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More on Earnings
Eddy Elfenbein, August 1st, 2012 at 4:45 pmHere’s another earnings update from Wendy Soong at Bloomberg. Of the 500 companies in the S&P 500, 351 stocks have reported so far. A total of 235 (or 67%) have beaten expectations, 39 (11.1%) matched and 77 (21.9%) came in below expectations.
Earnings are tracking for a decline of 0.6%. When you take out financials, earnings are down 1.4%. Earnings are now expected to decline by 1.1% in Q3, then rise by 10% in Q4.
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Today’s FOMC Policy Statement
Eddy Elfenbein, August 1st, 2012 at 2:14 pmInformation received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. (I think that’s a bit strong. Housing has gotten much better – Eddy.) Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.
The condensed version: We aren’t doing anything. BTW, did you know an election is three months away?
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S&P 500 Total Return Index
Eddy Elfenbein, August 1st, 2012 at 11:23 amThrough July, the S&P 500 is up 11% with dividends included. Over the last 12 years, the S&P 500 is up 21% including dividends. Annualized, that’s 1.6% a year.
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The Treasury Is Considering Floating Rates
Eddy Elfenbein, August 1st, 2012 at 11:01 amThere’s an interesting story out today that the Treasury Department is considering floating rate securities to finance the government’s debt. This could happen within the next year.
The idea is that it works just like a regular bond but the interest rate would be tied to a short-term rate. For example, the Treasury may auction off a 10-year bond that offers a coupon of the current 90-day yield plus, say, 75 basis points. That coupon would then reset every few months.
Obviously, Uncle Sam has had to borrow a lot of money over the past four years, and with rates so low at the short-end, this may be a way to take advantage of lower borrowing costs. I think this is a good idea and it will give investors more options for investing in debt.
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July ISM = 49.8
Eddy Elfenbein, August 1st, 2012 at 10:27 amThe latest ISM number came out this morning and it was 49.8. A reading of greater than 50 means the economy is growing. Less than 50 signals a contraction.
This is the second month in a row that ISM has come in below 50. But this comes after a run of 33 months in a row when ISM had topped 50.
Bear in mind that historically, we’re still well above the danger zone. Recessions usually kick in when the ISM is below 45 or so.
The big news this week is still the jobs report. We got a sneak preview this morning when ADP, the private payrolls folks, said that 163,000 new jobs were added last month. That’s 43,000 more than Wall Street had been expecting. The government reports its jobs numbers on Friday.
So far, Wall Street is in a good mood. The S&P 500 is up a little, but we’re waiting for what the Federal Reserve has to say when their policy statement is released later today. That should come out at 2:15 pm ET.
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Morning News: August 1, 2012
Eddy Elfenbein, August 1st, 2012 at 6:37 amSpain Reports Record Capital Flight
Economic Thinkers Try to Solve the Euro Puzzle
Draghi Reshapes ECB Crisis Pragmatism as Trichet’s Dogma Fades
Joblessness in Euro Zone Reaches Record High
China Hits Back at U.S. Sanctions Against Bank
China’s Manufacturing PMI At 8-Month Low
2nd Day of Power Failures Cripples Wide Swath of India
Oil Falls on Speculation Fed to Forgo Stimulus
S.E.C. Suggests Reforms of Municipal Bond Market
Regulator Rebuffs Obama on Plan to Ease Housing Debt
Apple, Samsung Launch Salvos As Smartphone Trial Heats Up
BMW Keeps Outlook, Warns Of Tougher Market Conditions
Pfizer’s Cost-Cuts Offset Loss of Lipitor
Jeff Miller: Four Actionable Investment Themes
Stone Street: That’s a Preposterously Long Series of Clown Questions Bro
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Starbucks Tumbles
Eddy Elfenbein, July 31st, 2012 at 3:56 pmIn May, I listed 13 stocks to avoid. Recently, Chipotle ($CMG) got slammed and now another one on the list has been trapped by the bears. This time it’s Starbucks ($SBUX). Last week, the company’s earnings missed expectations and guidance was poor. Wall Street had been expecting 2013 EPS of $2.28. Starbucks said it will only be as high as $2.14.
The stock got slammed for a 9% loss on Friday. It dropped another 1% yesterday and three more percent today. Starbucks is down more than 17% since I first put it on my stocks to avoid list 11 weeks ago. Netflix ($NFLX) is down more than 26% and Chipotle is off by 28%.
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The Decline of Stock Splits
Eddy Elfenbein, July 31st, 2012 at 1:20 pmI’m happy that there are fewer stock splits than there used to be. Ideally, a company should split 2-for-1 or 3-for-1 once a decade or so. By the way, the worst abuser was JetBlu ($JBLU) who split 3-for-2 three times in three years despite not going anywhere. There’s been talk that Apple ($AAPL) may split soon so it can be added to the Dow.
There are lots of good factoids in this Bloomberg article:
Dow Reshuffle
Dow membership was last reshuffled in June 2009, when Cisco and Travelers Cos. replaced General Motors Corp., which filed for bankruptcy protection, and Citigroup Inc., the recipient of $45 billion in taxpayer aid.
Apple and Google Inc. have been passed over for inclusion because the shares would command the biggest weightings in the index, which ranks stocks by price. With both stocks trading above $600, they would have three times the influence of IBM, which has the largest weight in the index.
“Excluding IBM, tech’s weighting in the Dow is only 5.3 percent,” Sacconaghi said. Compared to the Standard & Poor’s 500 index, which is weighted by market value, technology stocks are underweight by 370 basis points in the Dow, he said. Apple has a 4.55 percent weighting in the S&P.
“This disparity between tech weighting in the Dow and S&P 500 leads us to believe Dow is likely to add more tech stocks, and that Apple would be a primary candidate if the company split its stock.”
Nine companies in the Standard & Poor’s 500 Index have announced stock splits this year and 16 did in 2011, according to S&P. That compares with an average of 35 from 2004 through 2007 and represents a fraction of the 102 in 1997, the data show. Splits are designed to attract investors by making stocks more affordable.
Historic Splits
While the bull market that began in March 2009 has pushed the benchmark gauge for U.S. equities within 10 percent of its record high this year, the lack of splits helped send the average price of shares in the S&P 500 to a record $58.52 apiece on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than when the index reached its all-time high of 1,565.15 in October 2007 and 31 percent above the index peak in 2000.
The Dow average was devised by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. Originally containing 12 stocks, it expanded to 20 companies in 1916 and to 30 in 1928. Members must have an “excellent” reputation, show sustained growth and “be of interest to a large number of investors,” according to the S&P Dow Jones Indices website.
Kraft Decision
The average’s new owners will face their first decision on how the 116-year-old gauge should be composed when Kraft Foods Inc. splits itself in two later this year. Kraft’s $70 billion market value is ranked 21th in the 30-stock gauge and will shrink with the spinoff of its of its U.S. grocery business.
Past spinoffs have led to deletions. Altria Group Inc. was dropped in February 2008, one month before the divestiture of its overseas tobacco unit and almost one year after its spinoff of Kraft. Westinghouse Electric Corp.’s split into separate manufacturing and media companies led to its removal in 1997.
The Dow, which began in 1896 with General Electric Co., American Tobacco and 10 other companies, was taken over in July by S&P Dow Jones Indices, a joint venture of McGraw-Hill Cos. and CME Group Inc. About $28 billion in products such as exchanged-traded funds are linked to the index, and changes prompt money managers to buy or sell stocks to match the adjustments.
Changes in the composition of the average “are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component’s core business,” according to the S&P Dow Jones Indices website. “When such an event necessitates that one component be replaced, the entire index is reviewed,” and “multiple component changes are often implemented simultaneously.”
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Harris Earns $1.42 Per Share
Eddy Elfenbein, July 31st, 2012 at 11:02 amMore Buy List earnings. This morning, Harris Corp. ($HRS) reported quarterly earnings of $1.42 per share which was a penny more than estimates. This was Harris’ fiscal fourth quarter and they earned $5.20 per share for the entire year.
“Harris fourth quarter results represented a solid finish to fiscal 2012,” said William M. Brown, president and chief executive officer.
“Both income and earnings per share from continuing operations increased compared with the prior year, driven by operating improvement in all three segments and from a lower share count. Cash flow was particularly strong in the fourth quarter, contributing to excellent full year results.
“Although revenue declined as expected, orders in the quarter were higher than revenue and increased in all three segments with the strongest increase in Integrated Network Solutions. Our recent wins are encouraging as we enter a new fiscal year facing uncertainty in the government spending environment.”
The most important news today is that Harris reiterated its guidance for the current fiscal year for earnings between $5.10 and $5.30 per share. The stock is currently going for eight times earnings.
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Buy List Earnings Calendar
Eddy Elfenbein, July 31st, 2012 at 10:53 am
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His 