Refining the Gold Model
Posted by Eddy Elfenbein on December 12th, 2011 at 12:09 pm

In this morning’s news roundup, I linked to an interesting post by Willem Weytjens who took my gold model and refined it with updated inputs. I’m happy to see this and I strongly encourage any stat geeks out there to run with this.

My goal for my model was to establish a model for a model of the price of gold. My original description has the price of gold rising eight-fold, in the opposite direction, for each percentage point real rates are from 2%.

As I said in my original post, “if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate (that’s been about the story for the past decade). Conversely, if the real rate jumps to 3%, then gold will drop at an 8% rate.”

Weytjens found a better fit using a deflator of 2.15% and 2.2%, and a leverage ratio of 5.7 and 6.95. Check out his charts; the fit looks really good. He found that the model forecasts a gold price of $4,380 in two years.

Morning News: December 12, 2011
Posted by Eddy Elfenbein on December 12th, 2011 at 4:51 am

Euro Undermined as Draghi Undoes Trichet Rates

European Leaders’ Fiscal Accord May Solve Next Crisis, Not This One

A Stark Step Away From Europe

Russian Economy Hampered by ‘Poor’ Business Climate, OECD Says

India’s Industrial Output Slumps, Pressures Central

Royal Bank of Scotland Report Blames Bank Managers for Collapse

European Banks Hunt for Ways to Raise Cash

Oil Drops as Europe Debt Outlook Counters Iran Calls for OPEC Output Cuts

Bank Credit Highest Since Before Lehman as U.S. Growth Continues

Fed to Weigh Publishing a Forecast on Rates

A Romance With Risk That Brought On a Panic

Etihad Orders More Boeing 787-9s, 777s in $2.8 Billion Deal

Whitehaven Buys Aston Resources

Pincus Faceoff With Zuckerberg Shows Fearsome Prelude to Zynga’s IPO

Gold Model Forecasts $4380 Gold Price

Howard Lindzon: The Year 2012…The World Is a Startup and/or Armageddon Gets a Rest

Stone Street: With Un-Verified Reviews (Almost) Everyone Loses, So Why Are They Still So Prevalent?

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Warren Buffett: If I See A Shirt I Like, I’ll Usually Just Buy It
Posted by Eddy Elfenbein on December 11th, 2011 at 11:52 am

The Onion has Oracle’s commentary:

I’m not really the kind of person to get caught up in the latest trends or fashions or anything like that. But some days, if I get out of work early and have a little time to kill before dinner, I’ll go do some window-shopping in the downtown Omaha area. Usually I just stick to browsing, but occasionally I’ll see a shirt I like, and if I try it on and it looks good, I’ll say, “What the heck,” and go ahead and buy it.

Because why not, right?

If you think about it, we’re only talking $50 or $60 tops here. I’ve had a steady income for years now, and I’m at the point in my life where I just refuse to feel guilty about treating myself to a decent shirt every once in a while. See, because it’s not even about the money. It’s about feeling good. So if I come across a nice blue button-down or a really sharp Tommy Hilfiger polo, I just think, “Warren, in the span of a lifetime are you really going to miss the $40 you spent on a shirt you might wear for upwards of 10 years?” Of course not.

Look, I’m old enough to understand that it’s okay to spend a little cash on something that makes you happy. To tell the truth, I wish I’d learned that lesson years ago.

Now, I’m not saying you should go hog wild and buy 200 shirts at a time or anything. That’d be crazy. And no matter how much money you have, spending $150 on a shirt is just plain silly: I’d bet you dollars to doughnuts that someone somewhere makes a shirt that looks just as nice for half the price. For example, the Men’s Wearhouse at Oak View Mall typically has nice dress shirts for decent prices by all the top name brands, like Ralph Lauren, Geoffrey Beene, and so on. It’s not cheap stuff by any means, but if you have a member card you can get a 15 percent discount, and why not take advantage of a good deal when you see one.

I don’t know about Men’s Wearhouses outside Omaha, but I assume they have a similar discount at their other locations, as well.

When you’re used to pinching pennies and watching where every dollar goes, it can be hard to let loose and just splurge on something. Believe me, I know. But, hey, I’ll drop $8 on a movie once in a while, and it doesn’t even have to be the greatest film in the world, either. And, sure, a $30 box of chocolates for your wife might be a bit extravagant, but the look on her face when you give it to her is more than worth it. (And, let’s be honest, that $30 isn’t exactly going to break the bank!)

I will say that I never buy just to buy. Having some extra sawbucks lying around doesn’t mean they need to be spent. In fact, just last week I walked into a Banana Republic—I like their sweaters a lot—looked around for about 15, 20 minutes, and walked right out. Seriously, just walked right on out.

But, yeah, if something catches my eye, I’m not going to ignore it. I’m going to try it on, see how it looks with the pants I’m wearing, maybe try on a pair of khakis to see if they go with it better. If I like the khakis enough, I’ll buy them, too. Even if it adds up to $160, it’s an outfit I’ll be able to wear many times, and I know I’ll feel confident every time I wear it. That sounds like a bargain to me.

After all, I work hard. I deserve it.

One more thing: I learned the hard way to always try clothes on first. That’s just smart shopping. Case in point: I recently bought this turtleneck at Eddie Bauer without seeing if it fit. Well, you know where that turtleneck is now? Collecting dust in my closet. Sometimes I wear it under a sports coat, but very rarely. Sixty-five dollars down the drain.

But you know what? It’s just 65 bucks, for crying out loud. Big deal.

Mercedes Benz
Posted by Eddy Elfenbein on December 9th, 2011 at 4:00 pm

It’s 4 pm and the markets are closed. Let Janis get your weekend started — and I figure we might as well help the German economy while we’re at it..

CWS Market Review – December 9, 2011
Posted by Eddy Elfenbein on December 9th, 2011 at 7:40 am

Let me start off this CWS Market Review by discussing the dramatic events in Europe. I’m writing this early on Friday morning, and today is the day of the big EU Summit.

By common agreement, this summit is the last chance to save the euro. And by “last,” I mean the absolute last chance. That’s it—no more. Time’s up. These folks have dragged this on long enough and now it’s time to see who’s really in this thing. In last week’s CWS Market Review, I said that this summit’s aim would be to please financial markets. My belief was that this was actually an easy choice because there simply is no alternative.

Well, they found an alternative. More disagreements.

According to the latest news—and please bear with me, this is rapidly a developing story—the leaders have rejected plans to alter the EU treaty. This was the main goal. The Brits wanted an exception to protect their financial sector (London is huge for finance) and the continentals said “non/nein.”

Instead, 23 of the 27 countries have agreed to a weaker “fiscal compact” which pledges stricter fiscal discipline. There had been hopes that in exchange for this compact, the ECB would jump in and buy bonds. Though Mr. Draghi has endorsed the compact, he’s walked back any commitment to buy bonds in a serious way. This isn’t good.

Here’s the problem: Since this fiscal compact is outside the EU Treaty, there’s no way the EU institutions can enforce it. Really, the compact is nothing more than a pledge saying “I promise to be good.” Well…if they had been good, they wouldn’t be in this mess. David Cameron even said that Britain “would never join the euro.” In addition to the United Kingdom, three other countries, Sweden, Hungary and the Czech Republic, haven’t signed on.

My take is that this is a major blow for Europe. The best scenario would be that if the ECB buys enough bonds, that could hopefully restore investor confidence. In turn that could buy more time, but for now, Europe is at the mercy of a very pissed-off bond market. Who can blame them?

The question for us is: “How much will this impact our markets?” Until a few weeks ago, it’s been a lot. Slowly, however, the U.S. financial markets have separated themselves from the febrile European debt market. I’ve been generally impressed with our stock market’s wobbly recovery over the past two months. Sure, I wish it could be steadier but it’s been up against a flood of near-panic news out of Europe.

Despite several hiccups, including another 2% drop on Thursday, the S&P 500 has gained more than 12.3% since its October 3rd low—and our Buy List has done even better. That ain’t bad. The index even briefly broke above its 200-day moving average a few times this past week. Unfortunately, it failed each time to close above the magic 200-DMA.

This cautious rally has been even more impressive when you consider that the Treasury yield curve has barely changed over the past month. Actually, I’ll go even further than that: interest rates have been eerily stable. Since November 2nd, the 10-year yield has closely hovered around 2%. The 30-year has locked in on 3%, and the five-year yield has parked itself in a range between 0.86% and 0.97%.

Now here’s the important part: I strongly suspect that this tight trading range will soon come to an end. Treasury yields, especially at the long end, are simply too low. Despite more signs that the economy has steered clear of a Double Dip, the yield on 10-year TIPs is still at 0%. It was one thing when the world was ready to come apart at the seams. But now that the U.S. economy has demonstrated some resiliency, a 10-year real return of 0% just doesn’t make any sense.

