Posts Tagged ‘EBAY’

• CWS Market Review – January 23, 2015
  Eddy Elfenbein, January 23rd, 2015 at 7:08 am

  “There are two kinds of people who lose money: those who know
  nothing and those who know everything.” – Henry Kaufman

  We’re now heading into the thick of earnings season, and the stock market’s mood is much brighter. The S&P 500 has rallied for four days in a row, and we just closed at a new high for the year.

  The earnings reports for our Buy List stocks are looking especially good. On Thursday, shares of eBay ($EBAY) jumped 7% after the company beat earnings and hinted that another spinoff could be on its way. I’ll have more details in a bit. Also on Thursday, shares of Signature Bank ($SBNY), one of our new Buy List members, jumped 5.7% after a very good earnings report. It was their 21st-straight record earnings report.

  Next week is going to be a busy one for us; six of our Buy List stocks are due to report earnings. Later on, I’ll give you a preview of what to expect. We also have another Federal Reserve meeting scheduled for next week. Plus, the government will give us our first report on Q4 GDP. The reports for Q2 and Q3 were pretty good.

  The stock market also got a boost this week thanks to Mario Draghi. The head of the ECB announced a bold plan of buying at least 1.1 billion euros’ worth of bonds to help fight off deflation and get the European economy moving again. In response, the euro fell to an 11-year low. I’ll tell you what all this means. But first, let’s look at our earnings winners this earnings season.

  Strong Earnings from eBay and Signature Bank

  After the closing bell on Wednesday, eBay ($EBAY) reported Q4 earnings of 90 cents per share. That beat Wall Street’s forecast by a penny per share. In October, the online auction house said that Q4 earnings would range between 88 and 91 cents per share. At the time, this was considered a disappointment, as Wall Street had been expecting 91 cents per share. For all of 2014, eBay earned $2.95 per share. That compares with $2.71 per share in 2013.

  Now the bad news. For Q1, eBay said they expect earnings to range between 66 and 71 cents per share. Wall Street had been expecting 76 cents per share. They expect full-year 2015 earnings of $3.05 to $3.15 per share. Frankly, I suspect eBay is low-balling us, but it’s too early to say for sure. I think the strong dollar is squeezing a lot of companies, so they figure it’s safest to put out modest forecasts. On the earnings call, CEO John Donahoe said that 2014 was a tough year: “quite frankly, we’re glad to see it come to an end.”

  

  eBay also announced cuts of 2,400 jobs as they get ready for the PayPal spinoff, which should happen later this year. That’s about 7% of their workforce. The company had already said that job cuts were on the way, but now they’ve laid out the details. Once PayPal is spun off, it could be worth as much as $40 billion.

  eBay also said it’s looking to sell or IPO its enterprise division, since it doesn’t really fit into eBay or PayPal. Shares of eBay jumped more than 7% on Thursday, and they’re not far from a fresh 52-week high. eBay also reached a deal with Carl Icahn. They added more people to eBay’s board, plus they added provisions which give investors a greater say in how PayPal would be run. I have to say that Icahn pushed hard for the PayPal spinoff, and he was exactly right.

  Here’s my view: eBay’s core business is in a rough patch right now. They’re riding it out well, but they’re not quite through it just yet. The best part about this stock is PayPal and any other deal. eBay remains a very good buy up to $60 per share.

  On Thursday morning, Signature Bank ($SBNY) reported Q4 earnings of $1.60 per share. That was four cents more than Wall Street’s forecast. The shares jumped 5.7% on Thursday. I should add that the stock had been weak going into its earnings report. This was their 21st record quarter in a row.

  For all of 2014, Signature made $296.7 million, which comes to $5.95 per share. Total revenue was $836.1 million. The underlying numbers are very strong. Deposits grew 32.6% last year.

  CEO Joseph J. DePaolo said, “2014 was another stellar year in which we continued to reap solid returns and deliver unprecedented results, including record deposit growth, record loan growth and the seventh consecutive year of record earnings. Moreover, it was also a year where we heavily invested in the future of our institution. This is evidenced by the successful public offering we completed this past summer, raising nearly $300 million in common stock to fuel the Bank’s continuing expansion, along with two business lines we added under Signature Financial, five new private client banking teams that joined the Bank and three Banking Group Directors that were appointed to existing teams.” Forbes recently named Signature as being the best bank in America.

  Wall Street currently expects 2015 earnings of $6.79 per share for SBNY. I think that might drift higher over the next few days. The shares are currently going for 18.3 times forward earnings, which is high but not unreasonable. Signature Bank is a very strong bank. For now, I’m keeping my Buy Below at $133 per share.

  Draghi Goes Big

  The investment world was on pins and needles waiting to hear the details of Mario Draghi’s stimulus plan for Europe. He decided to make it big. On Thursday, Draghi said that the European Central Bank will buy 60 billion euros’ worth of bonds every month through at least September of 2016. That’s huge. I think he wanted to go “all in” so he wouldn’t have to repeat his effort of building political support for buying bonds.

  Essentially, Draghi has decided to follow Ben Bernanke and do a Quantitative Easing for Europe. The problem is that many politicians, particularly in Germany, have been against the idea from Day One. Slowly Draghi has prevailed. Honestly, this should have happened two years ago.

  Personally, I was afraid that the plan wouldn’t be large enough, but thankfully, I was wrong. The equity markets celebrated, and the euro got punished. The euro fell to an 11-year low of $1.1318. One index of European stocks closed at a seven-year high. In the U.S., our Fed is thinking about when it will raise rates, but many other countries are going in the other direction. There was the surprise move in Switzerland last week. (It seems like these once-in-a-billion-year events now happen every few years.) Central banks in Denmark, Turkey, India, Canada and Peru have all cut rates as well.

  One immediate effect of Draghi’s plan is that it strengthens the dollar (as if it really needed more help). This puts even more pressure on commodity prices. This week, we learned that China had its slowest quarterly GDP growth in 24 years. Of course, growth slowing down to 7.4% is still pretty impressive, but China’s woes are also putting pressure on commodities like copper.

  The Federal Reserve meets again next week, and the super-strong dollar takes some of the heat off them to raise rates soon. While the central bank has made it clear that they’re on track to raise rates later this year, I’m starting to doubt that it will happen. Or it may happen towards the end of the year. The last inflation report showed deflation. The 30-year Treasury recently had its lowest yield since it was introduced in 1977. Plus, the last report on industrial production showed a small decline.

  I’m not alone in my skepticism. At the start of the year, the futures market saw a 30% chance the Fed would raise rates by June. That’s now down to 15%. Draghi’s move only adds to this. Companies are already announcing how much the rising dollar is pinching their profits (see Stryker below). I think that’s part of the reason why eBay’s guidance was below expectations.

  Analysts have been slashing their earnings-growth forecasts for this year. I think it’s likely we’ll see earnings growth around 3% to 6% for this year. With yields staying so low, investors should concentrate on high-quality stocks that pay good dividends. This means Buy List stocks like Microsoft, Ford and Wells Fargo, which has already released a good earnings report. Now here’s a look at our Buy List earnings for next week.

  Six Buy List Earnings Reports Next Week

  We have six earnings reports due next week. (By the way, you can see a complete calendar of our earnings season reports here.) On Monday, Microsoft is due to report. Stryker follows on Tuesday. Qualcomm is on Wednesday. CR Bard and Ford report on Thursday. Finally, Moog reports on Friday.

  Microsoft ($MSFT) has really turned a corner. Not that long ago, it seemed the company could do nothing right. But the new CEO has brought renewed energy to the software giant. Their last earnings report was quite good; Microsoft beat by five cents per share, and revenue beat expectations by more than $1 billion.

  Microsoft is doing well across the board, and their cloud business is doing especially well. Wall Street expects Q4 earnings of 71 cents per share, which seems quite reasonable. I’d like to see the stock make another run at $50 per share. The shares briefly pierced $50 in mid-November but pulled back. The all-time high of $59.97 was reached 15 years ago. Microsoft also pays a decent yield of 2.63% based on Thursday’s close. I currently rate Microsoft a buy up to $50 per share.

  Stryker ($SYK) reports on Tuesday, but there’s not much drama here. The company already released a preliminary earnings report (dontcha love companies that are actually shareholder-friendly?) Stryker said that Q4 earnings came in between $1.43 and $1.45 per share. Like so many other companies, the strong dollar is impacting their profits. Previously, Stryker said the strong dollar would nick this year’s earnings by 10 to 12 cents per share. Now they say it will be 20 cents per share. Stryker is a buy any time the shares are below $98.

  Qualcomm ($QCOM) was our earnings dud last earnings season, but they crushed earnings for Q2. The big headache for Qualcomm is their conflict with the Chinese government, and there’s not much the company can do. My guess is that the Chinese government will level a big fine on them, and they’ll have to pay it and move on. Qualcomm also disclosed that it’s facing anti-trust investigations by the FTC and by the EU.

  For this current fiscal year (ending September 2015), Qualcomm expects earnings between $5.05 and $5.35 per share, and revenue between $26.8 billion and $28.8 billion. Let’s remember that Qualcomm has tons of cash, no debt and strong free cash flow. They’re not going broke anytime soon. Buy up to $76.

