• The Cyclical-to-S&P 500 Ratio
    Posted by on August 22nd, 2011 at 1:20 pm

    I’ve often talked about the under-performance of cyclical stocks. Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. When the line is rising, cyclicals are out-performing. When the line is falling, cyclicals are trailing the market.

    The ratio has plunged from 0.844 on February 11th to 0.705 on August 19th.

  • Bloomberg: Wall Street Aristocracy Got $1.2 Trillion From Fed
    Posted by on August 22nd, 2011 at 11:04 am

    Great article from Bloomberg. Here’s a snippet:

    Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

    By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

    Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

    “These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

  • Medtronic’s Earnings Preview
    Posted by on August 22nd, 2011 at 10:03 am

    Medtronic ($MDT) reports tomorrow. This will be a key test for the new CEO, Omar Ishrak. Here’s an earnings preview from the AP:

    Ishrak said Medtronic must communicate why its new products not only benefit patients, but also save health systems money. As one example he points to the company’s Revo pacemaker, the first such device that is compatible with MRI scanning. Older devices would often malfunction when exposed to the magnetized imaging technique.

    Not only will patients benefit from better care, he says, but providers will save money because doctors will spot health problems before they grow into more catastrophic, costly problems.

    “If there’s value there, we’ll get paid for it — but that’s not the point,” Ishrak said. “I want to make sure everything we do is geared to have the right economic impact on health care and on customers.”

    With Medtronic trailing competitors in developing new versions of stents, heart valves and other key products, analysts hope Ishrak will focus on cost controls, restructuring and selling off underperforming business units.

    WHAT’S EXPECTED: Analysts polled by FactSet expect earnings of 80 cents per share on revenue of $3.98 billion, on average.

    LAST YEAR’S QUARTER: In the first quarter last year Medtronic earned 80 cents per share excluding one-time items on $3.77 billion in revenue.

  • So Long Moammar, Wall Street Rallies
    Posted by on August 22nd, 2011 at 9:36 am

    Thanks to the good news coming out of Libya, the stock market looks to rally strongly this morning. Wall Street is focused on two events coming this Friday. The first is that the government will revise its report on second-quarter GDP growth. The initial report said that the economy expanded by just 1.3% for the second three months of the year. Wall Street expects that to be pared to 1.1%.

    The other even is that Ben Bernanke will be giving a speech at the Fed’s annual shindig in Jackson Hole, Wyoming. This is where one year ago Bernanke announced the Fed’s plans for the second round of quantitative easing. Some analysts think this is the time he’ll unveil a third program to buy Treasury bonds (i.e., QE3).

    Personally, I doubt that will happen although there could be a sort of extra buying announced. The reality is that the long-term bond market is vastly overstretched. Either the bond market thinks we’re going into a recession or they’re expect more Fed bond purchases. Still, I find myself looking at a third option which is that the bond market is just plain wrong on this. In deference to Jimmy McMillan, bond prices are too damn high and stock prices are too low.

    One mistake that investors often make is that a lower price doesn’t necessarily mean that a stock is a good buy. It only means that the stock is cheaper than where it was. Earlier this year, shares of Hewlett-Packard ($HPQ) got chopped from $48 to $41 after the company announced poor earnings guidance. I got a lot of email asking me if HPQ was a good buy. According to the numbers, the answer was “yes,” but my answer was “no, HPQ is a sell.”

    That’s a good example of when we have to see the numbers for what they are. They’re only a reflection of business reality, not business reality itself. When we take a closer look at what’s happening at HPQ, we can see that things haven’t been going well.

    This is what I wrote six months ago in a post called, “Hewlett-Packard Is Cheap, For Good Reason.”

    Since Hurd left HPQ, I’ve been down on the stock and fortunately I look smart today by telling investors to stay away six months ago. My concern is that the company’s aggressive acquisition plans may be doing more harm than good. HPQ has been going after IBM’s business in a big way and they’ve been shelling out major bucks to do it. I hated the 3Com purchase and the Palm acquisition still gives me nightmares. At the time, I gave Hurd the benefit of the doubt. Now that he’s gone, that benefit is also gone.

    It boils down to the question: “Can new CEO Léo Apotheker engineer a turnaround from the previous turnaround?”

    I say all of this in the context of last week’s earnings report. Hewlett-Packard reported earnings of $1.36 per share which was seven cents more than Wall Street’s forecast. Wall Street responded by tossing the shares in the garbage. The shares dropped nearly 10% on Wednesday. Since the stock is a Dow component, the plunge distorted the entire index.

    What freaked out Wall Street so much? Let’s dig into the numbers. The hitch was that quarterly revenue rose only 4% to $32.30 billion from $32.96 billion. Wall Street had been expecting $32.96 billion. In the wider scope of things, that’s really not a big miss, so what else was going on?

    Hewlett-Packard also gave guidance for Q2 and the entire year. For this quarter, HPQ said it expects revenues between $31.4 billion and $31.6 billion, and earnings-per-share between $1.19 and $1.21. Wall Street didn’t like that at all. The consensus was for revenues of $32.6 billion and earnings of $1.25 per share.

    HPQ’s full-year forecast (their fiscal year ends in October) was for total revenues between $130 billion and $131.5 billion. The consensus on Wall Street was for $132.91 billion. HPQ said it expects full-year earnings to range between $5.20 and $5.28 per share. The Street was expecting $5.23 per share, so I suppose that’s inline. HPQ has traditionally issued conservative forecasts so they can raise them later. Perhaps they’re doing that now to mask the poor Q2 guidance.

    So this seems odd. It appears that HPQ gave lousy near-term guidance but the long-term guidance is still what the Street expects. Yet the stock’s popularity is somewhere between Kim Jong-il and Diphtheria. (Did Hurd get out at the right time? Sure looks like it.)

    According to the company’s guidance, the stock is selling for just eight times earnings. The good sign is that their enterprise storage, servers and networking division saw its revenues increase by 22%. Also, the gross margins are up 1.5% to 23.4%.

    The stock is tempting, but I’m still steering clear.

    HPQ has a few problems to work through. They’re experiencing weakness in consumer PCs and services. I’m also not a big fan of the quality of their earnings. Always be wary when a company grows too much through acquisition. That’s often a sign of trouble. A company should be focused on making earnings not buying them.

    When I wrote that, the shares were at $43. Now they’re at $23.

  • Morning News: August 22, 2011
    Posted by on August 22nd, 2011 at 6:40 am

    Merkel Says She’ll Resist Pressure for Euro Bond

    Italy’s Debt May Swell as Austerity Chokes Growth

    Yen, Franc Weaken Amid Speculation Japan, Switzerland Ready to Intervene

    China Yuan Down Late On Import Settlements

    Oil Slips $2 Towards $106 on Libya End-game

    Wheat Rises to Two-Month High as U.S. Drought May Curb Sowing; Corn Gains

    S&P: ‘No Math Error’ In US Rating Cut, No Qualms about More Actions

    For Bernanke, No Summer Fun at Jackson Hole

    Wall Street Aristocracy Got $1.2T in Loans

    Motorola’s Identity Crisis

    China Construction Bank Net Profit Jumps 31%

    United Continental Spruces Up Cabins

    Smacked by Big Market Swings, Investors Should Alter Their Outlook

    James Altucher: How to Be a Human

    Epicurean Dealmaker: The Devil’s Book of Aphorisms: Part 1

    The Big Lebowski Live Cast Reunion

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  • Cramer Vs. Hobbs
    Posted by on August 19th, 2011 at 2:55 pm

    I think Cramer is right here.

    Via: B-Riz

  • Oracle’s Low Valuation
    Posted by on August 19th, 2011 at 12:37 pm

    The chart really says it all. Oracle‘s ($ORCL) stock is the blue line and it follows the left scale. The earnings line is yellow and it follows the right scales. The two axes are scaled at a ratio of 15-to-1 so whenever the lines cross, the P/E Ratio is exactly 15. The red line is the earnings estimates.

  • CWS Market Review – August 19, 2011
    Posted by on August 19th, 2011 at 12:16 pm

    The stock market seemed to be recovering for a few days. That is, until Thursday hit. From the S&P 500’s low of August 9th (1,101.54) to the high of this past Wednesday, August 17th (1,208.47), the market gained an impressive 9.7%. We’re still a way from the recent peak of July 22nd, but it’s nice to regain some lost ground. The bears, however, got back in control on Thursday and shaved another 4.46% off the index.

    So where do we go from here? It’s still hard to say but in this issue of CWS Market Review, I want to discuss some likely scenarios and more importantly, tell you how to position yourself for the weeks ahead.

    Initially, I was never terribly impressed with the arguments made by the folks who were expecting a Double Dip recession. After all, these folks already blew this call last year as their worrying helped bring down the market by 18%. All their panicking did was offer up some great bargains. Anyone else remember when Wright Express ($WXS) broke below $30 last summer? Thank you, panic sellers!

    Over the past few days, I’ve become more convinced that the fears of a Double Dip recession are, as of now, vastly overblown. As always, let’s look at the facts rather than at our emotions.

    Earlier this week, the government released its industrial production report for the month of July, and it showed the largest increase in four months. This is important because most of the other reports were for the month of June which was in the second quarter. Only now are we getting a better handle on the third quarter which is already more than half over. For July, industrial production rose by 0.9% which nearly doubled the 0.5% expected by Wall Street. Also, capacity utilization hit 77.5%, a three-year high.

    Last week, the number of initial claims for unemployment dropped below 400,000 for the first time in 17 weeks. Yesterday’s report showed that we jumped up to 408,000 but the trend is still favorable. Also, the recent report on retail sales was the strongest in four months. This is important because it reflects the strength of consumers, the backbone of the U.S. economy. For July, the Commerce Department said that retail sales rose by 0.5%.

    I don’t want to ignore the bad spots. Housing is still a mess and the jobs market is bleak. The recent Consumer Confidence survey was terrible. It was the lowest number since the Carter Administration. Also, I wasn’t exactly thrilled by the ISM report at the beginning of the month. But even that mediocre report is still a long way from a recession. We have to view the actual news in context of what everyone else’s perception is. Bear in mind that the 10-year Treasury dropped below 2% and the 10-year TIPs is negative. The fear on Wall Street is massively overdone.

    My view is that the economy will probably bounce along at a growth rate between 1% and 2% or so. For folks out of work, that’s bad news. But the outlook for corporate profits and, by extension, the stock market, is still pretty decent especially considering the cheap valuations and extremely low Treasury yields.

    I took notice earlier this week when both Home Depot ($HD) and Walmart ($WMT) reported higher-than-expected earnings; plus both companies raised their full-year earnings guidance. I can’t think of a company that better reflects the breath of American shoppers than Walmart. We’re not yet seeing earnings revisions from most companies. Wall Street still expects the S&P 500 to earn close to $100 this year and $113 for next year, though I think the latter number should probably be close to $105.

    Due to the sluggishness of the economy, I still encourage investors to steer clear of most of the cyclical names. I’m writing this early on Friday and the Morgan Stanley Cyclical Index (^CYC) actually broke below 800 very briefly. That’s a stunning 28% collapse in just six weeks. That’s the thing about cyclicals—they move in cycles. When everything is good, it’s very, very good. When it’s not, get out of the way.

    I’m inclined to believe that the worst of the selling has past. That doesn’t mean we won’t go lower from here, but future selling won’t match that selling we’ve already seen. Bear attacks usually end before most investors realize it. I’m also struck by the persistence of high volatility. Instead of reflecting danger in the markets, I think high volatility is more of a reflection of the war between the Double Dip and Anti-Double Dip camps. Once the market settles on a thesis, I expect a quick return to low volatility, but there will be fits and starts along the way.

    I still like a lot of the names on our Buy List. Let me highlight a few that look especially good right now. I noticed that Oracle ($ORCL) dropped down below $26 per share. Let’s remember that this company has been consistently beating earnings, and Wall Street has been raising estimates. For this current fiscal year (ending in May), Wall Street expects earnings of $2.41 which gives ORCL a forward P/E Ratio of 10.6.

    I have to fess up that I blew my Sysco ($SYY) call. In last week’s issue of CWS Market Review, I said expect earnings of 60 cents per share, plus or minus two cents. Instead, Sysco reported 57 cents per share which matched Wall Street’s estimate. The shares got pounded hard on Monday and they’ve continued to retreat.

    It turns out what I missed is that the company was hurt by food cost inflation more than I expected. That put the squeeze on margins which is what every business hates. However, in pure operational terms, I think Sysco had a decent quarter. When we look at a company, we have to discern between manageable problems and non-manageable ones. For Sysco, higher food costs are ultimately very manageable. The silver lining is that Sysco now yields over 3.8%. This is a very good stock to own below $28.

    We’re soon going to get earnings reports from our companies that have quarters ending in July. Medtronic ($MDT) is due to report this Tuesday, August 23rd. Jos. A. Bank ($JOSB) will probably report around September 1st. Wall Street expects earnings of 79 cents per share for MDT which sounds about right. Frankly, even if they miss by a little, Medtronic is so cheap right now that the stock shouldn’t be too dented. The stock currently yields a little over 3%. Medtronic is a good buy below $32.

    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

  • The Cyclical Index Breaks Below 800
    Posted by on August 19th, 2011 at 12:02 pm

    On July 7th, the Morgan Stanley Cyclical Index (^CYC) closed at 1,114.09. Today, it briefly fell below 800.

  • Morning News: August 19, 2011
    Posted by on August 19th, 2011 at 6:45 am

    Japan Urges G-7 Coordination on Markets

    Yuan Pipeline Back to China Securities Seen by Year-end – HK Official

    European Stock Markets Open Sharply Lower

    Austria Says Finnish Collateral Deal May ‘Blow Up’ Greek Rescue

    Putin Calls U.S. ‘Parasite’ as Russia Gorges on Its Debt

    Morgan Stanley Raises Yen, Sterling Forecasts

    Spot Gold Soars To New Record

    Stocks, Oil Drop on Growth Concern; Gold at Record

    U.S. Economy: Consumer Prices Climb, Manufacturing Falters

    AIG Pays $2.15 Billion From Sale to U.S.

    HP to ‘Reinvent’ Company With Return to Roots

    Bank of America Set to Slice Jobs

    Volkswagen Global Vehicle Sales Surged 16% In July

    Liberty Invests $204 Million in Barnes & Noble After Dropping Takeover Bid

    Jeff Miller: Interpreting the St. Louis Fed Stress Index

    Brian Shannon: Stock Market Video Analysis 8/18/11

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