Posts Tagged ‘JPM’

• Jamie Dimon: A Drag on JPMorgan’s Stock?
  Eddy Elfenbein, June 16th, 2012 at 9:56 am

• CWS Market Review – May 18, 2012
  Eddy Elfenbein, May 18th, 2012 at 7:20 am

  Wall Street’s spring slide got even uglier this past week. The S&P 500 has now dropped for five days in a row and for ten of the last 12. On Thursday, the index closed at its lowest level since January. Measuring from the recent peak on May 1st, the S&P 500 is down 7.18%. Bespoke Investment notes that in the last two months, more than $4 trillion has been erased from global markets.

  I know it’s scary, but let me assure you—there’s no need to panic. In this week’s CWS Market Review, I want to focus on the two events that have rattled Wall Street’s nerves: the massive trading losses at JPMorgan and the growing possibility that Greece will exit the euro. The really interesting angle is that these two events are partially connected. I’ll have more on that in a bit.

  I’ll also talk about how we can protect our portfolios during times of trouble: by focusing on high-quality stocks with generous dividends. Right now, six of our Buy List stocks yield more than 3.4% which is double the going rate for a 10-year Treasury bond. Reynolds American ($RAI), for example, yields a hefty 5.8%. There aren’t many top-notch stocks that can say that. But first, let’s talk about the god-awful mess at JPMorgan.

  How JPMorgan Chase Lost $2 Billion Without Trying

  Last week, JPMorgan Chase ($JPM) stunned Wall Street by announcing an unexpected trading loss of $2 billion. This was especially disappointing because JPM had been one of the best-run banks around. Despite the massive loss, JPM is still on a solid financial footing. Mostly, this is a huge embarrassment for the firm and their loudmouth outspoken CEO Jamie Dimon.

  I honestly don’t know how much longer Dimon can last at JPM. He shouldn’t be on the New York Fed Board, either. In my opinion, bank CEOs shouldn’t draw attention to themselves. Ideally, they should be very dull and very competent. Dimon is half that equation and I fear he’s become a liability for shareholders.

  

  So what the heck happened? I’ll try to explain this in an easy-to-understand way. First, we have to talk about “hedging.” When an investor wants to hedge a bet, this means they want to take positions that offset each other in order to get rid of some aspect of risk.

  Let’s say you’re a bookie. You don’t care who wins the game; you only want to make sure that you’ve taken in the same amount of money from both sides. Now let’s say that your “clients” have bet $1,000 on the Lions and $900 on the Bears. Oops, you’re caught with some risk. No worries, you can place a $100 bet on the Bears with another bookie and presto, you’re back to even (minus some vig costs of course).

  Now back to JPM. Last year the bank wanted to hedge their overall credit risk. The problem is that this isn’t so easy when you’re the size of JPM, so they shorted credit indexes. Or more specifically, they mimicked doing that by buying credit protection on baskets of credit. Now for the other side of the trade, JPM sold protection on an index of credit default swaps called CDX.NA.IG.9. I know that sounds like a George Lucas film, but trust me, it really exists.

  With me so far? The problem with this hedge is that JPM had to sell a lot more protection on the CDS index than they bought on the credit baskets. For a while this worked fine. But late last year, the European Central Bank flooded the credit markets with tons of liquidity. The two sides of the hedge started to move together, not separately. In effect, the Lions and Bears were both winning and JPM had bet against both. Once again, the financial modelers had accurately predicted the past, but they weren’t so hot at predicting the future.

  The bank dug the hole deeper for itself by ratcheting up on the CDS index side of the hedge. Soon hedge funds started to notice the prices getting seriously out of whack. What really struck them was that whoever was on the other side of this trade seemed to have limitless funds. This dude never gave in. They jokingly called him “the London Whale,” and it didn’t take long for people to suspect he was at JPM. Eventually the news broke that it was a French trader in JPM’s London office named Bruno Iksil.

  Now the story gets a little murky. Last week, Jamie Dimon announced the trading losses on a special conference call. To Dimon’s credit, he said it was a massive mistake by the bank. On the call, Dimon said that the bank could incur another $1 billion in losses over the next few quarters as the trade is gradually unwound. It seems that the hedge funds smelled blood, figured out the specifics of the hedge and attacked. Hard. So instead of taking another $1 billion in losses over a few quarters, that got squeezed down to four days. There could be more losses to come.

  What to Do With JPMorgan?

  Shares of JPMorgan are down from over $45 in early April to just $33.93 based on Thursday’s close. As frustrating as the past week has been, I’m sticking with the bank. I’m furious with JPM’s management and their careless risk management. But with investing, we need to shut off our emotions and stick with the facts.

  Let’s run through some numbers: Last year, JPM made $4.48 per share. For the first quarter, they made $1.31 per share which was 13 cents better than estimates. Those are impressive results. If the bank loses a total of $3 billion in this fiasco, that will come to about 80 cents per share. In other words, this is a punch in the face but it’s not a dagger to the heart.

  At $34, JPM is clearly a bargain. When it will recover is still a mystery, but time is on the side of patient investors. Due to the recent events, I’m going to lower my buy price on JPM from $50 to $38. At the current price, the stock yields 3.54%. Make no mistake: This is a cautious buy, but the price is very good.

