Archive for February, 2012

  • Does the Stock Market Love Inflation?
    , February 22nd, 2012 at 10:13 am

    It appears so. Here’s a graph of the S&P 500 versus the 10-year inflation premium (the 10-year T-bond yield minus the 10-year TIPs yield). Since 2008, these two series have been waltzing partners.

    There’s no reason to expect a long-term relationship to last. After all, we’re comparing a price index to a yield. But, for whatever reason, whatever causes investors to expect more inflation seems to be highly aligned with higher equity prices. Correlation, of course, doesn’t mean causation.

  • Obama Wants 28% Corporate Tax Rate
    , February 22nd, 2012 at 9:20 am

    From the AP:

    President Barack Obama is proposing to cut the corporate tax rate from 35 percent to 28 percent and wants an even lower effective rate for manufacturers, a senior administration official says, as the White House lays down an election-year marker in the debate over tax policy.

    In turn, corporations would have to give up dozens of loopholes and subsidies that they now enjoy. Corporations with overseas operations would also face a minimum tax on their foreign earnings.

    Over the last 40 years, corporate taxes have fallen as a percentage of federal revenues. I can’t say if this has a realistic chance of becoming law. I would think that fighting for corporations during an election isn’t a good idea.

    Of course, corporations don’t pay taxes. A corporation is just a piece of paper. The companies pass the cost on to their customers. The benefit for the government is that it hides their taxes by imbedding it in a third-party’s prices.

  • Walmart’s Trading Range Lives
    , February 22nd, 2012 at 9:08 am

    A few weeks ago, I noted that Walmart ($WMT) has been trapped in the “Mother of All Trading Ranges” for the last 12 years. Not once in over 3,000 trading days has WMT closed above $64 or below $42. The last time it did was on January 19, 2000 when it closed at $64.06. More than 78% of the time, the stock been between $48 and $59.99.

    On Friday, the stock closed at $62.48 which is very close to the top of its range. It seemed like the strange range would finally be broken. But yesterday, Walmart’s disappointing earnings knocked the shares back to $60.07.

    By the way, Walmart’s sales rose by 5.8% to $122.29 billion. That means that Walmart averaged $1 million in sales. A minute. Also, despite what people may think of how corporations are run, Walmart’s profit margin was just 4.24%.

  • Bloomberg: Stocks Cheapest in 50 Years
    , February 22nd, 2012 at 8:09 am

    According to an article at Bloomberg, U.S. stocks are near the cheapest level relative to bonds in 50 years. Here’s how it works: If we take the market’s price/earnings ratio and flip it over to get earnings divided by price, then we have the earnings yield. When we compare that yield to the yield on the 10-year Treasury bond, the gap in favor of stocks is close to the widest its been since 1962.

    Earnings in the S&P 500 have more than doubled to $96.58 since 2009 and are projected to reach a record $104.28 this year, more than 11,000 analyst estimates compiled by Bloomberg show. The earnings yield, or annual profits divided by price, climbed to 7.1 percent, 5 percentage points more than the rate on 10-year Treasuries. That’s wider than in 97 percent of months in 50 years of Bloomberg data.

    I think this analysis is basically sound; however, there are a few problems. It says that stocks are cheap versus bonds. It doesn’t mean that stocks are cheap on an absolute level. In other words, it can mean that bonds are over-priced which I think is also true.

    On a philosophical level, we should remember that all prices are relative. We’ve been trained to think that all prices are expressed in dollars, but that’s a bit of a mind trick. All prices are relative to each other — dollar bills are just the middleman.

    Ideally, the earnings yield ought to be compared with rates longer than the 10-year bond. What’s interesting is that rates are unusually steep after ten years. The 20-year yield is currently 79 basis points over the 10-year, while the 30-year is 115 basis points above it.

    The spread was last this wide in the four months before the S&P 500 (SPX) reached a 12-year low in March 2009, data compiled by Bloomberg show. The benchmark gauge for American equities has increased 101 percent since then, including an 8.3 percent increase in 2012, the best start to a year since 1997.

    Low valuations and signs of recovery have failed to lure individuals back to equities. Stocks are trading at a 14 percent discount to their average price-earnings ratio over the past five decades. The multiple has been stuck below the mean of 16.4 times earnings since May 2010, the longest stretch below the average since the 13 years beginning in 1973, data compiled by Bloomberg show.

    (…)

    Capital investments surged in 2006 as the total debt-to- assets ratio in the S&P 500 was climbing to 38.8 in the third quarter of 2007, the highest point since at least 1998, data compiled by Bloomberg show. The ratio is about 32 percent lower now. Companies spent the past three years paying down debt and cutting costs, boosting the S&P 500 profit margin to 13.8 percent, compared with 8.3 percent in 2009, the data show.

    S&P 500 companies increased cash and equivalents for 12 straight quarters to $998.6 billion in the third quarter, 60 percent more than in September 2007, just before the index reached an all-time high of 1,565.15, according to S&P. The total excludes financial, utility and transportation companies.

    I caution investors that while this analysis is very useful, don’t get too caught up in models. All this is based on projections. Outside of a few months, forecasters don’t really have a good idea of what’s going to happen. They’re usually good at predicting that an existant trend will continue. But they’re not so good at spotting the turning points which is the most important part.

  • Morning News: February 22, 2012
    , February 22nd, 2012 at 5:49 am

    Greek Bailout Wins Two Cheers From Wary Investors

    Greek Crisis Raises New Fears Over Credit-Default Swaps

    New Bailout Is a Reprieve for Greece, but Doubts Persist

    A Battle for Mongolia’s Copper Lode

    Oil Trades Near 9-Month High After Iran Denies Access to UN Team

    Obama Offers to Cut Corporate Tax Rate to 28%

    Watchdog Targets Overdraft Charges

    High-End Retailers Report Strong Profits, but Walmart Still Struggles

    Dell Earnings and Forecast Fall Short of Wall St. Views

    Kraft’s Net Rises 54% on Higher Prices

    Alibaba Offers to Take Web Portal Unit Private

    Ford Pours $3.8 Billion into Pension Plan, Eyes Shift to Bonds

    Peugeot in Alliance Talks After Report of GM Discussions

    Shell Offers to Buy Cove Energy for $1.6 Billion

    Joshua Brown: What a Waste.

    Paul Kedrosky: The Unexpected Physical Consequences of Technology

    Every Face Punch in Road House!

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  • After Market Updates
    , February 21st, 2012 at 9:54 pm

    Ultimately, the stock market gave back some of its gains this afternoon. The S&P 500 closed at 1,362.21 which was just shy of the post-crash high close of 1,363.61 from May 2nd of last year.

    Today’s market was split between large-cap stocks which fared the best and small-cap stocks which fared the worst. The small-cap Russell 2000 was down 0.66% today while the S&P 500 was up 0.98 points or 0.07%. The mega-cap S&P 100 was up 0.27%.

    Interestingly, shares of Apple ($AAPL) gained $12.73 or 2.54%. That’s a market cap gain of $11.87 billion. Each point in the S&P 500 is worth $9.05 billion. That means that Apple’s gain was worth 1.31 points in the S&P 500. The index gained 0.98 points so without Apple, the index would have closed just slightly lower today.

    In Buy List news, Johnson & Johnson‘s ($JNJ) CEO resigned:

    William C. Weldon, who presided over Johnson & Johnson during one of the most tumultuous periods in its history, will step down as chief executive in April, the company announced Tuesday.

    Alex Gorsky, head of the medical device and diagnostics business, will take over as chief executive. Mr. Weldon will remain as chairman.

    The news of Mr. Weldon’s retirement comes as Johnson & Johnson has struggled to emerge from a swarm of product recalls, manufacturing lapses and government inquiries that tarnished the name of a company that was once one of the nation’s most trusted household brands. In 2010, the company recalled millions of bottles of liquid children’s Tylenol and other medications, as well as tens of thousands of artificial hips and millions of contact lenses.

    Much of the blame for Johnson & Johnson’s stumbles fell on Mr. Weldon, the son of a Broadway stagehand and seamstress who became chief executive in 2002 after spending his entire career at the company. Critics said the company’s once-vaunted attention to quality slipped under his watch. The company said in a statement that neither Mr. Weldon nor Mr. Gorsky was available for comment.

    Oracle ($ORCL) was downgraded by JMP Securities. They’re paring back their earnings estimates but they add that the stock is not unreasonably valued.

    WSJ‘s “Market Beat” notes that DirecTV ($DTV) may soon join the streaming bandwagon.

  • Here Comes Dow 13,000
    , February 21st, 2012 at 11:16 am

    The stock market is up this morning and the Dow Jones Industrial Average is a mere 10 points from cracking 13,000.

    I hope this will be different from the eight previous times we’ve broken 13,000. (That’s not an exaggeration. From April 2007 to May 2008, the Dow broke through 13,000 on eight different occasions going by the daily close.) If the Dow had merely kept pace with inflation over the last 12 years, it would be at 13,837 today.

    The S&P 500 is currently up to 1,366 which would be a post-crash high. Today could be the highest close since June 5, 2008. That was 44.5 months ago.

    On Friday, the Wilshire 5000 Total Return Index, which is about the broadest index possible, closed at its highest level since October 2007. That index includes dividends. By my math, we need a jump of 0.89% to make an all-time high. The Wilshire 5,000 is up 0.33% so far today.

  • Morning News: February 21, 2012
    , February 21st, 2012 at 6:18 am

    Greece Wins Second Bailout as Europe Picks Aid Over Default

    Draghi Stays Silent on ECB Role in Greek Bailout

    Nordic Currencies Stung in Debt Crisis

    U.S. in Accord With Mexico on Drilling

    Foreign Investors Fear Japan Banks May Hijack Olympus

    China Buys Least Iran Crude in Five Months Amid Price Talks

    Rising Gas Prices Give G.O.P. Issue to Attack Obama

    Fed Housing Blueprint Lost in Din of Politics

    Some Doubt a Settlement Will End Mortgage Ills

    Mazda Mulling Raising 170 Billion Yen, Shares Take Beating

    URS Agrees to Acquire Flint Energy Services for $1.25 Billion

    Wal-Mart Raises Stake to 51% in China Online Retailer Yihaodian

    Trademarks Take On New Importance in Internet Era

    Pinterest Introduces “NOPIN” to Counter Copyright Concerns

    Howard Lindzon: The Incredible Shrinking World…Make It Work for You!

    Phil Pearlman: Brett Steenbarger Classics A Must Follow for Young Traders

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  • 50 Years Ago Today
    , February 20th, 2012 at 1:06 pm

  • The Stock Market is Closed for Washington’s Birthday
    , February 20th, 2012 at 11:11 am

    The New York Stock Exchange is closed today in honor of George Washington’s birthday. That’s right — on the NYSE, it’s not President’s Day. My apologies to Millard Fillmore but here’s the explanation from the NYSE:

    Washington’s Birthday was first declared a federal holiday by an 1879 act of Congress. The Monday Holiday Law, enacted in 1968, shifted the date of the commemoration of Washington’s Birthday from February 22 to the third Monday in February, but neither that law nor any subsequent law changed the name of the holiday from Washington’s Birthday to President’s Day. Although the third Monday in February has become popularly known as President’s Day, the NYSE’s designation of Washington’s Birthday as an Exchange holiday (Rule 51) follows the form of the federal holiday outlined above (section 6103(a) of title 5 of the United States Code).