Author Archive

• Morning News: April 2, 2013
  Eddy Elfenbein, April 2nd, 2013 at 6:31 am

  Unemployment in Euro Zone Reaches a Record High of 12 Percent

  Cypriots Feel Betrayed by European Union

  Chinese Factories Rise But U.S. Manufacturing Slows

  Abe Says BOJ May Miss Price Target If Global Economy Changes

  Low-Cost Drugs in Poor Nations Get a Lift in Indian Court

  Stockman Sundown Belied by Stocks Showing Morning for Investors

  Nasdaq to Buy Treasurys Platform for Up to $1.23 Billion

  Raw-Material Bull Market Fading as Supply Expands

  Airlines Rejected by Top Court on Price Advertising Rules

  Apple CEO Cook Apologizes for China IPhone Warranties

  A $25 Million Question Over a Bid for Dell

  Glencore Pushes Back Xstrata Deal Due To China Probe

  Wal-Mart Customers Complain Bare Shelves Are Widespread

  Roger Nusbaum: Barron’s Picks Up A Random Roger Theme?

  John Hempton: Cupid PLC’s Strange Balance Sheet

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• The Stock Market Since 1925
  Eddy Elfenbein, April 1st, 2013 at 1:37 pm

  I just got the latest edition of the Ibbotson SBBI Yearbook. This is a well-known resource for investors which covers the long-term data on stocks, bonds, bills and inflation. Over the next few days, I’ll post some of the charts from the updated yearbook.

  I’m always a bit leery of studies of long-term market returns, especially when the study goes into the 19th century. The idea of a stock market that the average consumer can participate in is a relatively recent phenomenon.

  Here’s a chart of the stock market’s return since 1825. The red line is capital gains, the blue is dividends and the black is both together. After 188 years, one dollar turned into more than $4.2 million; annualized, that comes to 8.45%. Of that, 5.02% is from dividends and 3.27% is from capital gains.

  

  Before the bull market of the 1920s, the stock market was almost entirely one of dividends. You’d buy a stock near its par value (usually $100) and wait for the board of directors to declare the dividend each year—and that was the stock market.

  Think of it this way: during the last third of the 19th century, inflation fell by about 2% per year on average. If you were getting a stock that paid 5% per year in dividends and had zero capital appreciation, you were basically matching long-term real returns. That idea is very foreign to modern investors, but that’s how things worked back then. The idea of steadily rising capital gains is not a constant.

  The phrase “this time is different” is often mocked but the bull market of the 1920s really did permanently change the market from one that focused on dividends to one that focused on capital gains.

  Another concern I have is that using this long-term data creates overly optimistic expectations. I doubt that the extraordinary success of the United States over the past 180 years is easily repeatable. Even in the more recent past, I think the era of post-World War II prosperity was a one-off deal.

• Dividends Continue to Rise
  Eddy Elfenbein, April 1st, 2013 at 11:25 am

  The dividend numbers are in for the first quarter and the S&P 500 paid out $7.954 per share (that’s an index-adjusted figure). This was a 12.2% increase over the first quarter of 2012 and it marks the ninth-straight quarter that dividends have grown by double digits.

  Due to tax reasons, there was a surge of dividends in Q4. Dividends rose more than 22.7% over the fourth-quarter of 2011, but I’m glad to see that the dividend trend still continues. For the last four quarters, the S&P 500 has paid out $32.112. At 2%, that comes to 1,605.60.

  Here’s a look at the S&P 500 (in blue, left scale) and its dividend (in black, right scale). The two lines are scaled at a ratio of 50-to-1 so whenever the lines cross, the market’s dividend yield is exactly 2%.

  

  What I find interesting is that this latest bull market seems much more solid than the previous two, especially the tech boom of the late 1990s. Dividends have been rising quite steadily. Except for the worst part of the financial crisis, the S&P 500 has mostly had a dividend yield of about 2% for the last 10 years.

• Weak ISM Leads the Market Lower
  Eddy Elfenbein, April 1st, 2013 at 11:01 am

  The market is down so far this morning (and month and quarter). The March ISM came in at 51.3 which is down from February’s surprisingly strong 54.2.

  Any reading above 50 indicates that the manufacturing sector is expanding. Below 50 means it’s shrinking. Forty-three of the last 44 months have been above 50.0. Although today’s ISM is weaker than expected, today’s report is still well above the danger zone.

  

• Morning News: April 1, 2013
  Eddy Elfenbein, April 1st, 2013 at 6:08 am

  As Banks in Cyprus Falter, Other Tax Havens Step In

  Russia Won’t Help Out Cyprus Depositors, Says Minister

  Lira Bonds Worst Performer as Policy Confuses: Turkey Credit

  Pessimism Declines Among Japan’s Big Manufacturers, Survey Shows

  China Manufacturing Expands at Faster Pace, PMI Gauges Show

  China’s Urbanization Drive Leaves Migrant Workers Out In The Cold

  Michael Dell Said to Consider Blackstone LBO Only With CEO Guarantee

  Drug Maker Novartis Loses India Patent Battle

  E-Commerce Companies Bypass the Middlemen

  What The Rise Of Bitcoin Teaches Us About Money

  Discovery Expands Its Reach Overseas

  Insider Case Against SAC Manager May Be Tough To Prove

  Edward Harrison: Buiter: ‘It Was Clear That Cyprus Was A Laboratory’

  Jeff Miller: Weighing The Week Ahead: Signs Of Another Economic Soft Patch?

