Baxter Approves Share Repurchase of $2.5 Billion
Posted by Eddy Elfenbein on December 13th, 2010 at 4:23 pm

Another Buy List stock, Baxter International (BAX), is buying back its stock:

Baxter International Inc. announced today that its Board of Directors has approved a share repurchase authorization of up to $2.5 billion of the company’s common stock.

Baxter has approximately $600 million of remaining authorization under a previous $2.0 billion share repurchase program approved in July 2009. Shares will be repurchased in the open market at times and amounts determined by the company based on its evaluation of market conditions and other factors.

“This approval is consistent with our disciplined capital allocation approach and reflects the confidence we have in our ongoing ability to generate strong cash flows and deliver increased value to our shareholders,” said Robert J. Hombach, chief financial officer.

Over the last five years, the company has returned more than $10 billion to shareholders in the form of dividends and share repurchases. Baxter has doubled its dividend rate during this period, and recently announced a 7 percent increase for 2011.

AFLAC Buying Dollar-Denominated Debt
Posted by Eddy Elfenbein on December 13th, 2010 at 1:17 pm

Bloomberg notes that AFLAC (AFL) is buying as much as $1 billion worth of corporate bonds through the end of this year:

Columbus, Georgia-based Aflac, the world’s biggest seller of supplemental health insurance, is shifting from Japanese government securities and focusing on dollar-denominated corporate debt rated A with a duration of about 10 years. Japanese government bonds due in 7 to 10 years yield about 0.99 percent, compared with 4.52 percent for A rated U.S. corporate debt.

“Given that interest rates are so low you have to look at your duration preferences,” Kriss Cloninger, president and chief financial officer of Aflac, said in an interview last week. “At the time we were placing the money, we felt the risk- reward advantage was with shorter-duration corporates as opposed to the longer-term Treasuries.”

The New S&P Dividend Aristocrats
Posted by Eddy Elfenbein on December 13th, 2010 at 12:01 pm

Here’s the new list of the S&P 500 Dividend Aristocrats. These are stocks that have increased their dividends for 25-straight years. For the year, this index is up 17.57%.

A&P Files for Bankruptcy
Posted by Eddy Elfenbein on December 13th, 2010 at 8:42 am

As it’s officially known, The Great Atlantic & Pacific Tea Company (GAP), or A&P, has filed for bankruptcy.

The Great Atlantic & Pacific Tea Co., the 101-year-old U.S. operator of almost 400 supermarkets under names including Waldbaum’s, The Food Emporium and Pathmark, sought bankruptcy protection after failing to successfully compete with wholesale clubs and drugstores.

The retailer, which also runs stores under its own name, Super Fresh and Food Basics, had $8.8 billion in sales for the year ended in February, according to its website. Yesterday, it listed assets of $2.5 billion and debt of $3.2 billion in a Chapter 11 filing in U.S. Bankruptcy Court in White Plains, New York. A shift in consumer spending at wholesale clubs, supercenters and drugstores hurt sales in the quarter ended Sept. 11, A&P said in a regulatory filing.

“We have taken this difficult but necessary step to enable A&P to fully implement our comprehensive financial and operational restructuring,” Chief Executive Officer Sam Martin said in a statement yesterday. “We could not complete our turnaround without availing ourselves of Chapter 11.”

This is a sad day, but honestly, things weren’t looking so good on Friday when the shares dropped by 67%. That’s usually a bad sign.

Jim Cramer called A&P exactly right over a year ago: “This one is bad. Why would I want to be on the worst operator in the group? That one is a sell, sell, sell.”

A&P has a long and proud history. The company actually was the darling of Wall Street at the beginning of the depression since it was one of the very few companies that continued to do well.

Benjamin Graham famously used the example of A&P in his book the Intelligent Investor (pages 200 to 203).

Sector Relative Strength By 10-Year T-Bond Movement
Posted by Eddy Elfenbein on December 13th, 2010 at 8:27 am

When the 10-year Treasury bond moves higher or lower, there’s a corresponding movement of stock sectors. For the most part, cyclical stocks do well and consumer stocks lag. I wanted to show what the historical relationship has been.

