Archive for May, 2012

  • Morning News: May 7, 2012
    , May 7th, 2012 at 5:57 am

    Greek Election Gridlock Raises Risk for Bailout, Euro Future

    Hollande Signals Return of France as Complicated Ally for West

    Swiss Stocks Fall After Elections; Roche, Swiss Re Drop

    European Elections Hit Asian Markets

    Spanish Banks Resist Idea of ‘Bad Bank’ Bailout

    Indonesia 1Q GDP Growth Slows; Central Bank May Be On Hold

    U.S. Treasury Sells $5 Billion of AIG Stock

    Stock Trading Is Still Falling After ’08 Crisis

    UBS Bets on Toxic Debt Demand After Fed’s Record Sale

    Buffett Says Berkshire Will Top $34 Billion Railroad Deal

    AT&T Making Big Investment in Home Monitoring

    Satellite Firm Spurns Bid for Takeover From Rival

    Global Bakery Giant CSM Jumps on Shift From Bakery Supplies

    Study Says Broker Rebates Cost Investors Billions

    Jeff Carter: Entrepreneurship is Merit Based

    Stone Street: Some Lingering Thoughts/Observations Economic and Otherwise

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  • “Twelve Facts That May Surprise You About the Housing Bust”
    , May 4th, 2012 at 3:36 pm

    Nick Timiraos has a great post at the WSJ’s Real Estate blog which summarizes the findings of an academic paper. Here are 12 facts about the housing bust that may surprise you:

    Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.

    Fact 2: No mortgage was “designed to fail.” Instead, the products weren’t designed to sustain a drastic decline in home prices.

    Fact 3: There was little innovation in mortgage markets in the 2000s.

    Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.

    Fact 5: The originate-to-distribute model was not new.

    Fact 6: MBS, CDOs, and other “complex financial products” had been widely used for decades.

    Fact 7: Mortgage investors had lots of information.

    Fact 8: Investors understood the risks.

    Fact 9: Investors were optimistic about house prices.

    Fact 10: Mortgage market insiders were the biggest losers.

    Fact 11: Mortgage market outsiders were the biggest winners.

    Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.

    Here’s the paper.

  • NFP = +115,000
    , May 4th, 2012 at 8:44 am

    Another tepid jobs report. The economy created just 115,000 new jobs last month. The unemployment rate is down to 8.1%.

    Since February 2009, the economy has created 152,000 new jobs. Between January 2008 and February 2010, the economy lost 8.779 million jobs. We’ve made back 3.745 million (or 43%).

    The jobs market peaked 12 years ago when the unemployment rate hit 3.8%. Since then, the civilian non-institutional population has grown by 30.766 million while the labor force has grown by just 11.614 million. The number of employed is up by 4.595 million and the number of unemployed rose by 7.019 million.

    For us to have the same jobs-to-population ratio as 12 years ago, we’d need to have 15.324 million more jobs, or 23.669 million fewer people.

    The number of Americans either unemployed or not in the workforce now stands at a staggering 101 million. That’s an all-time record.

  • CWS Market Review – May 4, 2012
    , May 4th, 2012 at 5:43 am

    Vanessa: I said the market fluctuates. Remember?
    Jerry: Look, Vanessa, of course the market fluctuates. Everybody knows that. I just got fluctuated out of four thousand dollars!
    — Seinfeld

    In the CWS Market Review from five weeks ago, I told you to expect the stock market to enter a holding pattern, and that’s pretty much what’s happened. The S&P 500 has spent most of the last month bouncing between 1,375 and 1,405. The index has stuck its head outside that range a few times, but not by much.

    There are two reasons causing this trading range: uncertainty about jobs and uncertainty about earnings. The two, of course, are connected and becoming more so every day. In this week’s CWS Market Review, I want to focus on the market trends hiding just beneath the surface. Investors need to understand that in a seemingly quiet market, a lot is going on behind the scenes.

    I’ll also take a look at some of our recent Buy List earnings reports. We had some good reports from stocks Nicholas Financial ($NICK) and Fiserv ($FISV). We also got another dividend hike from Reynolds American ($RAI). The tobacco stock now yields more than 5.8%. This is exactly why we focus on high-quality stocks.

    Investors Are Getting Nervous About the Economy

    This has turned out to be a decent earnings season. Not a great one, but a decent one. It’s especially good considering how nervous analysts were going into April. For the most part, the corporate world has proved them wrong.

    The latest numbers show that 375 of the 500 companies in the S&P 500 have reported earnings. Of that, 258 have beaten expectations (68.8%), 79 have missed (21.1%) and 38 have matched (10.1%). Although the earnings “beat rate” is quite high by historical standards, it has quietly slid down over the past several days.

    The jobs outlook is still quite bleak. The government is due to report on the labor market on Friday morning. Wall Street doesn’t expect much good news, and that’s probably what they’ll get. The equation is simple: More jobs means more consumers which means more revenue. Companies have done a great job growing earnings by cutting costs, but now they need more customers.

    The big change that’s happened over the last three months is that cyclical stocks have trailed the market. These are the stocks that are most closely tied to the fortunes of the economy. Since February 3rd, the release day of the January jobs report, the S&P 500 has gained 3.5%, but the Morgan Stanley Cyclical Index (^CYC) has shed 3.4%. This tells me that investors have become more concerned about the health of the economy. The last few jobs reports have been disappointing, plus last week’s GDP report wasn’t much either. On Thursday, we learned that the ISM Services Sector index dropped to its lowest level since December.

    Don’t get me wrong: This doesn’t mean that the economy is about to spill over into a recession. We’re still a long way from that. But it does mean that the stock market may wind up spinning its wheels for a while more. Some conservative investors have already jumped ship; the 10-year Treasury just fell to its lowest yield since late February. The yield has now been below 2% for 15 days in a row.

    What’s happening is that the market is becoming much more judgmental. If a stock even hints that there might be bad news, it can take a beating. Just look at what happened to Green Mountain Coffee ($GMCR) this week. This also tells us why some of our stocks reacted poorly this week even after beating expectations.

    Our Buy List Earnings Reports

    Now let’s take a look at the recent earnings report for our Buy List. Our theme this week was “good results followed by a lower share price.” Let me assure you: It’s frustrating when this happens but it’s an important part of not following the crowd, and that’s a much safer strategy in the long run. I advise you not to get discouraged. Our stocks are poised to fare much better in the weeks ahead.

    Moog ($MOG-A) is a perfect example of a “good news/bad market” stock. Last Friday, the company reported very good earnings (77 cents versus an estimate of 75 cents). Moog also reiterated its full-year outlook for $3.31 per share. The stock, however, plunged below $37 at the open. The market then regained its sanity. Moog rallied strongly and came close to breaking $43 per share. That’s a one-day turnaround of more than 16%. Still, you can see that the market bears were ready to pounce—they didn’t even need those pesky “facts” to get in their way. I rate Moog a very good buy up to $50.

    Fiserv ($FISV) had the second-strangest response to earnings. Last week, I said that I was concerned that Wall Street’s earnings estimate for Fiserv might be too high. If so, the stock might pull back to a good entry point. I’m glad to say that I was wrong about the earnings, but the stock fell anyway. For the first quarter, Fiserv earned $1.20 per share which was five cents better than Wall Street’s estimate.

    Fiserv also reiterated its full-year guidance of $5.04 to $5.20 per share. Who can complain about that? Sure enough, the stock gapped lower on Wednesday morning after the announcement. The shares have since stabilized around $69 per share. Now that I’ve seen the earnings, I’m much more confident about Fiserv. The stock is an excellent buy anytime you see the shares below $75.

    Last week, I said that I don’t expect Ford ($F) to stay under $12 for much longer. The stock is now below $11. No matter; I still like the story here. The company had another good earnings report—its 11th-straight quarter of operating profits. For Q1, Ford earned 39 cents per share which was four cents more than estimates. This is a good example of the stock market turning against cyclical stocks. There’s no hint of a slowdown here. Ford said it expects profits in North America to be significantly higher than last year. I think Ford can finish this year above $15 per share.

    Harris ($HRS) had your classic good news/bad news week. On Tuesday, the company reported quarterly earnings of $1.39 per share which was six cents more than estimates. They also narrowed their full-year EPS guidance from a range between $5.10 and $5.30 to a new range between $5.15 and $5.25.

    That was the good news. The bad news was that Harris also lowered their 2012 revenue guidance from $6 billion to $5.45 billion. Harris offered initial EPS guidance for 2013 of $5.10 to $5.30. Honestly, that’s not very impressive. The stock took a beating and closed Thursday below $42 per share. The best news, however, is that Harris is finally selling their broadcast business which has been a major drag on earnings.

