Morning News: November 9, 2016
Posted by Eddy Elfenbein on November 9th, 2016 at 7:03 am

Republican Donald Trump Is Elected President Of United States And Global Markets Plunge

Trump’s Victory Shakes Europe’s Geopolitical Order

What Trump’s Win Means for the Fed

News Media Yet Again Misreads America’s Complex Pulse

Why India Pulled Big Bank Bills From Circulation

China Oct Factory Prices Rise More Than Forecast, Consumer Prices Also Pick Up

Big Oil Looks Past Profit Crunch as Cash Flow Shows Recovery

Alphabet Pushes Out Leaders of Drone-Delivery Project

Carlsberg Upgrades Full Year Outlook Despite Sales Dip

Dish Network Profit Jumps; Subscriber Loss Smaller Than Expected

Warner Bros., Quietly Thriving, Recasts Its Own Story

GoPro Recalls New Karma Drone

Samsung Runs Newspaper Ads on Note 7 Fires: ‘We Are Truly Sorry’

Josh Brown: Off the Lows ™

Cullen Roche: What Does President Trump Mean for the Economy & Market?

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Morning News: November 8, 2016
Posted by Eddy Elfenbein on November 8th, 2016 at 6:23 am

Safeguarding As The ‘Fear Index’ Surges

Hillary Clinton and Donald Trump Keep Asia Markets Guessing

Mexico is Feeling Jitters Over the Prospect of a Trump Victory

An Idea to Revolutionize Europe’s Debt Could Be Coming of Age

Voters Take Note: China’s Trade Surplus With U.S. Is Shrinking

Iran to Sign $6 Billion Gas-Field Deal With Total, CNPC

Dubai, Hyperloop One to Study Potential for Abu Dhabi Line

Toyota Raises Operating Profit Forecast, Says Cost Cuts To Curb Yen Impact

US Senate Panel Urges FTC to Launch Antitrust Probe of Mylan

News Corp Swings to a Loss

CBS Taps Moelis, Goldman to Advise on Possible Viacom Merger

Priceline Shares Hit All-Time High After Profit and Revenue Beat Estimates

TV Networks Face a Skeptical Public on Election Night

Josh Brown: How to Become a “2%” Investor

Jeff Carter: The Oligopoly and Crony Employeeism

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Updates on Today’s Market
Posted by Eddy Elfenbein on November 7th, 2016 at 10:40 pm

I wanted to add a few comments on today’s market activity. The S&P 500 had its best day since March 1. The stock market had fallen nine days in a row, but those declines were quite modest. Today’s big gain won back more than 70% of what had been lost in nine days.

Gold had its worst day in a few weeks, and the Dow retook 18,000. The Dow also crossed back above its 50-day moving average.

Today was the best pre-election day for the market in 84 years. All 20 Buy List stocks closed higher. We had especially big gains from Biogen (BIIB) and Cognizant Technology (CTSH), the latter due to its impressive earnings report, and the former due to a positive drug study.

A few weeks ago, shares of CTSH fell sharply after the company said it may have been involved in some illegal activities. Until now, we haven’t had any more news. Now we have some details from Reuters:

IT services provider Cognizant Technology Solutions Corp said on Monday some senior managers may have participated in or failed to take action to prevent making about $5 million in “potentially improper payments” primarily related to real estate and procurement in India.

Cognizant, whose shares were up 4 percent at $54.18 in early trading, said the material weakness existed as of Dec. 31, 2015, and continues to exist in subsequent interim periods.

The company also said its ongoing internal investigation had identified a material weakness in its internal control over financial reporting.

If the payments are limited to $5 million, this would probably be well below investors’ worst case, Cowen and Co analysts said in a research note.

Cognizant said in September it was conducting an internal investigation into possible violations of U.S. anti-corrupt practices laws related to payments in India.

The company also said that the people possibly involved with the payments are no longer with the company or in a senior management position.

The company said in September that President Gordon Coburn had resigned, giving no reason for his departure, and that he would be replaced by Rajeev Mehta, the head of IT services.

