Archive for March, 2015

• Morning News: March 24, 2015
  Eddy Elfenbein, March 24th, 2015 at 7:11 am

  Growth in Eurozone Business Activity Near Four-Year High

  Wave of Investor Cash Exits Eurozone

  U.K. Inflation Rate Drops to Zero in February

  Asian Stocks Mixed Over China Growth Fears

  Oil Below $56 as Saudi Output Near Record, China Activity Slows

  There’s a Big Fed Speech Coming Up on Monday – Here’s Why Traders Are Paying Attention

  Fed’s Bullard: Zero Rates No Longer Appropriate for U.S. Economy

  Comcast Tries Yet Again To Fix Its Customer Service (This Time, Online)

  Are You Willing to Pay to Watch Video Clips Online?

  H&M Profit Tops Estimates as Retailer Extends Offering

  Eli Lilly (LLY) Stock Gains Today After FDA Lifts Ban on Pain Treatment Drug Trials

  Li Ka-shing’s Hutchison Nears $15 Billion Deal for O2

  Louisville Slugger, Iconic U.S. Baseball Brand, Sold to Wilson

  Roger Nusbaum: The Fed Loses Its Patience

  Cullen Roche: Is It Impossible to Predict the Future?

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• On Vacation
  Eddy Elfenbein, March 23rd, 2015 at 6:45 pm

  I’m relaxing in The Philippines for the next few days. Posting will be light but I’ll try to chime in on important events.

• Morning News: March 23, 2015
  Eddy Elfenbein, March 23rd, 2015 at 7:13 am

  European Stocks Dip as Talks on Future of Greece’s Bailout Continue

  Draghi Cheerleads for Euro-Area Economy as Greek Risk Looms

  S&P 500 Earnings Set To Decline As Greece Rears Its Troublesome Head Again

  China Stocks Near 7-Year Highs, Property Jumps on Hopes of Policy Moves

  China to Reap Alibaba Windfall As Tightens Up on Tax

  Lagarde Says IMF to Co-operate With China-Led AIIB Bank

  Saudi Arabia’s OPEC Governor: It Will Be Hard For Oil to Reach $100-120 a Barrel Again

  Searching for the Right Reading of Last Week’s FOMC

  Dizzying Pre-IPO Tech Values Spurred by Rush of Hedge-Fund Money

  A Deal to Be Made: Three Gulf Carriers, Three Alliances, Three JVs, Milan-JFK Goes Away

  Uber Gains a New Partner in India, Times Internet to Fuel Uber’s Expansion

  ChemChina to Buy Italian Tire Maker Pirelli in $7.7 Billion Deal

  At the Box Office, It’s No Longer a Man’s World

  Howard Lindzon: Live Streaming Video…Twitter, Periscope and Meerkat

  Jeff Miller: The Quest for New Worries

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• CWS Market Review – March 20, 2015
  Eddy Elfenbein, March 20th, 2015 at 7:08 am

  “It is not the crook in modern business that we fear, but the honest
  man who doesn’t know what he is doing.” – Owen D. Young

  I’m out of the office, enjoying a quiet vacation far from the madding crowds of Wall Street, but I wanted to send you an abbreviated CWS Market Review this week. There were two big stories this week. At the macro level, the Federal Reserve’s latest policy statement dropped the word “patient” from descriptions of the Fed’s outlook for raising interest rates.

  The bulls were glad to see the Fed’s forecast showing that unemployment can go lower before it stokes inflation. Janet Yellen fed the optimism when she said, “Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient.” Almost instantaneously, the stock market jumped about 1% Wednesday afternoon.

  

  The big story for our Buy List was a 25% dividend increase from Oracle (ORCL). For their fiscal Q3, Oracle earned 68 cents per share, which matched expectations. The company is basically doing well, but it’s being impacted by—I hope you’re sitting down—the strong U.S. dollar! The dividend news was good to see, and their cloud business is strong. Shares of ORCL jumped nearly 3% on Wednesday. I’ll have more details in a bit.

  The Fed Feeds the Bulls

  Wall Street had been a bit nervous going into this week’s Federal Reserve meeting. The Volatility Index (VIX) got as high as 17 last week. There’s been a disconnect between what the Fed’s been saying and what the market thinks will happen. The Fed has repeatedly hinted that they’ll start raising interest rates by the middle of this year. Wall Street thinks it will happen later.

  For their part, the Fed took an April rate hike off the table. But previously, they had said they plan to be patient in their move to a rate increase. They stopped doing it this time. In Wednesday’s policy statement, the Fed said that it will be appropriate to raise rates when the FOMC “has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.”

  In other words, watch the labor market and inflation. Since we haven’t had much inflation lately (deflation, actually), that still signals to us that they’re in no hurry to raise interest rates. The bond market sold off after the Fed meeting, but the 10-year yield is still below 2%. If anything, the Fed is coming around to the bond market’s view.

  

  You may be curious why the Fed and its outlook for interest rates are so important to investors. The reason is that short-term rates serve as the basic competition for investors’ money. For a long time, I haven’t been concerned by the market’s periodic downturns. Since the bull market began six years ago, there have been 12 dips of 5% or more. Each one led to a new high. The reason for my optimism is that the low rates offered in fixed income are a poor substitute for high-quality stocks. Why would anyone want to get 0.26% from a one-year Treasury when they could get 2.7% in Wells Fargo (WFC) or 2.9% in Microsoft (MSFT)? Those are conservative stocks, and they’re yielding 10 times what you can get in fixed income.

  I apologize, but I’m going to use a fancy economic term, and that’s NAIRU. That stands for the non-accelerating inflation rate of unemployment. (Now you can impress people at dinner parties.) Translated into English, NAIRU means the unemployment rate below which inflation starts to rise. The problem is that no one knows exactly where NAIRU is. It would make things easier if we did, and NAIRU probably moves around as well. The reason I mention this is that the Fed this week lowered its NAIRU estimate. In December, the Fed said stable prices would happen when unemployment gets between 5.2% and 5.5%. They just lowered that range to 5% to 5.2%. That’s good news, because it implies the Fed will need to do less tightening as the economy improves.

  The Fed has been pretty clear that a rate increase will happen later this year; 15 of the 17 FOMC members currently believe so. If the Fed thinks NAIRU has fallen, they’re not going to be raising rates so quickly. The Fed’s latest projections show that they expect, on average, to have rates at 0.75% by the end of this year. Plus, the Fed thinks inflation will range between 1.7% and 1.9% next year. In other words, even after the rates increase, we’ll still have negative real rates. To boil down this week’s news to a simple statement, while the Fed dropped the word “patient,” they still plan to be generally quite patient. That’s what made the bulls so happy.

  What’s complicated things is our old friend, the strong dollar. The U.S. economy is gaining steam, while Europe is still weak. This week, in fact, Sweden’s central bank cut interest rates to negative 0.25%. The Riksbank thought their previous rate of -0.1% was simply too high. Mario Draghi is still doing everything he can to weaken the euro. The strong dollar has effects very similar effects of the Fed’s tightening—without the Fed’s actually tightening. Fortunately, the U.S. isn’t as export-intensive as other countries, so a strong dollar doesn’t immediately translate into a recession. But it does hurt. In fact, let’s look at the latest earnings report from Oracle.

  Oracle Raises Dividend by 25%

  On Tuesday, Oracle (ORCL) reported fiscal Q3 earnings of 68 cents per share. That matched Wall Street’s consensus. The bad news is that quarterly revenue came in at $9.33 billion, which was below consensus of $9.47 billion. Oracle said that if you exclude the impact of the strong dollar, quarterly sales would have risen by 6%.

  Larry Ellison said that before the end of this year, his company will be making more money off cloud than Salesforce.com (CRM). For fiscal Q4, which ends in May, Oracle sees earnings ranging between 90 and 96 cents per share. Wall Street had been expecting 88 cents per share.

  I wanted to highlight this part of Oracle’s earnings call. This is Safra Catz discussing Oracle’s cloud business, which is also known as platform-as-a-service or Paas:

  Our customers are clearly embracing Oracle PaaS faster than we expected, which is actually great for us. Just to give you a little bit of insight on how we look at the business, for every $1 million of license we sell, we expect to collect another $1 million from support over five years, for a total of $2 million, while for every $1 million of PaaS we sell, we actually expect to collect $5 million over five years.

  Think about that! The best news for investors is that Oracle raised its quarterly dividend by 25%. The payout will increase from 12 to 15 cents per share. Oracle isn’t a big dividend payer, but an increase is still nice to see. Shares of Oracle jumped 3% on Wednesday to touch a two-month high. I’m keeping my buy below on Oracle at $48 per share.

  Before I go, I wanted to highlight a few other points. Fiserv (FISV) finally broke $80 per share on Thursday. What an amazing stock this has been. Cognizant Technology Solutions (CTSH) also broke out to a fresh 52-week high. The stock is up 50% from its October low. eBay (EBAY) has slumped recently. The online-auction house was downgraded by Piper Jaffray due to concerns that PayPal will soon face more competition. That’s certainly true, but I think a downgrade is very premature. eBay remains a solid buy. AFLAC (AFL) nearly hit $64 per share on Wednesday. It’s about time the duck stock got some love from the market.

  That’s all for now. There are two important economic reports to watch for next week. On Tuesday, the government releases the CPI report for February. We know that deflation has been moderated, but not yet by how much. The Fed clearly thinks deflation will soon pass, and I suspect they’re right. Then on Friday, the government releases the final report on Q4 GDP. 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 20, 2015
  Eddy Elfenbein, March 20th, 2015 at 7:01 am

  Empty Greek Coffers Bring ‘Accident’ Threat Closer

  Russia’s Putin Calls for Regional Currency Union

  A New Look at the New China-Led Financial Institutions

  Japan’s Recovery Is Complicated by a Decline in Household Savings

  Fed Is Pushing and Pulling on Rates Riddle

  ETFs Crowd Into Top US Oil Contract

  Continuing Jobless Claims Near a Low, and That May Not Be Good

  Regulators Say Yes to Amazon Drone Test

  Holcim and Lafarge Review Terms to Get Merger Back on Track

  Biogen Alzheimer’s Drug Slows Disease Progression in Trial

  GoDaddy to Raise Up to $418 Million in IPO

  Streaming Music Drowns Out Sales in US For the First Time

  Nike Shares Increase 4% in After-Hours After Positive 4Q Forecasts

  Edward Harrison: Front-Running the Fed on Interest Rate Hikes

  Jeff Carter: Too Good To Be True

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• Morning News: March 19, 2015
  Eddy Elfenbein, March 19th, 2015 at 6:57 am

  Tsipras Heads to Summit as Merkel Tries to Defuse Greek Crisis

  Swiss Government Cuts Growth Forecasts After Franc Cap Removed

  Oil Falls to $55 as Kuwait Comments Refocus on Oversupply

  Why the Fed Switched to a Slower Track

  Yahoo Logging out of China? Firm Shutting Office, Laying Off 200 People

  Rakuten to Pay $410 Million for U.S. E-Book Platform OverDrive

  Adobe’s Slowing ‘Creative Cloud’ Growth Worries Analysts

  Angry Birds Maker Takes a Profit Hit

  Target to Increase Wages to At Least $9/Hour for All Workers in April

  Target Extends Return Window for Private-Label Brands

  Suddenly, Plenty of Options for Cord Cutters

  Would You Discuss Race With Your Starbucks Barista?

  Starbucks Partners Drinks Maker Tingyi to Expand in China

  Joshua Brown: Fed Removes ‘Patient’, Sparks Roman Orgy

  John Hempton: The Herbalife Compensation Puzzle

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• St. Patrick’s Day and the Greenback
  Eddy Elfenbein, March 18th, 2015 at 3:53 pm

  From Gary Alexander:

  St. Patrick’s Day is an important historical date in the long-term battle between Greenbacks and Gold:

  On March 17, 1862, the U.S. Treasury abandoned the gold standard by sanctioning the first two issues of Greenbacks, which were not tied to any promise of redemption in gold. As the nation entered its second year of a suddenly-long and costly Civil War, governments of both North and South found it necessary to replace their scarce gold with cheap paper money. By war’s end, the Union printed $450 million in greenbacks. The natural result was runaway inflation by war’s end.

  On March 17, 1968, during another costly war, the link between gold and greenbacks was once again severed. In early 1968, LBJ’s “guns and butter” policies led to a hemorrhage of U.S. gold at $35 per ounce. On Sunday, March 17, the seven nations of the London Gold Pool agreed on a two-tiered gold price. This was the first step toward an abandonment of gold and the free-floating of currencies in the 1970s, leading to a long and costly bout of inflation that lasted until 1982.

  On Monday, March 17, 2008, the day after Bear Stearns collapsed, gold closed above $1,000 per ounce for the first time. The London gold price fix was $1,011.25, while the New York nearby futures contract closed at $1,000.40. Silver closed at $20.92, its highest level since 1980. The U.S. Dollar Index, which had fallen sharply since 2001, reached an intra-day record low of 70.69 in late March, and a record low close of 71.56 on April 3, ending a seven-year dollar bear market.

  In the seven years since the U.S. Dollar Index hit its all-time low, the dollar is up over 40%. The gains were slow at first, with a couple of head fakes along the way, but the dollar’s rise since last July has been meteoric – the kind of rise that often ends in a sharp reversal at some unpredictable moment.

• The Market Abides
  Eddy Elfenbein, March 18th, 2015 at 3:45 pm

  Can you tell when the FOMC policy statement came out? If you squeeze your eyes real tight, you can barely make out a slight, teeny upturn after 2 pm.

  

• Today’s Fed Statement:
  Eddy Elfenbein, March 18th, 2015 at 3:38 pm

  Hot off the presses:

  Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; 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 remain near its recent low level 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 energy price declines 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. (Here comes the important stuff – Eddy) 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. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range. (End of the important stuff.)

  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: March 18, 2015
  Eddy Elfenbein, March 18th, 2015 at 7:09 am

  Japan’s Businesses Respond to Abe’s Push for Higher Wages

  OECD Sees Stronger Europe, Japan Growth as Reform Need Upheld

  Euro Fetching Less Than $1 Becomes Hot Call for Options Traders

  Protesters, Police Clash Near New European Bank HQ in Frankfurt

  George Osborne Set to Unveil U.K. Budget

  Sterling Hits 5-year Low Vs. Dollar as Investors Push Back Rate Hike Bets

  Oil Drops to Six-Year Low as U.S. Index Futures Fall

  Fed Rate Watch — What Investors Should Be Looking for From Janet Yellen

  California Tightens Water Restrictions as Drought Worsens

  The Big Number in Tencent’s Earnings

  With Revenue Flat, Oracle Blames Strong U.S. Dollar

  Lyft Takes Over SXSW to Prove It’s Nothing Like Uber

  Gulf Carriers Strike Back at U.S. Campaign to Re-examine Open-Skies Agreements

  Cullen Roche: A World Without the Federal Reserve

  Credit Writedowns: Currency Wars, the Swiss Franc, Policy Divergence and Fed Rate Hikes

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