Author Archive

  • CWS Market Review – December 18, 2015
    , December 18th, 2015 at 7:08 am

    “The expectation of an event creates a much deeper impression
    on the exchange than the event itself.” – Jose de la Vega, 1688

    Ladies and gentlemen, here’s the 2016 Crossing Wall Street Buy List.

    AFLAC (AFL)

    Alliance Data Systems (ADS)

    Bed Bath & Beyond (BBBY)

    Biogen (BIIB)

    Cerner (CERN)

    Cognizant Technology Solutions (CTSH)

    CR Bard (BCR)

    Express Scripts (ESRX)

    Fiserv (FISV)

    Ford (F)

    HEICO (HEI)

    Hormel Foods (HRL)

    Microsoft (MSFT)

    Ross Stores (ROST)

    Signature Bank (SBNY)

    Snap-on (SNA)

    Stericycle (SRCL)

    Stryker (SYK)

    Wabtec (WAB)

    Wells Fargo (WFC)

    The five new stocks are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle. I’ll have more to say about them next week. Don’t worry, I’ll go into full detail. I’ll also explain why I’m removing the deletions.

    The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. Remember that we have an extra stock leaving this year due to the PayPal spinoff.

    To recap, I assume the Buy List is equally weighted among the 20 stocks. The buy price for each stock will be the closing price as of December 31, 2015. The new Buy List goes into effect on January 4, 2016, the first day of trading of the new year.

    The Buy List is now locked and sealed, and I won’t be able to make any changes for the entire year. I’ll have a complete recap of 2015 at the end of the year. I’ll also have more to say about our new buys, and I’ll give you new Buy Below prices.

    As far as this year’s Buy List goes, there are only nine trading days left in 2015, and it appears that our Buy List will return to its market-beating ways. Through Thursday, our Buy List is up 4.09% while the S&P 500 is down 0.83% (not including dividends). This will be the eighth time in the last nine years that we’ve beaten the S&P 500.

    The Federal Reserve Raises Interest Rates

    This week, for the first time in nearly a decade, the Federal Reserve raised interest rates.

    (Dramatic pause.)

    To a still very, very low level. On Wednesday, the Fed did as we expected and raised the Fed funds’ target range to 0.25% – 0.50%. In my opinion, the Fed is probably a wee bit premature in doing this, but I can’t say it’s very damaging.

    On one hand, there’s no sign of inflation. In fact, the government just said that inflation was flat last month. On top of that, commodity prices are still crashing. On Monday, spot oil dropped below $35 per barrel. Natural gas is now down to $1.74 per million BTU, and gold is at a six-year low.

    But Janet Yellen said that the Fed wanted to move before there were signs of inflation. My opinion is that it’s impossible to get monetary policy exactly right. You’re bound to err on one side or the other. But I don’t think the Fed is being reckless in its policy. In fact, I think the central bank is right to convey the idea that it’s going to be guided by events.

    It raised rates by 0.25%. For every $100,000, that works out to about 68 cents per day. I just don’t think that’s going to wreck the economy.

    During the Fed’s last tightening cycle, it raised rates by 0.25% at 17 straight meetings. In retrospect, that was a big mistake. This time, the Fed has made it clear that there’s no predetermined path. I wouldn’t be surprised if the Fed only hikes rates once or twice all next year.

    The Fed also released the economic projections from the FOMC members. These are the “blue dots” you may have heard about. I think the current projections are far too hawkish. The median dot sees four hikes this year followed by another four next year. No way. I expect to see the blue dots sing a different tune as the year goes on (I think I’m mixing metaphors.)

