The State of Macro
Posted by Eddy Elfenbein on September 4th, 2009 at 10:31 am

Paul Krugman has a very good article in the New York Times on the state of macroeconomics and how the profession got blindsided by the credit crisis. As an economics writer, there simply isn’t anyone better at bringing complex issues to the average reader. As a partisan political writer, well, that’s a different matter.
I only have two minor quibbles. The first is that I think Krugman overstates the importance that economic ideas have on theory. Just because a lot of professors who write in journals and show up at conferences believe in efficient markets doesn’t mean that impacts policy at all. That’s a tough line to draw from theory to results.
The second point is that I think he overstates the faith in efficient markets. I could be wrong here, but I’ve rarely met a trader of professional investors who believes in, or even cares about, efficient markets. Krugman makes it sounds as if this were a widely held doctrine that was suddenly exposed by the housing bubble. For many economists, that could be correct. I would think the tech bubble, which Krugman doesn’t mention, was a better refutation of efficient markets.
Anyway, those are minor points. It’s a good read.

Most Folks Trade Too Much
Posted by Eddy Elfenbein on September 4th, 2009 at 10:13 am

Wise words from David Merkel:

Most people and investment managers trade too often. They sell their winners too rapidly, and panic too soon on their losers. Now, I’m not advocating “buy and forget,” or Buffett’s statement, “Our favorite holding period is forever.” Buffett has had a huge opportunity loss on many of his “permanent” holdings. Granted, when you are managing that much money, it is tough, so I give him a pass, not that he needs it from me. (Rather, I am the needy one. If you ever read me, Mr. Buffett, sir, would you send me an e-mail? I have one favor to ask.)
Measure twice, cut once. Risk control is best done on the front end, analyzing what you will buy, rather than having strict sell rules that limit losses. Many who have strict sell rules die the death of a thousand cuts. Careful selection matters more, in my opinion. What should you aim for at present?
* A strong balance sheet
* Cheap price versus earnings and book
* An industry that is needed even in bad times.
* Earnings quality — low earnings from accrual entries.

You can also check out David’s list of buy candidates.

The Market and Future Earnings
Posted by Eddy Elfenbein on September 2nd, 2009 at 11:17 am

I was playing with some numbers I got off Robert Shiller’s website. I was curious to see historically how long it’s taken the market to earn back its value. The P/E ratio is concerned with past earnings, but I wanted to see how good the market is at valuing future earnings.
It turns out, the market is generally worth about its earnings for the next 40 quarters, or 10 years. This makes sense since the historic P/E ratio is around 14-16, so going by normal growth, it ought to take roughly ten years to earn your money back. Let me add that the market has been known to be wrong about such things.
Here’s a look at the S&P 500 compared with its earnings ten years hence. Because of that restriction, the chart has to stop in the late 1990s.

From the 1929 peak, it took the market 24 years to earn its money back. In 1942 and 1982, it took less than seven years.

Morning News
Posted by Eddy Elfenbein on September 2nd, 2009 at 10:47 am

I’m relieved to see that Donaldson (DCI) has come off its rotten open from this morning. This is typical after bad news—a sharply lower open followed by a rally. Let’s hope it holds.
Danaher (DHR) is in the news today. The company said it’s cutting 3,300 jobs and it will close 30 facilities which more than previously planned. The company also said it’s paying $1.1 billion for MDS’s instruments business. The shares are up today.
Joe Bank (JOSB) is also doing nicely today. The company just reported earnings of 68 cents a share, 14 cents better than estimates. Sales were up close to 10%. A year ago, the company earned 48 cents a share so that’s very nice growth. This stock is insanely erratic, but it’s been good to us this year. JOSB is up over 70% since January 1.

Donaldson’s Earnings Report
Posted by Eddy Elfenbein on September 1st, 2009 at 11:26 pm

Our filtration company, Donaldson (DCI), released pretty bad earnings after the close. For their fiscal fourth quarter, Donaldson made 35 cents a share which was five cents better than estimates but still down from 60 cents a year ago. Sales dropped over 30%.
More bad news is that the company sees fiscal 2010 EPS ranging between $1.44 and $1.64 which is less than Wall Street was expecting. I’m afraid that the stock is too high right now.

S&P 500 Total Return Index
Posted by Eddy Elfenbein on September 1st, 2009 at 11:05 pm

Forget talk of a V-shaped or W-shaped economy, we’ve had an M-shaped market for the last several years. Here’s the S&P 500 total return index since 1997:

Through Monday, the S&P 500 is up 14.97% this year including dividends.

Altria Yields 7.5%
Posted by Eddy Elfenbein on September 1st, 2009 at 12:35 pm

I really like shares of Altria (MO) and it’s probably a good candidate for next year’s Buy List. The stock is going for about 10 times this year’s earnings. The company just raised its quarterly dividend by two cents a share to 34 cents. That works out to an increase of 6.25%, and a yearly dividend payment of $1.36 comes to a yield of 7.5%.
I’ve also been impressed by the recent earnings trend. For Q2, Altria earned 50 cents a share, three cents better than expectations. The company also raised its 2009 EPS outlook for continuing ops to a range of $1.51 to $1.56 from the earlier range of $1.47 to $1.52. The net EPS range increased to $1.72 to $1.77 from $1.70 to $1.75, hence the roughly 10 times earnings I mentioned before.

Bernie’s Beach House Up for Sale
Posted by Eddy Elfenbein on September 1st, 2009 at 10:25 am

If you’re in the market for some beach front property, Bernie Madoff’s crib in Montauk is up for sale. The Feds are asking for $8.75 million. I should warn you that the AP said it’s “not that palatial.”

A Real Cash Cow
Posted by Eddy Elfenbein on September 1st, 2009 at 10:06 am

Looking to find a higher yield? French savers are turning to cows. I’m serious.

Pierre Marguerit, director of Gestel, a company in southeastern France that manages some 30,000 animals on behalf of 1,000 investors, said sales have doubled in the past year.
“You buy one or more cows, which are rented out to professional farmers. Your herd then increases as the years go by. A herd of 20 cows will bring you one extra cow every year, that’s roughly 4-5 percent,” said Marguerit.
Although the birth rate within the herd is higher, a portion of the offspring will make up for deaths, while others are sold off to cover the costs of rearing the animals.
However, in a particularly fertile year, the net increase can run as high as 7 percent.
Investors can choose to sell the new cows and take the cash, or allow their herd to build up over the years by keeping the offspring, then draw a regular income at retirement.

U.S. Libor Drops to Record Low
Posted by Eddy Elfenbein on September 1st, 2009 at 9:59 am

How things have changed. Last October 10, the three-month Libor hit 4.8%. Now it’s down to 0.33%. The TED spread has plunged as well.