Archive for September, 2011
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CWS Market Review – September 2, 2011
Eddy Elfenbein, September 2nd, 2011 at 7:24 amContinuing with my theme from last week’s CWS Market Review, the “Fear Trade” that gripped Wall Street in July and August is slowly retreating. Every investor needs to understand how this dynamic is driving trading right now.
What’s interesting is that the stock market isn’t so much rallying on good news as it’s rallying on the lack of bad news (or lack of “bad as expected” news). That’s how scared traders are. Nor is the market really rallying as much as it’s walking back to the ground it hurriedly fled from during the jittery days of July and August. My advice to investors is to expect the Fear Trade to continue to fade. Specifically, this means that stocks will cautiously gain ground while bonds, gold and volatility will pull back.
From Friday through Wednesday, the S&P 500 put on its first four-day win streak in nearly two months. In fact, we’re probably two good days’ rallies away from breaking above the 50-day moving average. Some of this week’s rally was due to Hurricanes Irene and Bernanke not causing as much damaged as was feared.
We can’t say this for certain yet, but imagine if this statement turned out to be true: “The summer sell-off ended 25 days ago and we’ve already made back 40% of the money we lost.” That may turn out to be correct and it has a very good chance of doing so, but you’d never know it by listening to some of the folks out there.
Remember that the stock market isn’t a great predictor of the economy. Since 1945, the S&P 500 has fallen 17% or more 14 times, and nine of those times have seen recessions. The bond market, however, has a better track record. Bloomberg writes, “the economy has never contracted with the difference between 10-year and 30-year Treasury yields as wide as the current 1.38 percentage points, or 138 basis points.” That’s pretty eye-opening.
Through Wednesday, the S&P 500 posted its best eight-day gain since 2009. At one point on Wednesday, the S&P 500 got as high as 1,230.71. Thursday looked like it was going to be our fifth-straight up day until more jitters about Friday’s employment report took hold (more on that in a bit). The initial good news on Thursday was that the ISM Manufacturing Index came in at 50.6 which was better-than-expected. There were even whispers that the ISM could print as low as the mid-40s. Fear, I suppose, is contagious.
Let me explain this a little. The ISM Index has a decent track record of aligning with recessions and expansions and we’re still well above the danger zone. The worry was that we were rapidly falling into the danger zone. Historically, the economy has done fairly well, on average, when the ISM is in this territory. I checked the numbers and found that there were 49 times when the ISM printed between 50.0 and 51.0 and only three of those months have been during official NBER recessions.
One month ago, Wall Street was rattled by the reports on consumer spending and factory orders. However, those reports were for the month of June which is in the second quarter. Well, we already knew that the economy was sluggish during Q2, yet the bears had a field day and smacked the bulls around. Now, one month later, those two reports for July turn out to be not so bad. We learned that consumer spending rebounded by 0.8% in July, which topped expectations by 0.3%. That was the biggest jump in five months. On Wednesday, the Commerce Department reported that factory orders rose by 2.4% in July. That was the biggest increase since March. Yet the bulls are still the scared ones.
So far, the Double Dip hypothesis has been sound and fury signifying not a whole lot. Let me be clear that I’m not saying a Double Dip won’t happen; I’m saying that the evidence proving the case, for now, is very small. At CWS Market Review, we’re guided by facts, not emotions. The good news for us is that we don’t need to predict the future with perfect accuracy to be good investors. But we do need to make reasonable judgments about the here and now.
The fact is that the overall stock market is inexpensive. Let’s look at some numbers: Second quarter earnings for the S&P 500 came in at $24.85. That’s an 18.9% increase from one year ago. Wall Street currently expects 3Q earnings of $24.95 which is a 15.7% increase over last year. So far, we haven’t seen many companies lower guidance and this is particularly true for our Buy List stocks. In fact, they’ve been raising guidance.
For all of 2011, Wall Street expects earnings of $98.59 for the S&P 500 (though I think $100 is possible). Since we’re already two-thirds of the way through the year, that forecast is probably pretty accurate. For 2012, Wall Street expects earnings of $112.67. Since that’s further out, we shouldn’t consider that number to be as reliable, and I think it may be too high.
This means that going by Thursday’s close, the S&P 500 is trading at 12.22 times this year’s earnings estimate. Flip that over and you get an earnings yield of 8.19% which demolishes just about anything you can find in the frothy bond market. A ten-year T-bond is supposed to offer safety but…c’mon, is that really worth 600 basis points? I don’t think so. The Fear Trade has simply gone too far.
