CWS Market Review – March 1, 2013
Posted by Eddy Elfenbein on March 1st, 2013 at 6:52 am

“Business, more than any other occupation, is a continual dealing with the future;
it is a continual calculation, an instinctive exercise in foresight.” – Henry R. Luce

The stock market had a rather raucous few days this week, which included our worst single-day plunge since November, thanks to, of all things, unexpected election results in Italy. But after some good earnings and positive economic reports, plus bullish comments from Mr. Bernanke, the stock market regained its legs; the Dow is now only steps away from an all-time high. You know, it’s a wonder what pumping in a few trillion dollars can do for a market’s spirits.

Here’s an interesting fact: The S&P 500 has risen in both January and February. Since 1945, the S&P 500 has been positive for the first two months of the year 26 times. Every single time that’s happened, the index has closed higher for the year. No exceptions. In fact, it’s usually closed a lot higher. The average total gain, including dividends, has been 24%. If the S&P 500 were to rack up a 24% total return this year, the index would have to be well over 1,700 by the end of the year.

Of course, I’m not predicting such a move. We’re too smart to play the price targets game around here, but I do think this market will continue to be tricky. Frankly, earnings estimates are too high, and I see a lot of lousy stocks gaining ground. That’s not a good sign. On the plus side, the economic recovery is starting to gain some momentum, and our Buy List continues to be an oasis in a troubling climate. As usual, our strategy is to ignore the noise and remain focused on high-quality stocks.

We didn’t have any earnings reports this week, so I’m going to discuss some broader themes impacting the market. First, let’s look at what had the market so grumpy earlier this week.

Reports of the Euro’s Death Are Greatly Exaggerated

The early news on Monday showed that it looked like Pier Luigi Bersani’s left-of-center party was going to win the election in Italy. But as the results came in, both Beppe Grillo and Silvio Berlusconi, who are, respectively, a former comedian and a former Prime Minister, did much better than expected. The better they did, the worse stocks did.

In other words, the ditch-the-euro-and-bury-austerity crowd is still pulling in a lot of votes. As it turns out, Italians prefer governing themselves and not having Germany tell them what to do. Who knew? In fact, Grillo and Berlusconi did so well that due to the rules of Italy’s legislature, probably no one will be able to cobble together a governing coalition. And that probably means it’s back to the polls we go.

So here we are in 2013, with our portfolios noticeably impacted by the decision of a former comedian not to join in the governing of the Italian nation. My friends, we live in interesting times.

Now you might think it’s odd that I’m discussing these election results in a service dedicated to investing, and I have to agree with you—it is odd. But like the proverbial flap of a butterfly’s wing that causes a tornado thousands of miles away, the election results have far-reaching consequences. For one, the S&P 500 dropped 27.75 points on Monday, and it was the worst daily loss since the day after President Obama’s reelection.

Now let me explain what’s really going on and what it means for us: The plan to save Europe was perfectly drawn up and perfectly executed. There was one teeny, tiny, minor, little flaw: no one bothered to ask the voters. Well, technically they did ask, but the pro-euro policies slid by in Greece and other places. Now in Italy, voters are pushing back. That’s why this isn’t just about one election. It’s really a much broader battle, and that’s why our market reacted so dramatically. Bear in mind that the establishment’s candidate wasn’t Bersani; it was the current Prime Minister Mario Monti, and he was totally blown out.

If the anti-euro and anti-austerity movement gains power, it could undermine all the work that’s been done to save the eurozone. Remember last summer when Mr. Draghi made his dramatic statement that he was prepared to do whatever it takes to save the euro? Just look at any chart from that period and you’ll see that’s precisely when the lines that had been going down started to rise and when the rising lines started to fall. More specifically, that’s when investors finally stepped away from crowding en masse into U.S. Treasuries and started buying dollar-denominated stocks. That’s also when cyclical stocks started to take the lead. We’ve come a long way, so the recent events in Italy are seen as a big threat.

Here’s my take: This latest round is really a political crisis, whereas the previous episodes were part of a financial crisis. The good news is that bond yields in Europe are down dramatically from where they had been last summer. I think this was another example of investors who had already been looking to exit some U.S. stocks jumping on this excuse to unload their positions. The fundamentals in Europe and the U.S. are much better. Panicky traders, however, will never change. There may be more euro flare-ups to come, but those whom the Bond Market Gods wish to destroy, they first make Greek or Spanish. Maybe Portuguese. But not Italian.

The Equation That’s Been Driving the Market

The other big news this week was the Congressional testimony from Ben Bernanke. The Fed Chairman’s semi-annual testimony used to be a big deal, but since Bernanke allowed at least a little more transparency into a hopelessly opaque institution, the thoughts of Mr. Bernanke aren’t wholly unexpected.

