Archive for March, 2016

• Morning News: March 28, 2016
  Eddy Elfenbein, March 28th, 2016 at 6:59 am

  Oil Recovery Hits Saudi Devaluation Bet

  Oil Enthusiasts Stay Out of Rally Led by Shrinking Bearish Bets

  Red Meat, It’s What’s for Dinner Again as Beef Prices Tumble

  China Bank Profits Flat-Line as Bad Debts Continue to Soar

  Brazilians Scrimp and Save in Unwelcome Surprise for Investors

  Israeli Court Strikes Down Natural Gas Development Deal

  Japan’s NTT to Buy Dell Systems for $3.055 Billion

  American Tech Giants Face Fight in Europe Over Encrypted Data

  Where Tech Leads? The Battle For Yahoo’s Boardroom

  Microsoft Meets With Private Equity Over Yahoo Deal

  Ethereum, a Virtual Currency, Enables Transactions That Rival Bitcoin’s

  Charter’s $67 Billion Cable Merger Hinges on the Cord Cutters

  The Roll-Up Racket

  Popular IRS Charitable Tax Break Can Be Valuable—for Those Who Know How to Use It

  Jeff Miller: Can Markets Finally Celebrate Good News?

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• Q4 GDP Growth was Revised Up to 1.4%
  Eddy Elfenbein, March 25th, 2016 at 9:33 am

  This morning, the government revised higher its report on fourth-quarter GDP. The economy grew, in real terms, by 1.4% (annualized) during the final three months of last year.

  The revision mainly reflects better consumer spending on services, signaling domestic stability in the face of overseas headwinds that stung manufacturers, energy firms and financial markets.

  The balance sheets of U.S. companies weakened during the quarter. Corporate profits after tax, without inventory valuation and capital consumption adjustments, fell at an 8.1% pace last quarter from the third. That was largest quarterly decline since the first quarter of 2011. Profits fell 3.3% in third quarter from the second. On a year-over-year basis, corporate profits declined 3.6% in the fourth quarter.

  Still, for all of 2015, profits were up 3.3% from 2014. The unadjusted measure of corporate profits tracks most closely with what companies report in earnings statements.

• CWS Market Review – March 25, 2016
  Eddy Elfenbein, March 25th, 2016 at 7:08 am

  “Fate laughs at probabilities.” – Edward Bulwer-Lytton

  Wall Street is closed today for Good Friday, so this is a good opportunity to look at the recent sea change on Wall Street.

  Stocks are up, volatility is down and risky assets are gaining in popularity. To sum it up, things have chilled out in a major way this month.

  Consider that Thursday was the ninth day in a row in which the S&P 500 closed up or down by less than 1%. In the 48 days prior to that, it happened 27 times. That’s pretty frenetic trading. At that rate, 2016 was on pace to being one of the most volatile years since the 1930s.

  

  Then it all changed. In this week’s CWS Market Review, we’ll take a closer look at what happened, why it happened and what it means for us. I also want to preview the Q1 earnings season, which is quickly coming our way. I’ll also update you on several of our Buy List stocks. I particularly want to focus on the legal issues impacting Express Scripts (ESRX). But first, let’s look at the market’s impressive resiliency in the wake of terror.

  Terror Fails to Scare Investors

  On Tuesday, the world was shocked by the awful events in Belgium. I’ll never understand what could lead people to such senseless acts of violence.

  If there’s a silver lining, at least in the world of business, it’s that the terrorist acts failed to scare investors. There was a small “flight to safety” move, but it was hardly similar to what we’ve seen following previous attacks.

  I think this is notable for a few reasons. First, let’s remember that the market’s rally since the February low has been led, in large part, by riskier stocks. By that I mean “high beta” sectors. While many “low-vol” and defensive stocks have made new highs, those stocks were largely unscathed by the market’s nasty downturn during the first six weeks of this year. It’s the riskier assets that Wall Street has returned to.

  To be very blunt, the events of Tuesday gave investors an understandable reason to rotate away from risk, and they didn’t take it. That’s a very encouraging sign. I’ll give you an example. Look at the recent performance of transportation stocks.

  

  This is a group that had a horrible 2015, and it got really bad late in the year. But Transports suddenly became hot again in January. The Dow Jones Transportation Index, now in its 132nd year, has soared 20% in the last two months. FedEx (FDX), for example, recently popped on a good earnings report. On our Buy List, shares of Wabtec (WAB), a key supplier for the rail industry, have also rebounded impressively.

  After the terror attacks, some airlines and travel stocks pulled back, but it was a fairly muted response. Market watchers like to keep an eye on transports for hints of the future. It’s a key cyclical sector. After all, if companies are shipping more goods, they expect consumers to buy them. It’s not surprising that the recovery in transports has come at the same time that we’ve seen improvement in consumer spending.

  Another region that’s popped back has been Emerging Markets. Stock markets in countries like Brazil, Argentina and Russia were in a world of pain last year. Now they’re suddenly hot again. This is another example of investors being willing to step up the risk ladder and take on more-volatile stocks.

  

  The movement in Emerging Markets is often an echo of the U.S. dollar. In short, investors want to get some extra reward for venturing into Emerging Markets. But if the dollar spurts higher, the effect is taken away, so capital flees back to America. As a result, Emerging Markets tend to move in strong waves—everybody in or everybody out. There’s not a lot of middle ground. (Of course, I’m generalizing.)

  The softer dollar has helped many Emerging Markets. I was impressed to see that the Emerging Markets ETF (EEM) pulled back only a bit this week, but not as much as I expected (see above). This is another good sign that investors are committed to weathering greater volatility.

  I’ve also noticed that high yield spreads have narrowed recently. This is the premium that investors demand in order to lend to lower-grade borrowers. Part of this trend is clearly the surge in energy prices, but that’s not all of it. If the economy is improving, as the data suggest, then defaults ought to decline. This means lenders will have more confidence to fund marginal borrowers. Of course, the lower borrowing costs also help the balance sheet of the borrowers, so it can become a self-reinforcing trend. While high yield spreads have narrowed dramatically, they’re still much wider than they were a year ago.

  Most importantly, the Federal Reserve is still on the side of taking more risks. The recent Fed statement seems to be a signal that the Fed isn’t in a hurry to raise rates. Traders see a 10% chance of a rate hike in April and a 41% chance of a hike in June. I’d place those odds at 1% and 15%. So if you can’t get income from your bank account, it becomes necessary to own stocks, especially stocks with good earnings.

  Now let’s look at the Q1 earnings season, which is less than three weeks away.

  Preview of First-Quarter Earnings Season

  The first quarter comes to an end next Thursday. Shortly after that, Q1 earnings season will start. On our Buy List, Bed Bath & Beyond (BBBY) still has to report Q4 earnings. That’s scheduled for April 6. After that, Wells Fargo (WFC) will lead off our earnings season with their report on April 14. Over the following four weeks, sixteen of our Buy List stocks will report earnings. I like to say that earnings time is Judgment Day for Corporate America, and Wall Street can render harsh verdicts.

  For Q4, more than two-thirds of the companies in the S&P 500 beat expectations. That’s roughly in line with the long-term average. (Yes, that’s right. In Wall Streetistan, companies are expected to beat expectations.) But expectations had been slashed going into earnings.

  As a result, last quarter was the fifth quarter in a row of declining earnings. Earnings for the S&P 500 fell by 13.8%. I should add that this is earnings per share, and that’s a metric that’s been greatly aided by share buybacks. Companies in the S&P 500 are on pace to buy back $165 billion worth of stock this quarter. During Q4, 25% of the stocks in the index reduced their share count by more than 4%.

  It looks like Q1 could be the sixth quarter in a row for declining earnings. As of now, Wall Street expects the S&P 500 to report earnings of $26.11 for Q1 (that’s the index-adjusted figure). That’s a small increase of 1.6% over last year’s Q1. I should note that earnings estimates have been slashed the past few weeks, and we’ll probably see some more paring by the time earnings season begins. On the other hand, Wall Street will most likely top expectations by a predictably modest amount.

  Another factor driving this earnings season is the horrible state of many energy companies. Earnings for the Energy sector are expected to be cut in half for Q1. Analysts also expect a 12% earnings decline for Financials. Outside that, the earnings picture shouldn’t be that bad. The Tech Sector is expected to show a 4% increase for Q1, and Consumer Discretionaries are expected to be up close to 10%.

  For all of 2016, Wall Street sees earnings of $118.57 for the S&P 500. That’s almost certainly too high. The index earned about $100 last year, and I’m expecting around $110 for this year. Investors should continue to focus on solid companies with consistently growing earnings. Now let’s look at some current bargains on our Buy List.

  Buy List Updates

  Like the rest of the market, our Buy List has shaken off a poor start to the year, and we’re close to being in the black for 2016. Stocks like Fiserv (FISV) and Stryker (SYK) have recently made new highs, and CR Bard (BCR) came close to breaking $200 per share for the first time in six months.

  Be sure to take notice of my Buy Below prices. The rule is simple: any time a stock is below its Buy Below price, I consider it a buy. It’s not a price target, since I change these prices frequently.

  One Buy List stock that looks particularly attractive at the moment is Biogen (BIIB). Don’t be alarmed by the biotech’s poor start to the year. I’m looking forward to a good earnings report from Biogen on April 21.

  My Buy Below for Cerner (CERN) is $58 per share. I’m going to keep it there, but the stock is an especially good buy if you can get it below $52 per share.

  I also like Signature Bank (SBNY). If you can pick up SBNY below $140, then you made a good move.

  Let’s look at some recent news affecting our Buy List stocks.

  Oppenheimer downgraded Fiserv (FISV). That’s nothing to worry about. I’m looking forward to another good earnings report.

  UBS shocked Wall Street by initiating coverage of Wells Fargo (WFC) with a Sell rating. No one ever says Sell! UBS says Wells faces several headwinds impacting all banking. I can’t disagree, but the bank has solid management and the valuation is still quite reasonable. Of all the stocks on our Buy List, Wells Fargo is one of the least to worry about.

  Warren Buffett recently said that Mark Fields, Ford’s CEO, is doing an outstanding job. I agree. Here’s an interesting extended interview Henry Blodget recently did with Fields.

  The war between Express Scripts (ESRX) and Anthem (ANTM) doesn’t appear to be cooling off. This week, Anthem filed a lawsuit in an attempt to recover what they claim were excess charges. Anthem is ESRX’s largest customer.

  This feud has been going on for a few weeks, and you just knew somebody was going to throw down a lawsuit. I had thought Anthem’s public whining was part of the negotiating process. Unfortunately, the relationship may be in worse shape than I imagined.

  Anthem has been throwing around pretty outrageous figures for damages, but that happens in most lawsuits. Tim Wentworth, the incoming CEO for Express, said he’s committed to keeping Anthem as a client. As I look at it, I think it would be too much of a hassle for Anthem to ditch Express, but I also don’t see the need for these theatrics. I still lean towards Anthem staying with Express, but it’s not unthinkable for them to part ways.

  That’s all for now. The first quarter comes to an end next Thursday. On Monday, we’ll get the personal-income report for February. On Wednesday, ADO will release its private-payroll report. Friday will be a busy day for economic reports. We’ll get the latest construction-spending report and ISM report. It’s also Jobs Day. The last report should show unemployment to be at an eight-year low. 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

  P.S. Good news! We’re moving ahead with our plans for an ETF based on our Buy List. But we need to gauge the level of interest. Please take a moment to fill out this brief survey. Thank you!

• Morning News: March 25, 2016
  Eddy Elfenbein, March 25th, 2016 at 7:00 am

  How $40 Oil Is Driving Social Change in Saudi Arabia

  U.S. Oil Explorers Return to Parking Rigs as Supplies Build

  Plan to Rescue Puerto Rico Advances, Led by House Republicans

  Wait Times Are Down, But IRS Still Faces Serious Challenges

  On Business Issues, Republicans Might Want a Justice Garland

  Durable Goods Orders Dropped 2.8% in February

  Cage-Free Eggs May Be Golden Goose for Retail Profits

  Wall Street Got Bullish on Power Deals After Pepco Approval

  Judge Gives Volkswagen One More Month to Fix its Cheating Diesel Engines

  Starboard Value Seeks to Oust Yahoo’s Board

  TiVo Surges on Report Company Is in Sale Talks With Rovi

  In Shift to Streaming, Music Business Has Lost Billions

  Playboy is Looking to Sell Itself for $500 Million

  Joshua Brown: Camelot Lost

  Howard Lindzon: A Real Catalyst For Real Estate

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• ETF Survey: Let Me Hear From You!
  Eddy Elfenbein, March 24th, 2016 at 5:20 pm

  A few months ago, I ran an informal survey looking at the potential interest in an exchanged traded fund (ETF) based on our Crossing Wall Street Buy List. The response was overwhelming, and greatly exceeded our expectations.

  I’m happy to say that we’re working to make a Buy List ETF a reality. This will be great tool for investors. After we launch, you’ll be able to easily buy the entire Buy List in one tradeable security in a highly tax-efficient structure. But I’m absolutely determined to keep our fees low. I refuse to budge on this point.

  Now we run up against simple economics. In order to keep our costs low, the ETF must be a respectable size. That’s why I want to reach out to you again and gauge your interest. This is very important so I welcome your responses.

  Please fill out our brief survey.

  Thank you for your feedback!

• Morning News: March 24, 2016
  Eddy Elfenbein, March 24th, 2016 at 7:06 am

  The World’s Best Performing Market Is Still in Serious Trouble

  Pound’s $16 Billion of Option Trades Envisage Drop to 1980s Lows

  Pentagon Opens Investigation Into Space Launch Contracts

  Crude Oil Poised for First Weekly Decline Since Mid-February

  F.B.I. Clash With Apple Loosed a Torrent of Possible Ways to Hack an iPhone

  Mega Utility Deal Between Exelon and Pepco Gets Toughest Approval Yet

  Starboard Will Seek to Replace Yahoo’s Entire Board, WSJ Says

  KKR, Chinese Sovereign Fund Said to Study Yum! China Investment

  Virgin America’s Biggest Shareholders Appear To Want To Cash Out, But Who Would Buy Them Out?

  Zoomlion Shares Tumble After Sweetening Terex Offer

  Opposition Rises Over Chinese Bid For Syngenta

  Energy Transfer Paints Grim Picture of Williams Deal

  Goldfarb Exits as Sequoia’s Valeant Debacle Caps 45-Year Career

  Cullen Roche: The Investor Podcast – Macro Thoughts

  Jeff Miller: How to Create a Perfect “Forecast”

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• The Top Market Trends of the Day
  Eddy Elfenbein, March 23rd, 2016 at 4:06 pm

  Here’s my appearance yesterday on Bloomberg:

• Morning News: March 23, 2016
  Eddy Elfenbein, March 23rd, 2016 at 7:01 am

  Germany’s Bonds Fall as Nation Auctions 30-Year Securities

  Puerto Rico Gets Mixed Reception at U.S. Supreme Court

  After Taking a Shower, Shower Your Lawn?

  Helicopter Money Takes Flight as Latest Drastic Monetary Idea

  The Unsettling Acquisitiveness of Anbang, a Chinese Insurer, in the U.S.

  Time To Buy Airlines Despite The Brussels Terror Attacks

  Nike Profit Jumps 20% Even As Currency Headwinds Persist

  Sell Herbalife Before It Ends Up Like Valeant

  Coke Tweaks Its Business Model Again

  Apple Policy on Bugs May Explain Why Hackers Would Help F.B.I.

  Google’s Cloud Business Nabs Home Depot as Client

  Convoy Sees Itself as the Uber of Local Trucking

  Credit Suisse, the Jailed Banker and an Oligarch’s Missing Money

  Jeff Carter: Trading Virtual Reality

  Josh Brown: The Market’s Response to Crisis

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• Morning News: March 22, 2016
  Eddy Elfenbein, March 22nd, 2016 at 7:02 am

  German Business Confidence Rebounds on Resilient Domestic

  RBS Pays $1.7 Billion to Scrap U.K. Treasury’s Dividend Rights

  The Great Commodity Rebound – Central Bank Cherry On Top

  OPEC Official Says Some Members May Not Attend Doha Freeze Meeting

  New York Fed Had `Major Lapse’ in Robbery, Bangladesh Says

  Euro-Area Deflation Risks Persist Even as Markit Sees Growth

  IHS Becomes Latest Company to Give Up U.S. Citizenship for Lower Taxes

  Anthem Sues Express Scripts On Drug Pricing

  Amazon Begins Reselling Comcast Services on its New Site, the Amazon Cable Store

  Petrobras Surprises Analysts with Record Loss as Oil Rout Bites

  Deutsche Bank CFO Says Banks Have Had Tough Start To Year

  Fed Approves Goldman Acquisition of GE Capital’s U.S. Online Deposits

  The German Chain That’s Beating Wal-Mart at Its Own Game

  Cullen Roche: Understanding Flow of Funds Accounting

  Roger Nusbaum: It’s An Easy Planet

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• Five Straight Up Weeks
  Eddy Elfenbein, March 21st, 2016 at 10:08 am

  The S&P 500 closed out its fifth-straight winning week. It’s quite early but we’re already in the black for #6.

  

  This is an unusually broad rally for the market. Within the S&P 500, 470 stocks are above their 50-DMA. The data exists on that since 2002 and it’s nearly a record. A total of 455 stocks in the index are above their 20-DMA.

  Volatility has also chilled out. The VIX is back below 15. It was over 30 a little more than one month ago. The S%P 500 hasn’t had a 1% daily move for five straight days. Ryan Detrick notes that that is the longest such streak this year. We had 1% moves in 26 of the first 50 days this year.