- Posted by Eddy Elfenbein on October 20th, 2014 at 11:20 am
Here are two charts I alluded to in Friday’s newsletter. The first shows the recent plunge in the two-year Treasury yield (the red line). I think this highlights the market’s view that higher rates may not come until later 2015, or even early 2016. I included the one-year yield (blue line) for comparison.
The second chart shows the falloff in the five-year “breakeven” rate. In simpler terms, inflation expectations have fallen a great deal in the last four months.
Ginni Rometty on IBM’s Quarter
Posted by Eddy Elfenbein on October 20th, 2014 at 11:09 am
27 Years On
Posted by Eddy Elfenbein on October 20th, 2014 at 10:36 am
Yesterday was the 27th anniversary of the 1987 Crash. The Dow fell 508 points in one day, which was a loss of 22.6%. Today that would be a drop of 3,700 points.
Here’s the long-term chart. On the long view, the 1987 drop is barely a blip.
I ran the numbers and found that the Dow has risen 7.64% annualized since the 1987 Crash, and 8.66% annualized since the day after the 1987 Crash.
October is rife with market anniversaries. This Friday is the 85th anniversary of Black Tuesday. Next Monday is the 17th anniversary of the 1997 mini-Crash. Tomorrow is the 107th anniversary of the start of the Panic of 1907.
Microsoft: “a textbook example of how not to do CEO succession”
Posted by Eddy Elfenbein on October 20th, 2014 at 9:26 am
At Vanity Fair, Bethany McLean has a 7,500-word article on the challenges faced by Microsoft. Here’s a sample:
Many people blame Microsoft’s predicament on Steve Ballmer, the big, bald, manic, fist-pumping sales guy who was Bill Gates’s longtime best friend and anointed successor, becoming C.E.O. in 2000. His contentious tenure ended more abruptly than most people expected when he stepped down last February, after announcing he would do so in August 2013. After a five-month search for a new C.E.O., which Fortune called a “textbook example of how not to do CEO succession,” and which at first focused on candidates who didn’t work inside the company, Nadella, who has spent 22 years at Microsoft, was chosen. Until then, his name was barely known in the outside world. As one former Microsoft executive puts it, “He was flying commercial a year ago!”
Not the least of the board’s problems in finding a new C.E.O. was that there weren’t a lot of outsiders who wanted the job. Gates and Ballmer are both aggressive personalities. They stopped speaking to each other as a result of the bad blood surrounding Ballmer’s resignation. But both were then still sitting on the board, ready to second-guess each other and, perhaps, the new C.E.O.’s decisions.
The balance of power between Gates and Ballmer is not as obvious as it may seem. At Gates’s current clip of stock sales he will be out of Microsoft by the end of the decade. Meanwhile, Ballmer has sold very rarely, and so the consigliere now owns more of the company than the founder. Indeed, Ballmer’s 333 million shares, worth some $15 billion, make him Microsoft’s largest individual shareholder, with a 4 percent stake.
In July, Ballmer announced his $2 billion purchase of the Los Angeles Clippers basketball team from the embattled Donald Sterling; in August he abruptly announced his retirement from Microsoft’s board, citing his “multitude of new commitments.” These days Ballmer, the man who once referred to Microsoft as his “fourth child,” is working out of a 40th-floor condominium some 20 minutes from the sprawling campus he once presided over, having meetings with basketball greats. “I’m kind of moving on,” he says. It will make Nadella’s job a little bit easier.
IBM Bombs Earnings
Posted by Eddy Elfenbein on October 20th, 2014 at 9:13 am
IBM ($IBM) released a terrible earnings report this morning. For the third quarter, Big Blue earned $3.68 per share. That’s 63 cents per share below Wall Street’s consensus. IBM also ditched its 2015 earnings target of $20 per share.
Last quarter was ugly in nearly every way. Their revenue dropped to $22.4 billion. Wall Street had been expecting $23.37 billion. This was their tenth straight quarter with a revenue decline.
IBM also said it will pay Globalfoundries $1.5 billion over three years to take their chip-making business off their hands. The shares are looking to open around 7% lower.
Morning News: October 20, 2014
Posted by Eddy Elfenbein on October 20th, 2014 at 6:54 am
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Posted by Eddy Elfenbein on October 19th, 2014 at 5:59 pm
IBM ($IBM) is due to report its earnings tomorrow. The company just released this cryptic statement:
ARMONK, N.Y.–(BUSINESS WIRE)–
IBM (IBM) will make a major business announcement and separately release its third-quarter 2014 earnings results on Monday, October 20 at 7:00 a.m. EDT.
Martin Schroeter, IBM senior vice president and chief financial officer, will host the company’s quarterly earnings conference call on Monday, October 20 beginning at 8:00 a.m. EDT.
The Webcast may be accessed via a link at http://www.ibm.com/investor/events/earnings/3q14.html.
Now Bloomberg is reporting that IBM is paying Globalfoundries Inc. $1.5 billion to take on their money-losing chip-making business.
IBM will also receive $200 million worth of assets, making the net value of the deal $1.3 billion, said the people who asked not to be identified because the plan is private. The companies plan to announce the deal tomorrow morning, the people said. IBM put out a statement today saying it planned to make a “major business announcement” tomorrow at 7 a.m. New York time.
After months of on-again, off-again talks, IBM Chief Executive Officer Ginni Rometty struck a deal to jettison the chipmaking unit, which has been a drag on earnings. Globalfoundries, owned by an investment arm of the government of Abu Dhabi, is taking on the unit to tap the expertise of its engineers in the fundamentals of semiconductor design and manufacturing.
CWS Market Review – October 17, 2014
Posted by Eddy Elfenbein on 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!
Morning News: October 17, 2014
Posted by Eddy Elfenbein on October 17th, 2014 at 6:45 am
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Industrial Production Rose 1% in September
Posted by Eddy Elfenbein on October 16th, 2014 at 12:17 pm
Industrial production rose by the most since November 2012.
The 1 percent advance in output at factories, mines and utilities exceeded the highest forecast in a Bloomberg survey and followed a 0.2 percent drop the prior month, Federal Reserve figures showed today in Washington. Utility production was the strongest since May 2012, while factories made strides even as motor vehicle output fell for a second month.
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