Archive for September, 2011

• Morning News: September 14, 2011
  Eddy Elfenbein, September 14th, 2011 at 5:32 am

  Risk Rises at ECB as Europe Banks Lose Deposits

  From Europe, Mounting Pressure Over Greece’s Debt

  French Banks Downgrade Revives Euro Debt Fears

  European Shares Turn Positive on Euro Bonds Hopes

  Asia Corporate Sentiment Slides on Global Worries

  World Must Cut Deficits, Not Rely on China: Wen

  Gold Declines as Stocks, Commodities Drop on European Debt Risk

  Crude Oil Drops From Six-Week High on Concern Economic Recovery to Falter

  Geithner Takes Tougher Tone on Europe

  Banks Brace for a Season of Fall-Offs

  RIM Poised to Miss Tablet Estimates as IPad Wins

  Dell Sets $5 Billion Buyback

  Demand at Target for Fashion Line Crashes Web Site

  Soaring U.S. Poverty Casts Spotlight on ‘Lost Decade’

  Joshua Brown: Short Interest Explodes, Face-Ripper™ Coming?

  Phil Pearlman: If It Weren’t for the Sales Tax Break, Amazon Would be Getting Crushed By Best Buy

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• The Power of Momentum
  Eddy Elfenbein, September 13th, 2011 at 7:49 am

  In a post yesterday, I criticized some sloppy analysis which tried to make overly broad statements based on long-term stock data. Here’s a good example of how long-term data ought to be used. The chart below shows the historical performance of stocks ranked by momentum decile (meaning 10% slices).

  I took the numbers from Ken French’s data library. The reason why this is a more sound method is that we’re using long-term data to isolate one particular aspect of stock performance.

  It turns out that stocks that are in motion have a very long record of continuing to stay in motion. Just to be clear, momentum is defined by performance over the 11-month period starting 12 months ago and ending one month ago. The month directly prior to each period is excluded. At the end of the month, the whole thing is repeated.

  

  The deciles are perfectly ranked by momentum. The portfolio with the highest momentum did the best. The second-best came in second and so on, all the way down to the worst momentum which came in last.

  Decile	Gain
  Low	-1.58%
  2	4.73%
  3	5.85%
  4	8.09%
  5	8.46%
  6	9.38%
  7	10.68%
  8	12.35%
  9	13.11%
  High	16.72%

• Morning News: September 13, 2011
  Eddy Elfenbein, September 13th, 2011 at 5:00 am

  More Job Cuts Loom for European Banks With Fixed Pay

  Wary Investors Start to Shun European Banks

  I.M.F. Chief’s Change of Tune on Bank Capital

  Italian Bonds Decline Before Debt Auction; German Bunds Fall

  Gold Rebounds 1% on Persistent Euro Zone Worries

  Nikkei Rises From 2 1/2-Year Low as Trichet Eases Europe Worry

  Treasury Yield 8 Basis Points From Record Low on Debt Concerns

  HP Extends $11.2 Billion Autonomy Offer

  Microsoft May Disappoint With 19% Payout Boost

  Detroit Sets Its Future on a Foundation of Two-Tier Wages

  Broadcom’s Chip Valuation Signals 39% Gain for Cavium

  Obama Team Backed $535 Million Solyndra Aid as Auditor Warned on Finances

  Outsiders’ Ideas Help Bank of America Trim Jobs and Costs

  More College Grads Defaulting on Student Loans

  Todd Sullivan: Lehman and Used Car Sales

  Howard Lindzon: Momentum Monday (09/12/11)…Why Visibility is Dead and Why Apple and Amazon Love It!

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• Goldman Breaks Below $100
  Eddy Elfenbein, September 12th, 2011 at 2:54 pm

  Shares of Goldman Sachs ($GS) dropped below $100 very briefly today. This is an enormous drop off from the start of the year when the stock was at $168. Bear in mind that Goldman earned over $22 per share in 2009.

  

• From the Department of Silly Analysis
  Eddy Elfenbein, September 12th, 2011 at 12:59 pm

  E.S. Browning’s “Abreast of the Market” column today features a very bullish forecast made by Professor Richard Sylla of NYU.

  Using 10-year averages of annual market returns, including dividends and adjusted for inflation, Prof. Sylla and his colleagues found that U.S. stocks have risen and fallen in surprisingly consistent waves for more than 200 years. The pattern has become even steadier since World War II.

  I think this sort of analysis is highly superficial yet (and?) it seems to be very popular. First, looking at very long-term market performance is interesting from a historical perspective but much of this data is far from rigorous. The stock market was a minor speck of the American economy in 1790. Equity markets in a modern sense didn’t develop until the 1920s. Plus, the markets were not very efficient through the 1960s. I like to look at long-term data as well, but it’s a mistake to draw precise conclusions from it.

  If the market sticks to its long-term pattern, Prof. Sylla says, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from today. The Standard & Poor’s 500-stock index might hit 2300, up 99% from Friday’s close of 1154.23.

  It’s one thing to say that stocks are below their long-term average. I’m fine with that and it’s something you can easily show. But as with many in the art of pseudo-forecast, Professor Sylla is hedging his call beyond reason.

