Archive for October, 2011

  • More on Stocks Against Bonds
    , October 31st, 2011 at 1:45 pm

    Here’s another look at the epic battle of stocks against bonds. As a proxy for the long-term bond markets, I used Vanguard’s Long-Term Investment-Grade Index Fund (VWESX) and for stocks, I used Vanguard’s 500 Index (VFINX). It’s not perfect but it’s good enough to make my point.

    The graph below shows VFINX divided by VWESX so whenever the line is rising, stocks are outperforming bonds.

    As you can see, bonds have held their own for a long time which runs counter to established wisdom that there’s a “premium” in holding equities. I still think there is an equity premium but it’s much smaller than most folks realize. Furthermore, the premium is very volatile so it’s not unusual to experience long phases where bonds beat stocks.

    Despite how well the stock market has done since the March 2009 low, it’s dead even with corporate bonds since May 8, 2009.

    Since July 13, 2007, corporate bonds have gained 46.74% while stocks have lost 9.38%.

  • Even More Innumeracy from Jeremy Siegel
    , October 31st, 2011 at 11:43 am

    When Wharton Professor Jeremy Siegel takes on math, it’s usually not pretty. I’ve caught him making basic math errors a few times before.

    He’s still doing it.

    In the Bloomberg article I linked to before, Siegel has a long quote:

    “The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

    He may be right about the direction of bonds, but he’s simply and obviously incorrect about the mathematical impossibility of bonds outperforming.

    Just because yields are low doesn’t mean they can’t go lower.

    Let’s take a 30-year bond with a coupon of 10%. If the bond sees its price jump by 50%, that brings the yield down to 6.28%.

    But if we take a 30-year bond with a coupon of 5% and if its price soars by 50%, that brings the yield down to 2.59%.

    In other words, as yields go lower each basis point is worth a greater price.

    Yes, bond yields are low, but there’s absolutely no rule in the realm of mathematics that prevents bonds from seeing the sames kinds of returns they’ve experienced.

  • For the First Time on 150 Years….
    , October 31st, 2011 at 9:43 am

    The 30-year return of bonds has beaten stocks (from Bloomberg):

    The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

    Fixed-income investments advanced 6.25 percent, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

    The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.

    “The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

    Part of this stat is due to timing — 30 years ago was the trough of the bond market. However, I think this underscores a point I’ve made for some time: the expected return of stocks over bonds is smaller than most experts believe. If I had to guess, I’d say that the equity premium of stocks over long-term bonds is probably 1.5% to 2%.

  • Morning News: October 31, 2011
    , October 31st, 2011 at 5:57 am

    Berlusconi Defiant as EU’s Focus Shifts to Italy

    Draghi Takes ECB Helm in Battle Mode

    Danish Banks May Shun $76 Billion Cash Lifeline

    Iceland Passes Final Hurdle in $11.4B Payout

    Sarkozy Criticized for Seeking China’s Help

    Japanese Officials Intervene to Weaken Yen

    Japanese Companies Question Long-Term Effect of Yen Intervention

    Oil Declines, Paring Biggest Monthly Increase Since May 2009

    As Meeting Approaches, Fed Panel Is Divided on Direction

    Chinese Internet Portal Profit Rises 14%

    Panasonic Swings to Net Loss

    Barclays Q3 Profit Climbs Amid Sovereign Crisis

    MF Global Said to Be in Deal Talks With Interactive Brokers

    Cable Is Holding Web TV at Bay, Earnings Show

    Jeff Miller: Weighing the Week Ahead: Will the Modest Economic Rebound Continue?

    James Altucher: I Surrender

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  • Comment From Seeking Alpha
    , October 29th, 2011 at 9:00 pm

    Here’s a comment courtesy of rschus at Seeking Alpha regarding my recent post on Amazon‘s ($AMZN) super-rich valuation.

    Not only does rschus prove my point that investors in Amazon refuse to look at the numbers, but I find all his criticisms to be rather complimentary:

    Mr Elfenbein strikes me as a technocrat rigidly locked into rules and numbers without considering the kind of positive vibes that a company like Amazon generates for the individuals who shop there and its iconic name (akin to Google) in the wider world. This is a powerful and well-run company that, despite occasional stumbles, will only grow because shopping there gets you what you want with comparison shopping, great prices, reviews and whatever you don’t get by dragging yourself to stores with usually uninformed salesmen and limited inventory. P/E? Shmee/E? Amazon will grow.

    He’s right — I don’t consider positive vibes when looking at a stock.

  • CWS Market Review – October 28, 2011
    , October 28th, 2011 at 5:05 am

    Thursday was one of the most spectacular days in the history of Crossing Wall Street. It’s odd for us to see the market behave so irrationally for so long and then suddenly, in a matter of a few hours, see nearly all of our views vindicated. On Thursday, six of our Buy List stocks rallied by more than 7%. Over the last 18 sessions, our Buy List has gained a staggering 18.72%.

