Author Archive

  • Keynes on the Gold Standard
    , October 4th, 2011 at 11:03 am

    (via Matt Yglesias)

  • Bernanke Speaks!
    , October 4th, 2011 at 10:21 am

    Welcome to a bear market! The S&P 500 is now over 20% below its April high.

    Big Ben is speaking before Congress today. Here’s a sample:

    To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal would be a substantial step; however, more will be needed to achieve fiscal sustainability.

    A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.

  • Morning News: October 4, 2011
    , October 4th, 2011 at 5:37 am

    EU Signals Bigger Losses for Bondholders on Greek Bailout

    Belgium, France May Act To Help Stricken Dexia

    Macau Gambling Revenue Rises 39% in September

    Gold Hits 1-Week High On Greece Deficit Miss

    Crude Oil Declines to Eight-Week Low on U.S. Supplies, Libyan Production

    Market Nears Bear Territory

    Protests Against Wall Street Spread Across U.S.

    U.S. Senate Backs Tough China Trade Moves

    U.S. Vehicle Sales Soared Nearly 10% in September, Despite Economic Gloom

    Toyota, Honda Lose Market Share in September U.S. Sales Rebound

    BMW Rides X3 to U.S. Luxury Sales Lead

    UBS Sees ‘Modest’ Profit After Trading Loss

    Before Latest Phone Debut, Apple Has Harsher Competition

    American Airlines Resumes Pilot Talks as Stock Rout Shows Bankruptcy Concern

    Joshua Brown: In Case You Haven’t Noticed, the Protesters are Winning

    Phil Pearlman: Dark Songs For A Stock Market Crash via @Dinosaurtrader

    Be sure to follow me on Twitter.

  • Surveying the Damage
    , October 3rd, 2011 at 10:50 pm

    Ugh! Monday was a rotten day for the stock market. Let’s survey some of the damage.

    The S&P 500 plunged 32.19 points or 2.85% to close at 1,099.23 which is the lowest close in 13 months. The index now has its lowest trailing Price/Earnings Ratio in over 22 years. The S&P 500 is trading at just 11.69 times earnings which it hasn’t done since March 30, 1989.

    As bad as today was for the S&P 500, the small-cap stocks did much worse. The Russell 2000 ($RUT) plunged 5.38% and the S&P Small-Cap 600 ($SML) lost 5.06%. The large-cap S&P 100 ($OEX) lost “only” 2.59% while the Dow dropped 2.36%.

    Smaller stocks tend to be more cyclically focused. The Morgan Stanley Cyclical Index ($CYC) lost 3.6% to close at 737.63. That’s the CYC’s lowest close since November 4, 2009.

    Looking at the S&P sectors, the financials were once again the biggest losers. The Financial Index dropped 4.53%. The Financial Sector ETF ($XLF) is down to $11.28.

    Several major banks are now selling at distressed valuations. Shares of Bank of America ($BAC) plunged through the $6 barrier to close at $5.53. The stock has been chopped in half in just three months. Shares of BAC are about where they were in December 1985.

    During the financial crisis, BAC cut its dividend from 32 cents per share to one penny per share, just to say that they’re still paying a dividend. Well at four cents per year, that yield comes to 0.72% which isn’t far from a five-year Treasury yield of 0.88%.

    We’re now seeing many major financial firms with yields north of 3.5%. AFLAC ($AFL), an S&P Dividend Aristocrat, now yields 3.57%.

    Once again, the big worry today was Europe. Bloomberg noted that the cost to protect against default on European corporate debt nearly reached a three-year high today. The strange fact is that the recent economic data has been fairly positive. The folks at Bespoke Investment Group pointed out that 17 of the last 21 economic reports have been better than expected. Of course, much of that data is past news.

    To give you an idea of how low the valuations are, if we assume that the market is going for 14 times next year’s earnings, that would mean that earnings would have to drop 20% next year. Earnings are currently expected to rise over 13% next year.

  • S&P 500 = 1,099.23
    , October 3rd, 2011 at 4:06 pm

    The trading range has been broken. For the first time since September 8, 2010, the S&P 500 closed below 1,100.

  • Still Beating the Market But Barely
    , October 3rd, 2011 at 11:56 am

    Our Crossing Wall Street Buy List has beaten the S&P 500 for the last four years in a row.

    We have a good shot of making it five in a row this year, but it may be very close. Through the first three quarters of 2011, the Buy List is down 9.81% compared with a loss of 10.04% for the S&P 500.

    Once you include dividends, our Buy List is down 8.64% compared with 8.68% for the S&P 500. In other words, we’re beating the market by just four basis points this year.

