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Brent Vondera, Senior Analyst
Friday, April 23, 2010
Thursday, April 22, 2010
Daily Insight: Mortgage Apps, Stimulating Default and EU Under Pressure
U.S. major stock indexes ended essentially flat on Wednesday as the EU sovereign debt story weighed just enough to erase early-session gains. The Dow closed up slightly and the S&P 500 down a smidge. The tech-laden NASDAQ performed the best of the three majors; tech earnings are the most solid of all industries – financials profits are up the most on paper but it’s artificial.
Yesterday’s earnings reports were good for the most part, which offered support to the market. Again though, I can’t help but mention for a second day that multinational companies are reporting weak domestic growth; most of the profit growth is coming from overseas, currency translation and payroll cost-cutting. The financial company reports of the past couple of days showed that their profits are coming from big trading profits, thanks to Dr. Zero. I continue to believe that the banks are going to have a reality problem a couple of quarter out as the home sales reports will show distressed properties are making up a larger percentage of total sales – that percentage has been averaging about 35% and data from various states suggests it’s going over 40%; price declines will follow and that means banks will have to set aside more cash, which cuts into earnings. With 30% of home borrowers either underwater or with less than 5% equity, there is zero room for additional price declines.
On the EU sovereign debt problem, the relevance regarding the Greek financing issue is not that the country defaults on some payments per se, but that other EU countries have similar budget problems. Since the Eurozone is heavily dependent on government spending, the required and austere budget cuts will certainly be seen in their already very weak GDP readings. Further, I suspect that European banks hold large amounts of government debt and as those securities get whacked, so does the capital of those banks – as goes the capital so goes the lending.
The major industry groups were split with five up and five down. Industrials led the gainers and health-care the losers – the shares got hammered relative to the market, down 1.74%.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Yesterday’s earnings reports were good for the most part, which offered support to the market. Again though, I can’t help but mention for a second day that multinational companies are reporting weak domestic growth; most of the profit growth is coming from overseas, currency translation and payroll cost-cutting. The financial company reports of the past couple of days showed that their profits are coming from big trading profits, thanks to Dr. Zero. I continue to believe that the banks are going to have a reality problem a couple of quarter out as the home sales reports will show distressed properties are making up a larger percentage of total sales – that percentage has been averaging about 35% and data from various states suggests it’s going over 40%; price declines will follow and that means banks will have to set aside more cash, which cuts into earnings. With 30% of home borrowers either underwater or with less than 5% equity, there is zero room for additional price declines.
On the EU sovereign debt problem, the relevance regarding the Greek financing issue is not that the country defaults on some payments per se, but that other EU countries have similar budget problems. Since the Eurozone is heavily dependent on government spending, the required and austere budget cuts will certainly be seen in their already very weak GDP readings. Further, I suspect that European banks hold large amounts of government debt and as those securities get whacked, so does the capital of those banks – as goes the capital so goes the lending.
The major industry groups were split with five up and five down. Industrials led the gainers and health-care the losers – the shares got hammered relative to the market, down 1.74%.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Wednesday, April 21, 2010
Daily Insight: Is Eight Enough, Crude Reversal and Not So Confident
U.S. stocks marched higher on good earnings reports, moving above the 1200 mark on the S&P 500. This puts the broad market within 4% of its pre-Lehman collapse level. The tech-laden NASDAQ Composite has already fueled past its pre-Lehman number of 2300, crossing the 2500 mark for the third time in a week so we’ll see if we can hold it this time.
Profit reports are looking good again this quarter, the second quarter of improvement following nine periods of decline; although the theme among the multi-nationals has been Asian growth, with sales from the Americas weak-to-flat relative to the year-ago period -- IBM and Coca-Cola’s results were the latest examples. Also, corporate cost-cutting via payroll slashing is the primary boost to profits. This massive cost-cutting is both good and bad. While it helps the profit story, it stings personal incomes – exclude the $365 billion in transfer payments over the past 18 months, which cannot be sustained anyway, and personal income is down 4% over the last year-and-a-half.
As we’ve discussed, this profit cycle should extend for a few quarters, but for it to prove the multi-year run that is usually the case we’ll have to see the final demand necessary to fuel top-line improvement; that means several quarters of above-average GDP that is required for strong job growth. The requisite household de-leveraging process once job growth picks up will prove a headwind for consumer activity. If stocks hold these gains, it will make the process easier; if not, then consumers won’t have that relative wealth effect that helps propel spending. For now, the more cars bought (as 0% loans and $0 down is all the rage again) and the more iPhones purchased by generations X and Y that just can’t do without their gazillion apps, the necessary de-leveraging is only delayed.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Profit reports are looking good again this quarter, the second quarter of improvement following nine periods of decline; although the theme among the multi-nationals has been Asian growth, with sales from the Americas weak-to-flat relative to the year-ago period -- IBM and Coca-Cola’s results were the latest examples. Also, corporate cost-cutting via payroll slashing is the primary boost to profits. This massive cost-cutting is both good and bad. While it helps the profit story, it stings personal incomes – exclude the $365 billion in transfer payments over the past 18 months, which cannot be sustained anyway, and personal income is down 4% over the last year-and-a-half.
