Archive for 2013

• The Economy and the Stock Market Aren’t the Same
  Eddy Elfenbein, September 9th, 2013 at 2:40 pm

  Don’t read too much into this chart, but I think it’s interesting for investors to take note of. This is a scatterplot of the annual change in nominal GDP (horizontal) along with the annual change in the S&P 500 (vertical):

  

  Just looking at it, there’s no correlation. In fact, it almost appears to be slightly negative.

  I think there are a few important takeaways. The first is that the stock market is not the economy. They are different animals though closely related. For one, the stock market tries to anticipate the economy so it will often lead it by a few months.

  Also, the stock market is concerned with corporate profits which is only a small part of the overall economy. Over the past few years, for example, corporate profits have grown quite well, but the overall economy has not.

  You should always hold economic news, good or bad, at a slight distance when considering your investments.

  Here’s nominal GDP (blue, left) along with the S&P 500 (right, red). Both are in log scale.

  

• Cyclical-S&P 500 Ratio Hits Two-Year High
  Eddy Elfenbein, September 9th, 2013 at 11:37 am

  Cyclical leadership continues. The Morgan Stanley Cyclical Index ($CYC) divided by the S&P 500 is at another two-year high.

  

• On Track for Five Straight Up Days
  Eddy Elfenbein, September 9th, 2013 at 11:31 am

  The stock market is up again in early trading this morning. This could be our fifth-straight rally this September, but that includes a microscopic gain on Friday. The Dow crossed back over 15,000. More importantly, the S&P 500 is inching closer towards its 50-DMA which is currently 1,666.50.

  The market appears to like the very strong GDP numbers from Japan. A report on Chinese exports was also better than expected. Cyclicals are doing well again today. Energy, Industrials and Materials are leading the rally. Finance, Utilities and Healthcare are in the rear, but still up for the day.

  Once again, the issue of Syria is weighing on the market. I don’t think any action in Syria would impact the markets or economy very much, but without other news, it will take on outsized influence. The Senate will vote on a resolution later this week. On our Buy List, shares of CR Bard ($BCR) have been as high as $118.47 today which is a new 52-week high. Ford Motor ($F) is also doing well.

  The Fed, of course, meets again next Tuesday and Wednesday. The current consensus on the Street is that they’ll taper their bond purchases by $10 billion per month.

• Morning News: September 9, 2013
  Eddy Elfenbein, September 9th, 2013 at 6:17 am

  Financial Crisis: Lessons of the Rescue, A Drama in Five Acts

  Economy in China Benefits from Stronger U.S. Demand

  China’s Inflation Slows to 2.6% in August

  Now or Never for Japan Reforms

  Mexico Tax Plan Adds Sweeping New Social Programs

  Russia to Brazil Intervention Adds to U.S. Debt Distress

  Here’s What Obamacare Will Actually Cost

  Investors Are Poised to Pay $6 Billion for Neiman Marcus

  Japan’s Suntory to Buy GSK Drink Brands Lucozade and Ribena for $2.7 Billion

  Kabel Deutschland Shareholders Fear Falling Shy Of Vodafone Goal

  Worries That Microsoft Is Growing Too Tricky To Manage

  Deloitte Fined 14 Million Pounds Over MG Rover Advice

  Nomura: These 6 Companies Are Set To Make A Fortune On The 2020 Olympics

  Jeff Miller: Weighing the Week Ahead: What Does the Syrian Crisis Mean for Stocks?

  Epicurean Dealmaker: I, Fembot

  Be sure to follow me on Twitter.

• The Most Important Economic Chart in the U.S. Right Now
  Eddy Elfenbein, September 6th, 2013 at 11:58 pm

  Healthcare price index divided by the core inflation index:

  

  The trend is still young, but after decades of outpacing inflation, healthcare costs have been acting like everybody else.

  If this holds up, it’s a game-changer.

  Very soon, year-over-over healthcare inflation may come in below core inflation. That hasn’t happened in 32 years.

  

• Pictures from Life’s Other Side
  Eddy Elfenbein, September 6th, 2013 at 5:00 pm

• August NFP = 169k, Unemployment Falls to 7.3%
  Eddy Elfenbein, September 6th, 2013 at 8:42 am

  The August jobs report is out and it showed that 169,000 jobs were created last month. The weak part is that only 152,000 jobs were created in the private sector. The number for July was revised downward from 162,000 to 104,000. That’s a big revision. June was also lowered from 188,000 to 172,000.

