Black Friday — 143 Years Ago Today
Posted by Eddy Elfenbein on September 24th, 2012 at 11:59 am

Today is the 143rd anniversary of Black Friday when some speculators tried to corner the gold market. The government started selling gold and the speculators were wiped out.

Here’s the entry from Wikipedia:

During the reconstruction era after the American Civil War, the United States government issued a large amount of money that was backed by nothing but credit. After the war ended, people commonly believed that the U.S. Government would buy back the “greenbacks” with gold. In 1869, a group of speculators, headed by James Fisk and Jay Gould, sought to profit off this by cornering the gold market. Gould and Fisk first recruited Grant’s brother-in-law, a financier named Abel Corbin. They used Corbin to get close to Grant in social situations, where they would argue against government sale of gold, and Corbin would support their arguments. Corbin convinced Grant to appoint General Daniel Butterfield as assistant Treasurer of the United States. Butterfield agreed to tip the men off when the government intended to sell gold.

In the late summer of 1869, Gould began buying large amounts of gold. This caused prices to rise and stocks to plummet. After Grant realized what had happened, the federal government sold $4 million in gold. On September 20, 1869, Gould and Fisk started hoarding gold, driving the price higher. On September 24 the premium on a gold Double Eagle (representing 0.9675 troy ounces (30.09 g) of gold bullion at $20) was 30 percent higher than when Grant took office. But when the government gold hit the market, the premium plummeted within minutes. Investors scrambled to sell their holdings, and many of them, including Corbin, were ruined. Fisk and Gould escaped significant financial harm.

Subsequent Congressional investigation was chaired by James A. Garfield. The investigation was alleged on the one hand to have been limited because Virginia Corbin and First Lady Julia Grant were not permitted to testify. Garfield’s biographer, Alan Peskin, however, maintains the investigation was quite thorough. Butterfield resigned from the U.S. Treasury. Henry Adams, who believed that President Ulysses S. Grant had tolerated, encouraged, and perhaps even participated in corruption and swindles, attacked Grant in an 1870 article entitled The New York Gold Conspiracy. Grant’s suspected involvement also led his presidency to be called the Era of Good Stealings.

Although Grant was not directly involved in the scandal, his personal association with Gould and Fisk gave clout to their attempt to manipulate the gold market. Also, Grant’s order to release gold in response to gold’s rising price was itself a manipulation of the market. Grant had personally declined to listen to Gould’s ambitious plan to corner the gold market, since the scheme was not announced publicly, but he could not be trusted. Gould had promoted the plan to Grant as a means to help farmers sell a bountiful 1869 wheat crop to Europe.^[1]

A highly fictionalized account of Fisk’s life, culminating in a dramatic presentation of the gold corner, was shown in the 1937 film The Toast of New York.

Morning News: September 24, 2012
Posted by Eddy Elfenbein on September 24th, 2012 at 6:31 am

European Stocks Slip

Merkel, Hollande EU Unity Pledge Fails to Stretch to Bank Union

Monti Should Seek Aid to Straitjacket Successor

Fed Recovery Doubts Spur Investor Bid for Treasuries

Oil Falls Below $110 On Growth Worries

Apple’s Feud With Google Is Now Felt on iPhone

Toyota Drops Plan For Widespread Sales Of Electric Car

CGGVeritas to Buy Fugro’s Seismic Unit for $1.6 Billion

Galloping Horse America and Reliance Media Words Jointly Submit Winining Bid to Acquire Assets of Digi

EADS Says BAE Talks Productive, Expects To Meet Deadline

Data Barns in a Farm Town, Gobbling Power and Flexing Muscle

Jeff Miller: Weighing the Week Ahead: Time for a Rebound in Confidence?

Epicurean Dealmaker: Defending the Indefensible

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CWS Market Review – September 21, 2012
Posted by Eddy Elfenbein on September 21st, 2012 at 9:05 am

“In modern business it is not the crook who is to be feared most; it is the honest man who doesn’t know what he is doing.” – William Wordsworth

On the surface, Wall Street seemed very stable this week. The last three trading sessions all resulted in moves of less than 0.13% for the S&P 500. That’s not much at all, and it’s a welcome change from the 3% or 4% daily swings we saw this time last year. But this September, Wall Street is in a serene mood. The Volatility Index, or VIX, dropped below 14 on Wednesday, which is less than one-third the peak reading of one year ago.

