• Where Will the S&P 500 End the Year?
    Posted by on August 16th, 2011 at 7:35 pm

  • What’s Driving the Bond Rally?
    Posted by on August 16th, 2011 at 4:17 pm

    Treasury bond yields have plunged recently which may seem odd since long-term Treasuries were famously downgraded by Standard & Poor’s. So what’s driving the bond rally?

    We can never say for certain but we can shine a light on some of the usual suspects underpinning the bond market.

    Here’s a look at the yield on the 10-year Treasury bond (blue) along with the 10-year TIPs (or Treasury Inflation-Protected security in red).

    The 10-year TIPs yield recently turned slightly negative which means that investors are so frightened that they’re willing to forgo all of their real profits just for the safety of the Treasury market. Or rather, the supposed safety of the Treasury market. (In fact, it may even be worse for bond holders since the CPI probably understates inflation.)

    The key for us to watch is the spread between the two lines which represents the inflation premium. Since both lines have plunged in near tandem, this means the market isn’t expecting inflation to either ramp up or slow down. The inflation premium is currently around 2.2% and that’s been pretty stable (between 2.2% and 2.6% for the last several months). Instead, the plunge in yields is almost entirely due to lower real rates.

    That’s mostly the result of a worsening economic outlook and a desire from investors to hold anything liquid.

    Now here’s the chart which I think is particularly fascinating and should be getting a lot more attention. It shows how the 10-year inflation premium (in red, meaning the difference between the two lines above) has closely matched the S&P 500 (blue) over the last three-and-a-half years.

    This is a chart Lord Keynes (and Paul Krugman) might enjoy because it seems that the market has rallied as inflation expectations rose. This is the exact opposite of what happened during the 1970s when inflation slowly ground down stock valuations. I should add the proper caveat that correlation doesn’t mean causation. The higher inflation expectations, of course, might be a response to higher share prices — or the correlation might be entirely illusionary.

    But another interesting angle is that the recent equity sell-off marked the first major departure between these lines in quite some time. This lends evidence to the idea that the lower real bond yields are the result of a dreary economic outlook.

    The lines have just recently gotten together again. For now, the stock market may be asking for some more inflation. I recently ran the numbers from Professor Robert Shiller’s website to see how stocks perform relative to different inflation rates. The stock market clearly hates inflation, but historically, the hatred doesn’t kick in until inflation hits 5.3%. We’re still a long way from there.

    The sad story might be that the Fed’s only clear-cut triumph of the last 30 years (defeating inflation) might be exactly what we don’t need right now.

  • Sarkel Kills the Rally
    Posted by on August 16th, 2011 at 1:42 pm

    I always get nervous whenever the president speaks during market hours. Today I learned that talking European politicians can kill a rally just as well as any American politician.

    Right before the Sarkozy/Merkel joint press conference, the S&P 500 got as high as 1,204.22 which was just 0.02% below yesterday’s close. Now we’re more than 1.5% below yesterday’s close.

  • Industrial Production Rose 0.9% in July
    Posted by on August 16th, 2011 at 10:50 am

    So far, we’ve had some negative economic data points for the month of July, but today’s industrial production report was pretty good. Industrial production rose by 0.9% last month which is the strongest growth this year. The number for June was revised to 0.4%. Over the last two years, industrial production is up by 11.5%.

    I often hear people say “we don’t make anything in this country anymore.” That’s simply not true. The U.S. is a manufacturing powerhouse. The difference is that many fewer people do the work.

  • Market to Open Lower as HD and WMT Raise Guidance
    Posted by on August 16th, 2011 at 8:38 am

    The stock market looks to open lower today as Germany reported economic growth of just 0.1% for the second quarter. That’s just terrible. The whole Eurozone economy grew by 0.2% in the second quarter which was down from 0.8% for Q1.

    This news doesn’t come at a good time for Europe as Sarkozy and Merkel are meeting today in a summit. There had been some talk about Europe issuing “eurobonds” to help fix the mess everyone’s in, but apparently that’s not on the agenda for today’s meeting.

    Perhaps the most important market news this morning is Walmart’s ($WMT) earnings report. The company already told us that Q2 (which ends with July) would come in between $1.05 and $1.10 per share. They weren’t lying; WMT earned $1.09 per share although same-store sales were flat.

    More importantly, Walmart said that Q3 should range between 95 cents and $1 per share. The company also raised its full-year EPS range from $4.35 to $4.50, to $4.41 to $4.51. This means the stock is going for just 11.6 times the midpoint of the new full-year guidance.

    They’re not the only one boosting guidance. Home Depot ($HD), which is also a Dow stock, just reported a 14% earnings increase. For Q2, HD earned 86 cents per share which was three cents better than estimates. The company raised full-year EPS guidance from $2.24 to $2.34. The stock is going for 13.4 times this year’s estimate which seems about right.

  • It’s Cheaper Now to Buy Than Rent
    Posted by on August 16th, 2011 at 8:06 am

    CNN Money has an interesting article saying that it’s now cheaper to buy a home rather than renting one:

    Home prices have taken such a beating and demand for rental units has increased so much that it’s now cheaper to buy a two-bedroom home than to rent one in most major U.S. cities.

