Archive for March, 2012

  • More On Investors Warming Up to Risk
    , March 27th, 2012 at 11:23 am

    Here’s another graph showing how investors are willing to take on more risk. This shows the spread between the yield on the 10-year Treasury bond and the yield on BofA Merrill Lynch US Corporate BBB Index.

    Late last year, the spread was over 280 basis points. This means that investors were demanding extra incentive to buy riskier assets. Since then, the spread has narrowed to 180 basis points. That’s a dramatic change in just a few weeks.

    Before the financial crisis, the spread was often around 120 basis points. Last spring, the spread got that low again but started to rise over the summer as fear increased during the debt ceiling debate and renewed fears in Europe.

  • Home Prices Near 10-Year Low
    , March 27th, 2012 at 10:31 am

    The Case-Shiller report shows that home prices are the lowest they’ve been since early 2003.

    Year-to-year, unadjusted January prices declined 3.9% for the 10 major markets while the 20-city index dropped 3.8%. The latest year-to-year drop represented a marginal improvement over the 4.1% decline reported last year for both indexes. Just three cities reported annual growth. Denver home prices edged up 0.2%. Detroit and Phoenix–two cities that have seen massive price declines in recent years–reported year-to-year increases of 1.7% and 1.3%, respectively. Atlanta again posted the biggest drop–at nearly 15% year-to-year.

    BTW, here’s an article from early 2003 warning us that there’s no housing bubble:

    But people have been wondering about a “housing bubble” since early 2001, and it hasn’t popped yet.

    For one thing, housing, like politics, is always local. There are some parts of the country — Sacramento, we’re looking at you — where bubbles seem to have formed, with prices rising higher than the market apparently can support.

    But on a national level, economists believe the supply of available housing is low enough to keep demand strong and keep prices from falling suddenly.

    “1.85 million new homes being built per year in a population of 290 million and growing doesn’t seem to be outrageous,” Robertson said.

    Economists warn that the housing market should slow down when interest rates start to rise, but that’s not expected to happen for quite some time — not until the situation in Iraq is cleared up, at the very earliest.

    And the only thing that’s going to bring interest rates up significantly in the short term is stronger economic activity, anyway, which will offset a good bit of the damage to the housing sector.

    “If we’re in a situation where rates are higher because the economy’s great, the housing market is going to be last thing I’ll be worried about,” said Brown Brothers Harriman economist Lara Rhame, a former Fed economist.

    For the most part, economists expect a gradual slowdown in the housing market through 2003 — the National Association of Realtors, for example, thinks home-price growth will slow to 3.0 percent by the fourth quarter.

  • Walgreen Earns 78 Cents Per Share
    , March 27th, 2012 at 9:58 am

    Last Friday, I tweeted:

    $WAG is looking like a good value. Earnings are next week. Anyone else think it can be a $40 stock? $$

    This morning, Walgreen ($WAG) reported quarterly earnings of 78 cents per share which was one penny better than estimates:

    For the quarter ended Feb. 29, Walgreen reported a profit of $683 million, or 78 cents a share, down from $739 million, or 80 cents a share, a year earlier. The latest period included inventory provisions of $72 million compared with $56 million a year earlier. Analysts polled by Thomson Reuters most recently projected earnings of 77 cents.

    Gross margin edged up to 28.9% from 28.8%. Overhead costs were up 4.1%.

    Earlier this month, Walgreen reported that total sales edged up 0.8% to $18.7 billion.

    The stock has been as high as $35.49 this morning, which is more than 5% higher since the time of my tweet.

    Walgreen’s business isn’t in the best shape, but I think the shares are a good value here. The company was hurt last quarter by exiting Express Script’s network. Walgreen said the impact of the exit was seven cents per share. They were also hurt by a mild flu season (bad news for us is good news for Walgreen).

    I like the numbers here. Wall Street currently expects Walgreen to earn $2.62 per share for the fiscal year (ending this August), and $2.91 for the fiscal year after that. Even if the company posts mediocre results, I think it can hit $40 by the end of this year.

  • Morning News: March 27, 2012
    , March 27th, 2012 at 7:36 am

    O.E.C.D. Chief Urges Europe to Increase Euro Firewall to 1 Trillion Euros

    German Strike Disrupts Flights

    EU Probes UTC’s Proposed Goodrich Buy

    Hungarian Central Bank to Offer 2-Year Loans From April 3

    Afren Expects More Companies to Enter Kenya After Tullow’s Find

    U.S. Stock Futures Little Changed Before Confidence Data

    Awaiting Health Law Ruling, and Preparing Plan B

    U.S. Agency Seeks Tougher Consumer Privacy Rules

    Goldman Diaspora Falters as Flamand Hedge Fund Declines

    Sharp To Tie Up With Hon Hai Precision In LCD Panel Ops

    China Life Expects 2012 Profit To Be Better Than 2011’s – Vice President

    Lennar First-Quarter Profit Beats Analysts’ Estimates on Revenue

    Apple CEO in China Mission to Clear Up Problems

    Michaels Stores Prepares for an I.P.O.

    Credit Writedowns: A Primer on Minsky

    Howard Lindzon: Man Pants, Crowdfunding and Momentum Monday…Liquidity Meets Window Dressing Meets Good Mood …

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  • Moog Breaks Above $44
    , March 26th, 2012 at 12:09 pm

    One of the more puzzling stocks on our Buy List has been Moog ($MOG-A). Despite impressive earnings, the stock hasn’t done much of anything.

    Moog’s stock took a hit earlier this month and I highlighted it in the March 9th issue of CWS Market Review. The stock finally came to life today and broke above $44 per share. The story continues to look very good. Moog has reiterated its forecast of full-year earnings of $3.31 per share.

    I’m expecting another good earnings report in a month.

  • …And We’re Back Over 1,400
    , March 26th, 2012 at 9:34 am

    The stock market looks set to rally today. On Friday, we gained back a little ground after our three-day sell-off. The good news today came from Germany where a report showed that business confidence is rising.

    German business optimism has edged higher for a fifth consecutive month but failed to match the pace of improvement seen earlier this year, as the eurozone debt crisis continues to leave scars on Europe’s largest economy.

    The Munich-based Ifo institute said its business sentiment indicator had risen from 109.7 in February to 109.8 this month – the highest since last July. But the latest increase was noticeably smaller than in previous months. “The German economy is losing some of its momentum,” said Hans-Werner Sinn, Ifo’s president.

    March’s index rise was the result of German companies taking a more upbeat view on the outlook for the next six months. Their assessment of current business conditions was unchanged. Retailers’ optimism increased strongly, while the mood in manufacturing turned slightly more pessimistic.

    Ben Bernanke spoke today on “recent developments in the labor market” and noted the puzzle that unemployment is declining despite fairly modest growth in the economy. Normally, such declines in unemployment need much stronger GDP growth. Bernanke gave some reasons why this is happening, but the key takeaway for investors is that the Fed seems to believe that short-term rates will stay near zero through at least 2014.

    If you have time, I encourage you to read Bernanke’s speech. He’s very clear on what he means, and what Bernanke says is so contradictory to what we’re told he means. The Fed’s next meeting will be in late April.

  • Morning News: March 26, 2012
    , March 26th, 2012 at 7:40 am

    RBS Halts India Tanker Payment Due to Iran Sanctions

    German Finance Ministry: Firewall Discussion Not About Raising ESM Cap

    Euro Stumbles as Boost From German Data Fizzles

    Sinopec’s Profit Rose 2% Last Year on Oil Prices

    Minsheng Bank Seeks To Raise Up To US $1.46 Billion As China Banks Tap Equity Markets Again

    Chinese Carmaker BYD Falls After Forecasting 95% Profit Plunge

    Dubai’s DP World to Repay $3 Billion Loan in April

    Bernanke Hesitates to Extol Economy to Keep Reputation

    Pimco’s Gross Says Fed May ‘Hint’ at QE3 at April Meeting

    Bats CEO Blaming Code Stirs Concern on Market Complexity

    Hedge Funds Capitulating Buy Most Stocks Since 2010

    Anger at Goldman Still Simmers

    Microsoft Raids Tackle Crime

    A Game Explodes and Changes Life Overnight at a Struggling Start-Up

    EasyJet Sees Narrower Loss on Cost Controls

    Jeff Miller: Weighing the Week Ahead: Time to Worry about China?

    James Altucher: Ask James: Is Money Evil? Will the US Pay Its Debt? Procrastination, Creativity, Lying, and More

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  • Zou Bisou Bisou
    , March 26th, 2012 at 12:49 am

    This is what Megan was singing on Mad Men:

  • Bernanke’s Lecture, Round 2
    , March 23rd, 2012 at 11:29 am

  • CWS Market Review – March 23, 2012
    , March 23rd, 2012 at 6:34 am

    The S&P 500 closed lower on Thursday for the third day in a row. Don’t be too worried about the recent downtrend. All told, it amounts to a loss of 1.2%. Before this, the market had rallied for eight of the previous nine sessions and for 44 of the last 64. That’s a remarkable run.

    We need to remember that for the last six months, the stock market has treated us very well. From October 3rd to March 22nd, the S&P 500 climbed 26.7% which ain’t bad for half a year’s work. Actually, that’s a pretty good return for two years’ work.

    In this week’s issue of CWS Market Review, I want to focus on the upcoming Q1 earnings season. I’m expecting another round of great earnings from our Buy LIst stocks. Speaking of which, Oracle ($ORCL) delivered very strong results this past week (except the stock fell). I’ll share my view on that in a bit, but I’ll give you a preview: I’m raising my buy price on Oracle. I’ll also focus on the earnings report for Bed Bath & Beyond ($BBBY) which is less than two weeks away.

    China’s Economy Faces Growing Pains

    So what’s the cause of our three-day slump? The answer is China. The big-wigs there are concerned that their economy is slowing down. Of course, any developed country in the world would love to be growing at half of China’s “slowing” rate.

    China is a major player and we need to take notice. A few weeks ago, it was big news when the premier of China reduced the country’s GDP growth target from 8% to 7.5%. That was the first time in eight years that the Chinese cut their growth target. Ever since then, a slew of negative economic news has come out. So far, the Chinese Fed has cut reserve requirements twice, but it hasn’t yet touched interest rates. Today we learned that a manufacturing index compiled by HSBC dropped to 48.1 in March. That’s the fifth-straight monthly decline. Any reading below 50 means the economy is contracting.

    There’s a lot to admire about China’s rapid growth, but there are some emerging problems as well. I’ll try to portray the situation as simply as possible. Let’s say you’re some big-shot Chicom apparatchik in Beijing and you have a choice to make. Would you rather have A) millions of unemployed 19-year-old men in your central cities, most of whom have immigrated from the sticks to find work, or B) OMG, I’ll do anything that’s not that first thing!

    I’m guessing you chose B. Smart move.

    Think about this number: An estimated 230 million people have moved from rural China to the cities for work. That’s like Tom Joad times 1,000. That’s why a huge portion of China’s economy depends on exports. The country has transformed itself into a gigantic export machine, and they’ll do anything to keep it going. Those export sectors tend to be heavy industry sectors. Here’s another scary fact: Over 70% of the water in China’s five major rivers is “unsuitable for human contact.” This is the water that countless millions of people, including children, use every day.

    Keeping the exports flowing is going to be a problem if Europe’s economy is flat on its back. Until now, China has played the currency game and weakened the yuan to keep the exports going. The country has a staggering $3 trillion in currency reserves. But now that game’s not going to be so easy to play since the euro also needs to fall. China’s challenge is to work to balance its economy so it’s not so dependent on shipping things out of the country. I don’t know what the answer is, but it would be good for everyone if China found a way to boost its domestic consumption.

    If China is slowing, that’s a big deal for us. Economic growth from the world’s largest country helped the U.S. economy recover from the Great Kablooey of four years ago. Personally, I think some bears on Wall Street have been eagerly jumping on the news from China as an excuse to exit their positions. That’s understandable since the folks waiting for stocks to plunge have gotten it wrong for so long. They’re ready to take anything they can get.

    Oracle Beats the Street by Six Cents Per Share

    The next event on the horizon will be the first-quarter earnings season. Until last earnings season, Corporate America had amassed a string of impressive quarterly earnings. This time, Wall Street has been paring back estimates for Q1, but the numbers will probably be pretty good.

    Right now, analysts see earnings rising by 5.5% over last year’s first quarter. If Wall Street’s earnings forecast is right, the S&P 500 is closing in on $100 in trailing four-quarter earnings. We’ll probably hit that mark some time this summer. The S&P 500’s current sub-1,400 position means that stocks are reasonably valued. I’m also pleased to see more companies raising their dividends. In January and February, 100 stocks in the S&P 500 increased their dividend. That’s the most at this time of year in at least eight years.

    Perhaps the best news this week was the solid earnings report from Oracle ($ORCL). After the market closed on Tuesday, Oracle reported fiscal third-quarter earnings of 62 cents per share. This was six cents more than Wall Street’s forecast. Oracle’s earnings were up 15% over a year ago. The revenue number was inline with estimates. Oracle continues to do well with its licensing revenues, and profit margins are strong. The weak link is still hardware, but Larry Ellison has said that that business will pick up later this year. We’ll see.

    On the earnings call, Oracle said to expect Q4 earnings to range between 76 cents and 81 cents per share. That impressed me. The Wall Street consensus had been 76 cents per share. This means that Oracle should earn roughly $2.40 per share for this fiscal year which ends in May.

    The odd part was the stock’s reaction. Early Wednesday, Oracle gapped up to $31.15 per share, but the rally didn’t last. By the end of the day, the stock finished below $30. Then on Thursday, the stock fell below $29. I’m not worried at all. Recall that Oracle’s stock dropped after the last earnings report only to rally even higher shortly afterward. That came after a weak report and this was a good one.

    One thing I got wrong last week was my forecast for a higher dividend. I said to expect Oracle to raise its quarterly dividend by one penny per share. No such luck. Overall, I’m very pleased with Oracle’s performance. This was a very good report, and the guidance is especially encouraging. I’m raising my buy price on Oracle to $32 per share.

    Look for Strong Earnings from Bed Bath & Beyond

    Two months ago, I raised my buy price for Bed Bath & Beyond ($BBBY) from $60 to $66. Apparently, the stock was inspired because it just smashed $66 this week and closed at a new all-time high. This is a solid company and it’s been a huge winner for us. This week, I want to preview the upcoming earnings report which is due on April 4th.

    This requires a little explanation. BBBY’s fiscal year ends at the end of February. Many retailers do this so they can they can include the entire holiday shopping season in one quarter. So the report coming in two weeks will be for the important Christmas quarter. Typically, the holiday quarter accounts for around 35% of BBBY’s annual profit. In other words, this is a biggie.

    Three months ago, Bed Bath & Beyond told us to expect Q4 earnings to range between $1.28 and $1.33 per share. That’s a bold forecast and my numbers say it’s a few pennies on the low side. For the fiscal year, BBBY’s forecast translates to earnings of $3.86 to $3.92 per share. That’s an annualized growth rate of more than 25%.

    Thanks to the recent rally, I’m afraid that Bed Bath & Beyond isn’t the screaming value that it used to be. That’s why I’m going to keep my buy price at $66 until I hear guidance for next quarter. This is a good stock, but don’t chase it. Wait for it to come to you.

    I’m pleased to see that the recent trend of investors willing to take on more risk has continued. An important sign is that high-yield spreads are now at their lowest level in more than six months. Many of our financial stocks have rallied lately. Hudson City ($HCBK), for example, broke $7.60 per share this week. JPMorgan Chase ($JPM) got above $45 this week.

    Our Buy List continues to do well. On Wednesday, Wright Express ($WXS) closed at an all-time high. The stock was helped by graduating to the S&P 400 Mid-Cap Index. I’ve also been very impressed by the surge in Fiserv ($FISV). I think it can break $70 per share very soon.

    Before I close, I want to highlight some of our high-dividend stocks. Sysco ($SYY) yields 3.62%. Reynolds American ($RAI) has been flat this year but the stock yields 5.42%. That’s equivalent to more than 700 Dow points. Let’s not forget CA Technologies ($CA) which quintupled its dividend this year. The shares now yield 3.69%.

    That’s all for now. Next week is the final week of Q1 and it will probably be a slow news week. I’ll be watching for the revision to Q4 GDP growth. 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