• Warren Buffett’s 2010 Shareholder Letter
    Posted by on February 26th, 2011 at 11:37 am

    The 2010 shareholder letter from the Oracle of Omaha is online. Here’s a sample:

    Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.

    Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of “great uncertainty.” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

    Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

    We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.

  • Theo Jansen’s Strandbeests
    Posted by on February 25th, 2011 at 4:35 pm

    The stock market finally broke its losing streak today (although our Buy List was up yesterday). That’s enough stock talk for today. Check out this amazing video:

  • Leucadia National Reports Earnings
    Posted by on February 25th, 2011 at 10:41 am

    Here’s today’s press release from Leucadia (LUK). I have to mention that LUK refuses to play the quarterly earnings game. As a result, they don’t give any guidance, nor do they adjust their earnings reports to make historic comparisons easier.

    NEW YORK–(BUSINESS WIRE)– Leucadia National Corporation (NYSE:LUK – News) today announced its operating results for the year ended December 31, 2010. On December 31, 2010, the Company recorded an adjustment that reduced the deferred tax valuation allowance and credited income tax expense by $1,157,100,000. The adjustment resulted from the Company’s conclusion that it is more likely than not that it will have future taxable income sufficient to realize that portion of the net deferred tax asset. Net income attributable to Leucadia National Corporation common shareholders was $1,939,312,000 (including the $1,157,100,000 adjustment to income tax expense) or $7.85 per diluted common share for the year ended December 31, 2010 compared to net income of $550,280,000 or $2.25 per diluted common share for the year ended December 31, 2009. Net income attributable to Leucadia National Corporation common shareholders for 2010 and 2009 also included income from discontinued operations, including gain on disposal of $51,149,000 or $.19 per diluted common share and $16,621,000 or $.07 per diluted common share, respectively.

    According to the balance sheet, LUK’s equity is $6.96 billion and they have 243.8 million shares. That works out to a book value of $28.56 per share. I think it’s reasonable for LUK to go for 1.5 times book which is close to $43 per share.

  • Apple From 1983 to 2005
    Posted by on February 25th, 2011 at 9:23 am

    Here’s a fact investors ought to consider. From Apple‘s (AAPL) peak in the middle of 1983, the stock underperformed the S&P 500 for the next 22 years.

    By the way, you may want to keep this in mind if you’re thinking of buying Netflix (NFLX).

  • Q4 GDP Revised Down to 2.8%
    Posted by on February 25th, 2011 at 8:37 am

    Ugh! Fourth-quarter GDP growth was revised down to 2.8% from the previous estimate of 3.2%. I always find these news items a little odd since we’re learning what happened between five months ago and two months ago.

    The simple fact is that 2.8% GDP growth simply absorbs new workers coming into the work force; it’s not enough to lower the unemployment rate.

    This is important for investors because the expanding profit margin story has mostly run its course. We need to see expanding sales growth soon and that will mean more jobs and higher wages.

    The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated and less than forecast as state and local governments made deeper cuts in spending.

    The revised increase in gross domestic product compares with a 3.2 percent estimate issued last month and a 2.6 percent gain in the third quarter, figures from the Commerce Department showed today in Washington. The economy, excluding inventories, grew at a 6.7 percent pace, the most since 1998.

    Americans may be in a better position to keep spending after tax cuts put more money in their pockets, while companies such as Caterpillar Inc. benefit from faster economies overseas and business investment. A surge in oil prices sparked by turmoil in Africa and more cutbacks by state and local governments represent risks to growth.

  • Morning News: February 25, 2011
    Posted by on February 25th, 2011 at 8:01 am

    German Stocks Advance, Trimming Weekly Loss; Daimler, Douglas Shares Rise

    Asian Shares End Mostly Up; Investors Look Past Mideast, North Africa

    Russian Central Bank Unexpectedly Raises Main Rates, Reserve Requirements

    Korea Exchange Imposes Record Fine on Deutsche Unit

    Japan to Spend 110 Billion Yen to Cut Rare Earth Usage

    Obama Tells Panel U.S. Recovery Harmed by Jobless Rate

    Rising Oil Prices Pose New Threat to U.S. Economy

    Regulators Decry Proposed Cuts in Commodity Futures Trading Commission Budget

    The Biggest Company You Never Heard Of

    Resurgent G.M. Posts 2010 Profit of $4.7 Billion

    AIG Posts First Profit in Three Quarters on Asset-Sale Gains

    Huawei Calls on U.S. to Investigate Accusations

    Joshua Brown: Mary Meeker: The US Needs a Corporate Turnaround

    Leigh Drogen: RIAs Must Follow Testimonial Rules On Social Networks

  • CWS Market Review – February 25, 2011
    Posted by on February 25th, 2011 at 7:47 am

    In last week’s e-letter, I said I was concerned that the stock market’s rally looked overextended. Unfortunately, I was spot on. On Tuesday, Wall Street gave us our biggest one-day sell-off in six months-and that was just the beginning. The market continued to fall on Wednesday and Thursday. The $VIX, which is the Volatility Index, spiked to its highest level since November.

    What’s also troubling is that oil has soared due to the political unrest in the Middle East. If you’re a Middle Eastern tyrant, your job security ain’t looking too hot right about now. The problem with higher gasoline prices is that it almost acts like a regressive tax on American consumers. The major difference is that those funds generally leave the country instead of heading towards the U.S. Treasury.

    I continue to believe that stock returns won’t be very impressive this spring. A flattish market is the safest assumption. For the entire year, I continue to like the market a lot. Profits have been very strong and the rout in the bond market has cooled off. The yield on the 10-year Treasury is back below 3.5% which isn’t much competition to a market that just completed its fastest double since the Depression. I think it’s very possible that the S&P 500 can break 1,500 before the year is over. Make no mistake; that’s a very aggressive forecast. On top of that, our stocks are ahead of the market for the year so far, and I expect that lead to grow. We already have five double-digit winners on the Buy List.

    Today I want to revisit an issue I discussed before: the relative downturn of cyclical stocks. I thought we had already seen the peak in cyclicals a few weeks ago, but it turned out to be a head-fake as cyclicals gave us one last surge. Since February 11th, cyclicals have been trailing the market and they’ve faced a lot of pain this week. Since last Thursday, the Morgan Stanley Cyclical Index ($CYC) is down over 6.2%. That’s equivalent to 750 points on the Dow which is about three times what the Dow has actually lost.

    You may be curious as to why I pay so much attention to the relative performance of cyclical stocks. The reason is it tells us a lot of what the market is thinking. Also, cyclical peaks and valleys tend to be very pronounced. Once a trend is established, it’s often quite strong and will last for a few years. If you want an example, the Dow would have to be around 24,000 today if it had kept pace with the CYC since March 2009.

    Many of the stocks on the Buy List are counter-cyclicals (also known as “defensive stocks”). These are stocks from sectors like healthcare, utilities and consumer staples. The common characteristic is that defensive stocks don’t see their businesses suffer much during an economic downturn. Consumers don’t cut back as much on their food or medical costs (or cigarettes-thank you, RAI). I think it’s very likely that these sectors are due for a long stretch of outperformance.

    The other fact to keep in mind is that cyclical stocks tend to outperform the market when the market itself is rising. This is sort of a double-whammy effect and that’s exactly what we’ve seen over the past two years. Conversely, cyclicals tend to underperform during falling markets, though this is more of a generality than an iron rule. That’s why I think defensive stocks will prosper this year even though the market will also do well, but you certainly shouldn’t expect the S&P 500 to double again over the next two years.

    Now let’s look at some individual stocks. One of our healthcare stocks, Medtronic ($MDT), reported earnings this week. In last week’s issue of CWS Market Review, I said to expect earnings of 86 cents per share which was two cents more than Wall Street’s consensus. Once again, I was spot on.

    My take is that Medtronic is a very good buy, but I should warn you that the company is currently working its way through a rough patch. Stocks that turn out to be good buys are often seen as damaged goods on Wall Street. That’s why their share price is low and that’s how Medtronic looks today. The company lowered its full-year guidance twice last year. No doubt, that’s spooked a lot of folks. Still, the company is making a good profit and the lowered guidance isn’t as bad as it may appear.

    With the earnings report, Medtronic narrowed its full-year guidance to a range between $3.38 and $3.40 per share. Since MDT’s fiscal year ends in April, that’s equivalent to a Q4 forecast of 91 to 93 cents per share. (My take: That’s probably a wee bit too low.)

