Archive for 2011

• Morning News: July 19, 2011
  Eddy Elfenbein, July 19th, 2011 at 7:05 am

  EU Struggles to Convince on Greek Deal

  Debt Worries Roil Markets

  China’s Treasury Holdings Make U.S. Woes Its Own

  Europe’s Economic Powerhouse Drifts East

  Gold May Snap Best Run in 31 Years as Advance to Record Price Spurs Sales

  Obama Vows Fight Over Efforts to Weaken Dodd-Frank

  Wall Street’s Newest Regulator a Longtime Foe

  Wynn Second-Quarter Profit Jumps on Return of Gamblers to Macau, Las Vegas

  I.B.M. Reports Strong Second-Quarter Earnings

  Borders Forced to Liquidate, Close All Stores

  Murdoch Struggles to Control News Corp. as Phone-Hacking Scandal Escalates

  Cisco Cuts 6,500 Workers, Record $1.3B in Costs

  Clorox Rejects Icahn’s $10.2 Billion Offer, Adopts Shareholder Rights Plan

  Joshua Brown: Caption Contest Monday: Debt Ceiling 101

  Howard Lindzon: The Cotton Crash…The Q-tip Bear Market of 2011

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• Seven-Year TIPs Now Negative
  Eddy Elfenbein, July 18th, 2011 at 3:05 pm

  The yield on the seven-year inflation-protected bond dropped into negative territory today. This is very close to an all-time low yield.

  In February, the yield was just over 1%. Last October, the seven-year hit a low yield of -0.12%.

  

• A Third Bounce For the 200-DMA?
  Eddy Elfenbein, July 18th, 2011 at 1:10 pm

  The S&P 500 has dipped below 1,300 today. It’s very possible that we’re headed for a third test at the 200-day moving average. The current 200-day moving average is close to 1,278.

  

• Bank Of America’s Black Hole
  Eddy Elfenbein, July 18th, 2011 at 9:11 am

  Bank of America ($BAC) is even in worse shape than I thought:

  Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds.

  Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 — at about $18 billion for each percentage point — crimping Moynihan’s ability to raise dividends and repurchase shares.

  “They are likely to be in capital-building mode for longer than previously anticipated,” Jason Goldberg, a Barclays Capital analyst, said in an interview. For now, he said, “I’m hard-pressed to see meaningful capital redeployment.”

  Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America’s stock declined 25 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.

  The stock is currently worth about twice what the bank earned in 2006.

  

• Gold Breaks $1,600/Ounce
  Eddy Elfenbein, July 18th, 2011 at 8:57 am

  Gold is up for the 11th day in a row, and very likely, we’re heading for our 11th-straight yearly gain. Gold just broke $1,600 per ounce in London. Silver is up even more this year.

  I think the latest rally in gold is due to the realization that the Federal Reserve won’t be raising interest rates any time soon. In fact, with the election coming up in 15 months, we may not see an interest rate increase until 2013, at the earliest.

  Immediate-delivery gold gained as much as $9.85, or 0.6 percent, to $1,603.40 an ounce and traded at $1,602.05 by 1:04 p.m. in London. Prices are up for an 11th day, the longest streak of gains since July 1980. Gold for August delivery was 0.8 percent higher at $1,603 an ounce on the Comex in New York after reaching a record $1,603.80.

  

• Morning News: July 18, 2011
  Eddy Elfenbein, July 18th, 2011 at 7:27 am

  Allianz’s Achleitner Suggests Voluntary Swap for Greek Bonds

  Allegations Against Chinese Companies to Continue, Affect Funding – Fitch

  Stocks, Euro Drop on EU Crisis Concerns

  Pain Builds in Europe’s Sovereign Debt Risk

  Investors Boost Bullish Commodity Bets

  Moody’s Suggests U.S. Eliminate Debt Ceiling

  Hertz Will Pay $250 Million to Buy Leasing Firm Donlen

  Philips Chief Makes $2.8 Billion Bet on Overhaul to Meet Goals

  Google CEO Page Adds About $1.9 Billion in Personal Wealth After Earnings

  Man to Acquire Lehman Estates Liabilities From GLG Funds

  No Bidders for Borders as Deadline Passes

  Fast Traders, in Spotlight, Battle Rules

  Phil Pearlman: Google Behaving Like Its Too Small Too Fail

  Epicurean Dealmaker: The Cheapest Substance in the World

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• Google Soars on Earnings
  Eddy Elfenbein, July 15th, 2011 at 11:40 am

  Last month, I highlighted how inexpensive shares of Google ($GOOG) had become (which was actually a follow-up from a similar post in May).

  I noted that the premium for Google’s valuation was just 8.8% based on this year’s earnings, and 6.5% based on next year’s. Yesterday, the company reported Q2 earnings of $8.74 per share which was 89 cents higher than estimates. The stock has been up as much as $71 today.

• CWS Market Review – July 15, 2011
  Eddy Elfenbein, July 15th, 2011 at 8:10 am

  The second-quarter earnings season has officially begun. Very soon we’ll get a handle on how well Corporate America fared during the second three months of the year. So far, we’ve had good earnings reports from companies like Google ($GOOG) and Yum Brands ($YUM). If all goes well, this earnings season will mark a new all-time record for corporate profits.

  The current earnings record was set during the second quarter of 2007 when the S&P 500 earned $24.06. Not long after, things fell apart in a serious way. The good news is that we’ve recovered strongly. Wall Street’s current consensus for this year’s Q2 is $24.13 which would be a new record although not by much (and less than inflation over the last four years). Still, it’s nearly a 75% increase over the Q2 earnings of 2009. More importantly for us, the S&P 500 is over 15% lower than it was four years ago today despite earnings being higher.

  Let me explain what’s happening. The earnings outlook is still very favorable for most companies. The S&P 500 has a shot of earning $100 this year and perhaps as much as $112 next year. However, earnings growth is decelerating, meaning that earnings are growing but at a slower rate. Second-quarter earnings will probably come in around 15% higher than last year’s Q2.

  This slowing rate of growth is concerning many money managers and that’s part of the reason why the market has been jittery lately. Consider that every day this week, the S&P 500 has closed more than 1% below its high for the day. Simply put, the very easy money has been made. Now folks are madly searching for bargains and anything less than perfection gets tossed aside.

  I’ll give you an example of what I mean: DuPont ($DD) will probably earn close to $4 per share this year. At the low from 2009, the stock was going for just over $16 per share. In other words, DuPont’s stock was going for just four times earnings from just two years into the future! And we’re not talking about some unknown pink sheet listing. This is a Dow component and one of the largest industrial companies in the world. It was a stock screaming to be bought (and yes, I missed it).

  Now let’s look at what’s been happening to DuPont. Three months ago, the company reported very solid earnings for Q1 (15 cents higher than the Street) and raised expectations. So what did the stock do? It went down. Two months after the earnings report, DuPont was trading 10% lower than before its earnings report.

  Don’t get me wrong. I don’t mean to pick on DuPont; it’s a fine company. But I want to show you just how nervous investors have become, especially about cyclical stocks. Since mid-February, the Morgan Stanley Cyclical Index (^CYC) has trailed the S&P 500 by roughly 3.5%. When a stock that’s delivering on earnings is getting smacked around, you know something’s up. The lesson here is that investors have been scared and they’ve been looking for reasons to sell. When the problems in Europe came along, that seemed like as good a time as any.

  What investors need to understand is that the earnings are still out there, but they’re not nearly as easy to find as they used to be. Another example is JPMorgan Chase ($JPM), a Buy List stock, which reported very good earnings on Thursday. For last year’s Q4 and this year’s Q1, I was highly confident that JPM was going to beat the Street’s estimate, and I was right both times. This time around, I wasn’t nearly as certain. Many financial stocks are in rough shape. I’m particularly leery of companies like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). I’m afraid their earnings reports will not be pretty.

  The good news is that JPM came through once again. The bank earned $1.27 per share for Q2 which was six cents higher than Wall Street’s consensus. Although Thursday was a down day for the broader stock market, shares of JPM closed higher by 1.84% (and were up as much as 4% during the trading day).

  Similar to the story at DuPont, JPMorgan’s business has been doing well but investors have been skittish of the stock. In this case, the focus is on the bank’s exposure to Europe, although CEO Jamie Dimon has tried to calm those fears. One of the fears going into Thursday’s earnings report was that fixed-income trading had plunged. Fortunately, this was not the case.

