FedEx reported earnings today which apparently missed a whisper number and/or the company said insufficiently upbeat things about the global economy. The stock is down a few points pre-open to about $86/share, having run up massively from its low point in the mid $30's one year ago.
Long-term FedEx holders have been well-rewarded. The stock traded in a range in 1980 with the midpoint around $5.50/share. Since its dividend yield has been near zero all this time, I compared the total return from FedEx since election day 1980 to that of a zero-coupon Treasury with today's maturity date, about 29 1/2 years.
At that time, Treasuries of that maturity yielded 12.5%. would have given about double the total return of FedEx stock, with lower volatility and less need to follow corporate events.
And FedEx has been one of the big winners over the past several decades.
Kind of makes one think.
Another big winner that by now yields over 1% dividend rate is Teva. It was announced today that Teva is acquiring a German-based generic drugs firm, Ratiopharm, in a competition with Pfizer among other bidders.
Teva is a roll-up. It keeps acquiring large generic firms at premium valuations. It has $2.5 B in tangible net worth against a market cap of $53 B. It is getting too big to acquire. Its stock has gone up for decades. Its market cap to tangible net worth ratio is more than double Merck's. Its dividend yield is one-quarter of Merck's off an estimated P/E on 2011 earnings that is higher than Merck's. It has much less proprietary technology than the brand companies.
It may well be that one of these days, the generic drugs industry will have a major price war. Or, Teva will let its costs get out of control. Or something. I am not loving the risk-reward longer-term for Teva anymore. In the same space, Watson Pharmaceuticals is the one stock I own. Even though there's no dividend, the chart is quite promising and there are numerous potential buyers for this company that now has a global footprint.
The bigger picture is that the "fear index" -- the VIX on the S&P 500, is well into bull market range at 16.77. General market timers historically are on thin ice at this level, but this is NOT a sell signal. The pattern of this recent stock market suggests that a reaction to a VIX at least at 20 will follow sooner rather than later, and if it is not overly delayed, the averages will likely be at least somewhat below today's even if the trend is up over the intermediate term.
Meanwhile, somehow simple chart measurements and comparisons to prior up-cycles in gold in the "aughties" going back to 2001 led me to blog in early December that I was selling almost all my gold ETFs and was looking for an equilibrium point of GLD at $110 +/- $3. Well, here we are at GLD $110 once again. There was a brief stock market-related dip below $107, but my suspicion is that similar factors that pushed gold up the prior decade remain in force, namely excessive money (credit) creation.
The new ETF "PHYS" has a more modest premium to net asset value than does
"GTU". It also offers large holders the guarantee that they can actually withdraw bullion. People who don't want to hold, or don't want to exclusively hold, physical ETF gold via "GLD" may want to consider PHYS.
Copyright (C) Long Lake LLC 2010
Showing posts with label Teva. Show all posts
Showing posts with label Teva. Show all posts
Thursday, March 18, 2010
Thursday, March 4, 2010
Accounting Gimmicks not Limited to Government: Focus on Teva
Regular EBR readers know that going back to some months from the March 2009 stock market bottom, I commented that the best stocks from my standpoint going forward were ones with structurally strong charts. Prominent amongst them was Teva Pharmaceuticals (TEVA), which has been mentioned positively here several times thereafter. There is a downside to Teva shared by numerous other companies. Now that Teva has justified my faith, I have sold all my shares in it, because I mistrust its earnings presentations in that its P/E is actually quite high. Teva has become a glamor stock masquerading as a low P/E value stock.
In Teva's last earnings release, it reports results for full-year 2009 and the last quarter.
Here is one of the highlights:
* Quarterly non-GAAP net income and non-GAAP EPS of $847 million and $0.94, up 28% and 18%, respectively, compared with the fourth quarter of 2008. Quarterly GAAP net income and EPS totaled $379 million and $0.42, respectively, compared with a loss of $694 million and a loss of $0.88 per share in the fourth quarter of 2008.
Here is some of the company's commentary:
Non-GAAP net income and non-GAAP EPS for the fourth quarter of 2009 are adjusted to exclude the following items:
* Legal settlements of $379 million;
* Amortization of purchased intangible assets and inventory step up of $139 million;
* Impairment of assets of $71 million;
* Restructuring charges and acquisition costs of $25 million;
* Purchased in-process R&D of $23 million;
* Other net financial income of $8 million; and
* A related tax benefit of $161 million.
In Teva's last earnings release, it reports results for full-year 2009 and the last quarter.
Here is one of the highlights:
* Quarterly non-GAAP net income and non-GAAP EPS of $847 million and $0.94, up 28% and 18%, respectively, compared with the fourth quarter of 2008. Quarterly GAAP net income and EPS totaled $379 million and $0.42, respectively, compared with a loss of $694 million and a loss of $0.88 per share in the fourth quarter of 2008.
Here is some of the company's commentary:
Non-GAAP net income and non-GAAP EPS for the fourth quarter of 2009 are adjusted to exclude the following items:
* Legal settlements of $379 million;
* Amortization of purchased intangible assets and inventory step up of $139 million;
* Impairment of assets of $71 million;
* Restructuring charges and acquisition costs of $25 million;
* Purchased in-process R&D of $23 million;
* Other net financial income of $8 million; and
* A related tax benefit of $161 million.
For Teva to pretend that legal settlements are not part of normal operating results is asking too much. Everyone who knows the generic industry knows that that is an important part of the business. Similar, restructuring is a real cost. Closing a high-cost factory to relocate in India has a cost and is a regular part of the ongoing business. Certainly the upcoming cost savings that increase operating margins will not reciprocally be claimed as one-time profit gains.
