Author Archive

  • Inflation Is Trending Higher
    , May 13th, 2011 at 10:17 am

    The government reported this morning that consumer prices rose 0.4% last month which is what Wall Street had been expecting. The “core rate,” which excludes food and energy prices, rose by 0.2% and that also matched expectations.

    Inflation is clearly trending higher. To better illustrate this, below is the six-month trailing rate of consumer core inflation. I took the seasonally-adjusted numbers and annualized them for easier comparison.

    That rate has been steadily climbing higher since it bottomed out at 0.27% in April 2010. For the most recent six months, core inflation has risen at an annualized rate of 1.77%. That’s the highest in nearly two years. Still, it’s not very high in historical terms, but trend is clearly toward higher inflation.

    Inflation has often been a trend-sensitive data series. In other words, higher inflation begets even higher inflation. The numbers aren’t a problem yet, but the trend should be a concern for the Federal Reserve.

  • CWS Market Review – May 13, 2011
    , May 13th, 2011 at 8:16 am

    The stock market has reached a crossroads this week and I want to explain in full detail what’s happening. Investors need to understand that there’s a major shift happening on Wall Street and it will have a big impact on our performance for the rest of this year.

    First off, let’s look at our Buy List. I like to tout how well (or poorly) we’ve done, and we’ve been doing especially well recently. Through Thursday, our Buy List is up 1.41% for the month while the S&P 500 is down 1.10%. For the year, we’re up 12.97% compared with 7.24% for the S&P 500. Each week, it seems, we put more and more distance between us and the rest of the market.

    The Buy List is specifically designed to follow the broader market but perform a few percentage points better while having a little less volatility. Part of the reason we’re doing so well recently is that we don’t have any energy stocks or materials stocks, and it’s those sectors that have been feeling the most pain recently.

    What happened is that as the U.S. dollar plunged against other world currencies, the price for many industrial commodities soared. The most dramatic example was silver. However, the price for gold, copper, and as anyone who’s been near a gas station can tell you, oil have all jumped as well.

    The problem is that higher commodity prices (especially oil) inevitably hurt consumers and that’s a danger for the entire economy. The argument therefore is that the Fed’s policies aren’t merely not helping; rather, the Fed’s policies are actually actively hurting the economy by sacrificing the dollar.

    What’s odd is that the commodity rally started to get out of hand. Over the last few days, the dollar finally started to stabilize and it even rose somewhat modestly. Even though the uptick in the dollar wasn’t much, it was just enough to knock the air out of commodities. The sell-off soon turned into a rout.

    Let’s look at the some of the recent damage: The Silver ETF (SLV) lost more than one-third over the last two weeks. This is similar to Silver Thursday from 1980 which wiped out the Hunt Brothers. Instead of happening in one day, this time it’s happening in slow motion. Besides silver, the Oil ETF (OIL) is down 13% for the month. This has naturally dented the major commodity-based stocks. ExxonMobil (XOM) has shed nearly $40 billion in market value in May alone.

    In perfect timing, the downturn in oil stocks happened at the exact moment that Congress decided to hold hearings on subsidies to “Big Oil.” Anyone with a sense of history had to appreciate seeing Senator Jay Rockefeller say that oil executives were “out of touch” with the American people. This Sunday, by the way, will be the 100thanniversary of the Supreme Court’s decision to break up John D. Rockefeller’s Standard Oil into 34 companies, many of which form the major oil companies of today.

    So if investors are shunning commodities, where have they been going? The answer is: pretty much anywhere safe. I tweeted recently “Today in market news, paper beats rock.” I was being facetious but it’s pretty much true. Investors have poured out of gold and silver and piled into super-safe Treasuries. Not only have short-term yields plunged to slightly above zero, but we’re also seeing some longer-term yields do so.

    The yield on the one-year Treasury bond slipped below 0.2%. I think that’s probably the best example of how fearful many investors are. Despite worries that our Treasury bond will be shunned by the world market, investors are still willing to pay very high prices for our debt.

    The yield for the one-year Treasury got down to 0.17% recently. That’s the equivalent of just 21 Dow points for the entire year. Bear in mind that the Dow will pay out around 250 points in dividends alone. In other words, some investors are so worried over the future of equity markets that they’re willing to sock their cash away for a year and get almost nothing in return. In their eyes, there’s no other option. I think that’s crazy, but I want to show you how dramatic events have become.

    In last week’s CWS Market Review, I wrote about Sysco‘s (SYY) upcoming earnings report. I said that Wall Street was expecting earnings of 41 cents per share whereas I thought earnings would come in at 43 cents per share. Once again, I was a pessimist but only by a penny. On Monday, Sysco reported earnings of 44 cents per share. The stock responded by jumping 10.7% that day.

    While I felt pretty confident that Sysco would beat Wall Street’s forecast, I had no idea it would react so dramatically. I should also note that Sysco is your quintessential consumer-staples stock. The company is one the largest food services firms in the country which means its business isn’t heavily impacted by the gyrations of the economy. I also like that Sysco’s dividend currently yields 3.25%. That’s a good deal. I now rate a Sysco a “buy” up to $32 per share.

