Archive for September, 2012

  • Morning News: September 17, 2012
    , September 17th, 2012 at 6:19 am

    European Squabbling on Euro Crisis Solution May Test Rally

    Draghi Euro Humbles Thought Leaders Seeing End of Union

    Indian Rates Held Steady Despite “Big Bang” Reforms

    German Banks’ Funding Boost Drives Global Loan Rebound

    Istanbul Aims to Outshine Dubai With $2.6 Billion Bank Center

    U.S. to File W.T.O. Case Against China Over Cars

    The Crude World of Middle East Oil

    Stocks, More Than Housing, Seen As Initial QE3 Winners

    Probe Focuses On JPMorgan’s Monitoring Of Suspect Transactions

    Buffett Style Fashions Berkshire’s Foreign Deals

    Hennes & Mauritz Sales Miss Estimates After August Heatwave

    Billionaire Arnault’s LVMH Amasses EU4 Billion in Belgium

    1 Year On, Occupy Is In Disarray; Spirit Lives On

    Howard Lindzon: What does a Market TOP Look Like…Not [Friday]!

    Phil Pearlman: Shrinkologicals: Who Is Really Panicking?

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  • The Market’s P/E Ratio Is Lower Now Than It Was Most of the Time from 1991 to 2010
    , September 16th, 2012 at 8:17 am

    One of the paradoxes of this market is that stocks have climbed higher even as earnings estimates have come down. Consider that the S&P 500’s earnings multiple is up nearly 30% since the market’s low nearly one year ago.

    I think part of the reason for the increased valuation is that the economic uncertainty has started to fade. The Federal Reserve’s move last week probably helped clear up some of that uncertainty.

    What’s interesting is that despite the higher valuations, the S&P 500’s Price/Earnings Ratio is still lower now that it was at any point from March 1995 to October 2008. And except for some brief periods, the market’s P/E Ratio is currently lower than it was during the vast majority of the time from 1991 to 2010.

  • Fed Admits Up Until Now U.S. Has Just Been Coasting Off Money From ‘Avatar’
    , September 15th, 2012 at 12:13 pm

    ‘We Spent It All’ Reveals Bernanke

    From The Onion:

    WASHINGTON—Addressing the nation’s finances at a major economic conference Friday, Federal Reserve chairman Ben Bernanke acknowledged that for the past three years the United States has been scraping by on the revenue generated by the 2009 sci-fi blockbuster Avatar. “By circulating $2.8 billion through the economy in gross box-office receipts alone, the cash from Avatar has been the only thing keeping America’s head above water,” said a solemn-faced Bernanke, adding that when money from the theatrical release ran dry, DVD sales had been able to pick up just enough slack to keep the United States solvent for another year. “We had hoped the Avatar money would see us through the end of 2012, but at this point we’ve blown through all the revenue from toys, clothing, video games, and book tie-ins, and it appears we are now headed over the fiscal cliff.” With a sequel not expected until 2015, Bernanke called for an emergency rerelease of the film “in IMAX 3-D with bonus scenes” in order to prevent the United States from defaulting on overseas loans.

  • Seagull Steals Camera
    , September 15th, 2012 at 6:34 am

  • UnitedHealth to Go in the Dow
    , September 14th, 2012 at 12:05 pm

    The keepers of the Dow just announced that UnitedHealth Group ($UNH) will take the place of Kraft Foods ($KFT) in the Dow Jones Industrial Average. These changes aren’t made very often.

    What’s interesting to note is that Kraft has mostly been a market performer but UNH has not. The Dow is going in a different direction and this will increase the volatility of the index.

  • CWS Market Review – September 14, 2012
    , September 14th, 2012 at 8:23 am

    Last week, it was thank you, Mario. This week, it’s thank you, Ben!

    The stock market surged to its highest close in four years on Thursday when it was reported that that the Federal Reserve is embarking on another round of quantitative easing. The last time the S&P 500 was this high was on the final day of trading in 2007. The market had a great day on Thursday, and several of our Buy List stocks like Medtronic ($MDT), DirecTV ($DTV), Hudson City ($HCBK) and Harris Corp. ($HCBK) all broke out to new 52-week highs.

    I’m also pleased to announce that—after many of you requested it—I’ve added a “Buy Below” column to our Buy List page. I think you’ll like it a lot. Now you’ll be able to know exactly what I think is a good entry point for all the stocks on our Buy List. It’s important for investors to stay disciplined and never chase after stocks. My Buy Below prices will help you do exactly that.

