Archive for March, 2015

• Q1 Is on the Books
  Eddy Elfenbein, March 31st, 2015 at 7:41 pm

  I’m still on the road but I wanted to update you now that the first quarter of 2015 is officially over. For the first three months of the year, the S&P 500 gained 0.44% while our Buy List gained 3.26%.

  Fifteen of our 20 stocks are up for the year. The big winner is Cognizant with an 18.48% gain. The three biggest losers are all big tech names: MSFT, ORCL and QCOM. I’m happy to see that all five of our new buys are beating the market.

  With dividends, the S&P 500 was up 0.95% for the quarter. With dividends, the Buy List was up 3.55% for the quarter.

• Morning News: March 31, 2015
  Eddy Elfenbein, March 31st, 2015 at 7:08 am

  Greece, EU/IMF Lenders End Round of Technical Talks Without Deal

  Greece Looks to Russia As Deal With Europe Stumbles

  It’s Normal That UK GDP Is Still Below Pre-Crisis Levels

  Japan Says Not Bound By Deadline to Join AIIB, And Not Yet Decided

  China to Introduce Bank Deposit Insurance From May

  China Appears to Attack GitHub by Diverting Web Traffic

  Iran Nuclear Envoys Near Outline Agreement, Buy More Time

  Oil Heads for Third Quarterly Drop as Iran Deal Deadline Looms

  Here Comes a New Wave of Billion-Dollar Hedge Funds

  Prosecutors Scrutinize Minority Borrowers’ Auto Loans

  Philips Sells 80.1% of Lighting Components Unit For $2.8 Billion

  Tesla to Unveil New Product-Likely a Battery-Next Month

  The Geek of Chic Aims High As Yoox Merges With Net-A-Porter

  Jeff Carter: The Great Unbundling

  Roger Nusbaum: First Quarter Closing On A Deceptively Volatile Note

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• Morning News: March 30, 2015
  Eddy Elfenbein, March 30th, 2015 at 7:19 am

  Forecasters Shrug Off Winter Economic Blues

  China Stocks Surge to 7-year Highs on Silk Road Building Project, Easing Hopes

  Amid Yemen Chaos, China Keeps Oil Shipments Flowing

  Japan Clips Thailand’s Wings With Airline Ban

  Consumer Spending in U.S. Rose Less Than Forecast in February

  Bernanke Will Blog on Economics, Finance and Sometimes Baseball

  UnitedHealth Buys Catamaran for $12.8 Billion for Drug Benefits

  Teva to Buy Auspex to Bolster Central-Nervous-System Business

  Horizon Pharma Offers to Acquire Hyperion Therapeutics for $1.1 Billion

  Dufry to Undertake Bid For All of Its Rival, World Duty Free

  News Companies See Movies as Opportunity for Growth

  Fidelity Moves to End DuPont Proxy Battle

  Big Oil Pressured Scientists Over Fracking Wastewater’s Link to Quakes

  Joshua Brown: Confusing Today’s Liquidity With Tomorrow’s

  Jeff Miller: Weighing the Week Ahead: Time For an Economic Spring Thaw?

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• No Back-to-Back Gains
  Eddy Elfenbein, March 27th, 2015 at 9:55 am

  Here’s a closer look at a stat I mentioned in today’s newsletter. The S&P 500 hasn’t had back-to-back up days since February 13-17. That’s a run of 27 days which is the longest such streak in more than 20 years.

  Update: Our friends over at Bespoke ran the numbers: “After taking into account the fact that the S&P 500 won’t make back-to-back gains today (we didn’t have an up day yesterday) we’re now at a 28-day streak without gains on consecutive trading days. It turns out that this is incredibly rare: it has only happened twice since World War 2!”

• Q4 GDP Revision Still at 2.2% Growth
  Eddy Elfenbein, March 27th, 2015 at 8:56 am

  The government revised its Q4 GDP number. In real terms, the economy grew by 2.2% for the final three months of 2014. That’s the same as the previous report. Actually, looking at the decimals, real GDP was revised a tiny bit higher, from 2.193% to 2.218%. For all of 2014, real GDP grew by 2.389%.

