• Cisco Drags Down the Market
    Posted by on November 11th, 2010 at 10:45 am

    The market is being dragged down today by lousy guidance from Cisco (CSCO). So far, our Buy List isn’t down as much as the rest of the market, although AFLAC (AFL) is currently down over 3%.

    Wall Street had been expecting Cisco to earn 42 cents per share for this quarter. Instead, the company said it will be no more than 35 cents per share. The stock has been down as much as 17% today.

    Think of it this way: a miss of seven cents per share leads to a loss of 420 cents in the share price. If the seven cents happens each quarter, today’s haircut has a P/E Ratio of 15 (420 divided by 28).

    I’ve long been critical of Cisco’s endless stock buybacks. I was happy to see that the company will finally pay a dividend sometime this fiscal year. The big question now is how much they will pay. Like lots of companies, Cisco has tons of cash. The problem is that it’s held overseas and bringing it home will lead to a nasty tax bill.

  • Thanks Vets
    Posted by on November 11th, 2010 at 9:14 am

    In Flanders fields the poppies blow
    Between the crosses, row on row,
    That mark our place; and in the sky
    The larks, still bravely singing, fly
    Scarce heard amid the guns below.

    We are the Dead. Short days ago
    We lived, felt dawn, saw sunset glow,
    Loved and were loved, and now we lie,
    In Flanders fields.

    Take up our quarrel with the foe:
    To you from failing hands we throw
    The torch; be yours to hold it high.
    If ye break faith with us who die
    We shall not sleep, though poppies grow
    In Flanders fields.

    By Lieutenant Colonel John McCrae, MD (1872-1918)
    Canadian Army

  • Morning News: November 11, 2010
    Posted by on November 11th, 2010 at 7:22 am

    Kiss Your Assets Goodbye When Certainty Reigns: Barry Ritholtz

    Market Shrinkology with Dr. Phil Pearlman

    Lilly’s Survival Plan Is Far From Generic

    Morgan Stanley Says Equities Are ‘Crazy Cheap’

    In Defense of Ben Bernanke and the Fed

    Stock Futures Drop After Disappointing Cisco Earnings

    Trade Deficit in U.S. Shrinks as Exports Climb to Two-Year High

    Cisco’s Dismal Outlook Stuns Street, Hits Sector

    Wal-Mart Says ‘Try This On’: Free Shipping

    Whales Suffering From Sunburn

    Hi Ho Silver!

  • Morgan Stanley Strategist Sees “Multi-Year Bull Market”
    Posted by on November 10th, 2010 at 10:59 pm

    From Bloomberg:

    Now is a good time for investors to get into the stock market, as rising profits and a growing middle class power a “multi-year bull market,” particularly in the U.S. and emerging markets, according to Charles Reinhard, a global investment strategist at Morgan Stanley Smith Barney.

    “We have a two-speed recovery — with emerging market countries growing at 6 percent, developed countries growing at 2 percent — and we have equities that are an extraordinary value,” Reinhard said today in New York at a presentation by the world’s largest brokerage, a joint venture between Morgan Stanley and Citigroup Inc. “What we think is powering this growth is simply good, old fashioned profit growth. Profits have leaped ahead, back to almost where they were, but the stock market has not done that yet.”

    Global equities are poised to reach 30 percent profit growth this year or better and then taper off, Reinhard said. “If markets could just move with profit growth, most people would find that to be a pretty good experience.”

    In eight of the last 10 times that the U.S. has pulled out of a recession, there has been a bull market lasting at least two years, according to Reinhard, who cited the two exceptions as the period during the Cuban Missile Crisis and the double-dip recession in the early 1980s.

    “If we can avoid a geo-political provocation akin to the Cuban Missile Crisis, the odds go up,” he said. “A few months ago, people were worried about [a double-dip recession], but we have clearly veered off that path, too.”

    Asia, Eastern Europe

    The engines driving profit growth are the emerging market regions of China, South Asia, East Asia and Eastern Europe, which will account for about 93 percent of households that have middle class income worldwide, according to Morgan Stanley Smith Barney research. Emerging markets’ middle class makes up 56 percent of all households worldwide, the research said.

    “This is going to have powerful implications because as people become a little bit wealthier they demand different things,” Reinhard said. “Their approach to food, their approach to fashion, their approach to travel. As people have a little bit of money, they’re curious. They want to see how other people live. Tourism is only going to get bigger.”

    The firm is upbeat on the stock market because no “assassins,” or dangers to the market, are present, Reinhard said. Inflation at around 1 percent is not a concern right now, “irrational exuberance” is no longer in the stock market, and a looming recession is not ready to cut into profits, he said.

    “Bull markets don’t die of old age, they die when they’re assassinated,” Reinhard said. “We should have a very good year ahead for equities.”

  • Ford on Ford
    Posted by on November 10th, 2010 at 3:46 pm

  • Cigarette Packages to Carry Images of Corpses, Lungs
    Posted by on November 10th, 2010 at 1:23 pm

    Why is Reynolds American (RAI) down 2.2% today?

    This might have something to do with it.

  • What If the Stock Market Were a Bond? – Update
    Posted by on November 10th, 2010 at 1:01 pm

    Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

    Crazy? Let me explain.

    I took all of the historical market performance of the S&P 500 (including dividends) and invented a hypothetical long-term bond that matched the market’s monthly gains step-for-step.

    I assumed that it’s a bond of infinite maturity and pays a fixed coupon each month.

    There’s one hitch, though. I have to choose a starting yield-to-maturity for the beginning of the data series in December 1925. So this isn’t a completely kosher experiment because the starting point is based on my guess.

    If I choose a number that’s too high, the historical performance won’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.

    Fortunately, the data makes my job easy. After 85 years, the window I have to work with is pretty narrow. Starting with 6.6% is too high, and 6.4% is too low. After playing with the numbers, I finally settled on 6.502%.

    Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 85 years. Through the end of October, the yield stood at 12.05%.

  • The AAA/10-Year Spread
    Posted by on November 10th, 2010 at 12:21 pm

    Here’s a look at the yield spread between AAA corporate bonds and the 10-year T-bond.

    I’m surprised this spread hasn’t narrowed much since the worst of the financial crisis. Instead of corporate bonds being underpriced, I’m inclined to think that mid-term Treasuries are overpriced. This is very probably due to the Fed’s policies.

  • Earnings Season Round-up
    Posted by on November 10th, 2010 at 10:57 am

    From Zacks:

    * 436 of the S&P 500 firms have reported 3Q earnings. The remaining firms are unlikely to significantly change the overall results. Four sectors are done and five more are over 90% done.
    * Strong season so far with a median surprise of 4.98%, and a 3.87 surprise ratio (317 beats, 82 misses); 76.8% of all firms reporting beat expectations.
    * Positive year-over-year growth for 346, falling EPS for 87 firms, 3.45 ratio, 79.4% of all firms reporting have higher EPS than last year.
    * Total net income up 27.4%. All sectors but Construction have more positive surprises than disappointments. Six sectors have surprise ratios of 6:1 or better.

    Historically, a “normal earnings season” will have a surprise ratio of about 3:1 and a median surprise of about 3.0%. Thus, this is a positive earnings season, or will be if the numbers hold up as the final firms report. While the season has faded a bit from when the first firms were reporting, it still looks to be a very solid season overall.

  • S&P 500 -0.66% This Morning
    Posted by on November 10th, 2010 at 10:23 am

    The market is sliding lower again today, continuing its trend from late yesterday.

    There was some good economic news today. The number of first-time jobless claims for unemployment benefits dropped by 24,000 to 435,000. That’s the lowest level since mid-July. Economists were expecting a drop of 9,000.

    The number of people filing unemployment claims for a second week or more fell to 4,301,000. That’s down 86,000 from last week’s revised average of 4,387,000.

    If Congress doesn’t make any changes by the end of this month, two million people will run out of unemployment benefits next month.

    General Motors just reported a profit of $2.16 billion. The company is due to IPO next week. Well, I guess technically we don’t need an I in their IPO since the company has been traded for many decades. GM is 61% owned by Uncle Sam.

    The plan is for GM to sell 365 million shares somewhere between $26 and $29 per share. That works out to somewhere between $9.5 billion and $10.5 billion. GM will also offer about $3 billion in preferred stock that will become common stock. I wouldn’t go anywhere near this offering.

    The government also said that our massive trade deficit narrowed just a tad in September. The trade gap closed by 5.3% to $44 billion in September. Still, the trade gap for the year is 40% higher than last year’s. Exports rose by 0.3% to 154.1 billion. That’s the highest level in two years. Imports dropped by 1% to $198.1 billion.