U.S. stocks bounced yesterday, nearly erasing the prior session’s losses, after the latest regional factory survey and pending home sales beat expectations.  The major indices went positive out of the gate and the rally gained ground after those economic reports were released – they essentially offset a weaker-than-expected jobless claims reports (more on this data beyond the click). 

However, the credit market didn’t follow suit as the Treasury market rallied again (the safety trade), investment grade corporates sold off a touch and European sovereigns traded lower. 

Financials, industrials and energy led the broad market higher.  Consumer staples, utilities and telecoms were the day’s laggards but even these groups (two of which are the best-performing sectors for the year) posted nice gains. 

Despite the upswing in stocks, and the basic materials group outperforming the broad market, the commodity complex traded lower.  Nickel, natural gas, hogs and gold led the CRB Index lower.  Gold has taken a beating over the past six weeks, down 14% -- and 18% off the peak hit in August.  That’s the steepest decline for gold since 2008 when all chaos broke loose and traders/investors sold anything they could.  

Read More...

U.S. stocks began the session slightly higher yesterday but quickly reversed course, along with European stock and bond markets, to close near the day’s low.  Those European markets also spent their early session a bit higher after a successful Italian 90-day auction sent yields lower (bond prices higher), for a spell.  But when the rally evaporated, yields backed up again and it adversely affected stock markets.

The euro got clocked after the latest weekly ECB report was released, showing the balance sheet continues to explode (more on this below).  EUR/USD is down to 1.29 from the 1.34 a couple of weeks back and the 1.48 back in the summer.  So this has sent the Dollar Index screaming higher and that alone will cause a stock sell off as computer-generated algorithmic trading platforms are set to sell when this occurs. 

All 10 of the major sectors lost ground for the day, led by basic material, energy and financial shares.  Consumer staples, utilities and telecoms outperformed, but they too closed lower. 

The commodity complex traded higher early, but along with stocks lost steam to close near the session’s low.  And that includes crude, which slipped back below the century market, closing at $99.52/bbl, after nearly hitting $102 in the early trade.

Well, yesterday we talked about how the Bank of Japan was blaming weak global growth on their recent economic woes.  I should mention that the Japanese economy has been stagnant for 20 years so blaming their woes on anyone else is pretty laughable.  But for whatever reason, their latest data continues to look pretty dire.  Household spending fell 3.2% in the latest month (down 13 of the past 14 months) and industrial production declined 2.6% (flat since March).

And moving on to Europe, one learns to views certain things immediately when they come in these days.  The things to watch are always changing, but what’s been a main beacon for a while is the Italian yield curve – and the focus is really on the long end, viewing to see if that yield has bounce back to 7% or to have eased back closer to 6.50%.  That’s the level to watch because many people believe that that country cannot manage around its debt problem if that cost of money.   More beyond the click.

Read More...

U.S. stocks were able to buck a downward bias among Asian bourses (the night before) for much of the session, but another ugly close in Europe (as those bourses lost all of their early momentum) resulted in the same late-session weakness here.  Most of the major indices did manage to close higher though and that means the latest bounce was extended to five sessions.

Utilities were the day’s clear winner with telecoms, consumer discretionary, energy, tech and health care also closing positive. The losers were financials, industrials, consumer staples and basic materials.

Putting pressure on those Asian bourses was a comment from the Bank of Japan, which warned of more downside risks to their economy from other parts of the world.  That’s a pretty amusing comment as it comes from a poster child of economic stagnation, and for 20 years now.  It’s only real rival in this respect (and we’re talking about the developed-market world) is Italy.  

The price of crude has powered back above $101/bbl -- it’s been quite the rollercoaster: falling to $75 in early October, rebounding quickly to $103 by mid November, back down to $92 by December 16; and back to triple digits again.  This latest move above the century mark appears to be largely on Middle East concerns.  It took all of about two days following our official end to military activity in Iraq for a new level of chaos to ensue.   The Iranian’s have clearly been instigating the violence.  In addition, they’ve increased their military exercises in the Strait of Hormuz and their Vice President stated yesterday that they’d do what they can to close that pass if the West increases sanctions on the country. 

Read More...

Major U.S. stock indices continued their latest bounce as a good jobless claims report was able to offset a lower revision to Q3 GDP.  This three-session bounce in stock prices, mostly due to Tuesday’s 3% move, has reduced the correction (from the three-year high hit on April 29) back to just 8% -- thanks Santa!

Now, the reality is growth is much too soft to propel payrolls in the substantial and consistent manner needed to repair the job market – specifically, the long-term jobless problem.   Nevertheless, initial jobless claims have suddenly slid to their lowest level since July 2008 and that should result in a respectable December payrolls report.  (More on GDP and jobless claims beyond the click)

Financials and energy led the market higher.   Consumer staples and utilities were the day’s laggards – staples being the only group to actually close lower.

Oh, and joy of all joys, last evening Congress decided to extend the payroll tax reduction through February.  Yes!  We can now revisit this circus, among many other comedies, in about 60 days.

Read More...

U.S. stocks held in there quite well yesterday considering that over 500 euro-zone banks felt the need to take advantage of the ECB’s latest lending facility (for a grand total of €489 billion) and we were coming off of a big bounce the day before.

There are also signs that France will see its credit rating downgraded from AAA status, which has meaningful consequences for the size of its bailout fund.  The fact that Italy has fallen back into contraction doesn’t help matters. (Italy and Spain are responsible for 30% of the guarantees on the very bailout fund that is tasked with saving them if need be – how’s that for a laugh..or cry?)

Utilities, energy and consumer staples led the broad market to its gain.  Unusual to have a cyclical like energy join areas of safety but crude returned to $99/bbl after the latest energy report showed a huge drawdown in stockpiles – a seasonal thing as we typically export more oil at the end of the year, but it was more than analysts were expecting.

That thumping the housing market has taken over the past few years was harder than previously believed as the National Association of Realtors (NAR) revised existing-home sales back to 2007 down by 14.3%, or 2.9 million units.  More on this beyond the click…

Read More...

U.S. stocks bounced on Tuesday as the ECB’s new liquidity program officially began and yields on Spanish and Italian sovereigns slid (prices up).  A better-than-expected housing starts number also helped to juice traders’ optimism…we get into the details and the flawed interpretation of the report beyond the click.  Yesterday’s rally was enough to erase the losses of the past week, sending the broad just above where it closed a week ago Monday.

Energy (as oil jumped back above $97/bbl), basic materials and financials led the rally.  Consumer staples, telecoms and health care were the laggards – but even these groups bounced by roughly 2%.

So Tuesday’s letter was titled Draghi-ed Lower as ECB President Draghi’s comments on the state of the eurozone economy was a drag on stocks.  But yesterday was another day as his latest liquidity injection program (can you call it liquidity when this funding last for three full years now?) officially kicked off.  (And this morning we find that euro-zone banks took €489 billion in the largest ever single ECB operation yet.)

In addition to those negative comments on the state of the continent’s economic situation, Draghi also reminded euro-zone banks that they can use the funding via the new three-year liquidity program to buy sovereign debt (wink wink).  For one day the plan is worked as long-term Spanish and Italian yields fell and short-term yields plunged.  For instance, Spanish three-month bills rallied to the point that sent the yield to 1.74% from nearly 5% a week ago.  Italian bills didn’t improve quite so much, but still substantially, as those yields fell from 4.50% to 2.30%. 

Continued below the click…

Read More...

U.S. stocks began the session higher for a third-straight day but erased those gains yet again, this time taking it a bit deeper to actually close lower – in the previous two sessions the broad market found a way to hold onto enough of the gains to close positive.

The out of the gate rally appeared to be more of a follow through from gains in European bourses, but those stock indices began to falter after ECB President Draghi repeated his view that the eurozone won’t escape recession, and our indices mirrored the move.  There’s not much sign of that Santa Claus rally, maybe he’s said it just isn’t worth it, content with an extended period of jobless benefits.

Health care and consumer staples outperformed but couldn’t totally shake the overall decline as they closed slightly lower.  Financials, basic materials and energy were the heavy laggards.

In the world of commodities, the precious metals complex failed to gain any traction yesterday even as the CRB managed to rebound a bit (the CRB is an index of 19 commodity prices).  Gold has taken a beating over the past couple of months, trimming its 2011 gain to 12%.  Silver has been lambasted by 33% from its peak hit in August, down 7% for the year.   Crude rebounded a touch to $93.88/bbl, down from over $100 a week ago.  Wholesale gasoline halted a four-session decline that was good for trimming 14 cents from the price to settle at $2.49/gal.

I listened to much of that Draghi press conference yesterday and in addition to his views on the euro-zone economy, he also made a point of advising that automatic regulations are not triggered when/if more banks/governments have their credit ratings cut.  Some of those regulations mean higher capital requirements, collateral calls and margin rates. This was on top of the statement early in the day (touched on in yesterday’s letter) when he reminded banks that they can fund more sovereign debt purchases with the new and elongated ECB liquidity programs – a tacit call for them to engage in a carry trade with this very cheap and abundant funding.  (That is, use your ugliest collateral to borrow at a nothing rate from the ECB and use those funds to buy sovereign debt at yields considerably higher – which consequently results in adding more ugly collateral back onto your bank’s balance sheet).  It appears he’s moving to desperation mode.

Shifting to Congress and the fate of the payroll tax cut and extended jobless benefits beyond the click...

Read More...

Major U.S. stock indices ended mixed on Friday as another early rally fizzled (Dow up 99 points out of the gate) along with key sovereign bond prices within the eurozone.    For the week, the broad market gave back 2.83% for its first weekly loss in three.

Energy and basic materials finally found a little breathing room, leading the gainers for the first time in several sessions.  Utilities (only sector to close negative), health care and consumer staples were the laggards.

Italian, Spanish and French bonds yields declined (prices up) for most of the European session on Friday as it looks like what Barclays Capital called a “backdoor bazooka”  began to show itself.  That is, the ECB’s new lending facility (a facility that takes central-bank liquidity enhancement to a whole new level as it offers loans for up to three years now) has resulted in a new carry trade – borrow from the ECB at essentially nothing and buy sovereign debt that offers considerably higher yields.

Now, I can’t know if this is actually happening, but as we’ve seen in the past every improvement in these sovereigns has been driven by some sort of ECB action – which is exactly why the rallies have been short-lived.  But if it’s not this new carry-trade that people are saying is underway, then it’s simply about the ECB more directly buying this paper in the secondary market.  However, this didn’t help these sovereigns from selling off again late in the European session as Italian, Spanish and French bonds backed back up (prices lower/yields higher).

So overall it was a failed attempt, but the Draghi is becoming more Bernanke-like and attempting to manipulate the markets further – evidenced this morning by his statement that banks can use these loans to buy government bonds.  He can’t force the banks to do so, and due to the trouble they’re in I highly doubt they’ll take on more exposure, but the wink-wink statement has helped these bonds to rally again this morning.  We’ll see if the rally has more staying power than it did on Friday.

And moving on to Asia, as everyone knows by now Kim Jong Il is dead, making way for his third son Kim Jong Un to take over.  Will this new Little Kim live up to his name as become the Un Il?   I doubt it, he’s probably just as ruthless and ill-intentioned, but time will tell.  It’s just one more uncertainty we’ll all have to deal with.

Read More...

In bonds it was yet another year of miserably low rates brought on by even more easing from the Fed. The “extended period” language that had been the main focus of the Fed statements for over a year was exchanged for the more aggressive “at least through mid-2013” language. Operation Twist was brought on to move the average maturity of the Fed’s portfolio further out the curve to bring down longer term interest rates. The Fed’s involvement with the Euro crisis is probably unfinished, but they have already made steps toward improving liquidity conditions overseas.

Read More...

Some people are obsessed with dividends, especially in a low interest rate environment like we have today.  A common mistake is fixating on the yield of a stock or exchange-traded fund (ETF) rather than thinking about total return.  As a stock investor, you risk your capital by taking ownership in a business and receive a return in the form of dividend payments, capital appreciation, or both.

Cash dividends aren’t the only way companies return earnings to investors.  One of the most overlooked by dividend junkies are share repurchases.  From a management perspective, share repurchases are an increasingly popular method of returning capital to shareholders due to the flexibility it provides with future payout policy.  Because cash dividends are considered a long-term commitment, there are dire consequences for a company that reduces or eliminates that payment.  Alternatively, share repurchases are temporary and allow companies to respond to changes in the economic environment.

Think back to 2008 when companies were squeezed for cash due to economic turmoil.  Those that slashed their dividend were punished by investors selling their shares, which caused a drastic drop in the company’s market value.  Companies that continued to pay cash dividends but reduced or eliminated share purchases did not experience the same sort of investor exodus.  It should come as no surprise that the reduction in total dollars spent on share repurchases was far greater than the total dollar reduction to dividend payments among U.S. companies that year.

From an investor perspective, I’m going to skip over a lot of theory to prevent boring you, but know that a rational investor should be indifferent to whether a company spends $1 on a cash dividend or a share repurchase – both methods reduce cash on the balance sheet and both transfer value directly to shareholders.  Unlike a cash dividend, share repurchases only provide current income to the investors that sell their shares back to the company.  However, investors that keep their shares following a buyback end up with a larger claim on the company’s future earnings, and theoretically the higher earnings per share should translate into a higher stock price (capital appreciation).

There is also a tax component to the dividends versus share repurchases discussion.  Historically dividends have been taxed at an investor’s ordinary income tax rate, while long-term capital gains were taxed at a lower rate.  This would normally make share repurchases more tax efficient, but currently dividends are long-term capital gains are taxed equally – that may change if there is tax reform in 2013.  Investors may still prefer capital gains over dividends in today’s tax environment because of the control over the timing of your tax liability (you are only taxed when you sell your shares).

Dividends are a good indicator of a company’s health, but they may also be a sign that management can’t find attractive investment opportunities for growth, thus cash is paid in lieu of expansion.  Consequently, this has an impact on a company’s potential for capital appreciation.

There are other ways management can enhance shareholder returns.  For example, shareholders may be better off without dividends or share repurchases if management can use earning to fund projects at a lower cost and/or earn a higher rate of return than they could using external funding like issuing bonds or new stock.  Another indirect reward to shareholders is using earning to pay off outstanding debt, especially if it lowers the cost of funding future expansion.  These actions enhance the value of the company, which leads to the capital appreciation component of total return that so many dividend junkies ignore.

The point here is not to be anti-dividend when selecting investments, but instead to bring some perspective to investors only looking at the dividend yield when making investment decisions. Your primary concern should be total return, not just the quarterly cash payment.

Read More...