A surprise increase in consumer sentiment last week was not enough to offset lackluster Chinese economic data, ongoing worries over economies and elections in the euro zone, as well as a $2 billion trading loss at JPMorgan Chase (widely considered the best in the business).

The Dow Jones Industrial Average lost 1.67% to 12,821 (its worst week of the year). The NASDAQ Composite fell .76% to 2934 and the Standard & Poor’s 500 Index dropped 1.15% to 1353. Amongst the S&P 500 sectors, materials led on the downside while telecoms finished higher.

While down weeks are never pleasant, Bulls can take comfort from the fact the major stock market averages did not fare worse. It was not long ago when negative news out of China and Europe, along with an unexpected trading loss at a major financial would have really cratered the markets. It is a bad sign when markets decline on good news. It is a sign of strength when markets are able to take bad news somewhat in stride.

In a drop that is generally more pleasant, the price of oil fell 2.4% for the week and is currently at the lowest level of the year. Crude oil for June delivery settled at $96.13 in the New York Mercantile Exchange.
Looking to the week ahead:

*Minutes from the Federal Reserve’s late April meeting are released on Wednesday and Wall Street will be focusing on the probability of further stimulus options.

*Economic data to watch include (along with consensus estimates) April Retail Sales (.2%), April Housing Starts (685,000), April Industrial Production (+.6) and the May Philadelphia Fed Survey (10.0).

*This is what we refer to as “retail week”, when a batch of major retailers report their earnings results – including Home Depot (.65), J.C. Penney (-.10), Limited Brands (.40), Target (1.01), Staples (.30), Dollar Tree (.97), Sears Holdings (-.67), Gap (.46) and Wal-Mart (1.04)

As always, don’t hesitate to contact us with any questions or concerns you may have.

Best – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

With over 400 S&P 500 companies having already reported their earnings results for the first quarter of 2012 – we see that 72% of them have exceeded estimates and that the blended earnings growth rate is 6.4% (according to data from FactSet Research). It was only a few weeks ago that the street was anticipating little or no growth in earnings. So contrary to what most were expecting, it looks like another solid quarter for corporate profits. The recent jobs data however, is not so encouraging.

While the initial weekly jobless claims report was a little better-than-expected, the latest ADP employment report was much weaker-than-expected. Most disappointing was the April Nonfarm Payroll Report released on Friday by the Department of Labor indicating that nonfarm payroll employment rose by just 115,000 – well shy of the 170,000 that was forecast. While the unemployment rate improved to 8.1%, that was largely due to the fact that 342,000 unemployed people gave up looking for work and dropped out of the labor force (thus no longer included in the unemployment rate calculation). With the employment outlook souring and rising worries about Europe – the stock market really took it on the chin last week – as the Standard & Poor’s 500 Index and the NASDAQ Composite posted their worst week of the year.

The Dow Jones Industrial Average lost 1.44% to 13,038. The NASDAQ Composite tumbled 3.68% to 2956 and the Standard & Poor’s 500 Index shed 2.44% to 1369. With the markets taking a breather and flattening out after a nice run, we’d like to take this opportunity to review an options strategy we sometimes recommend, known as covered call writing.

Discussions about options get lengthy and complex very quickly. We neither want to bore you nor bog you down in minutia – so we’ll just present the big picture philosophy and thinking behind this strategy as straightforward and simply as we can. Covered call writing – is an options strategy to make monthly income and limit risk by selling call options against an existing stock position. Using Apple as an example, here is how it would work:*

Apple is currently $565.25 a share, and the Apple June $600 calls are 9.75. So if you hold (or buy shares in Apple) and are willing to sell them at $600 between now and June 16, you will receive an upfront payment of $975 for every hundred shares you are willing to sell at $600. This represents a 1.7% premium for a 6-week time period. The $975 is yours to keep (cash sooner is better than cash later) and so long as you bought Apple below the $600 level, you would make an additional profit on the sale of Apple (while possibly being sold sooner, your Apple stock would be sold at $600 if it was above that when the calls expire). Aside from generating monthly income, selling calls reduce your risk. In taking in 9.75 per share in call premiums for Apple, an investor is making up for a 9.75 drop in Apple stock. If for example you sold a 570 call for 20.75 and Apple dropped 25 points, you would be down a net of 4.25 per share, instead of 25 per share. Like any strategy though, covered call writing has both advantages and disadvantages.

