My Watch List
Posted by Eddy Elfenbein on January 27th, 2015 at 1:08 pm

Below is my latest Watch List. This is my unofficial list of high-quality stocks I like to follow. If a stock is on this list, then there’s a very good chance that it’s in the upper 5% of well-run companies on Wall Street. This is the elite.

I’m often asked how I go about selecting the stocks for my Buy List. It’s actually very simple. I have this Watch List of stocks and if one of them falls down to a very attractive price, then it becomes a contender for the new Buy List. I like to think of the Watch List as the minor leagues for the Buy List. Strong prospects earn their way up the ladder.

The Watch List is very informal. Unlike the Buy List, I’m constantly adding and deleting names. In fact, I have a bad habit of letting the Watch List grow too large. I often find myself adding three names for every one I delete. It’s simply not possible to follow 130 stocks.

Every few months I promise myself that this will be the time to trim down the Watch List. Well, I actually did it this time! Over the past several weeks, I trimmed the Watch List down to 76 names.

Spies and Finance
Posted by Eddy Elfenbein on January 27th, 2015 at 11:48 am

Yesterday, the FBI arrested a Russian businessman named Evgeny Buryakov and charged him with being an agent of Russian intelligence.

Buryakov was in the U.S. on “non-official status,” meaning he didn’t have diplomatic immunity, while his two co-conspirators (Igor Sporyshev and Victor Podobnyy) had official status but they had already split back to Mother Russia.

Reading the details of their story, it’s pretty embarrassing. These guys come across more like Boris Badenov rather than international men of mystery. The spies are on the phone complaining about their jobs.

While it’s easy to dismiss these buffoons as merely buffoons, noted strategy analyst John Schindler cautions that there’s something more sinister afoot. Bear in mind that Vladimir Putin is a former KGB officer and that he takes spy warfare seriously. Putin believes Russia is in a Holy War with the west, the U.S. especially, and he intends to win.

Schindler notes that the important part of the story, the part that we ought to be paying attention to, is that the spies were targeting the U.S. financial infrastructure. They were looking for information on topics like high-frequency trading and automated trading algorithms. Basically, anything that could be used to destabilize our financial markets.

As with the Illegals Network in 2010, journalists and commentators who are ignorant of Russian espionage tradecraft are blowing this story off as being of little consequence, even comedic. There is, however, nothing funny about this case. In the first place, it shows that the Kremlin continues to collect economic intelligence in the West, using various covers to steal information of many sorts. This is a big win for the FBI and U.S. counterintelligence, but luck was on our side here, and that cannot be counted on.

Moreover, Illegals have many purposes, including functioning as long-term sources to maintain agent networks in the event of war, when diplomatic facilities close and Legals get pulled home. Given the parlous state of relations between the West and Russia now, this is not a theoretical concern. The Kremlin, unlike most Western intelligence services, tends towards the long-view and worst-case planning with utmost seriousness.

Most individual investors are unaware of how much modern trading is dominated by machines. These are highly sophisticated operations. Whenever you buy a stock, it’s very likely you’re buying it from a machine. Whenever you sell a stock, it’s very likely a machine bought it from you. There’s a vast army of computers that do nothing all day but trade at insanely high speeds to eek out a micro-penny’s profit on each trade. The worry is that once one robot starts selling massively, it could trigger all the other robots to sell as well.

Could this really happen? I don’t know, but we’ve had Flash Crashes before. It’s realistic enough that the Russians were looking into it. The trio was especially interested in ETFs (exchange traded funds). On the other hand, rather than them attacking us, they have been interested in finding out if we had been attacking them.

The irony here is that it’s been the Russian system that’s been destabilized. The Russian economy has been clobbered by the recent fall in oil. The ruble has been smashed and the Russian Fed has responded by jacking up interest rates. As I’ve noted before, the Russian ETF ($RSX) is in a severe bear market. Capital outflows ballooned from $60 billion in 2013 to $150 billion last year.

It may soon get worse for Russia. Yesterday, S&P cut Russia’s bond rating to junk (and someone may have known). The U.S. wants to kick Russia out of the SWIFT banking network. This is the standardized network that lets banks conduct international transactions. This is a big deal as it would isolate the Russian economy even more. Dmitry Medvedev said that Russia’s reaction would be “unlimited.” The fear is that with a busted up financial system, the Russian Fed won’t be able to conduct monetary policy.

In 2009, a computer programmer (and Russian immigrant) named Sergey Aleynikov was arrested and accused of improperly copying computer codes that could be used to destabilize the markets. This was the inspiration for Michael Lewis’s “Flash Boys.” After years of legal battles, Aleynikov’s case was ultimately thrown out, although his life was nearly ruined.

This is a secret world of spycraft and high finance. We may never know exactly what’s going on. In the meantime, it’s best to remember those haunting words by T.S. Eliot, himself a Lloyd’s Bank employee:

Between the order
And the confirmation
Between the bid
And the ask
Falls the shadow.

Morning News: January 27, 2015
Posted by Eddy Elfenbein on January 27th, 2015 at 7:07 am

Greece’s Odd-Couple Only Agrees About Ending Austerity

Russia’s Downgrade Has Important Political Implications

British Economy Brows at Best Annual Rate Since 2007

Doubts Grow About Mid-Year Rate Hike, But Fed Won’t Express Any

Oil Price Recovers as Dollar Weakens Against Euro

Winklevoss Twins: Bitcoin Will Explode Beyond $1 Trillion

Wall Street Left With Skeleton Crews Down as Blizzard Bears Down

Price Caps Leave Blizzard Riders Out in the Cold

IBM Dismisses Forbes Report of Massive Layoffs

Philips Lags Behind Its Profit Targets as Earnings Slide

Ericsson Hurt by North American Slowdown

Novartis Upbeat Despite Weaker Profit

Shake-Up at Mattel as Barbie Loses Her Appeal

Jeff Carter: First Regulated Bitcoin Exchange

Joshua Brown: QOTD: Is Fundamental Indexing Passive or Active?

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Microsoft Earns 71 Cents per Share
Posted by Eddy Elfenbein on January 26th, 2015 at 4:59 pm

Microsoft reported fiscal Q2 earnings of 71 cents per share. That matched Wall Street’s consensus.

The company’s bottom line has been hit in recent quarters by expenses related to job cuts started last summer and the Nokia mobile phone business that it acquired in April. The July plans included up to 18,000 jobs cuts, or about 14% of its workforce at the time, largely to clear up overlap with the Nokia businesses.

For the period ended Dec. 31, Microsoft reported a profit of $5.86 billion, or 71 cents a share, down from $6.56 billion, or 78 cents a share, a year earlier. Microsoft said its per-share earnings in the latest quarter were hurt by 2 cents from costs related to integration and restructuring.

Revenue increased to $26.47 billion from $24.52 billion.

Analysts polled by Thomson Reuters expected per-share profit of 71 cents and revenue of $26.29 billion.

The stock is down 3% after hours.

All Hail Starbucks!
Posted by Eddy Elfenbein on January 26th, 2015 at 12:45 pm

I have to confess that I’m not a consumer of Starbucks ($SBUX) — I’m just not a coffee drinker — but I’m a fan of the company. As a business, Starbucks has done incredibly well.

I often tell investors that doing a business turnaround is far harder than it looks, and Starbucks pulled one off. The shares fell from $40 down to $7.

The stock is now at $88 and on Thursday, Starbucks reported another good quarter:

Sales in the quarter, which ended Dec. 28 and was its first quarter for the 2015 fiscal year, rose 13 percent to $4.8 billion, while earnings rose to $983.1 million, from $540.7 million in the same quarter a year earlier, thanks to the Starbucks Japan purchase.

Adjusted for that acquisition, earnings on each share of stock were 80 cents, a 16 percent increase over the same quarter last year. The figures for revenue and earnings per share were records for Starbucks.

The company also announced that Kevin Johnson, the retired chief executive of Juniper Networks and a member of the Starbucks board, would become its new president and chief operating officer. Mr. Johnson replaces Troy Alstead, who starting in March will take a yearlong sabbatical from the company, as previously announced.

Investment analysts were closely watching comparable-store sales performance, after five quarters of relatively lackluster traffic. The company used a mix of new products and promotions, including an increased selection of gift cards and a new latte, Chestnut Praline, to attract consumers during the critical holiday season.

The company has an ambitious goal to nearly double sales and operating income over the next five years, and to that end, has begun acting on several strategies to make its stores more productive in the afternoons and evenings and increase their convenience to consumers.

Last fall, it announced it would begin wine and beer sales, previously tested in the Chicago area, in about a quarter of its 12,000 stores, and more of the food being made through its purchase of La Boulange in 2012 is geared toward light lunch and dinner meals.

Starbucks earns about 16 percent of its revenue from its mobile payment system, which is regarded as a model by others in the food industry, and it has been testing a new mobile ordering and payment system that it hopes will lift sales and shorten the time customers spend waiting in line.

It also is working on a delivery service.

The Markets Post-Greece
Posted by Eddy Elfenbein on January 26th, 2015 at 12:19 pm

The stock market is holding up better today than I thought it would following the elections in Greece. The S&P 500 just turned positive for the day.

Former Buy List stock, IBM ($IBM), is in the news today. The company is planning layoffs but not as large as had been expected. This is tough for me to see because the company is in more trouble than I had realized. The job cuts are difficult but are necessary for IBM to get back on track.

The Federal Reserve meets tomorrow and on Wednesday, plus New York City is being hit with a massive snow storm (we’re getting a little here in DC but not much). We’re also waiting on Microsoft ($MSFT) to report after the close today.

