Archive for December, 2014

  • Morning News: December 16, 2014
    , December 16th, 2014 at 7:36 am

    Weak Private Sector Growth Data Pushes Euro Zone Yields to New Lows

    3 Banks Fall Short in Bank of England Stress Test

    Ruble Continues Its Decline in Russia, Despite Interest Rate Increase

    Dubai Stocks Lead Gulf Markets Lower as Oil’s Plunge Deepens

    Shale Veteran Takes On Argentina’s $6 Billion Shortfall

    When Will Short-Term Interest Rates Rise?

    Will Low Oil Prices Affect The U.S. Fed’s Decisions?

    U.S. Industrial Output Surpasses Prerecession Peak

    Halal Beef Supplier Vows to Contest Fraud Charges

    Repsol Agrees to Buy Canada’s Talisman for $8.3 Billion

    Riverbed Technology Accepts $3.6 Billion Takeover Bid

    Fallout for the S.E.C. and the Justice Dept. From the Insider Trading Ruling

    Korean Air Facing Sanctions For Urging Employees to Lie About Nut-Rage Case

    Cullen Roche: Can A Central Bank Always Create Inflation?

    Jeff Carter: What’s A Position Limit?

    Be sure to follow me on Twitter.

  • Russia Raises Rates 6.5%
    , December 15th, 2014 at 10:39 pm

    In last Friday’s CWS Market Review, I wrote:

    The ruble is looking more like rubble. Russia estimates that inflation will hit 10% next year. The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

    Someone must be listening to me. The Bank of Russia just announced that it’s raising interest rates to 17%. That’s a stunning increase of 6.5%. The increase was announced at 1 a.m. As a rule of thumb, anything done by a central bank in the middle of the night is probably bad news. It’s also probably very important.

    Russia is in a classic situation that many countries have faced before. The international currency and bond markets have lost faith in the ruble. Every day it’s been attacked. Until now, Russia has attempted, rather weakly, to defend the indefensible ruble. The defense hasn’t been nearly adequate but they’ve finally taken a tough stand.

    These currency wars are characterized by an odd feedback relationship. If the markets have faith in the government, then the crisis ends. If they don’t, the situation worsens and it thereby becomes more difficult for the government to do what needs to be done. It’s not so easy to turn a vicious cycle into a virtuous one. Nearly every government leader since the dawn of time has blamed a currency attack on “speculators,” though I’ll note that these evil speculators have an odd habit on ganging up on currencies that can’t withstand attacks. Funny, that.

    Russia is in much better shape than they were in 1998. During the crisis 16 years ago, Russia raised rates to 150%. Make no mistake: The big rate hike is a war on the shorts. Check out the amazing decline in the Russian ETF ($RSX). It’s lost 35% in the last three weeks.

    big12152014a

  • The Pain in Junk Bonds
    , December 15th, 2014 at 11:02 am

    The junk bond market has been getting clobbered recently. The chart below shows the recent plunge in the Junk Bond ETF ($HYG) The sell-off is partly a spillover from lower oil prices since many energy companies have floated low-rated bonds. Last week was the worst week for junk bonds in three years.

    The weakness in junk isn’t necessarily a harbinger of bad times, but it’s an important development. It’s basically a broad reassessment of risk. Investors are now demanding a greater premium to own riskier bonds.

    For an economy to show a broad recovery, I would expect to see marginal borrowers do well, but that’s not a given. The WSJ notes that, “Junk bonds now trade at a yield of 5.28 percentage points above yields of comparable U.S. Treasurys, up from 3.23 points at their June low for the year.”

    big.chart12152014

  • Strongest Industrial Production since May 2010
    , December 15th, 2014 at 10:01 am

    Last week was the worst for the S&P 500 in two-and-a-half years. For the Dow, it was its worst week in more than three years. The market may also be getting more volatile. The high for the VIX on Friday was more than twice its low from the previous Friday. Fortunately, stocks are holding on to modest gains this morning.

    One hopeful sign is that Prime Minister Shinzo Abe of Japan won a big reelection victory yesterday. That ought to give him a mandate to continue with his economic reforms which have included a dramatically lower yen. The yen has dropped from 101 to the dollar in July to 121 per dollar last week. Japan hasn’t had much good economic news in a long time.

    On a related note, the amazing drop in oil continues. On Friday, West Texas Intermediate got as low as $57.34 per barrel. That’s the lowest price since May 2009. For some context, in the summer of 2008, oil was going for more than $140 per barrel.

    The big econ report this morning showed that Industrial Production rose by 1.3% last month. That’s the biggest jump since May 2010 (see below). The report also showed the biggest gain in consumer production in 16 years. The theme is the same—the U.S. economy is improving, but very slowly.

    The Federal Reserve meets on Tuesday and Wednesday of this week. This meeting will be followed by a Yellen presser plus updates on the Fed’s projections (better known as the blue dots). I actually think this meeting won’t be so important. We know rates are going higher, but we don’t know when.

    There might be some nervousness this morning as the terrible hostage drama plays out in Australia. I also noticed that PetSmart ($PETM) is up this morning on the news that it’s being bought out for $83 per share. That’s 16.7 times estimated earnings for next fiscal year (ending in January 2016). I’ve often kept an eye on PETM and considered it for previous Buy Lists. I am a little surprised by how low the premium is. It’s less than 7% above Friday’s close.

    Oracle ($ORCL) is up strongly this morning thanks to an upgrade at Morgan Stanley. Although it’s odd to upgrade a stock that’s going to report earnings on Wednesday.

  • Morning News: December 15, 2014
    , December 15th, 2014 at 7:00 am

    The Rouble Is Tumbling Again

    BOJ Survey Shows Japan Business Mood Fragile, Highlights Abe’s Challenges

    Bundesbank Backs ECB Line on Possible Further Measures

    India’s Wholesale Inflation at Lowest in Over Five Years

    Oil Jumps Most in Two Weeks as Fighting, Strike Curb OPEC Output

    U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40

    Airlines Charging Sky-High Prices as Oil Costs Plummet

    Paris Taxis Block Highway to Urge Ban on Uber Cabs

    Uber Briefly Quadruples Prices For Rides Out of Hostage-Crisis Sydney

    PetSmart to Sell Itself to Investor Group for $8.7 Billion

    Emerson to Sell Power Transmission Unit for $1.4 Billion

    Shunning Apple Tops Long List of Bad Market Calls in 2014

    Sony Pictures Demands That News Agencies Delete ‘Stolen’ Data

    Roger Nusbaum: Grandma Got Run Over By A Dividend Portfolio

    Jeff Miller: Weighing the Week Ahead: Will Crashing Oil Prices Change the Fed’s Course?

    Be sure to follow me on Twitter.

  • Apple’s IPO: 34 Years Ago Today
    , December 12th, 2014 at 9:52 am

    Thirty four years ago today, Apple Computer ($AAPL) went public. Today, the company is officially just Apple Inc. The offering was for $22 per share. Since then, Apple has split four times; three times 2-for-1 and once 7-for-1. That adds up to 56-for-1 which means the $22 offering is 39.3 cents split adjusted.

    image1447

    This may sound surprising, but Apple wasn’t a hit. By mid-1982, the shares were going for half the offering price. The stock did have its moment in the sun: In the 26 months prior to the 1987 crash, shares of Apple rose eight-fold.

    But overall, Apple was not a hot stock. At its low point in 2003, Apple was lower than where it had been in 1983. Think about that! Twenty years of no gain, and this was well after Steve Jobs had returned.

    But in 2003, Apple started one of the most amazing rallies in Wall Street history. In less than ten years, the stock jumped more than 100-fold. To be precise, Apple rose 107-fold (10,603%) in nine years and five months. That includes a brutal 60% drop during the Financial Crisis.

    Apple gained back what it lost but suffered another painful correction. From September 2012 to April 2013, Apple shed 44%. That was when we heard the refrain, “Apple doesn’t know how to innovate anymore.” Once again, Apple made back everything it had lost.

    Now here are some numbers. Measuring from the offering price 34 years ago, Apple has gained 28,412%. Annualized, that’s 18.1%.

    Apple’s single-worst day came on September 29, 2000 when the stock plunged 51.9%. The catalyst was that Apple said they were going to miss earnings. That was also Apple’s highest volume day. It traded over 1.8 billion shares that day.

    Apple has suffered other big drops. On the day of the 1987 crash, Apple fell 24.4%. The stock has fallen more than 10% in a single day 26 times, which is nearly once per year.

    Apple’s single-best day came on August 6, 1997 when it soared 33.2%. That was the day Steve Jobs announced at a MacWorld trade show that Microsoft was investing $150 million in Apple preferred stock. That moved saved Apple. At the time, people in the crowd booed. Here’s a story from the Seattle Times about the announcement.

    A lot of people forget that Apple used to pay a dividend many years ago. They introduced a small quarterly dividend in 1987. Apple raised it four times, and then kept it the same for five years until it expired in 1995. Two years ago, Apple resumed paying a dividend. The current quarterly dividend is 47 cents per share which is a 120% return on the IPO price.

    When Apple was founded on April 1, 1976, there were three founders; Steve Wozniak, Steve Jobs and Ronald Wayne. On April 11, Wayne sold his 10% back to the Steves for $800. Apple’s current market value is $655 billion making it the most valuable company in the world.

  • CWS Market Review – December 12, 2014
    , December 12th, 2014 at 7:09 am

    “Successful investing is anticipating the anticipations of others.” – J.M. Keynes

    Before I get into this week’s issue, I want to remind you that I’ll be unveiling the 2015 Buy List in next week’s CWS Market Review. As always, I’ll be adding five new stocks and removing five current ones.

    For tracking purposes, the “buy prices” of each stock will be the closing prices on December 31, 2014. The exchanges will be closed on New Year’s Day, so the new Buy List will go into effect on Friday, January 2. Once the Buy List is set, it’s locked and sealed. I won’t be able to make any changes until next December.

    Now let’s look at the market’s latest doings. Last Friday, the Dow came within inches of cracking 18,000 for the first time in history. But the market followed up by dropping the next three days. It could have been a fourth as the indexes dropped quickly going into Thursday’s close, but we held on to modest gains.

    The major development continues to be the remarkable decline in the price of oil. What started out as a modest pullback has turned into a full-fledged rout. I’m ready to say it out loud: “OPEC is dead!” On Thursday, oil dropped below $60 per barrel for the first time in five years. I don’t think people are surprised that oil has fallen, but nobody expected it to fall this much this quickly. Less than six months ago, oil was going for $107 per barrel.

    What makes the falloff in crude so important is that much of the world economy had been based on oil’s being worth around 80% more than it currently is. I’m not exaggerating when I say that the math of the entire world economy has shifted. In this week’s issue, we’ll look at what the fallout is. We’ll also take a look at the recent news from eBay ($EBAY), and we’ll preview next week’s earnings report from Oracle ($ORCL). But first, let’s take a closer look at last week’s jobs report and what it means for investors.

    The Economy Created 321,000 Jobs Last Month

    Last Friday, the Labor Department reported that the U.S. economy created 321,000 net new jobs last month. That was well above expectations, and it was one of the best jobs reports in years. The unemployment rate is now down to 5.8%. I was pleased to finally see some real improvements in “discouraged workers” (folks who had left the workforce entirely). There’s also some evidence to indicate that wages might be growing as well.

    What’s the impact of an improving jobs market on the stock market? There are several factors at work. For one, it helps consumer stocks. More people with more jobs being paid higher wages means more shoppers. Since the beginning of August, retail stocks have done twice as well as the rest of the market. On Thursday, the Commerce Department reported that retail sales rose 0.7% in November. That’s the best report in eight months. (By the way, ignore any discussion of the impact of Black Friday. It’s really not that important.)

    The retail sales report for October was good as well. Clearly, cheaper fuel prices are helping the gains here, and this portends a strong holiday shopping season. On our Buy List, Ross Stores ($ROST) hit another new high on Thursday.

    An improving jobs market is also good for financial stocks. Obviously, more people working means a lower default rate. On a relative-strength basis, financial stocks have been doing very well this month. Wells Fargo ($WFC), our favorite big bank, is close to a new 52-week high. The better jobs market also has a major impact on homebuilding stocks. The homebuilders had been lagging the broader market since early 2013. Only in the last two months have they resumed leading the market. I think this trend will continue. Mortgage rates are still holding below 4%.

    Speaking of mortgage rates, the recent behavior of the bond market has been interesting. Bond traders were largely unimpressed with last week’s jobs report. Yields ticked up for a bit, but the yield on the 10-year is back below 2.2%. Interestingly, the yield on shorter-ranging debt is starting to creep higher. The yield on the one-year Treasury has doubled in the past few weeks. Of course, by doubling, I mean going from 0.1% to 0.2%. Still, the one-, two- and three-year Treasuries are all near three-year highs, while longer-term yields have trended lower. This means that the yield curve is getting narrower.

    One of my favorite economic indicators to watch is the spread between the two- and ten-year Treasuries. Whenever the 2/10 spread turns flat or negative, the odds that a recession will soon follow are quite high. Since the beginning of this year, the 2/10 spread has narrowed by more than 100 basis points. (One basis point is bond-nerd shorthand for 0.01%.) The 2/10 spread is now down to 157 basis points, which is still quite wide, so I doubt we’re in immediate danger of a recession. The 2/10 spread hasn’t dipped below 120 basis points in nearly seven years.

    To me, this indicates that bond traders truly expect the Fed to raise interest rates sometime next year. This is also why the dollar has been rallying. As long as the yield curve remains relatively wide, stocks are the best place to be. But this won’t last forever. To borrow from Churchill, the narrowing of the spread isn’t the beginning of the end for stocks, but it is the end of the beginning. Now let’s look at the stunning drop in oil.

    OPEC is Dead

    On Thursday, the price of West Texas Intermediate Crude dropped below $60 per barrel for the first time since July 2009. This is the biggest fall since the financial crisis. The difference this time is that it’s not about demand—it’s about supply and demand.

    Of course, the tremendous growth of U.S. shale has roiled oil. President Rouhani of Iran said that the drop in oil is a conspiracy against the Muslim world. (I’m not making that up. He really said that.) Apparently no one told the Saudis, because they seem perfectly willing to stand by and watch oil fall.

    The fact is that OPEC, for all intents and purposes, is dead. Killed by shale. OPEC simply doesn’t have the pricing power they used to. If a cartel can’t do that, what’s the point? The U.S is rapidly becoming energy-independent. Plus, the U.S. economy is much more efficient than it used to be. Twenty years ago, the U.S. consumed 1,760 barrels of oil for every $1 billion in GDP. Today that’s down to 1,178 barrels. On top of that, China’s economy appears to be slowing, so that’s pinching demand as well. There’s talk that oil could fall as low as $40 per barrel. Wow!

    Naturally, the strong dollar is playing a major role as well. The greenback just backed off a two-year high against the euro and a seven-year high against the yen. Bond yields in Europe aren’t just low—they’re absurdly low. The yield on the German 10-year bond got down to 0.68%. With falling oil, there’s now fear that Europe might experience deflation. That would be more ammo for Mario Draghi to start his own QE program. The euro might be headed a lot lower.

    The oil bear is weighing heavily on Russia. The ruble is looking more like rubble. Russia estimates that inflation will hit 10% next year. The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

    The impact of lower oil can be seen in so many different areas. Tesla ($TSLA), the headline-grabbing electric-car stock, is 28% off its high from September. Energy stocks as a whole have been getting clobbered. The Energy Sector ETF ($XLE) was over $100 per share in July. This week, the XLE dipped below $75 per share.

    My advice: Don’t be fooled into thinking energy stocks are cheap. A lower stock simply means it’s cheaper than where it was, not that it’s cheap in an absolute sense. I’m still leery of most energy stocks. I expect oil to continue to fall. The forces working against oil are just too strong. This is good news for many consumer stocks. Now let’s look at one of our favorite consumer stocks, eBay.

    eBay is a Buy up to $60 per Share

    Shares of eBay ($EBAY) got a nice bounce on Thursday. Unfortunately, the good news was rather unpleasant news. The Wall Street Journal reported that eBay is considering laying off thousands of workers next year in preparation for their spin-off of PayPal. According to the WSJ, the online-auction house is looking to shed 3,000 positions, which is about 10% of their workforce. The cuts will mainly impact eBay’s marketplace division, which runs eBay.com and StubHub.

    Personally, I’m conflicted about news items such as this. I can’t help but think of the employees who are laid off. However, I have to concede the reality of the situation; eBay is planning to be a stand-alone company, and they need to keep overhead as low as possible. I also realize that the market very much approves of this kind of news. Shares of EBAY jumped 2.7% on Thursday to reach a nine-month high. This week, I’m raising my Buy Below on eBay to $60 per share.

    Oracle Earnings Preview

    Oracle ($ORCL) is due to report fiscal Q2 earnings on Wednesday, December 17 after the closing bell. I wasn’t exactly thrilled with Oracle’s last earnings report. The company missed earnings by two cents per share (62 cents versus a 64-cent estimate). This was the third quarter in a row in which Oracle missed estimates. But not everything in the report was bad; Oracle’s cloud business is doing quite well. The hardware business, however, continues to be a weak spot.

    The biggest news in the last earnings report wasn’t earnings—it was that Larry Ellison said he’s stepping down as CEO. In his place, Mark Hurd and Safra Catz are now co-CEOs. In my opinion, that’s a big mistake. These things sound good on paper, but I’m convinced that any dual CEO scheme is a bad idea. I predict that within two years, there will only be one CEO, and it will probably be Mark Hurd.

    Oracle told us to expect Q2 earnings to range between 66 and 70 cents per share. Wall Street expects 69 cents. According to my numbers, that’s about right. Oracle is coming through a difficult period for them, but I think things are turning around. The company should earn at least $3 per share for this fiscal year, which ends in May. That means that Oracle is going for about 13.6 times this year’s earnings. That’s not bad. Plus, I think Oracle may raise its dividend soon. Oracle remains a buy up to $42 per share.

    That’s all for now. The Federal Reserve meets again next week. The policy statement will be out on Wednesday afternoon. It will be interesting to hear of any changes in their thinking. We’re also going to get key reports on inflation, industrial production and housing starts. Also, Oracle will report earnings after the close on Wednesday. Don’t forget: Next week, I’ll unveil the Buy List for 2015. 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: December 12, 2014
    , December 12th, 2014 at 6:55 am

    Trillion Dollar IT Trade Deal on a Knife Edge at the WTO

    China’s Slowdown Deepens as Factory Output Growth Wanes

    Greek Borrowing Costs at Most Since 2012 Amid Political Turmoil

    Solar Rises in Malaysia During Trade Wars Over Panels

    Global Oil Demand to Slow Despite Plunging Prices

    How America Is Kicking Its Oil Habit

    Retail Sales Boost Businesses

    U.S. Authorities Face New Fallout From Insider Trading Ruling

    U.S. Spending Fight Moves to Senate After Narrow House Passage

    Delta Expects Profit Boost From Lower Fuel Prices

    Chinese Search Engine Baidu to Invest in Uber

    Ten Banks Broke Analyst Rules in Rush to Win Work With Toys R Us

    SeaWorld Dumps Its CEO: Don’t Just Blame Blackfish

    Cullen Roche: Is Technology Making Us Worse Investors?

    Joshua Brown: Get to Know Lending Club

    Be sure to follow me on Twitter.

  • Morning News: December 11, 2014
    , December 11th, 2014 at 6:55 am

    Cheap Loans From E.C.B. Get Tepid Response Among Eurozone Banks

    Russia Inflation to Hit 10% By 2015, Growth Flat

    Carney Wants Fed-Style Schedule as Part of BOE Decision Revamp

    Central Banks’ Decisions Support FX Direction

    Fed Proposes Extra Capital Cushion For Eight Big U.S. Banks

    Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets

    Oil Trades Near 5-Year Low as Saudis Question Need to Cut Output

    FAA’s Treatment Of Amazon Proves Congress Must Act Or Companies Will Take Drone Research Abroad

    The Mergers and Acquisitions Cycle: Buy. Divide. Conquer.

    Lending Club Set to Debut, And Industry Is Watching

    Airbus Management Seek to Halt Share Price Slide

    Wal-Mart Says Found China Pricing Discrepancies in 2011

    Walgreen CEO Wasson To Step Down

    Jeff Carter: Why Is There A Bubble?

    Jeff Miller: Some Crucial Facts About Energy

    Be sure to follow me on Twitter.

  • Oil Hits Five-Year Low
    , December 10th, 2014 at 10:43 pm

    The stock market had a terrible day today. The S&P 500 lost 1.64%. That’s the worst day in nearly two months. In fact, the loss is more than twice as much as the second-biggest loss over that time.

    The worst damage was among energy stocks. The Energy Sector of the S&P 500 was down more than 3%. Small-caps were also hit hard. Outside of energy, it was a rough day but not too bad. Defensive stocks like staples and utes were down the least. Of course, that’s why they’re defensives.

    All 20 stocks on our Buy List were down for the day, but thanks to not having any energy stocks, we outperformed the S&P 500 by 0.11% today. The selling in oil continues. Oil dropped more than $2 a barrel today to close at $61.22. At one point, it got as low at $60.43 per barrel. This is the lowest oil has been since July 2009. It’s interesting to see that Tesla (TSLA) has been falling as well since lower gas means less demand for alternatives.

    eBay ($EBAY) made some news today when they said they’re planning on cutting 3,000 jobs next year to prepare for the PayPal spinoff. That’s about 10% of their workforce.