Archive for April, 2013

  • Morning News: April 23, 2013
    , April 23rd, 2013 at 7:28 am

    Euro Zone Slumps Again

    Spain Recession Deepened Slightly in 1Q – Bank of Spain

    OECD in Fresh Warning on Japan Debt

    Yen Sends Cash to Priciest Topix to JGBs Since ’11

    Obama Budget Spreads the Tax Pain

    Panel Blocks CFPB’s Chief

    Bernanke Warned by Barnier That Bank Unit Rules Risk Retaliation

    Subscribers Help Propel Netflix Gain

    Microsoft Rises as ValueAct Discloses $1.9 Billion Stake

    Caterpillar Cuts Full-Year 2013 Outlook

    STMicroelectronics Forecasts Revenue Growth Amid Wireless Losses

    Publicis Focuses on Emerging Markets as Revenue Grows, CEO Says

    Thai Billionaire Offers $6.6 Billion for Discount Retailer

    Joshua Brown: Use Hedge Funds for Proven Return Reduction

    Phil Pearlman: A Tale of Two Barron’s Covers

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  • Bard’s Earnings
    , April 22nd, 2013 at 1:37 pm

    I have a quick correction on the earnings report from CR Bard ($BCR). According to their website, the earnings webcast will be tomorrow at 5 pm. My apologies for any confusion.

  • The Spike in the VIX
    , April 22nd, 2013 at 12:55 pm

    The Volatility Index ($VIX) has recently come back to life. Last Thursday, the VIX got as high as 18.20. That’s a huge turnaround from the six-year low of 11.05 reached on March 14th.

    But let’s add some perspective here. The VIX never got below 18.20 — NOT ONCE — during the entire second half of 2008 and all of 2009. That’s eighteen months.

    For investors, there are things to worry about right now, but higher volatility ain’t one of ’em.

  • The Mind of Jeffrey Gundlach
    , April 22nd, 2013 at 11:27 am

    Gundlach

    Jeffrey Gundlach is a prophet, a mathematician, an art aficionado and occasional dabbler in painting, a former drummer in a failed rock band, a sometime student of philosophy, a reciter of poetry, a blowhard, a consumer of sports automobiles and crossword puzzles, and an egotist of striking dimensions.

    He’s also a man with a genuinely original mind, as well as the manager of one of top-performing bond funds on the market. His firm, DoubleLine Capital LP, is the fastest-growing mutual fund startup in history. Its DoubleLine Total Return Bond Fund has yielded an annual average of 11.50% since its inception and amassed some $50 billion in assets. (For comparison, bond king Bill Gross’s $290-billion Pimco Total Return Fund netted an average of 6.96% for the same period.) Gundlach is also a man who inspires fierce loyalty in his subalterns. When he was fired from Trust Company of the West, his old employer, in December of 2009 and went off to start his own firm, 45 of his 65 team members quit their very comfortable jobs to step out into the great unknown with him.

    He is, in short, an individual, in the honorific sense of the word. If his pronouncements are frequently over the top, his uncanny penetration makes him hard to write off. Blowhards are quickly forgiven if they have the chops to back up their swag.

    His beginnings are ordinary enough. A Buffalo childhood in a modest, middle-class home (father an industrial chemist, mother a housewife); near-perfect SATs, back when that was a real accomplishment; four years at Dartmouth on a scholarship; summa cum laude in philosophy and mathematics. All par for the course among America’s best and brightest. After that, Gundlach enrolled in a Ph.D. program in theoretical mathematics at Yale, seemingly for lack of anything better to do.

    In an alternate universe, he would have gone on to a respectable professorial career, and his weekend gigs with his new-wave band would have made him the cool prof in the eyes of his students. But there were problems. First, there was his thesis. When he told his dissertation adviser that he wanted to prove that infinity didn’t exist, he was told that his topic was outside the “mainstream interests” of Yale’s mathematics faculty. Second, his expansive side was getting restless. Yale and the academic game were too confining. So he dropped out and moved to California, where he gigged with a couple more bands and slowly went broke.

    Suddenly, he decided he wanted to be rich. It was the 80s, and in the 80s if you wanted to be rich, you were an investment banker. So he called up Trust Company of the West, offered them his services as a mathematician, landed an interview, and started his first real job. He would stay at that job a quarter of a century, becoming manager of a $500-million fund at age 28 and pulling down a million dollars a year by age 30. When the financial crisis hit in 2007, his TCW Total Return fund still averaged an amazing 9.1% annually for the next three years. His team was by now managing almost all of TCW’s assets. Gundlach had made himself into that rarest of creatures in American business: someone who is irreplaceable.

    Except that TCW didn’t understand that. In December of 2009, in what seems an act of incomprehensible self-sabotage, they fired him, charging he was conspiring to pilfer the company’s staff, steal its databases and client lists, and start his own firm. The charges were unjust, thus impelling Gundlach to…raid the company’s staff, reconstruct its client lists, and start his own firm. TCW filed suit; Gundlach filed a countersuit—and won, collecting $67 million in unpaid wages for himself and his associates. Meanwhile, he and they were frenetically scrambling to scrape together capital for their new mutual funds. Even with the litigation cloud hanging over them, they still succeeded in aggregating $7 billion inside their first year, largely on the strength of Gundlach’s reputation for delivering results.

    How those results are obtained principally involves mortgage-backed securities, of both the guaranteed and the non-guaranteed variety. The former are insured by the government corporations Fannie Mae and Freddie Mac and yield lower returns, making them more popular when the market is bearish, while the latter are issued directly by banks and other financial institutions and thus carry more risk, causing them to yield higher returns when the market is in its bull phase. Thus far, Gundlach’s distinctive blend of the two in his bond portfolio has continuously trumped other players in the game.

    But Gundlach isn’t given to boosterish optimism. Lately his thinking has taken a prophetic turn, and a gloomy one at that. He’s always been one to look at the big picture—he’s one of the analysts who correctly predicted the subprime-mortgage debacle—and in the next few years he foresees several national economies entering what he calls “Phase Three,” which entails defaulting on their national debts and receiving further government stimulus-spending as triage. This, he says, will cause inflation to spike, but also create unprecedented opportunities. Other of Gundlach’s views are equally visionary: he advocates, for example, abolishing the Fed. Not exactly received wisdom, but Gundlach’s keenness and conviction can make almost any idea interesting.

    Gundlach has consciously cultivated a flamboyant style: Mondrian paintings in his office, quotations from the Great Books at meetings, unflagging self-promotion. But these mannerisms are mere epiphenomena of a mind unafraid to voice its ideas, or to call nonsense when it sees it. As such, he is a rare commodity, an American original. Ralph Waldo Emerson: “A man or a company of men, plastic and permeable to principles, by the law of nature must overpower and override all cities, nations, kings, rich men, poets, who are not.”

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  • Microsoft Continues to Rally
    , April 22nd, 2013 at 11:18 am

    The stock market is down a bit this morning. The S&P 500 currently stands at 1,552.88 which is 2.37 points lower from Friday’s close. The index is trading just above its 50-day moving average. We briefly dropped below the 50-DMA last week. Gold, however, is up strongly today. The metal is currently up $29 per ounce to $1.425. The economic news this morning was that existing home sales dropped 0.6% last month to an annualized 4.92 million units. That was a bit of a surprise. Economists were expecting an increase to 5.01 million.

    Caterpillar ($CAT), which is a Dow component, is making news this morning. The company had a terrible earnings report and it slashed guidance. Wall Street had been expecting earnings of $1.40 per share; instead CAT earned $1.31 per share. Previously, CAT said it expected full-year earnings to fall between $7 and $9 per share. Now they say it will be $7 per share. Still, the overall earnings picture looks decent. The latest numbers show that 106 companies in the S&P 500 have reported earnings so far. Of that, 72% have topped estimates.

    We have one standout on our Buy List today and that’s Microsoft ($MSFT). Shares of the software giant broke $31 per share earlier today. MSFT is now at a seven-month high. The catalyst for today’s rally is the news that an activist hedge fund has taken a massive stake in the company. CNBC said that ValueAct Capital will soon announce that it has a $2 billion position in MSFT. Bear in mind that the entire company is worth more than $250 billion. Since the earnings report came out, Microsoft is up by 7%.

    CR Bard ($BCR) is due to report later today. Previously, the company warned us that 2013 would be a rough one but that growth would pick up next year. Wall Street currently expects earnings of $1.43 per share which is a big drop from the $1.61 per share Bard made for last year’s Q1.

  • Morning News: April 22, 2013
    , April 22nd, 2013 at 7:07 am

    Italy’s Deficit at EU Limit Last Year for First Time Since 2008

    Europe’s Leaders Hear Call to Do More to Spur Growth

    Spain Has EU’s Largest Deficit, Undermining Rajoy Pickup

    U.S. Box Office Heroes Proving Mortal in China

    Brent Makes Inroads Above $100 on Hopes of Improving Demand

    LG Display’s Quarterly Profit Drops on Worries About Apple

    ABB to Buy Power-One for $1 Billion

    China Mobile First-Quarter Profit Little Changed on Costs

    Slower Europe Hits Philips’ Growth

    ANA, JAL Said Set to Start Battery Fixes of Grounded 787

    Elan Corporation, plc’s Board of Directors Unanimously Reject Royalty Pharma’s Unsolicited Tender Offer

    Deutsche Bank Margin Call on Vik Turns Into $2.5 Billion Dispute

    Restyled as Real Estate Trusts, Varied Businesses Avoid Taxes

    Cullen Roche: Fading Magazine Covers…

    Jeff Miller: Weighing the Week Ahead: Interpreting Mixed Signals

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  • The Original Simpsons Writers Reunite
    , April 19th, 2013 at 10:21 pm

  • Microsoft Breaks $30
    , April 19th, 2013 at 12:01 pm

    Thanks to yesterday’s good earnings report, shares of Microsoft ($MSFT) broke above $30 per share this morning. MSFT is currently at $29.74 per share which is a 3.3% gain for the day.

    Today’s high is $30.24 (so far). Last week, MSFT got to $30.32 which is the highest price since late September.

    big04192013a

  • CWS Market Review – April 19, 2013
    , April 19th, 2013 at 8:08 am

    “Labour was the first price, the original purchase—money that was
    paid for all things. It was not by gold or by silver, but by labour, that
    all wealth of the world was originally purchased.” – Adam Smith

    This was an ugly week for Wall Street. In the last four days, more than $1 trillion was erased from global stock markets. On Monday, the S&P 500 had its single-worst one-day loss in five months. Fortunately, we regained some lost ground on Tuesday, but Wednesday was the second-worst plunge in five months. Then on Thursday, the index closed below its 50-day moving average for the first time this year. That’s usually a bad omen for stocks.

    big.chart04192013

    The Worst Gold Plunge in 30 Years

    But as rough as things were for stocks, gold’s been doing far worse. On last Friday and Monday, gold had its worst sell-off in three decades. In two days, the price for the yellow metal dropped more than 13% or $200 per ounce. Au was acting like Pb balloon.

    What’s behind gold’s pain? That’s easy. Traders are worried that deflation is picking up and I think they’re right. This week’s CPI report showed that consumer inflation fell 0.2% in March. Leading the downward charge were energy costs; the price of gasoline fell 4.4% last month. Emerging deflation means that real interest rates are climbing and that’s bad news for commodities. All this worry about inflation has been hot air. Just look at the market. Inflation-averse investors like to buy TIPs; these are inflation-protected bonds, but this week’s TIPs auction had its worst bid-to-cover ratio in five years.

    Retail sales got clipped earlier this year thanks to the end of the payroll tax holiday. That’s clearly holding some consumers back, but make no mistake, the larger story is falling commodity prices. While cyclical stocks have been trailing the market badly over the last month, I don’t believe that’s due to expected lower growth. This week’s report on industrial production was pretty good. Instead, I believe the market is taking on a more defensive posture. We heard a lot of talk about a Great Rotation out of bonds and into stocks. It appears that the rotation is simply out of commodities.

    The S&P 500 hit a near-term peak in 2010 on April 23rd. In 2011, it came on April 29th, and last year, it came on April 2nd. I’m sensing a pattern here. In other words, spring sell-offs have been regular occurrences in the greatest bull market in decades.

    In this week’s CWS Market Review, I want to focus on our upcoming earnings reports. Next week is going to be a busy week for our Buy List, with five earnings reports due. While Q1 earnings season is still young, the numbers for the overall market are promising. Of the 85 companies in the S&P 500, 75% have beaten earnings estimates and 51% have beaten sales estimates. Before we get to our upcoming reports, let’s look at some recent results from our Buy List starting with the strong earnings report from Microsoft.

    Microsoft Is a Buy up to $32 per Share

    After the closing bell on Thursday, Microsoft ($MSFT) reported quarterly earnings of 72 cents per share which was four cents better than Wall Street’s estimate. For the same quarter one year ago, the company made 60 cents per share. I’ve been bewildered by the slew of negative comments about Microsoft. Just a few days ago, Goldman lowered MSFT to “Sell.” Yes, the company does have problems, but don’t let that fool you. The overall firm is very profitable.

    For the first three months of the year, MSFT’s fiscal third quarter, their net profits grew 19% to $6.06 billion. While the company is feeling the squeeze from struggling PC sales and weak reception for Windows 8, Microsoft is doing well with its corporate software and Xbox biz. They’ve also done a commendable job of keeping their costs in check. In fact, cost control was probably the main driver of the earnings beat. Looking at the top line, revenue rose 18% to $20.5 billion which matched what the Street was expecting.

    It’s true that Bing is spewing red ink but let’s add some context. Last quarter, Microsoft’s online division lost $282 million, but the entire company made a profit of more than 20 times that. For now, I’m raising my Buy Below to $32 per share. Microsoft continues to be a solid bargain. The shares currently yield 3.2% and I think we’re going to see a nice dividend increase this September.

    Big Earnings from our Big Bank Stocks

    Just after I sent last week’s CWS Market Review, our two big banks reported earnings. For the first quarter, JPMorgan Chase ($JPM) earned $1.59 per share which was 20 cents better than estimates. Net profits rose 33% to $6.53 billion. Revenues, however, were “only” $25.8 billion which was $100 million below estimates. The earnings benefited by $1.15 billion thanks to lower loss provisions.

    Bloomberg quoted analyst Charles Peabody as saying the reserve releases plus a tax-benefit and a one-time accounting adjustment helped JPM’s bottom line by 26 cents per share. Without those, the bank would have missed earnings. While the mortgage business is soaring, the profits from mortgages aren’t because rates are so low. Thanks to the negative reaction from some traders, the shares pulled back below $47. I’m not worried about JPM at all. The bank remains a good buy up to $52 per share.

    Wells Fargo ($WFC) reported earnings 92 cents per share for the first quarter which topped analysts’ expectations by four cents per share. Net income jumped 22% to $5.17 billion which is a record for the bank. WFC’s revenues dropped 1.2% for the quarter but like Microsoft, they’ve been able to cut costs to please analysts.

    Profits at Wells’ community banking division rose 25% to $2.92 billion. Profits in wholesale banking rose 9.5% to $2.05 billion. In their wealth and brokerage unit, profits were up 14% to $337 million. Unlike JPM, the last group is a small portion of their overall business. Wells recently got approval from the Fed to raise their dividend to 30 cents per share. Thanks to the improved financial conditions of JPM and WFC, both banks are borrowing costs have dropped and they’re wisely raising tons of cash from investors. Wells Fargo is an excellent buy up to $40 per share.

    Next Week Buy List Earnings Reports

    Next week is going to be a busy week for our Buy List. Five of our stocks are due to report results next week including three on Tuesday. Let’s run down the reports.

    On Monday, CR Bard ($BCR) is scheduled to report Q1 earnings. Previously, the company warned us that 2013 would be a rough one but that growth would pick up next year. Wall Street currently expects earnings of $1.43 per share which is a big drop from the $1.61 per share Bard made for last year’s Q1. I’m not yet confident to say that Bard’s business will rebound strongly, but if it does then the shares are quite inexpensive at the moment. I want to see the details of the earnings report before I can make a stronger case for Bard. The shares are a buy up to $102 per share.

    On Tuesday, AFLAC, Ford and Stryker are due to report. The story for AFLAC ($AFL) is straightforward: Business is going well but the weak yen is gobbling up profits. In October, one dollar fetched 78 yen. That same dollar today gets 98 yen. AFLAC has said that if the yen averages 100 for the year, operating earnings per share will range between $5.99 and $6.19 per share. The stock closed Thursday at $48.90. AFLAC is a good buy up to $54.

    Ford ($F) has had remarkable success lately, and I’m particularly impressed with the company’s growth in China. The weak link, however, is Europe, and that’s not all Ford’s fault. Thanks to the euro, the continent’s economy is a mess. Ford is working hard to restructure their European operations but it will take a while to see results. Wall Street expects earnings of 39 cents per share but I think Ford is our best candidate for a big earnings beat. Ford continues to be a very good buy up to $15 per share.

    Stryker ($SYK) had been the hottest stock on our Buy List. Only this week have shares showed any sign of cooling off. The stock closed Thursday just below $64 per share. I’m not so worried about Stryker’s earnings report. The company usually comes within a penny or two of Wall Street’s consensus. This time around, analysts expect earnings of $1.01 per share. The company didn’t give guidance for Q1 but said to expect earnings between $4.25 and $4.40 for the entire year. Frankly, I think they’re low-balling but it’s still early in the year. Stryker remains a good buy up to $66 per share.

    Moog ($MOG-A) is one of those dull stocks that I like a lot. The company is due to report earnings on Friday, April 26th. The last earnings report was a dud and the company lowered the upper-end of its full-year guidance by 10 cents per share. Still, Moog should turn in good results. The company expects fiscal year results to range between $3.50 and $3.60 per share. Moog earned $3.33 per share last year. The stock remains a solid buy up to $50 per share.

    That’s all for now. Next week is a huge week for earnings. We’re also going to get our first look at the government’s report on GDP growth for Q1. I suspect that the GDP reports for this year will be better than most folks expect. 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!

    – Eddy

  • Morning News: April 19, 2013
    , April 19th, 2013 at 7:23 am

    IMF’s Lagarde Says ECB Has More Room to Ease

    Japan PM Reveals Growth Strategy Based on Working Women, Health Care

    Russia, Japan Edge Toward Breakthrough In Gas Supplies

    Senate Energy Committee Endorses MIT Physicist Ernest Moniz to Be Energy Secretary

    U.S. Weekly Jobless Claims Edge Higher

    Advisers’ Senior Credentials Rules Urged by U.S. Consumer Bureau

    Blackstone Said to Pull Out of Dell Bid on Falling PC Sales

    GSK Accused Of Abusing ‘Dominant Position’

    Public Offering Values SeaWorld at $2.5 Billion

    Microsoft to IBM Struggle to Manage Mobile-Computing Shift

    After Apple’s Rise, a Bruising Fall

    A 5-Second Guide To What’s Happening In Markets Today

    Correlation, Causality, and Casuistry

    Credit Writedowns: Why The Reinhart-Rogoff Paper Was Flawed Right From The Start

    Howard Lindzon: Apple…The Prologue… I Blame Tim Cook and…and Elon Musk is The New King

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