Archive for November, 2010

  • Earnings and Market Performance
    , November 29th, 2010 at 12:59 pm

    I was curious to see how the stock market performs when earnings are growing and when earnings are shrinking.

    I looked at Robert Shiller’s data which goes back to 1871.

    I found that there were 969 months when earnings grew from the previous year, 658 months when earnings fell and 46 when earnings stayed the same. That works out to 58% of the time with expanding earnings, 39% with falling earnings and 3% when earnings stayed the same.

    Combined, the 969 months of growing earnings combined for a market advance of more 32,000%. Annualized, that works out to 7.44%.

    For the unchanged earnings periods, the market rose by an annualized rate of 5.69%.

    For the 658 months when earning fell from one year before, the market combined for a loss of nearly 40%. That works out to a loss of 0.92% on an annualized basis.

    The takeaway is that the market’s performance is closely aligned with earnings growth. The difficulty is that you can’t always be sure what earnings are doing at the exact moment.

    The other hitch is that Shiller’s data is a monthly interpolation of quarterly numbers. During this last cycle, earnings peaked in the second quarter of 2007 and bottomed in the first quarter of 2009.

    The good news is that earnings are projected to continue growing.

  • Pat Robertson — Market Strategist
    , November 29th, 2010 at 11:43 am

    Google currently yields 385,000 results for the search “predicted the credit crisis” (without parentheses). With so many people apparently having seen disaster coming, it’s a wonder how it happened.

    There is one prediction, however, that’s often overlooked. In case you missed it, I’ll give you a quick reminder. It’s from January 2008:

    Religious broadcaster Pat Robertson predicted Wednesday that 2008 will be a year of violence worldwide and a recession in the United States, followed by a major stock-market crash by 2010.

    Sharing what he believes God has told him about the year ahead is an annual tradition for Robertson.

    On Wednesday’s “700 Club” broadcast, the founder of the Christian Broadcasting Network predicted that evangelism will increase and more people will seek God as the chaos develops. Robertson said, “We will see the presence of angels and we will see an intensification of miracles around the world.”

    Last year, Robertson predicted that a terrorist act, possibly involving a nuclear weapon, would result in mass killing in the United States. Noting that it hadn’t come to pass, Robertson said, “All I can think is that somehow the people of God prayed and God in his mercy spared us.”

    OK, maybe the miracles and angels jazz was a bit off, but you gotta give old Pat props on his market call. The stock market did indeed crash. He was right when a lot of “experts” were wrong.

    Personally, I don’t get too worked up about Robertson’s calls. He’s also the guy who blamed 9/11 on “pagans, abortionists, feminists, gays, lesbians, the American Civil Liberties Union and the People For the American Way.” I won’t even mention Robertson’s claim of leg-pressing 2,000 pounds, which is far more than world-class athletes.

    Pat loves to make crazy predictions. He’s seen the end of the world coming more than once. By the way, for all you gold bugs out there, the Reverend Mr. Robertson sees gold heading to $1,900 per ounce.

    I don’t want to discuss the accuracy of Pat Robertson’s market forecasts. Instead, I want to highlight the uselessness of making market forecasts in the first place. These predictions might be fun as a parlor game but if you’re an investor, getting a market call right or wrong does nothing for you.

    Market calls are useless. In fact, they’re worse than useless—they’re downright harmful because they give you the illusion of wisdom when they’re really just guesses about things that aren’t important.

    The reality is that the market goes up and the market goes down. I’m not trying to be dismissive of the stock market. I want to convey the reality of owning a portfolio of businesses. The stock market bounces around every day, often for little or no reason. There are thousands of stocks traded on the major U.S. exchanges. The idea of trying to predict the outcome of thousands of different business with any sort of accuracy is lunacy.

    Plus, even if a market call is accurate, what does it do for you? With so many stocks out there, plenty will buck the trend. Look at McDonalds (MCD). Shares of MCD are up 25% this year (through Friday). The stock has more than doubled over the last five years, which was a terrible time for the market.

    The reason McDonalds has done well is because its business has done well. If you had listened to accurate forecasts about the economy or the stock market, you would have completely missed this stock. If you had ignored the noise and instead focused on McDonalds’ growing business, you would have found a gem.

    It’s not like McDonalds was an unknown stock in 2005. They weren’t the only one, either. Amazon.com (AMZN) is up 260%. Apple (AAPL) is up over 360%.

