Archive for December, 2011

  • AFLAC “Way Ahead of Target”
    , December 16th, 2011 at 12:22 pm

    From Bloomberg:

    Aflac Inc. (AFL), the health insurer that gets about three-quarters of its sales in Japan, will continue to beat goals in that country, said Chief Executive Officer Dan Amos.

    “We have achieved all of our targets and our sales are actually running way ahead of target, as we said in the third quarter, and we expect them to continue,” Amos told Tom Keene and Ken Prewitt during an interview on “Bloomberg Surveillance” today.

    Customers who bought policies through banks drove a 14 percent gain in Japanese sales for the nine months ended Sept. 30, Aflac said last week. The world’s biggest provider of policies supplementing work and government health coverage has prospered as the Japanese market has “pretty much gone back to normal” since the March 11 earthquake and tsunami, Amos said.

    “It’s amazing, the adaptability of the Japanese and how they were able to transform,” Amos said. “We as Americans would find this more difficult.”

    Here’s the audio.

  • CWS Market Review – December 16, 2011
    , December 16th, 2011 at 6:51 am

    Before I get into today’s CWS Market Review, here’s my Buy List for 2012:

    AFLAC ($AFL)
    Bed Bath Beyond ($BBBY)
    CR Bard ($BCR)
    CA Technologies ($CA)
    DirecTV ($DTV)
    Fiserv ($FISV)
    Ford ($F)
    Harris ($HRS)
    Hudson City Bancorp ($HCBK)
    Johnson & Johnson ($JNJ)
    Jos. A. Bank Clothiers ($JOSB)
    JPMorgan Chase ($JPM)
    Moog ($MOG-A)
    Medtronic ($MDT)
    Nicholas Financial ($NICK)
    Oracle ($ORCL)
    Reynolds American ($RAI)
    Stryker ($SYK)
    Sysco ($SYY)
    Wright Express ($WXS)

    Fifteen of the stocks from last year will stay on the list for next year. The five new stocks are CR Bard ($BCR), CA Technologies ($CA), DirecTV ($DTV), Harris ($HRS) and Hudson City Bancorp ($HCBK).

    The five deletions are Abbott Labs ($ABT), Becton, Dickinson ($BDX), Deluxe ($DLX), Gilead Sciences ($GILD) and Leucadia National ($LUK).

    The new Buy List goes into effect on January 2, 2012 which is the first day of trading of the new year. For tracking purposes, I assume the Buy List is a $1 million portfolio that’s equally weighted among 20 positions of $50,000 each based on the closing price of December 30, 2011. As usual, I can’t make any changes to the Buy List during the year.

    Through Thursday’s close, our 2011 Buy List is down 1.63% for the year while the S&P 500 is down 3.33%. Including dividends, our Buy List is up 0.15% while the S&P 500 is down 1.36%. There are only ten trading days left this year, but it’s looking like we’re going to beat the market for the fifth year in a row. Once again, we’ve shown that discipline and patience can beat the market.

    The problem for us right now is that market hasn’t been in a terribly good mood. After putting on a decent rally of close to 9% between November 25th and December 7th, the S&P 500 is limping into the end of the year. On Thursday, the index closed at 1215 which I like to call the Magna Carta line. If all goes well, we can be at back at the Black Death (1348-1350) in early in 2012.

    There are some reasons for optimism. For one, the economic news continues to be…not awful, which is a pleasant change of pace. On Thursday, for example, we learned that the number of initial jobless claims fell to 366,000 which is the lowest number since May 2008. This stat tends to have a lot of noise so it’s best to see more confirmation of a positive trend, but the past few reports have been pretty good.

    The Philly Fed report showed that manufacturing picked up there at the fastest pace in eight months. The report from the New York Fed also showed that the economy is better than expected. I noticed that FedEx ($FDX) posted good earnings recently. This is noteworthy because their business is often a good barometer for the overall economy.

