Archive for May, 2015

• Morning News: May 25, 2015
  Eddy Elfenbein, May 25th, 2015 at 7:18 am

  Greece Won’t Meet IMF Repayments in June, Interior Minister Says

  Bernanke Says Currency Mismatch a Risk for China Policy Makers

  China to Cut Tariffs on Some Imported Consumer Goods to Spur Spending

  Iran Says OPEC Unlikely to Change Output Ceiling

  Oil Prices Edge Down As Dollar Strengthens

  Nigeria Fuel Shortages Hit MTN, Guaranty Trust Bank

  Gold Slips Toward $1,200 as Interest Rate Outlook Boosts Dollar

  Fiat Chrysler Falls as M&A Prospects Hit by Report of GM Rebuff

  GM Is Set to Face Criminal Charges Over Ignition Switches

  Amazon to Stop Funneling European Sales Through Low-Tax Haven

  Fusion Media Aims at Millennials, but Struggles to Find Its Identity

  How A 19th Century Shipwreck Could Give Canada Control of the Arctic

  John Nash, ‘A Beautiful Mind’ Laureate, Dies in Crash

  Cullen Roche: Fun With Charts, Part Deux

  Joshua Brown: Michael Batnick’s Ten Harsh Financial Commandments

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• No Newsletter this Week
  Eddy Elfenbein, May 22nd, 2015 at 11:46 am

  There’s no CWS Market Review this week. Have a happy and safe Memorial Day weekend. I’ll be back next week with a new issue of CWS Market Review!

• Morning News: May 22, 2015
  Eddy Elfenbein, May 22nd, 2015 at 7:21 am

  ECB’s Draghi Calls for Reform, Points to Europe’s Modest Prospects

  Merkel Warns ‘Whole Lot Left’ to Do on Greece Bailout Talks

  German Growth and Confidence Slip

  China, India Likely to Be Biggest Shareholders in AIIB

  Saudi Oil Supply Outpaces Rivals in Grab for Record China Demand

  Bank of Japan Chief Cheers On Tokyo’s Surging Stocks

  Hong Kong Investors Want More Oversight After $35 Billion Wipeout

  FOMC Minutes Analysis: USD Back Is Against The Wall

  This Time, Senate Votes to Advance Trade Pact

  HP Sells $2.3 Billion China Unit Stake to Forge Partnership With Tsinghua Unigroup

  GM Ups Ante With $439 Million Investment in Chevrolet Corvette

  Gap Matches Estimates as Old Navy Helps Prop Up Rest of Retailer

  Longtime Twitter Cheerleader Chris Sacca Is Dropping the Pompoms

  Jeff Carter: Getting Rid of Hierarchy is in Vogue

  Roger Nusbaum: The (Investment) World Is Changing And You Need To Get On Board

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• Ross Stores Earns $1.33 per Share
  Eddy Elfenbein, May 21st, 2015 at 6:37 pm

  After today’s close, Ross Stores (ROST) reported very good earnings. For their fiscal Q1, Ross earned $1.33 per share. Three months ago, they told us to expect earnings to range between $1.21 and $1.26 per share. In our CWS Market Review, I said I was expecting earnings around $1.30 per share. Quarterly sales rose 10% to $2.938 billion. Comparable store sales were up 5%. Those are solid numbers.

  Barbara Rentler, Chief Executive Officer, commented, “We are pleased with our better-than-expected sales and earnings in the first quarter. Our results continue to benefit from value-focused customers responding favorably to our fresh and exciting assortments of name brand bargains. Operating margin for the first quarter grew to 15.7%, up from 14.6% in the prior year, driven by a combination of higher merchandise margin, strong expense controls, and the aforementioned favorable timing of packaway-related costs.”

  Ms. Rentler continued, “During the first quarter of fiscal 2015, we repurchased 1.7 million shares of common stock for an aggregate price of $176 million. As planned, we expect to buy back a total of $700 million in common stock during fiscal 2015 under the new two-year $1.4 billion authorization approved by our Board of Directors in February of this year.

