Archive for November, 2010

  • CWS Market Review – November 12, 2010
    , November 12th, 2010 at 7:53 am

    As I expected, this has been a fairly slow week for market news. We’re now wrapping up the third-quarter earnings season, and overall, earnings have been very good. Unfortunately, the media hasn’t talked about this much.

    Normally, the average stock beats its earnings estimate by 3%. Analysts like to low-ball since missing by a penny too little looks much better than missing by a penny too much. This season, the median earnings beat was by close to 5%. More than three of out every four stocks in the S&P 500 have beaten expectations. This is excellent news, and it will hopefully put an end to all the nonsense we heard about a Double Dip over the summer.

    According to the latest numbers, Q3 earnings for the S&P 500 are up 36.1% from one year ago. The current projection is that earnings will be up another 26.8% for Q4. The S&P 500 is on track to earn $83.51 for all of 2010. The current forecast is for $94.34 for next year. Going by Thursday’s close, that’s a forward P/E of just 12.86. In other words, stocks are still a good deal.

    The difficulty will be earnings for next year. Expanding margins have been the main driver of earnings increases, but that’s going to be much harder to do next year.

    I’m happy to say that 14 out of the 15 stocks on our Buy List that report on the March/June/September/December cycle beat expectations. Only Moog ($MOG-A) missed and that was by a penny per share. Some stocks, like Wright Express ($WXS) and Nicholas Financial ($NICK), had exceptionally strong reports.

    Now we’re moving on to earnings reports from companies whose quarter ended in October. In fact, the market was rattled today by earnings news from Cisco ($CSCO) which has an October quarter.

    Cisco’s stock is almost exactly where it was 12 years ago. Oddly, some of the problems that Cisco faces are cutbacks in government spending. Cisco is feeling the pinch not just because of Uncle Sam but also at the state level and internationally as well. The company gets about 22% of its business from the public sector.

    The most fascinating news this week was in silver, which is often called the “poor man’s gold.” On Tuesday the CME announced that it was raising the margin requirement on silver which, led to some crazy trading.

    The Silver ETF ($SLV) traded an astounding 145 million shares on Tuesday. To put that in context, over the summer SLV often traded around 5 million shares per day. Thanks to the margin news, silver’s explosive rally was halted in its tracks. On Tuesday, SLV dropped from a high of $28.72 to a close of $26.18. In late August, SLV was going for $18.

    The margin change is eerily similar to when margin rules were changed in 1980 when the Hunt brothers tried—and nearly succeeded—to corner the world silver market. They borrowed huge amounts of money for their gambit.

    At first, it was a brilliant move and the brothers made billions. This is back when being a billionaire was something special. But the bottom fell out of the market on “Silver Thursday,” March 27, 1980. The plunge in silver was much greater than the plunge in gold. So far, SLV has recovered from its mini-plunge, closing at $27.11 on Thursday.

    I don’t recommend investing in gold or silver, but I won’t be surprised to see gold move higher from here. In fact, it could go a lot higher. I published my gold model (or really a model for a gold model) last month in which I indicated that the key is real interest rates. As long as the Fed keeps interest rates low, gold ought to do well. I have nothing against gold, but I feel the best way to invest is with strong stocks. They’re much more stable and less open to speculative frenzies (but not impervious to them either).

    Speaking of strong stocks, I should remind you that Reynolds American ($RAI) will be splitting its shares 2-for-1 next week. Don’t be alarmed if you see that the stock is down by 50%. It’s not really so. If you own RAI, you’ll have twice as many shares. The split will be effective on Tuesday morning.

    Reynolds American got dinged on Wednesday due to the news of the graphic packaging that’s been proposed for cigarette boxes. After October 22, 2012, all cigarettes sold in the U.S. must have labels with phrases like “smoking can kill you.” The graphics have to cover half of the front and back of cigarette boxes.

    We have three stocks on the Buy List whose quarter ended in October: Medtronic ($MDT), Eaton Vance ($EV) and Jos. A Bank Clothiers ($JOSB). I don’t know the earnings dates yet, but Medtronic and Eaton Vance usually report around Thanksgiving. JOSB will probably follow in early December.

    Medtronic is the one I’m most confused about so let me share my thoughts on that one. I was very disappointed by Medtronic’s last earnings report. They missed by a penny and they also lowered their full-year EPS range from $3.45 to $3.55 to a range of $3.40 to $3.48.

    My concern is that even their lowered forecast assumes a strong second half of the fiscal year. They can certainly hit those numbers. We’re still early since the fiscal year ends in April, but I have to say that there’s a chance that Medtronic could lower their forecast again. I’ve noticed that the Street’s estimate is down to $3.41 which almost certainly means that they’re worried about additional lower guidance.

    Still, at $35 per share, the stock is a good value. Wall Street’s estimate for the October quarter is 82 cents per share. If Medtronic beats that with no accompanying lower guidance, the stock could be off to the races. But for now, I can’t tell how it will turn out.

    I should urge caution on Eaton Vance’s earnings because the company’s bottom line can be fairly erratic. They don’t play Wall Street’s earnings game (which is kind of ironic for a mutual fund company). For example, EV missed earnings by 11 cents in May and by four cents in August. The stock got punished but it’s hardly anything like what you saw from Cisco today.

    The big news next week will be the inflation reports and the IPO for General Motors. The plan is for GM to sell 365 million shares somewhere between $26 and $29 per share. That works out to somewhere between $9.5 billion and $10.5 billion. GM will also offer about $3 billion in preferred stock that will become common stock. I wouldn’t go anywhere near this offering. If you’re a U.S. taxpayer you already own GM, and that’s too much already.

    I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy

  • Disney Accidentally Releases Earnings Early
    , November 11th, 2010 at 3:55 pm

    Disney (DIS) made a little mistake. The earnings report came out at 3:44 pm instead of after the 4 pm closing bell. Josh Brown has the best comment.

  • Cisco Drags Down the Market
    , November 11th, 2010 at 10:45 am

    The market is being dragged down today by lousy guidance from Cisco (CSCO). So far, our Buy List isn’t down as much as the rest of the market, although AFLAC (AFL) is currently down over 3%.

    Wall Street had been expecting Cisco to earn 42 cents per share for this quarter. Instead, the company said it will be no more than 35 cents per share. The stock has been down as much as 17% today.

    Think of it this way: a miss of seven cents per share leads to a loss of 420 cents in the share price. If the seven cents happens each quarter, today’s haircut has a P/E Ratio of 15 (420 divided by 28).

    I’ve long been critical of Cisco’s endless stock buybacks. I was happy to see that the company will finally pay a dividend sometime this fiscal year. The big question now is how much they will pay. Like lots of companies, Cisco has tons of cash. The problem is that it’s held overseas and bringing it home will lead to a nasty tax bill.

  • Thanks Vets
    , November 11th, 2010 at 9:14 am

    In Flanders fields the poppies blow
    Between the crosses, row on row,
    That mark our place; and in the sky
    The larks, still bravely singing, fly
    Scarce heard amid the guns below.

    We are the Dead. Short days ago
    We lived, felt dawn, saw sunset glow,
    Loved and were loved, and now we lie,
    In Flanders fields.

    Take up our quarrel with the foe:
    To you from failing hands we throw
    The torch; be yours to hold it high.
    If ye break faith with us who die
    We shall not sleep, though poppies grow
    In Flanders fields.

    By Lieutenant Colonel John McCrae, MD (1872-1918)
    Canadian Army

  • Morning News: November 11, 2010
    , November 11th, 2010 at 7:22 am

    Kiss Your Assets Goodbye When Certainty Reigns: Barry Ritholtz

    Market Shrinkology with Dr. Phil Pearlman

    Lilly’s Survival Plan Is Far From Generic

    Morgan Stanley Says Equities Are ‘Crazy Cheap’

    In Defense of Ben Bernanke and the Fed

    Stock Futures Drop After Disappointing Cisco Earnings

    Trade Deficit in U.S. Shrinks as Exports Climb to Two-Year High

    Cisco’s Dismal Outlook Stuns Street, Hits Sector

    Wal-Mart Says ‘Try This On’: Free Shipping

    Whales Suffering From Sunburn

    Hi Ho Silver!

  • Morgan Stanley Strategist Sees “Multi-Year Bull Market”
    , November 10th, 2010 at 10:59 pm

    From Bloomberg:

    Now is a good time for investors to get into the stock market, as rising profits and a growing middle class power a “multi-year bull market,” particularly in the U.S. and emerging markets, according to Charles Reinhard, a global investment strategist at Morgan Stanley Smith Barney.

    “We have a two-speed recovery — with emerging market countries growing at 6 percent, developed countries growing at 2 percent — and we have equities that are an extraordinary value,” Reinhard said today in New York at a presentation by the world’s largest brokerage, a joint venture between Morgan Stanley and Citigroup Inc. “What we think is powering this growth is simply good, old fashioned profit growth. Profits have leaped ahead, back to almost where they were, but the stock market has not done that yet.”

    Global equities are poised to reach 30 percent profit growth this year or better and then taper off, Reinhard said. “If markets could just move with profit growth, most people would find that to be a pretty good experience.”

    In eight of the last 10 times that the U.S. has pulled out of a recession, there has been a bull market lasting at least two years, according to Reinhard, who cited the two exceptions as the period during the Cuban Missile Crisis and the double-dip recession in the early 1980s.

    “If we can avoid a geo-political provocation akin to the Cuban Missile Crisis, the odds go up,” he said. “A few months ago, people were worried about [a double-dip recession], but we have clearly veered off that path, too.”

    Asia, Eastern Europe

    The engines driving profit growth are the emerging market regions of China, South Asia, East Asia and Eastern Europe, which will account for about 93 percent of households that have middle class income worldwide, according to Morgan Stanley Smith Barney research. Emerging markets’ middle class makes up 56 percent of all households worldwide, the research said.

    “This is going to have powerful implications because as people become a little bit wealthier they demand different things,” Reinhard said. “Their approach to food, their approach to fashion, their approach to travel. As people have a little bit of money, they’re curious. They want to see how other people live. Tourism is only going to get bigger.”

    The firm is upbeat on the stock market because no “assassins,” or dangers to the market, are present, Reinhard said. Inflation at around 1 percent is not a concern right now, “irrational exuberance” is no longer in the stock market, and a looming recession is not ready to cut into profits, he said.

    “Bull markets don’t die of old age, they die when they’re assassinated,” Reinhard said. “We should have a very good year ahead for equities.”

  • Ford on Ford
    , November 10th, 2010 at 3:46 pm

  • Cigarette Packages to Carry Images of Corpses, Lungs
    , November 10th, 2010 at 1:23 pm

    Why is Reynolds American (RAI) down 2.2% today?

    This might have something to do with it.

  • What If the Stock Market Were a Bond? – Update
    , November 10th, 2010 at 1:01 pm

    Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

    Crazy? Let me explain.

    I took all of the historical market performance of the S&P 500 (including dividends) and invented a hypothetical long-term bond that matched the market’s monthly gains step-for-step.

    I assumed that it’s a bond of infinite maturity and pays a fixed coupon each month.

    There’s one hitch, though. I have to choose a starting yield-to-maturity for the beginning of the data series in December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess.

    If I choose a number that’s too high, the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.

    Fortunately, the data makes my job easy. After 85 years, the window I have to work with is pretty narrow. Starting with 6.6% is too high, and 6.4% is too low. After playing with the numbers, I finally settled on 6.502%.

    Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 85 years. Through the end of October, the yield stood at 12.05%.

  • The AAA/10-Year Spread
    , November 10th, 2010 at 12:21 pm

    Here’s a look at the yield spread between AAA corporate bonds and the 10-year T-bond.

    I’m surprised this spread hasn’t narrowed much since the worst of the financial crisis. Instead of corporate bonds being underpriced, I’m inclined to think that mid-term Treasuries are overpriced. This is very probably due to the Fed’s policies.