Archive for February, 2011

  • Obama to Unveil $3.7 Trillion Budget
    , February 14th, 2011 at 8:10 am

    Today is the day President Obama submits his budget to Congress. Of course, the actual budget that finally passes will look quite different from what we see today. This may be the first major confrontation between the White House and the new GOP-led House of Representatives. Within the fight, the Tea Party will most certainly be applying pressure to House Republicans.

    Looking at the budget, the numbers aren’t pretty. The budget will total $3.7 trillion. This year’s deficit is projected to hit $1.6 trillion, which would be the largest ever. That comes to nearly 11% of the economy.

    According to the President Obama’s projections, the deficit will fall to $607 billion by 2015 which is still 3.2% of the economy. If there’s ever a time we need to get several quarters of 6% or 7% GDP growth, this is it.

    The problem is that borrowing costs are starting to rise. Bloomberg somehow got hold of a Treasury presentation to bond dealers saying that interest expense on the debt will rise from 1.3% of GDP in 2010 to 3.1% of GDP by 2016. Higher interest costs, of course, make the budget outlook even worse.

    The long end of the yield curve has risen substantially over the past few months. On Friday, the 30-year yield closed at 4.71%. Last August 26, the yield stood at 3.53%. I think it’s very possible that the bond market may play a role in any budget confrontation. The bond and currency markets can serve as virtual parliaments so even if the budget flies through Congress, the budget can still be effectively vetoed by investors. This is exactly what happened in Greece and Ireland.

    Stay tuned; we’re about to see if our leaders are serious or not.

  • Morning News: February 14, 2011
    , February 14th, 2011 at 7:44 am

    NYSE-Deutsche Boerse Merger Is Free With Derivatives: Real M&A

    China’s Trade Surplus Shrinks as Nation Imports More

    France’s Lagarde Hopes To Deliver Indicative Guidelines at G-20 This Week

    Merkel’s Permanent Euro-Rescue Plan Needs Opposition Backing

    Obama to Submit $3.7 Trillion Budget, GOP Promises Fight

    Housing Crash Is Hitting Cities Once Thought to Be Stable

    Clothing Prices to Rise 10% Starting in Spring

    Icahn Again Extends Dynegy Offer, but Shares Tendered Dwindle

    GE to Buy U.K.’s John Wood Unit for $2.8 Billion

    Hong Kong Stock Preview: China Southern, Golden Harvest, PICC

    Credit Suisse Pads Capital with 6 Billion Swiss Francs in Coco Bonds

    Chapter 11 for Borders, New Chapter for Books

    EchoStar to Buy Hughes for $1.35 Billion

    Joshua Brown: How Ballmer Snagged Nokia For Free

    James Altucher: How Stevie Cohen Changed My Life

  • So Long Hosni!
    , February 11th, 2011 at 2:55 pm

    I’ve been gripped by the dramatic scenes from Egypt. I won’t even pretend to say that this has any effect on U.S. financial markets.

    Whatever the cause, the stock market is up today and the Buy List is at a new year-to-date high. The year is just six weeks old and the Buy List is already up over 6% for the year.

    I’m pleased to see that Ford (F) is having a good day. I wasn’t pleased with Ford’s earnings miss but the company keeps making the right moves. Yesterday they announced that they’re going to cut down their debt by another $3 billion. Last year, they cut down their debt by $14.5 billion. Ford said this recent move will save them $180 million in annual interest payments.

    JP Morgan Chase (JPM) and Reynolds American (RAI) are also having good days. Leucadia National (LUK), Moog (MOG-A), Stryker (SYK) and Wright Express (WXS) are all at fresh 52-week highs.

  • CWS Market Review – February 11, 2011
    , February 11th, 2011 at 7:49 am

    Earnings season is just about over and the profit picture continues to look very good. According to the latest numbers, 352 of the stocks in the S&P 500 have reported earnings. Weighted by market cap, fourth quarter earnings are on track to rise 26.7% to $23.00 per share. Not including financials, earnings are up 30.1%.

    On Thursday, we got more good earnings news for our Buy List. Last week I said that Wright Express ($WXS) was our best candidate for an earnings surprise and that’s exactly what happened. Wright reported adjusted Q4 earnings of 74 cents per share which is three cents more than expectations. What’s even better is that Wright sees Q1 earnings-per-share coming in between 63 cents and 69 cents.