In short, Bernanke said that the economy hit a rough patch late last year but that things are looking better at the start of this year. The part of Bernanke’s remarks that caught my attention was his robust defense of the Fed’s asset purchases. Some folks on Wall Street thought the recent Fed minutes indicated that the central bank was ready to pull the plug on their bond-buying. That ain’t happening. Bernanke made it clear that they want to keep buying bonds until the labor market gets much better. The Bearded One said, “The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.” Seems pretty clear to me.

Now let me circle back and explain why this is so important. I’ll give you the simple equation to understand the stock market for the last six months or so. The areas that have done exceptionally well are found wherever you see consumers intersecting finance. This is absolutely crucial.

What do I mean by this? It’s not just that consumers are buying more things; it’s that they also need to finance those purchases. That means housing, which has done extremely well. The Homebuilder ETF ($XHB) is up 41% in the last year.

That means cars. Ford Motor ($F) has rallied more than 36% in the last seven months. Nicholas Financial ($NICK) continues to thrive as well. It also means travel and airline stocks. And spillover industries. Home Depot ($HD) just reported very good earnings, plus they raised their dividend by 34%. People buying. People borrowing. Banks lending.

On the other side of the financing, the big banks have done well. This has been great for JPMorgan Chase ($JPM) and Wells Fargo ($WFC), both of whom made a conscious decision to focus on mortgages. Stocks like Visa ($V) and MasterCard ($MA) have also been big winners. All of these stocks have benefited from the same effect: Consumers buying things with money they don’t have at the moment but plan to get soon. This is why Bernanke’s defense of QE, and his dismissal of its risks, is so important. This trend isn’t nearly over, either. Mortgage rates are still very low, and housing inventory is getting pretty thin as well. Monetary policy does eventually work, though it may tarry.

Two Buy Below Adjustments

I want to make two small adjustments to our Buy Below prices. I’m going to bump up FactSet Research’s ($FDS) Buy Below to $96. Fiscal Q2 earnings are due out in mid-March, and I’m expecting good news. The Street’s looking for $1.11 per share. I also want to raise Stryker’s ($SYK) Buy Below to $64. Stryker is our #1 performer this year, with a YTD gain of 16.5%. Despite the recent rally, the shares are still quite reasonably priced.

That’s all for now. Next week, the government will revise its productivity report, plus we’ll get the Fed’s important Beige Book report. But the most important event will be next Friday’s jobs report. Remember what Bernanke said about “a substantial improvement.” 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: March 1, 2013
Posted by Eddy Elfenbein on March 1st, 2013 at 6:45 am

Asian Manufacturing Growth Slows, Data Show

Eurozone Unemployment Hits 11.9%

Spending Cuts Signal Austere Future for Domestic Programs

Consumers, Exports Nudge Up Economy

4 Possible Silver Linings In The Sequester

Buffett Outlining Dividend Plan May Ease Successor’s Path

Groupon Dismisses Chief After a Dismal Quarter

J.C. Penney Lowest Sales in Decades Show Johnson Stumbles

Banana Republic: Turning Khaki Into Gold

Lloyds Posts Loss on Loan Insurance, Swaps Compensation

Sears Holdings Q4 Loss Narrows

Ad Firm WPP Sees Business Confidence Improving

Barnes & Noble Rethinks Its Strategy for the Nook

Roger Nusbaum: You Maniacs, You Blew It Up

Stone Street: ZAGG:SKUL::Punxsutawney:Paris

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Remarkable Stat on Real GDP
Posted by Eddy Elfenbein on February 28th, 2013 at 10:42 am

Here’s a stat that I find astonishing:

From 1947 to 1973, real GDP grew by 175.9603%.
From 1973 to 2012, real GDP grew by 175.9607%.

In other words, the U.S. economy grew by the same amount over the last 39 years as it did in the 26 years before, despite the latter period being 50% longer. And when I say the same, I mean almost precisely exactly the same.

Here’s quarterly GDP growth for the last few years:

The Dow Closes in on All-Time High
Posted by Eddy Elfenbein on February 28th, 2013 at 10:27 am

The Dow closed yesterday just 89.16 points from an all-time high close. This was the highest close for the index in 64 months. To give you an idea of how close we are to making a record, the 30 stocks in the Dow need to rise by a combined total of $11.61. The index has been up as much as 30 points today.

Morning News: February 28, 2013
Posted by Eddy Elfenbein on February 28th, 2013 at 7:13 am

Draghi Says ECB in No Rush to Tighten as Inflation Slows

Monti Says European Crisis Management, Populism Led to Defeat

Banker Bonuses Face Curbs in EU Basel Law Deal

Osborne’s ‘Shrink The Bank’ Strategy Means A Smaller, Less Profitable RBS

Bankia Posts Record 21.2 Billion Euros After-Tax Loss

Wheat Rises as U.S. Export Demand May Increase After Price Drop

Businesses Show Resilience Despite Drop in Goods Orders

Senate, in a More Affable Mode, Backs Treasury Nominee

Groupon Drops 24% On Weak Results, Forecast

Chief Talks of Mistakes and Big Loss at J.C. Penney

Samsung Armors Android to Take On BlackBerry

Wal-Mart Struggles to Restock Store Shelves as U.S. Sales Slump

The Excessive Uproar Over Marissa Mayer’s Telecommuting Ban

Cullen Roche: Nasdaq Sentiment Remains Near its Highest Levels Since March 2000

Jeff Miller: Investors: How tO Profit by Understanding the Fed

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Update on My Watch List
Posted by Eddy Elfenbein on February 27th, 2013 at 1:16 pm

I’m often asked how I go about picking stocks for my Buy List. The answer is really quite simple. I don’t have a magic formula and I hate stock screeners.

Instead, I have a Watch List of stocks that I try to follow. These are what I would call “really good companies.” They’re in the top tier of Corporate America. It’s taken me years to build up this list and I change it often.

The Watch List serves as the minor leagues for my Buy List. It’s from this list that almost all candidates for the Buy List come, and it’s where they return after they’ve been deleted.

Let me make it clear that I’m not recommending any of these stocks listed below. That’s what the Buy List is for. I just wanted to show you which stocks make the first cut in the process. Honestly, this list is too large and I should knock off around 30 names. If a stock is on this list, you can be pretty sure it’s a decent company (the price may not be).

My secret formula is nothing more than watching really good companies and making a move when the price looks good.

My Plan
Posted by Eddy Elfenbein on February 27th, 2013 at 10:11 am

Step One: Form bank holding company, the Bank of Eddy.

Step Two: Borrow $470 billion from the Federal Reserve at 0%.

Step Three: Announce tender offer to buy out Apple for $500 per share.

Step Four: Once I have control of Apple, use the $140 billion in cash to buy all the mortgage debt I can possibly find. (Also, buy CNBC.)

Step Five: Every six month, IPO a different Apple division. Spin-offs, you know, outperform.

Step Six: Use proceeds to pay off the Fed.

Step Seven: Distribute the rest to Bank of Eddy shareholders minus, of course, my $10 billion fee.

Step Eight: Relax at pool.

So…who’s with me?

The Yen’s Impact on AFLAC’s Earnings
Posted by Eddy Elfenbein on February 27th, 2013 at 9:55 am

Below I’ve tried to reproduce a chart from AFLAC’s latest 10-K. This shows the impact that the yen/dollar exchange rate is expected to have on AFLAC’s 2013 operating earings.

Here’s a look at the surge in the dollar since October:

Market Up a Bit, Ben’s Speaking Again
Posted by Eddy Elfenbein on February 27th, 2013 at 9:41 am

The market is signaling higher today. Ben Bernanke speaks again before Congress. This time, he heads over to the House of Capitol Hill.

This morning, we learned that durable goods orders fell 5.2% last month which was worse than Wall Street’s forecast of a 4.8% decline. But if we look at nondefense orders excluding aircraft, then durable goods rose by 6.3%. That was well above the Street’s forecast of no growth.

Morning News: February 27, 2013
Posted by Eddy Elfenbein on February 27th, 2013 at 6:54 am

Euro Strengthens as Italian Bonds Fluctuate After Debt Auction

Italian Borrowing Costs Jump But Demand Remains Strong At Crucial Auction

EU Moves Closer To Imposing Caps On Banker Bonuses

India’s Downturn ‘More Or Less Over’

Bernanke Defends Asset Buying as Benefits Outweigh Risks

Austerity Kills Government Jobs as Cuts to Budgets Loom

S.E.C. Nominee Tries to Allay Skepticism

Wall Street Pay Rises, for Those Who Still Have a Job

Home Prices in 20 U.S. Cities Increase by Most Since 2006

Wall Street Junk Kings Selling Debt Poised to Lose Value

JPMorgan Mortgage, Community Units to Lose Up to 19,000 Jobs

AB InBev’s Profit Gains as U.S., Brazil Beer Shipments Rise

Teleworking: The Myth Of Working From Home

Edward Harrison: On Bernanke’s Testimony

John Hempton: Gulfport Energy’s Accounts Payable and Accrued Liabilities

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