Archive for 2011

  • Comparing REIT Yields With the S&P 500
    , May 16th, 2011 at 12:59 pm

    Here’s an example of how crazy markets can be.

    I wanted to see a historical comparison of the dividend yields on REITs versus the yield on the S&P 500. REITs are real estate investment trusts. To keep their tax status, REITs have to pay out nearly all their income as dividends. As a result, REITs usually have high dividend yields.

    I looked at the Vanguard REIT Index Fund (VGSIX) as a proxy for the REIT sector (it’s not perfect but it works for our purposes). I then looked at the trailing dividend yield and compared it with the Vanguard 500 Index Fund (VFINX).

    During the tech bubble when no one was interested in dividends, the REIT sector as a whole was offering yields of more than 8.5% while the S&P 500 was yielding less than 1.5%. That’s insane, but the conditions lasted for years. It took a massive real estate rally to push REIT yields below 5%, and even that took six years.

    We’ve gone from one extreme to another. Only now does the yield difference look appropriate.

  • Moving Averages, But How Long?
    , May 16th, 2011 at 8:35 am

    One of the puzzles of finance is why momentum seems to work so well. I’ve often called the 50-day moving average “the dumb rule that works for very smart reasons.”

    The idea is that once a stock gets set in motion in one direction, it has a strong tendency to keep moving. I’ve always been curious if there’s an ideal time limit at which the moving average “works.” Why have we settled on 50-day and 200-day moving averages?

    I had just been thinking about this when CXO Advisory highlighted this academic paper: Technical Analysis with a Long Term Perspective: Trading Strategies and Market Timing Ability by Dušan Isakov and Didier Marti. Here’s the abstract:

    This article extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages over longer horizons than those usually considered. The different trading rules are simulated on daily prices of the S&P 500 index over the period 1990 to 2008 and we find that trading rules are more profitable when signals are generated over longer horizons. Second, we analyse if financial leverage can improve the profitability of the different strategies. It appears to be the case when leverage is achieved with debt. Third, we propose a new test of market timing that assesses whether a trading strategy is able to generate signals corresponding to longer market phases. According to this test, the signals generated by the complex rules investigated in this article coincide strongly with bull and bear markets.

  • Citi Upgrades Ford
    , May 16th, 2011 at 8:12 am

    I see that Citigroup has upgraded Ford ($F) from a Hold to a Buy. That’s good to hear and it’s about time someone highlighted how good Ford is. The stock may get a little boost after today’s open.

    Let’s remember that Ford fell short of earnings by 18 cents per share for Q4 but beat earnings by 12 cents per share in Q1. However, the stock still reflects the earnings miss, even though the earnings beat made up for two-thirds of the shortfall.

    Wall Street currently expects Ford to earn $1.92 per share for this year and $2.01 for next year. That means the Ford is going for less than eight times this year’s earnings estimate.

    Shares were up 12 cents, or 0.8 percent, to $15.20 in premarket trading Monday. Michaeli maintained his $18 one-year price target and wrote that the stock was still a high risk.

    Michaeli also wrote that Ford has made impressive gains in cash flow and liability management, and an upgrade to investment grade status appears likely late this year or early next year. That should be a catalyst for the stock, he wrote. “A return to investment grade would open a few doors for the equity story including providing a path to refinance secured debt, shed covenants and eventually restore a dividend,” he wrote.

    Ford also should benefit from model shortages expected this summer by Japan-based automakers due to parts shortages caused by the March 11 earthquake and tsunami, Michaeli wrote.

    He maintained his forecast that U.S. sales would be 13.4 million this year, despite a Citi survey showing that fewer people are expecting to add vehicles in their households in the next two years. But he lowered his 2012 forecast to 13.9 million from 14.6 million based on the survey. For 2013, he also reduced the forecast to 14.5 million vehicles from 15 million.

  • Morning News: May 16, 2011
    , May 16th, 2011 at 7:38 am

    Asian Shares End Mostly Down; Fresh Nuclear Concerns Hit Tokyo

    GREATER CHINA DAYBOOK: Alibaba’s Dispute With Yahoo; Pork Prices Increase

    Dubai’s Government Rescues Dubai Bank; Injects Capital

    IMF in Wake of Scandal Turns to Lipsky

    Money Troubles Take Personal Toll in Greece

    Canadian Banks Make Rival Bid for Toronto Exchange

    Silver Zooming Back To New Lows

    BP Seeks TNK Buyout to Save Rosneft Deal

    DuPont Wins Support of Danisco Investors for $6.3 Billion Buyout

    Joy Global To Acquire Mining Ops From Rowan For $1.1 Billion

    Teva Buys Japanese Generics Maker Taiyo for $460 Million

    Autonomy To Buy Some Iron Mountain Digital Assets For $380 Million

    Lowe’s Profit Falls, Misses Estimates

    Chinese Company Rides to Saab’s Rescue — Again

    Paul Kedrosky: Brazil Discovers the Wonders of Consumer Credit

    Joshua Brown: Starbucks CEO Sees an Agriculture Bubble

    Be sure to follow me on Twitter.

  • Standard Oil Co. of New Jersey v. United States
    , May 15th, 2011 at 1:48 pm

    100 years ago today, the Supreme Court ruled against Standard Oil.

    Here’s the coverage from a New York-area newspaper.

  • Intel — The Dividend Stock?
    , May 13th, 2011 at 2:51 pm

    For the second time in the last six months, Intel ($INTC) has increased its quarterly dividend. First it went from 15.75 cents to 18.12 cents per share. Now it’s going from 18.12 cents to 21 cents per share. (Just 18 months ago, Intel raised its dividend from 14 cents to 15.75 cents per share, so that’s a 50% increase in a year-and-a-half)

    Going by yesterday’s closing price of $23.71, Intel now yields 3.42%. Jeff Reeves of Investorplace notes that Intel is now the fifth-highest yielding stock in the Dow.

    Intel should easily make over $2.20 per share this year and next year, so the dividend is very safe. The company is also sitting on $12 billion in cash which is $2.20 per share.

    I think shareholders ought to be pleased. I’m always leery when companies sit on too much cash. This is what Peter Lynch called “the Bladder Theory of Corporate Finance.” There’s nothing wrong with Intel rewarding its owners.

    I also think we may be seeing a shift in the way investors view common stocks. This could be the beginning of a period where investors place more emphasis on dividends rather than earnings growth.

    In the 1990s, no one would have believed me if I told them that Intel would be looked upon as an income stock in the not-too-distant future.

  • Inflation Is Trending Higher
    , May 13th, 2011 at 10:17 am

    The government reported this morning that consumer prices rose 0.4% last month which is what Wall Street had been expecting. The “core rate,” which excludes food and energy prices, rose by 0.2% and that also matched expectations.

    Inflation is clearly trending higher. To better illustrate this, below is the six-month trailing rate of consumer core inflation. I took the seasonally-adjusted numbers and annualized them for easier comparison.

    That rate has been steadily climbing higher since it bottomed out at 0.27% in April 2010. For the most recent six months, core inflation has risen at an annualized rate of 1.77%. That’s the highest in nearly two years. Still, it’s not very high in historical terms, but trend is clearly toward higher inflation.

    Inflation has often been a trend-sensitive data series. In other words, higher inflation begets even higher inflation. The numbers aren’t a problem yet, but the trend should be a concern for the Federal Reserve.

  • CWS Market Review – May 13, 2011
    , May 13th, 2011 at 8:16 am

    The stock market has reached a crossroads this week and I want to explain in full detail what’s happening. Investors need to understand that there’s a major shift happening on Wall Street and it will have a big impact on our performance for the rest of this year.

    First off, let’s look at our Buy List. I like to tout how well (or poorly) we’ve done, and we’ve been doing especially well recently. Through Thursday, our Buy List is up 1.41% for the month while the S&P 500 is down 1.10%. For the year, we’re up 12.97% compared with 7.24% for the S&P 500. Each week, it seems, we put more and more distance between us and the rest of the market.

    The Buy List is specifically designed to follow the broader market but perform a few percentage points better while having a little less volatility. Part of the reason we’re doing so well recently is that we don’t have any energy stocks or materials stocks, and it’s those sectors that have been feeling the most pain recently.

    What happened is that as the U.S. dollar plunged against other world currencies, the price for many industrial commodities soared. The most dramatic example was silver. However, the price for gold, copper, and as anyone who’s been near a gas station can tell you, oil have all jumped as well.

    The problem is that higher commodity prices (especially oil) inevitably hurt consumers and that’s a danger for the entire economy. The argument therefore is that the Fed’s policies aren’t merely not helping; rather, the Fed’s policies are actually actively hurting the economy by sacrificing the dollar.

    What’s odd is that the commodity rally started to get out of hand. Over the last few days, the dollar finally started to stabilize and it even rose somewhat modestly. Even though the uptick in the dollar wasn’t much, it was just enough to knock the air out of commodities. The sell-off soon turned into a rout.

    Let’s look at the some of the recent damage: The Silver ETF (SLV) lost more than one-third over the last two weeks. This is similar to Silver Thursday from 1980 which wiped out the Hunt Brothers. Instead of happening in one day, this time it’s happening in slow motion. Besides silver, the Oil ETF (OIL) is down 13% for the month. This has naturally dented the major commodity-based stocks. ExxonMobil (XOM) has shed nearly $40 billion in market value in May alone.

    In perfect timing, the downturn in oil stocks happened at the exact moment that Congress decided to hold hearings on subsidies to “Big Oil.” Anyone with a sense of history had to appreciate seeing Senator Jay Rockefeller say that oil executives were “out of touch” with the American people. This Sunday, by the way, will be the 100thanniversary of the Supreme Court’s decision to break up John D. Rockefeller’s Standard Oil into 34 companies, many of which form the major oil companies of today.

    So if investors are shunning commodities, where have they been going? The answer is: pretty much anywhere safe. I tweeted recently “Today in market news, paper beats rock.” I was being facetious but it’s pretty much true. Investors have poured out of gold and silver and piled into super-safe Treasuries. Not only have short-term yields plunged to slightly above zero, but we’re also seeing some longer-term yields do so.

    The yield on the one-year Treasury bond slipped below 0.2%. I think that’s probably the best example of how fearful many investors are. Despite worries that our Treasury bond will be shunned by the world market, investors are still willing to pay very high prices for our debt.

    The yield for the one-year Treasury got down to 0.17% recently. That’s the equivalent of just 21 Dow points for the entire year. Bear in mind that the Dow will pay out around 250 points in dividends alone. In other words, some investors are so worried over the future of equity markets that they’re willing to sock their cash away for a year and get almost nothing in return. In their eyes, there’s no other option. I think that’s crazy, but I want to show you how dramatic events have become.

    In last week’s CWS Market Review, I wrote about Sysco‘s (SYY) upcoming earnings report. I said that Wall Street was expecting earnings of 41 cents per share whereas I thought earnings would come in at 43 cents per share. Once again, I was a pessimist but only by a penny. On Monday, Sysco reported earnings of 44 cents per share. The stock responded by jumping 10.7% that day.

    While I felt pretty confident that Sysco would beat Wall Street’s forecast, I had no idea it would react so dramatically. I should also note that Sysco is your quintessential consumer-staples stock. The company is one the largest food services firms in the country which means its business isn’t heavily impacted by the gyrations of the economy. I also like that Sysco’s dividend currently yields 3.25%. That’s a good deal. I now rate a Sysco a “buy” up to $32 per share.

    Some other stocks on the Buy List that look particularly good right now include AFLAC (AFL), Abbott Laboratories (ABT), Becton, Dickinson & Co. (BDX) and JPMorgan Chase (JPM). We’re now entering a slow period for our Buy List. There probably won’t be any major news until after Memorial Day, and there won’t be any important economic reports next week. Still, don’t be lured into complacency. I strongly urge all investors to focus on high-quality stocks.

    This overall market environment continues to look good for patient investors. The first-quarter earnings season is nearly over and it’s been a very good one for us. According to Bloomberg’s latest numbers, 72% of companies have beaten analysts’ estimates. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

    For all of 2011, the S&P 500 is projected to earn $98.19. Going by Thursday’s close, the index is trading at 13.74 times this year’s forecast. That works out to an earnings yield of 7.18%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.

    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!

  • Morning News: May 13, 2011
    , May 13th, 2011 at 8:15 am

    Asian Shares Lower; Wall St Drop, Volatility Across Assets Weigh

    Euro-Region Expansion Beats Forecasts

    Euro-Zone Debt Market Faces Key Week

    Exports Boost Spanish GDP

    World’s Top Banks Face Capital Surcharge Hit

    Bernanke Says Using Debt Limit as ‘Bargaining Chip’ Could Threaten Economy

    Energy Costs Lift Retail Sales and Producer Prices

    Investors See Stocks Retreating as Yields Rise

    U.S. Bank Failure Costs to Exceed Estimates by $2 Billion

    Uncertain Leadership Strains Financial Overhaul

    U.S. Attorney Sends a Message to Wall Street

    Treasury Won’t Sell GM Shares Before August

    AT&T, T-Mobile USA Break-up is $6 Billion

    Spain’s Telefonica Net Profit Falls As Margins Drop

    Paul Kedrosky: Another Day, Another Money-Losing IPO Filing

    Joshua Brown: Greg Gets Corny

  • Commodities Get Clobbered
    , May 12th, 2011 at 11:07 am

    Let me help explain what’s been going on in the market over the past few days. Now that earnings season is mostly over, there’s been a rush out of formerly hot commodities as investors have sought shelter in very low-risk bonds or in stocks in non-cyclical industries.

    To give you an example, the Silver ETF ($SLV) got as high as $48.35 two weeks ago. Today it’s been as low as $31.97. Ouch! The Gold ETF ($GLD) has backed off from $153.61 last Monday to $145 today. Oil ($USO) has dropped from $45.60 to $38.59. (Prices at the pump, however, are still high.)

    Now let’s check out what’s happening in the debt market: The yield on the one-year Treasury has dropped below 0.17%. Sure, it’s one thing for short term rates to be microscopic, but now we’re talking about one full year.

    Let’s take a step back and see what that means. One year at 0.17% works out to about 21 Dow points stretched out over a full year. Plus, that doesn’t include dividends. In other words, the Treasury investor would lose to the broad-based investor even if the Dow fell by (roughly) 1.8% over the next twelve months. So what is it that debt investors want so badly? The answer is security. They want it so badly, they’re willing to vastly overpay for it.

    I think that’s nuts, but there’s a buyer for every seller.

    On the stock front, the damage has mostly hit the commodity stocks. These are the stocks you find in the Energy ($XLE) and Materials ($XLB) sectors. The fall off in oil is really starting to hurt some of the major oil stocks. The market value of ExxonMobil ($XOM) has dropped by $40 billion this month. There are only a handful of companies in the world that are worth $40 billion.

    Energy and Materials stocks are the core of the cyclical side of the stock market. As I’ve been expecting, investors are rotating out of cyclical stocks and finding safe refuge in stable stocks. Cyclical stocks tend to lead the market on the way up, but they are punished more on the way down.

    Since our Buy List is focused away from cyclicals, we’re not down nearly as much as the rest of the market is. In fact, some of our stocks continue to rally. Jos. A. Bank ($JOSB), for example, is at another new high today. Sysco ($SYY) is also holding up well after its massive jump after the earnings report. Outside of our Buy List, defensive stocks like CVS ($CVS) and Southern Company ($SO) are at new 52-week highs.

    According to Bloomberg’s latest numbers, 72% of companies beat analysts’ estimates this earnings season. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

    For all of 2011, the S&P 500 is projected to earn $98.19. Going by yesterday’s close, the index is trading at 13.67 times this year’s forecast. That works out to an earnings yield of 7.32%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.