CWS Market Review – December 2, 2011
Posted by Eddy Elfenbein on December 2nd, 2011 at 8:04 am

If you were expecting a calm, reasoned financial market going into the holidays, I’m afraid you may be disappointed. On Wednesday, the Dow soared 490 points for its single-best day in nearly three years. This came after the stock market suffered its worst Thanksgiving week since 1932.

Usually, when the market does as well as it did on Wednesday, it’s following a big down day. But Wednesday’s move came after a slight rally on Tuesday. The S&P 500 gained 4.33% on Wednesday which was its eighth-best gain following an up day in the last 70 years.

I was pleased to see that stocks only finished modestly lower on Thursday. The S&P 500 is now back above its 50-day moving average and it’s only a small push from breaking above its 200-day moving average.

In this issue of CWS Market Review, I want to delve into some of the reasons for the market’s abrupt about-face. I’ll also tell you how to position your portfolios for the last few weeks of 2011. Remember that historically, the best time of year for stocks is a 17-day run from December 22nd to January 7th. More than 40% of the Dow’s historical gain has come during this period which is less than 5% of the calendar year.

The catalyst for Wednesday’s rally was—we’re told—the news that the Fed teamed up with other central banks to provide more liquidity for the global financial system. Allow me to explain; it’s all very simple. The Federal Reserve and other central banks agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements from OIS +100 basis points to…ugh…getting sleepy…can’t…stay…awake…zzzzzzzz.

Look, forget all the mumbo-jumbo. The stock market did not see one of its best rallies in decades because some bureaucrats put out a press release. Thankfully, they’re not that important. Instead, the market rallied because the market’s cheap. It’s that simple. The problem is that no one wanted to be first in the pool. I don’t blame them. Playing the bear had been the winning trade for three-straight weeks. Screaming you’re scared from the rooftops is the only trade that’s made anyone any money. Plus, our friends across the pond have been doing their best to show that they’re as clueless on how to run their economies as we are in running ours.

To borrow from Comrade Trotsky, you may not be interested in the European financial crisis but the European financial crisis is interested in you. The news from Europe has been the main driver of the U.S. market for the last several weeks. But as I mentioned in the CWS Market Review from two weeks ago, our markets are slowly disentangling themselves from the mess in Europe.

Just look at the decent economic news we’ve had recently. Please note that I’m not saying “good news,” just that there’s zero evidence of an imminent Double Dip. The fact that we can say that in December would have surprised a lot of folks this summer. For example, this past earnings season was pretty good. Thursday’s ISM report was decent. The Chicago PMI just hit a seven-month high. I’m writing this in the wee hours of Friday morning so I don’t know what the jobs report will say (check the blog for updates), but this week’s ADP report was very encouraging.

Next Friday will be the big EU summit. This is it—Zero Hour. The Germans want more fiscal integration, and I think they’ll get it (of some sort). The Germans finally got religion once one of their bond auctions fizzled. When the country that’s supposed to bail everyone else out can’t get a loan, well…then it’s time to worry.

But now the Germans have stopped dragging their heels. Anyone with a sense of history will have to appreciate the recent quote from Radek Sikorski: “I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.” Strange days, no?

For Europe, this is beginning to feel like the fall of 2008. France’s AAA credit rating is on life support. Despite the bond auction disaster, the German one-year note recently went negative meaning that investors would prefer to take a loss just so they can be a creditor to Germany. This is exactly the kind of hysteria that’s been rattling our markets since August. It’s a mystical aura of fear, and that’s masking a truly inexpensive American market (Ford’s at 5.6 times 2012 earnings!)

Now that everyone’s been suitably freaked out, they can finally do something. In fact, we’re starting to get an idea of what the game plan will look like. The basics are that Germany wants the ECB on a tight leash while it wants to set hard rules for how budgeting is done in the Euro zone. No surprises there. I suspect the Germans may give up their opposition to joint euro-bonds if the member states agree to some sort of debt-reduction fund. I’m not sure of the details, but something the market likes will come out of the summit. That’s not a guess. There’s no other alternative.

But this crazy correlation we’ve had to Europe makes no sense. Here in the U.S., investors are quietly warming up to risk. We’ve already seen high-yield spreads in the U.S. begin to narrow as Treasury yields have climbed. Since December 23rd, the yield on the 30-year Treasury has risen by 30 basis points to 3.12%. The 10-year yield is up to 2.11% which is its highest yield in more than one month. As recently as July 25th, the 30-year was at 4.31%.

Now let’s turn to some recent news from our Buy List. On Tuesday, Jos. A. Bank Clothiers ($JOSB) reported very good earnings for its fiscal third quarter. The company earned 54 cents per share for the three months ending on October 29th, which was three cents better than Wall Street’s estimate.

JOSB’s business continues to hum along: earnings grew by 19% last quarter and revenues rose by more than 20%. The company has now reported higher earnings in 40 of its last 41 quarters including the last 22 in a row. However, there was one hitch. In the earnings report, JOSB warned that the fourth quarter “has started out more slowly than we had planned.”

The market didn’t like that at all and chopped 3.7% off the stock on Wednesday in the face of a big rally plus another 2.4% on Thursday. Until we hear more, I’m inclined to side with Joey Banks. This is a very solid company. Some of you may recall six months ago when the market slammed JOSB for a 13% one-day loss after it missed earnings by—are you ready?—one penny per share. JOSB is a very good buy below $54 per share.

In the CWS Market Review from October 14th, I said that I expected Becton, Dickinson ($BDX) to soon raise its dividend for the 39th year in a row. Sure enough, Becton came through and announced a 9.8% increase dividend increase on November 22nd. The new quarterly dividend is 45 cents per share and based on Thursday’s market close, BDX now yields 2.43%. There aren’t many stocks that can boast a dividend streak like Becton’s. Honestly, the stock is a bit pricey here in the low $70s. My advice is: don’t chase it. Instead, wait for a pullback below $65 before buying BDX.

Last week, Medtronic ($MDT) reported fiscal Q2 earnings of 84 cents per share which was two cents better than estimates. This is pretty much what I expected. Two weeks ago I wrote that “they can beat by a penny or two.” I have to explain that the market has dismally low expectations for Medtronic even though the company is still doing well with pacemakers and insulin pumps. The trouble spot is Infuse, its bone growth product used in spinal fusions. Sales for Infuse dropped by 16% last quarter.

The key for us is that Medtronic also reiterated its full-year EPS forecast of $3.43 to $3.50 per share. This means the stock is going for just over 10 times earnings. I’m raising my buy price for Medtronic to $40 per share.

On November 22nd, Gilead Sciences ($GILD) stunned Wall Street when it announced that it’s buying Pharmasset ($VRUS) for $11 billion. That’s an insanely rich price for a company that doesn’t have any products on the market yet. (I had to reread that sentence just now after typing it. Yep, it’s still nuts.)

So what does Pharmasset have? The company is pretty far along in developing oral drugs for hepatitis C. That could be a very lucrative market. Still, I think this was a terrible move on Gilead’s part. This is a business deal made out of fear rather than trying to spot an opportunity. Gilead was simply nervous that someone else would snatch up Pharmasset. I very much doubt that Gilead will be on our Buy List next year.

You may have noticed that Nicholas Financial ($NICK) has been especially volatile of late. Why? I have no idea. There’s been no news. I suspect that it’s pure market jitters. Of course, it’s the market’s irrationality that helps us find bargains, so that means we have to deal with bad volatility as well. Over the last two weeks, little NICK has gone from $11.75 per share down to $10.01 and then back up to as much as $11.56 yesterday. I don’t have any more to say than “ride out the storm.” NICK is an excellent stock.

Some other stocks on our Buy List that look attractive include Oracle ($ORCL), Moog ($MOG-A) and Ford ($F). Oracle should be coming out with its fiscal Q2 earnings in two weeks. Ford just reported a 13% sales increase for November. Also, Reynolds American ($RAI) has recently broken out to a new 52-week high. The stock is currently our top-performing stock for the year (+28%). The shares currently yield 5.37% which is equivalent to 645 Dow points.

That’s all for now. Today is the big jobs report. 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

P.S. I’m going to unveil the 2012 Buy List on Thursday, December 15th. As usual, I’m only adding and deleting five stocks from the current list. (Low turnover is my BFF.) I won’t start tracking the new Buy List until the start of the year. I like to make the names known publicly beforehand so no one can claim I’m front-running the market somehow.

Morning News: December 2, 2011
Posted by Eddy Elfenbein on December 2nd, 2011 at 5:20 am

EU Push for Budget Policing Meets Resistance

Germany’s Merkel Says Euro Crisis Is Like a ‘Marathon’

French President Warns of Dire Consequences if Euro Crisis Goes Unsolved

Banks Vie With Nations to Sate $2 Trillion Funding Need

Analysis: Japan’s Silent Majority May Find Voice Over Olympus

For Jobless, Little Hope of Restoring Better Days

Regulators Pledge New Rules After MF Global’s Demise

For Wall Street Watchdog, All Grunt Work, Little Glory

G.M. Offers to Buy Back Hybrid Volts From Owners

Netflix is ‘Broken’ With No Fix in Sight, Analyst Says

Cullen Roche: Swap Lines – Not a Panacea

Howard Lindzon: Financial Wisdoms Daily from Stocktwits

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Disney Raises Its Dividend By 50%
Posted by Eddy Elfenbein on December 1st, 2011 at 11:27 am

With all the good news about yesterday’s rally, I wanted to highlight another optimistic news item: Disney raised its dividend by 50% to 60 cents per share. I’m not sure why, but Disney only pays an annual dividend.

This is actually a very small dividend compared with the company’s total profit. Disney is expected to earn $2.90 per share for the fiscal year ending next September. Sixty cents works out to a payout ratio of just over 20%. The stock’s dividend yield is only 1.67% which is still well below the overall market’s yield.

Disney’s last two earnings reports have been pretty good. The stock looks to be a pretty solid value.

“The Walt Disney Company had a great creative, strategic and financial year,” Robert A. Iger, president and chief executive officer, said in the statement. “We are pleased to be able to raise our shareholder dividend by 50 percent while continuing to invest for future growth.”

On November 10th the company reported a 21 percent increase in fiscal 2011 profit to $4.81 billion, or $2.52 per share, on revenue that gained 7.4 percent to $40.9 billion.

Disney was expected to raise its dividend by 5 cents to 45 cents, according to data compiled by Bloomberg. An increase to 65 cents is forecast for next year, according to the data.

November ISM = 52.7
Posted by Eddy Elfenbein on December 1st, 2011 at 10:54 am

This morning, the Institute for Supply Management’s manufacturing index for November came in at 52.7. That was above expectations of 51.0 and it was an increase from October’s number of 50.8. This was also the highest reading in five months.

Any number above 50 means the economy is growing. November was the 28th-straight +50 ISM. Today’s ISM report is more bad news for the Double Dippers. Since 1948, the ISM had landed between 50.0 and 55.0 a total of 225 times yet only nine of those months have been official recessions.

Morning News: December 1, 2011
Posted by Eddy Elfenbein on December 1st, 2011 at 5:31 am

Spain, France Bond Sales Take On EU Crisis

Draghi Says ECB Bond Purchases ‘Limited’

6 Central Banks Act to Buy Time in Europe Crisis

China Factory Sector Shrinks First Time in Nearly 3 Years

Euro-Zone Manufacturing Downturn Deepens

Majority of Economists Still See Deflation Gloom

Crude Oil Trades Near Two-Week High Amid Supply Risks, Euro Debt Concern

Beige Book Survey Finds Slow to Moderate Gains

Fed Dollar-Funding Cut Shows Limits of Action

Ranbaxy’s Lipitor Copy in U.S. Stores Threatens Pfizer Sales

Senators Question Deals to Block Generic Lipitor

Yahoo Board Said to Lean Toward Sale of Minority Stake

Zynga Expected to Seek $10 Billion Valuation in I.P.O.

American Won’t Be the Last Airline Bankruptcy

Joshua Brown: Build-a-Bull Workshop

Randall Wray: Time to Demand Transparency and Accountability of Our Public Stewards

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Today’s Monster Day
Posted by Eddy Elfenbein on November 30th, 2011 at 5:06 pm

We had a spectacular rally today. By my numbers, this was the eighth-best day following an up day for the S&P 500 in the last 70 years. There have been other strong days, but they often came after big down days. Yesterday, we were up slightly.

The Dow gained 490 points today which was its best day since March 2009. What impressed me was that we continued to rally into the close which means that investors aren’t so afraid to hold stocks overnight.

While the S&P 500 gained 4.33%, which is about 470 billion in market cap, our Buy List trailed the market gaining 3.91%. The shortfall was due to Jos. A. Bank ($JOSB) which was our only losing stock today. Shares of JOSB dropped by 3.7% due to today’s warning although they had been much lower.

Seven of our stocks were up more than 6%, three were up by more than 7% and JPMorgan Chase ($JPM) added 8.4% for the day. As I suspected this morning, today was a huge day for cyclical stocks. The Morgan Stanley Cyclical Index ($CYC) jumped 5.92% today to close at 900.46. The $VIX plunged 9.3% to 27.80.

Is Microsoft a Value Stock?
Posted by Eddy Elfenbein on November 30th, 2011 at 2:44 pm

Check out the plunge in Microsoft‘s ($MSFT) P/E Ratio:

Even though Microsoft’s earnings have risen steadily, the stock has basically ranged between $25 and $30 for the last eight years. Add the two phenomena together and you get a declining Price/Earnings Ratio.

So is the stock cheap? Maybe.

For the fiscal year ending in June 2012, Microsoft is expected to earn $2.75 per share. The stock is currently going for 9.24 times that.

Over those same four quarters, the S&P 500 is expected to earn $101.73. At the current price, the index is going for 11.17 times that. This means that Microsoft’s valuation is 17% less than the overall market’s.

Also, bear in mind that Microsoft recently raised its quarterly dividend to 20 cents per share. That 80-cent dividend for the year works out to a yield of 3.15%.

Amazon Is Still Too Expensive
Posted by Eddy Elfenbein on November 30th, 2011 at 11:16 am

Amazon‘s ($AMZN) stock is down a lot since its October plunge. On October 25th, the shares dropped from $227.15 to $198.40 after missing its earnings by 10 cents per share. The stock is currently down to $191.

So is it cheap now?

Nope, not even close. Put it this way: Wall Street has cut its EPS estimate for next year from $3.80 four months ago to “only” $2.05 today.

At the current price, that’s still more than 93 times earnings.

Stay away from Amazon.

Still More Good News
Posted by Eddy Elfenbein on November 30th, 2011 at 11:00 am

We’re not done yet. The S&P 500 has been as high as 1,239.37 today. Every single Buy List stock, save for Joey Bank ($JOSB), is up today.

The National Association of Realtors reported that pending home sales surged 10.4% last month. The expectation was for an increase of just 2%.

The other good news is that the Chicago PMI just hit a seven-month high.

Jos. A. Bank Beats By Three Cents
Posted by Eddy Elfenbein on November 30th, 2011 at 9:28 am

Another great quarter from Jos. A. Bank Clothiers ($JOSB). The company just reported fiscal Q3 earnings of 54 cents per share which was three cents more than the Street was expecting.

Revenues rose 20.9% to $209.6 million. That’s more than $14 million more than the consensus. Comparable store sales rose by an impressive 14.6%.

JOSB has now grown earnings for 40 of the last 41 quarters including the last 22 in a row. The company also offered a warning about the start of the fourth quarter. Here’s what they had to say:

JoS. A. Bank Clothiers, Inc. announces that net income for the third quarter of fiscal year 2011 increased 19.3% to $15.0 million as compared with net income of $12.6 million for the third quarter of fiscal year 2010. Earnings per share for the third quarter of fiscal year 2011 increased 20.0% to $0.54 per share as compared with earnings per share of $0.45 for the third quarter of fiscal year 2010. The third quarter of fiscal year 2011 ended October 29, 2011; the third quarter of fiscal year 2010 ended October 30, 2010.

Total sales for the third quarter of fiscal year 2011 increased 21.0% to $209.6 million from $173.3 million in the third quarter of fiscal year 2010, while comparable store sales increased 14.6% and Direct Marketing sales increased 28.6%.

Comparing the first nine months of fiscal year 2011 with the first nine months of fiscal year 2010, net income increased 18.9% to $53.3 million as compared to $44.9 million and earnings per share increased 18.6% to $1.91 per share as compared to $1.61 per share. Total sales for the first nine months of fiscal year 2011 increased 17.4% to $633.6 million from $539.8 million for the first nine months of fiscal year 2010, while comparable store sales increased 9.9% and Direct Marketing sales increased 26.1%.

“We are pleased to report another solid sales and earnings performance for the third quarter of fiscal year 2011 with sales growth of 21.0% and earnings growth of 19.3%. With this quarter’s results, we have achieved earnings growth in 40 of the past 41 quarters when compared to the respective prior year periods, including 22 quarters in a row,” stated R. Neal Black, President and CEO of JoS. A. Bank Clothiers, Inc. “The fourth quarter, compared to a very strong performance last year, has started out more slowly than we had planned. November comparable store sales declined, while our direct segment sales increased, compared to the same period last year. As a result, we have adjusted our December merchandising and marketing plans for stores. We believe our efforts will be effective and appealing to our customers. Therefore we remain cautiously optimistic for the outcome of this year’s fourth quarter,” continued Mr. Black.

Update: The shares are down today due to the warning mentioned above.