Archive for 2011

• CWS Market Review – November 18, 2011
  Eddy Elfenbein, November 18th, 2011 at 9:06 am

  Despite coming off a record earnings season, the stock market is still in a sour mood. On Thursday, the S&P 500 closed at 1,216.13 which was its lowest close in nearly one month. Since October 28th, we’re down 5.3%.

  The S&P 500 fell by more than 1.6% on both Wednesday and Thursday this week and it’s now hovering just above its 50-day moving average (the NASDAQ Composite is already below it). The index has closed above its 50-DMA every day since October 10th. I try to avoid “timing” the market but I’ll note that the 50-DMA is often an important demarcation line separating bull markets from bear markets.

  In this week’s CWS Market Review, I want to discuss a major change that’s happening in the market that’s not getting much attention. More importantly, I’ll tell about some of the best places to invest your money right now.

  For the last several weeks, the U.S. stock market has been heavily dependent on what’s been happening in Europe. This is hardly surprising but it’s also been very frustrating because…well, Europe’s economy is massively screwed up. On top of that, the political situation seems to favor ignoring the issues rather than solving them. However, my biggest fear is that we’ll never see a rally here until the mess is over over there.

  Lately, however, we’re starting to see the first signs that our market is disentangling itself from the European malaise. This is very important. Let me explain: Over the last few months, the U.S. stock market has been unusually highly correlated with the euro-to-dollar trade. Whenever the euro has rallied, stocks here have been very likely to rise, and when the euro has sunk, U.S. stocks have gone south. These two lines have moved together like waltzing partners.

  About 18% of the profits for the S&P 500 comes from Europe. Yet at the end of October, the 30-day correlation between the Dow and the EURUSD hit an incredible 0.958. By the end of last week, it slipped to 0.834 and lately, it’s been as low as 0.498. That’s a big turnaround and I think there’s a very good chance it will continue.

  

  The reason is that the U.S. economy is starting to show signs of life. Make no mistake, we’re not ripping along, but the recent news is somewhat optimistic. For example, this week’s report on industrial production showed a 0.7% gain last month. That was much better than Wall Street’s forecast of 0.4%. The inflation news continues to look good. We also had a decent report on retail sales which is often a glimpse at the confidence of consumers. Jobless claims fell to the lowest level since May. There’s clearly no Double Dip at hand.

  Economists up and down Wall Street have been revising their economic growth estimates higher. JPMorgan Chase ($JPM) just raised its estimate for Q4 GDP growth from 2.5% to 3%. Morgan Stanley ($MS) thinks it will be 3.5%. Joe LaVorgna, the chief economist at Deutsche Bank ($DB), said that he wouldn’t be surprised if Q4 growth topped 4%. Bespoke notes that this earnings season showed the highest “beat rate” this year. What we’re seeing is a fundamentally healthy economy that’s fighting off a housing sector mired in a depression—and as bad as housing is, even that’s showing some slight glimmers of hope.

  If the U.S. stock market can finally shake off the daily gyrations caused by our friends across the pond, I think we can see a nice year-end rally. Consider how fearful the market is right now. Shares of Microsoft ($MSFT) are trading at just over eight times next year’s earnings estimate. Wall Street currently thinks the S&P 500 can earn $109.30 next year which means the index is going for just over 11 times earnings. The yield on the 30-year Treasury is back below 3% and the yield on the 10-year is below 2%. In other words, the risk trade continues to be swamped with folks afraid to put their money to work in stocks.

  Now let’s turn our attention to the Buy List which continues to lead the overall market this year. I especially want to highlight some of our higher-yield stocks because they’re the best way to protect yourself in a fragile market like this.

  In last week’s CWS Market Review, I said that I expected to see Sysco ($SYY) raise its quarterly dividend for the 42nd year in a row, but only by one penny per share. On Wednesday, the company proved me right. Going by the new dividend, Sysco currently yields 3.95%. The stock is a good buy up to $30 per share.

  Our only Buy List stock to fall short of its earnings expectation this past earnings season was Reynolds American ($RAI). I told investors not to worry since the quarterly earnings game doesn’t matter so much to a conservative stock like Reynolds. Sure enough, the stock broke out to a fresh 52-week high this week. I wasn’t thrilled by the company’s recent share buyback announcement but it’s clearly given a lift to the stock. Reynolds is now our second-best performer on the year; only Jos. A Bank Clothiers ($JOSB) has done better. At the current price, Reynolds yields 5.27%. The shares are a strong buy below $42.

  Some other stocks on the Buy List that look particularly good right now include AFLAC ($AFL), Moog ($MOG-A), Ford ($F), Fiserv ($FISV) and Oracle ($ORCL).

