CWS Market Review – January 13, 2012

The stock market continues to have an impressive 2012. The S&P 500 has closed higher on seven of the eight trading days so far. The index is now up 3.01% for the year while our Buy List is up by 3.57%.

Things are about to get much more interesting as the earnings reports start coming in for our Buy List stocks. JPMorgan Chase ($JPM) will report on Friday. Wall Street will be watching this report very closely for signs of how well the banking sector did during Q4. For most banks, it’s not going to be pretty.

The consensus among analysts is for JPM to report 90 cents per share, and what I’ll be paying most attention to is any full-year earnings guidance from the bank. JPM remains one of the best-run large banks around, and the stock is cheap. Be sure to visit the blog for the latest earnings news.

In this week’s CWS Market Review, I want to shift gears and talk more about the bond market since that’s often a future driver of stock prices. Beginning in late July of last year, the long end of the Treasury market took off while stocks slumped. Even though stocks have recovered somewhat, Treasury yields remain low. Very, very low.

Last week I said that the bond market’s 30-year bull run may already be over. The bond market had other ideas and yields dropped even lower this past week. The Treasury has had no problems auctioning off new debt. Just this week, an offering of 10-year debt was auctioned off at the lowest yield ever. On Wednesday, the yield on the five-year Treasury nearly hit an all-time low.

Honestly, I don’t see how much longer these low yields can last. The math is, quite simply, horrible. Investors can’t even get 2% from a 10-year Treasury while there are gobs of blue chip stocks yielding 3% or more. Sysco ($SYY), for example, yields 3.68% and Johnson & Johnson ($JNJ) yields 3.50%. Compare this to even a two-year Treasury which will fetch you a yield of just 0.22%. Sure it’s safe, but at what price?

Part of the reason for the wide stock-bond divergence is probably the safe haven effect. When things get bumped, investors gravitate toward safety. Or in this case, they stampede. The latest trouble spot is Germany where it appears that their economy is in a recession. Short-term yields there recently turned negative, so that may be driving some of the demand for our debt.

What’s especially puzzling about the latest rally in bonds is that it’s occurring amid positive economic news and a rally in cyclical stocks. Cyclical stocks often do well as long-term yields rise. This isn’t a hard rule, but it’s a well-known generality.

Last week I said that cyclical sector is starting to look more attractive. The Morgan Stanley Cyclical Index (^CYC) has outperformed the broader market for ten straight sessions. This clearly reflects greater optimism for the U.S. economy, although the market would have had a tough time becoming more pessimistic. To be fair, last week’s jobs report wasn’t too bad, and earlier this week, we learned that consumer credit had its largest monthly gain in a decade. I think it’s possible that Q4 GDP topped 4%.

As far as corporate earnings go, I continue to be a realist. I think that more than a few companies will disappoint investors this earnings season. We’ve already seen plenty of lower guidance. This is Wall Street’s old trick of lowering the bar to six inches off the ground and expecting a standing ovation for stepping over it. That ain’t gonna happen this time around.

Many of our Buy List stocks will serve as an oasis. Stryker ($SYK), for example, just gave very good preliminary guidance for 2012. The company won’t report its Q4 earnings until January 24th, but it already said to expect a sales increase of 11%. Stryker also said that full-year earnings should range between $3.72 and $3.74 per share. By my count, this is the second time the company has raised the low-end of its guidance.

But I was most impressed to hear the company say that earnings-per-share should rise by “double digits” in 2012. I don’t think many companies will be telling investors that this month, and even fewer will be able to deliver. I don’t have any such doubts about Stryker. We should also remember that last month the company raised its quarterly dividend by 18%. That sends a strong message to investors. Until now, I had been urging some caution towards Stryker until I heard better news. Now that it’s here I feel much better about the stock. Stryker is an excellent buy up to $55 per share.

Shares of CA Technologies ($CA), one of our new stocks this year, also had some good news this week. The shares got a nice lift on Thursday when Taconic Capital, a prominent hedge fund, announced that it had acquired a large position. Any holding of more than 5% has to be made public, and Taconic got a hair more than 5% so they most certainly knew their position would cause a splash. Shares of CA Technologies jumped 4.2% on Thursday. The stock is already up 7.9% for the year.

Taconic is known as an activist investor, which means they make recommendations about how to quickly improve a business. In the case of CA, I have to admit that their ideas are very sound. CA Technologies is a very strong buy up to $24 per share.

I’m particularly optimistic about Ford ($F) right now. The company said that it ended 2011 on a strong note and the stock seems to be riding the cyclical rally. I think the stock can reasonably hit $15 before the end of the year.

That’s all for now. Be sure to keep checking the blog for daily updates. The stock market will be closed on Monday in honor of Dr. Martin Luther King. The civil rights leader would have been 83 years old. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on January 13th, 2012 at 5:31 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.