The Fed Tapers Again
Posted by Eddy Elfenbein on March 19th, 2014 at 2:02 pm

The Evans Rule is gone! Here’s the statement.

Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. (Now here comes the newsy stuff so pay attention – Eddy) In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.

Morning News: March 19, 2014
Posted by Eddy Elfenbein on March 19th, 2014 at 7:20 am

West Readies Tighter Sanctions After Russia Seals Crimea Claim

Goldman Sachs Rules at the Bank of England

Vietnam Ramps Up Measures to Clean Up Bad Banking Debt

What to Watch From the Fed Meeting

Trading Probe Breaks String of Gains for U.S. Exchange Operators

New Alliances in Battle for Corporate Control

Snowden Has One Very Important And Potentially Devastating Question to Answer

J.P. Morgan Agrees to Sell Commodities Business

Toyota and Justice Department Said to Reach $1.2 Billion Settlement in Criminal Case

The Biggest Threat To The U.S. Auto Industry From GM’s Recalls

BMW Sees ‘Clear Growth’ in 2014 Pretax Profit

Oracle Quarterly Results Disappoint Wall Street; Shares Fall

Luck Vs. Skill: What Bill Gross and Bill Miller Have in Common

Cullen Roche: Will the Bank of England’s Report on Endogenous Money Change Anything?

Howard Lindzon: The Era of Curation and Verticalization…My Interview with Michael Covel

Be sure to follow me on Twitter.

Oracle’s Q4 Guidance: 92 to 99 Cents Per Share
Posted by Eddy Elfenbein on March 18th, 2014 at 11:14 pm

From Oracle‘s ($ORCL) conference call.

As we said before, we are committed to returning value to our shareholders through earnings growth, stock repurchases and a dividend. This quarter we repurchased 55.4 million shares for a total of $2 billion.

Over the last 12 months we have repurchased nearly 360 million shares for a total of $10.7 billion and reducing our — reduced our share count by 5%. We also paid out more than $1.6 billion in dividends this fiscal year so far.

Stock repurchases and dividends have totaled more than 85% of free cash flow over the last 12 months and the Board of Directors declared a quarterly dividend of $0.12 per share.

Now to the guidance and if currency were to stay where it is today than the impact of currency would be minimal, of course, this could change quickly. New software license and cloud subscription revenue growth is expected to range from zero to 10%. Hardware product revenue growth is expected to range from zero to 10%.

As a result, total revenue growth on both GAAP and non-GAAP basis is expected to range from 3% to 7% in reported dollars. Non-GAAP EPS is expected to be somewhere between $0.92 and $0.99 in constant dollars and in reported dollars. GAAP EPS is expected to be $0.79 to $0.86.

Now I want to remind you the last year we recognized an acquisition-related benefit of $269 million in connection with the Pillar Data Systems earn-out, excluding that benefit GAAP EPS last Q4 would have been $0.74.

This guidance assumes a GAAP tax rate of 21.5% and a non-GAAP tax rate of 23.5%, and of course it may end up being different.

Wall Street had been expecting 96 cents per share.

Oracle Earned 68 Cents Per Share
Posted by Eddy Elfenbein on March 18th, 2014 at 4:59 pm

Oracle‘s ($ORCL) earnings are out. The company earned 68 cents per share for fiscal Q3, which is at the low end of their range of 68 to 72 cents per share. Revenue came in at $9.31 billion which was below consensus of $9.36 billion.

Net income in the third quarter rose 2.4 percent to $2.57 billion, or 56 cents a share. New software-license and cloud-subscription sales, a closely watched indicator of future revenue, rose 3.6 percent to $2.42 billion, the company said today.

Oracle is the second-largest maker of business applications behind SAP AG, and it entered the computer-server market with the 2010 acquisition of Sun Microsystems. Hardware product sales rose 8 percent to $725 million during the quarter.

Oracle is under pressure in its three main businesses, Thill said. Microsoft Corp. has gained ground in database software, along with newer companies such as MongoDB Inc. and Couchbase Inc. that are chipping away at more established providers. Other customers are leaving Oracle because they’re putting data in the cloud with vendors like Amazon.com Inc.

