CWS Market Review – June 15, 2012

On Thursday, the S&P 500 closed at its highest level in the last 12 sessions. The index finished the day at 1,329.10 which is almost exactly a 4% gain from June 1st, the lowest close since January. It’s not that stocks are suddenly doing well. Instead, it’s more accurate to say that the market is walking back some of the damage we saw from the very unmerry month of May 2012.

Make no mistake, investors are still very nervous. In fact, Thursday’s auction of 30-year Treasury bonds went off at an all-time low yield of 2.72%. There was a similar record auction for 10-year bonds on Wednesday. Once again, investors are concerned about Europe and what will happen to the euro.

In this week’s CWS Market Review, we’ll take a closer look at the mess in Europe. With the Greek do-over election coming this weekend, I think this is a rare moment for optimism. We’ll also take a look at some upcoming earnings reports for our Buy List stocks. Our stocks have perked up recently; we had a dividend increase from CR Bard ($BCR), its 40th-consecutive dividend hike, and Jamie Dimon’s appearance on Capitol Hill helped give a nice boost to JPMorgan’s ($JPM) stock.

Greek Elections Could Spur Rally

But first, let’s discuss the latest developments in the Old World. This Sunday, Greece will hold another election. Greeks went to the polls last month but no party emerged with enough support to form a governing coalition. The only clear-cut messages were that everyone’s mad at everyone else and no one likes the austerity policies.

As a result, the Greeks have called a do-over and they’re voting again. I suspect that the Greek public got sufficiently freaked out by last month’s uncertainty that they’ll give enough (grudging) support to the New Democracy Party and that they’ll be able to form a pro-European government. This means that they’re not ready to quit the euro just yet. Sure, there will be tons of infighting before we get there, but that seems to be the general course of events. The other major party is Syriza, which is a leftwing party that’s strongly anti-bailout.

A New Democracy victory would probably lead to a rally in Europe and one over here. Some of this week’s strength may be in anticipation of a New Democracy win. Just to give you an example, on Thursday, the Greek stock market soared over 10%. The election in Greece is absolutely critical. Bear in mind that the last two votes taken in Greece that were this important ended in deadlock and hemlock.

Right behind Greece on the worry train is Spain. The difference is that Spain isn’t so small. The EU just promised them 100 billion euros to help their banks. After a quick rally, things once again turned south as investors felt that wasn’t nearly enough. Moody’s didn’t like the increased debt load so they downgraded Spain’s debt by three full notches. They’re now just one rung above officially being junk debt. The 10-year Treasury bond yields in Spain just crossed 7%, which was seen as an important psychological barrier.

As bad as things are, I still believe the authorities are willing to do what needs to be done. The Spanish foreign minister made a good point when he said, “If the Titanic sinks, it takes everyone with it, even those travelling in first class.” The issues don’t end with Greece and Spain. The place of concern behind Spain is Italy where the public debt is already 120% of GDP.

On Monday and Tuesday, the G20 will be meeting in Los Cabos on the southern tip of the Baja Peninsula in Mexico. (The G20 is 19 of the largest economies in the world plus the European Union.) The U.S. stock market got a late-day bounce on Thursday on a report from Reuters that central banks were planning for coordinated action if (if) the Greek elections led to more financial market chaos. What this tells me is how badly the markets want to see more forcefulness from the authorities. In a few minutes, the S&P 500 gained $100 billion in market value. News that tepid about a possible intervention shouldn’t cause a rally that big.

The Federal Reserve meets again next week and the economic outlook here in the U.S. has gotten worse since the Fed last got together in April. Wall Street has been paring back its estimates for Q2 GDP growth. The latest catalyst for the downgrades was the soggy retail sales report. Goldman lowered their GDP growth forecast from 1.8% to 1.6%. Morgan Stanley lowered theirs from 2% to 1.8%. JPM dropped theirs to 2% from 2.5%, and BofA Merrill went from 2.4% to 1.9%.

This has led to speculation that we’ll see another round of easing from the Federal Reserve. I’m still a doubter. For one, people seem to forget that the Federal Open Market Committee is indeed a committee. It’s not whatever Bernanke wants. More easing is clearly unpopular with some Fed officials such as Richard Fisher, the head of the Dallas Fed. Charles Evans of the Chicago Fed is probably a sure vote for more easing. Vice-Chair Janet Yellen and San Francisco President John Williams may be on board as well. But we have a big election coming up and the rest of the committee members seem non-committal. The bottom line is that investors shouldn’t expect more help from the Fed any time soon.

Look for More Good Earnings from BBBY

We have two earnings reports coming next week. On Wednesday, Bed Bath & Beyond ($BBBY) will report its fiscal first-quarter earnings. I’m excited for this report because in April, the company had an outstanding earnings report. For their Q4, which is BBBY’s most important quarter, they earned $1.48 per share which was 15 cents better than Wall Street’s consensus. The stock gapped up on the earnings report but has settled into a trading since then, mostly between $68 and $72.

On the earnings call back in April, Bed Bath & Beyond’s management said to expect Q1 earnings to range between 79 and 83 cents per share. I’ve run the numbers and I think that’s too low. Here’s my take: I think BBBY can earn 88 cents per share, give or take. I realize that sounds very optimistic but BBBY’s business is going very well right now.

I’ve also been impressed by some of Bed Bath & Beyond’s strategic moves recently. They just bought Linen Holdings for $105 million, and a few weeks ago they bought Cost Post for $495 million. These are solid acquisitions. I currently rate BBBY an excellent buy up to $75 per share.

Next Thursday, after the market closes, Oracle ($ORCL) is due to report its fiscal Q4 earnings. Oracle’s last earnings report was very good. I had been worried because the earnings report before that was a dud. Here’s my concern: The weak link in Oracle’s business has been hardware, but Larry Ellison said that that business will pick up later this year. I’m inclined to believe Larry although we haven’t seen the hard evidence just yet.

On the last earnings call, Oracle told us to expect earnings for Q4 to range between 76 cents and 81 cents per share. That sounds about right. I’m curious to hear what kind of guidance, if any, Oracle will provide for the current fiscal year. Wall Street currently thinks Oracle can earn $2.62 per share for the fiscal year ending next May. If so, the stock is pretty cheap at just over 10 times earnings. I’m not expecting a big earnings beat but Oracle is a solid value at this price. I wouldn’t mind seeing a dividend hike either. I rate Oracle a strong buy anytime you see the stock below $30 per share.

CR Bard Raises Dividend for 40th-Straight Year

On Wednesday, CR Bard ($BCR) announced that they’re raising their dividend by 5%. The quarterly payout is rising by a penny from 19 cents to 20 cents per share. Bard has now increased its dividend every year since 1972. Bard also announced a share repurchase program of up to $500 million. I love seeing these long runs of higher dividends especially in an environment of record low bond yields. CR Bard is a very good buy up to $102 per share.

JPMorgan Chase ($JPM) is slowly recovering from the damage of the horrendous trades made out of their London office. CEO Jamie Dimon testified before Congress on Wednesday, and his cocksure attitude helped a nice rally in shares of JPM. The stock briefly broke $35 per share. Last week, the stock bottomed out below $31.

I have mixed feelings about Dimon. On one hand, he’s an excellent manager and he’s done a good job at JPM. On the other hand, he’s a loudmouth who draws too much attention to himself. Banking is done best when it’s boring. I still like JPM’s stock—it’s an excellent value here—but I believe the company and its shareholders would be best served by Mr. Dimon leaving the CEO’s suite. I don’t mind him hanging around as head of the board, but Dimon can no longer be the public face of JPM. I’m tired of him holding the stock back.

That’s all for now. The Greek elections are on Sunday. The G20 meeting in Mexico is on Monday and Tuesday, and the Fed meets on Tuesday and Wednesday. My forecast is for dark suits and lots of jargon. 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 June 15th, 2012 at 7:16 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.