Still At Zero
Posted by Eddy Elfenbein on January 27th, 2010 at 4:45 pm

Here’s the latest Fed statement:

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and with 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. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
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 economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Gilead Sciences Leads Our Buy List Higher
Posted by Eddy Elfenbein on January 27th, 2010 at 10:38 am

The market is somewhat soggy this morning, but our Buy List is being helped by a very strong earnings report from Gilead Sciences (GILD). For the fourth-quarter, the company earned 93 cents a share which easily beat Wall Street’s estimate of 85 cents a share. The company now projects 2010 net products sales of $7.6 billion to $7.7 billion, which translates to a growth rate of 17% to 19% for this year. Wall Street had been forecasting earnings of $3.31 a share for this year, but that will now increase.
The shares have been up by as much as 6.6% today. Here’s a look at the earnings call from Seeking Alpha
The other earnings report was from Stryker (SYK), and that wasn’t so strong. On absolute terms, they did just fine as they almost always do. Stryker earned 82 cents a share but that merely matched Wall Street’s consensus. They reiterated their 2010 outlook of $3.20 to $3.30 per share. I’m fine with that but I guess investors wanted a little more.
Here’s the CEO on CNBC this morning.
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Stryker is down about 4% this morning.

Investing By Day of the Month
Posted by Eddy Elfenbein on January 26th, 2010 at 10:12 pm

Here’s a breakdown of how well the stock market has performed during the first 10 trading days of the month. Each line is based on S&P 500’s cumulative gain on each particular trading day of the month (i.e., being long on the X day of the month, then all cash until the X day of the following month).

The clear winners are the first three days of the month. In fact, stocks aren’t worth the bother for the next seven days. (I know the last few days of the month are also quite good, but I’ll look at that another time.)
If you had invested solely during the first three days of each month, you would have made 5,824% (dividends not included) over the last 78 years. Even though this represents a small sliver of time (about 13.7%), it’s still a hefty portion of the S&P 500 gain which is about 14,000%.
The combined return of the fourth through tenth day is a tad over 100% which is less than inflation.
Here’s a breakdown of the average daily gains:

To give you a reference point, a daily return of 0.1% works out to over 28% a year.

J&J’s Earnings Beat the Street
Posted by Eddy Elfenbein on January 26th, 2010 at 11:31 am

Johnson & Johnson (JNJ) reported fourth-quarter earnings of $1.02 a share which was five cents higher than Street forecasts.

Fourth-quarter sales rose 9% to $16.55 billion, also exceeding Wall Street expectations. Favorable currency-exchange comparisons contributed 4.5 percentage points of the growth, reversing the currency headwinds that J&J and other multinational drug companies had faced in previous quarters.
J&J’s biggest unit, medical devices and diagnostics, had sales of $6.31 billion, up 11.8%. Pharmaceutical sales rose 5.4% to $5.99 billion, while consumer-product sales rose 10.2% to $4.25 billion.
For the full year, J&J said it earned $4.63 a share excluding items, which exceeded the forecast range J&J had provided in October, of earnings between $4.54 and $4.59 a share. Full-year sales were $61.9 billion, in line with the forecast range of $61 billion and $62 billion.
J&J said it expects 2010 earnings of $4.85 to $4.95 a share, excluding certain items.

That means that JNJ is going for about 12.8 times this year’s earnings estimates which is about 13% less than the S&P 500.

Odd Lots
Posted by Eddy Elfenbein on January 25th, 2010 at 3:38 pm

SEC mulled national security status for AIG details
Abnormal Returns & Stocktwits!!
Home sales tumble as tax credit lift wanes
Feinstein throws her support behind Fed chairman Bernanke
The President’s Bank Reforms Don’t Add Up
Reviews of Crossing Wall Street at Investimonials
Clearwater woman called 911 saying she was tired of her husband

About That Plunging Dollar
Posted by Eddy Elfenbein on January 25th, 2010 at 2:52 pm

I hear all the time about the plunging dollar, but if it has plunged, I’m afraid I missed it. You’d never know this by listening to the rhetoric, but the dollar lost only -2.9% against euro last year. The year before that, the dollar gained 4.9% against the euro. Doesn’t sound like a plunge to me.

(The chart above is dollars-per-euro, so a downward line means a strengthening dollar.)

AXA to Delist from NYSE
Posted by Eddy Elfenbein on January 25th, 2010 at 10:55 am

The French insurance company, AXA (AXA) has announced that it will delist from the NYSE due to lacking of trading volume. This strikes me as very bad news for New York and the American market. I would think that at least some American investors would be interested in trading a $45 billion insurance company. Based on revenue, this is one of the largest companies in the world.
Is this solely about trading volume, or are the French concerned about our regulatory climate?

Should You Listen to Your Broker?
Posted by Eddy Elfenbein on January 25th, 2010 at 10:34 am

New research shows that you should pay careful attention to what your stock broker says.
Then do the exact opposite.

It turns out, there is information in analyst forecasts, specifically, shorting your broker. In Long-Term Earnings Growth Forecasts, Limited Attention, and Return Predictability by Da and Warachka, they find that if you take the long-run earnings growth and divide by the recent earnings growth, you get a straightforward metric of optimism: higher is more optimistic. It turns out, the highest decile has a 4% annualized lower risk-adjusted return than the lowest decile; more optimistic stocks have lower returns.
A simple explanation (see here) is that mutual funds “herd” (trade together) into stocks with consensus analyst upgrades and (especially) herd out of stocks with consensus downgrades. Stronger fund herding occurs when analyst recommendation revisions are more unanimous.
However, there is some information that analyst recommendations are more useful at the industry level. Portfolios long in industries about which analysts are optimistic and short in industries about which analysts are pessimistic generate significant abnormal returns (see here).
So, listen to your broker’s advice on sectors and stocks, just remember to short the stock picks.

Four More Years
Posted by Eddy Elfenbein on January 25th, 2010 at 10:28 am

The stock market is rebounding this morning and the news that it appears that Ben Bernanke will be confirmed for another term as Fed chair, though of course, it’s hard to tie any one-day rally to a specific news item.
I think the anger at Bernanke closely resembles the Two-Minute Hate Sessions in George Orwell’s 1984. Americans are rightfully angry, but they don’t know exactly who to be angry. They were angry at George Bush and he’s not around. Alan Greenspan? He’s also gone. That leaves Ben Bernanke.
If having him reconfirmed by a whisker placates enough folks, I’m fine with that. But rejecting Bernanke would be an awful, awful move. Consider the take of one Nebraska-based investor:

CNBC:….Should he be confirmed?
Buffett: If I could vote twice I would. He should be. He did a magnificent job over this period… We can’t sit here and armchair quarterback him. But when we look back at September and October 2008, he took some extraordinary actions….we talked about it being an economic pearl harbor. He did what he should have done in response.
Q: What happens if he’s not recommended?
Buffett: Well, just tell me a day ahead of time so I can sell some stocks.

There seems to be a view that deep with the offices of the Federal Reserve is a large machine called a Bubble Popper. At anytime, the Fed can wheel it out, aim and fire. Then magically, whatever bubble formed will be popped without damaging anything.
My guess is that Bernanke will be passed with just a few votes over 60, but there was no real danger to his reconfirmation.

What’s Down the Most?
Posted by Eddy Elfenbein on January 23rd, 2010 at 10:16 pm

The S&P 100 is down -5.25% since Tuesday. Here’s a look at how the 100 stocks have performed.

Read more…