• S&P 500 At Five-Month High
    Posted by on January 10th, 2012 at 10:01 am

    Thanks to a decent earnings report from Alcoa ($AA), the stock market is riding higher this morning. The S&P 500 just broke above 1,290 and is now at its highest point since August 1.

    Earnings season starts this week, and JPMorgan Chase ($JPM) will be our first Buy List stock to report. JPM reports earnings on Friday. This report will be closely watched by a lot of traders to get an idea of how well the banking sector did in Q4.

    Many of the large banks have seen their earnings estimates slashed over the past several weeks. Goldman Sachs ($GS), for example, was expected to earn $2.86 per share for the fourth quarter two months ago. Today that estimate is down to $1.69. Wall Street has cut Morgan Stanley’s ($MS) earnings estimate from a profit of 30 cents per share to a loss of 56 cents per share.

    JPMorgan has mostly side-stepped the downgrade party. Over the past two months, Wall Street has cut its Q4 forecast from 98 cents per share to 91 cents per share. That’s unpleasant but it’s not nearly as bad as some others.

    Again, we need to add some context. Even if JPM’s earnings came in on the low side, the stock is still going for about eight times what it will make in 2011. That’s pretty darn cheap. Plus, I hope to see the bank raise its dividend again.

  • Morning News: January 10, 2012
    Posted by on January 10th, 2012 at 4:52 am

    Swiss Central Bank Seeks New Blood After Chief Quits

    Currency Test Looms for Interim Swiss Bank Chief

    Italian Banking Giant UniCredit’s Weak Share Offering Is Poor Omen in Europe

    Germany and France Warn Greece on Bailout Money

    China Trade Growth Slows to 2-year Lows in December

    India Said to Be Told Turkey May Stop Helping With Iran Crude-Oil Payments

    Abu Dhabi May Rescue More Developers

    Wall Street Considers Pay Freeze on Some Bankers

    Wanted or Not: Alternative-Fuel Cars Flood Auto Show

    Recession Holds Down Health Spending

    Alcoa Posts First Quarterly Loss Since 2009

    Idenix Leads Hepatitis Drug Developers Higher After Bristol-Inhibitex deal

    Philips Says Weak European Markets Cut Quarterly Profit

    Olympus Surges as Delisting Concern Fades, Executives Sued

    Swatch Sees More Growth after Record Sales in 2011

    U.S. Inquiry of MF Global Gains Speed

    Edward Harrison: The Job Guarantee, Kleptocracy and Blogging

    Jeff Carter: CFTC Says CME No SRO

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  • Economists Believe Markets Are and Are Not Efficient
    Posted by on January 9th, 2012 at 5:58 pm

    Two years ago, I compiled a list of deep truths about the markets and investing.

    On list my I wrote: “Whatever the issue, your typical finance professor will blame the investing public and urge more self-denial as the solution. Bank on it.”

    Over the past few weeks, the IGM Economic Experts Panel has been surveying economists to get a sense of what the consensus is in the profession.

    Regarding the stock market the survey found that economists overwhelmingly agree with this statement:

    Unless they have inside information, very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.

    And they overwhelmingly disagree that:

    Plausible expectations of future dividends, discounted using a plausible risk-adjusted interest rate, explain well the level of stock prices for recently listed internet businesses in 1999.

    Arnold Kling points out this means that economists strongly stand behind weak market efficiency yet disagree with strong market efficiency. Theoretically, there’s nothing contradictory about this even though the vote margin is remarkable.

    Still, my explanation is much easier.

  • ACE Limited Boosts Dividend By 34%
    Posted by on January 9th, 2012 at 2:19 pm

    One of the great secrets of investing is that insurance companies are often great investments. The hitch is that it’s only the best of the best. But those top-tier insurance companies can be great long-term performers.

    Today we learned that ACE Limited ($ACE) is raising its quarterly dividend from 35 cents per share to 43 cents per share. That’s a 34% increase. The company has raised its dividend every year since 1995. The company already had a 6% dividend increase in May. With the new payout, ACE now yields 2.45%.

    The stock currently goes for just over 9 times the estimate for 2012.

  • 97% of New Jobs Are Going to Men
    Posted by on January 9th, 2012 at 9:59 am

    From the New York Post:

    It’s reigning men.

    Males in the workforce, who occupied 70 percent of the jobs cut during the recent economic downturn — prompting economists to dub it the “Mancession” — are now staging a monster comeback.

    Since the US economic recovery started in mid-2009, a whopping 97 percent of the new jobs — all but 43,000 of 1.4 million positions created — have gone to the guys, according to data released yesterday by the National Women’s Law Center, which analyzed jobs data between June 2009 and December 2011.

    The report showed the trend toward hiring men over women is occurring across industries, including some traditionally female professions, said Joan Entmacher, vice president of the DC advocacy group.

    In retail, for example, women lost 168,800 jobs between June 2009 and last June, while men gained 172,800 jobs. In the private health and education sector, women continue to dominate the new jobs but at a slower rate than before.

    In addition to men gaining most of the new jobs, women are also losing jobs at a faster rate. Since the recovery began, the overall unemployment rate for women has increased from 7.6 percent to 7.9 percent; the rate for men dropped from 9.9 percent to 8.0 percent.

    “We looked industry by industry to try to understand what was happening and why women were doing so badly,” Entmacher told The Post. “But looking at it, it was hard to understand what was going on,” she said.

    Indeed, the “Mancession” — a playful take on recession — was attributed to massive slashes in male-dominated industries in the wake of the housing meltdown, including construction, finance and manufacturing.

  • Morning News: January 9, 2012
    Posted by on January 9th, 2012 at 5:08 am

    Draghi May Copy Bernanke on Path to Low Rates

    EU Deficit-Control Powers Face Test in Belgium

    Euro Recovers Before Berlin Meeting

    German, French Data Raise Hope

    Hungary Runs Out of Options in Row With IMF

    China Yuan Drops for Fourth Day as Europe Crisis Bolsters Dollar

    US Moves Toward Legal Action Against Swiss Bank

    Unemployment Scars Likely to Last for Years

    Bristol Tie-Up Targets Hepatitis C

    A Tech Show Loses Clout as Industry Shifts

    Ford Turns to the Midsize Car to Challenge Japan

    GM China Sales Rise to Record in 2011 on Buick, Chevrolet

    Wall Street Prepares to Take Sharp Pay Cut

    Factset: Earnings Insight

    Cullen Roche: 5 Global Risks to Monitor Heading Into 2012

    Epicurean Dealmaker: The Root of Some Evil

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  • Dividends Growing at the Fastest Rate in 35 Years
    Posted by on January 6th, 2012 at 1:55 pm

    Here’s another look at how dividends have come back into play. The blue line is the S&P 500 and it follows the left scale. The yellow line is dividends and it follows the right scale. The two lines are scaled at a ratio of 50-to-1 which means that the dividend yield is exactly 2% whenever the lines cross.

    What I like about looking at dividends is that dividends don’t lie. Earnings, book value and cash flow can all be distorted. But when a company sends you a check, you can be pretty sure they earned it.

    I also like dividends because the dividend line tends to be very stable, especially compared with earnings and stock prices. Companies do not like to cut their dividend payments. They will if they have to, but it’s something they try to avoid.

    This last recession was unusual because many financial companies had to slash their dividends or get rid of them entirely. By looking at dividends, you can see how absurdly cheap the market was in early 2009.

    Dividends have been growing for the last seven quarters in a row. For Q4, dividends were up 20.62% from a year before. That’s the strongest quarterly growth since Q4 1976. (Note: Howard Silverblatt of S&P notes that due to actual payment days, the increase in Q3 dividends was minor, while Q4 was larger.)

  • 106-Year-Old Stockbroker
    Posted by on January 6th, 2012 at 12:10 pm

    (Via: Todd Sullivan)

  • 200,000 New Jobs in December
    Posted by on January 6th, 2012 at 10:23 am

    The unemployment rate drops to 8.5%.

    Employment grew solidly last month and the jobless rate dropped to a near three-year low of 8.5 percent, offering the strongest evidence yet of an acceleration in economic activity.

    Nonfarm payrolls increased 200,000 last month, the Labor Department said on Friday, the most in three months and way above economists’ expectations for a 150,000 gain.

    The economy needs to sustain the current pace of job creation to signal a robust recovery is finally under way.

    The unemployment rate dropped from a revised 8.7 percent in November, which was previously reported as 8.6 percent. The jobless rate is now the lowest since February 2009.

    Since the recession officially ended 30 months ago, the economy has created 1.4 million jobs. In the 18 months before that, we lost 7.5 million jobs.

  • CWS Market Review – January 6, 2012
    Posted by on January 6th, 2012 at 5:20 am

    The stock market has gotten off to a good start in 2012. The S&P 500 has risen all three trading days this year and is already in the black by 1.87%. Of course it’s still early, but after all the frustrations of 2011 I’m happy to see some gains.

    The S&P 500 closed Thursday at 1,281.06 which is its highest close since October 28th, and it’s a wee 0.33% rally away from hitting a five-month high. Since October 3rd, the index has surged more than 16.5%. There could be more good news ahead—the S&P 500 is currently above both its 50- and 200-day moving averages and that’s often a sign of a strong market.

    Some of our Buy List stocks are also enjoying a nice rally. Through Thursday, JPMorgan Chase ($JPM) is up 7.31% for the year. Hudson City ($HCBK), one of our new picks, is up 6.72% and Ford ($F), a big under-performer last year, is up by 7.71%. It’s interesting that many of our poorer-performing stocks from 2011 are leading the charge so far in 2012.

    In this issue of CWS Market Review, I want to explain an important market development in more depth. Namely, the U.S. market continues to divorce itself from the mess in Europe. I’ve talked about this in recent issues of CWS Market Review, but we’re really seeing this trend accelerate.

    Putting it in basic terms, a weaker euro no longer automatically means a weak U.S. stock market. From mid-September until mid-December, the weak euro/weak market connection had been the rule. But as the Santa Claus Rally arrived and boosted U.S. stocks, the euro continued to sink like a…well, European Union currency. The euro just hit a 15-month low against the U.S. dollar.

    What really caught my eye was on Thursday when Italian bond yields jumped back above 7% despite buying by the ECB. Seven percent is considered to be the point at which people who worry about such things start to worry. Not too long ago, 7% rates in Italy would have almost surely triggered selling in our market. But not this time. U.S. stocks took the news in stride.

    So why is the U.S. market disentangling itself from Europe? The reason is that the economic news continues to look promising. For example, Tuesday’s ISM report came in at 53.9 which was above expectations. That’s the 29th report in a row signaling an economic expansion. Earlier this year the ISM plunged, and that was one of the signs Double Dippers took for an imminent recession. They were wrong. The ISM quickly stabilized itself and the December report was the highest in six months.

    I like to keep a close eye on the monthly ISM report because it has a good tracking record of lining up with recessions and expansions. For now, a reading of 53.9 is well inside the safe zone. The ISM has fallen between 53.0 and 55.0 a total of 100 times and just two of those have been official recessions.

    As hard as it may be to believe, even U.S. manufacturing is coming back to life. But the most encouraging economic news came on Thursday when the private payroll company ADP ($ADP) said that the U.S. economy created 325,000 new jobs last month. That was a huge shocker. Wall Street was expecting 178,000.

    I have to explain that the ADP report is just the pre-game show. The big kahuna is the official Labor Department report which comes out Friday morning (be sure to check the blog for the latest). The ADP report is welcome news because the jobs market has been one area of the economy that has shown almost zero improvement. Let me caution you that the ADP report isn’t always an accurate bellwether of the government’s report. But if it is, then this would be one of the best jobs reports in years. The consensus on Wall Street is for an increase of 150,000 in nonfarm payrolls.

    I want to be clear that the economy is still in very bad shape and millions of Americans are without jobs, but after three years we may finally have evidence of good news. Green shoots, at last.

    So what does this mean for us investors? One outcome would be higher bond yields. Actually, that’s already happening as Treasury yields have gradually climbed higher since December 19th. On Thursday, the 30-year T-bond got to 3.06% which is the highest yield in nearly a month. The yield on the 10-year has soared all the way to—are you sitting down?—2.03%. Ok, ok, that’s still very low, but bear in mind that it’s an increase of 30 basis points since September 22nd. (By the way, I think September 2011 may have marked a generational low in bond yields).

    Another effect of stronger economic data is that the underperformance of cyclical stocks has most likely passed. Last year, I warned investors to steer clear of stocks of companies whose businesses are heavily tied to the economic cycle (energy, transports, industrials, etc.). Early in 2011 cyclicals started to underperform, and by the summer, the bottom fell out. In less than three months, the Morgan Stanley Cyclical Index (^CYC) lost one-third of its value. Now, however, cyclicals aren’t nearly as dangerous. For us, this means that Buy List stocks like Ford ($F), Harris ($HRS) and Moog ($MOG-A) have a good shot of being our top performers this year.

    Earlier I mentioned how some of last year’s duds now look like star performers. It’s not just happening on our Buy List. Look at the Homebuilder ETF ($XHB) which has soared 44% in the last three months. This is a sector that’s seen almost nothing but bad news for years. Even the financials, particularly the non-bank financials, are showing some life. Since December 19th, the Financials ETF ($XLF) has added 10%.

    While the macro-economy is getting better, I need to explain one apparent contradiction and that’s that the news for corporate profits won’t be as good. Corporate profits had been the one area of the economy that was doing fairly well. For the last several quarters, companies consistently beat analysts’ expectations.

    But now companies have been busy lowering expectations. Just this week, both Target ($TGT) and Eli Lilly ($LLY) gave lower earnings guidance. Part of this is about managing expectations. But another part is that many companies have run out of room to increase profit margins. Until now, they’ve increased margins not by raising prices but by cutting costs. In other words, laying people off. Oddly enough, the corporate earnings story is the opposite side of the coin of the jobs story.

    Make no mistake, earnings are still good. They just won’t be quite as good as many people thought a few weeks ago. Wall Street currently expects the S&P 500 to earn $24.31 for Q4. That’s an increase of 10.85% over a year ago, but it’s a drop of 3.88% from Q3. (I should also mention that what’s left of AIG will have an unusual impact on overall earnings.) If that forecast is right, it would bring the full-year total for 2011 to $97.02. Again, let’s look at the big picture: that’s a 70% increase from two years before.

    There are lots of good bargains on the Buy List. Wright Express ($WXS) looks good. CA Technologies ($CA), one of our new stocks, also looks good here. AFLAC ($AFL) got as high as $45.27 on Thursday which is its highest price in a month. Plus, shares of Ford ($F) look like they’re about to break out above $12. The upcoming earnings season should be a big help for us.

    That’s all for now. 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