  Here’s the million dollar real GDP chart going back a few years:

• CWS Market Review – March 27, 2015
  Eddy Elfenbein, March 27th, 2015 at 7:08 am

  “We wander for distraction, but we travel for fulfillment.” – Hilaire Belloc

  Greetings from Manila! I’m writing to you from the Philippines, where I’m on vacation. It’s interesting that back home in Washington, I live a few blocks from the Federal Reserve, yet after having traveled 8,600 miles from home, one of the things that most strikes me is the purchasing power of the strong U.S. dollar. Even on vacation, you can’t escape economics.

  While the pronounced rally for the greenback has been tough on domestic manufacturers, it’s a boon for Americans going overseas. The Philippine peso has held up better than many other currencies. I should also point out that while I’m here, the Philippine Stock Exchange Index just hit another all-time high. To be fair, I can’t take full credit for this. I will, however, note the fortuitous correlation.

  

  The first quarter of 2015 ends next week, and soon we’ll get a look at Q1 earnings reports. I have to say that I’m not expecting very strong numbers. Once again, analysts have been slashing their forecasts, and we can largely blame the strong dollar. This doesn’t appear to be the start of a downturn for the economy, but merely a pause in corporate earnings growth. I’ll have more on this in a bit. I’ll also discuss this week’s stock split announcement from Ross Stores (ROST) and what it means for our Buy List. But first, let’s take a look ahead at what to expect for the Q1 earnings season.

  Q1 Earnings Preview

  Analysts now expect Q1 earnings for the S&P 500 of $26.75 per share. (That’s the index-adjusted number. Each point on the S&P 500 is about $8.9 billion.) At the start of the year, they had been expecting Q1 earnings of $30.57 per share. So that’s a big cut in just a few months. If they’re right, Q1 will have the smallest profit since Q2 of 2013. It will be just slightly below the profits from Q4 of 2014.

  Let me be clear that this is merely a pause in earnings growth, not a broad-based decline like we would see in a recession. In fact, there was a similar pause in 2012-13. Looking at this upcoming earnings season is what has led me to stress the Strong Dollar Trade so frequently. The reason is that some sectors are being greatly impacted, while others barely feel the difference. For example, the Energy Sector is expected to see its earnings fall more than 62% for Q1. But healthcare is expected to show a 21% increase. As we often learn, stock prices and earnings may ignore each other in the short term, but they’re joined at the hip in the long term. The Energy Sector ETF (XLE) is currently more than 24% off its 52-week high, while the similar figure for Healthcare (XLV) is less than 5%.

  There’s a point at which a strong dollar is no longer a good thing, and the harm it does to the domestic economy is real. This week, Bloomberg cited a study that showed that since 1972, whenever the dollar rallies by more than 25%, the S&P 500 falls by an average of 6.4% in six months.

  The important Tech Sector is expected to show earnings growth of 18%. Lately, however, many large-cap tech stocks have been underperforming. On Wednesday, the Nasdaq Composite had its best one-day drop since April. My Buy Below for Microsoft (MSFT) is currently $45 per share, but if you can get it below $41.33, that’s a very good deal. That’s exactly where the stock would be for the dividend to yield 3%. Meanwhile, the 10-year Treasury yield currently stands at 2.01%.

  Last week, I talked about the dividend increase at Oracle (ORCL). The stock initially reacted well, but has since given back its entire gain. Remember that the earnings report showed us that business is basically going well, and would be even better if not for that meddling dollar. At 14 times next year’s earnings, I think Oracle is a good deal.

  The S&P 500 has fallen every day this week (please note, this has happened when I’m not around). But if the earnings slowdown is temporary, and I suspect it will be, the S&P 500 is still going for a reasonable valuation. Analysts currently expect earnings next year of $135 per share. I should add that I’m always a bit leery of analyst estimates, especially that far out. In this case, I’m using these figures to represent reasonable scenarios. That would mean the S&P 500 is going for 15.2 times next year’s earnings. That’s hardly a bubble. For now, we should expect soggy earnings for the next three quarters, but the profit outlook should improve before the end of the year.

  Our Recent Bout of Deflation Is Over

  Earlier this week, the government reported that consumer prices rose for the first time since October. Consumer prices rose by 0.2% last month. The “core rate,” which excludes food and energy prices, also rose by 0.2%. Of course, that’s small, but it’s a break from the recent trend.

  The uptick in inflation is important for us because it gives the Fed more reasons to raise interest rates, and a rate increase may come soon. It’s hard to justify raised interest rates while prices are falling. Charles Evans, the head of the Chicago Fed, said he doesn’t expect a rate hike in June. I hope he’s right, but I’m afraid he’s not. The futures market currently thinks there’s a 65% chance that rates will rise before the end of the year. (By the way, a fund manager at Morgan Stanley thinks the Fed’s next move could be a rate cut.)

  The recent tensions in Yemen have given a temporary boost to the oil market, but I doubt this will last. All the important signs point to lower prices for oil, but it won’t happen in a straight line.

  Here’s a remarkable stat: The S&P 500 has now gone 27 days without posting back-to-back daily gains. That’s the longest streak in more than 20 years. The four-day selloff in the S&P 500 is the longest since January, but the index came very close to another all-time high last Friday. The highest close came on March 2, when the S&P 500 finished the day at 2,117.39. Last Friday, it got to 2,108.06.

  Ross Stores to Split 2 for 1

  On Tuesday, Ross Stores (ROST) announced that it split its stock 2 for 1. This means that shareholders will get twice as many shares, while the share price will drop in half. Ross closed the day on Thursday at $103.82.

  This will be the fifth time in the last eighteen years that Ross has split 2 for 1. One share of ROST bought 20 years ago for $11.50 is now 16 shares at $103.77. Let me be clear that a stock split by itself doesn’t add any value. But it’s generally seen as good news, since profitable, growing enterprises split their shares every few years, and that’s what Ross has done.

  

  Ideally, I think a company shouldn’t pay much attention to its share price. In my view, management should have more important things to do, like make a profit. As long as a company does well, the stock price should follow. Warren Buffett famously has never split Berkshire Hathaway (BRKA), and the “A” shares are currently worth $216,240.

  You’ll often hear that stock splits “increase the liquidity” of a stock. That could be true, but I would be leery of any investment in which lack of liquidity is an issue. I’m sometimes amused by companies that are overeager to split their shares just so they can say they split their shares. For example, I don’t see why anyone would want to declare a 3-for-2 stock split. JetBlue (JBLU) once split its stock 3 for 2 three times in three years, yet their stock didn’t appreciate much at all.

  If I had my way, only splits greater than 2 for 1 would be allowed. No 5 for 4s or 3 for 2s. Also, only stocks with share prices greater than $100 would be allowed. This would stop much pointless meddling by management.

  The important news for us is that Ross continues to do well. Despite the stock’s poor showing during the first half of 2014, earnings are still quite good. Last month’s earnings report beat consensus by nine cents per share. Ross remains a good buy up to $107 per share. The split will take effect on June 11. One final note: As the stock splits 20 for 1, so, too, will our Buy Below Price.

  That’s all for now. This Tuesday will be the final day of the first quarter. After that, we will get the important turn-of-the-month economic reports. On Wednesday, the ISM Index comes out. Manufacturing is still expanding, but the ISM has slowly declined for the last four months in a row. I want to see a turnaround here. The big jobs report comes out next Friday. The key isn’t the number of new jobs; I want to see if there’s been a marked increase in wages. That’s what will drive the direction of interest rates. The stock market will be closed next Friday for Good Friday. 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: March 27, 015
  Eddy Elfenbein, March 27th, 2015 at 7:06 am

  Japan’s Zero Inflation Is No Worry

  Economy in U.S. Grew 2.2% in Fourth Quarter on Consumer Spending

  Futures Tick Lower as Dollar Gains Ahead of Yellen

  Fed Market Gurus Prep Rate Hike Amid Last-Minute Anxieties

  Payday Lenders Warn That Proposed New Rules Could Hurt Consumers

  Senate Adopts Budget That Won’t Privatize Medicare

  BlackBerry Reports Surprise Profit as Sales Fall Short

  Google CFO Gets $70 Million Pay Package

  Dow and Olin Corporation Create an Industry Leader in Chlor-Alkali and Derivatives with Revenues Approaching $7 Billion

  Chevron Exits Australia in Record $461 Billion Block Trade

  Gamestop Outlines Acquisition Plans in Push to Diversify Stores

  Amazon in Talks to Buy Online Luxury Retailer Net-a-Porter

  Contact Lens Makers and Discounters Tussle Over Price Setting

  Cullen Roche: The USA is Addicted to California Agriculture (and its low Water Prices)

  Jeff Carter: The Smallest Possible Leads to Biggest Possible

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• Morning News: March 26, 2015
  Eddy Elfenbein, March 26th, 2015 at 5:10 am

  Asian Stocks Are Getting Smoked

  Why Bombing This Tiny Oil Producer Is Roiling the Energy Market

  Oil, Gold and Yen Up on Yemen Tensions

  The Central Banker Who Saved the Russian Economy From the Abyss

  Trans-Pacific Partnership Seen as Door for Foreign Suits Against U.S.

  SEC Proposes Rule Aimed at Monitoring High Freq. Trading More Closely

  Payday Lenders to Face New Regulations

  Kraft-Heinz Deal Shows Brazilian Buyout Firm’s Cost-Cutting Recipe

  Comcast Pushes Back Closing for Time Warner Cable Merger to Middle of 2015

  Adidas Targets Turnaround With New Strategy

  Modular Mojo: Toyota Re-engineers Its Appeal

  Lumber Liquidators Under Investigation by Consumer Agency

  Dark Clouds Loom Over Yingli Green Energy

  Joshua Brown: Turning Bonds Into Stocks

  Cullen Roche: A Bond “Bubble” Is Very Different From a Stock “Bubble”

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• Morning News: March 25, 2015
  Eddy Elfenbein, March 25th, 2015 at 7:17 am

  German Business Confidence Rises Again in March

  Capital Flees Europe And Fed Warns – Time To Trim Stocks

  Fed’s Evans Says Low Inflation Makes Rate Rise Too Risky in 2015

  Oil Prices Steady, But Inventory Build Drags

  A New Rule Could End Up Punishing the Wrong Banks

  3G Capital, Berkshire to Buy Kraft, Merge It With Heinz

  Freeport-McMoRan Cuts Dividend as Commodity Slump Bites

  Amazon Blasts U.S. Agency for Slowness on Drone Regulation

  Fitch: Lexmark International’s ‘BBB-‘ IDR Unaffected by Kofax Acquisition

  No Deal for Shale Driller Whiting as Stock Sale Announced

  Netflix, Amazon and Hulu No Longer Find Themselves Upstarts in Online Streaming

  Delhi Requests Block on Uber, Ola Apps

  Silicon Valley’s Blockbuster Growth Draws Valuable New Talent From Wall Street

  Joshua Brown: Inbox: Leverage Your Luxuries for Instant Liquidity

  Credit Writedowns: AIIB Prelude to SDR Decision

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• Ross Stores to Split 2-for-1
  Eddy Elfenbein, March 24th, 2015 at 8:56 am

  Ross Stores (ROST) just announced that it will be splitting its stock 2-for-1. This means that shareholders will have twice as many shares, and the share price will fall in half.

  A stock split doesn’t add any value by itself but a stock that splits every few years is seen as a healthy, growing enterprise. The split at Ross will happen on June 11.

  In commenting on this action, Barbara Rentler, Chief Executive Officer, said, “We have delivered solid and consistent financial performance over the past few years which has contributed to significant stock price appreciation over this period. Our decision to split the stock reflects both the Board of Directors’ and management’s ongoing confidence in the Company’s future growth prospects and our continued commitment to enhancing stockholder value.”

  To be clear, our Buy Below price will split 2-for-1 as well.

  Ross has had four previous 2-for-1 splits; 1997, 1999, 2003 and 2011. One share bought 20 years ago for $11.50 is now 16 shares at $106.