First Intel, Next Up is JPMorgan Chase
Posted by Eddy Elfenbein on July 14th, 2010 at 11:56 am

Frankly, the Intel (INTC) surprise wasn’t that hard to figure out. I think the next candidate for a big earnings surprise is JPMorgan Chase (JPM).
The case for the monster bank, however, is a bit harder than Intel’s. First is that JPM is indeed a monster bank — they have over $2 trillion in assets. Second is that the Street hasn’t been anywhere close to getting JPM’s earnings right over the past few quarters. These big banks can be a bit of a black box. We never know exactly what Dimon & Co have been doing until the numbers come out. I’m certain Greece hasn’t been pleasant but I just don’t know how much so.
The Street is expecting earnings of 71 cents a share for Q2 which is slightly less than what they made for the first quarter. If there are more clues of a double-dip, it will be found in the numbers for these large banks. The bank also faces some special taxes and charges. The good news is that fixed-income trading should do very well. There’s nothing quite like a steep yield curve to bail out a bond trader. Think of it as a government bailout under another name.
There’s also the case that JPM is the first of the big banks to report. If they hit it big, we can expect the other banks to do well. This may also have a broad impact if it causes the double dip thesis to fade.
What would be truly inspiring is if JPM announced a big-ass dividend increase. Back when the world was falling apart, the bank slashed its quarterly dividend from 38 cents a share to just five cents a share. Their balance sheet is plenty strong to bring it back to, say, 25 cents a share. But if they did, it would be major news that the banks are confident again.

Artificial Intelligence Is Beating Genuine Ignorance
Posted by Eddy Elfenbein on July 14th, 2010 at 10:43 am

Er…I’m a little skeptical but it is in the Wall Street Journal:

With artificial intelligence, programmers don’t just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Most investors trying the approach are using “machine learning,” a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future. It is used by tech companies such as Google Inc. to match Web searches with results and NetFlix Inc. to predict which movies users are likely to rent.
Digits
One upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks. Run by a small team of twentysomething math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor’s 500-stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund. Like many hedge funds, its goal is to beat the broader market year after year.
“It’s pretty clear that human beings aren’t improving,” said Spencer Greenberg, 27 years old and the brains behind Rebellion’s AI system. “But computers and algorithms are only getting faster and more robust.”

Intel SMASH!!
Posted by Eddy Elfenbein on July 13th, 2010 at 5:18 pm

Yes readers, every so often I get one right. Yesterday I said that Intel (INTC) would easily beat Wall Street’s earnings estimates and I was right.
The Street was looking for 43 cents per share. I said they’d top 45 cents share. The correct answer: 51 cents per share. Make no mistake, this was an outstanding quarter for Intel. The stock is up about 6.7% after-hours.

Intel, the world’s No. 1 chipmaker, said revenue in the three months ended June 26 totaled $10.8 billion, compared with $8 billion in the year-earlier period and the $10.25 billion expected by analysts polled by Thomson Reuters I/B/E/S.
“In a quarter where people expected relatively strong performance, they beat that pretty handily and set a good forecast. They seem unaffected by the negativity that’s impacting equities,” said Charter Equity Research analyst Edward Snyder.
The company posted net income of $2.9 billion, or 51 cents a share, versus a net loss of $398 million, or 7 cents a share, in the second quarter of 2009, when Intel’s results included a $1.4 billion fine by the European Commission.
Analysts had expected earnings of 43 cents per share in the second quarter.
Intel said its gross profit margin in the second quarter was 67 percent, compared with the 64 percent expected by analysts.
Looking forward, Intel estimated revenue in the third quarter of $11.6 billion, plus or minus $400 million, exceeding the $10.92 billion expected by analysts.

I don’t have all the numbers, but here’s some guesswork. Thanks to Intel’s bullish sales forecast, the Street will probably peg this year’s EPS at $2 (give or take). The company’s net cash position is about $2.50 per share. So if the stock goes for 14 times this year’s earnings, which is quite reasonable, plus the cash, then Intel is a $30 stock.

The Market Extends Its Gains
Posted by Eddy Elfenbein on July 13th, 2010 at 12:33 pm

The stock market is having another strong session. It’s too early to say but I think Doug Kass may be right, the market has made its low for the year.
I’m particularly glad to see that AFLAC (AFL) is over $49 a share. I’m slightly concerned that today’s rally is heavily weighted towards cyclicals because I don’t think that group will be leading the market over the next year.
The numbers look good: All 20 of our stocks are currently up for the day. After dipping in the red, the Buy List is back in the black for the year. Excluding dividends, we’re up about 2% for the year.
On the news front, the government announced that the trade deficit unexpectedly widen in May. Imports and exports rose to the highest level since 2008. Alcoa (AA) is doing well today after it reported decent earnings, although I don’t see much to like in the stock. To me, the real drama will come when Intel (INTC) reports after today’s close. Only recently has Intel started to perk up.
Lastly, I see that Amedisys (AMED), which was a star stock last decade, is having troubles this decade. The home health and hospice care provider said that earnings were going to come in below expectations. Wall Street analysts are jumping ship. How quickly fortunes can change.

Expect Good Earnings from Intel
Posted by Eddy Elfenbein on July 12th, 2010 at 2:45 pm

Tomorrow marks the beginning of second-quarter earnings season for the stocks on my Buy List. The first stock to report is Intel (INTC) and I expect to see very good results.
First, let me fill you in on the story so far. In April, Intel surprised Wall Street when it said it was expecting Q2 revenue of $10.2 billion, plus or minus $400 million. That was well above the Street’s estimate of $9.7 billion. Then in May, the company said that it was “highly confident” that it would achieve its financial goals for the second quarter.
Wall Street currently expects to see earnings of 43 cents a share. I’m not exactly giving away state secrets when I say that no one expects that. Intel will easily earn over 45 cents a share. The question is, how much over?
Investors curiously seem to feel that Intel is heavily exposed to the prospects of a double-dip recession. The shares dropped over 23% from their April high to their July low. The good news is that the stock is a solid bargain here.
Let’s go over some of the numbers. Wall Street currently expects Intel to earn $1.87 a share this year which means the stock is going for about 11 times earnings. That’s cheap right there, but there’s more. The company is sitting on a monster pile of cash, nearly $2.50 a share net. Since cash pays next to nothing, almost all of Intel’s earnings will comes from its operations. If we back out the cash, Intel’s operations are going for less than 10 times earnings.
Barron’s posted this research piece from Sterne, Agee & Leach. Here’s a sample:

We are looking for an in-line top-line quarter versus consensus of $10.9 billion (up 8% quarter-over-quarter), our estimates are $11 billion or 52 cents a share. We believe gross margins should improve sequentially as mix shifts with continued strength in notebooks and the key-server market. We continue to see Nehalem Server and strength in notebooks growing 5% to 10% quarter-over-quarter after a strong first-half 2010.
There are concerns in the supply chain, given the macro commentary with Europe and the state of the consumer. Intel has been a solid execution story, but the macro has been source of concern.

Upcoming Earnings Reports
Posted by Eddy Elfenbein on July 12th, 2010 at 11:19 am

With second-quarter earnings season about to begin, here’s a rundown of our Buy List‘s earnings reports.

Of the 20 stocks on the Buy List, 16 are “on-cycle” meaning their quarter ends on June 30. Fourteen are listed above. The other two are Leucadia National (LUK) and Nicholas Financial (NICK) which aren’t currently followed by any analysts.

The Gold Mystery
Posted by Eddy Elfenbein on July 12th, 2010 at 9:45 am

There’s an odd mystery going on in the world’s gold market. The Bank of International Settlements revealed that it has a huge amount of gold compared with nothing a year ago.
It turns out that someone sold the BIS the equivalent of one-fifth of the world’s annual production of gold in exchange for $14 billion cash.
So now the question is, whodunit?
The implication is that some central bank was desperately short cash and they’re dumping grandma’s silver (well, gold) to bail themselves out.
The unusual suspects would be central banks in southern Europe. The hitch is that those banks don’t have a lot of latitude in what they can do with extra cash. Another suspect is the International Monetary Fund.

Renowned gold expert Jim Sinclair adopted this explanation. The panic came when people mistook a lease for a swap, he argues. Far from being a big release of gold into the market, it is simply a commercial arrangement between the IMF and BIS with a favourable rate of interest paid for the foreign currency.

Sinclair is the person who offered a $1 million bet in April 2008 that gold would rise to $1,650 an ounce by the second week of January 2011. We’re now just six months away.
At the time, gold was going for $900 an ounce. It’s up to around $1200 so it still needs a good rally to hit Sinclair’s target. Even if he doesn’t get the price right, he did call the rally.
The problem is that BIS said the deal wasn’t done with a central bank but with a private commercial bank.

This did nothing to quell the sense of mystery surrounding the deal or deals. It is almost inconceivable that a single commercial bank could have accumulated so much gold alone. And cynics have suggested that the whole affair still looks like a secretive European bailout that a single country wants to keep quiet.
In this case, one or more of the so-called bullion banks – which act as wholesale market-makers and include Goldman Sachs, Deutsche Bank, JP Morgan, HSBC, Barclays, UBS, Societe Generale, Mitsui and the Bank of Nova Scotia – would have agreed to act on behalf of a monetary authority.
This would add an extra layer of anonymity. “So the BIS swaps look like a tripartite transaction,” writes Adrian Douglas of the Gold Anti-Trust Association. “The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.”

Vatican Posts Loss
Posted by Eddy Elfenbein on July 12th, 2010 at 9:20 am

A Major European-based financial organization posts its third consecutive annual loss.

The effects of the global financial crisis put the Holy See’s budget in the red for the third consecutive year, the Vatican said in a statement on Saturday.
The Holy See ended the year 2009 with a loss of 4.1 million euros (5.2 million dollars), compared to its loss of 911,514 euros in 2008. In 2007 it had lost nine million euros.
Over the course of the year, the Vatican spent 254.2 million and had income of 250.1 million euros.
In 2009, the Vatican absorbed “the negative fluctuations that had been suspended in 2008,” the statement said.
Vatican Radio said that the Holy See would have posted a profit, had it not been for the absorption of 2008 losses.
Donations from churches around the world to the Holy See, also known as Peter’s Pence, grew to 82.5 million dollars, compared to 75.8 million dollars in 2008.
The largest donations came from the United States, Italy and France, the statement said.

The Big Mac Index
Posted by Eddy Elfenbein on July 12th, 2010 at 8:51 am

The Palm Beach Post looks at the Big Mac Index which gauges how much a Big Mac costs in different countries around the world. The Economist has been tracking the Big Mac Index since 1986.
The idea behind the index is that you can tell how a strong or a weak a country’s currency truly is by looking at how much the massive McDonald’s (MCD) hamburger costs. As it turns out, the cost varies a lot by country.
In the United States, the average price for a Big Mac is $3.58. In China, however, which is often criticized for manipulating its currency, a Big Mac goes for the equivalent of $1.83. That’s nearly half of what it costs here. In Norway, a Big Mac will set you back $6.87.
So is there any value to the Big Mac Index? Apparently, there is:

While the Big Mac Index is a novel way to look at what a dollar buys from one country to the next, it also has proved strikingly accurate at foreshadowing changes in currency, University of Florida Professor Dave Denslow said.
“If the Big Mac Index says that a currency is undervalued, it tends to appreciate,” Denslow said.
That’s exactly what happened with the Chinese currency, though pressure from U.S. and European governments probably weighed more heavily of the minds of Chinese officials than the word of a British business publication.
Last month, just days before the G-20 Summit, China announced that it will revalue the yuan.

Estimates for Q2
Posted by Eddy Elfenbein on July 10th, 2010 at 9:13 pm

With second quarter earnings season about to begin, here are the EPS growth and sales growth estimates from S&P:

The good news is that earnings are growing faster than sales. The means that profit margins are expanding. The warning sign is that margin-expansion can’t continue forever. At some point, sales growth needs to pick up.