    Some other stocks on the Buy List that look particularly good right now include AFLAC (AFL), Abbott Laboratories (ABT), Becton, Dickinson & Co. (BDX) and JPMorgan Chase (JPM). We’re now entering a slow period for our Buy List. There probably won’t be any major news until after Memorial Day, and there won’t be any important economic reports next week. Still, don’t be lured into complacency. I strongly urge all investors to focus on high-quality stocks.

    This overall market environment continues to look good for patient investors. The first-quarter earnings season is nearly over and it’s been a very good one for us. According to Bloomberg’s latest numbers, 72% of companies have beaten analysts’ estimates. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

    For all of 2011, the S&P 500 is projected to earn $98.19. Going by Thursday’s close, the index is trading at 13.74 times this year’s forecast. That works out to an earnings yield of 7.18%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.

    That’s all for now. 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!

  • Morning News: May 13, 2011
    , May 13th, 2011 at 8:15 am

    Asian Shares Lower; Wall St Drop, Volatility Across Assets Weigh

    Euro-Region Expansion Beats Forecasts

    Euro-Zone Debt Market Faces Key Week

    Exports Boost Spanish GDP

    World’s Top Banks Face Capital Surcharge Hit

    Bernanke Says Using Debt Limit as ‘Bargaining Chip’ Could Threaten Economy

    Energy Costs Lift Retail Sales and Producer Prices

    Investors See Stocks Retreating as Yields Rise

    U.S. Bank Failure Costs to Exceed Estimates by $2 Billion

    Uncertain Leadership Strains Financial Overhaul

    U.S. Attorney Sends a Message to Wall Street

    Treasury Won’t Sell GM Shares Before August

    AT&T, T-Mobile USA Break-up is $6 Billion

    Spain’s Telefonica Net Profit Falls As Margins Drop

    Paul Kedrosky: Another Day, Another Money-Losing IPO Filing

    Joshua Brown: Greg Gets Corny

  • Commodities Get Clobbered
    , May 12th, 2011 at 11:07 am

    Let me help explain what’s been going on in the market over the past few days. Now that earnings season is mostly over, there’s been a rush out of formerly hot commodities as investors have sought shelter in very low-risk bonds or in stocks in non-cyclical industries.

    To give you an example, the Silver ETF ($SLV) got as high as $48.35 two weeks ago. Today it’s been as low as $31.97. Ouch! The Gold ETF ($GLD) has backed off from $153.61 last Monday to $145 today. Oil ($USO) has dropped from $45.60 to $38.59. (Prices at the pump, however, are still high.)

    Now let’s check out what’s happening in the debt market: The yield on the one-year Treasury has dropped below 0.17%. Sure, it’s one thing for short term rates to be microscopic, but now we’re talking about one full year.

    Let’s take a step back and see what that means. One year at 0.17% works out to about 21 Dow points stretched out over a full year. Plus, that doesn’t include dividends. In other words, the Treasury investor would lose to the broad-based investor even if the Dow fell by (roughly) 1.8% over the next twelve months. So what is it that debt investors want so badly? The answer is security. They want it so badly, they’re willing to vastly overpay for it.

    I think that’s nuts, but there’s a buyer for every seller.

    On the stock front, the damage has mostly hit the commodity stocks. These are the stocks you find in the Energy ($XLE) and Materials ($XLB) sectors. The fall off in oil is really starting to hurt some of the major oil stocks. The market value of ExxonMobil ($XOM) has dropped by $40 billion this month. There are only a handful of companies in the world that are worth $40 billion.

    Energy and Materials stocks are the core of the cyclical side of the stock market. As I’ve been expecting, investors are rotating out of cyclical stocks and finding safe refuge in stable stocks. Cyclical stocks tend to lead the market on the way up, but they are punished more on the way down.

    Since our Buy List is focused away from cyclicals, we’re not down nearly as much as the rest of the market is. In fact, some of our stocks continue to rally. Jos. A. Bank ($JOSB), for example, is at another new high today. Sysco ($SYY) is also holding up well after its massive jump after the earnings report. Outside of our Buy List, defensive stocks like CVS ($CVS) and Southern Company ($SO) are at new 52-week highs.

    According to Bloomberg’s latest numbers, 72% of companies beat analysts’ estimates this earnings season. S&P has the S&P 500 on track to earn $22.58 for Q1. That’s a 16.51% increase over Q1 of 2010. It’s very likely that this current quarter will top the record earnings ($24.06) made in Q2 of 2007.

    For all of 2011, the S&P 500 is projected to earn $98.19. Going by yesterday’s close, the index is trading at 13.67 times this year’s forecast. That works out to an earnings yield of 7.32%. That’s about 400 basis points more than a 10-year Treasury. For next year, the S&P 500 is projected to earn $111.82.

