Stocks: Waking the Slumbering Bull
February 13th, 2009 | Posted by stockDespite some attention getting jumps and slumps – like a 300 point drop following Treasury Secretary Geithner’s disclosure of the bank rescue plan on Feb. 10 — the stock market has essentially done nothing for the last two months. Since rallying from its lows on November 20, the Dow Jones has traded in a 1000 point range, while the S&P 500 has bounced between 800 and 925.
For the bulls out there, this is good news. They look at the constant stream of negative headlines – falling bank stocks, rising unemployment, cratering home prices – and see a market that could have, perhaps should have, fallen much, much further. “Citigroup traded $12 back in November when the market hit 7500,” says Robert Auer, manager of the Auer Growth Fund. “We’ve been able to cut bank shares in half again and the market isn’t any lower. It’s absorbed all the bad news.”
So what’s it going to take to get the market moving again? Auer sees a lot of “dry powder” sitting on the sideline, $3 trillion worth, actually. In normal times, a little over $1 trillion sits in money market funds. Now it’s around $4 trillion. That money is earning next to nothing, and as soon as the market starts to recover, it could flood back into stocks, Auer says.
Nor does it take a magician – or a Madoff – to turn $3 trillion into $10 trillion. On the way down, more market cap is lost than the actual dollar amount traded. For instance, on Feb. 13, JPMorgan Chase dropped nearly 6%, to close at $24.69 on light volume of 58.19 million shares. That means it took only $1.4 billion of investor money to shed $5.6 billion in market capitalization, a drop of $4 dollars for every one dollar traded.
But the same math works on the upside as well. That $3 trillion sitting in money market accounts, if invested in the stock market, could turn into $10 trillion in market gains. When that happens is anyone’s guess – Auer doesn’t have a time frame. But he is more than a little optimistic that the worst is over. “This was the worst ten years ever [for the stock market], even worse than the depression,” Auer says. “Now, we could be going into a glory decade.”
That’s a notion that shell-shocked investors may not share at the moment, but market rallies sometimes happen when you least expect them.
More Markdowns for Retail Stocks?
February 12th, 2009 | Posted by stockAsk a portfolio manager what stocks you should buy and there’s a very good chance he or she will warn you away from retail stocks. The consumer is scared and pinching pennies, they say, and unemployment is still on the rise. It’s going to be a long year for consumer discretionary stocks.
So then it’s a surprise when U.S. retail sales rise 1% in January, far more than economists were expecting. A few economists dismissed today’s number as the result of “seasonal distortions.” But, Mike Englund of Action Economics said it was good news, “a long-awaited sign of a diminishing consumer downdraft.” The report “puts a floor under the U.S. GDP contraction in the current quarter,” he wrote.
Is there hope for some consumer stocks after all?
Chipotle Mexican Grill (CMG) offered some hope today when the restaurant chain reported better-than-expected earnings and the stock surged 12%. Profit margins narrowed, but same-restaurant sales were up 3.5% and total revenue rose 20%. In 2009, the chain expects low-single-digit same-restaurant sales growth, and it plans to open 120 to 130 new restaurants.
Another company that might cheer investors is Costco Wholesale Corp. (COST). At least according to UBS (UBS) analyst Neil Currie, who recently upgraded the member warehouse chain from a ‘neutral’ rating to a ‘buy’ rating. While acknowledging the problems all retailers face, Currie pointed to Costco’s “record club traffic, rock solid membership, increasing relevance with shoppers and a strong balance sheet.”
This is, as Currie writes, an environment in which “consumers have largely pulled back on spending on anything that is not either food or heavily on sale.”
However, as demonstrated by today’s data, Chipotle’s sales figures and Costco’s traffic, it’s not at all true that consumers have stopped spending entirely. Dollars are flowing to stores and restaurants that are more “relevant” to these tough times.
Unfortunately, this argument only takes you so far. Companies relevant to cash-strapped consumers are already priced at a premium to other discretionary stocks. And nearly every retailer is trying to adjust to the new economic realities, resulting in a sector that is fiercely competitive and getting more so.
Currie’s report on Costco is titled “short-term pain for long-term gain.” But how much pain and for how long? That’s something no investor knows at this point.
Obama Needs a Secretary of Innovation
February 11th, 2009 | Posted by innovow.
Two Main Objectives
But the overall health of innovation in the private sector is ailing, and a good push from Washington to help get it going again will be tantamount to our future economic success. A recovering economy does not come from “relief packages” but rather from the creation of businesses, products, and services that, in turn, create jobs and fuel growth.
