Author Archive

  • Obama Wants to Raise Taxes on Investors
    , February 13th, 2012 at 1:56 pm

    President Obama released his 2013 budget today. Bloomberg has the details:

    President Barack Obama’s budget plan calls for taxing dividends received by high-income taxpayers as ordinary income, raising the top rate to 39.6 percent from 15 percent.

    The proposal, in the president’s fiscal 2013 budget released today, would reverse his previous policy that called for taxing dividends more lightly than wage income. Obama would treat dividends as ordinary income for married couples making more than $250,000 a year and individuals making more than $200,000.

    In all, compared with current tax policies, today’s budget would raise $1.4 trillion over the next decade from high-income taxpayers.

    The dividend tax proposal would raise $206.4 billion over 10 years. Obama is proposing a top individual income tax rate of 39.6 percent in 2013, up from 35 percent. His budget would tax capital gains at a top rate of 20 percent, up from 15 percent. The top dividend tax rate is now 15 percent.

    Another 3.8 percent tax on the unearned income of couples earning $250,000 and individuals making at least $200,000 will take effect in 2013 as part of the 2010 health-care law.

    The administration’s fiscal 2012 budget had said that setting the top capital gains and dividend tax rates at 20 percent “reduces the tax bias against equity investment and promotes a more efficient allocation of capital.” Before 2003, all dividends had been taxed as ordinary income.

    The president also wants to institute the “Buffett Rule” which would require the people who make over $1 million per year to pay at least 30% tax. Michael Brendan Dougherty notes that it’s odd that a rule named after a person worth $39 billion will apply to folks who earn $1 million.

  • Sorry But Black-Scholes Did Not Cause the Financial Crisis
    , February 13th, 2012 at 12:20 pm

    The UK Guardian carries a remarkably silly story on the Black-Scholes options pricing formula called “The mathematical equation that caused the banks to crash.” I honestly don’t know where to begin, but claiming that the Black-Scholes options pricing model caused the financial crisis is economically illiterate.

    The best thing I can say about the story is that at one point, the text directly contradicts the headline:

    The equation itself wasn’t the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren’t appropriate. The trouble was its potential for abuse.

    That’s like saying subtraction caused the crisis. Well, not subtraction directly of course. But subtraction was abused.

    Look, options have been around for a long time. This site has an image of an options contract from 1959. Options were around decades before 1973 when the Black-Scholes formula came about. So why didn’t options cause a crisis before 2007?

    The article seems to blame the crisis on all financial models. But a financial model is only as good as the data you put in. If you put in garbage, well…that’s exactly what you get. It wasn’t the fault of modeling that their designers didn’t assume home prices would or could drop by 20%.

    We can point to the incredible growth of Credit Default Swaps. The CDS market grew from $3.7 trillion in notional value in 2003 to $62.2 trillion by 2007. But again, can that be blamed on a model?

    Instead, it’s far more interesting to ask what was driving the demand. Even if you make CDS’s illegal, a lot of folks out there wanted them. Why? Unfortunately, the answer isn’t so easy. The financial crisis was complicated and it had many players.

    Barry Ritholtz collected a list of culprits whose actions led to the financial crisis. You probably won’t be surprised to see that Alan Greenspan comes in at #1. And Black-Scholes doesn’t even make the top 25.

  • Apple Breaks $500
    , February 13th, 2012 at 10:55 am

    Shares of Apple ($AAPL) broke $500 today. The computer company has edged out ExxonMobil ($XOM) for being the largest company in the world (although XOM’s profit is larger). Three years ago, Apple was at $100 per share.

    I should remind investors that from the beginning of 1983 and continuing through the end of 1997, the S&P 500 increased more than six-fold while Apple’s stock lost money. Price matters. Since July 2009, boring Caterpillar ($CAT) has outperformed Apple.

  • Stocks Rise as Athens Burns
    , February 13th, 2012 at 9:15 am

    Over the weekend, the Greek parliament passed its highly unpopular “austerity budget.” They had to do this in order to get another 130 billion euros of bailout coins from the EU and IMF.

    Meanwhile, Athens burned as rioters took to the streets to protest. Party leaders put the squeeze on their members to vote for the budget. In fact, a number of MPs got expelled from their parties for not marching along.

    On Wednesday, European finance ministers are getting together to sign off on the Greek plan. Let me caution folks not to get too worked up about the news you may hear. The authorities there will do something. It may not be smart. It may not be timely. But they will do something. The German finance minister said that Greece “will be saved in one way or another.”

    The stock market had its biggest drop of the year on Friday. Perhaps the more compelling news is that the biggest drop of the year was a measly 69 bip downturn. That’s nothing compared with some of the volatility we saw six months ago.

    The market looks to rally this morning. My take is that we’re going to see higher stock and gold prices and lower bond prices for the next few weeks.

