The Duck Ducks Greece
Posted by Eddy Elfenbein on June 28th, 2010 at 9:41 am

I haven’t made much of a secret that I think AFLAC’s (AFL) stock is absurdly low. I think the market is very nervous over what’s in AFLAC’s portfolio, especially in Europe, and that’ understandable. The most unnerving aspect of a financial crisis is that you never know who is exposed to what, until too late. The company, however, has made it clear that its portfolio is doing fine.
Today the company reports that it has dumped all of its Greek sovereign bonds. AFLAC got $270 million for the bonds, which is a loss of $67 million, or around 14 cents a share. That’s barely a dent.
AFLAC has also reduced its exposure to perpetual securities (also known as “hybrids”) through two separate transactions. This is how they describe the sales:

The company also exchanged a perpetual, Upper Tier II security of a European issuer for a higher-rated, fixed maturity, senior debt instrument. In addition, the company further reduced its perpetual Upper Tier II holdings through a privately negotiated transaction with another European issuer.

Hmmm. A bit murky, no? The important news is that those sales will bring in $80 million in profit to their Q2 GAAP earnings, or about 17 cents per share.
This is very good news and it shows investors how well AFLAC manager risk. Kriss Cloninger III, the president and CFO said:

Although these transactions resulted in losses on a statutory accounting basis, we estimate they will add approximately 20 points to our risk-based capital ratio by reducing investment concentrations and reinvesting into higher-rated debt securities. As we have repeatedly discussed, our primary focus is to maintain a strong capital position. That is especially true today, given uncertainty in the global economic environment and the volatility of capital markets. As such, we will continue to assess the creditworthiness of issuers in our portfolio and manage our investments in a way that reflects our risk tolerance and the objectives we’ve set for earnings growth. In that regard, we continue to believe our objectives of increasing operating earnings per diluted share 9% to 12% in 2010 and 8% to 12% in 2011, before the impact of currency translation, are achievable.

Last year, AFL made $4.85 per share. For this year, they said they expect to earn somewhere between $5.24 to $5.56 per share.

Lowest Mortgage Rates in 50 Years
Posted by Eddy Elfenbein on June 26th, 2010 at 11:11 am

Not that anyone has any money:

Mortgages are cheaper today than they’ve been in a half-century. If only most people had the job security, the credit score and the cash to qualify.
The average rate for a 30-year fixed loan sank to 4.69 percent this week, beating the low set in December and down from 4.75 percent last week, Freddie Mac said Thursday. Rates for 15-year and five-year mortgages also hit lows.
Rates are at their lowest since the mortgage company began keeping records in 1971. The last time they were any cheaper was the 1950s, when most long-term home loans lasted just 20 or 25 years.

Today’s Ugly GDP Report
Posted by Eddy Elfenbein on June 25th, 2010 at 10:15 am

When the initial first-quarter GDP report came out two months ago, I said it was pretty bad.
Now here we are two months later and it turns out that GDP growth was worse than we thought. The government said the economy grew by just 2.7% during the first three months of the year.

North Korea Says We Owe Them $65 Trillion
Posted by Eddy Elfenbein on June 24th, 2010 at 11:27 pm

$64.96 trillion to be exact due to 60 years of hostility:

The official North Korean news agency, KCNA, says the cost of the damage done by the US since the peninsula was divided in 1945 is estimated at $US64.96 trillion.
The compensation call comes on the eve of the 60th anniversary of the start of the 1950-1953 Korean War.
KCNA said the figure includes $US26.1 trillion arising from US “atrocities” which left more than 5 million North Koreans dead, wounded, kidnapped or missing.
The agency also claims 60 years of US sanctions have caused a loss of $US13.7 trillion by 2005, while property losses were estimated at $US16.7 trillion.
The agency said North Koreans have “the justifiable right” to receive the compensation for their blood.
It said the committee’s calculation did not include the damage North Korea had suffered from sanctions after its first nuclear test in 2006.

Bed Bath & Beyond Earns 52 Cents a Share
Posted by Eddy Elfenbein on June 24th, 2010 at 9:34 am

