Archive for 2011

• Morning News: May 27, 2011
  Eddy Elfenbein, May 27th, 2011 at 6:57 am

  Fitch Puts Japan Debt Rating On A Negative Outlook

  German Two-Year Notes Rise as Inflation Slows, Denting Interest-Rate Bets

  China Yuan Down Late On Dollar Demand From Oil Firms

  Greece: Political Leaders To Meet On Economic Crisis

  EU Vows No Backdown on Basel

  Brazil’s OGX Sells $2.56 Billion of Seven-Year Bonds in Debut Issue

  Gold, Sliver Up In Asia On Weak Dollar

  EBay and PayPal Sue Google Over Trade Secrets

  Former Nasdaq Manager Johnson Pleads Guilty to U.S. Insider Trading Scheme

  Heated Frenzy for Tech I.P.O.’s Fails to Ignite Freescale

  Microsoft’s Ballmer Bares China Travails

  Yandex Underwriters Exercise Full Overallotment Option

  AT&T’s $39 Billion T-Mobile Bid May Be Reviewed by California State Agency

  Epicurean Dealmaker: Hail Mary, Full of Grace

  James Altucher: The Nine Ways to Guarantee Success

  Howard Lindzon: Long 8 Days on the Road… The Web is Relentless and The Government Wants Higher Prices

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• P/E Ratios for Selected Financials
  Eddy Elfenbein, May 26th, 2011 at 12:19 pm

  Here’s a rundown of several large-cap financial stocks along with their earnings multiples based on next year’s earnings. Note how inexpensive many are. Of course, this also means that Wall Street has a rather dim view of earnings quality.

  Company	Symbol	Forward P/E
  Hartford Financial Services	HIG	6.45
  Genworth Financial	GNW	6.65
  Lincoln National	LNC	6.68
  Bank of America	BAC	6.69
  Assurant	AIZ	6.90
  Goldman Sachs	GS	7.08
  MetLife	MET	7.40
  JP Morgan Chase	JPM	7.47
  Citigroup	C	7.52
  AFLAC	AFL	7.59
  Unum Group	UNM	7.83
  Morgan Stanley	MS	7.84
  Wells Fargo	WFC	7.99
  Prudential Financial	PRU	8.16
  Allstate	ALL	8.24
  Torchmark	TMK	8.54
  SLM	SLM	8.77
  The NASDAQ OMX Group	NDAQ	8.78
  Fifth Third Bancorp	FITB	8.83
  American International Group	AIG	8.97
  Principal Financial Group	PFG	9.00
  Capital One	COF	9.06
  Ace Limited	ACE	9.12
  Ameriprise Financial	AMP	9.27
  Discover Financial Services	DFS	9.36
  Huntington Bancshares	HBAN	9.40
  Janus Capital Group	JNS	9.43
  PNC Financial Services	PNC	9.43
  U.S. Bancorp	USB	9.66
  Bank of New York Mellon	BK	9.71
  The Travelers	TRV	9.78
  State Street	STT	10.47
  Hudson City Bancorp	HCBK	10.54
  BB&T	BBT	10.68
  XL Group plc	XL	10.70
  KeyCorp	KEY	10.74
  Chubb	CB	11.07
  Regions Financial	RF	11.08
  Invesco Plc	IVZ	11.18
  M&T Bank	MTB	11.49
  NYSE Euronext	NYX	11.71
  SunTrust	STI	11.75
  American Express	AXP	12.19
  Legg Mason	LM	12.40
  Progressive	PGR	12.66
  Franklin Resources	BEN	12.75
  Zions	ZION	12.81
  Federated Investors	FII	12.96
  HCP	HCP	13.13
  Loews	L	13.20
  Comerica	CMA	13.24
  Aon	AON	13.30
  Equifax	EFX	13.44
  Northern Trust	NTRS	13.54
  First Horizon National	FHN	13.55
  Health Care REIT S	HCN	13.56
  E*TRADE Financial	ETFC	13.96
  Host Hotels & Resorts	HST	14.17
  Marsh & McLennan	MMC	14.25
  CME Group	CME	14.51
  Moody’s	MCO	14.71

• The Economy Still Isn’t Moving
  Eddy Elfenbein, May 26th, 2011 at 11:11 am

  The government updated its number for Q1 GDP growth today. Actually, there was nothing to change. The government said that the economy grew by 1.8% during the first three months of the year, which is what they said last month. Breaking out the fractions, real GDP growth was revised upward from 1.751% to 1.843%.

  Here’s a look at real GDP growth over the last few years. The numbers are trillions of dollars change to 2005 levels.

  

  While the economy showed a little pep in the first two quarters off the bottom, the last four have been sluggish. In fact, real GDP growth for Q4 of 2009 and Q1 of 2011 was nearly as strong as it was for the last four quarters despite being half the time (2.16% to 2.31%).

  Here’s a look at the contribution corporate profits make up in the entire economy. For Q1, profits made up 11.33% of the economy which is the highest level in over four years.

  

  This is an important number to follow. Think of it as a profit margin for the entire economy. For the last several quarter, profit growth has outrun economic growth, but that can’t last forever. Historically, profits hit around 11% to 12% near the top of the business cycle.

  Thus far, profits have grown thanks to higher profit margins — that’s come from lower wage costs (layoffs). But going forward, profit growth will have to be roughly in line with economic growth and that will require more jobs. The easy gains have already been made.

• Stock Returns and Record-Breaking Skyscrapers
  Eddy Elfenbein, May 26th, 2011 at 10:05 am

  A new academic paper by Gunter Löffler of University of Ulm:

  This papers shows that construction starts of record-breaking skyscrapers predict subsequent US stock returns. In the three to five years after the construction of a record-breaking new skyscraper began, per annum stock market returns are around 10 percentage points lower than in other years. The predictive ability is significant and relatively stable. It exceeds that of alternatives such as the prevailing historical mean, predictions based on dividend ratios, and recently suggested combination forecasts. The findings are robust against a wide range of specifications. Further analyses show that tower building also predicts international stock market returns. One explanation for these patterns is that tower building is indicative of over-optimism. Widespread over-optimism could lead not only to tower-building, but also to overvalued stock markets. The rational asset pricing explanation is that in periods of low risk aversion, financing of large-scale projects such as record-breaking towers is easier, and expected returns are lower. The explanations are difficult to separate empirically. There is no significant influence of financing conditions or sentiment on tower building. However, unlike in other models studied in the literature, imposing a non-negativity constraint on return forecasts does not increase predictive accuracy. This provides indirect evidence that the predictive content of tower building is at least partly related to overvaluation.

  The idea is that the plans to build a monster new building are correlated with the mindset of a market bubble. The Woolworth Building opened in 1913 right as everything was falling apart. The Empire State Building was built during the depths of the Great Depression. The Petronas Towers in Kuala Lumpur were built just in time for the East Asian meltdown.

  (HT: CXO Advisory)

• Morning News: May 26, 2011
  Eddy Elfenbein, May 26th, 2011 at 7:49 am

  ECB May Have Leeway for Greek Restructuring

  Euro Crisis Looms for Group of 8

  Qaddafi Reportedly Stashes Billions in Western Institutions

  Gold Knocked Off 3-week Peak by Silver Slide

  S.E.C. Adopts Its Revised Rules for Whistle-Blowers

  Lenovo’s Profit Triples on Corporate Demand

  Sony Forecasts $975 Million Profit for Year

  UBS Weighs Moving Investment Bank Out of Switzerland

  Citigroup Lags in Debt Deals as Pandit Rebuilds

  Tiffany Reports Strong First Quarter Results

  Burberry more than doubles profit, revenue up 27%

  The Yahoo Debate: Break Up or Not

  Martha Stewart Living Seeks Buyer or Partner

  Hedge Fund Star Calls for Microsoft CEO to Go

  Paul Kedrosky: Oil Prices and Finger Monkeys

  Todd Sullivan: ValuePlays TV 5/24/2011

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• “Bond Yields Are So Low, There’s No Profit”
  Eddy Elfenbein, May 25th, 2011 at 1:20 pm

  I often hear investors whine that since bond yields are already so low, there’s almost no room to profit.

  Actually, there’s lots of room. If a perpetuity (a bond yield that never matures) sees its yield drop in half, that means the price doubled. That’s even true if the yield drops from 1% to 0.5% or even 0.0001% to 0.00005%. It’s always a double.

  My point isn’t to suggest that you should expect perpetuities to double. Earlier today, Kelly Evans of the WSJ tweeted that it wouldn’t surprise her to see the 30-year T-Bond below 3%.

  Right now, the 30-year is yielding about 4.25%. A move from 4.25% down to 3% equals a rise in price by about 25%. Don’t let the math fool you. Big gains can still be made from low yields — assuming yields continue going lower.

• Stock Size and Exchange Rates
  Eddy Elfenbein, May 25th, 2011 at 12:03 pm

  Here’s a post I’m aiming at new investors:

  I’m a big fan of the St. Louis Fed’s economic data page. They have gobs of data and yet can customize your graphs.

  I made the one below and it shows the S&P 500 divided by the Wilshire 5000 which is the blue line and it follows the left axis. This shows the relative performance of large-cap stocks. When the blue line is rising, large-caps are leading the market. When it’s falling, as it has for several years now, that means that small-caps are leading.

  The black line is the trade-weighted exchange rate index for the U.S. dollar and it follows the right axis.

  

  I think this is an interesting graph because at first blush, it’s not obvious that these two data sets should be related. But they are.

  Let me explain: Large-cap companies, especially the giants in the S&P 500, are heavily weighted toward the massive multinationals. The companies is the Wilshire 4500 (stocks in the Wilshire 5000 but not in the S&P 500) are much smaller, and by extension, have businesses that are more domestically focused. Of course, we’re talking about averages, not every stock.

  When the U.S. dollar rises against foreign currencies, that makes U.S.-made products less competitive on the world market. American companies that already have a broad global reach — think, Disney ($DIS) or General Electric ($GE) — will tend to do well relatively speaking. Domestic manufacturing, however, will suffer. This is reflected in the under-performance of small-cap stocks.

