The Double Dip Is Dead
Posted by Eddy Elfenbein on October 29th, 2010 at 12:50 pm

Continuing with what I said before, the Economic Cycle Research Institute also calls the end of the Double Dip:

The good news is that the much-feared double-dip recession is not going to happen.

That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn’t lead to recession.

For 25 years, we’ve personally spent every working day studying recessions and recoveries. Based on our work and that of our colleagues at ECRI, we’ve called the last three recessions and recoveries without any false alarms, including an accurate forecast of the end of the most recent recession in the summer of 2009.

After completing an exhaustive review of key drivers of the business cycle, ranging from credit to inventories and measures of labor market conditions, we can forecast with confidence that the economy will avoid a double dip.

But the bad news is that a revival in economic growth is not yet in sight. The slowing of economic growth that began in mid-2010 will continue through early 2011. Thus, private sector job growth, which is already easing, will slow further, keeping the double-dip debate alive.

Of course, it is the renewed job market weakness, combined with deflation fears, that is behind the Fed’s promise to implement a second round of quantitative easing, or QE2.

QE2 Will Spur Demand for More Risk
Posted by Eddy Elfenbein on October 29th, 2010 at 10:19 am

Next week, the Federal Reserve is expected to announce another round of Quantitative Easing, or as the cool kids are calling it, QE2. All investors need to understand that QE2 will have a major impact on their investments. The most important aspect is that Quantitative Easing will help fuel a demand for riskier asset classes.

More specifically, Quantitative Easing will aid a shift toward growth stocks at the expense of bonds and value stocks. QE2 won’t affect the direction of stock market—that will remain strong—as much as it will alter the market’s internal leadership.

Now let me back up and explain this in more detail. Over the last several weeks, the Federal Reserve has made its QE intentions crystal clear. I’m surprised that they haven’t taken out a full-page ad in the Wall Street Journal.

The Fed’s main problem is that the economy is still grinding its wheels, as today’s GDP report shows, and interest rates are already at 0%. As a result, the central bank now plans to inject money into the economy by buying enormous amounts of U.S. Treasuries.

The only question now is “how much?” The general consensus on the Street is that QE2 will clock in around $500 billion, although some say it could be as much as $1 trillion. We’re really in unchartered territory here.

Personally, I think the plan will be less than the Street expects. Remember, the C in FOMC is for “committee” and that means compromises. We can expect uber-hawk Thomas Hoenig, the president of the Kansas City Fed, to be a “nay” vote, and he may be joined by one or two others. I expect an announcement of around $250 billion give or take, which may even cause a near-term pullback. Much like a pampered Hollywood starlet, Wall Street just loves to be disappointed when it receives favors.

So where will Bernanke and his buddies get all this cash? That’s easy. They have a magical super power where they can write checks out of thin air. Or, at least, they can create currency out of thin air. The U.S. dollar has already gotten smacked around in the currency pits lately, although it’s not nearly as bad as the dollar’s haters make it sound.

My thesis that the Fed’s purchasing of debt will lead an exodus out of Treasuries and into riskier assets may sound counterintuitive. The important point is that the market is already heavily tilted toward low-risk assets. Currently, there’s a lot of money—too much money—sitting on the sidelines. Moody’s Investors Service reports that U.S. companies are sitting on $943 billion in cash. Three companies; Cisco (CSCO), Microsoft (MSFT) and Google (GOOG) account for the largest portion. Hey, who needs the Fed? They could do a QE all by themselves!

The simple fact is, to paraphrase Jimmy McMillan, bonds are too damn high. In fact, the move out of bonds has already started. Yesterday, the yield on the 30-year Treasury closed at its highest level in nearly three months and it’s now over 50 basis points from its low point in late August. Not by coincidence, that was right when the stock market bottomed. In short, the stock rally has been at the expense of bonds.

What this means is that at long last, investors are finally choosing sanity over liquidity. Let’s look at some numbers: Since August 31, the S&P 500 is up 12.8%. That’s a nice run, but the growth side of the index as measured by the S&P 500 Growth Stock Index is up 19.3%. That’s nearly double the 10.4% gain for the S&P Value Index.

Here’s the key to understanding QE2’s impact: Don’t think of it as a stock movement. Instead, think of it as a risk movement with a seal of approval from the Federal Reserve.

Third-Quarter GDP Grew By 2%
Posted by Eddy Elfenbein on October 29th, 2010 at 8:31 am

The official numbers are in and the third-quarter GDP grew by just 2%.

That estimate matched the consensus forecasts for the gross domestic product, and is a slight uptick from the second quarter.

Though the recovery officially began in June 2009, growth since then has been tepid, at best. The economy expanded at a 1.7 percent pace in the second quarter, down sharply from a 3.7 percent rate in the first.

In recent weeks, the economy has presented two faces, which is reflected in the latest G.D.P. numbers. There have been fledgling signs of growth: home sales and chain store sales are up bit, a swelling stock market has raised consumer confidence a few notches, and jobless claims fell noticeably last week, albeit to a still quite high and painful level. At the same time, the steroidal effect of the stimulus spending is fading. City and state governments have shed tens of thousands of employees, and states face a sea of red ink as they look at next year’s budgets.

Sigh. This is yet another quarter of subpar growth. For the economy to truly recover, we need to see several quarters of GDP growth over 3%. Over 4% would be even better.

This report is the government’s first attempt at an estimate. The report will be revised two more times, at the end of November and at the end of December, and it will probably be revised a few more times after that.

The trouble is that the government tries to estimate the trade numbers for the last month of the quarter. They give it a good effort, but we never know exactly. For the third quarter, it turns out that trade knocked off 2% from the final number. Excluding trade, the economy grew by 4%.

Here are the GDP numbers for the past few quarters:

The good news, if there is any, is that the economy is no longer decelerating, meaning the rate of growth isn’t slowing.

That’s basically what all the Double Dip hype amounted to: it was all in the second derivative. We never dipped. We grew, but the rate of growth dipped. This report has shown a very, very slight acceleration. Very, very, very slight.

Over the last 10 years, real GDP has grown by 17.68% which is just 1.64% on an annualized basis. The economy has grown at a slower pace over the last 10 years than over the three-year period of 1963, 1964 and 1965.

Morning News: October 29, 2010
Posted by Eddy Elfenbein on October 29th, 2010 at 7:55 am

Economy in U.S. Likely Grew as Consumer Spending Climbed

Stock Futures Ease with GDP on Tap

Global Stocks Lower; Nikkei Slides 1.8%

Credit Suisse Grabs No. 1 Position in Advising Consumer M&A

Inflation and Unemployment Rise in Euro Region

Obama to Promote Business Deduction to Spur Investment

Microsoft Profits Soar 51%

Sony, Samsung Brace for `Miserable’ Christmas Sales as TV Price War Looms

Total’s third-quarter adjusted profit up 32%, Production increases more than 4%

The 5 Dumbest Things on Wall Street: Oct. 29

This Is What A Blow Off Top Looks Like

Keith Richards

“The whole business thing is predicated a lot on the tax laws,” says Keith, Marlboro in one hand, vodka and juice in the other. “It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don’t want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out.”

The Last Five Closes for the S&P 500
Posted by Eddy Elfenbein on October 28th, 2010 at 5:10 pm

Feel the excitement!

Growth Stocks Takes the Lead
Posted by Eddy Elfenbein on October 28th, 2010 at 1:55 pm

Here’s a look at the S&P 500 Growth Stock Index compared with the Value Stock Index:

Lately, growth has taken a lead, which is what you would expect in a rising market. There’s also another relationship: growth usually outperforms value when interest rates are rising.

The long end of the yield has climbed over the past few weeks but it’s nothing too dramatic yet. However, it might turn into something. I still think the Federal Reserve will raise short-term rates sooner than most people expect.

Obama Moves Markets
Posted by Eddy Elfenbein on October 28th, 2010 at 11:53 am

Just not Barack:

How can Mrs. Obama help sell clothes?
By wearing them. David Yermack, a business and finance professor at New York University’s Stern School, looked at 29 clothing companies whose garments Michelle Obama wore in 189 public appearances between November 2008 and December 2009. Their stock prices typically jumped by 2 to 3 percent — and when the first lady wore J. Crew on “The Tonight Show” in October 2008, the company’s stock price climbed 25 percent in the next three days. Such increases that “cannot be attributed to normal market variations,” says Yermack.

How much money do the companies make?
Yermack reckons that, on average, an appearance by Michelle Obama in a company’s clothes is worth $14 million. The total boost for all of the appearances examined in the study — a whopping $2.7 billion. Designer Naeem Khan found out first hand about the first lady’s influence when she wore one of his outfits to a state dinner in February 2009. “My stuff is flying out of stores,” the designer says. “It’s the gift that doesn’t stop giving.”

How does the effect last?
“The stock price gains persist days after an outfit is worn and in some cases even trend slightly higher three weeks later,” says Yermack. Some clothing companies, likes Saks, appear to have experienced long-term gains. And the effect persists regardless of how President Obama is doing. “Her husband’s approval rating appears to have no effect on the returns,” says Yermack. Or, as Marni Katz puts it at NBC New York, “even when his approval ratings are down, Mrs. Obama’s style score soars.”

Nicholas Financial Earns 33 Cents Per Share
Posted by Eddy Elfenbein on October 28th, 2010 at 10:09 am

Earnings are out and they’re good!

Nicholas Financial, Inc. announced that for the three months ended September 30, 2010, net earnings, excluding change in fair value of interest rate swaps, increased 70% to $3,897,000 as compared to $2,286,000 for the three months ended September 30, 2009. Per share diluted net earnings, excluding change in fair value of interest rate swaps, increased 65% to $0.33 as compared to $0.20 for the three months ended September 30, 2009. See reconciliations of the Non-GAAP measures below. Revenue increased 11% to $15,732,000 for the three months ended September 30, 2010 as compared to $14,158,000 for the three months ended September 30, 2009.

For the six months ended September 30, 2010, net earnings, excluding change in fair value of interest rate swaps, increased 68% to $7,323,000 as compared to $4,367,000 for the six months ended September 30, 2009. Per share diluted net earnings, excluding change in fair value of interest rate swaps, increased 63% to $0.62 as compared to $0.38 for the six months ended September 30, 2009. See reconciliations of the Non-GAAP measures below. Revenue increased 10% to $30,684,000 for the six months ended September 30, 2010 as compared to $27,851,000 for the six months ended September 30, 2009.

According to Peter L. Vosotas, Chairman and CEO, “We are pleased to report record 2nd quarter revenue and earnings. Our results were primarily impacted by an increase in revenues, a reduction in the net charge-off rate and an increase in the cost of borrowed funds. The Company continues to evaluate additional markets for future branch locations, and subject to market conditions, could open additional branch locations during the year. The Company remains open to acquisitions should an opportunity present itself,” added Vosotas.

This is a very good report. Let’s see how close my estimates were. Here’s what I predicted:

Receivables: $245 million
Gross yield: 25%
Interest Expense: 2.5%
Provision for Credit Losses: 2.8%
Pre-Tax Yield: 10%
EPS: 30 cents or more

Here are the results:

Receivables: $249,065,668
Gross yield: 25.25%
Interest Expense: 2.33%
Provision for Credit Losses: 2.75%
Pre-Tax Yield: 10.24%
EPS: 33 cents

Here’s a chart that I think is a good way to see the improvement at NICK:

The blue area is the pre-tax yield which just broke 10% for the first time since 2007. The maroon area is the provision for credit losses which has dropped by over 7% in the last two years. As you can see, the credit losses were mainly responsible for the earnings decline. When you add the two together, NICK has been fairly consistent.

NICK has so far earned 80 cents per share this calendar year. Q4 is often on the slow side for NICK but I think the company can earn $1.25 for the whole year.

Here’s my spreadsheet detailing NICK’s numbers.

AFLAC’s Earnings Call
Posted by Eddy Elfenbein on October 28th, 2010 at 10:05 am

I’ve been reading the through Seeking Alpha‘s transcript of the AFLAC‘s (AFL) earnings call. By the way, reading through one of these is a great way to learn about a company and where it’s headed. I’m surprised how often good news is hidden in plain sight.

Here’s the company on their outlook:

Lastly, let me comment on the earnings outlook for 2010. As you heard, we have affirmed our objectives for 2010 of a 9% to 12% increase in operating earnings per diluted share, excluding the impact of the yen.

As was mentioned at our Analyst Meeting in May of this year, our expectation is that we will be close to a 10% increase for the full year before currency fluctuations. That would equate to $5.34 for the full year assuming no change in currency from last year’s average.

If operating earnings per share increased 10% this year and the yen averages 80 to 85 for the remainder of the year, we would expect operating earnings per share to be $5.52 to $5.57. Using the same foreign currency assumption, we would expect fourth quarter operating earnings to be $1.31 to $1.36 per diluted share. That compares with the First Call estimate that’s currently out there of a $1.36.

Since AFL is off some today, perhaps the market is interpreting this lower guidance. I have no idea why. The company makes it clear that business is doing well and will continue to do well.

81% of Earnings Reports Are Beating Expectations
Posted by Eddy Elfenbein on October 28th, 2010 at 9:04 am

The market seems poised to rise today after staging a nice afternoon rally yesterday. For a while there it looked like it was going to be an ugly day. Around 1:15 pm, the S&P 500 was at 1,172, but we added more than 10 points from there. In the end, the S&P 500 only lost 0.27% yesterday.

The good news today is that the unemployment claims report came in below expectations. Normally this is among the least-important economic reports, but I think traders want to latch on to something positive. The number of jobless claims fell by 21,000 to 434,000, which is the lowest total since July. The total number of people receiving unemployment insurance dropped to a two-year low.

The big news today will be earnings from Nicholas Financial (NICK). After that, the big event will be tomorrow’s GDP report. I’m not sure what to expect, probably something between 1.5% and 2.2%. Anything below 3% isn’t good enough. The fourth quarter, however, may be better.

Then next Tuesday we have the election and after that, the Fed will meet and announce QE2. I think the Fed will say that it plans to buy somewhere between $300 billion and $500 billion worth of Treasuries between, say, five years and twenty years. What the Fed will say is still up in the air, but I guarantee you that whatever they say, it won’t be enough for some people.

The Fed is reportedly asking bond dealers, “Suppose we said we’re going to buy tons of Treasuries—and we’re not saying we are—but say we said we might say we are, how might that affect yields, if that event did in fact occur?” I’m paraphrasing, but that’s the idea.

Here’s something interesting I spotted at MarketWatch:

In all, with roughly half of the S&P 500 reporting by Wednesday, 81% had exceeded expectations, with just 13% coming up short, according to data compiled by Thomson Reuters.

If that percentage holds, it would be the highest level of companies beating estimates in a quarter ever — or a least since Thomson Reuters began tracking them 16 years ago. It would top even the 79% mark hit in the third quarter of 2009, when the economy came off the absolute rock bottom of late 2008.