Author Archive

  • $6 Trillion in Phony Treasuries Found
    , February 17th, 2012 at 1:08 pm

    Scary story from Italy:

    Italian anti-mafia prosecutors said they seized a record $6 trillion of allegedly fake U.S. Treasury bonds, an amount that’s almost half of the U.S.’s public debt.

    The bonds were found hidden in makeshift compartments of three safety deposit boxes in Zurich, the prosecutors from the southern city of Potenza said in an e-mailed statement. The Italian authorities arrested eight people in connection with the probe, dubbed “Operation Vulcanica,” the prosecutors said.

    The U.S. embassy in Rome has examined the securities dated 1934, which had a nominal value of $1 billion apiece, they said in the statement. “Thanks to Italian authorities for the seizure of fictitious bonds for $6 trillion,” the embassy said in a message on Twitter.

    The saddest part is that even after they were found to be phony, Bernanke still offered to buy them for $10 trillion.

  • The Lizard People Are Coming
    , February 17th, 2012 at 12:45 pm

    I don’t think people realize how much garbage advertising is on CNBC. But in the field of wretchedness, one commercial manages to stand out.

    If you’re a regular viewer of CNBC you may have seen an ad voiced by Alex Jones, the noted conspiracy nut. Jones regularly does us the favor of warning Americans about the New World Order. He is, quite naturally, a 9/11 Truther.

    This story actually gets even more insane. The CNBC ad touts a video made by a character named Porter Stansberry. The title of the video is, “The End of America.” One of the experts referred to in this video is David Icke. Mr. Icke believes that the earth is run by a secret cabal of…lizard people.

    I swear, I’m not making this up.

    At the heart of his theories lies the idea that the world is becoming a global fascist state, that a secret group of reptilian humanoids called the Babylonian Brotherhood controls humanity, and that many prominent figures are reptilian, including George H. W. Bush, Queen Elizabeth II, Kris Kristofferson, and Boxcar Willie.

  • CWS Market Review – February 17, 2012
    , February 17th, 2012 at 9:41 am

    Despite repeated death notices, the most-hated stock market rally in history continues to march on. On Thursday, the S&P 500 closed at 1,358.05 which is its highest level since May 2nd. The index is already up 8% this year and we’re only halfway through the first quarter. The S&P 500 has almost exactly doubled from its March 9, 2009 low close—and we’re just a small push away from a new post-crash high.

    In this issue of CWS Market Review, I want to take a step back and discuss what’s in store for the market going forward. The Q4 earnings season has passed and we rallied despite unimpressive results. That most likely won’t happen again. The problem for investors is that much of the easy gains have already been made. This, of course, is the unfortunate benefit of panicked investors having sent the stock market to generational lows. In 17 months (from October 2007 to March 2009), the S&P 500 shed 57%.

    The good news is that the end of the world didn’t come. At least not for the non-Greece part of the world. Much of the three-year rally has been investors realizing that the worst has passed and that Earth is still here. Now, however, the lack of bad news is no longer enough; we’ll need to see actual growth. Companies can’t rely on current consumers to spend more money. Those folks are tapped out. Instead, we need more consumers.

    One outcome of this new market focus is that investors will start paying much more attention to the jobs market. We already saw that on Thursday with the market rallying on the news of the lowest jobless claims in nearly four years. The equation is quite simple: More profits will have to come from more revenue, and that needs to come from more consumers, and that means more jobs. Lots more jobs.

    Job Growth Is Desperately Needed for Profit Growth

    The January jobs report was pretty good: a net gain of 243,000 jobs. The difficult task before us is that, going by that rate, it will take several years for the economy to get back to anything resembling normal. Over the last two years, 3.1 million jobs have been created. That’s pretty good, but we need to put it into larger context. In the two years prior to that, 8.7 million jobs were lost. Plus, we’re not even counting the natural growth of the population. This shows that the big obstacle for companies is a dearth of shoppers: folks who could be out there buying stuff but can’t because they have no income.