As we’ve discussed, this profit cycle should extend for a few quarters, but for it to prove the multi-year run that is usually the case we’ll have to see the final demand necessary to fuel top-line improvement; that means several quarters of above-average GDP that is required for strong job growth. The requisite household de-leveraging process once job growth picks up will prove a headwind for consumer activity. If stocks hold these gains, it will make the process easier; if not, then consumers won’t have that relative wealth effect that helps propel spending. For now, the more cars bought (as 0% loans and $0 down is all the rage again) and the more iPhones purchased by generations X and Y that just can’t do without their gazillion apps, the necessary de-leveraging is only delayed.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Tuesday, April 20, 2010
Daily Insight: Europe vs. The Volcano, and SEC Vote
U.S. stocks erased early-session losses after it was learned that the Securities and Exchange Commission’s (SEC) vote on pursuing a case against Goldman Sachs was not unanimous. The vote came in at 3-2, which means the SEC pursuit of the way Goldman has allegedly conducted itself may not be as vigorous as previously expected.
While many will say that it’s GS for the SEC not to pursue the case aggressively, the market also feared the short-term market ramifications of such action. But we shouldn’t put our guard down, as Congress and state attorneys general are there, in all their populist fury, to go after the entire financial industry by way of a new regulatory regime.
I do find it surprising the SEC voted this way, considering the several acts of serious malfeasance they missed over the past couple of years, or decades in terms of Madoff. One would have thought they’d go after this case, maybe even to overdo it, just to make a statement.
The early slide was largely led by basic material shares. China’s pullback on its stimulus, particularly on the loan front as they shift to more stringent credit standards and halt loans to those speculating within the housing market (third home buyers as they call them), has people worried about Asian demand a few months out. China’s very aggressive stimulus program, both in terms of outright government spending and in massive credit creation, has fueled the Asian economic bounce. But the market’s mid-day rally gave life to the commodity trade and basic material shares bounced back.
In the end, all 10 major industry groups close up for the session. Industrials were the laggard, essentially unchanged. Financials, Friday’s big losers, was the best-performing group, up 1.10%.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
While many will say that it’s GS for the SEC not to pursue the case aggressively, the market also feared the short-term market ramifications of such action. But we shouldn’t put our guard down, as Congress and state attorneys general are there, in all their populist fury, to go after the entire financial industry by way of a new regulatory regime.
I do find it surprising the SEC voted this way, considering the several acts of serious malfeasance they missed over the past couple of years, or decades in terms of Madoff. One would have thought they’d go after this case, maybe even to overdo it, just to make a statement.
The early slide was largely led by basic material shares. China’s pullback on its stimulus, particularly on the loan front as they shift to more stringent credit standards and halt loans to those speculating within the housing market (third home buyers as they call them), has people worried about Asian demand a few months out. China’s very aggressive stimulus program, both in terms of outright government spending and in massive credit creation, has fueled the Asian economic bounce. But the market’s mid-day rally gave life to the commodity trade and basic material shares bounced back.
In the end, all 10 major industry groups close up for the session. Industrials were the laggard, essentially unchanged. Financials, Friday’s big losers, was the best-performing group, up 1.10%.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Monday, April 19, 2010
Eli Lilly (LLY) Earnings and Measuring the Costs and Impat of Healthcare Reform
Eli Lilly (LLY) became the first Big Pharma firm to give some concrete numbers relating to the cost of reform.
LLY trimmed its 2010 earnings guidance to reflect a 35-cent (full-year) impact from U.S. healthcare reform. The company projected government rebates related to healthcare reform to reduce full-year revenues by $350 million to $400 million. The healthcare reform-related charges in the first quarter amounted to 12 cents, or 9% of EPS.
The charges were higher than analysts were expecting, but this will not necessarily be the case for all drugmakers. Roughly 20% of LLY’s total sales are to government programs Medicare and Medicaid, both of which received discounts from pharmaceutical firms in the healthcare bill. As more pharma firms report earnings, I think we will see that LLY’s high exposure Medicare and Medicaid creates a disproportionately large impact for the firm relative to its peers.
It will take several years for the volume created by newly insured patients to offset the costs associated with the healthcare legislation. At the same time, I expect LLY to be one of the harder hit firms in the industry.
Shares of LLY are basically flat on today’s earnings release, but they have trailed the broader market over the past year. The firm’s pipeline will not offset the revenue loss expected from looming patent expirations and it seems inevitable that LLY will need to acquire a late-stage drugs.
Without additional revenues, LLY will need to slash its attractive dividend. Of course, any M&A activity would likely lead to a reduction in the payout anyways. The bigger downside to M&A is that it has historically destroyed shareholder wealth for drugmakers.
These concerns are well-known and something I’ve covered before; I’d say the bigger takeaway from LLY’s results is that investors will now expect the same level of disclosure regarding the impact from healthcare reform. That’s better than nothing, right?
