VIX On Pace for 5-Year Low
Posted by Eddy Elfenbein on August 13th, 2012 at 3:15 pm

The Volatility Index ($VIX) is on pace for its lowest close since June 19, 2007.

So is a low VIX good for stocks? A few years ago, I looked at the numbers and found that a very low VIX does provide some benefit for the market:

To the extent there’s a tipping point, it seems to be a VIX of 13. Above 13, the S&P shows an annualized return of 3.0%, below 13 it jumps to 14.1%. However, 13 is a very low VIX reading; it’s been below 13 about 18% of the time.

“I’m an Outspoken Defender of the Truth”
Posted by Eddy Elfenbein on August 13th, 2012 at 1:57 pm

Jessica Pressler spent 122 minutes with Jamie Dimon and lived to tell the tale. Here are some highlights:

“Everyone is talking about the culture, the culture, and all that, and it’s just not true,” Dimon says. “Most bankers are decent, honorable people. We’re wrapped up in all this crap right now. We made a mistake. We’re sorry. It doesn’t detract from all the good things we’ve done. I am not responsible for the financial crisis,” he adds. “I hate to tell you. We were a port of safety in the storm. I find it unbelievable that that is the general theme—that you have to walk in a room and act like you are responsible for things you are not responsible for.”

He’s staring into the middle distance as he says all of this, as if addressing an invisible, unpersuadable audience. But when I ask if this episode has made him regret being such an outspoken defender of the banking industry, he looks at me point blank. “I’m an outspoken defender of the truth,” he corrects me. “Everyone is afraid of retaliation and retribution. We recently had an event with a hundred small bankers here, and 85 percent of them said they can’t challenge the regulation because of the potential retribution. That’s a terrible thing. Okay? This is not the Soviet Union. This is the United States of America. That’s what I remember. Guess what,” he says, almost shouting now. “It’s a free. Fucking. Country.”

I still think Dimon ought to resign but he is a piece of work.

Buy List Earnings Calendar
Posted by Eddy Elfenbein on August 13th, 2012 at 1:45 pm

JPMorgan to Float Five-Bonds
Posted by Eddy Elfenbein on August 13th, 2012 at 1:32 pm

JPMorgan Chase ($JPM) is looking to float some five-year bonds. The bank is hoping to lock-in a yield of 137.5 basis points above similar Treasury bonds. The five-year Treasury currently goes for 0.69%, so that translates to roughly 2.065%.

What’s interesting is that JPM bumped up its quarterly dividend to 30 cents per share. At the current price, the stock yields about 3.5%. In other words, the company can make an instant profit by issuing debt to buy their own stock.

Obviously if the company tried to sell enough debt to take themselves private, the yield would be much higher than 2.065%. But it’s interesting that the risk in owning equities is so high that it creates an obvious arbitrage opportunity for any company, especially the largest bank in America.

Pfizer Files for Animal Health Spin-Off
Posted by Eddy Elfenbein on August 13th, 2012 at 12:44 pm

I often tell investors that I’m not a big fan of most IPOs. There’s an implicit assumption in any IPO that the issuer can get a good price for themselves, and that’s to the detriment of shareholders. The academic research shows that this is more often than not correct.

I do like to pay attention when a company, especially a blue-chip company, has a yard sale. I take notice whenever I see a large company spin-off a smaller unit.

Today’s news is that Pfizer will be spinning off its animal health unit. This unit isn’t exactly small either. Last year, it generated sales of $4.23 billion. The independent company will be called Zoetis.

According to Bloomberg, current investors may be able “to swap a portion of their Pfizer shares for stock in the new company.”

I can’t say if Zoetis is a buy just now (we still don’t know the price), but it will definitely be a stock worth watching.

Sysco Earns 55 Cents for Q4
Posted by Eddy Elfenbein on August 13th, 2012 at 10:29 am

Good news this morning; Sysco ($SYY) reported fiscal Q4 earnings of 55 cents per share. That’s pretty much what I was expecting. Wall Street’s consensus was for 54 cents per share. For the year (Sysco’s fiscal year ends in June), the company made $1.93 per share. Investors seem pleased as the stock is up $1.21 or 4.20%.

Quarterly sales came in at $11 billion which is a 5.9% over last year’s Q4. What Sysco calls “adjusted operating income” increased by 2.2% to $608 million. The Street expects earnings for the current fiscal year of $2 per share. That means the stock is going for about 15 times earnings.

Morning News: August 13, 2012
Posted by Eddy Elfenbein on August 13th, 2012 at 7:41 am

Growth Doubts Send Shares Lower, Central Banks Eyed

European Stocks Pare Gains After Italy’s Bill Sale

Merkel Handed Sub-Zero Yields As ECB Plan Gains Traction

Greek GDP Sinks As Crisis Batters Economy

Japan Post-Quake Rebound Wanes As Spending Nears Stall

Julius Baer to Buy Merrill Unit

Total Told To Halt Kurdish Deals Or Sell Halfaya Stake

Facebook’s Drop Limits Goldman Sachs Gain As Lockup Ends

Google To Cut 4000 Motorola Mobility Jobs, Take $275 Million Charge

Nordstrom Raises Profit Outlook, To Speed Rack Buildout

Standard Chartered Nemesis Has History As Strict Enforcer

Libor Case Energizes a Wall Street Watchdog

Roger Nusbaum: The Big Picture for the Week of August 12, 2012

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Wall Street Expects $115.28 for 2013 S&P 500 Earnings
Posted by Eddy Elfenbein on August 10th, 2012 at 3:35 pm

I’m always a bit suspicious of analysts’ forecasts and I’m particularly leery of forecasts that go out too far in time. In the near-term, forecasts aren’t so bad. Of course, they’re much less important as well.

But now 2013 isn’t so far away. Wall Street currently expects the S&P 500 to earn $115.28 for next year. Below is a chart from S&P and it shows how much that forecast has fallen in recent months, although it has stabilized recently.

For this year, Wall Street expects earnings of $101.86. That’s down from $113 one year ago. Going by yesterday’s close, the S&P 500 is going for just 12.2 times next year’s earnings. Unless earnings suddenly plunge, I think the S&P 500 is very reasonably priced.

CWS Market Review – August 10, 2012
Posted by Eddy Elfenbein on August 10th, 2012 at 6:49 am

The world’s most-hated rally continues pace. On Thursday, the S&P 500 closed higher for the fifth day in a row. The index is now at its highest level since May 1st, and we’re a little over 1% away from taking out a four-year high.

Our Buy List is also doing quite well. Oracle ($ORCL), for example, got to its high for the year, and it’s close to breaking through $32 per share. DirecTV ($DTV) just hit a new 52-week high. Stocks like AFLAC ($AFL) and JPMorgan Chase ($JPM) have been quite strong recently, and Harris Corp. ($HRS) has rallied for seven days in a row. Also, Nicholas Financial ($NICK) gave us a big present this week by increasing its dividend by 20%.

In this week’s CWS Market Review, we’ll take a closer look at what could be the end of Wall Street’s huge defensive rotation. I’ll also look at why the economy might be stronger than most people believe. Plus, we’ll preview Sysco’s ($SYY) earnings report. SYY currently yields a hefty 3.76%, and I’m expecting them to increase their dividend for the 43rd year in a row. Not many stocks can say that. But first, let’s look at the new mood on Wall Street.

“Believe Me, It Will Be Enough”

On July 26th, ECB President Mario Draghi dropped a bomb on world markets when he said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Heavens to Murgatroyd! Central bankers aren’t supposed to speak in such dramatic tones. I mean, that’s just not done. Of course, the worry is that if he thinks there’s a reason to say “believe me,” that must mean that there are plenty of folks who, in fact, don’t believe him.

But any reason for doubt shouldn’t rest solely with Mr. Draghi and his level of commitment. For one, Draghi seems to be blurring the lines between monetary policy and fiscal policy. Plus, we still have to contend with the familiar question: “Will the Europeans set aside their bickering and do what it takes to save the euro?” As always, the Europeans appear to be a quintessential “hot bed of cold feet.”

The Germans, for example, are very much opposed to more bond buying. If anything, their opposition seems to be growing. If a new bond buying program does start—and it most certainly will—it will only be for countries in the periphery and after a formal request.

But let’s turn back to Mr. Draghi’s remarks. I’ll give him credit for one thing—he shook up the markets. Long-term bonds in Italy and Spain have rallied, and stock markets there have come back to life. The day before Draghi spoke, the Spanish 10-year yield peaked at 7.751%. Recently, it’s been below 6.8%.

The effect isn’t just in Europe, but it’s being felt in the U.S. as well. Here’s what you need to understand: Investors are creeping away from their tightly-held defensive posture and they’re slowly taking on more risk. Just look at the U.S. bond market: The yield on the 10-year Treasury jumped from an all-time low of 1.39% on July 24th to 1.69% on Thursday. I thought it was interesting that the U.S. Treasury had a lousy auction this week for a fresh batch of 10-year bonds. The auction had the lowest big-to-cover ratio in three years. Perhaps investors have finally grown weary of ultra-low risk.

Before Draghi’s remark, investors were shunning risk at every chance. I mentioned in last week’s CWS Market Review how dramatic the defensive posture had become. Consider that from July 5th to August 1st, the Russell 2000, which is a gauge of small-cap stocks (think “higher risk”), dropped by 5.7% while the S&P 500 managed to make a small gain. No one wanted anything with a hint of risk. But since August 1st, the tables have turned. The Russell has gained 4.1% which is more than double the S&P 500.

