Archive for 2011

• Minutes from the Fed’s June Meeting
  Eddy Elfenbein, July 12th, 2011 at 3:53 pm

  The Federal Reserve just released the minutes from its June meeting. By the way, the Fed’s Board has seven members but there are currently two vacancies. That means that even inside the Fed, unemployment is running at 28%.

  Here’s a part of the minutes:

  Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee’s dual mandate.

  At the same time, the Fed released its revised economic forecast which you can see here.

  In response to today’s Fed minutes, gold for August delivery closed at $1,562.30 after getting as high as $1,574.30.

• Public Storage +2,350% in 20 Years
  Eddy Elfenbein, July 12th, 2011 at 12:25 pm

  Here’s a look at Public Storage ($PSA) which is one of those quiet stocks that have been amazing performers over the last few decades. Here’s a company description from Hoovers:

  If the attic or garage runneth over, Public Storage can help. The real estate investment trust (REIT), is one of the largest self-storage companies in the US. It operates more than 2,100 storage facilities comprising some 135 million sq. ft. of storage space both at home and in Europe (through its Shurgard Europe affiliate). The firm’s self-storage properties, located in densely populated areas, generate some 90% of the company’s sales. Public Storage, which was founded in 1980, also rents trucks, and sells moving supplies such as locks, boxes, and packing supplies. It owns 41% of publicly traded PS Business Parks, an office building REIT.

  Over the last 20 years, the stock is up 2,350% and that doesn’t include dividends. The stock currently yields 3.2%.

  

• Alcoa’s Earnings Fall Short
  Eddy Elfenbein, July 12th, 2011 at 10:56 am

  Alcoa ($AA) kicked off earnings season after the close yesterday when it reported Q2 earnings of 32 cents per share. Although that more than doubled last year’s result, it was a penny shy of Wall Street’s forecast. What’s most troubling is that Wall Street’s forecasts had been drifting lower over the past several weeks, and Alcoa still fell short.

  This may be a harbinger of a weaker-than-expected earnings season. So far, Alcoa’s stock is holding up in today’s market (it’s basically unchanged). The problem in looking at the earnings trend of a company like Alcoa is that so much of the business is tied to the direction of aluminum prices.

  Alcoa isn’t representative of the broader economy. Companies like UPS ($UPS) are much better for that kind of analysis. But Alcoa’s weakness could point to weakness in other cyclical stocks.

  Here’s a look at the trend in the S&P 500’s earnings. In the second quarter of 2007, the S&P 500 earned $24.06 which was its all-time peak. For Q2 of 2011, Wall Street expects $24.12 which will be a new record. (Note: The S&P 500 lost $0.09 in Q4 of 2008.)

  

• Morning News: July 12, 2011
  Eddy Elfenbein, July 12th, 2011 at 8:01 am

  Worries Over Italy’s Debt Drag Down Markets

  Italy Sells 6.75 Billion Euros of Treasury Bills as Borrowing Costs Climb

  China Bank Lending Quickens; Fans Rate Risk

  China Premier Wen: Stabilizing Prices Continues to Be Main Priority

  Bank of Japan Upgrades View of Economy

  Shares Needed as Cambodia Gets a Stock Exchange

  Gold Declines for First Day in Seven as Europe’s Debt Crisis Lifts Dollar

  Department of Energy Awards Strategic Petroleum Reserve Oil to 15 Companies

  U.S. Stock-Index Futures Slump on Italy Debt-Crisis Concern; Alcoa Plunges

  Wall Street Set to Tumble as Global Markets Roiled

  Murdoch Buys Time on Hacking Scandal With BSkyB Review

  Analysts Cut BSkyB As News Corp Deal Seen Dragging Into Next Year

  Bank’s Deal Means More Will Lose Their Homes

  Cisco May Cut as Many as 10,000 Jobs to Buoy Profit

  Buy and Hold Investing Works

  Howard Lindzon: Uncapped Convertible Notes…Barf!

  Todd Sullivan: EPS Up 120%

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• Yes, Arnold, Stock Returns Can Outpace Economic Growth Indefinitely
  Eddy Elfenbein, July 11th, 2011 at 3:11 pm

  One of my favorite economic bloggers, Arnold Kling, recently wrote:

  Every few years, I have this argument with a new round of commenters.

  The ratio of stock prices to earnings is P/E.

  The ratio of earnings to GDP is E/Y.

  The ratio of stock prices to GDP is P/Y, which equals P/E times E/Y.

  (Note that the basic math here uses stocks that turn all of their earnings into capital gains, paying none as dividends. Including dividend payouts makes the story more complex, but does not change the economic analysis.)

  For stock prices to grow faster than GDP, either prices have to grow faster than earnings or earnings have to grow faster than GDP.

  Stock prices certainly can rise faster than GDP for long but finite periods. If the P/E ratio starts at about 5 and gradually rises to about 25, that will do it. Something like that happened in the 20th century. Also, if earnings of shareholder-owned companies start at less than 10 percent of GDP, then they can grow faster than GDP for a long time.

  Looking forward from today, which do you think is going to happen? Is the P/E ratio going to go up, because people become more willing to hold stocks? Or is the share of national income that goes to shareholder-owned companies going to go up? If you have a good story for one of those two happening, let me know.

  (For example, one story is that U.S. firms will earn increasing profits overseas. I do not think that this will be a big enough effect over a sufficiently long period of time to drive earnings growth much above GDP growth. Still, it is an empirical issue.)

