Archive for 2011

  • AFLAC and the Japanese Earthquake
    , March 11th, 2011 at 11:01 am

    Like you, I’m in shock by the news of the devastating earthquake in Japan. I can’t even imagine what an 8.9 quake is like. I was completely unraveled when a 3.6 quake hit DC last year.

    My first thoughts turn to the injured and deceased and their families. If anything, I’m surprised that the loss of life hasn’t been greater. I think that speaks well of the orderliness of Japanese citizens. Since we talk about finance around here, I should comment on the financial implications of this disaster.

    Naturally, AFLAC is going to be affected. The stock opened down 3.2% but it seems to have recovered a little bit. The stock is currently down 1.2%.

    The WSJ got hold AFLAC’s CEO:

    Aflac Inc. Chief Executive Dan Amos said Japan will bounce back quickly if the nation’s actions after the 1995 Kobe earthquake are any guide.

    “I believe within a short period of time they will recover,” Mr. Amos said in a telephone interview on CNBC. Aflac, which sells supplemental health and life insurance, does a majority of its business in Japan. Mr. Amos said Aflac wasn’t exposed to property claims.

    Update: Saner heads prevailed. AFL lost just 15 cents today.

  • CWS Market Review – March 11, 2011
    , March 11th, 2011 at 8:37 am

    On Thursday, the S&P 500 closed below its 50-day moving average for the first time since Labor Day. The index snapped its amazing streak of 130-straight days closing above its 50-DMA. That’s the seventh-longest streak in the last 75 years.

    The damage was pretty bad on Thursday. The S&P 500 lost 1.89% which was its worst break since the post-President’s Day sell-off of February 22nd. The index closed at 1,295.11 on Thursday and the Dow dropped 229.48 points to close at 11,984.61. For the first time since January, the S&P 500 is below 1,300 and the Dow is below 12,000. In the last five weeks, the S&P 500 has had daily drops of 1.5% or more four times. In the five months prior to that, it happened just twice.

    The stocks that were particularly hard hit on Thursday were the cyclicals (stop me if you’ve heard this one before). The Morgan Stanley Cyclical Index ($CYC) was off by 2.14% which is 0.25% worse than the S&P 500. Oil was down sharply due to the unrest in Saudi Arabia and that’s why many energy stocks got dinged by 3% or more. ExxonMobil ($XOM), for example, lost $15 billion in market value today which is roughly equal to watching the entire market value of Xerox ($XRX) vanish before our eyes.

    On days like Thursday, I’m happy we don’t have any energy stocks on the Buy List. It’s not a macro-economic decision on my part. It’s simply that I haven’t spotted any energy stocks that I thought were “must buys.”

    Whenever stocks go down, it seems like bonds are required to rally, and that’s exactly what we saw on Thursday. There was particular strength in shorter-term maturities. Even the microscopic yield on the three-month Treasury bill got…well…even more microscopic. The three-month T-bill dropped down to 0.065% which is its lowest yield in nearly nine months.

    To add some context for you, that 0.065% yield means that if you were to buy a $1 million T-bill, you’d make $1.78 per day for the next three months. That’s probably the sum total of what’s kept in your average convenience store’s "take-a-penny tray." This is also why, despite my near-term concerns, I’m still a market bull. Any way you look at it, the investing math favors stocks.

    At the longer end of the yield curve, the yield on the five-year Treasury fell below 2.1% and the ten-year is now below 3.4%. Both are at the lowest yields in five weeks. This signifies that investors became more risk averse which is the opposite of the larger market trend since last summer.

    I’ve written before that the most important outcome of the Fed’s QE2 policy is that it pushes investors out of ultra-conservative assets and forces them to take on riskier assets. This is very good for our Buy List. It also tells us that there’s no use wasting your time in T-bills that will yield next to nothing while there are fundamentally sound stocks, like Reynolds American ($RAI), that pay generous dividends.

    As I said last week, I think the most likely scenario for the next few weeks will be a range-bound market. Historically, breaking below the 50-DMA signals a flattish market. I’m also concerned that the stream of positive earnings guidance has begun to dry up. Perhaps this will change when Q1 earnings season begins next month. The key fact is that markets generally don’t double in two years, so everyone needs some rest right about now.

    The good news is that our Buy List is doing exactly what it’s designed to do-hold up well when everyone else gets nervous. We’ve outperformed the S&P 500 for the last three days, and since February 23rd, the S&P 500 is down 0.94% while the Buy List is up 0.22%. That’s pretty good for a well-diversified portfolio. For the year, we’re beating the S&P 500 by 1.5%. I think that lead will grow wider once earnings season starts in another month.

    In last week’s e-letter, I said that Jos. A Bank Clothiers ($JOSB) looks like it might be the next one of our stocks to break out, and that’s pretty much what happened. While everyone else was in a sour mood on Thursday, shares of JOSB jumped 3.33% and nearly hit a new 52-week high.

