Author Archive

  • Operation Twist
    , September 20th, 2011 at 11:56 am

  • S&P 500 = 1,220
    , September 20th, 2011 at 11:44 am

    Since August 5th, the S&P 500 has been locked in a range with 1,230 on the high side and 1,120 on the low side. The index has been as high as 1,220.39 today which is its highest level since September 1st.

  • Expect at Least 51 Cents Per Share from Oracle
    , September 20th, 2011 at 10:18 am

    After being down sharply for most of the day yesterday, the stock market rallied back in the afternoon. So far, we’re holding on to those gains this morning. As of now, we’re up slightly.

    The big news today is the beginning of the Federal Reserve’s two-day meeting in Washington. With every two-day meeting, Ben Bernanke holds a press conference on the second day. The Fed is widely expected to announce its “operation twist” which involves selling the short-term debt in its portfolio in order to buy longer-term debt. We’ve already seen the 30-year Treasury bond fall to the lowest yields in nearly three years.

    On our Buy List, Oracle ($ORCL) will report its fiscal Q1 earnings after the close. Three months ago, the company told us to expect Q1 earnings to range between 45 cents and 48 cents per share. My numbers say that’s way too low. I’m expecting at least 51 cents per share. One month ago, the stock dropped below $25 per share which was very cheap. Since then, Oracle has gradually climbed higher. Today, the shares have been as high as $29.36. I still rate Oracle a strong buy up to $30 per share.

    Here’s a chart I did last month looking at Oracle’s valuation.

  • Morning News: September 20, 2011
    , September 20th, 2011 at 5:03 am

    S&P Cuts Italy Rating on Weak Growth Outlook

    Euro Falls Third Day After S&P Cut Italy’s Rating; Dollar Gains

    Siemens Withdrew EUR500M From SocGen Before Stress Tests -Source

    Greek Aid Talks With Troika Resume 1700 GMT Tues – Greek Fin Min

    OPEC’s $1 Trillion Cash Quiets Poor on $100 Oil

    Slovenian Government May Fall Amid Debt Crisis

    Gold Slips In Asia As Dollar Gains On Italy, Greece Worries

    Geithner Predicts Europe Will Follow ‘Lessons’ of U.S.’s Financial Crisis

    Obama’s Home State Illinois Turns to China for Economic Boost

    Google’s Payment Tool Emerges, Adds New Partners

    Netflix CEO Unbowed

    GM Labor Deal Heads Toward UAW Vote

    UBS Board to Meet in Singapore to Review Loss

    UBS Scandal Is a Reminder About Why Dodd-Frank Came to Be

    Brian Shannon: Webinar Recording & Ideas for 9/20/11

    Joshua Brown: S&P Cuts Italian Debt to A/A-1, Outlook Delicious

    Be sure to follow me on Twitter.

  • Apple Hits New All-Time High
    , September 19th, 2011 at 12:59 pm

    The Double Dip hasn’t hurt Apple ($AAPL) so much. The stock broke out to a new all-time high today. Shares of AAPL have been as high as $411.50 today (so far).

    Two months ago, I looked at Apple’s valuation after its most-recent earnings report and found that the stock really can’t be called overpriced.

    Since then, Apple had fallen to $353 by early August but it’s made back all it lost since then.

    Wall Street currently thinks Apple will earn $27.53 per share for this fiscal year which ends in a few days. For FY 2012 (ending September one year from now), Wall Street expects earnings of $32.39.

    The S&P 500 is expected to earn $108.39 from September 30, 2011 to September 30, 2012 which gives the index a forward P/E Ratio of 11.01 based on the current price.

    Apple, by contrast, is going for 12.67 times forward earnings. That means that Apple is going for a 15% premium to the S&P 500 which seems very reasonable.

  • The 30-Year Yield Is Close to Multi-Year Low
    , September 19th, 2011 at 12:05 pm

    The yield on the 30-year Treasury bond hit 3.2% today. That’s just above the 3.19% from September 6th which was the lowest yield in 32 months. On July 26th, the yield was at 4.34%.

  • The Risks at AFLAC
    , September 19th, 2011 at 10:52 am

    At Seeking Alpha, Thomas Lott shares his thoughts on AFLAC ($AFL):

    Book per share today is $25.65. Compared to a $36 stock price, that is a 1.4x price to book ratio. Historically going back to 2001, the price to book has averaged around 2.6x. That does make AFL seem somewhat cheap. I think my problem as pointed out above is that bank losses have probably hurt the balance sheet since June 30th. AFLAC has begun to derisk, and the smart play for management is to sell down European bank bonds they own. Let’s just assume that their $706mm in losses is $1BB now, and that their capital gains have been cut in half (roughly $1BB of capital gains). That would imply a hit of around $2 per share to book to around $23.65. With the stock at $36, that is a price to book multiple of 1.5x.

    Read the whole thing. On balance, Lott likes the stock although he thinks there’s a chance it could fall to $22 if there’s a full panic in Europe. On the plus side, he calls it a buy below $30 per share and says it could hit $60 within two years. However, he’s curious as to why the company is so invested in Europe.

  • Larry Summers: “The world must insist that Europe act”
    , September 19th, 2011 at 10:18 am

    In the Financial Times:

    At every stage of this process, from the first signs of trouble in Greece, to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the stalemate machine. They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

    The process has taken its toll on policymakers’ credibility. As I warned European friends quite some time ago, authorities who assert in the face of all evidence that Greece can service on time 100 per cent of its debts will have little credibility when they later assert that the fundamentals are sound in Spain and Italy, even if their view on the latter point is a reasonable one. After the spectacle of European bank stress tests that treat assets where credit default swaps exceed 500 basis points as riskless, how can markets do otherwise than to ignore regulators’ assertions about the solvency of certain key financial institutions?

    Personally, I’m not so concerned with preserving the credibility of policymakers.

  • Netflix Separates Its DVD and Streaming Business
    , September 19th, 2011 at 10:09 am

    A customer backlash truly works — or perhaps I should say that a customer and investor backlash truly works. Netflix ($NFLX) has announced today that it’s separating its online streaming and DVD-by-mail service. The new division will be called “Qwikster” (who thinks of these names?).

    The streaming business will continue to be called Netflix. Members who subscribe to both services will have two entries on their credit card statements. Instead of Netflix, the distinctive red envelopes will now say Qwikster.

    The stock fell from a high of $304 on July 13 to $154 last Friday. The company has been on the defensive ever since they announced a controversial price increase this summer.

    The problem was that the stock was enormously over-priced so any disruption could cause the shares to plunge. Last week, Netflix had to lower its Q3 subscriber forecast and that caused even more pain for the stock.

    Reed Hastings, the CEO, finally took hold of the issue and publicly said that they made a mistake:

    Acknowledging that he “messed up,” Hastings said he “slid into arrogance based upon past success” when he did not adequately explain the reasons behind the plan separation and effective price hike. He said the reason is that instant streaming and DVD-by-mail are becoming “two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”

    Explaining the reasons behind the plan change “wouldn’t have changed the price increase, but it would have been the right thing to do,” Hastings wrote.

    Hastings said the DVD service will be the same as ever, “just a new name.” But customers will see a video games upgrade option for game rentals on the Qwikster website. Andy Rendich, who has been working on Netflix’s DVD service for 12 years, and leading it for the past four years, will be the CEO of Qwikster.

    The real Qwikster, of course, is the stock market and how quickly it turned against Netflix. This apology may help in the short-term but the stock is still vastly overpriced.

  • Greece Hits U.S. Stocks Again
    , September 19th, 2011 at 9:53 am

    After rising every single day last week, the stock market is sharply lower today. The S&P 500 rose from 1,154 to 1,216 last week and we’ve been as low as 1,193 this morning, so we’ve given some of our gains back but not all of them.

    As you might expect, investors are again worried about Europe. Again. Now we’re being told that it might take until October for a bailout plan to be in place. This is a repeat of the similar pattern we saw over the summer when stocks fell sharply on Monday due to the political uncertainty created over the weekend.

    Greece’s 10-year yield rose 163 basis points to 22.82 percent while two-year notes added 513 basis points to 60.0 percent. The notes rose for the first week in two months last week as traders trimmed bets for a pending default after the leaders of Germany and France signaled a commitment to keeping Greece in the euro area. They had climbed above 80 percent for the first time on Sept. 14 amid speculation the country wouldn’t be able to meet its obligations to investors.

    The policymakers seem to think they can solve this matter by an endless series of half-steps — just enough to claim that they’re doing something but not enough to truly change course.

    President Obama has introduced his plan to cut the deficit by over $3 trillion over the next ten years. The proposal includes tax increases and a New York Times article indicates that the president will veto any plan that relies on spending cuts alone.

    Under Mr. Obama’s proposal, $800 billion of the $1.5 trillion in tax increases would come from allowing the Bush-era tax cuts to expire. The other $700 billion, aides said, would come from a combination of closing loopholes and limiting deductions among individuals making more than $200,000 a year and families making more than $250,000.

    Mr. Obama’s plan will hover over Congressional budget-cutting negotiations that are under way over the next two months. A bipartisan Congressional committee is charged with coming up with its own cuts by Nov. 23; unless passed by Congress by Dec. 23, $1.2 trillion in cuts to defense and entitlement programs will go into effect automatically in 2013.

    Mr. Obama, however, is challenging the Congressional committee to go well beyond its mandate. “He’s showing them where they could find the savings,” one administration official said.

    This seems to be setting up Congress and the White House for another showdown, except this one will happen closer to an election.