Archive for March, 2015

• Specialty Drug Spending
  Eddy Elfenbein, March 10th, 2015 at 12:59 pm

• The S&P 500 Falls Below Its 50-DMA
  Eddy Elfenbein, March 10th, 2015 at 12:16 pm

  

• The Market Can Rally Past Profits
  Eddy Elfenbein, March 10th, 2015 at 11:17 am

  Over at Bloomberg, Lu Wang notes that the market can and has rallied past its peak profitability:

  Even if corporate profitability peaked today in the U.S., the market would rally for another year.

  That’s the finding of Jason Trennert, the chief investment strategist at Strategas Research Partners in New York, who studied the relationship between equities and earnings margins since 1949. On average, the peak in profit margins came four quarters before the market’s top, the study shows.

  (…)

  Thanks to near-record low interest rates, stagnant pay and more than $2 trillion of share buybacks, chief executive officers have increased profit by an average 15 percent a year since 2009, three times faster than sales.

  Operating margins for S&P 500 companies, the difference between revenue and expenses, climbed to a record 10.1 percent in the third quarter of 2014 and probably slipped to 9 percent in the final three months, data compiled by S&P Dow Jones Indices show.

  Profit margins peaked in September 2006 during the last bull market, four quarters before the S&P 500 reached an all-time high in October 2007, data compiled by Strategas show. The equity gauge’s record in March 2000 came 10 quarters after corporate profitability hit a high. The shortest gap occurred in 1973, when there was only one quarter between peaks of margins and the market.

  “I’d follow the trend of margins,” Trennert said. “They’re not noisy and there are clear cycles.”

• Morning News: March 10, 2015
  Eddy Elfenbein, March 10th, 2015 at 7:13 am

  Draghi Urged Greece to Allow Troika Back Before It’s Too Late

  A Tap on Brakes for China Car Sales

  Russia’s Well for Corporate Bailouts Appears to Be Running Dry

  New Zealand Market Shudders at Threat to Dairy Industry

  Brent Oil Futures Fall Below $58 as Dollar Hits 11-Year High

  Gold Drops to Three-Month Low on Dollar, U.S. Rate Expectations

  Obama Directing Changes to Make Student Loan Navigation Easier

  Former SEC Director Rips the Red Tape Off His Mouth

  New Credit Suisse Boss Has Plenty of Challenges in His In-Tray

  GM Sets Buyback, Placating Activists

  Under-Fire Uber Pledges to Enlist 1 Million Female Drivers By 2020

  Lovin’ Goes Only So Far as McDonald’s Sales Slide Again

  7 Reasons People Think They Can Ignore Warren Buffett’s Advice

  Joshua Brown: The Riskalyze Report: Advisors Buy the Corporate Bond Dip

  Cullen Roche: Tax Loss Harvesting – Too Good to Be True?

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• Qualcomm Raises Their Dividend by 14%
  Eddy Elfenbein, March 9th, 2015 at 6:06 pm

  In Friday’s CWS Market Review, I said that Qualcomm (QCOM) may soon be raising its dividend. Good timing! After the closing bell today, Qualcomm announced a 14% dividend increase plus a share buyback program of $15 billion. They plan to spend $10 billion of that within the next year. For comparison, Qualcomm currently has a market cap of $120 billion.

  The quarterly dividend will rise from 42 to 48 cents per share. That’s $1.92 per share on the year which works out to a yield of 2.64% based on today’s closing price.

  The company added:

  ”Our business continues to generate substantial operating cash flow, and today’s announcement represents an important step in returning that cash to our owners while still preserving the strategic flexibility needed to drive stockholder value through growth,” said Steve Mollenkopf, CEO of Qualcomm Incorporated. “I am pleased that we continue to build on our track record of returning capital to stockholders, having exceeded each of our capital return commitments in 2014 and returned approximately $37 billion to stockholders since these programs began in 2003.”

  The shares are up 3% in the after-hours market. Qualcomm said they intend to return 75% of their free cash flow to shareholders in the form of dividends and share buybacks. Last year, they returned 93% to investors.

  Curiously, Qualcomm said, “The Company plans to finance the capital return program primarily by accessing the public debt markets in 2015.” If it’s all coming out of free cash, then why do they need to tap the bond market? Qualcomm currently has more than $30 billion in cash. I assume it’s a repatriation issue, but the press release doesn’t make that clear.

• Mark Haines Calls the Bottom; March 10, 2009
  Eddy Elfenbein, March 9th, 2015 at 12:49 pm

• iDow
  Eddy Elfenbein, March 9th, 2015 at 11:07 am

  Forty years ago last Thursday, Steve Wozniak went to a meeting of the Homebrew Computer Club. He came away so impressed that it led him to build the Apple 1. Forty years and one day later, it was announced that Apple (AAPL) is being added to the Dow Jones Industrial Average.

  A lot can be said about how the Dow is not a very good index, and I agree, but it still represents the apex of American business. Next year the Dow will be celebrating its 120th anniversary. Just being that old deserves some respect.

  Last year, Apple split its stock 7-for-1. At the time, I thought this was a play to get in the Dow.

  In Apple’s case, they could be playing to get into the Dow Jones 30. Since the Dow is a price-weighted index, a $560 share price would have an outsized influence on the index. But an $80 value could be more reasonable in the eyes of the index keepers. Right now, Travelers (TRV) is the smallest company in the Dow. In fact, if its market cap were to double, it would still be the smallest company in the Dow. Apple is worth more than 15 times Travelers, so I think TRV is a top candidate to get the boot.

  I was wrong about Travelers. It’s AT&T (T) that’s getting the boot. The Dow is calculated by adding up the prices of all 30 stocks and dividing by a current divisor. If you’re curious, the divisor is published each day in the WSJ. It’s currently 0.15571590501117. More simply, each $1 in a Dow stock is worth about 6.42 points.

  The Dow doesn’t change very often. They made no changes to the index between 1939 and 1956 and that was a great time for the market. They made a big change in 1959 when they added and deleted five stocks. After that, no changes were made until 1976.

  AT&T was added to the index in 1999 when it was SBC Communications. It later bought the legacy AT&T and took its name. The original AT&T (meaning Ma Bell) was added to the Dow in 1916 when the index expanded from 12 to 20 stocks. That remained in the index past the break up of AT&T. It wasn’t removed from the index until 2004 when SBC bought it.

  Verizon remains in the Dow. The company was formed when a Baby Bell (Bell Atlantic) merged with GTE. So some of the old AT&T lives on in the Dow, but after nearly 100 years, the name AT&T is no longer in the Dow Industrials.

  While it’s true the Dow isn’t a great index, sometimes people pile on. It generally follows the S&P 500 pretty closely. Personally, I prefer the S&P 500, which just celebrated its 58th birthday last week.

• Morning News: March 9, 2015
  Eddy Elfenbein, March 9th, 2015 at 7:12 am

  German Trade Surplus Contracts on Falling Exports

  ECB Starts Buying German, Italian Government Bonds Under QE Plan

  Greece Has No Good Plan Bs

  US interest Rate Hike Fears May Weigh on Indian Markets Despite European Central Bank Easing

  Oil Drops Towards $59 on Dollar, Stock Builds

  Stronger Oil Trains Are Still Rupturing

  GM Announces $5 Billion Buyback as Wilson Drops Out

  Credit-Reporting Agencies Agree to Overhaul

  At Goldman Sachs, Stress Test Results Could Endanger an Important Profit Source

  Tesla Shedding Jobs in China as Sales Target Missed

  Apple Watch Event: What to Look For

  Alcoa to Buy Titanium Supplier RTI as Aerospace Focus Continues

  Swiss Pair Launch Effort to Pilot Solar-Powered Plane Around Globe

  Credit Writedowns: Albert Edwards on China

  Jeff Miller: Weighing the Week Ahead: Is Good News Now Bad for Investors?

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• Deep Thoughts from the Cookie Monster
  Eddy Elfenbein, March 6th, 2015 at 3:30 pm

• February NFP = +295K
  Eddy Elfenbein, March 6th, 2015 at 8:33 am

  The jobs report is out. The economy created 295,000 net new jobs last month. The unemployment rate fell to 5.5%.

  Here’s the monthly change in NFP:

  Here’s the year-over-year percentage change:

  Here’s the unemployment rate with the estimate for NAIRU. That’s the non-accelerating inflation rate of unemployment. In English, it means if you go below this line, that’s when inflation starts to go up. At least, that’s the theory.