Author Archive

• Jose de la Vega’s Investing Rules
  Eddy Elfenbein, June 7th, 2013 at 1:57 pm

  In this week’s CWS Market Review, I used a quote from Jose de la Vega. Though he’s not well-known today, in 1688 he wrote the first important book on investing, Confusion of Confusions. In it, he outlined four basic rules on investing.

  The first rule in speculation is: Never advise anyone to buy or sell shares. Where guessing correctly is a form of witchcraft, counsel cannot be put on airs.

  The second rule: Accept both your profits and regrets. It is best to seize what comes to hand when it comes, and not expect that your good fortune and the favorable circumstances will last.

  The third rule: Profit in the share market is goblin treasure: at one moment, it is carbuncles, the next it is coal; one moment diamonds, and the next pebbles. Sometimes, they are the tears that Aurora leaves on the sweet morning’s grass, at other times, they are just tears.

  The fourth rule: He who wishes to become rich from this game must have both money and patience.

• CA Technologies Breaks Out
  Eddy Elfenbein, June 7th, 2013 at 12:00 pm

  CA Technologies ($CA), one of our quieter stocks, is breaking out today:

  

  The stock cracked $28 yesterday and suddenly ran as high as $29.83 today.

• May NFP = +175K, Unemployment Rate = 7.6%
  Eddy Elfenbein, June 7th, 2013 at 10:47 am

  This morning’s jobs report showed that the U.S. economy created 175,000 jobs last month. The figure for March was revised higher by 4,000 while April was revised down by 12,000.

  Despite signs of optimism from consumers, other indicators of the health of the job market have been mixed. Average weekly hours and average hourly earnings, for example, have shown little improvement in recent months, according to the Labor Department.

  Job gains in May were concentrated in service sectors like professional and business services, retail, and food services and drinking places. That last category has added 337,000 jobs over the past year.

  The federal government, on the other hand, lost 14,000 jobs in May, presumably a result of the across-the-board spending cuts, known as the sequester, implemented by Congress in March.

  The only thing remotely interesting about this report is how close it is to the established trend. Over the last 32 months, NFP has averaged a gain of 178,000. The standard deviation has been just 67,000. In other words, we’re locked in a trend.

  Officially, the unemployment rate rose from 7.5% in April to 7.6% for May. If you work out the decimals, it rose from 7.510% to 7.555%.

  This is a pretty dull report. Still, the stock market is very pleased. So far, the S&P 500 is up about 1% to 1,640.

  

• CWS Market Review – June 7, 2013
  Eddy Elfenbein, June 7th, 2013 at 7:43 am

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

  After countless predictions of its imminent demise, this year’s bull market is finally starting to show some cracks. On Thursday, the S&P 500 not only fell below its 50-day moving average, but also fell below 1,600 for the first time in a month. Fortunately, a strong afternoon push-back rally brought us back over 1,622, but traders are clearly getting nervous. The Volatility Index ($VIX) jumped 40% in just 12 trading days.

  

  In this week’s CWS Market Review, we’ll take a closer look at what’s going on. I also want to preview some of our upcoming Buy List earnings reports. The turmoil in the broader market has actually been good for our Buy List which has outpaced the S&P 500 for nine of the last ten days, and we’re once again beating the index for the year. This would be our seventh year in a row of beating the market. Before I get to our portfolio, let’s look at what’s been causing the market so much grief lately.

  Don’t Expect the Bond Selloff to Continue

  What’s been unusual about 2013, at least until now, is that the stock market hasn’t had any major reversals. That’s not how previous years have played out. Despite the historic bull market, the S&P 500 had major drops in 2010, 2011 and 2012. Now we have a modest one: Measuring from the intra-day peak on May 22nd to Thursday’s low, the S&P 500 lost 5.27%. That’s the biggest break all year.

  Here’s what’s happening. Since May 2nd, long-term interest rates have gapped up significantly. But what’s interesting is that shorter-term rates (inside of one year) haven’t moved much at all. The yield curve is essentially flat out to one year. If anything, short rates have edged slightly downward in the past three months.

  One reason for the higher long-term rates is that the economy seems to be improving. The housing market, for example, is much better, and consumer confidence is on the upswing. With the improved economy, traders believe that Ben Bernanke and his pals at the Fed will ratchet down their bond-buying spree. “Taper” is the new buzzword on the Street.

  I have to explain that moves in the bond market often foreshadow moves in the stock market. Usually, it’s by a few months, but sometimes it’s only a matter of weeks. Think of the two markets, stocks and bonds, as being in constant competition with each other for investors’ dollars. In just a few days, the yield on the 30-year Treasury has climbed from 2.8% to 3.3%, so that’s tempting to some folks who are getting a measly 2% yield out of the S&P 500.

