Archive for May, 2012

• No Comment
  Eddy Elfenbein, May 17th, 2012 at 5:19 pm

• Losses at JPMorgan Grow
  Eddy Elfenbein, May 17th, 2012 at 9:38 am

  Jamie Dimon said that the trading losses at JPMorgan Chase ($JPM) totalled $2 billion and that there might be another $1 billion to add over the next few quarters. The bank was stuck with a terrible position that it was trying to unwind. The market smelled blood and traders have attacked JPM’s position. Instead of the next few quarters, it looks like their losses grew by another $1 billion over four days.

  A spokeswoman for the bank declined to comment, although Mr. Dimon has said the total paper trading losses will be volatile depending on day-to-day market fluctuations.

  The Federal Reserve is examining the scope of the growing losses and the original bet, along with whether JPMorgan’s chief investment office took risks that were inappropriate for a federally insured depository institution, according to several people with knowledge of the examination. They spoke on the condition of anonymity because the investigation is still under way.

  The overall health of the bank remains strong, even with the additional losses, and JPMorgan has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer.

  Still, the huge trading losses rocked Wall Street and reignited the debate over how tightly giant financial institutions should be regulated. Bank analysts say that while the bank’s stability is not threatened, if the losses continue to mount, the outlook for the bank’s dividend will grow uncertain.

  The bank’s leadership has discussed the impact of the losses on future earnings, although a dividend cut remains highly unlikely for now. In March, the company raised the quarterly dividend by 5 cents, to 30 cents, which will cost the bank about $190 million more this quarter.

• Morning News: May 17, 2012
  Eddy Elfenbein, May 17th, 2012 at 6:04 am

  Spanish Bond Yields Nudge Higher Ahead Of Auction

  Bund Yield Approaches Record Low as Spanish Borrowing Costs Rise

  Japanese Consumers Lead Economic Rebound in First Quarter

  Market Optimism on U.S. and Japan Offset by Greek Fears

  Oil Rises From Six-Month Low on Japan Data, Pipeline Reversal

  Several on FOMC Said Easing May Be Needed on Faltering

  Foreclosures Plunge to Five-Year Low in U.S. Recovery

  JPMorgan’s Trading Loss Is Said to Rise at Least 50%

  J.C. Penney’s Shares In Free-Fall After 1Q Loss

  HSBC Turnaround on Target, Sees Revenue Boost

  Berkshire Takes GM Stake as Buffett Deputies Buy Stocks

  Credit Suisse, RBC Interested in BofA Wealth Units, Reuters Says

  Ahead of Facebook I.P.O., a Skeptical Madison Ave.

  GM Chooses UK Plant Over Germany for New Astra

  Jeff Miller: Possible Endings for the Greek Drama

  Credit Writedowns: The Euro Zone Has Become A Political Economy Black Hole

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• The Einhorn Effect
  Eddy Elfenbein, May 16th, 2012 at 5:49 pm

  David Einhorn, the famous hedge fund manager who foresaw the disaster that was Lehman Brothers, spoke at an investment conference today. When Einhorn talks, traders listen.

  Today, he bashed the stock of Martin Marietta Materials($MLM). Einhorn called the CEO a “megalomaniac.” This coming from a hedge fund manager.

  By looking at the chart below, can you guess when the news hit? Look closely. I bet you can.

  

  It must be nice to talk your book and get rewarded for it. Many investors thought Einhorn was going to target the company Herbalife ($HLF). Two weeks ago, he had asked questions during the company’s conference call.

  As to Martin Marietta Materials, I think Einhorn is correct. According to my patented “world’s simplest stock valuation method,” the fair value for MLM is $45.58. That means that it’s still 50% overpriced going by today’s close.

• The Diverging Market
  Eddy Elfenbein, May 16th, 2012 at 2:49 pm

  This chart shows what’s been happening with the market recently. The “sell in May” memo apparently didn’t get to everyone.

  The three defensive ETFs, Staples ($XLP), Utilities ($XLU) and Healthcare ($XLV), aren’t doing so badly.

  But the real damage is happening to the cyclical ETFs: Industrials ($XLI), Energy ($XLE) and Materials ($XLB).

  

• Colgate-Palmolive at New All-Time High
  Eddy Elfenbein, May 16th, 2012 at 10:34 am

  Shares of Colgate-Palmolive ($CL) are up to a new all-time high today. The stock is up more than 14,000% since its 1980 low. I think the stock may be over-extended at this price. Going by my simple valuation method, CL is about 40% overvalued.

  

• The Bond Bull Lives
  Eddy Elfenbein, May 16th, 2012 at 7:04 am

  I continue to be amazed by the strength of the bond market. Folks in the media love to mention how most money managers can’t beat the stock market. That’s true, but for the last several years, the stock market hasn’t even been able to beat the bond market. If you had just parked your money in a long-term T-bond, you would have beaten many top pros. By a lot.