    As disappointed as I am in the lower revenue guidance and tepid earnings outlook, Harris is a remarkably inexpensive stock. The shares are going for roughly eight times earnings. Harris is a solid buy up to $45.

    Last week, I said that Wright Express ($WXS) is our “best candidate for an earnings beat.” The company reported earnings of 91 cents per share which was a penny better than estimates. But the stock got smacked around after Wright said that earnings for Q2 would range between 92 and 98 cents per share. The Street had been expecting $1.08 per share. On Thursday, Wright got as low as $58 per share.

    I think traders are missing the big picture with Wright. The company made a point that it’s sticking with its full-year guidance of $4.10 to $4.30 per share. The company also raised its revenue guidance for the year from $590 million – $610 million to a new range of $602 million – $617 million. Even if Wright hits the low end of its earnings forecast, the stock is going for a good price. Wright Express is a strong buy up to $65.

    My favorite micro-cap, Nicholas Financial ($NICK), reported fiscal Q4 earnings of 50 cents per share. That brings their fiscal year earnings to $1.85 per share. The stock had been acting a little nervous going into earnings but the good earnings should settle some nerves. The quarterly dividend is currently 10 cents per share and I’d like to see a big hike soon, perhaps to 15 cents per share. Nicholas Financial is a great buy below $15.

    Reynolds American Now Yields 5.82%

    Two weeks ago, I said that Reynolds American ($RAI) could raise its quarterly dividend from 56 cents to 60 cents per share. Well, I was close. The board just raised the dividend to 59 cents per share. I had said that I wasn’t too concerned about Reynolds beating or missing its earnings by a penny or two because the important aspect of the stock is the dividend. That’s why I’m pleased to see this dividend increase. Going by the new dividend, Reynolds now yields 5.82% which is close to double a 30-year Treasury bond.

    We’re almost done with earnings season, but we have three more Buy List stocks due to report next week. Sysco ($SYY) will report on Monday, May 7th. DirecTV ($DTV) follows on Tuesday. Then CA Technologies ($CA) will report on Thursday, May 10th.

    I’ll be especially interested to hear what CA Technologies has to say. The last earnings report crushed estimates and the company raised their full-year forecast. CA also increased its dividend by five-fold. For Thursday, Wall Street expects earnings of 52 cents per share.

    One quick note on Bed Bath & Beyond ($BBBY). The stock got nicked on Thursday due to some collateral damage from the plunge in Green Mountain. The coffee stock has a big presence inside of BBBY’s stores. But the falloff in GMCR is more about that stock being overpriced rather than any weakness in BBBY’s business.

    That’s all for now. Stay tuned for more earnings reports next week. 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: May 4, 2012
    , May 4th, 2012 at 4:51 am

    RBS Posts Wider Net Loss as It Shrinks Balance Sheet

    European Central Bank Opposes Higher Taxes

    Hollande Holds Lead Over Sarkozy as French Campaign Wraps Up

    Hitting Argentina for Oil Seizure Can Hurt U.S. Interests

    U.S. Stresses Concessions From China

    Once Remote, Goldman Sachs Puts on a Friendly Public Face

    Facebook at 99 Times Profit Exceeds 99% of S&P 500 Index

    Zuckerberg Facebook IPO to Make Him Richer Than Ballmer

    GM First-Quarter Profit Falls as Losses in Europe Widen

    LinkedIn Posts Profit Surge, SlideShare Deal

    Kraft 1Q Profit Up 1.8% As Revenue Rises But Margins Weaken

    Air France Loss Heightens Pressure to Broker Union Cuts Deal

    SodaStream Tumbles After Green Mountain Plunge

    Joshua Brown: You Are Now About to Witness the Strength of Street Knowledge

    Phil Pearlman: The Next Killer Coffee Maker in a Post Green Mountain World

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  • Reynolds American Raises Quarterly Dividend to 59 Cents Per Share
    , May 3rd, 2012 at 4:11 pm

    Reynolds American ($RAI) announced that it’s raising its quarterly dividend from 56 cents to 59 cents per share. Going by today’s closing price of $40.56, the annual dividend of $2.36 yields 5.82%. That’s the equivalent of 770 Dow points.

