Archive for 2011

• Morning News: December 13, 2011
  Eddy Elfenbein, December 13th, 2011 at 5:31 am

  EU Banks Selling ‘Crown Jewels’ for Cash

  Cameron’s Backers Look Past ‘History of Antipathy’

  U.K. Inflation Slows on Food, Transport Costs

  Pondering a Dire Day: Leaving the Euro

  Gold Falls to 7-Week Low on Europe Anxiety

  China’s 150 Million Electric Bikes Bolstering Lead

  Rating Agency Warnings Bring Down the Markets

  Bernanke’s Legacy at Fed: Still a Lagging Indicator

  Intel Sees Opportunity in Shortage of Drives

  Jive Software Raises $161.3 Million in IPO After Pricing Above Its Range

  Sony Shopping is ‘Wrong Direction’ in Apple War

  WaMu Ex-Officials Settle FDIC Lawsuit

  U.S. Judge Grants Delay in Challenge to AT&T Deal

  Google Acquisition of Motorola Delayed in Europe

  No Hit Toy to Brighten Retailers’ Christmas

  Jeff Carter: Do You Fund Start Ups or Store Fronts?

  Cullen Roche: The Role of The Entrepreneur in a Capitalist Economy

  Be sure to follow me on Twitter.

• Where Do Profits Come From?
  Eddy Elfenbein, December 12th, 2011 at 3:31 pm

  I was listening to today’s EconTalk podcast with Russ Robert and he was talking with Mike Munger about the source of profits. Munger made a good point that profits aren’t about exploitation; they’re really about correcting errors:

  I think it is important, and the reason I wanted to start with that, as you pointed out, hilarious joke, that we need to recognize what the source of profits are. The source of profits is correcting errors. The economy around us is full of errors. And what I mean by errors is a maladjustment, a divergence between what we are actually producing and what we “should” produce in order to use the stuff that we have–our mental resources, physical capital, labor–to produce the highest possible level of satisfaction of what the public wants. So, there’s this unobservable thing that nobody knows and nobody can know, and that is: What is it that a consumer-sovereignty oriented society would produce? How are we going to allocate our resources? There’s all sorts of mistakes in the way we are allocating resources. If we not making iPods, if we are not making things that people want to buy, even if they don’t know that they want to buy it. The genius of Steve Jobs was to say: Here’s the way people want to buy these things. They don’t know it, but if we do it, we correct this mistake.

• Tim Tebow’s Pass Plays
  Eddy Elfenbein, December 12th, 2011 at 3:07 pm

  I’m not sure if there’s a market lesson here, but here’s a look at all of Tim Tebow’s pass plays from yesterday.

  During the second and third quarters, Tebow failed to complete a single pass in nine attempts. Yet in the fourth quarter and overtime, he was amazingly accurate. At one point, he completed ten straight passes.

  For his first 16 passes (the fist 48 minutes of the game), Tebow had a passer rating of 13.5. For his last 24, he had a rating of 111.6.

  First Quarter
  2nd-13, DEN12 10:26 T. Tebow passed to L. Ball to the left for 10 yard gain
  3rd-3, DEN22 9:57 T. Tebow incomplete pass to the right
  2nd-9, DEN10 6:03 T. Tebow passed to D. Thomas to the left for 12 yard gain
  2nd-11, DEN21 4:49 T. Tebow incomplete pass to the left
  3rd-16, DEN16 4:42 T. Tebow passed to M. Willis to the left for 23 yard gain
  2nd-6, CHI39 2:44 T. Tebow incomplete pass to the right
  3rd-6, CHI39 2:26 C. Tillman intercepted T. Tebow for no gain

  Second Quarter
  1st-10, CHI15 8:15 T. Tebow incomplete pass to the left
  3rd-6, CHI11 7:31 T. Tebow incomplete pass to the left
  1st-10, DEN42 5:44 T. Tebow incomplete pass to the right
  1st-10, DEN33 0:29 T. Tebow incomplete pass to the right
  2nd-10, DEN33 0:25 T. Tebow incomplete pass to the right
  1st-10, DEN47 0:00 T. Tebow incomplete pass down the middle

  Third Quarter
  2nd-10, DEN45 13:11 T. Tebow incomplete pass down the middle
  3rd-10, DEN45 13:05 T. Tebow incomplete pass to the left
  1st-10, DEN20 5:19 T. Tebow incomplete pass to the right

