- Posted by Eddy Elfenbein on May 20th, 2013 at 2:55 pm
You know what’s rallying? Crap!
The most-indebted U.S. companies are rallying more than any time in almost four years compared with the rest of the stock market amid the broadest rally since at least 1995.
Federal Reserve interest rates near zero and the expanding economy are allowing Standard & Poor’s 500 Index companies with the lowest working capital, smallest earnings and highest debt ratios to reduce borrowing costs and avoid default. The stocks surged 27 percent this year, almost double the gains for businesses with the most cash and least borrowing, according to data compiled by Bloomberg and Goldman Sachs Group Inc.
Bulls say the spread shows the futility of fighting the Fed at a time when more than 90 percent of the companies in the Russell 1000 Index have risen in 2013, the most in at least 18 years. Bears say loose monetary policy has inflated prices and owners of the riskiest stocks will suffer the biggest losses when the Fed curtails bond purchases.
“The rally is so broad that the weakest companies that hadn’t been participating have finally caught fire and roared ahead,” said Anthony Lawler, a fund manager who helps oversee about $53 billion at GAM Holding AG in London. “A rally can stay broad-based for a period of time. It’s not an indication that it’s toppy.”
Industries most reliant on economic growth have led gains since the S&P 500 reached a six-week low on April 18, data compiled by Bloomberg show. Banks, mining companies, technology producers and material shares climbed more than 9 percent in the period. A total of 914 companies in the Russell 1000 have risen this year, the most since Bloomberg data starts in 1995.
Indebted companies beat those with stronger finances by about 1 percentage point since April 28 after outperforming by 9 points in the first three months of the year, the most since the third quarter of 2009, the data show.
“The catch-up is greater in stocks with weak balance sheets,” Hayes Miller, who helps oversee about $48 billion as the Boston-based head of asset allocation in North America at Baring Asset Management Inc., said in a phone interview on May 17. “Investors by and large feel they have to gain greater exposure to equities.”
Yahoo’s $1.1 Billion Mistake
Posted by Eddy Elfenbein on May 20th, 2013 at 11:12 am
Yahoo ($YHOO) is buying Tumblr for $1.1 billion which, in my opinion, is a big mistake. I’ve long been a critic of Yahoo, or more specifically, Yahoo’s valuation. It’s a fine company but it’s not an especially fast-growing company.
I think Yahoo is basically similar to a newspaper and it should be valued the same way. For many years, I said that Yahoo should be valued around $15 per share, and I was usually right in that the stock failed to perform.
The advent of Marissa Mayer, however, has changed that and the stock has jumped over the last few months to $27 per share. Yahoo is still over-priced but not as egregiously as before.
The good news for Yahoo is they got a pile of cash from selling off their stake in Alibaba. This brings us to the “Bladder Theory” of corporate finance — oftentimes too much cash is not a good thing. Management feels they have to do SOMETHING BIG. Too much cash over-inflates the role of management, and they feel they have to do something dramatic. As I’ve often said, there’s nothing wrong with a special dividend.
Yahoo clearly feels the need to stay hip and cool so buying Tumblr seems like an easy choice. From the New York Times:
The blogging site has been trying to create new ad efforts like interactive campaigns, rather than using standard clickable ads, with mixed success. It has set a revenue goal of $100 million for this year; the company reported only $13 million for the first quarter and reported $13 million for 2012.
Despite its ranking as the 24th most viewed Web site on the Internet, according to Quantcast, Tumblr has yet to translate that into success on mobile devices, something Yahoo needs.
Tumblr also bears a fair amount of unsavory content that may unsettle advertisers. Pornography represents a fraction of content on the site, but not a trivial amount for a site with 100 million blogs.
The search for profits isn’t unique to Tumblr, as free apps and services struggle to wring money from their users. Instagram famously generated no money when Facebook bought it.
A good tell of a bad merger is when it’s done out of fear, and that’s what this is. Ideally, a merger should appear to be an obvious extension of both parties business. Yahoo is paying more than 10 times revenue for a company that might not hit its revenue target. I don’t see the need for that.
At Fortune, John Saroff has a better idea:
Instead of Tumblr, I propose that Yahoo focus its cash not on bulk of pageviews, but on acquisitions and R&D that erect barriers to entry (Buffett’s famous moat) around its already robust display business. Those likely take the form of deep investments in the product and engineering corps and strategic acquisitions of adtech businesses. Those maneuvers will be less sexy, but they have the potential to reinvigorate Yahoo for the next 20 years. It is hard to see how, with all of the strategic risks inherent in the deal, acquiring Tumblr builds the moat for Yahoo that I believe it needs
Aaron’s (AAN) Is a Good Buy Here
Posted by Eddy Elfenbein on May 20th, 2013 at 10:48 am
One stock that I’ve been watching closely is Aaron’s ($AAN), the lease-to-own retailer. The company came in below expectations on their last two earnings reports and I think that has unduly hurt the shares. The stock closed on Friday at $28.72 but I think the shares are worth close to $35.
A few weeks ago, with the first-quarter earnings report, Aaron’s lowered their full-year forecast. The old range was $2.25 to $2.41 per share, and the new range is 2.11 to 2.23 per share. Make no mistake, that’s quite a hit. For Q2, AAN expects earnings to range between 45 and 49 cents per share. The Street’s consensus was for 54 cents per share.
The company has had some short-term problems but nothing it can’t fix. The stock is a good value here.
An Economist Gives Investing Advice
Posted by Eddy Elfenbein on May 20th, 2013 at 10:19 am
Harvard professor Greg Mankiw writes in the New York Times on how economists look at the stock market. He makes several good points except I’m afraid he includes that the Efficient Market Hypothesis which only seems to be believed in academia.
The other points Mankiw makes are that the stock market’s moves are often inexplicable. This is absolute true. I recently pointed out that the standard deviation of the Dow’s daily change is more than 40 times its average change. That means there’s a lot of noise in there. Mankiw writes that holding stocks is a good bet. I’d add that it depends which stocks you hold.
In 1985, Rajnish Mehra and Edward C. Prescott, both now at Arizona State University, published a paper in the Journal of Monetary Economics called “The Equity Premium: A Puzzle.” They pointed out that over a long time span, stocks have earned, on average, about 6 percent more per year than safe assets like Treasury bills. This large premium, they said, is hard to explain with standard economic models. Sure, stocks are risky, so you can never be certain you’ll earn the premium, but they are not risky enough to justify such a large expected return.
Since the paper was published, economists have made some limited progress in explaining the equity premium. In any event, the large premium has convinced most of us that stocks should be part of everyone’s financial plan. I allocate 60 percent of my financial assets to equities.
The buy-and-hold philosophy is widely mocked nowadays even though it’s been a huge winner for the last three years. Mankiw also stresses the importance of diversity and investing outside the United States.
The S&P 500 Has Gained 1,000.58 Points
Posted by Eddy Elfenbein on May 20th, 2013 at 10:02 am
I’m back in the office today. I was out traveling last week so there was no newsletter. I’m happy to report that the market had a very good day on Friday. The S&P 500 closed at its intra-day high of 1,667.47 which is a remarkable gain of 1,000.58 points since the intra-day low from March 6, 2009. One point in the S&P 500 is currently worth about $8.9 billion. I was happy to see that Ford finally broke $15 per share. The auto stock closed at $15.08 on Friday.
The stock market is down a bit this morning. Bed Bath & Beyond ($BBBY) is taking a little hit after it was downgraded to Hold from But at Jefferies. I’m not at all worried.
Even though Cognizant ($CTSH) disapproved its critics by reporting good earnings, the shares have been shaken up by the recent debate on the immigration bill. I’m not yet able to say how this will impact Cognizant but the company is the largest recipient of visas bringing H-1B temporary workers to the United States. CTSH hires these folks then sends them around the country to work at clients’ sites. Whatever bill emerges will probably make it tougher for outsourcing firms, but we don’t know how tough the rules will be. Until then, expect some volatility in CTSH.
The other big story for our Buy List is tomorrow’s shareholder vote on the fate of Jamie Dimon. JPMorgan Chase ($JPM) shareholders will decide whether to split the roles of Chairman of the Board and CEO. The vote is non-binding and only advisory. Still, I hope they vote yes, are at least enough people do so that Mr. Dimon makes the right decision.
Morning News: May 20, 2013
Posted by Eddy Elfenbein on May 20th, 2013 at 6:40 am
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Morning News: May 17, 2013
Posted by Eddy Elfenbein on May 17th, 2013 at 7:29 am
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So I Guess Gold Was Right….
Posted by Eddy Elfenbein on May 16th, 2013 at 10:12 pm
The price of gold has been dropping pretty sharply recently. According to my gold model, that must mean the real interest rates have been on the rise. Since short-term rates are still close to 0%, that means that we’ve been experiencing deflation.
This morning, the government confirmed that’s exactly what’s been happening. Consumer prices fell 0.4% last month which is the biggest drop since 2008. It’s also the second-straight monthly drop. The annualized rate of deflation over the last two months was -3.27%. In effect, the Fed has raised interest rates.
Here’s a look at the price of gold. In September 2011, the yellow metal peaked at $1,923 per ounce. Now it’s at $1,385.
Does Lower Fertility = Lower Interest Rates?
Posted by Eddy Elfenbein on May 16th, 2013 at 7:58 am
Economists have been puzzled by the persistence of low interest rates. Several years ago, Ben Bernanke talked about a “global savings glut” as one possible reason. Kenneth Rogoff recently discussed some of the competing theories which includes factors such as emerging economies and increased long-term uncertainty.
I want to advance one heretical idea: Are long-term interest rates being held down by lower fertility rates? Mark Perry highlights the dramatic plunge in global fertility rates. In the last 50 years, women have shifted to having half the number of children they used to.
How does this affect interest rates? For most of human history, your retirement plan was your kids. Having a lot of children and raising them was your savings account. With modernity, people are trading in their metaphorical savings account for real ones.
This is just a speculative question on my part, but I wonder if these two phenomena are related.
Morning News: May 16, 2013
Posted by Eddy Elfenbein on May 16th, 2013 at 6:58 am
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