Author Archive

• The Bond Bull Lives
  Eddy Elfenbein, May 16th, 2012 at 7:04 am

  I continue to be amazed by the strength of the bond market. Folks in the media love to mention how most money managers can’t beat the stock market. That’s true, but for the last several years, the stock market hasn’t even been able to beat the bond market. If you had just parked your money in a long-term T-bond, you would have beaten many top pros. By a lot.

  Several pundits, myself included, have said that the bond market’s 30-year bull run has finally ended. That appeared to happen last September, but it was a head fake. Treasury yields continue to move lower.

  Yesterday, the yield on the seven-year Treasury closed at 1.19% which is a multi-decade low (the FRED data goes back to 1969). For contrast, in 1981, a seven-year Treasury was yielding more than 16%.

  The yields on the 5-, 10- and 20-year bonds are now just a few basis points above generational lows. The 30-year bond is a bit of an exception. Its yield is still 38 basis points above the low yield from December 2008. Don’t think this latest run for bonds is all due to purchases by the Federal Reserve. Corporate bonds are also doing well.

  Check out this chart which shows how stocks are doing relative to bonds. For my stock proxy, I used the Vanguard 500 Index Investor Fund (VFINX); for bonds I used Vanguard Long-Term Investment-Grade (VWESX).

  

  When the blue line goes down, that means bonds are beating stocks. When it climbs, stocks are beating bonds. Outside a big run-up during the late 1990s, and a smaller climb last decade, bonds have done a very good job of keeping pace with stocks. Over the last 23 years, the corporate bond index fund has outperformed the stock index fund.

• Morning News: May 16, 2012
  Eddy Elfenbein, May 16th, 2012 at 5:52 am

  Greek Leaders Meet on Election After European Stocks Drop

  Merkel-Hollande Meeting Yields Greece Growth Signal

  Rajoy Says Spain at Risk of Being Shut Out of Markets

  Singapore Dollar Falls To Near 4-Month Low On Greek Political Woe

  Treasury Yield Is 9 Basis Points From Low on Greece

  Needy States Use Housing Aid Cash to Plug Budgets

  US Farmland Stays Hot At Record High Prices-Fed Surveys

  Facebook Boosts IPO Size By 25%, Could Top $16 Billion

  Ahead of I.P.O., G.M. to Quit Advertising on Facebook

  A Russian Magnate’s Facebook Bet Pays Off Big

  Sina May Post Second Straight Loss as Weibo Costs Climb

  EADS Reports First Quarter (Q1) Results 2012

  J.C. Penney Posts Big Loss as 3 Retailers Gain

  Soda Makers Scramble to Fill Void as Sales Drop

  Roger Nusbaum: Black Swan Alert–Financial Stocks Still Stink

  Phil Pearlman: Don’t Hang Around Too Long in the Facebook Proxy Trades

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• Coty Walks Away from Avon
  Eddy Elfenbein, May 15th, 2012 at 9:49 am

  Last month, Coty offered to buy Avon Products ($AVP) for $23.25 per share. Avon’s stock had been at $19.36, but despite the premium, the company shot the offer down. Coty then raised the price to $24.75 per share and set a take-it-or-not deadline.

  This is where it gets strange. Avon asked for a deadline extension, and Coty has now withdrawn the bid. Apparently, Avon didn’t “engage” with Coty, which would upset me as well. I don’t think people are telling us the full story, but something happened that soured the Coty folks on Avon.

  My take is that this was a lousy deal for Coty, and Avon should have taken any price they could have gotten. According to the world’s simplest stock valuation tool, Avon should be worth half its market price.

  Overvalued companies shouldn’t get greedy (for that matter, neither should undervalued companies). Four years ago, Yahoo ($YHOO) turned down Microsoft’s buy-out offer of $31 per share. Yahoo got greedy and wanted more. Microsoft raised their bid to $33 per share and Yahoo still said no. I said this was a bad move. Today, Yahoo’s stock is trading for half that amount.

• More Troubles in Greece
  Eddy Elfenbein, May 15th, 2012 at 9:22 am

  Today looks like it’s going to be a relief rally for stocks. Today’s CPI report showed that inflation was flat last month. Year-over-year inflation is running at 2.3%. The core rate, which excludes food and energy, rose by 0.2%.

