• Brexit Does the Fed a Favor
    Posted by on June 27th, 2016 at 2:04 pm

    Another effect of the Brexit vote is that any plans for a Fed rate hike this year are completely off the table. This was a huge favor for the Fed as they now have a disingenuous excuse to abandon an untenable policy.

    Brexit won’t hurt us that much, but the idea of the Fed hiking rates this year is nuts. Remember that not that long ago, the Fed was planning to raise rates four times this year, and four more times in 2017.

  • The Market Turns Defensive
    Posted by on June 27th, 2016 at 12:05 pm

    This is an instance where charts can say it all. Here’s the relative strength of staples (blue) and utilities (black):

    sc06272016d

    Here are the financials:

    sc06272016g

    And the 10-year yield:

    sc06272016b

    The 10-year yield is now down to 1.46%. Four years ago, it hit 1.39% which was the lowest yield since 1790.

  • The Pound Continues to Fall
    Posted by on June 27th, 2016 at 10:48 am

    big06272016a

    The pain for the British pound continues. The currency had been at $1.50 just before the vote. Today, it’s been below $1.32.

  • The Post-Brexit Blues
    Posted by on June 27th, 2016 at 9:40 am

    Friday was obviously a very dramatic day on Wall Street. Stocks plunged and bonds soared. Gold rallied to a two-year high and the 10-year yield is close to a multi-decade low. The Japanese yen soared to under 100 against the dollar.

    Stocks opened lower this morning. The S&P 500 is currently down about 1%. The index has been as low as 2,015 this morning.

    The post-Brexit fallout is mostly a financial issue, meaning it’s impacting banks and the credit markets. While stocks involved in the production part of the economy are down, the pain isn’t nearly as severe. Hormel Foods, for example, closed higher on Friday. Walmart came close to closing in the green as well.

  • Morning News: June 27, 2016
    Posted by on June 27th, 2016 at 7:32 am

    Bank Shares Slide as Brexit Turmoil Hits World Stocks

    Text of Statement by George Osborne, Chaneloor of Exchequer, on ‘Brexit’

    Oil Trades Below $48 a Barrel as Brexit Spurs Market Volatility

    Auto Makers Shift Gears After ‘Brexit’ Vote

    IMF Urges Quick, Cohesive Action After ‘Brexit’

    China’s Premier Attempts to Bolster Investor Confidence After Brexit

    Israeli Shekel Extends Slump as Biggest Trade Partner Splinters

    ‘Brexit’ Vote Casts Pall Over U.K. Businesses

    Brexit Boon Seen for European Cities Poaching From London

    Medtronic Adds Heart Devices in $1.1 Billion HeartWare Deal

    Apparent Conflicts of Interest May Dog Tesla-SolarCity Deal

    Volkswagen Faces Long Road Ahead Even After Civil Settlement

    German Publishers Appeal Decision in Market Power Case Against Google

    Howard Lindzon: The Brexit Aftermath…

    Jeff Miller: Is The Brexit Vote a Turning Point For Stocks?

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  • Morgan Housel on Brexit
    Posted by on June 24th, 2016 at 9:00 pm

    The latest from Morgan:

    An investor friend of mine, Tren Griffin, jokes whenever market-moving news occurs that he “cannot wait to get to my computer in the morning and proceed to do absolutely nothing.”

    The most important thing you can do right now is heed his advice. We’re not selling. We’re not making changes to our portfolios. We’re genuinely shaking our heads in surprise, but we’re not worried. If anything, huge declines become opportunities. That’s why Motley Fool CEO Tom Gardner is committed to ​buying​ stocks next week in his real-money portfolio, just as normally scheduled.

    My litmus test for whether the world economy will create value over time is asking the question, “Did more people wake up this morning seeking to solve problems and make life better for others than do the opposite?” And the answer is still firmly “yes.”

  • Queen Elizabeth Screaming At Stockbroker To Dump Everything
    Posted by on June 24th, 2016 at 8:42 pm

    From The Onion:

    LONDON—Following the United Kingdom’s historic vote to exit the European Union, sources confirmed that Queen Elizabeth II spent Friday frantically screaming at her stockbroker to dump everything. “Just get rid of whatever we have—right now, goddammit!” said Her Royal Highness, who reportedly slammed her fist against a 16th-century desk while shouting at her broker over the phone. “There’s no time, so dump the whole fucking portfolio—all of it—on anybody who will take it. Just hurry the fuck up and do it!” At press time, after speaking with several financial advisors, Queen Elizabeth had gathered the rest of the Royal Family together to inform them they will have to cut back by eliminating servants and start pitching in more around Buckingham Palace.

  • Brexit Update
    Posted by on June 24th, 2016 at 10:04 am

    Shortly after I wrote today’s newsletter, much of it became obsolete. As I wrote the newsletter, the outcome of the Brexit was in doubt. Now we know that Leave has won the day.

    This was unexpected and the results have been very dramatic. The British pound plunged as low as $1.33. That’s a 31-year low. Hours before, it had been near $1.50.

    big06242016t

    The U.S. dollar has soared and the 10-year Treasury yield dropped to 1.52%. That’s the lowest in four years.

    It looks like the 54-day streak of not dropping by 1% is over. The S&P 500 has been down as much as 2.82% today.

    The financials are down the most, and many of the major Wall Street firms are the biggest losers in the S&P 100.

  • CWS Market Review – June 24, 2016
    Posted by on June 24th, 2016 at 7:08 am

    “The second Vice is Lying; the first is running in Debt.” – Ben Franklin

    I’m writing this to you early on Friday, and the big U.K. Brexit vote is still up in the air. Going into the vote, traders had been expecting a victory for Remain, which helped pushed the S&P 500 to within 1% of its all-time high. The index has now gone 54 days in a row without a 1% drop.

    big06242016

    The buoyant market is also helping to lift some of our favorite Buy List stocks. Just this week, both Stryker and CR Bard made new 52-week highs. They’re turning into big winners for us this year. Thanks to the strong Japanese yen, shares of AFLAC just broke out to a new all-time high. The duck stock is a now a 20% winner on the year for us. I don’t think many people on Wall Street were expecting that.

    In this week’s CWS Market Review, I’ll discuss this week’s earnings report from Bed Bath & Beyond. It wasn’t as good as I had hoped. I’ll have all the details in a bit. Also, Janet Yellen also went to Capitol Hill to give her semi-annual monetary policy testimony. I’ll focus on what she said, and what it means for us. But first, let’s look at the Brexit vote and how it’s impacting world markets.

    The UK Votes

    I tried to get the most current news on the Brexit Referendum for this issue, but I had to call for a deadline at some point, so some of this may already be dated. The vote simply appears to be too close to call. The initial news suggested that Remain was going to pull it out, but the early results indicate that it’s all up in the air.

    As usual, I’ll withhold my political opinion on such matters, but I will address the investment implications. Financial markets were clearly nervous leading up to the big vote. A Leave decision, it’s believed, will cause a recession, and some damage will spill over to U.S. markets. Honestly, that’s probably overhyped, but rhetoric around political campaigns tends toward stoking fears. Since a Remain win had been expected, a Leave victory will probably unravel the market’s recent moves.

    Every time a poll came out showing Leave ahead, the British pound would drop against the dollar and other major currencies. Then, quite suddenly, over the last few days, the British pound started to rally strongly. The pound jumped from roughly $1.40 to $1.50 in just a few sessions. This was a sign that world markets expected Remain to pull it out. Every rumor or new poll sent the pound careening back and forth. The implied volatility involved in betting on the pound reached the highest levels since the financial crisis.

    big06242016a

    As I’m watching the latest results, the pound is bouncing up and down like a tech stock from the 1990s. With this vote, there’s a large asymmetry. That’s a fancy way of saying that a Remain victory would be taken in stride, while an Exit win would freak everybody out. That’s actually quite common with investing. The Great Rule of investing is that things crash quickly, and recover slowly. In fact, by the time people realize that something bad is happening, it’s probably too late. In this case, the Exit forces were in full view.

    As I write this, the S&P futures are down about 1.3%, which basically erases the entire gain from Thursday. As I said, these results aren’t final. The BBC reports that the Electoral Commission will have their results on Friday, “around breakfast time,” which may be the most British thing ever.

    I don’t think a Brexit victory would hurt the U.S. economy, but it could spur other countries to ditch the EU. George Soros, who famously broke the Bank of England in 1992, said the pound could fall 15% to 20%. I would also expect money to flee to the perceived safety of U.S. assets.

    My advice is don’t panic. Either result should have minimal effect on our Buy List stocks. I’ll have more to say once the outcome is clearer.

    Yellen Still Sees the Need for Rate Hikes

    This week, Janet Yellen headed to Capitol Hill to give her semiannual testimony on monetary policy. This comes after last week’s Fed meeting, in which the central bank decided to forgo raising interesting rates.

    I’ll briefly summarize her comments. Yellen said that the pace of improvement in the jobs market has slowed down. While she was careful to say that it may not be the start of a larger trend, there does seem to be evidence that wage growth is picking up. If so, that would be very good news.

    Yellen also noted that the strong dollar has weighed down the economy in recent quarters. That’s certainly been evident in the financial markets. (You may remember how much I spoke of the Strong Dollar trade.) Recently, business investment has been quite weak. On the plus side, Yellen said that Q2 GDP will probably be better than Q1, and that consumer spending appears to be rising.

    Overall, Yellen said she’s optimistic for the economy, and she believes that gradual rate hikes may be needed. Hmmm. I’m not so sure about that, and the market doesn’t buy it either. Inflation is still quite low. Yellen also mentioned that the Chinese economy isn’t as healthy as it could be. That’s undoubtedly true.

    Just look at the futures market. Traders currently think there’s a 63% chance the Fed will hold rates steady through the next three meetings. I would also think the pressure to do nothing will grow as Election Day gets closer. The yield on the two-year Treasury is currently at 0.78%. Sure, that rate has tripled in the last three years, but it’s gone from next to nothing to barely above next to nothing. The markets are clearly not concerned with any rate hikes.

    With yields so low, the focus remains on stocks. In a few weeks, Q2 earnings season will begin. For the first time in a while, operating earnings are rising. The upcoming earnings season is projected to break our six-quarter run of lowering earnings.

    According to S&P, analysts on Wall Street expect the S&P 500 to earn $28.41 for Q2. That’s the index-adjusted number. The estimate is down from $31.02 at the start of the year. Wall Street now expects the S&P 500 to earn $114 this year, and $134 for next year. Based on trailing earnings, the stock market looks a bit pricey. However, analysts expect this profit recession to end. If the profit estimates for next years are anywhere close to accurate, then the stock market is still quite reasonable.

    Sluggish Quarter for Bed Bath & Beyond

    We had one Buy List earnings report this week. After the closing bell on Wednesday, Bed Bath & Beyond (BBBY) reported fiscal Q1 earnings of 80 cents per share. That’s down from 93 cents per share for last year’s Q1. Wall Street had been expecting 86 cents per share.

    This is not a strong report. Net sales were almost exactly the same as last year, while comparable-store sales fell by 0.5%. Digging into comparable-store sales, those from digital channels grew by over 20%, while in-store sales were down in “the low single-digits.”

    One bright spot is that the company continues to buy back tons of its own stock. In the past year, shares outstanding dropped by 10%. You can expect the share count to continue to shrink. The company still has over $2 billion left in its current authorization. Bed Bath is also standing by its full-year profit range of $4.50 to $5 per share. Previously, they had said they expected to be at the high end of that range. Now they say they’ll be “comfortably within” that range. I’m not sure if that counts as lower guidance.

    The shares dropped 5% in Wednesday’s after-hours market. Fortunately, the bears ran away in time for Thursday’s trading, as shares of BBBY gained 1.5%. I think the earnings call assuaged some investor fears. For example, the company seems to be very optimistic about its recent acquisition, One Kings Lane. On the conference call, Bed Bath updated its assumptions for the rest of this fiscal year. They expect comparable store sales to grow by 0% to 1%.

    I also think there’s the simple fact that the negative sentiment was so strong that just about any news would be seen as positive. Quite frankly, I’m disappointed with Bed Bath’s performance. Perhaps there needs to be more pressure from shareholders to shake up management. I could be wrong, but I believe this is the first time they’ve taken questions on an earnings call. If I don’t see better performance here, I doubt BBBY will return to next year’s Buy List.

    Top Buy List Bargains and New Buy Below Prices

    I wanted to highlight a few Buy List stocks which I think look particularly attractive at the moment. I really like Ford Motor (F) below $13.50. It pays a generous dividend, and I expect a good earnings report in a few weeks. I also like Cognizant Technology Solutions (CTSH) here. This stock can move fast. In the banking sector, I really like Signature Bank (SBNY) when it’s below $135 per share. The bank has delivered 26 record quarters in a row.

    Since this has been a fairly quiet time for our Buy List, I wanted to adjust a few of our Buy Below prices this week. Biogen (BIIB) continues to be weak, but I’m expecting a decent earnings report. This week, I’m lowering my Buy Below on Biogen to $265.

    I also want to pare back Wabtec’s (WAB) Buy Below from $87 to $83. This isn’t a negative for either stock. I simply want the Buy Below prices to reflect the market’s current activity.

    With Stryker’s (SYK) new high, I’m going to lift its Buy Below from $114 to $122 per share. Stryker is up 27% for us this year. I’m also going to raise our Buy Below on Fiserv (FISV) to $110 per share.

    I also wanted to touch on AFLAC (AFL). As the yen has gained ground, the duck stock has quacked higher. When the yen was getting smacked around in 2014-15, I cautioned investors not to read too much into it, and that AFLAC is a well-run company. Now that we’re getting rewarded by forex, I still hold the same view.

    AFLAC based this year’s earnings estimate on the yen’s being at 120.99 to the dollar. It’s now down to 104, and there’s talk of it soon breaking 100. Based on that 120.99 figure, AFLAC gave a full-year earnings range of $6.17 to $6.41 per share.

    big06242016b

    Basically, for every one yen the Japanese currency strengthens against the dollar, meaning the ratio goes down, three cents per share are added to AFLAC’s full-year profits. I estimate the yen has averaged 112 this year. That translates to a 27-cent headwind.

    The shares tested $70 for several weeks in May and June, and have finally burst through. The duck stock came close to touching $72 per share on Thursday. AFLAC remains an excellent company.

    That’s all for now. The first half of the year comes to a close next week. I’ll have a summary of our performance in next week’s issue. On Tuesday, the government will again revise its estimates for Q1 GDP growth. The last report said the economy grew by just 0.8% during the first three months of the year. We’ll also get key reports on personal income and spending. The big jobs report won’t be until the following Friday, July 8. 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: June 24, 2016
    Posted by on June 24th, 2016 at 7:03 am

    U.K. Backs Brexit as Cameron Resigns After Historic Rupture

    World Stocks in Freefall as UK Votes for EU Exit

    ‘Panic Is Palpable’ as Markets Swoon on Brexit Vote Few Expected

    With a British Adieu to EU, It’s Farewell to a Fed Rate Hike for Now

    Nation’s Biggest Banks Would All Withstand Recession, Fed Says

    Looking for a Gainer Amid the Sea of Red? Bitcoin Jumps With Yen

    Ryan Remains Defiant After Sit-In Tests His Control of House

    Senate Reports Fault Cable, Satellite TV Providers for Questionable Billing Practices

    Twilio’s Shares Jump 92% in Trading Debut

    Comcast Agrees to Acquire Icontrol Networks

    Commission Rules Arista Infringed on Cisco Networking Patents

    Costco’s Transition to VISA Cards Riddled With Problems

    Bank of America to Pay $415 Million to Settle S.E.C. Inquiry

    Josh Brown: What Investors Should Be Thinking Right Now

    Cullen Roche: Brexit is Here – Bremain Brational

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