Reynolds American Splits 2-for-1
Posted by Eddy Elfenbein on November 16th, 2010 at 11:03 am

Here’s a quick reminder that Reynolds American (RAI) split 2-for-1 this morning. The price has fallen in half but there are now twice as many shares.

The dividend split as well, and it was just increased. The pre-split dividend was 90 cents per share. The next dividend, post-split, will be 49 cents per share and it’s payable on January 3rd to shareholders of record as of December 10th.

At the stock’s current price, the $1.96 annual dividend works out to a little over 6% per year.

For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally divided into 20 stocks at the beginning of each year.

The original RAI position as of midnight on December 31, 2009 was 943.9305 shares at $52.97. I’ve now adjusted that to 1887.861 shares at $26.485.

Signs that the Economy Is Better Than You Think
Posted by Eddy Elfenbein on November 16th, 2010 at 8:19 am

Retail sales rose by 1.2% in October. That’s the most in seven months.

Corporate profits are nearing an all-time high.

Jobless claims just fell to a four-month low.

Third-quarter productivity was 1.9% which nearly doubled expectations.

Over the last four months, private sector payrolls have increased by 526,000.

The ISM Index has been above 50 for 15-straight months.

Consumer confidence is the highest level since June.

The U.S. dollar is at a six-week high.

The total cost of TARP and the AIG bailout will come in at less than $50 billion, which is $300 billion less than estimated one year ago.

The federal budget deficit for 2010 is $125 billion less than it was for 2009.

Mortgage rates are at the lowest level since data was first kept in 1971.

The trade deficit narrowed (slightly).

Although industrial production fell 0.2% in September, it’s still up 5.4% in the past year.

The TED spread is currently at 0.16%. Over the summer, it had spiked to 0.48%. Two years ago, it peaked at 4.65%.

Morning News: November 16, 2010
Posted by Eddy Elfenbein on November 16th, 2010 at 7:38 am

Stocks Fall for 7th Day, Ireland Premium Rises

Foreclosure Mess Prompts Call for Stress Tests

Industrial Production in U.S. Probably Increased in October

Europe Fears That Debt Crisis Is Ready to Spread

Under Attack, Fed Officials Defend Buying of Bonds

China Readies Price Controls to Tackle Food Inflation

Home Depot’s Net Up 21%; Sales Come Up Short

Caterpillar CEO Steps Up Deals to Target Emerging Markets

Apple Said to Reach Deal on Selling Beatles Music via ITunes

Wal-Mart Profit Up but Same-store Sales Decline

GM IPO as Climax for the Reflation Trade

What Does a “Normal” Yield Curve Look Like?
Posted by Eddy Elfenbein on November 15th, 2010 at 8:35 pm

I was curious to see if there’s a “normal bend” to the yield curve besides that it ought to be positive. I averaged all the yields on several points on the yield curve with data going back to 1985.

Those are the points in blue. I set the 3-month yield to 0% so you can see how the rest of the curve relates to that.

I added the points for the current yield curve. Those are the points in red.

I was a little surprised that the 20-year yields were slightly higher than the 30-year yields. Perhaps there’s a liquidity effect.

Actually, to get a better sense of how out-of-the-ordinary the current curve is, I could have set the 30-year yield to 0%. Then we could see how the rest of the curve related to that.

The point is that current short-term rates are very low and the yield curve doesn’t anticipate them rising anytime soon.

The QE2 Critics
Posted by Eddy Elfenbein on November 15th, 2010 at 2:04 pm

Alan Blinder has a column in today’s Wall Street Journal inadvisedly called “In Defense of Ben Bernanke.”

That’s a poor title since Mr. Blinder isn’t really defending Bernanke but rather pointing out the holes in the arguments of QE2 critics. Many of the aspects claimed about QE — that it devalues the dollar or promotes inflation — are true about traditional Fed tools like lowering short-term rates.

The Fed has a dual mandate: low inflation and high employment. The only tool it has right now is QE. As I see it, the soundest argument against QE is that it isn’t needed since the economy is recovering.

Here’s an open letter to Bernanke arguing against QE2.

Beware the Cyclically Adjusted P/E
Posted by Eddy Elfenbein on November 15th, 2010 at 1:40 pm

Henry Blodget points out that the stock market is 30% overvalued according to the Cyclically-Adjusted P/E Ratio (CAPE) which looks at the inflation-adjusted earnings of the last ten years.

I’m very leery of the CAPE because the stock market is itself cyclical so there’s no need to adjust for it. Also, a ten-year window is too long to consider. For example, the CAPE maybe high now but it will probably fall very soon due to very favorable comparisons.

Earnings peaked in September 2000 and hit a bottom in March 2002. This means that those lower earnings numbers will come off the CAPE while higher earnings will be added on. This will appear as an earnings growth upward revamp when in fact, all we have done is ditch the depressed earnings from ten years ago. As a result, the CAPE may soon tell us that the market is fairly valued.

SNL on the G-20
Posted by Eddy Elfenbein on November 15th, 2010 at 1:10 pm

Odd Lots
Posted by Eddy Elfenbein on November 15th, 2010 at 12:01 pm

The Nasdaq Composite (^IXIC) is currently almost exactly half its all-time high from March 2000. If the price of gold had kept pace, it would be about $135 per ounce right now.

Saturday will be the second anniversary of Ford (F) hitting $1.01. Today it’s at $17. That’s 17-fold in two years.

Since late August, cyclicals and small-caps have been beating up on large-caps. Here’s the Russell 2000 compared with the S&P 100:

Medtronic to Report on November 23
Posted by Eddy Elfenbein on November 15th, 2010 at 10:43 am

Medtronic (MDT) has said that they’ll report earnings next Tuesday, November 23.

If their current forecast holds, I think the stock is a very good buy, but I won’t be certain until the earnings report comes out. Wall Street’s current forecast is for 82 cents per share.

Here’s a look at Medtronic’s quarterly sales and EPS for the last several years:

The last three quarters are estimates.

Here’s a look at the growth of the trailing four-quarter sales and earnings. Sales follows the left scale and EPS follows the right. Notice how the estimates (in red) are based on an expansion in profit margins. That’s what has me concerned.

Taleb Dodges Question
Posted by Eddy Elfenbein on November 15th, 2010 at 10:04 am

Long-time readers will know that I’m not much of a fan of Nassim Taleb. Unfortunately, Mr. Taleb has ended his media boycott to bring us his thoughts on Ben Bernanke and QE2.

Taleb says that Bernanke doesn’t understand risk because there’s a chance that QE2 will cause hyperinflation. That’s certainly true, but it’s not an argument against QE; it’s an argument against any Fed easing at any time for any reason. Even by Taleb’s standards, this is a frivolous point. Inflation is currently flat (even Roubini thinks it’s not a problem) and unemployment is miles from the point of accelerating inflation.

I think a lot of students would find Taleb amusing because he tells them that experts are idiots. His commentary, however, never goes beyond this. This clip has a a good example. The interviewer asks Taleb what the Fed should be doing. The truth is that Taleb doesn’t have any answers, only juvenile antics. Watch as he artfully dodges the question.