  Looking at the details of the report, the number that jumps out is that gasoline prices dropped by 2.6% last month. The average price for gasoline has dropped for six straight weeks. It’s now down 20 cents per gallon from a year ago. This is obviously good news for consumers, and it helps the economy as well.

  Still, the economy doesn’t seem to be moving very quickly. The retail sales report this morning showed a 0.1% increase last month, which is what analysts were expecting.

  The latest attempt in Greece to form a government has failed. This is becoming a pattern and the news is not being well received by the European markets. I think they need to call elections again soon. The problem is that a new election will probably be good for the far left-wing parties, and that will almost certainly lead to Greece departing the euro. The euro is now worth less than $1.28.

• Morning News: May 15, 2012
  Eddy Elfenbein, May 15th, 2012 at 5:44 am

  Italian Default Protection Costs Rise After Bank Downgrades

  Spain Finance Minister: Experts To Audit Banks In Two Months

  European Stocks, Euro Up, But Bounce Seen Short-Lived

  Asian Stocks Fall as Greek Concern Outweighs China Easing

  Czech Economy Extends Recession on Austerity Measures

  Oil Trades Near Five-Month Low on Europe, U.S. Supplies

  SEC Halts Trades in 379 Shell Companies in Fraud-Prevention Push

  A Guide to How JPMorgan’s Surprise $2 Billion Loss Might Change Financial Overhaul

  Facebook Is Said to Raise Offering Share Price

  Google-Backed Offshore-Wind Grid Gets Environmental Review

  Coty Withdraws $10.7 Billion Offer to Buy Avon

  Groupon Makes First Profit, Shares Surge

  Drop in Disasters Helps Allianz

  Falcone’s LightSquared Files for Bankruptcy

  Loeb Makes $122 Million on Yahoo as Thompson Steps Down

  Cullen Roche: Old Fashioned Banking…

  Howard Lindzon: Momentum Monday…The Facebook IPO…What a Market Top Looks Like Part 3

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• 13 Stocks to Avoid
  Eddy Elfenbein, May 14th, 2012 at 10:58 am

  Here’s a list of 13 stocks that are way, way, WAY overpriced. I listed Friday’s closing price with each stock.

  Amazon ($AMZN), $227.68

  Motorola Mobility ($MMI), $39.23 (getting bought by Google)

  Salesforce.com ($CRM), $137.78

  Netflix ($NFLX), $77.38

  Coke ($KO), $77.47

  Whole Foods ($WFM), $88.54

  Costco ($COST), $84.60

  Stericycle ($SRCL), $83.24

  Starbucks ($SBUX), $55.01

  Nike ($NKE), $108.26

  Ariba ($ARBA), $39.17

  Chipotle ($CMG), $408.25

  Intuitive Surgical ($ISRG), $558.95

• Morning News: May 14, 2012
  Eddy Elfenbein, May 14th, 2012 at 5:28 am

  Euro Officials Begin to Weigh Greek Exit

  European Stocks Drop on Greek Deadlock, Merkel’s Setback

  Strategists Lower Australian Dollar Forecasts

  India Inflation Unexpectedly Quickens, Curbing Rate-Cut Room

  Sub-Saharan Africa’s `Strong’ Growth to Risks, IMF Says

  Far Behind Rivals, Ford Tries to Play Catch-Up in China

  Yahoo CEO Resigns Over Resume Discrepancy

  Dimon Fortress Breached as Push to Betting Blows Up

  Concho Resources to Buy Three Rivers for $1 Billion

  Aluminum Giant RUSAL’s Q1 Net Drops 84% as Aluminum Prices Fall

  Unit of Ally, ResCap, Said to Plan Bankruptcy

  LightSquared Moves Toward Bankruptcy

  Facebook’s Purchases May Hint at Its Future

  Avon Says Its Board Will Respond to Coty’s New Offer in a Week

  Aleph: Simple Stock Valuation (David takes a look at my ultra-simple stock valuation equation)

  Jeff Carter: Our Energy Future

  Josh Brown: JPM: How to Deal With a Good Trade Gone Bad

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• The Bears Had a Good Week
  Eddy Elfenbein, May 11th, 2012 at 7:05 pm

  They’re so happy, they’ve formed a Conga Line:

• CWS Market Review – May 11, 2012
  Eddy Elfenbein, May 11th, 2012 at 7:40 am

  The stock market finally broke out of its trading range this week. Unfortunately, it was to the downside. More troubles from Europe, including shake-up elections in France and Greece, helped the S&P 500 close Wednesday at its lowest level in nine weeks. However, the initial jobless claims report on Thursday helped us make up a little lost ground.

