Archive for October, 2014

  • Entire Darden Board Voted Out
    , October 13th, 2014 at 12:22 pm

    Starboard Value won a big victory for investors. Their slate of candidates completely swept out the current board of Darden Restaurants ($DRI).

    The election of Starboard’s 12-director slate, announced Friday at Darden’s annual meeting, was a feather in the cap for the New York hedge fund, Darden’s second-largest investor with an 8.8 percent stake.

    It was a stinging defeat for Darden, which this year alienated investors by brushing off their vote requesting a special meeting to debate the company’s then-proposed sale of its struggling Red Lobster chain.

    The “extraordinary” and “totally self-inflicted” loss for Darden comes as no surprise given Darden’s “tone deafness” to investor wishes regarding the Red Lobster sale, said Charles Elson, director of the Weinberg Center for Corporate Governance in Delaware.

    “It was kind of a done deal, wasn’t it?” agreed Karl Sooder, a Darden investor and University of Central Florida marketing professor, who attended Darden’s annual meeting in Orlando.

    The board sweep, which is based on a preliminary vote count, is notable because of Darden’s size, experts said. Darden is the largest U.S. operator of full-service restaurants with $8.55 billion in 2013 sales.

    I don’t have a dog in this fight, but I’m glad to see boards get fired. This should happen much more often.

  • The S&P 500 Breaks Its 200-DMA
    , October 13th, 2014 at 10:19 am

    For the first time in nearly two years, the S&P 500 broke below its 200-day moving average this morning. The index also dipped below 1,900. On Friday, we closed just above the 200-DMA.

    big10132014r

  • The Strong Dollar Trade
    , October 13th, 2014 at 8:21 am

    Recently, I’ve talked a lot about the Strong Dollar Trade. I wanted to show you exactly what I meant by using a series of charts.

    First off, here’s the soaring dollar index:

    big.chart10132014

    The strong dollar has caused commodities to tumble:

    big.chart10132014a

    And that includes gold:

    sc10142014b

    Lower commodity prices have hurt energy stocks:

    big.chart10142014c

    Yet Consumer Staples haven’t budged:

    big.chart10142014d

    Long-term Treasury yields have fallen:

    big.chart10142014e

    The shift in the market has caused greater volatility:

    big.chart10142014f

    Notice the gradual increase in the spread between the daily high and low.

    big.chart10142014g

    Small-cap stocks have felt most of the pain:

    big.chart10142014h

  • Morning News: October 13, 2014
    , October 13th, 2014 at 6:53 am

    Draghi Asset Plan Seen Falling Short as QE Bets Rise

    Dollar Drops as Fed Officials Warn on Slowing Growth; Yen Gains

    I.M.F. Warns of Global Financial Risk From Fiscal Policies

    Finland Loses One of Euro Zone’s Last Top Credit Ratings

    China Posts Strong Trade Figures, But Data Deserve Close Scrutiny

    Growth Slows in China Passenger Vehicle Sales

    Fed Vice Chairman Confident Regarding Next Move

    Crude Oil May Not Fall Below $80 Per Barrel; Are OMCs a Blind Buy?

    Russia Spending $6 Billion Not Enough to Stop Ruble Rout on Oil

    Norway’s Statoil Sells Stake in Caspian Sea Oil Field for $2.25 Billion

    Synergy Health Agrees To $1.9 Billion US Takeover

    Marissa Mayer Faces Investor Revolt at Critical Time For Yahoo

    Fiat Chrysler Crowns Merger With Wall Street Debut

    Epicurean Dealmaker: The Privy Counselor

    Jeff Miller: Weighing the Week Ahead: Can Corporate Earnings Reports Reverse the Stock Market Decline?

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  • On Fire?
    , October 12th, 2014 at 9:37 pm

    Ed Bradford (@fullcarry) is one of the more astute observers of the economy. That’s why I was surprised to see him tweet this:

    Is he wrong? Personally, I wouldn’t go as far as Ed does and use the words “on fire,” but the larger point that ex-housing, the economy is doing well, is largely correct.