Cognizant said in a regulatory filing on Monday that it had not maintained an “effective tone at the top”.

“We will continue the investigation until we are confident that we have tracked it all down,” Chief Financial Officer Karen McLoughlin said on a conference call, adding that it was “early days” in the investigation.

I think this is very good news. It shows that CTSH is on top of it, and it doesn’t appear to be a very large deal in financial terms. Bear in mind that CTSH plunged more than 13% when the news first came out on September 30.

The Power of One Stock
Posted by Eddy Elfenbein on November 7th, 2016 at 2:11 pm

Here’s a good lesson on what one stock can do to your portfolio.

In 1939, IBM was taken out of the Dow Jones Industrial Average. It was put back 40 years later, in 1979. Over those four decades, IBM was an outstanding stock. It gained over 220 fold!

So what if IBM had stayed in the Dow? Bryan Taylor at Global Financial Data ran the numbers. First we assume that IBM replaced AT&T. Technically, two stocks left in 1939 (IBM and Nash Motors) and two came in (AT&T and United Aircraft).

The DJIA stood at 151.1 on March 14, 1939 and 841.98 on June 29, 1979. Since the DJIA is price weighted, you can remove the impact of AT&T on the DJIA by subtracting out the price of AT&T allowing for the splits, and replacing this amount with the value of IBM stock, allowing for the splits in IBM. If you do this, you would find that the DJIA would have been at 23,582 in June 1979, not 841.98. In other words, IBM would have added 22,740 points to the DJIA had it never been removed.

(Update: Now that I’ve looked this over, I’m not sure the math is correct. I think IBM’s price needs to be adjusted for the Dow’s divisor. I’m not positive, but it’s a strong suspicion. Still, the larger point stands that one huge long-term winner can do wonders for a portfolio.)

(Update to the previous update: Dividend Investor passes along two articles (here and here) which suggest I’m correct.)

WSJ: “Why the Math Behind Passive Investing May Be Wrong”
Posted by Eddy Elfenbein on November 7th, 2016 at 12:19 pm

Wesley R. Gray has an interesting piece at today’s WSJ: “Why the Math Behind Passive Investing May Be Wrong.” It’s zeroes in on the research of William Sharpe who was an early advocate of passive investing. Here’s a sample:

A recent essay by Druce Vertes at the CFA Institute, and more formal research by NYU Professor Lasse Pedersen, suggests that Mr. Sharpe’s conclusions might be incorrect. Dr. Pedersen offers a very powerful critique in a new white paper entitled, “Sharpening the Arithmetic of Active Management.” Dr. Pedersen argues Mr. Sharpe’s arithmetic relies on the faulty assumptions that the market never changes and passive investors never need to trade.

Objectively, these assumptions are false: The market is not static, as new firms are created through IPOs, new shares are issued or repurchased, and indexes are reconstituted all the time. Additionally, passive investors must sometimes rebalance their portfolios, for instance to raise cash or reinvest dividends. In short, passive managers must, and do, trade with active investors.

As evidence for the need of passive investors to trade, Dr. Pedersen cites the case of a theoretical passive investor in 1927, who never trades. After 10 years, this investor owns only 60% of the market. And this ongoing market turnover is persistent: The average turnover for all equities from 1926 through 2015 was a whopping 7.6% per year. Last year, the Vanguard 500 Index Fund reported turnover of 10%. Clearly, the assumption that passive investors never need to buy and sell is false. And this mechanical need to trade opens passive investors up to exploitation by active investors.

Cognizant Earns 86 Cents per Share
Posted by Eddy Elfenbein on November 7th, 2016 at 7:10 am

This morning, Cognizant Technology Solutions (CTSH) reported third-quarter earnings of 86 cents per share. That was two cents better than estimates. They earned 76 cents per share in last year’s Q3. Cognizant’s quarterly revenue climbed 8.4% to $3.45 billion. Operating margin was 19.3%.

