Author Archive

  • Treasury Term Premium Hits Record Low
    , September 6th, 2011 at 12:51 pm

    Today is shaping up to be a very ugly day. The S&P 500 is currently a bit off its low for the day, but that low was very, very low. The index bottomed at 1,140.13 and we’re at 1,153 right now. The bond market is slightly up for the day, and gold started to backslide at 11 am.

    The real weak spot today is in the energy sector. The financials are also doing poorly. Watch the Financial Sector ETF ($XLF). It’s a speculative buy if it drops below $12 per share.

    On our Buy List, Joey Banks ($JOSB) and Nicholas Financial ($NICK) have crawled into the black, plus a few other stocks look like they’re about to break into the money.

    I’ve been saying that bonds are insanely expensive and now a Fed model agrees with me. The part of the yield curve where you’re paid more money to lend your money for longer term is the term premium. That’s at a record low.

    A financial model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation shows 10-year notes are the most overvalued ever.

    As Treasuries hover near record low yields amid stagnant U.S. employment and lingering European debt concern, the so- called term premium, which Fed Chairman Ben S. Bernanke cited in a 2006 speech in New York as a useful guide in setting monetary policy, fell to negative 0.54 percent today, indicating the notes are expensive when compared with the average 0.84 percent for the gauge this decade through mid-2007. The term premium touched negative 0.55 percent on Sept. 2, the lowest ever according to Bloomberg data that begins in 1976.

  • The Fear Trade Still Lives
    , September 6th, 2011 at 9:21 am

    The Fear Trade isn’t leaving very quietly. The futures market indicates that the stock market is going to open about 2.5% lower this morning. Gold is back above $1,900 which is about 1% higher, and the bond market is up strongly as well.

    The yield on the 10-year Treasury got as low as 1.907% which is the lowest yield since the 1940s. The yield on the 10-year is now 173 basis points above the two-year yield. That spread is down 100 points in the last two months.

    Over the past few decades, a narrow 10/2 spread has often preceded a recession, but it needs to be much narrower than it is right now.

    The concern today is that the Eurozone is about to plunge into recession and that this will drag the rest of the world down with them. Asian markets were also hit hard overnight. The Swiss franc has surged higher over the past several months as the euro has been rightfully kicked around. The Swiss central bank said today that it’s going to intervene in the currency market to “cap” the franc-to-euro rate at 1.2. The Swiss stock market loved this move.

    Bank shares are set to get pummeled again. Bank of America ($BAC) is now below where it was when Warren Buffett decided to rescue it.

  • Morning News: September 6, 2011
    , September 6th, 2011 at 5:19 am

    World in ‘Dangerous’ Period With Europe Turmoil: Zoellick

    European Bankers Urge Leaders to Move Quickly on Debt Crisis

    Switzerland Caps Franc

    Greek 10-Year Bonds Fall on Concern Bailout Inadequate; Italian Notes Drop

    Futures Point to Wall Street Losses

    Crude Oil Choppy In Thin Trade, Taking Equity Cues

    China Loses WTO Appeal Against U.S. Tire Tariffs

    U.S. Banks Offered Deal Over Lawsuits

    Toshiba in Talks to Buy Shaw Group’s 20% Stake in Westinghouse

    Starbucks Plans Big Expansion in China

    Solyndra, Solar-Panel Maker in California, Files for Bankruptcy

    Telefonica Revamps Units to Stem Stock Decline

    The Fallacy Behind Tax Holidays

    Aleph Blog: The Yield Curve Can’t Invert With Fed Manipulation

    Epicurean Dealmaker: A Good Death

    Howard Lindzon: VIX 1,000… $6,000 Gold… and Dow Zero by October

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  • Lower Earnings Guidance Is Running Below Normal
    , September 6th, 2011 at 12:09 am

    Bloomberg notes that despite that stock slump, lower earnings guidance from companies is running below average:

    The number of chief executive officers cutting profit forecasts fell 38 percent below average last month, even as the slowing economy pushed valuations to the lowest level at the start of September since 1985.

    A total of 138 companies reduced earnings forecasts in August, compared with the average of 221 for the same month since 2000, according to data compiled by Bloomberg. At the same time, the Standard & Poor’s 500 Index slumped 5.7 percent, pushing its price-earnings ratio to 13.3, the data show.

    For bears, the lowest multiples since March 2009 show companies will capitulate and lower their estimates, causing the benchmark index for American equities to fall this month, historically the worst for U.S. stocks, according to Bloomberg data since 1928. Bulls say CEOs are the better gauge and that lower multiples, combined with expectations for 15 percent earnings growth this quarter, will make stocks irresistible.

    The article also says that the profits of the S&P 500 have exceeded estimates for 10-straight quarters. The estimate for next year is at $112.32 which is probably too high. Even after that were to come down six or eight dollars, the S&P 500 would still look cheap.

  • Morning News: September 5, 2011
    , September 5th, 2011 at 7:14 am

    Italian, Spanish Yields Near One-month Highs

    U.K. Services Sector Slows Sharply

    World Bank, China May Cooperate to Transfer Manufacturing Jobs to Africa

    China PBOC To Sell CNY3 Bln 1-Year Bills Tuesday

    Asian Shares End Lower; Weak US Jobs Heighten Global Slowdown Worries

    Trichet: EU States Must Approve Reforms Immediately

    Ex-Premier Faces Charges for Iceland’s Fiscal Woes

    Crude Oil Down In Asia; Economic Concerns Weigh

    Funds Boost Bullish Farm Bets on Shortages

    Stagnant U.S. Hiring May Signal Renewed Recession

    A Debate Arises on Job Creation and Environment

    Postal Service Is Nearing Default as Losses Mount

    Neither Smurf Nor Wizard Could Save Summer Movie Attendance

    With or Without an AT&T Deal for T-Mobile, Sprint Faces Daunting Challenges

    Joshua Brown: Mutual Fund Managers Failing Miserably in 2011 – Good News!

    Paul Kedrosky: More Density in Cities

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  • No New Jobs Made Last Month
    , September 2nd, 2011 at 8:31 am

    The U.S. economy didn’t create one single new job last month. The unemployment rate stayed at 9.1%. The private sector created 17,000 jobs.

    Breaking out the digits, the unemployment rate increased from 9.092% to 9.093%. Over the last seven years, the labor force has grown by 6.03 million and there are only 54,000 new jobs.

    The economy showed no job growth in August, the first time there has been no increase in net jobs in the United States in 11 months.

    The flat performance in the job market was down sharply from a revised 85,000 gain of jobs in July, the Labor Department said Friday, and was far below a consensus forecast by economists of 60,000. The unemployment rate stayed constant at 9.1 percent in August.

    The nonfarm payrolls numbers were unchanged in August after a prolonged increase in economic anxiety that began with the brinksmanship in Washington’s debt-ceiling debate and was followed by the country’s loss of its triple-A credit rating, stock market whiplash and renewed concerns about Europe’s sovereign debt.

    The jobs figure, a monthly statistical snapshot by the Department of Labor, may appear more negative because it does not include 45,000 Verizon workers who were on strike when the survey was taken.

  • CWS Market Review – September 2, 2011
    , September 2nd, 2011 at 7:24 am

    Continuing with my theme from last week’s CWS Market Review, the “Fear Trade” that gripped Wall Street in July and August is slowly retreating. Every investor needs to understand how this dynamic is driving trading right now.

    What’s interesting is that the stock market isn’t so much rallying on good news as it’s rallying on the lack of bad news (or lack of “bad as expected” news). That’s how scared traders are. Nor is the market really rallying as much as it’s walking back to the ground it hurriedly fled from during the jittery days of July and August. My advice to investors is to expect the Fear Trade to continue to fade. Specifically, this means that stocks will cautiously gain ground while bonds, gold and volatility will pull back.

    From Friday through Wednesday, the S&P 500 put on its first four-day win streak in nearly two months. In fact, we’re probably two good days’ rallies away from breaking above the 50-day moving average. Some of this week’s rally was due to Hurricanes Irene and Bernanke not causing as much damaged as was feared.

    We can’t say this for certain yet, but imagine if this statement turned out to be true: “The summer sell-off ended 25 days ago and we’ve already made back 40% of the money we lost.” That may turn out to be correct and it has a very good chance of doing so, but you’d never know it by listening to some of the folks out there.

    Remember that the stock market isn’t a great predictor of the economy. Since 1945, the S&P 500 has fallen 17% or more 14 times, and nine of those times have seen recessions. The bond market, however, has a better track record. Bloomberg writes, “the economy has never contracted with the difference between 10-year and 30-year Treasury yields as wide as the current 1.38 percentage points, or 138 basis points.” That’s pretty eye-opening.

    Through Wednesday, the S&P 500 posted its best eight-day gain since 2009. At one point on Wednesday, the S&P 500 got as high as 1,230.71. Thursday looked like it was going to be our fifth-straight up day until more jitters about Friday’s employment report took hold (more on that in a bit). The initial good news on Thursday was that the ISM Manufacturing Index came in at 50.6 which was better-than-expected. There were even whispers that the ISM could print as low as the mid-40s. Fear, I suppose, is contagious.

    Let me explain this a little. The ISM Index has a decent track record of aligning with recessions and expansions and we’re still well above the danger zone. The worry was that we were rapidly falling into the danger zone. Historically, the economy has done fairly well, on average, when the ISM is in this territory. I checked the numbers and found that there were 49 times when the ISM printed between 50.0 and 51.0 and only three of those months have been during official NBER recessions.

    One month ago, Wall Street was rattled by the reports on consumer spending and factory orders. However, those reports were for the month of June which is in the second quarter. Well, we already knew that the economy was sluggish during Q2, yet the bears had a field day and smacked the bulls around. Now, one month later, those two reports for July turn out to be not so bad. We learned that consumer spending rebounded by 0.8% in July, which topped expectations by 0.3%. That was the biggest jump in five months. On Wednesday, the Commerce Department reported that factory orders rose by 2.4% in July. That was the biggest increase since March. Yet the bulls are still the scared ones.

    So far, the Double Dip hypothesis has been sound and fury signifying not a whole lot. Let me be clear that I’m not saying a Double Dip won’t happen; I’m saying that the evidence proving the case, for now, is very small. At CWS Market Review, we’re guided by facts, not emotions. The good news for us is that we don’t need to predict the future with perfect accuracy to be good investors. But we do need to make reasonable judgments about the here and now.

    The fact is that the overall stock market is inexpensive. Let’s look at some numbers: Second quarter earnings for the S&P 500 came in at $24.85. That’s an 18.9% increase from one year ago. Wall Street currently expects 3Q earnings of $24.95 which is a 15.7% increase over last year. So far, we haven’t seen many companies lower guidance and this is particularly true for our Buy List stocks. In fact, they’ve been raising guidance.

    For all of 2011, Wall Street expects earnings of $98.59 for the S&P 500 (though I think $100 is possible). Since we’re already two-thirds of the way through the year, that forecast is probably pretty accurate. For 2012, Wall Street expects earnings of $112.67. Since that’s further out, we shouldn’t consider that number to be as reliable, and I think it may be too high.

    This means that going by Thursday’s close, the S&P 500 is trading at 12.22 times this year’s earnings estimate. Flip that over and you get an earnings yield of 8.19% which demolishes just about anything you can find in the frothy bond market. A ten-year T-bond is supposed to offer safety but…c’mon, is that really worth 600 basis points? I don’t think so. The Fear Trade has simply gone too far.

    The slightly better economic news comes at a crucial time for the Federal Reserve. The last FOMC meeting saw the largest dissension in two decades. The next meeting is scheduled for September 20-21. It was originally supposed to be a one-day meeting. I think the “hawks” now have the upper hand and I don’t expect another round of quantitative easing. For now.

    I’m writing this on Friday morning and Wall Street expects another dismal jobs report later today (expectations are for 70,000). I don’t blame them. However, the same dynamic is in play: traders expect to be disappointed so anything that fails to live up to that (or down to that) will be seen as good news. Be sure to check the blog to see how the August jobs report shakes out.

    As investors, we should continue to focus our attention on solid companies that are delivering steady earnings growth. Speaking of which, let’s jump to the best news of the week and that was the strong second-quarter earnings report from our Buy List member, Jos. A. Bank Clothiers ($JOSB). Three months ago, JOSB missed earnings by two cents and the stock got taken to the woodshed. This time, Wall Street was expecting 68 cents per share which I thought was on the low side. The earnings turned out to be even better than I expected. For Q2, JOSB reported earnings of 74 cents per share. Sales came in at $230.7 million which was $20 million more than consensus.

    On Wednesday, the stock gapped up as much as 11.8%. All across the board, Joey Bank’s numbers look very good. Same-store sales rose 14.7% and year-over-year direct marketing sales rose 27.8%. The company has grown its earnings for 39 of the last 40 quarters, including the last 21 quarters in a row.

    I had cautioned investors not to chase JOSB because I wanted to be certain that the company is on a firm footing. Now we have solid proof. I think JOSB can do $3.50 per share for this fiscal year. As a result, I’m raising my buy price on Jos. A. Bank Clothiers to $54 per share. This is our top-performing stock of the year, but I have to warn you that it can be highly volatile.

    I was surprised to see Nicholas Financial ($NICK) announce that it will start paying a quarterly dividend of 10 cents per share. Based on Thursday’s close, that works out to a yield of 3.78%. Not bad. If you’re a regular reader of Crossing Wall Street, you know that this is one of my favorite stocks. I think a fair price for NICK is at least $17 per share.

    I can’t say that I’m a huge fan of NICK paying a dividend, but I will say that there are many things worse that a company can do with shareholders’ money (poor acquisitions, share buybacks). You’ll never go broke cashing a dividend check, and NICK will have no trouble covering this dividend. I don’t have much faith that companies can engineer a higher share price outside of their very basic duty of delivering higher profits.

    I still believe that NICK can earn as much as $1.70 per share for this calendar year. The news that the Fed will keep rates low helps NICK, and the company just extended their credit line to $150 million. This is a really solid outfit. Nicholas Financial is an excellent buy up to $14 and it’s especially good below $11.

    Some other Buy List stocks that look particularly attractive here include Oracle ($ORCL), Reynolds American ($RAI), AFLAC ($AFL) and Wright Express ($WXS).

    That’s all for now. The market will be closed on Monday for Labor Day. I hope everyone has a restful long weekend. 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: September 2, 2011
    , September 2nd, 2011 at 5:17 am

    Merkel Brings Debt Crisis to Party Campaign

    Greek EU-IMF Financing Review to Resume Later This Month, Official Says

    India Factory Output Growth Falls to 29-Month Low

    UBS Cuts Target for Asia Stocks as Data Signals Regional Economies Slowing

    Taiwan to Relax Rules on Banks Investing in China

    China Benefits as U.S. Solar Industry Withers

    U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

    Fed Asks Bank of America to List Contingency Plan

    SAP Wins Bid to Reject $1.3B Oracle Verdict

    T-Mobile May Suffer if AT&T Deal Fails

    AstraZeneca Shares Fall on Crestor Study Result

    Ross’s 60%-Off Nikes Set to Overtake Gap

    BMW’s U.S. Sales Rise, Outselling Mercedes

    Tech Blogger to Invest in Start-Ups

    Jeff Miller: August Employment Preview

    Phil Pearlman: The First Wireless Phone Circa 1913

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  • The S&P 500 Total Return Index
    , September 1st, 2011 at 2:08 pm

    Through August, the S&P 500 is down 3.08% for the year and the total return index, which includes dividends, is down 1.77%. Since August 2000, the Total Return Index is down 1.31%.

    Even though dividend yields are low, they do add up over time. Over the last five years, dividends have added 11.22% to your returns. That’s microscopic at even a monthly level, but it does slowly make a difference.

    If you pulled a Rip Van Winkle in early 1997 and started ignoring the market, only to wake up today, you probably wouldn’t be too surprised to learn where the market is. How it got there…well, that’s another story.

    By the way, the chart below begins in January 1997. Alan Greenspan made his famous Irrational Exuberance speech on December 5, 1996. I only have monthly data, so including all of December 1996, the total return of the S&P 500 is up 109% since then.

  • Nicholas Financial Extends Credit Line
    , September 1st, 2011 at 10:30 am

    Good news.

    CLEARWATER, Fla., Sept. 1, 2011 — Nicholas Financial, Inc., announced that the Company has executed an amendment to its Bank Credit Line that increases the size of the Credit Line from $140 million to $150 million and extends the maturity date to November 30, 2013. All other terms and conditions of the Company’s Credit Line remain in effect.

    According to Peter L. Vosotas, Chairman and CEO, “We are extremely pleased that our consortium of bank lenders has agreed to increase our Credit Line and extend the maturity date. The Credit Line increase will allow us to continue our expansion strategy during the next few years. The Company is very proud to continue its lending relationship with Bank of America which began in March of 1993 and also includes Wells Fargo Preferred Capital, Capital One Bank, First Horizon Bank, and Bank of Montreal as participating banks.”