  Next Tuesday, Medtronic ($MDT) will report its fiscal second-quarter earnings. The company has said to expect earnings for this fiscal year (which ends in May) to range between $3.43 and $3.50 per share. Wall Street expects a quarterly report of 82 cents per share which seems about right to me. I think they can beat by a penny or two, but not by much more. Either way, Medtronic is cheap. The stock is currently going for less than 10 times the company’s own earnings forecast.

  That’s all for now. The stock market will be closed next Thursday for Thanksgiving. For reasons I’ll never understand, the stock market is open on the Friday after Thanksgiving but it will close at 1 p.m. This completely pointless session is usually one of the lowest volume days of the year. 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

• Morning News: November 18, 2011
  Eddy Elfenbein, November 18th, 2011 at 6:05 am

  Franco-German Spat on Role of ECB Renewed

  ‘Unsellable’ Real Estate Threatens Spanish Banks

  European Rift on Bank’s Role in Debt Relief

  Task Force Urges Greece to Improve Tax Collection

  EU Rules May Soak Up $93 Billion of Utility Cash

  Japan Probes Possible Olympus Gangster Link

  Crude Oil Heads for Worst Weekly Performance Since September

  The Real Reason Behind Crude Oil’s Strength

  Housing Starts in U.S. Fell 0.3% to 628,000 Rate in October

  Fed Official Backs Action

  Motorola Mobility Accused in Lemko Lawsuit Alleging Theft of Trade Secrets

  Sears Holdings Posts Loss on Weakness in Sales

  UBS Sets Profitability Goal, First Cash Dividend in 5 Years

  Angie’s List Stock Has Strong First Day; Yelp Files for IPO

  Jeff Carter: European Bond Yields Up=No Inflation…..Yet

  James Altucher: 10 Things I Didn’t Learn in College

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• The 50-DMA Holds
  Eddy Elfenbein, November 17th, 2011 at 9:52 pm

  The S&P 500 had its second big fall in a row. The index is now down to 1,216.01 which is just above its 50-day moving average. We’ve been above the 50-DMA continuously since October 10th.

  

• Once Burned, Twice Shy: How Naïve Learning, Counterfactuals and Regret Affect the Repurchase of Stocks Previously Sold
  Eddy Elfenbein, November 17th, 2011 at 8:06 pm

  I like this academic study:

  We establish two previously undocumented patterns in the purchase selections of individual investors. These patterns hinge on investors’ previous experiences with a stock. We demonstrate that investors prefer to (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss and (2) repurchase stocks that have lost value subsequent to a prior sale rather than those that have gained value. We document these trading patterns by analyzing trading records for 66,465 households at a large discount broker between January 1991 and November 1996, and 665,533 investors at a large retail broker between January 1997 and June 1999. We propose that the first trading pattern results from a simple form of learning whereby investors repeat actions that previously resulted in pleasure while avoiding actions that previously led to pain (i.e., they repurchase their previous winners more readily than their previous losers). We argue that the second trading pattern is tied to counterfactuals. Investors who buy a stock at a higher price than they previously sold it for are painfully aware that they are worse off than if they had simply never sold that stock. Investors who buy a stock at a lower price than they previously sold it experience the pleasure of knowing they are better off than if they had never sold that stock. Investor returns do not benefit from either of the two patterns we document.

  (Via: Alea)

• Morning News: November 17, 2011
  Eddy Elfenbein, November 17th, 2011 at 5:22 am

  Greece Turns to Budget After Confidence Vote Win

  Widening Split in Europe on the Virtue of Austerity

  U.S. Airline Group Looks to Block Air India Funding

  Japan Restricts Fukushima Rice Shipments After Radiation Found

  U.S. Banks Face Contagion Risk From European Debt: Fitch

  Thai Baht Weakens as Fitch Says Europe Crisis a Threat to U.S. Banks

  India Food Inflation Eases

  Oil Climbs to Five-Month High in New York as Supplies Counter Debt Concern

  Gold Top Pick at Morgan Stanley as Europe Debt Spurs Demand

  As New Graduates Return to Nest, Economy Also Feels the Pain

  Why Wall Street’s Layoffs Are More Serious Than You Think

  Reform Adds More Twists to a Convoluted Derivatives World

  With MF Global Money Still Lost, Suspicions Grow

  SABMiller Runs Into Tough Trading in Europe and U.S.

  Branson’s Virgin Money to Acquire Northern Rock From U.K. for $1.2 Billion

  Cullen Roche: 5 Misconceptions About Peak Oil

  Phil Pearlman: The Markets and The Deep Layer of Chronic Diffuse Anxiety

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• Inflation Continues to Chill Out
  Eddy Elfenbein, November 16th, 2011 at 10:31 am

  It’s rather amusing how many people are predicting the imminent return of hyper-inflation. On these matters, I prefer to be a realist. We haven’t had much inflation and it doesn’t appear that we will any time soon.

  The Labor Department reported this morning that inflation actually fell by 0.1% last month. Economists were expecting no change. The core rate, which excludes food and energy, rose by 0.1% and that matched expectations.

  Here’s my preferred way of looking at inflation. This is the monthly core rate which is seasonally adjusted and annualized:

  

  My point is that you can see a clear rising trend of inflation. We’re not so concerned with one or two outliers, but a trend tells us something. That trend, however, peaked in May at 3.5%. Since then, inflation has gradually crept back down. In September, it dropped to 0.66% and last month, it was 1.64%.

  What does this mean for stocks? Lately, the stock market tends to move in alliance with inflation expectations. But expectations of inflation and inflation aren’t the same thing. Historically, the stock market isn’t much concerned with inflation that’s below 5.3%.

• Sysco Raises Dividend
  Eddy Elfenbein, November 16th, 2011 at 9:51 am

  In our last CWS Market Review, I said that I expected Sysco ($SYY) would soon raised its quarterly dividend by a penny per share:

  Here’s the important part: Sysco has raised its quarterly dividend for the last 41 years in a row, and I expect to see #42 very soon. However, the increase will probably be very modest. My guess is that the board will bump up the quarterly dividend from 26 cents to 27 cents per share. That would give the shares a yield of close to 4%. In this environment, that’s not bad. Sysco is a good buy up to $30 per share.

  Sure enough, I got it right. Sysco just announced that it’s raising its dividend by a penny to 27 cents per share. Going by yesterday’s close and the new dividend, the current yield comes to 3.92%.

• Morning News: November 16, 2011
  Eddy Elfenbein, November 16th, 2011 at 5:29 am

  Euro Falls To Fresh 1-Month Low On Debt Woes

  JPMorgan Joins Goldman Keeping Italy Debt Risk in Dark

  European Union Softens Bid to Rein in Ratings Agencies

  Bank of Japan Cuts Economic View as Europe Crisis Becomes Growing Risk

  China Foreign Investment Rises at Faster Pace

  Spain Set to Purge Banks of Property Hangover

  Spared in War, Libya’s Oil Flow Is Surging Back

  Iraqi Cabinet Approves Royal Dutch Shell’s Natural Gas Contract

  Crude Futures Fall; Europe Bond Yields Hurt Sentiment

  Gold Trades Flat, Euro Jitters Help Recoup Losses

  Obama Warns Market Turmoil to Continue Over Europe

  Wal-Mart Profit Below Wall Street Despite Better Sales

  Dell Outlook Cloudy

  Exile on Wall Street Author Mike Mayo on Pundit Review Radio

  Edward Harrison: David McWilliams on Irish (and Italian) Euro Exit

  Joshua Brown: Morningstar Launches New Forward-Looking Fund Ratings

  Be sure to follow me on Twitter.

• Buy List Year to Date
  Eddy Elfenbein, November 15th, 2011 at 10:22 pm

  Our Buy List has beaten the S&P 500 for the last four years in a row and we’re just barely ahead this year as well. It looks like it may come down to the wire. Through today’s trading, the S&P 500 is up 0.01% while our Buy List is up 0.79%. That doesn’t include dividends.

  We started off the year strongly. By early May, our Buy List was leading the S&P 500 by more than 5.8%. But our lead collapsed during July and at one point in mid-September, we trailed the index by more than 1%.

  We’ve held a slight lead for most of the past few months but any sudden move from one of our stocks can change things very quickly.

  

• Reynolds American Announces $2.5 Billion Share Buyback
  Eddy Elfenbein, November 15th, 2011 at 11:43 am

  I sometimes think these announcements are done specifically to annoy me. Reynolds American ($RAI) just announced a $2.5 billion share repurchase plan. To be more specific, the plan is “up to” $2.5 billion so that includes other numbers…such as $0. Also, this isn’t all at once. The program will last for two-and-half years.

  Basically, this news is released so the company can claim that it’s releasing good news.

  I really like RAI a lot and I especially like the dividend. A little over a year ago, RAI raised its quarterly dividend from 45 cents per share to 49 cents per share. Then in February, they raised it again — this time to 53 cents per share.

  A $2.5 billion share buyback program works out to $4.30 per share which is 11% of the current stock price. I think RAI shareholders would much rather have that in cash than the hope that it will boost the share price that much.

  The company is also making an accounting change that will alter their reported earnings.

  Reynolds American generally analyzes its pension and post-retirement plan performance annually as of the end of the year. Under the change, any actuarial gains or losses outside a 10 percent range will be recognized during the fourth quarter as a mark-to-market adjustment included in pension and post-retirement expenses.

  The accounting change will be applied retrospectively to prior periods.

  As a result of the change, Reynolds American expects adjusted full-year earnings of $2.77 to $2.82 per share. Using the company’s previous accounting methodology, Reynolds American had expected $2.63 to $2.68 a share. Analysts surveyed by FactSet had expected $2.64 per share, on average.