Archive for September, 2011

  • Gold Continues Its Plunge
    , September 26th, 2011 at 10:40 am

    Thanks to the Fed’s Operation Twist, gold continues to fall:

    Gold is often sold off as a means of raising dollars when funding conditions deteriorate, much as they did in late 2008 with the onset of the credit crunch that ensued from banks withholding lending because of their concern over counterparty exposure to toxic U.S. mortgage-backed assets.

    “Gold is one of the few assets that remains in positive territory this year, in a sense it is one of the last assets standing, and because of this as investors head for cash they sell the assets that have performed. Essentially gold is a victim of its own success as liquidity trumps,” wrote UBS analyst Edel Tully in a note.

    Silver came under fire, falling by as much as 16 percent at one point in the day and set for its worst three-day fall on record, having lost more than 25 percent in this period.

    The spot price was last down 6.7 percent at $29.00 an ounce, its lowest since last November.

    Platinum fell by 3 percent to $1,559.25 an ounce, its lowest since May last year, while palladium recovered from an earlier 5.0-percent fall to trade up 0.4 percent on the day at $637.22 an ounce, around its lowest since last October.

  • Berkshire Hathaway to Buy Back Shares
    , September 26th, 2011 at 10:17 am

    As I’ve said many times, I’m not a fan of share buybacks. My view is that companies ought to focus on their businesses and not waste their time trying to financially engineer a higher share price.

    When in doubt, excess cash flow should go to investors in the form of dividends. If investors then wish to buy more stock, that’s their decision. I hope that someday the tax fund is more favorable to that decision. I also think companies often use share buybacks to mask the extent to which they’ve diluted their stocks with executive stock options.

    As such, I was surprised to see that Berkshire Hathaway ($BRKA) has announced a share repurchase. The stock has been hit hard lately so there’s been more pressure on the company to do something. Berkshire has said that it will spend no more than a 10% premium of book value on share repurchase of the A and B shares.

    Berkshire is currently sitting on a war chest of $38 billion. Sometimes I wonder if having too much cash is a problem for companies. It’s as if the giant piggy banks distort their vision and they think they have to spend it all. This leads to poor acquisitions or countless share repurchase programs. The only benefit I see is that they generate positive press releases.

    This repurchase is an interesting and surprising move coming from Buffett. He has said that it’s harder for him to see promising acquisition candidates given Berkshire’s size. The company said it won’t have its cash position fall below $20 billion.

    The shares are up about $5,000 today.

  • Morning News: September 26, 2011
    , September 26th, 2011 at 5:17 am

    Europe Stews on Greece, and Markets Sweat Out the Wait

    German Government Confident on Euro Rescue Fund

    Tokyo Shares End Down; Nikkei Hits 29-Mo Low On Weaker Euro

    PBOC’s Zhou Says ‘Too Early’ to Decide How to Aid Europe

    Euro Remains Above Average Amid Debt Concerns

    Polish Zloty Goes From First to Worst Amid Crisis

    As Sides Dig In, Panel on Deficit Has an Uphill Fight

    UBS in ‘Disarray,’ Ermotti Named Interim CEO

    Record Dividends Lure Morgan Stanley to Asia as Equities Drop

    Netflix Secures Streaming Deal With DreamWorks

    Samsung’s Legal Woes Threaten to Crimp Tablets, Chips

    Boeing Sees 787 as Jet Lineup’s ‘Backbone’ With Delay Set to End

    Chevron, Partners Approve $29 Billion LNG Project

    Anglo-Dutch Publishing Group Reed Elsevier to Buy Accuity

    Europe Plan In Works Is A Game Changer

    Joshua Brown: This Trend is Nobody’s Friend

    Epicurean Dealmaker: A Victim of Soycumstance

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  • BOATLIFT, An Untold Tale of 9/11 Resilience
    , September 25th, 2011 at 1:25 pm

  • Emanuel Derman on the Perils of Pragmamorphism
    , September 24th, 2011 at 11:52 am

    Wise words:

    Models are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. They are graven images, useful but not very accurate.

    Models tell you only what something is more or less like. Theories tell you what something actually is.

    In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact.

    Therefore the similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance.

    The world is not a model.

    Read the whole thing.

  • Gold Crashes
    , September 23rd, 2011 at 5:31 pm

    On September 6th, the spot price of gold hit an intra-day high of $1,920.94 per ounce. Today, gold crashed over $100 per ounce. This was the third-largest daily percentage loss of the last 20 years.

    Gold slumped more than 6 percent at one point — its biggest slide since the financial crisis in 2008 — to hit early-August lows as this week’s losses accelerated. The sell off came even as stock and oil markets stabilized after Thursday’s rout.

    Adding to Thursday’s losses, gold is down almost 9 percent over the last two days, while silver has lost nearly 25 percent. In the case of gold particularly, it was the third-sharpest daily loss in the past 20 years.

    “I’m sure talk of hedge fund liquidation is helping to pressure things, though there’s no confirmation of any single fund selling,” said Jonathan Jossen, an independent COMEX trader.

