Morning News: August 5, 2011
Posted by Eddy Elfenbein on August 5th, 2011 at 6:48 am

EU Struggles to Tame Crisis Amid Contagion

Germans Lead Resistance to ECB Bond Buying

Japan Dusts Off Mr. Yen’s Policy Toolkit as Recovery Risked by Haven Flows

German Industrial Output Unexpectedly Fell

Time to Say It: Double Dip Recession May Be Happening

Markets Fall as Global Worries Multiply

Payrolls Awaited as Markets Fear Recession

Volatility Index Forewarned Market Turmoil: The Ticker

LinkedIn Ekes Out a Profit, as Sales Surge

Profit Hurt at Southwest on Higher Fuel Costs

P&G Results Top Views, But Outlook Falls Short

Viacom Profit Climbs 37% on Higher U.S. Sales

Allianz Profit Falls 8.2%, Missing Estimates

Kraft CEO Spent Billions Preparing to Dismantle

Paul Kedrosky: QotD: Barton Biggs — I Want to Go Home

Howard Lindzon: Global Markets – I Want My Mommy!!!! and Always Respect Risk

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Wright Express CEO on Business Outlook
Posted by Eddy Elfenbein on August 4th, 2011 at 10:25 am

Via TheStreet.com:

The High-End and Low-End Thrive
Posted by Eddy Elfenbein on August 4th, 2011 at 10:12 am

This chart tells you a lot about the current economy. Two stocks that are doing well cater to the very high end and the very low end.

The blue line is Tiffany ($TIF), the jewelry store, and the black line is First Cash Financial ($FCFS), which is a publicly-traded pawn shop.

Stocks Plunge — Again
Posted by Eddy Elfenbein on August 4th, 2011 at 10:03 am

The market plunged at the open. Once again, the yield on the one-month T-bill has gone negative.

A few weeks ago, I remarked on Carl Icahn’s bid for Clorox ($CLX). First he bid $76.50 per share then increased it to $80. The stock bounced as high as $75.44 but the board had no interest and neither did anyone else. I told investors to get out as soon as possible. The stock is now below $68 per share.

S&P 500 Vs. 10-Year TIPs Spread
Posted by Eddy Elfenbein on August 4th, 2011 at 8:21 am

Here’s a fascinating chart. The increase in the 10-year TIPs spread (in red) closely matches the rebound in the stock market (in blue). The TIPs spread is the difference between the 10-year Treasury yield and the yield on the inflation-protected yield. In other words, it’s the market’s view of expected inflation.

Of course, there’s a causation/correlation angle here. Did inflation expectations increase because investor optimism increased? Or did higher share prices lead to a concern about higher prices?

Either way, the Fed’s efforts to increase inflation expectations starting last year worked, and stocks climbed as well. The problem is that the TIPs spread peaked in early April and the peak in stocks came shortly afterward.

If there is good news in this, it’s that the rally in bonds has been matched by a stronger rally in TIPS. That translates to a slightly wider TIPs spread.

Morning News: August 4, 2011
Posted by Eddy Elfenbein on August 4th, 2011 at 8:00 am

BOE Keeps Rate on Hold Amid Fading U.K. Recovery

Italy, Spain Yields Fall on ECB Support Speculation

UniCredit Bank Austria First-Half Profit Rises on Eastern Europe

Turkish Lira Weakens After Central Bank’s Surprise Rate Cut

Gold May Climb Toward Record as Global Slowdown Increases Demand for Haven

Currency Intervention Revived as Odds Escalate Fed to Ease

Even Marked Up, Luxury Goods Fly Off Shelves

Announced U.S. Job Cuts Jumped 59% in July

Kraft to Split Snacks and Grocery Businesses

G.M. Earnings Climb 89%

CenturyLink 2Q Profit Down 57% On Acquisition Charges

Deutsche Telekom Profit Down As Europe Weighs

CVS Caremark Profit Tops Expectations

ING Insurance Improving Ahead Of IPOs; Will Markets Follow?

