CWS Market Review – July 12, 2013

“I guess I should warn you, if I turn out to be particularly clear,
you’ve probably misunderstood what I’ve said.” – Alan Greenspan

What a difference six days make. The S&P 500 has rallied for the last six days in a row, and on Thursday, the index reached an all-time high close, although we’re still a bit short of the all-time intra-day high. The small-cap Russell 2000 is at an all-time high and the Nasdaq Composite is at its highest point in 13 years. Check out how poorly the S&P 500 has performed compared with the Russell 2000.

big.chart07122013

What’s the cause for the about-face? It all comes down to the Federal Reserve—or more specifically, people’s expectation of what the Fed is thinking. After throwing a minor temper tantrum, Wall Street has apparently reconciled itself to the fact that the Fed will start tapering its bond purchases in September.

In this week’s CWS Market Review, we’ll take a closer look at what this means and how it impacts our portfolios. We’ll also take a look at some upcoming earnings reports for our Buy List. Speaking of which, our Buy List has been en fuego lately. Just look at Cognizant Technology ($CTSH). Two weeks ago, I spotlighted CTSH as an especially good buy, and the stock is up 13% since then. I’m raising my Buy Below for Cognizant to $76 per share. Thanks to the rally, I have several more updated Buy Below prices. Before we get to those, let’s look at why the markets are so happy this week.

Bernanke Calms the Market’s Panic Attack—Which He Created

In last week’s CWS Market Review, I said traders were on the lookout for this week’s release of the minutes from the Fed’s June meeting. It was in June that Ben Bernanke’s post-meeting press conference sent the stock market into a quick dizzy spell.

Traders read far too much into the Fed’s caution that their bond buying program will, at some point, slowly wind down. Ever since that press conference, the central bank has been hard at work trying to calm the market down. Ben and Friends want to make it absolutely clear that they’re not going to pull the rug out from the economy.

One piece of encouraging news came last Friday when the government reported that the economy created 195,000 new jobs in June. That was 30,000 more than expected. How’s this for consistency: According to the government, 199,000 jobs were created in April, and 195,000 were created in May. These are decent numbers, though there’s a lot of room for improvement. Still, we had a seven-month run last year where every report was less than 170,000.

An improving labor market is important for several reasons. It obviously means more folks drawing paychecks who are eager to buy more things. While Corporate America has done a great job cutting back on expenses, you can’t improve profit margins forever. At some point, you need more bodies in the door.

Mr. Bernanke has often pointed out that helping the jobs market is part of the Fed’s mandate, and he’s pledged to add monetary stimulus until there’s substantial improvement in the economy. In a Q&A on Wednesday, Bernanke said that the current unemployment rate probably understates the strength of the jobs market due to low workforce participation. In English, that means we don’t really know how bad things are, because a lot of folks have simply stopped looking for work.

Bernanke also did something interesting in those remarks. He made it clear that short-term interest rates will remain low for a long time after any bond buying starts to taper off. I think he sees rates staying low into 2015, and perhaps beyond. Of course, this will be long after he’s left D.C. The important thing is that QE is not the same as holding down short-term rates, and the Fed sees these as two distinct policies.

A lot of market watchers have been concerned about the rapid run-up in long- and intermediate-term interest rates. The five-year Treasury jumped 95 basis points in two months. In effect, the economy is tightening credit on itself. Bernanke is clearly concerned about this, but any concerns that the housing market is about to be slammed shut are very premature (although there have been some big cracks in a number of mortgage finance stocks).

The odd thing is that a lot of investors have reacted as if the Fed has suddenly changed its game plan. That’s not the case at all. Looking at the details, the central bank has been pretty consistent. The market’s reaction, however, has been wildly inconsistent. While the stock market has made back all of its losses, the five-year Treasury has fallen only 20 basis points from its 95-point surge.

Looking at the makeup of the market also gives us some clues. For example, the Consumer Discretionary Sector ($XLY) has now risen for 12 days in a row. That’s exactly what we would expect to see when knowing that the Fed is on the side of the stock market. The Discretionaries include companies like Bed Bath & Beyond ($BBBY) and Ford Motor ($F). Basically, it’s stuff that people would like to buy, not what they have to buy. This is important because strength here points to broader optimism.

The message from Bernanke is crystal clear even though some folks are desperate to hear something different. The Federal Reserve will continue to be on the side of stocks and not bonds. Bernanke just watched a big drop in bonds and did nothing to stop it. What does that tell you? Keep focusing on our Buy List names, and ignore any market hiccups. That’s just part of being an investor. This will be another good earnings season for us. Now let’s look at our Buy List.