I went to the data library hosted by Dartmouth Professor Ken French. He has a listing of 49 industry groups going back to 1963. I broke down the daily relative performance by days when the yield on the 10-year Treasury rose, stayed the same, and fell.

The following results are annualized. In other words, when the yield on the 10-year T-bond rose, gold stocks outperformed the market by an average of 26% per year. When the yield on the 10-year fell, gold stocks underperformed by 23% per year.

Morning News: December 13, 2010
Posted by Eddy Elfenbein on December 13th, 2010 at 7:30 am

Treasury Yields Rise Again, Equities Gain

European Stocks Gain for Sixth Day; Kazakhmys, Wellstream Rise

Yen Falls as Signs of Economic Recovery and Stock Gains Ease Risk Aversion

Wall Street Sees Record Revenue in Recovery From Bailout

GE to Buy UK Oil Pipemaker Wellstream for $1.3 Billion

A Secretive Banking Elite Rules Trading in Derivatives

Infographic: How Color Affects Our Purchasing Habits

I Want to Work at CNBC

Wal-Mart to Close Moscow Office

Sanofi Extends Offer for Genzyme

Netflix Vs. Its Vendors

The Fed Made the Mess Worse
Posted by Eddy Elfenbein on December 12th, 2010 at 4:16 pm

If you’re curious why the Federal Reserve did everything it could to bail out the banking system, the reason is due to an event that happened 80 years ago this weekend.

Yesterday was the 80th anniversary of the collapse of the Bank of United States. The bank’s odd-sounding name was an attempt to fool depositors into thinking the bank was backed by the government.

According to Milton Friedman, the bank’s failure was the critical date of the Depression. At the time, it was the largest bank failure in U.S. history. This is when the Fed’s lack of response turned a regular recession into a massive depression.

According to Friedman, BOUS was a sound bank. Even when it was forced to liquidate, it paid off depositors 83.5 cents on the dollar.

Friedman discussed the failure of the Bank of United States and its repercussions in Free to Choose (see pages 80 to 82).

Netflix Joins the S&P 500
Posted by Eddy Elfenbein on December 10th, 2010 at 2:37 pm

The stock they’re replacing: The New York Times (NYT).

Bonds Down, Stocks Up
Posted by Eddy Elfenbein on December 10th, 2010 at 1:37 pm

Take a wild guess what’s happening today. That’s right — stocks are up and bonds are down. Again. Just like almost everything for the past few weeks.

Right now, 18 of the 20 Buy List stocks are up. Only Leucadia (LUK) is down and Stryker (SYK) is unchanged.

Here’s a look at the S&P 500 alongside the Long-Term Treasury Bond ETF (TLT).

CWS Market Review – December 10, 2010
Posted by Eddy Elfenbein on December 10th, 2010 at 9:29 am

Before I get into the meat of today’s update, I have a special announcement: I’ll be unveiling the Buy List for 2011 one week from today-December 17, 2010.

As usual, there will be 20 stocks, and as usual, I’m only making five changes to the list. The new list will go into effect at the beginning of the year. According to the rules of my Buy List, once the new Buy List is set, I can’t make any changes for the entire year.

My goal is to show investors that a disciplined strategy focused on high-quality stocks can consistently beat the market. This will be the fourth year in a row that we’ve beaten the S&P 500.

I announce the Buy List early (usually around the middle of December) so no one can say that I’m using tricks to boost my results.

Now let’s get to the latest news on Wall Street. The S&P 500 closed at yet another 26-month high on Thursday. The index is now up to 1,233.00. Only a few days ago, the index fell below its 50-day moving average. I guess the bear saw its shadow and quickly returned to hibernating. This has been a great run over the last 21 months, and I think the market still has room to run. The problem, however, is that future gains will be much harder to come by.

As I mentioned last week, the key aspect that’s driving the market is that investors are shifting from low-risk assets to higher-risk assets. This is very important and all investors need to understand this key fact.

During the financial crisis, investors rushed to any super-safe security, completely abandoning everything else. It’s as if everyone on a sinking ship stormed just one lifeboat. As a result, we’re now seeing some very unusual prices.

I’ll give you an example: The Wall Street Journal recently noted that U.S. nonfinancial companies are sitting on close to $2 trillion in cash. That’s 7.4% of their assets which is the highest level in 50 years. Companies are nearly terrified to put their money to work. This $2 trillion number is also inflated because a lot of that money is held overseas and to bring it back to the United States would incur taxes.

Consider that investors are currently willing to lend their money to the U.S. Treasury for five years in return for just 1.9% per year. That’s crazy, and what’s even crazier is that the yield is up about 70 basis points in the last month. In contrast to U.S. government debt, Reynolds American ($RAI) currently yields more than three times what the 5-year Treasury yields. Or, look at Nicholas Financial ($NICK) which is selling for well below 10 times earnings. Sure, I understand that safety is valuable, but these prices just don’t make sense.

So now we’re seeing this madness slowly unwind. My take is that the Fed’s recent policies are aiding this risk shift. For example, mirroring the stock market rally, long-term Treasuries continue to sell off which means that their yields rise. On Wednesday, the yield on the 30-year Treasury broke 4.5%, the highest yield in over six months.

In other words, the trend is out of bonds and into stocks (especially cyclicals), and our Buy List has done especially well. For the year, our Buy List is up 13.38% through Thursday. Let’s look at some news impacting our stocks.

I was happy to see that Leucadia National ($LUK) broke out to a two-year high on Thursday. Earlier this week, Leucadia announced that it’s restoring its 25-cent annual dividend after not having paid a dividend since 2007. That’s a nice vote of confidence.

Speaking of dividends, Stryker ($SYK) announced a 20% increase in its quarterly dividend. The dividend will rise from 15 cents per share to 18 cents per share. The new dividend will be paid on January 31 to shareholders of record as of December 31.

I really like Stryker. The odd thing is that the stock has been a sluggish performer since the spring. (A lot of good health care stocks have been slow to move.) Nevertheless, Stryker had a very good earnings report in October and they raised the low-end of this year’s EPS forecast. They now see 2010 earnings coming in between $3.27 per share and $3.30 per share. Last year, they earned $2.95 per share which is pretty decent growth in a weak economy.

I’m also happy to see that shares of AFLAC ($AFL) have recovered. In the last few e-letters, I reminded you that AFL was looking cheap. The stock got as high as $56.23 on Thursday before settling back to $55.62. I have no idea how this stock could have dropped below $51 a few days ago, but it did.

As I’ve said before, I think AFL will soon make a run at $60. The company should make about $6.20 per share next year. If AFL went for the same earnings multiple as the rest of the market, it would be an $81 stock.

We also saw a new 52-week high for Becton, Dickinson ($BDX) earlier this week (please note: This was incorrectly labeled as Black & Decker in the email). This is interesting because BDX was our only Buy List stock to fall short of its Wall Street earnings estimate during the last reporting season. They missed by just a penny, but it was still a decent earnings report.

Some Buy List stocks that look especially good here (in addition to the ones mentioned above) include Wright Express ($WXS), Gilead Sciences ($GILD) and Bed Bath & Beyond ($BBBY).

There are two news items to look forward to next week. On Tuesday, the Federal Reserve meets. I don’t expect them to take any action, but it will be interesting to see if the language in their post-meeting policy statements hints at any changes in their thinking. The recent surge in cyclical stocks leads me to believe that a rate hike will come sooner than most folks on Wall Street expect. I suspect that there might be some growing dissention within the FOMC.

On Wednesday, the Fed will release the November report on industrial production. The last industrial production report appeared a bit tepid, but the details showed that manufacturing production increased in October. Manufacturing production was also revised higher for both August and September.

This helps explain why, through this past Tuesday, the Morgan Stanley Cyclical Index had outperformed the S&P 500 for nine-straight sessions, for 13 of the last 14 and for 21 of the last 25. The equation is the same: movement out of low risk and into higher-risk.

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