Archive for February, 2014

  • Morning News: February 24, 2014
    , February 24th, 2014 at 6:43 am

    Draghi Says ECB Prepared to Add Stimulus If Deflation Risks Rise

    Emerging Stocks Drop as China Growth Concern; Ukraine Bonds Jump

    Greece to Resume Talks With Bailout Inspectors on Monday

    Can The Fed Stop The Next Recession? Business Can’t Bank On It

    Netflix to Pay Comcast for Smoother Streaming

    HSBC Profits Tick Higher in 2013 Helped by Cost Cuts

    Keystone Review Goes to PSC Faulted Over Campaign Cash

    China’s Sina Plans U.S. IPO for Weibo

    Dixons Discusses Possible Merger With Carphone Warehouse

    Mt Gox Resigns From Bitcoin Foundation

    Will Betting Bitcoins Ever Happen in Las Vegas?

    Yahoo Aims to More Deftly Blend Ads With Content

    Woes of Megacity Driving Signal Dawn of ‘Peak Car’ Era

    John Hempton: The Really Strange Comcast-Netflix Deal

    Cullen Roche: Can We All Agree to Stop Comparing Everything to the S&P 500?

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  • “The Lady And The Stock Exchange”
    , February 21st, 2014 at 11:55 pm

  • CWS Market Review – February 21, 2014
    , February 21st, 2014 at 7:18 am

    “Someone will always be getting richer faster than you. This is not a tragedy.” – Charlie Munger

    Frankly, there wasn’t much important news on Wall Street this week. The markets were closed on Monday for Presidents’ Day, and earnings season is just about over.

    But there’s a lurking danger whenever there’s a dearth of news. Traders don’t like a news vacuum, and that creates an environment where routine events are greatly hyped beyond their true importance. Traders need something to trade on, and if someone doesn’t give it to them, they’ll invent it. It’s either that, or watch curling.


    What we saw this week was that everyone, it seemed, had an opinion on a series of mega-deals. Last week, Comcast said it’s hooking up with Time Warner Cable. Later we heard that Apple’s M&A people were talking with Tesla (dream on!). Then came the blockbuster deal: Facebook is buying WhatsApp for $16.4 billion (possibly as much as $19 billion if you include restricted stock).

    WhatsApp has a grand total of 55 employees, and last year they brought in $20 million in revenue (not profits—revenue). Five years ago, WhatsApp’s CEO, Jan Koum, applied for a job at Facebook. He was rejected. Now he’s a billionaire several times over.

    Is all this crazy? In my opinion, probably, but it’s added some mid-winter excitement, that’s for sure. After the deal was announced, Facebook’s stock opened lower, then rallied throughout the day, and ultimately closed higher by more than 2%.

    Now some professional scolders are saying that these crazy deals are the signs of a frothy bull market. While some of these deals are hard to justify, I don’t think the entire market can be judged a bubble.

    Sure, there are some trouble spots. The Q4 earnings season was decent, but it was hardly spectacular. The crummy weather has hurt a lot of retailers. Even Walmart, the big daddy of retailers, missed earnings by 25 cents per share. You don’t see that a lot. Plus, there are still troubles in many emerging markets. The news out of China is disappointing, and of course, the violence in Ukraine is heart-wrenching.

    In this week’s CWS Market Review, I want to cover some of the overlooked news. The minutes from January’s Fed meeting came out this week, and if you look past the talking heads, it’s clear they’re talking about ditching the Evans Rule. That’s a big deal, and I’ll explain what that means in a bit.

    We also had an outstanding earnings reports from DirecTV. The satellite-TV stock crushed estimates by 23 cents per share. The shares raced 3% higher on Thursday to hit a new all-time high. I have my new Buy Below for you (you can see our complete Buy List here. We also got good earnings reports from Medtronic and Express Scripts. I’ll also preview next week’s earnings report from Ross Stores. But first, let’s take a closer look at what’s on the Fed’s mind.

    The Debate Raging within the Federal Reserve

    There’s a debate raging within the Federal Reserve as to what to do about the “Evans Rule.” This was guidance adopted by the Fed, at the urging of Chicago Fed President Charles Evans, as to what specific metric would cause the Fed to raise short-term interest rates. The Fed said that it would use an unemployment rate of 6.5%. Previous Fed Chairman Ben Bernanke was careful to warn that this was a threshold and not a trigger.

    The problem is that unemployment has already declined to 6.6%, and no one’s even close to raising interest rates. Most FOMC members don’t see a rate increase happening until 2015 or 2016. There are even some folks who say that low rates are here to stay and the Fed’s use of Quantitative Easing will become its primary tool to fine-tune the economy. That’s probably too extreme, but it’s being talked about.

    The minutes released this week covered the Fed’s January meeting. Interestingly, the Fed`s members were surprised at the economy’s strength. That obviously contributed to the decision to gradually pare back their massive bond-buying program. But what’s interesting is that the central bank is showing no signs of backing away from taper plans, even though the last two jobs reports weren’t so hot.

    Strangely, the Fed is as undecided about when to raise short-term rates as it is stubborn about tapering. In fact, the Fed may even back away from using a specific number, like Evans had suggested, and fall back on using garbled econo-speak. The plus is that this doesn’t lead the markets to false expectations. Some FOMC members favor this direction but it adds a layer of opaqueness to the Fed’s deliberations.

    The Fed may elect to lower the threshold. Narayana Kocherlakota, the president of the Minneapolis Fed, wants to go down to 5.5%. I think some voting members want to get rid of a precise number altogether. As I said, markets will find something to fret about. Of course, all of this is complicated by the Fed`s having a new boss in Janet Yellen. The Fed’s next meeting, and the first one under Yellen, will be on March 18 and 19.

    What this means for investors: The Fed is still clearly on the side of investors. Quantitative Easing is with us, and will be for several more months. The pace of stimulus, however, will gradually decline. The curveball about QE is that it impacts the long end of the yield curve, while traditional Fed stimulus is at the short end. Higher long-term rates could impede sectors like housing, but I doubt we’ll see much impact, although we’ve seen mortgage financing take a hit. The simple fact is that housing inventory is lean, and the market needs more homes. Bad weather may delay that fact, but it won’t change it.

    This is good news for the economy and for the stock market in general. I think it’s very likely that 2014 will be one of the strongest years for economic growth in a long time. I won’t go so far as predicting a bond market sell-off, but I do think the long end of the curve is a bad place for investors. The yields are just too measly, and the math is squarely on the side of stock “longs.” Continue to focus your portfolio on high-quality stocks such as our Buy List. If the Evans Rule is altered or dropped, it could propel the market much higher. Now let’s look at some of our Buy List earnings from this week.

    Medtronic Is a Buy up to $61 per Share

    On Tuesday, Medtronic ($MDT) reported fiscal Q3 earnings of 91 cents per share, which matched expectations. In last week’s CWS Market Review, I said that was my estimate as well. Quarterly revenues rose by 3.4% to $4.16 billion, which was $10 million more than forecast. Medtronic is one of those stable-growth companies. It’s not blistering growth, but it’s steady.

    Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. Note that their fiscal year ends in April. For the first three quarters of this fiscal year, MDT earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 – $1.13 per share. Wall Street had been expecting $1.12 per share.

    Overall, this was a good quarter for Medtronic. Sales of their diabetes products rose by 16%. The medical-devices company was particularly strong in emerging markets, where sales rose by 10%. MDT expects to do even better in EM in the coming quarters.

    Even though these results were almost exactly what I had expected, the stock dropped nearly 3% after the report came out, then rallied the rest of the week. By the closing bell on Thursday, the shares were 40 cents higher than they were before the report. Naturally, this makes no sense, but it’s what markets do (remember what I had said about Facebook earlier). In any event, Medtronic remains a high-quality buy up to $61 per share.

    DirecTV Smashes Wall Street’s Earnings Estimate

    In last week’s CWS Market Review, I said that Wall Street’s consensus was too low on DirecTV’s ($DTV) earnings. I was right about that. On Thursday, the satellite-TV company reported Q4 earnings of $1.53 per share, which was 23 cents better than expectations.

    This was an outstanding quarter for DTV. The shares gapped up 3% on Thursday to a new all-time high. Latin America continues to be a growth powerhouse. Last year, revenues there were up 10%, and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, less than clear in some parts of Latam. The company plans to add another one million new Latin American subscribers this year.


    The U.S. wasn’t so bad either. DTV added 93,000 new American subscribers. Analysts were expecting an increase of just 21,000. DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few companies that do it right. They actually reduce their overall share count. Imagine that! Over the last seven years, DTV’s share count is down by 57%. Working out the math, a $3.5 billion buyback is roughly 9% of DTV’s market cap. I’m raising our Buy Below on DirecTV to $80 per share.

    Express Scripts Is a Buy up to $83 per Share

    On Thursday, Express Scripts ($ESRX) reported that it earned $1.12 per share for the fourth quarter. That also hit expectations on the nose. This really wasn’t a major surprise, since in October, the pharmacy-benefit manager told us to expect Q4 earnings to range between $1.09 and $1.13 per share.

    I was especially curious to hear what ESRX had to say in the way of guidance. For all of 2014, they see earnings ranging between $4.88 and $5 per share. Those are very good numbers, and it gives the stock a reasonable valuation. The Street’s consensus had been for $4.93 per share. In a press release, Express Scripts said it’s “targeting annual earnings per share growth of 10 per cent to 20 per cent for the next several years.”

    Previously, I said I wanted to see the earnings report before I decided to alter our Buy Below price. Now I see it, and I’m pleased with what I see. This week, I’m raising our Buy Below on ESRX to $83 per share.

    Preview of Ross Stores, and a Few New Buy Below Prices

    We have one earnings report due next week, from Ross Stores ($ROST). I like Ross a lot; it’s one of my favorite deep-discount retailers. That’s why I was so surprised when they gave a dour outlook for Q4 earnings. Ross said to expect fourth-quarter earnings (their Q4 covers November-December-January) to range between 97 cents and $1.01 per share. Wall Street had been expecting $1.09 per share.

    Wall Street didn’t like that at all. ROST dropped from a high of $82 just prior to Thanksgiving to less than $66 in early February. The question is, how much of this is due to Ross, and how much is due to a lousy environment for retail? Like I said, even Walmart is having trouble. It appears that lousy weather has hurt shopping across broad stretches of the country.

    Ross is due to report earnings next Thursday, February 27. I think investors are looking past the Q4 numbers and want to see any guidance for 2014. I’m inclined to think that ROST’s problems are sector-related and not specific to them. Ross Stores continues to be a good buy up to $74 per share.

    Before I go, I want to make a few Buy Below adjustments. Stryker ($SYK) continues to do very well for us. A few weeks ago, the company beat earnings and guided higher. The stock hit another 52-week high this week. Remember that after the earnings report, the stock fell, which should tell you all you need to know about the market’s short-term judgment. This week, I’m raising our Buy Below on Stryker to $87 per share.

    Two weeks ago, I lowered the Buy Below on Fiserv ($FISV) after the stock missed earnings by a penny. I’ve mulled this over, and I think I acted too rashly. FISV is a dependable stock, and it’s rallied for six of the last seven days. I’m lifting my Buy Below on Fiserv to $60 per share.

    I’m pleased to see CR Bard ($BCR) rebound so well. Since February 3, shares of Bard have rallied 12%, and the stock just hit a brand-new 52-week high. Look for another dividend increase this spring. I’m raising our Buy Below on BCR to $144 per share.

    Finally, I’m keeping our Buy Below for Cognizant Technology ($CTSH) at $104 per share, but remember that it’s going to split 2 for 1 in early March. Our Buy Below will split along with it. Until then, CTSH remains a very good buy up to $104 per share, and $52 per share post-split.

    That’s all for now. Next week is the final trading week of February. On Tuesday, the Consumer Confidence report comes out. Thursday is the Durable-Goods report, and after the bell, we’ll hear Q4 earnings results from Ross Stores. On Friday, the government will revise the Q4 GDP report. The initial report said the economy grew by 3.2% during the last three months of 2013. 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: February 21, 2014
    , February 21st, 2014 at 6:57 am

    G20: Pressure Mounts on Delegates to Agree to Meaningful Global Strategies

    January Retail Sales in UK Fall Back After Exceptional December

    Ukraine Credit Rating Cut by S&P as Violence Continues

    Yanukovych Offers Snap Presidential Vote to End Crisis

    Royal Bank of Scotland to Slash Headcount by Up to a Quarter in Revamp

    Consumer Prices Edge Up, Moving Closer to Fed Target

    Study Finds Greater Income Inequality in Nation’s Thriving Cities

    Firm Stops Giving High-Speed Traders Direct Access to Releases

    Founders of an Anti-Facebook Are Won Over

    Hewlett-Packard Sales, Profit Exceed Estimates on Server Demand

    Groupon Shares Drop as Forecast Trails Estimates on Expenses

    Chevron’s Free Pizza Offer Only Feeds Public’s Distrust

    Does Bitcoin Really Need the Winkdex?

    Joshua Brown: Truer Words Were Never Spoken

    Epicurean Dealmaker: Venn Diagram

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  • A Zero-Commission Brokerage?
    , February 20th, 2014 at 3:19 pm

  • The Five-Year Itch
    , February 20th, 2014 at 10:22 am

    I caution against reading too much into this, but two recent bull markets have had five-year lifespans.

    By closing low to closing high:

    Low: August 12, 1982
    High: August 25, 1987

    Low: October 9, 2002
    High October 9, 2007

    Low: March 9, 2009
    High: ?????

  • DirecTV Beats By 23 Cents per Share
    , February 20th, 2014 at 9:52 am

    This morning, DirecTV ($DTV) reported earnings of $1.53 per share which was 23 cents better than expectations. This was a very strong quarter.

    Latin America continues to be a growth powerhouse. Revenues were up 10% in that region and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, cloudy in some part of Latam.

    DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few that do it right. They actually reduce their overall share count. Working out the math, $3.5 billion is roughly 9% of DTV’s market cap.

    The shares gapped up to a new all-time high this morning.

  • Morning News: February 20, 2014
    , February 20th, 2014 at 2:20 am

    G20 Final Document to Address U.S. Policy Impact on Emerging Markets

    Don’t Cut Too Quickly, IMF Warns Advanced Economies

    Global Bond Frenzy Raises Concerns

    Forex – USD/JPY Rises After Record Trade Deficit in Japan

    China Factory Gauge Falls Amid Risks of Credit Souring

    Singapore’s Soaring Land Prices ‘Suicidal’ for Developers

    F.C.C. Seeks a New Path on ‘Net Neutrality’ Rules

    Fed Puts Rate Increase on the Radar

    Facebook to Buy Messaging App WhatsApp for $19 Billion

    Safeway Putting Itself Up For Sale

    Signet Jewelers to Acquire Rival Zale

    Peltz Revives Bid to Split PepsiCo

    Einhorn Says Don’t Be Fooled as Companies Beat Estimates

    Roger Nusbaum: If You Can’t Retire at 30 Then How About 38?

    Jeff Miller: Mean Reversion: The Misunderstood “Mystery Method” Behind Big Market Blunders

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  • Will Investing Be Free?
    , February 19th, 2014 at 6:18 pm

    Herbert Moore has a provocative thesis — that investing will be free in five years. I’m not sure if I agree with his endpoint, but the trends he describes are certainly real.

    Here’s a sample:

    Trading fees: Zero is inevitable

    Investors are also increasingly benefiting from lower trading fees. Whereas brokerage firms charged close to $40 per trade through the 1980s and 1990s, online brokerages now charge less than $10. With scalability, the marginal cost to a broker for processing a trade becomes zero, and brokerages will be able to offer free trading by focusing on other revenue streams.

    Processing a trade costs a brokerage (virtually) nothing

    Trading commissions consist of a clearing fee (though if the broker self clears there is no clearing fee), an exchange fee, and any markup by the broker to cover the cost of the platform, customer service, etc. Of these, the exchange fee is the only inescapable cost, while the others are simply markups charged by a clearing or brokerage firm. The actual costs of clearing a trade through an exchange are minimal at just fractions of a cent. The NYSE, one of the more expensive exchanges, charges $0.0025 if you are taking liquidity with a trade, and rebates $0.00150 if you are providing liquidity. While the brokerage and clearing infrastructure can be expensive to create, at thousands or millions of trades, the cost per individual trade becomes negligible to the firm. An external brokerage and clearing firm like Apex (clears for smaller online brokerages like TradeKing, Zecco, Firstrade and others) charges just pennies per share on anything over 100,000 trades per month, giving a proxy for how much the internal trading infrastructure costs at scale.

    It’s true that investing has become more democratic over the years. Discount brokers, ETFs, trading in decimals, plus growth of blogs and Twitter have opened the door on Wall Street.

    The downside is that like the sorcerer’s apprentice, the potential for mischief has risen as well.

  • Morning News: February 19, 2014
    , February 19th, 2014 at 7:00 am

    Japan Says Prices ‘Rising Moderately’ For First Time in More Than Five Years

    Puerto Rico Wants to Incur More Debt to Regain Financial Footing

    Obamacare’s Latest Surprise for Taxpayers?

    Fed Requires Foreign Banks in U.S. to Hold More Money in Reserves

    Minimum Wage Report Puts Democrats on Defensive

    Household Debt Rises at Fastest Pace Since Global Financial Crisis

    Darker U.S. Homebuilder Mood Not Just Due to Bad Weather

    Peugeot’s $3 Billion Loss Shows Rescue Deal is Just a Start

    Icahn’s Fight Opened Door to Actavis’s Post-Generics Evolution

    Candy Crush Maker, King, Seeks I.P.O. to Further Its Momentum

    Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year

    Capital One to Revisit Credit Card Contract Terms After Outcry

    Bitcoin Shop: The Latest Growth Opportunity In The Cryptocurrency World

    U.S. Commercial Banks’ Changing Asset Mix

    Jeff Carter: Using Algebra For Politics and Policy

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