  Several pundits, myself included, have said that the bond market’s 30-year bull run has finally ended. That appeared to happen last September, but it was a head fake. Treasury yields continue to move lower.

  Yesterday, the yield on the seven-year Treasury closed at 1.19% which is a multi-decade low (the FRED data goes back to 1969). For contrast, in 1981, a seven-year Treasury was yielding more than 16%.

  The yields on the 5-, 10- and 20-year bonds are now just a few basis points above generational lows. The 30-year bond is a bit of an exception. Its yield is still 38 basis points above the low yield from December 2008. Don’t think this latest run for bonds is all due to purchases by the Federal Reserve. Corporate bonds are also doing well.

  Check out this chart which shows how stocks are doing relative to bonds. For my stock proxy, I used the Vanguard 500 Index Investor Fund (VFINX); for bonds I used Vanguard Long-Term Investment-Grade (VWESX).

  

  When the blue line goes down, that means bonds are beating stocks. When it climbs, stocks are beating bonds. Outside a big run-up during the late 1990s, and a smaller climb last decade, bonds have done a very good job of keeping pace with stocks. Over the last 23 years, the corporate bond index fund has outperformed the stock index fund.

• Morning News: May 16, 2012
  Eddy Elfenbein, May 16th, 2012 at 5:52 am

  Greek Leaders Meet on Election After European Stocks Drop

  Merkel-Hollande Meeting Yields Greece Growth Signal

  Rajoy Says Spain at Risk of Being Shut Out of Markets

  Singapore Dollar Falls To Near 4-Month Low On Greek Political Woe

  Treasury Yield Is 9 Basis Points From Low on Greece

  Needy States Use Housing Aid Cash to Plug Budgets

  US Farmland Stays Hot At Record High Prices-Fed Surveys

  Facebook Boosts IPO Size By 25%, Could Top $16 Billion

  Ahead of I.P.O., G.M. to Quit Advertising on Facebook

  A Russian Magnate’s Facebook Bet Pays Off Big

  Sina May Post Second Straight Loss as Weibo Costs Climb

  EADS Reports First Quarter (Q1) Results 2012

  J.C. Penney Posts Big Loss as 3 Retailers Gain

  Soda Makers Scramble to Fill Void as Sales Drop

  Roger Nusbaum: Black Swan Alert–Financial Stocks Still Stink

  Phil Pearlman: Don’t Hang Around Too Long in the Facebook Proxy Trades

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• Coty Walks Away from Avon
  Eddy Elfenbein, May 15th, 2012 at 9:49 am

  Last month, Coty offered to buy Avon Products ($AVP) for $23.25 per share. Avon’s stock had been at $19.36, but despite the premium, the company shot the offer down. Coty then raised the price to $24.75 per share and set a take-it-or-not deadline.

  This is where it gets strange. Avon asked for a deadline extension, and Coty has now withdrawn the bid. Apparently, Avon didn’t “engage” with Coty, which would upset me as well. I don’t think people are telling us the full story, but something happened that soured the Coty folks on Avon.

  My take is that this was a lousy deal for Coty, and Avon should have taken any price they could have gotten. According to the world’s simplest stock valuation tool, Avon should be worth half its market price.

  Overvalued companies shouldn’t get greedy (for that matter, neither should undervalued companies). Four years ago, Yahoo ($YHOO) turned down Microsoft’s buy-out offer of $31 per share. Yahoo got greedy and wanted more. Microsoft raised their bid to $33 per share and Yahoo still said no. I said this was a bad move. Today, Yahoo’s stock is trading for half that amount.

• More Troubles in Greece
  Eddy Elfenbein, May 15th, 2012 at 9:22 am

  Today looks like it’s going to be a relief rally for stocks. Today’s CPI report showed that inflation was flat last month. Year-over-year inflation is running at 2.3%. The core rate, which excludes food and energy, rose by 0.2%.

  Looking at the details of the report, the number that jumps out is that gasoline prices dropped by 2.6% last month. The average price for gasoline has dropped for six straight weeks. It’s now down 20 cents per gallon from a year ago. This is obviously good news for consumers, and it helps the economy as well.

  Still, the economy doesn’t seem to be moving very quickly. The retail sales report this morning showed a 0.1% increase last month, which is what analysts were expecting.

  The latest attempt in Greece to form a government has failed. This is becoming a pattern and the news is not being well received by the European markets. I think they need to call elections again soon. The problem is that a new election will probably be good for the far left-wing parties, and that will almost certainly lead to Greece departing the euro. The euro is now worth less than $1.28.