Huge Jobs Report for November
Posted by Eddy Elfenbein on December 5th, 2014 at 9:22 am

The government reported that the U.S. economy created 321,000 net new jobs last month. This was our 50th-straight month of jobs gains.

On top of that, the number for September was revised higher by 15,000, and October was increased by 44,000. In the last 10 months, the economy created 2.5 million new jobs. The unemployment rate stayed the same at 5.8%.

This is a very strong report. Wall Street had been expecting an increase of 230,000 jobs. Average hourly earnings rose nine cents to $24.66 per hour.

CWS Market Review – December 5, 2014
Posted by Eddy Elfenbein on December 5th, 2014 at 7:09 am

“I rest perplexed with a thousand cares.” – Henry VI, Pt 1

So does the stock market. Share prices continue to march higher, yet in very measured steps. On Wednesday, the S&P 500 closed at yet another all-time high, although we gave some of that back on Thursday. Still, the indexes are holding on to solid year-to-date gains. The S&P 500 is up more than 12% this year.

On Monday, the S&P 500 had its worst drop in six weeks. Of course, I have to laugh at this because the worst drop in six weeks is a measly -0.68%. Historically, that ain’t nothing. It’s especially small compared with the hyper-volatility of a few years ago. The fact is, the equity markets have chilled out in a major way.

The recent drama hasn’t been in stocks but in the commodity pits. The price of oil has been sliding since the spring (see above). Then, last Friday, the bottom fell out. Oil plunged 10% in one day. Bear in mind that this drop came after black gold had fallen by 27% in five months. Prices at the pump are the lowest they’ve been in four years!

Just about every major commodity has been feeling the pain. In this week’s CWS Market Review, we’ll take a closer look at what the commodities bear means for us. I’ll also run down some of the latest news for our Buy List stocks. Stryker ($SYK), one of our healthcare stalwarts, just gave us a nice 13% dividend increase. Express Scripts ($ESRX) just snapped a streak of 12-straight daily rallies. Before we get to that, though, let’s take a look at the slide in oil and the still-kicking Strong Dollar Trade.

The Global Fallout of the Rising Dollar

Earlier this year, I started telling you about the Strong Dollar Trade. I argued that this was emerging as a dominant investing theme and that it was impacting the economy and financial markets in different ways. All investors need to understand the effects of the rising greenback.

Put simply, the Strong Dollar Trade refers to the efforts of policymakers in Europe and Asia to weaken their currencies. Those economies are in rough shape, so they hope to spark a recovery by bringing down their currencies. That means the U.S. dollar appreciates. In turn, a rising dollar puts the squeeze on commodities like gold, silver and oil. This hurts energy stocks, but on the other hand, cheaper gasoline frees up money for consumers to shop more, and that’s good for retail stocks.

The Strong Dollar Trade is still on, but the ripple effects have spread further out. The most startling consequence is the effect on the Russian economy. Vladimir Putin’s soft autocracy has been aided by a long-term rise in energy prices. To the average Russian, his bluster delivered peace and prosperity. Then he annexed Crimea and began his ongoing shadow war in Ukraine. Now energy prices are no longer rising. The U.S. and our allies have responded with sanctions against Russia, and they’ve started to hurt. Even worse than any sanctions we’ve imposed against Russia is the collapsing price of oil. The Russian government estimates that the impact of cheap oil is more than twice that of the sanctions.

As a result of all this, the Russian currency, the ruble, has been getting crushed on the forex market. In July, a ruble was worth 2.9 cents. Today it’s down to 1.8 cents. In 2008, the ruble was going for 4.3 cents. The decline has been stunning. President Putin has responded by taking full responsibility. No, I’m kidding. He’s blamed “speculators.” Since July, the Russia ETF ($RSX) is down by 30%. (But stay away! Down isn’t the same thing as cheap.)

It’s important to keep in mind that Russia has an extraction-based economy. Their adventurism in the 1970s was funded by a bull market in gold and oil (ending in a hostile takeover of Afghanistan). The long commodity slide of the 1980s probably helped speed up the dissolution of the Soviet Union. The Russian economy is in much better shape than it was during the 1998 financial crisis, when the Russians devalued the ruble and defaulted on their debt. Russia isn’t as heavily indebted; plus they have foreign currency reserves standing by to defend the ruble—though for how long is another matter. Their economy is slowing down, and inflation is on the rise. I don’t see things getting better soon.

The outlook for oil continues to be bleak. What happened last week was fascinating as OPEC got together in Vienna. With oil dropping, some observers though OPEC would respond by cutting back on production. They didn’t, and that led to the oil crash last Friday.

Why did OPEC balk? There are a lot of theories. Some say the Saudis want to hurt the Russians, and possibly the Iranians. I can see that. Others think it’s a swipe at the U.S. shale market. The Shale Revolution has upended the world energy market, since we’re no longer so dependent on foreign oil.

The problem is that Saudi Arabia has a very low breakeven point ($5 to $6 per barrel), while American shale’s is fairly high. Perhaps the Saudis want to bring oil down low enough to make shale uneconomical. In any case, many major energy stocks are well off their highs. Apache ($APA) is down 39%; Haliburton ($HAL) is off by 45%. Airlines, which are major energy consumers, have been some of the strongest stocks around. The Airline Index is up 35% since mid-October.

Another wrinkle is that a lot of energy companies are over-represented in the junk-bond market. That was the way they could get funding to extract shale. As a result, the spread between junk-bond yields and higher-grade debt has widened. It’s still somewhat tame, but it’s interesting to see the connections in financial markets. We had a real-estate bust, and we had little idea of exactly who was exposed. I’m reminded of the little towns in Norway that were nearly ruined after they invested in complex instruments tied to the American mortgage market. Sometimes finance is like a giant game of dominos where you don’t know which domino is next to which—that is, until they fall.

There’s concern that a worsening market for low-grade debt could hurt the stock market since so much of the bull market has been funded by debt-fueled share buybacks. I doubt that will be a major factor, but undoubtedly, it will impact marginal borrowers.

Another impact of cheaper oil is that it helps the consumer sector. Prices at the pump are the lowest they’ve been since 2010. For many Americans, any savings there goes right into more shopping. Just look at Walmart ($WMT). The stock jumped 20% in six weeks. Nike ($NKE) seems to rise every day. On our Buy List, Ross Stores ($ROST) and Bed Bath & Beyond ($BBBY) have rebounded nicely (I’ll have more on them in the next section). Consumer staples have been leading the market since the summer. While consumer-discretionary stocks have been weak most of the year, they’ve picked up strongly in the last month. The recovery is beginning to filter down to the level of consumers.

The stronger dollar also acts to hold down inflation. There’s been absolutely no evidence of inflation, so that may give the Federal Reserve more breathing room to help the economy. If inflation is still holding between 1.5% and 2.0%, there will be little demand to raise rates. As a result, the 30-year yield is back under 3%, while mortgage rates are at their lowest levels in 18 months. That will certainly help housing. Mid-curve yields haven’t budged, so the spread between the 5-year and 30-year Treasuries has narrowed to 135 basis points. The spread hasn’t been that narrow since the bull market began.

For now, we should continue to focus on high-quality stocks like the ones on our Buy List. Earnings season doesn’t start for several more weeks, but we want to watch out for more signs of happy consumers. This could be a very good holiday season for businesses. Now let’s take a look at some recent news affecting our stocks.

Buy List Updates

Through Thursday, our Buy List is up 9.97% for the year, trailing the S&P 500’s YTD gain of 12.10% (that doesn’t include dividends). We’ve beaten the market for the last seven years, and sadly, it looks like that streak will come to and end.

While I’m disappointed, I have absolutely no plans to alter our long-term high-quality strategy. It may lose to the market here and there, but it works. Actually, most of our underperformance came earlier this year, during the spring. The good news is that we’ve been doing very well this quarter. Since September 30, our Buy List is up 8.00% compared with 5.05% for the S&P 500. Yes, we’re losing to the market YTD, but not by much (a deficit of about 2.1%), and we’re still making a solid profit. I’ll have the complete stats on our Buy List at the end of year. Now let’s look at some recent news impacting our stocks.

