Archive for November, 2010

  • Days of Wine and Liquidity
    , November 19th, 2010 at 3:04 pm

    Gary Alexander celebrates what would be Johnny Mercer’s 101st birthday (yesterday) with some market talk:

    Call me Old Fashioned, but if I Had my Druthers, markets would rise Day In and Day Out, Come Rain or Come Shine. But Jeepers Creepers, the Days of Wine and Roses can also be a Charade. Fools Rush In, seeking Out of This World riches, while those who Hit the Road to Dreamland may be Building Up for an Awful Letdown, and I Wanna Be Around to Pick up the Pieces when they sing The Blues in the Night.

    Turning to the Fed, Something’s Gotta Give in the war between inflation and deflation, so the Lazy Bones at the Fed use That Old Black Magic to print more money, saying “This Time the Dream’s on Me.”

    Seasonally, markets tend to fall in Early Autumn, when Autumn Leaves begin to fall In the Cool, Cool, Cool of the Evening. But When October Goes, If I Had a Million Dollars (One for My Baby and Another One for the Road), my Dream (My Shining Hour) would be to Take the Long Road Home, on the Atcheson, Topeka and the Santa Fe, with my Dearly Beloved Satin Doll (Laura), to Moon River, where the Skylark and Bob White sing. After all, Any Place I Hang My Hat is Home. It’s all Too Marvelous for Words!

  • Hansen Natural Takes Out 2006 High
    , November 19th, 2010 at 1:00 pm

    How’s this for a comeback? Hansen Natural (HANS), the Monster Energy Drink stock, just took out its 2006 high.

    For those of you keeping score at home, the stock went from 50 cents (post-split) in 2003 to a high of $52.72 in 2006. HANS then dropped to $26 before rising to an all-time high of $68. By October 2008, it was back below $21 and now it’s been as high as $52.85 today.

    We try to analyze stocks as best as we can using reason and logic, yet sometimes the market has other ideas.

  • Harrah’s Shelves IPO
    , November 19th, 2010 at 10:33 am

    Harrah’s Entertainment Inc. was set to IPO this week but canceled due to “market conditions.” I’m not sure what changed so much over the past week, but they didn’t ask my opinion.

    In the years leading up to the financial crisis, gobs of companies were taken off the market by private equity firms. Now the companies are being unloaded and many are for losses. Bloomberg estimates that 40% of the IPOs from private equity firms are for losses.

    Harrah’s had been bought out by Apollo Global Management and TPG Capital in January 2008. The stock had been hugely successful for investors over the years.

  • Bernanke Defends QE2
    , November 19th, 2010 at 9:17 am

    I continue to think Ben Bernanke is doing a very good job. Instead of hearing what other people say his plans are, you can listen to him.

    Here’s a brief excerpt of his defense of QE2:

    The Federal Reserve’s policy target for the federal funds rate has been near zero since December 2008, so another means of providing monetary accommodation has been necessary since that time. Accordingly, the FOMC purchased Treasury and agency-backed securities on a large scale from December 2008 through March 2010, a policy that appears to have been quite successful in helping to stabilize the economy and support the recovery during that period. Following up on this earlier success, the Committee announced this month that it would purchase additional Treasury securities. In taking that action, the Committee seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.

    Although securities purchases are a different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms are very similar. In particular, securities purchases by the central bank affect the economy primarily by lowering interest rates on securities of longer maturities, just as conventional monetary policy, by affecting the expected path of short-term rates, also influences longer-term rates. Lower longer-term rates in turn lead to more accommodative financial conditions, which support household and business spending. As I noted, the evidence suggests that asset purchases can be an effective tool; indeed, financial conditions eased notably in anticipation of the Federal Reserve’s policy announcement.

    Incidentally, in my view, the use of the term “quantitative easing” to refer to the Federal Reserve’s policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors’ portfolios, on a wider range of assets.

    This policy tool will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives. Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve’s mandate. In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time. The Fed’s power to pay interest on banks’ reserves held at the Federal Reserve will allow it to manage short-term interest rates effectively and thus to tighten policy when needed, even if bank reserves remain high. Moreover, the Fed has invested considerable effort in developing tools that will allow it to drain or immobilize bank reserves as needed to facilitate the smooth withdrawal of policy accommodation when conditions warrant. If necessary, the Committee could also tighten policy by redeeming or selling securities.

  • Fiserv Buys Back “Up To” 7 Million Shares
    , November 19th, 2010 at 8:46 am

    Groan.

    Fiserv, Inc., the leading global provider of financial services technology solutions, today announced that its Board of Directors has authorized a repurchase of up to seven million additional shares of the company’s common stock, which represents approximately five percent of its outstanding shares.

    Fiserv may repurchase shares in the open market or in privately negotiated transactions at the discretion of management subject to its assessment of market conditions and other factors. This authorization does not expire.

