• The Bubble Popper
    Posted by on January 6th, 2010 at 10:40 am

    Listening to some people, you’d think the Fed chairman has a machine in his office called “the bubble popper.” It will instantly pop any bubble without affecting anything else. If only, he would just turn it on.

  • Looking At the Numbers at Nicholas Financial
    Posted by on January 5th, 2010 at 3:50 pm

    I’ve always been impressed with the amount of financial info that Nicholas Financial (NICK) provides about their portfolio in their quarterly statements. I wish more companies were this forthcoming. I’ve assembled a portfolio summary on this spreadsheet of how they’ve done over the last several quarters.
    By looking at this spreadsheet you can see why I’m such a big fan of the stock. The pre-tax bottom line is column N. However, the most important line to watch is column K, the provision for credit losses. That zoomed up during the credit crisis and it took out a huge chunk of NICK’s earnings.
    The pre-tax yield before adjusting for credit losses has been remarkably consistent for the past 12 quarters, usually around 12.5%. The credit losses completely altered NICK’s profitability. But something big happened the last two quarter. The eight-quarter run of year-over-year increases in the provision for credit losses finally stopped. It’s still high, but if it continues to drop, that will give a big boost to NICK’s bottom line.
    Let’s make some assumptions for the next earnings report. If the pre-tax yield for the last quarter hit 7% on receivables of $230 million that comes to about $4 million pre-tax for the quarter. With the new shares post stock dividend, that’s 35 cents a share. After taxes, that’s about 22 cents a share.
    For the first six months of the fiscal year (ends March 31), NICK made 40 cents a share. So we’re probably talking about stock on its way to making around 80 cents a share for the year during an awful recession. As I see it, this company is almost like an 11% or 12% bond and the credit quality is improving.

  • Your Home Is a Terrible Investment
    Posted by on January 5th, 2010 at 1:48 pm

    So says Karen Pence who runs the Fed’s household and real estate finance research group. Here are her five reasons:

    1. It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”
    2. It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.
    3. Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.
    4. It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.
    5. It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.

  • Lilly Works to Improve Drug Pipeline
    Posted by on January 5th, 2010 at 9:59 am

    One of my Buy List stocks, Eli Lilly (LLY), has often been criticized for its dwindling pipeline of new drugs. That’s probably one of the reasons the stock goes for less than eight times next year’s earnings and it carries a dividend yield of 5.5%.
    Lilly, however, has been working hard to fix the problem. The WSJ focuses today on the company’s use of outside research firms:

    Eli Lilly & Co., like many other pharmaceutical companies, is seeking to make its drug-development efforts more productive as it copes with thin new-product pipelines. Its approach: hiring outside contractors to run tests on its drug candidates.
    Pharmaceutical companies have traditionally kept a tight lid on drugs under development, conducting key work in-house. But early this year, the Indianapolis drug maker will decide whether to move a promising molecule to treat rheumatoid arthritis into late-stage testing, based on mid-stage data developed by scientists outside of its own research team. If the drug eventually wins regulatory approval, it will compete in a $16 billion annual market.
    By outsourcing human tests of such a potentially important drug, Lilly is among a crowd of pharmaceutical giants adopting out-of-the-box strategies to revive fallow research-and-development organizations.

  • Bloomberg Profiles David Tepper
    Posted by on January 5th, 2010 at 8:31 am

    Bloomberg profiles hedge fund manager David Tepper who make a few billion dollars last year betting that the world was not, in fact, coming to an end.

    “It was crazy,” says Tepper, a Pittsburgh native. “In February and early March, people were in a panic.”
    Appaloosa began scooping up bank-related securities, including common and preferred shares and junior subordinated debt. The Short Hills, New Jersey-based hedge fund firm bought into Bank of America, Citigroup, Fifth Third Bancorp and SunTrust Banks Inc. Tepper also bought the bonds of New York- based American International Group Inc., Frankfurt-based Commerzbank AG and London-based Lloyds Banking Group Plc, paying as little as a nickel on the dollar.

