• Buy List Closes at YTD High
    Posted by on June 23rd, 2015 at 4:32 pm

    The Nasdaq Composite closed today at an all-time high, and the S&P 500 closed at its highest level since May 22.

    Our Buy List closed at its YTD high, now up 5.93% for the year (dividends not included). The S&P 500 is up 3.17% on the year. Our current lead over the S&P 500 is 276 basis points which is the second-widest this year. On March 31, we were leading by 282 basis points.

    I haven’t included dividends in this post because I didn’t have the time, but please know that dividends are part of my final calculations. I’m not trying to hide anything. The S&P 500 does yield a bit more than our Buy List, but it’s not that big of a factor.

  • No 2% Days this Year
    Posted by on June 23rd, 2015 at 9:43 am

    As a sign of falling volatility, the S&P 500 hasn’t had a single 2% daily move all year.

  • Durable Goods Fall in May
    Posted by on June 23rd, 2015 at 9:25 am

    The government reported that orders for durable goods fell by 1.8% last month.

    New orders for durable goods—products such as computers and trucks designed to last at least three years—decreased a seasonally adjusted 1.8% in May from a month earlier, the Commerce Department said

    Tuesday. April durable goods orders fell a revised 1.5%, compared with the previously reported 1% decrease.

    Economists surveyed by The Wall Street Journal had expected overall orders to fall 1% in May.

    Details of the report were mixed, with underlying figures showing gains in some key categories but nothing in the way of a breakout.

    “The bottom line is that equipment investment is one of the few expenditure components that isn’t showing signs of a marked rebound in the second quarter,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients.

    Through the first five months of the year, overall orders are down 2.2% compared to the same period in 2014.

  • Morning News: June 23, 2015
    Posted by on June 23rd, 2015 at 7:18 am

    Tsipras Aims to Stave Off Defections in Greece Over Aid Plan

    German Private Sector Grows, Points to 0.3% Growth in Second-Quarter

    Putting Woman on $10 Note Spurs Backlash Over Hamilton Demotion

    Good News On The Grapevine From The Supreme Court About Raisins

    Alibaba And Ant Financial to Invest $1 Billion in Local Services

    24M: A Breakthrough In Lithium-Ion Battery Technology?

    With A Tap of Taylor Swift’s Fingers, Apple Retreated

    Syngenta Chairman Sets Criteria For ‘Serious’ Takeover Offer

    Takata Is Said to Have Stopped Safety Audits as Cost-Saving Move

    Dow Chemical Weedkiller May Cause Cancer, WHO Agency Says

    Why The Uber Ruling Shows the ‘Sharing Economy’ Is Bunk

    Uber’s Promises of Privacy Ring Hollow, Says Group

    Wall Street Diverges as Gorman and Blankfein Take Opposite Paths

    Joshua Brown: How are Active Managers Beating the Market? By Taking More Risk.

    Jeff Carter: Success Is A Lousy Teacher

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  • Let’s Try this Market Metaphor
    Posted by on June 22nd, 2015 at 12:06 pm

    Imagine that instead of a stock market, all stock prices are decided by a committee of ten men. Inside a big room, ten guys who all look somewhat look like the Monopoly Man convene once a day. They judge each stock and the average of their decisions is the stock’s price.

    Let’s say that for one particular stock, the committee rules as follows. Two members say it’s worth $23 per share. Two more say it’s worth $24. Four members say $25. One says it’s $26.

    That leaves one more member. He says stock is worthless. $0 per share.

    Thanks to the ultrabear, the average of the ten comes to $22 per share.

    It’s this one bearish outlier that’s our very good friend. Because of this spread, the prices underlying the stock’s price aren’t normally distributed. There’s a small fear of disaster. Even though the fear is small, it weighs heavily on the share price.

    Although this is just a thought exercise, I like it because it elucidates a broader truth about the market. Every stock has a fear premium built into its price. Most of the market’s gains come from the slow, incremental advance in the judgment of the vast majority of the market. The sudden downshifts are when the lone dissenter is able to get a few more people into his camp. And very rarely, everyone joins his camp.

    This is why changes in stock prices don’t follow the normal bell curve. As a very general rule of thumb, stock prices go up slowly and fall rapidly. In fact, bear markets are often largely done right at the point the public realizes they’re in one.

    What value investing does, in essence, is constantly short the fear premium—that one $0 guy. It’s not the nine people paring back their view that creates opportunity. If the market is efficient, it’s those nine guys who are. The inefficiency happens when the fear premium jumps.

  • EU Meeting Agrees to Hold More Meetings
    Posted by on June 22nd, 2015 at 9:29 am

    Time is running out on the Greek saga, and the two sides still aren’t close to a deal. There was a surge of optimism this weekend which has carried over into the markets on Monday. But the Europe finance ministers were quick to temper any enthusiasm. The Greek government has offered a new plan, but the EU hasn’t had a chance to look at the details just yet. There probably won’t be a breakthrough today.

    The Greeks are demanding to meet with the big prime ministers of Europe, not just the bureaucrats within the EU. The meetings on Monday seem to be largely a waste of time. The only outcome is the promise of more meetings. Assuming a deal is reached soon, it still needs to pass the Greek parliament.

    The Greek two-year is at 23%.6. Actually, I should say that it’s down to 23.6%. It had been much higher.

    I have to believe that some deal at some point will be reached somehow. There’s more to lose than to gain. Still, I’m not willing to make a bet on that. Watch shares in the National Bank of Greece (NBG). They may shoot up or down by 15% over the next week.

  • Morning News: June 22, 2015
    Posted by on June 22nd, 2015 at 7:21 am

    ECB Approves Additional Emergency Liquidity for Greek Banks

    Greek Optimism Tempered by Finance Chiefs as Plan Sows Confusion

    What Do Greek Bonds Tell Us About the Crisis?

    Gold Eases From Near-Four-Week High on Greek Debt Talks

    Effect of Saudi Arabia Decisions on Global Crude Oil Supply and Demand

    iPhones as Hard to Find as Dollars in Venezuela During Oil Slump

    Health Insurers Brace for Supreme Court Ruling

    California Ruling Seen Unlikely to Dent Value of Uber, Other Start-Ups

    Altice Arm Offers €10 Billion for Bouygues Telecom

    ’Emotional’ Robot Sells Out In A Minute

    Cigna Rebuffs Anthem’s ‘Deeply Disappointing’ Proposal

    Taylor Swift Criticism Spurs Apple to Change Royalties Policy

    Leave Hamilton Alone

    Roger Nusbaum: Alternative Retirement: Working or Not Retiring

    Jeff Miller: Weighing the Week Ahead: What Does the Greek Crisis Mean for Financial Markets?

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  • Bursting the China Bubble
    Posted by on June 19th, 2015 at 11:09 am

    Josh Brown wonders if the Chinese stock bubble just burst.

    Shanghai’s A shares market has just corrected by 13% over the last week, one of the biggest pullbacks for Chinese stocks on record. Is this a buyable pullback in a longer-term uptrend or the beginning of the end.

    I don’t know the answers to these questions, nor will anyone until after the fact.

    Check out the Shanghai Composite over the last two weeks:


    One year ago, the index was a little over 2,000.

  • CWS Market Review – June 19, 2015
    Posted by on June 19th, 2015 at 7:08 am

    “I can calculate the motion of heavenly bodies, but not the madness of people.”
    – Isaac Newton

    On Thursday, the Nasdaq Composite touched its highest point ever. Yesterday, the index hit an intra-day peak of 5,143.32. That finally eclipsed the high of 5,132.52 reached on March 10, 2000, more than 15 years ago. The Nasdaq had already broken its record for closing highs, but the intra-day peak held out until yesterday.

    It’s not just the Nasdaq. On Thursday, the small-cap Russell 2000 closed at an all-time high. The S&P 500, which is a broader index than both the Russell or Nasdaq, closed at 2,121.24, which is less than 0.5% from its all-time closing high reached four weeks ago.


    What’s the reason for the rally’s latest surge? For that, we can thank Janet Yellen and her friends at the Federal Reserve. This week, the Fed decided against raising interests, at least for now. The Fed made it clear that interest rates will be going higher soon, and probably before the end of the year. But now Wall Street is starting to think the Fed may raise rates once or twice, and then stop.

    Our Buy List continues do well (+5.39% YTD) but we had a weak earnings report from Oracle (ORCL). The culprit was, again, the strong U.S. dollar. Shares of Oracle lost nearly 5% on Thursday. I’ll have full details in a bit. Later on, I’ll discuss the latest act of the ongoing Greek drama. It seems that both sides are incapable of serious negotiations unless it’s the final minute. I’ll also bring us up to speed on the latest news from our Buy List. But first, let’s look at what the Federal Reserve had to say this week.

    Will the Fed Do a One-and-Done?

    On Wednesday, the Federal Reserve wrapped up its two-day meeting in Washington. For now, the Fed decided against raising interest rates but strongly hinted that a rate hike isn’t far off. As part of this meeting, Fed members updated their economic projections. These are the famous “blue dots” from the graphs in this report.

    The key detail from these forecasts is that 15 of the 17 FOMC members said they see a rate increase coming before the end of this year. Since the year is nearly half over, that’s not too far away.

    The Fed’s policy statement said that the economy is growing moderately and that job growth is picking up. They also noted that the housing market is getting better, while household spending is “moderate.”

    The crucial point for the Fed is that inflation is still low, but they said they expect inflation to rise towards their 2% target. The Fed hasn’t done a very good job of hitting that target. The central bank’s preferred measure of inflation is the personal-consumption expenditures price index, and that’s come in below 2% for 36 straight-months.

    On Thursday, the government released the Consumer Price Index report for May. That showed the highest monthly inflation rate in more than two years. Don’t worry, inflation’s still low, but it may be trending upward. Don’t forget that a few months ago, we had three months of deflation, which was largely due to plunging oil prices. That episode has passed.

    Personally, I like to look at the “core rate” of inflation, which excludes food and energy prices. So far this year, core inflation is growing at 2.37% annualized. It’s still early to say that inflation is definitely in an uptrend, but the early evidence suggests that the Fed may finally reach its 2% target. Naturally, that would boost the argument for raising interest rates sooner rather than later.

    The Fed has four meetings left this year. Here’s what the futures market currently thinks. For the July meeting, the futures say “no way”—there’s a 0% chance of a rate hike. I have to agree. For September, that rises to 16.8%. For the October meeting, the chances rise to 34.4%. So, possible, but not probable. But for December, the chances rise to 57.1%. The futures market actually thinks there’s a 20% chance there could be two rate hikes by December.

    But here’s something to consider: What if the Fed raises rates only once and pauses? Or maybe once, pauses, then again, and another pause? The last rate-hike cycle consisted of 17 rate hikes at 17 consecutive meetings. Just because they did it that way before doesn’t mean they’ll do it again.

    To my mind, what really bolsters the case for the one-and-done scenario is what Janet Yellen said during her post-meeting press conference. The Fed Chairwoman said, “Let me emphasize that the importance of the initial increase should not be overstated. The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate in order to support continued progress towards our objectives of maximum employment and 2% inflation.”

    I think that’s what’s causing the market’s latest rally. This means that real interest rates, meaning inflation-adjusted rates, will probably remain negative for 18 more months. Maybe even longer. That’s good news for stocks. I’m still in the bullish camp until interest rates provide significant competition for stocks. On our Buy List, some of the best bargains include Qualcomm (QCOM), Hormel Foods (HRL), Wells Fargo (WFC) and Stryker (SYK).

    The Consequences of Greece Exiting the Euro

    I haven’t written much about Greece and its ruinous finances lately since I don’t believe it has a major impact on our portfolios. The issue, however, has dominated a lot of the financial media, so I wanted to say a few words (and calm some nerves).

    The short version is that Greece has a major debt payment coming due to the IMF. Greece’s creditors, the IMF and other euro countries, have demanded that Greece make some reforms to its public finances. The Greek government is screaming that this is blackmail, and they’ve resisted every step of the way. The EU has hinted that this time they’ve been pushed too far and that they’re willing to let Greece default and exit the euro.

    Negotiations fell though this week, and leaders are planning a summit for Monday to give it another shot. But time is running out. The loans are due at the end of the month. There’s been a lot of finger-pointing as both sides blame each other for the impasse. Alexis Tsipras, Greece’s prime minister, won the election by his vocal opposition to the terms of the bailout. His recent chumminess with Vladimir Putin hasn’t helped.

    Would it be such a disaster if Greece leaves the euro? The IMF said that a default would be manageable for Europe, but the impact on the U.S. economy would be minimal. Greece simply isn’t a major trading partner for the United States. A Greek default would barely register on our markets and in our economy. Greek savers are already pulling their money out of banks. The authorities may have to step in and limit withdrawals. The ECB said they’re not sure if Greek banks can open on Monday. Shares in the National Bank of Greece (NBG) have fallen to $1 per share. In 2007, they were going for $700.


    But the real fear isn’t Greece—it’s who comes next. If Greece leaves the euro, then it establishes a precedent. Soon, countries like Spain, Italy or Portugal could follow. The fear before was that an exit from the euro would disrupt the intertwined banking system. That’s not the case now. Rather, it’s a political fear that an anti-establishment party in one of the euro countries would lead a revolt against its creditors.

    I think any fears of this happening are very premature. Greece is a very different case from the rest of Europe. (If you have time, I’d recommend Michael Lewis’s devastating look at the Greek economy.) As bad as Greece is, the rest of Europe wants to keep them in. A deal will probably be reached at the last possible moment. There’s little chance of any contagion spreading across the continent.

    Oracle Drops on Earnings Disappointment

    After the closing bell on Wednesday, Oracle (ORCL) reported fiscal Q4 earnings of 78 cents per share. That’s not good. It was nine cents below Wall Street’s estimate. The results were even below the company’s own guidance. Oracle had told us to expect earnings to range between 90 and 96 cents per share. Quarterly revenues came in at $10.71 billion, which was below the Street’s forecast of $10.92 billion.

    So what was the problem? Oracle said that their business was “significantly impacted” by the strong U.S. dollar. They said the same thing three months ago. Revenues fell 5% compared with last year, but Oracle said that adjusted for forex, revenues would have risen by 3%.

    Looking at the numbers, I agree that currency was a factor, but that’s not all. Oracle is facing real headwinds with their business. In fact, it’s impacting all tech. For Q4, software sales fell 6% to $8.4 billion. I was expecting more. One bright spot is that Oracle’s cloud revenue rose 28%, but that’s still a small part of their overall business.

    I’m disappointed with this earnings report, but I’m not about to bail on Oracle. The company still has lots of strength. For the fiscal year, Oracle earned $2.77 per share. Their free cash flow was an astounding $12.9 billion. Net of debt, the company is sitting on $12 billion in cash.

    For fiscal Q1, Oracle sees earnings coming in between 56 and 59 cents per share. Wall Street had been expecting 61 cents per share. The share dropped sharply on Thursday. At one point, Oracle got as low at $40.97 per share, but it rallied back to close at $42.74. Oracle is not a pricey stock, but they need to give investors something to cheer about. This week, I’m lowering my Buy Below on Oracle to $45 per share.

    Buy List Updates

    On Thursday, three of our stocks hit new 52-week highs; Fiserv (FISV), Snap-on (SNA) and Wells Fargo (WFC). Also, Stryker (SYK) is closing in on its 52-week high. Here’s some more news on our Buy List stocks.

    Bed Bath & Beyond (BBBY) is due to report fiscal Q1 earnings on Wednesday, June 24. I previewed the earnings report in last week’s CWS Market Review. I said that I’ve gotten a little frustrated with BBBY. I don’t like to see them spend so much on share buybacks. It’s a solid company, but I want to see better numbers. They gave us an earnings range of 90 to 95 cents per share. I’m also curious to see what their guidance is for the current quarter.

    Ross Stores (ROST) split 2-for-1 last Friday, so I hope you didn’t panic about the lower share price. The deep discounter continues to perform well. Ross got dinged after the last earnings report, even though it looked fine to me. Traders were expecting better guidance. On Thursday, Ross closed above $50 for the first time since the earnings report. Ross Stores is a good buy up to $52 per share.

    Signature Bank (SBNY) announced this week that former Congressman Barney Frank is joining their board of directors. I got a few emails telling me that this move spells certain doom for the bank. (Even the Wall Street Journal got in the act “Barney Frank—Yes, THAT Barney Frank—Joins a Bank Board.”)

    Sorry, but I’m not going to bite. For one, Congressman Frank has lots of experience that can serve Signature well. Don’t forget that the financial-reform law is called Dodd-Frank. Congressman Frank also chaired the House Banking Committee. It’s nice to have someone like that on your team. I’ve seen too many investors get hurt when they use their politics as the basis for their portfolios. Signature is a buy up to $150 per share.

    That’s all for now. Next week is the final full week of Q2. We’re also going to get some key economic reports. The durable-goods report comes out on Tuesday. On Wednesday, the government will release its second revision to Q1 GDP. The last report said that the economy contracted by 0.7% during Q1. Then on Thursday, the government reports on personal income and spending for May. 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 19, 2015
    Posted by on June 19th, 2015 at 7:05 am

    E.C.B. Holds Emergency Meeting on Extending Lifeline to Greece

    Greek PM Optimistic on Debt Deal As Banks Bleed

    BOJ’s Kuroda Backpedals on Yen Warning, Says Weakness Not So Harmful

    Who Says China Markets Are Rallying More Than India?

    After Doubts, Economists Find China Kills U.S. Factory Jobs

    House Sends Trade Bill Back to Senate in Bid to Outflank Foes

    Proposed Rule For Big Trucks Aims at Cutting Fuel Emissions

    Two Macroeconomic Puzzles Answered By California’s Uber

    Exxon Mobil, Petróleos de Venezuela to Sell Jointly Owned Refinery

    The Shale Industry Could Be Swallowed By Its Own Debt

    Nucor Forecasts Dip in Profit as Imports Hit Steel Prices

    Google Told to Expect Large Fines in EU Antitrust Probe

    Toyota in Damage Control Mode After American Exec Arrested

    Marc Chandler: This is the Framework of a Potential Greek Compromise Taking Shape

    Joshua Brown: What You Need to Know About the FOMC’s Dot Plot

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