Archive for March, 2016

• Morning News: March 21, 2016
  Eddy Elfenbein, March 21st, 2016 at 7:13 am

  Today’s Brexit FUD: CBI Says Economy Would Take £100 Billion Hit

  Shanghai Composite Rallies Above 3,000 as Margin Debt Curbs Ease

  Growth-Focused China Signals It Hasn’t Forgotten Leverage

  Brazilians Brace for More Drama at Top Court, Congress

  Crude Oil: Putin’s Star Rises As Politics Rule For The Next Month

  As Coal’s Future Grows Murkier, Banks Pull Financing

  Wall Street’s Pile of Unwanted Treasuries Exposes Market Cracks

  Fed’s Lacker Says He is Confident Inflation Will Return to 2%

  IHS and Markit to Merge, Creating Data Heavyweight

  Marriott (MAR) Revises Terms of Starwood Hotels (HOT) Merger to $79.53/Share

  ASX CEO Elmer Funke Kupper Quits as Tabcorp Is Investigated

  Sherwin-Williams to Acquire Valspar in $9.3 Billion Paint Deal

  Hollywood Divided Over Movie Streaming Service

  Josh Brown: America’s Fifth Largest Brokerage Goes Fiduciary

  Jeff Miller: Weighing the Week Ahead: What’s Up With Housing?

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• CWS Market Review – March 18, 2016
  Eddy Elfenbein, March 18th, 2016 at 7:08 am

  “A bull market is like sex. It feels best just before it ends.” – Barton Biggs

  The Federal Reserve met this week, and finally, after months of exploring several other options, decided to agree with reality. The Fed no longer believes it will need to raise interest rates a few more times this year.

  Wall Street responded, “Gee, you think so, Captain Obvious?” (I’m paraphrasing.) The stock market jumped to its highest level all year. The S&P 500 is now down a wee 0.16% for 2016, but remember how lousily the year started? This was one of the worst starts to a year in Wall Street history. By February 11, the S&P 500 was more than 11% in the hole. Five weeks later, we can see this has been a hugely impressive turnaround, and a few of our stocks, like Fiserv and Stryker, broke out to new highs this week.

  

  I’ll break down what this week’s Fed decision means for us (spoiler alert: it’s quite good). We also got some surprising news on the inflation front. Core prices, which exclude food and energy, are rising at their fastest pace in years. I’ll tell you what it all means. But first, let’s take a closer look at what Janet and her friends at the FOMC were up to this week.

  Wall Street Loves the Fed’s Softer Tone

  The Federal Reserve had another policy meeting this week, and as expected, the central bank held off on raising interest rates. Frankly, that wasn’t much of a surprise.

  But what was a surprise was the Fed’s new “dovish” outlook. Until now, the Fed projected that it would need to raise interest rates four times this year. Even as trouble spread in Europe and Asia, the central bank stuck to its guns. The Federal Reserve is the only major central bank in the world whose last move was a rate hike. Everybody else is cutting. Poor Mario Draghi at the ECB has slashed below 0% and he doesn’t seem to have plans to stop.

  But Wall Street never went along with the Fed’s view. At the start of the year, traders expected a few more hikes, though not much. During the first part of the year (January 1 to February 11), the economic outlook badly deteriorated. Not only was oil moving in lockstep with the market, but so were the expectations for the Fed. As stocks sunk lower, the odds for more rate hikes became ever smaller.

  At the time, we heard loud calls that the Fed had screwed up by raising interest rates in December. The Fed, we were told, had to placate the market gods by taking back the rate increase. Some people started to jabber that Janet would have to follow Mario into negative-rate land. Chairwoman Yellen was even asked this at last month’s Congressional testimony.

  You could really see the sea change by looking at the bond market. At the start of the year, the two-year Treasury (which is often a good proxy for Fed policy) was yielding 1.02%. By February 11, it was down to 0.64%. In the futures pits, the odds for a June rate hike fell to 2%. Futures traders didn’t think there would be any rate hikes this year, or next. It was as if interest rates had become a thing of the past. You may recall that a lot of bank stocks got squeezed.

