Archive for June, 2018

  • OK…Maybe Not
    , June 13th, 2018 at 11:59 am

    In a strange development today, Stryker (SYK) said they’re not in deal talks with Boston Scientific (BSX). This comes two days after there were reports that a deal was on the table. I guess we can infer that they weren’t able to reach a deal or price.

    On Monday, The Wall Street Journal reported Stryker had made a takeover approach to Boston Scientific, a move that would create a medical-device giant and would be the latest effort to consolidate a corner of the health-care industry that has produced a raft of large deals lately.

    Stryker said in a filing with the Securities and Exchange Commission on Wednesday it doesn’t typically comment on these matters, but it chose to respond following market speculation about a possible deal for Boston Scientific.

    Stryker’s filing didn’t dispute that it had made a takeover approach.

    The Journal had reported it wasn’t clear how receptive Boston Scientific was to a deal. Boston Scientific said in a statement after the Journal reported on the advance Monday that it was aware of the report but declined to comment.

    Boston Scientific declined to comment Wednesday after Stryker’s filing.

    Stryker, based in Kalamazoo, Mich., is one of the largest makers of knee- and hip-replacement parts, competing with companies including Johnson & Johnson and Zimmer Biomet Holdings Inc.

    Boston Scientific, based in Marlborough, Mass., is one of the largest makers of heart devices such as pacemakers and artery-opening stents, competing with Medtronic and Abbott Laboratories . It develops devices used in diagnosing and treating coronary artery disease, heart monitoring and a broad range of gastrointestinal and pulmonary conditions. The company also makes non-heart devices such as endoscopes, a type of surgical camera.

    Stryker is rallying today, but it hasn’t made back everything it lost from the drop earlier this week.

  • Morning News: June 13, 2018
    , June 13th, 2018 at 7:11 am

    Professor Who Rang VIX Alarm Says Tether Used to Boost Bitcoin

    Trump’s Trade War Could Mess Up the Fed’s Plans

    What’s in a Name? Consumer Bureau to Find Out

    Trump Gambles and Loses on AT&T

    AT&T-Time Warner Ruling Shows a Need to Reboot Antitrust Laws

    Netflix and Alphabet Will Need to Become ISPs, Fast

    ZTE Shares Tank in Asian Markets After it Agrees to Pay $1.4 Billion Settlement to the US

    Toyota Pumps $1 Billion in Grab in Auto Industry’s Biggest Ride-Hailing Bet

    Nissan Doubles Down on Emerging Markets as U.S. Sales Slow

    Musk’s Model 3 Miscalculation Culminates in Major Tesla Job Cuts

    Zara Goes High-Tech in Race With Amazon

    There Aren’t Enough Drivers to Keep Up With Your Delivery Lifestyle

    Nick Maggiulli: It Can Happen to Anyone: On the Life-Altering Effects of Money

    Roger Nusbaum: Never Underestimate the Importance of Balance

    Ben Carlson: Why Do Stocks Generally Go Up Over Time?

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  • Inflation Is Up 2.8% in the Last Year
    , June 12th, 2018 at 10:51 am

    The government reported the CPI numbers for May this morning. In the last month, headline inflation is up just 0.21% while the headline core rate rose 0.17%.

    Over the last year, headline inflation is up 2.80%. That’s the fastest rate in more than six years.

    The core rate is up 2.24% in the last 12 months. That’s close to the fastest rate since late 2008. The current title holder is 2.33% from February 2016. We might be able to break that soon. Year-over-year core inflation has been over 3% since 1995.

    Here’s the real Fed funds rate based on core inflation. The Fed funds will likely rise tomorrow by 0.25%. It looks like it will take two more hikes to bring us to 0%.