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• The Howling Fat Men of the Coen Brothers
  Eddy Elfenbein, March 29th, 2013 at 3:41 pm

• First-Quarter Market Performance
  Eddy Elfenbein, March 29th, 2013 at 2:31 pm

  Here’s how different sectors performed during the first quarter of 2013. I also included the S&P 500 Total Return.

  Sector	Market Cap (bil)	Index	Q1 Gain
  Energy	$1,526	583.98	9.57%
  Materials	$480	247.52	4.17%
  Industrials	$1,413	361.89	10.08%
  Cons Disc	$1,625	420.27	11.76%
  Cons Staples	$1,532	410.47	13.77%
  Health Care	$1,752	533.42	15.22%
  Financials	$2,226	245.41	10.92%
  Info Tech	$2,519	483.34	4.21%
  Telecom Svc	$415	158.01	8.20%
  Utilities	$490	198.69	11.84%
  S&P 500	$13,979	1,569.19	10.03%
  S&P 500 Total Return		2,770.05	10.61%

• CWS Market Review – March 29, 2013
  Eddy Elfenbein, March 29th, 2013 at 7:42 am

  “See, the stock market only deals in facts, in reality, in reason, and the
  stock market is never wrong. Traders are wrong.” – Jesse Livermore

  Ladies and gentlemen, it finally happened. Write down this date: Thursday, March 28, 2013, A.D. That’s the day the S&P 500 finally (finally!) closed at a new all-time high. The official close was 1,569.19, which breaks the old record of 1,565.15 set on October 9, 2007. That was 1,997 days ago. It’s hard to believe that it took us five-and-a-half years to get back to the peak of the bubble. Of course, maybe we’re lucky. The Dow didn’t break its 1929 peak for more than a quarter of a century.

  Now that the first quarter is on the books, our Buy List gained 8.01%, which trails the S&P 500’s gain of 10.02% (dividends not included). I’m happy with the gain, but my competitive spirit doesn’t like losing to the market. We’ve beaten the market for six years in a row, and I’m confident we will do so again in 2013. As always, patience and discipline are our keys. Speaking of which, later on I’ll talk about DirecTV ($DTV), which suddenly sprang to life after traders ignored a blow-out earnings report.

  

  Measured from its low close on March 9th, 2009, the S&P 500 has now gained an amazing 131.95%. If we include dividends, investors have made 152.96%, and our Buy List has done ever better. Over the last two weeks, the index had a heck of a frustrating time lurching past the goal line. On seven of the ten days before Thursday, the S&P 500 had gotten above 1,560 during the day but had never broken 1,565. Early in the day on Thursday, the S&P 500 even went up to 1,565.14, just a measly 0.01 away from the previous high, before retreating. We didn’t break though the magic market number until about 30 minutes before the close. I should add that trading volume has been pretty tame this week. I think a lot of traders are getting a head start on the three-day weekend.

  In this week’s CWS Market Review, I want to take a look at the upcoming first-quarter earnings season. For several months, analysts have been paring back on their forecasts for Q1, but we’ll get to see the results soon. Investors need to understand that earnings season is Judgment Day for Wall Street, and that’s when we learn who’s been performing well and who hasn’t.

  What to Expect This Earnings Season

  The market is closed on Friday for Good Friday, so that means that Thursday was the final trading day of the first quarter. Overall, it was a very good quarter for the stock market. I’m pleased to say that T.S. Eliot had it wrong. Far from being the cruelest month, April has been pretty good for investors. The Dow has risen for the last seven Aprils in a row. Let’s hope we can make it eight, but that will depend on earnings season.

  According to the numbers from S&P, Wall Street expects the S&P 500 to report earnings of $25.51 for the first quarter. Just to be clear, that’s the index-adjusted number (every point in the S&P 500 is worth about $8.9 billion).

  Nine months ago, Wall Street was expecting earnings of $27.71 for Q1. It’s interesting that the market has climbed more than 15% since then, even though earnings estimates are 7% lower. I think this is less due to the market’s overvaluation of today and more because of the big undervaluation of last summer. If you recall, traders were extremely nervous about events in Europe. You can really see how much Mr. Draghi’s famous promise to “do whatever it takes to preserve the euro” comment changed the market’s sentiment.

