Replies to post #3270 on The Rising Influence of Rising Affluence

[DewDiligence]

Abbey Joseph Cohen’s comments in today’s Barron’s:

http://online.barrons.com/article/SB50001424052702303960104576498613736669414.html

›At current prices, the market already has factored in significant [future] weakness in economic activity and corporate profits. In the U.S., P/E ratios are down to about 12 times S&P 500 earnings for the next 12 months. This is notably below the historic average of about 17 to 18 times earnings. That shows a risk aversion, an uncertainty that isn't dissimilar to what we saw in the spring of 2009 [which proved to be a great buying opportunity for stocks (#msg-35980601)]. But the U.S. banking sector is in much more solid condition now than then.

In the view of our U.S. portfolio-strategy team, the S&P 500 should be at about 1400 by year end [i.e. 19% above the current level]. This number had been at 1450, but we revised our economic forecasts around the world last week in light of growth and earnings expectations for 2012. Even with these changes, global growth will be well in excess of 4% next year, so we aren't expecting a global recession. Our 2012 U.S. GDP forecast is at 2.1%, and for Europe, 1.4%.

We maintain a constructive view of China and the other so-called BRIC nations [Brazil, Russia, India and China]. The decline of commodity prices in the past several weeks may be helpful for these nations. China will benefit from the decline in oil and metals prices. India will be benefiting from a decline in food prices.

Goldman Sachs analysts expect crude prices to rise due to supply constraints. They like ExxonMobil [XOM], which has been under pressure. The stock has a 2.8% dividend yield and trades for 7.3 times 2011 earnings. Return on equity exceeds 25%.

Wells Fargo [WFC] exceeded expectations in the second quarter, reflecting its progress in reducing costs and deploying capital. Nonperforming assets are shrinking. The company repurchased shares, yet still is likely to increase its excess capital. The current P/E is 7.8, and dividend yield is 2.1%.

Pfizer [PFE] has performed poorly, yet there have been few new fundamental concerns. Pfizer has significant and rising cash balances, and a management team committed to spinoffs, dividend increases and share repurchases, and improving R&D [research and development]. The stock yields 4.7% and the P/E ratio is 7.5.‹

[DewDiligence]

The Sunny Side of Doom and Gloom

http://www.nytimes.com/2011/10/23/your-money/pessimism-can-be-the-stock-markets-best-friend.html

›October 22, 2011
By PAUL J. LIM

Since the market ran into serious trouble during the summer, the Standard & Poor’s 500-stock index has clawed its way back to the 1,200 level on four separate occasions. On the first three runs, the rallies quickly lost steam amid fresh sets of worries about the global economy.

No wonder that investors have shown little confidence in the staying power of the latest rebound, which since Oct. 3 has lifted stock prices by 13 percent [+15% since the intraday low on Oct 4], leaving the S.& P. at 1,238. Last week, the Investors Intelligence adviser survey, a widely followed gauge that tracks the opinions of more than 100 independent investment newsletters, showed that bears continued to outnumber bulls even though the index had climbed almost half the way back.

But sentiment can be a funny thing. The best thing that Wall Street may have going for it right now is that so many investors are pessimistic. That’s because the mood in the market is often regarded as a contrarian indicator of future activity.

In late April, for example, the number of bullish newsletter advisers outnumbered bears by a ratio of three to one — with 54.3 percent of advisers expressing optimism at the time and 18.5 percent being bearish. That sense of hope was registered just as the market peaked and started its worst slide since the financial crisis, dropping 19.4 percent by early October in what some strategists have considered to be a bear market. (In recent years, a bear market has often been defined as a 20 percent drop in prices, based on daily closing values.)

Conversely, in the logic of contrarian thinking, negativity can be a very good thing. “When you see high levels of pessimism, it can be a sign of a market bottom and signal that there’s lower risk to buy,” said John Gray, co-editor of Investors Intelligence.

Sentiment indicators for consumers are often regarded as a good way to capture the emotional state of households — yet they’re often wrong when it comes to predicting how families will really behave.

Here’s a case in point: The most recent Reuters/University of Michigan consumer sentiment survey, released on Oct. 14 showed that the mood of households continued to worsen in mid-October, even as the stock market showed new signs of life.

“Consumer confidence is inching itself deeper into the recession zone,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. Yet the most recent government data show that retail sales jumped a larger-than-expected 1.1 percent in September. In short, actual consumer spending would seem to point to a much rosier economic outlook, which in turn should help support hopes for a more stable stock market.

