Author Archive

  • Morning News: August 4, 2014
    , August 4th, 2014 at 6:48 am

    Germany Blocks Rheinmetall Sale of Russian Combat Center

    Banco Espirito Santo Junior Bonds Slide as Bailout Forces Losses

    UK House-Building PMI Grows at Fastest Rate Since 2003

    China’s Stocks Rise to Eight-Month High as Chalco Rallies

    Chinese Group Bids $441 Million for Roc Oil of Australia

    Booming African Lion Economies Gear Up to Emulate Asians

    HSBC’s Profit Declines on Slowdown in Asia and Markets

    McDonald’s to Resume Full Menu in China Cities This Week

    A Glance at New Changes at Walmart.com

    P&G to Sell Up to 100 Brands to Revive Sales, Cut Costs

    Auto Sales Head for Best Since ’06 on Confidence, Jobs

    Tycoon Li Ka-Shing’s Cheung Kong Eyes on AWAS Assets

    Evercore Partners to Buy ISI Group

    Jeff Miller: Weighing the Week Ahead: Will the Fed’s Experiment End Badly?

    Epicurean Dealmaker: Where Did He Learn to Negotiate Like That?

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  • Follow-Up on Q2 GDP
    , August 1st, 2014 at 7:04 pm

    Here’s a small footnote to this week’s Q2 GDP report.

    If we work out the decimals, the economy grew by 3.9501881957% during Q2. That’s the annualized after-inflation rate. Of course, that rounds up to 4.0% which was reported just about everywhere.

    But how close did we come to being rounded down to 3.9%? By my calculations, we crossed the rounding-up threshold in the final 6 minutes and 7.4 seconds of the quarter.

  • July NFP +209,000
    , August 1st, 2014 at 11:29 am

    The government reported this morning that the U.S. economy created 209,000 net new jobs last month. This was actually below Wall Street’s estimate of 230,000. Still, this is the sixth month in a row that we’ve cleared 200K.

    The NFP number for June was revised higher by 10,000, and May’s was revised upward by 15,000. The unemployment rate ticked up to 6.2%.

  • CWS Market Review – August 1, 2014
    , August 1st, 2014 at 7:10 am

    “I’m only rich because I know when I’m wrong…I basically
    have survived by recognizing my mistakes.” – George Soros

    I’m currently enjoying a lovely vacation in Mont-Tremblant, Quebec, but I wanted to update you on the latest events on Wall Street, the economy and most importantly, our Buy List. The stock market evidently chose my vacation time to give us one of its worst days this year.

    On Thursday, the S&P 500 dropped 2% to 1,930.71. That’s the index’s biggest loss since April 10th. Of course, by historical standards, a 2% drop is hardly a big drop, but it’s quite unusual for 2014. This is the third time in the past two weeks that the S&P 500 has moved by more than 1% in a single day. That didn’t happen at all in the 62 trading days prior to that. The Dow Jones Industrials have now given back their entire gain for the year.

    So what caused the traders to freak out this time? It’s always hard to say exactly what event triggers any sell-off. Of course, there are several lingering concerns like Russia, Argentina and Syria, but it seems that investors were unnerved by, of all things, a 0.7% rise in the employment cost index for the second quarter. Expectations were for an increase of 0.5%.

    This seems like an unusual event to cause such a big reaction. However, the employment cost report could foreshadow more inflation. Personally, I’d like to see a modest increase in inflation, but traders are hypersensitive on the issue, and given inflation’s historic impact on equity prices, it’s hard to blame them. I think it’s far too premature to worry over this issue. In fact, isn’t it good news for business that people are getting raises?

    Fortunately for us, our Buy List only lost 1.51% on Thursday. Of course, our goal is to make money, not suck less than the overall market. However, Thursday’s reaction tells us that investors aren’t fleeing high-quality names as much as they are the more speculative stocks. The good economic news for this week was a stronger-than-expected GDP report for Q2. We also had a Fed meeting and several more Buy List earnings reports, but first, let’s take a closer look at the surprisingly good GDP report for Q2.

    Second-Quarter GDP Grows by 4%

    Over the past few months, we’ve gotten lots of evidence indicating that the economy shook off a poor start to the year. A few weeks ago, I said that real GDP growth for Q2 even had a chance of being as high as 4%. Well, that’s exactly what happened.