    Despite its steep losses this week, gold remained up 16 percent year-to-date, thanks to gains from earlier months. But silver turned negative, with the spot price down almost 1 percent for the year.

    By 2:45 p.m. EDT, the spot price of bullion was down 5.5 percent at $1,641 an ounce, after falling to a session low under $1,628. The move was more than 5 standard deviations beyond the normal one-day change. At $127 an ounce, the intraday move was the biggest on record in dollar terms.

  • P/E Ratio Hits 22-Year Low
    , September 23rd, 2011 at 11:23 am

    Thanks to the recent plunge in stocks, the P/E Ratio for the S&P 500 fell to 12.05 based on yesterday’s close. That’s the lowest reading since April 17, 1989.

    Here’s a look at the S&P 500 (black line, left scale) along with its earnings (gold line, right scale). The two lines are scaled at a ratio of 16-to-1.

  • CWS Market Review – September 23, 2011
    , September 23rd, 2011 at 8:33 am

    One day after the Federal Reserve announced “Operation Twist,” the stock market got absolutely slammed. The Dow was dinged for 391 points on Thursday and this comes on top of a 283-point haircut we took on Wednesday, most of which came after the Fed’s announcement.

    In the last two days, the S&P 500 has shed 6%. The index closed Thursday’s trading session at 1,129.56 which is the lowest close in a month. We even hit an intra-day low of 1,114.22 which was below the recent closing low of August 8th (1,119.46). However, we haven’t pierced the intra-day low of 1,101.54 from August 9th. At least, not yet. The $VIX, also known as the Fear Index, shot up more than 10% on Thursday to close at 41.35 which is a one-month high.

    So what’s going on?

    In this issue of CWS Market Review, I’ll give you the low-down on the Fed’s plans and why the market reacted so negatively. Plus, I’ll update you on two very good earnings reports from our Buy List standouts, Oracle ($ORCL) and Bed Bath & Beyond ($BBBY). More importantly, I’ll highlight some outstanding high-yielding stocks that will help us weather the storm.

    First, let’s take a closer look at Bernanke’s new plan to get the economy off the mat. At 2:23 pm on Wednesday, the Federal Reserve released its policy statement from this week’s meeting. In it, the Fed said it’s going to replace $400 billion of short-term debt in its portfolio with long-term Treasury debt.

    The idea is to push long-term interest rates down with the hope of spurring more borrowing. Ideally, this will also help get the housing market going again. As I explained in the CWS Market Review from two weeks ago, economic recoveries are often led by the housing sector. The problem this time around is that housing is still flat on its back.

    Bernanke & Co essentially downgraded the entire U.S. economy. The Fed aims to sell roughly three-fourths of the amount of short-term debt it holds. Investors concluded that if the Fed is going into long-term bonds, well…they might as well ride that wave. So they dumped stocks and crowded into Treasuries. By “crowded,” I mean a massive buying panic.

    On Thursday, the yield on the 30-year Treasury plunged to 2.78%. That’s a drop of roughly 50 basis points from Wednesday afternoon. To put that in context, the Long-Term Bond ETF ($TLT) jumped from $114 to $123 in the same time period. (Remember that these are bonds. They’re supposed to be boring and stable.)

    As dramatic as the 30-year bond’s drop was, the 10-year plunged to its lowest yield ever. On Thursday, the yield hit 1.72%. That’s a drop of 150 basis points since July 1st. We’re through the looking glass here, people.

    I should point out that this recent action is slightly different from the fear trade that I’ve talked about before. The difference is that gold fell on Wednesday and it got hit hard yesterday which is a reflection that real short-term interest rates may rise from the Blutarsky levels they’re at right now. I doubt they’ll go very high, but the Fed is by far the largest player in the T-bill market.

    As you might expect, the major losers on Thursday were the cyclical stocks. The Morgan Stanley Cyclical Index (^CYC) dropped 5.22% on Thursday to close at 762.10. Two months ago, the index was at 1,071.84. Both the Energy Sector ETF ($XLE) and Materials Sector ETF ($XLB) lost more than 5.6% on Thursday while defensive areas like Consumer Staples ($XLP) and Healthcare ($XLV) lost “only” 1.90% and 2.02% respectively. (That’s exactly why we call them defensive.)

    The folks at Bespoke Investment Group point out that more than half of the stocks in the S&P 500 now yield more than the 10-year Treasury bond.

    Some analysts on Wall Street are saying that Operation Twist is a really covert bailout of the big banks. I’m not cynical enough to say that’s the Fed intent, but it will certainly help the banks offload their holdings on Treasury bonds. But I’m doubtful that Operation Twist will spur more mortgage lending or even get people to refinance. Mortgage rates are already at 60-year lows. I don’t see how a few more basis points will help out troubled homeowners.

    To be perfectly frank, I think this whole episode shows how limited the Fed’s powers really are. (At the Fed’s website, they included an FAQ on Operation Twist). David Kelly of JPMorgan Funds said, “Ben Bernanke is at least trying to do the right thing. He just doesn’t know what the right thing is.” Ouch!

