Author Archive

  • CPI Unchanged Last Month
    , July 17th, 2012 at 9:54 am

    Some folks are convinced that we’re in an era of hyperinflation. The data, however, seems to disagree. The CPI for June showed no increase last month. The core rate, which excludes food and energy prices, rose by 0.2% for the fourth month in a row.

    We’ll learn more of Bernanke’s views later today when he testifies before Congress. But we do know that inflation is trending below the Fed’s target rate of 2%.

  • J&J Is Another Victim of the Dollar
    , July 17th, 2012 at 9:22 am

    Johnson & Johnson ($JNJ) reported adjusted second-quarter earnings of $1.30 per share this morning which was one penny better than expectations. Sales for the quarter fell by 0.7% to $16.48 billion which was $0.21 billion below Wall Street’s forecast.

    While J&J has introduced some promising new drugs recently, sales have been pressured by the loss of patent protection for older drugs, including attention deficit/hyperactivity disorder treatment Concerta.

    The health-care giant also recently completed its $19.7 billion acquisition of orthopedic products maker Synthes Inc., which it plans to integrate with its DePuy business. In the latest quarter, Synthes contributed 1.2 percentage points to global sales growth.

    The bad news is that Johnson & Johnson is getting squeezed by the strong dollar. The company lowered its full-year forecast today from $5.07 – $5.17 per share to $5.00 – $5.07 per share. In last week’s CWS Market Review I said I think the company has a shot of earnings $5.21 per share this year. I was clearly too optimistic.

    The silver lining is that the lower guidance isn’t due to problems with operations but rather due to the foreign exchange rate. I’m not as worried by that since foreign exchange issues come and go. If it’s a problem with the business itself, that’s something much more worrying.

    I still like Johnson & Johnson and the stock has performed well in the past month. Going by this morning’s price, the shares yield 3.6%.

  • Morning News: July 17, 2012
    , July 17th, 2012 at 7:12 am

    Spanish Borrowing Costs Drop as Economy Minister Warns on Debt

    Bank of England’s King Testifies To Parliament Committee

    ZEW Investor Confidence Declines to Lowest Since January

    Cuba Hits Walls in 2-Year Effort at Privatization

    Gold Climbs Towards $1,600/Oz Ahead Of Bernanke

    Oil Near Seven-Week High on Iran Tension, Fed Speculation

    Fed Shifts Focus to Jobs as Unemployment Stalls Above 8%

    U.S. Tightens Security for Economic Data

    U.S. Drought Worsens Crop Damage, Raising World Food, Fuel Worry

    A Yahoo Search Calls Up a Chief From Google

    Three Lessons From GlaxoSmithKline’s Purchase Of Human Genome Sciences

    Hokuriku Bank Linked To HSBC Money-Laundering Probe

    Visa Among U.S. Firms Seen Helped by WTO Ruling on China

    Mattel’s Profit Tops Estimates On Lower Costs

    Jeff Carter: The Fallacy of Government Spending

    Cullen Roche: Is The Wall Street Casino Closing?

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  • The Complete Interview
    , July 16th, 2012 at 12:38 pm

    Here’s the entire interview I did with Brian Richards of the Motley Fool.

  • 10-Year Yield Hits All-Time Low
    , July 16th, 2012 at 11:59 am

    The stock market dropped early on in today’s trading, but we regrouped and have made back everything we lost. Right now, the S&P 500 is holding on to a small gain.

    Both Johnson & Johnson ($JNJ) and Reynolds American ($RAI) got to new 52-week highs this morning. Tomorrow we’re going to receive earnings reports from JNJ and Stryker ($SYK). It will be interesting to hear what they have to say.

    The yield on the 10-year Treasury dropped to an all-time low today. The yield got to 1.442%.

  • The S&P 500 and Earnings
    , July 16th, 2012 at 10:44 am

    Here’s a look at the S&P 500 (black line, left scale) along with its earnings (yellow line, right scale). The two lines are scaled at a ratio of 16-to-1 which means that whenever the lines cross, the market’s P/E Ratio is exactly 16.

    We’re at a crossroads right now in the market. Earnings are going to be flat this earnings season but they’re expected to be flat. Wall Street currently expects earnings and the economy to reaccelerate later this year (note the upturn in the yellow line). The market, however, is a doubter. Actually, right about now is the trough in earnings growth.

    If analysts are right and earnings start growing again, the market right now is very cheap. Under a reacceleration scenario, I think the S&P 500 could easily hit 1,500.

    But if traders are picking up something not yet seen in the data, and the economy drops sharply, stocks could drop even further.

