Archive for 2011

• It’s Even Worse Than I Thought
  Eddy Elfenbein, June 8th, 2011 at 9:19 am

  From Bloomberg:

  About 33 percent of investors surveyed said they didn’t know how they pay for the investment advice they receive, and 31 percent said they thought their adviser or broker provided investment advice for free. Those who were unsure of how they pay for advice were most likely to be unhappy with their financial adviser, with 47 percent reporting dissatisfaction, the study said. About 27 percent of those who said they pay commissions reported being dissatisfied.

  Thirty-one percent think their investment advice comes for free? Oh dear lord.

• Stocks and War
  Eddy Elfenbein, June 8th, 2011 at 8:05 am

  An academic paper looks at the war puzzle:

  We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to decrease stock prices, but the ultimate outbreak of a war increases them. In cases when a war starts as a surprise, the outbreak of a war decreases stock prices. We show that this paradox cannot be explained by uncertainty about investment decisions, nor by the expectation about a quick end of the war or ambiguity aversion. A connection of this puzzling phenomenon to mean-variance preferences of investors is suggested.

  It doesn’t seem like much of a paradox to me. Investors get skittish during the run-up to war and then optimistic once the bombing starts. Why should we expect nationalist feelings to stop at the market’s edge?

  War may be hell as Sherman said but it’s also what Heraclitus said — the father of us all. Ultimately, war focuses a society and by extension, the state. That resolution is a major boost to optimism and that spills over into stocks.

  A perfect example of the sell-off during the run-up and buying spree once the war starts happened during the Iraq war more than eight years ago. Here’s how the S&P 500 performed in 2003 and 2004:

  

  The market made a low in July of 2002, then tested it in October and in fact made a new low. Then it went back to retest it again in March of 2003. This time, the old low held and the market turned north and didn’t stop for four years.

  We’ve also established a recent March pattern. The 2003 closing low came on March 11. In 2000, the closing high for the Nasdaq Composite came on March 10. Then in 2009, the S&P 500’s closing low came on March 9.

  I’ve often noticed that investors always feel that they want to “wait and see what happens.” The thing is, they always feel this way — as if a resolved answer will be known to all in a matter of days. It doesn’t work that way.

  I think that’s what causes the jitters during a run-up to war. Investors think that they ought to remain neutral and “see how this plays out.” When the war starts, it creates a buying storm as the market works to make up for lost ground.

  (HT: CXO Advisory)

• Morning News: June 8, 2011
  Eddy Elfenbein, June 8th, 2011 at 7:19 am

  Merkel Called to Explain Greek Aid as ECB Clash Looms

  Greek Jobless Rate Breached 16 Percent for First Time on Record in March

  IMF Signals Support For Japan Sales Tax Hike

  Emerging Nations Warm to Lagarde for I.M.F. Role

  Saudi Oil Min Met Separately With 4 Mins Who Resist OPEC Boost

  World Food Prices Linger Near Record as Meat and Dairy Costs Gain, UN Says

  No News Is New News For Sterling

  Bernanke Says ‘Uneven’ Recovery Still Needs Stimulus

  Shrinking Valuations Drive Bank Payroll Cuts

  Buyout Firms Beaten in Takeover Auctions

  California’s Blue Shield Caps Income and Pays Rebates

  India’s ONGC, GAIL Keen To Buy Exxon Mobil Stake In Kazakhstan Oil Field

  Hon Hai Says IPad Production Advances to Start Paying Off in Second Half

  James Altucher: Some People Were Upset At Me

  Phil Pearlman: The Financials Always Mattered

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• I’m Back!
  Eddy Elfenbein, June 8th, 2011 at 6:19 am

  I’m back on the office after a wonderfully relaxing week in New England. I figured I could take off the week after Memorial Day — what could possibly go wrong? The S&P 500 has now dropped five days in a row and the index closed at its lowest level since March 18.

  We’re now up just 2.17% for the year. I say “just” 2.17% to contrast it from where we were, but in reality, 2.17 for just over five months is about what to expect for a long-term stock returns. It’s 5.08% annualized (not including dividends).

