CWS Market Review – June 10, 2016
Posted by Eddy Elfenbein on June 10th, 2016 at 7:08 am

“Don’t gamble; take all your savings and buy some good stock and hold
it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

Last week, we got a terrible, lousy, awful jobs report, and that was a good thing. Not for workers, of course, but it’s a good thing for investors because it most likely put the kibosh on the Federal Reserve’s wrong-headed plan to hike interest rates next week.

Janet Yellen and her friends at the Fed had been dropping strong hints to anyone and everyone that the Fed wants to raise rates, and they want to do it soon. As I explained last week, raising rates now is a bad idea, which, unfortunately, isn’t a reason for the Fed not to do it. But then the May jobs report came along and said that only 38,000 net new jobs were created last month. That was less than one-fourth of expectations! Yet the bad news may have saved us. Hopefully, some folks inside the Fed are reconsidering their plans.

In this week’s CWS Market Review, I’ll explain what the market’s shakeout means for us. Every investor needs to understand that the stock market has shifted toward long-neglected economically cyclical stocks. Later on, I’ll highlight some good news from our Buy List. As expected, CR Bard raised its dividend for the 45th year in a row. There aren’t many stocks that can say that. CR Bard is now a 20% winner for us this year. Before we get to that, though, let’s take a closer look at the latest hijinks on a certain street in lower Manhattan.

The Big Chill Comes to Wall Street

The stock market has been unusually happy lately despite many reasons to be fearful. On May 19, the S&P 500 closed at 2,040.04 which made the index just slightly red for the year. That must have been the signal the bulls had been waiting for, because the S&P 500 has gradually marched higher ever since.

On Wednesday, the S&P 500 closed at 2,119.12 for its highest close since last July. In fact, we’re inching ever closer to 2,130, which is the all-time closing high reached a little over one year ago. But don’t forget dividends! Looking at the S&P 500 Total Return Index, which includes dividends, we’re already at a new all-time high.

What’s interesting about this recent rally is how gradual it’s been. There really haven’t been major upsurges. In fact, the S&P 500 has gone a full nine weeks without a single day of losing more than 1%. That ain’t how this year started. Take a guess how many days had 1% drops during the first nine weeks of this year? I’ll give you a hint—the answer is 14.

It’s not just the subdued nature of the rally; I’ve also been struck by its content. I touched on this subject last week, but it’s worth exploring in a little more detail. Since February, the stock market has been led by economically cyclical stocks. These are the types of businesses whose fortunes are closely tied to the economic cycle. Think construction, transportation, manufacturing, chemicals, etc. It’s been a long time since cyclical stocks were popular.

Investors need to understand that a cyclical stock isn’t in any fundamental sense better or worse than a defensive stock. To every thing, there is a season, and cyclical stocks tend to move in, well…cycles. Since February, the market has rewarded cyclicals.

Defensive sectors are areas like Consumer Staples and Healthcare. When I say cyclical stock, I generally mean stocks from three sectors—Energy, Materials and Industrials. The first two are largely impacted by commodity prices, and the rebound in oil has been quite remarkable. This week, oil broke $50 per share. Black gold has nearly doubled off its February low. I’m not optimistic on the long-term outlook for oil. (Don’t take my word for it: check out the dumpster fire that used to call itself OPEC.) But I wouldn’t be too confident to call for a top in oil.

Not surprisingly, Energy stocks have been some of the top performers this year. ExxonMobil, for example, is up nearly 20% this year, while 3M, your classic Industrial, is up nearly 15%. These stocks had been laggards for so long.

Our Buy List, as a whole, is slightly weighted against the cyclical sectors. That’s not a macro call on my part. It’s just how things worked out. It’s nearly impossible to be completely neutral in all sectors. Just about any portfolio is going to lean toward some sectors, but our minor defensive bias is impacting our performance this year. The effect isn’t dramatic, but it’s clearly at work.

Before their sudden burst of popularity, the Energy and Materials sectors had been lagging the overall market for five years. In fact, that preceded the meltdown in commodity prices. It also could have reflected a growing realization that the current recovery is unusually subdued. Whatever the reason, these cycles constantly flow within the markets, and it’s important to understand why.