(One can decide what one wants about the appropriateness of excluding amortization of intangible assets from an earnings presentation, or impairment charges.)
If one looks at Yaoo's standard array of quick facts for TEVA, one will see a P/E (trailing) of 26.96. This likely incorporates GAAP accounting. Yet if one goes to "Analyst Estimates" on the same site, one will find the non-GAAP "earnings" for Q4 2009 of $0.94.
Teva is hardly alone. Bristol-Myers (BMY) in the same industry has similar though less dramatic differences between GAAP and "headline" earnings. Of course, none of this is limited to the pharmaceutical industry.
It is GAAP that was correct in the valuation of Fannie Mae and Freddie Mac before they collapsed.
After its latest price surge, Teva trades at a rich multiple of tangible book value, sales, and dividend payout.
Teva has recently disclosed a multi-year 13% or more growth target.
It would appear that it has done a great job promoting its stock. The stock certainly has momentum.
However, its size, at $53 B market cap, makes it too large for almost any brand company to acquire, so it is not clear what the exit strategy is. The dividend yield is a trifle above 1% despite a recent dividend hike. The stock sells for over 20X tangible book value.
It just may be that Teva's generic products offer better real value than does the stock given GAAP accounting and with attention paid to real assets rather than assets accounting for intangibles.
Copyright (C) Long Lake LLC 2010
Thursday, January 21, 2010
Nouriel Roubini Should Stick to Economics, not Market Forecasting
In Roubini Says Global Stocks May Correct as Growth Disappoints, Bloomberg.com continues to publicize the market views of a top-tier economist who has built a large consulting business. The article begins:
A global rally in stocks may end in the second half of the year amid a muted recovery in the world’s largest economies and as deflationary pressures limit gains in corporate earnings, Nouriel Roubini said.
Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may also cause an “unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth,” Roubini, the Harvard- schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today.
At this point, the Roubini outlook as expressed in the article are quite mainstream.
Because they are mainstream, it is unclear whether even if events occur as he predicts whether markets are discounting this and will look forward even as a growth slowdown occurs.
What is most important in looking at markets is spying relative over- and under-valuation. A classic example involves March 2000. The NASDAQ peaked around 5100, having doubled in 1999 and gone up a bit farther in the new year. Fundamental measures of market overvaluation were at record levels, surpassing those of 1929.
Yet there were a great many industry groups that bottomed exactly when the averages popped. These groups were diverse and included homebuilders, HMOs, basic industry, and other out of favor groups. By mid-2002, if memory serves me well, the Russell 2000 was hitting record levels even as the averages were floundering. By the time the market his its double bottom in early 2003, many stocks had moved a great deal.
Toll Brothers, for example, bottomed in March 2000 around 4 and hit 15 little over 2 years later, ending 2003 at 20 (about where it trades today).
What had really happened was that the average stock, rather than the large cap stocks and the tech sector, topped out during the Asian contagion that began in 1997 and rolled on through 1998; it is those stocks that kept bleeding support and got grossly undervalued relative to the popular stuff.
It appears to me that a milder version of that has now occurred. One can look through Value Line and find company after company that is way off its lows, has a poor long-term chart, relatively weak financial strength, no dividend payment and none on the way, and a fundamentally rich valuation. One can also find strong companies with fundamental reasonable valuation, rising and record dividends, rising and record sales and earnings, and no reason not to have a reasonable expectation at least mid-to-high single digit returns to shareholders over a 5-10 year history. Relative to the market, they have underperformed the past year, but on a 2-year or 5-year basis, these companies have outperformed the stuff that I believe has moved too much.
These companies have been highlighted many times here. The list does not change much. Some, such as National Presto, have moved a great deal and are no longer cheap. Others, such as Teva, have not moved much. Everest Re, trading around book value, was up yesterday despite the general sell-off.
There are a series of poor investment choices available due to the general inflation of financial assets that Bill Gross wrote about in his December Pimco letter. This will cycle, but living in the present, we know that cash is being trashed but all bonds are increasingly risky given the explosion of debt combined with stagnant incomes.
The warnings of seers such as Nouriel Roubini are part of the chatter, no matter how right they are. Where they are most valuable is when they identify an evolving bubble or a seriously undervalued situation. Right now, the major imbalances - governmental deficits and money-printing are well known (don't sell gold). Unsexy stocks such as Chubb, Everest Re selling at single-digit P/E's and yielding over 2%; discount retailers with low double-digit P/E's and huge free cash flows; Teva and other special situations; and others provide inflation protection yet can do well in a no-growth economy. Over time these financially strong companies that have proven themselves winners over many years tend to continue to be winners.
Nothing in Nouriel Roubini's outlook have any special relevance to my willingness to hold all the above as part of a diversified portfolio. Until he develops more market experience, he would be well advised to stick to getting the economics correct and letting his clients adjust their market expectations accordingly.
Copyright (C) Long Lake LLC 2010
A global rally in stocks may end in the second half of the year amid a muted recovery in the world’s largest economies and as deflationary pressures limit gains in corporate earnings, Nouriel Roubini said.
Failure to restrain asset-price bubbles in emerging markets, fueled by loose monetary policies in the U.S. and around the world, may also cause an “unraveling and a significant correction of asset prices which will be damaging to global and regional economic growth,” Roubini, the Harvard- schooled New York University professor who in 2006 foresaw the financial crisis, said in Hong Kong today.
At this point, the Roubini outlook as expressed in the article are quite mainstream.
