A Look at the Defense Sector
Posted by Eddy Elfenbein on January 10th, 2011 at 11:59 am

The Spade Defense Index (^DXS) had a remarkable run for several years. The index outperformed the S&P 500 every year for nine-straight years from 2000 through 2008.

Lately, however, many defense and aerospace stocks have come under hard times. Just recently, a few defense names have come to life. Over the last three sessions, the DXS is up by 2.36% compared with just 0.10% for the S&P 500.

A couple of stocks like General Dynamics (GD), Lockheed Martin (LMT) and Raytheon (RTN) are beginning to look very attractive. Check out their P/E ratios.

From our Buy List, I like Moog (MOG-A). I’ve also written before that DigitalGlobe (DGI) and GeoEye (GEOY) both look very compelling.

Here’s a look at the stocks in the index along with their dividend yield and forward P/E ratios:

The Invention of Money
Posted by Eddy Elfenbein on January 10th, 2011 at 9:45 am

This past weekend, This American Life had a good show on the subject of money: What exactly is money?

It’s an interesting question and the answer isn’t so easy to explain. The show is about an hour long, and if you have the chance, I recommend giving it a listen.

Morning News: January 10, 2011
Posted by Eddy Elfenbein on January 10th, 2011 at 7:29 am

Stock Futures Lower on Portugal Concerns Despite M&A

Wall Street Dumps Most Treasuries Since 2004 on Growth

German Refusal to Boost Euro Rescue Fund May Weaken

Euro Zone Debt Worries Return to Hit Euro, Stocks

China’s Trade Surplus Decline Suggests Less Reliance on Exports

China Stays World’s Largest Auto Market as 2010 Sales Jump 33% on Stimulus

The Story Of 2011 Is That Major Emerging Markets Are Tanking

Laos Launches Stock Exchange

The Invention of Money

Dupont to Buy Danisco for $5.8 Billion to Add Enzymes

Patni-iGate Buyout Deal Valued at $1.22 Billion

2 Goldman Traders to Set Up Their Own Fund

Stocktwits Interview… with Charles Kirk

Wanna feel old? The teacher from Van Halen’s “Hot for Teacher” video turns 50 today. Happy Birthday!

Townes Van Zandt – Dead Flowers
Posted by Eddy Elfenbein on January 7th, 2011 at 5:47 pm

The first week of 2011 was a good one for us. The Buy List gained 1.61% to the S&P 500’s 1.10%.

Time to stop work. Have Townes Van Zandt get your weekend started right with this classic:

The Dow Has Missed the Rally
Posted by Eddy Elfenbein on January 7th, 2011 at 10:15 am

Here’s one for the wonks. The Dow Jones Industrial Average has badly trailed the S&P 500 since the rally began in late August.

I’m not much of a fan of the Dow since it’s 30 stocks are weighted by price. The problem is that the Dow hasn’t captured the strength in cyclical stocks.

NFP = 103,000
Posted by Eddy Elfenbein on January 7th, 2011 at 8:41 am

The Labor Department has reported that the economy created 103,000 jobs last month. That’s not good. With revisions, the economy created 71,000 jobs in November and 210,000 in October.

The unemployment rate fell to 9.4%. Ben Bernanke testified before Congress this morning. Here’s the bit getting a lot of attention:

Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully.

Morning News: January 7, 2011
Posted by Eddy Elfenbein on January 7th, 2011 at 7:59 am

U.S. Stock Futures Flat Ahead of Payrolls Data

Eurozone Economy Suffers Growth Slowdown

China’s Stocks Decline for Second Day on Inflation Concern; Ping An Drops

Bernanke to Face Senate Skeptical of Fed Policy

Apple, Dow Drive U.S. Fourth-Quarter Profits to 19-Year High

The Downsizing in Detroit

Average Stock Ownership: 22 Seconds

So, Now That We Know Facebook’s Numbers, Is It WORTH $50 Billion?

JPMorgan, Morgan Stanley Approved to Form Chinese Joint Venture

With Android Phones, Verizon Is in Position to Gain Lost Ground

Private Equity Fundraising Grinds to Halt

53 Things I Learned from Howard Lindzon

Clowns Killed in Alleged Drug Gang Hit in Mexico

CWS Market Review – January 7, 2011
Posted by Eddy Elfenbein 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 Eddy Elfenbein 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 Eddy Elfenbein 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!