Archive for July, 2009

• 2009 Earnings: A Moving Target
  Eddy Elfenbein, July 29th, 2009 at 8:46 am

  Earlier this week, I mentioned that earnings have been running well ahead of expectations so far this earnings season. Of course, expectations were pretty low.
  For all of 2009, Wall Street now sees the S&P 500 earnings $59.80. If we continue to beat expectations, then we have a good shot of exceeding $60.
  To put that number in context, here’s a table John Mauldin posted earlier this year of the trend in analyst expectations for 2009.
  
  So expectations are now higher than they were on September 10, 2008. The difference is that the S&P 500 then stood at 1,232.04 compared with yesterday’s close of 979.62.

• Decade Inflection Points
  Eddy Elfenbein, July 28th, 2009 at 2:44 pm

  If March 9th holds up as the low, this could continue a tradition of major market turning points near the turn of a decade.
  The Nasdaq peaked in March 2000 over 5,000. It’s still down over 60%.
  The Japanese Nikkei peaked on the last day of trading of 1989 near 39,000. It’s still down around 75%.
  Gold peak at $850 just three weeks into the 1980. Gold eventually bottomed out around $253 in 1999, again close to a new decade.
  One of the greatest bull markets in history began in June 1949. Thanks to high dividends, the market averaged over 20% a year above inflation for the next seven years.
  Finally, in late 1929, stocks ran into a wee bit of trouble.

• 95 Years Ago This Week on Wall Street
  Eddy Elfenbein, July 28th, 2009 at 1:20 pm

  On Tuesday, July 28, Austria-Hungary attacked Serbia, and World War I officially began. Stock markets around the world collapsed (some closed), and the price of gold soared. On Wall Street, trading volume hit 1,020,000 shares, and market officials pondered closing the exchange.
  On Wednesday, July 29, politicians were trying to halt the European violence, but Austro-Hungary bombed Belgrade and Russia mobilized troops along Austria’s border. In response, three major European stock exchanges (Vienna, Rome and Berlin) closed their doors.
  On Thursday, July 30, the rush to sell stocks and buy gold escalated. Panic selling on the New York exchange reached 1.3 million shares, the highest volume since the Panic of 1907. Many blue chip stocks crashed, falling 20% to 30% that single day. GM fell from $59 to $39 (-34%). Even Bethlehem Steel, which figured to profit from making war armaments, was down 14%. That night, exchange officials met to decide whether or not to close the exchange on Friday.
  Early in the morning of Friday, July 31, the London Stock Exchange announced that it would suspend trading until further notice, the first time it had done so in its centuries-long heritage. If the New York Stock Exchange opened for trading on this final day of July, it would have been the only open stock market in the world. Since markets were now connected by undersea cables, all the world’s sellers would converge on Wall Street. In fact, the overnight sell orders “at any price” were lined up for the opening bell, so the NYSE governors decided to close for only the second time in its history. The NYSE was totally closed until the middle of December, 1914, but only a few stocks traded then. The full board only re-opened in April, 1915 – nine months later.
  However, U.S. banks stayed open, and the rush to convert cash to gold wiped out many banks. From July 27 to August 7, 1914, $73 million in gold was withdrawn from New York banks alone.
  On Monday, August 3, 1914, no stock markets in Europe or America were open. On that day, Germany declared war on France and invaded Belgium; very soon, Britain declared war on Germany, and Turkey signed a military pact with Germany. As the sun set on that dismal day, Sir Edward Grey, British foreign secretary, said, “The lamps are going out all over Europe; we shall not see them lit again in our lifetime.”
  (via: Gary Alexander)

• IBM Snatches Up SPSS
  Eddy Elfenbein, July 28th, 2009 at 12:22 pm

  Fifteen months, I highlighted SPSS (SPSS), the predictive analysis company, as a good stock to own during tough economic times. When I wrote about SPSS, it was around $42 a share and it promptly dropped in half. So much for my predictive analysis.
  Fortunately, IBM (IBM) came to my rescue today (admittedly, that probably wasn’t their top priority). They’re buying SPSS for $50 a share.
  The lesson is an old one: Just because a trade goes against you doesn’t mean you’re wrong. Good stocks show their value, but it takes patience.

