Best Performers from the Low
Posted by Eddy Elfenbein on June 8th, 2016 at 4:18 pm

Morning News: June 8, 2016
Posted by Eddy Elfenbein on June 8th, 2016 at 7:30 am

Asia’s $60 Trillion Wealth Takes Europe Down a Peg

ECB’s Hansson: Corporate Bonds Could Be More Effective in Boosting Inflation

China Steel Exports Rise, Defying Japan, U.S. Call for Curbs

PBOC’s Ma Says Credit Curbs Mean Short-Term Pain, Long-Term Gain

Jeb Hensarling Plan Rekindles Debate as Republicans Aim to Dismantle Dodd-Frank

Treasuries Climb as U.S. Sells $24 Billion of Three-Year Debt

Bezos Says Amazon to Up India Investment to $5 Billion

Micron Deal For Taiwan’s Inotera Delayed

Lululemon Athletica Revenue Tops Views, Gives Downbeat Quarterly Prognosis

Shell to Build Pennsylvania Plastics Plant in Bid for Market Share

Suzuki Motor CEO to Step Down Over Fuel-Economy Scandal

The Web’s Creator Looks to Reinvent It

The CFA Exam’s Toughest Question: What’s the Payoff?

Cullen Roche: The Downside of Academic Finance

Jeff Carter: The Human Touch

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Biogen Plunges
Posted by Eddy Elfenbein on June 7th, 2016 at 12:19 pm

Rough day for Biogen (BIIB):

Biogen Inc. said an investigational therapy for multiple sclerosis missed its primary and secondary goals in a mid-stage study, but that the data suggested evidence of a clinical effect.

Shares of the Cambridge, Mass., biopharmaceutical company fell 9.1% to $263.50 in recent premarket trading.

Biogen Chief Medical Officer Alfred Sandrock said that owing to the complex nature of the data, the company continues to analyze the results “to inform the design of our next study.”

The treatment—known as opicinumab—aims to repair the nervous systems of people with relapsing multiple sclerosis by employing a certain antibody in the effort to restore myelin sheaths that coat nerve fibers.

Biogen generates the majority of its revenue from three multiple sclerosis drugs that are experiencing slowing growth. The company has focused its research and development efforts on new treatments for multiple sclerosis—with two other multiple sclerosis treatments in its pipeline—and other neurodegenerative conditions, including Alzheimer’s disease and Parkinson’s disease. The company plans to spin off its hemophilia drug business to narrow its focus to neurological disorders.

In the latest trial, opicinumab missed the primary endpoint of improving walking ability, upper extremity function, cognition and other measures of physical disability. The treatment also missed the secondary endpoint for slowing the progression of disability.

In a separate study of patients after a first episode of acute optic neuritis, opicinumab met its primary endpoint related to responses to light stimuli compared with a placebo, but it wasn’t effective on secondary goals of changing the thickness of retinal layers or visual function.

Multiple sclerosis disrupts transmission of signals between the brain and spinal cord and other parts of the body and is marked by such symptoms as fatigue, muscle weakness, cognitive difficulties and, in some advanced cases, paralysis below the waist.

Morning News: June 7, 2016
Posted by Eddy Elfenbein on June 7th, 2016 at 7:32 am

Why Britain Is Edging Toward ‘Brexit’

Euro-Area Economy Grows Faster as Consumption Gathers Pace

Why Trump, the ‘King of Debt,’ Hates Dodd-Frank

Verizon to Bid $3 Billion for Yahoo’s Web Assets

Valeant Cuts Forecast Under New CEO, Key Drug Sales

The Alchemist Who Turned Toxic Assets Into Gold at Citigroup

Shell Raises Savings Target From BG Group Deal

Who Decides ‘Fair Value?” In Dell’s Case, a Judge

Redstone Family Firm Moves to Block Paramount Pictures Sale

Hertz Global Sets Date for Separation, Updates on Pricing

Tribune Publishing Vote Tally Shows Big Support for Gannett Bid

General Mills Releases Tiny Toast, Its First New Cereal In 15 Years

Oil Hits 2016 High on Ebbing Supply, Softer Dollar

Josh Brown: The Riskalyze Report: Advisors Dump “Low Vol”

Howard Lindzon: The Stock Market and Trains: Nothing But Opportunity

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Yellen Says Rates Need to Rise
Posted by Eddy Elfenbein on June 6th, 2016 at 12:53 pm

Janet Yellen’s remarks for today indicate that she sees rates going up, but she’s less clear on when:

Federal Reserve Chair Janet Yellen said positive forces supporting U.S. job growth and higher inflation will still probably outweigh negative developments, calling additional gradual interest-rate increases appropriate without specifying their precise timing.

