• 10% Above Last Week’s Low
    Posted by on August 17th, 2011 at 10:22 am

    Last Tuesday, the S&P 500 hit a low of 1,101.54. We’ve bounced pretty strongly since then. The index got as high as 1,208.18 this morning. The rally will be 10% once we get to 1,211.69.

  • The Double Dippers Are on the Defensive
    Posted by on August 17th, 2011 at 9:02 am

    The futures currently indicate that the bears are going to give it another chance this morning. Just like last year, the Double Dip thesis is now on the defensive. The industrial production report combined with retail sales figures show that the economy isn’t heading off the cliff during the third quarter. We’re still far from healthy, but as of yet, there are few signs that the economy is actually losing ground.

    What really stands out in my mind is what we’re hearing from companies. Or rather, what we’re not hearing. Overall, companies aren’t announcing massive layoffs or plans of business retrenchment (though a few have, they’re exceptions).

    The good earnings news continues as both Staples ($SPLS) and Target ($TGT) beat estimates this morning. Yesterday, Walmart ($WMT) and Home Depot ($HD) beat estimates and guided higher. I think that should be getting more attention than it has.

    Something else that’s helping the economy is that gasoline prices have eased back a little. Yes, gasoline is still expensive, but it’s not as expensive as before. Cheaper fuel has a major impact on consumer spending which is the key driver of the U.S. economy.

  • Morning News: August 17, 2011
    Posted by on August 17th, 2011 at 6:39 am

    Iceland Raises Rates for First Time Since 2008

    Franc Gains as Switzerland Stops Short of Peg

    Europe’s Debt Crisis Weakens Quarterly Growth

    Brent Oil Rises to $110, U.S. Gasoline Supports

    Fitch, in Affirming U.S. as Triple-A, Leaves S&P a Solo Act

    U.S. Makes Special Purchase of $40 Million of Chicken Products

    On Economy, Raw Data Gets a Grain of Salt

    Retailers Glean Profit in Slow Sales

    Dell Posts Flat Sales but Its Profit Rises 63%

    Maersk’s Tanker Subsidiary Extends Losses Into a Third Year

    British SABMiller Goes Hostile in Pursuit of Australian Brewer Foster’s

    Carlsberg Cuts Full-Year Profit Forecast as Beer Market in Russia Declines

    Manchester United Said to Plan $1 Billion Initial Share Sale in Singapore

    Phil Pearlman: Magazine Covers Do Not Mark Bottoms

    Jeff Miller: The Wall Street Parrot

    Todd Sullivan: Buyback Expected

    Be sure to follow me on Twitter.

  • Where Will the S&P 500 End the Year?
    Posted by on August 16th, 2011 at 7:35 pm

  • What’s Driving the Bond Rally?
    Posted by on August 16th, 2011 at 4:17 pm

    Treasury bond yields have plunged recently which may seem odd since long-term Treasuries were famously downgraded by Standard & Poor’s. So what’s driving the bond rally?

    We can never say for certain but we can shine a light on some of the usual suspects underpinning the bond market.

    Here’s a look at the yield on the 10-year Treasury bond (blue) along with the 10-year TIPs (or Treasury Inflation-Protected security in red).

    The 10-year TIPs yield recently turned slightly negative which means that investors are so frightened that they’re willing to forgo all of their real profits just for the safety of the Treasury market. Or rather, the supposed safety of the Treasury market. (In fact, it may even be worse for bond holders since the CPI probably understates inflation.)

    The key for us to watch is the spread between the two lines which represents the inflation premium. Since both lines have plunged in near tandem, this means the market isn’t expecting inflation to either ramp up or slow down. The inflation premium is currently around 2.2% and that’s been pretty stable (between 2.2% and 2.6% for the last several months). Instead, the plunge in yields is almost entirely due to lower real rates.

    That’s mostly the result of a worsening economic outlook and a desire from investors to hold anything liquid.

    Now here’s the chart which I think is particularly fascinating and should be getting a lot more attention. It shows how the 10-year inflation premium (in red, meaning the difference between the two lines above) has closely matched the S&P 500 (blue) over the last three-and-a-half years.

    This is a chart Lord Keynes (and Paul Krugman) might enjoy because it seems that the market has rallied as inflation expectations rose. This is the exact opposite of what happened during the 1970s when inflation slowly ground down stock valuations. I should add the proper caveat that correlation doesn’t mean causation. The higher inflation expectations, of course, might be a response to higher share prices — or the correlation might be entirely illusionary.

    But another interesting angle is that the recent equity sell-off marked the first major departure between these lines in quite some time. This lends evidence to the idea that the lower real bond yields are the result of a dreary economic outlook.