Stone Street: Shared Sacrifice

Phil Pearlman: Fear Sells at the Times

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Stockmageddon
Posted by Eddy Elfenbein on August 3rd, 2011 at 5:40 pm

What a crazy day on Wall Street. Even after yesterday’s plunge, the market started off on a bad foot this morning. By 10:40 am, the S&P had lost 1.55%.

Then we suddenly rallied and closed at 1,260.34 which is a gain on the day of 0.50%. Our Buy List did even better as it gained 0.68%.

The S&P 500 finally snapped its streak of seven-straight down days. The Dow had fallen for eight straight days in a row (and the S&P 500 was only up a measly 0.09% on the day before its streak began). Johnson & Johnson ($JNJ) has fallen for eight straight days. In the last two weeks, the stock market has lost a total of $1.07 trillion in market value.

Every day we’ve been getting hit with bad economic news. On Friday, it was the GDP. On Monday, it was the ISM manufacturing index. Yesterday, it was consumer spending. The bad economic news today was that the ISM service index hit its lowest level since February 2010.

There’s no big economic report due tomorrow (the initial jobless claims figure isn’t that important). But the big report will be the jobs number on Friday morning. I hope I’m not ruining your suspense when I say that it won’t be good. Wall Street is expecting a gain of 115,000 jobs. This morning, ADP said in its jobs estimate that the economy created 114,000 new jobs last month. Wall Street is getting the message. JPMorgan Chase ($JPM) cut its estimate for third-quarter growth to 1.5%.

This morning, I posted on Wright Express’ ($WXS) good earnings report and higher guidance. At least I thought it was a good report. At one point, shares of Wright were down 6.75%. Then, much like the overall market, WXS started to surge. The stock closed the day at $47.21. That’s 1.48% higher than yesterday’s close and 8.83% above today’s low. I have no idea how that makes sense, but that’s daily market activity for you.

The Onion: “Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is”
Posted by Eddy Elfenbein on August 3rd, 2011 at 12:49 pm

The Onion is on the scene:

SEWARD, NE—Claiming he wasn’t afraid to let everyone in attendance know about “the real mess we’re in,” Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood’s Corner Tavern about how absolutely fucked the U.S. economy actually is.

Bernanke, who sources confirmed was “totally sloshed,” arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was “pretty goddamned awful if you want the God’s honest truth.”

“Look, they don’t want anyone except for the Washington, D.C. bigwigs to know how bad shit really is,” said Bernanke, slurring his words as he spoke. “Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I’m telling you.”

“And hell, as long as we’re being honest, I might as well tell you that a truer estimate of the U.S. unemployment rate is actually up around 16 percent, with a 0.7 percent annual rate of economic growth if we’re lucky—if we’re lucky,” continued Bernanke, nearly knocking a full beer over while gesturing with his hands. “Of course, if everybody knew that, it would likely cripple financial markets across the entire fucking globe, even in various emerging economies with self- sustaining growth.”

After launching into an extended 45-minute diatribe about shortsighted moves by “those bastards in Congress” that could potentially exacerbate the nation’s already deeply troublesome budget imbalance, the Federal Reserve chairman reportedly bought a round of tequila shots for two customers he had just met who were seated on either side of him, announcing, “I love these guys.”

Numerous bar patrons slowly nodded in agreement as Bernanke went on to suggest the United States could pass three or four more stimulus packages and “it wouldn’t even matter.”

“You think that’s going to create long-term economic growth, let alone promote job creation?” Bernanke said. “We’re way beyond that, my friend. There are no jobs, okay? There’s nothing. I think that calls for another drink, don’t you?”

While using beer bottles and pretzel sticks in an attempt to explain to the bartender the importance of infusing $650 billion into the bond market, the inebriated Fed chairman nearly fell off his stool and had to be held up by the patron sitting next to him.

Another bargoer confirmed Bernanke stood about 2 inches from her face and sprayed her with saliva, claiming inflation was going to “totally screw” consumer confidence and then asking if he could bum a smoke.

“Sure, we could hold down long-term interest rates and pursue a program of quantitative easing, but c’mon, we all know that’s not going to make the slightest bit of difference when it comes to output, demand, or employment,” Bernanke said before being told to “try to keep [his] voice down” by the bartender. “And trust me, with the value of the U.S. dollar in the toilet, import costs going through the roof, and numerous world governments unprepared for their own substantial debt burdens, shit’s not looking too good for us abroad, either.”

“God, I’m so wasted,” added Bernanke, resting his head on the bar.

Later in the evening, Richard Kampman, a truck driver who was laid off in 2010, said Bernanke approached him in the men’s restroom and attempted to strike up a conversation about various factors contributing to the current financial crisis.

“He stumbled up to the urinal and started mumbling on about the depressed housing sector or something,” said Kampman, who claimed Bernanke had to use both hands on the wall to steady himself. “Then after a while he just sort of stopped and I couldn’t tell if he was laughing or crying.”

“Then he puked all over the sink and the mirror,” Kampman added.

Customers at the bar told reporters the “shitfaced” and disruptive Bernanke refused to pay for his drinks with U.S. currency, claiming it was “worthless.” Witnesses also confirmed that near the end of the evening, Bernanke put money into the jukebox and selected Dire Straits’ “Money For Nothing” to play five times in a row.

“This is what it’s all about,” said Bernanke, who reportedly danced alone in the middle of the dark tavern. “Fucking love this song.

S&P 500’s P/E Drops to 21-Year Low
Posted by Eddy Elfenbein on August 3rd, 2011 at 10:48 am

Thanks to the market’s recent sell-off, the Price/Earnings Ratio for the S&P 500 is now at a 21-year low. The S&P 500 is currently going for just 13.43 times trailing earnings. That’s an earnings yield of close to 7.5%. The market’s P/E Ratio hasn’t been this low since November 1990.

Here’s a look at the S&P 500 in the black line along with its earnings in the gold line. The black earnings follows the left scale and the gold line follows the right. The two lines are scaled at a ratio of 16-to-1 which means that the market’s P/E Ratio is exactly 16 whenever the two lines cross.

Obviously, the future part of the earnings line is based on Wall Street’s forecast. I should caution you that Wall Street has been known to be wrong about these things.

Here’s a look at the S&P 500’s P/E Ratio:

The P/E Ratio reached a peak of 30.4 on January 4, 2002. This means that valuations have dropped by 55% in nearly a decade.

The P/E Ratio is a good measure of valuation but it’s not the only one you should use. Like all others, it has some problems and we may be seeing why right now.

The problem with the P/E Ratio is that the earnings line looks backwards in time while current stock prices always peer into the future by a few months. Due to this mismatch, the P/E Ratio can give you false readings.

For example, the ratio could be artificially low right now. Instead of indicating a cheap market, it may be the result of stocks forecasting lower earnings. That would mean higher trailing earnings are being divided by declining stock prices. That, in turn, would cause the ratio to fall.

Conversely, during the initial stage of a bull market, the P/E Ratio often rises even though stocks continue to rally. Again, it’s not necessarily a sign of high valuations but rather of stocks anticipating strong earnings growth in the near future. Look at how the black line jumped in 2009 before the gold line eventually turned.

Investing in the Lottery
Posted by Eddy Elfenbein on August 3rd, 2011 at 9:22 am

Fascinating article from the Boston Globe:

UNDERLAND – Billy’s Beer and Wine sold exactly $47 worth of lottery tickets the day before Marjorie Selbee arrived, just another sleepy day for the liquor store in this tiny Western Massachusetts town. But from the moment the 70-something woman from Michigan entered the store early July 12, Billy’s wasn’t sleepy anymore.

Over the next three days, Selbee bought $307,000 worth of $2 tickets for a relatively obscure game called Cash WinFall, tying up the machine that spits out the pink tickets for hours at a time. Down the road at Jerry’s Place, a coffee shop in South Deerfield, Selbee’s husband, Gerald, was also spending $307,000 on Cash WinFall. Together, the couple bought more than 300,000 tickets for a game whose biggest prize – about $2 million – has been claimed exactly once in the game’s seven-year history.

But the Selbees, who run a gambling company called GS Investment Strategies, know a secret about the Massachusetts State Lottery: For a few days about every three months, Cash WinFall may be the most reliably lucrative lottery game in the country. Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets.

Read the whole thing.