The CWS Buy List YTD
Posted by Eddy Elfenbein on September 3rd, 2010 at 10:44 am

Thanks to this morning’s push, the Crossing Wall Street Buy List has crept back into the black for the year.
Through yesterday’s close, we were down -0.79% for the year compared with -2.24% for the S&P 500. That doesn’t include dividends.
Here’s a look at the chart:

By early April, we ran to a big lead of more than 600 basis points. Since then, our lead has steadily eroded but we’re still ahead of the market.

The Good News Is that the Bad News Wasn’t as Bad as Expected!
Posted by Eddy Elfenbein on September 3rd, 2010 at 9:46 am

Today’s jobs report is being celebrated as “better-than-expected” which probably comes as a surprise to most non-Wall Streeters. After all, the unemployment rate ticked up from 9.5% in July to 9.6% for August, and there are now close to 15 million unemployed people in the country. That also doesn’t count the people who have left the job market entirely.
The “good” part of the news is that the private sector added 107,000 jobs in August while Wall Street was expecting just 40,000. Overall employment fell by 54,000 which was the same amount lost during July.

Employment at service-providers decreased 54,000. Construction companies added 19,000 workers, the first gain in four months, and retailers cut 4,900 workers.
Average hourly earnings rose 0.3 percent to $22.66 from $22.60 in the prior month, today’s report showed.
Government payrolls decreased by 121,000. State and local governments reduced employment by 10,000, while the federal government lost 111,000 jobs.
The average work week for all workers held at 34.2 hours.

As I mentioned, the overall unemployment rate rose from 9.5% to 9.6%, if we break down the decimals, it really rose from 9.51% to 9.64%. Only 12,000 more job losses and the number would round up to 9.7%.
One of the bright spots is that the civilian labor force increased by 550,000. This means that more people are looking for work. All I can say is that it could have been worse.

$4 Trillion a Day
Posted by Eddy Elfenbein on September 2nd, 2010 at 2:28 pm

Guess what market has daily volume of $4 trillion?
Give up? I’ll give you a hint: The currency markets.
Look at the table on the link. What’s interesting is how much the U.S. dollar dominates the currency markets. In fact, if you were to place a non-dollar trade — say, British pounds to Mexican peso — it would probably go pounds to dollars and then dollars to pesos.

ISM Chart
Posted by Eddy Elfenbein on September 2nd, 2010 at 9:56 am

Here’s the latest chart on the Institute for Supply Management index:

As I’ve discussed before, this is one of the best metrics for telling us if we’re in a recession or not. Notice how often the recession bars on the chart coincide with low ISMs.
A reading above 50 means the economy is expanding, below 50 means we’re contracting. Yesterday’s reading was 56.3.
Until now, I’ve been a doubter on the Double-Dip hypothesis, but now I think I need to take that scenario a lot more seriously. I still don’t think a second recession is probable, but the odds of one have increased markedly.
Fortunately, the ISM takes some of the worry off. The jobs outlook, however, does not. Despite all the concerns of a Double Dip, the quarterly GDP growth number has dropped from 5% in Q4 to 3.7% in Q1 to 1.6% in Q2.
That’s not good, but it’s (for now) not a recession. I should add that we have been fooled before by a false Double Dip. Let’s take a look at what happened 19 years ago:

GDP growth was negative for three straights quarters (you can’t see Q3’90 of -0.006% but it’s there).Then the economy grew by 2.7% in the third quarter of 1991, followed by 1.7% in Q4 and 1.6% in Q1 of 1992. That’s successively lower growth just like we’re seeing now. Yet, it didn’t lead us to another recession. In fact, it led to four straight quarters of 4% of more growth.
Here’s an AP article from December 1991 titled “National economy stalled on brink of double-dip recession.” This came right as the time the double-dip threat was passing.
I’m not saying that history will repeat itself. I’m merely pointing that a double-dip is certainly possible, we still have a ways to go to get to one.

A Look at the Mid-Term Rally
Posted by Eddy Elfenbein on September 1st, 2010 at 2:10 pm

The stock market has historically done very well from its low point during a mid-term election year to the high point during a presidential election year. Check out the numbers:

(Data via Gary Alexander)
The Dow’s lowest close (so far) this year came on July 2 at 9,686.48. A 57% rally would bring the Dow to over 15,200.

ISM 56.3
Posted by Eddy Elfenbein on September 1st, 2010 at 9:58 am

Whew! The ISM number came in at 56.3 which was well above expectations of 53.
I feel like we dodged a bullet here. The market should continue to rally.

ISM Due at 10 am
Posted by Eddy Elfenbein on September 1st, 2010 at 9:29 am

Stocks are rocking this morning, but the ISM comes out at 10 am. The Street expects 53. A negative surprise could be very nasty. I’m now hiding under my snuggie.

Good Earnings from Joe Bank
Posted by Eddy Elfenbein on September 1st, 2010 at 8:52 am

Jos. A. Bank Clothiers (JOSB) just released a very good Q2 earnings report this morning. The company earned 59 cents a share which was six cents more than Wall Street was expecting. Let’s hope the stock gets a nice bump today.
The details look very solid. Sales rose 12.3% and same-store sales rose 9.2%. A year ago, the company earned 45 cents a share. I’m especially glad to see that gross margins improved to 62.8% from 61.5%.
Right now, Wall Street pegs JOSB to earn $3 for the entire year, bear in mind that a very large part of that comes in their fourth quarter. I expect Wall Street to up its full-year estimates soon. Three months ago, JOSB beat the Street by 14 cents a share.
JOSB has posted higher year-over-year earnings for 35 of the last 36 quarters including the last 17 in a row. Even at $3 a share, the stock is going for about 12 times forward earnings which is a decent value.
Update: The stock is up 13% today. I’m now playing that Gary Glitter HEY song in my office.

From 1985: What Will Shopping Be Like in 2010?
Posted by Eddy Elfenbein on August 31st, 2010 at 12:05 am

From 1985, peer into the distant future of 2010.

The WSJ Takes on the P/E Ratio
Posted by Eddy Elfenbein on August 30th, 2010 at 2:43 pm

The Wall Street Journal has a rather unusual column today claiming that the Price/Earnings Ratio is not only declining, but the metric’s importance is declining as well. For supporting evidence, they offer up the fact that corporate earnings were strong this past earnings season but the stock market has since fallen.
Sorry folks but that’s not a hard knot to entangle: The P/E Ratio looks backward while stock prices look forward. As a result, you can get some poor readings. I’m afraid to tell the WSJ that despite this minor conflict, the P/E Ratio remains very important (though we must be aware of its shortcomings).
The WSJ goes on to say that the P/E Ratio has plunged about 36% in the past 12 months which is the biggest drop in seven years. Again, this shouldn’t be much of a surprise because, as I just mentioned, the P/E Ratio looks backward. Corporate earnings have improved very dramatically since the depths of the recession. A higher E with a flat-to-lower P means a lower P/E Ratio. Mystery solved.
The WSJ also writes that the forward P/E Ratio has dropped from 14.4 in May to 12.2 currently. This probably means that stock prices are ahead of analysts’ forecast and that those projections may be headed lower soon.
Because of the time discrepancy in the P/E Ratio we sometimes get “false readings.” For example, when stocks are cheapest, the earnings line is often still headed lower. As a result, the very first stages of a bull market often shows the P/E Ratio dramatically expanding. The opposite happens when the market begins to look rich, which may be happening right now. Stocks are sluggish while earnings have improved. As a result, you have stocks falling after good earnings combined with a subdued P/E Ratio.

Three months ago, analysts expected the companies in the Standard & Poor’s 500-stock index to boost profits 18% in 2011. Now, they predict 15%. Mutual-fund, hedge-fund and other money managers put the increase at closer to 9%, according to a recent Citigroup survey, while Mr. Levkovich’s estimate is for 7% growth.
“The sustainability of earnings is in doubt,” said Howard Silverblatt, an index analyst at S&P in New York. “Estimates are still optimistic.”

The WSJ says that the P/E Ratio is plagued by the lack of certainty in future earnings, and on this point I agree. Think of it this way. Imagine we have two stocks that are similar in every way except for one difference. Stock A is projected to earn $1 a share next year, plus or minus 20 cents. Stock B is projected to earn $1 a share next year, plus or minus three cents. Which stock will be worth more? Outside of rare exceptions, we can assume that Stock B will be worth more. Why? Because the market rewards certainty.
The WSJ also claims that the P/E Ratio has had earlier bouts of loss of importance — from the Great Depression to the early post-war period and again during the inflation struggles of the 1970s and early 80s. I agree on the former, but the latter was hardly a refutation of the P/E Ratio. It’s simply that the P/E is closely tied to interest rates. As rates head higher, P/E Ratios headed lower so stocks could actively compete with bonds.
I can assure you that any obituary for the P/E Ratio is very premature.