    On Wednesday, the Commerce Department reported the U.S. economy grew in real terms at an annualized rate of 4% for the second quarter. That makes it the third-strongest quarter in the last eight years. This is very good news, and it’s a nice follow-up to the lousy performance for Q1. Technically, the strong number for Q2 was aided by inventory rebuilding. Interestingly, the opposite effect is what hindered GDP during Q1. Stripping out the impact of inventories, the turnaround in the economy from Q1 to Q2 wasn’t quite so dramatic.

    The positive GDP news shouldn’t be that much of a surprise, since it confirms lots of other data we’ve seen, like jobs and corporate earnings. It’s interesting to note that one of the most accurate forecasters has been stock prices. Now we know why the market has been so happy!

    Also on Wednesday, the Federal Reserve announced, as expected, yet another tapering. Slowly but surely, the economy is returning to something resembling normal. Starting in August, the Fed will purchase $25 billion worth of bonds each month. That’s $15 billion in Treasuries and $10 billion in mortgage-backed securities. There was one dissenter from this week’s FOMC statement: Charles Plosser, the head of the Philly Fed. Plosser thinks the Fed will have to keep rates low for a significant time after QE is done. I think he may be right, but honestly, that’s looking out pretty far ahead.

    The earnings news for Q2 continues to be quite good. Of the S&P 500 companies that have reported so far, 76% have beaten analysts’ expectations, while 66% have topped their sales expectations. Unlike previous quarters, we didn’t need dramatic low-balling going into earnings season to get their earnings surprises. We’re not seeing blistering growth. Rather, it’s a lot of steady growth that’s been heavily aided by share buybacks.

    Now let’s take a look at some of our recent Buy List earnings reports.

    Moog Is a Buy up to $71 per Share

    Last Friday, shortly after I sent you last week’s CWS Market Review, Moog ($MOG-A) reported fiscal Q3 earnings of $1.08 per share. That was four cents better than expectations. The problem was guidance. For all of 2014, Moog now says it expects earnings of $3.65 per share. Since we know that Moog has already made $2.59 for the first three quarters of their fiscal year, that translates to expected earnings of $1.06 per share for fiscal Q4, which ends in September. Wall Street had been expecting $1.15 per share. For 2015, Moog now expects EPS of $4.25. Wall Street had been expecting $4.56 per share.

    That’s not good, and shares of Moog took a big tumble last Friday, but the stock has found a floor around $66 per share. I still like Moog a lot. The stock has done well for us, but I’m trimming our Buy Below to $71 per share. Let’s not lose sight of the fact that Moog’s “disappointing” guidance is still for earnings growth of more than 16%, and the shares are going for about 15.5 times next year’s estimate. Moog is a good stock.

    AFLAC Is a Bargain below $60

    We had three earnings reports on Tuesday. AFLAC ($AFL) reported Q2 operating earnings of $1.66 per share, which was seven cents more than consensus. Remember that with insurance stocks, it’s better to look at their operating earnings to get a better sense of how the underlying business is doing.

    The problem for AFLAC continues to be the dollar/yen exchange rate. Fortunately, the damage was far less than it’s been in previous quarters. AFLAC said they lost three cents per share due to forex. The company was also hurt by poor sales of new insurance premiums. That’s a bit more troubling, but I think AFLAC can close the gap.

    As for guidance, CEO Dan Amos said, “If the yen averages 100 to 105 to the dollar for the third quarter, we would expect earnings in the third quarter to be approximately $1.38 to $1.47 per diluted share. Using that same exchange-rate assumption for the remainder of 2014, we would expect full-year reported operating earnings to be about $6.16 to $6.30 per diluted share.” Wall Street had been expecting $1.44 per share for Q3 and $6.24 per share for all of this year.

    Even though AFL’s guidance range covered expectations, the stock got punished this week. On Thursday, the stock closed below $60 for the first time in nearly a year. I still like AFLAC; it’s a solid stock. But due to the recent pullback, I’m lowering my Buy Below to $66 per share; the stock is especially cheap below $60.

    Express Scripts Rallies after Good Earnings

    The big winner this week was Express Scripts ($ESRX). The stock rose 2.1% on Tuesday, ahead of the earnings report. ESRX then jumped another 5% on Wednesday after the report. What’s interesting is that ESRX has been a pretty poor performer for us over the past five months. The lesson here is that good stocks will have their day; it just takes some patience.