  The unemployment rate actually ticked down from 7.4% to 7.3%.

  

• CWS Market Review – September 6, 2013
  Eddy Elfenbein, September 6th, 2013 at 6:58 am

  “Sometimes your best investments are the ones you don’t make.” – Donald Trump

  The Labor Day weekend is behind us, and the stock market has so far shaken off its August blues. The S&P 500 has rallied for three straight days this week and is back over 1,655. In fact, the index is getting close to breaking above its 50-day moving average. Since August 16th, we’ve closed below the 50-DMA every day but one.

  

  Now all eyes are on the Federal Reserve and what it will do at its next meeting on September 17-18. Make no mistake, this is the most-anticipated FOMC meeting in years. The bigwigs inside the central bank have more than hinted to us that we can expect a paring back in the Fed’s asset-buying program. Of course, no decision has been made yet. Plus, even if there is a tapering announcement, we still don’t know how much it will be. Either way, over the next two weeks, you can expect a lot of opinion-makers opining on what the Fed’s opinion ought to be.

  Fortunately for us, we don’t have to fret over such decisions. Our strategy remains the same. We’re focusing on high-quality stocks going for good prices, and it’s working. Despite the August slump, our Buy List holds a nice 4.7% lead over the S&P 500 for the year. By the way, did you notice the nice rebound in Ford ($F)? The automaker just reported its best sales months since 2006.

  In this week’s CWS Market Review, we’ll preview the upcoming Fed meeting. I also want to cover the terrible deal Microsoft ($MSFT) just struck with Nokia ($NOK). (I really wish awful dealmakers like Steve Ballmer were in my fantasy football league.) I also want to share with you some names that I’m considering for next year’s Buy List. Plus, I want to touch on the very good ISM reports from this week. But first, let’s look at what Ben Bernanke and his crew at the Fed have in store for the economy, Wall Street and our Buy List.

  Countdown to the September FOMC Meeting

  The Federal Reserve meets again in two weeks, and this meeting is a biggie. Without making anything definite, Fed officials have used speeches and the media to hint that an announcement of tapering bond purchases is on the table.

  Here’s where we stand. Since short-term interest rates are already close to 0%, the Fed has had to use its bond buying as an extra-special tool to help the economy get back on its feet. The Fed has also said that it will stop the bond buying first before it considers raising short-term interest rates. The Fed’s policy is that it won’t raise short-term rates until unemployment falls to 6.5%, which they don’t see happening until the middle of 2015 at the earliest.

  So has the bond-buying program worked? That’s hard to say, and to some extent, I don’t care. At the least, we can say that the program has correlated with a recovery in the housing market and a surge in U.S. auto sales. The big winners in the stock market for the last year have been anything at the intersection of consumer finance and large-ticket consumer items. In plainer words, stuff people buy with borrowed money. That’s why the Consumer Discretionary ETF ($XLY) and stocks like Visa ($V) have done so well.

  The stock market has been gradually rewarding riskier investments lately at the expense of safer areas. For example, utilities and consumer staples have been rather weak, but industrials have been strong. While financial stocks have been big winners since late 2011, they’ve been underperforming lately. I think this market shift is in anticipation of improved economic growth.

  I think it’s a mistake to assume that the entire economy has been aided by steroids from the Fed. More than a few folks on Wall Street think that once the Fed’s assistance is gone, stock prices are due to crash. I disagree. The economy appears to have reached escape velocity, where every improvement builds on what came before. Analysts on Wall Street expect to see earnings growth of over 12% for Q3, and over 25% for Q4. If those forecasts are in the ballpark, the stock market is still cheap.

  What’s really shocked people, including myself, is the rout in the bond market. As we look back at the 2013 investing year, May 2nd may turn out to be the key date. That’s when the bond market started to turn south in a big way. Except for very short-term rates which haven’t budged, most Treasury yields are at two-year highs, and they continue to rise. On Thursday, the yield on the ten-year Treasury broke 3% for the first time since July 2011.

  Consider that the yield on the five-year jumped from a measly 0.65% in early May to 1.85% by Thursday’s close. Of course, in absolute terms, that’s still a puny yield, but it’s a big turnaround from what we’ve seen. It’s hard to believe that in the spring of 2011, the five-year was inching up over 2.35%.

  The rise in yields has been greatest with the seven- and ten-year bonds (more than 130 basis points for each). Interestingly, short-term yields haven’t moved. What’s also caught my eye is that the spread among the longer-dated bonds has actually narrowed a bit. In early May, the 30-year yield was 116 basis points higher than that of the 10-year; now it’s down to 90 basis points. The biggest impact on the yield curve is happening in the middle.

  As I explained in last week’s issue, I don’t believe the downturn in the bond market is due to fears of inflation or of the Fed’s shutting off the spigots. Instead, the higher yields are actually in anticipation of an improving economy. We got more evidence of that this week with a very strong ISM report on Tuesday. Then on Thursday, we learned that the ISM Services Index hit its highest level since 2005. We should also add the great sales report from Ford to the positive economic news pile.

  So what’s all this mean? It seems that in May, the market saw Fed rate increases as being a long way off. Now it doesn’t. In May, the futures contract for the Fed funds in July 2015 rates got to $99.72. Recently, it’s been as low as $99.13. That’s a big shift.

  I suspect that traders are probably getting ahead of themselves in predicting any rate increases. The Fed has said it wants to see unemployment down to 6.5% before it starts raising rates. I’m writing this early on Friday, ahead of the August jobs report, so I don’t know what the results will be (check the blog for updates), but we’re still a long way from 6.5%. The key for investors to understand is that the Fed isn’t going away anytime soon.

  We don’t have much hard evidence yet on how the economy has performed during the third quarter. The ISM reports offer some clues, and the August jobs report will shed some light. The ADP report on Thursday showed an increase of 176,000 jobs last month, which nearly hit consensus on the nose.

  Investors should continue to favor high-quality stocks. Our own Harris Corp. ($HRS) got off to a shaky start this year, but it has been impressive lately. We recently got a 13.5% dividend increase, and the stock hit a new 52-week high on Thursday. Later this month, three of our Buy List stocks are set to report: Oracle ($ORCL), FactSet ($FDS) and Bed Bath & Beyond ($BBBY). I’ll preview these reports in greater detail in next week’s issue, but the one that’s concerning me is Oracle. The last two reports have been duds, and I’m very reluctant to go against Larry Ellison, but I want to see solid performance in this report. Speaking of large-cap tech stocks, let’s look at the big story from this past week.

  Microhard: The Awful $7.2-Billion Deal with Nokia

  On Labor Day, Microsoft ($MSFT) announced that it’s buying Nokia’s ($NOK) devices and services unit for $7.2 billion in a deal that includes Nokia’s patents. I think this is another one of Steve Ballmer’s lousy deals, and traders agreed with me. Shares of MSFT dropped more than 4.5% on Tuesday (see chart below), which erased the entire surge from Ballmer’s retirement announcement. The stock has lost more than $18 billion in market value since the $7.2 billion deal was announced.

  

  To quote myself, it’s usually a bad sign when news of your resignation causes a market-value increase of $24 billion. This latest deal shows us why the market so distrusts Ballmer. I’m afraid this is another in a long line of bad deals for Microsoft. Ballmer wasn’t joking around when he said he wants MSFT to be a devices company. You have to wonder how much longer the “soft” will be a part of Microsoft.

  The Nokia deal is a deal made from weakness, and that’s usually a bad sign. On one level, it makes sense in that it brings together Windows 8 with its biggest hardware supporter. I suppose they think they can replicate the Google-Apple model. I’m not sure what was going to happen. Perhaps Nokia was going to ditch MSFT and go with Android, or maybe NOK was going to declare bankruptcy. That’s not unthinkable. The stock is still down more than 90% from its tech-bubble high. It’s very probable that Microsoft saw only bad scenarios unfolding and decided to make a move. Most importantly, I’m not sure why MSFT can succeed where Nokia has failed.

  Microsoft is still on my Buy List, and will be until the end of the year. I’m very unhappy with this recent decision. The only positive thing I can say is that the Nokia deal isn’t that big relative to MSFT’s overall position. It comes to about 86 cents per share. Microsoft is sitting on a cash position of $61 billion, so this doesn’t exactly stretch their finances.

