Archive for June, 2016

• Morning News: June 20, 2016
  Eddy Elfenbein, June 20th, 2016 at 7:01 am

  Could a “Brexit” Weaken Europe’s Ability to Tackle Global Poverty?

  Modi Camp Critiques Rajan While Moving to Calm India Investors

  Rosneft on Putin’s Agenda in China

  Hong Kong Leader Vows Action After Bookseller Recounts Ordeal in China

  Oil Rallies as Fears Over Brexit Abate

  The Fed Totally Surrendered

  LinkedIn Gets Lucky

  A Final Checklist for Costco’s June 20 Credit Card Switch

  In the Birthplace of U.S. Oil, Methane Gas Is Leaking Everywhere
  

  Comcast CEO Prepares His Netflix Killer for an Olympics Showcase

  Reckoning Near for Merger of Energy Transfer and Williams

  BP Approves Investment in Egypt Gas Field 15 Months After Discovery

  Saudi Unit of Auditor Deloitte Penalized by Market Regulator

  Josh Brown: Future of FinTech: Millennials and the Great Wealth Transfer

  Jeff Miller: What Does The Brexit Vote Mean For Financial Markets?

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• CWS Market Review – June 17, 2016
  Eddy Elfenbein, June 17th, 2016 at 7:08 am

  “He that can have patience can have what he will.” – Benjamin Franklin

  At the end of this month, the U.S. economic recovery will turn seven years old. (They grow up so fast!) Almost constantly for seven years, we’ve heard folks wonder, “When will interest rates finally return to normal?”

  Yet every single prediction for higher rates has been wrong. All of them—and there have been many. At some point, you have to draw the line and say that seven years is long enough. What we have now is normal. It’s the new normal.

  

  This week, the Federal Reserve once again decided against raising interest rates. That was hardly a surprise. There’s now a reasonable chance the central bank may go all year without touching interest rates. We’ve seen a big disconnect between what the Fed’s been saying and what the Fed’s been doing. Hawkish talk and dovish walk.

  In this week’s CWS Market Review, we’ll take a closer look at the Fed’s plans for 2016 and what they mean for investors. We also had some exciting news for our Buy List. Microsoft announced that it’s buying LinkedIn for $26.2 billion. We also have an upcoming earnings report from Bed Bath & Beyond. The home-furnishings stock has been beaten up, and I think it’s a good value here. But first, let’s look at what the Fed didn’t do and why they didn’t do it.

  Welcome to the New Normal

  If you look at the Fed’s projections from three years ago, they predicted that interest rates would be a lot higher by 2016. Yet here we are, and interest rates are still just above 0%. As low as they are here, rates are even lower in Europe. The 10-year bond in Germany is negative. This week, the Swiss Central Bank decided to leave rates unchanged at, hold on, -0.75%! Germany has negative interest rates out to ten years. Japan’s are negative out to 15 years and Switzerland’s are out to 30 years!

  The Federal Reserve met on Tuesday and Wednesday of this week. On Wednesday afternoon, they released their latest policy statement which said they’re keeping interest rates unchanged. Earlier this year, Janet Yellen and other Fed members expressed their belief that rates need to go higher at some point. They’ve always left wiggle room, saying that they’re going to be “data dependent” and such. But whenever the time has come to strike, the Fed has always seemed to pass. They’ve only hiked once, and that was in December.

  Two weeks ago, we got the May jobs report, and it was a bust. That convinced me, and a lot of folks besides, that the Fed wasn’t about to raise rates. The good news for the economy is that the unemployment rate is down, but there are still large gaps. Wage growth, for example, has been pretty weak. Business investment isn’t terribly strong. The economy probably did better in Q2 than it did during Q1, but it’s hard to make an argument that the economy is overheating.

  Just look at inflation. This week, we got the latest CPI, and it showed that inflation is still well contained. Consumer prices rose by just 0.2% last month, which was below what economists had forecasted. The core rate, which ignores food and energy prices, also rose by 0.2%. Inflation is hardly a problem.

  Now comes the interesting part. In addition to the Fed’s policy statement, the Fed members also updated their economic projections. I should add that the Fed has a pretty lousy track record, but it’s interesting to see what they’re thinking.

  There are 17 members who provide forecasts. Of them, six see the Fed raising interests just once this year, while nine members see two rate hikes. Not that long ago, the Fed was expecting four rate hikes this year, plus another four next year. How times have changed. With every meeting, it seems, the Fed gradually cedes more ground to reality. As I said, hawkish talk and dovish walk.

  What struck me is that the Fed sees the real Fed Funds rate, meaning adjusting for inflation, as being negative through 2017. That means real rates are expected to be negative for another 18 months. At least!

  The 10-Year Treasury Yield Plunges

  The bond market responded by going absolutely bonkers. The yield on the 10-year Treasury got as low at 1.52%. That’s astounding. Think of what the market is saying here. You can loan your money to Uncle Same for a decade, and in that time, you’ll make a total return of 15%. That’s pathetic.

  The 10-year bond yield reached its multi-decade low four years ago when it touched 1.39%. At the time, I wondered if that marked the end of a 30-year bull market for bonds. By late 2013, the yield soared all the way up to crazy, insane, nosebleed levels. By that, I mean 3%. (Three whole percent!)

  

  Here’s an interesting tidbit: The 10-year yield touched its generational low the same day Mario Draghi made his famous proclamation that he’ll do whatever it takes to preserve the euro—“believe me, it will be enough.” Four years later, there’s a couple trillion dollars’ worth of negative-yielding bonds floating around, and Draghi is now buying corporate bonds.

  Let’s break down some math. The 10-year TIPs (inflation-protected bonds) yield a minuscule 0.15%. The regular 10-year yield closed Thursday at 1.564%. Compare that to the S&P 500, which has an indicated dividend yield of 2.18%, and that’s for the whole index. Remember that 85 stocks (or 17%) in the S&P 500 don’t even pay a dividend. Yet the financial markets are offering 60 basis points extra to take on stocks compared with bonds, and that ignores the big fact that stocks can raise their dividends. It’s right there in the name; fixed income is fixed.

  The bottom line is that the market is asking you—begging you—to ignore bonds and lock in blue-chip stocks for the long term. There’s simply nowhere else to go.

  I want to reiterate another point I’ve made a few times, that the market has shifted toward cyclical stocks. That means stocks like Transports, Industrial, Chemicals and Energy. Unfortunately, our Buy List is underweighted in those sectors, so we haven’t ridden the recent rally as much as I would have liked.

  For the time being, we should expect interest rates to stay near 0%. This is the new normal. I’m not expecting things to go back to where they were. The larger question, and one that I’m not equipped to answer, is, “Have we reached the limit of what monetary policy can do for the economy?” The Fed is powerful, but there are things even beyond their control. Perhaps the U.S. economy needs deep structural changes that can be addressed with free money. Until then, we should need Mr. Franklin’s advice and be patient.

  Microsoft Buys LinkedIn for $26.2 Billion

  Microsoft (MSFT) shocked us this week by announcing that it’s buying LinkedIn (LNKD), the resume folks, for $26.2 billion. That works out to $196 per share for LNKD, which is a 50% premium. That sounds like a lot, but it’s still well below LinkedIn’s peak price of $276 per share.

  This is a bold move for Microsoft. It’s their largest deal ever. The software giant actually had the chance to buy LinkedIn more than 10 years ago for $250 million. Critics point out that this is an expensive buy, and I have to agree, but I’m leaning towards liking this deal. Microsoft has been rightly criticized for a string of lousy deals, but those were done by Steve Ballmer, the former CEO. Satya Nadella, the current CEO, seems to have a more cautious approach.

  

  The deal will have almost no impact on Microsoft’s earnings this year or next. After that, it should start giving a boost to MSFT’s bottom line. Microsoft said they intend to finance the deal with debt. Moody’s said that they’re going to review Microsoft’s AAA-rating. My response: Who cares if they lose their AAA rating? They’re sitting on $117 billion in cash and liquid assets (much of that is outside the U.S.)

  This ties in to what I said earlier about bonds. I imagine there are lots of European investors who are getting nothing on their bonds that would love to load up on some newly minted Microsoft bonds. Mr. Nadella can do them the favor of borrowing their money on the cheap. Microsoft still has its gigantic $40 billion share-repurchase authorization that it’s planning to wrap up by the end of this year. In other words, Microsoft has no problems with cash flow.

  Shares of Microsoft dropped to $49 after the deal was announced, but have since rallied back to $50.39. I’m going to give Nadella the benefit of the doubt here. Look for a good earnings report from Microsoft on July 19. The shares currently yield 2.86%.

  Bed Bath & Beyond Earnings Preview

  We’re in one of the quiet stretches for our Buy List earnings reports. There’s only one earnings report due for the month of June: Bed Bath & Beyond (BBBY). The company is scheduled to report its fiscal Q1 earnings on Wednesday, June 22.

  Shares of BBBY have been very unpopular lately, and I think the selling is overdone. The last earnings report wasn’t so bad. Earnings came in near the top of expectations. Same-store sales adjusted for currency grew by 2.1%. That’s not bad at all.

  A big problem for Bed Bath is that their margins are getting squeezed. That’s a tough headwind for any business. The company made $5.10 per share last year. They said they expect earnings to be near the high end of their range of $4.50 to $5 per share. That means the stock is going for less than 10 times this year’s earnings.

  Wall Street expects Q1 earnings of 86 cents per share which is down from the 93 cents per share they made in last year’s Q1. Bed Bath also recently initiated a quarterly dividend of 12.5 cents per share. They also love to buy back enormous amounts of their own stock.

  For all the talk of Bed Bath being stuffy and insular (which is fair), they struck back this week by announcing the purchase of One Kings Lane, an online retailer. One Kings Lane had been valued at nearly $1 billion. For a time, it was one of the hottest businesses around. They raised a ton of VC money, but weren’t able to get into the big leagues. Now Bed Bath has stepped in with an undisclosed offer. By all measures, BBBY is a cheap stock.

  That’s all for now. We’re nearing the end of the first half of 2016. Next week, we’ll get reports on new and existing home sales, plus orders for durable goods. But the big event for world finance will be the Brexit vote on June 23 when Britain decides if it wants to remain in the EU. Polls show that it’s very close. 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: June 17, 2016
  Eddy Elfenbein, June 17th, 2016 at 7:04 am

  The World Economy Looks a Bit Like It’s the 1930s

  Brexit Campaign on Hold for Second Day After Lawmaker Murder

  China Imposes Blackout on Hong Kong Bookseller’s Revelations

  Here Is Why The Fed Is One and Done

  The First Big Company to Say It’s Serving the Legal Marijuana Trade? Microsoft

  Revlon Agrees to Buy Elizabeth Arden

  BMW Breaks Ground on Mexican Plant

  U.S. Strikes Back at Judge’s Decision That MetLife Not ‘Too Big To Fail’

  Microsoft’s LinkedIn to Be Like Facebook for Careers, Gates Says

  Barclays Labels $1.0 Billion Lawsuit Over 2008 Fundraising ‘Misconceived’

  Pimco Cuts Jobs After Decline in Assets Since Gross’s Exit

  Mitsubishi Motors Plans One-Time Loss for Fuel-Economy Scandal

  HSBC to Pay $1.58 Billion to Settle Subprime Suit

  Howard Lindzon: Identity is Impossible to Value….Why Microsoft Bought LinkedIn and the Multiplier Effect is GOOD

  Roger Nusbaum: Prepare For A Bear

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• Investments for an Uncertain Market
  Eddy Elfenbein, June 16th, 2016 at 1:12 pm

• Another Reason to Buy Gold?
  Eddy Elfenbein, June 16th, 2016 at 11:09 am

• Morning News: June 16, 2016
  Eddy Elfenbein, June 16th, 2016 at 6:55 am

  Putin’s Reliance on American Commerce Has Never Been Greater

  Jordan Puts SNB on Alert for Turmoil as Brexit Probability Rises

  China Dumping More Than Treasuries as U.S. Stocks Join Fire Sale

  Yellen Says Forces Holding Down Rates May Be Long Lasting

  Yes, Obamacare Premiums Are Going Up

  Shanghai Disneyland Opens Amid Rain and Pageantry

  Alibaba Not Interested in Paramount, Prefers Licensing Deals

  UberChina-Didi Fight Drives Merger Talk

  Visium Hedge Fund Managers Charged With Insider Trading

  Infiity Pharmaceuticals’ Disappointing Data

  How Will The Sale Of LinkedIn Affect Social Media’s Future?

  Can Netflix Survive in the New World It Created?

  Joshua Brown: This Is a Low-Flying Panic Attack

  Winning by Playing Small Ball

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• July Rate Hike off the Table?
  Eddy Elfenbein, June 15th, 2016 at 5:34 pm

• Today’s Fed Statement
  Eddy Elfenbein, June 15th, 2016 at 2:01 pm

  No change in rates:

  Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most 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 strengthen. 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 past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

  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; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.

  Here are the current projections.

• Morning News: June 15, 2016
  Eddy Elfenbein, June 15th, 2016 at 7:30 am

  Stock Selloff Deepens as Investors Seek Safety

  Fed Faces Battle to Escape World’s Low Interest Rate Grip

  China’s Bank Lending Rebounds; Good for Growth, Bad for Risk

  Iran Said to Have Deal With Boeing to Buy Passenger Planes

  India’s Government Approves New Civil Aviation Policy

  Fund Managers Are Stockpiling Cash

  Retail Sales Rise More Than Forecast as U.S. Consumers Spend

  The 60/40 Portfolio Is Dead… And It’s Not Coming Back

  MSCI Slaps China in the Face With Index Decision

  Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven

  Microsoft – Wide Awake In Seattle

  JP Morgan Says Brexit Lead For Leave Bigger After Removing Hoax Poll

  The Deepest Money Pit Atlantic City Has Ever Seen Re-Opens This Week

  Howard Lindzon: Nobody and No Entity is Bigger than The Markets…2016 Edition

  Jeff Carter: Getting to No

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• Join Me on Thursday
  Eddy Elfenbein, June 14th, 2016 at 9:32 am

  Join me this Thursday at 4 p.m. Eastern Time. I’ll be the guest on AdvisorShares’ weekly live “Alpha Call.” You can join the call and ask me a question.

  Here are the call-in details:

  Dial 1.310.372.7549 (or 1.800.356.8278) and enter access code 176071.