But I’ll warn you, I don’t expect this quiet time to last. Just below the surface, unseen by most investors, the investing terrain is changing, and I think we’re in for an ugly few weeks. Don’t be too alarmed. I expect that after the election in November, Wall Street will be ready for a strong year-end run.

In this week’s CWS Market Review, we’ll look at what has me so concerned, plus I’ll show you the best ways to position your portfolio for the turbulent weeks ahead. I’ll also highlight the recent Buy List earnings reports from Bed Bath & Beyond ($BBBY) and Oracle ($ORCL). But first, let’s take a closer look at the quiet before the storm.

The Quiet before the Storm

The mood is quietly shifting on Wall Street as investors are beginning to set their sights on the third-quarter earnings season, which begins in just a few weeks. Analysts currently expect a modest earnings decline of 2.2%. That sounds about right, give or take. Once again, Wall Street will have to survey the damage done to profits thanks to the mess in Europe and the slowdown in China.

A possible preview came this week when FedEx ($FDX) slashed its full-year earnings forecast. This is noteworthy because FDX’s business is a decent barometer for the larger economy. The company had expected FY 2013 earnings to range between $6.90 and $7.40 per share. Now FedEx expects an earnings range between $6.20 and $6.60 per share.

What’s interesting is that FDX’s customers seem to be turning away from high-cost overnight services in place of slower and lower-cost alternatives. That’s what happens when people need to cut costs. And it’s not just FedEx. Bank of America ($BAC) also made headlines this week when it announced plans to lay off 16,000 people before the end of the year. I was also struck when Thursday’s report on initial jobless claims came in worse than expectations.

While the stock market has had an impressive 14% run since the June low, there’s been a nearly unnoticed but ultimately positive development for disciplined investors. Specifically, stock correlations have fallen. By this, I mean the tendency for stocks to move the same way each day. During the summer, it seemed like every stock was joined at the hip to every other. In July, the correlation among the ten S&P 500 sectors was an astonishing 89%.

This is bad news for large institutional traders because they need to prove to their clients that they can stand out from the crowd (and thereby justify their large fees). So when all the fish are swimming together, it’s harder for any single one to be the first up the falls. This is probably why hedge funds are having a terrible year. With our strategy of focusing on high-quality stocks, I’m cheering the decline in correlations. This makes it easier to pick up bargain stocks that have strayed far from the pack. Not only is stock correlation dropping, but the correlation between gold and the S&P 500 fell from 64% in July to 32.6% in August.

What’s causing the decline in correlations? That’s hard to say exactly. My guess is that this “disaggregation” is probably a reflection of the first hints of optimism in Europe. That’s why Draghi’s recent move was so important. When things there look so bleak, it was easy to treat anything that used dollars as the same thing. Well, that’s not the case anymore. Looking back on it, I think the IPO flop of Facebook ($FB) woke up a lot of investors.

The key for investors, as always, is to focus on high-quality stocks such as the members of our Buy List. I want to highlight Ford ($F) for a moment because this stock has been such a tremendous buying opportunity for us. I’ve mentioned several times recently how inexpensive it has become. Just last month, I wrote that I didn’t see how Ford could be trading for less than $10, but it was. Now the market has turned and this week, the shares got as high as $10.66. Ford does about one-fourth of its business in Europe, so the numbers in the near-term will be soggy, but that won’t last. Ford is an excellent buy anytime the stock is below $12 per share.

Take Advantage of the Drop in BBBY

On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal Q2 earnings of 98 cents per share which was four cents below Wall Street’s estimate. If you recall, when the previous earnings report came out in June, the company warned investors that Q2 earnings would range between 97 cents and $1.03 per share. At the time, Wall Street had been expecting $1.08 per share, so the stock got chopped for a 17% loss the next day.

So Bed Bath & Beyond’s warning was accurate. Interestingly, net income fell by 2.2%, but earnings-per-share increased from 93 cents to 98 cents per share thanks to fewer outstanding shares. BBBY seems to be one the few companies that truly reduces their share base. Total revenue rose 12.05% to $2.593 billion. The key retailing metric, comparable store sales, rose by 3.5%, which is a decent number.

The problem with Bed Bath & Beyond right now is that the company has become overly reliant on discount coupons in order to get people in the door. That’s fine during a recession when there’s a lot of pressure on you to clear out your shelves. But now that the economy isn’t so dire and the housing sector is showing some tentative signs of recovery, they need to have greater pricing power.

Bed Bath & Beyond’s net profit margin dropped from 9.91% for last year’s second quarter to 8.65% for this year’s Q2. Put it this way—a falloff in margins like that turns a sales increase of 14.57% into an increase in profits of 0%. It’s hard to fight against the discounting tide.

But the most important news was the forecast for Q3 and the entire year. Bed Bath & Beyond sees Q3 earnings ranging between 99 cents and $1.04 per share. The Street had been expecting $1.02, so it was still within range. The company kept their full-year guidance the same, between the high single digits and the low double digits. Investors, however, reacted very negatively, and the stock dropped nearly 10% on Thursday.

While I’m concerned about the company’s overuse of coupons, I still like BBBY a lot. They overcame the housing bust, which was much more serious than this. To reflect the selloff, I’m lowering my Buy Below on Bed Bath & Beyond to $67 per share. This is a very good company.

Oracle Is a Good Buy Below $35

After the closing bell on Thursday, Oracle ($ORCL) reported fiscal Q1 earnings of 53 cents per share, which matched Wall Street’s forecast. Personally, I was expecting much more. This was a decent increase from last year’s Q1, when Oracle earned 48 cents per share. The trouble spot was on the top line. Oracle’s sales fell by 2% to $8.18 billion, which was $230 million below the Street’s forecast.

Like a lot of companies, Oracle got dinged by currency costs. The strong dollar puts the squeeze on all that money flowing back to the United States. Oracle said that adjusting for currency cost them three cents per share in earnings.

The good news is that Oracle’s licensing revenue rose by 5% last quarter. This is important because it’s probably a good sign of future revenue. Unfortunately, this growth is a slight drop-off from the 7% rate in the previous quarter. Still, Oracle’s CFO said “we’re off to a good start in the new year,” and I have to agree.

On the conference call, Oracle said it expects Q2 earnings ranging between 59 and 63 cents per share and sales growth of flat to 4%. The Street had been expecting 61 cents per share and 4.7% growth. So the outlook was mostly within expectations. I think traders were nervous about this earnings report, as shares of ORCL pulled back on Wednesday and Thursday, but these numbers allay any worries I had. Oracle is a very solid buy up to $35 per share.

Updates to Our Buy Below Prices

Before I go, I want to make a few adjustments to our Buy Below prices. You’ll notice that many of our buy prices are pretty close to the current prices. That’s exactly how I want it. This is an unforgiving market, so let’s not chase stocks but instead wait for good prices to come to us.

For adjustments, let’s start with Hudson City ($HCBK), which continues to look good. I’m raising the buy price to $8. DirecTV ($DTV) just hit a 52-week high last Friday. I’m raising the Buy Below on DTV to $55 per share. I also want to bump up Medtronic’s ($MDT) Buy Below to $46.

That’s all for now. Next week, we’ll get important reports on consumer confidence and durable-goods orders, plus another revision to the Q3 GDP. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: September 21, 2012
Posted by Eddy Elfenbein on September 21st, 2012 at 8:29 am

Italy, Spain Won’t Seek Aid Unless Yields Surge, Official Says

Spain’s Leader Fails to Reach Deal With Catalonia

ECB Says Cost of New Frankfurt Skyscraper Soars by 41%

Draghi Plan Helping Only Those Who Don’t Need It

Canadian Auto Workers Union and G.M. Agree on Contract

Lonmin Deal With Illegal Strikers Sets ‘Dangerous’ Precedent

Oil Trims Biggest Drop Since June as Losses Considered Excessive

Behind the Scenes, Some Lawmakers Lobby to Change the Volcker Rule

Wal-Mart Is Deleting the Kindle From Stores

Bank of America Ramps Up Job Cuts

Norfolk Southern Falls as Profit Echoes FedEx Slowdown

Microsoft, HP Skirted Taxes Via Offshore Units-U.S. Senate Panel

Universal Wins E.U. Approval for Purchase of EMI

Credit Writedowns: Expats’ Leaving China In Droves Is A Bad Economic Signal

Howard Lindzon: Entrepreneurs and Angels are Arm Chair Quarterbacks…Revisited

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Morning News: September 20, 2012
Posted by Eddy Elfenbein on September 20th, 2012 at 6:27 am

Euro Zone Business Decline Grinds On Despite ECB Action

Spain Borrowing Costs Ease At Auction

Central Banks Flex Muscles

Sky Ruled Fit For Broadcast License, But James Murdoch Comes In For Criticism

Libor-Like Manipulation Possible in Other Benchmarks, Iosco Says

China Manufacturing May Shrink in September on Weak Exports

Hong Kong, China Shares Rise After BOJ Spurs Hopes Beijing Will Ease Policy

US Housing Recovery Gains Momentum In August

Starbucks Gives Single-Serve a Shot

Groupon Launches Credit Card Payment Business

General Mills Profit Rises as Yogurt Makes Comeback

Adobe Cuts Forecast as Users Migrate Online

Deutsche Bank Agrees to Sell BHF to RHJ for $497 Million

Salesforce.Com’s Marc Benioff Preaches The Social Enterprise Gospel

Cullen Roche: A Flaw in the QE Expectational Transmission Mechanism?

Jeff Carter: The Virtuous Cycle

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Astrology in the Stock Market
Posted by Eddy Elfenbein on September 19th, 2012 at 8:40 pm

Heidi Moore, the ruler of Twitter, has a piece about investors who base their decisions on astrology. Yes, this is real.

Starich charges $237 annually for her newsletter, which 300 traders subscribe to for news of what will happen to the stock prices of companies, or even bigger, to the Federal Reserve. She sees dark times ahead in the Fed’s horoscope.

“They now have Saturn squared to Neptune, which is really bankruptcy,” Starich explains.

Neptune represents money. But when Saturn shows up in a chart, it indicates restriction. So for the Fed, that means the “fiscal cliff is here, and there’s no place to go except to print more money or unravel these financial institutions,” Starich says.

Of course, a lot of Wall Street traders, and others, don’t want it to be known that they’re relying on anything other than their own talent. Arch Crawford, a financial astrologer who actually got his start on Wall Street as a stock analyst at Merrill Lynch, recalls one subscriber asking for his newsletter in “brown paper wrappers.”

Crawford warns his 2,000 subscribers particularly against the dangers of Mercury in retrograde, a time when the planet appears to be going in reverse across the sky. The phenomenon, which happens three times or more a year, indicates a month when communications will be screwed up. He warns his subscribers never to start anything new during that time. He points to the fact that Knight Capital launched a new software program in August, when Mercury was in retrograde, and the brokerage firm nearly went out of business. He also notes that most major market glitches have happened while Mercury was in retrograde.

What I find fascinating is how they interpret some star pattern to concrete advice.

Bed Bath & Beyonds Earns 98 Cents Per Share
Posted by Eddy Elfenbein on September 19th, 2012 at 4:24 pm

Well, management at Bed Bath & Beyond ($BBBY) was right: Q2 was a lousy quarter. For the months of June, July and August, the company earned 98 cents per share. Sales rose 12.1% to $2.593 billion. They had warned us that earnings would range between 97 cents and $1.03 per share. Wall Street had been expecting $1.02 per share.

For Q3, Bed Bath & Beyond sees earnings between 99 cents and $1.04 per share. Wall Street was again expecting $1.02 per share. For the entire year, the company sees earnings rising somewhere between the high single digits to low double digits.

Bed Bath & Beyond Inc. today reported net earnings of $.98 per diluted share ($224.3 million) in the fiscal second quarter ended August 25, 2012, an increase of approximately 5.4% versus net earnings of $.93 per diluted share ($229.4 million) in the same quarter a year ago. Net sales for the fiscal second quarter of 2012 were approximately $2.593 billion, an increase of approximately 12.1% from net sales of approximately $2.314 billion reported in the fiscal second quarter of 2011. Comparable store sales in the fiscal second quarter of 2012 increased by approximately 3.5%, compared with an increase of approximately 5.6% in last year’s fiscal second quarter.

During the fiscal second quarter of 2012, the Company repurchased approximately $199 million of its common stock representing approximately 3.1 million shares. As of August 25, 2012, the remaining balance of the current share repurchase program authorized in December 2010 was approximately $414 million.

For the fiscal first half ended August 25, 2012, the Company reported net earnings of $1.87 per diluted share ($431.2 million), an increase of approximately 13.3% over net earnings of $1.65 per diluted share ($410.0 million) in the corresponding period a year ago. Net sales for the fiscal first half of 2012 were approximately $4.811 billion, an increase of approximately 8.8% from net sales of approximately $4.424 billion in the corresponding period a year ago. Comparable store sales for the fiscal first half of 2012 increased by approximately 3.3%, compared with an increase of approximately 6.3% in last year’s fiscal first half.

Here are the sales and earnings figures for the past few quarters:

Notes on My Gold Model
Posted by Eddy Elfenbein on September 19th, 2012 at 3:34 pm

By far the most-viewed post I’ve ever done was my post on a possible model for the price of gold.

The model is based on the idea that gold follows an inverse relationship with real (meaning after inflation) interest rates.

Here’s a look:

In this chart, the gold line is the change in gold prices over the last year. The blue line is the three-month Treasury yield minus inflation. These two lines seem to move in the opposite direction.

My model states that whenever real short-term interest rates are below 2%, gold rallies. Whenever the real short-term rate is above 2%, the price of gold falls. Gold holds steady at the equilibrium rate of 2%. For every one percentage point real rates differ from 2%, gold moves by eight times that amount per year. So if the real rates are at 1%, gold will move up at an 8% annualized rate. If real rates are at 0%, then gold will move up at a 16% rate.

When I first developed this idea, I was really aiming for a model to create a model for the price of gold. I think an accurate model needs to incorporate two ideas — a breakeven interest rate and a volatility ratio. In my original model this was 2% and a ratio of eight.

I believe those are useful long-term averages but I don’t believe those hold up well in the short-term. These aren’t constants. Gold has not done terribly well recently despite real interest rates being negative. I suspect that the breakeven rate has fallen from 2% and now may be close to 0%.

Think of the breakeven rate as the global price to employ capital. The problems in Europe and the slowdown in China may have pushed the rate downward.

Bed Bath & Beyond Leads Its Industry
Posted by Eddy Elfenbein on September 19th, 2012 at 10:58 am

Spencer Jakab in the Wall Street Journal has some good things to say about Bed Bath & Beyond ($BBBY)

Part of Bed Bath’s success stemmed from others’ failures, specifically the bankruptcy of competitor Linens N’ Things, plus smaller operations. But that is giving management short shrift. It did a good job of controlling costs and piling up cash for both organic growth and timely acquisitions, snapping up two companies in the recent quarter.

That is amply reflected in Bed Bath’s share price. Although the stock sold off by 17% in June, when the company reported same-store sales decelerated in the fiscal first quarter, they have since clawed back around two-thirds of that.

Now, for example, Bed Bath’s ratio of enterprise value, or market value plus net debt, to sales is 65% higher than the average of four indirect competitors: Pier 1 Imports, Macy’s, Williams-Sonoma and Target. Bed Bath is in the middle of the pack on multiple of price to earnings. But that comparison is flattered by margins that may have benefited from the vacuum in its retail category. Oppenheimer noted Tuesday that Bed Bath is relying more on coupons lately to drive sales growth, which could damp profitability.

It would be natural, but premature, for some of the enthusiasm about housing’s rebound to carry over to Bed Bath. While home prices have recovered, existing- and new-home sales are far below peak levels. And the percentage of first-time buyers remains below historical norms. Those are the ones most likely to buy sheets, towels and small appliances in the wake of purchasing a home.

Bed Bath has made the most of some tough years but now finds its valuation beyond compare.

He also notes that BBBY will have 60% more stores by the end of this fiscal year than it had five years ago, while operating margins are higher now than at the height of the housing boom.

A Very European Break Up (She’s German, He’s Greek)
Posted by Eddy Elfenbein on September 19th, 2012 at 10:36 am