Archive for April, 2014

• Buffett: Market Not “Frothy”
  Eddy Elfenbein, April 23rd, 2014 at 4:25 pm

  He also has good things to say about IBM.

• Morning News: April 23, 2014
  Eddy Elfenbein, April 23rd, 2014 at 7:54 am

  Goldman Sachs Stands Firm as Banks Exit Commodity Trading

  Demand for Fed Reverse Repos Rises as Treasury Cuts Bill Supply

  Bonus Season at the IRS

  Sales of Existing U.S. Homes Fall for a Third Month

  Citigroup Shareholders Approve Leaders’ Pay

  Apple’s Slowing IPhone, IPad Sales Test Investor Resolve

  McDonald’s 1Q Profit Slips as US Sales Decline

  Procter & Gamble Third-Quarter Profit Rises

  Toyota Sells 2.58 Million Vehicles, Outselling General Motors

  This Is the Absolute Best Day to Advertise on Facebook

  AT&T Inc. Posts Earnings Beat, But Slowing Wireless Segment Pulls Stock Price Down

  Gilead’s Hepatitis C Drug Sovaldi Tops Estimates by $1 Billion

  Here’s Why This Best-Selling Book Is Freaking Out the Super-Wealthy

  Jeff Carter: HFT Isn’t the Elephant In the Room

  Jeff Miller: Weighing the Week Ahead: Will Springtime Bring Some Optimism?

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• CR Bard Earns $1.91 Per Share
  Eddy Elfenbein, April 22nd, 2014 at 4:31 pm

  After the closing bell, CR Bard ($BCR) reported first-quarter earnings of $1.91 per share. That beat estimates by seven cents per share. Bard had told us to expect earnings between $1.83 and $1.87 per share so this is an impressive beat. Sales rose 8% to 799.3 million. Sales in the U.S. rose 11% and foreign sales were up 3%.

  CEO Timothy M. Ring said, “The financial results in the first quarter reflect a positive start to the year, as we exceeded our expectations for both sales and earnings per share. The organization is focused on executing our strategic investment plan with the objective of improving the long-term growth profile of the business.”

  The press release describes Bard as “a leading multinational developer, manufacturer and marketer of innovative, life-enhancing medical technologies in the fields of vascular, urology, oncology and surgical specialty products.”

• The Effect of Smart Beta
  Eddy Elfenbein, April 22nd, 2014 at 2:24 pm

  Lately there’s been a lot of talk about Smart Beta. I wanted, gentle reader, to show the exact impact Smart Beta has on your portfolio.

  The equation is as follows:

  (Smart Beta * 4.78 / ROE ^ 0.78 – Net Operating Cash) * 0

• The Now-Forgotten Tech Stock Crash on “Earth Day” 1970
  Eddy Elfenbein, April 22nd, 2014 at 12:26 pm

  Gary Alexander writes on the now-forgotten tech crash of 44 years ago.

  I would hazard a guess that not one in 10 of my readers remembers the stock market crash on Earth Day, 1970. If you Google “Tech stock crash 1970,” you will see precious few entries that directly address that specific crash. The first two Google entries I saw came from our own article on the subject in April 2010, on the 40th anniversary of that crash – “(Back to) Earth Day” – reprinted by Investorplace and NASDAQ.

  In writing that 2010 article, I found precious few resources to consult. Due to a lack of online sources, I used a faded old Dun’s Review article from 1971 and a 1973 book, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s, by New Yorker financial writer John Brooks. The 1997 reprint of that book includes a forward by best-selling author Michael Lewis. Here’s how the book starts:

  “On April 22, 1970, Henry Ross Perot of Dallas, Texas, one of the half-dozen richest men in the United States…suffered a paper stock-market loss of about $450 million.” This amounted to “more than the annual welfare budget of any city except New York; and more – not just in figures, but in actual purchasing power – than J. Pierpont Morgan was known to be worth at the time of his death in 1913.”

  Furthermore, the collapse of Perot’s EDS stock “was not based on any bad news about the company’s operations. To the contrary, the news was all spectacularly good; per-share earnings for 1969 were more than double those for 1968, and even for the first quarter of 1970 – a time of fast-deepening general business recession – EDS showed a 70% profits increase over the same period for 1969.” The EDS crash, the book shows, was a “bear raid” based upon the narrow float of available shares of EDS at the time.

  Perot’s big loss came on the first Earth Day, so I characterized the 1970 stock market collapse as “back to earth” day for tech stocks, which had been the darlings of the late 1960s. Perot was not alone. Many tech stocks fell by 80% or more from 1969 to mid-1970, with the core losses coming in five weeks, April 21 to May 26, 1970. Perot’s EDS fell a total of 85%, from a peak of $162 to $24, while Control Data fell 83%.

  In the aftermath of that crash, financial consultant Max Shapiro constructed a list of 30 leading “glamour stocks” and their fate. He picked 10 leading conglomerates (like LTV), 10 computer stocks (led by IBM), and 10 hot technology stocks (Polaroid, Xerox, etc.). In Dun’s Review in January 1971, he showed that the 10 conglomerates fell by an average 86%, the computer stocks fell 80%, and the tech stocks fell 77%.

  The overall market did not collapse at anywhere near those levels. The S&P 500 fell 9% in April 1970, another 6% in May, and 5% in June, for a cumulative 19% drop in the second quarter of 1970. The Dow lost just 13% in the second quarter and 35% from peak to trough. But second-tier stocks fared worse. According to Go-Go Years author John Brooks, “a portfolio consisting of one share of every stock listed on the Big Board was worth just about half of what it would have been worth at the start of 1969.”

  At the time, the tech stock crash of 1970 was overshadowed by troubling national news. Not only did the Earth Day celebration of April 22 take Ross Perot off the front pages the next day, but there was also the dramatic news of Apollo 13’s near-fatal moon mission (April 11-17), followed by President Nixon’s incursion into Cambodia (April 29), resulting in campus riots and shootings at Kent State (May 4) and Jackson State (May 14), amidst a recession engineered by Nixon as a way to fight inflation by “cooling the economy.” In the week of May 4-8, over 80 college campuses were completely closed down, and a violent conflict between students and “hard hats” took place in the shadow of Wall Street on May 8, 1970.

• The Long-End of the Yield Curve Flattens
  Eddy Elfenbein, April 22nd, 2014 at 11:04 am

  Here’s a look at the yield spread between the 5- and 30-year Treasuries. The gap between the two recently narrowed to 177 basis points which is a 4.5-year low.

  

  What’s happening is that the back end of the yield curve is starting to flatten. Bear in mind that it’s still quite steep. It’s merely not as steep as it used to be.

  What does this flatter back end mean? It’s hard to say but I suspect there are two opposing forces at work. At one end, investors are realizing that the U.S. fiscal situation isn’t as dire as once believed. The CBO recently had the “good” news that this year’s deficit will be under half a trillion dollars (yay?). That’s huge but not as huge as it used to be. Also, yields in the middle part of the yield curve are starting to reflect the belief that interest rates will rise next year, and in 2016.

  Here’s a look at the yield curve from five months ago and from yesterday. You can see where the red line is both higher and lower than the blue.

  

  Historically, the best indicator for the economy has been the spread between the 2- and 10-year Treasuries. That’s still quite wide.

• McDonald’s Earns $1.21 per Share
  Eddy Elfenbein, April 22nd, 2014 at 8:34 am

  Disappointing earnings this morning from McDonald’s ($MCD). The fast food joint earned $1.21 per share for Q1 which was three cents below estimates. Interestingly, the stock is unchanged this morning. I suppose that means it was expected for them to miss expectations.

  McDonald’s is a cheap stock, and frankly, that valuation isn’t unearned. The restaurant has made several missteps lately and we can see that in today’s numbers. Profits dropped 5.2%. Sales rose 1.4% but not as fast as costs, which rose 2.3% (higher beef costs).

  As I see it, the situation at McDonald’s is similar to IBM. They’re both iconic brands who have slipped in recent years. The fundamental business is good but they desperately need to revive themselves. This is what Ford did several years ago, and Microsoft did more recently.

  Despite today’s numbers, I think the outlook for McDonald’s is brighter than at IBM because management realizes the task at hand. The issues at MCD can be resolved, and I think it can be done rather cheaply. Their business in Europe isn’t that bad, it’s in the U.S. where the problems are. Their menu is far too complicated.

• Morning News: April 22, 2014
  Eddy Elfenbein, April 22nd, 2014 at 7:07 am

  U.S. Business Lobby Says Market Access Concerns in China Growing

  Battling for a Safer Bangladesh

  Ukraine Accord Nears Collapse as Biden Meets Kiev Leaders

  Philips More Cautious For 2014 as Euro Crimps Profit

  Supreme Court Seems Inclined to Bolster Truth-in-labeling Laws

  S&P 500 Rises to Cap Longest Rally in 2014 Amid Earnings

  Scorecard Needed for Today’s Drug Industry Dance

  Lilly Announces Agreement to Acquire Novartis Animal Health

  Ackman, Valeant Team Up to Bid for Allergan

  Mulally’s Legacy: Setting Ford on a Stronger Course

  Netflix Shares Rise Following Better Than Expected Q1 Profits

  The Hot War Between Netflix and Comcast Is Escalating

  Tesla CEO: Panasonic Likely Partner in Battery Plant

  Joshua Brown: Here’s The Good News…

  Roger Nusbaum: Robo Advisors & Behavioral Finance

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• Shiller: “Easy to Beat the Market” Long Term
  Eddy Elfenbein, April 21st, 2014 at 5:59 pm

• Bonds Beating Stocks YTD
  Eddy Elfenbein, April 21st, 2014 at 12:16 pm

  Here’s the chart which has confounded a lot of people this year. I think it was broadly assumed that stocks would continue to rally, and bonds would slowly fall. That hasn’t happened. The gold line is the Long-Term Treasury ETF ($TLT) and it’s done quite well this year while the S&P 500 ETF ($SPY) has been mixed.