CWS Market Review – October 5, 2012
Posted by Eddy Elfenbein on October 5th, 2012 at 8:12 am

“The best stock to buy may be the one you already own.” – Peter Lynch

I’m writing today’s CWS Market Review early on Friday morning so I don’t have the results of September’s jobs report (be sure to check the blog for complete coverage). The jobs report will probably be out by the time you’re reading this. But I can say that Wall Street has very modest expectations. The consensus is for a gain of 115,000 jobs. While that’s better than nothing (or a loss), it’s not very robust growth. The rule of thumb is that you need at least 150,000 new jobs each month to bring down the unemployment rate. The ADP report on Wednesday was better-than-expected so that may be a positive omen for today’s report.

The stock market seems, for the time being, to have regained its footing. The S&P 500 has rallied all four days this week, and on Thursday, the index closed at its highest level since September 14th. The stock market is a mere 0.3% away from closing at a 57-month high. A good jobs report could carry us across the line.

Unfortunately, I can’t sound the “all clear” siren just yet. We still have an election to get through, plus more drama in Europe, and most importantly, third-quarter earnings season is only a few days away. I still believe that we’re in for a few bumpy weeks, and I urge investors to be especially cautious right now. But there is some good news to report: Analysts on Wall Street had spent much of this year paring back their earnings forecasts, which the market has mostly ignored, but estimates have stopped trending downward recently. That’s good to see.

In this issue of CWS Market Review, I want to say a few words about politics and its impact on the stock market. I don’t like to write about politics but I will discuss mistakes investors make, and a biggie is letting your political views interfere with a sound investment strategy. I’ll also let you know which stocks on our Buy List look especially attractive right now. (Here’s a preview: Expect to see a very impressive earnings beat from JPMorgan next week.) But first, let’s look at why elections aren’t so important in the eyes of your stock portfolio.

Don’t Let Politics Interfere With Your Investing

You wouldn’t know it from reading much of the financial commentary but the stock market has had an amazing run. In one year and one day from the 2011 low, the S&P 500 has gained nearly 32% while the Dow has added a cool 2,920 points. That’s more than the whole thing was worth 25 years ago.

I’m also happy to report that our Buy List has continued to thrive. Over the last nine weeks, our Buy List has gained 10.65% compared with just 7.06%. And on Thursday, Buy List standouts Fiserv ($FISV), Medtronic ($MDT) and Hudson City ($HCBK) all hit fresh 52-week highs. Plus, Sysco ($SYY) and Harris ($HRS) made news highs earlier this week. If you recall from last week’s newsletter, I urge you to focus on high-yielding Buy List stocks.

I was amused this week when I heard market pundits attribute Thursday’s rally to Mitt Romney’s debate performance. Sure, that could be the reason, but honestly, I doubt it. For one, this theory conveniently skips over the fact that the market opened slightly on Thursday. The rally continued throughout the day, well after the market had the opportunity to digest the outcome of the debate.

This argument beings me to a mistake that too many investors make—they let their political opinions seep into their investing strategy. I like to call this the “Larry Kudlow Fallacy,” after the CNBC pundit and former Reagan official who can always find his political views confirmed by whatever happened on Wall Street that day.

Don’t mistake me as saying that the market doesn’t care about policy. Public policy can have a major impact on the financial markets. But the market is surprisingly indifferent to the standard back-and-forth bickering of partisan politics. Stock prices are chiefly concerned with earnings and interest rates, and very little else.

The stock market has performed well under Republicans and Democrats. The market has performed poorly under both as well. And of course, just because one party controls the executive mansion doesn’t mean that they have absolute power. Presidents routinely find their agendas frustrated by Congress or the courts or even public opinion. Any investor who bailed out when President Obama took office missed one of the greatest rallies in history.

I’ll give you an example of a small story that’s probably far more important to stocks and bonds than anything discussed at the debates. The minutes from the FOMC’s September meeting indicate that several members believe the Fed ought to tie their interest rate policy to some economic metric. The minutes didn’t specify which metrics were discussed. If they mean employment, that probably means that short-term rates will stay low for quite some time. This would be a huge benefit for dividend-paying stocks, and companies like Nicholas Financial ($NICK) that rely on short-term funding.

In fact, a bigger event for U.S. stock prices may not even be happening in this country. Over the past few days, the Iranian currency has completely fallen apart. The Iranian rial plunged 59% in one week. I won’t even try to guess what the fallout will be.

Let’s remember the important lesson: The key for being a successful investor is being disciplined. You need to be disciplined in the stocks you select. Disciplined in when you sell. And most importantly, you must be disciplined in holding on during lousy markets. All of these involve holding your emotions at bay, and people can be very passionate about politics. Don’t let the elections rattle you or change your strategy of investing in high-quality stocks. Once the election passes, I see a strong year-end rally forming especially for our stocks on the Buy List.

