Archive for 2013

• Morning News: February 14, 2013
  Eddy Elfenbein, February 14th, 2013 at 7:20 am

  Euro Zone 2012: Not a Single Quarter Showing Economic Growth

  BOJ Chief Defends Policy Ahead Of G20 As Economy Contracts

  Indian Inflation Slows to 38-Month Low; Boosts Rate-Cut Case

  BNP Paribas Begins Overhaul After Fourth-Quarter Profit Drop

  Obama Bid for Europe Trade Pact Stirs Hope on Both Sides

  Calmly, Pick for Treasury Offers Replies to Senators

  401(k) Balances Reached Record on 2012 Stock Market Rally

  Small Businesses Still Struggle, and That’s Impeding a Recovery

  American and US Airways Announce $11 Billion Merger Deal

  Citigroup Lost $15 Million With UBS’s ‘Crap’ CDO Blessed by S&P

  Cisco Forecasts Sales That Miss Some Analysts’ Estimates

  Rio Tinto’s New CEO Vows Cost Cuts And Disposals

  India’s Tata Motors Q3 Net Profit Halves, JLR Margin Sags

  Groupon Surges on Expected E-Commerce Expansion

  Credit Writedowns: Japanese RORO

  Roger Nusbaum: Not All Stock Picking is Wildly Complex

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• 11 Stocks to Sell Right Now
  Eddy Elfenbein, February 13th, 2013 at 12:01 pm

  Here’s a list of 11 stocks that investors should sell as soon as possible. I’ve included yesterday’s closing price for future reference.

  Company	Symbol	Close 2/12/2013
  TiVo	TIVO	$13.15
  Forest Labs	FRX	$35.74
  salesforce.com	CRM	$172.36
  Netflix	NFLX	$177.95
  Amazon.com	AMZN	$258.70
  Zillow	Z	$36.15
  Red Hat	RHT	$55.33
  Weyerhaeuser	WY	$30.31
  Iron Mountain	IRM	$34.47
  iRobot	IRBT	$21.41
  HomeAway	AWAY	$24.83

• January Retail Sales +0.1%
  Eddy Elfenbein, February 13th, 2013 at 10:05 am

  The Commerce Department reported that retail sales rose by just 0.1% last month. That’s not very strong, but part of the problem was that higher taxes took a bite out of consumers. Still, the report was inline with what economists were expecting.

  Economists also like to look at “core sales,” which is retail sales excluding cars, gas and building materials. In others words, they want to focus on basic consumer spending habits. For January, core sales also rose by 0.1%.

  Even though the Q4 GDP report was rather poor, economists were impressed by the strength of consumer spending. That’s why people are interested to see if that trend is holding up into Q1. This is especially important for our retail stocks like Bed, Bath & Beyond ($BBBY) and Ross Stores ($ROST). If you recall, Ross recently said they had pretty good sales for January.

  I should add that the Q4 GDP report will probably be revised higher thanks to the recent trade report. In fact, it will most likely go from being a negative number to a positive one.

  The outlook in Europe got a boost this morning when the industrial production number came in at 0.7% growth which was better than the 0.2% that was expected.

  In the U.S. market, the Volatility Index ($VIX) is close to hitting a six-year low today. If this keeps up, we might have to change the name from the VIX to the NIX. The VIX closed yesterday at 12.64 while the low is 12.29 from January 18th. The last time we were that low was February 27, 2007 which was the start of the financial crisis.

• My Simple Rule for Government Financing
  Eddy Elfenbein, February 13th, 2013 at 9:43 am

  As part of my continuing effort to solve all of the world’s problems, I’ve devised a simple rule for the U.S. budget deficit. Here it is:

  (Unemployment Rate x 2) – 10 = Budget Deficit / GDP

  Here’s how my rule has held up (in blue) against the real budget deficit (in red).

