Author Archive

• The Market Doesn’t Always Do What We Want
  Eddy Elfenbein, January 19th, 2010 at 10:20 am

  Before Intel’s earnings came out I wrote, “The Street is looking for 30 cents a share which is definitely too low. I expect earnings around, 35 cents a share, but the mystery is how Wall Street will react.”
  I was more right than I realized. Intel obliterated the Street by earning 40 cents a share, yet the stock fell 3.2% the next day. So if exceeding expectations disappoints, you have to wonder what the true expectations were.
  There was some talk that Intel’s gross margins are now so high (67%) that there’s no way they can increase them anymore. Sure, I buy that. The company has said it’s targeting margins 61% for this year. But it in way means that Intel will be less profitable.
  The point for us is how unpredictable investing can be. Even when all the fundamentals go our way, we can still lose. If the market wants to go down, it will go down. The media and analysts will attempt to seize on any bit of info to explain the sell-off. Yet, the accurate explanation for why it happened is simply unknowable.
  Unfortunately, that doesn’t make for a good analyst report or news item. In the long run, stock prices do make sense. But in the short term, it might as well be astrology.

• Intel Delivers Huge Quarter
  Eddy Elfenbein, January 14th, 2010 at 4:17 pm

  Yesterday I said that I expected Intel (INTC) to report earnings of 35 cents a share which was well above Wall Street’s consensus of 30 cents a share. Even my optimistic estimate was too low. The company just reported earnings of 40 cents a share.
  Here’s a look at their future guidance:

  Q1 2010
  * Revenue: $9.7 billion, plus or minus $400 million.
  * Gross margin percentage: 61 percent, plus or minus 2 percentage points.
  * R&D plus MG&A spending: Approximately $3 billion.
  * Amortization of acquisition-related intangibles and costs associated with the Wind River acquisition: Approximately $20 million.
  * Impact of equity investments and interest and other: Gain of approximately $20 million.
  * Depreciation: Approximately $1.1 billion.
  Full-Year 2010
  * Gross margin percentage: 61 percent, plus or minus 3 percentage points.
  * Spending (R&D plus MG&A): $11.8 billion, plus or minus $100 million.
  * R&D spending: Approximately $6.2 billion.
  * Tax rate: Approximately 30 percent.
  * Depreciation: Approximately $4.4 billion, plus or minus $100 million.
  * Capital spending: Expected to be $4.8 billion, plus or minus $100 million.

  That Q1 revenue target of $9.7 billion +/-$400 million is well above Wall Street’s consensus of $9.35 billion.

• Barney Vs. Erin
  Eddy Elfenbein, January 14th, 2010 at 4:02 pm

  Here’s an entertaining interview of Barney Frank by Erin Burnett:
  

• The Dow Jones Hit Its Bull Market High 10 Years Ago Today
  Eddy Elfenbein, January 14th, 2010 at 6:48 am

  On Friday, January 14, 2000, the Dow closed at 11,722.98 — a level it wouldn’t break for over six years. That peak capped an amazing 17-1/2 year run. In the ensuring 10 years, we’ve lost about 1,000 points or roughly 8.9%. Inflation, or at least the CPI, has increased by about 28% which makes the inflation-adjusted close from ten years more like 15,000. Ten years ago, gold was going for about $280 an ounce (around $360 inflation adjusted).
  In the letters section of the January 2000 issue of the Atlantic, J. Douglas Van Sant of Stockton, California criticized the article in the September 1999 issue on Dow 36,000 by James Glassman and Kevin Hassett.
  Mr. Van Sant wrote:

  I would be willing to bet Glassman and Hassett that even ten years from now, when earnings and dividends should have nearly doubled, the Dow Jones Industrial Average will still be closer to its current level of 11,000 than to their hyperbolic projection of 36,000.

  Good call. The Dow closed yesterday at 10,680.77.
  Glassman and Hassett replied:

  To J. Douglas Van Sant we say, if the Dow is closer to 10,000 than to 36,000 ten years from now, we will each give $1,000 to the charity of your choice.

  I recommend Haiti.
  