Because they are mainstream, it is unclear whether even if events occur as he predicts whether markets are discounting this and will look forward even as a growth slowdown occurs.
What is most important in looking at markets is spying relative over- and under-valuation. A classic example involves March 2000. The NASDAQ peaked around 5100, having doubled in 1999 and gone up a bit farther in the new year. Fundamental measures of market overvaluation were at record levels, surpassing those of 1929.
Yet there were a great many industry groups that bottomed exactly when the averages popped. These groups were diverse and included homebuilders, HMOs, basic industry, and other out of favor groups. By mid-2002, if memory serves me well, the Russell 2000 was hitting record levels even as the averages were floundering. By the time the market his its double bottom in early 2003, many stocks had moved a great deal.
Toll Brothers, for example, bottomed in March 2000 around 4 and hit 15 little over 2 years later, ending 2003 at 20 (about where it trades today).
What had really happened was that the average stock, rather than the large cap stocks and the tech sector, topped out during the Asian contagion that began in 1997 and rolled on through 1998; it is those stocks that kept bleeding support and got grossly undervalued relative to the popular stuff.
It appears to me that a milder version of that has now occurred. One can look through Value Line and find company after company that is way off its lows, has a poor long-term chart, relatively weak financial strength, no dividend payment and none on the way, and a fundamentally rich valuation. One can also find strong companies with fundamental reasonable valuation, rising and record dividends, rising and record sales and earnings, and no reason not to have a reasonable expectation at least mid-to-high single digit returns to shareholders over a 5-10 year history. Relative to the market, they have underperformed the past year, but on a 2-year or 5-year basis, these companies have outperformed the stuff that I believe has moved too much.
These companies have been highlighted many times here. The list does not change much. Some, such as National Presto, have moved a great deal and are no longer cheap. Others, such as Teva, have not moved much. Everest Re, trading around book value, was up yesterday despite the general sell-off.
There are a series of poor investment choices available due to the general inflation of financial assets that Bill Gross wrote about in his December Pimco letter. This will cycle, but living in the present, we know that cash is being trashed but all bonds are increasingly risky given the explosion of debt combined with stagnant incomes.
The warnings of seers such as Nouriel Roubini are part of the chatter, no matter how right they are. Where they are most valuable is when they identify an evolving bubble or a seriously undervalued situation. Right now, the major imbalances - governmental deficits and money-printing are well known (don't sell gold). Unsexy stocks such as Chubb, Everest Re selling at single-digit P/E's and yielding over 2%; discount retailers with low double-digit P/E's and huge free cash flows; Teva and other special situations; and others provide inflation protection yet can do well in a no-growth economy. Over time these financially strong companies that have proven themselves winners over many years tend to continue to be winners.
Nothing in Nouriel Roubini's outlook have any special relevance to my willingness to hold all the above as part of a diversified portfolio. Until he develops more market experience, he would be well advised to stick to getting the economics correct and letting his clients adjust their market expectations accordingly.
Copyright (C) Long Lake LLC 2010
Saturday, December 26, 2009
Stocks for the Intermediate Run
One of the good things about markets is the ability to look for relative undervaluation. Readers know that I believe that we are in an era where labor is undervalued relative to financial assets, and a re-equilibration is likely to occur. Once that is said, what is the manager of money to do?
Yours truly took the long view about 28 months ago to exit stocks for cash and bonds. This winter, when it looked likely that a fragile technical stock market bottom and bond interest rate bottom was made, specific stocks were mentioned along with gold. The stocks have all done well with limited risk: Teva (TEVA), Ross Stores (ROST), and National Presto (NPK) all made all-time highs, and all remain in all-time high territory. The other specific stock was McDonald's (MCD), which has done well but did not hit an all-time high and has to be sure lagged the market. This lagging is specifically related not to any special failing of the company, which kept exceeding earnings expectations and had a substantial dividend increase, but due to the catch-up nature of the stock rally.
Regular readers know of my consistent kind words for gold all year, whether the metal was priced in the $800s or the $1000s, and of the tactical sell when GTU reached about a 7-8% premium over NAV when the physical metal was around $1200. The recent strength of the dollar per the DXY index is seen much less using the St. Louis Fed's trade-weighted index.
Any number of technicians and fundamentalists are both positive on gold longer-term but cautious to bearish short-term.
In a primary bull market, the trend is your friend. Either gold has gotten too popular and should be avoided for some time to come, or the recent strength of the dollar against the Euro is just that one drunk is a little more upright than the other this spree. On Christmas Eve, more support for Fannie/Freddie came out, along with the revelation that Treasury also spent hundreds of billions of dollars buying mortgage-backed securities this past year. Yikes, as they say.
This is all gold-friendly.
What happened technically to gold this summer and fall was that while the price remained below its winter 2008 highs, its moving averages went t0 new highs-- and quietly.
A similar thing appears to be happening with certain individual stocks which meet the criteria for reasonable valuation (little is cheap!) and strength not just in the stock price but in the 50 and 200 day moving averages, along with upside earning surprises or at least rising earnings estimates. Unsurprisingly, these companies are global and are self-financing. In addition to all the ones listed above except MCD, these include Oracle (ORCL), IBM and TJX, all of which have consistent records of shrinking shares outstanding; though ORCL has turned into such a serial acquirer that it pays dividends instead.
One perhaps fundamentally undervalued group of stocks includes some insurers. Chubb (CB) and Everest Re (RE) are off of their panic lows but have global franchises, high quality financial bona fides, and limited to no premium to tangible book value. In normal financial times, these stocks trade at premiums to book value. Their P/E's are single digits. There is nothing exciting at all about their financials, and they are well off their bear market lows, so purchase of them is likely to be boring. But assuming a muddle-through economy this year, I believe we are seeing the market neglect certain sectors and be over-excited about others.