    I like JOSB a lot but I need to explain an unusual tick in JOSB’s business cycle. Actually, this is common for many retailers. JOSB ends their fiscal year on January 31st so they can include the entire holiday shopping season in Q4. Historically, the company makes close to half their annual profit during the fourth quarter.

    Since their Q4 results take a bit longer to compile than the other quarters’ results, we probably won’t get their Q4 earnings report until late March or probably early April. Bear in mind what this means: in early April, we’ll be learning what happened in November, December and January. That’s a long time-lag. After the Q4 report, it’s usually about two months until the Q1 report comes out in early June.

    Wall Street currently expects JOSB to report earnings of $1.44 per share for Q4 which is likely too low. I expect EPS of $1.50 or more. The details tell us that JOSB is a very solid stock. The company has posted higher year-over-year earnings for 36 of the last 37 quarters including the last 18 in a row. If you’re looking to add JOSB, I’d wait for a pull back below $45 which we may get in the next few weeks. JOSB isn’t worth chasing in a flat market. Let the bargains come to you.

    Let me name a couple of stocks that look good right now.  First is AFLAC ($AFL). The shares just fell under $56. I’ve been saying for a while that AFLAC should make a run at $60.

    Ford ($F) has pulled back much more than I thought it would. I had thought the stock was about to break $20 but that seems very doubtful. This is a good stock, but the company didn’t communicate well with Wall Street and therefore, it’s being punished. The selling is getting a bit overdone. Ford’s recovery is going so well that it’s considering ditching its valuation allowance held against deferred tax assets. This could add $10 billion to $13 billion in profits this year. Ford is a good buy at $14.

    Finally, Johnson & Johnson ($JNJ) closed at its lowest price in six months. As blue chips go, you really can’t get much bluer than JNJ. The current quarterly dividend of 54 cents per share works out to an annual yield of 3.62%. That’s more than a 10-year Treasury, and at this point, JNJ is probably a better risk than the U.S. government.

    On top of that, JNJ will probably announce another dividend increase next month. They’ve increased their payout every year for the last 48 years so another one shouldn’t be a surprise. If they raise their dividend by another five cents per share, that would bring the yield to 4%. JNJ is a very good buy.

    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!

    Best – Eddy

  • Morning News: March 11, 2011
    , March 11th, 2011 at 7:49 am

    IEA: No Call For Oil Supply Assistance From Japan After Quake

    Japanese Firms Assess Effects of Earthquake

    Yen Reverses Strongly Higher in Wake of Earthquake

    Saudi Capital Calm On Day Protests Called

    HK Shares End Lower On Japan Earthquake; China Tightening Concerns

    China Consumer-Price Index Rises 4.9%

    Pain in Spain Is Hard to Ascertain

    Currency Investors Fret Over ECB Policy, Bet Against Euro

    Merkel Said to Back Lower Bailout Rates for Greece, Ireland

    Families Slice Debt to Lowest in 6 Years

    Irish Banks Seek to Delay `Evil Day’ as Loan Losses Rise

    Wal-Mart Attempts to Revive U.S. Sales

    The Burden of Pensions on States

    Utah Legislature goes for gold, silver as currency options

    Leigh Drogen: Stop Trying To Create Digital Newspapers

    Paul Kedrosky: The Happiness Hypothesis, with Appearances from Jackie Chan and Tiger Woods

  • Your Tax Dollar at Work
    , March 10th, 2011 at 9:44 pm

    From the WaPo:

    The 33 Securities and Exchange Commission employees and contractors reprimanded last year for accessing pornography on agency computers worked in Washington, D.C. and six regional offices, according to documents released as part of a lawsuit.

    The employees and contractors worked at agency offices in Atlanta, Boston, Chicago, Denver, Fort Worth, Los Angeles and Washington; the documents didn’t disclose how many worked at each office. Denver-area attorney Kevin D. Evans, who sued the SEC last May for more information on the pornography sting, obtained the information as part of a Freedom of Information Act request

    The agency contractors caught up in the sting worked for Labat-Anderson, CACI International, Garda Security, Keane Federal and ISN Corporation.

    Evans has defended clients in securities cases and is involved in ongoing litigation against the agency. He said he pursued information about the pornography matter because it “galled me to no end” that SEC employees were spending “hours and hours over weeks and weeks” viewing porn while collecting government pay.

    But his legal case regarding the pornography sting ended in December when a federal judge denied a request to publicly release the names of the disciplined employees and contractors, citing federal privacy laws. Until Congress changes those laws, which permit agencies to withhold sensitive personnel information, “I think FOIA requesters will continue to get stiffed” in their attempts to learn more about government employees and contractors implicated in such investigations, he said.

    Several of the employees involved in the pornography investigation held senior positions and earned between $99,300 and $222,418 per year, according to the SEC inspector general investigation. Three of the incidents occurred in 2010, 10 in 2009, 16 in 2008, two in 2007 and one each in 2006 and 2005.

  • Green Mountain Coffee Roasters Soars
    , March 10th, 2011 at 3:21 pm

    By the way, if you get the chance to return to October 9, 1998, then I’d suggest you pick up a few shares of Green Mountain Coffee Roasters (GMCR). The stock closed that day at $3-7/8 (remember fractional pricing?…blah).

    Since then, GMCR (the #1 stock of last decade) has split four times; twice 3-for-1, a 2-for-1 and a 3-for-2 which comes to a grand total 27-for-1. That means we can adjust that $3-7/8 down to 14.35 cents.

    The stock is up to $62 today on the news of a deal with Starbucks (SBUX) which I believe is some sort of coffee chain. So that’s a nice 43,000% profit for you.

    You’re welcome.

  • The S&P’s 50-DMA Streak Is on Life Support
    , March 10th, 2011 at 12:29 pm

    They key number to watch today is 1,300.13.

    Update: It’s official. The S&P 500 closed at 1,295.11. The 130-day streak is over.

  • Follow Up on Raven Industries
    , March 10th, 2011 at 11:55 am

    Since I wrote about Raven Industries (RAVN) the other day and its remarkable long-term performance, I wanted to follow up because the company reported its Q4 earnings today.

    Raven had a great fourth quarter. Sales and earnings were up 27%. For the year, sales were up 32% and net income rose 42%. This is from today’s press release:

    Rykhus concluded, “This past year was another one for the record books. What makes this even more significant is the fact that we accomplished growth in sales and profits during an unprecedented period of reinvestment across the company. We believe these investments will help us sustain our long-term growth track and we could see double-digit profit growth even in this coming year. We’re really just beginning to test the potential of what we can accomplish with our corporate culture of innovation and strong competitive drive.

    “While the economic environment remains uncertain, our best defense is to stay focused on our market niches and run profitable businesses. Due to our strong growth opportunities, as well as scaling necessities, we are using cash to invest in organic growth more aggressively than in the recent past. Along with the continued hiring of new people we estimate our capital spending this current fiscal year will more than double last year’s $14 million. We also continue to look for complementary acquisitions. At the same time, our cash management strategy is geared to support continued growth in quarterly dividends.”

    I’m not recommending the stock, but I’d love to add it one day to a future Buy List. My point is to show investors that we should concentrate on how well a company is running its business.

    Too many investors do what I call “investing at 40,000 feet.” This is when their portfolio is determined by what they think is happening with the Fed or inflation or the broader economy. There are always well-run companies out there doing a good job and Raven is one of them.

  • What If the Stock Market Was a Bond?
    , March 10th, 2011 at 10:21 am

    Here’s an update to one of my more off-the-wall ideas. I took the data for the total return for the Wilshire 5000 going back 40 years. I wanted to see what that return would look like in “bond form.”

    Weird, no? Let me explain: I took the daily changes for the Wilshire 5000 and applied them to a hypothetical consol bond (meaning one that never matures).

    I had to assume a starting yield for the first data point in 1971, so there was some guesswork on my part. While this “bond” doesn’t really exist, this table below shows exactly what the stock market really did.

  • Morning News: March 10, 2011
    , March 10th, 2011 at 6:56 am

    Moody’s Downgrades Spain Debt Rating

    ECB Says ‘Strong Vigilance’ Needed to Contain Price Risks

    China Yuan Down Late; February Trade Deficit Surprises

    China, HK Shares Slip, Dragged by Banks on PBOC Cash Mop-Up

    Bank of Korea Raises Key Interest Rate to 3% as Inflation Breaches Target

    Oil Prices Steady as Libya Conflict Rages On

    Heat Damages Colombia Coffee, Raising Prices

    Foreclosures Plunge 27% – Biggest Drop on Record

    U.S. Solar Power Market Reaches $6 Billion In 2010, Installations Double

    Catalyst To Buy Walgreen Drug-Benefit Unit For $525 Million

    BMW 2010 Profit Surges on Demand for 5-Series, Mini

    Hurt by Debt, Dynegy Says Bankruptcy Is a Possibility

    Facebook Puts Six on Forbes Billionaire List

    Howard Lindzon: What were YOU Doing March 9, 2009…and Why Blogging Is the Best Retirement Investment You Can Make!

    Paul Kedrosky: Ireland’s Road to Serfdom

  • Inflation Expectations Soar
    , March 9th, 2011 at 1:22 pm

    I think the predictions for the imminent return of hyperflation are crazy, and fortunately the market agrees. However, inflation expectations have crept up recently.

    Here’s a look at the spread between the 1-year Treasury and the TIPs that’s due on April 15, 2012 (it’s not a perfect apples-to-apples comparison but it’s close enough to make the point).