Archive for December, 2010

  • Bonds Down, Stocks Up
    , December 10th, 2010 at 1:37 pm

    Take a wild guess what’s happening today. That’s right — stocks are up and bonds are down. Again. Just like almost everything for the past few weeks.

    Right now, 18 of the 20 Buy List stocks are up. Only Leucadia (LUK) is down and Stryker (SYK) is unchanged.

    Here’s a look at the S&P 500 alongside the Long-Term Treasury Bond ETF (TLT).

  • CWS Market Review – December 10, 2010
    , December 10th, 2010 at 9:29 am

    Before I get into the meat of today’s update, I have a special announcement: I’ll be unveiling the Buy List for 2011 one week from today-December 17, 2010.

    As usual, there will be 20 stocks, and as usual, I’m only making five changes to the list. The new list will go into effect at the beginning of the year. According to the rules of my Buy List, once the new Buy List is set, I can’t make any changes for the entire year.

    My goal is to show investors that a disciplined strategy focused on high-quality stocks can consistently beat the market. This will be the fourth year in a row that we’ve beaten the S&P 500.

    I announce the Buy List early (usually around the middle of December) so no one can say that I’m using tricks to boost my results.

    Now let’s get to the latest news on Wall Street. The S&P 500 closed at yet another 26-month high on Thursday. The index is now up to 1,233.00. Only a few days ago, the index fell below its 50-day moving average. I guess the bear saw its shadow and quickly returned to hibernating. This has been a great run over the last 21 months, and I think the market still has room to run. The problem, however, is that future gains will be much harder to come by.

    As I mentioned last week, the key aspect that’s driving the market is that investors are shifting from low-risk assets to higher-risk assets. This is very important and all investors need to understand this key fact.

    During the financial crisis, investors rushed to any super-safe security, completely abandoning everything else. It’s as if everyone on a sinking ship stormed just one lifeboat. As a result, we’re now seeing some very unusual prices.

    I’ll give you an example: The Wall Street Journal recently noted that U.S. nonfinancial companies are sitting on close to $2 trillion in cash. That’s 7.4% of their assets which is the highest level in 50 years. Companies are nearly terrified to put their money to work. This $2 trillion number is also inflated because a lot of that money is held overseas and to bring it back to the United States would incur taxes.

    Consider that investors are currently willing to lend their money to the U.S. Treasury for five years in return for just 1.9% per year. That’s crazy, and what’s even crazier is that the yield is up about 70 basis points in the last month. In contrast to U.S. government debt, Reynolds American ($RAI) currently yields more than three times what the 5-year Treasury yields. Or, look at Nicholas Financial ($NICK) which is selling for well below 10 times earnings. Sure, I understand that safety is valuable, but these prices just don’t make sense.

    So now we’re seeing this madness slowly unwind. My take is that the Fed’s recent policies are aiding this risk shift. For example, mirroring the stock market rally, long-term Treasuries continue to sell off which means that their yields rise. On Wednesday, the yield on the 30-year Treasury broke 4.5%, the highest yield in over six months.

    In other words, the trend is out of bonds and into stocks (especially cyclicals), and our Buy List has done especially well. For the year, our Buy List is up 13.38% through Thursday. Let’s look at some news impacting our stocks.

    I was happy to see that Leucadia National ($LUK) broke out to a two-year high on Thursday. Earlier this week, Leucadia announced that it’s restoring its 25-cent annual dividend after not having paid a dividend since 2007. That’s a nice vote of confidence.

    Speaking of dividends, Stryker ($SYK) announced a 20% increase in its quarterly dividend. The dividend will rise from 15 cents per share to 18 cents per share. The new dividend will be paid on January 31 to shareholders of record as of December 31.

    I really like Stryker. The odd thing is that the stock has been a sluggish performer since the spring. (A lot of good health care stocks have been slow to move.) Nevertheless, Stryker had a very good earnings report in October and they raised the low-end of this year’s EPS forecast. They now see 2010 earnings coming in between $3.27 per share and $3.30 per share. Last year, they earned $2.95 per share which is pretty decent growth in a weak economy.