• Baxter International Announced $2 Billion Share Buyback
  Eddy Elfenbein, July 28th, 2009 at 11:40 am

  Although the market is down this morning, our Buy List isn’t down nearly as much. In fact, we just passed the 15% outperformance mark.
  The good news today isn’t terribly good news. Baxter International (BAX) just announced a $2 billion share buyback. I’ve grown to hate share repurchases. Just give me the money and don’t worry about the share price.
  This is a pretty big repurchase from BAX. The company has 605 million shares, so that’s over $3 a share or about 6% of the share price.

• Everybody Celebrate! Home Prices Rise By Tiny Amount!
  Eddy Elfenbein, July 28th, 2009 at 10:55 am

  
  We finally had some good news in housing today (ok, modestly good news). The Case-Shiller Index of home prices in 20 leading cities showed a very slight advance in May. Not any second derivative stuff, but an actual real live gain.
  The gain was tiny but at least it’s a gain. This ends a run of 34 straight months of declines.

  The S&P/Case-Shiller home-price index rose 0.5 percent from April, the first monthly gain since July 2006 and biggest since May of that year, the group said today in New York. The measure was down 17.1 percent from May 2008, less than forecast and the smallest year-over-year drop in nine months.
  Price declines may keep moderating as demand steadies and distressed properties account for a smaller share of transactions. Even so, rising unemployment, stagnant confidence and the loss of wealth caused in part by the drop in property values mean a rebound may be slow to take hold.
  “After three years of this nasty housing recession, I think we’ve got to be pleased with such an improvement in a relatively short period,” said Harm Bandholz, U.S. economist at UniCredit Research in New York.
  Economists forecast the index would drop 17.9 percent from a year earlier, according to the median of 32 projections in a Bloomberg News survey. Estimates ranged from declines of 17.5 percent to 18.3 percent.
  Compared with a month earlier, 14 cities showed price gains, led by a 4.1 percent jump in Cleveland and a 1.9 percent increase in Dallas.

  Home prices in Las Vegas and Phoenix are more than half off their peak.

• Lithuania’s GDP plummets 22.4%
  Eddy Elfenbein, July 28th, 2009 at 9:12 am

  Wow. It’s astounding that a country’s economy can fall by nearly one-fourth.

  Lithuania’s economy shrank 22.4 percent in the second quarter compared to the same period a year ago, the biggest drop since the Baltic country broke away from the Soviet Union in the early 1990s, officials said Tuesday.
  The preliminary figures from Statistics Lithuania were worse than expected, and raised concerns that neighboring Latvia and Estonia may also post steeper-than-expected declines in the second quarter.
  The Baltic countries enjoyed strong growth after joining the EU in 2004 but their economies stalled as a property bubble burst and gross domestic product started falling last year amid the global credit crunch.
  In the first quarter, EU statistics showed Latvia, Estonia and Lithuania had the worst performing economies in the 27-member bloc, with annual drops in output of 18.6 percent, 15.6 percent and 10.9 percent, respectively.
  Danske Bank analyst Lars Christensen said Lithuania’s worse-than-expected figures for the second quarter calls into question whether the EU’s euro3.1 billion bailout package for Latvia was based on “too optimistic” economic forecasts.
  The deal relies on an estimate that Latvia’s gross domestic product will drop by 18 percent this year, but Christensen said he expected GDP to fall “no less than 20 percent.”
  Unlike Latvia, Lithuania has not requested help from international lenders.
  “The GDP fall is just catastrophic, but we were not expecting anything else,” said Gitanas Nauseda, analyst at SEB bank in Vilnius. He said the annual drop is expected to be smaller in the second half of the year.

