Pfizer & Wyeth
Posted by Eddy Elfenbein on January 27th, 2009 at 9:26 pm

Now that Pfizer (PFE) and Wyeth (WYE) are getting together, I wanted to take a quick look at the long-term performance of both stocks. They’re done pretty well. Since the beginning of 1982, Pfizer’s stock is up 1,346.4% while Wyeth is up 875.4% (neither figure includes dividends). For comparison, the S&P 500 is up 589.1%.

Interestingly, both stocks peaked nearly ten years ago on the same day, April 12, 1999.

The Most Predictive Factor: Momentum
Posted by Eddy Elfenbein on January 27th, 2009 at 12:37 pm

Mebane Faber posts about Richard Tortoriello’s book, Quantitative Strategies for Achieving Alpha.

In the more than 40 single factors he tested from 1987-2006, guess which factor was most predictive?
Momentum.

This isn’t a surprise to me. I think the power of momentum is one of the great mysteries of finance. Why has it been so successful and can it make me money?
Mebane also notes the limitations of quant analysis. Right now, everyone is working from the same data so how can anyone gain an advantage?

Credit Default Swaps
Posted by Eddy Elfenbein on January 27th, 2009 at 10:44 am

Peter J. Wallison writes “Everything You Wanted to Know about Credit Default Swaps–but Were Never Told.” This comes on the heels of Gretchen Morgenson’s recent column, “Time to Unravel the Knot of Credit-Default Swaps.”

Thain Doing His Part
Posted by Eddy Elfenbein on January 27th, 2009 at 10:13 am

According to the New York Post, while dining recently, John Thain, “loudly told the waiter, for all to hear, ‘under the circumstances with this tough economy, I think I’ll have tap water.'”
Going by his recent track record, I’m guessing he offered to pay $3.7 billion for the tap water.

Dividends Being Cut at Fastest Pace in 50 Years
Posted by Eddy Elfenbein on January 27th, 2009 at 9:54 am

Bank of America (BAC) recently cut its annual dividend from $1.28 a share to four cents. (Why even keep it?) Of course, now that you’re on Uncle Sam’s bailout list, it’s hard to justify send profit checks to your owners. Dividends had made a big comeback in recent years, now it looks like the trend is in the other direction:

Already this year, seven companies in the Standard & Poor’s 500 index have decreased their dividends, removing some $12 billion from shareholders’ pockets in the coming months. On Monday, Pfizer became the latest blue-chip company to do so.
These cuts serve up another hit to shareholders who have already been battered by the steep declines in the stock market. That is especially true of retirees, who tend to be attracted to so-called “widows and orphans” stocks that provide them with a steady cash flow.
If the trend continues, this will be the worst year for dividend cuts since 1958, when annual payments fell by 8.4 percent, according to new research from S&P.
“It is easy to say this is going to be the worst in 50 years, but the bigger question is whether it is going to be much worse than that,” said Howard Silverblatt, senior index analyst at S&P.

Geithner Is Confirmed
Posted by Eddy Elfenbein on January 26th, 2009 at 6:24 pm

The Senate votes to confirm Geithner 60-34.

Cyclical Stocks Still Have a Long Way to Fall
Posted by Eddy Elfenbein on January 26th, 2009 at 3:59 pm

Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). For such a simple metric, I think is an often-revealing look at the market’s mentality. What it tells us is how well economically sensitive stocks are performing compared with the overall market.
About two years ago, I started warnings investors that cyclical stocks were heading towards a top. On July 19, 2007, the CYC reached its peak ratio against the S&P 500 at 0.7273. Since then, all most all kinds of stocks have down poorly but cyclical stocks have down much worse. Through Friday, the S&P 500 is down 46.4% from July 19, 2007, but the CYC is down 62.3%.
The other reason why I like to follow this ratio is that it tends to move in multi-year waves, as one would expect from looking at economic cycles. Until the ratio starts to show some improvement, I’m not going to be terribly optimistic for the broader economy. The ratio is currently around 0.51 which is still well above typical cycle lows.

Blame China
Posted by Eddy Elfenbein on January 26th, 2009 at 12:56 pm

Sebastian Mallaby claims China’s currency policy was a major cause of the housing bubble:

Geithner is correct that China manipulates its currency. What’s more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China’s cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.
China’s leaders protest that they are being unfairly scapegoated. Yet while there are rival accounts of the origins of the crisis, neither has the explanatory force of the blame-China narrative.

A Capital-less Financial System
Posted by Eddy Elfenbein on January 26th, 2009 at 12:19 pm

Here’s a sample of a fascinating article from Ricardo Caballero at the Financial Times Economists Forum:

Forcing institutions to raise capital, be it private or public, at panic-driven fire sale prices threatens enormous dilutions to already shell-shocked shareholders, further exacerbating uncertainty and fuelling the downward spiral. This is self-defeating.
The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses.
I believe it is feasible to run such a system for a while, because, essentially, distressed financial institutions need (regulatory) capital for two basic purposes: To act as a buffer for negative shocks, and to reduce their risk-shifting incentives by exposing them to their losses.
However these two functions can be replaced, respectively, by the provision of a comprehensive public insurance, and by strict (and intrusive) government supervision while this insurance is in place.
A few days ago the UK announced a policy package that almost got it right, by pledging to insure banks’ balance sheets and other private liabilities.
Unfortunately, it backfired and caused a worldwide run on financials because it did not dissipate, and even exacerbated, the fear of forced capital raising (or nationalisation).
The events following Lehman’s demise should have taught us that this fear needs to be put to rest until we can return to normality. Financial institutions are too intertwined to predict with any precision the impact of diluting any significant stakeholder, and the markets are too fearful to feed them more uncertainty. Strong guarantees with strict supervision, and the commitment of no further capital injections at fire sale prices (directly or through convertible bonds) should go a long way in building a foundation for a sustained recovery.

Buy List Updates
Posted by Eddy Elfenbein 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.