    For the full year, Wright forecasts earnings ranging between $3.17 and $3.37 per share. The Street had been expecting earnings of $3.18 per share so I’m sure we’ll see some analyst upgrades. The shares rallied 4.4% on Thursday and we’re now up over 13.5% for the year. Wright Express continues to be an excellent buy.

    However, not all of our recent earnings news has been good. Becton Dickinson ($BDX), Fiserv ($FISV) and Reynolds American ($RAI) all missed estimates by a penny per share, and Sysco ($SYY) missed by three cents per share. Some of these stocks got knocked down pretty hard by the market.

    Honestly, I’m not terribly concerned by these small earnings misses because they’re all high-quality companies. For lower-quality stocks, the game is often “live by earnings or die by earnings.” But with top-notch stocks, I pay far more attention to earnings guidance, and that’s been pretty good.

    Mind you, not all companies provide full-year earnings guidance. In fact, most do not. I seek out those that not only give full-year guidance but also have proven track records of delivering on their guidance. I’m not a fan of having an antagonistic relationship with the stocks I own. Well-run companies don’t have anything to hide, so they’re open about their expectations. Not even the best analysts on Wall Street know what’s going on inside a firm better than the executives themselves.

    Fiserv is a good example of a company I’m not worried about. Yes, Fiserv missed estimates by a penny per share, but the company said it expects full-year earnings between $4.42 per share and $4.54 per share. Let’s put that into some context. For 2010, Fiserv earned $4.05 per share so their guidance represents very strong growth. On top of that, I think the company should have little trouble earning $5 in 2012.

    Yet after the earnings report came out, FISV dropped over 3%. Movements like this make me annoyed with nervous traders. Who cares about a miss of one little penny compared to such a bold growth forecast? Keep your eye on the picture! Fiserv continues to be a very strong buy.

    Fiserv isn’t alone. BDX shares were hacked by over 5% after the company’s earnings report. But let’s look at what they said: Becton Dickinson expects full-year earnings somewhere between $5.45 and $5.55 per share. This isn’t Goldman Sachs or Citigroup making an estimate; this is BDX itself! If you don’t own it, this is a good time to take advantage of BDX’s lower price. The shares are going for less than 15 times the low end of the earnings range—and I wouldn’t be surprised to see higher guidance later this year.

    Reynolds American said it sees full-year 2011 earnings-per-share coming in between $2.60 and $2.70. The growth rate implied is modest, between 4% and 8%, but it’s nothing to sneeze at. Looking at the valuation, RAI is going for around 12 times this year’s guidance, and don’t forget Reynolds’ hefty dividend which currently yields 6.1%. That’s around 240 basis points more than the 10-year Treasury.

    I continue to be very optimistic for the equities for 2011, but we may be in for some short-term bumps. One reason is that the market has risen so impressively recently. The S&P 500 has rallied for seven of the last nine sessions. The Dow had rallied for eight-straight days before falling slightly on Thursday.

    Mirroring this rise in equities has been a sell-off in long-term bonds. The yield on the 30-year Treasury has climbed for seven of the last nine sessions. My take is that this is the exact outcome of the Fed’s effort at Quantitative Easing. The Fed’s plan has forced investors out of low-risk assets and into higher-risk assets. Fortunately, this is why our Buy List has prospered.

    It’s not so much that stocks were a great value a few months ago. Instead, it’s that stocks were a great value relative to very overpriced bonds. Recall that back in August, investors pushed the yield on the 30-year Treasury down to 3.53%. That’s just nuts especially when you could easily match that yield with many blue chip stocks. On Thursday, the 30-year T-bond yield closed at 4.77% which is the highest closing yield since last April.

    Here’s what investors need to watch: The bond market often leads the stock market by a few weeks or months. When the spread between stocks and bonds gets too wide, there’s often a sharp reaction. As a result, I wouldn’t be surprised to see the stock rally cool off soon. Don’t get me wrong: I’m not expecting a major reversal, but the easy gains have already been made.

    The key for investors is to focus on high-quality stocks. Some of the names on the Buy List that look especially good right now include Oracle ($ORCL), Abbott Labs ($ABT) and Gilead Sciences ($GILD). I also really like Ford ($F) below $16.

