Archive for February, 2013

• CWS Market Review – February 22, 2013
  Eddy Elfenbein, February 22nd, 2013 at 6:47 am

  “Lost in a gloom of uninspired research.” – William Wordsworth

  As soon as I started joking about the stock market’s slumber party, we should have known something was up. In last week’s CWS Market Review, I said that trading had become dead boring; intra-day volatility had fallen to a 26-year low. Sure enough, the bears woke up from their hibernation this week and feasted on freshly grilled bull.

  

  On Wednesday, the S&P 500 dropped 19 points—its biggest drop this year. The selling continued on Thursday, when the index lost another 9.53 points and briefly dropped below the crucial 1,500 barrier. In just two days, the S&P 500 shed more than $250 billion.

  No, the Fed’s Bond Buying Isn’t about to End

  So what went wrong? As is often the case, we can turn our eyes towards the Federal Reserve. On Wednesday, the central bank released the minutes from their late-January meeting. You think the jargon-packed minutes of a meeting of economists can’t evoke excitement? Well, welcome to Planet Wall Street, my friend.

  What happened is that several members of the policy committee said the Fed should alter the size of its bond purchases in response to the economy. In other words, some of Bernanke’s posse are talking about pulling back on all the bond buying they’ve been doing.

  It’s not exactly a state secret that Wall Street loves Quantitative Easing. In the Street’s eyes, the more the better, and that’s certainly been a major factor in causing the S&P 500 to double in less than four years. So once there was any hint that it might come to an end, the bears rushed in to take charge.

  Here’s what we know. Fact one: The Fed is buying tons of bonds to prop the economy. Fact two: To borrow from LTC Kilgore, someday this policy is going to end. What we don’t know is when. All the Fed has said is that there should be “substantial” improvement in the labor market. While there’s been some improvement in the labor market, in my opinion, we’re still a long, long, loooong way from calling it substantial. As far as 0% interest rates go, the Fed has said that it’s pledged to that as long as unemployment is above 6.5% and inflation is below 2.5%. That’s at least a year away. Probably more.

  What the minutes told us is that there are some voices within the Fed talking about a QE Exit Strategy. This really shouldn’t be a surprise. Instead of a sudden halt, they’re considering scaling back some of the purchases. Let me make something clear, something which has been overlooked: There was nothing in the Fed minutes about ending QE.

  Here’s my take. The Fed minutes weren’t a reason to sell. Instead, they were a reason for people who had already been looking for a reason to sell to sell. Given that the S&P 500 has climbed for seven weeks in a row, I certainly understand that there are folks looking to clear out some positions.

  Here’s the odd part: The Fed minutes were basically a dumb reason to make some smart moves. There’s no reason to fear that the Fed is going to pull the rug out from under the economy. But there is a good reason for investors to expect a modest pullback, which I’ve talked about for a few weeks. Earnings expectations are probably too high. I’ve also been disturbed by the fact that the low-quality stocks are leading the rally. This isn’t so troubling for us, since we concentrate on high-quality names, but our Buy List has lagged the broader market this month. That tends to happen when the market gets ahead of itself.

  There’s really nothing in the Fed’s minutes that anyone should find surprising, at least anyone who’s been paying attention. As far as inflation goes, that’s not a worry at all. This week’s CPI report was very tame. In fact, there’s some emerging evidence that spiraling healthcare costs might finally be coming under control. Of course, the irony of the Fed minutes is that they’re talking about reining in QE because the economy is doing well (or at least better).

  The key to watch is employment. That’s part of the Fed’s dual mandate, and the part that Congress is most interested in. The unemployment rate is currently at 7.9%, and that’s not counting the folks who have stopped looking for work. I’d say that the jobless rate would have to fall to 7% before they entertained the idea of cutting back on Quantitative Easing. Not ending it, mind you, but just trimming its sails. For now, the Fed is on the side of higher stock prices.

  What Would Reduced QE Mean for Investors?

  Let’s look ahead and talk about what will happen when the Fed finally takes away the punchbowl. The biggest impact would be in the gold market, and we got a preview of that this week. A drop in gold makes sense because we’re talking about higher real interest rates. The higher interest rates go above inflation, the worse it is for gold.

