Author Archive

• Morning News: January 24, 2012
  Eddy Elfenbein, January 24th, 2012 at 5:34 am

  EU Seeks Bondholder Concessions on Greece

  Permanent Rescue Fund Seems Nearer in Europe

  In Europe, Arguing to Apply Some Stimulus Along With the Austerity

  Euro-Area Manufacturing Unexpectedly Expands

  Europe Weighs Tough Law on Online Privacy

  BOJ Sees Recovery Delayed as Europe Bites But Skips Easing

  A Loophole Poses Risks to Investors in Chinese Companies

  India Unexpectedly Cuts Reserve Ratio as BRIC Nations Act to Shield Growth

  Crude Oil Trades Near $100 on Concern Iran May Respond to European Embargo

  U.S. CO2 Emissions to Stay Below 2005 Levels as Coal Use Shrinks

  Meet the New Federal Reserve Members

  Political Push Moves a Deal on Mortgages Inches Closer

  Texas Instruments Beats Estimates in Sign Components Market Bottoming Out

  European Semiconductor Giant STMicroelectronics Predicts Sales Decline

  Chesapeake Stalls Slide in Gas Prices With Cutbacks in Drilling

  Global Macro Monitor: On the Collapse of the Shanghai Composite

  Phil Pearlman: It’s Not How Apple Reports Tonight, It’s Do You Have A Plan?

  Be sure to follow me on Twitter.

• Goldman Says to Short the 10-year Treasury
  Eddy Elfenbein, January 23rd, 2012 at 12:16 pm

  At Business Insider, Joe Weisenthal points us toward this note from Goldman Sachs, which supports our thesis of higher long-term yields. Goldman is now urging clients to short the 10-year U.S. Treasury.

  Go Short 10-yr US Treasuries

  Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00. Our rationale is as follows.

  At this stage of the cycle, growth expectations are in the driver’s seat: The value of intermediate maturity government bonds can be related to expectations of future policy rates, activity growth and inflation, and a ‘risk factor’ highly correlated across the main countries. These simple relationships are captured by our Sudoku econometric framework for 10-yr maturity yields. In coming months, we expect effective overnight rates to remain close to zero in the main currency blocs (US, Japan, Euroland, and UK) and retail price inflation to hover around 1.5-2.0% – consistent with the forwards and central banks’ objectives. With policy rates and inflation ‘dormant’ at this stage of the business cycle, bond yields (and the 2-10-yr slope of the yield curve) will likely react mostly to shifts in growth expectations.

  Bond valuations are already stretched relative to consensus growth expectations: Around the turn of the year, the outlook on economic activity was buffeted by cross-currents reflecting the adverse credit conditions in the Euro area on the one hand, and the upward revisions to US GDP growth on the other. Our Sudoku model, which helps us trade-off these shifts, indicates that 10-yr government bond yields are currently trading too low (to the tune of 50-75bp) when mapped against prevailing macro expectations. Taking into account the cumulative impact of the Fed’s security purchases, the degree of mis-valuation of 10-yr bonds is roughly the same across the main regions.

  I think this is right. What I find unusual is that it hasn’t already happened especially considering the continued rise in cyclical stocks versus the broader market. The Morgan Stanley Cyclical Index ($CYC) got as high as 982 today which is a 33% run from October 3rd.

• Stock Trading Is Lowest in U.S. Since 2008
  Eddy Elfenbein, January 23rd, 2012 at 10:03 am

  Bloomberg reports:

  Trading in U.S. stocks fell to the lowest level since at least 2008 amid mutual fund withdrawals and Wall Street job cuts.

  An average of 6.69 billion shares changed hands on U.S. exchanges in the 50 days ended Jan. 18, the fewest on record in Bloomberg data starting three years ago that excludes over-the- counter venues. On the New York Stock Exchange, volume has tumbled to the lowest level since 1999, the data show.

