• Bloomberg on Danaher
    Posted by on May 20th, 2015 at 11:01 am

    At Bloomberg, Justin Fox writes about Danaher (DHR), one of our favorites.

    Every once in a while a business journalist notices how well Danaher Corp. has performed during the past few decades, and feels compelled to remark upon it. Well, now I’ve noticed, and I guess the most appropriate remark is, “wow.” Or maybe “jeepers.”

    There are a few companies with even more impressive long-run returns than this — Berkshire Hathaway and Altria since the late 1960s; Microsoft and Oracle since their 1986 initial public offerings. But everybody knows about them (well, maybe Altria is a surprise). Danaher is in rarified territory, but it doesn’t get much attention.

    What does the Washington-based company do? It makes essential-but-obscure stuff — engine brakes for trucks, testing equipment for electronics, diagnostic instruments for doctors, braces for your teeth. The big name-brand exception used to be the Craftsman hand tools sold at Sears, but Danaher sold that business to Bain in 2012. Such dealmaking is core to the company’s identity — it has made hundreds of acquisitions since the early 1980s and sold off a lot too. Last week, though, it seemed to take things to a new level. Danaher said that it will be splitting into a “science and technology growth company,” which will keep the Danaher name, and a “diversified industrial growth company,” which won’t. It also announced the $13.8 billion acquisition of Pall Corp., a maker of filtration and purification systems that will be part of the science-and-technology Danaher, and the beginning of an exchange offer in which Danaher spins off to shareholders its stake in NetScout Systems, with which it recently merged its communications-equipment business.

  • Hormel Foods Earns 67 Cents per Share
    Posted by on May 20th, 2015 at 10:47 am

    Good earnings for Hormel Foods (HRL). The company just reported fiscal Q2 earnings of 67 cents per share which was four cents per share more than estimates. That’s also 29% over last year’s Q2 earnings. Revenues climbed 1.5% to $2.28 billion which was below Wall Street’s estimates of $2.39 billion.

    “We achieved record second quarter earnings and sales, driving double-digit earnings growth with all five segments delivering increases,” said Jeffrey M. Ettinger, chairman of the board, president and chief executive officer.

    “Although declining pork markets drove lower pricing and net sales this quarter, Refrigerated Foods increased operating profit by 52 percent with strong sales growth of foodservice and retail value-added products,” commented Ettinger. “Jennie-O Turkey Store entered the quarter with excellent momentum and drove robust sales and earnings gains, but exited the quarter with substantial supply chain challenges brought on by avian influenza. Grocery Products benefited from input cost relief and growth of our SPAM® family of products, while the export business in our International segment continued to be challenged by port issues and the strong U.S. dollar,” commented Ettinger. “Specialty Foods delivered earnings growth as the team continues to achieve synergies with the recently acquired CytoSport business.”

    Hormel acknowledges that avian flu will be an issue for them, but they’re sticking by their full-year guidance of $2.50 to $2.60 per share. They’ve already made $1.30 per share for the first half of this fiscal year.

    “While we enjoyed an excellent first half, we expect Jennie-O Turkey Store to be significantly challenged going forward due to the impacts of avian influenza on our turkey supply chain,” commented Ettinger. “Refrigerated Foods and Grocery Products will continue to benefit from value-added product growth and lower pork input costs. Specialty Foods is positioned to deliver substantial earnings increases in the back half with the CytoSport business. Taking these factors into consideration, we are maintaining our 2015 non-GAAP earnings guidance at the lower end of our previously stated $2.50 to $2.60 per share range.”

    The stock has been up as much as 5.7% today.

  • Morning News: May 20, 2015
    Posted by on May 20th, 2015 at 7:17 am

    Doubts Over Greece Add to Euro’s ECB-Driven Frailty

    Japan’s Economy Grows At Fastest Pace In A Year On Boost From Inventory

    Bubble Blowing to Continue So Long as Yellen Isn’t Raising Rates

    Fed’s Evans: Rate Hike Not Appropriate Until Early 2016

    Wal-Mart Eyes Amazon in Potentially Costly e-Commerce Battle

    Yahoo Affirms Spinoff Plan as IRS Comments Trigger Share Slump

    CME to Launch Eight European Power Futures Contracts on CME Europe From June 15

    Gail in Talks With Shell to Sell U.S. LNG Supply

    Altice in Advanced Talks to Buy Cable Company Suddenlink

    UBS to Pay $545 Million Over Forex Scandal, Rivals Await Fate

    Hanergy Plunges 47% as Skies Darken for China’s Solar Industry

    Lowe’s Misses on Top, Bottom Lines

    Staples Reports 39% Decline in First-Quarter Profit

    Jeff Carter: 4 Ways to Build a Startup Community: Local Investors Need to Ignore Talks of Startup Bubble

    Joshua Brown: The Number One Thing That Makes You Susceptible To Fraud

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  • The Elfenbein Theory to Explain the Entire Stock Market
    Posted by on May 19th, 2015 at 8:11 am

    I had a little extra time this morning, so I’d thought I’d do a quick post that explains the entire stock market for you.

    Before I begin, let me stress that I’m discussing generalities about how the stock market behaves. As you read this, I urge you to focus on the larger themes I’m discussing instead of getting bogged down in nitpicky details or in excessive demands for precision. Out of necessity, my explanation is over-generalized.

    The first thing to understand is that the stock market is overwhelmingly influenced by interest rates. It’s difficult to overstate this key fact. More specifically, the stock market is ruled by long-term and short-term interest rates. Of the two, long-term rates are more influential.

    A few years ago, I ran some through some historical data. I isolated all the days in which the 10-year Treasury yield closed lower. On those days, the stock market averaged an annualized gain of more than 42%.

    The bond market leads the stock market. Whatever the bond market is doing, the stock market will likely do a few weeks or months later. The two assets are in constant battle for investors’ love. Their perpetual tug-of-war is at the heart of financial markets. Short-term rates are also important, and that’s why the Federal Reserve is so closely watched.

    The movement of short-term and long-term rates also determines which types of stocks do well. When long-term interest rates rise, cyclical stocks tend to outperform the overall market. When long-term rates fall, defensive stocks tend to lead the market. Importantly, this is a short-term relationship that grows weaker as time wears on.

    With short-term rates, we see a similar but slightly different effect. When short-term rates fall, value stocks outperform. When short-term rates rise, growth stocks tend to lead.

    These are the two primary “dimensions” of the stock market (Cyclical/Defense, Value/Growth). These categories have some similarities, and they’re easily confused, but I want to highlight their differences. The Cyclical/Defense divide is fought over the future of the production part of the economy. Are we producing more than we’re consuming, or consuming more than we produce? The Value/Growth divide is about the financial part of the economy. How much inflation will there be, and what are real rates doing?

    By Cyclical stocks, I mean stocks in sectors like Energy and Materials which are closely tied to the economic cycle. The Defensive sectors are areas such as Consumer Staples and Healthcare, which are areas that aren’t so hurt in downturns.

    Value stocks are generally in high-dividend areas like REITs and Utilities. As short-term rates drop, investors naturally crave those dividends. Growth stocks tend to be in low-dividend areas like Tech and more inflation-sensitive sectors like Commodities and Gold Mining.

    As I said, these two dimensions are related. They’re cousins in much the same way that short-term and long-term yields are cousins. Now with this background, let’s envision the market as a matrix with short-term rates on the horizontal axis and long-term rates on the vertical.

    You can probably see where I’m going with this. We now have four quadrants. The upper right is when both long-term and short-term rates are rising. The lower left is when both ends are falling. The lower right is when short-term rates are rising and long-term rates are falling. In other words, the yield curve is getting narrower. The upper left is the opposite: the yield curve is getting wider.

    image1473

    When long- and short-term rates both rise, industrial stocks do well. When both rates fall, dividend stocks do well (more probably, they’re falling the least). When the yield curve widens, financial stocks do well. Bear in mind that a bank is basically the yield curve with incorporation papers. As the yield curve narrows, defensive stocks do well. Importantly, we’ll also see that when a particular quadrant behaves one way, one of its opposing quadrants will do the exact opposite.

    Let me add a clarification. It may be the case that industrial stocks lead the market, not when short-term and long-term rates are literally moving in opposite directions, but when the spread is increasing. What the market is concerned with is the relative standing of short and long rates against each other.

    With the four quadrants, the general stock market moves clockwise around the matrix. Quadrant I is the sweet spot of the rally. These stocks have a double-whammy effect: they outperform while the market itself is rallying. Hence the name cyclicals. Conversely, they underperform when the market is tanking (Quadrant III).

    I should add that few stocks are pure breeds belonging solely to one quadrant. Typically, they have mixed DNA. For example, a stock like Chevron is a classic energy stock, but it also pays a generous dividend. You’ll also see healthcare stocks, which are classic defensive stocks, that are partly related to tech stocks.

    As I mentioned before, these classifications are most important in the short term. As time goes on, the part of any stock which reflects its individual nature will become more prominent. Each day, two biotech stocks may track each other closely, but after five years, they can be miles apart. The more times that passes, the stronger this effect is.

    The idea that different sectors do better or worse at different points in the economic cycle is nothing new (see here and here). It’s been pointed out many times before. The Elfenbein Theory, however, is a way for investors to see an overriding framework for what drives this behavior.

    (You can sign up for my free newsletter here.)

  • Morning News: May 19, 2015
    Posted by on May 19th, 2015 at 7:12 am

    Euro, Bond Yields Tumble as ECB Hints at Faster Buying Pre-Summer

    German Investor Morale Drops in May, Buffeted by Market Turmoil

    Deutsche Bank Begins U.K. Review as EU Exit Vote Looms, FT Says

    Athens Sees EU Deal Soon, Greeks’ Approval of Government Stance Dwindles

    U.K. Flirts With Deflation as Prices Fall in April

    Oil Prices Decline as Dollar Strengthens

    Weak First-Quarter Growth Due to Seasonal Issues After All, SF Fed Says

    High Court Ruling Adds Protections for Investors in 401(k) Plans

    Wal-Mart Results Miss Estimates as Currency Crimps Earnings

    Buoyant Housing Market Can’t Hide Home Depot’s Hacking Scars

    Starbucks Link 7,000 Stores with Spotify to Provide In-Store Music for Customers

    Mongolia and Rio Tinto in Deal to Build Copper Mine

    Altera’s Price of Refusing Intel

    Roger Nusbaum: Market in Retro Grade

    Howard Lindzon: Off to China…and Will The Nasdaq Beat Bitcoin to 6,000?

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  • Don’t Fret About Tobin’s Q
    Posted by on May 18th, 2015 at 9:49 am

    Bloomberg has a piece this morning on another valuation indicator. This time it’s Tobin’s Q, showing that the stock market is dramatically overvalued.

    If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you’d have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality.

    The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets — higher than any time other than the Internet bubble and the 1929 peak.

    I’m usually very skeptical of these market models. For one reason, just because the market is over-valued doesn’t mean that it won’t become even more richly valued. It’s very difficult to precisely time when the market will pop. The bubble of the 1990s kept inflating for more than three years after Alan Greenspan’s warning. Once again, Janet Yellen has recently warned us about high valuations.

    We also have to be careful when we talk about “the market” as if it’s just one giant stock. The great bubble of the 1990s was largely driven by large-cap tech stocks. Many small-cap stocks never surged and hence, never crashed. There are thousands of stocks out there and we have just 20 on our Buy List. Small investors can get away with owning as few as eight stocks. I don’t see the need to obsess about “the market.”

    I’ll say this again, and it’s an unpopular view: the stock market rarely reaches a bubble. This shocks people, but I stand by it. By a bubble, I mean when valuations soar dramatically past fundamentals. Just because valuations are elevated doesn’t mean that’s a bubble—and it certainly doesn’t mean that we’re going to revert to the mean anytime soon. More often, stock prices fall when fundamentals fall. That’s not a bubble. Not every selloff is the ending of a stock bubble. Even in 1929, valuations weren’t that excessive. Only in the last few months did prices get expensive.

    These valuation measures imply that there’s a long-term relationship that’s still applicable. Jack Bogle famously said that the four most dangerous words are “it’s different this time.” But the truth is that it’s different this time. It’s different every time. We value equities more than we used to.

    Any investors who based their investment decisions on the Q ratio would have missed most of the rally since 2009, according to Jeffrey Yale Rubin, director of research at Birinyi’s firm. The measure rose above its historic mean three months into this bull market and since then, the S&P 500 has climbed 131 percent.

    The valuation revolution happened in the 1950s and 60s, and we’ve never gone back. Notice how rarely anyone talks about the stock bubble of the 1950s. Stocks had an amazing run from 1949 to 1956. It’s one of the greatest on record. But it’s not considered a bubble…because it never crashed.

    For some reason, it’s considered much more sophisticated to warn that stocks are in a terrible bubble. No one gets credit for telling people that there’s not much to worry about.

  • Morning News: May 18, 2015
    Posted by on May 18th, 2015 at 7:19 am

    Greek Endgame Nears for Tsipras as Collateral Evaporates

    China’s Improving Property Scene Still a Drag

    Egypt’s Stock Market Rises After Halt of Capital Gains Tax

    Nobel Winner’s Math Is Showing S&P 500 Unhinged From Reality

    Bubble Blowing to Continue So Long as Yellen Isn’t Raising Rates

    Goldman Sachs Cuts Crude Price Forecasts for the Next Five Years

    Anadarko Picks CBI, Chiyoda, Saipem for Mozambique LNG Plant

    Berkshire Fights Rooftop Solar as Buffett Champions Green Energy

    Endo to Buy Par Pharma for About $8 Billion

    Alibaba Sued in U.S. By Luxury Brands Over Counterfeit Goods

    Target Puts Some Food Suppliers On The Back Burner

    Kijiji, a Flop in the U.S., Rules Online Classifieds in Canada

    Tom Rothman’s High-Wire Act at Sony Pictures

    Cullen Roche: Thoughts on The Bond Debacle

    Jeff Miller: Weighing the Week Ahead: Will the Interest Rate Spike Threaten Stock Prices?

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  • How Data Nerds Found A 131-Year-Old Sunken Treasure
    Posted by on May 17th, 2015 at 9:59 pm

  • Vooza
    Posted by on May 16th, 2015 at 12:24 am

  • RIP: B.B. King
    Posted by on May 15th, 2015 at 4:48 pm