Archive for August, 2010

• Sysco Misses by a Penny
  Eddy Elfenbein, August 16th, 2010 at 1:33 pm

  After opening lower today, the stock market is rallying off its lows. Before the opening bell Sysco (SYY) released earnings for its fiscal fourth quarter. The company earned 57 cents a share which was a penny below forecasts but four cents more than a year ago.
  Sysco is a consumer staple so it’s usually good stock to own during a recession. Still, times are tough and the company’s CEO said, “We have seen no consistent pattern of improvement on a week to week basis.”
  Looking at the numbers, Sysco is still doing well. Not great, but well enough. For the quarter, revenue rose 14% to $10.35 billion, up from $9.09 billion last year. For the full year, Sysco earned $1.99 per share which is up from $1.77 per share.
  Sysco is your classic slow-and-steady stock so I’m not too concerned about it missing earnings by a penny. The company should probably make another $2 a share this year so the current price is a pretty good value. The shares are down about 3% today.

• Will the Dems Dump Pelosi After a Defeat?
  Eddy Elfenbein, August 16th, 2010 at 12:59 pm

  With the mid-term election only three-and-a-half months away, I noticed that the Intrade contract for the GOP to retake the House is up to 64.7. Of course, those are just odds but it does mean that “the market” sees a GOP takeover as slightly probably.
  I’m curious that if the Republicans do take control of the House, would Nancy Pelosi have to depart as Minority leader? I really don’t care one way or the other but I think it’s interesting scenario, and I’m guessing she would have to depart. Taking your party to parliamentary defeat happens a lot in other political systems but it’s fairly rare in the United States.
  For example, after taking his party to defeat this past May, Gordon Brown had to step down as leader of the Labour Party. The party is currently deciding who the next leader will be.
  We really haven’t established much of a precedent in the U.S. When the Republicans won the House in 1994, the issue of what former Speaker Tom Foley would do wasn’t an issue since he lost his House seat as well. When the Democrats took control in 2006, former Speaker Dennis Hastert resigned his seat mid-session. But Hastert had already said that 2006 was going to be his last election so he was a lame duck anyway.
  When the GOP lost the House in 1954, former Speaker Joseph Martin hung on as Minority leader until the Democrats big victory in 1958. In January 1959, he was ousted by Charles Halleck by a vote of 74 to 70. Six years later, after another big GOP defeat, Halleck was ousted by the Gerald Ford.
  I guess that in the U.S. system the “Shadow Leader,” if you will, isn’t an official position although it’s often clear what people are important to listen to and they usually aren’t in the House of Representatives. I remember when Mario Cuomo was treated as the faux Shadow Leader for a few years in the late 1980s. Ronald Reagan held that position for perhaps as long as 15 years. Is Sarah Palin the current Shadow Leader? I really don’t know. But I think having those people outside of the House takes some of the heat, and light, off what the Party Leader does.

• Bloomberg FTW
  Eddy Elfenbein, August 15th, 2010 at 11:27 pm

  Finally, the Taleb bubble is starting to pop:

  In February, he told a conference in Moscow that “every single human being” should bet Treasury bonds will decline. It’s a “no-brainer” to sell short the debt, he added. Since then, 2- and 10-year notes have rallied.

• The Hindenburg Omen
  Eddy Elfenbein, August 14th, 2010 at 3:49 pm

  
  Like we don’t have enough to worry about, the stock market just tripped the dreaded Hindenburg Omen. That’s when an unusually high number of stocks reach 52-week highs and 52-week lows.
  As you can probably guess from the name, the Hindenburg Omen means bad news as it’s named after the biggest disaster to hit the Garden State until the second season of Jersey Shore.
  From Bloomberg:

  This week’s plunge in U.S. stocks triggered a technical indicator known as the Hindenburg Omen that may signal a more severe selloff, according to analysts who follow charts to predict market moves.
  The market signal, named for a German zeppelin that caught fire and crashed more than seven decades ago, occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows. The indicator last occurred in October 2008, according to UBS AG.
  The Standard & Poor’s 500 Index yesterday completed the biggest three-day decline since July 1, after an unexpected increase in unemployment claims added to evidence an economic recovery is weakening. The benchmark gauge for U.S. stocks has dropped 3.4 percent so far this week as Federal Reserve policy makers said growth “is likely to be more modest” than they previously forecast.
  The indicator may suggest “a savage equity downturn is imminent,” said Albert Edwards, a London-based strategist at Societe Generale SA, who has told investors to favor bonds over stocks for more than a decade. “Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge.”
  The Hindenburg signal was triggered yesterday as the proportion of stocks reaching new one-year highs and lows both exceeded 2.2 percent of the total listed on the NYSE, according to Michael Riesner, a technical analyst at UBS in Zurich.
  Rising Market
  The number of stocks at a 52-week high must not be more than twice the number marking lows, the technical theory also says, according to analysts. The indicator is only valid in a rising market, as defined by the NYSE Composite Index’s rolling average value in the last 10 weeks. It must also occur when the NYSE McClellan Oscillator, a measure of market momentum, is negative.
  The Hindenburg Omen must be confirmed with a second occurrence within 36 days, according to Riesner. He said the signal occurred seven times in 2008 as the S&P 500 posted its biggest annual drop since the Great Depression.
  “It’s an interesting name but what you really have as a technical background is a classic distribution phase in the market,” Riesner said. “It’s the classic tug of war between bulls and bears that you have there.”
  In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index. UBS is ranked as the top bank for equity technical analysis and charting according to a 2010 Thomson Extel survey.

• The Bond Bubble
  Eddy Elfenbein, August 12th, 2010 at 5:16 pm

  Johnson & Johnson (JNJ) smartly takes advantage of the bond bubble. The rule is simple: When rates and stock prices are low, it’s better to raise money through debt. When stock prices and interest rates are high, issue stock.

  Johnson & Johnson sold $1.1 billion of debt at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for corporate debt.
  The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.
  “Even though some faith in the rating agencies has been blown, the triple-A is still sacred,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.

  JNJ’s dividend yields 3.6%. This means that you could issue as much 10-year debt as you can and use it to buy the shares. The stock can rise another 22% from here and you’re still getting a higher yield than your interest payments (.036/.0295=1.22). And that doesn’t count the likely dividend increases.
  I guess the obituaries for the Equity Risk Premium were a bit premature.

• Stocks Versus Bonds
  Eddy Elfenbein, August 12th, 2010 at 2:11 pm

  The current estimate for this year’s EPS for the S&P 500 is $83.11
  Going by the current price for the S&P 500 and current yield for the 10-year T-bond, the 10-year T-bond will earn an equivalent of $29.41.
  Think about that: $83.11 versus $29.41.

• Executive Order 9250
  Eddy Elfenbein, August 12th, 2010 at 1:48 pm

  Ever heard of FDR’s Executive Order 9250 which established a tax rate of 100% at $25,000. Yes, it really happened?
  Here’s a sample:

  7. In order to correct gross inequities and to provide for greater equality in contributing to the war effort, the Director is authorized to take the necessary action, and to issue the appropriate regulations, so that, insofar as practicable no salary shall be authorized under Title III, Section 4, to the extent that it exceeds $25,000 after the payment of taxes allocable to the sum in excess of $25,000. Provided, however, that such regulations shall make due allowance for the payment of life insurance premiums on policies heretofore issued, and required payments on fixed obligations heretofore incurred, and shall make provision to prevent undue hardship.

• GM to IPO
  Eddy Elfenbein, August 12th, 2010 at 11:33 am

  General Motors, a division of the U.S. government, just reported Q2 net income of $1.5 billion. Not too bad. But the big news is that the CEO Ed Whitacre is out and the company is gearing up for an IPO. This will be one of the most anticipated offerings ever.
  One old rule of investing is to pay attention whenever a government has a yard sale. You can often pick up cheap bargains. In fact, that’s how Carlos Slim and Silvio Berlusconi made their big bucks.
  GM is planning to raise between $12 billion and $16 billion in a public offering. According to reports, the IPO will involve 20% of the company’s shares. Since Uncle Sam currently owns 61%, the IPO would bring the governments total to under 50%.
  My only fear is that the current market is a rotten environment for an IPO. Debt is loved and stocks are unloved. That tells me that it’s a better call for GM to issue bonds and buy the Treasury’s shares from them.

• 28 Years Ago
  Eddy Elfenbein, August 12th, 2010 at 11:05 am

  It was 28 years ago today that the 1982-2000 bull market started. The Dow closed at 776.92 on August 12, 1982.
  Just like this year, the following day was a Friday the 13th. In fact, two movies opened that Friday, Friday the 13th, Part 3 and Fast Times at Ridgemont High. As Gary Alexander points out, it was five years later, on August 13, 1987, that the Dow broke 2700 for the first time. That was a 250% rally!
  Gary writes:

  Since the big 1982-99 bull market began on Friday, August 13, 1982, there have been 46 trading days falling on Friday the 13th, with a historical record of more than 2-to-1 positive outcomes: We’ve seen 31 up and 15 down days (67% positive). More recently, six of the last seven Friday the 13th markets have risen, including a whopper (+165.77) on June 13, 2008, right before the financial crisis struck in October.
  Basically, when we’re in a bull market, Friday the 13th becomes exceptionally lucky. During the 1990s bull market, stocks rose 13 times (vs. 3 down days) on Friday the 13th. However, there were four straight declining Friday the 13th trading days from 2002 to 2004, as the big bear market of 2000-03 ended.

• I Didn’t Realize the Reversion was Going to be so Mean!
  Eddy Elfenbein, August 12th, 2010 at 10:40 am

  Ugh! The market is getting hit hard for the second day in a row. The S&P 500 was down -2.82% yesterday and we’ve been down by as much as -1.17% today. Some buyers seem to be crawling out from their hiding places, but we’ll have to see what happens.
  Clearly, investors were spooked by this week’s Fed decision, plus some poor economic reports and Cisco’s results. Let me caution you to wait this one out. The fact is that interest rates are already so low, there’s not much place else for investors to go but stocks and gold—and the latter trade is looking very crowded.
  The 10-year T-bond dipped under 2.7% recently which is just…nuts. That means that the government will pay you just 27% over the next ten years for the privilege of renting your money. I think this isn’t so much a statement on the U.S. government’s finances and it’s one about the level of anxiety of investors. A 10-year at 2.7% is basically throwing in the towel and refusing to play anymore.
  For individual names, I really like Intel (INTC) below $20 a share.