The Secretary of Innovation should be responsible for two major tasks. The first is to lead a systematic national innovation process, bringing this powerful strategy to bear on the government’s role in unclenching the lockjaw of this economic crisis. The second is to create a national innovation mindset, reinvigorating innovation in the private sector.
Innovation is one of the most abused buzzwords of the past decade. It is a term with enormous appeal, suggesting (without having to deliver) breakthrough thinking and new ways of approaching problems. It implies action where, as we have seen time and again, none exists. How many times have you seen a reference in corporate advertising to “innovation” or heard an embattled CEO talk about his company’s innovations as if you could buy them by the dozen?
Leveraging Capabilities
Innovation is not invention, nor is it the result of a eureka moment. The innovation process, properly done, begins with research to identify needs, wants, and problems and then addresses them in a way that draws upon many different disciplines and functions. Innovation breaks through a business-as-usual mindset, revealing an array of opportunities with a high probability of success.
The process of innovation can have just as much to do with rebuilding a devastated economy as it does with rebuilding a product line. It needs someone responsible for leveraging the talents, skills, technologies, and capabilities that we have as a country.
It is imperative that establishing the Secretary of Innovation not signal the start of a new bureaucracy. The model would be similar to the corporate CIO: the person responsible for assembling cross-functional teams in the search for breakthrough ideas so that innovation is seen as an organizationwide effort, not the product of yet another silo.
Cross-Fertilization
Problems in the economy are enormous. Obama and his team are thinking big as they attack economic and social ills. We are hearing about a huge economic stimulus package with public works and jobs components and ways of attacking health-care issues and taxation. We’d be better off if the new Administration employed a process that cuts across the sectors of government; by doing so, Washington could recognize that solutions to health-care and environmental issues would also solve many of the nation’s economic problems.
Consider the hastily assembled Toxic Asset Recovery Program (TARP). It was built upon the best guesses of experts. It was, in fact, an invention, not an innovation, put into place without a careful enough look at whether it would solve the problem it was intended to address. The skeptical reaction of Congress, the outpouring of alternatives, and the speed with which the original idea was abandoned (but not the money) are ample proof that a better approach was needed.
Beyond solving major problems within the public sector, the Secretary of Innovation would team up with the private sector to foster a national innovation mindset. The U.S. is, after all, an economy based on private enterprise. The day will come when the government backs off and business reasserts its leadership. With an innovation mindset, companies will be motivated to invest in technology, R&D, and new products and services.
To help shift this mindset, our government might create tax incentives or perhaps national incubators in a number of cities to encourage the efforts of entrepreneurs. It might involve a U.S. Innovation Award program to recognize and inspire innovation across all walks of life. The program would signal the power of innovation, with an impact similar to that of the Malcolm Baldridge National Quality Awards.
It is easy to talk about innovation in addressing the enormous challenges facing this nation. That is innovation as a buzzword. The Secretary of Innovation would help ensure that the full power of the innovation process will be used in the vital work of stabilizing the economy and for advancing innovation in the private sector.
February 11th, 2009 | Posted by stockDividends are expected to have their worst year since 1942, with the S&P 500 payment declining 13.3%, and that’s my optimistic estimate clich here.
And while companies that can’t afford to pay dividends shouldn’t, after all this is the year of the cash flow, I find many issues that can and should continue to pay and increase. Linked is file of 142 S&P 500 issues that have paid increased cash dividends for at least ten years in a row or have paid increased cash dividends in at least 20 out of the last 25 years. I’ve also added a coverage column for issues where their current earnings (net income) covered their dividend rate by at least twice, as well as where their 2009 street estimated earnings are at least twice. The file is a starting point for dividend investors, not a buy list, and was produced by screening historical data. While these issues have a strong dividend history, the current economic climate has drastically changed things; investors need to cautious. Higher yields are a product of the generally distressed stock prices, but much higher yields are a sign of stress. Picking a dividend stock today means picking an issue with current product that produces sufficient cash flow (those words again, get use to them) to cover the business, the dividend and grow both of them. The screened 142 dwindle down quickly as your safety concerns increase, but there are attractive issues on the list, just not the starting 142 click here.
February 9th, 2009 | Posted by stockFrom the stock market to the political world, this past year has demonstrated the folly of plenty of old maxims. Still, credit crisis or not, there’s nothing more reliable than death.
So it was a little surprising to see today Service Corporation International (SCI) warn of falling profits. SCI is the biggest funeral and cemetery company in the world. It owns 1,300 funeral homes and 350 cemeteries.
Death may be inevitable, but the death business apparently hasn’t matched the reliability of other consumer staples like cereal (Kellogg) and shampoo (Procter & Gamble).
