Archive for February, 2016

  • The Correlation Continues
    , February 29th, 2016 at 1:38 pm

    Here’s the year-to-date chart. The S&P 500 is in red and oil is in black.


  • China Cuts Reserve Requirement
    , February 29th, 2016 at 12:03 pm

    The stock market is up modestly today. The big news is that China cut its reserve requirement for its big banks. That’s how much money they have to keep in reserve and can’t lend out. The rate is now 17%. According to Bloomberg, the move will inject $105 billion to the Chinese economy.

    The economy in China is weak and getting weaker. The authorities there have been trying everything to get it back on its feet, and the reserve requirement cut is their latest move. Of all the world’s stock markets, China’s is the single worst performer this year.

    This is a change in China’s policy. Until now, the PBOC, China’s Fed, had used more modest policy tools to help the economy. Lowering the reserve requirement is seen as playing hardball. One concern is liquidity.

    At noon, the U.S. market is up about 0.5%. It seems to be a fairly broad rally. Materials are leading while Healthcare is lagging.

  • Morning News: February 29, 2016
    , February 29th, 2016 at 7:01 am

    China Cuts Reserve Requirement Ratio for Fifth Time Since Feb. 2015

    India Unveils Pro-Poor Budget, Keeps Deficit Target

    ECB Window for Stimulus Message Closing as Inflation Stalls

    Buffett: Politicians ‘Dead Wrong’ on Economy

    Social Security Explains New Claiming Rules

    Bullish Oil Bets Rise as Hedge Funds See Supply Tightening

    Debt Swaps Become a Tough Sell for Cash-Strapped U.S. Energy Firms

    Apple’s Cook Picks Up Where Snowden Left Off in Privacy Debate

    Amazon Strikes Deal with U.K. Grocer Morrisons

    With Humility, Starbucks to Enter Italian Market

    Sharp Says Has Not Set a Deadline for Deal With Hon Hai

    Lumber Liquidators Swings to Loss Amid Laminate Flooring Fallout

    Gameloft Board Rejects Vivendi’s Takeover Offer

    Jeff Miller: Can a Rebounding Economy Support Stock Prices?

    Jeff Carter: Some Wrongheaded Policy on Minimum Wage

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  • Leap Day Returns
    , February 27th, 2016 at 5:19 pm

    Here’s a look at all the Leap Day returns for the Dow. Twelve of the last 16 have been down days. Odd fact: There was no Leap Day in 1900.

    Year Return
    1904 0.96%
    1908 -0.87%
    1912 -0.21%
    1916 0.15%
    1924 -0.48%
    1928 0.43%
    1932 -0.71%
    1936 -0.25%
    1940 -0.01%
    1944 -0.36%
    1952 -0.16%
    1956 -0.42%
    1960 -0.30%
    1968 -0.50%
    1972 0.42%
    1980 1.02%
    1984 -0.22%
    1988 2.39%
    1996 -0.37%
    2000 0.89%
    2008 -2.51%
    2012 -0.41%
  • Warren Buffett’s Shareholder Letter
    , February 27th, 2016 at 11:28 am

    This is always worth a read. Here’s Warren Buffett’s latest letter to shareholders. Here’s a key passage:

    It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

    That view is dead wrong: The babies being born in America today are the luckiest crop in history.

    American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.

    Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains.

    America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.

    Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.

    Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.

    The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.)

    For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.

  • Q4 GDP Revised to 1.0%
    , February 26th, 2016 at 11:11 am

    This morning, the government revised its forecast for real fourth-quarter GDP growth to 1.0%. The original report was 0.7%. Wall Street had been expecting a lower revision, down to 0.4%.

    Here’s a look at quarterly growth for the last several quarters.

  • CWS Market Review – February 26, 2016
    , February 26th, 2016 at 7:08 am

    “The laws of probability, so true in general, so fallacious in particular.”
    – Edward Gibbon

    The stock market has finally been acting better. After one of the worst starts to a year in history, the bulls have recently gained the upper hoof. In the last nine trading sessions, the S&P 500 is up nearly 7%.

