Archive for September, 2014

• Morning News: September 16, 2014
  Eddy Elfenbein, September 16th, 2014 at 6:49 am

  China Foreign Direct Investment at Four-Year Low

  German Economic Outlook Downbeat

  Biggest Banks Said to Overhaul FX Trading After Scandals

  Dollar Is 0.2 Percent From Six-Year High Versus Yen as Fed Meets

  Industrial Output Drops as Automakers Adjust Plans

  So What Exactly Is Alibaba?

  United To Offer Up to $100,000 Lump Sums to Thin Out Flight Attendant Ranks

  Adam Smith Explains Why Calpers Is Pulling Out Of Hedge Funds

  GM’s Opel to Cut Russia Production as Slowdown Bites

  Airbus Seeks to Sell Some Defense and Space Operations

  Orange Offers to Acquire Jazztel of Spain for $4.4 Billion

  Facing Big Ride-Sharing Competitors, Sidecar Enlists Richard Branson

  Pershing Square, Valeant and Allergan Settle Pending Litigation Before the Delaware Court of Chancery

  Jeff Carter: Startup Investing, Is It For You?

  Joshua Brown: Buybacks and Tradebots

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• The Alibaba IPO
  Eddy Elfenbein, September 15th, 2014 at 5:20 pm

  I haven’t said much about the Alibaba IPO. I prefer to stay quiet on areas that I don’t know much about (that seems to be a minority view on Wall Street).

  But I will note that the numbers about the Alibaba IPO are truly massive. The company is looking to sell 320.1 million shares to the public somewhere between $66 and $68 per share. The previous range was $60 to $66 per share, and it was recently raised. Interest is very strong so I think we can expect to see the shares price at the high end of the range.

  If all goes well, the IPO will be priced on Thursday and BABA will start trading on Friday. After the offering, Alibaba will have 2.47 billion shares outstanding. At $70 per share, that would make Alibaba worth $173 billion. Amazon is worth $150 billion. Yahoo will be cutting its stake from 22.4% to 16.3%.

• Industrial Production Falls 0.1%
  Eddy Elfenbein, September 15th, 2014 at 2:39 pm

  Another slowish day for the market. The S&P 500 is currently down about 4 points to 1982. On our Buy List, Cognizant Technology Solutions ($CTSH) made some news today. The company is buying TriZetto for $2.7 billion which will expand their reach into the healthcare market.

  eBay (EBAY) is down again today. The stock has been falling ever since Apple unveiled its Apple Pay program. The stock had an interesting day on Friday when it sold off early then rallied sharply. There was some loose talk about someone making a bid for eBay. I’m a doubter but stranger things have happened. In any event, I don’t see how eBay can be so close to $50 per share.

  I forgot to mention this on Friday but there was a very good report on retail sales. The Commerce Department said that retail sales were up 0.6% in August. I think that lower prices at the pump are helping out. The number for July was revised higher from flat to 0.3% growth.

  One bad sign was today’s report on Industrial Production. For the first time since January, Industrial Production fell. Wall Street had been expecting a 0.3% increase. Instead, we got a 0.1% decline. The number for July was cut from 0.4% to 0.2%. That’s a bad sign, but it’s too early to say it’s a trend.

  A fall in IP isn’t that unexpected even in a strong up trend. IP had done very well over the last 62 months even though it fell on ten of those months. The data series is naturally volatile.

• Morning News: September 15, 2014
  Eddy Elfenbein, September 15th, 2014 at 7:18 am

  Western Sanctions Are Testing Russia’s Strength: Medvedev

  Scots Breakaway at 45% Odds as Economists Warn of Capital Flight

  World Waits For White Smoke From U.S. Fed

  A Scary World, But Investors Trust the Fed

  Is Sinopec’s Retail Sale a Big Deal?

  Cognizant to Acquire TriZetto in $2.7 Billion Deal

  Danaher to Buy Implant Maker Nobel for $2.2 Billion

  SABMiller Said to Approach Heineken Family in Buyout Bid

  Alibaba Said to Plan Boosting IPO Price Amid Heavy Interest

  Better News on Insurance Premiums

  Home Depot Upped Defenses, But Hacker Moved Faster

  Marriott International Joins The Envelope Please™, A New Initiative Created By Maria Shriver And A Woman’s Nation™ In Support Of Hotel Room Attendants

  Epicurean Dealmaker: Some Work of Noble Note May Yet Be Done

  Howard Lindzon: The ‘War on Leisure’… USA, USA, USA!

  Jeff Miller: Weighing the Week Ahead: Will the Fed Change Course?

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• Groundskeeper Willie on Scottish Independence
  Eddy Elfenbein, September 13th, 2014 at 12:52 pm

• CWS Market Review – September 12, 2014
  Eddy Elfenbein, September 12th, 2014 at 7:13 am

  “Fate laughs at probabilities.” – Edward Bulwer-Lytton

  The stock market is continuing with its subdued ways. This past Tuesday, the S&P 500 dropped 0.65%, for its worst day in five weeks. But the arresting part of that stat isn’t the drop; rather, it’s that the worst day in five weeks was a measly 0.65% loss. By historic standards, that’s barely a ripple, and going by what we saw a few years ago, it’s next to nothing. Tuesday’s plunge snapped the S&P 500’s streak of closing up or down by less than 0.5%. That was the longest such streak in 45 years. As I described it last week, this summer has been the Big Chill for Wall Street.

  As I expected, the stock market has been a little weak lately. The S&P 500 is down from its all-time high from last Friday. But the interesting action hasn’t been in the stock market. Instead, the currency markets have suddenly become very interesting. Over the past few weeks, the U.S. dollar has gotten a lot stronger against many currencies around the world (see the chart of the dollar index below). If you’re a traveler, you’ve probably noticed the effects. Investors need to understand that a strong currency has a large impact on the economy and on our Buy List stocks. In this week’s CWS Market Review, I’ll review what it all means.

  

  I’ll also take a look at the upcoming earnings report from Oracle ($ORCL). Their last report was a dud, but I’m expecting better news this time around. I also want to look at the recent weakness in eBay (EBAY), which is normally a solid stock. But first, let’s take a look at last week’s sluggish jobs report and what it means for the Federal Reserve’s interest-rate plans.

  Expect Higher Rates Next Year

  Last Friday, shortly after I sent out last week’s CWS Market Review, the government reported that the U.S. economy created only 142,000 jobs in August. This was well below Wall Street’s forecast, and it snapped the economy’s six-month streak of creating more than 200,000 jobs.

  The weak jobs report put a wrench into the plans of folks who have been expecting the Fed to raise rates this coming spring. As I’ve said, I continue to like the stock market as long as interest rates are near the floor (although I expect some minor sluggishness this month). But once the Fed starts to raise interest rates, the game changes.

  Think of it this way: It’s one thing to like Microsoft ($MSFT) when it’s yielding 2.4% and short-term rates are 0% (the one-month Treasury even went negative a few times this week), but it will be quite another if they’re both yielding 2%. As always, the game is about risk and reward.

  Lately we’ve been seeing some signs of dissension within the Fed, but that’s to be expected as I-Day approaches. (That’s my term for the date of the Fed’s first rate increase.) Janet Yellen has tried to make it clear that the Fed isn’t on a pre-set course, and that they’ll change as events change. The Fed meets again next week, and all of Wall Street will be watching. In addition to another $10 billion taper announcement, we’ll hear updated interest-rate projections. (I’ll warn you, the Fed’s track record on predicting the economy is terrible.)

  But rather than trying to parse various Fed statements for clues, I think it’s better to look at the Fed’s arch enemy, which is the bond market. Here I like to follow the one-year Treasury yield as it compares with the two- and three-year yields (see below). Think of this as the “Yellen Chart” because it’s mainly focused on the first rate increase. This is an interesting chart to follow because the one-year yield has been remarkably flat, but the two and three-year yields have climbed steadily higher. In fact, the yield on the three-year has tripled since April. Not only that, but the gap between the two- and three-years has widened as well. It’s as if the bond market were saying, “higher rates are on the way, but not just yet.”

  There are also futures contracts that trade on the Fed funds rate. The latest prices indicate that the market expects the Fed funds rate to be at 0.25% by May 2015 and at 0.50% by September. That strikes me as a bit too soon. Right now, I’d place I-Day around the middle of next year.

  What’s also interesting is that at the same time that the middle part of the yield curve has seen higher interest rates, the long yield of the yield curve has seen lower rates. The yield on the 30-year Treasury is down 69 basis points since the start of the year. Lately, however, long-term rates have started to edge higher, which is what I predicted four weeks ago.

  What the Strong Dollar Means for Investors

  In last week’s issue, I mentioned how the European Central Bank had decided to jump on the bond-buying bandwagon. The economy in Europe has been dreadful, and many euro bonds pay next-to-nothing yields. To quote myself, Mario Draghi is sending a loud message to currency traders: “Please, please, pleeezze bring the euro down!” They’re not alone. Japan has embarked on a similar strategy.

  As a result, the U.S. dollar has soared. It’s not that the greenback is strong in an absolute sense. It’s that the dollar is the cleanest of the dirty shirts. Since July, the dollar has rallied from 101 yen to 107 yen today. Meanwhile, the euro has dropped from $1.37 to $1.29.

  What’s the impact of the strong dollar? This can be confusing, since it seems normal to assume that the conjunction of the words “strong” and “dollar” can only yield positive results, but that’s not necessarily the case. Like many things economic, it involves tradeoffs. For example, a strong dollar tends to help imports but hurt our export market. Those of you who do a lot of international travel may have noticed that the stronger dollar helps your purchasing power abroad. The same forces are in play for companies. European stocks look cheaper for American companies, so we can expect to see more international buyouts (like Medtronic/Covidien).

  A stronger dollar also takes some of the pressure off the Fed to raise rates so quickly. That’s part of the reason I’m skeptical of the futures market on interest rates. People want to invest in the dollar because they see better growth ahead. Goldman Sachs just said that the U.S. economy grew by 4.7% last quarter. If the dollar were weaker, the Fed would have to raise rates to entice people to hold dollars. The dollar rally has taken that potential problem off the table.

  Now let’s consider the bad effects of the stronger dollar. The dollar’s rally against the yen has stung AFLAC ($AFL), which is one of my favorite Buy List stocks. The problem is that AFLAC does about 75% of its business in Japan. As a result, it has to convert that profit from yen into dollars. So a strong yen is good for AFL’s bottom line, but a weak one is bad. This is unfortunate, because as far as its business goes, AFLAC is doing quite well. Sadly, a lot of those gains are lost due to currency effects. It’s annoying, but to quote Hyman Roth, “this is the business we’ve chosen.”

  In July, AFLAC said they expect full-year operating earnings to range between $6.16 and $6.30 per share, but that forecast assumes a yen/dollar exchange rate between 100 and 105. Now it’s up to 107, which explains why shares of AFLAC recently slipped below $60.

  

  My view is that the currency effect is mostly transitory. Sometimes it helps you, sometimes it hurts. But if a company is well run, it will most likely stay that way. Unfortunately, AFLAC is getting the short end of this stick lately. I still like the stock a lot, and it’s an especially good buy below $60 per share.

  A strong dollar also helps keep the lid on inflation, and you can see that in the commodities market. The last few inflation reports have been quite subdued. Last week, I talked about the weakness in gold. This is a direct outcome of the dollar’s surge. Commodity prices are staying well behaved. AAA recently said that the average price for gasoline fell to a seven-month low. In turn, that has helped U.S. consumers (remember the strong earnings report from Ross Stores). A lot of energy stocks have not joined in the rally this year. Stocks like Apple, Microsoft and Facebook are all up over 25% this year, but ExxonMobil, one of the largest companies in the world, is down for the year.

  I think some of the dollar’s strength is due to Russia. In one sense, investors flock to a strong currency in times of stress. But also, any sanctions on Russia will probably hurt Europe as well. A strong dollar tends to correlate with large-cap stocks outperforming small-caps, but it’s not a very strong relationship.

  The odd part of a rising dollar is that it’s usually the result of good news. People are more optimistic about the domestic economy. The problem is that the good news can lead to bad news like weaker imports. Investors should continue to focus on high-quality companies with strong positions in their markets. Don’t try to second-guess the forex market. That’s a sucker’s game. The best companies know how to plan for their markets and they act accordingly. As always, time is on the side of the disciplined investor. Now let’s look at Oracle’s upcoming earnings report.

  Oracle Is a Buy up to $44 per Share

  Now that we’re in September, we have two Buy List stocks that have quarters ending in August. Bed Bath & Beyond ($BBBY) is due to report its earnings on September 23. Next Thursday, September 18, Oracle ($ORCL) is due to report their fiscal Q1 earnings.

  Three months ago, Oracle bombed their last earnings report. For Q4, the House of Ellison earned 92 cents per share, which was three cents below Wall Street’s consensus. The company had told us to expect earnings to range between 92 and 99 cents per share. It’s unusual to see Oracle hit the low part of their range.

  Looking at the numbers, Q4 was surprisingly weak. Quarterly revenue rose only 3.4%, to $11.32 billion, which was $160 million below expectations. One of the keys for Oracle‘s business is sales of new software licenses. For Q4, that came in at $3.77 billion, which was flat. Their hardware revenue, now finally growing, rose only 2%, to $1.5 billion. One bright spot was that Oracle’s cloud revenue jumped 23% to $327 million.

  Oracle has said they see Q1 earnings ranging between 62 and 66 cents per share. That’s not so bad. Wall Street had been expecting 64 cents per share. Oracle sees quarterly revenue growth between 4% and 6%. Breaking that down, they expect new software-license revenue to be up by 6% to 8%. Hardware will be between -1% and 3%, but cloud revenue is expected to be up by 25% to 35%. If their guidance is accurate, that tells us that last quarter’s weakness was temporary. Oracle remains a solid buy up to $44 per share.

  Updates on Other Buy List Stocks

  Be on the lookout for a dividend increase soon from Microsoft ($MSFT). The software giant isn’t normally thought of as a dividend stock, but they’ve been working to change that. In the last four years, Microsoft has increased its dividend by 115%. The quarterly payout is currently 28 cents per share. I think MSFT will raise it to 31 cents per share. The stock recently broke out to another 14-year high. Microsoft remains a buy up to $48 per share.