    Reynolds raised its dividend twice last year. First it went from 49 cents to 53 cents. Then it was raised to 56 cents.

  • Green Mountain Plunges
    , May 3rd, 2012 at 1:38 pm

    Shares of Green Mountain Coffee Roasters ($GMCR) are getting cut in half today. The stock is currently around $25 and yesterday’s close was $49.52. In September, it was over $110.

    Still, the stock has been an outstanding performer over the years. From the low in the fall in 1998 to the high in the fall in 2011, Green Mountain gained over 77,500%.

  • Initial Jobless Claims Fall to 365,000
    , May 3rd, 2012 at 9:21 am

    The Labor Department reported this morning that initial jobless claims fell last week to 365,000. This was 14,000 below Wall Street’s expectation.

    The previous reading was 392,000. Some folks had been getting nervous because jobless claims had suddenly popped up after a long, steady decline. And that 392,000 number was just revised down to 388,000. Last week’s decline was the biggest drop in more than one year.

    Today’s report comes just before tomorrow’s big jobs report. Wall Street expects a meager gain of 140,000 jobs and the unemployment rate will stay steady at 8.2%.

  • The Hidden Bull Market for Consumer Discretionary Stocks
    , May 3rd, 2012 at 8:51 am

    The 500 stocks of the S&P 500 are subdivided into 10 sectors. Investment analysts like to track these sectors to see what’s driving the market. Most of the sectors are well-known like tech or finance. But today, I want to focus on one of the overlooked sectors which is Consumer Discretionary.

    Consumer Discretionary companies make things that people buy even though they don’t need to buy them. For example, Carnival ($CCL), the cruise operator, is a Consumer Discretionary company.

    The reason I highlight this sector is because the Consumer Discretionary Index has been doing very well. It’s almost like a hidden bull market. The index hit a new all-time high yesterday. Not only that, it also reached its highest relative strength mark in over 22 years (that’s as far back as my records go). This means that if you bought the entire sector at any point in the last 22 years and held on until today, you would have beaten the overall market.

    Here’s a look at the ratio of the Consumer Discretionary index to the S&P 500:

    Of the ten sectors, Consumer Discretionary has been the top-performer for the last three and six months. It’s also been the best performer since the bear market low in March 2009 and even since the bull market high in October 2007. It was the top performer yesterday as well. In terms of market value, Consumer Discretionary is now the fourth-largest sector and it’s close to overtaking Healthcare for third place.

    The main Consumer Discretionary ETF that’s tied to the index is $XLY. The XLY doesn’t get nearly the attention of trader favorites like the Financials ($XLF) or Energy ($XLE). On your average day, the XLF will have more than 12 times the volume as the XLY.

    So why has Consumer Discretionary outperformed everyone else? It’s hard to say, but my take is that’s it’s due to pent-up demand from the folks who have remained employed during the Great Recession. In 2008 and 2009, they held back on their big-ticket purchases and now they’re opening up their wallets.

    One of our favorites, Bed, Bath & Beyond ($BBBY) is probably a good example of this. The stock was unquestionably hurt by the downturn, but it was never in danger of going out of business. Consumers still want their duvets — and now they’re getting them.

  • Morning News: May 3, 2012
    , May 3rd, 2012 at 5:28 am

    ECB May Soften Stance as Draghi’s Recovery Falters

    Spanish, French Debt Insurance Costs Rise Ahead of Auctions

    King Says BOE Will Risk Unpopularity to Prevent Crises

    China Opening To Reform Discussions

    China Curbs on Currency Still an Issue

    Socgen’s Booming Fixed Income Brightens First-Quarter Profit Hit

    Progress is Seen in Advancing a Final Volcker Rule

    Taking On the Little Guy, but Missing the Bigger Ones

    UBS Earnings Sink, Following a Trend in Europe

    Visa Profit Surges; Justice Probes Debit Strategy

    Distilling Giant Diageo’s Third-Quarter Revenue Rises on Emerging Markets

    Carlyle Weighs Lower IPO Price at Discount to Blackstone

    BMW Remains Conservative as Profit Beats Estimates

    Green Mountain Unable To Predict Keurig Sales; Shares Down More Than 40%

    Jeff Miller: April Employment Report Preview

    Pragmatic Capitalism: The Growth Divergence Between The USA and Europe – It’s The Credit Conditions Stupid!

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