P/E Ratios of Financial Stocks
Posted by Eddy Elfenbein on August 25th, 2010 at 12:01 pm

Here’s another look at the P/E Ratios are selected large-cap financial stocks. The P/E Ratios are based on earnings estimates for next year:

David Merkel adds: “The key metric, which is hard to measure for financials, is earnings quality. That’s one reason why P/Es are so low.”

More on Stocks Vs. Bonds
Posted by Eddy Elfenbein on August 24th, 2010 at 3:49 pm

Here’s another quick-and-dirty view of how badly bonds have been beaten stocks recently. This shows the Vanguard 500 Index Investor Fund (VFINX) divided by the Vanguard Long-Term Investment-Grade Fund (VWESX):

I’m using Vanguard’s main S&P 500 index fund as a proxy for stocks and it’s main corporate bond fund as a proxy for bonds. It’s not perfect but it suits our purposes.
As you can see, bonds have beaten stocks consistently since mid-April (meaning, the ratio is falling). The ratio is about where it was 13 months ago, and it’s not terribly far from it’s very low reading from March 2009.
According to this reading, bonds have outperformed stocks since April 1988. It could be older, but the data only goes back to November 1987.

Time for US Treasury Consols?
Posted by Eddy Elfenbein on August 24th, 2010 at 1:00 pm

With Treasury yields being so low, here’s an idea to consider—let’s have the U.S. Treasury consider floating some long-term debt, some very long-term debt, like a 100-year bond. Hey, Norfolk Southern (NSC) just floated some 100-year paper and the yield was under 6% so why not Uncle Sam? Perhaps not a big auction at first, but it’s certainly worth dipping our toes in the water to see what demand is like (in other words, will China approve?). This could save taxpayers huge amounts of money.
In fact, why stop at 100 years? In the 18th century, the British government issued consol bonds which are perpetuities—bonds that never mature. The word consol refers to the fact that the issue consolidated all of the governement’s debt into one issue. The bonds are callable and the British government has lowered the coupon a few times over the past 250 years. The yield is so low now (2.5%) that they’re not worth redeeming which means the Brits did well off them.
I say let’s float some Treasury perpetuities. Start with a small auction at first to see how it goes. We used to have redeemable Treasury bonds although none is currently outstanding. But for political cover, we can say that these perpetuities aren’t callable for the next, say, 50 years. We could even call them “Obama Bonds.” I wouldn’t be surprised if we could lock-in 4%.
Students of finance will also be happy because once the maturity of a bond becomes infinite, the yield-to-maturity equation gets a whole lot easier. Just divide the coupon by the price and you’re done.

Bond 36,000
Posted by Eddy Elfenbein on August 24th, 2010 at 11:21 am

The bond boom continues. The yield on the 10-year T-bond briefly dropped below 2.5% this morning:

Nortfolk Southern just sold $250 million in 100-year bonds.

The interest rate on Norfolk Southern’s new debt is 6% for a yield of 5.95%, about 0.90 percentage points more than where the company’s outstanding 30 year debt was trading Monday. It was the lowest yield for 100-year debt bankers could recall, breaking through the 6% yield on the company’s 100-year issue in 2005.

What’s the point of even having a stock market if investors only want debt? Just float debt and buy back all your stock.

Medtronic Falls on Lower Guidance
Posted by Eddy Elfenbein on August 24th, 2010 at 10:32 am

Shares of the Medtronic (MDT) are getting bashed this morning after the company lowered its earnings guidance for fiscal 2011. In my opinion, the market is overeacting but of course, that’s what markets do.
Here are the facts. Medtronic earlier said to expect EPS for FY 2011 (which ends in April 2011) to range between $3.45 and $3.55 with revenue growth ranging between 5% and 8%. Now they’ve lowered that to a range of $3.40 and $3.48, with revenue growing between 2% and 5%.
If we take the midpoints of the EPS forecasts, then the downward revision is just 1.7%. The shares, however, have been down by as much as 11.5% today. I am concerned that one lowered forecast often leads to another (and another and another….).
Still, let’s not get ahead of ourselves. Medtronic just reported pretty good earnings for their fiscal Q1 of 80 cents per share. That hit the Street’s forecast on the nose. In June, the company said to expect EPS between 79 and 81 cents which at the time was lower than the Street’s view of 84 cents per share.
With today’s earnings, MDT technically earned 76 cents per share plus there were four cents per share in charges. Revenue fell by 4% to $3.77 billion but some of that was due to currency conversion. I don’t worry so much about variables that are out of the company’s hands.
What’s causing Medtronic’s problem? CEO Bill Hawkins said, “Although we have experienced a slowdown in the markets of our largest businesses, the investments we are making in emerging markets and emerging therapies will allow us to achieve market-leading performance over the long-term.”
The AP notes:

The world’s largest medical-device company said global sales for its Cardiac and Vascular Group fell 5 percent to $2.03 billion in the quarter. Those sales actually increased 1 percent when adjusted for foreign currency and the extra week last year.
Spinal revenue dropped 9 percent to $829 million due to growing pricing pressures and weaker procedure growth, the company said.
Spinal devices make up Medtronic’s second-largest franchise. Medtronic spent nearly $4 billion to acquire spinal implant maker Kyphon in 2007, though many analysts say the unit is not living up to expectations.

