How Closely Tied Are the Stock Market and the Economy?
Posted by Eddy Elfenbein on April 29th, 2013 at 12:33 pm

We often speak of the stock market and economy as if they’re closely tied together. The evidence suggests they’re not.

For one, the stock market follows corporate profits which is only a small part of the overall economy. Secondly, the stock market tries to look ahead in time. That’s why the best time to invest is when things look terrible. Consider how glum everyone was four years ago.

Here’s a look at quarterly changes in GDP (horizontal) along with quarterly changes in the S&P 500 (vertical). To me, it looks like one big mess.

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Nominal GDP Continues to Track 4% Growth
Posted by Eddy Elfenbein on April 29th, 2013 at 11:57 am

There’s a growing movement calling for the Federal Reserve to track a regular increase of nominal (including inflation) GDP. The number 5% is most frequently cited.

What these proponents say is that the Fed should draw a 5% trendline. If nominal GDP drops below that trendline, they ought to loosen monetary policy. If it’s above 5%, they ought to tighten.

What’s interesting is how closely nominal GDP has tracked a 5% growth trendline over the last 14 quarters. Not only is it close, I doubt the Fed could have done a better job if it had tried.

The blue line is nominal GDP and the black line is a 4% trendline.

Six Straight Up Months for the S&P 500
Posted by Eddy Elfenbein on April 29th, 2013 at 11:36 am

You’d never know this by reading a lot of financial commentary but the S&P 500 is about to close out its sixth-straight monthly gain. The latest numbers show that 273 of the 500 companies in the S&P 500 have reported earnings so far. Of those, 74% have beaten earnings expectations but 55% have missed sales expectations.

The government reported that personal income rose 0.2% last month. Personal spending was also up 0.2% in March, but that’s down from the big 0.7% rise in February. The next big report will be Friday’s jobs report. Economists forecast that the U.S. economy created 153,000 jobs last month.

The stock market is doing well this morning. The S&P 500 has been as high as 1,592 which is very close to an all-time high. I should also the note the impressive rally in bonds. On March 15th, the 10-year Treasury yielded 2% exactly. Today it’s down to 1.66%.

Shares of AFLAC ($AFL) got as high as $53.95 today. The stock was last above $54 in February.

Man Retires at 30; He Lives More with Less
Posted by Eddy Elfenbein on April 29th, 2013 at 10:39 am

The Washington Post has a fascinating interview with a man who retired at the age of 30, not due to extreme wealth but due to living with less. Instead of being unfulfilled, the living-with-less philosophy has made him “ridiculously happy.”

You may find his choices unusual, but I truly admire anyone who is willing to live their life on their own terms. I think if anyone were to observe the lives of most middle-class Americans in a perfectly detached way, they would be shocked by how much wasteful spending there is.

Here’s a sample from the interview:

You describe the typical middle-class life as an “exploding volcano of wastefulness.” Seems like lots of personal finance folks obsess about lattes. Are you just talking about the lattes here?

The latte is just the foamy figurehead of an entire spectrum of sloppy “I deserve it” luxury spending that consumes most of our gross domestic product these days. Among my favorite targets: commuting to an office job in an F-150 pickup truck, anything involving a drive-through, paying $100 per month for the privilege of wasting four hours a night watching cable TV and the whole yoga industry. There are better, and free, ways to meet these needs, but everyone always chooses the expensive ones and then complains that life is hard these days.

Morning News: April 29, 2013
Posted by Eddy Elfenbein on April 29th, 2013 at 7:38 am

Markets are Rallying and Italy Is on a Tear

Euro-Area Economic Confidence Falls More Than Forecast

Asian Officials Must Respond Early to Overheating Risk, IMF Says

Lloyds Seen Reporting the End of Era for Surging Impairments

Market’s $20 Trillion Yielding 1% Shows Austerity Mistaken

GM’s China Bet Mimics Toyota’s Bet on U.S. Last Century

VW Brand Bears Brunt Of Crisis As First-Quarter Profit Halves

Santander’s Chief Executive Resigns

Top Lieutenant of Dimon Is Departing JPMorgan

Canada’s Capstone to Buy BHP Arizona Copper Mine for $650 Million

Bayer to Acquire Conceptus to Bolster Contraceptive Business

The Truth About Social Media For Business: It’s A Risk

Facebook Deserted By Millions Of Users In Biggest Markets

Cullen Roche: The Power of Understanding Monetary Realism

Epicurean Dealmaker: In Praise of Jargon

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Kmart – Ship My Pants
Posted by Eddy Elfenbein on April 26th, 2013 at 3:28 pm

Interesting Fact
Posted by Eddy Elfenbein on April 26th, 2013 at 9:22 am

Here’s an interesting fact I just discovered.

