Archive for February, 2013

• Remarkable Stat on Real GDP
  Eddy Elfenbein, February 28th, 2013 at 10:42 am

  Here’s a stat that I find astonishing:

  From 1947 to 1973, real GDP grew by 175.9603%.
  From 1973 to 2012, real GDP grew by 175.9607%.

  In other words, the U.S. economy grew by the same amount over the last 39 years as it did in the 26 years before, despite the latter period being 50% longer. And when I say the same, I mean almost precisely exactly the same.

  Here’s quarterly GDP growth for the last few years:

  

• The Dow Closes in on All-Time High
  Eddy Elfenbein, February 28th, 2013 at 10:27 am

  The Dow closed yesterday just 89.16 points from an all-time high close. This was the highest close for the index in 64 months. To give you an idea of how close we are to making a record, the 30 stocks in the Dow need to rise by a combined total of $11.61. The index has been up as much as 30 points today.

  

• Morning News: February 28, 2013
  Eddy Elfenbein, February 28th, 2013 at 7:13 am

  Draghi Says ECB in No Rush to Tighten as Inflation Slows

  Monti Says European Crisis Management, Populism Led to Defeat

  Banker Bonuses Face Curbs in EU Basel Law Deal

  Osborne’s ‘Shrink The Bank’ Strategy Means A Smaller, Less Profitable RBS

  Bankia Posts Record 21.2 Billion Euros After-Tax Loss

  Wheat Rises as U.S. Export Demand May Increase After Price Drop

  Businesses Show Resilience Despite Drop in Goods Orders

  Senate, in a More Affable Mode, Backs Treasury Nominee

  Groupon Drops 24% On Weak Results, Forecast

  Chief Talks of Mistakes and Big Loss at J.C. Penney

  Samsung Armors Android to Take On BlackBerry

  Wal-Mart Struggles to Restock Store Shelves as U.S. Sales Slump

  The Excessive Uproar Over Marissa Mayer’s Telecommuting Ban

  Cullen Roche: Nasdaq Sentiment Remains Near its Highest Levels Since March 2000

  Jeff Miller: Investors: How tO Profit by Understanding the Fed

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• Update on My Watch List
  Eddy Elfenbein, February 27th, 2013 at 1:16 pm

  I’m often asked how I go about picking stocks for my Buy List. The answer is really quite simple. I don’t have a magic formula and I hate stock screeners.

  Instead, I have a Watch List of stocks that I try to follow. These are what I would call “really good companies.” They’re in the top tier of Corporate America. It’s taken me years to build up this list and I change it often.

  The Watch List serves as the minor leagues for my Buy List. It’s from this list that almost all candidates for the Buy List come, and it’s where they return after they’ve been deleted.

  Let me make it clear that I’m not recommending any of these stocks listed below. That’s what the Buy List is for. I just wanted to show you which stocks make the first cut in the process. Honestly, this list is too large and I should knock off around 30 names. If a stock is on this list, you can be pretty sure it’s a decent company (the price may not be).

  My secret formula is nothing more than watching really good companies and making a move when the price looks good.