Jeffrey Kleintop, chief market strategist at LPL Financial, says the recent mood of households doesn’t seem to reflect some of the positive economic numbers that have been released lately.

“The data on earnings, the economy, and the news out of Europe is not great,” he says. “But it is great relative to sentiment.”

He adds that “the only time the gap between economic data and economic sentiment was as wide as it was in the past couple of months was in late 1999 and early 2000 when the opposite of the current situation was the case: sentiment was much more positive than the data.”

It’s not just retail spending that market strategists are watching.

Despite concerns about the outlook of consumers, the S.& P. 1500 retail index has showed surprising strength this year — it is up more than 7 percent. In fact, this group of stocks is only around 2 percent below its record high.

Similarly, the S.& P. consumer discretionary index — which tracks shares of S.& P. 500 consumer companies that make goods that households want, not need — has soared 16 percent since the market bottomed on Oct. 3, outpacing the broad market.

“This does point to the expectation now, at least from investors, that we are going to avoid a new recession,” said Doug Ramsey, chief investment officer at the Leuthold Group, an investment management and advisory firm.

To be sure, this doesn’t necessarily mean that the stock market has regained its footing. Historically, Mr. Ramsey notes, the severity of bear markets that are associated with recessions is actually quite similar to downturns that occur during times of economic growth.

Nor does it mean that the recent bout of market volatility will be over soon.

But it does mean that the gloomy mood among many investors could turn out to be good for the market in the short term.

In the long run, will that be enough to counteract the real economic worries that are weighing down the market, particularly the continuing fiscal mess in Europe? That’s a discussion for another day.‹

[DewDiligence]

3Q11 Profits Rise Sharply Despite Modest Increase in US GDP

http://online.wsj.com/article/SB10001424052970204531404577053910216209718.html

›NOVEMBER 22, 2011, 12:06 P.M. ET
By JEFFREY SPARSHOTT And JEFF BATER

Corporate profits in the U.S. rose even as the economy grew less than initially thought during the third quarter as companies fought through a tepid recovery.

Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 2.0% in the July to September period. While still the strongest performance of the year, the Commerce Department's second estimate of GDP is lower than the advance estimate of 2.5%. Economists surveyed by Dow Jones Newswires expected a revised figure of 2.3%.

A big downward revision to inventory investment--and smaller adjustments to business investment and consumer spending--dragged down the GDP number.

Despite a slow recovery, corporate profits--after tax and unadjusted for inventories or capital consumption--rose at a 6.5% seasonally adjusted rate compared with a year earlier, the Commerce Department said in its first estimate for the quarter. Profits were up 2.5% from the prior period, the third consecutive quarterly increase. Even as many corporate balance sheets appear healthy, the economy's slow pace of growth hasn't been enough to bring down unemployment much or boost wages. The unemployment rate was 9.0% in October and has been stuck close to that level all year.

That's frustrated some policy makers.

"I am deeply unhappy with the current forecast of prolonged high unemployment, and will continue to review whether there is more that we could do that would bring more benefit than cost," William Dudley, president of the Federal Reserve Bank of New York, said last week. "We are not out of ammunition."

One possible step: the Fed could buy more mortgage-backed securities to revive the ailing housing market.

Still, some at the central bank are worried that new measures would fuel higher inflation, and it's not clear if the Fed will take additional steps.

The core inflation rate--which excludes volatile moves in food and energy prices and is closely watched by the Fed--increased 2.0% from the previous quarter. That was revised down from an initial estimate of 2.1%.‹

[DewDiligence]

Stocks Close at 4-Year High

[Actually, not quite. Although the DJIA closed at the highest level since 2008 and the Nasdaq closed at the highest level since late 2000, the S&P 500 remains about 2% below its May 2011 high. (Including reinvested dividends, the S&P 500 is very nearly even with its May 2011 high.)]

http://online.wsj.com/article/SB10001424052970203711104577200541043672370.html

›FEBRUARY 3, 2012, 4:22 P.M. ET
By CHRIS DIETERICH And CHRISTIAN BERTHELSEN

Stocks rose after the U.S. economy added more jobs than expected last month, driving the Nasdaq Composite to an 11-year high and pushing the Dow to its highest reading in almost four years.

The Dow Jones Industrial Average advanced 154 points, or 1.2%, to 12859, its highest close since May 2008. The Standard & Poor's 500-stock index tacked on 19 points, or 1.5%, to 1345, for its fifth straight weekly gain.

