CWS Market Review – June 13, 2014
Posted by Eddy Elfenbein on June 13th, 2014 at 7:04 am

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle

After rallying 11 times in 13 days, the S&P 500 has now pulled back for three days in a row. Despite Wall Street’s give and take, the truly interesting aspects of this market have been the low volatility and very low trading volume. Consider this: Thursday was the market’s worst day in four weeks, and even that was a measly 0.74% loss. It’s been more than two months since the S&P 500 dropped more than 1% in a single day (see chart below). Overall, this has been a very placid spring.

Now some folks are worried about—wait for it—the market’s complacency! Sheesh, some folks aren’t happy unless they’re worried about something. Personally, I’m not too worried about other people worrying about the lack of worrying. They say that bull markets crawl a wall of worry, and that’s certainly true. As usual, we look past our emotions and concentrate on the facts. We’re nearly halfway though the year, and the outlook continues to be moderately favorable for stocks. Sure, the market got a little spooked this week by the troubling events in Iraq, and the price of oil surged higher, but the fundamentals of this market remain quite good. I’ll go into more details in a bit.

I also want to cover the news of the latest jobs report and tell you what it means for us and our portfolios. My take: It’s mostly good news. The economy is improving, but at a tepid rate. The Fed is still on our side, and I’ll let you know what Buy List stocks look especially good here.

This week, we also had a small dividend increase from CR Bard, and I’ll discuss the latest from a former Buy List favorite, Nicholas Financial. The used-car loan company has officially pulled out of its merger deal with Prospect Capital. (Frankly, I didn’t like that deal from Day One.) I’ll also highlight the upcoming earnings reports from Oracle. But first, let’s look at the (mostly) good news from last Friday’s jobs report.

The Economy Added 217,000 Jobs Last Month

Shortly after I sent out last week’s CWS Market Review, the government released the big May jobs report. According to the Labor Department, the U.S. economy created 217,000 jobs last month. (That’s net, of course. The economy is always creating and destroying jobs at the same time.) That’s a decent number, but I’d like to see monthly jobs gains close to 300,000. The unemployment rate was unchanged at 6.3%.

These jobs numbers certainly aren’t great, but they are an improvement. In fact, this latest jobs report marked an important milestone: The number of nonfarm payrolls finally surpassed the pre-recession peak. Of course, the population has grown over that time as well.

This raises the other concern about the jobs market, which is the dramatic decline in workforce participation. To put it bluntly, more and more people have simply left the workforce. The workforce participation rate is at a 35-year low. According to the government’s numbers, when you stop looking for a job, you’re not even counted as unemployed.

An important stat I like to watch is the number of people working compared with the total population. (Note: For population, econo-nerds like to track the civilian non-institutional population over the age of 16.) The ratio of people working to the population has barely budged since the recovery started (check out the chart see below). Part of this can be explained by demographics. Baby Boomers have started to retire, and that’s not going to stop anytime soon. But demographics don’t explain all of the lower participation.

I should add an important caveat to the government’s jobs report. It’s just an estimate, and by the government’s admission, it carries a high error range. They also revise the figures, sometimes considerably, each month. We should pay more attention to the overall trend rather than obsess over an individual statistic.

How is the jobs report important to us as investors? There are two main reasons it’s important. For one, it gives us a good read of where the economy is at the moment. Believe it or not, at the end of this month, the U.S. economy’s recovery officially turns five years old. But many Americans haven’t experienced a recovery at all.

In response to the recession, U.S. companies cut back on their overheads, and that means lower labor costs. The good news is that profit margins soared. While that is good news because it means companies became leaner and meaner, the problem is that profit margins can’t keep rising forever. At some point, you need to get more folks coming through the front door. More consumers come from more employed folks, and that’s how a recovery becomes a positive cycle, each turn reinforcing the next.