What, you ask, are those companies?
Look at Barron's this week, with a lead article warning about Burlington Northern.
It appears that the "Street" is much more optimistic about BNI's 2010 earnings than even the best-case scenario of the company itself.
Many industrial companies have declining consensus earnings estimates, high P/E's and stock prices double their low of the bear market. Methinks the risk-reward is better with the above-mentioned names that pay dividends, have controlled but positive stock charts, and a true valuation story so that barring an AIG-type collapse, one can hold the stock should it drop after purchase and not feel compelled to sell if it goes up the way one might if one bought Amazon at 80 times earnings.
The above is stated with the repeated caveat that there is a reason why short term interest rates are near zero.
That reason is that there really is a financial crisis, and the government wants real interest rates to be negative. Now that they have in fact have crossed that threshold and the ECRI data continue to be strong, we may be at that point in the economy and markets where everything seems to work. Inflation is cyclically low, as labor is by far the most important input to prices and labor has zero pricing power; therefore profits rise; the Federal deficit surprises people by being less than expected, yet the Fed does not take away the punch bowl.
We are in a make-believe financial world, where a roll-up like Teva with no tangible book value and a minimal dividend can be a powerhouse company and trillions of Federal or Fed dollars just appear at will. No asset is good or bad, it's just what is the flavor du jour and what was yesterday's flavor. If ORCL is at an 8 year high in stock price on good news and also on its moving averages, a melt-up is possible. That ORCL also has no tangible book value and almost no dividend yield means something in a bear market. It means nothing when stock buyers ignore those fundamentals. If you buy the stock or own it already, you must remember there is no large stash of gold carried at $42.20 per ounce in the company coffers to provide fundamental value. Oracle is a strong company that just might be a good speculative asset play for the months ahead.
Anyone owning stocks should in my opinion be able to follow Mr. Buffett's rule and be able to financially and psychologically withstand a 50% fall in the stock averages.
No guarantees, but all the stocks mentioned above are of very high apparent quality and thus should drop less than the market in a general collapse. When and from what level and with what degree of warning the next market downturn will occur is unknown. Perhaps it will start Monday.
Caveat emptor and owner.
Copyright (C) Long Lake LLC 2009
Yours truly took the long view about 28 months ago to exit stocks for cash and bonds. This winter, when it looked likely that a fragile technical stock market bottom and bond interest rate bottom was made, specific stocks were mentioned along with gold. The stocks have all done well with limited risk: Teva (TEVA), Ross Stores (ROST), and National Presto (NPK) all made all-time highs, and all remain in all-time high territory. The other specific stock was McDonald's (MCD), which has done well but did not hit an all-time high and has to be sure lagged the market. This lagging is specifically related not to any special failing of the company, which kept exceeding earnings expectations and had a substantial dividend increase, but due to the catch-up nature of the stock rally.
Regular readers know of my consistent kind words for gold all year, whether the metal was priced in the $800s or the $1000s, and of the tactical sell when GTU reached about a 7-8% premium over NAV when the physical metal was around $1200. The recent strength of the dollar per the DXY index is seen much less using the St. Louis Fed's trade-weighted index.
Any number of technicians and fundamentalists are both positive on gold longer-term but cautious to bearish short-term.
In a primary bull market, the trend is your friend. Either gold has gotten too popular and should be avoided for some time to come, or the recent strength of the dollar against the Euro is just that one drunk is a little more upright than the other this spree. On Christmas Eve, more support for Fannie/Freddie came out, along with the revelation that Treasury also spent hundreds of billions of dollars buying mortgage-backed securities this past year. Yikes, as they say.
This is all gold-friendly.
What happened technically to gold this summer and fall was that while the price remained below its winter 2008 highs, its moving averages went t0 new highs-- and quietly.
A similar thing appears to be happening with certain individual stocks which meet the criteria for reasonable valuation (little is cheap!) and strength not just in the stock price but in the 50 and 200 day moving averages, along with upside earning surprises or at least rising earnings estimates. Unsurprisingly, these companies are global and are self-financing. In addition to all the ones listed above except MCD, these include Oracle (ORCL), IBM and TJX, all of which have consistent records of shrinking shares outstanding; though ORCL has turned into such a serial acquirer that it pays dividends instead.
One perhaps fundamentally undervalued group of stocks includes some insurers. Chubb (CB) and Everest Re (RE) are off of their panic lows but have global franchises, high quality financial bona fides, and limited to no premium to tangible book value. In normal financial times, these stocks trade at premiums to book value. Their P/E's are single digits. There is nothing exciting at all about their financials, and they are well off their bear market lows, so purchase of them is likely to be boring. But assuming a muddle-through economy this year, I believe we are seeing the market neglect certain sectors and be over-excited about others.
What, you ask, are those companies?
Look at Barron's this week, with a lead article warning about Burlington Northern.
It appears that the "Street" is much more optimistic about BNI's 2010 earnings than even the best-case scenario of the company itself.
Many industrial companies have declining consensus earnings estimates, high P/E's and stock prices double their low of the bear market. Methinks the risk-reward is better with the above-mentioned names that pay dividends, have controlled but positive stock charts, and a true valuation story so that barring an AIG-type collapse, one can hold the stock should it drop after purchase and not feel compelled to sell if it goes up the way one might if one bought Amazon at 80 times earnings.
The above is stated with the repeated caveat that there is a reason why short term interest rates are near zero.
