Archive for October, 2012

  • The Market Breaks Its Streak
    , October 22nd, 2012 at 10:24 am

    The stock market is currently up a little bit this morning. On Friday, the Dow plunged 205 points which made it the worst day for the index since June 25th. That broke a run of 81 straight days without a 1% decline. Bespoke Investment Group notes that that’s only the 19th time since 1900 that the Dow has gone 80 days without a 1% drop (via Steven Russolitto). Historically, the market hasn’t done well in the period after breaking a long streak like this. The S&P 500 also closed a hair below its 50-day moving average.

    The good news for our Buy List this morning is that Wright Express ($WXS) was upgraded to neutral at JPMorgan. The stock is up over 3.3% today.

    Here are some numbers on earnings season so far: According to Bloomberg, 69% of the S&P 500 companies that have reported so far have topped expectations. The average earnings beat is coming in at 4%. The sour note is that sales are only growing at 1.8%. The most surprising fact is that for the first time in 17 years, U.S. stocks are the top asset category.

    I have a correction to the earnings dates I had in the last CWS Market Review. I had said that CR Bard ($BCR) reports today. My bad. The company will report earnings tomorrow along with AFLAC ($AFL) and Reynolds American ($RAI).

  • Morning News: October 22, 2012
    , October 22nd, 2012 at 5:21 am

    German Economy to Slow Significantly

    EU Power Struggle Haunts Mersch as ECB Women Row Looms

    EU To Propose Bank Resolution Agency In 2013

    Greece Austerity Diet Risks 1930s-Style Depression

    Intervention Can’t Stop Strong Hong Kong Dollar

    Yen Declines on Japan Stimulus Bets as Euro, Commodities Advance

    BP Near Deal to Sell Assets to Rosneft

    Rupert Murdoch Looking To Buy LA Times, Chicago Tribune

    Apache LNG Plan in Limbo

    Disney, Struggling to Find Its Digital Footing, Overhauls Disney.com

    Big Brewers Chase U.S. Cider Growth on Craft Beer Explosion

    Buy Reviews on Yelp, Get Black Mark

    NBC Finds Itself in Unfamiliar Territory: On Top

    Credit Writedowns: Raghuram Rajan Is Right About The Perils Of Today’s Monetary Policy

    Jeff Carter: Green Energy, Bankrupting the Taxpayer

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  • It’s Going to Be Close
    , October 19th, 2012 at 2:36 pm

    An hour and a half till the close. The current 50-day moving average is 1,433.44. We haven’t closed below the 50-DMA since June 28.

  • The Numbers Since 1987
    , October 19th, 2012 at 12:10 pm

    Since 1987, the Dow has gained 679.24% or 8.56% annualized. Including dividends, the Dow has gained 1,376.26% or 11.37%. Dividends have added 89.45% or 2.59% annualized.

    Over the last 25 years, the Consumer Price Index has risen 101.76% or 2.85% annualized. That’s from September 1987 to September 2012, since we won’t get the October CPI until next month.

    In real terms, the Dow has returned 631.70% since the crash, or 8.29% annualized.

  • So How Predictable Was 1987?
    , October 19th, 2012 at 10:02 am

    Twenty-five years on, any investor has to wonder, “how predictable was the market crash of 1987?” We’ve never seen anything quite like it. Following the meltdown, of course, we soon learned that lots of folks had apparently warned us. After the financial crisis of four years ago, I was surprised to hear how obvious it all was. (Unfortunately, no one ever told me.)

    But what I find interesting in 1987 is seeing how arbitrary it all seemed. In 1987, there were several unusual events that all seemed to coalesce before the plunge. Southern England, for example, had one of its worst storms in centuries. The morning of the crash, the WSJ ran a chart showing the rise in the Dow compared with the rise during the 1920s. Alan Greenspan had only been on the job for two months before the crash.

    On October 14th, the market was rattled by the high trade deficit report. The bond market took a big hit the next day. On Friday the 16th, the Treasury bond broke the critical 10% mark.

