• Inflation at Lowest Rate in Four Years
    Posted by on December 14th, 2012 at 11:30 am

    The gold market has been telling us the truth — real interest rates are too high. Despite the Fed keeping nominal short-term rates at 0%, prices have been falling recently which means that real interest rates have been positive. As my gold model suggests, that leads to a lower price for gold which is exactly what’s been happening.

    Today’s report on consumer prices for November from the Labor Department said that prices fell 0.3% last month.

    Economists polled by Reuters had expected consumer prices to fall 0.2 percent.

    The so-called core C.P.I., which excludes food and energy prices, edged up 0.1 percent after rising 0.2 percent in October. Although food prices rose 0.2 percent in a lagged response to the summer drought, price pressures remain tame.

    Going by the seasonally adjusted rate, this is the biggest drop in four years.

  • Industrial Production Rises 1.1% in November
    Posted by on December 14th, 2012 at 10:01 am

    More good economic news. Last month, industrial production rose by the most in two years.

    Output at factories, mines and utilities increased 1.1 percent last month after a revised 0.7 percent drop in October that was more than initially estimated, the Federal Reserve reported today in Washington. Economists forecast a 0.3 percent advance, according to the Bloomberg survey median. Manufacturing, about 75 percent of production, surged 1.1 percent in November, the most this year.

    Further gains in manufacturing, which has stumbled in the second half of the year, would help the expansion build on the recent pickup in housing and sustained consumer spending. At the same time, the industry faces the hurdles of slower global economies and a lack of clarity on the U.S. budget that has prompted companies to hold back on investment.

  • “We Have a Lot of Room to Profitably Grow”
    Posted by on December 14th, 2012 at 9:45 am

    Ford CEO Alan Mulally discusses his company and splits some infinitives.

    Bloomberg TV is taking a look at Ford all day today so there are lots of good videos to see here.

  • CWS Market Review – December 14, 2012
    Posted by on December 14th, 2012 at 7:42 am

    The stock market is a giant distraction to the business of investing. – Jack Bogle

    The S&P 500 rose for six straight days, and on Thursday, for the 13th time in a row, the index failed to extend a six-day winning streak into a seven-day streak. Nevertheless, the market continues to do well, which is exactly as I suspected. I’m still holding to my view that the market will rally well into 2013; this is a good time to be an investor.

    This was an eventful week. On Wednesday, the Federal Reserve made news by announcing economic triggers for its interest rate policy. The stock market responded by surging to a two-month high. I’ll explain what it all means for investors in just a bit. Perhaps the best news of the week was that Nicholas Financial ($NICK) joined the special dividend parade by announcing a monster $2-per-share dividend. Percentagewise, that’s a big deal, and the stock surged.

    Let me also remind you that next week, I’ll unveil our 2013 Buy List. I won’t start tracking the new list until the start of the year. I’m happy to report that the current Buy List is ending the year on a strong note. Since August 2nd, our Buy List has more than doubled the S&P 500, 9.2% to 4%. It looks like we’re going to narrowly beat the S&P 500 for our sixth-straight market-beating year. Now let’s take a look at the Fed’s announcement this week and what it means for us.

    The Fed Lays Its Card on the Table

    Meetings of central bankers are usually rather dull affairs, and that’s probably how it ought to be. This past week, however, the Federal Reserve actually did something interesting. For the first time, the Fed laid out specific trigger points for its interest rate policy.

    Let me explain, and I’ll try to avoid any econo-speak. When the economy went into the toilet, the Fed responded by slashing interest rates. In fact, they even cut rates to 0%. After all, that’s what models say you should do. The problem was that the model even said to go into negative rates. The Fed responded by doing the equivalent—they started buying bonds—or as economists call it, “Quantitative Easing” (QE if you want to sound cool).

    The Fed then ran into another problem. The central bank was simply announcing a bond-buying program with a price tag. Once that ran out, they announced another. Then another. Then in September, the Fed took a step back and said “Look, this isn’t working. Forget these dollar amounts and deadlines. We’re going to keep buying bonds and we’re not going to stop until things get better. That’s that.”

    To be more specific, the Fed said it was going to buy $40 billion of agency mortgage-backed securities (MBS) each month. In practical terms, the Fed swaps assets with a bank. The Fed gets a risky MBS, while the bank gets low-risk reserves, which, I should add, are held at (guess where?) the Federal Reserve.

    The game-changer in September wasn’t the $40 billion number. It’s that the Fed said it was going to go all in until things got better. By taking a time horizon off the table, the Fed sent a clear signal to investors that it was going to do what it had to in order to help the economy. But there was still the question “how will we know when things get better?” That’s where this week’s news comes in. But first let me quote the CWS Market Review from September 21:

    An idea gaining popularity among economists is that the Fed should buy bonds until some metric like the unemployment rate or nominal GDP hits a specific target. With today’s news, the Fed has clearly moved towards that position without expressly saying so. The Fed said that the bond buying would continue until the labor market improved “substantially” and “for a considerable time after the economic recovery strengthens.”

    In this week’s policy statement, the Fed gave us an answer. They said they won’t raise interest rates as long as the unemployment rate is over 6.5% (we’re currently at 7.7%) and inflation is under 2.5%. Basically, this means that rates are going to stay low for a long while more.

    There are a few key takeaways: This is especially good news for financial stocks. Nicholas Financial ($NICK), for example, borrows money at the short end of the yield curve. The lower rates are, the better it is for them. In fact, I think a lot of the major banks are going for good values. Given the current conditions, I think JPMorgan Chase ($JPM) will have a very profitable 2013.

    The housing market should also continue to get better. This has been an underreported story this year. A key difference between the current “Quantitative Easing” and the previous attempts is that back then, the housing market was still in free fall. Now it’s gaining strength, and in turn, that’s helping consumers. We don’t have the numbers in yet, but this may turn out to be a good holiday shopping season. We just got the retail sales report for November, and it was pretty good. The initial jobless claims report came very close to hitting a five-year low (which means the spike from Hurricane Sandy has now passed).

    This new Fed policy will also be good for economically sensitive “cyclical” stocks. These are sectors like energy, transportation and heavy industry. There’s also a key “double whammy” effect with cyclicals since they tend to outperform the market when the market itself is doing well. I like to follow how the Morgan Stanley Cyclical Index ($CYC) performs relative to the S&P 500, and it’s improved very nicely since the summer. The CYC-to-S&P 500 ratio is close at an eight-month high. I should warn you that Q4 GDP will probably be a dud (0% to 1% growth), but we may see greater than 3% growth toward the latter half of 2013.

    This week’s Fed news is a clear signal that the Fed is in the investors’ corner and is willing to boost the economy for several more quarters. The risk right now is finding yourself getting left behind. Now let’s look at my second-favorite NICK of the holiday season.

    Nicholas Financial’s Special Dividend

    On Tuesday, Nicholas Financial ($NICK) announced a special $2-per-hare dividend. In previous issues, I’ve talked about how companies have announced special dividends before the end of the year so they won’t get hit by higher taxes, which are almost certainly on their way next year.

    The major difference with NICK is that this is a pretty large dividend. It works out to be about 15% of the stock’s value. The dividend will be paid out on December 28th to shareholders of record as of December 21st. Also note that NICK is a Canadian company, so there may be foreign tax withholdings (please consult your tax advisor).

    I want to clear up a few things about this dividend. This news, by itself, doesn’t do anything to boost NICK’s value. It’s simple math: Once the dividend is paid out, we can expect the shares to fall by $2. Since the dividend works out to be roughly one year’s worth of profits, we shouldn’t expect any dividends next year.

    While the special dividend doesn’t add value to NICK, the perception did, as the value of the stock rallied nicely on Wednesday, getting as high as $14.14 per share. Why did it rally? That’s hard to say exactly, but it was probably an appreciation of the company’s boldness. Think of it this way: You’re not going to pull a big move like that unless you’re pretty darn confident about your business’s ability to rake in cash. Traders took notice. NICK continues to be a very good buy.

    Earnings from Oracle and Bed, Bath & Beyond

    Next week, we’ll get earnings reports from Oracle ($ORCL) and Bed, Bath & Beyond ($BBBY). Also, BBBY will lay out some important planning assumptions for next year. Both of these companies wrapped up the end of their quarter in November.

    Oracle made news last week by announcing that they’re going to pay out their next three dividends before the end of the year in order to avoid the taxman. The company will report its fiscal Q2 earnings on Tuesday, December 18th. In September, Oracle told us to expect earnings to range between 59 and 63 cents per share. The Street expects 61 cents per share, which Oracle should be able to beat.

    Last quarter, Oracle got dinged by currency costs. That’s frustrating, but I’m not particularly worried, since those tend to be transient concerns. I’d be much more concerned by a downturn in their overall business, and Oracle isn’t experiencing that. I’ll be interested to hear what Ellison & Co. have to say about fiscal Q3 and how badly Europe is hurting then. I continue to like Oracle a lot and rate it a good buy up to $35 per share.

    Bed Bath & Beyond is due to report on Wednesday, December 19th. In June, BBBY surprised Wall Street (and me) by guiding lower for their August quarter. The stock got hammered, and analysts quickly slashed their forecasts. When the results came out in September, BBBY still came in four cents below consensus. It was just an ugly quarter, which is very uncharacteristic of BBBY.

    The problem is that Bed Bath & Beyond had become overly reliant on coupons to get feet in the door. I understand the temptation, but a retailer can’t discount their way to sales for the long-term. I’m not giving up on BBBY. This is a very well-run outfit, and they’ve already steered their way though an historic housing bust. I think they can handle this.

    Interestingly, the guidance for Q3 was 99 cents to $1.04 per share, which really isn’t that bad. What traders seemed to overlook is that the company stood by its previous full guidance of earnings growth between the high single digits and low double digits. BBBY also has a rock-solid balance sheet. I currently rate BBBY a buy up to $62 per share. This is a solid company, and the shares are going for a good value.