  The slowdown in trading shows that investors remain skittish after five years of withdrawals from mutual funds that buy U.S. equities and one of the most volatile years on record for the Standard & Poor’s 500 Index. While the benchmark index is having its best January rally since 1997, securities firms around the world cut more than 200,000 jobs last year.

  “Investor confidence is shaky at the very least,” Mark Turner, head of U.S. sales trading at Instinet Inc. in New York, said in a telephone interview on Jan. 20. His firm handles about 4 percent of the total daily U.S. equity volume. “We need to see the U.S. economy improve. We need to see some sort of a plan in place to deal with Europe’s debt crisis before the market gains some confidence. At that point, we’ll start to see an increase in volume.”

  Daily equity trading approached 12 billion shares in May 2009, near the start of a three-year bull market in which the S&P 500 has almost doubled. The total is based on the 50-day average volume on venues including those run by NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc. and Direct Edge Holdings LLC.

• Greece to Be Saved…Again
  Eddy Elfenbein, January 23rd, 2012 at 9:45 am

  Today is the day that finance ministers in the euro zone are going to decide exactly what to do with Greece. If you’re keeping score, this is the second time they’re trying to settle this question once-and-for-all. The hard part is to get the people Greece owes to accept the idea that they’re not getting all of their money back. Rough, I know. The early indications are that the bondholders are going to get about one-third back. I’m actually surprised it’s that high.

  The market is basically unchanged so far this morning. I see that Ford ($F) seems to be extending its gains from last week. It’s good to see that investors are ready to dump all the profits they made recently. Tomorrow is going to be a very big earnings day for us.

  There’s also talk of when the Fed will embark on its third round of quantitative easing. Frankly, I’m a doubter. Not only is it politically unpopular, but also it may not be needed.

• Morning News: January 23, 2012
  Eddy Elfenbein, January 23rd, 2012 at 5:26 am

  Euro Leaders Seek Crisis Fix as Greek Talks Drag On

  Europe Heads to Davos Surprising Doomsayers

  U.K. Dividends Increase to Record in 2011

  Europe Stocks Cheapest to U.S. Since 2004

  Saudi Market to Let Foreign Shares Dual-List

  EU Diplomats Agree on Iran Oil Embargo

  U.S. Gasoline Price Rises to $3.39 a Gallon, Lundberg Survey Shows

  Fed Inflation-Unemployment Mandate Shows Bernanke’s Model Better in Crisis

  Fed Begins an Effort to Remove All Doubt on What It’s Doing

  Apache Reaches Oil Deal on Home Turf

  U.S. Gas Glut Favors Would-Be Exporter

  Thyssen, Outokumpu Discuss Stainless Steel Tie-up

  More Lockouts as Companies Battle Unions

  Bowing to Critics and Market Forces, RIM’s Co-Chiefs Step Aside

  Epicurean Dealmaker: All Together Now

  Howard Lindzon: The ‘Swoosh’ of Nike – Marketing, Sales, Fashion, Technology, Data, and even Biotech!

  Be sure to follow me on Twitter.

• RIP: Etta James
  Eddy Elfenbein, January 20th, 2012 at 4:01 pm

  The weekend is here. Let the great Etta James show you how to do the Eagles right.

• CWS Market Review – January 20, 2012
  Eddy Elfenbein, January 20th, 2012 at 5:37 am

  Huzzahs are in order! The S&P 500 just closed at its highest level in five months. We only need another 4% push to hit a new post-crash high. That’s the odd thing about investing: last year most everyone looked pretty clueless, but this year, suddenly everyone’s a genius. Funny how that happens.

  All joking aside, the numbers are pretty impressive. The stock market is off to its best start in 15 years. Consider that the S&P 500 closed higher on seven of the first eight trading days of this year. That’s only happened eight times since 1900. The Nasdaq 100 Index just hit a 10-year high. For the time being, the bulls are in charge and that’s a pleasant change from the tug-of-war market we saw last year.