    I’m also happy to see that shares of AFLAC ($AFL) have recovered. In the last few e-letters, I reminded you that AFL was looking cheap. The stock got as high as $56.23 on Thursday before settling back to $55.62. I have no idea how this stock could have dropped below $51 a few days ago, but it did.

    As I’ve said before, I think AFL will soon make a run at $60. The company should make about $6.20 per share next year. If AFL went for the same earnings multiple as the rest of the market, it would be an $81 stock.

    We also saw a new 52-week high for Becton, Dickinson ($BDX) earlier this week (please note: This was incorrectly labeled as Black & Decker in the email). This is interesting because BDX was our only Buy List stock to fall short of its Wall Street earnings estimate during the last reporting season. They missed by just a penny, but it was still a decent earnings report.

    Some Buy List stocks that look especially good here (in addition to the ones mentioned above) include Wright Express ($WXS), Gilead Sciences ($GILD) and Bed Bath & Beyond ($BBBY).

    There are two news items to look forward to next week. On Tuesday, the Federal Reserve meets. I don’t expect them to take any action, but it will be interesting to see if the language in their post-meeting policy statements hints at any changes in their thinking. The recent surge in cyclical stocks leads me to believe that a rate hike will come sooner than most folks on Wall Street expect. I suspect that there might be some growing dissention within the FOMC.

    On Wednesday, the Fed will release the November report on industrial production. The last industrial production report appeared a bit tepid, but the details showed that manufacturing production increased in October. Manufacturing production was also revised higher for both August and September.

    This helps explain why, through this past Tuesday, the Morgan Stanley Cyclical Index had outperformed the S&P 500 for nine-straight sessions, for 13 of the last 14 and for 21 of the last 25. The equation is the same: movement out of low risk and into higher-risk.

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

  • 80 Years Ago: The Bank of United States Fails
    , December 10th, 2010 at 9:23 am

    Gary Alexander notes some important market/economic anniversaries are happening this weekend:

    December 12, 1791: The Bank of the United States opened. It was the first (eventually failed) experiment in U.S. central banking. Ironically, a bank by a similar name failed over a century later, around the same date: On December 11, 1930, the New York branch of the Bank of United States filed for bankruptcy, in the nation’s single worst bank failure. Despite its official-sounding name, this Bank of United States was privately held. It was not an arm of the Fed. It had 400,000 depositors in 60 branches. Many of those depositors were poor immigrants. By year’s end, over 1,300 banks had failed in the United States.

    On December 12, 1800: Washington, DC was established as the new capital city of the United States, after lower Manhattan (Wall Street) and Philadelphia had served their time as America’s first capitals.

    December 12, 1805: Henry Wells, the father of speed-conscious delivery and creative banking services, was born in Thetford, Vermont. Wells began as an agent for Harden’s Express in upstate New York. Obsessed with the express transport business, he first set up shop as Livingston Wells and Pomeroy’s Express, which ferried “goods, valuables, and specie” between Buffalo and Albany. In 1844, Wells joined forces with William Fargo and Daniel Dunning to start Wells & Company. In 1850, he merged these two concerns into the American Express Company, which linked the Eastern seaboard to California. In 1852, he teamed with Fargo to form Wells, Fargo & Co. In retirement, Wells spent his fortune on charity, mostly to aid chronic stutterers and to establish Wells Seminary (now Wells College) for women. Henry Wells died in Glasgow, Scotland, two days short of his 73rd birthday, on December 10, 1878.

    On December 12, 1900, the original Charles Schwab, age 38, president of Carnegie Steel, was honored at the University Club (at 58th St. & 4th Avenue), in the presence of 80 great titans of industry, including Andrew Carnegie, E.H. Harriman, Jacob Schiff, and J.P. Morgan. Asked to make a few remarks, the charismatic young Schwab knew that this was his greatest sales opportunity ever. He spoke for over an hour, during which time he laid out his vision for a consolidation of America’s greatest steel companies into something he called “U.S. Steel.” Sitting next to Schwab, J.P. Morgan rolled his unsmoked cigar back and forth during the entire talk, and then asked for a private meeting with Schwab. Morgan bought the idea and U.S. Steel was born. U.S. Steel was so huge that on its first day of operation, it was almost triple the size of the U.S. government and it represented 13% of the entire U.S. manufacturing sector.

    On December 12 1901, Guglielmo Marconi (1874-1937) sent a radio signal from an antenna in Cornwall, England, to Newfoundland, Canada, 2,232 miles away, in the first trans-Atlantic radio signal. This news literally electrified the world. Previously, the scientific community had argued that the curvature of the earth would limit the transmission of any radio waves to a 100 to 200 mile radius. In 1910, Marconi hired a Russian emigrant, David Sarnoff, as a telegraph operator. Sarnoff was the first person to pick up the Titanic’s S.O.S. call, staying at his post for 72 straight hours. Sarnoff later proposed that the Marconi Company market a “radio music box,” which led to the birth of RCA in 1921. In one of those delicious ironies of history, David Sarnoff died on December 12, 1971, 70 years after Marconi’s historic invention.

    On December 12, 1914, the New York Stock Exchange reluctantly opened its doors for limited stock trading, after being closed since the end of July, 1914, in fear of panic selling at the outset of the Great War in Europe. Only a few issues could be traded, and for cash only. Volume was so low that it reached a 20th Century nadir on December 30, when fewer than 50,000 shares traded. Full trading restrictions were not removed until April 1, 1915, making a total of eight months partial closure: four months total closure and four months of partial closure. As a result of this excess of paranoia, a new tradition emerged, restricting all future closings to “no more than three days.” Until 9/11, 2001, the market never took a four-day break. (This is why the stock market holds a half-day session on the Friday after Thanksgiving.)

    On December 11, 1929 – six weeks after the Wall Street crash – a winning design was announced for the Empire State Building, which rose to the sky throughout 1930 and was finished in 1931. Life goes on…

    December 11, 1931: Japan went off the gold standard. Britain had ended the gold standard earlier in 1931. America would hold on to the gold standard for two more years, until new President Franklin Roosevelt confiscated privately-held gold in 1933 and then raised the price of gold from $20.67 to $35 per ounce.

  • Morning News: December 10, 2010
    , December 10th, 2010 at 7:40 am

    Wall Street Futures Signal Higher Open

    China Raises Banks’ Reserve Ratios Again

    Fitch Downgrades Republic of Ireland’s Ratings to BBB+; Outlook Is Stable

    Household Wealth Grows $1.2 Trillion

    China Trade Surplus Tops Estimates, Adding to Tension

    Mortgage Rates are Up So The Sky Must Be Falling

    OPEC Raises 2011 Forecast for Non-OPEC Supply on Russia, China

    Day Trading Still Alive, Outsourced to China

    Dell’s Pursuit of Compellent Deal Would Help Fill Storage Need

    Sinopec to Buy Occidental Argentine Assets

    Who Are The Famous Bubble Deniers?

    The Real Value of Group Buying Sites

  • Manning and Brady Are Nearly Tied in Lifetime Passer Rating
    , December 9th, 2010 at 3:12 pm

    Since I like to cover statistical anomalies on Wall Street and other places, I thought I’d share a fun one: Tom Brady and Peyton Manning are nearly tied in the NFL’s (mostly useless) Passer Rating.

    I won’t even try to settle the argument of who is better, but the Manning camp could always say that their guy had the better passing rating. This was true for most of the past few years.

    But thanks to throwing 11 interceptions in the last three weeks, Manning’s Passer Rating has dropped to 94.7567. Tom Brady’s is 94.6978. They’re now separated by less than 0.06 points. Just seven weeks ago, Manning was leading by over two full points. Four years ago, he was leading by more than six points.

