CWS Market Review – January 27, 2012

Hold on, folks! We’re now at the crest of the fourth-quarter earnings season. For the overall market, the numbers are, to use a technical term, pretty blah. Earnings growth is tracking at a measly 4.4%. The silver lining is that if we exclude financials (and don’t I wish we could!), growth is tracking at 12.5%.

Bloomberg reports that 172 companies in the S&P 500 have reported earnings so far. Of that, 104 have beaten expectations while 28 have missed and 20 were inline. That’s a “beat rate” of just over 60% which sounds better than it is. Wall Street likes to keep a firm hand on expectations so normally most companies exceed expectations. But a beat rate of 60% would actually be one of the worst earnings seasons in years. On top of that, we have to remember that a lot of analysts had lowered their estimates going into earnings season.

Despite the mediocre results, the stock market continues to thrive. The S&P 500 got as high as 1,333.47 early in the day on Thursday which is a six-month high; plus it’s more than 24% above the intra-day low from October 4th. Believe it or not, the index isn’t far from making a post-crash high. But instead of calling this a rally, I think it’s more accurate to say that the stock market is taking back much of the ground it lost during the freak-out panic attack we saw over the summer. Yikes, that wasn’t fun. That’s when the debt ceiling debate and S&P downgrade gave the market a super-atomic wedgie. In just two weeks, the S&P 500 plunged more than 16%.

Those were scary times, but those who stuck it out have seen big gains. In the CWS Market Review from six months ago, I wrote: “So is it time to sell? Absolutely not. In fact, this would be a terrible time to sell.” Since then the S&P 500 has gained nearly 10%.

The reason the market was so panicked this summer was that investors thought that the debt crisis in Europe had the potential to bring down our economy. I thought that was outlandish, and only now are investors seeing that reality. Jamie Dimon, the CEO of JPMorgan Chase ($JPM), made news this week when he said something perfectly obvious: if Greece if defaults, big whoop—it will have almost no impact on U.S. banks. Don’t get me wrong. I feel bad for the Greeks, but we’re not seeing a repeat of 2008.

Slowly and steadily, the denouement of the Greek drama is beginning to take shape. The good news is that the spillover effect to other countries appears to be far less severe that originally feared. While two-year notes in Greece now yield over 200% (yes, two effing hundred percent), yields in other trouble spots are coming down. The yield on the 10-year Italian bond just dropped below 6% for the first time in six weeks. In November, Italian bond yields were 575 basis points higher than German yields. Today that spread is down to 418 basis points. In Spain, the spread is down to 334 points. In other words, people are starting to chill out.

The worst of the euro crisis is passing and its impact on our markets is rapidly dissipating. Last week I highlighted the fact that the correlation between the euro and the S&P 500 had dropped from 0.91 in November to 0.66 recently. This has led to far less volatility in our market plus higher stock prices despite the sluggish earnings reports. Last year the S&P 500 closed lower by 0.50% or more 72 times. It’s only happened once this year (-0.58% on Thursday).

Now let’s get to the most over-rated news story this week which came from our dear, dear friends at the Federal Reserve. Bernanke & Co. said that they don’t anticipate raising interest rates until at least 2014. They’re making the Mayans sound optimistic! I know this news sounds dramatic but it’s not a commitment to do anything. The simple fact is that the Fed has a pretty dismal forecasting record. Plus, the Fed’s main goal should be establishing its credibility in the present. That’s what the bond market cares about. The Fed’s job isn’t about predicting what may or may not happen three years from now.

The immediate impact of the Fed’s news was that the Treasuries in the middle part of the yield curve soared. On Thursday, the yield on the five-year Treasury dropped down to 0.77% which is an all-time low. The three-year yield is down to 0.31% which is just above the all-time low of 0.29% from September 19th. Think about that. You can stuff your money away until 2015 and make a grand total of less than 1%. Even though the Fed made a lot of headlines this week, investors ought to ignore this news. My take is that it’s rather silly to see news in what someone else thinks may happen three years from now.

