Author Archive

• Walmart’s Trading Range Lives
  Eddy Elfenbein, February 22nd, 2012 at 9:08 am

  A few weeks ago, I noted that Walmart ($WMT) has been trapped in the “Mother of All Trading Ranges” for the last 12 years. Not once in over 3,000 trading days has WMT closed above $64 or below $42. The last time it did was on January 19, 2000 when it closed at $64.06. More than 78% of the time, the stock been between $48 and $59.99.

  

  On Friday, the stock closed at $62.48 which is very close to the top of its range. It seemed like the strange range would finally be broken. But yesterday, Walmart’s disappointing earnings knocked the shares back to $60.07.

  By the way, Walmart’s sales rose by 5.8% to $122.29 billion. That means that Walmart averaged $1 million in sales. A minute. Also, despite what people may think of how corporations are run, Walmart’s profit margin was just 4.24%.

• Bloomberg: Stocks Cheapest in 50 Years
  Eddy Elfenbein, February 22nd, 2012 at 8:09 am

  According to an article at Bloomberg, U.S. stocks are near the cheapest level relative to bonds in 50 years. Here’s how it works: If we take the market’s price/earnings ratio and flip it over to get earnings divided by price, then we have the earnings yield. When we compare that yield to the yield on the 10-year Treasury bond, the gap in favor of stocks is close to the widest its been since 1962.

  Earnings in the S&P 500 have more than doubled to $96.58 since 2009 and are projected to reach a record $104.28 this year, more than 11,000 analyst estimates compiled by Bloomberg show. The earnings yield, or annual profits divided by price, climbed to 7.1 percent, 5 percentage points more than the rate on 10-year Treasuries. That’s wider than in 97 percent of months in 50 years of Bloomberg data.

  I think this analysis is basically sound; however, there are a few problems. It says that stocks are cheap versus bonds. It doesn’t mean that stocks are cheap on an absolute level. In other words, it can mean that bonds are over-priced which I think is also true.

  On a philosophical level, we should remember that all prices are relative. We’ve been trained to think that all prices are expressed in dollars, but that’s a bit of a mind trick. All prices are relative to each other — dollar bills are just the middleman.

  Ideally, the earnings yield ought to be compared with rates longer than the 10-year bond. What’s interesting is that rates are unusually steep after ten years. The 20-year yield is currently 79 basis points over the 10-year, while the 30-year is 115 basis points above it.

  The spread was last this wide in the four months before the S&P 500 (SPX) reached a 12-year low in March 2009, data compiled by Bloomberg show. The benchmark gauge for American equities has increased 101 percent since then, including an 8.3 percent increase in 2012, the best start to a year since 1997.

  Low valuations and signs of recovery have failed to lure individuals back to equities. Stocks are trading at a 14 percent discount to their average price-earnings ratio over the past five decades. The multiple has been stuck below the mean of 16.4 times earnings since May 2010, the longest stretch below the average since the 13 years beginning in 1973, data compiled by Bloomberg show.

  (…)

  Capital investments surged in 2006 as the total debt-to- assets ratio in the S&P 500 was climbing to 38.8 in the third quarter of 2007, the highest point since at least 1998, data compiled by Bloomberg show. The ratio is about 32 percent lower now. Companies spent the past three years paying down debt and cutting costs, boosting the S&P 500 profit margin to 13.8 percent, compared with 8.3 percent in 2009, the data show.

  S&P 500 companies increased cash and equivalents for 12 straight quarters to $998.6 billion in the third quarter, 60 percent more than in September 2007, just before the index reached an all-time high of 1,565.15, according to S&P. The total excludes financial, utility and transportation companies.

  I caution investors that while this analysis is very useful, don’t get too caught up in models. All this is based on projections. Outside of a few months, forecasters don’t really have a good idea of what’s going to happen. They’re usually good at predicting that an existant trend will continue. But they’re not so good at spotting the turning points which is the most important part.

• Morning News: February 22, 2012
  Eddy Elfenbein, February 22nd, 2012 at 5:49 am

  Greek Bailout Wins Two Cheers From Wary Investors

  Greek Crisis Raises New Fears Over Credit-Default Swaps

  New Bailout Is a Reprieve for Greece, but Doubts Persist

  A Battle for Mongolia’s Copper Lode

  Oil Trades Near 9-Month High After Iran Denies Access to UN Team

  Obama Offers to Cut Corporate Tax Rate to 28%

  Watchdog Targets Overdraft Charges

  High-End Retailers Report Strong Profits, but Walmart Still Struggles

  Dell Earnings and Forecast Fall Short of Wall St. Views

  Kraft’s Net Rises 54% on Higher Prices

  Alibaba Offers to Take Web Portal Unit Private

  Ford Pours $3.8 Billion into Pension Plan, Eyes Shift to Bonds

  Peugeot in Alliance Talks After Report of GM Discussions

  Shell Offers to Buy Cove Energy for $1.6 Billion

  Joshua Brown: What a Waste.

  Paul Kedrosky: The Unexpected Physical Consequences of Technology

  Every Face Punch in Road House!

  Be sure to follow me on Twitter.

• After Market Updates
  Eddy Elfenbein, February 21st, 2012 at 9:54 pm

  Ultimately, the stock market gave back some of its gains this afternoon. The S&P 500 closed at 1,362.21 which was just shy of the post-crash high close of 1,363.61 from May 2nd of last year.

  Today’s market was split between large-cap stocks which fared the best and small-cap stocks which fared the worst. The small-cap Russell 2000 was down 0.66% today while the S&P 500 was up 0.98 points or 0.07%. The mega-cap S&P 100 was up 0.27%.

  Interestingly, shares of Apple ($AAPL) gained $12.73 or 2.54%. That’s a market cap gain of $11.87 billion. Each point in the S&P 500 is worth $9.05 billion. That means that Apple’s gain was worth 1.31 points in the S&P 500. The index gained 0.98 points so without Apple, the index would have closed just slightly lower today.

  In Buy List news, Johnson & Johnson‘s ($JNJ) CEO resigned:

  William C. Weldon, who presided over Johnson & Johnson during one of the most tumultuous periods in its history, will step down as chief executive in April, the company announced Tuesday.

  Alex Gorsky, head of the medical device and diagnostics business, will take over as chief executive. Mr. Weldon will remain as chairman.

  The news of Mr. Weldon’s retirement comes as Johnson & Johnson has struggled to emerge from a swarm of product recalls, manufacturing lapses and government inquiries that tarnished the name of a company that was once one of the nation’s most trusted household brands. In 2010, the company recalled millions of bottles of liquid children’s Tylenol and other medications, as well as tens of thousands of artificial hips and millions of contact lenses.

  Much of the blame for Johnson & Johnson’s stumbles fell on Mr. Weldon, the son of a Broadway stagehand and seamstress who became chief executive in 2002 after spending his entire career at the company. Critics said the company’s once-vaunted attention to quality slipped under his watch. The company said in a statement that neither Mr. Weldon nor Mr. Gorsky was available for comment.

  Oracle ($ORCL) was downgraded by JMP Securities. They’re paring back their earnings estimates but they add that the stock is not unreasonably valued.

  WSJ‘s “Market Beat” notes that DirecTV ($DTV) may soon join the streaming bandwagon.

• Here Comes Dow 13,000
  Eddy Elfenbein, February 21st, 2012 at 11:16 am

  The stock market is up this morning and the Dow Jones Industrial Average is a mere 10 points from cracking 13,000.

  

  I hope this will be different from the eight previous times we’ve broken 13,000. (That’s not an exaggeration. From April 2007 to May 2008, the Dow broke through 13,000 on eight different occasions going by the daily close.) If the Dow had merely kept pace with inflation over the last 12 years, it would be at 13,837 today.

  The S&P 500 is currently up to 1,366 which would be a post-crash high. Today could be the highest close since June 5, 2008. That was 44.5 months ago.