Corporate profits and dividends are still growing, although the rate of growth has slowly come down. The latest numbers from S&P 500 show that Wall Street expects index-adjusted earnings from the S&P 500 of $119.65 for this year and $137.30 for 2015. I strongly suspect the latter figure is too high, but let’s work with it for now. If we put a multiple of 16 to it, that gives us a S&P 500 of nearly 2,200 at the end of next year. That’s a gain of 13.8% in a little over 18 months. Please don’t mistake this for a target price for the market. Instead, I want to see if the current valuation is reasonable, and I think it clearly is. For now, any bubble talk is nonsense (although there are some tech values I´m suspicious of).

The other reason why the jobs report is important to us is due to inflation. Once the jobs market gets tight, employment costs start to rise, and that leads to a rise in consumer prices. According to last week’s jobs report, hourly earnings are up 2.1% over the last year. The problem with the lower workforce participation is that we don’t really know how much slack there is in the labor force. The old rules no longer seem to apply.

A lot of commentators have predicted that increased inflation, even hyperinflation, is just around the corner. Please. Every single one of those predictions has fallen flat on its face. Now, however, there are some quiet signs of a little more inflation. Or more accurately, the decline of inflation (disinflation) has come to an end. This is what Janet Yellen and her friends inside the Fed are watching. Remember that inflation is the vital enemy of all central bankers, and the Fed doesn’t want us to go back to the 1970s. Chairwoman Yellen has indicated the Fed will start raising interest rates about one year from now, give or take. Last Friday’s jobs report was another sign that the free-money party will be coming to an end. The Fed meets again next week, and we can expect to hear another taper announcement.

As long as the Fed is on our side, stocks are a good place to be. Some of the best bargains on our Buy List include AFLAC ($AFL), Bed Bath & Beyond ($BBBY), Ford ($F), Oracle ($ORCL), Ross Stores ($ROST) and eBay ($EBAY). Be disciplined with your buying, and don’t chase stocks. Pay attention to my Buy Below prices.

CR Bard’s Amazing Dividend Streak

At the end of last week’s issue, I said to expect a dividend increase very soon from CR Bard ($BCR). That’s exactly what happened a few days later. I wish I could say that this was due to my most amazing powers of prognostication. Sadly, it’s not. Bard has increased its dividend every year since 1972, and they kept that streak going one more year.

Actually, that sums up our investing strategy. We predict the perfectly obvious and wait until the payoff is good. Whenever I hear that someone predicted this or forecast that, I’m immediately suspicious. Bard said they’re raising their quarterly payout from 21 to 22 cents per share. That’s an increase of 4.76%, which isn’t much, but I’ll take it. The dividend is payable on August 1 to shareholders of record at the close of business on July 21.

Shares of Bard have gotten dinged recently. Given the new dividend, the medical-equipment company now yields 0.62%. CR Bard remains a good buy up to $151 per share.

Earnings Preview for Oracle

Oracle ($ORCL) has been one of the hotter stocks on our Buy List. The shares are up nearly 10% for the year, and they just hit another 14-year high. We’re closing in on Oracle’s all-time high of $46.47 from September 1, 2000. Oracle is due to release its fiscal fourth-quarter earnings report after the closing bell on Thursday, June 19. The stock has perked up lately, which is nice to see because there are a lot of Oracle haters.

In March, Oracle reported earnings of 68 cents per share, which was two cents below consensus. Interestingly, Oracle got pounded in after-hours trading. Fortunately, we don’t get involved in the short-term trading game. Instead, we sat back and waited. Sure enough, sense returned to the market, and Oracle is up significantly since then.

On the March earnings call, Oracle said that Q4 earnings should range between 92 and 99 cents per share. That’s a decent forecast. The Street had been expecting 96 cents per share. Oracle also said Q4 sales should rise between 3% and 7%. The company gave a range of 0% to 10% for hardware sales, new software-license revenue and cloud sales. Last quarter was the first increase in hardware sales since Oracle bought Sun Microsystems four years ago.

A lot of techies will be looking out for the guidance Oracle offers for Q1. Wall Street currently expects earnings of 64 cents per share. I suspect that might be at the high end of Oracle’s range, but I’m not yet sure. For FY 2015 (ending next May), we can expect earnings of about $3.20 per share, which means the stock is still going for a good value. Tech writer Ashlee Vance pointed out what “Oracle has done perhaps better than any other major business software maker, which is make the transition from the old to the new in a highly profitable way.” Oracle remains a solid buy up to $44 per share.

The Prospect Capital/Nicholas Financial Deal Is Dead

I wanted to give you an update on one of our old Buy List stocks, Nicholas Financial ($NICK). I took NICK off this year’s Buy List after the company got a buyout offer from Prospect Capital ($PSEC). I wasn’t thrilled with the deal, as I thought NICK was selling itself for too little.

According to the terms of the deal, if it wasn’t closed by June 12, then NICK had the right to walk away. As soon as the deal was announced, there were problems. The SEC wanted PSEC to restate their financials, and that caused the deal to drag on and on.

Finally, on June 11, the SEC reversed itself and said PSEC didn’t have to restate their financials. But that wasn’t enough to placate Nicholas Financial. NICK’s board met and decided to terminate the deal. That’s a difficult call, but I think it was the right decision.

I honestly don’t know where this leaves NICK. The stock dropped down to $14.68 by Thursday’s close. I think the most likely outcome is that another bidder will come along to snatch them up, but who knows when or at what price? I think a private equity firm could get a very good deal, but the bottom line is that I don’t believe NICK is an attractive buy here.

The lesson for us is that merger deals can be tricky things. Never expect some white knight to come along to solve all your problems. This same lesson can be applied to the AT&T/DirecTV deal. While I think that deal will eventually close, we have to keep in mind that it, too, has risks. Anything from shareholder objections to government regulations can trip up the deal. No deal is a sure thing.

That’s all for now. The Federal Reserve meets again next week. Expect to hear another $10 billion taper announcement on Wednesday afternoon. We’ll also get the Industrial Production report on Monday and the Consumer Price Inflation report on Tuesday. The last two CPI reports have shown emerging signs of inflation. It will be interesting to see if this trend continues. 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 13, 2014
Posted by Eddy Elfenbein on June 13th, 2014 at 6:42 am

IEA Sees Much Higher Demand for OPEC Oil for Rest of 2014

China Output, Consumption Pick Up in May: Government

BOJ Sticks With Easing as Analysts Delay Action Calls

Fitch Lowers South Africa Credit-Rating Outlook to Negative

Treasury Yield Curve Flattens Amid Fed Interest-Rate Speculation

Senate Confirms Two Fed Governors, Makes Fischer Vice Chairman

Hostile Takeover Bids for Big Firms Across Industries Make a Comeback

Intel Boosts Revenue Forecast as Business Demand Picks Up

Canada’s Amaya Gaming Buys PokerStars Owner for $4.9 Billion

Express Soars After Sycamore Partners Says It Plans to Make Bid

Twitter Exec Steps Down as Stock Falls

Nokia to Buy Smart Data Firm For Its Map Business

BMW and Tesla Executives Meet to Discuss Electric Cars

Joshua Brown: The World Cup Will Do Nothing For Brazil’s Economy

Stocktwits Trending Tickers on Marketwatch… The Data has Signal and Signal Can Make You Money.

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It’s Offical: The Nicholas Financial-Prospect Capital Deal Is Dead
Posted by Eddy Elfenbein on June 12th, 2014 at 2:13 pm

Remember what I said earlier today? The opposite just happened. NICK has killed the deal:

CLEARWATER, Fla., June 12, 2014 (GLOBE NEWSWIRE) — Nicholas Financial, Inc. (the “Company”) (NICK) is filing this Current Report on Form 8-K to report that, on June 11, 2014, the Company’s Board of Directors (the “Board”) held a special meeting to consider the status of the Company’s proposed transaction with Prospect Capital Corporation (“Prospect”) in light of the pending June 12, 2014 termination deadline. As previously disclosed, on December 17, 2013, the Company entered into an arrangement agreement (the “Arrangement Agreement”) whereby the Company agreed to sell all of its issued and outstanding Common Shares to an indirect wholly-owned subsidiary of Prospect, pursuant to a plan of arrangement (the “Arrangement”) under the Business Corporations Act (British Columbia). Prospect (PSEC) (www.prospectstreet.com) is a closed-end investment company that has filed an election to be treated as a business development company under the Investment Company Act of 1940. It focuses on lending to and investing in private businesses. Prospect’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.

The termination deadline for completion of the Arrangement pursuant to the Arrangement Agreement is June 12, 2014. At its June 11, 2014 meeting, the Company’s Board of Directors determined to terminate the Arrangement Agreement on the basis that certain conditions requisite to consummation of the Arrangement could not be satisfied by the termination deadline. The Board of Directors further determined to continue to retain Janney Montgomery Scott LLC as its independent financial advisor to assist the Board in evaluating strategic alternatives for the Company, including, but not limited to, the possible sale of the Company to Prospect or another third party, potential acquisition and expansion opportunities, and/or a possible debt or equity financing.

Microsoft’s Strategy Is Paying Off
Posted by Eddy Elfenbein on June 12th, 2014 at 10:35 am

Here’s some good news about Microsoft ($MSFT). We’ve been hearing for a long time how the company is unable to reform itself, but Satya Nadella seems to be shaking things up:

Microsoft’s strategy for moving customers to its cloud email and productivity software is resonating with many corporate customers. Microsoft says the number of commercial seats for Office 365, its flagship productivity and email cloud service, more than doubled over the 12 months ending March 2014. It hopes its moves will lead to sales of a broader array of services to existing customers, including more complex business applications and cloud infrastructure services. But it remains to be seen whether it can convince customers who don’t see the need to switch to cloud-based computing just yet.

Although Microsoft has been selling cloud software, in which it rents email and other applications to customers, for the last several years, that strategy has accelerated under current CEO Satya Nadella, who called for a “mobile first, cloud first” approach to selling software when he assumed the job in February.

Many chief information officers have decided to swap their existing portfolios of productivity software, which includes Microsoft Office and email, to Microsoft’s cloud-based Office 365 service, because they believe making Microsoft the custodian of their email and productivity software enables them to redeploy IT staff to more innovative projects. Microsoft has also made Office 365 more attractive to customers by changing its licensing terms. Now, employees can use the software on up to five devices for the cost of a single license. That option, made available in February 2013, has become increasingly attractive as greater numbers of employees do their work from home, on personal devices, and on the road.

Nicholas Financial Merger Possibly Back On
Posted by Eddy Elfenbein on June 12th, 2014 at 10:15 am

We took Nicholas Financial ($NICK) off this year’s Buy List, and I’m glad we did. NICK and Prospect Capital ($PSEC) have been trying to close out their merger deal and it hasn’t gone well.

The SEC told PSEC that they had to restate their past earnings, and that hurt both stocks. Now, however, the SEC has apparently reversed that decision (although they’ll need to restate future earnings). Both NICK and PSEC rallied yesterday.

NICK said it would give PSEC until June 12th, which is today, to close the deal. After that, it would make a call about their relationship and that could include walking away from the deal. I assume that now the deal is back on.

Morning News: June 12, 2014
Posted by Eddy Elfenbein on June 12th, 2014 at 6:51 am

Growing Iran Oil Exports Challenge U.S. Nuclear Sanctions

Crude Tops $111 on Iraq Unrest

New Zealand Central Bank Guidance Surprises Market

Indonesia Prolongs Halt in Rate Increases as Expansion Slows

Brazil Needs More Than a World Cup Win

Uber Protests Snarl Paris Traffic as London Cabs Gather

Why Amazon Loves Local — and Why It Absolutely Shouldn’t

Goldman Sachs Misses Out on Big Alibaba Payoff

France Still Talking With GE to Improve Bid for Alstom’s Power-Equipment Unit

BNP Paribas Bank Says Chief Operating Officer Georges Chodron de Courcel to Quit Amid US Probe

Change of Guard at Infosys: Can New CEO Vishal Sikka Lift Embattled Company?