  Interest rates have been close to or below inflation for years, and that’s been great for gold. However, the yellow metal hasn’t made a new high in nearly 18 months. Gold is down more than $200 an ounce since October, and it recently fell for five days in a row, including a $40 plunge on Wednesday. Like I said, it’s going to be a while before the Fed starts raising interest rates, but once it does, it won’t be pretty for gold.

  Reduced QE would also be a big negative for cyclical stocks. The Morgan Stanley Cyclical Index (CYC) did much worse than the rest of the market on Wednesday. The CYC has now trailed the market for four days in a row. The Homebuilder ETF (XHB), a classic cyclical sector, dropped more than 4.4% on Wednesday. On our Buy List, cyclicals like Ford (F) got smacked around. Shares of Ford are now down to $12.39, which, I should add, is an excellent deal. Ford currently yields 3.2%, which is roughly 3.2% more than Bernanke.

  Another victim of the Fed’s minutes was obviously low volatility. On Tuesday, the Volatility Index (VIX) reached a six-year intra-day low. From Tuesday’s close to Thursday’s close, the VIX jumped more than 23%. Not bad for two days’ work. Of course, this is an increase from very, very low to very low. Interestingly, the folks in the futures pits aren’t convinced that volatility is on its way back. I think they’re right. QE will be around for a while, and so will low volatility.

  Medtronic Is a Buy up to $48 per Share

  We only had one Buy List earnings report this week, and that came from Medtronic (MDT). I’ve been impressed by how well the medical-device maker has been doing for us lately. At one point, MDT was up more than 15% on the year. In January, we got good news from Medtronic when the company raised the low end of their full-year guidance by four cents per share. They now see earnings coming in between $3.66 and $3.70 per share. (Note that MDT’s fiscal year ends in April.)

  On Tuesday, Medtronic reported that they earned 93 cents per share for their third quarter, which was two cents more than Wall Street’s consensus. That’s a nice increase from the 84 cents per share they earned one year ago. Sales rose by 2.8% to $4.03 billion, which was a teeny bit below consensus.

  Despite the good earnings news, the shares lost ground on Tuesday and Wednesday. The two-day loss came to 5%, which I found rather surprising. Apparently, the market didn’t like Medtronic’s weak sales in Europe. The company generates about one-fourth of their total sales from the Old World. Medtronic also experienced a sales decline in their spinal-products business (ick!) and their defibrillators and pacemakers unit.

  There was also good news as Medtronic said that the 2.3% excise tax that’s part of President Obama’s healthcare reform will cost the company $25 million this year, which is half the original projection. I’ll be curious to hear what guidance Medtronic gives for next year. The Street expects $3.86 per share, which I suspect is too conservative. Medtronic remains a very good buy below $48. The company has increased its dividend every year since 1977.

  Nicholas Financial’s Quarterly Dividend

  I want to add a quick note on Nicholas Financial (NICK)´s dividend. Perhaps I misunderstood, but I thought NICK’s big $2 dividend late last year was in lieu of all cash dividends for this year. Apparently, that’s not the case. The company just announced another 12-cent quarter dividend. The dividend will be paid on March 29th to shareholders of record as of March 22nd. Going by Thursday’s close, NICK yields 3.62%.

  Before I go, I want to highlight a few stocks on our Buy List that are currently exceptionally good values. Microsoft (MSFT) had a good Q4 report, and the yield is up to 3.35%. As I mentioned before, shares of Ford (F) have slid back to $12.39. That’s a good price. Remember, Ford doubled their dividend a few weeks ago. Plus, the company just announced that it’s expanding its engine output in the United States. I discussed Bed Bath & Beyond (BBBY) in last week’s issue. BBBY has fallen into the bargain bin; below $58 is a very good price. Last month, I told you not to worry about Moog’s (MOG-A) lower guidance. The stock came within a penny of making a new 52-week high this week. Moog looks very good here.

  That’s all for now. Next week, the government will revise its Q4 GDP report. It’s very likely that the trade data will cause them to revise the original -0.1% to a positive number. It could be as high as 1%. Then on Friday, we’ll get the ISM report for February. The report for January was surprisingly good. Let’s hope the trend continues. 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: February 22, 2013
  Eddy Elfenbein, February 22nd, 2013 at 6:03 am

  European Countries Will Miss Deficit-Reduction Targets in 2013

  EU Says Euro Zone to Shrink in 2013 as Unemployment Rises

  BOE Plans to Sign Yuan Currency Swap Deal With China

  Fattened Margins Seen Shrinking 40% at Banks

  SEC Boosts Tally of Enforcement Successes With Routine Actions

  U.S. Food-Inflation to Ease on Bigger Grain Crops, USDA Says

  Federal Spending Cuts Threaten Delays in Air Travel

  Wal-Mart, Despite Profit Gain, Says Rise in Payroll Tax Hindered Shoppers

  AgBank to Add Traders as Dim Sum Sales Seen Rising

  Air France-KLM Net Loss Widens

  Apple Preferred Stock Plan Would Help Value, Einhorn Says

  Sign of a Comeback: U.S. Carmakers Are Hiring

  Nielsen Adjusts Its Ratings to Add Web-Linked TVs

  Credit Writedowns: A Brief History of the Chinese Growth Model

  Cullen Roche: Did Keynes Understand Endogenous Money?

  Be sure to follow me on Twitter.

• More Good News on Healthcare Costs
  Eddy Elfenbein, February 21st, 2013 at 11:15 am

  Today’s CPI report showed that prices were unchanged last month. Economists were expecting an increase of 0.1%. The core rate, which excludes food and energy prices, was up 0.3%.

  We also got the latest data point on the trend I discussed earlier this week. Medical prices are largely matching core inflation. Actually, this is far too short to call a trend, but it is a hopeful sign.

  

• The Fed’s Minutes Scare the Market
  Eddy Elfenbein, February 21st, 2013 at 11:05 am

  The broadly expected sell-off may finally be happening. The S&P 500 fell 19 points yesterday and it’s down another 7.5 points today. The index may even drop below 1,500 very soon.

  What had investors in a bad mood is possibly signals from the recent Fed minutes that the central bank is considering pulling back on its Quantitative Easing policy. Personally, I think folks are using this rather tame bit of news as an excuse to exit some positions. The markets have risen quite rapidly so I understand the temptation.

  The odd part is that what the Fed really said is that the economy is improving and because of that, it may downshift on the amount of their bond purchases. So the market is down on somewhat optimistic economic news.

  Perhaps the Gold market had suspected this news was going to happen because the price of the precious metal had been pulling back. If the Fed takes its foot off the pedal, that means real interest rates would rise and gold would take a tumble. Gold fell for five days in a row and it plunged $40 per ounce on Wednesday.

  At its high in September 2011, gold got to $1,923 per ounce. Today, it’s down to $1,579 per ounce. Gold is also close to a death cross which is when the 50-day moving average falls below the 200-day moving average.

• Morning News: February 21, 2013
  Eddy Elfenbein, February 21st, 2013 at 7:44 am

  Euro-Area Manufacturing, Services Contraction Worsens

  Obama Rated at 3-Year High in Poll, Republicans at Bottom

  Gasoline Futures Fall From Highest in More Than Four Months

  Fed Signals Possible Slowing of QE Amid Debate Over Risks

  Fed Comments Rattle Markets

  Wal-Mart Holiday Profit Rises Despite Lackluster Sales

  Office Stores’ Merger News Jumped Gun

  New York Times Co. Puts Boston Globe Up for Sale

  As Construction Begins Rebound, Looming Labor Shortages Raise Concern

  Lego Profit Soars 35% as Toy Bricks for Girls Drive Sales Growth

  Christie Lets Atlantic City Bet Ride as Revel Reorganizes

  MGM China Rises on Special Dividend

  With PlayStation 4, Sony Aims for Return to Glory

  Joshua Brown: QOTD: Advice is Not a Transaction

  Roger Nusbaum: Understanding the Bull Market

  Be sure to follow me on Twitter.

