CWS Market Review – December 30, 2011

CWS Market Review – December 30, 2011

There’s just one trading day left in 2011. I, for one, am happy to see this market year end. There’s been way too much sturm und drang, not to mention Bernanke und Trichet, for my taste. The next time I read about “European spreads,” I really hope it’s about Nutella.

There has been, of course, one bright spot to this year and that’s been our Buy List. Through Thursday, our Buy List holds a small lead over the S&P 500. For the year, our Buy List is up 1.32% (3.18% including dividends) while the S&P 500 is up 0.43% (2.55% including dividends).

True, that’s hardly a big lead, but remember that the large majority of money managers don’t get this far. Unless disaster strikes on Friday, this will be our fifth year in a row of beating the overall market. In this issue of CWS Market Review, I want to talk about the market’s current mood and explain why our Buy List has stayed so close to the S&P 500.

But first, I want to remind you that on Tuesday, January 3rd, the new Buy List takes the field. The stock exchange will be closed on Monday for New Year’s Day so Tuesday will be the first trading day of the new year.  Five new faces will be joining us: CA Technologies ($CA),Hudson City Bancorp ($HCBK), CR Bard ($BCR), Harris ($HRS) and DirecTV ($DTV). Let’s hope 2012 will be our sixth market-beating year in a row! (And let’s hope for a much bigger lead at the end as well.)

One of the frustrating aspects of this market is that stocks have been unusually highly correlated with each other this year. This is a crucial point and every investor needs to understand what’s been happening. Let me explain it in a user-friendly way: Typically most stocks move up and down together but there’s often a minority that swims against the stream. Money managers love to key in on these “dispersion” stocks because they want to show their clients that they can stand apart from the crowd, preferably in a good way. When everybody else is zigging, the big money is going to find the guys who can zag.

The problem is that when there’s too much correlation going on, as there is now, the non-correlated area gets far too much attention. As Yogi Berra once said of a popular restaurant, “No one goes there anymore. It’s too crowded.” In more concrete terms, this helps explain why we‘re seeing such absurd valuations for stocks like ($AMZN) or Starbucks($SBUX). They’re two of the few zaggers in town, so everybody has latched on.

Earlier this year, shares of Netflix ($NFLX) got a super-atomic wedgie after the company tried to…well, I’m not exactly sure. But it was pretty dumb whatever it was. Anyway, the stock got destroyed. Here’s the key part I want you to understand: The attention is going to the crash but the real story is why anyone was paying $300 for this stock in the first place (that’s 77 times trailing earnings).

That’s nuts especially when you compare it with many stodgy blue chips. For too long, Netflix was one of the few stocks that was “working.” Meanwhile, if the S&P 500 was up, say, 1% on a given day, you could be pretty sure that GE ($GE) or Walmart ($WMT) or Microsoft ($MSFT) was doing pretty much the same thing. That’s frustrating—and frustrated investors are bad investors.

Why has correlation been so high this year? It all comes down to what’s euphemistically called “headline risk,” which is better known as Europe’s unholy mess. As the problems in Europe have grown, the market has increasingly treated our market less as a market of individual equities and more as one giant mass that has a cash flow in U.S. dollars. In this case, the importance of U.S. dollars is that they’re not euros.

What happened is that the dollar trade became highly correlated with every other asset (often negatively), and within assets, stocks have become highly correlated with each other. Ideally, stocks should trade on, oh you know, things like earnings and dividends. Instead, they’re trading on what Angela Merkel may or may not do at the next five summits which will decide on how to lay out an agenda for the next 73 summits. Sorry, but that ain’t much fun. Of course, if you’re an investor in European bonds, then you probably have all the dispersion you can handle.

Since I build the Buy List for long-term performance, I don’t give a whit about being correlated or not. If you’re focused on the long-term, that’s something that comes and goes. In 2011, it’s been here in a big way and it explains why our Buy List is sticking so closely to the S&P 500. It’s just something that you have to deal with. This, too, shall pass.