  Euro So Beautiful

  The other issue that’s got Wall Street worried is Greece. The politicians there haven’t been able to form a governing coalition, so they’re going to have elections again next month. The only issue that unites voters is anger at the bailouts. My guess is that some left-wing anti-austerity coalition will eventually prevail.

  On Thursday, Fitch downgraded Greece’s debt to junk. Actually, it was already junk, but now it’s even junkier junk. For a long time, I didn’t think it was possible for Greece to leave the euro. Now it seems like a real possibility, but it will be a costly one. Greek savers have already been pulling their money out of banks because they want to hold on to euros. Their fear is that if Greece changes over to drachmas, the new currency will be worth a lot less and I can hardly blame them.

  The standard line in Europe is that no one wants Greece to leave the euro, but also no one seems willing to do what’s needed to keep them in. The Greek economy isn’t strong enough to pay back their debt because the debt is so heavy that it’s weighing down the economy (Mr. Circle meet Mr. Vicious). There’s simply not much time left. Greece’s deputy prime minister said the country will run out of money in a few weeks. If Greece ditches the euro, Ireland and Spain might be right behind. In fact, foreigners are even pulling their money out of Italian banks. This is getting worse by the day.

  How exactly would Greece leave the euro? Eh…that’s a good question and I really don’t know. But if Greece were to leave the euro, a lot of eurozone banks would take a major hit. I don’t think the damage would necessarily be as bad as feared, assuming the banks were recapitalized. If enough people want this done, it can be done.

  The standard line is that this is what Argentina did several years ago. The difference is that the global economy was much stronger then. I think the best path for countries like Greece, Portugal, Ireland and Italy is to go full Iceland: to depreciate their currencies. It’s painful in the short-run, but it’s a much sounder strategy. Interestingly, Iceland has actually been doing rather well lately.

  So with Europe already in recession and China slowing down, what’s the impact for investors? One impact is that the euro has been plunging against the dollar. The currency is down five cents this month to $1.27. I think it will head even lower.

  Another impact is that U.S. Treasuries are surging as investors head for cover. On Thursday, the yield on the 10-year Treasury closed at 1.69% which is at least a 59-year low. The Fed’s data only goes back to 1953. The intra-day low from last September was slightly lower. The bond rally has lured money away from stocks, but that may soon end.

  

  A further impact is that the stock sell-off has been felt most heavily among cyclical stocks. Over the last two months, the Morgan Stanley Cyclical Index (^CYC) is down nearly 15%. The Morgan Stanley Consumer Index (^CMR), however, is down less than 3% over the same time span. That’s a big spread. You can see the impact of this trend by looking at Buy List stocks such as Ford ($F) and Moog ($MOG-A).

  Protect Yourself by Focusing on Yield

  The market’s recent drop has given us several good bargains on our Buy List. AFLAC ($AFL), for example, is now below $40. It was only three weeks ago that the company beat earnings by nine cents per share. Here’s a shocking stat: The tech sector has dropped for 12 days in a row. Oracle ($ORCL) is now going for less than 10 times next year’s earnings. That would have been unthinkable during the Tech Bubble.

  This week, I want to highlight some of our higher-yielding stocks on the Buy List. I always urge investors to look out for stocks that pay good dividends. Their shares are more stable, and they hold up much better whenever the market gets jittery.

  For example, look at CA Technologies ($CA). This was another company with a solid earnings report and the stock now yields 3.90%. Nicholas Financial’s ($NICK) yield is up 3.21%. I think NICK can easily raise its dividend by 30% to 50% this year.

  I already mentioned JPM’s yield, but check out another bank: Hudson City ($HCBK) which yields 5.23%. Last month, Johnson & Johnson ($JNJ) raised its dividend for the 50th year in a row. JNJ now yields 3.84%.

  Sysco ($SYY), which also beat earnings, now yields 3.89%. Harris ($HRS) raised its dividend by 18% earlier this year. The shares yield 3.39%. Our highest-yielder is Reynolds American ($RAI). Just two weeks ago, the tobacco stock bumped up its quarterly dividend by three cents per share. RAI currently yields a sturdy 5.80%. These are all excellent buys and they’ll work to protect your portfolio during downdrafts while having enough growth to prosper during a rally.

  That’s all for now. I’m looking for a relief rally next week as traders get ready for Memorial Day. On Monday, Medtronic ($MDT) is due to report earnings. They’ve already told us to expect earnings between 97 cents and $1 per share. I also expect Medtronic to increase its dividend for the 35th year in a row very soon. 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

• Losses at JPMorgan Grow
  Eddy Elfenbein, May 17th, 2012 at 9:38 am

  Jamie Dimon said that the trading losses at JPMorgan Chase ($JPM) totalled $2 billion and that there might be another $1 billion to add over the next few quarters. The bank was stuck with a terrible position that it was trying to unwind. The market smelled blood and traders have attacked JPM’s position. Instead of the next few quarters, it looks like their losses grew by another $1 billion over four days.

  A spokeswoman for the bank declined to comment, although Mr. Dimon has said the total paper trading losses will be volatile depending on day-to-day market fluctuations.

  The Federal Reserve is examining the scope of the growing losses and the original bet, along with whether JPMorgan’s chief investment office took risks that were inappropriate for a federally insured depository institution, according to several people with knowledge of the examination. They spoke on the condition of anonymity because the investigation is still under way.

  The overall health of the bank remains strong, even with the additional losses, and JPMorgan has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer.

  Still, the huge trading losses rocked Wall Street and reignited the debate over how tightly giant financial institutions should be regulated. Bank analysts say that while the bank’s stability is not threatened, if the losses continue to mount, the outlook for the bank’s dividend will grow uncertain.

  The bank’s leadership has discussed the impact of the losses on future earnings, although a dividend cut remains highly unlikely for now. In March, the company raised the quarterly dividend by 5 cents, to 30 cents, which will cost the bank about $190 million more this quarter.

• CWS Market Review – May 11, 2012
  Eddy Elfenbein, May 11th, 2012 at 7:40 am

  The stock market finally broke out of its trading range this week. Unfortunately, it was to the downside. More troubles from Europe, including shake-up elections in France and Greece, helped the S&P 500 close Wednesday at its lowest level in nine weeks. However, the initial jobless claims report on Thursday helped us make up a little lost ground.

  In this week’s CWS Market Review, I’ll explain why everyone’s so freaked out (again) by events in Europe. I’ll also talk about the latest revelations from JPMorgan Chase ($JPM). The bank just told investors that it lost $2 effing billion on effing derivatives trades gone effing bad. I’ll have more to say on that in a bit. We also had more strong earnings reports from our Buy List stocks DirecTV ($DTV) and CA Technologies ($CA), and shares of CR Bard ($BCR) just hit a 10-month high.

  Greece Is Bad but the Real Story Is Spain

  But first, let’s get to Greece. Here’s the 411: The bailout deals reached by Greece required them to get their fiscal house in order. The problem is that no one asked the voters. Now they’ve been asked and the voters don’t like it at all. Actually, I understated that—they’re royally PO’d.

  Greece is massively in debt. They owe the equivalent of Switzerland’s entire GDP. Politically, everything has been upended. In Greece, there are two dominant political parties and both got creamed in the recent election. Seventy percent of Greeks voted for parties opposed to the bailouts. Mind you, the supposed beneficiaries of the bailout are the ones most opposed to them.

  Since there was no clear-cut winner in the election, folks are scrambling to build a governing coalition. This won’t be easy. Whatever they do come up with probably won’t last long and they’ll need new elections. As investors, we fortunately don’t need to worry about the minutia of Greek politics. The important aspect for us is that the Greek public wants to ditch the austerity measures into the Aegean, but that means giving up all that euro cash that was promised them.

  My take is that the bigwigs in Greece will do their best to stay in the euro but try to get the bailout terms renegotiated. That puts the ball in Europe’s court, and by Europe, I mean Germany. Too many people have invested too much to see the European project go down in flames. I think the Europeans will ultimately make some concessions in order to keep the euro going. If one country leaves the euro, it sets a precedent for others to leave—and that could start a flood.

  As bad of a shape as Greece is in, they’re small potatoes (olives?). The real story is what’s happening in Spain. For the fourth time, the country is trying to convince investors that its screwed-up banks aren’t screwed-up. The problem is that Spanish banks are loaded down with toxic real estate debt.

  The Spanish government is trying to prop up the banks, but it may delay the problem rather than solve it. It just took control of Bankia which itself was formed when the government forced some smaller banks together in an effort to save them. What’s most troubling about the problems in Spain is that the future is so cloudy. I really can’t say what will happen. Nouriel Roubini said that Spain will need an external bailout. If so, that may lead to a replay of what we’re seeing in Greece, except it would be much, much larger.

  The immediate impact of the nervousness from Europe is that it spooked our markets. On May 1st, the Dow got to its highest point since 2007. The index then fell for six straight days which was its longest losing streak since August. But here’s the key: not all stocks are falling in the same manner.

  Investors have been rushing away from cyclical sectors and towards defensive sectors. For example, the Utilities Sector ETF ($XLU) closed slightly higher on Thursday than it did on May 1st. Low-risk bonds are also doing well. Two months ago, the 30-year Treasury nearly broke above 3.5%. This past week, it dipped below 3%. On Thursday, Uncle Sam auctioned off $16 billion in 30-year bonds and it drew the heaviest bidding in months.

  The trend towards defensive stocks is holding back some of our favorite cyclical stocks like Ford ($F), Moog ($MOG-A) and AFLAC ($AFL). Let me assure investors that these stocks are very good buys right now and I expect them to rally once the skies clear up.

  JPMorgan Chase Reveals Huge Trading Losses

  Now let’s turn to some recent news about our Buy List stocks. The big news came after Thursday’s closing bell when JPMorgan Chase ($JPM) announced a special conference call. CEO Jamie Dimon told investors that the bank took $2 billion in trading losses in derivatives and that it could take another $1 billion this quarter. Jamie, WTF?

  For his part, Dimon was clear that the bank messed up. This is very embarrassing for JPM and frankly, I don’t expect this type of mismanagement from them. The stock will take a big hit from this news, but it doesn’t change my positive outlook for the bank. (Matt Levine at Dealbreaker has the best explanation of the losses: “This was not driven by the market moving against them (though it seems to have); it was driven by them getting the math wrong”).

  As ugly as this is, it’s not a reflection of JPM’s core business operations. Sure, it’s terrible risk-management. But as far as banking goes, JPM is in good shape. Don’t be concerned that JPM faces a similar fate as the banks in Spain. They don’t. In fact, most banks in the U.S. are pretty safe right now. Warren Buffett recently contrasted U.S. banks with European banks when he said that our banks have “liquidity coming out of their ears.” He’s right. JPMorgan Chase remains a very good buy up to $50 per share.

  Bed Bath & Beyond ($BBBY) surprised us this week by buying Cost Plus ($CPWM) for a half billion dollars. The deal is all-cash which is what I like to hear. The best option for any company is to pay for an acquisition without incurring new debt.

  BBBY said they expect the deal to be slightly accretive. That means that BBBY is “buying” CPWM’s earnings at a price less than the going rate for BBBY’s earnings. As a result, the deal will show a net increase to BBBY’s bottom line for this year. The press release also said: “Bed Bath & Beyond Inc. continues to model a high single digit to a low double digit percentage increase in net earnings per diluted share in fiscal 2012.” I’m keeping my buy price at $75.

  Now let’s look at some earnings. On Monday, Sysco ($SYY) had a decent earnings report although the CEO said the results “fell short of our expectations.” Sysco is a perfect example of a defensive stock since the food service industry isn’t adversely impacted by a downturn in the business cycle. The key with investing in Sysco is the rich dividend. The company has increased their payout for 42 years in a row, and I think we’ll get #43 later this year, although it will be a small increase. Going by Thursday’s close, Sysco yields 3.87%. Sysco is a good buy up to $30.

  DirecTV ($DTV) reported Q1 earnings of $1.07 per share. That’s a nice jump over the 85 cents per share they earned a year ago. DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America. DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they added 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America. Last year, revenue from Latin America revenue grew by 42%.

  DirecTV has projected earnings of $4 per share for this year and $5 for 2013. This earnings report tells me they should have little trouble hitting those goals. The shares are currently going for less than 11 times this year’s earnings estimate. They’re buying back stock at the rate of $100 million per week. DirecTV is a solid buy below $48 per share.

  On Thursday, CA Technologies ($CA) reported fiscal Q4 earnings of 56 cents per share. That’s a good result and it was four cents better than Wall Street’s estimates. For the year, CA made $2.27 per share which is a nice increase over the $1.92 from last year. For fiscal 2013, CA sees revenues ranging between $4.85 billion and $4.95 billion and earnings-per-share ranging between $2.45 and $2.53. I’m impressed with that forecast, but Wall Street had been expecting revenues of $5 billion and earnings of $2.50 per share. The stock was down in the after-hours market on Thursday, but I don’t expect any weakness to last. CA is going for less than 11 times the low-end of their forecast.

  A quick note on Oracle ($ORCL): The stock took a hit this week on the news of Cisco’s ($CSCO) lousy outlook. Oracle is also in the middle of a complicated intellectual property trial with Google ($GOOG). I doubt the trial will go Oracle’s way, but the dollar amounts involved are pretty small compared with the size of these two firms. On Thursday, Oracle fell below $27 for the first time since January. That’s a very good price. The stock is a good buy up to $32.

  That’s all for now. Wall Street will be focused on Facebook’s massive IPO scheduled for next Friday. The stock might fetch 99 times earnings. I’m steering clear of this one. 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

• CWS Market Review – April 20, 2012
  Eddy Elfenbein, April 20th, 2012 at 5:16 am

  We’re entering the high tide of the first-quarter earnings season, and so far earnings have been quite good. Of course, expectations had been ratcheted down over the past several months, but there have still been fears on Wall Street that even the lowered expectations were too high.

  According to the latest figures, 103 companies in the S&P 500 have reported earnings and 82% have beaten Wall Street’s expectations. That’s very good. If this “beat rate” keeps up, it will be the best earnings season in at least ten years.

  Earnings for our Buy List stocks are doing especially well. JPMorgan Chase, Johnson & Johnson and Stryker all beat expectations. Plus, J&J did something I always love to see: raise their full-year forecast.

  Next week is going to be another busy earnings week for us; we have five Buy List stocks scheduled to report earnings. In this week’s issue, I’ll cover the earnings outlook for our Buy List. I’m expecting more great results from our stocks. I’ll also let you know what some of the best opportunities are right now (I doubt AFLAC will stay below $43 much longer.) But before I get to that, let’s take a closer look at our recent earnings reports.

  Three Earnings Beats in a Row

  In last week’s CWS Market Review, I said that I expected JPMorgan Chase ($JPM) to slightly beat Wall Street’s consensus of $1.14 per share. As it turned out, the House of Dimon did even better than I thought. On Friday, the bank reported earnings of $1.31 per share. Interestingly, JPM’s earnings declined slightly from a year ago, but thanks to stock repurchases, earnings-per-share rose a bit.

  The stock reacted poorly to JPM’s earnings—traders knocked the stock down from $45 to under $43—but I’m not too worried. The bank had a very good quarter and Jamie Dimon has them on a solid footing. Last quarter was better than Q4 and this continues to be one of the strongest banks on Wall Street. (If you want more details, here’s the CFO discussing JPM’s earnings.) Don’t be scared off; this is a very good stock to own and all the trends are going in the right direction. I rate JPMorgan Chase a “strong buy” anytime the shares are less than $50.

  On Tuesday, Stryker ($SYK) reported Q1 earnings of 99 cents per share which matched Wall Street’s forecast. Last week, I said that 99 cents “sounds about right.” I was pleased to see that revenues came in above expectations and that gross margins improved. That’s often a good sign that business is doing well.

  Stryker’s best news was that it reiterated its forecast for “double-digit” earnings growth for this year. I always tell investors to pay attention when a company reiterates a previous growth forecast. I think too many investors tend to ignore a reiteration as “nothing new,” but it’s good to hear from a company that its business plan is still on track. I suspect that Stryker will raise its full-year forecast later this year. Stryker is an excellent buy up to $60.

  

  Last week, I said that Johnson & Johnson ($JNJ) usually beats Wall Street’s consensus by “about three cents per share.” This time they beat by two cents which is probably more of a testament to how well the company controls Wall Street’s expectations. For Q1, J&J earned $1.37 per share. I’ve looked at the numbers and this was a decent quarter for them.

  For the first time in a while, I’m excited about the stock. A new CEO is about to take over, and the company will most likely announce their 50th-consecutive dividend increase. The company also won EU approval for its Synthes acquisition. But the best news is that the healthcare giant raised its full-year guidance by two cents per share. The new EPS range is $5.07 to $5.17. Johnson and Johnson is a good stock to own up to $70 per share.

  Focusing on Next Week’s Earnings Slate

  Now let’s take a look at next week. Tuesday, April 24th will be a busy day for us as AFLAC ($AFL), Reynolds American ($RAI) and CR Bard ($BCR) are all due to report. Then on Wednesday, Hudson City ($HCBK) reports and on Friday, one of our quieter but always reliable stocks, Moog ($MOG-A), will report earnings.

  Let’s start with AFLAC ($AFL) since that continues to be one of my favorite stocks and because it has slumped in recent weeks. AFLAC has said that earnings-per-share for this year will grow by 2% to 5% and that growth next year will be even better. Considering that the insurance company made $6.33 per share last year, that means they can make as much as $6.65 this year and close to $7 next year.

  So why are the shares near $42 which is less than seven times earnings? I really don’t know. AFLAC has made it clear that they shed their lousy investments in Europe. Wall Street’s consensus for Q1 earnings is $1.65 per share which is almost certainly too low. I think results will be closer to $1.70 per share but I’ll be very curious to hear any change in AFLAC’s full-year forecast. Going by Thursday’s close, AFLAC now yields more than 3.1% which is a good margin of safety. AFLAC continues to be an excellent buy up to $53 per share.

  I’ve been waiting and waiting for CR Bard ($BCR) to break $100. The medical equipment stock has gotten close but hasn’t been able to do it just yet. Maybe next week’s earnings report will be the catalyst. Three months ago, Bard said to expect Q1 earnings to range between $1.53 and $1.57. That sounds about right. I like this stock a lot. Bard has raised its dividend every year for the last 40 years. It’s a strong buy up to $102.

  With Reynolds American ($RAI), I’m not so concerned if the company beats or misses by a few pennies per share. The important thing to watch for is any change in the full-year forecast of $2.91 to $3.01 per share. If Reynolds stays on track to meet its forecast, I think we can expect the tobacco company to bump up the quarterly dividend from 56 cents to 60 cents per share.

  Reynolds American has been a bit of a laggard this year. It’s not due to anything they’ve done. It’s more of a result of the theme I’ve talked about for the past few weeks: investors leaving behind super-safe assets for a little more risk. It’s important to distinguish if a stock isn’t doing well due to poor fundamentals or due to changing market sentiment. Reynolds is still a very solid buy. The shares currently yield 5.4%.

  Hudson City Bancorp ($HCBK) raced out to a big gain for this year, but it’s given a lot back in the past month. The last earnings report was a dud, but the bank is still in the midst of a recovery. Some patience here is needed. Wall Street’s consensus for Q1 is for 15 cents per share. I really don’t know if that’s in the ballpark or not, but what’s more important to me is the larger trend. Hudson City is cheap and a lot of folks would say there’s a good reason. I think the risk/reward here is very favorable. At the current price, Hudson City yields 4.8%. The shares are a good buy up to $7.50.

  As I mentioned before, Moog ($MOG-A) is one of our most reliable stocks. The company has delivered a string of impressive earnings reports. Moog has said that it sees earnings for this year of $3.31 per share (note that their fiscal year ends in September). That gives the stock a price/earnings ratio of 12.2. I think Moog can be a $50 stock before the year is done.

