Archive for June, 2016

  • Morning News: June 14, 2016
    , June 14th, 2016 at 7:18 am

    Central Banks And Markets On Accommodative Juice – Commodities To Rally

    Brexit’s First 100 Days Promise Chaos, Fear, Damage Limitation

    IEA Sees Oil Market Balance in 2016, Surplus to Re-Emerge Next Year

    Microsoft Buys LinkedIn for $26.2 BIllion

    Why Big Profits On Gun Stocks May Be In the Past

    McDonald’s Return to Chicago Defies City’s Financial Troubles

    New Valeant CEO Meets Investors as Doubts Grow About Drug Company

    Alibaba’s Jack Ma: Better-Than-Ever Fakes Worsen Piracy War

    NXP Semiconductors to Sell Standard Products Unit for $2.75 Billion

    EU Set to Clear Unconditionally Marriott, Starwood Deal

    Quicken Founder and Warren Buffett Have Ties Beyond Yahoo Deal

    Josh Brown: Brexit “Remain” Vote as Market Catalyst

    Roger Nusbaum: Rate Hike This Week Off The Table (Probably…)

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  • John Oliver on Retirement Plans
    , June 13th, 2016 at 6:02 pm

  • Microsoft to Buy LinkedIn
    , June 13th, 2016 at 11:19 am

    Microsoft (MSFT) is shelling out $26.2 billion to buy LinkedIn. The deal is all cash, and Microsoft is paying $196 per shares for LNKD. That’s a 50% premium from Friday’s close, but it’s well below LNKD’s high of $276.18 from February 2015.

    Microsoft said LinkedIn will “retain its distinct brand, culture and independence,” with Chief Executive Jeff Weiner remaining at the helm, reporting to Microsoft CEO Satya Nadella. The deal, the largest acquisition ever for Microsoft, is expected to close within the year.

    The companies see cost savings of about $150 million a year by 2018. LinkedIn would be required to pay a $725 million breakup fee if it backs out of the deal.

    Microsoft believes the acquisition will expand the market for both LinkedIn and Microsoft’s Office products. The software giant has made a significant push in the past few years to make its products more connected and wants to use data to make them more intelligent. LinkedIn’s vast network offers data that could help.

    Microsoft may find ways to generate revenue from LinkedIn’s professional network that LinkedIn couldn’t independently, said Stifel Nicolaus & Co. analyst Brad Reback.

    Shares of Microsoft dropped to $49 this morning but have since rallied to about $50.50.

  • The Fed Debates Knut Wicksell
    , June 13th, 2016 at 10:37 am

    wicksell-TT

    The Federal Reserve is currently debating the natural interest rate, a concept developed by Knut Wicksell, a Swedish economist who died 90 years ago.

    In today’s Wall Street Journal, Harriet Torry writes:

    While Federal Reserve officials debate when to next raise short-term interest rates, they are also wrestling with the question of how high to lift them in coming years.

    Signs point toward the new normal being much lower than in the past, which has broad implications for when the Fed should tighten monetary policy, how quickly, and how far.

    Fed officials disagree about their likely end point, in part because they are struggling to understand why another underlying interest rate—the mysterious natural rate—has fallen in recent years. And for that many are turning to the musings of Knut Wicksell, a Swedish expert on the subject who died 90 years ago.

    According to the textbooks, this so-called natural rate is the inflation-adjusted rate that’s consistent with the economy operating at its full potential, expanding without overheating. Also known as the equilibrium or neutral rate, it balances savings and investment.

    The natural rate can’t be observed directly; the Fed knows it has been reached only by how the economy responds. “It’s like discovering Pluto: you can only see the effect of the gravitational pull,” said Eddy Elfenbein, an investor and blogger at the site Crossing Wall Street, comparing it to the dwarf planet whose existence was inferred from the orbits of Uranus and Neptune.

    The Fed meets again this week, and they’ll update their forecasts. Within the forecasts, they’ll provide a long run outlook for interest rates which can be implied, to some degree, as to being the Fed’s estimate for the natural rate.

    In March, the Fed saw long-run real rates at 1.25%. That’s below 2% which had been assumed for many years.

    Most economists figured the natural rate was around 2% just before the financial crisis. Today, seven years after the recession, most estimates are around or just below zero.

    “We’re seeing no pickup, none whatsoever, in the natural rate even as the economy has gotten back to full strength,” John Williams, the San Francisco Fed president who has spent years studying it, said in a recent interview with The Wall Street Journal.

    This implies the central bank won’t be moving its benchmark federal-funds rate up much from its current level between 0.25% and 0.50% over the next few years. This, in turn, means lower rates for borrowers and lower returns to savers.

    Policy makers are likely to leave their benchmark rate unchanged Wednesday at the conclusion of their two-day policy meeting, and could consider moving in July or September if the economy improves. They also will release Wednesday new projections for where they think the rate will rest in the long term.

    No one knows where the natural rate is but we know it’s low. Very low.

    “I think the current level of neutral or normal rates is pretty low,” Fed Chairwoman Janet Yellen said in Philadelphia last week. She expects it will rise over time, but said “that is something we’re uncertain about and have to find out over time.”

    Economists have offered several theories for why the natural rate has fallen. Former Fed Chairman Ben Bernanke has cited a glut of savings world-wide. Harvard University economist Lawrence Summers blames ‘secular stagnation,’ or a chronic shortfall in investment demand.

    Ms. Yellen has said temporary headwinds that have restrained growth since the financial crisis may be responsible, such as economic uncertainty, a strong dollar, and slower growth of productivity and the labor force.

    Wicksell has been in vogue lately.

    For guidance Fed officials have been revisiting the work of Mr. Wicksell, a famed Swedish economist who did much of the seminal thinking on the subject more than a hundred years ago. Speeches by senior policy makers, including Ms. Yellen, have referenced Mr. Wicksell five times in the past year alone, and Mr. Bernanke has blogged about the Swede’s ideas about the relationship between interest rates, economic growth and inflation.

    Mr. Wicksell characterized the natural rate of interest as “a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them.” But the natural rate isn’t observable and depends on “a thousand and one things which determine the current economic position of a community,” and those factors—such as productivity, unemployment, and technological and demographic change—are constantly in flux, he said.

  • Gun Stocks Soar
    , June 13th, 2016 at 10:22 am

    Strong opens for Smith & Wesson (SWHC), and Sturm Ruger (RGR):

    big06132016

  • Morning News: June 13, 2016
    , June 13th, 2016 at 7:29 am

    Brexit: Britain Leaving the EU Could Be A Messy Divorce

    Will MSCI Hand China a Game Changer?

    China Car-Sales Growth Reaches Five-Month High

    Fed Decision Makers Wrestle With So-Called Natural Rate

    Which Labor Market Data Should You Believe?

    There’s a Seismic Change Coming to Money Markets

    Treasuries in Best Run Since February as Rate Outlook Shifts

    Pew’s Nick Bourke Weighs In on New Payday Loan Regulations

    Symantec Splurges $4.6 Billion On Blue Coat

    DiDi Chuxing Bags $600 Million From China Life

    China Spent $500 Billion to Maintain Confidence in Renminbi

    Gas Is Going Up, But Maybe Not Enough

    Silicon Valley’s Audacious Plan to Create a New Stock Exchange

    Jeff Miller: The Fed, Brexit and the Markets

    Cullen Roche: Three Things I Think I Think – Weekend Edition

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  • CWS Market Review – June 10, 2016
    , June 10th, 2016 at 7:08 am

    “Don’t gamble; take all your savings and buy some good stock and hold
    it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

    Last week, we got a terrible, lousy, awful jobs report, and that was a good thing. Not for workers, of course, but it’s a good thing for investors because it most likely put the kibosh on the Federal Reserve’s wrong-headed plan to hike interest rates next week.

    Janet Yellen and her friends at the Fed had been dropping strong hints to anyone and everyone that the Fed wants to raise rates, and they want to do it soon. As I explained last week, raising rates now is a bad idea, which, unfortunately, isn’t a reason for the Fed not to do it. But then the May jobs report came along and said that only 38,000 net new jobs were created last month. That was less than one-fourth of expectations! Yet the bad news may have saved us. Hopefully, some folks inside the Fed are reconsidering their plans.

    In this week’s CWS Market Review, I’ll explain what the market’s shakeout means for us. Every investor needs to understand that the stock market has shifted toward long-neglected economically cyclical stocks. Later on, I’ll highlight some good news from our Buy List. As expected, CR Bard raised its dividend for the 45th year in a row. There aren’t many stocks that can say that. CR Bard is now a 20% winner for us this year. Before we get to that, though, let’s take a closer look at the latest hijinks on a certain street in lower Manhattan.

    The Big Chill Comes to Wall Street

    The stock market has been unusually happy lately despite many reasons to be fearful. On May 19, the S&P 500 closed at 2,040.04 which made the index just slightly red for the year. That must have been the signal the bulls had been waiting for, because the S&P 500 has gradually marched higher ever since.

    On Wednesday, the S&P 500 closed at 2,119.12 for its highest close since last July. In fact, we’re inching ever closer to 2,130, which is the all-time closing high reached a little over one year ago. But don’t forget dividends! Looking at the S&P 500 Total Return Index, which includes dividends, we’re already at a new all-time high.

    What’s interesting about this recent rally is how gradual it’s been. There really haven’t been major upsurges. In fact, the S&P 500 has gone a full nine weeks without a single day of losing more than 1%. That ain’t how this year started. Take a guess how many days had 1% drops during the first nine weeks of this year? I’ll give you a hint—the answer is 14.

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    It’s not just the subdued nature of the rally; I’ve also been struck by its content. I touched on this subject last week, but it’s worth exploring in a little more detail. Since February, the stock market has been led by economically cyclical stocks. These are the types of businesses whose fortunes are closely tied to the economic cycle. Think construction, transportation, manufacturing, chemicals, etc. It’s been a long time since cyclical stocks were popular.

    Investors need to understand that a cyclical stock isn’t in any fundamental sense better or worse than a defensive stock. To every thing, there is a season, and cyclical stocks tend to move in, well…cycles. Since February, the market has rewarded cyclicals.

    Defensive sectors are areas like Consumer Staples and Healthcare. When I say cyclical stock, I generally mean stocks from three sectors—Energy, Materials and Industrials. The first two are largely impacted by commodity prices, and the rebound in oil has been quite remarkable. This week, oil broke $50 per share. Black gold has nearly doubled off its February low. I’m not optimistic on the long-term outlook for oil. (Don’t take my word for it: check out the dumpster fire that used to call itself OPEC.) But I wouldn’t be too confident to call for a top in oil.

    Not surprisingly, Energy stocks have been some of the top performers this year. ExxonMobil, for example, is up nearly 20% this year, while 3M, your classic Industrial, is up nearly 15%. These stocks had been laggards for so long.

    Our Buy List, as a whole, is slightly weighted against the cyclical sectors. That’s not a macro call on my part. It’s just how things worked out. It’s nearly impossible to be completely neutral in all sectors. Just about any portfolio is going to lean toward some sectors, but our minor defensive bias is impacting our performance this year. The effect isn’t dramatic, but it’s clearly at work.

    Before their sudden burst of popularity, the Energy and Materials sectors had been lagging the overall market for five years. In fact, that preceded the meltdown in commodity prices. It also could have reflected a growing realization that the current recovery is unusually subdued. Whatever the reason, these cycles constantly flow within the markets, and it’s important to understand why.

    The popularity of cyclical stocks may also suggest that the economy is doing better than people realize. The latest forecast from the Atlanta Fed sees Q2 GDP coming in at 2.5%. We’ll get our first look at Q2 GDP in late July. In one more month, second-quarter earnings season starts, and we’ll get a look at how well Corporate America did during the spring. This very likely will break our six-quarter streak of falling operating earnings.

    According to S&P, Wall Street expects the S&P 500 to report earnings of $28.43 (that’s the index-adjusted number). That would be an increase of 8.8% over last year’s Q2. However, the forecast for Q2 has been pared back by 8.3% since the start of the year. Analysts usually start out with high forecasts and then cut them as earnings day gets closer. It will be very nice to put this “earnings recession” behind us.

    Now let’s circle back to the jobs report. On Friday, the Labor Department said that only 38,000 net new jobs were created last month. Wall Street had been expecting 162,000. This wasn’t just a miss—it was an historic facepalm! This was the worst jobs report in more than five years.

    Going into the jobs report, the futures market put the odds of a June rate hike from the Fed at 30%. Now that’s down to 3.8%, which is probably 3.79999% too high. Still, the Fed is talking tough. It’s hard for me to see the need for a rate hike since GDP growth is pretty sluggish and there’s not much in the way of inflation.

    After the jobs report came out, there was a pronounced shift within interest rate-sensitive stocks. Areas with high-dividend yields like Utilities gapped up, while banks and other financials took a hit. Gold had one of its best days in weeks, and the U.S. dollar suffered its worst drop all year.

    I’m still concerned about inflation, but so far, the evidence just isn’t there. If that changes, I think the Fed would be justified in raising interest rates. But it wouldn’t take much from the Fed to flatten out the yield curves since long-term rates are so low. In fact, the bond market rallied and has continued to rally. The 10-year yield just closed at 1.68%, which is a four-month low, and it’s very close to being the lowest level in more than three years.

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    Meanwhile, Mario Draghi at the ECB has started buying corporate bonds. The European economy is still a mess, and the authorities there are pulling out all the stops. Bond yields in the Old World are falling to microscopic levels. In Germany, the 10-year yield is getting very close to 0%. Switzerland said it plans to issue a 13-year bond with a coupon of 0%. In the U.K., their 10-year bond fell below 1.25%, which is a record low. Now there are reports of foreign investors buying up U.S. junk debt. There’s simply no other place to go.

    If you had decided to sit out stocks this year and plant your money in long-term Treasuries, you’d be enjoying a nice lead over the S&P 500. But going forward, I think the stock market is much safer. The S&P 500, as a whole, now yields about 50 basis points more than the 10-year Treasury. And don’t forget an important fact about fixed income: the income is fixed. That’s not the case with equities which can raise their dividends. Speaking of which, let’s turn to this week’s news from CR Bard.

    CR Bard Raises Its Dividend for the 45th Year in a Row

    On Wednesday, CR Bard (BCR) announced that it’s raising its quarterly dividend from 24 to 26 cents per share. (In last week’s issue, I predicted 27 cents.) This is the 45th consecutive year in which Bard has raised its dividend. There are only a handful of publicly traded stocks that can boast track records like that.

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    The company said that the dividend is payable on July 29 to shareholders of record at the close of business on July 18. Bard only pays out a modest portion of its profits as dividends. For the average stock in the S&P 500, the average payout usually runs around 33%. For Bard, it’s less than 10%. Going by Thursday’s closing price, Bard now yields 0.31%. That’s puny, but Bard can easily afford to keep raising its dividend for many years to come.

    The company also announced a new $500 million share-repurchase authorization. This is on top of the current program, which has $205 million left in it. Shares of BCR are up 20% for us this year. This week, I’m lifting my Buy Below on CR Bard to $231 per share.

    Biogen Drops 12.8% after MS Study

    One of my favorite biotech stocks, Biogen (BIIB), got dinged hard this week after the company said that Opicinumab, one of its experimental drugs related to multiple sclerosis, had performed poorly during mid-stage tests. There’s been a worry on Wall Street that Biogen has a thin pipeline, and this news didn’t help. The stock dropped 12.8% on Tuesday. This is especially unfortunate because the stock had been trending higher.

    Opicinumab isn’t dead yet, but the drug needs more time for trials. Biogen wasn’t in any sense staking its future on Opicinumab, but it’s not a pleasant setback. If you recall, Biogen said it’s going to focus on its neurology business, and they plan to spin off their hemophilia drugs.

    While this week’s news is unfortunate for Biogen, but they still have a lot going for them. Let’s remember that the last few earnings reports have easily beaten expectations. The lower share price also means the stock is going for less than 13 times next year’s earnings estimate. Plus, we have the possible spinoff coming later this year, or in early 2017. Don’t be scared out of Biogen. The company has a bright future.

    That’s all for now. Next week is the big Fed meeting. The FOMC gets together on Tuesday and Wednesday. The policy statement will come out at 2 p.m. on Wednesday, which will be followed by a press conference from Fed Chairwoman Janet Yellen. The Fed members will also update their economic projections (the “blue dots”). I’m not expecting any change in rates, but market watchers will pore over every letter in the statement, looking for clues. 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 10, 2016
    , June 10th, 2016 at 7:04 am

    Bund Brexit Rally Puts Zero Yield Firmly In Sight

    How China’s War on Dissenting Views Spills Over Into Pop Music and French Cosmetics

    Bullish Oil Sentiment Intact After Government Report

    Drop in Jobless Claims Suggests Layoffs Remain Low

    Restrictions on Payday Loans Hurt the Poor

    The End of the U.S. Manufacturing Renaissance (Such as It Was)

    Adapting to Modest Oil Prices, BP Spins Off Norway Business Into New Venture

    Apple Plans to Sell Excess Rooftop Solar Energy From New Home

    Is Tesla Trying to Keep Owners From Reporting Vehicle Safety Problems?

    2 Reasons Chipotle’s Stock Tanked on Thursday

    Line Corp Plans Dual Tokyo, New York IPO, Valuing Firm at $5.5 Billion

    Mitsubishi Motors to Hire Auditor to Oversee Errant Tech Unit

    Viacom Rumblings: Stacking the Board and Maybe Remerging With CBS

    Cullen Roche: Beware of Guru Worship – George Soros Edition

    Jeff Miller: Finding the Best Contrarian Stocks

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  • Will Gold Break Back above $1,300?
    , June 9th, 2016 at 9:43 am

    My ear thingie pops out at 2:01. I believe I handled it well.

  • Morning News: June 9, 2016
    , June 9th, 2016 at 7:39 am

    Brazil Benchmark Interest Rate Holds As Inflation Continues To Weigh Heavily On Beleaguered Economy

    Yen Steady, Shrugs Off Soft Manufacturing Report

    Russia Unveils New Passenger Plane It Says Will Rival Boeing, Airbus

    Putin’s Core Support Begins to Waver

    Weighted by Debt, Puerto Ricans Divided Over Federal Oversight

    S&P 500 Up for Third Straight Session, Inching Toward Record High

    DONG Energy Shares Jump After Biggest European IPO This Year

    A Bearish George Soros Trades Again

    What You Need to Know from the New CBO Income Figures

    Morgan Stanley Fined $1 Million for Client Data Breach

    More Reasons Why Silver Wheaton Will Keep Soaring

    Apple Case Against Samsung Should Go Back To Lower Court: Justice Department

    Lawyers Ordered to Testify on Client’s Tax Evasion Case

    Josh Brown: S&P Financials Down 30% Over the Last Decade

    Roger Nusbaum: Closed End Fund Palooza

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