Author Archive

• Morning News: October 14, 2011
  Eddy Elfenbein, October 14th, 2011 at 5:18 am

  G-20 Mulls Boosting IMF Lending Power

  China’s Zhu Says G20 Ministers Discussed More Credit for Europe

  China Inflation Ticks Lower, Policy on Pause

  Spain’s Credit Rating Cut by S&P on Weaker Growth Outlook

  Brent Crude Oil Rises Near $112 as China Inflation Cools

  Oil Firms Face Liability Protection Challenges

  Hurting at Home, U.S. Ranchers Find Markets in Russia for Their Beef, on the Hoof

  Bank Rules That Serve Two Masters

  Wall Street Protests Planned in London, Tokyo

  Google Gains After Advertising Demand Helps Sales Top Estimates

  UBS Rating Cut, Fitch Says More Than Dozen Banks May Follow

  Unilever to Buy Russia’s Kalina in $694M Deal

  Gap to Slash Its Store Count

  News Corp. Hits a Bump as Investors Prepare to Meet

  Phil Pearlman: xxxx Recommends Caution Into Google Earnings

  Edward Harrison: Hockett Says Restructure Debt and Invest in Infrastructure

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• JPMorgan Chase Earns $1.02 Per Share
  Eddy Elfenbein, October 13th, 2011 at 10:50 am

  From Bloomberg:

  JPMorgan Chase & Co. (JPM), the second-largest U.S. bank, reported an approximately 33 percent profit decline excluding a $1.9 billion accounting benefit as earnings from investment banking and trading slumped.

  Third-quarter earnings fell to about $3.1 billion, or 73 cents a share, not including the 29-cent accounting gain, from $4.71 billion on the same basis a year earlier. Net income was $4.26 billion, or $1.02 a share, compared with the average per- share estimate for adjusted earnings of 92 cents in a survey of 30 analysts by Bloomberg, the New York-based company said today.

  Revenue at the investment-banking unit fell 13 percent from the second quarter as concern that Greece would default and U.S. lawmakers would fail to raise the debt ceiling roiled markets. The firm said the division will face similar market conditions for the rest of the year. The retail business fared better, with mortgage fees and related income gaining 25 percent from the second quarter and credit-card revenue up 7 percent.

  The debt-valuation gain, “does not relate to the underlying operations of the company,” Chief Executive Officer Jamie Dimon, 55, said in a statement. Dimon said on a conference call with journalists that the after-tax effect of the accounting change was about 60 percent of the total gain for the quarter.

• Q3 Projected to Be Lower than Q2
  Eddy Elfenbein, October 13th, 2011 at 10:10 am

  As earnings season begins to heat up, Wall Street thinks that earnings for the S&P 500 will be lower in the third quarter than they were in the second.

  For the record, the S&P 500 earned $24.86 in the second quarter which was an all-time record. Wall Street currently expects Q2 earnings to come in at $24.29 which is a drop of 2.29%.

  Don’t be too alarmed — this is still a projected increase of 12.66% from one year ago. Wall Street expects earnings growth to accelerate to close to 17% in the fourth quarter, which seems too optimistic to me. The Street also expects earnings growth of 13.18% in 2012, which is again probably too high.

  Sales for the S&P 500 are projected to fall sequentially from $258.76 to $263.31. That’s a drop of 1.73%. Since earnings are projected to fall more than sales, that means operating margins are expected to fall slightly — from 9.44% to 0.39%.

  The operating margin market of 9.44% in Q2 was the highest since the 9.60% mark reached in the third quarter of 2006. The lesson is that earnings can’t continue to rise thanks to higher margins — sales need to rise as well.

  To give you an idea of how powerful the margin story has been, sales growth from Q2 of 2009 to Q2 of 2011 was almost 18%. Earnings growth, however, was 80%. Margins increased from 6.19% to 9.44%.

  

• Stock Market Report – 101 Years Ago
  Eddy Elfenbein, October 13th, 2011 at 10:02 am

  The Morning Leader
  Regina, Saskatchewan
  January 15, 1910

  Genuine liquidation was evident today in a demoralized stock market. However strange it may appear to those who believe the president’s campaign of legislation is in the interests of the stockholders, it is a fact that the world in general seems alarmed at what President Taft proposes to do. Selling was undoubtedly precipitated by the Rock Island affair, and professionals took advantage of the uneasiness, thus causing the public to get worried. The public, not understanding the technical condition of the market, has believed something fundamental is wrong.

  The selling of stock is now from the hands of the real owners. It is not a Wall Street protest, but a protest from small investors. There is little doubt that it will be listened to by the powers at Washington, and the chances are that the politicians, when they see out of what quarter the wind is blowing, will trim their course accordingly, and head off all legislation whatever.

  Many well meaning persons believe that the government is going too far in assuming control and management of the railroads and manufacturing industries of the country. Those who believe that such control would be of great advantage to the stockholders and to the public are apparently in the minority, and must bow to the will of the great opposition that has made itself manifest through the selling of investment stocks.

  It can be said on the highest possible authority that the great financiers of Wall Street are in favor of closer control by the government. They have been preaching cheerfulness and higher prices in the past two weeks, and they have made their words good by heavy purchases in the stock market. There is no doubt, for instance, that the Morgan following has bought steel freely, every fraction down. Right now they are advising its purchase without reserve. Those closest to the Harriman throne are buying Union Pacific and Southern Pacific and are telling every enquirer that they must certainly dismiss the suit against the Union Pacific.

• Morning News: October 13, 2011
  Eddy Elfenbein, October 13th, 2011 at 5:46 am

  China Exports Slow on ‘Severe Challenges’

  IMF: Japan Must Do More To Cut Debt, Secure Fiscal Confidence

  EU Barroso: Greece Must Reduce Debts If It Is To Succeed

  Europe Tells Its Banks to Raise New Capital

  German Institutes Cut 2012 Growth Forecast

  Protesters to ‘Occupy’ London Stock Exchange

  Congress Ends 5-Year Standoff on Trade Deals in Rare Accord

  Divisions Grow on Federal Reserve’s Policy Committee

  Fed Signals Next Move May Link Stimulus to Economic ‘Mileposts’

  Buffett’s Son Defends Occupy Wall Street

  U.S. Treasury Didn’t Review Solyndra Rescue Effort, Memo Shows

  Retail Giant Carrefour Warns on Profit as Europeans Cut Back

  Rolls Shares Surge on Profit Boosting Engine-Venture Exit

  Liz Claiborne Rises Most in 24 Years on Brand Sale to Penney

  For BlackBerry Maker, Crisis Mounts

  Jeffrey Carter: Government Reports, Market Volatility and Big Government

  Stone Street: Dude, Where’s MY Bailout???

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• Ford Continues to Thrive
  Eddy Elfenbein, October 12th, 2011 at 11:55 am

  I want to say a few words about Ford Motor ($F). I was very optimistic for this stock at the beginning of the year. However, a number of problems have hindered the company and the stock has plunged.

  As a result, Ford has been near the top of my list for stocks to ditch for next year’s Buy List. But Ford is now so cheap that it’s a good bargain. The selling has been very overdone.

  Also, there’s been some good news at Ford recently. Moody’s said that it’s considering raising the company’s credit rating which is currently in the toilet. The catalyst is the recent deal agreed to by Ford and the UAW. Obviously labor costs are a major issue for the company to remain competitive. (Ford and the union aren’t quite there since one of the locals just rejected the deal.)

  Ford borrowed a ton of money before the financial crises. The company has worked to pay off their debt but there’s still a long way to go. An improved credit rating will help alleviate some of their interest costs.

  The company also had a strong sales month for September. It was their best September since 2004. The company’s car sales aren’t strong but the trucks and utility models are doing very well.

  The Dearborn, Mich.-based auto maker said its total U.S. sales increased 8.9% last month to 175,199 units. Ford-brand sales leaped 14.4% to 168,181, while its struggling Lincoln unit suffered a 6.6% decline to 7,018 vehicles.

  Ford’s growth was highlighted by a 41% jump in Escape sales and a 204% surge in Explorer sales.

  The company also sold 15% more trucks, including its best month of F-Series sales of the year at 54,410 units sold.

  SUV sales climbed 35%, posting their best month at Ford since 2004. Ford’s hot-selling Escape vehicle has set internal monthly sales records seven out of nine months and is up 32% to 187,850 year-to-date.

  “Ford continues to deliver strong sales results in a dynamic marketplace with a broad portfolio of fuel-efficient, high-quality products,” Ken Czubay, vice president for U.S. marketing sales and service, said in a statement. “This is further proof that Ford is offering the vehicles – with the fuel economy and technologies – that people truly want and value.”

  Last week, the stock dropped to $9.05 which is 4.7 times this year’s earnings. Ford has been as high as $11.77 today.

• Pepsi Beat Earnings
  Eddy Elfenbein, October 12th, 2011 at 9:53 am

  Pepsi ($PEP) isn’t on my Buy List but it’s a stock I like a lot. The company has raised its dividend for the last 39 years in a row. Also, Pepsi is a lot more than soft drinks. Close to half of its sales come from snacks.

  Pepsi just reported third-quarter earnings that were one penny better than expectations:

  PepsiCo Inc., the world’s largest snack-food maker, reported a 4.1 percent rise in third-quarter profit, helped by price increases and sales of snacks in Latin America.

  Net income advanced to $2 billion, or $1.25 a share, from $1.92 billion, or $1.19, a year earlier, Purchase, New York- based PepsiCo said today in a statement. Profit excluding some items totaled $1.31 a share, beating the $1.30 average of 14 analysts’ estimates compiled by Bloomberg.

  

• Morning News: October 12, 2011
  Eddy Elfenbein, October 12th, 2011 at 5:33 am

  Europe Stocks Erase Losses as Carmakers, Chemical Companies Gain

  Germany’s Schaeuble Confident Slovakia Will Ratify EFSF

  As Greece Avoids a Default, Recapitalization Plans Emerge for European Banks

  China Shares End Sharply Higher On Policy Loosening Hopes

  Textile Makers Fight to Be Heard on South Korea Trade Pact

  U.K. Unemployment Jumps to Highest in 15 Years

  Gold Gains in London as European Debt Concerns Spur Demand

  IEA Cuts Demand Forecast

  Senate Blocks Obama’s $447 Billion Job Creation Plan

  Wall Street Sees ‘No Exit’ From Financial Woes

  Painful Job Cuts Coming to Wall St.

  Alcoa Profit Misses Estimates as Europe Cuts Aluminum Orders

  99 Cents Stores Agrees To $1.55 Billion Offer From Ares, Canada Pension

  European Semiconductor Equipment Giant ASML Forecasts Sales Rise in Fourth Quarter

  Roger Nusbaum: Forget About Stocks?

  Paul Kedrosky: Benford’s Law and the Decreasing Reliability of Accounting Data

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• Stocks Mirroring Inflation Expectations
  Eddy Elfenbein, October 11th, 2011 at 3:43 pm

  I’ve run this chart before but I think it captures a fascinating aspect of this market. Stock prices seem to move with inflation expectations.

  

  The red line is the S&P 500 and it follows the right scale. The blue line is the difference between the 10-year Treasury yield and the 10-year TIPs, and it follows the left scale.

  The relationship isn’t perfect–few financial comparisons are–but this one looks pretty darn good. In fact, the correlation seems to be getting stronger in recent months.

  Correlation, of course, doesn’t mean causation. The two phenomena could be responding to a third. Or perhaps, the relationship is purely illusionary.

  But if the chart is to be believed, then Mr. Market is a major inflation dove.

• Netflix Is Down $200 in Three Months
  Eddy Elfenbein, October 11th, 2011 at 12:13 pm

  Eighteen months ago, I called Netflix ($NFLX) “The Absolute Worst Stock to Buy Right Now.” Ugh; not one of my better calls. The posting even caused the CEO to send me a snippy email.

  This was part of my post:

  Last year, Netflix made $115.9 million of sales of $1.67 billion. That works out to earnings of $1.98 a share. The stock, however, is currently around $86 or 43 times trailing earnings. The shares were overpriced at the start of the year and they’re up another 55% since then.

  When the fourth-quarter earnings came out in January, Netflix said that it expects full-year earnings-per-share for 2010 to range between $2.28 and $2.50. So even going by the top end of forward earnings, NFLX is still trading with a P/E ratio of around 35 which is more than twice the S&P 500. That’s just crazy.

  Seems reasonable, but it was one of the worst calls I’ve ever made. At the time, the stock was at $87. Three months ago, NFLX hit $304.79.

  To be fair, I continued to call the stock horribly overpriced. For example, when it hit $110 or when it hit $188 or when it hit $230 or when it hit $267. Hey, at least I’m consistent.

  To be a good investor, you need to look at your mistakes. So why was I so off about Netflix? I think my analysis was right but I was wrong on just how irrational the market can be — and how long it be irrational for. In the end the facts win, but that can take awhile.

  Today, shares of Netflix hit $103.13 which is a loss of $201.66 in just three months. I don’t believe that Netflix is down so much because they upset their customers and made some bad moves at damage control. Of course, that’s part of the move but that alone doesn’t cause a company to lose two-thirds of its value in a matter of weeks.

  Instead, the severe drop was due to a vastly inflated share price. The price issue was merely a catalyst for the momentum investors to get out. And they did.