I was somewhat right about Bed Bath & Beyond‘s (BBBY) earnings report. The company earned 52 cents a share for its May quarter. My range of 52 to 54 cents a share was more than Wall Street’s consensus of 48 cents a share.
I was also right that the big news would be the company’s outlook for this quarter. BBBY said to expect earnings for the August quarter to range from 59 to 63 cents a share. Wall Street was expecting 63 cents per share.
For the full-year, BBBY said it expects profit growth of 15%. Last year, the company made $2.30 a share so that translates to earnings of $2.65 per share for this year. That’s five cents below Wall Street’s view. In April, BBBY’s original forecast was for EPS growth of 10% to 15% for this year, so there’s really no downgrade at all. In fact, I think $2.65 is probably on the low side.
The stock was off sharply in the after-hours market yesterday but it seems to have recovered somewhat. This news really isn’t that bad; I’d say it’s closer to fine-tuning than poor guidance. The good news is that profit margins continue to improve. This is the fifth straight quarter that year-over-year net margins are up.
For the last four quarters, BBBY’s net margin is just over 8%. That’s a huge improvement from under 6% just a few quarters ago. To give you some perspective, that kind of margin growth turns a sales increase of 12% into profit growth of close to 50%.
Here’s a look at the trailing four-quarter EPS going back a few years. The red line is the company’s forecast.

The company has clearly recovered from the recession. To many people make the mistake of lumping BBBY in with housing stocks. Their business is affected by housing but it’s not so heavily dependent on the overall health of that sector.
My view is that if you can get this stock below $40, you’re getting a good deal.
Here are the earnings results going back a few years:

It’s Always Sunning On Wall Street
Posted by Eddy Elfenbein on June 24th, 2010 at 9:05 am

Via Paul Kedrosky comes this chart showing how rarely Wall Street tells us to sell.

Today’s Fed Statement
Posted by Eddy Elfenbein on June 23rd, 2010 at 2:28 pm

A hint of optimism?

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

The market is happy!
Dow Jones reports that the futures market now sees a 22% chance of a Fed hike in January. Before the meeting, it was 32%.

Medtronic Gives 2011 Outlook
Posted by Eddy Elfenbein on June 23rd, 2010 at 9:32 am

Once again, the stock market looks to rise this morning. The Federal Reserve is meeting in Washington and will almost certainly leave interest rates unchanged. Traders, however, will dissect the Fed’s policy statement for any hint of a change in direction. I’ve said that I believe the Fed will raise rates before most people expect.
As for now, the dominant fact is that unemployment is close to 10% and inflation is very tame. In Britain, the results of their most recent policy meeting showed that one member did vote to increase rates (shocker), but everyone else wanted to continue with low rates.
Medtronic (MDT) said that it expects earnings of 79 cent to 81 cents per share for its fiscal first quarter which ends next month. That’s below Wall Street’s estimate of 84 cents per share so the stock may come down today, but the news isn’t that bad. For the full year, Medtronic sees earnings ranging between $3.45 and $3.55 per share while the Street sees earnings coming in at $3.51 a share. The stock is now below $38 a share so Medtronic is going for a decent valuation.

Update on Momentum Stocks
Posted by Eddy Elfenbein on June 22nd, 2010 at 2:59 pm

Here’s an update to the chart of the historical performance of momentum stocks. This is one of the most fascinating phenomena in finance. Stocks that have done well, on average, continue to do well.
The chart shows the historical performance of stocks ranked by momentum decline (meaning 10% slices).

The deciles are perfectly rank ordered. The stocks that had been doing the best, do the best. The stocks that had been doing the worst, fare the worst.
The data comes from Dr. Ken French’s website. Just to be clear, momentum is defined by performance over the 11-month period starting 12 months ago and ending one month ago. The one-month directly prior to each period is excluded. At the end of the month, the whole thing is repeated. The data series goes back over 80 years.
Here’s how each decile has performed:
Decile 1: 16.79%
Decile 2: 13.11%
Decile 3: 12.42%
Decile 4: 10.63%
Decile 5: 9.42%
Decile 6: 8.47%
Decile 7: 8.05%
Decile 8: 5.73%
Decile 9: 4.54%
Decile 10: -1.73%

The Yuan Rally Fades Away
Posted by Eddy Elfenbein on June 22nd, 2010 at 1:37 pm

Yesterday’s yuan rally totally collapsed and we’re not advancing much at all today. The market is becoming similar to a World Cup match—little scoring and lots of buzzing in the background.
The Buy List is finally having a good day today. I said before that I was wary of Bed Bath & Beyond (BBBY), but I didn’t expect such a pullback in that stock. I’ll be very curious to hear what they have to say about Q2 when Q1 earnings come out tomorrow.
The most notable move today is that energy stocks aren’t doing well. This is good four our Buy List’s relative performance since we’re underweighted in energy.
I’m also surprised by the rally in the five-year Treasury. The yield has dropped from 2.3% yesterday to 2% today. That’s a big move. What’s interesting is that the five-year T-note has tried repeatedly to break below 2% and it just can’t stick. It bounced off 2% last December and has had a longer battle with 2% ever since late April. If I knew more about technical analysis, I might call it “resistance.”