Archive for September, 2015

  • The S&P 500 Tests a 12-Day High
    , September 9th, 2015 at 10:27 am

    The Japanese stock market had an astounding 7.71% rally yesterday. This has helped U.S. stocks open higher this morning. The S&P 500 isn’t too far from 1993.48, which is its intra-day high for the last 12 trading days. The index has been as high as 1,988.63 today.

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    The VIX is starting to chill out as the market rises. The VIX is currently at 22. As I’ve said before, I’m looking for a close below 20 before I give the “all clear” signal.

    In retrospect, the Chinese devaluation completely changed traders’ view of when a Fed rate hike would come. Before the devaluation, traders thought a September rate hike was probable. Now they don’t, but they think a December hike is likely. I’m not convinced the Federal Reserve cares what stock traders think, but the perception is that a rate increase has been delayed.

  • The Six-Month Treasury Yield Jumps
    , September 9th, 2015 at 9:28 am

    Yesterday, the yield on the six-month Treasury closed at 0.27%. That may not sound like a lot but it’s the highest yield in years. On June 19, less than three months ago, the six-month yielded 0.05%.

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    According to the Treasury’s website, the six-month yielded 0.27% on April 5, 2010. Before that, the six-month hasn’t yielded higher than 0.27% since August 8, 2009.

    Obviously, the market is gearing up for a rate increase at some point; we still don’t know when yet. But remember that the yield is very low, and it’s still well below the rate of inflation.

  • Morning News: September 9, 2015
    , September 9th, 2015 at 7:04 am

    Japan’s Nikkei 225 Rises 7.7% for Biggest Gain Since October 2008

    One Thing China Got RIght

    China Changes GDP Data Calculation Method to Improve Accuracy

    Citigroup Sees 55% Risk of a Global Recession Made in China

    Merkel Says Reform Efforts of Euro Zone Countries Have Paid Off

    Investment Strategies Meant as Buffers to Volatility May Have Deepened It

    Apple to Show Off New iPhones, Apple TV on Wednesday

    Instagram Opens Up to Advertisers Worldwide

    McDonald’s to Use Eggs From Only Cage-Free Hens

    Google to Start Testing Fresh Food and Grocery Deliveries

    Intel to End Sponsorship of Science Talent Search

    The Tiny Town That Hates Elon Musk and His Space-X Launches

    United CEO Is Out Amid Inquiry at Port Authority

    Roger Nusbaum: A Positive Start to the Week?

    Cullen Roche: Have Savers Been “Punished” in the Low Interest Rate Environment?

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  • The S&P 500’s 200-DMA Is Tilting Lower
    , September 8th, 2015 at 12:30 pm

    Ryan Detrick points out a fact I hadn’t realized. After 870 days of rising, the S&P 500’s 200-day moving average is falling again. It’s simply the average of the preceding 200 days, which is about 10 months.

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    The 200-DMA is a simple metric, but the market has a good record of doing well when it’s above the 200-DMA and not so well when it’s below it.

  • Hedge Fund Is Gobbling up Treasuries
    , September 8th, 2015 at 9:04 am

    The WSJ has an interesting story on Element Capital. This is a hedge fund that’s been buying up U.S. Treasuries at a furious pace. Element is run by Jeffrey Talpins, “a former Yale University math whiz.”

    Element had been shorting, or betting against, bonds in anticipation of higher interest rates but has been exiting from that wager, according to someone close to the matter. That is one reason the fund has been a big buyer of Treasurys lately.

    But people who have worked with the firm or are close to Mr. Talpins said there is another reason: Element is among the last to embrace “bond-auction strategies,” trading maneuvers that have become less popular since the financial crisis.

    These trades aim to take advantage of the effects of supply and demand in the $12.8 trillion Treasury market. Demand for these bonds often fluctuates based on factors including investor perceptions of economic growth and market risk, while supply can be affected by regular auctions of different-maturity Treasury securities. A burst of new supply tends to slightly depress prices for short periods, sometimes for less than an hour.

    In the past, Wall Street dealers and hedge funds scored profits shorting “when-issued” bonds. These are contracts conferring the right to purchase Treasury securities when they are sold days later at auction. Then, these traders would buy bonds during Treasury auctions at the slightly lower prices and use these newly purchased bonds to close out their short sales.

    The difference between the higher price at which they sold the Treasurys and the lower price they paid at auction was their profit.

    There are a number of variations to this strategy, traders said. The maneuver involves a bet against bonds, so traders usually purchased hedges such as Treasury futures or interest-rate swaps to protect against rising bond prices while the trade was under way, said Tom di Galoma, head of fixed-income and rates trading at ED&F Man.

    After the 2008 financial crisis, bank traders pulled back as regulators discouraged trading risks. Some hedge funds also began shying away from bond-auction strategies. Wall Street banks have significantly cut back their lending to hedge funds.

    The pullback by rivals has left Element with a large presence in bond auctions to complement strategies such as in foreign-currency derivatives, people close to the matter said. In 2008, the firm gained 35%, these people say, even as financial markets crumbled. The next year, Element was up 79%. Last year it rose just 2.9%.

    But it was up 18.5% through July of this year, an investor said, beating most hedge funds and overall markets. Some recent gains came from bullish wagers on the U.S. dollar, according to the person. The firm’s annualized average return has exceeded 20% since its launch, investors said.

    There are dangers with the auction strategy. Once in a while, the prices of bonds being auctioned jump, rather than fall, for reasons such as bad economic news that prompts an investor flight to safety. Hedges sometimes don’t work out. And the strategy relies on inexpensive borrowing because each trade usually yields minimal profits.

    In other words, there are no hacks in the market.

  • Morning News: September 8, 2015
    , September 8th, 2015 at 7:06 am

    Eurozone Growth Revised Up to 0.4% Growth in Second Quarter

    ECB Quantitative Easing: Failure to Spark

    Fresh Signs of a Steepening Industrial Downturn in China

    Nikkei Erases 2015 Gains; Chinese Stocks Close Higher

    Dollar Drops Versus Commodity Currencies With Fed Rate Bets Low

    Bond Market Sends Fed All-Clear to Raise Interest Rates

    Liar Loans Redux: They’re Back and Sneaking Into AAA Rated Bonds

    U.S. Small-Business Confidence Improves a Bit in August, NFIB Says

    Media General, Meredith To Combine To Create Meredith Media General: A New Powerful Multiplatform And Diversified Media Company

    Amlin Ship Shape as Mitsui Takes the Helm

    Patrick Drahi Positions Himself to Be a Player in U.S. Cable

    JPMorgan Uses Its Might to Cut Costs in Credit Card Market

    Verizon to Offer Free Mobile TV, With an Eye on Millennials

    Jeff Carter: One Reason Why It’s Harder to Build Wealth

    Joshua Brown: China is “Blotting Out the Sun”

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  • Morning News: September 7, 2015
    , September 7th, 2015 at 7:11 am

    Emerging Currencies Drop as Ambiguity on Fed Timing Hurts Stocks

    China’s Forex Reserves Fall by Record $93.9 Billion on Yuan Intervention

    Brazil’s Currency Drop Is Good News for Coffee Bears

    Why the Oil Rout Isn’t Over

    Eurozone GDP Could Move Oil Prices This Week

    Something-for-Everyone Jobs Data Solidify Wall Street Fed Biases

    Glencore to Sell as Much as $2.5 Billion Shares, Suspend Final Dividend

    Uber China Raises $1.2 Billion in Ongoing Fundraising Round

    MBK Partners Clinches Deal for Tesco’s Korean Operations

    Toyota to Finance $50 Million ‘Intelligent’ Car Project

    Boeing Left With No Net Jumbo-Jet Orders on Nippon Cargo Cutback

    Toshiba Posts Net Loss, Plans Restructuring to Put Scandal Behind It

    The Crowding-Out Effect of Gargantuan Movies

    Investing for 10-80 year Olds…A Beginner’s Guide to Unbundling the Markets

    Jeff Miller: Weighing the Week Ahead: Time to Revise Year-End Market Estimates?

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  • Barron’s: Wells Fargo Looks Cheap
    , September 5th, 2015 at 2:09 pm

    In this weekend’s Barron’s, Wells Fargo (WFC) is highlighted as a good buy right now:

    Wells Fargo, in particular, is looking like a bargain now. The stock (WFC) has fallen 12% in the past month to a recent $51 versus an 8% drop for the S&P 500; it now offers a 3% dividend yield. It trades at 11.2 times next year’s expected earnings and is in a strong position to benefit from the growing U.S. economy and the improving housing market.

    Wells Fargo could reach $63.56 if it traded at 14 times expected 2016 earnings, where some high-quality regional banks are currently trading. The bank has raised its dividend with the Fed’s blessing every year since 2010, and investors expect more of the same in the years ahead.

    “We’re almost assured of continued dividend growth,” says longtime holder Hank Smith, chief investment officer at Haverford Trust. “They should be giving shareholders low-double-digit dividend growth over the next three to five years.”

    Few companies have the kind of low-cost and low-risk funding stream of Wells Fargo, which can fund its entire loan book and then some with its $1.2 trillion worth of deposits, which cost the bank only eight cents for every $100 as of the end of the second quarter. Meanwhile, the bank’s $889 billion in loans yield an average of 4.2%.

    The company generates about 55% of its income from its community banking division, serving households and small businesses; about 35% is a product of its wholesale banking unit, which mostly serves corporations and governments; and the bulk of the rest comes from its wealth management and brokerage businesses.

    Wells Fargo doesn’t have large investment banking and trading desks like its peers which may hold down earnings growth in exuberant times but also gives the bank some unique advantages.

    The simplicity of the bank’s business model is increasingly a benefit in an era of greater regulation, says Jason Clark, a portfolio manager at AFAM Capital, which holds the stock in client accounts. “Given all the oversight, it’s probably good that they’re not heavily dependent on investment banking,” he says.

  • August Jobs: +173,000, 5.1% Unemployment
    , September 4th, 2015 at 8:32 am

    The August jobs report is out. The economy created 173,000 net new jobs last month. That was below expectations of 220,000. But there were revisions of 44,000 for May and June. The unemployment rate declined to 5.1%. That’s the lowest since April 2008.

    The unemployment rate is lower today than it was at any time from May 1974 to March 1997. Except for one month, March 1989.

  • CWS Market Review – September 4, 2015
    , September 4th, 2015 at 7:10 am

    “The best time to invest is when you have money.” – John Templeton

    The late-summer squall on Wall Street is still with us. Once again, I want to caution you to expect more wild swings. We’re not out of this just yet. Since I last wrote you, the S&P 500 has jumped as high as 1,993 and as low as 1,903. Until the Volatility Index (^VIX) closes below 20, you can expect more of this.

    The good news is that there’s been more good news, which confirms our hypothesis that this is a market event far more than it is an economic one. That’s not a guarantee that the market will bounce back, but it does increase the odds. Looking at the recent spate of positive economic data, this week’s Beige Book report from the Federal Reserve was quite good. Personal income and spending are also doing well. The August jobs report is due out later this morning, and I expect more steady gains (check the blog for the latest).

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    I’m also pleased that our Buy List, while down, has held up quite well versus the broader market. In fact, through Thursday, our Buy List is in the black for the year with a gain of 0.35%. Sure, that’s small, but it’s better than the S&P 500’s YTD loss of 5.23%. There’s no magic to what we’ve done. We’ve focused on top-quality stocks and held onto them during jittery markets. That’s why I want investors to keep their heads now and focus on bargains.

    In this week’s CWS Market Review, I’ll take a much closer look at the positive economic news. The U.S. economy isn’t in great shape, but we’re far from heading off a cliff. Things are improving, just slowly. I’ll also run down some of my favorite bargains on our Buy List; plus I have four Buy Below price changes for you. But first, let’s look at the touch-and-go relationship between Wall Street and Main Street.

    Don’t Worry about China or the Fed

    The economy and the stock market have an uneasy relationship. They’re somewhere between distant cousins and frenemies, and it’s a big mistake to confuse them. There have been lots of times when the stock market has rallied while the economy has sputtered along. Or there have been times when the market has gotten rattled even though the economy kept on humming (think 1987).

    The current correction, which is what Wall Street calls a 10% decline, is closer to the latter case—good economy, bad market. In fact, most of the factors weighing on the market are truly secondary to the economy. For example, the mess in China has spooked U.S.-based investors, but as James Surowiecki recently pointed out in the New Yorker, China’s not about to sink us.

    Given how much we hear about China’s economic importance, you might think that these problems would have a big impact on the U.S. They won’t. In fact, total U.S. exports to China are just a hundred and sixty-five billion dollars, less than one per cent of G.D.P. There are certainly firms—including commodity producers, microchip makers, and fast-food companies—for which China is a huge market today. But for most firms the prospect of selling billions of products to Chinese consumers remains more of a promise than a reality. Goldman Sachs, for instance, estimates that just two per cent of the S. & P. 500’s revenues come from sales to China.

    Or you may have heard that we’re going to be in big trouble once China starts dumping U.S. Treasury bonds. Please. I’ve heard about this for years, and it won’t happen in any serious way. Yes, China has pared back on its Treasuries, but that’s to support the yuan. If China tried to dump Treasuries, it would hurt China a lot more than it would hurt the U.S. The reason the U.S. has been able to sell so much debt to China is because, well, they want it to buy it.

    The other concern, what the Federal Reserve will do with interest rates, only impacts the economy after a few rate increases. I still think the Fed will start raising rates later this month, but I’m hardly worried about it. The futures market thinks the Fed may wait some more. Since the start of September, the odds of a rate hike at this month’s meeting have dropped from 38% to 30%. I think the Fed has made it clear that they’re unmoved by the whelps of pain emanating from Wall Street. I can hardly blame them.

    Last week, I noted that Q2 GDP growth was revised higher to 3.7%. We’re starting to get a look at numbers for Q3. This week’s ISM Manufacturing Index for August came in at 51.7. That’s the lowest in two years, but it’s still over 50 which indicates an expanding factory sector.

    Last Friday, the Bureau of Economic Analysis released the personal income and spending reports for July. Personal income rose by 0.4%, and spending increased by 0.3%. Those are solid numbers. The Census Bureau said that construction spending rose by 0.7% in July. It’s always nice to see a rise here because it suggests more activity to come. Construction spending for May and June were revised higher as well.

    On Wednesday, the Fed released its Beige Book report which is a survey of the Fed’s 12 districts. The report is a bit wonky, but it provides good insight on how well the economy is doing. Most of the districts reported improved economic activity, and they see things as continuing to get better. The report also noted that the real-estate market is improving across all 12 districts.

    I’m writing this to you on Friday morning. Later today, we’ll get the jobs report for August. Frankly, the importance of the monthly jobs report has faded over the past few years. The reason is that the trend has been clear. For the last five years, non-farm payrolls have grown at a fairly steady rate (around 2%). The August report should show more of the same. I’ll be curious to see what the report says for average hourly earnings. Wage growth has been stuck near 2% for the last several years. I’d like to see some acceleration. Higher wages means wealthier customers.

    In Europe, Mario Draghi strongly hinted that the ECB is ready to expand its bond-buying program. That gave a short-lived boost to our stock market. What’s interesting is how misaligned Europe and the U.S. are. While the Fed is poised to pull in the reins, the Europeans are stuck where Bernanke was a few years ago. The euro fell to a 12-year low against the dollar earlier this year. It’s recovered since then, but it may be ready to head down again. This is important because a stronger dollar puts pressure on commodity prices. You may recall how often I talked about the strong dollar trade. The ECB meets on Friday, and we’ll get to hear more on their plans.

    Our Buy List Continues to Lead the Market

    There hasn’t been much news about our Buy List stocks. Wait. Scratch that. There hasn’t been any news about our stocks. Personally, I’m fine with that. We own high-quality businesses, and they should be focused on sales and profits more than on a hyperactive stock market.

    It’s worthwhile to take a look at how our Buy List has performed relative to the rest of the market over the past few weeks. When the market started to drop, our Buy List held up much better than the rest of Wall Street. That’s to be expected since investors naturally gravitate toward higher quality during rough patches. At the moment, a good rule of thumb for investors is that as long as the VIX closes above 20, the S&P 500 will remain volatile. This chart should give you an idea of how dramatic the VIX surge has been.

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    When the market bounced strongly on August 26 and 27, our Buy List lagged behind. That’s because fast money poured into stocks they thought could fly the furthest. That’s not our kind of stocks. That’s also why you can expect these mini-rallies to be strongly challenged by the bears.

    Since then, our stocks have quietly outpaced the market. I don’t obsess over such a short term—remember that we haven’t had a single earnings report since Ross Stores (ROST)—but I wanted to give you an idea of what to expect with our stocks. I don’t get too excited when we beat the market in a given week. Nor do I get too down when we lag. As long as sales, earnings and dividends are growing, I feel fine.

    Last week, I held off making any changes to our Buy List prices. I felt that the market was too volatile, and there were bound to be more wild swings. I still feel that way, but I want to add a few tweaks to our Buy Belows to give you a good sense of what’s a good entry point at the moment.

    Four New Buy Below Prices

    I’ve been struck by the decline in Signature Bank (SBNY). If you don’t own this bank, you ought to think about adding it. SBNY is a solid long-term position, and it’s nearly 16% off its high from six weeks ago. I almost feel like we’re in a secret club that knows about Signature while nobody else does. Signature has delivered record profits for the last 23 quarters in a row.

    The bank finally got some media attention this week. There was a very nice article in the WSJ. Here’s a sample:

    Recent results have been particularly strong: The bank’s loans and deposits both grew by more than 32% in 2014, compared with 4.2% loan growth and 4.6% deposit growth for similar banks, according to SNL Financial. The bank’s net interest margin, an important measure of lending profitability largely tied to interest rates, was higher than most of its peers at about 3.27% in the second quarter.

    This week, I’m dropping my Buy Below on Signature by $17 to $139 per share.

    On Tuesday, Ford Motor (F) reported its best sales for August in nine years. U.S. sales were up 5%. The F-Series totaled sales of 71,332. According to Morgan Stanley, the F-Series makes up 90% of Ford’s total profit. It’s been a year since Ford started its plan to change to aluminum-body pickups. There have been some missteps, but the overhaul is done and the company is starting to see the benefits. I’m going to lower my Buy Below on Ford Motor to $15 per share.

    Wells Fargo (WFC) has also been unusually weak, even compared with the recent downturn. I think the stock is a good bargain here. I’m not alone. Sandler O’Neill just upgraded Wells to a Buy. They have a price target of $59 per share. I’m lowering my Buy Below on Wells Fargo to $56 per share.

    Going by Thursday’s close, Microsoft (MSFT) yields 2.85%. But I expect the software giant to bump up its dividend soon. The quarterly payout is currently 31 cents per share. I think they’ll raise it to 34 cents, give or take. If 34 cents is right, that gives the stock an expected yield of 3.13%. I’m lowering my Buy Below on Microsoft to $47 per share.

    That’s all for now. The stock market will be closed on Monday for Labor Day. In the U.S., the Labor Day weekend traditionally marks the end of summer, and trading volume typically picks up in September. Next Wednesday, we’ll get the report on jobs openings for July. Initial jobless claims will be on Thursday, and latest report on the budget deficit will be on Friday. 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