• The Meltdown Caused by the Meltdown is Melting Down
    Posted by on March 22nd, 2011 at 8:35 am

    Yesterday was a very good day for the stock market. The S&P 500 gained 1.50% to close at 1,298.38. The index is now only about 5 points from closing back above its 50-day moving average.

    It appears that the partial market meltdown caused by the partial nuclear meltdown has partially melted away. But who knows what traders will choose to freak out about next?

    I was happy to see AFLAC (AFL) jump up to $52.23 yesterday. The stock is roughly back to where it was in late December. Bed Bath & Beyond (BBBY) also got a nice lift thanks to an upgrade from FBR Capital. Leucadia National (LUK) closed at a new 52-week high, and remarkably, it’s our top-performing stock on the Buy List.

    I was surprised to the see the VIX, the Volatility Index, come down so quickly from its recent spike. The VIX had mostly bounced around the upper-teens until the earthquake. Last Wednesday, it reached an intra-day peak of 31.28. Since then, it’s cooled off and yesterday the VIX closed at 20.61.

  • Morning News: March 22, 2011
    Posted by on March 22nd, 2011 at 4:46 am

    Japan Finance Minister: BOJ Prohibited By Law From Underwriting JGBs

    All Clear Sounded as Markets Shrug Off Multiple Black Swans

    Euro at 10-Month High Versus Dollar on Rate Outlook; Pound Rises

    Hong Kong Monetary Authority Declines to Comment on PBOC Raise of Yuan Clearing Rate

    China Profitable as Business Climate Worsens, Amcham Says

    Crude Oil Lower, But Supported By Middle East Supply Worries

    Sales of U.S. Existing Houses Fall, Prices Reach Nine-Year Low

    Rate Futures Report: Yields Seen Up After Treasury MBS Move

    Shell Wins Approval for Deep-Water Exploration Plan in Gulf of Mexico

    Merck, Sanofi Abandon Plan to Combine Animal Health Units

    Honda To Extend Auto Production Halt Until March 27 In Japan

    China’s Panic-buying of Salt: A Sign Economy is at Breaking Point?

    For Consumers, Little to Cheer in AT&T Deal

    Joshua Brown: Happy 5th Birthday, Twitter!

    James Altucher: Was Greece Just Nuked?

    You can also follow me on Twitter.

  • Cartoon: How the Stock Market Works
    Posted by on March 21st, 2011 at 8:32 am

  • Citigroup Announces 1-for-10 Reverse Split
    Posted by on March 21st, 2011 at 7:30 am

    Good news! Citigroup‘s (C) stock will soon be over $40 per share.

    Bad news: It’s happening the wrong way. Citigroup has announced that it’s doing a reverse stock split. That means that for every ten stocks you own now, you’ll have just one after. The company will also start paying a dividend of ONE PENNY per share!

    There’s an odd belief that quality stocks need to have higher share price. I think Wall Street deems it’s a bit gauche when your stock can’t break $5. Citigroup closed on Friday at $4.50. The stock has mostly bounced between $3.50 and $5 for the past 18 months.

    I’m always amazed at the attention investors pay to the actual share price — not the value — but the nominal price. I often hear investors say that they don’t like stocks over $50 or $60. Why? It makes no sense.

    People automatically think a $12 stock is somehow a better buy. It’s not. The nominal price makes zero difference at all to how it will perform in the future. It’s not like a reverse stock split somehow fools investors. The only thing I could say about the share price is that a very low-priced stock will probably be a lot more volatile.

    Two years ago, a certain insurance stock had a 1-for-20 reverse stock split. That raised the nominal share price, but it hasn’t magically transformed it into a better performer.

    Two years ago, Citi was kicked out of the Dow. I’m curious what a 1-for-10 reverse split would do to the Dow’s divisor. This is the number that the company has kept for over 100 years to calculate the number for the index. You add up all 30 stocks and divide by it to get the index figure.

    Also, due to Citigroup’s low share price and large outstanding share base, the stock is a favorite among the High-Frequence Trading crowd.

    Citi often trades an average of 20,000 shares per second during the trading day. On December 9, 2009, Citi traded more than 3.7 billion shares. That’s about 13% of the number of shares outstanding. It also averages about 161,000 shares per second for the entire trading day.

    I imagine a 1-for-10 reverse split will cause a fall-off in volume of much more than 1/10th.

  • The Triumph of Data-Mining
    Posted by on March 21st, 2011 at 7:17 am

    What drives the price of Berkshire Hathaway (BRKA)? Some say it might have something to do with cash flow and earnings. Well, that’s one school of thought.

    Dan Mirvish suggests it’s news on…Anne Hathaway:

    On the Friday before the Oscars, Berkshire shares rose a whopping 2.02%. And on the Monday just after the Academy Awards, they rose again, this time 2.94%. But it’s not just an Oscar bounce, or something Warren Buffett may have said in the newspaper, or even necessarily something the company itself is doing (i.e. rumors afoot to buy Costco). Just look back at some other landmark dates in Anne Hathaway’s still young career:

    Oct. 3, 2008 – Rachel Getting Married opens: BRK.A up .44%
    Jan. 5, 2009 – Bride Wars opens: BRK.A up 2.61%
    Feb. 8, 2010 – Valentine’s Day opens: BRK.A up 1.01%
    March 5, 2010 – Alice in Wonderland opens: BRK.A up .74%
    Nov. 24, 2010 – Love and Other Drugs opens: BRK.A up 1.62%
    Nov. 29, 2010 – Anne announced as co-host of the Oscars: BRK.A up .25%

    Hmmm. Could be. I’ve read worse ideas.

  • Our Massive Sinking Hole
    Posted by on March 21st, 2011 at 6:28 am

    How bad is the nation’s financial situation? Consider these facts: Last week, Congress passed yet another continuing resolution to keep the government going. Congress cut $6 billion from the budget.

    CNS put that cut into context:

    If Congress were to cut $6 billion every three weeks for the next 36 weeks, it would manage to save between now and late November as much money as the Treasury added to the nation’s net debt during just the business hours of Tuesday, March 15.

    Just during the business hours? Wow. These numbers are simply staggering. At some point, we need to address our massive debt and deficit. If we don’t take action, the markets will.

  • Morning News: March 21, 2011
    Posted by on March 21st, 2011 at 4:38 am

    TOP Oil Market News: Crude Rises; Hedge Funds Slash Oil Bets

    Libya Strikes Raise Risks of Oilfield Shutdowns, Reprisals

    Risk Currencies Move Higher While Yen Held In Check

    Japan’s ‘BP Moment’ Troubles Global Economy

    US Energy Policy: Two Very Different Disasters Will Have Profound Effects

    VIX Rises Most Since May Driving S&P 500 to 1% Average Loss

    Wheat Rebounding 11% as Global Stockpiles Drop Most Since 2007

    Japanese Factories Take Steps to Resume Production

    Deutsche Telekom Surges on $39 Billion U.S. Sale to AT&T

    T-Mobile Deal Leaves Sprint’s Future Unclear

    Times’s Online Pay Model Was Years in the Making

    Buffett Remains Wary of Apple, Electronics Makers Compared With Coca-Cola

    Howard Lindzon: The Internet ‘Black Swan’…

    Joshua Brown: My Japanese Small Cap Trade

    Paul Kedrosky: Adventures in Falsifiying Economics

  • JPMorgan Chase Raises Dividend to 25 Cents
    Posted by on March 18th, 2011 at 10:59 am

    It finally happened. JPMorgan Chase (JPM) just announced that they’re raising their quarterly dividend from 5 cents to 25 cents per share.

    Before the financial crisis, JPM paid a dividend of 38 cents per share. In 2009, they cut it to five cents and held it there for the last eight quarters. The Fed just gave some banks approval for dividend increases. Earlier, Jamie Dimon had said that he wanted the dividend to be to between 75 cents and $1 per share, so he seems to have gotten his wish.

    The board also authorized a new $15 billion repurchase program of which up to $8 billion is approved for 2011.

    Remarking on the dividend action and repurchase authorization, Jamie Dimon, Chairman and CEO, said, “We are pleased to be in a position to increase our dividend and to establish a new share repurchase program. Our current expectation is to return to a payout ratio of approximately 30% of normalized earnings over time. We will operate the business with the objectives of maintaining a Basel I Tier 1 Common ratio of at least 9.0% and meeting the Basel III requirements substantially ahead of time. Our earnings power will allow us to generate significant capital in excess of our objectives allowing us to aggressively invest in our future.”

    Dimon added, “JPMorgan Chase has substantial organic growth opportunities – building branches, adding bankers, and expanding product and service capabilities globally. Quality organic growth is our top priority and our best use of capital. We expect, though at a minimum, essentially to repurchase the same amount of shares that we issue for employee stock-based incentive awards. Beyond this, we intend to repurchase stock only when we are generating capital in excess of what we need to fund our organic growth and when we think it provides excellent value to our existing shareholders.”

    In October, I looked at the dividend potential of some major banks.

  • Cisco to Pay First Ever Dividend
    Posted by on March 18th, 2011 at 10:45 am

    Few stocks have lost as much luster as Cisco (CSCO) has over the past few years. I’ve been continuously disgusted by how much money they’ve wasted on stock buybacks.

    Here’s a post from August 2005 where I predicted that Cisco would start paying a dividend:

    I’m going to make a prediction. No, not like my other lousy predictions. This time, I’m nearly serious. I predict that Cisco will start paying a cash dividend. Really, it makes perfect sense. The company generates gobs of cash, but they waste it on buying their own stock (just like everyone else who buys Cisco’s stock).

    There are two reasons why Cisco buys so much stock. They issue tons of stock, and they give out tons of options to their employees. They bought nearly $20 billion of stock in the last two years and the stock hasn’t done a thing. Forget fighting the market: Just give it to shareholders.

    It only took them five-and-half-years to listen to me. Cisco is sitting on a mountain of cash ($40 billion or $7.28 per share). The company announced a six-cent quarterly dividend that will be paid on April 30th to shareholders of record on March 31st.

  • CWS Market Review – March 18, 2011
    Posted by on March 18th, 2011 at 10:22 am

    This has obviously been a tough week for the stock market. The news out of Japan has been grim and our thoughts go out to the people who have been impacted by these awful events.

    Truthfully, equity markets aren’t the best places for short-term analysis of real-world events. Traders are nervous folks who tend to act before thinking. Actually, they’ll do many things before thinking. Stocks pulled back on Monday, Tuesday and Wednesday, but we got a decent rally on Thursday. Measuring from the S&P 500’s February high to the intra-day low on Wednesday, the market dropped 7%. That’s a pretty sharp pullback for such a short time period.

    We still really don’t know what the economic impact of the earthquake and tsunami will be. My initial thoughts are that the media tends to overplay these events, but ultimately, no one has enough information to make a proper assessment.

    So now we ask, “What should investors do?” Earlier this week, Barry Ritholtz was asked what investors ought to do in emergencies. He said that people should already have their contingency plans in place. He’s exactly right. If there’s some plan you need to go to, you can be sure that some trader got there first. Fortunately, we have a contingency plan built into our Buy List, and that’s simply that the Buy List is full of high-quality stocks. Few things are safer than investing in well-run companies led by managers that know what they’re doing.

    While the Buy List fell along with the rest of the market, it didn’t fall nearly as much as the broader indexes did simply because our stocks are much stronger. For example, I know that Bed Bath & Beyond (BBBY) is a good business today and I’m very sure it will be a good business tomorrow and the day after that. The management team is smart and they’ll know how to work their way through short-term problems.

    Even shares of Nicholas Financial (NICK) fell, though I can’t imagine how their business would be impacted by this week’s events. If anything, I would assume a used-car financer would be helped. But I’ve long ago stopped questioning why the market does what it does. If some people want to panic and give me a bargain, I can live with that.

    The one stock that’s been most impacted by the events in Japan is AFLAC (AFL). The company has operated in Japan for several decades and it has a very large presence there. Currently, about three-fourths of their revenue comes from Japan. One month ago, AFL was closing in on $60. Earlier this week, it bounced off $48 per share.

    I applaud AFLAC’s management for communicating with the public. Dan Amos, the CEO, has said that AFLAC will barely be impacted by the earthquake and tsunami. He said on Bloomberg TV this week that the company’s 2011 outlook is unchanged.

    Let’s look at the numbers. Wall Street currently expects AFLAC to earn $6.20 per share for 2011 and $6.75 in 2012. The stock closed Thursday at $50.45. This means the stock is going for about eight times this year’s estimates and 7.5 times next year’s estimate. I thought AFLAC was cheap at $59 and I think it’s even cheaper at $50. I apologize if you’ve found the bumps and bruises unpleasant. So have I. But AFLAC continues to be an excellent buy.

    Next I want to turn to Oracle (ORCL). The company is due to report its fiscal Q3 earnings next Thursday, March 24th. The consensus on Wall Street is for 49 cents per share. I think that’s too low. My take is that Oracle will earn 53 cents per share. Oracle has a very strong business and they’ve been executing very well lately.

    I try not to be shocked by what I see on Wall Street, but even I took notice when Oracle fell below $30 per share this week. Look forward to good numbers from them next week. I think Oracle is a very strong buy below $32 per share.

    Let me add a few words on some other Buy List stocks. Leucadia National (LUK) not only refused to pull back but it made a new 52-week high on Thursday. Abbott Laboratories (ABT) is back below $48 per share which is a very good entry price.

    We also had some decent economic news this week. Jobless claims fell to 385,000. This is the fourth-straight time that claims have come in under 400,000. Industrial production dropped 0.1% in February but that was due to milder weather. Just looking at manufacturing, production rose by 0.4% in February. That’s the sixth-straight increase for manufacturing production. The Index of Leading Economic Indicators, which tries to pinpoint where the economy is headed, rose 0.8% last month after a meager 0.1% increase in January. The economic recovery is slow, but the economy is recovering.

    I had been a little concerned that inflation was showing early signs of heating up. The latest report, however, shows that core consumer prices are still contained (just 0.2% last month). This could change soon. I noticed that Kimberly-Clark (KMB), a consumer products company, said it will start raising prices in North America. Consumers expect gasoline prices to bounce around, but when prices for tissues and diapers start to rise, that’s another story. I still think there’s a good chance the Fed will raise rates sooner than most folks expect.

    Let’s stick with our game plan of investing in high-quality stocks. I still believe cyclical industries will lag the market. The market will probably be range-bound for the next few weeks. Once Q1 earnings season starts in mid-April, we will get a better sense of how well our stocks have been doing. I’ll be particularly interested to see dividend increases from many financial stocks.

    That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!