  • A Higher VIX Points to Higher Stocks?
    , October 3rd, 2011 at 11:08 am

    I’m generally very skeptical of any attempt to tie VIX levels to equity returns, but this caught my eye:

    The VIX has closed above 40 a total of 166 times since it began on Jan. 2, 1990, data compiled by Bloomberg show. Adjusted to group together periods when it fluctuated around that level over 30 days, the S&P 500 returned 3.2 percent in the next three months and 19 percent over the next year, the data show.

  • September ISM = 51.6
    , October 3rd, 2011 at 10:41 am

    Today we got more news that the Double Dip recession still isn’t upon us. The Institute for Supply Management reported that the factory index for September clocked in at 51.6. That was up from 50.6 in August. Wall Street was expecting 50.5.

    Any number above 50 means that the economy is expanding; below 50 means it’s contracting. As an economic indicator, I like the monthly ISM for a few reasons. First, it comes out on the first business day of the month. Second, it’s not subject to countless revisions. But I particularly like the ISM because it has a decent track record of lining up with official recessions. Note how well a dip in the ISM lines up with the gray recession bars.

    I’ve broken down the numbers and whenever the ISM falls below 45, there’s a very good chance that the economy is in an official recession as declared by NBER, the established recession dating committee.

    A reading of 51.6 is hardly outstanding but it does run counter to the nonstop Double Dip fears that have dominated the news lately. Since 1948, the ISM has come in between 50 and 52 a total of 88 times and 28 were recessions.

    At the beginning of the year, the ISM came in over 60 for four-straight months and hit some of the highest levels in decades. Then in May and again in July, it collapsed which helped spread the Double Dip fears.

  • Morning News: October 3, 2011
    , October 3rd, 2011 at 5:39 am

    Greece Approves $8.8 Billion Austerity Package

    ECB’s Noyer: French Bank Exposure Exaggerated

    Euro Drops to 8-Month Low Versus Dollar

    Japan’s Tankan Survey Shows Rebound

    Asia’s Factories Downshift to Crisis-era Lows

    Oil Falls After Closing at One-Year Low as Europe Ministers Meet

    Others Go, but Buffett Stays on Side of President

    Economy to Be a Challenge for New Military Chief

    Ma’s Alibaba Turns to Potential Bidder From Investment for Yahoo

    Sony Tumbles to 24-Year Low on Outlook, Yen

    Apple Loses to RIM in India Smartphone Market

    A U.S.-Backed Geothermal Plant in Nevada Struggles

    Clear Channel Owner Names Pittman as CEO to Lead Digital Advance

    PwC Reports Record $29.2 Billion Revenue, Regains Lead

    Edward Harrison: Currency Revulsion

    Epicurean Dealmaker: If the Phone Don’t Ring, You’ll Know It’s Me

    Howard Lindzon: Guest Post: Chartly Is an Idea Generating Machine

    Be sure to follow me on Twitter.

  • CWS Market Review – September 30, 2011
    , September 30th, 2011 at 7:35 am

    I’m happy to see this ugly third quarter end. This will be the market’s worst quarter for stocks since 2008. For the last several weeks, the stock market has been stuck in a tight trading range. The S&P 500 has now closed inside a 100-point gap—between 1,119 and 1,219—for 40-straight trading sessions.

    Frankly, being caught in a trading range is frustrating. Every rally is quickly met with a sell-off, and every sell-off is quickly turned around. Thursday, in fact, was a microcosm of the last two months. The S&P 500 soared as high as the level of a 2.16% gain early in the session. Then stocks delivered a collapse worthy of the Red Sox. By 3 p.m., the market was down nearly 1%. That’s a peak-to-trough drop of more than 3%. Yet in the last hour, we rallied to close higher for the day by 0.81%.

    In this issue, I’ll explain the dynamic driving this back-and-forth market. Fortunately, this may soon come to an end. By mid-October, the third quarter earnings season will be ramping up and we’ll get a chance to see how well corporate America did during the third three months of the year. This could be what the market needs to finally break out of its trading range. One historical note is that since 1945, whenever the market has tanked by 10% or more in the third quarter, the fourth quarter has gained an average of 7.2%.

    I should warn you that since early June, Wall Street analysts have been paring back their earnings estimates for the third quarter. At one point, the consensus estimate was as high as $25.03 but it’s now down to $24.64 which is still a pretty good number. That’s not a huge downgrade, but analysts are clearly becoming more cautious and they’re lowering their forecast for Q4 and for 2012 as well. Analysts have a tendency to trim their numbers right before earnings season starts. The good news is that earnings have topped expectations for the last 10 quarters in a row. I’m not certain that this will be the 11th, but it may be close.

    As an aside, I should say that I don’t place a great deal of faith in Wall Street’s forecasts. Some people like to dismiss these forecasts out of hand which I think is a mistake. Here’s the key: In the short-term, analysts’ forecasts really aren’t so bad.

