Archive for April, 2015

  • The Opening Day Market
    , April 6th, 2015 at 3:25 pm

    It’s finally Opening Day! At least for most teams.

    Well, the market was supposed to go down today, but as it likes to do, the market has fooled us all. This has turned into a good day for stocks. The S&P 500 is currently up 19 points of 0.92%. Energy stocks are leading the way while Finance and Healthcare are up the least. Surprisingly, the 10-year yield is up a few basis points to 1.91%. It was as low as 1.84% this morning.

    This morning we learned that the ISM Non-Manufacturing Index fell to 56.5 last month. Last week’s ISM Manufacturing report showed that the index fell for the fifth month in a row.

    On our Buy List, Snap-on (SNA) and AFLAC (AFL) hit new 52-week highs this morning. Microsoft (MSFT) is up more than 3% today. Another Buy List stock, Wells Fargo (WFC), raised their rating on MSFT. The big loser is Qualcomm (QCOM). The stock was downgraded by FBR Capital. Also, a website got their hands on the Galaxy S6 and found that it doesn’t use Qualcomm’s chips.

    Bloomberg has an interesting article noting that Amazon (AMZN) is luring away some of eBay’s (EBAY) loyal merchants.

    Amazon’s pool of merchants climbed to more than 2 million in 2014, while the number of sellers on EBay has remained flat at about 25 million in the past two years. Businesses that at first set up online storefronts on EBay say they’re surprised how quickly sales surge on Amazon once products appear on both sites.

    The move to Amazon, which boasts a bigger user base and offers more ways to ship merchandise, poses a threat to EBay, which pioneered the idea of an Internet marketplace where merchants big and small could hawk wares.

    Shares of eBay are flat today.

  • Dividends Rose Nearly 15% Last Quarter
    , April 6th, 2015 at 12:40 pm

    Dividends had another solid quarter for Q1. According to numbers from Standard & Poor’s, the S&P 500 paid out $10.55 in dividends last quarter. That’s the index-adjusted number (each one point in the index is about $8.85 billion).

    That’s an increase of 14.84% over the first quarter of 2014. The S&P 500 only rose 0.43% for the first quarter, or 1.76% annualized. That means that the dividend yield is increasing for stocks. The dividend yield is, of course, only one measure of value, but for now, it doesn’t signal that stocks are in bubble territory.

    Dividends for the first quarter were 93% higher than they were for the first quarter of 2010. That’s an impressive growth rate for five years. The S&P 500 will probably pay out about $44 in dividends this year. What’s interesting is how closely the index has tracked a 2% dividend yield over the past several years.

    Here’s a chart of the S&P 500 (left scale, black line) along with the dividends (right scale, blue line). I scaled the two lines at a ratio of 50-to-1 so whenever the lines cross, the dividend yield is exactly 2%.

    image1467

    Beginning in about 2003, the blue and black lines track each other fairly well. The exception is during the financial crisis, but they soon got back together.

    Again, dividend analysis is only one tool in our arsenal. But one thing I like about it is how steady the trends are, especially compared with the volatility of prices.

  • The Lagging S&P 100
    , April 6th, 2015 at 10:17 am

    The S&P 100 is an interesting index to watch. It’s the 100 largest companies in the S&P 100. It’s basically an index of mega-cap stocks.

    While the mega-caps drove a lot of the 1990s rally, they’ve been lagging lately. Part of it is the impact of the strong dollar, but the underperformance started before that.

    Here’s the S&P 100 compared with the S&P 500 since August 1, 2012:

    big04062015d

    Relative to how those two usually perform, that’s a large divergence. Yet the lines really aren’t that far apart. The point I’m making is how much the S&P 500 is dominated by the S&P 100. I believe that S&P 100 comprises about 57% of the market cap of the S&P 500.

  • The S&P 500 Made an All-Time Inflation-Adjusted High
    , April 6th, 2015 at 9:54 am

    On February 12, I said that the S&P 500 may have closed at an all-time inflation-adjusted high. The problem was that I couldn’t say for sure; I had to estimate. The reason was that the official inflation stats wouldn’t come out until a few weeks after the month had ended. In this case, the CPI report for February was released on March 24.

    Well, we now have the numbers for February and it turns out, I was one day off. On February 13, the S&P 500 finally topped its inflation-adjusted high set nearly 15 years before. Of course, with dividends, the S&P 500 has had a real positive return.

    The computation was further complicated by our recent bout of deflation. The unadjusted CPI fell six times in seven months. But in February, consumer prices rose.

