Hurray for Spin-Offs
Posted by Eddy Elfenbein on September 10th, 2010 at 11:13 am

In general, I like spin-offs and hate mega-mergers: which leads me to smoking stocks and they’ve been smoking lately. Altria (MO) is at a 52-week high and it’s close to an all-time high.
The company spun-off Kraft (KFT) in 2007. Kraft was already publicly traded but MO decided to ditch its remaining 88% in the company. Then in 2008, MO spun-off Philip Morris (PM).
Here’s a look at how they’ve done:

Every stock has beaten the S&P 500 which is the gold line at the bottom. Kraft is the red line, Philip Morris is the blue and Altria is the black.
Mega-mergers sound great. They make a lot of news, but the results are usually pretty unimpressive. Spin-offs, however, can often be good places to find cheap stocks. I should add that after the spin-off, MO was kicked out of the Dow which is another index it has outperformed.

Stocks Aganst Bonds
Posted by Eddy Elfenbein on September 10th, 2010 at 10:10 am

Here’s an interesting chart. This shows how the S&P 500 ETF (SPY) has done compared with the Long-Term Treasury ETF (TLT). Since April, they’ve become almost mirror images of each other.

I ran the numbers and found that since April 21, the daily correlation between the two is -0.55. In other words, when stocks go up, long-term bonds go down. When bonds go down, long-term stocks go up. Now let’s place “generally” before those last two statements, but you get the idea.
What does it mean for the market? It’s hard to say. It usually means that capital is undecided. Money has a simple rule: It goes where it’s treated best. Right now, equity and debt are slugging it out.
The 10-year bond has been taking a hit recently but that’s hardly a shocker considering how low the yield went. On August 25, the intra-day yield dropped to just 2.42%. Think about that for a moment. At that rate, even after 10-years, you still won’t have made 25% on your dough. The yield has crept up and it just jumped above 2.8% today.
I’m happy to see the market go up, but we need to bear in mind that it’s only coming at the bond market’s expense. Personally, I can live with that. But if I had my preference, I’d like to see new money come in from commodities that would fuel both asset classes.

Morning News: September 10, 2010
Posted by Eddy Elfenbein on September 10th, 2010 at 9:41 am

FOREX-Dollar bounce loses steam, Swissie slides

Nokia Hires Microsoft’s Elop as CEO to Reverse Losses to Apple
China Posts $20 Billion Trade Surplus as U.S. Seeks Yuan Gains
Goolsbee to Lead Panel on Economy
Dubai World Close to Agreement on Debt

Ozawa win may push Bank of Japan to buy government bonds
Deutsche Bank Said to Weigh Share Sale of Up to $11.4 Billion
SEC Examines Funds of Hedge Funds

Oh Melissa
Posted by Eddy Elfenbein on September 9th, 2010 at 11:26 am

(HT: TBI)

Stick a Fork In Us, We’re Done
Posted by Eddy Elfenbein on September 9th, 2010 at 10:20 am

Today’s must-read item is “Paradise Lost: Why Fallen Markets Will Never Be the Same” by Ian Bremmer and Nouriel Roubini. Be warned: It checks in at over 4,000 words.
I’m generally pretty skeptical of these kinds of things, but I wanted to pass it your way. If I have any brilliant insights, I’ll add them later.
I’m afraid I’m not swayed by their argument: or rather, I supposed I’m relieved.
Update: Ok, I just finished the article. For one, the title seems to clash with the body. Far from telling us that markets will never be the same, they simply list many changes and problems in the world economy.
I also think they have a very “guys-in-suits-centric” view of the world. Just because the kind of folks invited to G-20 meetings disagree with one another or don’t have answers to the world’s problems doesn’t mean these problems are intractable. Nor does it even mean the problems will last.
The problem with this article is that it’s long on concepts and flushed out with strawmen, trendy buzzwords (nonpolar!) and the assumption that current trends will last: but it’s very short on support.
Felix Salmon has more.

