Archive for August, 2016

• 5 Signs that Stocks Have Room to Run
  Eddy Elfenbein, August 31st, 2016 at 2:21 pm

• Share Buybacks Are Down
  Eddy Elfenbein, August 31st, 2016 at 10:27 am

  Interesting facts via James Saft:

  U.S. company stock buybacks are down 21 percent in the first seven months of 2016 compared to the same period a year earlier, according to TrimTabs Investment Research, a fall driven in part by five consecutive quarters of year-over-year earnings declines among S&P 500 stocks.

  (…)

  Over the first six months of the year S&P 500 companies paid out 112 percent of their earnings in the form of either dividends or share buybacks.

  (…)

  Companies have issued debt in such size that net debt compared to a standard measure of earnings is now at an all-time high for non-financial companies in the S&P 500, according to data from FactSet, having almost doubled in about five years.

• How Should We Read Investor Letters?
  Eddy Elfenbein, August 31st, 2016 at 9:57 am

  In the latest New Yorker, John Lanchester writes on the science and art of the investor letter. Here’s a sample:

  If Buffett hadn’t chosen to be one of the richest men in the history of the world, he would have made an unfailingly readable financial journalist. He has a great eye for telling details: talking about the risks in the insurance business, he comes up with the startling fact that the epicenter of the biggest earthquake in American history, 8.7 on the Richter scale, was located far from any tectonic fault line, in New Madrid, Missouri, in 1812. (At least that’s how Buffett tells it; seismologists agree it was one of the biggest earthquakes, estimated at between 7.0 and 8.8.) He tells us about a year in the insurance business during which a colleague underwrote insurance policies on the life of Mike Tyson, the possibility of more than two hundred and twenty-five Lloyd’s “Names” dying, and two Chinese satellites. “Happily,” he says, “both satellites are orbiting, the Lloyd’s folk avoided abnormal mortality, and if Mike Tyson looked any healthier, no one would get in the ring with him.” His writing is lucid, with a strong folksy streak, often borrowed from the lyrics of country music: “A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: ‘When the phone don’t ring, you’ll know it’s me.’ ” Or, on acquisitions gone wrong: “How can I miss you when you won’t go away?” He can be mordant, too. “If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.”

  The letters need not have been written. Buffett could easily have decided that the numbers speak for themselves—especially when they’re enunciating as loudly and clearly as his do. Buffett took over Berkshire Hathaway in April, 1965, when the shares cost eighteen dollars. By the time of his fiftieth-anniversary letter to shareholders, in 2015, the shares were trading for two hundred and twenty-three thousand dollars, an annual gain of about twenty-one per cent. No other investor matches that record over that period of time. In the world of hedge funds, secrecy about investment methods is de rigueur: if the sauce weren’t secret, you wouldn’t be having to pay two per cent per year, and twenty per cent of the profit on top, for your serving of it. Buffett, by contrast, doesn’t miss an opportunity to explain his ideas.

• Morning News: August 31, 2016
  Eddy Elfenbein, August 31st, 2016 at 7:09 am

  Africa’s Biggest Economy Has Crashed Into Recession

  Euro-Area Inflation Undershoots Forecast Before ECB Meeting

  Apple Ireland Ruling Could Be the End of Easy European Tax Deals

  Two Fed Officials Offer Different Views on Risks From Low Rates

  Why Apple’s $14.5 Billion Tax Fine Is Worse for Shareholders Than it Looks

  Will Amazon Kill FedEx?

  Theranos Halts New Zika Test After FDA Inspection

  Warren Buffett-Backed BYD Rises To 14-Month High After Electric Car Sales Soar

  Alphabet Expands Car-Pooling Project, Casting Shadow on Uber

  Mitsubishi Heavy Discusses U.S. Armored Vehicle Tie Up After Losing Sub Deal

  SWIFT Discloses More Cyber Thefts, Pressures Banks on Security

  College Group Sues U.S., Saying It’s Target of Political Agenda

  French Coca-Cola Workers Find Smuggled Cocaine in Shipment

  Howard Lindzon: The Myth of Professionals and The Stock Market

  Josh Brown: Everyone Is A Closet Technician

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• Buy Real Estate Stocks?
  Eddy Elfenbein, August 30th, 2016 at 3:54 pm

• Morning News: August 30, 2016
  Eddy Elfenbein, August 30th, 2016 at 6:44 am

  Japanese Puzzle: Why More Jobs Don’t Mean More Spending

  Here’s What You Need To Know About Apple’s $14.5 Billion EU Tax Bill

  Central Bankers Hear Plea: Turn Focus to Government Spending

  Oil Prices Rise on U.S. Weather Disruption, OPEC Action Speculation

  Mondelez/Hershey Deal Breaks – Is It Time For A Snack?

  E-commerce Site IronPlanet Is Sold For $758 Million

  American Airlines President Moves to United Continental

  Google and Amazon Vie for Big Inroad Into Wall Street Data Trove

  Amazon is Piloting Teams With a 30-Hour Workweek

  Mylan Tries Again to Quell Pricing Outrage by Offering Generic EpiPen

  Buffett’s 167-Year-Old Railroad Tests Skies for the Drone Age

  Paid $75,000 to Love a Brand on Instagram. But Is It an Ad?

  Japan Government Finds Mitsubishi Overstated Mileage For Eight More Models

  Jeff Carter: What’s The Right Tax Rate For Carried Interest?

  Roger Nusbaum: Who Is Stan Fischer & Why Does He Hate The Market?

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• Morning News: August 29, 2016
  Eddy Elfenbein, August 29th, 2016 at 7:08 am

  Central Bankers Spurn Call for Radical Approach at Jackson Hole

  German 10-Year Bond Yield Rises to Week-High on Fed Rate Message

  China Launches Own Aircraft Engine-Maker to Rival The West

  Obama Finds an Ally in Wal-Mart, Whose Stores He Once Shunned

  How the Next U.S. Jobs Report Could Influence the Fed

  Mylan to Launch First Generic to EpiPen Allergy Injection

  Warned of a Crash, Start-Ups in Silicon Valley Narrow Their Focus

  Amazon Tests 30-Hour Work Week

  Uber, Careem Suspend Services in UAE Capital

  A Cheaper Airbag and Takata’s Road to a Deadly Crisis

  Drone Pilots are Lining Up to Get Licensed by the U.S.

  Cyber Threat Grows for Bitcoin Exchanges

  Turning Instagram Into a Radically Unfiltered Travel Guide

  Jeff Miller: Will the Fed Get the Signal for a September Rate Hike?

  Howard Lindzon: Everyone can Be a Professional Investor and Stocktoberfest Schedule is Live (October 13-15 on Coronado)

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• CWS Market Review – August 26, 2016
  Eddy Elfenbein, August 26th, 2016 at 7:08 am

  “Reversion to the mean is the iron rule of financial markets.” – Jack Bogle

  I’m enjoying a little time off in sunny Florida. Apparently, the rest of Wall Street is on vacation as well, as the stock market continues its lazy summer.

  The market’s daily volatility ain’t just low, it barely registers a pulse. Since Brexit, the S&P 500 has now gone 42 straight sessions without a daily decline greater than 0.7%. Compare that with the first 42 days of this year when it happened 15 times!

  

  We also had a very nice earnings report this week from HEICO, our top-performing Buy List stock this year. The company raised guidance for the third time this year, although the shares pulled back on Thursday. I’m actually raising my Buy Below price for HEICO. I’ll have more details in a bit.

  Wall Street is looking ahead to Janet Yellen’s speech in Jackson Hole. The speech will come later today. I’ll discuss what it means for us. But first, let’s look at what’s happening just beneath the surface of a very quiet stock market.

  Wall Street Warms Up to More Risk

  In last week’s issue, I discussed the “low quality rally.” I want to expand on that subject a little bit this week. Standard & Poor’s runs a “High Quality” index for the bluest of the blue chips in the S&P 500. There’s an ETF geared to this index, with the symbol SPHQ. I like to track how well the SPHQ is doing against the broader market. I think of this as a quick-and-easy way of reading the market’s mind, particularly the market’s willingness to take on risk.

  

  High-quality stocks have led the stock market almost continuously since late 2009. But that outperformance really took off at the end of the last year, and it continued into the first few weeks of this year. If you recall, 2016 started out as the worst year on record for stocks. (How times have changed!) By February 11, the market was down more than 10% for the year.

  What happened is that everyone got scared and rushed, insanely, to own blue chips at the expense of nearly everything else. Since April, however, high quality has lagged the market. There are two things going on here. First is the unwinding of the fear trend that sent everyone rushing to own high quality. Second, for the first time in a long time, investors are willing to shoulder more risk. Investors need to understand that this is a key turning point for the market.

  When the market becomes less afraid of risk, it starts out well, and usually ends very badly. Don’t worry. We don’t have anything to be afraid of on that score. Our Buy List stocks are very high quality. However, we may hit a frustrating patch of underperformance. Again, there’s no need to worry. To everything there is a season—and that includes junky stocks.

  What’s interesting is that we see this same trend being acted out in the junk bond market. When analyzing the market, it’s always important to see if we can spot a similar trend being played out in a different market. At the beginning of the year, everyone was freaking out as they rushed into high-quality stocks; they were also running away from junk bonds. No one wanted any part of anything that had the slightest scent of risk. Junk-bond spreads (meaning the extra yield compared with investment-grade bonds) soared.

  The high-yield carnage was also driven by the dramatic plunge in oil prices. Remember that oil will flow as long as credit flows. But once oil gets below around $35 per barrel, lenders get very nervous and demand a greater premium for the honor of using their capital. The oil and junk-bond markets both hit their lows on February 11, along with the stock market. Since then, everything has reversed course. It’s no coincidence that high-quality started to lag a few weeks later.

  

  Here’s the key point I want to convey: oil, stock, high-yield spreads and daily volatility are all interrelated. Many markets, but they all reflect one thing. When daily volatility is so low, there’s more pressure to take on more risk. That means lower junk-bond spreads and lagging performance for investments like SPHQ. When oil rises, lenders are more eager to fund new projects, so yield spreads tighten.

  What does this all mean? As investors, we shouldn’t view risk appetite as a good or bad event. It’s more like the tides: it just happens. But I encourage you not to climb the risk ladder in search of better returns. Stick with sound stocks at a good price like you’ll find on our Buy List.

  The World Await Yellen’s Speech in Jackson Hole

  Fed Chairwoman Janet Yellen is scheduled to speak later today at the Fed’s Jackson Hole conference. The title of the speech is “The Federal Reserve’s Monetary Policy Toolkit.” This has Wall Street a bit nervous. In previous years the Fed has used the Jackson Hole event to announce important policy changes. It’s expected that she’ll sound some hawkish notes, but if you’ve been paying careful attention, that’s pretty much where she’s been this year.

  I think the Fed is leaning towards raising rates but they want more evidence that it’s safe to do so. Bill Dudley, the head of the New York Fed, said the central bank could raise rates as soon as next month. John Williams of the San Francisco Fed said he’d hike right now.

  The fact is that the economy is improving. The Atlanta Fed GDPNow expects 3.4% growth for Q3. The unemployment rate is holding under 5% and wages are starting to improve. That’s roughly what full employment looks like. The futures market now expects a rate increase in December. Interestingly, they don’t see another rate hike for several months after that.

  Still, the bond market seems pretty calm. The two-year yield is good to watch to gauge the bond market’s view of the Fed. The two-year yield has gradually climbed up to 0.79%. That’s up but remember that at the start of the year, the two-year had been yielding over 1%.

  

  I think Janet Yellen will hint that more rate hikes are coming without saying anything concrete. My hunch is that she wants to convey that rates are going up while trying to reassure investors that the pain will be minimal. Now let’s look at our one Buy List earnings report from this week.

  HEICO Earns 62 Cents per Share

  On Wednesday, HEICO (HEI) reported fiscal Q3 earnings of 62 cents per share. That’s up 22% from last year’s Q3. HEICO isn’t widely followed enough to have a true earnings consensus, but I did see it reported as 59 cents per share. For the year so far, earnings have risen 18% to $1.64 per share.

  Sales for the quarter rose 19.1% to $356.1 million. That’s a company record. Sales for the year so far are up 18% to $1,013.0 million.

  Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s third-quarter results, stating, “Our record quarterly results in consolidated net sales, operating income and net income reflect the impact of our profitable fiscal 2016 and 2015 acquisitions, as well as organic growth within both the Flight Support Group and Electronic Technologies Group.

  (…)

  As we look ahead to the remainder of fiscal 2016, we anticipate organic growth within our commercial-aviation aftermarket replacement parts and specialty-products product lines moderated by softer demand for certain component repair and overhaul parts and services. Further, we foresee modest full-year organic growth within the Electronic Technologies Group based on current forecasted product demand. During the remainder of fiscal 2016, we plan to continue our focus on new product development, further market penetration, executing our acquisition strategies and maintaining our financial strength.

  Based on our current economic visibility, we are increasing our estimated consolidated fiscal 2016 year-over-year growth in net income to 13% – 15%, up from our prior growth estimate of 12% – 14%. In addition, we continue to estimate consolidated fiscal 2016 year-over-year growth in net sales to approximate 15% – 17%, our consolidated operating margin to approximate 18.5% – 19.0%, depreciation and amortization expense of approximately $62 million, capital expenditures to approximate $32 million and cash flow from operations to approximate $220 million.”

  This is the third time this year that HEICO has increased its earnings guidance. The company only provides guidance for net income, not earnings per share. Let’s do a little math.

  Last year, HEICO earned $1.97 per share. That means an increase of 13% to 15% works out to a range of $2.23 to $2.27 per share. However, HEICO’s shares are 0.4% higher this year, so that will dilute that range by about one penny per share. Since the company has already made $1.64 per share so far this year, we can expect 58 to 62 cents per share for Q4. Wall Street’s consensus, such as it is for little HEICO, was for 64 cents per share. As a result, shares of HEICO lost about 3.4% on Thursday. This week, I’m raising my Buy Below on HEICO to $76 per share.

  Buy List Updates

  I wanted to pass along some updates on our Buy List stocks.

  This week, I want to lower my Buy Below on Alliance Data Systems (ADS) to $220 per share. ADS has pulled back since it had a pretty good earnings report last month. I’m not worried about ADS.

  In June, Bad Bath & Beyond (BBBY) said it was buying One Kings Lane. This was part of the company’s effort to beef up its online business. Since the deal was so small, BBBY didn’t have to disclose the price it paid, but we did know that at one time One Kings Lane was valued at $900 million. This week, Recode reported that BBBY paid less than $30 million for One Kings Lane. In other words, it was practically a steal compared to its peak value.

  This week, Hormel Foods (HRL) was upgraded by Credit Suisse and Edward Jones. The Credit Suisse analyst raised his price target to $43 per share.

  Shares of Express Scripts (ESRX) got dinged for 6% on Thursday. The concern is that Mylan’s plan to cut the cost of EpiPen could hurt their bottom line. Mylan has blamed the “middleman” for higher drug prices. That’s a charge ESRX has strongly denied.

  That’s all for now. Next week is the last full trading week before Labor Day. I think we can expect volatility to increase once traders get back from the Hamptons. On Monday, the government will report on personal income and spending. On Thursday we’ll get the ISM and productivity reports. Then on Friday, we’ll get the August jobs report. 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: August 26, 2016
  Eddy Elfenbein, August 26th, 2016 at 7:04 am

  Team Abe Challenges – Incomes UP, Savings UP, But Investment DOWN

  And Now For Yellen…

  Uber Loses at Least $1.2 Billion in First Half of 2016

  Drug Companies Spend Millions to Keep Charging High Prices

  ABInBev Warns of Thousands of Merger-Related Job Losses

  Plot Thickens in SEC Case of a $35 Billion Company No One Knows

  How Walmart Won Back Shoppers From Dollar General

  Investors Brace For Worst as Welspun Awaits Wal-Mart Review

  America’s Real Mountain Of Cheese Is On Our Plates

  How Salesforce Intends to Make Its Software Smarter

  Big Lots Posts Revenue Decline But Raises Forecast

  Land Buyers Stampede Into Texas Oil Patch

  Why Citron Case Leaves Hong Kong Investors Squeezed

  Josh Brown: Next Time You Hear “Bond Liquidity Crisis”, Show Them This

  Cullen Roche: 3 Big Flaws in “The Market” Portfolio

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• Morning News: August 25, 2016
  Eddy Elfenbein, August 25th, 2016 at 7:06 am

  Brussels Rebuffs U.S. Attack on EU Tax Investigations

  German Companies Get Delayed Brexit Shock as Confidence Plunges

  Portugal Reaches Agreement With EU on Caixa’s Capital Increase

  A Short History of Stock Market Crashes

  The Federal Reserve Needs New Thinking

  Raising the Inflation Target Would Be a Risky Challenge for the Federal Reserve

  SEC Says 71 Muni Borrowers Lied About Disclosure Histories

  Mylan Raised EpiPen’s Price Before the Expected Arrival of a Generic

  HP Reports Lower Earnings, Revenue

  Sears Holdings Posts Quarterly Loss as Revenue Slides

  Viacom May Tighten Reins on Paramount

  Monsanto Shelves Plans for New GMO Cotton Seeds in India

  Glencore’s Worst Profit Shows Miners Still Reeling From Rout

  Roger Nusbaum: Alternative Context

  Jeff Carter: Why Twitter Has Staying Power

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