• Fiserv Buys Back “Up To” 7 Million Shares
    Posted by on November 19th, 2010 at 8:46 am

    Groan.

    Fiserv, Inc., the leading global provider of financial services technology solutions, today announced that its Board of Directors has authorized a repurchase of up to seven million additional shares of the company’s common stock, which represents approximately five percent of its outstanding shares.

    Fiserv may repurchase shares in the open market or in privately negotiated transactions at the discretion of management subject to its assessment of market conditions and other factors. This authorization does not expire.

    Let’s work out the math. Seven million shares at the current price comes to $385 million. At last count, FISV has 149 million shares outstanding.

    I’m pretty sure most shareholders would rather have $2.58 per share of cash dividends in their pockets than have the board buying FISV shares near a 52-week high.

    Of course, the board has only authorized a purchase “up to” 7 million, which also includes zero shares. These share repurchase statements are good for PR, but they don’t do much for shareholders.

  • CWS Market Review – November 19, 2010
    Posted by on November 19th, 2010 at 8:01 am

    After falling for six out of seven days, the stock market closed a tiny bit higher on Wednesday, and then we had a very good rally yesterday. The S&P 500 rose 18.10 points or 1.54% on Thursday. For a very brief spot, the index climbed over 1,200 but we couldn’t hold on by the closing bell.

    The big news on Thursday was General Motors’ return to the public market. I strongly advise steering clear of this stock. The best I can say is that there was a lot of interest in the offering. While the stock got as high as $35.99, it sold off for the rest of the day and even dipped below $34.

    Eric Falkenstein summed up GM well when he wrote: “In the same way that a spendthrift whose rich dad pays off his credit cards every so often has no incentive to become frugal, GM has no need to make hard decisions. It will survive one, maybe two, recessions.”

    Reynolds American ($RAI) split 2-for-1 on Tuesday. The stock was hit hard last week after the government announced new packaging regulation for cigarettes. Fortunately, the sell-off was minor and we gained back almost everything we lost. Reynolds continues to be a very strong buy up to $34 per share. The stock currently yields just over 6%. This is an excellent investment for income investors.

    There wasn’t much economic news, but what there was continues to be positive. The headline CPI for October came in at 0.2% while the core rate was flat. Wall Street had been expecting a 0.3% rise for the headline number and a 0.1% increase for the core rate.

    The problem with the inflation debate is that so much rides on it politically that people have a hard time looking at inflation dispassionately. The simple fact is that there are no signs of inflation. We’re in a very odd period where some folks honestly believe that hyperinflation is imminent while others believe that deflation is just around the corner. If either outcome is on its way, it’s doing a good job of disguising itself.

    If there’s one thing the stock market hates, it’s inflation. In fact, the only thing it hates more is deflation. The best environment for stocks is low, boring inflation which is exactly what we have now. A few years ago, I looked at the numbers and found that when inflation is over 5% or under -5%, the market averages a real 5.5% loss. However, when inflation is between -5% and 5%, it averages a 15% gain.

    Besides low inflation, we had a strong report from the Philadelphia Fed. Also, the report on industrial production was so-so. Manufacturing production for September was revised to a small gain of 0.1% instead of a 0.2% loss in the original report. Manufacturing production for October showed a 0.5% gain. This isn’t great news, but it’s good news.

    It’s hard for people to believe this but the United States really is a manufacturing powerhouse. The difference is that a lot fewer people work in manufacturing than they did before. But actual manufacturing production has doubled since 1983. Fewer workers do much, much more.

    Next week will be another slow week. The stock market will be closed on Thursday for Thanksgiving. On Friday, or Black Friday as it’s called, the stock market closes at 1 pm instead of the usual 4 pm, so if you’re looking to make some trades be on the lookout for the early close. This is usually the slowest trading day of the year. When I was a rookie, I was the only guy in the office who had to come in on the Friday after Thanksgiving. I can assure you that nothing happens.

    Medtronic ($MDT) will report earnings this Tuesday. I have to say that my thoughts are divided on Medtronic. I think it’s a very good company, and the stock is very probably inexpensive. However, the last few earnings reports haven’t been very impressive. Plus, the company already lowered its full-year forecast and I think it’s very possible they could do it again. My fear is that the estimates for their fiscal fourth quarter (which ends in April 2011) are too high.

