Archive for February, 2013

• How Overpriced Were Stocks in 1929?
  Eddy Elfenbein, February 12th, 2013 at 10:46 am

  Scott Sumner recently wrote, “studies have shown that stocks were not overpriced in 1929.” This observation surprises many people. They’ve been led to assume to stocks were wildly overvalued in 1929, but carefully looking at the evidence shows that that really isn’t the case.

  While stocks did soar during the 1920s, so did earnings and dividends. Stocks exploded higher in 1929, especially after April. The Federal Reserve also stepped in by raising rates a few times.

  

  The chart above is from data from Robert Shiller’s website. The S&P 500 is the black line and it follows the left scale. The one-year trailing earnings and dividends follow the right scale. The lines are scaled at a ratio of 16-to-1, so whenever the lines cross, the earnings multiple is exactly 16 or the dividend yield is 6.25%.

  I think a good way to view bear markets is to divide them into two categories. One is when prices far overshoot fundamentals. The other is when fundamentals crumble beneath prices; 1987 and 2000 are examples of the former, 1990 and 2007 are examples of the latter. I would say that 1929 is another good example of fundamentals falling apart beneath prices. So were stock prices overvalued in 1929? I think it’s fair to say that stock prices became “elevated,” but I don’t believe it was anything truly excessive.

  According to the monthly Shiller data, the peak P/E Ratio, based on one-year trailing earnings, was 20.2 in September 1929. That’s high but hardly out of orbit. The dividend yield for September was 3%.

  Bear in mind that I’m speaking from the standpoint of an investor at the time. Of course, investors then wouldn’t have known that the Federal Reserve engaged in an historic blunder by tightening as things got worse which, in turn, made things even worse. But for a person in 1929, there was little reason to believe that stock prices had reached the moon. In early 2000, by contrast, it was quite obvious that tech stocks bore little relation to their long-term value. They were going up simply because they were going up. As Herb Stein said about unsustainable trends, they eventually come to an end.

  Let me add that any look at the market’s value is inherently subjective. There’s no one perfect measure of something’s worth. After all, if there were one, we wouldn’t need markets. In the end, something is worth how much someone else is willing to pay for it. So I’m not saying stocks were perfectly valued or undervalued in late 1929. I’m saying that there was no obvious signal at the time that stocks were overvalued.

  That brings me to Robert Shiller’s CAPE, which is the Cyclically Adjusted Price/Earnings Ratio. That’s the P/E Ratio but based on the average of the last 10 years’ worth of earnings. As I’ve written before, I’m not a fan of CAPE. The issue for me is that stock valuations are inherently cyclical so there’s no need to adjust them for a cycle. With the 1929 example, we can really see the weakness of CAPE.

  The problem is that 10 years prior to 1929, the earnings denominator included the earnings plunge of the early 1920s. That really weighs down the data and thereby elevates CAPE. On the chart, notice how earnings dropped below dividends which is a good sign that the data is a bit messy. If the CAPE were five years instead of 10, the picture would look much different. I used one-year data in my chart which I think gives us a better picture of what was truly happening.

  Historically, CAPE doesn’t have a great track record. It showed that stocks were rather high in 1995 at the start of the bull market, and it showed that prices were fairly valued only weeks after the March 2009 low.

  Recently I wrote about the little-appreciated bull market of 1949-55. I think it’s ignored because it didn’t come to a crashing end. The 1929 market gets the opposite effect. Because it came to a crashing end, people assume stocks were outrageously priced. The ultimate judge of a market shouldn’t be what comes after.

• Morning News: February 12, 2013
  Eddy Elfenbein, February 12th, 2013 at 7:00 am

  World Bank Chief Economist Calls On G20 To Coordinate Policies

  G-7 Won’t Target Exchange Rates Amid Currency War Concern

  ECB Ready to Offset Banks’ Accelerated LTRO Payback

  U.K. Inflation Stays at 2.7% as Price Pressures Mount

  Buyout-Boom Shakeout Seen Leaving One in Four to Starve

  Corn Heads for Longest Losing Run Since 2010 as Output May Climb

  Yellen Says Higher Rates Not Assured After Thresholds Hit

  Karen Mills to step down as head of Small Business Administration

  Barclays Posts $1.3 Billion Loss and Plans to Cut 3,700 Jobs

  Shell Vessels Sidelined, Imperiling Arctic Plans

  Hostess Gets Approval to Auction Twinkies, Drake’s Brands

  UK Fines UBS $15 Million For Failings In AIG Fund Sale

  Samsung Girds for Life After Apple in Disruption Devotion

  Howard Lindzon: Momentum Monday…The Magic Behind LinkedIn and Tesla Motors

  John Hempton: Another Day – Another Strange Gulfport Energy Related Party Transaction

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• About That Earnings Acceleration….
  Eddy Elfenbein, February 11th, 2013 at 2:28 pm

  One aspect of this market that I’m starting to strongly doubt is the belief that earnings growth is about to ramp up. In other words, the rate of growth will itself increase.

