Eddy Elfenbein, July 7th, 2015 at 10:47 am
For the first time since April 1, the S&P 500 is below 2,050.
The index has also given up its 200-day moving average.
The S&P 500 has had a pretty good run of staying above its 200-DMA. There was a brief stretch of six days last October when the index drifted below its 200-DMA (thanks to Ebola). Before that, the last time the S&P 500 closed below its 200-DMA was November 16, 2012.
How to Game the Market
Eddy Elfenbein, July 7th, 2015 at 8:30 am
It’s an easy way to game the stock market, and getting easier by the day.
With some deft maneuvers, hedge funds and Wall Street trading desks are reaping hundreds of millions at the expense of index mutual funds, the investments of choice for a growing number of ordinary Americans.
The tactic, in some ways, resembles illegal front-running – – but in this case, it’s perfectly fine. The traders are simply buying stocks before they’re added to the indexes that, by definition, index funds must track.
As the popularity of index investing soars to new heights, the emergence of index front-running is raising fundamental questions about so-called passive investment strategies, as well as how indexes are compiled and the role the funds themselves play in elevating costs. By one estimate, it gouges owners of funds tracking the Standard & Poor’s 500 Index to the tune of $4.3 billion a year, a sum that can double or even triple the cost of such investments.
“Portfolio managers are aware of it, but some of them will say ‘My clients demand an index fund, and I’m going to give it to them come hell or high water,’” Michael Rawson, an analyst at Morningstar Inc., said from Chicago. “Yes, you matched the index return, but the investor is now worse off. You don’t hear about that as much.”
“Fixed Income is Always a Good Foundation for a Portfolio”
Eddy Elfenbein, July 7th, 2015 at 7:52 am
From Simon Constable at the Wall Street Journal:
Given the expected rise in interest rates, does your portfolio still need a healthy allocation of bonds? Probably yes, according to the experts.
Many agree that the security and diversification bonds offer shouldn’t be spurned just because the direction of rates could be changing. But, depending on the investor, now may be a good time to adjust the size of that allocation and its contents, with regard to lengths of maturities and levels of risk.
“Fixed income is always a good foundation for a portfolio,” says Eddy Elfenbein, Washington, D.C., author of the Crossing Wall Street blog and newsletter. “Security and safety.… Each month and quarter there is a regular check from the coupons.”
Mr. Elfenbein says he generally suggests a 30% allocation in bonds once investors hit 40, and an increasing allocation as the years progress. Younger investors may want to be in stocks only, he says, because they will be able to weather more market swings.
Morning News: July 7, 2015
Eddy Elfenbein, July 7th, 2015 at 7:12 am
Be sure to follow me on Twitter.
Eddy Elfenbein, July 6th, 2015 at 11:07 pm
The price of oil had one of its worst days all year today. Until recently, it looked as if oil had stabilized. In this case, the problem isn’t Greece but China. Investors are worried that a slowdown in China could reduce demand for crude. Off to the side, Iran has hinted that it’s looking to grow its exports.
The fall started late last week as U.S. producers said they wanted to ramp up production and data showed them adding drilling rigs to their fields for the first time since December. Iraqi production also turned out to be larger than expected, and data showed production across the Organization of the Petroleum Exporting Countries rising throughout June, analysts said.
“Even without additional Iranian barrels, there is already too much oil,” said Tim Evans, analyst at Citi Futures Perspective in New York. “We may have tipped the balance in the market.”
The U.S. benchmark oil price slid for the third session in a row, closing down $4.38, or 7.7%, to $52.53 a barrel on the New York Mercantile Exchange. Monday’s losses are the biggest in percentage terms for a single session since February, though they also included declines during limited electronic trading on the Friday holiday.
The reaction in the stock market was predictable — energy and materials were down the most while utilities and healthcare were mostly unscathed (an anti-Quadrant I day). Several of the major energy stocks like Chevron, Royal Dutch Shell, ConocoPhillips and Rio Tinto hit new 52-week lows. Our Buy List has no energy stocks so that helped us outperform the indexes by a little bit.
Greece Votes “No”
Eddy Elfenbein, July 6th, 2015 at 8:10 am
The results are in and the people of Greece voted strongly against the bailout. I honestly don’t know what comes next. I suppose it’s possible for Greece to stay in the eurozone, but that seems unlikely. The choice Greece faces is between two very bad outcomes. The country will now be a pariah in the international debt market. Greece’s colorful Finance Minister, Yanis Varoufakis, has resigned.
There’s a big eurozone meeting on Tuesday to discuss what comes next. All banks in Greece are closed today. Tsipras believes he now has greater negotiating power. On the other hand, Greece’s creditors believe they have more reasons to cut their losses and move on.
S&P 500 futures are currently down about 0.88%.
Eddy Elfenbein, July 6th, 2015 at 7:54 am
The losses — Chinese shares have shed more than a quarter of their value in three weeks — pose an added risk, and possibly greater danger, to a global economy grappling with Greece’s difficulties in repaying foreign loans and its possible exit from the euro. About $2.7 trillion in value has evaporated since the Chinese stock market peaked on June 12. That is six times Greece’s entire foreign debt, or 11 years of Greece’s economic output.