That reason is that there really is a financial crisis, and the government wants real interest rates to be negative. Now that they have in fact have crossed that threshold and the ECRI data continue to be strong, we may be at that point in the economy and markets where everything seems to work. Inflation is cyclically low, as labor is by far the most important input to prices and labor has zero pricing power; therefore profits rise; the Federal deficit surprises people by being less than expected, yet the Fed does not take away the punch bowl.
We are in a make-believe financial world, where a roll-up like Teva with no tangible book value and a minimal dividend can be a powerhouse company and trillions of Federal or Fed dollars just appear at will. No asset is good or bad, it's just what is the flavor du jour and what was yesterday's flavor. If ORCL is at an 8 year high in stock price on good news and also on its moving averages, a melt-up is possible. That ORCL also has no tangible book value and almost no dividend yield means something in a bear market. It means nothing when stock buyers ignore those fundamentals. If you buy the stock or own it already, you must remember there is no large stash of gold carried at $42.20 per ounce in the company coffers to provide fundamental value. Oracle is a strong company that just might be a good speculative asset play for the months ahead.
Anyone owning stocks should in my opinion be able to follow Mr. Buffett's rule and be able to financially and psychologically withstand a 50% fall in the stock averages.
No guarantees, but all the stocks mentioned above are of very high apparent quality and thus should drop less than the market in a general collapse. When and from what level and with what degree of warning the next market downturn will occur is unknown. Perhaps it will start Monday.
Caveat emptor and owner.
Copyright (C) Long Lake LLC 2009
Thursday, October 22, 2009
Stocks for the Long Run
The financial markets had an interesting day yesterday that were consistent with the hypothesis that a correction is underway. The late-day sinking spell in stocks was unexpected and had no real obvious cause, though a report from the "why does any care what he thinks" personality and "analyst" Richard Bove is said to have sparked selling in the financials. EBR however has been noting early signs of weakness in the financials and has been more than hinting about a change of leadership. The late-day price drops are just the opposite of what started happening in the winter when stocks were ready to be taken upward.
It is routine to have a correction in a strong end-of-recession (depression) rally. The deeper the recession low from the high, the more likely the post-rally recession is to undergo a more severe drop. 1975 saw such a downturn, and adjusted for the inflation of the time, the rally to the 1975 high was about as good as it got until the markets blasted off in 1982 when Mr. Volcker eased up on Mr. Reagan, having achieved both the crushing of inflation expectations and the securing of a strong midterm election for the Democrats less than three months later.
Nonetheless, there are always investment opportunities on the long side in today's markets, where one can go long a "short" fund or short a "long" fund. Within stocks, here are three that were mentioned months ago as having strong fundamentals, recession-resistant qualities, and, importantly, strong long-term charts.
One way to look at these charts is to open a second window and click for the charts in that window, keeping this one open throughout.
Click for the 2-year and max charts for Ross Stores (ROST; discount clothing), with the 2-year showing the 50 and 200 day moving averages. The long-term chart hardly shows the depression. The stock went to an all-time high this year. It is now correcting. Fundamentally, it may have problems getting enough cheap inventory, as general clothing stores are ordering very conservatively. This is one that I would not buy yet unless it were for a multi-year period.
The 2-year and max charts on Teva (TEVA; generic drugs) are similar but the stock looks different than ROST to me. The brand drug-makers have been regaining pricing power, which helps Teva. Teva had much less of a run off the bottom than Ross, which more than doubled. Teva is almost immune to the inventory cycle. If it meets consensus 2010 estimates, it is trading at about 10.5 X earnings. This stock could easily trade at 16-18 X earnings. I own Teva but not Ross.
Finally, I admire the business discipline of the little-known stock National Presto (NPK; diversified), and mentioned it this spring. Click for the 2-year and max charts. The max chart is difficult to interpret casually because the company is cash-rich in an old-fashioned way and pays huge dividends once a year. Thus, the total return is far greater than the chart suggests. The stock simply looks ahead of itself, but it has strong support at 80. Not shown is NPK's fundamental problem, which is that traditionally it sells down every now and then to book value, which is far below the current price. I am out of NPK for now.
The working hypothesis here is that the well-publicized penalizing of Citi and BofA is not quite a death sentence but could easily put the kibosh on their over-hyped, over-traded, over-priced stocks. Every bubble ends up frustrating the bulls in the field of the prior bubble. This cycle and these stocks are expected to follow the script.
Junk may well have had its day for a while. The stocks highlighted above, and the pharmaceutical sector in particular, may be relatively immune if all we are facing is a correction within a cyclical bull move; granted that in the style of Churchill's comment about Russia, this is probably all happening within a secular bear market that may be just passing the halfway mark.
Copyright (C) Long Lake LLC 2009
It is routine to have a correction in a strong end-of-recession (depression) rally. The deeper the recession low from the high, the more likely the post-rally recession is to undergo a more severe drop. 1975 saw such a downturn, and adjusted for the inflation of the time, the rally to the 1975 high was about as good as it got until the markets blasted off in 1982 when Mr. Volcker eased up on Mr. Reagan, having achieved both the crushing of inflation expectations and the securing of a strong midterm election for the Democrats less than three months later.
Nonetheless, there are always investment opportunities on the long side in today's markets, where one can go long a "short" fund or short a "long" fund. Within stocks, here are three that were mentioned months ago as having strong fundamentals, recession-resistant qualities, and, importantly, strong long-term charts.
One way to look at these charts is to open a second window and click for the charts in that window, keeping this one open throughout.