“We see ongoing client demand for our services across industries and geographies,” said Francisco D’Souza, Chief Executive Officer. “As the physical and digital worlds converge, we have made it easier for clients to work with us by aligning our organizational structure and capabilities around the broader focus of assisting clients drive digital transformations. Our new President, Raj Mehta, who has been a key member of our senior leadership team for two decades, and the broader team of executives are leading our strategic initiatives. They have a proven track record of innovation, execution and an unwavering focus on client service and satisfaction.”

For Q4, Cognizant sees revenues between $3.45 billion and $3.51 billion, and EPS between 85 and 88 cents per share. That works out to full-year revenue of $13.47 billion to $13.53 billion, and 2016 EPS between $3.38 and $3.41.

“Third quarter revenue was within, and non-GAAP EPS was slightly above, our guided range, indicating that we continue to execute well on our stated strategy,” said Karen McLoughlin, Chief Financial Officer. “Our solid performance was also reflected in another strong quarter of cash flow generation as cash and investments, net of debt increased by $390 million.”

Q3 2016 Earnings Calendar
Posted by Eddy Elfenbein on November 7th, 2016 at 7:03 am

Sixteen of our 20 Buy List stocks have been reporting Q3 earnings over these past few weeks. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results:

Morning News: November 7, 2016
Posted by Eddy Elfenbein on November 7th, 2016 at 6:49 am

Wall Street Is Expecting Another Down Year for Bonuses

Oil Leaders Meet in Abu Dhabi, Hoping Market Now at Bottom

Saudi Aramco Suspends Egypt’s Oil Shipments Until Further Notice

May’s Indian Outreach Falters as Modi, Tata Play Hard to Get

Ahead of Brexit, Some Banks Quietly Shift M&A Bankers to Frankfurt

Emerging Markets Rebound as Mexican Peso Surges on FBI Statement

Toxic Smog in World’s Most Polluted City May Soon Hit Economy

China’s Internet Controls Will Get Stricter, to Dismay of Foreign Business

Yuan Slumps Most in a Month as Depreciation Pressures Intensify

Can a Media Merger Bring Success? Comcast and NBCUniversal Say Yes

HSBC’s Capital Growth Lifts Buyback Prospects

Nissan Profit Falls 16% on Stronger Yen, Higher Incentives

Beware, iPhone Users: Fake Retail Apps Are Surging Before Holidays

Cullen Roche: The Failing Pursuit of the Truth…

Jeff Miller: Time For Some Clarity?

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October Jobs Report
Posted by Eddy Elfenbein on November 4th, 2016 at 8:59 am

This morning, the government reported that the U.S. economy created 161,000 net new jobs last month. The NFP number for September was revised higher by 35,000.

The unemployment rate fell 0.1% to 4.9%. In 12 of the last 13 months, the unemployment rate has been either 4.9% or 5.0%. We now have the second-lowest unemployment rate since 2008. The unemployment rate is lower now than it was in every single month from December 1973 to July 1997.

Average hourly earnings rose 0.4% in October, and are up 2.8% in the last year.

Get ready for some charts. Here’s the unemployment rate:

Here’s the change in non-farm payrolls:

Here’s the year-over-year change in average hourly earnings. Note the recent acceleration:

CWS Market Review – November 4, 2016
Posted by Eddy Elfenbein on November 4th, 2016 at 7:08 am

“There are two times in a man’s life when he shouldn’t speculate: when he can afford to and when he can’t.” – Mark Twain

After being stuck in a trading range for three months, the bears have finally gotten bold enough to take the market down a peg. The S&P 500 has now fallen eight days in a row. That’s the longest losing streak since the heart of the Financial Crisis in the fall of 2008. The index has closed lower in ten of the last eleven sessions. The last time we hit nine in a row was in 1980.

Still, the overall decline has been pretty tame—just 2.9% in eight days. In fact, all eight of the one-day drops have been less than 0.7%. It’s just that we’ve been so steady for so long. The S&P 500 snapped a streak of 82 days in a row of closing in the 2100s. Perhaps we’re riding through some pre-election jitters as the polls appear to be tightening.