    Now let’s look at earnings. The pharmacy-benefits manager reported Q2 earnings of $1.23 per share, which was one penny better than expectations. Express Scripts also slightly narrowed their full-year range. The previous range was $4.82 to $4.94 per share. Now it’s $4.84 to $4.92 per share. The good news was that sales only fell 4.8% to $25.11 billion. Wall Street was expecting a 7.6% slide to $24.38 billion.

    I said last week that our $74 Buy Below for ESRX was probably too high, but I didn’t want to change it just yet. I’m glad we didn’t, because I now think $74 is just right. Express Scripts is a very good stock.

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    Fiserv Beats by a Penny

    Fiserv ($FISV) is one of those fairly dull stocks that regularly churns out impressive earnings. If you’re not familiar with Fiserv, they do a lot of outsourcing for the financial-services industry. Three months ago, the company had a great earnings report, so I tempered my expectations this time. Fortunately, Fiserv came through again. On Tuesday, Fiserv reported Q2 earnings of 81 cents per share, which was a penny better than expectations.

    CEO Jeffery Yabuki said, “Our second quarter’s results are in line with expectations, and helped fuel a meaningful increase in our adjusted internal revenue growth in the first half of the year compared to 2013.”

    I had a feeling that Fiserv was going to alter their full-year guidance, and indeed they did. Fiserv raised the low end of their full-year forecast by three cents per share. The company now expects 2014 earnings to range between $3.31 and $3.37 per share. To give you some context, FISV made $2.99 per share for last year. Fiserv remains a solid buy up to $64 per share.

    DirecTV Is a Conservative Buy up to $95 per Share

    On Thursday, DirecTV ($DTV) reported earnings of $1.59 per share for the second quarter. That was six cents better than expectations. As we’ve come to expect, DTV’s business in Latin American is en fuego. Last quarter, they added 543,000 subscribers in the region. That’s up more than threefold from a year ago. DirecTV now has 12.5 million subscribers in Latin America.

    As good as these results are, don’t expect much action out of DTV. The stock is largely a bet that the AT&T deal will go off at $95 per share. Unfortunately, I can’t say when or if the deal will be completed, but I would say it’s quite likely. Direct remains a conservative buy up to $95 per share.

    Next Wednesday, August 6, Cognizant Technology Solutions ($CTSH) will be the final Buy List stock to report for the June reporting cycle. (Medtronic and Ross Stores are our only two Buy List stocks with quarters ending in July, so they’ll report later in August.)

    In May, Cognizant told us to expect Q2 earnings of 62 cents per share. Their full-year estimate is for EPS of at least $2.54. Shares of CTSH have traded in a very narrow range over the last six weeks. Look for a modest earnings beat, but I would be especially glad to see higher full-year guidance. Cognizant is a buy up to $52 per share.

    That’s all for now. We get a few turn-of-the-month economic reports next week. Factory orders and ISM Services are on Tuesday. The trade report is on Wednesday, which could impact any revisions to the GDP report. Cognizant also reports on Wednesday. Consumer credit is on Thursday, and the Productivity report is 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: August 1, 2014
    , August 1st, 2014 at 6:48 am

    Fight Over Comma Sank WTO Deal as Modi Defends Subsidies

    Royal Bank of Scotland Curbs Russian Exposure

    Argentine Stocks Sink Over 8% After Default

    Espirito Santo Family’s Swift Fall From Grace Jolts Portugal

    Wall Street Hounded By Multiple Concerns

    Dollar’s Rally Picks Up Steam

    Chrysler’s U.S. Sales Rise 20% as Jeep Soars to Best July

    Action Camera Maker GoPro Reports Bigger Loss as Costs Double

    ArcelorMittal Warns on Profit as Ore Price Hits Mining

    Why is Alibaba Making Enormous Investments in US Tech Companies?

    Wary High-Rollers Shy Away From Macau’s Casinos

    Japan’s Sharp Logs $17.4 Million First-Quarter Net Loss

    MoneyPak, a Popular Prepaid Money Card, Opens Path to Fraud Schemes

    Roger Nusbaum: Relax, The World Is Not Ending

    Cullen Roche: Did 2013 Prove That Fiscal Stimulus Doesn’t Work?

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  • DirecTV Earned $1.59 per Share
    , July 31st, 2014 at 10:30 am

    DirecTV ($DTV) reported another solid quarter. The satellite TV operator earned $1.59 per share for Q2 which was six cents better than esimtates.

    Net subscriber disconnections in DirecTV’s U.S. business totaled 34,000, compared with 84,000 disconnections a year earlier. The total subscriber base was about 20.2 million at the end of the quarter. Revenue in the region rose 5.5% to $6.27 billion.

    A sharp increase in subscribers in Latin America, however, helped drive better results. The company added net 543,000 subscribers in Latin America, more than three times the 165,000 subscribers added a year earlier. The company had a total of 12.5 million subscribers in the region and revenue rose 6.1% to $1.79 billion.

    The stock isn’t doing much today, and I don’t expect it to move a whole lot. As long as the AT&T merger is expected to go through, DTV will gradually drift higher to the $95 deal price.

  • Morning News: July 31, 2014
    , July 31st, 2014 at 7:23 am

    Eurozone Inflation Falls to 0.4% in July

    What Would a Default Change for Argentina?

    Blame It On The World Cup

    Bouncing Back, Economy Grew 4% for Quarter

    Fed Tunes Into Yellen Still Playing Labor-Market Blues

    Shell Says Russian Sanctions Minimize Restraints on Gas

    Twitter Takes Off, Lifts Fortunes Of Co-Founders Dorsey, Williams

    Samsung’s Mobile Chief Feels Pressure Over Sales

    Sony Warns Smartphone Weakness will Brake profit Progress After Q1 Surge

    Bank of America Raises Its Settlement Offer

    Siemens CEO Says to Focus on Restructuring, Not M&A

    AB InBev Scores with World Cup Beer Sales

    As Sales Flag Abroad, Coke Refocuses on Home Turf

    Jeff Carter: Where Bitcoin Could Get Traction

    Edward Harrison: Europe: A Plan to Boost Economy by Cutting Taxes

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  • Today’s Fed Statement
    , July 30th, 2014 at 3:16 pm

    Here’s today’s FOMC statement:

    Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.

    The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month. 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. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

    The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

    To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward 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 developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

    When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

    Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.

  • Q2 GDP Grew By 4%
    , July 30th, 2014 at 11:27 am

    Good news for the economy. The government reported that the economy expanded by 4% during the second three months of the year. The terrible number for Q1 was revised up from -2.9% to 2.1%. Still bad, but not quite as bad.

    The GDP figure was aided by inventory rebuilding. The opposite effect caused much of the damage for Q1.

    Over the past year, the economy grew 2.4%—slightly ahead of the 2.3% average annual gain from recovery’s start until the end of 2013, before an unusually cold winter socked the economy.

    The first-quarter “was an anomaly and growth will be much stronger through the rest of this year,” said PNC Financial Services Group economist Stuart Hoffman. “Consumers are spending thanks to job and income gains, and with borrowing costs still low businesses are investing to meet stronger demand.”

    Annual revisions, also released Wednesday, showed the economy expanded at a 4% pace in the second half of 2013, the best six-month stretch in 10 years. But figures over the past five years, including new revisions back to 2011, continue to tell a familiar tale. Unable to string together several quarters of steady growth, the recovery that began in 2009 is still the weakest since World War II.

    Wednesday’s report showed household spending advanced at a 2.5% rate last quarter, an increase from the first quarter’s modest 1.2% gain. Spending on total goods accounted for its highest contribution to GDP since late 2010, and spending on long-lasting durable goods was near a five-year high, led by a big jump in auto sales.

    Gold and stocks are down, while bonds are up.

  • Morning News: July 30, 2014
    , July 30th, 2014 at 6:53 am

    U.N. Agency to Form Airline Safety Task Force After Ukraine Crash

    Spain’s Economy Grows Faster Than Expected, But CPI Flags Deflation Threat

    Home Prices Rise, But More Slowly

    Liberals Love the ‘One Percent’

    Barclays Returns to Quarterly Profit as Impairments Fall

    Ed Balls Backs Tougher Bank Regulation

    UBS and Deutsche Bank Embroiled in Dark Pool Probe

    McDonald’s Ruling Sets Ominous Tone for Franchisers

    Twitter’s User Growth Picks Up

    Topix Gains for Fourth Day Amid Earnings as Honda Jumps

    Why Flipkart Looks Set to Fail Against Amazon

    Total Leads European Shares Lower on Russia Worries

    Amazon Says Lower Ebook Prices Benefit Authors, Publishers

    Joshua Brown: The Death of Twitter Had Been Greatly Exaggerated

    Howard Lindzon: Congrats Tubemogul ….Citibank Blows (Bank of America Too) …and Why Do We Need Banks for IPO’s in 2014

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