Qualcomm Rejects Split Idea
Posted by Eddy Elfenbein on December 15th, 2015 at 10:24 am

Qualcomm’s board rejected the idea of breaking itself up. I think that was the wrong decision.

Qualcomm Inc. rejected calls to split, betting that keeping its chipmaking and patent licensing business together is the best formula for turning around an earnings slump and stock drop.

Qualcomm also updated the outlook for its fiscal first quarter ending this month, saying it may “modestly” exceed its prior profit forecast.

Following a review of the “benefits and challenges of the existing structure,” the mobile chipmaker’s board and management decided, as anticipated, not to separate the two arms of the company.

“We have a focused plan in place that we believe will drive growth and we are off to a good start implementing that plan,” said Chief Executive Officer Steve Mollenkopf. “The strategic benefits and synergies of our model are not replicable through alternative structures.”

(…)

Qualcomm’s decision contrasts with other technology companies that have split this year. Hewlett Packard became two entities in November, EBay Inc. split with payments unit PayPal and Yahoo! Inc. is separating itself from its stake in Alibaba Group Holding Ltd. to return the asses to shareholders without incurring taxes.

The decline in Qualcomm’s stock price has pushed its market value to about $70 billion, compared with a peak of more than $130 billion in 2014, when it surpassed Intel Corp. to become the biggest U.S. publicly traded chip company. Talk of a split was rekindled earlier this year by activist investor Jana Partners LLC, which bought up stock in the company. Jana signed off on the strategic review, which was initiated in July and included a 15 percent employee reduction and a shakeup of the board.

The stock is up about 2.6% today.

CRB Index Falls to 41-Year Low
Posted by Eddy Elfenbein on December 15th, 2015 at 10:04 am

Yesterday, the CRB Index, a major index of commodities, fell to a 41-1/2-year low. The index hasn’t been this low since the middle of 1973.

Inflation Was Flat Last Month
Posted by Eddy Elfenbein on December 15th, 2015 at 10:00 am

With the Federal Reserve set to raise interest rates this week, we had one more inflation report to digest. This morning, the government reported on inflation for November.

As it turned out, headline inflation was completely flat last month, 0.0%. But core inflation, which excludes food and energy prices, rose by 0.2%.

Over the last year, core inflation has rise by 2%. That’s the fastest pace in more than three years. Of course, it’s still pretty tepid inflation.

Here’s the monthly change in the headline rate:

Here’s the monthly change in the core rate:

Morning News: December 15, 2015
Posted by Eddy Elfenbein on December 15th, 2015 at 7:01 am

Oil Prices Rally on Hopes That U.S. Crude Export Ban Will be Lifted

For Consumers, Fed’s Expected Rate Hike is Unlikely to Cause Shock and Awe

VW’s Europe Market Share Narrows Most Since Emissions Crisis

PR Newswire Sold to Cision for $841 Million

General Electric to Sell Commercial Lending Business in Japan

Why GoPro Shares Could Double in the Next Year

Sanofi Seeks $25 Billion Deal in Asset Talks With Boehringer

Dell’s Finances Show Revenue Decline, Similar to Rivals

Apple Opens Secret Laboratory in Taiwan to Develop New Screens

Dow, DuPont Eye Big Tax Savings in Rare Merger of Equals

Diagnosing Yahoo’s Ills: Ugly Math in Marissa Mayer’s Reign

Inside Information Aside, Lumber Liquidators Is Still In A Lot Of Trouble

Inside A Community’s Fierce Fight To Prevent A Nuclear Tragedy

Jeff Carter: Where Are Calls to Crucify the Speculators?

Roger Nusbaum: Wasn’t Cheaper Crude Supposed To Be A Good Thing?

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Morning News: December 14, 2015
Posted by Eddy Elfenbein on December 14th, 2015 at 7:12 am

European Bonds Fall as Rally Fades Before Fed’s Rate Decision

Dollar Gains Versus Euro as Investors Await Fed’s Rate Decision

Draghi Says ECB Stimulus Will Raise Inflation Without Delay

South Africa Tries to Restore Credibility After Zuma U-Turn

Big Oil, Make Way for Big Solar. The Winners and Losers in Paris

Crude Falls Below $35 per Barrel in New York for First Time Since 2009

Wholesale Prices Fall Again in November, But Food Costlier

AstraZeneca Exploring Strategic Options with Acerta Pharma

Shell Plans to Shed 2,800 Jobs After BG Takeover

Micron Buys Rest of Inotera Memories for $3.2 Billion

Seattle Considers Measure to Let Uber and Lyft Drivers Unionize

Alibaba Agrees on $266 Million Acquisition Deal With South China Morning Post

In Virtual Reality Headsets, Investors Glimpse the Future

Joshua Brown: “Is My High-Yield Fund In Danger?”

