• CWS Market Review – August 31, 2012
    Posted by on August 31st, 2012 at 8:02 am

    “The investor’s chief problem—and even his worst enemy—is likely to be himself.” – Benjamin Graham

    Even though the stock market is still in its late-summer doldrums, our Buy List stocks made some very impressive headlines this week. First, Hudson City ($HCBK) jumped 15% in one day after it announced a $3.7 billion merger agreement with M&T Bank ($MTB). Then JoS. A. Bank Clothiers ($JOSB) soared 14% thanks to a very strong earnings report. Looking at the numbers, our Buy List has had a very good August. In the last four weeks, the Buy List gained 5.9%, which is more than double the gains of the S&P 500.

    As Churchill said on V-E Day, “We may allow ourselves a brief period of rejoicing.” While this month was great for our Buy List, let’s not get overconfident. This is a tough market, and there are many stocks, such as Amazon.com ($AMZN), that are extremely dangerous to own. The bond market looks shaky as well. As always, patience and discipline are our keys to success.

    In this week’s CWS Market Review, I’ll bring you up to speed on the latest developments. Plus, I’ll tell you the best way to position yourself in the weeks ahead. We also had a pleasant 12.1% dividend increase from Harris Corp. ($HRS). This quiet little stock just had a remarkable run, rallying on 18 out of 21 days—and it’s still going for less than 10 times earnings. Now let’s take a closer look at the news from Hudson City and Joey Bank.

    Hudson City Agrees to Merge with M&T

    At the start of the week, Hudson City Bancorp said it had agreed to merge with M&T Bank ($MTB) in a deal worth $3.7 billion. Shares of HCBK jumped 15.7% on Monday.

    I have to confess some embarrassment, since I had actually been down on HCBK and recently lowered the stock to a “hold.” The board members at M&T apparently aren’t subscribers to CWS Market Review. The merger between MTB and HCBK is interesting for several reasons. One is that this is the largest bank merger since Dodd-Frank came into effect. I think banks have been understandably reluctant to do any large deals since the financial crisis. Regulators certainly will be paying extra-close attention to any merger.

    The merger agreement allows shareholders of Hudson City to take cash or 0.08403 shares of MTB for each share of HCBK they own. Given where MTB closed last Friday, that values HCBK at $7.22 per share. Here’s another interesting twist. The acquisitor in any large deal normally sees its stock drop. But this time, shares of MTB rallied 4.6% on Monday. That really caught Wall Street’s attention. Plus, when MTB rises, it values HCBK even more. M&T closed the day on Thursday at $87 per share, which translates to $7.31 for HCBK (note that HCBK is slightly discounted relative to the merger ratio). If MTB can get to $95, which is a very fair valuation (12.4 times next year’s earnings estimate), then that would value HCBK just shy of $8. I’m not saying it will happen, but it’s a very plausible scenario.

    The merger agreement calls for the total payment from MTB to be 60% in stock and 40% in cash, so individual shareholders may not get the exact allocation they want. It all depends on what the balance of HCBK shareholders say (here’s a transcript of the conference call).

    My recommendation for HCBK holders is to take shares of MTB. That’s what we’re going to do on the Buy List. M&T is a good bank, and it pays a decent dividend. M&T hasn’t had a losing quarter in 36 years. They were also one of the very few large banks to maintain their dividend through the financial crisis.

    Bear in mind that we’re not in any hurry to exchange our shares. According to the conference call, the banks are looking to wrap up the deal by the second quarter of next year. That’s between seven and ten months away. I should remind you that any deal, no matter how solid it looks, does have a chance of falling apart. It’s certainly not likely, but the odds aren’t zero either. On the conference call, management said they hope to maintain Hudson’s dividend, but they need to hear from the regulators. For now, I rate Hudson City a good buy any time the shares are below $7.50.

    Joey Bank Soars on Strong Earnings

    On Wednesday, JoS. A. Bank Clothiers stunned everybody, including me, by reporting very strong earnings. The stock vaulted 14% that day, which came on the heels of a 3.5% rally on Tuesday. If you recall from last week’s CWS Market Review, I was rather skeptical of this earnings report.

    For JOSB’s fiscal second quarter, they earned 83 cents per share, which was 10 cents more than Wall Street’s consensus. At one point on Wednesday, JOSB was up close to 19%. If you recall, the last earnings report was a dud. While the recent rally is impressive, JOSB is really taking back a lot of the ground it lost during the spring. It appears that short-sellers were ganging up on JOSB, and once the strong earnings came out, they got routed. The shorts then had to cover their positions and that drove the stock even higher, which in turn caused more shorts to scramble for the exits. That’s not a fun game to play.