  Now a recovery with 6.5% average annual returns, equal to the historical inflation-adjusted average, would fit, he says. He isn’t saying stocks will rise that much each year, just that this could be the average.

  Prof. Sylla does see a 25% chance that the next decade could fall well short of that.

  Sorry–this is where you lose me. A 25% chance isn’t exactly small. Making any forecast and giving yourself a one-in-four chance of being WAY off the mark makes the other 75% totally worthless.

• Greece Gets Ready to Default
  Eddy Elfenbein, September 12th, 2011 at 12:20 pm

  The stock market is down yet again today. The S&P 500 got as low as 1,141.53 today so it’s still above the August 8th closing low of 1,119.46. One interesting aspect of today’s sell-off is that gold is also down today.

  The financial markets are beginning to adjust to the reality that Greece is going to default. Forbes writes: “Last week five-year Greek credit-default swaps indicated a 92% chance that the country would miss its debt payments.” This is having major spillover effects. The euro has been clobbered against the dollar and many other currencies. Now it looks like French banks are in serious trouble as Moody’s is considering downgrading them.

  The National Association for Business Economics today cuts its forecast for U.S. GDP growth. They see the economy growing by 1.7% this year and 2.3% next year. That’s down from their earlier estimates of 2.8% for this year and 3.2% for 2012.

  The Financial Sector ETF ($XLF) bounced off $12 per share. If it breaks below $12, I think it will be an outstanding buy. I also see that Nicholas Financial ($NICK) dropped below $10 per share which is less than its book value of $10.18.

• Morning News: September 12, 2011
  Eddy Elfenbein, September 12th, 2011 at 5:43 am

  Britain’s I.C.B. Recomends Gradual Banking Reform

  Germany Readies Surrender Over Greece

  Draghi’s Hands May Be Tied on ECB Stimulus

  Euro Falls To More Than 10-Year Low Vs Yen

  China’s False Promises

  SocGen Sovereign Debt Manageable, to Speed Changes

  India Industrial Output Grows at Slowest Pace Since ’09, Missing Estimates

  Oil Drops for Third Day on Concern Debt Crisis to Limit Growth, Fuel Need

  Technip Buys Global Industries in $937 Million Subsea Expansion

  Suzuki-Volkswagen Alliance Teeters

  Foster’s Rejects SABMiller’s Ex-Dividend Offer

  Dell Loses Orders as Facebook DIY Servers Gain

  Carol Bartz Resigns From Yahoo Board

  Brian Shannon: Stock Trading Ideas for 9/12/11

  Paul Kedrosky: What Caused the Recession of 1937-38?

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• Crossing Wall Street Ten Years Ago
  Eddy Elfenbein, September 11th, 2011 at 8:46 am

  

  I want to draw your attention to a worthy organization named Tuesday’s Children which supports families that were impacted by the events of ten years ago.

• Kenneth Rogoff on the Pro-Inflation Argument
  Eddy Elfenbein, September 10th, 2011 at 2:32 pm

  The Boston Globe has an interesting article about Kenneth Rogoff who makes the case that the economy needs some inflation right now. (Note: I’m not endorsing it, just highlighting the argument.)

  Here’s a sample:

  Like corruption, crime, and asbestos, “inflation” is a word that many Americans imagine in all-red capital letters, flashing across TV screens amid warnings of crisis. For anyone who remembers the gloomy, scary 1970s, when the inflation rate in the United States reached double digits, the word is shorthand for an economy that has spiraled out of control, the dollar losing value and prices climbing feverishly. “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” said Ronald Reagan in 1978, as nervous citizens imagined the day when they’d have to push a wheelbarrow full of cash to the grocery store in order to buy a loaf of bread.

  That particular nightmare never came to pass, thanks to drastic measures taken by the Federal Reserve. For the better part of the past 30 years, the dollar has stayed stable, reassuring American families and the nation’s trading partners, with the central bank standing guard over the economy and doing everything necessary to keep inflation low.

  You might say that Kenneth Rogoff has been one of the guards. As a research economist at the Federal Reserve during the first half of the 1980s, he helped ensure that the word “inflation” would never again flash across American TV screens. His reputation as a conservative-minded inflation hawk followed him from the Fed to the International Monetary Fund to his current position in the economics department at Harvard.

  But then came the financial crisis of 2008, and the ensuing slump. And as the economy has continued to stagnate, Rogoff, 58, has become the flag-bearer for an unlikely position: that as we struggle to help the economy find its way out of the darkness, inflation could be the answer. It’s time, Rogoff says, to put Reagan’s “hit man” to work for the good guys.

• CWS Market Review – September 9, 2011
  Eddy Elfenbein, September 9th, 2011 at 8:54 am

  As ugly as trading has been since mid-summer, the stock market is finally showing some strength lately. I was particularly impressed by Wednesday’s huge rally and by the fact that we didn’t give it all back on Thursday. Up till now, every rally has been met with an equal or greater sell-off.

