Archive for November, 2011

  • Gilead Buys Pharmasset for $11 Billion
    , November 21st, 2011 at 9:33 am

    Gilead Sciences ($GILD) announced a gigantic deal today. The company will buy Pharmasset ($VRUS) for $11 billion. Gilead currently has a market value of $30 billion.

    I’m guessing that Pharmasset squeezed every nickel from Gilead. The deal calls for GILD to pay $137 per share for each share of VRUS. That’s 89% more than its closing price on Friday.

    So what does Pharmasset have to offer? The WSJ:

    Clinical-stage drug developer Pharmasset last month reported it was further expanding a trial of its hepatitis C treatment, citing the oral drug’s rapid and consistent antiviral effects.

    Gilead’s research and development portfolio includes seven unique molecules in various stages of clinical development for the treatment of the disease.

    Gilead expects the deal will be dilutive to earnings through 2014 and begin adding to profit in 2015. The company expects to give further guidance after the deal closes, anticipated in the first quarter of next year.

    Gilead is down about 10% today. So far, I have to agree with the conventional wisdom that this is a great fit but it’s awfully darn expensive. I really wish Gilead’s board was in my fantasy football league.

  • Morning News: November 20, 2011
    , November 21st, 2011 at 6:42 am

    Stocks, So Far Resilient, Face a Week of Challenges

    Spain’s Rajoy Says ‘Hard Times Ahead’ After Landslide

    Global Economic Outlook Grim, China Tells U.S. Trade Talks

    Japanese Exports Decline as China Sees Prolonged Global Slowdown: Economy

    Moody’s Warns on French Rating Outlook

    Thai GDP Growth ‘Disappointing’

    Buffett: Euro Zone Not Working, Words Alone Won’t Fix It

    Nymex Crude Oil Falls In Asia; China Outlook Warning Weighs

    Stocks Extend Losses as U.S. Budget Talks Stall

    Foreign Banks Double Dollar Deposits at Fed

    Supercommittee Likely to Announce No Deal on Deficit Cuts

    Mixed Results as Google Enters Microsoft’s Turf

    Cigna in Deal to Sell Health Insurance in India

    Transatlantic Is Said to Be Near a Sale to Alleghany for $3.4 Billion

    Lessons for U.S. From Canada’s “Basket Case” Moment

    Epicurean Dealmaker: Sovereign Triviality

    Howard Lindzon: Facebook is NOT Ruining Anything…More Like Pressured and Relentless

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  • Can Technology Be Society’s Economic Engine?
    , November 18th, 2011 at 12:36 pm

    Watch live streaming video from techonomy at livestream.com

  • Oracle Is a Good Buy Here
    , November 18th, 2011 at 12:15 pm

    Here’s a very short post.

    Oracle ($ORCL) is a very good buy below $31 per share. People rightfully quibble that Oracle’s earnings are messy due to all their acquisitions. That’s true, but even after that, Oracle has often hit 15 times earnings. At that rate, the stock would hit $36 in six months.

  • LEI Up 0.9% Last Month
    , November 18th, 2011 at 11:05 am

    There’s more good economic news today. The Index of Leading Economic Indicators rose 0.9% last month.

    “The [index] is pointing to continued growth this winter, possibly even gaining a little momentum by spring,” said Ken Goldstein, economist at the board.

    While next year’s economy looks better than this year’s performance, William Dudley, president of the New York Federal Reserve Bank, said in a speech in Albany, N.Y., earlier Friday that, “As we look toward 2012, the U.S. economy continues to face several obstacles to a robust recovery.” Dudley thinks the U.S. economy can grow about 2.75% for 2012.

    In October, nine of the 10 leading indicators increased. The most positive indicators were building permits and the interest rate spread. The only negative indicator was supplier deliveries.

    The coincident index was up 0.2% last month, after a revised flat reading in September, first reported as a 0.1% increase. The lagging index increased 0.6% in October after a revised 0.1% advance, first reported as 0.2%.

    I’m surprised at the strength of the consumer.

