CWS Market Review – June 12, 2015

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle

The good news is that good news is once again bad news. Before, bad news was actually good news because the bad news was worse than had been expected. Since the expectations of bad news had in fact been expected, that was actually good news.

Follow?

Don’t worry. I’ll try to untangle the mess for you. On Planet Wall Street, the rules of what’s good or bad are constantly changing. It’s like a $20 trillion game of Calvinball.

In this week’s CWS Market Review, I’ll take a closer look at the May jobs report. The headline numbers were pretty good, but there’s still a lot of weakness out there. I’ll also discuss the bond market’s recent drop. The yield on the 10-year Treasury is flirting with nine-month highs (see below). On Wednesday, as the bond market was retreating, stocks had their best day in more than a month. Bonds and stocks are decoupling. As I explained in last week’s issue, this is part of an important rotation unfolding on Wall Street that’s impacting our portfolios.

Speaking of which, I’ll preview upcoming earnings reports from Oracle (ORCL) and Bed Bath & Beyond (BBBY). The tech world will be especially interested in how Oracle has been doing. This week, we got a 9% dividend increase from CR Bard (BCR). I love a good Buy List dividend hike! The medical-equipment company has increased its dividend every year since 1972. Not many companies can say that but we like those long-term winners on our Buy List. But first, let’s take a step back and look at the macro picture.

More Americans Are Working, but Wage Growth Is Slow

Last Friday, the government said that the U.S. economy created 280,000 net new jobs in May. That’s a strong report; economists had been expecting an increase of 222,000. On top of that, the poor payroll number for April was revised higher by 34,000, while the May figure was revised a little bit lower.

The increase in jobs is especially good considering the big cutbacks in the energy sector. The plunge in crude hit the energy sector hard. Jobs in drilling and mining fell by 17,000 last month. That’s the fifth month in a row of job losses in that sector. Energy stocks are still looking rough.

For the overall jobs market, the problem area continues to be wage growth. More people are working, but folks aren’t seeing much in the way of raises. In May, wages rose by only 0.3%. In the last year, wages are up 2.3%. That’s not much, and it’s actually the best year-over-year increase since 2013. Though, as Josh Brown reminded us this week, wage growth usually comes in the latter stages of an economic recovery.

What really concerns Wall Street is inflation. Despite numerous predictions that inflation is about to come back, prices are still well contained. However, a tighter jobs market should lead to higher wages, which will in turn lead to higher prices. There’s been news recently of high-profile employers like McDonald’s (MCD), Walmart (WMT) and Target (TGT) raising worker pay. This week’s JOLTS report showed that job openings jumped to a record high (the data series began in 2000).

Former Fed Chairman William McChesney Martin famously described the Fed’s job as taking away the punchbowl once the party gets going. It looks like the Fed is getting ready to take away the punchbowl before the party has even started. Heck, I don’t think the invitations have even been sent out!

But that hasn’t stopped the bond market from taking its cue. On Wednesday, the 10-year Treasury yield came within a whisker of breaching 2.50%. The 10-year hasn’t yielded that much since last September. This is part of the market’s rotation. Stocks and bonds are moving in completely different directions.

To go back to my introduction, we’ve reached another classic impasse on Wall Street when good news may actually be bad news. Or more specifically, good economic news is bad news for the financial markets, since it means that the Fed is more inclined to hike interest rates.

But I want to reiterate my view since it seems to be in the minority on Wall Street, and that’s that the economy is doing better than a lot of people realize. Please don’t take this as a political stand. Rather, I’m looking at the numbers. For example, the retail-sales report for May was pretty good. Last month, sales rose 1.2%. Excluding gasoline, retail sales were up 1.0%. The numbers for March and April were revised higher as well.

I was also pleased to see that Corelogic reported that homes in foreclosure are at their lowest level since November 2007. Foreclosures are 67% below their peak. That’s very good news. The broad economic stats for Q2 should be quite good. The Atlanta Fed has a GDP model. Currently, the model sees GDP growth for Q2 coming in at 1.9%. I think it will be closer to 3%.

The weakness in the bond is perhaps the strongest clue that the economy is getting better. It’s also interesting to note that financial stocks have been leading the market over the past few weeks. The Financial Sector ETF (XLF) has been outperforming the overall market since late April (think Quadrant 2 from last week’s chart).

