CWS Market Review – December 18, 2015

December 18, 2015
“The expectation of an event creates a much deeper impression
on the exchange than the event itself.” – Jose de la Vega, 1688

Ladies and gentlemen, here’s the 2016 Crossing Wall Street Buy List.

AFLAC (AFL)

Alliance Data Systems (ADS)

Bed Bath & Beyond (BBBY)

Biogen (BIIB)

Cerner (CERN)

Cognizant Technology Solutions (CTSH)

CR Bard (BCR)

Express Scripts (ESRX)

Fiserv (FISV)

Ford (F)

HEICO (HEI)

Hormel Foods (HRL)

Microsoft (MSFT)

Ross Stores (ROST)

Signature Bank (SBNY)

Snap-on (SNA)

Stryker (SYK)

Stericycle (SRCL)

Wabtec (WAB)

Wells Fargo (WFC)

The five new stocks are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle. I’ll have more to say about them next week. Don’t worry, I’ll go into full detail. I’ll also explain why I’m removing the deletions.

The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. Remember we have an extra stock leaving this year due to the PayPal spinoff.

To recap, I assume the Buy List is equally weighted among the 20 stocks. The buy price for each stock will be the closing price as of December 31, 2015. The new Buy List goes into effect on January 4, 2016, the first day of trading of the new year.

The Buy List is now locked and sealed, and I won’t be able to make any changes for the entire year. I’ll have a complete recap of 2015 at the end of the year. I’ll also have more to say about our new buys, plus I’ll give you new Buy Below prices.

As far as this year’s Buy List goes, there are only nine trading days left in 2015, and it appears that our Buy List will return to its market-beating ways. Through Thursday, our Buy List is up 4.09%, while the S&P 500 is down 0.83% (not including dividends). This will be the eighth time in the last nine years that we’ve beaten the S&P 500.

The Federal Reserve Raises Interest Rates

This week, for the first time in nearly a decade, the Federal Reserve raised interest rates.

(Dramatic pause.)

To a still very, very low level. On Wednesday, the Fed did as we expected and raised the Fed funds’ target range to 0.25% to 0.50%. In my opinion, the Fed is probably a wee bit premature in doing this, but I can’t say it’s very damaging.

On one hand, there’s no sign of inflation. In fact, the government just said that inflation was flat last month. On top of that, commodity prices are still crashing. On Monday, spot oil dropped below $35 per barrel. Natural gas is now down to $1.74 per million BTU, and gold is at a six-year low.

But Janet Yellen said that the Fed wanted to move before there were signs of inflation. My opinion is that it’s impossible to get monetary policy exactly right. You’re bound to err on one side of the other. But I don’t think the Fed is being reckless in its policy. In fact, I think the central bank is right to convey the idea that it’s going to be guided by events.

It raised rates by 0.25%. For every $100,000, that works out to about 68 cents per day. I just don’t think that’s going to wreck the economy.

During the Fed’s last tightening cycle, it raised rates by 0.25% at 17 straight meetings. In retrospect, that was a big mistake. This time, the Fed has made it clear that there’s no pre-determined path. I wouldn’t be surprised if the Fed only hikes rates once or twice all next year.

The Fed also released the economic projections from the FOMC members. These are the “blue dots” you may have heard about. I think the current projections are far too hawkish. The median dot sees four hikes this year, followed by another four next year. No way. I expect to see the blue dots sing a different tune as the year goes on (I think I’m mixing metaphors.)

I’ll also credit the Fed for clearly communicating its actions to the public. The Fed said, “if X happens, we’ll do Y.” X happened. So they did Y. It’s really that simple. I have to address a common misperception. There’s a strong tendency to see the Fed as being much more powerful than it truly is. In reality, it’s reacting to the same forces we all are. I also don’t for a moment believe that the Fed’s actions are impacted by what goes on in China or the junk bond market or even the dollar. That’s just noise. The Fed pays attention to jobs and prices, and that’s about it.

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The stock market initially rallied after the Fed’s statement came out on Wednesday, but gave back much of that gain on Thursday. Yields at the short end of the yield curve moved higher, which you would expect. The two-year yield broke 1% for the first time since 2010 (see above). But long-term yields didn’t move much. That tells me that the Fed news was a yawner.

As a general rule of thumb, if your central bank isn’t making much news, then it probably has the right policy.

The main driver of the economy in 2016 will be the housing market, and that’s in pretty good shape. The good news is that it’s not a soaring but a steadily growing one. Expect to see a moderately expanding economy next year, with growing corporate profits and still-low short-term interest rates. This is a good environment for stock investors.

Oracle Earns 63 Cents per Share

We had one earnings report this week, and it was our final one for the calendar year. It’s also fromOracle (ORCL), a stock which will not be returning with us next year. Oracle reported fiscal Q2 earnings of 63 cents per share, which was three cents more than expectations. Revenue fell 6% to $9.0 billion, but adjusted for currency, it was flat.

“We’re very pleased with our non-GAAP EPS of $0.63, beating the mid-point of guidance by 4 cents despite a stronger-than-expected currency headwind,” said Oracle CEO, Safra Catz. “We grew our SaaS and PaaS revenue 38% in constant dollars this past quarter, and we expect that revenue-growth rate to accelerate to nearly 50% in Q3 and close to 60% in Q4. This rapid increase in our cloud revenue will help drive our SaaS and PaaS cloud gross margins from 43% in Q2 to approaching 60% in Q4 and drive significant EPS growth in Q4.”

“It was a very strong growth quarter for our cloud business, with SaaS and PaaS bookings up 75% in constant currency and billings up 68% in U.S. dollars,” said Oracle CEO, Mark Hurd. “We did 100 Fusion HCM deals and over 300 Fusion ERP deals in the quarter. We now have more than 1,500 ERP customers in the cloud — that’s at least ten times more ERP customers than Workday.”

“We are still on target to sell and book more than $1.5 billion of new SaaS and PaaS business this fiscal year,” said Oracle Executive Chairman and CTO Larry Ellison. “That is considerably more SaaS and PaaS new business than any other cloud services provider, including salesforce.com.”

It’s not easy for me to let Oracle go, but I’ve felt that I’ve given them enough time to turn the ship around. The company has continuously said that things will start to improve, and I hope they do, but I’m done waiting.

On the conference call, Oracle gave fiscal Q3 guidance of 63 to 66 cents per share. For Q4, they gave guidance of 83 to 86 cents per share. The shares dropped 5.1% on Thursday to close at $36.93.

That’s all for now. The stock market will close at 1 p.m. on Thursday, December 24, and it will be closed all day on Friday for Christmas. On Tuesday, the government will release the second update for Q3 GDP growth. Last month, they revised the initial report of 1.5% growth up to 2.1%. 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

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Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 seven times in the last eight years. This email was sent by Eddy Elfenbein through Crossing Wall Street.

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