  • Investing for the Long Run
    , November 18th, 2011 at 10:54 am

    New academic paper on the benefits of investing for the long haul:

    Long‐horizon investors have an edge. They can ride out short‐term fluctuations in risk premiums, profit from periods of elevated risk aversions and short‐term mispricing, and they can pursue illiquid investment opportunities. The turmoil we have seen in the capital markets over the last decade has increased the competitive advantage of a long investment horizon. Unfortunately, the two biggest mistakes of long‐horizon investors – procyclical investments and misalignments between asset owners and managers – negate the long‐horizon advantage. Long‐horizon investors should harvest many sources of factor risk premiums, be actively contrarian, and align all stakeholders so that long‐horizon strategies can be successfully implemented. Illiquid assets can, but do not necessarily, play a role for long-horizon investors, but investors should demand high premiums to compensate for bearing illiquidity risk and agency issues.

  • CWS Market Review – November 18, 2011
    , November 18th, 2011 at 9:06 am

    Despite coming off a record earnings season, the stock market is still in a sour mood. On Thursday, the S&P 500 closed at 1,216.13 which was its lowest close in nearly one month. Since October 28th, we’re down 5.3%.

    The S&P 500 fell by more than 1.6% on both Wednesday and Thursday this week and it’s now hovering just above its 50-day moving average (the NASDAQ Composite is already below it). The index has closed above its 50-DMA every day since October 10th. I try to avoid “timing” the market but I’ll note that the 50-DMA is often an important demarcation line separating bull markets from bear markets.

    In this week’s CWS Market Review, I want to discuss a major change that’s happening in the market that’s not getting much attention. More importantly, I’ll tell about some of the best places to invest your money right now.

    For the last several weeks, the U.S. stock market has been heavily dependent on what’s been happening in Europe. This is hardly surprising but it’s also been very frustrating because…well, Europe’s economy is massively screwed up. On top of that, the political situation seems to favor ignoring the issues rather than solving them. However, my biggest fear is that we’ll never see a rally here until the mess is over over there.

    Lately, however, we’re starting to see the first signs that our market is disentangling itself from the European malaise. This is very important. Let me explain: Over the last few months, the U.S. stock market has been unusually highly correlated with the euro-to-dollar trade. Whenever the euro has rallied, stocks here have been very likely to rise, and when the euro has sunk, U.S. stocks have gone south. These two lines have moved together like waltzing partners.

    About 18% of the profits for the S&P 500 comes from Europe. Yet at the end of October, the 30-day correlation between the Dow and the EURUSD hit an incredible 0.958. By the end of last week, it slipped to 0.834 and lately, it’s been as low as 0.498. That’s a big turnaround and I think there’s a very good chance it will continue.

    The reason is that the U.S. economy is starting to show signs of life. Make no mistake, we’re not ripping along, but the recent news is somewhat optimistic. For example, this week’s report on industrial production showed a 0.7% gain last month. That was much better than Wall Street’s forecast of 0.4%. The inflation news continues to look good. We also had a decent report on retail sales which is often a glimpse at the confidence of consumers. Jobless claims fell to the lowest level since May. There’s clearly no Double Dip at hand.

    Economists up and down Wall Street have been revising their economic growth estimates higher. JPMorgan Chase ($JPM) just raised its estimate for Q4 GDP growth from 2.5% to 3%. Morgan Stanley ($MS) thinks it will be 3.5%. Joe LaVorgna, the chief economist at Deutsche Bank ($DB), said that he wouldn’t be surprised if Q4 growth topped 4%. Bespoke notes that this earnings season showed the highest “beat rate” this year. What we’re seeing is a fundamentally healthy economy that’s fighting off a housing sector mired in a depression—and as bad as housing is, even that’s showing some slight glimmers of hope.

    If the U.S. stock market can finally shake off the daily gyrations caused by our friends across the pond, I think we can see a nice year-end rally. Consider how fearful the market is right now. Shares of Microsoft ($MSFT) are trading at just over eight times next year’s earnings estimate. Wall Street currently thinks the S&P 500 can earn $109.30 next year which means the index is going for just over 11 times earnings. The yield on the 30-year Treasury is back below 3% and the yield on the 10-year is below 2%. In other words, the risk trade continues to be swamped with folks afraid to put their money to work in stocks.

    Now let’s turn our attention to the Buy List which continues to lead the overall market this year. I especially want to highlight some of our higher-yield stocks because they’re the best way to protect yourself in a fragile market like this.

    In last week’s CWS Market Review, I said that I expected to see Sysco ($SYY) raise its quarterly dividend for the 42nd year in a row, but only by one penny per share. On Wednesday, the company proved me right. Going by the new dividend, Sysco currently yields 3.95%. The stock is a good buy up to $30 per share.

    Our only Buy List stock to fall short of its earnings expectation this past earnings season was Reynolds American ($RAI). I told investors not to worry since the quarterly earnings game doesn’t matter so much to a conservative stock like Reynolds. Sure enough, the stock broke out to a fresh 52-week high this week. I wasn’t thrilled by the company’s recent share buyback announcement but it’s clearly given a lift to the stock. Reynolds is now our second-best performer on the year; only Jos. A Bank Clothiers ($JOSB) has done better. At the current price, Reynolds yields 5.27%. The shares are a strong buy below $42.

    Some other stocks on the Buy List that look particularly good right now include AFLAC ($AFL), Moog ($MOG-A), Ford ($F), Fiserv ($FISV) and Oracle ($ORCL).

    Next Tuesday, Medtronic ($MDT) will report its fiscal second-quarter earnings. The company has said to expect earnings for this fiscal year (which ends in May) to range between $3.43 and $3.50 per share. Wall Street expects a quarterly report of 82 cents per share which seems about right to me. I think they can beat by a penny or two, but not by much more. Either way, Medtronic is cheap. The stock is currently going for less than 10 times the company’s own earnings forecast.

    That’s all for now. The stock market will be closed next Thursday for Thanksgiving. For reasons I’ll never understand, the stock market is open on the Friday after Thanksgiving but it will close at 1 p.m. This completely pointless session is usually one of the lowest volume days of the year. 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

  • Morning News: November 18, 2011
    , November 18th, 2011 at 6:05 am

    Franco-German Spat on Role of ECB Renewed

    ‘Unsellable’ Real Estate Threatens Spanish Banks

    European Rift on Bank’s Role in Debt Relief

    Task Force Urges Greece to Improve Tax Collection

    EU Rules May Soak Up $93 Billion of Utility Cash

    Japan Probes Possible Olympus Gangster Link

    Crude Oil Heads for Worst Weekly Performance Since September

    The Real Reason Behind Crude Oil’s Strength

    Housing Starts in U.S. Fell 0.3% to 628,000 Rate in October

    Fed Official Backs Action

    Motorola Mobility Accused in Lemko Lawsuit Alleging Theft of Trade Secrets

    Sears Holdings Posts Loss on Weakness in Sales

    UBS Sets Profitability Goal, First Cash Dividend in 5 Years

    Angie’s List Stock Has Strong First Day; Yelp Files for IPO

    Jeff Carter: European Bond Yields Up=No Inflation…..Yet

    James Altucher: 10 Things I Didn’t Learn in College

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  • The 50-DMA Holds
    , November 17th, 2011 at 9:52 pm

    The S&P 500 had its second big fall in a row. The index is now down to 1,216.01 which is just above its 50-day moving average. We’ve been above the 50-DMA continuously since October 10th.

  • Once Burned, Twice Shy: How Naïve Learning, Counterfactuals and Regret Affect the Repurchase of Stocks Previously Sold
    , November 17th, 2011 at 8:06 pm

    I like this academic study:

    We establish two previously undocumented patterns in the purchase selections of individual investors. These patterns hinge on investors’ previous experiences with a stock. We demonstrate that investors prefer to (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss and (2) repurchase stocks that have lost value subsequent to a prior sale rather than those that have gained value. We document these trading patterns by analyzing trading records for 66,465 households at a large discount broker between January 1991 and November 1996, and 665,533 investors at a large retail broker between January 1997 and June 1999. We propose that the first trading pattern results from a simple form of learning whereby investors repeat actions that previously resulted in pleasure while avoiding actions that previously led to pain (i.e., they repurchase their previous winners more readily than their previous losers). We argue that the second trading pattern is tied to counterfactuals. Investors who buy a stock at a higher price than they previously sold it for are painfully aware that they are worse off than if they had simply never sold that stock. Investors who buy a stock at a lower price than they previously sold it experience the pleasure of knowing they are better off than if they had never sold that stock. Investor returns do not benefit from either of the two patterns we document.

    (Via: Alea)