• Once Again, Economists Are Split
  Eddy Elfenbein, January 13th, 2010 at 12:21 pm

  I sometimes think that a group of academic economists couldn’t agree on the color of the sky. The WSJ surveyed economists over Ben Bernanke’s view that low rates didn’t contribute to the housing bubble (to be fair, Bernanke merely said it wasn’t the primary cause of the bubble).
  Here’s what the WSJ found:
  

• This Just In
  Eddy Elfenbein, January 13th, 2010 at 12:16 pm

  “Whatever we did, it didn’t work out well.” Lloyd Blankfein CEO of Goldman Sachs

• The Buy List So Far
  Eddy Elfenbein, January 13th, 2010 at 11:20 am

  I probably shouldn’t mention this so early and jinx myself, but the Buy List has gotten off to a very nice start this year. Through 11am this morning, the Buy List is up 3.77% for the year which is almost exactly double the S&P 500, which is up 1.88%. So far, so good.
  The Buy List will get a big test tomorrow when Intel (INTC) reports its earnings. The Street is looking for 30 cents a share which is definitely too low. I expect earnings around, 35 cents a share, but the mystery is how Wall Street will react.

• The Credit Market Slowly Wakes Up
  Eddy Elfenbein, January 13th, 2010 at 10:57 am

  The credit markets recently passed an important milestone when the spread between the BAA corporate bond index and the 10-year Treasury bond fell below 250 basis points. This spread is a good measure of the willingness of lenders to take on default risk.
  
  In the best of times, the spread is around 160 basis points, and that’s where it was during the summer of 2007. By early 2008, the spread doubled and then nearly doubled again during the frantic days of September 2008. The spread reaches its peak of 616 basis points on December 4, 2008.
  Since then, the spread has plunged. It dropped below 300 over the summer, and it just recently fell below 250 for the first time in over two years.
  
  So what does that means for equities? It’s hard to put an exact effect on each instance, but historically stocks have shown a clear preference for a tighter BAA-10YTB spread.
  I ran the numbers and found that since 1986, when the spread is 250 basis points or more, the stock market has lost an average of -4.50% annually. When the spread is 249 basis points or less, the market has gained an average of 12.13% annually.
  There’s probably a feedback loop at work. Because the yield spread narrows, it’s good for companies because it lowers their borrowing costs. The lower borrowing costs make them more profitably and in turn, less likely to default.

• Chinese Revaluation Needs to Come Soon
  Eddy Elfenbein, January 13th, 2010 at 9:56 am

  The WSJ writes on the most important economic issue right now, the absurd peg of the Chinese yuan:

  Surging Chinese exports and an expansion in the U.S. trade deficit have shown this week that a revaluation in the Chinese yuan is the most urgent item of unfinished business for the global economy.
  Most economists believe a modest appreciation in the yuan is inevitable sometime this year. The latest move by the People’s Bank of China — an incremental increase in its T-bill rate last week and a hike in reserve ratios and one-year T-bills on Tuesday — could even pave the way for this.
  But time is running out. Anger is growing around the world over what many see as a grossly unfair advantage for China’s exporters. “The monetary disorder has became unacceptable,” said French President Nicolas Sarkozy last week.
  China’s leaders have said nothing of plans to raise the value of their currency — even though this would help diffuse inflationary pressures — and have at times sounded hostile to the suggestion.

  This could get ugly. China currently holds $2 trillion in reserves.

• One Bank Had a Very Good Year
  Eddy Elfenbein, January 12th, 2010 at 10:26 am

  The Federal Reserve earned $45 billion last year:

  Much of the higher earnings came about because of the Fed’s aggressive program of buying bonds, aiming to push interest rates down across the economy and thus stimulate growth. By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier. The interest income on those investments was a major source of Fed profits — though that income comes with risks, as the central bank could lose money if it later sells those securities to reduce the money supply.
  The Fed also made money on its emergency loans to banks and other firms and on special programs to prop up lending, such as one that supports credit cards, auto loans, and other consumer and business lending. Those programs impose interest and fees on participants, with the aim of ensuring that the Fed does not lose money.
  And while the central bank in its most recent financial report had recorded a $3.8 billion decline in the value of loans it made in bailing out the investment bank Bear Stearns and the insurer American International Group, the Fed also logged $4.7 billion in interest payments from those loans. Further losses — or gains — on the two bailouts are possible as time goes by. The Fed also charges fees for operating the plumbing of the financial system, such as clearing checks and electronic payments between banks.

  Despite what conspiracy theorists think, any profit over the Fed’s 6% dividend goes right to the U.S. Treasury.