Archive for June, 2013

• Biggest Selloff of the Year
  Eddy Elfenbein, June 5th, 2013 at 12:23 pm

  See that little spot of trouble in mid-April?

  

  The recent drop just surpassed that as our biggest drop of the year. Measuring from the intra-day high to intra-day low, the S&P 500 lost 3.84% between April 12 and April 18.

  On May 22, the S&P 500 reached a high of 1,687.18. So to have a larger drop than the one in April, the S&P 500 had to break below 1,622.41. We hovered just above that mark earlier this week. The Monday intra-day low was 1,622.72 and on Tuesday it was 1,623.62.

  Today, however, is a different story. So far, the S&P 500 has been as low as 1,612.29. This is the the biggest drop of the year.

• The Graham Number
  Eddy Elfenbein, June 5th, 2013 at 11:25 am

  Ever heard of the Graham Number? This was a formula developed by Ben Graham, the father of securities analysis, to determine the fair value for a stock.

  The Graham Number is:

  The square root of [earnings-per-share * book-value-per-share * 22.5]

  (Take note that earnings-per-share divided by book-value-per-share is our good friend return on equity.)

  Let’s run an example: Nicholas Financial ($NICK) earned $1.63 per share in the four quarters ending March 31, 2013. The book value per share is $10.46.

  So…if we multiply $1.63 * $10.46 * $22.5, that gives us $383.62.

  The square root of $383.62 gives us $19.59. So by the Graham Number, NICK is going for a hefty 25% discount to its fair value.

• Q1 Productivity Revised Down to 0.5%
  Eddy Elfenbein, June 5th, 2013 at 10:38 am

  The productivity report for Q4 was terrible. Fortunately, productivity improved in Q1. The government’s initial report said that productivity rose by 0.7% for the first three months of the year. Today that was revised down to 0.5% growth.

  

• Higher Rates Are Good for Wells Fargo
  Eddy Elfenbein, June 5th, 2013 at 10:01 am

  Not everything about higher rates is bad. The CFO of Wells Fargo ($WFC) said that higher rates will actually help them:

  Wells Fargo, the biggest U.S. home lender, is well-positioned for rising interest rates because the firm will benefit from higher returns, said Chief Financial Officer Timothy Sloan.

  “The current backup in rates we think is attractive and will allow us to invest,” Sloan, 53, said today at a New York investor conference in response to a question about rising Treasury note yields. One drawback is that “it makes some consumers who were thinking about refinancing their mortgage probably think twice.”

  Managing through a rise in interest rates is the biggest challenge facing bankers today, Sloan’s boss, Chief Executive Officer John Stumpf, said last week. While the San Francisco-based firm erred by prematurely keeping money on the sidelines in anticipation of rising rates, the shift may finally be coming, he said.

  Analysts and investors have expressed concern that banks will be stuck with loans and other assets that will lose value because they were created when rates were near record lows.

  “We’re very well-poised for an increase in interest rates,” Sloan said. “If rates go up, we can operate successfully.”

  

• ADP Misses By 30,000, Look for Lower Open
  Eddy Elfenbein, June 5th, 2013 at 9:29 am

  The great Tuesday winnings streak finally came to an end yesterday. Note that it was only a winning streak for the Dow, not for the S&P 500. Despite how much news the winning streak got, it’s really not important for investors.

  What is important for us is to see the fundamentals of the market improve which means corporate earnings. This Friday will be the big jobs report. Each month’s jobs report is by far the biggest economic report. On the Wednesday before each jobs report, ADP, which is a private payroll firm, releases its estimate. This morning, ADP said that the economy created 135,000 jobs in May which was less than what economists were expecting. The consensus was for a gain of 165,000. The stock market looks to pull back in early trading today.

  I was impressed to see that Ford ($F) reported 45% sales growth in China. This is good news, but Ford is still way behind its rivals in China.

