Author Archive

  • Morning News: May 19, 2011
    , May 19th, 2011 at 7:20 am

    Germany Backs a European for IMF Head Replacement

    France’s Lagarde May Stake Claim as First Female IMF Chief

    Yen Falls as Japan Enters Recession

    Asian Shares End Mixed; Grim GDP Data Weigh Tokyo Shares

    IEA Calls on Oil Producers to Act as Prices Risk Recovery

    Oil in N.Y. Trades Near Highest in More Than a Week on U.S. Supply Decline

    LinkedIn’s Biggest Backers Will Own $2.5 Billion Stake After Initial Sale

    Glencore Rises After $10 Billion I.P.O.

    Air France Posts Annual Profit on Economy

    Sears Swings To 1Q Loss But Revenue Falls Less Than Expected

    Takeda Signs Deal To Buy Nycomed For EUR9.6 Billion

    World’s Second Largest Brewer SABMiller Full-Year Profit Beats Estimates

    Delta-Northwest Merger’s Long and Complex Path

    Howard Lindzon: Chasing…a Tactic, not a Strategy!

    Todd Sullivan: Orion Crushes

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  • S&P Sectors Year-To-Date
    , May 18th, 2011 at 9:52 pm

    Our Buy List is heavily tilted toward healthcare stocks. That wasn’t a smart move in previous years but it’s helping out this year.

    Index Name Market Cap Index Level 1 Day MTD QTD YTD
    Total Return
    S&P 500 (TR) N/A 2,270.57 0.90% -1.53% 1.39% 7.39%
    Price Return
    S&P 500 $12,221,340.74 1,340.68 0.88% -1.68% 1.12% 6.60%
    Sectors
    Healthcare $1,444,958.57 420.57 0.78% 3.18% 9.81% 15.29%
    Energy $1,506,967.27 554.08 1.97% -7.35% -5.98% 9.34%
    Staples $1,324,423.86 331.90 0.20% 2.30% 7.47% 9.33%
    Discretionary $1,315,259.47 319.92 1.15% -0.14% 3.74% 8.25%
    Utilities $411,564.56 172.23 -0.34% 2.45% 6.37% 8.09%
    Industrials $1,351,418.87 323.85 1.11% -3.20% -0.60% 7.55%
    Telecom $371,777.50 134.60 0.29% 0.34% 1.01% 4.55%
    Tech $2,192,686.04 419.77 0.74% -2.34% 0.51% 3.76%
    Materials $432,495.54 241.82 2.10% -4.98% -3.02% 0.92%
    Financials $1,869,789.06 214.39 0.49% -2.77% -2.86% -0.18%

  • AFLAC Down on Lower Guidance
    , May 18th, 2011 at 12:45 pm

    AFLAC ($AFL), one of my favorite stocks, is down sharply today due to a lower forecast from the company. Dan Amos, the CEO, told a dinner audience last night that the company is expecting to grow its earnings by 0% to 5% next year.

    Let’s remember that the company said it expects to earn between $6.09 and $6.34 per share for this year. Wall Street’s consensus for 2011 is currently $6.22 but I think $6.30 is probably more accurate. At 0% to 5%, that implies 2012 earnings of $6.30 to $6.61 per share. Wall Street had been expecting $6.64 per share.

    Market Watch noted these comments from Randy Binner at FBR Capital Markets:

    “While we believe the guidance may be overly conservative and there were positive comments on 2Q11 sales growth and de-risking activities, we believe Aflac shares trade based on EPS,” Binner wrote in a note to investors Wednesday. “As such, we would expect shares to adjust to the lower EPS outlook.”

    I agree that this forecast is overly conservative. This would be the slowest growth in AFLAC’s history. Ultimately, they may hit Wall Street’s forecast (which will soon be lowered) of $6.64 per share.

    Still, 2012 is a long way away and AFLAC is sticking with its growth forecast for 2011. AFLAC has set the bar low and now it’s up to them to surpass it.

