Archive for 2011

  • Sorry Folks, QE3 Ain’t Coming
    , June 21st, 2011 at 10:35 am

    The Federal Reserve is beginning a two-day meeting today in Washington. There’s little doubt that the Fed will continue with its low interest rate policies. All eyes will be on the policy statement which will come out tomorrow at 12:30, and once again, Bernanke will meet the press.

    The words that everyone will be looking at are “extended period.” That’s how the Fed has described its commitment to hold interest rates very low. Once the words “extended period” leave, then you know something’s up. I think it’s very likely that “extended period” will be in tomorrow’s statement, and it will probably still be there by October at least. After all, the unemployment rate is still at 9.1%.

    The bond market also knows what the deal is. Consider that from February’s high to the recent low, the yield on the 10-year Treasury has plunged 85 basis points. Not to mention that the U.S. stock market had shed over $1 trillion since late April.

    However, the Fed is also facing a problem of inflation. I shouldn’t say that inflation is a problem yet, but it’s at the very edge of the radar screen. The most recent inflation report showed the largest price gains in four years. In a relative sense, this isn’t a high level of inflation, but the Federal Reserve has two mandates: full employment and low inflation. Until now, the low inflation issue has been on the back burner as the Fed has tried everything to help the economy get on its feet.

    Right now, I think it’s obvious that the Fed won’t touch rates for the rest of the year. At the end of this month, the Fed’s QE2 program will come to an end. Some folks are expecting a third round of bond buying. I don’t see that happening and I think the Fed has made it very clear to Wall Street that it’s not coming.

  • Looking to a Strong Open
    , June 21st, 2011 at 9:05 am

    It looks like the stock market will open higher thanks to the news that the Greek Prime Minister will survive a no-confidence vote today. The very fact that we’re watching parliamentary votes in Greece looking for good is itself highly questionable news. The sad fact is that Europe’s troubles have dominated our markets recently. Last week, the S&P 500 finally shook off its six-week losing streak which was the longest downhill run in over two years.

    The other big story today is that the Federal Reserve is meeting again in Washington. There’s little doubt that the Fed will continue with its current policies. As we’ve seen from the ultra-low yields in the bond market, Wall Street expects the Fed to keep its rock-bottom rates going for a few months more.

    As I noted recently, the yield on the two-year Treasury bond is down to 0.38%. It’s one thing to see low yields in short-term rates, but two years isn’t so short. Investors so desire liquidity that they’re willing to forgo nearly any income.

    To bring you up to speed on all things Greek, the country needed a huge cash infusion last year to avoid going under. They got it, but now they need more. This time, the European finance ministers are demanding a pound of flesh. Or more precisely, several million euros of flesh. The Greek government will need to pass some strict austerity measures. Naturally, this has caused domestic political turmoil.

    The no-confidence vote will come around 5 pm ET.

  • Morning News: June 21, 2011
    , June 21st, 2011 at 7:33 am

    Papandreou Confidence Vote May Decide Greece’s Fate

    Vote of Confidence Is Only the First Step for Greece

    German Investor Morale Falls to 2009 Lows in June

    Crude Oil Rises as Greek Debt Concerns Ease

    Chinese Banks Falter as Slowdown, Tightening Bite

    Fitch Ratings Comments on U.S. Debt

    Big Banks Lose Ruling on Research

    JPMorgan, RBS Sued by Federal Agency Over Mortgage Bonds

    BP Rises From Six-Month Low After Weatherford Agrees on Payment

    Brewing Giant SABMiller Pursuing Foster’s After $10 Billion Bid Rejected

    RIM Takeover Beckons Microsoft With Cheapest Multiple

    PNC to Buy R.B.C. Unit for $3.5 Billion

    Japan Will Rise, and So Will the U.S.

    Jeff Miller: The Super Powers of Ben Bernanke

    Todd Sullivan: ACAS Update

    Stone Street: Project YOKU-zuna: Downgrading to Conviction Sell (Again)

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  • Pride Apparently Comes Before and After the Fall
    , June 20th, 2011 at 9:42 pm

    Today’s WSJ:

    Armstrong Says AOL Undervalued in Light of IPOs

    BWAHAHAHAHA

    *wiping tear*

  • Stocks Cheapest in 26 Years
    , June 20th, 2011 at 12:46 pm

    Alexis Xydias at Bloomberg passes along some fascinating numbers on the market’s valuation:

    Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010, according to the average estimate of more than 9,000 analysts compiled by Bloomberg. Higher profits haven’t stopped the gauge from falling 6.8 percent since April 29, pushing valuations to the cheapest levels in 26 years. Even if companies posted no growth, price-earnings ratios would be lower than on 96 percent of days in the past two decades.

