Morning News: May 31, 2013
Posted by Eddy Elfenbein on May 31st, 2013 at 6:02 am

Euro-Area Inflation Accelerates as Food Costs Offset Energy Drop

IMF Warns Over Yen Weakness

Frankfurt “Blockupy” Protesters to Target ECB, Banks and Airport

What They Said: India’s Growth Slumps to a Decade Low

Unions Press to End Special Trade Status for Bangladesh

ANALYST: The Dominoes Are Falling, As the Fed’s Turning Point Is Crushing Emerging Market Currencies

GDP: U.S. Economic Growth Revised To 2.4% For Q1

Treasury Extends HAMP Mortgage-Modification Program Through 2015

Americans Have Rebuilt Less Than Half Of Wealth Lost To The Recession, Study Says

Smithfield Traders Wager Shuanghui’s Deal Wins

Not So Anonymous: Bitcoin Exchange Mt. Gox Tightens Identity Requirement

Sell U.S. Treasuries Before They ’Crash,’ Bank of America Says

General Petraeus, the General Partner

John Hempton: Practical Lessons in Assessing Exotic Risks

Phil Pearlman: The Difficulties of Measuring Sentiment

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Shady Stock Buybacks
Posted by Eddy Elfenbein on May 30th, 2013 at 10:57 am

James Saft at Reuters highlights an issue that I’ve often discussed. Namely, companies using stock buybacks to mask their executive compensation.

You know those “shareholder-friendly” stock buybacks the market is so excited about? Most of that money is going to offset options granted to executives.

Perhaps even better, much of the funding for this transfer of assets (or just reward for managerial excellence in a competitive marketplace, if you prefer) is being funded by debt.

And what is making this latest debt binge possible? Quantitative easing.

That is pretty much all you need to know as an investor, both about the state of American corporate governance and monetary policy.

Here are the facts about S&P 1500 companies, excluding financials, courtesy of Societe Generale quantitative analyst Andrew Lapthorne:

“In the first quarter of 2013, buybacks done to offset the dilution from executive stock options reached a post-crisis high. Meanwhile, the amount of buybacks done to reduce the overall share count (i.e. for the benefit of shareholders) reached a 32-month low,” he writes in a note to clients.

In other words, companies buying up shares with one hand and handing them out to employees with the other. And, at least in the first quarter, they were handing out so many that more than half of the billions being spent on buybacks was simply going to keep pace with new share issues, much of which is compensation.

Q1 GDP Growth Revised to 2.4%
Posted by Eddy Elfenbein on May 30th, 2013 at 10:16 am

The government revised the first-quarter GDP report down to 2.4% growth from the initial estimate of 2.5%. Obviously, that’s not a very big adjustment. We’re also starting to get some distance from Q1. We’re already two-thirds of the way through Q2.

This is a frustratingly low number, though some the details below the surface are encouraging. I’m also glad to see that there’s some momentum to the economy. Growth this year should surpass last year’s growth rate. We haven’t had back-to-back quarters of GDP growth topping 2.4% since 2007.

Morning News: May 30, 2013
Posted by Eddy Elfenbein on May 30th, 2013 at 6:52 am

Euro-Area Economic Confidence Climbs Amid Recession

Japan’s Stocks Correction Raises Stakes for Abe’s Growth Plan

Philippine Growth Underpinned By Revitalised Manufacturing Sector

Brazil Steps Up Pace of Rate Increases as Inflation Hurts Growth

Berkshire’s Abel Builds Buffett Energy Unit With Purchase

Shuanghui’s Smithfield Deal Pushes Morgan Stanley to Top of Asia M&A Tables

Nasdaq to Pay SEC $10 Million Over Facebook IPO

For Virtual-Currency Cops, Liberty Reserve Was the Easy Part

Roku Gets $60 Million in New Funding to Expand Streaming

Tesla: We’ll Hurry Up (On Superchargers), But You’ll Wait A Bit For A Cheaper Car

Volcker Warns on Limits of U.S. Fed’s Easy Money

Jeff Carter: Which Vertical Should You Invest In+Why The Stock Market Still Has Legs

Howard Lindzon: Mary Meeker….Pssst…The Internet Is Growing…Pass it on…And What is Really Happening on The Internet

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The Five-Year Breaks 1%
Posted by Eddy Elfenbein on May 29th, 2013 at 2:37 pm

For the first time in more than a year, the five-year broke above 1%. The yield hasn’t yet closed above 1%. Last summer, the yield got down to 0.54%.

The longer end of the yield curve is moving up but it’s interesting to see the middle part of the curve also being effected.

Sallie Mae To Splits in Two
Posted by Eddy Elfenbein on May 29th, 2013 at 10:49 am

One way of finding good stocks to buy is to wait for an historically strong company to spin off assets of split itself up. For example, in 1996, Dun & Bradstreet spun off Cognizant Technology Solutions. D&B also spun off Moody’s and Nielsen. Corporate Executive Board was spun off from the Advisory Board in the 1990s. Tyco recently spun off ADT and Pentair.

What you’ll often find is that one unit has been effectively subsidizing poorer performing units. This can create internal problems. Or a poor merger will mask how well a smaller unit has performed. Once freed from the mother ship, the small company can prosper as its own stock.

Today, Sallie Mae (or more formally, SLM Corp.) said it’s going to break itself in two. One company will be an education loan management business and the other will be a consumer banking business.

The principal assets of the business are likely to include approximately $118.1 billion in federally guaranteed loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for about 10 million federal education loan customers. This includes 4.8 million customer accounts serviced under Sallie Mae’s contract with the U.S. Department of Education.

Sallie Mae’s private education loan origination and servicing businesses, including Sallie Mae Bank and the private education loans it currently holds, will operate separately under the Sallie Mae brand. Joseph DePaulo, executive vice president of banking and finance will serve as the consumer education lending franchise’s CEO.

The consumer banking business’ assets are likely to include about $9.9 billion of assets made up mostly of private education loans and related origination and servicing platforms; cash and other investments and the Sallie Mae Upromise Rewards program.

The two separate companies will initially be owned by Sallie Mae stockholders, but the separation of the businesses does not require a shareholder vote.

Earlier this year, Abbott Labs splits itself up. The medical products company is still called Abbott Labs ($ABT). The research company has the ugly name AbbVie ($ABV). Interestingly, it spinoffs, it’s often the less-interesting company that prospers. Both look too expensive here.

Morning News: May 29, 2013
Posted by Eddy Elfenbein on May 29th, 2013 at 6:07 am

Euro Bulls Rule in Germany Amid Merkel-Draghi Aplomb

OECD Sees Weaker Recovery, Burden on Central Banks

IMF Forecasts Lower China Growth, Warns on Debt

Home Prices Rise, Putting Country in Buying Mood

Eurozone Fears for Slovenia as Bad Debt Brings Economy to a Standstill

Fannie, Freddie Regulator Reaches Settlement With Citigroup

Apple CEO Sees More ‘Gamechangers’; Hints At Wearable Devices

Wal-Mart Pleads Guilty to Dumping Hazardous Waste

Suntory Unit Gets $4.7 Billion IPO Approval

SoftBank and Sprint Said to Win National Security Clearance for Deal

Teco Energy Agrees to Buy New Mexico Gas for $750 Million

KKR, Carlyle Said To Eye Bids For Singtel’s $1.9 Billion Australia Unit

Eminem Meets Marchionne in Chrysler Redesign of 200 Sedan

Credit Writedowns: On QE, Inflation and Deflation

Jeff Carter: Gary Gensler of the CFTC: Thinks He Should Be King

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Our 2013 Buy List So Far
Posted by Eddy Elfenbein on May 28th, 2013 at 6:46 pm

Here’s a look at how our Buy List and the S&P 500 have done year-to-date:

We’re trying to beat the S&P 500 for the sixth year in a row. Unfortunately, we’re currently trailing the index. Through Tuesday, our Buy List is up 15.66% for the year while the S&P 500 is up 16.40% (not including dividends). I’m very competitive and I’m confident we’ll end on top once again.

The good news for us is that we’ve closed the gap considerably. At the start of the year, we charged out of the gate and ran more than 1.8% ahead of the index by January 24th. After that, the S&P 500 soared and the Buy List lagged. By April 23rd, we were more than 3.6% behind the S&P 500. The recent rally, however, has been very good for our Buy List.

I should take a step back and point out that our Buy List follows the S&P 500 pretty closely. When I talk about trailing the index by 3%, or 0.74% as we are now, that’s small potatoes compared with other portfolios, whether they be hedge funds or mutual funds. The daily changes between the Buy List and the S&P 500 have a correlation in excess of 92%. Goldman Sachs recently said that the average mutual fund is trailing the market by 10% this year.

The Gradual Rally
Posted by Eddy Elfenbein on May 28th, 2013 at 2:19 pm

This has been one of the most gradual rallies I’ve ever seen. It’s as if the market goes up by a small amount nearly every day. I find this statistic remarkable — the Dow hasn’t had a three-day slump all year.

The S&P 500 has now gone more than 100 days without having a 5% pullback. That’s the longest streak like that since early 2007. Bespoke notes that the largest pullback this year, measuring from the high, has been 3.49%. That’s the smallest since 1995.

“If You Only Know 5 Things About Investing”
Posted by Eddy Elfenbein on May 28th, 2013 at 11:08 am

The Motley Fool’s Morgan Housel is quickly becoming one of my favorite writers on things financial. Morgan recently wrote a great post titled, “If You Only Know 5 Things About Investing, Make It These.”

Here’s a sample:

2. The single largest variable that affects returns is valuations — and you have no idea what they’ll do

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.

The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% per year.

What about the change in earnings multiples? That’s totally unknowable.

Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?

If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.