Archive for October, 2015
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Greeting from San Diego!
Eddy Elfenbein, October 19th, 2015 at 2:02 amI’m currently in San Diego for Stocktoberfest 2015. This is the annual gathering thrown by Howard Lindzon, the guiding force behind StockTwits. Howard is a force of nature and he’s been a big supporter of mine for years.
The weather alone is enough to get me here but I’m looking forward to connecting with other members of the finance part of Social Media. On Monday, I’ll be hosting a panel of technical analysts. This should be good. If I have time, I’ll try to give you updates.
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S&P 500 Closes at Two-Month High
Eddy Elfenbein, October 16th, 2015 at 5:22 pmThe S&P 500 rallied again today. That makes 11 up days in the last 14 sessions.
The S&P 500 closed today at 2,033.11 which means we’ve nearly erased everything we lost in the two-day plunge back in August.
As a reminder, the index closed at 2,035.73 on Thursday, August 20. It then lost 3.19% on Friday, August 21 and another 3.94% on Monday, August 24. So we’re now just 0.13% below from the start of that two-day plunge. (The index had dropped for three days in a row going into the big two-day drop.)
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CWS Market Review – October 16, 2015
Eddy Elfenbein, October 16th, 2015 at 7:08 am“I hate weekends because there is no stock market.” – Rene Rivkin
Last week, I sounded the “All Clear” signal, and the market has responded. On Thursday, the S&P 500 closed at its highest level in eight weeks. The index has now risen for 10 of the last 13 days. Ever since Carl Icahn warned investors of danger ahead, the stock market has jumped 7.5%. I hope we get more warnings soon.
A few weeks ago, I was interviewed on Bloomberg TV, and I said that the VIX was too high given the market’s volatility. This was one of those times where I was hardly revealing some hidden fact—the math just didn’t add up. Since then, the VIX has crashed (see below). At one point, it fell for 10 straight days, and on Thursday, the VIX closed at its lowest level in nearly two months. Stocks are up, and expected volatility is down.
Fortunately, we can now focus on something important: earnings. Since our Buy List is focused on high-quality stocks, I look forward to earnings season. That’s when we can prove our mettle. In fact, we’ve already had our first earnings beat with Wells Fargo (WFC). But I need to warn investors: this is going to be a tough earnings season for companies that don’t please the expectations gods of Wall Street. We’ve already seen Walmart (WMT) get cut down for a 10% loss while Netflix (NFLX) lost more than 8%. There will be more.
Next week is going to be crucial for us. Seven of our Buy List stocks are due to report, including five on Thursday. In this issue, I’ll preview what’s in store. Before I get to that, though, I want to discuss the latest economic news. It now looks as if Wall Street doesn’t expect the Federal Reserve to do anything with interest rates for a few more months. As it turns out, all the warnings from the Fed this summer may have been for naught. Of course, this isn’t the first time the Fed has changed its plans.
No Rate Hike This Year Is Good for Stocks
On Wednesday evening, the Wall Street Journal posted an article by Jon Hilsenrath and Anna Louie Sussman titled “Fed Doubts Grow on 2015 Rate Hike.” Investors have learned to take notice when Hilsenrath writes because it’s widely assumed that he’s Janet Yellen’s main conduit to the investing community.
The article said that the odds of a rate hike coming from the Fed this year are falling fast. As you may recall, the central bank did everything it could this summer to prepare investors for a rate hike. Several times it hinted that an increase was coming soon.
The problem is the Fed expected the economy to accelerate in the back half of 2015, and that hasn’t happened. This week’s retail sales report wasn’t that good. The ISM report was weak, and the September jobs report was a bust.
This week, we got another inflation report and once again, consumer prices fell. In fact, the rate of deflation increased last month. That means that by doing nothing, the Fed has actually raised real interest rates. Some of this is the result of plunging commodity prices, but not all. The “core rate” of inflation is subdued as well.
A rate hike in 2015 is most likely off the table. The Fed has another meeting scheduled in two weeks. After that, there’s only one more meeting left for this year, which is on December 15-16. The futures market thinks there’s a 30% chance that rates will go up in December. It’s not until March that the futures market expects a rate hike, and that’s still only at 54%.
At the time, the Fed’s decision to forego a rate hike in September was controversial. Now it appears to be a no-brainer. In just a few weeks, the bond market has dramatically reversed course. On Wednesday, the 10-year Treasury closed at its lowest yield since April. One month ago, the one-year Treasury got to 0.47%. Now it’s back down to 0.22%.
