• Today with Joe Weisenthal and Scarlet Fu
    Posted by on September 23rd, 2016 at 10:59 pm

  • CWS Market Review – September 23, 2016
    Posted by on September 23rd, 2016 at 7:08 am

    “If being the biggest company was a guarantee of success, we’d all be using IBM computers and driving GM cars.” – James Surowiecki

    On Wednesday, the Federal Reserve decided, yet again, to forego raising interest rates. This is what the market had expected, and more importantly, it’s what the market wanted. Stocks responded by rallying Wednesday afternoon, and the buying continued into Thursday. The S&P 500 is once again not far from a new all-time high.


    However, the Fed hinted that higher rates are coming. In fact, I think there’s a very good chance that we’ll see a rate hike in December. Not everyone is pleased that rates are still so low. In this week’s policy statement, three members of the FOMC dissented. They want rates to go up right now.

    What does this mean for us as investors? Continued low rates means that the stock market remains a good place to be. This week, we got a nice dividend increase from Microsoft. The software giant is also going to buy back $40 billion of its stock. Also on Wednesday, Bed Bath and Beyond released a blah blah and blah earnings report. The silver lining is that the stock rallied after management stuck by its full-year guidance. I’ll have all the details in a bit, but first, let’s look at what Fed did by not doing nothing.

    The Fed Holds for Now, but May Raise in December

    Let’s review the events leading up to this week’s Fed meeting.

    On August 17, the Fed released the minutes from its July meeting. These minutes showed that the Fed was divided over the need for a rate hike. At the time, I said I was baffled that Wall Street took these minutes as a “dovish” sign. To me, it was clear that the Fed was leaning toward a rate hike. The only question was when. I wrote, “I think it’s possible that the Fed will raise rates in December or early next year.”

    Then on August 26, Janet Yellen spoke at the Fed’s big conference in Jackson Hole. She conceded that the argument for higher rates was getting stronger, but she didn’t try to soothe the market’s nerves either. We often forget that the C in FOMC stands for committee, and that a Fed chair needs to build a consensus. At the time, I wrote, “I think the Fed is leaning towards raising rates, but they want more evidence that it’s safe to do so.”

    After that, the data started talking. On September 1, the ISM report for August came in at just 49.4. Any reading below 50 means that the manufacturing sector is contracting. The next day was Jobs Day. The government said that the U.S. economy created 151,000 net new jobs in August, which was below forecasts.

    If I had to guess, I’d say it was these two reports that tipped the balance inside the FOMC toward the dovish side. That is, for September, but not for the rest of the year.

    On September 12, Fed Governor Lael Brainard spoke. This was the last speech before the Fed’s September meeting. Brainard has long been known to be a dove, and it was believed that if she had turned towards favoring a rate hike, then it was definitely on. Instead, Brainard gave a very dovish address.

    One important part of her talk jumped out at me. She noted that the strong dollar had already acted as a rate increase on the economy. Of course, a strong dollar isn’t the same thing as a rate hike, but the economic effects can be nearly identical. She said that the 20% rise in the U.S. dollar from June 2014 to January 2016 could have been the equivalent of a 200-basis-point rate increase! That’s a remarkable statistic.

    After Brainard’s speech, Goldman Sachs cut their odds of a rate hike from 40% to 25%. I still thought that was too high. Interestingly, at the same time, Goldman raised their odds of a December hike from 30% to 40%.

    So it wasn’t much of a surprise for me to learn that the Fed passed on raising rates this week. The vote was 7-3. All three dissenting votes were from reserve bank presidents, as opposed to Fed governors. (Governors rarely dissent. The last one was eleven years ago.) We can assume that the “hike now” caucus is at three and growing. I would guess that Bill Dudley may become the next member.

    In the Fed’s economic projections, 14 of the 17 FOMC members (not everyone votes) said they expect rates to go up before the end of the year (the dots plots below). The median dot now expects one more rate hike this year, plus two more next year, three more in 2018 and another three in 2019. If that’s right, that would give the Fed funds a target range of 2.5% to 2.75% by the end of 2019.


    The policy statement said, “The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence.” Note that that’s nearly identical to what I said a few weeks ago.

    There’s another Fed meeting in November. While Janet Yellen has stressed that all meetings are “live” meetings, it’s very doubtful they’ll raise in November. For one, it’s only a few days before the election. Also, it’s a one-day meeting. The December meeting is a two-day affair, and it will be followed by a Yellen press conference.

    I want to stress to you how much the thinking inside the Fed has changed. Consider this. One year ago, the FOMC members thought interest rates would be at 3.4% by the end of 2018. Now, one year later, that forecast is down to 1.9%. So if they’re going to start raising rates soon, they don’t expect to be doing it for very long.

    The immediate effect of low rates is that it helps the stock market. Nearly half the stocks in the S&P 500 yield more than 2%. Compare that with a two-year Treasury, which gets you 0.77%. Don’t mistake that for a prediction that stocks will go up; it’s looking at the numbers and realizing that a balanced portfolio of high-quality is the smart play. Now let’s look at some recent news from our Buy List stocks.

    John Stumpf Heads to Capitol Hill

    This week, Wells Fargo (WFC) CEO John Stumpf headed to Capitol Hill to testify at hearings regarding the massive fraud committed by the bank. It was tough to watch. The senators, of course, love to grandstand—it’s what they do—but Stumpf’s leadership thoroughly earned this grilling. Boy was he grilled.

    When Stumpf should have been more apologetic, he turned legalistic. I understand the approach, but he needed to make it clear that the bank was sorry and had learned its lesson. Moreover, Wells needs to show how it’s working to regain the public’s trust. Senator Elizabeth Warren called him “gutless.” That’s not what you want to see.


    I’ll say it again: Stumpf must go. Wells can survive this, but they need new leadership. The stock also got dinged this week when it was downgraded by JPMorgan (like they’re ones to judge). The overall loss in shares of WFC isn’t overwhelming, but the loss of prestige is distressing. They used to be one of the good guys. Wells is due to report Q3 earnings in three weeks.

    Bed Bath & Beyond Disappoints

    On Wednesday, Bed Bath & Beyond (BBBY) reported fiscal Q2 earnings of $1.11 per share. That was five cents below Wall Street’s estimates. Frankly, this was a lackluster quarter for BBBY in what’s been a lackluster year. For comparison, the home-furnishings company earned $1.21 per share in last year’s Q2.

    For this year’s Q2, net sales fell 0.2% to $2.988 billion. The key to watch is comparable sales, which dropped by 1.2%. The company had been projecting an increase of 0% to 1%. What really helped Bed Bath this quarter was its online presence (remember the One Kings Lane acquisition). Comparable sales from what the company calls “digital channels” were up over 20%. But in-store comparable sales fell “in the low single-digit percentage range” for Q2.

    Bed Bath continues to buy back tons of its own stock. Last quarter, they spent $121 million buying 2.7 million shares of BBBY. They still have $2 billion left in the current authorization. Given how the stock has performed, the company has spent a huge amount of money on a stock that hasn’t done much.

    The good news is that Bed Bath is standing by its previous full-year earnings forecast of $4.50 to $5.00 per share. The company has already earned $1.91 per share for the first half of the year. Bed Bath & Beyond is not in a strong position this year.

    Microsoft Raises Its Dividend by 8%

    In the CWS Market Review from two weeks ago, I told you Microsoft (MSFT) would probably soon raise its dividend. I was right. On Tuesday, the software giant raised its quarterly dividend by 8%. The payout rose from 36 cents to 39 cents per share.

    Microsoft continues to operate well in a difficult environment. In the last earnings report, Microsoft beat estimates by 11 cents per share. Their cloud business continues to do very well.

    Microsoft also announced a $40 billion share-purchase plan. Based on Thursday’s closing price, Microsoft now yields 2.7%. That’s over 100 basis points more than the 10-year Treasury. I’m keeping my Buy Below price on Microsoft at $59 per share.

    That’s all for now. Next week is the final week of the third quarter. Can you believe we’re already three-fourths done with 2016? On Thursday, we’ll get the second revision to Q2 GDP. The initial report showed growth of 1.2%. Last month, that was pared back to 1.1%. The Atlanta Fed’s model for Q3 is now down to 2.9%. On Friday, we’ll get data for personal income and spending. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: September 23, 2016
    Posted by on September 23rd, 2016 at 7:04 am

    Japan’s Antitrust Watchdog Considers Action Against Apple, Carriers

    Former OPEC President Optimistic There Will Be Deal in Algiers

    Saudis Offer Oil Cut for OPEC Deal if Iran Freezes Output

    LSE’s Rolet Says 100,000 Jobs at Risk If Clearing Leaves London

    Treasuries Set for Best Week Since July as Fed Tempers Rate View

    The Yahoo Email Hack Is Bad

    Airbnb Raises $555 Million in New Funding

    Deutsche Bank is Losing Its Place At The Top Table of Investment Banking

    The Man Who May Inherit the Mess at Wells Fargo

    Hanjin Should Finally Have Enough Cash to Unload $14 Billion in Cargo

    Harvard, Searching for Endowment Manager, Reports a Loss

    Rogue Trader to Learn if He’s to Pay Back $5.5 Billion on His Own

    Antiques Dealers Charged in Illegal Sale of Ivory Priced at $4.5 Million

    Cullen Roche: The Problem With Modern Banking

    Jeff Carter: Remaking An Old System

    Be sure to follow me on Twitter.

  • Gold Miners Surge After Fed
    Posted by on September 22nd, 2016 at 12:08 pm

  • Morning News: September 22, 2016
    Posted by on September 22nd, 2016 at 7:09 am

    Yellen Will Monitor Banks, Controls

    Global Stocks Extend Gains After Fed Holds Rates

    Turkey Cuts Overnight Lending Rate Amid Signs Growth Slowing

    Former EU Antitrust Chief Is Named in Bahamas Tax Haven Leaks

    Oil Prices Rise on U.S. Inventory Data

    Maersk to Split Group Into Separate Transport, Energy Companies

    BOE to Maintain Key Bank Buffer at Zero on Challenging Outlook

    How Chase Made the Perfect High for Credit Card Junkies

    Mylan’s Chief Is Chastised by Lawmakers Questioning EpiPen Pricing

    Jabil Circuit Profit Falls

    In Wells Fargo’s Bogus Accounts, Echoes of Foreclosure Abuses

    Yahoo Is Getting Ready to Confirm a Historic Hack Affecting 200 Million Users

    Cooperman Had Long, Often Costly Relationship With Cohen Family

    Howard Lindzon: Nasdaq Back at All-Time Highs…Then and Now

    Roger Nusbaum: Allocation Efficiency

    Be sure to follow me on Twitter.

  • Best ETF Picks For a Low-Rate Fed
    Posted by on September 21st, 2016 at 5:35 pm

  • Bed Bath & Beyond Earns $1.11 per Share
    Posted by on September 21st, 2016 at 4:40 pm

    Bed Bath & Beyond (BBBY) just reported fiscal Q2 earnings of $1.11 per share. That’s down from $1.21 per share from one year ago. Wall Street had been expecting $1.16 per share.

    For Q2, net sales were approximately $2.988 billion. That’s down 0.2% from a year ago. Comparable sales dropped by 1.2%. Comparable sales “from digital channels” were up by over 20%. In-store comparable sales fell “in the low single-digit percentage range” during Q2.

    The good news is that BBBY is standing by its previous full-year earnings forecast of $4.50 to $5.00 per share.

  • The Blue Dots
    Posted by on September 21st, 2016 at 3:46 pm

    Here are the latest economic projections from the Fed. I think it’s interesting that the Fed sees real rates staying negative for some time.

  • Today’s Fed Statement
    Posted by on September 21st, 2016 at 2:03 pm

    Here’s today’s Fed statement. No rate hike but three dissents!

    Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

    Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

    In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

    The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

    Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

  • Looking Ahead to Today’s Fed Meeting
    Posted by on September 21st, 2016 at 10:44 am

    This is the second day of the Fed’s meeting. The policy statement will come out at 2 pm. It’s widely expected that the Fed won’t do anything, but there may be hints of a rate hike in December.

    Not too long ago, people thought the Fed might move in September. Bloomberg has a nice summary of the data and speeches over the last two months that made September unlikely for a rate increase.