  In last week’s CWS Market Review, I highlighted McDonald’s ($MCD) as an especially good buy. Not good timing on my part. This past week, MCD announced their worst monthly sales in ten years. Same-store sales fell 3.7% in August. When it rains, it pours. The company also said that problems with suppliers in China will knock 15 to 20 cents off this quarter’s bottom line. The burger joint is also getting bullied in Russia by Colonel Putin’s government. A number of McDonald’s have been shut down in Russia due to “sanitary” concerns. (Yeah, right.) The stock briefly dropped below $91 per share, which is a very good price. I’m keeping my Buy Below at $101, but if you can pick up shares under $93, that’s a good longer-term investment.

  Shares of eBay ($EBAY) got beat up this week after Apple announced plans for Apple Pay, which will compete against eBay’s PayPal. 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. I’m lowering my Buy Below on eBay to $55 per share.

  That’s all for now. The Federal Reserve meets again next week, on Tuesday and Wednesday. The Fed will update its economic projections (the blue dots), and Chairwoman Yellen will hold a post-meeting press conference. I expect to hear another $10 billion taper announcement. That will bring their monthly bond purchases down to $15 billion starting in October. Next week, we’ll also get the Industrial Production report on Monday and the CPI report on Wednesday. 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 12, 2014
  Eddy Elfenbein, September 12th, 2014 at 6:41 am

  European States Struggle With Draghi’s Challenge

  Can an Independent Scotland, Free of London’s Dominance, Survive?

  IMF’s Christine Lagarde Says Women Vital for Global Recovery

  US Fines HP $108 Million For Bribery in Russia, Poland, Mexico

  U.S. Jobless Claims Hit Two-Month High, Breaking Steady Decline

  Alibaba’s IPO and The Hypocrisy in U.S.-China Economic Relations

  Fortunes Sour for Regional Airlines as Majors Prosper

  RadioShack Rescue Raises Question of What’s Worth Saving

  7 Stunning Reasons to Add Barclays PLC to Your Portfolio

  Newmont Signs Agreement to Sell Stake in Penmont Joint Venture in Mexico

  Wintershall Buys Statoil Assets for $1.3 Billion

  Vail Buys Park City Mountain Resort for $182.5 Million

  Virgin Money Boosts Board Amid IPO Preparation

  The Catalan Vote: Why It’s Time To Start Getting Worried About Complacency In Madrid

  Cullen Roche: The Savings Portfolio Perspective

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• The Strength in Healthcare
  Eddy Elfenbein, September 11th, 2014 at 2:01 pm

  I was surprised to see this, but the healthcare sector has been a steady out-performer for several years:

  

• Morning News: September 11, 2014
  Eddy Elfenbein, September 11th, 2014 at 5:16 am

  China August Inflation Cools More Than Expected, Gives Room for More Stimulus

  The Yen Drops To 107 On BoJ ‘Negative Interest Rate’ JGB Buying, But Abenomics’ Future Is Still Unclear

  RBS Warns It Would Relocate to England if Scots Vote Yes

  Australia Jobs Rise by Most on Record, in Huge Surprise

  Wholesale Inventories Barely Budge

  First Rise in Foreclosure Auctions in Nearly Four Years

  Fed’s Rate Guidance on Chopping Block, New Exit Plan Nears

  Alibaba Is Bringing Luxury, Fast, to China’s Middle Class

  Twitter to Raise $1.3 Billion Through Debt Offerings

  Number Of Aging Americans Paying Student Loans Soars

  Krispy Kreme Profit Rises 22% on Sales Growth

  Cereals Struggle in the U.S. as Tastes and Rituals Change

  Munger Hosts Groupies, Mocks Wall Street, Praises Buffett

  Robert Seawright: Beguiled by Narrative

  Jeff Carter: Chicago Booth’s Cliff Asness Talks About His Journey and Efficient Markets

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• Same Industry, Very Different Results
  Eddy Elfenbein, September 10th, 2014 at 2:35 pm

  Sometimes a picture does say it all. Check out this chart comparing Lowe’s ($LOW, gold line) with Home Depot ($HD, black line).

  

  Notice how the daily cracks and burps are nearly identical. But over the long term, these stocks are very different. This is an important lesson with investing. Daily movements are strongly impacted by a company’s industry, but that impact drains little by little each day.

  When most novice investors go about investing, they naturally ask, “what does the company do?” As odd as this sounds, that’s not as important as you’d think. Instead, the really important question is, how well do they do it?

  With investing, you hear a lot of talk about “portfolio defense.” In the end, I think the best portfolio defense is owning a really good company.