• A March Rate Hike May Be in Play
    Posted by on February 28th, 2017 at 12:58 pm

    Wall Street has changed its mind about an upcoming rate hike. The futures market is starting to think that a rate hike could come as soon as next month.

    The latest prices put the odds of a Fed rate increase for March at 35.4%. For May, that rises to 53.4%. For June, it’s 70.6%. I’m leaning towards May, but the expectations have certainly shifted.

    I’ve been watching the six-month Treasury. The yield got up to 0.72% today, which is an eight-year high. I realize that 0.72% doesn’t sound like much, and it’s not. But remember that the six-month yielded 0.02% a few years ago.

  • Notes on Today’s Market
    Posted by on February 28th, 2017 at 12:36 pm

    The Dow is looking to extend its winning streak to 13 days in a row. Right now, the Dow is down but just by a tiny bit.

    This morning, the government said that the economy grew by 1.9% in real terms in Q4, which is the same as the initial report. This is down from 3.5% growth in Q3.

    We also learned that consumer confidence rose to its highest point in 16 years. For February, Consumer Confidence rose to 114.8. The number for January was revised up to 111.6.

    After today’s close, Ross Stores and HEICO are due to report. This morning, shares of Target got slammed after they announced an earnings miss. Target said they’re adopting a new strategy to become more Walmart-y. In other words, they’ll try to be more competitive for lower end consumers. Target said they’re expecting to make between $3.80 and $4.20 per share this year. Wall Street had been expecting $5.37 per share. The stock is down 12%.

  • Morning News: February 28, 2017
    Posted by on February 28th, 2017 at 6:03 am

    Bill Gates Says It’s Too Early For Basic Income, But Over Time ‘Countries Will Be Rich Enough’

    Warren Buffett Thinks Only These Two Newspapers Are Certain to Survive

    Big Business Giants From Microsoft to J.P. Morgan Are Getting Behind Ethereum

    Snap IPO: Why It May Be The Next Facebook

    How Walmart Is Improving Its Pharmacy Service

    Fidelity Slashes Commissions in the Latest Salvo in the Fee Wars

    Priceline Revenue Up 17.4% on Higher Hotel Bookings

    Starbucks to Make Italian Debut With Upscale Roastery Cafe

    JPMorgan Software Does in Seconds What Took Lawyers 360,000 Hours

    Takata Pleads Guilty In Air Bag Scheme, Will Pay $1 Billion In Penalties

    Samsung Group Dismantles Nerve Centre as Chief Faces Bribery Charge Amid Scandal

    Uber Executive, Linked to an Old Harassment Claim, Resigns

    Oscars Mistake Casts Unwanted Spotlight on PwC

    Howard Lindzon: The Pusher of Omaha

    Cullen Roche: The Biggest Myths in Investing, Part 6 – Gold is a Good Portfolio Hedge

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  • The Financial Crisis 10 Years On
    Posted by on February 27th, 2017 at 1:29 pm

    You can quibble with an exact starting point for the Financial Crisis, but I’d go with February 27, 2007 — ten years ago today.

    The thing about the Financial Crisis is that it didn’t suddenly begin as one turned on the lights. Rather, several events came together that got worse and worse until…boom!

    Stocks tumbled across the board Tuesday, after declining markets in China and Europe and a steep drop in durable goods orders triggered a massive selloff on Wall Street.

    The Dow Jones industrial average (down 416.02 to 12,216.24) tumbled 416.02 points, its biggest one-day point loss since the day the stock market reopened after the Sept. 11th attacks. On that day, the Dow lost 684.81 points.

    On a percentage basis, the Dow lost about 3.3 percent. The blue-chip barometer has now fallen for five sessions straight.

    The broader S&P 500 (down 50.33 to 1,399.04) index fell 3.5 percent and saw its biggest one-day percentage loss in nearly four years. The S&P 500 also slumped for the previous four sessions.

    The Nasdaq (down 96.66 to 2,407.86, Charts) composite tumbled about 3.9 percent and saw its biggest one-day percentage loss since Dec. 9, 2002, according to early tallies.

    The Russell 2000 (down 31.03 to 792.66) small-cap index lost almost 4 percent.

    Trying to limit the declines, the New York Stock Exchange said it imposed trading curbs as of 1:03 p.m. ET, around the time the Dow slipped 200 points, CNN confirmed.

    Treasury bonds rallied as investors sought a safe place to park their money while the dollar fell. Oil prices inched higher and gold prices fell.

    On the final day of trading in 2012, the S&P 500 was still below its close from February 26, 2007.

  • Barron’s Highlights Axalta
    Posted by on February 27th, 2017 at 10:23 am

    In this weekend’s Barron’s, David Englander highlights the smallest stock on our Buy List, Axalta Coating Systems (AXTA). He lays out the case for a 20% rally from here:

    Axalta has a high-quality franchise, with No. 1 or No. 2 positions in various automotive-coating sectors. Notably, it’s the leader in refinishing, a less cyclical business than selling coatings for vehicles that are being assembled. Sales depend on collisions and miles driven, not on production rates.

    Refinishing, which accounts for about 40% of revenue, is expected to grow in the next year, a beneficiary of the more than 1.2 billion vehicles on the road, globally. Axalta draws another 40% of its revenue from coatings for new vehicles.

    On the basis of enterprise value to estimated Ebitda (earnings before interest, taxes, depreciation, and amortization), Axalta trades at a 10 times multiple, which looks inexpensive compared with coating peers. PPG Industries (PPG), for example, fetches 11 times.