In this week’s CWS Market Review, we’ll look at the recent GDP report. As I’ve been saying for a few weeks, the economy is growing, but at a mediocre pace. The important fact is that we’re not near a recession. I’ll also discuss this week’s Fed meeting. Later on, we’ll look at the earnings report from Cerner. Plus, I’ll preview next week’s earnings report from Cognizant Technology. We also got a nice 16% dividend increase from Snap-on. But first, let’s take a closer look at where the economy now stands.

The Economy Is Finally Accelerating

Last Friday, the government reported that the U.S. economy grew in real terms by 2.9% during the third quarter. Historically, that’s pretty average, but it’s not so bad compared with the last few years. It was the fifth-best quarter of the last 19 quarters.

The details were pretty good. Exports rose by 10% thanks to, believe it or not, big gains in soybean exports. Business investment needs to improve, but a lot of that weakness was driven by lower oil prices. Consumer spending rose by 2.1% in Q3. That’s not bad, but it’s lower than some recent quarters. Overall, we can say that the economy is accelerating, but that’s coming off tepid growth.

Earlier this week, we learned that personal spending rose by 0.5% in September, the final month of Q3. Personal income rose by 0.4%. Wall Street had been expecting increases of 0.4% for both. The ISM Manufacturing report for October rose to 51.9. The manufacturing sector has now risen for 89 months in a row.

I’m writing this to you on Friday morning, ahead of the big October jobs report. For September, the government said the economy created 156,000 jobs. The consensus on the Street for October is for a gain of 178,000 jobs. That sounds about right to me—maybe a bit too high. As important as the number of jobs is, I also want to see more gains in wages. There’s been some improvement here, but we need to see more. You can be sure Janet Yellen and her friends at the Federal Reserve will be paying close attention to the jobs report (as will some politicians).

Expect a Fed Rate Hike Next Month

The Federal Reserve held another meeting this week. Since we’re so close to the election, I didn’t expect them to make any changes to interest rates. The Fed did indeed decide to do nothing, but traders closely looked for any signs of what will happen next month.

I think it’s pretty clear that the Fed is going to raise rates in December. The fact is that the economy is creating new jobs. Wages are slowly rising, and financial markets are mostly stable. The Fed has been plenty patient. At the start of the year, the Fed anticipated raising rates four times this year. They haven’t done it once.

Of course, the FOMC is a committee, so it’s not always easy to pinpoint exactly where the majority currently lies. I thought it was interesting that the last policy statement had three dissensions. Those folks wanted to raise rates immediately. This week’s statement, however, only had two dissents. Eric Rosengren was the one who switched sides. I’m guessing that’s due to the election, but we can’t say for sure.

In the policy statement, the Fed said, “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” In recent years, the Fed has done a better job of telegraphing their intentions to Wall Street. Given the language they’re using, plus the recent dissents, I think all the signs point to a December rate hike.

For guessing what the Fed will do, I like to look at the two-year Treasury. At the start of the year, when the Fed looked like it was about to get busy, the two-year was yielding over 1%. But as those plans unraveled, the two-year slowly dropped down to 0.56% by the middle of the year. Now it’s back over 0.80%.

But what comes after that? That’s hard to say, but I suspect the Fed may hold steady for a few months, or possibly one increase. I don’t believe this is the start of a tightening cycle a la 2004-2006, when the Fed raised rates at 17 consecutive meetings.

For investors, low rates are good for stocks. The only danger is when the temptation from fixed income is so strong that it lures money away from stocks. We’re far from that happening. Until that time, investors should be focused on a portfolio of fundamentally superior stocks such as those on our Buy List.

Cerner Drops on Earnings Miss

Third-quarter earnings season is starting to come to a close for our Buy List. We had one earnings report this week, from Cerner (CERN), and we have one more next week, from Cognizant Technology Solutions.

Three months ago, Cerner told us to expect Q3 earnings ranging between 59 and 61 cents per share. On Tuesday, the healthcare IT company reported earnings of 59 cents per share. While that was within the company’s range and up 9% from last year, it was a penny below Wall Street’s consensus.

”While Cerner’s third-quarter results were slightly below our expectations, they were still solid and included the second- highest level of bookings in our history,” said Zane Burke, Cerner President. “Our competitiveness remains strong and has been bolstered by over $2 billion of investments in research and development over the past four years. We believe these investments have strengthened our clinical, revenue cycle and population health solutions and position us for strong growth going forward.”

Quarterly revenue came in at $1.18 billion, which was below Cerner’s guidance of $1.20 billion to $1.28 billion. For Q4, Cerner expects 60 to 62 cents per share and revenue between $1.225 billion and $1.300 billion. Wall Street had been expecting 65 cents per share. Cerner also gave preliminary guidance for next year of $2.50 to $2.70 per share. The Street was at $2.69 per share.

Cerner also said it will offer another set of buyouts for employees who qualify. They had a similar offer last year.

“This should not be viewed as a layoff or a sign that we don’t expect to grow,” Naughton said. “We’ve grown our head count by over 2,000 people this year and expect to grow head count next year as well.”

The shares dropped about 7% after the earnings report. Cerner is one of those companies I’m not terribly worried about if they miss earnings. The company is still fundamentally strong. The business is growing, just slightly less rapidly then they had expected. This week, I’m dropping my Buy Below price on Cerner down to $61 per share.

Earnings Preview for Cognizant Technology Solutions

On Monday, Cognizant Technology Solutions (CTSH) will be our final Buy List stock to report third-quarter earnings. Hanging over this report is the recent news that a Cognizant internal investigation revealed that they may have violated the U.S. Foreign Corrupt Practices Act. Cognizant notified the SEC and DOJ. The same day, the company’s president resigned.

The stock plunged sharply on the news but has since regained some lost ground. There’s no news to add, so I think traders fear the worst. I’m relieved that at least the company reported its own possible violations.

Still, we need to focus on CTSH’s operations. In August, the company had a good earnings report. The IT outsourcer earned 87 cents per share. That was a nickel better than expectations. Quarterly revenue jumped 9.2% to $3.37 billion, which matched consensus. Interestingly, the British pound’s fall post-Brexit knocked off about $40 million in revenue.

Cognizant’s guidance for Q3 was noticeably conservative. Francisco D’Souza, the CEO, said, “While our revised guidance reflects the impact of near-term macroeconomic headwinds, our longer-term outlook and underlying business fundamentals remain strong. We continue to see an expanding market opportunity ahead and are well positioned to capitalize on the digital transformations taking place among enterprises around the world.”

Cognizant sees Q3 coming in between 82 and 85 cents per share, whereas Wall Street had been expecting 86 cents per share. On the plus side, Cognizant reiterated its full-year guidance range of $3.32 to $3.44 per share.

On the revenue side, Cognizant sees Q3 ranging between $3.43 billion and $3.47 billion. Wall Street had been expecting $3.54 billion. The company also changed its full-year guidance range for revenue from $13.65 billion – $14.0 billion to $13.47 billion – $13.60 billion. Wall Street had been expecting $13.75 billion.

I’ll be curious to hear any guidance for next year and any updates regarding the investigation. I’m still quite optimistic about Cognizant.

Before I go, I have a few quick updates on our Buy List stocks. Ford Motor (F) said that its sales fell last month by 11.9%, although the Lincoln brand did well. Ford had a lot of fleet sales last month which tend to go for a lower sales price. The stock now yields 5.3%, based on Thursday’s close.

Shares of Bed Bath & Beyond (BBBY) recently dropped below $40 per share for the first time in six years. Since early 2015, the stock has been cut in half. Bed Bath needs to make changes to keep up. I’m lowering my Buy Below price to $43 per share.

On Thursday, Snap-on (SNA) increased its dividend by 16.4%. The quarterly payout will rise 10 cents, to 71 cents per share. The shares yield 1.86% based on Thursday’s close. The company had an excellent earnings report two weeks ago.

That’s all for now. Next week’s news will be dominated by some sort of electoral event on Tuesday. You may have heard about it. In any event, there will be more earnings reports as well. On Wednesday, the Commerce Department will report on wholesale inventories. Then on Thursday, we’ll get initial jobless claims, plus an update on the Federal budget. 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