Goldman Breaks Below $100
Posted by Eddy Elfenbein on September 12th, 2011 at 2:54 pm

Shares of Goldman Sachs ($GS) dropped below $100 very briefly today. This is an enormous drop off from the start of the year when the stock was at $168. Bear in mind that Goldman earned over $22 per share in 2009.

From the Department of Silly Analysis
Posted by Eddy Elfenbein on September 12th, 2011 at 12:59 pm

E.S. Browning’s “Abreast of the Market” column today features a very bullish forecast made by Professor Richard Sylla of NYU.

Using 10-year averages of annual market returns, including dividends and adjusted for inflation, Prof. Sylla and his colleagues found that U.S. stocks have risen and fallen in surprisingly consistent waves for more than 200 years. The pattern has become even steadier since World War II.

I think this sort of analysis is highly superficial yet (and?) it seems to be very popular. First, looking at very long-term market performance is interesting from a historical perspective but much of this data is far from rigorous. The stock market was a minor speck of the American economy in 1790. Equity markets in a modern sense didn’t develop until the 1920s. Plus, the markets were not very efficient through the 1960s. I like to look at long-term data as well, but it’s a mistake to draw precise conclusions from it.

If the market sticks to its long-term pattern, Prof. Sylla says, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from today. The Standard & Poor’s 500-stock index might hit 2300, up 99% from Friday’s close of 1154.23.

It’s one thing to say that stocks are below their long-term average. I’m fine with that and it’s something you can easily show. But as with many in the art of pseudo-forecast, Professor Sylla is hedging his call beyond reason.

Now a recovery with 6.5% average annual returns, equal to the historical inflation-adjusted average, would fit, he says. He isn’t saying stocks will rise that much each year, just that this could be the average.

Prof. Sylla does see a 25% chance that the next decade could fall well short of that.

Sorry–this is where you lose me. A 25% chance isn’t exactly small. Making any forecast and giving yourself a one-in-four chance of being WAY off the mark makes the other 75% totally worthless.

Greece Gets Ready to Default
Posted by Eddy Elfenbein on September 12th, 2011 at 12:20 pm

The stock market is down yet again today. The S&P 500 got as low as 1,141.53 today so it’s still above the August 8th closing low of 1,119.46. One interesting aspect of today’s sell-off is that gold is also down today.

The financial markets are beginning to adjust to the reality that Greece is going to default. Forbes writes: “Last week five-year Greek credit-default swaps indicated a 92% chance that the country would miss its debt payments.” This is having major spillover effects. The euro has been clobbered against the dollar and many other currencies. Now it looks like French banks are in serious trouble as Moody’s is considering downgrading them.

The National Association for Business Economics today cuts its forecast for U.S. GDP growth. They see the economy growing by 1.7% this year and 2.3% next year. That’s down from their earlier estimates of 2.8% for this year and 3.2% for 2012.

The Financial Sector ETF ($XLF) bounced off $12 per share. If it breaks below $12, I think it will be an outstanding buy. I also see that Nicholas Financial ($NICK) dropped below $10 per share which is less than its book value of $10.18.

Morning News: September 12, 2011
Posted by Eddy Elfenbein on September 12th, 2011 at 5:43 am

Britain’s I.C.B. Recomends Gradual Banking Reform

Germany Readies Surrender Over Greece

Draghi’s Hands May Be Tied on ECB Stimulus

Euro Falls To More Than 10-Year Low Vs Yen

China’s False Promises

SocGen Sovereign Debt Manageable, to Speed Changes

India Industrial Output Grows at Slowest Pace Since ’09, Missing Estimates

Oil Drops for Third Day on Concern Debt Crisis to Limit Growth, Fuel Need

Technip Buys Global Industries in $937 Million Subsea Expansion

Suzuki-Volkswagen Alliance Teeters

Foster’s Rejects SABMiller’s Ex-Dividend Offer

Dell Loses Orders as Facebook DIY Servers Gain

Carol Bartz Resigns From Yahoo Board

Brian Shannon: Stock Trading Ideas for 9/12/11

Paul Kedrosky: What Caused the Recession of 1937-38?

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Crossing Wall Street Ten Years Ago
Posted by Eddy Elfenbein on September 11th, 2011 at 8:46 am

I want to draw your attention to a worthy organization named Tuesday’s Children which supports families that were impacted by the events of ten years ago.

Kenneth Rogoff on the Pro-Inflation Argument
Posted by Eddy Elfenbein on September 10th, 2011 at 2:32 pm

The Boston Globe has an interesting article about Kenneth Rogoff who makes the case that the economy needs some inflation right now. (Note: I’m not endorsing it, just highlighting the argument.)

Here’s a sample:

Like corruption, crime, and asbestos, “inflation” is a word that many Americans imagine in all-red capital letters, flashing across TV screens amid warnings of crisis. For anyone who remembers the gloomy, scary 1970s, when the inflation rate in the United States reached double digits, the word is shorthand for an economy that has spiraled out of control, the dollar losing value and prices climbing feverishly. “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man,” said Ronald Reagan in 1978, as nervous citizens imagined the day when they’d have to push a wheelbarrow full of cash to the grocery store in order to buy a loaf of bread.

That particular nightmare never came to pass, thanks to drastic measures taken by the Federal Reserve. For the better part of the past 30 years, the dollar has stayed stable, reassuring American families and the nation’s trading partners, with the central bank standing guard over the economy and doing everything necessary to keep inflation low.

You might say that Kenneth Rogoff has been one of the guards. As a research economist at the Federal Reserve during the first half of the 1980s, he helped ensure that the word “inflation” would never again flash across American TV screens. His reputation as a conservative-minded inflation hawk followed him from the Fed to the International Monetary Fund to his current position in the economics department at Harvard.

But then came the financial crisis of 2008, and the ensuing slump. And as the economy has continued to stagnate, Rogoff, 58, has become the flag-bearer for an unlikely position: that as we struggle to help the economy find its way out of the darkness, inflation could be the answer. It’s time, Rogoff says, to put Reagan’s “hit man” to work for the good guys.

CWS Market Review – September 9, 2011
Posted by Eddy Elfenbein on September 9th, 2011 at 8:54 am

As ugly as trading has been since mid-summer, the stock market is finally showing some strength lately. I was particularly impressed by Wednesday’s huge rally and by the fact that we didn’t give it all back on Thursday. Up till now, every rally has been met with an equal or greater sell-off.

Over the past month, the S&P 500 has made three major bottoms and each time, we failed to go lower. While that’s certainly no proof that a new up phase is at hand, it may indicate that the worst is past us. Bear in mind that the S&P 500 hasn’t made a new closing low in one month.

In this issue, I want to take a step back and address some issues impacting the broader economy and how they affect the financial markets. Don’t worry. I’ll steer away from any “econospeak,” and I’ll try to make it very easy to understand. First, the good news is that corporate profits have rebounded fairly well since the worst days of the financial crisis three years ago.

Analysts on Wall Street still have pretty optimistic earnings forecasts for the rest of this year and into next year as well. For Q3, analysts see earnings for the S&P 500 coming in at $24.95. For Q4, they see profits of $26.23. That translates to profit growth of 15.72% and 19.61% respectively. In other words, earnings aren’t merely expected to grow but the rate of growth is expected to increase as well. I should caution you that these forecasts aren’t terribly reliable beyond a few months. The other good news is that corporate balance sheets are, as a whole, pretty strong.

The big question, however, is “Why is the economy still doing so poorly, especially on the jobs front?” The answer is that it all comes down to housing. I’m making a huge generalization here, but economic recoveries in this country have often been fueled by the housing sector.

Think of it this way: A developer’s decision to build a new 123-unit housing development or a brand-new 214-unit high-rise glass condo has a major ripple effect on the local economy. Except for a large government project, few things are as economically powerful as a new real estate construction project. You’re getting a big injection of money concentrated in one area all at once. Just think of how the cash flows through the local economy: the local contractors and sub-contractors get work. Those folks, in turn, spend their new cash at local stores and restaurants. What happens is that it starts a virtuous cycle.

It doesn’t end there. The other aspect that feeds off housing is the financial sector. Most Americans have far more invested in their homes than in the stock market. New homeowners take out mortgages, then savers get their interest and the banks get their profits. Once again, the virtuous cycle feeds upon itself and everyone is happy.

Yet this time, the housing sector is a bust because during the housing bubble, we built too many homes. Way too many homes! The Wall Street Journal recently reported, “Sales of newly built homes, which peaked at 1.3 million units in 2005, were running at an annual rate of just 298,000 units in July and are on pace to post the lowest count this year since record keeping began in 1963.”

Obviously, those excess homes won’t get tossed into the garbage, so no one is willing to plunk down the cash to get a new development going. That oversupply of homes is weighing on the housing market like a ton of bricks. And not just the housing market; it also weighs on all those areas that rely on the housing market. Home prices are depressed and many Americans are underwater with their mortgages or barely in the black.

The issue of bad mortgages has put enormous huge strain on banks as well. For example, we recently saw the financial world turn sharply against Bank of America ($BAC). This is an odd perception/reality dynamic because BAC is clearly far from being a sound institution, but it’s very hard to answer the question, “Do they need more capital?” (Bloomberg: Moynihan Tries to Keep Bank of America Intact as Mortgage Loans Fall Apart.) The bank said no, but investors said yes. Take a wild guess who won.

Now we have this strange disconnect in financial markets which I’ve labeled the “Fear Trade.” This is when bonds, gold and volatility are up but stocks are down. Since corporate profits have been decent, P/E Ratios are especially depressed. As I mentioned in last week’s CWS Market Review, a Double Dip recession is far from certain. This week, in fact, we had better-than-expected news for the ISM Services index. We also learned that the trade deficit hit a three-month low. The trade deficit report was so good that Goldman Sachs has said there’s a sizable upside risk to their 1% GDP forecast for Q3.

Strategists on Wall Street currently estimate that the S&P 500 will close this year at 1,353 which is a 14% run from here. One month ago, the consensus was that we’d finished the year at 1,401. So despite the market’s lousy mood, Wall Street really hasn’t pared back its estimates very much.

