CWS Market Review – December 19, 2014

“Other guys read Playboy. I read annual reports.” – Warren Buffett

Ladies and gentlemen, here’s the 2015 Crossing Wall Street Buy List:

AFLAC ($AFL)

Ball Corp. ($BLL)

Bed Bath & Beyond ($BBBY)

Cognizant Technology Solutions ($CTSH)

CR Bard ($BCR)

eBay ($EBAY)

Express Scripts ($ESRX)

Fiserv ($FISV)

Ford Motor ($F)

Hormel Foods ($HRL)

Microsoft ($MSFT)

Moog ($MOG-A)

Oracle ($ORCL)

Qualcomm ($QCOM)

Ross Stores ($ROST)

Signature Bank ($SBNY)

Snap-on ($SNA)

Stryker ($SYK)

Wells Fargo ($WFC)

Westinghouse Air Brake Technologies ($WAB)

The five new stocks are Ball Corp. ($BLL), Hormel Foods ($HRL), Signature Bank ($SBNY), Snap-on ($SNA) and Westinghouse Air Brake Technologies ($WAB). I’ll have more to say about the new buys in upcoming issues.

The five deletions are CA Technologies ($CA), DirecTV ($DTV), IBM ($IBM), McDonald’s ($MCD) and Medtronic ($MDT).

To recap, I assume the Buy List is equally weighted among the 20 stocks. The “buy price” for each stock will be the closing price as of December 31, 2014. The new Buy List goes into effect on January 2, 2015, the first day of trading of the new year.

The Buy List is now locked and sealed, and I won’t be able to make any changes for the entire year. I’ll have a complete recap of 2014 at the end of the year. I’ll also have more to say about our new buys, plus I’ll give you new Buy Below prices.

As far as this year’s Buy List goes, there are only eight trading days left in 2014, and it appears that our Buy List will lose to the broader market for the first time in eight years. But it will be close. Through Thursday, our Buy List is up 10.06% YTD, compared with 11.52% for the S&P 500 (not including dividends).

I’m disappointed to lose to the market, but we’re still making a good profit. Our low-turnover, long-term strategy continues to serve us well. I’m excited for 2015, and I’m confident we’ll see more profits next year. Now let’s look at what happened on Wall Street this week.

Janet Yellen Says the Fed Can Be Patient

This was a dramatic week for world finance. The Russian ruble crashed. Oil managed to drop even lower, and the 10-year Treasury got near 2%. Then on Wednesday, everything seemed to reverse course. Oil nearly hit $59 per barrel. Between the Tuesday low and Wednesday high, the Russian ETF ($RSX) soared 27%.

But on Wednesday afternoon, the Federal Reserve released its latest policy statement which gave the bulls a lot more faith. On Wednesday, the S&P 500 had its best day in 14 months. Then on Thursday, it did even better. For the first time in five years, the index rallied more than 2% on consecutive days.

The investing world wanted to see if the Fed would keep its language that it would wait a “considerable time” between the end of its bond-buying program and its first rate increase. The Fed said, “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The market took the “it can be patient” part to mean that the Fed is in no hurry to raise rates. In her post-meeting presser, Janet Yellen stressed that there’s been no change in policy. The difference is that we’re closer to Rate Hike Day, and that’s no longer a “considerable time.”

The Fed also released updated forecasts for interest rates. Of the 17 members of the FOMC (not all are voting members), 15 think interest rates will rise before the end of next year. Only two members see the first rate increase coming in 2016.

Personally, I think a 2016 increase is a realistic scenario, though not a probable one. The Fed has consistently over-estimated the strength of the economy, and by extension, the timetable for a rate increase. I hope they’re right, but the futures market isn’t on their side. At the end of 2016, two years from now, the consensus at the Fed sees rates at 2.5%. The futures market thinks they’ll be at 1.5%. When in doubt, I side with the market.

The outlook is far from certain, but as long as interest rates remain low, it’s a good environment for stocks. It’s just that simple. Until there’s a pickup in inflation, the Fed is in no hurry to raise rates, and that’s good for us. Now let’s look at a place where inflation is about to get much worse.

The Ruble Gets Crushed

In last week’s CWS Market Review, I criticized the Russian Central Bank for not taking the threat to the ruble seriously. I wrote:

The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

Perhaps I have some readers inside the Kremlin, because the Russian Central Bank responded with a dramatic 6.5% rate increase. They jacked up short-term rates from 10.5% to 17%. This was an attempt to prevent Russians from yanking their cash out of their local bank and exchanging their rubles for dollars. Once a panic gets going, it’s hard to stop.

Instead of rallying, the big rate increase caused panic selling. All over the world, traders were dumping rubles. At one point, the ruble dropped as low as 1.3 cents. Three weeks ago, it was at 2.2 cents. What a mess! Russia’s budget is balanced when oil is at $100 per barrel. Vladimir Putin warned that oil could go as low as $40. So far, Russia has spent $87 billion to prevent the ruble from collapsing. All of it failed.

I’m afraid the pain in Russia is just beginning, but I’m concerned about potential spillover effects. For example, Carlsberg, the Danish brewer, took a 6.6% hit earlier this week. One-third of their profits come from Russia. Google ($GOOGL), a 16-year-old company, now has a larger market value than the entire Russian stock market.

Any spillover effect from Russia on the U.S. economy will be slight. Russia makes up just 1% of our trade volume. Instead, my concern has to do with any hidden financial fallout. For example, did some bank or insurance company load up on Russian debt? Or did they loan money to a rogue trader who did that? I suspect this might be an issue for some German banks. Until this week, I had no idea that BP ($BP) owns 20% of Rosneft. “Only when the tide goes out do you discover who’s been swimming naked.”

There’s been some talk that lower oil prices will curtail demand for Ford’s new line of cars and trucks. The aluminum bodies are more fuel-efficient, but for now, I doubt that will have a significant impact. It’s something to key an eye on, and lower oil probably caused some of the recent weakness in Ford. But don’t get rattled. Ford is a solid stock.

So far, no one is willing to hold back production of oil. Not OPEC, and not here. As for American drillers, they’ve already spent their money, so they might as well produce. ExxonMobil ($XOM), the biggest energy company on the planet, plans to increase production next year. Last year, it cost Exxon $12.72 to extract a barrel of oil. In other words, this ain’t over. Oil can go much lower from here.

Oracle Soars 10%

After the closing bell on Wednesday, Oracle ($ORCL) reported fiscal Q2 earnings of 69 cents per share. That beat Wall Street’s estimate by a penny. This was their first earnings beat in a year. On Thursday, the shares rocketed 10% higher to $45.35 per share. That’s Oracle’s highest close in 14 years, and it’s not far from the all-time high close of 46.31 per share.

Three months ago, Oracle told us to expect earnings between 66 and 70 cents per share. In last week’s issue, I said that’s about right. Overall, this was a solid quarter for Oracle. I should add that this is the first one since Larry Ellison stepped down as CEO (his current role is Chief Technology Officer). Quarterly revenue came in at $9.6 billion, which also topped Wall Street’s consensus of $9.51 billion.

Oracle is doing especially well with its cloud business. That division saw its revenue rise 45% last quarter. Critics have claimed that Oracle has been lagging behind with its cloud service. But the company has responded aggressively. Over the last ten years, Oracle has spent more than $50 billion to buy 100 businesses.

Larry Ellison said that Oracle is on track to pull in $1 billion in new cloud subscriptions next year. He added, “We’re catching up to them, and catching up very quickly.” Yes, you are. This week, I’m raising Oracle’s Buy Below to $48 per share.

That’s all for now. The stock market will close at 1 p.m. on Wednesday and will be closed all day on Thursday for Christmas. Friday will be a full workday, but don’t expect a lot of trading. Despite the shortened schedule, there will be a few important economic releases next week, such as Durable Goods and GDP (on Tuesday). Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review. I hope everyone has a wonderful holiday season!

– Eddy

Posted by Eddy Elfenbein on December 19th, 2014 at 7:09 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.