The move toward offense can also be seen with the highest-yielder on our Buy List, Reynolds America (RAI). The stock soared to a new high but dropped 90 cents per share on Tuesday. That’s a very big drop for a stock like Reynolds. I think it has less to do with the company’s business outlook, which is fine, than with the fact that investors are searching for growth opportunities. We’ve also seen key defensive sectors like Healthcare ($XLV), Utilities ($XLU) and Consumer Staples ($XLP) trail the market in recent days.

It’s too early to say if this turn towards the offensive will last. For now, our strategy is to focus on high-quality stocks, especially ones that the market doesn’t get. Speaking of which, let me say a few words about DirecTV ($WXS) and Wright Express ($WXS) because these are perfect examples of why our strategy of concentrating on high-quality stocks works.

Last week, I highlighted the market’s bizarre reactions to the earnings reports from DirecTV and Wright Express. The earnings reports certainly weren’t outstanding, but the market initially treated both stocks as if they’re in serious trouble. That’s clearly not the case. Yet all we had to do was wait a few days as both stocks recovered. In the last six days, WXS gained 6.4% and DirecTV is on the cusp of making a new 52-week high. Wright Express is an excellent buy anytime the shares are below $65. I’m also raising my buy price on DirecTV to $53.

Some Modest Economic Bright Spots

We had some surprisingly good economic news this week. I’m not saying that the economy is doing well, but it may be the case that things aren’t as dire as they seem. The trade deficit report for June, for example, came in narrower than expected. The deficit for May was also revised favorably.

The trade suggests that the government’s initial estimate for Q2 GDP of 1.5% is too low and is perhaps closer to 2%. This is good news because it indicates that weakness in Europe and the strong dollar aren’t hurting us as much as was feared.

The other good news was that jobless claims fell by 6,000. This is a very volatile metric with a lot of noise, but the trend is still going in the right direction. What we’re seeing is that companies are working hard to become more efficient. On Wednesday, the productivity report showed that worker productivity rose by 1.6% in the second quarter after falling by 0.5% in the first quarter. The short-term downside of rising productivity is that it may lead firms to be cautious about expanding their payrolls.

I was also impressed to see that the median price for a new home in the second quarter was up 7.3% from the same period a year ago. That’s the strongest growth rate in six years. The housing news is especially promising because a pick-up in the housing sector has often been the catalyst for U.S. economic expansions. This time around, we had an enormous over-supply of homes so prices went nowhere. At last, we’ve finally worked off that inventory.

Nicholas Financial Gives Us a 20% Raise

Also in last week’s CWS Market Review, I discussed the possibility of Nicholas Financial (NICK) raising its dividend. Sure enough, that’s exactly what the company did this week. I would have preferred to see NICK go for a bolder increase, but the company gave us a 20% raise which ain’t too shabby. NICK now pays 12 cents per share per share or 48 cents for the entire year. Going by Thursday’s closing price, NICK yields 3.57%. That’s a good deal.

Sysco (SYY) is due to report earnings on Monday, August 13th. The food service company is usually one of the last companies on our Buy List to report earnings. The June quarter is the fourth quarter of their fiscal year so we’re going to get a look at their year-end results.

In May, Sysco reported earnings of 44 cents per share which was a penny more than Wall Street’s consensus. This time around, the Street expects 54 cents per share. I think that’s about right, although it will be interesting to see how much inflation and currency impacted their bottom line. What I like about Sysco is that its business tends to be very stable.

For the year, Sysco should earn about $1.93 per share, and Wall Street expects $2.00 per share for the current fiscal year. That means Sysco is going for less than 15 times earnings. Furthermore, Sysco pays out 27 cents per share in dividends. That makes the current yield 3.76%. Plus, the company will almost certainly raise its payout this fall for the 43rd year in a row. I’m raising my price on Sysco to $32 per share.

Before I go, a few of the bargains on our Buy List include Ford Motor ($F), Stryker ($SYK), Medtronic ($MDT) and JPMorgan Chase ($JPM).

That’s all for now. Stay tuned for Sysco’s earnings report on Monday. We’ll also get the key industrial production report 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: August 10, 2012
Posted by Eddy Elfenbein on August 10th, 2012 at 6:49 am

Monti’s Bond Frustrations Mount as Yields Stay High

Banks Seek ‘Scientific’ Libor Process, FSA’s Wheatley Says

Weak July Data Dims China Outlook

China’s New Target: Batteries

Easing U.S. Ethanol Mandate Would Help Prevent Food Crisis

Justice Department Drops Goldman Financial Crisis Probe

F.T.C. Fines Google $22.5 Million for Safari Privacy Violations

U.S. Postal Service Posts Quarterly Loss of $5.2 Billion

Manchester United Prices I.P.O. at $14 a Share

Key Events Involving Yahoo And Its Performance

SAP’s Chen Challenges Oracle, IBM With Database Advances

ThyssenKrupp Posts Profit as Europe Steelmakers Struggle

Regulator Shines a Spotlight on a Bank, and on Himself

Joshua Brown: Until the Market Rallies

Phil Pearlman: Talking Markets and Trending Tickers with Reuters’ Rhonda Schaffler

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