    I’ll also credit the Fed for clearly communicating its actions to the public. The Fed said, “if X happens, we’ll do Y.” X happened. So they did Y. It’s really that simple. I have to address a common misconception. There’s a strong tendency to see the Fed as being much more powerful than it truly is. In reality, it’s reacting to the same forces we all are. I also don’t for a moment believe that the Fed’s actions are impacted by what goes on in China or the junk bond market or even the dollar. That’s just noise. The Fed pays attention to jobs and prices and that’s about it.

    big12182018

    The stock market initially rallied after the Fed’s statement came out on Wednesday, but it gave back much of that gain on Thursday. Yields at the short end of the yield curve moved higher which you would expect. The two-year yield broke 1% for the first time since 2010 (see above). But long-term yields didn’t move much. That tells me that the Fed news was a yawner.

    As a general rule of thumb, if your central bank isn’t making much news, then it probably has the right policy.

    The main driver of the economy in 2016 will be the housing market, and that’s in pretty good shape. The good news is that it’s not a soaring but a steadily growing one. Expect to see a moderately expanding economy next year with growing corporate profits and still-low short-term interest rates. This is a good environment for stock investors.

    Oracle Earns 63 Cents per Share

    We had one earnings report this week, and it was our final one for the calendar year. It’s also from Oracle (ORCL), a stock which will not be returning with us next year. Oracle reported fiscal Q2 earnings of 63 cents per share, which was three cents more than expectations. Revenue fell 6% to $9.0 billion, but adjusted for currency, it was flat.

    “We’re very pleased with our non-GAAP EPS of $0.63, beating the mid-point of guidance by 4 cents despite a stronger-than-expected currency headwind,” said Oracle CEO, Safra Catz. “We grew our SaaS and PaaS revenue 38% in constant dollars this past quarter, and we expect that revenue-growth rate to accelerate to nearly 50% in Q3 and close to 60% in Q4. This rapid increase in our cloud revenue will help drive our SaaS and PaaS cloud gross margins from 43% in Q2 to approaching 60% in Q4 and drive significant EPS growth in Q4.”

    “It was a very strong growth quarter for our cloud business, with SaaS and PaaS bookings up 75% in constant currency and billings up 68% in U.S. dollars,” said Oracle CEO, Mark Hurd. “We did 100 Fusion HCM deals and over 300 Fusion ERP deals in the quarter. We now have more than 1,500 ERP customers in the cloud — that’s at least ten times more ERP customers than Workday.”

    “We are still on target to sell and book more than $1.5 billion of new SaaS and PaaS business this fiscal year,” said Oracle Executive Chairman and CTO Larry Ellison. “That is considerably more SaaS and PaaS new business than any other cloud services provider, including salesforce.com.”

    It’s not easy for me to let Oracle go, but I’ve felt that I’ve given them enough time to turn the ship around. The company has continuously said that things will start to improve, and I hope they do, but I’m done waiting.

    On the conference call, Oracle gave fiscal Q3 guidance of 63 to 66 cents per share. For Q4, they gave guidance of 83 to 86 cents per share. The shares dropped 5.1% on Thursday to close at $36.93.

    That’s all for now. The stock market will close at 1 p.m. on Thursday, December 24, and it will be closed all day on Friday for Christmas. On Tuesday, the government will release the second update for Q3 GDP growth. Last month, they revised the initial report of 1.5% growth up to 2.1%. 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: December 18, 2015
    , December 18th, 2015 at 7:02 am

    Japan Earmarks Billions to Help Prod Its Companies

    Ukraine Defaults on $3 Billion Bond to Russia

    Nigerian Farmers Cleared to Sue Shell in Dutch Court

    I.M.F. Chief Faces Trial in Case Dating to Time as French Finance Minister

    Hedge-Fund Casualties Jump to 257 in Third Quarter Amid Rout

    Glaxo to Pay Bristol-Myers Up to $1.46 Billion for HIV Drugs

    China’s Qihoo 360 Strikes New Buyout Deal

    Apple to Launch Apple Pay in China, Take on Alibaba, Tencent

    Zurich Buys Wells Fargo Crop Insurer for Up to $1.05 Billion

    Dell’s Cybersecurity Unit SecureWorks Files to Go Public

    P&G’s Gillette Sues Dollar Shave Club

    LifeLock to Pay $113 Million to Settle FTC Charges

    Drug C.E.O. Martin Shkreli Arrested on Fraud Charges

    Cullen Roche: Yellen Fears the Boom, Part Deux

    Joshua Brown: (sighs)

    Be sure to follow me on Twitter.

  • Morning News: December 17, 2015
    , December 17th, 2015 at 7:05 am

    India Stocks Rise Most in Month as Fed Rate Increase Eases Worry

    Day 1 After Fed Liftoff Shows Move Catapults Money Market Rates

    Congressional Leaders Agree to Lift 40-Year Ban on Oil Exports

    How Democrats and Republicans Differ on Social Security

    General Mills Profit Rises, Helped by Cost Cuts

    Rite Aid Revenue, Same-Store Sales Rise

    AstraZeneca Buys Most of Acerta for $4 Billion to Add Cancer Drug

    Oracle Shift to Cloud Products Hasn’t Yet Spurred Growth

    Valeant Makes Distribution Deal With Walgreens

    Air France-KLM and BA Biggest Winners as EU Fines Thrown Out

    The $500 Million Battle Over Disney’s Princesses

    Shkreli, CEO Reviled for Drug Price Gouging, Arrested on Securities Fraud Charges

    Finma Bans Six Former UBS Employees Over FX Rigging

    Cullen Roche: Rate Hikes and Roulette Wheels

    Jeff Carter: You Are In It For The Equity (And To Build Value)

    Be sure to follow me on Twitter.

  • Oil and Stocks Part Ways
    , December 16th, 2015 at 10:46 pm

    Since late-October, stocks and oil have been somewhat correlated. But today, on the day of the Fed meeting, there was a big divergence. Stocks did well while oil did not.

    Here’s the chart:

    sc12152015k

    What does it mean? That’s hard to say. Odd relationships can last for a few weeks before breaking up. I suspect that as oil starts to fall, it’s good for stocks. But if it falls too far too fast, then maybe it can harm the economy.

  • Yellen on Natural Rates
    , December 16th, 2015 at 5:33 pm

    This is from Janet Yellen’s press conference:

    This expectation is consistent with the view that the neutral nominal federal funds rate–defined as the value of the federal funds rate that would be neither expansionary nor contractionary if the economy were operating near potential–is currently low by historical standards and is likely to rise only gradually over time. One indication that the neutral funds rate is unusually low is that U.S. economic growth has been only moderate in recent years despite the very low level of the federal funds rate and the Federal Reserve’s very large holdings of longerterm securities. Had the neutral rate been running closer to its longer-run level, these policy actions would have been expected to foster a much more rapid economic expansion.

    The marked decline in the neutral federal funds rate may be partially attributable to a range of persistent economic headwinds that have weighed on aggregate demand. Following the financial crisis, these headwinds included tighter underwriting standards and limited access to credit for some borrowers, deleveraging by many households to reduce debt burdens, contractionary fiscal policy, weak growth abroad coupled with a significant appreciation of the dollar, slower productivity and labor force growth, and elevated uncertainty about the economic outlook. Although the restraint imposed by many of these factors has declined noticeably over the past few years, some of these effects have remained significant. As these effects abate, the neutral federal funds rate should gradually move higher over time.

    This view is implicitly reflected in participants’ projections of appropriate monetary policy. The median projection for the federal funds rate rises gradually to nearly 1-1/2 percent in late 2016 and 2-1/2 percent in late 2017. As the factors restraining economic growth continue to fade over time, the median rate rises to 3-1/4 percent by the end of 2018, close to its longer-run normal level. Compared with the projections made in September, a number of participants lowered somewhat their paths for the federal funds rate, although changes to the median path are fairly minor.

    I think this is very important and I’ll try to explain why. Prior to the recession, it was assumed that the natural rate was about 2% in real terms, meaning after inflation.