    The market has finally turned our way and it’s done so in a very dramatic fashion.

    Let’s break down some of the numbers from Thursday’s amazing day. The S&P 500 soared 42.59 points or 3.43%, making it one of the best days of the year. October, in fact, is shaping up to be one of the best months for the stock market since reliable records have been kept. Plus, an important event that I’ve been waiting for has finally come to pass—the S&P 500 just broke its 200-day moving average. Historically, that’s a very good sign for equities. Furthermore, the index is now positive for the year.

    Best of all, we’re outperforming a strong bull. Our Buy List soared 4.38% on Thursday which is a full 0.95% better than the market. We had several big winners. In last week’s CWS Market Review, I told you that AFLAC ($AFL) could easily earn $1.64 per share which was a bold call since it was four cents higher than Wall Street’s consensus. It turns out that I wasn’t optimistic enough! AFLAC reported Q3 operating earnings of $1.66 per share. The stock exploded higher on Thursday. At one point, AFLAC was up 11.5% for the day.

    AFLAC also raised its full-year EPS guidance for 2011 from $6.09 – $6.34 to $6.30 – $6.37. So I guess their European investments are bankrupting them! This earnings report confirms what I’ve been saying for weeks—AFLAC continues to perform extremely well. The company is also benefiting from the strong yen. (Check out the CEO on CNBC.) AFLAC boosted its dividend by 10% making this the 29th year in a row that the company has increased its dividend.

    Over the last five weeks, AFLAC has gained more than 43%. The stock continues to be an outstanding buy. I’m raising my buy price on AFLAC to $50.

    Our biggest winner on Thursday was little Nicholas Financial ($NICK). No one on Wall Street follows this company, but I gave my forecast on the blog recently. I said NICK could earn between 44 and 46 cents per share, and the company hit the top end of my range perfectly.

    Once again, my view on NICK was confirmed by the earnings report. This financer for used cars is doing very well and its business strategy is sound. The shares responded by rallying over 10% on Thursday. Even at that higher price, NICK yields close to 3.5%.

    Despite how well NICK has done, I still believe the shares are vastly underpriced. I think a reasonable buy-out price for NICK is at least $17 per share. However, if you’re looking to invest in NICK, I should warn you that the stock can be very thinly traded so be careful when placing buy orders. If you’re not careful, you could wind up pushing the price out of reach. NICK is an excellent buy for more aggressive small-cap investors.

    We also had a strong earnings report from Deluxe ($DLX). The company earned 78 cents per share which was three cents more than estimates. Deluxe is one of our quieter stocks but it’s doing very well. I really like the stock’s high dividend yield.

    For Q4, Deluxe sees earnings ranging between 77 cents and 84 cents per share on revenue between $359 million and $369 million. Wall Street had been expecting 82 cents per share on revenue of $362.84 million so there’s no surprise here. This is a solid buy.

    On Wednesday, Ford Motor ($F) reported earnings of 46 cents per share which was two cents better than Wall Street’s consensus. This is the automaker’s 10th-straight quarter of profitability. Actually, Ford’s earnings could have been much better. The company was hurt by weakness in Europe and also by rising commodity prices. Despite these challenges, the company delivered strong results.

    The stock actually fell on Wednesday but gained much of it back on Thursday. Thanks to a recent deal with its union, Ford had its credit rating upgraded. The company is even considering restoring its dividend. Now that I’ve had a chance to dig through the earnings report, I feel confident in saying that Ford is a strong buy up to $14 per share.

    So far this earnings season, eight of our nine stocks have beaten Wall Street’s expectations which is a ratio that’s far better than the rest of the market. Our only miss so far came from Reynolds American ($RAI). For Q3, Reynolds earned 70 cents per share which was three cents below consensus. The company also narrowed its full-year EPS range to $2.63 – $2.68 per share which implies a Q4 range of 67 – 72 cents per share.

    In my opinion, the more important news is that the company raised its quarterly dividend by three cents per share. Shares of RAI now yield 5.82% which beats just about everything else you can find. I’m not at all worried about a slight earnings miss for Reynolds. They missed earnings in the second quarter but that didn’t stop the stock from rallying. Reynolds American continues to be a very good buy for income-oriented investors.

    The final earnings report for this week came from Gilead Sciences ($GILD). For Q3, GILD earned $1.02 per share which was one penny better than expectations. This comes as a relief because the earnings report for the first quarter was a dud. I’m glad to see that Gilead is back on track. I like this stock a lot. Going by Thursday’s close, Gilead is selling for less than 10 times next year’s earnings estimate. This could easily be a $50 stock. It went as high as $57 three years ago and earnings are much higher today.

    That’s all for now. Coming next week, we’re going to have Buy List earnings reports from Moog ($MOG-A), Becton Dickinson ($BDX), Fiserv ($FISV) and Wright Express ($WXS). 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: October 28, 2011
    , October 28th, 2011 at 5:04 am

    Calling Bankers’ Bluff, Merkel Got Europe a Debt Plan

    EU Bank Debt Plan May Struggle to Thaw Funding Market

    Greek Prime Minister Praises European Debt Deal

    Gauging the Fallout of Another Rescue

    Europe Looks to IMF, China for Rescue-Fund Cash

    U.S. Economy Picks Up Pace, Averting a Stall

    Oil Drops on Japan Output, Pares Biggest Weekly Gain Since March

    Oil Industry Hums as Higher Prices Bolster Quarterly Profits at Exxon and Shell

    PetroChina Gains Top Sinopec as Crude Counters Refining Loss

    Samsung Overtakes Apple in Smartphone Sales

    HP Ditches Costly PC Unit Spin-off

    Potash Third-Quarter Profit More Than Doubles on Higher Fertilizer Prices

    Some MF Global Clients Move Money Away as Troubles Grow

    Advertising Giant WPP Predicts Full-Year Revenue Growth to Slow

    Disney Channel to Be Introduced in Russia

    Roger Nusbaum: Now That Would Be A Disclaimer

    Jeff Carter: Occupy Wall Street and Entrepreneur Investment

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  • The S&P 500 Breaks Above Its 200-DMA
    , October 27th, 2011 at 12:51 pm

    The S&P 500 just dipped above its 200-day moving average. If we close above 1,274.19, it will be the first time since August 1st that we’ve closed above the 200-DMA.

    The index’s high today was 1,279.27 which is a gain of 3.0008%.

  • Dan Amos on AFLAC’s Earnings
    , October 27th, 2011 at 12:43 pm

  • Deluxe Earns 78 Cents Per Share
    , October 27th, 2011 at 11:57 am

    The earnings parade continues! Deluxe ($DLX) just reported Q3 earnings of 78 cents per share which was three cents more than estimates. Revenue came in at $355.1 million which was just shy of consensus.

    Deluxe is one of our quieter stocks but it’s still doing well. I really like the stock’s high dividend yield. For Q4, Deluxe sees earnings ranging between 77 cents and 84 cents per share on revenue between $359 million and $369 million. Wall Street had been expecting 82 cents per share on revenue of $362.84 million so there’s no surprise here.

    The stock initially dropped this morning which is an odd reaction to today’s report, but the shares have since rallied. At the current price, DLX yields 4.13%. I probably won’t have Deluxe on next year’s Buy List but I think the shares are a good buy at this price.

    Here are some details on the recent quarter:

    “Deluxe delivered another solid quarter despite the ongoing sluggish economy,” said Lee Schram, CEO of Deluxe. “Excluding the impact of last year’s $25 million contract settlement and the recent PsPrint acquisition we grew revenue and delivered on our cost reduction initiatives. We also delivered strong operating cash flow and repurchased additional shares. With three quarters complete, we are confident in our ability to deliver the full year revenue and EPS objectives established in January despite added challenges from the economy.”

    Third Quarter 2011 Highlights:

    * Revenue for the quarter was $355.1 million compared to $367.6 million during the third quarter of 2010. Revenue in 2010 included a contract settlement of $24.6 million. Excluding the contract settlement, revenue increased 3.5% compared to 2010, with growth in Small Business Services more than offsetting declines in the personal check businesses.

    * Gross margin was 65.5 percent of revenue compared to 67.0 percent in 2010. The contract settlement in 2010 had a favorable impact of 2.4 percentage points on 2010 gross margin. Favorable impacts from price increases and the Company’s continued cost reduction initiatives more than offset increased material costs and delivery rates in 2011.

    * Selling, general and administrative (SG&A) expense increased $5.0 million in the quarter compared to 2010. Increased SG&A expense associated with acquisitions and investments in revenue generating initiatives was partially offset by benefits from continued execution against cost reduction initiatives.

    * Operating income in 2011 was $65.6 million compared to $88.5 million in the third quarter of 2010. The decrease was driven primarily by the $24.6 million contract settlement in 2010. Restructuring and transaction-related costs were $5.1 million in 2011 versus $0.1 million in 2010. The 2011 costs were primarily attributable to the Company’s on-going cost reduction initiatives and the July acquisition of PsPrint. Operating income was 18.5 percent of revenue compared to 24.1 percent in the prior year driven primarily by the 2010 contract settlement.

    * Reported diluted EPS decreased $0.27 from the prior year driven by the 2010 contract settlement of $0.31 per share, offset by improved operating performance and a lower effective tax rate primarily from actions taken to restore a portion of the deferred tax asset related to Medicare Part D subsidies.