• Morning News: June 5, 2013
  Eddy Elfenbein, June 5th, 2013 at 7:15 am

  Eurozone Recovery Signs Few And Far Between

  Japanese Shares Suffer Another Setback After Speech By Prime Minister Abe

  Euro Endorsement Key to Igniting Delayed Latvian Debt Rally

  China Hits Back at EU With Wine Probe

  Dow’s Record Tuesday Streak Comes to an End

  Jefferson County, Creditors Reach Deal to End Bankruptcy

  Apple Faces Limited Ban As U.S. Trade Panel Backs Samsung On Patents

  IBM Buying Cloud Computing Company SoftLayer

  Wilson Sonsini Advises Salesforce on ExactTarget Takeover

  Supermarkets Beware: Amazon is Coming

  Uncertain Outlook for Tesco Shares After Sales Fall Around the World

  Bill Gates Gets in on ‘Nerd Facebook’

  Warren Buffett Lunch Bids Quickly Top Apple CEO Cook’s Coffee

  John Hempton: Short Selling and Misrepresenting the Truth – Infitalis Edition

  Jeff Carter: 7 Things Kitchen Nightmares Can Teach a Business

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• Gundlach on Interest Rates
  Eddy Elfenbein, June 4th, 2013 at 4:44 pm

• Zynga Lays Off 18%
  Eddy Elfenbein, June 4th, 2013 at 10:39 am

  Yesterday, Zynga ($ZNGA) announced that it’s laying off 520 employees which is 18% of its workforce. I honestly feel terrible about about these types of stories; my first thoughts are with the people who are now out of work. But as an experienced investor, I’m afraid to say that I’m not surprised.

  Zynga is reiterating its outlook for this year:

  The company reaffirmed its revenue and earnings per share guidance for both the current quarter and the full year. But Zynga now expects a net loss of between $28.5 million and $39 million during the current quarter, worse than the $27.6 million loss analysts surveyed by Thomson Reuters had been expecting.

  I get frustrated when I see so many investors taken in by companies with little operating histories. Zynga went public 18 months ago and the IPO was a flop. Still, the shares off got close to $16. That’s simply crazy. The company was never worth half that much.

  A good rule for investors is to ignore all money-losing companies. A stock has to demonstrate to me that it can consistently earn a profit. Put it this way: Wall Street’s outlook for Zynga for 2014 is for earnings of $0.00. That’s right — nothing. I’m pretty sure Bed Bath & Beyond ($BBBY) will make more than nothing next year.

  Just stay away from the money losers.

• Morning News: June 4, 2013
  Eddy Elfenbein, June 4th, 2013 at 6:47 am

  IMF Tells France To Step Up Reforms And Contain Public Spending

  Yen Strengthens Again, in Challenge for Abe

  Oil Options Volatility Rises as Futures Gain on Stimulus Bets

  Spain’s Crisis Fades as Exports Transform Country

  RBA Sees Further Rate-Cut Scope as Aussie Remains High

  Behind the Rise in House Prices, Wall Street Buyers

  General Motors S&P 500 Inclusion Marks Another Step in Recovery

  AIG, Prudential Named Systematically Important by Panel

  Lenovo Group Confirms Preliminary Joint-Venture Talks

  Intel to Invest $100 Million in Voice, Gesture Control

  Nissan May U.S. Sales Rise 25%, Triple Industrywide Gain

  Zynga Slashes Work Force By A Fifth, Shares Dive

  Construction Spending in U.S. Increases on Private Building

  Cullen Roche: This Time is Different for Japan, Right?

  Credit Writedowns: Weak Income Growth Should Hold Back US Consumer Spending

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• Dividend Stocks Have Been Crushed
  Eddy Elfenbein, June 3rd, 2013 at 12:05 pm

  Check out this chart. It shows the Utility Sector ETF ($XLU) divided by the S&P 500.

  

  Over the last few weeks, the utes have badly lagged the rest of the stock market (though they’re ahead sharply today). It’s not just utes but it’s most stocks that pay rich dividends. Telecoms have struggled as well. The reason is that the market feels — wrongly in my opinion — that the Fed will soon raise interest rates. If that happens, then high-yielding stocks won’t be as important.