Peter Lazaroff, Investment Analyst
www.acrinv.com
LLY trimmed its 2010 earnings guidance to reflect a 35-cent (full-year) impact from U.S. healthcare reform. The company projected government rebates related to healthcare reform to reduce full-year revenues by $350 million to $400 million. The healthcare reform-related charges in the first quarter amounted to 12 cents, or 9% of EPS.
The charges were higher than analysts were expecting, but this will not necessarily be the case for all drugmakers. Roughly 20% of LLY’s total sales are to government programs Medicare and Medicaid, both of which received discounts from pharmaceutical firms in the healthcare bill. As more pharma firms report earnings, I think we will see that LLY’s high exposure Medicare and Medicaid creates a disproportionately large impact for the firm relative to its peers.
It will take several years for the volume created by newly insured patients to offset the costs associated with the healthcare legislation. At the same time, I expect LLY to be one of the harder hit firms in the industry.
Shares of LLY are basically flat on today’s earnings release, but they have trailed the broader market over the past year. The firm’s pipeline will not offset the revenue loss expected from looming patent expirations and it seems inevitable that LLY will need to acquire a late-stage drugs.
Without additional revenues, LLY will need to slash its attractive dividend. Of course, any M&A activity would likely lead to a reduction in the payout anyways. The bigger downside to M&A is that it has historically destroyed shareholder wealth for drugmakers.
These concerns are well-known and something I’ve covered before; I’d say the bigger takeaway from LLY’s results is that investors will now expect the same level of disclosure regarding the impact from healthcare reform. That’s better than nothing, right?
Peter Lazaroff, Investment Analyst
www.acrinv.com
Daily Insight: Housing Starts, Confidence, Korea and Goldman Not So Golden
U.S. stocks ran into a little trouble on Friday as the IMF is headed to Greece, the latest consumer confidence reading erased three-months of gains, the potential for conflict on the Korean peninsula got a little hotter and Goldman Sachs is now officially under investigation for defrauding investors.
Pre-market trading, which was pointing lower very early Friday morning, weakened just before the open when South Korea stated there’s a high possibility the sinking of their warship last month was due to an external explosion – one would think if their ship ran into a mine or was hit by a torpedo that they’d know by now. But if it was external, it has North Korea written all over it. This concern extended into the official trading session.
But concerns on that front were suddenly overcome by an SEC charge that Goldman Sachs defrauded investors. The deal is Goldman stated a financial product they marketed that was tied to subprime mortgages, as the housing market was beginning to crumble, was structured by an independent, objective third party. It appears though that the product, a synthetic CDO, was not structured by an independent source, but rather the portfolio selection was influenced by John Paulson’s hedge fund who was betting the securities underlying the CDO would default. This resulted in new fears that ramifications from the financials chaos of late 2008 may not have completely blown over. More on this below the jump…
The market has become incredibly complacent, and while stocks improved from the session’s low point, the news out of Korea and yet another case of financial fraud may have reminded traders of the various risks that lurk in the marketplace today. There are always risks, but they are abundant right now and when the market is so complacent, as illustrated by the VIX index, its sets up for stocks to get rocked.
Friday we held in there pretty well, a 1.6% decline is not getting rocked in my view. Hopefully, Friday slapped enough people from their pretty little wonderland to lower expectations just enough so we don’t endure something that scares traders and makes a harmful move lower self-fulfilling. This still fragile economy will not respond well to such an event.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
www.acrinv.com
Pre-market trading, which was pointing lower very early Friday morning, weakened just before the open when South Korea stated there’s a high possibility the sinking of their warship last month was due to an external explosion – one would think if their ship ran into a mine or was hit by a torpedo that they’d know by now. But if it was external, it has North Korea written all over it. This concern extended into the official trading session.
But concerns on that front were suddenly overcome by an SEC charge that Goldman Sachs defrauded investors. The deal is Goldman stated a financial product they marketed that was tied to subprime mortgages, as the housing market was beginning to crumble, was structured by an independent, objective third party. It appears though that the product, a synthetic CDO, was not structured by an independent source, but rather the portfolio selection was influenced by John Paulson’s hedge fund who was betting the securities underlying the CDO would default. This resulted in new fears that ramifications from the financials chaos of late 2008 may not have completely blown over. More on this below the jump…
The market has become incredibly complacent, and while stocks improved from the session’s low point, the news out of Korea and yet another case of financial fraud may have reminded traders of the various risks that lurk in the marketplace today. There are always risks, but they are abundant right now and when the market is so complacent, as illustrated by the VIX index, its sets up for stocks to get rocked.
Friday we held in there pretty well, a 1.6% decline is not getting rocked in my view. Hopefully, Friday slapped enough people from their pretty little wonderland to lower expectations just enough so we don’t endure something that scares traders and makes a harmful move lower self-fulfilling. This still fragile economy will not respond well to such an event.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
www.acrinv.com
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