    To have a well-diversified portfolio, you only need eight to twelve stocks. Even if these are fairly large stocks, you still own a small drop of a very large bucket. My advice is to save the market calls for fun. Instead, focus on own owning growing, profitable businesses.

    I think Pat Roberston summed it up well: “I have a relatively good track record,” he said. “Sometimes I miss.”

    Don’t worry about missing, Pat. You’re wrong on lots of things. It’s not the end of the world.

  • AFLAC = $51.38
    , November 29th, 2010 at 9:51 am

    Just a quick note: If you’re looking for a stock to buy today, AFLAC (AFL) is moving into crazy-cheap territory.

  • Politics Vs. Finance
    , November 29th, 2010 at 9:08 am

    I hope everyone had a happy Thanksgiving. The early reports show that holiday shopping was strong over the weekend. Honestly, the Black Friday stuff is very overrated (it’s not that big a driver of business), but it’s nice to see retail looking up.

    This looks to be a rather eventful week for the stock market. What happened in America in September 2008 seems to be happening now in Ireland and Portugal and Spain and well…all of Europe basically.

    Tyler Cowen writes:

    In a nutshell, we’re watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. It’s not just about PIGS and the future of the eurozone, it’s settling a very general question about the relative power of politics and finance. Either way, it is an event of momentous importance.

    I think he’s right: Finance will win.

    One of our Buy List stocks, JoS. A. Bank Clothiers (JOSB) has said that it will have a conference call this Thursday at 11 am to discuss its third-quarter earnings report. That should mean that the earnings report will come out after the closing bell on Wednesday.

    Wall Street currently expects Q3 earnings of 50 cents per share. I really like JOSB and I’m expecting a big beat from them. They made 42 cents per share for last year’s Q3 and I think they could easily make as much as 57 cents per share. I know that sounds very optimistic, but that’s how strong I think this stock is.

    The other news to keep an eye on is the Chicago PIM which comes out tomorrow. The Big ISM report will come out at 10 am on Wednesday. I think a “boring” number like 54 or 55 will be very good news for the economy. It will mean that the economy is still plowing along, albeit slowly.

    The Fed’s Beige Book comes also comes out on Wednesday. Finally, Friday brings the all-important jobs report. Maybe…finally, we’ll see some real improvements in the labor market, but I’m not going to celebrate until I see proof.

  • Morning News: November 29, 2010
    , November 29th, 2010 at 6:59 am

    Europe Stocks, Bonds Drop on Ireland Bailout Concern; U.S. Futures Advance

    Crude Oil Trades Near 10-Day High on Cold Weather in Europe, Debt Measures

    Yuan-Hungry Investors Urge Companies to Sell Dim-Sum Bonds: China Credit

    Japan’s Bonds Gain, Yields Fall from Three-Month High, After Retail Sales

    EU Supports Debt Rules in Retreat From Merkel Demands

    Wall Street Shrinks From Credit Default Swaps Before Rules Hit

    Thanksgiving Weekend Sales Rise 6.4% as Shoppers Splurge

    For PayPal, the Future Is Mobile

    Wal-Mart to Pay $2.3 Billion for Control of Massmart

    BP Rises After Sale of Argentine Stake for $7 Billion

    “Signs of Unsustainability” in Chinese Real Estate

  • Breaking Down the Numbers at Eli Lilly
    , November 26th, 2010 at 12:45 pm

    It’s “Link to Motley Fool Day” here at Crossing Wall Street! I honestly didn’t plan it this way, but here’s another good read by Matt Koppenheffer. He looks at Eli Lilly‘s (LLY) numbers and likes what he sees.

  • Parsing Gilead’s Earnings
    , November 26th, 2010 at 9:11 am

    Seth Jayson at the Motley Fool has a good article looking at the details of Gilead Science‘s (GILD) cash flow and earnings numbers. Companies have a lot of leeway to massage these numbers, but from Jayson’s analysis, Gilead’s numbers are pretty clean.

  • Morning News: November 26, 2010
    , November 26th, 2010 at 7:43 am

    Wall Street Futures Point to Weak Start after Holiday

    Black Friday Brings Out the Competitors

    Irish Republic to Get 85 Billion-euro EU and IMF Bailout

    Europe Shares Fall on Portugal Worry

    Turkish Stocks Most Expensive Since 2003 Imperil `Crowded Trade’

    Greek Stocks: Hygeia, Marfin Popular, Piraeus Bank, Proton Move

    Public Anger Has British Bankers Fretting About Bonuses

    KKR to Purchase Meow Mix Maker Del Monte Foods for $4 Billion

    Qatar Airways Slams Boeing, May Buy More Airbus

    Fiat, Chrysler Venture to Make Cars, SUVs at Turin Mirafiori Plant

    Rocks, Paper, Scissor

  • CWS Market Review – November 26, 2010
    , November 26th, 2010 at 7:07 am

    I hope everyone had a happy Thanksgiving. Although the trading week was shortened due to the holiday (the markets were closed yesterday and they close at 1pm today), there was a lot of news to cover, so let’s get to it!

    On Tuesday, the government upwardly revised its estimate for third-quarter GDP growth from 2% to 2.5%. This is good news. I should warn you that the government loves to revise its GDP reports. The revisions are themselves later revised, and then the revisions to the revisions are again revised. Sometimes I wonder if increased economic activity is solely due to economists’ continual revisions.

    Still, the 2.5% number is good news. The economy still isn’t growing at an acceptable level to create new jobs, but I think we can now say that the recession is behind us and that the crazy Double Dip fears from this summer were way overblown. The next hurdle is for the economy to create new jobs in a serious way. Next Friday, December 2, we’ll get the jobs report for November. I really don’t know what to expect, but a strong report will be evidence that the economic recovery is finally reaching Main Street.

    The problem is that the recovery has been heavily tilted towards Wall Street, meaning growth in profits and not jobs. That’s how things usually play out when the economy gets back on its feet. Profit increases are good, and the stock market has certainly responded over the last 20 months, but such increases have heavily relied on an increase in profit margins. In other words, companies have increased their sales by a little bit, but they’ve substantially cut their overhead by laying folks off. Now the top line needs to grow, and that means more jobs. Let’s see what next Friday has in store.

    We had two earnings reports from the Buy List this week—Medtronic ($MDT) and Eaton Vance ($EV). Medtronic earned 82 cents per share which was a penny better than the Street’s estimate. (In last week’s e-letter, I said it was 81 cents. The consensus apparently came down one penny.) This was a decent report given that I haven’t been terribly pleased with some of Medtronic’s recent earnings reports.

    In last week’s e-letter I had said it was very possible that Medtronic would lower its full-year forecast. I was right; it did. Medtronic lowered its full-year EPS to a range of $3.38 to $3.44. The original range was $3.45 to $3.55, and in August it was lowered to $3.40 to $3.48. I’ve looked at the numbers and the new range is a much more reasonable forecast.

    This is a frustrating stock, but the good news for us is that Wall Street loathes Medtronic. The stock is very cheap by most measures. My view is that MDT is a good value under $34 per share (which is 10 times 2011’s forecast). On top of that, the shares currently offer a nice 22.5-cent quarterly dividend (2.6% annualized). Don’t chase this stock. If you’re looking to buy it, let it come to you. “Patience young Skywalker, patience.”

    The other earnings report this week was from Eaton Vance, the mutual fund outfit. The company earned 41 cents per share which was two cents above Wall Street’s expectations. This was a good quarter for EV. Net inflows rose to $3.4 billion from $500 million. Revenue jumped 19% to $303.6 million from $254.1 million. Wall Street was looking for revenue of $287.4 million.

    Don’t expect a lot of fireworks from Eaton Vance. Instead, think of it as a good, stable stock that won’t let you down. Owning EV can be frustrating at times. The stock has been locked in a trading range for the last six months. It’s barely strayed from $30. The stock could break out at any time but I urge you to keep focused on the long-term. Last month, Eaton Vance raised its dividend for the 30th year in a row. The new dividend is 18 cents per share which is a 12.5% increase from the old dividend of 16 cents per share.

    The next Buy List earnings report will be from Jos. A Bank Clothiers ($JOSB). The company hasn’t said when it will report earnings but the fiscal third-quarter report usually comes in early December.

    Like a lot of retail stocks, Joey Banks ends its fiscal year at the end of January to facilitate factoring holiday sales into the fourth quarter. Even Walmart ($WMT) does this. The holiday season is very, very important to JOSB. That quarter alone usually accounts for close to half of JOSB’s profits for the entire year. (Also, I think they have good stuff, so check them out.)

    Wall Street currently expects Q3 earnings of 50 cents per share. I really like JOSB and I’m expecting a big beat from them. They made 42 cents per share for last year’s Q3 and I think they could easily make as much as 57 cents per share. I know that sounds very optimistic, but that’s how strong I think this stock is.

    JOSB is very much the opposite of a stock like Eaton Vance. They don’t pay a dividend and the shares can be very erratic. The stock plunged 20% from its April high earlier this year, and it fell 30% from its April high in 2009. During both years, business was doing very well, yet the stock got slammed anyway (fortunately for only a few weeks). If you can stand the volatility, I think Jos. A Bank Clothiers is an excellent buy up to $50.

    Some other bargains on the Buy List are AFLAC ($AFL) below $55 per share, Wright Express ($WXS)below $44, Nicholas Financial ($NICK) below $10 and Reynolds American ($RAI) below $34. (BTW: The recent drop is RAI is very attractive. It may not last long.)

    On Wednesday of next week, we’ll get the ISM Index report for November. I think is a report well worthy of our attention. A number over 50 means that the economy is expanding and the ISM has been over 50 for the past 15 straight months. I’m almost certain next week will make it 16.

    That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy

  • Happy Thanksgiving
    , November 25th, 2010 at 12:09 pm

    From the White House:

    THE WHITE HOUSE
    Office of the Press Secretary
    November 23, 2010

    THANKSGIVING DAY, 2010

    – – – – – – –

    BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

    A PROCLAMATION

    A beloved American tradition, Thanksgiving Day offers us the opportunity to focus our thoughts on the grace that has been extended to our people and our country. This spirit brought together the newly arrived Pilgrims and the Wampanoag tribe — who had been living and thriving around Plymouth, Massachusetts for thousands of years — in an autumn harvest feast centuries ago. This Thanksgiving Day, we reflect on the compassion and contributions of Native Americans, whose skill in agriculture helped the early colonists survive, and whose rich culture continues to add to our Nation’s heritage. We also pause our normal pursuits on this day and join in a spirit of fellowship and gratitude for the year’s bounties and blessings.

    Thanksgiving Day is a time each year, dating back to our founding, when we lay aside the troubles and disagreements of the day and bow our heads in humble recognition of the providence bestowed upon our Nation. Amidst the uncertainty of a fledgling experiment in democracy, President George Washington declared the first Thanksgiving in America, recounting the blessings of tranquility, union, and plenty that shined upon our young country. In the dark days of the Civil War when the fate of our Union was in doubt, President Abraham Lincoln proclaimed a Thanksgiving Day, calling for “the Almighty hand” to heal and restore our Nation.

    In confronting the challenges of our day, we must draw strength from the resolve of previous generations who faced their own struggles and take comfort in knowing a brighter day has always dawned on our great land. As we stand at the close of one year and look to the promise of the next, we lift up our hearts in gratitude to God for our many blessings, for one another, and for our Nation. This Thanksgiving Day, we remember that the freedoms and security we enjoy as Americans are protected by the brave men and women of the United States Armed Forces. These patriots are willing to lay down their lives in our defense, and they and their families deserve our profound gratitude for their service and sacrifice.

    This harvest season, we are also reminded of those experiencing the pangs of hunger or the hardship of economic insecurity. Let us return the kindness and generosity we have seen throughout the year by helping our fellow citizens weather the storms of our day.

    As Americans gather for the time-honored Thanksgiving Day meal, let us rejoice in the abundance that graces our tables, in the simple gifts that mark our days, in the loved ones who enrich our lives, and in the gifts of a gracious God. Let us recall that our forebears met their challenges with hope and an unfailing spirit, and let us resolve to do the same.

    NOW, THEREFORE, I, BARACK OBAMA, President of the United States of America, by virtue of the authority vested in me by the Constitution and the laws of the United States, do hereby proclaim Thursday, November 25, 2010, as a National Day of Thanksgiving. I encourage all the people of the United States to come together — whether in our homes, places of worship, community centers, or any place of fellowship for friends and neighbors — to give thanks for all we have received in the past year, to express appreciation to those whose lives enrich our own, and to share our bounty with others.

    IN WITNESS WHEREOF, I have hereunto set my hand this twenty-third day of November, in the year of our Lord two thousand ten, and of the Independence of the United States of America the two hundred and thirty-fifth.

    BARACK OBAMA