A fairly slow week was highlighted by comments from the FOMC and February’s CPI reading that flattened the curve as short-term yields and long-term yields moved inversely to each other. The two-year Treasury yield rose 4 bps to .99% while the ten-year fell 2 bps to 3.68%.
Consumer prices were unchanged in February from the previous month, versus an expected .1% rise, the first time the index didn’t print a positive change since last March when prices fell -.1%. The actual reading missing expectations by .1% isn’t huge news, but a larger trend of decreasing inflation expectations made its presence felt in the marketplace this week. Breakeven yield’s, which measure the spread between yields on TIPS and nominal Treasurys, fell steadily throughout the week. Ten-year breakevens fell 7 basis points to 220 as investors demanded higher real yields while nominal yields fell. Some of the movement on the long end of the curve is due to some positioning before next week’s $118 billion in Treasury issuance but words from the Fed this week also had an impact.
The “extended period” language was left unaltered, which indicates that the Fed intends to keep rates where they are for at least the next 4-6 months. A fed hike in early 2010 was a popular thought last fall, but any chance of that has been put off until the summer at the soonest. Implied probabilities point to a 28% chance of a hike to .5% by the August meeting, lower than the 50% chance the market was assigning to that at the beginning of the year. Regardless, removal of the “extended period” language will have to come first. If you follow the 4-6 month buffer between the removal of the language and the actual hike, the language will have to be dropped after the next meeting if we are to get a hike in the summer.
Have a good weekend.
Cliff J. Reynolds Jr., Investment Analyst
Friday, March 19, 2010
Plant some seeds in Monsanto (MON)
I’ve mentioned recently that it is difficult to find bargains in the market today, but it may be time to plant some seeds in Monsanto (MON).
The stock market rally has left behind the seed giant as falling grain prices sapped demand for seed and profits from selling herbicides were squeezed by generic competition. Not only has MON lagged the broader market, but it has trailed its peers in the fertilizer and agricultural industries.
But MON has two game-changing products about to hit the market that can drive margins and market share gains for years. The first is SmartStax corn, which has the broadest array of genes available for fighting pests both above and below ground and for tolerating pesticides. The second is Roundup Ready 2 Yield soybeans, which promise higher yields (more beans per pod).
Success of these products will further expand MON’s dominance over the food chain and help win back investors frightened by the shrinking herbicide unit and regulatory concerns. As the saying goes: be greedy when others are fearful.
“Wait, did he just say dominance over the food chain?” Yes, I did.
World population is growing and appetites are growing in developing countries with rising wealth (see related article). With only so much land and water for farming, seed technology that improves crop yield is essential to the planet’s food supply. And unlike fertilizer, the market for genetically tweaked seeds still is largely underpenetrated outside the U.S.
When it comes to the U.S. seed market, MON has at least one of its patented genes in 90% of soybeans and 80% of corn. And competitors can’t seem to catch up, choosing to partner with MON rather than compete. Pouring 10% of sales into research and development, MON has an unmatched product pipeline that Credit Suisse estimates is worth $11 to $17 per share alone. Add this to an intrinsic value between $85 and $88 for the core business and the shares appear to be a steal.
Of course, those who plant seeds in MON shares today must be patient as the upside is limited until we see positive yield performance on the company’s newest products from this fall’s harvest, these results will drive longer-term acreage targets. But, given the decent valuation, strong product pipeline, and solid fundamentals in the agricultural biotech industry, MON represents a compelling long-term investment.
Peter Lazaroff, Investment Analyst
The stock market rally has left behind the seed giant as falling grain prices sapped demand for seed and profits from selling herbicides were squeezed by generic competition. Not only has MON lagged the broader market, but it has trailed its peers in the fertilizer and agricultural industries.
But MON has two game-changing products about to hit the market that can drive margins and market share gains for years. The first is SmartStax corn, which has the broadest array of genes available for fighting pests both above and below ground and for tolerating pesticides. The second is Roundup Ready 2 Yield soybeans, which promise higher yields (more beans per pod).
Success of these products will further expand MON’s dominance over the food chain and help win back investors frightened by the shrinking herbicide unit and regulatory concerns. As the saying goes: be greedy when others are fearful.
“Wait, did he just say dominance over the food chain?” Yes, I did.
World population is growing and appetites are growing in developing countries with rising wealth (see related article). With only so much land and water for farming, seed technology that improves crop yield is essential to the planet’s food supply. And unlike fertilizer, the market for genetically tweaked seeds still is largely underpenetrated outside the U.S.
When it comes to the U.S. seed market, MON has at least one of its patented genes in 90% of soybeans and 80% of corn. And competitors can’t seem to catch up, choosing to partner with MON rather than compete. Pouring 10% of sales into research and development, MON has an unmatched product pipeline that Credit Suisse estimates is worth $11 to $17 per share alone. Add this to an intrinsic value between $85 and $88 for the core business and the shares appear to be a steal.
Of course, those who plant seeds in MON shares today must be patient as the upside is limited until we see positive yield performance on the company’s newest products from this fall’s harvest, these results will drive longer-term acreage targets. But, given the decent valuation, strong product pipeline, and solid fundamentals in the agricultural biotech industry, MON represents a compelling long-term investment.
Peter Lazaroff, Investment Analyst
Healthcare stocks may rally on reform bill
Bloomberg reports that U.S. health stocks are poised to rally if the overhang of uncertainty is removed by the passing of a healthcare reform. The argument in this article is extremely similar to a post of mine from January (see: Healthcare sector trending up).
The most visible positive catalyst for the industry is that the worst-case reform scenarios – a single-payer system or a public plan with a Medicare-linked fee schedule – are no longer a threat. Managed care companies like WellPoint (WLP) and UnitedHealth Group (UNH) stand to gain new customers as coverage expands to people who previously went without insurance.
A common concern for these insurers is that the government will restrict profitability by scrutinizing rate hikes as we’ve seen in recent months in California, but this concern is not justified. The fact that is important to consider is the cap Congress proposes to put on the medical-loss ratio – the percentage of premium revenue used to pay patient bills – is well above the industry’s historical average, which means that they will not be impinging on profitability as much as feared.
Overhaul or not, health insurers have always found ways to make money and preserve profitability despite government regulation. I don’t expect that to be any different this time around. Managed care, as well as pharmaceuticals, are still looking very cheap relative to the rest of the market, and removing the uncertainty surrounding reform will provide a catalyst to expand valuations throughout the healthcare sector.
Daily Insight: Jobless Claims, CPI, Philly Fed
U.S. stock indices ended mixed as the Dow and NASDAQ gained ground, while the broad S&P 500 closed fractionally lower. Mid and small cap stock indices also closed to the downside.
The broad market bounced between gain and loss on several occasions, as traders were conflicted by the positive of a strong manufacturing report yet the negatives of increased jobless claims and speculation the Fed will move to raise the discount rate – I wouldn’t call that a negative but traders don’t seem to like it much.
The discount rate is the rate at which banks can borrow from the Fed. They last raised the rate on February 18 as they are in the process of normalizing the spread between the discount rate and fed funds – normally disco is one full percentage point above that of fed funds, but the spread was cut to 25 basis points during the crisis and now stands at 50 basis points above fed funds. Now, it’s not like the market sold off on this speculation, the S&P 500 was essentially flat (but then again the rumor was fairly silly as it is unlikely the Fed would leak this news), but if traders are going to get a bit antsy about an increase in the discount rate, what’s going to happen when the Fed eventually begins to increase fed funds?
The 10 major sectors within the S&P 500 were split as five gained ground, while five declined. Industrials’ and health-care led the gainers; energy and financials led the declining sectors.
The Dow was boosted by shares of Boeing, 3M and IBM, which accounted for 60% of the index’s gain.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
The broad market bounced between gain and loss on several occasions, as traders were conflicted by the positive of a strong manufacturing report yet the negatives of increased jobless claims and speculation the Fed will move to raise the discount rate – I wouldn’t call that a negative but traders don’t seem to like it much.
The discount rate is the rate at which banks can borrow from the Fed. They last raised the rate on February 18 as they are in the process of normalizing the spread between the discount rate and fed funds – normally disco is one full percentage point above that of fed funds, but the spread was cut to 25 basis points during the crisis and now stands at 50 basis points above fed funds. Now, it’s not like the market sold off on this speculation, the S&P 500 was essentially flat (but then again the rumor was fairly silly as it is unlikely the Fed would leak this news), but if traders are going to get a bit antsy about an increase in the discount rate, what’s going to happen when the Fed eventually begins to increase fed funds?
The 10 major sectors within the S&P 500 were split as five gained ground, while five declined. Industrials’ and health-care led the gainers; energy and financials led the declining sectors.
The Dow was boosted by shares of Boeing, 3M and IBM, which accounted for 60% of the index’s gain.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Thursday, March 18, 2010
Daily Insight: Dollar, EU Second Thoughts, Mortgage Apps, PPI
U.S. stocks gained ground for a third-straight session, and the only two down days of the past 15 sessions were nothing more than fractional declines, on the heels of Tuesday’s Fed statement – yesterday’s reported decline in producer prices for February only reinforced the fact that the Fed won’t feel pressure on the inflation front to remove their unprecedented level of accommodation anytime soon. (Not that the Fed would be focused on inflation if it were a threat, not with 10% unemployment, banks that need a super-steep yield curve and a housing market that remains beaten down…but this is for another discussion I guess.)
The broad market did give back about a third of its earlier gains late in the session, but held on to record solid performance.
Energy shares led the advance (first time for that in a while) along with financials and materials. All 10 major sectors gained ground on the session, but there were clear laggards as utilities and health-care shares were the deepest under-performers.