  • Morning News: February 13, 2012
    , February 13th, 2012 at 5:32 am

    Europe Job Losses Accelerate on Global Cuts

    Draghi $158 Billion Free Lunch Boosts Bank Profits

    EU Will Keep Airline-Emissions Levies

    Japan Swings to a Contraction on Exports

    Japan Minister Threatens to Block Tepco Bailout

    China’s Government Bonds Rally After Wen Pledges Fine-Tuning

    Oil Rises as Greece Passes Austerity Measures, Iran Supply Threat Grows

    Bernanke Labor Pessimism Seen Misplaced as U.S. Growth Accelerates in 2012

    Economists Warn of Long-Term Perils in Rescue of Europe’s Banks

    Private Equity Industry Attracts S.E.C. Scrutiny

    Olympus Expects Net Loss, But Core Business Seen Unscathed

    Vodafone ‘Evaluating’ Cable & Wireless Bid

    Nestle Bites Into $8 Billion Premium Chocolate Market

    Erasing the Boundaries

    Jeff Carter: The Buck Doesn’t Stop With Them

    Howard Lindzon: What a Market Top Looks Like…’Larry Fink’

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  • English Bulldog Puppies Learning to Walk
    , February 11th, 2012 at 2:00 pm

  • Chart of the Day
    , February 10th, 2012 at 1:39 pm

    Check out home prices in Las Vegas.

  • CWS Market Review – February 10, 2012
    , February 10th, 2012 at 5:37 am

    After defying my prediction for several weeks, long-term interest rates are beginning to creep higher. This is by far the most important event on Wall Street right now, and every investor needs to understand how higher bond yields will impact their investments.

    In this issue of CWS Market Review, I’ll explain what’s happening and why. I’ll also show you areas that will benefit the most from a turn in the bond market. Later on, I’ll cover some of the recent earnings reports from our Buy List. The good news is that our strategy continues to do well. (Didya catch Wright Express? It just hit a new 52-week high on Thursday.)

    Before I get to that, let’s take a closer look at what has the bond market so spooked. On Thursday, the yield on the 30-year Treasury bond closed at 3.20%. That’s the highest yield in 15 weeks. Of course, that’s still very low, but the important point is that investors are migrating out of sure-thing assets in search of more excitement.

    Who can blame them? It’s not so much that bond yields are rising; it’s that the era of ultra-low yields is gradually passing. There are two reasons why long-term interest rates had been so low. One was due to aggressive buying by our friend at the Federal Reserve. The idea was that by gobbling up tons of bonds, Benny and his buds could push down yields and give the housing a market a boost. In turn, that would help lift the entire economy out of its doldrums. A reawakened housing sector has typically been the catalyst for an economic recovery.

    So, did it work? Put it this way: The latest numbers show that housing prices are back to 2003 levels, which is a roundabout way of saying “No, it didn’t work.”

    The other reason why bond yields were so low is that investors from around the world fled European markets and parked their money in safe U.S. Treasuries. The yield on 30-year Treasury Inflation Securities currently runs about 0.74%. That’s roughly one-third the yield you would have gotten one year ago.

    Now that Greece has reached an austerity deal in exchange for more bailout cash, some of the pressure has been taken off the quest for safety. I noticed that the one-year Treasury just hit its highest yield in six months. Don’t be too concerned; it’s still only at 0.15%.

    What the Change of Sentiment Means for Investors

    Our concern is the change of sentiment. The effect this has on the stock market is that investors are revisiting the areas they punished last year while backing away from the areas that did so well for them in 2011. What’s fascinating is that how poorly a stock did in 2011 is almost perfectly correlated with how well it’s doing this year. Look at Bank of America ($BAC) which went from being one of the worst performers last year to one of the best this year.

    It doesn’t end there. Earlier this week, I posted a chart showing the performance of the ten different S&P 500 sectors for last year and this year. It’s almost a perfect mirror image. Last year, for example, investors rushed to dividend stocks in their desire for safety. This greatly helped our dividend-rich tobacco stock, Reynolds American ($RAI).

    But this year, Reynolds hasn’t done much of anything. Personally, I don’t blame Reynolds. The company is doing just fine and I still like it (the earnings report and guidance were quite good). The difference is the market’s sentiment. Unfortunately, the market’s mood is impossible to predict. That’s why our strategy here is to stick with high-quality companies. If you’re patient, the market will eventually reward the deserving.

    Who’s Been Winning from the New Market

    Some of the market’s strength represents a new-found optimism for the economy. That’s why I said that cyclical stocks were about to take center stage. That’s exactly what happened. On Thursday, the Morgan Stanley Cyclical Index (^CYC) closed at 1,015.65 which is the highest level since July 28th. That’s an impressive 37.7% run since October 3rd. Again, it’s more accurate to say that this move is walking back the dramatic selloff rather than being a rally.

