Archive for February, 2011

• AFLAC Hits Fresh 52-Week High
  Eddy Elfenbein, February 17th, 2011 at 12:28 pm

  Remember that Citi downgrade from last week? Me neither.

  

  The shares have been as high as $59.47 today.

• Even Core Inflation Is Starting to Pick Up
  Eddy Elfenbein, February 17th, 2011 at 9:41 am

  Like a lot of observers, I’m pretty skeptical of the government’s inflation numbers. I think this data is skewed to under-report the amount that prices are increasing.

  As far as inflation goes, I’m a pragmatist. I’m not going to predict that hyper-inflation is just around the corner — and as far as I can see, ruinous inflation isn’t a problem that currently plagues us.

  That’s why I was surprised to see that today’s inflation report showed a very modest increase in consumer prices for January. The sound bite that you’ll see on most news report is that headline inflation rose by 0.4% which was 0.1% more than expected. The “core rate,” which excludes food and energy, rose by 0.2%.

  I looked at the core rate, which is the rate that many economists prefer. I then took the seasonally adjust core rate and annualized each monthly reading. The rate for January was 2.06% which is the highest since October 2009.

  Overall, that’s still a low rate. However, inflation tends to be a very trend-friendly data series, meaning higher inflation often begets still higher inflation. The chart below shows that the trend for the past few years has been lower inflation. Today’s data point seems to break that trend.

  Of course, this is just one data point. But even using the numbers that the Federal Reserve uses, the evidence that the deniers prefer may be telling us a change is underway.

  

• Stocks Up, Bonds Down
  Eddy Elfenbein, February 17th, 2011 at 9:13 am

  This chart pretty much explains it all. Since August, the S&P 500 is up by 27.6%. During the same time, the iShares Barclays 20+ Year Treasury Bond ETF (TLT) is down 17.3%

  

• “Weird Begets Weird”
  Eddy Elfenbein, February 17th, 2011 at 7:44 am

  David Merkel picks up on my post about the S&P 500 and looks at rallies in relationship to the falls. David says that “weird begets weird.” He finds that bull markets last longer than bear markets, but bear markets are faster than bulls.

  The summary statistics are these: bull markets last 3.5x as long as bear markets on average. Bear markets move at 1.9x the rate of bull markets.

  See David’s post for the histogram fun.

• Morning News: February 17, 2011
  Eddy Elfenbein, February 17th, 2011 at 7:37 am

  G-20 Ministers Squabble Over Measures to Spot Imbalances

  Portugal Producer Price Inflation Accelerates In January

  For Germany’s Banks, a Grim Future

  Brent Crude Trades Near Two-Year High on Mideast Supply Concern

  Japanese Stocks Rise on U.S. Economic Outlook; Canon Jumps

  China Seeks Transparency in U.S. Review Process

  Fed Officials Split on Stimulus, Disappointed on Job Growth

  Credibility Shaken, Hedge Funds Are Punished by Investors

  Swiss Engineer ABB’s Profit Rises 30%; Will Cut $1 Billion In Costs

  Dell Leads Rally in Tech Stocks

  Nestle Expects Lower Currency Volatility In 2011

  Las Vegas Sands Eyes More Singapore Land, Spain Casino

  Leigh Drogen: Iran On The Ropes

  Howard Lindzon: Lullabies, Lollipops and Liquidations…The Circle of Life

  Ken Jennings: My Puny Human Brain

• Reynolds American Raises Dividend by 8.2%
  Eddy Elfenbein, February 16th, 2011 at 1:00 pm

  Good news for shareholders of Reynolds American (RAI). The company just raised its quarterly dividend from 49 cents per share to 53 cents per share. That’s an 8.2% increase.

  In December, the company said it was raising its dividend payout ratio to 75% to 80% of earnings. The stock rallied on that news which I found strange. I calculated that that would come out to a dividend of 52 cents per share, but I didn’t think that was coming for another year.

  In October, when Reynolds announced the recent stock split, the company also increased its dividend from 45 cents per share to 49 cents per share. RAI has really raised its dividend by 17.8% in just a few months.

  In the most recent CWS Market Review, I said I wasn’t concerned that RAI missed its earnings by a penny:

  Reynolds American said it sees full-year 2011 earnings-per-share coming in between $2.60 and $2.70. The growth rate implied is modest, between 4% and 8%, but it’s nothing to sneeze at. Looking at the valuation, RAI is going for around 12 times this year’s guidance, and don’t forget Reynolds’ hefty dividend which currently yields 6.1%. That’s around 240 basis points more than the 10-year Treasury.

  Now it’s yielding 6.3%. Reynolds American continues to be an outstanding buy.

• The S&P 500 Has Officially Doubled!
  Eddy Elfenbein, February 16th, 2011 at 10:21 am

  Congratulations folks–we finally did it. On March 6, 2009, the S&P 500 hit an intra-day low of 666.79. That was the lowest reading in 12-1/2 years.

  This morning, the index broke through 1,333.58 marking an official double. This is the market’s fastest double in over 70 years.

  

  It took us 492 trading days (or just under two years) to double which works out to an average of 14 basis points per day.

  The S&P 500 doubled from its low of January 23, 1995 to its high of July 7, 1997 in 620 trading days or 29.5 months.

  I don’t have the intra-day numbers for decades past but by going by the daily close, the S&P 500 doubled in just 510 trading days from September 14, 1953 to September 23, 1955. That’s nine days over two years.

  The S&P 500 had a monster run when it doubled between March 14, 1935 and September 21, 1936. That’s just 385 trading days (I’m excluding Saturday trading which lasted until 1952) which is slightly more than 18 months.

  The biggest of all rallies came from July 8, 1932 to May 10, 1933. In just ten months or 202 trading days, the S&P 500 doubled from 4.41 to 8.82.

• Be Careful of Investing By Stock Screeners
  Eddy Elfenbein, February 16th, 2011 at 9:00 am

  Readers often ask me what my “formula” is for investing. Honestly, I don’t have one. I like to keep it simple: I follow a small group of very strong companies and jump in when the price looks good. It’s nothing more complicated than that.

  I think people find extra comfort when there’s some exacting formula like: “the dividend yield must be X or the P/E Ratio must be 0.7158 compared to its growth rate.”

  The problem is that these numbers can lead you astray. That’s also why I’m leery of stock screeners. They can be interesting, but I’m careful not to place too much faith in them.

  A good example is the stock Biogen Idec (BIIB). This is a terrific company and the profits are killing it right now.

  When we look at Biogen we see strongly growing profits and that it’s trading at a reasonable earning multiple. The stock is going for 11.5 times this year’s earnings estimate and for 11.1 times the estimate for 2012.

  Normally, that’s a fantastic bargain. The problem is that when we look more carefully at Biogen’s business, we can see several weaknesses. The company has been relying too much on price increases for growing their profits. That’s paying off handsomely now, but it’s very doubtful that this can last much longer.

  In this case, the market is probably right to discount Biogen’s stock. Stock screeners don’t detect those problems. This is more commonly known as a Value Trap. That’s when you spot a stock that superficially appears to be cheap, but then you learn it’s cheap for a good reason.

  Many of the stocks on the Buy List are in some way “damaged goods.” Deluxe (DLX) is a perfect example. The company has lots of problems and I don’t want to pretend it doesn’t. But in my opinion, the problems are manageable as opposed to a company like General Motors, where I’m afraid their problems are too deep to be manageable.

  Are Biogen’s problems manageable? Perhaps, but I can’t say for sure. With investing, I never take a risk I don’t need to. All stocks are assumed to be “sells” until proven otherwise. That’s why I’ll keep a close eye on Biogen, but I’m not a buyer.

• Morning News: February 16, 2011
  Eddy Elfenbein, February 16th, 2011 at 7:51 am

  BofE Governor King Says Bank of England May Keep Rate at Record Low for Months to Come

  Gold Fluctuates Near 4-Week High on Inflation, Rate Concerns

  America Accepts Defeat in NYSE Takeover

  Confidence in Equities Among Global Investors at Record, BofA Merrill Says

  Goldman Sachs Said to Have Been Warned of SEC Suit

  Legal Fees at Fannie Are Called Avoidable

  Sanofi Agrees to Buy Genzyme for at Least $20.1 Billion

  Abu Dhabi to Purchase Outstanding Shares of Spain’s Cepsa for $5.4 Billion

  Borders Files Bankruptcy as Expense Cuts Don’t Stem Losses

  Dell Blows Past Targets, but Doubt Persists

  World’s Largest Miner BHP in $80 Billion Expansion Spree, Puts Off Big Takeovers

  Peltz’s Trian Offers to Buy Discounter Family Dollar for Up to $60 Per Share

  Daimler’s Profit Misses Estimates on Mercedes Development Costs

  Leigh Drogen: Facebook Is Worth 100 Billion

  Joshua Brown: Fun With Madoff’s Prison Interview

• Earnings Season Details
  Eddy Elfenbein, February 15th, 2011 at 7:28 pm

  From Zacks:

  4Q earnings season going strong, with 372 reports in, median surprise of 3.83% and surprise ratio of 3.44 for EPS, 1.40% and 2.33 for revenues.

  Reported (372 firms) fourth quarter earnings growth of 27.4%, expected (128 firms) year-over-year growth of 34.1% for the firms yet to report. On the Revenue side, 8.50% growth reported, but decline of 2.50% expected for those yet to report.

  Reported net margins (372 firms) rise to 9.65% from 8.22% a year ago, down from 9.93% in third quarter. Margins excluding financials rise to 8.54% from 7.76% last year and 8.67% in third quarter.

  Net margins expected (128 firms) to expand to 6.29% (among those yet to report) from 4.57% a year ago, and from 6.09% in third quarter. Excluding Financials, margins expected to rise to 6.02% from 5.86% a year ago, but down from 6.19% in the third quarter.

  Full-year total earnings for the S&P 500 expected to jump 43.8% in 2010, 14.9% further in 2011. Growth to continue in 2012 with total net income expected to rise 12.1%.

  Total revenues for the S&P 500 expected to rise 6.42% in 2010, 5.28% in 2011, and 5.42% in 2012. Excluding Financials, revenues expected to be up 10.00% in 2010, 6.62% in 2011 and 5.74% in 2012.

  Net Margins marching higher, from 5.88% in 2008 to 6.42% in 2009 to 8.68% expected for 2010, 9.47% expected for 2011 and 10.07% in 2012. Major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.12% in 2009, 8.21% expected for 2010, 8.75% in 2011, and 9.29% in 2012.

  Revisions ratio for full S&P 500 at 1.73 for 2011, at 1.82 for 2012, both very bullish readings. Ratio of firms with rising to falling mean estimates at 1.98 for 2011, 1.81 for 2012, also very positive readings. Total revisions activity still expanding, making the revisions ratios more significant.

  S&P 500 earned $544.3 billion in 2009, expected to earn $785.5 billion in 2010, $902.7 billion in 2011. In 2012, the 500 are collectively expected to earn $1.012 Trillion.

  S&P 500 earned $57.62 in 2009: $82.82 in 2010 and $95.17 in 2011 expected, bottom up. For 2012, $106.69 expected in an early read. Puts P/Es at 15.96x for 2010, and 13.89x for 2011 and 12.39x for 2012.