• Buy List Updates
    Posted by on January 26th, 2009 at 10:48 am

    There are a couple of items to pass along this morning. Danaher’s (DHR) earnings were down from last year, but the company still beat estimates. Excluding charges, DHR made $1.11 a share, seven cents more than what the Street was expecting. The stock has been up by as much as 11% this morning.
    Moog (MOG-A) also has a good earnings report, but it lowered its revenue estimate for this year. The company’s Q1 EPS came in at 70 cents which is up from 64 cents last year, plus it’s two cents more than Street expectations. Moog cut its revenue outlook for the year from $2 billion to $1.95 billion. The shares are up about 5% so far today.
    Stryker (SYK) was downgraded from Buy to Hold by Needham. The company reports earnings tomorrow (Andrew Leckey has a good summary of SYK). Bed Bath & Beyond (BBBY) was downgrade by J.P. Morgan from neutral to underweight, although the downgrade doesn’t seem to be hurting the shares at all.
    Overall, the Buy List is having a good morning.

  • The Peter Schiff Backlash Begins
    Posted by on January 26th, 2009 at 10:05 am

    I’ve been saying for some time that I’m not particularly impressed with Peter Schiff and his hyper-bearish calls. Fortune just had an article on how prescient Schiff has been: “As one of the few talking heads who loudly, relentlessly, and more or less accurately sounded the alarm about the mortgage bubble and its consequences – in the process becoming the latest bearish commentator to earn the moniker “Dr. Doom” – Schiff has suddenly emerged as a cult hero and something of a minor celebrity.”
    Well, Dr. Doom has predicting disaster for several years now, and what we’re seeing now isn’t quite what Schiff predicted. Jonas Elmerraji of the Rhino Stock Report writes:

    While Schiff has proved himself as an economist, his ability to parlay those predictions into profits for his clients was questionable for 2008. For the last few years, he’s been betting big on overseas investments and precious metals – two areas that got hit as hard or harder than the S&P last year.
    According to Morningstar, the average international equity fund performed 7% worse than the average U.S. stock fund in the last year.
    Just look at the iShares MSCI Belgium (EWK), the worst performing ETF last year according to SmartMoney.com, or the iShares FTSE/Xinhua China 25 ETF (FXI), which lost 49% in 2008.
    Another of Schiff’s investment strategies has been to exit the U.S. dollar in favor of more fundamentally sound currencies. This too has proved untimely since anxious treasury investors have driven up the dollar in the last year.
    And some, like Seeking Alpha contributor Todd Sullivan, are quick to remind investors that Peter Schiff has been bearish on the market since at least 2002, when the S&P was poised to move up 48% over the next five years.

    Mish breaks it down in list form:

    12 Ways Schiff Was Wrong in 2008
    * Wrong about hyperinflation
    * Wrong about the dollar
    * Wrong about commodities except for gold
    * Wrong about foreign currencies except for the Yen
    * Wrong about foreign equities
    * Wrong in timing
    * Wrong in risk management
    * Wrong in buy and hold thesis
    * Wrong on decoupling
    * Wrong on China
    * Wrong on US treasuries
    * Wrong on interest rates, both foreign and domestic
    That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.
    Peter Schiff concludes many of his articles, books, etc. with the claim he saw this coming and “positioned his clients accordingly”.

  • The Obama Plan
    Posted by on January 25th, 2009 at 11:46 am

    President Obama has laid out his plans to revive the economy, and the price tag will be “at least $820 billion.” Something tells me that the “at least” part means “at the very, very least.”
    Obama’s goal is to create four million jobs. Dean Baker works out the math and says that the plan comes down to $65,000 per job.
    In my mind, the empirical evidence in favor a stimulus package is, at beat, inconclusive. The major problem, however, is that the recovery plan is no longer theoretical—we can see what it is. A lot of this spending isn’t for short-term fiscal stimulus, it’s merely larger government. The Washington Post opines:

    Helping hire, equip and pay police, a $4 billion item under the bill, might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy. Ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts. All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?

    The short answer is, they don’t belong. I expect the plan to sail through Congress. The only upside I see is that future economists will now have another bit of evidence to weight.

