Is Now the Time for International Investing? by John Blank – 09/21/2013

	Is Now the Time for International Investing?By: John Blank September 21, 2013

The U.S. stock market has been the safe and easy bet the last 4 years. However, as our stock prices ripen and mature, it is time to scour the globe for better opportunities. In fact, it is always a good time to consider putting some of our money to work abroad, given that there are often countries with healthier economic growth and more reasonable valuations.

This is an article I have wanted to write for quite some time. To share with you all my passion for this style of investing and, more importantly, how you can easily tap into these global markets yourselves to find attractive investment opportunities.

How I Found My World View

Twenty plus years ago, I had earned a mathematics degree, and I was fresh back from a year in Kenya. I had this plan to work on international development. I would live out in the field and study economics. It was a combination of a live ‘big picture’ subject and something technical that got me interested. What if I had studied biochemistry, or became a doctor like my father? I wouldn’t get face-to-face with the big picture. Yet I wanted a similar logic and rigor.

I started out as a professor. Then I moved into jobs that apply international economics. I learned how international tax regimes worked; wrote big picture documents for industry groups; worked for banks; and big global exchanges. I too carefully saved and invested, much like you.

In hindsight, this interest turned towards international investing because the 2008 crisis hit. People started asking me: What is going on?

I explained, with an authority I cobbled together along the way, what big macro forces hit the market. We all learned a hard lesson. Traditional styles of investing, no matter what, can be blown away. You cannot run and hide easily. All serious investors realized they needed a World View. One equipped to fit and guide strategic decisions in an interconnected scene.

With the timing benefit of the Zacks Rank, I am finally ready to truly help.

What’s the most straightforward case to an individual investor for seeking international opportunities?

If you know where to look, returns are big. They can be made reasonably safe with proper monitoring. When U.S. markets turn bearish or range-bound, there are bull markets somewhere. You can build up substantial personal wealth in those periods.

On top of that, the times we live in are turning out to be an especially good time to give a portfolio a big dose of international diversification.

Here’s why:

(1) U.S. Valuations

U.S. stocks are trading at all-time highs. They keep going higher. The last 12 months, prices on U.S. stocks went up much faster than real earnings growth. Meanwhile, non-U.S. regions remain undervalued. An international stock can trade at a discount to a U.S. counterpart doing the same thing. International markets did NOT deliver big returns the last 4 years. Returns could be easily found in U.S. markets. That huge force shifted. It is time to look outside our borders.

(2) Better Top-line Growth

Another incentive for looking abroad is the macro platform. Development is about raising a nation’s wealth. Since the end of Soviet Communism, the market was the policy framework that spread. Results over the last 20 years have been amazing. Foreign economies are now booming several times faster than that of the United States. Consider the economies of Turkey, Russia, Mexico, India and China. They can grow up to 3X faster than domestic GDP.

(3) Dislocations

Dislocation is the bogeyman in international investing. That is shorthand for rapid sell-offs. Small cap stocks share the problem. RISK-OFF and international stocks go out the door first. RISK-ON and it is back to the races. One line speaks volumes: ‘It’s seen one, and seen them all.’ The U.S., the Greeks and India supplied dislocations that went global. Like a hit on Billboard, others are surely on the way. The solution? At the proper moment, monitoring can turn down risk and turn up rewards.

Wrapping Up

When I look upon actual stock picks, I can make a personal case for international investing. It gets back to my original career mission. We learn about major developments anywhere in the world. And participate in a way we couldn’t imagine, with global stock markets.

Examples: No longer Communist, Russia offers a genuine competitor to Google. It has a search engine company of its own that delivers high double-digit earnings growth. Revenues are over $1B already.

What about Communist China? Shanghai just announced a free trade zone. Pharmaceutical companies are being built to rival Eli Lilly. Modern media networks are being scaled to a billion people. Publicly traded shares are available.

What about Africa? I got online yesterday and made a $25 loan to Jesicah in Kenya. She is building a network of chlorine dispensers. They clean potted water. I had collected all $25 from a loan I previously made in Mexico. A family there successfully started a line of natural shampoos.

That is why I do this. We are making progress this way. We can spend our working hours learning how to improve our world and profit from it as well.

CWS Market Review – February 1, 2013

February 1, 2013
“There are two times in a man’s life when he shouldn’t speculate:
                When he can afford to and when he can’t.” – Mark Twain

Remember the panic about the Fiscal Cliff? And the Debt Ceiling? And the Sequester? And about a dozen other things the financial media told us — insisted — that we simply had to worry about?

Well, here we are a few weeks later the Dow Jones Industrial Average just closed out its best January in 19 years. The Wilshire 5000, the broadest measure of the U.S. stock market, is just below its all-time high.

Fortunately, we stuck by our strategy and ignored the noise-making scaremongers on TV. What may be even more impressive is how low the market’s volatility has been. Consider this: On Wednesday, the S&P 500 had a rather minor loss of just 0.39% and that was its worst loss of the year! Between January 9th and January 25th, the S&P 500 rallied 12 times in 13 sessions, and the only downer was a miniscule 0.09% drop.

But I have to frank; the rally is beginning to look a little tired. For example, the S&P 500 tried to break 1,510 a few times this week and wasn’t able to bust through. That’s not a good sign. I think it’s very possible the bears may take back control of Wall Street in February. Nothing too serious, mind you, but just enough to scare the bulls away.

This was a mixed week for our Buy List stocks. The earnings reports were quite good, but some of our stocks, like Ford Motor (F) and Harris (HRS), didn’t respond well. That’s frustrating, but as you know, we’re in this game for the long haul.

We also had a negative GDP report for Q4 and that spooked a lot folks. As odd as it may sound, the negative report really wasn’t that bad. When you look past the plunging military spending, the economy isn’t so bad and we’re poised for decent growth in 2013. The other big news this past week was the Fed meeting. We learned that Bernanke & Co. are firmly committed to keeping the money spigots going for awhile longer. Some folks misread the December minutes believing that the Fed was going to pull back soon. Sorry, not a chance.

Now let’s take a look at some of our recent Buy List earnings reports.

Ford Is a Buy Up to $15 Per Share

In last week’s CWS Market Review, I told you to expect a big earnings beat from Ford Motor (F). Technically, I was correct. The company earned 31 cents per share which was 24% higher than the 25 cents per share that Wall Street was expecting.

Despite the earnings beat, Ford warned that its losses in Europe this year would be worse than it had anticipated. Traders overreacted (of course, or they wouldn’t be traders) and brought the stock back below $13 per share. Let me be clear that Ford’s business is doing very well, especially in North America. Their pre-tax earnings in North America soared 110% from Q4 of 2011.

The New York Times described Q4 as a “microcosm of Ford’s recent overall performance.” In other words, strong America, weak Europe. But Ford’s strength in North America didn’t come about quickly. It was part of a painful structuring process that’s only now paying dividends (literally, as Ford doubled its payout three weeks ago). Ford is employing that same turnaround strategy in Europe today, and the good news is that they’re far ahead of General Motors.

Don’t worry about the pullback in Ford. If you don’t already own it, the stock is a very good deal especially if you can get it below $13. Thanks to higher dividend, Ford currently yields 3.1%. I rate Ford a solid buy up to $15 per share.

Lower Guidance from Moog and Harris

On Tuesday, Harris (HRS), the communications equipment company, reported earnings of $1.25 per share for the December quarter which is the company’s fiscal Q2. This was five cents ahead of Wall Street’s consensus. Quarterly revenue dropped from $1.31 billion to $1.29 billion.

While Harris’ results were good, the news that has me concerned is that the company lowered its full-year guidance. I find that I often tell investors not to worry about this, or don’t worry about that. But lower guidance is indeed something to worry about. (By the way, I’m very glad we ditched JoS. A Bank from this year’s Buy List. The stock got pounded for a 15% loss on Monday after it gave an ugly earnings warning.)

Previously, Harris saw full-year earnings ranging between $5.10 and $5.30 per share. The company lowered that range by 10 cents per share at both ends. Harris now sees earnings ranging between $5.00 and $5.20 per share. So really, the guidance isn’t that much lower. We have to put this in context of a stock that closed the day on Thursday at $46.20, which is about nine times earnings.

Harris now sees 2013 revenue dropping by 2% to 4%. The previous range was flat to negative 2%. The company blamed the lower guidance on “slower government spending resulting from growing budget uncertainty.” It’s still early in the year, so I’m not giving up on Harris but I want to see some improvement later this year. Harris remains a good buy up to $53.

Moog (MOG-A) also joined the lower guidance club, and like Harris, the news is disappointing but hardly dire. Last Friday, Moog lowered its full-year guidance from $3.50 to $3.70 per share to $3.50 to $3.60 per share.

John Scannell, Moog’s CEO, noted that the company is off to a slow start this year, “The weakness in the major economies around the world is affecting our industrial business. On the other hand, the aircraft market is strong. We have moderated our forecast for the year slightly but we are still projecting growth in both sales and earnings in 2013, despite the headwinds in our industrial markets.” Interestingly, Scannell reflects the same news about lower defense spending that we saw in the GDP report.

Moog’s quarterly revenues were up 3% to $621 million. Net earnings dropped 6% to $34 million. On a per-share basis, Moog made 75 cents last quarter. Since no one follows them, I can’t say if that beat or missed expectations. The stock still looks good for the long-term. Moog is a good buy up to $46 per share.

Profit Machine at Nicholas Financial Continues to Hum

On Wednesday, Nicholas Financial (NICK), our favorite used-car loan company, reported quarterly earnings of 37 cents per share. But the results were distorted by taxes on their ginormous dividend late last year. Not including that, Nicholas earned 43.6 cents per share. Frankly, that’s a bit lower than I was expecting (around 45 cents per share), but not by much. I’m not a fan of NICK’s escalating operating costs, and I hope that doesn’t become a problem.

Our larger thesis for NICK still holds; that the company can rather easily churn out 45 cents per share every quarter. As long as rates are low and the economy is improving, NICK will do well. The math is pretty straightforward. Any company that’s pulling in, say, $1.80 per share per year should be going for at least $15, and possibly closer to $17. I think investors see NICK as a shaky subprime play. It’s not. In fact, NICK has gotten more conservative over the past few years. Like Ford, NICK pulled back below $13. Again, don’t be alarmed. NICK is a solid buy up to $15.

One more late earnings report. After the close on Thursday, CR Bard (BCR), the medical technology firm, reported earnings of $1.70 per share which beat consensus by three cents per share. Bard made $6.57 per share for all of 2012 which is up from $6.40 per share in 2011. I like that kind of growth. The downside is that Bard warned that 2013 will be rough but they see extra-strong growth coming in 2014 and beyond. For now, I’m lowering my Buy Price on Bard to $102.

More Buy List Earnings Next Week

We’re now heading into the back-end of earnings season, and the results have been good so far. The latest numbers show that of 237 companies in the S&P 500 that have reported, 74% have beaten earnings expectations, and 66% have beaten sales expectations.

Next week, we have four more Buy List earnings reports due; AFLAC (AFL), Cognizant Technology Solutions (CTSH), Fiserv (FISV) and WEX Inc. (WXS). I’m curious to hear what AFLAC has to say. Three months ago, they told us that Q4 earnings will range between $1.46 and $1.51 per share. That means full-year 2012 earnings between $6.58 and $6.63 per share. The problem is that AFLAC’s bottom line has probably been squeezed by the low yen. The question how is, how much? AFLAC has said to expect 2013 earnings to rise by 4% to 7% but that’s on a currency neutral basis. I like AFL up to $57.

Cognizant publicly said they expect earnings of 91 cents per share, and their forecast is usually very close. For this year, I think they can make $4 per share. I’m looking to see what kind of guidance they provide for 2013. CTSH remains a good buy up to $83.

Two weeks ago, Fiserv guided lower for Q4 but higher for all of 2013. I think this stock has some room to run. Fiserv is a good buy up to $88. Before I go, I wanted to highlight Microsoft (MSFT). The shares are an especially good buy if you can get them below $28.

That’s all for now. Stay tuned for more earnings reports next week. We’ll also get important reports on factory orders and productivity. 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. Our old friend Russell Wasendorf, Sr. was just sentenced to 50 years in prison for massive fraud. Here’s our post from this summer on ol’ Russ, and tips for how you can spot financial fraud.

Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 for the last six years in a row. This email was sent by Eddy Elfenbein through Crossing Wall Street.

2223 Ontario Road NW, Washington, DC 20009, USA

CWS Market Review – September 28, 2012

September 28, 2012

Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars. – Bernard Baruch

I’ve been warning investors that the stock market may be in for a rough patch, and we got a taste of that this week. On Thursday, the stock market finally snapped its five-day losing skid. Once again, the problems stem from Europe.

I know it sounds like a broken record but the economics of that continent seem terminally dysfunctional. There have been anti-austerity riots this week in Spain and Greece. Investors are beginning to realize that even if the euro survives, there will be a severe recession in Europe, and there’s a continent-wide rebellion against austerity policies.

In this week’s CWS Market Review, I want to take a closer at the economy and show you the best ways to protect yourself during the weeks ahead. The good news is that the worst of the euro crisis has already passed, but the road to recovery won’t be easy. Remember that the U.S. stock market bottomed out six months after Lehman Brothers went bankrupt.

The third quarter officially ends on Sunday, and we’ll soon get a look at Q3 earnings reports. Earnings season is Judgment Day for Wall Street; the good will be rewarded and the bad will be severely punished. I expect that our stocks on the Buy List will again demonstrate their superior attributes. Before we get to that, let’s dig into the surprising comeback of U.S. consumers.

U.S. Consumers Are Finally Waking Up

Putting Europe aside, not all the economic news has been dire. In fact, there’s been more evidence that U.S. consumers are finally waking up from their looong hibernation. This week, the Conference Board said that consumer confidence rose to a seven-month high. I was impressed to see that the expectations index rose as well.

This confirms previous evidence that there’s some emergent optimism in the air. Earlier this month, for example, Monster Worldwide, the job search website, said that there was an increase in online labor demand in August. And on Thursday, the Labor Department said that new claims for unemployment benefits dropped by 28,000 (though this number tends to bounce around a lot).

So what’s behind the new-found optimism of U.S. consumers? The main reason boils down to one word—housing. Economic recoveries in the U.S. have typically, but not always, been led by the housing sector. If you think about it, this makes a lot of sense. Not only is housing a major expense for consumers, but it also spills over into several other industries from retail (think Bed Bath & Beyond) to construction, transportation and finance.

The problem with this past recession is that we had so much overbuilding during the good times, that were was no need to build more homes. The homes built during the bubble weren’t going to disappear, so it’s taken us five years to work off the excess inventory. Only now are we getting the first clues that home prices are rising again. The CEO of Lennar (LEN) recently said, “the housing market has stabilized, and the recovery is well underway.” Let’s hope so because higher home values cause a “wealth effect” which makes consumers happier and more willing to spend.

I’ll show you an example. Check out this chart. It shows the Homebuilders ETF (XHB) in black along with the Retailers ETF (XRT) in gold.

As you can see, the two ETFs have risen together. I’d say that they’re both lifting each other up. Homebuilders have done better because that sector had suffered more damage. I don’t think this trend will let up soon. A recent survey of retailers indicates that many plan to hire more holiday workers this year. Toys R Us just said they plan to hire 45,000 employees for this holiday season. Both Walmart (WMT) and Kohl’s (KSS) plan to add 50,000 workers for the holidays.

In the near-term, Wall Street will be focused on events in Europe and the election battle in America. Those events will most likely lead to greater volatility and a soggy market for stocks. The Spanish ETF (EWP) recently gained 50% in just 52 days so some give back is probably due. But once the market gets past that, the signs are pointing to a strong year-end rally. Until that happens, investors need to play it safe.

Focus on High-Quality Dividends

The best way to protect yourself over the next few weeks is by making sure your portfolio has high-quality high-yield stocks. On our Buy List, this includes stocks like Reynolds American (RAI), our tobacco stock. Reynolds is a classic consumer staples stock because their business is barely impacted by the twists and turns of the broader economy. RAI currently yields a very generous 5.42%. That’s the equivalent of 730 Dow points a year just in dividends. Reynolds is a buy up to $45.

I know some investors are skittish about investing in tobacco but there are several other top-notch stocks that pay big dividends. Thanks to its recent pullback, Nicholas Financial (NICK) now yields 3.58%. Not only is NICK in good shape but I think the business has gotten stronger this year. Plus, the Fed’s willingness to keep short-term rates low is very good for NICK’s bottom line. Buy up to $15.

I highlighted Sysco (SYY) in the CWS Market Review from three weeks ago, and the stock just broke out to a new 52-week high. The food service industry tends to be quite stable. Despite the rally for Sysco, the shares currently yield 3.46%. SYY is a buy up to $32.

AFLAC (AFL) isn’t one of our higher yielders but I expect we’ll get another dividend increase when the company reports earnings next month. I’m not expecting a major increase. The quarterly dividend is currently 33 cents per share, and it will probably rise by one or two cents per share which means AFL may be yielding close to 3% right now. It’s frustrating that the market is treating AFL as if it’s a proxy for Europe. That’s simply not the case. AFL has dumped most of its lousy European holdings. This is a very undervalued stock. AFLAC is a strong buy up to $50 per share.

Another stock with an above-average dividend is Hudson City (HCBK). The bank is the process of being taken over by M&T Bank (MTB). Thanks to a rally for M&T, the buyout price for Hudson City has also increased. It will be a while before the deal is complete and management seems committed towards maintaining Hudson’s eight-cent-per-share quarterly dividend. At Thursday’s close, that works out to a yield of 4.07%. Hudson is a buy up to $8.

Thanks to its recent pullback, CA Technologies (CA) now yields 3.86%. I’m looking forward to another good earnings report next month. CA Technologies is a good buy up to $30 per share.

Moog (MOG-A) isn’t a dividend payer but I wanted to highlight it this week because it’s become one of the best values on our Buy List. Even though Moog gave us decent earnings guidance for 2013, and beat Wall Street’s earnings forecast in January, April and July, the stock hasn’t done much at all. Moog should be a $45 stock.

That’s all for now. Next week is the start of the fourth quarter, plus we’ll get the big jobs report on Friday. The summer is over so expect to see more volatility. 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

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Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 for the last five years in a row. This email was sent by Eddy Elfenbein through Crossing Wall Street.

What to Do Now in This Crazy Market

by Alexander Green, Investment U Chief Investment Strategist
Friday, June 1, 2012

During a radio interview last week, I was asked by the host to explain how Europe’s fiscal problems will play out and the likely impact on the U.S. stock market.

This question is a fine example of why I don’t do many media interviews and why it’s largely a waste of your time to listen to most of the pundits who grant them.

The Eurozone is a mess. That much is clear. But as I told the audience, no one knows how the weak sisters in Europe will resolve their fiscal problems. (Although it’s bound to be instructive for everyone watching.) No one knows what the ultimate fate of the euro will be. No one knows what the fallout will be in world financial markets. And to the extent that someone is confident that they do know, history shows they are very likely to be wrong. Billionaire Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing.

Europe’s banking and public debt troubles – and their negative ramifications – have dominated world headlines for months. Only a rank novice (or a perpetual gloom-and-doomer, of which there are many) can believe these developments aren’t currently discounted in global stock and bond prices. That doesn’t mean financial markets won’t go lower. They might. And perhaps they will.

But they can also rally from here. Those who say they can’t imagine how are admittedly suffering from a poverty of the imagination – and I’ll bet took no advantage of fire-sale prices during the recent financial crisis (or even the mini-meltdown last fall).

Share Prices Ultimately Follow Just One Thing…

I’ve said it before but it bears saying again. Economies and world stock markets are affected by the complex interplay of government policies, geopolitical tensions (and war), economic growth, interest rates, inflation, commodity prices, currency values, human psychology (particularly fear and greed), consumer confidence, capital flows, pending elections and potential legislation governing everything from tax rates to corporate regulations.

If you really believe you have all these things figured out, you probably shouldn’t be investing your own money.

But here’s something you can take to the bank: Share prices follow earnings. I challenge you to look back through history and pinpoint even a single public company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.

As Warren Buffett’s mentor Benjamin Graham famously said, “In the short term, the market is a voting machine, but in the long term it is a weighing machine.” What it weighs, of course, is corporate profits. A company’s true value will in the long run be reflected in its stock price. Bank on it.

If you understand this, you recognize that the current market is handing you a boatload of opportunities. It may not feel that way, but that’s how it always works. You pay a premium to invest in stocks when the outlook is rosy and investors are complacent. The real bargains appear only when there is trouble on the horizon and skepticism is high. (It’s too bad that millions recognize this only in hindsight.)

Right now you should be searching for solid, recession-resistant companies with double-digit sales growth, sustainable profit margins, high returns on equity, and quarterly profits that are likely to surprise on the upside in the weeks ahead.

These companies are likely to thrive – and deliver exceptional returns – to investors who are able to take the broader view, learn from the past and act unemotionally.

Good Investing,

Alexander Green

US Stock Futures Higher With Focus On GDP, Jobless Claims

By Barbara Kollmeyer

U.S. stock market futures rose on Thursday, inspired as European markets and commodities rebounded from the prior-day’s rout, with investors focused on a clutch of economic data to come.

Futures on the Dow Jones Industrial Average rose 60 points, or 0.5%, to 12441, while futures on the S&P 500 index rose 6.30 points, or 0.5%, to 1314.90. Futures on the Nasdaq-100 added 10.50 points to 2541.25.

Markets were taking on a sort of calm-after-the-storm approach, said analysts, as yields for 10-year Spanish and Italian government bonds eased and the Stoxx Europe 600 index rose 0.5%. Investors are keeping a close eye on news from Spain, while a referendum in Ireland on the fiscal treaty is expected to keep traders on edge.

“It would be a big surprise if the fiscal treaty is not approved, as all polls have shown a comfortable “yes”-lead, but many undecided voters still could still tip the balance,” said analysts at Danske Bank in a research note. While a “no” vote won’t block the fiscal treaty, they said it would present problems for Ireland and question its future in the euro zone.

The president of the Federal Reserve Bank of St. Louis, James Bullard, told reporters in Tokyo on Thursday that European policy makers must act to prevent the euro-zone crisis from turning into a “major meltdown for the world economy.” Speaking after a Bank of Japan conference, he said the situation was “grave” and noted concern as well about the slowdown in Asia and slightly weaker data out of China.

Wall Street stocks retreated 1% on Wednesday amid signs of a deepening crisis in Spain, reeling from a series of disturbing headlines showing private depositors pulling money out of Spanish banks in April, and problems surrounding the bailout of nationalized lender Bankia SA (BKIA.MC). A Greek poll showing the anti-bailout party leading in the polls ahead of June 17 elections also stomped on sentiment. The S&P 500 index fell 19.10 points on Wednesday, or 1.4%, to end at 1313.92.

The Dow Jones Industrial Average dropped 160.83 points, or 1.3%, to 12419.86, erasing all of a 126-point gain the prior session. Off 6% in May so far, the index is on track for the biggest monthly point drop since May 2010 and the biggest monthly percent drop since Sept. 2011.

U.S. investors will cast an eye to the domestic front on Thursday, with the first-quarter gross domestic product revision due to be released by the Commerce Department at 8:30 a.m. EDT.

Weekly jobless claims will also be released at 8:30 a.m. EDT, and the Automatic Data Processing Inc. (ADP) employment survey for May will be released just ahead of that, at 8:15 a.m. EDT. That data comes ahead of Friday’s all-important nonfarm payroll data for May.

Also, at 9:45 a.m. EDT, the Chicago PMI index of business activity will be released.

May retail same-store sales are also on tap. Warehouse retailer Costco Wholesale Corp. (COST) reported same-store sales rose 4% in the month, while total sales rose 7%.

Among other stocks to watch, Joy Global Inc. (JOY) is expected to report fiscal second-quarter earnings ahead of the opening bell.

In Asia, stocks played catch-up to losses seen across other global markets Wednesday, with the Japan Nikkei Stock Average giving up 1.1%.

The euro remained below $1.25 against the dollar, but the dollar index was trading at 82.745, down from 83.053 late Tuesday.

-By Barbara Kollmeyer; 34 91 395 8131; AskNewswires@dowjones.com

(END) Dow Jones Newswires

CWS Market Review – January 6, 2012

The stock market has gotten off to a good start in 2012. The S&P 500 has risen all three trading days this year and is already in the black by 1.87%. Of course it’s still early, but after all the frustrations of 2011 I’m happy to see some gains.

The S&P 500 closed Thursday at 1,281.06 which is its highest close since October 28th, and it’s a wee 0.33% rally away from hitting a five-month high. Since October 3rd, the index has surged more than 16.5%. There could be more good news ahead—the S&P 500 is currently above both its 50- and 200-day moving averages and that’s often a sign of a strong market.

Some of our Buy List stocks are also enjoying a nice rally. Through Thursday, JPMorgan Chase ($JPM) is up 7.31% for the year. Hudson City ($HCBK), one of our new picks, is up 6.72% and Ford ($F), a big under-performer last year, is up by 7.71%. It’s interesting that many of our poorer-performing stocks from 2011 are leading the charge so far in 2012.

In this issue of CWS Market Review, I want to explain an important market development in more depth. Namely, the U.S. market continues to divorce itself from the mess in Europe. I’ve talked about this in recent issues of CWS Market Review, but we’re really seeing this trend accelerate.

Putting it in basic terms, a weaker euro no longer automatically means a weak U.S. stock market. From mid-September until mid-December, the weak euro/weak market connection had been the rule. But as the Santa Claus Rally arrived and boosted U.S. stocks, the euro continued to sink like a…well, European Union currency. The euro just hit a 15-month low against the U.S. dollar.

What really caught my eye was on Thursday when Italian bond yields jumped back above 7% despite buying by the ECB. Seven percent is considered to be the point at which people who worry about such things start to worry. Not too long ago, 7% rates in Italy would have almost surely triggered selling in our market. But not this time. U.S. stocks took the news in stride.

So why is the U.S. market disentangling itself from Europe? The reason is that the economic news continues to look promising. For example, Tuesday’s ISM report came in at 53.9 which was above expectations. That’s the 29^th report in a row signaling an economic expansion. Earlier this year the ISM plunged, and that was one of the signs Double Dippers took for an imminent recession. They were wrong. The ISM quickly stabilized itself and the December report was the highest in six months.

I like to keep a close eye on the monthly ISM report because it has a good tracking record of lining up with recessions and expansions. For now, a reading of 53.9 is well inside the safe zone. The ISM has fallen between 53.0 and 55.0 a total of 100 times and just two of those have been official recessions.

As hard as it may be to believe, even U.S. manufacturing is coming back to life. But the most encouraging economic news came on Thursday when the private payroll company ADP ($ADP) said that the U.S. economy created 325,000 new jobs last month. That was a huge shocker. Wall Street was expecting 178,000.

I have to explain that the ADP report is just the pre-game show. The big kahuna is the official Labor Department report which comes out Friday morning (be sure to check the blog for the latest). The ADP report is welcome news because the jobs market has been one area of the economy that has shown almost zero improvement. Let me caution you that the ADP report isn’t always an accurate bellwether of the government’s report. But if it is, then this would be one of the best jobs reports in years. The consensus on Wall Street is for an increase of 150,000 in nonfarm payrolls.

I want to be clear that the economy is still in very bad shape and millions of Americans are without jobs, but after three years we may finally have evidence of good news. Green shoots, at last.

So what does this mean for us investors? One outcome would be higher bond yields. Actually, that’s already happening as Treasury yields have gradually climbed higher since December 19th. On Thursday, the 30-year T-bond got to 3.06% which is the highest yield in nearly a month. The yield on the 10-year has soared all the way to—are you sitting down?—2.03%. Ok, ok, that’s still very low, but bear in mind that it’s an increase of 30 basis points since September 22nd. (By the way, I think September 2011 may have marked a generational low in bond yields).

Another effect of stronger economic data is that the underperformance of cyclical stocks has most likely passed. Last year, I warned investors to steer clear of stocks of companies whose businesses are heavily tied to the economic cycle (energy, transports, industrials, etc.). Early in 2011 cyclicals started to underperform, and by the summer, the bottom fell out. In less than three months, the Morgan Stanley Cyclical Index (^CYC) lost one-third of its value. Now, however, cyclicals aren’t nearly as dangerous. For us, this mean s that Buy List stocks like Ford ($F), Harris ($HRS) and Moog ($MOG-A) have a good shot of being our top performers this year.

Earlier I mentioned how some of last year’s duds now look like star performers. It’s not just happening on our Buy List. Look at the Homebuilder ETF ($XHB) which has soared 44% in the last three months. This is a sector that’s seen almost nothing but bad news for years. Even the financials, particularly the non-bank financials, are showing some life. Since December 19th, the Financials ETF ($XLF) has added 10%.

While the macro-economy is getting better, I need to explain one apparent contradiction and that’s that the news for corporate profits won’t be as good. Corporate profits had been the one area of the economy that was doing fairly well. For the last several quarters, companies consistently beat analysts’ expectations.

But now companies have been busy lowering expectations. Just this week, both Target ($TGT) and Eli Lilly ($LLY) gave lower earnings guidance. Part of this is about managing expectations. But another part is that many companies have run out of room to increase profit margins. Until now, they’ve increased margins not by raising prices but by cutting costs. In other words, laying people off. Oddly enough, the corporate earnings story is the opposite side of the coin of the jobs story.

Make no mistake, earnings are still good. They just won’t be quite as good as many people thought a few weeks ago. Wall Street currently expects the S&P 500 to earn $24.31 for Q4. That’s an increase of 10.85% over a year ago, but it’s a drop of 3.88% from Q3. (I should also mention that what’s left of AIG will have an unusual impact on overall earnings.) If that forecast is right, it would bring the full-year total for 2011 to $97.02. Again, let’s look at the big picture: that’s a 70% increase from two years before.

There are lots of good bargains on the Buy List. Wright Express ($WXS) looks good. CA Technologies ($CA), one of our new stocks, also looks good here. AFLAC ($AFL) got as high as $45.27 on Thursday which is its highest price in a month. Plus, shares of Ford ($F) look like they’re about to break out above $12. The upcoming earnings season should be a big help for us.

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

U.S. private hiring surges, jobless claims dip

By Steven C. Johnson
NEW YORK, Jan 5 (Reuters) –
U.S. private-sector hiring surged in December as employers added 325,000 new workers while claims for jobless benefits fell, raising hope that recent labor market improvement would continue in 2012.

The ADP National Employment Report’s December job tally surprised economists who had expected a 178,000 gain. It was also well above the 204,000 private jobs added in November.

“The number is stunning,” said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. “This is another data point that shows our economy is healing. It fits in well with improvements we’ve seen in consumer sentiment, and obviously that’s because there are more people getting paychecks, which is making everyone happier.”

Joel Prakken of Macroeconomic Advisers, which helps produce the report, struck a note of caution, telling reporters that the December surge in hiring might have been caused in part by year-endseasonal factors and revisions were possible.

In the U.S. stock market, stock futures pared losses after the data while U.S. government debt prices fell slightly.

A more comprehensive government report due Friday is expected to show theeconomy added 150,000 public and private sector jobs last month, but the ADP report may cause some to revise that total upward.

Thursday’s data “point to what should be a fabulous number tomorrow,” said Todd Schoenberger, managing director atLandcolt Trading in Wilmington, Delaware. “We should welcome this positive news because clearly Santa Claus is still around.”

A separate report from consultants Challenger, Gray & Christmas showed the number of planned layoffs at U.S. firms fell to a five-month low in November.

But John Challenger, chief executive officer, said the two sectors that suffered the most job cuts in 2011 — government and financial services — look destined to struggle again this year. (news) The jobless rate is expected to have edged up to 8.7 percent as some Americans who had given up their search for work were lured back into the market, according to a Reuters survey.

Even so, economists say recent labor market trends have been encouraging. The number of Americans filing first-time claims for unemployment benefits fell last week for the fourth time in the last five weeks. (news)
However, in December 2010, a surge in private sector hiring far exceeded the totaljob gain for that month reported by the government.

“Some caution is required,” said Theodore Littleton, economist at IFR Economics, a unit of Thomson Reuters.