Archive for April, 2015

• Software Can’t Catch to Explosion of Trading in China
  Eddy Elfenbein, April 20th, 2015 at 9:47 am

  The Chinese market has doubled in the last six months. Turnover in Shanghai and Shenzhen surpassed the NYSE and Nasdaq last month. Apparently, this is causing some problems.

  China’s stock trading fever has made the Shanghai Stock Exchange the world’s biggest in terms of turnover, surpassing the New York Stock Exchange, but the explosion in volumes has exceeded the ability of the exchange’s software to report it.

  The exchange’s trading turnover exceeded 1 trillion yuan ($161.28 billion) for the first time on Monday, but the data could not be properly displayed because its software was not designed to report numbers that high.

  “This is a software configuration issue, not a technical glitch,” the Shanghai Stock Exchange said in a statement, adding that trading and price quotes for individual stocks were not affected.

  The exchange said it would need to replace its current software files that handle volume reporting to resolve the issue.

  One of the forgotten episodes on Wall Street was the paperwork crisis on the late 1960s. The NYSE had to shorten trading hours so brokerage houses could catch up.

• The Illusion of Control
  Eddy Elfenbein, April 20th, 2015 at 8:56 am

  From Jason Zweig’s The Intelligent Investor:

  And a streak of being right can make anyone forget how important luck is in determining the outcome.

  Research led by psychologist Ellen Langer, now at Harvard University, shows that when people who predict the tosses of a coin are told they got eight out of their first 10 flips correct, they conclude that they are significantly better than average at calling heads or tails—and that they could get well over half their guesses right if the coin were tossed another 100 times.

  Prof. Langer called these incorrect beliefs “the illusion of control.”

  If, however, people either get most of their early guesses wrong or win and lose in a random pattern, they don’t believe they have any special gift for calling heads or tails; nor do they remember being correct more often than they were.

  Guarding against the illusion of control takes constant vigilance. The longer you’ve been right, the harder it gets.

• Morning News: April 20, 2015
  Eddy Elfenbein, April 20th, 2015 at 7:09 am

  

  Euro Area Seeks Greece Roadmap to May Agreement

  Greece Flashes Warning Signals About Its Debt

  Bond Yields Vanish Across Euro Zone on Grexit Worries

  For the People’s Bank of China, Bond Buying Is Both Easy and Hard

  China Really Wants a Rising Stock Market

  China’s Reserve Cut Move Boosts Oil Price

  Just How Leaky Is The Fed?

  Prologis, Norway Buy KTR Real Estate for $5.9 Billion

  Liberty Global’s Subsidiary Telenet to Acquire BASE

  Comcast, Time Warner Cable to Meet Regulators in Bid to Save Merger

  Morgan Stanley Profit Jumps 60% on Trading Revenue

  Shanghai GM to Spend $16 Billion Developing New Vehicles

  Europe’s Used Jets Luring U.S. Bargain Buyers With Strong Dollar

  Cullen Roche: Finding Religion on “Crowding Out”

  Jeff Miller: Weighing the Week Ahead: A Geopolitical Risk to U.S. Stocks?

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• March CPI Rose 0.2%
  Eddy Elfenbein, April 17th, 2015 at 10:48 am

  The Fed seems to have been right — our decent bout of deflation has passed. The March CPI report said consumer prices rose 0.2%. The core rate, which excludes food and energy, also rose by 0.2%.

  Here’s a look at the headline rate in blue and the core rate in red.

• CWS Market Review – April 17, 2015
  Eddy Elfenbein, April 17th, 2015 at 7:03 am

  “To be an investor you must be a believer in a better tomorrow.” – Benjamin Graham

  We’re moving into the heart of Q1 earnings season. So far, we had a good earnings report from Wells Fargo (WFC). The big bank beat estimates by six cents per share. But get ready for an earnings blizzard. Next week, eight Buy List stocks report, including big names like Microsoft (MSFT), eBay (EBAY) and Qualcomm (QCOM). I’ll preview all the reports in a bit.

  Going into earnings season, traders weren’t expecting much. Thanks to the surging dollar, analysts expect that earnings fell 5.8% during the first three months of this year. The early evidence shows that it might not be that bad. So far, 36 stocks in the S&P 500 have reported, and 81% have beaten estimates. For comparison, the average “beat rate” is about 63%. (That’s right; on Wall Street you’re expected to beat expectations.) As a result, the S&P 500 is back over 2,100 and not far from a new all-time high. The index has now stayed close between 2,040 and 2,120 for 51 straight days (see below).

