to 45.3 in June to 49.1 in July. The index has been above 50 every month since August 2009.

  • Time Machine
    , September 20th, 2010 at 11:13 am

    Now that an independent body has declared the recession over, let’s take a look at some of the more wrong-headed forecasts:
    From March 6, 2009:
    Roubini Says Recession May Continue Until End of 2010
    Or the absurd fight between Dennis Kneale and bloggers. The fight quickly turned into exactly what Kneale wanted — a publicity stunt — but it originally began when Kneale said the recession had just ended.

  • Recession Over! (Technically)
    , September 20th, 2010 at 10:28 am

    It’s official, the recession ended in June 2009 according to the National Bureau of Economic Research:

    The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
    In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
    The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

  • Another Up Monday
    , September 20th, 2010 at 10:02 am

    Happiness reigns again on Wall Street, at least for now. The averages are modestly higher although we’re still below the Iron Curtain of 1130. I’m not a big fan of technical analysis but I do concede that markets often seem to act with undue deference towards “resistance points.” That’s happening again as the S&P 500 has tried and repeatedly failed to stay over 1130 for very long. But if this is going to be our fourth straight week of gains, then we’re off to a good start.
    The big news this week will be tomorrow’s Fed meeting. I don’t expect any change in rates—meaning, if we had something like interest rates. However, I’ll be curious if there’s any real change in the Fed’s policy statement.
    The other news item that I’ll be watching closely is the earnings report from Bed Bath & Beyond (BBBY). This is due to come on Wednesday. Here’s my latest take on BBBY’s earnings report.
    Finally, here’s a look at the S&P 500 along with the earnings:
    image986.png
    The implication is that the market is cheap IF the earnings scenario holds. The future earnings projections isn’t from me — that’s Wall Street’s consensus via S&P.

  • Morning News: September 20, 2010
    , September 20th, 2010 at 9:42 am

    Egged on by Hedge Funds, Oliver Stone Turns on Goldman Sachs
    Wall Street’s Profit Engines Slow Down
    Nissan to Double China Capacity
    Bond Markets Get Riskier
    Verizon Names President, COO
    Lennar Reports Profit as Cost Cuts Contribute to Wider Home-Sale Margins
    OIL FUTURES: Crude Nudges Higher, But Volumes Are Thin
    Pocket money ‘Cut for Youngsters’