    A recent poll of economists showed that they expect the economy to grow by 2.9% in the fourth quarter. That’s a big increase from 2.3% in a similar poll conducted last month. While that’s hardly a great rate, it’s a nice improvement over what we’ve seen (not to mention that many gurus confidently predicted we’d been in a nasty Double Dip right now). Only 25% of economists currently believe the economy will hit a recession in the next 12 months. Interestingly, the Federal Reserve met this week and their statement revealed no changes to current policy.

    Another good sign is that we’re seeing more strength in small-cap stocks. This sector got absolutely hammered during the late summer this year. Between July 13th and October 3rd, the Russell 2000 ($RUT), which is an index of small-cap stocks, dropped 27.2%. That’s 10% more than the loss suffered by the S&P 500. When people get scared they run towards safety. Or rather, what they think is safe. That means large-cap multinationals.

    Only when investors are more confident are they willing to take on more risk. Since October 4th, the S&P 500 has put on 10.6% while the Russell 2000 has added 17.5%. That’s a good sign. I’m also pleased to see the unraveling of stocks with absurd valuations like Netflix ($NFLX) and Amazon.com ($AMZN). (And yes, Amazon still has a long way to fall.) I’ll also point out that trading volume has been suspiciously light recently. Perhaps traders are getting fed up with the constant price swings.

    We’ve also seen a major breakdown in the price of gold. The Midas Metal fell below $1,570 per ounce this week. My guess is that this is related to the recent breakdown in the euro. As the euro loses ground to the dollar, the ECB will have more “permission” from the markets to lower interest rates. Remember that the price of gold is really a ratio—gold per dollar. In other words, movements in gold are often less about the metal and more about the currency.

    Investors are finding a lot more interest at the longer end of the yield curve. The yield curve has narrowed over the past few days. Part of this is certainly due to efforts of the Federal Reserve’s QE program, but I suspect many investors are riding this wave. On Wednesday, an auction of 30-year T-bonds went off at the lowest yield ever. The bid-to-cover ratio, which measures investor interest in the auction, was the highest in eleven years. A recent auction of three-year notes had the highest bid-to-cover ratio ever recorded for that maturity.

    I also want to touch on the financial sector. This part of the market has been a bust this year. Outside of a few positions like Nicholas Financial ($NICK) or JPMorgan ($JPM), our Buy List has been pretty light on financials. My feeling is that many financials were a value trap. This is when a stock or sector appears to be cheap based on traditional metrics but that’s only because the share prices correctly anticipated further declines in the fundamentals. I think that’s exactly what happened this year. Now, however, it’s becoming safer to move cautiously into financials. I think it’s very possible that the Financial Sector ETF ($XLF) can be at $16 this time next year.

    The only earnings report next week for our Buy List will come on Tuesday when Oracle ($ORCL) reports its fiscal second-quarter results. The company has told us to expect EPS to range between 56 and 58 cents. Let me reiterate what I said last week. I think Oracle has a good shot of earning 60 cents per share. Their cash flow has been very strong. Their licensing business continues to do well, although I’m a little concerned about the hardware side of the business which is a bit shaky. Bear in mind that Oracle earned 51 cents per share in last year’s Q2 which was very strong. The shares have dropped down to $29 recently which is a very attractive price. Oracle is a buy up to $34 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. Hopefully Europe will still exist next week. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: December 16, 2011
    , December 16th, 2011 at 6:50 am

    French Officials Continue U.K. Criticism

    Europe’s Crisis May Hold Seeds of Dealmaking

    Italy’s Monti Faces Confidence Vote on Austerity

    China Imposes New Tariffs on U.S. Vehicles

    The Indian Rupee Is an Abandoned Child

    Fitch Cuts Goldman, Deutsche, Five Other Large Banks

    As Sales Lag, Stores Shuffle the Calendar

    Kinder Morgan’s Major Bet on a Boom in Fracking

    Zynga Raises $1 Billion, Pricing IPO at Top of Range

    FedEx, Profit Rising, Credits Online Shopping

    BMW to Set Up Brazil Plant to Sustain Deliveries

    The Gold Medal Gold Model

    5 Reasons to Ignore Top 10 Stock Lists

    Edward Harrison: The Hidden Meanings of Debt

    Jeff Miller: How Investors Should Think about Europe

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  • RIP: Christopher Hitchens
    , December 16th, 2011 at 12:15 am

