Archive for August, 2014

• Morning News: August 20, 2014
  Eddy Elfenbein, August 20th, 2014 at 7:54 am

  Bank of England Officials Break Ranks on Rates

  Pound Fluctuates on BOE Minutes

  China Levies Record Antitrust Fine on Japanese Firms

  Argentina to Sidestep U.S. Ruling by Paying Bonds Locally

  Jackson Hole Rally at Risk as Investors Preempt Yellen

  Returns Are Set to Plunge

  Standard Chartered’s Headwinds Come From Many Directions

  Target Lowers Earnings Outlook, Still Reeling From Data Breach

  Lowe’s Shares Fall After Trimming Full-Year Outlook

  Wells Fargo Launches Startup Accelerator for Financial Services-Inspired Tech Innovators

  Glencore to Buy Back $1 Billion of Stock as Profit Gains

  Uber Hires Top Obama Adviser Plouffe as ‘Campaign Manager’

  Home Depot Profits Shine; Stock Still Undervalued

  Cullen Roche: What Backs the Value of Money?

  Joshua Brown: Google IPO: The Ten Year Anniversary

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• Apple Breaks $100 per Share
  Eddy Elfenbein, August 19th, 2014 at 4:31 pm

  Shares of Apple (AAPL) broke $100 today. The stock split 7-for-1 in June, so it’s not at a new all-time high. Apple got to $705.07 two years ago, which is $100.72 post split. Apple got as high as $100.68 today before closing at $100.53.

  On July 8, 1982, Apple closed at $11 per share. Adjusting for splits of 56-for-1, that works out to 19.6 cents per share. That means Apple is up 511-fold in just over 32 years.

  As recently as April 17, 2003, Apple was going for 93.7 cents per share. The stock has averaged 51% per year since then (not including dividends). That means Apple has gained, on average, 1% every 8.8 days for over 11 years.

  

  Apple’s gain has been so massive that the S&P 500 looks like a flat line in comparison.

• Google Turns 10
  Eddy Elfenbein, August 19th, 2014 at 12:25 pm

  The company Google ($GOOGL), which I believe is some kind of Internet “search engine,” went public ten years ago today. On August 19, 2004, the company offered 19.6 million shares to the public at $85 apiece. The stock has since split 2-for-1 so that the $85 price is $42.50 in terms of today’s stock. The stock opened at $100 (or $50 post-split) on its first day of trading.

  The shares are currently at $597, so Google is up more than 13-fold since the IPO, which is nearly 30% annualized. If an investor had paid $240 per share for Google, or more than five times the underwriting price, they still would have beaten the market (assuming they held on).

  

  To describe the share history a bit more fully, Google raced to $373.62 (post-split) by November 7, 2007. That’s an amazing gain of 730% in about 3-1/4 years. That’s more than 93% annualized. The shares then plunged by more than two-thirds over the next year.

  Measuring from Google’s extreme peak in 2007 to today, it’s been a decent stock, but not an outstanding one. Google has only barely outperformed the Wilshire 5000 (remember that Google doesn’t pay a dividend). But that’s a bit of cherry-picking with the data since the 2007 peak was so dramatic. The shares have gone on to make new highs. In February, Google reached its all-time high of $610 per share.

  Google is expected to earn $31.57 per share next year. That’s 74% of their 2004 offering price, which is a nice ROE if you can find it.

• Inflation Cools Off in July
  Eddy Elfenbein, August 19th, 2014 at 10:39 am

  Lately I’ve talked about how inflation has heated up. With this blog, I try to focus on the data and not let any larger economic/political views cloud my judgment. That’s why I’m taking a step back on my inflation views. For the second month in a row, the CPI data has come in soft.

  This morning, the government reported that headline inflation rose by just 0.1% in July. That’s the lowest rate in five months. The core rate, which excludes food and energy, also rose by 0.1%.

  Here’s a look at the monthly annualized changed in core prices since 2011. As you can see, the trend jumped higher in March, April and May but pulled back in June and July.

• The Diverging Market
  Eddy Elfenbein, August 19th, 2014 at 10:27 am

  Here’s a chart showing the point I was trying to make earlier. The black line (left scale) is the Russell 2000. Note how it peaked in March. In early July, it challenged that peak and failed to break it.

  Since then it’s lagged the market. While the S&P 500, in red, has gradually pushed upward and is close to making a new all-time high.

  

  Here’s the Russell 2000 divided by the S&P 500 since the start of last year. See how sharply the Russell has lagged since early this year.

  

• The Nasdaq Breaks Out to 14-Year High
  Eddy Elfenbein, August 19th, 2014 at 10:11 am

  The stock market is drifting higher in early trading on Tuesday morning. Yesterday, the Nasdaq Composite closed over 4,500 for the first time in more than 14 years. The last time the Nazz closed this high was March 31, 2000, just three weeks after the peak. The Nasdaq is up again today and has been as high as 4,519 this morning.

  It’s interesting to note that the stock market made a new high on July 3, then pulled back and rallied to a new high on July 24. However, that’s not the case for the small-cap Russell 2000. That index made a new high on March 4 (1,208.65), then came just shy of that on July 3 (1,208.15), and well short on July 24 (1,158.11). In other words, the rally has become narrower.

• Medtronic Earns 93 Cents Per Share
  Eddy Elfenbein, August 19th, 2014 at 9:17 am

  Medtronic ($MDT) just reported fiscal Q1 earnings of 93 cents per share which was one penny better than expectations. Quarterly revenues rose 4.7% to $4.27 billion which was $20 million better than expectations.

  Medtronic reaffirmed full-year guidance of $4.00 to $4.15 per share. They also reaffirmed their commitment to the Covidien deal.

  From the earnings report:

  “Our first quarter results are a solid start to fiscal year 2015,” said Omar Ishrak, Medtronic chairman and chief executive officer. “Our growth was broad based across businesses and geographies. I was especially pleased that our innovation pipeline is delivering strong results, particularly in the U.S., which had its highest revenue growth performance in 5 years.”

  The company noted that it had the strongest growth for U.S. medical devices in five years. Shares of MDT are largely unchanged so far in today’s trading.

• Morning News: August 19, 2014
  Eddy Elfenbein, August 19th, 2014 at 8:33 am

  Profit Growth Rises at Bank of China, But So Do Bad Loans

  China Antitrust Regulator Fines Two Japan Auto Parts Makers

  Oversold Pound to Test 6-Year High on Interest Rate View

  U.S. Consumer Prices Rise Modestly in July

  US Home Construction Jumps 15.7% in July

  Credit Swaps Polished in $19 Trillion Derivative Overhaul

  Greener Pastures Signaling Rebound in U.S. Beef Supplies

  Bidding War Breaks Out to Dominate Dollar Stores

  Good News For The Housing Market? Home Depot Raises Full-Year Forecast

  BHP Billiton Profit Up But Shares Down On Missed Capital Buyback

  Google: Still an Unconventional Company

  Medtronic Tops Views, Reaffirms Covidien Bid

  Maersk to Buy Back Shares for First Time, Earnings Rise

  Credit Writedowns: The Italian Runaway Train

  Cullen Roche: The “Secular Stagnation” Theory is Massively Overblown

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• Growth Takes the Lead
  Eddy Elfenbein, August 18th, 2014 at 1:52 pm

  In March and April of this year, the stock market sharply turned against Growth stocks in favor of Value stocks. Bear in mind, we’re talking about relative strength, not absolute performance. Lately, however, Growth stocks have taken the lead again.

  Here’s a look at the Vanguard Growth ETF ($VUG) divided by the S&P 500.

  

  Growth has beaten the market consistently since mid-July.

• Stock Prices and the Titantic Theory
  Eddy Elfenbein, August 18th, 2014 at 1:37 pm

  As I’ve written before, I’m not a fan of Robert Shiller’s “CAPE” valuation metric, which is the stock market’s P/E ratio based on the last ten years of earnings. I don’t see why we need to go back that far. Also, the CAPE has been above average almost consistently for the last 20 years. A good rule of thumb is that if some valuation metric reveals a big mispricing, the problem probably lies with the metric, not the price. In this weekend’s New York Times, Professor Shiller writes on stock market valuations:

  It’s possible that bond prices account for today’s stock market valuations. But that raises another question: Why are bond prices so high? There are short-term explanations: the role of central banks, for example. But is there a compelling reason for prices of stocks and bonds (and maybe houses, too) to remain high indefinitely?

  I’ve looked for untraditional answers. Perhaps today’s prices have something to do with anxiety about the future. I suspect that after the financial crisis, working people are much more worried about their future pay. Many are concerned that they might lose their jobs to cost-cutting, or that they might eventually be replaced by a computer or robot or website. Such anxiety might push them to try to make up for these potential shortfalls by investing in stocks and bonds — even if they worry that these assets are overvalued.

  Extrapolating from a theory of Robert E. Lucas Jr. of the University of Chicago, one might well expect lofty stock prices amid such worries: When there aren’t enough good investing opportunities, people wishing to save more for the future may succeed only in bidding up existing assets even if they think they’re overpriced. Call it the “life preserver on the Titanic” theory.

  This explanation, though, is probably not the whole story. The problem, as shown in my work with Sanford Grossman, founder of QFS Asset Management, and in work by Lars Peter Hansen of the University of Chicago and Kenneth Singleton of Stanford, is that the market just moves up and down more than Professor Lucas’s theory would suggest.

  So nothing I’ve come up with is a slam-dunk explanation for the continuing high level of valuations. I suspect that the real answers lie largely in the realm of sociology and social psychology — in phenomena like irrational exuberance, which, eventually, has always faded before. If the mood changes again, stock market investments may disappoint us.

  I don’t accept the notion that stock prices are elevated. For one, the market’s dividend yield is near 2% as it’s been for the last decade (except for the worst of the financial crises). The stock market’s one-year P/E Ratio has been fairly stable over the last 15 months. That may come as a shock to many people, but it’s true.

  Consider that the S&P 500 is up 6.65% so far this year and earnings are projected to grow 11.14%. The calendar year is 63% over which means valuations are basically the same now as they were at the start of the year.