Waiting on the Fed
Posted by Eddy Elfenbein on November 3rd, 2010 at 11:30 am

Now that the election is finally past us, we can turn our attention to the Fed and the announcement that’s due at 2:15 pm. How big will QE2 be?

I can guarantee you that some commentators will see it as far too big while others will see it as far too small. I’m starting to expect that the Fed may use a two-part strategy to boost the “headline effect.” For example, they may announce $500 billion in Treasury purchases followed by $300 billion in purchases from the payments from their mortgage holdings. Something like that. But really, I just don’t know, though I suspect that the market will be disappointed.

The indexes are just about flat today. The election seems to have gone according to most expectations, so the market isn’t digesting any major surprises. There also isn’t much going on with the Buy List today. Most of our stocks are near flat. Stryker (SYK) is up about 2.9%, making it our best mover on the day. Currently, the Buy List is up 0.08% today compared with a loss of 0.35% for the S&P 500.

Stay tuned for the Fed!

Morning News: November 3, 2010
Posted by Eddy Elfenbein on November 3rd, 2010 at 7:27 am

Dollar Steady but Seen Undermined by Fed QE

Dollar Falls Versus Most Counterparts on Prospects for Fed Bond Purchases

Bernanke Faces Greater Scrutiny After Republican Election Gains

Global Markets Look Past U.S. Election to Fed

SEC Mulls Ban on Unfettered Access to Markets

San Francisco Bans Happy Meals

Cotton Clothing Price Tags to Rise

Aetna 3Q Net Up 53% On Gains, Lower Medical Costs; View Raised

BP’s Dividend Takes Back Seat

Companies May Have to Make Amends After Midterm Elections

Cyclicals Are Still Rich
Posted by Eddy Elfenbein on November 2nd, 2010 at 1:43 pm

Here’s an admittedly crude metric I like to use to look at the valuation of cyclical stocks. These are stocks of companies whose businesses are closely tied to the economic cycle. This is the ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500:

In other words, when the line goes up, cyclicals are out-performing.

On April 26, the ratio closed at 0.8034, its highest reading ever. Since then, the ratio has moved down very slightly. In March of 2009, the ratio got to as low as 0.4184. Historically, when the cycle switches directions, it’s a big deal and it last for a few years (though not always).

The S&P 500 is currently trading around 1195. If it closes there, this would be the highest close since May 3 when the index was at 1202.26. The high for this year came on April 23 when the S&P 500 closed at 1217.28.

Even though the S&P 500 is still short of its high, the Dow is very close to making a new high. The Dow is currently at 11,217 which is higher than its April high close (which came on the 24th instead of the 23rd) at 11,205.03. The Dow is currently on track for its highest close since September 19, 2008 at 11,388.44.

With 0% of the Vote In….
Posted by Eddy Elfenbein on November 2nd, 2010 at 10:44 am

While we’re all waiting for the election returns to come in, here are a few items I found interesting:

Bespoke has a great post that notes the divergence in the recent rally. The weaker dollar is helping more internationally-focused companies. As a result, stocks of companies with no foreign sales are up just 10.36%. But stocks with more than half their sales coming from outside the U.S. are up 17.55%.

Michael Stokes takes a look at trading gold using my gold model.

The latest Intrade data shows the GOP gaining 63.75 seats with a standard deviation of 11.3. That’s based on the 50-seat and 60-seat contracts. If we use the 60-seat and 70-seat contracts, it’s a gain of 64.3 seats with a standard deviation of 13.

The lede of this story sounds like it’s from a Carson monologue from 1986:

Gov. Arnold Schwarzeneger says welfare recipients can no longer use state-issued debit cards at medical marijuana shops, psychics and other businesses whose services have been deemed “inconsistent with the intent” of the program.

On November 5, 1974, Jerry Brown was first elected Governor of California. The Dow was at 674.75.

Check out Josh Brown’s great Star Wars-themed roundup of the financial blogosphere. I’m honored to have been named a Jawa.

It’s Mid-Termania!
Posted by Eddy Elfenbein on November 2nd, 2010 at 10:23 am

The market is up again today but don’t get too excited. We had trouble holding on to gains yesterday which is exactly what happened a week ago.

For the last seven trading sessions, the closing high has been 1,185.64 and the closing low has been 1,182.45. Kinda narrow. Today we’ve been as high as 1192. Our Buy List is currently up 0.85% today compared with 0.67% for the S&P 500.

Of course, the big news today is the election. If the polling is to be believed, the Democrats are in for a major defeat. Intrade currently sees the GOP gaining over 60 seats in the House.

I should caution you from reading too much into the market from politics. I’ve called this the “Larry Kudlow Syndrome” where every uptick or downtick in the market is due to something in Washington.

I’m reminded of the story when Richard Nixon was asked what he’d be doing if he weren’t president. Nixon said that he’d probably be down on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he, too, would be buying stocks.

The Federal Reserve also begins its two-day meeting today in Washington. The big news will come tomorrow at 2:15 pm when they will announce their Quantitative Easing plan. As I said before, I expect everyone else to be disappointed so don’t be surprised to see a minor pullback.

Then on Thursday, we’ll have three more earnings reports. If that isn’t enough excitement, on Friday we’ll have the jobs report. After that, however, most of November ought to be pretty dull.

Morning News: November 2, 2010
Posted by Eddy Elfenbein on November 2nd, 2010 at 7:28 am

Rate Futures Report: Some Doubt About QE2 Before FOMC Meeting

Australia, India Raise Rates to Slow Inflation Before Fed Move

Oil Rises a Second Day on U.S. Stimulus Bets, Falling Fuel Supply Forecast

China Yuan Up On Weak Dollar Ahead of Fed Meeting

Why the Economy’s Growth Isn’t Easing Unemployment

GM to Sell over $13 Billion of Shares

BP Profit Down on Oil Spill Charges

BBVA to Buy Stake in Turkey’s Garanti Bank for $5.8 Billion

Gold Miner Newmont’s Third-quarter Profit Soars

Dell Plans Cloud Computing Acquisition and Tablet PC Push

The Hedge Fund Structure Is Dead

Sysco Moves in the Right Direction
Posted by Eddy Elfenbein on November 1st, 2010 at 2:59 pm

Michelle Leder spotted some more responsible behavior from Sysco (SYY). The company will no longer foot the bill when an senior exec takes a loss on a house. Michelle is careful to note that her praise is muted but that the company is moving in the right direction.

Stay tuned for earnings on Thursday.

The Turn-of-the-Month Effect
Posted by Eddy Elfenbein on November 1st, 2010 at 2:39 pm

I’m reposting this from February. I had done some research on the turn-of-the-month effect:

Since 1932, most of the S&P 500’s capital gain has come during a seven-day period at the turn of each month—specifically, the last four trading days and the first three trading days of each month. This represents about one-third of the total trading days. During the rest of the month, the stock market actually lost money.

Here are the numbers: Since the beginning of 1932, the S&P 500 has gained nearly 14,000% which is about 6.5% annualized. Investing in just the last four days and first three days of each month would have returned over 63,000% (not including trading costs). Annualized, that’s 8.6%. However, if you consider that it’s really only 32% of the time, the true annualized rate is over 28%.

The rest of the month — the other 68% of the time — has resulted in a combined loss of close to 78%.

Let me add some important caveats. First, I’m not offering this as trading advice. I’m merely showing that the market has historically experienced outsized gains at the turn of each month. Remember that trading in and out of the market is costly and these results don’t include taxes or commissions.

Secondly, this only refers to capital gains not dividends. A very large part of the market’s total return is due to dividends, and if you’re only invested one-third of the time, you’re going to lose out.

Having said that, here’s a graph showing what turn-of-the-month investing looks like. The S&P 500 is the red line. The blue line is performance during the seven-day period and the rest of the month is the black line.

Here’s a look at the average daily gains.

Why has the market shown this performance? It’s hard to say. One idea is that we’re seeing a pattern that’s simply the result of random behavior. If you splice and dice any data long enough, you’re bound to find some anomaly.

My hunch, however, is that there’s something to the turn-of-the-month effect. Perhaps it’s new money coming in or maybe positive business news is more likely to be announced.

Still, as powerful as the historical data is, I think the effect is too transient to base any investment strategy on.

Dollar/Yen Hits Reality, 15-Year Low
Posted by Eddy Elfenbein on November 1st, 2010 at 1:52 pm

The dollar is being battered by the yen.

The dollar fell to a fresh 15-year-low against the yen early Monday before investors backed off, reluctant to risk the possibility of another strong Japanese intervention.

The pair fell to Y80.21, its lowest in 15 years and the closest it has come to the Y79.75 level that has stood since April 1995 as the dollar’s lowest point since the end of World War II.

Noonish Market Update
Posted by Eddy Elfenbein on November 1st, 2010 at 12:46 pm

It’s Monday and it’s another rally we’re having trouble holding onto. The ISM report is helping the market. The S&P 500 got as high as 1195.81 which is just shy of last Monday’s high of 1196.13.

As of right now, the Buy List is up 0.30% compared with 0.44% for the S&P 500. Intel (INTC) is doing particularly well with shares up over 2% on news of a pickup in chip sales.

Sysco (SYY) is closing in on $30 just ahead of its earnings report. This tends to be a very stable stock, but I think it could make a run over $30 very soon.