Archive for August, 2013

• Morning News: August 22, 2013
  Eddy Elfenbein, August 22nd, 2013 at 5:11 am

  Scandinavia’s Richest Economy Stumbles as Euro Area Rebounds

  U.K. Banks Face More Compensation Claims

  Upbeat China Aug Flash HSBC PMI Points to Stabilizing Growth

  Indonesian Market Gets Smacked Again — Emerging Market Currencies Falling Out Of Bed

  Fed Minutes Deliver Fresh Blow to Emerging Markets

  Will Washington Politics Kill The US Energy Revival And Shale Gas Revolution?

  Household Income’s Slow Climb Back

  Options Market Suffers Biggest Disruption Since April

  HP Shuffles Top Ranks, Dashes 2014 Growth Hopes

  UPS Ending Health Coverage for Spouses Signals Cost Cuts

  Toll Brothers Profit Falls, but the Builder’s Optimism Rises

  Bad News Times Two for Barnes & Noble

  Ackman Reassures Investors of ‘Progress’

  Roger Nusbaum: Why A 1987 Crash Is Not In The Cards

  Cullen Roche: Banks and the Monetary Base – A Friendly Response to Paul Krugman

  Be sure to follow me on Twitter.

• Fed Minutes Boost Stocks — For Now
  Eddy Elfenbein, August 21st, 2013 at 3:32 pm

  The Fed released the minutes from their late-July meeting today. The market’s quick take is that the minutes are dovish as the rest of the FOMC seems lined up behind Bernanke’s timeframe for winding up Quantitative Easing.

  As I’ve said before, reading the Fed’s minutes is a study in the art of indefinite pronouns. Some say this, a few say that. Here’s the key line that folks are looking at:

  First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony.

  That seems reasonably clear that something maybe, possibly, could happen next month. I disagree with the conventional wisdom that higher interest rates are due to tapering talk. Some of it, sure. But probably not very much. One of the concerns of too much QE is that it forces investors to take on more risk than they should by hunting for yields in junk bonds. Still, the consensus is that the Fed will start tapering next month.

  My guess is that the initial claims report had a big impact on the Fed. The Fed believes that growth will pick up for the second-half of this year. I hope so but we should bear in mind that the Fed is often overly optimistic with its forecasts.

• Morning News: August 21, 2013
  Eddy Elfenbein, August 21st, 2013 at 7:58 am

  Fluctuations in Currencies Roil Markets

  Kuroda Open To Further Easing Should Tax Hike Threaten Recovery

  Japan’s Nuclear Crisis Deepens, China Expresses ‘Shock’

  Mexican Economy Contracted in Second Quarter

  Goldman Options Error Shows Peril Persists One Year After Knight

  The Retail Sector – Especially J.C. Penney (JCP) – Is Struggling

  Eastman Kodak Wins Approval Of Bankruptcy Reorganization Plan

  Home Depot Credits Housing Recovery for 17% Jump in Earnings

  Lowe’s Profit Tops Analysts’ Estimates on Housing Rebound

  The New J. Crew Catalog is a Pinterest Page

  DICK’S Sporting Goods Reports Second Quarter Results

  Barnes & Noble Ends Breakup Push for Now for Nook Revival

  Heineken Profits From Developing Markets Surge

  Joshua Brown: A Field Guide to Stock Market Corrections

  Howard Lindzon: Moral High Ground…The Most Expensive Real Estate on Earth… AND…No Conflict- No Interest!

  Be sure to follow me on Twitter.

• Medtronic Earns 88 Cents Per Share
  Eddy Elfenbein, August 20th, 2013 at 1:56 pm

  This morning, Medtronic ($MDT) reported fiscal Q1 earnings of 88 cents per share which matched estimates. They reiterated their full-year forecast of $3.80 to $3.85 per share.

  Medtronic Inc. (MDT), the world’s biggest maker of heart-rhythm devices, said first-quarter profit rose 10 percent on increasing demand for the company’s stents, pacemakers and other products used during surgery.

  Net income in the three months ended July 26 increased to $953 million, or 93 cents a share, from $864 million, or 83 cents, a year earlier, the Minneapolis-based company said today in a statement. Profit excluding one-time items matched the average of 88 cents of 20 analysts’ estimates compiled by Bloomberg. Revenue increased to $4.08 billion from $4.01 billion a year earlier.

