• Today’s Fed Statement: More Tapering
    Posted by on January 29th, 2014 at 2:02 pm

    Hot off the presses:

    Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. 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 the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more 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.

    Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 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 will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional 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 well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. 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.

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

    This is pretty much what I expected. The only minor surprise was that Narayana Kocherlakota didn’t dissent. Binyamin Appelbaum of the NYT tweeted: “Kocherlakota told me he would only dissent if he thought doing so would influence his colleagues. Apparently he decided it wouldn’t.”

  • Triumph Group Bombs
    Posted by on January 29th, 2014 at 12:21 pm

    In the CWS Market Review from December 27, I listed some of the finalists for this year’s Buy List. One of them was Triumph Group ($TGI), which is a maker of aerospace parts.

    I’m glad we didn’t choose Triumph Group because it just bombed earnings. Earnings for Q4 came in 24 cents below expectations ($0.99 versus $1.23). Triumph also lowered this year’s guidance from $5.25 per share to $4.75 per share. The stock has been down as much as 19% today.

    Triumph Group is a well-run company and I suspect they’ll come back. This is one to keep an eye on.

  • Morning News: January 29, 2014
    Posted by on January 29th, 2014 at 6:40 am

    Impact of Turkey Rate Decision Fades Fast

    EU Unveils Plan to Ban Banks’ Proprietary Trading

    ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil

    Obama Seeks Trade Deals Sought by Biggest U.S. Companies

    New York State Regulator Promises Tough Bitcoin Rules

    LG Beats Its Rivals in Q4 Smartphone Sales

    Pressure Builds for Apple to Overhaul or Expand Product Portfolio

    Sony Credit Cut To Junk Status As Smartphones ‘Cannibalize’ Its TV And PC Businesses

    American Airlines, US Airways Report Combined $1.95 Billion earnings for 2013

    Fiat Scraps Dividend After Chrysler Buy

    McDonald’s Seeks to Out-Latte Starbucks Amid Coffee Wars

    Ford Posts Higher Profit But Faces Pressure in U.S.

    Another Score for Crowdfunding: Indiegogo Raises $40 Million

    Russia Bucks the Trend – Talks the Ruble Lower

    Credit Writedowns: Turkey Moves, Focus Shifts to Fed

    Be sure to follow me on Twitter.

  • MyRA
    Posted by on January 28th, 2014 at 10:16 pm

    From President Obama’s State of the Union address:

    Let’s do more to help Americans save for retirement. Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can. And since the most important investment many families make is their home, send me legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of homeownership alive for future generations of Americans.

    I don’t know the details yet, but I’m having a hard time imagining what the benefits could be.

  • The Small-Cap Value Rally
    Posted by on January 28th, 2014 at 4:05 pm

    In reference to yesterday’s post on the small-cap premium, I want to look at the performance of small-cap value stocks compared with the rest of the market.

    The difference is quite startling. This chart below has the Vanguard 500 Index Fund (VFINX) in black along with the Vanguard Small-Cap Value Index Fund ($VISVX) in blue. Both include dividends. I also set both funds to 100 on April 8, 1999, which was the start of small-cap outperformance.

    image1382

  • Ford Beat by Three Cents per Share
    Posted by on January 28th, 2014 at 10:52 am

    We had more good earnings news today. Ford ($F) reported fourth-quarter earnings of 31 cents per share which was three cents better than estimates. In terms of net income, that’s a cool $3.04 billion. As usual, the company is doing well in North America. The F-Series trucks are very popular. For the 32nd year in a row, they were the top-selling vehicle in the U.S.

    The weak spot continues to be Europe. True, the economy there is a bit of a wreck, but Ford needs to be stronger in that market. For the year, Ford lost $1.61 billion in Europe. They expect more losses this year, but a profit by 2015. Things are improving. Ford lost $571 million in Europe last quarter which is bad, but it’s better than the $732 million they lost in Q4 2012. Also, Ford had a small loss from Latin America and a small profit from Asia, but those are still pretty minor parts of their overall business.

    Ford reiterated that profits will fall a bit this year ($8 billion to $7 billion pre-tax), but that’s because the company has very ambitious plans to roll out new models. Ford is introducing 23 new vehicles of which 16 are in North America. Overall, these were good results from Ford.

  • Morning News: January 28, 2014
    Posted by on January 28th, 2014 at 6:47 am

    Asian Stocks Fall a Fourth Day Amid China, Fed Stimulus Concerns

    Worried by EM Sell Off, Investors Seek Foothold in South Korea and Mexico

    Calm Returns to Emerging Markets

    RBI’s Dovish Outlook Soothes Bond Investors

    U.K. 4Q GDP Grows 0.7%, Ending Best Year Since 2007

    Bank of Montreal Parent Acquires British Asset Manager for $1.2 Billion

    Why Nothing Apple Does Is Ever Good Enough

    Ford Sets Profit Records in Key Markets Before Busy Year

    DuPont 4th-Quarter Profit Doubles

    Philips Q4 EBITA Beats Forecasts, Sees Tough 2014

    Comcast Profit Rises 26% on Broad Sales Growth

    Siemens Profit Rises as CEO Presses On With Cost Cuts

    Bitcoin Executive Charlie Shrem is Accuse of Money Laundering

    Markets, Herding and Avalanche Dynamics

    John Hempton: When the Hedge Doesn’t Work

    Be sure to follow me on Twitter.

  • Is There a Small-Cap Premium?
    Posted by on January 27th, 2014 at 3:25 pm

    Josh Brown highlighted an interesting post by Alex Bryan at Morningstar, “Does the Small-Cap Premium Exist?”

    Bryan touches on a few important points which I’ve long suspected. The long-term data suggests that small-cap stocks outperform their larger-cap bretheren.

    This is a good example of the fact being true, but it needs more context. The outperformance of small-caps has historically been very erratic. We’ve gone for many years, decades in fact, with small-cap stocks underperforming.

    The data also shows that most of the outperformance comes during the month of January. This is suspicious and it tells me that something else is going on. Perhaps beaten down small-caps are subjected to tax-loss selling.

    Bryan notes that there hasn’t been a small-cap premium over the last 30 years, nor does it appear in other countries. He thinks that liquidity may have played a role in shaping the historical data, and that may not play such a large factor in the future.

    I suspect that there is a small-cap premium but it’s very small and not very stable. I also think it’s more visible among small-cap value stocks than small-cap growth issues. There are lots of values to be found among small-caps but I would never buy a stock because it’s small.

    We often talk about the stock market as if it’s one entity, but that’s very misleading. The bull market of the late-1990s was heavily skewed to large-cap stocks. Morgan Housel writes, “In 1999, one of the best years for the market ever, more than half of stocks in the S&P 500 declined. Two companies, Microsoft and Cisco, accounted for one-fifth of the index’s return.” People speak of the terrible stock market from 2000 to 2009, but small-cap value stocks didn’t do so poorly, because they had been so badly left behind.

  • Scary Looking Chart
    Posted by on January 27th, 2014 at 3:09 pm

    This is hardly sophisticated analysis, but I’m struck by how scary this long-term chart of the Consumer Discretionaries ETF ($XLY) looks. I’ve compared it to the SPY.

    big01272014

    The largest holding in the XLY is Amazon which is always dangerous to bet against. But it also has solid Buy List stocks such as Ford ($F) and McDonald’s ($MCD).

  • The Emerging-Markets Meltdown
    Posted by on January 27th, 2014 at 7:55 am

    I wanted to talk a little about what’s been happening in the market recently. The Dow fell 176 points on Thursday and another 318 points on Friday. The real pain, however, has been in the emerging markets, and especially in their currency and bond divisions.

    A lot of folks are blaming the Federal Reserve, and the winding down of QE (more on that in a bit). While our central bank is a convenient villain—and very often, the proper one—in this case, I don’t think they deserve the blame.

    Let’s take a step back. When the financial crisis hit, the Fed and other central banks lowered interest rates to the floor. Econ 101: Money goes to where it’s treated best, so people started investing heavily in emerging markets where the yields (and risks) were higher. Investors particularly liked the so-called BRICs (Brazil, Russia, India and China). I’d throw South Africa into the mix as well.

    The problem is that a lot of the emerging economies have some serious structural problems. The inflow of cash bought them time, but they haven’t done much to change their ways. Now that the Fed is talking about winding down its extraordinary measure, investors realize that near-0% interest won’t last much longer. Naturally, that will dry up the capital flow to the emerging markets. This problem is compounded by the fact that the governments in the emerging markets loaded up on dollar-dominated U.S. Treasury debt. As a perverse result, they’re doubly sensitive to moves in U.S. interest rates.

    People knew this day would eventually come; they just didn’t know when. “When” is apparently now. The governments in the emerging markets are somewhat like a person who builds a balsa-wood house in a tornado zone. When the house goes to smash, they blame the poor foresight on the builder’s part, not the tornado.

    The situation in Argentina is especially screwed up—although when I use the phrase “screwed up” in conjunction with our friends on the Rio Plata, it’s like saying there’s “trouble” in the Middle East. The president of Argentina didn’t make any public appearances for six weeks. Can you imagine if President Obama had done the same?

    President Kirchner promised not to devalue the currency, but reality intervened. Of course this was after the government spent a pile of cash trying to defend the indefensible peso. In the last three years, Argentina’s currency reserves have been cut in half. No one really knows what the inflation rate or dollar-peso exchange rate truly is.

    There are a lot of people in Argentina, in and out of government, whose job it is to see how well the economy is doing. They track all sorts of complicated econ data, but I have a simple rule I use: How loudly are the politicians yapping about the Falklands? If they’re loud, you can be sure that means the economy is a wreck.

    I don’t want to pick on Argentina. Turkey is in bad shape as well. Brazil doesn’t look so hot, either. The one saving grace for a lot of EMs was their monster customer in China. But when we got sluggish economic reports from China, that really spooked EM investors. And oh yeah, there also appears to be a revolution going on in Ukraine. That, too, affects things.

    It’s gotten so desperate that even the poor battered yen has done well. I’ll give you another easy rule: If your country exports a lot of commodities (especially to China), then your currency probably got whacked. Places like Turkey, Argentina and Venezuela are running very low on their forex reserves. Broadly speaking, I think currency devaluations can be the best of several bad options, but they don’t work all by themselves. You need reform, too, and that can be politically unpopular.

    Quick tangent: One stock that I like to follow is Ingredion (INGR). They make high-fructose corn syrup. A lot of their operations are in Argentina, and last year, INGR cut its full-year forecast due to the government’s policies. The shares got hit hard on Thursday and Friday. By most superficial measures, the stock is cheap, but I’m not going near it. There are just too many unknowns.

    Several years ago, Bill Gross of PIMCO made a daring investment when he loaded up on Brazilian bonds. That was a shrewd move, and it turned out to be a big winner. So it was a bit jarring when Gross recently said that Brazil is no longer attractive.

    I don’t know where all these recent EM developments are headed, but we’re going to soon find out who’s been responsible and who hasn’t. Mexico, for example, will probably pull through just fine. Poland as well. But I’m not so sure about others. Until then, we can expect a little more volatility in our markets and a lot more in the emerging markets.