  • 20 Years Since the Nikkei’s Peak
    Posted by on January 5th, 2010 at 8:07 am

    Thinks it’s been bad here? Check out how the Japanese market has done over past two decades.
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    The Nikkei hit its peak 20 years ago on December 29, 1989 at 38,916. This past March, the index hit a low of 7054. That’s an 82% drop.

  • Remembrance of Stocks Past
    Posted by on January 4th, 2010 at 3:47 pm

    Mark Hulbert has an article in the New York Times on one of my favorite topics—momentum investing. The issue I take with Mark is that he focuses on the intermediate-term impact of momentum. The impact where momentum has been most strongly felt is in the short-term. The shorter the term, the stronger it is. Historically, the impact has been very real and quite large. Whether it will continue is another question, and I tend to doubt it will.
    The article contains this quote:

    “We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns,” he added, “and do not include history in the calculation.”

    Sorry, but that’s just not true. One of the mysteries of the stock market is that the past does have an effect on the future. What it is and how it works isn’t exactly clear. For example, the stock market does significantly better on days following up days, and significantly worse on days following down days. Also, the persistence of tall heads and fat tails suggests (but isn’t proof) that the past impacts the future. In other words, stocks may go down simply because they’re going down.
    Hulbert then goes on to discuss one area of market inefficiency which is the historical outperformance of small-cap stocks. Interestingly, this is the one anomaly that I’m most skeptical of. Historically, the numbers back it up but the small-cap premium is highly volatile compared with its size. In fact, small-caps have experienced decades of lagging the market.
    I’m currently reading Eric Falkenstein’s fascinating book, Finding Alpha which discusses the small-cap premium and suggests that it may be an illusion due to methodological errors. I suspect he’s right. The January Effect doesn’t make much sense without it.

  • 2010 Gets Off to a Nice Start
    Posted by on January 4th, 2010 at 2:14 pm

    The new year has gotten off to a very good start. The Dow has been up by as much as 170 points today and it came close to breaking 10,600 for the first time in 15 months. The Nasdaq is now at a 16-month high.
    The new Buy List is also doing well. Moog (MOG-A) is up over 4% today, plus Leucadia (LUK) and Stryker (SYK) are both up over 3%. Stryker is up thanks to an analyst upgrade, and price target revision from $48 a share to $59.
    Our new additions are also holding their own. I should add that I announce the new buys two weeks before the new year so I can’t be accused of trying to goose the numbers. Wright Express (WXS) is up about 4.5% today, and the big news of the day is an upgrade on Intel (INTC). The analyst at Robert W. Baird raised the stock to Outperform from Neutral, and bumped up the price target from $24 a share to $26.

  • Bernanke Defends the Fed
    Posted by on January 4th, 2010 at 12:50 pm

    I continue to be very impressed with Ben Bernanke. Yesterday, he gave a speech to the American Economics Association which defended the Federal Reserve from the charge that easy monetary policy caused the housing bubble. Naturally, this won’t sit well with the Fed’s critics.
    If you have the time, I encourage you read Bernanke’s speech. It’s long but he uses the length to carefully consider the evidence leveled against loose monetary policy. He briefly mentions a favorite topic of his, the global savings glut, as explaining some of the housing bubble. I think this is a very important topic. As I’ve said before, if you really want to damage another country, don’t send in tanks. Instead, lend them too much money.

  • Female CEOs Win Again
    Posted by on January 4th, 2010 at 9:46 am

    From the Chicago Sun-Times:

    Still, the year after Hillary Clinton and Sarah Palin fell just short of becoming the first female president or vice president, and heading into 2010, when women will begin outnumbering men in the work force, stocks of the 13 Fortune 500 companies that had a woman at the helm for all of 2009 were up an average 50 percent.