• Morning News: February 20, 2013
  Eddy Elfenbein, February 20th, 2013 at 7:01 am

  King Defeated in QE Vote as BOE Broadens Policy Debate

  Monti’s Market Votes Worthless as Berlusconi Gains

  Greek Unions Walk Out in Fresh Austerity Protest

  S&P Leaves Japan Rating Unchanged as Abe’s Task Seen Critical

  Gasoline Pump Prices Soaring on Refinery Repairs, Oil Rally

  With Cutbacks Days Away, Obama Tries to Pressure G.O.P.

  Are REITs Overexposed To The Big Box Office Supply Chains?

  Dell Sales Top Estimates as Company Prepares for Buyout

  Taking a Longer Look at Buffett and Berkshire’s Latest 13F Filing

  Marriott Fourth-Quarter Earnings Increase on U.S. Demand

  Staples May Be Winner in Office Depot-OfficeMax Merger

  Credit Agricole Posts Record Fourth-Quarter Loss

  Maker’s Mark Reverses Decision to Water Down Whiskey

  Jeff Carter: What Should We Do About Higher Gas Prices?

  John Hempton: Linn Energy: A Bizarre Definition Of Distributable Cash Hides Really Clapped Out Assets

  Be sure to follow me on Twitter.

• Is Healthcare Inflation Simmering Down?
  Eddy Elfenbein, February 19th, 2013 at 11:03 pm

  On Thursday, the government will release the CPI numbers for January. I’m not worried about overall inflation which has been extremely tame. But deep within the report, I’m very curious to see how healthcare costs are doing.

  As you’re probably aware, healthcare costs continue to rise every year. Here’s a look at the relative inflation of healthcare. This is the healthcare component of the CPI divided by core CPI. In other words, this isn’t just inflation — it’s the healthcare inflation that’s on top of inflation.

  

  This is a very important. Nearly every issue facing our economy and finances at some point intersects with the problem of rising healthcare costs. If that is somehow brought under control, the outlook completely changes.

  There’s some emerging evidence for optimism on the cost containment front (NYT: “Slower Growth of Health Costs Eases Budget Deficit“). Here’s the same chart above, but I’ve zoomed in to show the last few years.

  

  The line is still rising, but the last few dots are rather flattish. This is obviously far too early to call a trend, but it’s something worth keeping our eyes on.

• Nicholas Financial to Pay 12 Cent Dividend
  Eddy Elfenbein, February 19th, 2013 at 8:05 pm

  Perhaps I misinterpreted this, but I was under the assumption that Nicholas Financial‘s ($NICK) monster dividend was in place of its dividends for 2013. Apparently not. NICK announced another 12 cent quarterly dividend today. The dividend will be paid on March 29th to shareholders of record as of March 22nd.

  Peter L. Vosotas, Chairman and CEO noted, “Our capital position and continued confidence in our earnings capability played a large part in the Board of Director’s decision to declare a cash dividend.” Subject to market conditions and profitability targets, the Company anticipates it will continue to declare quarterly cash dividends in the future, however no assurances can be given.

  The stock rose to $13.25 today. That’s a yield of 3.62%.

• Berkshire Hathaway Breaks $150,000
  Eddy Elfenbein, February 19th, 2013 at 7:56 pm

  On Friday, for the first time ever, shares of Berkshire Hathaway ($BRKA) closed over $150,000. In December 2007, the stock popped its head above $150K a few times, but was never able to hang on by the close. Then came bad times. Not that long ago, September 2011 to be precise, BRKA dropped below $100,000.

  Since 1998, Berkshire has lost a lot of its historical super mojo. Still, it’s been a good performer. Berkshire first closed at $15,000 on May 27, 1993 — almost 20 years ago. The stock first broke $1,500 only eight years before that on March 19, 1985.

• Total Investor Yield
  Eddy Elfenbein, February 19th, 2013 at 12:40 pm

  I mentioned this before but Shawn Tully has an interesting article on the concept of total yield — the dividend yield plus buybacks.

  As I’ve written many times before, I’m not a fan stock buybacks. As a shareholder, I’d much rather have the cash in hand. A major issue is that too many companies wash away any benefit of share buybacks with massive executive stock compensation.

  In theory, I really like the idea of total shareholder yield, but I’m afraid that it needs to be adjusted to benefit companies that primarily use share repurchases to benefit shareholders. By the way, DirecTV ($DTV) is a good exmaple of a company that truly lowers its outstanding shares.