Morning News: September 23, 2010
Posted by Eddy Elfenbein on September 23rd, 2010 at 8:38 am

The Fed, Translated Into English
Amid Tension, China Blocks Vital Exports to Japan
Central Banks Struggle for Exit as Recovery Weakens
Blockbuster to Slash Debt by $900 Million via Bankruptcy
Dollar Recoups Losses; Euro Pulls Back
Buyers Send iPhones on a Long Relay to China
Warren Buffett to CNBC: “We’re Still In a Recession”
Bill Gates Tops Forbes 400 Ranking of Richest Americans With $54 Billion
Here’s the Cookie Monster dressed as Issac Hayes singing the theme from Shaft and eating the set. Also, it’s in Dutch. After that, it gets a little strange.

Bed Bath & Beyond’s Earnings: I Freakin Called It
Posted by Eddy Elfenbein on September 22nd, 2010 at 4:16 pm

Me a week ago:

I wouldn’t be surprised to see BBBY smash earnings next week. The stock could even make as much as 70 cents per share (look at me being all bold).

Today’s earnings report:

Bed Bath & Beyond Inc. today reported net earnings of $.70 per diluted share ($181.8 million) in the fiscal second quarter ended August 28, 2010, an increase of approximately 35% versus net earnings of $.52 per diluted share ($135.5 million) in the same quarter a year ago.

That wasn’t a small beat either. Wall Street was expecting 63 cents per share.

Net sales for the fiscal second quarter of 2010 were approximately $2.137 billion, an increase of approximately 11.6% from net sales of approximately $1.915 billion reported in the fiscal second quarter of 2009. Comparable store sales in the fiscal second quarter of 2010 increased by approximately 7.4%, compared with a decrease of approximately 0.6% in last year’s fiscal second quarter.
Also during the fiscal second quarter of 2010, the Company repurchased approximately $193 million of its common stock representing approximately 4.9 million shares.
For the fiscal first half ended August 28, 2010, the Company reported net earnings of $1.22 per diluted share ($319.3 million), an increase of approximately 42% over net earnings of $.86 per diluted share ($222.7 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2010 were approximately $4.060 billion, an increase of approximately 12.5% from net sales of approximately $3.609 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2010 increased by approximately 7.9%, compared with a decrease of approximately 1.1% in last year’s fiscal first half.
For the fiscal third quarter of 2010, the Company is modeling net earnings per diluted share to be approximately $.61 to $.65. For fiscal 2010, the Company is now modeling net earnings per diluted share to increase by approximately 20%, up from the previous model of approximately 15%.

That last line is great news. BBBY made $2.30 per share last year so the company is effectively increasing its EPS projection from $2.64 to $2.76. The Street was at $2.71.
Here are the earnings results going back a few years:

Here’s a closer look at the critical factor, the rebound in BBBY’s margins.

For financial newbies, net margin is a fancy way of saying the “bottom line.” Operating margin is just like net margin but it doesn’t include interest expense or taxes. What’s interesting is that BBBY is able to charge more for its products while sales are still growing at a healthy pace. Net sales have grown by double-digits for the last four quarters in a row.
I said last week that I would be leery of starting a position over $40. I still feel that way but the new guidance makes me willing to go as high as $42. The shares are up after hours. If you’re looking to buy BBBY, don’t it chase it — wait for it to come to you.

CNBC Debuts!
Posted by Eddy Elfenbein on September 21st, 2010 at 10:14 am

From 1989:

The Trading Range is Finally Broken
Posted by Eddy Elfenbein on September 21st, 2010 at 10:05 am

We finally did it yesterday. The S&P 500 had closed between 1022.58 and 1127.79 for 86 straight days.

Thanks to a surge yesterday, the market not only broke though 1130 but finished at 1142.71.

I can’t tell if this bodes well for the market, but I do believe that the market continues to be underpriced, particularly the stock on our Buy List. AFLAC (AFL) broke through $53 per share. Reynolds American (RAI) is getting very close to $60 per share. (I thought dividend stocks were supposed to be boring!)

Although it’s not on the Buy List, I noticed that ConAgra (CAG) just upped its dividend by 15%. The quarterly dividend is now 23 cents per share which is up from 20 cents per share. The stock now yields 4.3% which is about 45 bips above the 30-year Treasury.

Morning News: September 21, 2010
Posted by Eddy Elfenbein on September 21st, 2010 at 9:31 am

Worst Over in Global Poll Pointing to Reduced Market Returns
Airline Profits Expected to Soar This Year
SAIC of China Weighs Buying Stake in G.M.
Irish, Spanish, Greek Auctions Calm Investor Nerves
H.P. Settles Lawsuit Against Hurd
President Obama Defends Actions on Economy
Corporate Political Giving Swings Toward the GOP
Generation Y Giving Cars a Pass

Charlie Munger at the University of Michigan
Posted by Eddy Elfenbein on September 20th, 2010 at 2:09 pm

Ever wonder why Warren and not Charlie is the public face of Berkshire?

Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”
“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”
Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.”
“Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Munger said. “So I think when you have troubles like that you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”
Germany was unable to stabilize its financial system in the 1920s, and, Munger said, “We ended up with Adolf Hitler.”

Here’s the video.

AFLAC Upgrade
Posted by Eddy Elfenbein on September 20th, 2010 at 1:16 pm

Barron’s has Sandler O’Neil’s upgrade of AFLAC (AFL):

We are upgrading shares of Aflac to Buy from Hold and are increasing our price target to $63 from $54 following a recent analyst day in Tokyo.

We believe that sales of third-sector supplemental-type insurance products will continue to have growth in Japan given the country’s aging population, increasing out-of-pocket medical expenses for consumers, and a government cancer-awareness initiative.

Aflac’s sales through the bank channel will continue to increase over time, and Aflac has more bank distribution relationships than any of its competitors. The bank channel will account for an increasing proportion of Aflac’s sales.

Aflac’s new product sales appear to have continued their upward trajectory, although year-over-year comparisons will be challenging due to significant sales growth in second-half 2009. The child-endowment product will continue to have strong sales, and we expect cancer products will begin to reverse recent declines in sales.

The margins for the child endowment product are a little better than we had thought — management stated margins are about 5% and are similar to medical products.

We are adjusting our 2010 operating earnings-per-share estimate to $5.45 up from $5.44 to account for incremental strength in the Japan operations. We are also increasing our 2011 EPS estimate to $6.00 from $5.95 to account for stronger results in the Japan segment. Consensus EPS estimates are currently $5.46 and $5.99 for 2010 and 2011, respectively.

The stock broke $53 this morning.

Momentum: Not Monthly, but Daily
Posted by Eddy Elfenbein on September 20th, 2010 at 1:08 pm

Andrew Haldane of the Bank of England recently had a remarkable chart showing the success of momentum investing. Being in the market the month following an “up” month has historically creamed a buy-and-hold strategy.
The problem is that the data was wrong. Well, not wrong exactly but it was the wrong data. Haldane was using a monthly average for the index instead of the close. When you use the close, the chart looks very different.
Still, historically there’s been a very strong momentum effect. Instead of looking at monthly totals, I once looked at daily changes. The stock market has done very well on days following “up” days, and it’s done poorly on days following “down” days.
I found that the market’s entire capital gain has come on days following +0.64% or more gains. That’s only about 20% of the time. The other 80% of the time, the market is net flat. “Half the market’s gain came on day’s following 3.2% up moves. On average, that happens slightly less than once a year.”
While this strategy has been very successful historically, the impact has faded greatly over the past 15 to 20 years.

Gold Adjusted for Inflation
Posted by Eddy Elfenbein on September 20th, 2010 at 12:19 pm

Despite the rally, gold is still well below its value from 30 years ago.

Gold is still far below its inflation-adjusted high after a record rally, and at least one indicator suggests the precious metal won’t approach that peak any time soon.
The CHART OF THE DAY shows the gold price relative to January 1980, when the metal reached $873 an ounce. Yesterday’s record close in New York trading equals $454.88 an ounce in real terms, reflecting an increase in the U.S. consumer price index, according to data compiled by Bloomberg.
Gold would have to rise above $2,435 an ounce to exceed its high from three decades ago, based on the CPI’s current reading. That’s 91 percent higher than the closing price of $1,272.20 in New York trading yesterday.

The ISM Told Us
Posted by Eddy Elfenbein on September 20th, 2010 at 11:54 am

I’ve often said that the monthly ISM index has been a pretty reliable indicator of when NBER dates recessions. This time around, the ISM was slow in telling us when the recession started but was pretty good on getting the end.

The subject of recession dating is quite literally academic — it depends on what you call a recession. Here’s NBER’s official statement on how it pinpoints a peak and trough in the economic cycle.

I’ve found that the tipping point on the ISM index is about 44.4. According to NBER, the recession began in December 2007 when the ISM was still around 50. It danced around 50 until the financial crisis of that September.

The ISM jumped from 43.2 in May 2009 to 45.3 in June to 49.1 in July. The index has been above 50 every month since August 2009.