Archive for January, 2015

• Workers Got a Raise…in Real Terms
  Eddy Elfenbein, January 16th, 2015 at 9:43 am

  One item in last week’s jobs report was a disappointment: average hourly earnings fell 0.2% to $24.57. This morning we learned that consumer prices fell by 0.4% in December. We had deflation. That means that workers got a raise in real terms.

  The data series only goes back to 2006, but real AHE earnings actually hit a new high in December.

  

• CWS Market Review – January 16, 2015
  Eddy Elfenbein, January 16th, 2015 at 7:09 am

  “There’s no shame in losing money on a stock. Everybody does it.
  What is shameful is to hold on to a stock, or worse, to buy more
  of it, when the fundamentals are deteriorating.” – Peter Lynch

  The stock market has suddenly gotten a lot more volatile. We went all of 2014 without a losing streak of more than three days. Since Christmas, we’ve had two five-day losing streaks. So far, the U.S. stock market has lost nearly $1 trillion this year.

  Last year was the calmest year for stocks since 2006. The average daily change for the S&P 500 in 2014 was 0.53%. So far this year, we’re running at more than twice that. If you recall, the S&P 500 had a three-month stretch last year when it didn’t close up or down by more than 1% in a single day; but in the last five weeks, it’s happened eight times. On Thursday, the S&P 500 closed below 2,000 for the first time in a month. This is the index’s worst start for the year since 2009.

  

  So what’s behind the market’s vicissitude? There are several events coming together, but most of them are a result of our good friend, the Strong Dollar Trade. I’ve written about this before, but every investor needs to understand what this means. Just this week, the euro slumped to a nine-year low against the dollar. The Swiss National Bank responded by scrapping the franc’s price cap against the euro. All over the globe, forex trading went bonkers. Within minutes, the franc skyrocketed 38%.

  The rising dollar is putting a lot of pressure on commodities which are priced in dollars. On Tuesday, spot West Texas Intermediate broke below $45 per barrel. Then on Wednesday, copper plunged 5.3% for its biggest loss in nearly six years.

  Underlying the Strong Dollar Trade is the belief that the U.S. economy is semi-strong while Europe and Asia are weak. But our economy might not be as healthy as we thought. We just learned that last month’s retail sales were the weakest in a year. This week marked the beginning of Q4 earnings season, and we’re starting to see how the soaring greenback has impacted different companies.

  Confused? Don’t be. I’m pleased to report that our Buy List is well-positioned for whatever the market throws our way. In this week’s CWS Market Review, we’ll take a closer look at the earnings outlook and what it means for us. We’ll also break down the latest ructions in Europe. Later on, I’ll discuss the latest earnings report from Wells Fargo ($WFC). The big bank is doing well in a challenging environment for banks. I’ll also preview upcoming Buy List earnings reports from eBay and Signature Bank. But first, let’s take a look at how the Strong Dollar Trade is impacting the world.

  Looking at the Fourth-Quarter Earnings Season

  The Q4 earnings season has officially begun. This is an important earnings season because it’s our first look at how the plunge in oil has affected the corporate bottom line. In the weeks leading up to earnings season, analysts had been slashing their estimates, especially for energy stocks.

  In October, Wall Street had been expecting earnings to rise by 8.5% for Q4 and by 9.5% for Q1. That’s been pared back a lot. The Street now expects earnings growth of 2.0% for Q4 and 2.8% for Q1. As you might guess, energy is mostly to blame. From the end of June to the end of December, full-year 2015 earnings estimates for energy stocks dropped by 28.9%. For the rest of the S&P 500, estimates dropped by 1.5%. Actually, that probably understates the impact of energy, since the mega-caps like Chevron ($CVX) and Exxon ($XOM) aren’t down nearly much as many of the small- and mid-cap energy stocks.

  The irony is that if OPEC hadn’t been so greedy and let oil shoot over $100 per barrel, then no one would have put so much money and effort into fracking or horizontal drilling. It’s now a game of who’s going to blink first, the shale guys or OPEC. All across Wall Street, oil experts are playing a guessing game of “how low can it go.” Goldman said that oil will have to be near $40 to fend off new supplies. Bank of America and Societe Generale say that oil’s going below $40. Barron’s speculates that oil could hit $20 per barrel.

  AAA said that the average price at the pump is $2.101 per gallon. That’s the cheapest gasoline has been since May 2009. OPEC has shown every sign that they’re cool with this drop and that they’re ready to let oil slide down even more. Neither side is ready to blink. In December, Iraq exported more oil than it had since the 1980s.

  As I see it, a black swan is a white swan that got doused with $44 oil. Experts estimate that the supply of crude is outpacing demand by two million barrels every day. The oil bear has put the squeeze on the Russian bear. The situation in Russia is so bad that Mikhail Prokhorov, one of the big-time oligarchs, is selling his majority stake in the Brooklyn Nets. Does plunging oil hurt stocks? We don’t have a precise answer, but previous oil bears have been good for stocks.

  We can assume that lower oil is very good for consumers, and that’s been helping retail stocks like Ross Stores ($ROST). But we got a surprise this week from a weak retail sales report for December. Sure, more people are working, but last week’s jobs report showed that average hourly earnings fell in December. There’s also the fear that the oil bust could lead to a collapse in capex spending. That’s a fancy way of saying that energy companies won’t shell out as much money for new projects since oil’s so cheap. That could also lead to layoffs in the energy sector.

  The lousy average hourly earnings data may cause the Federal Reserve to rethink any rate-hike plans. The Strong Dollar Trade really overwhelms everything. Wholesale inflation just recorded its biggest drop in three years. Charles Evans, the president of the Chicago Fed, said that inflation may not hit 2% until 2018. Evans doesn’t want to see rates go up until next year at the earliest. He may be right. It looks like the Strong Dollar Trade is already doing its own monetary tightening, beating Yellen to the punch. That’s why the bond market continues to rally. This week, the yield on the 10-year Treasury dipped below 1.80% for the first time since May 2013 (see below). The yield on longer-dated bonds has fallen even more. The spread between the 10- and 30-year yields is at a six-year low.

  

  Wall Street can be unforgiving if a stock misses earnings. On Wednesday, JPMorgan Chase ($JPM), a former Buy List stock, got nailed for a 3.5% loss after the bank missed the Street’s earnings consensus by 12 cents per share. JPM’s legal costs were $2.9 billion last year. I realize that sounds bad, but it’s an improvement over the $11.1 billion from 2013. Bank of America ($BAC) and Citigroup ($C) have also been weak. On Thursday, Best Buy ($BBY) got taken to the woodshed after they warned of tough times ahead. Stryker ($SYK) just said that the strong dollar will nick this year’s earnings by 20 cents per share. The previous forecast was 10 to 12 cents per share.

  The real pain lately has been among “high beta” stocks, meaning the stocks that go up the most when the market goes up. Many richly valued Internet stocks like Twitter ($TWTR), Google ($GOOGL), Netflix ($NFLX), Priceline ($PCLN) and Amazon ($AMZN) have been poor performers. Investors should continue to concentrate on high-quality stocks like the ones on our Buy List. Two stocks on our Buy List that look especially attractive right now are Qualcomm ($QCOM) and Hormel Foods ($HRL). Now let’s look at Europe’s fight against slipping into deflation.

  Europe’s Battle Against Deflation

  Europe can’t seem to catch a break. The economy in the Old World is still flat on its face. Unemployment in the eurozone is 11.5%, and the latest stats show that Europe now faces a real threat of deflation. Mario Draghi, the head of the ECB, recently said, “If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending.” A deflationary spiral is a central banker’s worst nightmare.

  Draghi has been fighting intransigent European (read, German) politicians to get behind his efforts to do a large-scale Quantitative Easing, just like Bernanke did, but for Europe. Only since the latest batch of lousy economic stats has he finally prevailed. Like Bernanke, Draghi has cut rates down to nothing, and Europe is nowhere close to the ECB’s 2% target for inflation. Five-year bond yields in Germany, Finland and Switzerland have all turned negative. That means, you have to pay for the privilege of lending the government your own money!

  The ECB’s next meeting is on Thursday, January 22, and that’s when Draghi will unveil his stimulus plan. This is part of the reason why the euro’s been tanking against the dollar, and why the Swiss Fed decided to abandon its currency cap (see the crazy chart below). The Swiss National Bank lowered interest rates from -0.5% to -0.75%. Now there’s the question of a price tag for Draghi’s bond-buying. Analysts have been kicking around numbers from 500 billion to 800 billion euros. Some say it could even be one trillion euros. I think Draghi is a very determined guy. Remember, he’s the one who said in 2012 that he’ll do “whatever it takes” to save the euro.

  

  What’s Draghi going to buy? Well, that’s a really good question. His problem is that he’s going to have to buy enough bonds to make an impact, but that will mean he’ll have to buy bonds of more profligate countries, which opens him up to the charges of rewarding poor decisions. My view is that if Draghi has broad enough support from the important people, he can win his fight against deflation.

  Europe’s problems don’t end there. On January 25, the Sunday following the ECB meeting, Greek voters go to the polls. The far-left Syriza party, led by the charismatic Alexis Tsipras, is expected to do well. Syriza has promised to bail out of Greece’s bailout.

  The problem for investors is that that could trigger a nasty chain reaction. Europe lent Greece 240 billion euros in exchange for the government’s implementing austerity policies. Those policies are hugely unpopular. Germany has made it clear that they won’t be blackmailed by Greece, and they’re fine with Greece exiting the euro. This could turn into a massive headache for everyone. Honestly, I don’t see it coming to that, but it’s not a far-fetched scenario. Hopefully, some sort of compromise will be worked out. Now let’s look at the first earnings report from our Buy List this earnings season.

  Wells Fargo Earned $1.02 per Share for Q4

  On Wednesday, Wells Fargo ($WFC) led off earnings season for our Buy List. The San Francisco bank reported earnings of $1.02 per share, which matched Wall Street’s view. Net income rose slightly from $5.37 billion to $5.38 billion. This was Wells’s 18th consecutive quarter of profit growth.

  Wells was much more fortunate than other big banks (like JPM) because they focus more on deposits and lending rather than trading. Looking at the top line, WFC’s revenue rose 4% to $21.44 billion. The Street had been expecting $21.24 billion. Wells clearly benefited from loan growth. Total average loans rose 4% to $849.4 billion. On the downside, Wells said that expenses rose to their highest point in two years.

  WFC’s net interest margin (that’s the key metric for any bank) fell a bit to 3.04%. That’s still good. For the whole year, Wells had net income of $21.82 billion on revenue of $84.35 billion. That’s an increase of 4% and 1%, respectively. For the year, Wells earned $4.10 per share.

  Overall, I’m pleased with their performance, and I recognize that the environment is less friendly towards banking. Last year, Wells’s return on equity was 13.7%. That compares well with JPM, which had an ROE of 9.8%. So far this year, the S&P Bank Index is down 8.8%, while shares of WFC are down 6.5%. This is why we focus on high-quality companies; they do better when times are rough.

  Wells Fargo is also being hurt by a sluggish housing market, but I think that will gradually improve over the next several quarters. The stock got nicked after the earnings report, so this week I’m lowering my Buy Below on Wells Fargo to $54 per share.

  Earnings Preview for eBay and Signature Bank

  We have two more Buy List earnings reports coming next week. eBay reports Q4 earnings on Wednesday, January 21, and Signature Bank, a new member of our Buy List, reports earnings on Thursday, January 22. (You can see a complete Earnings Calendar for our Buy List stocks
  here.)

  Three months ago, eBay ($EBAY) had a good earnings report. The online-auction house earned 68 cents per share, which was a penny more than expectations. Quarterly revenue rose 12% to $4.4 billion. The report pleased Wall Street. From the October low to the December high, shares of eBay soared 25%.

  I was a little disappointed by their guidance for Q4. eBay said they see earnings ranging between 88 and 91 cents per share. Frankly, I think that’s too low. I’m expecting a modest earnings beat. On the revenue side, eBay sees the numbers as ranging between $4.85 billion and $4.95 billion. Again, that strikes me as conservative.

  Here’s my view: eBay is a very solid business. Last year, they probably generated more than $3.5 billion in EBITDA. Also, they have more than $15 billion cash in the bank. Of course, eBay also has the PayPal spinoff planned for the latter half of 2015. Revenues at PayPal are growing at more than 20% per year. eBay continues to be a buy up to $60 per share.

  Signature Bank ($SBNY) is one of the five new members of our Buy List this year. Signature isn’t very well-known, but it may be the quietest success story in banking. They’re rarely in the news, and that’s exactly how they like it. But their performance tells the story. Signature’s loan-delinquency rate is about one-tenth of the industry average. They also keep a tight rein on overhead, which runs about 40% below industry average.

  Three months ago, Signature reported Q3 earnings of $1.52 per share, which was six cents better than estimates. That was their 20th-straight quarter of record earnings. Earnings for Q3 grew by 27.7%. Shares of SBNY have drifted lower recently with other banking stocks. I started Signature with a Buy Below of $133, but I may tighten it up after next week’s earnings report.

  That’s all for now. The stock market is closed on Monday in honor of Dr. Martin Luther King’s birthday. Earnings season heats up next week. On our Buy List, eBay and Signature Bank are due to report. We’ll also get important reports on housing starts, building permits and inventories on crude oil. On Thursday, the ECB has its big meeting to introduce its asset-buying program. 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: January 16, 2015
  Eddy Elfenbein, January 16th, 2015 at 6:58 am

  Europe Car Sales Rise First Time Since 2007 on Renault

  Euro’s March Lower Getting Boost From Swiss Bankers

  Cheaper Oil Tames U.S. Producer Inflation; Jobless Claims Up

  Schlumberger Cuts 9,000 Jobs as Oil-Price Ax Falls

  Kinder Morgan: What Is The Impact Of The Shrinking Brent/WTI Spread?

  Citigroup Profit Plunges on Weak Trading and Legal Costs

  How Target Botched a $7 Billion Rollout

  Luxembourg Backed ‘Cosmetic’ Amazon Deal in 11 Days, EU Says

  Best Buy Battered After Soft Sales Forecast, But Optimists Still Abound

  Greece’s Eurobank, Alpha Bank Ask Central Bank for Emergency Liquidity Assistance

  Dish, Fox News Reach New Deal, Ending Weeks-Long Blackout

  RadioShack Prepares to File for Bankruptcy

  The Poor Pay More in Taxes

  Jeff Carter: Who Needs a Bank?

  Howard Lindzon: The State of the Markets…2015

  Be sure to follow me on Twitter.

• The Swiss Fed Gives Up
  Eddy Elfenbein, January 15th, 2015 at 11:11 am

  The central bank of Switzerland has spent a ton of money trying not to let the franc fall below 1.20 to the euro. But Mario Draghi is determined to weaken the euro in order to save Europe.

  Today, the Swiss finally gave up and abandoned their price cap. This chart tells it all.

  

  The Swiss ETF ($EWL) is doing well today. Until May, EWL had largely kept pace with the American market. But since May, it’s lagged badly. The last few days, however, have been quite good.

• Morning News: January 15, 2015
  Eddy Elfenbein, January 15th, 2015 at 7:29 am

  Interstate Conflict Is Biggest Worry of Davos Attendees

  German Economy Expanded 1.5% in 2014

  Swiss Franc Rockets After SNB Scraps Currency Cap

  Syriza Massages Foreign Policy Goals as It Smells Power

  Iran’s Budget Assumes $40 Oil After Prices Decline 33%

  What Rajan Wants From Modi to Keep Cutting India’s Rates

  GM Sees Improved Profit in 2015 on China, U.S. Growth

  JPMorgan CEO Dimon Says Banks ‘Under Assault’ By U.S. Regulators

  Caesars Unit Files For Bankruptcy Protection In Bid To Trim Debt

  Uniqlo Operator Vows to Improve Work Conditions in China

  Wells Fargo & Company Still Best In Class

  Samsung, Blackberry Deny They’re in Talks About a Deal

  Lennar Profit Rises as Homebuilder Reports Higher Revenue

  Credit Writedowns: Pie in the Sky

  Jeff Miller: Positions For 2015: Still Plenty Of Life In The ‘Aging Bull’

  Be sure to follow me on Twitter.

• Wells Fargo’s CFO on Q4 Earnings
  Eddy Elfenbein, January 14th, 2015 at 7:12 pm

• Another Down Day
  Eddy Elfenbein, January 14th, 2015 at 1:21 pm

  The S&P 500 is testing the lows from last Tuesday. So far, we’re holding just above them. The big losers today are Energy and Materials, while financials are just behind. This looks to be another four-day losing streak for the S&P 500.

  

  The 10-year Treasury has been as low as 1.78%.

• Wells Fargo Earns $1.02 per Share for Q4
  Eddy Elfenbein, January 14th, 2015 at 11:33 am

  Earnings season has begun for our Buy List. The lead-off batter is Wells Fargo ($WFC). This morning, the big bank reported Q4 earnings of $1.02 per share. That matched Wall Street’s forecast. Net income rose slightly, from $5.37 billion to $5.38 billion.

  Looking at the top line, WFC’s revenue rose 4% to $21.44 billion. The Street had been expecting $21.24 billion. The bank benefited from loan growth. Total average loans rose 4% to $849.4 billion. On the downside, Wells said that expenses rose to the highest level in two years.

  WFC’s net interest margin, the key metric for any bank, fell a bit to 3.04%. For the whole year, Wells had net income of $21.82 billion on revenue of $84.35 billion. That’s an increase of 4% and 1%, respectively. The bank earned $4.10 per share in 2014.

  Overall, this was an OK earnings report. Wells continues to do well, but the environment is less friendly towards banking.

• Morning News: January 14, 2015
  Eddy Elfenbein, January 14th, 2015 at 6:51 am

  World Bank Cuts Global Growth Forecast

  Draghi Buoyed as EU Court Aide Supports 2012 Bond-Buy Plan

  Russian Finance Minister Promises to Limit Government Spending

  India to Become Fastest-Growing Economy in PM Narendra Modi Government’s 4th Year

  Asia Markets Are Hurting As Oil Continues Falling

  China Stocks Rise Most in Week, Banks Rally Amid PBOC Support

  How Inversions Leaped From the Shadows to Doom Treasury Nominee

  $340 Million in Federal Funds Awarded to U.S. Conservation Projects

  Uber Agrees To Share Trip Data in Boston While Refusing to Do So in New York

  Burberry Cautious on Profits After Hong Kong Protests Put Off Shoppers in One of World’s Top Luxury Goods Markets

  Alibaba Buys Controlling Stake in Digital Marketing Firm AdChina

  Tesla to Hike Electric Car Output to ‘A Few Million’ by 2025

  IRS Warns Of Delayed Refunds, Long Waits For Taxpayers & Possible Shutdown

  Roger Nusbaum: Barron’s Makes The Case For Active Management

  Joshua Brown: Should We Be Worried About Margin Debt?

  Be sure to follow me on Twitter.

• How Much Is Google Worth?
  Eddy Elfenbein, January 13th, 2015 at 12:02 pm

  Shares of Google ($GOOGL) have been sliding lower since the late summer. The stock recently dipped below $500, and is now near a 13-month low. Google shareholders aren’t used to seeing a lot of pain, at least not since the Financial Crisis.

  Here’s a look at Google’s share price along with its earnings-per-share. The black line is the stock and it follows the left scale. The gold line is EPS and it follows the right scale. The two lines are scaled at a ratio of 20-to-1 which means that whenever the lines cross the P/E Ratio is exactly 20. I don’t mean to suggest that 20 is the proper valuation for Google; this ratio simply makes the chart most readable. The future portion of the yellow is Wall Street’s consensus.

  

  So where should Google’s price be? That’s not an easy question, but let’s try to make some reasonable estimates. According to Yahoo Finance, the consensus on Wall Street is that Google will make $30.28 for 2015. That’s a 17% increase over 2014’s earnings (remember, of course, that they still have to report Q4).

  The estimated five-year earnings growth for Google is 16.99%. If we take my world-famous World’s Simplest Stock Valuation Tool (Forward P/E = half the growth rate plus eight), that gives us a fair value of $499.63. Since we’re among friends, let’s round that to $500 per share.

  Looking into the balance sheet, there are a few items that work in Google’s favor. First, the company has $60 billion in cash, which works out to $88.53 per share. That’s roughly one-sixth of the share price. Obviously, that cash in the bank is barely earning Google any money. The vast majority of the earnings power comes from operations which are roughly valued at $412 per share. On the other side of the balance sheet, Google has $8.6 billion in debt which is easily manageable. Google is in no danger of financial trouble.

  Google is going for an attractive valuation, but the big question is earnings. The company has missed Wall Street’s estimate the last four quarters in a row, and those misses have grown steadily larger, rising from 1.5% to 2.8%. That’s not all. In the last three months, the estimate for full-year 2015 has drifted lower by $1.16 per share. So you can see why the stock has suffered.

  The search engine reports in another two weeks. If they deliver a major earnings beat, then I think Google will have shown Wall Street that it can hit those optimistic earnings forecasts. For now, I rate Google a buy anywhere below $510 per share. Stay tuned for earnings on January 29.