Archive for March, 2017

  • The 1% Streak Comes to an End
    , March 22nd, 2017 at 12:55 am

    The S&P 500 fell over 1% today for the first time since October 11. The index amassed an impressive run of 110-straight days without a 1% loss. In fact, there were only two losses that exceeded 0.7%. This is the longest such streak since 1993.

    Today, however, the index dropped 1.24%. From a larger context, that’s hardly a terrible loss. Not that long ago, losses like that happened all the time. But in our placid market of recent months, it’s an outlier.

    The losses were not evenly spread out. The banks, for example, took it hard. Bank of America was down 5.8%. Morgan Stanley dropped 4.3%. Our own Signature Bank lost 4.2%. BAC usually has the highest volume of any stock but today it had its highest volume in four months. Interestingly, there was no news today specific to BAC.

    Outside the banks, it really wasn’t that bad a day. The staples were down slightly and the utes were up. Whenever you see the financials and utes move in opposite directions like that, you know the market is debating short-term rates. Today was a strong move in favor of those thinking short-term rates will stay low for longer. I don’t know if they’re right, but they had control of the markets today.

    In the futures market, the odds of a June rate hike declined from 58.3% to 54.0%.

    I saw plenty of commentary saying the market fell for this or that reason (Trump, taxes, healthcare, North Korea). Call me skeptical. The healthcare stocks didn’t move that much.

  • RIP: David Rockefeller
    , March 21st, 2017 at 5:36 pm

    Here’s my piece in The Observer.

    Here’s Where Rockefeller Was Different

    We’ve lost something larger than a man.

    David Rockefeller passed away Monday, aged 101. He was the last surviving grandchild of the great oil tycoon, John D. Rockefeller, Sr. Born into great wealth and opulence—he grew up in the largest private residence in New York City—Rockefeller also inherited his famous family’s sense of noblesse oblige. The New York Times estimates that, over the course of his life, he donated $900 million to charity.

    Rockefeller was part of a vanishing and perhaps extinct breed of men—the Establishment Men. Serious and sober-minded gentlemen, well-born and from the East Coast elite, who left the Ivy League to serve their fellow men. They started foundations, served on boards, built skyscrapers, collected art, preserved nature and promoted high culture.

    Yet it was all done with an air of calm reserve. Rockefeller was a gentleman who embodied the great Yankee virtues of thrift and hard work. Well into his nineties, he would work from his office in, naturally, Rockefeller Center, the complex built by his father during the Depression.

    David Rockefeller was also a visionary who refused to accept the staid conventions of banking. In the 1970s, as chairman of Chase Manhattan, Rockefeller led a bold strategy of international expansion. He traveled the world and became a de facto global ambassador for American-style capitalism. In 1973, he even managed to open a branch office in the Soviet Union.

    Read the rest at The Observer

  • Keep Your Eye on Real Rates
    , March 21st, 2017 at 12:28 pm

    From John Melloy at CNBC:

    The bears believe that low interest rates have been the primary driver of this bull, allowing companies to borrow cheaply to buy back their own stock and making ballooning multiples acceptable on a relative basis. Now that the Fed is in an interest rate hiking cycle, with moves to shrink its balance sheet likely on the horizon, the bears believe the run fueled by cheap money is over.

    But Eddy Elfenbein, manager of the AdvisorShares Focused Equity ETF, points out that real rates (interest rates minus inflation) are still low.

    The “median Fed member sees the range for fed funds rates to be 2 percent to 2.25 percent by the end of 2018,” said Elfenbein citing the latest Fed “dot plot” data. “They also see inflation at 2 percent. That means real rates will remain negative (and next to negative) for nearly two more years.”

    “That’s the strongest point in the bulls favor,” he said.

  • Morning News: March 21, 2017
    , March 21st, 2017 at 7:09 am

    French Presidential Debate Lifts Euro To Six-Week Highs

    How the U.K. Beat Predictions of a Brexit Crunch So Far

    The Fed Goes High

    Rookie Currency Traders Are Causing Trouble at Crucial Moments

    Fed’s Dudley Says Wells Fargo Shows Bank Culture Needs Improving

    In Battle for Digital India, Vodafone Teams Up With Idea Cellular

    Google Announces ‘Tougher’ Policies and Hiring Spree to Prevent Brand Ads Appearing Next to Extremist Content

    Snap’s First Buy Rating Is Bizarre

    Hyundai Motor Shares Rally on Restructuring Speculation

    Wal-Mart Unveils ‘Store No. 8’ Tech Incubator in Silicon Valley

    Albertsons Gazes Into the Future and Envisions Organic Bananas

    David Rockefeller, Philanthropist and Head of Chase Manhattan, Dies at 101

    Man Draws $4.3M IRS Penalty For Lending $100K To Struggling Business

    Roger Nusbaum: Hawkishly Dovish?

    Jeff Carter: The Big Data Blind Alley

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  • Twilight of Hedge Funds?
    , March 20th, 2017 at 10:14 am

    In the New York Post, Carleton English notes that more hedge funds shut down last year than in any year since 2008. Not only that but hedge fund openings dropped 25% to 729.

    Might this represent the peak of the hedge fund industry? After all, there are more hedge funds than there are Taco Bells. I suspect the industry has reached a tipping point where investors are no longer willing to pay high fees for low returns.

    As with most any field, it helps to be the biggest player. Outside those lucky few, it will be a tough road for marginal players.

    Don’t feel too bad for hedge funds. They still run about $3 trillion.

  • HEICO Announces 5-for-4 Stock Split
    , March 20th, 2017 at 9:05 am

    They told us a split was coming and here it is. This morning, HEICO (HEI) announced a 5-for-4 stock split. This means that shareholders will get 25% more shares while the stock price will drop by 20%.

    Considering the reinvestment of cash dividends, and the impact of prior stock splits and stock dividends, a $100,000 investment in HEICO shares in 1990 has become worth approximately $18.7 million today, representing a compound annual growth rate of 22%. Additionally, in December 2016, we increased our semi-annual cash dividend by 13%, which was paid on January 18, 2017 and was HEICO’s 77th consecutive semi-annual cash dividend since 1979.”

    I’m not sure why companies do small stock splits like 5-for-4 or 3-for-2. I suppose it makes for a good press release. I’d rather see them only do 2-for-1 or 3-for-1 splits. Ideally, splits should be for stock over $100 per share.

    This will be HEICO’s 15th stock split since 1995. The split is payable on April 18 to shareholders of record as of April 7. Cash will be paid in lieu of fractional shares.

  • Morning News: March 20, 2017
    , March 20th, 2017 at 7:11 am

    Oil Drops as U.S. Drilling Growth Threatens to Counter OPEC Cuts

    Saudi King’s Asia Tour Trumpets Aramco’s Moves Downstream

    First Skirmish of G-20 Sets Scene for Battle of Trade Ideas

    G20 Ministers Give Mnuchin Space To Define Trump Trade Agenda

    Choice of I.M.F. Critic Highlights Trump’s Reversal of Global Policy

    Vodafone, Idea in $23 Billion Deal To Create New Indian Telecom Leader

    IBM Launches Enterprise-Ready Blockchain Service

    IBM’s Watson Is Tackling Healthcare With Artificial Intelligence

    N.C.A.A. Tournament Ads Work Around Glaring Absence: Players

    Two Executives to Leave Uber, Adding to Departures

    Tesla Bankruptcy Chances Increased Exponentially With The Capital Raise

    French Watchdog Clears GM’s Opel of Cheating On Diesel Emissions

    Hedge Fund Titan’s Surefire Bet Turns Into a $4 Billion Loss

    Josh Brown: What If He Blows It On Healthcare?

    Howard Lindzon: Weed Prices Up and Apple Prices Down

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  • Happy St. Patrick’s Day
    , March 17th, 2017 at 10:25 am

  • CWS Market Review – March 17, 2017
    , March 17th, 2017 at 7:08 am

    “The natural-born investor is a myth.” – Peter Lynch

    On Wednesday, the Federal Reserve decided to raise interest rates by 0.25%. This is only the Fed’s third rate increase since the financial crisis. The new range for the federal funds rate is 0.75% to 1%. That’s still rock bottom by almost any standard.

    But what’s interesting was Wall Street’s reaction. Obviously, they knew the rate hike was coming. I told you so, and Janet Yellen all but said so. Still, stocks rallied on the news. In fact, some folks on Wall Street have taken to calling this move a “dovish hike,” meaning that even though the Fed raised rates, the central bank was cautious on the need for further rate hikes. Bonds rallied, and in the commodity pits, gold rallied as well. That doesn’t normally follow rate increases.

    At her press conference, Fed chairwoman Janet Yellen said she didn’t share Wall Street’s enthusiasm. While Yellen noted that the economy has gotten better, she was clear that her outlook for gradual economic growth hasn’t changed at all. What’s going on? It seems like the Fed and Wall Street are headed in different directions.

    In this week’s CWS Market Review, we’ll look at what the Fed’s move means for us. I’ll also take a look at how our Buy List is performing this year. It’s early, but we’ve jumped out to a small lead against the S&P 500. I’ll also fill you in on some news impacting our Buy List stocks. But first, let’s see why we have little to fear from higher rates. At least, so far.

    The Fed Gives Us a Dovish Rate Hike

    This week’s Fed rate increase was hardly a surprise. Officials at the Fed have gotten quite good at telegraphing their moves to Wall Street. So the big news wasn’t this week, as the expectation for what was in the pipeline was formed over the last few weeks.

    Despite the news’s being well planned, the reception was unexpected. Stocks rallied on the higher rates, but the long end of the bond market rallied as well. In other words, long-term rates went down on the news that short-term rates went up. Gold also rallied. That’s not what the playbook says.

    The best way to square this circle is to believe that Wall Street expects higher rates, but perhaps not as quickly as they assumed. Wall Street had been very optimistic about the economy, not just regarding stocks’ going up, but regarding which sectors this was going to happen in (Tech, Cyclicals). That’s what the Trump Trade was all about. But in her press conference, Janet Yellen was very cautious: “We haven’t changed the outlook. We think we’re moving on the same course we’ve been on.” I think the Fed’s view is that Wall Street simply hasn’t been listening to them. The Fed sees gradual growth, but the Trump Trade was predicated on rip-roaring growth. In that battle, my money’s on the Fed largely because they’re the ones who make the money.

    Along with the Fed’s policy statement, its members also updated their economic forecasts. I should add that the Fed is notoriously bad at forecasting. I mean, even for economists, they’re really, really bad. Still, their outlook—the famous blue dots—tells us where they think the economy is going.

    For this year, the Fed expects two more rate increases. Not too long ago, I thought that prediction was far too optimistic. Now it looks quite reasonable. The Fed sees another three rate hikes coming next year as well. In fact, the median is only one vote away from seeing four rate increases next year. If that’s accurate, it would bring the range for Fed funds to 2.25% to 2.5% in months.

    The Fed sees inflation holding at 2%. That means that real short-term interest rates will remain negative for nearly two more years. There are few factors that are as bullish for stock investors as negative real rates. Effectively, the Fed is giving us no alternative but to invest in stocks. While much of the bull rally has been helped by share buybacks, there’s been real investment as well. It’s taken a while to wind its way to the real economy, but it’s there.

    What happens next? The Fed meets again in May, and it’s doubtful they’ll raise rates. After that, the Fed gets together in mid-June, and another rate hike is very possible. The futures market currently thinks the odds are roughly 50-50. Right now, I’d say it’s 70-30 in favor of another rate increase.

    But there are a lot of moving parts to this forecast. The keys to watch are inflation and the labor market. Last Friday, the government reported that the economy created 235,000 net new jobs. That’s a strong number. The unemployment rate dipped to 4.7%. Over the last year, average hourly earnings are up 2.8%. That’s not much, but at least it’s 0.6% ahead of core inflation. During much of the period from 2011 to 2014, wages basically stayed in line with core inflation. This means that workers saw no real wage increase. Now they are seeing one, even though it’s small.

    Inflation is still not a threat. On Wednesday morning, ahead of the Fed’s announcement, the government reported that consumer prices rose 0.1% last month. That’s what economists had been expecting. The “core rate,” which excludes food and energy prices, rose by 0.2%, which also matched expectations. So while the labor market has been expanding, there’s been only modest inflation pressure. That helps explain the Fed’s cautious approach.

    All of this will have an impact on the stock market. I think it’s very likely we’ll see better relative performance from defensive areas of the market. This includes areas like healthcare and consumer staples. When traders see a better economy, these areas tend to get left behind. I still hold to my belief that stocks may face a modest pullback soon. Say 5% to 7%. Nothing too serious, but enough to scare off some momentum traders. We have nothing to fear. In fact, it may give us some good buying opportunities.

    Until then, I encourage investors to focus on a list of high-quality stocks such as you’ll find on our Buy List. Remember to pay attention to our Buy Below prices. In a low-volatility environment, there’s no need to chase after good stocks. Now let’s look at how well our Buy List has done so far this year.

    Our Buy List Is Up 7.61% So Far This Year

    The year is barely one-fifth over, but I wanted to take a look at how well our Buy List is performing this year. I’m happy to say that it’s looking quite good for us. Through Thursday, our Buy List is up 7.61% for the year. That’s close to an average return for a full year, so doing it in eleven weeks ain’t bad. By contrast, the S&P 500 is up 6.37% (neither figure includes dividends).

    Of our 25 stocks on the Buy List, 22 are positive for the year. Ten stocks are up by double digits, and fourteen are beating the overall market. Let me be clear that this is a very short time period, and we like to focus on the long term.

    Of the stocks on our Buy List, Moody’s (MCO) is currently in first place. The credit-ratings firm is up 20.4% YTD. I always find it interesting that the top-performing stock is never one I would have guessed. Cerner (CERN) isn’t far behind, in second place with a gain of 19.0%. This stock was one of our worst performers last year.

    Perhaps the most surprising stock recently has been Axalta Coating Systems (AXTA). In last week’s CWS Market Review, I mentioned how Akzo Nobel rejected PPG’s buyout offer. Traders assumed that put Axalta in play as another backup buying opportunity. In a very short time, shares of AXTA jumped from $29 to $31.

    The rally continued into this week as the Royal Bank of Canada raised its price target on AXTA from $33 to $35 per share. The stock rose nearly 4% on Thursday to close at $32.28 per share. In the last seven trading days, AXTA has gained more than 11%. The stock is now up 18% on the year, making it our third-best stock this year.

    This week, I’m going to raise my Buy Below on Axalta to $35 per share. I’ll also remind you to not expect a buyout offer from PPG, or anyone. If that happens, it’s good fortune, but you shouldn’t base an investment strategy on trying to guess who will be bought out next.

    The worst performer so far this year is Wabtec (WAB). The rail-service stock is currently down 7% YTD. WAB actually started out the year well for us, but it got clobbered after last month’s lousy earnings report. The company badly missed earnings. I’m not worried about Wabtec at all. Give this one some time. They’ll be back.

    Our second-worst performer this year is Express Scripts (ESRX). This is a good example of a company that’s doing well but is caught in the middle of the healthcare debate. The shares are now at a three-year low. For this year, Express sees earnings coming in between $6.82 and $7.02 per share. This week, I’m lowering my Buy Below on Express Scripts to $69 per share. This is a very good stock going for a cheap price.

    That’s all for now. Next week will be a fairly quiet week for economic reports. The existing home-sales report comes out on Wednesday. The report for January was a 10-year high. The report for new home sales will be released 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

  • Morning News: March 17, 2017
    , March 17th, 2017 at 5:48 am

    German Authorities Raid U.S. Las Firm Leading Volkswagen’s Emissions Inquiry

    Fuel-Conscious U.S. Drivers Crimp OPEC’s Bid to Raise Oil Prices

    Mnuchin May Soften Brazen U.S. Trade Talk in His G-20 Debut

    The Fed Acts. Workers in Mexico and Merchants in Malaysia Suffer

    Edge or Liability? White House Ties May Cut Two Ways For Goldman

    Canada Goose’s CEO Doesn’t Sweat Warm Winters

    Why This Market Researcher Lowered Its Revenue Expectations for Snap

    Oracle Still Sees Databases as the Cloud’s Mother Lode

    Judge Approves $27 Million Driver Settlement in Lyft Lawsuit

    Car Industry Players Diverge on Timescale For Self-Driving Cars

    British Regulators to Investigate 21st Century Fox’s Deal for Sky

    Japan Minister Agrees to Share Toshiba Case Information With U.S.

    Top U.S. Coal Miner Peabody Eyes Bankruptcy Exit in April

    Roger Nusbaum: No, You Don’t Own An ETF

    Jeff Miller: The Role of Valuation in Trading

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