    Let’s work out the math. Seven million shares at the current price comes to $385 million. At last count, FISV has 149 million shares outstanding.

    I’m pretty sure most shareholders would rather have $2.58 per share of cash dividends in their pockets than have the board buying FISV shares near a 52-week high.

    Of course, the board has only authorized a purchase “up to” 7 million, which also includes zero shares. These share repurchase statements are good for PR, but they don’t do much for shareholders.

  • CWS Market Review – November 19, 2010
    , November 19th, 2010 at 8:01 am

    After falling for six out of seven days, the stock market closed a tiny bit higher on Wednesday, and then we had a very good rally yesterday. The S&P 500 rose 18.10 points or 1.54% on Thursday. For a very brief spot, the index climbed over 1,200 but we couldn’t hold on by the closing bell.

    The big news on Thursday was General Motors’ return to the public market. I strongly advise steering clear of this stock. The best I can say is that there was a lot of interest in the offering. While the stock got as high as $35.99, it sold off for the rest of the day and even dipped below $34.

    Eric Falkenstein summed up GM well when he wrote: “In the same way that a spendthrift whose rich dad pays off his credit cards every so often has no incentive to become frugal, GM has no need to make hard decisions. It will survive one, maybe two, recessions.”

    Reynolds American ($RAI) split 2-for-1 on Tuesday. The stock was hit hard last week after the government announced new packaging regulation for cigarettes. Fortunately, the sell-off was minor and we gained back almost everything we lost. Reynolds continues to be a very strong buy up to $34 per share. The stock currently yields just over 6%. This is an excellent investment for income investors.

    There wasn’t much economic news, but what there was continues to be positive. The headline CPI for October came in at 0.2% while the core rate was flat. Wall Street had been expecting a 0.3% rise for the headline number and a 0.1% increase for the core rate.

    The problem with the inflation debate is that so much rides on it politically that people have a hard time looking at inflation dispassionately. The simple fact is that there are no signs of inflation. We’re in a very odd period where some folks honestly believe that hyperinflation is imminent while others believe that deflation is just around the corner. If either outcome is on its way, it’s doing a good job of disguising itself.

    If there’s one thing the stock market hates, it’s inflation. In fact, the only thing it hates more is deflation. The best environment for stocks is low, boring inflation which is exactly what we have now. A few years ago, I looked at the numbers and found that when inflation is over 5% or under -5%, the market averages a real 5.5% loss. However, when inflation is between -5% and 5%, it averages a 15% gain.

    Besides low inflation, we had a strong report from the Philadelphia Fed. Also, the report on industrial production was so-so. Manufacturing production for September was revised to a small gain of 0.1% instead of a 0.2% loss in the original report. Manufacturing production for October showed a 0.5% gain. This isn’t great news, but it’s good news.

    It’s hard for people to believe this but the United States really is a manufacturing powerhouse. The difference is that a lot fewer people work in manufacturing than they did before. But actual manufacturing production has doubled since 1983. Fewer workers do much, much more.

    Next week will be another slow week. The stock market will be closed on Thursday for Thanksgiving. On Friday, or Black Friday as it’s called, the stock market closes at 1 pm instead of the usual 4 pm, so if you’re looking to make some trades be on the lookout for the early close. This is usually the slowest trading day of the year. When I was a rookie, I was the only guy in the office who had to come in on the Friday after Thanksgiving. I can assure you that nothing happens.

    Medtronic ($MDT) will report earnings this Tuesday. I have to say that my thoughts are divided on Medtronic. I think it’s a very good company, and the stock is very probably inexpensive. However, the last few earnings reports haven’t been very impressive. Plus, the company already lowered its full-year forecast and I think it’s very possible they could do it again. My fear is that the estimates for their fiscal fourth quarter (which ends in April 2011) are too high.

    Wall Street’s estimate for the October quarter (the fiscal second) is for 82 cents per share. If Medtronic beats that convincingly, they have a very good shot of making the company’s current full-year EPS range of $3.40 to $3.48. That would also mean the company is going for less than 10 times earnings. If you already own MDT, I say “hold it.” But if you don’t own it, wait for Tuesday’s earnings report. I’ll be sure to have lots to say about it on the blog.

    The other two stocks on the Buy List with October quarters are Eaton Vance ($EV) and Jos. A Bank Clothiers ($JOSB). I don’t know when they will report but historically EV has reported around Thanksgiving while JOSB has reported in early December. I’m particularly excited for JOSB’s earnings.

    Earlier I had said to expect a market sell-off after the Fed announced QE2. I thought I was wrong or that it came later than I expected. Either way, we had some decent buying opportunities over the last few days. Nicholas Financial ($NICK), for example, fell below $10 per share. This company has already earned 90 cents per share for the first three quarters of this year. There’s a very good chance NICK will make $1.25 per share for all of 2010.