    In this week’s CWS Market Review, I’ll explain what the Fed news means, and I’ll try to keep it jargon free. I’ll also discuss what this policy means for the economy and our portfolios. I’ll also highlight upcoming Buy List earnings reports from Oracle ($ORCL) and Bed Bath & Beyond ($BBBY). But first, let’s look at why stocks are so happy with the Bearded One.

    The Federal Reserve Embarks on QE-Infinity

    I have to confess some embarrassment with the Fed’s news, because I had long been a doubter that the central bank would pursue more quantitative easing. I even said last week that this week’s policy meeting would be a snoozer. In fact, I was afraid the market was setting itself up to be disappointed. Instead, the market celebrated the news.

    Now let’s look at what exactly the Federal Reserve did. The central bank said it will buy $40 billion per month of agency mortgage-backed securities (MBS). What will happen is the Fed will swap assets with a bank. The Fed will get a risky MBS while the bank will get low-risk reserves, which, I should add, are held at the Federal Reserve.

    Here’s the problem: Since interest rates are already near 0%, the Fed can’t cut them any further. But the hope is that by buying MBS, the Fed can push down mortgage rates, which will boost the housing market, which in turn will boost the overall economy. At least, that’s the plan. Remember that the housing sector is a key driver of new jobs, and I noted on Thursday that the stocks of many homebuilders gapped up on the news.

    The Fed Changes Course

    The problem with the two earlier rounds of bond purchases is that while they certainly helped the financial markets, their impact on the economy was probably pretty slight. Some critics said that the Fed simply wasn’t being bold enough. What’s interesting is that this round of bond buying is smaller than the previous rounds.

    But here’s the key: The Fed said something very different this time.

    To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

    In other words, this time the Fed’s plan is unlimited. Implicit in the above sentence is the Fed’s admission that its previous policy just wasn’t working. With the earlier bond buying, the Fed just said that they’re going to buy X dollar amount of bonds, and that’s that. There was no goal.

    An idea gaining popularity among economists is that the Fed should buy bonds until some metric like the unemployment rate or nominal GDP hits a specific target. With today’s news, the Fed has clearly moved towards that position without expressly saying so. The Fed said that the bond buying would continue until the labor market improved “substantially” and “for a considerable time after the economic recovery strengthens.” The $40-billion-per-month figure is almost irrelevant in context of an open-ended policy. All told, the Fed will be pumping $85 billion into the economy each month.

    What This All Means

    I may sound overly cynical, but I suspect the Fed will buy bonds until the bond market shuts them off. (Remember when I talked last week about how the Spanish bond market scared the bejesus out of the European Central Bank?)

    The Fed also said that it will keep interest rates near 0% through at least 2015. That’s very good news for a company like Nicholas Financial ($NICK). Another buried angle on today’s news is that the Fed is, in my opinion, giving up on the fiction that it has a dual mandate (low inflation and full employment). When it truly matters, the Fed only cares about employment.

    Will this QE-Infinity work? I honestly can’t say. One fear is that mortgage rates are already low, and that hasn’t done much to boost the economy. Looking at the track of previous quantitative easings doesn’t make me overly optimistic that a third version will do the trick.

    Let’s look at the probable outcomes for the market. I suspect that in the near term, cyclical stocks and financial stocks will get a nice boost. That’s what happened after the first two rounds of bond buying and Operation Twist. JPMorgan Chase ($JPM), for example, soared to $41.40 on Thursday, which effectively erased its entire loss since the London Whale trading loss was announced in May.

    Since the Fed is willing to turn a blind eye toward inflation for the time being, I suspect that hard assets (like gold) and commodity-based stocks will do well. I also think that higher-risk assets will gradually gain favor. For example, spreads between junk bonds and Treasuries will continue to narrow. This will also give a lift to many small-cap stocks, especially small-cap growth stocks. In the long run, I’m not convinced the Fed’s decision this week will have a major impact on the economy. Perhaps the best outcome is that a Fed-induced burst of enthusiasm will give the economy and labor market more time to right themselves. Until then, I urge all investors to own a diversified portfolio of high-quality stocks such as our Buy List.

    Earnings from Oracle and BBBY

    Next week, we have two earnings reports due. Bed Bath & Beyond ($BBBY) reports on Tuesday, September 18, and Oracle ($ORCL) reports the next day. This will be an interesting report for BBBY because three months ago, traders gave the stock a super-atomic wedgie after the company warned Wall Street that their fiscal Q2 would be below expectations. Wall Street had been expecting $1.08 per share, but BBBY said that earnings would range between 97 cents and $1.03 per share. Traders totally freaked and sent shares of BBBY from $74 all the way down to $58.