It wasn’t that long ago that the bond market was expecting interest rates here to rise. I apologize, but here’s some math: Six months ago, the yield on the one-year Treasury was 0.39% while the six-month bill was going for 0.18%. That implies that the six-month rate in six months would be 0.25%. But today, it’s just 0.04%. The current yield curve implies that over the next 12 months, the one-year yield will climb from 0.10% all the way to…0.34%.

What’s the reason for this mass apprehension? That’s easy. Everyone’s sitting on mountain of cash. Recent data from the Federal Reserve shows that non-financial firms in the U.S. have stockpiled an astounding $2.12 trillion in cash. Welcome to the Age of Deleveraging. It’s long overdue.

Back to my point: I just don’t see how interest rates can stay that low in the face of recent evidence. The fact is that the economic news continues to be modestly positive. On Thursday, we learned that initial jobless claims dropped to 381,000 which is a nine-month low. Bespoke Investment Group tells us that that’s the second-lowest reading since Lehman Brothers went kablooey.

The latest inventory data indicates that companies are restocking their shelves. That’s a good sign because inventory liquidation took a bite out of the Q3 GDP. The new inventory numbers caused Goldman Sachs to raise its estimate for Q4 GDP growth from 2.7% to 2.9%. Macroeconomic Advisors raised their estimate by 0.5% to 3.5%.

Sooner or later, all that cash will want to find a place where it’s treated better. (Of course, much of that cash is trapped outside our borders.) The stock market’s favorable valuation versus bonds is especially clear in light of the fact that we don’t have to look far to find stocks yielding more than 3%. Microsoft ($MSFT), for example, currently yields 3.15% and is rated AAA which is something that can’t be said for some governments. Just this past week, one of our Buy List stocks, Stryker ($SYK) raised its dividend by 18%. In two years, SYK’s dividend is up by over 41%.

Earlier this week, Oracle ($ORCL) said that its fiscal Q2 earnings report will come out on December 20th. The consensus on Wall Street is for earnings of 57 cents per share. That’s the midpoint of the range Oracle gave us three months ago of 56 cents to 58 cents per share. That’s a pretty strong number, and yet it may be too low. I think Oracle has a good shot of earning 60 cents per share. Their cash flow has been very strong. Their licensing business continues to do well, although I’m a little concerned about the hardware side of the business which is a bit shaky. Bear in mind that Oracle earned 51 cents per share in last year’s Q2 which was very strong.

Up and down Wall Street, analysts have been warming up to Oracle. Barclays initiated coverage with a price target of $37 and an “overweight” rating. Piper Jaffray also has an overweight rating. Jefferies cut its price target from $37 to $36 (???) but kept its “buy” rating. They also trimmed their quarterly EPS estimate by a penny to 56 cents. Deutsche Bank just raised their price target to $33. I honestly don’t think Wall Street “gets it” with Oracle. But I understand the need analysts have to follow the company’s guidance closely which is something I, fortunately, don’t have to worry about. Oracle is an excellent buy up to $34 per share.

I was pleased to see that Ford ($F) has reinstated its dividend after a five-year absence. The company will start paying a nickel per share on March 1st. Ford’s CFO said, “We are confident that we can begin to pay a dividend that will be sustainable through economic cycles.” The dividend, of course, is quite modest. The yield is only 1.86% but it’s more proof that Ford has turned itself around. It was only three years ago that Ford was going for $1.01 per share. I rate Ford a strong buy up to $14 per share.

That’s all for now. Be sure to keep checking the blog for daily updates. Hopefully, Europe will still exist next week. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

P.S. One more reminder that I’m going to unveil the 2012 Buy List on Thursday, December 15th. This is the day that millions of investors look forward to each year. Millions! As usual, I’ll have five additions and five deletions. Stay tuned!

Morning News: December 9, 2011
Posted by Eddy Elfenbein on December 9th, 2011 at 7:39 am

Euro Leaders’ Fiscal Union Pact Leaves Next Step to ECB

Treaty to Save Euro Takes Shape, but Britain Sits Out

EU Leaders Drop Demands for Investor Write-Offs

Moody’s Downgrades Top French Banks

Europe Bank Shares Bounce Back

Stress Test Reveals European Banks Need More Capital

China’s 10-Year Ascent to Trading Powerhouse

China Data Signals Pro-growth Policy Shift

Crude Heads for Biggest Weekly Drop Since September as Europe Disappoints

UBS, Citigroup May Be Penalized in Japan on Tibor Probe

Toyota Lowers Profit Forecast After Floods

Bluntly and Impatiently, Chief Upends G.M.’s Staid Tradition

Texas Instruments Sees Sales Below Estimates

KPMG Warned Olympus in Accounting Fraud, Then Got ‘Careless,’ Probe Finds

Paul Kedrosky: MF Global and the Great Wall St Re-hypothecation Scandal

Edward Harrison: Credit Writedowns Weekly Report, Vol 1 Issue 2: Solutions in Europe?

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Models and Confidence
Posted by Eddy Elfenbein on December 8th, 2011 at 5:59 pm

Arnold Kling writes:

Indeed, elsewhere Kahneman has told a story of a group of Swiss soldiers who were lost in the Alps because of bad weather. One of them realized he had a map. Only after they had successfully climbed down to safety did anyone discover that it was a map of the Pyrenees. Kahneman tells that story in the context of discussing economic and financial models. Even if those maps are wrong, we still feel better when using them.

Can the S&P 500 Hit 1720 Next Year?
Posted by Eddy Elfenbein on December 8th, 2011 at 3:07 pm

I like post titles that are questions rather than statements because it doesn’t require any commitment from me. Still, if we take some reasonable assumptions, we can arrive at very decent numbers for the S&P 500 one year from now.

Right now, Wall Street expects the S&P 500 to earn $97.45 this year and $107.68 for 2012. If we assume an earnings multiple, which is hardly excessive, then we get a year-end target of 1723 for the index.

After Five Year Absence, Ford’s Dividend Will Return
Posted by Eddy Elfenbein on December 8th, 2011 at 12:13 pm

Ford ($F) just announced that it’s going to pay a dividend of five cents per share. The dividend is payable March 1, 2012 to shareholders of record on Jan. 31, 2012.

The Board of Directors of Ford Motor Company today declared a quarterly dividend of 5 cents per share.

“We have made tremendous progress in reducing debt and generating consistent positive earnings and cash flow,” said Bill Ford , executive chairman, Ford Motor Company. “The board believes it is important to share the benefits of our improved financial performance with our shareholders. We are pleased to reinstate a quarterly dividend, as it is an important sign of our progress in building a profitably growing company and our confidence in the future.”

Lewis Booth , Ford executive vice president and chief financial officer, said the company’s strong liquidity and balance sheet improvements provide the underlying financial strength to resume paying a quarterly dividend.

“Building a strong balance sheet that supports our growth plans remains a core part of our One Ford strategy,” said Booth. “We have demonstrated our capability to finance our plans and we are confident that we can begin to pay a dividend that will be sustainable through economic cycles.”

A five-cent dividend is a puny portion of Ford’s annual profit. The company will earn about $1.87 per share this year and it’s expected to earn another $1.62 per share next year.

From 2002 to early 2006, Ford had paid a quarterly dividend of 10 cents per share. Then Ford cut it five cents for one quarter; then they got rid of it entirely.

The New Dividend Aristocrats
Posted by Eddy Elfenbein on December 8th, 2011 at 11:31 am

S&P follows an index it calls the Dividend Aristocrats which is a group of S&P 500 stocks that have increased their dividends every year for the last 25 years in a row.

S&P just announced that it’s adding 10 new stocks to the Dividend Aristocrats and deleting one. This brings the new list of Aristocrats up to 52.

The new additions are:

Franklin Resources ($BEN)
HCP Incorporated ($HCP)
T. Rowe Price ($TROW)
AT&T ($T)
Colgate-Palmolive ($CL)
Genuine Parts ($GPC)
Illinois Tool Works ($ITW)
Medtronic ($MDT)
Nucor ($NUE)
Sysco ($SYY)

The only deletion was CenturyLink ($CTL).

Howard Silverblatt of S&P passes on some dividend facts (via Michael Aneiro):

* Year-to-date (YTD) dividend payers in the S&P 500 have returned 1.72%, compared to the non-payers loss of 4.63%

* The actual dividend payment YTD is up 16.2%

* The indicated dividend rate (based on the current rate) is up 16.8% YTD, but still off 4.9% from the June 2008 high

* From 1995 the S&P 500 indicated dividend yield has averaged 43% of the U.S. 10-year Treasury note, the current rate is 105%

* 215 issues have a current yield higher than the 10-year Treasury

Now that Medtronic and Sysco are Dividend Aristocrats, this makes six of our Buy List stocks that are Aristocrats. The other four are AFLAC ($AFL), Abbott Laboratories ($ABT), Becton, Dickinson ($BDX) and Johnson & Johnson ($JNJ).

The Dividend Aristocrats have had a decent year. Here’s a look at the Dividend Aristocrats ETF ($SDY) divided by the $SPY: