Author Archive

  • The S&P 500 Breaks 1,420
    , April 2nd, 2012 at 12:12 pm

    For the first time since May 2008, the S&P 500 is trading above 1,420. Here’s a look at the S&P 500 Total Return Index, meaning with dividends included.

    From the end of March 2000 to the end of March 2012, the S&P 500 lost 6.01%. With dividends, it gained 17.55%. Inflation was 34.1%.

  • March ISM = 53.4
    , April 2nd, 2012 at 10:11 am

    The ISM report for March just came out at 53.4. Since 1948, the ISM has been between 53.0 and 54.0 a total of 48 times. Not once has been during a recession.

  • Investors Willing to Take on More Risk
    , April 2nd, 2012 at 9:27 am

    Here’s a thought exercise:

    Imagine you have two stocks (let’s call them A and B) that are equal in every way. Both stocks are expected to earn $1 per share this year. However, there is one small difference. Stock A is expected to earn $1 per share, plus or minus two cents. Stock B is expected to earn $1 per share, plus or minus 20 cents.

    So here’s the question: Which stock is worth more?

    The answer is that in most instances, we can assume that stock A is worth more. On occasion, stock B might be worth more, but as a general rule, it will be stock A. The reason why is that investors hate losses more than they like gains. That’s a very important point in finance and in human nature in general.

    As the two stocks trade, the gap between them will vary. The point I’ve been trying to make about Wall Street right now is that, in terms of this exercise, stock A is worth much, much more than stock B. This is due to the concerns that hit the market last year that sent investors rushing to “sure thing” investments.

    The story for this year is that those concerns have been slowly melting away. In other words, stock B is closing the gap. Eric Falkenstein noted that low-vol strategies (which I have written about before) have been trailing the market this year.

    Today is the first trading day of the second quarter and Wall Street just wrapped up its best quarter in over a decade. The Wall Street Journal writes today about the theme I’ve been harping on—that investors have willing to shoulder more risk.

    Also reflecting the improved outlook, investors have scaled back holdings of high-quality, low-yielding government debt that had been a haven from last year’s turmoil. Willing to take on greater risks, and hungry for yield with interest rates locked at low levels, they have poured money lower-quality bonds, such as high-yield corporate debt.

    Stock-market gains aside, capital markets have a more becalmed air than at the beginning of the year. One tell-tale sign of the more normal environment is that stocks are moving less in lockstep with other assets than during the second half of 2011.

    Last year, in a reflection of extreme levels of uncertainty and worries about Europe, correlations between different investments hit historic highs. Riskier assets—including stocks, commodities or emerging market currencies—would either rally together on “risk on” trading on days where investors were confident, or sell off as worried investors rushed for safety when markets were in “risk off” mode.

    This could be clearly seen in the tendency of the U.S. dollar and U.S. stocks to move in predictable fashion. When the dollar rose, stocks fell and vice versa. Historically, there has been no correlation between the two, reflecting the different nature of the two assets.

    But when fears of a euro-zone breakup hit a fever pitch last November and December, stocks—seen as a risky investment—would move in the opposite direction of the dollar—seen as a haven—60% or 70% of the time.

    Now that “inverse correlation” is down to around 30%, according to data from Macro Risk Advisors.

    Related to this, volatility has dropped dramatically, The WSJ notes that in the fourth quarter, there were 14 daily moves of 2% or more. But in the first quarter of 2012, there were zero moves that dramatic.

    I think it’s interesting that analysts have reversed course recently by raising full-year earnings estimates over the past month. In January and February, estimates had been coming down. The consensus now is that the S&P 500 will earn $104.37 this year. This means the stock market is 11% below the average P/E Ratio of the last 58 years.

  • Morning News: April 2, 2012
    , April 2nd, 2012 at 7:48 am

    Euro Leaders Seek Global Help After Firewall Boosted

    Euro-Region Unemployment Surges to Highest in More Than 14 Years

    Corporate Japan Defies Nikkei’s Rise

    Chalco Agrees to Buy Ivanhoe SouthGobi Stake in Takeover Offer

    DBS to Test Indonesian Openness With $7.2 Billion Takeover

    Bond King’s Trade Pays Off

    Oil Eases Below $123 After First-quarter Rally

    As Foreclosure Problems Persist, Fed Seeks More Fines

    Apple’s Chief Puts Stamp on Labor Issues

    Card Processor: Hackers Stole Account Numbers

    Pinnacle Airlines Seeks Chapter 11 Bankruptcy Protection

    Goldman Sachs Eyes $3 Billion Property Debt Fund

    Wells Fargo Opens Business for the Ultra-wealthy

    Census Bureau Rejects NYC Challenge

    Howard Lindzon: My Thoughts on Crowdfunding

    Jeff Miller: Weighing the Week Ahead: Can Job Growth be Improved?

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  • The Turnaround at Ford
    , March 31st, 2012 at 7:04 pm

    This is from a NYT review of “American Icon: Alan Mulally and the Fight to Save Ford Motor Company.”

    In 2008, the Ford Motor Company seemed caught in a death spiral.

    The company was hemorrhaging cash — more than $83 million a day — as the bottom fell out of the car market. In late autumn, Ford’s stock price bottomed out at $1.01.

    Move forward three years. For 2011, Ford turned a net profit of $20 billion on sales of $128 billion. It distributed profit-sharing payments of about $6,200 to each of 41,600 eligible employees. On Friday, its stock closed at $12.48.

    (…)

    First, Mr. Mulally knew that Ford could not hope to improve its market performance without simultaneously changing its culture. Some of the book’s most interesting passages deal with his efforts — often one person at a time — to improve accountability and to foster commitment among executives.

    Mr. Mulally’s chief instrument here was data-driven management, in which each executive was responsible for consistently knowing and reporting how his — very few women appear in this story — department was performing. Concentrating on consistent metrics, he argued early on, would focus managerial attention on the big picture while increasing transparency.

    He eliminated all corporate-level meetings except for two he introduced: the weekly, mandatory business plan review, when the senior team reported its progress on specific goals, and the special-attention review, when executives took up issues needing in-depth consideration. Over time, both meetings — which occurred daily in crucial periods — would become the highway on which Ford’s leaders drove change.

  • Technical Issues
    , March 30th, 2012 at 1:22 pm

    I apologize for the delay in getting this week’s CWS Market Review emailed out to everyone. We’re having some technical issues that we’re trying to address. Fortunately, we were able to post the text below.

  • CWS Market Review – March 30, 2012
    , March 30th, 2012 at 7:48 am

    Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

    — Warren Buffett

    Since February 22nd, the S&P 500 has rallied 3.36% while our Buy List is up even more, 4.31%. The lesson is that investors are gradually gravitating to the kinds of high-quality stocks that we favor.

    In this week’s issue of CWS Market Review, I want to take a closer look at some of the challenges ahead for Wall Street. I also want to discuss the shellacking that Joey Banks ($JOSB) took on Wednesday. (Ugh!) Finally, I’ll highlight some of the exceptional bargains on our Buy List. As well as we’ve done both in overall terms and against the broader market, I think the Buy List will do even better this spring and summer.

    Expect the Market to Enter a Holding Pattern

    Now let’s take a closer look at what’s been happening on Wall Street. On Monday, the S&P 500 closed at its highest point since May 2008. But like last week, Wall Street quickly gave back our gains. Actually, the stock market seems to be following the same pattern as last week—up on Monday, down on Tuesday, Wednesday and Thursday.

    I think it’s very likely that the market will be in a holding pattern until we clear two important events. The first will be next week’s jobs report. The second will be the first-quarter earnings season which will start during the second week of April. The last earnings season wasn’t too hot, so investors may have grown skeptical.

    The stock market has rallied almost consistently since the beginning of October, and much of the recent strength is due to the jobs market. As I’ve explained before, the stock market has become highly focused on the jobs outlook. The reason is that corporate profit margins have been stretched about as far as they can go. Historically, the stock market hasn’t done quite as well after profit margins have peaked. Since inflation is still low, many companies don’t have the market power to raise their prices. As a result, businesses need to get more customers.

    The latest jobs news has been pretty good. On Thursday, the Labor Department said that jobless claims fell by 5,000 to 359,000. That’s the lowest reading since April 2008. Wall Street had been expecting a little bit better number, so that may have prompted the sell-off on Thursday. The weekly jobless claims report tends to have a lot of “noise” so economists prefer to look at the general trend which has been very favorable.

    But Wall Street is waiting for the big daddy of jobs reports: the Labor Department’s March jobs report. The two big numbers to watch for are non-farm payrolls and the overall unemployment rate. You can be sure that this report will also be closely scrutinized by Governor Romney and President Obama. The March jobs report is due out next Friday, April 6th; and to make matters more dramatic, the stock market will be closed that day for Good Friday. This means we won’t know the market’s reaction until the following Monday.

    I was very optimistic for the February jobs report (you might say too optimistic although the future revisions may prove me right). But I’m a bit less sanguine for the March report. My concern is that traders are already factoring in a strong jobs report into current stock prices, and I’d prefer to see the facts before we take action.

    Earlier this week, the Grand Poobah of the Fed, Ben Bernanke, said that he was a bit mystified that the economy is creating jobs despite our subdued economic growth. The Bearded One suggested that one possibility is that companies “have become sufficiently confident to move their workforces into closer alignment with the expected demand for their products.” I think that, combined with the catch-up effect, may be correct. This is probably related to our theme that investors have been willing to shoulder more risk. Bottom line: There’s optimism out there, and it will help our portfolios later this spring and summer.

