Archive for May, 2011

  • Morning News: May 18, 2011
    , May 18th, 2011 at 7:46 am

    Greek Restructuring Rejected by ECB Officials in Clash With EU Politicians

    Bank of England Voted 6-3 to Hold Rate on Consumer Risks

    Malaysian Ringgit Advances as Growth, Inflation May Support Higher Rates

    Europe Aims to Keep IMF Job After Strauss-Kahn

    Crude Up On Weak Dollar Vs Euro; But Direction Lacking

    Corn Climbs for Fifth Straight Day as Wet Weather May Delay U.S. Seeding

    Dollar Mostly Weak but Rising Vs. Yen

    Geithner Wants Debt Ceiling “Done and Clean” in July

    New York AG Probes Banks Over Mortgage Securities

    Staples 1Q Net Up 5% After Charges As Sales Edge Up; View Reduced

    Dell Profits Soar As Company Continues Focus On Margins

    Corporate Spending Gives Dell Edge Over HP

    LinkedIn Raises Its IPO Price Range By $10 To $42-$45

    BP Arctic Deal on the Ropes

    For Buyers of Web Start-Ups, Quest to Corral Young Talent

    Joshua Brown: Soros Plays Gold Like a Fiddle

    Stone Street: Rolling Stones Hyperbole vs. Goldman Sachs Reality

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  • The Google Carry Trade
    , May 17th, 2011 at 1:41 pm

    Google ($GOOG), which is some sort of technology outfit similar to Alta Vista, has decided to go to the bond market to raise $3 billion.

    Here’s the odd bit: Google is sitting on $35 billion in cash. However, they can’t use most of that since it’s outside the U.S. (they funnel their money though Ireland). If Google repatriates those dollars, they’ll be hit with a massive tax bill. The company is probably assuming that the corporate tax rate will go down in the future and they’re probably right.

    So it’s off to the bond market they go. Naturally, with all that cash, you can be pretty sure that Google is a good credit risk—and the bond market agrees.

    The world’s biggest Internet-search company split the sale evenly between three-, five- and 10-year notes, according to data compiled by Bloomberg. The 1.25 percent, three-year notes yield 33 basis points more than similar-maturity Treasuries, the 2.125 percent, five-year debt pays a 43 basis-point spread, and the 3.625 percent, 10-year securities offer 58 basis points above benchmarks, Bloomberg data show.

    Even though Google didn’t snag a AAA credit rating, the bond market gave them spreads as if they were AAA.

    This is definitely a smart move by Google. Let’s look at Google’s earnings yield (which is the inverse of the P/E Ratio). Based on this year’s earnings estimate, Google’s earnings yield is 6.42%. Based on next year’s, it’s 7.48%. Even going by last year’s earnings, it’s still 5.60%.

    In other words, Google’s yield on its equity is far higher than its yield on its debt. The lesson is to use debt. In fact, I think an interesting trade would be to play Google’s risk premium—go long Google’s stock and short the bonds. This is effectively what a company does when it issues bonds to buy back its stock (or in the 1980s when many companies LBO’d themselves).

  • Putting Our Debt In Context
    , May 17th, 2011 at 11:35 am

    Megan McArdle passes this along from Dave Ramsey:

    Altogether, the government has $14.2 trillion in debt. What would happen if John Q. Public and his wife called my show with these kinds of numbers? Here’s how their financial situation would stack up: If their household income was $55,000 per year, they’d actually be spending $96,500–$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000!

  • The Tweet That Says It All
    , May 17th, 2011 at 10:33 am

    Joe Weisenthal tweeted this earlier and I think it sums up the market’s view succinctly:

    Crazy disconnect: Treasuries have been a killer trade for ages, yet there’s constant whining about Treasury holders getting screwed. $$

    Except for the worst moments of the financial crisis, the yield on the 30-year Treasury bond has been on a constant downtrend for years.

  • HPQ Cuts Forecast, You Heard It Here First
    , May 17th, 2011 at 9:30 am

    I often caution investors against investing by the numbers alone. Just because a stock has a low Price/Earnings Ratio or high Return-On-Equity doesn’t mean it’s a good buy. Those are often indicators of good buys but you need to look behind the numbers as well.

