CWS Market Review – November 19, 2010

After falling for six out of seven days, the stock market closed a tiny bit higher on Wednesday, and then we had a very good rally yesterday. The S&P 500 rose 18.10 points or 1.54% on Thursday. For a very brief spot, the index climbed over 1,200 but we couldn’t hold on by the closing bell.

The big news on Thursday was General Motors’ return to the public market. I strongly advise steering clear of this stock. The best I can say is that there was a lot of interest in the offering. While the stock got as high as $35.99, it sold off for the rest of the day and even dipped below $34.

Eric Falkenstein summed up GM well when he wrote: “In the same way that a spendthrift whose rich dad pays off his credit cards every so often has no incentive to become frugal, GM has no need to make hard decisions. It will survive one, maybe two, recessions.”

Reynolds American ($RAI) split 2-for-1 on Tuesday. The stock was hit hard last week after the government announced new packaging regulation for cigarettes. Fortunately, the sell-off was minor and we gained back almost everything we lost. Reynolds continues to be a very strong buy up to $34 per share. The stock currently yields just over 6%. This is an excellent investment for income investors.

There wasn’t much economic news, but what there was continues to be positive. The headline CPI for October came in at 0.2% while the core rate was flat. Wall Street had been expecting a 0.3% rise for the headline number and a 0.1% increase for the core rate.

The problem with the inflation debate is that so much rides on it politically that people have a hard time looking at inflation dispassionately. The simple fact is that there are no signs of inflation. We’re in a very odd period where some folks honestly believe that hyperinflation is imminent while others believe that deflation is just around the corner. If either outcome is on its way, it’s doing a good job of disguising itself.

If there’s one thing the stock market hates, it’s inflation. In fact, the only thing it hates more is deflation. The best environment for stocks is low, boring inflation which is exactly what we have now. A few years ago, I looked at the numbers and found that when inflation is over 5% or under -5%, the market averages a real 5.5% loss. However, when inflation is between -5% and 5%, it averages a 15% gain.

Besides low inflation, we had a strong report from the Philadelphia Fed. Also, the report on industrial production was so-so. Manufacturing production for September was revised to a small gain of 0.1% instead of a 0.2% loss in the original report. Manufacturing production for October showed a 0.5% gain. This isn’t great news, but it’s good news.

It’s hard for people to believe this but the United States really is a manufacturing powerhouse. The difference is that a lot fewer people work in manufacturing than they did before. But actual manufacturing production has doubled since 1983. Fewer workers do much, much more.

Next week will be another slow week. The stock market will be closed on Thursday for Thanksgiving. On Friday, or Black Friday as it’s called, the stock market closes at 1 pm instead of the usual 4 pm, so if you’re looking to make some trades be on the lookout for the early close. This is usually the slowest trading day of the year. When I was a rookie, I was the only guy in the office who had to come in on the Friday after Thanksgiving. I can assure you that nothing happens.

Medtronic ($MDT) will report earnings this Tuesday. I have to say that my thoughts are divided on Medtronic. I think it’s a very good company, and the stock is very probably inexpensive. However, the last few earnings reports haven’t been very impressive. Plus, the company already lowered its full-year forecast and I think it’s very possible they could do it again. My fear is that the estimates for their fiscal fourth quarter (which ends in April 2011) are too high.

Wall Street’s estimate for the October quarter (the fiscal second) is for 82 cents per share. If Medtronic beats that convincingly, they have a very good shot of making the company’s current full-year EPS range of $3.40 to $3.48. That would also mean the company is going for less than 10 times earnings. If you already own MDT, I say “hold it.” But if you don’t own it, wait for Tuesday’s earnings report. I’ll be sure to have lots to say about it on the blog.

The other two stocks on the Buy List with October quarters are Eaton Vance ($EV) and Jos. A Bank Clothiers ($JOSB). I don’t know when they will report but historically EV has reported around Thanksgiving while JOSB has reported in early December. I’m particularly excited for JOSB’s earnings.

Earlier I had said to expect a market sell-off after the Fed announced QE2. I thought I was wrong or that it came later than I expected. Either way, we had some decent buying opportunities over the last few days. Nicholas Financial ($NICK), for example, fell below $10 per share. This company has already earned 90 cents per share for the first three quarters of this year. There’s a very good chance NICK will make $1.25 per share for all of 2010.

AFLAC ($AFL) also fell as low as $53.12 this week. I wouldn’t be surprised to see AFL make a run at $60 very soon. Wright Express ($WXS) is another Buy List stock that’s looking very good at its current price.

That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Posted by on November 19th, 2010 at 8:01 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.