Archive for December, 2016

• Today Could Be the Day
  Eddy Elfenbein, December 20th, 2016 at 11:07 am

  The Dow has been as high as 19,987 this morning. Today could be the day it will finally hit 20,000. The Dow first broke 200 on December 19, 1927, and then 2,000 fell on January 8, 1987.

  

• Morning News: December 20, 2016
  Eddy Elfenbein, December 20th, 2016 at 7:08 am

  Hedge Fund Winners and Losers Emerge as Year Ends on Better Note

  Italy Seeks To Borrow 20 Billion Euros to Prop Up Banking Sector

  Yellen Tells College Graduates That Value of a Degree Is Rising

  What Is SoftBank?

  Uber’s Loss Exceeds $800 Million in Third Quarter on $1.7 Billion in Net Revenue

  EU Charges Facebook With Misleading Information During WhatsApp Takeover

  Apple Hits Back at EU’s Tax Order

  Lloyds to Buy Bank of America’s British Credit Card Business

  Authorities Allege $1 Billion Fraud at Platinum Partners

  Novartis Says Reaches Agreement to Buy Texas-Based Encore Vision

  The Tesla Advantage: 1.3 Billion Miles of Data

  Can This Woman Turn Around Tiffany?

  Roger Nusbaum: How Much Higher Will Interest Rates Go?

  Jeff Carter: Jason Calcanis, On Fire With Truthiness

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• Morning News: December 19, 2016
  Eddy Elfenbein, December 19th, 2016 at 7:05 am

  Oil Extends Advance Above $52 as Libyan Output Comeback Stalls

  Nationalized Ukrainian Lender Privatbank Has $5.6 Billion Hole in Balance Sheet

  German Business Confidence Improves as Growth Strengthens

  Australia’s Projected Annual Deficits Worsen by $7.5 Billion

  Apple Fights $13.6 Billion Tax Bill as EU Lifts Lid on Case

  One Thing Missing From The Iran Aircraft Order

  ExxonMobil Helped Defeat Russia Sanctions Bill

  Goldman Warns China Outflows Rising in Both Yuan Payments, Forex

  Volkswagen Nears Deal to Add Another $1 Billion to Emissions Scandal Costs

  A $55 Billion Manager Who Bought at Market Low Returns to Cash

  Snapchat Plays Hard to Get With Celebrities and Influencers

  Fairfax Financial To Buy Allied World For $4.9 Billion In Cash And Stock

  In India, a Clash at the Top of the Tata Empire Gets Ugly

  Jeff Miller: New Year, New Highs, and a New List of Worries

  Howard Lindzon: Bitcoin…Takes a Licking and Keeps on Ticking

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• The Empire Was Socialist
  Eddy Elfenbein, December 17th, 2016 at 9:51 pm

  Did you know the Empire was Socialist? Check out this deleted clip from the original Star Wars (jump to the 4:43 mark).

• “Do stocks have a big China problem?”
  Eddy Elfenbein, December 16th, 2016 at 6:51 pm

  I was to be on CNBC today but the segment was bumped due to President Obama’s news conference. Here’s the segment CNBC filmed for their website.

• CWS Market Review – December 16, 2016
  Eddy Elfenbein, December 16th, 2016 at 7:08 am

  “The best time to invest is when you have money.” – John Templeton

  Just a reminder that the 2017 Buy List will be unveiled in next week’s CWS Market Review. I’m really excited for the new list. For 2017, the Buy List will be expanded to 25 stocks. We’ll start tracking the new Buy List on January 2, which is the first day of trading in the new year. As always, newsletter subscribers are the first to get the new list.

  Now to the stock market. Earlier this week, the Federal Reserve decided to raise interest rates. This was only the second time in the last decade that the Fed has done a rate hike. But what caught Wall Street’s attention was the Fed’s forecast for the next few years. The central bank predicts it will increase rates three times next year, plus three times in the year after that and another three times in the year after that!

  Let’s just say I’m a little skeptical of the Fed’s bold plans. In more technical language, that’s just nuts. Of course, the Fed’s predictions of what they plan to do haven’t had a whole lot to do with what they’ve actually done. And it looks like that tradition is alive and well.

  This week, we got a nice earnings report from HEICO. I’ll go over that in a bit. I’ll also preview next week’s earnings report from Bed Bath & Beyond. But first, let’s look at this week’s Fed meeting and what it means for us.

  The Fed Hikes…but What Next?

  The Federal Reserve held one of its two-day meetings on Tuesday and Wednesday. This was probably one of the least-surprising rate hikes in the last few decades. Everybody and their dogs were expecting this rate hike.

  The increase was so expected that it really became a non-story. At one point, the futures market pegged a rate increase at 100%. It’s hard to get more certain that that! The Fed’s new target for the Fed funds rate is now 0.50% to 0.75%. That’s an increase of 0.25%. The vote inside the Fed was unanimous.

  Let me first say that Fed Chairwoman Janet Yellen did a good job. She conveyed the Fed’s intentions, plus she got all the FOMC members to go along. That’s not easy.

  In the Fed’s policy statement, they said, “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.”

  As you know, I’m well versed in the arcane dialect known as Fedspeak, and I’m happy to translate this garble into normal talk. Basically, the Fed is telling markets not to expect a lot more rate-hike activity from it this year. When it says “prevail in the long run,” the Fed is obliquely referring to the natural interest rate. This is the mysterious phantom interest rate that’s the theoretical equilibrium for the economy. If the Fed goes below the natural rate, they’re boosting the economy. If they go above it, they’re hitting the brakes. Well, the Fed plans to do a lot more boosting.

  But here’s where it gets interesting. Economists had assumed the natural interest rate was 2% above inflation. Ever since the economy went kablooey a few years go, the consensus is that the natural rate is a lot lower. This means the Fed is trying to go below a target that itself has moved lower.

  In their latest projections, the Fed thinks the natural rate is 1% above inflation. I think that’s probably too high. This is important, because the Fed thinks they’ll be dragging the economy along for a few more years. Here’s the key fact for us: Real short-term rates are expected to be negative for another two years. That’s a green light for stock investors.

  

  Let me explain. People always want to know if the stock market is cheap or expensive. The answer is, compared to what? If short-term rates are going to be negative, that makes stocks a no-brainer. Sure, long-term rates have moved up. In fact, the two-year yield just touched a seven-year high this week (see above). But they’re still a long way from being any real competition for stocks. The bullish conditions for the stock market haven’t changed in the slightest.

  Whenever the Fed holds a two-day meeting, it’s accompanied by updated economic projections and a press conference from Chairwoman Yellen. This week’s projections took me by surprise because the Fed sees themselves raising interest rates three times in each of the next three years. That would bring the Fed funds target from 2.75% to 3%. I suppose that’s possible but it seems like a very long shot. Bear in mind that the Fed is biased to always believe that its policies will work out just fine. Hence the need for rate hikes.

  But is that true? I ain’t so sure. On Thursday, for example, we learned that inflation is still well contained. Consumer prices rose by 0.2% last month. The core rate increased by the same amount. With any real inflation, there’s no hurry to jack up rates. Maybe inflation will be an issue at some point, but for now, it just isn’t there.

  What’s interesting is that much of the rest of the world is where the U.S. was a few years ago, economically speaking. As a result, we’re improving, while they’re still struggling to get on their feet. Our rates are going up, while their rates are negative. The higher rates from the Fed act like a magnet that sucks in money from all over the globe. That helped push the U.S. dollar up to a 13-year high this week. The euro got down to $1.04 per dollar, which is the lowest since 2003. Gold dropped to its lowest level in ten months.

  

  This has been a very good time for stocks. The Dow has set 15 record highs since the election. On Wednesday, the index came within 34 points of breaking 20,000. The S&P 100 broke though 1,000. In the options market, insurance to protect yourself from a market drop is the cheapest in two years.

  To be frank, the Trump Rally is starting to get a bit tired. I think we’ll see a bit of a pullback over the next few weeks. Nothing too scary, but I don’t want you to be caught off guard. Don’t chase after any stocks. Wait for good stocks to come to you. As always, stay focused on high-quality stocks such as those you find on our Buy List. Speaking of which, let’s look at this week’s earnings report from the biggest winner on this year’s Buy List.

  HEICO Is a Buy Up To $81 Per Share

  On Tuesday, HEICO (HEI) reported fiscal Q4 earnings of 65 cents per share. That’s up from 56 cents per share for last year’s Q4. Wall Street had been expecting 62 cents per share. This was a very good quarter for HEICO, and it wraps up a very strong fiscal year.

  If you’re not familiar with HEICO, the company makes replacement parts for the aircraft industry. If some weird part of your chopper splits in two, you can’t just run down to Pep Boys, but HEICO can probably help you out.

  For the last fiscal year, HEICO earned $2.29 per share. Earlier the company had projected net income to rise by 13% to 15%. As it turns out, net income rose by 17% while net sales rose by 16% to $1.38 billion. I was impressed to see their operating margin stayed the same at 19.3%. That’s a good sign.

  HEICO also boosted their semi-annual dividend from eight to nine cents per share. That may sound small, but these do add up over time. HEICO said they’re looking to split their stock sometime early next year.

  I love this nugget from their press release:

  Considering the impact of cash dividends, prior stock splits and stock dividends, one share of HEI worth $8.38 in 1990 has become worth on a combined basis approximately $1,417, representing an increase of approximately 169 times the 1990 value and a compound annual growth rate of approximately 22%.

  Not bad.

  For 2017, HEICO sees net sales growth of 5% to 7% and net income growth of 7% to 10%. That works out to an EPS range of $2.45 to $2.52. Wall Street had been expecting $2.53 per share.

  Shares of HEI pulled back a few dollars this week, but I’m not too worried. The stock is still up 40.8% YTD. This week, I’m raising my Buy Below to $81 per share.

  Preview of Bed Bath & Beyond’s Earnings

  Bed Bath & Beyond (BBBY) is due to report its Q3 earnings on December 21. This has been a tough year for Bed Bath. The home-furnishings store missed Wall Street’s consensus badly for fiscal Q1 and Q2. The stock had a terrible year until a few weeks ago when it started to make up for a lot of lost ground. Since November 4, BBBY has gained 23%. It’s now down 1% on the year.

  The company hasn’t given guidance for Q3, but they have said they expect full-year earnings to range between $4.50 and $5 per share. That’s down from $5.10 per share last year and $5.03 per share for the year before that. They’ve already made $1.91 per share for the first half of the year.

  The consensus on Wall Street is for Q3 earnings of 99 cents per share. It’s hard for me even to give a good estimate. I’d be very relieved if BBBY earned 99 cents per share last year, and I suspect the market would be as well. The problem is the company has grown overly reliant on coupons and share buybacks. That’s a good strategy when things are going well, but not when same-store sales are falling. Bed Bath is a good company, but they need to make a lot of changes, and soon.

  One more quick item. On Wednesday, Express Scripts (ESRX) reiterated their 2016 EPS guidance of $6.36 to $6.42 per share. The company also said they expect 2017 EPS to range between $6.82 and $7.02. Wall Street had been expecting $6.93. I thought the numbers were fine, but traders weren’t so impressed. The stock got clocked for a loss on Wednesday and Thursday.

  That’s all for now. Stay tuned for next week’s issue with the 2017 Buy List. Next Thursday, we’ll get an update on Q3 GDP growth, plus personal income and spending, and durable orders. The stock market will be open Friday but closed next Monday, the day after Christmas. 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: December 16, 2016
  Eddy Elfenbein, December 16th, 2016 at 7:04 am

  Japan Overtakes China as Largest Holder of U.S. Treasuries

  Another Socialist Economic Innovation – Cuba Reinvents Barter With Rum for Czech Republic

  Cash-Recall Chaos Means Venezuela’s New Bills May Be Delayed

  Lagarde Case is `Weak,’ French Prosecutor Says, Raising Chances of Acquittal

  How Frackers Beat OPEC

  Dollar Surges as U.S. Prepares for Higher Rates

  Facebook Now Flags and Down-Ranks Fake News With Help From Outside Fact Checkers

  Hacked Yahoo Data Is For Sale on Dark Web

  The Inside Story of Apple’s $14 Billion Tax Bill

  Oracle Earnings Fall; Co-CEO Catz to Join Trump Transition Advisory Team

  Lockheed Martin Takes Stake in Chip Designer

  DeVry University Will Pay $100 Million for Students’ Loans and Tuition

  States Sue Generic-Drug Companies Over Price-Fixing Allegations

  Josh Brown: Reacting to the Fed’s Expectations is a Clown Show

  Jeff Miller: Stock Exchange: Does the Symbolism of Dow 20K Affect Technical Analysis?

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• Morning News: December 15, 2016
  Eddy Elfenbein, December 15th, 2016 at 7:07 am

  SNB Joins Draghi in Warning of Dread for Politics Next Year

  Japan Legalizes Casino Gambling Despite Final Stalling Tactics From Opposition

  Dollar Climbs to Strongest Since 2003 on Fed Path; Bonds Drop

  Dollar Peg Trumps Economic Woes as Gulf Follows Fed’s Rate Rise

  After Fed, Eyes Turn to China for Emerging-Market Currency Fate

  Should The U.S. Roll Out A 50-Year Treasury Bond?

  ’I’m Here to Help,’ Trump Tells Tech Executives at Meeting

  Why Google Is Fumbling While Tesla Is Sprinting Toward Driverless Cars

  With Netflix and Stan Running The Show, Is There Any Room For Amazon?

  Yahoo Says 1 Billion User Accounts Were Hacked

  Iran Finalizes Deal For Seven Airbus Planes

  U.S. Generic Drug Probe Seen Expanding After Guilty Pleas

  American In Russia Returns to Face US Charges in JP Morgan Hacking Case

  Roger Nusbaum: No, This Time Is Not Different

  Jeff Carter: What Are the New Norms in FinTech?

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• The Two-Year Yield Highest Since 2009
  Eddy Elfenbein, December 14th, 2016 at 2:36 pm

  The yield on the two-year Treasury is at its highest since November 2009. This security is often the most sensitive to the Fed’s policies.

  

  for the record, I strongly doubt the Fed will need to raise rates three times in each of the next three years.

• The Fed Hikes
  Eddy Elfenbein, December 14th, 2016 at 2:03 pm

  For the second time in the last decade, the Federal Reserve has raised interest rates. The vote was unanimous.

  Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still 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 have moved up considerably but still are low; 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 expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected 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. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

  In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening 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 projections. The FOMC members see three rate hikes next year. Another three in 2018. And three more in 2019.