    As a general rule, analysts move in two modes. They either slightly underestimate earnings or they vastly overestimate earnings. The former is the rule of thumb during an expansion and the latter happens when the economy falls apart. Where analysts are horrible is in seeing the turning points. As such, I don’t rely on them for that. The analysts are very good at predicting that the trend will continue, which sounds harsher than I mean it to sound.

    For last year’s third quarter, the S&P 500 earned $21.56 so the current estimate translates to having a growth rate of 14.3%. For the fourth quarter, Wall Street sees earnings of $25.98 which would be earnings growth of 18.5% over last year. That strikes me as being too high, so I’ll expect earnings to be cut back over the next several weeks. Either way, the Q3 results will be the determining factor in setting expectations for Q4. I’ll feel a lot better when the S&P 500 breaks above its 50-day moving average which is currently at 1,200.

    Unfortunately, the stock market has been held captive lately by events in Europe—more specifically, the prospects for the Greek economy. The good news is that the German parliament just approved an expanded bailout fund. The bad news is that the fund has to be approved by all 17 countries that use the euro and that’s not going to be easy. Markets around the world have been severely rattled recently. Worldwide, initial public offerings are being shelved at a record pace.

    We’re currently in an “all or nothing market.” Each day, the market tends to shoot up a lot or get hammered hard. Whenever there’s good news out of Europe or from the U.S. Fed, we see all the sectors of the market rally strongly. Usually, financials do the best while gold and bonds do poorly and volatility rises. When the news is bad, the exact opposite happens. It’s as if all the passengers on a boat rush frantically from one side to the next. There’s little in between.

    Look at some of these numbers: In August and September, the S&P 500 closed up or down by more than 2% 17 times. In the 12 months before that, it happened just nine times. In the last two months, stocks and bonds have moved in opposite directions nearly 75% of the time. Only recently has gold broken from bonds and moved downward in a serious way.

    I’ll give you a good example of the irrationality of the “all or nothing market”: Shares of AFLAC, ($AFL) soared 6% on Thursday. I love AFLAC, but I’m sorry: their business is just too boring to move around that much in one day. The problem isn’t the business. The problem is the mindless traders trying to use AFL as a proxy bet on Europe. (AFLAC’s finances are fine as we’ll see when they report next month.)

    Volatility is a topic that causes confusion among many investors and it’s misunderstood by many professionals as well. Increased volatility isn’t necessarily bad for stocks. In this case, the increase in volatility is a reflection of two warring theses for the economy’s future. The market is trying to decide whether investors will rotate out of Treasuries and take on greater risk in stocks or whether stocks will continue to languish as investors seek protection in bonds. It’s this tug-of-war that has kept the S&P 500 locked in its trading range. Given the absurd prices for bonds and depressed earnings multiples for stocks, the smart money is on higher stocks, lower bonds and decreased volatility. Consider that right now, there’s currently over $2.6 trillion sitting in money market funds earning an average of 0.02% per year.

    We’re already seeing signs that one side is starting give way. Gold, for example, has been crushed over the past three weeks. Also, previous “can’t-lose” stocks like Netflix ($NFLX) are feeling the pain. They key is that the trends that were consistently winning no longer are. As a result, investors will start to key in on overlooked trades. I can’t say when this will happen, but earnings season seems like a prime catalyst.

    The Volatility Index ($VIX) closed Thursday at 38.84. That means that the market believes the S&P 500 will swing by an average of plus or minus 11.23% over the next month. Let’s compare that with the recent auction for seven-year Treasuries which went for a record-low yield of 1.496%. That means that the zero-risk return for the next seven years in Treasury debt is roughly equal to the one-month volatility—not return, just average expected swing—of stocks.

    It’s like the old saying that “a bird in the hand is worth two in the bush.” If that saying were revised for today’s market it would be “a bird in the hand is worth 30,000 in the bush!”

    In last week’s CWS Market Review, I highlighted some high-yielding stocks on our Buy List like Abbott Labs ($ABT), Johnson & Johnson ($JNJ) and Reynolds American ($RAI). I still like those stocks a lot. Interestingly, shares of Nicholas Financial ($NICK) have been weak lately. The stock is normally a very strong buy, but it’s exceptionally good if you can get it below $10 per share.

    One of the few cyclical stocks on the Buy List is Moog ($MOG-A). The stock has been trashed along with most other cyclicals, but don’t make the mistake of lumping Moog in with everybody else. This is a very good company. Last quarter, Moog beat earnings and raised guidance. The stock is now going for about 10 times’ guidance. Moog is a very good buy up to $36 per share.

    That’s all for now. Be sure to keep checking the blog for daily updates. Next week, Wall Street will be focused on Friday’s jobs report. Expect more bad news, I’m afraid. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy