CWS Market Review – April 13, 2012
Posted by Eddy Elfenbein on April 13th, 2012 at 8:20 am

That money talks, I’ll not deny, I heard it once: It said, ‘Goodbye’.
-Richard Armour

After sliding for five days in a row, the stock market has started to right itself. On the first trading day of April, the S&P 500 closed at a 46-month high but promptly broke up like a North Korean rocket and shed 4.26% in a week. That’s not a major pullback, but it’s one of the biggest slumps we’ve seen in months. Thanks to rallies on Wednesday and Thursday, the market has already made back half of what it lost (in fact, the traceback has been almost exactly 50%).

What’s most surprising about the market so far in April is the recrudescence of volatility on extremely low volume. Consider this: In the first 64 trading days of 2012, the S&P 500 suffered just one daily drop of more than 1%. In 2011, that happened 48 times. Then suddenly, we had three 1% drops in four days. Yet average daily trading volume last month was the lowest since December 2007. What gives?

In this issue of CWS Market Review I want to look at why the market has gotten so jittery all of a sudden. But more importantly, I want to take a look at the first-quarter earnings season. Over the next month, 16 of our Buy List companies are due to report earnings. As always, earnings season is the equivalent of Judgment Day for Wall Street. I’m expecting good news for our stocks, but the outlook may not be so sunny for the rest of Wall Street.

Sorry, Folks. QE3 Is Not Coming

Part of the reason why the stock market got a sudden case of the worries is what I mentioned in the previous two editions of CWS Market Review. Wall Street has been focused on the March jobs report and first-quarter earnings season. The jobs report wasn’t so hot and the market took its pound of flesh. Earnings season is the next hurdle.

Interestingly, the stocks that dropped the most during the five-day selloff were often the ones that rallied the most on Wednesday and Thursday. These tended to be cyclical stocks and financials. It’s also interesting to note that the Morgan Stanley Cyclical Index (^CYC) had peaked on March 19th, two weeks before the rest of the market. This means, the cyclicals had already started to erode before the jobs report pullback.

The stock market was given a boost on Thursday when two Fed officials, Janet Yellen and William Dudley, said that rates will have to stay low for a while longer. That‘s not a big surprise. Let me add a quick note on QE3. Some folks think the weak jobs report will cause Bernanke and his buddies at the Fed to jump in with a third round quantitative easing. Do not believe any of this. We often forget that the C in FOMC stands for “committee” and it’s obvious that the policy-makers are very far from a consensus on this issue. The media has been searching for any hint, no matter how trivial, that QE3 is on the way. It’s not. Plus, the jobs report was hardly a harbinger of a new recession. For now, the talk of QE3 is pure nonsense.

Although the selloff was initially triggered by the jobs report, it was kept alive by bad news from Europe and China. The yield spreads in Europe (specifically, between any country and Germany) have been inching upward, particularly in Spain. I think it’s somewhat amusing that Monsieur Sarkozy is using the example of Spain to scare French voters from supporting the socialist opposition in next month’s election.

The wider spreads signal some nervousness from investors but it’s important to note that we’re a long way from the frenzy we had last year. I want to urge investors not to be carried away by these renewed concerns from Europe. The fears of Spain not being able to pay her bills are greatly overblown. Europe will not sink the U.S. stock market.

Q1 Earnings: The Story Is About Margins

Last earnings season was disappointing. This time around, investors don’t expect much. The numbers vary but the consensus is that first-quarter earnings will be about the same as they were last year. In other words, zero profit growth. How times have changed. Not that long ago, analysts were expecting double-digit earnings growth for Q1.

One of the problems facing many companies is that higher fuel costs are cutting into profits. All 10 sectors of the S&P 500 will see higher sales numbers, but at least seven of those sectors will have a hard time turning those top-line dollars into bottom-line profits.

The story here isn’t that a slowdown is upon us. Rather, it’s that business costs are rising after being held back for so long. Part of this is the cost for new employees, which is a good thing. As I’ve said before, the story here is about margins, not a weakening economy. Even with as much as earnings growth estimates have fallen, the stock market hasn’t responded in kind. That’s because Wall Street correctly sees this as a temporary issue. In fact, the current view is that earnings growth will reaccelerate later this year as Europe comes back online.

The important point for us is that even with little earnings growth, the stock market is still a very good value compared with the competition. Bond yields have climbed, but they’re still way too low. As long as the migration away from super-safe assets continues, our Buy List will thrive.

Now I want to focus on some upcoming earnings reports for our Buy List stocks (you can see an earnings calendar here). Unfortunately, not all of our companies have said when earnings will come out yet.

Expect an Earnings Beat at JPMorgan

On Friday, JPMorgan Chase ($JPM) will be our first Buy List stock to report earnings. With a 34.86% year-to-date gain, the bank is our top-performing stock this year. That’s not bad for a little over three months’ work. (It’s always a surprise to me who the #1 stock will be.) What’s remarkable is that even with as well as the stock has done, the shares are still going for less than 10 times this year’s earnings estimate.

Wall Street currently expects JPM to report earnings of $1.14 per share for Q1. That’s down a little from one year ago. That estimate, however, has been climbing in recent weeks while estimates for many other companies have been pared back. I’ve looked at the numbers and I expect a small earnings beat from JPM. But I’ll be curious to hear what CEO Jamie Dimon has to say about the bank’s business.

Not only is JPM a big report for us, but it’s also a bellwether for the entire financial sector. Jamie Dimon likes to see himself as the unofficial spokesman for the banking world and a lot of investors want to hear what he has to say. JPM even moved up their earnings call so Jamie could hit the stage before Wells Fargo ($WFC).

I agree with Dimon’s assessment that the last earnings report was “modestly disappointing.” One of the concerns this time around is investment banking, but Jamie has been clear that the division will rebound. For Q1, trading profits will probably be down from a year ago but better than Q4. This is a solid bank and I was particularly impressed by the 20% dividend increase. Bottom line: I’m sticking with Jamie, and I’m raising my buy price on JPMorgan Chase from $45 to $50 per share.

Johnson & Johnson: 50 Straight Years of Dividend Increases

Next Tuesday, we’ll get two more earnings reports—Johnson & Johnson ($JNJ) and Stryker ($SYK). I’m afraid that J&J has been a weak performer this year. In January, the healthcare giant said that earnings-per-share for 2012 will range between $5.05 and $5.15. Wall Street had been expecting $5.21.

J&J has been dogged by a series of quality control problems, and the stock has lagged. Later this month, Alex Gorsky will take over as the new CEO. I think that’s a good choice particularly since he helped the company tackle its internal problems. Wall Street’s consensus for Q1 is for $1.35 per share which is exactly what Johnson & Johnson made one year ago. The stock usually beats by about three cents per share, but I’m not going to get worked up by a result that’s within a few pennies of $1.35. What I want to see is solid proof of a turnaround, although I realize it may take some time.

The best part about J&J is the rich dividend. Going by Thursday’s close, the stock yields 3.55%. But the yield to investors is probably even higher. Later this month, I expect the company to announce its 50th-straight dividend increase. But coming after January’s lower guidance, the quarterly dividend will probably rise from 57 cents to 60 cents per share. If that’s right, J&J now yields 3.74%. I’m keeping my buy price at $70.

Stryker Is a Good Buy Up to $60

Shares of Stryker ($SYK) haven’t done much for the past several weeks which is puzzling because the business has been strong. Stryker has said that it sees “double digit” earnings growth for 2012. I doubt they’ll have trouble hitting that forecast. In fact Stryker is probably low-balling us, but that’s understandable since the year is still so young.

For Q1, the Street expects earnings of 99 cents per share which sounds about right. Stryker rallied last earnings season after they met expectations. The business tends to be very stable. I think the stock is a good value here and I’m raising my buy price to $60 per share.

Before I go, I want to highlight some other good values on the Buy List. Among the financials, AFLAC ($AFL), Nicholas Financial ($NICK) and Hudson City ($HCBK) are all going for a good price. I also think that Ford ($F) has drifted down to bargain territory as well.

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

Morning News: April 13, 2012
Posted by Eddy Elfenbein on April 13th, 2012 at 7:55 am

ECB Seen Favoring Bond Buying Over Bank Loans

Bank Overhaul Mess Is Noose Around EU’s Neck, EBF Says

Spanish Banks’ ECB Borrowing Hits New High In March

Soros: EU Survival Requires More German Pragmatism

Chinese First-quarter GDP Grows 8.1%

Kuka Robots Invade China as Wage Gains Put Machines Over Workers

Argentina Has Oil Firm in Its Sights

Saudi’s Naimi Says Determined to Bring Down Oil Prices

Consumer Bureau Declines to Resist Upfront Credit Card Fees

Clouds on Solar’s Horizon

Google Announces 2-for-1 Stock Split

Google Stock Plan Irks Governance Watchdogs

The Instagram Deal: A Mark Zuckerberg Production

Goldman to Pay $22 Million to Settle “Huddles” Case

Credit Writedowns: Lots of Recent Policy Missteps: What are They Thinking?

Howard Lindzon: Instagram and ZAGG …Sometimes It is More About the Product Than The Financials

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The S&P 500 Breaks Its 50-DMA
Posted by Eddy Elfenbein on April 12th, 2012 at 3:17 pm

The S&P 500 had a very nice run of staying above its 50-day moving average since December 20th. Some of this was due to much lower volatility. This week, however, the index just briefly stepped below its 50-DMA.

Upcoming Buy List Earnings Reports
Posted by Eddy Elfenbein on April 12th, 2012 at 9:27 am

Of the 20 stocks on our Buy List, 16 follow the March/June/September/December quarterly schedule. Here’s a look at when the 16 are due to report. I’ve also included Wall Street’s earnings estimate. Note that not all companies have said when they’re going to report.

Morning News: April 12, 2012
Posted by Eddy Elfenbein on April 12th, 2012 at 5:54 am

Italian Government Bonds Advance for 2nd Day Before Sale

Monti to Tackle Italy Corruption as Scandals Topple Politicians

World Bank Cuts China 2012 Growth Outlook on Exports

China’s New Yuan Loans Surge as Money Supply Accelerates

Greek Crisis Leaves Cyprus Mired in Debt

Economy Continues to Recover Modestly, Fed Reports

Fed May Extend Support Past 2014, Official Says

Treasury Faulted in Effort to Relieve Homeowners

U.S. Alleges E-Book Scheme

Energy Costs Stir Worries in U.S. Economic Expansion

BrightSource Energy Withdraws IPO, Citing Market Volatility

Carrefour Cites ‘Difficult’ Retail Environment as Sales Rise

Nokia Sales Slump Puts Pressure on Elop to Consider Split

Stores Go Online to Find a Perfect Fit

Why Bank of America Is a Buy Now

Roger Nusbaum: Small Trade Executed

Jeff Carter: MRUN.us

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Does “Sell in May” Really Work?
Posted by Eddy Elfenbein on April 11th, 2012 at 1:34 pm

There’s an old Wall Street saying that investors should “sell in May and go away.” Recent years have been excellent examples. Last year, the stock market peaked on April 29th and in 2010, it peaked on April 23rd. This year, the S&P 500 is down since April 2nd.

I recently crunched all the Dow’s daily closing figures going back to 1896 and found that there is, indeed, a seasonal effect. The chart below shows what the Dow has done, on average, throughout the year. Historically, the Dow hits a peak on May 6th and pulls back an average of 1.33% by May 25th. The chart shows that even by October 27th, the Dow has advanced just 0.34% from May 6th. This means that the market is nearly flat for slightly more than one-third of the year. Excluding that period, that has gained an average of 7.5% for the rest of the year.

Morning News: April 11, 2012
Posted by Eddy Elfenbein on April 11th, 2012 at 6:19 am

Germany Grows Robust from Sick Man With Demand at Home

Japanese Investors Shun Spanish Bonds

Trade Gains Put China in Quandary

IMF Said Ready to Cut China Current-Account Surplus Forecast

Oil Trades Near Eight-Week Low on Rising U.S. Inventories

New Stance of Forgiving Mortgages

Lenders Again Dealing Credit to Risky Clients

Facebook Plays Offense and Defense in a Single Deal

A Billion-Dollar Turning Point for Mobile Apps

Apple Market Value Jumps Above $600 Billion Mark

SAP Challenges Oracle With $500 Million Hana Incentive

Alcoa Sees Aluminum Cuts as Production Gains

Best Buy CEO Resigns During Personal Conduct Probe

Luxury Goods Oust Executives With Global Economy in Flux

Joshua Brown: Earnings Season Approaches! Four Things to Watch For

Pragmatic Capitalism: It’s The Eurozone That’s Turning Japanese…Or Maybe We All Are

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Changes at the Top at Best Buy
Posted by Eddy Elfenbein on April 10th, 2012 at 10:55 am

Brian Dunn is out at Best Buy ($BBY). Since he became CEO, the stock had dropped from $33 to $22 while the S&P 500 rallied from 900 to 1,400.

Numbers Tell the Story
Posted by Eddy Elfenbein on April 10th, 2012 at 8:15 am

Investor’s Business Daily referenced this post in one of their editorials.

Numbers tell the story. Since Obama entered office promising a jobs boom from his “stimulus,” the economy has lost 1.6 million jobs. Since the employment peak in early 2008, 5.2 million jobs have disappeared.

Labor participation rates have plunged in recent years, in part due to retirements, but mostly due to people just dropping out — they can’t find jobs at all.

Today, a record 100.5 million Americans older than 16 don’t have jobs, up 34% since 2000. As Eddy Elfenbein, editor of the Crossing Wall Street blog, notes, “If we were to have the same jobs-to-population ratio as 12 years ago, there would have to be 14.6 million more jobs, or 22.6 million fewer people.”

That’s the scale of the damage done to our economy.

“DirecTV Simply Looks Too Cheap”
Posted by Eddy Elfenbein on April 10th, 2012 at 8:03 am

Bloomberg has an interesting article today on one of our Buy List favorites, DirecTV ($DTV). The article highlights two importact facts about DTV.

One is how well the company is doing in Latin America (“It’s not hard to envision a day when Latin America is perceived to be the core of DirecTV, and where the U.S. is an afterthought”).

The other is the enormous cash flow the company generates. They’re buying back $100 million of their shares per week.