Earnings Preview for Oracle and Bed Bath & Beyond

I’m pleased to see that our Buy List continues to lead the overall market this year. A few of our stocks like Cognizant Technology (CTSH), Wells Fargo (WFC) and Fiserv (FISV) are having excellent years so far. I expect more good results when the second-quarter earnings season begins next month. Before that happens, two of our Buy List stocks, Oracle and Bed Bath & Beyond, are due to report earnings. These are our only two stocks that report on the February/May/August/November reporting cycle.

Oracle (ORCL) is set to report their fiscal Q4 earnings after the closing bell on Wednesday, June 17. This will be a closely-watched earnings report for the entire tech sector.

Three months ago, Oracle reported earnings of 68 cents per share, which matched expectations. The problem was that they were clipped by the strong dollar. There’s been a lot of that going around. But the best news was that the software giant raised its dividend by 25%.

For Q4, Oracle said they see earnings ranging between 90 and 96 cents per share. Wall Street had been expecting 88 cents per share. I’ve been especially impressed with how well Oracle’s cloud business has been progressing.

Unfortunately, shares of Oracle have been locked between $43 and $45 for much of the last three months. I don’t feel confident saying Oracle will beat their earnings forecast. The question mark is the impact of currency. Outside that, I have a great deal of confidence in Oracle. I also want to see what they have to say for Q1 (which ends in August). Wall Street currently expects 62 cents per share.

I like Oracle a lot, but I want to be cautious here before we see solid evidence. Oracle remains a buy up to $46 per share. I want to keep a tight range here.

Bed Bath & Beyond (BBBY) is due to report fiscal Q1 earnings on Wednesday, June 24, exactly one week after Oracle. The home-furnishings store is in an odd spot. The company generates tons of cash. They’ve been using much of it to buy back stock. Unlike many other companies, BBBY actually reduces their share count. I like that. What I don’t like is their spending tons of money on a stock that’s no longer such a bargain.

The company told us to expect fiscal Q2 earnings to range between 90 and 95 cents per share. I’m not wild about that guidance. BBBY sees comp-store sales rising between 2% and 3% for the quarter and the entire fiscal year. For full-year earnings, BBBY expects flat to mid-single digits. Let’s say that means 0% to 5%, so that implies an EPS range of $5.07 to $5.32. Wall Street had been expecting $5.43 per share.

Honestly, I’m a little frustrated with BBBY, but I won’t give up on them. I’m especially interested to hear what guidance they have to offer.

Updates on Other Buy List Stocks

Don’t forget that Ross Stores (ROST) has split 2 for 1. You should now have twice as many shares. The deep discounter is a good buy up to $52 per share.

Last week, I highlighted Signature Bank (SBNY) as one of our Buy List stocks that looks especially attractive. The stock has now rallied for five days in a row, and it’s gained more than 5.2% in the last week. On Thursday, the bank hit another 52-week high. SBNY is now our second-best performer on the year. This week, I’m nudging up my Buy Below price on Signature to $150 per share.

Remember that stodgy, old-fashioned, boring dinosaur Snap-on (SNA)? Yep, new all-time high on Thursday.

Two weeks ago, I told you to expect another dividend increase soon from CR Bard (BCR). This week, Bard announced a 9% dividend increase. The quarterly payout will rise from 22 to 24 cents per share. That means the yearly dividend is 96 cents per share, which works out to a yield of 0.56%. That’s still pretty small.

I was able to predict Bard’s dividend increase based on my uncanny powers of prognostication, and also due to the fact that Bard has increased their dividend every year since 1972.

Bard also authorized a $500 million share buyback , which is about 4% of Bard’s overall market cap. My view is that Bard should put more of that towards the dividend, but I’m not about to complain. The company has performed very well for us.

That’s all for now. The Federal Reserve meets again next week. Don’t expect any move on interest rates, but Janet Yellen will a hold a post-meeting presser. The Fed will also update its economic projections, which tend to be pretty bad. The more interesting news will be the industrial production report, which comes out on Monday. IP has fallen for the last five months in a row. I hope this streak came to an end in May. Also, the CPI report for May will come out on Thursday. 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

Posted by Eddy Elfenbein on June 12th, 2015 at 7:08 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.