    The important news is that AFLAC is working to “de-risk” its portfolio:

    Insurer Aflac Inc. said it will incur a loss of about $31 million before taxes in the second quarter as it sells off some investments that had been flagged as problematic by analysts and investors.

    The largest loss, of $72 million, is tied to the sale of holdings in Irish Life and Permanent Group Holdings PLC (IL0.DB), according to a regulatory filing Tuesday. The company also sold off sovereign debt from Tunisia at a pre-tax loss of $5 million.

    Those losses were offset by gains of $18 million from the sale of perpetual securities issued by Lloyds Banking Group PLC (LLOY.LN) and $28 million of perpetual securities from Royal Bank of Scotland Group PLC (RBS.LN).
    The asset sales are part of Aflac’s ongoing effort to unload some of its sovereign and bank debt from financially stressed regions, and reduce the size of the largest positions in its investment portfolio. The company sold off Greek debt in the first quarter.

    Such investments have made some investors and analysts nervous in recent years, first amid the 2008 financial crisis and later when the European Union grappled with the mounting debts of Greece and other member nations last year.

    AFLAC has said that it’s looking to increase its dividend by 1% to 10% this year and next year. Plus, the company projects repurchasing 3 million to 12 million shares this year and zero to 12 million next year.

    The yen’s impact on 2011’s operating earnings is pretty straightforward. At an exchange rate of 87.69 yen per dollar, the earnings will grow by 8% to $5.97 per share for 2011. Every one point below that adds roughly five cents per share to AFL’s bottom line. Currently, the exchange rate is 81.4 so that’s good for us.

    The stock has been as low as $50 today. There’s no reason to sell AFLAC based on today’s news. The company is still fundamentally sound. They’re merely preparing themselves for what may be a more difficult environment.

  • The Tax Preference Economy
    , May 18th, 2011 at 10:54 am

    Here’s an email from a reader on Google’s ($GOOG) tax strategy.

    GOOG may not be betting on lower actual corporate tax rates. Like a lot of sophisticated U.S. companies that defer taxes by parking profits overseas, they may be waiting for the government to allow yet another “tax amnesty” repatriation scheme. That’s legislation that provides companies with a temporary period in which to repatriate assets while incurring lower taxes than they otherwise would. This has happened before, and there’s currently some lukewarm lobbying to make it happen again.

    Tax deferral for profits held overseas is – for better or worse – most likely a HUGE part of why many major companies have been accumulating tons of cash on their balance sheets.

    Tax preferences like this are lurking behind just about every weird financial distortion in the U.S. economy. Tax preferences for employer-provided healthcare. Tax preferences for interest on home mortgage indebtedness. Tax preferences for corporate debt over equity (that one’s debatable). Eventually, the muni market may be severely dislocated by the fact that municipal debt is overwhelmingly funded by a single class of investor: high-income individuals who justifiably wish to escape some income taxation on interest from municipal bonds. I haven’t seen anything particularly strange created by tax preferences for individual long-term cap gains over short-term cap gains, but I wouldn’t be surprised if it’s in there somewhere.

  • “What Is the Fed?” Starring Ben Bernanke
    , May 18th, 2011 at 10:46 am

  • The Breakdown in Cyclicals
    , May 18th, 2011 at 10:20 am

    I’ve been talking about the dangers in owning cyclical stocks and the breakdown is finally happening. Below is a chart of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. When the line is rising, cyclicals are outperforming. When it’s falling, cyclicals are trailing.

    The ratio had an explosive rally beginning in March 2009 and it reached an all-time high on of 0.8441 January 10, 2011 before pulling back. The ratio rallied again and just barely made a new all-time high on February 11 of 0.8442. The new high was made by slightly more than one-ten-thousandth of a point.

    In mid-February, cyclicals pulled back sharply then tried one more rally in March. Ultimately, the ratio failed to make a new high. But only in the last week have cyclicals started to fall apart.

    The cyclicals have now trailed the S&P 500 for five straight days and yesterday was the worst day relative to the rest of the market in more than two-and-a-half months. While the S&P 500 lost just 0.04% yesterday, the CYC lost 1.51%. I think we’re in for a multi-year period of cyclical underperformance.

  • Morning News: May 18, 2011
    , May 18th, 2011 at 7:46 am

    Greek Restructuring Rejected by ECB Officials in Clash With EU Politicians

    Bank of England Voted 6-3 to Hold Rate on Consumer Risks

    Malaysian Ringgit Advances as Growth, Inflation May Support Higher Rates

    Europe Aims to Keep IMF Job After Strauss-Kahn

    Crude Up On Weak Dollar Vs Euro; But Direction Lacking

    Corn Climbs for Fifth Straight Day as Wet Weather May Delay U.S. Seeding

    Dollar Mostly Weak but Rising Vs. Yen

    Geithner Wants Debt Ceiling “Done and Clean” in July

    New York AG Probes Banks Over Mortgage Securities

    Staples 1Q Net Up 5% After Charges As Sales Edge Up; View Reduced

    Dell Profits Soar As Company Continues Focus On Margins

    Corporate Spending Gives Dell Edge Over HP

    LinkedIn Raises Its IPO Price Range By $10 To $42-$45

    BP Arctic Deal on the Ropes

    For Buyers of Web Start-Ups, Quest to Corral Young Talent

    Joshua Brown: Soros Plays Gold Like a Fiddle

    Stone Street: Rolling Stones Hyperbole vs. Goldman Sachs Reality

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  • The Google Carry Trade
    , May 17th, 2011 at 1:41 pm

    Google ($GOOG), which is some sort of technology outfit similar to Alta Vista, has decided to go to the bond market to raise $3 billion.

    Here’s the odd bit: Google is sitting on $35 billion in cash. However, they can’t use most of that since it’s outside the U.S. (they funnel their money though Ireland). If Google repatriates those dollars, they’ll be hit with a massive tax bill. The company is probably assuming that the corporate tax rate will go down in the future and they’re probably right.

    So it’s off to the bond market they go. Naturally, with all that cash, you can be pretty sure that Google is a good credit risk—and the bond market agrees.

    The world’s biggest Internet-search company split the sale evenly between three-, five- and 10-year notes, according to data compiled by Bloomberg. The 1.25 percent, three-year notes yield 33 basis points more than similar-maturity Treasuries, the 2.125 percent, five-year debt pays a 43 basis-point spread, and the 3.625 percent, 10-year securities offer 58 basis points above benchmarks, Bloomberg data show.

    Even though Google didn’t snag a AAA credit rating, the bond market gave them spreads as if they were AAA.

    This is definitely a smart move by Google. Let’s look at Google’s earnings yield (which is the inverse of the P/E Ratio). Based on this year’s earnings estimate, Google’s earnings yield is 6.42%. Based on next year’s, it’s 7.48%. Even going by last year’s earnings, it’s still 5.60%.

    In other words, Google’s yield on its equity is far higher than its yield on its debt. The lesson is to use debt. In fact, I think an interesting trade would be to play Google’s risk premium—go long Google’s stock and short the bonds. This is effectively what a company does when it issues bonds to buy back its stock (or in the 1980s when many companies LBO’d themselves).

  • Putting Our Debt In Context
    , May 17th, 2011 at 11:35 am

    Megan McArdle passes this along from Dave Ramsey:

    Altogether, the government has $14.2 trillion in debt. What would happen if John Q. Public and his wife called my show with these kinds of numbers? Here’s how their financial situation would stack up: If their household income was $55,000 per year, they’d actually be spending $96,500–$41,500 more than they made! That means they’re spending 175% of their annual income! So, in 2011 they’d add $41,500 of debt to their current credit card debt of $366,000!

  • The Tweet That Says It All
    , May 17th, 2011 at 10:33 am

    Joe Weisenthal tweeted this earlier and I think it sums up the market’s view succinctly:

    Crazy disconnect: Treasuries have been a killer trade for ages, yet there’s constant whining about Treasury holders getting screwed. $$

    Except for the worst moments of the financial crisis, the yield on the 30-year Treasury bond has been on a constant downtrend for years.