• CWS Market Review – January 7, 2011
    Posted by on January 7th, 2011 at 7:43 am

    It’s now official: 2010 marked the fourth-straight year that our Buy List beat the S&P 500. The final numbers showed that our Buy List gained 16.62% including dividends compared with 15.06% for the S&P 500. For the five years combined, we’re up 34.03% to the S&P 500’s 11.99%.

    We actually had a much bigger lead against the S&P 500 but our Buy List was underweighted in cyclical stocks (I’ll have more on that in a bit). The big rally over the past few weeks heavily favored cyclicals and that hurt our relative performance. While our Buy List did rally, it didn’t rally quite as strongly as the rest of the market did.

    With the new stocks for this year’s Buy List, I tried to rectify our underweighting in cyclicals with stocks like Ford ($F) and JPMorgan Chase ($JPM). I’m glad I did. Ford is already up 8.52% making it our #1 performer so far.

    I’m pleased to say that the new Buy List has gotten off to a nice start so far in 2011. Through Thursday, our Buy List is up by 1.95% compared to 1.29% for the S&P 500 (excluding dividends). Sure, that’s only four days’ worth of data—we keep our eyes fixed on the long-term around here—but at least we’re headed in the right direction.

    Turning to the economy, we had some pretty good reports this week. On Monday, the ISM Index for December came in at 57.0. That’s basically what I had been expecting. Any reading higher than 50 means that the economy is expanding. Wall Street had been expecting 57.5 so this was a slight miss, but I’m not worried. The most important takeaway is that the economy expanded for the 17th month in a row in December.

    The key economic report will be Friday’s jobs report. Investors need to pay attention to this report because it may tell us a lot about where the market is headed. So far, this recovery has been very slow and jobless. While corporate profit growth has been impressive, jobs growth has not.

    Most of the increase in profits has come from higher margins which have come from lower overhead which has come from corporate layoffs. Put it this way: The economy lost over seven million jobs during the recession, and we’ve lost another 101,000 jobs during the recovery.

    The higher profit margins appear to have run their course. You can’t slash overhead indefinitely. At some point, we need to see higher sales and that means we need to see more hiring. More jobs means more consumers.

    Here’s the problem: Companies are sitting on mountains of cash. Apple ($AAPL), for example, has a cool $25.6 billion in the bank. The problem for many such companies is that the cash is overseas and if they bring it back home, they’ll get a big tax bill. But not all of it is held outside the United States. Much of it is just sitting there earning next to nothing in the bank. The Fed lowered rates to zilch, but companies still aren’t budging.

    I’ve been expecting a good jobs report for the last few months but I’ve been disappointed with every new report. In fact, the jobs news has actually gotten slightly worse. The unemployment rate jumped 0.2% in November to 9.8%. That was the second-highest level reached in all 2010. Thirteen months after peaking at 10.1%, the jobless rate has only fallen by 0.3%. That’s just lousy.

    There is some optimism for Friday’s report. One is the strength in cyclical stocks. Truth be told, the market is often not the best analyst at all. The surge in heavy industry stocks like Ford may be an omen that things are better on Main Street than Wall Street realizes.

    Another reason for optimism was the strong jobs report from ADP. This is a private company involved in payroll processing, so they ought to have a good read on the jobs front. I’ve never been too impressed by ADP’s forecasting skills, but I did take note that their report was very strong. ADP said that 297,000 jobs were created last month. Wall Street is expecting 150,000. We’ve also seen decent improvement in initial claims for unemployment insurance.

    Except for Census hiring, I’m not exaggerating when I say that we haven’t had a really strong jobs report (over 300,000 jobs) in close to five years.

    After the jobs report, we’ll soon start the fourth-quarter earnings season. On Monday, Alcoa ($AA) will be the first Dow component to report. Once I have the earnings dates, I’ll post a complete earnings calendar for our Buy List stocks on the blog.

    We already know that Buy List newbie JPMorgan Chase ($JPM) will report earnings next Friday, January 14. Wall Street currently expects 98 cents per share. I think that’s laughably too low. By my numbers, the bank should earn at least $1.10 per share and probably a lot more.

    I’m also expecting to see a big dividend increase from JPM. Before the financial crisis struck, the company paid a quarterly dividend of 38 cents per share. They slashed it to just five cents per share, and that wasn’t as severe as many others’ cuts were.

    I think JPM could easily increase their quarterly dividend to 25 cents per share. That would only be a dividend yield of 2.2%, but it would indicate to the world that the bank is confident in its future. JPM is currently going for less than 10 times this year’s earnings estimate. And as I said before, I think the Street’s earnings estimates are too low.

    Another attractive opportunity on the Buy List is AFLAC ($AFL). I still think AFL is running up to $60 per share.

    Two weeks ago, I highlighted Reynolds American ($RAI). Thanks to an upgrade from UBS, Reynolds rose 3% on Thursday. The stock currently yields 5.8%.

    Oracle ($ORCL), another new stock, is a good buy up to $34.

