Archive for 2011

  • Morning News: October 18, 2011
    , October 18th, 2011 at 5:34 am

    Euro Leaders’ Crash Crisis Campaign Bogs Down

    France Risks Losing Top Grade on Bailout Fund

    China’s Economic Growth Slows

    Chinese Company Scandals Are Spurring Due Diligence In HK -HK Exchanges Exec

    Banks to Mimic Bank of America With New Fees

    Farmers Facing Loss of Subsidy May Get New One

    Energy Deals See an Upswing as Bargains Abound

    Fed Officials at Odds on Inflation Threat

    Citigroup and Wells Fargo Shares Fall on Lower Quarterly Revenue

    Worries Persist for IBM

    Danone 3Q Sales Euro 4.81 Billion Vs. Euro 4.35 Billion; Confirms 2011 Targets

    An Investor Creates a Tempest in a Coffee Cup

    The Missed Red Flags on Groupon

    Accounting Board Criticizes Deloitte’s Auditing System

    Porsche Made in Leipzig Lowers Labor Costs

    Joshua Brown: And the Men Who Hold High Places…

    Paul Kedrosky: Traders Warn of Market Cracks

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  • The Current Mind of the Market
    , October 17th, 2011 at 1:36 pm

    Here’s another table that explains the point I’ve been trying to make — namely that the stock market is currently being pulled in two different directions by competing theses.

    On one hand, you have the view that everything’s fine and the market will rally higher. This will help the cyclical stocks plus the financials. On the other hand, you have the bearish view that only the defensive stocks will thrive.

    As a result, each day we get one or the other. Either the financials lead a cylical rally, or the financials get pounded and the cyclicals swoon. The down days are generally worse than the up days.

    The following table shows the average move of each S&P sector group based on the last 59 trading days (29 down, 30 up).

    Sector Up Days Down Days
    Financials 2.15% -2.83%
    Industrials 1.84% -2.33%
    Materials 1.81% -2.41%
    Energy 1.79% -2.39%
    Discretionary 1.69% -1.92%
    Tech 1.59% -1.70%
    S&P 500 1.58% -1.92%
    Healthcare 1.24% -1.53%
    Telecom 1.00% -1.20%
    Utilities 0.97% -0.98%
    Staples 0.93% -1.04%

    This is the source of the market’s recent volatility. It’s not about risk. Instead, it reflects the market’s internal tug-of-war.

  • Breaking Down the Bear
    , October 17th, 2011 at 11:42 am

    Since the market topped on April 29th, the S&P 500 has lost 10.2%. What’s interesting is that the losses have not been spread out equally. Here’s a look at the losses by each sector.

    Utilities 2.50%
    Staples -1.85%
    Tech -1.85%
    Discretionary -4.64%
    Healthcare -6.66%
    Telecom -7.32%
    S&P 500 -10.20%
    Energy -16.70%
    Industrials -17.04%
    Materials -17.22%
    Financials -22.94%

    Outside of the Financials and the major cyclical groups, the market hasn’t been that bad.

    Here’s an interesting stat: The Financials have been either the best- or worst-performing sector for 30 of the last 50 trading days. The Financials ended Friday also at exactly one-third of their all-time high (169.901 versus 509.553, a loss of 66.657%).

    The Consumer Staples are only down 4.55% from their all-time high reached in May. The Techs are down 4.41% from a 10-year high (they still have a looong way to go to make an all-time high).

  • Bed Bath & Beyond Hits New 52-Week High
    , October 17th, 2011 at 10:07 am

    The stock market is down a bit this morning but we’re still holding on to most of the gains we made from Friday’s big push. The S&P 500 is currently down about 5.5 points.

    The market is being helped by Citigroup’s ($C) earnings report which was quite good. The bank earned 84 cents per share which was two cents better than estimates.

    Citi’s losses from bad loans fell 41 percent during the quarter to $4.5 billion as defaults fell from its credit card loans for Citi-branded cards. That allowed Citi to add $1.4 billion to its earnings from credit reserves it set aside for deeper losses.

    The bank’s international consumer business increased 10 percent due to growth in Asia and Latin America. Its North American consumer business fell 9 percent from a year ago due mainly to lower average balances on its credit cards. Revenue in the card business also fell due to regulations that limit the ways banks can increase interest rates and fees.

    Citi said its stock and bond trading business was hurt by uncertainty in financial markets due to the debt crisis in Europe and a downgrade of the U.S. government’s credit rating in August.

    It could have been a lot worse. A lot. The shares are currently up about $1.

    I was very impressed by the recent fall in the $VIX and I suspect that to continue. Earlier this year, the $VIX had dropped below 15 and I think that will happen again over the next few months.

    On our Buy List, Bed Bath & Beyond ($BBBY) just broke out to another new 52-week high. The stock has been as high as $61.69 today.

    The other good news is that the UAW rank-and-file seem to favor the recent deal with Ford Motor ($F).

    UAW members at Ford went from voting 53 percent against the proposed contract on the morning of Oct. 14 to 62 percent in favor by yesterday at 8:30 p.m. New York time. The union said 14,845 members at Ford had cast ballots in favor of the labor deal while 9,076 voted against. Ford’s 40,600 U.S. hourly workers will conclude balloting tomorrow.

    If the deal wasn’t approved, there was a chance that Ford could have faced its first nationwide strike in 35 years. One analyst said the strike would have cost Ford $71 million per day.

  • Morning News: October 17, 2011
    , October 17th, 2011 at 5:14 am

    G-20 Gives EU One Week to Fix Debt Crisis

    Bunds Fall, Wait for Policymakers to Deliver

    Bankers Balk at EU Push for Bigger Greek Losses

    Chinese Banks Increase Mortgage Rates as Property Prices Decline

    Oil Rises to Highest in a Month on Europe Debt Rescue Efforts

    Volcker Rule Divides Regulators

    Ex-AIG CEO Greenberg Says U.S. Senate Bill on Yuan a ‘Dumb Idea’

    Kinder Morgan to buy El Paso Corp. for $20.7 Billion

    G4S Acquires ISS For GBP 5.2 Billion, Creating Giant

    Amazon Signs Up Authors, Writing Publishers Out of Deal

    BP Says Anadarko to Pay $4 Billion to Settle Gulf Spill Claims

    Wal-Mart China Chief Resigns as Retailer Faces Pork Probe

    Olympus Shares Plunge 24% Following Chief Ouster

    Philips’ TV Deal at Risk, Plans 4,500 Job Cuts

    Jeff Miller: WEIGHING THE WEEK AHEAD: ESCAPE FROM THE TRADING RANGE?

    Howard Lindzon: Screw Diversification…and The Amazon Starve Wall Street Palooza

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  • S&P 500 = 1,224.58
    , October 14th, 2011 at 4:29 pm

    Another strong day! The S&P 500 closed at 1,224.58 today which is the highest close since August 3rd. The market is now up 11.4% since October 3rd.

    This has been a pretty snappy run. Who knew October would be so good? The S&P 500 has now risen for seven of the past nine days. It’s 4.44% above its 50-DMA and we only need a push of 4.2% more to cross the 200-DMA.

    From the market top on April 29th to the October 3rd close, the S&P 500 lost 19.39%. The past nine days have basically cut that in half. We’re now 10.2% below our 2011 high.

    Interestingly, October may be a popular time for market turns. Of course, there were the events of 1929 and 1987. But the market marked an important low on October 9, 2002 and it peaked exactly seven years later on October 9, 2007.

    Perhaps October 3rd of 2011 marked another important low.

  • The VIX Breaks Below 30
    , October 14th, 2011 at 12:16 pm

    More evidence that the Fear Trade is unwinding. The Volatility Index ($VIX) just broke below 30.

    The VIX hasn’t closed below 30 since August 3rd.

  • Google Smashes Earnings
    , October 14th, 2011 at 11:26 am

    After the close yesterday, Google ($GOOG) reported very strong third-quarter earnings. The company earned $9.72 per share which was 98 cents better than estimates. The stock has gapped up as much as 7.2% this morning and it nearly came close to piercing $600 per share.

    Here’s a look at Google’s stock along with its earnings-per-share. The share price is the blue line (left scale). The earnings is the gold line and it follows the right scale. The red line is Wall Street’s forecast.

    I scaled the two axes at a ratio of 18-to-1 which means that the P/E Ratio is exactly 18 whenever the lines cross. (Note: Please don’t take 18 as my valuation of Google. I just thought the chart looks more readable using that ratio.)

    From early 2010 to this summer’s low, Google’s P/E Ratio has been nearly cut in half. Here are two ifs — if Wall Street’s earnings forecast is correct and if Google trades at 18 times that, then the stock will be at $750 by the end of 2012. That’s a 27% gain over the next 14-and-a-half months.

  • Strong Retail Sales Last Month
    , October 14th, 2011 at 9:15 am

    More evidence that there’s no Double Dip at hand. The Commerce Department reported that retail sales rose by 1.1% last month. The number for August was also revised to show a 0.3% gain.

    Higher food and energy prices crimped purchasing power earlier this year, while the debt ceiling crisis along with stock market losses undermined confidence. Recent data, meanwhile, showed that incomes fell in August, the first drop in nearly two years. That forced Americans to dig into their savings in order to maintain their living standards.

    But September’s broad-based retail spending gains indicate a degree of optimism.

    Friday’s data showed a 3.6% jump for auto and parts sales. Excluding cars, overall retail sales were up 0.6%. Economists had expected retail sales excluding autos to climb 0.4%.

    Restaurant, furniture, clothing, department store and non-store retail sales–a category that includes the internet–all posted gains. Gasoline station sales also showed another increase.

  • CWS Market Review – October 14, 2011
    , October 14th, 2011 at 8:19 am

    In last week’s CWS Market Review, I mentioned that we could be seeing the start of a prolonged rally. I’m happy to see that the stock market extended its gains this week. On Monday, the S&P 500 broke above its 50-day moving average. Then on Wednesday, the index came very close to hitting its highest close since August 3rd.

    Despite how well the market has done, I’m not a full-fledged believer just yet. I’ll feel a lot better once the market clears its 200-day moving average, but we have another 6% to go for that to happen. Historically, stocks perform much better when the S&P 500 is above its 200-DMA.

    I’m pleased to see investors are gravitating towards the kind of high-quality stocks we favor. Since Monday before last, our Buy List is up 10.29% which is 79 basis points more than the S&P 500. Over that same time span, shares of Ford ($F) and Wright Express ($WXS) are both up 21% and shares of boring little Deluxe ($DLX) are up close to 24%. Best of all, Deluxe still yields close to 4.5%.

    The fact is clear: for the first time in several weeks, investors are seeking safety in stocks, not bonds. Over the last three weeks, investors have quietly sold their bonds and yields have ticked higher. The 30-year Treasury dropped for six days in a row which was its longest slide in four years. The 10-year note recently crossed 2% and I think it could head to 2.5%.

    Until three weeks ago, investors had been massively piling into gold and bonds, seeking shelter from whatever weekly disaster was happening in Europe. The latest (tentative) news from Europe is hopeful and gold has taken its biggest drop in three years. This is part of the Fear Trade unwinding. It’s still too early to declare victory, but the bears are clearly walking back some of their risk-averse positions.

    Make no mistake, the European banks are far from healthy and S&P just downgraded Spain; but it looks like the authorities are starting to realize how bad things are. It’s as if everyone in Europe is waiting for a “Lehman” moment, which may never come. Instead, we’re watching a slow erosion of investor confidence. According to Barclays, the problems in Europe have erased $13 trillion of wealth since July 1st. I should add that I’ve been impressed by how strong the comments have been from officials in Europe. It looks like the next big meeting will be on November 3rd-4th when the G-20 assembles in Cannes.

    Here in the U.S., the next few weeks will be dominated by earnings reports. I expect this earnings season to be good but it won’t be as impressive as previous seasons have been. Overall, our stocks should continue to post good numbers and that’s probably giving us a lift. Earlier this week, Reynolds American ($RAI) hit a new 52-week high. Don’t let these conservative value stocks fool you. Reynolds is one of our best performers so far this year. The recent good news from Europe has also been positive for AFLAC ($AFL). Since September 23rd, the stock is up 28%. I’m expecting another solid earnings report in two weeks.

    Looking around at other stocks on our Buy List, I see that Bed, Bath & Beyond ($BBBY) is also near its 52-week high. Sometime within the next few weeks, I expect to see Becton, Dickinson ($BDX) increase its dividend for the 39th year in a row. I still like Oracle ($ORCL) a lot. In fact, I’m going to raise my buy price for it. Three weeks ago, I said Oracle was a good buy up to $30. I’m now raising that to $33. That’s a very good stock.

    I mentioned last week that the big story for us this week would be JPMorgan Chase’s ($JPM) earnings report. On Thursday, the bank reported earnings of $1.02 per share which was ten cents more than estimates. The stock fell after the earnings report but I think this was a decent report, though not a great one.

    Bear in mind that Wall Street has been slashing estimates for all the major banks for this earnings season. To give you an example, a few weeks ago the analyst community was expecting Goldman Sachs ($GS) to report earnings of more than $3 per share. Now that’s down to 27 cents per share. In fact, Goldman could post a loss. For JPM, the downgrades weren’t nearly as harsh. Estimates fell from around $1.20 per share to 92 cents per share (which they beat anyway). The story for JPM is that the capital markets side of the business is rather weak but traditional retail banking is doing fine.

    All told, JPM is still doing well despite a more challenging environment. By most reasonable metrics, the shares are cheap. In my opinion, the most important factor to watch with JPM is the dividend. The quarterly dividend is currently at 25 cents per share which gives the stock a yield of 3.16%. That’s about what a 30-year Treasury gets now. But more importantly, JPM can easily raise its dividend by 30% or more.

    The next earnings report from a Buy List stock will be Johnson & Johnson ($JNJ), which reports on Tuesday, October 18th. Wall Street expects Q3 earnings of $1.21 per share which is too low. That would actually be a decrease of two cents per share from one year ago. My analysis shows that JNJ can deliver earnings of $1.25 per share.

    In July, JNJ reiterated its full-year EPS forecast of $4.90 to $5. I think there’s a very good chance that they’ll raise both ends of their forecast by, say, five cents per share. The bottom line is that JNJ is the ultimate in blue chip safety. Unlike the United States of America, JNJ has a AAA credit rating. The stock currently yields 3.55%. Johnson & Johnson is a good buy up to $67 per share.

    On Wednesday, October 19th (the 24th anniversary of the ’87 Crash), Stryker ($SYK) will report earnings after the close. For the first and second quarters, the company earned 90 cents per share, so let’s go with that figure for the third quarter as well (the Street expects 89 cents). Stryker has said it expects full-year earnings of $3.65 to $3.73 per share. Stryker is a very good company but I’d like to see the stock a little lower than where it is right now before I feel confident calling it a very strong buy. As it is, Stryker is a good buy at $50 but I’d like it a lot more at $45.

    That’s all for now. 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