The popularity of cyclical stocks may also suggest that the economy is doing better than people realize. The latest forecast from the Atlanta Fed sees Q2 GDP coming in at 2.5%. We’ll get our first look at Q2 GDP in late July. In one more month, second-quarter earnings season starts, and we’ll get a look at how well Corporate America did during the spring. This very likely will break our six-quarter streak of falling operating earnings.

According to S&P, Wall Street expects the S&P 500 to report earnings of $28.43 (that’s the index-adjusted number). That would be an increase of 8.8% over last year’s Q2. However, the forecast for Q2 has been pared back by 8.3% since the start of the year. Analysts usually start out with high forecasts and then cut them as earnings day gets closer. It will be very nice to put this “earnings recession” behind us.

Now let’s circle back to the jobs report. On Friday, the Labor Department said that only 38,000 net new jobs were created last month. Wall Street had been expecting 162,000. This wasn’t just a miss—it was an historic facepalm! This was the worst jobs report in more than five years.

Going into the jobs report, the futures market put the odds of a June rate hike from the Fed at 30%. Now that’s down to 3.8%, which is probably 3.79999% too high. Still, the Fed is talking tough. It’s hard for me to see the need for a rate hike since GDP growth is pretty sluggish and there’s not much in the way of inflation.

After the jobs report came out, there was a pronounced shift within interest rate-sensitive stocks. Areas with high-dividend yields like Utilities gapped up, while banks and other financials took a hit. Gold had one of its best days in weeks, and the U.S. dollar suffered its worst drop all year.

I’m still concerned about inflation, but so far, the evidence just isn’t there. If that changes, I think the Fed would be justified in raising interest rates. But it wouldn’t take much from the Fed to flatten out the yield curves since long-term rates are so low. In fact, the bond market rallied and has continued to rally. The 10-year yield just closed at 1.68%, which is a four-month low, and it’s very close to being the lowest level in more than three years.

Meanwhile, Mario Draghi at the ECB has started buying corporate bonds. The European economy is still a mess, and the authorities there are pulling out all the stops. Bond yields in the Old World are falling to microscopic levels. In Germany, the 10-year yield is getting very close to 0%. Switzerland said it plans to issue a 13-year bond with a coupon of 0%. In the U.K., their 10-year bond fell below 1.25%, which is a record low. Now there are reports of foreign investors buying up U.S. junk debt. There’s simply no other place to go.

If you had decided to sit out stocks this year and plant your money in long-term Treasuries, you’d be enjoying a nice lead over the S&P 500. But going forward, I think the stock market is much safer. The S&P 500, as a whole, now yields about 50 basis points more than the 10-year Treasury. And don’t forget an important fact about fixed income: the income is fixed. That’s not the case with equities which can raise their dividends. Speaking of which, let’s turn to this week’s news from CR Bard.

CR Bard Raises Its Dividend for the 45th Year in a Row

On Wednesday, CR Bard (BCR) announced that it’s raising its quarterly dividend from 24 to 26 cents per share. (In last week’s issue, I predicted 27 cents.) This is the 45th consecutive year in which Bard has raised its dividend. There are only a handful of publicly traded stocks that can boast track records like that.

The company said that the dividend is payable on July 29 to shareholders of record at the close of business on July 18. Bard only pays out a modest portion of its profits as dividends. For the average stock in the S&P 500, the average payout usually runs around 33%. For Bard, it’s less than 10%. Going by Thursday’s closing price, Bard now yields 0.31%. That’s puny, but Bard can easily afford to keep raising its dividend for many years to come.

The company also announced a new $500 million share-repurchase authorization. This is on top of the current program, which has $205 million left in it. Shares of BCR are up 20% for us this year. This week, I’m lifting my Buy Below on CR Bard to $231 per share.

Biogen Drops 12.8% after MS Study

One of my favorite biotech stocks, Biogen (BIIB), got dinged hard this week after the company said that Opicinumab, one of its experimental drugs related to multiple sclerosis, had performed poorly during mid-stage tests. There’s been a worry on Wall Street that Biogen has a thin pipeline, and this news didn’t help. The stock dropped 12.8% on Tuesday. This is especially unfortunate because the stock had been trending higher.

