• Oil Versus Stocks
    Posted by on June 12th, 2012 at 1:00 pm

    It’s still too early to say if this is a trend, but for the first time in four years, stocks and oil are headed in different directions:

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  • Despite Europe, We’re Holding On
    Posted by on June 12th, 2012 at 11:52 am

    After the market’s late-day sell-off from yesterday, we’re holding on to some early gains. Today’s rally is being led by energy and materials stocks. I see that Boeing ($BA) is up by more than 3%. I think we’re going to see more investors shift to high-yielding stocks. Altria ($MO), for example, is at a 52-week high this morning.

    On our Buy List, Bed Bath & Beyond ($BBBY) is back over $71 per share after a brief dip below $70. Oracle ($ORCL) is right at $27 even. I think we’ll see in a rally in ORCL after the earnings report comes out next week.

    The bond market continues to give Spain its worst beat-down since the Spanish Armada. Yields on Spanish bonds jumped over 6.8% today. That’s the highest since the advent of the euro and it’s 537 bips over German bonds. This is a strong signal from the market that what the authorities just did wasn’t big enough. Now folks are worried about Italy. The spread between Italian and German bond yields is 482 points.

    Two quick points: One of our former Buy List stocks, FactSet Data Research ($FDS) came out with decent earnings today. As much as I like this company, the shares are WAY too expensive. I wish it were cheaper but until it is, I’m staying far away.

    One compelling stock is Seagate Technologies ($STX). David Einhorn disclosed that he’s got a big stake in this stock. Einhorn is always someone worth paying attention to. The numbers and dividend yield at Seagate look very good.

  • Morning News: June 12, 2012
    Posted by on June 12th, 2012 at 5:42 am

    Goirigolzarri’s Aid Demand Helped Push Spain to Bailout

    Cyprus Explores a Limited Bailout

    Spanish Aid To Offer CDS Fleeting Respite

    Pulling Plug on Greece Sells in German Town Opposing Merkel Plan

    China Oil Imports To Top May Record On Low Prices, Stockpiling

    China Could Impound European Planes In Carbon Row

    IMF: Yen Is Overvalued; Yen Falls on Remarks

    In a Time to Shine, India Can’t Get Off the Ground

    UAE Amends Stock Ownership Rules In Transparency Move

    Crude Ends Lower, Hits New 2012 Low As Rally Fades

    Average U.S. Family’s Wealth Plunged 40% In Recession, Fed Says

    How the SEC Could Pursue A Case Against JPMorgan

    Apple Takes On Google With Own Maps, Better Siri

    Buffett Pounces in Private-Jet Slump With $9.6 Billion

    Nobel Prize Amounts to Be Reduced

    Financial Astrologer Charts Stock Market’s Course

    Credit Writedowns: Will Globalization Go Bankrupt?

    Howard Lindzon: Mood Over Math…How to Profit In a Connected World

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  • Some Retail Stocks Are Heating Up
    Posted by on June 11th, 2012 at 2:50 pm

    Even though the stock market hasn’t been doing well lately, a number of retail stocks have bucked the trend. Target ($TGT), for example, just hit a new 52-week high today, and it’s not far from an all-time high. I expect Tar-Zhay to announce its 45th-straight dividend increase any day now. Last month, the company said it’s aiming to have its dividend at $3 per share by 2017. That’s pretty optimistic, but I like to see folks who have big plans.

    Walmart ($WMT) has also been doing well. On Friday, the Behemoth of Bentonville broke $68 per share for the first time since January 2000.

    Ross Stores ($ROST) hit a new all-time high today. The stock has practically been in a nonstop bull market for 18 years. In January 1994, shares of ROST were going for 74 cents. Now they’re at $64. That’s an annualized gain of over 27% a year, and it doesn’t include the dividend.

    On our Buy List, Bed Bath & Beyond ($BBBY) has pulled back from its all-time high of $74.67 (reached on May 29th). The company had an outstanding earnings report in early April. They beat Wall Street’s consensus by 15 cents per share. What’s interesting, though, is that the stock market took a while to react. After a small bump up after the earnings report, it was almost all gone three weeks later. Then the stock started to rally.

    BBBY will report earnings again on June 20th. The company sees fiscal Q1 earnings ranging between 79 cents and 83 cents per share.

  • Goldman Sachs Hires Single Morally Decent Human Being To Work In Separate, Enclosed Cubicle
    Posted by on June 11th, 2012 at 10:33 am

    The Onion:

    NEW YORK—Seeking to mollify critics over its role in the global financial crisis, Goldman Sachs announced Friday the hiring of junior analyst Greg Kohler, who executives said is the investment bank’s first and only employee to possess a clear set of morals or a basic understanding of right and wrong.