    Before I go, I want to make two adjustments to our Buy Below prices. Fiserv ($FISV) has been a monster for us this year. I’m raising our Buy Below price to $83 per share. Moog ($MOG-A) has been a lousy stock this year, but I think it’s an exceptionally good value. I’m raising the Buy Below on Moog to $40 per share.

    That’s all for now. Next week, we’ll get earnings from Oracle and Bed, Bath and Beyond. The government will also update the Q3 GDP report. 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

  • Morning News: December 14, 2012
    Posted by on December 14th, 2012 at 6:40 am

    Banks Spurn Europe Bond Rush Amid Central Bank Loan Largesse

    Global Banking: Regulations Force a Retreat

    Berlusconi Drags Merkel Into Italy Race in Monti Meeting

    Fitch Keeps Pressure on France

    Britain Bucks Trend As EU Car Sales Continue To Fall

    JGB Investors Say Yen Weakening Isn’t Turning Point For Bond Market

    China On Mend, But Euro Zone Still Shrinking

    A Fed Focused on the Value of Clarity

    U.S. Rejects Telecommunications Treaty

    Sprint’s Clearwire Acquisition In Trouble As Softbank Caps Bid

    Hostess Said to Attract Bids From Wal-Mart, Kroger

    Mercedes Valued at Half of BMW as Zetsche Loses Investors

    Building a Showcase Campus, Using an I.O.U.

    Stone Street: Short the DeMarco Trade

    Phil Pearlman: ReutersTV: The Apple VIX & How to Play It with Condor Options

    Be sure to follow me on Twitter.

  • “We Don’t Produce Goods Here Anymore”
    Posted by on December 13th, 2012 at 11:28 pm

    I noticed this quote in the New York Times:

    “In sector after sector, we’ve lost our innovation edge because we don’t produce goods here anymore,” said Mitzi Montoya, dean of the college of technology and innovation at Arizona State University

    I hear this a lot, that we don’t make things here anymore. But it’s flatly not true. It’s said as if it’s not an empirical fact that can be looked up.

    The truth is that America is a manufacturing powerhouse. The difference is that far fewer Americans work in manufacturing — and that’s due precisely to our innovation.

  • Cyclical Stocks Continue to Lead
    Posted by on December 13th, 2012 at 1:32 pm

    Every so often I like to look at how economically sensitive stocks are compared with the rest of the stock market. My preferred metric is dividing the Morgan Stanley Cyclical Stock Index ($CYC) by the S&P 500.

    Since August, this ratio has been racing higher. We’re close to taking out the recent high from November 7th which was the highest point of the last eight months.

  • The S&P 500 Is Zero for 12 After Six-Day Win Streaks
    Posted by on December 13th, 2012 at 12:50 pm

    We had some good economic news this morning. The government reported that retail sales rose by 0.3% last month. This may indicate that the holiday season is going well. Also, new claims for unemployment insurance dropped by 29,000 to 343,000. That’s just 1,000 away from matching the lowest level in nearly five years.

    The S&P 500 has risen for the last six days in a row. We were in positive territory earlier today but we’re currently down thanks to some disappointing news regarding the Fiscal Cliff. The S&P 500 hasn’t had a seven-day winning streak in six years. Interestingly, the index has been 0 for 12 after its last 12 six-day win streaks.

    CA Technologies ($CA) gapped up at the open today on the news that Michael Gregoire will be the new CEO. The shares got as high as $22.31 but have since given back their gain.

  • Morning News: December 13, 2012
    Posted by on December 13th, 2012 at 7:48 am

    Berlusconi Says Return Hinges on Incumbent

    SNB Maintains Ceiling as European Woes Weigh on Franc

    U.K. Government Lifts Ban on Shale Gas Fracking

    Qatar Fund, Canary Wharf Plan $1.6 Billion London Project

    Talks on Telecommunications Treaty Falter

    Investors Stay Calm, if Cautious, as Stalemate Simmers

    Fed Ties Rates To Jobs Recovery, Adds To Stimulus

    Home Seizures Rise as Banks Adjust to Foreclosure Flow

    Khosla Ventures Hires Condoleezza Rice as Adviser

    Clearwire Buyout by Sprint Seen Best For Owners

    Airline Profit Outlook Raised 63% by IATA on Capacity Cut

    Buffett Expands Buyback to Pay Up to 120% of Book Value

    Obama’s Bet on GM Hangs on New Pickup Boosting Share Price

    Amazon Wins EU E-Book Pricing Battle With Apple

    Roger Nusbaum: 12/12/12

    Walter Kurtz: Fed Targets More Treasury Purchases. So Why The Sell-off in Bonds?

    Be sure to follow me on Twitter.

  • Today’s Fed Statement
    Posted by on December 12th, 2012 at 12:53 pm

    Here’s today’s Fed statement:

    Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

    To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

    The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

    To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

    Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.