  Simultaneously, we’ve seen a gigantic boom in the Japanese stock market as the yen has plummeted against the dollar. The authorities in Japan are determined to boost their economy by getting some inflation going. I can’t judge if this will work, but their stock market responded. From November 13th to May 22nd, the Japanese Nikkei soared 80%. That’s an astounding gain. Since then, however, the Nikkei has given back 17%. The extreme volatility of the Japanese market seems to be causing some unease in the U.S. market.

  After getting crushed by the dollar for several months, the Japanese yen finally struck back in a big way on Thursday. I suspect that this is traders anticipating a weak jobs report on Friday and therefore more aid from the Fed. The stronger yen is good news for AFLAC ($AFL), but I’ll stress that I like AFLAC because of its business and low valuation, not as a backdoor play on the yen. AFLAC remains a good buy up to $57 per share.

  Despite the downturn in the bond market, I don’t believe it will last very long. While the economy is better, it’s still far from strong, and all the talk of the Fed’s tapering is premature. Frankly, I don’t see the Fed taking its foot off the pedal for the rest of this year. Expect to see bond yields go back down, although not to the mega-lows from last summer. In fact, bond yields have already dropped since their peak last Friday. I think the 10-year yield will soon drop below 2% again.

  My advice to investors is to ignore any short-term market fluctuations. The next big event for us will be Q2 earnings season. We’ve now passed the first-quarter earnings season, and there are only three weeks left in the second quarter. If the analysts are right, we’re going to see even better earnings growth for Q2. Now let’s take a look at three of our off-cycle stocks that are due to report soon.

  Oracle Is a Buy up to $38 per Share

  Most of the Buy List stocks are on the March-June-September-December reporting cycle, but we have three stocks—Oracle, Bed Bath & Beyond and FactSet Research—that follow the February-May-August-November cycle. As a result, they’ll be reporting earnings later this month.

  Oracle ($ORCL) wrapped up its fiscal year at the end of May, and the company is due to report its fiscal fourth-quarter earnings on June 20th. Frankly, the Q3 earnings report was a dud, and Oracle doesn’t do that very often. It seemed like half the analysts on Wall Street slashed their ratings on Oracle.

  But the times when investors start to doubt Oracle are when the company’s at its best. To be fair, their results were weighed down by weakness in Europe. Oracle has said they expect Q4 earnings to range between 85 and 91 cents per share. Look for a big earnings beat here. Yes, their hardware business is not in a happy place, but I’m expecting software-license growth of 10%. Last week, I raised my Buy Below price to $38 per share. Oracle remains a very solid buy.

  Buy Bed Bath & Beyond up to $73

  Last month, I was excited to see Bed Bath & Beyond ($BBBY) crack $70 per share. That was a very nice turnaround for us, especially considering BBBY had been bouncing around the $55 mark earlier this year.

  But over the past few weeks, BBBY has mostly flat-lined. On Wednesday, the stock got a nice bump from an upgrade by an analyst at Nomura. Aram Rubinson raised BBBY to “buy” from “neutral,” and lifted his price target to $82 from $72 per share. I detest the idea of price targets, but if he’s right, that’s a very nice rally from here.

  Bed Bath & Beyond will report earnings again on June 26th. On the April conference call, the company told us to expect Q1 earnings to range between 88 and 94 cents per share. I expect the results to be at the high end of that range. I’m also expecting full-year earnings of $5 per share. Bed Bath & Beyond remains an excellent buy up to $73 per share.

  FactSet Is a Very Good Buy Below $108

  Last month, FactSet Research Systems ($FDS) boosted its quarterly dividend by 13% to 35 cents per share. I was pleased to see that, but FDS pays a very small amount of its profit out as dividends. On June 18th, the company will report earnings for the fiscal third quarter. FactSet has already said that earnings should be between $1.14 and $1.16 per share. Since that’s such a narrow range, I’ll take that as a strong hint they know what the results are.

  I’m a little concerned that cost-cutting on Wall Street may take some growth off FDS, but they seem to be managing this well. Bear in mind that FactSet has increased its earnings for the last 16 years in a row. Not many companies can make that claim. FactSet is an excellent buy up to $108 per share.

  Before I go, I have a few other comments. I expect to see a dividend increase soon from CR Bard ($BCR) and Medtronic ($MDT). The latter has raised its dividend every year for the last 35 years in a row. I also want to highlight that Microsoft ($MSFT) broke out to another five-year high this week. But don’t chase it. MSFT is a good buy up to $35 per share.