    On Thursday, the index closed above its 50-day moving average for the first time this year. The S&P 500 went 38 straight days below its 50-DMA which is the longest such streak in more than four years. The index is now at its highest level in seven weeks.


    So far, the stock recovery is being led by a lot of defensive names. The consumer-staples sector just touched a new high, and many of our Buy List stocks are rallying as well. Fiserv is at a new 52-week high, and stocks like CR Bard and Stryker have rebounded in recent days. Heck, even Bed Bath & Beyond is doing well!

    Still, I’m not ready to say that all is well, but there are signs for optimism. In this week’s CWS Market Review, I’ll survey some of the recent economic news which has been encouraging. I’ll also highlight the good earnings report from HEICO, one of this year’s new stocks. I’ll also preview next week’s earnings report from deep discounter Ross Stores. But first, let’s take a look at what’s in store for the economy and our portfolios.

    Reasons for Modest Optimism

    The first quarter of 2016 may turn out to be one of the best quarters for economic growth in years. The Atlanta Fed runs a GDP predictor, and it currently forecasts Q1 GDP growth of 2.5%. Historically, that’s not terribly strong, but it’s better than what we’ve seen in recent years. Q4 came in at just 0.7% (the revision comes out later today).

    In some ways, we’ve seen the opposite trend of what we’ve had in recent years when Wall Street prospered as Main Street struggled. Lately, Wall Street has gotten rattled, but the news for consumers is slowly getting better.

    The labor market, for example, continues to improve. Weekly unemployment claims are quite good. In fact, non-seasonally adjusted claims are at their lowest level since 1973. Next week will mark 52 straight weeks that claims have been under 300,000. Next Friday, we’ll get another jobs report. While the unemployment rate has improved, the labor-force participation rate has been stubbornly low. In plain English, not enough people are out there looking for work.

    To be fair, some of the decline in workforce participation is due to retiring boomers (see below). It’s a fact that the country is getting older, but the good news is that we’re finally seeing some modest improvement in wages. In January, average hourly earnings rose by 0.5%. Higher wages lead to more consumer spending, which means more sales for businesses.

    This week the Chicago Fed said that last month economic activity improved nationally. I was pleased to see that core inflation, which excludes food and energy, picked up a bit last month. The seasonally-adjusted core inflation figure was the highest it’s been in ten years.

    The dramatic decline in oil has distorted the overall inflation picture. Inflation expectations are very low right now. In fact, they’re ridiculously low. Here’s a startling fact: A report this week by the St. Louis Fed said that oil would have to fall to $0 by mid-2019 for it to justify current inflation expectations. I think it’s safe to say that OPEC won’t let that happen.

    Shoppers Are Coming Back

    Of course, I don’t want to see excessive inflation, but I’d welcome some inflation. Deflation can be dangerous as it causes consumers to delay their shopping. A lot of retailers, like Macy’s, have been struggling, but two weeks ago, the retail-sales report finally beat expectations. That was the first time in more than a year that that report topped expectations. Retail is a key area to watch in the economy. In a bit, I’ll preview next week’s earnings report from Ross Stores. That should give us an idea of how active bargain-shoppers are.

    On Thursday, the Commerce Department reported that durable goods rose by 4.9% in January. That’s the biggest increase in ten months, and it nearly doubled Wall Street’s expectation. This report stands out because the manufacturing sector has been struggling for the last few months. I particularly like the capital-goods orders excluding defense and aircraft. That rose by 3.9% in January, which is quite good. On Tuesday, we’ll get the latest ISM report, which will hopefully confirm that the brief “factory recession” is behind us.

    This has been an unusual market because investors have run madly from anything perceived to be as risky, and they’ve richly rewarded any asset perceived as being sage. The 10-year Treasury currently goes for 1.7%. Now compare that to the S&P 500’s indicated divided yield, which is 2.3%. That’s the yield that the S&P 500 would pay out for the coming 12 months assuming the dividends stay constant. That 60-basis-point gap is very wide, and it shows us how much investors are valuing safety relative to opportunity. This is very good news for stock investors.

    The bond market is even more frightened in some overseas markets. Bond yields in Europe continue their march to 0%. The numbers here are remarkable. My guess is that Switzerland’s 30-year will be the first of that maturity to go negative. Others aren’t far behind. In France, their six-year has gone negative. In Germany, their eight-year is below 0%, and in Japan, the 10-year is in the minus column. In the U.S., our 30-year is a fat and happy 2.57%.

    Interestingly, AFLAC said that it significantly boosted its investment in Japanese equities. That’s not surprising when you’re in a world or low of negative bond yields. At the end of 2014, the duck stock held just $23 million in Japanese stocks. At the end of 2015, that figure jumped to $493 million. Don’t be worried that AFLAC is getting crazy with risk. Their total portfolio is $100 billion, so their position in Japanese stocks is a barely a speck. But this shows you how companies around the world are adjusting to the global rush for safety.

    The yield gap between stocks and bonds in Europe is especially wide. The estimated yield of European stocks is 4.3%, which is more than seven times higher than the average European bond yield. Investors figure that if Mario Draghi is going to be buying tons of bonds, they might as well front-run him.

    We can see the rush to safety operating in several markets. For example, junk bonds have been very weak. But gold, the unrivaled store of value, has done well this year. High-beta stocks have gotten hammered, while many low-volatility stocks have been left unscathed. Consumer Staples and Telecom stocks have done particularly well lately.

    Investors should continue to focus on high-quality stocks. I think that you can see some good bargains in more aggressive stocks. On our Buy List, stocks like Biogen, Cognizant and Wabtec look particularly attractive. As always, please pay attention to our Buy Below prices. Now let’s look at another solid earnings report from our Buy List.

    HEICO Reports Q1 Earnings of 49 Cents per Share

    After the bell on Thursday, one of our quieter stocks, HEICO Corp. (HEI), reported fiscal-Q1 adjusted earnings of 49 cents per share. That’s a 20% increase over last year. Net sales rose 14% to $306.2 million.

    Across the board, this was a solid quarter for HEICO. In last week’s issue, I told you I was expecting earnings of 46 cents per share. I always enjoy being proven insufficiently optimistic on our stocks.

    Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s first quarter results, stating, “Our first quarter year-over-year growth principally reflects the impact of our profitable fiscal 2015 and 2016 acquisitions, overall moderate organic growth within the Electronic Technologies Group and increased demand for certain products within the Flight Support Group’s specialty products and aftermarket replacement-parts product lines.”

    HEICO also increased its outlook for this year. The company now expects sales to rise between 14% and 16%. They also expect their unadjusted net income to rise between 10% and 13%.

    Unfortunately, the company didn’t provide a figure for unadjusted earnings, which is what I prefer to look at. In any event, both figures are increased from their initial guidance of 8% to 10%. We’re probably looking at full-year adjusted earnings in the neighborhood of $2.30 per share.

    Let me add that I often don’t trust the adjusted earnings from companies. You’ll often see “one-time” charges that come up again and again and again. But for high-quality stocks, like HEICO and the other stocks on our Buy List, I have a lot more faith in their accounting. HEICO remains a buy up to $58 per share.

    Earnings Preview for Ross Stores

    Ross Stores (ROST) is due to report earnings for its fiscal fourth quarter on Tuesday, March 1. This will be for the all-important holiday shopping season (November, December and January). You’ll notice that many retailers don’t follow the typical Mar/Jun/Sep/Dec reporting cycle so they can include the entire holiday season in their fiscal fourth quarter.


    Ross said they expect Q4 earnings to range between 60 and 63 cents per share. Frankly, that seems too low. I’m not sure if Ross is low-balling (which they like to do) or if they had some weakness during Q4. They see same-store sales growth between 0% and 1%. That’s down from 6% a year ago.

    The shares are very close to a new 52-week high. Note that Ross is currently trading above my $56 per share Buy Below price. Don’t chase it. I want to see what the earnings are like before I adjust our Buy Below.