  • Morning News: July 16, 2012
    , July 16th, 2012 at 6:59 am

    Merkel Gives No Ground on Demands for Oversight in Crisis

    Euro-Area Inflation Held Steady in June, Imports Fell in May

    Focus Shifts to Regulators in British Inquiry on Rate-Fixing

    London Self-Regulatory System Proves Illusory in Libor Scandal

    China’s Cabinet Meets as Wen Warns on Economy

    India Inflation Eases; Monsoon Holds Key To Rate Cut

    Crude Oil Futures Drop From One-Week High

    Consumer Bureau Poised to Unleash Rules

    JPMorgan Blaming Marks on Traders Baffles Ex-Employees

    Surveys Give Big Investors an Early View From Analysts

    Buffett Empowers Deputies by Raising Funds to $8 Billion

    Microsoft and NBC Complete Web Divorce

    BASF To Take On Asia’s Battery Chemicals Makers

    Howard Lindzon: Instagram (Facebook) Trumps Twitter

    Jeff Miller: Weighing the Week Ahead: A Summertime Three-Ring Circus

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  • JPMorgan Chase Earns $1.21 Per Share
    , July 13th, 2012 at 7:05 am

    JPMorgan just released their earnings report. For the second quarter, the bank earned $1.21 per share. They said that the botched trade in London lost $5.8 billion including $4.4 billion during the second quarter. They said that the trader was misleading them so they’ll have to restate Q1 earnings. Their income for Q1 will be $459 million less than originally reported.

    Here’s the earnings report:

    JPMorgan Chase & Co. (NYSE: JPM) today reported second-quarter 2012 net income of $5.0 billion, compared with net income of $5.4 billion in the second quarter of 2011. Earnings per share were $1.21, compared with $1.27 in the second quarter of 2011. The Firm’s return on tangible common equity for the second quarter of 2012 was 15%, compared with 17% in the prior year.

    Jamie Dimon, Chairman and Chief Executive Officer, commented on financial results: “Importantly, all of our client-driven businesses had solid performance. However, there were several significant items that affected the quarter’s results – some positively; some negatively. These included $4.4 billion of losses on CIO’s synthetic credit portfolio, $1.0 billion of securities gains in CIO and a $545 million gain on a Bear Stearns-related first-loss note, for which the Firm now expects full recovery. The Firm’s results also included $755 million of DVA gains, reflecting adjustments for the widening of the Firm’s credit spreads which, as we have consistently said, do not reflect the underlying operations of the Firm. The Firm also reduced loan loss reserves by $2.1 billion, mostly for the mortgage and credit card portfolios. These reductions in reserves are based on the same methodologies we have used in the past – the good news is that these reductions reflected meaningful improvements in delinquencies and estimated losses in these portfolios. We continue to maintain strong reserves.”

    Dimon continued: “Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO – whether measured by notional amounts, stress testing or other statistical methods. The reduction in risk has brought the portfolio to a scale that allowed us to transfer substantially all remaining synthetic credit positions to the Investment Bank . The Investment Bank has the expertise, capacity, trading platforms and market franchise to effectively manage these positions and maximize economic value going forward. As a result of the transfer, the Investment Bank’s Value-at-Risk and Risk Weighted Assets will increase, but we believe they will come down over time. Importantly, we have put most of this problem behind us and we can now focus our full energy on what we do best – serving our clients and communities around the world.”

    Commenting further on CIO, Dimon said: “CIO will no longer trade a synthetic credit portfolio and will focus on its core mandate of conservatively investing excess deposits to earn a fair return. CIO’s $323 billion available-for-sale portfolio had $7.9 billion of net unrealized gains at the end of the quarter. This portfolio has an average rating of AA+, has a current yield of approximately 2.6%, and is positioned to help to protect the Firm against rapidly rising interest rates. In addition to CIO, we have $175 billion in cash and deposits, primarily invested at central banks.”

    “The Firm has been conducting an extensive review of what happened in CIO and we will be sharing our observations today. We have already completely overhauled CIO management and enhanced the governance standards within CIO. We believe these events to be isolated to CIO, but have taken the opportunity to apply lessons learned across the Firm. The Board of Directors is independently overseeing and guiding the Company’s review, including any additional corrective actions. While our review continues, it is important to note that no client was impacted.”

    Commenting on the balance sheet, Dimon said: “Our fortress balance sheet remained strong, ending the second quarter with a strong Basel I Tier 1 common ratio of 10.3%. We estimate that our Basel III Tier 1 common ratio was approximately 7.9% at the end of the second quarter, after the effect of the final Basel 2.5 rules and the Federal Reserve’s recent Notice of Proposed Rulemaking.”