    For fiscal Q1 (which ended in May), I predicted that BBBY could earn as much as 88 cents per share, which was four cents above Wall Street’s consensus. In fact, the company reported earnings of 89 cents per share. Nevertheless, the weak earnings guidance was too much to overcome.

    In the CWS Market Review from June 22, I said that the selling was “way, way WAY overdone.” Fortunately, I was right. Since bottoming out in late-June, shares of BBBY have steadily rallied. On Thursday, the stock closed above $70 for the first time in three months. BBBY is still a good stock, and business is going well, but let’s be smart here and not chase it. I’m keeping my Buy Below price at $70.

    Oracle has been one of our best stocks this year. The company beat expectations in March and June, although the stock had a terrible month in May. This earnings report will be for their fiscal Q1. The company said that earnings should range between 51 and 55 cents per share, which is almost certainly too low. They earned 48 cents per share for last year’s Q1. Look for an earnings surprise. I’m raising my Buy Below price on Oracle to $35 per share.

    That’s all for now. Don’t forget to check out the new “Buy Below” column on the Buy List page. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: September 14, 2012
    , September 14th, 2012 at 6:35 am

    Bernanke’s Battle for Jobs Eclipses Inflation Concerns

    Asian Shares Rally On Fed Stimulus Measures

    European Stocks Seen Sharply Higher on Fed Boost

    Spain’s Aid Dilemma Takes Center Stage at Euro Crisis Meeting

    Prices Surged for Producers in August

    Gold At Six-Month High As Fed Fans Inflation Risk

    Oil Climbs to Four-Month High on Fed Stimulus Plan

    Fossil Fuel Industry Ads Dominate TV Campaign

    Huawei: Australia Law Could Exclude China Firms

    Home Depot to Shut Seven China Stores, Take $160 Million Charge

    Facebook Outperforming Google in Ad Revenue From Browsing

    Berkshire Posts 25% Intel Gain by Shunning Buy-and-Hold

    A Bump in Path to Wall Street

    Cullen Roche: A Disturbing Look Inside the Mind of Ben Bernanke

    Joshua Brown: The New Rules

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  • Homebuilders Approve
    , September 13th, 2012 at 1:23 pm

    Here’s another way of looking at today’s news. Check out the action of the Homebuilder ETF ($XHB). You can tell that it approves of today’s Fed news.

  • Today’s Fed Statement
    , September 13th, 2012 at 12:38 pm

    I’ve doubted that the Fed was going to take on more quantitative easing but it appears they’re going to give it a try.

    In short, the Fed is going to buy $40 billion per month of agency mortgage-backed securities. They’re also going to continue their policy of extending the maturity of their bond holdings (otherwise known as Operation Twist). This means selling short-term debt and buying long-term debt. Finally, the Fed is going to continue to reinvestment the dividends of their mortgage-backed securities into more mortgage-backed securities. Probably the biggest news is that the Fed now says that a highly accommodative stance is needed even after the economy shows signs of recovery.

    Here’s today’s Fed statement.

    Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months.  Growth in employment has been slow, and the unemployment rate remains elevated.  Household spending has continued to advance, but growth in business fixed investment appears to have slowed.  The housing sector has shown some further signs of improvement, albeit from a depressed level.  Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.  Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

    To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.  These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

    The Committee will closely monitor incoming information on economic and financial developments in coming months.  If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

    To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.  Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

  • You’re Almost Always Exposed to Some Variable You Didn’t Realize
    , September 12th, 2012 at 10:29 am

    Blogger King Felix Salmon has a good post highlighting the relative performance of mutual funds. Or more accurately, the consistent underperformance of most actively managed mutual funds.

    What I find interesting is that the relative performance of the actively managed funds is fairly strongly correlated with the relative performance of small-cap stocks. It’s not so much that active managers suddenly got dumb one year after being smart the year before. It’s more about sector rotation.

    It’s not so much that active managers “decide” to be in small-caps. The aggregate of all mutual funds has to, by definition, show a small-cap bias. The reason is that actively managed funds need to be diversified, and, ideally for them, not correlated with the indexes.

    What’s most fascinating is that the relative performance of active managers is related to small-cap relative performance even in asset classes outside of small-caps. What this probably means is that within any sector, let’s say large-cap, the active managers crowd into the small-caps of that sector. Hence the small-cap bias still lives.

    We can add another twist that small-caps’ outperformance is somewhat correlated with the dollar since larger companies have greater foreign exposure. The lesson for investors is that you’re often exposed to some market or variable even when you think you’re not.

    Consider the case of Long-Term Capital Management. In 1998, the hedge fund found out that when Russia defaulted on its debt, that impacted many of their trades. They had no idea they were so heavily exposed to such an event.