Archive for January, 2011

• Morning News: January 25, 2011
  Eddy Elfenbein, January 25th, 2011 at 8:37 am

  Euro Reaches Two-Month High on Growth Signs, Confidence in Debt Resolution

  I.M.F. Says European Debt Still a Threat to World Recovery

  Fed Likely to Press On With QE Even as Business Lending Rises

  A Hefty Price for Entry to Davos

  DuPont Profit Drops Less Than Expected; 2011 Forecast Raised

  Corning 4Q Profit Rises 41% As Demand Improves

  BlackRock Profit Doubles as Stock Rally Lifts Assets

  Regions Financial Swings To Surprise 4Q Profit On Higher Reveues

  American Express 4Q Profit Increases

  Harley-Davidson Loss Narrows on Financial Unit Gain

  Coach Profit up 26% as U.S. and China Sales Soar

  Joshua Brown: The New and Improved Barron’s Boost

  Paul Kedrosky: The Re-Rise of Copper Thefts

• Google’s Stock to $750?
  Eddy Elfenbein, January 24th, 2011 at 1:26 pm

  I’m often asked my opinion of Google’s (GOOG) stock so I wanted to share some thoughts with you.

  Generally, I prefer to steer clear of highly popular stocks. The research is very clear that stocks with high betas are not strong performers. Also, with so many eyes following Google, I’d have a very hard time gaining an edge over the market. That’s why I like to hunt for bargains where other folks don’t go.

  I have to give Google credit; their earnings have grown very impressively. Earnings are currently growing about 20% to 25% which is hard to match anywhere.

  The problem I have is that I don’t know how to properly value a company whose earnings are growing so rapidly. With 20/20 hindsight, we can say that Google was a great buy at its IPO. The shares then ran up to $700 by late 2007. The peak close came at $741.79 on November 6, 2007.

  Since then, Google has basically been a market performer — and the market has been a poor performer. Given its volatility, I’d say that owning Google hasn’t been worth the trouble over the last three years.

  What Google has done is pretty interesting since the stock went from a very high valuation to a more reasonable one (though still high), while the stock has generally kept pace with the market. The E of the P/E Ratio has grown by enough to offset the overall decline in Google’s P/E Ratio.

  Below is a look at Google’s stock in blue (left scale) and its earnings-per-share in gold (right scale). The red is Wall Street’s projection. I’ve scaled the two lines at a ratio of 20 to 1 so whenever the lines cross, the P/E Ratio is exactly 20.

  A few things to note: Notice how much higher the stock was compared with its earnings in early 2008. The P/E Ratio was over 40.

  See the slight slowing of Google’s earnings growth in 2009? The recession barely hit them but it is noticeable.

  Finally, you can really see how modest Wall Street’s earnings projection is compared with the recent trend. Just by mentally extending the gold line, I can see earnings hitting $35 per share this year. My current estimate is for $35.61 per share.

  The stock’s P/E Ratio has averaged 21 over the past few years. Given my earnings estimate, that translates to a price one year from now of $747.81 per share. Given the current price, Google is a good value.

  

• Real GDP Plunged 0.00004% in 2008
  Eddy Elfenbein, January 24th, 2011 at 10:49 am

  Here’s an odd statistical note:

  In 2007, GDP in chained millions of dollars came in at $13,228,853. In 2008, it dropped to $13,228,848.

  That’s a drop of 0.00004%.

  That means that 200-million plus consumers made countless economic decisions every day for a year and the total output for two consecutive years was almost perfectly identical.

  Few things are as surprising as the past.

  In 2009, real GDP fell by 2.6%. This Friday we’ll get the GDP for the fourth quarter of 2010. Real GDP probably grew around 2.8% to 3.0% last year.

• FBR on AFLAC
  Eddy Elfenbein, January 24th, 2011 at 9:54 am

  Barron’s carries a report on AFLAC (AFL) from FBR. They upgraded the stock to Outperform. Here’s a sample:

  Aflac (ticker: AFL) shares have lagged the group by 14% in the last three months, likely on increased European sovereign and financial credit concerns.

  In both our base-case and stress-case credit-loss scenarios, we believe Aflac is adequately capitalized to earn its way through potential impairments related to Portugal, Ireland, Italy, Greece and Spain (PIIGS) exposure.

  If credit losses materialize as we forecast in our base case, the company should be well positioned to deliver on the high end of buyback guidance, with the potential to upsize the buyback program.

  Even in our stress case, we believe the company could deliver on its buyback guidance of six million to 12 million shares per year. Our 2011 estimates and 2012 earnings-per-share estimates assume 10 million and 12 million of share buybacks, respectively.

  We have fine-tuned our 2011 EPS estimate to $6.25 from $6.31, as the yen has weakened recently, and introduce a 2012 EPS of $6.85.

  We are raising our price target to $69 from $59, based upon a 10 times multiple of 2012 EPS. Over the last five years, Aflac’s forward price-to-earnings ratio has averaged 11.1 times.

  This is a very positive report. Wall Street currently expects AFL to earn $6.17 per share so FBR is well above that. The stock got as high as $58.60 this morning which is another 52-week high.