• Morning News: June 7, 2011
  Eddy Elfenbein, June 7th, 2011 at 7:06 am

  China Official Warns on “Excessive” Holdings of U.S. Assets

  Europe’s Banks Too Fragile to Afford Greek Default

  Oil Rises; SocGen Sees 65% Chance OPEC to Raise Output Quotas

  Investor Demand For A Safe Harbor Boosts Gold

  U.S. Stock Futures Gain; International Paper Climbs on Temple-Inland Bid

  The Economic Perfect Storm That’s Killing Consumer Spending

  Big Names in Tech Back AT&T’s T-Mobile Bid

  Deal to Sell Goldman Unit Said to Be Near

  Paul Kedrosky: Groupon’s Eric Lefkofsky, Then and Now

  Joshua Brown: “Breaking News”

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• Morning News: June 6, 2011
  Eddy Elfenbein, June 6th, 2011 at 6:51 am

  Geithner May Back Lagarde at IMF to Keep American at World Bank

  Egypt to Obtain $3 Billion IMF Loan

  Ruble Depreciates to One-Month Low Against Euro as Greece Aid Hopes Rise

  Bank Shares Take a Beating, and It May Not Be Over Yet

  Statoil to Sell Pipeline Stake for $3.2 Billion

  Fed Exit Should Start ‘Long Before’ Jobs Recovery Is Assured, Plosser Says

  Treasury Yields Near Lowest This Year on Economy, Greek Concern

  Ritholtz Hedges His Bets

  Stone Street: The Bane of Bain’s China Aspirations?

  Epicurean Dealmaker: You All Know Brutus and Cassius Are Honorable Men

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• Sunset In Maine
  Eddy Elfenbein, June 5th, 2011 at 10:52 pm

  

  Or New Hampshire just got nuked.

• May Unemployment = 9.1%; NFP = 54,000
  Eddy Elfenbein, June 3rd, 2011 at 8:33 am

  Another lousy jobs report. The economy created just 54,000 jobs last month which was far below Wall Street’s prediction of 160,000 — and that prediction wasn’t very sunny to begin with.

  Of the new jobs created last month, 18,000 were in accounting and bookkeeping. Joe Weisenthal points out that manufacturing employment fell by 5,000 last month. The average duration of unemployment is now at 39.7 weeks which is the longest on record.

  The futures indicate the market is going to open lower.

• CWS Market Review – June 3, 2011
  Eddy Elfenbein, June 3rd, 2011 at 7:19 am

  I’ve gone up to the great state of Maine for a few days of R&R so this will be an abbreviated edition of CWS Market Review.

  Unfortunately, Wall Street decided to use my vacation time for a period of high drama. No need to panic—I’ll fill you in on the latest and I’ll tell you why Wall Street is being its usual melodramatic self.

  The big news, of course, is that the S&P 500 dropped 2.28% on Wednesday followed by another 0.14% fall on Thursday. Wednesday’s sell-off was the market’s biggest one-day plunge since August 11th. As you might have guessed, cyclical stocks were the biggest losers on Wednesday; the Morgan Stanley Cyclical Index (^CYC) shed more than 3.5%.

  As dramatic as the market drop sounds, the S&P 500 is still well within the trading range that I mentioned in last week’s issue of CWS Market Review. The S&P 500 has now closed between 1,305.14 and 1,348.65 for 42 of the last 48 days. So far, all we can say is that we moved from the top of the range to the bottom—in a very short period of time.

  The reason for the market’s bout of irritability seems to be a batch of poor economic news. What surprised me the most was Wednesday’s report on the ISM Index. Let me back up and explain what this is. On the first business day of each month, the Institute for Supply Management reports its manufacturing index for the month that just ended. Any reading above 50 means the economy is growing while any report below 50 means the economy is receding.

  Unlike many economic reports, I like ISM report. One reason is that it comes out quickly so there isn’t much time lag. Also, the report isn’t subject to countless revisions like the GDP report. Most importantly, the ISM report has a very good track record of telling us if we’re in a recession or not. Basically, whenever the ISM falls below 45, there’s a very good chance that the economy is in a recession.

  Until this latest report, the ISM had been putting up some impressive numbers: four straight months over 60 and 21 straight months over 50. In fact, the March ISM clocked in at 61.4 which was a tie for the highest level since 1983. So it was a bit of a shock on Wednesday when the ISM for May came in at 53.5. That was well below Wall Street’s consensus of estimate 57.1.

  Still, I think the bears are overreacting on this one and this reminds me of the Great Double Dip Hysteria of last summer. First, the ISM still came in above 50 (and for the 22nd month in a row) so the economy is growing, but perhaps not as quickly. Also, the stock market should have limited downside risk since valuations are already fairly cheap. Furthermore, this isn’t news to anyone who has been following the earnings trend. The economy is still growing, but the easy gains have faded. That’s a very different story from a recession.

  Here’s what’s going on in the stock market: The only thing that’s more dangerous than an investing thesis that’s dead wrong is one that’s partially right. The bears have been pushing hard the message that the economy is weak and stocks are vulnerable. They’re right, but it’s only true for most cyclical stocks and a few hi-fliers. Yes, anyone who bought LinkedIn ($LNKD) at $120 isn’t looking so smart right now. (I don’t think the buyers at $80 look much smarter.) The cyclical stocks are weak and they’re going to lag the market for some time to come. I strongly encourage investors to lighten up on cyclical stocks and long-term bonds. Defensive stocks and the high-quality stocks on our Buy List continue to offer investors very good values.

  The biggest side effect of Wednesday’s bloodletting was that bonds have entered the danger zone. The yield on the 10-year Treasury recently dipped below 3% for the first time this year. That’s a P/E Ratio of 33 for an asset that’s not growing its earnings at all. That should tell you how scared investors are. Going by Thursday’s closing price, Johnson & Johnson ($JNJ) yields 3.43% which is 40 basis points more than the 10-year T-bond. That makes zero sense to me.

  Turning to our Buy List, the big news this week was the market giving shares of Joseph A. Banks Clothiers ($JOSB) a super-atomic wedgie after its earnings report. The company reported earnings of 64 cents per share which was one penny below Wall Street’s expectations. This is particularly frustrating for me because it’s precisely what I told you to expect. Nevertheless, the bears took this one item of bad news and pounded shares of JOSB for a 13.3% loss on Wednesday.

  I apologize for the rattling but when an angry mob is out for blood, they won’t listen to reason. There are a lot of folks out there who simply don’t like JOSB. The stock has risen very quickly this year. In fact, it’s still our #2 performing stock for the year. I had also cautioned investors not to chase JOSB and to let the stock come to you. Well…it’s here. I think Joey Banks is an excellent buy below $50 per share.

  There are so many good buys right now on the Buy List. For now, I’ll highlight three. First, AFLAC ($AFL) is very cheap below $47 per share. Abbott Labs ($ABT) now yields 3.75%. Earlier this year, Abbott said it was expecting full-year earnings of $4.54 to $4.64 per share. ABT is an excellent buy below $52. JPMorgan Chase ($JPM) is also looking very good. Jamie Dimon recently said that the company is buying back shares faster than they originally indicated. I’d prefer to see higher dividends, but the bank is currently constrained by the Fed over how much it can raise its dividend. JPM is a good buy any time the stock is below $44 per share.

  That’s all for now. I’ll be heading back to the office on Tuesday. 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!

• Morning News: June 3, 2011
  Eddy Elfenbein, June 3rd, 2011 at 7:09 am

  Foreign Investors Buy Net 1.51 Billion Rupees of Indian Stocks

  EU, IMF Wind Up Greek Economy Review as Bailout Readied

  Treasuries Head for Third Weekly Gain as Data Signals Slowing Job Growth

  5 Big Numbers To Watch For In Today’s Jobs Report

  Fiat Buys Rest of U.S.’s Chrysler Stake

  Ford, Mazda Discussing Dissolving US Production Joint Venture

  Nokia Breakup Worth 52% Gain

  Pandora Seeks to Raise $123.2 Million in IPO of Web-Based Music Provider

  Paul Kedrosky: Groupon’s IPO Filing Produces Novella of Risks

  Joshua Brown: 14:59

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