CWS Market Review – June 1, 2012
This morning, the government reported that the U.S. economy created just 69,000 jobs in May. This was well below expectations, and last month’s numbers were revised downward as well. The national employment rate ticked up from 8.1% to 8.2%. That’s just lousy, and it’s yet more data in a run of below-average economic news.
Before anyone gets too worked up over the jobs numbers, let me remind you that these are very imprecise estimates. The media breathlessly reports these figures as if they were handed down from Mount Sinai, but as Jeff Miller notes, the margin of error for these reports is exceedingly wide. The numbers are also subject to large revisions in the coming months.
Still, we have to adjust ourselves to the reality that the economy isn’t doing as well as most folks believed a few weeks ago. The jobs gains simply aren’t there. The other negative economic news this week included a sharp drop in consumer confidence, a rise in first-time claims for unemployment insurance and a negative revision to first-quarter GDP. The last one is old news since we’re already into the back-end of the second quarter.
Treasury Yields Hit an All-Time Low
I can’t say that I find the sluggish economic news surprising. In the CWS Market Review from two weeks ago, I wrote that economically sensitive cyclical stocks had been badly lagging the market. This is an important lesson for investors because by following the relative strength of different market sectors, we can almost see coded messages the market is sending us. In this case, investors were bailing out of cyclical stocks while the overall market wasn’t harmed nearly as much. Now we see why.
Since February 3rd, the S&P 500 is down by 2.6%, but the Morgan Stanley Cyclical Index (^CYC) is off by more than 11%. Looking at the numbers more closely, we can see that the Energy and Materials sectors have been sustaining the most damage. ExxonMobil ($XOM), for example, lost over $30 billion in market cap in May. The price for oil slid 17% for the month thanks to weak demand from Europe. Interestingly, the Industrials had been getting pummeled, but they’ve started to stabilize a bit in the past few weeks.
Tied to the downturn in cyclical stocks is the amazing strength of Treasury bonds. On Thursday, the yield on the 10-year Treasury bond got as low as 1.54% which is the lowest yield in the history of the United States. The previous low came in November 1945, and that’s when the government worked to keep interest rates artificially low. A little over one year ago, the 10-year yield was over 3.5%. Some analysts are now saying the yield could soon fall under 1%.
Don’t blame the Federal Reserve for the current plunge in yields. While the Fed is currently engaged in its Operation Twist where it sells short-term notes and buys long-term bonds, that program is far too small to have such a large impact on Treasury rates. The current Treasury rally is due to concerns about our economy and the desire from investors in Europe to find a safe haven for their cash. I strongly urge investors to stay away from U.S. Treasuries. There’s simply no reward for you there. Consider that the real return is negative for TIPs that come due 15 years from now. Meanwhile, the S&P 500 is going for 11 times next year’s earnings estimate. That translates to an earnings yield of 9%.
The latest swing in opinion seems to believe that Greece will give staying in the euro another shot. It’s hard to say what will happen since we have new elections in two weeks. Still, I think the country will at least try to keep the euro. The reason is that Greece’s economy is very small compared to the rest of Europe. If it leaves the euro, the headaches involved will be too much to bother with.
The real issue confronting Europe is Spain’s trouble which can’t so easily be swept under the rug. Their banking system is a mess. Think of us as reliving 2008 with Greece being Lehman Brothers and Spain being AIG. The major difference with this analogy is that Europe may not be able to bail out Spain even if it wanted to. So far, the Spanish government is putting up a brave front and is strongly resisting any form of a bailout. The politicians there obviously see how well that played out with public opinion in Greece.
In Germany, the two-year yield just turned negative (ours is still positive by 27 basis points). While much of Europe is in recession (unemployment in the eurozone is currently 11%), and China’s juggernaut is slowing down (this year may be the slowest growth rate since 1999), there’s still little evidence that the U.S. economy is close to receding. We’re just growing very, very slowly.
The stock market performed terribly in May. The Dow only rose five times for the month which is the fewest up days in a month since January 1968. The S&P 500 had its worst month since last April. But we need to remember that the U.S. dollar was very strong last month. It’s probably more correct to say that the dollar is less weak than everybody else, but that still translates to high prices for dollars. So in terms of other currencies, the U.S. equity market didn’t do so poorly.
Jos. A. Bank Clothiers Disappoints
We had one Buy List earnings report this past week: Jos. A. Bank Clothiers ($JOSB). The company had already told us that the quarter was running slow, so that muted my expectations. For their fiscal Q1, Joey Bank earned 53 cents per share which missed Wall Street’s consensus by nine cents per share. Quarterly revenue rose by 4.2% to $208.91 million. But the important metric to watch is comparable stores sales, and that fell by 1%. That’s not good.
Shares of JOSB dropped on Wednesday and stabilized some on Thursday. I’m not happy with how this company is performing and it’s near the top of my list for names to purge from the Buy List for next year. Still, I won’t act rashly. The company has said that this quarter is off to a good start: “So far the second quarter has started out much better than the first quarter. For May, both our comparable store sales and Direct Marketing sales are up compared to the same period last year, continuing the positive trend established in the last five weeks of the first quarter. However, Father’s Day, the most important selling period of the quarter, is still ahead of us.” I’m lowering my buy price from $52 to $48 per share.
Shares of Bed Bath & Beyond ($BBBY) broke out to a new all-time high this past week. On Tuesday, the stock got as high as $74.67. It’s our #1 performer for year and is up nearly 25% YTD. The stock is an excellent buy below $75 per share, but I won’t move the buy price until I see the next earnings report which is due out on June 20th.
Two other Buy List stocks I like right now are Ford ($F) and Oracle ($ORCL). Ford has been doing so well that it’s actually having a hard time keeping up with demand. I’m expecting a strong earnings report from Oracle later this month. The May quarter, which is their fiscal fourth, is traditionally their strong quarter. Oracle is an excellent buy under $30 per share.
Before I go, let me say a quick word about Facebook ($FB). In last week’s CWS Market Review, I told you to stay away from the stock, and I was right as the shares have continued to fall. The stock got as low as $26.83 on Thursday. I don’t think Facebook is an attractive stock to own until it reaches $17 to $20 per share. Until then, keep your distance!
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!
– Eddy
Posted by Eddy Elfenbein on June 1st, 2012 at 9:18 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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