Archive for November, 2012

  • Stephen Fry on American vs British Comedy
    , November 30th, 2012 at 3:18 pm

  • The Great Moderation Lives. Maybe.
    , November 30th, 2012 at 3:09 pm

    One of the puzzles of modern economics is the Great Moderation. This is the fact that economic volatility declined dramatically after the recovery from the 1981-82 recession. In other words, the booms became less boomier and the busts were a lot less bustier.

    This led to a lot of theorizing. Hey, maybe the Fed had finally figured the economy out. Well, all these ideas got tossed out the window once the economy went kablooey in 2008.

    But here’s a fact you don’t hear much about — the Great Moderation may still be with us. The fact is that since the recovery began three years ago, the variability in quarterly GDP has been very low. In fact, it’s lower than at any point between 1982 and 2007.

    There’s no better way to explain this than by using a graph.

  • CWS Market Review – November 30, 2012
    , November 30th, 2012 at 8:43 am

    Time is your friend, impulse is your enemy. – Jack Bogle

    After a short downturn following the election, the bulls have once again taken control. This is exactly what I expected would happen, and I continue to believe we’re in the midst of a nice year-end rally.

    On Thursday, the S&P 500 touched a three-week high, and the NASDAQ Composite broke 3,000. The bulls were helped this week by a spate of positive economic news. For example, we learned that consumer confidence is now at a four-and-a-half-year high, and pending home sales are at a five-year high. And, as hard as it may be to believe, there was even good news out of Greece.

    This is more evidence that the Double Dip crowd once again got way ahead of themselves. For the time being, there’s no immediate threat of a recession. Since November 15th, the S&P 500 has rallied 4.6%. The index is now only 0.5% away from breaking its 50-day moving average, and we’re only 3.5% away from our highest close since 2007.

    Of course, you probably wouldn’t know this by watching much of the financial media. The gloom-and-doomers have gotten far more attention than they deserve. Consider that 14 months ago, Intrade believed there was a 65% chance that the U.S. would enter a recession in 2012. Today that figure stands at 1%.

    In this week’s CWS Market Review, we’ll take a closer look at why the Fiscal Cliff is nothing but hype. The media is largely inventing new worries for us. We’ll also discuss the terrible, rotten earnings report from JoS. A Bank Clothiers ($JOSB). Here’s a sneak preview: I’m not pleased with JOSB. More on that later.

    Despite some unpleasantness, our Buy List continues to thrive. Our strategy of discipline and patience is working out very well. AFLAC ($AFL), for example, is at an 18-month high. Only a few months ago, it was below $40 (see chart below). Plus, stocks like Ford ($F) and Oracle ($ORCL) have been particularly strong lately. Ford finished the day on Thursday at its highest close in seven months. But first, I want to tell you why you should ignore the ridiculous hype surrounding the Fiscal Cliff.

    Don’t Fall for the Fiscal Cliff Hype

    Wall Street’s fortunes seem to be beholden to the Fiscal Cliff (a registered trademark of CNBC). Late in the day on Tuesday, some rather casual remarks by Senator Harry Reid were enough to knock a few points off the S&P 500. The same thing happened again on Thursday, but this time, the remarks came from House Speaker John Boehner. Then, as word of progress leaked out, well…the market started to gain traction.

    Let me be clear: The threat from the Fiscal Cliff is greatly, hugely and fantastically exaggerated. It’s almost reached comical levels. The behavior at CNBC in particular has been reprehensible. The network is simultaneously over-hyping the threat while presenting themselves as the saviors. Folks, there’s nothing to worry about.

    Of course, if we really were to go over the cliff, that would be bad news—and that’s precisely why it won’t happen. In the meantime, both sides need to prove to their respective bases that they’re not backing down. It’s for show, like you see in a nature program about silver-backed gorillas fighting for dominance.

    But let’s get some facts. For one, the threat is easily avoidable. The White House and Congress have too much to lose by not reaching a deal. In fact, a recent article at Politico suggests that, despite the rhetoric we hear in public, the framework of a deal is starting to take shape. Neither side will get everything it wants, but they’ll both get enough to walk away with some pride. Also, remember that this deal is being made with the lame-duck Congress. That means there are a few folks who won’t even be members of Congress in a few weeks. In fact, a deal may even be reached some time in the new year. In a few months, no one will be talking about this.

    The market has resigned itself to the fact that taxes will go up. That’s no surprise. In response, dozens of companies like Costco ($COST) and Las Vegas Sands ($LVS) have announced special dividends. Other companies like Walmart ($WMT) have moved up their dividend dates in order to avoid the taxman. An analyst at Deutsche Bank suggested that Bed, Bath & Beyond ($BBBY), one of our Buy List stocks, could pay a special dividend. I’m a doubter, but I will note that the home-furnishings company is sitting on $4 per share in cash.

    One good way of putting the Fiscal Cliff threat into perspective is by looking at how well defense and aerospace stocks are doing. Needless to say, any sequester would be very bad news for these companies. The Defense Sector ETF ($ITA) badly lagged the market for most of this year. Its relative performance reached a low point in late September, but then, except for a brief period in mid-November, the ITA has been leading the market ever since. This tells me that that no one has the motive for a prolonged fight. Furthermore, the Volatility Index ($VIX) has remained subdued, and the stock market has largely avoided wild daily swings in the past few weeks. There’s only been one daily swing of more than 2% in the last two months, and that was the big sell-off on the day after the election. This has been a calm market.

    The Math Still Favors Stocks

    Due to market leadership from the Industrials and Consumer Discretionary sectors, I suspected that the sell-off would be short-lived. That’s not the script that sell-offs usually follow. Since June 5th, the Consumer Discretionary ETF ($XLY) is up by 12.2%. In simpler terms, the homebuilders and shoppers are waking up from their slumber. Even some crummy tech names have been doing well. Thanks to a jump in shares of Facebook ($FB), Mark Zuckerberg has made a cool $4 billion in the last three weeks.

    The good news about pending home sales, combined with a positive report on home prices, suggests that the housing recovery (such as it is) is propping up consumers. Mind you, there are still weak spots out there. Tiffany ($TIF), for example, just lowered guidance. But these are special cases rather than general rules.

    Probably the best news for investors this week was largely ignored. Charles Evans of the Federal Reserve said that the Fed needs to extend its bond-buying programs until the economy can consistently add 200,000 jobs per month. Until now, the Fed has been reticent in giving a specific economic target as to when they need to take their foot off the gas. I don’t know if Evans will get his way, but we now know there are some voices inside the Fed willing to pursue these policies.

    The bottom line is that there’s no possible solution to the Fiscal Cliff that alters the value spread between stocks and bonds. With the Fed gobbling Treasuries like Santa eating cookies, yields are low and will likely remain so. In fact, the austerity that would result from a Fiscal Cliff deal would add even more pressure.

    Let’s look at some numbers. Analysts now expect 2012 earnings for the S&P 500 of $99.76, and $113.40 for 2013. In June 2011, analysts expected the S&P 500 to earn $111.82 for 2012. So that’s a big change in outlook, yet the market rallied. The reason we rallied is that the market had dramatically overreacted to fears from Europe. Over the last 14 months, earnings estimates for Q4 have come down, on average, about 1% per month. Yet even these lowered numbers represent an acceleration of earnings growth. Prudent investors are in excellent shape right now. The indexes are up, and dividends are having a banner year. I think the S&P 500 can hit 1,500 by March.

    JoS. A Bank Clothiers Bombs

    One aspect of being a good investor is being upfront about our mistakes. After all, that’s how we learn. One big mistake we made this year was having JoS. A Bank Clothiers ($JOSB) on our Buy List. For the second time this year, Joey B badly missed earnings. I understand it happening once, but two times tells me there are some serious problems.

    On Wednesday, JOSB reported fiscal Q3 earnings of 47 cents per share, which was nine cents below estimates. Sales actually did pretty well, both total and comparable-store. But profits tanked. This tells us that JOSB is probably overstocked, and they’re dumping inventory at any price—hence all the buy-one-suit-get-78-free commercials.

    What’s even worse is that JOSB warned that comparable-store sales were down in November, and the company is “cautious” about Q4. That’s not good. Let’s just say that JOSB probably won’t be on next year’s Buy List.

    Oracle Is a Buy Up to $35

    We have earnings reports due soon from Oracle ($ORCL) and Bed Bath & Beyond ($BBBY). In our last issue, I highlighted Oracle as a good buy, and the shares rose to a two-month high. Oracle looks ready to break out with a new 52-week high. The company is due to release its next earnings report in about two weeks. I’m expecting another strong report. Oracle remains a strong buy any time it’s below $35 per share.

    One quick word about Stryker ($SYK). I expect SYK will soon raise its quarterly dividend. The company currently pays out 21.25 cents per quarter. I think they’ll bump it to around 23 cents per share in the next week or so. This is a solid company. They’ve raised their dividend every year since 1995. Stryker is a good buy up to $57.

    That’s all for now. On Monday, we’ll get the ISM report for November. All eyes on Wall Street will be focused on Friday’s big employment report. 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

  • Morning News: November 30, 2012
    , November 30th, 2012 at 7:20 am

    Eurozone Crisis Live: German Parliament Approves Greek Deal

    Hollande Mittal Push Risks Hurting Economy by Spooking Investors

    Japan Leads Asia Rally In November; China Slumps

    Japan Approves $10.7 Billion Stimulus Package

    India Growth Matching 3-Year Low Adds Policy-Revamp Pressure

    Youth Unemployment In Bulgaria Passes 30 Per Cent Mark As Jobless Rate In Euro Zone Hits New Record

    Third-Quarter U.S. Growth Is Not As Hot As It Looks

    Republicans Reject Obama Budget as He Sells It to Public

    Complaints Aside, Most Face Lower Tax Burden Than in 1980

    Lessons From The Other Facebook Effect

    Yacktman Bets BlackBerry Can Survive Market-Share Plunge

    Duke CEO Rogers to Resign Next Year in Deal With North Carolina

    Two Ex-Brokers Charged with Trading Scheme Tied to IBM

    Epicurean Dealmaker: The Rules

    Credit Writedows: Portugal and Ireland: Us Too, Please

    Be sure to follow me on Twitter.

  • Q3 GDP Revised to 2.7%
    , November 29th, 2012 at 10:43 am

    Good but not great economic news this morning. Real GDP growth for the third quarter was revised higher to 2.7% from the initial report of 2%. This is the 13th quarter in a row of positive GDP growth.

    As a small side note, which I think is interesting, one of the economic ideas that’s been talked about recently is that the Fed should try to target nominal (meaning not inflation-adjusted GDP). So if nominal GDP falls below some trend line growing at, say, 5%, then the Fed should lower rates. Conversely, if the economy is growing faster than the trend line, they ought to raise rates.

    What I noticed today when looking at the data is the nominal GDP has been growing by almost exactly 4.1% for three years. In fact, I don’t think the Fed could have done a better job targeting it to 4.1% if they tried.

    This chart has real GDP growth (the blue line) and I added a trend line increasing at 4.1% (in black).

  • Morning News: November 29, 2012
    , November 29th, 2012 at 7:19 am

    World Economy in Best Shape Since 2011: Investors

    Bank Of England Warns UK Banks May Lack Enough Capital

    Spanish Banks Agree to Layoffs and Other Cuts to Receive Rescue Funds in Return

    Gold Fields to Spin Off Two Mines

    Economic Growth Still Modest: Fed’s Beige Book

    Fed’s Fisher Urges U.S. Government To Act On Employment

    Vague Plans to Limit Tax Breaks Will Soon Die

    Siemens to Buy Rail Business for $2.9 Billion

    Groupon Chief Tested as Board Meets to Discuss His Fate

    Is SAC Capital’s Steve Cohen Worth Catching?

    As Official Drops Out, Race Shifts for S.E.C.

    Federal Budget Standoff Is Nerve-Racking For State’s Long-Term Jobless

    The Needless Tragedy of Student Loan Defaults

    Joshua Brown: Special Dividends

    Phil Pearlman: IvanHoff Says It Makes Sense for Apple Inc To Declare the Special Divvy

    Be sure to follow me on Twitter.

  • Discretionaries Take the Lead
    , November 28th, 2012 at 10:03 pm

    Here’s a breakdown of how the S&P 500 sector groups did during the recent down leg from October 17th to the post-election low on November 15th, and then on the recent rally since November 15th.

    Sector Oct-17 to Nov-15 Nov-15 to Nov-28
    Discretionary -5.41% 5.48%
    Industrials -5.79% 4.47%
    Staples -5.95% 4.39%
    Telecom -6.38% 2.30%
    Healthcare -6.59% 3.16%
    Financials -6.99% 3.41%
    S&P 500 -7.36% 4.18%
    Materials -8.55% 4.78%
    Energy -8.81% 3.40%
    Utilities -9.20% 2.06%
    Tech -9.59% 5.47%

    What’s interesting to note is that Consumer Discretionaries were down the least, and then up the most. Utilities came very close to being down the most and up the least.

  • JoS. A. Bank Earns 47 Cents Per Share
    , November 28th, 2012 at 8:11 am

    For its fiscal Q3, JoS. A. Bank Clothiers ($JOSB) reported earnings of 47 cents per share. That’s nine cents per share below Wall Street’s forecast. I expect the stock to have a rough day today.

    JOSB’s top-line growth was pretty decent. Total sales rose by 11.1% and comparable store sales rose by 4.8%.

    So what went wrong? Joe Bank’s profit margins got squeezed and the company also blamed Hurricane Sandy:

    “We are pleased that we were able to deliver comparable store sales growth and Direct Marketing segment sales growth during the third quarter of fiscal year 2012. However, we are disappointed that our net income declined versus the same period a year ago. We had a decline in our operating income margin due to additional markdowns and promotional activity which were needed to drive these sales. Also, Hurricane Sandy, which hit along the East Coast where the majority of our largest volume regions are located, negatively impacted third quarter sales, particularly when we ran a big promotion right at the end of the quarter,” stated R. Neal Black, President and CEO of JoS. A. Bank Clothiers, Inc. “The hurricane, along with the distractions of the national election, continued to have a negative impact in the first weeks of November. In November, for the start of the fourth quarter, comparable store sales were down. With the critical month of December still ahead of us, and continued pressure on margins, we remain cautious for the outcome of the fourth quarter,” continued Mr. Black.

  • Warren Buffett on Jon Stewart
    , November 28th, 2012 at 8:10 am

  • An Easy Explanation of the Fiscal Cliff
    , November 28th, 2012 at 8:08 am

    From Donald Marron of the Urban-Brookings Tax Policy Center.