CWS Market Review – October 7, 2011

On Monday, the S&P 500 finally broke out of its 100-point trading range. For 41 sessions in a row, the index had closed between 1,119 and 1,219. But on Monday, the S&P 500 dropped down to close at 1,099.23. That was our first close below 1,100 in over a year.

Since then, the market has raced higher. On Thursday, the S&P 500 closed at 1,167.97 which is a 5.98% surge in just three days. Naturally, we shouldn’t get too excited by this recent uptick. For the last several weeks, the stock market has bounced up and down in high-volatility spikes, but ultimately, we haven’t moved very far. However, with earnings season upon us, this time could be different.

As usual, the hurdle has been Europe, and more specifically, Greece. For a few months now, investors have been jerked around as we wait to hear something (anything!) promising from the Old World. Unfortunately, European officials seem firmly committed to doing a series of half-steps—and after each one, they seem puzzled that things aren’t getting any better. The good news is that it appears as if some folks in Europe are starting to understand what needs to be done.

In this issue of CWS Market Review, I want to give you a preview of the third-quarter earnings season. While the overall market continues to spin its wheels, I think several of our Buy List stocks are poised to surge higher. In fact a few of our stocks, like Deluxe ($DLX) and Ford ($F), have already started to turn the corner.

I’m writing you in the wee hours of Friday morning. Later today, we’ll get the crucial jobs report for September. Wall Street has been dreading this report for several days now, and it’s easy to understand why. Frankly, nearly every jobs report for the last few years has been dismal. I’m afraid I’m not expecting much better for September’s report. Wall Street is expecting a gain of 60,000 nonfarm payroll jobs, and as low as that estimate is, it might be too high.

If the news is better than expected, it may take some of the pressure off the Federal Reserve to get the economy going again. But bear in mind that the economy needs to create, on average, 200,000 net new jobs every month for a few years to get back to anywhere near normal. Truthfully, I think many of our economic problems are beyond the scope of the Fed’s repair kit, but I’ll save that for another time. If Friday’s jobs report is worse than expected, well…we’re already down so much that it may not hurt equities (although the political fallout could be dramatic).

The truth is that the U.S. economy isn’t doing nearly as badly as is generally perceived. Of course, I’m not saying that the economy is humming along. I’m just saying that its performance is far better than the febrile commentary I see every day. Consider that earlier this week Bespoke Investment Group noted that 17 of the last 21 economic reports have come in better than expected. Just this week, the ISM Manufacturing index topped expectations. The ADP jobs report beat consensus and the construction spending report was surprisingly strong. On October 27th, the government will release its first estimate of Q3 GDP growth and I think it’s possible that growth will come in over 2%. That’s not great, but it’s a far cry from a Double Dip.

Another promising note is that bond yields are finally beginning to creep higher. This is an early signal that investors may be willing to take on more risk. What’s interesting is how orderly the increase in risk is turning out to be. Yields for the one-, two- and three-year Treasuries all bottomed out on September 19th. Three days later, the yields for the five-, seven-, ten-, twenty- and thirty-year Treasuries hit their lows. Since then, the yield on the ten-year note has jumped 29 basis points. The five-year yield just closed above 1% for the first time in six weeks. The takeaway is that this orderly exodus out of low-risk investments may provide fuel for a sustained stock rally. Capital always goes where it’s treated best. If Friday’s jobs report comes in strong, Treasuries will continue to fall.

I’m pleased to see that many of our Buy List stocks continue to do well. In the last two weeks, the Buy List has gained 2.11% while the S&P 500 is down by 0.15%. On Thursday, shares of AFLAC ($AFL) got as high as $38.40. That’s the highest price since mid-August and it’s a 22% bounce off the low from two weeks ago. I’ve been flabbergasted by AFLAC’s recent plunge. The company is clearly doing well. I expect to see another strong earnings report on October 26th. I also wouldn’t be surprised to see another upward revision to next year’s earnings guidance. Still, investors seem convinced that AFLAC is taking a bath on its European investments. They’re not. AFLAC is well protected. The stock is a very good buy up to $40 per share.

Another big gainer recently has been JPMorgan Chase ($JPM). Over the last three days, the shares have gapped up by 14%. Next Thursday, JPM is due to report its third-quarter earnings. This will be the first of our stocks to report this season. Due to the problems in Europe and in our economy, Wall Street has been ratcheting down estimates for JPM. The Street currently expects JPM to report 98 cents per share which is 23 cents less than what they were expecting just one month ago.

I have to admit that I don’t have a good feel for what JPM should report next week. In previous quarters, I had a pretty good idea but there are too many unknowns to give you a precise forecast. However, I wouldn’t be surprised to see JPM miss estimates this time around; but I’ll be far more interested to hear what they have to say about their business. JPM continues to be the healthiest of the major banks. Thanks to the lower share price, the stock currently yields 3.2%. I also expect that the bank will bump up that dividend early next year. In fact, they could easily raise the dividend by 30% to 50%. If next week’s earnings report is positive, JPM would be a good buy up to $34 per share.

I’ve been very frustrated by the performance of Ford ($F) but I have to admit that the stock is well below a reasonable valuation for the company. Ford has turned itself around very impressively. I don’t like many cyclical stocks but Ford looks very good here. Sales continue to do well. The shares are currently going for about one-third of its sales. If you’re able to get shares of Ford below $11, you’ve gotten a very good deal.

There are a few other stocks I want to highlight. Over the last three sessions, shares of Deluxe ($DLX) are up nearly 18%. Even after that rally, the shares still yield 4.7%. Jos. A Bank Clothiers ($JOSB) is up over 10% since Monday and Wright Express ($WXS) has tacked on 13%. Last week, I highlighted Moog ($MOG-A), one of our quieter buys, and the stock has rallied nicely since then.

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

Posted by on October 7th, 2011 at 9:27 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.

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