CWS Market Review – November 11, 2011

Just when I thought the market was getting back to something resembling normal, the S&P 500 got hit for a 3.67% loss on Wednesday. In the five weeks preceding that (more precisely, from October 3rd to November 8th), the index gained 16.1% which is an impressive rally for such a short period of time. But once again, Europe’s mess is our pain.

The latest worry is Italy and truthfully, the story in Italy is basically the same as the story in Greece, except that it’s much larger which means that it’s potentially far worse. If need be, Greece can be tossed aside. Italy can’t. It’s perfectly positioned in no man’s land: too big to fail and too big to save. Italy is the third-largest economy in Europe and it holds $2.6 trillion in debt. That’s more than Greece, Ireland, Spain and Portugal combined. If that’s defaulted, well…people notice that sort of thing.

Investors have grown very weary of holding Italian bonds and I don’t blame them. The yield on the ten-year bond there shot up past 7% which is the trigger point at which other countries have sought bailouts. In the realm of international finance, the bond market is the court of no appeal; once that’s turned against you, the end is certainly near. Your business or economy can be a complete wreck but as long as someone is willing to lend you money, you can stay alive. But once the money train ends, you’re done. James Carville, the former political advisor to President Clinton, once said that he’d prefer to be reincarnated as the bond because “you can intimidate everybody.” He’s right.

To their credit, the Italian government has gotten intimidated. They’ve promised to fast-track reforms and that helped the markets recover a bit on Thursday. The European Central Bank has jumped in, starting to buy Italian debt in an effort to push down yields. Also, Prime Minister Berlusconi has promised to step down after a new budget deal is reached. Yesterday the Italian government auctioned off some one-year debt and that went much better than expected.

As I said last week, my fear is that all these moves merely treat the symptoms without curing the disease which is an inherently dysfunctional currency union. In fact, I’m not sure that the ECB can ultimately help Italy. We might really be seeing the end of the euro. In last week’s CWS Market Review, I said that the currency might be able to survive in a smaller union. Now we learn that France and Germany have been talking about exactly that for the past several months. For the euro to live, the periphery of Europe needs to start growing again and soon, and that won’t be easy with their new-found austerity. For now, I think the most-probable path will be a much weaker euro. This mess is going to get worse before it gets better.

One beneficiary of the nervousness in Europe is the U.S. bond market. Two weeks ago, the yield on the 10-year note broke above 2.4%, and that was a move I was happy to see. Investors are well-advised to shift out of these safe assets in exchange for riskier assets like high-yielding stocks. On Wednesday, however, the yield on the 10-year got as low 1.93%. Things could be changing. On Thursday, the Treasury auctioned off a new batch of 10-year notes and the demand was the lowest it’s been in nearly two years.

Now let’s turn to our Buy List. Some of the higher-yielding stocks I like right now include AFLAC ($AFL), Johnson & Johnson ($JNJ), Reynolds American ($RAI) and Sysco ($SYY). This week we had a last trickle of earnings reports for this earnings season. On Friday, Moog ($MOG-A) delivered a great earnings report. For their fiscal fourth quarter, Moog made 83 cents per share which was 10 cents more than Wall Street’s estimate. That also represented 17% growth over last year.

The more I look at Moog’s number, the more I like them. For all of 2011, Moog earned $2.95 per share. For 2012, the company sees sales increasing by 8% to $2.52 billion and EPS rising 12% to $3.31. Wall Street had been expecting $3.25 per share.

As a business Moog is very profitable, but as a stock it’s dull as dirt and that suits me just fine. The shares are basically flat for the year, but if you’re able to get MOG-A for less than $40 (which is 12 times forward earnings), then you’ve gotten yourself a good deal.

On Monday, Sysco ($SYY) reported quarterly earnings of 55 cents per share which topped Wall Street’s estimates by thee cents per share. Overall, the company had a very good quarter though demand wasn’t nearly as strong as I’d like. The good news, though not for consumers, was that Sysco’s bottom line was helped by higher food prices. I’m not so worried about factors that may impact Sysco’s business in the short term.

Here’s the important part: Sysco has raised its quarterly dividend for the last 41 years in a row, and I expect to see #42 very soon. However, the increase will probably be very modest. My guess is that the board will bump up the quarterly dividend from 26 cents to 27 cents per share. That would give the shares a yield of close to 4%. In this environment, that’s not bad. Sysco is a good buy up to $30 per share.

After the closing bell on Tuesday, Leucadia National ($LUK) reported a loss of $291 million for the third quarter. I have to explain that LUK refuses to play the quarterly earnings game. Since no analysts on Wall Street cover the stock, which is basically a large closed-end fund, the earnings report can be misleading. What’s hurt Leucadia lately is its holding of Jefferies ($JEF). LUK’s stock dropped more than 12% on Wednesday.

That’s all for now. The bond market will be closed on November 11th in honor of Veterans’ Day. Next week will be the last full week of trading before Thanksgiving. 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 November 11th, 2011 at 8:49 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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