DirecTV Beats By 23 Cents per Share
Posted by Eddy Elfenbein on February 20th, 2014 at 9:52 am

This morning, DirecTV ($DTV) reported earnings of $1.53 per share which was 23 cents better than expectations. This was a very strong quarter.

Latin America continues to be a growth powerhouse. Revenues were up 10% in that region and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, cloudy in some part of Latam.

DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few that do it right. They actually reduce their overall share count. Working out the math, $3.5 billion is roughly 9% of DTV’s market cap.

The shares gapped up to a new all-time high this morning.

Morning News: February 20, 2014
Posted by Eddy Elfenbein on February 20th, 2014 at 2:20 am

G20 Final Document to Address U.S. Policy Impact on Emerging Markets

Don’t Cut Too Quickly, IMF Warns Advanced Economies

Global Bond Frenzy Raises Concerns

Forex – USD/JPY Rises After Record Trade Deficit in Japan

China Factory Gauge Falls Amid Risks of Credit Souring

Singapore’s Soaring Land Prices ‘Suicidal’ for Developers

F.C.C. Seeks a New Path on ‘Net Neutrality’ Rules

Fed Puts Rate Increase on the Radar

Facebook to Buy Messaging App WhatsApp for $19 Billion

Safeway Putting Itself Up For Sale

Signet Jewelers to Acquire Rival Zale

Peltz Revives Bid to Split PepsiCo

Einhorn Says Don’t Be Fooled as Companies Beat Estimates

Roger Nusbaum: If You Can’t Retire at 30 Then How About 38?

Jeff Miller: Mean Reversion: The Misunderstood “Mystery Method” Behind Big Market Blunders

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Will Investing Be Free?
Posted by Eddy Elfenbein on February 19th, 2014 at 6:18 pm

Herbert Moore has a provocative thesis — that investing will be free in five years. I’m not sure if I agree with his endpoint, but the trends he describes are certainly real.

Here’s a sample:

Trading fees: Zero is inevitable

Investors are also increasingly benefiting from lower trading fees. Whereas brokerage firms charged close to $40 per trade through the 1980s and 1990s, online brokerages now charge less than $10. With scalability, the marginal cost to a broker for processing a trade becomes zero, and brokerages will be able to offer free trading by focusing on other revenue streams.

Processing a trade costs a brokerage (virtually) nothing

Trading commissions consist of a clearing fee (though if the broker self clears there is no clearing fee), an exchange fee, and any markup by the broker to cover the cost of the platform, customer service, etc. Of these, the exchange fee is the only inescapable cost, while the others are simply markups charged by a clearing or brokerage firm. The actual costs of clearing a trade through an exchange are minimal at just fractions of a cent. The NYSE, one of the more expensive exchanges, charges $0.0025 if you are taking liquidity with a trade, and rebates $0.00150 if you are providing liquidity. While the brokerage and clearing infrastructure can be expensive to create, at thousands or millions of trades, the cost per individual trade becomes negligible to the firm. An external brokerage and clearing firm like Apex (clears for smaller online brokerages like TradeKing, Zecco, Firstrade and others) charges just pennies per share on anything over 100,000 trades per month, giving a proxy for how much the internal trading infrastructure costs at scale.

It’s true that investing has become more democratic over the years. Discount brokers, ETFs, trading in decimals, plus growth of blogs and Twitter have opened the door on Wall Street.

The downside is that like the sorcerer’s apprentice, the potential for mischief has risen as well.

Morning News: February 19, 2014
Posted by Eddy Elfenbein on February 19th, 2014 at 7:00 am

Japan Says Prices ‘Rising Moderately’ For First Time in More Than Five Years

Puerto Rico Wants to Incur More Debt to Regain Financial Footing

Obamacare’s Latest Surprise for Taxpayers?

Fed Requires Foreign Banks in U.S. to Hold More Money in Reserves

Minimum Wage Report Puts Democrats on Defensive

Household Debt Rises at Fastest Pace Since Global Financial Crisis

Darker U.S. Homebuilder Mood Not Just Due to Bad Weather

Peugeot’s $3 Billion Loss Shows Rescue Deal is Just a Start

Icahn’s Fight Opened Door to Actavis’s Post-Generics Evolution

Candy Crush Maker, King, Seeks I.P.O. to Further Its Momentum

Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year

Capital One to Revisit Credit Card Contract Terms After Outcry

Bitcoin Shop: The Latest Growth Opportunity In The Cryptocurrency World

U.S. Commercial Banks’ Changing Asset Mix

Jeff Carter: Using Algebra For Politics and Policy

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The Dollar Trap
Posted by Eddy Elfenbein on February 18th, 2014 at 11:01 am

At Bloomberg, William Pesek writes on Eswar Prasad’s new book, “The Dollar Trap.” This part caught my attention:

Prasad’s argument is that for all the worries about U.S. policies and debt, and the many efforts to build up an alternative, the dollar’s linchpin role is only strengthening. What struck me most, though, is that China still can’t see that it’s the dupe in this giant pyramid scheme.

China’s $3.8 trillion of currency reserves are the largest stockpile ever amassed. Economists have long seen that money as a strength — the ultimate rainy-day fund should China’s shadow-banking system blow up. Trouble is, the value of those holdings depends on China’s $1.3 trillion of U.S. Treasuries. If they plunge in value, all hell breaks loose and officials from Beijing to Brasilia will scramble to exit the American bird cage.

(…)

As Prasad writes, “China now has a strong incentive to support the dollar’s value, limiting its losses for the time being but at the cost of getting even more entangled in the dollar’s sticky web.”

The Chinese central bank is stuck in a dangerous cycle. Every time it clamps down on credit to curb excessive lending, markets panic, interbank borrowing rates skyrocket and policy makers back off. At the same time, a minicrisis in emerging markets this year will greatly complicate President Xi Jinping’s efforts to restructure the economy away from exports and hyperinvestment.

The irony is that that means even more dollar purchases. This dynamic runs counter to Beijing’s aspirations for a greater global role for the yuan, and to the desire of Russians and others to get the dollar out of their lives. Indeed, one no longer hears much about the regional bank Xi proposed in October, to invest in infrastructure across the region. The Chinese leader had pledged to provide funding from what essentially would be a local International Monetary Fund free from those pesky Americans. The only problem is that the $7 trillion-plus Asia would tap for such an enterprise is largely beyond its reach.

“So the choice the U.S. offers the rest of the world is simple: you get to choose when to take a loss on your holdings of our debt — now or later,” Prasad says. “Faced with this stark choice between two evils, many emerging markets end up being boxed into maintaining export growth by accepting the unpleasant trade-off of a loss on their reserve holdings in the future. The choices they have made — intervening in foreign exchange markets and accumulating reserves as a self-insurance mechanism — have only fueled U.S. fiscal profligacy and strengthened the dollar’s role in the global monetary system.”

Medtronic Earns 91 Cents Per Share
Posted by Eddy Elfenbein on February 18th, 2014 at 9:44 am

Medtronic ($MDT) just reported Q3 earnings of 91 cents per share which matched expectations. Revenues rose 3.4% to $4.16 billion which was $10 million more than forecast.

Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. For the first three quarters of their fiscal year, MDT has earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 to $1.13 per share. Wall Street had been expecting $1.12 per share.

This was a good report. The stock is currently down about 2% but I doubt it will last.

Forest Labs to Be Bought Out
Posted by Eddy Elfenbein on February 18th, 2014 at 9:12 am

The big merger news this morning is that Actavis is going to buy Forest Labs ($FRX) for $25 billion. The cash-and-stock deal is for $89.48 per share which is a 25% premium over FRX’s close on Friday.

Forest Labs is notable because it’s been one of the best performing stocks for many years. I should warn you that this long-term data isn’t always reliable but according to the charts at Google Finance, FRX was going for 2.7 cents per share in early 1978. That works out to a 330,000% gain over 36 years. That’s more than 25% per year.

I trust the data from Yahoo Finance a little more but it doesn’t go back as far. Yahoo has FRX going for as little as $1.01 per share in May 1988. That adjusts for four 2-for-1 splits.

The shares had hit a peak of $78 in 2004 and had gradually fallen down to $18 by March 2009. As late as November 2012, FRX was going for less than $32 per share.

It’s odd how a company can watch a stock plunge 76% and then see it rebound by 289% — and then decide to buy it for a 25% premium.

Morning News: February 18, 2014
Posted by Eddy Elfenbein on February 18th, 2014 at 6:46 am

Japanese Stocks Lose Darling Status

Bank of Japan Holds Fire Despite Soft GDP, Expands Loan Programs

Gold Smuggling in India Likely to Rise if Curbs Stay – WGC

Understanding the Crucial Link Between Money Supply and Inflation

Danish Outsourcing Group ISS Plans One of Biggest Nordic IPOs

France Tries to Tempt In More Foreign Investment

European Car Sales Rise a Fifth Month on Volkswagen Growth

FX Traders Facing Extinction as Computers Replace Humans

Hedge Funds Raise Gold Bull Bets as Paulson Holds

Pratt, GE Battle Over Billions in Jet Engine Orders

Temasek Seeks to Sell $3.1 Billion Stake in Thailand’s Shin Corp to SingTel

Jim Rogers Tells Us What Everyone Keeps Getting Wrong About China

Kentucky Announces 5 Hemp Pilot Projects

Joshua Brown: The Best and Worst Thing About Investing

Cullen Roche: Is QE the Future of Monetary Policy?

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Q4 Earnings Calendar
Posted by Eddy Elfenbein on February 18th, 2014 at 5:31 am

Sixteen of our 20 Buy List stocks report on the Mar-Jun-Sep-Dec earnings cycle. Here’s a preliminary calendar. Please note that some of these dates may move.

Value Works But You Need to be Patient
Posted by Eddy Elfenbein on February 17th, 2014 at 6:53 pm

Interesting article from James Saft at Reuters:

Ben Inker, of value-investing-orientated funds house GMO LLC, coined the slow trade term to describe a fascinating phenomenon: if something looks good from a value perspective now, you usually do better by waiting a year.

“The slightly odd fact is that moving slowly on value-driven decisions has simply made more money historically than moving immediately would have,” Inker, who is co-head of asset allocation at GMO, wrote in a note to clients.

“Buying the assets that are cheapest at any given point in time has been a profitable strategy historically, but buying the assets that were cheapest on average during the past year, or odder still, the assets that were cheapest a year ago irrespective of their valuation today, has done even better.” (here)

First, let’s look at the data.

Between December 1978 and June 1999 a portfolio comprising equal weights of the two cheapest equity markets outperformed the broad market by 2.8 percent per year in the following year.

Make one little adjustment – hold not what is cheapest today but what was cheapest one year ago – and you up your outperformance to a whopping 7.4 percent annually.

Since June 1999 the outperformance is less, just 1.8 percent annually, as against just an 0.4 percent annual outperformance if you buy what is cheapest in real time. Quite possibly the diminished effect since 1999 is because the globalization of both money flows and policy have cut into the advantages you can wring from country effects on portfolio construction.

Take it to a stock level and the advantages of buying what was cheap a year ago still stand out, according to Inker. If you buy the cheapest 10 percent of the market on a price to book basis you’ll have outperformed the market by 2.5 percent a year since 1965. Do the same thing lagged by a year and you outperform by 3.5 percent.

Even more impressive, the slow trade play seems to be able to help compensate for the general underperformance of cheap stocks since 1992. If you were to have bought the cheapest 10 percent of the market, measured by price to book, since 1992 you would have actually underperformed by 1.6 percent a year. Do it on a one-year delay and you still get a 2 percent outperformance.