    That means that the Fed’s job is pretty simple: bring the Fed funds rate below 2% to get the economy going, and then bring it above 2% when the economy is running hot. As such, the trend of real Fed funds should oscillate between about 0% on the low end and 4% or so on the high end. Check out this chart:

    After the recession hit, all that went out the window. The Fed believes that the natural rate tanked and probably went negative. I think that’s right.

    Now the “sine wave” of real rates may fluctuate between, say, -2% and +2%. According to today’s blue dots, the Fed expects the real Fed funds rate (the blue line in the chart above) to be -0.9% at the end of this year. It will rise to -0.2% at the end of 2016, and to +0.5% by the end of 2017. The Fed believes the long-rate rate is 1.4% which we can assume is the Fed’s guess for the natural rate. I think that’s too high.

    To me, what the new numbers are isn’t exactly important. It’s that we live in a new economic world. The old rules no longer apply.

  • Oracle Earns 63 Cents per Share
    , December 16th, 2015 at 4:40 pm

    Oracle (ORCL) just reported fiscal Q2 earnings of 63 cents per share, three cents more than Wall Street’s consensus. Revenue fell 6% to $9.0 billion, but adjusted for currency, revenue was flat.

    “We’re very pleased with our non-GAAP EPS of $0.63, beating the mid-point of guidance by 4 cents despite a stronger than expected currency headwind,” said Oracle CEO, Safra Catz. “We grew our SaaS and PaaS revenue 38% in constant dollars this past quarter, and we expect that revenue growth rate to accelerate to nearly 50% in Q3 and close to 60% in Q4. This rapid increase in our cloud revenue will help drive our SaaS and PaaS cloud gross margins from 43% in Q2 to approaching 60% in Q4 and drive significant EPS growth in Q4.”

    “It was a very strong growth quarter for our cloud business, with SaaS and PaaS bookings up 75% in constant currency and billings up 68% in U.S. dollars,” said Oracle CEO, Mark Hurd. “We did 100 Fusion HCM deals and over 300 Fusion ERP deals in the quarter. We now have more than 1,500 ERP customers in the cloud — that’s at least ten times more ERP customers than Workday.”

    “We are still on-target to sell and book more than $1.5 billion of new SaaS and PaaS business this fiscal year,” said Oracle Executive Chairman and CTO Larry Ellison. “That is considerably more SaaS and PaaS new business than any other cloud services provider including salesforce.com.”

    The shares are up 2.2% in after-hours.

    Update: Oracle is now down in the after-hours market. On the conference call, the company gave fiscal Q3 guidance of 63 to 66 cents per share. For Q4, they gave guidance of 83 to 86 cents per share.

  • The Bond Market’s Reaction
    , December 16th, 2015 at 3:12 pm

    So far, the market’s reaction is pretty muted. The two-year yield looks to close above 1% for the first time in several years.

    big12152015g

  • The Fed’s Projections
    , December 16th, 2015 at 2:22 pm

    Here are the Fed’s projections. This is often referred to as the “blue dots.” Personally, I think the Fed is way off here. They see rates rising much faster than I think is needed. The FOMC members currently project four rate hikes next year, and another four in 2017. I think we’ll see one, or maybe two, next year.

  • The Fed Raises Rates
    , December 16th, 2015 at 2:00 pm

    The Federal Reserve has raised interest rates by 0.25%. The vote was unanimous. Here’s the complete statement:

    Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

    The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

    In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

    The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

    Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

  • Brief Updates
    , December 16th, 2015 at 1:17 pm

    The financial world is on pins and needles. Here are a few items I wanted to pass along.

    Jefferies initiated coverage on Hormel Foods (HRL) with a Buy rating. Of course, this comes after the Spam people rallied 50% this year. The stock is close to breaking $80 per share.

    Express Scripts (ESRX) said that they’ll announce their guidance for next year on Tuesday, December 22.

    Oracle’s (ORCL) earnings report will be our final Buy List earnings report for this calendar year.

    The futures market odds for the November 2016 meeting are exactly 50-50 of rates being 0.75% or less, or 1% or more.