Author Archive

  • Well Played Sir
    , January 11th, 2010 at 12:37 pm

    I’m not sure if this is real, but I like it anyway.
    (HT: Footnoted)

  • Animated Reconstruction of Hudson River Landing
    , January 9th, 2010 at 11:20 am

    Here’s an amazing animated reconstruction of Captain Sullenberger bringing Flight 1549 into the Hudson nearly one year ago.

    (HT: Ritholtz)

  • Trills Just Don’t Make Sense
    , January 8th, 2010 at 1:28 pm

    David Merkel has written a few on Robert Shiller’s idea of GDP-linked US Treasury bonds, or trills (see here, here and here). In his first post, David wrote:

    My interest rate models indicate that if the US were to issue a consol, a perpetual bond, it would have a yield near 4.4%. Here’s the question: what do you think nominal GDP growth will be on average forever? If it is above 4.4%, one should be willing to pay an infinite amount to buy it. At lower rates of nominal GDP growth, the security will have a finite value that declines rapidly with lower nominal GDP growth.

    I think he’s exactly right. The rational price for a trill would be an infinite amount which is another way of saying that trills don’t make sense. The Treasury can get the same thing for a lower price. Trills would be a waste of taxpayer money.
    Here’s a comment I left on David’s most recent post:

    A few quick points.
    There’s no way to pay off a trill except by running a budget surplus or by issuing conventional debt, thus negating the need for trills.
    There might also be a slight risk premium due to the uncertainty of each coupon payment. It might be small but even a small amount comes of out taxpayers’ wallets.
    The Q3 GDP for 1983 has been revised 10 times since it first came out. The last time was in 2009. Imagine the headache for trills.
    I keep coming back to your point that trills would be worth an infinite amount. I think that’s exactly right. For the borrower, trills are irrational. The US Treasury can get the exact same thing for less.

  • The Plunging VIX
    , January 8th, 2010 at 11:06 am

    The Volatility Index (^VIX) hit 18.70 today which matches yesterday’s low. That’s a level we haven’t seen in 19 months.

  • December Unemployment Report
    , January 8th, 2010 at 8:32 am

    The Labor Department reported that the unemployment rate for December was unchanged at 10%. Nonfarm payrolls declined by 85,000.
    For October, the loss of 11,000 was revised to a gain of 4,000. For November, the loss of 111,000 was revised to a loss of 127,000.
    image890.png

  • Bed, Bath & Beyond’s Huge Quarter
    , January 6th, 2010 at 4:35 pm

    After the bell, one of my favorite Buy List stocks, Bed, Bath & Beyond (BBBY) reported earnings of 58 cents a share which was 15 cents more than the Street’s forecast! Dayum… that’s a huge earnings beat. The stock is up 8% after-hours.
    Sales rose 10.8% to $1.98 billion which topped the Street’s estimate of $1.91 billion. Note that this was their November quarter so it didn’t include much of the holiday shopping season.
    BBBY also forecast earnings for this quarter of 67 to 71 cents a share which was above the Street’s estimate of 63 cents.
    There’s a lot I like about this earnings report. First is that sales growth came in strong. This is the best top-line growth number in two years. And with that, margins didn’t suffer which has been a problem in recent years. Year-over-year net margins fell for 14 straight quarters, but have now risen for the past three.
    Decreasing margins are like kryptonite for a company. In BBBY’s case, net margin fell from about 10% to 6%. That effectively erases a 66% gain in sales. Rising margins have the opposite effect. The problem for every retailer is that you have to walk the line between higher margins and its impact on sales. BBBY has pulled in more sales and higher margins.
    Here are the earnings results going back a few years:

    Quarter Sales Gross Profit Operating Profit Net Profit EPS
    May-99 $356,633 $146,214 $28,015 $17,883 $0.06
    Aug-99 $451,715 $185,570 $53,580 $33,247 $0.12
    Nov-99 $480,145 $196,784 $50,607 $31,707 $0.11
    Feb-00 $569,012 $238,233 $77,138 $48,392 $0.17
    May-00 $459,163 $187,293 $36,339 $23,364 $0.08
    Aug-00 $589,381 $241,284 $70,009 $43,578 $0.15
    Nov-00 $602,004 $246,080 $64,592 $40,665 $0.14
    Feb-01 $746,107 $311,802 $101,898 $64,315 $0.22
    May-01 $575,833 $234,959 $45,602 $30,007 $0.10
    Aug-01 $713,636 $291,342 $84,672 $53,954 $0.18
    Nov-01 $759,438 $311,030 $83,749 $52,964 $0.18
    Feb-02 $879,055 $370,235 $132,077 $82,674 $0.28
    May-02 $776,798 $318,362 $72,701 $46,299 $0.15
    Aug-02 $903,044 $370,335 $119,687 $75,459 $0.25
    Nov-02 $936,030 $386,224 $119,228 $75,112 $0.25
    Feb-03 $1,049,292 $443,626 $168,441 $105,309 $0.35
    May-03 $893,868 $367,180 $90,450 $57,508 $0.19
    Aug-03 $1,111,445 $459,145 $155,867 $97,208 $0.32
    Nov-03 $1,174,740 $486,987 $161,459 $100,506 $0.33
    Feb-04 $1,297,928 $563,352 $231,567 $144,248 $0.47
    May-04 $1,100,917 $456,774 $128,707 $82,049 $0.27
    Aug-04 $1,273,960 $530,829 $189,108 $120,008 $0.39
    Nov-04 $1,305,155 $548,152 $190,978 $121,927 $0.40
    Feb-05 $1,467,646 $650,546 $283,621 $180,980 $0.59
    May-05 $1,244,421 $520,781 $150,884 $98,903 $0.33
    Aug-05 $1,431,182 $601,784 $217,877 $141,402 $0.47
    Nov-05 $1,448,680 $615,363 $205,493 $134,620 $0.45
    Feb-06 $1,685,279 $747,820 $304,917 $197,922 $0.67
    May-06 $1,395,963 $590,098 $148,750 $100,431 $0.35
    Aug-06 $1,607,239 $678,249 $219,622 $145,535 $0.51
    Nov-06 $1,619,240 $704,073 $211,134 $142,436 $0.50
    Feb-07 $1,994,987 $862,982 $309,895 $205,842 $0.72
    May-07 $1,553,293 $646,109 $154,391 $104,647 $0.38
    Aug-07 $1,767,716 $732,158 $211,037 $147,008 $0.55
    Nov-07 $1,794,747 $747,866 $203,152 $138,232 $0.52
    Feb-08 $1,933,186 $799,098 $259,442 $172,921 $0.66
    May-08 $1,648,491 $656,000 $118,819 $76,777 $0.30
    Aug-08 $1,853,892 $739,321 $187,421 $119,268 $0.46
    Nov-08 $1,782,683 $692,857 $136,374 $87,700 $0.34
    Feb-09 $1,923,274 $785,058 $231,282 $141,378 $0.55
    May-09 $1,694,340 $666,818 $142,304 $87,172 $0.34
    Aug-09 $1,914,909 $773,393 $222,031 $135,531 $0.52
    Nov-09 $1,975,465 $812,412 $245,611 $151,288 $0.58

    Finally, here’s a BBBY’s trailing four-quarter EPS with the red being the company’s forecast:
    image889.png

  • A New Relative Strength High for Cyclicals
    , January 6th, 2010 at 12:53 pm

    A reader points out that the ratio of the Morgan Stanley Cyclical Stock Index (^CYC) relative to the S&P 500 (^SPX) has reached another new all time high. The ratio closed over 0.76 for the first time ever yesterday.
    image888.png
    I think there are three takeaways from this. The first is that it could be that cyclicals are due to lag the market very soon. That’s one of the reasons why the Buy List tilts toward non-cyclical areas like health and consumer stocks.
    The second is that if the market is correct, then this is one of the sharpest V’s in a V-shaped recovery that I’ve ever seen.
    The third is that you can really see how much of the market’s swoon and recovery was focused on cyclicals. If you had completely ignored this ratio from September 2008 to September 2009, then you’d find it almost exactly where you left it.

  • The Bubble Popper
    , January 6th, 2010 at 10:40 am

    Listening to some people, you’d think the Fed chairman has a machine in his office called “the bubble popper.” It will instantly pop any bubble without affecting anything else. If only, he would just turn it on.

  • Looking At the Numbers at Nicholas Financial
    , January 5th, 2010 at 3:50 pm

    I’ve always been impressed with the amount of financial info that Nicholas Financial (NICK) provides about their portfolio in their quarterly statements. I wish more companies were this forthcoming. I’ve assembled a portfolio summary on this spreadsheet of how they’ve done over the last several quarters.
    By looking at this spreadsheet you can see why I’m such a big fan of the stock. The pre-tax bottom line is column N. However, the most important line to watch is column K, the provision for credit losses. That zoomed up during the credit crisis and it took out a huge chunk of NICK’s earnings.
    The pre-tax yield before adjusting for credit losses has been remarkably consistent for the past 12 quarters, usually around 12.5%. The credit losses completely altered NICK’s profitability. But something big happened the last two quarter. The eight-quarter run of year-over-year increases in the provision for credit losses finally stopped. It’s still high, but if it continues to drop, that will give a big boost to NICK’s bottom line.
    Let’s make some assumptions for the next earnings report. If the pre-tax yield for the last quarter hit 7% on receivables of $230 million that comes to about $4 million pre-tax for the quarter. With the new shares post stock dividend, that’s 35 cents a share. After taxes, that’s about 22 cents a share.
    For the first six months of the fiscal year (ends March 31), NICK made 40 cents a share. So we’re probably talking about stock on its way to making around 80 cents a share for the year during an awful recession. As I see it, this company is almost like an 11% or 12% bond and the credit quality is improving.

  • Your Home Is a Terrible Investment
    , January 5th, 2010 at 1:48 pm

    So says Karen Pence who runs the Fed’s household and real estate finance research group. Here are her five reasons:

    1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
    2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
    3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
    4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
    5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.