    AFLAC ($AFL) also fell as low as $53.12 this week. I wouldn’t be surprised to see AFL make a run at $60 very soon. Wright Express ($WXS) is another Buy List stock that’s looking very good at its current price.

    That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy

  • Morning News: November 19, 2010
    , November 19th, 2010 at 7:54 am

    Wall Street Futures Signal Weaker Start for Equities

    Euro Rises for Third Day on Optimism for Irish Bailout; Dollar Declines

    Bernanke Steps Up Stimulus Defense, Turns Tables on China

    China Raises RRR Again as Inflation Fight Intensifies

    October Leading Economic Indicators Up 0.5%

    More Americans Feeling Serious Financial Distress

    G.M. Shares End 1st Day With 3.6% Rise

    Dell’s Margins Blow by Street and Shares Rise

    VW to Invest $71 Billion in Auto Unit in Next Five Years

    Harrah’s Shelves $531 Million IPO on Market Conditions

    Dear Warren Buffett…

  • Dollar-Cost Averaging: The Myth that Won’t Die
    , November 18th, 2010 at 3:20 pm

    Burton G. Malkiel, the author of “A Random Walk Down Wall Street.” has an op-ed in today’s WSJ defending buy-and-hold investing.

    While I also advocate buy-and-hold, my take is very different from Malkeil in that I favor holding a microscopic part of the market. He favors holding the whole thing. I change one-fourth of my Buy List each year which means that the average holding period is four years.

    In the op-ed, this passage caught my eye:

    While no one can time the market, two timeless techniques can help. “Dollar-cost averaging,” putting the same amount of money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms. More shares are bought when prices are low, thus lowering average costs.

    There are two notions about dollar-cost averaging (DCA). One is that most investors make regular additions to their portfolios. People are paid in fixed amounts, so they invest that way. I don’t have a problem with that.

    However, there is another notion that DCA is somehow inherently a less-risky way to invest. I’m not sure which notion Malkiel is referring to, but I want to be absolutely clear that the second notion is complete and total nonsense.

    There is absolutely no inherent advantage in dollar-cost averaging over lump-sum investing. ZERO. Spreading out your investments over an extended period doesn’t decrease your risk one bit. The idea has been thoroughly refuted, yet the myth won’t die.

    The advantage of dollar-cost averaging was blown to smithereens over 30 years ago in this article by George Constantinides. Here’s another article on the subject by John R. Knight and (my former finance professor) Lewis Mandell.

    Lump-sum investing is the best. Don’t diversify by time, diversify by assets.

  • S&P 500 Flirts With 1200, Gets Number, Never Calls
    , November 18th, 2010 at 1:32 pm

    The market’s morning surge is holding up well. The S&P 500 is holding just shy of 1200 and the cyclicals are leading the way. The Morgan Stanley Index of Cyclical (^CYC) stocks is up 2% right now. Also, small-caps continue to do well. The Russell 2000 (^RUT) is up 2.2% so far today.

    All 20 stocks on the Buy List are trading higher today, although as a whole we’re trailing the S&P 500 1.49% to 1.73%.

    I’m inclined to believe that the market liked the tame inflation report from yesterday. Also, today’s Philly Fed news was very good.

    A few years ago, I looked at inflation’s impact on the stock market. Here’s what I found:

    Going back to 1926, there have been 72 months of deflation coming in below -5%. The inflation-adjusted total return for that period is an annualized loss of -9.6%.

    Here’s how it breaks out.

    Inflation Rate…………Real Stock Returns (annualized)
    Below -5%……………………………..-9.6%
    Between 0% and -5%……………….20.9%
    No Inflation…………………………..17.1%
    Between 0% and 2%……………….10.0%
    Between 2% and 5%………………..14.1%
    Between 5% and 7.5%……………..-0.2%
    Between 7.5% and 10%…………….-2.8%
    Over 10%…………………………….-11.1

    Basically, when inflation is over 5% or under -5%, the market averages a real 5.5% loss. When inflation is between -5% and 5%, it average a 15% gain.

    Yesterday’s CPI came in at 0.2%. For the last year, the CPI is up 1.17%.

  • Looking at the CPI
    , November 18th, 2010 at 12:19 pm

    I really don’t have a major point to make with this post, but I wanted to show you what the seasonally-adjusted Consumer Price Index looks like. Most often, we only see the rate of change. This is the raw index.

    Leaving aside the discussion of the accuracy of the CPI in measuring inflation, we can see how unexciting the official data series really is. This is a very odd time in economics in that people are very worried about both deflation and hyperinflation. Looking at the data, I just don’t get it.

    Maybe something will change soon, but it’s sure taking its time. If the past is prologue, at least in the short-term, I don’t see much of a need to worry about deflation or rapid inflation.