    Next week, we’re going to get key reports on inflation plus the reports on industrial production, capacity utilization and retail sales. Except for Leucadia National ($LUK), this earnings season is over for us. LUK usually reports near the end of February. Coming before that will probably be Medtronic ($MDT) and that’s for the quarter that ended January 31st. Wall Street expects 84 cents per share and that sounds about right.

    That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy

  • Morning News: February 11, 2011
    , February 11th, 2011 at 7:40 am

    Asian Shares Mixed; Inflation Concerns Weigh Seoul

    In China, Tentative Steps Toward Global Currency

    Portugal Funding Fears Return As EMU Periphery Debt Supply Mounts

    U.S. Trade Gap Probably Widened in December on Oil Imports

    Deutsche Boerse AG’s Francioni Wins NYSE After Losing With Niederauer CEO

    White House to Uunveil Proposals for Mortgage Market Reform

    Apple’s IPhone Dominance Leaves Operators With Utility Status

    Nokia, Microsoft to Join Forces to Challenge Apple, Google

    French Oil Giant Total’s Adjusted Profit Up 23%

    Rio Tinto May Expand Buyback on Higher Prices, Analysts Say

    Kinder Morgan Prices $2.9 Billion I.P.O.

    Kraft Profit Squeezed by Cadbury Acquisition

    Paul Kedrosky: China Growth in Context

    Leigh Drogen: VYou to Answer Questions With Video

    Joshua Brown: Guns n’ Roses: Welcome to Derek, Joey and Kristin

  • The TIPs Yield Curve
    , February 10th, 2011 at 12:04 pm

    Here’s an updated look at the TIPs yield curve. The market still gives the TIPs maturing in January 2015 a yield-to-maturity of -0.067%.

  • Wright Express Earns 74 Cents Per Share
    , February 10th, 2011 at 10:24 am

    Wright Express (WXS) reports earnings of 74 cents per share, three cents more than Wall Street’s expectations. The shares are currently up 1.8% today.

    Total revenue for the fourth quarter of 2010 increased 38% to $114.9 million from $83.0 million for the fourth quarter of 2009. Fourth quarter 2010 revenue included $17.4 million from Wright Express Australia, which was acquired on September 15, 2010. Net income to common shareholders on a GAAP basis was $18.5 million, or $0.47 per diluted share, compared with $12.1 million, or $0.31 per diluted share, for the fourth quarter last year.

    On a non-GAAP basis, the Company’s adjusted net income for the fourth quarter of 2010 increased 32% to $28.8 million, or $0.74 per diluted share, from $22.1 million, or $0.56 per diluted share, for the year-earlier period. For the full year 2010, revenue grew 24% to $390 million from $315 million in 2009. On a GAAP basis, net income was $2.25 per share in 2010 compared to $3.55 last year per diluted share in 2009, which included a pre-tax gain of $136.5 million on the prepayment of the Company’s liability under a tax-receivable agreement. On an adjusted net income basis, earnings grew 26% to $2.75 per share versus $2.18 per share last year.

    Wright Express uses fuel-price derivative instruments to mitigate financial risks associated with the variability in fuel prices in North America. For the fourth quarter of 2010, the Company’s GAAP financial results include an unrealized $10 million pre-tax, non-cash, mark-to-market loss on these instruments. See Exhibit 1 for a full reconciliation of adjusted net income.

    “We ended 2010 with strong momentum driven by an unrelenting focus on execution underpinned by an improving macro-economic environment. Importantly, the strength of our results for the fourth quarter and full year were broad-based. We saw improving same-store sales, increased payment processing transactions, strong vehicle growth, exceptional growth in our MasterCard business, and Wright Express Australia met expectations. In addition, during the year we selectively invested in our business to enhance our competitive position and capitalize on compelling growth opportunities both domestically and abroad,” said Michael Dubyak, Chairman and CEO. “In 2011, we will build on this momentum and leverage the multiple avenues of growth in front of us by growing our core fleet business, expanding other payment solutions, and broadening our international footprint.”

    Wright also says it expects 63 to 69 cents per share for Q1, and $3.17 to $3.37 for all of 2011.

  • CBOE to Begin Publishing Values for CBOE S&P 500 Skew Index
    , February 10th, 2011 at 9:57 am

    This is odd. The CBOE is going to start a “skew index” which somehow measures tail risk. Here’s part of the press release:

    The Chicago Board Options Exchange (CBOE) announced today that on Wednesday, February 23, the Exchange will begin publishing values for the CBOE S&P 500 Skew Index (ticker symbol: SKEW), a benchmark measure of the perceived risk of extreme negative moves — often referred to as “tail risk” or a “black swan” event — in U.S. equity markets.

    “We are excited about adding yet another valuable tool to our rapidly growing suite of volatility benchmarks,” CBOE Chairman and CEO William J. Brodsky said. “The CBOE S&P 500 Skew Index will join our highly successful CBOE Volatility Index (VIX) in measuring the market’s expectation of stock market risk based on S&P 500 options prices. It offers an important new measure for investors who are concerned about potential market moves driven by unusual, high-impact events.”

    “Innovative measures of risks associated with market events, such as the VIX and now the SKEW, provide investors with powerful tools for understanding equity and derivative markets,” said Alexander Matturri, Executive Managing Director at S&P Indices. “The fact that these measures are based on the S&P 500 is recognition of the Index’s role in the U.S. equity markets.”

    The SKEW(SM) and VIX indexes are different, yet complementary measures of risk. The VIX captures the market’s expectation of likely daily S&P 500 returns over a 30-day time horizon. Statisticians typically describe these “likely” moves as falling within one standard deviation around the average, or “mean” return of the S&P 500 price distribution. The SKEW describes the tail risk of the distribution, that is, S&P 500 returns that are greater than two to three standard deviations below the mean.

    SKEW values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence.

    Hmmm. I’m not sure what to make of this. It sounds like a concept hunting for a market. My first reaction is that this sounds like a contradiction — we’re looking at how the market expects what it’s not expecting.

    My other reaction is that I’m curious if volatility at the extreme is always related to volatility of the whole. In other words, if the VIX declines as it has over the past year, does it follow that expectations of extreme moves have also declined? I’m guessing the answer is yes, but I would be interested to know if there are many counter-examples.

    If not, then the CBOE hasn’t really made a new product. They’ve simply ramped up older products.

    (H/T: Alea)

  • Morning News: February 10, 2011
    , February 10th, 2011 at 7:38 am

    NYSE Euronext-Deutsche Börse Exchange Deal Presages Shake-Up

    China Defends Yuan Policy After Bernanke Swipe

    European Stocks Fall As Earnings Disappoint

    Bank of England Keeps Asset Plan, Benchmark Rate Steady as Inflation Soars

    U.S. Treasury 10-Year Yields Approach Lowest in Four Days Before Bond Auction

    Bernanke Makes Sure Fed Reminds Congress Deficit Bigger Than QE2

    S.E.C. Seeks to Reduce Reliance on Credit Ratings

    Cisco Slides in Late Trading as Profit Margin Misses Estimates

    Five Years Later, Alcatel Is Solidly Back in the Black

    Credit Suisse Cuts Profitability Goal as Net Misses Estimates

    PepsiCo 4Q Profit Falls

    Rio Tinto Payout Tops Estimates, Unveils $5 Billion Buyback

    Paul Kedrosky: The Fed is Always About to Tighten, But … You Know, Doesn’t

    Joshua Brown: Hot Links: 100% Accuracy

  • The Dividend Cycle
    , February 9th, 2011 at 11:45 pm

    Here’s a topic I was curious about but I’m not sure how many other folks are. But it’s my blog, so I’ll post it anyway.

    The other day I looked at the return to dividends of the market since 1980. After a few years, that really adds up. As a rule of thumb, I’d say that the dividend rate basically tracks inflation.

    I was curious as to what the yearly cycle of dividends is. After breaking down the numbers, dividends seem to follow a quarterly cycle which makes obvious sense.

    Since 1980, the average return to dividends for the first quarter of the year is 0.925%. For the second quarter, it’s 0.949%. For the third quarter, it’s 0.915%. And for Q4, it’s 0.961%. That’s not a whole lot of deviation.

    Here’s what it looks like by month. In each quarter, the middle month is the highest return to dividends followed by the third month followed by the final month.

    January 0.183%
    February 0.431%
    March 0.309%
    April 0.180%
    May 0.485%
    June 0.281%
    July 0.203%
    August 0.439%
    September 0.270%
    October 0.222%
    November 0.442%
    December 0.295%

    Now let’s see what the average quarterly cycle looks like. There seems to be a bump up around the 15th of each month and near the end of each month.

    The return to dividends for each quarter seems to start slow. It then picks up near the end of the first month, then starts to slow down around the middle of the third month.