Stocks Up on Jobless Claims
Posted by Eddy Elfenbein on September 9th, 2010 at 9:49 am

It doesn’t seem like Thursday. Such are the joys of holiday shortened weeks. The stock market is doing well so far this morning.
As I mentioned before, we seem to be stuck in a trading range. The S&P 500 has bobbed between 1020 and 1130 for over three months. Thanks to the last few days, plus today, we may soon challenge the upper end of that range. Let’s hope we do because nearly everything the market gained in July was taken away by August. I don’t want September to be another July (doesn’t that sound like the title of an old song?).
We can never know exactly why the market is up on a certain day, but the good news this morning is that there was a drop in jobless claims. First-time claims fell to 451,000 last week from a revised 478,000 a week earlier. The Street had been expecting claims to fall to 470,000.
Frankly, I don’t put a great deal of faith in jobless claims. This number comes out every Thursday and it contains a lot of what stats folks call “noise.” On top of that, nine states didn’t give numbers this week due to the Labor Day holiday. I think this is simply a case of the market wanting to rally and if that’s the excuse, so be it.
I see that all of our Buy List stocks are rallying (except NICK and MOG-A haven’t traded yet). AFLAC (AFL) has been as high as $51.27 and it’s close to making a four-month high.

Morning News: September 9, 2010
Posted by Eddy Elfenbein on September 9th, 2010 at 9:23 am

British Regulators Fine Goldman over SEC Tourre Fraud Investigation

Britain Keeps Rates on Hold Amid Worries About Global Recovery
OECD Says Slowdown ‘More Pronounced’ Than Anticipated
Norway Buys Greek Debt as Sovereign Wealth Fund Sees No Default
Falling Rates Aid Debtors, but Hamper Savers
U.S. Slides in World Economic Forum’s Rankings
Bank of Korea Keeps Interest Rate Near Record Low
Verizon Guy Tells Me The Customer Is No Longer Always Right

Intel’s Margins Under Pressure
Posted by Eddy Elfenbein on September 8th, 2010 at 2:07 pm

Here’s a good segment from CNBC:

A Range-Bound Market
Posted by Eddy Elfenbein on September 8th, 2010 at 11:47 am

For 78 straight sessions, the S&P 500 has closed between 1022 and 1128.

It looks like today will be day #79.

Hulbert: What Stocks Do Well from Deflation
Posted by Eddy Elfenbein on September 8th, 2010 at 11:10 am

From MarketWatch:

By Tuesday’s close, the Dow Jones Industrial Average had fallen 107 points, erasing nearly half of its big gain during the previous session.
But are investors acting rationally when they dump stocks because of deflationary concerns?
Though it would certainly appear that they are, I’m not so sure. The job of a contrarian is to question widely-held assumptions, and the notion that deflation would be bad for stocks is so universally held these days that virtually no one appears to be subjecting it to any critical scrutiny.
One firm that has nevertheless done so is Ned Davis Research, the quantitative research firm. Lance Stonecypher, Senior Sector Strategist for the firm, recently analyzed sector performance during previous periods of significant deflation, both in this country as well as in Japan. Since there haven’t been many such periods, his conclusions of necessity must remain somewhat tentative.
But some fairly consistent themes nevertheless did emerge.
Perhaps the primary conclusion that Stonecypher reached was that, during past deflationary periods, the industry groups that performed the best fell into two categories Necessity and Defensive. Examples include Consumer Staples and Health Care.
Though Ned Davis Research doesn’t provide specific stock recommendations, examples of widely-held stocks in these two industry groups include Johnson & Johnson, Procter & Gamble, PepsiCo, Coca-Cola, and McDonald’s.
Digging further, Stonecypher also found that small-cap stocks have tended to markedly lag the large-caps during deflationary periods. The most pronounced periods of deflation in U.S. history came during the early 1930s, the late 1930s, and immediately after World War II. On average in those three cases, he found, small-cap stocks lagged the large caps by 13% per year.
Finally, Stonecypher suspects that the companies whose stocks perform the best during deflationary periods are those with the lowest debt/equity ratios. This makes sense in theory, he argues, because deflation makes it more difficult for debt to be repaid. (He was unable to confirm this theory, however, since he doesn’t have industry sector debt-to-equity data for the 1930s.)
The bottom line? It is possible to be gravely concerned about the prospects of outright deflation and still invest in equities. If you harbor such concerns but don’t want to give up completely on stocks, you might want to shift some of your equity holdings into the Consumer Staples and Health Care sectors, as well as shunning small-caps in favor of large-cap stocks with the lowest debt-to-equity ratios.

During the 1960s and 1970s, stocks like Wal-Mart (WMT) did very well by offering price-conscious consumers a place to go in order to fight inflation. While WMT’s pricing policies are controversial now, the company prospered thanks to its market position during the U.S. economy’s 15-year bout with inflation. The overall U.S. stock market didn’t do well at all.