Archive for 2011

  • Still Beating the Market But Barely
    , October 3rd, 2011 at 11:56 am

    Our Crossing Wall Street Buy List has beaten the S&P 500 for the last four years in a row.

    We have a good shot of making it five in a row this year, but it may be very close. Through the first three quarters of 2011, the Buy List is down 9.81% compared with a loss of 10.04% for the S&P 500.

    Once you include dividends, our Buy List is down 8.64% compared with 8.68% for the S&P 500. In other words, we’re beating the market by just four basis points this year.

  • A Higher VIX Points to Higher Stocks?
    , October 3rd, 2011 at 11:08 am

    I’m generally very skeptical of any attempt to tie VIX levels to equity returns, but this caught my eye:

    The VIX has closed above 40 a total of 166 times since it began on Jan. 2, 1990, data compiled by Bloomberg show. Adjusted to group together periods when it fluctuated around that level over 30 days, the S&P 500 returned 3.2 percent in the next three months and 19 percent over the next year, the data show.

  • September ISM = 51.6
    , October 3rd, 2011 at 10:41 am

    Today we got more news that the Double Dip recession still isn’t upon us. The Institute for Supply Management reported that the factory index for September clocked in at 51.6. That was up from 50.6 in August. Wall Street was expecting 50.5.

    Any number above 50 means that the economy is expanding; below 50 means it’s contracting. As an economic indicator, I like the monthly ISM for a few reasons. First, it comes out on the first business day of the month. Second, it’s not subject to countless revisions. But I particularly like the ISM because it has a decent track record of lining up with official recessions. Note how well a dip in the ISM lines up with the gray recession bars.

    I’ve broken down the numbers and whenever the ISM falls below 45, there’s a very good chance that the economy is in an official recession as declared by NBER, the established recession dating committee.

    A reading of 51.6 is hardly outstanding but it does run counter to the nonstop Double Dip fears that have dominated the news lately. Since 1948, the ISM has come in between 50 and 52 a total of 88 times and 28 were recessions.

    At the beginning of the year, the ISM came in over 60 for four-straight months and hit some of the highest levels in decades. Then in May and again in July, it collapsed which helped spread the Double Dip fears.

  • Morning News: October 3, 2011
    , October 3rd, 2011 at 5:39 am

    Greece Approves $8.8 Billion Austerity Package

    ECB’s Noyer: French Bank Exposure Exaggerated

    Euro Drops to 8-Month Low Versus Dollar

    Japan’s Tankan Survey Shows Rebound

    Asia’s Factories Downshift to Crisis-era Lows

    Oil Falls After Closing at One-Year Low as Europe Ministers Meet

    Others Go, but Buffett Stays on Side of President

    Economy to Be a Challenge for New Military Chief

    Ma’s Alibaba Turns to Potential Bidder From Investment for Yahoo

    Sony Tumbles to 24-Year Low on Outlook, Yen

    Apple Loses to RIM in India Smartphone Market

    A U.S.-Backed Geothermal Plant in Nevada Struggles

    Clear Channel Owner Names Pittman as CEO to Lead Digital Advance

    PwC Reports Record $29.2 Billion Revenue, Regains Lead

    Edward Harrison: Currency Revulsion

    Epicurean Dealmaker: If the Phone Don’t Ring, You’ll Know It’s Me

    Howard Lindzon: Guest Post: Chartly Is an Idea Generating Machine

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  • CWS Market Review – September 30, 2011
    , September 30th, 2011 at 7:35 am

    I’m happy to see this ugly third quarter end. This will be the market’s worst quarter for stocks since 2008. For the last several weeks, the stock market has been stuck in a tight trading range. The S&P 500 has now closed inside a 100-point gap—between 1,119 and 1,219—for 40-straight trading sessions.

    Frankly, being caught in a trading range is frustrating. Every rally is quickly met with a sell-off, and every sell-off is quickly turned around. Thursday, in fact, was a microcosm of the last two months. The S&P 500 soared as high as the level of a 2.16% gain early in the session. Then stocks delivered a collapse worthy of the Red Sox. By 3 p.m., the market was down nearly 1%. That’s a peak-to-trough drop of more than 3%. Yet in the last hour, we rallied to close higher for the day by 0.81%.

    In this issue, I’ll explain the dynamic driving this back-and-forth market. Fortunately, this may soon come to an end. By mid-October, the third quarter earnings season will be ramping up and we’ll get a chance to see how well corporate America did during the third three months of the year. This could be what the market needs to finally break out of its trading range. One historical note is that since 1945, whenever the market has tanked by 10% or more in the third quarter, the fourth quarter has gained an average of 7.2%.

    I should warn you that since early June, Wall Street analysts have been paring back their earnings estimates for the third quarter. At one point, the consensus estimate was as high as $25.03 but it’s now down to $24.64 which is still a pretty good number. That’s not a huge downgrade, but analysts are clearly becoming more cautious and they’re lowering their forecast for Q4 and for 2012 as well. Analysts have a tendency to trim their numbers right before earnings season starts. The good news is that earnings have topped expectations for the last 10 quarters in a row. I’m not certain that this will be the 11th, but it may be close.

    As an aside, I should say that I don’t place a great deal of faith in Wall Street’s forecasts. Some people like to dismiss these forecasts out of hand which I think is a mistake. Here’s the key: In the short-term, analysts’ forecasts really aren’t so bad.

    As a general rule, analysts move in two modes. They either slightly underestimate earnings or they vastly overestimate earnings. The former is the rule of thumb during an expansion and the latter happens when the economy falls apart. Where analysts are horrible is in seeing the turning points. As such, I don’t rely on them for that. The analysts are very good at predicting that the trend will continue, which sounds harsher than I mean it to sound.

    For last year’s third quarter, the S&P 500 earned $21.56 so the current estimate translates to having a growth rate of 14.3%. For the fourth quarter, Wall Street sees earnings of $25.98 which would be earnings growth of 18.5% over last year. That strikes me as being too high, so I’ll expect earnings to be cut back over the next several weeks. Either way, the Q3 results will be the determining factor in setting expectations for Q4. I’ll feel a lot better when the S&P 500 breaks above its 50-day moving average which is currently at 1,200.

    Unfortunately, the stock market has been held captive lately by events in Europe—more specifically, the prospects for the Greek economy. The good news is that the German parliament just approved an expanded bailout fund. The bad news is that the fund has to be approved by all 17 countries that use the euro and that’s not going to be easy. Markets around the world have been severely rattled recently. Worldwide, initial public offerings are being shelved at a record pace.

    We’re currently in an “all or nothing market.” Each day, the market tends to shoot up a lot or get hammered hard. Whenever there’s good news out of Europe or from the U.S. Fed, we see all the sectors of the market rally strongly. Usually, financials do the best while gold and bonds do poorly and volatility rises. When the news is bad, the exact opposite happens. It’s as if all the passengers on a boat rush frantically from one side to the next. There’s little in between.

    Look at some of these numbers: In August and September, the S&P 500 closed up or down by more than 2% 17 times. In the 12 months before that, it happened just nine times. In the last two months, stocks and bonds have moved in opposite directions nearly 75% of the time. Only recently has gold broken from bonds and moved downward in a serious way.

    I’ll give you a good example of the irrationality of the “all or nothing market”: Shares of AFLAC, ($AFL) soared 6% on Thursday. I love AFLAC, but I’m sorry: their business is just too boring to move around that much in one day. The problem isn’t the business. The problem is the mindless traders trying to use AFL as a proxy bet on Europe. (AFLAC’s finances are fine as we’ll see when they report next month.)

    Volatility is a topic that causes confusion among many investors and it’s misunderstood by many professionals as well. Increased volatility isn’t necessarily bad for stocks. In this case, the increase in volatility is a reflection of two warring theses for the economy’s future. The market is trying to decide whether investors will rotate out of Treasuries and take on greater risk in stocks or whether stocks will continue to languish as investors seek protection in bonds. It’s this tug-of-war that has kept the S&P 500 locked in its trading range. Given the absurd prices for bonds and depressed earnings multiples for stocks, the smart money is on higher stocks, lower bonds and decreased volatility. Consider that right now, there’s currently over $2.6 trillion sitting in money market funds earning an average of 0.02% per year.

    We’re already seeing signs that one side is starting give way. Gold, for example, has been crushed over the past three weeks. Also, previous “can’t-lose” stocks like Netflix ($NFLX) are feeling the pain. They key is that the trends that were consistently winning no longer are. As a result, investors will start to key in on overlooked trades. I can’t say when this will happen, but earnings season seems like a prime catalyst.

    The Volatility Index ($VIX) closed Thursday at 38.84. That means that the market believes the S&P 500 will swing by an average of plus or minus 11.23% over the next month. Let’s compare that with the recent auction for seven-year Treasuries which went for a record-low yield of 1.496%. That means that the zero-risk return for the next seven years in Treasury debt is roughly equal to the one-month volatility—not return, just average expected swing—of stocks.

