CBO Cut Budget Deficit Estimate
Posted by Eddy Elfenbein on April 14th, 2014 at 11:15 am
In February, the Congressional Budget Office lowered their estimate for this year’s Federal budget deficit to $514 billion. Today, they lowered it to $492 billion. Furthermore, the CBO sees next year’s deficit coming in at $469 billion. As a percent of GDP, the deficit is expected to 2.8% for this year and 2.6% for next year.
The CBO projects federal spending next year of 20.4% of GDP which is lower than every fiscal year from 1980 to 1993.
Here’s an update to the chart of “My Simple Rule for Government Financing.”
(Unemployment Rate x 2) – 10 = Budget Deficit / GDP
Best Retail Sales Report in 18 Months
Posted by Eddy Elfenbein on April 14th, 2014 at 10:01 am
This morning, the Census Department released the best retail sales report in 18 months. For March, retail sales rose by 1.1% which was 0.2% above expectations. Some of this was a rebound due to the weather’s impact earlier this year.
A 0.7 percent gain in retail sales excluding autos was the biggest in more than a year after a 0.3 percent increase in February, today’s data showed. The figures used to calculate gross domestic product, which exclude categories such as food services, auto dealers, home-improvement stores and service stations rose 0.8 percent in March after rising 0.4 percent the prior month.
The market was also helped by a better-than-expected earnings report from Citigroup ($C). By most conventional measures, Citigroup is a very cheap stock. However, I’m not willing to go near it until they’re allowed to raise their dividend to a respectable level. Citi has paid out a penny per share for the last few years. Bloomberg notes that mortgage lending has plunged to a 17-year low. For seven quarters in a row, mortgage originations at Wells Fargo ($WFC) topped $100 billion. Last quarter, that fell to $36 billion.
Shares of Medtronic ($MDT) are getting dinged today. On Friday, Edwards Lifesciences “won a court order limiting U.S. sales of Medtronic’s CoreValve system.” MDT was also downgraded by JPMorgan Chase.
The Wall Street Journal runs one of my favorite headlines: “Stock-Market Jitters Put Investors at Ease.”
Morning News: April 14, 2014
Posted by Eddy Elfenbein on April 14th, 2014 at 6:52 am
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About that Nasdaq Crash
Posted by Eddy Elfenbein on April 11th, 2014 at 8:54 am
A little context….
Wells Fargo Beats, JPM Misses
Posted by Eddy Elfenbein on April 11th, 2014 at 8:50 am
Today is a big day for bank earnings. Our former Buy List stock, JPMorgan Chase ($JPM), missed earnings. For Q1, JPM earned $1.28 per share which was 12 cents below consensus. They earned $1.59 in last year’s Q1.
The good news is that our current Buy Lister, Wells Fargo ($WFC), beat earnings. Wells earned $1.05 per share which beat estimates by eight cents per share. For last year’s Q1, Wells earned 92 cents per share.
Wells Fargo’s mortgage business, which provides nearly one in five U.S. home loans, continued to suffer from a drop in refinancing. Income from mortgage banking fell to $1.5 billion from $2.8 billion in the first quarter of 2013.
For the week ending April 4, applications for refinancing fell to their lowest share of total mortgage applications since July 2009, according to the Mortgage Bankers Association.
Wells Fargo’s new home loans fell to $36 billion in the quarter from $109 billion a year earlier and $50 billion in the fourth quarter.
February was the worst month for new home loans since at least 2000, according to Black Knight Financial Services.
Wells Fargo had $27 billion of mortgage applications in the pipeline at the end of the quarter, down from $65 billion at the end of the fourth quarter.
In the pre-market, JPM is looking to fall about 3% while WFC is up a few pennies.
CWS Market Review – April 11, 2014
Posted by Eddy Elfenbein on April 11th, 2014 at 7:42 am
“Individuals who cannot master their emotions are ill-suited
to profit from the investment process.” – Benjamin Graham
That’s so true. I’ve always thought that if things didn’t work out for Mr. Spock at Starfleet, he would have made a killer value investor. Once again, emotions boiled to the surface on Wall Street this week. Most specifically, the emotion of fear. On Thursday, the S&P 500 lost 2.1%, and the Nasdaq Composite dropped 3.1% for its worst day since 2011. Those two got off easy compared with the Nasdaq Biotech Index, which plunged 5.6%.