The Dow Industrial Average followed the S&P 500 in making a new 17-month high, surpassing what had been the recent high of 10,725 hit on January 19. Shares of Exxon, Chevron and Caterpillar led the Dow higher – energy stocks had conspicuously lagged the broad market over the past couple of months, but with crude now testing $83/barrel, they’ve found a bid.
Click here for the rest of this entry.
Brent Vondera, Senior Analyst
The broad market did give back about a third of its earlier gains late in the session, but held on to record solid performance.
Energy shares led the advance (first time for that in a while) along with financials and materials. All 10 major sectors gained ground on the session, but there were clear laggards as utilities and health-care shares were the deepest under-performers.
The Dow Industrial Average followed the S&P 500 in making a new 17-month high, surpassing what had been the recent high of 10,725 hit on January 19. Shares of Exxon, Chevron and Caterpillar led the Dow higher – energy stocks had conspicuously lagged the broad market over the past couple of months, but with crude now testing $83/barrel, they’ve found a bid.
Click here for the rest of this entry.
Brent Vondera, Senior Analyst
Wednesday, March 17, 2010
Daily Insight: Import Prices, Housing Starts, FOMC Statement
U.S. stocks gained good ground on Tuesday after S&P affirmed their credit rating on Greek government debt of BBB+ (they had threatened to lower that rating) and the EU signaled they’d sidestep “no-bailout” rules and provide emergency loans to that government. The market rally accelerated in the afternoon after the Fed confirmed the rate on fed funds will remain floored for an extended period (yeehaw!) and provided the impetus for traders to push past that 1150 market on the S&P 500 – had been stuck there for three sessions. The broad market sits at a new 17-month high.
Basic material, financials and industrial shares led the advance. All 10 of the major S&P 500 sectors gained ground on the day, but consumer staples and health-care (the traditional area of safety) along with telecoms were the laggards.
And speaking of commodity-related basic material shares, the price of oil is back above $82/barrel this morning – call it a Bernanke bounce. I’m watching for the price to breach $85, which hasn’t occurred since economic mayhem began in late 2008. At some point the market is going to view higher energy prices as another noose around the consumer’s neck. In quick order we could have both oil and stocks at fresh 17-month highs, both are unlikely to move higher in tandem for very long.
Sovereign debt default concerns eased again yesterday, here’s the ebb and flow we’ve been talking about, as European finance ministers laid out unspecific groundwork for a financial lifeline to Greece. If Greece runs into trouble rolling their debt, EU officials will provide emergency loans as members pool funds. The meeting didn’t provide an actual euro amount of these potential emergency loans.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Basic material, financials and industrial shares led the advance. All 10 of the major S&P 500 sectors gained ground on the day, but consumer staples and health-care (the traditional area of safety) along with telecoms were the laggards.
And speaking of commodity-related basic material shares, the price of oil is back above $82/barrel this morning – call it a Bernanke bounce. I’m watching for the price to breach $85, which hasn’t occurred since economic mayhem began in late 2008. At some point the market is going to view higher energy prices as another noose around the consumer’s neck. In quick order we could have both oil and stocks at fresh 17-month highs, both are unlikely to move higher in tandem for very long.
Sovereign debt default concerns eased again yesterday, here’s the ebb and flow we’ve been talking about, as European finance ministers laid out unspecific groundwork for a financial lifeline to Greece. If Greece runs into trouble rolling their debt, EU officials will provide emergency loans as members pool funds. The meeting didn’t provide an actual euro amount of these potential emergency loans.
Click here to read the rest of this entry.
Brent Vondera, Senior Analyst
Tuesday, March 16, 2010
General Electric (GE) to raise dividend in 2011
General Electric (GE) CFO Keith Sherin told investors the company would like to grow the dividend in 2011. Sherin said losses and delinquencies from GE Capital are going to peak sometime in 2010, which could allow for “a real earnings snapback,” going forward.
Substantial improvement to the leverage ratio and GE Capital, vastly improved capital market conditions, and projected earnings of $23 billion over the next two years support the idea of hiking the dividend. The company’s equipment and service and equipment backlog stands at $175 billion and is “slowly turning.”
In other news, financial reform proposals put GE under the Federal Reserve’s regulation, but do not force a break of the parent company and the finance unit. It appears GE will be able to keep its controversial industrial loan and thrift banks based in Utah.
The market seems to finally be warming up to GE and I feel vindicated.
Peter Lazaroff, Investment Analyst
Substantial improvement to the leverage ratio and GE Capital, vastly improved capital market conditions, and projected earnings of $23 billion over the next two years support the idea of hiking the dividend. The company’s equipment and service and equipment backlog stands at $175 billion and is “slowly turning.”
In other news, financial reform proposals put GE under the Federal Reserve’s regulation, but do not force a break of the parent company and the finance unit. It appears GE will be able to keep its controversial industrial loan and thrift banks based in Utah.
The market seems to finally be warming up to GE and I feel vindicated.
Peter Lazaroff, Investment Analyst
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