• Chipotle Continues to Fall
    Posted by on October 23rd, 2012 at 10:56 am

    In May, I listed 13 stocks to avoid. Since then, most of the stocks have dropped. The biggest loser is Chipotle ($CMG) which is off over 41% since I first listed it.

    The sell-off has brought the stock back closer to reality. In my opinion, a fair value for CMG is $195.

  • S&P 500 Down Again, Bernanke Out in 2014
    Posted by on October 23rd, 2012 at 10:04 am

    As I suspected, once the S&P 500 pierced its 50-DMA, the bears got much more confident. For the second time in the last three days, the stock market is getting hit hard. The S&P 500 is down to 1,414 which is its lowest level since September 6th.

    Andrew Ross Sorkin reports in the New York Times this morning that Ben Bernanke may leave the Fed when his term expires in 14 months, no matter who wins the election.

    But there is another wrinkle in the parlor game calculus: Ben Bernanke, the Federal Reserve chairman, is likely to need a successor, too. If Mitt Romney wins the presidency, he has already pledged he will replace Mr. Bernanke, whose term as chairman ends in January 2014, in just over 15 months. However, Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election.

    The good news for us is that our Buy List continues to do well. Reynolds American ($RAI) reported Q3 earnings this morning of 79 cents per share which matched Wall Street’s estimate. Revenues fell 3.8% to $2.12 billion which was $60 million below consensus.

    To me, the most important news is that Reynolds reaffirmed its full-year forecast of $2.91 to $3.01 per share. For the first three quarters, Reynolds earned $2.21 per share so that means they see Q4 coming in between 70 and 80 cents per share. I don’t think they’ll have any trouble hitting that.

    Later today, we’ll get earnings from AFLAC ($AFL) and CR Bard ($BCR).

  • Morning News: October 23, 2012
    Posted by on October 23rd, 2012 at 6:55 am

    Billionaire Ross Interested in Buying Spanish Bank Assets

    A Tight Rope on China’s Currency

    Iran Says May Stop Oil Sales If Sanctions Tighten

    Pfizer in Deal to Acquire NextWave

    Yahoo Rises as CEO Sees Growth in Technology, Small Deals

    Walmart, Temp Agencies Sued For Minimum Wage, Overtime Violations

    BP Will Switch Russian Partners Through a Deal With Rosneft

    Netflix Needs Growth Surge for Goal of 7 Million New U.S. Users

    Texas Instruments Forecasts Earnings MIssing Estimates

    Nokia To Issue €750m Bond To Boost Cash

    Permira Agrees to Buy Ancestry.com for About $1.6 Billion

    What Hasbro Earnings Mean to Investors

    I Like Coal: Peabody Ultra-Bullish On Coal As Natural Gas Prices Double

    Roger Nusbaum: Buy and Hold is Not Entirely Dead

    Howard Lindzon: Goldman Sachs…Whistleblowers… and Muppets

    Be sure to follow me on Twitter.

  • The Future of Computers
    Posted by on October 23rd, 2012 at 12:32 am

    From 1976:

  • The Pressure on Margins
    Posted by on October 22nd, 2012 at 2:22 pm

    Here’s a look at a chart that shows one of the most important dynamics of this market. Namely, corporate profit margins have been stretched about as far as they can go.

    The blue represents the trailing four-quarter earnings of the S&P 500 and it follows the right scale. The red line is the trailing four-quarter sales and it follows the left scale. The two lines are scaled at a ratio of 10-to-1. That means that if the lines cross, profit margins are exactly 10%.

    You’ll notice that the blue line closes the gap later in the cycle which means that profit margins rose. In this cycle, profits have risen considerably but sales haven’t grown very much. You can’t cut costs indefinitely. At some point, companies need to see greater sales growth in order to boost earnings. We’re currently right at the spot which has historically been the upper limit of profit margins. That doesn’t mean we can’t go higher, but it would be unprecedented.

  • The Market Breaks Its Streak
    Posted by on October 22nd, 2012 at 10:24 am

    The stock market is currently up a little bit this morning. On Friday, the Dow plunged 205 points which made it the worst day for the index since June 25th. That broke a run of 81 straight days without a 1% decline. Bespoke Investment Group notes that that’s only the 19th time since 1900 that the Dow has gone 80 days without a 1% drop (via Steven Russolitto). Historically, the market hasn’t done well in the period after breaking a long streak like this. The S&P 500 also closed a hair below its 50-day moving average.

    The good news for our Buy List this morning is that Wright Express ($WXS) was upgraded to neutral at JPMorgan. The stock is up over 3.3% today.

    Here are some numbers on earnings season so far: According to Bloomberg, 69% of the S&P 500 companies that have reported so far have topped expectations. The average earnings beat is coming in at 4%. The sour note is that sales are only growing at 1.8%. The most surprising fact is that for the first time in 17 years, U.S. stocks are the top asset category.

    I have a correction to the earnings dates I had in the last CWS Market Review. I had said that CR Bard ($BCR) reports today. My bad. The company will report earnings tomorrow along with AFLAC ($AFL) and Reynolds American ($RAI).

  • Morning News: October 22, 2012
    Posted by on October 22nd, 2012 at 5:21 am

    German Economy to Slow Significantly

    EU Power Struggle Haunts Mersch as ECB Women Row Looms

    EU To Propose Bank Resolution Agency In 2013

    Greece Austerity Diet Risks 1930s-Style Depression

    Intervention Can’t Stop Strong Hong Kong Dollar

    Yen Declines on Japan Stimulus Bets as Euro, Commodities Advance

    BP Near Deal to Sell Assets to Rosneft

    Rupert Murdoch Looking To Buy LA Times, Chicago Tribune

    Apache LNG Plan in Limbo

    Disney, Struggling to Find Its Digital Footing, Overhauls Disney.com

    Big Brewers Chase U.S. Cider Growth on Craft Beer Explosion

    Buy Reviews on Yelp, Get Black Mark

    NBC Finds Itself in Unfamiliar Territory: On Top

    Credit Writedowns: Raghuram Rajan Is Right About The Perils Of Today’s Monetary Policy

    Jeff Carter: Green Energy, Bankrupting the Taxpayer

    Be sure to follow me on Twitter.

  • It’s Going to Be Close
    Posted by on October 19th, 2012 at 2:36 pm

    An hour and a half till the close. The current 50-day moving average is 1,433.44. We haven’t closed below the 50-DMA since June 28.

  • The Numbers Since 1987
    Posted by on October 19th, 2012 at 12:10 pm

    Since 1987, the Dow has gained 679.24% or 8.56% annualized. Including dividends, the Dow has gained 1,376.26% or 11.37%. Dividends have added 89.45% or 2.59% annualized.

    Over the last 25 years, the Consumer Price Index has risen 101.76% or 2.85% annualized. That’s from September 1987 to September 2012, since we won’t get the October CPI until next month.

    In real terms, the Dow has returned 631.70% since the crash, or 8.29% annualized.

  • So How Predictable Was 1987?
    Posted by on October 19th, 2012 at 10:02 am

    Twenty-five years on, any investor has to wonder, “how predictable was the market crash of 1987?” We’ve never seen anything quite like it. Following the meltdown, of course, we soon learned that lots of folks had apparently warned us. After the financial crisis of four years ago, I was surprised to hear how obvious it all was. (Unfortunately, no one ever told me.)

    But what I find interesting in 1987 is seeing how arbitrary it all seemed. In 1987, there were several unusual events that all seemed to coalesce before the plunge. Southern England, for example, had one of its worst storms in centuries. The morning of the crash, the WSJ ran a chart showing the rise in the Dow compared with the rise during the 1920s. Alan Greenspan had only been on the job for two months before the crash.

    On October 14th, the market was rattled by the high trade deficit report. The bond market took a big hit the next day. On Friday the 16th, the Treasury bond broke the critical 10% mark.

    Over the weekend, Jim Baker, who was the Treasury Secretary, told the Germans to “either inflate your mark, or we’ll devalue the dollar.” Gary Alexander writes:

    On Sunday, October 18, Baker went on the Sunday morning talk shows, where he said that the U.S. “would not accept” the recent German interest rate increase. Later, an unnamed Treasury official said we would “drive the dollar down” if necessary. These were fighting words that panicked the market.

    Some said that Baker’s rash words, more than anything else, caused the Monday market crash: Jacques Delors, president of the European Commission, compared Baker’s remarks to “a pyro-manic fireman. When you’re living on the edge of the volcano, you don’t light matches.” Economist Pierre Rinfret also blamed Baker for the crash: “The Secretary of the Treasury started one of the worst panics in the history of the stock market.” Noted trader Jimmy Rogers agreed: “The crash had nothing to do with program trading or arbitrage or investment insurance. Greenspan and Baker simply panicked and blew it.”

    The rest of the world crashed long before New York opened that Monday. The market day began in Asia, where Monday opened with a 33% drop in Singapore, a 17% loss in Tokyo and 11% down in Hong Kong – a market which closed for the rest of the week. Europe fared no better, with a 22% drop in London, 14% in Zurich and 13% in Frankfurt. Hearing this news over their breakfast coffee, New York traders were bearish from the start, as the market dropped 104 points in the first hour alone. By the middle of the day, the market held its losses to between 100 and 200 Dow points. But after 2:00 p.m., the market lost 100 points each half hour, reaching a 376 point drop by 3:30pm and a 508-point drop at the closing.

    Here’s a chart showing the relative strength of utility stocks and transportation stocks in the period leading up to the crash. It’s simply the Dow Transportation Average divided by the Dow Industrials (red), and the Dow Utility Average divided by the Dow Industrials (blue). When the lines are heading up, the sectors are outperforming the market. When they’re going down, then they’re trailing the market.

    In the months leading up to the crash, investors dramatically rotated out of Utilities and into Transports. In other words, they were abandoning safe sectors with high dividends and crowding into riskier cyclical sectors. This is a good way of tipping us off that the market was becoming riskier. In fact, the two lines seem to be perfectly negatively correlated.

    Once the crash happened, everything shot back to normal. Still, this only tells us that investors had become more aggressive. It never told us when it would end.

    The 1987 crash also showed strange numerical connections. For example, people who follow the Elliott Wave stuff which is based on Fibonacci numbers saw lots of signs. For example, the year 1987 came 55 years after the massive low in 1932, plus 21 years after the downturn of 1966, 13 years after the big low in 1974 and five years after the low in 1982. Personally, I think this is another example of people trying to find patterns in randomness, but some people take it very, very seriously.

    Historically, the stock market’s one-day standard deviation is about 1%. A drop of 22% is 22 standard deviations below the mean. Statistically, that’s so rare it would take eons for it to happen. The issue, of coure, is that financial markets don’t follow normal distributions but they can appear to. With finance, as with many areas, we don’t know what we don’t know.

    The case of 1987 is another reason for my investing philosophy of investing in high-quality companies and not being rattled by short-term volatility — even extreme moves. Twenty-five years on, the Dow has gained 679.2%.