FBR on AFLAC
Posted by Eddy Elfenbein on January 24th, 2011 at 9:54 am

Barron’s carries a report on AFLAC (AFL) from FBR. They upgraded the stock to Outperform. Here’s a sample:

Aflac (ticker: AFL) shares have lagged the group by 14% in the last three months, likely on increased European sovereign and financial credit concerns.

In both our base-case and stress-case credit-loss scenarios, we believe Aflac is adequately capitalized to earn its way through potential impairments related to Portugal, Ireland, Italy, Greece and Spain (PIIGS) exposure.

If credit losses materialize as we forecast in our base case, the company should be well positioned to deliver on the high end of buyback guidance, with the potential to upsize the buyback program.

Even in our stress case, we believe the company could deliver on its buyback guidance of six million to 12 million shares per year. Our 2011 estimates and 2012 earnings-per-share estimates assume 10 million and 12 million of share buybacks, respectively.

We have fine-tuned our 2011 EPS estimate to $6.25 from $6.31, as the yen has weakened recently, and introduce a 2012 EPS of $6.85.

We are raising our price target to $69 from $59, based upon a 10 times multiple of 2012 EPS. Over the last five years, Aflac’s forward price-to-earnings ratio has averaged 11.1 times.

This is a very positive report. Wall Street currently expects AFL to earn $6.17 per share so FBR is well above that. The stock got as high as $58.60 this morning which is another 52-week high.

Morning News: January 24, 2011
Posted by Eddy Elfenbein on January 24th, 2011 at 7:07 am

Euro’s Slide Meets Resistance as Analysts Draw Line at $1.30

Super-Cycle Leaves No Economy Behind Before Davos Summit

Global Price Fears Mount

U.S. Stock Futures Edge Higher Before Earnings Reports

New Push at Fed to Set an Official Inflation Goal

U.S. Treasury’s Toxic Asset Funds Gain 27%

Terrified Investors Sold Out Of Munis At Record Pace Last Week

Novartis Buys U.S. Cancer Lab for $470 Million

Sara Lee Said to Get Apollo Bid Above Market Value

Philips Looks East as Weak TV Sales Hit Profit

IQ and Stock Market Participation

Joshua Brown: Why Do Traders Retweet Each Other So Much?

Benford’s Law and the Stock Market
Posted by Eddy Elfenbein on January 22nd, 2011 at 9:22 am

Abnormal Returns spotted a fascinating article on finance and Bedford’s Law.

Take any naturally occurring set of numbers and keep a count of the first digit in the number. A newspaper is an ideal test bed. Most people reckon that each number from 1 to 9 will occur with equal frequency: after all, why would they not? Yet they don’t: the number 1 appears almost a third of the time and each subsequent number reduces in frequency. And this, frankly, is bizarre at first flush.

The article notes that Benford’s Law has been used to spot financial fraud. It turns out that it’s not so easy to appear being random.

I took all of the closing numbers for the Dow going back to June 8, 1931 which is an even 20,000 points of data. I then broke down all the starting digits and here’s what I got:

Since the Dow has never made it to 20,000, there are a lot of readings in the Ones row, but that’s the point of Benford’s Law. According to the law, the Ones should have 30.1% of the readings which is pretty close to what we see (36.31%).

I’m guessing the list is a bit skewed because there are so many readings in the Eights and Nines column. Perhaps if this same test is run in 30 years, we’ll see an even stronger relationship to Benford’s Law.

Sesame Street Martians
Posted by Eddy Elfenbein on January 21st, 2011 at 4:06 pm

It’s Friday. The trading week is over. It’s time to go home. Yep, yep, yep, yep, yep, yep….

Gold Vs. the S&P 500
Posted by Eddy Elfenbein on January 21st, 2011 at 12:24 pm

In 1980, gold was going for more than 7.5 times the S&P 500. To hit that level today, gold would need to be close to $10,000 per ounce.

By July 1999, the ratio had fallen to less than 0.18 which in today’s terms would place gold at $230 per ounce. The ratio then rebounded to 1.37 in March 2009. Since then, gold and the S&P 500 have followed each fairly closely. Since last May, gold has held the upper hand but now the two are starting to get much closer.

Is a crossing in the works?