  In this week’s CWS Market Review, I’ll explain why everyone’s so freaked out (again) by events in Europe. I’ll also talk about the latest revelations from JPMorgan Chase ($JPM). The bank just told investors that it lost $2 effing billion on effing derivatives trades gone effing bad. I’ll have more to say on that in a bit. We also had more strong earnings reports from our Buy List stocks DirecTV ($DTV) and CA Technologies ($CA), and shares of CR Bard ($BCR) just hit a 10-month high.

  Greece Is Bad but the Real Story Is Spain

  But first, let’s get to Greece. Here’s the 411: The bailout deals reached by Greece required them to get their fiscal house in order. The problem is that no one asked the voters. Now they’ve been asked and the voters don’t like it at all. Actually, I understated that—they’re royally PO’d.

  Greece is massively in debt. They owe the equivalent of Switzerland’s entire GDP. Politically, everything has been upended. In Greece, there are two dominant political parties and both got creamed in the recent election. Seventy percent of Greeks voted for parties opposed to the bailouts. Mind you, the supposed beneficiaries of the bailout are the ones most opposed to them.

  Since there was no clear-cut winner in the election, folks are scrambling to build a governing coalition. This won’t be easy. Whatever they do come up with probably won’t last long and they’ll need new elections. As investors, we fortunately don’t need to worry about the minutia of Greek politics. The important aspect for us is that the Greek public wants to ditch the austerity measures into the Aegean, but that means giving up all that euro cash that was promised them.

  My take is that the bigwigs in Greece will do their best to stay in the euro but try to get the bailout terms renegotiated. That puts the ball in Europe’s court, and by Europe, I mean Germany. Too many people have invested too much to see the European project go down in flames. I think the Europeans will ultimately make some concessions in order to keep the euro going. If one country leaves the euro, it sets a precedent for others to leave—and that could start a flood.

  As bad of a shape as Greece is in, they’re small potatoes (olives?). The real story is what’s happening in Spain. For the fourth time, the country is trying to convince investors that its screwed-up banks aren’t screwed-up. The problem is that Spanish banks are loaded down with toxic real estate debt.

  The Spanish government is trying to prop up the banks, but it may delay the problem rather than solve it. It just took control of Bankia which itself was formed when the government forced some smaller banks together in an effort to save them. What’s most troubling about the problems in Spain is that the future is so cloudy. I really can’t say what will happen. Nouriel Roubini said that Spain will need an external bailout. If so, that may lead to a replay of what we’re seeing in Greece, except it would be much, much larger.

  The immediate impact of the nervousness from Europe is that it spooked our markets. On May 1st, the Dow got to its highest point since 2007. The index then fell for six straight days which was its longest losing streak since August. But here’s the key: not all stocks are falling in the same manner.

  Investors have been rushing away from cyclical sectors and towards defensive sectors. For example, the Utilities Sector ETF ($XLU) closed slightly higher on Thursday than it did on May 1st. Low-risk bonds are also doing well. Two months ago, the 30-year Treasury nearly broke above 3.5%. This past week, it dipped below 3%. On Thursday, Uncle Sam auctioned off $16 billion in 30-year bonds and it drew the heaviest bidding in months.

  The trend towards defensive stocks is holding back some of our favorite cyclical stocks like Ford ($F), Moog ($MOG-A) and AFLAC ($AFL). Let me assure investors that these stocks are very good buys right now and I expect them to rally once the skies clear up.

  JPMorgan Chase Reveals Huge Trading Losses

  Now let’s turn to some recent news about our Buy List stocks. The big news came after Thursday’s closing bell when JPMorgan Chase ($JPM) announced a special conference call. CEO Jamie Dimon told investors that the bank took $2 billion in trading losses in derivatives and that it could take another $1 billion this quarter. Jamie, WTF?

  For his part, Dimon was clear that the bank messed up. This is very embarrassing for JPM and frankly, I don’t expect this type of mismanagement from them. The stock will take a big hit from this news, but it doesn’t change my positive outlook for the bank. (Matt Levine at Dealbreaker has the best explanation of the losses: “This was not driven by the market moving against them (though it seems to have); it was driven by them getting the math wrong”).

