Author Archive
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The Five-Year Itch
Eddy Elfenbein, February 20th, 2014 at 10:22 amI caution against reading too much into this, but two recent bull markets have had five-year lifespans.
By closing low to closing high:
Low: August 12, 1982
High: August 25, 1987Low: October 9, 2002
High October 9, 2007Low: March 9, 2009
High: ????? -
DirecTV Beats By 23 Cents per Share
Eddy Elfenbein, February 20th, 2014 at 9:52 amThis morning, DirecTV ($DTV) reported earnings of $1.53 per share which was 23 cents better than expectations. This was a very strong quarter.
Latin America continues to be a growth powerhouse. Revenues were up 10% in that region and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, cloudy in some part of Latam.
DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few that do it right. They actually reduce their overall share count. Working out the math, $3.5 billion is roughly 9% of DTV’s market cap.
The shares gapped up to a new all-time high this morning.
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Morning News: February 20, 2014
Eddy Elfenbein, February 20th, 2014 at 2:20 amG20 Final Document to Address U.S. Policy Impact on Emerging Markets
Don’t Cut Too Quickly, IMF Warns Advanced Economies
Global Bond Frenzy Raises Concerns
Forex – USD/JPY Rises After Record Trade Deficit in Japan
China Factory Gauge Falls Amid Risks of Credit Souring
Singapore’s Soaring Land Prices ‘Suicidal’ for Developers
F.C.C. Seeks a New Path on ‘Net Neutrality’ Rules
Fed Puts Rate Increase on the Radar
Facebook to Buy Messaging App WhatsApp for $19 Billion
Safeway Putting Itself Up For Sale
Signet Jewelers to Acquire Rival Zale
Peltz Revives Bid to Split PepsiCo
Einhorn Says Don’t Be Fooled as Companies Beat Estimates
Roger Nusbaum: If You Can’t Retire at 30 Then How About 38?
Jeff Miller: Mean Reversion: The Misunderstood “Mystery Method” Behind Big Market Blunders
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Will Investing Be Free?
Eddy Elfenbein, February 19th, 2014 at 6:18 pmHerbert Moore has a provocative thesis — that investing will be free in five years. I’m not sure if I agree with his endpoint, but the trends he describes are certainly real.
Trading fees: Zero is inevitable
Investors are also increasingly benefiting from lower trading fees. Whereas brokerage firms charged close to $40 per trade through the 1980s and 1990s, online brokerages now charge less than $10. With scalability, the marginal cost to a broker for processing a trade becomes zero, and brokerages will be able to offer free trading by focusing on other revenue streams.
Processing a trade costs a brokerage (virtually) nothing
Trading commissions consist of a clearing fee (though if the broker self clears there is no clearing fee), an exchange fee, and any markup by the broker to cover the cost of the platform, customer service, etc. Of these, the exchange fee is the only inescapable cost, while the others are simply markups charged by a clearing or brokerage firm. The actual costs of clearing a trade through an exchange are minimal at just fractions of a cent. The NYSE, one of the more expensive exchanges, charges $0.0025 if you are taking liquidity with a trade, and rebates $0.00150 if you are providing liquidity. While the brokerage and clearing infrastructure can be expensive to create, at thousands or millions of trades, the cost per individual trade becomes negligible to the firm. An external brokerage and clearing firm like Apex (clears for smaller online brokerages like TradeKing, Zecco, Firstrade and others) charges just pennies per share on anything over 100,000 trades per month, giving a proxy for how much the internal trading infrastructure costs at scale.
It’s true that investing has become more democratic over the years. Discount brokers, ETFs, trading in decimals, plus growth of blogs and Twitter have opened the door on Wall Street.
The downside is that like the sorcerer’s apprentice, the potential for mischief has risen as well.
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Morning News: February 19, 2014
Eddy Elfenbein, February 19th, 2014 at 7:00 amJapan Says Prices ‘Rising Moderately’ For First Time in More Than Five Years
Puerto Rico Wants to Incur More Debt to Regain Financial Footing
Obamacare’s Latest Surprise for Taxpayers?
Fed Requires Foreign Banks in U.S. to Hold More Money in Reserves
Minimum Wage Report Puts Democrats on Defensive
Household Debt Rises at Fastest Pace Since Global Financial Crisis
Darker U.S. Homebuilder Mood Not Just Due to Bad Weather
Peugeot’s $3 Billion Loss Shows Rescue Deal is Just a Start
Icahn’s Fight Opened Door to Actavis’s Post-Generics Evolution
Candy Crush Maker, King, Seeks I.P.O. to Further Its Momentum
Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year
Capital One to Revisit Credit Card Contract Terms After Outcry
Bitcoin Shop: The Latest Growth Opportunity In The Cryptocurrency World
U.S. Commercial Banks’ Changing Asset Mix
Jeff Carter: Using Algebra For Politics and Policy
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The Dollar Trap
Eddy Elfenbein, February 18th, 2014 at 11:01 amAt Bloomberg, William Pesek writes on Eswar Prasad’s new book, “The Dollar Trap.” This part caught my attention:
Prasad’s argument is that for all the worries about U.S. policies and debt, and the many efforts to build up an alternative, the dollar’s linchpin role is only strengthening. What struck me most, though, is that China still can’t see that it’s the dupe in this giant pyramid scheme.