    One last thing before I go. I want to lower our Buy Below on Signature Bank (SBNY) to $144 per share. I still like Signature a lot, but I want our Buy Below to reflect some of the recent volatility among the financial stocks.

    That’s all for now. Leap Day is this Monday. After that, we’ll get the key turn-of-the-month economic reports. Construction spending and the ISM come out on Tuesday. We’ll also get a look at car and truck sales. On Wednesday, ADP releases its payroll report. Then on Thursday, the Q4 productivity report is revised. That leads up to the big jobs report on Friday. Last month, we finally saw some modest gains in wages. Let’s hope 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

  • Morning News: February 26, 2016
    , February 26th, 2016 at 7:03 am

    Global Stocks Gain Following Reassurances From China on Yuan

    RBS Shunning `Rainmakers’ as Bonus Pool, Millionaires Fall

    Durable Goods Still Contracting Despite ‘Job Gains’

    Once a Coup, Pipeline Company Deal Becomes a Nightmare

    Pfizer Seen Avoiding $35 Billion in Tax Via Allergan Merger

    Is Sears Heading For The Recycling Bin?

    Foxconn’s Four-Year Sharp Pursuit Stumbles Near Final Hurdle

    Judge Clears Way for SunEdison’s $1.9 Billion Vivint Deal

    Eni Posts Fourth-Quarter Loss as Lower Oil Prices Bite

    Ford Boosting Investment in Cleveland For Next F-150 EcoBoost Engines

    Nintendo Halves Profit Outlook on Weak 3DS Sales, Strong Yen

    JP Morgan Has New Theory About What Really Caused the Flash Rally

    UBS Charged With Money Laundering in Belgian Tax Case

    Cullen Roche: Why Stock Market Declines Are Good

    Joshua Brown: Abundance

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  • Morning News: February 25, 2016
    , February 25th, 2016 at 7:08 am

    China Says It Has Solutions to Its Economic Problems

    Pressure on ECB Mounts as Euro-Area Inflation Revised Lower

    Fed’s Kaplan Says FOMC Can Take Its Time to Weigh Policy Move

    St. Louis Fed: Financial Markets Are Saying Oil Will Be Worthless by mid-2019

    Foxconn Hesitates on $6 Billion Bid for Sharp

    Sears Posts $580 Million Fourth-Quarter Loss as Retailer Shrinks

    Target Says Online Sales Surge Tied to Store Inventories

    MasterCard Wants You To Pay For Stuff With Selfies Earnings Too Good To Be True?

    Lloyds Soars on Dividend Bump as Bank Signals End for PPI

    Tesla Battles GM Over Right to Sell Cars in Indiana

    Home Depot: A Blue Chip I Want To Own

    Mercedes Boots Robots From the Production Line

    Roger Nusbaum: Avoiding Unnecessary Risks in Firefighting & Investing

    Cullen Roche: Let’s Talk About Helicopter Drops (Again)

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  • Morning News: February 24, 2016
    , February 24th, 2016 at 7:10 am

    Oil Prices: Where Will They Go From Here?

    Brazil Credit Ratings Cut to Junk by Moody’s

    RBC Profit Misses Estimates as Capital Markets Revenue Falls

    ECB Board Member Warns of Risks From Excessive Stimulus

    Can Things Get Any Worse for Russia? You’re About to Find Out

    Fed’s Fischer Says `Still Early’ to Judge Impact of Market Woes

    Investors Fear Central Bank Policy Errors

    Uber Jumpstarts First Motorbike Service in Gridlocked Bangkok

    Lowe’s Sales Top Estimates as Home-Improvement Boom Continues

    Encana Posts Quarterly Loss, Cuts Spending Plan Amid Oil Slump

    For Exxon and Shell, Age of Ultramajors Comes at the Wrong Time

    BHP’s Boss Faces $11 Billion Dilemma as Prices Languish

    Solid Support for Apple in iPhone Encryption Fight

    Jeff Miller: You Do Not Get Paid for Knowing Yesterday’s News!

    Jeff Carter: Letting Employees Go

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