Archive for January, 2015

• Today’s Fed Statement
  Eddy Elfenbein, January 28th, 2015 at 2:02 pm

  Here’s today’s Fed statement:

  Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of 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 continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

  To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

  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. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

  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; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

• Morning News: January 28, 2015
  Eddy Elfenbein, January 28th, 2015 at 7:05 am

  German Consumer Sentiment to Reach 13-Year High in February

  China Accuses Alibaba Of Lax Merchant Control, Tells It To Stop Being Arrogant

  Alibaba Creates a Consumer Credit Rating Service

  London’s Canary Wharf: Qatar Bid Wins Battle

  Consumer Confidence in U.S. Rises More Than Forecast on Jobs

  Morgan Stanley: The Fed Isn’t Raising Rates Until March 2016

  Obama Proposes Offshore Drilling From Virginia to Georgia

  Apple Smashes Forecasts, Selling 74.5 Million iPhones In Q1

  TE Connectivity to Sell Broadband Network Unit to CommScope

  Nintendo’s Outlook Disappoints and Mario Can’t Save Wii U

  Roche Earnings Stagnate for First Time in Three Years on Costs

  H&M Posts Rise in Quarterly Profit, Plans 400 New Stores

  In DuPont Fight, Activist Investor Picks a Strong Target

  Ben Carlson: Would Keynes Have Been Fired As a Money Manager Today?

  Roger Nusbaum: 11 Investing and Personal Finance Hacks

  Be sure to follow me on Twitter.

• Stryker Earns $1.44 per Share
  Eddy Elfenbein, January 27th, 2015 at 4:14 pm

  Stryker ($SYK) just reported Q4 earnings of $1.44 per share. That was one penny below expectations. For all of 2014, the company made $4.73 per share. Here’s the outlook for 2015:

  We expect 2015 constant currency sales growth in the range of 5.5% to 7.0%, including organic sales growth in the range of 4.5% to 6.0%. Based on current foreign currency exchange rates we expect adjusted diluted net earnings per share to be in the range of $1.05-$1.10 and $4.90-$5.10 in the first quarter and the full year, respectively. If foreign currency exchange rates hold near current levels, we expect sales in the first quarter and full year of 2015 to be negatively impacted by approximately 3% to 4% and adjusted diluted net earnings per share to be negatively impacted by approximately $0.08 and $0.30 in the first quarter and the full year, respectively.

  Wall Street had been expecting $1.17 per share for Q1, and $5.14 for the whole year.

  Shorter version: Business is going well but the strong dollar is causing some pain.

• My Watch List
  Eddy Elfenbein, January 27th, 2015 at 1:08 pm

  Below is my latest Watch List. This is my unofficial list of high-quality stocks I like to follow. If a stock is on this list, then there’s a very good chance that it’s in the upper 5% of well-run companies on Wall Street. This is the elite.

  I’m often asked how I go about selecting the stocks for my Buy List. It’s actually very simple. I have this Watch List of stocks and if one of them falls down to a very attractive price, then it becomes a contender for the new Buy List. I like to think of the Watch List as the minor leagues for the Buy List. Strong prospects earn their way up the ladder.

  The Watch List is very informal. Unlike the Buy List, I’m constantly adding and deleting names. In fact, I have a bad habit of letting the Watch List grow too large. I often find myself adding three names for every one I delete. It’s simply not possible to follow 130 stocks.

  Every few months I promise myself that this will be the time to trim down the Watch List. Well, I actually did it this time! Over the past several weeks, I trimmed the Watch List down to 76 names.

  Symbol	Stock
  ABC	AmerisourceBergen
  ABT	Abbott Laboratories
  ADS	Alliance Data Systems
  AL	Air Lease
  AME	Ametek
  ANSS	Ansys
  ANTM	Anthem
  APH	Amphenol
  AZO	AutoZone
  BCPC	Balchem
  BDX	Becton, Dickinson
  BIIB	Biogen Idec
  CATM	Cardtronics
  CTAS	Cintas
  CERN	Cerner
  CHD	Church & Dwight
  CL	Colgate-Palmolive
  COST	Costco
  CPRT	Copart
  CVS	CVS Health
  DHR	Danaher
  DKS	Dick’s Sporting Goods
  DLX	Deluxe
  EV	Eaton Vance
  FAST	Fastenal
  FDS	FactSet Research Systems
  FL	Foot Locker
  FTI	FMC Technologies
  GGG	Graco
  GPN	Global Payments
  GWW	W.W. Grainger
  HEI	HEICO
  HSIC	Henry Schein
  HSNI	HSN Inc
  HSY	Hershey
  HUB-B	Hubbell
  ICE	Intercontinental Exchange
  IDXX	IDEXX Laboratories
  IEX	IDEX
  IFF	International Flavors & Fragrances
  INTU	Intuit
  IPCM	IPC Healthcare
  IT	Gartner
  JBHT	JB Hunt Transport Services
  JKHY	Jack Henry & Associates
  MDT	Medtronic
  MIDD	Middleby
  MKC	McCormick
  MTD	Mettler-Toledo International
  MWIV	MWI Veterinary Supply
  NKE	Nike
  NTCT	NetScout Systems
  OSIS	OSI Systems
  PB	Prosperity Bancshares
  PSA	Public Storage
  PZZA	Papa John’s International
  RAI	Reynolds American
  RMD	ResMed
  ROL	Rollins
  SBUX	Starbucks
  SEIC	SEI Investments
  SJI	South Jersey Industries
  SLGN	Silgan Holdings
  SRCL	Stericycle
  STJ	St. Jude Medical
  SWI	SolarWinds
  TJX	TJX
  TMO	Thermo Fisher Scientific
  TSCO	Tractor Supply
  TXRH	Texas Roadhouse
  TYL	Tyler Technologies
  V	Visa
  VFC	V.F. Corp
  VSI	Vitamin Shoppe
  WEX	WEX
  ZMH	Zimmer Holdings

• Spies and Finance
  Eddy Elfenbein, January 27th, 2015 at 11:48 am

  Yesterday, the FBI arrested a Russian businessman named Evgeny Buryakov and charged him with being an agent of Russian intelligence.

  Buryakov was in the U.S. on “non-official status,” meaning he didn’t have diplomatic immunity, while his two co-conspirators (Igor Sporyshev and Victor Podobnyy) had official status but they had already split back to Mother Russia.

  Reading the details of their story, it’s pretty embarrassing. These guys come across more like Boris Badenov rather than international men of mystery. The spies are on the phone complaining about their jobs.

  While it’s easy to dismiss these buffoons as merely buffoons, noted strategy analyst John Schindler cautions that there’s something more sinister afoot. Bear in mind that Vladimir Putin is a former KGB officer and that he takes spy warfare seriously. Putin believes Russia is in a Holy War with the west, the U.S. especially, and he intends to win.

  Schindler notes that the important part of the story, the part that we ought to be paying attention to, is that the spies were targeting the U.S. financial infrastructure. They were looking for information on topics like high-frequency trading and automated trading algorithms. Basically, anything that could be used to destabilize our financial markets.

  As with the Illegals Network in 2010, journalists and commentators who are ignorant of Russian espionage tradecraft are blowing this story off as being of little consequence, even comedic. There is, however, nothing funny about this case. In the first place, it shows that the Kremlin continues to collect economic intelligence in the West, using various covers to steal information of many sorts. This is a big win for the FBI and U.S. counterintelligence, but luck was on our side here, and that cannot be counted on.

  Moreover, Illegals have many purposes, including functioning as long-term sources to maintain agent networks in the event of war, when diplomatic facilities close and Legals get pulled home. Given the parlous state of relations between the West and Russia now, this is not a theoretical concern. The Kremlin, unlike most Western intelligence services, tends towards the long-view and worst-case planning with utmost seriousness.

  Most individual investors are unaware of how much modern trading is dominated by machines. These are highly sophisticated operations. Whenever you buy a stock, it’s very likely you’re buying it from a machine. Whenever you sell a stock, it’s very likely a machine bought it from you. There’s a vast army of computers that do nothing all day but trade at insanely high speeds to eek out a micro-penny’s profit on each trade. The worry is that once one robot starts selling massively, it could trigger all the other robots to sell as well.

  Could this really happen? I don’t know, but we’ve had Flash Crashes before. It’s realistic enough that the Russians were looking into it. The trio was especially interested in ETFs (exchange traded funds). On the other hand, rather than them attacking us, they have been interested in finding out if we had been attacking them.

  The irony here is that it’s been the Russian system that’s been destabilized. The Russian economy has been clobbered by the recent fall in oil. The ruble has been smashed and the Russian Fed has responded by jacking up interest rates. As I’ve noted before, the Russian ETF ($RSX) is in a severe bear market. Capital outflows ballooned from $60 billion in 2013 to $150 billion last year.

  It may soon get worse for Russia. Yesterday, S&P cut Russia’s bond rating to junk (and someone may have known). The U.S. wants to kick Russia out of the SWIFT banking network. This is the standardized network that lets banks conduct international transactions. This is a big deal as it would isolate the Russian economy even more. Dmitry Medvedev said that Russia’s reaction would be “unlimited.” The fear is that with a busted up financial system, the Russian Fed won’t be able to conduct monetary policy.

  In 2009, a computer programmer (and Russian immigrant) named Sergey Aleynikov was arrested and accused of improperly copying computer codes that could be used to destabilize the markets. This was the inspiration for Michael Lewis’s “Flash Boys.” After years of legal battles, Aleynikov’s case was ultimately thrown out, although his life was nearly ruined.

  This is a secret world of spycraft and high finance. We may never know exactly what’s going on. In the meantime, it’s best to remember those haunting words by T.S. Eliot, himself a Lloyd’s Bank employee:

  Between the order
  And the confirmation
  Between the bid
  And the ask
  Falls the shadow.

• Morning News: January 27, 2015
  Eddy Elfenbein, January 27th, 2015 at 7:07 am

  Greece’s Odd-Couple Only Agrees About Ending Austerity

  Russia’s Downgrade Has Important Political Implications

  British Economy Brows at Best Annual Rate Since 2007

  Doubts Grow About Mid-Year Rate Hike, But Fed Won’t Express Any

  Oil Price Recovers as Dollar Weakens Against Euro

  Winklevoss Twins: Bitcoin Will Explode Beyond $1 Trillion

  Wall Street Left With Skeleton Crews Down as Blizzard Bears Down

  Price Caps Leave Blizzard Riders Out in the Cold

  IBM Dismisses Forbes Report of Massive Layoffs

  Philips Lags Behind Its Profit Targets as Earnings Slide

  Ericsson Hurt by North American Slowdown

  Novartis Upbeat Despite Weaker Profit

  Shake-Up at Mattel as Barbie Loses Her Appeal

  Jeff Carter: First Regulated Bitcoin Exchange

  Joshua Brown: QOTD: Is Fundamental Indexing Passive or Active?

  Be sure to follow me on Twitter.

• Microsoft Earns 71 Cents per Share
  Eddy Elfenbein, January 26th, 2015 at 4:59 pm

  Microsoft reported fiscal Q2 earnings of 71 cents per share. That matched Wall Street’s consensus.

  The company’s bottom line has been hit in recent quarters by expenses related to job cuts started last summer and the Nokia mobile phone business that it acquired in April. The July plans included up to 18,000 jobs cuts, or about 14% of its workforce at the time, largely to clear up overlap with the Nokia businesses.

  For the period ended Dec. 31, Microsoft reported a profit of $5.86 billion, or 71 cents a share, down from $6.56 billion, or 78 cents a share, a year earlier. Microsoft said its per-share earnings in the latest quarter were hurt by 2 cents from costs related to integration and restructuring.

  Revenue increased to $26.47 billion from $24.52 billion.

  Analysts polled by Thomson Reuters expected per-share profit of 71 cents and revenue of $26.29 billion.

  The stock is down 3% after hours.

• All Hail Starbucks!
  Eddy Elfenbein, January 26th, 2015 at 12:45 pm

  I have to confess that I’m not a consumer of Starbucks ($SBUX) — I’m just not a coffee drinker — but I’m a fan of the company. As a business, Starbucks has done incredibly well.

  I often tell investors that doing a business turnaround is far harder than it looks, and Starbucks pulled one off. The shares fell from $40 down to $7.

  

  The stock is now at $88 and on Thursday, Starbucks reported another good quarter:

  Sales in the quarter, which ended Dec. 28 and was its first quarter for the 2015 fiscal year, rose 13 percent to $4.8 billion, while earnings rose to $983.1 million, from $540.7 million in the same quarter a year earlier, thanks to the Starbucks Japan purchase.

  Adjusted for that acquisition, earnings on each share of stock were 80 cents, a 16 percent increase over the same quarter last year. The figures for revenue and earnings per share were records for Starbucks.

  The company also announced that Kevin Johnson, the retired chief executive of Juniper Networks and a member of the Starbucks board, would become its new president and chief operating officer. Mr. Johnson replaces Troy Alstead, who starting in March will take a yearlong sabbatical from the company, as previously announced.

  Investment analysts were closely watching comparable-store sales performance, after five quarters of relatively lackluster traffic. The company used a mix of new products and promotions, including an increased selection of gift cards and a new latte, Chestnut Praline, to attract consumers during the critical holiday season.

  The company has an ambitious goal to nearly double sales and operating income over the next five years, and to that end, has begun acting on several strategies to make its stores more productive in the afternoons and evenings and increase their convenience to consumers.

  Last fall, it announced it would begin wine and beer sales, previously tested in the Chicago area, in about a quarter of its 12,000 stores, and more of the food being made through its purchase of La Boulange in 2012 is geared toward light lunch and dinner meals.

  Starbucks earns about 16 percent of its revenue from its mobile payment system, which is regarded as a model by others in the food industry, and it has been testing a new mobile ordering and payment system that it hopes will lift sales and shorten the time customers spend waiting in line.

  It also is working on a delivery service.

• The Markets Post-Greece
  Eddy Elfenbein, January 26th, 2015 at 12:19 pm

  The stock market is holding up better today than I thought it would following the elections in Greece. The S&P 500 just turned positive for the day.

  Former Buy List stock, IBM ($IBM), is in the news today. The company is planning layoffs but not as large as had been expected. This is tough for me to see because the company is in more trouble than I had realized. The job cuts are difficult but are necessary for IBM to get back on track.

  The Federal Reserve meets tomorrow and on Wednesday, plus New York City is being hit with a massive snow storm (we’re getting a little here in DC but not much). We’re also waiting on Microsoft ($MSFT) to report after the close today.

  Gold, which had been rallying this year, is down a lot today following Greece. The yellow metal is back below $1,280 per ounce. Gold was recently above $1,300.

• Morning News: January 26, 2015
  Eddy Elfenbein, January 26th, 2015 at 7:14 am

  Tsipras Forges Anti-Austerity Coalition in EU Challenge

  Tsipras Win Draws French Congratulations, German Threat

  German Business Confidence Exceeds Expectations

  Obama Fêted in Delhi as US Cements Closer Ties With India

  Economic ‘New Normal’ Needs Full Context

  Copper and Gold Prices Dip

  First U.S. Bitcoin Exchange Set to Open

  MWV and RockTenn Agree to Combination Creating a $16 Billion Global Packaging Leader

  AT&T Agrees to Buy Nextel Mexico for $1.875 Billion Minus Debt

  Post Holdings to Acquire MOM Brands for $1.15 Billion

  Unease for What Microsoft’s HoloLens Will Mean for Our Screen-Obsessed Lives

  Lenovo Brings Motorola Back to China as Moto X Phone Released

  NY Insider Trading Ruling Tests Prosecutors Beyond Wall Street

  Cullen Roche: Initial Thoughts on European QE

  Jeff Miller: Weighing the Week Ahead: Time to Focus on Europe?

  Be sure to follow me on Twitter.