In business applications, programs that handle tasks like finance, client management and human resources, customers are defecting to cloud-based suppliers like Salesforce.com (CRM) and Workday. In hardware, Oracle has “missed more quarters than they’ve made,” Thill said.

The stock is down about 5% in the after-hours market.

Stocks Climb as Invasion Fears Fade
Posted by Eddy Elfenbein on March 18th, 2014 at 11:32 am

The stock market is working its way higher again today. The S&P 500 cracked 1,870 earlier today. The good news is that tensions in Eastern Europe seem to be falling lower. Shares of the Russian ETF ($RSK) are up another 3.3% today. It’s up more than 11% from last Thursday’s low. We also got a favorable report on housing starts.

This is the first day of the two-day Fed meeting. All the action, however, will come tomorrow when the Fed releases its statement, updates its forecasts and Janet Yellen holds her first press conference.

On our Buy List, Microsoft ($MSFT), of all stocks, is doing very well today. The shares are up nearly 4% and it’s close to hitting $40. The company may introduce Office for Apple’s iPad next week.

Microsoft Chief Executive Officer Satya Nadella will begin unveiling his vision for the company when he debuts a version of Office for Apple Inc.’s iPad and offer some features of the application for free at an event next week, said people with knowledge of the announcement.

The Redmond, Washington-based company will introduce Office for the iPad with limited capabilities that can be upgraded to premium versions requiring a subscription to the Office 365 Internet-based software, said the people, who asked not to be identified because the plans aren’t public. At the event, which will be held March 27 in San Francisco, Nadella will also discuss his commitment to software services that work on Microsoft’s Windows and rival operating systems, the people said yesterday.

Microsoft last closed above $40 in July 2000.

Morning News: March 18, 2014
Posted by Eddy Elfenbein on March 18th, 2014 at 6:45 am

Putin’s Motives Rooted in History Remain a Mystery Abroad

Germany’s Top Court Upholds Legality of ESM Rescue Fund

Bank of England Names Two New Deputy Governors

Fed Seen Adopting Qualitative Rate Guidance as Job Market Gains

With Alibaba IPO Official, Pressure Mounts on Yahoo

GM Stock Unfazed by Recall Saga; CEO Mary Barra Issues Video Apology

Hertz Will Spin Off Equipment Rental Unit to Focus on Cars

Massachusetts to Cut Ties With CGI Group Over Troubled Online Health Exchange

Quiznos Files for Bankruptcy; Can it Ever Compete With Subway?

Walmart to Offer Customers Credit for Used Video Games

Tesla Fights For a Place to Park

Bitcoin Revelation Under Scrutiny

$1 Billion Contest: Some Already Cashing In

Jeff Carter: Is There Something Amiss?

Joshua Brown: You Tell Me…

Be sure to follow me on Twitter.

The Return of Bank Dividends
Posted by Eddy Elfenbein on March 17th, 2014 at 2:24 pm

The largest U.S. banks are currently going through another round of “stress tests” in order to prove to the Federal Reserve that they can withstand another financial crisis. Of course, this test comes seven years after it was truly needed. The test results will be made known on March 20 and March 26.

The immediate effect for investors is that some of these banks will get the green light to raise their dividends and increase share buybacks. Citigroup and Bank of America, for example, only pay out one penny per quarter. Citi is expected to earn nearly $5 per share this year, and BAC is projected to make $1.32 per share. In 2011, BAC asked the Fed if they could do a modest dividend increase. The Fed said no.

The truth is that nowadays these banks are quite profitable. Of course, we don’t know which banks could fail the test. The largest banks will most certainly pass, but this test includes some smaller ones and I’m sure someone will be left out. I suspect Citigroup will jack up its dividend soon, but that will also be complicated by a recent $400 million fraud decision. The unknown legal bills will weigh on several other banks as well.

The six largest U.S. banks may return $47.8 billion starting in April, the estimates show. That compares with $23.6 billion for the prior year, according to Stifel Financial Corp.’s KBW unit. The firms gave back $66.4 billion in the 2007 calendar year, data compiled by Bloomberg show.

“The dividends and buybacks — the sheer size of them — suggest there is plenty of profit to play with,” David Ellison, a Boston-based mutual-fund manager specializing in financial stocks at Hennessy Advisors Inc., said in a phone interview. “It shows that if a bank is run appropriately, it’s very profitable.”

I’ve told investors that in light of the uncertainty, the best way to value these banks is by the dividend yield (though that’s not the only way). The issue is that many of the other traditional valuation metrics don’t work well with the big banks.

I would be very careful about committing any funds to financials right now. It’s not that there’s long-term danger, but whoever fails the test will surely be punished by the market.

AwesomePennyStocks Come to an End
Posted by Eddy Elfenbein on March 17th, 2014 at 11:54 am

Sometimes the frauds committed on Wall Street are so comical that you have to wonder how anyone could have fallen for something so silly. Yet it’s also sad that gullible investors get wiped out.

Bloomberg has a story today on the fall of AwesomePennyStocks and its 26 year-old mystery man. You can read the whole story here, but here’s a sample:

The promotion cited by the SEC involved America West Resources Inc., a Salt Lake City-based coal company. AwesomePennyStocks and another list called PennyStocksUniverse sent messages promoting the company’s shares on Feb. 23, 2012, according to the SEC.

The stock rose as high as $1.80 from 29 cents as more than 7.8 million shares were traded, more than double the total volume in the prior year, the agency said. Babikian sold at least 1.3 million shares for $1.9 million, according to the SEC. America West filed for bankruptcy protection last year.

Stocks Rise on Strong Industrial Production
Posted by Eddy Elfenbein on March 17th, 2014 at 11:15 am

The stock market is bouncing back today after a rough end to last week. Investors were ignited this morning by a stronger-than-expected report on industrial production. This is one of those reports that track the rise and fall of the economy well.

Industrial production jumped 0.6% last month. Economists were only expecting an increase of 0.1%. Manufacturing output, which is the largest part of industrial production, rose by 0.8%. That’s its biggest gain since August. This is also more evidence that the weather-related sluggishness is probably behind us (though I’m writing this as we got a late season snow here in DC).

The rising tension in Ukraine is, of course, on everyone’s mind. It appears that Crimea is done, and it’s now part of Russia. The worry is that Putin will ratchet up and launch an invasion of Eastern Ukraine. That’s a nightmare scenario. On one hand, that’s an irrational move on his part, but on the other, Colonel Putin doesn’t seem to play by reason. Interestingly, the Polish ETF (EPOL) is very strong today, up 2.7%. Even the Russia ETF ($RSX) is showing some strength, which may hint that the worst is over. RSX had been getting crushed this year.

Our Buy List is also having a good day. CR Bard (BCR) continues to be remarkably strong. The stock got as high as $147.82 today which is another all-time high. Qualcomm is also having a good day for us, but that’s really making up for the weakness it showed on Thursday and Friday. Most of the tech world is waiting for Oracle’s earnings report tomorrow. Or more accurately, they’re waiting for Oracle’s guidance for the current quarter.

Morning News: March 17, 2014
Posted by Eddy Elfenbein on March 17th, 2014 at 6:58 am

QE Not the Only Option for ECB on Inflation

As Giant U.S. IPO Nears, Alibaba’s China E-commerce Crown Slips

Indian Solar Power: Cost of Production Dropped 60%; Price to Equal Thermal Power’s in Three Years

Commodities Cushioned From Crimea Crisis by Ample Supply

New York Strips London of Mantle as World’s Top Financial Center

U.S. Navy Seizes Tanker, Foiling Libya Rebel Attempt to Sell Oil

Federal Reserve Officials Weighing How to Retool Rate Guidance

U.S. Lags as Commercial Drones Take Off Around Globe

Rosneft to Buy Stake in Pirelli as Tiremaker’s Owners Reorganize

Toyota Unit Shuts 2 Factories in India

Vodafone to Buy Spanish Cable Operator Ono

Quiznos Files Pre-Packaged Chapter 11 Plan After Debt Deal

Candy Crush Saga Prices Initial Public Offering At Up To $7.6 Billion

Credit Writedowns: Capex May Be Behind the Sudden Improvement in U.S. Loan Growth

Jeff Miller: Weighing the Week Ahead: Yellen Takes The Stage

Be sure to follow me on Twitter.