  Fourth Quarter
  1st-20, DEN27 11:12 T. Tebow passed to D. Thomas to the left for 14 yard gain
  2nd-6, DEN41 10:34 T. Tebow passed to D. Thomas to the left for 9 yard gain
  1st-10, 50 10:05 T. Tebow passed to M. Willis to the left for 14 yard gain
  1st-10, DEN7 6:50 T. Tebow passed to E. Decker to the left for 23 yard gain
  1st-10, DEN30 6:22 T. Tebow incomplete pass to the left
  2nd-10, DEN30 6:18 T. Tebow incomplete pass to the right
  3rd-10, DEN30 6:12 T. Tebow passed to E. Decker to the right for 1 yard gain
  1st-10, DEN37 4:34 T. Tebow passed to L. Ball to the right for 6 yard gain
  2nd-4, DEN43 4:05 T. Tebow passed to L. Ball to the right for 10 yard gain
  1st-10, CHI47 3:42 T. Tebow passed to J. Johnson down the middle for 8 yard gain
  2nd-2, CHI39 3:17 T. Tebow passed to J. Johnson to the left for 3 yard gain
  1st-10, CHI36 3:11 T. Tebow passed to M. Willis down the middle for 19 yard gain
  1st-10, CHI17 2:39 T. Tebow passed to D. Thomas down the middle for 7 yard gain
  2nd-3, CHI10 2:08 T. Tebow passed to D. Thomas to the right for 10 yard touchdown.
  1st-10, DEN20 0:56 T. Tebow passed to E. Decker to the left for 9 yard gain
  2nd-1, DEN29 0:53 T. Tebow passed to L. Ball to the left for 11 yard gain
  1st-10, DEN40 0:53 T. Tebow incomplete pass down the middle
  2nd-10, DEN40 0:30 T. Tebow passed to M. Willis to the right for 19 yard gain
  1st-10, CHI41 0:23 T. Tebow incomplete pass to the right
  2nd-10, CHI41 0:18 T. Tebow incomplete pass to the left

  Overtime
  1st-10, DEN33 12:47 T. Tebow incomplete pass to the left
  2nd-10, DEN34 12:37 T. Tebow passed to W. McGahee to the right for 2 yard gain
  3rd-8, DEN36 12:12 T. Tebow passed to D. Thomas to the right for 10 yard gain
  2nd-12, DEN44 11:15 T. Tebow passed to D. Thomas to the right for 16 yard gain

• Intel Slides on Lower Guidance
  Eddy Elfenbein, December 12th, 2011 at 1:12 pm

  Intel ($INTC) is getting clipped today on news that it’s lowering guidance.

  Intel, a technology bellwether, said it now expected fourth-quarter revenue of $13.4 billion to $14 billion. It had previously forecast revenue of $14.2 billion to $15.2 billion for the holiday quarter.

  Analysts polled by FactSet were expecting revenue of $14.65 billion.

  Intel is the world’s largest maker of microprocessors, the brains of computers. The company said it expected personal computer sales to be up from the previous quarter. But it said computer makers are reducing inventories and microprocessor purchases because of hard drive shortages.

  Intel has been a supremely frustrating stock for us because I’ve played it exactly wrong — or perhaps we were too early. Still, I always want to look at our bad calls to see what we can learn.

  I had Intel on last year’s Buy List and it started off as a good position for us. By April, it was an 18% winner for us. The stock then dropped about 25% and recovered to make us a slight gain for the year but it still trailed the overall market.

  After a lot of consideration, I felt that my original thesis no longer held and I decide to boot it from the Buy List for this year. Once again, I was right — at first. Intel underperformed the market at the beginning of this year, then around April it started a large out-performance.

  The stock has beaten earnings pretty consistently for the past few years. I had even considered adding back on for 2012. But I couldn’t help feeling that Intel had over-run its value. Only today, now that 2011 is nearly over, do we see some cracks in the company’s business.

  The lesson for investors is that your thesis can be right but it may take a long time to see it pay off. I remember Peter Lynch saying that his stocks did best in the second or third year that he owned them.

• Refining the Gold Model
  Eddy Elfenbein, December 12th, 2011 at 12:09 pm

  In this morning’s news roundup, I linked to an interesting post by Willem Weytjens who took my gold model and refined it with updated inputs. I’m happy to see this and I strongly encourage any stat geeks out there to run with this.

  My goal for my model was to establish a model for a model of the price of gold. My original description has the price of gold rising eight-fold, in the opposite direction, for each percentage point real rates are from 2%.

  As I said in my original post, “if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.”