  Ross said they see Q2 earnings coming in between $1.19 and $1.24 per share with same stores sales rising 2% to 3%. That guidance is on the light side. Wall Street had been expecting $1.26 per share, though Ross tends to be conservative with their guidance.

  Ross also raised their full-year guidance. The previous guidance was $4.60 to $4.80 per share. I knew that was too low and I suspected they were going to raise the low end. Instead, they raised both. The new range is $4.72 to $4.87 per share. Ross earned $4.42 per share last year. (By the way, Ross’s guidance from last May was for $4.09 to $4.21 per share which shows you how conservative they tend to be.)

  Remember that Ross Stores will be splitting 2-for-1 next month.

• Qualcomm Initiates Accelerated Share Repurchase
  Eddy Elfenbein, May 21st, 2015 at 10:24 am

  Qualcomm (QCOM) announced today that they’re launching their accelerated share repurchase program. This is part of their $15 billion buyback program announced in March. The company plans to buy about 57.7 million shares for $5 billion. The purchasing is being funded by Qualcomm’s recent $10 billion bond deal.

  “We are pleased to initiate this accelerated share repurchase as we continue to execute on our enhanced capital return program,” said Steve Mollenkopf, CEO of Qualcomm Incorporated. “These repurchases represent a significant step towards meeting our goal of repurchasing $10 billion of common stock by March 2016, in addition to our commitment to return a minimum of 75 percent of free cash flow to stockholders through dividends and repurchases. The Board and the management team remain committed to returning capital to stockholders and believe we can continue to do so as we invest to create longer term stockholder value.”

  The shares are up 1.3% this morning.

• Morning News: May 21, 2015
  Eddy Elfenbein, May 21st, 2015 at 7:12 am

  Eurozone Economy Continues to Grow Modestly, Survey Finds

  Greek Optimism About Imminent Deal Not Justified: Schaeuble

  Japan Plans to Expand Infrastructure Investment in Asia

  Global Banks Admit Guilt in Forex Probe, Fined Nearly $6 Billion

  Record Gap Between Rich And Poor: OECD

  Oil Price Inches Higher as U.S. Storage Levels Decline

  SEC Proposes That Bond Funds Disclose Risk of Interest Rate Rise

  Lenovo’s PC Success Won’t Ring Smartphone Bell

  Elbit Systems Buys Nice’s Cyber Unit For Up To $158 Million

  CVS to Buy Omnicare in $12.7 Billion Deal for Pharmacy Expansion

  Altice’s Deal to Buy Suddenlink May Be Prelude to Pursuit of Time Warner Cable

  For Drivers, Confusion Reigns in Airbag Recall

  BP Settles With Transocean and Halliburton Over Gulf Spill

  Edward Hugh: Are The IMF and the EU at Loggerheads Over Greece?

  Cullen Roche: Fun With Charts – Paul Krugman Edition

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• Bloomberg on Danaher
  Eddy Elfenbein, May 20th, 2015 at 11:01 am

  At Bloomberg, Justin Fox writes about Danaher (DHR), one of our favorites.

  Every once in a while a business journalist notices how well Danaher Corp. has performed during the past few decades, and feels compelled to remark upon it. Well, now I’ve noticed, and I guess the most appropriate remark is, “wow.” Or maybe “jeepers.”

  There are a few companies with even more impressive long-run returns than this — Berkshire Hathaway and Altria since the late 1960s; Microsoft and Oracle since their 1986 initial public offerings. But everybody knows about them (well, maybe Altria is a surprise). Danaher is in rarified territory, but it doesn’t get much attention.

  What does the Washington-based company do? It makes essential-but-obscure stuff — engine brakes for trucks, testing equipment for electronics, diagnostic instruments for doctors, braces for your teeth. The big name-brand exception used to be the Craftsman hand tools sold at Sears, but Danaher sold that business to Bain in 2012. Such dealmaking is core to the company’s identity — it has made hundreds of acquisitions since the early 1980s and sold off a lot too. Last week, though, it seemed to take things to a new level. Danaher said that it will be splitting into a “science and technology growth company,” which will keep the Danaher name, and a “diversified industrial growth company,” which won’t. It also announced the $13.8 billion acquisition of Pall Corp., a maker of filtration and purification systems that will be part of the science-and-technology Danaher, and the beginning of an exchange offer in which Danaher spins off to shareholders its stake in NetScout Systems, with which it recently merged its communications-equipment business.