  As ugly as this is, it’s not a reflection of JPM’s core business operations. Sure, it’s terrible risk-management. But as far as banking goes, JPM is in good shape. Don’t be concerned that JPM faces a similar fate as the banks in Spain. They don’t. In fact, most banks in the U.S. are pretty safe right now. Warren Buffett recently contrasted U.S. banks with European banks when he said that our banks have “liquidity coming out of their ears.” He’s right. JPMorgan Chase remains a very good buy up to $50 per share.

  Bed Bath & Beyond ($BBBY) surprised us this week by buying Cost Plus ($CPWM) for a half billion dollars. The deal is all-cash which is what I like to hear. The best option for any company is to pay for an acquisition without incurring new debt.

  BBBY said they expect the deal to be slightly accretive. That means that BBBY is “buying” CPWM’s earnings at a price less than the going rate for BBBY’s earnings. As a result, the deal will show a net increase to BBBY’s bottom line for this year. The press release also said: “Bed Bath & Beyond Inc. continues to model a high single digit to a low double digit percentage increase in net earnings per diluted share in fiscal 2012.” I’m keeping my buy price at $75.

  Now let’s look at some earnings. On Monday, Sysco ($SYY) had a decent earnings report although the CEO said the results “fell short of our expectations.” Sysco is a perfect example of a defensive stock since the food service industry isn’t adversely impacted by a downturn in the business cycle. The key with investing in Sysco is the rich dividend. The company has increased their payout for 42 years in a row, and I think we’ll get #43 later this year, although it will be a small increase. Going by Thursday’s close, Sysco yields 3.87%. Sysco is a good buy up to $30.

  DirecTV ($DTV) reported Q1 earnings of $1.07 per share. That’s a nice jump over the 85 cents per share they earned a year ago. DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America. DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they added 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America. Last year, revenue from Latin America revenue grew by 42%.

  DirecTV has projected earnings of $4 per share for this year and $5 for 2013. This earnings report tells me they should have little trouble hitting those goals. The shares are currently going for less than 11 times this year’s earnings estimate. They’re buying back stock at the rate of $100 million per week. DirecTV is a solid buy below $48 per share.

  On Thursday, CA Technologies ($CA) reported fiscal Q4 earnings of 56 cents per share. That’s a good result and it was four cents better than Wall Street’s estimates. For the year, CA made $2.27 per share which is a nice increase over the $1.92 from last year. For fiscal 2013, CA sees revenues ranging between $4.85 billion and $4.95 billion and earnings-per-share ranging between $2.45 and $2.53. I’m impressed with that forecast, but Wall Street had been expecting revenues of $5 billion and earnings of $2.50 per share. The stock was down in the after-hours market on Thursday, but I don’t expect any weakness to last. CA is going for less than 11 times the low-end of their forecast.

  A quick note on Oracle ($ORCL): The stock took a hit this week on the news of Cisco’s ($CSCO) lousy outlook. Oracle is also in the middle of a complicated intellectual property trial with Google ($GOOG). I doubt the trial will go Oracle’s way, but the dollar amounts involved are pretty small compared with the size of these two firms. On Thursday, Oracle fell below $27 for the first time since January. That’s a very good price. The stock is a good buy up to $32.

  That’s all for now. Wall Street will be focused on Facebook’s massive IPO scheduled for next Friday. The stock might fetch 99 times earnings. I’m steering clear of this one. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  – Eddy

• Morning News: May 11, 2012
  Eddy Elfenbein, May 11th, 2012 at 6:42 am

  Germany to Euro Zone: Do as We Say, Not as We Do

  Credit Agricole Profit Hurt By Greek Exposure

  Bankia Said to Have End-May Deadline for Restructuring Plan

  France Entrepreneurs Flee From Hollande Wealth Rejection

  Credit Agricole First-Quarter Net Drops 75% on Greek Losses

  China Industrial Output Growth Slows Sharply In April

  India Industrial Output Surprisingly Falls

  J.P. Morgan’s $2 Billion Blunder

  A Shock From JPMorgan Is New Fodder for Reformers

  IAG Expects to Break Even at Best in 2012

  Mexico’s Slim Seeks Bigger Slice of U.S. Phone Market

  Nissan’s Quarterly Net Profit Surges

  Bank to Pay $202 Million To Settle Suit On Mortgages

  Credit Writedowns: Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

  Jeff Miller: When Something Goes Wrong: The Case of JP Morgan Chase

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