    This is also why tech stocks and financial stocks have been leading the market. The Tech Sector has rallied for ten days in a row and for 17 of the last 18. This explains why the Nasdaq recently touched an 11-year high even though the S&P 500 is still shy of its high from July. Most people know that the Nasdaq is heavily weighted with tech stocks, but it also carries an outsized portion of financial stocks. Five months ago, I said the Financial Sector ETF ($XLF) would be a good “speculative buy” if it fell under $12. It did. In fact, the XLF actually dipped under $11 at one point. On Thursday, it closed at $14.71.

    The lesson is that the market is rewarding more risk taking. That will help Buy List stocks such as Moog ($MOG-A), Ford Motor ($F), JPMorgan Chase ($JPM) and Hudson City ($HCBK). I also expect that gold will pick up as well.

    Another interesting aspect of this market is that as risk-taking gets rewarded, the market itself has become dramatically less volatile. The difference between the S&P 500’s daily high and low this year has averaged only 1%. That’s down from over 3.3% in August.

    The reason for the decreased volatility is that over the summer, two theses competed for the market’s soul: more safety versus more risk. The safety side won and that’s why yields got so low. As the daily tug-of-war has faded from the trading pits, the market’s frenetic swings have calmed down. Except for some occasional bumps, I expect the placid market to continue for several more weeks.

    Strong Earnings Lift Wright Express to an All-Time High

    Now let’s take a look at a few recent earnings reports from our Buy List:

    In last week’s CWS Market Review, I said to look for a strong earnings report from Wright Express ($WXS). The company had embarrassed Wall Street analysts for the past few quarters and they did it again. Wright earned 98 cents per share which was six cents above Wall Street’s forecast.

    I was also pleased with Wright’s guidance. For Q1, the company said it expects earnings between 87 and 93 cents per share and revenue between $134 and $139 million. For the year, Wright expects earnings to range between $4.10 and $4.30 per share on revenue between $590 million and $610 million. It’s too early for me to get a feel for whether or not these projections are too conservative.

    The stock initially dropped after the earnings report but regained its composure and rallied to an all-time high. Wright is up 13.2% on the year for us. The stock is a very strong buy up to $65.

    On Wednesday, Reynolds American ($RAI) reported Q4 earnings of 72 cents per share. That was four cents better than Wall Street’s consensus. More importantly, Reynolds offered earnings guidance for this year of $2.91 to $3.01 per share. I think the company has enough room to raise the quarterly dividend from 56 cents per share to 59 or 60 cents per share. Don’t expect the kind of capital gains surge we saw last year to repeat itself. Still, Reynolds is an excellent stock for conservative investors.

    Sysco ($SYY) was our dud of the week. The food supplier reported Q1 adjusted earnings of 46 cents per share. Wall Street didn’t like that at all. The shares dropped 3.6% on Monday plus another 1.44% on Tuesday. I have to admit that I’m frustrated with Sysco. This is exactly the kind of defensive stock that won’t be richly rewarded over the coming weeks. The best part is the generous 3.66% yield. I’m keeping my buy price at $30 per share.

    The final earnings report for this quarter will come on Thursday, February 16th when DirecTV ($DTV) reports its fourth-quarter earnings. One year ago, DTV earned 74 cents per share. Wall Street expects that to increase to 91 cents per share this time around. I particularly want to hear what the company has to say about their outlook for 2012.

    That’s all for now. 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 10, 2012
    , February 10th, 2012 at 5:36 am

    Greece Rebuffed on Aid Over Austerity Vote

    Draghi Slams ‘Virility Statements’ as Ackermann Shuns ECB Loans

    In Europe, Stagnation as a Way of Life

    China’s First Trade Contraction in Two Years Adds Growth Concern: Economy

    U.S. Postal Service Loses $3.3 Billion

    Mortgage Plan Gives Billions to Homeowners, but With Exceptions

    S.E.C. Reaches Settlement in Bear Stearns Fraud Case

    Technology Services Boost NYSE Euronext Profit

    Alibaba.com May Become Part of Deal With Yahoo

    Oracle Acquires Taleo for $1.9 Billion to Add Human-Resources Cloud Tools

    LinkedIn Forecasts Top Analysts’ Estimates as Ad Sales Surge; Shares Climb

    French Oil Giant Total SA’s Profit Rises on High Oil Prices

    Alcatel Sees Higher Margins After Ending Losses

    Barclays Caps Bonuses as Profit Falls

    Epicurean Dealmaker: The Harrowing

    Edward Harrison: Video: Quantitative Easing Revisited

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  • The Big Chill
    , February 9th, 2012 at 5:03 pm

    Check out this chart of the S&P 500. It’s is a high-low-close chart. Instead of focusing on the direction of the market, take note of the daily range — the spread between each day’s high and low.

    In particular, notice how much the daily range has narrowed over the last six months. This, my friends, is the big story. Investors have chilled out in a major way.