• Hormel Foods Earns 67 Cents per Share
  Eddy Elfenbein, May 20th, 2015 at 10:47 am

  Good earnings for Hormel Foods (HRL). The company just reported fiscal Q2 earnings of 67 cents per share which was four cents per share more than estimates. That’s also 29% over last year’s Q2 earnings. Revenues climbed 1.5% to $2.28 billion which was below Wall Street’s estimates of $2.39 billion.

  “We achieved record second quarter earnings and sales, driving double-digit earnings growth with all five segments delivering increases,” said Jeffrey M. Ettinger, chairman of the board, president and chief executive officer.

  “Although declining pork markets drove lower pricing and net sales this quarter, Refrigerated Foods increased operating profit by 52 percent with strong sales growth of foodservice and retail value-added products,” commented Ettinger. “Jennie-O Turkey Store entered the quarter with excellent momentum and drove robust sales and earnings gains, but exited the quarter with substantial supply chain challenges brought on by avian influenza. Grocery Products benefited from input cost relief and growth of our SPAM® family of products, while the export business in our International segment continued to be challenged by port issues and the strong U.S. dollar,” commented Ettinger. “Specialty Foods delivered earnings growth as the team continues to achieve synergies with the recently acquired CytoSport business.”

  Hormel acknowledges that avian flu will be an issue for them, but they’re sticking by their full-year guidance of $2.50 to $2.60 per share. They’ve already made $1.30 per share for the first half of this fiscal year.

  “While we enjoyed an excellent first half, we expect Jennie-O Turkey Store to be significantly challenged going forward due to the impacts of avian influenza on our turkey supply chain,” commented Ettinger. “Refrigerated Foods and Grocery Products will continue to benefit from value-added product growth and lower pork input costs. Specialty Foods is positioned to deliver substantial earnings increases in the back half with the CytoSport business. Taking these factors into consideration, we are maintaining our 2015 non-GAAP earnings guidance at the lower end of our previously stated $2.50 to $2.60 per share range.”

  The stock has been up as much as 5.7% today.

• Morning News: May 20, 2015
  Eddy Elfenbein, May 20th, 2015 at 7:17 am

  Doubts Over Greece Add to Euro’s ECB-Driven Frailty

  Japan’s Economy Grows At Fastest Pace In A Year On Boost From Inventory

  Bubble Blowing to Continue So Long as Yellen Isn’t Raising Rates

  Fed’s Evans: Rate Hike Not Appropriate Until Early 2016

  Wal-Mart Eyes Amazon in Potentially Costly e-Commerce Battle

  Yahoo Affirms Spinoff Plan as IRS Comments Trigger Share Slump

  CME to Launch Eight European Power Futures Contracts on CME Europe From June 15

  Gail in Talks With Shell to Sell U.S. LNG Supply

  Altice in Advanced Talks to Buy Cable Company Suddenlink

  UBS to Pay $545 Million Over Forex Scandal, Rivals Await Fate

  Hanergy Plunges 47% as Skies Darken for China’s Solar Industry

  Lowe’s Misses on Top, Bottom Lines

  Staples Reports 39% Decline in First-Quarter Profit

  Jeff Carter: 4 Ways to Build a Startup Community: Local Investors Need to Ignore Talks of Startup Bubble

  Joshua Brown: The Number One Thing That Makes You Susceptible To Fraud

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• The Elfenbein Theory to Explain the Entire Stock Market
  Eddy Elfenbein, May 19th, 2015 at 8:11 am

  I had a little extra time this morning, so I’d thought I’d do a quick post that explains the entire stock market for you.

  Before I begin, let me stress that I’m discussing generalities about how the stock market behaves. As you read this, I urge you to focus on the larger themes I’m discussing instead of getting bogged down in nitpicky details or in excessive demands for precision. Out of necessity, my explanation is over-generalized.

  The first thing to understand is that the stock market is overwhelmingly influenced by interest rates. It’s difficult to overstate this key fact. More specifically, the stock market is ruled by long-term and short-term interest rates. Of the two, long-term rates are more influential.

  A few years ago, I ran some through some historical data. I isolated all the days in which the 10-year Treasury yield closed lower. On those days, the stock market averaged an annualized gain of more than 42%.

  The bond market leads the stock market. Whatever the bond market is doing, the stock market will likely do a few weeks or months later. The two assets are in constant battle for investors’ love. Their perpetual tug-of-war is at the heart of financial markets. Short-term rates are also important, and that’s why the Federal Reserve is so closely watched.

  The movement of short-term and long-term rates also determines which types of stocks do well. When long-term interest rates rise, cyclical stocks tend to outperform the overall market. When long-term rates fall, defensive stocks tend to lead the market. Importantly, this is a short-term relationship that grows weaker as time wears on.

  With short-term rates, we see a similar but slightly different effect. When short-term rates fall, value stocks outperform. When short-term rates rise, growth stocks tend to lead.

  These are the two primary “dimensions” of the stock market (Cyclical/Defense, Value/Growth). These categories have some similarities, and they’re easily confused, but I want to highlight their differences. The Cyclical/Defense divide is fought over the future of the production part of the economy. Are we producing more than we’re consuming, or consuming more than we produce? The Value/Growth divide is about the financial part of the economy. How much inflation will there be, and what are real rates doing?

  By Cyclical stocks, I mean stocks in sectors like Energy and Materials which are closely tied to the economic cycle. The Defensive sectors are areas such as Consumer Staples and Healthcare, which are areas that aren’t so hurt in downturns.

  Value stocks are generally in high-dividend areas like REITs and Utilities. As short-term rates drop, investors naturally crave those dividends. Growth stocks tend to be in low-dividend areas like Tech and more inflation-sensitive sectors like Commodities and Gold Mining.

  As I said, these two dimensions are related. They’re cousins in much the same way that short-term and long-term yields are cousins. Now with this background, let’s envision the market as a matrix with short-term rates on the horizontal axis and long-term rates on the vertical.

  You can probably see where I’m going with this. We now have four quadrants. The upper right is when both long-term and short-term rates are rising. The lower left is when both ends are falling. The lower right is when short-term rates are rising and long-term rates are falling. In other words, the yield curve is getting narrower. The upper left is the opposite: the yield curve is getting wider.

  

  When long- and short-term rates both rise, industrial stocks do well. When both rates fall, dividend stocks do well (more probably, they’re falling the least). When the yield curve widens, financial stocks do well. Bear in mind that a bank is basically the yield curve with incorporation papers. As the yield curve narrows, defensive stocks do well. Importantly, we’ll also see that when a particular quadrant behaves one way, one of its opposing quadrants will do the exact opposite.

  Let me add a clarification. It may be the case that industrial stocks lead the market, not when short-term and long-term rates are literally moving in opposite directions, but when the spread is increasing. What the market is concerned with is the relative standing of short and long rates against each other.

  With the four quadrants, the general stock market moves clockwise around the matrix. Quadrant I is the sweet spot of the rally. These stocks have a double-whammy effect: they outperform while the market itself is rallying. Hence the name cyclicals. Conversely, they underperform when the market is tanking (Quadrant III).

  I should add that few stocks are pure breeds belonging solely to one quadrant. Typically, they have mixed DNA. For example, a stock like Chevron is a classic energy stock, but it also pays a generous dividend. You’ll also see healthcare stocks, which are classic defensive stocks, that are partly related to tech stocks.

  As I mentioned before, these classifications are most important in the short term. As time goes on, the part of any stock which reflects its individual nature will become more prominent. Each day, two biotech stocks may track each other closely, but after five years, they can be miles apart. The more times that passes, the stronger this effect is.

  The idea that different sectors do better or worse at different points in the economic cycle is nothing new (see here and here). It’s been pointed out many times before. The Elfenbein Theory, however, is a way for investors to see an overriding framework for what drives this behavior.

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