Lululemon Reduces Forecast Even as Earnings Exceed Estimates

TCP Capital Corp. Prices $100 Million Of 5.25% Convertible Senior Notes Due 2019

Jeff Carter: Should You Quit Your Corporate Job?

Cullen Roche: How Much Longer Will the Dollar Remain the Reserve Currency of the World?

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CR Bard Raises Dividend
Posted by Eddy Elfenbein on June 11th, 2014 at 4:52 pm

After today’s close, CR Bard ($BCR) raised its quarterly dividend from 21 to 22 cents per share. That may not sound like a lot–it’s an increase of just 4.76%–but bear in mind that Bard has increased its dividend every year since 1972.

The dividend is payable on August 1, 2014 to shareholders of record at the close of business on July 21, 2014.

Shares of Bard have gotten dinged the last two days. Bard lost 4.7% on Tuesday and another 3.1% today. Given the new dividend, Bard now yields 0.64%.

Morning News: June 11, 2014
Posted by Eddy Elfenbein on June 11th, 2014 at 6:43 am

EU to Investigate Apple’s Tax Affairs

Yen Rises Versus Euro on Monetary Policy Split With ECB

U.K. Unemployment Rate Tumbles in April, Wage Growth Slows

Spain’s Retailer Inditex Q1 Net Profit Falls 7.3%, Beats Expectations

South Africa’s Economic Growth Forecast Cut to 2%

Oil Hits $110 Per Barrel on Iraq Supply Disruption Fears

Alibaba Buys Remaining Stake in UC Web

Alibaba Launches U.S. Shopping Site 11 Main

Amazon Chases Local Services, The New E-Commerce Battleground

Bid for Allergan Puts Valeant’s Research and Development Cuts Under Scrutiny

Best Buy Boosts Dividend for the First Time in Two Years

Lufthansa Warns on Profit, Shares Plunge

United’s Frequent Flyer Program Changes Have One Interesting Aspect

Roger Nusbaum: Why The Glass Must Be Half Empty In Financial Planning

Jeff Carter: The Current Immigration Bill is Dead

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The Nasdaq Recovers
Posted by Eddy Elfenbein on June 10th, 2014 at 12:45 pm

The Nasdaq Composite has been as high as 4,338.87 today. The index is now within striking distance of the intra-day high from March 6 of 4,371.71. The correction in March and April was pretty sharp.

The Nasdaq’s all-time intra-day high came more than 14 years ago, on March 10, 2000, when it hit 5,132.52. (Wow!)

Job Openings Hit Seven-Year High
Posted by Eddy Elfenbein on June 10th, 2014 at 12:02 pm

At noon, the stock market is down but not by much. There’s been a lot of talk recently about the ultra low VIX level. The VIX is currently at 11.23, which is quite low, but remember that the VIX only looks one month ahead while stock prices are theoretically supposed to discount to eternity.

I’ve looked at the numbers and found that the VIX isn’t that strongly correlated with a good or bad market. The closest I’ve found is that a low VIX, below 13, is somewhat good for the market. Since 1990, the S&P 500 has gained 11.79% annualized when the VIX is below 13, and 6.36% annualized when it’s 13 or more.

What I think low volatility means is that the market has settled on a trend, whatever it may be, and sees it playing out for a while.

There’s not much in the way of economic news today. One report we got was on job openings. The number of job openings nearly hit a seven-year high in April. There are now 4.46 million jobs waiting to be filled which is the highest since September 2007.

Another report said that small businesses are the most optimistic they’ve been since 2007. It’s interesting how many data series have been making seven-year highs. Last week, non-farm payrolls finally took out its pre-recession high.

On our Buy List, most stocks are quiet but CR Bard ($BCR) and Cognizant Technology Solutions ($CTSH) are both down more than 3% today. CTSH was downgraded by Susquehanna to neutral from positive.

Facebook ($FB) is up on the news that PayPal’s president is jumping ship to FB. PayPal, of course, is a subsidiary of eBay ($EBAY). I don’t think this means much for eBay but its shares are down about 2% today.