Having heard those numbers, you´d probably think the economic news on Thursday was terrible. Not at all. The Department of Labor reported that initial claims for unemployment insurance dropped to their lowest level in seven years. In other words, the jobs market is getting better. On Tuesday, we learned that jobs openings climbed to a six-year high. So why are traders so upset?
In this issue of CWS Market Review, I’ll walk you through Wall Street’s latest panic attack, and more importantly, I’ll tell you what to do about it. I’ll also cover the disappointing earnings guidance from Bed Bath & Beyond, and I’ll preview IBM’s earnings report for next week. This is a crucial time for the market; U.S. corporations are sitting on $1.64 trillion in cash, the Federal Reserve is winding down an unprecedented experiment on the economy and earnings season is upon us. But first, let’s see why Value is beating the stuffing out of Growth.
The Current Sell-Off Is about Valuation, Not the Economy
If it feels like it was less than a week ago that the S&P 500 touched an all-time intra-day high, that’s because it was. From the big-picture perspective, the drop in the past week hasn’t been that much—just under 3%. But what makes it interesting is that the pain hasn’t been evenly distributed.
Here’s what investors need to understand: The current sell-off has been focused on valuation, not on economically-sensitive areas. This is important. Many of the richly valued, raging-bull stocks have been clobbered, while their more reasonably-priced cousins have barely been touched. Stocks like Gilead and Amazon are more than 20% below their 52-week highs.
Some observers have said that that the tech sector has been hit hard, but that’s not quite right. It’s been the big-name and richly-valued tech stocks like Facebook, Twitter and Tesla that have been taken down. But more sensibly valued names like Apple or Buy List favorite IBM have done just fine. Some of our favorite tech stocks like Oracle, Microsoft and Qualcomm have outpaced the Nasdaq over the last several sessions.
We can also see the effect by looking at the environment for Initial Public Offerings. That’s probably the most emotion-based part of the market. Not too long ago, investors were eager to snatch up whatever IPO Wall Street was throwing their way. Not anymore. La Quinta, the hotel franchise, was recently priced below expectations. Ally Financial flopped on its first day of trading, and King Digital, the Candy Crush people, was another disappointment.
We have to remember that the stock market has rallied for five straight years, so naturally investors grow complacent. As the bull market rages, we typically see shares in companies long on promises and short on results grab most of the gains. Now we’re witnessing a swift reaction.
What’s been happening is that the market is shifting from favoring Growth stocks to favoring Value stocks. (One effect of this shift is that large-cap is beating small-cap, but that’s the tail, not the dog.) This shift didn’t surprise me, but its pace and magnitude did. As a proxy for Growth and Value, I like to look at the ETFs run by Vanguard. Since February 25, the Growth ETF ($VUG) has lost 3.8%, while the Value ETF ($VTV) has gained 1.2%. That may sound small, but it’s a dramatic turn for such a short period of time and for such broad categories. Here’s a look at the VTV divided by the VUG. Notice how sharp the spike has been.
Now investors have been flocking to areas of safety (dividends, earnings, strong brands). For example, the S&P 500 Utilities Sector ($XLU) has been one of the top-performing market sectors. This is a direct reaction to the Fed’s policies because folks want to lock in those rich yields before rates go up.
Speaking of which, probably most surprising to many market watchers has been the strength in the bond market, especially at the long end. The yield on the 20- and 30-year Treasuries recently dropped to their lowest levels since July. The Long-Term Treasury ETF ($TLT) has been beating up the stock market this year. The long-term yields were already low, and they’ve gotten lower. The TLT is up 7.8% this year, while the S&P 500 is in the red.
A stronger shift from Growth to Value doesn’t worry me. On balance, it’s good for our Buy List. I would be much more concerned if I saw a rapid deterioration in many cyclical sectors. For example, the Homebuilders ($XHB) have been down, but nowhere near as severely so as the biotechs. The S&P 500 Industrials ($XLI) are also down, but largely in line with the rest of the market. That’s important because the market doesn’t see a broad industrial decline (at least, not yet). Some cyclicals, like our very own Ford, have actually led the market in recent days.
Overall, I think this newfound skepticism is healthy for investors. They’re questioning some of these rich valuations. Later on, I’ll talk about the news from Bed Bath & Beyond, but let’s put this in its proper context. BBBY’s bad news is that their earnings would be as high as we expected. Still, they have no debt, lots of cash and a strong cash flow. Compare that with Twitter, which is expected to make a total profit this year of one penny per share. Twitter´s profit margin for Q4 was -210%. In other words, they spent three times what they took in. So you can understand why investors might have second thoughts about that valuation. As Mr. Spock might say, “it’s only logical.” Now let’s look at some opportunities for bargain hunting in this market.
What to Do Now
Obviously, the first thing investors should do is not panic. For disciplined investors, times like this are your friends. This is also a good time for investors to focus on fundamentals. Not only are dividends in demand, but I think they’re going to be more demand as the year goes on.
We have several stocks on our Buy List with strong dividends, and prospects for even higher dividends. Let’s start with Ford Motor ($F), which increased its dividend by 25% earlier this year. The sales report for March was quite good. The earnings report for Q1 might not be so good, but that’s due to environment, not Ford. The company is improving its operations in Europe. Plus, General Motors has had some high-profile issues of late. The stock is going for eight times next year’s earnings. Ford currently yields 3.2%, and I rate it a very good buy up to $18 per share.
Another solid dividend Buy Lister is Microsoft ($MSFT). Thanks to their new CEO, for the fist time in a generation, Microsoft is hip. The last two earnings reports were quite good, and I’m looking for another one later this month. Last September, Microsoft increased its dividend by 22%. We should see another healthy increase later this year. The stock currently yields 2.8%. Microsoft remains a solid buy up to $43 per share.
I’m writing this to you on Friday morning, ahead of the first-quarter earnings report from Wells Fargo ($WFC). The bank just won approval to raise its dividend by 16.7%. They have plenty of room to raise the dividend even more next year. Wells currently yields 2.9%. WFC is an excellent buy up to $54 per share.
McDonald’s ($MCD) was one of the few stocks that rallied yesterday. That probably has a lot to do with its rich dividend. MCD currently yields 3.3%, which is a good deal in this market; that’s more than a 20-year Treasury. The fast-food chain is working hard to revamp itself. Look for a good earnings report the week after next. MCD is a good buy up to $102 per share.
Bed Bath & Beyond Is a Buy up to $71 per Share
On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal Q4 earnings of $1.60 per share. The home-furnishings store had said that earnings should come in between $1.57 and $1.61 per share. Clearly, this was a weak quarter for them. BBBY estimates that the lousy weather took six to seven cents per share off their bottom line.
The details weren’t encouraging. Quarterly sales dropped 5.8% to $3.203 billion. Comparable-store sales, which is the key metric for retailers, rose 1.7%. For the full year, BBBY made $4.79 per share, which is up from $4.56 in the year before.
As I’ve mentioned before, the poor Q4 numbers were expected, but I was curious to hear what they had to offer for guidance. For Q1, BBBY expects earnings to range between 92 and 96 cents per share. The consensus on Wall Street was for $1.03 per share. For the year, they expect earnings to rise by “mid-single digits.” If we take that to mean 4% to 6%, then their guidance works out to a range of $4.98 to $5.08 per share. Wall Street had been expecting $5.27 per share.
I’m not pleased with this guidance. The shares took a 6% cut on Thursday. Still, we should focus on some positives; BBBY is a well-run outfit, and they’ve been in tough spots before. The balance sheet is very strong, and they’ve been buying back tons of shares (though at higher prices). I’ll repeat what I said last week: don’t count these guys out. Bed Bath & Beyond remains a good buy up to $71 per share.
Expect Good Earnings from IBM
IBM ($IBM) is slated to report earnings after the closing bell on Wednesday, April 16. In January, Big Blue beat consensus by 14 cents per share, but a lot of that was driven by cost-cutting. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.
Here’s how I see it: IBM is at a crossroads right now. Much of the world is shifting to cloud-based networks, and a lot of people think IBM is being left behind. But IBM isn’t sitting still. The company is moving towards the cloud, and they’re getting rid of their lower-margin businesses. For example, they recently sold their server business to Lenovo for $2.3 billion. This may surprise a lot of people, but IBM’s cloud revenue rose by 69% last quarter.
For 2013, IBM earned $16.28 per share. They made a bold prediction saying that they expected to earn at least $18 per share this year. Still, Wall Street seems dubious. The consensus for 2014 earnings has slid from $18 per share a few months ago to $17.85 per share today.
For the first time in a long time, the stock is doing well (see above). On Thursday, IBM came close to trading over $200 per share for the first time in nine months. For Q1, Wall Street had set the bar low. Very low. The current consensus is for earnings of $2.54 per share, which is a decline of 15% from last year’s Q1. My numbers say IBM should beat that. I also expect IBM to raise its dividend later this month. The current dividend is 95 cents per share, and I think Big Blue could bump it up to $1.05 per share. The stock is going for about 11 times their own estimate for this year’s earnings. IBM remains a good buy up to $197 per share.
That’s all for now. Next week we’ll get important reports on inflation and industrial production, plus the Fed’s Beige Book (by the way, that’s a great resource for looking at the economy). The stock market will be closed next Friday for Good Friday. This is usually the one day of the year when the market is closed but most government offices are open. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
Morning News: April 11, 2014
Posted by Eddy Elfenbein on April 11th, 2014 at 6:53 am
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Lowest Initial Claims Report in Seven Years
Posted by Eddy Elfenbein on April 10th, 2014 at 9:50 am
This morning, the Labor Department reported that initial claims for unemployment insurance dropped to 300,000 last week. That’s the lowest number since May 12, 2007. Last week was revised up from 320,000 to 326,000. This tends to be a noisy number that bounces around a lot so economists focus on the four-week moving average. The trend is clearly moving in the right direction.
The stock market is mostly flat this morning. As expected, Bed Bath & Beyond ($BBBY) isn’t doing well. The stock is currently down 5.5%.
Under a deal announced Thursday, Icahn — whose has a minority stake in eBay — is dropping the PayPal strategy and withdrawing his proposal to put two nominees on the board.
In turn, eBay will make David Dorman an independent director, the 10th of the 12-member board. The 60-year-old Dorman is chairman of CVS Caremark Corp. and founding partner of Centerview Capital Technology.
Icahn still believes eBay should be spun off and said in a statement that he’ll seek confidential talks with the company, whose leadership Icahn has labeled as “either incompetent or negligent.”
Icahn said he and eBay President and CEO John Donahoe have agreed to meet regularly when Donahoe is in New York to talk about eBay’s strategic options.
I’m a big fan of Carl’s, but this fight was going nowhere.
BBBY’s Planning Assumptions
Posted by Eddy Elfenbein on April 10th, 2014 at 8:48 am
Bed Bath & Beyond ($BBBY) said they see first first-quarter earnings ranging between 92 and 96 cents per share. Furthermore, they project earnings for the entire year to rise by “mid single digits.” That’s based on several planning assumptions which they laid out in their conference call. Here’s a summary (this is edited down from the transcript via Seeking Alpha):
1. Q1 comparable stores sales growth of 1% to 2.5%. For the full year growth of approximately 3%.
2. Consolidated net sales growth of 2% to 3.5% for the first quarter and approximately 4% for the full year.
3. Depreciation for fiscal 2014 is expected to be approximately $240 million.
4. Assuming these sales levels, we are modeling deleverage for both gross profit and SG&A for the fiscal first quarter and full year. Contributing to the modeled gross profit deleverage on an assumed continuation and the shift of the mix of merchandise sold to lower margin categories and an increase in coupon expense. The modeled SG&A deleverage includes increases in technology expense and depreciation related to our ongoing investments.
5. Our annual interest line will include approximately $9.2 million in interest expense, substantially resulting from the inclusion of sale lease backed obligations related to certain distribution centers.
6. The first quarter and full year tax provisions are estimated to be in the mid to high 30s percentage range with expected variability as distinct tax events occur.
7. We expect to generate positive operating cash flow and to continue to fund operations entirely from internally generated sources.
8. We plan to continue to repurchase shares under our $2.5 billion repurchase program, which we estimate to be completed during fiscal 2015. However, this repurchase program may be influenced by several factors including business and market conditions.
9. We anticipate opening approximately 30 new stores companywide.
10. We expect to continue our program of renovating or repositioning stores within markets when appropriate.
11. Capital expenditures are planned to be approximately $350 million, which remain subject to the timing and composition of projects. Projected capital expenditures include the significant level of investment we will be making in our initiatives and primarily include the addition of new functionality to our selling websites, mobile sites and apps; development work necessary for a new and more robust point-of-sale system; deploying systems and equipment to our stores; equipping our new IT data center; opening an additional distribution facility for direct-to-customer and store fulfillment as well as new stores and existing store refurbishments.
The company is financially strong. BBBY has a cash balance of $943 million and shareholder equity is $3.9 billion.
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