Archive for March, 2014

• There’s No Such Thing as Value
  Eddy Elfenbein, March 27th, 2014 at 9:23 am

  One of the foundations of investment analysis is the dichotomy between a stock’s price and its value; the idea that a stock’s price hops above and below its rightful value. But I’ll let you in on a little secret: there’s no such thing as value. There’s no magic value gnome hiding underneath each stock. Instead, there’s only price.

  Value is a fiction, but a highly useful one. It’s an excellent way for us to think about a stock.

  Telling us that a stock is below its value doesn’t tell us much. What if the stock’s value falls? Or what if the price/value gap grows wider? The price/value dichotomy is further complicated by the fact that price itself can impact value. For example, an elevated share price can make it easier for a company to raise money.

  With any investment analysis, your constants are most likely highly contextual, and as a result, they’ll do a poor job of predicting out-of-sample results. That doesn’t bother me so much, and it’s also why I don’t much care for price targets. For all their sophistication, valuation models aren’t reality. They’re merely a blurry and highly conditional image of reality.

  The proper job of an analyst is to judge possible outcomes and their impact. Value is a tool, but it must always be seen within the context of if/then scenarios. Too often, modelers become enthralled by their model and don’t look at what the underlying message is. I always cringe whenever I see some perma-bear claim the S&P 500 is over-priced by a massive amount. The statement, by itself, is meaningless. I don’t know if he’s right, but I know for certain that his model has a wide error range.

  This is a subtle message to convey. Investments analysts should have a proper respect for reality, and a proper suspicion of make-believe.

• Morning News: March 27, 2014
  Eddy Elfenbein, March 27th, 2014 at 6:48 am

  ECB Promotes Stimulus Measures Even as Recovery Lessens Need

  I.M.F. Prepares $18 Billion in Loans for Ukraine

  Lira Fate Tied to Real Assets as Hot Money Flees: Turkey Credit

  BofA to Pay $9.5 Billion to Settle Fannie Mae, Freddie Mac Claims

  Fed Rejects Citigroup Capital Plan; Shares Down Premarket

  Citigroup Fraud Stings Mexico Star as Medina-Mora Chased

  Visionary or Looney? Zuckerberg on Spending Spree

  Crowdfunders of the Maker of Oculus Rift Denounce a Facebook Buyout

  Yahoo Japan to Buy eAccess From SoftBank for $3.2 Billion

  Japan’s ANA in Fleet Expansion Ahead of 2020 Tokyo Olympics

  H&M Profit Growth Is Held Back by Cost of Online Investment

  Babcock Agrees 1.65 Billion Pound Deal for Helicopter Group Avincis

  Given That Bitcoin Is A Thing Of Value It Was Always Going To Be Taxed As A Thing Of Value

  Roger Nusbaum: The Minefields of Stock Market Content

  Howard Lindzon: TubeMogul Files For IPO…Web Video FTW!

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• Wells Fargo Raises Dividend 16.7%
  Eddy Elfenbein, March 26th, 2014 at 5:39 pm

  Last week we learned that Wells Fargo ($WFC) passed the Fed’s stress test with flying colors. Now we learn that the Fed had zero objections to their capital plan.

  As a result, Wells Fargo will be raising their dividend by 16.7%. The quarterly dividend will rise from 30 to 35 cents per share. The press release adds:

  The plan also includes a proposed increase in common stock repurchase activity for 2014 compared with 2013. The Wells Fargo Board of Directors has approved an increase of 350 million additional shares in the Company’s authority to repurchase its common stock.

• Diebold Fails to Raise Its Dividend
  Eddy Elfenbein, March 26th, 2014 at 3:02 pm

  Last month, Diebold ($DBD) didn’t raise their dividend. Why is that news? Because this is something that hasn’t happened in 61 years. I can’t be positive, but I believe that’s the longest such streak in Corporate America.

  This is from a press release last month:

  In addition, the board of directors of Diebold, Incorporated declared a first-quarter cash dividend of $0.2875 per share on all common shares, which would maintain an annualized dividend of $1.15 per share. The dividend is payable on Friday, March 7, to shareholders of record at the close of business on Monday, Feb. 24.

  Here’s a press release from February 2013 noting the 60th consecutive increase. That increase was a measly 1%. I’m glad the company didn’t do a token increase just to keep the streak alive.

  I’m sorry to see the streak end, but I applaud DBD for a remarkable run.

• Could a DISH/DTV Merger Happen?
  Eddy Elfenbein, March 26th, 2014 at 2:13 pm

  Shares of DirecTV ($DTV) are up today on news of a possible merger.

  Dish Network Corp. Chairman Charlie Ergen recently contacted DirecTV Chief Executive Officer Mike White to discuss a merger of the two satellite television companies, according to several people with knowledge of the matter. Shares of both companies rose.

  Ergen made the approach in response to Comcast Corp.’s $45 billion acquisition of Time Warner Cable Inc. in mid-February, one of the people said, asking not to be identified discussing confidential information. White is reluctant to push forward with formal talks out of concern regulators may block the deal because the two companies directly compete with each other, another person said.

  Although White is hesitant to pursue a deal, he hasn’t ruled it out entirely, one person said. The talks are being conducted at a senior level with no official process yet under way, several people said.

  Can you tell when the news broke? If you look real hard you might be able to see it.

  

• Markets Edge Higher on Durable Goods
  Eddy Elfenbein, March 26th, 2014 at 11:31 am

  The stock market regained its footing somewhat this morning. Most of the headlines are focused on the poor IPO of King Digital Entertainment ($KING). The shares are down about 9% from the underwriting price. I’m not sure why every IPO is expected to soar, but this one certainly isn’t.