  I was especially impressed by the news that JPM is going to float a 30-year bond. No major bank has done that in six months. Bloomberg noted that the market is becoming more convinced of JPM’s creditworthiness. In October, the bank floated 30-year bonds that were 165 basis points higher than similarly-dated U.S. Treasuries. Now that spread is down to 115 basis points. That’s a good sign, so it’s smart to take advantage of the market’s judgment and raise some cash.

  Although JPM has been a poorly performing stock for the last three months, I still like the shares. I would like them a lot better if the company could double its dividend (the Fed would need to sign off on that). The bottom line is that money is cheap, the yield curve is wide and the stock is down. All of that combines for a good case in owning JPM. I’m keeping my buy-below price at $44 per share.

  I don’t know yet when all of the companies on our Buy List will report Q2 earnings (be sure to check the blog for updates), but I do know that three of our healthcare stocks are due to report next week. Both Stryker ($SYK) and Johnson & Johnson ($JNJ) will report on Tuesday, July 19, and Abbott Laboratories ($ABT) will report on Wednesday, July 20th.

  Of the three, Stryker is the most compelling buy right now. The company impressed Wall Street earlier this year when it gave very strong full-year guidance of $3.65 to $3.73 per share. Importantly, they’ve reaffirmed that guidance since then. Even though Stryker beat earnings by a penny per share in April, the stock hasn’t done much of anything. The Street expects 90 cents per share for Q2. That sounds about right though maybe a penny or two too low. I don’t think SYK will have any trouble hitting their optimistic range for this year. Stryker is a good buy up to $60.

  After doing nearly everything wrong, Johnson & Johnson is finally on the right path again. The company recently raised its quarterly dividend for the 49th year in a row. In April, JNJ gave us a strong earnings report and upped its full-year forecast to $4.90 to $5 per share. Wall Street expects $1.23 for Q2; I think $1.30 is doable.

  At the current price, JNJ yields 3.37% which is more than a 10-year Treasury bond. The stock has been in a mostly losing battle with the $70 barrier for more than six years. If next week’s earnings come in strong, I think JNJ will finally burst through $70 for good. Just to be ready, I’m raising my buy price on JNJ to $70.

  Wall Street expects Abbott Labs to earn $1.11 per share for its second quarter. The company has topped Wall Street’s forecast by one penny per share for the last six quarters. I don’t like surprises on my Buy List so let’s make it seven in a row. The company has already forecast full-year earnings of $4.54 to $4.64 per share. That’s a big number and if it’s right (which I think it is), that means that ABT is going for just 11.6 times the mid-point of that forecast. The shares currently yield 3.61%. I’m raising my buy on Abbott from $52 to $54.

  That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

• Morning News: July 15, 2011
  Eddy Elfenbein, July 15th, 2011 at 7:16 am

  German Government: No Set Plans For Euro-Zone Leaders Meeting

  Italy Parliament Prepares to Pass Austerity Package

  Europe’s Banks Brace For Clutch of Health Test Failures

  Markets Shrug After S&P Says 50% Chance of U.S. Credit-Rating Downgrade

  Citigroup Profit Beats Analysts’ Estimates

  U.S. Stock-Index Futures Advance on Citigroup

  Stocks Lose Gains as Bernanke Dims Stimulus Hopes

  U.S. Consumer Prices Fall on Drop in Fuel Costs

  Biden’s Influence Seen From Stimulus to Talks

  Icahn Makes $12.6 Billion Bid for Clorox

  Mining Giant BHP Billiton to Acquire Petrohawk for $12.1 Billion

  Pizza Demand in Asia Boosts U.S. Cheese Exports

  Rebekah Brooks Resigns From Murdoch’s British Subsidiary

  Stone Street: The Securities and Exchange Commission of La Mancha

  Joshua Brown: 7000 Muni Bonds at Risk of Automatic Downgrade

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• Reinhart and Rogoff on the Economy
  Eddy Elfenbein, July 14th, 2011 at 9:18 am

  Bloomberg has an interesting op-ed from Carmen Reinhart and Kenneth Rogoff. They warn that growing yourself out of debt isn’t so easy because at some point, debt begins to impede growth.

  As public debt in advanced countries reaches levels not seen since the end of World War II, there is considerable debate about the urgency of taming deficits with the aim of stabilizing and ultimately reducing debt as a percentage of gross domestic product.

  Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such.

  Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings — why not take advantage of the cheap money?