  I added MSFT to the Buy List this year, and I’m not sorry I did. I still think the stock was going for a discount relative to its fair value. I also expect to see Microsoft raise its quarterly dividend later this month. The current dividend is 23 cents per share. I’m expecting an increase to 26 cents. Going by Thursday’s closing price of $31.24, that comes to an annual yield of 3.33%. I’m going to lower my Buy Below price on Microsoft to $34 per share.

  Ten Candidates for Next Year’s Buy List

  Now that we’re in the final third of 2013, I wanted to pass along a few names that I’m looking at as candidates for next year’s Buy List. As usual, I’ll add five new stocks and delete five current ones.

  Please understand, this is just a preliminary list, and I won’t finalize next year’s Buy List until mid-December. There are currently ten stocks that I’m keeping a close eye on; IBM ($IBM), CVS Caremark ($CVS), Tupperware ($TUP), Express Scripts ($ESRX), DaVita ($DVA), Varian Medical Systems ($VAR), AutoZone ($AZO), United Stationers ($USTR), Bio-Reference Labs ($BRLI) and St. Jude Medical ($STJ).

  Honestly, that list is heavier on healthcare than I would prefer, but that’s where I’ve been seeing high-quality bargains. I plan to have another list of next year’s candidates before the official list comes out in December.

  Before I go, I want to make a few small adjustments to our Buy Below prices. In addition to lowering Microsoft’s ($MSFT) Buy Below to $34 per share, I also want to drop WEX’s ($WEX) down to $89. Nothing’s wrong with the stock. I simply want our buy ranges to reflect last month’s pullback. I also want to raise Ross Stores’s ($ROST) Buy Below by $1 to $71 per share. ROST has been doing very well for us.

  Lastly, I’m raising CR Bard’s ($BCR) Buy Below to $119. The company just picked up Rochester Medical for a cool $262 million. Bard is paying $20 per share for Rochester, which is a 44% premium. This looks to be a smart deal, and BCR rallied on the news. Bard looks very good here.

  That’s all for now. Next week, we’ll get important reports on retail sales and consumer credit. On Thursday, the Treasury Department will update us on how the budget deficit looks for this fiscal year, which concludes at the end of this month. This looks to be the government’s lowest budget deficit in five years. Of course, that’s comparing apples to trillion-dollar oranges. Still, this year’s deficit is projected to come in at a mere $680 billion. That’s nearly 38% below last year’s red ink. I want to see this trend continue. 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: September 6, 2013
  Eddy Elfenbein, September 6th, 2013 at 6:41 am

  Plan at G-20 Is to Tighten Global Rules on Taxes

  European Central Bank Chief Tamps Down Optimism

  Bogged-Down Banking Fight Leaves EU Vulnerable to Relapse

  Cyprus Lawmakers Adopt Key Terms For EU/IMF Bailout

  The Next Emerging Market Crisis

  Wall Street’s Most Bullish Forecast For Today’s Jobs Report

  Behold The Bounty That Shale Oil And Natural Gas Have Wrought

  Summers’s Fed Put Beats Bernanke’s for Potency: Cutting Research

  Treasury Yields Pierce 3% With Employment Data Ahead

  J.P. Morgan to End Student-Loan Business

  Yahoo Needs a Lifeboat Not a Logo

  Hearsay Social Raises $30 Million to Give Bankers an Online Presence

  Hundreds Protest Against Wal-Mart In 15 Cities, Demanding Higher Wages

  Jeff Carter: Commitment, Decision Making and Fear In Entrepreneurship

  Cullen Roche: 3 Things I Think I Think

  Be sure to follow me on Twitter.

• Even When You’re Right, It Takes Time
  Eddy Elfenbein, September 5th, 2013 at 12:17 pm

  At one point in 2011, shares of Groupon ($GRPN) got as high as $31. But by late July 2012, the stock had fallen down to $6.90 per share.

  That’s when I jumped in and tweeted.

  I can't believe I'm saying this but $GRPN really isn't that absurd at this price.

  — Eddy Elfenbein (@EddyElfenbein) July 31, 2012

  The only problem is that the stock kept falling. By November, it hit $2.60 per share. That’s a 62% drop from what I thought wasn’t a bad price.

  Since then, Groupon has rallied is currently close to $11 per share. Even if you think you’ve spotted a good value, you’ll never know when your bargain will materialize. Even if you’re right, the ride can be a lot rougher and longer than you think.