Archive for April, 2011

• Bastiat 2011
  Eddy Elfenbein, April 18th, 2011 at 9:16 am

  In 1845, French economist Frédéric Bastiat wrote his famous satire, The Candlemaker’s Petition. This was a move by the candlemakers to protest unfair business competition from the sun.

  That, of couse, was satire. This isn’t.

  In a related note, Rep. Chris Van Hollen warns us that “This Republican Plan simply rations health care and choice of doctor by income.” I hate to break this to Rep. Van Hollen, but nearly everything is rationed by income.

• Q1 Earnings Calendar
  Eddy Elfenbein, April 18th, 2011 at 8:40 am

  It’s still early but here’s a look at the earnings calendar for our Buy List stocks:

  Symbol	Date	EPS
  JNJ	19-Apr	$1.26
  SYK	19-Apr	$0.89
  GILD	20-Apr	$0.98
  ABT	20-Apr	$0.90
  RAI	21-Apr	$0.58
  BDX	26-Apr	$1.30
  AFL	27-Apr	$1.53
  FISV	27-Apr	$1.04
  DLX	28-Apr	$0.73
  F	TBA	$0.49
  MOG-A	TBA	$0.64
  SYY	TBA	$0.41
  WXS	TBA	$0.69

  These are all the stocks that follow the March/June/September/December reporting cycle. The only two I’ve excluded are Leucadia ($LUK) and Nicholas Financial ($NICK) since they’re not followed on Wall Street.

• J&J in Talks to Buy Synthes
  Eddy Elfenbein, April 18th, 2011 at 8:16 am

  The big news this weekend for Johnson & Johnson ($JNJ) is that it’s in talks to buy Synthes. This would be a huge deal for J&J. I have to say that I’m very skeptical of large-scale mergers. The historical evidence suggests that these deals usually don’t boost profitability.

  No deal has been announced yet but the market is guessing that it will be valued at about $20 billion. J&J’s current market value is $165 billion. According to the most recent balance sheet, the company has a cash balance of $27.66 billion so this purchase won’t require any financing.

  Buying Synthes, the biggest maker of devices to treat bone fractures and trauma, would end months of speculation about talks between J&J and U.K. device maker Smith & Nephew Plc. Synthes would give New Brunswick, New Jersey-based J&J a line of hip screws, surgical power tools and instruments to treat spinal and soft-tissue injuries that had $3.69 billion in 2010 sales, boosting the U.S. company’s share of the market for trauma care.

  “If I were J&J, I would rather buy Synthes,” said Lisa Bedell Clive, an analyst with Sanford C. Bernstein Ltd. in London, in a phone interview today. “It’s the chance to become the market leader in trauma,” which has more long-term growth and profit margin potential than replacement hips and knees.

  This could be a very smart move for J&J. Given the fact that its price hasn’t moved much, they’ve been forced into doing something. At this point, I don’t see how buying Synthes is a negative for J&J.

• Morning News: April 18, 2011
  Eddy Elfenbein, April 18th, 2011 at 6:58 am

  Euro Down On Regional Debt Concerns, But Losses Limited

  China Yuan Up Late As Stronger Currency Helps Curb Inflation

  Tokyo Shares End Off 0.4% Amid Pre-Earnings Caution, Stronger Yen

  Spain’s T-bill Yields Jump on Periphery Jitters

  G-20 Names ‘Too Big to Ignore’ Economies, Downplays Shocks

  Bonello Urges ECB Caution in Raising Rates as Most-Indebted Nations Suffer

  Gold Is Little Changed After Reaching a Record on Concern About Inflation

  UAE’s Oil Minister Says Crude Oil Market Is Well Supplied

  Bernanke Briefings May Offset Fed Hawks With Words as New Tool

  Debt Ceiling Increase Is Expected, Geithner Says

  Synthes Says It’s In Talks With J&J on Possible Combination

  Chinese Telecomm Equipment Giant Huawei Reports Profit, Reveals Board Details

  Inflationary Adventures in Extremistan

  Matt Taibbi’s Fact Souffle

  Euro vs. Invasion of the Zombie Banks

  Howard Lindzon: The ‘Swipe’ and ‘Tap’ Economy Continues To Pick up Steam

• “Parasites who persistently avoid either purpose or reason perish as they should”
  Eddy Elfenbein, April 15th, 2011 at 2:14 pm

  The movie Atlas Shrugged is opening this weekend. The book came out in 1957 and it was absolutely panned by critics.

  Some of the readers didn’t like the criticism. Here’s one such response:

  November 3, 1957:

  To the Editor:

  Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should. Mr. Hicks suspiciously wonders “about a person who sustains such a mood through the writing of 1,168 pages and some fourteen years of work.” This reader wonders about a person who finds unrelenting justice personally disturbing.

