Morning News: May 9, 2012
Posted by Eddy Elfenbein on May 9th, 2012 at 5:47 am

Moody’s Bank Downgrades Risk Choking European Recovery

German Exports, Imports Hit Highs

CAAM: Beijing Should Refrain From Policies Affecting Auto Industry Development

U.S. Millionaires Told Go Away as Tax Evasion Rule Looms

Oil Prices Fall Ahead Of US Data, Rising OPEC Output

Morgan Stanley’s Michael Grimes Is Where Money and Tech Meet

For Morgan Stanley, Third Cut Is the Deepest

Toyota to Treble Profit This Year, Trim Costs

Disney Races to Exploit ‘Avengers’ After 21% Profit Rise

Margin Calls Cost Green Mountain Chairman, Director

Glaxo to Begin Hostile Offer for Human Genome Sciences

Prudential Confident On Outlook As New Business Profits Rise

ING Profit Excluding Charges Beats Estimates, Boosting Shares

Allianz Confirms Target

Softbank: In Strategic Alliance To Create PayPal Japan

Howard Lindzon: Momentum Tuesday…Cracks!

Epicurean Dealmaker: Occupy Galt’s Gulch

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DirecTV Earns $1.07 Per Share
Posted by Eddy Elfenbein on May 8th, 2012 at 10:20 am

DirecTV ($DTV) reported first-quarter earnings of $1.07 per share. That beat Wall Street’s consensus by either one or two cents, depending on the source. A year ago, DTV earned just 85 cents per share.

DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America.

Put it this way: DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they aded 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America.

The problem is that it costs more to get a subscriber in Latin America, so that hurts DTV’s margins. This was a good quarter for DTV. The stock is off some because it wasn’t the kind of blowout quarter that we’ve seen.

The company said that it plans to make $4 per share this year and $5 next year. I think they can surpass those marks with ease.

The Flash Crash Fairy Tale
Posted by Eddy Elfenbein on May 8th, 2012 at 9:45 am

Two years ago, the stock market crashed in a few minutes, and in almost the same amount of time, it recovered.

The public wanted to know why; how could this have happened?

So the government did what governments do: they filed a report. The official report blamed a securities firm, Waddell & Reed, for dumping too many futures at once and screwing things up.

This is a nice story for the government to tell because it lays the fingers on a known entity. The bad boys at Waddell & Reed screwed up the market.

The government’s story has one small problem — it’s not true. At least not according to Eric Scott Hunsader. Mark Buchanan writes:

The actual crisis struck in the three minutes between 2:41 p.m. and 2:44 p.m., when the market fell another 5 percent to 6 percent. Hunsader’s analysis suggests this plunge was caused by high-frequency traders. They typically act as liquidity providers, standing ready to buy and sell at certain price levels. But the day’s volatility prompted them to dump their holdings to avoid losses. In a matter of minutes, they actively sold an accumulated stock of about 2,000 E-mini contracts. It was this selling, not Waddell & Reed’s passive orders, that caused liquidity to disappear.

There is nothing blameworthy about what the high-frequency traders did. Market makers aren’t charities, and their algorithms were only saving their skins amidst extreme market turbulence. Their actions do, however, rather undermine the common argument that high-frequency traders bring wonderful benefits to the market through the liquidity they provide. That liquidity, as many have pointed out, has a rather ghostly quality and tends to vanish when needed most.

The government’s story boils down to “some big meany came along and harmed our precious market.” They found a culprit and blamed it. That’s what governments do.

The government couldn’t have told us the real reason. So why did the market crash?

The answer is that there’s no answer. It’s just what markets do.

Morning News: May 8, 2012
Posted by Eddy Elfenbein on May 8th, 2012 at 5:46 am

Socialist Elephants Stampede for Jobs With Hollande

Bankia’s Rato Steps Down as Spain May Offer Banks Rescue

India Vows Cuts in Iranian-Oil Imports as Clinton Visits

Consumer Credit in U.S. Increases by Most in 10 Years

U.S. Could Make $15.1 Billion on AIG Bailout: GAO

HSBC Profit Beats Analysts’ Estimates on Investment Bank

KPN Jumps After America Movil Makes $3.4 Billion Offer

Toshiba Forecasts 83% Profit Increase, Beating Estimates

Electronic Arts Drops as Forecasts Misses Analysts’ Views

MasterCard Heats Up Battle For ‘Mobile Wallet’

Munich Re Returns to Profit as Disaster Claims Fall

Statoil Profit Falls

As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s

Amazon Leaps Into High End of the Fashion Pool

Nigerians Outstrip Americans in London Fashion Spending

Joshua Brown: Where Is Everybody?

Cullen Roche: A New Way of Thinking About the Global Machine…

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Cognizant Technology Solutions Plunges, But It’s Not a Buy Yet
Posted by Eddy Elfenbein on May 7th, 2012 at 2:49 pm

One of my favorite companies is Cognizant Technologies Solutions ($CTSH). Note that I didn’t say it’s one of my favorite “stocks.” Being a great company and a great stock aren’t necessarily the same thing.

Cognizant has made its mark by running computer call centers in India. This has been a hugely profitable business for them. Check out this growth in EPS since 2005: 53 cents, 78 cents, $1.15, $1.44, $1.78, $2.37 to $2.85. That’s exactly what I like to see–big increases each year.

We had the stock on our Buy List in 2009 and it made 151% for us. But at the end of the year, I thought the stock had become far too expensive at $45 and removed it from the Buy List. For comparison, the company had earned $1.78 per share that year.

Even though I got out early, I didn’t complain. By the end of 2010, Cognizant had run up to $73. By April 2011, CTSH was over $83 per share, meaning it had nearly doubled from a price I thought was too expensive.

This is always the trouble spot for investors. Momentum runs it higher, but anyone with a basic understanding of math can tell you the stock is in trouble. The only question is when. As long as there’s no bad news, the good times can last.

That came to an end today. Cognizant announced that it’s lowering its full-year guidance…are you sitting down?

About 2%.

So the shares are down around 20%. In other words, all the air that had gone into inflating the stock is leaving despite the actual news not being that bad. To be more precise, Cognizant lowered its full-year estimates from $3.69 to $3.62 per share.

The company failed to grow as fast as it had expected, especially in the financial services and pharmaceutical sectors, President Gordon Coburn told Reuters.

The banking sector – which brings in a quarter of Cognizant’s revenue – was flat in the first quarter for the company, hurt by softness among top North American clients.

“In North America … the incredible volatility many of our (banking) clients are seeing right now is causing them to pause,” CEO Francisco D’Souza said on a conference call.

The company counts J.P. Morgan Chase & Co, Rabobank and UBS AG among its core banking clients.

Cognizant said it expects its banking and pharmaceutical sectors to remain sluggish for the rest of the year.

I wouldn’t jump in just yet, but if CTSH can prove that it’s still growing at a rapid clip, I think this could be a very good buy.

The Yen’s Impact on AFLAC’s Earnings
Posted by Eddy Elfenbein on May 7th, 2012 at 1:11 pm

I’ve been watching AFLAC‘s ($AFL) investor presentation. Since so much of AFLAC’s business is generated in Japan, the yen-to-dollar exchange rate can add or detract to the company’s bottom line.

To their benefit, AFLAC prefers to gauge their performance before the impact of currencies. Here’s how it works: The stronger the yen, the more it helps AFLAC. Last quarter, the exchange rate added four cents to AFLAC’s earnings.

The average exchange rate last year was 79.75. If that holds true for 2012, AFL sees full-year earnings between $6.46 and $6.65.

If the exchange rate is 70, AFLAC estimates that will add 60 cents per share to 2012’s bottom line. If it’s 75, that will add 27 cents per share. At 80, it’s minus one penny. At 75, it’s minus 25 cents per share.

The latest exchange rate is 79.9460. I don’t anticipate this being a major issue for AFLAC this year, but I wanted investors to know the dynamics because this can have a big impact on their business.

On May 15th and 16th, the company will have more to say about guidance for 2013.

Sysco Earns 49 Cents Per Share
Posted by Eddy Elfenbein on May 7th, 2012 at 9:10 am

First-quarter earnings season will soon be coming to a close, but there are still a few key reports left. This morning, Sysco ($SYY) reported adjusted earnings-per-share of 49 cents. Although that was five cents better than Wall Street’s consensus, Sysco’s CEO said the earnings “fell short of our expectations.” It was a one-penny increase over last year.

Let’s dig into the numbers a bit. Sales rose 7.6% to 10.5 billion which is a record for the company. The March quarter was Sysco’s fiscal third. For the first three quarters of the fiscal year, Sysco has earned $1.50 per share compared with $1.38 last year.

Sysco said that food cost inflation is running at 5.5%. I think it’s interesting to note that commodity inflation tends to weigh heavily on low-income consumers. Sysco noted that inflation in meat and poultry is over 10%. The company also said that foreign currency exchange rates knocked 0.2% off their sales growth.

Last November, Sysco raised the quarterly dividend by one penny to 27 cents per share. That was the 42nd-straight annual dividend increase. I don’t know if they’ll raise their dividend again this year. I’m assuming they will to keep the streak alive, but it will most likely be another one-penny increase.

The important part is that Sysco is clearly able to cover their dividend. A dividend decrease is certainly not in the works. Going by Friday’s close, Sysco yields 3.87%.

Morning News: May 7, 2012
Posted by Eddy Elfenbein on May 7th, 2012 at 5:57 am

Greek Election Gridlock Raises Risk for Bailout, Euro Future

Hollande Signals Return of France as Complicated Ally for West

Swiss Stocks Fall After Elections; Roche, Swiss Re Drop

European Elections Hit Asian Markets

Spanish Banks Resist Idea of ‘Bad Bank’ Bailout

Indonesia 1Q GDP Growth Slows; Central Bank May Be On Hold

U.S. Treasury Sells $5 Billion of AIG Stock

Stock Trading Is Still Falling After ’08 Crisis

UBS Bets on Toxic Debt Demand After Fed’s Record Sale

Buffett Says Berkshire Will Top $34 Billion Railroad Deal

AT&T Making Big Investment in Home Monitoring

Satellite Firm Spurns Bid for Takeover From Rival

Global Bakery Giant CSM Jumps on Shift From Bakery Supplies

Study Says Broker Rebates Cost Investors Billions

Jeff Carter: Entrepreneurship is Merit Based

Stone Street: Some Lingering Thoughts/Observations Economic and Otherwise

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“Twelve Facts That May Surprise You About the Housing Bust”
Posted by Eddy Elfenbein on May 4th, 2012 at 3:36 pm

Nick Timiraos has a great post at the WSJ’s Real Estate blog which summarizes the findings of an academic paper. Here are 12 facts about the housing bust that may surprise you:

Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.

Fact 2: No mortgage was “designed to fail.” Instead, the products weren’t designed to sustain a drastic decline in home prices.

Fact 3: There was little innovation in mortgage markets in the 2000s.

Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.

Fact 5: The originate-to-distribute model was not new.

Fact 6: MBS, CDOs, and other “complex financial products” had been widely used for decades.

Fact 7: Mortgage investors had lots of information.

Fact 8: Investors understood the risks.

Fact 9: Investors were optimistic about house prices.

Fact 10: Mortgage market insiders were the biggest losers.

Fact 11: Mortgage market outsiders were the biggest winners.

Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.

Here’s the paper.

NFP = +115,000
Posted by Eddy Elfenbein on May 4th, 2012 at 8:44 am

Another tepid jobs report. The economy created just 115,000 new jobs last month. The unemployment rate is down to 8.1%.

Since February 2009, the economy has created 152,000 new jobs. Between January 2008 and February 2010, the economy lost 8.779 million jobs. We’ve made back 3.745 million (or 43%).

The jobs market peaked 12 years ago when the unemployment rate hit 3.8%. Since then, the civilian non-institutional population has grown by 30.766 million while the labor force has grown by just 11.614 million. The number of employed is up by 4.595 million and the number of unemployed rose by 7.019 million.

For us to have the same jobs-to-population ratio as 12 years ago, we’d need to have 15.324 million more jobs, or 23.669 million fewer people.

The number of Americans either unemployed or not in the workforce now stands at a staggering 101 million. That’s an all-time record.