    The lesson is that stock prices can go a long time without any real gains. It also shows us the importance of dividends. The S&P 500 paid out $39.44 in dividends last year (that’s the index-adjusted figure). That’s up from $16.69 paid out in 1999.

  • Morning News: April 6, 2015
    , April 6th, 2015 at 7:13 am

    Greece Will Be Walking a Fine Line With Its Visit to Moscow This Week

    She Would Say This, Wouldn’t She? Lagarde Welcomes Greek Promise To Pay IMF

    From Russia No Love: Ruble Slump Squeezes SE Asia Tourism

    Modi Says India to Strike Own Path in Climate Battle

    Record Gasoline Output to Curb Biggest U.S. Oil Glut in 85 Years

    Iran Nuclear Deal Primes Market for Rising Oil Exports

    Once Over $12 Trillion, the World’s Reserves Are Now Shrinking

    Growth Seen Rebounding Along With Jobs After U.S. Hits Soft Spot

    Ventas to Buy Ardent for $1.75 Billion

    Comcast Recruits Its Beneficiaries to Lobby for Time Warner Deal

    Samsung Electronics Shares Rise More Than 3% Ahead of Guidance

    RadioShack’s Blueprint for a Rebirth, Planned by a Hedge Fund

    Top Herbalife Members Contacted By Law Enforcement Agencies

    Credit Writedowns: Is Greece’s Debt Odious?

    Jeff Miller: Weighing the Week Ahead: Correction Looming?

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  • CWS Market Review – April 5, 2015
    , April 5th, 2015 at 10:31 pm

    “I made my money by selling too soon.” – Bernard Baruch

    I’m finally back home safe and sound in Washington, DC. Although the stock market was closed for Good Friday, the government released the big March jobs report on Friday morning and it was much weaker than expected. The U.S. economy created only 126,000 net new jobs last month. That was about half of what was expected. This was the weakest jobs report in over a year, and it may change the Federal Reserve’s plans for interest rates. The futures contracts for the S&P 500 dropped about 1% on Friday.

    Even though the jobs report caught a lot of folks by surprise, the bond market has been rising lately. It’s often interesting how the bond market is probably the only economic forecaster worth listening to. Despite the stock market being closed, the bond market was open on Friday and it rallied. The yield on the 10-year Treasury dropped to 1.85%. In the last four weeks, the yield is down 0.39%.

    big.chart04062015a

    What does the weak jobs report mean for the economy and our portfolios? That’s what we’ll look at in this week’s CWS Market Review. The short answer is, probably not much, but we still need to be vigilant. This is different from the vastly overstated hype about Cyprus or the Sequester. (Remember those?) I’ll also take a look at the upcoming earnings report from Bed Bath & Beyond (BBBY). Over the last nine months, the stock has had an amazing recovery. I hope it will continue, but first, let’s take a closer look at Friday’s jobs report.

    The March Jobs Report Was a Bust

    The jobs market had been on a roll the last few months which was a nice change from the past several years. Green shoots at last! The economy had been averaging more than 250,000 net new jobs each month. That’s why there was a lot of optimism going into Friday’s jobs report although the wage numbers had still been soggy. That’s also why the actual number, just 126,000 new jobs, was such a shocker. Wall Street’s consensus had been for 245,000. The numbers for January and February were also revised downward by 69,000.

    What’s happening is that we’re starting to see the impact of the strong dollar on the labor market. This is crucial to understand. Sectors like construction and manufacturing saw jobs losses. Mining and Logging lost 11,000 jobs while Retail increased. Shoppers love the lower gas prices. I’ve talked a great deal about the strong dollar and until now, its impact has mostly been felt in the financial markets, but that may be changing. For example, North Dakota, the frackingest state in America, just lost its title of having the lowest unemployment rate in the country. That title now belongs to Nebraska.

    Still, I don’t want to over-dramatize the jobs report. In the last year, the U.S. economy has created over three million jobs. That’s not bad. Also, the unemployment rate held steady in March at 5.5%. Just four years ago, it was 9%. Average hourly earnings rose seven cents last month. That’s the biggest increase since November. There was also the recent news that McDonald’s (MCD) has joined the trend in raising workers’ pay. The wage numbers aren’t very good, but the trend appears to be slowly changing.

    So where does this leave the Federal Reserve? I continue to believe that the Fed’s rhetoric is far ahead of where the economy is. I don’t see any need for a rate hike in the next six months. In fact, the Fed can probably sit out all of 2015 and the futures market agrees with me. In short, the strong U.S. dollar has done a tightening all by itself. The economy shouldn’t have to fight both Janet Yellen and the dollar at the same time.

    image1466

    It’s hard to justify raising interest rates when we just sailed through a period of deflation. After rising for a bit, gasoline prices have been trending lower again, and that’s more good news for retailers. (Remember that Ross Stores will be splitting soon.) The inflation hawks could point to a recovering jobs sector but now that appears in doubt. I can’t predict what the Fed will do, but pressure to act on rates is much lower than what Janet Yellen has said. To her credit, she said after the last meeting, “Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient.” I hope so.

    Now all eyes turn to Q1 earnings season which starts this week. Last earnings season, we heard company after company talk about the negative impact of the dollar. The generic report said “we’re doing well at home, but not so well overseas.” Earnings estimates have been cut back and corporate profits are expected to shrink for Q1. The pullback is expected to carry over into Q2 and Q3.

    A few years ago, during the initial stages of the recovery, companies were able to grow their profits through efficiency rather than by hiring new people. It was truly a “jobless recovery.” Profits soared and jobs stagnated. That probably helped spark the Occupy Wall Street protests. More efficiency is great but you can only cut overhead so much. At some point, you need to get more folks coming in the doors and that means more consumers which means more jobs. That had been happening, and that’s why the jobs report was so disappointing.

    I’ve mentioned before how Wall Street and Main Street had changed places. Main Street has been slowly recovering while the strong dollar had taken a bite out of earnings. At first, the only impact consumers saw of the strong dollar was much lower gas. Now they’re seeing the impact in new hiring.

    Bloomberg notes that in the options pits, “bearish puts on the S&P 500 outnumber bullish calls by the most since October 2008.” But an earnings slowdown doesn’t necessarily mean the economy is heading towards a recession, or that stocks are going into a bear market. We’ve seen earnings pauses before.

    For now, I want to stress to investors not to panic but to note that that the game has slightly changed. For example, small-cap stocks have strongly led the market over the last six months. The little guys had badly lagged in the eight months prior to that. The mega-cap S&P 100 has trailed the S&P 500 almost continuously since October 2014 (and more or less in a longer trend since September 2012).

    For Q1, oil companies are expected to see their profits drop by 63%. I don’t have any energy stocks on the Buy List and that’s the way I like it. I’m staying far away from energy and materials stocks. Some stocks on our Buy List that look especially good right now include Ford (F), Microsoft (MSFT), eBay (EBAY) and Cognizant Technology Solutions (CTSH). I’m expecting another good earnings season for our Buy List, but I suspect that many of our stocks will give cautious outlooks for Q2. Now let’s look at our one remaining Buy List earnings report from Q4.

    Bed Bath & Beyond Is a Buy up to $77 per Share

    This coming Wednesday, April 8, Bed Bath & Beyond (BBBY) will report their fiscal Q4 earnings. That’s the big holiday quarter; it covers December, January and February. Like most retailers, this holiday shopping season is vital for BBBY. The holiday quarter usually generates about one-third of BBBY’s annual profit.

    After hitting a rough patch, BBBY has gotten back on track. Three months ago, the home furnishings retailers reported Q3 earnings that matched Wall Street’s forecast. Curiously, the company released its Q4 forecast after the Q2 earnings report in September. BBBY said they expect Q4 earnings to range between $1.78 and $1.83 per share. In January, I was pleased to see them reiterate that forecast. They had developed a poor habit of issuing overly optimistic forecasts only to lower them later on.

    For the entire fiscal year, Bed Bath & Beyond expects earnings between $5.05 and $5.09 per share. That’s up from $4.79 per share the year before. Frankly, I’ve been a bit worried about their operating margins. Some slippage is understandable, but this could become a problem.

    Bed Bath & Beyond’s earnings have been dramatically impacted by share buybacks. I often say that I’m not a fan of buybacks, but I’m less judgmental on companies like BBBY that actually reduce their share count. The company floated a bond last year to fund the buybacks. Standard & Poor’s raised their rating on Bed Bath & Beyond from BBB+ to AAA-.

    I’m not expecting blowout results. The company’s guidance sounds about right. What I’m looking for is steady improvement. They’ll also give us guidance for Q1. I’m expecting something in the range of 95 cents to $1 per share. This is a very good company. I currently rate Bed Bath & Beyond a buy up to $77 per share.

    Buy List Updates

    Shares of Express Scripts (ESRX) spiked higher this week after UnitedHealth (UNH) said it was buying Catamaran (CTRX) for $12.8 billion. Traders assume that one buyout must lead to several more. Actually, this can be the case as other players react but it doesn’t happen so quickly. At one point on Tuesday, ESRX got as high as $88.55 per share. Express Scripts remains a good buy up to $89 per share.