Click for the 2-year and max charts for Ross Stores (ROST; discount clothing), with the 2-year showing the 50 and 200 day moving averages. The long-term chart hardly shows the depression. The stock went to an all-time high this year. It is now correcting. Fundamentally, it may have problems getting enough cheap inventory, as general clothing stores are ordering very conservatively. This is one that I would not buy yet unless it were for a multi-year period.
The 2-year and max charts on Teva (TEVA; generic drugs) are similar but the stock looks different than ROST to me. The brand drug-makers have been regaining pricing power, which helps Teva. Teva had much less of a run off the bottom than Ross, which more than doubled. Teva is almost immune to the inventory cycle. If it meets consensus 2010 estimates, it is trading at about 10.5 X earnings. This stock could easily trade at 16-18 X earnings. I own Teva but not Ross.
Finally, I admire the business discipline of the little-known stock National Presto (NPK; diversified), and mentioned it this spring. Click for the 2-year and max charts. The max chart is difficult to interpret casually because the company is cash-rich in an old-fashioned way and pays huge dividends once a year. Thus, the total return is far greater than the chart suggests. The stock simply looks ahead of itself, but it has strong support at 80. Not shown is NPK's fundamental problem, which is that traditionally it sells down every now and then to book value, which is far below the current price. I am out of NPK for now.
The working hypothesis here is that the well-publicized penalizing of Citi and BofA is not quite a death sentence but could easily put the kibosh on their over-hyped, over-traded, over-priced stocks. Every bubble ends up frustrating the bulls in the field of the prior bubble. This cycle and these stocks are expected to follow the script.
Junk may well have had its day for a while. The stocks highlighted above, and the pharmaceutical sector in particular, may be relatively immune if all we are facing is a correction within a cyclical bull move; granted that in the style of Churchill's comment about Russia, this is probably all happening within a secular bear market that may be just passing the halfway mark.
Copyright (C) Long Lake LLC 2009
Saturday, September 5, 2009
Unemployment, the Fed, and the Markets
On August 24, following comments from Fed officials, I blogged in The Fed Is Blowing It Again:
My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.
In the two weeks through the close of trading Fri. Sept. 4, gold is up over 5% in price. Treasuries sold off Friday despite a truly dismal household survey of (un)employment. How dismal? See Mish's quote from Dave Rosenberg's Friday note. Another analysis of the data can be found at Dr. Ed Harrison's Credit Writedowns.
The index of average weekly hours worked for most workers dropped from 99.2 to 98.9 from July to August, where 2002 represents 100. This is despite an approximate 7% increase in population. Adjusted for population growth, this is about an 8% decrease. Here is a link to the BLS report itself; click HERE.
In the meantime, the Economic Cycle Research Institute is more and more bullish:
A weekly measure of future U.S. economic growth rose in the latest week, while its yearly growth rate surged to a 38-year high that suggests the recovery is on track. . .
The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent.
Perhaps as part of the dispute between ECRI and Drs. Rosenberg and Roubini, the Reuters report on the ECRI data also included the following:
"With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan.
Last week, Achuthan said a double-dip recession in the fourth quarter is "out of the question."
I went back to the data. Six6 months after the above-mentioned date of May 21, 1971, the Dow Jones Industrial Average had fallen about 10%, and the ten-year Treasury had fallen about half a point in yield despite the Viet Nam War and the secular bear market in Treasuries that began around 1965 and continued until 1982. Past may be prologue.
The DoctoRx thinking is that since the government is borrowing at minimal interest cost for now and has been financing immense amounts of transfer payments to people and businesses, there has to be a technical recovery. Yet I have no reason to doubt Dr. Rosenberg's analysis that the Q2 GDP would have been down at an annualized rate of 6% without stimulus, and that Q3 would be down at a mild 1% annual rate without stimulus.
So from an economic basis, it would appear that the bears who were bearish last December and this past January were correct. Now, if government were doing innovative things such as Eisenhower's new system of interstate highways, or the successful handoff from the Dept. of Defense to the private sector of the Internet, I would say that taxpayer funds were being well used.
As in Japan in its post-bubble phase, there were two trends.
One was debasement of the currency vs. the dollar. Recently, of course, as the U. S. has led the Western world in economic mismanagement, of course the yen has been forced to strengthen against the dollar. Thus, the parallel here is that the dollar has fallen against gold every year since, and including, 2001. This year is looking like no exception. How high could gold go if the stock market and financial markets stayed stable? Based on average ratios of the price of gold following
its manic run-up of the late 1970s that led to aggressive high-interest rate policies of the Fed, gold could very easily go to 2-3X the S&P price, or let us say 2500/ounce. The future is of course wildly unpredictable, but the Fed and stock market appear to be following the 2001-3 and beyond pattern, so why should not gold continue to go from strength to strength? After all, a $700 gold price in 1980 would translate in buying power to over $2000/ounce today.
The other trend, unpopular though it is to say, is toward lower long-term Treasury rates.
It is felt here that so long as one is willing to buy and hold a certain number of Treasuries, they can play a valuable role both for income and possible capital gains as part of a diversified portfolio. Tactically, it is easy to see that the Fed would want sustained low market rates a la Japan for it to make money off of its purchases of Treasuries and mortgage-backed securities. Remember that the economic recovery that is either beginning or will come at some point (if for no other reason than the law of averages and random fluctuations) and that may be a "fake" recovery could well be followed by the totally surprising events of 2008, meaning yet lower lows in Treasury rates. Similar things happened after the economic recovery of FDR's first term, after which long-term Treasury rates did not bottom till at least 1940.