    The lines have just recently gotten together again. For now, the stock market may be asking for some more inflation. I recently ran the numbers from Professor Robert Shiller’s website to see how stocks perform relative to different inflation rates. The stock market clearly hates inflation, but historically, the hatred doesn’t kick in until inflation hits 5.3%. We’re still a long way from there.

    The sad story might be that the Fed’s only clear-cut triumph of the last 30 years (defeating inflation) might be exactly what we don’t need right now.

  • Sarkel Kills the Rally
    Posted by on August 16th, 2011 at 1:42 pm

    I always get nervous whenever the president speaks during market hours. Today I learned that talking European politicians can kill a rally just as well as any American politician.

    Right before the Sarkozy/Merkel joint press conference, the S&P 500 got as high as 1,204.22 which was just 0.02% below yesterday’s close. Now we’re more than 1.5% below yesterday’s close.

  • Industrial Production Rose 0.9% in July
    Posted by on August 16th, 2011 at 10:50 am

    So far, we’ve had some negative economic data points for the month of July, but today’s industrial production report was pretty good. Industrial production rose by 0.9% last month which is the strongest growth this year. The number for June was revised to 0.4%. Over the last two years, industrial production is up by 11.5%.

    I often hear people say “we don’t make anything in this country anymore.” That’s simply not true. The U.S. is a manufacturing powerhouse. The difference is that many fewer people do the work.

  • Market to Open Lower as HD and WMT Raise Guidance
    Posted by on August 16th, 2011 at 8:38 am

    The stock market looks to open lower today as Germany reported economic growth of just 0.1% for the second quarter. That’s just terrible. The whole Eurozone economy grew by 0.2% in the second quarter which was down from 0.8% for Q1.

    This news doesn’t come at a good time for Europe as Sarkozy and Merkel are meeting today in a summit. There had been some talk about Europe issuing “eurobonds” to help fix the mess everyone’s in, but apparently that’s not on the agenda for today’s meeting.

    Perhaps the most important market news this morning is Walmart’s ($WMT) earnings report. The company already told us that Q2 (which ends with July) would come in between $1.05 and $1.10 per share. They weren’t lying; WMT earned $1.09 per share although same-store sales were flat.

    More importantly, Walmart said that Q3 should range between 95 cents and $1 per share. The company also raised its full-year EPS range from $4.35 to $4.50, to $4.41 to $4.51. This means the stock is going for just 11.6 times the midpoint of the new full-year guidance.

    They’re not the only one boosting guidance. Home Depot ($HD), which is also a Dow stock, just reported a 14% earnings increase. For Q2, HD earned 86 cents per share which was three cents better than estimates. The company raised full-year EPS guidance from $2.24 to $2.34. The stock is going for 13.4 times this year’s estimate which seems about right.

  • It’s Cheaper Now to Buy Than Rent
    Posted by on August 16th, 2011 at 8:06 am

    CNN Money has an interesting article saying that it’s now cheaper to buy a home rather than renting one:

    Home prices have taken such a beating and demand for rental units has increased so much that it’s now cheaper to buy a two-bedroom home than to rent one in most major U.S. cities.

    According to real estate web site Trulia, buying was cheaper than renting in 74% of the country’s 50 largest cities in July. In just 12% of the cities, including New York, Seattle and San Francisco, renting was cheaper. In the remaining 14% of cities, renting was less expensive but close to the cost of buying.

    In addition to a continuing decline in home prices, rock-bottom interest rates have added a lot of weight to the buy side of the scale. The overnight average rate for a 30-year fixed was just 4.19% on Monday, according to Bankrate.com. A 15-year fixed averaged just 3.43%.

  • Stocks on Sale
    Posted by on August 16th, 2011 at 7:18 am

    Amid Warren Buffett’s call to raise taxes on himself, he also had fairly positive things to say about the economy. He even said that the economy might pick up faster than the Fed expects. That’s not all. The latest filings show that Buffett made his biggest bets of the year on August 8th as the stock market was falling.

    Clearly Buffett believes the market is cheap and the numbers back him up. According to the latest data, the Price/Earnings Ratio for the S&P 500 fell all the way down to 12.1 last week which is the lowest it’s been since May 1989.

    Yet the latest earnings data showed that the second quarter was a very strong one for the S&P 500. With 94% of its companies reporting, the S&P 500 is on track to earn $24.88 for Q2. That surpasses the previous record of $24.06 from the second quarter of 2007.

    Interestingly, Wall Street has only cut earnings estimates very slightly for the near future. For the third quarter, which we’re already halfway through, Wall Street expects earnings of $25.10. That represents growth of 16.4% over the third quarter of 2010.

    For all of 2011, Wall Street expects the S&P 500 to earn $98.94, and another $113.47 for next year. It’s very possible that earnings estimates will fall, but for now, the S&P 500 is going for 10.6 times next year’s earnings. That’s pretty cheap.