  

  While the S&P 500 is still below its all-time high, broader indexes like the Russell 3000 came within inches of a new high. The reason is that small-caps have been leading the charge. If you remember, small-caps dramatically underperformed during the first three quarters of 2014. But since October, they’ve been ruling the roost.

  Before I get to the Buy List earnings reports, let’s take a look at some of the recent economic news.

  Are We Close to a Recession?

  The economy seems to have hit a rough patch. The economy grew by just 2.2% in Q4, and the last jobs report was well below expectations. This week, we got more negative news. Housing starts were poor. This was the second month in a row they badly missed expectations.

  On Wednesday, we learned that industrial production fell by 0.6% in March. This comes on the heels of a 0.1% drop in February and a 0.4% drop in January. This was the first quarterly decline for IP since 2009. Not surprisingly, the weak link is the oil and gas industry. The government will release its first estimate of Q1 GDP on April 29, but the consensus of economists on Wall Street expects an increase of just 2%.

  

  Combined with the retrenchment in earnings, some folks are beginning to wonder if this is enough to push us into a recession. My view is that it’s highly doubtful. These recent issues are mostly bumps and hiccups as the economy tries to expand. Lousy weather played a part, as did the dollar. There were also some port disruptions on the West Coast due to a labor dispute. That’s now passed. The evidence still suggests that we’re a long way from a recession.

  This week’s retail sales report, for example, was a bright spot. For March, shoppers pushed sales up by 0.9%. This was the first increase in retail sales since November. This tells me that consumers are still out there willing to shop, but they’re more price-conscious. I thought it was interesting that sales at clothing stores were up 1.2% (think Ross Stores). But the good retail numbers for March were probably too late to make a sizable bump in Q1 GDP.

  Another possible sign of consumer strength is that oil is rising again. On Thursday, West Texas Intermediate closed at $56.53 per barrel. That’s the highest close this year. Oil is up $14 in a month. For the first time in several months, energy stocks have also been doing well.

  This week’s Beige Book (by the way, the Beige Book report is a very good wonky look at the economy) was mildly positive. Basically, it said that the economy is growing, albeit slowly. Despite the poor March jobs report, the initial claims continue to show a positive trend. The four-week moving average recently dipped to a 15-year low. It’s important to note that household finances are also much healthier. Speaking of which, let’s take a look at the recent earnings report from Wells Fargo.

  Wells Fargo Beats Earnings

  I like Wells Fargo (WFC) a lot, but we have to concede an important fact: this is a much tougher environment for banks. The mortgage market is especially tough, and I think we’ll see some pain in oil-rich states. Layoffs in the oil sector have already topped 91,000.

  On Tuesday, Wells reported Q1 earnings of $1.04 per share. That beat Wall Street’s consensus by six cents per share and my estimate by four cents per share. This was their first year-over-year drop in profits since 2008.

  Digging into the details, we can see come cracks. One troubling sign is that Wells’s lending margin fell below 3% for the first time in more than 20 years. Their efficiency ratio was 58.8%, which isn’t bad. Wells surprised me by increasing their mortgage-banking revenue by 2.5%.

  The shares sold off after the earnings report. At one point on Tuesday, WFC hit $53.57 per share. Frankly, there wasn’t a single piece of information in this report that should have scared a long out of his or her position. Sure enough, WFC quietly rallied back and broke above $55 on Thursday.

  My outlook on Wells remains the same. This is an excellent bank. The new dividend will yield investors 2.74% at the current price. Wells Fargo is a good buy up to $57 per share.

  Next Week’s Earnings Blizzard

  Our Buy List has been fairly tame over the past few weeks, but things will soon get a lot more interesting. We have eight Buy List earnings reports coming our way. Let’s run down the scorecard.

  On Tuesday, Stryker and Signature Bank are due to report. In January, Stryker (SYK) told us to expect Q1 earnings to range between $1.05 and $1.10 per share. That disappointed the Street, as analysts had been expecting $1.17 per share. As you might have guessed, they blamed the dollar. The orthopedics company also said they see full-year earnings ranging between $4.90 and $5.10 per share. Last year, they made $4.73 per share.

  I think the company is being conservative with this guidance, which makes sense in this environment. I expect a modest earnings beat. The stock has been stuck in a trading range between $90 and $95 per share for nearly the entire time since Thanksgiving. Last month, Stryker’s board approved a $2 billion buyback.

  Signature Bank (SBNY) doesn’t make a lot of news, and that’s exactly how they want it. The financial news loves to cover every minor creak or moan from Apple and Google. Meanwhile, Signature has quietly amassed an amazing track record. In Q4, the bank had their 21st record earnings season in a row.

  Analysts currently expect Q1 earnings of $1.59 per share. That’s a 16% jump over last year’s Q1. That’s a high number, but I think Signature can do it. The stock is going for 16.6 times next year’s earnings. Look for more good news from SBNY.

  On Wednesday, three Buy List stocks are due to report: eBay, Qualcomm and Wabtec. Shares of eBay (EBAY) have been weak recently, and I think they’re a good value here. The online auction house gave weak guidance for Q1: 66 to 71 cents per share. I think that’s too low, and I expect a solid earnings beat. Of course, the PayPal spinoff is in the works, and the company also hinted that it might sell off its enterprise division. That makes sense, since that division doesn’t fit into either eBay or PayPal. I hope they do it.

  Speaking of spinoffs, Jana Partners made news this week when they said that Qualcomm should break itself up. They want QCOM to spin off its chip business from its patent-licensing biz. Again, that makes a lot of sense, and I’d like to see QCOM do that.

  There’s often a familiar script to these demands from activist investors. The activists make a big splash by revealing a list of demands. The company ignores or denounces it. Then it quietly does much of what the activists wanted. Obviously, no one wants to be told how to do their job. But we like Qualcomm because the stock has sagged, and that puts more pressure than anything on a corporate board. Remember that QCOM recently announced a 14% dividend increase and a major buyback plan. I think Jana is exactly right.

  I like Wabtec (WAB) because it’s one of those dull businesses that’s actually quite profitable. WAB makes locomotives, brakes and other systems for the freight- and passenger-rail sectors. Hey, somebody’s got to do it. It’s already our second-best performer this year (see chart below). Earlier this year, the company said they expect full-year earnings of $4.05 per share. That’s up from $3.62 per share last year, and $3.01 in 2013. A lot of companies would love earnings growth like that. The stock came very close to making a new 52-week high on Thursday. A strong earnings report could push WAB over $100 per share.

  

  Next Thursday, three more Buy List stocks report: CR Bard, Microsoft and Snap-on. CR Bard (BCR) has been a great stock for us. Last year was a standout year for the medical-devices firm. Two years ago, the company changed direction to focus on emerging markets and faster-growing areas. That was a brilliant move. Bard expects earnings this year between $8.95 and $9.05 per share. That includes 25 cents per share due to the dollar. For Q1, they see earnings coming in between $2.04 and $2.08 per share. Don’t let the high share price scare you away, BCR is hardly overpriced.

  Lately I’ve been hyping Microsoft (MSFT) as one of the cheapest stocks on our Buy List, and I want to reiterate that now. The shares yield just under 3%, which is a good deal in this market. In January, Microsoft got smacked around after the last earnings report. The problem was a weak outlook for PC sales. That’s not really Microsoft’s fault but a macro issue. Next week’s earnings, which is their fiscal Q3, will be a weak one from Microsoft, but the question now is, how weak? Wall Street currently expects 51 cents per share, which is down from 68 cents per share for last year’s Q1. Microsoft faces some issues, but I like what Nadella is doing. I expect to see an earnings beat here.

  Snap-on (SNA) crushed earnings last time. The diversified manufacturer earned $1.97 per share, which was 16 cents more than estimates. Last year, Snap-on earned $7.14 per share, which was a 20% increase over 2013. Wall Street expects Q1 earnings of $1.82 per share. I currently rate Snap-on a buy up to $151 per share.

  In addition to those eight, we may have a ninth Buy List earnings report next week, which would be Moog (MOG-A). The company usually reports Q1 earnings on the last Friday of April, but I couldn’t get that date confirmed before I wrote this, so this is a just a guess. Either way, I’ll have full details on the blog. Like many others, Moog has felt the squeeze of the richer greenback. Wall Street expects earnings of 92 cents per share. Moog is a good, conservative stock.

  Before I go, I wanted to draw your attention to this IBD feature on Ross Stores (ROST). You can see why I like this retailer so much. Remember it will be splitting 2 for 1 in June. Ross Stores is a buy up to $107 per share.

  That’s all for now. Lots more earnings reports next week. You can see our Buy List earnings calendar here. We’ll also get important updates on the housing market; existing homes sales on Wednesday and new home sales on Thursday. Plus, durable goods comes out on Friday. 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: April 17, 2015
  Eddy Elfenbein, April 17th, 2015 at 7:01 am

  IMF’s Lagarde To Greece; Pay Us Or Else

  ‘Beijing Put’ May Be Driving China’s Stock-Market Fever

  For Reeling Turkish Investors, Politics Are Nothing But Trouble

  Deals Postponed After Bloomberg Terminals Go Down Globally

  Big-Bank Profit Engines Accelerate

  GE Power-Unit Sales Boost Profit Past Estimates Amid Oil Slump

  GE’s Exit From Finance Merely Shifts Systemic Risk to Others

  Emirates Signs Rolls for A380 Engines in $9.2 Billion Deal

  UnitedHealth’s Premium Valuation Could Lose Insurance

  AmEx Revenue Misses on Strong Dollar, Loss of Co-Branded Tie-Ups

  Seattle CEO Who Cut His Pay Sees a ‘Moral Imperative’ to Bridge Income Gap

  Mattel Posts Smaller-Than-Expected Loss as Barbie Woes Abate

  Honeywell Profit Beats Estimates While 2015 Sales Forecast Cut

  Jeff Carter: Never Look A Gift Horse In the Mouth

  Howard Lindzon: Peak Goldman or Peak Google…Who do you Anti-Trust

  Be sure to follow me on Twitter.

• IBD on Ross Stores
  Eddy Elfenbein, April 16th, 2015 at 3:17 pm

  Investor’s Business Daily has a nice feature on Ross Stores (ROST). Here’s a sample:

  Ross’ appeal is based on its motto, “Dress for Less.” Ross stores offer what the company calls “first-quality, in-season, name-brand and designer” apparel, accessories, footwear and home fashions at prices 20% to 60% below regular prices at department and specialty stores.

  With an average price of $10 on clothing purchases, “Ross ends up as the low-price leader in apparel,” said Greenberger. “There are few retailers out there that consistently price below Ross in apparel.”

  The average apparel price at TJX’s (NYSE:TJX) T.J. Maxx is $15, and for affiliated chain Marshalls it’s $14, she says, adding: “We love T.J. Maxx, but not everybody can afford to shop there.”

  Ross’ low price point is one of the main ingredients of its “secret sauce,” Greenberger says. “Almost anyone” can afford to shop there.

  But shoppers who can afford more like to go there, too. Take the tourist in Florida from Manhattan’s Upper West Side, who recently bragged to friends that she bought three designer dresses at a Ross store near West Palm Beach for $36 each.

  That kind of “thrill” of finding a bargain on a “fabulous brand” keeps shoppers coming back, Greenberger says.

• Morning News: April 16, 2015
  Eddy Elfenbein, April 16th, 2015 at 7:03 am

  China March FDI Robust at $12.4 Billion, Outbound Flows Up 29.6% in First-Quarter

  Saudi Arabia Adds Half a Bakken to Global Oil Market in a Month

  Yellen and Bernanke Go Separate Ways on Exit Strategy

  The Slow Global Spread of Savings Accounts

  Goldman Sachs Gains Focusing on Less-Volatile Businesses, Cutting Costs

  McDonald’s Japan Sees Wider Losses This Year After Food Scandals

  Here Comes Marissa Mayer’s First Home Grown Consumer Product for Yahoo

  Unilever Sees Tailwinds Boosting Sales Hopes

  Nokia Takeover Fulfills Alcatel Chairman’s Vision of Telecom Airbus

  Netflix: Street Applauds Disastrous Financial Results

  Bank of America Results Highlight Challenges

  3 Big I.P.O.s Could End Slow Start for ’15 Debuts

  Microsoft, Once an Antitrust Target, Is Now Google’s Regulatory Scold

  Roger Nusbaum: The Active/Passive Debate: Others Weigh In

  Joshua Brown: Effervescence Extrapolated

  Be sure to follow me on Twitter.

• High Beta Takes the Lead
  Eddy Elfenbein, April 15th, 2015 at 10:35 am

  Since January 15, the High Beta ETF (SPHB) has been beating the market soundly:

  

  This could be a result of investor frustration with finding bargains. The market is forced to reward riskier stocks, not because of a change in view of risk, but because there’s not much left out there.

• The Nasdaq Plunge 15 Years On
  Eddy Elfenbein, April 15th, 2015 at 10:07 am

  Last month we celebrated the 15th anniversary of the great Nasdaq top. On March 10, 2000, the Nasdaq Composite closed at 5,048.62. It’s never closed that high since.

  Yesterday was the 15th anniversary of the Nasdaq’s biggest one-day plunge. On April 14, 2000, the index fell 9.67% in one session.

  The Nasdaq had started drifting downward after March 10, but it wasn’t until April 14 that the selling really started. It wouldn’t let up. The index lost 33% in just 10 sessions.

  

  (Note the numbers on the vertical axis; these are big moves.)

  After May, the Nasdaq recovered a bit and many investors thought the storm was over. It was just beginning. There was another selling fury that fall. After 9/11, the Nasdaq was 72% below its 2000 high. It went on to make even lower lows in 2002.