Rosenberg’s Bullish Checklist
Posted by Eddy Elfenbein on January 21st, 2011 at 10:38 am

At Minyanville, Josh Lipton lists 10 things that David Rosenberg would need to see before turning bullish on the U.S.:

1) An energy policy that truly removes U.S. dependence on foreign oil.

2) A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment.

3) A credible plan that reverses the run-up in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any…We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable.

4) A massive mortgage write-down by the banks that provide much-needed equity to upside-down homeowners.

5) A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.

6) Tort reform. This is the only way to rationally bring down health care costs to more manageable levels.

7) And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.

8. Financial sector regulatory reforms that actually have some teeth.

9) Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!

10) Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential.

It’s an interesting list and I don’t have any problem with the issues he raises. I do have one concern, though: all of the things he criticizes were in place in March 2009 and that was the beginning of one of the great bull market rallies in history.

If he’s talking about being bullish about the economy, that’s one thing, but if he’s talking about being bullish about the stock market, then I think this is a fair criticism. The lesson for investors is to not confuse policy solutions with reasons to be bullish. The reason I highlight Rosenberg’s list isn’t because I don’t like it — I do. Rather, it’s the wrong way to think about investing.

Why was the stock market such a great buy in March 2009? What signal did we have? The answer is, “nothing.” Stocks simply got too cheap. The bears had overrun their thesis and stocks were a great bargain.

As stocks started to rise, we got more signs that the economy was improving. But at no point did anyone enact a policy proposal such as the ones Rosenberg suggests. Investors should focus on valuations and not on policy proposals.

Morning News: January 21, 2011
Posted by Eddy Elfenbein on January 21st, 2011 at 8:08 am

Global Stocks, Commodities Up; Euro Hits 2-Month High

OPEC Under Pressure as African, Asian Oil Tops $100

SEC Requires Disclosures on Asset-Backed Bonds in Rules Opposed by Munis

U.S. Debt Crosses $14 Trillion Mark

How Obama Helped Fuel a Wall Street Boom

Obama Taps GE’s Immelt to Head Economic Advisor Panel

What Did Google Do?

Aided by Finance Unit, G.E. Earnings Top Forecasts

Bank of America Posts 4th-Quarter Loss of $1.2 Billion

India’s Reliance Q3 Profit Up 28% But Lags Forecast

Leigh Drogen: Steve Jobs Means More To Apple Than Just Its Products

James Altucher: How I Screwed Yasser Arafat out of $2mm (and lost $100mm in the process)

CWS Market Review – January 21, 2011
Posted by Eddy Elfenbein on January 21st, 2011 at 7:40 am

All good things must come to an end, and Thursday signaled the end of the stock market’s incredible “baby step” rally. For 34-straight trading sessions, the S&P 500 closed above its 10-day moving average. That’s one of the longest such runs on record.

This streak was the result of two factors. The first is obvious: a slow and steady equity rally. The second factor was the market’s dramatic decline in volatility. Wednesday, in fact, marked the S&P 500’s first 1% or more decline in nearly two months.

Over the holidays, the market’s day-to-day volatility seemed to have completely dried up. Put it this way: Prior to Wednesday’s sell-off, the market’s worst day for the year came on January 6th when the S&P 500 lost a measly 0.21%. That’s barely a blip.

I don’t believe the market’s broader rally is terminal, though we may be in for a short-term period of consolidation. Today, however, I want to discuss a more important change in the market and how it affects our Buy List. The big change recently is that the cyclical trade is rapidly coming undone.

Here’s some context: Since the low from March 2009, the S&P 500 has rallied an amazing 89%. That’s one of the greatest rallies in history. Yet as impressive as that’s been, the Morgan Stanley Cyclical Index (^CYC) has rallied 119%. Whenever cyclicals outperform the market it generally means that investors are gaining greater confidence in an economic recovery. “Cyclical stocks” refer to stocks in sectors like heavy industry, autos, chemicals, mining and construction.

Yet for the last seven sessions in a row, the CYC has been badly thrashed by the S&P 500. Actually, that may have been an early warning sign that the market was due for a near-term pullback, and the peak eventually came on Tuesday. It’s interesting to note that the Dow, which is far less cyclical than the S&P 500, was barely dented on Wednesday.

The interesting characteristic of cyclical stocks is that they often (though not always) outperform the market when the market itself is rising, and conversely they underperform when the market is pulling back. In other words, cyclical have a double-whammy effect. So if you’re able to spot the turning points accurately, you can do very well.

So the question now is, “Have cyclical stocks reached the end of their outperformance run?” Right now, I can’t give a definite answer one way or the other. I’m inclined to say “yes” simply because the CYC recently hit an all-time high relative to the S&P 500. My data goes back to 1978 and the ratio reached an all-time high on January 10th.

I’ve also been impressed by the steep discounts we see in many of our healthcare stocks which are classic non-cyclical stocks (people buy Band-aids no matter how well the economy is doing). For example, both Abbott Labs (ABT) and Gilead Sciences (GILD) are going for roughly 10 times this year’s earnings. I just can’t ignore values like that.

Our Buy List is pretty light on cyclicals. I purposely added Ford (F) this year because I wanted to beef up our cyclical exposure. I’m glad I did. Even if cyclicals are headed for a period of lagging, I think Ford will still hold up well. It’s been hit recently during the cyclical pullback, but Ford is still a solid value. The shares are going for just eight times this year’s earnings.

If cyclicals do wind up lagging, our Buy List should strongly outperform the market. Many of our stocks like AFLAC (AFL), Medtronic (MDT), Sysco (SYY) and Wright Express (WXS) will prosper no matter what cyclicals bring. The other indicator that I’m watching is long-term interest rates which often fall when cyclicals underperform. It’s not an iron rule, and with the Fed being so active in the bond market, it may be a moot point.

We’re still early in the first-quarter earnings season. We’ve already had very good earnings from JPMorgan Chase (JPM) which I’m happy to say that I saw coming. After that, however, I don’t see any obvious earnings beats for us. I still think this will be a good earnings season for us, but I don’t see any earnings projections where Wall Street is clearly wrong.

This Tuesday, January 25th, three Buy List healthcare stocks will report: Gilead Sciences (GILD), Johnson & Johnson (JNJ) and Stryker (SYK). Stryker already gave us a preview and we know their report is going to be good. JNJ usually reports very close to what Wall Street expects. Last quarter, they beat by eight cents per share which was about as dramatic as they get. The current consensus on the Street is for $1.03 per share which sounds about right. The company is also currently looking at bidding for Smith & Nephew which makes me nervous since companies often overpay for large acquisitions.

Wall Street expects Gilead to earn 94 cents per share which is probably slightly too low. Even if it’s not, GILD is still an inexpensive stock. The stock is a good buy anytime you see it below $40 per share.

There will probably be some other Buy List earnings reports coming out next week, but the companies haven’t yet said when. Then next two weeks will be a busy time for the Buy List, and we should hear more guidance from our stocks.

The other big news story next week will be President Obama’s State of the Union address on Tuesday. This will be the first time he speaks to the 112th Congress which is partially controlled by the opposition party. There’s also a Fed meeting the next day, and if that’s not enough, we’ll also get our first look at the fourth-quarter GDP report. Some economists on Wall Street are looking for a very strong number, perhaps as high as 4%.

Keep focused on our Buy List stocks. Make sure you’re well diversified, and please don’t be rattled by any near-term increases in volatility. This is to be expected. The key for us is to watch for continued deterioration in cyclicals. If that keeps up, I expect to see more money rotate into the kind of stocks we like.

That’s all for now. I’ll have more market analysis for you in the next issue of CWS Market Review!

Best – Eddy

Good Day for Us and New High for Oracle
Posted by Eddy Elfenbein on January 20th, 2011 at 7:46 pm

Although the market was down today, it was another good day for us. The Buy List rose 0.47% compared with a loss of 0.13% for the S&P 500. The weakness in cyclicals definitely helped us as sectors like healthcare were strong.

For the year, we’re up 3.57% which is nearly twice the 1.80% for the S&P 500.

Oracle (ORCL), JPMorgan Chase (JPM) and Jos. A. Banks (JOSB) all climbed by more than 2% today. Oracle reached a new 52-week high.

Yesterday, JPM seemed to be hurt by Goldman’s earnings report which makes little sense since they already reported earnings. Today, JPM was helped by Goldman’s earnings which again, makes very little sense.

The Streak Ends
Posted by Eddy Elfenbein on January 20th, 2011 at 5:01 pm

It was very close, but the S&P 500 finally closed below its 10-DMA. The index closed the day at 1,280.26. The average for the last 10 day is 1,280.97. That ends a run of 34-straight sessions of closing above the 10-DMA.