Archive for June, 2015

• Morning News: June 5, 2015
  Eddy Elfenbein, June 5th, 2015 at 5:05 am

  Tsipras Should Hold Greek Referendum on Euro, Pissarides Says

  IMF Urges Fed to Delay Short-Term Rate Hike Until First Half of 2016

  Fed Deflects Outside Aid to Investigate Data Leaks

  Cash Shells Need Foresight To Beat The Cycle

  What to Expect From the Jobs Report

  Apple Is the New Pimco, and Tim Cook Is the New King of Bonds

  Shell CEO Discusses $2 Billion Debt Payment With Iran Oil Minister

  Vodafone in Talks to Exchange Assets With Liberty Global

  Yahoo to Shut Down Maps, Some Other Services

  Pepsi Plans to Introduce Healthier Craft Sodas Like Agave Vanilla Cream

  Baidu Leads $11.5M Investment In Startup That Provides WiFi For China’s Commuters

  Amazon, Google Race to Get Your DNA Into The Cloud

  U.S. Tax Informant Dodged Prison, Now Seeks $22 Million Reward

  Credit Writedowns: Trends and Prospects For Private-Sector Deleveraging in Advanced Economies

  Howard Lindzon: It’s a Lost decade…NO…It’s a Bubble ….Welcome to my World.

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• Bio-Reference Labs Being Bought for $52.78
  Eddy Elfenbein, June 4th, 2015 at 1:13 pm

  This morning, Bio-Reference Laboratories (BRLI) said that it’s being bought out by Opko Health (OPK) for 2.75 shares each. That comes to $52.58 per BRLI share.

  This is an interesting buy because BRLI had long been a controversial stock. The numbers said it was cheap, but that’s probably out of fear that something very bad was about to happen.

  Here’s what I wrote two years ago:

  I have to confess that I have very incomplete knowledge of this story, but there’s something very unusual going on with Bio-Reference Labs (BRLI). On the surface, it seems like a very well-run lab testing outfit. Earnings have grown impressively for several years.

  Last month, however, some short-selling websites came out publicly against BRLI with claims of phony billing practices. The stock dropped from around $26.14 to $24.20 on very heavy volume. The allegations stem from a former employee who claims she was fired after she exposed the wrongful practices. For their part, BRLI strongly deny the allegations and claim she’s a disgruntled former employee.

  The shares have rallied back and BRLI is now above $28 per share. But by most conventional measures, the stock ought to be higher. Clearly, the allegations are hanging over the stock and it has an unusually large short position against it. Of course, this can backfire and create a “short squeeze” as those who bet against BRLI are forced to cover which sends the price even higher.

  This isn’t the first time BRLI has been hurt by Internet bears. In September 2011, one website said the company often promoted specialty tests that were not cost effective. The next earnings report comes out on June 5th.

  I think these situations are fascinating because you really can’t split the difference. One side is telling the truth and another side is not. How exactly does “tail risk” impact the stock? It’s hard to say but let’s say the market believes there’s a 20% chance the allegations are true and the result is a $15 drop in shares price. That would mean if the company is right, the stock gains $3, and if they’re wrong, it drops $15. (Bear in mind, I’m making these numbers up.)

  The point is the market has to find a middle ground when there isn’t one. As a result, you get an odd share price. I should add that this is another reason why investors should like dividend-paying stocks. Companies can fudge all sorts of numbers, but if they’re going to send you a dividend check, you can be sure it’s real.

  A few months later I named Bio-Reference as one of the stocks I was considering for the 2014 Buy List. Ultimately, I passed. As always, I want to be as certain as I can. If not, I’ll pass.

  It’s interesting to note that BRLI is trading about 14% below the buyout ratio. There are still doubts.

  

• Avon Drops to 20-Year Low
  Eddy Elfenbein, June 4th, 2015 at 11:40 am

  Shares of Avon Products (AVP) dropped to a 20-year low this morning.

  That’s sad to see. Avon was one of the great Nifty 50 stocks of the 60s and early 70s. But earnings have plunged and the stock has followed.

  The data I used for this chart goes back to 1972, but I have a chart book showing how well the stock did during the 1960s. Avon was a fantastic performer for 10 years.

  

• Morning News: June 4, 2015
  Eddy Elfenbein, June 4th, 2015 at 7:10 am

  Greek Groundhog Day Continues With Talks Failing to Break Impasse

  European Central Bank President Hints at Concession for Greece

  US Steelmakers Demand That Americans Become Poorer With Anti-Dumping Tariffs

  New York Finalizes Bitcoin Trading Rules

  Alibaba Unit to Raise $1.6 Billion in Share Sale For Media-Related Acquisitions

  Bill Ackman’s Next Dealmaking Bet: Pershing Square Invests $350 Million In Nomad Foods

  Walmart Adjusts the Thermostat to Warm Worker Relations

  Joy Global’s Profit Plunges as Miners Cut Spending

  Food-Industry Cutbacks Create Problems for Kraft Castoffs

  6 Things That Twitter Investor Chris Sacca Thinks Will Fix Twitter

  Disney Lays Off 250 Employees, Replaces Them With Indian H1-B Workers

  Dish and T-Mobile US in Merger Talks

  Apple Takes On a Market Full of Streaming Services

  Joshua Brown: If The Greek Stock Market, Bond Market and GDP Disappeared

  Jeff Carter: Electric Cars Aren’t Green; But Subsidies are Greening Someone’s Pocket

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• Optimistic Beige Book
  Eddy Elfenbein, June 3rd, 2015 at 2:20 pm

  The Fed’s “Beige Book” report is one of those wonky things put out by the Fed that’s actually fairly interesting. The one that came out today had mostly good things to say about the economy.

  The informal survey of anecdotal business contacts’ views is conducted by each of the central bank’s 12 regional districts, and paints a fairly rosy picture of the outlook. The latest beige book report finds “overall economic activity expanded during the reporting period from early April to late May.”

  Growth was characterized as “moderate” in the Chicago, Richmond, Minneapolis and San Francisco districts; “modest” in New York, Philadelphia and St. Louis regions; mixed in the Boston district; “slight” in Cleveland and Kansas City; holding steady in Atlanta; and slowing “slightly” in Dallas. The latter could be associated with falling business spending in the energy sector.

  In a hopeful sign for the housing market, the Fed reported “residential and commercial real estate activity and construction improved since the last report.”

  Overall loan demand increased, the report said, particularly in the New York district.

• Quiet Rotation Today
  Eddy Elfenbein, June 3rd, 2015 at 1:02 pm

  The big jobs report comes out Friday but we got a sneak preview this morning. ADP said that the economy created 201,000 private sector jobs last month. For Friday’s report, the consensus on Wall Street is for 220,000 net new jobs.

  Also, the Department of Commerce reported that the trade deficit fell to $40.9 billion in April. That was less than consensus. Bill McBride notes that exports are 14% higher than their pre-recession peak, while imports are right at their pre-recession peak.

  This is an interesting day in the markets and it’s a continuation of what I discussed before; interest rate-sensitive stocks are lagging. This is a classic Quadrant I day. Industrial cyclicals are up, especially transports. The top-performing sector so far today is trucking.

  

  What’s interesting is that the broader market is up modestly so it’s masking the dramatic rotation that’s happening under the surface.

• Morning News: June 3, 2015
  Eddy Elfenbein, June 3rd, 2015 at 7:07 am

  OECD Gives Global Economy ‘B Minus’ As Cuts Forecast

  OECD Calls US Dip A Blip But Chops World Growth Forecast

  Greece in Last-Ditch EU Talks To Break Debt Deadlock

  The Secret Money Behind Vladimir Putin’s War Machine

  How OPEC Hurt Big Oil

  US Congress Pushed China Into Launching AIIB, Says Bernanke

  Korean E-commerce Leader Coupang To Raise $1 Billion From SoftBank At $5 Billion Valuation

  Amazon Debuts Free Shipping on Small Goods, No Minimum Order

  In Bid to Cut Costs, J.P. Morgan Cuts Voicemail For Some Employees

  Fitbit IPO Could Top $500 Million When it Makes NYSE Debut

  Perrigo Plays European Defense

  Huffington Post In Limbo At Verizon

  Deutsche Bank Partners With Microsoft, HCL, IBM in Tech Lab Launch

  Cullen Roche: Does A “Liquidity Trap” Ever End?

  Jeff Miller: How To Think About Risk

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• 6-Month/1-Year Spread Rises
  Eddy Elfenbein, June 2nd, 2015 at 6:27 pm

  The spread between the six-month and one-year Treasury yields recently hit 0.20% for the first time in more than five years. That’s up from four basis points in November.

  

  This is yet another sign that the market thinks higher rates are coming soon.

  The one-year Treasury closed today at 0.26% while the six-month bill stood at 0.07%. That implies that the six-month bill will yield 0.45% six months from now.

• Auto Sales Reach 10-Year High
  Eddy Elfenbein, June 2nd, 2015 at 3:37 pm

  U.S. auto sales were very strong last month:

  The U.S. auto industry remained on track for the best sales year in almost a decade as consumers bought cars and trucks at the fastest monthly pace since early 2006.

  Sales of pickup trucks and SUVs in May again led the way, which bodes well for profit margins of the major automakers. Consumers are shying away from cars and snapping up trucks and sport utility vehicles as the national average price of gasoline, at $2.75 a gallon, is nearly a dollar less than at this time last year.

  As has been the case since the 2008-2009 recession, the auto industry’s recovery continues to outpace that of the overall economy, which is on course to grow 0.8 percent in the second quarter, according to Federal Reserve forecasts.

  Consumers are finding it easier to obtain auto loans – another factor in boosting sales, analysts have said. Experian reported the average length of U.S. loans for new and used vehicles in the first quarter hit record highs, and nearly 30 percent of new-vehicle loans have payback periods longer than six years.

  This probably represents a rebound from the cold winter. Sales at Ford (F) dropped by 1.3% (Wall Street had been expecting a bigger drop), and the F-Series trucks fell by 10%. Demand is still high for the F-150 as Ford is ramping up production.

• Tough Times for Dividend Stocks
  Eddy Elfenbein, June 2nd, 2015 at 2:16 pm

  The WSJ recently noted that high-dividend stocks have been losing out in the market recently. Utility stocks badly lagged the market in February and haven’t done much since. REIT stocks, which tend to have generous yields, have followed a similar path.

  Utilities, real-estate investment trusts and master limited partnerships have been lifted since the financial crisis by a flood of money from portfolio managers and retirees starved for steady investment income amid low bond yields. Investors plowed $48.4 billion into mutual and exchange-traded funds tracking utilities and REITs from 2010 through 2014, according to Morningstar Inc.

  But portfolio managers are pulling back from these shares in 2015, as the prospect of the first short-term interest-rate increase by the Federal Reserve in nine years makes high-dividend stocks less attractive. Investors reason that higher rates will boost the payout—and therefore the appeal—of more stable income-paying investments, like government and corporate debt.

  Check out this chart. This shows the REIT index divided by the S&P 500 (in blue) along with the utility index divided by the S&P 500 (in black).

  

  This is a good example of what I described two weeks ago in my “Elfenbein Theory” on the market. What we’re seeing is an anti-Quadrant III rotation.

  

  The underlying message of this rotation is that the market is preparing itself for higher interest rates.