The technology-oriented Nasdaq Composite Index gained 46 points, or 1.6%, to 2906, its highest level since December 2000. The Nasdaq is off to its best start to the year since 1991, up 12%.

All 10 of the S&P 500's sectors rose Friday, with financials and consumer-discretionary stocks leading the way. Among blue chips, Bank of America rose 5.2% and Caterpillar added 3.3% [see #msg-71486409, #msg-71610153].

Friday's gains followed a strong employment report from the U.S. Labor Department. January data showed nonfarm payrolls rose 243,000 last month, marking the biggest gain since April. The jobless rate fell from 8.5% to 8.3%, the lowest it has been since February 2009.

Stocks popped higher at the open and cruised along in positive territory all day.

"The data seem to show the economy is mending a bit faster than it was a year or two years ago," said David Resler, chief economic adviser for Nomura Securities.

The Stoxx Europe 600 rose 1.7%, closing at a six-month high. Asian bourses were mixed, with Japan's Nikkei Stock Average down 0.5% and China's Shanghai Composite up 0.8%.

Gold futures dropped 1.1% to $1,737.90 a troy ounce, while crude-oil prices rose 1.5% to $97.84 a barrel. The dollar gained against the euro and yen. The yield on the 10-year Treasury rose to 1.936%.

In corporate news, Genworth Financial swung to a fourth-quarter profit as the insurer enjoyed net investment gains rather than losses and reported lower policy benefits. Shares climbed 14%.

Gilead Sciences' fourth-quarter earnings rose 5.7% as the biopharmaceutical company's product sales continued to rise and it no longer booked deep reductions in royalties. Shares gained 11%. [LOL—they missed the HCV impetus for today’s move.]

Wynn Resorts' fourth-quarter profit climbed 67% on a tax benefit and as the casino operator's Macau operations continued to post revenue growth, yet a battle between Chief Executive Steve Wynn and a shareholder overshadowed the results. Shares fell 4.8%.‹

[DewDiligence]

Stocks Close at 4-Year High

[Last time I posted this headline (#msg-71706580), it wasn’t quite true because the S&P 500, including reinvested dividends, was only about even with its May 2011 level. Now, including reinvested dividends, the S&P 500 is clearly above its May 2011 level and is higher than it has been at any time since late 200*7*. Has anyone heard from Noriel Roubini lately?]

http://online.wsj.com/article/SB10001424052970203918304577242812623597038.html

›FEBRUARY 24, 2012, 4:25 P.M. ET
By CHRIS DIETERICH

The Standard & Poor's 500-stock index squeaked out its highest close since 2008, as most stocks traded higher after better-than-expected reports on home sales and consumer sentiment.

The Dow Jones Industrial Average fell 1.74 points, or 0.1%, to 12982, after reaching above the 13000 mark earlier in the session. The S&P 500 tacked on 2.28 points, or 0.17%, to 1365.74, its highest close since June 5, 2008.The Nasdaq Composite added nearly seven points, or 0.2%, to 2964.

Technology and utility stocks led the advance, while financial stocks lagged behind. American Express topped the Dow, up 1.1%, while Hewlett-Packard fell 1.3% to weigh on blue chips for the second consecutive session.

Stocks edged higher after upbeat readings on the U.S. economic data front, but gave up gains in the afternoon.

"It's another day with not a lot of catalysts, not a lot of action. On days like today, relatively modest-sized orders can move the market," said Steve Sosnick, equity risk manager at Timber Hill LLC/Interactive Brokers Group LLC.

Data showed U.S. consumers turned more upbeat about the economy at the end of February. The Thomson Reuters/University of Michigan consumer sentiment index rose to 75.3, better than the 73 expected by economists surveyed by Dow Jones Newswires. Sales of new homes fell in January, but managed to beat expectations.

European markets were broadly higher. The Stoxx Europe 600 rose for the first time in four sessions, up 0.3%, as investors focused on firm economic data and earnings as concerns about Greece's debt recede. Data showed that consumer confidence in France rose slightly in February and that Germany's economy contracted marginally during the fourth quarter, in line with expectations. Meanwhile, the Greek Parliament approved a debt-restructuring plan for private bondholders.

Asian bourses also rose. Japan's Nikkei Stock Average rose 0.5% to a 6½-month high, while China's Shanghai Composite added 1.3% to finish a three-month high.

Crude-oil prices [i.e. WTI] climbed to $109.49 a barrel amid fears that cuts in imports of Iranian crude would tighten supplies, while gold prices slipped 0.6%, to $1,775.10 a troy ounce. The dollar rallied against the yen but lost ground against the euro. The yield on the 10-year Treasury note slipped to 1.979%.

In corporate news, American International Group rose 1.7% after the insurer reported a fourth-quarter operating profit late Thursday that was well above estimates, and said it was likely to report sustainable profits in the years ahead. Salesforce.com rallied 9.2% after the business-software maker reported fiscal fourth-quarter earnings and revenue that exceeded forecasts and lifted its full-year revenue outlook.

El Paso rose 1.5% after The Wall Street Journal reported that private-equity firm Apollo Global Management was nearing a deal to buy El Paso's oil-and-gas exploration unit for about $7 billion.

In other deal news, Kenneth Cole Productions ran up 19% after Kenneth Cole offered to take his namesake company private in a deal that values the apparel maker at about $280 million.

Clearwire fell 7.3% after Google, an early investor, said it would sell its entire stake in the wholesale mobile broadband provider at a loss of about $450 million. Clearwire built the nation's first 4G network on a technological standard known as WiMax and provides Sprint Nextel with the speedier data service. Sprint fell 3.6%.

Crocs slid 6.6% after the shoe maker's fourth-quarter earnings topped expectations but its first-quarter earnings outlook was below forecasts.

Chelsea Therapeutics soared 67% after the biopharmaceutical company said a Food and Drug Administration committee recommended the approval of its treatment for neurogenic orthostatic hypotension.

Deckers Outdoor slumped 13% after the footwear maker reported better-than-expected fourth-quarter results and announced a $100 million stock-repurchase program, but provided a disappointing full-year earnings and revenue growth outlook.

Rubicon Technology reported on Thursday that its fourth-quarter profit dropped 94% as weak demand continued to hurt the electronic-component supplier's sales. Shares fell 19%.‹

[DewDiligence]

U.S. Companies Strike Prophets

[A clever play on words by the WSJ!]

http://online.wsj.com/article/SB10001424052702303990604577368403618790154.html

›April 26, 2012, 5:53 p.m. ET
By JUSTIN LAHART

The first quarter hasn't provided the comeuppance for corporate results it was supposed to.

With companies topping analyst estimates by an unusually wide margin, profits look far healthier now than was expected earlier. For S&P 500 companies, first-quarter earnings now look set to rise 6.3% from a year earlier, according to Standard & Poor's Capital IQ. That is up from a projected increase of just 0.9% as expected at the end of last month.

Concern that companies might beat estimates, but then signal future weakness, also appears to have been misplaced. With around half of S&P 500 companies having reported, analysts have instead been nudging up estimates for the remainder of the year.

The first quarter's unanticipated vigor owes something to unexpectedly strong results from Apple : Take it out of the equation, and first-quarter earnings growth would be a slimmer 4.2%. Still, an unusually large number of companies have been topping estimates: 70% versus a 10-year average of 62%.

Another reason to cheer: The stronger earnings appear to have resulted not from more cost cutting but better sales.

Revenue growth for S&P 500 companies looks set to reach 6.2%, rather than the 5.5% analysts expected in March. That is a smaller shift than what's happened with earnings, but it's important to remember how sensitive earnings are to even slightly better sales.

All this suggests that a better outlook for the U.S. economy has so far trumped a worse one abroad [that’s only half right—many US companies are benefiting from strong growth in emerging markets]. The new refrain from companies has been that despite challenges in Europe and Asia, their U.S. business shone.

Weakness overseas hurt UPS, for example, which reported results Thursday that fell short of expectations. But it raised estimates for its package business at home. "We feel that the momentum in the domestic business continues unabated, so we feel good about the U.S. economy," said CFO Kurt Kuehn on the company's earnings call.

In and of itself, such optimism may bode well for the U.S. economy, since companies tend to hire and spend where things are getting better. It also suggests that companies conducting a large portion of their business within the U.S. are good investments—a lesson surely not lost on Italian automaker Fiat, which Thursday posted a first-quarter profit that would not have existed but for its majority stake in Chrysler Group.

Meanwhile, although earnings have beaten expectations from the end of March, the S&P 500 has fallen since then and now trades at 13.2 times expected 2012 earnings. One can't run a counterfactual analysis on where stocks would be if the European crisis hadn't flared up again, but better earnings plus lower prices mean a cheaper stock market.‹