    Think of it this way: When a recession hits, companies go into survival mode (I’m generalizing). This means they stop hiring, and they stop making new stuff. Next, they dump their current inventory for any price they can get. They don’t care about the price; just get some bucks in the door. This means that profit margins drop to the floor.

    This is the key point I want to get across: It’s profit margins that are really a killer for investors. This is why a 5% drop in GDP can lead to a market drop of 50% or more. Stock prices don’t follow the economy; they follow profits which are just one facet of the economy. One of the early signs of a company running into trouble is lower profit margins. Conversely, rising margins are almost always a sign of a company’s strength. Higher margins tell us that a company has pricing power in the market; this is a fancy way of saying that people really want what they’re selling.

    As the economy slowly woke up from the Great Recession, it was easy for companies to increase margins. That’s not hard to do when companies cut back on a major part of their overhead: compensation. As a result, profits soared while jobs didn’t improve that much.

    For the economy as a whole, profit margins have risen about as far as they can go. It’s possible that margins can go still higher, but we play it safe around here so it’s more prudent for us to assume that profit margins will revert to their long-term mean. Floyd Norris recently wrote in the New York Times: “In the eight decades before the recent recession, there was never a period when as much as 9 percent of American gross domestic product went to companies in the form of after-tax profits. Now the figure is over 10 percent.” Think of “profits as a percent of GDP” as a national profit margin.

    As a whole, I think overall profit growth will be pretty meager this year. The S&P 500 will probably earn somewhere between $100 and $105 which is a modest increase over the $97 for 2011. Of course that’s just an estimate, but I doubt we’ll see a major plunge. In fact, I think the odds of a big downturn in profits in 2012 are about as low as we can reasonably expect. As long as interest rates are still low, this environment is very favorable to equities.

    DirecTV Tops Estimates By Ten Cents Per Share

    The only recent Buy List earnings report was from DirecTV ($DTV) on Thursday morning. The company crushed estimates. For the fourth quarter, DirecTV earned $1.02 per share which was ten cents ahead of Wall Street’s consensus.

    DirecTV continues to do very, very well. One problem for them, and it’s not major, is that the cost of getting new subscribers is getting higher. We always want to view a company as being like a machine: Dollar bills go in and dollar bills come out. That, in essence, is what it’s all about.

    Before, it was very inexpensive for DTV to get those dollar bills to roll in. All they had to tell people is that cable is terrible, and that was enough. Now it’s getting harder. Infrastructure costs are rising and those costs will have to be eaten or passed along. Again, this is not a major problem for DirecTV but it is something on their radar.

    DirecTV is raking in profits. For Q4, earnings-per-share rose by 38%. That’s outstanding. On the company’s earnings call, they said, “We expect to grow earnings per share to well over $4 this year, on pace to achieve our EPS target of at least $5 in 2013.”

    The stock closed Thursday at $45.38 per share, which means it’s going for about 11 times this year’s earnings, and nine times 2013’s estimate. That’s a good bargain. It’s no wonder some value investors have taken notice. I rate DirecTV an excellent buy up to $48 per share.

    Earnings Due Next Week from Medtronic

    The only Buy List earnings report coming up is from Medtronic ($MDT). The medical supply company is due to report before the opening bell on Tuesday, February 21st. Medtronic has had a surprisingly good run since its last earnings report. Wall Street currently expects quarterly earnings of 84 cents per share which is probably a penny or two too low. Medtronic has previously told us to expect earnings for this fiscal year (ending in April) of $3.43 to $3.50 per share.

    The stock closed Thursday at $39.58, so that’s a decent valuation based on the earnings estimate. In December, I raised my buy price to $40 per share. I want to keep it there until I see what Medtronic has to say about their guidance. I think it’s very likely that they will narrow their profit range with this earnings report. Medtronic remains a good buy below $40 per share.