  Alan Greenspan, NY

  Yes, this is real.

• Elmo Talks Money
  Eddy Elfenbein, April 15th, 2011 at 1:01 pm

  It’s scary how many adults need these kinds of lessons.

• The CPI Report for March
  Eddy Elfenbein, April 15th, 2011 at 10:48 am

  Today’s CPI report said that headline inflation rose 0.5% in March which was inline with economists’ expectations. The core rate rose by 0.1% which was half of what was expected.

  Economists were expecting headline inflation to rise 0.5% and core inflation to rise 0.2%.

  With my blog I like to find the stats behind what’s reported by the media. Breaking out the decimals, we see that headline inflation actually rose by 0.549% for March. In other words, the CPI was just a teeny tiny bit from rounding up to 0.6%.

  While it’s really not that big of a deal, and we should laugh at the idea of the government’s measurements being so accurate, if the media had said that headline inflation rose by 0.6% in March, I think the market’s behavior would be very different today.

  Breaking out the core rate, we see that it rose by 0.135% in March which is still below the 0.2% expected by economists but not as much as the media reports would lead us to believe.

  By the way, those numbers are seasonally adjusted. The non-seasonally adjusted headline rate, rose by an annualized rate of 12.35%.

  Here’s a look at the annualized monthly core seasonally-adjusted inflation rate:

  

• Morning News: April 15, 2011
  Eddy Elfenbein, April 15th, 2011 at 7:33 am

  Eurozone Inflation Continues To Surge And It’s Not Just Food And Fuel Anymore

  Moody’s Cuts Ireland Rating Two Levels, Outlook Negative

  Greece Will Cut Spending, Sell Assets to Meet Debt Goal; Won’t Restructure

  China Vows to Punish Those Responsible for Leaking Economy, Inflation Data

  Singapore’s Policy Tightening May Prompt Asia to Step Up Inflation Fight

  World Bank and I.M.F. Discuss Inequality in Middle East

  U.S. Wholesale Prices Rise 0.7% in March

  Nestle Sales Beat Analyst Estimates on Emerging Markets

  High Costs Slow Google’s Profit

  BofA Earnings Miss Big, And The Stock Is Slipping

  Mattel Profit Drops 33% as Costs Rise

  Zipcar Opens Up 67% Post-IPO

  Pressure to Unwind CVS Merger

  Paul Kedrosky: Shutdowns and Foreign Debt

  James Altucher: How Kai Fu Lee Talked Me Out of Making a Million Dollars

• Microsoft Looks Very Cheap
  Eddy Elfenbein, April 14th, 2011 at 1:40 pm

  If you’re looking for a good stock to buy, I just noticed that there’s some sort of software outfit in the Seattle area. Here’s a look at Microsoft‘s ($MSFT) stock and its EPS line.

  The stock line is in blue and if follows the left scale. EPS is in gold and it follows the right. The two lines are scaled at a ratio of 15-to-1. The forward earnings represent Wall Street’s consensus.

  

  Microsoft is currently expected to earn $2.63 per share in this calendar year which means the stock is trading at about 9.6 times this year’s estimate.

  The S&P 500 is expected to earn 96.69 this year which means it’s trading at 13.5 times this year’s estimate. That means MSFT is going for a 29% discount to the market’s valuation.

  On top of that, MSFT is holding $4.76 per share in cash which generates almost no income. This means that the “operations” assets of Microsoft are probably going for around eight times earnings.

• What Number for the Equity Risk Premium?
  Eddy Elfenbein, April 14th, 2011 at 12:11 pm

  I’ve often said that the equity risk premium is probably a lot lower than most people realize. This is the amount that investors pay to own stocks over the risk-free rate of Treasury bills.

  Some academics decided to do a broad survey to see what others think:

  US Market Risk Premium Used in 2011 by Professors, Analysts and Companies: A Survey with 5.731 Answers

  The average Market Risk Premium (MRP) used in 2011 by professors for the USA (5.7%) is higher than the one used by analysts (5.0%) and companies (5.6%). The standard deviation of the MRP used in 2011 by analysts (1.1%) is lower than the ones of companies (2.0%) and professors (1.6%). Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from 58 persons that do not use MRP, and comments of 110 that do use MRP. The comments illustrate the various interpretations of the required MRP and its usefulness.

  Professors, analysts and companies that cite Ibbotson as their reference use MRP for USA between 2% and 14.5%, and the ones that cite Damodaran as their reference use MRP between 2% and 10.8%.

  Wow, the professors think it’s 5.7%! That’s quite high — and it’s down from 6% in 2010.

  My preference is to see what investors demand to own stocks over long-term Treasuries, and I think that’s probably around 1.5% to 2%.