Morning News: July 6, 2015
Eddy Elfenbein, July 6th, 2015 at 5:57 am
Be sure to follow me on Twitter.
CWS Market Review – July 3, 2015
Eddy Elfenbein, July 3rd, 2015 at 7:08 am
“Investors must keep in mind that there’s a difference between a good company and a good stock. After all, you can buy a good car but pay too much for it.” – Loren Fox
In last week’s CWS Market Review, I told you how calm and relaxed the market had become. It seemed like the market was taking it easy this summer. We hadn’t had a 2% drop all year.
Well, I guess I jinxed the market. Sure enough, on Monday, the S&P 500 not only dropped more than 2%, but the index had its worst daily fall in 17 months. Once again, investors were spooked by the unending mess in Greece. There’s a big yes-or-no national referendum scheduled for Sunday.
Once again, I’ll assure you not to worry about Greece. The simple version is that Wall Street doesn’t have much to focus on right now, so it’s giving outsized attention to Greece. Cullen Roche added some much-needed context by noting that Greece was defaulting on $1.6 billion. That’s equivalent to 30 hours’ worth of revenue for Walmart’s (WMT). The good news is that second-quarter earnings season starts next week, and we’ll finally have much more important news to digest.
In this week’s CWS Market Review, we’ll take a look at the upcoming earnings season and what it means for the market. I’ll also cover the latest news on the PayPal spinoff from eBay (EBAY). On July 20, PayPal will join our Buy List as a stand-alone company. I’ll also have the latest on Cognizant Technology (CTSH). The shares dropped on Thursday, but I don’t think it’s anything to worry about. Now let’s look at how well our Buy List did during the first half of 2015.
At the Halfway Marker, Our Buy List Is Beating the Market
I often tell investors not to stress out over short-term moves in the stock market. Viewed minute by minute, the market has a mind of its own. Investors need to understand that stocks fluctuate. Sometimes they go up for no good reason, and sometimes they go down for no good reason. To quote Hyman Roth, “this is the business we’ve chosen.” Only by taking the long view can you really take the measure of how well you’re doing.
On Tuesday, Wall Street closed the books on the first half of the year. In those six months, the S&P 500 gained a mere 0.20%. That’s the market’s worst first half since 2010. I’m please to report that our Buy List continues to outpace the rest of the market. The 20 stocks on our set-and-forget portfolio gained 3.02% for the first half of the year. Remember, that’s with making ZERO trades all year. (A mutual fund company would probably advertise our numbers as beating the market by 15 to 1.)
Once we include dividends, our Buy List gained 3.59% for the first half of the year. With dividends, the S&P 500 gained 1.22%. Roughly speaking, our Buy List yields about 1.1% annually, while the S&P 500 yields about 2%. (I can’t give an exact figure, since our dividends are probably growing faster than the rest of the market.)
Last year, our Buy List lost to the market (11.80% to 13.69%). That broke our streak of beating the S&P 500 for seven years in a row. I started the Buy List to show ordinary investors that with patience and a little discipline, you can consistently beat Wall Street over the long haul. So far, we’re on our way towards beating the market yet again. Patience and discipline are still the keys. Now let’s look at the upcoming earnings season.
Q2 Earnings Season Begins Next Week
On Wednesday, July 8, Alcoa (AA) will officially kick off Q2 earnings season when it reports. Over the next five weeks, 16 of our 20 Buy List stocks will report sales and earnings for the second three months of the year. A few will also update their guidance for the rest of the year. The first Buy List stock to report will be Wells Fargo (WFC) which is scheduled to report on Tuesday, July 14. I’ll preview more of our earnings reports in upcoming issues.
You’ll notice that many of our stocks offer sales and earnings guidance. Bear in mind that companies aren’t required to do this. It’s generally a sign of a better-run company that it tells investors what their goals are for the future.
Wall Street currently expects the S&P 500 to earn $28.42 per share for Q2. (That’s the index-adjusted number. Every one point in the S&P 500 is worth about $8.83 billion.) As with most quarters, analysts have been paring back their estimates. At the start of the year, Wall Street had expected Q2 earnings of $32.36 per share. But as investors realized the full scope of the damage caused by the surging dollar, Wall Street lowered its estimates. The continued impact of the dollar is one of the open questions for this earnings season. Wall Street had overestimated the damage done during Q1.
If Wall Street’s estimate for Q2 is accurate, then this will be the third quarter in a row of declining earnings. As this “earnings recession” began, there was a lot of fear that it would turn into a broader economic recession. Now that we have more data, it appears to be a minor blip within a favorable climate of rising sales and earnings. In fact, earnings are projected to increase slightly in Q3, and for Q4, Wall Street expects earnings growth of more than 17%.
I should also mention that dividends continue to grow very nicely. The S&P 500 saw dividend growth of nearly 10% during Q2. That means that despite many pronouncements of a stock-market bubble, dividends have actually been growing faster than stock prices, and the market’s dividend yield is rising, not falling.
We got more mildly positive news on Thursday, when the government said that the economy created 223,000 net new jobs in June. That was a bit below consensus, but basically it was what the market had been expecting, although the numbers for April and May were revised lower. The unemployment rate dipped to 5.3%, which is the lowest since April 2008. Part of the reason for the lower jobless rate is that more people are leaving the job market. The workforce participation is now at a 38-year low, but some of that is due to demographics (all those retiring Baby Boomers).
The bad news was that average hourly earnings were unchanged. Frankly, wage growth has been weak. What this means is that there’s less pressure on the Fed to raise rates soon. Bill Dudley, the Grand Poobah of the New York Fed, recently said the Fed could increase rates in September. Call me a doubter. The futures market currently thinks there’s a 50-50 chance the Fed will raise interest rates at their December meeting. That sounds about right.
The important takeaway from this jobs report is that there’s a lot of “slack” in the labor market. In previous recoveries, economists had assumed that inflation would start creeping up once unemployment hit 5.5% or so. That’s just not true anymore. In fact, I wouldn’t be surprised if the tipping point is now below 5%. That’s the thing about financial crises—the old rules no longer apply. The U.S. economy is nowhere close to full capacity. That’s good news for stock investors.
There was also mildly good news with the ISM Manufacturing report. The index came in at 53.8. That’s the second monthly increase in a row. It’s also the 30th month in a row that the ISM report topped 50, which indicates an expanding manufacturing sector. The Commerce Department also said that construction spending rose 0.8% in May. It’s now at a 6-1/2-year high. I hate to sound like a careless optimist, but I think Q2 GDP will be one of the best reports in years.
eBay to Spinoff PayPal On July 20
Mark your calendars for Monday, July 20. That’s when eBay (EBAY) will finally spin off PayPal. Technically, the shares will be “distributed” on Friday, July 17, but they won’t start trading until the following Monday.
If you’re an eBay shareholder, you’ll automatically get one share of PayPal for each share of eBay you own as of the close of business on July 8. The ticker symbol for PayPal will be PYPL.
Now there’s the issue of how much PayPal is worth. That’s a toughie. I won’t make a prediction on that, but most market watchers think PayPal will start trading around $35 per share. That would mean that eBay’s stock, without PayPal, will drop to around $26 per share. Remember, you’re not losing anything. You’re gaining a new stock.
To help make the adjustment smoother, “when-issued” shares of PayPal and eBay sans PayPal will start trading on Monday July 6. When-issued shares are for deals that have been announced but haven’t yet been consummated. They’re useful for gauging the market’s interest in the deal. But don’t worry about the when-issued shares. I just wanted you to be aware of what’s going on when you see them. You won’t get your PayPal shares for a few more days.
Overall, I think this is a very good deal for shareholders. I also think there’s a good chance that PayPal will be snapped up quickly by a large finance or tech company. I’m looking at you, Amazon (AMZN)!
Until then, PayPal will join our Buy List as the 21st stock. Just like the others, it’s locked and sealed for the rest of the year. I won’t have a Buy Below on PayPal until the deal is complete. I’ll also provide all the details on how we’ll account for the spinoff on our track record. eBay will report Q2 earnings, its last as a combined unit, on Thursday, July 16. Look for a good report.
Before I go, I want to highlight a few of our Buy List stocks that look especially attractive at the moment. I like Cognizant Technology (CTSH), especially below $62 per share. The shares got nicked on Thursday after Centene said it was buying Health Net, which is a partner with Cognizant. That deal would cost Cognizant $100 million in revenue, but the company was quick to reiterate its full-year guidance for earnings of at least $2.93 per share.
Microsoft (MSFT) also looks quite good if you can get it below $45 per share. The shares yield 2.8%, and I expect another dividend increase later this year.
Wabtec (WAB) has pulled back recently, and I think it’s a solid value here. WAB is especially attractive below $95 per share. The company recently raised its dividend by 33%.
That’s all for now. The stock market is closed on Friday, July 3, so investors can enjoy a three-day holiday weekend. Expect some drama next week. I didn’t talk much about Greece in this issue, but the big referendum is scheduled for Monday. It’s a lot of sound and fury and doesn’t signify all that much. Still, traders will look for any excuse to buy or sell. The big news will be the start of earnings season on Wednesday. Also on Wednesday, the Fed will release the minutes of its last meeting. That may contain clues as to what the central bankers are thinking. 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!
Morning News: July 3, 2015
Eddy Elfenbein, July 3rd, 2015 at 5:17 am
Be sure to follow me on Twitter.
- Tweets by @EddyElfenbein
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- July 2006
- June 2006
- May 2006
- April 2006
- March 2006
- February 2006
- January 2006
- December 2005
- November 2005
- October 2005
- September 2005
- August 2005
- July 2005