• Coach’s Earnings Fall
  Eddy Elfenbein, July 28th, 2009 at 9:01 am

  It’s always interesting to keep on eye on how well high-end retailers are doing. Consumers tend to cut back on luxury items during a recession.
  Coach (COH), the handbag maker, just reported bleak earnings.

  Profit for the quarter ended June 27 fell to $145.8 million, or 45 cents per share, from $213.5 million, or 62 cents per share, a year ago. Excluding one-time items, including tax accounting adjustments and other items, net income totaled 43 cents per share.
  Revenue fell less than 1 percent to $777.7 million from $781.5 million last year.
  Analysts polled by Thomson Reuters, on average, predicted a profit of 43 cents per share on revenue of $780.4 million. Analyst estimates typically exclude one-time items.

  When sales are flat and profits fall, that means that profit margins drop. Running the math, the profit margin is close to 19% which is down from 27% a year ago. Still, Coach has pretty high margins for a retailer.

• Recession Leading to Rise in Public Sex
  Eddy Elfenbein, July 27th, 2009 at 10:11 am

  In Britain anyway.

  Police say there has been a huge increase in the number of folk enjoying outdoor romps since the economic downturn began.
  Sex experts reckon with 2.4million out of work and those in jobs putting in fewer hours, people are having to look outside the workplace for their kicks.
  Behavioural expert Judi James said: “When people are working long hours they are knackered and also using up a lot of testosterone in the workplace. People may see it as daring and risky, which also perhaps replaces the lack of risk in the current work environment.”
  Dogging hotspots have seen record activity. In Ripponden, West Yorks, chiefs have stepped up patrols following a huge number of complaints.
  Other areas to have seen big increases include Thetford Forest in Norfolk, Clapham Common in London and Ashgrove picnic site, Bucks.

• Wall Street Analysts Are Finally Raising Dismal Profit Estimates
  Eddy Elfenbein, July 27th, 2009 at 9:48 am

  The good news is that Wall Street is raising its earnings estimates. The bad news is that the old estimates were for incredibly lousy earnings. Now, they’re just expecting somewhat lousy earnings. Still!

  Wall Street firms raised forecasts on Standard & Poor’s 500 Index companies 896 times in June and lowered 886, according to data compiled by JPMorgan Chase & Co. The last time analysts were bullish on a net basis was in April 2007, before more than $1.5 trillion of bank losses tied to subprime loans spurred the first global recession since World War II, the data show.
  The failure to anticipate Goldman Sachs Group Inc.’s record second-quarter profits or Freeport-McMoRan Copper & Gold Inc.’s tripling of bullion sales forced analysts to boost 2010 projections. Wall Street firms estimate the S&P 500 will earn $74.55 a share next year, up from $72.54 in May. Stocks now trade at 13.13 times estimated profit, indicating a 26 percent increase in the S&P 500 should the index return to its five-decade average of 16.54 times annual income.

  Wall Street currently sees the S&P 500 earning $59.80 this year. So far, 75% of earnings reports have beaten expectations this earnings season. That’s on track to be a new record since they started keeping data in 1993.
  Let’s look at Black & Decker’s (BDK) earnings because they serve as microcosm for what we’re seeing this earnings season. BDK’s Q2 EPS plunged 60% to 63 cents. However, that came in well above Wall Street’s consensus of 37 cents a share.
  What caused the earnings surprise? Cost-cutting. Lots of it. The company cut SGA (sales, general, and administrative costs) from nearly $400 million a year ago to $300 million. That’s pretty impressive. Obviously, one of easiest ways to cut overhead is to reduce your staff and that’s why the unemployment rate has steadily climbed higher.
  Some people are quick to dismiss these earnings as somehow phony. They’re not. The earnings are real and the companies who cut costs should be rewarded. But there is room for skepticism because you can’t cut costs indefinitely. At some point, a business needs to expand to survive.
  For their part, Black & Decker’s full-year EPS forecast was above the Street, even though the Q3 number was below consensus.