Archive for April, 2012

• Morning News: April 11, 2012
  Eddy Elfenbein, April 11th, 2012 at 6:19 am

  Germany Grows Robust from Sick Man With Demand at Home

  Japanese Investors Shun Spanish Bonds

  Trade Gains Put China in Quandary

  IMF Said Ready to Cut China Current-Account Surplus Forecast

  Oil Trades Near Eight-Week Low on Rising U.S. Inventories

  New Stance of Forgiving Mortgages

  Lenders Again Dealing Credit to Risky Clients

  Facebook Plays Offense and Defense in a Single Deal

  A Billion-Dollar Turning Point for Mobile Apps

  Apple Market Value Jumps Above $600 Billion Mark

  SAP Challenges Oracle With $500 Million Hana Incentive

  Alcoa Sees Aluminum Cuts as Production Gains

  Best Buy CEO Resigns During Personal Conduct Probe

  Luxury Goods Oust Executives With Global Economy in Flux

  Joshua Brown: Earnings Season Approaches! Four Things to Watch For

  Pragmatic Capitalism: It’s The Eurozone That’s Turning Japanese…Or Maybe We All Are

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• Changes at the Top at Best Buy
  Eddy Elfenbein, April 10th, 2012 at 10:55 am

  Brian Dunn is out at Best Buy ($BBY). Since he became CEO, the stock had dropped from $33 to $22 while the S&P 500 rallied from 900 to 1,400.

  

• Numbers Tell the Story
  Eddy Elfenbein, April 10th, 2012 at 8:15 am

  Investor’s Business Daily referenced this post in one of their editorials.

  Numbers tell the story. Since Obama entered office promising a jobs boom from his “stimulus,” the economy has lost 1.6 million jobs. Since the employment peak in early 2008, 5.2 million jobs have disappeared.

  Labor participation rates have plunged in recent years, in part due to retirements, but mostly due to people just dropping out — they can’t find jobs at all.

  Today, a record 100.5 million Americans older than 16 don’t have jobs, up 34% since 2000. As Eddy Elfenbein, editor of the Crossing Wall Street blog, notes, “If we were to have the same jobs-to-population ratio as 12 years ago, there would have to be 14.6 million more jobs, or 22.6 million fewer people.”

  That’s the scale of the damage done to our economy.

• “DirecTV Simply Looks Too Cheap”
  Eddy Elfenbein, April 10th, 2012 at 8:03 am

  Bloomberg has an interesting article today on one of our Buy List favorites, DirecTV ($DTV). The article highlights two importact facts about DTV.

  One is how well the company is doing in Latin America (“It’s not hard to envision a day when Latin America is perceived to be the core of DirecTV, and where the U.S. is an afterthought”).

  The other is the enormous cash flow the company generates. They’re buying back $100 million of their shares per week.

• Morning News: April 10, 2012
  Eddy Elfenbein, April 10th, 2012 at 5:45 am

  Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts

  In Surprise, China Posts Trade Surplus

  Food Prices Push Rate of Inflation Up in China

  Bank of Japan Stands Pat But Seen Keeping Finger on Trigger

  Bernanke Says Banks Need Bigger Capital Buffer

  Obama Candidate Sketches Vision for World Bank

  Raising the Floor on Pay

  Sony Posts Record Loss After Taking $3.7 Billion Tax Charge

  Microsoft’s AOL Deal Intensifies Patent Wars

  Billionaires Unmasked as Coty Persists in Pursuit of Avon

  Facebook to Buy Photo-Sharing Service Instagram for $1 Billion

  AT&T to Sell Majority of Yellow Pages Business to Cerberus

  A Costly Toy Subsidized by Others

  Credit Writedowns: The Ways China Can Rebalance

  Howard Lindzon: Creating Shareholder Value….Yahoo vs. AOL

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• Goodbye Dow 13,000
  Eddy Elfenbein, April 9th, 2012 at 5:26 pm

  Today was an ugly day on Wall Street. The market is still reeling from Friday’s jobs report. The cylicals were hit especially hard as were many financials.

  There are a few things to remember: The market has climbed almost continuously for six-straight months, so some give back is to be expected. Also, the jobs report is hardly evidence that the new recession is on the way. It merely signals that jobs growth isn’t quite as robust as we thought. These numbers will be revised and the other evidence continues to show a modestly improving jobs environment.

  One outlier in today’s selloff was Nicholas Financial ($NICK). The shares closed at $12.42 which is a 5.48% fall from Thursday’s close. The stock got as low at $12.14 in today’s trading. I wouldn’t worry about this at all.