  There are three Buy List stocks due to report soon but the companies haven’t told us when: Ford ($F), DirecTV ($DTV) and Nicholas Financial ($NICK). Ford and Nicholas are currently going for very good prices. They usually report right about now, so the earnings report may pop up any day now. I think both stocks are at least 30% undervalued.

  That’s all for now. Next week will be a busy week for earnings. We’re also going to have a Fed meeting plus the government will release its first estimate for Q1 GDP growth. 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

• JPMorgan Earns $1.31 Per Share
  Eddy Elfenbein, April 13th, 2012 at 2:18 pm

  This morning, JPMorgan Chase ($JPM) reported first-quarter earnings of $1.31 per share which was 13 cents more than Wall Street’s estimate (though I saw different reports of what the consensus was). The bank’s net income fell slightly but thanks to stock buybacks, the per-share figure was slightly higher than a year ago.

  The stock was up during the pre-market but the shares gradually lost ground and are now down about 2.2% for the day. My take is that the market isn’t pleased with JPM’s investment banking business. Nelson D. Schwartz at Deal Book writes:

  Mortgage-related liabilities continued to be a drain on earnings, with the bank adding $2.5 billion in reserves to cover litigation expenses, reducing earnings by 39 cents a share.

  Despite the run-up in the stock market, trading volumes in the first quarter haven’t been especially robust. At JPMorgan’s investment bank, revenue was down 11 percent, to $7.3 billion. Its net income was down 29 percent, to $1.7 billion.

  The bank also faces tough comparisons with a strong first quarter in 2011, when healthy trading revenue and reserve releases lifted results.

  The amount set aside for compensation at the investment bank fell to $2.9 billion, from $3.29 billion in 2011. Headcount dropped to 25,707 from 26,494. Based on those figures, average compensation declined to $112,800, from $124,300 a year ago.

  First-quarter results included several one-time items, including a $1.8 billion gain from reduced loan loss reserves, which added 28 cents a share to earnings. It also included a $1.1 billion gain from a bankruptcy settlement linked to the acquisition of Washington Mutual, which raised profit by 17 cents.

  Here’s the CFO talking about the earnings on CNBC:

  On the earnings calls, Jamie Dimon said that the bank is “very conservative” with its investments. I’ve looked at the numbers and this was a very good quarter for JPM. Delinquencies are down and the credit card and mortgage business is doing well.

• CWS Market Review – April 13, 2012
  Eddy Elfenbein, April 13th, 2012 at 8:20 am

  That money talks, I’ll not deny, I heard it once: It said, ‘Goodbye’.
  -Richard Armour

  After sliding for five days in a row, the stock market has started to right itself. On the first trading day of April, the S&P 500 closed at a 46-month high but promptly broke up like a North Korean rocket and shed 4.26% in a week. That’s not a major pullback, but it’s one of the biggest slumps we’ve seen in months. Thanks to rallies on Wednesday and Thursday, the market has already made back half of what it lost (in fact, the traceback has been almost exactly 50%).

  What’s most surprising about the market so far in April is the recrudescence of volatility on extremely low volume. Consider this: In the first 64 trading days of 2012, the S&P 500 suffered just one daily drop of more than 1%. In 2011, that happened 48 times. Then suddenly, we had three 1% drops in four days. Yet average daily trading volume last month was the lowest since December 2007. What gives?

  In this issue of CWS Market Review I want to look at why the market has gotten so jittery all of a sudden. But more importantly, I want to take a look at the first-quarter earnings season. Over the next month, 16 of our Buy List companies are due to report earnings. As always, earnings season is the equivalent of Judgment Day for Wall Street. I’m expecting good news for our stocks, but the outlook may not be so sunny for the rest of Wall Street.

  Sorry, Folks. QE3 Is Not Coming

  Part of the reason why the stock market got a sudden case of the worries is what I mentioned in the previous two editions of CWS Market Review. Wall Street has been focused on the March jobs report and first-quarter earnings season. The jobs report wasn’t so hot and the market took its pound of flesh. Earnings season is the next hurdle.

  Interestingly, the stocks that dropped the most during the five-day selloff were often the ones that rallied the most on Wednesday and Thursday. These tended to be cyclical stocks and financials. It’s also interesting to note that the Morgan Stanley Cyclical Index (^CYC) had peaked on March 19th, two weeks before the rest of the market. This means, the cyclicals had already started to erode before the jobs report pullback.

  The stock market was given a boost on Thursday when two Fed officials, Janet Yellen and William Dudley, said that rates will have to stay low for a while longer. That‘s not a big surprise. Let me add a quick note on QE3. Some folks think the weak jobs report will cause Bernanke and his buddies at the Fed to jump in with a third round quantitative easing. Do not believe any of this. We often forget that the C in FOMC stands for “committee” and it’s obvious that the policy-makers are very far from a consensus on this issue. The media has been searching for any hint, no matter how trivial, that QE3 is on the way. It’s not. Plus, the jobs report was hardly a harbinger of a new recession. For now, the talk of QE3 is pure nonsense.

  Although the selloff was initially triggered by the jobs report, it was kept alive by bad news from Europe and China. The yield spreads in Europe (specifically, between any country and Germany) have been inching upward, particularly in Spain. I think it’s somewhat amusing that Monsieur Sarkozy is using the example of Spain to scare French voters from supporting the socialist opposition in next month’s election.

  The wider spreads signal some nervousness from investors but it’s important to note that we’re a long way from the frenzy we had last year. I want to urge investors not to be carried away by these renewed concerns from Europe. The fears of Spain not being able to pay her bills are greatly overblown. Europe will not sink the U.S. stock market.

  

  Q1 Earnings: The Story Is About Margins

  Last earnings season was disappointing. This time around, investors don’t expect much. The numbers vary but the consensus is that first-quarter earnings will be about the same as they were last year. In other words, zero profit growth. How times have changed. Not that long ago, analysts were expecting double-digit earnings growth for Q1.

  One of the problems facing many companies is that higher fuel costs are cutting into profits. All 10 sectors of the S&P 500 will see higher sales numbers, but at least seven of those sectors will have a hard time turning those top-line dollars into bottom-line profits.

  The story here isn’t that a slowdown is upon us. Rather, it’s that business costs are rising after being held back for so long. Part of this is the cost for new employees, which is a good thing. As I’ve said before, the story here is about margins, not a weakening economy. Even with as much as earnings growth estimates have fallen, the stock market hasn’t responded in kind. That’s because Wall Street correctly sees this as a temporary issue. In fact, the current view is that earnings growth will reaccelerate later this year as Europe comes back online.

  The important point for us is that even with little earnings growth, the stock market is still a very good value compared with the competition. Bond yields have climbed, but they’re still way too low. As long as the migration away from super-safe assets continues, our Buy List will thrive.

  Now I want to focus on some upcoming earnings reports for our Buy List stocks (you can see an earnings calendar here). Unfortunately, not all of our companies have said when earnings will come out yet.

  Expect an Earnings Beat at JPMorgan

  On Friday, JPMorgan Chase ($JPM) will be our first Buy List stock to report earnings. With a 34.86% year-to-date gain, the bank is our top-performing stock this year. That’s not bad for a little over three months’ work. (It’s always a surprise to me who the #1 stock will be.) What’s remarkable is that even with as well as the stock has done, the shares are still going for less than 10 times this year’s earnings estimate.

  Wall Street currently expects JPM to report earnings of $1.14 per share for Q1. That’s down a little from one year ago. That estimate, however, has been climbing in recent weeks while estimates for many other companies have been pared back. I’ve looked at the numbers and I expect a small earnings beat from JPM. But I’ll be curious to hear what CEO Jamie Dimon has to say about the bank’s business.

  Not only is JPM a big report for us, but it’s also a bellwether for the entire financial sector. Jamie Dimon likes to see himself as the unofficial spokesman for the banking world and a lot of investors want to hear what he has to say. JPM even moved up their earnings call so Jamie could hit the stage before Wells Fargo ($WFC).

  I agree with Dimon’s assessment that the last earnings report was “modestly disappointing.” One of the concerns this time around is investment banking, but Jamie has been clear that the division will rebound. For Q1, trading profits will probably be down from a year ago but better than Q4. This is a solid bank and I was particularly impressed by the 20% dividend increase. Bottom line: I’m sticking with Jamie, and I’m raising my buy price on JPMorgan Chase from $45 to $50 per share.

  Johnson & Johnson: 50 Straight Years of Dividend Increases

  Next Tuesday, we’ll get two more earnings reports—Johnson & Johnson ($JNJ) and Stryker ($SYK). I’m afraid that J&J has been a weak performer this year. In January, the healthcare giant said that earnings-per-share for 2012 will range between $5.05 and $5.15. Wall Street had been expecting $5.21.

  J&J has been dogged by a series of quality control problems, and the stock has lagged. Later this month, Alex Gorsky will take over as the new CEO. I think that’s a good choice particularly since he helped the company tackle its internal problems. Wall Street’s consensus for Q1 is for $1.35 per share which is exactly what Johnson & Johnson made one year ago. The stock usually beats by about three cents per share, but I’m not going to get worked up by a result that’s within a few pennies of $1.35. What I want to see is solid proof of a turnaround, although I realize it may take some time.

  The best part about J&J is the rich dividend. Going by Thursday’s close, the stock yields 3.55%. But the yield to investors is probably even higher. Later this month, I expect the company to announce its 50th-straight dividend increase. But coming after January’s lower guidance, the quarterly dividend will probably rise from 57 cents to 60 cents per share. If that’s right, J&J now yields 3.74%. I’m keeping my buy price at $70.

  Stryker Is a Good Buy Up to $60

  Shares of Stryker ($SYK) haven’t done much for the past several weeks which is puzzling because the business has been strong. Stryker has said that it sees “double digit” earnings growth for 2012. I doubt they’ll have trouble hitting that forecast. In fact Stryker is probably low-balling us, but that’s understandable since the year is still so young.

  For Q1, the Street expects earnings of 99 cents per share which sounds about right. Stryker rallied last earnings season after they met expectations. The business tends to be very stable. I think the stock is a good value here and I’m raising my buy price to $60 per share.

  Before I go, I want to highlight some other good values on the Buy List. Among the financials, AFLAC ($AFL), Nicholas Financial ($NICK) and Hudson City ($HCBK) are all going for a good price. I also think that Ford ($F) has drifted down to bargain territory as well.

  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

• Dividends Are Making a Comeback
  Eddy Elfenbein, April 3rd, 2012 at 11:04 am

  Now that the first quarter is over, we have some stats on dividends. The S&P 500 paid out 7.09 in dividends (that’s the number adjusted for the index) which is a 15.06% increase over the first quarter of 2011.

  I think this will be a very good year for dividends, especially with the dividend news from Apple ($AAPL). The market also responded very well to the five-fold dividend increase from CA Technologies ($CA), plus the recent increase at JPMorgan ($JPM). So far this year, there have been 122 dividend increases in the S&P 500, plus seven new dividend payers. Only three companies have lowered their payouts.

  Looking at dividends has been a surprisingly good way of valuing the market over the past few years. You can never be quite sure about a company’s earnings or cash flow since accounting rules allow for enormous latitude. But if a company is willing to send shareholders a check, you can be pretty certain those numbers are legit (though not always).

  Dividends also tend to be very stable. Once a company raises its quarterly dividend, there’s an implicit understanding that that’s the new level. Shareholders will put up with a lot, but they do not like cuts in dividends, and woe be unto the company that lowers their payout. The recent recession, however, saw an unusually higher number of cut dividends or suspended payouts altogether. In 2009, annual dividends dropped by 21%. Contrast this with 2001 when the stock market crash led to dividends falling by just 3%.

  The lower dividends this time around have been largely concentrated in the financial sector. Part of this is due to rules around receiving TARP payments. I don’t have the exact numbers for the financial sector but the quarterly dividends for the Financial Sector ETF ($XLF) fell about 70%. The Financial Sector currently makes up 15% of the S&P 500.

  The good news is that higher profits are leading to higher dividends. Dividends are on pace to hit a new record this year. On top of that, the dividend payout ratio—the percent of profits paid out as dividends—is still below 30% which is far below normal.

  Here’s a look at the S&P 500 in the black line along with its dividends in the blue line. The black line follows the left scale and the blue line follows the right. The two lines are scaled at a ratio of 50-to-1 which means that the S&P 500 yields exactly 2% whenever the lines cross.

  

  I think the chart shows some interesting facts. For example, you can see how different the market crashes of 2000-01 and 2008-09 were. In the first, prices soared above fundamentals. In the latter, fundamentals crumbled beneath the price. From 2003 to 2007, stock prices generally followed the trend in dividends. We can also see how much investors panicked during the financial crisis. In March 2009, the S&P 500’s dividend yield eventually reached 4%.

  I asked Howard Silverblatt, the head stat guy at S&P, to tell me the dividend estimate for this year. He said it’s $29.70. To equal a dividend yield of 2%, the S&P 500 needs to get to 1,485 which is a 4.6% jump by the end of the year.

• JPMorgan Chase Raises Dividend to 30 Cents
  Eddy Elfenbein, March 13th, 2012 at 3:16 pm

  In last week’s CWS Market Review, I wrote:

  Jamie Dimon can easily afford to raise JPMorgan’s ($JPM) dividend from the current 25 cents to, say, 30 cents per share. Jamie has said that he’d prefer to ditch the dividend altogether but he understands that shareholders like it. The dividend increase last year was announced on March 18th, so another increase may come soon.

  Sure enough, look at what just happened:

  JPMorgan Chase & Co. (JPM) said it boosted its common stock quarterly dividend by 5 cents to 30 cents a share.

  The lender also authorized a new $15 billion stock buyback program, of which up to $12 billion is approved for this year and up to an additional $3 billion is approved through the end of the first quarter of 2013. JPMorgan said the Federal Reserve raised no objections to the proposed capital distributions.

  The shares are currently up about 6% today. Going by this afternoon’s price, JPM yields 2.8%.

  BTW, have you signed up for our free newsletter? Well…what are you waiting for??

• Mike Mayo: JPM Worth More If Split Up
  Eddy Elfenbein, February 27th, 2012 at 12:47 pm

  From Bloomberg:

  JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets, should consider breaking up and selling businesses because its parts are worth one-third more than its market value, according to Mike Mayo, an analyst at CLSA Ltd.

  While JPMorgan’s stock has outperformed its peers, the New York-based company has trailed the leading firms in its individual businesses, Mayo wrote in a note e-mailed today. JPMorgan executives must make the case at tomorrow’s investor conference for why the firm shouldn’t be broken up, he wrote.

  “At what point does the conglomerate discount become so great that it encourages the company to take action?” Mayo wrote. “The stock seems undervalued, but the question is how and when this value gets realized?”

  Wall Street expects the bank to earn $4.66 per share which means it’s going for 8.2 times earnings. Warren Buffett owns JPM on his personal account.