Opicinumab isn’t dead yet, but the drug needs more time for trials. Biogen wasn’t in any sense staking its future on Opicinumab, but it’s not a pleasant setback. If you recall, Biogen said it’s going to focus on its neurology business, and they plan to spin off their hemophilia drugs.

While this week’s news is unfortunate for Biogen, but they still have a lot going for them. Let’s remember that the last few earnings reports have easily beaten expectations. The lower share price also means the stock is going for less than 13 times next year’s earnings estimate. Plus, we have the possible spinoff coming later this year, or in early 2017. Don’t be scared out of Biogen. The company has a bright future.

That’s all for now. Next week is the big Fed meeting. The FOMC gets together on Tuesday and Wednesday. The policy statement will come out at 2 p.m. on Wednesday, which will be followed by a press conference from Fed Chairwoman Janet Yellen. The Fed members will also update their economic projections (the “blue dots”). I’m not expecting any change in rates, but market watchers will pore over every letter in the statement, looking for clues. 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 10, 2016
Posted by Eddy Elfenbein on June 10th, 2016 at 7:04 am

Bund Brexit Rally Puts Zero Yield Firmly In Sight

How China’s War on Dissenting Views Spills Over Into Pop Music and French Cosmetics

Bullish Oil Sentiment Intact After Government Report

Drop in Jobless Claims Suggests Layoffs Remain Low

Restrictions on Payday Loans Hurt the Poor

The End of the U.S. Manufacturing Renaissance (Such as It Was)

Adapting to Modest Oil Prices, BP Spins Off Norway Business Into New Venture

Apple Plans to Sell Excess Rooftop Solar Energy From New Home

Is Tesla Trying to Keep Owners From Reporting Vehicle Safety Problems?

2 Reasons Chipotle’s Stock Tanked on Thursday

Line Corp Plans Dual Tokyo, New York IPO, Valuing Firm at $5.5 Billion

Mitsubishi Motors to Hire Auditor to Oversee Errant Tech Unit

Viacom Rumblings: Stacking the Board and Maybe Remerging With CBS

Cullen Roche: Beware of Guru Worship – George Soros Edition

Jeff Miller: Finding the Best Contrarian Stocks

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Will Gold Break Back above $1,300?
Posted by Eddy Elfenbein on June 9th, 2016 at 9:43 am

My ear thingie pops out at 2:01. I believe I handled it well.

Morning News: June 9, 2016
Posted by Eddy Elfenbein on June 9th, 2016 at 7:39 am

Brazil Benchmark Interest Rate Holds As Inflation Continues To Weigh Heavily On Beleaguered Economy

Yen Steady, Shrugs Off Soft Manufacturing Report

Russia Unveils New Passenger Plane It Says Will Rival Boeing, Airbus

Putin’s Core Support Begins to Waver

Weighted by Debt, Puerto Ricans Divided Over Federal Oversight

S&P 500 Up for Third Straight Session, Inching Toward Record High

DONG Energy Shares Jump After Biggest European IPO This Year

A Bearish George Soros Trades Again

What You Need to Know from the New CBO Income Figures

Morgan Stanley Fined $1 Million for Client Data Breach

More Reasons Why Silver Wheaton Will Keep Soaring

Apple Case Against Samsung Should Go Back To Lower Court: Justice Department

Lawyers Ordered to Testify on Client’s Tax Evasion Case

Josh Brown: S&P Financials Down 30% Over the Last Decade

Roger Nusbaum: Closed End Fund Palooza

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CR Bard Raises Dividend
Posted by Eddy Elfenbein on June 8th, 2016 at 7:49 pm

For the 45th year in a row, CR Bard (BCR) raised their dividend. The quarterly dividend will increase from 24 to 26 cents per share. The dividend is payable on July 29 to shareholders of record at the close of business on July 18.

The company also announced a new $500 million share repurchase authorization. This is on top of the current program which has $205 million left in it.

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.