Author Archive

  • The Onion: “Economists Gently Suggest American Manufacturing Maybe Start Again With Something Simple Like A Ball”
    , May 27th, 2011 at 10:33 am

    The Onion has the news:

    WASHINGTON—After conducting an in-depth analysis of the nation’s industrial output and long-term economic future, leading economists delicately suggested this week that maybe American manufacturers might want to think about abandoning their current products and start over with something nice and simple, such as a ball.

    Claiming that the nation’s standing within the increasingly competitive global marketplace was perhaps not what it once was, the economists gently encouraged American producers to “wipe the slate clean” and rebuild their confidence by starting fresh with a plain, basic ball.

    “You really shot for the moon and tried to do something grand, and we think that’s just great,” read a statement from the American Economic Association that was addressed to the nation’s manufacturing sector. “But let’s face it, the whole American manufacturing thing hasn’t worked out quite as well as we’d hoped, so we think there’s no shame in just paring down your ambitions slightly and focusing on making a really good ball, no more, no less. How does that sound?”

    “Just give it a shot; it couldn’t hurt, right?” the statement continued. “We think you’d be really good at it.”

    Echoing the AEA’s statement, economists nationwide have carefully prodded manufacturers to adopt the ball-making plan. They have reportedly advised producers not to worry themselves with complex questions of whether the ball should be hollow or solid, suggesting instead that they focus solely on believing in themselves and making the best ball they can.

    “American manufacturers are ambitious and they’re naturally going to want to add flashing lights and microchips to the ball,” said industrial economist Rick Mattoon of Northwestern University. “But we think it would be a good idea if they fully mastered the fundamental aspects of the ball before moving on. For example, manufacturers should ask themselves, ‘Is our product round? Does it roll?’ If not, then they should just keep at it—we know they’ll get the hang of it eventually.”

    “Once they’ve demonstrated proficiency, then they can try something more ambitious, like a red ball or a green ball or even a ball that bounces,” Mattoon added.

    The AEA also proposed that U.S. manufacturers convene at a central location where they could all learn the ball-making procedure up close, with each company having the opportunity to observe and participate in the assembly of a ball before returning to their own factories to attempt the process themselves.

    A guide released by the AEA not only provides step-by-step ball-fabrication instructions, but also contains supportive and encouraging language aimed at instilling in manufacturers the idea that they are every bit as deserving of success as rising industrial powers such as China and Brazil.

    “As long as everyone tries their hardest at making a good ball, there’s no reason the U.S. can’t reemerge as a world-class manufacturing nation,” AEA vice president Timothy Bresnahan said. “Optimistically, by the end of the decade we could see a flourishing industry that produces everything from a dowel to a cup to a different-sized ball.”

    The response within the American manufacturing sector has thus far been overwhelmingly positive, with hundreds of aerospace, home appliance, and electronics corporations readily discontinuing their more complicated products in favor of a simple little ball.

    “We switched our equipment over to ball-production two days ago and things couldn’t be going better,” said Daniel Akerson, chairman and CEO of General Motors. “We’re making 15 tons of balls a day, they’re coming out nice and round, and we’re just overjoyed with how much we’re accomplishing. I’d completely forgotten how great it feels to make a product you’re actually proud of.”

    As of press time, all 4.1 million balls so far produced by U.S. manufacturers had been recalled for posing a choking hazard and leaching dangerous toxins.

  • CWS Market Review – May 27, 2011
    , May 27th, 2011 at 7:56 am

    In the March 4th issue of CWS Market Review, I told investors to expect a range-bound for much of this spring and that’s largely what we’ve seen. Every rally seems to fizzle out after a few days, and every sell-off is soon met with buying pressure.

    Consider this: Over the last two months, the S&P 500 has closed between 1,305.14 and 1,348.65 over 86% of the time. That’s a range of just 3.33%. Even going back to February 4th, we’ve still remained in that narrow range nearly 80% of the time. The Dow hasn’t had a single four-day losing streak since last August.

    Let me caution you not to get frustrated by sideways markets. This is how markets typically work. After impressive rallies, investors who got in early like to cash out their chips. This is known as a consolidation phase. Although the market may seem to be spinning its wheels, there’s a lot of action going on just below the surface.

