Author Archive

• Morning News: February 24, 2012
  Eddy Elfenbein, February 24th, 2012 at 6:32 am

  Europe Faces Pressure as G-20 Mulls IMF Role

  Deposit Flows Show Money Leaking to Germany

  Fitch Downgrades Three Australian Banks

  Japan Shuts AIJ Investment to Protect Clients

  In a Nod to Gas Prices, Obama Talks About Energy

  Bribery Case Falls Apart, and Tactics Are Doubted

  Bank of America Breaks With Fannie Mae

  AIG Profit Surges on Tax Benefit

  Lloyds 2012 Income to Decline After Full-Year Profit Slumps

  In a Gamble for Cash, Sears Plans to Sell Stores

  J.&J.’s Next Chief Is Steeped in Sales Culture

  Volkswagen Profit Advances to Record on Demand for Sport-Utility Vehicles

  Chemicals Giant BASF Expects Higher Sales in 2012

  At Apple Conclave, Nothing but Good News

  Jeff Carter: High Frequency Trading Fees-The Wrong Approach

  Roger Nusbaum: Morningstar Gets One Right

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• Stay Away from Hewlett-Packard
  Eddy Elfenbein, February 23rd, 2012 at 1:03 pm

  Last year, when Hewlett-Packard ($HPQ), was trading at $43, I warned investors to get out. Today, it’s at $27.

  This is unfortunate because HPQ could be a very good company; but right now, it’s a big mess. I don’t think they even know what business they’re in. After yesterday’s close, Hewlett came out with a horrible earnings report. Earnings dropped 32% (but actually beat expectations), and the company guided lower for this quarter.

  The shares have been down as much as 7.2% today, although they’ve come back some. This must be very frustrating for shareholders because until today, the stock had been doing fairly well coming off its October low. And that was very lowly low.

  For now, Hewlett-Packard is sticking with is full-year guidance of $4 per share, so you might be thinking, “Hey, $4 ain’t too shabby from a $28 stock.” Not so fast. This is a classic value trap. HPQ isn’t down because it’s cheap. It’s down because it’s lost. Hewlett-Packard is a long, long way from being healthy. Meg Whitman herself said that it will take years before HPQ is competitive again.

  I repeat, Hewlett-Packard is a sell.

• Companies Are Guiding Lower
  Eddy Elfenbein, February 23rd, 2012 at 9:00 am

  The Wall Street Journal reports today that corporations are cutting guidance at the fastest rate since 2009. That’s one of the those headlines that strikes you as sounding terrible, but as you give it more thought, it’s not nearly as dire as it sounds. Of course, once every three years there’s going to be the worst something in the last three years.

  Also, we’re talking the second derivative here. Companies are still earning money, and profits are still growing. The difference is that the rate of growth is slowing.

  Fifty-eight companies have released estimates for first-quarter earnings that fall below analyst consensus, compared with 23 that beat Wall Street. That’s the largest ratio of negative to positive announcements since the first quarter of 2009, when the S&P 500 was on its way to bottoming out below 700 in early March.

  “We’re seeing more negative guidance than usual,” said Greg Harrison, earnings analyst with Thomson Reuters. Estimated profits for 2012 have steadily fallen since October. The average S&P 500 company currently expects to add 8.3% in profits for the year. Just over a month ago, that estimate was at 10%.

  This is an extension of what I mentioned in last week’s CWS Market Review: profit margins have gone as far as they can go. You can cut expenses to boost profits, but that game isn’t a long-term plan.

  At some point, you need to bring in more revenue. Since companies can’t do much about raising prices in this environment, they need to sell more widgets. That means more customers, and that means more jobs.

  Today’s jobless claims (351,000, a four-year low) was more good news for workers — and equities.

• Target’s Earnings Were Good — And Possibly Bad
  Eddy Elfenbein, February 23rd, 2012 at 8:54 am

  From this morning:

  The AP:

  Target’s 4Q profit declines 5.2 percent

  Reuters:

  Target adjusted profit rises for holiday quarter

• Morning News: February 23, 2012
  Eddy Elfenbein, February 23rd, 2012 at 5:26 am

  Fitch Downgrades Greece on Debt Swap Plan

  German Business Confidence Hit 7-Month High in February

  Commerzbank Plans Capital Boost With Swap

  Royal Bank of Scotland Posts Loss Twice as Big as Expected

  Italian Consumer Confidence Rose More Than Forecast in February

  Buffett’s Berkshire Muscles into Thai Reinsurance

  S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion to Stocks

  Winners and Losers From a Tax Proposal

  Responding to Critics, S.E.C. Defends ‘No Wrongdoing’ Settlements

  The Volcker Rule, Made Bloated and Weak

  GM-Peugeot Still Seen as European Money-Losers

  H-P Profit Tumbles 44%; No Quick Fix, Says CEO

  Greek Bailout Leaves Europe on Road to Disaster: Clive Crook

  Jeff Miller: Big Market Worries: Profit Margins

  Global Macro Monitor: The Current Housing Bust is Much Worse Than The Great Depression

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• GDP-Linked Bonds Are Complete BS
  Eddy Elfenbein, February 22nd, 2012 at 7:58 pm

  Professor Robert Shiller is again arguing for GDP-linked bonds. These bonds would be based on 1/1,000,000,000,000th of a country’s Gross Domestic Product. The shorter name is “Trill” for one-trillionth.

  Shiller argues that we can solve the debt crisis by replacing treasury bills with Trills. The first mistake is that a debt problem is caused by…well, too much debt. A Trill is simply a different debt instrument. Changing the instrument of debt doesn’t change the existence of debt.

  The other problem with Trills is that they don’t make any sense for the issuer. When Shiller first wrote about this two years ago, David Merkel noted that the rational price for a Trill is infinite, and Felix Salmon repeats this again today. Lots of people are confused on this point, but David and Felix are exactly right.

  Of course, no one is going to pay an infinite price. Instead, when a rational price is infinite, it means that it’s not rational to issue a Trill to begin with.

  Think of it this way: You’re in business and you want a loan. Let’s say that the loan is at 5%. This means that both you and the lender believe that you can get a return-on-equity of at least 5% with that money. If you don’t think you can, there’s no need for you to borrow it, and there’s no incentive for the loaner to lend it. With a Trill, it’s impossible for the borrower to ever exceed the interest payments. It’s a never-ending cycle. It would be as if you, the business person, had instead earned a 12% return-on-equity on the lender’s money. So now you owe 12% to the lender. What’s the point?

  Here’s a comment I had left at David’s site on one of his Trill posts:

  A few quick points.

  There’s no way to pay off a Trill except by running a budget surplus or by issuing conventional debt, thus negating the need for Trills.

  There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.

  The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for Trills.

  I keep coming back to your point that Trills would be worth an infinite amount. I think that’s exactly right. For the borrower, Trills are irrational. The US Treasury can get the exact same thing for less.

• State Favorability Ratings
  Eddy Elfenbein, February 22nd, 2012 at 12:35 pm

  Below are the results of Public Policy Polling’s poll of states’ favorability ratings. They asked voters across the country what their impressions were of each state.

  I thought the results were fascinating. A few months ago I asked readers, “If we had to, which state should we boot from the union?” The results were somewhat similar.

  State	+/-	Margin
  Hawaii	54-10	44
  Colorado	44-9	35
  Tennessee	48-14	34
  South Dakota	42-8	34
  Virginia	45-13	32
  Montana	39-7	32
  Alaska	46-17	29
  Oregon	43-14	29
  North Carolina	40-11	29
  Pennsylvania	40-11	29
  Washington	43-17	26
  Kentucky	42-16	26
  Iowa	42-17	25
  Oklahoma	40-16	24
  Vermont	39-15	24
  Wisconsin	40-17	23
  Wyoming	34-11	23
  Florida	43-21	22
  North Dakota	33-11	22
  Missouri	32-11	21
  New Hampshire	37-18	19
  Indiana	31-12	19
  Idaho	30-11	19
  Nebraska	29-11	18
  Arizona	39-22	17
  Michigan	38-21	17
  Maine	32-15	17
  Ohio	34-18	16
  Delaware	32-16	16
  Maryland	31-15	16
  South Carolina	34-19	15
  New Mexico	30-15	15
  Kansas	28-13	15
  New York	40-29	11
  Georgia	31-20	11
  Minnesota	27-17	10
  Rhode Island	26-16	10
  Texas	40-31	9
  Massachusetts	35-27	8
  West Virginia	23-15	8
  Arkansas	25-20	5
  Connecticut	26-22	4
  Nevada	28-26	2
  Alabama	27-26	1
  Louisiana	24-24	0
  Utah	24-27	-3
  Mississippi	22-28	-6
  New Jersey	25-32	-7
  Illinois	19-29	-10
  California	27-44	-17

  I think it’s interesting that New York and Texas are two of the most liked and disliked states.

• Britain’s New 50% Top Tax Is Failing to Boost Revenue
  Eddy Elfenbein, February 22nd, 2012 at 12:08 pm

  The UK Telegraph reports:

  The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period.

  Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad.

  The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.

  I’m not a believer in the Laffer Curve, the idea that higher tax rates produce less revenue. I concede that it might occur at extremely high rates like 70%. However, I think it’s perfectly reasonable to see a short-term effect and I’d guess that’s probably what we’re seeing in Britain.

  People respond to incentives. The rest is details.

• Does the Stock Market Love Inflation?
  Eddy Elfenbein, February 22nd, 2012 at 10:13 am

  It appears so. Here’s a graph of the S&P 500 versus the 10-year inflation premium (the 10-year T-bond yield minus the 10-year TIPs yield). Since 2008, these two series have been waltzing partners.

  

  There’s no reason to expect a long-term relationship to last. After all, we’re comparing a price index to a yield. But, for whatever reason, whatever causes investors to expect more inflation seems to be highly aligned with higher equity prices. Correlation, of course, doesn’t mean causation.

• Obama Wants 28% Corporate Tax Rate
  Eddy Elfenbein, February 22nd, 2012 at 9:20 am

  From the AP:

  President Barack Obama is proposing to cut the corporate tax rate from 35 percent to 28 percent and wants an even lower effective rate for manufacturers, a senior administration official says, as the White House lays down an election-year marker in the debate over tax policy.

  In turn, corporations would have to give up dozens of loopholes and subsidies that they now enjoy. Corporations with overseas operations would also face a minimum tax on their foreign earnings.

  Over the last 40 years, corporate taxes have fallen as a percentage of federal revenues. I can’t say if this has a realistic chance of becoming law. I would think that fighting for corporations during an election isn’t a good idea.

  Of course, corporations don’t pay taxes. A corporation is just a piece of paper. The companies pass the cost on to their customers. The benefit for the government is that it hides their taxes by imbedding it in a third-party’s prices.