Express Scripts ($ESRX) has been on fire lately. The pharmacy-benefits manager tends to be quiet, but don’t let that fool you: they’re quite profitable. The stock closed higher on 12-straight trading sessions from November 17 to December 3. The shares are now up more than 22% from their October low.

So what’s the catalyst for the surge? Beats me. The only new story is that Warren Buffett recently started a position in ESRX. That’s certainly comforting. This was his only new position during Q3. In earning news, ESRX met expectations for Q3, and their guidance for Q4 was also within expectations. Personally, I’m fine with meeting expectations. It’s more important to me that a company hits the marks they state publicly rather than consistently low-balling us. ESRX is a classic slow-and-steady stock. This week, I’m raising our Buy Below on Express Scripts to $87 per share.

In the CWS Market Review from November 14, I told you to expect a dividend increase soon from Stryker ($SYK). I said I expected the quarterly payout to rise from 31.5 cents per share to 33 or 34 cents per share. I was close. This week, Stryker announced they’re raising their quarterly dividend to 34.5 cents per share. That’s a 13% increase. Given the new dividend, SYK now yields 1.46%.

Six months ago, after Medtronic ($MDT) announced their tax-inversion deal with Covidien, I said to keep an eye on Stryker and Smith & Nephew ($SNN). Sure enough, SYK is now said to be considering a tax inversion with SNN. I think a deal could come soon. It makes a lot of sense. I’m raising our Buy Below on Stryker to $98 per share.

As always, let me remind you: don’t chase after good stocks. Be patient and wait for good prices. Warren Buffett described investing as being like a batter standing at the plate who can wait for an endless number of pitches before swinging at a nice fat one coming down the middle. Keep that in mind.

CR Bard ($BCR) keeps on charging! It’s now our third-best performer this year. Shares of BCR are up nearly 29% this year. I’m raising the Buy Below to $175 per share, which is fairly tight. I’m expecting another good earnings report next month.

I also want to raise the Buy Below of our big bank, Wells Fargo ($WFC). I think Wells will raise its dividend again this spring. The stock is good for conservative investors. It tends not to move around so much. Wells is going for less than 13 times next year’s estimate. That’s a good deal. I’m bumping up my Buy Below on Wells to $57 per share.

Last month, for the first time in nearly 15 years, shares of Microsoft ($MSFT) pierced $50 per share. The stock reached its all-time high of $59.97 on December 30, 1999. We’re actually not that far from topping that. MSFT been a great stock for us this year. For now, I’m keeping our Buy Below at $50 per share.

Our two retailers, Bed Bath & Beyond ($BBBY) and Ross Stores ($ROST), have been performing quite well lately. The drop in oil prices certainly helps shoppers. I also think investors expect a strong holiday season for retail (we’ll get an important report on retail sales next week). This week, I’m raising my Buy Below on BBBY to $74 per share, and on Ross Stores to $93 per share. Both are excellent stocks.

One quick note: Even though BBBY’s fiscal third quarter ended last week, the company won’t report earnings until January 8. Our other Buy List stock on the November reporting cycle is Oracle ($ORCL). They’ll report earnings on December 17. That’s the only Buy List earnings report we’ll have this month.

I also wanted to touch on Ford Motor ($F). The stock recently traded over $16 per share for the first time since September. This year has been a rough one for Ford, but the payoff isn’t far away. Don’t expect much from the Q4 earnings report next month, but the fiscal Q1 report this spring will reflect Ford’s new business strategy. A lot of investors aren’t believers. Ford currently trades at less than 10 times next year’s earnings. I think Ford has made a lot of smart moves. Ford Motor remains a buy up to $17 per share.