  But what I find most interesting is that 2012 is almost a mirror image of 2011. By that I mean that some of the worst performers from last year are among the best performers this year, and some of last year’s stars are among the also-rans for this year. In more concrete terms, this means that sectors like industrials, homebuilders, materials and financials are finally doing well. On the other side, treasuries are off to their worst start in nine years. I believe this is the result of the market shaking off the worn-out thesis it desperately held on to for several months.

  Let me explain this in a little more detail. I’ve recently discussed how the American stock market has been in the process of disentangling itself from the mess in Europe. This is very important and every investor needs to understand what’s happening.

  Not very long ago, an investor didn’t even need to look at share prices to see what the U.S. market was doing on any given day. All he or she needed to do was look at the euro. I’m really not exaggerating. But this euro/stock battle isn’t the case anymore. Bloomberg notes that the 30-day correlation between the euro and the S&P 500 dropped from 0.91 in November to 0.66 today. In my opinion that’s still too high, but the message is clear: the old game no longer works.

  So what is working? I’m happy to report that our strategy of focusing on high-quality stocks is working very well. As well as the overall market has performed this year, our Buy List has done even better. In fact, we’ve increased our lead this past week.

  Through Thursday, the Crossing Wall Street Buy List is up 5.22% for 2012 which is 69 basis points more than the S&P 500. Four of our stocks are already double-digit winners. Ford Motor ($F) is our biggest winner for the year with a gain of 17.19%. I think it may break 20% very soon.

  In last week’s CWS Market Review, I focused on JPMorgan Chase’s ($JPM) earnings report. Even though the earnings matched expectations, it was a modestly disappointing report, and Jamie Dimon said as much. The stock took a hit for a few days but here’s the interesting part. Once the selling faded, JPM’s stock quickly regained what it lost and on Thursday it closed at a three-month high. This signals to me that investors are interested in holding on to high-quality stocks even though they’ve become more price-sensitive. Before, investors were primarily interested in holding safe assets and they were prepared to pay any price. I noticed the irony that investors were taking enormous gambles in order to avoid risk. All that jittery volatility is getting pushed out of the market. On Thursday, the Volatility Index ($VIX) closed below 20 for the first time in six months.

  Nearly the exact same story as JPMorgan played itself out at Bed Bath & Beyond ($BBBY). Last month, the share price got nicked after the company reporting earnings. What’s frustrating is that I thought it was a decent report. Traders, however, disagreed. Still, once the dust settled some rationality returned to the market and the stock made up lost ground. On Thursday, Bed Bath & Beyond closed at $63.19 which is just 25 cents from an all-time high close.

  I had previously told investors not to chase BBBY and instead to wait for a pullback below $60. I think the changing market environment will be good for this stock so I’m raising my buy-below price to $66 per share. (Please note that the buy prices I give are not price targets. They’re merely good entry points. I consider all of the stocks on the Buy List to be good buys.)

  The most important story on Wall Street right now is earnings season. The early indications are that it’s not going terribly well. The S&P 500 has topped expectations for the last 11 quarters in a row. I’m not sure we’re going to see #12. In fact, I think it’s very possible that earnings for Q4 will come in below the earnings for Q3.

  We’re heading into the peak of earnings season next week and the following week. Not all of our Buy List stocks have said when they’ll report earnings but I do know that next week will be a busy earnings week for us. On Tuesday, three Buy List stocks will report earnings; CA Technologies ($CA), Johnson & Johnson ($JNJ) and Stryker ($SYK). All three are excellent stocks and Stryker already told us to expect good news in this report.

  Last October, CA Technologies told us to expect earnings-per-share to range between $2.13 and $2.18 for its 2012 fiscal year (ending in March). On Tuesday’s earnings report, I think there’s a good chance the company will raise the lower bound of that range. The stock is a very good buy up to $24 per share.

  On Wednesday, Hudson City Bancorp ($HCBK) is set to report its Q4 earnings. This is a stock you should pay close attention to, but you want to ignore next week’s earnings report because it won’t be pretty. The good news will come in future quarters. Hudson City currently yields 4.69%.

  Before I go, I want to highlight a few other stocks. I was pleased to see AFLAC ($AFL) burst through $47 per share on Thursday. It’s about time! The duck stock will report earnings on January 31st. Look for another solid report.

  Oracle ($ORCL) is another stock that’s quietly recovering from an earnings disappointment. Smart investors know to never count this company out. Oracle is a good buy up to $30 per share.

  I usually don’t pay too much attention to the weekly jobless claims reports but the trend continues to be very positive. Thursday’s report showed the fewest claims in nearly four years. This should bode well for the next employment report in early February.

  That’s all for now. Earnings will dominate the headlines next week. We’ll also have a Fed meeting (snore! don’t expect much), and on Friday we’ll get our first look at the Q4 GDP report. I’ll have more market analysis for you in the next issue of CWS Market Review!

  – Eddy

• Morning News: January 20, 2012
  Eddy Elfenbein, January 20th, 2012 at 5:37 am

  EU Toughens Fiscal Pact Bowing to ECB Objection, Draft Shows

  ‘Substantial’ Greek Debt Talks Continue for Third Day

  New Normal on Wall Street: Smaller and Restrained

  U.S. Jobless Claims Fall Sharply

  Dodd Calls for Hollywood and Silicon Valley to Meet

  Microsoft Leads ‘Old Dogs’ in Topping Estimates; Google Dips

  Google Ad-Price Drop Leads to Page’s First Earnings Disappointment as CEO

  Intel Forecasts Revenue That May Exceed Analysts’ Estimates

  BofA Swings to Black for 2011

  GM is Again the World’s Largest Automaker

  Southwest Posts Strong Profit Despite Rising Fuel Expenses

  Sears Rises on Report CIT Approving Orders as Early as Today

  Vodafone Wins India Tax Case

  Can Bankruptcy Filing Save Kodak?

  Roger Nusbaum: Market Favoring Risk Assets Right Now

  Paul Kedrosky: Benford’s Law, and Worldwide Illicit Financial Flows

  Be sure to follow me on Twitter.

• Correlation of IQ and Stock Ownership
  Eddy Elfenbein, January 20th, 2012 at 2:23 am

  From Bloomberg:

  The smarter you are, the more stock you probably own, according to researchers who say they found a direct link between IQ and equity market participation.

  Intelligence, as measured by tests given to 158,044 Finnish soldiers over 19 years, outweighed income in determining whether someone owns shares and how many companies he invests in. Among draftees scoring highest on the exams, the rate of ownership later in life was 21 percentage points above those who tested lowest, researchers found. The study, published in last month’s Journal of Finance, ignored bonds and other investments.

• Eastman Kodak Files for Bankruptcy
  Eddy Elfenbein, January 19th, 2012 at 10:11 am

  After 131 years in business, Eastman Kodak ($EK) has filed for Chapter 11. Actually, I’m surprised they made it this long.

  Kodak’s story should be a reminder to fans of all fast-growing companies. EK was one of the most popular glamour stocks of the 1960s and early 1970s. The stock went from $10 in 1962 to $66 by 1972.

  Ultimately, what did in Kodak wasn’t greed or avarice or even poor management (though that may have played a role). Instead, someone came along and built a better mousetrap.

  

  When looking at stock charts, there’s a strong temptation to see the end result as perfectly obvious to the past. Consider that as late as October 2007, EK was going for $28 per share. What were they possibly thinking?

  Over the last 40 years, EK has almost always lagged the market. The stock briefly outperformed the market in the early 1980s and again in the mid-1990s as it tried to reform itself.

  You can see on the chart when EK spun off Eastman Chemicals ($EMN) in 1994 for about $12 per share. That stock lagged the market as well until 2000. Since then, it has beaten the S&P 500.