The entire gain for the Dow has come on days following 0.8% or greater gains for the index. All the other days, the Dow has been net flat.

Historically, the Dow has gained 0.8% or more one day in every six.

Q1 GDP Growth = +2.5%
Posted by Eddy Elfenbein on April 26th, 2013 at 9:12 am

From Bloomberg:

The U.S. economy grew less than forecast in the first quarter as a drop in defense outlays undercut the biggest increase in consumer spending in two years.

Gross domestic product rose at a 2.5 percent annual rate, lower than forecast, after a 0.4 percent fourth-quarter advance, Commerce Department figures showed today in Washington. The median estimate of 86 economists surveyed by Bloomberg called for a 3 percent gain. Consumer spending, the biggest part of the economy, climbed by the most since the fourth quarter of 2010.

A boost to wealth from rising stock and home prices, combined with a reduction in savings, helped Americans cushion an increase in the payroll tax that has now begun to pinch. Recent data signal the strength in other parts of the economy may also not be sustained as across-the-board cuts in planned federal spending, together with slower stockpiling by companies, may be restraining investment and employment.

Moog Earns 80 Cents per Share
Posted by Eddy Elfenbein on April 26th, 2013 at 7:54 am

Moog ($MOG-A) just reported first quarter earnings of 80 cents per share. No analysts follow the stock so I can’t say if that hit expectations. Sales were up 3% to $643 million.

The Company has updated its guidance for the year. Sales for the year will be $2.59 billion. Net earnings are now projected at $156 to $160 million and earnings per share in a range of $3.40 to $3.50. The midpoint of $3.45 is an increase of 4% over the previous fiscal year.

“Sales, earnings and earnings per share were up this quarter, so the news is generally good,” said John Scannell, CEO. “Our industrial markets remain soft so fiscal 2013 looks like it will continue to be a challenging year and we are working to ensure that we meet our operating goals. Our operations should deliver earnings per share in the range of $3.55 to $3.65 but we’ll incur a total of $.15 per share in restructuring that reduces the range to $3.40 to $3.50 per share for the year. Sales in the second half of the year will be higher than the first half, and we should see a pickup in earnings in both our Industrial and Space & Defense segments.”

CWS Market Review – April 26, 2013
Posted by Eddy Elfenbein on April 26th, 2013 at 6:47 am

“In the corporate world, if you have analysts, due diligence, and
no horse sense, you’ve just described hell.” – Charlie Munger

This is it, folks. We’re right at the peak of earnings season. So far, the numbers for Q1 are a mixed bag. According to the latest data from Bloomberg, 74% of the companies in the S&P 500 have beaten earnings expectations while 55% have missed expectations for revenue.

This tells me that we’re seeing a continuation of the trend we know so well: companies growing profits by cutting costs, as in new jobs, instead of getting more customers in the door. This has been a frustrating trend as the labor market has taken its sweet time to get back on its feet. But next Friday will be a key day for investors. That’s when the government will release its April jobs report. If the number comes in strong (over 200,000 new jobs), the market has a very good chance of continuing its rally.

One troubling sign is that stock correlations are on the rise. This means that stocks are increasingly behaving like one another. I prefer to see a market where there are plenty of rogues and lone wolves. We generally see higher correlations when there’s greater economic uncertainty. In plainer terms, that means when investors treat all stocks like they’re one big stock called “the economy.” The research suggests that rising correlations are bad omens for the market, especially bank stocks, and it’s in bank stocks that we’re seeing the strongest correlations.

The good news is that investors are pleased with the earnings results. The stock market is snapping back after a brief case of the willies earlier this month. On April 18th, the S&P 500 dropped to a six-week low. Since then, the index has rallied for five days in a row, and on Thursday, we got within a whisker of a new all-time high.

Apple Gives $100 Billion to Shareholders

One of the big catalysts for the stock market this week was the dividend hike from Apple (AAPL). Although the legendary iStock isn’t on my Buy List this year, the company is so large that it can move the market all by itself.

Apple said that it’s raising its dividend by 15% to $3.05 per share. The company is also increasing its share-repurchase program by $10 billion to $60 billion. The combined total of the dividend and share repurchase comes to $100 billion that Apple is paying out to shareholders. To put that in context, the new dividend works out to $12.20 per share for the year. Ten years ago this week, the whole stock was going for $6.60 per share. Apple is now sitting on a bank account of $145 billion. That’s enough to buy every single team in the NFL, NHL, NBA and major-league baseball.

Interestingly, Apple is borrowing money for its dividend and buybacks. That may sound odd, but rates are so low—hey, why not? I think the Apple news clearly gave investors a big confidence boost. This was especially true after the AP’s Twitter account was hacked. The hackers sent out some bogus tweets, and within a few seconds, $160 billion in market value was erased. So yeah, that kind of stuff tends to put people on edge.

Another sign of a calmer market is that the yield spread between junk bonds and Treasury bonds has fallen to a two-year low. This is exactly what we want to see. Investors are willing to take on more risk with their money. That’s why these higher dividends are so important. They can lure money away from rock-bottom yields in the Treasury market.

I should add that our own Wells Fargo (WFC) also joined the higher-dividend club. This week, WFC raised their dividend by 20%. The Fed had already approved an increase of up to 20%, but the bank just made it official. WFC now pays out 30 cents per share each quarter.

In this week’s CWS Market Review, we’ll run down the recent earnings reports from our Buy List. In last week’s newsletter, I highlighted Microsoft’s (MSFT) good earnings report, and the stock has rallied 11% in just five days. MSFT just touched a new 52-week high, and it’s close to making a five-year high. Microsoft now has a larger market cap than Google (GOOG). I’ll also highlight the Buy List earnings reports for next week. But first, let’s look at the good news from our favorite duck stock.

Strong Earnings from AFLAC and Ford Motor

On Wednesday, AFLAC (AFL) reported first-quarter operating earnings of $1.69 per share, which was seven cents better than expectations. We know that, as a business, AFLAC has been doing well, and it continues to do well. The problem, however, is that most of their business comes from Japan, and the weaker yen is taking a big bite out of their earnings. According to the earnings report, the weak yen cost AFL 15 cents per share last quarter. That’s actually not as bad as I was expecting. If you ignore currency costs, AFLAC’s operating earnings grew 5.7% last quarter. I’m very pleased with that.

I was also happy to hear the company reiterate that its objectives for 2013 haven’t changed. They’re still looking to grow currency-neutral profits by 4% to 7% this year. If the yen averages 95 to 100 per dollar for this year, then AFL sees full-year earnings as ranging between $5.99 and $6.37 per share. For Q2, they gave a range of $1.41 to $1.56, which seems to me to be on the low side.

My advice for investors is to not look at AFLAC as a way to trade the yen/dollar ratio. That will come and go. Instead, look at AFLAC as an excellent company that continues to perform well. On Thursday, the shares got as high as $53. This is a great company trading with a bargain P/E Ratio. AFLAC remains an excellent buy up to $54 per share.

In last week’s CWS Market Review, I said that Ford Motor (F) has the best chance of giving us a big earnings surprise, and that’s exactly what happened. On Wednesday, the automaker said it made 41 cents per share, which was four cents better than Wall Street’s expectations. That’s up from 35 cents per share in the first quarter of 2012. Ford’s sales rose to $33.9 billion, which beat estimates by $400 million.

Ford continues to do very well in North America, and the Ford Fusion is a big reason why. The weak link is Europe, but that’s largely due to their crummy economy. For the quarter, Ford made $2.4 billion in North America but lost $462 million in Europe. That’s about three times what they lost one year ago. The company expects to lose $2 billion in Europe this year.