China’s $3.8 trillion of currency reserves are the largest stockpile ever amassed. Economists have long seen that money as a strength — the ultimate rainy-day fund should China’s shadow-banking system blow up. Trouble is, the value of those holdings depends on China’s $1.3 trillion of U.S. Treasuries. If they plunge in value, all hell breaks loose and officials from Beijing to Brasilia will scramble to exit the American bird cage.
(…)
As Prasad writes, “China now has a strong incentive to support the dollar’s value, limiting its losses for the time being but at the cost of getting even more entangled in the dollar’s sticky web.”
The Chinese central bank is stuck in a dangerous cycle. Every time it clamps down on credit to curb excessive lending, markets panic, interbank borrowing rates skyrocket and policy makers back off. At the same time, a minicrisis in emerging markets this year will greatly complicate President Xi Jinping’s efforts to restructure the economy away from exports and hyperinvestment.
The irony is that that means even more dollar purchases. This dynamic runs counter to Beijing’s aspirations for a greater global role for the yuan, and to the desire of Russians and others to get the dollar out of their lives. Indeed, one no longer hears much about the regional bank Xi proposed in October, to invest in infrastructure across the region. The Chinese leader had pledged to provide funding from what essentially would be a local International Monetary Fund free from those pesky Americans. The only problem is that the $7 trillion-plus Asia would tap for such an enterprise is largely beyond its reach.
“So the choice the U.S. offers the rest of the world is simple: you get to choose when to take a loss on your holdings of our debt — now or later,” Prasad says. “Faced with this stark choice between two evils, many emerging markets end up being boxed into maintaining export growth by accepting the unpleasant trade-off of a loss on their reserve holdings in the future. The choices they have made — intervening in foreign exchange markets and accumulating reserves as a self-insurance mechanism — have only fueled U.S. fiscal profligacy and strengthened the dollar’s role in the global monetary system.”
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Medtronic Earns 91 Cents Per Share
Eddy Elfenbein, February 18th, 2014 at 9:44 amMedtronic ($MDT) just reported Q3 earnings of 91 cents per share which matched expectations. Revenues rose 3.4% to $4.16 billion which was $10 million more than forecast.
Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. For the first three quarters of their fiscal year, MDT has earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 to $1.13 per share. Wall Street had been expecting $1.12 per share.
This was a good report. The stock is currently down about 2% but I doubt it will last.
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Forest Labs to Be Bought Out
Eddy Elfenbein, February 18th, 2014 at 9:12 amThe big merger news this morning is that Actavis is going to buy Forest Labs ($FRX) for $25 billion. The cash-and-stock deal is for $89.48 per share which is a 25% premium over FRX’s close on Friday.
Forest Labs is notable because it’s been one of the best performing stocks for many years. I should warn you that this long-term data isn’t always reliable but according to the charts at Google Finance, FRX was going for 2.7 cents per share in early 1978. That works out to a 330,000% gain over 36 years. That’s more than 25% per year.
I trust the data from Yahoo Finance a little more but it doesn’t go back as far. Yahoo has FRX going for as little as $1.01 per share in May 1988. That adjusts for four 2-for-1 splits.
The shares had hit a peak of $78 in 2004 and had gradually fallen down to $18 by March 2009. As late as November 2012, FRX was going for less than $32 per share.
It’s odd how a company can watch a stock plunge 76% and then see it rebound by 289% — and then decide to buy it for a 25% premium.
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Morning News: February 18, 2014
Eddy Elfenbein, February 18th, 2014 at 6:46 amJapanese Stocks Lose Darling Status
Bank of Japan Holds Fire Despite Soft GDP, Expands Loan Programs
Gold Smuggling in India Likely to Rise if Curbs Stay – WGC
Understanding the Crucial Link Between Money Supply and Inflation
Danish Outsourcing Group ISS Plans One of Biggest Nordic IPOs
France Tries to Tempt In More Foreign Investment
European Car Sales Rise a Fifth Month on Volkswagen Growth
FX Traders Facing Extinction as Computers Replace Humans
Hedge Funds Raise Gold Bull Bets as Paulson Holds
Pratt, GE Battle Over Billions in Jet Engine Orders
Temasek Seeks to Sell $3.1 Billion Stake in Thailand’s Shin Corp to SingTel
Jim Rogers Tells Us What Everyone Keeps Getting Wrong About China
Kentucky Announces 5 Hemp Pilot Projects
Joshua Brown: The Best and Worst Thing About Investing
Cullen Roche: Is QE the Future of Monetary Policy?
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Q4 Earnings Calendar
Eddy Elfenbein, February 18th, 2014 at 5:31 amSixteen of our 20 Buy List stocks report on the Mar-Jun-Sep-Dec earnings cycle. Here’s a preliminary calendar. Please note that some of these dates may move.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His