Stocks are churning, in general offer insufficient income to be an attractive asset class and are manipulated or greatly affected in price by Big Finance according to self-serving metrics. Stocks that are liked here are some individual names, including Teva, McDonald's, Bristol-Myers, and National Presto (which is primarily a defense company now, though it is best known for crock pots and the like).
Currently the most interesting momentum and "fundamental" plays appear to include gold either via "GLD" or "GTU" or bullion; and TEVA and NPK in the stock market. Even if ECRI is correct about a very strong period of growth, as occurred in 1972, the general stock market could well be due for a rest.
Copyright (C) Long Lake LLC 2009
My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.
In the two weeks through the close of trading Fri. Sept. 4, gold is up over 5% in price. Treasuries sold off Friday despite a truly dismal household survey of (un)employment. How dismal? See Mish's quote from Dave Rosenberg's Friday note. Another analysis of the data can be found at Dr. Ed Harrison's Credit Writedowns.
The index of average weekly hours worked for most workers dropped from 99.2 to 98.9 from July to August, where 2002 represents 100. This is despite an approximate 7% increase in population. Adjusted for population growth, this is about an 8% decrease. Here is a link to the BLS report itself; click HERE.
In the meantime, the Economic Cycle Research Institute is more and more bullish:
A weekly measure of future U.S. economic growth rose in the latest week, while its yearly growth rate surged to a 38-year high that suggests the recovery is on track. . .
The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent.
Perhaps as part of the dispute between ECRI and Drs. Rosenberg and Roubini, the Reuters report on the ECRI data also included the following:
"With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan.
Last week, Achuthan said a double-dip recession in the fourth quarter is "out of the question."
I went back to the data. Six6 months after the above-mentioned date of May 21, 1971, the Dow Jones Industrial Average had fallen about 10%, and the ten-year Treasury had fallen about half a point in yield despite the Viet Nam War and the secular bear market in Treasuries that began around 1965 and continued until 1982. Past may be prologue.
The DoctoRx thinking is that since the government is borrowing at minimal interest cost for now and has been financing immense amounts of transfer payments to people and businesses, there has to be a technical recovery. Yet I have no reason to doubt Dr. Rosenberg's analysis that the Q2 GDP would have been down at an annualized rate of 6% without stimulus, and that Q3 would be down at a mild 1% annual rate without stimulus.
So from an economic basis, it would appear that the bears who were bearish last December and this past January were correct. Now, if government were doing innovative things such as Eisenhower's new system of interstate highways, or the successful handoff from the Dept. of Defense to the private sector of the Internet, I would say that taxpayer funds were being well used.
As in Japan in its post-bubble phase, there were two trends.
One was debasement of the currency vs. the dollar. Recently, of course, as the U. S. has led the Western world in economic mismanagement, of course the yen has been forced to strengthen against the dollar. Thus, the parallel here is that the dollar has fallen against gold every year since, and including, 2001. This year is looking like no exception. How high could gold go if the stock market and financial markets stayed stable? Based on average ratios of the price of gold following
its manic run-up of the late 1970s that led to aggressive high-interest rate policies of the Fed, gold could very easily go to 2-3X the S&P price, or let us say 2500/ounce. The future is of course wildly unpredictable, but the Fed and stock market appear to be following the 2001-3 and beyond pattern, so why should not gold continue to go from strength to strength? After all, a $700 gold price in 1980 would translate in buying power to over $2000/ounce today.
The other trend, unpopular though it is to say, is toward lower long-term Treasury rates.
It is felt here that so long as one is willing to buy and hold a certain number of Treasuries, they can play a valuable role both for income and possible capital gains as part of a diversified portfolio. Tactically, it is easy to see that the Fed would want sustained low market rates a la Japan for it to make money off of its purchases of Treasuries and mortgage-backed securities. Remember that the economic recovery that is either beginning or will come at some point (if for no other reason than the law of averages and random fluctuations) and that may be a "fake" recovery could well be followed by the totally surprising events of 2008, meaning yet lower lows in Treasury rates. Similar things happened after the economic recovery of FDR's first term, after which long-term Treasury rates did not bottom till at least 1940.
Stocks are churning, in general offer insufficient income to be an attractive asset class and are manipulated or greatly affected in price by Big Finance according to self-serving metrics. Stocks that are liked here are some individual names, including Teva, McDonald's, Bristol-Myers, and National Presto (which is primarily a defense company now, though it is best known for crock pots and the like).
Currently the most interesting momentum and "fundamental" plays appear to include gold either via "GLD" or "GTU" or bullion; and TEVA and NPK in the stock market. Even if ECRI is correct about a very strong period of growth, as occurred in 1972, the general stock market could well be due for a rest.
Copyright (C) Long Lake LLC 2009
Thursday, July 30, 2009
Charts
The DoctoRx method of longer-term technical analysis is simple. It requires no computers, no protractors, no 
expenses. It even sometimes appears to work!
expenses. It even sometimes appears to work!The Capital One (COF) chart shows a long-term convex upward uptrend through about 2006. In the bubble era beginning around 1998, you can see that it got a little out of phase upward, and then in the second dip of the 2000-2003 bear market, that "out-of-phaseness" had a mirror extra downward movement. But upward momentum was waning. The stock's relative momentum vs. the market peaked around 2006.
This company did not take the risks of a Fannie or Freddie, or an AIG, but it needed rescuing by the $23.7 Trillion intervention by the Fed and the Feds. The chart shows a stock in long-term trouble, with the convex downward trend unbroken despite a tripling of the stock price since the (? temporary) bottom this winter.