    I’m sorry to hear about the death of Christopher Hitchens. I was a big fan. He lived a few blocks from me and a few years ago, I ran into him. Here was my post from that experience.

    The Hitch and I

    So I was walking down Connecticut Avenue today, and I spotted a man in a bookstore who looked strangely familiar.

    I went in and asked, “excuse me, sir, are you Christopher Hitchens?” The man said, coyly, “who wants to know?” I’m assuming that’s an answer generally given by correctly identified parties. Also, he had a British accent. Yep, it was Hitch. So I tried to mumble something clever about being with George Galloway’s office.

    We chatted for a bit, as I did my best not to come off as Crazed Stalker Guy. Let’s face it: Even when I try to look threatening, it doesn’t come off too well. My coolness must have worked because as Hitchens was leaving the store, he asked if I was going uphill. I wasn’t but said yes anyway, and we chatted a little more.

    I was I could say that we had some fancy highbrow conversation, but it wasn’t that impressive. I mentioned that I had just finished Mark Steyn’s book, America Alone. He thanked me for reminding him that he had been asked to review the book. Those Brits, they have such good manners.

    It turns out that we’re both fans of Steyn. Hitchens said that he’s impressed with the amount of writing Steyn does, which I could imagine most people saying of him. Funny, I thought all these guys knew each other, but Hitchens said he doesn’t recall ever meeting Steyn, although he said that Steyn claims that they had once met.

    I told him that I liked Steyn’s book, but found it a bit alarmist. He said that in the case of Islamism, alarmism is justified. Then we reached his building, said our “good days” and that was it.

  • The 2012 Crossing Wall Street Buy List
    , December 15th, 2011 at 5:24 am

    *Drumroll please*

    Ladies and gentlemen, the following 20 stocks are my Buy List for 2012:

    AFLAC ($AFL)

    Bed, Bath & Beyond ($BBBY)

    CR Bard ($BCR)

    CA Technologies ($CA)

    DirecTV ($DTV)

    Fiserv ($FISV)

    Ford ($F)

    Harris ($HRS)

    Hudson City Bancorp ($HCBK)

    Johnson & Johnson ($JNJ)

    Jos. A. Bank Clothiers ($JOSB)

    JPMorgan Chase ($JPM)

    Moog ($MOG-A)

    Medtronic ($MDT)

    Nicholas Financial ($NICK)

    Oracle ($ORCL)

    Reynolds American ($RAI)

    Stryker ($SYK)

    Sysco ($SYY)

    Wright Express ($WXS)

    Fifteen of the 20 stocks from 2011 remain. The five new stocks are CR Bard ($BCR), CA Technologies ($CA), DirecTV ($DTV), Harris ($HRS) and Hudson City Bancorp ($HCBK). I’ll write more on the new stocks in the days to come.

    The five stocks I’m deleting are Abbott Laboratories ($ABT), Becton, Dickinson ($BDX), Deluxe ($DLX), Gilead Sciences ($GILD) and Leucadia National ($LUK).

    These changes don’t mean I think the old stocks are about to collapse. I simply believe the new stocks are better opportunities.

    The new Buy List goes into effect at the start of trading on Tuesday, January 3rd, 2012 which is the first trading day of the new year. As usual, the list is locked and I won’t be able to make any changes for the entire year.

    I will track the Buy List as if it is a $1 million portfolio with 20 equally-weighted positions of $50,000 each based on the closing price on December 30, 2011.

  • Morning News: December 15, 2011
    , December 15th, 2011 at 5:18 am

    Euro Remains Under Pressure As Markets Shun Risk

    Merkel Mired by Woes That May Deter Crisis Effort

    Euro Zone Deal Runs Into Second Thoughts

    Poland Skirts Euro Zone Woes, for Now

    Bernanke: Fed Has No Plans to Aid European Banks

    China Imposes New Tariffs on U.S. Vehicles

    OPEC Opts to Increase Its Level of Output

    Gold Extends Fall In Asia, Near-Term Outlook Weak

    Traders Confounded as Volatility Extends Run

    Mortgage Bonds Rally as Fed Backstop Seen in QE3

    Chevron’s Crude-Oil Spill in Brazil Prompts $10.6 Billion Lawsuit

    Lines Drawn on Antipiracy Bills

    Victoria’s Secret Revealed in African Child Labor

    SurveyMonkey Valued at $1 Billion as TPG Joins as Investor

    Stone Street: ZAGG + iFrogz: The $100 Million Acquisition Barely Worth Mentioning

    Joshua Brown: The Ten Biggest Market Moments of 2011

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  • Buy List Update
    , December 14th, 2011 at 5:00 pm

    Our 2011 Buy List currently holds a small lead over the S&P 500. As of today’s close, the Buy List is down 1.96% for the year while the S&P 500 is down 3.64% for the year.

    This is our biggest lead over the index since July 15th. These figures don’t include dividends but that probably erases about 40 basis points off our lead.

    There are now just 11 trading days remaining in 2011. If this holds up, 2011 will be our fifth-straight year of beating the S&P 500.

  • Morning News: December 14, 2011
    , December 14th, 2011 at 5:12 am

    Euro Crisis Shows Dutch Converge With Germany

    European Commission Chief Assails Britain Over Treaty Veto

    Italy Bond Costs Set to Mark New Record at Auction

    China Easing Case Grows on ‘Grim’ Outlook, Money Supply

    A Delisting for Olympus Puts Japan in a Debate

    OPEC Discusses 30 Million-Barrel Ceiling

    Fed Takes No Action, Citing Signs of Moderate Growth

    Bernanke Signals Fed Ready to Ease on EU Risk

    Stocks, Copper Fall as Fed Avoids Stimulus

    Wall St.’s Odd Couple and Their Quest to Unlock Riches

    Bears Hungry for More Tech Shares

    PayPal Bets on 103 Million Users to Target Groupon

    MF’s Corzine Said to Know of Customer Fund Misuse

    Goldman Loses Partners in Weakest Year Since 2008

    Avon to Seek New CEO, Separating Top Roles With Jung Remaining as Chairman

    Roger Nusbaum: Portfolio Expectations

    Paul Kedrosky: US Tax Rates in Three Graphs. Not Boring. Really.

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  • Today’s Fed Statement
    , December 13th, 2011 at 2:44 pm

    Snore.

    Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

    To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

    The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

    The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

    The only thing here that’s marginally noteworthy is that the Fed nearly admits that it can’t do much about high unemployment despite being part of its dual mandate.

  • An Equity Premium Quandry
    , December 13th, 2011 at 12:47 pm

    Here’s something I’ve been thinking about and I’m honestly not sure if it leads anywhere.

    Below is a chart I made at the St. Louis Fed’s FRED site. The blue line shows the Wilshire 5000 total return index dividend by the AA Corporate Bond total return index. In other words, it’s how much better stocks are doing than the long-term bond market.

    The red line is short-term interest rates. For this, I chose the 1-month AA non-financial rate. Note that this is a rate, not an index.

    Perhaps this relationship is illusionary but I’m curious if the relationship between long-term rates and equities is itself dependent on short-term rates.

    I also think it’s interesting that financially speaking, the 2000-2001 recession last for a much longer time than the gray bar suggests. The later recession, however, lasted roughly as long. In both cases, the market saw the recession before it officially started.