  • Contra Geithner
    Posted by on January 23rd, 2009 at 12:38 pm

    Joe Weisenthal makes the case against Geithner:

    We know that not everyone would’ve made the same decision here. We’ve worked with people in our professional life, who everytime they encountered something legally or ethically murky opted to make the conservative choice that wasn’t immediately beneficial to them. They do exist, believe it or not. We suspect a guy like Warren Buffett would’ve asked for a professional opinion on the tax issue, were he in that same position.
    Again, it’s not that Geithner is so bad, it’s just that his mindset is apparently similar to the people who got us here. Substitute “Moody’s” for “TurboTax” and it should be be obvious.
    It’s moot at this point. The speed of the banking crisis means the full Senate will sign off on today’s finance committee vote. But we will soon have a Treasury Secretary who was basically of the same mindset as everyone else, rather than a real clean break from the failed, convenient thinking of the past.

    Geithner said he simply made a mistake on his taxes and apologized. Well, the apology is good but it misses the point, the mistake is the issue. Calling it one doesn’t diminish the significance. The Secretary of the Treasury should know how to do his taxes without making obvious, boneheaded mistakes.
    Larry Ribstein has more.

  • New Stock Options for Google Employees
    Posted by on January 23rd, 2009 at 10:35 am

    A few years ago, I criticized a Wall Street Journal story that claimed corporate executives were profiting off 9/11 by granting themselves new options after the market dropped. I thought this was a completely made-up scandal. The article described perfectly legal activity in such a way as make it seem sinister (see here for my original post).
    The reason why I mention this is that Google has essentially done the same thing the WSJ was complaining about two-and-a-half years ago. Here’s the AP story in full:

    Google Inc. is allowing its employees to swap their stock options for new ones that will give them a better chance to profit from their holdings.
    The Mountain View-based company outlined the exchange program Thursday in its fourth-quarter earnings report. Google suffered its first-ever decline in quarterly profit because of charges taken to account for its deteriorating investments in Time Warner Inc.’s AOL and Clearwire Corp.
    Google will have to absorb another hit to earnings to pay for the new options being made available to its 20,222 employees. Management expects the accounting charge to be about $460 million, assuming the new exercise price for the options is around $300.
    Google shares ended Thursday at $306.50. The new options are expected to be priced on March 2. The exchange program is scheduled to start Jan. 29 and expire March 3.
    A 47 percent drop in Google’s stock price during the past year drove the decision to give employees a chance to turn in options that have been awarded during the past few years. As of Sept. 30, about 8 million of Google’s 14.3 million outstanding stock options had an exercise price of at least $400, leaving roughly 17,000 employees with options that are “under water” and can’t be cashed in now at a profit.
    Google reasons employees will have greater incentive to remain at the company and worker harder if they have stock options that are more likely to yield a windfall.
    The special treatment comes as Google is eliminating some employee perquisites and even laying off a smattering of workers to shore up its profits during the recession.

    For the record, I don’t think there’s anything wrong in what Google is doing. But I’m curious if we’ll hear the same screams of protest that we got in the summer of 2006.
    To use the problematic logic from the WSJ’s original article, Google executives are “profiting off” the global economic turmoil. Worse, they’re giving themselves raises while they’re laying their own people off.
    Where’s the media outrage?

  • Aflac’s Press Release
    Posted by on January 23rd, 2009 at 10:12 am

    I’m glad to see AFLAC (AFL) making a public statement:

    “I think it’s also appropriate to comment on the status of the perpetual debentures, or so-called “hybrid securities” we own. Based on preliminary year-end numbers, our holdings of hybrid securities at fair value were $8.1 billion, or approximately 11.8% of our consolidated investment portfolio of $68.6 billion. We purchased the hybrid securities from 1993 to 2005. For GAAP accounting purposes, the perpetual debentures are held in the available-for-sale category. As such, they are marked to market and reflected on the balance sheet at fair value. By contrast, these perpetual debentures are carried at amortized cost for statutory accounting purposes. That means that the changes in the fair value of these hybrid securities are not included in, and therefore do not impact, the risk-based capital ratio.
    “As we discussed in our third quarter earnings announcement and conference call, the Securities and Exchange Commission (SEC) issued a letter on October 14, 2008, to the Financial Accounting Standards Board (FASB) on the topic of hybrid securities. The SEC’s letter noted that due to the debt characteristics of hybrid securities, a debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses whether a debt or equity impairment approach is most appropriate. Aflac’s debt impairment approach is primarily based on an assessment of whether it is highly probable we will receive timely payment of interest and principal, whereas our equity impairment approach is based on the aging and degree of unrealized losses. With no pronouncement forthcoming from the FASB, we continued to apply our debt impairment model to the perpetual debenture investments as of December 31, 2008. Pending new guidance from the FASB, we will continue to use the debt impairment approach. In addition, for statutory accounting purposes, we will continue to evaluate our perpetual debenture holdings using the debt impairment approach, and we do not anticipate that approach changing.”

