Archive for March, 2014

  • AwesomePennyStocks Come to an End
    , March 17th, 2014 at 11:54 am

    Sometimes the frauds committed on Wall Street are so comical that you have to wonder how anyone could have fallen for something so silly. Yet it’s also sad that gullible investors get wiped out.

    Bloomberg has a story today on the fall of AwesomePennyStocks and its 26 year-old mystery man. You can read the whole story here, but here’s a sample:

    The promotion cited by the SEC involved America West Resources Inc., a Salt Lake City-based coal company. AwesomePennyStocks and another list called PennyStocksUniverse sent messages promoting the company’s shares on Feb. 23, 2012, according to the SEC.

    The stock rose as high as $1.80 from 29 cents as more than 7.8 million shares were traded, more than double the total volume in the prior year, the agency said. Babikian sold at least 1.3 million shares for $1.9 million, according to the SEC. America West filed for bankruptcy protection last year.

  • Stocks Rise on Strong Industrial Production
    , March 17th, 2014 at 11:15 am

    The stock market is bouncing back today after a rough end to last week. Investors were ignited this morning by a stronger-than-expected report on industrial production. This is one of those reports that track the rise and fall of the economy well.

    Industrial production jumped 0.6% last month. Economists were only expecting an increase of 0.1%. Manufacturing output, which is the largest part of industrial production, rose by 0.8%. That’s its biggest gain since August. This is also more evidence that the weather-related sluggishness is probably behind us (though I’m writing this as we got a late season snow here in DC).

    fredgraph03172014

    The rising tension in Ukraine is, of course, on everyone’s mind. It appears that Crimea is done, and it’s now part of Russia. The worry is that Putin will ratchet up and launch an invasion of Eastern Ukraine. That’s a nightmare scenario. On one hand, that’s an irrational move on his part, but on the other, Colonel Putin doesn’t seem to play by reason. Interestingly, the Polish ETF (EPOL) is very strong today, up 2.7%. Even the Russia ETF ($RSX) is showing some strength, which may hint that the worst is over. RSX had been getting crushed this year.

    Our Buy List is also having a good day. CR Bard (BCR) continues to be remarkably strong. The stock got as high as $147.82 today which is another all-time high. Qualcomm is also having a good day for us, but that’s really making up for the weakness it showed on Thursday and Friday. Most of the tech world is waiting for Oracle’s earnings report tomorrow. Or more accurately, they’re waiting for Oracle’s guidance for the current quarter.

  • Morning News: March 17, 2014
    , March 17th, 2014 at 6:58 am

    QE Not the Only Option for ECB on Inflation

    As Giant U.S. IPO Nears, Alibaba’s China E-commerce Crown Slips

    Indian Solar Power: Cost of Production Dropped 60%; Price to Equal Thermal Power’s in Three Years

    Commodities Cushioned From Crimea Crisis by Ample Supply

    New York Strips London of Mantle as World’s Top Financial Center

    U.S. Navy Seizes Tanker, Foiling Libya Rebel Attempt to Sell Oil

    Federal Reserve Officials Weighing How to Retool Rate Guidance

    U.S. Lags as Commercial Drones Take Off Around Globe

    Rosneft to Buy Stake in Pirelli as Tiremaker’s Owners Reorganize

    Toyota Unit Shuts 2 Factories in India

    Vodafone to Buy Spanish Cable Operator Ono

    Quiznos Files Pre-Packaged Chapter 11 Plan After Debt Deal

    Candy Crush Saga Prices Initial Public Offering At Up To $7.6 Billion

    Credit Writedowns: Capex May Be Behind the Sudden Improvement in U.S. Loan Growth

    Jeff Miller: Weighing the Week Ahead: Yellen Takes The Stage

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  • The Leprechaun Brothers
    , March 16th, 2014 at 11:39 am

  • CWS Market Review – March 14, 2014
    , March 14th, 2014 at 7:53 am

    “Don’t look for the needle in the haystack. Just buy the haystack!” – John C. Bogle

    This was a quiet week on Wall Street up until Thursday when renewed worries over Ukraine sent the S&P 500 down 1.2%. The index is once again in the red for the year, however, our trusty Buy List remains in the black.

    Despite the dearth of news this week, things will get a lot more interesting next week when the Federal Reserve meets on Tuesday and Wednesday. This will be Janet Yellen’s first meeting as Fed Chair. This will also be her first post-meeting press conference. But the most important news is that there’s a very good chance the Fed will officially drop the Evans Rule.

    The Evans Rule, named after Chicago Fed President Charles Evans, states that the Fed won’t raise short-term interest rates until the unemployment rate drops below 6.5%. The problem is that the jobless rate is 6.7% at last count and nearly everyone agrees that the economy is nowhere near ready for higher interest rates. The Evans Rule has been in effect since December 2012, and the Fed has been very careful to say that it’s a threshold and not a trigger.

    I first talked about the Fed ditching the Evans Rule in CWS Market Review from January 10. I didn’t think it would happen at the time, but I considered the possibility of it happening later this year. Apparently, later is now.

    What does the ditching of the Evans Rule mean for us? It’s very good news for investors. I’ll explain more in a bit, but it’s a clear message from the Fed that they’re going to be on the side of investors. Also in this newsletter, I’ll highlight some of the recent news from our Buy List. Plus, I’ll preview next week’s earnings report from Oracle. Larry Ellison’s firm has turned a corner and I expect more good news. I’ll also talk about the recent earnings warning from Bed Bath & Beyond. But first, let’s look at what’s on the Fed’s mind.

    It’s Time to Ditch the Evans Rule

    In last week’s CWS Market Review, I talked about the debate on Wall Street regarding how much of the soggy economic news was due to the soggy weather. I explained that most of the incoming data confirmed that the cold weather was in fact keeping shoppers at home.

    We recently got two more important pieces of evidence that underscored the bad weather hypotheses. Last Friday, shortly after I sent out last week’s newsletter, the Labor Department reported that the economy created 175,000 new jobs in February, which beat expectations. More importantly, it snapped a two-month streak of pretty bad jobs reports. Bear in mind that the jobs report is by far the most important monthly economic report.

    The other encouraging news was that retail sales showed its first increase in three months. Retail sales for February rose by 0.3%, which was 0.1% better than expectations. The numbers for December and January were pretty bad. I should add that Thursday’s initial jobless claims report was especially strong; 315,000 Americans filed first-time unemployment claims. That’s the lowest number since November, and the sixth-lowest in six-and-a-half years.

    Last Friday’s jobs report showed us that the pre-weather trend of mediocre jobs growth is still in tact. When the bad data came out, some folks started to wonder if the Fed may have started tapering their bond purchases too early. But most Fed officials stuck to their guns and made it clear that unless something really dramatic happened, they were going to continue paring back their monthly bond purchases.

    The plan with Quantitative Easing was that the Fed would purchase each month, $85 billion in bonds. That’s $40 billion in mortgage-backed securities and $45 billion in Treasuries. Twice now, the Fed has lowered the monthly number by $10 billion ($5 billion for each group), and they’re almost certainly going to do it again next week.

    Is the Labor Market Really Getting Tight?

    There are some concerns that the labor market may be getting “tight” right now, meaning there aren’t enough folks out there to fill up the job needs. As a result, wages are starting to rise. I don’t buy this argument. At least not yet. While it’s true that wage growth is starting to creep up, that’s working off a very low base.

    The trouble is that the current labor market is in uncharted territory. The workforce participation rate is near its lowest level in more than 35 years. Many folks have simply walked away from the job market. Some of that is due to demographics, most specifically retiring Baby Boomers, but we don’t know exactly how much.

    fredgraph03142014

    The unsettling aspect of the current jobs market isn’t the high level of unemployed people, but it may be the high level of unemployable people. I hate to sound so negative, but why would the economy rather pay existing employees higher wages than take on new recruits? Like I said, I’m not on board with the tight labor market idea, but the change in workforce participation has been quite startling.