  That’s all for now. Next week will be a slow news week for economic reports. On Thursday, we’ll get the report on retail sales. This is a good gauge for consumer strength. The most important report will come on Friday when the Federal Reserve releases its report on Industrial Production for May. The IP report for April was pretty weak, so it will be interesting to see if there was a rebound last month. 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: June 7, 2013
  Eddy Elfenbein, June 7th, 2013 at 7:03 am

  Europe Continues Wrestling With Online Privacy Rules

  German Industrial Production Increases Most in a Year

  Japan Public Pension Cuts Government Bond Weighting, Lifts Stocks

  Hiring Seen Pointing To Economy In Need Of Fed’s Help

  Feeling Like Gatsby? Net Worth Hits Another Record

  Is an FHA Loan Still a Good Idea?

  Is Big Data Turning Government Into ‘Big Brother’?

  In Drive To Simplify, Facebook Will Ditch Half Its Ad Formats

  Wal-Mart Board Seen at Risk of Losing Independent Voices

  Apple to Yahoo Deny Providing Direct Access to Spy Agency

  McDonald’s Testing New Late-Night Value Menu

  Dimon, Other Wall St. Titans Make Time for Ma Ahead of Alibaba IPO

  Forest Braces For Third Bout With Icahn

  Cullen Roche: The One Chart That Bodes Very Poorly For Job Growth

  Stone Street: Quick Observations on JOSB, GPS

  Be sure to follow me on Twitter.

• The S&P 500 Nears Its 50-DMA
  Eddy Elfenbein, June 6th, 2013 at 12:10 pm

  The S&P 500 has moved very close to its 50-day moving average. The 50-DMA is currently at 1,604.

  

• Morning News: June 6, 2013
  Eddy Elfenbein, June 6th, 2013 at 6:59 am

  Euro Rises to Four-Week High Before ECB Decision; Pound Advances

  London Should Hand Libor Supervision to EU, Says Brussels

  IMF Says Greece May Need Faster Debt Relief, Cites Own Mistakes

  Yen Strengthens as Fed Easing Debate Intensifies; Aussie Slides

  Financial Fears Gain Credence as Unrest Shakes Turkey

  Fed Grants Foreign Banks Leeway in Dodd-Frank Swap Pushout Rule

  SEC Unites Opponents on Money Fund Rule With Floating-Share Plan

  How Rising Mortgage Rates Could Affect the Housing Recovery

  ADP Report Shows 135,000 New Private-Sector Jobs

  Entitlement Changes to Put Seniors at Financial Risk

  Yahoo Not Done Acquiring

  PepsiCo in Talks to Buy SodaStream for $2 Billion

  Microsoft And The FBI Are Teaming Up To Take Down A Global Cyber Crime Ring

  Jeff Miller: The Most Expensive Investment Research is Free

  Joshua Brown: Defending 15,000

  Be sure to follow me on Twitter.

• Biggest Selloff of the Year
  Eddy Elfenbein, June 5th, 2013 at 12:23 pm

  See that little spot of trouble in mid-April?

  

  The recent drop just surpassed that as our biggest drop of the year. Measuring from the intra-day high to intra-day low, the S&P 500 lost 3.84% between April 12 and April 18.

  On May 22, the S&P 500 reached a high of 1,687.18. So to have a larger drop than the one in April, the S&P 500 had to break below 1,622.41. We hovered just above that mark earlier this week. The Monday intra-day low was 1,622.72 and on Tuesday it was 1,623.62.

  Today, however, is a different story. So far, the S&P 500 has been as low as 1,612.29. This is the the biggest drop of the year.

• The Graham Number
  Eddy Elfenbein, June 5th, 2013 at 11:25 am

  Ever heard of the Graham Number? This was a formula developed by Ben Graham, the father of securities analysis, to determine the fair value for a stock.

  The Graham Number is:

  The square root of [earnings-per-share * book-value-per-share * 22.5]

  (Take note that earnings-per-share divided by book-value-per-share is our good friend return on equity.)

  Let’s run an example: Nicholas Financial ($NICK) earned $1.63 per share in the four quarters ending March 31, 2013. The book value per share is $10.46.

  So…if we multiply $1.63 * $10.46 * $22.5, that gives us $383.62.

  The square root of $383.62 gives us $19.59. So by the Graham Number, NICK is going for a hefty 25% discount to its fair value.

• Q1 Productivity Revised Down to 0.5%
  Eddy Elfenbein, June 5th, 2013 at 10:38 am

  The productivity report for Q4 was terrible. Fortunately, productivity improved in Q1. The government’s initial report said that productivity rose by 0.7% for the first three months of the year. Today that was revised down to 0.5% growth.