CWS Market Review – August 12, 2011
Posted by Eddy Elfenbein on August 12th, 2011 at 11:25 am

As dramatic as the markets were last week, things got even more frenetic this week. Over the past four days, the Dow closed down 634, up 429, down 519 and up 423. On Thursday, the S&P 500 closed at almost exactly the same level it closed at two days before. It’s like watching some crazy football play where the running back scampers all over the field only to wind up back at the line of scrimmage.

In this week’s issue of CWS Market Review, I want to break down what’s happening and why, but I also want to tell investors what’s the best strategy to do with their money. The silver lining in all this crazy volatility is that there are some impressive bargains right now on our Buy List.

The big story of this past week, outside the down/up/down/up market, was Tuesday’s Fed meeting. Over the past several months, these FOMC meetings have been snoozefests. After all, what can you do when interest rates are already at 0%? This time, however, the Fed actually made some news.

In the post-meeting policy statement, they added important new language:

The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Bear in mind that central bankers are bred to speak in understated tones, so this statement is a pretty big deal. What Bernanke & Co. are saying is that the economy and inflation will be soft for at least two more years (which includes Election Day, by the way). Many folks in the market had suspected this was the case, but this is the first time we’ve heard the news right from Big Ben himself.

What’s happening is that S&P’s downgrade of our debt, while a bit silly in my opinion, is having major repercussions, though interestingly, not on the market for our debt. The S&P downgrade took the idea of further fiscal stimulus off the table. In other words, don’t expect Congress to act. More stimulus spending takes political will and that simply no longer exists.

Without the possibility of fiscal stimulus, all responsibility is placed on monetary policy—meaning the Federal Reserve. As a result we’ve been experiencing this odd combination of soaring Treasuries and soaring gold combined with weak and highly volatile stocks. Everyone is running for cover. Gold is soaring because it acts as a hedge against real short-term interest rates. As long as short-term rates are running below inflation, gold is poised to do well. It’s as if Bernanke gave commodity investors the green light—or perhaps the gold light.

What also made this past Fed meeting interesting is that there were three dissensions to the Fed policy statement. The Fed isn’t like the Supreme Court. They work very hard to get the effect of the broad consensus. If someone disagreed, then they really didn’t like the policy. The vote for the last policy statement was 7-3. There are currently two vacancies but we do have to wonder if it’s possible for Bernanke to be overruled at some point by the inflation hawks. That hasn’t happened to a Fed chair in 25 years.

What’s really stood out in my mind is the dramatic volatility of the past few days. I have a slightly different view of volatility than you often hear in the financial media. Volatility isn’t necessarily bad for the market. I think periods of high volatility reflect the violent clashing of multiple views on what’s driving the market. It’s as if two schools of thought are fighting for supremacy.

The bone-on contention is what shape the economy is in right now. Some investors think we’re headed right back for another recession. Personally, I think it’s too early to say. However, I do believe that it’s best for investors to lighten up on their economically-sensitive stocks. I also think we’ll see this crazy volatility begin to fade once traders get back from the beach after Labor Day.

Many financial stocks have come in for an especially severe pounding this month, but I think that’s become overdone, especially for the high-quality ones. In the CWS Market Review from four weeks ago, I said that I was “particularly leery” of financials like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). Since then, those three banks have fallen 22%, 28% and 14% respectively. As bad as they are, every stock has a price.

On our Buy List, I think financials like JPMorgan Chase ($JPM) and AFLAC ($AFL) are very good buys. Not only is Nicholas Financial ($NICK) a great buy but I think the recent Fed news actually helps them since short-term rates will continue to be very low for some time. NICK makes their money on the spread between short-term rates and what they lend out to their customers.

For investors, the important lesson is that when times get difficult, you always want to look at dividends. Accountants can do crazy things with a balance sheet, but dividends tend to be very stable. Even during the past recession, once you discount the financial sector, most dividends hung in there. That’s why I want to highlight some of the top yielders on the Buy List.

Abbott Labs ($ABT), for example, is now yielding 3.7%. Even Johnson & Johnson ($JNJ) is yielding close to 3.5%. AFLAC ($AFL) is over 3% and Medtronic ($MDT) isn’t far behind. Tiny Deluxe ($DLX) saw its yield come close to 5%. Most of these companies can easily cover their dividends, and a few have paid rising dividends for decades.

On Monday, Sysco ($SYY) will be our final earnings report of the second quarter. From what I see, the company is in pretty good shape. Wall Street expects earnings of 57 cents per share which is exactly what SYY earned a year ago. I think that’s a bit low. My numbers say that Sysco earned 60 cents per share, plus or minus two cents.

I think it’s interesting that the recent market pullback has impacted a non-cyclical stock like Sysco far less dramatically than it has the rest of the market. Even in this market, Sysco currently yields 3.6% which is a very good deal. The company has increased its dividend for the past 41-straight years and I think they’ll make it 42-straight in November, although it will probably be a one-cent increase. Still, that’s not bad in an environment where a 10-year Treasury goes for just over 2%.

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!

Morning News: August 12, 2011
Posted by Eddy Elfenbein on August 12th, 2011 at 6:55 am

Surging Yuan May Signal Boost For Global Recovery

Short-selling Ban Spurs Tentative Recovery

French Economy Stalls With Decline in Consumer Spending as Exports Dwindle

Italy Cabinet to Meet on Austerity Bill

Portugal Receives Bailout Endorsement

Stocks Climb in Europe as U.S. Index Futures Advance

Small Investors Recalibrate After Market Gyrations

Bernanke Borrows From Carney’s Stimulus Playbook With Interest-Rate Pledge

First-Time Jobless Claims in U.S. Unexpectedly Decrease to Four-Month Low

Citadel Chief Gives Up Dream for Investment Bank

Hong Kong Telecom Giant PCCW’s Profit Rises 8% on Mobile, Pay-TV Profit

Machinist Union Prevails at United

Bank of America Chief Sees Top U.S. Officials

Zynga Restates Sales on Accounting Change

Joshua Brown: Big Bounce, Gold and Bonds Give a Bit

Howard Lindzon: Excess Supply is a Bitch …. Don’t Trust Demand… and Risk Management Rules

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Intrade: Democrat to Win in 2012 = 49.9%
Posted by Eddy Elfenbein on August 11th, 2011 at 4:00 pm

From Intrade, the latest futures price for a Democrat to win next year’s presidential election dropped to 49.9.

For a Republican to win, the contract is 46.7.

10-Year TIPs Yield = 0%
Posted by Eddy Elfenbein on August 11th, 2011 at 2:16 pm

Amazing.

S&P 500 Nears Death Cross
Posted by Eddy Elfenbein on August 11th, 2011 at 1:27 pm

The S&P 500 is very close to reaching a “Death Cross.” This is when the 50- and 200-DMA cross.

This time, the 50-DMA is set to fall below the 200-DMA which technicians consider a signal of more bearishness ahead.

Last summer, the 50-DMA was below the 200-DMA from July 1 to October 21. Bear in mind that the S&P 500 rose 15% over that time so this is hardly a perfect indicator.

The key number for today is 1158.84. If the S&P closes above that, the 50-DMA will still be above the 200-DMA.

The Notch In the Yield Curve
Posted by Eddy Elfenbein on August 11th, 2011 at 11:22 am

This is an important point but it’s difficult for me to explain so please bear with me. Below is the current Treasury yield curve. The key part is the notch that extends out about three years (I added the red line to highlight the area). The blue line is pretty flattish and doesn’t start to rise until 2014 or 2015.

Embedded in any yield curve is a prediction of where short-term interest rates will be in the future. The steepness of the blue line indicates how quickly rates will rise.

What’s happened recently is that the market doesn’t expect rates to rise for some time. This is a direct response to the Fed’s throwing the towel announcement from earlier this week. In turn, this has led investors to crowd into gold.

Normally, a steep yield curve is very good for stocks (and banks). The problem is that steepness doesn’t really start on the yield curve until about three years out.

Will They Ever Learn?
Posted by Eddy Elfenbein on August 11th, 2011 at 10:37 am

Once again, regulators consider a bad idea that refuses to die:

Europe Considers Ban on Short Selling

BRUSSELS — A European market regulator is considering recommending a temporary ban on negative bets against stocks across the Continent in an effort to stop the tailspin in the markets.

The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, has been requesting information from member states about such bets against stocks, known as short-sales.

In such deals, a trader sells borrowed shares in hopes that they will decline in value before he has to buy them back to close out his loan. The difference in price is his profit, or loss. Critics say short-selling encourages speculation and pushes stock prices down, sometimes feeding on itself in a panicked market, while advocates say it keeps the market honest and maintains liquidity.

“We are discussing with national authorities and together we will decide whether we need coordinated action,” Victoria Powell, a spokeswoman for the authority, said Thursday. She declined to comment on the timing of any decision or its possible scope.

Short-selling is crucial to an orderly market. It’s difficult to over-state how important this is. Shorting is what gives a trader his power. It’s an energy field created by all tradeable securities. It surrounds us, penetrates us, and binds the markets together.

Short-selling is most important right now because it helps the market uncover the weakest firms. I find it interesting that regulators continue to blame short-sellers. The fact is that regulators overwhelmingly failed in finding problem spots in the economy and that’s exactly what the shorts did.

Understatement of the Year
Posted by Eddy Elfenbein on August 11th, 2011 at 10:16 am

Ladies and gentlemen, I hope you’re sitting down:

In other news, Napoleon concedes that invading Russia “may have been a bad idea.”

Dividend Yields on S&P Financial Stocks
Posted by Eddy Elfenbein on August 11th, 2011 at 9:39 am

Financial stocks have been getting battered and bruised. The Financial Sector ETF ($XLF) was over $17 earlier this year. Now it’s at $12.

Here’s a look at how some the dividend yields stack up:

Morning News: August 11, 2011
Posted by Eddy Elfenbein on August 11th, 2011 at 7:41 am

Central Bankers Race to Protect Growth

French Banks Lead European Sector Lower

Italy’s Tremonti Seeks Budget Reform

Financial Turmoil Evokes Comparison to 2008 Crisis

In U.S. Stress Tests, a Tool to Gauge Contagion in Europe

Treasuries Fall Before Auction of 30-Year Bonds; U.S. Stock Futures Rise

U.S. Futures Rise Amid Volatile Trade

Gold Slips In Asia As Base Metals See Renewed Buying Interest

Insiders Buy Stocks at Highest Rate Since 2009

Apple’s Market Crown Is Tribute to Agility: The Ticker

Chinese E-Commerce Giant Alibaba Reports Q2 Net Up, Sees Global Econ Threat to H2

Internet Co AOL Authorizes $250 Million Stock Repurchase Program

Fitch: Capital One On Negative Watch On Bid For HSBC Card Unit

Anheuser-Busch InBev’s US Cost-Cutting, Brazil Price Hikes Boost Profit

Paul Kedrosky: How the West Was Lost and Where it Got Us

Stone Street: Trina Solar (Potential) Fraud Investigation Update: Definitely, Maybe…

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