  • Morning News: May 12, 2011
    , May 12th, 2011 at 7:36 am

    IMF’s Borges Sees No Need for Restructuring of Greek Debt

    Schaeuble Tightens Screws on Greece With Demand to Increase Cost Savings

    Merkel’s Backing Puts Draghi In Pole Position For Top Job

    China Orders Banks to Set Aside More Cash

    Goldman’s Blankfein Is Said to Unveil Yuan-Denominated Private Equity Fund

    US Stock Futures Lower After Commodities Sell-Off, Weak Technicals

    IEA:High Oil Price Curbs Demand, But Market Still Tight

    AT&T’s T-Mobile Deal May Hurt Competition, Senators Say

    Cisco Ditches Sales Target Amid Strategy Shift

    Nissan Q4 Rises, Sees Full Production Likely By October

    Prada Plans To Seek Listing Approval May 19 For Planned HK IPO

    Takeda Pharmaceutical in Talks to Buy Nycomed for Up to $14 Billion

    Galleon Conviction Likely to Embolden Prosecutors

    Bonnafe to Land Banking Giant BNP Paribas’s Top Job

    Howard Lindzon: StockTwitsTV Interview with Bill Bishop

    Joshua Brown: Microsoft Just Getting Warmed Up

  • So Long, Raj. See You in 2030ish!
    , May 11th, 2011 at 8:15 pm

  • Exceedingly Brief Market Update
    , May 11th, 2011 at 10:39 am

    This is another good day for our Buy List. The cyclicals are getting pounded and that’s always good for our relative performance.

    Reynolds American ($RAI), Becton, Dickinson ($BDX), Joey Banks ($JOSB) and Johnson & Johnson ($JNJ) have all hit new 52-week highs. Notice that there are classic non-cyclicals like healthcare and consumer stocks.

    At 10:30, the S&P 500 is down 0.58% while the Buy List is only down 0.05%. That’s a big outperformance for one day.

    Don’t forget: You can follow me on Twitter at twitter.com/EddyElfenbein.

  • Soaring Oil Blasts the Trade Deficit
    , May 11th, 2011 at 10:19 am

    The trade numbers are out for March, and higher oil prices are widening out the trade deficit. Today’s trade report shows that exports rose by 4.6% in March to $172.7 billion. That’s the biggest gain since March 1994.

    The trade gap rose 6 percent to $48.2 billion, the biggest since June, from $45.4 billion in February, the Commerce Department reported today in Washington. The median forecast of 72 economists surveyed by Bloomberg News projected it would widen to $47 billion. Sales abroad climbed by the most in 17 years.

    Crude oil costs that surged above $100 a barrel for the first time in more than a year and a 9.4 percent drop in the dollar will probably keep driving up the cost of imports. At the same time, the weaker currency is making American goods more competitive to customers in emerging markets from Argentina to China, benefiting manufacturers like United Technologies Corp. (UTX) and Caterpillar Inc. (CAT).

    The original report for Q1 GDP growth was 1.8%. Today’s report indicates that an upcoming revision may be slightly lower.

    Four years ago, I looked at the impact of the euro on U.S. equity markets. The lesson is that a weaker euro is very good for our stocks. The biggest beneficiaries of a weak euro were tech, industrials and consumer discretionaries.

  • Morning News: May 11, 2011
    , May 11th, 2011 at 7:32 am

    Merkel to Back Draghi as Trichet’s ECB Successor

    Bank of England Signals Rate Increase This Year Amid Inflation

    EU Slows Drive for More Greek Aid

    Hong Kong Stocks Drop on China’s Inflation, Retail Sales Data

    Gold, Silver Up On EU Worries, Short Covering

    Crude Oil Futures Halt Two-Day Advance on Chinese Inflation, European Debt

    US Stock Futures Gain Ground As Commodities Extend Rebound

    Federal Retreat on Bigger Loans Rattles Housing

    Toyota Profit Drops 77% on Strong Yen, Sluggish Japan Sales

    Why The Microsoft-Skype Deal Has Big Implications For The Stock Market

    AIG Offering Near Low End of Range

    Danish Brewer Carlsberg’s Operating Profit Jumps 38%

    Leon Black’s Apollo Agrees to Purchase ‘Idol’ Owner CKX for $509 Million

    Howard Lindzon: Things that Make me say WOW!

    Joshua Brown: Media: Commodity Cool-Off?

    ETF Risk and the Natural History of a New Idea

  • The Plunge In Short-Term Yields
    , May 10th, 2011 at 10:03 pm

    Over the past few weeks, the yields for short-term Treasuries have plunged. The yields are basically near 0%. It’s one thing to have very low yields for 1-month T-bills, but now you’re not getting much for socking you’re money away from 12 months.

    To give you an idea of how low interest rates are, if you lend Uncle Sam $1 million for one day at one basis point, you get about 28 cents for your troubles.

    Check out the plunge in yields:

    And don’t pin this on the Federal Reserve. Most of the QE2 buying has been in the middle of the yield curve.

    Personally, I had been expecting the Fed to raise rates sooner than most people had expected. Apparently, Mr. Market disagrees and expects rates to stay low for a while longer.