Archive for April, 2012

  • Morning News: April 6, 2012
    , April 6th, 2012 at 6:21 am

    Swiss Franc Showdown Looms as Jordan Defends SNB Ceiling

    Spain to Present Budget Stability Plan to EU After Bonds Fell

    World’s Richest Lose $9 Billion as Global Markets Decline

    Crackdown on Tax Havens Opens Opportunities for Bankers

    Federal Judge Approves $25 Billion Mortgage Pact

    Investors’ Prying Eyes Blinded by New Law

    Microsoft is Writing Checks to Fill Out Its App Store

    Facebook to Nasdaq Gives CEO Greifeld a Victory Over NYSE

    Samsung Profit Exceeds Estimates on Smartphone, TV Demand

    Spring, in the Air and on the Racks, Helps Retailers

    Airbus Wins 90 Net Orders in Jan-March

    Motley Fool 52-Week-High Alert: Starbucks

    Spectrum Says Bladder Cancer Drug Fails, Buys Allos

    Stone Street: NFPreview Charts

    Roger Nusbaum: Deep (Portfolio) Thoughts With Marc Faber

    Be sure to follow me on Twitter.

  • Reprise: The Elfenbein Gold Model
    , April 5th, 2012 at 1:23 pm

    There’s been a lot of discussion about the price of gold lately. Below I’m reposting my idea for how to model the price of gold. I originally ran this post 18 months ago and it became, by far, the most clicked-on post I ever ran. Cullen Roche of Pragmatic Capitalist was kind enough to also run this post today at his site (by the way, that’s an excellent blog). Also today, Felix Salmon discussed his views on the price of gold.

    Here’s my original post from October 2010:

    One of the most controversial topics in investing is the price of gold. Eleven years ago, gold dropped as low as $252 per ounce. Since then, the yellow metal has risen more than five-fold, easily outpacing the major stock market indexes—and it seems to move higher every day.

    Some goldbugs say this is only the beginning and that gold will soon break $2,000, then $5,000 and then $10,000 per ounce.

    But the question is, “How can anyone reasonably calculate what the price of gold is?” For stocks, we have all sorts of ratios. Sure, those ratios can be off…but at least they’re something. With gold, we have nothing. After all, gold is just a rock (ok ok, an element).

    How the heck can we even begin to analyze gold’s value? There’s an old joke that the price of gold is understood by exactly two people in the entire world. They both work for the Bank of England and they disagree.

    In this post, I want to put forth a possible model for evaluating the price of gold. The purpose of the model isn’t to say where gold will go but to look at the underlying factors that drive gold. Let me caution that as with any model, this model has its flaws, but that doesn’t mean it isn’t useful.

    The key to understanding the gold market is to understand that it’s not really about gold at all. Instead, it’s about currencies, and in our case that means the dollar. Gold is really the anti-currency. It serves a valuable purpose in that it keeps all the other currencies honest (or exposes their dishonesty).

    This may sound odd but every currency has an interest rate tied to it. In essence, that interest rate is what the currency is all about. All those dollar bills in your wallet have an interest rate tied to them. The euro, the pound and the yen also all have interest rates tied to them.

    Before I get to my model, I want to take a step back for a moment and discuss a strange paradox in economics known as Gibson’s Paradox. This is one the most puzzling topics in economics. Gibson’s Paradox is the observation that interest rates tend to follow the general price level and not the rate of inflation. That’s very strange because it seems obvious that as inflation rises, interest rates ought to keep up. And as inflation falls back, rates should move back as well. But historically, that wasn’t the case.

    Instead, interest rates rose as prices rose, and rates only fell when there was deflation. This paradox has totally baffled economists for years. Yet it really does exist. John Maynard Keynes called it “one of the most completely established empirical facts in the whole field of quantitative economics.” Milton Friedman and Anna Schwartz said that “the Gibsonian Paradox remains an empirical phenomenon without a theoretical explanation.”

    Even many of today’s prominent economists have tried to tackle Gibson’s Paradox. In 1977, Robert Shiller and Jeremy Siegel wrote a paper on the topic. In 1988 Robert Barsky and none other than Larry Summers took on the paradox in their paper “Gibson’s Paradox and the Gold Standard,” and it’s this paper that I want to focus on. (By the way, in this paper the authors thank future econobloggers Greg Mankiw and Brad DeLong.)

    Summers and Barsky explain that the Gibson Paradox does indeed exist. They also say that it’s not connected with nominal interest rates but with real (meaning after-inflation) interest rates. The catch is that the paradox only works under a gold standard. Once the gold standard is gone, the Gibson Paradox fades away.

    It’s my hypothesis that Summers and Barsky are on to something and that we can use their insight to build a model for the price of gold. The key is that gold is tied to real interest rates. Where I differ from them is that I use real short-term interest rates whereas they focused on long-term rates.

    Here’s how it works. I’ve done some back-testing and found that the magic number is 2% (I’m dumbing this down for ease of explanation). Whenever the dollar’s real short-term interest rate is below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. It’s my contention that this was what the Gibson Paradox was all about since the price of gold was tied to the general price level.

    Now here’s the kicker: there’s a lot of volatility in this relationship. According to my backtest, for every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So 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.

    Here’s what the model looks like against gold over the past two decades:

    The relationship isn’t perfect but it’s held up fairly well over the past 15 years or so. The same dynamic seems at work in the 15 years before that, but I think the ratios are different.

    In effect, gold acts like a highly-leveraged short position in U.S. Treasury bills and the breakeven point is 2% (or more precisely, a short on short-term TIPs).

    Let me make this clear that this is just a model and I’m not trying to explain 100% of gold’s movement. Gold is subject to a high degree of volatility and speculation. Geopolitical events, for example, can impact the price of gold. I would also imagine that at some point, gold could break a replacement price where it became so expensive that another commodity would replace its function in industry, and the price would suffer.

    Instead of explaining all of gold, my aim is to pinpoint the underlying factors that are strongly correlated with gold. The number and ratios I used (2% break-even and 8-to-1 ratio) seem to have the strongest correlation for recent history. How did I arrive at them? Simple trial and error. The true numbers may be off and I’ll leave the fine-tuning for someone else.

    In my view, there are a few key takeaways.

    The first and perhaps the most significant is that gold isn’t tied to inflation. It’s tied to low real rates which are often the by-product of inflation. Right now we have rising gold and low inflation. This isn’t a contradiction. (John Hempton wrote about this recently.)

    The second point is that when real rates are low, the price of gold can rise very, very rapidly.

    The third is that when real rates are high, gold can fall very, very quickly.

    Fourth, there’s no reason for there to be a relationship between equity prices and gold (like the Dow-to-gold ratio).

    Fifth, the TIPs yield curve indicates that low real rates may last for a few more years.

    The final point is that the price of gold is essentially political. If a central banker has the will to raise real rates as Volcker did 30 years ago, then the price of gold can be crushed.

    Technical note: If you want to see how the heck I got these numbers, please see this spreadsheet.

    Column A is the date.
    Column B is an index of real returns for T-bills I got from the latest Ibbotson Yearbook. It goes through the end of last year.
    Column C is a 2% trendline.
    Column D is adjusting B by C.
    Column E is inverting Column D since we’re shorting.
    Column F computes the monthly change the levered up 8-to-1.
    Column G is the Model with a starting price of $275 (in red).
    Column H is the price of gold. It goes up to last September.

  • Would You Buy This Stock?
    , April 5th, 2012 at 12:01 pm

    What do you think?

    How about now?

  • Jobless Claims Fall…Again
    , April 5th, 2012 at 9:19 am

    I’m starting to lose count of how many times weekly jobless claims have dropped to a four-year low, but it happened again today. Combined with yesterday’s ADP report, this sets us up for an optimistic jobs report tomorrow. Economists expect to a see nonfarm payroll gain of 230,000.

    The futures market currently indicates that the market will open lower today. This looks like it could be the 15th day in a row of the “up, up, down, down, down” trend.

    One stock will probably buck the market today. Bed Bath & Beyond ($BBBY) looks to open over $69 per share this morning.

  • Morning News: April 5, 2012
    , April 5th, 2012 at 6:01 am

    Draghi Scotches ECB Exit Talk as Spain Keeps Crisis Alive

    Euribor Rates Hit New 21-month Lows After ECB Meeting

    Greece to Swap 20.3 Billion Euros of Foreign-Law Bonds April 11

    Bank of Japan Nominee Kono Rejected as Lawmakers Seek Easing

    Chinese Premier Blasts Banks

    Shares Dip as Fed Aims to Pull Back

    Americans Brace for Next Foreclosure Wave

    Wall St. Examines Fine Print in a Bill for Start-Ups

    Huffington Gains More Control in AOL Revamping

    British Airways’ Europe-Empire Zeal Tested by AMR-JAL Crunch

    Refinery Gets a Look From Delta, Perplexing Analysts

    Dimon Letter Derides Contrived, Confusing Financial Rules

    Electronic Dance Concerts Turn Up Volume, Tempting Investors

    Merkel Gunning for Germany as Luxury Rifles Draw Russians

    Jeff Carter: A Manufactured Crisis

    Jeff Miller: Guess the Pundit

    Be sure to follow me on Twitter.

  • From Bed Bath & Beyond’s Earnings Call
    , April 4th, 2012 at 10:04 pm

    The transcript is courtesy of Seeking Alpha. Here are some important points:

    Before concluding this afternoon’s call, a few additional comments relative to our recently concluded fiscal fourth quarter. Our balance sheet and cash flows remain strong. We ended the fiscal fourth quarter with cash and cash equivalents and investment securities of approximately $1.9 billion. This includes approximately $83.9 million of investments related to auction rate securities.

    These securities have an estimated temporary valuation adjustment of approximately $3.7 million to reflect their current lack of liquidity. Since this valuation adjustment is deemed temporary, it did not affect the company’s earnings. As we have said in the past and as we have experienced to date, we believe that given the high credit quality of these investments, we will ultimately recover, at par, all amounts invested in these securities.

    Inventories continue to be tailored by store to meet the anticipated demands of our customers and are in good condition. As of February 25, 2012, inventories at cost were approximately $2.1 billion or $57.35 per square foot, an increase of approximately 2.1% on a per square foot basis over last year.

    Consolidated shareholders equity at February 25, 2012, was approximately $3.9 billion, which is net of share repurchases, including the approximately $359 million, representing approximately 5.9 million shares repurchased during the fiscal fourth quarter of 2011. As of February 25, 2012, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $919 million.

    Cash of $1.9 billion comes to $8 per share. The company may want to consider paying a dividend sometime soon. If Apple can do it, so can BBBY.

  • Bed Bath & Beyond Earns $1.48 Per Share
    , April 4th, 2012 at 4:22 pm

    Wow! A huge earnings beat from Bed Bath & Beyond ($BBBY). For fiscal Q4, the company earned $1.48 per share. That’s 15 cents better than Wall Street’s consensus. The stock is currently up about 6% after hours.

    In December, Bed Bath & Beyond told us to expect Q4 results to range between $1.28 and $1.33 per share, so this was much better than expected. The earnings represented a 32% increase over Q4 of 2010. Quarterly sales rose by 9.1% and the key retailing metric, comparable store sales, rose by 6.8%.

    For the year, Bed Bath & Beyond earned $4.06 per share which was also a 32% increase over the year before. Sales rose 8.5% to $9.5 billion. Comparable store sales rose by 5.9%.

    Now for guidance. For Q1, Bed Bath & Beyond sees earnings ranging between 79 cents and 83 cents per share. For the full-year, they project earnings “to increase by a high single to a low double digit percentage range.” If we take that mean to 10%, that translates to a full-year forecast of $4.47 per share.

    This is the twelfth-straight quarter than Bed Bath & Beyond has expanded its net margins. In the three years since fiscal 2009, total sales have grown by 32% but net earnings are up by 133%. The reason is that net profit margins increased from 5.9% in 2009 to 10.4% last year.

    This is very good news. BBBY continues to exceed expectations. I said in December that I thought the Street’s forecast for 2012 of $4.39 was too high. Shows what I know.

    At $70 per share and $4.47 for this coming year, the stock is currently going for 15.66 times earnings which isn’t that expensive. Given today’s huge earnings beat, I now have reason to believe that the company’s earnings forecast is on the low side (which is smart given that the fiscal year has just begun).

    Here’s a look at BBBY’s earnings-per-share along with the company’s forecast in red. Notice how conservative the red line is.

    Here’s a look at BBBY’s quarterly numbers for the past few years:

    Quarter Sales Gross Profit Operating Profit Net Profit EPS
    May-99 $356,633 $146,214 $28,015 $17,883 $0.06
    Aug-99 $451,715 $185,570 $53,580 $33,247 $0.12
    Nov-00 $480,145 $196,784 $50,607 $31,707 $0.11
    Feb-00 $569,012 $238,233 $77,138 $48,392 $0.17
    May-00 $459,163 $187,293 $36,339 $23,364 $0.08
    Aug-00 $589,381 $241,284 $70,009 $43,578 $0.15
    Nov-01 $602,004 $246,080 $64,592 $40,665 $0.14
    Feb-01 $746,107 $311,802 $101,898 $64,315 $0.22
    May-01 $575,833 $234,959 $45,602 $30,007 $0.10
    Aug-01 $713,636 $291,342 $84,672 $53,954 $0.18
    Nov-02 $759,438 $311,030 $83,749 $52,964 $0.18
    Feb-02 $879,055 $370,235 $132,077 $82,674 $0.28
    May-02 $776,798 $318,362 $72,701 $46,299 $0.15
    Aug-02 $903,044 $370,335 $119,687 $75,459 $0.25
    Nov-03 $936,030 $386,224 $119,228 $75,112 $0.25
    Feb-03 $1,049,292 $443,626 $168,441 $105,309 $0.35
    May-03 $893,868 $367,180 $90,450 $57,508 $0.19
    Aug-03 $1,111,445 $459,145 $155,867 $97,208 $0.32
    Nov-04 $1,174,740 $486,987 $161,459 $100,506 $0.33
    Feb-04 $1,297,928 $563,352 $231,567 $144,248 $0.47
    May-04 $1,100,917 $456,774 $128,707 $82,049 $0.27
    Aug-04 $1,273,960 $530,829 $189,108 $120,008 $0.39
    Nov-05 $1,305,155 $548,152 $190,978 $121,927 $0.40
    Feb-05 $1,467,646 $650,546 $283,621 $180,980 $0.59
    May-05 $1,244,421 $520,781 $150,884 $98,903 $0.33
    Aug-05 $1,431,182 $601,784 $217,877 $141,402 $0.47
    Nov-06 $1,448,680 $615,363 $205,493 $134,620 $0.45
    Feb-06 $1,685,279 $747,820 $304,917 $197,922 $0.67
    May-06 $1,395,963 $590,098 $148,750 $100,431 $0.35
    Aug-06 $1,607,239 $678,249 $219,622 $145,535 $0.51
    Nov-07 $1,619,240 $704,073 $211,134 $142,436 $0.50
    Feb-07 $1,994,987 $862,982 $309,895 $205,842 $0.72
    May-07 $1,553,293 $646,109 $154,391 $104,647 $0.38
    Aug-07 $1,767,716 $732,158 $211,037 $147,008 $0.55
    Nov-08 $1,794,747 $747,866 $203,152 $138,232 $0.52
    Feb-08 $1,933,186 $799,098 $259,442 $172,921 $0.66
    May-08 $1,648,491 $656,000 $118,819 $76,777 $0.30
    Aug-08 $1,853,892 $739,321 $187,421 $119,268 $0.46
    Nov-08 $1,782,683 $692,857 $136,374 $87,700 $0.34
    Feb-09 $1,923,274 $785,058 $231,282 $141,378 $0.55
    May-09 $1,694,340 $666,818 $142,304 $87,172 $0.34
    Aug-09 $1,914,909 $773,393 $222,031 $135,531 $0.52
    Nov-09 $1,975,465 $812,412 $245,611 $151,288 $0.58
    Feb-10 $2,244,079 $955,496 $370,741 $226,042 $0.86
    May-10 $1,923,051 $775,036 $225,394 $137,553 $0.52
    Aug-10 $2,136,730 $874,918 $296,902 $181,755 $0.70
    Nov-10 $2,193,755 $896,508 $305,110 $188,574 $0.74
    Feb-11 $2,504,967 $1,076,467 $461,052 $283,451 $1.12
    May-11 $2,109,951 $857,572 $288,948 $180,578 $0.72
    Aug-11 $2,314,064 $950,999 $371,636 $229,372 $0.93
    Nov-11 $2,343,561 $958,693 $357,020 $228,544 $0.95
    Feb-12 $2,732,314 $1,163,669 $550,765 $351,043 $1.48

  • DirecTV Ad with Kate Upton
    , April 4th, 2012 at 11:05 am

    Here’s Kate Upton in a bikini. In an ad for DirecTV ($DTV). Which is on our Buy List. Therefore, this is relevant stock information.

  • Up, Up, Down, Down, Down….
    , April 4th, 2012 at 10:19 am

    For the 14th day in a row, the stock market is following its pattern of rising on Monday and Friday and then falling on Tuesday, Wednesday and Thursday.

  • ADP Says 209,000 Jobs Were Created in March
    , April 4th, 2012 at 9:08 am

    The big jobs report comes out on Friday but we got a sneak preview this morning when private payroll firm ADP said that 209,000 jobs were created last month. Wall Street expected ADP to say 206,000.

    The market got knocked yesterday by the release of the minutes from the last Fed meeting. Traders interpreted the comments to be on the hawkish side, meaning that the Fed is growing leery of playing nursemaid to this economy. I’ve long been a skeptic that any form of QE3 will be coming.

    As a result, stocks pulled back and gold dropped significantly. That trend may continue today. All eyes will be on Friday’s jobs report, but the market will be closed for Good Friday.