That’s all for now. The big jobs report will be later this morning. We’ve had a nice run of good jobs reports, and I expect the trend to continue. The weak spot has been wage growth, so hopefully we’ll see better news there. Next week, we’ll get important reports on retail sales. It will be interesting to see how strong the consumer is heading into the holiday season. Also, don’t forget that I’ll unveil the 2015 Buy List in two weeks. 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 5, 2014
Posted by Eddy Elfenbein on December 5th, 2014 at 6:47 am

ECB’s Wiedmann Says Monetary Policy Too Expansive for Germany

Yen’s Plunge Risks Haven Status as Bonds Are Worst

Saudi Arabia: Do The Math

Natural Gas Stocks Are ‘Strong Buys’ As Seasonal Demand Is Due To Spike

U.S. Jobless Claims Fall, Unwind Prior Week’s Increase

Starbucks Aims to Double U.S. Food Sales

Uber Raises $1.2 Billion, Putting Its Value at $40 Billion

Amazon Now Serves Takeout – And Diapers

Cadillac to Build 95% Cars Locally by 2018 for China Push

Low-Wage Workers Stage Strikes and Protests Over Pay

Sears Reports Wider Loss But Better LIquidity

Barnes & Noble and Microsoft End Nook Partnership

Time Is on AT&T’s Side in Wait for Slim’s Mexico Assets

Jeff Miller: Keeping Investors Scared Witless

Cullen Roche: The Cure Depends On The Disease

Be sure to follow me on Twitter.

Predicting NFP
Posted by Eddy Elfenbein on December 4th, 2014 at 2:52 pm

Tomorrow is the big November jobs report. Yesterday we got the ISM Employment report which came in at 54.9.

Since the beginning of 2008, the ISM Employment numbers have been decently correlated with monthly NFP growth (R-squared of about 0.71).

Going by the recent regression, 54.9 translates to a gain of 131,000 payroll jobs. That’s well below expectations. Bear in mind that there’s a sizeable error spread is this analysis.

Morning News: December 4, 2014
Posted by Eddy Elfenbein on December 4th, 2014 at 7:08 am

Bank of England Keeps Rates on Hold at Record Low

British Government Proposes a ‘Google Tax’

Putin Vows to Punish Speculators Pushing Down Ruble’s Value

Fed’s Beige Book: Hiring Picks Up Broadly, but Wage Growth Is Muted

Obama Offers Candor, Insights in Q&A With Top CEOs

ADP Says Companies in U.S. Added 208,000 Workers in November

Shareholders Meeting Spotlights the New Microsoft

Intel to Invest $1.6 Billion in China Factory

Executives at Samsung Unit Relieved From Posts

Sears 3Q Loss Widens as Retailer Reshapes Itself

SoftBank Invests $250 Million in Uber Competitor GrabTaxi

Best Buy to Sell China Business, Focus on North America

Booyah! Activist Investor Hurls Purple Prose at Jim Cramer

Credit Writedowns: How Might a China Slowdown Affect the World?

Yes, the American Consumer is Back, Epilogue

Be sure to follow me on Twitter.

Stryker Raises Dividend 13%
Posted by Eddy Elfenbein on December 3rd, 2014 at 4:34 pm

Stryker ($SYK) announced today that they’re raising their quarterly dividend by 13%. The payout will rise from 30.5 to 34.5 cents per share. The dividend is payable on January 30, 2015, to shareholders of record at the close of business on December 31, 2014. Based on today’s close and the new dividend, shares of SYK now yield 1.46%.

Morning News: December 3, 2014
Posted by Eddy Elfenbein on December 3rd, 2014 at 6:53 am

Another Chart Piling Pressure on ECB: Producer Prices Slide Most in a Year

Rouble Sinks to New Lows as Russia’s Problems Mount

Australia Enters Income Recession, Dollar Dives as Economy Stalls

Oil-Price Drop Adds New Element to Middle East Tensions

Income Gap Shrinks in Chile, for Better or Worse

US Federal Reserve’s Dudley Says Oil Price Drop a Net Benefit For U.S.

Business Chiefs to Press Obama Over Tax Stalemate

GM, Chrysler, Honda U.S. Sales Rise in November

Bezos H’app’y With Washington Post Purchase

IBM Signs $1.25 Billion WPP Cloud Deal and Says More Coming

Hershey Explores Removing High-Fructose Corn Syrup

Takata Rejects U.S. Demand for Nationwide Air-Bag Recall

Hackers Pirate Sony Films and Leak Studio Salaries

Epicurean Dealmaker: Show Me the Money

Howard Lindzon: Predictions for 2015 …Continued…Web Video and Financial Web

Be sure to follow me on Twitter.

There’s No Such Thing as Being Market Neutral
Posted by Eddy Elfenbein on December 2nd, 2014 at 1:07 pm

One of the important truths about investing is that there’s no such thing as truly being “market neutral.” Any investment takes some sort of angle on the market. Even doing nothing and having your money sit in the bank is, ironically, playing some market.

This year, actively managed funds are having their worst year against the market in 30 years. Lipper reports that 85% of actively managed large-cap funds are lagging their benchmark.

But that’s not due to managers being bad at their jobs. At least, that’s not the only reason. What we don’t often hear is that the relative performance of active managers is very strongly correlated with the relative performance of small-cap stocks (yes, even among large-cap funds). Actively managed funds tend to be over-weighted with small-cap stocks. When small-caps soar, active managers look smart. But when they break down, they don’t look so good.

But it doesn’t end there. The relative performance of small-caps is semi-strongly correlated with the U.S. dollar. When the dollar rises, small-caps lag. Putting it all together, actively managed funds are having a bad year partially related to the dollar’s rally. That, in turn, is related to efforts in Japan and Europe to weaken their currencies.

Everything’s related to everything else.

10 Straight Rallies for ESRX
Posted by Eddy Elfenbein on December 2nd, 2014 at 12:26 pm

The stock market is gaining ground today after yesterday’s plunge. Of course, by plunge, I mean a very modest decline. But given this market’s hyper-low volatility, yesterday’s drop of 0.68% was the S&P 500’s worst daily decline since October 22.

Stryker (SYK) has been in the news lately as it seems they’re ready to strike for Smith & Nephew (SNN). I knew some kind of deal was coming, but I wasn’t sure what it would be. Shares of SNN gapped up to $37 per share last week, but have since slid back. Meanwhile, SYK is up to a new 52-week high. Expect to see a dividend increase soon.

Ford (F) reported another blah month for sales for November. Again, I’m not worried since consumers are holding back waiting for the new line of trucks to hit. The stock is holding up well and is closing in on $16 per share.

Shares of Express Scripts (ESRX) have closed higher for ten straight days, and they’re up again today.

This morning, the Census Bureau reported that October construction spending rose 1.1%. Despite the increase, this is one data series that’s not even close to its pre-crash high.

Morning News: December 2, 2014
Posted by Eddy Elfenbein on December 2nd, 2014 at 7:03 am

Banks May Be Allowed to Up Stake in Troubled Projects: RBI Governor Raghuram Rajan

RBA Holds As Abenomics Downgraded

Decision on South Stream Can Be Taken Only By Both Russia and EU

Saudi-Venezuela OPEC Split Plays Out Behind Closed Doors

Gold Falls With Silver After Rally Yesterday as Dollar Climbs

Boehner Seeks Republican Support For Plan to Avoid Government Shutdown

Interest in Obamacare Exchanges for Small Business Still Languishing

The Dollar Comes Back Bid

Amazon Plans Debt Offering; Moody’s Cuts Outlook

Amazon Robots Speed Customer Orders But May Lead to Fewer Workers

Wal-Mart Is Facing Fierce Competition

Japan’s Otsuka Agrees to Buy Avanir Pharma for $3.54 Billion

Cypress Semiconductor to Buy Spansion for $1.6 Billion

Roger Nusbaum: AdvisorShares Weekly Market Review

Jeff Carter: Where Are The Hysterics Now?

Be sure to follow me on Twitter.