  It’s really not about size at all but rather something else: currencies. But size encompasses that bias. It’s also not a perfect match, but you can see that there’s a relationship that’s held up for ten years. While the lines aren’t dating, I think we can call them “it’s complicated.”

  The takeaway is that a lot of variables go into the soup that makes up equity prices, and many of these currents you can’t easily see. Your stock is an asset just like any other, and it’s competing against every investment in the world for capital.

  When the market makes a decision, it has its reason. It can be a terrible reason, but it’s a reason nevertheless.

• RIP: Mark Haines
  Eddy Elfenbein, May 25th, 2011 at 10:53 am

  Sad news today. CNBC anchor Mark Haines has passed away at age of 65.

  Veteran journalist Mark Haines, a fixture on CNBC for 22 years, died unexpectedly Tuesday evening. He was 65 years old.

  Haines, founding anchor of CNBC’s morning show “Squawk Box,” was co-anchor of the network’s “Squawk on the Street” program, providing insight and commentary sometimes humorous and occasionally acerbic.

  CNBC President Mark Hoffman called Haines a “building block” of the financial networks’ programming. Hoffman said Haines died at his home.

  “With his searing wit, profound insight and piercing interview style, he was a constant and trusted presence in business news for more than 20 years,” Hoffman said in a statement to CNBC employees. “From the dotcom bubble to the tragic events of 9/11 to the depths of the financial crisis, Mark was always the unflappable pro.

  “Mark loved CNBC and we loved him back. He will be deeply missed.”

  I always loved Haines’ style. He refused to let guests bully him. Check out this classic clip when Barney Frank tried to bully Haines. Let’s just say Frank didn’t come out the winner:

• Fastenal ($FAST) — A 299-Fold Winner
  Eddy Elfenbein, May 25th, 2011 at 8:09 am

  Here’s another edition in our continuing series of great companies that no one’s heard of. Well…in this case, many people have heard of Fastenal ($FAST) but few realize how greatly this stock has performed.

  Here’s the company description from Hoover’s:

  Some might say it has a screw loose, but things are really pretty snug at Fastenal. The company operates more than 2,360 stores in all 50 US states as well as in Canada, Mexico, Puerto Rico, Asia, and Europe. Its stores stock about 690,000 products in about a dozen categories, including threaded fasteners (such as screws, nuts, and bolts). Other sales come from fluid-transfer parts for hydraulic and pneumatic power; janitorial, electrical, and welding supplies; material handling items; metal-cutting tool blades; and power tools. Its customers are typically construction, manufacturing, and other industrial professionals. Fastenal Company was founded by its chairman Bob Kierlin in 1967 and went public in 1987.

  This week, FAST split its stock 2-for-1. This is the seventh split since it went public. The totals are six 2-for-1 splits and one 3-for-2 split which adds up to 96-for-1.

  Shortly after the IPO and one week after the market crash in October 1987, shares of FAST closed at $10-3/8 (yuck…I hated those fractions). Adjusted for splits, that’s 10.81 cents per share. This year, the company will earn about that much each month.

  FAST closed yesterday at $32.32 per share. So in less than 24 years, the stock is up 299-fold. An initial investment of $10,000 would be worth nearly $3 million today — and that doesn’t include dividends. Annualized, that works out to 26.8% per year for nearly a quarter of a century.

  Last month, Fastenal said that Q1 profits rose 42% and revenue jumped 23%. The company earned 54 cents per share which was three cents better than estimates (those numbers aren’t adjusted for this week’s 2-for-1 split). Wall Street currently expects full-year earnings of $1.17 per share.

  Here’s a look at the long-term chart. FAST has beaten the S&P 500 so badly that the index looks like a flat line in comparison.

  

• Morning News: May 25, 2011
  Eddy Elfenbein, May 25th, 2011 at 7:48 am

  French Minister to Seek Top I.M.F. Job

  Why The BRIC Revolt At The IMF Is A Huge Deal With Devastating Implications

  OECD Cuts Japan GDP Forecast Again, Urges Easy Monetary Policy

  Greece Should Hold Referendum on Reform Program, SEV Head Says

  China’s Utilities Cut Energy Production, Defying Beijing

  South African Rand Slumps to Lowest Versus Dollar in More Than a Week on Risk Aversion

  Gold May Climb as Concern About European Sovereign Debts Increases Demand

  U.S. Suit Sees Manipulation of Oil Trades

  Tumult? AIG’s ‘Re-IPO’ Remains on Go-Ahead

  Russian Internet Firm Yandex Leads IPO Pack

  Summary of Reported EPS for First Quarter of ’11 for S&P 500

  Costco 3Q Profit Rose 6%; Sales Growth Offset Lower Margins

  Toll Reports Second-Quarter Net Loss After ‘Disappointing’ Selling Season

  Liberty Media Plans A Hands-Off Role At Barnes & Noble

  An Econometric Approach to Tactical Asset Allocation

  Brian Shannon: Stock Market Video Analysis 5/24/11

  Stone Street: Goodbye Ruble Tuesday

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