    Wall Street’s estimate for the October quarter (the fiscal second) is for 82 cents per share. If Medtronic beats that convincingly, they have a very good shot of making the company’s current full-year EPS range of $3.40 to $3.48. That would also mean the company is going for less than 10 times earnings. If you already own MDT, I say “hold it.” But if you don’t own it, wait for Tuesday’s earnings report. I’ll be sure to have lots to say about it on the blog.

    The other two stocks on the Buy List with October quarters are Eaton Vance ($EV) and Jos. A Bank Clothiers ($JOSB). I don’t know when they will report but historically EV has reported around Thanksgiving while JOSB has reported in early December. I’m particularly excited for JOSB’s earnings.

    Earlier I had said to expect a market sell-off after the Fed announced QE2. I thought I was wrong or that it came later than I expected. Either way, we had some decent buying opportunities over the last few days. Nicholas Financial ($NICK), for example, fell below $10 per share. This company has already earned 90 cents per share for the first three quarters of this year. There’s a very good chance NICK will make $1.25 per share for all of 2010.

    AFLAC ($AFL) also fell as low as $53.12 this week. I wouldn’t be surprised to see AFL make a run at $60 very soon. Wright Express ($WXS) is another Buy List stock that’s looking very good at its current price.

    That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy

  • Morning News: November 19, 2010
    Posted by on November 19th, 2010 at 7:54 am

    Wall Street Futures Signal Weaker Start for Equities

    Euro Rises for Third Day on Optimism for Irish Bailout; Dollar Declines

    Bernanke Steps Up Stimulus Defense, Turns Tables on China

    China Raises RRR Again as Inflation Fight Intensifies

    October Leading Economic Indicators Up 0.5%

    More Americans Feeling Serious Financial Distress

    G.M. Shares End 1st Day With 3.6% Rise

    Dell’s Margins Blow by Street and Shares Rise

    VW to Invest $71 Billion in Auto Unit in Next Five Years

    Harrah’s Shelves $531 Million IPO on Market Conditions

    Dear Warren Buffett…

  • Dollar-Cost Averaging: The Myth that Won’t Die
    Posted by on November 18th, 2010 at 3:20 pm

    Burton G. Malkiel, the author of “A Random Walk Down Wall Street.” has an op-ed in today’s WSJ defending buy-and-hold investing.

    While I also advocate buy-and-hold, my take is very different from Malkeil in that I favor holding a microscopic part of the market. He favors holding the whole thing. I change one-fourth of my Buy List each year which means that the average holding period is four years.

    In the op-ed, this passage caught my eye:

    While no one can time the market, two timeless techniques can help. “Dollar-cost averaging,” putting the same amount of money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms. More shares are bought when prices are low, thus lowering average costs.

    There are two notions about dollar-cost averaging (DCA). One is that most investors make regular additions to their portfolios. People are paid in fixed amounts, so they invest that way. I don’t have a problem with that.

    However, there is another notion that DCA is somehow inherently a less-risky way to invest. I’m not sure which notion Malkiel is referring to, but I want to be absolutely clear that the second notion is complete and total nonsense.

    There is absolutely no inherent advantage in dollar-cost averaging over lump-sum investing. ZERO. Spreading out your investments over an extended period doesn’t decrease your risk one bit. The idea has been thoroughly refuted, yet the myth won’t die.

    The advantage of dollar-cost averaging was blown to smithereens over 30 years ago in this article by George Constantinides. Here’s another article on the subject by John R. Knight and (my former finance professor) Lewis Mandell.

    Lump-sum investing is the best. Don’t diversify by time, diversify by assets.

  • S&P 500 Flirts With 1200, Gets Number, Never Calls
    Posted by on November 18th, 2010 at 1:32 pm

    The market’s morning surge is holding up well. The S&P 500 is holding just shy of 1200 and the cyclicals are leading the way. The Morgan Stanley Index of Cyclical (^CYC) stocks is up 2% right now. Also, small-caps continue to do well. The Russell 2000 (^RUT) is up 2.2% so far today.

    All 20 stocks on the Buy List are trading higher today, although as a whole we’re trailing the S&P 500 1.49% to 1.73%.

    I’m inclined to believe that the market liked the tame inflation report from yesterday. Also, today’s Philly Fed news was very good.

    A few years ago, I looked at inflation’s impact on the stock market. Here’s what I found:

    Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.

    Here’s how it breaks out.

    Inflation Rate…………Real Stock Returns (annualized)
    Below -5%……………………………..-9.6%
    Between 0% and -5%……………….20.9%
    No Inflation…………………………..17.1%
    Between 0% and 2%……………….10.0%
    Between 2% and 5%………………..14.1%
    Between 5% and 7.5%……………..-0.2%
    Between 7.5% and 10%…………….-2.8%
    Over 10%…………………………….-11.1

    Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it average a 15% gain.

    Yesterday’s CPI came in at 0.2%. For the last year, the CPI is up 1.17%.

  • Looking at the CPI
    Posted by on November 18th, 2010 at 12:19 pm

    I really don’t have a major point to make with this post, but I wanted to show you what the seasonally-adjusted Consumer Price Index looks like. Most often, we only see the rate of change. This is the raw index.

    Leaving aside the discussion of the accuracy of the CPI in measuring inflation, we can see how unexciting the official data series really is. This is a very odd time in economics in that people are very worried about both deflation and hyperinflation. Looking at the data, I just don’t get it.

    Maybe something will change soon, but it’s sure taking its time. If the past is prologue, at least in the short-term, I don’t see much of a need to worry about deflation or rapid inflation.

  • General Motors Part 2
    Posted by on November 18th, 2010 at 9:52 am

    The stock market is in a good mood this morning. Shortly after the open, the Dow is up over 140 points.

    The General Motors IPO was priced at $33 per share. The 478 million shares sold will raise over $20 billion for GM. Including the overallotment, the total IPO could be $23.1 billion which would be the largest ever.

    The U.S. government isn’t doing so well on its investment. The Treasury offered about 358.5 million shares in the IPO, about 95 million more shares than initially planned. The Treasury’s cost basis is $43.67 per share. With today’s IPO, the 500 million shares left need to be sold at an average price of $53.07 per share to make a profit. I’m not sure that’s going to happen.

    The IPO brings the Treasury’s stake to 37% from 61% (or 33% with the overallotment).

    So far, the stock is getting a little pop. The shares have been as high as $35.99 this morning.

    Here’s what I wrote about the old GM nearly five years ago:

    Whither GM?

    In 1979, the British economy was in freefall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was falling apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.

    The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when doing so was deemed shameful. You were even expected to pay it back.

    A reporter asked the Prime Minister, James Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”

    That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun’s headline read: “Crisis? What Crisis?”

    I can’t help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it’s an embarrassment. What’s good for GM is largely irrelevant to America.

    For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM’s stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they’re doing wrong. The New York Times quotes York as saying: “The time has come to go into crisis mode and act accordingly.”

    No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million every day. That’s more than the Yankees. Yet the company still pays out $566 million per year in its dividend. Crisis? What Crisis?

    Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well…that’s a nice start, but I think GM will have to go a lot further, perhaps ditching some key brands like Hummer.

    The New York Times quoted Frederick A. Henderson, GM’s new CFO:

    “To be honest, I am in crisis mode. So I agree with him,” Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York’s speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke.

    Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices have forced the issue. The long-run was much shorter than any of us expected.

    The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently for $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance.

    GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time.

  • Latin Baseball Futures
    Posted by on November 18th, 2010 at 8:32 am

    I have a bad feeling about this:

    Investors from the United States believe they have found an exotic new prospect: Latin American baseball players, some as young as 13 and many from impoverished families.

    Recognizing that major league teams are offering multimillion-dollar contracts to some teenage prospects, the investors are either financing upstart Dominican trainers, known as buscones, or building their own academies. In exchange, the investors are guaranteed significant returns — sometimes as much as 50 percent of their players’ bonuses — when they sign with major league teams. Agents in the United States typically receive 5 percent.

    (….)

    “Buscones in the Dominican Republic are in the business of selling children,” he said. “And it’s very disturbing that American investors would come in to profit from a system that exploits and discriminates against young children.” An hour and a half by car from Santo Domingo, at the end of a dirt road in the town of Don Gregorio, a piece of the Dominican baseball system can be found in a small house surrounded by concrete walls and metal fences topped with shiny barbed wire. The entrances are locked.

    Inside is a pensión, a dormitory for about a dozen prospects as young as 14. They are trained by California Sports Management of Sacramento, a firm run by the agent Greg J. Maroni and financed by his father, Greg G. Maroni, a dentist who owns several fast-food franchises.

    Along with using the academy to produce teenage Dominican players they can represent, the younger Mr. Maroni represents Neftali Feliz, the Texas Rangers’ closer.

    The dormitory, which was built in 2007, contains one large bedroom with bunk beds and a small bathroom with two showers. The barbed wire was installed a few months ago, after a player hopped the fence to look for girls in town, said Carlos Paulino, a Dominican trainer who runs the dormitory for California Sports Management.

    Although one coach supervises the dormitory at night, two other prospects had gone over the fence earlier this year, Mr. Paulino said in September. “It’s to make sure they don’t get out,” he said.

    I’m curious what a bailout of baseball futures would look like.

  • Morning News: November 18, 2010
    Posted by on November 18th, 2010 at 7:38 am

    Global Stocks Rise; Nikkei Gains 2.1%

    China Behind Chilling Drop in Commodity Prices

    London Stock Exchange Profit Gains 26%; to Offer Derivatives in 2011

    Irish Central Banker Says Rescue Loan Is Likely

    Beijing’s Focus on Food Prices Ignores Broader Inflation Risk

    General Motors Returns to NYSE After Raising $20 Billion in IPO

    Goldman Says to Buy Calls, Not Shares, in Intel, IBM

    Sears Loss Widens on Tepid Sales

    More Shoppers at Malls on Black Friday Weekend

    I Don’t Short Uptrending Markets

  • IPOs by the Numbers
    Posted by on November 17th, 2010 at 12:50 pm

    Tim Kildaze at the Globe and Mail lists the five largest global IPOs and the five largest U.S. IPOs:

    Top 5 Largest Global IPOs

    Agricultural Bank of China – China
    Size: $22.1 billion (U.S.)
    Date: July 2010
    Sector: Banks

    Industrial and Commercial Bank of China – China
    Size: $22.0 billion (U.S.)
    Date: October 2006
    Sector: Credit institutions

    American International Assurance Group – Hong Kong
    Size: $20.5 billion
    Date: October 2010
    Sector: Insurance

    Visa Inc. – U.S.
    Size: $19.7 billion
    Date: March 2008
    Sector: Other financials

    NTT Mobile Communications Network Inc. – Japan
    Size: $18.1 billion
    Date: October 1998
    Sector: Wireless technologies

    Top 5 Biggest U.S. IPOs

    Visa Inc.
    Size: $19.7 billion
    Date: March 2008
    Sector: Other financials

    AT&T Wireless Group
    Size: $10.6 billion
    Date: April 2000
    Sector: Wireless Technologies

    Kraft Foods Inc.
    Size: $8.7 billion
    Date: June 2001
    Sector: Food and beverage

    UPS
    Size: $5.5 billion
    Date: November 1999
    Sector: Transportation and Infrastructure

    KKR Private Equity Investors
    Size: $5.0 billion
    Date: May 2006
    Sector: Alternative financial investments

    The GM IPO has a shot of becoming #1. Here’s how it breaks down:

    * Total IPO and preferred offerings before overallotments: $19.3 billion to $19.77 billion. The midpoint would be $19.54 billion.

    * Total IPO and preferred offerings including all overallotments: $22.19 billion to $22.74 billion. The midpoint would be $22.47 billion.

    * Treasury total take from IPO and preferred offering: Up to $15.7 billion from common stock sales including overallotments and $2.1 billion from selling its Series A preferred shares to GM when the IPO is completed.

    * Common share price range: $32 to $33 per share

    * Common shares offered: 478 million shares

    * Optional underwriter overallotment: 71.7 million

    * Total common shares with overallotments: 549.7 million

    * Series B preferred shares price: $50 per share

    * Preferred shares offered: raised to 80 million

    * Optional underwriter overallotment: 12 million shares

    * Total preferred shares with overallotments: 92 million

    * Preferred shares proceeds: $4 billion

    * Preferred proceeds with overallotment: $4.6 billion