  Weytjens found a better fit using a deflator of 2.15% and 2.2%, and a leverage ratio of 5.7 and 6.95. Check out his charts; the fit looks really good. He found that the model forecasts a gold price of $4,380 in two years.

• Morning News: December 12, 2011
  Eddy Elfenbein, December 12th, 2011 at 4:51 am

  Euro Undermined as Draghi Undoes Trichet Rates

  European Leaders’ Fiscal Accord May Solve Next Crisis, Not This One

  A Stark Step Away From Europe

  Russian Economy Hampered by ‘Poor’ Business Climate, OECD Says

  India’s Industrial Output Slumps, Pressures Central

  Royal Bank of Scotland Report Blames Bank Managers for Collapse

  European Banks Hunt for Ways to Raise Cash

  Oil Drops as Europe Debt Outlook Counters Iran Calls for OPEC Output Cuts

  Bank Credit Highest Since Before Lehman as U.S. Growth Continues

  Fed to Weigh Publishing a Forecast on Rates

  A Romance With Risk That Brought On a Panic

  Etihad Orders More Boeing 787-9s, 777s in $2.8 Billion Deal

  Whitehaven Buys Aston Resources

  Pincus Faceoff With Zuckerberg Shows Fearsome Prelude to Zynga’s IPO

  Gold Model Forecasts $4380 Gold Price

  Howard Lindzon: The Year 2012…The World Is a Startup and/or Armageddon Gets a Rest

  Stone Street: With Un-Verified Reviews (Almost) Everyone Loses, So Why Are They Still So Prevalent?

  Be sure to follow me on Twitter.

• Warren Buffett: If I See A Shirt I Like, I’ll Usually Just Buy It
  Eddy Elfenbein, December 11th, 2011 at 11:52 am

  The Onion has Oracle’s commentary:

  I’m not really the kind of person to get caught up in the latest trends or fashions or anything like that. But some days, if I get out of work early and have a little time to kill before dinner, I’ll go do some window-shopping in the downtown Omaha area. Usually I just stick to browsing, but occasionally I’ll see a shirt I like, and if I try it on and it looks good, I’ll say, “What the heck,” and go ahead and buy it.

  Because why not, right?

  If you think about it, we’re only talking $50 or $60 tops here. I’ve had a steady income for years now, and I’m at the point in my life where I just refuse to feel guilty about treating myself to a decent shirt every once in a while. See, because it’s not even about the money. It’s about feeling good. So if I come across a nice blue button-down or a really sharp Tommy Hilfiger polo, I just think, “Warren, in the span of a lifetime are you really going to miss the $40 you spent on a shirt you might wear for upwards of 10 years?” Of course not.

  Look, I’m old enough to understand that it’s okay to spend a little cash on something that makes you happy. To tell the truth, I wish I’d learned that lesson years ago.

  Now, I’m not saying you should go hog wild and buy 200 shirts at a time or anything. That’d be crazy. And no matter how much money you have, spending $150 on a shirt is just plain silly: I’d bet you dollars to doughnuts that someone somewhere makes a shirt that looks just as nice for half the price. For example, the Men’s Wearhouse at Oak View Mall typically has nice dress shirts for decent prices by all the top name brands, like Ralph Lauren, Geoffrey Beene, and so on. It’s not cheap stuff by any means, but if you have a member card you can get a 15 percent discount, and why not take advantage of a good deal when you see one.

  I don’t know about Men’s Wearhouses outside Omaha, but I assume they have a similar discount at their other locations, as well.

  When you’re used to pinching pennies and watching where every dollar goes, it can be hard to let loose and just splurge on something. Believe me, I know. But, hey, I’ll drop $8 on a movie once in a while, and it doesn’t even have to be the greatest film in the world, either. And, sure, a $30 box of chocolates for your wife might be a bit extravagant, but the look on her face when you give it to her is more than worth it. (And, let’s be honest, that $30 isn’t exactly going to break the bank!)

  I will say that I never buy just to buy. Having some extra sawbucks lying around doesn’t mean they need to be spent. In fact, just last week I walked into a Banana Republic—I like their sweaters a lot—looked around for about 15, 20 minutes, and walked right out. Seriously, just walked right on out.

  But, yeah, if something catches my eye, I’m not going to ignore it. I’m going to try it on, see how it looks with the pants I’m wearing, maybe try on a pair of khakis to see if they go with it better. If I like the khakis enough, I’ll buy them, too. Even if it adds up to $160, it’s an outfit I’ll be able to wear many times, and I know I’ll feel confident every time I wear it. That sounds like a bargain to me.

  After all, I work hard. I deserve it.

  One more thing: I learned the hard way to always try clothes on first. That’s just smart shopping. Case in point: I recently bought this turtleneck at Eddie Bauer without seeing if it fit. Well, you know where that turtleneck is now? Collecting dust in my closet. Sometimes I wear it under a sports coat, but very rarely. Sixty-five dollars down the drain.

  But you know what? It’s just 65 bucks, for crying out loud. Big deal.

• Mercedes Benz
  Eddy Elfenbein, December 9th, 2011 at 4:00 pm

  It’s 4 pm and the markets are closed. Let Janis get your weekend started — and I figure we might as well help the German economy while we’re at it..

• CWS Market Review – December 9, 2011
  Eddy Elfenbein, December 9th, 2011 at 7:40 am

  Let me start off this CWS Market Review by discussing the dramatic events in Europe. I’m writing this early on Friday morning, and today is the day of the big EU Summit.

  By common agreement, this summit is the last chance to save the euro. And by “last,” I mean the absolute last chance. That’s it—no more. Time’s up. These folks have dragged this on long enough and now it’s time to see who’s really in this thing. In last week’s CWS Market Review, I said that this summit’s aim would be to please financial markets. My belief was that this was actually an easy choice because there simply is no alternative.

  Well, they found an alternative. More disagreements.

  According to the latest news—and please bear with me, this is rapidly a developing story—the leaders have rejected plans to alter the EU treaty. This was the main goal. The Brits wanted an exception to protect their financial sector (London is huge for finance) and the continentals said “non/nein.”

  Instead, 23 of the 27 countries have agreed to a weaker “fiscal compact” which pledges stricter fiscal discipline. There had been hopes that in exchange for this compact, the ECB would jump in and buy bonds. Though Mr. Draghi has endorsed the compact, he’s walked back any commitment to buy bonds in a serious way. This isn’t good.

  Here’s the problem: Since this fiscal compact is outside the EU Treaty, there’s no way the EU institutions can enforce it. Really, the compact is nothing more than a pledge saying “I promise to be good.” Well…if they had been good, they wouldn’t be in this mess. David Cameron even said that Britain “would never join the euro.” In addition to the United Kingdom, three other countries, Sweden, Hungary and the Czech Republic, haven’t signed on.

  My take is that this is a major blow for Europe. The best scenario would be that if the ECB buys enough bonds, that could hopefully restore investor confidence. In turn that could buy more time, but for now, Europe is at the mercy of a very pissed-off bond market. Who can blame them?

  The question for us is: “How much will this impact our markets?” Until a few weeks ago, it’s been a lot. Slowly, however, the U.S. financial markets have separated themselves from the febrile European debt market. I’ve been generally impressed with our stock market’s wobbly recovery over the past two months. Sure, I wish it could be steadier but it’s been up against a flood of near-panic news out of Europe.

  Despite several hiccups, including another 2% drop on Thursday, the S&P 500 has gained more than 12.3% since its October 3rd low—and our Buy List has done even better. That ain’t bad. The index even briefly broke above its 200-day moving average a few times this past week. Unfortunately, it failed each time to close above the magic 200-DMA.

  This cautious rally has been even more impressive when you consider that the Treasury yield curve has barely changed over the past month. Actually, I’ll go even further than that: interest rates have been eerily stable. Since November 2nd, the 10-year yield has closely hovered around 2%. The 30-year has locked in on 3%, and the five-year yield has parked itself in a range between 0.86% and 0.97%.

  Now here’s the important part: I strongly suspect that this tight trading range will soon come to an end. Treasury yields, especially at the long end, are simply too low. Despite more signs that the economy has steered clear of a Double Dip, the yield on 10-year TIPs is still at 0%. It was one thing when the world was ready to come apart at the seams. But now that the U.S. economy has demonstrated some resiliency, a 10-year real return of 0% just doesn’t make any sense.

  

  It wasn’t that long ago that the bond market was expecting interest rates here to rise. I apologize, but here’s some math: Six months ago, the yield on the one-year Treasury was 0.39% while the six-month bill was going for 0.18%. That implies that the six-month rate in six months would be 0.25%. But today, it’s just 0.04%. The current yield curve implies that over the next 12 months, the one-year yield will climb from 0.10% all the way to…0.34%.

  What’s the reason for this mass apprehension? That’s easy. Everyone’s sitting on mountain of cash. Recent data from the Federal Reserve shows that non-financial firms in the U.S. have stockpiled an astounding $2.12 trillion in cash. Welcome to the Age of Deleveraging. It’s long overdue.

  Back to my point: I just don’t see how interest rates can stay that low in the face of recent evidence. The fact is that the economic news continues to be modestly positive. On Thursday, we learned that initial jobless claims dropped to 381,000 which is a nine-month low. Bespoke Investment Group tells us that that’s the second-lowest reading since Lehman Brothers went kablooey.

  The latest inventory data indicates that companies are restocking their shelves. That’s a good sign because inventory liquidation took a bite out of the Q3 GDP. The new inventory numbers caused Goldman Sachs to raise its estimate for Q4 GDP growth from 2.7% to 2.9%. Macroeconomic Advisors raised their estimate by 0.5% to 3.5%.

  Sooner or later, all that cash will want to find a place where it’s treated better. (Of course, much of that cash is trapped outside our borders.) The stock market’s favorable valuation versus bonds is especially clear in light of the fact that we don’t have to look far to find stocks yielding more than 3%. Microsoft ($MSFT), for example, currently yields 3.15% and is rated AAA which is something that can’t be said for some governments. Just this past week, one of our Buy List stocks, Stryker ($SYK) raised its dividend by 18%. In two years, SYK’s dividend is up by over 41%.

  Earlier this week, Oracle ($ORCL) said that its fiscal Q2 earnings report will come out on December 20th. The consensus on Wall Street is for earnings of 57 cents per share. That’s the midpoint of the range Oracle gave us three months ago of 56 cents to 58 cents per share. That’s a pretty strong number, and yet it may be too low. I think Oracle has a good shot of earning 60 cents per share. Their cash flow has been very strong. Their licensing business continues to do well, although I’m a little concerned about the hardware side of the business which is a bit shaky. Bear in mind that Oracle earned 51 cents per share in last year’s Q2 which was very strong.

  Up and down Wall Street, analysts have been warming up to Oracle. Barclays initiated coverage with a price target of $37 and an “overweight” rating. Piper Jaffray also has an overweight rating. Jefferies cut its price target from $37 to $36 (???) but kept its “buy” rating. They also trimmed their quarterly EPS estimate by a penny to 56 cents. Deutsche Bank just raised their price target to $33. I honestly don’t think Wall Street “gets it” with Oracle. But I understand the need analysts have to follow the company’s guidance closely which is something I, fortunately, don’t have to worry about. Oracle is an excellent buy up to $34 per share.

  I was pleased to see that Ford ($F) has reinstated its dividend after a five-year absence. The company will start paying a nickel per share on March 1st. Ford’s CFO said, “We are confident that we can begin to pay a dividend that will be sustainable through economic cycles.” The dividend, of course, is quite modest. The yield is only 1.86% but it’s more proof that Ford has turned itself around. It was only three years ago that Ford was going for $1.01 per share. I rate Ford a strong buy up to $14 per share.

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

  – Eddy

  P.S. One more reminder that I’m going to unveil the 2012 Buy List on Thursday, December 15th. This is the day that millions of investors look forward to each year. Millions! As usual, I’ll have five additions and five deletions. Stay tuned!

• Morning News: December 9, 2011
  Eddy Elfenbein, December 9th, 2011 at 7:39 am

  Euro Leaders’ Fiscal Union Pact Leaves Next Step to ECB

  Treaty to Save Euro Takes Shape, but Britain Sits Out

  EU Leaders Drop Demands for Investor Write-Offs

  Moody’s Downgrades Top French Banks

  Europe Bank Shares Bounce Back

  Stress Test Reveals European Banks Need More Capital

  China’s 10-Year Ascent to Trading Powerhouse

  China Data Signals Pro-growth Policy Shift

  Crude Heads for Biggest Weekly Drop Since September as Europe Disappoints

  UBS, Citigroup May Be Penalized in Japan on Tibor Probe

  Toyota Lowers Profit Forecast After Floods

  Bluntly and Impatiently, Chief Upends G.M.’s Staid Tradition

  Texas Instruments Sees Sales Below Estimates

  KPMG Warned Olympus in Accounting Fraud, Then Got ‘Careless,’ Probe Finds

  Paul Kedrosky: MF Global and the Great Wall St Re-hypothecation Scandal

  Edward Harrison: Credit Writedowns Weekly Report, Vol 1 Issue 2: Solutions in Europe?

  Be sure to follow me on Twitter.