  • Nikola Tesla: Master of Lightning
    , October 12th, 2014 at 4:54 pm

  • CWS Market Review – October 10, 2014
    , October 10th, 2014 at 7:07 am

    “There is scarcely an instance of a man who has made a
    fortune by speculation and kept it.” – Andrew Carnegie

    The stock market decided to get a whole lot more interesting this week. On Thursday, the S&P 500 fell 2.09% for its worst day in six months. This was surprising, considering how calm the markets had been. Earlier this year, there was a three-month stretch when the index never had a 1% day. Now it’s happened four times in the last five days.

    During Thursday’s trading, the Volatility Index ($VIX) spiked to over 19. Just a few days ago, it was less than 12. In the last few issues, I’ve talked about the distorting impact that the strong dollar has had on the markets. Now we’re seeing some of the negative fallout. On Thursday, the S&P 500 closed at 1,928.21. That’s a two-month low, and it’s a loss of 4.13% from the all-time high close of September 18. (Notice how the spread between the daily high and low has gradually increased.)

    big.chart10102014

    That’s not a big loss, but remember, we haven’t had a 10% correction in three years. I should remind all investors that every few years, stocks go down. It’s just the nature of the beast. But now we’re in earnings season, and this is when every stock is judged by the market. For disciplined investors, we also want to pay close attention to the earnings guidance from our stocks.

    In this week’s issue, I’ll walk you through what’s been roiling the market. I’ll also highlight three of our Buy List stocks which have earnings reports coming next week. For the broader market, I’m expecting a mild earnings season. Nothing great, but not terrible either. I’ll also have some updates on our Buy List stocks, but first, let’s look at what has the market so rattled lately.

    Volatility Makes a Comeback this Week

    Last Friday, the government reported that the U.S. economy created 248,000 jobs last month. That’s a pretty strong number. The Feds also revised higher the figures for July and August, and the unemployment rate dropped down to 5.9%. This was the first time the jobless rate has dipped below 6% since July 2008.

    The market briefly enjoyed the good news, and the S&P 500 rallied back over 1,970, but it wasn’t to last. Stocks sunk lower on Monday and Tuesday, but the heated action came on Wednesday and Thursday.

    Stocks started out poorly on Wednesday, but that afternoon, the Federal Reserve released the minutes from their last meeting. We never know exactly what happens behind the scenes at these meetings, but three weeks after each one, the Fed releases the minutes. In them, the Fed expressed some concerns about the rising dollar. While a rising dollar carries benefits, it can also impinge on growth and keep inflation down. The Fed has tried desperately to keep the economy afloat, and we know that inflation is running below their target, so you can see their concern.

    So does this mean there’s a growing chorus of doves at the Fed? Not exactly. I have to mention that reading the minutes from any Fed meeting is an arcane study in indefinite pronouns; “some participants say” this or “others” say that. In this week’s minutes, the concerns about the strong dollar were aired by “some” and “a couple.” Well, a few of us have a number of concerns some of the time about several of these minutes. What exactly are they saying?

    In any case, traders were quite pleased, and the market staged an impressive turnaround on Wednesday afternoon. In fact, it was the best day for the S&P 500 all year. I think they’re correct that the Fed has a bias towards keeping rates low, but we simply can’t say how much they’re weighing the impact of the strong dollar.

    Then on Thursday, concerns from Europe sent our stocks lower again. Mario Draghi, the head of the ECB, is clearly frustrated with the European economy. He’s particularly worried about the threat of deflation. The German economy is moving backward and there are concerns about its impact here. The sanctions against Russia aren’t helping either. So we followed the best day of the year with the fourth-worst day of the year. Market historians often tell us that weird things happen in October.

    The Fed’s minutes caused a brief pullback from the greenback, but the effects on the strong dollar trade are still evident. Small-caps are doing poorly. The relative strength of the Russell 2000 has been terrible. Gold has been awful, although it got a little bounce this week. Conversely, the dollar fell a little bit, but commodity stocks have lagged badly. The Energy Sector ETF ($XLE) has dropped from over $100 on July 24 to just under $85 on Thursday. The yield on the 10-year Treasury dropped to 2.33%, which is its lowest yield in more than 15 months. At the start of the year, the yield was near 3%. It’s not just Treasuries; 30-year fixed-rated mortgages are back below 4%.

    Several of our Buy List stocks got hit hard this week, including some of my favorites. AFLAC ($AFL), CA Technologies ($CA) and Ford Motor ($F) all touched new 52-week lows this week. I was really surprised by the falloff in Ford. The stock had already turned south after the lower guidance, but the selling has continued. A few weeks ago, Ford was closing in on $18 per share, and this week, it dropped below $14 per share. This week, an analyst at Morgan Stanley downgraded the automakers, not because of any weakness in their operations, but because of lower gas prices. The analysts said that cheaper gasoline won’t cause such a rush of buyers to snatch up Ford’s new aluminum trucks. Frankly, I think he’s missing the larger picture. What Ford is doing could be a massive change for the industry. I apologize for the volatility, but I haven’t altered my outlook on Ford. If their forecast for next year is correct, Ford is going for a great price here.

    What to do now: Investors should focus on earnings instead of day-to-day volatility. For Q3 earnings season, analysts currently expect profit growth of 4.9%. Three months ago, the expectation was for growth of 7.8%. As I said, I expect mild growth this season. Some of the most attractive Buy List stocks at the moment are Ford Motor ($F), AFLAC ($AFL), eBay ($EBAY), Cognizant ($CTSH) and Microsoft ($MSFT). Now let’s take a look at some earnings reports coming our way next week.

    Three Buy List Earnings Reports Next Week

    Next week is the start of earnings season for our Buy List. On Tuesday, Wells Fargo ($WFC) will become our first Buy List stock to report. Three months ago, the big bank earned $1.01 per share, which matched expectations. I’ve been impressed by how Wells has managed itself during an important juncture in the industry (see the chart below). Mortgage revenue has plunged, but Wells is well ahead of the curve. The bank has broadened its footprint in credit cards, cars loans and investment banking.

    big.chart10102014a

    Wells Fargo has managed to increase its earnings for 18 quarters in a row. Until last quarter, they beat expectations for 10 quarters in a row. The consensus on Wall Street is for Wells to earn $1.02 per share for Q3. My numbers say that’s about right. Frankly, the stock isn’t that exciting right now, but that’s a plus in this market. The stock is currently going for 12.4 times earnings, which is quite reasonable. This is a good stock for conservative investors. In a downturn, WFC probably won’t fall as much as other stocks and the dividend is secure. Wells Fargo is a buy up to $54 per share.

    On Wednesday, eBay ($EBAY) is due to report. The online auction house has had a rough year, although it’s improved since the spring. The big news recently was the announcement that they’re going to spin off PayPal next year. I think that’s a smart move, and I expect to hear more details about this on the conference call.

    For Q2, eBay beat by a penny per share. They said they expect Q3 earnings to range between 65 and 67 cents per share. Since that range is so narrow, I’m assuming that’s what it will be. Honestly, I’m surprised eBay is still below $55 per share. The business looks pretty good right now, and naturally, a stronger economy would help.

    For the entire year, eBay sees earnings coming in between $2.95 and $3.00 per share. They see revenues ranging between $18.0 billion and $18.3 billion. I’ll be curious to hear what they have to say about Q4 guidance. Wall Street expects 91 cents per share, but there’s a chance it could be higher. I’m keeping a fairly tight Buy Below here; eBay is a buy up to $55 per share. I may raise it if earnings and guidance are strong.

    On Thursday, it’s Stryker’s ($SYK) turn. The orthopedic company rarely surprises us, but they did last earnings season when they lowered the high end of their full-year guidance by ten cents per share. For Q3, they see earnings ranging between $1.12 and $1.16 per share. I think there’s a good chance SYK can top that. For the full year, Stryker projects earnings between $4.75 and 4.80 per share.

    I don’t always trust guidance from companies, but in Stryker’s case, I‘m more inclined to believe them. I should also point out that Stryker may be in the works for a merger. I’m not predicting anything will happen, but merger mania seems to be spreading across their industry. If the price is right, a deal might come about. Stryker is a buy up to $87 per share.

    Buy List Updates

    Shares of Bed Bath & Beyond ($BBBY) spiked higher on Tuesday after rumors broke that Carl Icahn had taken a position in the stock. Let me stress that there’s absolutely zero confirmation that the story is true.

    Traders naturally prefer to move first and wait for facts later. Sometimes that works for you, and sometimes it doesn’t. This week, it worked in BBBY’s advantage. Later on in the week, the shares kept their heads while the rest of the market got shaky. I doubt Carl made any move into BBBY, but you never know. Either way, we’re in this for the long term. Despite all the drama in this stock, the company hasn’t altered its long-term guidance. Bed Bath & Beyond remains a buy up to $70 per share.

    Earlier this year, Medtronic ($MDT) announced its big “tax inversion” deal with Covidien ($COV), a company based in Ireland. Recently, however, shares of Medtronic pulled back after the Obama administration announced new rules regarding such inversions. Some investors thought that might cause the deal to be scrapped. Not so.

    This week, Medtronic said they’re reworking the deal to be in compliance with the new rules. The combined entity will be domiciled on the Emerald Isle, and they’ll probably be able to cut their tax bill as well.

    Not to get too technical, but Medtronic was going to use their cash held outside the U.S., and loan that to Covidien to complete the deal. Now Medtronic will use cash from another source. I’ve been impressed by Medtronic’s insistence that they’re doing this deal for operational reasons, not solely for a cheaper tax bill. You’d expect them to say that publicly, but now we have further proof that both companies are on board. Medtronic is a buy up to $67 per share.

    That’s all for now. Next week will be about earnings. We’re also going to get important reports on retail sales and industrial production. You can see an earnings calendar for our Buy List stocks. 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: October 10, 2014
    , October 10th, 2014 at 6:56 am

    Sluggish Global Outlook Ripples in Markets

    Can I Ladder Bonds Using ETFs?

    OPEC Boosts Oil Supply by Most Since ’11 Amid Bear Market

    Carl Icahn in Right: iPhone Users Will Never Give Up Apple

    Ford Car Sales Decelerate in China

    GM Says Sept China Auto Sales Up 15.2% Year-On-Year

    Nissan’s China Sales Drop 20% in September

    PepsiCo Raises Profit Outlook For The Year Again

    Jeff Bezos Realizes A Dream With Amazon Storefront But The Purpose Remains Unclear

    Is Now A Good Time to Buy Gap (GPS) Stock?

    Liberty Global Wins EU Nod for Ziggo Bid With TV Pledge

    Dave & Buster’s In Play After $94.1 Million IPO

    Symantec to Split Into Security and Storage Software Companies

    Cullen Roche: Are There Flaws in Ray Dalio’s “Machine”?

    Edward Hugh: Is Japan Back in Recession?

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  • Morning News: October 9, 2014
    , October 9th, 2014 at 6:55 am

    German Exports Fall 5.8%, Deepest Since Jan. 2009

    Germany Considers Remedies for Slowing Growth

    Pound’s Slump Belies Strength None Other Can Match

    Obama Had Security Fears on JPMorgan Data Breach

    Fed Concerned About Overseas Growth, Dollar

    Alcoa Results Trounce Estimates

    J.C. Penney’s Stock Falls 11% as Plan Fails to Excite Investors

    Here’s The Chilling Greenpeace Video That Ended Lego’s $116 Million Deal With Shell

    Symantec Exploring Split Into Two Companies

    Tech Companies Lead Ranking of Most Valuable Brands

    AMD’s CEO Steps Down, COO Takes Over

    Facebook Has No Near-Term Plan to Monetize WhatsApp

    Service Without A Smile: Why Airlines Aren’t Nice

    Joshua Brown: An Investing Frankenstein

    John Hempton: Spectrum Valuation And A Case For Verizon and Against Wannabe Players Like Sprint and Desperado/Promotes Like GSAT

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  • Interview with Jeff Fleishman
    , October 8th, 2014 at 8:16 pm

    Here’s part of a recent interview I did with Jeff Fleishman:

    You seem to be a very rational, logical person. It’s difficult to find that with people that discuss the stock market. Like, sometimes I turn on CNBC and I just want to go crawl in a hole. Does the coverage of the stock market frustrate you?

    I don’t get too bothered by it. One of the things about investing is that you have to fight yourself, and keep your emotions away. Mr. Spock would have been a great investor. You just have to approach the market logically and rationally, because so many people don’t. I know this from being a broker, but when people are down and disappointed, they get angry and they sell and they act in all sorts of weird ways. So I try to be as business-like and dispassionate as possible.

    You can read the whole thing here.