    Looking at the numbers in the earnings report, JOSB did quite well. Total sales rose by 12.9% to $260.3 million. That was almost $10 million more than Wall Street had been expecting. Sales at JOSB’s direct marketing segment, which includes internet sales, rose over 39%. The important metric in retailing, same-store sales, saw an impressive rise of 6.1%.

    I was pleased to hear that JoS. A. Bank has very ambitious plans for the future. The company hopes to open 45 to 50 stores this fiscal year and next year as well. I’m going to raise my buy price on JOSB to $50. I also want to warn you to expect a bit of volatility from this stock. If that unnerves you, it may be best to stay away.

    Harris Corp. Is a Buy up to $50

    One of the biggest surprises this year has been the performance of Harris Corp. ($HRS). The company, which makes communication equipment, was a new addition to this year’s Buy List, but I don’t think I could have imagined that it would be our best-performing stock so far this year. Through Thursday’s trading, Harris is up 30.7% since the start of the year for us.

    On Wednesday, Harris announced that it’s raising its quarterly dividend by 12.1%. This is their second dividend increase this year. Six months ago, Harris raised its dividend from 28 cents to 33 cents per share. Now it’s rising to 37 cents per share. That makes the current yield 3.1%, which is more than a 30-year Treasury.

    Some Buy-List Bargains

    As I said last week, I’m expecting a minor pullback over the next few weeks. Nothing big, but we may shed a few points here and there. In fact, the S&P 500 closed just below 1,400 on Thursday. There are good buys out there. I want to highlight a few stocks on our Buy List that look especially good right now.

    Oracle’s ($ORCL) earnings, for example, are only a few weeks away. I’m expecting more good news. Ford ($F) and Moog ($MOG-A) are pretty cheap here. If volatility doesn’t bother you, then JPMorgan Chase ($JPM) is a strong buy.

    That’s all for now. The stock market will be closed on Monday for Labor Day. Next week, we’ll get some important economic reports, such as the ISM and productivity reports, and the big jobs report comes next Friday. 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: August 31, 2012
    Posted by on August 31st, 2012 at 6:48 am

    Germany Plays Bad Cop as Irish Chase Bank Debt Help

    EU Plan Said to Give ECB Sole Power to Grant Bank Licenses

    Euro Zone Inflation Jumps, Weighs On Rate Cut Bets

    Apple Loses Patent Lawsuit Against Samsung in Japan

    Qatar’s Rejection Leaves Glasenberg to Decide on Xstrata

    Majority of New Jobs Pay Low Wages, Study Finds

    Bernanke May Hint At QE Without Boxing Fed In

    Corporate Bond Sales Top $237 Billion in Record August

    Hermes Raises Growth Target as China Demand Boosts Sales

    Tata Motors Finds Success in Jaguar Land Rover

    Russia’s Berezovsky loses UK battle with Abramovich

    Credit Writedowns: Peak Oil: Light Sweet Crude Production Has Peaked Globally

    Jeff Carter: Entrepreneurial Ecosystems: Which Comes First, Entrepreneurs or Capital? Classic Chicken and Egg Dilemma

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  • “American Investors Lack Basic Financial Literacy”
    Posted by on August 30th, 2012 at 7:23 pm

    I recently wrote about the comics and games put out by the Federal Reserve. I concluded that unfortunately, many Americans need these types of materials because they know nothing about managing their money.

    One provision of the Dodd-Frank Act was to look at American financial literacy. The report came out today…and we got a big fat F. Here’s a depressing quote:

    According to the Library of Congress report, studies consistently show that American investors lack basic financial literacy. For example, studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Moreover, many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. According to the Library of Congress report, studies show that investors lack critical knowledge that would help them protect themselves from investment fraud. In particular, surveys demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lock of investment knowledge than the average general population. The Library of Congress Report concludes that “low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.” Furthermore, it states that “intensifying efforts to educate investors is essential,” and that investor education programs should be tailored to specific subgroups “to maximize their effectiveness.”

    What’s left unsaid is that it’s in Wall Street’s best interest to keep folks in the dark.

  • The Fed Gathers in Jackson Hole
    Posted by on August 30th, 2012 at 2:10 pm

    This week, the Federal Reserve gathers at its annual Labor Day weekend retreat in Jackson Hole, Wyoming. Investors all over the world are ready to hear news that could, just maybe, just possibly, be important.

    But probably not.

    Gary Alexander explains why Jackson Hole has become important:

    During Bernanke’s speech at Jackson Hole on August 27, 2010, hefirst acknowledged that the pace of economic growth had been “less vigorous” than the Fed was expecting and that the pace of the U.S. job growth had been “painfully” slow. Bernanke also acknowledged that the Fed was surprised by the “sharp deterioration” in the U.S. trade balance. His solution was to revive 2008’s “quantitative easing” as “QE-2.” The market loved QE-2: The S&P 500 rose from 1040 on the day of Bernanke’s 2010 Jackson Hole talk to 1363 the following April – up 30% in eight months.

    At Jackson Hole in 2011, Chairman Bernanke laid the groundwork for another monetary strategy called “Operation Twist.” Over the next few weeks, various Fed governors hit the road to explain and defend their $400 billion operation to artificially flatten the yield curve. The stock market also liked Operation Twist. The S&P 500 rose from 1099 to 1419 in the six months from October 3, 2011 to April 2, 2012. (A clear improvement in various economic indicators also helped!)

    So if it made headlines the last two years, it most certainly will again this year? Well, I doubt it.

    Under Bernanke, the Fed has become slightly more transparent. The central bank is still very opaque, but some rays of light have been allowed through.

    The Fed has been surprisingly forthright about its intentions, and this time around, they seem pretty clear that more action will not be needed. In fact, most economic news aides the case for inaction. And let’s not forget that a general election is only weeks away so the Fed will try to avoid any signs of partisanship.

    I’m not expecting much news out of Jackson Hole.

  • Amazon Touches $250
    Posted by on August 30th, 2012 at 11:31 am

    Earlier today, shares of Amazon.com ($AMZN) finally touched $250. That’s an astounding run since the comapny’s IPO more than 15 years ago. What’s interesting is even if bought Amazon at its 1999 peak of $113 per share and held on, you would have more than doubled your money 13 years later. The S&P 500, by contrast, is still down.

    The problem, of course, is the “and hold on” part. Would you have been able to watch your initial investment at $113 plunge all the way down to $5.51 as Amazon did after 9/11? I doubt I could.

    Wall Street currently expects Amazon to earn $2.38 per share next year. That means the stock is going for 105 times earnings. I don’t think this will end well.

  • Morning News: August 30, 2012
    Posted by on August 30th, 2012 at 8:10 am

    Euro-Area Confidence Drops, German Jobless Increases

    ECB Action Prospects Underpin Italian Bond Auction

    ICBC Profit Growth Slips to 11% as China Slowdown Hits Loans

    China to Continue Investing in Europe

    Gold Holds Steady Ahead of Jackson Hole Symposium

    U.S. Q2 Growth Revised Up, Fed Still Seen in Play

    Mortgage Settlement With Banks Starts To Ease Foreclosure Crisis

    Hedge Fund Proposal Would Allow Secretive Enclave to Open Up

    Costco, Limited Exceed August Sales Estimates

    GSV Capital, Placing Bets on Start-Ups, Falters

    Citigroup Agrees To Pay $590 Million In Shareholder Suit

    Sears Holdings Exiting S&P 500

    Joshua Brown: An Asset Allocator’s Prayer

    Howard Lindzon: The Web and Google are Winning…Facebook and Twitter are only #Winning

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  • JoS A Bank Soars on Strong Earnings
    Posted by on August 29th, 2012 at 3:35 pm

    For the second time this week, one of our Buy List stocks is soaring. And for the second time, it was one of the stocks I had been down on.

    This morning, JoS. A. Bank Clothiers ($JOSB) reported quarterly earnings of 83 cents per share for its fiscal second quarter. That was 10 cents per share more than Wall Street had been expecting. The metric is that same-store sales were up 6.1%. The company did especially well with its online sales.

    JoS A Bank, which competes with Men’s Wearhouse Inc, has set up Amazon.com Inc and eBay Inc stores, aiming for a bigger slice of shoppers’ wallets by catering to different consumers than the ones who come to their own websites and physical stores.

    Sales at its direct marketing segment, which comprises the Internet and catalog call centers, rose 39.3 percent for the second quarter. The segment recorded higher sales in August compared to last year, the company said.

    Direct marketing, driven primarily by Internet sales, accounted for about 10 percent of total sales last year.

    Several retailers are looking to grow into the online market place by setting up storefronts on Amazon and eBay.

    JoS A Bank also signed up for PayPal’s in-store service in May that allows shoppers to pay through their mobile phones, making purchases at brick-and-mortar stores easier.

    Comparable store sales increased 6.1 percent for three months ended July 28. Total sales rose 12.9 percent to $260.3 million.

    In last week’s CWS Market Review, I expressed my frustration with JoS. A. Bank. I even said that adding it to this year’s Buy List was a mistake. This is why I don’t try to time the market. Though in my defense I did say that the stock wasn’t unreasonably priced at $41.

    At one point today, the stock was up 18.76%, and that doesn’t include the stock’s 3.51% rally yesterday. JOSB has settled down some and it’s currently up just over 14%. Of course, much of today’s gain is merely walking back losses from earlier in the year. As of now, JOSB is down just over 2% for the year.

  • Q2 GDP Growth = 1.7%
    Posted by on August 29th, 2012 at 11:15 am

    The economy had some good news, and it’s slightly more evidence in favor of our the-economy-is-stronger-than-people-realize thesis. The government revised higher its estimate for second quarter GDP growth.

    The initial estimate one month ago said the economy grew by 1.5% during the second quarter. Now they’re saying it was 1.7%. Sure, that’s not a major revision but at least it’s in the right direction.

    A second straight quarter of slowing growth shows the world’s largest economy is having difficulty making headway as consumers stay frugal and looming tax changes prompt companies to limit investment and hiring. Chairman Ben S. Bernanke this week may reaffirm the view of many Federal Reserve policy makers that more stimulus will be needed unless the expansion shows signs of strengthening.

    “We are very much struck in a slow-growth mode,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly forecast the revision. “We still don’t see the economy breaking free of this 1.5 percent to 2 percent growth rate. A 1.7 percent pace is the personification of the Fed’s frustration.”

    The economy grew by 2% in the first quarter. Before today’s data came out, we were able to say that economic growth was “decelerating,” meaning rate of growth was slowing. That’s still technically true, but it’s probably more accurate to say that growth has leveled off during the first half of this year.

  • Morning News: August 29, 2012
    Posted by on August 29th, 2012 at 7:34 am

    Draghi Hits Back at German Criticism of ECB Bond Plan

    Spain, Italy Yields Hit 2-Week Highs on New Issue, Catalonia

    AgBank Sees Stern Challenges Ahead

    Hungary Tests Investors With Rate Cut as Recession Deepens

    What Downturn? Bank Profits Hit $34.5 Billion

    Home Prices Jump In 20 Major U.S. Cities

    Consumer Confidence in U.S. Declines by Most Since October

    Occupy Sets Wall Street Tie-Up as Protesters Face Burnout

    Daikin Buys Goodman For $3.8 Billion, Gains Access To North America

    U.S. Sets Higher Fuel Efficiency Standards

    Ford Breaks Ground On New Plant In Eastern China

    GM To Invest $1 Billion In Russia Within 5 Years

    Lexmark’s Inkjet Exit Symptomatic Of Industry

    Unplugged or Checked Out?

    Stone Street: Book Review: “Bailout” by Neil Barofsky, or: Why I’ll Never Work in Washington D.C.

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  • Morning News: August 28, 2012
    Posted by on August 28th, 2012 at 7:54 am

    Spain Says Recession Deepening, GDP Shrinks 0.4%

    German at European Central Bank at Odds With Country’s Policy Makers

    ECB Said to Urge Weaker Basel Liquidity Rule on Crisis Risks

    A Youthful Populace Helps Make the Philippines an Economic Bright Spot in Asia

    Occupy Hong Kong Holdouts Defy Order to Leave Despite Effort by HSBC

    Greece Plans “Special Economic Zones” To Boost Growth

    Isaac Seen Making Release of U.S. Strategic Oil Likely

    Apple Seeks Ban on Sales of Eight Samsung Phones in U.S.

    IBM Taps Into Talent With Kenexa Buy

    Struggling AOL Defies Gravity Again

    Ford’s European Legacy Losing to Hyundai’s Newcomer Edge

    Ford Readies Lincoln Launch In China By 2014

    New York Bank Merger May Be Too Good To Be True

    Credit Writedowns: Profit Incentives, Disruptive Technology, and Reducing Health Care Costs

    Cullen Roche: John Bogle’s 10 Rules of Investing

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