  The chart below shows the S&P 500 (blue line, left scale) along with its earnings (yellow line, right scale). The red line is Wall Street’s forecast (please note: it’s not my forecast, it’s Wall Street’s consensus). The lines are scaled at a ratio of 15-to-1 so whenever the lines cross, the P/E Ratio is exactly 15.

  

  It’s that red line that has me concerned. Wall Street seems to believe it’s about to hook upward. Me? I’m not so sure. For one, profit margins have been pushed about as far as they can go. I can believe that nominal GDP growth will pick up, but nothing close to what would sustain a major bounce in corporate earnings.

  The Street currently sees full-year earnings for the S&P 500 coming in at $111. That’s down from $117 ten months ago. Earnings growth was actually negative for Q3 and Q4 of 2012. Unless we see evidence of an earnings pickup for Q1 2013, I’m inclined to believe the market will earn $100 for all of 2013.

  Is the yellow line going through a minor bump like it did in 1998, or is it hitting a major peak like 2000 and 2007? I should add that if the earnings projections are correct, the S&P 500 is very undervalued here.

• Stocks Go for Seven Straight Up Weeks
  Eddy Elfenbein, February 11th, 2013 at 1:04 pm

  The stock market has now risen for six weeks in a row, and today we’re trying to make it seven. Right now, stocks are mostly unchanged. The S&P 500 is down a bit, but it’s nothing too serious. Just listening to the chatter, it seems like everyone is expecting a pullback to happen at some point. Just when and how much are the only missing pieces.

  There’s a big euro meeting today to discuss what to do over Cyprus and Greece. Then on Friday, the G-20 finance chiefs gather for a meeting in Moscow. The big political item this week will be tomorrow’s State of the Union by address by President Obama. It’s expected that he’ll offer specific proposals about gun control and immigration.

  The next earnings report from one of the stocks on the Buy List will be DirecTV ($DTV) which is due to report on Thursday. Wall Street expects earnings of $1.13 per share. Also on our Buy List, Medtronic ($MDT) made a fresh 52-week high.

• Morning News: February 11, 2013
  Eddy Elfenbein, February 11th, 2013 at 6:59 am

  Europe Threatened With The Slap Of Harsh Reality

  Kuroda Says Additional BOJ Easing Can Be Justified for 2013

  Putin Turns Black Gold to Bullion as Russia Outbuys World

  G-7 Said to Discuss Statement to Calm Currency War Concern

  U.S. Soy Supply at 48-Year Low as Brazil Ships Held

  Investor Aims High With Price For Dell

  American and US Airways May Announce a Merger This Week

  Hakon Agrees to Buy ICA Stake From Ahold for $3.1 Billion

  Samsung Emerges as a Potent Rival to Apple’s Cool

  Novo Nordisk Hit Hard As U.S. Rebuffs Insulin Drug

  Disruptions: Where Apple and Dick Tracy May Converge

  Rating Victims Didn’t Know S&P’s Toxic AAA Born of Greed

  Complex Investments Prove Risky as Savers Chase Bigger Payoff

  Credit Writedowns: Inflationary Pressure In Brazil Is Building

  Epicurean Dealmaker: Skin in Which Game?

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• Stock Market At Inflation-Adjusted All-Time High
  Eddy Elfenbein, February 8th, 2013 at 4:53 pm

  I can’t be absolutely certain of this but I’m reasonably confident in reporting that the total real return of the U.S. stock finally reached an all-time high today. By this, I mean adjusting for dividends and inflation, we took out the old peak from 13 years ago.

  

  Note: The above chart goes to the end of 2012.
  
  Here are some numbers: The Wilshire 5000 Total Return Index has increased by 35.41% from March 24, 2000 to today. Meanwhile, the CPI has increased by 34.1% from March 2000 through December 2012. The numbers for January won’t come out until later this month. Despite this, it would be a noticeable break from the recent trend for the January CPI to knock out the small lead that stocks appear to enjoy.

  So raise a glass to stocks. It only took 13 years to make a real profit. A very, very, very, very small (but real) profit.

• CWS Market Review – February 8, 2013
  Eddy Elfenbein, February 8th, 2013 at 8:12 am

  That money talks I’ll not deny,
  I heard it once: It said, “Goodbye.”
  -Richard Armour

  Last Friday, the Dow pierced 14,000 for the first time in five years. But as I suspected, investors got a case of the jitters, and the Dow hasn’t been able to hold 14,000. We even had a small uptick in volatility as the S&P 500 had three straight moves of greater than 1%. One money manager said, “We’ve moved so far so fast that the market’s just looking for any kind of sign to take something off the table.” I think that’s exactly right.

