Archive for July, 2016

  • Morning News: July 11, 2016
    , July 11th, 2016 at 7:10 am

    Bye-Bye Bonus: Brexit Seen Biting Profit for Years at U.S. Banks

    South Korea to Decide Soon on Whether to Suspend VW Car Sales

    Weakling Earnings Recession Is Why Nobody Pulled Cord on S&P 500

    Crude Falls on Oversupply Concern

    Hunger for Tech Startups Helps Japan’s Line Price IPO at Top of Range

    Wal-Mart’s Shipping Pass Won’t Help It Beat Amazon

    Thompson Reuters Sells IP & Science Business For $3.55 Billion

    Airbus, Boeing Get Farnborough Lift From Asian Narrow-Body Deals

    Virgin Atlantic to Buy Airbus A350 Long-Range Planes

    Nintendo Leaps 25% on Pokemon Go But The Hurdle to Killer Profits is High

    Seattle C.E.O. Who Promised $70,000 Salaries Wins Suit Filed by Brother

    Banker Sitting in U.S. Prison Has a Most Incredible Tale to Tell

    The Ugly Battle Over the Wildenstein Art Empire

    Howard Lindzon: The Markets are Speaking … Listen Up

    Jeff Miller: Will Earnings Expectations Sustain the Rally in Stocks?

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  • Close to a New ATH, but Not Quite
    , July 8th, 2016 at 5:10 pm

    The S&P 500 closed today at 2,129.90 today which is just shy of the all-time high close of 2,130.82 reached on May 21, 2015. During today’s trading, the index wandered as high as 2,131.71.

    While the fact that the S&P missed out on a record-book close by less than a point may be striking, most close-market watchers are shrugging it off.

    “It would have been bearish if we closed below the open, but I don’t think not making a high today means we won’t make one going forward,” Oppenheimer technical analyst Ari Wald wrote to CNBC after Friday’s close.

    Eddy Elfenbein, the editor of the Crossing Wall Street blog, is blunter.

    “Dude, a 1.5% rally is a failure?” he wrote to CNBC, drawing out the following stats: “All-time high weekly close. All-time high total return close. In the last eight days, we’re up 6.5%!“

    I have to agree with myself.

    Among S&P 500 sectors, the Industrials, Consumer Staples, Telecom and Utilities all reached new highs. The yield on the 10-year Treasury closed at a record low of 1.366%.

  • Profound Market Wisdom
    , July 8th, 2016 at 3:58 pm

    After weeks like this, I have to think the old guy was right.

  • June 2016 Jobs Report
    , July 8th, 2016 at 8:30 am

    The government reported that the economy created 287,000 net new jobs last month. That’s a huge number. The number for April was revised up by 21,000 while the May figure was revised down to 27,000.

    The unemployment rate is 4.9%. Average hourly earnings rose 0.1%.

    Average Hourly Earnings are growing at nearly the fastest pace in seven years.

    The stock and gold markets are both up. Bonds are rallying as well. You’d think that bonds would be down on a strong jobs number but this ties into the “term premium” rally.

  • CWS Market Review – July 8, 2016
    , July 8th, 2016 at 7:08 am

    “I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.” – Warren Buffett

    Eighty-four years ago today, the Dow Jones Industrials bottomed out at 41.22. That was an astounding 89% below its high from four years before. That was dark time for the world. Financial markets had collapsed and many people in Europe thought a solution lay in Totalitarianism.

    Fortunately in America, investor confidence returned and stock prices rose. Over the next 84 years, the Dow gained more than 43,300%, and that doesn’t include dividends. That tremendous gain happened despite recessions, panics, corrections, wars, downturns, disco, bubbles and crashes. Every single time, the market has bounced back.

    Welcome to the Post-Brexit World

    That’s a comforting thought to remind ourselves as markets continue to adjust to the post-Brexit world. Just this week, the 10-year U.S. Treasury yield plunged to an all-time low of 1.36%. As crazy as that sounds, it’s still a lot better than the yields you see in Europe because, at least, it’s a positive number. In Switzerland, the entire yield curve—all of it, from zero to 50 years out—is negative! Around the globe, more than $10 trillion in government bonds have a negative yield.

    At one point on Thursday, the S&P 500 got over 2,109. That’s nearly 6% above the post-Brexit low from seven trading days before. The Volatility Index (^VIX), which is often called the Fear Index, has nearly fallen in half since its immediate post-Brexit peak. In Britain, the pound continues to fall. The currency is hanging at a three-decade low against the U.S. dollar.

    Now Europe faces another crisis as the Italian banking sector is in free fall. The banks there are stuffed to the gills with deadbeat loans. The beautifully named Banca Monte dei Paschi di Siena, which is the oldest existing bank in the world, is in dire condition. The authorities have banned short sales of Monte dei Paschi for three months. Think about this: The bank was founded twenty years before Columbus sailed, and it can no longer stand on its own. Of course it would look especially bad for the ECB if they couldn’t stop a crisis in Italy right after British voters said they wanted no part of the EU.

    So when are rate hikes coming? That’s a good question. The futures market doesn’t see a rate hike coming from the Fed until March 2018, and that’s actually early compared with everyone else. Traders don’t expect the Eurozone to hike rates for another four years, and they don’t see the Bank of England moving until January 2022. It’s a no-rate world.

    Last month, the Federal Reserve decided unanimously to forgo raising interest rates. That was the right call. Interestingly, it was their first unanimous vote all year. The decision against raising rates wasn’t much of a surprise. But what caught people’s attention is that the Fed cited the pending Brexit vote as a reason to be cautious about the state of the economy. Now that we’re past Brexit those comments make the central bank appear prescient, which doesn’t happen too often.

    Personally, I think that’s all bogus. Here’s what really happened. The Fed got way ahead of itself in its interest rate projections. At one point, they thought they were going to hike rates four times this year plus another four times next year. The market never bought that line. But instead of admitting they had it wrong, the Fed went looking for outside events (China, Brexit) that could be blamed for increased uncertainty. It’s a disingenuous excuse to change an untenable policy.

    This week, the Fed released the minutes from their June meeting and it showed that members were clearly uncomfortable with the idea of hiking rates. The Fed meets again at the end of this month, and there’s no way they’ll touch rates.

    With the Fed on hold, the bond market has been as pleased as ever. Ten-year TIPs (inflation-protected bonds) again have negative yields. In the mortgage market, 30-year fixed-rate mortgages now average 3.41%. That’s close to a post-World War II low. Fifteen-year mortgages are averaging less than 3%. Not surprisingly, this has led to a refinancing boom as borrowers look to save on their monthly mortgage bills. It’s odd to think that a referendum vote in the U.K. could have a large impact on the U.S. mortgage market, but that’s the reality of the interconnected world we live in.

    What’s Working? The STUB Trade!

    At the end of this month, we’ll get our first look at how well the economy did during the second quarter. The estimate from the Atlanta Fed is for growth of 2.4%, but the details are pretty good. The number crunchers at the Fed project that consumer spending rose by 4.3% last quarter. That’s encouraging.

    The jobs market continues to look decent, although I’d like to see better numbers for wage growth. This week’s ISM Services report was pretty good. I’m writing this to you on Friday morning before the big June jobs report comes out. The report for May was pretty ugly and that was a catalyst for the bond market’s recent run. In fact, that helped start Wall Street’s latest love affair, the STUB Trade.

    What’s the STUB Trade? That’s the sudden rally in Staples, Telecom, Utilities and Bonds. In fact, we can mark the precise beginning of the STUB rally to April 21. Since then, the S&P 500 is up less than 3%, but the Staples ETF (XLP) is up 6.5%. The Telecom ETF (IYZ) is up 6.5%, and the Utes ETF (XLU) and the Long-Bond Treasury ETF (TLT) are both up nearly 11%. Boring has suddenly become interesting!

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    It’s an unusual market where the hottest stocks around are things like Campbell Soup (CPB), Pepsi (PEP), Kellogg (K) and Colgate Palmolive (CL), but that’s what we’re seeing. Verizon is the top-performing Dow stock this year. Of S&P 500 stocks with market caps over $120 billion, meaning the really big boys, the two best performers YTD are Verizon (VZ) and AT&T (T).

    The reason the STUBs are doing so well is that investors want to lock in those generous yields. It’s the same thing driving the refining boom. There’s even talk that the yield on the 10-year Treasury could fall below 1%. If the Fed isn’t going to raise rates, and has no plans to raise rates, anything that pays a decent yield is going to become a lot more popular.

    What’s interesting about the fall in bond yields is that it seems to be largely driven by a fall in the term premium. Let me explain. The term premium is the extra payment you get when you offer to lend your money for a longer period of time. In plainer terms, that’s why long-term mortgages have higher rates. The lender is rewarded for renting out their money for more time.

    What’s been happening is that the term premium has plunged, and that seems to account for the most of the move in bond yields. The wrinkle about the term premium is that it’s not connected to the economy. Instead, it’s driven by investor demand. That makes sense. If you’re a European investor, you might be understandably displeased with your yield options in the Old World, and you’re more than happy to ship your money off to New York City.

    The Wall Street Journal reports, “according to the New York Fed’s model, the term premium on the 10-year Treasury has fallen from 0.07 percentage points to a record low of negative 0.71 percentage points.” The Journal also notes that changes in European bonds are tracking the term premium more than Treasuries themselves. That’s a clear signal that our government debt is benefiting from a worldwide flight to safety.

    On our Buy List, the STUB Trade is helping stocks like Stryker (SYK), Fiserv (FISV) and CR Bard (BCR). While these aren’t officially in any STUB group, these stocks tend to be highly correlated with them. Stryker is now a 30% winner for us this year.

    As we get closer to earnings season, I want to highlight a few Buy List stocks that look especially good right now. With its high yield and low price, I have to mention Ford Motor (F). The automaker currently yields 4.7%. Their last earnings report crushed Wall Street’s forecast by more than 40%. I’ll again point investors toward Signature Bank (SBNY). The shares have gotten roughed up lately, but it’s a solid firm. I’m looking forward to another strong earnings report.

    Wells Fargo Earnings Preview

    Second-quarter earnings season kicks off next week. This is when investors finally get a chance to see how well their companies did during the second three months of the year. As usual, expectations have been pared back as we’ve gotten closer to earnings season.

    Next Friday, July 15, our first Buy List stock, Wells Fargo (WFC), is due to report earnings. You can skip any suspense because the big bank rarely surprises us. The last 12 earnings reports have all been between 98 cents and $1.05 per share. Remember, there are a lot of highly-paid analysts whose job it is to forecast WFC’s earnings, but all you need to do is say $1 per share every quarter and you know you’ll be pretty close.

    For Q2, Wall Street’s consensus is for $1.01 per share. That sounds about right. Wells just passed the Fed’s latest “stress test,” which means that if the world’s financial system goes kablooey again, Wells will make it out alive. Between you and me, I think these tests are a giant waste of time. The trouble isn’t the demons you’re aware of. What’s truly scary is the monsters you’re not even aware existed. The stress tests do show us what we’ve known, that Wells is a well-run outfit.

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    With the stock being down this year, it’s also no surprise that Warren Buffett said he wants the Fed’s permission to buy even more shares. Wells is already Buffett’s second-largest position. Due to share buybacks, Buffett’s personal position combined with Berkshire’s share, put the total holding over 10% ownership of Wells. Buffett has said that Wells is the single investment he would feel safest to place his entire net worth in for the next ten years. Charlie Munger, Buffett’s alter ego, said that Wells is the standard by which they judge all other investments. That’s how highly they think of WFC.

    With rates so low, this is a challenging environment for many banks. You’ll notice that every news cycle which indicates the Fed will hold off on raising rates is usually matched with banks lagging the indexes. Even though Wells will report roughly the same EPS as last year’s Q2, other big banks will probably post declines around 20%, possibly more. I should add that Wells has met or beaten Wall Street’s earnings estimate for 21 quarters in a row.

    Wells is currently going for a decent price. It’s trading at less than 11.5 times this year’s earnings. It may take some patience, but Wells is a solid investment.

    That’s all for now. Second-quarter earnings season kicks off next week. We’ll also get some key economic reports. The Fed’s Beige Book report comes out on Wednesday. That usually has a good summary of the economy broken down by region. On Friday we’ll get the latest CPI report as well as reports on retail sales and industrial production. The economy appears to be improving from its weak performance in Q1. 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: July 8, 2016
    , July 8th, 2016 at 7:03 am

    Brexit Batters UK Consumer Confidence, Retailers Worry Over Sterling

    Oil Bounces Off Two-Month Lows But Faces Sharp Weekly Loss

    Jobs Report in U.S. to Get Extra Scrutiny in Post-Brexit World

    Mester Says Fed Has Time To Weigh Next Rate Move Amid Brexit Uncertainty

    The DoJ Reportedly Has Serious Doubts About the Aetna-Humana Merger

    IRS Takes Facebook to Court, Signaling Start of Tougher Approach

    Dimon Says Brexit Could Be Reversed as Europe Fixes Region

    Dare to Dream: The Bank Mergers That Could Help Fix the Industry

    This Top Viacom Investor Says CEO Philippe Dauman’s Exit Is Inevitable

    Airbus Faces Uphill Struggle to Reach Full-Year Targets

    Gap Posts First Comparable-Sales Increase Since March 2015

    EU-U.S. Commercial Data Transfer Pact Clears Final Hurdle

    Theranos Founder, Elizabeth Holmes, Barred From Running Lab for Two Years

    How a Foreign Recession Could Cause US Stock & Real Estate Bubbles

    Jeff Carter: Why Seed or Early Stage?

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  • Morning News: July 7, 2016
    , July 7th, 2016 at 7:02 am

    Global Stocks and Sterling Bounce After Brexit Bashing

    Populist Politicians Take On Italy’s Massive Debt Pile

    Amid Political Uncertainty, Australia Faces Ratings Downgrade

    A Ukrainian Kleptocrat Wants His Money and U.S. Asylum

    OECD Sees Post-Crisis “Jobs Gap” Closing by End of 2017

    Deutsche Bank: World’s Most Dangerous Bank?

    Danone’s $10 Billion U.S. Deal Adds Soy Milk, Kale to Menu

    Samsung Gets Ahead in Headsets By Not Phoning It In

    Security Software Firm Avast to Buy Rival AVG for $1.3 Billion in Cash

    Pepsi, Buoyed by Domestic Growth, Boosts Its Outlook

    Temasek Reshapes Holdings in New Era of Subdued Market Returns

    CBS Planning IPO for Radio Unit With No Signs of Right Buyer

    A Wall Street Golden Boy Blames Gambling Addiction For $100 Million Fraud

    Josh Brown: How Dare You Make Us Eat Our Own Cooking!

    Howard Lindzon: The Autonomous Bull Market…

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  • The Fed Minutes
    , July 6th, 2016 at 2:59 pm

    Here are the minutes from the last Fed meeting. I want to highlight this key passage on financial markets.

    Market-based estimates of the probability of a hike in the federal funds rate at the June FOMC meeting were variable during the intermeeting period. The probability of an increase in June fell to near zero in early May in response to incoming economic data, jumped to about 30 percent after the release of the April FOMC minutes and other Federal Reserve communications, and dropped again to near zero after the May employment report. The expected path of the federal funds rate for the medium term implied by market quotes declined somewhat on net. The average probability assigned by respondents to the Desk’s June Survey of Primary Dealers and Survey of Market Participants was near zero for a rate hike in June and around 20 percent for a rate increase in July. The median respondent in each survey indicated that the most likely outcome was only one hike in 2016, down from two in the April surveys.

    The nominal Treasury yield curve flattened, on net, over the intermeeting period, mainly reflecting declines in longer-term rates; the flattening left the spread between yields on 2- and 10-year Treasury securities near its lowest level since 2007. Although a significant portion of the declines in yields occurred following the release of the May employment report, yields at longer maturities had begun drifting down earlier in the period, consistent with an apparent deterioration in global risk sentiment. Yields moved lower late in the period amid growing concerns about the upcoming British referendum. Some market participants attributed the decline in Treasury yields in part to heavy demand from foreign investors faced with extraordinarily low yields on foreign sovereign securities. Inflation compensation based on Treasury Inflation-Protected Securities (TIPS) decreased, particularly at longer tenors. Measures of inflation compensation based on inflation swaps also declined, but less than TIPS-based measures, consistent with anecdotal reports suggesting that a portion of the declines in TIPS-based measures might have been driven by elevated demand for longer-term nominal Treasury securities.

    Broad stock price indexes moved within narrow ranges but were modestly lower, on net, over the intermeeting period. However, one-month-ahead option-implied volatility on the S&P 500 index–the VIX–rose notably from fairly low levels and ended the period close to its historical median level. Spreads of 10-year triple-B-rated corporate bond yields over those on comparable-maturity Treasury securities were little changed on balance. High-yield spreads widened, mainly for firms outside of the energy sector; spreads on bonds for firms in the energy sector narrowed, likely in response to rising oil prices.

  • Gold Hits Two-Year High
    , July 6th, 2016 at 9:58 am

    Gold is up to a two-year high this morning. The yellow metal has been as high as $1,377 per ounce. That reflects a belief that real interest rates are going down. With that, Treasury bonds continue rally. The yield on the ten-year got down to 1.34%.

    The 2/10 spread is now below 80 basis points. That hasn’t happened since November 2007.

    The stock market is down a little but it’s broad. I haven’t checked the numbers but it seems like most members of the S&P 100 are off 0.2% to 0.6%.

    Earnings season is set to begin next week. Alcoa will report on Monday. Wells Fargo will be the first Buy List stock to report, and that will come next Friday.

  • Overlooked Posts
    , July 6th, 2016 at 9:10 am

    Tadas Viskanta, the talented proprietor of Abnormal Returns, asked a few of us bloggers to send them their “criminally overlooked” blog posts. Tadas writes, “Every blogger will tell you that the correlation between what they think is a good blog post and what gains traction is close to zero.”

    That’s certainly true. For my contribution, I picked this post from last year. I remember thinking that it might get a lot of attention. Well, I was wrong.

    Be sure to check out the other submissions at Tadas’ site.