  • Morning News: June 12, 2018
    , June 12th, 2018 at 7:17 am

    Oil: Short-Term Pain For Long-Term Gain

    Draghi Learns Lesson From Fed as ECB Stays Vague on Rate Outlook

    FAA’s Safety Rules for Commercial Drones Are Overly Strict, Report Says

    The $1.4 Trillion U.S. ‘Surplus’ That Trump’s Not Talking About

    North Korea Open For Business? Some See Hope in Trump Talks

    Trump May Doom the Medium He Loves

    Senators Set Deadline for Ajit Pai’s FCC to Open Up About Its DDoS Attack Claims

    3 Social Security Myths You Can’t Afford to Believe

    China Phone Giant Xiaomi May Be Twice as Expensive as Apple

    Building-Materials Firm USG Agrees to Knauf’s $7 Billion Buyout

    Wendy’s and Other Burger Chains Are Slamming IHOP for Its ‘IHOb’ Rebrand

    Jaguar Land Rover Preps for Electric Era Moving SUV From UK

    Howard Lindzon: Momentum Monday…Are We Too Extended?

    Michael Batnick: What Do Clients Want?

    Cullen Roche: Tariffs Won’t Make America Great Again

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  • Smucker’s Rebound
    , June 11th, 2018 at 4:06 pm

    This is quickly becoming a theme for our Buy List stocks. They drop after earnings and then quickly make back all they’ve lost. Now it’s Smucker’s turn:

    In the last four says, SJM has gained four cents.

  • Signature Bank and the Trumps
    , June 11th, 2018 at 3:33 pm

    USA Today recently ran a story detailing some real estate deals by Jared Kushner or Michael Cohen. The deals were financed by Signature Bank (SBNY), a member of our Buy List.

    I want to make it clear that SBNY merely financed these deals. This doesn’t mean they organized the deals. USA Today describes Signature as a “bank tied to the Trump family.” That’s disingenuous. Ivanka Trump was on their Board from 2011 to 2013. Barney Frank, hardly a Trump fan, is currently on the Board.

  • Stryker Looking at Boston Scientific
    , June 11th, 2018 at 12:18 pm

    The Wall Street Journal is reporting that Stryker is looking at buying Boston Scientific. If this deal happened, it would be huge.

    Stryker has recently made a takeover approach to rival Boston Scientific, a move that would create a medical-device giant with a combined value of more than $110 billion, according to people familiar with the matter.

    It is unclear whether Boston Scientific is receptive to the approach, and it is far from guaranteed there will be a deal. It comes amid a flurry of deal activity in the health-care sector as companies respond to industry and regulatory changes, demands for lower medical costs and the pressure to find new sources of growth.

    A deal, should one be inked, would be one of the biggest of the year, given Boston Scientific’s market value of $44 billion Monday morning.

    A combination of the two medical-device giants would bring together Stryker’s expertise in orthopedics, neurotechnology and spinal procedures with Boston Scientific’s operations in cardiovascular and so-called rhythm management, which develops implantable devices that monitor the heart and deliver electricity to treat cardiac abnormalities.

    Stryker, based in Kalamazoo, Mich., had a market value of about $67 billion Monday morning before The Wall Street Journal reported news of the approach and its stock dipped. It is one of the biggest makers of knee- and hip-replacement parts, competing with companies including Johnson & Johnson and Zimmer Biomet Holdings Inc. The company develops a range of medical devices that are used in orthopedics, neurotechnology and other surgical procedures. Last year, it generated global net sales of $12.4 billion, up almost 10%. Profits slumped 38% to $1.02 billion, hurt by one-time charges stemming from changes in the U.S. tax code. Excluding this impact, earnings rose by 12% to $2.5 billion.

    A takeover of Boston Scientific would diversify Stryker’s business into other areas of the medical-technology market and allow both companies to reach new customers.

    Boston Scientific, based in Marlborough, Mass., is one of the biggest makers of heart devices such as pacemakers and artery-opening stents, competing with Medtronic PLC and Abbott Laboratories . It develops devices used in functions such as diagnosing and treating coronary artery disease, heart monitoring and a broad range of gastrointestinal and pulmonary conditions. The company also makes non-heart devices such as endoscopes.

    Last year, Boston Scientific had net sales of $9.05 billion, up 7.9%. Profit fell to $104 million from $347 million.

    Boston Scientific has had some victories and stumbles in launching newer heart products in recent years. Last year, it recalled its new heart-valve replacement product, Lotus, over manufacturing defects. Analysts say it is uncertain whether the product, once viewed as having big sales potential, will come back to the market. But the company has notched increased sales of its Watchman device, designed to prevent strokes in people with an irregular heartbeat.

    There have been a number of big medical-device transactions in recent years as industry shifts prompt some of its biggest players to seek greater scale and diversity. Last year, Becton Dickinson & Co. acquired C.R. Bard Inc. for $24 billion. In 2015, Medtronic did a $49.9 billion deal to buy Covidien PLC.

  • Morning News: June 11, 2018
    , June 11th, 2018 at 7:12 am

    Oil Slips on Signs Russia Boosted Crude Output Before OPEC Meets

    Swiss Voters Reject Radical Sovereign Money Plan in Landslide

    Now the Fed Must Reckon With Long-Term Strategy

    The Repeal of Net Neutrality Is Official. Here’s How That Could Affect You.

    Bitcoin Tumbles as Hackers Hit South Korean Exchange Coinrail

    KKR Nears Deal to Buy Envision Healthcare

    Amazon Is Being Blasted by a Watchdog Group Over China Echo Factory Conditions

    AT&T Judge Could Clear Time Warner Deal With ‘No Blackout’ Fix

    Xiaomi Unveils Big Loss as It Prepares to Hawk IPO to Investors

    GDPR: The Biggest Data Breaches And The Shocking Fines (That Would Have Been)

    Bidding for Fox Will Get Serious After Court Ruling

    Stitch Fix: Risen From The Ashes

    Ben Carlson: Is the U.S. Due For A Recession?

    Jeff Miller: Do Individual Investors Face a Pivotal Decision?

    Joshua Brown: You Have to Live Through the Statistics

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  • CWS Market Review – June 8, 2018
    , June 8th, 2018 at 7:08 am

    “If you would know the value of money, go and try to borrow some.”
    – Benjamin Franklin

    The stock market suddenly got a lot more interesting this week. The Nasdaq Composite broke out to a new all-time high. So did the small-cap Russell 2000. The Dow is back over 25,000, and the S&P 500 rallied for four days in a row. The index recently touched its highest point in more than two months.

    The market isn’t so much celebrating good news as it is feeling relieved that the prospect for bad news has dissipated. Global tensions seem to be relaxing. There may even be some sort of détente with North Korea. In the last few weeks, the price of oil has dropped more than 10%.

    One piece of good news came last Friday when the government said that the unemployment rate fell to its lowest since the 1960s. In this week’s issue, we’ll take a closer look at the market and the economy. I’ll also discuss the disappointing earnings report from Smucker. I also have several Buy List updates for you this week (nice rebound for Ross Stores!). But first, is this really the best economy in half a century?

    The Best Economy in 50 Years?

    Last Friday, the government released the jobs report for May, and it said that the U.S. economy created 223,000 net new jobs last month. That figure beat expectations of 190,000 jobs. The unemployment rate ticked down to 3.8% which tied the cycle low from April 2000. However, if you work out the decimals, the jobless rate is actually the lowest since the 1960s. (Well, since December 1969.) For women, it’s the lowest jobless rate since 1953.

    Despite the good news, there are some noticeable holes in the current expansion. For one, it’s always a bit dicey to compare unemployment rates over such a long period of time. The economy is quite different from what it was in 1960, and so is the labor market. While the economic numbers are improving, we’re still not seeing much in the way of wage growth. In the last year, average hourly earnings were up 2.7%. That’s okay, and it’s above inflation, but it needs to be better. The equation is simple: higher wages means more shoppers.

    The Federal Reserve meets again next week, and it’s a near-certainty that the central bank will raise interest rates. This will be their seventh increase of this cycle. To recap, the Fed raised rates once in 2015, another time in 2016, then three times last year and already once more this year. This will bring the target range for Fed funds up to 1.75% to 2%.

    Not too long ago, it looked like there might be four hikes this year, but that’s probably off the table. For now. With this meeting, we’ll get a post-meeting press conference with Chairman Jay Powell. The Fed members will also update their economic forecasts. These forecasts are notoriously poor, but I have to give the Fed some credit: they’ve largely stuck to their recent rate-hike plans.

    I’ve tried to stress to investors that rising interest rates are Kryptonite to a stock rally. However, and this is crucial, it usually takes a few hikes to do any real damage. We’re now getting close to the point where the Fed funds rate is equal to the dividend yield of the S&P 500. In 2009, that would have seemed like it was light-years away.

    I like to keep track of the “real” Fed funds rate. That’s the rate adjusted for inflation (I prefer using the core rate). After next week’s hike, the real Fed funds rate will be very close to something it hasn’t been in a long time—a positive number! In real terms, the Fed has been handing out free money for over a decade. I think we’ll need one more hike to finally push real Fed funds into positive territory. As a very general rule, it’s hard to be against stocks when the Fed is handing out free checks. The Fed’s low-rate policy has certainly been a key driver of this long rally.

    But what about next year? According to the Fed’s last projections, they see three more hikes next year. But there was wide dispersion, meaning the individual estimates are far apart. That’s why next week’s meeting is so important. We’ll probably get a better idea of the Fed’s thinking. Three more hikes could do some damage to the economy and the market.

    There are a few things to consider. One is that long-term rates have come down some. That’s kinda like the ceiling for short-term rates. Trouble usually happens when short rates exceed long rates. My favorite indicator is the 2/10 Spread which is now at 45 basis points. That’s down about 90 basis points in the last 18 months. We’re not in the danger zone yet, but it’s no longer unthinkable.

    Smucker Drops after Poor Earnings

    On Thursday, JM Smucker (SJM) got dinged for a 5.4% loss after the jelly company reported disappointing earnings. Smucker reported fiscal Q4 earnings (after a few adjustments) of $1.93 per share, which was well below the company’s own guidance of $2.17 to $2.27 per share. Wall Street had been expecting $2.18 per share. The CEO blamed the miss on “industrywide headwinds and certain discrete items.” More on that in a bit.

    Smucker also had disappointing guidance for the coming year. Smucker sees this year’s earnings (ending in April) coming in between $8.40 and $8.65 per share. Wall Street had been expecting $9.18 per share.

    There are a few reasons for Smucker’s slide. For one, Canada announced retaliatory tariffs on American jam which is a core SJM product. The company is also facing higher costs which places it in the tough position of passing said costs on to consumers. This is a tough environment in which to raise prices. Bear in mind that Smucker is a lot more than jelly. They also make Jif peanut butter and Folger’s coffee, and they have a pet-food division, which is the company’s largest.

    Last quarter, sales of Smucker’s consumer foods fell by 1.8%. Pet food was flat, while coffee was up 0.5%. For the quarter, net sales fell by 0.1%. The issue really comes down to pricing and how much latitude Smucker truly has. Everyone in the industry is facing the same issue. These results suggest that Smucker may have to give in and deal with lower margins. To be fair, Smucker has already started to adjust its business model to better compete in a challenging market. For example, they’re looking to sell off their baking business.

    Last year, Smucker made $7.96 per share. The stock closed Thursday at $100.80, which is exactly 12 times the lower bound of their full-year guidance. This week, I’m dropping my Buy Below on Smucker down to $114 per share. I still like Smucker, but the company needs to make some important adjustments in order to meet a difficult environment.

    Buy List Updates

    Our philosophy of investing is to focus on great companies and hold them as long as we can. This has two important benefits. The first is that it’s less work, which is always nice. But more importantly, it’s a superior system because it removes us from the irrationality of the day-to-day market. I often stress this, but we got a good lesson recently from Ross Stores (ROST).

    I’m a big fan of Ross, and it’s been part of our Buy List for several years. The deep-discounter reported earnings on May 24. They beat expectations, but their guidance wasn’t that hot. Well, that’s what Ross always does, so I paid it no mind. I thought the earnings report was just fine, but the market gods were not pleased. Shares of ROST dropped nearly 7% the next day.

    In last week’s issue, I wrote, “I’m not at all worried about Ross Stores.” Sure enough, Ross has rallied six times in the last seven days. The stock closed Thursday at $85.09. Not only did Ross make back everything it lost, but the stock is even higher than it was going into earnings.

    I will freely admit you that I had no idea Ross would snap back so quickly. Of course, I was puzzled by the drop in the first place. But this is the reality of stock investing. Sometimes, weird things happen. This is precisely why we lock in on great companies and let time do the heavy lifting. This week, I’m raising my Buy Below on Ross Stores to $90 per share.

    Another stock that’s rising from the ashes is Alliance Data Systems (ADS). Poor ADS has been one of our worst stocks this year. The stock went from a high of $278 in January down to $192 in early May. The last earnings report was pretty good, but that wasn’t enough to halt the selling. Lately, however, ADS has turned a corner. The shares closed Thursday at $220.57. It’s too early to declare victory, but things are finally going in the right direction. Check out this recent article from Forbes, “Why Alliance Data Is Trading at a Discount.”

    Carriage Services (CSV) made some news this week, which is pretty rare. The funeral-home company made some complicated moves to restructure its balance sheet. This was to correct for, in their words, “unforced errors.” Since the company had to issue more shares, they reduced their four-quarter EPS guidance to $1.33 to $1.38. I think the moves are to Carriage’s long-term benefit. Don’t abandon this one.

    In early May, Continental Building Products (CBPX) missed earnings by a penny per share. During the next trading day, the stock got as low at $25.70 per share. That was a loss of over 7%. I was impressed that the company didn’t change its full year forecast. Here we are five weeks later, and CBPX is up to $31.45 per share. That’s a 14% gain in the last 23 days. I’m raising our Buy Below on Continental Building to $34 per share.

    We’re done with Buy List earnings reports for a while. FactSet (FDS) is due to report on June 26, but that’s it until the Q2 earnings season starts up in mid-July. RPM International’s (RPM) fiscal fourth quarter ended in May, and their earnings will probably be out in late July.

    That’s all for now. Get ready for a Fed rate hike next week. The Federal Reserve meets on Tuesday and Wednesday. The policy statement will come out at 2 p.m. on Wednesday. We’ll also get a look at the updated forecasts. There will also be some key economic reports. The retail-sales report will come out on Thursday. Then on Friday, we’ll get to see the latest report on industrial production. 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 8, 2018
    , June 8th, 2018 at 7:04 am

    Argentina Reaches $50 Billion Financing Deal With I.M.F.

    Brazil Hosts Major Auction for Oil Fields

    Oil Prices Fall on Dip in China Demand, Surging U.S. Output

    As Utility Stocks Get Crushed, Possibilities Emerge

    Betting on Crisis, Hedge Funds Short Italian Bonds

    Banks Don’t Share Wells Fargo’s ‘Systemic’ Account Problems, Regulator Says

    Spare Us, Warren Buffett

    How the Gig Economy Is Reshaping Work: Not So Much

    Jack Ma’s Ant Financial Valued Around $150 Billion After Funding Round

    Google Renounces AI Weapons; Will Still Work With Military

    Tesla’s Energy Storage Business Is Surging

    KFC is Right — People Are Gobbling Up ’Meat Replacements’

    Lawrence Hamtil: Not Even Buffett Can Escape the Reversion to the Mean

    Roger Nusbaum: Indexing Will Fail? Really?

    Blue Harbinger: Do You Start the Day With a Trading Plan?

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