  

• Morning News: February 13, 2013
  Eddy Elfenbein, February 13th, 2013 at 7:20 am

  BoE Will Tolerate Inflation To Aid Growth

  G-7 Roils Currency Markets With Split on Yen Views

  IEA Trims Oil Demand Forecast

  Wheat Falls to Seven-Month Low as Rain in Plains May Boost Crop

  Obama Paints Wider Role for Government in Middle Class Revival

  Raising Minimum Wage Would Ease Income Gap but Carries Political Risks

  Silicon Valley and Immigrant Groups Find Common Cause

  Small-Business Optimism in U.S. Improves for Second Month

  Comcast Buys Rest of NBC’s Parent

  ING Cutting 2,400 Jobs as Quarterly Profit Misses Estimates

  Peugeot Citroën Reports Record Loss

  Big Investors Stiffen Their Resistance to Dell’s Offer

  Apple Said to Have Team Developing Wristwatch Computer

  Pragmatic Capitalism: Market Volatility and Returns

  Joshua Brown: begging your pardon…

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• The Yen Drag
  Eddy Elfenbein, February 12th, 2013 at 7:07 pm

  I thought this chart was interesting. It shows how much better the Nikkei Index has done than the iShares MSCI Japan Index ($EWJ) which is, of course, denominated in dollars. Japanese stocks are indeed doing well but devaluation explains some of it, though not all of it.

  

• How Overpriced Were Stocks in 1929?
  Eddy Elfenbein, February 12th, 2013 at 10:46 am

  Scott Sumner recently wrote, “studies have shown that stocks were not overpriced in 1929.” This observation surprises many people. They’ve been led to assume to stocks were wildly overvalued in 1929, but carefully looking at the evidence shows that that really isn’t the case.

  While stocks did soar during the 1920s, so did earnings and dividends. Stocks exploded higher in 1929, especially after April. The Federal Reserve also stepped in by raising rates a few times.

  

  The chart above is from data from Robert Shiller’s website. The S&P 500 is the black line and it follows the left scale. The one-year trailing earnings and dividends follow the right scale. The lines are scaled at a ratio of 16-to-1, so whenever the lines cross, the earnings multiple is exactly 16 or the dividend yield is 6.25%.

  I think a good way to view bear markets is to divide them into two categories. One is when prices far overshoot fundamentals. The other is when fundamentals crumble beneath prices; 1987 and 2000 are examples of the former, 1990 and 2007 are examples of the latter. I would say that 1929 is another good example of fundamentals falling apart beneath prices. So were stock prices overvalued in 1929? I think it’s fair to say that stock prices became “elevated,” but I don’t believe it was anything truly excessive.

  According to the monthly Shiller data, the peak P/E Ratio, based on one-year trailing earnings, was 20.2 in September 1929. That’s high but hardly out of orbit. The dividend yield for September was 3%.

  Bear in mind that I’m speaking from the standpoint of an investor at the time. Of course, investors then wouldn’t have known that the Federal Reserve engaged in an historic blunder by tightening as things got worse which, in turn, made things even worse. But for a person in 1929, there was little reason to believe that stock prices had reached the moon. In early 2000, by contrast, it was quite obvious that tech stocks bore little relation to their long-term value. They were going up simply because they were going up. As Herb Stein said about unsustainable trends, they eventually come to an end.

  Let me add that any look at the market’s value is inherently subjective. There’s no one perfect measure of something’s worth. After all, if there were one, we wouldn’t need markets. In the end, something is worth how much someone else is willing to pay for it. So I’m not saying stocks were perfectly valued or undervalued in late 1929. I’m saying that there was no obvious signal at the time that stocks were overvalued.

  That brings me to Robert Shiller’s CAPE, which is the Cyclically Adjusted Price/Earnings Ratio. That’s the P/E Ratio but based on the average of the last 10 years’ worth of earnings. As I’ve written before, I’m not a fan of CAPE. The issue for me is that stock valuations are inherently cyclical so there’s no need to adjust them for a cycle. With the 1929 example, we can really see the weakness of CAPE.

  The problem is that 10 years prior to 1929, the earnings denominator included the earnings plunge of the early 1920s. That really weighs down the data and thereby elevates CAPE. On the chart, notice how earnings dropped below dividends which is a good sign that the data is a bit messy. If the CAPE were five years instead of 10, the picture would look much different. I used one-year data in my chart which I think gives us a better picture of what was truly happening.