The slightly better economic news comes at a crucial time for the Federal Reserve. The last FOMC meeting saw the largest dissension in two decades. The next meeting is scheduled for September 20-21. It was originally supposed to be a one-day meeting. I think the “hawks” now have the upper hand and I don’t expect another round of quantitative easing. For now.
I’m writing this on Friday morning and Wall Street expects another dismal jobs report later today (expectations are for 70,000). I don’t blame them. However, the same dynamic is in play: traders expect to be disappointed so anything that fails to live up to that (or down to that) will be seen as good news. Be sure to check the blog to see how the August jobs report shakes out.
As investors, we should continue to focus our attention on solid companies that are delivering steady earnings growth. Speaking of which, let’s jump to the best news of the week and that was the strong second-quarter earnings report from our Buy List member, Jos. A. Bank Clothiers ($JOSB). Three months ago, JOSB missed earnings by two cents and the stock got taken to the woodshed. This time, Wall Street was expecting 68 cents per share which I thought was on the low side. The earnings turned out to be even better than I expected. For Q2, JOSB reported earnings of 74 cents per share. Sales came in at $230.7 million which was $20 million more than consensus.
On Wednesday, the stock gapped up as much as 11.8%. All across the board, Joey Bank’s numbers look very good. Same-store sales rose 14.7% and year-over-year direct marketing sales rose 27.8%. The company has grown its earnings for 39 of the last 40 quarters, including the last 21 quarters in a row.
I had cautioned investors not to chase JOSB because I wanted to be certain that the company is on a firm footing. Now we have solid proof. I think JOSB can do $3.50 per share for this fiscal year. As a result, I’m raising my buy price on Jos. A. Bank Clothiers to $54 per share. This is our top-performing stock of the year, but I have to warn you that it can be highly volatile.
I was surprised to see Nicholas Financial ($NICK) announce that it will start paying a quarterly dividend of 10 cents per share. Based on Thursday’s close, that works out to a yield of 3.78%. Not bad. If you’re a regular reader of Crossing Wall Street, you know that this is one of my favorite stocks. I think a fair price for NICK is at least $17 per share.
I can’t say that I’m a huge fan of NICK paying a dividend, but I will say that there are many things worse that a company can do with shareholders’ money (poor acquisitions, share buybacks). You’ll never go broke cashing a dividend check, and NICK will have no trouble covering this dividend. I don’t have much faith that companies can engineer a higher share price outside of their very basic duty of delivering higher profits.
I still believe that NICK can earn as much as $1.70 per share for this calendar year. The news that the Fed will keep rates low helps NICK, and the company just extended their credit line to $150 million. This is a really solid outfit. Nicholas Financial is an excellent buy up to $14 and it’s especially good below $11.
Some other Buy List stocks that look particularly attractive here include Oracle ($ORCL), Reynolds American ($RAI), AFLAC ($AFL) and Wright Express ($WXS).
That’s all for now. The market will be closed on Monday for Labor Day. I hope everyone has a restful long weekend. 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
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Morning News: September 2, 2011
Eddy Elfenbein, September 2nd, 2011 at 5:17 amMerkel Brings Debt Crisis to Party Campaign
Greek EU-IMF Financing Review to Resume Later This Month, Official Says
India Factory Output Growth Falls to 29-Month Low
UBS Cuts Target for Asia Stocks as Data Signals Regional Economies Slowing
Taiwan to Relax Rules on Banks Investing in China
China Benefits as U.S. Solar Industry Withers
U.S. Is Set to Sue a Dozen Big Banks Over Mortgages
Fed Asks Bank of America to List Contingency Plan
SAP Wins Bid to Reject $1.3B Oracle Verdict
T-Mobile May Suffer if AT&T Deal Fails
AstraZeneca Shares Fall on Crestor Study Result
Ross’s 60%-Off Nikes Set to Overtake Gap
BMW’s U.S. Sales Rise, Outselling Mercedes
Tech Blogger to Invest in Start-Ups
Jeff Miller: August Employment Preview
Phil Pearlman: The First Wireless Phone Circa 1913
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The S&P 500 Total Return Index
Eddy Elfenbein, September 1st, 2011 at 2:08 pmThrough August, the S&P 500 is down 3.08% for the year and the total return index, which includes dividends, is down 1.77%. Since August 2000, the Total Return Index is down 1.31%.
