Archive for November, 2014

  • Some Fun Market Stats
    , November 17th, 2014 at 12:12 pm

    Here are some fun stats I recently found.

    So far this year, the S&P 500 is up 12.73% on Tuesday and Wednesday. The rest of the week, the index is down -2.10%.

    Here’s how it works out:

    Monday: -0.89%
    Tuesday: 8.12%
    Wednesday: 4.27%
    Thursday: -4.66%
    Friday: 3.59%

    I also found that the best seven days of the last seven years comprised the S&P 500’s entire gain. The rest of the time, the index was net flat.

    That’s a good example of a stat that’s true, but it’s a bit misleading. For one, it excludes dividends. Even with low yields, dividends add up after seven years.

    Also, the last seven years haven’t been that good for the market. Add in a very volatile time in 2008 and the stat isn’t that hard to believe. All seven days came within an unpleasant six-month period, and five of the seven came during a six-week stretch.

  • Stock Returns and 5-Year TIPs
    , November 17th, 2014 at 10:25 am

    Here’s a remarkable stat I just found. Since 2003, when the yield on the 5-year TIPs is 1.11% or less, the Wilshire 5000 Total Return Index has had an average annualized return of 22.5%.

    But when the yield on the 5-year TIPS is 1.12% or more, the Wilshire 5000 has averaged -5.0% per year.

    The difference is quite striking. I should warn you that that’s a small sample size. Unfortunately, TIPs are fairly new so the data doesn’t go back that far. Intuitively, this relationship makes sense. When real bond yields are high, investors will ditch stocks in favor of bonds. Conversely, when real bond yield are in the dumps, investors will naturally turn to stocks.

    Since 2003, the 5-year TIPs has been 1.11% or less, 58.1% of the time. It’s been 1.12% or more, 41.9% of the time.

    The good news is that real bond yields are still quite low. The five-year TIPs is currently barely positive (0.16% on Thursday). That’s up from the spring of 2013 when the 5-year TIPs were near -1.5%.

    The 5-year TIPs last yielded 1.12% or more on September 4, 2009. If this relationship is to be trusted, it means the stock rally still has room to run.

  • Industrial Production Fell 0.1% in October
    , November 17th, 2014 at 9:41 am

    We got a little surprise this morning when the Industrial Production report for October showed a 0.1% decline.

    Output fell 0.1 percent after a 0.8 percent increase in September that was smaller than previously estimated, figures from the Federal Reserve in Washington showed today. The median forecast in a Bloomberg survey of 83 economists projected a 0.2 percent gain. Factory production rose 0.2 percent, matching the prior month’s advance that was also revised down.

  • Four Straight Under 0.1% Moves
    , November 17th, 2014 at 8:27 am

    Oh dear lord, this market has been sound asleep. Here are the five closings, in order, for the S&P 500 last week; 2,038.26, 2,039.68, 2,038.25, 2,039.33 and 2,039.82.

    Someone check for a pulse.

    The S&P 500 has finished the day, up or down, by less than 0.1% for four straight days. That’s the longest such streak in more than 35 years.

    Since October 17, we’ve had only one day down of more than 0.3%. On Friday, the S&P 500 closed above its five-day moving average for the 21st day in a row.

    This has been a cat’s-feet rally, but the market is taking a rest after a hectic few weeks. Bloomberg notes that from October 15 to November 11, the market staged its biggest 20-day rally in more than two years.

  • Morning News: November 17, 2014
    , November 17th, 2014 at 6:52 am

    Carney Says Fixed Pay May Be Next Target After Bonus Curbs

    France, a Tax Haven? Yes, for Companies From Microsoft to Huawei

    Japan’s Economy Makes Surprise Fall Into Recession

    Australia, China Deepen Ties With Landmark Free-Trade Deal

    Link Opens Between Hong Kong and Shanghai Stock Markets

    Tiger Economy Loses Its Roar as Thailand’s Exports Slump

    Crude Oil Prices Fall Sharply as OPEC Meeting Awaited

    Allergan Near Buyout of Up to $65 Billion to Escape Valeant, Ackman

    Halliburton to Buy Baker Hughes for $34.6 Billion

    Apple Adds Chinese Payment System UnionPay to App Store

    Pfizer Dampens Astra Bid Hopes By Signing German Merck Cancer Deal

    Boeing Deepens Supply Relationship With Toray

    The World Could Be Heading Toward a Global Shortage of Chocolate

    Howard Lindzon: Peak America? Peak Internet Freedom? Peak Lindzon?

    Jeff Miller: Weighing the Week Ahead: Time to Buy Commodities?

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  • Ford at $19.68?
    , November 15th, 2014 at 6:12 pm

    In this week’s Barron’s, Jack Hough says shares of Ford ($F) could climb by 30%. A 30% gain from here would put the stock at $19.68.

    There’s more to the bull case than the F-150, but let’s start there. With an aluminum alloy replacing steel in the body, the truck weighs hundreds of pounds less than the model it replaces. Ford says this will bring up to 20% better fuel economy. With U.S. gasoline averaging $2.94 a gallon last week, down 39 cents since the beginning of the year, pump savings is perhaps a waning motivator. But the weight loss also makes for better handling, faster acceleration, and more hauling and towing power.

    F-series trucks bring in the bulk of Ford’s automotive profit. General Motors (GM) re-entered the cheaper midsize pickup market with the Chevrolet Colorado and GMC Canyon. That could indirectly benefit Ford, which doesn’t sell a midsize pickup in the U.S. If GM lowers prices too far on its full-size Chevrolet Silverado and GMC Sierra trucks, it could cut into sales of its new midsize line. If GM keeps its prices relatively high, Ford can do the same, regardless of what the Ram unit of Fiat Chrysler Automobiles (FCAU)—a rising but still distant No. 3 in pickup sales—does.

    FORD CEO MARK FIELDS, who replaced Alan Mulally, who retired in July, brought a full payload of bad news to Ford’s late-September investor day. Warranty expenses will cost $1 billion this year, with about half connected to a faulty air-bag mechanism. Operations in Europe and South America will lose more money than expected. Add in the cost to retool F-Series production lines for the new truck, and Ford says pretax profit this year will total $6 billion, short of its goal of $7 billion to $8 billion.

    Wall Street expects Ford to earn $1.11 a share this year, down 31%, on $137.1 billion in revenue, down 2%. The revenue decline partly reflects Ford’s decision to pull back on low-margin sales to rental fleets. In 2015, revenue is expected to rebound 7% and earnings per share, to climb back to $1.61. The following year, earnings should approach $2 a share; the stock trades at just 7.5 times that figure.

  • 21 Straight Days
    , November 14th, 2014 at 5:29 pm

    For the 21st day in a row, the S&P 500 closed above its five-day moving average.

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  • The Sleepy Market
    , November 14th, 2014 at 1:20 pm

    Look at the daily changes for the S&P 500. Note how the bars are getting smaller and smaller. The S&P 500 has closed above its 5-DMA for 20 straight days. Low volume, low volatility and a cat step rally. Since October 17, we’ve had only one day down by more than 0.3%.

  • CWS Market Review – November 14, 2014
    , November 14th, 2014 at 7:17 am

    “Things are almost never clear on Wall Street, or when they
    are, then it’s too late to profit from them.” – Peter Lynch

    Consider this fact: In the last four weeks, the value of the global stock market has increased by a staggering $3.4 trillion. For some reason, we were terrible investors in September and early-October, but we’ve been brilliant investors ever since.

    Or…perhaps, the mood of investors turned on a dime. It’s hard to believe that only a few days ago, investors were scared out of their wits about impeding elections, a deteriorating economy in Europe and truly scary news about the Ebola virus. How times have changed!

    big11142014b

    Investors shook these fears off and the stock market rallied to new highs again this week. Through Tuesday, the S&P 500 hit record closing highs for five straight days. The index has now made 40 record highs this year. That compares with 45 record highs last year. The S&P 500 has closed higher 16 times in the last 21 trading days, and three of those five declines were pretty measly (less than 0.2%). In the last month, we’ve experienced only one meaningful daily decline. This has been a golden time for investors, although trading volume has been very low (some chart watchers say that’s a bad sign).

    In this week’s CWS Market Review, we’ll take a closer look at what’s driving this market. The simple explanation is that what’s been happening is still happening, only more so. Don’t worry; I’ll explain what it all means in a bit. I’ll also review this past earnings season. Except for a few duds, this was a solid earnings season for our Buy List. I’ll also preview two Buy List reports coming our way next week. Yes, the October reporting cycle is already upon us. We also had another good jobs report last week. But first, let’s look at what’s driving this market.

    What’s Driving this Market

    This has been a fascinating rally of late because we can see several factors at work. The most important factor continues to be the strength of the U.S. dollar. I’m afraid I might sound like I’m discussing the same phenomenon each week, but the dollar’s impact is crucial to what’s impacting our portfolios.

    Since the economy in Europe and Japan are still quite weak, the governments there are purposely trying to weaken their currencies. It’s not so much that the dollar is truly strong; it’s that the greenback is the tallest Munchkin in Munchkin Land. Of course with forex, that’s all that matters. The yen just dropped to a seven-year low against the dollar. It looks like the government is about to call snap elections there. The British pound recently fell to a 14-month low against the dollar.

    One impact of the rising dollar is that it puts the squeeze on commodity prices. The price of gold recently fell to a four-year low. Gold has been in a near non-stop plunge over the last three years. Since its 2011 peak, gold has lost close to $800 per ounce. That’s not all. Crude oil has been falling as well. On Thursday, oil fell below $75 per barrel. For the first time since 2010, prices at the pump are below $3 per gallon.

    One of the reasons for the drop in oil is that Saudi Arabia has stepped up production. Normally, the Saudis would try to curtail their output in an attempt to prop up prices. This is probably evidence of OPEC’s declining influence. We can also see that Energy stocks have been quite weak (see the chart below). Many of the large oil stocks have mostly sat out this rally. The Energy Sector ETF ($XLE) is down slightly for the year, while most other sectors have done quite well. We currently don’t have any Energy stocks on the Buy List so that’s been a big help. I don’t see a broad rally for the Energy sector starting anytime soon.

    big11142014a

    Lower gas prices have been a welcome relief for many consumers. Despite the growth in payrolls, workers haven’t seen any real improvement in their wages. Since 2007, median income is down by 5%. About 10% of retail sales goes towards gasoline so lower prices at the pump frees up more money for other items. On Thursday, Walmart ($WMT) impressed Wall Street by reporting earnings that topped the consensus figure by three cents per share. The stock jumped 4.7% on the day. Business has been going well for WMT lately. Next year, Walmart has a good chance of clearing $500 billion in annual revenue.

    Walmart’s strength has been good news for our favorite retailers. Shares of Bed Bath & Beyond ($BBBY) breached $71 this week. The stock hasn’t been that high since January. Our other big retailer, Ross Stores ($ROST), is due to report its fiscal Q3 earnings on Thursday, November 20. This is for the quarter that ended in October. Like BBBY, Ross has been rallying strongly lately. The shares topped $83 on Thursday for a fresh 52-week high. It was only four months ago that Ross was languishing at $62 per share.

    For ROST’s last earnings report in August, the deep discounter beat estimates by six cents per share. The stock jumped more than 7% the next day, and it has continued to rally. For Q3, Ross said it expects earnings to range between 83 and 87 cents per share. Oh, please. That’s almost certainly too low. (Ross tends to be conservative with its estimates.)

    For Q4 (November, December and January), Ross expects to see earnings between $1.05 and $1.09 per share. Naturally, the holiday season is very important for any retailer. For this year, Ross sees earnings coming in between $4.18 and $4.26 per share. Ross is getting pricier but it’s far from outrageous. For now, I’m keeping our Buy Below tight, at $83 per share. If the results are good, I’ll raise the Buy Below. Ross Stores continues to be a solid stock. Our patience has paid off.

    Finance and Healthcare Have Been the Leaders

    The two sectors of the market that have taken the lead for the Strong Dollar Trade are Healthcare and Finance, although Healthcare’s big run has preceded the emergence of the Strong Dollar Trade. The Healthcare Sector ETF ($XLV) has been a steady winner since February 2011. The recent election results also gave a boost to many Healthcare names.

    The Healthcare stocks on our Buy List have also been doing quite well. Stryker ($SYK), Medtronic ($MDT) and CR Bard ($BCR) all hit new 52-week highs on Thursday. All three stocks are also handily beating the market this year. The Buy List is overweighted with Healthcare and that’s been good for us this year.

    Medtronic is due to report earnings on Tuesday, November 18. This will be for their fiscal second quarter. Three months ago, the medical device stock topped earnings by a penny per share. For Q1, revenue rose 4.7% to $4.27 billion, which was $20 million better than expectations. Medtronic had its strongest growth for U.S. medical devices in five years.

    The best news for Medtronic recently was the result of last week’s election. While I caution investors not to let their politics interfere with their investments, it appears that Congress will try to repeal the medical devices tax. I can’t say if this will happen, but it’s interesting to note that shares of MDT bounced nicely the day after the election.

    Medtronic has stood by its intended acquisition of Covidien ($COV). The company plans to rework the specifics so it can clear any new regulations concerning tax inversions. This week, the company also offered concessions to please EU regulators. Medtronic will restructure the financing for the $43 billion deal which will allow the American company to reincorporate in Ireland and thereby lower its tax bill.

    Medtronic has said they see full-year earnings (ending in April) ranging between $4.00 and $4.15 per share. Wall Street currently expects Q2 earnings of 96 cents per share. I don’t expect a big earnings beat from Medtronic. Rather, I expect to see more steady growth. This is an ideal stock for conservative investors. Medtronic is a buy up to $70 per share. Again, I’ll raise the Buy Below if earnings are strong, but I caution you not to chase it. Disciplined investors wait for good stocks to come to them.

    Financial stocks have been more of a direct beneficiary of the Strong Dollar Trade. The Financial sector has led the market since August 20, although many financials got dinged hard in early October.

    Our big banking stock is Wells Fargo ($WFC), and that’s ridden the recent wave quite nicely. Shares of WFC touched a new high a few days ago. The bank’s earnings have been very good lately, and they’ve navigated a difficult time for the industry. Wells is by far the best-run big bank in the country. (By the way, I’m so happy we got rid of JPMorgan this year.) Wells Fargo is a buy up to $54 per share.

    Survey of Q3 Earnings Season

    Earnings season is just about done, so let’s look at where we stand. Of the 445 companies in the S&P 500 that have reported so far, 332 beat expectations, 73 missed and 40 met.

    For Q3, the S&P 500 is on track to report operating earnings of $29.83 per share. That’s an index-adjusted number, and it represents an increase of 10.8% over last year’s Q3. (These numbers are from S&P and they sometimes differ from other news sources.) At the start of the year, Wall Street had been expecting $30.89 for Q3. The estimates gradually fell as the year wore on. I should add that estimates generally start out too high, and it’s common to see them fall as earnings day approaches.

    Over the last four quarters, the S&P 500 has earned $114.74 per share, so the index is going for 17.8 times that. Wall Street currently expects Q4 earnings to come in at $31.13 per share. That would be an increase of 10.2% over last year’s Q4. I like to see these steady 10% to 12% increases.

    Interestingly, the estimates for Q4 had been fairly stable for much of the year. At the beginning of 2014, Wall Street was expecting $32.17 for Q4. On September 30, the estimate had increased by a tiny bit to $32.24. Only recently have the numbers come down.

    If the current Q4 estimate is accurate, it would bring full-year earnings to $117.62. That would be an increase of 9.6% over last year. I’m fine with that. Going by Thursday’s close, the S&P 500 is now up 10.33% this year. In other words, the S&P 500 has largely kept pace with earnings this year. Despite some careless talk of bubbles, valuations haven’t changed. I should add that dividend growth has mostly tracked share prices as well.

    In other words, there’s no bubble. The threat to the market isn’t excess valuations. Rather, it’s the potential for lack of growth. I don’t see difficulties in the immediate horizon, but that could change. As long as rates stay low, and the economy expands, stocks are the place to be.

    Buy List Updates

    This week, for the first time since September, shares of Ford ($F) topped $15 per share. The company finally started production on its aluminum-based F-150 trucks. This could be a game changer for the industry. (I hate that cliché so forgive me, but it’s true in this case.) Ford is currently going for less than 10 times next year’s earnings. The automaker just reported very good sales growth in Europe, especially in Britain and Italy. Ford remains a good buy up to $17 per share.

    Earlier I mentioned that Stryker ($SYK) reached a new 52-week high. I also expect to see Stryker increase its dividend soon. Last year’s increase came on December 4. The company currently pays 30.5 cents per share. I think that will go up to 33 to 34 cents per share. Stryker is a buy up to $90 per share.

    That’s all for now. Next week, we’ll get important reports on Industrial Production and Capacity Utilization. On Wednesday, the Fed will release the minutes from the last FOMC meeting. That’s when the Fed decided to end Quantitative Easing. On Thursday, we’ll get the latest report on Consumer Inflation. I expect to see more evidence that the strong dollar is holding back prices. We’ll also get earnings reports from Medtronic and Ross Stores. 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: November 14, 2014
    , November 14th, 2014 at 7:02 am

    German-French Rebound Helps Euro-Area Keep Expanding

    This Will Be Fun As Islamic State Mints Its Own Gold Dinar

    IEA Sees New Era, No Quick Rebound in Oil Prices

    Lew Warns of European ‘Lost Decade’

    Hurray! Americans Are Quitting Their Jobs

    Twitter Trashed With ‘Junk’ Rating from S&P

    After a Bump in Sales, Walmart Braces for a Competitive Holiday Season

    Bristol-Myers Squibb to Build Biologics Plant in Ireland

    Airbus Group Nine-Month Profits Rise, Keeps Targets

    Nokia Shares Slide As It Lifts Profit Guidance

    Halliburton Is In Talks To Buy Rival Baker Hughes

    Amazon and Hachette Settle Bitter Dispute

    SAP To Pay Oracle $359 Million To End Bitter Legal Battle

    Cullen Roche: The Fed is Not The Reason You’ve Been Wrong

    Ben Carlson: “Speculation has always been a part of the market and always will be.”

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