Now I want to focus on two upcoming earnings reports. On Tuesday, September 20th, Oracle ($ORCL) will report its fiscal first-quarter earnings. I was shocked by how low ORCL’s share price was recently. For a few days, it dipped below $25, but Oracle’s business continues to be very strong. The company told us to expect Q1 earnings between 45 cents and 48 cents per share. Oh, please! That’s obviously too low. The consensus on Wall Street is for 47 cents per share. I’m expecting at least 51 cents per share.

Oracle is a remarkably profitable company, plus they’re sitting on nearly $30 billion in cash. By the way, don’t believe any rumors that Oracle is going to buy Hewlett-Packard ($HPQ). That’s just crazy. My take is that Oracle is a very good buy below $30 per share.

The other earnings report will come from Bed Bath & Beyond, ($BBBY) on the following day. Three months ago, the company gave us an outstanding earnings report, plus they raised their full-year forecast which shows you that good companies can prosper during rough times. For the upcoming earnings report, BBBY told us to expect earnings to range between 77 and 82 cents per share. My numbers say that 82 cents is about right.

For this fiscal year (ending in May), BBBY should earn about $3.70 per share. I want to caution you that the stock has already done pretty well (it’s our second-best performer this year), so it’s not a screaming bargain right now. I’m going to hold my buy price on BBBY at $58 per share.

That’s all for now. 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 9, 2011
Posted by Eddy Elfenbein on September 9th, 2011 at 4:16 am

Ghost of Lehman Haunts G-7 Amid Debt Crisis

Europe’s Markets Trade Lower

Europe Pushing Greece To Cut Deficit By Further 0.7% Of GDP -Source

China Inflation Moderated in August

Fed Chief Describes Consumers as Too Bleak

US Jobs Plan: Barack Obama Unveils $450 Billion Package

Settlement Said to Be Near for Fannie and Freddie

Deutsche Telekom, AT&T at Odds Over Deal

Tullow, Shell Discovery Opens New French Guiana Oil Play

Bank of America Cutbacks May Hit 40,000

Who to Run Yahoo? Strong Candidates Abound, But First — a Vision, Please

Wal-Mart to Bring Back Layaway for Holidays

Judge Widens Antitrust Suit Against Private Equity Firms

Jeff Miller: Obama on Jobs

Phil Pearlman: Some Quick Comments on Yahoo! and How I am Playing It Here

Joshua Brown: The Latest Scam – $100 Trade Confirmation Fees

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Ben Bernanke the Comedian
Posted by Eddy Elfenbein on September 8th, 2011 at 6:18 pm

(H/T: Courtney Comstock)

Bernanke Speaks in Minneapolis
Posted by Eddy Elfenbein on September 8th, 2011 at 1:52 pm

As I’ve said before, Bernanke speaks pretty clearly. Here’s a key part of his talk:

Why has this recovery been so slow and erratic? Historically, recessions have tended to sow the seeds of their own recoveries as reduced spending on investment, housing, and consumer durables generates pent-up demand. As the business cycle bottoms out and confidence returns, this pent-up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring. Increased production in turn boosts business revenues and increased hiring raises household incomes–providing further impetus to business and household spending. Improving income prospects and balance sheets also make households and businesses more creditworthy, and financial institutions become more willing to lend. Normally, these developments create a virtuous circle of rising incomes and profits, more-supportive financial and credit conditions, and lower uncertainty, allowing the process of recovery to develop momentum.

These restorative forces are at work today, and they will continue to promote recovery over time. Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.

Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time–with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines–the rate of new home construction has remained at less than one-third of its pre-crisis peak. Depressed construction also has hurt providers of a wide range of goods and services related to housing and homebuilding, such as the household appliance and home furnishing industries. Moreover, even as tight credit for builders and potential homebuyers has been one of the factors restraining the housing recovery, the weak housing market has in turn adversely affected financial markets and the flow of credit. For example, the sharp declines in house prices in some areas have left many homeowners “underwater” on their mortgages, creating financial hardship for households and, through their effects on rates of mortgage delinquency and default, stress for financial institutions as well.

As I noted, the financial crisis of 2008 and 2009 played a central role in sparking the global recession. A great deal has been and continues to be done to address the causes and effects of the crisis, including extensive financial reforms. However, although banking and financial conditions in the United States have improved significantly since the depths of the crisis, financial stress continues to be a significant drag on the recovery, both here and abroad. This drag has become particularly evident in recent months, as bouts of sharp volatility and risk aversion in markets have reemerged in reaction to concerns about European sovereign debts and related strains as well as developments associated with the U.S. fiscal situation, including last month’s downgrade of the U.S. long-term credit rating by one of the major ratings agencies and the recent controversy surrounding the raising of the U.S. federal debt ceiling. It is difficult to judge how much these events and the associated financial volatility have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth.

While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn. There is ample room for debate about the appropriate size and role for the government in the longer term, but–in the absence of adequate demand from the private sector–a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.

The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers. As I have emphasized on previous occasions, without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health-care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage. But, while prompt and decisive action to put the federal government’s finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery. Fortunately, the two goals–achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery–are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.