    A good example of this came in February when shares of Hewlett-Packard ($HPQ) got hammered after its earnings report. A lot of people asked me if I thought HPQ was a good buy. This is what I had to say in my post Hewlett-Packard Is Cheap, For Good Reason:

    Hewlett-Packard reported earnings of $1.36 per share which was seven cents more than Wall Street’s forecast. Wall Street responded by tossing the shares in the garbage. The shares dropped nearly 10% on Wednesday. Since the stock is a Dow component, the plunge distorted the entire index.

    What freaked out Wall Street so much? Let’s dig into the numbers. The hitch was that quarterly revenue rose only 4% to $32.30 billion from $32.96 billion. Wall Street had been expecting $32.96 billion. In the wider scope of things, that’s really not a big miss, so what else was going on?

    Hewlett-Packard also gave guidance for Q2 and the entire year. For this quarter, HPQ said it expects revenues between $31.4 billion and $31.6 billion, and earnings-per-share between $1.19 and $1.21. Wall Street didn’t like that at all. The consensus was for revenues of $32.6 billion and earnings of $1.25 per share.

    HPQ’s full-year forecast (their fiscal year ends in October) was for total revenues between $130 billion and $131.5 billion. The consensus on Wall Street was for $132.91 billion. HPQ said it expects full-year earnings to range between $5.20 and $5.28 per share. The Street was expecting $5.23 per share, so I suppose that’s inline. HPQ has traditionally issued conservative forecasts so they can raise them later. Perhaps they’re doing that now to mask the poor Q2 guidance.

    So this seems odd. It appears that HPQ gave lousy near-term guidance but the long-term guidance is still what the Street expects. Yet the stock’s popularity is somewhere between Kim Jong-il and Diphtheria. (Did Hurd get out at the right time? Sure looks like it.)

    According to the company’s guidance, the stock is selling for just eight times earnings. The good sign is that their enterprise storage, servers and networking division saw its revenues increase by 22%. Also, the gross margins are up 1.5% to 23.4%.

    The stock is tempting, but I’m still steering clear.

    HPQ has a few problems to work through. They’re experiencing weakness in consumer PCs and services. I’m also not a big fan of the quality of their earnings. Always be wary when a company grows too much through acquisition. That’s often a sign of trouble. A company should be focused on making earnings not buying them.

    I should add that things may change soon. On March 14th, Apotheker will unveil his business plan for Hewlett-Packard. (BTW, Léo, that shouldn’t take six months to do). I’m curious to hear what he has to say, but I don’t have enough confidence to buy before then. Until then, HPQ is a sell.

    Sure enough, Hewlett-Packard cut that already-lowered forecast today. The company now says that sales for the year will be between $129 billion and $130 billion, and earnings will be $5 per share. Wall Street was expecting earnings for the May-June-July quarter of $1.23 per share. Instead, HPQ said it will be $1.08 per share.

    Investors tend to think companies are like athletes and can shake off a bad night. Business generally doesn’t work that way. One problem leads to another problem and things can escalate very quickly. You should also be very skeptical of any company that relies on the strategy of “growth through acquisition.” Simply put, it rarely works.

  • Morning News: May 17, 2011
    , May 17th, 2011 at 7:45 am

    Greek Government Notes Rise as Juncker Proposes ‘Soft’ Debt Restructuring

    King Says Inflation Driven By Commodity Prices, to Rise Further

    Tokyo Shares End Up As Yen Slip Masks Utilities Sell-Off

    EU’s Van Rompuy Says Euro is Stable, ‘Too Strong’ Compared to China’s Yuan

    Oil Drops for Second Day on Concern Over Greek Debt Crisis, U.S. Supplies

    Gold Rises as Dollar Retreats From 7-week High

    Nasdaq and ICE Drop Offer for NYSE Euronext

    New York Investigates Banks’ Role in Fiscal Crisis

    Wal-Mart Earnings Rise 3 Percent; U.S. Stores Still Slumping

    Hewlett-Packard CEO Sees ‘Tough Third Quarter’

    Rosneft Pulls Out Of BP Deal

    Rowan Slips After $1.1 Billion Sale of Manufacturing Unit

    Home Depot Profit Meets Analyst Estimates

    Home Depot Earnings Sum Up The Entire Economy

    Jeff Miller: Understanding Economic Progress

    Epicurean Dealmaker: Put Down Your Pitchforks

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  • The Magic Inflation Rate = 5.3%
    , May 16th, 2011 at 10:15 pm

    I downloaded Professor Robert Shiller’s historical stock market data to see how inflation has impacted stock returns. I had done this before with data from Ibbotson. Those numbers go back to 1925, but Professor Shiller’s numbers go back to 1871.