    Don’t Give Up on Joey Banks

    Now let’s talk about this week’s problem child, Jos. A. Bank Clothiers ($JOSB). The company reported Q4 earnings of $1.78 per share which hit Wall Street’s consensus on the button. On top of that, they wrapped up a very successful year. Sales rose 14.2% to nearly $1 billion. The key metric for the industry is comparable store sales, and that rose by 7.6% last year. Net income increased by 13.6% to $97.5 million and earnings-per-share rose from $3.08 to $3.49. Not many companies have numbers like that.

    The problem, however, is what they had to say about the current quarter:

    The first quarter of 2012 has started out more slowly than we had planned with declines in both comparable store sales and Direct Marketing sales for the first 8 weeks of the quarter. The declines are primarily due to weaker than expected traffic and also due to the warmer winter weather which is resulting in significantly lower sales of outerwear and cold weather merchandise. We are making marketing changes to address the sales trend. We believe that these changes will be effective and appealing to our customers; however we remain cautious about the outcome of the first quarter of 2012.

    The stock dropped 8.55% on Wednesday. I’m disappointed, but I’ll remind you that this has happened before. JOSB often gets knocked around after earnings — good or bad — and eventually recovers. Last June, the stock dropped 13.3% after the company missed earnings by two cents per share. Yet by October, the stock had nearly made up all the lost ground. (The next two earnings reports beat by six cents and by two cents.)

    I was pleased to see the stock recover a bit on Thursday. I want investors to play this one safely. I’m lowering my buy price on Jos. A. Bank from $54 to $52.

    Our next Buy List earnings report will be from Bed Bath & Beyond ($BBBY) on Wednesday, April 4th. This will be for the all-important holiday quarter. The company has told us to expect earnings to range between $1.28 and $1.33 per share. That’s very doable.

    As I explained last week, BBBY’s recent rally has made me slightly queasy on the price. Don’t chase it. Let’s see what the earnings report and guidance are like. For now, Bed Bath & Beyond is a very good buy up to $66 per share.

    Outstanding Bargains on Our Buy List

    I want to highlight some bargains on the Buy List. A few of our financial stocks have drifted lower recently. AFLAC ($AFL) is below $46 and Nicholas Financial ($NICK) is under $13.50. Both are very good buys. Reynolds American ($RAI) hasn’t done much of anything this year. At $41 per share, the stock yields more than 5.4%. I’m confident we’ll see another dividend increase near the end of the year.

    CR Bard ($BCR) is one of our quieter stocks, but it’s climbed steadily all year. We already have a 15.72% YTD gain. Bard has increased its dividend every year since 1972 and it will happen again in a few months. I’m raising my buy price from $96 to $102.

    Let me add a quick word on Oracle ($ORCL). If you recall, the stock initially bounced on better-than-expected earnings. Then the stock market had second thoughts and Oracle pulled back below $29 per share. The stock stabilized this week above $29 and I still believe it’s an excellent buy up to $32 per share.

    One more thing: Oracle and Google ($GOOG) are about to go to court in a fight over patent issues surrounding Android. The trial will get a lot of attention, but don’t be too worried. Relative to the size of these companies, the dollar amount involved is small potatoes.

    That’s all for now. Remember that the market will be closed on Friday, April 6th for Good 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

  • Morning News: March 30, 2012
    , March 30th, 2012 at 7:09 am

    Europe Moves to Bolster Firewall to Protect Spain, Italy

    Europe Agrees to $1 Trillion Bailout Fund for Euro

    Eurozone Inflation Slows Less Than Expected

    Greek Leader Puts a Halt To Jockeying Ahead of Vote

    Spain Gives Assurances on Austerity Budget

    Santander Proves Greenest as No. 2 Bank of America Becomes Solar

    Case Based in China Puts a Face on Persistent Hacking

    PetroChina Plans ‘Large Scale’ Acquisitions to Expand Output

    Large Hedge Funds Fared Well in 2011

    Oaktree Capital Files to Raise as Much as $595 Million in IPO

    Three Major Banks Prepare for Possible Credit Downgrades

    RIM Earnings, Sales Fall Short as BlackBerry Demand Wanes

    AIG Targets China Drivers in $50 Billion Insurance Market

    Phil Pearlman: Doug Kass and the Housing Recovery

    Joshua Brown: Intermarket Correlations – Ten Years Ago and Today

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  • Bernanke’s Third Lecture
    , March 29th, 2012 at 12:55 pm

    Here’s the third installment of Ben Bernanke’s lecture series at GW.

  • Coke Nears All-Time High
    , March 29th, 2012 at 10:30 am

    Although the stock market is down this morning, shares of Coke ($KO) are at a 52-week high. In fact, the stock is at its highest point in more than 13 years. It’s interesting that the company hasn’t been able exceed its high from July 1998.

    When you look at the chart, it’s interesting to see how much smoother the line has become over the years. It’s gone from highly jagged to pretty stable.