What does this mean for us as investors? It all comes down to simple competition. The bond market is the stock market’s main rival. When the 10-year Treasury is yielding a measly 2% like it is now, that’s not much competition for stocks going at 14 or 15 times earnings. The S&P 500 will probably see its earnings fall around 5% this earnings season. Even with that decrease, stocks are still a bargain compared with the bond market.
Right now, 10-year TIPs (inflation-protected bonds) are going for 0.54%. My research has shown that TIPs historically aren’t a threat to stocks until they yield 2.43%. We’re still a long way from there.
There’s a concept in economics called the “non-accelerating inflation rate of unemployment” or NAIRU. Don’t let the name scare you; it’s actually pretty simple. NAIRU says that once the economy drops below X% unemployment, inflation will start heating up. So…what’s X? As turns out, no one knows. Economists had assumed X to be around 5.5%. We’re now down to 5.1%, and there’s still no inflation in sight.
Now folks are beginning to wonder if X is a lot lower than we’d thought. Maybe 4.5% or even lower. Why the change? That’s hard to say. Maybe demographics. Maybe technology. Or maybe the structure of the economy has changed in some way we don’t quite understand. As investors we don’t need to worry about why. The good news is that there’s no worry that inflation is going to strike us soon.
The chain of causality goes like this. Inflation leads to higher interest rates. Higher interest rates are tougher competition against stocks. That tougher competition leads to lower stock prices. Without that first step, I’m not so worried about the last step. Now let’s take a look at our first earnings report for this earnings season.
Wells Fargo Beat by a Penny per Share
On Wednesday, Wells Fargo (WFC) became our first stock to report results. Wells reported Q3 earnings of $1.05 per share, which beat Wall Street’s estimate by one penny per share. Overall, Wells had a decent quarter, but there are a few weak spots. Looking past that, Wells continues to be, in my opinion, the best-run large bank in America.
For Q3, the bank’s revenue rose to $21.88 billion, which beat estimates by $120 million. Total loans were up 7.7% while commercial and industrial loans were up 15%. That’s the good news. The downside is that Wells’s net interest margin came in a tad below 3%, which isn’t where I’d like it Of course, that’s the problem of living in a low-interest-rate world.
The bank has also been squeezed by dud loans to the energy sector. There’s been a lot of careless jabber on Wall Street about how large banks are much more vulnerable to bad energy loans than people realize. Truthfully, it’s an issue, but it’s hardly an earnings killer. Energy loans make up about 2% of Wells’s overall portfolio.
Wells conceded that the delinquency risk is higher than they initially estimated. Last quarter, the bank set aside $703 million for bad loans. That’s nearly double the number from a year ago, but the slowly-improving economy is helping consumers. Profits in community banking rose 6.5% to $3.69 billion, and profits in their brokerage unit were up 10% to $550 million.
Banks have what’s called an “efficiency ratio” which is expenses as a share of revenue. For Wells, their ratio last quarter was 56.7%. That’s within the bank’s target range.
The mortgage business has been a drag on Wells. Profits in that division fell by 2.7%, but I think we’ll see improvement from here. Earlier this week, Wells said it bought a big chunk of assets from General Electric (GE). GE’s strategy is to ditch its financial businesses.
Wells started off the year quite well for us, but it’s been lagging the market for the past two months. It’s been especially bad since the market turned towards Cyclicals about two weeks ago. This isn’t as much of a problem for Wells as it has been for the entire financial sector. This report tells me that Wells is doing just fine. Wells Fargo remains a strong buy up to $56 per share.
Seven Buy List Earnings Reports Next Week
Next week is going to be a busy one for us. Seven of our Buy List stocks are due to report, including five on Thursday. You can see a complete calendar of our earnings reports here. Let me preview what’s in store for next week.
On Tuesday, Signature Bank (SBNY) will report Q3 earnings. I said that Wells is the best-run big bank in America. Well, Signature is the best-run smaller bank. If they keep growing at this rate, soon they won’t be so small. Signature has now delivered 23-straight record quarters. They’ll almost certainly make that 24 next week. The consensus on Wall Street is for earnings of $1.82 per share.
One item that concerns me is that Signature has made many medallion loans for cab drivers, but Uber has hurt that business. Like Wells and energy, it’s an issue, but not a back-breaker.
On Wednesday, eBay (EBAY) is due to report its earnings. This will be the first earnings report for eBay without PayPal (PYPL). Wall Street expects 40 cents per share. Frankly, I’ve grown a bit frustrated with the online auction house. Amazon is squeezing them and the strong dollar has also taken its toll. ChannelAdvisor recently reported some poor metrics for eBay’s core business. I’m not ready to toss in the towel just yet on eBay, but I want hard evidence that business is getting better.
Thursday is the big day for us. Snap-on (SNA) and Wabtec (WAB) are due to report before the opening bell, while CR Bard (BCR), Microsoft (MSFT) and Stryker (SYK) will report after the closing bell.
Snap-on (SNA) has been one of our surprise winners this year. Through Thursday, the shares are up 17.4% YTD. The consensus on Wall Street is for Q3 earnings of $1.94 per share, which is probably a few cents too low. I also expect a nice dividend increase from Snap-on sometime next month. The stock is particularly attractive if you see it below $160 per share.
This summer, Wabtec (WAB) said that it’s targeting full-year earnings of $4.10 per share. That seems very doable. The company has already made $2.03 per share for the first half of the year.
Three months ago, CR Bard (BCR) not only beat earnings but raised its full-year guidance as well. For Q3, Bard expects earnings to range between $2.21 and $2.25 per share. For the full year, Bard is looking for earnings of $9.00 to $9.05 per share. I think they can beat both numbers. This is a solid stock.
Three weeks ago, I highlighted Microsoft (MSFT) as being an especially good buy below $44 per share. The bargain didn’t last long; shares of MSFT perked up and are now above $47 per share. I particularly liked the company’s 16% dividend increase from a few weeks ago. I have to say that I’m a bit cautious on this earnings report. While Microsoft has been struggling with its phones, the company has been doing well in other areas. Xbox, for example, is strong. The consensus for this earnings report is for 58 cents per share.
Stryker (SYK) has said it expects Q3 earnings to come in between $1.20 and $1.25 per share. It also raised its full-year guidance to a range of $5.06 to $5.12 per share. A lot of healthcare stocks have gotten beaten up lately, and Stryker suffered some as well. Between August 19 and September 28, Stryker dropped 11.6%. I think a lot of this was sector-focused, and the stock has started to recover. Look for another good earnings report from Stryker.
That’s all for now. Next week will be dominated by earnings. The big day for us will be Thursday, when five of our Buy List stocks are due to report. There’s not much in the way of econ reports next week, but I’ll want to see if the initial jobless claims can make a fresh four-decade low on Thursday. Existing homes will also come out on Thursday. 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
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Morning News: October 16, 2015
Eddy Elfenbein, October 16th, 2015 at 6:23 amChina’s Economy May Be Even Bigger Than You Think
Putin Allies Said to Be Behind Scrutinized Deutsche Bank Trades
Gold Stages Comeback, Erasing 2015 Losses on View Fed May Delay
Why Can’t Something Be Done About Our Broken Home Mortgage System?
Ford China Venture to Recall 220,000 SUVs Over Risk of Fuel Leak
AT&T Writes Down $1.1 Billion on Venezuelan Adjustment
Deutsche Wohnen Rejects Vonovia’s Takeover Offer as Inadequate
Nestle Reduces Sales Outlook Amid Weakness in Chinese Market
AMD Reports a Loss on 26% Revenue Decline
Citigroup Profit Jumps on Lower Legal Expenses
Yum Rises After Naming Activist Investor Meister to Board
Not Lovin’ It! McDonald’s Franchisees Say All-Day Breakfast Has Been a Nightmare
Cash Drops and Keystrokes: The Dark Reality of Sports Betting and Daily Fantasy Games
Cullen Roche: Thinking About Bonds and Benchmarks
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Fewest Jobless Claims in 42 Years
Eddy Elfenbein, October 15th, 2015 at 11:15 amWall Street is reconciling itself to the fact that there probably won’t be an interest rates hike this year. So far, the market is relieved.
The major data point in favor of an improving jobs market has been the initial jobless claims report. Today we learned that jobless claims fell by 7,000 to 255,000. That ties the number from July 18 which is the lowest point since 1973.
The weekly jobless claims number tends to bounce around a lot so economists prefer to look at the four-week moving average. That average is also at its lowest level since 1973. Generally speaking, it’s a good sign when jobless claims are running below 300,000.
We also got the inflation report for September, and it showed more deflation. Consumer prices fell 0.2% last month. In other words, by doing nothing, the Fed is actually tightening money. It’s not just about commodities. The core rate for September rose by 0.2%.
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Morning News: October 15, 2015
Eddy Elfenbein, October 15th, 2015 at 6:40 amChina Economic Growth Seen Slowing Despite Policy Easing
Euro Falls as ECB Seen Upping the Ante on Missed Inflation Goals
Gold Steadies Off 3-1/2 Month High as Dollar Recovers
Millions of Social Security Recipients to Learn COLA Fate
Burberry Shares Dive on Weaker Asian Demand
Wal-Mart Heirs See $11 Billion Vanish in a Day on Share Fall
UnitedHealth Beats Street 3Q Forecasts
Netflix Blames Weak U.S. Subscriber Adds on New Chip-Based Cards
Uber Debuts On-Demand Delivery Service For Small Businesses In NYC, San Fran And Chicago
Bristol-Myers, Five Prime Enter Licensing Deal of Up to $1.74 Billion
Bank of America Beats as Legal Bills Plummet, Trading Hangs On
Nike Expects Sales to Hit $50 Billion by 2020
The 129 Finance People You Have to Follow on Twitter
Cullen Roche: Thinking About Bonds and Benchmarks
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Walmart Drops 10%
Eddy Elfenbein, October 14th, 2015 at 2:48 pmShares of Walmart (WMT) are having their worst day in 15 years. The stock is currently down 10% today. That’s a market cap loss of about $20 billion.
Walmart has 3.21 billion shares outstanding but the float is only 1.37 billion shares. The heirs of Sam Walton still own a gigantic amount of the company. According to Bloomberg, the family has lost $9 billion today, and $39 billion this year.
The billionaire Waltons — Christy, Jim, Alice and Rob — have a combined $122 billion fortune, according to the Bloomberg Billionaires Index, with the bulk of their wealth in the shares they inherited from Wal-Mart founder Sam Walton. The four shareholders, three children of Sam and Christy, the surviving spouse of a fourth sibling, are among the year’s worst-performing billionaires, losing a total of $39 billion since Jan. 1.
It’s not just today; the stock has been lagging the market all year. The Walmart heirs started the year with $169 billion. They’re now down to their last $122 billion.
The catalyst for today’s selloff was the company warning that its earnings for the next fiscal year (ending January 2017) may fall as much as 12%. Wall Street had been expecting a small gain. Obviously, Walmart is a gigantic enterprise. On average, Walmart brings in $15,000 of revenue every second.
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The S&P 500 Touched a Seven-Week High
Eddy Elfenbein, October 14th, 2015 at 11:31 amThis morning, the Census Bureau reported that retail sales rose 0.1% last month, but if you don’t count gasoline, then retail sales were up 0.4%. Sales were up 2.4% in the last year. Today’s report matched expectations; however, the August number was revised from 0.2% growth to unchanged. Not great, but some improvement.
The VIX rose yesterday after falling for 10-straight sessions. In two weeks, the VIX nearly got cut in half. When I went on Bloomberg a few weeks ago, I said that the VIX was too high given the market’s current behavior. I think I was right on that.
The S&P 500 has fallen back below 2,000 but I don’t expect that to last long. The Dow is currently a hair below 17,000. It’s interesting how the market has zeroed in on this 8.5-to-1 ratio between the Dow and the S&P 500. Seven years ago, during the height of the financial crisis, the Dow was ten times the S&P 500. That was a 40-year high. (To be clear, we’re talking nominal index value not total market cap.)
I’m not a technical analysis guy, but it’s interesting how the S&P 500 has been toying with “resistance levels.” For example, the market’s recent high and low are almost perfectly equidistant from 2,000.
On August 24, the S&P 500 bounced off 1,867.01. It tested that level again on September 29 when the index reached a low of 1,871.91. The market held and we went on to rally but found new resistance points.
On September 17, the S&P 500 got as high as 2,020.86. This past Friday, we got up to 2,020.13. I don’t think that’s an accident. Yesterday, we pierced the high and got up to 2,022.34. That was a seven-week high, and we’ve slid back ever since.
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Wells Fargo Beats by a Penny
Eddy Elfenbein, October 14th, 2015 at 10:23 amEarnings season is underway for our Buy List. This morning, our first Buy List earnings report came out. For Q3, Wells Fargo (WFC) earned $1.05 per share which topped Wall Street’s estimate by one penny per share. The bank’s revenue rose to $21.88 billion which beat estimates by $120 million.
Wells Fargo’s loan activity picked up during the quarter. Total loans at the end of the quarter were $903.23 billion, a 7.7% increase from $838.88 billion in the same period a year ago. Commercial and industrial loans, which make up one of the largest parts of the bank’s total portfolio, were $292.23 billion, up 15% from $254.2 billion in the same period last year.
That’s pretty good. The downside is that Wells’s net interest margin came in a tad below 3% which isn’t where I’d like it. The bank has also been squeezed by dud loans to the energy sector. There’s been a lot of careless jabber on Wall Street that large banks are much more vulnerable to bad energy loans than people realize. Truthfully, it’s an issue, but it’s not an earnings killer. Last quarter, Wells didn’t release a dime in loan loss reserves.
Loans to energy companies comprised about 2% of Wells Fargo’s overall portfolio, but the bank said after its second-quarter earnings report that there was a risk of delinquency on $508 million in those balances, or around four times its estimate for the first quarter.
In the third quarter, Wells Fargo set aside $703 million to cover loans that could potentially turn bad in the future. That compares with $368 million in the third quarter of 2014 and $300 million in the second quarter. The bank lost $703 million to loan defaults, or 0.31% of its overall portfolio, compared with a 0.32% charge-off rate in the third quarter a year ago.
More importantly, Wells is profiting from the slowly-recovering consumer.
Overall profits at Wells Fargo’s community banking division, which includes its consumer operations, were $3.69 billion, a 6.5% increase from the $3.46 billion it earned in the third quarter of 2014. Wells Fargo’s wholesale banking division recorded profits of $1.77 billion, down 8.1% from the $1.93 billion it reported in the same quarter last year. The bank’s wealth, brokerage and retirement unit posted profits of $606 million, a 10% increase from the $550 million it earned in the third quarter of 2014.
Costs increased 1.2% to $12.4 billion. Expenses as a share of revenue was 56.7%, within the range of 55% to 59% that Wells Fargo targets for its so-called “efficiency ratio.”
Wells Fargo’s mortgage business, the largest in the U.S. by volume, earned $1.59 billion in fees in the quarter, down 2.7% from the $1.63 billion it earned in same period a year ago. The bank extended $55 billion in home loans between the end of June and the end of September, compared with $48 billion in the third quarter of 2014 and $62 billion in the second quarter of this year.
A large piece of Wells Fargo’s growth strategy this year has involved acquiring assets and businesses that General Electric Co.’s finance arm was shedding as part of the manufacturer’s retreat from banking. Within the past two weeks the bank announced it was acquiring the conglomerate’s railcar leasing and commercial lending and leasing businesses, and earlier this year it purchased $9 billion of GE’s property loans.
Wells started off the year quite well for us, but it’s been lagging the market for the past two months. It’s been especially bad since the market turned towards cyclicals about two weeks ago. This isn’t so much a problem for Wells as it has been for the entire financial sector. The shares are down about 1% this morning, but it’s not something to worry about.
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Morning News: October 14, 2015
Eddy Elfenbein, October 14th, 2015 at 7:09 amU.K. Unemployment Unexpectedly Drops to Least Since 2008
China Third-Quarter Growth Seen Dipping to 6.8%, Weakest Since 2009
Brazil’s Next Big Crisis Is Scaring Bankers and Wiping Out Jobs
Cyberspace Becomes Second Front in Russia’s Clash With NATO
Gold Hits 3-Month High on Talk of Delay in Fed Rate Hike
A 2nd Fed Governor Opposes Raising Rates This Year, Breaking With Yellen
Mounting Full-Time Employment Shows Less Slack for Yellen’s Fed
Why Angus Deaton Deserved the Economics Nobel Prize
Wells Fargo to Buy $32 Billion GE Assets, Add 3,000 Workers
Mega Beer Deal Offers Molson Coors a Bigger Swig of U.S. Market
Twitter to Cut Up to 8% of Workforce
Intel Q3: Cloud, Memory Chips Shine, Enterprise Weakens
BofA Posts Quarterly Profit as Expenses Fall
Joshua Brown: Why the Stock Market Has to Go Down
Howard Lindzon: Stocktoberfest 2015- Robinhood, Stocktwits and SparkFin
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