CWS Market Review – March 9, 2012

Will 2011 ever end? It seems like the typical pattern we saw during much of last year returned to haunt Wall Street again this week. Specifically, news from Europe spooked the markets; and stocks tumbled as cyclicals, small-caps and financials saw the most damage.

It was only last Thursday that the S&P 500 closed at a 44-month high. In three days (Friday, Monday and Tuesday) the index shed 2.2%. Of course, that’s a puny loss compared with some of harsh downdrafts we saw last year. Remember, it was only six months ago when the S&P 500 dropped more than 11% in three days.

But in 2012’s era of ultra-low volatility, 2.2% is now considered rough sailing. On Tuesday, the S&P 500 dropped 1.53% which was the worst daily drop of the year. It was nearly twice as much as the second-worst.

Don’t Be Fooled—Greece Defaulted

The good news is that once again, the worries about Greece are fading. The “powers that be” have organized a massive, gigantic, humongous debt-swap deal. This deal allows for private holders of Greek debt to swap their old worthless bonds in for new shiny almost-worthless bonds with lower coupons and longer maturities. Hooray!

Investors had been nervously watching to see how many debt holders would take the deal. They’re still crunching the numbers, but the latest reports say that around 95% of the folks are on board. The key level is 90%. If they hit that, they will avoid triggering the Credit Default Swaps.

Make no mistake, this is a default. It just has another name and it’s trying to be a little more orderly. Bottom line: This is the largest sovereign debt restructuring in the history of the world. Still, in my opinion, going with this deal is an easy call because…well, there’s simply no alternative. In exchange for the debt swap, Greece will get a new injection of 130 million euros to keep the country running for a while longer, but we’re not out of the tzatziki just yet. The best news is that this buys some time for Greece and for the rest of Europe. Stand by because Portugal may be next.

What does this mean for us? For one, it takes some of the macro worries off the table for now. I really don’t believe this latest twist in the Greek drama could have had that much of an impact on the U.S. economy. Greece’s economy, after all, isn’t that big. But as we all know, if you give Wall Street something that it can worry about, it will.

The immediate benefit of the debt deal is that stocks in the U.S. markets rallied. The S&P 500 closed Thursday at 1,365.92 which is very close to a fresh 44-month high. One casualty from our Buy List is AFLAC ($AFL). Even though the company has repeatedly made it clear that it cut its exposure to the problem spots in Europe, the stock dropped 54 cents on Thursday to close at $44.76. That’s AFLAC’s lowest close since January 17th. Shares of AFL now yield 2.95% and trade at just 6.7 times this year’s earnings. AFLAC continues to be a very strong buy.

Why Friday’s Jobs Report Is So Important

In this issue of of CWS Market Review, I want to focus on two upcoming events that will have major implications for Wall Street and for our Buy List. The first event will be Friday’s jobs report. I’m writing this in the wee hours on Friday morning so I don’t know yet what the Labor Department will say. But I can tell you that Wall Street has been eagerly anticipating (or dreading) this report and it could be a big one.

As I’ve discussed in previous issues of CWS Market Review, the jobs market has taken on an especially important role for the equity markets. The reason is that corporations have extended their profit margins about as far as they can go. In order to keep growing profits, we need to see more consumers, and that means more jobs.

Despite how well the jobs market has improved over the last two years, we’re still a long way from healthy. Over the last 23 months, the U.S. economy has created 3.165 million jobs. The problem is that we lost 8.779 million in the 25 months before that. That works out to a four-year loss of 5.614 million jobs and that doesn’t include the natural population gain. In short, people are in a lot of pain and our economy is still operating well below capacity.

The last two employment reports were pretty good. The economy created over 200,000 jobs in both December and January. It’s hard to say exactly what to expect later today, but I’ll lay out some of my thoughts. One early indicator came this week when ADP, the private payroll firm, said that 216,000 jobs were added in February. The consensus on Wall Street is for a gain of 213,000 non-farm payrolls.

I’ve looked at the numbers and I think that’s on the low side. In fact, I think Friday’s report has a realistic shot of topping 300,000. The recent jobless claims reports have been pretty strong; and rising gas prices may be related in part to recovering consumer demand.

If the jobs report comes in much stronger than expected, it would be a game changer. For one, it will take a lot of heat off the Federal Reserve since part of their dual mandate is job creation (the Fed meets again next week). Obviously, good news on the jobs front would be very helpful for President Obama and his reelection efforts. But it would also give a boost to equity prices. The S&P 500 is still going for 13 times this year’s earnings estimate which, based on historic numbers, is inexpensive. I think the S&P 500 has a good chance of hitting 1,500 before the end of the year.

Our Buy List is poised to do even better than the overall market. Through Thursday, our Buy List is up 9.27% for the year compared with 8.61% for the S&P 500. This could be our sixth year in a row of beating the S&P 500.

It’s odd to say on the third anniversary of one of the greatest bull markets in history that stocks are still cheap, but that’s what the numbers say. Interestingly, this is a big time of the year for major stock market inflection points. The Nasdaq Composite reached its all-time high close (5,048.62) on March 10, 2000.

The S&P 500 hit two bear market closing lows at this time of year. On March 11, 2003, the index closed at 800.73 (which was just above the low from the previous October). Then on March 9, 2009, the S&P 500 closed at 676.53 which will probably be remembered as a generational low. As usual, our strategy of patience and good stock-picking has paid off enormously for us.

My Preview for Oracle’s Earnings Report

The other event on the horizon I want to discuss is Oracle’s ($ORCL) fiscal Q3 earnings report which is due on Tuesday, March 20th. I like Oracle a lot, but the company stumbled badly during the second quarter. The Q2 earnings report was terrible. Oracle earned 54 cents per share which was three cents below Wall Street’s estimates. It was even below the company’s public range of 56 to 58 cents per share. At one point during the day following the earnings announcement, the stock was down by 14%.

This was a shocker since Oracle rarely fails to deliver. Whenever Oracle has thrown something bad the market’s way, the company has worked quickly to make it better. That’s why the upcoming earnings report may be a positive one. I also suspect that once Oracle saw they were going to miss last quarter, they pulled up at the end. There’s no reason why Oracle would miss so badly across the board. Some of those missing orders may spill over into Q3. Oracle is a very well-run company so anytime people talk about “execution problems,” you can be pretty sure that’s a transient issue.

The stock market has been unusually kind to Oracle’s stock. The shares have made back all that they lost following the last earnings report. Despite a three-cent miss, the stock is cheap (12.85 times earnings). Three months ago, Oracle gave guidance for Q3 of 56 cents to 59 cents per share. That’s pretty aggressive. I also expect to see Oracle raise its quarterly dividend from six cents to seven cents per share.

For now, I’m keeping my buy price at $30 per share. I want to see what Oracle has to say about the future before raising my buy price.

In addition to Oracle, I expect to see some more dividend increases from our stocks. We already saw a hefty 18% dividend increase from Harris Corp. ($HRS) last week. Jamie Dimon can easily afford to raise JPMorgan’s ($JPM) dividend from the current 25 cents to, say, 30 cents per share. Jamie has said that he’d prefer to ditch the dividend altogether but he understands that shareholders like it. The dividend increase last year was announced on March 18th, so another increase may come soon.

I also expect to see Johnson & Johnson ($JNJ) raise its dividend next month for the 50th year in a row. I’m forecasting an increase in the quarterly dividend from 57 cents to 60 cents per share. If I’m right, that would give the stock a yield of 3.7%.

Before I go, I want to highlight a few bargains on our Buy List. Hudson City ($HCBK) is back down to $6.61. That translates to a yield of more than 4.8%. Moog ($MOG-A) has pulled back below $42 per share which is a very good price. The company sees earnings of $3.31 per share for this fiscal year ending in September. Finally, I noticed that Fiserv ($FISV) got to $68 on Thursday which was a fresh all-time high. The stock is up 15.6% on the year for us. Fiserv remains an excellent buy.

That’s all for now. The big news next week will be the Fed’s meeting on Tuesday. I’m afraid to say that it will be another yawner. 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 March 9th, 2012 at 6:21 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.