    Let’s bust out some math: In August MDT lowered its 2011 EPS guidance to a range of $3.40 to $3.48 from $3.45 to $3.55. Then in November, it was brought down to $3.38 to $3.44; and now it’s $3.38 to $3.40. This means that MDT will probably wind up missing the low end of the original forecast by a few pennies, yet the stock has badly lagged the market. Medtronic is a strong buy below $40 per share.

    Outside of Medtronic, some other Buy List stocks that look good right now include Moog ($MOG-A), Stryker (SYK) and Oracle ($ORCL). Oracle is due to report earnings in about a month and I think we’ll see some very strong numbers. I also want to note that shares of Ford ($F) continue to plunge lower. Ford is a risky stock but it’s one the few cyclicals I like.

    Next week will be a fairly quiet time for earnings news, although Leucadia ($LUK) may report. The big news event will occur next Friday when the Labor Department releases the jobs report for February. Almost all of the jobs reports have been terrible, so it will be interesting to see if there’s a break in that trend.

    I’m also keeping a close eye on the market’s 50-day moving average. This is one of those simple rules that has a pretty good track record. As long as the S&P 500 trades above its average close for the previous 50 days, the market tends to do well. When it breaks below the 50-DMA, the index does much worse. It’s that simple, but the 50-DMA has a much better track record than folks who are paid much more than it have. Despite the recent sell-off, we’re still holding just above the 50-DMA. This could change very soon.

    That’s all for now. 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!

    Best – Eddy

  • S&P 500 Earnings for 2010 = $83.78
    Posted by on February 24th, 2011 at 6:38 pm

    The numbers are almost complete. According to the latest figures, the S&P 500 earned $83.78 for 2010.

    I bring this up because that number would have been considered insanely bullish a few months ago. In June 2009, I noted that Wall Street was expecting earnings of $73.56. One commenter at Seeking Alpha wrote “There is No Way the S&P will earn $70+ in 2010.”

    In May 2009, David Rosenberg had an S&P 500 target of 600 to 840 based on earnings of $50 to $70. In January of 2010, the bears were ready to mock the bullish forecasts of Wall Street which turned out to be too low.

    I point this out because the perma-bears are so rarely held accountable.

  • Three Down Days in a Row
    Posted by on February 24th, 2011 at 4:40 pm

    Sorry for the lack of posting today; I had a few technical issues to address.

    Unfortunately, Wall Street made it three losses in a row today. The S&P 500 dropped 0.10% to 1,306.10. This comes on the heels of yesterday’s 0.61% drop and Tuesday’s 2.05% rout.

    The good news is that our Buy List swam against the tide and rallied for a 0.32% gain. Abbott Labs (ABT) had a good day thanks to the reversal of a $1.8 billion patent infringement lawsuit. Another one of our Buy List stocks, Johnson & Johnson (JNJ), was one of the plaintiffs but their stock didn’t suffer much. Gilead Sciences (GILD) and Leucadia (LUK) also had good days.

    I’m still a little surprised that Medtonic (MDT) is hanging below $40 per share. Despite the troubles from last year, the company is still churning out the profits, and we need to remember that they beat expectations. If you have free cash you’re looking to deploy, MDT is a solid value.

    I should also note that, once again, cyclical stocks lagged the market today. The CYC dropped 0.50% which is 40 basis points more than the S&P 500.

  • Morning News: February 24, 2011
    Posted by on February 24th, 2011 at 7:42 am

    Oil Keeps Rally Going, Weighing on Global Markets

    Why the Disruption of Libyan Oil Has Led to a Price Spike

    Solid Q4 Growth Puts Germany on Firm Footing for 2011

    Geithner Says U.S. Financial System Now Stronger Than Before Recession Hit

    Foreclosures Make Up 26% of Home Sales

    Durable Goods Orders in U.S. Probably Rose in January

    Wheat Resumes Plunge as African Unrest Drives Away Speculators

    Gold Hits 7-Week Top on Libya Unrest, Market Jitters

    JPMorgan Raises $1.2 Billion To Invest In Twitter And Facebook

    Brazil Cellular Leader Vivo 4Q Net Soars On Better Operational Performance

    Dish 4Q Net Up 41% Though Co Loses Subscribers; EchoStar Swings To Profit

    Sears 4Q Profit Falls 13% On Weakness At Namesake Brand >SHLD

    Leigh Drogen: Dictators Don’t Have Perfect Information

    James Altucher: 10 Unusual Things I Didn’t Know About Steve Jobs