  • Your Cash Hoarding Data Point of the Day
    , December 9th, 2010 at 1:30 pm

    From WSJ:

    U.S. companies continued to hoard cash in the third quarter, while households pared back borrowing, according to a Federal Reserve report.

    U.S. nonfinancial companies had $1.93 trillion stashed in cash and short-term assets at the end of the third quarter—7.4% of total assets—up from $1.8 trillion, or 6.9% of total assets. That’s the highest level in more than 50 years.

    The total debt in the U.S. nonfinancial sectors grew 4.2% in the third quarter, boosted by increased government and business debt.

    Household debt, however, fell by 1.7%, the 10th straight quarterly decline, the Fed on Thursday said in its “Flow of Funds” data. Home mortgage debt dropped, as did consumer credit. Another Fed report this week showed credit-card use by U.S. consumers tumbled a 26th straight time in October, as Americans keep working to clean up their balance sheets amid high joblessness that’s restraining the economic recovery.

    Though consumers avoided taking on new debt, the report showed the net worth of Americans rose last summer on a rebound in stock-market prices.

    U.S. households’ total net worth rose 2.2% during July through September, to $54.89 trillion.

    Net worth represents total assets such as homes and stock portfolios, minus liabilities like mortgages and credit card debt. Rising stock market assets offset declines in real estate holdings in the third quarter, the Fed report showed. Stock market wealth had fallen in the second quarter, contributing to a decline in total net worth during those three months.

    The “Flow of Funds” said household net worth rose to about 4.81 times disposable personal income in the third quarter from about 4.72 times income in the second quarter.

  • Discussion of Irish Economy With Actual Irishman
    , December 9th, 2010 at 11:48 am

    Needless to say, hysterical but NSFW:

    I want to see this guy on Fast Money. This needs to happen.

  • Morning News: December 9, 2010
    , December 9th, 2010 at 8:02 am

    BOE Maintains Bond Plan as Economy Sustains Momentum

    Futures Rise as Treasuries Steady, Jobs Data Due

    EU to Decide Greek Loan Extension in Early 2011

    Home Values Tumble $1.7 Trillion in 2010

    Oil Rises for First Day in Three as Recovery Trims Supply Excess

    Japan’s 3Q Growth Revised Up to 4.5 Percent

    U.S. 10-year Yields Rise to Highest Level Since June

    AIG Strikes Deal to Retire Fed Credit Line, Wind Down Bailout

    Mastercard Set to Buy Part of Travelex

    Home Depot Ups Outlook Slightly

    McDonald’s November Store Sales Rise 4.8% Globally

    Largest IPO in History, QueeQuee.com, Set to Debut

  • Stryker Raises Dividend By 20%
    , December 8th, 2010 at 9:19 pm

    Good news for Stryker (SYK). The company is raising its quarterly dividend from 15 cents per share to 18 cents per share. The dividend will be paid on January 31st to shareholders of record on December 31st.

    The company also announced that it’s buying back $500 million of its stock.

  • Poll: Americans Think China has the World’s Largest Economy
    , December 8th, 2010 at 12:24 pm

    This passage caught my attention:

    Asked which nation now has the world’s strongest economy, just 20 percent picked the United States. More than twice as many (47 percent) picked China. Eleven percent chose Japan. White working-class voters—the group that turned most sharply against the Democrats in November—were the most pessimistic: Just one in seven of them placed the U.S. atop the list; half named China. But the pessimism was widespread. Almost half of both college-educated whites and minority adults also tabbed China as No. 1. Americans who consider themselves politically independent were especially downbeat (53 percent went with China), but both Republicans and Democrats were also twice as likely to name China as the U.S.

    Few economists would second that judgment. China this year became the world’s second-largest economy, but the U.S. gross domestic product remains more than two and a half times bigger than China’s, according to the International Monetary Fund. On a per capita basis, the advantage is nearly 11-to-1. China’s economy has grown much faster than the U.S. for years, however, and Beijing has amassed an enormous surplus in its international accounts while accumulating huge amounts of U.S. government debt.