Archive for September, 2012
Best Industries Over the Last Three Months
Eddy Elfenbein, September 28th, 2012 at 12:17 pm
Here are the top-performing industries of the last three months. What’s interesting is how many seem related to QE3.
Industry Gain Dow Jones U.S. Platinum & Precious Metals Index 42.87% Dow Jones U.S. Mobile Telecommunications Index 29.12% Dow Jones U.S. Mortgage Finance Index 23.49% Dow Jones U.S. Internet Index 23.13% Dow Jones U.S. Gold Mining Index 21.88% Dow Jones U.S. Paper Index 21.40% Dow Jones U.S. Forestry & Paper Index 21.40% Dow Jones U.S. Consumer Electronics Index 20.18% Dow Jones U.S. Durable Household Products Index 16.87% Dow Jones U.S. Home Construction Index 16.78%
CWS Market Review – September 28, 2012
Eddy Elfenbein, September 28th, 2012 at 7:23 am
Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars. – Bernard Baruch
I’ve been warning investors that the stock market may be in for a rough patch, and we got a taste of that this week. On Thursday, the stock market finally snapped its five-day losing skid. Once again, the problems stem from Europe.
I know it sounds like a broken record but the economics of that continent seem terminally dysfunctional. There have been anti-austerity riots this week in Spain and Greece. Investors are beginning to realize that even if the euro survives, there will be a severe recession in Europe, and there’s a continent-wide rebellion against austerity policies.
In this week’s CWS Market Review, I want to take a closer at the economy and show you the best ways to protect yourself during the weeks ahead. The good news is that the worst of the euro crisis has already passed, but the road to recovery won’t be easy. Remember that the U.S. stock market bottomed out six months after Lehman Brothers went bankrupt.
The third quarter officially ends on Sunday, and we’ll soon get a look at Q3 earnings reports. Earnings season is Judgment Day for Wall Street; the good will be rewarded and the bad will be severely punished. I expect that our stocks on the Buy List will again demonstrate their superior attributes. Before we get to that, let’s dig into the surprising comeback of U.S. consumers.
U.S. Consumers Are Finally Waking Up
Putting Europe aside, not all the economic news has been dire. In fact, there’s been more evidence that U.S. consumers are finally waking up from their looong hibernation. This week, the Conference Board said that consumer confidence rose to a seven-month high. I was impressed to see that the expectations index rose as well.
This confirms previous evidence that there’s some emergent optimism in the air. Earlier this month, for example, Monster Worldwide, the job search website, said that there was an increase in online labor demand in August. And on Thursday, the Labor Department said that new claims for unemployment benefits dropped by 28,000 (though this number tends to bounce around a lot).
So what’s behind the new-found optimism of U.S. consumers? The main reason boils down to one word—housing. Economic recoveries in the U.S. have typically, but not always, been led by the housing sector. If you think about it, this makes a lot of sense. Not only is housing a major expense for consumers, but it also spills over into several other industries from retail (think Bed Bath & Beyond) to construction, transportation and finance.
The problem with this past recession is that we had so much overbuilding during the good times, that were was no need to build more homes. The homes built during the bubble weren’t going to disappear, so it’s taken us five years to work off the excess inventory. Only now are we getting the first clues that home prices are rising again. The CEO of Lennar ($LEN) recently said, “the housing market has stabilized, and the recovery is well underway.” Let’s hope so because higher home values cause a “wealth effect” which makes consumers happier and more willing to spend.
I’ll show you an example. Check out this chart. It shows the Homebuilders ETF ($XHB) in black along with the Retailers ETF ($XRT) in gold.
As you can see, the two ETFs have risen together. I’d say that they’re both lifting each other up. Homebuilders have done better because that sector had suffered more damage. I don’t think this trend will let up soon. A recent survey of retailers indicates that many plan to hire more holiday workers this year. Toys R Us just said they plan to hire 45,000 employees for this holiday season. Both Walmart ($WMT) and Kohl’s ($KSS) plan to add 50,000 workers for the holidays.
In the near-term, Wall Street will be focused on events in Europe and the election battle in America. Those events will most likely lead to greater volatility and a soggy market for stocks. The Spanish ETF ($EWP) recently gained 50% in just 52 days so some give back is probably due. But once the market gets past that, the signs are pointing to a strong year-end rally. Until that happens, investors need to play it safe.
Focus on High-Quality Dividends
The best way to protect yourself over the next few weeks is by making sure your portfolio has high-quality high-yield stocks. On our Buy List, this includes stocks like Reynolds American ($RAI), our tobacco stock. Reynolds is a classic consumer staples stock because their business is barely impacted by the twists and turns of the broader economy. RAI currently yields a very generous 5.42%. That’s the equivalent of 730 Dow points a year just in dividends. Reynolds is a buy up to $45.
I know some investors are skittish about investing in tobacco but there are several other top-notch stocks that pay big dividends. Thanks to its recent pullback, Nicholas Financial ($NICK) now yields 3.58%. Not only is NICK in good shape but I think the business has gotten stronger this year. Plus, the Fed’s willingness to keep short-term rates low is very good for NICK’s bottom line. Buy up to $15.
I highlighted Sysco ($SYY) in the CWS Market Review from three weeks ago, and the stock just broke out to a new 52-week high. The food service industry tends to be quite stable. Despite the rally for Sysco, the shares currently yield 3.46%. SYY is a buy up to $32.
AFLAC ($AFL) isn’t one of our higher yielders but I expect we’ll get another dividend increase when the company reports earnings next month. I’m not expecting a major increase. The quarterly dividend is currently 33 cents per share, and it will probably rise by one or two cents per share which means AFL may be yielding close to 3% right now. It’s frustrating that the market is treating AFL as if it’s a proxy for Europe. That’s simply not the case. AFL has dumped most of its lousy European holdings. This is a very undervalued stock. AFLAC is a strong buy up to $50 per share.
Another stock with an above-average dividend is Hudson City ($HCBK). The bank is the process of being taken over by M&T Bank ($MTB). Thanks to a rally for M&T, the buyout price for Hudson City has also increased. It will be a while before the deal is complete and management seems committed towards maintaining Hudson’s eight-cent-per-share quarterly dividend. At Thursday’s close, that works out to a yield of 4.07%. Hudson is a buy up to $8.
Thanks to its recent pullback, CA Technologies ($CA) now yields 3.86%. I’m looking forward to another good earnings report next month. CA Technologies is a good buy up to $30 per share.
Moog ($MOG-A) isn’t a dividend payer but I wanted to highlight it this week because it’s become one of the best values on our Buy List. Even though Moog gave us decent earnings guidance for 2013, and beat Wall Street’s earnings forecast in January, April and July, the stock hasn’t done much at all. Moog should be a $45 stock.
That’s all for now. Next week is the start of the fourth quarter, plus we’ll get the big jobs report on Friday. The summer is over so expect to see more volatility. 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!
Morning News: September 28, 2012
Eddy Elfenbein, September 28th, 2012 at 6:33 am
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Q2 GDP Revised Down
Eddy Elfenbein, September 27th, 2012 at 10:49 am
This morning, the government revised second-quarter GDP growth down to 1.3% from its initial estimate of 1.7%. For the first quarter, the economy grew by 2.0%.
Output was also revised down to reflect weaker rates of consumer and business spending than previously estimated. Outlays on residential construction export growth were also not as robust as had been previously estimated.
Economists polled by Reuters had expected second-quarter GDP growth would be unrevised at a 1.7 percent pace. The economy grew at a 2.0 percent pace in the January-March period.
The worst drought in half a century, which gripped large parts of the country in the summer, saw farm inventories dropping $5.3 billion in the second quarter after slipping $1 billion in the first three months of the year.
Data in hand for the third-quarter suggest little improvement in the growth pace, even as the housing market digs out of a six-year slump. Manufacturing, the pillar of the recovery from the 2007-09 recession is cooling, hurt by fears of tighter U.S. fiscal policy in January and slower global demand.
The GDP report also showed that after-tax corporate profits unexpectedly rose at a 2.2 percent rate instead of the previously reported 1.1 percent increase. After-tax profits fell 8.6 percent in the first quarter.
Morning News: September 27, 2012
Eddy Elfenbein, September 27th, 2012 at 6:32 am
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The Importance of Extreme Events
Eddy Elfenbein, September 26th, 2012 at 11:05 pm
Over the 116 years of its existence, the Dow Jones Industrial Average has risen by 4% or more in a single day 138 times, which works out to about once every ten months.
Now if we take the combined gain of these 138 days, it comes to more than six times the entire gain of the Dow over its entire 116 years.
In other words, most of the stock market’s gain has come on just 0.5% of the trading days. The other 99.5% of the time, the market is a net loser (this is just capital gain, not dividends).
Now let me stop for a second. While these stats are accurate, they’re slightly misleading. The problem happens with extreme events — at the far tails of the distribution. For example, the 138 days aren’t evenly spread out. Seventy of those days, a slim majority, came during the 1930s. There were only two 4% or more days between Pearl Harbor and JFK’s assassination.
The lesson is that finance tends to move in two speeds. The vast majority is slow and boring. Then, very suddenly, things get very, very dramatic.
Dividend Guy’s Stock Screen
Eddy Elfenbein, September 26th, 2012 at 4:03 pm
I’m not usually a fan of stock screens. I think they’re fine when looking for good prospects but I caution investors not to blindly follow them.
I do like the five criteria list at The Dividend Guy.
1. Yield above 3%. I would say “above market,” but 3% is a good rule of thumb.
2. Five-year dividend growth rate over 1%. Basically, a rising dividend even if it’s small.
3. ROE over 10%. Yep, that’s always good. That means a company is probably healthy.
4. Five-year income growth over 1%. This one I’m not so sure about. The problem, of couse, is that the last five years have been very atypical. Many well-run companies have seen their profits plunge.
5. Dividend payout under 75%. Meaning less than three-fourths of their profits should be paid out. That’s good because it would eliminate companies that don’t have confident plans for future growth.
The longer I invest, the more impressed I am with dividends. There are several reasons why. They’re easy to follow. Unlike accounting earnings, you know exactly what you’re getting. Dividends also tend to be “sticky,” meaning most companies have an implicit promise to maintain their dividend at the same level, or possibly increase it.
The Presidential Election Cycle
Eddy Elfenbein, September 26th, 2012 at 9:58 am
I don’t put too much faith in seasonal trading patterns but I do find them interesting from an historical perspective.
A few years ago, I took the entire Dow from its inception and worked out what the average four-year presidential election cycle looks like.
The second half of the election year has been one of the best times for the market. The Dow has gained an average of 14.5% during those six months. The good mood lasts until September of the year following the election. After that, the market enters a lousy patch that doesn’t end until the mid-term election.
The S&P 500’s First 1% Drop in Two Months
Eddy Elfenbein, September 26th, 2012 at 9:27 am
For the first time in two months, the S&P 500 lost more than 1% yesterday. The market didn’t start out so poor yesterday but traders got nervous after Charles Plosser, the head of the Philadelphia Fed, said that QE3 won’t work. Specifically, Plosser said that by pinning so much on the policy, the Fed is risking its credibility. My initial reaction is that I’m afraid that happened a long time ago.
The market slowly moved down towards yesterday’s closing bell. Financial stocks were particularly hard hit. Members of our Buy List like AFLAC ($AFL), JPMorgan Chase ($JPM) and Nicholas Financial ($NICK) were surprising losers.
The market is still nervous about events in Europe. The austerity policies have led to more riots in Greece. There are also protests in Spain and bond yields there are back over 6%. The government there is prepared to ask for a bailout. In China, the Shanghai Composite has fallen to a 3.5-year low.
The key metric that’s on everyone’s mind is the bond market in Europe. The authorities there have made it clear that they intend to defend the euro. That would lead me to believe that yield spreads would tighten. That had been happening but now the yields are moving in the other direction.
Morning News: September 26, 2012
Eddy Elfenbein, September 26th, 2012 at 6:28 am
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