Archive for September, 2013

  • CWS Market Review – September 6, 2013
    , September 6th, 2013 at 6:58 am

    “Sometimes your best investments are the ones you don’t make.” – Donald Trump

    The Labor Day weekend is behind us, and the stock market has so far shaken off its August blues. The S&P 500 has rallied for three straight days this week and is back over 1,655. In fact, the index is getting close to breaking above its 50-day moving average. Since August 16th, we’ve closed below the 50-DMA every day but one.

    big.chart09062013

    Now all eyes are on the Federal Reserve and what it will do at its next meeting on September 17-18. Make no mistake, this is the most-anticipated FOMC meeting in years. The bigwigs inside the central bank have more than hinted to us that we can expect a paring back in the Fed’s asset-buying program. Of course, no decision has been made yet. Plus, even if there is a tapering announcement, we still don’t know how much it will be. Either way, over the next two weeks, you can expect a lot of opinion-makers opining on what the Fed’s opinion ought to be.

    Fortunately for us, we don’t have to fret over such decisions. Our strategy remains the same. We’re focusing on high-quality stocks going for good prices, and it’s working. Despite the August slump, our Buy List holds a nice 4.7% lead over the S&P 500 for the year. By the way, did you notice the nice rebound in Ford ($F)? The automaker just reported its best sales months since 2006.

    In this week’s CWS Market Review, we’ll preview the upcoming Fed meeting. I also want to cover the terrible deal Microsoft ($MSFT) just struck with Nokia ($NOK). (I really wish awful dealmakers like Steve Ballmer were in my fantasy football league.) I also want to share with you some names that I’m considering for next year’s Buy List. Plus, I want to touch on the very good ISM reports from this week. But first, let’s look at what Ben Bernanke and his crew at the Fed have in store for the economy, Wall Street and our Buy List.

    Countdown to the September FOMC Meeting

    The Federal Reserve meets again in two weeks, and this meeting is a biggie. Without making anything definite, Fed officials have used speeches and the media to hint that an announcement of tapering bond purchases is on the table.

    Here’s where we stand. Since short-term interest rates are already close to 0%, the Fed has had to use its bond buying as an extra-special tool to help the economy get back on its feet. The Fed has also said that it will stop the bond buying first before it considers raising short-term interest rates. The Fed’s policy is that it won’t raise short-term rates until unemployment falls to 6.5%, which they don’t see happening until the middle of 2015 at the earliest.

    So has the bond-buying program worked? That’s hard to say, and to some extent, I don’t care. At the least, we can say that the program has correlated with a recovery in the housing market and a surge in U.S. auto sales. The big winners in the stock market for the last year have been anything at the intersection of consumer finance and large-ticket consumer items. In plainer words, stuff people buy with borrowed money. That’s why the Consumer Discretionary ETF ($XLY) and stocks like Visa ($V) have done so well.

    The stock market has been gradually rewarding riskier investments lately at the expense of safer areas. For example, utilities and consumer staples have been rather weak, but industrials have been strong. While financial stocks have been big winners since late 2011, they’ve been underperforming lately. I think this market shift is in anticipation of improved economic growth.

    I think it’s a mistake to assume that the entire economy has been aided by steroids from the Fed. More than a few folks on Wall Street think that once the Fed’s assistance is gone, stock prices are due to crash. I disagree. The economy appears to have reached escape velocity, where every improvement builds on what came before. Analysts on Wall Street expect to see earnings growth of over 12% for Q3, and over 25% for Q4. If those forecasts are in the ballpark, the stock market is still cheap.

    What’s really shocked people, including myself, is the rout in the bond market. As we look back at the 2013 investing year, May 2nd may turn out to be the key date. That’s when the bond market started to turn south in a big way. Except for very short-term rates which haven’t budged, most Treasury yields are at two-year highs, and they continue to rise. On Thursday, the yield on the ten-year Treasury broke 3% for the first time since July 2011.

    Consider that the yield on the five-year jumped from a measly 0.65% in early May to 1.85% by Thursday’s close. Of course, in absolute terms, that’s still a puny yield, but it’s a big turnaround from what we’ve seen. It’s hard to believe that in the spring of 2011, the five-year was inching up over 2.35%.

    The rise in yields has been greatest with the seven- and ten-year bonds (more than 130 basis points for each). Interestingly, short-term yields haven’t moved. What’s also caught my eye is that the spread among the longer-dated bonds has actually narrowed a bit. In early May, the 30-year yield was 116 basis points higher than that of the 10-year; now it’s down to 90 basis points. The biggest impact on the yield curve is happening in the middle.

    As I explained in last week’s issue, I don’t believe the downturn in the bond market is due to fears of inflation or of the Fed’s shutting off the spigots. Instead, the higher yields are actually in anticipation of an improving economy. We got more evidence of that this week with a very strong ISM report on Tuesday. Then on Thursday, we learned that the ISM Services Index hit its highest level since 2005. We should also add the great sales report from Ford to the positive economic news pile.

    So what’s all this mean? It seems that in May, the market saw Fed rate increases as being a long way off. Now it doesn’t. In May, the futures contract for the Fed funds in July 2015 rates got to $99.72. Recently, it’s been as low as $99.13. That’s a big shift.

    I suspect that traders are probably getting ahead of themselves in predicting any rate increases. The Fed has said it wants to see unemployment down to 6.5% before it starts raising rates. I’m writing this early on Friday, ahead of the August jobs report, so I don’t know what the results will be (check the blog for updates), but we’re still a long way from 6.5%. The key for investors to understand is that the Fed isn’t going away anytime soon.

    We don’t have much hard evidence yet on how the economy has performed during the third quarter. The ISM reports offer some clues, and the August jobs report will shed some light. The ADP report on Thursday showed an increase of 176,000 jobs last month, which nearly hit consensus on the nose.

    Investors should continue to favor high-quality stocks. Our own Harris Corp. ($HRS) got off to a shaky start this year, but it has been impressive lately. We recently got a 13.5% dividend increase, and the stock hit a new 52-week high on Thursday. Later this month, three of our Buy List stocks are set to report: Oracle ($ORCL), FactSet ($FDS) and Bed Bath & Beyond ($BBBY). I’ll preview these reports in greater detail in next week’s issue, but the one that’s concerning me is Oracle. The last two reports have been duds, and I’m very reluctant to go against Larry Ellison, but I want to see solid performance in this report. Speaking of large-cap tech stocks, let’s look at the big story from this past week.

    Microhard: The Awful $7.2-Billion Deal with Nokia

    On Labor Day, Microsoft ($MSFT) announced that it’s buying Nokia’s ($NOK) devices and services unit for $7.2 billion in a deal that includes Nokia’s patents. I think this is another one of Steve Ballmer’s lousy deals, and traders agreed with me. Shares of MSFT dropped more than 4.5% on Tuesday (see chart below), which erased the entire surge from Ballmer’s retirement announcement. The stock has lost more than $18 billion in market value since the $7.2 billion deal was announced.

    big.chart09062013a

    To quote myself, it’s usually a bad sign when news of your resignation causes a market-value increase of $24 billion. This latest deal shows us why the market so distrusts Ballmer. I’m afraid this is another in a long line of bad deals for Microsoft. Ballmer wasn’t joking around when he said he wants MSFT to be a devices company. You have to wonder how much longer the “soft” will be a part of Microsoft.

    The Nokia deal is a deal made from weakness, and that’s usually a bad sign. On one level, it makes sense in that it brings together Windows 8 with its biggest hardware supporter. I suppose they think they can replicate the Google-Apple model. I’m not sure what was going to happen. Perhaps Nokia was going to ditch MSFT and go with Android, or maybe NOK was going to declare bankruptcy. That’s not unthinkable. The stock is still down more than 90% from its tech-bubble high. It’s very probable that Microsoft saw only bad scenarios unfolding and decided to make a move. Most importantly, I’m not sure why MSFT can succeed where Nokia has failed.

    Microsoft is still on my Buy List, and will be until the end of the year. I’m very unhappy with this recent decision. The only positive thing I can say is that the Nokia deal isn’t that big relative to MSFT’s overall position. It comes to about 86 cents per share. Microsoft is sitting on a cash position of $61 billion, so this doesn’t exactly stretch their finances.

    I added MSFT to the Buy List this year, and I’m not sorry I did. I still think the stock was going for a discount relative to its fair value. I also expect to see Microsoft raise its quarterly dividend later this month. The current dividend is 23 cents per share. I’m expecting an increase to 26 cents. Going by Thursday’s closing price of $31.24, that comes to an annual yield of 3.33%. I’m going to lower my Buy Below price on Microsoft to $34 per share.

    Ten Candidates for Next Year’s Buy List

    Now that we’re in the final third of 2013, I wanted to pass along a few names that I’m looking at as candidates for next year’s Buy List. As usual, I’ll add five new stocks and delete five current ones.

    Please understand, this is just a preliminary list, and I won’t finalize next year’s Buy List until mid-December. There are currently ten stocks that I’m keeping a close eye on; IBM ($IBM), CVS Caremark ($CVS), Tupperware ($TUP), Express Scripts ($ESRX), DaVita ($DVA), Varian Medical Systems ($VAR), AutoZone ($AZO), United Stationers ($USTR), Bio-Reference Labs ($BRLI) and St. Jude Medical ($STJ).

    Honestly, that list is heavier on healthcare than I would prefer, but that’s where I’ve been seeing high-quality bargains. I plan to have another list of next year’s candidates before the official list comes out in December.

    Before I go, I want to make a few small adjustments to our Buy Below prices. In addition to lowering Microsoft’s ($MSFT) Buy Below to $34 per share, I also want to drop WEX’s ($WEX) down to $89. Nothing’s wrong with the stock. I simply want our buy ranges to reflect last month’s pullback. I also want to raise Ross Stores’s ($ROST) Buy Below by $1 to $71 per share. ROST has been doing very well for us.

    Lastly, I’m raising CR Bard’s ($BCR) Buy Below to $119. The company just picked up Rochester Medical for a cool $262 million. Bard is paying $20 per share for Rochester, which is a 44% premium. This looks to be a smart deal, and BCR rallied on the news. Bard looks very good here.

    That’s all for now. Next week, we’ll get important reports on retail sales and consumer credit. On Thursday, the Treasury Department will update us on how the budget deficit looks for this fiscal year, which concludes at the end of this month. This looks to be the government’s lowest budget deficit in five years. Of course, that’s comparing apples to trillion-dollar oranges. Still, this year’s deficit is projected to come in at a mere $680 billion. That’s nearly 38% below last year’s red ink. I want to see this trend continue. 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: September 6, 2013
    , September 6th, 2013 at 6:41 am

    Plan at G-20 Is to Tighten Global Rules on Taxes

    European Central Bank Chief Tamps Down Optimism

    Bogged-Down Banking Fight Leaves EU Vulnerable to Relapse

    Cyprus Lawmakers Adopt Key Terms For EU/IMF Bailout

    The Next Emerging Market Crisis

    Wall Street’s Most Bullish Forecast For Today’s Jobs Report

    Behold The Bounty That Shale Oil And Natural Gas Have Wrought

    Summers’s Fed Put Beats Bernanke’s for Potency: Cutting Research

    Treasury Yields Pierce 3% With Employment Data Ahead

    J.P. Morgan to End Student-Loan Business

    Yahoo Needs a Lifeboat Not a Logo

    Hearsay Social Raises $30 Million to Give Bankers an Online Presence

    Hundreds Protest Against Wal-Mart In 15 Cities, Demanding Higher Wages

    Jeff Carter: Commitment, Decision Making and Fear In Entrepreneurship

    Cullen Roche: 3 Things I Think I Think

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  • Even When You’re Right, It Takes Time
    , September 5th, 2013 at 12:17 pm

    At one point in 2011, shares of Groupon ($GRPN) got as high as $31. But by late July 2012, the stock had fallen down to $6.90 per share.

    That’s when I jumped in and tweeted.

    The only problem is that the stock kept falling. By November, it hit $2.60 per share. That’s a 62% drop from what I thought wasn’t a bad price.

    Since then, Groupon has rallied is currently close to $11 per share. Even if you think you’ve spotted a good value, you’ll never know when your bargain will materialize. Even if you’re right, the ride can be a lot rougher and longer than you think.

    big09052013

  • Ford’s Joe Hinrichs on Growth
    , September 5th, 2013 at 11:52 am

    Here’s Ford’s Joe Hinrichs who has my favorite job title — President of the Americas:

  • Morning News: September 5, 2013
    , September 5th, 2013 at 6:20 am

    Key Euribor Rate Steady As ECB Seen On Hold

    BOJ Gov Kuroda: To Take Necessary Steps if Sales Tax Hike Makes Inflation Goal Difficult

    Investors Seek Balance Between Central Banks, Syria And Rebounding Economy

    Emerging Stocks Rise to Two-Week High as Indian Banks Rally

    Salmon: Larry Summers and the Politicization of the Fed

    Fed Says ‘Modest to Moderate’ Growth Aided by Homes, Cars

    U.S. Car Sales Soar to Pre-Slump Level

    Schwab Case Casts Spotlight on Securities Arbitration and Its Flaws

    LinkedIn: Endorsed for Financial Acumen

    With Chances Dimmer for Sale to Microsoft, BlackBerry May Have To Do The Splits

    Samsung Has Hobbled Its Smart Watch Before It Even Launches

    P&G to Test Waters Again on a Bargain Tide

    How Yahoo Picked a New Look For An 18-Year-Old Brand

    Credit Writedowns: Corporate Profits: In the Long Run, Valuation Means Everything

    John Hempton: We Interrupt For a Brief Herbalife Update

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  • The Limits of Fundamental Analysis
    , September 4th, 2013 at 1:17 pm

    Georgetown_canal

    With my investment approach, I try to be as rational as is possible. If things had never worked out for Mr. Spock at Star Fleet Academy, he probably would have made a decent money manager. Sure, some work would have been needed on client relations, but you get my point. Still, it’s amazing to me how irrational people can be when they go about investing their money.

    Being a rational investor, I rely on a great deal of numbers. But here’s the tricky part: even numbers can be deceiving. I’ve discussed this many times before. For example, your classic P/E Ratio doesn’t always work well with cyclical stocks. In fact, the market’s P/E Ratio is often elevated during the early phases of a bull market.

    Also, not all earnings are created equal. When a company borrows money, they’re sacrificing near-term earnings for (hopeful) long-term success. Companies that have high assets relative to their profits tend to report ersatz earnings. Or a company with significant equity exposure in an overvalued stock will have its return-on-equity distorted.

    All of these issues can confuse the job of attaching a proper valuation to a stock. I rely on numbers because that’s all I have. If I had prices ten years from now, I’d surely go on those. Because I don’t, I’m left with a bunch of flawed statistics. The hard part is knowing what’s flawed. But even fundamental analysis runs up against its own limitations.

    I’d say there’s about 10% of stocks, maybe even just 5%, where fundamental analysis is totally useless. Take Tesla ($TSLA) for example. By any conventional metric, the stock is absurdly overvalued. Unfortunately, I’m not considered a genius for pointing that out. Everyone knows that. The reason is that conventional metrics don’t work on unconventional stocks. If a technology comes along which changes the entire ballgame, all those ratios go out the window.

    Consider the case of Amazon.com ($AMZN). At its peak during the tech bubble, the stock was going for a ridiculous valuation. As it turns out, the stock was actually cheap. Since the turn of the century, Amazon has greatly outperformed the S&P 500. AMZN has more than tripled while the S&P 500 has had meager returns. The reason is that Amazon was a new business that changed the marketplace. Valuation didn’t tell you that.

    How should someone have valued Eastman Kodak twenty years ago? The stock was a long-recognized stalwart of American business. It was a classic Nifty 50 stock and it paid a good dividend. As late as 2007, shares of EK were over $30. While all seemed calm on the surface, the company was quickly being made obsolete. Today, a share of EK goes for three cents. The dynamics changed and just by following the numbers, you would have been left in the dust.

    I live in Washington D.C. and you can see the beautiful canal that runs through Georgetown. Where the canal hits the Potomac is the water’s gate hence the name of the Watergate complex and all the “scandal-gates” that followed.

    What impresses me is that the canal was an astounding feat of engineering. It took a lot of men and a lot of money to dig this thing. Yet as soon as the canal was built, it was economically obsolete. The canal was done in by the railroad. The entire effort turned out to be a waste of time and money. This is the process of Creative Destruction identified by the economist Joseph Schumpeter. There’s always some innovation going on somewhere that threatens to upend the entire game, and fundamental analysis won’t see it coming.

  • Morning News: September 4, 2013
    , September 4th, 2013 at 5:32 am

    Global Competitiveness Report: India Slips To 60th Rank, Switzerland On Top

    Man Who Saw Japan’s 0.5% 10-Year Yield Now Predicts 0.25%

    Spanish Services Post Jobless Growth With First Gain Since 2011

    Ryanair Warns on Profit Expectations

    S&P Calls U.S. Lawsuit ‘Retaliation’ for U.S. Downgrade

    Fracking Boom Seen Raising Household Incomes by $1,200

    Microsoft Jettisons Windows Playbook With Nokia Devices

    Kodak Moments Just a Memory as Company Exits Bankruptcy

    Hedge Funds Load Up on J.C. Penney Shares

    Jarden Buying Yankee Candle for $1.75 Billion

    LinkedIn Cashing In: Social Network To Raise $1 Billion In Share Offering As Stock Flies High

    KitKat Revamped Its Entire Website In A Hilarious Parody Announcing Its New Partnership With Google

    H&R Block Declines After Saying Bank Sale Possibly Delayed

    Howard Lindzon: CNBC Ratings at New Lows…How? …and Why Can’t Business TV Do What ESPN Does?

    Phil Pearlman: Sunk Costs: Microsoft Throws Good Money After Bad

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  • The Bad Time of the Year for Stocks
    , September 3rd, 2013 at 11:11 am

    We’re nearing the bad time of the year for the stock market. I crunched all the numbers going back to the start of the Dow in 1896, and I found that the index has historically peaked on September 6th. From there, it pulls back an average of 2.51% to October 29th.

    image1350

    Historically, there’s some sluggishness in May, and a drop in early December, but nothing comes close to the September-October slowdown.

    As usual, I caution against basing any investment decision on this type of data. I simply think these are interesting trends.

  • Microsoft Buys Nokia Handset Business
    , September 3rd, 2013 at 10:14 am

    I hope everyone had a nice three-day weekend. The day after Labor Day always feels like a giant “reset” on Wall Street. All the major players are back from their summer retreats. This is also a big week for economic news. This morning, the August ISM was 55.7 which is a very good reading. This is the highest ISM in more than two years.

    fredgraph09032013

    Thanks to some lessening of the tensions regarding Syria, the stock market is doing well today. The S&P 500 briefly broke 1,650 this morning which is more than 1% higher than Friday’s close.

    The big news today is that Microsoft ($MSFT) is buying Nokia’s ($NOK) handset business for $7.2 billion. Many observers think this is the marriage of two companies desperately behind the times. Under Ballmer, Microsoft has wasted billions of dollars on overpriced deals so it’s easy to see this as just one more. Interestingly, the deal also includes NOK’s patents.

    Traders are not pleased with the deal. While the rest of the market is rallying, shares of MSFT are currently down more than 4%. Consider that since December 31, 1999, shares of Microsoft are down more than 42% while shares of Nokia are down 91%. The deal is huge for Nokia, but works out to about 86 cents per share for Microsoft. Henry Blodget calls this a smart deal for MSFT but notes that it has a low probability of succeeding.

  • Morning News: September 3, 2013
    , September 3rd, 2013 at 6:16 am

    OECD Warns Global Growth Could Weaken

    ECB’s Draghi Tries To Shepherd Markets Fixated On Fed

    RBA Leaves Rates On Hold At 2.5% Amid Fractious Election Campaign

    Abe All Ears on Growth Proposals

    Phablets a Big Hit With Asian Consumers

    Belarus Charges Kerimov in Potash Probe

    As Summers’s Odds Rise, Stimulus Easing Is Seen

    Microsoft to Buy Nokia’s Devices Unit for $7.2 Billion

    Nokia Sale Marks End of an Era

    Verizon-Vodafone Talked Merger Before Agreeing to Stake Sale

    Why The $130 Billion Deal For Verizon Wireless Is Key To Verizon’s Fight For The Future Of Mobile And Media

    How Velti, One Of The Largest Mobile Ad Companies On The Planet, Lost $130 Million

    Steve Ballmer Tells Employees: ‘Stephen Elop Will Be Coming back to Microsoft’

    Roger Nusbaum: Barron’s Interviews Cliff Asness

    Joshua Brown: The Number One Threat to the Market

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