The biggest disadvantage, as you may have already figured, is the limited upside inherent in the strategy. If Apple goes to 650 within the timeframe that you are required to sell it at 600, you will miss out on 40.25 points in gains (remember you got 9.75 for the calls so you would in essence be selling the stock for 609.75). This is a significant negative to covered call writing, and is the reason why we would only select strike prices (the 600 in this example) that are at levels and time-frames we are comfortable with (many choices are available for both months and prices). On the other side of the negative where you sold a stock at 600 that later went to 650, is the case where a stock was sold (via covered calls) at 45 for example, and then later crashed to 20. The call kept you out of a lot of trouble! Moreover, a stock can be sold at a certain price and then move higher later on without a covered call being in the middle of the transaction. Covered call writers are not the only people to have ever sold a stock too soon!

Another common criticism of covered calls, and part of the reason for this discussion is the statement that “I buy a stock that I want to go up,” implying the question of why an investor would consider covered call writing in the first place.

That question strikes us as too narrow and limited. Besides the monthly income and the risk reduction, other scenarios often develop that answer the above question (criticism). Take the case of an investor who bought XYZ stock at 40 and has a price target of 55….with XYZ now at 54 for example, he can sell an XYZ 55 call. This is similar (but not exactly like) placing a sell order at 55, but while getting paid an option premium to do it. So the investor bought a stock, it went up, and now he is trying to generate some income from the position and/or sell it at little higher price.

Additionally, not all stocks are bought because the buyer expects them to shoot up in the next few months. Selling calls on a small hyper-growth company is much different than selling calls on a big cap value stock. Many stocks are bought for their dividend yield, relative safety, and/or their long-term slow and steady growth. Supplementing stock dividends with call premiums strikes us a conservative and often worthwhile strategy, and a way to seek to “manufacture” returns.

Several studies have been done analyzing covered call writing across entire stock indices and over long periods of market history. The usual conclusion is that covered call writing outperforms the market slightly, and does so with much less volatility. Moreover, studies have shown that call writing outperforms even in rising markets (in addition to flat and declining markets were outperformance would be more expected)!

Portfolio management (and call writing) strategies are unique, complex, dynamic and interrelated. It is a disservice to view them in isolation or to criticize income and risk reduction strategies with a generic and simplistic phrase such as “I buy a stock I want to go up”. We guess another implication of that quote would be to discredit dollar cost averaging, or building a position over time…but those are topics for another memo!

If you have any questions about this topic or anything else, please don’t ever hesitate to contact us.

Best – Mike, Tom, Dave

*This discussion was to present an overview of call writing as simply as we could in limited space. Our call example does not describe every possible outcome. Besides the risk tolerances and goals/objectives of each individual, items to consider include but are not limited to: tax considerations, commissions and transaction costs, general market as well as individual stock characteristics and conditions, various options months and strike prices, nuances involved with stock assignments, and the ability to close positions or engage in other offsetting positions.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

Corporate earnings reports look strong. With over half the companies in the Standard & Poor’s 500 Index reporting so far, 78% have posted results that have exceeded Wall Street expectations (compared to an average of 72% over the past four quarters). In looking at revenues we see that 68% of companies have exceeded street expectations, compared with an average of 63% over the past four quarters (according to data from Factset). These earnings and revenue data points are having an impact on the market.

Strong earnings reports last week, led by another blockbuster report from Apple (which earned $11.6 billion on revenue of $39.2 billion), along with a positive interpretation of comments from Federal Reserve Chairman Bernanke led the stock market averages to solid gains.

The Dow Jones Industrial Average rose 1.53% to 13,228. The tech-heavy NASDAQ Composite jumped 2.29% to 3069. The Standard & Poor’s 500 Index climbed 1.80% to end the week at 1403. These gains came despite some formidable negatives.

The Commerce Department reported that the advance reading on U.S. economic growth (GDP) for the first quarter of 2012 came in shy of forecasts. Weekly initial jobless claims totaled 388,000 which was also worse than the market expected. Further, in another sign of European trouble, Standard & Poor’s downgraded Spain’s credit rating. These bearish factors did not hold the equity markets back though, so if you’re keeping score – give the Bull’s the victory.

The battle is back on again this week – we’ll get profit reports from over 100 S&P 500 Index companies along with data on jobs, jobs, and jobs. The ADP Employment Report is due on Wednesday with the consensus forecast at 170k. Initial Jobless Claims data is out on Thursday and consensus is for a reading of 375k. Friday is the government’s report on April Nonfarm Payrolls and Unemployment Rate, where expectations are for 162k and 8.2% respectively.

Have a great week and feel free to contact us with any questions or concerns you may have.

Good Buy – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The quarterly earnings season is off to a good start so far. Of the approximately 20% of the S&P 500 companies that have reported results, 83% have done better-than-expected (according to FactSet). Should this pace hold up, it would be the best beat rate in three years. While earnings have been a positive, concerns about the strength of the U.S. economy and the European debt situation are dampening the mood of the market and acting as a drag. With this tug of war being played out – the stock market finished mixed last week.

The Dow Jones Industrial Average rose 1.40% to 13,029.26. The NASDAQ Composite declined .36% to 3000.45, and the Standard & Poor’s 500 Index gained

.60% to finish the week at 1378.53. Utilities and consumer staples were leaders on the upside, while technology and financials performed the worst. The markets have a full plate on their table in the week ahead.

Nearly 180 S&P 500 companies are scheduled to be report their earnings results this week. The most anticipated report will be from Apple (AAPL) after the closing bell tomorrow. Apple is the biggest company in the world and how it trades often impacts not only the technology sector, but also the market as a whole. Apple is expected to post earnings of $10.00 per share on revenues of $36.63 billion.

Other blue chip names reporting include (along with their consensus earnings estimates): AT&T (T) .57, 3M Company (MMM) 1.49, Caterpillar (CAT) 2.13, Boeing (BA) .93, ExxonMobil (XOM) 2.07, PepsiCo (PEP) .67, Colgate-Palmolive (CL) 1.24, Procter & Gamble (PG) .93, and Merck (MRK) .97. Along with plenty of earnings reports we’ll get input from the Federal Reserve and a handful of various economic data.

The Fed concludes its two day meeting on Wednesday with updated forecasts on the economy and a news conference by Chairman Bernanke. This might be watched more than usual as some weaker economic numbers of late have many wondering about the status of QE3 (QE3 refers to the potential of another round of monetary stimulus by the Fed).
 
Economic data out this week include April Consumer Confidence expected to come in at 69.8; March New Home Sales forecast at 318,000; March Durable Goods Orders which are expected to decline 1.7%; and the advance estimate for Gross Domestic Product released by the U.S. Department of Commerce on Friday, for which the consensus estimate is growth of 2.5%.

Looking at the big picture of where the stock market is right now we see that (based on current earnings estimates for 2012) the market trades at a multiple of approximately 13. This is below the all-time average of 15, and the last 50 year average of 16 ½. In other words, the cost for $1 of earnings is now $13, as opposed to $15 or $16.50 respectively. So from a historical perspective based on the important Price/Earnings Ratio, this appears to be a long-term buying opportunity.

Feel free to contact us with any questions or concerns you may have. As always, also let us know if there are any changes pertaining to your financial situation, your goals/objectives, or your risk tolerances.

Best – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The major stock market averages posted their worst week of the year as European debt fears, slower than expected growth in China, and some tepid U.S. economic data pushed stock prices lower last week. Discouraging data from the prior week also fed into last week’s action. The March Nonfarm Payrolls report showed that only 120,000 jobs were added last month, well short of the approximately 200,000 that was forecast. This data was released by the U.S. Department of Labor when the stock markets were closed in observance of Good Friday, so its negativity wasn’t factored into the market until last week.

The Dow Jones Industrial Average dropped 1.61% to 12,849. The NASDAQ Composite tumbled 2.25% to 3,011 and the Standard & Poor’s 500 declined 1.99% to 1370. All ten S&P sectors finished the week with losses, led lower by energy and financials.

While the markets worried about things such as rising Spanish bond yields, economic growth of “only” 8.1% in China, and weaker U.S. employment figures – a strong start to quarterly earnings season was for the most part overlooked. Companies including Alcoa, Google, JPMorgan Chase, and Wells Fargo all reported results that were better-than-expected. Further, of the 32 S&P 500 companies that have reported earnings so far, 75% have beaten Wall Street estimates (according to data from FactSet). Earnings will really roll in this week.

The week ahead is one of the two busiest weeks for earnings releases during this quarterly reporting period. Nearly one-fifth of the S&P 500 companies are scheduled to report this week. Big blue-chips reporting include “Big Blue” (IBM), Microsoft, Johnson & Johnson, Coca-Cola, McDonald’s, Bank of America, and General Electric. Interestingly, literally no growth is expected for overall earnings this quarter – so it would not take much too pleasantly surprise. When the bar is set low it is easier to jump over!

As always, don’t hesitate to contact us with any questions or concerns you may have.

Best – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The stock market’s gain last week can be attributed in large part to comments from Federal Reserve Chairman Ben Bernanke. Speaking before the markets opened on Monday, Bernanke emphasized that low interest rates are still needed to confront deep problems in the labor market. This strengthened the belief that rates will remain low for an extended period. Further, some market participants interpreted his statements to mean that the Fed is open to another round of monetary stimulus. Better-than-expected increases in consumer sentiment and personal spending reports on Friday also helped feed into the week’s gains.

For the week the Dow Jones Industrial Average gained 1% to 13,212. The NASDAQ Composite rose .77% to 3,092, and the Standard & Poor’s 500 Index increased .81% to 1,408. This was the eleventh weekly gain in 13 tries for the S&P, resulting in its best quarterly performance since 2009. In the holiday-shortened week ahead, employment data is the major report set to be released, while earnings reports will likely be front and center in the upcoming weeks.

March Nonfarm Payrolls are expected to rise by 205,000 and the March Unemployment Rate is seen holding steady at 8.3%. This data is released by the U.S. Department of Labor on Friday however, when the fixed-income markets close early and the equity markets are closed entirely in observance of Good Friday. So we’ll have to wait until the following Monday to see market reaction to the data. After that it’s time to get ready for another season of quarterly earnings reports.

Earnings reporting season for this year’s first quarter “officially” begins on April 10th when aluminum company Alcoa announces their results. This round of reports is not expected to be strong. In fact, the estimated earnings growth rate for Q1 2012 is -0.1%. This is revised lower from an estimated growth rate of 3.0% since the start of the quarter (according to data from FactSet). As always though, markets deal with numerous data points at any given time, and looking at valuation measurements we see that stocks still appear to trade at a discount.

The 12-month forward Price-Earnings ratio (a measurement of how expensive the market is), currently stands at 12.9 – which is below the average forward 12-month P/E ratio of 14.6 over the past ten years (also according to FactSet). So even though the market does not have high hopes for the upcoming earnings reporting season, it is important to consider the level of the market in relative terms. Even after the good run so far this year, we do not believe the market is overpriced.

Have a good holiday weekend and we will be back with or next memo on April 16th. If you have any questions or concerns please don’t ever hesitate to contact us.

Best – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

You know it is not 2011 anymore when a weekly drop of 1.2% for the Dow and .5% for the S&P ranks as the worst week of the year (hence the exclamation mark in the title)! The past week even saw a gain in the NASDAQ, so the overall pain level in the stock market was not too severe. The pain we did get, can be attributed to a combination of things from around the globe.

Weak economic news from the euro zone, fears of a hard landing in China, and a series of data regarding the U.S. housing market that was on balance a little worse-than-expected, were largely responsible for the down week. With its drop of 1.2% the Dow Jones Industrial Average ended at 13,081. The ½ percent dip for the Standard & Poor’s 500 Index put it at 1,397. The NASDAQ gained .4% and finished the week at 3,068.

Generally speaking, the broad market averages are digesting the gains they have made so far this year and pausing to wonder about the direction and magnitude of the next move. Uncertainty regarding global economic growth and the strength of first-quarter earnings results (which are just around the corner) are a couple of things giving the market pause right now. On the bright side, jobless claims data continue to improve (from weak levels).

Initial unemployment claims for the latest reporting period came in better-than-expected (348k actual versus expectations of 355k) and continue to be in an improving trend. For individual companies, Apple was in the spotlight again last week. Apple announced plans to initiate a quarterly dividend of $2.65 per share starting in the fourth quarter of its fiscal 2012, which begins on July 1. Also, Apple authorized a $10 billion share repurchase program set to begin in the company’s fiscal 2013. Turning to the week ahead (the final week of 2012’s first quarter), investors will have a handful of data to sort through.

Tuesday’s release of March Consumer Confidence may give us an indication of the impact that higher gasoline prices are having on the consumer. Expectations are for the index to decline to 70.0 from 70.8 in February. February Durable-Goods Orders are set to be released on Wednesday with expectations for a 3.0% increase. Initial Jobless Claims are released on Thursday and are expected to again come in around the 350k mark. February Personal Income and February Consumption data scheduled for release on Friday are both expected to show improvements from the prior period.

As always, don’t hesitate to contact us with any questions, comments, or concerns you may have. We always look forward to your feedback!

Good Buy – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The Federal Reserve announced last Tuesday that most of the largest U.S. banks passed their latest stress test of how they would fare in another crisis. The Fed said that 15 of 19 banks tested would have enough capital even under a financial shock where equity prices drop 50%, housing prices decline 21%, and the unemployment rate hits 13%. The severe test conditions gave it credibility and reassured the markets that the U.S. banking industry is generally strong.

Passing of the stress test also clears the way for banks to implement some widely anticipated dividend increases and share buybacks. The nation’s biggest bank, JPMorgan Chase was first out of the gate, announcing it is raising its dividend by 20% and authorizing a $15 billion equity repurchase program. Strength in the financial sector (which suffered so much during the Great Recession) was a primary driver behind last week’s stock market gains.

The Dow Jones Industrial Average, led by gains in financial giants JPMorgan Chase and Bank of America, rose 2.4% to 13,233. The NASDAQ Composite gained 2.2% to 3,055. The Standard & Poor’s 500 Index rallied 2.4% to 1,404 as nine of its ten sectors advanced, also led by financials.

Some interesting individual stock stories from last week include Bank of America closing at 9.80 which is nearly double its 52-week low, and Apple crossing the $600 level in intra-day trade during a week when the company’s new iPad went on sale. Switching from the week that was to the week ahead – we see the market will have plenty of data/information to digest.

Some of the focal points include a closet full of housing data, a bellwether earnings report from FedEx, and a series of Fed speeches that the markets will, as always, pay close attention to. February Housing Starts, February Existing Home Sales, and February New Home Sales are generally expected to show some slight improvement. Shipping giant FedEx is expected to post earnings of 1.35 per share on Thursday. This report is widely viewed as a proxy for economic growth and it often influences the broader stock market. As to the Fed speeches, we are not expecting any surprises, but will be watching for any change in tone regarding monetary policy.

As always, never hesitate to contact us with any questions or concerns you may have.

Good Buy – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

Wall Street certainly did not have a Super Tuesday last week – as stocks had biggest drop of the year on that day. The Dow Jones Industrial Average fell 204 points over concerns about things such as global economic growth, the European debt crisis, and rising oil prices. Prior to that, the Dow had gone 45 trading days without a triple-digit point loss, the longest streak in over 5 years. Tuesday’s drop of 1.5% in the Standard & Poor’s 500 Index was its first move down by 1% or more this year. Other days last week made up for Tuesday’s drop though, the jobs data continued to paint an improving picture, and the markets finished basically flat.

The Dow Jones Industrial Average lost .43% to 12,922. The NASDAQ Composite gained .41% to 2,988, and the Standard & Poor’s 500 Index rose .09% to 1,371. The benchmark S&P celebrated an anniversary last week.

Last Friday marked the three year anniversary when the Standard & Poor’s 500 Index posted a 12 year closing low of 675.53 during the depth of the financial crisis. The index has more than doubled since that day. Unfortunately that low point represented a loss of over 50% from the prior high. It is a hard investment/mathematical reality that when a market loses 50% of its value – it takes 100% gain just to get back to even. While the price of the market has doubled since that 2009 low – the valuation has not!

The market is at about the same valuation as it was three years ago and in fact still looks cheap relative to its historical average. The current 12-month forward P/E ratio (a valuation ratio of price compared to earnings) is 12.5, which is below the average forward 12 month P/E ratio of 14.6 over the past ten years (according to data from FactSet Research).

If market participants were valuing stocks at more historically average levels the oft quoted Dow Jones Industrial Average would be around the 15,000 range. Remember that price and value are two different things. When analyzing stocks it is often the case that a $500 stock is “less expensive” than $100 stock. The same applies to the broader market – the price level of an index is properly measured against its level of earnings. So the takeaway is that while market averages may have doubled in price from their panic low – the “price” to buy those averages certainly has not. Buying equities today does not mean you are paying double (relative to earnings) what you were three years ago!

Best – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The major stock market averages ran their engines mostly in neutral last week and finished little changed. The Dow Jones Industrial Average lost .04% to 12,978. The NASDAQ Composite gained .42% to 2,976, and the Standard & Poor’s 500 Index rose just .28% to 1,370.

Despite the flat trading though, the Dow logged its first close above 13,000 since May 2008 and Apple’s rally helped the NASDAQ touch the 3,000 mark for the first time since December 2000. Keep in mind these big round numbers are only of psychological and historical note. They are not important technical levels, so don’t worry that we closed below them! Something else of historical note (and a future trivia question) is the aforementioned Apple.

Apple’s market capitalization (the total dollar market value of all a company’s outstanding shares) shot above $500 billion last week. Apple is only the 6th company to ever reach the exclusive half-trillion club. The five other companies to ever reach that level include Microsoft, Intel, Cisco, General Electric, and ExxonMobil. Apple is holding a media event on Wednesday in San Francisco, at which markets are expecting a new iPad to be announced. Whatever the case, that event will certainly be more interesting than the economic data we are about to talk about next.

Economic data last week came in a little softer than we have been seeing of late. Personal spending and personal income came in below market expectations, as did the ISM Manufacturing Index. Construction Spending and Durable Goods Orders also came in below analyst expectations. On the bright side, the latest initial jobless claims number came in better-than-expected at 351,000 – which still indicates an improving labor market trend, even though we remain at very depressed levels. Data out this week will largely be about jobs, jobs, jobs.

Initial jobless claims are again expected to be around 355k. We’ll also get the ADP report on private sector hiring and the key February Payroll and Unemployment report from the Department of Labor. The February Nonfarm Payroll report is expected to show that employment rose by 210,000 and that the unemployment rate held steady at 8.3%.

As always, don’t hesitate to contact us with any questions or concerns you may have.

Good Buy – Mike, Tom, Dave

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness