Ouch!
Posted by Eddy Elfenbein on June 29th, 2015 at 6:32 pm

The market was not in its happy place today. Right after I told you how placid the market has been acting in the last newsletter, the S&P 500 dropped 2.09% today.

This was the worst day of the year so far. It was the first 2% decline in 2015, and it was the biggest drop since February 3, 2014. The S&P 500 is now down for the year. The index is just above its 200-day moving average.

The weak spots today were healthcare, financials and materials. The best areas, meaning down the least, were utilities and energy. Today was a Quadrant 3 day.

The S&P 500 High Beta index was off 2.73% while Low Vol was down 1.82%. The S&P 500 High Quality Index was down 1.86%.

This was a harsh day for our Buy List as well. We were down 2.52% today which was 43 basis points worse than the market. But that comes after an impressive run of beating the S&P 500. We’re still 288 basis points ahead of the market. Qualcomm (QCOM) came near its 52-week low. The stock now yields just over 3%.

Two Quick Stories
Posted by Eddy Elfenbein on June 29th, 2015 at 12:46 pm

Overall, this is a rough day for the markets. As I’ve said, the scare isn’t Greece but who’s next. Once a precedent is set, then the dominos can fall.

With the PayPal spinoff coming, I have to think that it might be snapped up quickly. IBD looks at that possibility:

JPMorgan raised its price target on eBay (NASDAQ:EBAY) ahead of its spinoff of payments arm PayPal, and said a “stand-alone” eBay could be involved in M&A.

PayPal, meanwhile, has been viewed as a possible partner of Alibaba Group or a takeover target. PayPal will face stiff competition from Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL) and Samsung in mobile payments, some analysts say.

Doug Anmuth, a JPMorgan analyst, raised his eBay price target to 64 from 60.

“Some of eBay’s playbook sounds familiar, and management will now need to show that it can execute on it better than over the past few years,” said Anmuth in a research report. “But eBay also has some fallback with $1 billion to $2 billion in net cash at separation, more than $2 billion in annual free cash flow, and significant capacity to lever up and return capital if desired.”

“A stand-alone eBay also becomes more of an M&A candidate going forward, in our view,” he added.

(…)

“We currently value PayPal at a market cap of $44 billion,” Anmuth wrote, “and a post-spin share price of $36. Overall, we are encouraged by the prospects for both PayPal and eBay as stand-alone companies and investment vehicles. However, between the two we believe PayPal is better positioned in terms of the potential to drive future innovation, the competitive landscape, and overall growth opportunities.”

William Dudley, the head of the New York Fed, recently said that the Fed may increase interest rates in September:

Speaking on Friday, Mr Dudley said the data since then have made him “less worried about the labour market piece”. He declined to reveal his personal forecast for when the Fed will first lift rates, indicating it was perfectly possible the central bank will wait until December before moving.

“If we hit 2.5 per cent growth in the second quarter and it looks like the third quarter is shaping up for something similar, then I think you are on a firm enough track that you would imagine you would have made sufficient progress in our two tests [for a rate hike], certainly by the end of the year,” he said.

“It would not shock me if we decided to lift off in September, or it wouldn’t shock me if the data were a little softer and it caused us to wait.”

Markets Down on Greek News
Posted by Eddy Elfenbein on June 29th, 2015 at 11:25 am

The stock market is down today on more disappointing news from Greece. Negotiations broke down over the weekend, and there’s been a run on Greek banks. Everyone there wants to get euros in hand, and fast.

It’s gotten so bad that the government stepped in and closed all banks along with their stock market. They’ve also decided to have a referendum this Sunday on whether the country should accept austerity in exchange for more aid. Shares in the National Bank of Greece are down 20% today.

I still think some deal will come about but I’m not certain. I think the IMF and European Union are fed up with Greece and their far-left government.

The fallout in our market isn’t too dramatic. Cullen Roche noted that Greece is looking at defaulting on a $1.6 billion loan. That’s Walmart’s revenue over 30 hours. So let’s put this all in some perspective.

The S&P 500 is currently down 1.14% but there’s a big spread underneath the surface. The Low-Volatility Index is down 0.82% while the High Beta sector is down 1.71%. That’s a big gap.

Morning News: June 29, 2015
Posted by Eddy Elfenbein on June 29th, 2015 at 7:03 am

Greece Imposes Capital Controls as Fears of Grexit Grow

Merkel, Hollande Turn Away From Greece as Referendum Die Is Cast

Greek Crisis Weighs on Global Stock and Bond Markets

Swiss Central Bank Intervened to Stabilize Franc Amid Greek Concerns

Greek Ties to Bulgarian Banks Spur a Bond Rout as Contagion Spreads

China’s Stocks Enter Bear Market as Rate Cut Fails to Stop Rout

Iran’s Economic Boost From Nuclear Deal Projected to Come Slowly

Fed’s Dudley Says September Rate Hike ‘Very Much in Play’

High-Profile Study Turns Up the Antitrust Heat on Google

Element Financial to Acquire Bulk of GE’s Fleet Unit For $8.6-Billion

Novartis Buys Queensland Drug Developer Spinifex for $US 200 Million Plus

Musk’s Space-Taxi Vision Sustains Blow as SpaceX Rocket Blows Up

When a Company Is Put Up For Sale, In Many Cases, Your Personal Data Is, Too

Jeff Miller: Weighing the Week Ahead: Greek Ripples or Economic Fireworks?

Joshua Brown: ”the one who will suffer most”

Be sure to follow me on Twitter.

eBay Sets PayPal Spinoff
Posted by Eddy Elfenbein on June 26th, 2015 at 4:56 pm

Circle your calendars for July 17. That’s when eBay (EBAY) will spinoff PayPal.

For every one share you have of eBay, you’ll get one share of PayPal. It will trade under the symbol PYPL.

eBay Inc. (EBAY) today announced that its board of directors has approved the completion of the previously announced separation of eBay and PayPal into independent publicly traded companies. The separation will occur through a pro rata distribution of all of the stock of eBay’s subsidiary PayPal Holdings, Inc. to eBay stockholders. The distribution remains subject to satisfaction of the conditions described in the preliminary information statement filed with the Form 10, including, but not limited to, obtaining all necessary regulatory approvals, including that of the European Central Bank.

In the distribution, eBay Inc. stockholders will receive one share of PayPal common stock for each share of eBay Inc. common stock held as of the close of business on July 8, 2015, the record date for the distribution. Subject to the satisfaction of the conditions to the distribution, the distribution of PayPal common stock is expected to occur on July 17, 2015. PayPal will not issue fractional shares of its common stock in the distribution. Immediately following the distribution, PayPal will be an independent, publicly traded company and will be listed on the NASDAQ Stock Market under the ticker “PYPL.” eBay will continue to trade on the NASDAQ Stock Market under the ticker “EBAY.”

“eBay and PayPal are two great, special businesses,” said John Donahoe, President and CEO of eBay Inc. “As separate, independent companies, eBay, led by Devin Wenig, and PayPal, led by Dan Schulman, will each have a sharper focus and greater flexibility to pursue future success in their respective global commerce and payments markets. I am confident that eBay and PayPal each have the right leadership team, strategy, structure and operational discipline to create sustainable, long-term value for stockholders and deliver great opportunities and experiences for customers worldwide.”

eBay is a global commerce leader celebrating its 20th anniversary this September. At any given time, approximately 800 million live listings can be shopped on eBay, which connects 25 million active sellers and 157 million active buyers worldwide. About 3 out of every 4 items sold on eBay are new, and 80 percent of merchandise on eBay is sold at fixed price. eBay’s revenue in 2014 was $8.8 billion.

As a new independent publicly traded company, PayPal is the industry leader in digital payments with its open digital payments platform, and is the most trusted digital wallet brand. In 2014, PayPal processed $235 billion in payment volume across 165 million active customer accounts, and handled one billion mobile transactions. PayPal supports 10 million merchants worldwide. Revenue in 2014 was $8 billion.

Beginning on or about July 6, 2015, and continuing up to and through the distribution date, it is expected that there will be two markets in eBay common stock. Shares that trade in the “regular-way” market will be entitled to shares of PayPal common stock distributed pursuant to the distribution; shares that trade in the “ex-distribution” market will trade without an entitlement to shares of PayPal common stock distributed pursuant to the distribution. Shares of eBay in the “ex-distribution” market will trade under the symbol EBAY.wi.

PayPal anticipates that “when-issued” trading will begin on or about July 6, 2015, and will continue up to and through the distribution date. Shares of PayPal in the “when-issued” market will trade under the symbol PYPL.wi. “Regular-way” trading in PayPal’s common stock is expected to begin on July 20, 2015, the first trading day following the completion of the separation (although this date may change if certain conditions are not satisfied by that date, as described in PayPal’s preliminary information statement filed with the Form 10).

eBay stockholders who hold common stock on the record date and decide to sell any of their common stock before the distribution date should consult with their stockbroker, bank or other nominee to understand whether the shares of eBay common stock will be sold with or without the entitlement to PayPal common stock pursuant to the distribution.

No action is required by eBay’s stockholders in order to receive shares of PayPal common stock in the distribution. eBay expects to mail the information statement to all stockholders entitled to receive the distribution of shares of PayPal common stock. The information statement is an exhibit to PayPal’s Registration Statement on Form 10 that describes PayPal, including the risks of owning PayPal common stock, and other details regarding the separation. The distribution of PayPal common stock is subject to the conditions described in the information statement, including, but not limited to, obtaining all necessary regulatory approvals, including that of the European Central Bank.

Goldman, Sachs & Co. and Allen & Company LLC are serving as financial advisors and Wachtell, Lipton, Rosen and Katz is serving as legal counsel in connection with the separation and distribution.

CWS Market Review – June 26, 2015
Posted by Eddy Elfenbein on June 26th, 2015 at 7:08 am

“Summertime, and the livin’ is easy…” – Porgy & Bess

Indeed it is. We just passed the solstice and Wall Street is already in its summer doldrums. Frankly, there’s not much going on. The S&P 500 hasn’t closed more than 1.25% from 2,105 for 56 straight trading days. We haven’t had a 2% move all year. In fact, we haven’t even had a 1% move in nine weeks. That’s the longest such streak since 1993.

This market’s just dull, dull, dull.

Traders, however, don’t like a dull market. They need something—anything—to worry about. If it’s hard to find this week’s Worry of the Century, well, then they’ll keep looking around until they find something. That’s probably why the news from Greece has gotten more attention than it truly deserves. Once again, let me remind you to not lose one second of time worrying about Greece. Here’s a stat for you: Americans own $5.7 billion worth of Greek stocks. For perspective, that’s about the size of Dunkin Donuts (DNKN), which is the 110th largest stock in the mid-cap index.

In this week’s CWS Market Review, I’ll talk more about the economy. Until now, I suspected that the economy had improved this quarter. Now that we have more evidence, that case has grown much stronger. GDP for Q2 could be one of the best numbers in the last few years. You heard it here first.

I’m pleased to report that our Buy List is finishing up the first half of this year on a strong note. The Buy List has outpaced the S&P 500 for the last five days in a row. As of Thursday’s close, we’re up 5.20% for the year compared with 2.11% for the S&P 500. That’s a lead of 3.09%, which is our widest lead of the year. Let’s hope this is another market-beating year for us.

Later on, I’ll discuss the blah earnings from Bed Bath & Beyond (BBBY). It wasn’t terrible, but it wasn’t that good, either. I’ll fill you in. Also, shares of Ford Motor (F) got a nice boost this week (about time!) thanks to an upgrade from Goldman Sachs. Before I get to that, let’s look at the best personal spending report in six years.

Strongest Consumer Spending in Six Years

Next week, the U.S. economic recovery officially turns six years old. Of course, if you tell that to a lot of folks, they might be surprised that it’s even begun. I certainly know what they mean. Many home values are miles from their highs reached six or seven years ago, and millions of Americans are still looking for work.

This week, the government revised its estimate of Q1 GDP growth. The good news is that it was revised higher. The bad is it was revised up to -0.2%. In other words, the U.S. economy shrunk in real terms during the first three months of the year. So we’re six years into a recovery and we’re still seeing negative growth. That just doesn’t ring right.

This is the third time in the last five years that the first quarter has shown negative growth. Some folks on Wall Street think the government’s methodology might be off. For their part, federal number crunchers are looking into the issue. Being a market watcher, I’m not surprised by the poor GDP report. We already saw the evidence in Q1 earnings reports. Of course, part of that was due to the strong dollar. The rising greenback clearly took a bite out of profits and economic growth.

As a result, some folks were expecting more bad news as we headed into Q2. The Federal Reserve, however, said that it was a passing storm, and the evidence now suggests they were right. On Thursday, the government reported that personal income rose by 0.5% in May, and personal spending jumped by 0.9%. That’s a big number. It was the best report for spending since August 2009. Economists had been expecting an increase of 0.7%.

We won’t get the Q2 GDP report until late July, but we’ve already seen the personal spending reports for April and May. Taken together, they’re point towards a 3.1% annualized increase for personal spending in Q2. I always try to take a reality-based view of the markets and the economy, so trust me when I say that’s good news.

The government also said that jobless claims rose by 3,000. That’s not much. More importantly, they’ve come in below 300,000 for the last 16 weeks in a row. Janet Yellen and her friends at the Fed took a risk by holding out against calls for an immediate rate hike. At the same time, she communicated to the market that a rate increase is coming even if she can’t yet say when. That’s a tough balancing act. You may recall that the jobs report for March was pretty weak. In retrospect, that report appears to be an outlier.

Wall Street is now turning its eyes to next Thursday. That’s when the government will release the jobs report for June. I think we’ll see more of the same: an increase of 250,000 jobs, give or take. But more important than jobs growth is wage growth. Only recently have we had evidence that workers are getting an increase in pay. This trend needs to continue. More pay means more shoppers and that leads to more revenue.

High-Dividend Stocks Have Lagged

Once the Fed starts to increase interest rates, that will have a major shift on the markets. Actually, the shift has already started. The folks at Bespoke Investment Group divided the S&P 500 into 10 deciles sorted by dividend yield.

The decile with the lowest-yielding stocks has been the top performer so far this year while the highest-yielding decile has been the worst. That’s exactly what you’d expect in an environment of higher rates. Utility stocks have lagged while financials have led. On our Buy List, stocks like Wells Fargo (WFC) and Signature Bank (SBNY) have been among our better-performing stocks this year. I also think it’s interesting that some of our higher-yielding stocks like Ford (F) and Microsoft (MSFT) haven’t done that well.(I’ll have more on Ford in a bit.)

Second-quarter earnings will begin in a few weeks. I think we’ll see good numbers, but the open question is how much damage was caused by the U.S. dollar. For Q1, analysts were expecting a bigger impact than we got. But by looking at the recent earnings report from Oracle (ORCL), we can see that it’s still an issue. Oracle said that quarterly revenue dropped by 5%, but in constant currency, it rose by 3%.

I urge investors to focus on high-quality stocks. Stay away from regions like or China or Greece. I’m also wary of some of the recent IPOs we’ve seen. Some of the stocks on the Buy List that look particularly good at the moment are Stryker (SYK), Cognizant Technology (CTSH) and Wabtec (WAB). Boring and dependable is the way to go. Now let’s look at the recent earnings report from Bed Bath & Beyond.

Bed Bath & Beyond Earns 93 Cents per Share

It’s no secret that I’ve gotten a little frustrated with Bed Bath & Beyond (BBBY). Please don’t take this to mean that it’s a bad stock. But with our investments, I strive to see things as they are instead of how I would like them to be.

On Wednesday, Bed Bath & Beyond reported fiscal Q1 earnings of 93 cents per share. That was one penny below estimates, although it was within the company’s range of 90 to 95 cents per share. Quarterly revenues rose 3.1% to $2.74 billion which matched Wall Street’s expectations. Historically, Q1 is the weakest quarter of the year for the company.

The key number to watch is same-store sales, and that rose by 2.2%. Again, that was within the company’s range of 2% to 3%. For Q2, BBBY sees earnings ranging between $1.18 and $1.23 per share. Wall Street had been expecting $1.23 per share.

I’m not crazy about this earnings report, but honestly, I was afraid it was going to be worse. A miss of one penny per share isn’t that bad. Traders, naturally, didn’t take it well. The shares dropped as low as $67.50 on Thursday morning, which I thought was excessive. The stock came back a little later in the day to close at $69.23 per share. That’s a loss of 1.6% for the day.

The best news is that the company reiterated their full-year growth forecast. BBBY expects earnings to rise from flat to mid-single-digits. For clarity’s sake, let’s say that’s 0% to 5%. They also expect same-store sales to grow by 2% to 3%. They made $5.07 per share last year, so this year’s guidance works out to $5.07 to $5.32 per share. That means the stock is going for about 13.0 to 13.6 times this year’s earnings. By that measure, it’s hard to say that BBBY is too pricey.

Ideally, when I announce my new buys and sells each December, there shouldn’t be any major surprises. That’s still a long way off, but I will say that BBBY will need to show some improvement until then. Also in the red zone are Moog (MOG-A) and Oracle (ORCL). I’m keeping my Buy Below on BBBY at $75 per share.

Goldman Sachs Upgrades Ford Motor

I’ve been very optimistic on Ford Motor (F) for the last few weeks, and the shares haven’t done much. That’s ok-we play the long game around here. I knew that something would happen eventually.

This week, Goldman Sachs upgraded the automaker to a buy from a hold. At the same time, Goldman said to dump shares of GM (GM). Patrick Archambault said that Ford is hitting its “sweet spot” and that “The key driver is a superior growth outlook at Ford as it starts to see the volume, mix, and pricing benefits from the F-150 launch in [the second half of 2015], as well as still improving positioning in China.”

Ford’s stock, which had been as low as $14.86 last week, got as high as $15.66 this week. I don’t get why the shares are so low. The company hasn’t changed its full-year outlook at all. The stock is going for less than 10 times this year’s earnings, and next year is expected to be much better. Even with the higher price, Ford still yields 3.9%. I get why there’s a headwind against high dividend stocks, but Ford’s plainly cheap here. I rate Ford Motor a buy up to $17 per share.

That’s all for now. On Tuesday, the second quarter comes to an end. I’ll have a summary of the Buy List’s first-half performance on the website. I don’t want to get ahead of ourselves, but it’s been a good six months for us against the broader market. Let’s hope the back half goes as well as the front half. On Wednesday, the ISM report comes out along with the ADP jobs report. Then Thursday will be crowded. We’ll get the June jobs report along with initial claims on factory orders. The market will be closed on Friday, July 3 to give us a three-day weekend for Independence Day. 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 26, 2015
Posted by Eddy Elfenbein on June 26th, 2015 at 7:03 am

Chinese Stock Indexes Plunge

Chinese Stock Plunge Leaves State Media Speechless

New Partnership Aims To Improve Consumer Lending In China

Why It Won’t Be a Default If Greece Misses IMF Payment Next Week

IMF to Fed: Drop the Dots

Supreme Court Allows Nationwide Healthcare Subsidies

Jeb Hensarling’s Fight Against Ex-Im Bank Succeeds, For The Moment

Capital One, Apollo Among Bidders for GE Health-Care Lender

Aetna Closing In on Deal to Acquire Humana

Charter Lists Consumer Benefits to Win Merger Approval

Is Greece Lehman Brothers, Or Is It RadioShack?

Sorry Not Sorry: Why CEOs Need To Apologize More

Whole Foods Is Ripping You Off (And It Has Been For Years)

Jeff Carter: Entrepreneurship is About Overcoming Obstacles

Howard Lindzon: Robinhood Just Made ‘Passive’ Investing Easier Than Ever

Be sure to follow me on Twitter.

Personal Spending Rises 0.9%
Posted by Eddy Elfenbein on June 25th, 2015 at 12:03 pm

This morning, the government said that personal spending rose by the most in nearly six years. In May, PCE jumped 0.9% which beat Wall Street’s estimates of 0.7%. Initial jobless claims rose by 3,000 but are still quite low. This is the 16th week in a row they’ve been below 300,000.

Bloomberg notes that the S&P 500 is going for its ninth-straight week without a move of more than 1%. That’s the longest streak since August 1993.

Insurance stocks are doing well thanks to the Supreme Court’s Obamacare ruling. Eli Lilly (LLY) is up 4.7% and UnitedHealth Group (UNH) is up 2.8%. On our Buy List, AFLAC (AFL) and Express Scripts (ESRX) are doing quite well today.

Bed Bath & Beyond (BBBY) is down today after its soggy earnings report, but only by 2.4%. I was afraid it might be worse.

It’s hard to provide an update on the situation in Greece as headlines are changing so quickly. The EU and Greek government haven’t yet reached a deal and time is running out. Plus, the banking system looks ever-more fragile as people pull out their money.

Morning News: June 25, 2015
Posted by Eddy Elfenbein on June 25th, 2015 at 7:14 am

Dueling Greece Plans Presented as Ministers Race for Aid Deal

Austria Bemoans Greek Lack of Urgency

ECB Holds Athens Lifeline Unchanged as Bundesbank Protests

Businesesses Worry About Shouldering Burden of Greek Debt

China Moves to Scrap Rule Limiting Bank Loans to 75% of Deposits

Slower Quarters Leave U.S. Economy’s Expansion Stuck in First Gear

TransUnion Valued at $4 Billion in I.P.O.

Monsanto Quarterly Earnings Outdo Analysts’ Expectations

Disney Raises Dividend 15%, Will Start Paying Semi-Annually

Vivendi Boosts Telecom Italia Stake as Brazil Decision Looms

Options Bears Take Fresh Stab at Biotech Amid Rally Topping 500%

The Rise of the Compliance Guru – And Banker Ire

Takata Chief Apologizes For Airbag Problems

Joshua Brown: Chart o’ the Day: Global Growth Outlook by Country

Cullen Roche: Where Does Money Come From?

Be sure to follow me on Twitter.

Bed Bath & Beyond Earns 93 Cents per Share
Posted by Eddy Elfenbein on June 24th, 2015 at 4:38 pm

Bed Bath & Beyond (BBBY) just reported fiscal Q1 earnings of 93 cents per share. That was one penny below expectations. The stock is down after-hours. Honestly, I was afraid it was going to be worse.

For the first quarter of fiscal 2015, the Company reported net earnings of $.93 per diluted share ($158.5 million) compared with net earnings for the first quarter of fiscal 2014 of $.93 per diluted share ($187.1 million). Net sales for the first quarter of fiscal 2015 were approximately $2.738 billion, an increase of approximately 3.1% from net sales of approximately $2.657 billion reported in the first quarter of fiscal 2014. Comparable sales in the first quarter of fiscal 2015 increased by approximately 2.2%, compared with an increase of approximately 0.4% in last year’s fiscal first quarter. Comparable sales for the first quarter of fiscal 2015 include an approximate 0.3% unfavorable impact from the year over year change in the Canadian currency exchange rate.

For fiscal Q2, which is more than half over, Bed Bath sees earnings ranging between $1.18 and $1.23 per share. The Street had been expecting $1.23 per share.

The Company is modeling a 2.0% to 3.0% increase for comparable sales for the fiscal 2015 second quarter and continues to model a 2.0% to 3.0% increase for the remainder of the year. Net earnings per diluted share are modeled to be in the range of $1.18 to $1.23 for the fiscal 2015 second quarter and to be between relatively flat and a mid-single digit percentage increase for the fiscal full year.

Here are some quarterly financial stats going back a few years.