    Over the weekend, Jim Baker, who was the Treasury Secretary, told the Germans to “either inflate your mark, or we’ll devalue the dollar.” Gary Alexander writes:

    On Sunday, October 18, Baker went on the Sunday morning talk shows, where he said that the U.S. “would not accept” the recent German interest rate increase. Later, an unnamed Treasury official said we would “drive the dollar down” if necessary. These were fighting words that panicked the market.

    Some said that Baker’s rash words, more than anything else, caused the Monday market crash: Jacques Delors, president of the European Commission, compared Baker’s remarks to “a pyro-manic fireman. When you’re living on the edge of the volcano, you don’t light matches.” Economist Pierre Rinfret also blamed Baker for the crash: “The Secretary of the Treasury started one of the worst panics in the history of the stock market.” Noted trader Jimmy Rogers agreed: “The crash had nothing to do with program trading or arbitrage or investment insurance. Greenspan and Baker simply panicked and blew it.”

    The rest of the world crashed long before New York opened that Monday. The market day began in Asia, where Monday opened with a 33% drop in Singapore, a 17% loss in Tokyo and 11% down in Hong Kong – a market which closed for the rest of the week. Europe fared no better, with a 22% drop in London, 14% in Zurich and 13% in Frankfurt. Hearing this news over their breakfast coffee, New York traders were bearish from the start, as the market dropped 104 points in the first hour alone. By the middle of the day, the market held its losses to between 100 and 200 Dow points. But after 2:00 p.m., the market lost 100 points each half hour, reaching a 376 point drop by 3:30pm and a 508-point drop at the closing.

    Here’s a chart showing the relative strength of utility stocks and transportation stocks in the period leading up to the crash. It’s simply the Dow Transportation Average divided by the Dow Industrials (red), and the Dow Utility Average divided by the Dow Industrials (blue). When the lines are heading up, the sectors are outperforming the market. When they’re going down, then they’re trailing the market.

    In the months leading up to the crash, investors dramatically rotated out of Utilities and into Transports. In other words, they were abandoning safe sectors with high dividends and crowding into riskier cyclical sectors. This is a good way of tipping us off that the market was becoming riskier. In fact, the two lines seem to be perfectly negatively correlated.

    Once the crash happened, everything shot back to normal. Still, this only tells us that investors had become more aggressive. It never told us when it would end.

    The 1987 crash also showed strange numerical connections. For example, people who follow the Elliott Wave stuff which is based on Fibonacci numbers saw lots of signs. For example, the year 1987 came 55 years after the massive low in 1932, plus 21 years after the downturn of 1966, 13 years after the big low in 1974 and five years after the low in 1982. Personally, I think this is another example of people trying to find patterns in randomness, but some people take it very, very seriously.

    Historically, the stock market’s one-day standard deviation is about 1%. A drop of 22% is 22 standard deviations below the mean. Statistically, that’s so rare it would take eons for it to happen. The issue, of coure, is that financial markets don’t follow normal distributions but they can appear to. With finance, as with many areas, we don’t know what we don’t know.

    The case of 1987 is another reason for my investing philosophy of investing in high-quality companies and not being rattled by short-term volatility — even extreme moves. Twenty-five years on, the Dow has gained 679.2%.

  • CWS Market Review – October 19, 2012
    , October 19th, 2012 at 7:09 am

    “There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.” – Peter Lynch

    Hold on, folks. We’re about to enter the high tide of earnings season. So far, the Q3 earnings reports have been pretty decent. Not great, but decent—although there have been some notable exceptions such as Google ($GOOG), which lost a cool $60 yesterday.

    I’m happy to see that our Buy List continues to do very well. AFLAC ($AFL) and Fiserv ($FISV) just hit new 52-week highs. Hudson City Bancorp ($HCBK) is up over 50% for us in three months. And just as I expected, JPMorgan Chase ($JPM) handily beat Wall Street’s forecast last week. The shares finally broke $43 and are at a new post-Whale high. The bank is clearly doing well, so I’m raising my Buy-Below price on JPM to $45.

    I was also pleased to see Johnson & Johnson ($JNJ) beat its earnings estimate and guide higher for the rest of the year. Few things please me more than the old “beat and guide higher” chorus. On Thursday, the stock got oh so close—just two pennies away—from breaking its all-time high set four years ago. I’m going to raise my Buy-Below on JNJ as well. The stock is a strong buy up to $76 per share.

    The only dud this week was Stryker ($SYK), and honestly, that wasn’t by much. The phony bone company missed estimates by a penny per share and gave mediocre guidance. The company blamed their troubles on—stop me if you’ve heard this one before—weakness in Europe and the medical device excise tax. Still, the stock rallied after its earnings report. Stryker remains a solid buy up to $57.

    In this week’s CWS Market Review, we’ll break down earnings season. Next week, five of our Buy List stocks report, so it’s going to be busy. The good news is that investors are gradually migrating towards riskier assets. On Thursday, the S&P 500 closed less than 0.6% from its highest close since 2007. Still, I think we have a few hurdles to overcome before a sustained rally occurs.

    Deconstructing Third-Quarter Earnings

    According to the latest numbers, 104 companies in the S&P 500 have reported earnings so far. Of that, 75 have topped Wall Street’s estimate, 26 have fallen short and three have reported inline. That’s a pretty good “beat rate.”

    The financial media have gotten in the habit of saying that this earnings season will be the first earnings decline after 12 straight quarters of growth. They may be jumping the gun. I still think earnings have an outside chance of showing a very slight increase over last year’s Q3. On top of that, analysts expect earnings growth to ramp up to 13% for Q4. Analysts have largely stopped lowering guidance over the past few weeks. As of now, Wall Street expects the S&P 500 to earn $114.83 next year. That means the index is going for 12.7 times next year’s earnings estimate, which is very reasonable.

    Once again, we’re witnessing a similar theme: a housing recovery is lifting consumers. This week, we learned that housing starts rose to their highest level in four years. Housing starts are up 82% from their recession low. The Commerce Department reported that retail sales for September rose more than had been expected, and the number for August was revised higher to show the strongest growth since 2010.

    This probably hints that the holiday season will be a good one for retailers, which is something we haven’t seen in quite some time. I think it’s interesting to note that toymakers Hasbro ($HAS) and Mattel ($MAT) have both rallied strongly since the summer. Someone’s expecting Santa to be extra-generous this year. A strong holiday season should also bode well for Bed Bath & Beyond ($BBBY).

    The market was also buoyed by a strong industrial production report. This is welcome news because the last IP report was a dud. I’ve also been impressed by the strength of financials stocks. Since June 4th, the Financial Sector ETF ($XLF) is up more than 22%.

    Beware the Dreaded Triple Top!!

    We don’t want to get ahead of ourselves. While the economy is showing some emerging signs of strength, we still have a long way to go. The problem is that investors have crammed themselves into risk-averse assets like U.S. Treasuries.

    There’s also the issue of stretched profit margins. Companies have done a good job of growing their profits by cutting overhead. In other words, cutting jobs. While the earnings beat rate has been pretty good this earnings season, the revenue beat rate is only running at 42%. That’s 20% below the long-term average. What this tells us is that companies still aren’t seeing impressive top-line growth. You can’t cut your way to prosperity indefinitely. At some point, companies need to see more bodies come through the front door.

    I’m also concerned that the market is heading into a perfect example of a Triple Top. For the uninitiated, a Triple Top is a chart pattern when a stock or index hits three eerily similar peaks very close together, but can’t break though. (See the chart below.) It’s like a fullback trying to bust over the goal line on a second and third effort.

    A Triple Top grabs traders’ attention because it’s often, though not always, a bearish sign. It’s as if the bulls tried and tried, but finally surrendered to the bears. Again, I caution you not to take these chart patterns too seriously, but the unfortunate fact is that many traders swear by them—and as we learned last May, it’s hard to argue facts and logic with an angry mob that’s out for blood (or worse, short-term profits).

    The first sign that the chart followers were in charge came last week, when the S&P 500 came within a hair’s breath of touching its 50-DMA moving average. The index actually fell below it during the day on Friday, but closed just above it. Once the line held, that was a clear signal. The stock market proceeded to rally on Monday, Tuesday and Wednesday, which built the final “up” stage of a Triple Top.

    If we can’t make a new high soon, then the next level of support is the 50-day moving average, which is currently at 1,432.87. If the S&P 500 drops below that, then I’m afraid we may be in for another leg down. As always, the key for us is to focus on high-quality stocks at good prices. Once the election passes, I think the environment will be much better for us.

    A Look at Next Week’s Earnings Reports

    Now let’s look at some of our upcoming Buy List earnings reports. Not everyone has announced when they’ll report, but it appears as if we’re going to have five earnings reports next week.

    On Monday, CR Bard ($BCR) will lead off the parade when it reports Q3 earnings. Wall Street wasn’t pleased with Bard’s number from three months ago, and it punished the shares in the near term. But Bard is a high-quality stock, and it soon recovered. For Q3, the company told us to expect earnings to range between $1.60 and $1.64 per share. I suspect that they might be low-balling us a little bit, which I can understand after the last earnings report.

    The good news is that Bard stuck by its full-year guidance of 3% to 4% EPS growth, which translates to $6.59 to $6.66 per share. The company also raised its dividend in June to 20 cents per share. I’m looking for a good earnings report from Bard, but what I really want to see is a higher guidance for Q4 (meaning $1.75 to $1.80 per share). CR Bard remains a very good buy up to $112 per share.

    On Tuesday, AFLAC ($AFL) and Reynolds American ($RAI) are due to report. I’m happy to see that AFLAC has quietly rallied. The stock reached a new 52-week high on Thursday. In July, AFLAC told us to expect Q3 earnings to range between $1.64 and $1.69 per share. That seems slightly high but it’s very possible for them to hit assuming a favorable yen/dollar exchange rate.

    In July, the company narrowed its full-year guidance to $6.45 to $6.52 per share. That’s a lot of money for a stock at $50. As I’ve said before, I think the market unwisely treats AFLAC as if it’s a proxy on the health of Europe. That’s a big mistake. The company has shed almost all of the bum assets in Europe.

    The key fact many investors are overlooking is that AFLAC has said that earnings growth should accelerate next year. In fact, I think AFLAC could earn as much as $7 per share in 2013. On Tuesday, I also expect the company to raise its dividend, as it has for every year since 1983. AFLAC remains a strong buy anytime the shares are below $50. Don’t chase this one.

    I’m not so concerned about the earnings report from Reynolds American. The Street expects 79 cents per share. The important point is their full-year trend. Reynolds has said they see 2012 EPS ranging between $2.91 and $3.01. The company is right on track to hit that. I’ll also be curious to hear any guidance for 2013. RAI currently yields 5.52%. Reynolds is a good buy up to $45.

    On Wednesday, CA Technologies ($CA) and Hudson City Bancorp ($HCBK) are due to report. In July, CA lowered the upper-end of their full-year guidance. The company now expects full-year earnings of $2.45 to $2.50. The shares currently yield just over 4%. Look for a good earnings report. CA is a good buy below $30.

    Hudson City has been our all-star recently. The little bank is up more than 50% in the last three months! The latest surge was thanks to a blow-out earnings report from merger partner M&T Bank ($MTB). Net income rose by 60% as the bank netted $2.24 per share for the third quarter. That was 38 cents more than the Street’s consensus. Going by M&T’s closing price on Thursday, the buyout ratio values Hudson City at $8.81 per share. HCBK remains a strong buy up to $9.

    That’s all for now. Next week is another big week for earnings. Also, the Fed meets on Tuesday and Wednesday, and we’ll also get our first look at the third-quarter GDP report on 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

    P.S. Today is the 25th anniversary of the Crash of 1987. On October 19, 1987, the Dow lost 508 points or 22.6%. That’s still the largest one-day percentage loss in history. I should add that since then, the Dow has gained 679.2%.

  • The Al Smith Dinner
    , October 19th, 2012 at 12:08 am

  • Morning News: October 19, 2012
    , October 19th, 2012 at 12:00 am

    Italy and Spain Win Surprise Bond Relief

    Black Monday Echoes With Computers Failing to Restore Confidence

    Initial Jobless Claims Rise

    Holiday Price-Matching Could Backfire for Retailers

    Starbucks Opens First India Store in Mumbai

    Orient-Express Surges After Indian Hotels Takeover Offer

    Yahoo To Exit South Korea In First Asian Pullout

    Google Under Pressure to Wring Sales From Mobile Users

    BP Gets $25 Billion Bid for Russian Firm Stake

    Morgan Stanley Beats Estimates On Big Bond Trade Gains

    U.S. Oil Boom Upends Nigerian Exports

    AMD Swings To Loss, Laying Off 15% Of Workforce

    At Newsweek, Ending Print and a Blend of Two Styles

    Joshua Brown: Stocks Skyrocket on Horrendous Earnings

    Cullen Roche: Predicting the Direction of the Tide….

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  • Is Coke Being Valued Like a U.S. Treasury?
    , October 18th, 2012 at 11:19 am

    I’m still surprised by the high price that Coca-Cola ($KO) is fetching. The stock closed yesterday at $37.74 which isn’t far from a 52-week high. I just don’t see how that’s justified.

    Let’s look at some numbers. Earlier this week, the company reported Q3 earnings of 51 cents per share which matched Wall Street’s estimate. As we’ve come to expect with companies that do a lot of business outside the U.S., the strong dollar took a bite out of Coke’s profits. Revenue rose only 1% to $12.34 billion which was $70 million shy of Wall Street’s estimate. The rising greenback knocked five percentage points off revenue growth and seven points off operating income growth. That’s unfortunate but I doubt that headwind will last.

    Still, Coke is going for 17.1 times next year’s earnings estimate. I just don’t see how Coke can justify an above-market premium in an environment like this. Coke’s earnings growth for the next five years is estimated to be 7.43% which is 2.75% less than what’s expected of the S&P 500.

    The current quarterly dividend is 25.5 cents per share which makes the payout ratio exactly 50%. For the S&P 500, the payout ratio is running close to 30%. Even with that high payout ratio, Coke’s dividend only comes to 2.7%. Many high-quality stocks pay yield much higher than that right now.

    By my math, Coke’s fair value is close to $26. Perhaps investors see the Coke brand as similar to a U.S. Treasury. After all, there aren’t many better representatives of American capitalism than Coca-Cola. I think this way of thinking is a huge mistake, but I can see how investors can reason a 17 P/E for Coke in a world where a five-year Treasury has a P/E of 130.

    The major mispricing in the market right now is that investors are vastly over-paying for security, and they are under-paying for risk. I think this will slowly unwind—in fact, it’s already started. That explains why U.S. stocks have advanced this year even as earnings estimates have come down. The market is slowly reverting to normal.

  • Morning News: October 18, 2012
    , October 18th, 2012 at 6:02 am

    EU Summit Highlights Financial Divide

    Spain Banks Face More Pain as Worst-Case Scenario Turns Real

    Economists React: China Growth Slows, But Other Numbers Up

    SEC Proposes Rules For Security-Based Swap Dealers

    Housing Industry Recovering Faster Than Many Economists Expected

    Crude Trades Near One-Week High in New York on China Optimism

    Oil’s Second-Biggest Deal Nears as BP, Rosneft CEOs Meet

    Kinder Morgan Energy Partners Profit Soars

    Bank of America Posts a Profit, Though Slight

    EBay’s Focus on Mobile Apps Helps Lift Revenue 15%

    AmEx Profit Meets Estimates as Card-Spending Growth Slows

    Man Group Outflows Increase to $2.2 Billion on ‘Subdued’ Sales

    Former Citigroup CEO Vikram Pandit Could Forgo $33M As Exit Voids Retention Plan

    Jeff Miller: Information You Need…….And Do Not Get!

    Phil Pearlman: Johnson & Johnson Has Been Going Sideways Forever

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