    It’s like the old saying that “a bird in the hand is worth two in the bush.” If that saying were revised for today’s market it would be “a bird in the hand is worth 30,000 in the bush!”

    In last week’s CWS Market Review, I highlighted some high-yielding stocks on our Buy List like Abbott Labs ($ABT), Johnson & Johnson ($JNJ) and Reynolds American ($RAI). I still like those stocks a lot. Interestingly, shares of Nicholas Financial ($NICK) have been weak lately. The stock is normally a very strong buy, but it’s exceptionally good if you can get it below $10 per share.

    One of the few cyclical stocks on the Buy List is Moog ($MOG-A). The stock has been trashed along with most other cyclicals, but don’t make the mistake of lumping Moog in with everybody else. This is a very good company. Last quarter, Moog beat earnings and raised guidance. The stock is now going for about 10 times’ guidance. Moog is a very good buy up to $36 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. Next week, Wall Street will be focused on Friday’s jobs report. Expect more bad news, I’m afraid. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: September 30, 2011
    , September 30th, 2011 at 5:05 am

    Chinese Stocks Plummet on News of Justice Department Inquiry

    Japan’s 10-Year Bonds Fall, Post Weekly Drop, Before Auction

    Germany Approves Bailout Expansion, Leaving Slovakia as Main Hurdle

    German Retail Sales Decline More Than Forecast

    China’s Manufacturing Steady in September

    Ireland Weighs Payback for Averting Bank Default

    S&P, Fitch Downgrade New Zealand, Citing External Debt

    Deal Would Unite S&P With DJIA

    Banks to Make Customers Pay Fee for Using Debit Cards

    Outsize Severance Continues for Executives, Even After Failed Tenures

    McGraw-Hill in Talks to Lead Stock Indexes Joint Venture

    Nokia Cuts 3,500 Manufacturing Jobs

    Sumitomo Mitsui Banking Corp. to Make Consumer Lender Promise Wholly Owned Unit

    Jeff Carter: Environmental Dust Up in Nebraska

    Roger Nusbaum: The Australian Permanent Portfolio?

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  • Michael Lewis on California
    , September 29th, 2011 at 7:00 pm

    In February, I joked: “I’m not saying the Chinese market is a total scam. I’m just saying Michael Lewis may be paying them a visit sometime soon.”

    Lewis is a brilliant writer and he has the ability to shine a light on dysfunctional systems and economies. This time, he looks at the former state-of-the-future, California:

    David Crane, the former economic adviser—at that moment rapidly receding into the distance—could itemize the result: a long list of depressing government financial statistics. The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.” Crane is a lifelong Democrat with no particular hostility to government. But the more he looked into the details, the more shocking he found them to be. In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

  • Good Interview with Stryker’s CEO
    , September 29th, 2011 at 1:33 pm

  • Good Economic News
    , September 29th, 2011 at 9:18 am

    This morning we got some positive economic news. The second-quarter GDP growth rate was revised up from 1% to 1.3%. Bear in mind that Q2 began six months ago and ended three months ago.

    Also, jobless claims fell sharply last week from 428,000 to 391,000. Wall Street was expecting 420,000.

    Here’s a look at real GDP over the past few years. As I’ve mentioned before, the economy isn’t doing well but there’s still very little definite evidence that the economy is entering a Double Dip.

  • Morning News: September 29, 2011
    , September 29th, 2011 at 5:21 am

    Germany to Vote on Euro Rescue Fund

    Greek Bonds Lure Some, Despite Risk

    Norway to Cut Bank Support Amid Europe Crisis

    Gold Reverses Losses, Up 1% as Jewelers Buy

    Call by Fed for Money-Fund Curbs

    Bernanke: Unemployment Poses ‘National Crisis’

    Sony Says It Expects ‘Huge Impact’ on Profit From Euro Slump

    Amazon’s Tablet Leads to Its Store

    BOA, Merrill Pledge Support for Lehman Exit Plan

    H&M Profit Drop Beats Estimates as Margin Damage Is Limited

    Facebook, Twitter Usage Increases Companies’ Security Risks

    A Start-Up Takes On Procter & Gamble Over a Name

    Reebok To Pay Settlement Over Health Claims

    Yale Endowment Posts 22% Gain to End Fiscal Year at $19.4 Billion

    Pragmatic Capitalism: More on “Japan in Fast Forward”

    Paul Kedrosky: The Gazillion Euro Question

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