  Healthcare stocks are doing well today, but that’s after a few rough days for them, particularly biotech names. The Commerce Department said this morning that orders for durable goods rose by 2.2% last month. That’s good news; economists were expecting an increase of just 1.0%. The number for January was revised lower to show a drop of 1.3%.

  On our Buy List, Qualcomm ($QCOM) is up over $79 per share which is another 14-year high. Oracle ($ORCL) is also making a run at a new 14-year high. Three weeks ago, ORCL hit an intra-day high of $39.85. Today, it’s been as high as $39.45. I think it will hit $40 soon. IBM ($IBM) has also been strong lately. The shares hit a six-month high yesterday.

  In other news, “NYC police remove barricades from Wall Street bull.”

• Morning News: March 26, 2014
  Eddy Elfenbein, March 26th, 2014 at 6:50 am

  Ukraine Starts Talks With Slovakia for Importing Gas From EU

  Lifting U.S. Crude Export Ban Would Help Counter Russia- Oil CEO

  British Government to Sell a Big Stake in Lloyds Banking

  U.S. Unemployment Seen Below 6% by Year’s End

  New York Fed: Large Banks Have Significant Funding Advantage

  Bitcoin Currency Use Impeded by IRS Property Treatment

  Facebook in $2 Billion Deal for Virtual Reality Company

  How Tesla’s Fight With Car Dealers Could Help Decide the Next President

  Walgreen Co. to Close 76 Unprofitable Stores

  Why Employers Will Stop Offering Health Insurance

  Murdoch Makes Big Succession Planning Step With Jobs For Sons

  A Likely Heir Is Leaving JPMorgan Chase

  Warren Buffett Wants to Make It Easier For You to Win His Billion Collars

  Credit Writedowns: More Thoughts About Potential for QE from the ECB

  Jeff Carter: What Will Wearables Look Like? Will We Even Wear Them?

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• The Shift to Value Continues
  Eddy Elfenbein, March 25th, 2014 at 12:19 pm

  Over the last month, the stock market has strongly shifted away from growth stocks and towards value stocks. You can see that most prominently in the drop in Biotech stocks.

  Here’s a look at the Vanguard Value ETF ($VTV) divided by the Vanguard Growth ETF ($VUG):

  

• Breaking Down the Yield Curve
  Eddy Elfenbein, March 25th, 2014 at 8:34 am

  The Treasury yield curve is one of the more important animals in finance. It tells us how much each Treasury bill, note or bond yields across the maturity spectrum.

  For the most part, a steep yield curve is bullish for the economy and stock market. A flat or inverted yield curve has often preceded rough times. The yield curve is one of the few forward indicators that has a good track record of predicting what will come.

  The yield curve also gives us a glimpse into the future. For example, if we look at the yields on the one- and two-year Treasury, we can work out the math to see what the market believes a one-year Treasury will yield one year from today.

  Warning, math ahead. The one-year currently yields 0.14% and the two-year goes for 0.47%. So if you were to get a yield of 0.14% for the next year, you would need to yield 0.80% for the following year to make a two-year yield of 0.47%. Think of it as the market’s opinion for what the market will say in the future.

  Here’s the interesting part—every yield curve has in it an implied direction for short-term interest rates. The exact same information in any yield curve can be expressed in the expected direction of short-term rates. For example, we can take the two-year Treasury and compare it with the two-and-a-quarter-year Treasury, and see where the market thinks three-month bills will be two years from now. The steeper the curve, the more rapidly rates are expected to rise.

  Check out the chart I made below. The red dots are the current Treasuries at yesterday’s close. I added the blue line in an attempt to smooth out the trend of the red dots. The black line is the implied three-month T-bill based off the blue line.

  

  I have to add that the black line looks a little screwy after about five years out. Don’t worry about that part of the graph. The problem is that any small deviation in those long-dated bonds can have a big impact on the implied short-term rate.

  The interesting part is what’s expected over the next five years. The bond market’s view is largely inline with the Fed’s most recent guidance. In fact, the bond market is a bit more hawkish than the Fed. The bond market sees rates rising next year and hitting 1% before the year is out. After that, rates are expected to rise continually until the middle of 2017 when they’ll be near 3%.

  Janet Yellen’s comments last week caused that rise in the black line, from 0% to 3%, to move to the left by two months.

  (My pal, David Merkel, has made these types of graphs before, I believe, with a smoothing function.)

• Morning News: March 25, 2014
  Eddy Elfenbein, March 25th, 2014 at 7:35 am

  Putin Threatened With More Sanctions as Russia Out of G-8

  Punishing Putin Fuels Energy-Export Drive in Congress

  German Business Confidence Slips on Ukraine Tension

  UK Inflation Hits New 4-year Low in February, House Prices Up Sharply

  EasyJet Leads the Way as Positive Company News Pushes FTSE 1% Higher

  With Start-Ups, Greeks Make Recovery Their Own Business

  Harbin Bank Said Planning to Price $1.1 Billion IPO Near Low End

  Treasury 5-to-30-Year Yield Curve Least Since 2009 on Rates View

  Payday-Lending Rules Near as U.S. Agency Sees Debt Traps

  Disney Buys YouTube Network Maker Studios for $500 Million

  Internet Company Mega Plans New Zealand Listing

  Morgan Stanley Investors Await Fed’s Buyback Blessing

  Jury Says 5 Madoff Employees Knowingly Aided Swindle of Clients’ Billions

  Joshua Brown: Moooooooooo! The Ag Trade is Back!

  Cullen Roche: Economists Already Understood the Money Multiplier (not)

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