Gold, which had been rallying this year, is down a lot today following Greece. The yellow metal is back below $1,280 per ounce. Gold was recently above $1,300.

Morning News: January 26, 2015
Posted by Eddy Elfenbein on January 26th, 2015 at 7:14 am

Tsipras Forges Anti-Austerity Coalition in EU Challenge

Tsipras Win Draws French Congratulations, German Threat

German Business Confidence Exceeds Expectations

Obama Fêted in Delhi as US Cements Closer Ties With India

Economic ‘New Normal’ Needs Full Context

Copper and Gold Prices Dip

First U.S. Bitcoin Exchange Set to Open

MWV and RockTenn Agree to Combination Creating a $16 Billion Global Packaging Leader

AT&T Agrees to Buy Nextel Mexico for $1.875 Billion Minus Debt

Post Holdings to Acquire MOM Brands for $1.15 Billion

Unease for What Microsoft’s HoloLens Will Mean for Our Screen-Obsessed Lives

Lenovo Brings Motorola Back to China as Moto X Phone Released

NY Insider Trading Ruling Tests Prosecutors Beyond Wall Street

Cullen Roche: Initial Thoughts on European QE

Jeff Miller: Weighing the Week Ahead: Time to Focus on Europe?

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Syriza Wins in Greece
Posted by Eddy Elfenbein on January 25th, 2015 at 6:47 pm

Expect the U.S. stock market to open lower tomorrow morning. The far-Left Syriza has won the elections in Greece. That means austerity is gone, and with it, perhaps EU money. It’s hard to say at this point.

I would like to think that Greece and the EU will reach some sort of deal to restructure Greece’s debt. No one wants to see the euro go down because of Greece.

Syriza leader Alexis Tsipras said that Greece’s era of bowing to international creditors is over, as he celebrated his party’s victory in Greek elections dominated by a public backlash against years of budget cuts.

Tsipras, addressing supporters in central Athens Sunday night after Prime Minister Antonis Samaras conceded defeat, said that Greece is turning a page and putting austerity behind it. The Syriza government’s priority “will be for Greece and its people to regain their lost dignity,” he said.

“There will neither be a catastrophic clash nor will continued kowtowing be accepted,” said Tsipras, 40. “We are fully aware that the Greek people hasn’t given us carte blanche but a mandate for national revival.”

While Syriza’s victory was more decisive than polls had predicted, it remains unclear whether the party will be able to govern alone. Even with a razor-thin majority or in a fragile coalition, the result hands Tsipras a clear mandate to confront Greece’s program of austerity imposed in return for pledges of 240 billion euros ($269 billion) in aid since May 2010. The challenge for him now is to strike a balance between keeping his election pledges including a writedown of Greek debt and avoiding what Samaras repeatedly warned was the risk of an accidental exit from the euro.

I’m reminded of François Mitterrand’s stunning election victory in 1981. At the time, it was seen as a dramatic turn to the left for France. But once the franc started to plunge, the government quickly reversed course. The world that is has a nasty habit of beating the world that ought to be.

Signature Bank: “We don’t even have a line item in our budget for advertising.”
Posted by Eddy Elfenbein on January 23rd, 2015 at 3:44 pm

Very nice article on Signature Bank ($SBNY):

With just 0.1 percent of Signature’s loan portfolio listed as “nonperforming,” meaning that the debtor has not made scheduled payments on the loan for 90 or more days, it would be easy to assume there was some secret formula to how the bank finds solid borrowers. But DePaolo chalks the bank’s loan portfolio success up to its niche in the market, targeting privately held businesses valued between $20 million and $100 million.

“For the most part, either we know the client or prospect, or they were referred by an existing client that’s well-known to us,” DePaolo said.

The chief executive said that Signature, nestled in the largest financial market in the country, is well-positioned to siphon off business in that privately held business market from the big banks, a pull that those banks likely have noticed.

“We have a lot of opportunity to take business away from them,” DePaolo said. “I’m not sure that they want to admit it to anyone, but they’re worried about us.”

(…)

With $26 billion in assets and a market capitalization of approximately $6.09 billion, Signature Bank has branches in New Rochelle and White Plains, another branch soon to open in Greenwich, Conn., and about 30 total locations in the New York metropolitan area.

But those locations, DePaolo said, aren’t as visible as those of the big banks, by design. They are often on the upper floors of office buildings, near the action, but somewhat hidden in plain sight.

Each morning, when DePaolo gets off that 5:45 a.m. Metro-North train from New Rochelle, he walks by the brightly lit big bank signs to lead a bank that takes a different approach.

“That’s just not us,” DePaolo said of the flashy advertising. “We don’t even have a line item in our budget for advertising.”

Swiss 50-Year Bonds
Posted by Eddy Elfenbein on January 23rd, 2015 at 9:35 am

The 50-year bonds in Switzerland now yield 22.35%.

That’s not annualized — that’s the whole darn thing.