Even though dividend yields are low, they do add up over time. Over the last five years, dividends have added 11.22% to your returns. That’s microscopic at even a monthly level, but it does slowly make a difference.
If you pulled a Rip Van Winkle in early 1997 and started ignoring the market, only to wake up today, you probably wouldn’t be too surprised to learn where the market is. How it got there…well, that’s another story.
By the way, the chart below begins in January 1997. Alan Greenspan made his famous Irrational Exuberance speech on December 5, 1996. I only have monthly data, so including all of December 1996, the total return of the S&P 500 is up 109% since then.
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Nicholas Financial Extends Credit Line
Eddy Elfenbein, September 1st, 2011 at 10:30 amCLEARWATER, Fla., Sept. 1, 2011 — Nicholas Financial, Inc., announced that the Company has executed an amendment to its Bank Credit Line that increases the size of the Credit Line from $140 million to $150 million and extends the maturity date to November 30, 2013. All other terms and conditions of the Company’s Credit Line remain in effect.
According to Peter L. Vosotas, Chairman and CEO, “We are extremely pleased that our consortium of bank lenders has agreed to increase our Credit Line and extend the maturity date. The Credit Line increase will allow us to continue our expansion strategy during the next few years. The Company is very proud to continue its lending relationship with Bank of America which began in March of 1993 and also includes Wells Fargo Preferred Capital, Capital One Bank, First Horizon Bank, and Bank of Montreal as participating banks.”
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August ISM = 50.6
Eddy Elfenbein, September 1st, 2011 at 10:28 amOn the first business day of each month, the ISM Manufacturing number comes out. This is the report that has been freaking people out recently.
Let me explain: The break-even point for the ISM is 50. Any number above that indicates a growing economy; anything below 50 indicates a shrinking one.
The ISM for April was 60.4 which is very high. That dropped to 53.5 for May. In June, it bumped up to 55.3. Then in July, the ISM dropped to 50.9.
So there you have it: a clear downward trend to recession. Well, not exactly. Some folks were expecting today’s ISM report for August to continue the trend and hit the mid-40s. Instead, it seems to have stalled just above 50, which is perfectly fine.
Historically, the odds of a recession shoot up when the ISM is below 45 and we’re still way above that. I ran the numbers and found that the ISM printed between 50.0 and 51.0 forty-nine times, and only three of those were official NBER recessions. In other words, there’s still no solid proof that a Double Dip is on the way. It may happen, but the numbers don’t yet show it.
I keep harping on the “Fear Trade” but this is exactly what’s driving the markets. Notice that stocks turned higher when the ISM came out. So we rallied, not on good news, but simply because the bad news failed to show up. That tells you how fearful traders are.
For now, it’s not so much that stocks are going up and bonds are going down, but they’re walking back the ground they unreasonably took over the last several weeks. This should continue.
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Thank You!
Eddy Elfenbein, September 1st, 2011 at 10:16 amWe just finished a record traffic month here at Crossing Wall Street. So while the market was falling apart, folks were coming here!
All told, we had over 84,000 visitors and 114,000 page views during the month of August. I want to thank everyone who came on by and I hope you become a regular visitor to our humble home.
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Morning News: September 1, 2011
Eddy Elfenbein, September 1st, 2011 at 5:21 amIMF, ECB at Odds Over Sovereign-Debt Damage to Banks, FT Says
Euro-Zone Manufacturing Contracts
China Shares End Down After Wen’s Comments, Higher August PMI
BRICs No Cure for Global Economy This Time
East Asian Bond Issuance Drops
U.K. House Prices Decline Most in 10 Months
London Loses as Banks Look to Book Trades Overseas
Deutsche Telekom Unprepared for AT&T Deal Collapse
In T-Mobile Suit, Consumers Are Central
European Distilling Giant Pernod’s Earnings Get Boost From Emerging Markets
Solar Firm Aided by Federal Loans Shuts Doors
Sony Tablets Face Tough Sell on Price, Hardware
Bank of New York Mellon Chief Resigns in a Shake-Up
James Altucher: Abolish the Presidency. It’s a Useless Job.
Stone Street: AT&T Bringing Call Center Jobs Back to The U.S. Hooray!!! Wait, What?
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