CWS Market Review – May 13, 2011

The stock market has reached a crossroads this week and I want to explain in full detail what’s happening. Investors need to understand that there’s a major shift happening on Wall Street and it will have a big impact on our performance for the rest of this year.

First off, let’s look at our Buy List. I like to tout how well (or poorly) we’ve done, and we’ve been doing especially well recently. Through Thursday, our Buy List is up 1.41% for the month while the S&P 500 is down 1.10%. For the year, we’re up 12.97% compared with 7.24% for the S&P 500. Each week, it seems, we put more and more distance between us and the rest of the market.

The Buy List is specifically designed to follow the broader market but perform a few percentage points better while having a little less volatility. Part of the reason we’re doing so well recently is that we don’t have any energy stocks or materials stocks, and it’s those sectors that have been feeling the most pain recently.

What happened is that as the U.S. dollar plunged against other world currencies, the price for many industrial commodities soared. The most dramatic example was silver. However, the price for gold, copper, and as anyone who’s been near a gas station can tell you, oil have all jumped as well.

The problem is that higher commodity prices (especially oil) inevitably hurt consumers and that’s a danger for the entire economy. The argument therefore is that the Fed’s policies aren’t merely not helping; rather, the Fed’s policies are actually actively hurting the economy by sacrificing the dollar.

What’s odd is that the commodity rally started to get out of hand. Over the last few days, the dollar finally started to stabilize and it even rose somewhat modestly. Even though the uptick in the dollar wasn’t much, it was just enough to knock the air out of commodities. The sell-off soon turned into a rout.

Let’s look at the some of the recent damage: The Silver ETF (SLV) lost more than one-third over the last two weeks. This is similar to Silver Thursday from 1980 which wiped out the Hunt Brothers. Instead of happening in one day, this time it’s happening in slow motion. Besides silver, the Oil ETF (OIL) is down 13% for the month. This has naturally dented the major commodity-based stocks. ExxonMobil (XOM) has shed nearly $40 billion in market value in May alone.

In perfect timing, the downturn in oil stocks happened at the exact moment that Congress decided to hold hearings on subsidies to “Big Oil.” Anyone with a sense of history had to appreciate seeing Senator Jay Rockefeller say that oil executives were “out of touch” with the American people. This Sunday, by the way, will be the 100thanniversary of the Supreme Court’s decision to break up John D. Rockefeller’s Standard Oil into 34 companies, many of which form the major oil companies of today.

So if investors are shunning commodities, where have they been going? The answer is: pretty much anywhere safe. I tweeted recently “Today in market news, paper beats rock.” I was being facetious but it’s pretty much true. Investors have poured out of gold and silver and piled into super-safe Treasuries. Not only have short-term yields plunged to slightly above zero, but we’re also seeing some longer-term yields do so.

The yield on the one-year Treasury bond slipped below 0.2%. I think that’s probably the best example of how fearful many investors are. Despite worries that our Treasury bond will be shunned by the world market, investors are still willing to pay very high prices for our debt.

The yield for the one-year Treasury got down to 0.17% recently. That’s the equivalent of just 21 Dow points for the entire year. Bear in mind that the Dow will pay out around 250 points in dividends alone. In other words, some investors are so worried over the future of equity markets that they’re willing to sock their cash away for a year and get almost nothing in return. In their eyes, there’s no other option. I think that’s crazy, but I want to show you how dramatic events have become.

In last week’s CWS Market Review, I wrote about Sysco‘s (SYY) upcoming earnings report. I said that Wall Street was expecting earnings of 41 cents per share whereas I thought earnings would come in at 43 cents per share. Once again, I was a pessimist but only by a penny. On Monday, Sysco reported earnings of 44 cents per share. The stock responded by jumping 10.7% that day.

While I felt pretty confident that Sysco would beat Wall Street’s forecast, I had no idea it would react so dramatically. I should also note that Sysco is your quintessential consumer-staples stock. The company is one the largest food services firms in the country which means its business isn’t heavily impacted by the gyrations of the economy. I also like that Sysco’s dividend currently yields 3.25%. That’s a good deal. I now rate a Sysco a “buy” up to $32 per share.

Some other stocks on the Buy List that look particularly good right now include AFLAC (AFL), Abbott Laboratories (ABT), Becton, Dickinson & Co. (BDX) and JPMorgan Chase (JPM). We’re now entering a slow period for our Buy List. There probably won’t be any major news until after Memorial Day, and there won’t be any important economic reports next week. Still, don’t be lured into complacency. I strongly urge all investors to focus on high-quality stocks.

This overall market environment continues to look good for patient investors. The first-quarter earnings season is nearly over and it’s been a very good one for us. According to Bloomberg’s latest numbers, 72% of companies have beaten analysts’ estimates. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

For all of 2011, the S&P 500 is projected to earn $98.19. Going by Thursday’s close, the index is trading at 13.74 times this year’s forecast. That works out to an earnings yield of 7.18%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.

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!

Posted by on May 13th, 2011 at 8:16 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.