  • Worst Hoax Ever
    Posted by on January 22nd, 2009 at 4:08 pm

    Dude, if you’re going to be a jerk, at least get a copy-editor.

  • Strong Earnings from Baxter
    Posted by on January 22nd, 2009 at 2:19 pm

    Baxter International (BAX), one of the new stocks on my Buy List, posted decent earnings for the fourth quarter. Earnings-per-share came in at 91 cents, two cents ahead of the Street’s estimate. The company sees 2009 EPS ranging from $3.70 to $3.78. That could be on the low side.

    JP Morgan analyst Michael Weinstein wrote in a research note. “To put this in perspective, at the start of 2008, management provided initial guidance of $3.10 to 3.18 a share, yet ended up delivering $3.38.”

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  • AFLAC’s Hybrids
    Posted by on January 22nd, 2009 at 11:44 am

    The problems in the British banking sector have spread back across the Atlantic to strike our very own AFLAC (AFL). The stock is getting crushed today on concerns about its losses in UK bank investments. Like a lot of insurance companies, AFLAC invests in perpetual debenture investments or “hybrid securities,” and an analyst is worried about the losses they’ve taken in banks like Royal Bank of Scotland, HBOS or Barclays.
    Morgan Stanley said, ”If even a small portion of these losses are realized, the hit to Aflac’s capital ratios could be substantial, and their overall capital adequacy could be significantly less than most investors believe.”
    Barron’s notes:

    According to Morgan, Aflac has nearly $8 billion exposure to hybrid securities, with as much as 80% of this exposure to European financial services companies, including Royal Bank of Scotland (RBS) and Barclays (BCS), both of whose solvency has become a subject of open conjecture amid talk that the British Treasury might nationalize some of its financial institutions.
    Some of the hybrid securities products have declined as much as 30% in just the past week, so that many have traded at less than 50 cents on the dollar. It’s these losses, that, if realized, would hurt Aflac’s capital adequacy.

    The stock opened down 11% but it’s slid all morning. At one point, AFL was down 39% for the day. In the most recent 10-Q, AFLAC discussed some of the accounting issues involved in their hybrids:

    Securities and Exchange Commission Guidance: On October 14, 2008, the Securities and Exchange Commission (SEC) issued a letter to the FASB addressing recent questions raised by various interested parties regarding declines in the fair value of perpetual preferred securities, or so-called “hybrid securities,” which have both debt and equity characteristics and the assessment of those declines under existing accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid securities are often structured in equity form but generally possess significant debt-like characteristics. The SEC also recognized that existing accounting guidance does not specifically address the impact, if any, of the debt-like characteristics of these hybrid securities on the assessment of other-than-temporary impairments.
    After consultation with and concurrence of the FASB staff, the SEC concluded that it will not object to the use of an other-than-temporary impairment model that considers the debt-like characteristics of hybrid securities (including the anticipated recovery period), provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade), in filings after the date of its letter until the matter can be addressed further by the FASB.
    As more fully discussed in Note 3 of the Notes to the Consolidated Financial Statements, in light of the recent unprecedented volatility in the debt and equity markets, we have concluded that all of our investments in perpetual debentures, or hybrid securities, should be classified as available-for-sale securities. We have also concluded that our perpetual debentures should be evaluated for other-than-temporary impairments using an equity security impairment model as opposed to our previous policy of using a debt security impairment model until further guidance is provided by the SEC and the FASB. We recognized realized investment losses of $294 million ($191 million after tax) in the third quarter of 2008 as a result of applying our equity impairment model to this class of securities. The impact of classifying all of our perpetual debentures as available for sale and assessing them for other-than-temporary impairments under our equity impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period.

    AFLAC has said that it’s “comfortable” with its capital position. Earnings are due on Monday, February 4.

  • Political Interference in Bank Bailout Decisions
    Posted by on January 22nd, 2009 at 11:10 am

    I’m shocked! Absolutely shocked something like this could happen:

    Troubled OneUnited Bank in Boston didn’t look much like a candidate for aid from the Treasury Department’s bank bailout fund last fall.
    The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives’ use.
    Nonetheless, in December OneUnited got a $12 million injection from the Treasury’s Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.
    Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging that OneUnited be considered for a cash injection.

    The WSJ has a nice graphic showing the distribution of TARP funds.