SCI lowered fourth quarter earnings guidance, blaming the decline on weaker pre-need cemetery sales and lower income from trust funds. The stock plunged 13% on Feb. 9 to a share price of 4.25, and all told shares are off 63% in the past 12 months.
A heavy debt load seems to be a problem for SCI. And, Raymond James (RJF) analyst John Ransom sees the firm’s recurring free cash flow plunging, from $252 million in 2007 to an estimated $184 million in 2009.
However, Ransom reiterated his “strong buy” rating on the stock, citing its “attractive valuation.”
Traders Hope Jobs Report Hurries Stimulus
February 6th, 2009 | Posted by stockThis stock market demonstrates, over and over again, the degree to which bureaucrats and legislators in Washington are influencing trading lately as much (and maybe more than) earnings figures and economic data are.
Today a brutal report showed the U.S. economy lost 598,000 jobs in January. The unemployment rate rose from 7.2% to 7.6%.
And yet stocks rallied on the news. Why?
“The only ‘positive’ of today’s report is that these ugly numbers put even more pressure on policymakers to finally agree on fiscal measures to stop the downward spiral of the economy,” wrote UniCredit economist Harm Bandholz in an instant analysis of the numbers.
I talked with Univest chief economist Gary Wolfer, and he agreed. This week the Obama administration’s political situation got shakier, and support for a stimulus package looked like it was fading a bit.
Now, the jobs numbers are “going to force the hand of the Senate,” Wolfer says. He and other market participants have plenty of criticisms of the stimulus proposals — Wolfer thinks it doesn’t contain enough infrastructure spending and too many extraneous items.
But, he says: “Any stimulus is better than none.”
A major worry remains that it might not be enough.
I like Felix Salmon’s take on the jobs report:
I still think that things are going to get worse before they get worse: I just can’t for the life of me see the engine for any recovery. Certainly the stimulus bill isn’t going to do it on its own — the economic problems facing the US are so large that the government can at best only try to make things slightly less bad than they otherwise might have been.
For workers and long-term investors, complaints about the stimulus proposals are worrying. (And those complaints are all over the map — that bills contain too many tax cuts and not enough, that they’re too large and too small, etc.) All that criticism highlights the possibility that the stimulus plan might not work. Job losses could continue and earnings could continue to slide lower.
Still, traders in the market are betting that, for stocks, some stimulus from the government is better than nothing. And the sooner the better, please.
February 4th, 2009 | Posted by stockPieces of good news do come along every once in a while to lift investors’ spirits. But these items are often shadowed by bad news. Consider the following from the past week or so…
Good news: Small-cap stocks — at least those outside the U.S. — outperformed large-cap stocks last month. The Russell Global ex-U.S. Small Cap Index was up 6.1% in January while Russell’s large cap index dropped 8.9%. Why is this good? Small stocks are often “early cyclical stocks” and, Rob Balkema, a Russell Investments analyst says, “the leaders off the bottom of a market downturn typically are early cyclical stocks.”
Bad news: In the U.S., large caps beat out small caps in January. Furthermore, the S&P 500, the broad U.S. index, dropped 9% in January. The so-called “January Barometer” says the S&P’s performance in January is a good guide to its performance for the whole year. According to the Stock Trader’s Almanac: “The indicator has registered only five major errors since 1950 for a 91.4% accuracy rate.”
Good news: The U.S. Senate confirmed Timothy Geithner as Treasury Secretary, meaning the Obama administration can get serious about ending the financial crisis.
Enrique Chang, chief investment officer at American Century Investments, sums up the optimists’ case:
With each passing day, the challenges we face are running their course and government countermeasures are gaining traction, bringing us closer to the market and economic turning points we are anticipating and preparing for.
Bad news: General frustration that it’s taking too long, and worries governments aren’t doing enough. Deutsche Bank’s economics team, led by Peter Hooper writes:
Unfortunately, progress toward implementing rescue plans falls well short of the ideal on a global scale. The US may come closest, but even there the opposition of voters runs high and the pending
legislation could be weakened further in response to political opposition. Overall, we see the risks of insufficient action on the financial front rising, and with them the risks that the global economy will be mired in a prolonged period of sluggish growth.
Good news: M&A dealmaking bounced back in January, when global investment banking volume was higher than in any month since September, according to Thomson Reuters. If deals are happening, that’s one sign of optimism from the world’s bankers, executives and corporate boards.
Bad news: Global investment banking volume in January of $705.8 billion still was 22.4% below a year ago. Also, $64.6 billion of that volume came from the proposed acquisition of Wyeth (WYE) by Pfizer (PFE). That deal may not be representative of more deals to come.
Recent Blog Posts:
Popular Blog Posts:
Subscribe to our RSS