  

  Then a funny thing happened. People suddenly realized that the economy isn’t that bad. Also, why would anyone want to get 0.64% for a two-year note if you could get three or four times that much from stock dividends? Or in the case of a Buy List stock like Microsoft, they could get four or five times that—not to mention that MSFT is a growing company.

  “A Slightly More Accommodative Path”

  In the last few issues of CWS Market Review, I’ve highlighted the better economic numbers. I’ve been careful to say that the economy still has a lot of room for improvement, but it’s far from dire. Wall Street finally got the message. On February 11, the S&P 500 retested the “Tchaikovsky Low” and broke it, and the bulls have been top dog ever since. On January 20, only 9% of the stocks in the S&P 500 were above their 50-day moving average. Now 90% are.

  Which brings us to this week’s Fed news. At her press conference, Chairwoman Yellen said, “What you see here is a virtually unchanged path of economic projections and a slightly more accommodative path.” In other words, rates will be lower for longer.

  Yellen gave two reasons for the policy shift. She noted that while the U.S. is getting back to normal, the rest of the world is still mired in slow growth. It’s especially hard for the Fed to raise rates when so many other central banks are cutting. The other reason is that the market has already done much of the Fed’s work for them. By that, I mean that lending standards have tightened.

  So what we’re seeing is a twofold move. First, the Fed is abandoning its strongly hawkish cash for rate hikes, while Wall Street has abandoned its very strongly dovish outlook for a moderately dovish outlook. The two-year yield, in fact, is now back up to 0.87%, and traders think there’s a 40% chance of a June hike. What a difference one month makes!

  Why does this matter for stock investors? It all comes down to math. If investors can get stiffer competition from fixed income relative to stocks, stocks will go down to compensate. Capital always goes to wherever it’s treated best.

  Let me explain why the Fed’s move this week is very good for us. In addition to the policy statement, the Fed also updated its economic projections. In December, the FOMC expected that they would be raising rates four times in 2016, and another four times in 2017. The median projection thought rates would be around 2.5% by the end of 2017.

  This week’s projections are far more realistic. A majority of members think rates will be under 2% by the end of next year. Given the Fed’s outlook for inflation, which hasn’t changed, that would mean that the Fed thinks real rates will still be negative 21 months from now. That’s amazing, and it’s a very strong signal for investors that stocks are still your best bet. Equities love easy money.

  The Fed sent us a strong signal to stick with stocks, and the economy is still on the rise. Now let’s look at a surprising trend: the quiet emergence of inflation.

  Is Inflation Coming Back?

  On Wednesday morning, a few hours before the Fed’s announcement, the government released the latest CPI report. For February, consumer prices fell by 0.2%, but much of that was due to lower energy prices.

  In this case, it’s important for us to look at the “core rate,” which excludes volatile food and energy prices. We’re not ignoring these costs—obviously, they are an important part of a household’s budget. But food and energy prices can be subject to transient factors like a supply disruption. What we want to know is, what’s the broader trend of consumer prices?

  For February, core prices rose by 0.3%. This is the second month in a row in which core prices have run hot. Here’s some context: of the last 117 months, February had the fourth-highest core inflation, while January had the highest. Together, core inflation has annualized about 3.5% this year.

  
  To be sure, that’s hardly a lot of inflation. People who remember the 1970s surely know what I mean. But it could be evidence that the economy has turned a corner. Companies now finally have some latitude to raise prices, but they’ll have to raise wages as well. When there are millions of Americans out of work, it’s easier to keep a lid on wage hikes. Now that the labor market is getting tighter, employers have to be more accommodating. This also may suggest that the lower labor-force-participation rate could be the new normal.

  The stock market has an odd relationship with inflation. Historically, inflation has been bad for stocks. In fact, the only thing that’s been worse for stocks is deflation. What the market likes best is low and steady inflation. I’ve run the numbers, and inflation is pretty benign for stocks as long as it’s below 5%. We’re still well within that boundary.

