CWS Market Review – August 24, 2012
The Great Summer Snoozefest continues. Volatility is low, and trading volume is moribund. Don’t worry, though, friends. Things will get a lot more exciting once all the traders and hedge-fund big shots get back from the Hamptons and Martha’s Vineyard after Labor Day.
In this week’s CWS Market Review, I’ll tell you why the S&P 500 may be due for a short-term pullback. Not a biggie, but perhaps a short rest is in order. I’ll also highlight another good earnings report from Medtronic ($MDT). And I’ll tell you why the latest reports of imminent Fed stimulus are way off base. Plus, we have an upcoming earnings report from Jos. A. Bank Clothiers ($JOSB). (Sadly, I’m not expecting much from them.)
Expect a Modest Pull-Back over the Next Few Weeks
On Friday and Monday, the S&P 500 came oh-so-close to finishing the day at a fresh post-Crash high. But it was not to be. Then on Tuesday, the index got as high as 1,426.68 before we gave back much of our gains. Still, even this uptick in volatility is kid’s stuff compared with the rollercoaster we were on last August. The market has had a pretty good run this summer. Going back to early June, the stock market has been on a definite upwards sawtooth rally (see the chart below).
As I’ve described in recent issues of CWS Market Review, the underlying currents of the rally have changed. At first, the market was very defensive as we saw high-yielding stocks like Reynolds American ($RAI) and Johnson & Johnson ($JNJ) lead the charge. Lately, however, the market has adopted a more aggressive posture as stocks like JPMorgan Chase ($JPM) have marched higher.
I suspect—though I’m not yet fully convinced—that this is due to the market’s newfound belief that the economy is doing better. Or at least, that it’s doing horribly at a slower pace than before. Some of the recent economic reports, like those for industrial production and retail sales, have been pretty good. Notice how stocks like Walmart ($WMT) and Bed Bath & Beyond ($BBBY) have done fairly well.
I’ve also been impressed by a pickup in the housing market. Home prices just had their biggest jump in over six years. I should explain that traditionally the housing market has been a major catalyst for the economy to get back on its feet. The fear this time around is that with the massive overbuilding, any recovery would be hollow since it wouldn’t be aided by the housing market. That may be changing. The weak spot in the economy is still the jobs market, but initial jobless claims are holding below 400,000. We’ll know more when the next jobs report comes on September 7th.
The problem right now is that the market has charged higher without much resistance. Over the next few weeks, Wall Street will face its greatest enemy—uncertainty. Not only is there an election coming, but there are still unresolved issues in Europe, plus the domestic earnings outlook isn’t quite so rosy. That leads me to believe that stocks will probably go sideways for a bit or may even lose some ground. But I think any pullback will be a prelude to a strong year-end rally.
The most important fact facing investors is that stocks are cheap and bonds are pricey. Analysts’ estimates for next year have stopped falling. If they’re right, that means the S&P 500 is currently going for just over 12 times earnings. That’s pretty stiff competition for a 10-year Treasury, which is up to 1.67%.
Ignore the QE3 Nonsense
Sometimes Wall Street can be such a drama queen. On Wednesday, traders freaked out over the “news” that the minutes from the Federal Reserve’s last meeting hinted that more stimulus was imminent. The gold market was especially emotional. Here’s the line that everyone latched on to:
Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.
I hate to break it to them, but that sentence doesn’t mean much. Read by itself, it sounds far more impressive than it is. This is the type of boilerplate language that’s always included in Fed minutes. Read the whole thing, and you’ll see what I’m talking about.
The Fed’s minutes are jam-packed with indefinite pronouns (many, several, some). The reason is simple—they’re debating the economy, and people have differing views. And even given these differing views, there are different opinions about what to do next. It’s very easy for “many” to feel that Action A would “likely be warranted” assuming event B becomes a reality. Big whoop. That’s a far cry from promising that a large-scale asset-purchase program is on the way.
If the Fed is ready to act, then they would be far more decisive than they are at the moment. On Thursday, James Bullard, the head of the St. Louis Fed, said that even modest growth of 2% would be enough for the Fed to keep its powder dry. That may be unpleasant for some people to hear, but it sounds right to me.
The minutes make it clear that at least one member (most certainly Richmond’s Jeffrey Lacker) is strongly opposed. There may be others. I don’t see how the Fed can implement a program so soon before an election, and with divisions within the Federal Open Market Committee. Bottom line: There’s no QE3 on the way.
Medtronic Is a Buy up to $44
Now let’s turn to our Buy List. On Tuesday, Medtronic ($MDT) reported quarterly earnings of 85 cents per share. That was in line with Wall Street’s forecast, though I was expecting a little more. The important news is that the company is sticking with its full-year earnings forecast of $3.62 to $3.70 per share.
The good news is that sales of Medtronic’s coronary and vascular devices and structural heart products all improved. The downside is that sales of pacemakers and defibrillators fell. For the quarter, Medtronic’s sales rose 1.6% to $4.01 billion. I thought it was interesting that MDT’s earnings-per-share figure got a 3% boost thanks to fewer shares outstanding. That’s a pleasant exception to the normal corporate action of diluting shares via executive compensation. Notice how well-run companies do even the little things better.
On CNBC, the CEO said that he was pleased by the performance of Medtronic’s new products. Even though the overall market isn’t growing very much, the company has been able to gain market share. That’s important to note. On Wednesday, shares of MDT touched a new 52-week high. Remember that the company bumped up its quarterly dividend by 7% in June to 26 cents per share. That’s a sign of confidence. At Thursday’s closing price, the stock yields 2.58%. Medtronic is a very solid buy whenever the shares are below $44.
My Mistake with Jos. A. Bank Clothiers
We have an earnings report due soon from Jos. A. Bank Clothiers ($JOSB). I don’t know the precise date just yet, but for the last few years, the company has reported on the Wednesday before Labor Day, so I’m assuming next Wednesday, August 29th will be the day this year.
With JOSB, I have to confess that I made a mistake. I should not have kept it on this year’s Buy List. I try to be very up front with you about why we do what we do, and it’s important to realize when you’ve made a mistake. For many new investors, the biggest mistake they make is their refusal to admit an earlier and often smaller mistake.
Three months ago, JOSB had a terrible earnings report—they missed by nine cents per share. Revenue dropped by more than 4%, and the key metric, same-store sales, dropped by 1%. Ugh! The company had warned us that the quarter would be weak, but those numbers are quite poor. JOSB did say that last quarter, the fiscal second, was off to a good start. We’ll see.
For the second quarter, Wall Street expects earnings of 73 cents per share. That’s one penny below last year. I don’t have a precise estimate for you, but I’m afraid Wall Street might be too high. I’ll note in JOSB’s favor that the stock isn’t unreasonably priced at $41, but that’s because it’s down from $54 in March. My apologies, but this is why we keep a well-diversified Buy List. I’m keeping my buy price at $48.
Some Buy-List Bargains
I want to highlight a few stocks on our Buy List that look especially good right now. I’ve been impressed by the recent rally in Oracle ($ORCL). Look for another strong earnings report next month. I also like Ford ($F). I don’t see how the stock can go for less than $10, but it is. JPMorgan Chase ($JPM) has rallied, but it’s still going for a good price. Lastly, CA Technologies ($CA) has quietly settled to a good price. The stock also yields a cool 3.88%. Not bad.
That’s all for now. Next week is the week before Labor Day, so I don’t expect to see much action. I’ll be curious to see if the government revises the Q2 GDP report higher on Wednesday. If not, it will give traders something to freak out about. 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
Posted by Eddy Elfenbein on August 24th, 2012 at 6:31 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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