Expect an Earnings Beat from JPM

Here are a few notes on some of our Buy List stocks. I continue to like Ford ($F) a lot. If you can get it below $10 per share, then you’ve gotten a very good deal. Truck sales at Ford are pace for their best year since 2007. Ford is a buy up to $12.

The fraud suit brought against JPMorgan Chase ($JPM) made a lot of news this week, but there’s less there than meets the eye. I think this was a bit of political grandstanding before the election. Plus, all this happened with Bears Stearns which the government pleaded with JPM to buy.

Look for another good earnings report from JPM next Thursday, October 11. Wall Street currently expects earnings of $1.21 per share. My numbers say that JPM will easily beat that. JPMorgan is a good buy up to $43 per share.

One of the best values on our Buy List is Moog ($MOG-A). At $38, the stock is a very strong buy. I rate Moog a strong buy up to $45.

Before I go I want to say that I was impressed by this week’s ISM report which finally ticked back over 50. The report came in at 51.5. Any number above 50 means that the manufacturing sector is expanding. This was the best report since May.

That’s all for now. We’ll get some early earnings reports next week. The first Buy List stock to report will be JPMorgan which reports on Thursday. Look for a big earnings beat. I’ll also be curious to see the Fed’s Beige Book which comes out on Wednesday. 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 5, 2012
Posted by Eddy Elfenbein on October 5th, 2012 at 5:10 am

Spain Bailout Seen as Not Imminent as Deficit Doubts Mount

Top Spanish Banker Says Private Investors Won’t Back Bad Bank

Japan Political Shifts Expose BOJ to Demands for Action

Japan Stocks Rise on ECB Bond Pledge, U.S. Economic Data

FDI In Insurance: CPI(M) Flays Indian Government’s Move To Raise Cap

Coal Producers Nervous As South Africa Strikes Spread

Fed’s Bullard Warns Inflation Won’t Ease US Debt Burden

Weak U.S. Labor Market Looms Ahead Of Elections

California Gas Stations Shut as Oil Refiners Ration Supplies

When Job-Creation Engines Stop at Just One

Hit Machine Fading, Zynga Warns Again

Facebook Flirts With Local Geeks in Battle for Russia

Facebook Investor IPO Lawsuits Sent to New York Judge

Stone Street: Bassmasters, It’s A Fishing Show

Howard Lindzon: A Socially Loved Trend Ignored by the Old Guard…3D Printing

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Looking at the 2/10 Spread
Posted by Eddy Elfenbein on October 4th, 2012 at 12:36 pm

Here’s another look at the spread between the 10-year and 2-year Treasuries. I like to check in on this metric every so often because it has a decent track record of going negative before a recession starts.

There are many indicators that tell us if we’re currently in a recession but it’s hard to find a good one that’s a leading indicator. Note how often the 2/10 spread has gone negative before the grey bars (which are official recessions).

The spread is still over 140 basis points which is far from the danger area. In fact, the spread has been rising recently.

Of course, not all metrics are perfect including one like this which has done so well from the last 30 years. The problem is that the 2/10 spread may not work so well in an era of zero short-term interest rates. The two-year is currently going for about 0.25% so it’s hard for the 10-year to fall below that.

Morning News: October 4, 2012
Posted by Eddy Elfenbein on October 4th, 2012 at 5:49 am

Draghi Stares at Spain as Brinkmanship Keeps ECB Waiting

France’s LBO Firms Predict ‘Death’ From Hollande’s 75% Carry Tax

Cyprus Said to Seek 11 Billion Euros in Fifth European Bailout

China’s Slowdown Reverberates as ADB Cuts Forecasts

Japan Political Shifts Expose BOJ to Demands for Action: Economy

P.M. Kitco Metals Roundup: Gold Ends Higher, Notches Fresh 7-Mo. High as Bulls Remain in Firm Command

How to Play This Range-Bound Oil Market

Manufacturing in U.S. Expands Unexpectedly as Orders Rise

U.S. Companies Add Jobs In September, Service Sector Expands

3M Dropping Office Unit Deal Leaves Avery Seeking Buyer

Netflix is Loved Again – Stock Surges 11%

Vanguard FTSE Switch to Boost China as Korean Stocks Sold

H.P. Shares Fall as Chief Sees Trouble

Edward Harrison: Why QE Will Fail, Dissonant Voices Edition

Phil Pearlman: Talking Landholding Companies with Todd Sullivan for ReutersTV

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Hewlett-Packard Plunges
Posted by Eddy Elfenbein on October 3rd, 2012 at 2:45 pm

Shares of Hewlett-Packard ($HPQ) plunged as low as $15.15 today as Meg Whitman projected a profit next year between $3.40 and $3.60 per share. Wall Street has been expecting $4.18 per share.

This stock has been absolutely clobbered. Earlier this year, HPQ got to $30 and in 2010 it got as high as $49. Two years ago, when the stock was at $42, I was warning investors to stay away from HPQ. I reiterated that advice again, again and again.

As an investor, whenever you hear the words “growth through acquisition” — run!

The Dow Is Up 2,800 Points in the Past Year
Posted by Eddy Elfenbein on October 3rd, 2012 at 2:16 pm

One year ago today, the S&P 500 hit its closing low for the year at 1,099.23. It was the first time the index dropped below 1,100 in nearly 13 months. The next day, the index got down to its intra-day low of 1,074.77.

From the close of October 3rd to right about now, the S&P 500 has gained close to 32%. Of course, you wouldn’t know it from reading many blogs or following the financial news that stocks have done so well. It was about this time one year ago that crank Alessio Rastani gained notoriety by telling the BBC that the world economy was toast. The Dow has added over 2,800 points in the past year..

Morning News: October 3, 2012
Posted by Eddy Elfenbein on October 3rd, 2012 at 5:50 am

Portugal To Announce More Austerity As Spain Resists Bailout

Europe’s Banks Urged to Keep Trading and Lending Operations Separate

China’s Slowdown Reverberates as ADB Cuts Forecasts

Tokyo Shares Fall as Focus Returns to Economic Weakness

Economic Suicide: Chasing Away The Job-Creating Immigrant Entrepreneurs

Industrial Stocks Rally on Manufacturing Data

California Has A PMI Report And It Just Took A Horrifying Nose Dive

BNP Is Coming Under Pressure With SocGen to Isolate Risk

JPMorgan, Credit Cards, Morgan Stanley: Compliance

Intel invests $40 million in 10 tech-startups such as Hungama.com, Box, Jelli

Lenovo to Set Up PC Plant in U.S.

Vanguard Dumps MSCI Indexes From 22 Funds To Cut Costs

Best Buy Founder Presses Forward On Possible $11 Billion Buyout Plan

Joshua Brown: Who You Calling the Dumb Money?

Pragmatic Capitalism: 3 Major Risks to the 4th Quarter

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Mark Hurd on CNBC
Posted by Eddy Elfenbein on October 2nd, 2012 at 5:52 pm

Here’s Oracle’s President Mark Hurd on CNBC earlier today:

Sure, It’s Down But Is Dell a Buy?
Posted by Eddy Elfenbein on October 2nd, 2012 at 12:36 pm

The stock of Dell ($DELL) has gotten clobbered over the past few years. It’s now under $10, and it was over $18 earlier this year. Any smart investor has to be wondering if the stock is a good buy at this price.

I bring up the case of Dell because we often see similar scenarios in investing. A formerly great stock is way, way off its high. Many good stocks to be are ones that are down. But not all stocks that are down are good buys.

Dell is clearly a company in trouble. But we do have to remember that the company is still profitable. Going by my World’s Simplest Stock Valuation method, Dell is currently going for half its fair value. Of course, that’s just an estimate. But accept for now the premise that Dell is going for less than most reasonable valuation models. Well…that still doesn’t mean that it’s a good buy.

Stocks aren’t like professional athletes who have hot or cold streaks. If there are big problems at a company, they usually aren’t so easy to fix. Starbucks ($SBUX) did an impressive turnaround and so has Ford ($F), but those are the exceptions. Big problems like to hang around and drain a company.

I’m a cautious investor so I don’t even try to time the exact bottom for a stock. A trend always runs much further than you think it could. But Dell has done one thing that I like very much: it initiated a quarterly dividend of eight cents per share. The company shouldn’t have much trouble covering that payout. As an investor, that guarantees us at least some money back.

My strategy would be to choose an interest rate where I’d be comfortable owning Dell. For now, I’d say 4% is enough comfort. That translates to a price of $8 per share. If Dell wasn’t paying a dividend, then I wouldn’t even consider it.

Morning News: October 2, 2012
Posted by Eddy Elfenbein on October 2nd, 2012 at 5:49 am

Spain ‘Ready To Ask For Bailout But Germany Says To Wait’

Spanish Banks Need More Capital Than Tests Find, Moody’s Says

Unemployment in Euro Zone at Record High

Dollar Weakens as Fed to Sustain Stimulus; Europe Futures Fall

In China and Japan, Economic Troubles Persist

Reserve Bank of Australia Cuts Rate to 3.25% as Mining-Driven Growth Wanes

Manufacturing in U.S. Expands Unexpectedly as Orders Rise

SEC Leads From Behind as High-Frequency Trading Shows Data Gap

Tax Questions That Need Answers At Obama-Romney Debate

JPMorgan Targeted By U.S. Task Force For Role In Financial Mess

Softbank of Japan to Buy Rival eAccess for $2.3 Billion

American Express Says It Will Refund $85 Million

Apple’s IPhone 5 Infringes Patents, Samsung Says in Suit

Roger Nusbaum: Investment Lessons from John Templeton

Epicurean Dealmaker: Too Much Is Never Enough

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