Commodities Get Clobbered
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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!
Posted by Eddy Elfenbein on May 11th, 2011 at 8:15 pm

Exceedingly Brief Market Update
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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.

NASDAQ Close to 10-1/2 Year High
Posted by Eddy Elfenbein on May 10th, 2011 at 4:23 pm

While the S&P 500 is still below its high from October 2007, that NASDAQ Composite ($COMPQ) closed today just inches from its highest close since December 12, 2000.

Thanks to the news that Microsoft ($MSFT) is buying Skype for $8.5 billion, the NASDAQ closed today at 2,871.89 which is just 1.65 below the close from April 29, 2011.

Sysco Looking to Make Deals
Posted by Eddy Elfenbein on May 10th, 2011 at 10:54 am

Thanks to yesterday’s huge move from Sysco ($SYY), our Buy List gained 1.04% yesterday compared with 0.45% for the S&P 500. For the year, the Buy List is up 11.67% to the S&P 500’s 7.05%.

Sysco got as high as $32.76 yesterday but closed at $31.57. I was surprised by the magnitude of yesterday’s move, but sometimes the best stock to buy is the one you already own. Sysco also said that they’re looking to make acquisitions going forward.

“We are also committed to looking for acquisition opportunities both in and beyond the core,” DeLaney said on a conference call today. “We are doing this mainly through building a pipeline of high-quality potential domestic acquisitions and also by looking at adjacencies and new geographies.”

Sysco, which controls almost one-fifth of the restaurant- distribution industry’s more than $200 billion in sales, may look to Western Europe for growth as people there eat out more, said Jack Russo, an analyst at Edward Jones. Sysco has completed at least seven acquisitions in the past five years, the latest being the purchase of Nebraskan distributor Lincoln Poultry & Egg Co. last year.

Our Buy List continues to do well today. Both Jos. A. Bank ($JOSB) and Wright Express ($WXS) are at new 52-week highs.

Morning News: May 10, 2011
Posted by Eddy Elfenbein on May 10th, 2011 at 7:30 am

Merkel Says No Aid Decisions Until Greek Assessment Reports

Unease About Greece Grows as S.&P. Downgrades Its Debt Again

ECB’s Bini Smaghi-Debt Restructuring Would Be Suicide

Yuan Forwards Rise for Second Day as Reference Rate Set Higher

U.S., Chinese Firms Sign Solar-Power Pact

Chinese Exports Hit Record for April

Australia Shrinks Spending to Combat Mining-Fueled Inflation

Crop Damage From Weather Growing as Cost of Grains Advances

Oil Inventories Increase to Near a Two-Year High in Survey

U.S. Gasoline Extends Gains as Mississippi River Threatens Refineries

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Treasuries Hold Loss Before Debt Auctions; Gross Increases Bet on Decline

Microsoft in Talks to Acquire Skype for $8.5 Billion

Hertz Makes New Dollar Thrifty Bid of $2.1 Billion

Joshua Brown: MicroSkype

Howard Lindzon: Megatrends…Mobile, Social, Cloud, Global and REINVESTMENT