    (…)

    At 34 days, the decrease is the second longest since the bull market began. The 16 percent tumble from April to July 2010 lasted 49 days, Bloomberg data show. This year’s retreat has coincided with a decline in predictions for 2011 gross domestic product growth to 2.6 percent from 3.2 percent, according to the median estimate of 83 economists surveyed by Bloomberg.

    Losses since April have pushed the price of the S&P 500 to 14.5 times the past year’s earnings, compared with the average of 20.5 since June 1991, according to Bloomberg data. The gauge is valued at 8.7 times cash flow, cheaper than in 81 percent of occasions since 1998. The gauge is priced at 2.1 times book value, or assets minus liabilities, lower than it has traded 90 percent of the time since 1995.

    (…)

    Analysts are boosting profit forecasts even with the global economy showing signs of weakness. S&P 500 earnings may rise to $99.61 a share in 2011 from $84.58 last year and $61.52 in 2009, according to data compiled by Bloomberg. That’s an increase from the forecast of $95.37 on Jan. 3 and $98.70 on April 29, the data show.

    Should stocks stay at current prices and the analyst prediction come true, the S&P 500 would trade at 12.8 times income on Dec. 31, the lowest level since 1985 except for the six months after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008 and nine months in the late 1980s, according to Bloomberg data. Companies in the S&P 500 are forecast to earn $24.31 this quarter, up from $24.16 at the start of April.

    I contacted Alex just to make sure I had the numbers right. He kindly responded by saying that if the analyst projections are correct, that the S&P 500 is currently going for 12.8 times this year’s earnings. Except for the six months after Lehman going under, that’s the cheapest since 1985.

  • Wal-Mart Wins Gender Bias Suit
    , June 20th, 2011 at 12:08 pm

    Shares of Walmart ($WMT) are currently going for less than 12 times this year’s earnings estimate. The stock has been stuck in a wide trading range for several years.

    The company, however, got a big boost today when the Supreme Court tossed out a gender bias suit brought against Walmart. Don’t ask me what the logic was behind this, but “the suit aimed to cover every woman who worked at the retailer’s Wal-Mart and Sam’s Club’s stores at any point since December 1998, including those not hired until years after the suit was filed.”

    Every woman hired? The suit was originally brought by six women but the class would cover an estimated 1.5 million workers. The Financial Times reports:

    In rejecting the class action, the Supreme Court justices said the plaintiffs’ lawyers had failed to identify a common corporate policy that led to gender discrimination against workers at Walmart stores across the country.

    The justices were ruling only on the viability of the class action and not on the merits of the accusations levelled at Walmart. The case had taken a decade to reach the country’s highest court.

    I don’t have much to say about Walmart’s policies but I’m glad to see the Supreme Court reject this suit. These overly-broad lawsuits are damaging for business and they create too much uncertainty for shareholders.

  • Inside the Secret World of an Apple Store
    , June 20th, 2011 at 11:36 am

    This is embarrassing to admit, but I’ve completely fallen for the Apple ($AAPL) cult. Worst of all, it happened precisely by their design. It started with an iPod as a present. From there, I got a Shuffle, then a MacBook and then an iPhone.

    These items have somehow placed themselves squarely in my daily routine and now it’s hard to think what life was like before I had them. I’ve gone to Apple’s ultra modern-looking store in Georgetown several times and the young folks there have been remarkably professional.

    Today’s WSJ takes a fascinating look at the Apple stores:

    More people now visit Apple’s 326 stores in a single quarter than the 60 million who visited Walt Disney Co.’s four biggest theme parks last year, according to data from Apple and the Themed Entertainment Association. Apple’s annual retail sales per square foot have soared to $4,406—excluding online sales, according to investment bank Needham & Co. Add in online sales, which include iTunes, and the number jumps to $5,914. That’s far higher than the sales per square foot and online sales of jeweler Tiffany & Co. ($3,070), luxury retailer Coach Inc. ($1,776), and electronics retailer Best Buy Co. ($880), according to estimates.

    With their airy interiors and attractive lighting, Apple’s stores project a carefree and casual atmosphere. Yet Apple keeps a tight lid on how they operate. Employees are ordered to not discuss rumors about products, technicians are forbidden from prematurely acknowledging widespread glitches and anyone caught writing about the Cupertino, Calif., company on the Internet is fired, according to current and former employees.

    I find it interesting that Apple has laid out its stores on the “shopping experience” instead of just being a warehouse of goods. Even though the stores are airy, every part of an Apple store is specifically designed to help the customer.

    I think it’s fascinating that aesthetics play such a key role in how customers make their decisions. This, of course, is nothing new. Starbucks ($SBUX) realized this lesson years ago. People don’t just buy coffee. They go for the coffee experience (great brand name, btw).

  • Morning News: June 20, 2011
    , June 20th, 2011 at 7:19 am

    Europe Falters in Bid to Rescue Greece

    Japan Raises Its Economic Assessment for First Month in Four

    China Yuan Down Late On Large Import Settlements

    Oil Drops to Four-Month Low, Heads for Bear Market, on Europe Debt Crisis

    Professor Bernanke Warning of Japan Paralysis Meets Fed Chief Facing Same

    Companies Push for Tax Break on Foreign Cash

    Post-Lehman Squeeze Still Felt as Fundraisers Cope With Smaller Donations

    Moody’s Downgrades Tepco To Junk Status, Says Further Moves Possible

    Panasonic Forecasts 59% Profit Drop as Quake Effects Linger

    GE Sees More Than $10 Billion Engine Orders at Paris Air Show

    ING Eyes Sale of Car Leasing Unit, Worth $5.7 Billion

    GE, Unions Reach Tentative Agreements on New Contracts

    Small Group Rode LinkedIn to Big Payday

    Jeff Miller: Weighing the Week Ahead: Bernanke Meets the Press, Round 2

    Howard Lindzon: The Osama Bin Laden Market Top…Mood is a Mysterious Drug

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  • Oracle Vs. Google
    , June 17th, 2011 at 11:13 am

    Bloomberg reports:

    Oracle Corp. (ORCL) is seeking billions of dollars in damages in a patent- and copyright-infringement lawsuit against Google Inc. (GOOG) that claims the search-engine company’s Android software uses technology related to the Java programming language, according to court papers.

    The extent of the claims was disclosed yesterday in San Francisco federal court by Oracle, as it sought to prevent Google from filing under seal documents in the case stating Oracle’s monetary claims.

    “Oracle’s damages claims in this case are in the billions of dollars,” the company said in a filing, arguing that its demands “are based on both accepted methodology and a wealth of concrete evidence.”

    “They should not be hidden from public view,” Oracle said.

    Oracle got Java when it bought Sun Microsystems. I would expect that any legal battle might take years to resolve. But someone must think they have a case. Shares of $ORCL are up more than 2% today.

  • CWS Market Review – June 17, 2011
    , June 17th, 2011 at 7:43 am

    For a little while, on Tuesday, it looked like the market was finally going to shake off its six-week losing streak. But soon, fears of more problems in Greece sent U.S. share prices lower once again. There’s a very good chance that this will be our seventh-straight week of losses.

    The reality is that Europeans have failed miserably in their attempt to contain the problems in Greece. I should add that I don’t have any bright ideas on this myself, but the Europeans seem to be going out of their way to prove themselves a dysfunctional political unit.

    Put it this way: two-year notes are running around 30% in Greece. The credit swaps indicate that the market thinks there’s an 81.5% chance that Greece will default on its debt. That’s not “in the bag” but it’s very close. On top of that, Ireland and Portugal are also looking shaky, but they’re nowhere as bad as Greece is. At least, not for now.

    The message is that if the Europeans are unwilling or unable to do something about Greece, there’s little reason to believe they’ll be able to tackle the next problem child. And there will be a next.

    For investors, the effects of this crisis are being felt in many areas. The euro just hit a record low against the Swiss franc. This is a good measurement to watch since Switzerland is surrounded by Eurozone countries but it’s not actually in it. Folks have turned against the euro and options players are paying mightily for insurance against a euro plunge.

    This week, I want to highlight some comments that Ben Bernanke made recently. The Fed Chairman acknowledged weakness in the U.S. economy and in the jobs market in particular; plus he discussed the recent rise in commodity prices. According to Bernanke, these issues, while serious, are “transitory” and he expects that they’ll soon fade. Bernanke said that the economy should firm up later this year.

    What I find interesting is that the stock market still seems unusually complacent and I suspect that Bernanke has convinced investors that he’s right. Here’s an example: The Volatility Index, better known as the $VIX, typically moves in the opposite direction of the stock market. And as the stock market has moved lower, the VIX has in turn moved higher. But, and here’s the catch, the VIX hasn’t rallied as much as much as we would expect. Perhaps the market already sees reasons to be calm that haven’t become readily apparent yet.

    Another example of the news/price disconnect can be in seen in the bond market. Quite simply, the bond market isn’t at all worried about inflation despite emerging signs of higher prices. This past week’s inflation report showed the highest core inflation in four years. This is important because the core inflation report doesn’t include food or energy prices which can be highly volatile. Furthermore, there’s been a clear trend of rising inflation for several months now.

    But if we look at bond prices, once again we can see that Bernanke’s optimism seems to be the dominant view. The ten-year Treasury yield is back down to 2.91% after a brief spike up to 3.1%. It’s now at its lowest point of the year. Similarly, the five-year Treasury yield has fallen to 1.5% which is its lowest yield this year. In other words, bond traders seem very unimpressed by the recent inflation reports. Perhaps they value the liquidity of Uncle Sam’s debt which can be dumped quickly if needed. Or they may be convinced by Bernanke’s view.

    The security that I find most surprising is the two-year Treasury. Investors are now willing to lock up their money for 24 months in exchange for 0.38% per year. Do they not know what stock dividends are? Investors are paying sky-high prices for security and very low prices to shoulder any risk which I believe is a result of the problems in Europe. Since the market peaked on April 29th, U.S. stocks have shed over $1 trillion, and the S&P 500 is now within sight of its 200-day moving average.

    Outside of the inflation report, we got some modestly positive economic news. Housing starts for May increased more than forecast. Building permits rose by 8.7% in May which was the highest jump this year. Work on multi-family homes rose by 23%. Also, fewer Americans applied for unemployment benefits. This may be the beginning of a trend but we still need to see more data to confirm that a turnaround is in the works.

    Now let’s turn to our Buy List, which is still ahead of the market for the year although both the market and the Buy List have had lost some luster over the last seven weeks. Leucadia National ($LUK) said that it’s selling a large portion of its stake in Fortescue Metals for $615 million. This is probably a very shrewd move. Fortescue is a large Australian iron ore producer.

    Johnson & Johnson ($JNJ) said that it’s quitting the stent business. Even though J&J was an early pioneer is this field, upstarts have been grabbing market share. Interestingly, two of the more successful rivals are on our Buy List: Abbott Labs ($ABT) and Medtronic ($MDT). Johnson & Johnson said they’re going to incur a charge of between $500 million and $600 million.

    Shares of Gilead Sciences ($GILD) got knocked a bit earlier this week on news of a Justice Department investigation. An analyst at Oppenheimer said this was a “minor concern” and I suspect he’s correct.

    Earlier this week, I did a post on why I think Oracle is a good value. The company gave us a very optimistic forecast for this quarter so I’m expecting an earnings beat, but not a very large one. What I find interesting is that Oracle’s earnings forecast came out when the quarter was still young. They wouldn’t say something so bold that early unless they were very confident. The earnings report is due out this Thursday. Wall Street currently expects earnings of 71 cents per share while I expect 73 cents per share. Either way, Oracle is still a very good value. Oracle is a buy up to $34 per share.

    The other Buy List earnings report next week will be from Bed Bath & Beyond ($BBBY). There have also been some rumors that BBBY is about to be acquired. These stories make me laugh because I would think that anyone who really knows isn’t talking.

    I’m going to reiterate what I said last week: In April, BBBY said it expects fiscal Q1 earnings of 58 to 61 cents per share. I think that’s on the low side. Remember that Q4 was a blow-out quarter for them. I’m expecting a modest earnings surprise—around 63 cents per share, give or take. I hope to see Q2 guidance of 80 to 85 cents per share. I’m keeping my buy price for BBBY at $55 per share.

    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!

    – Eddy