    One bull on the stock, analyst Mike Sisson at KeyBanc Capital Markets, thinks a 12 multiple is reasonable. He values Axalta shares at $35. Using the same multiple on 2018 estimates, the stock could be worth more than $38.

  • The Treasury Is Considering 50-Year Bonds
    Posted by on February 27th, 2017 at 9:14 am

    Treasury Secretary Steven Mnuchin recently said that the Treasury is considering floating 50-year Treasury bonds. I think this would be a good idea.

    Generally speaking, the larger your debt is, the longer you want to roll it out. Now that Uncle Sam’s debt is at $20 trillion, we should think about longer durations. Also, interest rates are still historically low. This would be a good opportunity to lock in low yields.

    Having a liquid market is valuable, but the market is telling other bond issuers that it wants lots more long-term debt. The Treasury should sell more 30-year bonds, and even 50-year or 100-year bonds to meet that demand.

    Ireland, Belgium and Mexico have recently sold 100-year bonds. Ford, Disney and Coca-Cola have sold 100-year bonds as well. The Canadian Pacific Corp. sold a 1,000-year bond.

    And many governments, such as the U.K., have issued bonds that have no maturity date at all: Called perpetuals or consols, these bonds continue paying a coupon year-after-year until the principal is redeemed. The U.K. recently redeemed the consols that had financed its earlier wars against Napoleon and the kaiser.

    Who buys these long bonds? Mostly pension funds and insurance companies that want to match the maturities of their assets and their liabilities. The U.S. government should also think about issuing more long-term bonds to match the timing of future Social Security and Medicare payments.

    Kudos to Mnuchin and Trump for thinking of the taxpayer first.

    From a data perspective, I’d be curious to see if there’s any significant difference in the yield of a 30-year and 50-year bond.

  • The Dow Makes It 11 in a Row
    Posted by on February 27th, 2017 at 9:01 am

    Late in the day on Friday, the Dow staged a great comeback to close higher for the 11th day in a row.

  • Morning News: February 27, 2017
    Posted by on February 27th, 2017 at 7:22 am

    Man Who Moved Oil With His Words Won’t Talk About It Anymore

    LSE-Deutsche Boerse Deal In Danger

    Fed Turns to Job Hoppers as 1950s Inflation Guide Shows Its Age

    FBI Lawyer Sting Rattles Billion-Dollar Whistle-Blower Unit

    To Keep U.S. Jobs, Chip Makers Share a Factory and Pin Hopes on Trump

    Buffett Asks Big Money: Why Pay High Fees?

    The Complete Bearish Case Against Investing in Snapchat’s Massive IPO

    Minimum Wage Hikes And Online Sales Will Save Wal-Mart, But Not Neighborhood Stores

    SoftBank Is Homing in on a $3 Billion Investment in WeWork

    Smartvue Delivers IoT Video Services for Hewlett Packard Enterprise

    Popularity of Sony’s PlayStation VR Surprises Even the Company

    Amazon, Netflix Grab a Share of Oscar Glory

    Takata’s Guilty Plea to Be Considered Monday by U.S. Judge

    Jeff Miller: Have Stock Prices Lost Touch with Reality?

    Josh Brown: Proudly Permabullish

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  • The Berkshire Letter
    Posted by on February 25th, 2017 at 10:46 pm

    Here’s Warren Buffett’s latest letter to shareholders. Even for those of you who don’t own any shares of Berkshire Hathaway, the annual letter makes for good reading.

    I though this section on share repurchases was interesting.

    Share Repurchases

    In the investment world, discussions about share repurchases often become heated. But I’d suggest that participants in this debate take a deep breath: Assessing the desirability of repurchases isn’t that complicated.

    From the standpoint of exiting shareholders, repurchases are always a plus. Though the day-to-day impact of these purchases is usually minuscule, it’s always better for a seller to have an additional buyer in the market.

    For continuing shareholders, however, repurchases only make sense if the shares are bought at a price below intrinsic value. When that rule is followed, the remaining shares experience an immediate gain in intrinsic value. Consider a simple analogy: If there are three equal partners in a business worth $3,000 and one is bought out by the partnership for $900, each of the remaining partners realizes an immediate gain of $50. If the exiting partner is paid $1,100, however, the continuing partners each suffer a loss of $50. The same math applies with corporations and their shareholders. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.

    It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. That certainly wouldn’t be the case if a management was buying an outside business. There, price would always factor into a buy-or-pass decision.

    When CEOs or boards are buying a small part of their own company, though, they all too often seem oblivious to price. Would they behave similarly if they were managing a private company with just a few owners and were evaluating the wisdom of buying out one of them? Of course not.

    It is important to remember that there are two occasions in which repurchases should not take place, even if the company’s shares are underpriced. One is when a business both needs all its available money to protect or expand its own operations and is also uncomfortable adding further debt. Here, the internal need for funds should take priority. This exception assumes, of course, that the business has a decent future awaiting it after the needed expenditures are made.

    The second exception, less common, materializes when a business acquisition (or some other investment opportunity) offers far greater value than do the undervalued shares of the potential repurchaser. Long ago, Berkshire itself often had to choose between these alternatives. At our present size, the issue is far less likely to arise.

    My suggestion: Before even discussing repurchases, a CEO and his or her Board should stand, join hands and in unison declare, ‘What is smart at one price is stupid at another.’

  • Buy These Two S&P Losers?
    Posted by on February 24th, 2017 at 9:25 am