I was glad to see Ford give an ambitious production forecast for Q2: 800,000 vehicles in North America and 390,000 in Europe. Right now, Ford is trying to right itself in Europe the same way they turned themselves around in the U.S. The company is also making gains in China, where they’re a small player.

I think Ford can earn $1.50 per share this year, which means the stock is going for about nine times earnings. Plus, don’t forget that the company doubled its dividend at the start of this year. Ford remains an excellent buy up to $15 per share.

On Tuesday, CR Bard (BCR) reported Q1 earnings of $1.44 per share, which was two cents ahead of expectations. Sales rose 1% to $740.3 million, which was $12 million above expectations. In January, the company said that this year will be tough for them, but they expect extra growth next year to make up for the slack. While the company hasn’t given specific numbers for the year, Wall Street has lowered its 2013 EPS forecast from $6.84 three months ago to $6.29 today.

For Q2, Bard sees earnings coming in between $1.35 and $1.39 per share, which was a disappointment. Wall Street had been expecting $1.46 per share. Despite the guidance, the stock has been holding steady. Bard remains a good buy up to $102 per share.

On Wednesday, Stryker (SYK) reported Q1 earnings of $1.03 per share, which was two cents better than estimates. Most importantly, Stryker reiterated its full-year range of $4.25 to $4.40 per share. The stock had been one of the hottest on the Buy List, and it only started to break down in early mid-April. The positive earnings report seems to have reversed that. Stryker continues to be an excellent buy up to $66 per share.

Three Upcoming Buy List Earnings Reports

We have three earnings reports coming up next week (plus Moog, which reports later today). Fiserv and Harris Corp are due to report earnings on Tuesday, April 30th. Then WEX Inc. reports on Wednesday, May 1st.

Fiserv (FISV) has done very well lately, and the stock recently broke above my $88 Buy Below price and hit a new all-time high. Let me caution you not to chase FISV. I don’t want to change my Buy Below until I get a chance to see the earnings report. Wall Street currently expects earnings of $1.34 per share. Stay tuned.

Harris (HRS) recently lowered its earnings guidance due to the federal government’s sequester. The stock took a big hit but has come back some recently. I’m not too worried about problems outside a company’s control that may hurt their bottom line such as government dysfunction or currency fluctuations. As I said with AFLAC, those issues come and go. Well-run companies have a tendency to stay well-run. The sell-off in Harris also highlights why it’s good to focus on stocks with generous dividends. Dividends act as a floor for a sinking share price. Harris remains a good buy up to $45 per share.

WEX Inc. (WEX) had a decent earnings report for Q4, but their guidance for Q1 was terrible. WEX expects 89 to 96 cents per share. Wall Street had been expecting $1.08 per share. The stock took a hit, and I dropped my Buy Below to $75. I’m not pleased with WEX, but it’s still early in the year. Let’s see what the company has to say.

Cognizant Technology Solutions Is a Buy up to $70 per Share

Shares of Cognizant Technology Solutions (CTSH) have dropped sharply recently. The stock has fallen for ten days in a row. On Thursday, CTSH finished the day at $61.35, which is down 21% in two weeks.

So what’s going on? The company doesn’t report Q1 earnings until May 8th. The problem is that Infosys (INFY), a similar company, recently gave terrible guidance, so traders are convinced CTSH will do the same. The earnings miss from IBM (IBM) also raised eyebrows that CTSH is in for trouble.

There are also concerns that, in light of recent events, upcoming legislation may impact the status of foreign workers. How much will this impact CTSH? Right now, I can’t say. While these concerns are real, they don’t impact CTSH directly. We’ll know more once the earnings report comes out. For now, I’m lowering my Buy Below on Cognizant to $70 per share.

That’s all for now. We have lots more earnings to come next week. Plus, the important ISM report comes out on Wednesday. The ISM has printed at 49.9 or better for 45 months in a row. Let’s see if that streak continues. Then on Friday, it’s the big jobs report. In the past three years, the U.S. economy has created 5.7 million jobs, but we’re still nearly 3 million below the peak from five years ago. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy