Archive for August, 2016

• Morning News: August 15, 2016
  Eddy Elfenbein, August 15th, 2016 at 7:10 am

  PBOC Says Money Supply Growth Will Rebound, No ‘Liquidity Trap’

  Japan’s Economy Stalls in April-June, Casts Doubts on Abe’s Policies

  Japan Is Said to Be Negotiating with Banks to Borrow At a Zero Rate

  OPEC is Jawboning Again

  Dollar Extends Drop as Faltering Economy Pares Rate-Boost Wagers

  FAA Clears Indonesian Carriers for Takeoff to the U.S.

  How Millennials Became Spooked by Credit Cards

  Tesla Removes ‘Autopilot’ From China Website After Beijing Crash

  Lonza to Acquire InterHealth for as Much as $300 Million

  MAA to Buy Post Properties

  Sharp Extends Gain After Foxconn Completes Capital Injection

  A Tech Mogul’s Fight to Keep Control of a Newspaper Empire

  At Aldi’s Empire of Austerity, a Fight Over Extravagant Spending

  Jeff Miller: Have Stock and Oil Prices Decoupled?

  Jeff Carter: Serendipity Doesn’t Happen By Being Passive

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• CWS Market Review – August 12, 2016
  Eddy Elfenbein, August 12th, 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

  If I were to ask someone who only paid attention to major news headlines and gave zero attention to the stock market where they thought the market currently is, they’d probably think we’re in pretty rough shape. I doubt they’d say were in an all-time record high with low volatility.

  But that’s the truth. In fact, on Thursday, all three major indexes closed at all-time highs. The last time that happened was on December 31, 1999. The stock market has shaken off nearly every reason to go down (Brexit, China, Zika, terrorism, politics). It’s almost as though the worse the news is, the better the stocks do.

  

  Fortunately, we got some good news last week, with a strong jobs report. There’s also—finally—some decent news on wages. I’ll have more details for you in a bit. We also had a nice earnings beat from Cognizant Technology Solutions, although the outlook was on the cautious side.

  Later on, I’ll preview two Buy List earnings reports for next week, Ross Stores and Hormel Foods. My numbers say Ross Stores should beat expectations. But first, let’s take a closer look at this boring, dull, lethargic stock market. Which, by the way, is at an all-time high.

  The Current Market Is Boring, and That’s a Good Thing

  I think I’m running out of stats to explain how drowsy this market is. Let me try a couple on you: In the last 27 days, the second-worst day for the S&P 500 was a loss of 0.36%. Oh the humanity! Every day but one has been better than that.

  The daily range of the S&P 500, meaning the distance between the high and the low, has been less than 0.65% 19 times in the last 22 days. To put that in perspective, that didn’t happen once during the first 45 trading days of this year. Notice how much smaller the daily “candlesticks” have become in the chart above. The beginning of this year was like a different world.

  Remember how poorly the market started out this year? It was one of the worst starts to a year in history. By February 11, the S&P 500 was down more than 10% for the year. But the funny thing is, this rally is still hated. The sentiment indicator from the American Association of Individual Investors shows that the number of bulls came in below average for a record 40th week in a row.

  I’ll consolidate a great deal of market wisdom by telling you that the stock market likes to move at two speeds—fast/down and slow/up. Inexperienced investors are obsessed with the first speed. We pay attention to the second.

  Interestingly, we had a good example of the fast/down speed after Brexit, but what inexperienced investors never seem to grasp is that by the time it’s clear what’s happening, it’s over. Consider that the S&P 500 is up nearly 10% from its post-Brexit low. Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That’s very true. Volatility will come back. Sometime. But don’t bother trying to predict when.

  The U.S. Economy Created 255,000 Jobs Last Month

  Last Friday, the government said that the U.S. economy created 255,000 net new jobs last month. That easily beat Wall Street’s forecast of 180,000. The numbers for May and June were revised higher as well.

  When you smooth out all the bumps, we’ve been on a trend of creating about 220,000 to 230,000 jobs per month, and this report confirms that the trend is alive and well. That’s the red line in the chart below, with in the S&P 500 in blue. The unemployment rate stayed at 4.9%.

  

  But what really caught my attention is that average hourly earnings rose by 0.3%. That’s not bad. This is a key number to watch, because the more folks make, the more they spend. Consumer spending is the main driver of the economy. We also want to pay attention to inflation. So far, inflation has been well contained, but that may be due to wage growth being sluggish.

  For the first time in a while, I think the market is underestimating the odds of a Fed rate increase. This is a strange position for me to be in, since the markets and the Fed have consistently overestimated the timetable for rate hikes. If a robot endlessly said, “the rate-hike timetable will be pushed back,” it would look a lot more prescient than a lot of well-paid economists. Prices may start to creep higher, and that would get the Fed’s attention.

  Right now, the futures market thinks there’s roughly a 50-50 chance of a rate hike coming at the Fed’s December meeting. Goldman Sachs recently said that the odds are 75%. I’m siding with Goldman on this. It’s not a lock-solid bet, but it is likely, especially if this jobs trend keeps up. If you recall, last December, the Fed raised rates for the first time in nearly a decade.

  The final earnings numbers for Q2 are almost in. So far, 78% of companies in the S&P 500 have beaten their earnings expectations, while 56% have beaten on sales. Of our 16 Buy List stocks that have quarters ending in June, ten beat Wall Street’s estimate, three missed and another three matched estimates.

  Cognizant Technology Solutions Is a Buy up to $63

  Last Friday, Cognizant Technology Solutions (CTSH) became our final Buy List stock to report Q2 earnings. For the second three months of the year, the IT outsourcer earned 87 cents per share. That was five cents more than expectations. Quarterly revenue rose 9.2% to $3.37 billion, which matched consensus.

  Overall, this was a good quarter for Cognizant. The company, however, was cautious about the rest of the year.

  “Our second-quarter performance, as anticipated, represented broad-based revenue growth across service lines, geographies and industries, including healthcare and financial services,” said Francisco D’Souza, Chief Executive Officer. “While our revised guidance reflects the impact of near-term macroeconomic headwinds, our longer-term outlook and underlying business fundamentals remain strong. We continue to see an expanding market opportunity ahead and are well positioned to capitalize on the digital transformations taking place among enterprises around the world.”

  “The shift to digital continues to intensify and accelerate,” said Gordon Coburn, President. “Our strong second-quarter revenue growth, adding incremental quarterly revenue of nearly $170 million, is the result of clients turning to Cognizant to help them define strategy and infuse new technologies to address key challenges and implement new business models. Our robust strategy and implementation capabilities have made us a key partner to clients as they fundamentally transform their businesses and navigate the shift to the digital economy.”

  Gordon said that the pound’s fall post-Brexit knocked off about $40 million in revenue. He also noted that some major healthcare companies are holding back on spending, since they’re working through deals.

  Cognizant sees Q3 coming in between 82 and 85 cents per share, whereas Wall Street had been expecting 86 cents per share. On the plus side, Cognizant reiterated their full-year guidance range of $3.32 to $3.44 per share.

  

  On the revenue side, Cognizant sees Q3 ranging between $3.43 billion and $3.47 billion. Wall Street had been expecting $3.54 billion. The company also changed its full-year guidance range for revenue from $13.65 billion to $14.0 billion to $13.47 billion to $13.60 billion. Wall Street had been expecting $13.75 billion.

  The stock had a frenetic day last Friday. Shortly after the open, CTSH dropped to a 3.2% loss for the day. Traders then did an about-face. By the afternoon, CTSH made up everything it had lost and peaked at a gain of 2.9%. Due to the conservative guidance, I’m going to lower our Buy Below on Cognizant to $63 per share. The company also added $1 billion to its stock-repurchase plan.

  Earnings Preview for Ross Stores and Hormel Foods

  Second-quarter earnings season is now over for our stocks on the March/June/September/December reporting cycle. However, we have three stocks that are one month off cycle; their quarters ended with July, and soon they’ll report earnings.

  This Thursday, August 18, Ross Stores (ROST) will report its fiscal Q2 earnings after the market closes. When the last earnings report came out in May, the deep discounter said it expected Q2 earnings to range between 64 and 67 cents per share. Wall Street expects 67 cents per share. Ross also sees same-store sales rising by 1% to 2%. I think their guidance is quite conservative, and I expect to see an earnings beat.

  I’ll be curious to see if Ross updates its full-year guidance, which is currently at $2.63 to $2.72 per share. I should add that Ross has been gobbling up tons of its own stocks. Ross pays a dividend, but it’s quite modest—just 13.5 cents per share, which works out to a yield of 0.87%.

  Shares of ROST have rallied strongly over the last few weeks, and the stock hit another new all-time high on Thursday.

  Hormel Foods (HRL) is also due to report its earnings on Thursday, August 18, but their report will come out before the opening bell. The Spam people said they expect full-year earnings between $1.56 and $1.60 per share. They’ve already made 83 cents per share for the first two quarters of the year.

  One point of concern is Hormel’s shrinking margins. That caused the stock to get dinged hard earlier this year. Wall Street’s consensus for Hormel’s fiscal Q3 is for 35 cents per share, which is a 25% increase over last year.

  HEICO (HEI), our quietest, smallest and best performer, is scheduled to report its fiscal Q3 earnings on Wednesday, August 24. I’ll have more details on HEI next week.

  That’s all for now. There are a few key events to look out for next week. On Tuesday, the July CPI report comes out. Inflation has been rather subdued, but with some modest gains in wages, there soon could be a rise in consumer prices. I don’t think it’s likely, but we need to keep an eye the data. On Wednesday, the Fed will release the minutes from its last meeting. This is when the Fed said, “Near-term risks to the economic outlook have diminished.” I’ll be curious to hear more details. 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 12, 2016
  Eddy Elfenbein, August 12th, 2016 at 7:05 am

  Stocks Hit New Highs, and That Could Be Just the Start

  IMF Deal Boosts Egypt, Saudi Falls Despite Reform News

  German Economy Grows Faster Than Expected; Italy Disappoints

  Economic Doldrums? China Blames it on the Rain

  EU Opens Antitrust Probe on Dow Chemical, DuPont Merger

  Envisioning Bitcoin’s Technology at the Heart of Global Finance

  Will Jet.com Be Enough to Move the Needle for Wal-Mart Stores Inc?

  Hewlett Packard Enterprise Just Spent Millions on This Supercomputer Maker

  Toshiba Reports Its First Profit in 6 Quarters

  Macy’s, Kohl’s and Nordstrom’s 2Q 2016 Earnings Reports Deliver Some Positive Surprises

  Electronic Marlboro Sucks Japanese Smokers Away From Japan Tobacco

  Arianna Huffington to Leave the Huffington Post

  Driven to Suicide by an ‘Inhuman and Unnatural’ Pressure to Sell

  Josh Brown: Reaction: Jesse Livermore – Boy Plunger

  Roger Nusbaum: This Is The New Normal

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• Morning News: August 11, 2016
  Eddy Elfenbein, August 11th, 2016 at 7:12 am

  More Old Than Young: A Population Plague Spreads Around the Globe

  IMF, Egypt Agree on $12 Billion Loan to Fix Ailing Economy

  IEA Sees Oil Glut Easing

  Australia Risks Chinese Anger Over Power Grid Sale

  U.S. Budget Deficit Little Changed in July

  The Bond Bubble Is About to Burst

  Why the Big Three Airlines Are So Much the Same

  Alphabet Unit Google’s VC Chief Bill Maris to Exit

  Alibaba Results Boosted by More Users, Mobile Growth

  Yelp Rises After Earnings Beat Estimates, Analysts Back Stock

  Shake Shack’s Stock Gets Whacked As Investors React To Disappointing Sales

  Ralph Lauren Is Losing the Battle for America’s Preppies

  Valeant Under Criminal Investigation

  Howard Lindzon: The NASDAQ Made America Great Again…

  Josh Brown: Volatility Drives Us Mad and Steals Our Future

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• Oil and Stocks Part Ways
  Eddy Elfenbein, August 10th, 2016 at 11:30 am

  One of the interesting developments this summer is that the previous relationship between oil and stocks seems to have broken down. For several months, the two asset classes were like waltzing partners. Wherever oil went, stocks weren’t far behind. Or maybe it was the other way around.

  Either way, the relationship appeared solid. Even when both markets turned in early February, they turned together.

  

  Lately, however, the two seem to have parted ways. It’s hard to place an exact starting point when this happened. I think something clearly broke down at the beginning of May. But by July, oil and stocks were no longer speaking.

  

  According to the WSJ, the correlation fell to 0.77 although I’m not sure what time frame their figure indicates.

  What does this all mean? That’s hard to say exactly. I think we’ve moved into an era where low oil prices are good — that is, until they’re not. There’s probably a point at which low oil is a net negative for the U.S. economy. I suspect that’s below $40 per barrel but that’s just a guess.

  OPEC has noticed the lower price for oil and they’re going to hold a less-formal meeting next month. I strongly doubt they’ll come to any agreement on holding back production. The Iranians are recently off sanctions and they’re going to gun supply until they get back to pre-sanctions levels. The Saudis also don’t seem interested in cutting back production. My guess is that we’re going to see more downward pressure on oil this year.

• Morning News: August 10, 2016
  Eddy Elfenbein, August 10th, 2016 at 7:17 am

  Japan’s Plunging Jobless Rate Is All About Aging, Not Abenomics

  BOE Finds Its Brexit Warnings Coming True in Company Plans

  Why Did Productivity Fall? Look To The Price of Oil and Gas

  America’s Worst Borrowers Are Grabbing Credit Cards Like It’s 2006

  U.S. Judge Dismisses Challenge to Seattle’s Uber, Lyft Union Law

  Jefferies, Free of the Restraints of Bigger Banks Is Emboldened

  Apple Said to Plan First Pro Laptop Overhaul in Years

  Why Coach Is Disappearing From Some Department Stores

  Yelp Raises Revenue Projection as It Swings to Quarterly Profit

  Disney Bets on Streaming, Joining With Major League Baseball

  Walmart, In Acquiring Jet.com, Gets More Than An Early Leg Up On Amazon

  ‘Self-Driving’ in Spotlight Again as China Sees First Tesla Autopilot Crash

  PG&E Guilty of Safety Violations Stemming From Fatal Blast

  Howard Lindzon: Big Stock Market Crash Coming … Guaranteed

  Cullen Roche: What Does it Mean to be a “Modern” Monetary System?

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• Morning News: August 9, 2016
  Eddy Elfenbein, August 9th, 2016 at 7:07 am

  China Inflation Slows Again, Giving PBOC Room for Easing

  China Warns U.K. That Relations Hang on Hinkley Point

  BOE’s McCafferty Says More Easing Will Likely Be Required

  Valeant Says to Reorganize; Maintains Full-Year Forecast

  Why Twilio Uses Two Revenue Metrics to Report Its Financials

  Randstad to Buy U.S. Jobs Site Monster for $429 Million

  Alibaba Cloud Computing Arm to Help Foreign Tech Firms Enter China

  Barclays Agrees to Pay $100 Million Over State Libor Probes

  FTC Sues 1-800 Contacts Over Online Search Advertising

  Why Mattress Firm May Give Steinhoff Sleepless Nights

  SFR Shares Rally as CEO Says French Price War Easing

  Uber’s Deal With Didi in China Totally Sideswiped Indian Competitor Ola

  Every User of This Hacked Bitcoin Exchange Is About to Lose 36% From Their Account

  Josh Brown: The Jaws of Life

  Jeff Carter: How to Fix Capitalism

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• P/E Ratios Are Effectively Worthless
  Eddy Elfenbein, August 8th, 2016 at 7:25 pm

  I wanted to show you this passage from an article criticizing the Fed model as a valuation metric.

  The Fed model fares poorly compared with simpler methods of judging when stocks are attractive. A study by Bank of America found that as a tool for predicting 10-year returns, P/E ratios were 10 times more accurate as an indicator of what stocks would do, while metrics like price to book value did even better. The S&P 500 trades for 20 times annual earnings, the highest P/E since 2009, and 2.9 times book, or assets minus liabilities.

  In many respects, the case against the Fed model is the same as the case against any investment strategy predicated on valuation: they’re fraught with false signals. Data compiled by Bloomberg show that even the most conservative applications of price-earnings ratios as a buy or sell indicator are effectively useless for predicting how stocks will perform in the coming year.

• How Good of a Predictor is the Yield Curve?
  Eddy Elfenbein, August 8th, 2016 at 3:36 pm

  How good of a predictor is the yield curve? Economists Michael Bordo and Joseph Haubrich dug through the data and found the answer. It depends.

  The results are intriguing. They surveyed many distinct periods in U.S. financial and monetary history, from the era of the classical gold standard to the creation of the Fed to the breakdown of the gold standard, its resurrection on the international level under Bretton Woods, and its eventual collapse in 1971.

  They found that the utility of the yield curve had a great deal to do with the monetary regimes of the day. In particular, they found that the yield curve worked better as a predictive tool when the monetary system was out of kilter and inflation a problem, and worse when the monetary system was predictable and inflation stable.

  In other words, it would seem that the utility of the yield curve is inversely related to the credibility of the monetary regime. When the market thinks that inflation could spiral out of control because of the incompetence of policy makers, the yield curve works pretty well. But when inflation is kept in check, you can’t take the yield curve as seriously.

  Which brings us to today. Although we still don’t know for certain what the yield curve is telling us, the possible answers come into sharper focus. If the market is sensing that the Fed doesn’t have a hold on inflation, then perhaps the yield curve is unequivocally signaling a recession. But if inflation isn’t a threat, then the yield curve could be giving us a misleading reading.

  Right now, there’s almost no sign that inflation is about to spin out of control. And that, perhaps, is a sign that the crystal ball known as the yield curve is too cloudy to trust.

  Here’s their study.

• Morning News: August 8, 2016
  Eddy Elfenbein, August 8th, 2016 at 7:12 am

  Disappointing China July Imports Suggest Cooling Domestic Demand

  German Industrial Output Stronger Than Expected in June

  Fed’s Powell Urges Patience on U.S. Rates, Citing Growth Risks

  OPEC to Hold Talks in September as Oil Market Takes Downturn

  Amazon Japan Offices Searched on Suspicion of Antitrust Law Violations

  Why Uber Couldn’t Crack China

  Steinhoff Buys Mattress Firm For 115% Premium As Foreign Buyers Bet Big On The U.S. Economy

  Wal-Mart’s Deal for Jet.com Said to Hinge on Keeping Its Founder

  Bristol-Myers Partner Ono Plunges as Drug Fails Trial

  Video Software Maker Kaltura Raises $50 Million From Goldman

  UK to Probe Airbus’s Use of Third-Party Agents to Sell Planes

  How a Hairdresser’s Lawsuit Could Spell Trouble for Brexit

  Delta Grounds Flights Worldwide Following Computer Outage

  Jeff Miller: Earnings Recession Ending Next Quarter?

  Howard Lindzon: NASDAQ 10,000…What Could go Right?

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