Author Archive

  • Morning News: September 29, 2011
    , September 29th, 2011 at 5:21 am

    Germany to Vote on Euro Rescue Fund

    Greek Bonds Lure Some, Despite Risk

    Norway to Cut Bank Support Amid Europe Crisis

    Gold Reverses Losses, Up 1% as Jewelers Buy

    Call by Fed for Money-Fund Curbs

    Bernanke: Unemployment Poses ‘National Crisis’

    Sony Says It Expects ‘Huge Impact’ on Profit From Euro Slump

    Amazon’s Tablet Leads to Its Store

    BOA, Merrill Pledge Support for Lehman Exit Plan

    H&M Profit Drop Beats Estimates as Margin Damage Is Limited

    Facebook, Twitter Usage Increases Companies’ Security Risks

    A Start-Up Takes On Procter & Gamble Over a Name

    Reebok To Pay Settlement Over Health Claims

    Yale Endowment Posts 22% Gain to End Fiscal Year at $19.4 Billion

    Pragmatic Capitalism: More on “Japan in Fast Forward”

    Paul Kedrosky: The Gazillion Euro Question

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  • Oracle Strikes Back
    , September 29th, 2011 at 2:30 am

    This is amusing:

    Oracle Corp. (ORCL) fired back at Autonomy Corp. (AU.LN, AUTNY) Wednesday, saying the British business-analytics company’s chief executive didn’t tell the truth about an April meeting purportedly held to shop the business around.

    The dispute also concerns Oracle rival Hewlett-Packard Corp. (HPQ), which last month agreed to buy Autonomy in a deal valued at about $10.3 billion. Oracle has followed an increasingly common script in Silicon Valley by morphing into one of H-P’s fiercest competitors.

    Oracle on Wednesday repeated its contention that Autonomy approached its executives before H-P publicly made its offer. Oracle has said it rejected the Autonomy deal because the price was too high.

    Autonomy Chief Executive Mike Lynch later disputed Oracle’s version of events, which prompted the California-based software giant to issue a statment late Wednesday.

    According to Oracle, Lynch and investment banker Frank Quattrone met with Oracle mergers-and-acquisitions chief Douglas Kehring and President Mark Hurd. The Autonomy chief pitched his company with a PowerPoint presentation, Oracle said.

    “Either Mr. Lynch has a very poor memory or he’s lying,” Oracle’s statement said. “The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

    In an emailed statement, Lynch denied that the April meeting was intended to pitch a possible sale of the company.

    “In April there was a 30-40 minute meeting between Autonomy and Mark Hurd, which was set up by Frank Quattrone as an introduction to Mark Hurd,” Lynch said. “Oracle is an Autonomy customer. In the meeting, in response to a joke about Mr. Quattrone’s presence, it was made clear Autonomy was not for sale and there was no process underway.”

    Lynch added that Autonomy hadn’t yet engaged Quattrone’s company at the time and said there has been no contact with Oracle since then.

    Oracle shares were recently up 0.6% at $29.64 in after-hours trading. The stock is up 8.3% over the past year.

  • Minimum Variance Portfolios
    , September 28th, 2011 at 4:58 pm

    Eric Falkenstein is probably the financial blogosphere’s biggest advocate of Minimum Variance Portfolios (MVP). The idea is that in investing risk and reward are not trade-offs. In fact, the lower the risk, the higher the reward. As counter-intuitive as this sounds, the numbers back it up.

    Falkenstein has shown that a portfolio constructed of the lowest-risk stocks in the S&P 500 has outperformed the index. I got the data off his site and here are the returns since 1998:

    Since the beginning of 1998 through August 2011, the S&P 500 has returned 31.59% while the Minimum Variance Portfolio has returned 211.18%. Annualized, that’s a lead of 8.7 to 2%.

    But here’s the kicker: the MVP has accomplished this with…well, minimum variance.

    Get ready for some math.

    In the table below, the blue dots indicate all of the daily changes in the chart above. The X-axis is the changes in the S&P 500. The Y-axis has the changes for the MVP.

    The key is that the MVP doesn’t go as high as the S&P 500 during an up day, nor does it fall as low as the index during a down day. I added the diagonal red line to show the 1-to-1 divide.

    Notice how the blue dots fall below the red line in the upper right quadrant and above the red line in the lower left quadrant. That’s what MVP is all about.

    The black is the linear trend and the formula is the classic linear equation (y=mx+b). The slope of the trend line is 0.558. What this means is that for every one unit the black line moves to the right, it climbs by 0.558 units, and for every one unit it falls, it drops by 0.558 units.

    In finance speak, that’s the beta of the portfolio, 0.558. If a portfolio has a beta of 1.0, it exhibits the same variance as the S&P 500. If it’s greater than 1.0, the portfolio swings greater than the market.

    Historically, our Buy List has a beta of 0.94.

    The b in the equation is the y-intercept, meaning that’s where the trend crosses the Y-axis when x=0. But more importantly for us, this also tells us how well the MVP has done against the S&P 500. Since it’s positive, the MVP has beaten the market by an average of three basis points per share, or 0.03%. (It’s actually about 2.5 basis points but Excel rounded up.)

    So despite having nearly half the variance as the overall market, the MVP has crushed the S&P 500 over the 13 years years.

    If you’re interested in learning more, here’s a link to Eric’s book, Finding Alpha: The Search for Alpha When Risk and Return Break Down. And here are the 47 stocks currently in the MVP (it’s rebalanced every six months):

    Company Symbol
    3M CO MMM
    ABBOTT LABS ABT
    AMERISOURCEBERGE ABC
    BAXTER INTL INC BAX
    BECTON DICKINSON BDX
    CAMPBELL SOUP CO CPB
    CEPHALON INC CEPH
    CLOROX CO CLX
    COCA-COLA CO KO
    COLGATE-PALMOLIV CL
    CONAGRA FOODS CAG
    CONS EDISON INC ED
    CR BARD INC BCR
    DOMINION RES/VA D
    DUKE ENERGY CORP DUK
    DUN & BRADSTREET DNB
    GENERAL MILLS IN GIS
    GENUINE PARTS CO GPC
    HJ HEINZ CO HNZ
    HOSPIRA INC HSP
    IBM IBM
    INTEGRYS ENERGY TEG
    JM SMUCKER CO SJM
    JOHNSON&JOHNSON JNJ
    KELLOGG CO K
    KIMBERLY-CLARK KMB
    KRAFT FOODS INC KFT
    KROGER CO KR
    L-3 COMM HLDGS LLL
    LABORATORY CP LH
    MCCORMICK-N/V MKC
    MCDONALDS CORP MCD
    MEDTRONIC INC MDT
    MILLIPORE CORP MIL
    PEPSICO INC PEP
    PFIZER INC PFE
    PINNACLE WEST PNW
    PROCTER & GAMBLE PG
    PROGRESS ENERGY PGN
    QUEST DIAGNOSTIC DGX
    RAYTHEON CO RTN
    REYNOLDS AMERICA RAI
    SOUTHERN CO SO
    WAL-MART STORES WMT
    WATSON PHARM WPI
    WISCONSIN ENERGY WEC
    XCEL ENERGY INC XEL

  • The Plunge of Major Financials
    , September 28th, 2011 at 10:23 am

    Check out how sharply Goldman Sachs ($GS), Citigroup ($C), Bank of America ($BAC), and Morgan Stanley ($MS) have fallen since the start of the year:

  • Durable Goods Orders Fell 0.1% in August
    , September 28th, 2011 at 9:49 am

    The futures indicate that the stock market will open modestly higher today. Yesterday was a very good day for stocks although we lost a lot of our gains as the day wore on.

    This morning, the Commerce Department reported that durable goods orders fell in August by 0.1%. This isn’t a huge drop but in July, orders soared by 4.1%.

    The important number to watch in the durable goods report is orders of “non-defense capital goods.” This is a good barometer for telling us how much businesses are spending.

    One of the major problems in this economy is that businesses are sitting on tons of cash but they’re not willing to spend it. The good news is that orders of non-defense capital goods increased by 1.1% in August after falling 0.2% in July.

  • Morning News: September 28, 2011
    , September 28th, 2011 at 6:20 am

    EU Barroso Calls For Use Of Fiscal Policy To Boost Growth

    Greek Vote Approves a Despised Property Tax

    Greek Strikes Maintain Momentum

    Nagging Fears on Europe Slow a Wall Street Rally

    Euro Crisis Makes Fed Lender of Only Resort

    Obama Jobs Plan May Prevent 2012 Recession

    Dallas Fed President Fisher Says Central Bank Is Under Attack From Ron Paul, Barney Frank

    Health Insurers Push Premiums Sharply Higher

    Free Checking Falls to 45% of Customer Accounts, Bankrate Says

    Taiwan Semiconductor Shares Climb After New York Chip Venture with Intel

    For Bank of America, a $50 Billion Claim of Havoc Looms

    Time Warner Balks at European Media Prices

    SABMiller a Step Closer to Snaring Australia’s Foster’s

    United Feeling Merger Pains

    Tasgall Group: Granger Things Have Happened

    Szelhamos Rules: You Know What I Like

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  • The 50-DMA Is In Sight
    , September 27th, 2011 at 2:55 pm

    I’ll feel much better when the S&P 500 finally crosses above its 200-day moving average. The 50-DMA, however, may be broken very soon.

    The 200-DMA is running about 1,281 right now but the 50-DMA is currently at 1,208.

  • Richard Fisher on Dissenting
    , September 27th, 2011 at 2:17 pm

    At the last FOMC meeting, Dallas Fed President dissenting from approving the Fed’s policy statement. Today, he explained why. Here’s part of his speech:

    One other factor gave me pause and that was, and remains, the moral hazard of being too accommodative. For years, I have been arguing that monetary policy cannot solve the problem of substandard economic performance unless it is complemented by fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity we are able to create as the nation’s monetary authority. These actions are not within the Fed’s purview; they are the business of Congress and the president. Chairman (Ben) Bernanke said it well in his recent speech at Jackson Hole (Wyo.): “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Both within the FOMC and in public speeches, I have argued that until our fiscal authorities get their act together, further monetary accommodation―be it in the form of quantitative easing or performing “jujitsu” on the yield curve through efforts such as Operation Twist―will represent nothing more than pushing on a string.

  • The S&P 500 is +2.25% at Noon
    , September 27th, 2011 at 12:03 pm

  • The Upcoming Third-Quarter Earnings Season
    , September 27th, 2011 at 10:52 am

    This is, thankfully, the final week of the third quarter. In a few weeks, the third-quarter earnings season will begin.

    For last year’s Q3, the S&P 500 reported earnings of $21.56. Wall Street currently expects earnings of $24.72 for this year’s Q3 which represents an increase of 14.7%. For the second quarter, the S&P 500 earned $24.86 so sequential earnings may decline slightly.

    Earnings growth for the fourth quarter is actually expected to accelerate to 18.7%. But I wouldn’t be surprised to see those estimates get pared back between now and the end of the year.

    Here’s the expected earnings third-quarter growth for the 10 S&P 500 sectors:

    Consumer Discretionary 12.6%
    Consumer Staples 7.8%
    Energy 50.3%
    Financials 2.8%
    Health Care 11.4%
    Industrials 10.5%
    Information Technology 15.2%
    Materials 27.7%
    Telecommunication Services 2.2%
    Utilities 1.7%