    Here’s the bottom line: The Fed will continue to taper. They seem pretty set on that. The Fed wants to get QE out of the way before they start raising interest rates. Right now, most folks expect the first rate increase will come around the middle of next year. The best early warning sign to watch is rising wages. Of course, that’s good news for workers, but at some point that will turn into higher inflation.

    We also want to keep an eye on commodity prices which have risen very sharply in the past few months. Coffee prices, for example, have surged dramatically. For now, your local Starbucks can absorb the blow, but at some point, those commodity prices will take a bit out of consumers’ wallets.

    The risk/reward ratio is still very much on the side of stocks. Consider that a Buy List stock such as McDonald’s ($MCD) currently yields 3.33%. That’s 68 basis points more than a 10-year Treasury bond. In other words, investors are still vastly over-paying for safety. Until interest rates rise, the math is clearly on the side of stocks. Now let’s look at some of our Buy List stocks.

    Oracle Is a Buy Up to $41 per Share

    Oracle ($ORCL), the enterprise software king, will report fiscal Q3 earnings next Tuesday, March 18. Three months ago, the company told us to expect Q3 earnings to range between 68 and 72 cents per share. That sounds about right to me. They see revenues rising between 2% and 6%.

    I’m pleased to say that reports of Oracle’s demise have been greatly exaggerated. The company is far more “cloudy” than a lot of folks realize. Safra Catz, Oracle’s President and CFO, recently said, “We decided that we were really going to lean in to the cloud to get market share.” That they have.

    In December, Oracle reported Q2 earnings of 69 cents per share which was at the top their range. Bookings for Oracle’s cloud enterprise offerings jumped an impressive 35%. The weak spot is new software license subscriptions; revenue there fell by 1%.

    I’m in the optimistic camp on Oracle for a few reasons. One is I never go against Larry Ellison. I’ve also been impressed by their headway into the cloud sector. The company has reorganized its sales staff and strategy. I also like how Oracle has been buying back its shares. While I’m not normally a fan of buybacks, Oracle is truly reducing share count and thereby raising EPS.

    I’m very curious to see what guidance Oracle offers for Q4, which ends in May. The Street expects 96 cents per share which may be a bit too high. I’ll warn you that the bears love to pounce on ORCL. Either way, Oracle continues to be a very good buy up to $41 per share.

    Bed Bath & Beyond Shakes Off the Bad Weather Blues

    After the closing bell last Friday, Bed Bath & Beyond ($BBBY) released a statement saying that the lousy weather had zapped six or seven cents per share off their fiscal Q4 earnings. Their fourth quarter ended on March 1, and the earnings report will come out on April 9.

    Let’s look at some math. The home furnishings store now says it sees Q4 coming in between $1.57 and $1.61 per share. The previous guidance has been for $1.60 to $1.67 per share. If you recall, the stock gotten beaten up in January when they lowered their initial guidance of $1.70 to $1.77 per share.

    Here’s what’s interesting: I was almost convinced that the market was going to punish the shares at Monday’s open. Didn’t happen. Instead, BBBY was one of the top performers on our Buy List. It looks like the bad-weather message finally got through to traders.

    The company said that during Q4, a store had to be closed for the entire day due to the bad weather 464 times. On top of that, there were 1,923 partial closings. Obviously people can’t shop at closed stores. There may be good news for BBBY in the future. Williams Sonoma, a close competitor, just reported earnings above expectations thanks to new home construction. That could be a lift for the industry. In fact, the entire retail sector has snapped back recently. For now, Bed Bath & Beyond remains a good buy up to $71 per share.

    More Buy List Updates

    I wanted to add a few quick notes on some of our other Buy List stocks. Cognizant Technology Solutions ($CTSH) split 2-for-1 on Monday. The stock has been weak lately after Infosys, a competitor, gave poor guidance. For the most part, CTSH has been executing much better than Infosys so I don’t know if this is such a bad omen. CTSH is a solid buy up to $56 per share.

    The Icahn Vs. eBay ($EBAY) battle got even louder, if you can imagine that. This week, eBay (are you sitting down?) rejected both of Carl Icahn’s nominees for eBay’s board. eBay said they’re unqualified and urged shareholders to vote against them. This feud is getting tiresome. eBay has made it clear that they’re not going to sell PayPal. Carl, if you’re reading this, move on. eBay continues to be a good buy up to $62 per share.

    McDonald’s ($MCD) has made an embarrassing amount of errors recently. That’s why the stock has lagged, and partly why I like it. At BusinessWeek, Vanessa Wong takes a look at how MickeyD’s is working to right the ship. McDonald’s is a good buy up to $102 per share.

    That’s all for now. In addition to next week’s Fed meeting, the government will release the industrial production report for February on Monday. Then on Tuesday, we’ll get reports on inflation and housing starts. It will be interesting to see if any of the rise in commodities shows up in consumer prices. I suspect that it’s too early. 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: March 14, 2014
    , March 14th, 2014 at 7:15 am

    Russia Says Kiev Not in Control of Ukraine as Vote Looms

    Emerging Stocks Set for Weekly Drop on China Data to Crimea Vote

    Premier Li Overshadowed by Chinese President Xi’s Strong Leadership

    China’s Central Bank Halts Tencent, Alibaba Mobile Payment Process

    UBS Traders Found to Have Tried Rigging Hong Kong Rate

    Inflation Signs Lurk in Broader Labor Data Yellen Seeks at Fed

    US Budget Deficit Hits $193.5 Billion in February

    Electric-Grid Attack Fuels Sniper-Versus-Hacker Debate

    Amazon Increases Prime’s Cost as it Turns Focus to Profit

    Vodafone Close to Deal to Buy Spain’s Ono

    Bill Gates: People Don’t Realize How Many Jobs Will Soon Be Replaced By Software Bots

    303 Deaths Seen in G.M. Cars With Failed Air Bags

    Steve Cohen Personally Made $2.3B In 2013 Despite Having To Shut Down SAC Capital

    Are Exchanges Monopolies?

    Cullen Roche: The Bank of England Debunks the Money Multiplier

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  • GE to Spin Off Synchrony Financial
    , March 13th, 2014 at 11:11 am

    One of the best ways to find great stocks is to see when a good company holds a garage sale. General Electric ($GE) just announced plans to spin off its North American consumer lending unit. The new company will be called Synchrony Financial. Last year, the unit made $2 billion. This is one to pay attention to.

  • Initial Claims at 6-1/2 Year Low
    , March 13th, 2014 at 9:46 am

    This morning, the Census Bureau reported that retail sales rose 0.3% last month which topped expectations of 0.2%. If we take out autos, retails sales rose by 0.3%. The report for January was revised downward from minus 0.4% to minus 0.6%. This was the first increase in retail sales in three months.

    Atif Mian and Amir Sufi dug into the state-level data and found that, yep, it was the weather.

    The evidence is pretty clear. New auto purchases in January 2014 were more than 5% down in states that were more than 7 degrees below their normal January temperature. New auto purchases were down slightly in states that were between -7 and -4 degrees below normal. In the rest of the country where temperatures were closer to normal, new auto purchases were quite strong.

    The Department of Labor said that initial unemployment claims fell to 315,000 last week. That’s the sixth-lowest figure in the last six-and-a-half years.

    On our Buy List, Cognizant Technology Solutions ($CTSH) is so far shaking off a weak announcement from Infosys ($INFY), a major competitor. INFY said that earnings will come in at the low end of their guidance.

  • Morning News: March 13, 2014
    , March 13th, 2014 at 6:55 am

    Russia Said to Ready for Iran-Style Sanctions in Worst Case

    Watching China’s Great Wall of Worry

    China Data Show Economy Cooling

    N.Z. Raises Rate to Become First Developed Nation to Tighten

    Health Insurance Rates Likely to Rise in 2015

    Regulators Size Up Wall Street, With Worry

    Shell Cuts American Upstream Spending to Lower Shale Exposure

    Google Stock Split to Favour Founders, Shake Up S&P 500

    Danish Outsourcing Firm ISS Surges in I.P.O.

    Bouygues Raises Bid for Vivendi’s SFR to Shut Out Numericable

    Sun Pharma Slumps as Unit Gets USFDA Import Alert; Doxycycline Prices Fall

    Herbalife’s FTC Probe Threatens Stock Rally That Had Hurt Ackman

    GM Staff, Media Flagged Ignition Fault Long Before Recall

    Joshua Brown: Twitter is the New CNN

    Wall Street and Casinos…Are They Similar?

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  • McDonald’s Goes Back to Basics
    , March 12th, 2014 at 11:21 am

    As a value investor, I often find stocks that appear to be damaged goods. Cheap stocks have lots of dings on them, but the question is, how serious are these problems?

    A good example is one of our new additions to the Buy List this year: McDonald’s ($MCD). Their business has not performed well and they’ve made a lot of errors; however, they’re beginning to move in a different direction.

    Venessa Wong describes some of the new strategies MCD is undertaking:

    You could say 2013 was a year of experimentation for McDonald’s (MCD): Fish McBites came out in February, McWraps in March, and Mighty Wings in September—all relative novelty items for the fast-food giant. All that innovation amounted to a 0.2 percent drop in U.S. same-store sales over the year. Maybe that’s why for its first permanent addition to the menu in 2014, McDonald’s is sticking to basics: a new burger.

    The Bacon Clubhouse, available in beef or chicken this week, is the chain’s first burger besides the Big Mac to be topped with special sauce. It comes with leaf lettuce—not the shredded stuff—and a thick slice of tomato. Taking a cue from Wendy’s (WEN) fancy bread strategy, the Clubhouse is served on an “artisan roll.” A reviewer on Grubgrade.com called it “the most satisfying burger I’ve ever had from McDonald’s.”

    The company recently slowed product launches as it works on improving operations and service. “We acknowledged last year that we probably did things a little bit too quickly in terms of the Egg White Delight and then the McWraps and then the Quarter Pounders with the various toppings,” McDonald’s Chief Financial Officer Peter Bensen said at a conference on Tuesday, “and that was a big stress to the restaurants.”

    As part of its turnaround, McDonald’s plans to “refocus on the core,” Bensen added—meaning favorites like the Big Mac, Quarter Pounder, French fries, Chicken McNuggets—as well as breakfast. Any new items introduced this year will be easier to prepare with the chain’s new kitchen equipment. McDonald’s spokeswoman Tyler Litchenberger says the Bacon Clubhouse Burger will be a “core menu item.”

    The new sandwich shouldn’t be too unfamiliar for McDonald’s kitchen workers. Burger Business describes it as basically a Clubhouse Angus—a sandwich the chain tested in 2012—with a quarter-pound patty, lettuce, tomato, and a new bun. The emphasis on sandwiches was also a prominent theme in the new Dollar Menu and More launched in November, which includes new items like the BBQ Ranch Burger, Buffalo Ranch McChicken, Bacon McDouble, Bacon Cheddar McChicken, and Bacon Buffalo Ranch McChicken.

    McDonald’s 2014 menu pipeline “is designed to introduce new products and limited-time offers at the right pace and price points,” Bensen said. Executives are certainly hoping a milder form of menu innovation will go down easier than last year’s bold experiments.