  But if you think that stock returns will be higher than GDP growth without either ratio increasing, then one of us is incapable of doing simple algebra, and I am going to guess that it’s not me.

  Arnold, I’m afraid it’s you. But the good news is that it’s not your algebra.

  The reason I highlight this is because it gets to the heart of what it means to invest in stocks. Returns to stock investors can remain higher than economic growth indefinitely (even leaving aside the issue of equity valuations). This is a crucial point. The problem is, it’s hard to explain easily.

  There are lots of good explanations in the comments of Arnold’s post, but I’ll try to make it as basic as I can: when you buy a stock, you’re buying all of its future cash flow. Economic growth impacts the growth of that cash flow.

  When you buy stocks, what you’re buying is the future cash flow. Think of it like buying a river. All that water that passes though, is yours to keep.

  Economic growth would determine how much the river expands or contracts — even though water is still flowing. If economy expands (metaphorically, our river widens) then even more water flows through. The growth of the economy is not the same as what accrues to the shareholder.

  The size of the river can’t expand than the economy forever, but the stream owner keeps all which passes through.

• The Shrinking Labor Market
  Eddy Elfenbein, July 11th, 2011 at 10:49 am

  One of the most depressing aspects of the current jobs market is how many Americans have simply dropped out of the labor market. After growing for decades, the labor market participation rate lost all of its gains over the last 25 years.

  

  Over the last 11 years, the civilian population has grown by 27 million, but the labor force has only grown by 10.8 million and the number of employed has grown by just 2.4 million.

• Italy Drags Us Down
  Eddy Elfenbein, July 11th, 2011 at 9:07 am

  The stock market looks to open sharply lower today. Through Thursday, the S&P 500 was having a nice rally but concerns about Europe have again pushed equity prices lower.

  Now traders are worried about the financial condition of Italy. Reuters notes that the cost of insuring Italian debt has risen to a five-year high. Now, some Italian politicians are blaming “speculators” which is a near-universal sign that it’s all the politicians’ fault.

  We’re also at the start of the second-quarter earnings season. Alcoa ($AA) will be the first major company to report earnings when it reports after today’s close. The company has a good shot of reporting a doubling of its profit.

• Morning News: July 11, 2011
  Eddy Elfenbein, July 11th, 2011 at 8:13 am

  Best Currency Forecasters Say Dollar Slump Over

  China June Trade Surplus Widens to $22.27 Billion

  China Yuan Down Late On Expectations Inflation Has Peaked

  Italy Moves to Rein in Short-Selling Amid Market Jitters

  Italian, Spanish, Portuguese Bonds Slump

  OECD Warns Europe to Agree Greece Deal Quickly

  Crude Oil Falls As Concerns Over China, EU Weigh

  Tough Era for ‘Macro’ Funds

  A Top British Leader Urges Murdoch to Drop TV Deal

  Quick Action Helps Google Win Friends in Japan

  Alcoa Profit May Double on Aluminum Demand

  Nestle Buys 60% of Chinese Candymaker for $1.7 Billion

  Elpida Memory to Raise Nearly $1 Billion From Issuances

  Howard Lindzon: The Stocktwits Hall of Fame…Miracles and Shame on Wall Street

  Epicurean Dealmaker: In Praise of the Outsider

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• June NFP = +18,000
  Eddy Elfenbein, July 8th, 2011 at 10:00 am

  The June jobs report came out this morning and it was a disaster. The economy created just 18,000 jobs last month and the unemployment rate rose to 9.2%.

  Wall Street was expecting a gain of 105,000 jobs which isn’t that strong to begin with. On top of that, the number of jobs created in May was revised down to 25,000.

  Factory payrolls rose by 6,000 in June after a 2,000 decline in the previous month.

  Employment at service-providers increased 14,000 in June, the least since a decline in September. Construction employment fell 9,000 workers and retailers added 5,200 employees.

  Government payrolls declined by 39,000 in June, the eighth straight decline. Employment at state and local governments declined by 25,000.
  Average hourly earnings fell 1 cent to $22.99, today’s report showed. The average work week for all workers dropped to 34.3 hours, from 34.4 hours the prior month.

  The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — increased to 16.2 percent from 15.8 percent.

• Morning News: July 8, 2011
  Eddy Elfenbein, July 8th, 2011 at 7:17 am

  German Exports Increased More Than Forecast

  Offshore Yuan Clearing Bank to Buy China Bonds

  Ethanol Subsidies Besieged

  Geithner Doesn’t Think Obama Has The Constitutional Authority To Ignore Debt Ceiling

  Elizabeth Warren’s Dream Becomes a Real Agency She May Never Get to Lead

  Behind the Gentler Approach to Banks by U.S.

  Dim Sum Market Stirs U.S. Borrowers

  To Slow Piracy, Internet Providers Ready Penalties

  News Corp.’s BSkyB Bid Facing Delay on Review

  JPMorgan Settles Bond Bid-Rigging Case for $211 Million

  Target, Limited Sales Beat Estimates in June Amid Discounts

  S.Korea’s SK Telecom, STX Battle for $2.3 Billion Hynix Stake

  Buffett Donates $1.5 Billion in Annual Gates Foundation Gift

  James Altucher: 7 Unusual Things I Learned from Louis Armstrong

  Brian Shannon: Stock Market Analysis & Ideas for 7/8/11

  Phil Pearlman: Drudge Is The Master

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