    Before I go, I want to highlight some other stocks from our Buy List. CA Technologies ($CA) just hit a fresh 52-week high. The stock is up 34.7% for the year. Quiet little Harris Corp. ($HRS) is at a six-month high. The company just reported earnings above Wall Street’s consensus for the 14th quarter in a row. Jos. A. Bank Clothiers ($JOSB) has woken up from its slumber and has now rallied for seven of the last eight trading days. Finally, Oracle ($ORCL) looks like it’s ready for a breakout above $30 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. The stock market will be closed on Monday in honor of President’s Day. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Coke Raises Dividend for 50th Straight Year
    , February 17th, 2012 at 9:33 am

    Congratulations to Coca-Cola ($KO). The soft drink company just raised its dividend for the 50th year in a row. Coke bumped up its quarterly dividend from 47 cents per share to 51 cents per share. That’s a dividend increase of 8.5%. Based on the new dividend, KO now yield 2.96%.

    Here’s a list of the longest current dividend raising streaks (via Dynamic Dividend):

    Company Symbol Since
    Diebold DBD 1954
    American States Water AWR 1955
    Dover Corporation DOV 1956
    Northwest Natural Gas NWN 1956
    Emerson Electric EMR 1957
    Genuine Parts GPC 1957
    Procter & Gamble PG 1957
    3M Company MMM 1959
    Vectren Corporation VVC 1960
    Cincinnati Financial CINF 1961
    Johnson & Johnson JNJ 1963
    Lancaster Colony Corp. LANC 1963
    Lowe’s Companies LOW 1963
    The Coca-Cola Company KO 1963

  • The Stock Market’s Plunging Volatility
    , February 17th, 2012 at 9:15 am

    Where has all the volatility gone? Sometimes a simple chart tells it all. Here’s a look at the daily changes in the S&P 500 since last August.

    In just six months, we’ve gone hyperactive to nearly comatose. Notice how many daily swings were over 2% last summer. But we haven’t had any since before Christmas. The biggest down day we’ve had all year was a puny 0.69% drop last Friday.

  • Morning News: February 17, 2012
    , February 17th, 2012 at 6:10 am

    Germany Seeks to Avoid Two-Step Vote on Greek Aid

    Sarkozy Pledges Referendums at First Rally

    ECB to Swap Greek Bonds for New Debt to Avoid Loss

    U.K. Retail Sales Unexpectedly Rise on Household Goods

    Regulators Make Nice as U.S. Banks Bristle Over Tough Examiners

    Congress Will Auction Public Airwaves to Pay for Benefits

    Moody’s Warns Big Banks of Possible Credit Rating Cuts

    Baidu’s Profit Rises 77%

    GM Earns Record Net Income While Fixing Opel Will Take Longer

    Apple’s iPhone Loses China Market Share

    Anglo American Profit Climbs 23% on Output

    Icahn to Bid $2.6 Billion for CVR

    Graff Diamonds Said to Prepare $1 Billion I.P.O. in Hong Kong

    Yelp Expects Its I.P.O. to Price at $12 to $14 a Share

    Doug Huber: Manufacturing In Decline?

    Cullen Roche: The U.S.A. is Not the Roman Empire

    Be sure to follow me on Twitter.

  • DirecTV’s Outlook for 2012 and 2013
    , February 16th, 2012 at 11:54 pm

    Transcript from Seeking Alpha:

    Next, I would like to make a few comments on our consolidated outlook. We expect to grow earnings per share to well over $4 this year, on pace to achieve our EPS target of at least $5 in 2013. Before interest and taxes, cash flow is expected to grow in the low double-digit range. However, free cash flow is likely to come in relatively flat compared with 2011, due mostly to our cash taxes, which will be higher in 2012, due to greater earnings and higher cash tax rate of 30% range, primarily related to the reversal of accelerated depreciation and benefits associated with prior year economic stimulus programs.