  Company	Symbol
  Aaron’s	AAN
  Abbott Laboratories	ABT
  Advance Auto Parts	AAP
  Alliance Data Systems	ADS
  AmerisourceBergen	ABC
  Ametek	AME
  Ansys	ANSS
  AT&T	T
  AutoZone	AZO
  Balchem	BCPC
  Ball	BLL
  Baxter International	BAX
  Becton, Dickinson	BDX
  Biogen Idec	BIIB
  Carter’s	CRI
  Cerner	CERN
  CH Robinson Worldwide	CHRW
  Cheesecake Factory	CAKE
  Church & Dwight	CHD
  CLARCOR	CLC
  Clorox	CLX
  Coach	COH
  Coca-Cola	KO
  Colgate-Palmolive	CL
  Community Health Systems	CYH
  Concur Technologies	CNQR
  Cooper	COO
  Corrections of America	CXW
  Costco	COST
  Crane	CR
  Cummins	CMI
  CVS Caremark	CVS
  Danaher	DHR
  Darden Restaurants	DRI
  DaVita HealthCare Partners	DVA
  Deckers Outdoor	DECK
  Deluxe	DLX
  DENTSPLY International	XRAY
  Dick’s Sporting Goods	DKS
  Dolby Laboratories	DLB
  Donaldson Company	DCI
  Endo Health Solutions	ENDP
  Esterline Technologies	ESL
  Expeditors International of Washington	EXPD
  Express Scripts	ESRX
  Fair Isaac	FICO
  Fastenal Company	FAST
  FMC Technologies	FTI
  Foot Locker	FL
  Gardner Denver	GDI
  Gartner	IT
  General Dynamics	GD
  Gentex	GNTX
  Gilead Sciences	GILD
  Global Payments	GPN
  Graco	GGG
  Hasbro	HAS
  HEICO	HEI
  Henry Schein	HSIC
  HMS Holdings	HMSY
  Hologic	HOLX
  Hormel Foods	HRL
  Hospira	HSP
  HSN	HSNI
  Hubbell	HUB-B
  Humana	HUM
  IBM	IBM
  IDEX	IEX
  IDEXX Laboratories	IDXX
  Informatica	INFA
  Infosys Ltd.	INFY
  Ingram Micro	IM
  Ingredion Incorporated	INGR
  Intel	INTC
  IntercontinentalExchange	ICE
  International Flavors & Fragrances	IFF
  Intuit	INTU
  Intuitive Surgical	ISRG
  Iron Mountain	IRM
  Jack Henry & Associates	JKHY
  Jarden	JAH
  JB Hunt Transport Services	JBHT
  John Wiley & Sons	JW-A
  Johnson & Johnson	JNJ
  Kansas City Southern	KSU
  Life Time Fitness	LTM
  McCormick	MKC
  McDonald’s	MCD
  MEDNAX	MD
  Mettler-Toledo International	MTD
  MICROS Systems	MCRS
  Mylan	MYL
  NeuStar	NSR
  Nike	NKE
  Nordson	NDSN
  Panera Bread	PNRA
  Pentair Ltd.	PNR
  PetSmart	PETM
  Polaris Industries	PII
  Progressive	PGR
  Prosperity Bancshares	PB
  Quest Diagnostics	DGX
  Rackspace Hosting	RAX
  Raven Industries	RAVN
  Regal Beloit	RBC
  Reinsurance Group of America	RGA
  Rent-A-Center	RCII
  ResMed	RMD
  Reynolds American	RAI
  Riverbed Technology	RVBD
  Rollins	ROL
  Seaboard	SEB
  SEI Investments	SEIC
  Seneca Foods	SENEA
  Sensient Technologies	SXT
  Sigma-Aldrich	SIAL
  Signature Bank	SBNY
  Silgan Holdings	SLGN
  Snap-on	SNA
  SolarWinds	SWI
  St. Jude Medical	STJ
  Starbucks	SBUX
  State Street	STT
  Stericycle	SRCL
  Sysco	SYY
  Target	TGT
  Tech Data	TECD
  Teradata	TDC
  Thermo Fisher Scientific	TMO
  Thoratec	THOR
  TIBCO Software	TIBX
  Tiffany &	TIF
  TJX Companies	TJX
  Towers Watson &	TW
  Tractor Supply	TSCO
  Trimble Navigation Limited	TRMB
  Triumph Group	TGI
  Tupperware Brands	TUP
  U.S. Bancorp	USB
  Universal Health Services	UHS
  URS	URS
  V.F.	VFC
  Varian Medical Systems	VAR
  VeriFone Systems	PAY
  Visa	V
  W.W. Grainger	GWW
  Wabtec	WAB
  Walgreen	WAG
  Waters	WAT
  WellPoint	WLP
  Wells Fargo	WFC
  Western Union	WU
  Weyco Group	WEYS
  World Fuel Services	INT
  Yum! Brands	YUM
  Zimmer Holdings	ZMH

• My Plan
  Eddy Elfenbein, February 27th, 2013 at 10:11 am

  Step One: Form bank holding company, the Bank of Eddy.

  Step Two: Borrow $470 billion from the Federal Reserve at 0%.

  Step Three: Announce tender offer to buy out Apple for $500 per share.

  Step Four: Once I have control of Apple, use the $140 billion in cash to buy all the mortgage debt I can possibly find. (Also, buy CNBC.)

  Step Five: Every six month, IPO a different Apple division. Spin-offs, you know, outperform.

  Step Six: Use proceeds to pay off the Fed.

  Step Seven: Distribute the rest to Bank of Eddy shareholders minus, of course, my $10 billion fee.

  Step Eight: Relax at pool.

  So…who’s with me?

• The Yen’s Impact on AFLAC’s Earnings
  Eddy Elfenbein, February 27th, 2013 at 9:55 am

  Below I’ve tried to reproduce a chart from AFLAC’s latest 10-K. This shows the impact that the yen/dollar exchange rate is expected to have on AFLAC’s 2013 operating earings.

  Exchange Rate	EPS Range	Growth Rate	Yen Impact
  79.81	$6.86 to $7.06	3.9% to 7.0%	$0.00
  85	$6.60 to $6.80	0% to 3%	-$0.26
  90	$6.37 to $6.57	(3.5%) to (0.5%)	-$0.49
  95	$6.17 to $6.37	(6.5%) to (3.5%)	-$0.69
  100	$5.99 to $6.19	(9.2%) to (6.2%)	-$0.87

  Here’s a look at the surge in the dollar since October:

  

• Market Up a Bit, Ben’s Speaking Again
  Eddy Elfenbein, February 27th, 2013 at 9:41 am

  The market is signaling higher today. Ben Bernanke speaks again before Congress. This time, he heads over to the House of Capitol Hill.

  This morning, we learned that durable goods orders fell 5.2% last month which was worse than Wall Street’s forecast of a 4.8% decline. But if we look at nondefense orders excluding aircraft, then durable goods rose by 6.3%. That was well above the Street’s forecast of no growth.

• Morning News: February 27, 2013
  Eddy Elfenbein, February 27th, 2013 at 6:54 am

  Euro Strengthens as Italian Bonds Fluctuate After Debt Auction

  Italian Borrowing Costs Jump But Demand Remains Strong At Crucial Auction

  EU Moves Closer To Imposing Caps On Banker Bonuses

  India’s Downturn ‘More Or Less Over’

  Bernanke Defends Asset Buying as Benefits Outweigh Risks

  Austerity Kills Government Jobs as Cuts to Budgets Loom

  S.E.C. Nominee Tries to Allay Skepticism

  Wall Street Pay Rises, for Those Who Still Have a Job

  Home Prices in 20 U.S. Cities Increase by Most Since 2006

  Wall Street Junk Kings Selling Debt Poised to Lose Value

  JPMorgan Mortgage, Community Units to Lose Up to 19,000 Jobs

  AB InBev’s Profit Gains as U.S., Brazil Beer Shipments Rise

  Teleworking: The Myth Of Working From Home

  Edward Harrison: On Bernanke’s Testimony

  John Hempton: Gulfport Energy’s Accounts Payable and Accrued Liabilities

  Be sure to follow me on Twitter.

• The S&P 500 and Its Earnings
  Eddy Elfenbein, February 26th, 2013 at 4:04 pm

  Here’s an update of a chart I run every so often. This is the S&P 500 along with its operating earnings.

  

  There are, however, two changes with this chart. One, this is the first time I’ve had earnings estimates for 2014. Please note that these aren’t my estimates. These are the consensus numbers provided by S&P.

  The other change is that I normally scale the two lines at a ratio of 16-to-1. This time, I lowered it to 15-to-1. That’s not a judgment on proper valuation. I simply think it makes the chart look better.

  I’m still surprised that Wall Street expects earnings growth to reaccelerate so robustly later this year and into 2014. I certainly hope it happens, but hope isn’t an investment strategy.

  The final earnings number for 2012 should be about $96.95. The Street expects $111.22 for 2013 and $125.44 for 2014. Hmmm…not sure about that….

• Bernanke’s Testimony Today
  Eddy Elfenbein, February 26th, 2013 at 10:02 am

  Chairman Johnson, Ranking Member Crapo, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report. I will begin with a short summary of current economic conditions and then discuss aspects of monetary and fiscal policy.

  Current Economic Conditions

  Since I last reported to this Committee in mid-2012, economic activity in the United States has continued to expand at a moderate if somewhat uneven pace. In particular, real gross domestic product (GDP) is estimated to have risen at an annual rate of about 3 percent in the third quarter but to have been essentially flat in the fourth quarter. The pause in real GDP growth last quarter does not appear to reflect a stalling-out of the recovery. Rather, economic activity was temporarily restrained by weather-related disruptions and by transitory declines in a few volatile categories of spending, even as demand by U.S. households and businesses continued to expand. Available information suggests that economic growth has picked up again this year.

  Consistent with the moderate pace of economic growth, conditions in the labor market have been improving gradually. Since July, nonfarm payroll employment has increased by 175,000 jobs per month on average, and the unemployment rate declined 0.3 percentage point to 7.9 percent over the same period. Cumulatively, private-sector payrolls have now grown by about 6.1 million jobs since their low point in early 2010, and the unemployment rate has fallen a bit more than 2 percentage points since its cyclical peak in late 2009. Despite these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are able to find only part-time work. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. Lengthy periods of unemployment and underemployment can erode workers’ skills and attachment to the labor force or prevent young people from gaining skills and experience in the first place–developments that could significantly reduce their productivity and earnings in the longer term. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt.

  The recent increase in gasoline prices, which reflects both higher crude oil prices and wider refining margins, is hitting family budgets. However, overall inflation remains low. Over the second half of 2012, the price index for personal consumption expenditures rose at an annual rate of 1-1/2 percent, similar to the rate of increase in the first half of the year. Measures of longer-term inflation expectations have remained in the narrow ranges seen over the past several years. Against this backdrop, the Federal Open Market Committee (FOMC) anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

  Monetary Policy

  With unemployment well above normal levels and inflation subdued, progress toward the Federal Reserve’s mandated objectives of maximum employment and price stability has required a highly accommodative monetary policy. Under normal circumstances, policy accommodation would be provided through reductions in the FOMC’s target for the federal funds rate–the interest rate on overnight loans between banks. However, as this rate has been close to zero since December 2008, the Federal Reserve has had to use alternative policy tools.

  These alternative tools have fallen into two categories. The first is “forward guidance” regarding the FOMC’s anticipated path for the federal funds rate. Since longer-term interest rates reflect market expectations for shorter-term rates over time, our guidance influences longer-term rates and thus supports a stronger recovery. The formulation of this guidance has evolved over time. Between August 2011 and December 2012, the Committee used calendar dates to indicate how long it expected economic conditions to warrant exceptionally low levels for the federal funds rate. At its December 2012 meeting, the FOMC agreed to shift to providing more explicit guidance on how it expects the policy rate to respond to economic developments. Specifically, the December postmeeting statement indicated that the current exceptionally low range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” An advantage of the new formulation, relative to the previous date-based guidance, is that it allows market participants and the public to update their monetary policy expectations more accurately in response to new information about the economic outlook. The new guidance also serves to underscore the Committee’s intention to maintain accommodation as long as needed to promote a stronger economic recovery with stable prices.

  The second type of nontraditional policy tool employed by the FOMC is large-scale purchases of longer-term securities, which, like our forward guidance, are intended to support economic growth by putting downward pressure on longer-term interest rates. The Federal Reserve has engaged in several rounds of such purchases since late 2008. Last September the FOMC announced that it would purchase agency mortgage-backed securities at a pace of $40 billion per month, and in December the Committee stated that, in addition, beginning in January it would purchase longer-term Treasury securities at an initial pace of $45 billion per month. These additional purchases of longer-term Treasury securities replace the purchases we were conducting under our now-completed maturity extension program, which lengthened the maturity of our securities portfolio without increasing its size. The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.

  The Committee also stated that in determining the size, pace, and composition of its asset purchases, it will take appropriate account of their likely efficacy and costs. In other words, as with all of its policy decisions, the Committee continues to assess its program of asset purchases within a cost-benefit framework. In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC’s 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth–for example, through higher home prices–these developments have in turn supported consumer sentiment and spending.

  Highly accommodative monetary policy also has several potential costs and risks, which the Committee is monitoring closely. For example, if further expansion of the Federal Reserve’s balance sheet were to undermine public confidence in our ability to exit smoothly from our accommodative policies at the appropriate time, inflation expectations could rise, putting the FOMC’s price-stability objective at risk. However, the Committee remains confident that it has the tools necessary to tighten monetary policy when the time comes to do so. As I noted, inflation is currently subdued, and inflation expectations appear well anchored; neither the FOMC nor private forecasters are projecting the development of significant inflation pressures.

  Another potential cost that the Committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage. On the other hand, some risk-taking–such as when an entrepreneur takes out a loan to start a new business or an existing firm expands capacity–is a necessary element of a healthy economic recovery. Moreover, although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses. In any case, the Federal Reserve is responding actively to financial stability concerns through substantially expanded monitoring of emerging risks in the financial system, an approach to the supervision of financial firms that takes a more systemic perspective, and the ongoing implementation of reforms to make the financial system more transparent and resilient. Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.

  Another aspect of the Federal Reserve’s policies that has been discussed is their implications for the federal budget. The Federal Reserve earns substantial interest on the assets it holds in its portfolio, and, other than the amount needed to fund our cost of operations, all net income is remitted to the Treasury. With the expansion of the Federal Reserve’s balance sheet, yearly remittances have roughly tripled in recent years, with payments to the Treasury totaling approximately $290 billion between 2009 and 2012. However, if the economy continues to strengthen, as we anticipate, and policy accommodation is accordingly reduced, these remittances would likely decline in coming years. Federal Reserve analysis shows that remittances to the Treasury could be quite low for a time in some scenarios, particularly if interest rates were to rise quickly. However, even in such scenarios, it is highly likely that average annual remittances over the period affected by the Federal Reserve’s purchases will remain higher than the pre-crisis norm, perhaps substantially so. Moreover, to the extent that monetary policy promotes growth and job creation, the resulting reduction in the federal deficit would dwarf any variation in the Federal Reserve’s remittances to the Treasury.

  Thoughts on Fiscal Policy

  Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health. The economy’s performance both over the near term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.

  Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015. As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.

  However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

  At the same time, and despite progress in reducing near-term budget deficits, the difficult process of addressing longer-term fiscal imbalances has only begun. Indeed, the CBO projects that the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade, reflecting in large part the aging of the population and fast-rising health-care costs. To promote economic growth in the longer term, and to preserve economic and financial stability, fiscal policymakers will have to put the federal budget on a sustainable long-run path that first stabilizes the ratio of federal debt to GDP and, given the current elevated level of debt, eventually places that ratio on a downward trajectory. Between 1960 and the onset of the financial crisis, federal debt averaged less than 40 percent of GDP. This relatively low level of debt provided the nation much-needed flexibility to meet the economic challenges of the past few years. Replenishing this fiscal capacity will give future Congresses and Administrations greater scope to deal with unforeseen events.

  To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.

  The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy. To the greatest extent possible, in their efforts to achieve sound public finances, fiscal policymakers should not lose sight of the need for federal tax and spending policies that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure. Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face.

  Monetary Policy Report to the Congress