  Over the past month, the S&P 500 has made three major bottoms and each time, we failed to go lower. While that’s certainly no proof that a new up phase is at hand, it may indicate that the worst is past us. Bear in mind that the S&P 500 hasn’t made a new closing low in one month.

  In this issue, I want to take a step back and address some issues impacting the broader economy and how they affect the financial markets. Don’t worry. I’ll steer away from any “econospeak,” and I’ll try to make it very easy to understand. First, the good news is that corporate profits have rebounded fairly well since the worst days of the financial crisis three years ago.

  Analysts on Wall Street still have pretty optimistic earnings forecasts for the rest of this year and into next year as well. For Q3, analysts see earnings for the S&P 500 coming in at $24.95. For Q4, they see profits of $26.23. That translates to profit growth of 15.72% and 19.61% respectively. In other words, earnings aren’t merely expected to grow but the rate of growth is expected to increase as well. I should caution you that these forecasts aren’t terribly reliable beyond a few months. The other good news is that corporate balance sheets are, as a whole, pretty strong.

  The big question, however, is “Why is the economy still doing so poorly, especially on the jobs front?” The answer is that it all comes down to housing. I’m making a huge generalization here, but economic recoveries in this country have often been fueled by the housing sector.

  Think of it this way: A developer’s decision to build a new 123-unit housing development or a brand-new 214-unit high-rise glass condo has a major ripple effect on the local economy. Except for a large government project, few things are as economically powerful as a new real estate construction project. You’re getting a big injection of money concentrated in one area all at once. Just think of how the cash flows through the local economy: the local contractors and sub-contractors get work. Those folks, in turn, spend their new cash at local stores and restaurants. What happens is that it starts a virtuous cycle.

  It doesn’t end there. The other aspect that feeds off housing is the financial sector. Most Americans have far more invested in their homes than in the stock market. New homeowners take out mortgages, then savers get their interest and the banks get their profits. Once again, the virtuous cycle feeds upon itself and everyone is happy.

  Yet this time, the housing sector is a bust because during the housing bubble, we built too many homes. Way too many homes! The Wall Street Journal recently reported, “Sales of newly built homes, which peaked at 1.3 million units in 2005, were running at an annual rate of just 298,000 units in July and are on pace to post the lowest count this year since record keeping began in 1963.”

  Obviously, those excess homes won’t get tossed into the garbage, so no one is willing to plunk down the cash to get a new development going. That oversupply of homes is weighing on the housing market like a ton of bricks. And not just the housing market; it also weighs on all those areas that rely on the housing market. Home prices are depressed and many Americans are underwater with their mortgages or barely in the black.

  The issue of bad mortgages has put enormous huge strain on banks as well. For example, we recently saw the financial world turn sharply against Bank of America ($BAC). This is an odd perception/reality dynamic because BAC is clearly far from being a sound institution, but it’s very hard to answer the question, “Do they need more capital?” (Bloomberg: Moynihan Tries to Keep Bank of America Intact as Mortgage Loans Fall Apart.) The bank said no, but investors said yes. Take a wild guess who won.

  Now we have this strange disconnect in financial markets which I’ve labeled the “Fear Trade.” This is when bonds, gold and volatility are up but stocks are down. Since corporate profits have been decent, P/E Ratios are especially depressed. As I mentioned in last week’s CWS Market Review, a Double Dip recession is far from certain. This week, in fact, we had better-than-expected news for the ISM Services index. We also learned that the trade deficit hit a three-month low. The trade deficit report was so good that Goldman Sachs has said there’s a sizable upside risk to their 1% GDP forecast for Q3.

  Strategists on Wall Street currently estimate that the S&P 500 will close this year at 1,353 which is a 14% run from here. One month ago, the consensus was that we’d finished the year at 1,401. So despite the market’s lousy mood, Wall Street really hasn’t pared back its estimates very much.

  Now I want to focus on two upcoming earnings reports. On Tuesday, September 20th, Oracle ($ORCL) will report its fiscal first-quarter earnings. I was shocked by how low ORCL’s share price was recently. For a few days, it dipped below $25, but Oracle’s business continues to be very strong. The company told us to expect Q1 earnings between 45 cents and 48 cents per share. Oh, please! That’s obviously too low. The consensus on Wall Street is for 47 cents per share. I’m expecting at least 51 cents per share.

  Oracle is a remarkably profitable company, plus they’re sitting on nearly $30 billion in cash. By the way, don’t believe any rumors that Oracle is going to buy Hewlett-Packard ($HPQ). That’s just crazy. My take is that Oracle is a very good buy below $30 per share.

  The other earnings report will come from Bed Bath & Beyond, ($BBBY) on the following day. Three months ago, the company gave us an outstanding earnings report, plus they raised their full-year forecast which shows you that good companies can prosper during rough times. For the upcoming earnings report, BBBY told us to expect earnings to range between 77 and 82 cents per share. My numbers say that 82 cents is about right.

  For this fiscal year (ending in May), BBBY should earn about $3.70 per share. I want to caution you that the stock has already done pretty well (it’s our second-best performer this year), so it’s not a screaming bargain right now. I’m going to hold my buy price on BBBY at $58 per share.

  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!

  – Eddy