CWS Market Review – June 14, 2013

“If you are shopping for common stocks, choose them the way you would
buy groceries, not the way you would buy perfume.” – Benjamin Graham

I’ve been telling investors to keep an eye on the stock market’s 50-day moving average. The 50-DMA is simple, really—it’s the average of the last 50 closes. It’s one of those simple rules that has, for whatever reason, proven itself to work quite well over the years.

Last week, the S&P 500 briefly fell below its 50-DMA but, importantly, has never closed below it. Then on Wednesday of this week, the index came oh-so-close to closing below the magic mark, but just barely held on. That signal probably gave some confidence to the bulls, and we had a nice rally on Thursday to bring us back over 1,636.


The interesting action, however, hasn’t been in the U.S. market—it’s been in Japan. Last year, the Nikkei began a furious rally after the government said it’s going to do everything it can to get inflation going. The Japanese economy has been mired in a two-decade slump, so they’re desperate to try anything. But starting in late May, the Nikkei suddenly took a pounding. But what’s interesting is that investors aren’t scared of the government’s pro-inflation agenda. No, the selling was actually due to fears that the government isn’t committed enough to revving up inflation! (This is a big contrast to the U.S. market which turns tail and runs at the mere mention of inflation.)

In this week’s CWS Market Review, I want us to take a step back and look at the larger economic picture. The Federal Reserve faces a problem similar to Japan’s, though not nearly as bad. The Fed has a big meeting coming up next week, and the big wigs are giving us not-so-subtle clues about what’s in store. We also have three big earnings reports coming up later this month. But first, let’s look at the recent success of our Buy List.

Our Buy List Is up 16.58% for the Year

When talking about the performance of the Buy List, I’m careful not to toot our own horn too loudly. Naturally, that’s bad karma, and disciplined investing means checking your ego at the door. But today I can’t help myself: our Buy List has suddenly sprung to life, and I feel obliged to give it a well-deserved shout-out.

Consider some numbers: Over the last month, the S&P 500 is up a scant 0.16%, but our Buy List has gained 4.14% (these numbers don’t include dividends). For the year, our Buy List is up 16.58%, which is a high for the year, while the S&P 500 is up 14.74%. If our lead holds up, it will be the seventh-straight year we beat the market. You can see why I’m so proud of our performance. Now let’s preview next week’s Fed meeting.

Preview of Next Week’s Fed Meeting

The Federal Reserve meets next week, and this meeting will be a biggie. I’d love to be a fly on the wall (and maybe NSA will have some flies on duty), but the minutes from the meeting won’t be released for another three weeks.

We’re at an interesting time for the market because normally, the jobs reports and Fed policy statements are by far the most important economic events. But now, I’d say the release of the minutes of the Fed meetings has taken center stage.

Why’s that? It’s because investors are on the lookout for any sign that the Fed is going to wind up their massive bond-buying program. The stock market has clearly been aided by the Fed’s bond purchases. Heck, the Fed even said that was one of their intentions. But I think some investors believe the entire rally has been due to the Fed’s pulling the bull along. That’s a giant overstatement. But you don’t have to go far on Wall Street to find folks who think: no Fed help, then sell everything you got. They’re wrong, but they can cause us headaches.

My position had been to ignore this fear-mongering. I didn’t think the Fed was even close to considering a change in its policy before the end of the year. I still believe the Fed shouldn’t make any changes until the moribund jobs market gets better or inflation starts to heat up, and there’s no sign of that happening. But, for some strange reason, I’m not allowed to vote on the Federal Open Market Committee.

I’m now concerned that the Fed may start tapering off their bond purchases before the year is out. What happened to change my thinking is that last Friday, Jon Hilsenrath of the Wall Street Journal, who’s widely understood to be Bernanke’s go-to media conduit, wrote:

Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn’t disappoint.

Whoa. I didn’t see that coming, and that caught a lot of people’s attention. I, for one, am going to assume that’s Bernanke speaking. Note that he didn’t say they “will pull back,” but merely, “they’re on track to begin pulling back.” Of course, I can say that I’m “on track” for a lot of things. It doesn’t mean they’re about to happen. Still, the Fed wouldn’t be floating this in the media if they didn’t think it was important. So this is a big deal.

We also have to remember that the Federal Open Market Committee is just that—a committee. Bernanke is the head of it, but a majority can oppose him. It’s happened before. Despite Hilsenrath’s (cough cough Bernanke’s) article, I’m inclined to believe the Fed won’t make any changes just yet, but I can’t be sure. I suspect that there are some Fed members who think it’s time to end the buy-bonds frenzy. Perhaps Bernanke wants to adjust the language and spell out clear timelines to appease those folks.

Even if the Fed does start tapering off, I don’t subscribe to the view that the stock market is toast without the Fed’s help (and a lot of people do subscribe to such a belief). Let’s remember that there are some definite bright spots in the economy. The housing market is better, and budget deficits are shrinking. I think a key driver of what the Fed will do can be found in the Fed’s economic forecast. Hilsenrath notes that the Fed has been consistently over-optimistic about what I’ll generously call “the recovery.” The problem is that fiscal policy has been holding back the economy. At least, that’s Bernanke’s view. The economy is, so far, running behind the Fed’s forecast for 2013. So either the Fed will lower their forecast next week or they’ll double down and expect the economy to ramp up later this year. The stock market believes earnings will ramp up, too.

There’s No Reason to Fear the Fed’s Changing Course

My overall view is that there’s a lot riding on this second-half recovery. If it indeed comes, a lot of problems will be taken care of. Investors are afraid of the Fed’s tapering off, which may not happen soon, and even if it does, there’s no reason to be so scared. My advice to investors is to stay focused on our Buy List stocks, but be prepared to see some volatility coming our way. If the market gets weak, it will be a great opportunity to buy, but don’t jump in just yet.

Earlier, I mentioned that the Federal Open Market Committee is in fact a committee. Well, there’s an unrecognized member of the committee who has the most important vote of all, and that’s the market. It’s interesting to note that the S&P 500 peaked in May at the exact time that Ben Bernanke told a congressional committee that the Fed could start winding down its bond buying.

Apparently, the Fed is scared that it’s scaring the market. So yesterday afternoon, just before the market closed, Hilsenranke came out with another article. In it, he conveyed the Fed’s caution to investors not to overreact to any adjustments to their bond buying. Easier said than done. It’s like a teenager calling his parents and opening with, “don’t overreact.” Whatever may follow, it probably ain’t good.

Again, I think these comments are coming right from Bernanke, and I understand his concern. The financial markets are clearly worried the party is about to end. The long end of the bond market is already factoring in higher interest rates, and that’s why interest-rate stocks lost favor.

But here’s the thing: This is really the same story we’re seeing in Japan, just not as dramatic. Investors think the Fed isn’t fully committed to propping up the market. The Fed has said that it won’t raise short-term interest rates until unemployment gets to 6.5%. We’re at 7.6%, which is a long way away. Most economists think that at best, we won’t get to 6.5% until 2015. Still, the futures market for interest rates expects increased rates before then. In short, that unrecognized voting member of the Fed might exercise its power of veto.

Interestingly, in last week’s CWS Market Review, I mentioned how “tapering” had become Wall Street’s favorite buzzword. Well, Hilsenranke had another article from last Friday saying that the Fed really hates the word “tapering.”

The hangup for Fed officials is the word “tapering,” which suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

Because Fed officials are uncertain about the economic outlook and the pros and cons of their own program, they might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments — but they don’t want the markets to think that’s a set plan. It is, as Fed officials like to say, “data dependent.”

Hmmm. This strikes me as a bit pedantic. With interest rates, Fed policy almost always follows a trend. It stands to reason that bond buying will be similar.

CR Bard Raises Its Dividend

In last week’s CWS Market Review, I said that I expected a dividend increase soon from CR Bard ($BCR). Sure enough, the company announced a one-penny-per-share increase.

The quarterly dividend will rise from 20 cents to 21 cents per share. I know it’s not a lot, but don’t be quick to dismiss a 5% increase. For one, these increases do add up over time. Bard’s dividend has doubled since 2002. Also, a dividend increase is a sign from the company that things are going well. A firm can do lots of things to its financial statement, but money paid to shareholders is something tangible.

Bard also announced a $500-million share-buyback program. Personally, I don’t care too much for these. Of course, it’s merely the “authorization” to buy more shares. I’d rather have the cash, but from a quality company like Bard, I view it as mildly positive. The stock is near a 52-week high, and I’m going to raise my Buy Below on Bard to $113 per share.

Before I go, I’m also raising my Buy Below price on WEX Inc. ($WEX) to $75 per share. I’ve wanted to keep a tight range on this stock, but the shares are rallying away from us. I still don’t want investors to chase it, but I’m going to give WEX some more slack and raise the Buy Below. I want to see a good earnings report next month before I feel comfortable raising the Buy Below again. Also, the volatility in Japan has caused the yen to rally against the dollar, which is good for AFLAC ($AFL). The duck just hit another 52-week high, so I’m going to raise my Buy Below price to $60. AFLAC continues to be an excellent buy.

That’s all for now. This Tuesday and Wednesday will be the big Fed meeting, so there could be some volatility headed our way. Ben Bernanke will hold a post-meeting press conference, and the Fed will update its economic projections. We’ll also get earnings reports from Oracle ($ORCL) and FactSet Research Systems ($FDS). I previewed both reports last week. I’m expecting particularly strong numbers for ORCL. 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 14th, 2013 at 7:12 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.