• Q3 GDP Growth = 2%
    Posted by on October 26th, 2012 at 10:34 am

    The government reported that third-quarter GDP growth came in at 2%.

  • CWS Market Review – October 26, 2012
    Posted by on October 26th, 2012 at 7:30 am

    “The future will soon be a thing of the past.” – George Carlin

    For the last few weeks, I’ve warned investors to invest defensively, believing that we’re headed for rough waters. Well, that’s exactly what has happened. Last Friday, the S&P 500 had its worst drop in four months, and it closed just below its 50-day moving average. As I pointed out last week, the S&P 500 almost perfectly formed a Triple Top—three success tops. That technical signal made the bears a lot more confident, and the selling continued into this week. The S&P 500’s loss on Tuesday was nearly as bad as Friday’s. Then on Wednesday, the market closed at a seven-week low.

    Fortunately, our defensive posture has served us very well. Our Buy List has outperformed the S&P 500 for six of the last seven days. Best of all, we’ve regained the lead against the broader market, and we’re now on track towards beating the S&P 500 for the sixth year in a row.

    In this week’s CWS Market Review, we’ll survey some of our recent earnings reports. I was very pleased to see that AFLAC ($AFL) topped Wall Street’s consensus by an impressive 11 cents per share. Not only that, but the duck stock guided higher, and it raised its dividend for the 30th year in a row. You can see why I’m such a big fan.

    I’ll also take a look at some of our upcoming earnings reports. I think Nicholas Financial ($NICK) looks especially good going into its earnings report. I’ll also have a few words to say about Ford ($F). But first, let’s look at why the recent downturn for the market probably won’t last much longer.

    Stocks Are Poised for a Rally—but Not Yet

    While Wall Street suffered its worst setback in a few months, I think stocks are prepping themselves for a strong year-end rally. The skies, however, aren’t clear just yet. Once the election passes and the problems in Spain begin to fade, I think the S&P 500 will make a run at its five-year high.

    One of the reasons for my optimism is the nature of the recent sell-off. Cyclical stocks normally fall the most when the market drops. This time around, they’ve fallen the least. In fact, the Morgan Stanley Cyclical Index (^CYC) outperformed the S&P 500 for eight days in a row (they finally lost on Thursday). This suggests that the economy continues to improve, albeit in an unsteady manner.

    Just this past week, we got a good report on orders for durable goods, plus jobless claims fell by 23,000 and new home sales rose to a two-year high. The Federal Reserve met this past week, and their policy statement noted that the economy continues “to expand at a moderate pace.” The Fed said that household spending is up and the housing sector is improving. This is all good news.

    Wall Street continues to be focused on earnings, while I’ve been more concerned with guidance. The third-quarter earnings season has been mostly good, but there have been some notable weak spots. The earnings “beat rate” is running at 71%, which is decent, but the revenue miss rate is at 61%. This tells us that profit margins are still being stretched.

    One of the most ignored stories on Wall Street this year is that volatility has plunged. In fact, this has been one of the biggest volatility fades on record. Earlier I mentioned how the market’s drop last Friday was the worst in four months. If that loss had happened last year, it would have been the 31st worst.

    But now traders are getting nervous again. The Volatility Index ($VIX) has rallied quite strongly over the last week. Options players have especially been crowding into higher volatility bets. The VIX actually flirted with “backwardation” a few days ago. I think some of this is due to uncertainty about the election. That’s understandable. But volatility can work on the upside as well. Investors want to see the uncertainty get cleared up. It almost doesn’t matter if the news is good or bad; they just want resolution.

    The important thing for us is that the numbers are still in the stock market’s favor. Analysts have been trimming their earnings forecasts for Q4, but the Street still expects earnings growth for the S&P 500 of 12.1%. I wouldn’t be surprised if that’s soon in the upper single digits. For 2013, analysts expect earnings of $114.30 for the S&P 500. That would be an increase of 13% over 2012. The index currently trades at 12.36 times next year’s earnings, which is quite reasonable.

    When traders get nervous, they move toward safety and quality. Before, investors were afraid of anything but the most secure assets. Now, however, the market is more open to higher-quality stocks—which has been a boon for our Buy List. Now let’s look at some recent earnings reports.

    AFLAC Is a Strong Buy up to $55

    After the closing bell on Tuesday, AFLAC ($AFL) reported third-quarter operating earnings of $1.77 per share. This was 11 cents above Wall Street’s forecast. Digging into the details, AFLAC’s bottom line was helped by some tax issues, but don’t let that fool you—AFLAC’s core business is doing very well.

    I won’t go into the exhaustive details, but if you want to learn more, check out this transcript from this week’s earnings call. The company explains how they’ve reduced their exposure to Europe.

    For future guidance, AFLAC said it expects Q4 earnings to range between $1.46 and $1.51 per share. Since the company has made $5.12 per share over the first three quarters of 2012, this means that the full-year guidance is expected to range between $6.58 and $6.63 per share. That’s an increase from the previous full-year guidance of $6.45 to $6.52 per share.

    As for next year, AFLAC expects earnings growth of 4% to 7%. Working off the higher base for 2012, this implies earnings of $6.84 to $7.09 per share for next year. Wall Street currently expects $6.88 per share, so I expect to see that rise.

    AFLAC also announced a 6.1% increase to its quarterly dividend. This is the 30th year in a row that AFLAC has raised its payout. Not many companies can say that. The quarterly dividend will rise by two cents to 35 cents per share. This is basically what I said would happen two months ago, but the stock market was expecting more. The initial disappointment, combined with the broader market sell-off, probably caused the shares to pull back some. Don’t be fooled. AFLAC is a very strong company. I’m raising my Buy-Below price to $55 per share.

    Earnings from CR Bard, Reynolds, Hudson City and CA Technologies

    On Tuesday, CR Bard ($BCR) reported third-quarter earnings of $1.64 per share, which was a penny ahead of expectations, although revenue came in slightly lower than expected. For Q4, Bard sees earnings ranging between $1.64 and $1.68. Frankly, that’s lower than I was expecting. I still like Bard, but for now, I‘m lowering my Buy-Below price to $102.

    Reynolds American ($RAI), our tobacco stock, reported third-quarter earnings of 79 cents per share, which matched Wall Street’s consensus. Quarterly revenue fell by 3.8% to $2.12 billion, which was $60 million below expectations.

    The most important news is that Reynolds reiterated its full-year forecast of $2.91 to $3.01 per share. I’ve looked at the numbers, and they should have no trouble hitting that. If you’ve been waiting for a pullback with Reynolds, this is a good opportunity. The shares are down about 10% since late August. The stock currently yields 5.71%, which is outstanding. Reynolds American is a good buy up to $45.

    Hudson City ($HCBK) reported earnings of 12 cents per share, which was two cents below expectations. No matter. M&T ($MTB) is still going though with the merger. Also, Hudson City confirmed that it’s paying out another quarterly dividend of 8 cents per share. HCBK remains a good buy up to $9 per share.

    After the closing bell on Thursday, CA Technologies ($CA), the IT management software firm, reported quarterly earnings of 59 cents per share which was inline with Wall Street’s forecast. Frankly, this was a rough quarter for CA; revenues fell 4.0% to $1.152 billion which was just shy of estimates. The company also lowered guidance for the second time this year. CA’s fiscal year ends in March. In May, they gave full-year guidance of $2.45 to $2.53 per share Then in July, they lowered it to $2.45 to $2.50 per share. Now CA sees full-year earnings ranging between $2.36 and $2.44 per share. The stock dropped 5% after hours on Thursday. Fortunately the company still pays a generous dividend, but I’m lowering my Buy-Below price to $27.

    More Earnings Coming Next Week

    We’re heading into the home stretch of earnings season. Next week, Harris ($HRS) reports earnings on Monday, October 29th. Then on Tuesday, Ford ($F), Fiserv ($FISV) and Nicholas Financial ($NICK) are due to report. Wright Express ($WXS) will report its earnings on Wednesday, October 31st. If you own Wright Express, or are just a fan, please note that the company has officially changed its name to WEX Inc.

    I’m particularly looking forward to the earnings report from Ford ($F). The company made news this week when it said its losses in Europe were worse than they had thought and that the company is closing plants there. Basically, Ford is doing in Europe now exactly what they did in the United States a few years ago. This belt-tightening strategy is painful, but it helped Ford survive the recession. Overall, Ford said it’s reducing capacity in Europe by 18%. Wall Street expects Ford to post earnings of 30 cents per share on Tuesday. Look for an earnings beat. Ford is a very good buy up to $12.

    Nicholas Financial ($NICK) has pulled back recently, and the shares now yield 3.55%. I’m expecting another good earnings report soon (say, 42 to 45 cents per share). NICK continues to be very cheap by any reasonable valuation metric. Wall Street has mostly ignored NICK, which is fine by me. I think investors assume that a used-car loan company must be a risky operation. Not at all. In fact, the quality of NICK’s loan portfolio has improved dramatically, and the outlook for low short-term interest rates is very good for them. NICK is a strong buy up to $15.

    That’s all for now. Next week is another big week for earnings. On Friday, we’ll get the important jobs report for October. 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: October 26, 2012
    Posted by on October 26th, 2012 at 6:29 am

    Spain’s Unemployment Reaches Record as Bailout Looms

    9 More Banks Subpoenaed Over Libor

    S. Africa Budget Deficit Widens, Prompts Spending Cap

    Japan Stock Futures Gain as Yen Falls to 4-Month Low on Stimulus

    Consumer Spending Probably Helped Lift U.S. Economic Growth

    Jobless Claims in U.S. Show Limited Labor Market Progress

    Apple Profit Rises 24% on Sales of iPhone 5

    Spending Spree Stains Amazon With Red Ink

    P&G’s Results Top Forecast, Easing Pressure on CEO

    Flight Delays, Cancellations Hurt United’s Profit

    Best Buy Warns On Profit; U.S. Unit Head To Leave

    Samsung’s Success Is Its Biggest Weakness

    Citi Chairman Is Said to Have Planned Chief’s Exit Over Months

    Roger Nusbaum: People Who Think They Are Conservative Investors

    Howard Lindzon: And on the Eighth Day God Said…Let There be Apple

    Be sure to follow me on Twitter.

  • The Volatility Trades Gets Crowded
    Posted by on October 25th, 2012 at 2:37 pm

    From Bloomberg:

    Investors are flocking to the options market at an unprecedented rate to place bets on Standard & Poor’s 500 Index volatility, a sign they see risks increasing after the calmest election year in two decades.

    Outstanding contracts tied to the Chicago Board Options Exchange Volatility Index reached 9.01 million on Oct. 16, the highest level ever, according to data on open interest compiled by Bloomberg. Calls that pay should the VIX increase have almost tripled this year to 4.38 million, while puts climbed 52 percent to 2.14 million, the data show.

    Election Year

    Traders are snapping up VIX options after the gauge, which moves in the opposite direction of the S&P 500 about 80 percent of the time, lost 22 percent in 2012 through yesterday. That’s the largest annual drop for any election year since it was created in 1990, according to data compiled by Bloomberg. The VIX has climbed 22 percent since Oct. 18 as the equity gauge retreated 3.3 percent.

    “The market is uncertain of the outcome of the election,” Andrew Greeley, a senior managing director at Stamford, Connecticut-based Acorn Derivatives Management Corp., which manages more than $500 million in volatility assets, said yesterday. “It will be range-bound until it is decided. Soon after the election, we could experience a stronger move.”

  • NYT Profits Plunge 85%
    Posted by on October 25th, 2012 at 10:35 am

    Yesterday I noted that the put-call ratio on the stock of the New York Times ($NYT) had soared 30-fold in two days.

    It turns out, they were on to something.

    Today the NYT reported that its earnings plunged 85%. The stock has been down as much as 15% today.

    Profit for the quarter sank to $2.28 million, or two cents a share, from $15.7 million, or 10 cents, a year earlier.

    The loss from continuing operations was two cents a share, compared with earnings of five cents a share from continuing operations year ago. Excluding severance and other items, the loss from continuing operations was one cent in the most recent quarter.

    Revenue declined 0.6% to $449 million, and operating margin narrowed to 1.9% from 4.7%

    Advertising revenue fell 8.9% on a 11% decline in print ad sales. Digital advertising revenue decreased 2.2%.

    Circulation revenue rose 7.4%. Paid digital subscriptions across the company were roughly 592,000, an 11% increase from the second quarter.

    Analysts polled by Thomson Reuters had most recently forecast earnings of eight cents on revenue of $479 million.

  • Wright Express is Now WEX Inc.
    Posted by on October 25th, 2012 at 10:24 am

    Wright Express ($WXS) has changed its name to WEX Inc.

    Wright Express Corporation, today announced its name change to WEX Inc. The new name reflects the Company’s transformation and growth strategies which are focused on physical, digital and virtual corporate card payment solutions for businesses internationally. The Company will continue to be listed on the New York Stock Exchange under the ticker WXS.

    “Today begins a new chapter in our Company’s evolution with the launch of our new, international brand, WEX Inc. This new brand is built on a foundational set of Company values ― integrity, innovation and execution ― that have remained constant as we have grown,” said Michael E. Dubyak, chairman, president and CEO of WEX Inc. “Over the last 30 years, we have achieved a leadership position in the rapidly changing corporate payments industry through our passion to deliver precision solutions, combined with our persistence in delivering an exceptional customer experience. The ongoing execution of our growth strategy further enables WEX Inc. to diversify its business and expand our international footprint, while maintaining our focus on expanding our core Americas’ fleet business.”

    Since its beginnings as a fleet card provider in 1983, through a successful initial public offering in 2005, WEX Inc. has grown exponentially to become an international company with 2011 revenues of approximately $553 million.

  • Durable Goods Orders Jump 9.9%
    Posted by on October 25th, 2012 at 10:09 am

    The stock market is gaining back some lost territory this morning. The S&P 500 is currently up about 10 points. Yesterday, the index closed at a seven-week low.

    This morning, the Labor Department reported that jobless claims dropped by 23,000. I should caution you that that number has been swinging wildly in recent weeks. Economists have been closely watching the jobs figures for any sign confirming the improving trend in employment. Next Friday, we’ll get the jobs report for October and that will tell us a lot more.

    Also this morning, the Commerce Department said that orders for durable goods soared 9.9% last month. That’s the biggest jump since January 2010.

    The market is intensely focused on Apple’s ($AAPL) earnings which will come out after the close. I think the financial media greatly distorts the impact of well-known stocks. Apple is certainly important but please, there’s still another 97% of the stock market.

    A few items for our Buy List.

    Ford ($F) said it’s going to lose $1.5 billion in Europe this year. That’s much higher than their previous forecasts. The company is working to restructure its European operations which include shutting down a plant in Belgium in 2014. This is unfortunate but it has less to do with Ford and more to do with the weakness in Europe.

    Medtronic ($MDT) is under fire this morning. The company is accused of manipulating studies on bone growth after spinal surgery.

    The doctors and researchers who were the authors of the studies were part of a $210 million consulting and royalty payments program by Minneapolis-based Medtronic and never disclosed their ties or the company’s influence in their papers, the panel said in its report.

    “Medtronic’s actions violate the trust patients have in their medical care,” Senator Max Baucus, a Montana Democrat and committee chairman, said in a statement. “Medical journal articles should convey an accurate picture of the risks and benefits of drugs and medical devices, but patients are at serious risk when companies distort the facts the way Medtronic has.”

    I can’t speak to the accusation but Medtronic has strongly denied doing anything wrong. The stock is currently up this morning.

    Lastly, CA Technologies ($CA) will report after the close.

  • Morning News: October 25, 2012
    Posted by on October 25th, 2012 at 5:53 am

    Spain’s Bad Bank Seen as Too Big to Work: Mortgages

    UK Growth Fastest Since 2007

    Draghi Defends Bond Buying Program

    Yen Weakens Past 80 Per Dollar on Bets BOJ to Ease More

    Crude Oil Options Fall as Futures Slide Below $86 a Barrel

    Fed Keeps Rates Low, Says Growth Is Moderate

    U.S. Sues BofA Over Mortgage Sales

    Zynga, Survival at Stake, Beats Forecasts

    Facebook Shares Soar After Beating Estimates on Mobile

    Credit Suisse to Cut More Costs as Quarterly Profit Falls

    Ford Expected To Announce Southampton Transit Plant Closure

    Unilever Sales Beat Estimates as Brazil Leads Gains

    Ex-Goldman Director to Serve 2 Years in Prison on Insider Trading Case

    Phil Pearlman: Talking Facebook on Reuters TV with BuzzFeed’s Jon Steinberg

    John Hempton: CEO Dead Pool

    Be sure to follow me on Twitter.

  • AFLAC’s Q4 Guidance
    Posted by on October 24th, 2012 at 3:42 pm

    Here are some key bits from AFLAC’s earnings call this morning:

    I was very pleased that the Board of Directors approved the 6.1% increase in the quarterly cash dividend effective with the fourth quarter payment. This marks the 30th consecutive year we’ve increased cash dividend to the shareholders. We continue to believe that we are well-positioned to achieve our stated earnings objectives of 3% to 6% increase in operating earnings per diluted share, excluding the impact of foreign currency.

    In the second quarter, we have guided toward the low end of the range. However, reflecting the lower annual effective tax rate, we now expect operating earnings for 2012 to be better. If the yen average is JPY 80 to the $1 for the last 3 months of the year, we expect reported operating earnings for the fourth quarter to be in the range of $1.46 to $1.51 per diluted share.

    Under the same exchange rate assumptions, we expect the full year operating earnings to be $6.58 to $6.63 per diluted share, which would be roughly a 4% to 5% increase on a currency-neutral basis. We believe this is reasonable and achievable. Importantly, we continue to believe that 2013’s operating earnings per share will increase 4% to 7% on a currency-neutral basis.

    In addition to operating earnings growth, we also focused on producing industry-leading return on equities. On an operating basis, the third quarter ROE was 25.2%. For 2012 and 2013, we continue to believe it’s reasonable to see operating ROE in the area of 22% to 26%. We remain focused on our vision of being the leading provider of voluntary insurance in the United States and the #1 provider of supplemental insurance in Japan. In both segments, I am confident in our brand, the fundamental needs of our products, and more importantly, the success of Aflac. Overall, I believe we had the best quarter since 2008.

    I think traders wanted a bigger dividend increase, but don’t let that fool you; AFLAC is doing very well.

  • Today’s Fed Statement
    Posted by on October 24th, 2012 at 2:39 pm

    Here it is:

    Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher 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 would 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 continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it 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. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put 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 agency mortgage-backed securities, undertake additional asset purchases, 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 economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

    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 additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.