Archive for May, 2017

  • The Quants Are Taking Over
    , May 22nd, 2017 at 3:43 pm

    The WSJ runs a story today on the emergence of quant funds:

    Up and down Wall Street, algorithmic-driven trading and the quants who use sophisticated statistical models to find attractive trades are taking over the investment world.

    On many trading floors, quants are gaining respect, clout and money as investment firms scramble to hire mathematicians and scientists. Traditional trading strategies, such as sifting through balance sheets and talking to companies’ customers, are falling down the pecking order.

    “A decade ago, the brightest graduates all wanted to be traders at Wall Street investment banks, but now they’re climbing over each other to get into quant funds,” says Anthony Lawler, who helps run quantitative investing at GAM Holding AG . The Swiss money manager last year bought British quant firm Cantab Capital Partners for at least $217 million to help it expand into computer-powered funds.

    Guggenheim Partners LLC built what it calls a “supercomputing cluster” for $1 million at the Lawrence Berkeley National Laboratory in California to help crunch numbers for Guggenheim’s quant investment funds, says Marcos Lopez de Prado, a Guggenheim senior managing director. Electricity for the computers costs another $1 million a year.

    Algorithmic trading has been around for a long time but was tiny. An article in The Wall Street Journal in 1974 featured quant pioneer Ed Thorp. In 1988, the Journal profiled a little-known Chicago options-trading firm that had a secret computer system. Journal reporter Scott Patterson wrote a best-selling book in 2010 about the rise of quants.

    Prognosticators imagined a time when data-driven traders who live by algorithms rather than instincts would become the kings of Wall Street.

    That day has arrived. In just one sign of their power, quantitative hedge funds are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013, according to the Tabb Group, a research and consulting firm in New York.

    Quants have almost caught up to individual investors, which outnumber quants and collectively have 29% of all stock-trading volume.

    At the end of the first quarter, quant-focused hedge funds held $932 billion of investments, or more than 30% of all hedge-fund assets, estimates HFR Inc. In 2009, quant funds held $408 billion, or 25% of all hedge-fund assets.

    Quants got $4.6 billion of net new investments in the first quarter, while the overall hedge-fund business saw withdrawals of $5.5 billion.

    The computers are outperforming humans at picking investments. In the past five years, quant-focused hedge funds gained about 5.1% a year on average. The average hedge fund rose 4.3% a year in the same period.

    This is a good article and I recommend you give it a read. My only quibble, and it’s a small one, is that it seems late by about ten years. These trends have been building for a long time.

  • New High Today for Stryker
    , May 22nd, 2017 at 2:21 pm

    I noticed that Stryker (SYK) is at a new all-time high today. I added the stock to the Buy List in 2008. It promptly crashed with the bear market and underperformed for more than four years. We held on and have done quite well. Good investing takes patience.

  • Incentives Matter
    , May 22nd, 2017 at 12:01 pm

    Josh Brown noticed that Steven Russolillo is winding down the WSJ‘s stock-picking column. Why? Simply put, hunting for cheap stocks has become a dying art.

    Josh sees this as part of a long-term decline for active investing, and he highlights AllianceBernstein’s new incentive-based pay structure for active managers.

    Later on Josh, talks about my venture into exchange-traded funds:

    I gave some money to my old friend Eddy Elfenbein when his Crossing Wall Street ETF launched last fall. He did well and I will probably him some more.

    He’s got the first actively managed ETF with a variable management fee built into it (his product was launched through Noah Hamman’s AdvisorShares fund family). He’s doing between 20 and 30 of his favorite stocks, which will either be very good or very bad in different market environments. But overall, he’s not snuggling up to the Russell 3000 or the S&P 500. I have no way of knowing whether or not what he’s trying to do will work, I only know that it won’t look exactly like an index fund I can buy for approximately zero dollars.

    Here’s Voss and Howard again on concentration:

    Studies show that buy-side analysts are quite good at security selection: Take, for example, the high levels of accretive alpha of their highest conviction/largest positions, as measured by ex-ante relative portfolio weights. Moving down the relative weights, performance worsens, with holdings beyond the top 20 generating negative alpha. In other words, most portfolios are overdiversified and research shows that hurts performance.

    What’s interesting is that, because Eddy doesn’t focus on the benchmark in terms of how he talks about his approach, I have never even once looked at CWS’s performance against it, only absolutely. There’s a benefit to this sort of reframing that I should probably think more deeply about.

    There should be more attempts at innovation like what we’re seeing from Eddy and AB. Something will eventually click.

  • Mark Fields is Out at Ford
    , May 22nd, 2017 at 9:48 am

    Mark Fields has been fired as CEO of Ford. That’s a tough break for him and I feel bad. The company is making a decent profit but the stock has gone nowhere.

    Last year, I finally decided to ditch Ford from our Buy List after holding on for too long.

    During Mr. Fields’s three-year tenure — a period when Ford’s shares dropped 40 percent — he came under fire from investors and Ford’s board for failing to expand the company’s core auto business and for lagging in developing the high-tech cars of the future.

    The change came less than two weeks after Mr. Fields was sharply criticized during the company’s annual shareholders meeting for Ford’s deteriorating financial results.

    (…)

    As recently as last week, Mr. Fields, 56, had been trying to strengthen Ford’s bottom line by cutting 1,400 salaried jobs. But, unable to reverse the stock decline, he ran out of time to carry out his strategy to slash costs and expand Ford’s lineup of trucks and sport utility vehicles, while also investing in autonomous and electrified vehicles.

    Despite spending heavily on self-driving research, Ford was struggling to keep pace with larger automakers such as General Motors and tech giants like Google, both of which have been testing self-driving vehicles. Ford is promising to have a fully autonomous vehicle on the road by 2021.

    I think this is a good example of a CEO getting blamed for things that weren’t entirely his fault. The new CEO is Jim Hackett. He was in charge of Ford’s efforts in autonomous vehicles.

    The shares are back up over $11. At least week’s low, Ford was yielding 5.6%.

  • Morning News: May 22, 2017
    , May 22nd, 2017 at 6:35 am

    Farming the World: China’s Epic Race to Avoid a Food Crisis

    Saudi Arabia’s $20 Billion Wager With Blackstone is Record-Sized Bet on U.S. Infrastructure

    Saudi Arabia and Russia Are at Odds on Almost Everything, Except Oil

    Swiss Voters Back Plan to Phase Out Nuclear Power

    Ford Fires CEO Mark Fields; Former Steelcase Chief Jim Hackett To Take Over

    Cathay Pacific Is Cutting 600 Jobs in Its Largest Restructuring in Decades

    Huntsman, Clariant Agree to Merge

    LafargeHolcim Poaches Sika’s Jan Jenisch For Chief Executive

    Move Over Tesla, Europe’s Building Its Own Battery Gigafactories

    At Warner Bros., Former Disney Exec Leads New Charge on Merchandise

    SoftBank’s Son Chases Boyhood Dreams With $100 Billion Fund

    `The Internet Is Broken’: @ev Is Trying to Salvage It

    Jeff Miller: Will The Fed Change Course?

    Howard Lindzon: How Many Bankers Did it Take to Grow Ethereum?

    Michael Batnick: These Are The Goods

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  • Ingredion in Barron’s
    , May 20th, 2017 at 5:33 pm

    This weekend’s Barron’s discusses the attractiveness of defensive stocks in tough markets. Derek Anguilm of the Westcore Mid-Cap Value Dividend Fund mentions one of his favorites:

    One favorite is Ingredion (INGR), which makes sweeteners and nutrition ingredients, like ones that make crackers crisper, and pharmaceutical products like intravenous solutions. The stock has pulled back amid concerns about changes in foreign trade. Anguilm sees demand rising from a growing middle class in emerging markets and aging populations in the developed world.

    Ingredion “generates strong and consistent cash flows, has a healthy balance sheet, and has a history of returning cash to shareholders,” he says. Ingredion yields 1.7% but has grown its dividend by 170% over the past five years. Its payout ratio is 26% of earnings, “which we believe will allow for attractive dividend growth in the years ahead,” says Anguilm, who recently added to the fund’s position.

  • CWS Market Review – May 19, 2017
    , May 19th, 2017 at 7:08 am

    “Pride of opinion has been responsible for the downfall of more men on Wall Street than any other factor.” – Charles Dow

    Wall Street’s deep sleep came to an end this week. The S&P 500 had a run of 16 straight days in which it never traded outside a band that was a little more than 1% wide. Then on Wednesday, the index suddenly dropped 1.8% for its biggest plunge all year.

    Of course, that drop was from an all-time high close, so we can hardly say that there’s been a lot of pain on Wall Street. The major indexes are still having a very good year, and it’s only May. The move was such a shock since everything had, until then, been so complacent.

    But here’s the key, Wednesday’s drop wasn’t spread out evenly. Many of the stocks that characterized the Trump Rally, like the big banks, fell the most. At the other end, defensive stocks fell the least. Some, like Hormel Foods, even rose a tad.

    What does this all mean? There’s been a lot of talk that this is Wall Street’s verdict on President Trump. I don’t buy that at all. What’s really going on is that Wall Street is suddenly getting cold feet about another Fed rate hike. I’ve been warning that a rate increase next month would be a mistake. Some folks, apparently, are coming around to my side. I’ll have more on that in a bit.

    On the earnings front, we got a very good report from Ross Stores, plus higher full-year guidance. I love it when that happens. Ross seems to be one of the players that’s standing up to the great Retail Apocalypse. I’ll also preview two Buy List earnings reports headed our way next week, from HEICO and Hormel. But first, let’s take a closer look at Wall Street’s worst day since September.

    Wednesday’s Selloff Was about the Fed, Not Trump

    In recent issues, I’ve said that it would be a mistake for the Federal Reserve to raise interest rates next month. The economy, sadly, just isn’t strong enough. Since I’m not a member of the Federal Open Market Committee, my views on the matter don’t count for much. But this week, the world may have shifted in my direction.

    According to the latest futures prices, the market is placing 73.8% odds on a rate increase in June. That’s high, but it was even higher not too long ago. That’s why Wednesday’s selloff caught my attention. The worst performers were big banks and financial institutions. The best performers were high-dividend stocks like REITs and utilities, with some consumer cyclicals.

    Whenever you see banks and dividend stocks move in opposite directions like that, you know that the market is arguing about the direction of short-term interest rates. Banks want short rates to go up. Dividend-payers want them to go down. When it’s a big drop like this, it’s almost as if the market is begging the Fed for some relief. I don’t know if they’re listening.

    What makes this more interesting is that the economic news has been getting a little better recently. Still not enough to justify a rate hike, in my opinion, but we must consider all the evidence. For example, on Monday, the industrial production report was quite good. Economists had been expecting industrial production to show a 0.4% rise for April. Instead, it was up a full 1%. That’s the biggest increase in three years. Importantly, it’s for the month of April, which is in Q2.

    A few weeks ago, we learned that the U.S. economy grew by a meager 0.7% for Q1. That’s pretty bad. Next week, we’ll get an update. But now we’re starting to get a few clues for what the Q2 numbers will be like. The Atlanta Fed has its GDPNow forecasting tool, which says that Q2 GDP is currently tracking at 4.1%. I have to be honest: that shocked me. I hope they’re right, but we still need to see more data.

    Last Friday, shortly after I sent out the newsletter, the government released the inflation report for April. If you recall, the report for March was light—very light. Core inflation had its steepest drop in 35 years. The numbers for April were higher, but still quite subdued. Headline inflation rose by 0.17% for April, and core inflation was up by 0.07%. Except for March, that’s the softest in four years. No matter how you look at it, inflation just isn’t out there.

    What’s interesting is that if the Federal Reserve were doing nothing, then it would, in effect, be tightening. Stable rates plus falling prices means higher real rates, and that’s what puts the brakes on the economy. That’s what’s been happening (see above), and it needs to stop. Don’t believe the hype that the stock market is revolting against Trump. It’s upset with a short-sighted Fed policy. The sooner the Fed changes course, the better. Now, let’s check out the strong earnings report from Ross Stores.

    Ross Stores Earned 82 Cents per Share

    After the closing bell on Thursday, Ross Stores (ROST) reported fiscal first-quarter earnings of 82 cents per share. This is for the months of February, March and April, which is typically the slowest time of year for Ross.

    Ross had been expecting Q1 earnings between 76 and 79 cents per share and comparable-store sales growth of 1% to 2%. In last week’s issue, I said, “This strikes me as conservative.” I was right, but I can’t take too much credit. We know that Ross likes to keep expectations low.

    Barbara Rentler, Chief Executive Officer, commented, “We achieved respectable growth in both sales and earnings during the first quarter despite the uncertainty and volatility in the external environment. Operating margin of 15.2% exceeded our expectations due to above-plan sales and merchandise margin.”

    I’m especially impressed by that operating margin number. Retail is all about keeping control of costs, especially for a deep discounter like Ross. The retail sector has been getting creamed lately, but Ross is one of the few that have been holding up relatively well. As I’ve long believed, Ross is a rare retailer that’s Amazon-resistant.

    Now let’s look at guidance. For Q2, which ends on July 29, Ross sees EPS ranging between 73 and 76 cents per share. That’s compared with 71 cents per share for last year’s Q2. Ross sees comparable-store sales growth of 1% to 2%.

    Now for the good news. Ross is raising its full-year earnings forecast. The company now projects 2017 earnings between $3.07 and $3.17 per share. That’s an increase from the previous range of $3.02 to $3.15 per share. Ross made $2.83 per share last year; however this year will include an extra business week. Ross estimates that adds eight cents per share.

    Ross recently increased its quarterly dividend from 13.5 to 16 cents per share. That’s an increase of 18.5%. Over the last seven years, the company has raised its dividend by 300%. Ross is on track to buy back $875 million in stock this year. Ross Stores remains a buy up to $70 per share.

    Earnings from HEICO and Hormel

    We have two more Buy List earnings reports coming next week, from HEICO and Hormel Foods. Both companies ended their fiscal second quarters in April.

    HEICO (HEI) is one of my favorite little companies. They make replacement parts for the aircraft industry. It was our top-performing stock last year, and it’s doing pretty well this year. The company is due to report its earnings on Tuesday, May 23.

    In February, HEICO had Q1 earnings of 59 cents per share. That was five cents more than estimates. I was very pleased to see that cash flow rose 24%. The company provides guidance for several metrics, except earnings-per-share, so we need to make a few guesses. But the good news in February was that they raised their 2017 guidance.

    Previously, HEICO expected full-year sales growth of 5% to 7% and net income growth of 7% to 10%. Now they see sales growth of 6% to 8% and net income growth of 9% to 11%. Assuming share count doesn’t meaningfully change, that’s probably about $2.02 to $2.05 per share. HEICO also recently split its stock 5-for-4.

    The consensus on Wall Street (that’s only six analysts) is for Q2 earnings of 50 cents per share. This stock has an amazing long-term record. If you had invested $100,000 in HEICO in 1990, today it would be worth $18.7 million. For now, I’m keeping my Buy Below for HEICO at $72. I may raise it depending on the earnings report.

    In February, Hormel Foods (HRL) missed earnings for the second time in a row. For Q1, the Spam stock earned 44 cents per share which was one penny below estimates. At the time, Hormel also lowered its full-year guidance to $1.65 to $1.71 per share, a decrease of three cents to both ends of the range.

    The company cited “challenging market conditions in the turkey industry,” which, I have to admit, sounds kind of funny. Despite the earnings miss, the first quarter was Hormel’s 15th record quarter in a row. The fiscal Q2 earnings report is due out before the opening bell on Thursday, May 25. The consensus on Wall Street is for 40 cents per share.

    Buy List Updates

    On Monday, Moody’s (MCO) announced that they bought a Dutch company, Bureau van Dijk, for $3.1 billion. Moody’s will finance the deal with $1.3 billion in cash parked overseas plus a $2 billion debt offering. They expect the deal to close in the third quarter. Bureau van Dijk is a global business-intelligence and company-information provider. Shares of MCO rallied on the news.

    I also want to make a few adjustments to some of our Buy Below prices. This week, I’m lowering my Buy Below on Cinemark (CNK) to $43 per share. I’m also dropping Alliance Data Systems (ADS) to $249 per share.

    That’s all for now. Next week will be the last work week prior to the Memorial Day weekend, which is the traditional start of summer. On Tuesday, we’ll get the new-home sales report followed by the existing-home sales report on Wednesday. I’ll be particularly interested to see Friday’s update to the Q1 GDP report. The initial report showed real growth of just 0.7% which was the weakest report in three years. 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: May 19, 2017
    , May 19th, 2017 at 7:02 am

    Full Tanks and Tankers: a Stubborn Oil Glut Despite OPEC Cuts

    Saudi-U.S. Ties Shift as Kingdom Turns to Trump for Investments

    The Trump Administration’s Plans to Crack Down on Wall Street Are Being Called Into Question

    Mnuchin May Face Fight With Watt Over Fannie-Freddie Dividends

    In A Driverless Future, Uber and Lyft Will Sit in the Passenger Seat

    Elon Musk Sends Seemingly Mixed Messages on Tesla’s Valuation

    Walmart Will Never Beat Amazon

    Cisco’s Soggy Outlook Tests Patience with the Transformation

    Bain, KKR, Broadcom Among Suitors Lining Up For Toshiba’s Chips Business

    4 Automakers Settle Takata Airbag Claims for $553 Million

    The Giddy Messages Citi Traders Sent While Lehman Died

    Anthony Scaramucci, Hedge Fund Showman, Finds Himself in Limbo

    Victims Call Hackers’ Bluff as Ransomware Deadline Nears

    Josh Brown: This Will Never End, But We’ll Get Used To It

    Jeff Miller: Time To Buy The Dip in IBM?

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  • Morning News: May 18, 2017
    , May 18th, 2017 at 7:13 am

    Japan’s Economy Is Growing, But Don’t Call It A Hot Streak

    Oil Stuck in Trump Slump as Risk Aversion Damps U.S. Supply Drop

    Here’s Why the Dow’s 373 Point “Plunge” Is Laughable

    VIX Surge Is Unwelcome Lesson in Duplicity of Volatility Wagers

    Deutsche Bank’s Cryan Sees Better Revenue Opportunities in 2017

    U.S. Called Terror Risk Critical in Laptop Ban Meeting

    E.U. Fines Facebook $122 Million Over WhatsApp Data Collection

    Amazon’s Next Big Disruption May Be the Pharmacy Business

    German Newcomer Lidl Threatens Walmart in Discount Grocery Wars

    How Uber and Waymo Ended Up Rivals n the Race for Driverless Cars

    GM Will Cut Operations in India, South Africa

    Cisco Revenue Forecast Disappoints; Says to Cut 1,100 More Jobs

    With Ransomware, It’s Pay and Embolden Perpetrators, or Lose Precious Data

    Ben Carlson: Think Global to Avoid the Shrinking U.S. Stock Market

    Cullen Roche: The All or Nothing Bias

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  • Painful Day Today
    , May 17th, 2017 at 12:53 pm

    The stock market is taking a big hit today. To be fair, it’s really not down that much, but the market’s been so tame in recent weeks that any sizable move grabs our attention.

    The S&P 500 is currently down 1.13%. The biggest pain is being felt by the financials. Several of the big banks are off by 3% or more. Today’s like its own unwinding of the Trump Trade.

    We can see that most clearly by looking at the High Beta sector. I like to track the High Beta ETF (SPHB). High Beta got absolutely clobbered in 2015. It came back strongly in 2016, and it really soared after Election Day. Since December, however, it’s gradually lagged the market. Today has been especially rough.

    The defensive names like Hormel and Smucker are holding up well. Some are even in the green. A little bit at least. In the last month, the tech sector has been holding up so much of the market.