While high correlation makes stock-picking harder, it also means we should focus on fundamentals all the more, since high correlation is a fleeting thing. The Chicago Board Options Exchange actually has an index that tracks implied correlation. Fortunately, in recent weeks, this index has slowly started to fall, but make no mistake, correlation is still very high.

I suspect that in 2012, we’re going to see more “dispersion trades” fall apart and many won’t be pretty. In fact, that may be happening right now with gold. It recently made a six-month low and I won’t be surprised to see a few hedge funds go under because they were heavily invested in gold and silver futures. The gold sell-off may also signal that the Fed’s “extend period” policy for low interest rates may not be so extended. But it’s just too early to say.

Another emerging “dispersion” story could be in healthcare. In this case, it’s slowly getting stronger. On Thursday, Medtronic ($MDT) closed at its highest level in nearly six months. If you recall, the company had a solid earnings report a few weeks ago and it reiterated its full-year forecast. On Tuesday, Johnson & Johnson closed above $66 for the first time since July. And even though Abbott Labs ($ABT) is set to depart our Buy List, it hit a fresh 52-week high on Thursday.

Frankly, not much has been going on this week on Wall Street. Trading volume is very low. On the economic front, the consumer confidence report was very good and the pending home salesfigure was particularly strong.

The slow news will end soon as we have fourth-quarter earnings season on the horizon. Our first Buy List stock to report will be JPMorgan Chase ($JPM) on January 13th. I’m particularly looking forward to a strong earnings report from Ford ($F). Plus, the company will soon pay out its first dividend to shareholders in five years.

That’s all for now. Over the weekend, I’ll post the final numbers for this year’s Buy List. 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



Among the companies whose shares are expected to actively trade in Friday’s session is AMR Corp. (AMR).

New York Stock Exchange regulators said it will delist the common stock of AMR Corp. before the opening bell on Jan. 5., saying that it is “no longer suitable” for listing. NYSE Regulation cited reasons including the timing and outcome of last month’s bankruptcy filing as well as the company’s sharply weakened share price. Shares plunged 38% to 32 cents in recent after-hours trading.

   Watch List:

Fitch Ratings slashed its ratings on Sears Holdings Corp. (SHLD) Thursday and kept the door open for further cuts deeper into junk, after the retailer warned of disappointing holiday sales earlier this week.

Samsung Electronics Co. (SSNHY, 005930.SE) strengthened its lead as the top handset maker in the U.S. during the three months ended in November, while Google Inc.’s (GOOG) Android platform expanded its dominance of the U.S. smartphone market, according to industry tracker comScore Inc. (SCOR).

-Edited by Ian Thomson and Corrie Driebusch; write to and

Germany, France Kick Off Heavy Euro-Zone Bond Issuance In 2012

By Emese Bartha


FRANKFURT (Dow Jones)–German and French government bond issuance next week will kick off another busy year in the euro zone, leaving no breather after Italy’s bond auction Thursday.

The single currency area looks to start 2012 similarly as it finished 2011, under threat from countries with weak economies and shaky public finances.

But this time around, the euro zone as a whole faces a mild recession, while the extended debt crisis makes it increasingly difficult, and expensive, for many issuers to lure new buyers of their debt.

“With the sovereign debt crisis and fiscal austerity measures weighing heavily on business and consumer confidence in the euro zone, we believe the probability of recession is high,” said ING Bank’s senior economists James Knightley and Carsten Brzeski.

Euro-zone governments will try to sell around a gross EUR800 billion of government bonds in 2012, a figure just marginally off from bond supply in 2011. The funding costs of non-core countries, primarily of Italy, remain at elevated levels, questioning long-term funding sustainability.

“Euro-zone government bond supply will remain one of the hot topics of the European Union debt crisis in 2012, especially in the first months of the year,” said BNP Paribas SA strategists in a note.

Decreasing demand for peripheral bonds has caused funding difficulties for their issuers, the BNP Paribas strategists said, adding that the first quarter of 2012 is going to be much heavier than the fourth quarter of 2011 in terms of euro-zone government bond supply.

January is the traditionally busiest month of the year, while the first quarter typically is the heaviest three-month period.

Deutsche Bank AG strategist Abhishek Singhania expects gross bond supply to total EUR95 billion next month. March and April will see comparably heavy supply with EUR88 billion each, according to Singhania.

Wednesday, Germany will auction EUR5 billion of its ill-fated 2% January 2022 bund, the one which drew very disappointing bids at its latest auction Nov. 23, further escalating the European debt crisis.

Thursday, France will auction EUR7 billion to EUR8 billion of long-term debt, or OATs, maturing in 2021, 2023, 2035 and 2041.

-By Emese Bartha, Dow Jones Newswires; +49 69 2972 5516;

Global FX & Fixed Income News


-Dollar lower vs yen, yuan; Treasurys flat; U.S. stocks seen flat; Nymex Feb crude at $99.83, up $0.18, Feb Brent crude up $0.17 at $108.18; gold at $1,558.13, up $13.63.

-Watch for: there are no major economic data expected

-Top News: Yuan Hits New High On Aggressive PBOC Guidance; Banks’ Borrowing From ECB Highest Since Feb; Eurocoin Points To Euro-Zone Contraction



The dollar fell to a three-week low against the yen Friday in Asia due to last-minute settlement orders by Japanese exporters that also pushed down the euro.

The greenback fell to as low as Y77.51 during the Asian session, the lowest level since Dec. 9. Traders said the impact of small dollar-selling orders by a few Japanese exporters was magnified by the extremely thin year-end market.

“It looks like there were still some exporters who must sell dollars,” said Atsushi Hirano, head of foreign exchange sales at The Royal Bank of Scotland in Tokyo.

Against the dollar, the euro was at $1.2942 from $1.2960. Elsewhere, the dollar fell to a record low against the Chinese yuan at CNY6.3070. Traders said the market reacted to Friday’s central parity rate, which was CNY6.3009, the lowest rate on record.

“The fixing surprised us, but most traders think it’s politically motivated, partly as a friendly gesture to the U.S. for not labeling China a currency manipulator,” said a Shanghai-based foreign bank trader.


Treasurys were largely unchanged in London in extremely thin trading volumes. The 2-year note was little changed at 99-23/32 to yield 0.269%; the 10-year note was steady at 100-30/32 to yield 1.897% while the 30-year bond was up at 104-12/32 to yield 2.903%. The March Treasurys futures contract was a shade lower at 130.225 with just over 23,000 contracts traded.


U.S. stocks are called to open flat to slightly lower, in line with U.S. futures, with Spreadex calling the DJIA down 20 points at 12,267 and the S&P 500 flat at 1263. Spreadex said it expected a very quiet session, with low volumes heading towards the New Year weekend. “There will be no economic data to push the market in any real direction… People will be playing it very safe to close the year.” At 0449 ET, the Dow front month futures contract and S&P 500 futures contract traded down 0.1% at 12,202.00 and 1256.30, respectively.


Crude-oil futures edged higher, as positive U.S. economic data boosted risk sentiment, but gains were limited as investors refrained from making aggressive bets on the last trading session in 2011.

Energy consulting firm Ritterbusch and Associates said Nymex futures could retreat to the mid-$90 area, as it expects the euro zone to be the primary driver of oil pricing during the first quarter of 2012.

“We still view the euro-zone debt issues as intractable despite this week’s Italian bond auctions that were widely perceived as better than expected. Nonetheless, a breakdown in the euro to 15-month lows is an element that can’t be denied when assessing oil price direction across the month of January,” Ritterbusch said in a note.

After a tumultuous year that saw gold set a new price record of $1,920.94/oz in September, the metal is likely to end 2011 with a modest gain of about 9.6%, significantly lower than a 29.6% rise in 2010. The near-20% correction in the last four months has fueled talk that gold’s heyday is over, but it is too early to write off the metal which has consistently protected value and generated steady returns for investors, market participants said Friday.

Investment bank Morgan Stanley expects gold to average $2,200/oz in 2012.

“The defensive nature of gold should continue to support investment demand as investors look for safe-havens,” Morgan Stanley said in a report earlier this month.

According to a survey by Singapore’s OCBC Bank, 56% of the fund managers polled believed gold to be the most promising commodity to invest in, over the next 12 months.

=======TODAY'S CALENDAR======= 
0830  US       Dec     ISM-NY Report 
1300  CAN              Bank of Canada Financial Statistics 

Yuan Rises 4.7% In 2011; Hits Record-High On Aggressive PBOC Guidance

The yuan rose 4.7% against the U.S. dollar in 2011, hitting a fresh high under the current system Friday after the People’s Bank of China set a bullish reference exchange rate on the year’s last trading day.

Banks' Borrowing From ECB Highest Since Feb

Euro-zone banks’ overnight borrowing from the European Central Bank jump to EUR17.307 billion, a level unseen since early this year, while their deposits remain close to the record levels hit earlier this week.

Eurocoin Points To Euro-Zone Contraction

The euro-zone economy continues to contract in December, although no more sharply than in the previous month, according to a measure of activity compiled by the Centre for Economic Policy Research and the Bank of Italy.

China Manufacturing Activity Still Contracting

Chinese manufacturing activity contracted again in December, though at a more moderate pace than in the previous month, HSBC’s gauge shows.

IMF Warns Greece On Debt Levels, Worsening View

The IMF recently told Greece that a worsening economic outlook suggests it may be unable to cut its debt to sustainable levels even with a planned 50% write down in privately-held Greek government bonds.

Japan Fin Min Vows To Help Europe On Debt Crisis

Japan’s Finance Minister Jun Azumi says that Tokyo will continue its support for European countries in solving the region’s ongoing sovereign debt crisis.

Spanish Inflation Eases On Lower Fuel Prices

Spanish inflation eased in December due mainly to falling fuel prices, a preliminary estimate released Friday by the country’s National Statistics Institute shows.

WSJ: US Web Sales Sparkled During Holiday Season

Online shopping flourished in the U.S. this holiday season, as Internet retailers such as (AMZN) reported blockbuster sales and drew more dollars from their brick-and-mortar counterparts.

WSJ: N Korea Says New Leader Won't Work With S Korean President

North Korea on Friday said that new leader Kim Jong Eun won’t work with South Korean President Lee Myung-bak, continuing the anger its regime displayed under Kim Jong Il over Mr. Lee’s refusal to provide it with unconditional economic aid.

WSJ: Egyptian Raids on U.S. Groups Draw Ire

Egyptian soldiers and police stormed nongovernmental organization offices, adding tensions to fraying ties between Egypt’s interim military leadership and its allies in Washington.

US Issues Alert Over Alaska Volcano Cloud

The U.S. Geological Survey has issued a heightened alert after a volcano on a remote Alaskan island belched a cloud of ash 15,000 feet high, potentially affecting trans-Pacific flight routes.

-By Paul Larkins, Dow Jones Newswires; 4420-7842-9319;

IMF’s Zhu: Emerging Economies Must Head Off Problems From Overly Fast Loan Growth

BEIJING (Dow Jones)–Emerging economies need to take effective measures to avert potential crises resulting from overly fast growth in bank lending in recent years, International Monetary Fund Deputy Managing Director Zhu Min said.

“Emerging countries have created large new risks in the last two years, and their new lending has risen too fast,” partly because they sought to counter the effects of the last global financial crisis, Zhu said in remarks published Friday in the Caixin magazine.

Zhu said new loans in China relative to the country’s gross domestic product growth climbed to 200% in 2010, compared with 100% before the crisis that began with the collapse of Lehman Brothers in 2008.

“In a period of global economic slowdown, too much debt and possible asset quality problems mean potential risk,” he said.

Chinese banks formally extended CNY7.95 trillion ($1.21 trillion) in new loans last year, well beyond the government’s CNY7.5 trillion target. But banks also created CNY3.47 trillion in off-balance-sheet credit, calculations by the central bank showed.

Developed economies need to take decisive action to head off any problems arising from the surge in lending, Zhu said, without offering any proposals.

Regulators have been pushing local banks to increase capital and add to provisions to cover bad debt. They have also taken a tougher stance on off-balance-sheet lending.

Analysts widely anticipate China’s banks to deal with an increasing amount of bad debt after issuing a record CNY18 trillion in new loans during the two years from 2008. A large portion of that money flowed into infrastructure projects such as bridges and roads, but some went into more speculative property development projects.

Newspaper website:

-Eliot Gao contributed to this article, Dow Jones Newswires; (86 10) 8400-7705;

China Yuan Hits Record High Late; Gains 4.7% In 2011

Vs Parity    Pvs 
USD/CNY Central Parity   6.3009              6.3157 
USD/CNY OTC 0830 GMT     6.2940    -0.11%    6.3192 
             High        6.3136    +0.20% 
             Low         6.2940    -0.11%

SHANGHAI (Dow Jones)–China’s yuan jumped to a record high against the U.S. dollar late Friday after the People’s Bank of China set a bullish reference exchange rate for the local unit, pushing it to record a 4.7% gain against the greenback in 2011.

Traders believe the PBOC also intervened in late trading to drive the yuan higher, instructing large state-owned banks to buy hundreds of millions of dollars worth of the local currency.

On the over-the-counter market, the dollar was at CNY6.2940 around 0830 GMT, down from CNY6.3192 late Thursday. The greenback sank to an intraday low of CNY6.2940–the lowest level recorded since Beijing’s landmark currency reforms in 1994–after rising as high as CNY6.3136 during the session.

The yuan has risen 8.5% against the dollar since June 2010, when China dropped its two-year currency peg to the dollar and vowed to make the yuan more flexible. It’s up 32% since July 2005, when China abandoned an earlier decade-long peg to the dollar.

The PBOC set Friday’s dollar/yuan central parity rate at 6.3009, down from the previous low of 6.3146 Wednesday, and at a level which was well below market expectations. The fixing, on the final trading day of the year in Asia, translates into a 5.1% rise in the yuan’s mid-point rate over the last 12 months.

The PBOC’s aggressive guidance reflects a largely political objective to show a 5% appreciation in the Chinese currency over the past year, traders said.

“The fixing surprised us. Most traders think it is politically motivated, partly as a friendly gesture to the U.S. for not labeling China a currency manipulator,” said a trader at a foreign bank in Shanghai.

Dealers said they expect Beijing to allow the yuan to strengthen further in 2012. However, gains may be limited to 3% or less as China faces a weaker economic outlook.

Offshore, the yuan rose against the dollar in the nondeliverable forward market but fell in spot market. One-year dollar-yuan nondeliverable forwards fell to 6.3820/6.3900 from 6.3960/6.4000 late Thursday, implying a 1.2% fall in the yuan against the U.S. currency over the next year.

In the offshore yuan market in Hong Kong, where the Chinese currency floats freely, the dollar/yuan exchange rate was at 6.3480, compared with 6.3440 late Thursday.

-By Jean Yung, Dow Jones Newswires; 8621 6120-1200;

DATA SNAP: Italy Nov Producer Prices Rise Slightly On Energy

By Liam Moloney and Christopher Emsden


ROME (Dow Jones)–Italian producer prices inched up in November, driven by energy prices, national statistics institute Istat said Friday.

Italy’s producer price index–a measure of prices at factory gates–rose 0.1% in November from October and was up 4.2% from November 2010, Istat said, citing preliminary data.

The data matched the average forecast of three economists polled by Dow Jones Newswires.

Producer prices rose slightly more strongly in the domestic market, but net of energy prices fell 0.1% from October and rose only 3.1% on the year, according to Istat.

-By Liam Moloney and Christopher Emsden, Dow Jones Newswires; +39 06 6976 6924;