This stock is a "Don't buy! Don't buy!"both in Cramerica and in DoctoRx-land.
On the other hand, Econblog Review has praised Ross Stores (ROST), also shown above. The chart is completely different from COF. Even at the bottom last fall, the stock had not broken down on the long-term charts. It is not up as much from the bottom as COF, but it is now trading at its all-time high. No short-term or long-term holder of ROST has lost a penny.
Other stocks praised by EBR for similar chart patterns and other positive corporate attributes are National Presto (NPK), Teva Pharmaceuticals (TEVA) and McDonald's.
Nothing is guaranteed, but strength begets strength in part because corporate cultures tend to have a continuity. Thus in my field of pharmaceuticals, J&J and Teva go from strength to strength, while lesser companies falter. In addition, industries may have a life cycle, such as autos or steel, but even within challenged industries, look how the prior chart strength of Honda (HMC) and Toyota vs. GM years ago presaged the current situation.
All the above stated, ROST and Teva are well above their 200 day moving averages. I have taken my profits in them and am waiting for buying opportunities where it takes more guts to buy than now, when the charts look so strong.
Two final notes. One is that this site does not provide investment advice. The other is that a long-term look at the S&P 500 (a nearly 60-year chart) does not look so hot right now. Gold and the 10-30 T-bond complex look better; while yours truly is long them both, cash equivalents continue to look mighty fine. Hard to lose there!
Copyright (C) Long Lake LLC 2009
Tuesday, July 21, 2009
Health Care Bill Less Likely to Pass Soon: Investment Considerations
In the New York Times article Democrats May Limit Tax Increases for Health Care Plan, the real news is the likely acceptance by the President that this priority of his is going to involve a longer time line than he wishes:
But rather than repeating his demand that each chamber of Congress pass a health care bill before the August break, Mr. Obama emphasized the need to reach a final agreement by the end of the year. “So let’s fight our way through the politics of the moment,” he said. “Let’s pass reform by the end of this year.”
Despite White House insistence to the contrary, the end-of-year deadline suggested that Mr. Obama was backing away slightly from his timetable; previously he had called on Congress to send him legislation to sign by mid-October.
Given EBR's focus on generating income with one's capital (or else owning gold to profit from or at least keep up with inflation), it brings the reader's attention to Eli Lilly, which yields 5.9%, sells for 8 times this year's estimated earnings and has rising earnings estimates both for this year and next year. In addition, while its market cap is close to $40 B, a small number of super-giant pharma companies could acquire it. The long-term chart of LLY happens to stink, but yours truly owns it. The stock is back where it was a dozen years ago. A previously-miserably run company that appears to have stabilized is Bristol-Myers Squibb ("BMY"), which yields 6.2%.
This spring, EBR mentioned a small number of stocks with strong fundamentals and strong long-term and short-term charts. Amongst them was Teva ("TEVA"). Teva recently hit an all-time high, has a long-term growth rate in the high teens, yields as much as cash in the bank (1.2%), and sells at 12 times estimated next year's earnings. This has been a beautifully-run (Israeli) company that has delivered for shareholders while being uninvolved in the various shenanigans afflicting so much of American industry.
None of LLY, BMY or TEVA play the stock buyback game to a significant extent. Teva can win regardless of the fate of health care reform. It is felt at EBR that valuations on LLY and BMY are low enough that P/E risk is low even if "Obamacare" passes, and that if it fails, P/E and dividend yield could allow for substantial long-term returns to shareholders.
Note: The author of this post owns TEVA and LLY and may sell either without notice. None of the commentary herein constitutes advice to anyone to buy or sell any security.
Copyright (C) Long Lake LLC 2009
But rather than repeating his demand that each chamber of Congress pass a health care bill before the August break, Mr. Obama emphasized the need to reach a final agreement by the end of the year. “So let’s fight our way through the politics of the moment,” he said. “Let’s pass reform by the end of this year.”
Despite White House insistence to the contrary, the end-of-year deadline suggested that Mr. Obama was backing away slightly from his timetable; previously he had called on Congress to send him legislation to sign by mid-October.
Given EBR's focus on generating income with one's capital (or else owning gold to profit from or at least keep up with inflation), it brings the reader's attention to Eli Lilly, which yields 5.9%, sells for 8 times this year's estimated earnings and has rising earnings estimates both for this year and next year. In addition, while its market cap is close to $40 B, a small number of super-giant pharma companies could acquire it. The long-term chart of LLY happens to stink, but yours truly owns it. The stock is back where it was a dozen years ago. A previously-miserably run company that appears to have stabilized is Bristol-Myers Squibb ("BMY"), which yields 6.2%.
This spring, EBR mentioned a small number of stocks with strong fundamentals and strong long-term and short-term charts. Amongst them was Teva ("TEVA"). Teva recently hit an all-time high, has a long-term growth rate in the high teens, yields as much as cash in the bank (1.2%), and sells at 12 times estimated next year's earnings. This has been a beautifully-run (Israeli) company that has delivered for shareholders while being uninvolved in the various shenanigans afflicting so much of American industry.
None of LLY, BMY or TEVA play the stock buyback game to a significant extent. Teva can win regardless of the fate of health care reform. It is felt at EBR that valuations on LLY and BMY are low enough that P/E risk is low even if "Obamacare" passes, and that if it fails, P/E and dividend yield could allow for substantial long-term returns to shareholders.
Note: The author of this post owns TEVA and LLY and may sell either without notice. None of the commentary herein constitutes advice to anyone to buy or sell any security.
Copyright (C) Long Lake LLC 2009
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