• Morning News: January 24, 2011
  Eddy Elfenbein, January 24th, 2011 at 7:07 am

  Euro’s Slide Meets Resistance as Analysts Draw Line at $1.30

  Super-Cycle Leaves No Economy Behind Before Davos Summit

  Global Price Fears Mount

  U.S. Stock Futures Edge Higher Before Earnings Reports

  New Push at Fed to Set an Official Inflation Goal

  U.S. Treasury’s Toxic Asset Funds Gain 27%

  Terrified Investors Sold Out Of Munis At Record Pace Last Week

  Novartis Buys U.S. Cancer Lab for $470 Million

  Sara Lee Said to Get Apollo Bid Above Market Value

  Philips Looks East as Weak TV Sales Hit Profit
  

  IQ and Stock Market Participation

  Joshua Brown: Why Do Traders Retweet Each Other So Much?

• Benford’s Law and the Stock Market
  Eddy Elfenbein, January 22nd, 2011 at 9:22 am

  Abnormal Returns spotted a fascinating article on finance and Bedford’s Law.

  Take any naturally occurring set of numbers and keep a count of the first digit in the number. A newspaper is an ideal test bed. Most people reckon that each number from 1 to 9 will occur with equal frequency: after all, why would they not? Yet they don’t: the number 1 appears almost a third of the time and each subsequent number reduces in frequency. And this, frankly, is bizarre at first flush.

  The article notes that Benford’s Law has been used to spot financial fraud. It turns out that it’s not so easy to appear being random.

  I took all of the closing numbers for the Dow going back to June 8, 1931 which is an even 20,000 points of data. I then broke down all the starting digits and here’s what I got:

  First Digit	Occurrences
  1	7262
  2	2236
  3	1089
  4	961
  5	748
  6	1114
  7	1247
  8	2889
  9	2454

  Since the Dow has never made it to 20,000, there are a lot of readings in the Ones row, but that’s the point of Benford’s Law. According to the law, the Ones should have 30.1% of the readings which is pretty close to what we see (36.31%).

  I’m guessing the list is a bit skewed because there are so many readings in the Eights and Nines column. Perhaps if this same test is run in 30 years, we’ll see an even stronger relationship to Benford’s Law.

• Sesame Street Martians
  Eddy Elfenbein, January 21st, 2011 at 4:06 pm

  It’s Friday. The trading week is over. It’s time to go home. Yep, yep, yep, yep, yep, yep….

• Gold Vs. the S&P 500
  Eddy Elfenbein, January 21st, 2011 at 12:24 pm

  In 1980, gold was going for more than 7.5 times the S&P 500. To hit that level today, gold would need to be close to $10,000 per ounce.

  By July 1999, the ratio had fallen to less than 0.18 which in today’s terms would place gold at $230 per ounce. The ratio then rebounded to 1.37 in March 2009. Since then, gold and the S&P 500 have followed each fairly closely. Since last May, gold has held the upper hand but now the two are starting to get much closer.

  Is a crossing in the works?
  

• Rosenberg’s Bullish Checklist
  Eddy Elfenbein, January 21st, 2011 at 10:38 am

  At Minyanville, Josh Lipton lists 10 things that David Rosenberg would need to see before turning bullish on the U.S.:

  1) An energy policy that truly removes U.S. dependence on foreign oil.

  2) A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment.

  3) A credible plan that reverses the run-up in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any…We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable.

  4) A massive mortgage write-down by the banks that provide much-needed equity to upside-down homeowners.

  5) A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.

  6) Tort reform. This is the only way to rationally bring down health care costs to more manageable levels.

  7) And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.

  8. Financial sector regulatory reforms that actually have some teeth.

  9) Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!

  10) Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential.

  It’s an interesting list and I don’t have any problem with the issues he raises. I do have one concern, though: all of the things he criticizes were in place in March 2009 and that was the beginning of one of the great bull market rallies in history.

  If he’s talking about being bullish about the economy, that’s one thing, but if he’s talking about being bullish about the stock market, then I think this is a fair criticism. The lesson for investors is to not confuse policy solutions with reasons to be bullish. The reason I highlight Rosenberg’s list isn’t because I don’t like it — I do. Rather, it’s the wrong way to think about investing.

  Why was the stock market such a great buy in March 2009? What signal did we have? The answer is, “nothing.” Stocks simply got too cheap. The bears had overrun their thesis and stocks were a great bargain.

  As stocks started to rise, we got more signs that the economy was improving. But at no point did anyone enact a policy proposal such as the ones Rosenberg suggests. Investors should focus on valuations and not on policy proposals.

• Morning News: January 21, 2011
  Eddy Elfenbein, January 21st, 2011 at 8:08 am

  Global Stocks, Commodities Up; Euro Hits 2-Month High

  OPEC Under Pressure as African, Asian Oil Tops $100

  SEC Requires Disclosures on Asset-Backed Bonds in Rules Opposed by Munis

  U.S. Debt Crosses $14 Trillion Mark

  How Obama Helped Fuel a Wall Street Boom

  Obama Taps GE’s Immelt to Head Economic Advisor Panel

  What Did Google Do?

  Aided by Finance Unit, G.E. Earnings Top Forecasts

  Bank of America Posts 4th-Quarter Loss of $1.2 Billion

  India’s Reliance Q3 Profit Up 28% But Lags Forecast

  Leigh Drogen: Steve Jobs Means More To Apple Than Just Its Products

  James Altucher: How I Screwed Yasser Arafat out of $2mm (and lost $100mm in the process)