• Two-Year High
    Posted by on November 4th, 2010 at 11:58 am

    The S&P 500 has been as high as 1,217.52. The April 23rd closing high was 1,217.28. If we close above it, we’ll have reached the market’s highest point since September 19, 2008 — four days after Lehman Brothers declared bankruptcy.

    Also, Wright Express (WXS) has been up as much as 16.9% today!

  • Good News — I Was Wrong About QE2
    Posted by on November 4th, 2010 at 10:53 am

    Well, I’m happy to say that I was dead wrong about QE2. I said its size would be small. It’s not. I said that it would disappoint Wall Street and that stocks would fall this week. They haven’t.

    My inaccurate forecast has been great for our Buy List. As of now, our Buy List is up over 1.7% today, which is 40 basis points more than the S&P 500.

    The S&P 500 is currently at 1,214. We’re inches away from the Magna Carta. At this rate, we should be at the Bubonic Plague in no time.

    As Bernanke wrote in his editorial, QE is a “less familiar” tool of monetary policy so we don’t know exactly how to respond. Normally, lower interest rates are good for stocks. With QE2, the Fed is depressing the mid-range of the yield curve (note the distribution in the New York Fed’s statement).

    The following paragraph is getting a lot of attention. Many folks see this as Bernanke saying he’s going to push for higher stock prices.

    This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

    I don’t read it that way, and I caught the implication when I first read it. I think it’s clear that Bernanke means to ease financial conditions; and certain events, like higher stock prices, tend to follow suit. I don’t see what’s so controversial about that. It’s what the Fed always does.

    In my view, the key part is that the Fed wants to raise expectations for inflation. At the same time, Bernanke wants to assure us that inflation won’t be a problem. Historically, stocks haven’t been hurt by inflation up to a rate of about 5%. After that, inflation is a killer for stocks. In fact, the only thing worse is deflation, and I think that’s what’s on Bernanke’s mind.

    So I was all prepared to tell folks not to get rattled by a pullback because stocks are still cheap. I thought we were going to have a buying opportunity. Instead, the market has continued to rally. As I’ve said, the Fed is on our side. They want investors to take higher risks. This should help stocks and growth stocks in particular.

  • Wright Express Jumps 12%
    Posted by on November 4th, 2010 at 10:12 am

    After a minor setback with Becton, Dickinson‘s (BDX) earnings (the stock is higher today), Wright Express (WXS) gave us a great earnings report and the stock is currently up 11.96% today.

    For the third quarter, WXS earned 72 cents per share which was four cents better than expectations.

    Total revenue for the third quarter of 2010 increased 17% to $100.2 million from $85.8 million for the third quarter of 2009. Net income to common shareholders on a GAAP basis was $20.6 million, or $0.53 per diluted share, compared with $23.4 million, or $0.60 per diluted share, for the third quarter last year.

    On a non-GAAP basis, the Company’s adjusted net income for the third quarter of 2010 increased 13% to $28.1 million, or $0.72 per diluted share, from $24.9 million, or $0.63 per diluted share, for the year-earlier period.

    Wright Express uses fuel-price derivative instruments to mitigate financial risks associated with the variability in fuel prices in North America. For the third quarter of 2010, the Company’s GAAP financial results include an unrealized $6.7 million pre-tax, non-cash, mark-to-market loss on these instruments. See exhibit 1 for a full reconciliation of adjusted net income.

    “We experienced further momentum during the third quarter, exceeding both our top- and bottom-line guidance,” said Michael Dubyak, Chairman and CEO. “We made strides in advancing our long-term strategy to expand our presence abroad. Late in the third quarter, we closed the acquisition of Retail Decisions’ Australian fuel and prepaid card businesses, which allows us to extend our international presence and create a new platform for growth outside of fuel cards. We also began processing commercial fuel card transactions for BP International in New Zealand in September. These important steps in our international strategy, combined with strength in MasterCard and improving results in Fleet, provide us with multiple avenues for continued growth.”

    In July, the company said to expect Q3 earnings between 65 and 68 cents per share, so business is going better than expected internally.

    For all of 2010, they had been expecting EPS between $2.47 to $2.57. Today they raised the range to $2.69 to $2.75 per share. That’s a big increase. The full-year range translates to a Q4 range of 68 cents to 74 cents per share.

  • Morning News: November 4, 2010
    Posted by on November 4th, 2010 at 8:06 am

    Bernanke Experiments With Crisis Tools to Boost Economy

    Dollar Jettisoned After Fed, Risk Appetite Stoked

    Emerging Market Countries Criticize Fed Decision

    China Should ‘Normalize’ as U.S. Eases, PBOC Official Urges

    German Bonds Fall After Fed Decision; France, Spain to Auction Securities

    Crude Oil Extends Gains After Breaching 6-Month High

    SEC Bans ‘Naked Access’

    Time Warner Cable to Buy Back $4 Billion in Stock in Its First Repurchase

    Samsung Tops U.S. Mobile Phone Market

    Unilever Upbeat on Pricing as Q3 Sales Rise

    GM Said to Have Disagreed With Treasury Over IPO Price Range

    Mythbuster: Russolillo on Stocks During Gridlock

  • Bernanke’s Editorial
    Posted by on November 4th, 2010 at 6:12 am

    In the Washington Post, Ben Bernanke explains why the Fed went ahead with Quantitative Easing:

    This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

    While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

    Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

    Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.

    Read the whole thing. This doesn’t strike me as terribly convincing.

    He’s saying that because we need to get inflation higher, we’re resorting to the same strategy we tried before, which, by the way, didn’t result in higher inflation the first time.

  • Psst — Don’t Tell Anyone But Earnings Have Been Great This Quarter
    Posted by on November 3rd, 2010 at 10:27 pm

    Lost in all this talk of QE2 and elections has been the fact that this has been a great earnings season. (No, really. It has.)

    We’re more than two-thirds done and this season is on track to have one of the best “beat rates” ever. The media earnings surprise has been 4.9%. Normally, surprises run around 3%. As of Monday, there have been 255 positive surprises and just 56 misses. That’s really good.

    There is a downside, though. Most of the good news has been due to higher margins. The sales beats have been nowhere near as impressive as the earnings beats. Higher margins are good, but the catch is that margins can only go so high. Eventually, you have to have sales growth. We’ve also seen that analysts haven’t been raising estimates for next year.

    The overriding fact is that the market is still cheap on a valuation basis. The S&P 500 is probably on track to make $84 this year, give or take. Assuming there are no meteor strikes next year, we’ll probably make $95.

    The S&P 500 closed just shy of 1200 today, so we’re talking about a forward P/E Ratio of 12.6. Flip it over and that’s an earnings yield of 7.9%. Last I checked, yields aren’t anywhere close to that.

    As I’ve said before, the Fed is telling everyone to shift up the risk ladder. They want all those companies to use their cash hordes to hire people. They’ll do whatever it takes.

  • Becton, Dickinson Misses By a Penny
    Posted by on November 3rd, 2010 at 9:01 pm

    Becton, Dickinson (BDX) sneaked up on us and reported earnings after today’s close. Unfortunately, this became our first earnings miss of the season, although it was only by a penny.

    For their fiscal fourth-quarter, Becton, Dickinson earned $1.24 per share compared with Wall Street’s forecast of $1.25 per share. I’m a little disappointed since the last two earnings reports were quite good.

    The good news, and more important in my view, is that the company gave guidance for the next fiscal year (ending September 2011) of earnings ranging between $5.45 per share and $5.55 per share. The Street was at $5.42 so it’s nice to see them exceed expectations. For this past year, BDX made $4.90 per share. The revenue forecast for next year of 4% growth is on the light side. The stock fell a bit after-hours.

    The company also said it plans to buy back $1.5 billion worth of stock next year and another $600 million in 2012. I know investors don’t like high-priced stocks, but BDX is a solid buy. Any entry below $80 is a good value.

    Update: Here’s the transcript of the earnings call from Seeking Alpha.

  • Ford Hits Five-Year High
    Posted by on November 3rd, 2010 at 3:20 pm

    If anyone cares about stocks today, Ford (F) just broke out above $15 per share. This is Ford’s highest price since July 2004:

  • The 30-Year Yield Soars
    Posted by on November 3rd, 2010 at 3:09 pm

    Can you guess when the QE2 announcement came? I’ll bet you can!

  • Detail from the NY Fed
    Posted by on November 3rd, 2010 at 2:56 pm

    From the NY Fed’s website:

    Statement Regarding Purchases of Treasury Securities
    November 3, 2010

    On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

    The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.

    Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.

    The Desk plans to distribute these purchases across the following eight maturity sectors based on the approximate weights below:

    Nominal Coupon Securities by Maturity Range*

    1.5 to 2.5 years: 5%
    2.5 to 4 years: 20%
    4 to 5.5 years: 20%
    5.5 to 7 years: 23%
    7 to 10 years: 23%
    10 to 17 years: 2%
    17 to 30 years: 4%
    1.5 to 30 year TIPs: 3%

    *The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
    **TIPS weights are based on unadjusted par amounts.

    (This distribution is why the belly of the yield curve is plunging. The two-year is at a record low. The 30/5 spread is at a record.)

    Under this distribution, the Desk anticipates that the assets purchased will have an average duration of between 5 and 6 years. The distribution of purchases could change if market conditions warrant, but such changes would be designed to not significantly alter the average duration of the assets purchased.

    To provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, the Desk is temporarily relaxing the 35 percent per-issue limit on SOMA holdings under which it has been operating. However, SOMA holdings of an individual security will be allowed to rise above the 35 percent threshold only in modest increments.

    Purchases associated with balance sheet expansion and those associated with principal reinvestments will be consolidated into one set of operations to be announced under the current monthly cycle. On or around the eighth business day of each month, the Desk will publish a tentative schedule of purchase operations expected to take place through the middle of the following month, as well as the anticipated total amount of purchases to be conducted over that period. The schedule will include a list of operation dates, settlement dates, security types to be purchased (nominal coupons or TIPS), the maturity date range of eligible issues, and an expected range for the size of each operation.

    The Desk expects to conduct the November 4 and November 8 purchase operations that were announced on October 13, and it plans to publish its first consolidated monthly schedule on November 10 at 2:00 p.m.

    Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system. Consistent with current practices, the results of each operation will be published on the Federal Reserve Bank of New York’s website shortly after each purchase operation has concluded. In order to ensure the transparency of our purchase operations, the Desk will also begin to publish information on the prices paid in individual operations at the end of each monthly calendar period, coinciding with the release of the next period’s schedule.