If you own MDT, I know today’s news seems very bad, but the stock is still a very attractive buy. With today’s downturn, MDT is going for about nine times the lower bound of the revised forecast. Plus, the dividend yield is up to 2.9%.
Here are the sales and earnings numbers going back a few quarters:

Pujols and the Triple Crown
Posted by Eddy Elfenbein on August 24th, 2010 at 9:56 am

Last night, Albert Pujols went three-for-four; he hit a single, a double and a three-run home run which was the 399th of his career.
Pujols now leads the National League with 33 home runs, 92 runs batted in, and he’s third in batting average at .319. Pujols trails only Joey Votto (.323) and Martin Prado (.320). In 18 games this August, Pujols is hitting .425 with nine home runs and 20 RBI.
All this means that Pujols has a good chance of becoming the first major leaguer to win the Triple Crown since Carl Yastrzemski in 1967. In fact, no one has really come close since then. In all that time, perhaps the next closest is Joey Votto this year who, as mentioned, is leading the league in batting, and he’s second in RBI and third in home runs.
Even if Pujols win the Triple Crown, there’s a good chance that Votto might edge him out for MVP. Votto’s Reds are currently 2.5 games head of Pujols’ Cardinals in the NL Central.
In my book, Hank Aaron is still the home run king. When he does hit his next home run, Pujols will be the third youngest to 400. I’ll be strongly rooting for him to get to 756.

The War for Potash
Posted by Eddy Elfenbein on August 23rd, 2010 at 10:39 am

If it’s Monday and it’s 2010, then the market is probably up and wouldn’t you know it, it is! Right now, 19 of our 20 Buy List stocks are trading higher and Nicholas Financial (NICK) is unchanged with just 100 shares traded. Once again, the cyclical stocks are trailing the overall market. I think that’s going to be a major theme going forward.
The big news today is that Potash (POT) has officially rejected the $39 billion buyout bid it got from BHP Billiton (BHP) last week. Now Potash is looking around for a “white knight” to rescue them, but it won’t be easy. Billiton’s bid is $130 per share which is pretty rich. The Street expects Potash to make $5.50 per share this year, so the BHP bid is 23.6 times that. Plus, you know the old saying, “$39 billion in hand is better than nothing in the bush.” Interesting tidbit: In any deal, Potash’s CEO will walk away a cool half billion. That’s not bad for saying “yes.’
What will Potash do? Beats me. Maybe some private equity guys will link up. Maybe the Chinese. Maybe the Brazilians. It’s an open game. I also think Billiton will up their bid just to play nice because they may go hostile.
Honestly, I’m not so interested in who will win but who’s willing to play. I still think that the bond market has far outrun the stock market so we should be seeing more aggressive plays like this. The Potash bid is good for the market and I’d like to see some more players join in.
We saw almost the exact same story three years ago when Billiton went after Rio Tinto (RTP), who had just snagged Alcan. Rio shot down the offer so BHP went hostile. Soon after, the world economy exploded and Billiton threw in the towel. When BHP first made the offer in November 2007, shares of Rio surged from $84 to $103. Today, Rio is at $52. Ouch!

Another Down Friday
Posted by Eddy Elfenbein on August 20th, 2010 at 1:02 pm

The market is down again on a Friday which has been the trend this year. And once again, the cyclical stocks are leading us lower.
Every so often I like to look at ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. This is a quick-and-dirty way of telling us where we are—or at least where the market thinks we are—in the economic cycle.
As you might expect, this ratio often moves in a cycle. Cyclical stocks tend to lead the market up out of a recession and conversely, lead us lower at the beginning of a recession.
I’ve said before that cyclical stocks, as a whole, probably aren’t a good place to be right now. This graph of the ratio shows how elevated the ratio is:

You can also see how dramatic the ninth-month period was from September 2008 to August 2009. The ratio closed at an all-time high of 0.803 on April 26 of this year, exactly one session after the market’s highest close in nearly two years. Since then, the S&P 500 has given back about 12% while the CYC is off by more than 16.5%. Although I think the broad market will recover, I still believe that cyclical stocks will be laggards.

Jos. A Bank Clothiers Split 3-for-2
Posted by Eddy Elfenbein on August 19th, 2010 at 6:27 pm

There’s one small housekeeping announcement. Jos. A Bank Clothiers (JOSB) split 3-for-2 today.
For tracking purposes, I assume the Buy List is a $1 million portfolio starting on January 1 of each year. That means all 20 stocks are equal positions of $50,000 each. On January 1, our position on JOSB was 1,185.115 shares at the buy price of $42.19.
With the 3-for-2 split, our JOSB position is 1,777.6725 shares at a starting price of $28.1267.

Is There a Bond Bubble?
Posted by Eddy Elfenbein on August 19th, 2010 at 12:40 pm

Lately, there’s been a lot of talk among financial bloggers of a Bond Bubble. There very well could be but the key question is, a bubble relative to what?
Compared with stocks, yes, I think bond yields are far too low. My hope is that stocks will rise to bring the two into better balance. You can think of investing as a perpetual battle between stocks and bonds. Is it better to raise money by borrowing, or taking on new partners? Understanding that key fact is to see how the market works.
The plus of borrowing is that when you’re done renting someone else’s money, it’s over. Taking on new partners never goes away unless you by them out. The negative of borrowing is that you have to pay interest, so whatever you sell, a few pennies in price goes towards paying interest. The positive of equity financing is that there’s no up-front cost.
Right now, I believe bond yields are very, very low, even adjusting for inflation. Just look at the TIPs yield curve.

The TIP coming due in July 2010 currently yields just 1% over inflation (or rather, over the CPI). In my opinion, that’s awful.
I don’t, however, believe that bond yields will plummet like dot-com stocks did 10 years ago. Rather, I think investors are unduly fond of the security of Treasury bonds. Sure, they’re safe but that safety comes at a price. One percent real yield for 10 years is too rich for me. The good news is that our massive debt can be financed rather cheaply.