Gold Soars
Posted by Eddy Elfenbein on July 13th, 2011 at 12:25 pm

While Bernanke speaks. (Click on graph for ultra-massive version.)

Is Gold Money?
Posted by Eddy Elfenbein on July 13th, 2011 at 12:11 pm

Bernanke’s Testimony
Posted by Eddy Elfenbein on July 13th, 2011 at 11:04 am

Twice each year, the Chairman of the Federal Reserve is required to testify before Congress. I’ve actually hauled over to Capitol Hill a few times to see this. It’s a very odd experience since the hearing room is mostly empty.

The two testimony dates usually come on the hottest day of the year and the coldest day of the year. Today is one of the hottest and Bernanke spoke before the House Financial Services Committee.

Before Bernanke starts speaking, the Fed releases the transcript of what he’s going to say. Here’s today’s testimony.

I’ve said before that there’s been a surprising gap between what Ben Bernanke says and what other people say he says. If you want to get a handle on what the Fed thinks, I encourage you to give it a read. It’s pretty clear.

He said that the economy has been hurt by some temporary issues. Bernanke also noted that inflation has picked up some but that should also be temporary.

Morning News: July 13, 2011
Posted by Eddy Elfenbein on July 13th, 2011 at 8:17 am

Draghi Says EU Debt Crisis Is in New Phase

E.U. Vows to Back Banks That Fail Stress Tests

Moody’s Downgrades Ireland Debt to Junk Status

China’s Economy Slowed a Bit in the 2nd Quarter

Italian Borrowing Costs Rise on Debt Crisis Fears

French Banks Face Greatest Italian Risk

IEA: Saudi Domestic Crude Demand May Cap Exports

Bernanke to Face Grilling on Jobs, Debt, Europe

Stock Index Futures Gain on Signs of China’s Growth

Netflix Rates Rise Up to 60% for DVD, Streaming

Amazon Backs End to Online Sales Tax in California

Capital One’s Earnings Rise 50%

Electronic Arts to Buy PopCap Games

Jeff Miller: How the Individual Investor Can Trade Like a Pro

Joshua Brown: UBS: Apple TV Could Be Worth $100 Billion

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Couldn’t Hold the 50-DMA
Posted by Eddy Elfenbein on July 12th, 2011 at 4:19 pm

So close but the S&P 500 just slipped below its 50-day moving average.

Minutes from the Fed’s June Meeting
Posted by Eddy Elfenbein on July 12th, 2011 at 3:53 pm

The Federal Reserve just released the minutes from its June meeting. By the way, the Fed’s Board has seven members but there are currently two vacancies. That means that even inside the Fed, unemployment is running at 28%.

Here’s a part of the minutes:

Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee’s dual mandate.

At the same time, the Fed released its revised economic forecast which you can see here.

In response to today’s Fed minutes, gold for August delivery closed at $1,562.30 after getting as high as $1,574.30.

Public Storage +2,350% in 20 Years
Posted by Eddy Elfenbein on July 12th, 2011 at 12:25 pm

Here’s a look at Public Storage ($PSA) which is one of those quiet stocks that have been amazing performers over the last few decades. Here’s a company description from Hoovers:

If the attic or garage runneth over, Public Storage can help. The real estate investment trust (REIT), is one of the largest self-storage companies in the US. It operates more than 2,100 storage facilities comprising some 135 million sq. ft. of storage space both at home and in Europe (through its Shurgard Europe affiliate). The firm’s self-storage properties, located in densely populated areas, generate some 90% of the company’s sales. Public Storage, which was founded in 1980, also rents trucks, and sells moving supplies such as locks, boxes, and packing supplies. It owns 41% of publicly traded PS Business Parks, an office building REIT.

Over the last 20 years, the stock is up 2,350% and that doesn’t include dividends. The stock currently yields 3.2%.

Alcoa’s Earnings Fall Short
Posted by Eddy Elfenbein on July 12th, 2011 at 10:56 am

Alcoa ($AA) kicked off earnings season after the close yesterday when it reported Q2 earnings of 32 cents per share. Although that more than doubled last year’s result, it was a penny shy of Wall Street’s forecast. What’s most troubling is that Wall Street’s forecasts had been drifting lower over the past several weeks, and Alcoa still fell short.

This may be a harbinger of a weaker-than-expected earnings season. So far, Alcoa’s stock is holding up in today’s market (it’s basically unchanged). The problem in looking at the earnings trend of a company like Alcoa is that so much of the business is tied to the direction of aluminum prices.

Alcoa isn’t representative of the broader economy. Companies like UPS ($UPS) are much better for that kind of analysis. But Alcoa’s weakness could point to weakness in other cyclical stocks.

Here’s a look at the trend in the S&P 500’s earnings. In the second quarter of 2007, the S&P 500 earned $24.06 which was its all-time peak. For Q2 of 2011, Wall Street expects $24.12 which will be a new record. (Note: The S&P 500 lost $0.09 in Q4 of 2008.)

Morning News: July 12, 2011
Posted by Eddy Elfenbein on July 12th, 2011 at 8:01 am

Worries Over Italy’s Debt Drag Down Markets

Italy Sells 6.75 Billion Euros of Treasury Bills as Borrowing Costs Climb

China Bank Lending Quickens; Fans Rate Risk

China Premier Wen: Stabilizing Prices Continues to Be Main Priority

Bank of Japan Upgrades View of Economy

Shares Needed as Cambodia Gets a Stock Exchange

Gold Declines for First Day in Seven as Europe’s Debt Crisis Lifts Dollar

Department of Energy Awards Strategic Petroleum Reserve Oil to 15 Companies

U.S. Stock-Index Futures Slump on Italy Debt-Crisis Concern; Alcoa Plunges

Wall Street Set to Tumble as Global Markets Roiled

Murdoch Buys Time on Hacking Scandal With BSkyB Review

Analysts Cut BSkyB As News Corp Deal Seen Dragging Into Next Year

Bank’s Deal Means More Will Lose Their Homes

Cisco May Cut as Many as 10,000 Jobs to Buoy Profit

Buy and Hold Investing Works

Howard Lindzon: Uncapped Convertible Notes…Barf!

Todd Sullivan: EPS Up 120%

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Yes, Arnold, Stock Returns Can Outpace Economic Growth Indefinitely
Posted by Eddy Elfenbein on July 11th, 2011 at 3:11 pm

One of my favorite economic bloggers, Arnold Kling, recently wrote:

Every few years, I have this argument with a new round of commenters.

The ratio of stock prices to earnings is P/E.

The ratio of earnings to GDP is E/Y.

The ratio of stock prices to GDP is P/Y, which equals P/E times E/Y.

(Note that the basic math here uses stocks that turn all of their earnings into capital gains, paying none as dividends. Including dividend payouts makes the story more complex, but does not change the economic analysis.)

For stock prices to grow faster than GDP, either prices have to grow faster than earnings or earnings have to grow faster than GDP.

Stock prices certainly can rise faster than GDP for long but finite periods. If the P/E ratio starts at about 5 and gradually rises to about 25, that will do it. Something like that happened in the 20th century. Also, if earnings of shareholder-owned companies start at less than 10 percent of GDP, then they can grow faster than GDP for a long time.

Looking forward from today, which do you think is going to happen? Is the P/E ratio going to go up, because people become more willing to hold stocks? Or is the share of national income that goes to shareholder-owned companies going to go up? If you have a good story for one of those two happening, let me know.

(For example, one story is that U.S. firms will earn increasing profits overseas. I do not think that this will be a big enough effect over a sufficiently long period of time to drive earnings growth much above GDP growth. Still, it is an empirical issue.)

But if you think that stock returns will be higher than GDP growth without either ratio increasing, then one of us is incapable of doing simple algebra, and I am going to guess that it’s not me.

Arnold, I’m afraid it’s you. But the good news is that it’s not your algebra.

The reason I highlight this is because it gets to the heart of what it means to invest in stocks. Returns to stock investors can remain higher than economic growth indefinitely (even leaving aside the issue of equity valuations). This is a crucial point. The problem is, it’s hard to explain easily.

There are lots of good explanations in the comments of Arnold’s post, but I’ll try to make it as basic as I can: when you buy a stock, you’re buying all of its future cash flow. Economic growth impacts the growth of that cash flow.

When you buy stocks, what you’re buying is the future cash flow. Think of it like buying a river. All that water that passes though, is yours to keep.

Economic growth would determine how much the river expands or contracts — even though water is still flowing. If economy expands (metaphorically, our river widens) then even more water flows through. The growth of the economy is not the same as what accrues to the shareholder.

The size of the river can’t expand than the economy forever, but the stream owner keeps all which passes through.