Double Top in Cyclicals?
Posted by Eddy Elfenbein on February 23rd, 2011 at 11:15 am

The stock market is getting knocked again today, but the pain isn’t evenly spread out. Who’s up for another look at the relative strength of cyclicals? Great–me, too!

As long-term readers know, one of my favorite metrics to follow is the Morgan Stanley Cylical Index (^CYC) divided by the S&P 500 (^SPX). This is far from a comprehensive analysis but it is a quick-and-dirty look at the “mind of the market.”

Since late August, the market’s rally has been disproportionally powered by cyclical stocks. In fact, the ratio of the CYC to the S&P 500 reached an all-time high on February 11th (my data goes back to 1978).

The ratio hit a previous peak on January 10th, and soon after, cyclicals dropped off sharply. I quickly jumped on this and thought it was the end of the cycle. Wrong! The ratio soon rallied and peaked on February 11th, just a hair above the level for January 10th (0.8442 to 0.8441).

The CYC is down again today (although many energy names are up). If today’s numbers hold up, the ratio will close below the low made on January 21st.

The reason these cycles are so important is that once they get going, they often last for a few years. Put it this way: if the Dow had kept pace with the CYC since the low from two years ago, today the Dow would be over 24,000 today.

$60 For Every Man, Woman and Child
Posted by Eddy Elfenbein on February 23rd, 2011 at 7:50 am

Walmart (WMT) released its earnings report yesterday. I’m always astounded by the size of this company. For 2010, Walmart had sales of $418.52 billion. That works out to an average of $1.14 billion in sales every day of the year—or nearly $50 million every hour of the day. Another way to think about it is that it’s equal to roughly $60 in sales for every man, woman and child on planet earth.

Despite what many critics may think, Walmart’s profit margins are very small. For 2010, Walmart’s gross margins worked out to 25.3%.

Gross margin refers to the profit compared to the variable cost of each item. If we go down another level to operating profit, which includes fixed costs, Walmart’s profit is just over 6%. Then when we get to post-tax net income, Walmart’s profit margin is just 4%.

As impressive as Walmart’s numbers are, ExxonMobil (XOM) will probably top them this year. The current consensus is that XOM will have revenue of $460 billion this year.

Morning News: February 23, 2011
Posted by Eddy Elfenbein on February 23rd, 2011 at 7:47 am

Pound Rises After BOE Minutes Reveal 6-To-3 Split Vote

Oil Rises on Libya Turmoil; Euro, Pound Rally, Stocks Decline

South Korea Sanctions Deutsche Unit for Market Manipulation

ECB Rejects EU Call to Become Ratings Provider

HK Government To Sell HK$5 Billion-HK$10 Billion Inflation-Linked Bonds

Nasdaq Mulls NYSE Bid in Exchange Deal Dash

Bank Closings Tilt Toward Poor Areas

HP Shares Plunge as Sales, Outlook Lag Street

Toll Brothers Reports First-Quarter Profit as Luxury-Home Demand Revives

Holly to Pay $2.9 Billion for Frontier Oil in All-Stock Deal

Lowe’s Profit Rises 39%

Best Buy Shuts China Stores to Focus on More Profitable Brand

Danish Maersk Returned to Profit in 2010 as Container Market Grew

James Altucher on Pundit Review Radio

Paul Kedrosky: How Institutional Investors Destabilize Commodity Markets

Ouch! Dow Drops 178 Points
Posted by Eddy Elfenbein on February 22nd, 2011 at 5:03 pm

Serves me right for boasting. Right after I tell you how well the Buy List has been doing for the year, we get smacked down today.

This was an ugly day of trading. All told, the S&P 500 dropped 2.05% making it the market’s worst day since August 11, 2010. Plus, oil gained more than 6% on tensions in the Middle East. Some are now talking about oil hitting $200 per barrel.

The S&P 500 is still holding above its 50-DMA. This was the 119th day in a row that the index has been above its 50-DMA. That’s the 10th-longest run since 1932. Tomorrow we’ll have a chance to tie the ninth-best streak which happened 40 years ago.

The Buy List dropped 2.25% today. Leucadia National (LUK) was especially hard-hit as it lost 5.93%. LUK owns a stake in Fortescue Metals Group and that company lost a court ruling last week. JPMorgan Chase (JPM) and Wright Express (WXS) were also hit hard.

The S&P 500 Is Still Below 16 Times Earnings
Posted by Eddy Elfenbein on February 22nd, 2011 at 2:18 pm

Here’s a look at the S&P 500 and its earnings. The index is the black line and it follows the left scale. The trailing four-quarter operating earnings is the gold line and it follows the right scale. The two lines are scaled at a ratio of 16-to-1 so whenever the lines cross, the P/E Ratio is exactly 16.

The black line has almost caught up to the gold line. The market hasn’t had its P/E Ratio at 16 since last May. The Double Dip hysteria of last summer brought the S&P 500 down below 1,030 and the P/E Ratio got as low as 13.62 which was a 20-year low.

There’s nothing magical about 16. It seems to be the number that the market most likes to track. The future part of the earnings line is Wall Street’s projection.

For 2011, Wall Street sees the S&P 500 earning 96.14. At a 16 P/E Ratio that means the market would be at 1,538.24 by year’s end. That’s a 14.5% rise from Friday’s close.

Gilead Sciences to Acquire Calistoga for $375M
Posted by Eddy Elfenbein on February 22nd, 2011 at 11:47 am

Gilead Sciences (GILD) makes a move:

Gilead Sciences Inc., a drug research company, said Tuesday it has agreed to acquire privately held biotechnology company Calistoga Pharmaceuticals Inc. for $375 million, expanding its research capabilities into cancer-fighting drugs.

Seattle-based Calistoga could earn up to an additional $225 million if certain milestones are achieved.

Gilead, which has specialized in HIV drugs and developed the flu fighting drug Tamiflu, anticipates closing the deal in the second quarter, subject to satisfaction of certain conditions. The company plans to finance the acquisition through available cash on hand.

Calistoga focuses on the development of medicines to treat cancer and inflammatory diseases. It is researching a drug, CAL-101, that may help fight non-Hodgkin’s lymphoma and help treat in elderly patients a specific type of leukemia.

“Oncology remains an area of significant unmet medical need and our increased understanding of the genetic basis of cancer allows for the development of disease specific targeted therapies,” said Gilead’s Chief Scientific Officer Norbert W. Bischofberger. “We are very encouraged by emerging clinical data for CAL-101, and this compound could represent an advance for the treatment of certain hematological cancers.”

Consumer Confidence Hits Three-Year High
Posted by Eddy Elfenbein on February 22nd, 2011 at 11:10 am

More good economic news:

Confidence among U.S. consumers rose in February to the highest level in three years as Americans became more optimistic about their incomes and the economy.

The Conference Board’s index of sentiment increased to 70.4, the highest since February 2008, from 64.8 the prior month, figures from the New York-based private research group showed today. Economists projected the gauge would be little changed at 65.5, according to the median forecast in a Bloomberg News survey.

A pickup in optimism and job gains may encourage Americans to increase purchases, bolstering consumer spending, the biggest part of the economy. At the same time, unemployment at 9 percent or higher for almost two years and mounting home foreclosures threaten to restrain households.

“The consumer believes that growth is picking up pace,” said Jonathan Basile, senior economist at Credit Suisse in New York, whose forecast of 70 for the index was the most accurate. “The ducks are in a row for stronger consumer spending this year.”

Medtronic Earns 86 Cents Per Share
Posted by Eddy Elfenbein on February 22nd, 2011 at 8:51 am

This morning, Medtronic (MDT) reported earnings of 86 cents per share for its fiscal third quarter. That matched exactly what I said I was expecting in the most recent issue of CWS Market Review. The consensus on Wall Street was for 83 cents per share. I’m not sure if that will be enough to off-set a sluggish market mood today.

Medtronic’s revenue rose 3% to nearly $4 billion. The company also said it would cut 1,500 to 2,000 jobs as part of its restructuring efforts. I’m not happy to see those folks lose their jobs but it’s a move MDT needs to make.

I decided to stick with Medtronic on this year’s Buy List even though the company had lowered its guidance twice during 2010. Normally, that would have me running from a stock but I still think Medtronic is a decent value.

I also expected MDT to narrow its full-year guidance which they did. Earlier, Medtronic had said it was expecting earnings-per-share to range between $3.38 to $3.44. Now the range is $3.38 to $3.40 per share. That implies fiscal Q4 earnings between 91 and 93 cents per share.

Here’s a look at Medtronic’s quarterly sales and EPS for the last several years:

Here’s an eye-opening look at Medtronic’s stock along with its earnings-per-share:

Morning News: February 22, 2011
Posted by Eddy Elfenbein on February 22nd, 2011 at 7:37 am

European Stocks Tumble; Libya Woes Intensify

Oil Spikes and Stocks Fall as Unrest Intensifies

India Expects More Global Bids For Oil, Gas Fields Post BP Entry

Emergency Borrowing From ECB Still at High Level

BRICs Losing for Second Time in Decade as America Takes Over

U.S. Consumer Bureau Says Credit-Card Rules Curtail Rates, Fees

Farmers Can’t Meet Demand as Corn Stocks Drop to 1974 Low

Home Depot Quarterly Profit Rises 72% on Customer Visits

Refiners Holly, Frontier Oil to Merge in $7 Billion Deal

Mining Giant BHP Billiton to Buy Chesapeake Shale Assets For $4.75 Billion

Blockbuster Gets ‘Stalking Horse’ Bid For Company From Group

Dynegy’s Top Executives to Resign in Wake of Failed Deals

Top 100 Entrepreneurs Who Made Millions Without A College Degree

Joshua Brown: You Can Disregard this Meaningless NYT “Blogging is Dead” Story

Buy List YTD
Posted by Eddy Elfenbein on February 21st, 2011 at 8:36 am

The Buy List is doing pretty well so far. Through Friday, the Buy List is up 8.20% for the year compared with 6.79% for the S&P 500.

Including dividends, the Buy List is up 8.42% compared with 7.07% for the S&P 500.