  On Friday, the Wilshire 5000 Total Return Index, which is about the broadest index possible, closed at its highest level since October 2007. That index includes dividends. By my math, we need a jump of 0.89% to make an all-time high. The Wilshire 5,000 is up 0.33% so far today.

• Morning News: February 21, 2012
  Eddy Elfenbein, February 21st, 2012 at 6:18 am

  Greece Wins Second Bailout as Europe Picks Aid Over Default

  Draghi Stays Silent on ECB Role in Greek Bailout

  Nordic Currencies Stung in Debt Crisis

  U.S. in Accord With Mexico on Drilling

  Foreign Investors Fear Japan Banks May Hijack Olympus

  China Buys Least Iran Crude in Five Months Amid Price Talks

  Rising Gas Prices Give G.O.P. Issue to Attack Obama

  Fed Housing Blueprint Lost in Din of Politics

  Some Doubt a Settlement Will End Mortgage Ills

  Mazda Mulling Raising 170 Billion Yen, Shares Take Beating

  URS Agrees to Acquire Flint Energy Services for $1.25 Billion

  Wal-Mart Raises Stake to 51% in China Online Retailer Yihaodian

  Trademarks Take On New Importance in Internet Era

  Pinterest Introduces “NOPIN” to Counter Copyright Concerns

  Howard Lindzon: The Incredible Shrinking World…Make It Work for You!

  Phil Pearlman: Brett Steenbarger Classics A Must Follow for Young Traders

  Be sure to follow me on Twitter.

• 50 Years Ago Today
  Eddy Elfenbein, February 20th, 2012 at 1:06 pm

• The Stock Market is Closed for Washington’s Birthday
  Eddy Elfenbein, February 20th, 2012 at 11:11 am

  The New York Stock Exchange is closed today in honor of George Washington’s birthday. That’s right — on the NYSE, it’s not President’s Day. My apologies to Millard Fillmore but here’s the explanation from the NYSE:

  Washington’s Birthday was first declared a federal holiday by an 1879 act of Congress. The Monday Holiday Law, enacted in 1968, shifted the date of the commemoration of Washington’s Birthday from February 22 to the third Monday in February, but neither that law nor any subsequent law changed the name of the holiday from Washington’s Birthday to President’s Day. Although the third Monday in February has become popularly known as President’s Day, the NYSE’s designation of Washington’s Birthday as an Exchange holiday (Rule 51) follows the form of the federal holiday outlined above (section 6103(a) of title 5 of the United States Code).

• Morning News: February 20, 2012
  Eddy Elfenbein, February 20th, 2012 at 6:46 am

  Iron Lady Merkel Bucks German Street on Greek Aid

  Greek Rescue Close as Ministers Meet to Resolve Disputes

  Greece Eyes Bailout Deal

  Pressure, Chinese and Foreign, Drives Changes at Foxconn

  China Cuts Reserve-Ratio for Growth as Inflation Deters Interest-Rate Move

  In China Movie Pact, More 3-D, Less Reality

  Japan’s Trade Deficit Widens to a Record as Export Slump Deepens

  Thailand GDP Shrinks 10.7%

  Israel Safest for Investors in Past Decade

  EU Says It Has Enough Oil Stocks as Nations Cut Iran Imports

  Wal-Mart Ups Stake in China E-Commerce

  Deals to Split EMI Spur Scrutiny and Criticism

  TNT Express Faces Investor Pressure for Better UPS Deal

  Lloyds Banking Group Said to Demand Repayment of Bonuses

  Epicurean Dealmaker: The Standard Model

  Stone Street: My First Forbes Column – So What if Apple Has A Chinese Labor Problem?

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• “How Your Cat Is Making You Crazy”
  Eddy Elfenbein, February 18th, 2012 at 3:58 pm

  I don’t know much about this subject matter but I found Kathleen McAuliffe’s article in The Atlantic to be spellbinding. It’s long, but I highly recommend it.