    Officials confirmed the upstanding Kohler, 24, will be based out of the company’s Lower Manhattan headquarters, working from within a small cubicle strategically located in a remote corner of the building where he is unlikely to have contact with his morally bankrupt coworkers.

    “We are very pleased to welcome Mr. Kohler, who will be adhering to the letter of the law in a workspace physically detached from the rest of our firm’s operations,” public relations chief Richard Siewert said during a press conference. “He’ll be joining a select group of 33,000 talented individuals at Goldman Sachs as our sole employee not motivated purely by the pursuit of obscene wealth at the expense of society.”

    “While Mr. Kohler won’t be attending a single meeting or influencing any of our business decisions, we’re confident his acute sense of professional integrity will prove a valuable asset,” Siewert continued. “He will technically be on our staff, collecting a paycheck, and that’s really all that counts.”

    According to Siewert, Kohler’s unique values of fairness, honesty, and social responsibility will be put to the test immediately, with daily tasks that include not searching for SEC loopholes to exploit, not deliberately misleading clients into unwise investments and then betting against them, and not taking massive risks at the expense of American taxpayers.

    Working in the seclusion of his 16-square-foot office in a seldom-traveled hallway adjacent to the office cafeteria’s dishwashing facility, Kohler will report to a vice president of private wealth management who will be barred from communicating with him in person, by phone, or over e-mail in the event Kohler accidentally hears about, and thus has to report, any instances of duplicitous behavior.

    In a recent letter to shareholders, CEO Lloyd Blankfein stressed that the firm has taken every precaution to ensure Kohler has no influence on Goldman’s culture of rampant amorality, writing, “Trust me, no one here is going to be listening to [Kohler]. He’ll only be allowed to access our building through the freight entrance.”

    “Unlike the numerous members of our organization who have brazenly done so in the past, Mr. Kohler will be prohibited from ever taking a high-ranking position within the U.S. government, as that would present a serious conflict of interest,” Siewert told reporters. “Nor will he be allowed, as our lone ethically minded employee, to draw upon those dubious connections to secure favorable treatment for Goldman Sachs or any of its global interests.”

    “Our plan is to ask for his advice on strategy and then immediately abandon anything he believes to be a good idea,” he added.

    Despite the official announcement welcoming Kohler, several employees voiced concerns that Kohler’s hire represents a shift away from the firm’s long-standing commitment to making as much money as possible, as quickly as possible, without any regard for human decency.

    “On a certain level, I’m not worried about having him on board—he’s just one guy, after all—but the mere fact that we’ll be sharing an office with someone who plays by the rules is extremely depressing,” said a managing director who spoke on condition of anonymity. “At the end of the day, you just want to cut loose with a few of your coworkers and expense a $2,000 meal without having to think that someone’s back at the office doing his job with professionalism and character.”

    “It’s just that I value the tradition we’ve all worked so hard to create here,” he continued. “I wouldn’t want one virtuous person to ruin that.”

    In addition to Kohler, Goldman Sachs also announced the hiring of 10 unscrupulous profit-mad sociopaths as a hedge against any of his moral convictions actually costing the company money.

  • That Was Quick….
    Posted by on June 11th, 2012 at 10:30 am

    That rally didn’t last long. There are now concerns that the aid headed Spain’s way won’t be nearly enough. The S&P 500 has now given back almost all of its gains. Markets in Spain reversed course, and Italy’s market fell as well. The authorities are concerned that Italy is next.

    Spain became the fourth euro member — following Greece, Ireland and Portugal — to seek a bailout since the debt crisis began almost three years ago after its borrowing costs approached euro-era highs. The amount sought by the nation is about 2.7 times the funds deemed necessary for its banks by the International Monetary Fund in a report released on June 8.

    Prime Minister Mariano Rajoy, who took office in December and denied the need for a banking bailout as recently as May 28, is trying to complete the cleanup of Spanish lenders after past efforts fell short. He’s also faced with an economy in recession and an unemployment rate higher than 24 percent.

    The bailout “takes the pressure off the Spanish government in the short term but Spain still has deep economic problems,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.

    Italian 10-year bonds dropped for a fourth day, with the yield climbing 12 basis points to 5.89 percent. It earlier reached 6.02 percent, the highest level since Jan. 31.

  • Spain Secures Massive Bailout
    Posted by on June 11th, 2012 at 9:09 am

    There’s good news for Spain today. Rafael Nadal won his seventh French Open and the European agreement to rescue Spain’s banks for $125 billion. This bailout looks pretty bad for Spain’s prime minister who two weeks ago said they didn’t need any money. The markets have a different opinion since Spanish stocks are up strongly today.

    The politicians in Spain are contorting themselves in an effort to say this isn’t what it is – a bailout. The desired results are already apparent. At one point, Spanish bonds were trading at 548 basis points over German bonds. That spread is now down to 466 basis points. This latest bailout is a big chunk of money and it’s why everyone is so focused on Greece’s elections next weekend. If Greece again decides to ditch austerity, that could knock them out of the eurozone. I don’t think it will come to that but it’s a real possibility.

    The futures in the U.S. markets hint at a decent open.

  • Morning News: June 11, 2012
    Posted by on June 11th, 2012 at 6:39 am

    Greece Threatens Wall Street Jobs in Third Trading Plunge

    Risk Assets Rally On Spain Plan, But Gains Fragile

    Ireland Pursues Debt Gain From Spain’s Banking Pain

    Italy Moves Into Debt-Crisis Crosshairs After Spain

    Selling Abroad, China Eases Slump at Home

    China Shares End up After Stronger-Than-Expected Economic Data

    Oil Climbs Above $100 On Spanish Banks Rescue, Iran

    Telefonica to Sell $1.4 Billion of China Unicom Stake

    World’s Biggest Airline to Form in $11 Billion Merger

    BMW Posts May Sales Record, Volumes Up 6.4%

    Tesco UK Arm Notches Up One Year of Falling Sales

    UnitedHealth to Keep Reform Provisions, Regardless of Court Ruling

    Banks Look to Burnish Their Images by Backing Green Technology Firms

    Radio Royalty Deal Offers Hope for Industrywide Pact

    Epicurean Dealmaker: 50 Ways to Leave Your Lover

    Jeff Miller: Weighing the Week Ahead: A Search for Leadership

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  • Venice in 3D
    Posted by on June 8th, 2012 at 4:03 pm

  • CWS Market Review – June 8, 2012
    Posted by on June 8th, 2012 at 6:58 am

    I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over. – Warren Buffett

    In the CWS Market Review from February 17th, I explained why the monthly jobs report has become so important to the stock market. The first Friday of each month has become a Super Bowl-like event for Wall Street.

    The reason has to do with simple economics. Corporate profit margins have gone about as far as they can go. Companies have done a commendable job increasing their bottom lines, but it’s mostly been done by cutting costs. For many businesses, the main cost is labor. The problem with cutting costs and raising your profit margin is that it’s a finite solution. You can’t do it forever and at some point, you gotta grow the top line. It’s as simple as that and in a low-inflation environment, raising prices is out of the question. That leaves us with getting more customers in the door, and that means more jobs.

    The poor jobs market has taken its toll on stocks, but in this week’s issue of CWS Market Review, I’ll show you what’s been driving the market recently. I’ll also explain why the stock market wants inflation to go up, or more specifically, why it wants inflation expectations to go up. All investors need to understand this fact.

    I’ll also highlight some of our Buy List stocks that have turned sharply recently. Even in a tough environment like this one, high-quality stocks can prosper. Fiserv ($FISV), for example, is back above $68 and it’s within striking distance of a new 52-week high; and quiet, unassuming Sysco ($SYY) is up to its highest close in over a month. But first, let’s talk about the market’s sudden about-face this week.

    After a Tough Battle, the Bulls Hold the Line

    Last Friday’s dismal, awful, no-good jobs report rattled Wall Street. Sixty-nine thousand jobs was less than half of what economists were expecting, and the numbers were revised downward for the previous months. The slump in the market brought the S&P 500 as low as 1,266 on Monday. The index also dropped below its 200-day moving average for the first time in five months. Bloomberg said the market was going for 12.9 times earnings which was its lowest valuation since November.

    But here’s the key: the index never closed below the magic line of 1,277.14. Not once. Why’s that number so important? Because it marks an exact 10% correction from the April 2nd high of 1,419.04. I know it sounds bizarre, but trust me, technicians watch these battles closely and there was a war this week for the market’s soul. Last Friday, the S&P 500 closed at 1,278.04, and on Monday it closed at 1,278.18. In other words, the bulls had held the line.

    Once the bulls finally made a stand, the game quickly changed. Technicians call what happened a “doji pattern,” meaning the opening and closing were at nearly the same price. Dojis can often mark important turning points. The market rose modestly on Tuesday and then surged 2.3% on Wednesday for its best one-day rally of the year. Even Facebook ($FB) went up. The S&P 500 broke above its 200-DMA, and the Dow finally closed out back-to-back gains which it hadn’t done since late April. Remarkably, that was one of the longest droughts without consecutive ups in the last 100 years.

    The market was also buoyed by some positive economic news which was a welcome relief from a stunning run of dismal economic reports. On Tuesday, the ISM Services Index came in at 53.7 which was 1.7 above expectations. Then on Wednesday, a Federal Reserve report was surprisingly positive on the economy. On Thursday, the Labor Department reported that initial unemployment claims fell to 377,000.

    The market was also relieved that China cut interest rates for the first time since 2008. Perhaps the best news came when Spain held a bond auction that went fairly well. The country’s budget minister had publicly warned Europe that a bailout was inevitable since the bond market had effectively shut them out. That’s why this recent bond auction was good news. Bear in mind that half of U.S. GDP growth was due to exports.

    What Does Wall Street Want? Inflation!

    Last Friday, the yield on the 10-year Treasury bond closed at a ridiculously low yield of 1.47%. The yield has come up some since then as the stock market has turned, but the fate of the bond and stock markets are closely tied.

    The low-yield for bonds tells us how scared investors are and that they’re willing to pay nearly any price for safety. Ultimately, however, the low yields are good for stocks since they lower borrowing costs and make cash flows from equities more attractive.

    What’s fascinating is that the stock market has been strongly correlated with the 10-year inflation premium found in the bond market. That’s the difference between the yield on the 10-year Treasury and the yield on the 10-year TIPs. Check out this chart below which shows the S&P 500 (red line) and the difference between the 10-year inflation premium (blue line). For the last several months, these lines have been acting like waltzing partners.

    Roughly speaking, every 0.1% increase in inflation expectations adds about 50 points to the S&P 500. (Note: This is a short-term correlation, not a long-term rule.) This relationship makes sense for several reasons. One is that higher inflation would shake money out of the bond market, and that will undoubtedly find its way towards stocks. Remember also that we’re not talking about inflation specifically but about expectations of inflation. Only part of the bond rally is due to lower inflation expectations.

    Also, a stronger economy would boost stock prices and the ensuing greater demand would put upward pressure on prices. Banks are currently sitting on tons of cash and if they think inflation will tick up, that will spur them to ramp up lending. With that, businesses will see greater incentives to borrow and expand—and hopefully hire employees. This would create a positive reinforcing cycle.

    In his Congressional testimony this week, Ben Bernanke specifically referred to the inflation expectations metric we’re using, except he used the five-year rate. Bernanke said that he expects inflation to stay around 2%. Obviously, the Fed is constrained by its dual mandate to provide maximum employment and low inflation. But right now, rising prices are not a problem. In fact, consumers are benefitting from falling (but still elevated) prices at the pump. Oil is in the midst of its longest losing streak in 13 years.

    I think if inflation expectations were allowed to drift higher, it would be accompanied by a decent stock rally. Inflation expectations probably wouldn’t need to rise very high—perhaps to 2.7% (which is where they were in mid-2006) would do the trick. I don’t expect this tight stock-inflation relationship to last. But for the next several months, the future of the market and the course of inflation expectations are joined at the hip. Any market rally is dependent on higher inflation expectations.

    Ford Continues to Be One of the Best Buys Around

    Now let’s turn to some of the stocks on our Buy List. Ford Motor ($F) had some more good news this week. I continue to believe this is one the cheapest stocks around. The company took advantage of its increased debt rating by raising $1.5 billion from the bond market. This was Ford’s first investment-grade offering in seven years. The offering of five-year bonds was popular enough to get a coupon of 3%.

    Ford also said that it’s working to iintroduce indigenous, or China-only, brands to China. The company is also working on building up its own brands in that country. I think this is an exciting move. Ford’s stock dipped below $10 per share earlier this week which I think is an unbelievable value. The automaker will most likely earn about $1.50 per share this year. The shares were at $19 early last year and the company’s outlook has improved by any objective measure. Ford Motor continues to be an excellent buy.

    A few weeks ago, I highlighted Sysco ($SYY) as a good stock to own during turbulent markets. SYY just broke above its 200-day moving average and closed at its highest level since May 2nd. I was particularly impressed to see that Sysco was able to auction off $300 million in three-year bonds with a coupon of 0.55%. The company also sold $400 million worth of 10-year bonds with a coupon of 2.6%. That’s the seventh-lowest coupon for a bond of that maturity.

    What’s interesting to note is that Sysco’s stock currently yields 3.77% which is more than the company’s cost of debt. Theoretically, Sysco could borrow money to buy its own stock for a quick arbitrage profit. (BTW, I hope they don’t!) This shows you the big disconnect between the stock and bond markets.

    Reuters summed it well: “Although Sysco’s business is not the most glamorous, delivering food is viewed by investors as an essential business that generates guaranteed cash flow in good and bad economic times.” Sysco remains a good buy up to $30.

    That’s all for now. Next week, Wall Street is nervously eyeing the Greek election scheduled for Sunday, June 17th. The last election produced a stalemate as no one could get a governing coalition together. Not next week but the week after, we’ll get earnings reports from Bed Bath & Beyond ($BBBY) and Oracle ($ORCL). I’m also expecting another dividend increase from Medtronic ($MDT). 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