Archive for June, 2013

  • Preview of the Fed’s Next Meeting
    , June 10th, 2013 at 10:13 am

    The stock market opened up a little bit higher today but is now down a little bit. Looking across the sectors in the U.S. market, frankly, there doesn’t appear to be much movement at all. But the Japanese Nikkei had a very impressive move today as it jumped nearly 5%. Of course, the volatility there has been very high.

    The Federal Reserve meets again next week, and this looks to be an important meeting. The central bank will be discussing the beginning of the end of its bond buying program. Up till now, I’ve been in the camp saying the Fed won’t make any moves before the end of the year. I’m less sure of that today.

    On Friday, Jon Hilsenrath of the Wall Street Journal, who is widely understood to be Bernanke’s go-to media conduit, wrote:

    Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn’t disappoint.

    I’m going to assume that’s Bernanke speaking. Note that he didn’t say they “will pull back,” but “they’re on track to begin pulling back.” Of course, I can say that I’m “on track” for a lot of things. It doesn’t mean that’s about to happen. Still, the Fed wouldn’t be floating this in the media if they didn’t think it was important. This is a big deal.

    We also have to remember that the Federal Open Market Committee is just that—a committee. Bernanke is the head of it but a majority can oppose him. It’s happened before.

    We’ve come to an interesting point in the market where the economic events that are normally the big boys, like the jobs report or a Fed statement, are no longer top dog. Instead, the releasing of the Fed’s minutes is perhaps the most important event. The Fed releases the minutes of each meeting three weeks after they’re held. That means the all-important minutes from this meeting will be out around July 10th. Everyone will want to know what is said. I should add that the Fed’s minutes are a study in indefinite pronouns. Many said this. A few said that. Some added that. It’s almost like it’s written in code.

    Also, the minutes release will be probably be just ahead of Bernanke’s Humphrey Hawkins testimony before Congress. He does that twice a year, once in the dead of winter and again in the middle of summer. This is where he spells out the details of monetary policy.

    The key driver of what the Fed will do is the Fed’s own forecast of what will happen. Hilsenrath notes that the Fed has been consistently over-optimistic in what I’ll generously call “the recovery.” The problem is that fiscal policy has been holding back the economy. At least, that’s Bernanke’s view. The Fed believes that the economy will ramp up later this year. The stock market believes earnings will, too. There’s a lot riding on this second-half recovery. If it indeed comes, a lot of problems will be taken care of.

    Hilsenrath had another article on Friday saying that the Fed really doesn’t like Wall Street’s latest buzzword: tapering.

    The hangup for Fed officials is the word “tapering” suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

    Because Fed officials are uncertain about the economic outlook and the pros and cons of their own program, they might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments — but they don’t want the markets to think that’s a set plan. It is, as Fed officials like to say, “data dependent.”

    This strikes me as a bit pedantic. With interest rates, Fed policy almost always follows a trend. It stands to reason that bond buying will be similar. I think it would be a mistake for the Fed to start tapering (or whatever you call it) before the end of the year. Inflation is hardly a threat and the jobs market is sluggish at best. Unfortunately, I don’t think they’ll take this advice.

  • Morning News: June 10, 2013
    , June 10th, 2013 at 6:46 am

    Hearing Pits German Monetary Heavyweights Against Each Other

    On the IMF’s Big Fat Greek Woulda-Shoulda-Coulda

    Japan’s Economy Builds Momentum, Gives Abe’s Policies A Boost

    Japan’s Nikkei Surges on Revised Growth Figures

    Rupee Falls to Record Lows

    AirAsia X, Nok Air to Raise Funds in IPO Amid Boom in Travel

    U.S. Expansion Poised for Longevity

    Middling Jobs Numbers Signal a Long Path to Healthy Payrolls

    AstraZeneca Buys U.S. Lung Drug Firm Pearl For Up To $1.15 Billion

    Battery Maker Exide Technologies Files For Bankruptcy

    Inside Amazon’s Plan to Sell You Groceries

    Disruptions: Celebrities’ Product Plugs on Social Media Draw Scrutiny

    New Report Details Just How Apple Will Change The Look Of The iPhone’s Software

    Joshua Brown: “modest encroachments on privacy”

    Jeff Miller: Weighing the Week Ahead: Is This a Tipping Point?

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  • Buffett & Gates on Success
    , June 8th, 2013 at 7:51 pm

  • Jose de la Vega’s Investing Rules
    , June 7th, 2013 at 1:57 pm

    In this week’s CWS Market Review, I used a quote from Jose de la Vega. Though he’s not well-known today, in 1688 he wrote the first important book on investing, Confusion of Confusions. In it, he outlined four basic rules on investing.

    The first rule in speculation is: Never advise anyone to buy or sell shares. Where guessing correctly is a form of witchcraft, counsel cannot be put on airs.

    The second rule: Accept both your profits and regrets. It is best to seize what comes to hand when it comes, and not expect that your good fortune and the favorable circumstances will last.

    The third rule: Profit in the share market is goblin treasure: at one moment, it is carbuncles, the next it is coal; one moment diamonds, and the next pebbles. Sometimes, they are the tears that Aurora leaves on the sweet morning’s grass, at other times, they are just tears.

    The fourth rule: He who wishes to become rich from this game must have both money and patience.

  • CA Technologies Breaks Out
    , June 7th, 2013 at 12:00 pm

    CA Technologies ($CA), one of our quieter stocks, is breaking out today:

    big06072013a

    The stock cracked $28 yesterday and suddenly ran as high as $29.83 today.

  • May NFP = +175K, Unemployment Rate = 7.6%
    , June 7th, 2013 at 10:47 am

    This morning’s jobs report showed that the U.S. economy created 175,000 jobs last month. The figure for March was revised higher by 4,000 while April was revised down by 12,000.

    Despite signs of optimism from consumers, other indicators of the health of the job market have been mixed. Average weekly hours and average hourly earnings, for example, have shown little improvement in recent months, according to the Labor Department.

    Job gains in May were concentrated in service sectors like professional and business services, retail, and food services and drinking places. That last category has added 337,000 jobs over the past year.

    The federal government, on the other hand, lost 14,000 jobs in May, presumably a result of the across-the-board spending cuts, known as the sequester, implemented by Congress in March.

    The only thing remotely interesting about this report is how close it is to the established trend. Over the last 32 months, NFP has averaged a gain of 178,000. The standard deviation has been just 67,000. In other words, we’re locked in a trend.

    Officially, the unemployment rate rose from 7.5% in April to 7.6% for May. If you work out the decimals, it rose from 7.510% to 7.555%.

    This is a pretty dull report. Still, the stock market is very pleased. So far, the S&P 500 is up about 1% to 1,640.

    fredgraph06072013

  • CWS Market Review – June 7, 2013
    , June 7th, 2013 at 7:43 am

    “The expectation of an event creates a much deeper impression
    on the exchange than the event itself.” – Jose de la Vega, 1688

    After countless predictions of its imminent demise, this year’s bull market is finally starting to show some cracks. On Thursday, the S&P 500 not only fell below its 50-day moving average, but also fell below 1,600 for the first time in a month. Fortunately, a strong afternoon push-back rally brought us back over 1,622, but traders are clearly getting nervous. The Volatility Index ($VIX) jumped 40% in just 12 trading days.

    big.chart06072013

    In this week’s CWS Market Review, we’ll take a closer look at what’s going on. I also want to preview some of our upcoming Buy List earnings reports. The turmoil in the broader market has actually been good for our Buy List which has outpaced the S&P 500 for nine of the last ten days, and we’re once again beating the index for the year. This would be our seventh year in a row of beating the market. Before I get to our portfolio, let’s look at what’s been causing the market so much grief lately.

    Don’t Expect the Bond Selloff to Continue

    What’s been unusual about 2013, at least until now, is that the stock market hasn’t had any major reversals. That’s not how previous years have played out. Despite the historic bull market, the S&P 500 had major drops in 2010, 2011 and 2012. Now we have a modest one: Measuring from the intra-day peak on May 22nd to Thursday’s low, the S&P 500 lost 5.27%. That’s the biggest break all year.

    Here’s what’s happening. Since May 2nd, long-term interest rates have gapped up significantly. But what’s interesting is that shorter-term rates (inside of one year) haven’t moved much at all. The yield curve is essentially flat out to one year. If anything, short rates have edged slightly downward in the past three months.

    One reason for the higher long-term rates is that the economy seems to be improving. The housing market, for example, is much better, and consumer confidence is on the upswing. With the improved economy, traders believe that Ben Bernanke and his pals at the Fed will ratchet down their bond-buying spree. “Taper” is the new buzzword on the Street.

    I have to explain that moves in the bond market often foreshadow moves in the stock market. Usually, it’s by a few months, but sometimes it’s only a matter of weeks. Think of the two markets, stocks and bonds, as being in constant competition with each other for investors’ dollars. In just a few days, the yield on the 30-year Treasury has climbed from 2.8% to 3.3%, so that’s tempting to some folks who are getting a measly 2% yield out of the S&P 500.

    Simultaneously, we’ve seen a gigantic boom in the Japanese stock market as the yen has plummeted against the dollar. The authorities in Japan are determined to boost their economy by getting some inflation going. I can’t judge if this will work, but their stock market responded. From November 13th to May 22nd, the Japanese Nikkei soared 80%. That’s an astounding gain. Since then, however, the Nikkei has given back 17%. The extreme volatility of the Japanese market seems to be causing some unease in the U.S. market.

    After getting crushed by the dollar for several months, the Japanese yen finally struck back in a big way on Thursday. I suspect that this is traders anticipating a weak jobs report on Friday and therefore more aid from the Fed. The stronger yen is good news for AFLAC ($AFL), but I’ll stress that I like AFLAC because of its business and low valuation, not as a backdoor play on the yen. AFLAC remains a good buy up to $57 per share.

    Despite the downturn in the bond market, I don’t believe it will last very long. While the economy is better, it’s still far from strong, and all the talk of the Fed’s tapering is premature. Frankly, I don’t see the Fed taking its foot off the pedal for the rest of this year. Expect to see bond yields go back down, although not to the mega-lows from last summer. In fact, bond yields have already dropped since their peak last Friday. I think the 10-year yield will soon drop below 2% again.

    My advice to investors is to ignore any short-term market fluctuations. The next big event for us will be Q2 earnings season. We’ve now passed the first-quarter earnings season, and there are only three weeks left in the second quarter. If the analysts are right, we’re going to see even better earnings growth for Q2. Now let’s take a look at three of our off-cycle stocks that are due to report soon.

    Oracle Is a Buy up to $38 per Share

    Most of the Buy List stocks are on the March-June-September-December reporting cycle, but we have three stocks—Oracle, Bed Bath & Beyond and FactSet Research—that follow the February-May-August-November cycle. As a result, they’ll be reporting earnings later this month.

    Oracle ($ORCL) wrapped up its fiscal year at the end of May, and the company is due to report its fiscal fourth-quarter earnings on June 20th. Frankly, the Q3 earnings report was a dud, and Oracle doesn’t do that very often. It seemed like half the analysts on Wall Street slashed their ratings on Oracle.

    But the times when investors start to doubt Oracle are when the company’s at its best. To be fair, their results were weighed down by weakness in Europe. Oracle has said they expect Q4 earnings to range between 85 and 91 cents per share. Look for a big earnings beat here. Yes, their hardware business is not in a happy place, but I’m expecting software-license growth of 10%. Last week, I raised my Buy Below price to $38 per share. Oracle remains a very solid buy.

    Buy Bed Bath & Beyond up to $73

    Last month, I was excited to see Bed Bath & Beyond ($BBBY) crack $70 per share. That was a very nice turnaround for us, especially considering BBBY had been bouncing around the $55 mark earlier this year.

    But over the past few weeks, BBBY has mostly flat-lined. On Wednesday, the stock got a nice bump from an upgrade by an analyst at Nomura. Aram Rubinson raised BBBY to “buy” from “neutral,” and lifted his price target to $82 from $72 per share. I detest the idea of price targets, but if he’s right, that’s a very nice rally from here.

    Bed Bath & Beyond will report earnings again on June 26th. On the April conference call, the company told us to expect Q1 earnings to range between 88 and 94 cents per share. I expect the results to be at the high end of that range. I’m also expecting full-year earnings of $5 per share. Bed Bath & Beyond remains an excellent buy up to $73 per share.

    FactSet Is a Very Good Buy Below $108

    Last month, FactSet Research Systems ($FDS) boosted its quarterly dividend by 13% to 35 cents per share. I was pleased to see that, but FDS pays a very small amount of its profit out as dividends. On June 18th, the company will report earnings for the fiscal third quarter. FactSet has already said that earnings should be between $1.14 and $1.16 per share. Since that’s such a narrow range, I’ll take that as a strong hint they know what the results are.

    I’m a little concerned that cost-cutting on Wall Street may take some growth off FDS, but they seem to be managing this well. Bear in mind that FactSet has increased its earnings for the last 16 years in a row. Not many companies can make that claim. FactSet is an excellent buy up to $108 per share.

    Before I go, I have a few other comments. I expect to see a dividend increase soon from CR Bard ($BCR) and Medtronic ($MDT). The latter has raised its dividend every year for the last 35 years in a row. I also want to highlight that Microsoft ($MSFT) broke out to another five-year high this week. But don’t chase it. MSFT is a good buy up to $35 per share.

    That’s all for now. Next week will be a slow news week for economic reports. On Thursday, we’ll get the report on retail sales. This is a good gauge for consumer strength. The most important report will come on Friday when the Federal Reserve releases its report on Industrial Production for May. The IP report for April was pretty weak, so it will be interesting to see if there was a rebound last month. 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: June 7, 2013
    , June 7th, 2013 at 7:03 am

    Europe Continues Wrestling With Online Privacy Rules

    German Industrial Production Increases Most in a Year

    Japan Public Pension Cuts Government Bond Weighting, Lifts Stocks

    Hiring Seen Pointing To Economy In Need Of Fed’s Help

    Feeling Like Gatsby? Net Worth Hits Another Record

    Is an FHA Loan Still a Good Idea?

    Is Big Data Turning Government Into ‘Big Brother’?

    In Drive To Simplify, Facebook Will Ditch Half Its Ad Formats

    Wal-Mart Board Seen at Risk of Losing Independent Voices

    Apple to Yahoo Deny Providing Direct Access to Spy Agency

    McDonald’s Testing New Late-Night Value Menu

    Dimon, Other Wall St. Titans Make Time for Ma Ahead of Alibaba IPO

    Forest Braces For Third Bout With Icahn

    Cullen Roche: The One Chart That Bodes Very Poorly For Job Growth

    Stone Street: Quick Observations on JOSB, GPS

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  • The S&P 500 Nears Its 50-DMA
    , June 6th, 2013 at 12:10 pm

    The S&P 500 has moved very close to its 50-day moving average. The 50-DMA is currently at 1,604.

    big06062013

  • Morning News: June 6, 2013
    , June 6th, 2013 at 6:59 am

    Euro Rises to Four-Week High Before ECB Decision; Pound Advances

    London Should Hand Libor Supervision to EU, Says Brussels

    IMF Says Greece May Need Faster Debt Relief, Cites Own Mistakes

    Yen Strengthens as Fed Easing Debate Intensifies; Aussie Slides

    Financial Fears Gain Credence as Unrest Shakes Turkey

    Fed Grants Foreign Banks Leeway in Dodd-Frank Swap Pushout Rule

    SEC Unites Opponents on Money Fund Rule With Floating-Share Plan

    How Rising Mortgage Rates Could Affect the Housing Recovery

    ADP Report Shows 135,000 New Private-Sector Jobs

    Entitlement Changes to Put Seniors at Financial Risk

    Yahoo Not Done Acquiring

    PepsiCo in Talks to Buy SodaStream for $2 Billion

    Microsoft And The FBI Are Teaming Up To Take Down A Global Cyber Crime Ring

    Jeff Miller: The Most Expensive Investment Research is Free

    Joshua Brown: Defending 15,000

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