  Historically, CAPE doesn’t have a great track record. It showed that stocks were rather high in 1995 at the start of the bull market, and it showed that prices were fairly valued only weeks after the March 2009 low.

  Recently I wrote about the little-appreciated bull market of 1949-55. I think it’s ignored because it didn’t come to a crashing end. The 1929 market gets the opposite effect. Because it came to a crashing end, people assume stocks were outrageously priced. The ultimate judge of a market shouldn’t be what comes after.

• Morning News: February 12, 2013
  Eddy Elfenbein, February 12th, 2013 at 7:00 am

  World Bank Chief Economist Calls On G20 To Coordinate Policies

  G-7 Won’t Target Exchange Rates Amid Currency War Concern

  ECB Ready to Offset Banks’ Accelerated LTRO Payback

  U.K. Inflation Stays at 2.7% as Price Pressures Mount

  Buyout-Boom Shakeout Seen Leaving One in Four to Starve

  Corn Heads for Longest Losing Run Since 2010 as Output May Climb

  Yellen Says Higher Rates Not Assured After Thresholds Hit

  Karen Mills to step down as head of Small Business Administration

  Barclays Posts $1.3 Billion Loss and Plans to Cut 3,700 Jobs

  Shell Vessels Sidelined, Imperiling Arctic Plans

  Hostess Gets Approval to Auction Twinkies, Drake’s Brands

  UK Fines UBS $15 Million For Failings In AIG Fund Sale

  Samsung Girds for Life After Apple in Disruption Devotion

  Howard Lindzon: Momentum Monday…The Magic Behind LinkedIn and Tesla Motors

  John Hempton: Another Day – Another Strange Gulfport Energy Related Party Transaction

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• About That Earnings Acceleration….
  Eddy Elfenbein, February 11th, 2013 at 2:28 pm

  One aspect of this market that I’m starting to strongly doubt is the belief that earnings growth is about to ramp up. In other words, the rate of growth will itself increase.

  The chart below shows the S&P 500 (blue line, left scale) along with its earnings (yellow line, right scale). The red line is Wall Street’s forecast (please note: it’s not my forecast, it’s Wall Street’s consensus). The lines are scaled at a ratio of 15-to-1 so whenever the lines cross, the P/E Ratio is exactly 15.

  

  It’s that red line that has me concerned. Wall Street seems to believe it’s about to hook upward. Me? I’m not so sure. For one, profit margins have been pushed about as far as they can go. I can believe that nominal GDP growth will pick up, but nothing close to what would sustain a major bounce in corporate earnings.

  The Street currently sees full-year earnings for the S&P 500 coming in at $111. That’s down from $117 ten months ago. Earnings growth was actually negative for Q3 and Q4 of 2012. Unless we see evidence of an earnings pickup for Q1 2013, I’m inclined to believe the market will earn $100 for all of 2013.

  Is the yellow line going through a minor bump like it did in 1998, or is it hitting a major peak like 2000 and 2007? I should add that if the earnings projections are correct, the S&P 500 is very undervalued here.

• Stocks Go for Seven Straight Up Weeks
  Eddy Elfenbein, February 11th, 2013 at 1:04 pm

  The stock market has now risen for six weeks in a row, and today we’re trying to make it seven. Right now, stocks are mostly unchanged. The S&P 500 is down a bit, but it’s nothing too serious. Just listening to the chatter, it seems like everyone is expecting a pullback to happen at some point. Just when and how much are the only missing pieces.

  There’s a big euro meeting today to discuss what to do over Cyprus and Greece. Then on Friday, the G-20 finance chiefs gather for a meeting in Moscow. The big political item this week will be tomorrow’s State of the Union by address by President Obama. It’s expected that he’ll offer specific proposals about gun control and immigration.

  The next earnings report from one of the stocks on the Buy List will be DirecTV ($DTV) which is due to report on Thursday. Wall Street expects earnings of $1.13 per share. Also on our Buy List, Medtronic ($MDT) made a fresh 52-week high.