    Snap-on (SNA), one of our new buys this year, has been rallying of late. The stock touched a new 52-week high last week. The last earnings report was outstanding and I’m looking forward to another one in a few weeks. This week, I’m raising my Buy Below on Snap-on to $151 per share.

    I also want to bump up our Buy Below on AFLAC (AFL). The soaring dollar story has pretty much abated vis-a-vis the Japanese yen. Over the last four months, the yen has largely stabilized around 118 to 120 to the dollar. AFLAC also offers a nice yield of 2.45%. Look for another good earnings report later this month. I’m raising my Buy Below to $65 per share.

    That’s all for now. Earnings season begins this week. Alcoa (AA) will be the first major company to report on Tuesday. Bed Bath & Beyond (BBBY) will also report on Tuesday but that’s for the quarter that ended in February. The following the Tuesday, April 14, Wells Fargo (WFC) will be our first Buy List stock to report Q1 earnings. On Wednesday, the Federal Reserve will release the minutes from their March meeting, when they dropped “patience” from the policy statement. It will be interesting to see how much debate there was on this point. Given Friday’s jobs report, the policy doves may now have the upper hands. 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

  • Delayed CWS Market Review
    , April 3rd, 2015 at 9:16 am

    I’m home safe and sound from my two-week vacation in the Philippines. I had a great time. The flight home was fine but very long.

    I’m pretty tired right now, but I hope to send out the CWS Market Review later this weekend.

  • Big Jobs Miss
    , April 3rd, 2015 at 9:08 am

    The government reported this morning that the U.S. economy created just 126,000 net new jobs last month. That was well below expectations of 245,000 jobs.

    This is the worst jobs report since December 2013. The unemployment rate held steady at 5.5%. The NFP numbers for January and February were also revised downward.

    The stock market is closed today, but the bond market is rallying this morning. Hopefully this news will add more pressure on the Federal Reserve to delay raising interest rates.

    It’s always interesting to see how the bond market is ahead of everyone. The 10-year yield started to climb earlier this year. It got as high as 2.26% on March 6, but it has been falling ever since. We may go below 1.8% very soon.

    Average hourly earnings rose by 0.3% last month. That’s not bad.

  • Morning News: April 3, 2015
    , April 3rd, 2015 at 7:05 am

    Stampede to Join China’s Development Bank Stuns Even Its Founder

    Greece Says Ready to Make IMF Payment on April 9

    Cyprus to Lift All Capital Controls Monday: President Nicos Anastasiades

    Antitrust and Other Inquiries in Europe Target U.S. Tech Giants

    Oil Falls Nearly 4% After Tentative Nuclear Deal for Iran

    What the Nuclear Accord Means for Business Opportunities in Iran

    Solid US Job Growth Is Expected Today Despite a Weak Economy

    What to Expect From the March Jobs Report

    IRS Budget Cuts Decreases Tax Audit For The Wealthy And Increases Audits On Low-to-Mid Income Families

    The 5 Things Walmart Actually Needs To Do With Its Battered Supplier Base

    China’s Alibaba Finance Arm, Xiaomi Partner in Wearable Payments

    Samsung Said to Win Apple A9 Chip Orders for Next iPhone

    How Can I Build Credit When I Am New to the USA?

    Roger Nusbaum: Is A Lost Decade For Performance Coming?

    Joshua Brown: If You Have Nothing Nice to Say…

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  • Morning News: April 2, 2015
    , April 2nd, 2015 at 7:17 am

    Samaras Says He’d Join Alliance to Keep Greece in Euro

    Global Trade Lags As China Makes Its Own Inroads

    Prosecutors Ease Crackdown on Buyers of China-Bound Luxury Cars

    EU Regulators Probe Apple’s Music Streaming Plans in Europe

    Kraft Foods Emails Lay Out Plan to Depress U.S. Wheat Prices – CFTC

    Pfizer to Cease Vaccine Sales Business in China

    Target to Shutter Last of Canadian Stores by April 12

    Airbnb Is Now Available in Cuba

    McDonald’s to Raise Pay at Outlets It Operates

    Walmart Emerges as Unlikely Social Force

    Sears’s $2.5 Billion REIT Plan May Be Blueprint for Future Deals

    HSBC Is Deemed Slow to Carry Out Changes

    JPMorgan Chase On Track to Pay $9 Billion to Homeowners as Part of Settlement

    Jeff Carter: Should You Own Distribution, or Broker It?

    Cullen Roche: Bernanke’s Misguided Global Savings Glut Hypothesis

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