Archive for May, 2011

• Morning News: May 24, 2011
  Eddy Elfenbein, May 24th, 2011 at 7:51 am

  Greek Worries Halt Euro’s Rally

  Greek Opposition Leader Rejects New Austerity Plan

  HK Shares Pare Losses To End Flat; China Mobile Gains

  Analysis: Asia’s Reticence Costs It A Shot At IMF Power

  Goldman Finding Third Time a Charm in Russia

  An Interesting Change In German And Spanish Markets

  Obama Says Ireland’s Resilience Will Drive Recovery

  Commodities Gain as Goldman Advises Buying

  U.S. Sues to Stop H&R Block Deal for Rival

  Liberty’s Greg Maffei Says Barnes & Noble Stores Can Drive Digital Sales

  Yandex Said to Raise $1.3 Billion as Public Offering Prices Above Range

  Why LinkedIn’s Price May Have Been Right

  Glencore Stuck Below Offer Price on Day One

  Delta Ups LaGuardia Push Amid N.Y. Competition

  Todd Sullivan: Jamba Turns The Corner…

  Joshua Brown: The Barrel Bounce

  Paul Kedrosky: Serial Bubble-Callers R Us

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• Our Buy List Is Well Ahead of the S&P 500
  Eddy Elfenbein, May 23rd, 2011 at 12:46 pm

  We’re just over halfway through Q2 and our Buy List is holding up well against the broader market. Through Friday, the Buy List is up 11.08% while the S&P 500 is up 6.01%. That’s a lead of 507 basis points.

  Both the Buy List and the S&P 500 are down today. Due to further weakness in the cyclicals, we should outperform the S&P 500 again today. Here’s a look at the Buy List’s spread over the S&P 500 this year.

  

• Put Those Rate Hike Expectations on Hold
  Eddy Elfenbein, May 23rd, 2011 at 9:54 am

  I had been expecting the Federal Reserve to hike interest rates before most people expected. Now I think it’s time for me to change that outlook (and yes, we always want to change our market views based on new information — you never want to be tied to a thesis).

  First, check this out. It’s from the Cleveland Fed and shows the market’s take on a Federal Reserve rate hike at the next few FOMC meetings. The lesson is that the market overwhelmingly expects the Fed to keep rates unchanged at near 0%.

  Here’s a look at May 2012 futures contract for the Fed Funds rate. This is a full year away and the market has turned decidedly against any major move from the central bank.

  

• LinkedIn and the Winner-Take-All
  Eddy Elfenbein, May 23rd, 2011 at 8:43 am

  With the success of LindedIn’s ($LNKD) IPO, I want to discuss one of the reasons, in my opinion, why Internet stocks have caused such a frenzy for a little over a decade.

  One of the popular ideas that swept thinking circles in the mid-1990s was the impact of what economists call “natural monopolies.” The idea was also known as “the first mover advantage.” Robert Frank’s book, “The Winner-Take-All Society,” also touched on these themes.

  The general idea is that if a company is the first to unveil a certain type of product, it becomes “the standard.” This is crucial because it’s in everyone’s interest to recognize it as the standard.

  Probably the best example is Microsoft’s ($MSFT) Windows. Once Windows was established as the standard, so the idea goes, no one could knock it off and the company enjoyed an enormous competitive advantage. There’s no need to for two operating systems. Similarly, there was no need for VHS and Betamax to exist. (In econo-speak, a natural monopoly has very high fixed costs relative to its variable costs.)

  Likewise, when one company is established on the Internet, say selling pet supplies as advertised by a sock puppet, it will hold a near-monopoly over the entire industry. As a result, the normal metrics of valuing a company need not apply. Or so we were told.

  I remember how often I was told that some Internet stock was going to be huge and that it all had to do with the QWERTY keyboard. This was the easy way to explain the first-mover advantage. The story is that the QWERTY keyboard was established in the 19th century even though it’s an inefficient layout. The reason it won out, and is still around today, is that it became enthroned as the standard. QWERTY became the winner, and it took all.

  The takeaway is that the better mousetrap didn’t win the race (I’m mixing metaphors; deal). The worse keyboard board won only because it was first. Again, so we were told.

  It’s hard to emphasize strongly enough how widespread these ideas were. In Bill Clinton’s re-election campaign, he often warned voters about the emergence of the winner-take-all society. In 1998, there was even a new tech magazine called The Industry Standard.

  Today, LinkedIn potentially holds a similar winner-take-all grip over the resume market. Why bother being listed some place? The problem with the winner-take-all thesis is that it doesn’t always hold. Industry standards do get knocked out. It may take time, but it can happen.

  By the way, not all the stories we told we true. In typing contests, for example, QWERTY has held its own as an efficient layout. The biggest threat to natural monopolies comes, not from a competitor, but from innovation. As a result, these standards can be far more vulnerable than we realize. That’s why I’m so suspicious of the elevated price for LinkedIn.

  One more thing: in 2001, the The Industry Standard went bankrupt.

• Morning News: May 23, 2011
  Eddy Elfenbein, May 23rd, 2011 at 7:45 am

  Greece Readies Crisis-Fighting Steps

  EU Approves Restructuring of Greece’s ATE Bank

  Lagarde is Front-Runner to Head IMF

  China’s Yuan Snaps Four-Day Rally as Greek Debt Crisis Worsens

  Moody’s Warns Japan Recession is Negative for Rating

  Crude Oil Falls In Asia; Greece Concerns, China Data Weigh

  Fed Focusing on Inflation Expectations

  Toyota, Salesforce.com To Create Social Media Network For Vehicles

  Sony Sees Annual Net Loss of $3.2 Billion

  Hyundai, Kia See Output Loss Of 50,000 Units On Parts Shortage

  India Mahindra Satyam Posts Q4 Loss on Charge

  Commerzbank to Issue $7.4 Billion in New Shares

  Jimmy Choo Sold to Labelux for About $800 Million

  Watch Out, The Infamous Sotheby’s Indicator Is Flashing A Huge Red Flag

  Jeff Miller: Weighing the Week Ahead: Keeping Turmoil in Perspective

  Howard Lindzon: How Do You Value Magic and Utility…You Can’t!…Fasten Your Seat Belt for More LinkedIn’s $LNKD

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• Goldman Sachs Closes Below $135
  Eddy Elfenbein, May 20th, 2011 at 6:04 pm

  For the first time since last July, Goldman Sachs ($GS) closed below $135 per share — $134.99 to be exact.

  I don’t think Goldman’s problems are over. The stock is now going for just 5.5 times 2007’s earnings. Goldman is trading at nearly exactly its book value of $133.94 per share.

  In 2009, Goldman earned $22.13 per share and that dropped to $13.18 per share last year. Their earnings will be probably be around $14 or $15 per share for this year.

  

• CWS Market Review – May 20, 2011
  Eddy Elfenbein, May 20th, 2011 at 8:59 am

  For several weeks now, I’ve warned investors that cyclical stocks are due to underperform the broader market. My favorite cyclical gauge, the Morgan Stanley Cyclical Index ($CYC), reached its peak against the S&P 500 in mid-February, but only recently has it started to lag the market badly.

  To give you an example of how the market’s mood has changed, on Tuesday the S&P 500 lost just 0.04% while the CYC dropped 1.51%. Investors are clearly flocking out of cyclical names for safe shelter in defensive stocks. Don’t weep for cyclical stocks—they’ve had an amazing two-year run. If the Dow Jones had kept pace with the CYC since its March 2009 low, it would be over 25,000 today.

  I strongly encourage investors to tilt their portfolios away from cyclical stocks. I think we’re in for a multi-year period of cyclical underperformance. That’s how these cycles usually work. Outside of a small number of cyclical stocks like Ford ($F), your portfolios will be best served by quality stocks in defensive sectors like healthcare and consumer staples.

  Fortunately, our Buy List is already light on cyclicals and our defensive issues have been helping us outpace the market. In fact, we’ve nearly doubled the market so far this year. We’re on pace toward beating the S&P 500 for the fifth year in a row. Through Thursday, our Buy List is up 12.14% for 2011 compared with just 6.84% for the S&P 500.

  Healthcare is the single-largest component of our Buy List, and it’s the top-performing market sector this year. Several of our healthcare stocks, like Abbott Labs ($ABT), Becton Dickinson ($BDX), Johnson & Johnson ($JNJ) and Medtronic ($MDT), have hit new 52-week highs in recent days—and Stryker ($SYK) looks to hit a new high any day now. Also, many of our consumer stocks look very strong. Reynolds American ($RAI) is a 21% winner on the year and Jos. A. Banks ($JOSB) is up over 40% for us.

  I should point out that we’re starting to see some signs of the bull maturing. An obvious example is the huge post-IPO surge for LinkedIn ($LNKD). The stock soared 109% on its first day of trading which reminds me of the kind of investor frenzy we saw during the Tech Bubble. We’re also seeing analysts on Wall Street analysts paring back their earnings estimates for this year and next. It’s not a lot so far but it may signal that most of the easy gains are already gone.

  What I find amazing is that investors still craze short-term bond maturities. I can’t decide which is more detached from reality—investors paying several hundred times earnings for LinkedIn or that the yield on the two-year Treasury note is now down to just 0.55%.

  There’s still plenty of good news for patient investors. Q1 earnings season was a good one for the market although the earnings “beat rate” was down a lot from previous quarters. I was pleased to see that sales growth for the S&P 500 topped 10% for the first time in five years. There are also some positive technical signs. For example, the put-to-call ratio is at a two-month high.

  After breaking 1,370 on May 2nd, the stock market has been in a slight down trend for most of this month. This past Tuesday, the S&P 500 dropped below 1,320 for the first time in one month. Recently, however, the bulls have started to reassert themselves. On Wednesday, the S&P 500 had its biggest rally in three weeks. The market rallied again on Thursday thanks to the jobless claims report beating expectations.

  I still believe this is a market that will be friendly towards investors in high-quality stocks like our Buy List. The yield curve is very wide and that’s historically bullish for stocks. Plus, yields on many of our Buy List stocks are very competitive with what’s being offered in the bond market. Abbott Labs ($ABT) currently yields 3.34%, Deluxe ($DLX) yields 3.75% and Sysco ($SYY) is at 3.12%. Even a blue chip like J&J ($JNJ) yields 3.25%.

  I also wanted to comment on AFLAC ($AFL) since I’ve recommended it so highly this year. The stock got hit for a 6.31% loss on Wednesday and I want you to know exactly what’s happening. Most importantly, I still like this stock a lot and I don’t see any reason to sell.

  What happened is that AFLAC held a meeting with some Wall Street analysts. Most of what they had to say was good news. The company is “de-risking” its portfolio and they reiterated their earnings guidance for this year. But what everyone focused on was Dan Amos’ comments that AFLAC will grow its earnings by 0% to 5% next year.

  That’s not great news, but it’s hardly awful news. First off, 2012 is still a long way away and this forecast strikes me as overly conservative. But even if it’s not, AFLAC is still a solid company going for a very attractive price.

  Let’s puts our emotions aside and look at the facts. AFLAC has already said that it expects operating earnings-per-share for this year to range between $6.09 and $6.34. Some of this will obviously depend on the exchange and that’s been working in our favor recently.

  The current yen/dollar exchange rate puts AFLAC on track to earn $6.28 per share for all of 2011. Bear in mind that this isn’t my forecast or Wall Street’s. This is coming straight from AFLAC itself, and we know their guidance has been very reliable (and usually conservative).

  Thursday’s closing price is almost exactly eight times this year’s earnings estimate. Even if they show 0% growth next, AFLAC is still a bargain. Furthermore, the shares currently yield 2.38% and AFLAC said they’re aiming to raise the dividend by as much as 10% this year and next. The company has raised its dividend for the last 28 years in a row.

  The other good news is that AFLAC is ditching some of their assets held in problem spots around the world like Ireland. They had already dumped much of their Greek investments. This has obviously been freaking out a lot of investors.

  The bottom line is that the 2012 forecast wasn’t good news and I don’t want to pretend otherwise. But considering AFLAC’s overall high-quality, recent earnings trend, decline risk and depressed valuation, the stock is still a very compelling buy.

  That’s all for now. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

• Morning News: May 20, 2011
  Eddy Elfenbein, May 20th, 2011 at 7:58 am

  France’s Christine Lagarde Is Favored to Head IMF

  Bank of Japan’s Shirakawa Sees Supply Constraints Easing But Nuclear Problems Remain A Threat

  Greek Government Bonds Fall on Reprofiling Concern; German Bunds Advance

  Another Big Spain Problem: Mountains Of Hidden Debt Are About To Be Revealed

  China Gold Imports to Rise After Investment Overtakes India, Council Says

  Gold Drops as Expectations of Slowing Inflation Curb Precious-Metal Demand

  Dollar Weakens Ahead of Federal Reserve Minutes

  LinkedIn’s Surge Sets Stage for More Internet I.P.O.’s

  Head of Japanese Utility Steps Down After Nuclear Crisis

  ABN Amro Reports Doubling in Profit, May Boost Savings Goal

  Prada Wins Approval for $2 Billion Initial Offer

  Liberty Media Offers $1 Billion for Barnes & Noble

  BP Cuts Oil Spill Burden With $1 Billion Mitsui Deal

  Many With New College Degree Find the Job Market Humbling

  Paul Kedrosky: The Triple-Digit IPO League Tables

  Brian Shannon: Stock Market Video Analysis 5/19/11

  Phil Pearlman: IPO Fun Facts from Renaissance Capital: Not Even Close to Bubble Levels

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• Medtronic Device Helps Paraplegic Stand
  Eddy Elfenbein, May 19th, 2011 at 9:20 pm

  Bloomberg reports:

  Rob Summers, a 25-year-old day trader paralyzed from the chest down five years ago, now stands on his own with the aid of a Medtronic Inc. (MDT) device originally designed for a different application.

  The device, sold by Minneapolis-based Medtronic to control pain, delivers electrical stimulation to Summers’ lower spinal cord that helps him move his toes, ankles, knees and hips, and even take steps on a treadmill with the aid of a harness. The Los Angeles man’s case, described in the U.K. medical journal The Lancet, may spell hope for about 12,000 U.S. patients who incur spinal cord injuries yearly.

• The S&P 500 With and Without Financials
  Eddy Elfenbein, May 19th, 2011 at 4:14 pm

  Barry Ritholtz posted a chart of the S&P 500 with and without the financial sector. I constrcuted my own version of the same chart below (though see my note below). The Financials now make up 15.3% of the index which is down from over 22% before the crash (20 years ago, they were under 10%).

  

  What really stands out is how much of the market’s rally between 2003 and 2007 was due to Financials. Take them away and the market still did well, but it wasn’t the great bull run that appeared on the surface. Naturally, much of the crash was heavily laid on the shoulders of Financials as well. (The same goes for the Tech sector during the late 90s and early Aughts.)

  If investors had avoided Financials all together, they still would have been in for a rollercoaster ride, but not as dramatic a ride as it was for broad-market investors.

  Barry Ritholtz posted

  (Note: I don’t have the historical weightings so I had to imply them from the historical daily indexes. As a result, my chart may differ slightly from S&P’s data.)