    Dimon concluded: “Through the depth of the financial crisis and through recent events, we have never stopped fulfilling our mission: to serve clients – consumers and companies – and communities around the globe. During the first half of 2012, we provided $130 billion of credit to consumers. Over the same period we provided nearly $10 billion of credit to small businesses, the engine of growth for our economy, up 35% compared with the same period last year. For America’s largest companies, we raised or lent over $720 billion of capital in the first six months to help them build and expand around the world. Even in this difficult economy, we have added thousands of new employees across the country – over 62,000 since January 2008. In 2011, we founded the “100,000 Jobs Mission” – a partnership with 54 other companies to hire 100,000 U.S. veterans by the year 2020. We have hired more than 4,000 veterans since the beginning of 2011, in addition to the thousands of veterans who already worked at our Firm. I am proud of JPMorgan Chase and what all of our employees do every day to serve our clients and communities in a first-class way.”

    Excluding all adjustments, the bank earned 67 cents per share last quarter.

  • CWS Market Review – July 13, 2012
    , July 13th, 2012 at 6:17 am

    The second-quarter earnings season is about to enter full bloom. We only have a few reports in so far, but the early numbers indicate this is going to be a lousy season. Bespoke Investment Group found that only one of the 16 companies that have reported has beaten expectations.

    This is especially disappointing because Wall Street has been slashing its earnings forecasts for the last several weeks. In other words, we’re having trouble meeting reduced expectations. On top of that, many companies have offered lower guidance for the rest of the year. On Thursday, the S&P 500 closed lower for the sixth day in a row.

    So who’s to blame for the poor earnings? We can point to the usual suspects like tight margins and weak growth in Europe. But we also need to pin some blame on a new suspect: the strong U.S. dollar. Thanks to the euro’s tanking, the dollar has rallied to a two-year high and this has made many U.S.-based companies less competitive in foreign markets. Unfortunately, this will put the squeeze on stocks like Ford ($F).

    In this issue of CWS Market Review, we’ll take a closer look at some of the upcoming reports for our Buy List stocks. I’ll also highlight which stocks look especially good right now. There are lots of good bargains out there. (Anyone notice the nice rally in Johnson & Johnson ($JNJ) in the past month?). I’ll also look at the prospects for the U.S. economy. Other regions around the world are clearly slowing down. Will the U.S. follow?

    It’s Time for JPM to Face Wall Street

    I’m writing this letter very early on Friday morning and some time later today, JPMorgan Chase ($JPM) will be our first Buy List stock to report earnings. This report will obviously be of great interest to Wall Street not only due to JPM’s huge influence on the Street but also because we’ll get to see the first details of how serious the trading losses were in their London office. Officially, CEO Jamie Dimon has said that the trading loss was $2 billion and that it might grow to $3 billion, but New York Times said that it might be as high as $9 billion. Unfortunately, there’s been far more speculation than news.

    Before the losses were reported, Wall Street had been expecting JPM to earn $1.24 per share for Q2. The consensus is now down to 76 cents per share. Since the bank has 3.81 billion shares outstanding, a $2 billion loss works out to 52.5 cents per share. So the decrease in guidance closely matches the expected trading loss.

    Here’s my take: The trading loss is simply inexcusable and I’d like to see Mr. Dimon leave the CEO’s suite. The share price has suffered from what we euphemistically call “headline risk.” But JPM is still a very profitable outfit. If earnings, excluding the big loss, are still strong, which I expect will be the case, JPM is an outstanding buy. The key for us is to see how strong the fundamentals of the bank are. After a brief recovery during June, the stock has drifted lower again recently. I still rate JPMorgan a strong buy anytime the stock is below $38 per share. The problem for us is that even if the bank’s earnings are good, it may take some time before investors are willing to go back into the stock. This is an investment for the long haul.

    Stryker and Johnson & Johnson Will Report Next Week

    Stryker ($SYK), the medical equipment firm, is due to report earnings on Tuesday. Three months ago, the company reported earnings of 99 cents per share which matched estimates. Revenues were above expectations and gross margins improved. For Q2, Wall Street is again expecting earnings of 99 cents per share. I’ve run the numbers and that sounds about right.

    In April, I was pleased to see Stryker reiterate its forecast of “double digit” earnings growth for this year. I think there’s a good chance that this forecast is too low, but I wouldn’t expect any increase in guidance until later in the year. Double-digit earnings growth translates to earnings of at least $4.09 per share. That means the stock is going for less than 13 times earnings. That’s a good deal for a high-quality stock like Stryker. I also think we’ll see another generous dividend increase later this year.

    Over the past few months, shares of Stryker have closely followed the S&P 500 (see the chart below). Stryker is a much better bargain than the overall market so I expect to see some outperformance soon. I rate Stryker a very good buy up to $60 per share.

    Johnson & Johnson ($JNJ) hasn’t officially said when it will report earnings, but I’m assuming it will be sometime next week. JNJ is oddly in a position somewhat similar to JPM in that their seemingly endless recalls soured many investors on the stock. The good news is that the company has a new CEO, and it appears that JNJ has put these issues behind them. After doing not much of anything for several months, the stock suddenly perked up last month. From June 12th to July 3rd, Johnson & Johnson gained nearly 10%. On Thursday, the shares got very close to a new 52-week high.

    JNJ’s stock got knocked around earlier this year when the guidance they gave for 2012 ($5.05 to $5.15 per share) was below Wall Street’s consensus of $5.21. Yet as things now stand, I think JNJ has a decent shot of getting to $5.21. The Q1 earnings report was pretty good. Wall Street’s consensus for Q2 is $1.29 per share. That’s very doable. JNJ currently yields 3.6% which is more than twice a 10-year Treasury. I rate Johnson & Johnson a strong buy up to $70 per share.

    Some Buy List Bargains

    Like the rest of the market, our Buy List has gotten tossed around for the past few days, but several stocks look especially good right now. Fiserv ($FISV), for example, has performed exceptionally well. The stock got to a 52-week high last week. I’m looking forward to another good report soon.

    CR Bard ($BCR) is one of our quiet stocks, but it’s continued to thrive in this market. The stock broke above $108 recently and it’s now our #2 best performer this year with a gain of 23.52%. CA Technologies ($CA) is in first place with a gain of 26.11%.

    I was rooting for Oracle ($ORCL) to finally break $30 per share. The stock came within two cents on July 3rd, but it couldn’t do it. I still like Oracle a lot. The last earnings report gave me a lot of confidence in ORCL. The stock is a great buy below $30.

    Don’t Believe the Recession Talk—For Now

    There’s a growing chorus of folks who are convinced that the U.S. economy is either in a recession right now or about to go into one. I want to choose my words carefully here. While there’s plenty of evidence that economic growth is very sluggish, there’s zero clear-cut evidence that the economy is currently in a recession. That may soon change, but until then, I don’t see an imminent recession nor do I see the Federal Reserve launching another round of quantitative easing.

    The stock market is still trying to recover from the lousy jobs report from last Friday. The jobs market, however, may have turned a corner. On Thursday, we got the best jobless claims report in more than four years. Some folks are dismissing the report as an anomaly due to the July 4th holiday. We’ll need more data to say for sure, but this could indicate some strength in employment. Even the dismal gain of 80,000 jobs in June is still a gain. During the depths of the recession we saw massive jobs losses each month.

    Ben Bernanke and his buddies at the Fed seem to prefer a wait-and-see approach. On Wednesday, the Fed released the minutes from its June 19-20 meeting. This gave us some hints as to what the Fed is thinking. The central bankers agreed that unemployment will be a problem for another five to six years, but they don’t believe that’s serious enough to provide for more stimulus.

    The minutes indicate that members of the Fed have been disappointed by economic growth being slower than expected (I share that view), and they’re concerned that inflation is trending below its 2% target. Apparently, there’s opposition to further stimulus, but we don’t know how broad that opposition is.

    As market watchers, we’ve already seen economically cyclical stocks lag the market. This was a tipoff that the economy wasn’t as rosy as many people expected. This week, several Wall Street firms got the hint and slashed their forecasts for Q2 GDP growth. They estimate growth coming in between 1% and 1.5% which is very weak, but it’s still not receding.

    The weaker growth has caused the bond market to continue its rally. This week, the U.S. Treasury sold 30-year bonds at a record low yield of 2.58%, and 10-year bonds at a record low of 1.46%. While the economy is in a rough patch right now, the evidence still does not point to a recession. In fact, many market watchers now anticipate economic growth (and profit growth) to accelerate into 2014.

    That’s all for now. Next week will be a big week for earnings. We’ll also get key reports on industrial production and retail sales. This will tell us more about how the economy is behaving. 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. Here are some more videos (here, here, here, here and here) of the interview I did with Brian Richards of The Motley Fool.

  • Morning News: July 13, 2012
    , July 13th, 2012 at 5:31 am

    Italy Bond Rating Cut by Moody’s on Contagion Risks

    Italy Exits Before Greece in BofA Game Theory

    France Has No Problem With Sovereignty in Euro Crisis Response

    China’s Growth Rate Slowed in the 2nd Quarter, Down Sharply From a Year Ago

    China Economic Data Questioned as Electricity Use Slows

    Bank Analysts at Odds Over Libor Litigation Bill

    Geithner Tried to Curb Rate Rigging in 2008

    Treasury Yield Is 3 Basis Points From Low on Slowdown

    New Claims for Unemployment Benefits Fall by 26,000

    Airbus Confronts Delivery Challenge as Boeing Prevails With MAX

    Acer Cuts PC Shipment Forecast on Global Economy, Windows 8

    Acron Says Will Buy Even Minority Stake In Tarnow

    The Curious Case Of Iowa Broker’s Romanian Property Empire

    Credit Writedowns: The Euro Disaster Is About More Than Just Current Account Imbalances

    Joshua Brown: Two Reasons the LIBOR Scandal Matters (And One Reason It Doesn’t)

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