    According to real estate web site Trulia, buying was cheaper than renting in 74% of the country’s 50 largest cities in July. In just 12% of the cities, including New York, Seattle and San Francisco, renting was cheaper. In the remaining 14% of cities, renting was less expensive but close to the cost of buying.

    In addition to a continuing decline in home prices, rock-bottom interest rates have added a lot of weight to the buy side of the scale. The overnight average rate for a 30-year fixed was just 4.19% on Monday, according to Bankrate.com. A 15-year fixed averaged just 3.43%.

  • Stocks on Sale
    Posted by on August 16th, 2011 at 7:18 am

    Amid Warren Buffett’s call to raise taxes on himself, he also had fairly positive things to say about the economy. He even said that the economy might pick up faster than the Fed expects. That’s not all. The latest filings show that Buffett made his biggest bets of the year on August 8th as the stock market was falling.

    Clearly Buffett believes the market is cheap and the numbers back him up. According to the latest data, the Price/Earnings Ratio for the S&P 500 fell all the way down to 12.1 last week which is the lowest it’s been since May 1989.

    Yet the latest earnings data showed that the second quarter was a very strong one for the S&P 500. With 94% of its companies reporting, the S&P 500 is on track to earn $24.88 for Q2. That surpasses the previous record of $24.06 from the second quarter of 2007.

    Interestingly, Wall Street has only cut earnings estimates very slightly for the near future. For the third quarter, which we’re already halfway through, Wall Street expects earnings of $25.10. That represents growth of 16.4% over the third quarter of 2010.

    For all of 2011, Wall Street expects the S&P 500 to earn $98.94, and another $113.47 for next year. It’s very possible that earnings estimates will fall, but for now, the S&P 500 is going for 10.6 times next year’s earnings. That’s pretty cheap.

  • Morning News: August 16, 2011
    Posted by on August 16th, 2011 at 6:50 am

    Europe Q2 Expansion Slows More Than Forecast

    Merkel, Sarkozy May Edge Toward Euro Bonds, Bofinger Says

    India’s Inflation Rate May ‘Peak’ in August, Finance Ministry’s Basu Says

    China Finance Ministry Said to Begin Yuan Bond Sale Tomorrow

    Swiss Ponder Battle Over Runaway Franc

    Oil Drops as Slowing German Economy Signals Demand May Falter

    Gold Fever Gripping the Australian Outback

    Freddie: Most Homeowners Used Fixed Rates To Refinance In 2Q

    Home Depot Results Top Analyst Estimates

    Is Google Turning Into a Mobile Phone Company? No, It Says

    Asian Shares End Mixed; Google’s Motorola Buy Boosts Handset Makers

    Qantas Overhauls With $9 Billion Fleet Order, 2 New Airlines

    Cargill Will Acquire Provimi Group for $2.14 Billion

    National Oilwell Pens $1.5 Billion Brazil Supply Deal

    Howard Lindzon: Buddy Media is Going for It!

    Brian Shannon: Stock Trading Ideas for 8/16/11

    Be sure to follow me on Twitter.

  • QOTD
    Posted by on August 15th, 2011 at 10:33 am

    From the Wall Street Journal:

    “I’m sure there were some wealthy families who were drinking the Bernanke Kool-aid and got burned,” he said. “But I don’t know many families in that boat.

    Via Paul Kedrosky

  • Sysco Drops on Mediocre Earnings
    Posted by on August 15th, 2011 at 10:26 am

    Sysco ($SYY) just reported earnings of 57 cents per share which was inline with analysts’ estimates. However, it was well below my estimate of 60 cents per share, plus or minus two cents.

    “Looking at the overall business landscape, for some time now we have characterized the current economic recovery as slow, choppy, uneven and even fragile. Our fourth-quarter results and the events that have played out in Washington and in the financial markets over the past few weeks certainly support that outlook,” said Chief Executive Bill DeLaney on a conference call. “Nevertheless, we continue to believe that our industry will experience modest real growth over the long term.”

    The company, which derives most of its sales from the restaurant industry, said its sales growth of 0.7% for the quarter was affected by inflation, acquisitions and currency translations, and that aside from these factors, its sales would have risen 1%. The company also said volume growth was positive for the quarter but remains at modest levels.”

    Sysco is undergoing a major business-transformation project with a pilot in place at an Arkansas facility that it says will help drive growth and increase productivity. However, due to problems, such as the speed of taking and processing orders, it is delaying the wider rollout of the new system. It says it is still evaluating the financial impact of the delay.

    Some analysts believe the delay is chalked up more to the company’s avoiding the capital spending on a full launch during such an uncertain economy. However, Sysco said that even with headwinds such as inflation not appearing to be letting up in the next couple quarters, it hasn’t come to that yet.

    The stock dropped as much as 5.8% today, although it recovered some and finished 3.93% lower. With the lower price, the dividend yield is now 3.7%.