“I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run,” Yellen said, according to the text of a speech she is scheduled to deliver Monday in Philadelphia.

Yellen was less specific than in her previous remarks in describing when she thought the Fed should raise rates again. On May 27 at Harvard University, she said an increase would likely be appropriate in “coming months,” a phrase omitted from Monday’s speech text. Since then, the Labor Department on Friday reported U.S. employers in May added the fewest number of new jobs in almost six years, causing expectations for a rate increase to plunge.

The May employment numbers were “disappointing,” she said, while also pointing to one of the few encouraging elements of the report — the increase in average hourly earnings.

June Rate Hike Odds Plunge
Posted by Eddy Elfenbein on June 6th, 2016 at 11:55 am

Friday’s jobs report has shaken Wall Street’s expectations. The Fed meets again next week and the futures market thinks there’s less than a 1-in-25 shot they’ll raise rates. That might even be understating it. Expectations for a July hike are now down to 35%.

Cyclical stocks are doing well today which is a continuation of the trend since late January. When the economy does better, Wall Street shifts from defensive areas like consumer staples and healthcare to more economically dependent areas like industrials and energy. These cycles tend to last a few years.

The S&P 500 just broke above 2,110. If we hold here by the end of the day, it will be our highest close since July. It’s interesting how 2,100 held like a brick wall for so long, and it took a lousy jobs report for us to break through.

Morning News: June 6, 2016
Posted by Eddy Elfenbein on June 6th, 2016 at 7:10 am

Why Inflation Targets Are Getting Harder to Hit – ECB

Luxembourg to Invest $227 Million in Asteroid Mining

German Industry Orders Fall More Than Expected in April

The Land Below Zero: Where Negative Interest Rates Are Normal

Saudi Diversification Plan May Accelerate With Bet On Uber

U.S. to Press China to Curb Industrial Output

Central Bankers Told They Should Be Sprinting Toward Blockchain

Fed’s Rosengren Flags Jobs Report, Yet Says Fed Rate Hikes Coming

Gogo Falls as American Holds Right to Pull Service on Jets

Why the Economic Payoff From Technology is So Elusive

Devon Energy to Get Nearly $1 Billion From Asset Sales

Facebook Co-Founder Saverin Takes a Shine to Singapore Underdog

Watchdog That Shepherded Panama Papers Now Constrained by Finances

Roger Nusbaum: Hopefully the Short Run Doesn’t Kill You

Jeff Miller: Is Small Employment Growth Big News for Stocks?

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The Market Rotates
Posted by Eddy Elfenbein on June 3rd, 2016 at 12:38 pm

With today’s lousy employment report, the market suddenly realizes that the Fed probably won’t raise rates later this month, and perhaps not in July as well.

Students of “The Elfenbein Theory to Explain the Entire Stock Market” know exactly what to expect. High dividend areas like Utilities are doing well, while banks and financials are doing poorly.

Check this out:

May Jobs Report +38,000
Posted by Eddy Elfenbein on June 3rd, 2016 at 8:32 am

The government just released the May jobs report. The economy created only 38,000 net new jobs last month. The unemployment rate fell to 4.7%.

Revisions for March and April subtracted 59,000. Average hourly earnings rose by 0.2%.

I think this takes a June rate hike off the table.

The unemployment rate is lower now than it was in every single month from November 1973 to October 1997.

Here’s payroll employment along with the stock market.

CWS Market Review – June 3, 2016
Posted by Eddy Elfenbein on June 3rd, 2016 at 7:08 am

“If you’ve followed my forecasts, you’ve probably lost a lot of money.”
– St. Louis Fed President James Bullard

Yeah, thanks for that tip, James, but we’ve already shied away from following the Federal Reserve’s predictions. Still, the central bank is kinda hard to ignore. There’s another big Fed meeting in two weeks, and the top brass is hinting that they’re serious about a rate hike. I honestly don’t know what will happen, but I think raising rates now would be a big mistake.

In this week’s CWS Market Review, we’ll take a closer look at where we stand with the economy, the Fed and Wall Street. More importantly, we’ll zero in on how it impacts our portfolios.

Later on, I’ll cover the very good earnings report from HEICO. The company raised guidance for the second time this year. (I love it when our stocks do that!) HEICO is now our #1 performer this year, with a YTD gain of 22%. When you have a well-diversified portfolio, you never know who’s going to have an all-star year.

I’ll also bring you up to speed on some other Buy List stocks, plus I’ll tell you which ones look particularly cheap at the moment. But first, let’s look at what the Fed might have planned for us later this month.

The S&P 500 Rises to a Seven-Month High

Wall Street has been in a good mood lately. The Nasdaq Composite has rallied for seven straight sessions. The S&P 500 closed Thursday at 2,105.26, which is a seven-month high. The index is now just 1.2% from its all-time high close reached a little over a year ago.

While the recent uptick is nice to see, I’m not ready to celebrate a breakout just yet. As we’ve seen, the broad market indexes have been fairly range-bound for the past 18 months. The 2,100 barrier has been tough to break. We also have a few hurdles in our way, like the upcoming Fed meeting, plus the Brexit vote in the U.K.

One factor I like about the market’s rally is that it’s been fairly broad, meaning more stocks are joining in on the fun. Charlie Bilello, one of my favorite technicians, points out that 66% of stocks on the NYSE are trading above their 200-day moving averages. That’s the most since July 2014.

We’re also seeing that different sectors like Utilities, Tech and Industrials are all near new highs. For example, Amazon.com is at a new high, and that’s getting a lot of attention (I was asked about it this week on CNBC). Yet fairly bread-and-butter stocks like Johnson & Johnson, Lowe’s and Illinois Tool Works are also at new highs (alas, CNBC did not ask me about ITW).

At the moment, Wall Street is focused on the June 14-15 Fed meeting. At this meeting, the Fed will also update its economic forecasts, and Chairwoman Yellen will host a post-meeting press conference. She and other Fed officials have signaled their willingness to raise interest rates in the coming months. This has been in contrast to what Wall Street, and I, think is needed.

For the most part, I believe the Fed has overestimated the need for higher interest rates (and Mr. Bullard apparently agrees). While there have been some improvements to the economy, there are still large areas of weakness, especially in the labor market. I could certainly understand the need for a rate increase if we saw rising consumer prices and decent wage gains. Instead, commodities like oil are rebounding after a steep fall, and wage growth has been fairly lackluster.

While I think a rate hike now would be a bad idea, I can’t say that a 0.25% increase would sink the economy. We got through the first rate hike from late last year. Second-quarter GDP will probably be a lot better than Q1. I‘ve also noticed that many heavy-industry stocks have been doing well. From our Buy List, Wabtec (WAB) and HEICO are good examples. That may suggest that the industrial sector is gaining strength. This week, we saw that the ISM Manufacturing Index for May was 51.3. That’s not great, but it does mean that the factory sector is expanding.

If I had to guess, I’d say the Fed won’t raise rates at this meeting, but I’m far from certain. Right now, the futures market thinks there’s a 20.6% the Fed will raise rates. But for the July meeting, the odds rise to 58.5%. After that, the futures market expects the Fed to sit on its hands for a few months.

The bond market is already taking notice. The yield on the one-year Treasury is up to 0.68%. Of course, that’s not very high, but it’s near the highest yield in more than seven years. Not that long ago, the one-year Treasury yield was bouncing around between 0.1% and 0.2%. Still, much of the world is talking about negative interest rates. This week, the ECB decided to keep deposit rates at -0.4%. If that’s not enough, next week, the ECB will start buying corporate bonds.

One interesting stat to watch is the spread between the two- and ten-year Treasuries. I’ve talked about the 2/10 spread before. It’s been one of the best economic indicators of the last three decades. Whenever the spread has turned negative, meaning the two-year yield has exceeded the ten-year yield, economic trouble has shortly followed.

The 2/10 spread recently narrowed to less than 95 basis points. It hasn’t been that narrow since 2007. What this means is that lenders are becoming more discerning with their loans. Let me be clear: we’re still a long way from the danger zone, but within the credit markets, the tightening cycle has begun. Just this week, JPMorgan CEO Jamie Dimon said that the auto-loan business is “a little stressed.” Eventually, tighter credit spills over to less consumer spending.

If the Fed hikes, and the long end of the bond market doesn’t respond, then the spread will get narrower. But consumers aren’t so sour just yet. This week, the Federal Reserve released its Beige Book report. This is a pretty wonky report, but it often has good insight into the economy. I was surprised to see the Beige Book mention that labor markets were “tight,” which would suggest that wages are improving. The report was largely optimistic for the economy.

I’m not concerned yet about higher interest rates, but it certainly could be a problem in the near future. A few months ago, I looked at the data and found that the stock market has performed much better when the difference between the 90-day and 10-year Treasuries has been greater than 1.21%. The difference is currently 1.51%.

