Archive for March, 2013

• Today’s Fed Statement
  Eddy Elfenbein, March 20th, 2013 at 2:02 pm

  Here it is:

  Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. (No surprise there – EE) Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive (interesting, they acknowledge the fiscal drag – EE). Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable (same old, same old – EE).

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective (glad they admitted that – EE).

  To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative (we’re seeing that – EE).

  The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

  To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this 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. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

  Here’s the Fed’s economic forecast. Fifteen of the 19 members see the Fed raising rates in 2015.

• Happy Fed Day!
  Eddy Elfenbein, March 20th, 2013 at 10:33 am

  Today is Fed Day! The central bank will release its policy statement this afternoon and Ben Bernanke will meet the press. I don’t expect to hear any significant changes to their policy. Traders, however, will be paying close attention for any hint that rates are about to go higher. They’re not, but that’s never stopped traders before.

  The mess in Cyprus is getting more complicated. The parliament massively shot down the bailout deal. Now there’s talk of a Plan B, or the Cypriots may strike a deal with the Russians. I really don’t know what will happen. The fear is what will happen once the banks open on the island: will there be a massive run? I do think that the issues of Cyprus are far too small to impact investors in the U.S.

  The S&P 500 is currently up to 1,557 and we’re again close to the record close from October 9th, 2007 (1,565.15). The S&P 500 fell for the last three days in a row so we’re on track to break that streak. Oracle ($ORCL) is due to report earnings after the close. I think the company can earn 70 cents per share, or more.

• FactSet’s Outlook for Fiscal Q3
  Eddy Elfenbein, March 20th, 2013 at 8:56 am

  From Seeking Alpha, here are some key bits from FactSet’s ($FDS) earnings call:

  Now let’s turn to our guidance for the second quarter — for the third quarter of fiscal 2013. Revenues are expected to range between $213 million and $216 million. The midpoint of this range would mean revenue growth of 5% in Q3. We are anticipating continued weakness in sell-side ASV and no immediate uptick in buy-side purchasing behavior.

  Operating margins are expected to range between 33% and 34%. GAAP diluted EPS should range between $1.14 and $1.16. The midpoint of the range represents 10% growth over last year’s third quarter.

  Our annual effective tax rate should range between 29.5% and 30.5%. We continue to expect that capital expenditures for the full 2013 fiscal year should range between $20 million and $28 million, net of landlord contributions.

  To provide a little extra color on our revenue guidance, I’d also like to take a moment to look at general views of the market over the past quarter. Despite optimism expressed by the global equity markets, we’re still facing the effects of significant job cuts at many of the largest global investment banks. Some estimates put the number of headcount reductions at 11,000 jobs at bulge bracket banks since November 2012. Those cuts have been driven by increasing regulation, lower trading volumes and the continuation of the economic crisis in some parts of the world.

  Although we’re impacted by user reductions, it’s important to note that many of the areas hardest hit are not those typically serviced by FactSet. Our market on the sell-side, which accounts for only 18% of our revenues, is still in a very difficult and contracting environment. The good news is that our primary user groups are not enduring new structural changes. Though they’re still tightening, equity research has been under tight expense [ph] management for many years, and M&A deal flow has always had some cyclicality, but is essentially the same business model as before the global financial crisis.

  The bad news is that when large sell-side firms struggle, even in departments we do not cover, it impacts near-term ASV for all vendors in our industry.

  The news is somewhat brighter for the buy-side. Coming off double digit equity returns in almost all global markets in 2012, equity returns in 2013 have been solid thus far. AUM for our clients and prospects have also been augmented by year-to-date inflows, too. These inflows are from idle cash and not from fixed income strategies. So there is potential for more AUM inflows, if managers decide to allocate away from fixed income and back to equity. Despite this change in the macro environment, we still do not see evidence yet that buy-side firms have begun to expand their employee base.

  To wrap it up, our business model continues to show its resilience. Again this quarter, we have shown that, even in a tough environment for 18% of our clients, we continue to grow our market share. We have put up another double-digit quarter of EPS growth and our 3-year average return on equity has increased to 33%.

• Morning News: March 20, 2013
  Eddy Elfenbein, March 20th, 2013 at 6:17 am

  Europe Weighs Cyprus’s Fate After Lawmakers Reject Deal

  Cyprus Boosts Moscow as City Eyes Cash

  Protecting Their Own, Russians Offer an Alternative to the Cypriot Bank Tax

  Cameron Evokes Black Wednesday as Pound Weakens 7%

  DeMarco Pushes Housing Finance Reform as Fannie Profits Soar

  Getting Past America’s Bad Case of Retirement Blues

  Adobe Shares Rise as Profit Tops Estimates on Web-Software Sales

  Blackstone Said to Mull Outbidding Silver Lake for Dell

  EBay Simplifies Listing Fees, Going After Amazon

  JetBlue Says AMR Should Cut Washington Flights After Deal

  IATA Raises Profit Outlook For World’s Airlines

  In a New Aisle, Energy Drinks Sidestep Some Rules

  Real Fur, Masquerading as Faux

  Roger Nusbaum: Cypriot Possibilities

  Cullen Roche: Experiements in Negative Real Rates Tend to Lead to Excess…

  Be sure to follow me on Twitter.

• There’s a Wide Spread Between Stocks and Government Bonds
  Eddy Elfenbein, March 19th, 2013 at 5:52 pm

  Interesting.

  Stocks are close to the least expensive ever versus government bonds, using a valuation method favored by former Fed Chairman Alan Greenspan that compares earnings with interest payments. S&P 500 companies currently generate profit equal to 6.5 percent of their share prices, about 4.5 percentage points more than yields on 10-year Treasuries. The average spread in the past 10 years was about 2.5 percentage points, data compiled by Bloomberg show.

• Cyprus Says No
  Eddy Elfenbein, March 19th, 2013 at 4:24 pm

  The Dow closed up 3.76 points while the S&P 500 closed down 3.76 points.

  The big news today was that the parliament in Cyprus shot down the bailout deal. It didn’t get a single vote. But our stock market got a bump later in the day when the ECB said they’ll provide liquidity for banks in Cyprus. Still, things will be ugly there when banks eventually open. Whenever that is.

  The deposit tax idea strike me as something similar to the mint the coin idea that was floating around a few weeks ago. The idea makes some sense and it’s better than a lot of alternatives. The problem is that it seems to the average person on the street to be not merely flawed policy but outright immoral. You just don’t go around confiscating wealth. Good citizens are the ones who are supposed to be saving their money in the bank.

  The Fed began a two-day meeting today. Tomorrow we’ll get a look at their policy statement and Ben Bernanke will meet the press.

• Cylicals Continue to Lead
  Eddy Elfenbein, March 19th, 2013 at 2:07 pm

  Here’s a look at the ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the &P 500. The ratio just hit a 19-month high. The ratio has turned around strongly over the last seven months.

  

  I think this is an omen that the economy is better than many believe.

• Goldman and Morgan Stanley Raise S&P 500 Forecasts
  Eddy Elfenbein, March 19th, 2013 at 11:59 am

  Now that the S&P 500 is close to an all-time high, what do prominent bears do? They turn bullish.

  Goldman Sachs Group Inc.’s chief U.S. equity strategist, David Kostin, raised his target today for the benchmark stocks gauge by 3.2 percent to 1,625 from 1,575. Adam Parker of Morgan Stanley boosted his 2013 estimate by 12 percent to 1,600 from 1,434. They join strategists at Deutsche Bank AG, Credit Suisse Group AG and Jefferies Group LLC in increasing their targets for U.S stocks in the last week.

  “The 2013 U.S. equity market story is becoming one of improving business activity accompanied by increased CEO confidence,” Kostin wrote in a report. “Recent economic data has been strong as employment growth, ISM surveys and retail sales have all posted positive surprises. The ‘sequester’ has begun, and the federal government is still functioning.”

  The rally in U.S. equities has pushed bearish strategists to capitulate in 2013 after being conservative last year, when stock seers forecast the smallest gain in seven years for the S&P 500. Kostin and Parker estimated the S&P 500 would fall in 2012 to 1,250 and 1,167, respectively, making them the two most bearish strategists among the 14 surveyed by Bloomberg. The equity index surged 13 percent to 1,426.19 in 2012.

• Cyprus Looks to Reject Deal
  Eddy Elfenbein, March 19th, 2013 at 10:52 am

  The latest out of Cyprus is that the parliament seems certain to reject the bailout deal. There’s now talk of a Plan B which would have the same deposit tax but exempt folks with less than $20,000 in the bank. The problem with that is that would cause Cyprus to come up short on the amount of cash they need. Banks are still closed on the island and I’m afraid to see what will happen on Thursday morning when banks eventually reopen.

  There is an interesting solution to this mess. Last night, Felix Salmon highlighted a remarkably simple three-step plan by Lee Bucheit and C. Mitu Gulati:

  1. All insured depositors to be protected. Indeed, the public announcement of the bailout package would liberally sprinkle adjectives such as “sacred” and “inviolable” in front of the words “insured deposits” wherever they appear.

  2. Holders of deposits in excess of the insured €100,000 minimum would receive, at par, interest-bearing bank certificates of deposit for those excess amounts. Depositors would be given the option of taking CDs of, say, five or ten years’ duration, with differing interest rates designed to encourage a longer stretch out. Also, to encourage a takeup of the longer dated CDs, the Government could offer a limited recourse guarantee on the ten-year CDs benefiting from a pledge of a portion of the Cypriot gas revenues that should come on line when those CDs mature. The CDs would be freely tradable and liquid in the hands of the holders.

  3. The maturity dates of all sovereign bonds would be extended by a fixed number of years, let’s say five years. By our reckoning, this would reduce the total amount of the required official sector bailout funding during a three-year program period by about €6.6 billion.

  This seems much easier. I don’t think the authorities understood the backlash of taxing bank accounts. That’s something that seems so opposed to the rule of law. In the West, we don’t just seize assets because we want to.

  With the plan above, nobody has their wealth confiscated. There’s still pain to be had but folks who are in for the long haul won’t feel it as much. The CDs can trade but they’ll be going for a deep discount, so some savers would be punished.

• FactSet Earns $1.14 Per Share
  Eddy Elfenbein, March 19th, 2013 at 10:25 am

  This morning, FactSet Research Systems ($FDS) reported second-quarter (ending February) adjusted earnings of $1.14 per share which was three cents better than Wall Street had been expecting. This is good news and it was actually better than the forecast FactSet gave three months ago when they said earnings should range between $1.11 and $1.13 per share.

  Interestingly, at the time of that guidance, Wall Street was disappointed because they had been expecting $1.13 per share. FactSet said they expected revenues to range between $212 and $215 million. Today they reported that Q2 revenues rose 7% to $213.1 million.

  The problem, if you can even call it that, is that banks have been working hard to cut costs. JPMorgan recently announced plans to decrease headcount by as much as 17,000.

  “While we were pleased to achieve ASV growth of $17.3 million in the quarter, we continue to operate in a challenging sell-side environment” said Philip A. Hadley, Chairman and CEO. “”Our second quarter results include growing adjusted EPS by 12% and free cash flow by 11%. I am also proud to share that FactSet was recently named one of FORTUNE’s 100 Best Companies to Work For, marking our fifth appearance on that list in the last six years.”

  For Q3, FactSet sees revenues ranging between $213 and $216 million, and earnings-per-share coming in between $1.14 and $1.16. Wall Street had been expecting revenues of $217 million and earnings of $1.13 per share.

  I’m happy with today’s numbers but the shares are currently down about 3% today. Still, FactSet has had a good run since the start of the year. Business continues to go well for them.