Now let’s jump to our Buy List because this has been a great week for us. Stryker ($SYK), for example, gapped up 4% on Wednesday thanks to a good earnings report. Also on Wednesday, Hudson City Bancorp ($HCBK) rallied to a six-month high. But our biggest winner was CA Technologies ($CA) which soared nearly 10% on the news that it’s raising its dividend fivefold. CA now yields twice as much as a 10-year T-bond. Take that, Benny!

Through Thursday, our Buy List is up 7.25% for the year compared with 4.84% for the S&P 500. It’s still early and we know all too well how quickly the market’s mood can change, but I have to admit that I’m very pleased with how 2012 is going. Let’s not get cocky. Investors should focus on high-quality companies selling at good prices. As always, don’t chase stocks. Instead, let good stocks come to you.

Now here’s a quick recap of our earnings news from this week:

On Tuesday, Johnson & Johnson ($JNJ) reported Q4 earnings of $1.13 per share which was four cents better than estimates. The only sour note is that JNJ sees earnings for 2012 ranging between $5.05 and $5.15 per share. Wall Street had been expecting $5.21 per share. Johnson & Johnson is a good buy up to $70.

Stryker ($SYK) reported Q4 earnings of $1.02 per share which matched forecasts. The company also reiterated its outlook for “double digit” earnings growth for this year. That means EPS of at least $4.09. Frankly, I think Stryker is low-balling which makes sense at the beginning of the year. I’m keeping my buy price at $55. Don’t chase this one.

Hudson City Bancorp ($HCBK) reported a loss of 73 cents per share but that’s because the bank extinguished a massive amount of debt. Smart move. This gives a major boost to their balance sheet. Early on Wednesday, HCBK got as high as $7.46 although it gave much of it back later on. Still, this is a very good value. I rate Hudson City a solid buy up to $7.50.

What else can I say about CA Technologies ($CA)? For a boring stock, this is certainly treating us very well. For Q4, the company earned 65 cents per share, 11 cents more than estimates. CA also raised its EPS range for fiscal 2012 from $2.13 – $2.18 to $2.21 – $2.25. And to top it all off, the company jacked up its annual dividend fivefold from 20 cents per share to $1 per share. This stock is up nearly 25% on the year for us. I’m raising my buy price from $24 to $27.

As I said, we’re just at the crest of earnings season. We have many more reports to come. On Friday, Ford ($F) and Moog ($MOG-A) are due to report. I’m very excited for Ford this year. The company has done a brilliant job turning itself around. Last year was Ford’s third-straight annual profit.

Once the final numbers are in, Ford probably will have made $20 billion in 2011 which would make it their best year since 1998. Wall Street currently expects Ford to earn $1.66 per share this year which means the auto company is going for just over eight times earnings. One fund manager said about Ford, “The stock is too cheap for a company that has done very right.” Well put. I think the stock has a reasonable shot of breaking $15 per share before the year is up (that’s another 17% from here).

Next Tuesday, January 31st, we’ll have three reports; AFLAC ($AFL), CR Bard ($BCR) and Harris Corp ($HRS). On Thursday, Fiserv ($FISV) is due to report.

I’m excited to see what AFLAC has to say. The stock came very close to hitting $50 this week which it hasn’t done since May. (Remember it was at $31 only four months ago.) Three months ago, AFLAC said it expects to earn $1.45 to $1.52 for the fourth quarter. My numbers say that’s too low. I’ll be interested to see if AFLAC revises its 2012 earnings growth forecast of 2% to 5%. I think they will at some point, but maybe not this early in the year.

That’s all for now. Earnings will be the big story next week. Then on Friday, all eyes will be focused on the jobs report. My prediction: Whatever the jobs report says, Republicans and Democrats will argue over it. You heard it here first. 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 January 27th, 2012 at 10:04 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.