Jeff Miller: Is It Finally Time For The Santa Claus Rally?

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Recreating Chaplin/Fairbanks
Posted by Eddy Elfenbein on December 13th, 2015 at 12:47 pm

Here I am doing a very poor job of recreating the iconic image of Charlie Chaplin and Douglas Fairbanks selling World War I bonds.

The Collapse of Junk
Posted by Eddy Elfenbein on December 11th, 2015 at 2:50 pm

In today’s CWS Market Review, I mentioned how poorly the junk bond market has performed. I spoke too soon. Today has been a disaster for junk.

Check out this chart of the junk bond ETF (JNK):

This could be the lowest close for JNK since June 2013. I think we’ll see many commodity-related defaults next year.

CWS Market Review – December 11, 2015
Posted by Eddy Elfenbein on December 11th, 2015 at 7:08 am

“Other guys read Playboy. I read annual reports.” – Warren Buffett

Get ready! Next week is a big week for us and for Wall Street. On Tuesday and Wednesday, the Federal Reserve meets in Washington and will very likely raise interest rates for the first time in nine and a half years.

The day that some thought would never come is finally at hand. No more QE. No more Operation Twist, and no more ZIRP (Zero Interest Rate Policy). A lot has changed since June 2006. Believe it or not, Apple was around $8 per share. Companies like Facebook and Twitter had just been started, and Uber was still a few years away.

But our Buy List was already around. Which reminds me: the other big news coming next week will be the 2016 Buy List. I’ll unveil the new list in next week’s issue. As a reminder, I’ll be adding five new stocks and deleting six of our current stocks. The extra one is the due to the PayPal spinoff. The new Buy List will go into effect at the start of trading on January 4. That will be the first day of trading for the New Year.

In this week’s CWS Market Review, I want to take a closer look at the dramatic decline in the price of oil. OPEC has effectively surrendered, and the price of crude is at its lowest point in seven years. I’ll also preview next week’s earnings report from Oracle (ORCL). Plus, we got a nice 10% dividend increase from Stryker (SYK). Since 1991, the orthopedic stock has raised its payout by 243-fold! But first, I want to take a closer look at the stock market which has been a bit more complicated than the indexes suggest.

The Stock Market Isn’t One Giant Stock

On the surface, this has been a flattish year for stocks, but if we peer just below the surface we can glimpse a much more complicated environment. The fact is, this has been a very unbalanced market. The gap between the biggest winners and everybody else hasn’t been this wide in 16 years.

The last time we saw a spread like this was during the Tech Bubble in 1999. If you take away a small number of very big winners, this has been a pretty blah year for the overall market. Here’s a jaw-dropping stat: According to Goldman Sachs, 20% of the margin growth for the entire stock market during this bull market has come from one stock—Apple.

Even recently, the market’s stats tell a complex story. For example, the S&P 500 has rallied nine times in the last 10 weeks. I would never have guessed that to be the case. (This current week will probably be a downer, but I’m writing this on Friday morning.) Yet on Wednesday, the S&P 500 touched its lowest close in nearly a month.

The index hasn’t been able to get much traction lately. We haven’t had back-to-back up days since November 2-3. That’s one of the longest such streaks in decades. The last nine up days for the market have all been followed by down days. There’s just no follow-through. Puts against losses in the S&P 500 are now worth twice the calls for similar gains.

Ryan Detrick (a must-follow on Twitter) notes that the S&P 500 touched 2,100 an amazing 55 times this year. That’s 23% of the trading days. Twice this year, the Dow has had 100-point moves for seven consecutive days. It very nearly happened a third time this week. Compare that to last year when it didn’t happen once.

Through Thursday, the S&P 500 is down a scant 0.32% on the year. No big deal, right? Yet 151 stocks are up more than 10% on the year, while another 174 are down more than 10%. The middle has been hollowed out. Only about one third of the index even comes close to reflecting what “the market” is doing—and I’m using a very broad definition for that term.

In fact, we can see this effect on our Buy List. While we’re up more than 47% in Hormel Foods (HRL), together with a 31% winner in Fiserv (FISV) and three more +20% winners, we’ve been hurt by big losses in Bed Bath & Beyond (BBBY) at-29% and Qualcomm (QCOM) at-34%. In markets like this, you feel the key isn’t picking big winners but staying away from big losers.