  CR Bard ($BCR) continues to be a rock star for us. It’s already our top performer on the year, with a 7.18% YTD gain. The shares just hit a new 52-week high. The medical-equipment company has said they expect Q4 earnings between $2.22 and $2.26 per share. That’s very strong growth. The shares have spiked 26% from the October low. Don’t chase Bard. My Buy Below is $175 per share.

  There’s not much more to say about Ford Motor ($F) at the moment. The automaker is in the midst of a bold transition. As a result, next week’s earnings report won’t be so important, but the ones after that will be critical. I was very impressed with Ford’s recent 20% dividend increase. That’s a strong sign from management. Wall Street expects Q4 earnings of 23 cents per share. The stock is currently going for just over nine times this year’s earnings estimate. Going by Thursday’s close, Ford yields just under 4%. Ford is a buy up to $17 per share.

  I always feel bad about poor little Moog ($MOG-A). It’s the smallest stock on our Buy List, and they always report earnings on a Friday, just after CWS Market Review goes out. But Moog has been a very good stock for us. For the last fiscal year (through September), Moog earned $3.52 per share, which is an increase from $3.26 the year before. Moog expects to make another $4.25 per share this coming year. Wall Street expects earnings of 86 cents per share. Buy it up to $78.

  That’s all for now. More earnings reports to come next week. The Federal Reserve meets on Tuesday and Wednesday. The policy statement will come out on Wednesday afternoon. On Friday morning, we’ll get our first look at Q4 GDP. The reports for Q2 and Q3 were quite good, so it will be interesting to see if the trend is intact. 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

• CWS Market Review – October 17, 2014
  Eddy Elfenbein, October 17th, 2014 at 7:09 am

  Our job is to find a few intelligent things to do, not to keep
  up with every damn thing in the world.” – Charlie Munger

  Good advice, Charlie. Unfortunately, every damn thing in the world and then some has been on Wall Street’s mind lately. This has been the most dramatic week for the stock market all year. On Monday, the S&P 500 broke below its 200-day moving average for the first time in nearly two years. That gave the bears a lot more confidence to do more damage.

  On Wednesday, the market dropped sharply at the open, then bounced back, then fell even lower, and then rallied even stronger. Remember how laid back and peaceful everything was this summer? Well, not anymore. I guess weird things happen on Wall Street in October. In just one week, the Volatility Index (VIX) doubled. At one point on Wednesday, the S&P 500 got as low as 1,820.66, and the Dow fell below 16,000.

  

  As febrile as the stock market was, the bond market was even crazier. The yield on the ten-year Treasury fell below 2% this week. At one point on Wednesday, it dipped below 1.9%. At the start of the year, the ten-year was yielding 3%. (Note that this will eventually be a big help for the slumbering housing market.)

  What’s causing the market to be such a drama queen? That’s simple. It’s the three E’s—earnings, Europe and Ebola. Some are real concerns (like Europe), and some are not (like Ebola). I think traders saw an opportunity to panic since everything had been so calm for so long. It was probably the dramatic impact of the strong dollar that first unnerved traders. Then once Ebola came into the news, they had their chance to panic, and they took it. Beware: Bearish sentiment can be spread through the air—or even by casual contact.

  As usual, we don’t pay attention to the madding crowd. Instead, we focus on facts, and that means earnings. This week, we got three decent earnings reports from our Buy List stocks, although the guidance was fairly tepid. I’ll run through the details in a bit. I’ll also preview six Buy List earnings reports coming our way next week. We’re heading right into the heart of earnings season. But first, let’s take a closer look at the three E’s.

  Riding out the October Storm

  I’m not a close follower of chart patterns or technical analysis, but I do like to keep an eye on the stock market’s 200-day moving average. This is simply the average of the S&P 500 over the last 200 trading days (roughly ten months).

  I’ve crunched the numbers, and it’s true: the S&P 500 does much better when it’s above its 200-DMA than when it’s below it. Since 1933, the S&P 500 has averaged an 11% annualized gain when it’s sitting above its 200-DMA, compared with a 1% annualized loss when it’s below.

  Why does the 200-DMA seem to work? I think it’s a good example of a dumb rule that works well for complex reasons. The stock market tends to be very sensitive to trends. Once it gets going in one direction, it tends to stay there. The hard part, of course, is picking the turning points. These can be sharp and unexpected. The 200-DMA seems to capture the sweet spot in that it’s long enough to identify the trend, yet short enough to capture turning points.

  You can see how going below the 200-DMA changed sentiment by looking at what happened on Thursday. We got the best initial jobless claims report in 14 years. It was the second-best report in 40 years. Yet traders continued to panic over the Ebola news. I’m certainly no expert in public health, but those who are continuing to maintain this hysteria are absurd.

  As we know, the market likes to sell first and ask questions later. For example, airline stocks have plunged in response to Ebola. Shares of Southwest Airlines (LUV) dropped 20% in less than a month. Clorox (CLX) said that sales of disinfectants are up 28% in the last month.

  I think the market’s panic reached a peak on Wednesday when the Volatility Index hit 31. I expect to see this slide downward next week. This may sound contradictory, but the stock market’s most manic phase usually comes before the lowest share prices are reached. For example, Wall Street’s volatility peaked in the fall of 2008, even though stocks continued to meander lower for another six months. Despite the lower share prices, by March 2009, other market measures such as the VIX or the TED Spread had calmed down dramatically. This pattern is very typical.

  
  I wouldn’t be surprised to see the S&P 500 fall to near 1,800 soon, but I strongly suspect that most of the damage has already been done. That’s one of the characteristics of a selloff: Once you realize what’s happening, most of it has already passed. The economy’s fundamentals are quite solid. Q3 Earnings season is still young, but analysts expect earnings growth of 4.8% and sales growth of 4.2%. That’s not blistering, but it’s far from a recession.

  The strong dollar continues to make its presence felt. The price of oil dropped below $80 per barrel this week. It seems that Saudi Arabia is perfectly willing to let the price fall. They have no intention of cutting back production. Perhaps it’s a challenge to Russia. Perhaps they want to show American shale producers who’s boss. Perhaps they have no choice, since Europe is weak. Whatever the reason, the price of oil is down and may go even lower. That’s good for consumers, but not so good for domestic producers. Americans aren’t used to thinking of themselves as big-time energy producers.

  The strong dollar is also putting the squeeze on inflation. James Bullard, the head of the St. Louis Fed, said this week that the Federal Reserve ought to reconsider ending its bond-buying program. Even though the labor market appears to be getting better, workers aren’t getting higher wages. Also, inflation expectations have fallen, and getting inflation up to 2% is the Fed’s target.

  Inflation expectations, as measured by the five-year “breakeven” rate, have dropped substantially. Three months ago, the bond market expected inflation to be 1.96% over the coming five years. Now that’s down to 1.37%. I see Bullard’s point, but I don’t think there’s anything like a majority within the Fed to keep buying bonds. But I think it’s very possible that the Fed will hold off on any rate increase until late 2015, or even 2016. The yield on the two-year Treasury is down 20 basis points in the last two weeks. That’s probably the maturity that’s most sensitive to changes in the Fed’s outlook. We’re living in a low-rate world.

  Investors shouldn’t get rattled by this latest selling. Although the market is down, the relative performance of our Buy List has improved a great deal this month. That’s because investors flock towards high-quality stocks when things get scary. With Ebola, I urge calm. With Europe, I urge patience. And with earnings, I urge you to focus on quality. Now let’s take a look at our recent earnings reports.

  Wells Fargo Earns $1.02 per Share

  Wells Fargo (WFC) kicked off earnings season for our Buy List. The big bank reported Q3 earnings of $1.02 per share, which matched expectations. Digging in the details, the bank was helped out by a gain in venture capital and lower-than-expected taxes. Without that, they would have missed earnings. But on the plus side, WFC’s quarterly revenue rose to $21.21 billion, which topped expectations.

  Frankly, this is a difficult time for the banking sector, since mortgage activity has dried up. Make no mistake, Wells is doing just fine. They’re the best-run big bank in America. I’m also pleased to see that WFC’s “underperforming” loans are getting smaller. They’re well capitalized and can weather any storm.

  Unfortunately, one thing Wells isn’t protected against is a rash of selling. WFC dropped below $46 on Wednesday, which is a very attractive price. The stock is currently going for less than 12 times this year’s earnings. That’s a bargain, but it will take a calmer market for Wells to rally. This is a keeper. Wells Fargo is a buy up to $54 per share.

  eBay Drops below $48 per Share

  After the bell on Wednesday, eBay (EBAY) reported Q3 earnings of 68 cents per share. That was one penny more than expectations. Three months ago, the online auction house gave us a range of 65 to 67 cents per share, so they’re running ahead of their own guidance. Quarterly revenue rose 12% to $4.4 billion, which was slightly better than expectations.

  From the press release:

  “Rapidly changing competitive environments in commerce and payments underscore the opportunities for eBay and PayPal and highlight how each business will benefit from the focus and agility of being an independent company,” said eBay Inc. President and CEO John Donahoe. “PayPal had another strong quarter, and its mobile-payments leadership and momentum continued, with mobile volume up 72 percent to $12 billion. PayPal is on track to process 1 billion mobile transactions in 2014. And eBay continues to focus on enhancing its competitive position, improving the experience for buyers and sellers and investing in consumer engagement. As we prepare to separate eBay and PayPal in 2015, our teams are focused on strong execution to ensure each business is set up for long-term success.”

  Guidance was blah (to use a technical term). For Q4, eBay expects earnings to come in between 88 and 91 cents per share. Wall Street had been expecting 91 cents per share. The company expects Q4 revenue of $4.85 billion to $4.95 billion. That raised an eyebrow. Wall Street had $5.16 billion.

  eBay lowered their full-year revenue guidance to $17.85 billion to $17.95 billion. The old guidance was $18.0 billion to $18.3 billion. They made no comment about full-year earnings guidance, so I’m assuming the previous guidance of $2.95 to $3.00 per share still holds. The stock got sacked for a 4.7% loss on Thursday. That hardly seems commensurate for a company that hasn’t altered its earnings forecast. Stick with this one; eBay is a buy up to $55 per share.

  Stryker Is a Buy up to $87

  On Thursday, Stryker (SYK) reported Q3 earnings of $1.15 per share, which was a penny ahead of expectations. They had said to expect earnings between $1.12 and $1.16 per share. Like so many other companies, Stryker has felt the impact of the strong U.S. dollar. Unfortunately, Stryker said they expect full-year earnings to be at the low end of their previous guidance, which was $4.75 to $4.80 per share.

  That’s still a healthy profit. I don’t get too worried about issues of exchange rates because that can happen to anyone. The good news is that Stryker continues to see organic sales rising by 5% to 6%. For the quarter, revenue rose 11% to 2.39 billion, which beat expectations by $70 million. Stryker is an ideal buy-and-hold stock. SYK is a buy up to $87 per share.

  Six Buy List Earnings Reports Next Week

  Next week, we have six Buy List earnings reports coming out. Here’s a rundown:

  IBM (IBM) is due to report on Monday. Frankly, the company’s business has been rather lackluster of late, but large-scale buybacks have greatly aided Big Blue’s earnings-per-share. Wall Street currently expects Q3 earnings of $4.32 per share. That may be a bit too high, but I want to see how their business units are faring under the stronger dollar.

  McDonald’s (MCD) is due to report on Tuesday. The burger giant is working to turn itself around, and that’s taking longer than I had anticipated. On Thursday, the shares hit a fresh 52-week low. Thanks to the lower share price, the yield on MCD is up to 3.78%. The stock is cheap here, but I want to see concrete evidence that things are getting better.

  On Wednesday, CA Technologies (CA) is due to report. The company was one of the bright spots last earnings season. Shares of CA jumped after they beat earnings by five cents per share, but the stock hasn’t done well since then. They also touched a 52-week low on Thursday, and yield is now close to 4%. I’m not sure what more the market expects from them.

  CR Bard (BCR) will report on Wednesday, and like CA, Bard also had an impressive earnings beat this summer. They raised their full-year guidance by five cents per share at each end. Bard now expects full-year earnings of $8.25 to $8.35 per share. For Q3, they expect earnings to range between $2.07 and 2.11 per share. Bard has raised its dividend every year since 1972. Look for more good news from them next week.

  On Thursday, it’s Microsoft’s (MSFT) turn. This will be for their fiscal fourth quarter. Last month, the software giant gave shareholders a gift by raising their dividend by 11%. That shows confidence in their future. MSFT’s last earnings report was a little confusing, since they missed expectations by five cents per share. One problem for Microsoft is that Nokia’s handset business is a money-loser. They need to do something about that. On the plus side, Microsoft’s cloud business is doing very well. Wall Street currently expects quarterly earnings of 49 cents per share. This is our second-best performer on the year.

  I’m very curious about Ford’s (F) earnings report, which comes out next Friday. I can tell you right now that the results won’t be very strong, but that’s for operational reasons. Lots of folks are holding off buying new Fords since the company is getting ready to roll out their new aluminum-bodied trucks. The automaker also lowered expectations for this year, but they’ve kept an optimistic outlook for 2015. If Ford is right about next year, the stock is very cheap here. On Wednesday, Ford went as low as $13.28 per share. The stock is currently going for about 8.5 times next year’s estimate. This could be a home run for us, but I want to hear more specifics in the earnings report.

  That’s all for now. Stay tuned for lots more earnings reports. You can see our complete Earnings Calendar. Next week, we’ll also get important reports on consumer inflation, plus new and existing home sales. The housing market continues to weigh on the overall economy, but lower mortgages rates may help it turn the corner. 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

• CWS Market Review – September 12, 2014
  Eddy Elfenbein, September 12th, 2014 at 7:13 am

  “Fate laughs at probabilities.” – Edward Bulwer-Lytton

  The stock market is continuing with its subdued ways. This past Tuesday, the S&P 500 dropped 0.65%, for its worst day in five weeks. But the arresting part of that stat isn’t the drop; rather, it’s that the worst day in five weeks was a measly 0.65% loss. By historic standards, that’s barely a ripple, and going by what we saw a few years ago, it’s next to nothing. Tuesday’s plunge snapped the S&P 500’s streak of closing up or down by less than 0.5%. That was the longest such streak in 45 years. As I described it last week, this summer has been the Big Chill for Wall Street.

  As I expected, the stock market has been a little weak lately. The S&P 500 is down from its all-time high from last Friday. But the interesting action hasn’t been in the stock market. Instead, the currency markets have suddenly become very interesting. Over the past few weeks, the U.S. dollar has gotten a lot stronger against many currencies around the world (see the chart of the dollar index below). If you’re a traveler, you’ve probably noticed the effects. Investors need to understand that a strong currency has a large impact on the economy and on our Buy List stocks. In this week’s CWS Market Review, I’ll review what it all means.

  

  I’ll also take a look at the upcoming earnings report from Oracle ($ORCL). Their last report was a dud, but I’m expecting better news this time around. I also want to look at the recent weakness in eBay (EBAY), which is normally a solid stock. But first, let’s take a look at last week’s sluggish jobs report and what it means for the Federal Reserve’s interest-rate plans.

  Expect Higher Rates Next Year

  Last Friday, shortly after I sent out last week’s CWS Market Review, the government reported that the U.S. economy created only 142,000 jobs in August. This was well below Wall Street’s forecast, and it snapped the economy’s six-month streak of creating more than 200,000 jobs.

  The weak jobs report put a wrench into the plans of folks who have been expecting the Fed to raise rates this coming spring. As I’ve said, I continue to like the stock market as long as interest rates are near the floor (although I expect some minor sluggishness this month). But once the Fed starts to raise interest rates, the game changes.

  Think of it this way: It’s one thing to like Microsoft ($MSFT) when it’s yielding 2.4% and short-term rates are 0% (the one-month Treasury even went negative a few times this week), but it will be quite another if they’re both yielding 2%. As always, the game is about risk and reward.

  Lately we’ve been seeing some signs of dissension within the Fed, but that’s to be expected as I-Day approaches. (That’s my term for the date of the Fed’s first rate increase.) Janet Yellen has tried to make it clear that the Fed isn’t on a pre-set course, and that they’ll change as events change. The Fed meets again next week, and all of Wall Street will be watching. In addition to another $10 billion taper announcement, we’ll hear updated interest-rate projections. (I’ll warn you, the Fed’s track record on predicting the economy is terrible.)

  But rather than trying to parse various Fed statements for clues, I think it’s better to look at the Fed’s arch enemy, which is the bond market. Here I like to follow the one-year Treasury yield as it compares with the two- and three-year yields (see below). Think of this as the “Yellen Chart” because it’s mainly focused on the first rate increase. This is an interesting chart to follow because the one-year yield has been remarkably flat, but the two and three-year yields have climbed steadily higher. In fact, the yield on the three-year has tripled since April. Not only that, but the gap between the two- and three-years has widened as well. It’s as if the bond market were saying, “higher rates are on the way, but not just yet.”

  There are also futures contracts that trade on the Fed funds rate. The latest prices indicate that the market expects the Fed funds rate to be at 0.25% by May 2015 and at 0.50% by September. That strikes me as a bit too soon. Right now, I’d place I-Day around the middle of next year.

  What’s also interesting is that at the same time that the middle part of the yield curve has seen higher interest rates, the long yield of the yield curve has seen lower rates. The yield on the 30-year Treasury is down 69 basis points since the start of the year. Lately, however, long-term rates have started to edge higher, which is what I predicted four weeks ago.

  What the Strong Dollar Means for Investors

  In last week’s issue, I mentioned how the European Central Bank had decided to jump on the bond-buying bandwagon. The economy in Europe has been dreadful, and many euro bonds pay next-to-nothing yields. To quote myself, Mario Draghi is sending a loud message to currency traders: “Please, please, pleeezze bring the euro down!” They’re not alone. Japan has embarked on a similar strategy.

  As a result, the U.S. dollar has soared. It’s not that the greenback is strong in an absolute sense. It’s that the dollar is the cleanest of the dirty shirts. Since July, the dollar has rallied from 101 yen to 107 yen today. Meanwhile, the euro has dropped from $1.37 to $1.29.

  What’s the impact of the strong dollar? This can be confusing, since it seems normal to assume that the conjunction of the words “strong” and “dollar” can only yield positive results, but that’s not necessarily the case. Like many things economic, it involves tradeoffs. For example, a strong dollar tends to help imports but hurt our export market. Those of you who do a lot of international travel may have noticed that the stronger dollar helps your purchasing power abroad. The same forces are in play for companies. European stocks look cheaper for American companies, so we can expect to see more international buyouts (like Medtronic/Covidien).

  A stronger dollar also takes some of the pressure off the Fed to raise rates so quickly. That’s part of the reason I’m skeptical of the futures market on interest rates. People want to invest in the dollar because they see better growth ahead. Goldman Sachs just said that the U.S. economy grew by 4.7% last quarter. If the dollar were weaker, the Fed would have to raise rates to entice people to hold dollars. The dollar rally has taken that potential problem off the table.

  Now let’s consider the bad effects of the stronger dollar. The dollar’s rally against the yen has stung AFLAC ($AFL), which is one of my favorite Buy List stocks. The problem is that AFLAC does about 75% of its business in Japan. As a result, it has to convert that profit from yen into dollars. So a strong yen is good for AFL’s bottom line, but a weak one is bad. This is unfortunate, because as far as its business goes, AFLAC is doing quite well. Sadly, a lot of those gains are lost due to currency effects. It’s annoying, but to quote Hyman Roth, “this is the business we’ve chosen.”

  In July, AFLAC said they expect full-year operating earnings to range between $6.16 and $6.30 per share, but that forecast assumes a yen/dollar exchange rate between 100 and 105. Now it’s up to 107, which explains why shares of AFLAC recently slipped below $60.

  

  My view is that the currency effect is mostly transitory. Sometimes it helps you, sometimes it hurts. But if a company is well run, it will most likely stay that way. Unfortunately, AFLAC is getting the short end of this stick lately. I still like the stock a lot, and it’s an especially good buy below $60 per share.

  A strong dollar also helps keep the lid on inflation, and you can see that in the commodities market. The last few inflation reports have been quite subdued. Last week, I talked about the weakness in gold. This is a direct outcome of the dollar’s surge. Commodity prices are staying well behaved. AAA recently said that the average price for gasoline fell to a seven-month low. In turn, that has helped U.S. consumers (remember the strong earnings report from Ross Stores). A lot of energy stocks have not joined in the rally this year. Stocks like Apple, Microsoft and Facebook are all up over 25% this year, but ExxonMobil, one of the largest companies in the world, is down for the year.

  I think some of the dollar’s strength is due to Russia. In one sense, investors flock to a strong currency in times of stress. But also, any sanctions on Russia will probably hurt Europe as well. A strong dollar tends to correlate with large-cap stocks outperforming small-caps, but it’s not a very strong relationship.

  The odd part of a rising dollar is that it’s usually the result of good news. People are more optimistic about the domestic economy. The problem is that the good news can lead to bad news like weaker imports. Investors should continue to focus on high-quality companies with strong positions in their markets. Don’t try to second-guess the forex market. That’s a sucker’s game. The best companies know how to plan for their markets and they act accordingly. As always, time is on the side of the disciplined investor. Now let’s look at Oracle’s upcoming earnings report.

  Oracle Is a Buy up to $44 per Share

  Now that we’re in September, we have two Buy List stocks that have quarters ending in August. Bed Bath & Beyond ($BBBY) is due to report its earnings on September 23. Next Thursday, September 18, Oracle ($ORCL) is due to report their fiscal Q1 earnings.

  Three months ago, Oracle bombed their last earnings report. For Q4, the House of Ellison earned 92 cents per share, which was three cents below Wall Street’s consensus. The company had told us to expect earnings to range between 92 and 99 cents per share. It’s unusual to see Oracle hit the low part of their range.

  Looking at the numbers, Q4 was surprisingly weak. Quarterly revenue rose only 3.4%, to $11.32 billion, which was $160 million below expectations. One of the keys for Oracle‘s business is sales of new software licenses. For Q4, that came in at $3.77 billion, which was flat. Their hardware revenue, now finally growing, rose only 2%, to $1.5 billion. One bright spot was that Oracle’s cloud revenue jumped 23% to $327 million.

  Oracle has said they see Q1 earnings ranging between 62 and 66 cents per share. That’s not so bad. Wall Street had been expecting 64 cents per share. Oracle sees quarterly revenue growth between 4% and 6%. Breaking that down, they expect new software-license revenue to be up by 6% to 8%. Hardware will be between -1% and 3%, but cloud revenue is expected to be up by 25% to 35%. If their guidance is accurate, that tells us that last quarter’s weakness was temporary. Oracle remains a solid buy up to $44 per share.

  Updates on Other Buy List Stocks

  Be on the lookout for a dividend increase soon from Microsoft ($MSFT). The software giant isn’t normally thought of as a dividend stock, but they’ve been working to change that. In the last four years, Microsoft has increased its dividend by 115%. The quarterly payout is currently 28 cents per share. I think MSFT will raise it to 31 cents per share. The stock recently broke out to another 14-year high. Microsoft remains a buy up to $48 per share.

  In last week’s CWS Market Review, I highlighted McDonald’s ($MCD) as an especially good buy. Not good timing on my part. This past week, MCD announced their worst monthly sales in ten years. Same-store sales fell 3.7% in August. When it rains, it pours. The company also said that problems with suppliers in China will knock 15 to 20 cents off this quarter’s bottom line. The burger joint is also getting bullied in Russia by Colonel Putin’s government. A number of McDonald’s have been shut down in Russia due to “sanitary” concerns. (Yeah, right.) The stock briefly dropped below $91 per share, which is a very good price. I’m keeping my Buy Below at $101, but if you can pick up shares under $93, that’s a good longer-term investment.

  Shares of eBay ($EBAY) got beat up this week after Apple announced plans for Apple Pay, which will compete against eBay’s PayPal. PayPal is a big money-maker for eBay, and there’s been a lot of pressure on the company to sell the division. As I noted a few weeks ago, just a rumor of that news sent shares of eBay higher. Even though eBay has said they’re not interested in selling PayPal, I think the market’s evident interest will prevail. It usually does. I can’t say whether Apple Pay will crush PayPal, but I think it will add more pressure on eBay to move. The board also has “cover” to make an about-face. I’m lowering my Buy Below on eBay to $55 per share.

  That’s all for now. The Federal Reserve meets again next week, on Tuesday and Wednesday. The Fed will update its economic projections (the blue dots), and Chairwoman Yellen will hold a post-meeting press conference. I expect to hear another $10 billion taper announcement. That will bring their monthly bond purchases down to $15 billion starting in October. Next week, we’ll also get the Industrial Production report on Monday and the CPI report on Wednesday. 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

• CWS Market Review – March 7, 2014
  Eddy Elfenbein, March 7th, 2014 at 8:53 am

  “The best stock to buy is the one you already own.” – Peter Lynch

  I can’t remember a week that started off so scary yet ended so optimistically. The U.S. stock market dropped sharply on Monday on the news that Russian troops had moved into the Crimea, or as our government worded it, made “an uncontested arrival.” Soon there was talk of a possible invasion of eastern Ukraine.

  While Vladimir Putin was ignoring Western leaders, he may have been paying attention to the financial markets. On Monday, the Russian ruble was the worst-performing currency in the world. The ruble, which is already down 10% this year, plunged to its lowest level ever against the dollar. In order to defend its currency, the Russian Fed jacked up interest rates by 150 basis points, from 5.5% to 7.0%. That’s a huge move, and it has a cost.

  We don’t know for sure, but it’s estimated that the Russian central bank shelled out somewhere between $10 billion and $12 billion to defend the ruble. For now, Russia’s foreign currency reserves are large enough to take the hit, but they can’t keep it up forever. On Monday, the Russian version of the Dow Jones, the Micex Index, plunged 11% for its worst loss in more than five years. Interestingly, Bloomberg estimates that several Russian oligarchs lost billions of dollars due to the Crimean incursion. In other words, perhaps this arrival wasn’t entirely uncontested.

  Well, somebody felt the heat, because on Tuesday we heard that Putin had ended Russia’s military exercises in western Russia. Everyone breathed a huge sigh of relief. Even though the Crimean crisis is still an issue, it doesn’t look like it will become something bigger and far more unpleasant. The S&P 500 celebrated on Tuesday by shooting above 1,870 to a new all-time high. It didn’t end there. On Thursday, the S&P 500 closed at yet another new all-time, 1,877.03. This is the index’s 50th record close in the past year. Since February 3, the S&P 500 has tacked on more than 7.7%.

  

  In this week’s CWS Market Review, I’ll bring you up to speed on the big debate on Wall Street: How much is poor weather really to blame for the soggy economic news? I’ll also share more good Buy List news with you. Qualcomm announced a 20% dividend increase, DirecTV cracked $80 per share (it’s already a 16% winner in the year for us) and eBay is at a 14-year high. Not bad. But first, let’s look at why all the weather excuses may have been correct.

  The Bad Weather Excuse Has Won the Argument

  Over the last few weeks, there’s been a debate raging on Wall Street about the soft economic data. The last two jobs reports weren’t so hot. The bears have said that the economy is soft and getting softer. The bulls have blamed the weak numbers on lousy weather. So who’s right?

  This is a hard debate to resolve, which is probably why it’s intensified. This week, however, we got some more data that indicates that the poor-weather thesis was probably correct. This is good news for investors, and it may suggest that 2014 will be the best year for the economy since the recession. In fact, in President Obama’s latest budget quest, he forecasts real growth of 3.1% for this year. That would be the fastest growth rate in nine years. Not only that, the president sees growth accelerating to 3.4% in 2015.

  Of course, those are just forecasts, and worse yet, forecasts from politicians. But let’s look at some hard numbers. On Monday, the ISM Manufacturing Index, a report I follow closely, came in at 53.2, which was above the Street’s expectations of 52.3. Any number above 50 indicates an expansion, while one below 50 signals a contraction. This was an important report because the ISM for January was a dud—just 51.3. That report came out on February 3, which marked the S&P 500’s recent low. Now that we’ve seen a healthy rebound, I think it’s safe to say that the January report wasn’t the start of a new trend.

  That’s not the only evidence. We also learned on Monday that real personal-consumption expenditures rose by 0.3% in January after a 0.1% pullback in December. On the other side of the ledger, consumer spending rose by 0.4% in January after a contraction of 0.1% the month before. The January spending was led by a 0.9% increase in services. That was the biggest jump in 13 years, and it was most likely due to a greater demand for utilities. In other words, folks were trying to keep warm. Another check mark for bad weather.

  But the biggest evidence to support blaming the bad weather was this week’s Beige Book, which is a collection of regional surveys done by the Federal Reserve. Eight of the 12 districts reported modest economic improvement. New York and Philadelphia had slight declines, which they blamed on the weather. Kansas City and Chicago said they were stable. Consider this stat: The December Beige Book mentioned “weather” five times. That jumped to 21 times in January. In February, “weather” was mentioned 119 times.

  The next big economic report will be the February jobs report. I’m writing this early Friday morning, and the jobs numbers come out at 8:30 ET, so you may already know the results (be sure to check the blog). As I mentioned earlier, the last two jobs reports were rather weak. The economy created 75,000 net new jobs in December and 113,000 jobs in January. That’s not so hot. Put it this way: The economy averaged more than 205,000 new jobs each month for the year prior to that. If we see a big increase in non-farm payrolls for February—say, over 200,000—then it would be another signal that the economy suffered a minor weather-related blip.

  We got a sneak preview of the jobs report on Wednesday when ADP, the private payroll firm, said they counted 139,000 new jobs last month. However, the ADP report doesn’t always sync up with the government’s figures. But another promising number came out on Thursday: The number of Americans filing first-time jobless claims fell to 323,000, which is a three-month low.

  Lately, a number of Wall Street firms have pared back their growth forecasts for Q1 GDP. Just a few weeks ago, Goldman Sachs had expected 3% growth. Now they’re at 1.7%. JPMorgan just cut their forecast from 2.5% to 2%. I don’t have a firm view just yet, but I’m beginning to think those forecasts are too pessimistic. Either way, we’ll get our first look at Q1 GDP in late April.

  The bottom line is that a lot of the market’s resiliency this week was due to more than just the calming effect in Ukraine. Investors are beginning to realize that this might be a very good year for economic growth. Let me add another point about the current market. I caution you that I’m not a technical analyst, but many chart-watchers have been impressed by the breadth of this market. In other words, a rising tide is lifting a heckuva lot of boats. It’s not a rally led by a small number of monster-sized winners like we saw during the Tech Bubble. Now let’s look at how our Buy List has been faring.

  Qualcomm Raises Its Dividend by 20%

  The good news for the market has been even better news for our Buy List. We’ve beaten the S&P 500 for six of the last seven days. Through Thursday’s close, our Buy List is up 2.22% for the year, which is more than the S&P 500’s gain of 1.55%. This is a pleasant turnaround for us. Less than one month ago, we were trailing the index by close to 1%. I’ve also been impressed that our systemic risk (that’s beta for you smart kids) is less than the overall market’s.

  Last week, we got a 17% dividend increase from Ross Stores ($ROST). This week, we got a 20% dividend increase from Qualcomm ($QCOM). I like this stock a lot. Their quarterly payout will rise from 35 cents to 42 cents per share. The board also approved a $5 billion increase to their buyback authorization. That brings the total authorization to $7.8 billion.

  If you recall, just a few weeks ago, the company handily beat Wall Street’s earnings estimates and bumped up its full-year guidance. Qualcomm also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman. On Thursday, QCOM broke $77 for the first time in 14 years. Qualcomm remains a very good buy up to $79 per share.

  

  Last week, I mentioned the public feud between Carl Icahn and eBay’s board. It got even nastier this week. The immediate positive for us is that the brawl has helped the stock. Shares of eBay ($EBAY) nearly cracked $60 this week.

  Honestly, this fight is rather tedious, but I’ll boil it down for you. What happened is that eBay had bought Skype, but it didn’t do much for them, so they sold it for $2.75 billion to an investor group led by Mark Andreessen’s company (he serves on eBay’s board). Two years later, Microsoft bought all of Skype for $8.5 billion. Andreessen said that everything he did was above board and fully disclosed at the time.

  Icahn ain’t buying it. In fact, he said that he’s “never seen worse corporate governance than eBay.” Really, Carl? Icahn’s goal isn’t a secret; he wants eBay to sell off PayPal, but the board has zero interest. Don’t get me wrong: I’m an Icahn fan. We need more people putting pressure on corporate boards, but even I concede that he can take things too far. Don’t expect a PayPal spinoff anytime soon. The board has made it clear that that’s a non-starter. My take: Ignore the bickering and concentrate the business. eBay remains a solid buy up to $62 per share.

  More Buy List Updates

  Several of our Buy List stocks have rallied strongly lately. Warren Buffett recently disclosed in his yearly Shareholder Letter that Berkshire Hathaway continues to have a big stake in DirecTV ($DTV). Buffett owns 22.2 million shares in DTV, which is 4.3% of the company. Last month, the satellite-TV crushed earnings by 23 cents per share. I also like that they’re really reducing share count with their buybacks. DTV is up 16% this year, and it’s our top-performing stock on the Buy List. This week, I’m raising our Buy Below price to $84 per share.

  In January, Moog ($MOG-A) became our first dud of the year. The maker of flight-control systems missed earnings by a penny per share and guided lower for the year. The stock was clobbered and fell as low as $57 per share. But this is why we like high-quality stocks—they tend to rebound. (We just don’t know when.) Or as Peter Lynch put it in today’s epigraph, “the best stock to buy is the one you already own.” Moog shot up more than 5% on Tuesday and closed at $64.21 on Thursday. Moog continues to be a good buy up to $66 per share.

  On Thursday, Wells Fargo ($WFC) got to a new high, as did Express Scripts ($ESRX). Remember it was only a few days ago that ESRX fell after its earnings report. Now it’s at a new high!

  Also on Thursday, Oracle ($ORCL) came within 15 cents of hitting $40 per share. Larry Ellison’s baby last saw $40 in October 2000. The company will release its next earnings report after the closing bell on Tuesday, March 18. On the last earnings call, Oracle said to expect fiscal Q3 earnings between 68 and 72 cents per share.

  I also want to remind you that Cognizant Technology Solutions ($CTSH) will split 2 for 1 on Monday. This means that shareholders will now own twice as many shares, but the share price will be cut in half, so don’t be surprised when you see the lower share price on Monday. The stock has recovered very impressively from its January sell-off. CTSH is currently up more than 20% from last month’s low. I’m raising my Buy Below on Cognizant to $112 per share, which will become $56 per share on Monday. This is a great stock.

  That’s all for now. Next week will be a slow week for economic news. I’ll be curious to see the retail-sales report which is due out on Thursday. This will give us a clue as to how strong consumer spending is. 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

• CWS Market Review – February 28, 2014
  Eddy Elfenbein, February 28th, 2014 at 7:47 am

  “A bull market is like sex. It feels best just before it ends.” – Barton Biggs

  The fourth time’s a charm! For three days in a row, the S&P 500 rallied above 1,850 and was ready to make a new all-time record close, but each time, the bears arrived late in the day to pull us back down. On Thursday, it looked like it was going to happen for a fourth time, but this time, the bulls prevailed, and the S&P 500 closed at 1,854.29—a new record close.

  We’re coming up on the fifth anniversary of a generational low for stocks. The climate back then was dreadful. On Friday, March 6, 2009, the Labor Department reported that the unemployment rate had hit a 25-year high and the economy had lost a staggering 651,000 non-farm payroll jobs the previous month. That morning, the S&P 500 touched an evil-sounding intra-day low of 666.79, which was the index’s lowest point in more than 12 years. The Dow was in even worse shape. Adjusted for inflation, the Dow was back to where it had been 43 years before.

  The closing low came the following Monday, March 9, when the S&P 500 finished at 676.53. That was nine years to the day after the Nasdaq Composite first closed above 5,000. Now it was roughly one-quarter of that. The following day, Ben Bernanke told the Council on Foreign Relations that he thought we should review our mark-to-market accounting rules, and a few weeks later, the FASB agreed. That gave a huge boost to the rally. Five years on, the S&P 500 has gained 174%. Including dividends, it’s up 205%. In plainer terms, investors have tripled their money in five years. This is one of the greatest rallies in Wall Street history.

  

  So where do we go from here? In this week’s CWS Market Review, we’ll take a look at the economy and how it could impact our portfolios. I’ll also highlight some good news from our Buy List. An entertaining battle of billionaires is helping our position at eBay. The stock just touched an all-time high. Also, Ross Stores just announced that it’s raising its dividend by 17%. This is the 20th year in a row that Ross has increased its payout. Not many stocks can make that claim. But before we get to that, let’s look at some recent economic news and what it means for us.

  Why the Housing Market Holds the Key

  On Thursday, new Federal Reserve chair Janet Yellen told Congress that it’s possible the Fed would hold off on its tapering plans if there were a “significant change” in the economic outlook. Frankly, that’s not really news; the Fed has consistently held this line. But this time, investors are taking it more seriously since the economic news has been less favorable. Eric Rosengren, the president of the Boston Fed, who incidentally was the only FOMC member in favor of cutting rates in September 2008, said the Fed should be “very patient” in cutting stimulus. Lousy weather has been a convenient scapegoat for poor numbers, but it’s pretty hard to separate out what’s been caused by the weather and what hasn’t.

  On Thursday, the Commerce Department said that orders for durable goods fell 1% last month. But on closer inspection, there were bits of good news in this report. If you exclude transportation, which can be very volatile, durable-goods orders actually rose 1.1% last month. That was the biggest increase since May. Economists were expecting a decline of 0.3%.

  On Wednesday, the Census Bureau said that new-home sales rose to a five-year high. The housing situation is critical in determining where the economy goes from here. Even though new-home sales are up, the current level is still near the low point of previous cycles. That tells you just how crazy the housing boom was. It created a massive, gigantic oversupply of homes. All those empty homes weren’t incinerated. Instead, it’s taken us this long to work off the inventory. Only now is housing inventory back to normal.

  This is why I’m optimistic on housing. We’ve finally burned off that excessive inventory, and people are going to need more new homes. Normally, housing leads a recovery, and we didn’t get that this time. As a result, we got a sluggish recovery—and for many folks, there was no recovery at all. In fact, I think we could have very easily dropped back into a recession in 2011-12 if not for the assistance of the Federal Reserve. Budget-cutting from the government was a major drag on the economy. (Please note I’m not saying whether I approve of this or not, just that government austerity was a big factor.)

  It’s true that mortgage rates have risen. The average rate for a 30-year fixed mortgage jumped from 3.35% last May to 4.33% now. While higher mortgage rates have crushed the refi market (Wells Fargo just announced more layoffs in their mortgage unit), they don’t appear to be holding back new buyers. The simple fact is that we’ll need more new homes. Despite the poor weather, the economy is slowly gaining steam. That’s why I strongly doubt we’ll see the Fed shelve its tapering plans this year.

  Let me also touch on the consumer end of the economy. Retail stocks got off to a terrible start this year. That was reflected on our Buy List with bad performances from Ross Stores and Bed Bath & Beyond, but they weren’t alone. Nearly everyone from Walmart on down had a lousy quarter. The retail sector came back to life this week; even troubled retailers like J.C. Penney and Target saw big gains this week.

  I suspect that the bad times for retailers have passed. The facts are clear. Consumers have paid down their debts. The great enemy of consumer spending, the price at the pump, is below its average of the last three years. Lastly, the labor market has improved, though at a very leisurely rate.

  The Perils of Complacency

  One of the concerns I have is the unintended consequences of the Federal Reserve’s policies. No matter how you feel about QE, and I do think it’s been a plus for stocks, massive bond buying distorts the market’s gauging of risk and reward. In short, the Fed has encouraged more risk-taking. That was understandable when everyone was terrified, but what about now?

  I’ll give you an example of some possible distortions we’re seeing. Since February 3, the most-shorted stocks, meaning those with the most bets against them, have done the best. The hated stocks have doubled the return of the rest of the market. Tesla is a perfect example. Shorts make up an astounding 37% of their shares, yet the stock has skyrocketed. Shares of Tesla got to $265 this week; a year ago, they were at $35.

  Another example is in the biotech sector. In the last ten weeks, the biotech index is up 25%, yet one-third of the companies don’t turn a profit. Facebook broke $71 per share this week, which is more than 90 times last year’s earnings. Some folks are claiming that the rash of big-ticket M&A deals is due to non-existent returns from sitting on cash. Also, everyone’s favorite alternative asset, gold, is having a good year so far (after a very rough 2013). Or we can look at the bond market. The yield spread between junk debt and Treasuries narrowed to its lowest level in six years (see below).

  

  These are all signals that investors are willing to shoulder more risk. On one hand, that’s a good thing. The danger comes when investors become complacent and feel they have little reason to worry. Consider that investors have become programmed to buy every dip. Since the bull market began five years ago, there have been 19 nervous breakdowns of 5% or more. Every single one was turned back.

  The problem with risk is the things we don’t know we don’t know. Let’s look at what’s been happening in China’s economy. The growth of their “shadow banking” system has been alarming. No one truly knows its size. What if there’s a major default in China and that ignites a panic? What’s interesting is that growth from China has helped ease our pain from the Great Recession.

  I don’t have a specific worry that I see looming on the horizon. Rather, it’s that I see investors becoming sloppy. I’m not so concerned about a large-scale bubble; I worry about small things like poorly thought-out acquisitions. (Peter Lynch has referred to this as the “Bladder Theory” of corporate finance.) The key for investors is not to be tempted by easy gains or to feel the need to chase stocks for fear of being left behind. Frustrated investors are bad investors. Now let’s look at a long-term strategy that works.

  Our Buy List Is up for the Year

  I’m happy to report that our Buy List is up slightly for the year, and we’re leading the market. Of course, it’s still very early, but through Thursday, our Buy List is up 0.45% this year, while the S&P 500 is up 0.32% (not including dividends). Bear in mind that only a few weeks ago, we were down nearly 6%. Our Buy List has beaten the S&P 500 for the last seven years in a row. Now let’s look at some recent news from our Buy List stocks.

  Just after I sent you last week’s CWS Market Review, Express Scripts ($ESRX) had a rough day on the market. Shares of ESRX dropped 4% last Friday. This was despite reporting earnings that were in line with estimates, and they offered a good guidance for this year. I’m a little baffled by the market’s sour reaction, as there was little in this report that anyone should find surprising. The company said it’s aiming to return 50% of its cash flow to investors as dividends or buybacks. I still like Express Scripts and think it’s a good buy up to $83 per share.

  Shares of eBay ($EBAY) had a good week, and we have our friend Carl Icahn to thank. The multi-gazillionaire released three open letters this week. In them, he’s reiterating his call for eBay to spin off their very lucrative PayPal business. The company has made it abundantly clear that they’re not interested.

  The battle between Icahn and eBay’s board is getting ugly. Icahn doesn’t like the fact that Scott Cook and Marc Andreessen are on the board. Cook founded Intuit which competes against PayPal, and Andreessen’s company bought Skype from eBay and then sold it to Microsoft.

  Pierre Omidyar, eBay’s chairman and founder, shot back and said that Icahn’s views are “false and misleading.” I love it when billionaires fight, especially when it helps our stock. Thanks to the high-profile kerfuffle, shares of eBay rallied above $59 on Thursday and took out the all-time high from 2004. Now Icahn has challenged eBay to a public debate, which sounds a bit nutty. The irony is that ever since Icahn went on the warpath, Omidyar has made $450 million from the eBay rally. My take: I think it’s clear that the board isn’t going to budge. Meanwhile, I’m raising my Buy Below on eBay to $62 per share.

  This is actually a lull period for Buy List earnings reports. Our only earnings report for the next several weeks will be Oracle ($ORCL), which should report sometime in mid-March. I’m expecting another good report from them. Oracle tested our patience last year, but I think it’s starting to pay off. For Q3, Oracle sees earnings coming in between 68 and 72 cents per share. On Thursday, the shares broke above $39 for the first time since Bill Clinton was president. Oracle remains a very good buy up to $41 per share.

  Ross Stores Announces Big Dividend Increase

  After the closing bell on Thursday, Ross Stores ($ROST) reported Q4 earnings of $1.02 per share. This is for the crucial holiday shopping quarter. In November, the deep-discount retailer spooked Wall Street when it said that Q4 earnings would be below forecasts. The Street had been expecting $1.09 per share; Ross said to expect between 97 cents and $1.01 per share.

  Overall, Ross is doing quite well. For the entire year, Ross earned $3.88 per share which was a nice increase over the $3.53 from 2012. The fiscal year for 2012 was 53 weeks which added 10 cents per share to that year’s earnings.

  Michael Balmuth, Ross’s CEO, said, ”Our fourth-quarter sales performed in line with our guidance, with earnings that were slightly better than expected, primarily due to above-plan merchandise gross margin. Despite a very promotional retail environment throughout the holiday season, customers responded favorably to the compelling bargains we offered on a wide assortment of fresh and exciting name-brand fashions and gifts.”

  Now for some guidance. For Q1, Ross sees earnings coming in between $1.11 and $1.15 per share. Wall Street had been expecting $1.20. For all of 2014, Ross sees a range of $4.05 to $4.21 per share. The Street was at $4.34 per share. That’s a disappointing forecast, and the shares were weak in the after-hours market.

  But there is good news. Ross announced a 17.6% dividend increase. The quarterly payout will rise from 17 cents to 20 cents per share. This is Ross’s 20th year in a row of raising its dividend. At 80 cents per share for the full year, that works out to a yield of 1.1%. I’m raising my Buy Below on Ross to $76 per share.

  That’s all for now. Next week, we get several important economic reports. On Monday, the ISM report comes out. Last month’s report was surprisingly weak, so it will be interesting to see if this was a temporary move or the start of a larger trend. The Fed’s Beige Book comes out on Wednesday, followed by the productivity report on Thursday. Then on Friday is the big jobs report for February. The last two jobs reports were noticeably subdued, and it appears that the weather excuse has outlived its welcome. 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

• CWS Market Review – January 24, 2014
  Eddy Elfenbein, January 24th, 2014 at 9:21 am

  “Successful investing is anticipating the anticipations of others.” – JM Keynes

  The stock market has been getting bumped around lately, and it hasn’t had much direction at all. Since December 23rd, the S&P 500 has closed every day but one between 1,826 and 1,849. That’s a fairly narrow range, although we are starting to see some behind-the-scenes rotations. For example, healthcare stocks are outperforming as consumer discretionary issues are lagging. The bond market has quietly improved, and the 10-year yield just hit a six-week low.

  

  Of course, the major focus this week has been earnings, earnings and more earnings. The theme so far is that not even good earnings are enough. Investors want to see big earnings beats plus higher guidance. If you don’t have both, you’re in trouble.

  We’re still fairly early in the Q4 earnings season. Some 109 of the 500 stocks in the S&P 500 have reported so far. Of those, 74% have beaten their earnings estimates, while 67% have beaten their sales estimates. Unfortunately, those numbers sound better than they are when we consider that going into earnings, many companies had rolled back expectations. Essentially, they lowered the bar to the ground and now expect applause from investors for stepping over it. Well, that hasn’t been happening.

  Fortunately, our Buy List stocks have reported very good earnings results so far. Again, it’s early, but all six stocks have beaten expectations. A few beat them by a lot. However, the stocks haven’t been richly rewarded by the market. It’s not just our stocks; no one’s getting any earnings love, and this really shows the market’s ornery temperament.

  Make no mistake: I still like the environment for stocks, but we have to come to terms with the reality that the market’s easy gains have already been made. This year won’t be as easy and stress-free as last year was. We’ll still see gains, but we need to be patient and have some humility.

  In this week’s CWS Market Review, I’ll run through our Buy List earnings reports. We had especially strong results from CA Technologies and Microsoft. The report from IBM, however, was rather weak, though I wasn’t expecting much.

  Later on, I’ll highlight our earnings reports for the coming week. Also, our friends at the Federal Reserve meet on Tuesday and Wednesday. It will be Mr. Bernanke’s swan song, and I expect to see another taper announcement. But first, let’s look at why everyone hates IBM (but me).

  IBM Beats Earnings but Falls

  On Tuesday, International Business Machines ($IBM) reported Q4 earnings of $6.13 per share. That was 14 cents more than Wall Street’s consensus. That’s the good news. The bad news is that much of that earnings beat was driven by cost-cutting. IBM’s top line numbers were pretty weak. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.

  We know that much of the tech world is shifting to cloud-based networks, but Big Blue isn’t exactly sitting still. The company is aggressively moving toward cloud services, and they’re ditching their lower-margin businesses. They just sold their server business to Lenovo for $2.3 billion. The company also realizes the situation it’s in; the entire senior team has foregone bonuses. On the positive end, I was impressed to hear IBM say that it sees earnings for 2014 of at least $18 per share. They also reiterated their earnings target of $20 per share for 2015.

  Simply put, IBM isn’t popular on Wall Street at the moment. The stock got clipped by more than 3% on Wednesday, the day after the earnings report came out. I’m not saying that IBM doesn’t face a difficult environment. It does. Its systems and tech revenue fell 26% last quarter. But IBM has transformed itself many times in its history. Remember that their cloud revenue rose by 69% in Q4 to $4.4 billion.

  I think IBM is in a position similar to where Microsoft was one year ago. Bears have been having a field day beating them up, but the stock is cheap now. It’s going for about 10 times earnings, which is far less than the rest of the market. My take: IBM will require some patience, but it’s a solid stock. I rate IBM a buy up to $195 per share.

  CA Technologies Is a Buy up to $36 per Share

  Also on Tuesday, CA Technologies ($CA) reported earnings of 84 cents per share, which easily beat Wall Street’s forecast of 71 cents per share. Last week, I said the Street’s consensus was “a wee bit too low.” Shows you what I know! Interestingly, this was the third time in the last four quarters that CA has beaten earnings by 13 cents per share.

  CA also guided Wall Street higher for the rest of the year. The December quarter is the third quarter of its fiscal year. So for 2014, CA now sees earnings ranging between $3.05 and $3.12 per share, compared with Wall Street’s estimate of $3.02 per share. The company also sees full-year revenues ranging between $4.52 and $4.57 billion, versus the consensus of $4.50 billion. This is what we like to see: beat and raise.

  CEO Mike Gregoire said, “Based on our results so far this year, we expect our fiscal year 2015 revenue growth rate and non-GAAP operating margin to be similar to fiscal year 2014.” That sounds good to me. So what did the market do with this good news? On Wednesday, shares of CA rallied by…four cents! Then on Thursday, they dropped by 65 cents. No, it doesn’t make any sense, but you can never argue with traders. Instead, we look at the facts. Going by Thursday’s closing price, CA’s dividend yields 3%. This week, I’m raising our Buy Below on CA to $36 per share. This is one of the good ones.

  Both Stryker and eBay Beat by a Penny per Share

  On Wednesday, both Stryker and eBay reported earnings that beat expectations by one penny per share. Let’s break down the results.

  For Q4, Stryker ($SYK) earned $1.23 per share, compared with Wall Street’s consensus of $1.22 per share. Honestly, I wasn’t too concerned with Stryker’s earnings report. They usually come very close to expectations. But I wanted to hear what the orthopedic outfit had to say about 2014.

  For this year, Stryker said they see organic revenue growth of 4.5% to 6%, and earnings ranging between $4.75 and $4.90 per share. That’s a very good number, and it’s well above where the Street was at $4.63 per share. For all of 2013, Stryker earned $4.23 per share.

  So with all this good news, what did the stock do on Thursday? It dropped 1%. I don’t get this one either. Stryker remains an excellent buy. I’m raising our Buy Below on Stryker to $81 per share.

  eBay ($EBAY), one of our new stocks this year, turned out to be the most newsworthy company this week. For Q4, the online-auction house reported earnings of 81 cents per share, one penny more than consensus. The company also authorized another $5 billion for its share-buyback program.

  But the big news came when multi-gazillionaire Carl Ichan said that he wanted to see eBay spin off its PayPal business. Icahn said that he’s going to nominate two of his people for the eBay board. Spinning off PayPal isn’t a new idea, but this is the first time someone so prominent has endorsed it. The board doesn’t like the idea, and they told Icahn so. But the market seems favorable for a spin off. On Wednesday afternoon, shares of eBay were trading up 8% in the after-hours market. On Thursday, however, eBay rallied for a 1% gain.

  Frankly, I doubt we’ll see a PayPal spin-off. It’s too integrated into eBay’s business. But I like seeing Carl Icahn advocate on behalf of shareholders. He didn’t get to where he is by being a shrinking violet. eBay had a solid quarter, and it continues to be a very good buy up to $58 per share.

  A Tough Quarter at McDonald’s, but Give Them Time

  On Thursday morning, McDonald’s ($MCD) reported Q4 earnings of $1.40 per share. That made the company our third earnings report in a row that beat estimates by one penny per share. Sales at the hamburger giant rose by 2% to $7.09 billion. But the details were pretty ugly. Comparable-store sales dropped by 0.1%, and in the U.S., comparable-store sales fell by 1.4%. Ouch.

  McDonald’s faces a number of challenges. The new CEO, Donald Thompson, hasn’t been as effective as I would have hoped. They’ve played around with the menu, but nothing has really taken off. The menu has probably grown too complicated and could use some paring down.

  The situation at McDonald’s is somewhat similar to that at IBM. The current environment is rough, but the stock is going for a good value. Ultimately, I think the problems are very fixable, but it will take a little time and effort. McDonald’s made about the same profit as one year ago, but thanks to share buybacks, there are fewer shares outstanding, so EPS rose by two cents. The dividend currently yields us 3.4%, which is a nice buffer for us. MCD is a buy up to $102 per share.

  Impressive Earnings Beat from Microsoft

  After the bell on Thursday, Microsoft ($MSFT) had a very strong earnings report. It turns out that Xbox had a great holiday season. The software giant had a net income of $6.56 billion, or 78 cents per share. That was a full dime more than Wall Street’s forecast. At the top line, revenue rose 14% to $24.52 billion. The Street had been expecting sales of $23.68 billion. The best news is that Surface revenue more than doubled to $893 million.

  While Xbox continues to be a great profit center for Microsoft, the Surface is still small potatoes. One big piece of missing news is that Microsoft still hasn’t yet announced who its next CEO will be. Ballmer is out soon. If you recall, there was some speculation that Ford’s Alan Mulally would jump ship and take over at Microsoft. Fortunately, that won’t happen.

  Microsoft jumped up more than 3% in Thursday’s after-hours market, but we’ll have to see how it trades from here. Microsoft was a great buy for us last year when it was under $27 per share. MSFT isn’t a screaming buy like it was a few months ago, but it’s still a good value. We also had a very nice dividend increase recently. Microsoft is a good buy up to $40 per share.

  Upcoming Buy List Earnings

  Still more earnings come in next week. Ford is due to report on Tuesday, January 28. Qualcomm follows on Wednesday, January 29, and CR Bard on Thursday, January 30. These dates may change, so please check our website for the latest. Also, Moog ($MOG-A) is due to report later today.

  I’m most looking forward to Ford’s ($F) earnings report. The automaker recently threw a damper on expectations for 2014. The short version of the story is that North America is doing well, but Europe is not. Ford has made it clear they’re playing the long game, so we probably won’t see a turnaround in Europe until 2015 or 2016. Wall Street currently expects Q4 earnings of 29 cents per share, which is down two cents from a year ago. That would be disappointing, but Ford is clearly moving in the right direction. The 25% dividend boost was a great vote of confidence.

  Qualcomm ($QCOM), another new stock on our Buy List, will be an interesting earnings report to see. The last report was a dud, and the stock’s subdued performance last year led me to add it to this year’s Buy List. The sentiment is beginning to shift here. If Qualcomm beats and offers impressive guidance, the shares could break out.

  Three months ago, CR Bard ($BCR) told us to expect Q4 earnings to range between $1.34 and $1.39 per share. That would put full-year 2013 earnings between $5.70 and $5.75 per share. They should hit that range without much difficulty. Bard is a buy up to $142 per share.

  That’s all for now. Next week will be the final trading week for January. The Federal Reserve meets on Tuesday and Wednesday. This will be Ben Bernanke’s final meeting as Fed chair. I expect to see another round of tapering. We have a few more Buy List earnings reports coming our way. On Thursday, we’ll also get our first look at Q4 GDP. The last three GDP reports have all seen increased growth rates, meaning economic acceleration. Let’s see if that continues. 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

• CWS Market Review – January 17, 2014
  Eddy Elfenbein, January 17th, 2014 at 7:12 am

  “It is not the crook in modern business that we fear, but the honest
  man who doesn’t know what he is doing.” – Owen D. Young

  Earnings season is finally here. We’ve already had one good earnings report from Wells Fargo ($WFC). The big bank beat earnings by two cents per share, and after a delayed reaction, the shares broke out to a new 52-week high. This week, I’m raising my buy below on WFC (more on that in a bit).

  Things are about to get very busy for our Buy List. Next week, we’re due to have six earnings reports including heavyweights like IBM, McDonald’s and Microsoft. In this week’s CWS Market Review, I’ll preview our upcoming earnings, and I’ll break down the results from Wells Fargo.

  Looking at this earnings season, the consensus on Wall Street is that earnings rose 4.9% last quarter. That’s kind of blah, but going into this earnings season, there were some serious concerns. Before earnings season even started, there were 95 earnings warnings in the S&P 500, compared with just 15 good-news surprises. But most of those warnings have been about rather minor adjustments. Actually, the market seems unusually sedate. A few times this week, the Volatility Index ($VIX) dropped below 12, which brought the “Fear Index” to some of its lowest levels in the past seven years. Fortunately, the stock market continues to hold up well, and the S&P 500 reached an all-time high close on Wednesday. We edged out the previous high close of December 31 by 0.00108%.

  

  The economic news continues to be mostly positive, with a few bumps. This week, the Federal Reserve released its Beige Book report, which looks at regional economies across the country. The reports were mostly good, and I think we can expect more tapering when the Fed meets again at the end of this month. Janet Yellen officially becomes the new Fed Chairman on February 1.

  This past Tuesday, the Census Bureau released the December retail-sales report, which showed an increase of 0.2%. December is obviously a huge month for retail. While the report wasn’t outstanding, economists were expecting a gain of 0.1%. Also, the big increase for November was revised downward from 0.7% growth to 0.4%.

  These are important numbers because consumers drive most of the economy. Also, retail stocks have been hit hard this year. I still like our Buy List retailers, Ross Stores ($ROST) and Bed Bath & Beyond ($BBBY). However, their most recent quarterly reports included sales through November, and not the holiday season. Once the dust settles in the retail sector, I expect our stocks to flourish.

  Of course, it’s still very early, but our Buy List is already slightly ahead of the S&P 500 this year. We’ve done that despite a horrible start for Bed Bath & Beyond, which is now down over 16% for the year. Ouch! The lesson here is that diversification works. I should also note that you’ll often see the worst stock in your portfolio dropping more than the gain from your best stock. Stock performance tends to be asymmetrical. In plain English, the bad ones are worse than the best are good. That’s a key insight, and ultimately, it’s what makes value investing so effective. Now let’s look at Wells Fargo.

  Wells Fargo Is a Buy up to $50 per Share

  On Tuesday, Wells Fargo ($WFC) reported fourth-quarter earnings of $1 per share. That beat Wall Street’s consensus by two cents per share. Strangely, the shares initially dropped after the earnings report (yep, we know how melodramatic traders can be). Then on Wednesday, it was as if rationality and math suddenly dawned on everyone, and the nervous traders got squeezed out. Before the closing bell, WFC had rallied to a new 52-week high.

  Lesson: Don’t trust the market’s first reaction. Actually, keep a wary eye on the second and third ones as well.

  Now that I’ve had a chance to look at the earnings from Wells, I can say that I’m impressed. Net income for Q4 rose 10% over last year’s Q4. For the entire year, Wells’s net income rose 16% to $21.9 billion. This was their fifth-straight record year. Last year, Wells made more money than JPMorgan Chase (sorry, Jamie).

  I was particularly impressed with the efforts of CEO John Stumpf and his team to trim overhead. (Notice how good companies don’t wait to cut costs; they’re always looking for excess fat they can cut.) Quarterly revenue dropped 6% to $20.7 billion. For banks, you want to see where their “efficiency ratio” is. That’s a good measure of how well they’re managing their operations. For Wells, their efficiency ratio actually ticked up a bit last quarter. That’s not bad, coming in the wake of lower revenue.

  Wells’s mortgage-originations business got shellacked last quarter, but there wasn’t much they could do about that. In that sector, you’re at the mercy of the Mortgage Rate Gods. On the plus side, Wells’s wealth and brokerage business did very well. One big benefit for Wells is that they don’t have the legal bills that many of the other big banks have.

  I like Wells Fargo a lot. The bank is going for less than 11 times this year’s earnings estimate. I expect another dividend increase this spring. This week, I’m raising my Buy Below on WFC to $50 per share.

  Next Week’s Buy List Earnings Reports

  Next Tuesday, two of our big tech stocks, IBM and CA Technologies, report earnings. I want to warn you ahead of time that IBM ($IBM) may fall below expectations. The Street expects $5.99 per share, which could be just a bit too high. I’ll tell you ahead of time not to worry about a slight earnings miss. New additions to our Buy List are often dented merchandise, and Wall Street bears have been out to get IBM. They may not be done just yet. Either way, IBM is a solid value at this price. My take: IBM is a good buy anytime you see it below $195 per share.

  Three months ago, CA Technologies ($CA), the shy kid, blew the doors off its earnings report. CA netted 86 cents per share for Q3, which was 13 cents more than estimates. Wall Street expects 71 cents for Q4, which is probably a wee bit too low. There’s also a chance that CA might sweeten its quarterly dividend. CA Technologies remains a solid buy up to $35 per share. I have much love for CA.

  Wednesday: Earnings from Stryker and eBay

  On Wednesday, we get earnings reports from Stryker and eBay. If you recall, Stryker ($SYK) raised its dividend by 15% last month. The company missed earnings by two cents in its last report. That was mostly due to currency effects, and I said not to worry about SYK. Indeed, the stock just hit another 52-week high. This time around, Wall Street expects $1.22 per share in earnings, but I’m more interested in what they’ll have to say about 2014. Wall Street currently expects full-year earnings of $4.56 per share for 2014. Stryker remains a very good buy up to $79 per share.

  eBay ($EBAY)’s earnings tend to be very consistent. So far this year, their earnings are up 14%. If we apply a 14% increase over the Q4 earnings from 2012 (70 cents per share), that gives us 80 cents per share, which is, not surprisingly, exactly what Wall Street expects. eBay is a very good buy up to $58 per share.

  Thursday: Earnings from McDonald’s and Microsoft

  On Thursday, we get two more blue-chip earnings reports: McDonald’s and Microsoft.

  Three months ago, Microsoft ($MSFT) surprised a lot of folks on Wall Street with an outstanding earnings report. The software giant earned 62 cents per share, which was eight cents more than estimates. Sales rose 16% to $18.5 billion. Microsoft generated sales that were $700 million more than expectations. I think people forget that MSFT is a very profitable company, especially with its business clientele. For the December quarter, the expectation is for MSFT to earn 68 cents per share, which is down from 76 cents the year before. That sounds about right. We should remember that in September, MSFT raised its dividend by 22%. Microsoft is very attractive below $40 per share.

  Like IBM, McDonald’s ($MCD) has been rather sluggish lately. This one may take some time before we see solid results. The consensus on the Street is for earnings of $1.39, which is only one penny more than last year’s Q4. The burger giant is coming off a lackluster year, but you should never count Ronald and his friends out. McDonald’s is a good buy up to $102 per share.

  That’s all for now. The stock market will be closed on Monday in honor of Dr. Martin Luther King’s 85th Birthday. Next week will be all about earnings. In fact, there’s not much in the way of economic reports. An important note: With these earnings reports, we want to pay attention to forward guidance as much as to the actual results. I think a lot of traders are nervous about this year, especially with the Fed’s tapering plans, so any optimism from companies will go a long way. 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