  Sales of stents, used to prop open heart arteries, were bolstered by demand in Japan where the company’s Resolute device is still in its first year of introduction. Demand for spinal products and implanted devices such as defibrillators to regulate the heart’s electrical activity, two of the company’s biggest units, continued to show signs of stability after several years of decline.

  “Medtronic is poised to deliver a sixth consecutive quarter of solid mid-single-digit organic sales growth despite still soft – but largely as expected – MedTech market dynamics more broadly this earnings season,” Danielle Antalffy, an analyst with Leerink Swann Research in New York, wrote in an Aug. 14 note to investors.

  No surprises here. The stock is down about 2% today.

• Morning News: August 20, 2013
  Eddy Elfenbein, August 20th, 2013 at 5:01 am

  Ross Sees Cargo Rebound on China Shipbuilding Limits

  Indonesia Stocks Drop as Index Falls as Much as 20% From Peak

  Leftist Leader Wants to Repair, Not Privatize Mexico’s Oil Industry

  Obama Presses for Action on Bank Rules

  Fed Finds 18 Large Banks Weak in at Least One Capital Area

  Falcone Agrees to Five-Year Ban in Stiffer Deal With SEC

  JPMorgan Says Buy Indian Options as Stock Swings Widen

  Oversight Board Faults Broker-Dealer Audits

  Judge Endorses Use Of Fraud Law Against Bank of America

  Statoil: USD 2.65 Billion Transaction to Capture Value and Focus the Portfolio

  Fast-food Workers Call for Nationwide Walkout Aug. 29

  Saks Incorporated Announces Results for the Second Quarter and Six Months Ended August 3, 2013

  Re/Max Files for I.P.O. as Housing Market Continues Upswing

  Credit Writedowns: China: The Urbanization Fallacy

  Phil Pearlman: Talking with Jay Zalowitz About The Amazon & Google Outages

  Be sure to follow me on Twitter.

• Thales aka Olive Finger
  Eddy Elfenbein, August 19th, 2013 at 11:13 pm

  From Aristotle’s Politics, Book I, Chapter 11, sections 5-10:

  There is, for example, the story which is told of Thales of Miletus. It is a story about a scheme for making money, which is fathered on Thales owing to his reputation for wisdom; but it involves a principle of general application. He was reproached for his poverty which was supposed to show the usefulness of philosophy; but observing from his knowledge of meteorology (so the story goes) that there was likely to be a heavy crop of olives [next summer], and having a small sum at his command, he paid down earnest-money, early in the year, for the hire of all the olive-presses in Miletus and Chios; and he managed, in the absence of any higher offer, to secure them at a low rate. When the season came, and there was a sudden and simultaneous demand for a number of presses, he let out the stock he had collected at any rate he chose to fix; and making a considerable fortune he succeeded in proving that it is easy for philosophers to become rich if they so desire, though it is not the business which they are really about.

• The Doomsday Trade
  Eddy Elfenbein, August 19th, 2013 at 10:03 pm

  My pal Josh Brown pointed out this article at Fortune. It turns out that the Doomsday Trade isn’t working out for the end-of-the-world crowd. One of the biggest flaws in investing is people investing by their ideology. Investing is the ultimate in practicality beating ideology.

  For one small group of investors, this return to normal places them in a new, confounding position. While a worried mainstream saw gold as a hedge against short-term instability, the past five years have seen huge exposure, particularly in America, for a set of ideas that sees gold as a protection against the total collapse of the financial system as we know it. Probably the most well-known proponent of this viewpoint is former Fox News personality Glenn Beck, who has persistently warned of the inevitability of hyperinflation, lawlessness, and bread riots in the wake of QE and other Fed initiatives to inject liquidity and expand the money supply.

  Starting in 2008 and with little respite since, Beck has kept up a drumbeat of parallels between American monetary policy and disaster scenarios such as Weimar Germany. Whether by correlation or causation, Beck also happens to be heavily sponsored (both in his Fox News days and now in his internet enterprise) by Goldline, a company selling gold coins. Alex Jones, a goldbug and conspiracy theorist only slightly less influential than Beck, is sponsored by Midas Resources Inc., which … well, guess.

  Though Glenn Beck and Alex Jones are in many ways fringe figures, they have significant followings, and their goldbug ideas are part of an even larger pattern of thought that encompasses genuinely influential groups including Ron Paul’s Libertarian wing of the U.S. Republican Party, and the even more powerful Tea Party faction. “Anyone who is not looking at a financial collapse of the United States right now is not looking at our debt and the inability of our government to rein in costs. It’s no longer a case of if, but a case of when,” says Norman Cillo, a member of the Tampa Bay Tea Party. With that scenario in mind, gold looks like a pretty good bet, no matter what the market is doing.

  Gold’s longtime nickname, “God’s Money,” captures some of the faith these goldbugs put in the yellow stuff as a life raft for the most extreme, yet imaginable, scenarios. For most of the last five years, this has been an easy enough proposition — doomsayers could have their apocalypse and profit from it too, watching gold prices rise in dollar terms while also being confident in the commodity’s value in the lawless, feral world they think Ben Bernanke’s monetary policy is laying the groundwork for.

  So their Doomsday forecasts were wrong. Oh well, it’s not the end of the world.

• The Typical Trend of Earnings Estimates
  Eddy Elfenbein, August 19th, 2013 at 12:14 pm

  Earlier this year, Thomson Reuters had an interesting research piece of how earnings estimates usually trend during the year. Here are the key bullet points:

  Analysts tend to overestimate earnings initially, but subsequent downward revisions bring estimates closer to actual earnings.

  During the calendar quarter, estimates typically continue to decline, driven in part by company issued guidance that is typically more negative than positive.

  Positive surprises during earnings season tend to bring the blended earnings growth estimate back up to its actual value.

  Read the whole thing.

• Why P/E Ratios Can Be Misleading
  Eddy Elfenbein, August 19th, 2013 at 11:31 am

  I write a lot about stock valuation metrics. One thing to get across is that it’s important to look at everything but worship nothing. Every financial stat can be misleading.

  In the Wall Street Journal, Mark Hulbert look at the famous Price/Earnings Ratio:

  Consider the S&P 500’s current P/E based on trailing earnings. For the four quarters through June 30, the index’s earnings per share amounted to $91.13, according to S&P Dow Jones Indices. That translates into a P/E ratio of 18.2, which is higher than 79% of comparable readings since 1871, according to a database maintained by Yale University professor Robert Shiller.

  Many bulls try to wriggle out from this bearish sign by focusing on estimated earnings.

  According to FactSet Data Systems, the consensus forecast from Wall Street analysts is that earnings from companies in the S&P 500 will be $122.01 a share next year, which translates into a P/E ratio of 13.6. That is 6% less than the 14.5 median of historical P/Es in Mr. Shiller’s database.

  There is a catch: Forward-looking P/Es are almost always lower than those based on trailing earnings—often much lower. There are at least three reasons why, says Anne Casscells, a managing partner at Aetos Capital, which runs several hedge funds. First, corporate earnings usually rise from one year to the next. In addition, analysts’ estimates focus on what’s known as “operating earnings,” a looser category than the actual reported earnings used to calculate the average of past P/Es.

  And last but not least: Wall Street analysts’ predictions tend to be way too optimistic.

  A few years ago, I touched on another problem inherent in the P/E Ratio:

  We have to remember that the P/E Ratio is an unusual statistic because it looks at the relationship between two different kinds of the numbers. A stock’s price is a fixed-point number, which means you know exactly what a price is at any given time, but earnings is a rate, meaning it must be defined at something that only exists between two certain points in time.

  There’s nothing inherently wrong about combining two different kinds of numbers though we should be bear in mind its limitations and this is one such time.

• Google’s Stock Turns Nine
  Eddy Elfenbein, August 19th, 2013 at 11:07 am

  It was nine years today ago that Google ($GOOG) had its IPO. The underwriting price was $85 per share, and the stock opened and closed trading at $100. The New York Times opined: “At its closing price of just above $100 yesterday, Google is valued at a bubbly $27 billion.”

  Bubbly? It turns out that that was only the beginning. GOOG, which has never split, raced to $747 by November 2007.

  Then came the recession and GOOG lost two-thirds of its value in a year. By November 2008, the stock dipped below $250. It then rallied to $600 before the end of 2009. After that, Google was pretty flat until about a year ago. The shares took out their 2007 high in September, and last month Google touched its all-time high of $928.

  

  Consider that Google’s underwriting price was $85, and Wall Street expects the company to earn $51.34 per share next year.