    This week, I want to take a closer look at some of these hidden currents. As I’ve discussed before, the market is rapidly changing its leadership away from cyclical stocks. In fact, the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500 nearly broke through 0.8 this week for the first time in six months. Cyclicals have underperformed the broader market for nine of the last 12 trading sessions, and most of the worst-performing sectors this month are cyclical sectors. This trend will only intensify.

    The other important change is that the bond market has turned around, and it’s been much stronger than a lot of people expected. After the Fed announced its QE2 plans last August, bond yields started to rise, especially for the middle part of the year curve (around five to 10 years). Beginning late last year, the yield on the five-year Treasury more than doubled in just a few weeks. This was part of a larger shift as investors moved out of safe assets and into riskier asset classes. I’d like to say that I saw this coming, but I merely followed the path laid out for us by the Federal Reserve.

    Now bonds are hot again. The yield on the five-year treasury is at its lowest level of the year. The 10-year yield is close to breaking below 3% again. This week’s auction of seven-year notes had the highest bid-to-cover ratio since 2009. What’s happening is that investors are growing more skeptical of the U.S. economy and they’re seeking safer ground. Also, the fear of inflation is subsiding. In April, the inflation premium on the 10-year Treasury hit 2.67% which was its highest in three years. Today, the inflation premium is down to 2.26%.

    Many investors are also worried that the European sovereign debt crisis is getting worse. I think that’s correct. What you need to understand is that the shift back into Treasuries compliments the move out of cyclicals stocks. The common thread is a desire for less risk. This current is perfectly understandable and it helps our Buy List since most of our stocks are non-cyclical.

    For us, the takeaway is that the stock market will eventually break out of its trading range but it will be a more cautious and risk-averse rally. That’s good for us. Please don’t get frustrated by a churning market. It will come to an end before you know it. Until then, make sure your portfolio has plenty of high-quality defensive and non-cyclicals stocks such as the ones on our Buy List.

    Speaking of the Buy List, we had one earnings report this past week and it was a slight disappointment. Medtronic ($MDT) reported earnings-per-share of 90 cents for its fiscal fourth quarter which was three cents below Wall Street’s consensus. That’s not good news, but honestly, it’s not too bad.

    Over the last several months, Medtronic has repeatedly lowered its earnings forecast. As I like to say, these lower earnings revisions tend to be like cockroaches—there are a few more hiding for every one you see. But last August, Medtronic dropped below $32 which made it an outstanding buy. Since then, MDT has put on a nice rally that only broke down recently.

    With this past earnings report, Medtronic gave us a full-year earnings guidance range of $3.43 to $3.50 per share (their fiscal year ends in April). Wall Street had been expecting $3.62 per share. My take: I think the company has grown tired of lowering its forecasts so they decided to give us a low ball to start the year. Even so, let’s put this into proper perspective: Medtronic is currently going for 11.78 times the low-end of their forecast. That’s pretty cheap.

    With other companies, the lowered guidance would get to me, but Medtronic isn’t like most stocks. Some time in the next few weeks you can expect Medtronic to raise its dividend as it has every year for the past 34 years. That’s a very impressive record. Medtronic is a solid buy below $45 per share.

    The next Buy List earnings report will be from Jos. A Banks Clothiers ($JOSB). Three months ago, I said that Joey Banks looked like it was ready break out. How right I was. The shares are up over 20% since then. For the year, JOSB is up 37.52% for us and it’s our top-performing stock.

    The company hasn’t said when they’ll report yet, but they’ve historically released their Q1 report shortly after Memorial Day. I have to explain that JOSB’s annual earnings are heavily tilted towards their Q4 (November, December, January). About 40% of their profits for the year come during that quarter while the other 60% is divided up during the other three quarters. As a result, the upcoming earnings report isn’t nearly as crucial as the report from two months ago.

    For the coming earnings report, Wall Street’s consensus is for 65 cents per share which is probably a bit too high. JOSB’s earnings are hard to predict so a little leeway should be expected. For example, the earnings “miss” from six month ago clearly hasn’t hurt the stock. Joey B has a very compelling business model and this will very likely be their 20th straight quarter of higher earnings.

    I still think JOSB is a great stock, but if you don’t own, I urge you not to chase it. Chasing stocks is simply bad investing; good investors are disciplined about price. If you want to buy JOSB, wait until it falls below $50 per share. Patience, my friend. Patience.

    Some other Buy List stocks that look good right now include Deluxe ($DLX) which is a good buy up to $26. I love that 4% yield! The folks at Motley Fool have a good article explaining why DLX’s earnings are so strong. Fiserv ($FISV) is also looking strong. I rate it a good buy any time the shares are less than $65. Their board just approved a share repurchase of up to 5% of the outstanding shares. Lastly, I think AFLAC ($AFL) is a great buy below $50 per share. AFL is going for less than eight times my estimate for this year’s earnings.

    That’s all for now. The market will be closed on Monday for Memorial Day. I hope everyone has a great long weekend. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  • Morning News: May 27, 2011
    , May 27th, 2011 at 6:57 am

    Fitch Puts Japan Debt Rating On A Negative Outlook

    German Two-Year Notes Rise as Inflation Slows, Denting Interest-Rate Bets

    China Yuan Down Late On Dollar Demand From Oil Firms

    Greece: Political Leaders To Meet On Economic Crisis

    EU Vows No Backdown on Basel

    Brazil’s OGX Sells $2.56 Billion of Seven-Year Bonds in Debut Issue

    Gold, Sliver Up In Asia On Weak Dollar

    EBay and PayPal Sue Google Over Trade Secrets

    Former Nasdaq Manager Johnson Pleads Guilty to U.S. Insider Trading Scheme

    Heated Frenzy for Tech I.P.O.’s Fails to Ignite Freescale

    Microsoft’s Ballmer Bares China Travails

    Yandex Underwriters Exercise Full Overallotment Option

    AT&T’s $39 Billion T-Mobile Bid May Be Reviewed by California State Agency

    Epicurean Dealmaker: Hail Mary, Full of Grace

    James Altucher: The Nine Ways to Guarantee Success

    Howard Lindzon: Long 8 Days on the Road… The Web is Relentless and The Government Wants Higher Prices

    Be sure to follow me on Twitter.

  • P/E Ratios for Selected Financials
    , May 26th, 2011 at 12:19 pm

    Here’s a rundown of several large-cap financial stocks along with their earnings multiples based on next year’s earnings. Note how inexpensive many are. Of course, this also means that Wall Street has a rather dim view of earnings quality.

    Company Symbol Forward P/E
    Hartford Financial Services HIG 6.45
    Genworth Financial GNW 6.65
    Lincoln National LNC 6.68
    Bank of America BAC 6.69
    Assurant AIZ 6.90
    Goldman Sachs GS 7.08
    MetLife MET 7.40
    JP Morgan Chase JPM 7.47
    Citigroup C 7.52
    AFLAC AFL 7.59
    Unum Group UNM 7.83
    Morgan Stanley MS 7.84
    Wells Fargo WFC 7.99
    Prudential Financial PRU 8.16
    Allstate ALL 8.24
    Torchmark TMK 8.54
    SLM SLM 8.77
    The NASDAQ OMX Group NDAQ 8.78
    Fifth Third Bancorp FITB 8.83
    American International Group AIG 8.97
    Principal Financial Group PFG 9.00
    Capital One COF 9.06
    Ace Limited ACE 9.12
    Ameriprise Financial AMP 9.27
    Discover Financial Services DFS 9.36
    Huntington Bancshares HBAN 9.40
    Janus Capital Group JNS 9.43
    PNC Financial Services PNC 9.43
    U.S. Bancorp USB 9.66
    Bank of New York Mellon BK 9.71
    The Travelers TRV 9.78
    State Street STT 10.47
    Hudson City Bancorp HCBK 10.54
    BB&T BBT 10.68
    XL Group plc XL 10.70
    KeyCorp KEY 10.74
    Chubb CB 11.07
    Regions Financial RF 11.08
    Invesco Plc IVZ 11.18
    M&T Bank MTB 11.49
    NYSE Euronext NYX 11.71
    SunTrust STI 11.75
    American Express AXP 12.19
    Legg Mason LM 12.40
    Progressive PGR 12.66
    Franklin Resources BEN 12.75
    Zions ZION 12.81
    Federated Investors FII 12.96
    HCP HCP 13.13
    Loews L 13.20
    Comerica CMA 13.24
    Aon AON 13.30
    Equifax EFX 13.44
    Northern Trust NTRS 13.54
    First Horizon National FHN 13.55
    Health Care REIT S HCN 13.56
    E*TRADE Financial ETFC 13.96
    Host Hotels & Resorts HST 14.17
    Marsh & McLennan MMC 14.25
    CME Group CME 14.51
    Moody’s MCO 14.71

  • The Economy Still Isn’t Moving
    , May 26th, 2011 at 11:11 am

    The government updated its number for Q1 GDP growth today. Actually, there was nothing to change. The government said that the economy grew by 1.8% during the first three months of the year, which is what they said last month. Breaking out the fractions, real GDP growth was revised upward from 1.751% to 1.843%.

    Here’s a look at real GDP growth over the last few years. The numbers are trillions of dollars change to 2005 levels.

    While the economy showed a little pep in the first two quarters off the bottom, the last four have been sluggish. In fact, real GDP growth for Q4 of 2009 and Q1 of 2011 was nearly as strong as it was for the last four quarters despite being half the time (2.16% to 2.31%).

    Here’s a look at the contribution corporate profits make up in the entire economy. For Q1, profits made up 11.33% of the economy which is the highest level in over four years.

    This is an important number to follow. Think of it as a profit margin for the entire economy. For the last several quarter, profit growth has outrun economic growth, but that can’t last forever. Historically, profits hit around 11% to 12% near the top of the business cycle.

    Thus far, profits have grown thanks to higher profit margins — that’s come from lower wage costs (layoffs). But going forward, profit growth will have to be roughly in line with economic growth and that will require more jobs. The easy gains have already been made.

  • Stock Returns and Record-Breaking Skyscrapers
    , May 26th, 2011 at 10:05 am

    A new academic paper by Gunter Löffler of University of Ulm:

    This papers shows that construction starts of record-breaking skyscrapers predict subsequent US stock returns. In the three to five years after the construction of a record-breaking new skyscraper began, per annum stock market returns are around 10 percentage points lower than in other years. The predictive ability is significant and relatively stable. It exceeds that of alternatives such as the prevailing historical mean, predictions based on dividend ratios, and recently suggested combination forecasts. The findings are robust against a wide range of specifications. Further analyses show that tower building also predicts international stock market returns. One explanation for these patterns is that tower building is indicative of over-optimism. Widespread over-optimism could lead not only to tower-building, but also to overvalued stock markets. The rational asset pricing explanation is that in periods of low risk aversion, financing of large-scale projects such as record-breaking towers is easier, and expected returns are lower. The explanations are difficult to separate empirically. There is no significant influence of financing conditions or sentiment on tower building. However, unlike in other models studied in the literature, imposing a non-negativity constraint on return forecasts does not increase predictive accuracy. This provides indirect evidence that the predictive content of tower building is at least partly related to overvaluation.

    The idea is that the plans to build a monster new building are correlated with the mindset of a market bubble. The Woolworth Building opened in 1913 right as everything was falling apart. The Empire State Building was built during the depths of the Great Depression. The Petronas Towers in Kuala Lumpur were built just in time for the East Asian meltdown.

    (HT: CXO Advisory)

  • Morning News: May 26, 2011
    , May 26th, 2011 at 7:49 am

    ECB May Have Leeway for Greek Restructuring

    Euro Crisis Looms for Group of 8

    Qaddafi Reportedly Stashes Billions in Western Institutions

    Gold Knocked Off 3-week Peak by Silver Slide

    S.E.C. Adopts Its Revised Rules for Whistle-Blowers

    Lenovo’s Profit Triples on Corporate Demand

    Sony Forecasts $975 Million Profit for Year

    UBS Weighs Moving Investment Bank Out of Switzerland

    Citigroup Lags in Debt Deals as Pandit Rebuilds

    Tiffany Reports Strong First Quarter Results

    Burberry more than doubles profit, revenue up 27%

    The Yahoo Debate: Break Up or Not

    Martha Stewart Living Seeks Buyer or Partner

    Hedge Fund Star Calls for Microsoft CEO to Go

    Paul Kedrosky: Oil Prices and Finger Monkeys

    Todd Sullivan: ValuePlays TV 5/24/2011

    Be sure to follow me on Twitter.

  • “Bond Yields Are So Low, There’s No Profit”
    , May 25th, 2011 at 1:20 pm

    I often hear investors whine that since bond yields are already so low, there’s almost no room to profit.

    Actually, there’s lots of room. If a perpetuity (a bond yield that never matures) sees its yield drop in half, that means the price doubled. That’s even true if the yield drops from 1% to 0.5% or even 0.0001% to 0.00005%. It’s always a double.

    My point isn’t to suggest that you should expect perpetuities to double. Earlier today, Kelly Evans of the WSJ tweeted that it wouldn’t surprise her to see the 30-year T-Bond below 3%.

    Right now, the 30-year is yielding about 4.25%. A move from 4.25% down to 3% equals a rise in price by about 25%. Don’t let the math fool you. Big gains can still be made from low yields — assuming yields continue going lower.

  • Stock Size and Exchange Rates
    , May 25th, 2011 at 12:03 pm

    Here’s a post I’m aiming at new investors:

    I’m a big fan of the St. Louis Fed’s economic data page. They have gobs of data and yet can customize your graphs.

    I made the one below and it shows the S&P 500 divided by the Wilshire 5000 which is the blue line and it follows the left axis. This shows the relative performance of large-cap stocks. When the blue line is rising, large-caps are leading the market. When it’s falling, as it has for several years now, that means that small-caps are leading.

    The black line is the trade-weighted exchange rate index for the U.S. dollar and it follows the right axis.

    I think this is an interesting graph because at first blush, it’s not obvious that these two data sets should be related. But they are.

    Let me explain: Large-cap companies, especially the giants in the S&P 500, are heavily weighted toward the massive multinationals. The companies is the Wilshire 4500 (stocks in the Wilshire 5000 but not in the S&P 500) are much smaller, and by extension, have businesses that are more domestically focused. Of course, we’re talking about averages, not every stock.

    When the U.S. dollar rises against foreign currencies, that makes U.S.-made products less competitive on the world market. American companies that already have a broad global reach — think, Disney ($DIS) or General Electric ($GE) — will tend to do well relatively speaking. Domestic manufacturing, however, will suffer. This is reflected in the under-performance of small-cap stocks.

    It’s really not about size at all but rather something else: currencies. But size encompasses that bias. It’s also not a perfect match, but you can see that there’s a relationship that’s held up for ten years. While the lines aren’t dating, I think we can call them “it’s complicated.”

    The takeaway is that a lot of variables go into the soup that makes up equity prices, and many of these currents you can’t easily see. Your stock is an asset just like any other, and it’s competing against every investment in the world for capital.

    When the market makes a decision, it has its reason. It can be a terrible reason, but it’s a reason nevertheless.

  • RIP: Mark Haines
    , May 25th, 2011 at 10:53 am

    Sad news today. CNBC anchor Mark Haines has passed away at age of 65.

    Veteran journalist Mark Haines, a fixture on CNBC for 22 years, died unexpectedly Tuesday evening. He was 65 years old.

    Haines, founding anchor of CNBC’s morning show “Squawk Box,” was co-anchor of the network’s “Squawk on the Street” program, providing insight and commentary sometimes humorous and occasionally acerbic.

    CNBC President Mark Hoffman called Haines a “building block” of the financial networks’ programming. Hoffman said Haines died at his home.

    “With his searing wit, profound insight and piercing interview style, he was a constant and trusted presence in business news for more than 20 years,” Hoffman said in a statement to CNBC employees. “From the dotcom bubble to the tragic events of 9/11 to the depths of the financial crisis, Mark was always the unflappable pro.

    “Mark loved CNBC and we loved him back. He will be deeply missed.”

    I always loved Haines’ style. He refused to let guests bully him. Check out this classic clip when Barney Frank tried to bully Haines. Let’s just say Frank didn’t come out the winner: