Archive for September, 2014

• Three Quarters Down
  Eddy Elfenbein, September 30th, 2014 at 4:59 pm

  That’s the end of the third-quarter. The year is officially 75% over, and the decade is already 47.5% past.

  For the year, the S&P 500 is up 6.70%. Add in dividends, and the S&P 500 is up 8.34%.

  For the year, our Buy List is up 1.83%. With dividends, we’re up 2.89%.

  Here’s the stock-by-stock gain not including dividends:

  Stock	Symbol	31-Dec	30-Sep	Gain/Loss
  DirecTV	DTV	$69.06	$86.52	25.28%
  Microsoft	MSFT	$37.41	$46.36	23.92%
  Wells Fargo	WFC	$45.40	$51.87	14.25%
  Fiserv	FISV	$59.05	$64.64	9.46%
  Medtronic	MDT	$57.39	$61.95	7.95%
  Stryker	SYK	$75.14	$80.75	7.47%
  CR Bard	BCR	$133.94	$142.71	6.55%
  eBay	EBAY	$54.87	$56.63	3.21%
  IBM	IBM	$187.57	$189.83	1.20%
  Ross Stores	ROST	$74.93	$75.58	0.87%
  Qualcomm	QCOM	$74.25	$74.77	0.70%
  Moog	MOG-A	$67.94	$68.40	0.68%
  Express Scripts	ESRX	$70.24	$70.63	0.56%
  Oracle	ORCL	$38.26	$38.28	0.05%
  McDonald’s	MCD	$97.03	$94.81	-2.29%
  Ford Motor	F	$15.43	$14.79	-4.15%
  Cognizant Tech.	CTSH	$50.49	$44.77	-11.33%
  AFLAC	AFL	$66.80	$58.25	-12.80%
  CA Technologies	CA	$33.65	$27.94	-16.97%
  Bed Bath & Beyond	BBBY	$80.30	$65.83	-18.02%

• Edit the Fed!
  Eddy Elfenbein, September 30th, 2014 at 10:49 am

  One of my recent pet peeves has been the growing length of FOMC policy statements. The statements have grown steadily longer without conveying more information. They’re terribly written and needlessly jargon-filled.

  I’m not merely complaining about their general ugliness, but more importantly, such writing is bad policy. The central bank ought to be able to communicate with the public in a clear and concise manner. George Orwell famously wrote how the English language gets abused when it’s in the hands of the government. The Fed simply needs to say, “this is what we’re doing and this is why we’re doing it.”

  The last statement ran on to 895 words. I wanted to try my hand at rewriting it. First, here’s the Fed’s version:

  Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

  The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

  The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

  To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

  When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

  Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance. President Plosser objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.

  Now here’s my version:

  The data released since we met in July suggests that the economy is growing modestly. The jobs market’s getting better, but there are still too many Americans out of work. The good news is that households and companies are spending again, but the housing market is weak. The government’s smaller budget deficits are also holding back growth, but the impact here is waning.

  Since the economy is improving, we’ve decided to taper our bond purchases again. Starting next month, the New York Fed will buy $10 billion per month of Treasuries and $5 billion per month of mortgage-backed securities. That’s a decrease of $5 billion for each. We’re also continuing to reinvest the interest and principal from these bonds. The goal of this policy is to keep long-term interest low, which in turn will help the economy.

  Ideally, we’ll decide to wrap up our bond-buying program at our next meeting in late October, but there’s no guarantee. If the outlook for the economy changes, then we’re prepared to change as well.

  Importantly, we still believe the economy currently demands a very loose monetary policy. In our view, we’ll need to keep interest rates low for a considerable time after the bond-buying ends. This is especially true if inflation continues to run below our 2% target. In fact, we may have to keep rates low even when we’re near our goals of 2% inflation and maximum employment. The key drivers of our policy will be the financial markets, the labor market and inflation (both expectations and signs of incipient inflation).

  The Committee approved today’s policy by a vote of 8 to 2. The yes votes were:

  Yellen (Chair)
  Dudley (Vice-Chair)
  Brainard
  Fischer
  Kocherlakota
  Mester
  Powell
  Tarullo

  The votes against were:

  Fisher
  Plosser

  President Fisher believes the economy is doing well enough already and that we’ll soon need to pull back on monetary stimulus. President Plosser doesn’t believe interest rates will need to stay low for a considerable time after our bond-buying policy ends. He thinks the economy has already made considerable progress towards our goals.

  Was that so hard?

  The Fed’s version is 895 words. Mine is 344. I concede that there may be some subtle nuances that the Fed wanted to convey that I didn’t pick up on. After all, it’s written by a committee. Still, there’s no excuse for such horrible writing especially on important matters of public policy. I’m certain my version conveyed 95% of what the Fed was trying say but I needed less than half as many words.

• eBay to Spinoff PayPal
  Eddy Elfenbein, September 30th, 2014 at 10:27 am

  Carl Icahn was right! After saying they weren’t going to sell PayPal, eBay ($EBAY) said today that they’re going to spin off the unit next year. Icahn, who’s known as an activist investor, had pressured the company for some time to ditch PayPal. eBay’s stock jumped whenever there was a hint of such a move—and sure enough, the shares are up strongly today. Of course, with the huge Alibaba IPO, a lot of folks inside the C-suites at eBay probably wondered what PayPal could do on the open market.

  I anticipated this move from eBay in a recent CWS Market Review:

  PayPal is a big money-maker for eBay, and there’s been a lot of pressure on the company to sell the division. As I noted a few weeks ago, just a rumor of that news sent shares of eBay higher. Even though eBay has said they’re not interested in selling PayPal, I think the market’s evident interest will prevail. It usually does. I can’t say whether Apple Pay will crush PayPal, but I think it will add more pressure on eBay to move. The board also has “cover” to make an about-face.

  Here are some details on today’s news from Reuters:

  Donahoe acknowledged in an interview with the New York Times on Tuesday that eBay was following Icahn’s recommended strategy. But he contended the company arrived at its conclusion through “a deliberate process” and not by reacting to outside pressure.

  LOL

  “A thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively,” Donahoe said in a statement.

  EBay said revenue in its marketplaces and enterprise businesses increased 10 percent to $9.9 billion in the last four quarters, while PayPal’s revenue rose 19 percent to $7.2 billion.

  “By separating marketplace and PayPal, it could make marketplace more attractive as an acquisition, which is something that investors have been thinking about since Alibaba’s (BABA.N) IPO,” PiperJaffray analysts wrote in a research note.

  The shares are currently up about 7% today.

• Morning News: September 30, 2014
  Eddy Elfenbein, September 30th, 2014 at 6:50 am

  Europe Ticking All the Wrong Boxes Starts Mirroring Japan

  Eurozone Inflation Slows to Five-Year Low in September

  UK Economy Bigger Than Thought at 2.7% Ahead of Pre-Crisis Peak

  R.B.S. Expects Fewer Charges for Bad Loans in 2014

  Gold Ends Mixed; Short Covering and Bargain Hunting Offset by Strong U.S. Dollar

  Europe Set to Give Details on Apple and Starbucks’ Alleged Tax Evasion

  Bank of America Pays $7.65 Million to Settle SEC Charges

  Vista Equity to Buy Tibco Software for $4.3 Billion

  Ford Cuts Forecast as Russia Turmoil Outshines U.S Gains

  Billions Fly Out the Door at Pimco

  Boeing Shifting Defense Jobs Away From Washington

  Yahoo-AOL Marriage Does Not Solve Issues

  A.I.G. Trial Witnesses Will Be Central Cast From 2008 Crisis

  Cullen Roche: Not All Bonds Are Created Equal

  TED’s All Time Greatest Hits

  Be sure to follow me on Twitter.

• Ford Drops on Lower Guidance
  Eddy Elfenbein, September 29th, 2014 at 5:47 pm

  Ugly day for Ford Motor ($F). The stock dropped sharply late in the day after the automaker cut its earnings guidance for this year. By the closing bell, Ford lost 7.5% to close at $15.11.

  Before, Ford had said that its operating profit for this year would range between $7 billion and $8 billion. Now they’re saying it will be $6 billion.

  There are a few culprits for the bad news. One is Europe and Russia in particular. The sanctions there are starting to weigh in and the European economy as a whole is still in rough shape. Ford said they expect to lose $1.2 billion in Europe this year. But that will improve to a loss of “only” $250 million next year.

  On top of that, last week Ford said it had to recall 850,000 vehicles to fix an airbag problem. The total cost will be $500 million. Ford also said it projects to lose $1 billion in South America this year. One bright spot is Asia where Ford projects a profit of $700 million.

  In the U.S., Ford sees margins between 8% and 9% which is at the low end. The recalls are taking a toll. To their credit, Ford is optimistic for next year. They see 2015 profits ranging between $8.5 billion to $9.5 billion. That’s about $2.20 to $2.45 per share in pre-tax earnings.

  I’m disappointed by this lower guidance. Ford has been recovering well, but there are clearly more hurdles to overcome. I’m not so concerned about the geopolitical issues; Ford can’t control those. I am, however, concerned by the recalls. They’re not a good sign.

  In the longer run, Ford’s core business is still truck sales in North America. The big issue for the next 12 months is how well the new aluminum-bodied car will be received. The company has a lot at stake on this.

  

• Read of the Day
  Eddy Elfenbein, September 29th, 2014 at 10:43 am

  Check out Bloomberg, which has the crazy stock market read of the day. It’s a longish article about a Japanese day trader. Here’s a sample:

  It was six minutes after the opening bell on Feb. 4, and dozens of big-name stocks were still untraded in Tokyo. Telecommunications giant SoftBank Corp. was among those that hadn’t budged. The offer price fell 5 percent, then more, and still there were no takers.

  Then an order was filled: 300,000 shares at 6,714 yen — worth just over 2 billion yen, or almost $20 million. Other buyers followed, momentum built, and the stock ended the day as one of only two gainers in the Nikkei 225 Stock Average.

  The man who made the market for SoftBank that winter morning was sitting in pajamas in a bedroom cluttered with comic books. He was leaning into the glare of four computer screens and munching a carrot — something to calm his stomach.

  Betting on rebounds was dangerous, but he’d watched SoftBank lose a fifth of its value over nine days, and a drop in U.S. markets overnight had driven the shares even lower. The odds were tilting further in favor of a bounce, by his reckoning. He decided to pull the trigger, rat-a-tat-tatting the orders in, Bloomberg Markets magazine will report in its November issue.

  Ninety minutes later, he cashed out with a profit of 140.6 million yen. Then it was on to the next trade for the former video game champion and pachinko gambler who goes by the name CIS. The 35-year-old day trader says he made 6 billion yen, after taxes, betting on Japanese stocks last year.

• Morning News: September 29, 2014
  Eddy Elfenbein, September 29th, 2014 at 5:00 am

  EU to Publish Details of Probes of Tax Deals Benefiting Apple, Fiat

  China Lists Industries to Free Up in Shanghai Zone

  Modi Says Economy to Grow ‘Very Fast’ as Rules Ease

  Fisher Says Fed Must Not Fall Behind the Curve in Increasing Rates

  Business Spending, Exports Spur Big Bounce in U.S. Economy

  Postal Service Seeks to Extend Grocery Deliveries

  With Perspective From Both Sides of His Desk, F.C.C. Chairman Ponders Net Neutrality

  Tougher Shield for Soldiers Against Predatory Lenders

  Pimco’s New Chiefs Seek to Calm Investors After Gross Departure

  AIG Still Battling Over 2008 Bailout

  DreamWorks Weighing $3.4 Billion Bid From Softbank

  Worthless Yahoo! Is Now ‘In Play’ As Investors Look to Extract Profits

  With New Ad Platform, Facebook Opens Gates To Its Vault of User Data

  Joshua Brown: Flipper, Faster Than Lightning

  Jeff Miller: Weighing the Week Ahead: What Will be the Message from the Economic Data Deluge?

  Be sure to follow me on Twitter.

• Sir John Templeton and Peter Lynch
  Eddy Elfenbein, September 27th, 2014 at 4:30 pm

• Alessio Rastani Three Years On
  Eddy Elfenbein, September 26th, 2014 at 10:42 am

  Three years ago today, the BBC interviewed a trader named Alessio Rastani who told them that the stock market was toast.

  Rastani’s comments were ridiculous and ill-informed. Nevertheless, this got a great deal of attention at the time and many people viewed him as a hero. Occupy Wall Street had started just a few days before. Rastani was clever enough to play to his base, “The Governments don’t rule the world, Goldman Sachs rules the world.” Yeah, right.

  Now, with the benefit of hindsight, we can see how wrong he was. The October 3rd low was just days away. The S&P 500 is up 69% from the time of his interview. Rastani’s remarks were so absurd that some people thought it was a joke. The BBC even released a statement saying that he’s really a trader.

  Here’s a transcript of the interview with the BBC:

  Alessio Rastani: …it’s gonna crash and it’s gonna fall pretty hard. Because markets are ruled right now by fear. Investors and the big money, the smart money …I’m talking about the big funds, the hedge funds, the institutions, they don’t buy this rescue plan. They basically know that the market is toast. They know that the stock market is finished, the Euro as far as they’re concerned they don’t really care, they’re moving their money away to safer assets like Treasury bonds, 30 year bonds, and the US dollar. So it’s not gonna work.

  Maxine Croxall: We keep hearing that whatever the politicians are suggesting — it’s all been rather wooly — isn’t right. Can you pin down exactly what would keep investors happy, make them feel more confident?

  Alessio Rastani: Ah, that’s a tough one. Personally, it doesn’t matter. I’m a trader, I don’t really care about that kind of stuff. If I see an opportunity to make money, I go with that. So for most traders we don’t really care that much how they’re going to fix the economy, how they’re going to fix the whole situation. Our job is to make money from it and personally I’ve been dreaming of this moment for three years. Personally, I have a confession to make, I go to bed every night and I dream of another recession. I dream of another moment like this. Why? Because people don’t seem to maybe remember, but the ’30’s depression, the Depression of the ’30’s wasn’t just about a market crash. There were some people who were prepared to make money from that crash and I think anybody can do that. It isn’t just for some people in the elite, anybody can actually make money, it’s an opportunity. When the market crashes, when the Euro and the big stock markets crash, if you know what to do, if you have the right plan to set up you can make a lot of money from this. For example, hedging strategies is one, then investing in bonds, Treasury bonds that sort of stuff.

  Maxine Croxall: If you could see the people around me, jaws have collectively dropped at what you’ve just said. I mean we appreciate your candor, but it doesn’t help the rest of us does it, or the rest of the Eurozone.

  Alessio Rastani: I will say this, listen. I would say this to everybody who’s watching this, this economic crisis is like a cancer. If you just wait and wait thinking this is going to go away, just like a cancer it’s gonna grow and it will be too late. What I would say to everybody is get prepared. This is not a time right now to wishful think that the Government is going to sort things out. The Governments don’t rule the world, Goldman Sachs rules the world. Goldman Sachs does not care about this rescue package neither does the big funds. So actually, I would actually tell people, I want to help people. People can make money from this, it isn’t just traders. What they need to do is learn about how to make money from a downward market. The first thing people should do is protect their assets, protect what they have because in less than 12 months, my prediction is that savings of millions of people is gonna vanish and this is just the beginning. So I would say, be prepared and act now. The biggest risk people can take right now is not acting.

  Maxine Croxall: Alessio Rastani thank you very much for talking with us.

  If you read this closely, you’ll notice he doesn’t say anything substantive. People are afraid because people are afraid, markets are going down because they’re going down.

  To be perfectly clear, I’m not opposed to having negative voices in the media. Nor am I opposed to having people with terrible track records in the media. People who have been wrong are wrong, but can be right on the big picture.

  What I’m opposed to is having frivolous voices in the media. Rastani had nothing to say. It’s cynicism dressed up as wisdom masquerading as investment advice. The dance of the perma-bear never ends. They always have an excuse and never have a time horizon. “It’s even worse now.” “The Fed has only delayed the pain.” And their rotten calls always find a way to slip down the memory hole.

  

• Q2 GDP Revised to +4.6%
  Eddy Elfenbein, September 26th, 2014 at 8:52 am

  This morning, the government revised second-quarter GDP growth up to 4.6%. This means that last quarter was the best for economic growth since the first quarter of 2006. This was a revision up from the previous report which had Q2 growth of 4.2%.

  The final upward revision reflected new-found strength in business investment, which grew at an annual rate of 9.7 percent in the second quarter. The result is better than the government’s previous estimate of 8.1 percent, bolstered by both investment in structures and equipment.

  The revision showed that export sales grew at an 11.1 percent rate in the second quarter, stronger than a previous 10.1 percent estimate, another factor helping to boost growth.

  Consumer spending, which accounts for more than two-thirds of economic activity grew at a 2.5 percent annual rate, unchanged from the previous estimate but double the 1.2 percent growth in consumer spending in the first quarter.