• Revised Q2 GDP = 1.0%
    Posted by on August 26th, 2011 at 8:33 am

    The government just revised second-quarter GDP growth down to 1.0% from the initial estimate of 1.3%. Wall Street was actually afraid that it might be worse. I’ll remind you that the second quarter began four-and-a-half months ago and ended one-and-a-half months ago.

    Over the last four years, the U.S. economy has grown by 0.66% in real terms. The economy has shrunk by 0.49% from its all-time peak in the fourth quarter of 2007. Over the last 11 years, the economy has grown by 17.88% (or 1.51% annualized) which is less than it grew in the four years prior to that.

    Here’s a look at real GDP based on 2005 dollars. What’s most troubling is the last two data points.

    By the way, what letter describes this…V-shaped? U-shaped? Maybe an N? I really don’t know anymore.

  • CWS Market Review – August 26, 2011
    Posted by on August 26th, 2011 at 6:48 am

    “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” – Warren Buffett

    Very true, Warren. Very true. Quietly, this past week has been a turning point for the stock market. The “Fear Trade” that gripped Wall Street this summer is slowly beginning to unravel. Specifically, the Fear Trade consisted of investors dumping cyclicals especially and crowding into gold and Treasury bonds. Starting on July 22nd, the Wall Street bears had been in complete command. Every rally was yet another opportunity to short. That is, until this week. After a staggering $2 trillion was shed by the S&P 500, the Fear Trade has finally gotten some (minor) pushback.

    I’ll give you an example of what I mean: The S&P 500 made very similar closing lows on August 8th (1,119.46) and August 10th (1,120.76) and then again on August 19th (1,123.53) and August 22nd (1,123.82). Notice how close together those lows are. Yet the bears weren’t able to bring us any lower. That’s a telling sign.

    It’s still too early to say if this is the beginning of a major leg up, but it probably signals that the worse of the Fear Trade is past us. On closer inspection, much of the negative news was vastly overhyped (I’m looking at you, S&P downgrade). We had some promising rallies on Tuesday and Wednesday, and Thursday looked to be a good day until the German market tanked. Still, I like the trend that I’m seeing.

    The pushback isn’t just happening in the stock market; let’s look at what’s happening in Bondistan. Last Thursday, the yield on the ten-year Treasury dropped below 2% and the five-year plunged to an absurd 0.79%. The three-month LIBOR rate is actually less than the two-year Treasury yield. Dear Lord, I don’t know what to say about prices like that except that it shows us how much fear there was in the market. The short-term Treasuries even pulled a Blutarsky. In the CWS Market Review from three weeks ago, I wrote “All across the board, investors are dumping risk and hoarding security. Fear is giving greed a major beat-down.”

    Well, greed is getting back on its feet. The five-year T-note recently broke above 1%. Of course, that’s far from normal, but the key is that people aren’t suddenly dumping bonds and hoarding stocks. Instead, they’re walking back from some of the fear that took hold of the markets this summer.

    With the Fear Trade, the riskier an asset was (or was perceived to be), the worse it did. Junk bonds, for example, have been getting beaten like a rented step-mule. The Wall Street Journal recently wrote: “The spread on the Barclays Capital High Yield Index over Treasurys widened to 7.66 percentage points this week—the highest since November 2009—from 5.87 percentage points at the end of July.”

    The clearest area where the Fear Trade is coming unglued is in the gold pits. On Wednesday, gold dropped $104 per ounce which is one of its biggest plunges ever. Earlier this week, gold peaked at $1,917 per ounce and it closed the day on Thursday at $1,775.20. As long as real rates are low, gold will do well; but the metal has gotten ahead of itself. Once the Fear Trade got going, investors headed into the only areas that were working. Soon that turned into a flood and everything else got left behind (AFLAC at $35?). I remember when the Nasdaq peaked 11 years ago and there were healthy REITs that were paying 12% dividend yields. Only in retrospect do we see how insane that was.

    I’m writing this early Friday morning and the big news due later today is the Ben Bernanke speech at the Fed’s annual shindig in Jackson Hole, Wyoming. I don’t expect any news, but too many people who ought to know better think the Fed will announce another round of Quantitative Easing. That simply isn’t going to happen. As a result, many traders expect Wall Street to be disappointed if QE3 doesn’t come our way. Call me a doubter, but that may have weighed on the stock market on Thursday. If anything, some of the recent data takes pressure off of Bernanke and the Fed.

    The other important item on Friday will be the first revision to second-quarter GDP growth. The initial report said that the economy grew by 1.3% during the second three months of the year. Wall Street expects that to be revised slightly and they’re probably right. Still, the second quarter is now well within our rear-view mirror. I’m more concerned with the rest of Q3 and Q4.

    Now let’s look at what’s happening with our Buy List. We only had one earnings report this past week which was from Medtronic ($MDT). The company reported fiscal Q1 earnings of 79 cents per share which matched Wall Street’s estimate. I wasn’t expecting much of an earnings surprise or shortfall. Honestly, this company has some problems, but ultimately, I think they’re manageable. I’d really like to see Medtronic become a leaner and meaner outfit and I think the new CEO agrees.

    The best news is that they reiterated their full-year guidance of $3.43 to $3.50 per share. As I’ve said before, never dismiss these “reiterations.” Hearing that things are still “on track” is news. If you recall, MDT slashed their full-year guidance several times last year.

    Let’s run through some numbers here: Shares of MDT dropped from over $43 in May to nearly $30 this month. The shares rallied on the earnings report not because the news was good but probably because there wasn’t any bad news. You often see that in value investing when investors get so disgusted by a stock that they expect to be disappointed. As odd as it may sound, that’s often a good buying opportunity.

    Even the low end of Medtronic’s range tells us that the stock is going for less than 10 times this year’s earnings estimate. That’s a good value. The stock currently yields 2.86% and the dividend has been raised for the last 34 years in a row. Medtronic is a good buy below $35 per share.

    We only have one earnings report due next week and that’s from Jos. A. Bank Clothiers ($JOSB) on Monday. If you recall, JOSB got smacked hard in June when the company’s fiscal Q1 earnings came in two cents below consensus. That two-penny miss caused the stock to plunge more than 13% in one day.

    For Monday, the Street expects earnings of 68 cents per share. Sales should rise about 11% to $210 million. I should warn you that since JOSB doesn’t provide guidance, the earnings can vary widely from consensus. Sixty-eight cents sounds slightly low but I’m afraid traders are very strongly biased to be disappointed by whatever JOSB says. My advice is to not be surprised by a pullback. If you don’t already own JOSB, hold on. If you don’t own it, don’t chase it. If JOSB’s earnings come in at 70 cents or more and the stock pulls back below, it will be a very good buying opportunity. I’ll have more on the earnings report on the blog.

    I also want to highlight Oracle ($ORCL) which looks very good at this level. In seven weeks, the shares have dropped from $34 to $26 yet their business outlook remains unchanged. The next earnings report should be out in mid-September. Oracle is an excellent buy below $25.

    That’s all for now. There’s some talk going around that the NYSE might be closed due to Hurricane Irene. I’ll let you know as soon as I do. 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: August 26, 2011
    Posted by on August 26th, 2011 at 5:46 am

    Shortage of Engineers Threatens German Automakers

    Finland Committed to Greek Demands as Talks Over Collater Model Continue

    Greece Sets Out Conditions for Bond Swap

    Stock Futures Signal Gains; Bernanke Eyed

    Gold Rises, Reducing Weekly Decline, as Lower Prices Fuel Investor Demand

    The Weight of the World is on Bernanke’s Shoulders

    For Some in G.O.P., a Tax Cut Not Worth Embracing

    Buffett’s Bank of America Stake Is Viewed as a Seal of Approval

    Pandora Gains on Subscriptions and Mobile Ads

    Andrew Mason Fires Back At Groupon Critics

    Bloomberg Agrees to Buy Bureau of National Affairs for About $990 Million

    Manchester United IPO May Rely on Fan Support

    Big Shoes at Apple, but Maybe Not Unfillable

    James Altucher: 7 Things I Learned from the First Blogger

    Brian Shannon: Things We Sometimes Forget As Traders

    Be sure to follow me on Twitter.

  • P/E Compression at Medtronic
    Posted by on August 25th, 2011 at 3:12 pm

    A reader sent this in. I don’t have much to add, but notice how strongly Medtronic‘s ($MDT) Price/Earnings Ratio got squeezed over the past decade. The lesson is that price matters (not a new lesson, but an important one).

  • The Slow Unraveling of the “Fear Trade”
    Posted by on August 25th, 2011 at 2:01 pm

    In less than one month, the S&P 500 lost $2 trillion in market value. That’s actually a lot of money. But let’s look at the past week: stocks are up, bonds and gold are down. In other words, investors are slowly tip-toeing out of the places that they madly rushed into over the past four weeks. I’m impressed that this is happening before Hurricanes Ben and Irene are scheduled to strike.

  • The Financial Spyders ETF
    Posted by on August 25th, 2011 at 11:47 am

    The $XLF has crashed and burned recently. But just because it’s down doesn’t mean that it’s cheap. It’s just cheaper than it was. Expect another test of $12 soon.

  • The Buffett Bailout
    Posted by on August 25th, 2011 at 11:25 am

    The market had opened higher today thanks to the news that Warren Buffett was investing $5 billion into Bank of America ($BAC). In exchange, Buffett will get 6% preferreds. He always gets amazing deals. Shares of BAC rose as much as 25% today. In a matter of minutes, Buffett had made a cool (unrealized) gain of $700 million. So after publicly insisting that they don’t need to raise capital, BAC goes ahead and raises capital.

    The good news is that Buffett’s move helped the financials. AFLAC ($AFL) briefly cracked $37 and JPMorgan Chase ($JPM) got to $38.57. Even Nicholas Financial ($NICK) rose to $11.45.

    Sadly, the market has already given back much of those gains, and the S&P 500 is back in the red. Wall Street is focused on Ben Bernanke’s speech in Jackson Hole tomorrow. I really think this is a non-event; I don’t expect any major news. Plus, some of the recent data has been better which takes some of the heat off the Fed.

    The most interesting activity has come in the gold pits. Gold dropped $104 yesterday and the fall continues today. Two days ago, gold got to $1,917.90 per ounce. Now it’s at $1,739.

  • Morning News: August 25, 2011
    Posted by on August 25th, 2011 at 4:42 am

    Asian Stocks Rise as U.S. Durable-Goods Orders, Home Prices Beat Forecasts

    German Consumer Sentiment Weakens

    Crude Oil Advances in New York on Fed Speculation, U.S. Supply Decline

    Gold Margins Raised 27% on CME’s Comex After Biggest Price Drop Since 2008

    Dollar Falls Versus Euro on Speculation Bernanke May Announce More Easing

    Bernanke Signaling No QE Backed by Higher Data

    Jobs Steps Down at Apple, Saying He Can’t Meet Duties

    Distilling Giant Diageo Surges on Full-Year Profit Growth

    Toll Brothers 3Q Earnings Up 54%, Revenue Slumps

    France’s Credit Agricole’s Quarterly Net Drops 11% on Greece

    Commodities Trader Glencore’s First-Half Profit Increases 57%

    Bank of America Shares Rise as Capital Debate Continues

    Buffett’s Berkshire Wins EU Okay for Lubrizol Buy

    Fugitive Moody’s Analyst Ordered to Pay $35 Million to S.E.C.

    Howard Lindzon: Steve Jobs…What Has He Ever Done for Us?

    Joshua Brown: He’s Got the Whole World in His Hands

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  • Gold Can’t Be in a Bubble Because It’s Gone Up So Much
    Posted by on August 24th, 2011 at 7:12 pm

    Please listen to this clip and tell me I heard this right. Beginning at 5:13, the guy says that gold isn’t in a bubble because — are you ready? — it’s gone up so much.

    I’m not kidding. He really says that: “I’m getting kinda sick of the bubble chat because it’s an absurd conversation. OK. Look at what gold has done! You would have massively outperformed over an extended period of time at a lower volatility. That’s a good investment.”

    Now if you’ll excuse me, I’m going to light myself on fire.

  • Steve Jobs Resigns
    Posted by on August 24th, 2011 at 6:48 pm

    Here’s the press release via the WSJ:

    August 24, 2011–To the Apple Board of Directors and the Apple Community:

    I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come.

    I hereby resign as CEO of Apple. I would like to serve, if the Board sees fit, as Chairman of the Board, director and Apple employee.

    As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple.

    I believe Apple’s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.

    I have made some of the best friends of my life at Apple, and I thank you all for the many years of being able to work alongside you.

    When Steve Jobs rejoined Apple ($AAPL) in December 1996, the stock was around $6 per share. It closed today at $376. That’s a gain of more than 6,000%.