  There’s absolutely no news to indicate that NICK is in any trouble. This is purely a market-driven event. If anything, the belief that the Fed will hold down rates for a while longer is actually good news for NICK. Going by today’s close, the stock yields 3.22%.

• The Reckoning for Friday’s Jobs Report
  Eddy Elfenbein, April 9th, 2012 at 10:18 am

  The stock market is getting its first chance to react to Friday’s lousy jobs report, and not surprisingly, it’s not happy. The Dow is down 140 points and the S&P 500 is below 1,380.

  The cyclicals and financials are taking most of the hits. The gold market is up which makes sense if traders expect the Fed will be more accommodative (though it’s kinda hard to be any more accommodative at this point). The bond market is also rallying.

  This could be the fourth down day in a row for the market. Plus, it would finally snap the “up, up, down, down, down” trend of the past three weeks. Still, this isn’t that much of a drop. We’re currently off about 2.7% from the 44-month high we made last Monday.

  I said that the stock market had two hurdles coming — one was the jobs report and the second was earnings season. Wall Street clearly didn’t like the first, so now it’s up to the second. As I’ve said, I expect the market to bounce around for a few weeks until we have a clearer picture of what the second half of 2012 will look like. That’s why I’m not only focusing on earnings but also on company guidance.

• Morning News: April 9, 2012
  Eddy Elfenbein, April 9th, 2012 at 7:26 am

  In Europe, Unease Over Bank Debt

  China Inflation Data Keeps Policy Bias on Growth

  Japan Current Account Moving to Surplus Adds Support for Yen

  Russian Stocks Drop on Central Bank Rates Decision, Lower Crude

  Qatar Builds Up Xstrata Stake Ahead of Glencore Deal

  Brazil Will Not Levy Taxes on All Foreign Capital

  Crude Oil Lower After Disappointing US, China Data

  Jobs Pose Challenge S&P 500 Has Overcome Nine Times

  Federal Funds to Train the Jobless Are Drying Up

  JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets

  A Ballooning Megabyte Budget

  AT&T, CWA Remain in Talks After Labor Contracts Expire

  Sony to Cut Estimated 10,000 Jobs

  Jeff Miller: Weighing the Week Ahead: More Excuses for Selling?

  Phil Pearlman: The Anticipation and the Reality of Correction Shrinkology

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• The Jobs Report Was a Bust
  Eddy Elfenbein, April 6th, 2012 at 11:14 am

  I said that the stock market will probably stay in a holding pattern until we get a better idea of how well the jobs market is recovering and how the corporate earnings front looks.

  This morning we learned that the jobs market isn’t quite so hot. The Labor Department reported that a meager 120,000 nonfarm payroll jobs were created last month. That’s half the gain from February. Wall Street had been expecting a gain of 205,000. The unemployment rate ticked down to 8.2% from 8.3% the month before.

  Over the last seven years, the U.S. economy has created a grand total of minus 13,000 nonfarm payroll jobs. If we were to have the same jobs-to-population ratio as 12 years ago, there would have to be 14.6 million more jobs, or 22.6 million fewer people. There is now an all-time record of 100.5 million American adult civilians without jobs (civilian non-institutional population over the age 16 not working). That’s a 34% increase since 2000.

  Although the stock market is closed today, the bond market rose as investors migrated toward more conservative assets.

  

• CWS Market Review – April 6, 2012
  Eddy Elfenbein, April 6th, 2012 at 6:50 am

  On Thursday, the stock market finished the fifteenth day in a row of its “up, up, down, down, down” pattern. Why is this happening? Honestly, I have no idea and it’s safe to say that even trying to find a reason will only lead us to being fooled by randomness. But as I said last week, the stock market is most likely entering a trading range until we have a better handle on how the jobs market and earnings outlook shake out.

  In this week’s issue of CWS Market Review, I want to highlight some of our most promising upcoming earnings reports. I’ll also explain why assets are suddenly disentangling. If you want to sound smart, you can say the correlations are declining, but between you and me, this simply means that the normal order is reasserting itself—and that’s a very good omen for our Buy List.

  Bed Bath & Beyond Soars on Blow-Out Earnings

  Before we get to that, let’s talk about our star pupil of the week: Bed Bath & Beyond ($BBBY). The stock soared 8.5% on Thursday after a blowout earnings report. BBBY is a wonderful company and it’s in a great position to prosper from renewed consumer spending.

  After the closing bell on Wednesday, Bed Bath & Beyond said it netted $1.48 per share for its fiscal fourth quarter. That creamed Wall Street’s consensus by 15 cents per share. Not too shabby. In December, the company told us to expect Q4 earnings to range between $1.28 and $1.33 per share. So their results were even better than they expected.

  Looking through the numbers, the details were exceptionally strong. Profits jumped 32% from the fourth quarter of 2010. Quarterly sales rose by 9.1% and the key retailing metric, comparable store sales, rose by 6.8%. For the year, Bed Bath & Beyond earned $4.06 per share which was also a 32% increase over the year before. Sales rose 8.5% to $9.5 billion, and comparable store sales increased by 5.9%.

  I’ve discussed before how growing margins have aided corporate profits, but the effect has been especially pronounced at Bed Bath & Beyond. This is the twelfth quarter in a row in which the company has expanded its net margins. In the three years since fiscal 2009, total sales have grown by 32%, but net earnings are up by an amazing 133%. The reason is that net profit margins increased from 5.9% in 2009 to 10.4% last year.

  

  Even with as good as the numbers are, I was especially impressed by Bed Bath & Beyond’s guidance. For Q1, BBBY sees earnings ranging between 79 cents and 83 cents per share. They earned 72 cents per share in last year’s Q1. For the full-year figure, they project earnings “to increase by a high single to a low double digit percentage range.” If we take that mean to 10%, it translates to a full-year forecast of $4.47 per share.

  This is excellent news. We now have a 24% year-to-date gain and that comes on top of a nice 18% gain we racked up last year. BBBY continues to exceed expectations. I said in December that I thought the Street’s forecast for 2012 of $4.39 was too high. Shows what I know! Plus, I urged investors to be cautious about this stock going into earnings. Now we have solid evidence of how well things are going. In fact, I suspect that the company is low-balling us with this latest guidance. We have a winner on our hands. I’m raising my buy price on BBBY to $75 per share.

  The Stock Market’s Return to Normalcy

  During most of last year, the stock market was jerked around by an annoying tug-of-war between risk-on and risk-off trades. The U.S. stock market became highly correlated with the dollar/euro trade, and that was tied to the latest political rumors in Europe. Not only were stocks correlated with currencies, but also stocks were highly correlated with each other.

  When this happens, it’s very frustrating for our investing style which focuses on high-quality stocks. I prefer to see a lot of dispersion among stocks (meaning everybody doing their own thing). Last year, it seemed like every stock behaved like every other stock. One odd offshoot of this effect is that the handful of stocks that didn’t follow the crowd saw highly abnormal activity. Netflix ($NFLX) was probably the best example. The company soared to an absurd valuation simply because it was one of the very few ideas that seemed to be working. Not surprisingly, the stock has plunged back to earth over the past several months.

  The financial media often reported that most actively managed mutual funds underperformed the broader indexes last year. That’s true, but it missed an important fact: The relative performance of active managers is highly correlated to the relative performance of small-cap stocks.

  This makes perfect sense since the index funds dominate the mega-cap stocks. With the rising level of fear last year, investors flocked to larger (and hopefully) safer names. Now we’re learning that some of those big-name stocks may not be so safe. Blue chips like ExxonMobil ($XOM) have badly lagged the market this year.

  Fortunately, the U.S. stock market has slowly untangled itself from the ups and downs of Europe. As bad as the events in Greece are, they’re very small within the realm of global finance. One outcome of the market’s return to normalcy is that daily volatility has declined dramatically. This year, volatility has had its biggest decline in 78 years.

  The WSJ recently noted that stock correlations are at their lowest level since before the financial crisis. I view this as a very positive development for us, and investors will soon realize that there will be a very large gap between good stocks and bad stocks.

  Look for Good Earnings from Ford

  Earnings season begins next week and I’m already going through my preparations. Outside of our Buy List, I’m not especially optimistic for the results this time around. One company that I think has a very good chance of surprising investors is Ford ($F). Wall Street currently expects earnings of 38 cents per share, which seems very low to me.

  The news at Ford continues to get better. In my humble opinion, the company has a very good shot of earning $1.50 per share for this year, which means the stock is going for a little over eight times earnings. That’s a very good bargain. I was pleased to see Ford report its best March sales in five years. Plus, a major analyst recently raised his earnings estimate for the automaker. Ford is also ramping up production in China. The stock is a very good buy up to $15 per share.

  Another earnings report to keep an eye on is CA Technologies ($CA). Three months ago, the company stunned Wall Street by beating earnings estimates by more than 20%. CA also raised its dividend five-fold. Look for more good results in a few weeks. Some other earnings surprises to watch for are from Wright Express ($WXS), JPMorgan Chase ($JPM) and Moog ($MOG-A). As I said, the market may be choppy over the next few weeks, so please don’t get discouraged. The trends are definitely in our favor.

  That’s all for now. Remember that the market will be closed on Good Friday. 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