  If Wall Street’s forecast is correct, then Q1 earnings will represent an increase of 5.2% from the first quarter of 2012. It will also break the two-quarter streak of profit declines. Lakshman Achuthan of the Economic Cycle Research Institute got a lot of attention recently when he made a bold forecast that the U.S. is in a recession. Achuthan was criticized by most sensible analysts and I, too, think he’s way off base. But one of his reasons was that back-to-back quarters of earnings decline often line up with recessions. Well, it looks like this time will be an exception.

  The earnings outlook appears to be changing. Wall Street currently expects earnings to accelerate for the rest of this year, meaning the rate of growth will itself increase. I continue to be a bit skeptical of exactly how strong this re-acceleration will be. A lot of this depends on our friends from Europe. Some areas are already showing improvement. Right now, the analyst community expects full-year earnings for the S&P 500 of $111.16. That would be a healthy 14.80% increase over 2012. Furthermore, the Street expects the S&P 500 to rake in $124.77 for 2014, which would be a 12.24% increase over this year. Breaking out some math, this means that the S&P 500 is going for just over 12.5 times next year’s earnings. That’s quite attractive, compared with a 10-year Treasury that fetches you a puny 1.85%.

  This favorable math isn’t exactly a secret. Over the past few days, some of the big-name firms on Wall Street have been raising their year-end targets for the S&P 500. Bull markets tend to do that. Morgan Stanley just raised their target from 1,434 to 1,600. Goldman raised their target by 50 points to 1,625. Deutsche Bank increased theirs from 1,600 to 1,625.

  Of the ten S&P 500 sectors, the largest growth is expected to come from the financials. Profits for the financials are expected to rise by 19.08%, which is more than double their closest rival (consumer discretionary at 6.52%). This is good news for our financial stocks like JPMorgan ($JPM) and Wells Fargo ($WFC). Wall Street expects JPM to report earnings of $1.38 per share, which is a 16% increase over last year’s Q1. Remember, of course, that JPMorgan has made a nice habit of trouncing Wall Street’s forecasts. For last year’s Q2, they beat analysts by more than 70%! The Street expects 88 cents per share from Wells, which would be a 17.3% increase over last year. Both WFC and JPM remain very good buys.

  Buy DirecTV up to $59 per Share

  In mid-February, DirecTV ($DTV) had a great earnings report. The satellite TV company crushed earnings by 42 cents per share. Unfortunately, traders were spooked by an earnings charge due to the currency devaluation in Venezuela. I thought that was pretty minor stuff, but it was enough to bring the stock down below $48 per share. I’ll never understand traders. DTV’s earnings report was about as good as it could be. Sure enough, once all the suckers got cleared out, the stock started to rally. The shares also got a bump after the company wisely pulled out of the bidding for Vivendi’s Brazilian division. Now we’re sitting on a rather nice gain. On Thursday, DTV got as high as $57.64. DirecTV continues to be an excellent stock. I’m raising my Buy Below to $59 per share.

  Before I go, I want to name some of the stocks that look especially good on our Buy List. First is Harris ($HRS). Its solid dividend is ideal for conservative investors. HRS is a buy up to $53. Bed Bath & Beyond ($BBBY) continues to look very good. The home-furnishings store will report earnings on April 9th. That will be for their important fourth quarter, which ends in February. I’m raising my Buy Below on BBBY to $65. There’s no news on Nicholas Financial ($NICK). Don’t be alarmed by the volatility here. Traders are going on absolutely nothing. I’ll let you know once there’s real news. Let me put in a final word for boring old Microsoft ($MSFT). Business is improving, and the 3.2% yield ain’t bad. MSFT is a solid buy up to $30.

  That’s all for now. Remember, the stock market is closed on Good Friday, and Monday is the start of Q2. Next week, we’ll get a look at the ISM report for March. The report for February was surprisingly good. The ADP jobs report will come out on Wednesday. Then, next Friday, the government releases its big jobs report. Wall Street forecasts that 185,000 jobs were created in March. 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: March 29, 2013
  Eddy Elfenbein, March 29th, 2013 at 7:20 am

  Cyprus President Confident Crisis ‘Is Contained’

  Norms on Baguette Size to Windows Choking France, Report Says

  Japan’s Jobless Rate Up To 4.3%; Prices, Manufacturing Fall

  Cyberattacks Seem Meant to Destroy, Not Just Disrupt

  Economy Up 0.4% in Fourth Quarter

  Jobless Claims Rise, But GDP Data Shows More Growth

  U.S. Clean-Gasoline Rule Opposed by Oil Group Said Near

  Amazon Buys Book-Recommendation Site Goodreads

  Sprint Nears a U.S. Deal to Restrict China Gear

  Amazon, Overstock Lose Challenge to N.Y. Web Sales Tax

  Underappreciated Consumer Stars In S&P 500 Rally

  Should the Government Finance New-Energy Technologies?

  Is Steven A. Cohen Buying Off The U.S. Government?

  Joshua Brown: The Lurkers of Wall Street

  Phil Pearlman: 2nd Quarter Outlook: Waiting for Godot…

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• We’re an All-Time High
  Eddy Elfenbein, March 28th, 2013 at 4:01 pm

  1,569.02.