    Nicholas Financial ($NICK) is great bargain, especially if you see it below $10 per share.

    Finally, Gilead Sciences ($GILD) is nice bargain below $39 per share.

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

    Best – Eddy

  • RIP: Donald Tyson
    Posted by on January 6th, 2011 at 9:08 pm

    The founder of Tyson Foods has died at the age of 80:

    In a career that spanned five decades, Mr Tyson transformed Tyson Foods through serial acquisitions from one of many chicken producers – it was 14th in size in the US in 1968 – to the country’s largest.

    In 1968, it supplied 1 percent of the country’s chicken. Last year, Tyson accounted for 20 percent of chicken consumed in the US, according to the National Chicken Council.

    Mr Tyson served as chairman emeritus when his son engineered the acquisition of IBP, a leading producer of meat and pork, in 2001, after which Tyson Foods became the world’s largest meat company. In 2009, Brazil-based JBS eclipsed Tyson, taking over the number-one spot after its acquisition of Bertin and Pilgrim’s Pride.

    Like Frank Perdue, another major figure in the development of the industry in the US, Mr Tyson benefited from the steady growth in chicken consumption across America in the latter half of the 20th century. Mr Tyson was not well known outside the industry, or politics, where he was an active player for much of his career.

    In 1980, Mr Tyson helped the company develop a relationship with McDonald’s, supplying chicken meat for the restaurant chain’s experimental new product, the “Chicken McNugget”. The relationship continues to this day.

  • The Buy List Is Off to a Good Start
    Posted by on January 6th, 2011 at 4:45 pm

    Yesterday marked the end of the Santa Claus Rally period which runs from December 22 to January 5. Historically the Dow has gained 3.39% over that stretch, but this time around, the index gained just 1.41%.

    Today was a very good day for the Buy List. While the S&P 500 lost 0.21%, the Buy List gained 0.38%.

    The biggest winner of the day was Reynolds American (RAI) which was up 3.04% thanks to an upgrade by UBS. Moog (MOG-A) wasn’t far behind with a 2.41% gain. Ford (F) gained 1.84% to reach another new 52-week high. Ford is our biggest winner for the year as it’s up 8.52% in just four days.

    For the year so far, our Buy List is up 1.95% compared with 1.29% for the S&P 500. Yes, it’s very early, but I’m happy to say that this looks like a strong start to 2011!

  • JPMorgan Chase’s Mounting Legal Bills
    Posted by on January 6th, 2011 at 1:08 pm

    One sign that JPMorgan Chase (JPM) is doing well: Everyone’s trying to sue them. Bloomberg notes that a Madoff trustee is after them for $6.4 billion. Also, Lehman Brothers is on the warpath for $8.6 billion.

    So far this year, JPM has reported $5.2 billion in legal costs. The company had very good earnings for the third quarter, but it would have been even greater if they hadn’t had to set aside a big chunk of change for lawsuits.

    Linda Sandler picks out some interesting facts: In their latest 10-Q filing, the bank used the word “litigation” more than 50 times. The potential losses for JPM come to 13% of their book value. For Bank of America (BAC) the figure comes to 17%.

    Naturally, this is a big headache for banks. I’m sure JPM wouldn’t be sued if they weren’t so successful. The difficulty is how to value these suits. Obviously, the bank thinks most of these suits are bogus and therefore shouldn’t cost them a dime. Of course, that decision isn’t up to them; it’s up to the courts. Still, they need to disclose the potential costs however frivolous.

    JPM reports earnings one week from tomorrow. The consensus on the Street is for 98 cents per share. In my opinion, that’s laughably too low. I understand why analysts want to low-ball their estimates. Personally, I’d be surprised if JPM earns anything less than $1.10 per share.

    In other JPM news, Obama will name William Daley, one of the bank’s big shots, as his new Chief of Staff.

  • “Snowstorms do not destroy demand”
    Posted by on January 6th, 2011 at 10:29 am

    The Labor Department reported that initial unemployment claims rose by 18,000 last week to 409,000. The number for the week before was revised up by 3,000 to 391,000. Last week’s report got some attention because it dropped pretty sharply. This drop coupled with the very strong ADP report hints that tomorrow’s jobs reports will be strong.

    Why is this important for investors? The good news is that profit growth has been very strong lately. The problem is that the increase in profits has mostly been due to increased profit margins.

    For example, let’s look at Wal-Mart (WMT). For their fiscal year that ended in January 2010, their sales rose by less than 1% while their profits rose by 7%. For the first nine months of this year, sales were up by 3.8% while profits rose by 7.5%. Make no mistake, that’s good. The issue is that raising profit margins can’t continue forever. At some point, a company needs to grow its sales. More profits means more sales which means more jobs.

    We’re also getting sales reports from retailers and so far, they’re not so good.

    Some U.S. retailers’ sales fell short of analysts’ projections last month as a blizzard the day after Christmas kept shoppers from stores, overshadowing earlier holiday buying.

    Sales at stores open more than a year at Gap Inc., the largest U.S. apparel retailer, declined 3 percent, compared with the 2.4 percent average increase indicated by analyst estimates compiled by Retail Metrics Inc. Macy’s Inc., Target Corp. and American Eagle Outfitters Inc. also trailed projections.

    A Dec. 26 storm that dumped more than a foot of snow on parts of the U.S. Northeast “disrupted” post-holiday shopping, Macy’s Chief Executive Officer Terry Lundgren said in a statement. The day after Christmas is typically one of the busiest shopping days of the year. That may have pushed sales into January, according to Customer Growth Partners’ Craig Johnson.

    “Snowstorms do not destroy demand, they simply displace demand,” said Johnson, president of the New Canaan, Connecticut-based retail consulting firm. “Those gift cards don’t disappear, they get redeemed in January.”

    The Buy List is having another good day. Leucadia (LUK), Reynolds American (RAI) and Moog (MOG-A) are all at new 52-week highs. Ford (F) and Wright Express (WXS) are also close to new highs.

  • Morning News: January 6, 2010
    Posted by on January 6th, 2011 at 7:42 am

    Japanese Stocks Shine, Others Lag Before U.S. Payrolls

    Euro Depreciates on Regional Sovereign Debt, EU Bondholder Plan Concerns

    German Factory Orders Surged in November on Export Demand

    Standard Life Picks Barclays, BP to Lift U.K. Stocks in 2011

    Gold Drops for a Fourth Day as Stronger Dollar Curbs Demand From Investors

    ETF Scoreboard for 2010

    The 11 Slowest Growing Economies Of 2011

    Bonanza in TV Sales Fades Away

    Costco December Same-store Sales Rise 6%

    Goldman Unit Passed on Earlier Facebook Investment

    LinkedIn Plans a Stock Offering This Year

    Sorry But I Have To Say It

  • The Truth on Pink Sheet Stocks
    Posted by on January 5th, 2011 at 1:48 pm

    Every so often, I’m asked for my opinion on a stock trading on the Pink Sheet, or more formally, the OTC markets. Simply put, if a company is serious about its business, it’s not on the Pink Sheets. It’s on a real exchange.

    Here’s a study that looked at Pink Sheet returns from 2000 to 2008. A tiny few did well. The overwhelming majority did horribly. The median return was -97%.

  • How to Build a Cyclicals ETF
    Posted by on January 5th, 2011 at 11:28 am

    I write a lot about cyclical stocks and the Morgan Stanley Cyclical Index (^CYC). The market has richly rewarded this sector over the last several months.

    There is not, to my knowledge, an ETF that tracks the CYC. Fortunately, dear reader, you have me. And fortunately for me, I have Excel’s LINEST function.

    Here’s a quick-and-dirty way to build your own Cyclical ETF. All you need to do is buy four different sector ETF’s in these ratios:

    4.07 shares of Materials Sector (XLB)
    9.30 shares of Industrials Sector (XLI)
    7.33 shares of Consumer Discretionary Sector (XLY)
    3.93 shares of Energy Sector (XLE)

    The model isn’t a perfect match, but it’s not too bad.

  • ADP +297,000
    Posted by on January 5th, 2011 at 10:15 am

    I’m usually pretty skeptical of the ADP employment forecast but I should note that it came in very strong today. According to ADP, employers added 297,000 jobs last month which is the largest monthly increase in 10 years.

    The official employment report comes out on Friday. ADP does its own private sector forecast. Overall, ADP’s track record is pretty mixed.

    Over the previous six reports, ADP’s initial figures were closest to the Labor Department’s first estimate of private payrolls in July, when it understated the gain in jobs by 29,000. The estimate was least accurate in October, when it underestimated the employment gain by 116,000.

    ADP’s initial November estimate showed a 93,000 gain in private employment compared with the government’s estimate of a 50,000 increase. October payrolls rose 79,000. Projections among the 33 economists surveyed by Bloomberg for December ranged from gains of 50,000 to 150,000.

    “There is certainly a strong signal in the ADP data,” Joel Prakken, chairman of Macroeconomic Advisers LLC, which produces the figures with ADP, said in a conference call with reporters. “It has accelerated in each of the last three months and the gains that we reported this morning were widespread.”

    Jeff Cox at CNBC’s NetNet notes that not everyone is buying the ADP number. We’ll know more on Friday.

  • Mutual Funds: Worst Year Ever
    Posted by on January 5th, 2011 at 10:09 am

    Think you had a bad year? The mutual fund industry just finished its worst year ever in terms of relative performance. Only 20% of actively managed funds were able to beat the Russell 1000.

    By the end of November, a quarter of all funds were beating the index but it got even worse in December.

    Given that the December rally was led by low priced, small cap, less liquid companies that are inherently difficult for large cap managers to meaningfully overweight, performance was hard to come by – last month, the lowest priced companies which constitute about 10% of the benchmark, contributed almost 20% of its returns.

    (Via: Aleph Blog)