As investors, we’re in a good spot now, but it’s important that the Fed not cause any damage. Now let’s take a look at the excellent earnings report from HEICO.

HEICO Is a Buy up to $70 per Share

On Wednesday of last week, May 25, HEICO (HEI) reported fiscal Q2 earnings of 57 cents per share. This was another good quarter for the aircraft-parts supplier. Not enough analysts follow HEICO for us to claim that there’s truly a “consensus” on Wall Street, but I had been expecting earnings of 55 cents per share. HEICO had earned 49 cents per share in last year’s Q2. Quarterly sales rose 20% to $350.6 million.

Laurans A. Mendelson, HEICO’s Chairman and CEO, commented on the Company’s second-quarter results, stating, “We are very pleased to report record quarterly results in consolidated net sales and net income driven by record net sales at both operating segments and record operating income at the Electronic Technologies Group. Our outstanding performance reflects profitable contributions to earnings from the fiscal 2015 and 2016 acquisitions, strong quarterly organic growth within the Electronic Technologies Group and continued increased demand within our Flight Support Group’s aftermarket replacement-parts and specialty-products lines.

The good news is that HEICO also raised its guidance for this year:

Based on our current economic visibility, we are increasing our estimated consolidated fiscal 2016 year-over-year growth in net sales to 15% – 17% and net income to 12% – 14%, up from prior growth estimates in net sales of 14% – 16% and growth in net income of 10% – 13%. Additionally, we anticipate our consolidated full-year operating margin to approximate 18.5% – 19.0%, depreciation and amortization expenses to approximate $62 million, capital expenditures to approximate $32 million and cash flow from operations to approximate $220 million.

This is the second time HEICO has increased its guidance this year. Unfortunately, HEICO only provides guidance for net income and not earnings-per-share. The company earned $1.97 per share last time, so we can infer a full-year EPS between $2.25 and $2.30 (assuming a stable number of shares). That’s seems very doable. HEICO has already earned $1.03 per share for the first half of this year.

The shares reacted very well to the earnings report. At one point, HEI broke $67 per share. I had been holding off on adjusting our Buy Below price, but this earnings report shows us that the company is doing very well. This week, I’m raising my Buy Below on HEICO to $70 per share.

Buy List Updates

A few of our lagging Buy List stocks have started to perk up. High-quality stocks may disappoint you for a few months, but they tend to bounce back. Stocks like Wells Fargo (WFC) and Biogen have recently broken out to fresh four-month highs.

Remember back in March when Oppenheimer downgraded Fiserv (FISV)? The firm also pulled its $100 price target. Fortunately, we ignored it. Fiserv had another great earnings report in April, and the shares hit yet another new high this week of $106.65. Fiserv remains a solid stock.

Shares of Alliance Data Systems (ADS) are finally showing signs of life. I won’t mince words—ADS has been a big disappointment for us this year. In January, the stock plunged 19% in one day. But lately, ADS has rallied, and it just touched a four-month high. The stock is now up more than 27% from its February low. This is exactly why we focus on the long term.

Three weeks ago, I said that Biogen (BIIB) hasn’t done well for us this year, “but I think it’s ready for a turn.” It’s still early, but it looks like I was right. The biotech stock recently breached $291 per share, and it’s at its highest point since the start of the year. Keep watching this one.

Look for another dividend increase from CR Bard (BCR). The company usually announces the new dividend in early June. My guess is they’ll raise the quarterly payout from 24 to 27 cents per share. Bard has increased its dividend every year since 1972.

Express Scripts (ESRX) is another disappointing stock that’s starting to come back. Shares of ESRX are now at their highest level since January. The company has had a lot of drama this year, which has weighed down the stock, but let’s not forget how profitable they are. I’m expecting another good earnings report in July.

Shares of Ford Motor (F) dropped this week after a disappointing sales report for May. Ford’s truck business is still doing well, but their car business didn’t live up to expectations. I still like Ford a lot here. Look for another good earnings report in late July. The dividend currently yields 4.5%.

There are a few Buy List stocks that look especially good right now. I mentioned Biogen before, but I think this one has room to run. I also like Bed Bath & Beyond (BBBY). I realize it’s a frustrating stock to own but the price is very low. Earnings are due out on June 22.

That’s all for now. I’m writing this to you early Friday, and the May jobs report comes out later this morning. Wall Street expects a gain of 160,000 jobs, but this number may be distorted by the Verizon strike. Still, the key figure to watch will be wage growth. On Tuesday, we’ll get the productivity report, and on Friday, the government reports on the 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