  

  Wall Street is still focused on earnings. While fourth-quarter earnings season has been good (not great), I’m starting to have concerns that Wall Street’s earnings outlook is too optimistic. According to the Street, earnings growth will accelerate, meaning the pace of growth itself will increase, throughout 2013. That’s certainly possible, but I see that as a best-case scenario. More likely, earnings growth will flat-line or grow rather modestly.

  That’s not necessarily awful news. Corporate America has been raking it in lately. The companies in the S&P 500 will probably net a cool $1 trillion this year. But we have to face the fact that the easy money in this bull market has already been made. Stocks have more than doubled in less than four years. The next four years won’t be so fortunate.

  That’s why I urge all investors to focus on high-quality stocks for the long term like the stocks on our Buy List. We had more good news this week, including a 21% dividend increase from Ross Stores ($ROST), and JPMorgan ($JPM) reached yet another 52-week high. Now let’s look at some of our earnings reports this week.

  AFLAC Is a Buy up to $54 per Share

  After the close on Tuesday, AFLAC ($AFL) reported fourth-quarter earnings of $1.48 per share. Make no mistake: this was a solid quarter for the duck stock, and it was squarely in line with what they told us to expect. Three months ago, AFLAC said Q4 EPS should range between $1.46 and $1.51.

  But here’s the issue for us: Since most of AFLAC’s business comes from Japan, their bottom line can be adversely impacted (or helped) by fluctuations in the yen/dollar exchange rate. Lately, the government in Japan has aggressively stated its intention of pursuing a pro-inflation policy. That’s caused the yen to tank against the dollar. In response, the Nikkei Index has soared.

  As I said, AFLAC as a business is fine and dandy and as strong as it’s ever been. I want to make it clear that I’m not overly worried about the exchange rate, but I have to say that it’s an issue for investors. AFLAC said the falling yen cost dinged their Q4 by four cents per share. Not fun, but not a disaster either. Bear in mind that AFLAC’s full-year earnings for 2012 were actually helped by one penny per share, thanks to the exchange rate. So it works in both directions.

  For all of 2012, AFLAC made $6.60 per share in operating earnings. The company said it sees operating earnings growth of 4% to 7% for this year. On a currency-neutral basis, that means operating earnings of $6.86 to $7.06 per share.

  Now here’s the tricky part (warning: math ahead). Each move in the exchange rate of one yen from 78.5 will cost AFLAC 4.3 cents per share for the year. So if the exchange rate averages 90 for the entire year, that will cost AFLAC 49.45 cents per share (11.5 times 4.3). That stings, but it’s roughly 50 cents per share out of $7 of earnings. It’s not enough for me to change my opinion that AFLAC is a very solid stock to own. And of course, I have no idea what the exchange rate will do this year. However, I suspect that most of the damage to the yen has already been done.

  Shares of AFL pulled back after the earnings report, but the stock is basically where it was three months ago. AFLAC remains an excellent company. Due to the recent pullback, I’m going to lower my Buy Below to $54 per share.

  Good News from FISV and CTSH, Bad News from WXS

  Also on Tuesday, Fiserv ($FISV) reported Q4 earnings of $1.39 per share, which exactly matched Wall Street’s forecast. The company already told us that this was going to be a good quarter. Remarkably, this is Fiserv’s 27th-straight year of double-digit earnings growth. There aren’t many companies that can boost a record like that.

  For 2012, Fiserv earned $5.13 per share, which is a very nice increase over the $4.58 per share they made in 2011. Fiserv said that they expect growth of 15% to 18% for this year, and they specified an earnings range of $5.88 to $6.07 per share. If that’s correct, FISV is going for less than 14 times this year’s earnings. This is a solid stock. Fiserv is a buy up to $88 per share.

  We had a great earnings report from Cognizant Technology Solutions ($CTSH) on Thursday. The company reported Q4 earnings of 99 cents per share, which is up from 84 cents for Q4 of 2011. That’s eight cents more than the Street had been expecting. Quarterly revenue rose 17.1% to $1.95 billion. For all of 2012, revenue rose 20% to $7.35 billion, and earnings-per-share increased from $3.07 in 2011 to $3.70 for 2012. This is clearly a rapidly-growing outfit.

  Cognizant also offered very impressive guidance for Q1 and all of 2013. The company sees Q1 revenue rising by 20% to “at least” $2 billion and expects earnings-per-share to hit $1.01. Wall Street had been expecting 93 cents per share. For the whole year, CTSH sees revenue climbing to “at least” $8.6 billion. That’s an increase of 17%. Cognizant also sees earnings-per-share of at least $4.31. That’s a big increase over Wall Street’s expectation of $4.00 per share. CTSH is an excellent buy anytime you see it below $81.

  Our dud this week came from WEX Inc. ($WXS). The company reported fourth-quarter earnings of $1.07 per share, which was a penny below consensus. Quarterly revenue rose 20.9% to $169 million.

  But the earnings weren’t the bad part; it was the guidance. For Q1, WXS expects earnings to range between 89 cents and 96 cents per share. The Street had been expecting $1.08 per share. For all of 2013, WXS sees earnings between $4.30 and $4.50 per share. The Street was expecting $4.88 per share. For all of 2012, WXS made $4.06 per share which was a nice increase from $3.64 per share on 2011.

  Frankly, this guidance is very disappointing news. I’m not ready to toss in the towel with WXS; the stock has been a huge winner for us over the last eight months. But for now, I’m going to lower the Buy Below price to $72.

  Ross Stores Is a Buy up to $62

  Ross Stores ($ROST) gave us great news this week. The retailer reported blowout sales for January, and thanks to the rush of business, Ross sees Q4 earnings coming in at $1.06 to $1.07 per share, and $3.52 to $3.53 per share for the entire year. (Note that like a lot of retailers, Ross ends their fiscal year at the end of January.) The earnings report should be out in mid-March.

  But the best news is that Ross raised their quarterly dividend from 14 cents to 17 cents per share. That’s a 21% hike. Ross pays out a very small amount of their profits as dividends to shareholders (about 20%). Based on Thursday’s closing price, Ross yields 1.13%. That’s obviously not a very high yield, but the dividend increase and strong sales news are a good omen for Ross Stores. ROST remains a very good buy up to $62.

  Before I go, I want to highlight two Buy List stocks that look especially attractive. Again, Microsoft ($MSFT) looks very good here. The pullback in Harris ($HRS) seems about done. Shares of HRS got hit hard for a modest decrease in guidance.

  That’s all for now. Next week, we get important reports on retail sales and industrial production. Our final earnings report of this cycle will be from DirecTV ($DTV) on Wednesday, February 13th. Wall Street expects $1.13 per share. 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 8, 2013
  Eddy Elfenbein, February 8th, 2013 at 7:10 am

  China Trade Growth Hints At Strong 2013

  European Leaders Struggle to Bridge Budget Gaps

  Aso Says Pace of Yen Decline Too Fast With G-20 Set to Meet

  Draghi’s Powerful Weapon Is Words as Euro Heeds His Voice

  German Exports Rose in December to Cap Trillion-Euro Year

  4 Years After Crisis, Ireland Strikes Deal to Ease a Huge Debt Load

  Gold Sideways in Asia as Outlook Unclear; Precious Metals Lower

  Worker Productivity in U.S. Declines, Pushing Up Labor Costs

  Business and Labor Unite to Try to Alter Immigration Laws

  Apple With $137 Billion in Cash Considers Preferred Stock

  Hewlett Directs Its Suppliers in China to Limit Student Labor

  BMW Posts Record Group Sales In January, Up 9.9 Percent

  Google Suit Against IRS Planned Over Domestic Tax Dispute

  Jeff Miller: Dumb Money?

  Roger Nusbaum: Position Management

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• FedEx +4,147%
  Eddy Elfenbein, February 7th, 2013 at 1:37 pm

  The U.S. Post Office just announced major cutting measures including the ending of Saturday service. Last year, the USPS lost $15.9 billion.

  As a comparison, I think it’s interesting that FedEx ($FDX) just hit a new five-year high today. From May 6, 1980 to yesterday’s close, shares of FDX are up 4,147%. That would turn a $25,000 investment into over $1 million.

  

• Cognizant Guides Higher for 2013
  Eddy Elfenbein, February 7th, 2013 at 10:49 am

  Before the opening bell, Cognizant Technology Solutions ($CTSH) reported Q4 earnings of 99 cents per share which is up from 84 cents for Q4 of 2011. That’s eight cents more than the Street had been expecting. Quarterly revenue rose 17.1% to $1.95 billion. For all of 2012, revenue rose 20% to $7.35 billion, and earnings-per-share increased from $3.07 in 2011 to $3.70 for 2012. As you can see, this is a rapidly-growing outfit.

  Cognizant also offered very strong guidance for Q1 and all of 2013. The company sees Q1 revenue rising by 20% to “at least” $2 billion and earnings-per-share hitting $1.01. Wall Street had been expecting 93 cents per share. For the whole year, CTSH sees revenue climbing to “at least” $8.6 billion. That’s an increase of 17%. Cognizant also sees earnings-per-share of at least $4.31. The Street had been expecting $4.00 per share.