  Oil prices are also rising again. Let me rephrase that—oil is exploding higher. In the last 24 trading days, crude oil is up an amazing 53%. Personally, I’d welcome a modest amount of inflation. The key is that it steers us away from potential deflation. Once people know that prices are falling, they’ll hold off buying, and that causes prices to fall further.

  Inflation also tends to benefit price-conscious businesses. That’s part of the reason why Walmart (WMT) became so dominant during the 1970s. Shoppers knew they could find bargains while prices seemed to rising everywhere.

  I don’t want to sound the inflation alarm bells just yet, but it’s something we have to keep an eye on. Not only can inflation change the outlook for stocks, but it can alter the outlook for different kinds of stocks.

  Buy List Updates

  This is an unusual time for our Buy List because we’re in the lag period between earnings reports. Bed Bath & Beyond (BBBY) reports on April 6. Then after that, the Q1 Earnings Season will kick off with Wells Fargo (WFC) reporting on April 14.

  Speaking of Wells, I think we can expect another dividend increase from the big bank next month. Wells currently pays out 37.5 cents per share for its quarterly dividend. They can easily bump that up to 40 cents per share. If I’m right, that means WFC currently yields more than 3.2%. Wells Fargo is a buy up to $52 per share.

  I also wanted to highlight the big bounce in shares of Wabtec (WAB). The stock plunged from over $100 last year to as low as $60 a few weeks ago. Last month, the company issued fairly good guidance for this year. Since then, it’s been on an upward swing. Since February 9, WAB has gained 30%. Quality stocks go down, but value eventually shines through.

  That’s all for now. Next week is the final full week of the first quarter. On Monday, we’ll get the report on existing-home sales followed by the new-home sales report on Wednesday. The durable-goods report is on Thursday. On Friday, we’ll get the second revision to Q4 GDP. The initial report showed growth of 0.7% which was later revised to 1%. 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

• Morning News: March 18, 2016
  Eddy Elfenbein, March 18th, 2016 at 7:04 am

  Eurozone Core Inflation Revised Up, Helping Euro to Climb

  Turns Out a ‘Lie’ Lurked Beneath the Bookends of the BRICS

  Attackers Fire Rockets at Gas Facility in Algerian Sahara

  Mozambique’s Bondholders Eyeing Gas Riches Back Exchange Offer

  Dow’s Freakish Bounce Makes Investors Whole, Can’t Erase Doubts

  GAO Investigator Says Federal Reserve Review May Involve Other Regulators

  As U.S. Ports Go, So Goes the U.S. Economy

  Baidu to Test Autonomous Cars in the U.S.

  TransCanada Locks in Growth With $10.2 Billion Pipeline Deal

  SEC Says Amazon Should Allow Shareholder Vote on Gender Pay

  Adobe Beats Estimates as Demand Surges for Cloud Services

  Tencent’s Earnings Show the Strength of the Chinese Consumer

  JPMorgan increases Stock Buyback Program by Up to $1.88 Billion

  Roger Nusbaum: Your Strategy Will Sometimes Lag and That’s OK

  Jeff Miller: A Bear Market Rally?

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• Morning News: March 17, 2016
  Eddy Elfenbein, March 17th, 2016 at 7:05 am

  Abe Coalition Ally Says Premier Shouldn’t Back Down on Tax Rise

  Billionaire Li Ka-shing Says China Property Prices `Reasonable’

  Swiss Central Bank Holds Negative Rates Steady

  Norway’s Central Bank Cuts Key Rate, as Expected; Sees Further Cut

  Dollar Swoons as Fed Scales Down Rate Hike Forecasts

  The Other March Madness: What the IRS Thinks of Your Bracket

  Oil Investors See $7.4 Billion Vanish as Dividends Are Targeted

  How GE Exorcised the Ghost of Jack Welch to Become a 124-Year-Old Startup

  Lufthansa Shares Fall After Airline Warns of Slower Earnings Growth

  Investors Shrug as China’s State Press Slams Alibaba for Fraud

  Tencent’s Profit Misses Estimates as Video Content Costs Climb

  GlaxoSmithKline CEO Andrew Witty to Retire in March 2017

  Toshiba Gets $5.9 Billion Deal to Sell Medical Unit to Canon

  Do You Hate Tying Laces? Nike Has A Solution For You!

  Coal’s ‘Last Man Standing’ Dragged to the Brink of Bankruptcy

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• The Fed’s Policy Statement
  Eddy Elfenbein, March 16th, 2016 at 2:00 pm

  The Federal Reserve has left interest rates unchanged. Here’s the policy statement:

  Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

  Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

  In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

  Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

  Here are the updated projections.

• The Fed Has Been Cutting Real Rates
  Eddy Elfenbein, March 16th, 2016 at 11:06 am

  That’s a provocative title, but I’ll stand by it. If we look at the real Fed funds rate — the overnight rate adjusted for core inflation — then the Federal Reserve has been slightly lowering interest rates not increasing them.

  The Fed’s one modest hike has been completely swallowed up by the recent rise in core inflation.

• Core CPI Is Finally Running Hot
  Eddy Elfenbein, March 16th, 2016 at 9:10 am

  The government just released the CPI numbers for February. The headline inflation rate fell 0.2% last month, but the “core rate” came rose by 0.3%. Over the last year, core inflation has risen by 2.33% which is the highest since September 2008.

  Of the last 117 months, this month’s Core CPI was the fourth-highest. Last month’s was the highest.

  Update: Capacity utilization came in at 76.7%, which is down 0.4%, and industrial production fell 0.5% last month.

• Morning News: March 16, 2016
  Eddy Elfenbein, March 16th, 2016 at 7:07 am

  China Seeks to Avoid Mass Layoffs While Cutting Production

  Frankfurt and London Seal $30 Billion Trading Tie-Up to Counter U.S. Threat

  Europe’s New Car Sales Leaped Ahead in February

  New Guard Rises in Saudi Arabia as Oil Crisis Forces Rethink

  Federal Reserve Expected to Leave Key Interest Rate Unchanged

  Low Gas Prices Drag Down US Retail Sales in February

  U.S. NAHB Housing Index Holds at 58 in March

  Peabody Says It May Need to File Bankruptcy Amid Coal Rout/a>

  UberEats Expands in SF with All-Day-Orders from 100 Restaurants

  Santander’s U.S. Unit Misses Report Deadline Again

  Chipotle Weighs Stepping Back From Some Food-Safety Changes

  Are Drones a Useful Tool or Toys That Need To Be Regulated?

  Meet the DIY Quants Who Ditched Wall Street for the Desert

  Cullen Roche: The Single Entity Risk Problem

  Josh Brown: The Global Economy Our Next President Has to Deal With

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• The Two-Year Yield Soars Back
  Eddy Elfenbein, March 15th, 2016 at 2:33 pm

  Perhaps the big story of the investing year so far is that the consensus went from expecting several rate hikes this year, to expecting none, and now back to expecting some.

  That’s probably best captured by looking at the two-year yield since the start of the year.

  

  The Fed meets today and tomorrow. I don’t expect any hikes, but the odds for a June hike are about 50-50. A month ago, the odds were 2%.

• Retail Sales Fell Last Month
  Eddy Elfenbein, March 15th, 2016 at 12:40 pm

  I had hoped to see a rebound in consumer spending, and a subsequent uptick in retail sales. No such luck. Retail sales fell 0.1% last month.

  The 0.1 percent decline in purchases followed a revised 0.4 percent January decrease, Commerce Department figures showed Tuesday. Sales excluding gasoline rose 0.2 percent in February, reversing the previous month’s retreat.

  The decrease in purchases, which included auto dealers, department stores and furniture outlets, showed Americans were salting away money saved at the gas pump amid volatile financial markets. The disappointing reading on the biggest part of the economy comes as Federal Reserve officials meet to gauge whether growth is strong enough to eventually warrant another increase in interest rates.

  The retail report topped expectations. The key is that after we exclude gasoline, we’re still seeing an increase in retail sales.