Archive for March, 2012

• CWS Market Review – March 16, 2012
  Eddy Elfenbein, March 16th, 2012 at 5:55 am

  After a long, dull stretch, this was a pretty eventful week for Wall Street. The S&P 500 cracked 1,400 and several of our Buy List stocks are breaking out. Two of our stocks, CA Technologies ($CA) and JPMorgan Chase ($JPM), are already up over 34% for us on the year. The resurgence of risk-taking has given a major lift to our portfolio.

  Last week, I said that Friday’s jobs report would be a major driver for the market, and indeed it was. Although, the jobs report for February wasn’t quite as strong as I was expecting, it was still pretty good and Wall Street took notice.

  Here’s the bottom line: The U.S. economy has proven its ability to create more than 200,000 jobs per month, which is a nice change of pace from shedding millions of jobs per year. Plus, the good jobs news looks to continue. Thursday’s jobless claims report was the best one in four years.

  Slowly, the economy is gaining strength. To be sure, we’re still a long way from full stride, but the key for us as investors is that companies are seeing more bodies come through their doors. In fact, Bed Bath & Beyond ($BBBY), a major retail player, gapped up to a new 52-week high on Thursday. Longtime readers will recall that this was our top-performing stock from last year. It’s already up 13.1% for us this year. Look for another good earnings report on April 4th.

  The Fed’s Optimism Lifts Our Buy List

  The other big news from this past week was Tuesday’s Federal Reserve meeting. I was pleased to see that the Fed’s post-meeting policy statement reflected a more optimistic outlook for the economy. The central bank said that “the economy has been expanding moderately” and that “strains in global financial markets have eased.” This is especially encouraging because central bankers almost always see the dark clouds in any silver lining.

  The question now is: Will Benny and his Buds be encouraged to raise interest rates before their 2014 forecast? My view is that we simply can’t tell right now. It’s best for us to assume that rates are going to stay low for a good while longer. Outside of certain commodities, most companies don’t have enough market power to raise prices.

  Fortunately, continued low interest rates is good news for many stocks on our Buy List like Nicholas Financial ($NICK). Speaking of which, that stock gapped up to $14.41 on Tuesday. It’s hard to believe that three years ago NICK was going for less than $2 per share. I think we may see a dividend increase here as well.

  Throughout the financial markets, what we’re seeing is a continuation of the trend I’ve been highlighting: investors are gradually taking on more risk. This is a very good sign for us. It’s more accurate to say that investors are finally letting go of their super-conservative investments in favor of moderately risky investments.

  Consider that after an historic three-year bull run, the S&P 500 isn’t outrageously priced. That’s odd to say, but it’s true. Even at 1,400, the index is trading at less than 14 times this year’s earnings estimate. I think it’s very possible that dividends for the S&P 500 could rise by 15% this year.

  Another sign that investors are becoming more tolerant of risk is that the long end of the Treasury yield curve is still rising. It’s not good for stocks when so many investors are glad to accept 2% for lending Uncle Sam their capital for 10 years. Perhaps that makes sense when it seems like world is about to end. But now things are changing. The yield on the 30-year T-bond recently ticked above 3.4%. Six months ago, it was yielding less than 2.8%. The key for us is that as investors take on more risk, our Buy List will continue to do well.

  JPMorgan Backs Up My Dividend Call

  In last week’s CWS Market Review, I said that JPMorgan Chase could “easily afford” to raise its dividend by five cents per share. Sure enough, that’s exactly what happened. The bank raised its quarterly dividend from 25 cents to 30 cents per share. That news actually helped spark a financials-led rally on Tuesday afternoon. (Some folks thought it was Jamie Dimon’s way of stealing the spotlight from the Fed.) JPMorgan continues to be one of the strongest major banks on Wall Street. Going by Thursday’s closing price, the new dividend gives JPM a yield of 2.68%.

  As I mentioned, JPM’s dividend news lifted the entire market on Tuesday. Our financial stocks AFLAC ($AFL), Hudson City ($HCBK) and Nicholas Financial ($NICK) all saw big gains. The market continued to rally on Thursday and the S&P 500 broke 1,400 for the first time since 2008. Our Buy List continues to break out to new highs, and it’s even extending its lead against the S&P 500. Through Thursday, our Buy List is up 13.20% for the year compared with 11.53% for the S&P 500.

  I should remind you that Oracle’s ($ORCL) earnings report is coming next Tuesday, March 20th. I’m not yet confident that we will see a major earnings surprise here. Still, Oracle is a strong company and it’s very well-positioned. I also like the fact that Oracle has very strong cash flow. I feel that the company embarrassed itself last earnings season and they’re looking to right themselves in Wall Street’s eyes.

  The numbers here are pretty clear: The stock is going for less than 12 times next year’s earnings (their fiscal year ends in May). On top of that, I think we’ll see Oracle raise its dividend from six cents to seven cents per share. If you’re able to get Oracle for less than $30 per share, you’ve gotten a good deal.

  Reynolds American ($RAI) made news this past week when the tobacco company said that it’s planning on cutting 10% of its U.S. workforce. Fortunately, this will be achieved by attrition instead of laying people off. I’m glad to see that Reynolds is staying alert on ways to keep costs down.

  Before I go, I should mention that some of our quieter Buy List stocks have been doing very well. Wright Express ($WXS) just closed at a 52-week high on Thursday. Fiserv ($FISV) continues to plow ahead. Both stocks are up 18% for us this year. Hudson City ($HCBK) is up by 10% just in the last three days—and it still yields more than 4.3%. Ford ($F) just topped $13 per share for the first time in over a month.

  That’s all for now. We’re heading near the close of the first quarter so earnings season isn’t far way. I expect to see another round of stellar results from our stocks. 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!

  – Eddy

• Morning News: March 16, 2012
  Eddy Elfenbein, March 16th, 2012 at 5:55 am

  Italy Pays Morgan Stanley $3.4 Billion to Exit Derivative

  China Forecasts Soaring Shale-Gas Output

  Chevron Halts Brazil Production After New Leak

  Norway Faces Housing Bubble as Krone Steals Policy Agenda

  Bad Loans at State-Run Banks Add to India’s Woes

  U.K. ‘Wasted’ 4 Years on Failed $1.6 Billion Carbon-Capture Plan

  Oil Rebounds From One-Week Low on Outlook for U.S. Demand Growth

  Goldman Employee Reinforces Need for Volcker Rule, Democrats Say

  Obama Defends Energy Policy, Hitting Back at Presidential Candidates

  S.E.C. Appears Poised to Win Appeal in Citigroup Settlement

  Apple Goes From $500 to $600 in a Month

  Cisco’s Chambers Sees Bigger Software Focus After NDS Deal

  1 Reason This Coffee Stocked Surged 75% in 5 Days

  UPS Extends ‘Constructive’ Takeover Discussions With TNT

  Wall Street’s Latest Campus Recruiting Crisis

  Jeff Carter: Lessons From Yahoo

  Phil Pearlman: Sublime Noise and the Goldman Op Ed

  Be sure to follow me on Twitter.

• The S&P 500 Breaks 1,400
  Eddy Elfenbein, March 15th, 2012 at 2:06 pm

  For the first time since 2008, the S&P 500 broke 1,400 today. The index first reached that level in July 1999. To add some perspective, Barack Obama was 37 years old.

  

  By the way, notice how the line has gradually become less jagged over time.

• Jobless Claims At Four-Year Low
  Eddy Elfenbein, March 15th, 2012 at 11:45 am

  More good news on the jobs front. The Labor Department reported this morning that the number of Americans filing first-time claims for unemployment benefits dropped to a four-year low. Jobless claims fell by 14,000 to 351,000 last week. That wasn’t the only good news:

  Separately, the New York Federal Reserve said its Empire State general business conditions index rose to 20.21 – its highest level since June 2010 – from 19.53 in February.

  “This suggests that the recovery is firmly on track,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

  The Philly Fed also reported manufacturing growth in its region. This is good news but we’re not out of the woods just yet.

• Morning News: March 15, 2012
  Eddy Elfenbein, March 15th, 2012 at 5:48 am

  Greek Restructuring Delay Helps Banks as Risks Shift

  Officials Unite Again to Protect Eastern Europe’s Banks

  Greek Bonds Signal $2.6 Billion Payout on Credit-Default Swaps

  New Day New Tax as Sarkozy Battles Hollande in French Campaign

  U.S. May Sanction India Over Level of Iran-Oil Imports

  FDIC Shoots to Kill on “Too Big to Fail”

  Jobs Bill Stalls as Congress Fights Over Agency

  Goldman Roiled by Op-Ed Loses $2.2 Billion for Shareholders

  Cisco to Buy NDS for $5 Billion

  Avaya Agrees to Acquire Radvision for About $230 Million

  Private Businesses Fight Federal Prisons for Contracts

  Foreclosures Fall 8% in U.S. With Seizure Increase Coming

  Lufthansa’s Main Brand Adds to Malaise as Profit Slide to Deepen

  Galaxy Earnings Miss Estimates, Won’t Pay Dividend

  What Buffett Knows About Bank Investing That You Don’t

  Cullen Roche: On Leaving Goldman Sachs

  Howard Lindzon: Encyclopaedia Britannica….’We Have A Better Tool Now’

  Be sure to follow me on Twitter.

• Bed Bath & Beyond Surges to 52-Week High
  Eddy Elfenbein, March 14th, 2012 at 2:34 pm

  Shares of Bed Bath & Beyond ($BBBY) are rocking today. The stock has been as high as $65.27.

  From Seeking Alpha:

  Bed Bath & Beyond (BBBY +4.1%) moves up after its comp estimates are raised at Bernstein to 4.6% from 3.3%. Baird cites the company’s improvement in discrete comp drivers and improving sales trends. The company rates the shares at Outperform with an $80 price target.

  The company is due to report fiscal Q4 earnings at the beginning of April. I’m looking for a strong report.

• Reynolds American Brings Out the Knife
  Eddy Elfenbein, March 14th, 2012 at 9:59 am

  Reynolds American ($RAI) announced today that it will cut 10% of its U.S. workforce by the end of 2014. That sounds dramatic but a lot of it will be achieved by normal turnover.

  Reynolds said this move will save $25 million this year and $70 million by 2015.

  Reynolds American pegged the expected cost of the work-force reduction at about $110 million, which reflects severance payments and other costs. The company noted it will take a charge in the first quarter that will include those costs.

  “Our businesses’ four key brands are all on a growth trajectory,” said Chief Executive Daniel M. Delen. “In order to sustain that growth, we need to ensure we have the financial resources and employees aligned behind the right programs and processes.”

  As cigarette volumes have declined across the tobacco industry, Reynolds American, the nation’s second-largest tobacco company behind Altria Group Inc. (MO), has shifted its focus toward a few key brands. The company has also diversified into smokeless tobacco.

  If the $70 million figure is accurate, we’re talking about 12 cents per share per year. That’s not so small. These cuts are certainly painful, but it’s good to see that Reynolds is staying alert to cutting costs.

• What If the Stock Market Were a Bond?
  Eddy Elfenbein, March 14th, 2012 at 9:15 am

  Here’s an update to one of my crazier/demented/possibly brilliant ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

  Crazy? Let me explain.

  I took the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the index’s gains step-for-step.

  I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

  There’s one hitch, though. I had to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

  If I chose a number that was too high, the historical performance wouldn’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM was too low, the yield would gradually get pushed down to microscopic levels.

  Fortunately, the data made my job easy. After four decades, the window I had to work with is pretty narrow. Starting with 9.2% was too high, and 8.8% was too low. After playing with the numbers, I finally settled on 8.95%.

  Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past four decades. Through yesterday, the yield stood at 7.74%.

  

• Morning News: March 14, 2012
  Eddy Elfenbein, March 14th, 2012 at 5:56 am

  In a First, Europeans Act to Suspend Aid to Hungary Unless It Cuts Deficit

  China Yuan Down Late On PBOC Guidance, Depreciation Concerns

  Tudou Owners Get World’s Best Deal Taking Youku Stock

  London Shops Disappear as Olympics Pays $1.2 Billion for Cycling

  Enel Targets Renewables, Latin America to Counter Italian Slump

  Brent Crude Dips Below $126 Ahead of US Oil Data

  U.S. Said to Have Received Saudi Assurances on Ample Oil Supply

  Fed Says 15 of 19 Banks Have Adequate Capital in Stress Scenario

  In Otherwise Dour Report From Fed, the Tiniest Touch of Optimism

  Bayer Sees Healthcare Business Driving Growth

  Cathay Pacific Declines on Profit Drop, ‘Challenging’ Outlook

  End of An Era for Britannica

  In Private Equity I.P.O., a Shareholder Fear of Losing Favor

  Motley Fool: The CPI Is a Conspiracy! (Or Maybe You Just Don’t Understand It)

  Epicurean Dealmaker: Welcome to the Sausage Factory

  Jeff Miller: The Quest for Yield (Part 6): Enhancing the Yield from Your Dividend Stocks

  Be sure to follow me on Twitter.

• Britain to Offer a 100-Year Gilt
  Eddy Elfenbein, March 13th, 2012 at 10:40 pm

  Here’s an interesting story from our cousins across the pond. The Brits are looking to float a 100-year gilt. The general rule is that the larger your debt, the longer your average maturity should be. Her Majesty’s government currently has a debt of 1 trillion pounds.

  Is this a wise move? Well, it depends. If the bond market responds favorably, then yes, it’s a good move. If not, then it’s a bad move. It all depends on what interest rate investors demand. I wouldn’t be surprised if investors like what they see.

  The government is also considering never-ending bonds. By the way, something magical happens with perpetuities. When you calculate the yield to maturity, you simply divide the coupon by the price and presto.

  If this float goes well, I’d be interested to see the U.S. Treasury give a long-dated bond a try. While we’re at it, I wouldn’t mind seeing a gold-backed bond either.