One of the candid market stats comes from Morgan Housel, who writes, “According to JP Morgan, 40% of stocks have suffered ‘catastrophic losses’ since 1980, meaning they fell at least 70% and never recovered.” This is a good reminder that investors ought to use some caution whenever they talk about “the market” as if it’s one giant stock.

Don’t Let the Fed Scare You

I’ll warn you now. The financial world will come to a halt on Wednesday afternoon, waiting to hear what the Fed has to say. The futures market now thinks there’s an 83% chance that rates will go up next week. Personally, I think that’s about 16.99% too low.

In the October 30 issue of CWS Market Review, I said that if the next two jobs reports average 180,000 net new jobs, the Fed will go ahead and raise rates in December. Since then, the two jobs reports were +298,000 for October and +211,000 for November. That averages to +254,500.

Ultimately, a rate increase is a positive sign in that it reflects that our economy has finally gotten back to normal after a long and painful recession. Of course, we’re not fully recovered yet, but we should note the progress that’s been made. I’m still troubled by the low workforce-participation rate, although some demographic factors are at play. I’d also like to see a greater increase in average hourly earnings.

Following the meeting, Fed Chairwoman Janet Yellen will face the media in a press conference. The members of the FOMC will also update their economic projections (these are the “blue dots,” so named for the Fed’s scatterplot graphs). In my opinion, the Fed’s outlook has been far too hawkish, meaning they see rates going up too far too fast.

Jon Hilsenrath, the WSJ reporter most widely assumed to be the conduit for the Fed, recently noted that the Fed doesn’t want to be locked in a predetermined path. The central bank wants to maintain its flexibility in determining the right path for interest rates.

Here’s the interesting part: what comes after next week? The futures market thinks the Fed will probably raise rates again at its April 2016 meeting. Sounds reasonable. After that, they’re almost evenly split on the chances for a third hike at the September 2016 meeting. What this means is that the market is not expecting an aggressive round of rate hikes. In fact, the Fed funds rate will most likely continue to be well below inflation for all of 2016. That’s good for stocks.

The Decline and Fall of OPEC

Last Friday, OPEC held a meeting in Vienna, and it may go down in history. At the meeting, the cartel essentially decided to abandon any production quotas. If a cartel can’t or won’t prop up prices, then it’s really not much of a cartel.

Going into the meeting, we knew that OPEC members were cheating anyway. The meeting just made de facto de jure ‘cause de oil is gonna be pumped no matter what.

But I wouldn’t be so quick to declare OPEC dead. It’s still big and very influential. There’s also the issue of Iranian oil coming back on line at some point. The giant, as always, is Saudi Arabia, and if they wanted to, they could unleash a massive supply of oil onto the world. We’re seeing a rift grow between the core members of OPEC and the more marginal players (like Ecuador or Venezuela, which I always forget are in OPEC.) The marginal players are losing—and badly. Last weekend, voters in Venezuela gave the socialist government there a crushing defeat.

In the U.S., the junk-bond market is closely tied to oil production. As oil has fallen, junk-bond spreads have increased. There could be a lot of defaults coming soon. Speaking of the junk bond market, Jeffrey Gundlach recently said, “I don’t like things when they go down every single day.” It’s as if it’s 2008 all over again, but just in the energy patch.

Lately, however, there are signs that the weakness in junk bonds isn’t solely about oil, and it may be spreading to other areas. Some bears are latching onto this as an omen of bad times, and they think higher rates from the Fed will make things even worse. One junk bond fund just blocked investor withdrawals. I’m concerned about a breakdown in the high-yield sector, but I’m not alarmed just yet.

Oracle’s Earnings Preview

Oracle (ORCL) is due to report its fiscal Q2 earnings after the market closes on Wednesday, December 16. Wall Street currently expects earnings of 60 cents per share which is down from 69 cents for the same quarter last year.

The strong dollar has clobbered Oracle’s earnings recently. I expect to see more of the same for Q2. Oracle was late to the game in the cloud business, but they’ve been trying to close the gap.

Oracle has been going through a tough transition period. We’ve probably just passed the low point (Q4 was a total disaster). Bookings have been strong for Oracle, and I think we’ll see much better results from them in the future.

The company said it sees Q2 earnings ranging between 63 and 66 cents per share and revenue (in constant currency) coming in between -1% and +2%. But they project cloud growth of 50%. I recently listed Oracle as one of the stocks I’m considering dropping next year. I hope to see strong signs of improvement here.

Stryker Raises Dividend by 10%

On Thursday, Stryker (SYK) announced that it’s bumping up its dividend by 10%. I love it when good companies reward their investors. SYK’s quarterly dividend will rise from 34.5 cents to 38 cents per share.

From the press release:

“As part of our capital-allocation strategy, we are committed to consistent growth in our dividend, which is reflected in the announced 10% increase for 2016,” said Kevin. A. Lobo, Chairman and Chief Executive Officer. “We will continue to utilize our balance sheet for acquisitions that support our growth goals, dividends and share repurchases to help drive shareholder value.”

The annual dividend adds up to $1.52 per share. Based on Thursday’s close, that works out to a yield of 1.64%. Since 1991, Stryker has increased its dividend by 243-fold. Stryker remains a buy up to $101 per share.

Buy List Updates

As we head toward the close of 2016, I want to make a few adjustments to our Buy Below prices. This week, I’m raising the Buy Below on Ross Stores (ROST) to $56 per share. By the way, I think Ross will have little trouble beating its guidance for Q4.

I’m also raising my Buy Below on Microsoft (MSFT) to $58 per share. The stock made its all-time high in the closing days of the last millennium. I think there’s a good chance MSFT will make a new all-time high very soon.

Ball (BLL) has been on a roll (sorry). The company looks like it will win approval from the EU for the Rexam deal. Since September 29, shares of BLL are up nearly 20%. Interestingly, Ball is floating euro-denominated bonds to finance the deal. For now, I’m keeping my Buy Below on Ball at $70 per share.

I also want to lower my Buy Below on Cognizant Technology Solutions (CTSH). Don’t worry. I don’t think any less of CTSH. I just want to align the Buy Below better with the current price. The company has been doing very well lately. You may want to check out this recent Bloomberg article on Cognizant’s efforts to go after IBM in consulting. I rate Cognizant a buy up to $65 per share.

That’s all for now. Next week will be all about the Federal Reserve. The Fed meets on December 15-16. The policy statement will be released at 2 p.m. ET on Wednesday. Yellen’s presser will follow. On Tuesday, the government will release the CPI report for November. There’s a good chance that trailing core inflation hit 2%. That hasn’t happened in a while. Oracle will report its earnings after the market closes on Wednesday, December 16. 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: December 11, 2015
Posted by Eddy Elfenbein on December 11th, 2015 at 7:00 am

South Africa Faces Watershed as Investors Despair of Zuma

IEA Sees Oil Glut Lasting to Late 2016 as OPEC Keeps Pumping

No Cheer as China Yuan Hits Four-and-a-Half-Year Low, Oil at Seven-Year Low

Dollar Rises as Doubts Over U.S. Economy Ease

U.S. Wealth Tumbled in the Third Quarter

Loan to San Bernardino Shooter Draws Scrutiny to Online Lending Industry

DuPont, Dow Chemical to Combine in Merger of Equals

Coca-Cola India Says It May Have to Shut Factories If New Sin Tax Passed

Yum Details China Plans and Tightens Focus on Its Brands

Why You Shouldn’t Hold On To Coca-Cola Just Because Warren Buffett Has A Stake

Jaguar Land Rover to Invest 1 Billion Pounds in Slovak Plant

China’s Tsinghua Unigroup Plans to Buy Stakes in Taiwan Chip-Packaging Companies

The Last Of The Great Tech Unicorn IPOs (For 2015)

Cullen Roche: Three Things I Think I Think

Jeff Carter: Some Days, You Have to Bring Your A Game

Be sure to follow me on Twitter.

Stryker Raises Dividend by 10%
Posted by Eddy Elfenbein on December 10th, 2015 at 10:12 am

This morning, Stryker (SYK) announced that they’re raising their dividend by 10%. The quarterly payout will rise from 34.5 cents to 38 cents per share.

“As part of our capital allocation strategy, we are committed to consistent growth in our dividend which is reflected in the announced 10% increase for 2016,” said Kevin. A. Lobo, Chairman and Chief Executive Officer. “We will continue to utilize our balance sheet for acquisitions that support our growth goals, dividends and share repurchases to help drive shareholder value.”

The annual dividend is now $1.52 per share. Based on Wednesday’s close, that works out to a yield of 1.63%. Since 1991, their dividend is up 243 fold.