    Finally, regarding our balance sheet, at this time, we still believe there are significant value in DIRECTV’s stock price, which merits our capital allocation strategy for share repurchases. Therefore, as Mike stated earlier, we expect to continue repurchasing shares at a pace of about $100 million per week. We also expect to opportunistically exit the debt markets in the near future. Once we get beyond 2012 with our balance sheet re-leveraging substantially completed, the level of buybacks will be based on a number of considerations, including strategic opportunities, our share price, leverage capacity and further investments in Latin America. If we accomplish all of these targets and deliver the expected financial results, I believe we will continue generating substantial shareholder value by leading the industry in revenue and earnings growth, as well as returning cash to shareholders.

    The stock is at $45 which means it’s going for 11 times this year’s earnings and for nine times 2013’s.

  • DirecTV Beats by Ten Cents Per Share
    , February 16th, 2012 at 3:25 pm

    Before the opening bell this morning, DirecTV ($DTV) reported fourth-quarter earnings of $1.02 per share. That was ten cents more than Wall Street was expecting, and it’s a 38% increase over Q4 2010. After opening higher, the shares are currently down about 2% today.

    The numbers show that DirecTV continues to do very well. The major issue for them is that it’s become more expensive to get new customers. That’s to be expected. For the fourth-quarter, DTV gained a net 125,000 subscribers in the United States which was less than Wall Street’s forecast. Comcast, however, is hemorrhaging subscribers. DirecTV continues to make major gains in Latin America. The company added 590,000 new subscribers in that region last quarter.

    DirecTV also announced another $6 billion share buyback program. Frankly, that doesn’t impress me so much. I’d much rather have the company pay this money out to shareholders rather than hope for a capital gain. Plus, DirecTV just announced a slew of new equity awards for senior execs.

    Again, I have no problem with the senior brass getting paid tons of money (as long as the company is well run). But just pay them in cash! There’s no need to do this two-step of giving them stock options and then trying to force the stock higher. It simply dilutes future earnings.

  • Malaysia Islamic Clerics Forbid Forex Trading
    , February 16th, 2012 at 11:36 am

    Via Eclectic Linkfest I saw this story:

    Malaysia Islamic clerics forbid forex trading

    Malaysia’s highest Islamic body has issued an edict forbidding foreign exchange trading by Muslim individuals, saying such speculation violates Islamic law.

    The National Fatwa Council ruled forex trading by money changers or between banks was allowable but trading by individuals “creates confusion” among the faithful, according to a report issued Wednesday by state news agency Bernama.

    Council chairman Abdul Shukor Husin warned “there are many doubts about it (forex trading) and it involves individuals using the Internet, with uncertain outcomes,” Bernama reported.

    “A study by the committee found that such trading involved currency speculation, which contradicts Islamic law,” he was quoted saying.

    Forex and religion don’t have a great history. The only time Jesus used physical force is when he expelled the money-changers from the temple. Matthew 21:12-13:

    And Jesus went into the temple of God, and cast out all of them who sold and bought in the temple, and overthrew the tables of the moneychangers, and the seats of them that sold doves,

    And said unto them, It is written, My house shall be called the house of prayer; but ye have made it a den of thieves.

    Skipping over any doctrinal issues, trading foreign currency is a terrible idea for individual investors. It’s a zero-sum game and you most likely won’t win.

    You’ll notice that it’s always around forex that trading outfits style their sales pitches in order to lure in customers. If you’re saving for your retirement, trust me — stay away from forex.

  • “We Don’t Make Anything Anymore.” Really?
    , February 16th, 2012 at 11:20 am

    One of the biggest misconceptions about the U.S. economy is that we “don’t make anything anymore.” Not only is it not true, it’s very not true. The fact is that the United States is a manufacturing superpower. In the last 25 years, industrial production is up by more than 70%.

    The difference, of course, is that far fewer people work in that sector. But that’s a big leap to say “we don’t make anything anymore.” We do. We’re just a lot more efficient.