    Still, some of the big banks like Goldman Sachs ($GS) and Morgan Stanley ($MS) plunged to multi-year lows. Bank of America ($BAC) closed at $6.06 on Thursday; Warren Buffett’s warrants have a strike price of $7.14. Our Buy List mega-bank, JPMorgan Chase ($JPM), fell below $30 per share and it now yields 3.42%. JPM is still, by far, the healthiest of the major banks.

    I honestly don’t see how Operation Twist will boost the economy, but I’m still not in the Double Dip camp. I think the most likely scenario is that the economy will bounce along at a 1% to 2% growth rate: not enough to get the labor market going but not slow enough to be an official recession.

    As rough as this week was for the stock market, I’m happy to say that we had two very good earnings report from our Buy List. After the close on Tuesday, Oracle ($ORCL) reported earnings of 48 cents per share which was two cents better than Wall Street’s forecast.

    I was actually expecting even more from Oracle. My mistake was that I didn’t foresee how weak their hardware business would be. Despite my over-optimism, the market reacted positively to the earnings report. On Wednesday, the shares got as high as $30.96. (Bear in mind that they were under $25 just one month ago.) The stock only broke down once the rest of the market did.

    Oracle continues to be a very profitable company. Over the past 12 months, Oracle’s cash flow is up 46%. Wall Street was mostly upbeat on the earnings report. For their fiscal second-quarter, which ends in November, Oracle forecasts earnings of 56 – 58 cents per share. That’s a surprisingly narrow range. The Q2 from last year came in at 51 cents per share and that was a very strong quarter; Oracle cautioned investors that the comparisons are much tougher. I continue to rate Oracle a strong buy up to $30 per share.

    While I was overly-optimistic on Oracle, I wasn’t optimistic enough on Bed Bath & Beyond ($BBBY). On Wednesday, the company reported fantastic second-quarter earnings of 93 cents per share. That was nine cents more than Wall Street was expecting.

    This comes on top of a blow-out earnings report last quarter. BBBY also raised their full-year guidance for the second time this year. Originally, the company told us to expect earnings to grow by 10% – 15% for this year. Then after the big earnings report in June, they raised that forecast to 15% – 20%. Now they’ve bumped that up to 22% – 25%. That translates to full-year earnings of $3.74 – $3.84 per share. In business, good news often leads to good news. Businesses aren’t like ball players who have an “off night” or a “hot hand.” If there’s something good going on, it will tend to last.

    At one point on Thursday, BBBY was one of only two stocks in the S&P 500 to be higher for the day. Thanks to Bed Bath & Beyond’s strong earnings and higher guidance, I’m raising my buy price to $60 per share. This is a very solid company.

    Some other stocks on my Buy List that look particularly attractive right now (thanks to their high yields) include Abbott Labs ($ABT, yields 3.79%), AFLAC ($AFL, yields 3.75%), Johnson & Johnson ($JNJ, yields 3.68%), Reynolds American ($RAI, yields 5.85%), Sysco ($SYY, yields 4.00%) and Nicholas Financial ($NICK, yields 4.13%).

    That’s all for now. Be sure to keep checking the blog for daily updates. Next week is the final week of the third quarter. We’ll also get another revision to the second-quarter GDP report. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: September 23, 2011
    , September 23rd, 2011 at 4:50 am

    G-20 Vows to Tackle ‘Renewed’ Global Risks

    ECB Ready to Act Next Month If Outlook Deteriorates

    Europe Mulls Increasing Rescue Fund Firepower

    Greece on Edge 24 Centuries After First Default

    European Stocks Pare Gains

    South Korea Regulator Says Some Banks That Flunked Stress Tests Now Sound

    Special Report: How to win business in Libya

    Crude Oil Rebounds More Than $1.00 Per Barrel

    Fed’s ‘Operation Twist’ Fails to Reassure

    Treasury Decline After G-20’s Pledge to Tackle Risks Damps Refuge Demand

    Whitman Will Stick to Apotheker’s HP Strategies

    Sany Roadshow on Course After $3.3 Billion Share Sale Delay

    In Rush to Assist Solyndra, U.S. Missed Warning Signs

    Old Saturn Plant Could Get a Second Chance

    Todd Sullivan: Temp Staffing & Total Employment & Recessions

    Stone Street: Is Our Tax System Fair? If Not, Why? — Veronique de Rugy

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  • The 2/10 Spread
    , September 22nd, 2011 at 3:52 pm

    I’m not exactly sure why, but the spread between the two- and ten-year Treasury bonds seems to have a very good track record of predicting recessions.

    Notice how the spread goes negative in the months before official recessions (the grey bars). That’s a track record that many economists would envy.

    The spread between the two and ten is still wide although it has narrowed over the past several weeks. Still, we’re a long way from the danger zone. That’s why I’m a Double Dip doubter. A recession, of course, will come along eventually, but this point combined with other data (like the ISM) tells me that a Double Dip recession is unlikely in the immediate future.