Update on the 10-year/30-Year T-Bond Spread
Posted by Eddy Elfenbein on August 4th, 2010 at 11:53 pm

Earlier I wrote, “the S&P 500 hasn’t shown any net capital gain whenever the 10-year/30-year spread is wider than 43 basis points.”
That’s correct, however, I looked into the numbers a little more and it seems that the recent financial crisis had an unusual impact on this data series.
In my mind, a positive spread ought to have a positive impact on equity prices. I found that if I take out the period from October 2007 to March 9, 2009—yeah, I know, that’s a very big if—then numbers start to make more sense. Suddenly, a positive 10/30 spread is good for stocks.
After taking out that awful 17-month stretch, here’s what I found. Stocks do well whenever the 10/30 spread is greater than -33 basis points (that’s about 95% of the time). Stocks do especially well when the spread is greater than 11 basis points which is about 63% of the time. A spread of more than 11 points translates to an annualized gain of 15.6% (not including dividends). When the spread is less than 11 basis points, the annualized gain is just 1%. To reiterate, we’re now at the highest spread ever.
So is what I’m doing kosher? Errr…it’s hard to say. I can be accused of data-mining because that’s exactly what I’m doing. However, as an analyst, we have to look at our data in context. When the world was falling apart, the numbers started to make very little sense. It’s almost like putting a magnet near a compass—all the readings go kablooey.
Ultimately, I think it’s ok to play with numbers like this as long as we understand that we’re looking at models of the market. When things get hot, any historical relationship can and will break down.

Nicholas Financial Rings the Closing Bell
Posted by Eddy Elfenbein on August 4th, 2010 at 8:39 pm

Here’s the video and some pictures.

Thanks Nancy
Posted by Eddy Elfenbein on August 4th, 2010 at 4:48 pm

From Mark Hulbert:

(T)he Dow between 1897 and 2004 produced an annualized return of 5.3% when Congress was out of session, in contrast to just 0.4% when it was in session.

CNN:

House to return from summer break next week, Pelosi says

(Via: Abnormal Returns)

Record Spread Between 10-Year and 30-Year Treasury Bonds
Posted by Eddy Elfenbein on August 4th, 2010 at 10:52 am

The spread between the 10-year (^TNX) and 30-year Treasury (^TYX) is now at its widest spread ever since the 30-year started trading in 1977.
Here’s a look at the two yields:

As you can see, the two bonds track each other pretty closely so it’s hard to see the difference. Here’s a look at just the difference between the two:

The spread is now at 114 basis points. We just took out the previous high of 111 points from October 6, 1992.
So what does this mean for the stock market? It’s hard to say. It could mean that the deflation bet is off the table for now.
I ran the numbers and was surprised to learn that the S&P 500 hasn’t shown any net capital gain whenever the 10-year/30-year spread is wider than 43 basis points.

Polo Ralph Lauren Beats by 32 Cents
Posted by Eddy Elfenbein on August 4th, 2010 at 10:30 am

This morning’s earnings report from Polo Ralph Lifshitz (RL) really caught my eye. Earnings grew by 57%. The company earned $1.21 per share which is 32 cents better than expectations. That’s a huge earnings beat. RL said that for this quarter it expects sales to grow at a high-single-digits pace, although operating margins won’t be as high.

The company saw the gradual return of luxury customers late last year. However, in May it anticipated pressure from the euro’s recent woes and rising raw-materials and labor costs. Polo in recent years has been expanding in Asia—where many high-end brands are seeking growth as North American and European markets slow—and the company recently agreed to take control of its distribution in South Korea.
Clothing retailers, especially luxury brands, were hurt last year as consumers cut spending. Polo was shielded from some of the declines because each of its brands has its own distribution channel and target customer.

The stock is currently going for less than 15 times the estimate for next fiscal year (ending March 2012).

Jobs Report Lifts Stocks
Posted by Eddy Elfenbein on August 4th, 2010 at 9:55 am

Good news for Intel (INTC) today. The Federal Trade Commission said it has reached a deal with Intel regarding an anti-trust case. The problem was that Intel wasn’t charging people enough for its chips. I’m not making that up.
Like many anti-trust cases, the complaint wasn’t brought by a customer but by one of Intel’s competitors, Advanced Micro Devices (AMD). The two companies settled a civil trial last year when Intel had to fork over $1.25 billion.
The good news is that this time Intel won’t pay a dime in damages. Instead, the company will have to alter the way it sells some of its products.
The market is in a good mood this morning thanks to an optimistic jobs report from ADP. On Friday, we’ll get the official employment report from the government but the private payroll company likes to provide its own sneak-peak. According to ADP, payrolls grew by 42,000 last month and the figure for June was revised higher to a gain of 19,000. I’m not very impressed by those number but at least they’re positive!

Buy List YTD
Posted by Eddy Elfenbein on August 3rd, 2010 at 4:23 pm

Here’s an update on how the Buy List is doing so far this year. Through today, the average of the 20 stocks is up 3.03% compared with 0.48% for the S&P 500 (neither figure includes dividends). We’re on track for beating the market for the fourth straight year.

The rules of the Buy List are that I chose 20 stocks at the beginning of the year. Once they’re chosen, it’s set. I can’t make any changes during the entire year.
For tracking purposes, I assume the Buy List is a $1 million portfolio, equally weighted with $50,000 in 20 different positions as of the closing price of the previous year. Each year, I only change five of the stocks.
By mid-April, we had a big 6% lead over the market but that’s been cut in half since then. We’re still 2.55% ahead of the market.
Here’s our stock-by-stock record:

If you started the year with, say, $10 billion and followed my advice, I would have made you over $300 million.
And I don’t charge nothing neither!

Duck and Cover for For-Profit Ed
Posted by Eddy Elfenbein on August 3rd, 2010 at 1:50 pm

Tomorrow, the government will come out with a report on for-profit education. In preparation, a lot of these stocks are trading lower. It’s expected that the Feds will accuse them of all sorts of naughty things and deceptive practices.
This is what I wrote last September about higher ed:
Imagine If Lehman Brothers Had a Football Team

Lately it’s been all the rage to complain about companies that are too big to fail. However, there’s another prominent American institution that’s also become too big to fail. It’s bloated, overstaffed and often fails to meet the most basic need of its customers.

Welcome to American higher education.

More Americans are wising up to the fact that college is a big fat waste of money. Sure, if you’re lucky enough, and smart enough, get into a big-name school, college is just fine. But for millions of other students, a four-year degree often puts them in a mountain of debt and doesn’t give them the skills they need in the job market.

First, let’s consider how long it takes many students to finish college. Even after six years, only 54% of college students even get a degree. For high-school students in the bottom 40% of their class and who go to a four-year college, an amazing two-thirds hadn’t earned a diploma after eight-and-a-half years. Sheesh, that’s worse than Bluto! I can’t think of another industry that has such a dismal record.

David Leonhardt recently wrote at the New York Times: “At its top levels, the American system of higher education may be the best in the world. Yet in terms of its core mission—turning teenagers into educated college graduates—much of the system is simply failing.” He’s exactly right.

Still, tuition costs continue to skyrocket. Between 1982 and 2007, tuition and fees rose 439% compared with just 147% for median family income. The trend shows no sign of stopping. One year at Yale now goes for $47,500. The University of Florida system wants to raise tuition by 15%, the maximum allowed.

Much like the housing bubble, the Higher Ed bubble is being driven by cheap, government supported credit. The problem is compounded by the fact that hugely important financial decisions are placed on the backs of 19-year-olds, many of whom simply don’t have the life experience to weigh the implications of a gigantic, 20-year debt load. Heck, at least the irresponsible mortgage borrowers during the crazy days were adults (even though many acted like infants).

One report shows that students from lower-income families need to pay 40% of their family income to enroll in a public four-year college. That’s a lot of coin to have some Marxist feminist theorist tell you about atavistic nature of late-stage capitalism. Please, you can watch the Oscars to learn that. Don’t think community colleges are a bargain, either. The average tuition is up to 49% of the poorest families’ median income from 40% in 1999-2000.

The pro-college crowd likes to repeat the claim that college grads earn $1 million more, on average, over their working lifetime. Sure, this is true, but college grads start out in a big hole. On average, they don’t even catch up to high school grads until age 33.

The debt load piled on students is scandalous. One in five students who graduated in the 1992–93 school with over $15,000 in debt defaulted on his or her loan within 10 years of graduation. We’re setting young people up for failure and ruin credit records. Thanks to the recession defaults are up 43% over the last two years. Many students go to grad school and pile on even more debt. The average law grad owes $100,000. Plus, many schools often use grad students as greatly underpaid professors in order to cut costs. Think of Lehman Brothers. Now imagine if they had a football team.

The loans fall especially hard on minorities since colleges love to boast their “diversity.” For African-American students, the overall default rate is more than one-third. That’s five times higher than white students and over nine times higher than Asian students.

What makes things even worse for many colleges is that the recent bear market put the squeeze on their endowments. Harvard’s endowment dropped by $11 billion and they announced they’re laying off 25% of their investment staff. Cornell’s endowment plunged 27% in the final six months of 2008. Yale lost $5.9 billion, or one-fourth its value. Lower endowments means…you guessed it, higher tuition.

School financing has exploded in recent years, doubling in just ten years. Total student debt now stands at over half a trillion dollars. The average borrow took out a loan worth $19,200. That’s a 58% jump since 1993.

Naturally, the government is set to make a bad situation worse. Last week, the House of Representatives voted to elbow Sallie Mae (SLM) out of the student loan biz and shift all student loans to a government-run, taxpayer financed system. So instead of government subsidized loans run through banks to students, we’ll now have a government monopoly. Hmmm…what could possibly go wrong?

I got a better idea. It’s a real simple government program. I call it, “Dude, you really shouldn’t be going to college.” Best of all, the program is very cheap. The costs are solely a postcard and my consulting fee. If don’t want to listen to me, fine, then listen to the folks at the ACT who say that only 23% of students have the skills to do well in college.

The good news is that Americans are catching on to the college scam. Admissions applications are dropping at elite school. Applications are off by 20% at Williams College. Middlebury saw a 12% decline and Swarthmore had a 10% drop. I believe this is just the beginning.

The reason I’m so confident is that these are boom times for the for-profit education sector. Long derided as diploma mills, these companies are raking it. Already this decade, shares of Strayer Education (STRA) are up over 1,000% and shares of ITT Educational Services (ESI) are up over 1,300%.

Business is so strong that the schools are having difficulty even making earnings estimates. In January, ESI issued 2009 EPS guidance of $6.25 to $6.45 which well above the Street’s view of $5.73. Since then, the company raised guidance three times. The current EPS range is now $7.55 to $7.85. In other worlds, no bailouts needed here.

These schools are ideal for older students who are attending school on their own initiative instead of doing what their parents expect. Many of the schools have comprehensive programs but students often go there to take a few courses to round out their job qualifications. Businesses also like to use the schools for employee training. The graduation rates tend to be high and the default rates are low (though still not ideal as some members of Congress have noted).

I also like the fact that the school has an efficient business mode. Operating margins tend to be high and they businesses don’t drain capital.

Look at the success of a company like Lincoln Educational Services (LINC). A few weeks ago, Lincoln reported blowout Q2 earnings. Check out these digits. Revenue rose 51% and earnings-per-share jumped an astounding 440%. The company netted 27 cents a share which schooled the Street’s consensus of 19 cents a share. On top of that, Lincoln boosted its full-year EPS guidance to a range between $1.40 and $1.45 from their prior range of $1.25 to $1.30. Who’s laughing at the diploma mill now?

Lincoln is hardly alone. Last month, Corinthian Colleges (COCO) issued 2010 EPS guidance of $1.30 to $1.36 which was well above the Street’s view of $1.14. If COCO hits their range, then we’re talking about a growth rate of over 50%.

The big kid on the block is Apollo Group (APOL) owner of the University of Phoenix which has more than 200 campuses and over 400,000 students. Apollo has a market cap of $10 billion and it’s one of the two for-profit ed stocks in the S&P 500 (DeVry being the other). The shares have vaulted nearly 100-fold since the IPO 15 years ago. Apollo is doing more than any bureaucrat to reshape the landscape of American higher education. Make no mistake how serious they are. Three years ago, the company shelled out $150 million to turn the home of the Arizona Cardinals into the University of Phoenix stadium.

The for-profit sector still contains many risks. Loan defaults rates are a problem which doesn’t look so good considering the schools have healthy operating margins. The industry was dreading a recent GAO report which turned out to be milder than expected.

Of all the for-profit schools, I think Lincoln Educational Services offers the best value right now. The company just gave a big earnings boost and the shares are now going for about 12 times 2010’s forecast. Strayer, on the other hand, is the one to avoid. The stock is up to 23 times next year’s consensus. For a school stock, that’s not very smart.

No Comment
Posted by Eddy Elfenbein on August 3rd, 2010 at 10:45 am

From an Ayn Rand disciple:

“I’ve never seen the type of animosity between the government and Wall Street,” Greenspan said, adding he was “not sure where it comes from.”

Cognizant Soars on Earnings
Posted by Eddy Elfenbein on August 3rd, 2010 at 10:24 am

One of my fundamental rules of investing is to not worry what happens to stocks after you sell them. Still, it’s hard to ignore “what could have been.”
Last year, Cognizant Technology Solutions (CTSH) was a huge winner for us on our Buy List. The stock was up 151%. for us.
I didn’t want to be greedy so I dropped it off this year’s Buy List.
Thanks to the blow-out earnings report, CTSH is up 10% today and over 34% for the year.

Cognizant Technology Solutions Corp. booked a 22 percent jump in net income Tuesday, benefiting from a surge of pent up demand.
The results, as well as Cognizant’s forecast for the rest of the year, topped Wall Street forecasts and sent the company’s shares up 12 percent ahead of regular trading.
Cognizant, which provides consulting and information technology outsourcing, earned $172.2 million, or 56 cents per share, in the three months ended June 30.
That’s up from $141.3 million, or 47 cents per share, a year ago and better than the 52 cents per share analysts expected, according to Thomson Reuters.
Revenue jumped 42 percent to $1.11 billion, beating the average forecast of $1.02 billion.
“Our clients are investing again in discretionary programs to foster growth and innovation,” CEO Francisco D’Souza said in a statement. “We saw particular strength in our financial services segment, which had previously been hard hit by the global credit crisis.”
The company’s forecast for the quarter ending in September was equally upbeat.
It expects earnings of at least 59 cents per share and revenue of $1.18 billion, while analysts were looking for 54 cents per share on $1.06 billion.
For the full year, Cognizant said earnings should come to at least $2.26 per share with revenue of at least $4.46 billion. The average forecast calls for $2.13 per share $4.14 billion.

Grrrrr.