    I wanted to see how the stock market performed at different rates of inflation. I took the after-inflation total return of each month from 1871 through 2010.

    I found that the magic number is 5.3%. If the annualized inflation rate for the month is under 5.3%, the stock market has performed very well. But when inflation is above 5.3%, the market does poorly. It’s pretty amazing how well this relationship has held up over 140 years. Historically, monthly inflation has been above 5.3% about one-third of the time.

    My calculations show that when inflation is below 5.3%, the stock market has had an annualized after-inflation gain of 9.59%. When inflation is above 5.3%, then stock market has had an annualized loss of 8.15%. Stretched out over 140 years, that’s a loss of nearly 98%.

  • Comparing REIT Yields With the S&P 500
    , May 16th, 2011 at 12:59 pm

    Here’s an example of how crazy markets can be.

    I wanted to see a historical comparison of the dividend yields on REITs versus the yield on the S&P 500. REITs are real estate investment trusts. To keep their tax status, REITs have to pay out nearly all their income as dividends. As a result, REITs usually have high dividend yields.

    I looked at the Vanguard REIT Index Fund (VGSIX) as a proxy for the REIT sector (it’s not perfect but it works for our purposes). I then looked at the trailing dividend yield and compared it with the Vanguard 500 Index Fund (VFINX).

    During the tech bubble when no one was interested in dividends, the REIT sector as a whole was offering yields of more than 8.5% while the S&P 500 was yielding less than 1.5%. That’s insane, but the conditions lasted for years. It took a massive real estate rally to push REIT yields below 5%, and even that took six years.

    We’ve gone from one extreme to another. Only now does the yield difference look appropriate.

  • Moving Averages, But How Long?
    , May 16th, 2011 at 8:35 am

    One of the puzzles of finance is why momentum seems to work so well. I’ve often called the 50-day moving average “the dumb rule that works for very smart reasons.”

    The idea is that once a stock gets set in motion in one direction, it has a strong tendency to keep moving. I’ve always been curious if there’s an ideal time limit at which the moving average “works.” Why have we settled on 50-day and 200-day moving averages?

    I had just been thinking about this when CXO Advisory highlighted this academic paper: Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability by Dušan Isakov and Didier Marti. Here’s the abstract:

    This article extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages over longer horizons than those usually considered. The different trading rules are simulated on daily prices of the S&P 500 index over the period 1990 to 2008 and we find that trading rules are more profitable when signals are generated over longer horizons. Second, we analyse if financial leverage can improve the profitability of the different strategies. It appears to be the case when leverage is achieved with debt. Third, we propose a new test of market timing that assesses whether a trading strategy is able to generate signals corresponding to longer market phases. According to this test, the signals generated by the complex rules investigated in this article coincide strongly with bull and bear markets.

  • Citi Upgrades Ford
    , May 16th, 2011 at 8:12 am

    I see that Citigroup has upgraded Ford ($F) from a Hold to a Buy. That’s good to hear and it’s about time someone highlighted how good Ford is. The stock may get a little boost after today’s open.

    Let’s remember that Ford fell short of earnings by 18 cents per share for Q4 but beat earnings by 12 cents per share in Q1. However, the stock still reflects the earnings miss, even though the earnings beat made up for two-thirds of the shortfall.

    Wall Street currently expects Ford to earn $1.92 per share for this year and $2.01 for next year. That means the Ford is going for less than eight times this year’s earnings estimate.

    Shares were up 12 cents, or 0.8 percent, to $15.20 in premarket trading Monday. Michaeli maintained his $18 one-year price target and wrote that the stock was still a high risk.

    Michaeli also wrote that Ford has made impressive gains in cash flow and liability management, and an upgrade to investment grade status appears likely late this year or early next year. That should be a catalyst for the stock, he wrote. “A return to investment grade would open a few doors for the equity story including providing a path to refinance secured debt, shed covenants and eventually restore a dividend,” he wrote.

    Ford also should benefit from model shortages expected this summer by Japan-based automakers due to parts shortages caused by the March 11 earthquake and tsunami, Michaeli wrote.

    He maintained his forecast that U.S. sales would be 13.4 million this year, despite a Citi survey showing that fewer people are expecting to add vehicles in their households in the next two years. But he lowered his 2012 forecast to 13.9 million from 14.6 million based on the survey. For 2013, he also reduced the forecast to 14.5 million vehicles from 15 million.