Our Buy List Is up 21.27% for the Year

Our Buy List has been punching like champ lately. We’re now up 21.27% for the year, and it’s not even the All-Star Break yet. I want to run down some of our big winners and give you some new Buy Below prices. Our #1 performer this year is quiet little Moog ($MOG-A), which is inches away from being our first 40% winner for the year. Of our 20 stocks on the Buy List, 13 are up more than 20% this year, including six that are up more than 30%. This week, I’m raising my Buy Below on Moog to $57.

Several of our stocks have been hitting new highs lately, like Ford Motor ($F). On Thursday, shares of F came within one penny of hitting $17 per share. The upcoming earnings report could be a home run. Ford continues to be a great buy up to $18 per share.

It seems like it was only a week ago that I raised my Buy Below on WEX Inc. ($WEX) and Bed, Bath & Beyond ($BBBY). Actually, it was only a week ago, but both stocks have powered right through to new highs. This week, I’m raising WEX to $86, and BBBY to $79.

AFLAC ($AFL) continues to do well for us. On Thursday, the stock got as high as $59.38, which is the highest price in more than two years. AFL is still going for less than 10 times this year’s earnings estimate. I’m looking forward to another good earnings report at the end of this month. I’m raising AFL’s Buy Below to $63 per share.

Last month, traders panicked due to our FactSet’s ($FDS) terrible, awful, horrible earnings. In other words, FactSet merely met the Street’s earnings forecast. At the time, I said FDS “is doing just fine.” Sure enough, the stock has since made back everything it lost and broken out to another new high. (If it weren’t for panicky traders, we wouldn’t have any traders at all.) I’m raising our Buy Below on FactSet to $112 per share.

I have three more Buy Below changes: I’m raising CA Technologies ($CA) to $31 per share, Harris ($HRS) to $53 and CR Bard ($BCR) to $115. Earnings for all three will be coming soon.

I also want to mention that DirecTV ($DTV) is bidding to buy Hulu, which is an online video service. This is a pretty high-profile bidding war for Hulu. I don’t have any new info, but I’ll add that DTV tends to be pretty conservative in these matters, and I know they’re not afraid to walk away from a deal if it’s not a good fit.

I’ll warn you that the bidding war may cause some near-term volatility for DTV. If they lose, which is probable, the stock will probably rally. Incidentally, DTV got a nice bump on Thursday when Liberty Media’s Chairman John Malone said that DISH and DTV should merge. I really don’t see that happening. Either way, DirecTV remains an excellent buy up to $67 per share.

Upcoming Earnings from Microsoft and Stryker

Before we get to the next week’s earnings, I have to make a correction. Last week, I said that JPMorgan ($JPM) and Wells Fargo ($WFC) were due to report earnings on Thursday, July 11th. That’s incorrect. Both banks will report on Friday, the 12th, which is just after the deadline for this week’s issue. No need to worry. I’ll cover the earnings report in next week’s CWS Market Review. Also, I previewed the earnings in last week’s issue, which you can see here. My apologies for any confusion.

Assuming my calendar is right, this Thursday, July 18th, Microsoft ($MSFT) and Stryker ($SYK) are due to report Q2 earnings. For Microsoft, the June quarter is the fourth quarter of their fiscal year. Both have been excellent stocks for us this year.

In April, Microsoft had a very good earnings report, and this news came at a time when a lot of big-name firms were disappointing Wall Street. The software giant earned 72 cents per share, which was four cents more than estimates.

It’s true that MSFT is being hurt by slower PC sales, and Windows 8 didn’t blow people away. But lots of other areas are going well for them. Microsoft’s corporate business is picking up, and Xbox biz looks quite good. The company generates an astounding cash flow.

On Thursday, Microsoft announced a major reorganization. They’re revamping their eight divisions into four. The new structure is designed to offer more collaboration and diminish rivalries. Steve Ballmer has said he wants Microsoft to be known as a “devices and services” firm.

I tend to be a bit skeptical about high-profile reorganizations. They can be done, but reorgs are usually more difficult than originally assumed. On Thursday, MSFT came within one penny of a new 52-week high. Wall Street currently expects 75 cents per share for next week’s earnings report. That’s almost certainly too low. I’m going to bump up my Buy Below price to $38 per share. Microsoft remains a very good buy.

Stryker exploded out of the gate for us this year. SYK was up 16% before the end of January. The medical-devices company has said that it expects $4.25 to $4.40 per share this year. It’s still early, but I think SYK should easily clear $4.30 per share this year. Stryker earned $1.03 per share for Q1, and their result for Q2 is usually very close to what they earned in Q1. Sure enough, Wall Street’s consensus for Q2 is for $1.03. Stryker remains a very good buy up to $71 per share.

That’s all for now. Earnings season rolls on next week. We’ll get reports from Microsoft and Stryker. There will also be several key economic reports. Retail sales is on Monday; on Tuesday, we’ll get a look at consumer inflation; and industrial production is on Wednesday. Then housing starts on Thursday. 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 July 12th, 2013 at 7:06 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.

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